DEVIL@FINANCE

UBS Tax Probe Fallout Exacerbated by Swiss Pressure in Bailout

2009-02-02T03:05:00.000-08:00

UBS AG, the Swiss bank that received $59.2 billion in an unprecedented national bailout, is facing growing pressure from government officials on both sides of the Atlantic to resolve a U.S. tax evasion investigation and restructure its loss-making investment bank.

While the tax probe threatens UBS’s business in the U.S. where the company derives almost 20 percent of revenue, the Zurich-based bank is struggling to stabilize its wealth- management units after clients withdrew a record 101 billion Swiss francs ($87 billion) in 2008, JPMorgan Chase & Co. analyst Kian Abouhossein estimates. UBS shares slumped 63 percent during the past 12 months, more than any bank in the benchmark Swiss Market Index.

Pressure is intensifying on Chairman Peter Kurer, whose one- year term expires in April, to restore earnings. After helping UBS unload subprime and other toxic U.S. mortgage-backed securities, the Swiss government wants management to move faster to reorganize the investment bank, which analysts estimate had a loss last year of 32.5 billion francs, and to stop customers from pulling funds, said a person familiar with the matter who declined to be identified.

“UBS seems to be a magnet for a particular slew of problems,” said Scott Moeller, a finance professor at Cass Business School in London and former banker at Morgan Stanley and Deutsche Bank AG. “They need to do something quickly.”

UBS has said it will reduce risk-taking and the balance sheet, scale down the securities unit to complement wealth management and return to profitability this year. The company lowered assets by more than $700 billion since June 2007, announced 9,000 job cuts, and raised $32 billion from investors to replenish capital after $48.6 billion of losses and credit- market writedowns, according to data compiled by Bloomberg.

Biggest Swiss Loss

The largest Swiss bank may report a loss of almost 18 billion francs for 2008 when it publishes results on Feb. 10, according to the median estimate of eight analysts surveyed by Bloomberg. It would be the most in the country’s history. The fourth-quarter deficit was probably 6.3 billion francs.

Executives at UBS declined to comment. Kurer told shareholders at a Nov. 27 meeting that the Swiss government’s aid package “wasn’t an unavoidable emergency action” and rather a “preemptive measure” to regain confidence.

Raoul Weil, the former head of wealth management, UBS’s biggest unit, was declared a fugitive from U.S. justice last month and Jerker Johansson’s position as head of the investment banking division is tenuous, said four bankers who work in the group.

Shrinking Assets

UBS has lost 79 percent of its market value from the peak in June 2007, compared with the 68 percent drop of Zurich-based Credit Suisse Group AG, the second-biggest Swiss bank, in the same period. Deutsche Bank AG in Frankfurt, the largest German bank, fell 82 percent and London-based HSBC Holdings Plc, Europe’s No. 1 bank by market value, declined 42 percent.

Of the 39 analysts who track UBS, eight recommend investors sell the stock, Bloomberg data show. By contrast, five are telling clients to get rid of Credit Suisse shares. UBS may climb 33 percent to 19.42 francs in Swiss trading in the next 12 months, according to the average estimate of analysts in the survey.

Kurer, 59, told investors in Zurich last month that the recovery of UBS’s reputation and a settlement of the probe into whether the bank helped 20,000 wealthy clients avoid American taxes are priorities for this year. Both have the potential to further erode UBS’s wealth-management subsidiary, from which clients may redeem another 65 billion francs in 2009, according to JPMorgan’s Abouhossein in London.

Cayman Islands

UBS’s assets under management probably will drop to 2.3 trillion francs this year from 3.3 trillion francs in mid-2007, Dresdner Kleinwort analyst Stefan-Michael Stalmann said. While assets are down to levels last seen in early 2005, UBS employs about 10,000 more people at the units than four years ago.

The executive team hasn’t yet proven it can achieve a turnaround to stop client withdrawals, said Florian Esterer, a senior portfolio manager at Zurich-based Swisscanto Asset Management AG, which oversees about $48 billion and owns UBS shares. “I’m afraid it will be pretty difficult. One big problem for UBS is the U.S. investigation,” he said.

UBS may pay a $1.7 billion fine as part of a settlement with U.S. authorities before the next meeting of the Senate’s Permanent Subcommittee on Investigations, scheduled for Feb. 24, said a person with knowledge of the matter.

Conspiracy Charges

UBS also may turn over 200 to 1,000 accounts that had a middleman between the Swiss account and the account-holder, typically a Liechtenstein trust or Cayman Islands corporation, said two people with knowledge of the probe. The entities were set up so clients could invest in U.S. securities without being detected by the Internal Revenue Service, they said.

The use of such entities may be viewed as fraud in Switzerland, which would provide a reason to turn over the documents to U.S. authorities, the people said. U.S. officials are also looking into American accounts in other parts of UBS’s business, three people with knowledge of the case said.

UBS is straddling the divide between cooperating with U.S. officials and maintaining the confidentiality of its clients, a cornerstone of Swiss banking. Sabine Jaenecke, a spokeswoman for the bank, declined to comment on the U.S. inquiry.

“Nearly any level of financial settlement would be good news, if it was capable of delivering finality and the ability to return to repairing the brand,” Credit Suisse analysts Daniel Davies and Rupak Ghose wrote in a Jan. 29 note to clients.

Madoff Connection

Weil, 49, who became head of wealth management after Marcel Rohner, 44, was named chief executive officer in July 2007, was indicted on conspiracy charges in the U.S. tax case and stepped down from his role at the bank in November. Weil has denied allegations through his lawyer.

In his indictment, U.S. prosecutors said that about 60 private bankers “routinely” traveled to the U.S. to conduct unlicensed banking and investment advisory activities in the country. Former UBS private banker Bradley Birkenfeld pleaded guilty in June to helping Igor Olenicoff, a California billionaire, dodge taxes. He also described schemes used by UBS bankers to help conceal clients’ assets, including the smuggling of diamonds into the U.S. in a toothpaste tube.

