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We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
Home / Markets / Industries / Technology
Wednesday, May 07, 2008
Sprint, Clearwire to Merge Wireless Broadband Units
Associated Press
NEW YORK--
Clearwire and Sprint Nextel are planning to merge their wireless broadband units to create a new $14.55 billion wireless communications company.
The new company, to be named Clearwire, will receive a $3.2 billion investment from Intel Corp. (INTC), Google Inc. (GOOG), Comcast Corp.(CMCSA), Time Warner Cable Inc. (TWX) and Bright House Networks. The investment is based on a target price of $20 per Clearwire share and will give the companies a 22% stake in the new venture.
Overland Park, Kan.-based Sprint Nextel Corp. will be majority owner with a 51% equity stake, while existing Clearwire shareholders will receive about 27% interest.
Clearwire, which will concentrate on rolling out a mobile network based on the emerging WiMAX standard, will also receive an investment from Trilogy Equity Partners, led by U.S. wireless industry veteran John Stanton.
WiMAX promises faster download speeds than the latest networks run by cell-phone operators, and it's even seen as a potential competitor to fixed-line broadband.
Rivals such as AT&T Inc.(T) and Verizon Wireless have eschewed WiMax, opting instead for upgrades to their current wireless broadband networks and a future technology called Long Term Evolution.
Clearwire already provides wireless Internet service in some parts of the country, using a WiMax-like technology. The company had a subscriber base of nearly 400,000 wireless broadband customers at the end of 2007.
The new company is looking for a U.S. network deployment between 120 million and 140 million people by the end of 2010.
Sprint and Clearwire, a startup founded by cellular pioneer Craig McCaw, had already announced their plans to build out networks using WiMAX technology, but had been looking for outside funding.
The new company will be led by Clearwire Chief Executive Benjamin Wolff, with Sprint Chief Technology Officer Barry West serving as president. West also leads Sprint's XOHM division.
The Kirkland, Wash.-based venture will house workers from Clearwire and Sprint's XOHM unit and will have research and development and other operations located in Herndon, Va. Its board will consist of 13 members at the start. Sprint will name seven of them, which will include at least one independent director. The investor group will name four members, including one independent. Eagle River, a private investment company controlled by wireless veteran Craig McCaw, will name one member, with the remaining independent member selected by Clearwire's nominating committee.
McCaw is expected to serve as non-executive chairman. Other anticipated board members include Sprint President and CEO Dan Hesse, Comcast Chairman and CEO Brian Roberts, Time Warner Cable President and CEO Glen Britt and Stanton.
The deal, which has been approved by the boards of all companies involved, is expected to close during the fourth quarter. The company will apply for a Nasdaq listing under the ticker "CLWR."
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