The biggest stories of 2013

The taper finally arrives

For most of the year, all eyes were on the Federal Reserve, as investors and economists waited for the central bank to pull back from its controversial, $85 billion–a-month bond-buying program. The “easy money” policy, known as quantitative easing, has been unpopular with fiscal hawks, who worry it could lead to big losses for the central bank if interest rates rise—and to out-of-control inflation once the economy picks up speed. Yet for much of the year, Wall Street fretted that markets would “suffer withdrawal” when the Fed stopped administering “the financial-world equivalent of a performance-enhancing drug,” said Adam Shell in USA Today.

The question of how and when the latest round of quantitative easing—the third since 2008—would end arose in earnest at the Fed’s May 21 meeting, when Fed Chairman Ben Bernanke signaled that the central bank might scale it back when unemployment dropped below 7 percent. With the so-called taper explicitly tied to unemployment, investors adopted a laser-like focus on the Labor Department’s monthly jobs data. The Fed was widely expected to start tapering off in September, but officials surprised investors by holding off in the face of tepid economic data. Yet many were equally surprised in mid-December, when the Fed responded to a marked improvement in the economy by announcing it would reduce its monthly bond buying slightly, to $75 billion a month. The taper had begun, but so gingerly that the markets and the dollar rose in response.

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The Fed also had a change in leadership. Vice Chairwoman Janet Yellen was named as the Obama administration’s choice to succeed Bernanke as chairman of the central bank. Many had predicted that Obama would choose Lawrence Summers, a former Treasury secretary in Clinton’s White House and director of Obama’s National Economic Council, but he was strongly opposed by liberal Democrats, who criticized his role in Clinton-era financial deregulation and his reputation for arrogance. They also complained that Obama had a poor track record of appointing women. Faced with what he said would have been an “acrimonious” confirmation process, Summers withdrew. The Senate was expected to confirm Yellen in January.

2013’s bullish stock bonanza

This year’s stock market proved that “the ‘death of equities’ has been greatly exaggerated,” said Steven Perlberg in BusinessInsider.com. The markets soared to unprecedented heights, hitting new records week after week. Encouraged by the Federal Reserve’s bond-buying program, investors poured cash into stocks, sending the S&P 500 soaring above 1,800 for the first time ever, while the Dow Jones industrial average surpassed 16,000—another all-time high. More bearish investors—some of them perhaps seeking to justify having missed significant gains by staying out of the market—saw the zooming prices as an augur of an impending crash, and some experts confirmed those fears. “I am most worried about the boom in the U.S. stock market,” said Yale economist Robert Shiller. “Our economy is still weak and vulnerable.”

In fact, the economy was something of a mixed bag. The housing market heated up and car sales consistently hit high numbers, but federal spending cuts, higher income taxes, and a partial government shutdown were all seen as drags on growth and output. And while the unemployment rate hit a five-year low of 7 percent, the labor market wasn’t all good news. Many worried that employers were hiring too many part-timers rather than full-time workers, and pointed out that the unemployment rate’s fall was largely a reflection of more and more retirees and unemployed workers simply giving up on finding jobs and leaving the labor market altogether. Still, by year’s end most signs pointed to a period of more robust growth, with economists predicting the economy will expand by an average of 2.6 percent in 2014.

Twitter’s public market debut

Twitter’s spectacular entry on the New York Stock Exchange in November suggested that these days, “innovative ideas are more valuable than physical assets or existing cash flow,” said Larry Popelka in Businessweek.com. Twitter has no profits, yet its stock surged 73 percent above its initial valuation of $26 on the first day. The $2.1 billion initial public offering was the second-largest market debut for an Internet company ever, behind Facebook’s $16 billion IPO in 2012. The microblogging site’s listing on the NYSE was a blow for rival Nasdaq, which had to pay millions in compensation after technical glitches delayed Facebook’s IPO.

Despite a few temporary flutters, Twitter’s stock has continued to rise in the weeks since its market launch, reaching share prices more than double its initial valuation. Buyers have been encouraged by Twitter’s pre-IPO claim of an active user base of 232 million—up 39 percent from September 2012—and by its improving prospects as an advertising medium.

Some investors had doubts. Twitter expected 2013 revenue of $638 million, yet it lost $134 million in the first three quarters of the year alone. Facebook, in comparison, had more than $2 billion in revenue and $425 million in income just in the third quarter. But Twitter buyers were unfazed. “I want my family to love me the way the market loves Twitter,” said CNBC stock analyst Jim Cramer. “It’s the kind of unconditional love that means you never have to say you’re sorry.”

Airline merger takes off

After a long haul involving bankruptcy proceedings and a federal antitrust suit, government officials cleared the runway for American Airlines to merge with US Airways. It had already “been a bumpy two years at American Airlines,” said Jad Mouawad in The New York Times, after the Fort Worth–based airline filed for bankruptcy protection in 2011. But instead of simply restructuring, American teamed up with US Airways in an $11 billion merger.

The Justice Department initially sought to block the merger—which would create the world’s largest airline—over concerns that it would lead to higher fares and monopolize routes from certain hubs, particularly Ronald Reagan National Airport in Washington, D.C., and LaGuardia Airport in New York City. But critics accused the government of unfairly targeting American and US Airways, pointing out that regulators had approved mergers between Delta and Northwest in 2008 and United and Continental in 2010. After rallying support from industry union leaders and cities served by the carriers’ routes, American and US Airways were able to strike a deal with the Justice Department that required the new airline to give up more than 130 takeoff and landing slots at the airports in exchange for regulatory approval.

In November, a federal bankruptcy judge gave the final go-ahead for the merger of the airlines, which will operate under the American Airlines name. But it will still be some time before the two airlines can fully align their individual operations, a process that has proven complicated in past airline mergers. While the new airline plans to operate the two carriers’ websites, planes, and reservation systems separately for the time being, travelers can already swap mileage points between both airlines and access both carriers’ airport lounges.

JPMorgan’s costly legal woes It was a tough year for JPMorgan Chase, the largest U.S. bank, which found itself embroiled in more than a dozen legal disputes. The bank settled the biggest of them, regarding overstating the quality of mortgage securities in 2006 and 2007, for $13 billion. That huge sum—which flows to the Justice Department, the Department of Housing and Urban Development, and government-backed mortgage administrators Freddie Mac and Fannie Mae—amounts to the largest “combination of fines and damages extracted by the U.S. government in a civil settlement with any single company,” said Devlin Barrett and Dan Fitzpatrick in The Wall Street Journal. The settlement came after months of unwanted publicity over the bank’s practices. The 2012 London Whale case—which Jamie Dimon, the bank’s chief executive and chairman, initially dismissed as “a tempest in a teapot”—ended up costing the bank $6 billion in trading losses and more than $1 billion in fines.

JPMorgan’s legal woes seemed to pose a threat to Dimon’s dual role at the top of the bank until he was given overwhelming support at a shareholders meeting in May. Since then, the bank has faced new scrutiny over allegations that it routinely hired the children of influential Chinese officials to secure business in China, in breach of the federal Foreign Corrupt Practices Act. Even Bernard Madoff’s Ponzi scheme reared its hoary head last month, as JPMorgan and federal authorities entered settlement talks over charges that the bank should have spotted and stopped Madoff’s fraudulent scheme as it played out through JPMorgan accounts he controlled. The Madoff settlement was expected to involve roughly $2 billion in penalties, half of which would go to resolve criminal violations and the rest to bank regulators.