Olenicoff in turn sued UBS, naming Kurer, the former general counsel, as one of the defendants in an alleged plot to dupe the billionaire and other U.S. clients about their tax liabilities and put them “in the cross-hairs of a criminal investigation.”

Jaenecke declined to comment when asked for Kurer’s response to the allegations.

‘Issue of Leadership’

UBS also faces legal wrangling from its role as custodian for the $1.4 billion LuxAlpha Sicav-American Selection fund in Luxembourg, which invested with Bernard Madoff, who allegedly ran a $50 billion Ponzi scheme. French investors in the fund filed a request with Luxembourg’s financial regulator last week to order UBS to reimburse them for losses. LuxAlpha Sicav was established at the request of clients, UBS has said.

Kurer’s nomination to replace Marcel Ospel as chairman met opposition last year from shareholders led by Luqman Arnold, 58, a former UBS president, who said the lawyer lacked the experience to run a bank with 2.23 trillion francs of assets and 84,000 workers at the time.

Vice Chairman Sergio Marchionne told a Swiss magazine in October that Kurer wouldn’t have been on the candidates’ list to replace Ospel, 58, if the bank had more time to find a successor, and conceded that some directors also had doubts about Rohner’s appointment at the time.

Management Changes

“There is an enormous amount of pressure at UBS, and while the Swiss government isn’t directly interfering, Kurer and Rohner know they have a short life span in that position,” said Markus Granziol, 57, former chairman and CEO of the company’s investment banking subsidiary. “The issue of leadership is a big question.”

The appointment of Swedish-born Johansson, 52, who joined last March from New York-based Morgan Stanley where he co-headed sales and trading, also stirred criticism because his background was primarily in equities rather than fixed-income, where most of UBS’s losses occurred.

“We saw something in Jerker Johansson that we thought was adequate to run the investment bank,” Marchionne, the 56-year- old CEO of Fiat SpA, said after the UBS shareholders’ meeting last April. “We’ll put him to the test and find out whether he can or cannot do it.”

The investment bank’s goal for 4 billion francs in pretax profit, set by Johansson last May, won’t be reached this year or even next, according to estimates from analysts including Citigroup Inc.’s Jeremy Sigee and JPMorgan’s Abouhossein.

Losing Market Share

Ten months into Johansson’s tenure, the new heads of the fixed-income unit, hired late last year, announced that further “radical change” is needed to return that business to profitability.

UBS plans to exit the real estate and securitization, and so-called exotic structured products businesses, Carsten Kengeter and Jeff Mayer said in a Jan. 21 memo that didn’t mention Johansson.

Todd Morakis, who ran commodities, Sascha Prinz and David Sacco, co-heads of global rates, and credit head Chris Ryan will leave the bank, the memo to employees said. An unspecified number of jobs also will be eliminated, adding to the 6,100 announced since October 2007.

In equities, UBS hasn’t regained the market share it started losing in 2007. The bank generated the second-largest sales and trading revenue from equities behind Goldman Sachs Group Inc. in 2006, data compiled by Bloomberg show. It probably ranked fourth last year behind New York-based Morgan Stanley, Goldman Sachs and Merrill Lynch & Co., company reports and analysts’ estimates show.

‘Fight Fires’

All Johansson “was able to do this year was fight fires,” said Andy Lynch, who oversees about $2 billion at London-based Schroder Investment Management Ltd., including UBS shares. “The main focus was on reacting to market crises rather than being able to actively follow any strategy.”

As the bank plots more job reductions, UBS’s losses and the state’s assistance have aroused a public backlash against bonuses for bankers. The 2008 bonus pool for UBS staff, excluding brokers in the U.S., dropped more than 80 percent to less than 2 billion francs.

“Even if the most highly paid take the brunt, a lot of people will be getting very little,” said Philip Keevil, a senior partner at London-based Compass Advisers LLP and a former head of investment banking for Warburg in the U.S. “This will be the acid test to see if they lose the really good people.”

Ruble Weakens Below Central Bank’s Target Rate of 36 Per Dollar

2009-02-02T03:03:00.000-08:00

Russia’s ruble weakened to below the central bank’s target exchange rate of 36 per dollar, less than two weeks after Chairman Sergey Ignatiev widened the trading band and pledged reserves to defend the new level.

The ruble depreciated as much as 1.7 percent to 36.3550 per dollar, the weakest since January 1998. Ignatiev said Jan. 22 that the central bank would protect the currency at a level of 41 against its basket of dollars and euros, which translates to 36 per dollar. A Bank Rossii spokesman declined to comment.

“The pace of the move to the target is definitely going to be a source of concern to the central bank,” said Martin Blum, head of emerging-market economics and currency strategy at UniCredit SpA in Vienna. “Global risk appetite is continuing to deteriorate so the pressures on the ruble will continue.”

The ruble has slumped 35 percent against the dollar since August as a 63 percent drop in Urals crude oil prices and the worst global economic crisis since the Great Depression spurred locals and investors to withdraw about $290 billion from the country, according to BNP Paribas SA.

Bank Rossii expanded its trading range for the ruble 20 times since mid-November before switching policy to let “market” forces help determine the exchange rate within a widened limit. The expanded trading range would only be widened should oil, Russia’s biggest export earner, fall to $30 a barrel and stay there “for a long time,” Ignatiev said at the time.

Prime Minister Vladimir Putin said in a Jan. 25 interview with Bloomberg Television that Russia had set itself apart from other countries by using reserves so as not to “crush the national currency overnight,” avoiding a repeat of the crisis a decade ago when the ruble plunged as much as 29 percent in a day as the government defaulted on $40 billion of debt.

Draining Reserves

Russia reduced its foreign-currency reserves, the world’s third-largest, by more than a third to $386.5 billion as it bought rubles to stem the depreciation.

The ruble lost 0.7 percent to 40.5551 against the basket by 11:31 a.m. in Moscow. It dropped 0.6 percent to 46.0437 per euro. Russia manages the ruble against a basket made up of about 55 percent dollars and the rest euros to limit currency swings that disadvantage Russian exporters.

