Standard & Poor’s lowered the debt of Puerto Rico to junk status on Tuesday, sending shock waves through the investor community, which has long enjoyed the tax-exempt interest generated by the island’s municipal bonds. While S.&P. only dropped Puerto Rico’s rating to BB+ from BBB-, the one-notch downgrade has intensified a cash squeeze for the commonwealth, Mary Williams Walsh writes in DealBook.
Though much of the island’s debt was issued with promises to make cash payments if it fell below investment grade, Puerto Rico is currently lacking the cash to make good on its word despite recent efforts to shore up liquidity. To make matters worse, some institutional holders of the debt have rules saying they cannot hold junk-rated debt â€" but only if two of the three top rating agencies downgrade the debt to below investment grade. While Moody’s Investors Service and Fitch Ratings both rate the island’s debt a single notch above junk, S.&P.’s downgrade has eroded market confidence, leaving investors fearing the worst.
MORGAN STANLEY TO PAY $1.25 BILLION IN MORTGAGE CASE Â |Â Another day, another settlement. Morgan Stanley agreed on Tuesday to pay $1.25 billion to the Federal Housing Finance Agency to resolve claims that it sold faulty mortgage securities to Fannie Mae and Freddie Mac. If the Morgan Stanley settlement becomes final, it would be the third-largest monetary payment by a Wall Street firm to settle an F.H.F.A. lawsuit, Michael Corkery and Jessica Silver-Greenberg write in DealBook.
But the F.H.F.A. still has pending mortgage securities cases against about a dozen other financial institutions.
Still, progress is being made. In a separate action on Tuesday, JPMorgan Chase agreed to a $614 million deal with federal prosecutors who accused the bank of violating the rules of the Federal Housing Administration’s mortgage insurance program. And last Friday, a New York State Supreme Court judge approved an $8.5 billion settlement between Bank of America and a group of investors that purchased mortgage securities that went sour during the credit crisis.
MICROSOFT’S NEW CHIEF  | After an intense period of speculation, Microsoft has announced its new leader. The company on Tuesday named Satya Nadella as its chief executive, only the third in Microsoft’s almost 40-year history. The selection of Mr. Nadella to succeed Steven A. Ballmer came at the same time as news that Bill Gates, the company’s founder, had stepped down from his role as chairman to become a technology adviser to Mr. Nadella. John W. Thompson became the company’s new chairman.
Mr. Gates said Mr. Nadella is “a proven leader with hard-core engineering skills, business vision and the ability to bring people together.†Though he is known for using technical jargon in his conversations and speeches, he is nevertheless seen by many as likable and able to take charge.
“Mr. Nadella is probably as good a choice as the company could make,†Robert Cyran of Reuters Breakingviews writes. “The old guard is slipping into the background,†giving Mr. Nadella plenty of room to “turn Microsoft toward a more focused, and potentially valuable, future.â€
ON THE AGENDA  | The ADP national employment report for January is out at 8:15 a.m. The I.S.M. nonmanufacturing index for January is released at 10 a.m. The House Committee on Financial Services holds a hearing at 10 a.m. to discuss the effect of the Volcker Rule on job creation, its second on the subject. The House Oversight and Investigations Subcommittee reviews its annual report of the Office of Financial Research at 2 p.m. Two regional Federal Reserve presidents give speeches on the economic outlook â€" Charles I. Plosser, president of the Philadelphia Fed, takes the stage at 12:30 p.m. and Dennis P. Lockhart, president of the Atlanta Fed, is on at 1:40 p.m. Laurence D. Fink, chairman and chief executive of BlackRock, is on Bloomberg TV at 11 a.m. Twitter reports fourth-quarter earnings after the market closes, its first update on how the company is doing since i went public on Nov. 7.
