U.S. payment-card industry grapples with security

By Ross Kerber

BOSTON (Reuters) – Fresh details of large-scale cyber attacks against data processor Heartland Payment Systems Inc and supermarket chain Hannaford Brothers show the challenges facing the efforts of the U.S. credit-card industry to upgrade security measures.

While both companies say their computer networks met the tough new standards meant to prevent data breaches, Visa Inc said Heartland at least may have let its guard down.

The positions reflect broader disagreements in the industry, as squabbling between merchants and financial firms over technology and the cost of systems upgrades continues to impede progress, said Robert Vamosi, an analyst for California consulting firm Javelin Strategy & Research.

“They both need to fight fraud and they are fighting each other,” he said.

The financial stakes are getting higher. Fraud involving credit and debit cards reached $22 billion last year, up from $19 billion in 2007, according to California consulting firm Javelin Strategy & Research.

The security of consumer information came under renewed scrutiny on August 17 when a 28-year-old Florida man, Albert Gonzalez, was indicted along with two other unnamed hackers for breaching the computer networks of Heartland and Hannaford, both of which said they were in compliance with security requirements.

Those standards were set by a council that includes the world’s two largest credit card networks, Visa and MasterCard Inc; fast-food leader McDonald’s Corp; oil major Exxon Mobil Corp; and big banks Bank of America Corp and Royal Bank of Scotland Plc.

All these companies face rising costs linked to fraud and its prevention. Of the 275,284 complaints received last year by the government’s Internet Crime Complaint Center, 24,775 were tied to credit or debit card fraud, up from 13,033 in 2007 and 9,960 in 2006.

Yet some 5 percent of the largest retailers and restaurants still have not met compliance deadlines set in 2007, according to Visa.

Even companies that meet the standards could be vulnerable should they lower their guard, Visa security executive Ellen Richey said last spring in a speech critical of Heartland.

“It was the lack of ongoing vigilance in maintaining compliance that left the company vulnerable to attack,” she said in March.

Merchants, for their part, complain via trade groups like the National Retail Federation that Visa and MasterCard are asking them to pay more than their fair share for security upgrades.

Some retail executives also say Visa and MasterCard have been slow to adopt better encryption technology and cards with high-security computer chips because of the associated costs.

“I can’t even tell you how many sour, disgruntled calls I get from retailers,” said Gartner Inc technology consultant Avivah Litan, who also works with banks.

GOVERNMENT REGULATION?

At Heartland, Gonzalez was charged with stealing more than 130 million payment card numbers, a record. Previously the biggest such hacking case was at TJX Cos Inc, where federal prosecutors last year accused Gonzalez and others of conducting an electronic break-in starting in 2005 that companies said compromised as many as 100 million card numbers.

Gonzalez, who is awaiting trial, has pleaded not guilty to the charges related to TJX, which had not met security standards at the time of the data breach.

This time, prosecutors say Gonzalez and his co-conspirators penetrated Hannaford and Heartland’s systems in late 2007 with code known as “structured query language,” which the security standards require companies to protect themselves against.

They also charged the ring breached systems at convenience store operator 7-Eleven Inc, roughly in August 2007. The company said the breach only affected transactions at automated teller machines owned by a third party at some of its stores, and wouldn’t comment further.

A spokesman for Hannaford, a unit of Belgium’s Delhaize Group, said an audit unit of Verizon Communications Inc showed it met the security standards.

Heartland said through a spokesman that its systems had been checked by audit firm Trustwave of Chicago as recently as April 2008 — about four months after prosecutors say the hackers began their theft.

The security standards represent “the lowest common denominator and the bad guys have figured out how to get around some of the weaknesses,” the spokesman said.

A Verizon spokesman confirmed it had audited Hannaford and found it to meet the standards, but declined to elaborate. A Trustwave spokeswoman said the firm wouldn’t comment.

Security is critical to Heartland because it processes card payments for merchants, and its stock dropped sharply in the two months after the attack was discovered.

In response, Chief Executive Robert Carr has tried to reassure customers and stepped up calls for better data encryption.

Ultimately, should the payment card industry fail to get its act together, it could face more government regulation, said Cynthia Larose, an attorney at Mintz Levin in Boston.

“If the stakeholders cooperate, we would see much better security,” she said.

(Editing by Matthew Bigg and Gerald E. McCormick)

Young investors wary of jumping into market lows

By Erin Kutz

BOSTON (Reuters) – Young investors may accept the argument that those who begin investing when stocks are cheap end up with more retirement money, but after the turmoil of the past year, some find it hard to put their money in the market.

Asset managers and analysts say that those who invest in rock-bottom stocks of a bear market will see share values rise for decades.

But many in their 20s and early 30s are not buying rosy projections, due to immediate financial pressures and exposure to the longest recession since the 1930s Great Depression.

“I would keep all my money in cash,” said Alex Corbacho, a senior at Boston University.

The trend has some worrisome long-term implications. Stock brokers may find themselves largely shut out of a big customer base, and demand for equities will likely be crimped as investors favor safer havens, hurting the stock market’s prospects. It’s also unclear whether these young investors will have accumulated enough to fund their retirements when the time comes.