The dollar-ruble target was based on an exchange rate of 1.3 per euro, Ignatiev said at the time. The dollar jumped 0.5 percent to 1.2753 per euro today, after gaining 1.3 percent last week.

Accelerating Drop

The dollar’s strength accelerated the ruble’s depreciation against the U.S. currency target. Bank Rossii will defend the level of 41 against the basket until the attrition of reserves becomes “unsustainable,” said Blum at UniCredit.

The central bank, which sold foreign currency from Jan. 28 to 30 to mitigate the ruble’s drop, is yet to be seen making offers on the market today, said Evgeny Nadorshin, senior economist at Trust Investment Bank, citing the Moscow-based lender’s currency traders.

Despite doubts, Citigroup made municipal bond deals

2009-02-02T02:59:00.000-08:00

In August 2007, an executive at Citigroup sent an e-mail message to a colleague warning of trouble in an obscure corner of the financial world: the $330 billion market for auction-rate securities.

"There are definitely cracks forming in the market," read the e-mail message, which is cited in a complaint filed last month by the U.S. Securities and Exchange Commission against a Citigroup subsidiary, Citigroup Global Markets. "Inventories are starting to creep higher in the market and failed auction frequency is at an all-time high."

In the following weeks, the problems in the market, which state and local governments across the United States relied on to raise money for public projects, became more acute. So did the alarm at Citigroup.

But that did not stop the bank from peddling the securities to investors and working with government agencies - including the Metropolitan Transportation Authority, which runs New York's subway, bus and commuter rail system - to bring more bonds into the already stressed market. With Citigroup Global Markets as one of its underwriters, the authority issued $430 million of auction-rate bonds on Nov. 7, 2007.

Almost immediately the deal soured. Interest rates on the bonds, set in weekly auctions, began to climb, to 4 percent from about 3 percent, and finally, by February, to 8 percent. By then, the entire auction-rate market had collapsed as panicked investors worried that they could not get access to their money.
Stunned by the soaring rates, which were costing it up to $560,000 a week, the authority redeemed the securities in March. To do so, it issued a new set of bonds, outside the auction system and at more favorable interest rates. But the move came with a cost: about $5.6 million in fees to bankers, lawyers and others, including the state, according to data provided by the authority.

All told, Citigroup earned more than half a million dollars on the two sales; Goldman Sachs, the authority's financial adviser, which counseled in favor of the auction-rate sale, made $929,500 for its work on both.

The transportation authority is now grappling with its worst fiscal crisis in decades, caused by plummeting tax revenues, rising expenses and a heavy debt load. To help plug a threatened $1.2 billion budget shortfall, it has proposed steep fare and toll increases for this year, as well as sharp cuts in service.

The SEC civil complaint charges that Citigroup misled investors and provides new evidence that the bank recognized early that the market was unstable but continued to underwrite and sell bonds.

Though the complaint does not mention the authority's bond sale in November 2007, it covers the bank's actions during that time.

Executives at Citigroup refused to answer questions about the transportation authority's bond deal; in a statement, the bank said, "Since the beginning of the auction-rate securities crisis, Citigroup has worked diligently with issuers, investors and regulatory authorities to work toward solutions."

Goldman Sachs refused to make an executive available to comment on its involvement. "Investor demand for this type of security was strong," the bank said. "Our market judgments and advice to clients were based on prevailing market conditions, which were far different from the unprecedented market dislocations in early 2008."

The complaint against Citigroup was filed in U.S. District Court in New York on Dec. 11, 2008, the same day a prearranged final settlement was announced.

Without admitting wrongdoing, Citigroup had settled the SEC complaint and other cases brought by New York State regulators, including the attorney general, Andrew Cuomo, agreeing to buy back more than $7 billion of securities from investors and to pay a $100 million fine. Other banks have agreed to similar settlements.

While the commission's complaint takes Citigroup to task, there is also evidence that the transportation authority - or its adviser, Goldman Sachs - should have seen warning signs, as other government issuers did. The authority's offering was one of the largest municipal bond sales in the months before the auction-rate market collapsed, according to data compiled by Ipreo, a financial services firm.

"We saw problems," said Richard Froehlich, the general counsel and executive vice president for capital markets of the New York City Housing Development Corp. That agency had used auction-rate bonds in the past, but as he prepared to sell more bonds in late 2007, Froehlich said he deemed them too risky. "There were dislocations that started in the summer of '07," he said. "After that, it was never our desire to go back into auction rate."

One transportation authority board member, Doreen Frasca, has voiced concern about some financing decisions, including why the authority stepped into the auction-rate market just as it was about to implode.
"I think there was a very surprising lack of foresight in reading the handwriting that was on the wall," said Frasca, who runs a consulting firm that specializes in airport finance. She joined the board after the auction-rate bonds had been redeemed.

Gary Dellaverson, the authority's chief financial officer, said he did not believe that he was misled by the bankers or the authority's financial adviser. He said that the experience with the bonds must be judged within the authority's overall borrowing program, which contained a predominance of fixed-rate debt and a smaller portion of less-expensive but riskier variable-rate debt. Over the past three years, he said, the variable-rate debt has saved the authority $150 million in interest payments, compared to the same debt in fixed-rate bonds.

"This was a calamitous disruption in the credit markets," Dellaverson said. "We managed our way through it."

Auction-rate bonds are long-term bonds with interest rates that reset at regular auctions, as often as once a week. Holders of the bonds would put them up for sale and investors would bid by designating the minimum interest rate they would accept.

But for an auction to be successful, all the bonds for sale on that date had to find buyers. If there were not enough bids at the right price, the auction would fail. For years, the banks had stepped in to keep auctions from failing by buying whatever bonds were not selling.

Citigroup had never allowed an auction to fail, according to the SEC complaint, a fact it advertised to assure clients of the market's soundness. But in August 2007, according to the complaint, demand for the securities began to weaken as investors sought safer places for their money. As a result, Citigroup had to invest increasing amounts to buy up bonds that had no other takers.