A LESSON ON HERBALIFE’S VOLATILE STOCK PRICE  | When William A. Ackman, founder of the hedge fund Pershing Square Capital Management, announced a year ago that his firm had taken a $1 billion short position in Herbalife, he was essentially betting that the company was operating as a pyramid scheme. Herbalife, of course, vehemently denied Mr. Ackman’s claims. “It’s now a year later, and I still don’t know who is right,†Steven M. Davidoff writes in the Deal Professor column.
But to some investors in Herbalife, the truth does not seem to matter. Though hedge funds and even individual investors have jumped into the fray, these outsiders have not provided any clarity on Herbalife’s business model, creating extreme volatility in the company’s stock as investors trade on speculation and innuendo rather than fact.
Mr. Davidoff writes: “What we have here is the opposite of a search for truth. No one has shown a great interest in examining the company to find out what is exactly going on.â€
ANOTHER ‘WOLF OF WALL STREET’ BOOK DEAL  | The book, by Christina McDowell, whose father Tom Prousalis went to prison for his involvement with the “Wolf of Wall Street†kingpin, Jordan Belfort, will be based on this open letter, which she wrote to discourage people from seeing the movie. The memoir is slated to come out in the spring of 2015.
‘IT’S TIME WE TALK ABOUT WHERE START-UPS COME FROM’  | A father and son discuss the lure of joining a start-up. From McSweeney’s Internet Tendency.
NOT SO SNEAKY TRADERS AT IT AGAIN  | The Securities and Exchange Commission announced charges against two traders on Tuesday, claiming that one trader temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus. The media for their scheme? Instant messages and text messages. “Check your text messages in like 3 minutes,†one trader wrote, to which the other responded, “haha, ok … sneaky sneaky.†Word to the wise: the phrase “sneaky sneaky†is likely to attract the S.E.C.’s attention.
DEBT CEILING WATCH  | On Friday, the United States Treasury will lose its ability to issue new net debt. From a DealBook article in October, after a last-minute agreement to raise the nation’s borrowing limit was reached: “Many investors were left worrying that the budget crises that have become more frequent in recent years could spin on endlessly, with no long-term resolution.â€
#APOLOGYWATCH: TARGET  | John J. Mulligan, the chief financial officer of Target, said he was “deeply sorry†for the data breach the company allowed over the holiday shopping period. Help DealBook keep track of new apologies by leaving a comment on the website and on Twitter using the hashtag #ApologyWatch.
PASS THE HOT CHOCOLATE  | It’s snowing again in New York. This time, there’s also some freezing rain.
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Entegris to Purchase ATMI for $1.15 Billion  | Entegris announced on Tuesday that it would buy ATMI for $1.15 billion in a deal that would combine two semiconductor industry suppliers, Reuters reports. REUTERS
Lenovo Shares Tumble in Wake of Company’s Deal Spree  | Tuesday was the stock’s first full day of trading since Lenovo announced it would buy Motorola Mobility from Google for $2.9 billion last week. DealBook »
A Microsoft Breakup Could Bolster Valuation  | With new leadership in place, Microsoft could double its valuation if it splits off some of its businesses, Bloomberg News writes. BLOOMBERG NEWS
Foursquare Gets $15 Million Investment from Microsoft  | Foursquare, the location sharing application, has announced a data licensing partnership and a $15 million investment from Microsoft, which will be used to incorporate Foursquare recommendations into Microsoft’s local and search products over the next four years, the Bits blog reports. NEW YORK TIMES BITS
Deutsche Bank Bolsters U.S. Business  | Deutsche Bank is adding senior staff, including a new co-chief of fixed-income trading in New York, and infusing billions of dollars in capital to its United States business as part of its effort to re-establish its position in the American investment banking market, The Financial Times reports. FINANCIAL TIMES
Former Banker Teams With Chef to Sell Lunchboxes  | Osamu Ito, a former banker at Morgan Stanley MUFG Securities Company, is starting a crowdfunding company to invest in start-ups, including a company overseen by a Michelin-starred chef that would provide diet lunchboxes, Bloomberg News writes. BLOOMBERG NEWS
