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Firms Trying to Beat the Heat

Jason Stipp

Jason Stipp: I'm Jason Stipp with Morningstar and welcome to the Friday Five. As it starts to warm up outside, lots of folks are going out and feeling the heat, but some folks in Corporate America are really feeling the heat.

Here with me to talk about who is trying to beat the heat is Morningstar markets editor, Jeremy Glaser. Jeremy, thanks for joining us.

Jeremy Glaser: You are welcome, Jason.

Stipp: So, what do you got for the Friday Five this week?

Glaser: Well, this week we'll see even more heat being put on BP, Goldman Sachs and the rest of the big banks. CVS is finding itself in a little bit of a pickle. And finally, the regulators are turning their eye towards Apple and putting the heat on there.

Stipp: Well, it's no surprise that BP is continuing to feel the heat, but it really got cranked up this week. What have you seen there?

Glaser: It's absolutely right, Jason. BP has been under pressure for quite a few weeks now. But even as they finally have been able to contain some of the oil that's spilling into the Gulf, the rhetoric is actually stepping up in Washington. There is now talk that it's unconscionable for BP to continue to pay its dividend, that they are going to have to have essentially unlimited liability for the entire Gulf spill, including lost wages for the people who are on offshore platforms or for fisherman who aren't going to be able to do their job because of the oil spill. I think that the costs were pretty uncertain before, and I think that uncertainty just continues to grow, even as less oil is being spilled into the Gulf every day.

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Stipp: There's talk this could extend into August as they are still drilling the relief well. So, certainly the heat is going to continue probably all through summer.

Another one that's been on the hot seat recently was Goldman Sachs. I know that they were in Washington and really got grilled by some Congressmen, but they also were still continuing to feel the heat this week. What did you see on Goldman?

Glaser: Goldman Sachs received a subpoena for even more documents related to transactions that they completed in the years leading up to the financial crisis. They have provided Congress with a lot of documents before, millions of documents. But apparently a lot of them were unrelated to the transactions, and it was very difficult for anyone to be able to comb through it and figure out what was pertinent and what wasn't.

It almost seems like Goldman is trying to intentionally make it difficult for people to figure out exactly what happened. When you listen to the testimony that they had before in front of Congress and then with some of the document dumps that they've been doing, it seems like they are trying to hide something or at least make it difficult for investigators to do their job. I think that they're going to have to change their tune pretty quickly or they're got to find that a lot more of these allegations are coming. The government will continue to turn the heat up throughout the rest of the year.

Stipp: Speaking of the banks, derivatives obviously another big issue that the banks have been on the hot seat for before. Some news on that front this week, what did you see?

Glaser: It's certainly possible that the derivatives amendments of the financial reform bill got a big boost this week as Blanche Lincoln won the Democratic runoff for the Senate seat in Arkansas. She has been one of the biggest proponents of an amendment to the bill that would force the big banks to take the derivatives tradings operations, which are hugely profitable for them, and spin them off into separate entities.

She is very upset that they get to use FDIC-insured deposits to make these big derivative bets, which could have led to a lot of the volatility we saw during the financial crisis. So, if she is back in the Senate or at least is going to be running on this for the general election, she is going to be pushing really hard, and it could mean that there is a better chance that this amendment will get into the final bill.

Stipp: Very interesting election for the banks to watch.

Going on now to the retail area and the pharmacies, there's some interesting questions about CVS and Caremark, a company that they bought a while ago, that's creating a little bit of heat potentially for the company also involving Walgreens. It's kind of a complicated story. Can you entangle that a little bit for us?

Glaser: When CVS bought Caremark, there was a lot of talk about there being a potential conflict of interest. Now what Caremark essentially does is they are a third-party administrator of a prescription drug benefit through any number of health plans, and there was a lot of talk about if Caremark was going to unnecessarily favor people to go to CVS Pharmacy to get their drugs versus, say, Walgreens.

Now people thought it'd be years before any of this came to a head, but Walgreens kind of abruptly said this week that no new members into the Caremark network could be able to pick up their prescriptions at Walgreens. Now this is a big care to Caremark, because people like the option to be able to go to Walgreens. So they retorted by saying that no Caremark members will be able to go to Walgreens in the future.

So this seems to be a lot of corporate back and forth, and no one knows what's really going to end. But our analyst thinks that if other members of the Caremark network follow Walgreens' lead and start restricting the ability of members to actually get their drugs quickly, it could lead to the breakup of CVS and Caremark, and this conflict of interest could be too big to overcome. So it'll be definitely interesting to watch to see how this plays out, and to see where people are going to be getting their drugs from in the future.

Stipp: So lastly, for number five, Apple was in the news this week because of the launch of the new iPhone ... but you also said they might be feeling a little bit of heat in other area. Tell us a little bit about what you see on the Apple front.

Glaser: Along with the iPhone, Apple also announced that iAds are going to be rolling out very soon. Now these ads are meant to compete against primarily Google in the ads that are served up to keep a lot of apps free.

Now Apple wants to get a big slice of this market, which makes sense, because it could potentially be a very lucrative one, and they don't want to cede it to Google, but it seems like they are starting to take steps to make it more and more difficult for people to use anything but the Apple ad service.

They're going to block third-party tracking software to see who is necessarily looking at the ads, unless it comes from completely independent publishers, and other moves are starting to raise the eyebrows of some regulators. They're worried that Apple is going to take a monopoly over this platform, and there's obviously nothing formal announced yet, and it could be years before anything comes of it, but it's definitely a shot across the bow that Apple really needs to be careful about some of these antitrust issues.

Stipp: So maybe if the regulatory heat comes down, we'll see if Steve Jobs has short sleeve versions of his trademark black turtleneck.

Jeremy, thanks for joining me.

Glaser: You're very welcome, Jason.

Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.