Corbacho is no stranger to markets. At age 13 he invested his birthday money and a matching donation from his father, $1,000 in total, in tech stocks only to feel the sting when the Internet bubble burst.

He carried the lesson with him in early 2008, after seeing signs of economic trouble as an intern at a Boston investment bank. He put the majority of his stock investments, which had reached about $5,000, into a certificate of deposit instead.

Corbacho doesn’t plan returning to stocks for a few years after graduation and is instead focusing on saving.

The recent market collapse has made holding cash for immediate expenses far more attractive to young people than investing, said Rodger Smith, managing director of Connecticut consulting firm Greenwich Associates.

“They are taken aback by how much they lost and how quickly they lost it,” Smith said.

The early exposure to such dramatic declines could restrain many from investing aggressively when they are older and have accumulated more money to put into the market, some say.

Asset managers, financial advisers and investors agree that young people will emerge from the financial crisis more educated, and more cautious, about managing their money.

“I do think they are taking a more practical and slightly more conservative view of the world,” said Michael Doshier, vice president of Fidelity’s Workplace Investing Group.

Corbacho said his generation should not expect to accumulate sudden wealth like some in the past.

“We might be a little smarter and a little wiser moving forward. We will have been more conservative and more observant and won’t have 65 percent of our life savings invested in equities,” he said.

Assets in U.S. retirement plans fell 22 percent in 2008 or nearly $4 trillion, with almost 75 percent of the drop in the second half of 2008, the Investment Company Institute found.

“These folks need to be resold on the idea that a 401k is a long-term investment,” said Smith, who oversees a profit-sharing plan for his firm and advises younger investors.

LONG-TERM CONCERNS

Financial advisers have long suggested that those further from retirement invest more heavily in equities, then switch to less risky assets as they near their golden years.

But the portfolios of those in their early 20s don’t reflect that advice. At Fidelity Investments, those 20-24 years old invest 31 percent of their 401ks in equities, compared to those 50-59 years old with 35 percent equities investments.

Overall, those saving for retirement have pulled back from stocks. In June, 48 percent of all Fidelity 401k participants were in equities, down from 53 percent a year ago.

Those in the investment industry say young investors should buy stock early and often.

“The key message is that it’s not a bad time for everybody,” said Christine Fahlund, senior financial planner at T. Rowe Price.

Ita Mirianashvili, a 35-year-old fellow at Massachusetts Institute of Technology’s Sloan School of Management, has confidence in long-term stock market prospects.

“I know the downturn cycle we are in will continue for some time but it will come back,” she said outside a MIT class that simulates a stock trading room.

But concerns about inflation, heavy government spending and rising bankruptcies has left many young investors uncertain.

“It’s still difficult to be bullish … for the long-run,” said Ashan Walpita, a 2009 Boston University graduate and former president of the school’s finance club.

Other short-term obstacles may hold young investors back. Employer-sponsored retirement plans often give people their first market exposure but with many graduates not finding work, they are yet to get started on making investments.

(Editing by Mark Egan and Cynthia Osterman)

Fed’s specter could steer GE Capital revamp

By Scott Malone – Analysis

BOSTON (Reuters) – The possibility of the Federal Reserve gaining regulatory authority over General Electric Co’s hefty finance arm could influence how the company restructures that business.

When President Barack Obama this week unveiled his proposal for the most sweeping overhaul of U.S. financial regulations since the 1930s, he proposed the central bank oversee not just banks but “other large firms that pose a risk to the entire economy in the event of failure.”

That was a reference to troubled insurer American International Group, which has received roughly $180 billion in government bailout money. But GE investors said the label could just as easily apply to the U.S. conglomerate’s finance business, a major commercial lender.

“I could definitely see that potentially becoming an issue if companies like GE and their finance arms came under more scrutiny,” said Perry Adams, vice president and senior portfolio manager at Huntington Private Financial Group in Traverse City, Michigan, which holds GE shares.

The Fairfield, Connecticut-based company is already working to scale back GE Capital, which has faced a sharp drop in profit through the recession and is a major reason for the 58 percent drop in GE shares over the past year, a sharper decline than the 30 percent slide of the Dow Jones industrial average.

Finance had accounted for half of GE’s profit in 2007, but Chief Executive Jeff Immelt said he plans to downsize the unit so that in the future the world’s largest maker of jet engines and electricity-producing turbines would rely on it for just 30 percent of earnings.

Last year GE Capital earned $8.6 billion, about one-third of the corporate total, and executives said in March it could earn $2 billion to $2.5 billion this year if the conditions envisioned in the Fed’s base case for the economy pan out.

GE aims to reduce its reliance on investments including real estate and on consumer finance, instead focusing more on financing GE products and other heavy equipment.

‘POUND OF FLESH’

While Obama did not name GE Capital, investors said it could easily come in for more federal oversight.

“Anybody who got aid of some sort, whether it was direct or indirect, probably is going to find that the government is going to extract their pound of flesh, have more regulation just because they don’t want to do that again,” said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which owns GE shares.

GE did not seek capital under the Troubled Asset Relief Program, but it did participate in Washington’s Commercial Paper Funding Facility and issue debt backed by the Temporary Liquidity Guarantee Program.