Why Banking and Work-Life Balance Do Not Mix  | “It is easy for banks to tell employees not to work too hard, but in practice you either put in the hours to get the work done or pay for it with your career prospects,†Sanjay Sanghoee writes in Fortune. “If banks really want to alter this dynamic, they need to streamline the work process, but that too is easier said than done given the nature of the business and the demands of clients.†FORTUNE
Sony Nears Sale of Computer Unit  | Sony is said to be in talks with Japan Industrial Partners, a private equity fund backed by Bain Capital and Mizuho Securities, to sell Vaio, its personal computer business, in a deal worth up to $490 million, The Financial Times reports. FINANCIAL TIMES
Canada Pension Board Opens Brazil Office  | The Canada Pension Plan Investment Board announced on Wednesday that it would open an office in São Paulo in April, Reuters reports. The board’s chief executive said the fund might target private equity investments as capital frees up in the region. REUTERS
Ackman’s Pershing Square Fund Rises 3.8 Percent  | William A. Ackman’s flagship Pershing Square L.P. fund rose 3.8 percent in January, bolstered in part by the Mr. Ackman’s investment in the whiskey maker Beam Inc., which was acquired by Suntory of Japan for $13.6 billion last month, The Wall Street Journal reports. WALL STREET JOURNAL
Mexican Airline Is Said to Explore I.P.O. of Frequent-Flier Program  | Grupo Aeroméxico, the largest airline in Mexico, is considering an initial public offering of its frequent-flier rewards program, Bloomberg News reports, citing unidentified people familiar with the situation. BLOOMBERG NEWS
Continental Building Products Prices I.P.O. Â |Â Continental Building Products, a construction products maker backed by private equity, priced its initial public offering at $14 a share, below its expected range of $16 to $18 a share, Reuters writes, citing an underwriter. REUTERS
Drug Development Start-Ups Prepare I.P.O.’s  | Eleven companies are planning to go public this week, many of which are small deals for start-ups that develop drugs, The Wall Street Journal reports. WALL STREET JOURNAL
Venture Capital Firm Focused on the Midwest Raises a $250 Million Fund  | “We truly believe the best place in America to build your company is in the Midwest,†says one of the partners behind Drive Capital, which aims to bring Silicon Valley-style investing to the Midwest. DealBook »
PillPack Receives $4 Million in Funding  | PillPack, a start-up that ships customers medication in presorted dose packs, has raised $4 million from both a Series A funding round and an angel investment, The Wall Street Journal reports. The company is using the money to obtain licenses to do business in all 50 states. WALL STREET JOURNAL
500 Startups Tops List of Venture Capital Investors  | 500 Startups made 57 new deals in 2013, taking the top position on a list of the most active venture capital firms, The Wall Street Journal reports. Coming in second was Andreessen Horowitz, which made 56 new deals. WALL STREET JOURNAL
Noom Raises $7 Million  | Noom, a maker of smartphone apps for weight loss and fitness, has raised $7 million in Series A funding led by RRE Ventures, ReCode reports. RECODE
Welcome Relief for Homeowners, Then the Tax Bill  | JPMorgan Chase can write off $1.5 billion in debt relief, but it will be treated as taxable income for homeowners, resulting in burdensome costs for many families, The New York Times writes. NEW YORK TIMES
Budget Deficit Projected to Fall  | A Congressional Budget Office analysis released on Tuesday estimated that the budget deficit would fall to $514 billion in the 2014 fiscal year, or about 3 percent of economic output, from $1.4 trillion in 2009, The New York Times reports. NEW YORK TIMES
Market for Patents Was Softer in 2013, Firms Say  | Technology companies have for years been stockpiling patents as a defense against lawsuits. But patent prices and transfers were down in 2013, according to data from two companies. DealBook »
Judge Approves JPMorgan’s Madoff Settlement  | A judge approved JPMorgan Chase’s $543 million settlement with Irving H. Picard, the trustee seeking money for victims of Bernard L Madoff’s huge Ponzi scheme, Bloomberg News reports. BLOOMBERG NEWS