Typically, Citigroup kept $1 billion to $2 billion tied up in such bonds, the complaint said. But beginning that August, the amount began to increase. By February 2008 it was more than $10 billion.

The bank was facing other demands on its capital, partly because of bad bets it had made on subprime mortgages, and it knew it could not continue indefinitely to support the auctions, the SEC said.

In internal e-mail messages sent as early as August 2007, managers began raising the specter of letting auctions fail. Despite that, the bank kept underwriting new bond sales. According to the commission, Citigroup's investment bankers wanted to continue bringing new bonds to market to "earn fees and to maintain their position vis-à-vis bankers at other broker-dealers."

Roubini Sees ‘Nowhere to Hide’ From Global Slowdown

2009-01-27T09:29:00.001-08:00

Stock market declines globally are increasingly correlated and emerging economies will follow developed nations into a “severe recession,” according to New York University Professor Nouriel Roubini.

Roubini said economic growth in China will slow to less than 5 percent and the U.S. will lose 6 million jobs. The American economy will expand 1 percent at most in 2010 as private spending falls and unemployment climbs to 9 percent, Roubini said.

“There is nowhere to hide,” Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said in an interview with Bloomberg Television. “We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.”

Roubini said the U.S. government should nationalize the biggest banks and absorb their bad holdings because losses will exceed assets, threatening to push them into bankruptcy. The banks could be privatized again in two or three years, Roubini said. The professor reiterated his previous prediction that U.S. financial losses may reach $3.6 trillion.

“Nobody’s in favor of long-term ownership of the U.S. banking system by the government, but if you don’t do it this way you end up like Japan where you kept alive for decade zombie banks that were never restructured,” he said. “That’s going to be much worse. It’s better to clean it up, nationalize it and sell it to the private sector.”

‘Lost Decade’

Japanese policy makers hesitated in addressing a banking crisis in the 1990s and then struggled to revive growth as deflation and recessions stranded the nation in what is known as the “Lost Decade.”

In July 2006, Roubini predicted the financial crisis. In February of last year, he forecast a “catastrophic” meltdown that central bankers would fail to prevent, leading to the bankruptcy of large banks with mortgage holdings and a “sharp drop” in equities. Since then, Bear Stearns Cos. was forced into a sale and Lehman Brothers Holdings Inc. went bankrupt, prompting banks to hoard cash and depriving businesses and households of access to capital.

The world’s biggest economies are sliding deeper into recession as the fall-out from the global financial crisis hobbles manufacturing output and punctures consumer spending from New York to Beijing. The U.S. economy probably contracted at 5.5 percent pace in the fourth quarter, the fastest in 26 years, a survey of economists showed.

26-Year High

Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV led companies announcing at least 77,000 job cuts yesterday as sales withered while U.S. jobless claims touched a 26-year high of 589,000 in the week ended Jan. 17. President Barack Obama is pushing congress to approve an $825 billion stimulus package to create 3 million to 4 million new jobs.

In China, the urban unemployment rate, which doesn’t include millions of migrant workers, rose for the first time since 2003 in the fourth quarter. The government is targeting a rate of 4.6 percent for the year, which would be the highest since 1980. The slowdown may destabilize the country’s communist government, Albert Edwards, a strategist at Societe Generale in London, said in a Jan. 15 research note.

Cosmo, Accused of Ponzi Scheme, Raised $370 Million, U.S. Says

2009-01-27T09:27:00.000-08:00

Nicholas Cosmo, founder of Agape World Inc. in Hauppauge, New York, was charged with defrauding 1,500 investors of more than $370 million, U.S. authorities said.

Cosmo operated a Ponzi scheme at least between October 2003 and December 2008 that raised more than $370 million from more than 1,500 individual investors and deposited that money into Agape World bank accounts, according to a 51-page affidavit by U.S. Postal Inspector Richard Cinnamo detailing the allegations against Cosmo.

Cosmo, arrested after he surrendered yesterday in Hicksville, New York, claimed he was putting investors’ money into bridge loans to businesses, according to the Cinnamo affidavit, which was unsealed today. Just $746,000 of the money was found in the bank accounts last week, Cinnamo said. Less than $10 million was loaned out, the alleged business of Agape World.

Instead, more than $100 million was invested in commodity futures trading accounts, with losses of about $80 million, according to Cinnamo.

Cosmo was expected to be arraigned later today before U.S. Magistrate Judge E. Thomas Boyle in U.S. District Court in Central Islip, New York.

The case is U.S. v. Cosmo, U.S. District Court, Eastern District of New York (Brooklyn).

Japan Bank's Crisis Triple Whammy

2009-01-27T09:01:00.000-08:00

The fourth-quarter loss was reported as the Japanese government threw a £12bn lifeline to companies threatened by the global financial crisis.
Nomura bought the Asian, European and Middle East operations of failed Wall Street bank Lehman Brothers last year, aiming to expand its business outside its domestic market.
But it has been forced to pay out large sums to keep key Lehman employees and absorb other costs at a time when the financial crisis has triggered losses on its own business.
Nomura announced last month that it had a £225m exposure to Madoff, the Wall Street trader accused of running a £35bn worldwide fraud.
The bank's bad news comes amid turmoil in Japan, which the government is seeking to turn around with a plan to shield the shrinking economy from more job losses and bankruptcies.
Under the scheme, Japanese state banks will buy shares in non-financial companies threatened by collapsing demand and frozen credit markets.
This will compound efforts by the Bank of Japan to make funds available by buying corporate debt from lenders.
The government share buying would support small- and medium-sized firms, which employ 70% of Japan's workforce and are critical suppliers to the major manufacturers at the heart of Japan's economy.
Japanese bankruptcies jumped 24% in December from a year earlier.

U.S. Corporate Profits Probably Fell for Sixth-Straight Quarter

2008-12-29T08:56:00.000-08:00

U.S. corporate earnings probably fell for a sixth-straight quarter, the longest streak in at least 20 years, as consumer spending on automobiles, homes and retailers collapsed.