GE Capital has braced for more government oversight, but is waiting to see how it will be affected, said spokesman Russell Wilkerson.

“We have anticipated and planned for increased regulation of financial institutions and are supportive of the broad themes of addressing systemic risk and increased transparency,” Wilkerson said. “However, many elements of the administration’s proposal are new and bear further scrutiny.”

Given that the company is already working to downsize its finance arm, it may choose to exit businesses that will face substantial new regulations, investors said.

“What happens with regulation, obviously, is the returns come down,” Klein said. “All things being equal, it will find less pleasure in being a regulated entity, and there may be less emphasis on GE Capital.”

BANK WITHIN FIVE YEARS?

During the worst of the credit crisis last year, GE officials considered seeking a bank holding company charter, which would have given them access to the Fed’s lending window but also would have subjected them to more regulation. They ultimately opted not to seek a federal charter.

But under the new regulatory framework, the company may need to become a bank holding company within the next five years, wrote Goldman Sachs analyst Terry Darling, in a note to clients.

That is not necessarily a bad thing for GE investors, who in March watched the shares fall briefly below $6 — about half their current level — as Wall Street worried that GE Capital contained a “time bomb” or some sort of massive liability that investors did not know about.

GE executives responded by holding a day-long investor briefing where they reviewed GE Capital in great detail, in a bid to assuage Wall Street’s anxiety.

“We believe the ultimate outcome is unlikely to be perilous for GE shares,” Goldman’s Darling wrote. “A strong (GE Capital) is in the best interest of the economic recovery the government is trying to foster.”

(Reporting by Scott Malone, editing by Matthew Lewis)

BlackRock’s Fink engineers biggest deal of career

By Svea Herbst-Bayliss

BOSTON (Reuters) – In the rarefied circles of institutional investors and government officials asking for investment aid, Laurence Fink is known as the go-to man.

Now he may become that to average savers around the world.

As chief executive of BlackRock Inc (BLK.N: Quote, Profile, Research, Stock Buzz), already the largest publicly traded U.S. asset manager, Fink this week engineered a blockbuster deal to buy Barclays Plc’s investment unit BGI. Together they will become world’s biggest money manager with roughly $2.8 trillion of assets.

To analysts and investors the move is typical Fink — a carefully considered deal with a hefty price tag designed to add critical mass, access new products and bring in the retail clients BlackRock has long wanted to attract.

And one the California native, known for keeping top talent happy, is expected to execute on time.

“There is potential there for BlackRock to pull this one off,” said Michael Herbst, a mutual fund industry analyst at research firm Morningstar Inc.

Since 1988 when Fink co-founded BlackRock as a one-room fixed income shop, he has proven his hand at orchestrating a string of acquisitions, including a $8.6 billion deal to buy Merrill Lynch Investment Managers in 2006.

Before that he bought Boston-based State Street Research & Management and after that purchased the funds-of-funds business from Quellos Group.

Fink, who has deep roots in the mortgage markets, has worked hard to diversify BlackRock’s capabilities and make it more than a bond manager locked in a deep rivalry with West Coast competitor PIMCO.

And when Washington needs a trusted player on Wall Street to help calm markets during the financial crisis, BlackRock often gets a call, insiders at the company have said.

The company applied to become one of the Treasury Department’s hand-picked managers assigned to buy toxic assets from banks as part of its Public-Private Investment Program.

The lanky executive is not well-recognized by the public and can walk through midtown Manhattan without creating a stir. Unlike other bank chief executives, Fink is no danger of being pelted with expletives, largely because his company rode out the financial crisis with relative ease.

Since January, BlackRock has returned 36.12 percent, ranking among the best performers in the industry.

Two years ago Fink was in the running to take the helm of Merrill Lynch but was not offered the job after he began asking to tear into the company’s financial documents more deeply, people familiar with the search said.

Merrill Lynch was acquired by Bank of America last year and John Thain, who beat Fink to the position, is out of a job.

Fink apologized to shareholders for any unrest the talk of his leaving might have caused and has been fully devoted to BlackRock ever since.

Famous for the long hours he keeps, Fink is also known for navigating turbulent markets, wooing and keeping top talent, and speaking plainly about all types of topics, according to people who work with him and know him.

The 56 year old is also known to be both diplomatic and plain-spoken. He helped persuade embattled former New York Stock Exchange Chairman Dick Grasso to step down and helped find John Thain to take the top job.

Fink, who traditionally wears a tie to work even as he encourages other BlackRock employees to sport more casual wear, is usually at his midtown Manhattan office by 6 a.m.

He sticks to a grueling but predictable schedule that includes lunch at a favorite Italian restaurant near the office and lots of overseas travel.

Over the years, Fink’s fascination with geology has become well-known on Wall Street, where he and his partners stuck to the rock theme in naming their company, as well as products like the Obsidian and Galaxite hedge funds.

Even in his free time, rocks aren’t far from Fink’s mind. People who know him say the avid outdoorsman enjoys hiking and fly-fishing in the mountainous state of Colorado.

(Editing by Steve Orlofsky)