By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

When the  president asks for help it would be difficult for even the busiest corporate chief to say no. It’s even harder when he owes the federal government a big favor. And so it is that Jeffrey Immelt, General Electric’s longstanding boss, is heading to Washington to advise Barack Obama on how to make the United States a job-creating colossus again.

Shareholders, already cheered by GE’s stellar fourth-quarter earnings, including a strong showing by its troublesome GE Capital unit, don’t seem bothered that Immelt will have to divert some of his attention to the president’s agenda. After all, many of the objectives — such as bolstering America’s manufacturing might and promoting access to foreign markets — dovetail nicely with GE’s own global industrial businesses.

But it’s a matter of timing. While GE’s share price has nearly tripled from the dark days of the financial crisis, it’s still around 50 percent off the highs seen before the investors panicked about dodgy investments made by the conglomerate’s finance unit. Immelt should be credited with steering the company — with generous support from the government through debt guarantees and short-term loans — in the right direction. But he also failed to avert GE’s falling into a precarious state to begin with.

Gaining access to the  president’s ear has its advantages, and there’s a long history of executives, including former GE officials, advising a commander-in-chief while continuing to run their own firms. Yet the current climate carries a distinctive disadvantage: backlash from the public if it suspects the relationship is too cozy. Angry voters could make it difficult to focus on business — just ask Goldman Sachs.

And GE still needs its best minds focused on business. To Immelt’s credit, investors spend much less time worrying about the finance unit, which knocked its mammoth parent to its knees two years ago. He’s committed to cutting it down to a more manageable size by 2012 and making it less dependent on short-term financing.

But GE shareholders, especially those who stuck with the company through its darkest days and are still nursing losses, deserve a committed captain. Should Immelt appear stretched too thin, they’d be right in demanding he choose between one job and the other.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Petrobras, Brazil’s energy giant, will pay bond investors a percentage point more than the government that controls it. With sovereign bond yields so low and inflation flaring up, bond-buying fanciers of this BRIC could be better off lending to its oil-backed corporate proxy.

The 10-year portion of Petrobras’ $6 billion deal is expected to price at a yield of around 5.36 percent. That’s compared with the yield on 10-year U.S. Treasuries of just under 3.5 percent. Brazil’s dollar-denominated government debt only earns about 1 percentage point more than Treasuries — still among the safest and lowest yielding investments in the world — despite being rated nine notches below top-rated U.S. debt.

Moreover, Brazil has an inflation problem. The latest reading of annual inflation, at  5.9  percent, showed consumer price increases running at a six-year high. The central bank raised interest rates by a hefty half-percentage point on Wednesday to 11.25 percent, and more hikes look to be on the way. That could weigh heavily on the value of government bonds, even those denominated in dollars, especially if investors lose confidence in Brazil’s inflation-fighting capability.

Petrobras carries its own risks: the price of oil could tumble, or it could suffer its own BP-like disaster. But if its $224 billion investment plans pan out, bondholders could be rewarded. Petrobas has its sights set on surpassing Exxon, one of four triple-A-rated companies left standing, by 2017 as the largest publicly traded producer of oil. As a majority stakeholder in the company and with its future revenue riding on the company’s success, Brasilia is sure to prioritize its energy champion’s success.

It also doesn’t hurt to have a bit of oil exposure, to capitalize on global economic growth, hedge a bit against inflation, and reduce the impact of any investment exodus from emerging markets. Strong demand for the Petrobras bond offering, the largest from an emerging market issuer over the past year, suggests some investors may be thinking the same thing.

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Today, there’s no U.S. federal bankruptcy process for states — though there is for municipalities and, of course, for companies. Veteran Republican Newt Gingrich and other conservatives want to change that. So far, though, the proposal smacks of politics and ivory-tower musing rather than practical policy.

States are in a bind. Overpromising benefits to public servants, overspending and a terrible economy have spawned yawning budget deficits. And fear of defaults is making investors wary of the municipal bond market. Yet states are not as close to the brink as the headlines suggest. They have ways to close their budget gaps. Illinois, for instance, just enacted a temporary state income tax increase to cut down its deficit, while California hopes wage cuts and tax extensions will help fill its $25 billion hole.

One subtext of the Gingrich effort is that a bankruptcy process would give states a big stick with which to beat unions. But labor bosses know that if states run out of money their members may simply not get paid, so they already have an incentive to compromise — and some are already making concessions on benefits for new workers.

