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CME Group vs. Gov. Pat Quinn: Now it’s about saving face

The CME Group corporate entity over Chicago Board Trade Chicago Mercantile Exchange has threatened leave state battle with Gov. PQuinn

The CME Group, the corporate entity over the Chicago Board of Trade and Chicago Mercantile Exchange, has threatened to leave the state in a battle with Gov. Pat Quinn over the tax code. | Keith Hale~Sun-Times

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roeder report

David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday

Updated: November 17, 2011 8:56AM

What’s the difference between a private and closely held company and one that’s publicly traded? Consider the case of Chicago’s CME Group (CME), the corporate overlord of the Chicago Mercantile Exchange, the Chicago Board of Trade and, lest we forget, the New York Mercantile Exchange.

A decade ago, they still operated independently as member-owned co-ops. The Chicago exchanges had invited the world into the markets they ran and the world responded, but the business was executed here. The thought of them leaving Chicago would have been preposterous.

Competition forced exchanges to throw aside member control for the pursuit of profit. The bosses at CME now answer to investors ahead of traders. And with most futures trading now on screens instead of inside pits, the company has threatened to leave town for a better tax climate.

The trading floor would stay, but the corporate headquarters and back office operations could easily be in Timbuktu. CME’s chairman, Terry Duffy, stated the relocation threat in June. He complained about the state’s increase in corporate income taxes plus its tendency to grant loopholes to companies other than his own. And he said he hadn’t started direct negotiations with the state.

It was an odd way of raising a direct challenge to Gov. Pat Quinn. CME directly employs about 2,000 people in Chicago, its political connections are deep and Chicago’s first-year mayor, Rahm Emanuel, used to serve on the CME board. There were behind-the-scenes ways to do this.

Since June, the company has acknowledged incentive packages from several states. One report said Indiana offered $150 million. Gov. Mitch Daniels disputed the sum but not the interest in CME. And Duffy later explained that his company accounts for 6 percent of all corporate tax receipts in the state. By my calculations, that means CME pays Illinois more than $120 million a year.

But Duffy’s public complaint set a high bar for Quinn. Is he supposed to rewrite the corporate tax code for CME’s benefit? Is he supposed to find incentives worth $50 million a year, the extra amount CME says it must pay because of this year’s tax increases? Quinn might not have the political strength to favor a company with a 37 percent profit margin. A state spokeswoman said Friday that “active discussions” continue with CME but declined further comment.

Duffy had hopes for a resolution by year’s end. Quinn has promised an agreement in time for the legislative veto session, which is scheduled to start Oct. 25, in case any General Assembly action is needed.

But it’s hard to see what Quinn can do for a company that’s not promising a significant new investment if its stays. CME already has its facilities, including a 428,000-square-foot data center it recently opened in Aurora and a renovated Board of Trade building that got $15 million in city help.

The company’s actions say it’s not going anywhere. Duffy and Quinn need to find a new kind of incentive deal that’s more about saving face than saving jobs.

MORNINGSTAR’S TROUBLE: The Chicago investment advisory firm Morningstar (MORN) has been sued in Pennsylvania by three investors who accuse it of negligence in assigning a top five-star rating to a hedge fund that federal regulators later called a Ponzi scheme. Each investor asserted losses of at least $75,000 in the now-closed Life’s Good Stabl Mortgage Fund.

Morningstar said it’s not its job to sniff out fraud and that its hedge fund ratings rely on unverified data. That’s a big limitation, and the website that promotes the service doesn’t make a big deal out of it.

Meanwhile, Morningstar said it is changing a forthcoming plan to rate mutual funds on the basis of expected performance. It had planned a positive rating scale of AAA, AA and A, which could be confused with credit ratings. Those have been changed to gold, silver and bronze.

The star ratings continue and signify past performance. But at what point do all these ratings just confuse people and diminish the Morningstar brand?

GAS SPILL: A government report has found that ethanol production worsens greenhouse gases. Look out, corn market.

CLOSING QUOTE: “There are 14 million unemployed people in the U.S.; 9.3 million more are ‘involuntary’ part-time workers. And 2.5 million others were ‘marginally’ attached to the labor force, having not technically looked for a job for four weeks, according to the [Bureau of Labor Statistics]. That’s nearly 26 million people, almost 17 percent of the labor force. It’s an ‘army of the unemployed’ more than 10 times the size of the U.S. military and its reserves. Right now they’re despondent. But if they ever got angry, they would make Occupy Wall Street look like, well, a tea party.” — Howard Gold, columnist,

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