Fourth-quarter profit at companies in the Standard & Poor’s 500 Index may have dropped an average of 11.9 percent from a year earlier, according to data compiled by Bloomberg.

The slump would be the longest since at least 1988 when the index began compiling the data, said Standard & Poor’s senior analyst Howard Silverblatt. Weyerhaeuser Co., the largest North American lumber producer, said fourth-quarter earnings will be “significantly” lower than it expected. General Motors Corp., which is receiving a $9.4 billion government bailout, may report a loss of $6.61 a share, according to analysts’ estimates.

“The earnings weakness has spread beyond the financial sector,” said John Praveen, the Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages about $602 billion. “I don’t think this is the bottom.”

Analysts are predicting the streak will reach eight quarters with a 10.3 percent decline in the first three months of 2009 and a drop of 5.8 percent in the second quarter. Analysts currently expect a 12.6 percent increase in earnings in the third quarter next year.

The S&P 500 Index has fallen 25 percent in the fourth quarter through Dec. 26, the biggest drop since the third quarter of 1974. For the year, the index has plummeted 41 percent, the worst annual performance since a 47 percent drop in 1931, according to data compiled by Bloomberg.

Dollar’s Gains

Earnings slid 23 percent in the second quarter, the most since at least 1998, according to Bloomberg data, and 18 percent in the third quarter. Profit declined 22 percent in the fourth quarter of 2007.

In prior years, the declining value of the dollar meant overseas earnings boosted profit of U.S. companies, Praveen said. Now with the dollar gaining against currencies in Europe and Japan, profit from overseas doesn’t help the bottom line as much, he said.

Of 10 industry groups in the S&P 500, seven will see earnings decline, analysts estimated.

Raw-materials producers will be hit hardest, with profit falling about 63 percent, according to analysts.

Weyerhaeuser cut its dividend by more than half on Dec. 19. Analysts on average expect a loss of 50 cents a share compared with a profit of 51 cents a share in the same period a year earlier.

The next biggest group affected is consumer discretionary, which includes the auto industry. Earnings for these companies may be down 47 percent. Consumer spending, which accounts for more than two- thirds of the U.S. economy, fell at a revised 3.8 percent annual rate, according to the U.S. government. It’s the first decline since 1991 and the biggest since 1980. The unemployment rate has climbed to 6.7 percent, the highest level since 1993.

Retail, Finance Earnings

Among retailers, Office Depot Inc. may report a loss of 5 cents a share compared with a 10-cent profit a year earlier, according to analysts’ estimates. The world’s second-largest office-supplies retailer said it will close almost 10 percent of its North American stores and cut 2,200 jobs as the U.S. recession saps demand for business furniture.

Financial services companies, which have been weighed down by $1 trillion in losses and writedowns from the collapse of the subprime mortgage market, should be able to stop a run of five straight quarters of declining profit.

In finance, earnings are expected to rise 68 percent, led by Bank of America Corp. where a per-share profit of 25 cents is predicted, up from 7 cents a share a year earlier, according to the average of 21 analysts’ estimates in a Bloomberg survey.

‘Turning the Corner’

“We are turning the corner,” said Thomas Sowanick, chief investment officer of Princeton, New Jersey-based Clearbrook Financial LLC, which manages $20 billion. “If we do enter into a period where credit quality stabilizes, you could get a huge jolt to earnings.”

Others aren’t as optimistic. The banks and real estate sub- groups may fall 31 percent and 21 percent, respectively, on average, according to analyst estimates.

“My gut feeling says analysts are too optimistic in terms of the magnitude of the write offs,” said Frederic Dickson, who helps oversee about $19 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It probably won’t be as bad as we saw a year ago, but there could be some shock value.”

Biggest Bond Buyers Favor European Notes as ECB Cut

2008-12-29T08:55:00.000-08:00

The world’s biggest bond investors are betting European Central Bank President Jean-Claude Trichet will be forced to follow Federal Reserve Chairman Ben S. Bernanke and step up the pace of interest-rate cuts.

BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows. Barclays Capital, the top primary dealer of German debt, says bunds offer “unprecedented value” because the ECB will accelerate rate cuts as the economic slump deepens.

“It still makes sense to be long selective markets and Europe is one of those,” said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. “The ECB is behind the curve.”

While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2 percent, the Frankfurt- based ECB lagged behind.

The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5 percent and will cut the benchmark rate 1 percentage point to 1.5 percent by June, based on the median of 16 economists’ forecasts compiled by Bloomberg.

Closer to Fed

Even though Trichet said in a Dec. 16 speech further reductions may fail to bolster the economy as long as banks refuse to lend to each other, the ECB may bring its key rate closer to the Fed’s, according to Gregor MacIntosh, a money manager in Edinburgh at Standard Life. The firm has about $265 billion in assets.

“The European economy will underperform the U.S. next year,” Macintosh said. “On a relative basis, European bonds look more attractive than the U.S. market.”

German bunds returned 12.1 percent this year, including price gains and reinvested interest, the most since gaining 16 percent in 1995, according to Merrill Lynch & Co. index data. French government debt returned 11.5 percent, while Spanish bonds added 8.8 percent.

Treasuries returned more than bunds, handing investors 14.6 percent. A rally in Treasuries in the fourth quarter pushed 10- year U.S. debt yields to 89 basis points below bunds of similar maturity, the lowest since 1993. As recently as last month they yielded 22 basis points, or 0.22 percentage point, more than bunds.

The spread was 84 basis points by 3:29 p.m. in London.

‘Unlikely’ Reversal

Investors piled into the relative safety of government debt this year as credit losses and writedowns at the world’s largest financial companies surpassed $1 trillion and Europe, the U.S. and Japan entered their first simultaneous recessions since World War II. The rally drove yields on German two-year notes down by more than 200 basis points to 1.73 percent, the steepest drop since falling 268 basis points in 1995.

“A reversal of the bullish trend is unlikely to take hold before the third quarter of next year,” said Laurent Fransolet, head of European fixed-income strategy at Barclays in London. Fransolet recommends bonds due in five and 10 years, which he says offer “unprecedented value.”