Further, constitutionally states couldn’t be forced to file for a federally overseen bankruptcy. And there are good reasons why they wouldn’t want to. First, there’s the cost. Even the small Californian city of Vallejo, with a population under 120,000, has spent $9.5 million in legal fees since it filed for bankruptcy in 2008 — and it’s still in court. Imagine the scaled-up cost and time for a state.

A bankruptcy would also shut a state out of capital markets. That means infrastructure projects would be mothballed and crucial financing needed to smooth out lumpy revenue would disappear. California, for example, would have to find as much as $10 billion a year just to manage its cash flows.

On top of all this Gingrich, who hopes a lawmaker in Congress will take up the cause, wants to take tax increases off the table should a state find itself in bankruptcy court. That rules out one obvious and practical way for states to tide themselves over and sounds like political dogma. And with its revenue-raising hands tied, a state would presumably need financing help from the federal government to get through years in bankruptcy. That’s surely what Gingrich wants to avoid.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

It may still be only a twinkle in investors’ eyes, but eventually easy money and a recovering U.S. economy will bring rising prices. A slew of floating-rate issuance by Corporate America’s heavyweights is giving inflation worriers an early chance to protect themselves.

The traditional go-to hedges have been gold and the U.S. Treasury’s inflation-protected securities, known as TIPS. But both have drawbacks. Gold has become the preferred vehicle for the world’s doom and gloomers, who see it as a refuge should the global financial system collapse. In a market whose small size makes it vulnerable to exaggerated moves, that makes some investors fear a bubble. The real yields on five-year TIPS, meanwhile, are currently in negative territory. That means some market players are so convinced that inflation will re-emerge over the next five years that they’re willing to accept short-term pain.

Lately, though, U.S. corporate titans like Berkshire Hathaway, General Electric and MetLife have given investors an arguably more palatable way to hedge inflation — through the simple means of issuing floating-rate debt. Accounting for more than 45 percent of the investment-grade corporate bond market in 2007, floaters became an endangered species in 2009, representing less than 5 percent of issuance, according to Thomson Reuters. That’s changing. More than a third of the GE finance arm’s $6 billion deal on Tuesday came in floating form.

Berkshire’s three-year floating-rate notes, which accounted for around a quarter of its $1.5 billion offering on Monday, priced to yield a meager 0.6 percent. But should inflation return, floating interest rates tend to track prices higher — increasing investors’ returns but also sparing them the big principal losses that can befall holders of fixed-rate debt.

Despite a flash flood of floating-rate supply in recent days, demand doesn’t yet appear particularly heavy. But that could change quickly when consumer prices make a decisive turn higher. Floating interest rate debt offers investors worried about inflation a place to comfortably brace for impact.

Could the U.S. government stop subsidizing mortgages altogether? Probably not in real life. But that is where the debate over reforming Fannie Mae and Freddie Mac, as well as righting the public-private sector balance in housing, should begin.

This unlikely dream imagines the government out of the business of guaranteeing housing finance within 10 years. That should be long enough to phase out subsidies slowly, preventing the still fragile housing market from dropping further. It would give private-sector banks time to absorb an estimated $5 trillion of government-backed mortgages. And it would wean homeowners gently off the subsidized financing they’ve grown accustomed to. Just as importantly, though, 10 years is short enough to focus minds now.

The Treasury, due to propose ideas for Fannie and Freddie in January, has been prevaricating for two years. And the indecision has made the not-so-dynamic duo more powerful. They currently guarantee the highest percentage of U.S. home mortgages seen in the last 20 years, according to Barclays. They enjoy unlimited access to taxpayer funds and have expanded their affordable housing mission to include the well-off.

By laying out a clear exit plan in 2011, legislators could reverse the expansion that has already sucked down more than $150 billion of taxpayer funds. It would also make it easier to roll back emergency measures put in place at the height of the recent crisis. For example, Fannie and Freddie are still guaranteeing loans for as much as $730,000 in high-cost areas, even though the private sector is again strong enough to provide loans to rich homebuyers. Without a deadline such temporary measures risk becoming permanent.

While they are at it, U.S. lawmakers should consider ending the deduction of mortgage interest for tax purposes. It’s another subsidy for home ownership — though it probably partly defeats itself by making homes more expensive at the same time as it makes mortgages cheaper.

