Week in Review

U.S. Economy Grew at Disappointing 3.7% Rate

The economy grew by a disappointing annual rate of 3.7% in the summer, the government said in a report that underlined the economic challenges that the next president would face.

The growth rate in the three months ended in September exceeded the 3.3% of the spring quarter but fell short of the 4.3% that economists had forecast on average.

Expansion was fed by businesses’ taking final advantage of an expiring tax break for investment and by a jump in consumer spending. Restraining the growth rate were companies that met new orders by drawing down inventories.

The Commerce Department report showed an economy that could be humming along -- or beginning to stumble -- as the nation prepared to elect the next president.

*

Marsh Bars Special Fees After CEO Resigns

Bowing to pressure from New York Atty. Gen. Eliot Spitzer, the chief executive of insurance broker Marsh & McLennan Cos. resigned, and the company said it would take steps to address accusations that it had rigged bids and cheated clients.

Jeffrey W. Greenberg was replaced by Michael G. Cherkasky, a former Manhattan prosecutor and onetime mentor to Spitzer.

Spitzer, who sued the company this month, said he would not file criminal charges against Marsh, but he reserved the right to charge individual executives criminally.

Spitzer’s suit said Marsh, instead of getting the best deals for its mostly corporate clients, steered them to insurance companies that made backdoor payments to the broker.

Marsh said it would end questionable special fees it had been receiving from insurers, would give its clients more information about all fees and commissions and would create a new oversight unit.

*

California’s Lockyer to Open Insurer Probe

Atty Gen. Bill Lockyer said he would open an investigation into alleged illegal bid-rigging and other anti-competitive activities in the insurance industry.

Unlike Insurance Commissioner John Garamendi, who announced a similar probe, Lockyer has the ability to bring criminal charges.

Lockyer said he would use state antitrust laws to go after insurers that might be paying the same type of under-the-table commissions to brokers recently brought to light by New York Atty. Gen. Eliot Spitzer.

“Businesses cannot conspire to give themselves an unfair advantage over competitors or harm consumers by keeping prices artificially inflated,� Lockyer said in a statement.

*

Ovitz, on Stand, Details His Split With Eisner

Former Disney President Michael Ovitz took the witness stand in a shareholder suit against directors and spoke of a betrayal by Chief Executive Michael Eisner that Ovitz said left him shattered and bewildered.

“I was best friends with this guy and his family,� said Ovitz, who was Hollywood’s most powerful agent before becoming Disney’s president. “What to this day, and until the day I die, I will never be able to understand ... [is] how I spend 25 years with a man and his family, and within 60 days of taking this position he decides that I’m a number of things that he had 25 years to figure out if I was or I wasn’t.�

Ovitz’s catharsis on the stand seemed to have less to do with the merits of the case -- whether Ovitz deserved his big severance payout -- than with settling a score with Eisner.

Eisner’s attorney, Gary Naftalis, declined to respond to Ovitz’s testimony about his relationship with Eisner, saying it was “not relevant to the legal issues being tried in the courtroom.� Eisner is expected to testify in the days ahead.

*

Sony BMG, Grokster in File-Sharing Venture

Breaking from the rest of the entertainment industry, record giant Sony BMG is cooperating with Grokster Ltd.’s file-sharing network on a venture that combines free music sampling with paid downloads.

Dubbed “Mashboxx,� the venture marks a surprising alliance between a major record label and an online network that the entertainment industry has blamed for rampant piracy.

The initiative reflects the growing interest among record labels and movie studios to harness, rather than fight, the popularity of file sharing.

Many details are still in flux, but people familiar with Mashboxx said that users could search for a Sony BMG track, then the system would allow them to download only authorized versions of the song. Mashboxx hasn’t set any prices.

Executives at Sony BMG and Grokster declined to comment.

*

Deadline for Power Reserves Is Moved Up

State regulators, hoping to avoid electricity shortages and rolling blackouts, approved a controversial plan that significantly moves up the deadline for California utilities to create power reserves capable of handling peak summer demand.

In a 3-2 vote, the Public Utilities Commission ordered investor-owned utilities such as Southern California Edison Co. to line up electricity supplies by June 2006 that are at least 15% greater than forecast needs. The deadline had been January 2008.

Gov. Arnold Schwarzenegger had made the deadline change a key part of his plan to restructure the state’s energy market.