Yields on German 10-year notes will fall to 2.85 percent by the end of the second quarter from 2.93 percent last week before rising to 3.20 percent at year-end 2009, according to Barclays. The London-based bank buys more debt at German government-bonds auctions than any of the other 28 primary dealers, according to the Bundesbank.

Breaking Even

While analysts expect yields on 10-year bunds to rise to 3.4 percent by the end of 2009, investors will likely break even for the year, according to the median of 10 forecasts compiled by Bloomberg.

An investor buying $1 million of 10-year bunds would lose about $5,000 by the end of next year if the yield rose to the level forecast in the survey. That compares with the $78,000 a buyer of the same amount of 10-year Treasuries would lose should the yield increase to the 3.4 percent predicted in a separate Bloomberg poll of 54 strategists.

Bonds may fall in 2009 as governments prepare to sell a record amount of debt to finance bank bailouts amid falling tax revenue, according to Zurich-based UBS AG, Switzerland’s biggest bank.

Germany will issue a record 323 billion euros ($456 billion) of debt next year, including 149 billion euros of bonds maturing in more than one year, according to the Federal Finance Agency. France plans to sell a record 145 billion euros of securities.

‘Overwhelming Issuance’

“The sheer amount of issuance due from European governments is likely to overwhelm potential demand,” UBS strategists Meyrick Chapman and Andrew Rowan wrote in a report to clients Dec. 18. Investors will see “the bulk of the returns” in the first half and “barely break even” in the second, the London- based analysts said.

Two-year German note yields will rise to 2.05 percent by the end of next year, according to the median of 10 economists’ forecasts compiled by Bloomberg, from 1.694 percent today.

The global credit seizure prompted the world’s biggest central banks to cut rates and offer record amounts of cash to prevent financial institutions from collapse following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

“A quicker-than-expected return to risk appetite is a risk for bonds and could lead to a sell-off, even though the European economy isn’t likely to recover in the next half or one year from now,” said Michiel de Bruin, who manages about $18 billion as head of European government bonds at F&C Asset Management’s Dutch unit in Amsterdam.

No Choice on Rates

Trichet may have no choice but to lower borrowing costs again, according to David Scammell, a money manager in London at Schroder, a unit of the U.K.’s largest publicly traded fund company. The economy of the 15 nations sharing the euro will shrink 1 percent in 2009 after expanding 1 percent this year, based on the median of 15 forecasts compiled by Bloomberg. The U.S. is likely to contract 1 percent, a separate poll shows.

“Poor economic numbers will bring them to their knees,” said Scammell, whose parent firm oversees $19 billion of assets. “The ECB will have to cut interest rates more aggressively. We are bullish on European bonds, as next year is not going to be any better than this year in terms of the economy.”

Growing pessimism over the economy and expectations of rate reductions drove the yield on two-year bonds to 148 basis points below 10-year bunds in November, the widest spread since 2004.

As the ECB brings rates closer to zero, the gap may narrow because investors will seek higher yields offered by longer-dated securities, Scammell said.

“The curve will flatten because there’s nowhere for the short end to go anymore, and not because of expectations of an economic recovery,” he said. “The U.S. led this cycle and it’s moving into a curve-flattening mode. Europe is likely to follow.”

Rohm & Haas Drops After Dow Deprived of Kuwaiti Funds

2008-12-29T08:52:00.000-08:00

Rohm & Haas Co., the target of a $15.4 billion takeover offer, dropped the most in 20 years in New York trading after suitor Dow Chemical Co. lost access to $9 billion of cash planned to fund the acquisition.

Kuwait yesterday scrapped a deal to buy a 50 percent stake in Dow Chemical’s plastics unit, eliminating proceeds earmarked for the takeover. Rohm & Haas, a maker of paint and circuit-board coatings, fell $14.36, or 23 percent, to $49.20 at 9:39 a.m. in New York Stock Exchange trading, the most since October 1987. Midland, Michigan-based Dow Chemical declined $3.75, or 19 percent, to $15.59.

While the collapse of the joint venture damages Dow Chemical Chief Executive Officer Andrew Liveris’s plan to cut the company’s reliance on commodity products, it may also leave shareholders of Rohm & Haas in the lurch. The Philadelphia-based business rose 64 percent after Dow Chemical’s $78-a-share offer on July 10 and has already lost 10 percent this month in New York trading.

“This throws into question whether the Rohm & Haas acquisition will go through,” said London-based Christopher Middleton, CEO of Atlantic Equities LLP, in a phone interview. “It’s less likely, because they still need to find the money.”

Liveris planned to fund the purchase with a $13 billion bridge loan, a $3 billion equity investment by Warren Buffett’s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority. Dow needed only about $5 billion of the bridge loan assuming the Kuwait proceeds, Chief Financial Officer Geoffery Merszei said Oct. 23 on a conference call.

Rohm & Haas issued a statement today saying the aborted deal “is not a closing condition for the proposed merger” and that it “continues to work diligently towards completing the proposed transaction with Dow in early 2009.”

Overpriced

The Kuwaiti government has been under pressure from opposition lawmakers to scrap the deal, which they said was overpriced. Some members of parliament threatened public questioning of Prime Minister Sheikh Nasser al-Mohammed al-Sabah, a nephew of Emir Sheikh Sabah al-Ahmed al-Sabah, Kuwait’s ruler. They said the investment was too large at a time of falling oil prices.

Crude-oil futures in New York have dropped more than 70 percent from the record $147.27 a barrel in July on signs that a deepening global recession is cutting demand for fuel and energy. Oil reached a four-year low of $32.40 on Dec. 19.

“There is a reassessment on the part of all of the sovereign wealth funds about where they want to be strategically,” said Middleton. “Commodity prices have come off an awful lot, and these funds have become more circumspect.”