Most important, though, is to start by re-examining the policy goals underlying today’s subsidies: how far should the government push home ownership, and how much support for affordable housing should be focused on buying rather than, say, renting. The usual Washington tinkering with the status quo isn’t enough. To create a new, sustainable American dream, lawmakers need first to wake up.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

NEW YORK — Americans may feel less confident, but they didn’t let that get in the way of holiday cheer. Enthusiastic shoppers pushed retail and services sales up 5.5 percent in the run-up to Christmas, according to MasterCard Advisors. Next year’s payroll tax cut for the 90 percent of the working population that still has jobs should keep the nation’s malls bustling in 2011, but the temporary stimulus can only do so much. The housing market offers a cautionary tale.

Home prices are ready to go negative again. In fact, the S&P/Case-Shiller tracker of 20 metropolitan areas already has. It fell 0.8 percent in October, erasing the gains seen earlier this year when the government’s home tax credit pushed fence-sitters to buy new homes. That program expired in April. Home prices have been falling since May.

The two-percent payroll tax cut negotiated as part of a broader $900 billion tax stimulus package will be felt immediately in consumers’ paychecks, giving them added incentive to hit the malls. The labor market may be terrible with nearly 10 percent of Americans out of a job, but it has stabilized. That means those with a job should feel more comfortable spending their “pay raise” rather than squirreling it away.

The problem with relying on this fix, like the home tax credit, is that it’s temporary. Congress only approved the tax cut for a year. Unless the economy starts cooking and employers, rather than the government, beef up wages, the retrenchment in spending in 2012 could be impressive. A year is long enough for workers to get used to a bigger paycheck. When it  ends, it will feel like a pay cut rather than a return to “normal.”

And the nation’s mood remains anything but exuberant. An industry group said Tuesday that consumer confidence actually fell in December, rather than improving as many had expected. With energy costs continuing to rise and home prices falling, consumers could become even more watchful. And that could muffle the bang from the stimulus even before it expires.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own

American commercial real estate used to be a sucker’s bet. Think Lehman Brothers’ interest in Archstone-Smith, the disastrous 2006 purchase of New York’s Stuyvesant Town/Peter Cooper Village complex for $5.4 billion, and a host of other deals in which investors and their lenders got in way over their heads.

After Lehman’s failure in September 2008, many expected a day of reckoning in commercial real estate much like that seen in the housing market. But it may not happen.

In 2010, large city markets like New York, Los Angeles and Washington have primed the pumps for a broader market recovery. A combination of big-ticket sales — Google, for instance, recently paid $1.8 billion for a Manhattan office building in one of the biggest deals since Lehman collapsed — and solid returns on some investments has breathed life back into commercial real estate.

Money is already starting to flow into second-tier markets like Houston, Dallas and Seattle as real estate investment trusts and private equity reach for higher-hanging fruit. That should continue in 2011. Not only is real estate a rare relatively cheap-looking asset class, but a faster economy should, at least at the margin, help reduce vacancy rates and increase cash flow.

Such a virtuous cycle could put a solid floor under prices. National valuations rose in October for the second consecutive month but they’re still nearly 42  percent off their peak, according to Moody’s Investors Service. That’s important for owners and lenders who inked deals during the boom.

They’ll be competing for refinancing in 2014 through 2017 from lenders who will probably impose much stricter standards. Nearly $430 billion of loans repackaged into securities will mature in that four-year period, according to Amherst Securities Group. The total amount of maturing debt will be much higher.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

If Ben Bernanke were an investor, he’d be bummed out. The first chunk of the Federal Reserve’s $600 billion Treasury bond purchase program is in the red thanks to rising yields. The central bank’s cheap financing makes outright losses unlikely, but Mr. Bernanke, the Fed chairman, could still face an image problem.

To the extent the Fed’s second round of so-called quantitative easing, colloquially known as QE2, was designed to keep a lid on interest rates, it has backfired. Since the program was unveiled in early November, five-year yields have marched more than 0.9 percentage points higher, eradicating the initial yield slump seen after the Fed first hinted a few months earlier that another round of easing was on the cards.

When bond yields rise, prices fall. As a result, the Fed’s first $116 billion of QE2 purchases were worth approximately $113 billion at the end of active trading on Tuesday, a paper loss of nearly 3 percent.

Of course, the Fed won’t be selling these securities anytime soon. The U.S. economy and employment situation will have to improve noticeably before that happens. But a continuation of the recent rise in yields would bring much lower valuations by then.

Even so, the Fed may not actually lose any money overall, thanks to its low cost of funds and the interest payments rolling in on its holdings. In fact, the Fed’s supersized balance sheet — now at $2.4 trillion — is a bit of a cash cow for the Treasury. In 2009, when it was smaller, the Fed plumped the government’s coffers by $47.4 billion.