Dissenting PUC members Loretta Lynch and Carl Wood accused the majority of caving in to pressure from the governor and private power generators. A rush to lock up power could create a sellers’ market for power providers, Wood said. Utilities would pay too much for electricity, he said, and pass those costs along to their customers.

Consumer advocates have attacked the plan as unneeded.

*

DreamWorks Has a Hit With Animation IPO

The newly minted stock of Glendale-based DreamWorks Animation SKG Inc. took its first public bow. By day’s end, the shares had soared 38%.

The stock rose Thursday to $38.75 on the New York Stock Exchange, up $10.75 from the $28 price set for its initial public offering, which raised $812 million.

The high demand for the shares boosted the company’s market value to $4.1 billion. Separately, DreamWorks also said it had arranged a $200-million revolving credit line.

DreamWorks Animation now is under pressure to deliver investors some of the monster-sized success it enjoyed with its “Shrek� films. The company has vowed to do something that even computer-animation leader Pixar Animation Studios has yet to accomplish: deliver two animated films each year. Next year, DreamWorks Animation plans to release “Madagascar.� “Shrek 3� is scheduled for 2006.

*

Dollar Hits Lows in Up-Down Week for Oil

The dollar’s value skidded early last week as concerns about record oil prices, the health of the economy and the tight presidential race dimmed the appeal of the buck compared with other major currencies.

Analysts also pointed to comments by some U.S. and foreign economic policymakers that suggested a weaker dollar might do more good than harm.

The dollar fell to a 12-year low against Canada’s dollar Monday, an eight-year low against the Swiss franc and nearly matched its worst level against the euro since that currency was introduced in January 1999.

But oil prices fell sharply Wednesday and Thursday, pulled down in part by a report indicating higher supplies and by expectations of slower economic growth in China after its government raised interest rates. Oil prices headed up again Friday. A barrel of crude rose 84 cents to $51.76 in New York.

*

Boeing and Northrop Post Strong Profit Gains

Boeing Co. and Northrop Grumman Corp. posted sharply higher third-quarter earnings, as increased Pentagon spending on military electronics and computer systems boosted sales.

Boeing said its net income grew 78% to $456 million, or 56 cents a share, from $256 million, or 32 cents, a year earlier. The company received a boost from a tax benefit of 14 cents a share and other adjustments. Analysts’ average profit estimate was 40 cents.

Northrop reported net income of $278 million, or 76 cents a share, up 51% from $184 million, or 50 cents. Operating profit was 80 cents a share, beating analysts’ forecasts of 77 cents.

Boeing’s revenue was up 8% to $13.2 billion, while Northrop sales rose 11% to $7.4 billion.

Boeing, of Chicago, and Century City-based Northrop are the largest private employers in Southern California, with a total of 60,000 workers in the region.

Boeing and Northrop, calling the outlook bright for defense-related work, said they expected to add 4,000 to 6,000 workers to payrolls this year.

*

U.S. May Buy Flu Shots From Canada, Germany

Federal health officials said that they might buy 5 million flu shots from Germany and Canada to combat a severe shortage in the U.S., a strategy that ultimately could end the nation’s reliance on just two suppliers of the scarce vaccine.

Teams from the Food and Drug Administration this week are expected to inspect supplies at a GlaxoSmithKline plant in Germany, which may have 4 million available doses, and at ID Biomedical Corp. in Canada, which may have 1.2 million, said Tommy G. Thompson, U.S. secretary of Health and Human Services.

If approved, the extra vaccine would enter the U.S. under a special “investigational� new-drug application. The vaccine could be available in the first half of December.

The additional doses would replace only about 10% of the shortfall in vaccine prompted when Chiron Corp said it couldn’t supply its vaccines to the U.S.

*

Howard Stern, FCC Chief Exchange Words on Air

Howard Stern had Federal Communications Commission Chairman Michael K. Powell hot under the collar last week.

Stern, who is moving in 2006 to satellite radio to avoid the FCC’s anti-indecency rules, called in during Powell’s appearance on San Francisco talk radio station KGO-AM. Stern accused Powell of nepotism and political opportunism and of conducting a vendetta against him and his current employer, Viacom Inc.

Stern complained about Powell’s enforcement of the rules and said they undermined his right to free speech. “I really don’t even think you are qualified to be the head of the commission,� Stern said. “Do you deny that your father got you this job?�

Powell’s father is Secretary of State Colin L. Powell.

The younger Powell responded, in part: “It’s a cheap shot to say just because my father’s famous I don’t belong in my position.�

*

For a preview of this week’s business news, please see Monday’s Business section.