Breakup Payment

Kuwait’s state-owned Petrochemical Industries Co. has the advantage of seeing how faltering demand impaired the $11.6 billion acquisition of General Electric Co.’s plastic division by Saudi Arabia’s chemical company. Saudi Basic Industries Corp., also known as Sabic, plans to cut 1,000 jobs, or 9.5 percent of its plastics unit workforce, after taking over the business last year. The Riyadh-based chemicals supplier is reducing thermoplastic production by about 20 percent.

“Dow is extremely disappointed with the decision by the Kuwait government and is in the process of evaluating its options pursuant to the joint-venture formation agreement,” Dow Chemical said yesterday in the statement.

Either side can claim as much as $2.5 billion if the other cancels the transaction, Dow Chemical said in a Dec. 1 regulatory filing.

“It is doubtful that Dow will be able to easily raise the funds” to complete the Rohm & Haas deal, Sean Egan, managing director of Egan-Jones Ratings Co. of Haverford, Pennsylvania, said in an e-mailed report. Dow has been “skewered,” he said.

Holiday Sales Drop to Force Bankruptcies, Closings

2008-12-29T08:51:00.000-08:00

U.S. retailers face a wave of store closings, bankruptcies and takeovers starting next month as holiday sales are shaping up to be the worst in 40 years.

Retailers will close 12,000 stores in 2009, according to Howard Davidowitz, chairman of retail consulting and investment- banking firm Davidowitz & Associates Inc. in New York. AnnTaylor Stores Corp., Talbots Inc. and Sears Holdings Corp. are among chains shuttering underperforming locations.

More than a dozen retailers, including Circuit City Stores Inc., Linens ‘n Things Inc., Sharper Image Corp. and Steve & Barry’s LLC, have sought bankruptcy protection this year as the credit squeeze and recession drained sales. Investors will start seeing a wide variety of chains seeking bankruptcy protection in February when they file financial reports, said Burt Flickinger.

“You’ll see department stores, specialty stores, discount stores, grocery stores, drugstores, major chains either multi- regionally or nationally go out,” Flickinger, managing director of Strategic Resource Group, a retail-industry consulting firm in New York, said today in a Bloomberg Radio interview. “There are a number that are real causes for concern.”

Sales at stores open at least a year probably dropped as much as 2 percent in November and December, the International Council of Shopping Centers said last week, more than the previously projected 1 percent decline. That would be the largest drop since at least 1969, when the New York-based trade group started tracking data. Gap Inc. and Macy’s Inc. are among retailers will report December results on Jan. 8.

Women’s Clothing, Electronics

Consumers spent at least 20 percent less on women’s clothing, electronics and jewelry during November and December, according to data from SpendingPulse.

Retail Metrics Inc.’s December comparable-store sales index will drop an estimated 1.2 percent, or 5 percent excluding Wal- Mart Stores Inc. Retailers’ fourth-quarter earnings may fall 19 percent on average, the seventh consecutive quarterly decline, according to Ken Perkins, president of Retail Metrics, a Swampscott, Massachusetts-based consulting firm.

Probably 50,000 stores could close without any effect on consumer choice, Gregory Segall, a managing partner at buyout firm Versa Capital Management Inc., said this month during a panel discussion held at Bloomberg LP’s New York offices. Only retailers with healthy balance sheets will survive the recession, according to Matthew Katz, a managing director at consulting firm AlixPartners LLP.

Store Closings

About 200,000 stores may close in 2009, compared with a record 160,000 in 2008, Flickinger said.

The U.S. economy shrank in the third quarter at a 0.5 percent annual pace, the worst since 2001, according to the Commerce Department. Economists surveyed by Bloomberg in the first week of December forecast the world’s largest economy will contract through the first half of 2009.

The Standard & Poor’s 500 Retailing Index shed 34 percent this year before today, with only two of its 27 companies rising.

The index doesn’t include Wal-Mart, the world’s largest retailer, which fell 21 cents to $55.14 at 9:58 a.m. in New York Stock Exchange composite trading. Wal-Mart shares gained 16 percent this year through Dec. 26.

“If you’re going to be in retail right now, the discount space is where you want to be,” Patrick McKeever, a senior equity analyst at MKM Partners LLC, said today in a Bloomberg Television interview.

Discount Advantage

Discounts of 70 percent off or more by Macy’s, AnnTaylor Stores Inc. and other retailers failed to prevent a spending drop of as much as 4 percent during the final two months of the year, according to data from SpendingPulse. Consumers are trained for sales, according to Patti Freeman Evans, an analyst at Jupiter Research in New York.

“The situation is not going to right itself in January; it’s going to be a long while that discounting’s going to be around,” said Evans. “Consumers are going to get used to it and it’s going to very difficult for retailers to move forward in a full-price mode.”

Retail bankruptcies may help the industry in the long run, according to Flickinger.

“We’ll be going from a Dickens-esque worst of times this December to the best of times in future Decembers because we’ll rationalize out all the redundant retailers and retail space in shopping centers,” Flickinger said.

Recession Opens U.S.-China Rift Paulson Talks Bridged

2008-12-29T08:48:00.000-08:00

The global recession is re-exposing fissures in U.S.-China relations that Treasury Secretary Henry Paulson spent more than two years smoothing over.

Heightened tensions between China and the U.S. may worsen a contraction in world trade that already threatens to deepen and prolong the economic downturn. The friction comes as President- elect Barack Obama readies a two-year stimulus package worth as much as $850 billion that will require the U.S. to borrow more than ever from China, the largest buyer of Treasury securities.

“The American economic slump is running into the Chinese economic slump,” says Derek Scissors, a research fellow at the Washington-based Heritage Foundation. “It's creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship.”

Paulson, 62, who visited China 70 times during his career on Wall Street, made improving ties a priority when he arrived at the Treasury in 2006. He advocated diplomacy instead of confrontation, establishing a twice-yearly “strategic economic dialogue” with officials in Beijing, aimed at cooling tensions and deterring Congress from taking up trade sanctions.