Yet the slide in governments gives detractors ammunition for questioning the Fed’s judgment. The extraordinary QE2 policy was supposed to stimulate the economy by keeping interest rates low. So far, the opposite has happened. Moreover, the tax-related deal in Congress — if passed — arguably reduces the need for it. When Mr. Bernanke next has to convince lawmakers that QE2 was a good idea, the red ink could work against him.

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

NEW YORK — Corporate titans aren’t usually rewarded for shrinking their companies. But the CEOs of two of the world’s biggest companies, General Electric’s Jeffrey Immelt and Citigroup’s Vikram Pandit, have had to do something like that. Bloated balance sheets heavily reliant on short-term financing forced both to beg for government help two years ago. Since then, they’ve been shedding assets in a bid to return to normal business and create a buffer against ever needing taxpayer handouts again.

If it were a race, Citi Holdings, the bank’s unit that houses blacklisted assets, would have a sizable lead. Including the pending sale of Student Loan Corp, Citi Holdings has slashed its balance sheet by 44 percent in two years. GE Capital, in comparison, is pacing itself. The unit’s balance sheet has shrunk only 15 percent since the end of 2008. Its unwanted “red assets” are only about 24 percent smaller than a year ago, at an estimated $105 billion.

To be fair, Citi Holdings and GE Capital are two varieties of apple. Citi created its unit to clear the garbage — and noncore units like the Smith Barney brokerage — out of its still mighty global bank. Much of GE Capital, meanwhile, remains an integral unit of its industrial parent. So while it may be shedding assets like Polish mortgages, these will be partially offset by growth in lines like commercial lending and leasing which support its world-class industrial and infrastructure businesses.

Still, both made similarly critical missteps by piling into risky investments linked to the booming real estate market with short-term borrowings. Citi received the most help from Washington — capital injections, guarantees for its debt and insurance on its most toxic assets. But without government support, it’s hard to see how GE Capital could have managed through the crisis without a firesale of good assets. It borrowed nearly $12 billion over five days from a Federal Reserve facility in October 2008.

The race is still not over. GE Capital sees the finishing line in 2012, by which time it hopes to lop another $40 billion from the balance sheet. And though Immelt may be lagging Pandit, if he remains committed to shrinking he’s unlikely to hear many boos at his annual investor presentation Tuesday. Still, it may not be as much fun as the shareholder speech he chaired precisely five years ago. It was titled “Go Big.”

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Armageddon makes for a sexy story. Volatility in the $2.8 trillion U.S. municipal bond market is real, but the scary tale being spun out of budget-busting states like California involves a lot of literary license.

The rockiness of the market lately is shown by the surge in the perceived riskiness of muni bonds. The highest-rated issuers’ paper is trading at yields that are 0.5 to 0.8 percentage point higher than at the beginning of November. Meanwhile, investors in mutual funds that specialize in the sector pulled out $5.6 billion of their money in the five weeks to Dec. 1, the biggest withdrawal since the financial crisis two years ago.

The volatility seems to have been kicked off by technical factors rather than rising worries about state and municipal defaults. Surging Treasury yields, which underpin munis and other bonds, rattled the famously illiquid market; a flash-flood of new supply didn’t help; the future of the popular but temporary Build America Bond program is bound up in the Washington tax debate; and the related uncertainty over personal tax rates hardly fills investors in the tax-driven muni asset class with much confidence, either.

Moreover, munis have few natural buyers once any kind of exodus gets going. Their tax-exempt status makes them best suited for wealthy American investors who buy them to tuck away in portfolios. Retail investors hold more than two-thirds of outstanding muni debt, according to Federal Reserve data. That compares with U.S. Treasuries, where retail holders account for roughly 20 percent of the total, and equities where they account for less than 60 percent.

That arguably leaves the muni market especially vulnerable to perceptions. It’s true that higher yields make it more expensive for small issuers like cities, sewage authorities or school districts to raise funds. That could make a municipal default more likely — but only at the margin.

Meantime, the alarming-sounding deficits of some big states have attracted predictions of defaults from high-profile figures like bank analyst Meredith Whitney. Yet while a state default isn’t impossible, comparisons with, say, Greece or Italy are misleading. California’s debt-to-gross state product ratio is just 5 percent — minuscule compared with the Greek debt-to-GDP level of 133 percent, as estimated for the year-end by JPMorgan, or the U.S. federal government’s 88 percent.