The approach produced some results, including a pledge to share data on food safety and agreement to allow foreign mutual funds to invest in China's stock market. The value of China's currency, the yuan, rose 21 percent versus the dollar from 2005 levels to redress what U.S. officials saw as an unfair price advantage for Chinese products.

Shelved Sanctions

Paulson refrained from labeling China a currency manipulator and hailed an end to tax rebates on Chinese exports as a sign of improving trade relations. Congressional leaders, though dissatisfied with the pace of progress, shelved sanctions legislation.

Paulson “achieved some success, but it was much more difficult to get the Chinese to restructure their economy,” says Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington. Now, Brilliant says, the economic crisis has prompted China to turn back to “export-oriented policies that could lead to an increase in the trade imbalance” and new tensions with the U.S.

China's exports declined in November for the first time in seven years, and economic growth may slow by more than half to as little as 5 percent in 2009, according to Royal Bank of Scotland Plc. That has prompted China's leaders to increase tax rebates on thousands of exported products; meanwhile, the yuan's steady rise against the dollar stalled in July, and the currency has barely budged since. It was trading at 6.8462 a dollar at 1:33 p.m. in Shanghai today, from 6.8414 on Dec. 26.

A Harder Line

In the U.S., business and labor groups, along with lawmakers, are pushing the new Obama administration to take a harder line with China than President George W. Bush did.

Senate Finance Committee Chairman Max Baucus, a Democrat from Montana, plans legislation that would raise tariffs on dumped imports from China and other nations. And newly elected Democratic congressmen such as Larry Kissell of North Carolina and Dan Maffei of New York have pledged actions to stop jobs from being shipped to China.

Lawyers representing companies such as Nucor Corp., the second-largest U.S. steelmaker, NewPage Corp., a maker of coated paper, and smaller textile and steel pipe makers say they are considering new trade complaints against China. During the presidential campaign, Obama promised groups including the National Council of Textile Organizations and the Alliance for American Manufacturing that he would take a tougher stance on China's currency policies.

Pushing Back

Officials in Beijing will push back, says James McGregor, chairman of Beijing-based research firm JL McGregor & Co. and author of the book “One Billion Customers,” about doing business in China. Chinese leaders “will do whatever they need to protect their interests and to say to the U.S., 'Do not mess with us on this one,'” he says.

Paulson, before leaving for talks in Beijing this month, told business representatives his biggest concern was that China was changing course and reversing moves it had made during the past year to cut aid to exporters and stimulate domestic consumption.

China's five-year plan through 2010 seeks to rebalance growth away from exports -- so far, without significant result. Household consumption slumped to slightly more than 35 percent of China's gross domestic product last year from 45 percent in 1993. By contrast, consumer spending represents more than two-thirds of the U.S. economy.

Low Consumption

“What separates China from the rest of the world is its incredibly low level of consumption relative to GDP,” says Brad Setser, a fellow at the Council on Foreign Relations in Washington. “What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40 percent of GDP.”

Policies in both countries are shaped by the need to cope with steep declines in employment. More than 10 million migrant workers lost their jobs in China during the first 11 months of this year, Caijing Magazine reported Dec. 17, citing a Labor Ministry official.

The total will likely grow in 2009. The World Bank forecasts that global trade, which grew 6.2 percent in 2008, will shrink by 2.1 percent next year, the first such contraction since 1982.

The collapse in overseas demand is exposing China's years of overinvestment in industries such as automobiles and telecommunications.

Sitting on a Stockpile

China's steel industry, the world's largest, is sitting on a stockpile of 63 million metric tons, equivalent to about 13 percent of annual production, and Baosteel Group General Manager He Wenbo said in November that his company was facing the “most difficult” period since it was founded 30 years ago.

The government is considering measures including buying unsold inventory and raising export rebates to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong said Dec. 12.

In the U.S., factory payrolls have shrunk by 4 million during the eight years of the Bush administration, and total job losses this year may top 2 million.

“China-bashing will only intensify in a softer economic climate,” says Stephen Roach, chairman of Morgan Stanley's Asia division in Hong Kong. “Bipartisan congressional support for anti-China trade legislation has been gathering in intensity.”

Obama's Pledges

Obama made specific pledges on the campaign trail to take a tougher approach to China than the Bush administration did. He has said the failure by Bush and Paulson to label China a currency manipulator was “unacceptable,” and he endorsed legislation to let U.S. companies seek import duties to compensate for the advantage an undervalued currency gives their Chinese competitors.

Obama also pledged to reverse course from Bush and consider petitions seeking higher tariffs on specific Chinese products.

American businesses, labor unions and lawmakers are already gearing up to force Obama's hand. Steelmakers, paper producers and textile companies are preparing trade complaints that could lead to increased tariffs. Unions and lawmakers plan to push measures to force China to raise the value of its currency.

McGregor says Obama's China policy will require a balancing act “fundamentally different” from what his predecessors faced: Obama's Treasury will need to fund a budget deficit heading for $1 trillion this year and “you don't scream at your banker.” China's holdings of U.S. Treasury securities, at $653 billion, are the world's largest.

That means an increase in trade tension “is very easy for China to handle,” says Guan Anping, a managing partner of Beijing-based law firm Anjin & Partners and a legal adviser to former Vice Premier Wu Yi until 1993. “China can react by reducing its purchases of U.S. government bonds.”

Even so, the Obama administration may not need much prodding to take a harder line on the currency issue, says William Reinsch, president of the National Foreign Trade Council and a former Clinton administration trade official.

“There will be consequences,” he says. “But they will do it anyway, if only to distinguish themselves from Bush.”

Russia’s Central Bank Devalues Ruble for Third Time in Week

2008-12-25T09:23:00.000-08:00

Russia devalued the ruble for the third time in a week, sending the currency to its lowest level against the dollar since January 2006, as oil’s drop below $37 a barrel dimmed the outlook for growth.

The ruble, down 18 percent against the dollar since the beginning of August, weakened 0.9 percent against the U.S. currency to 28.6905 and 1.4 percent versus the euro to 40.1773, near an all-time low.

The central bank allowed the ruble to fall about 1 percent against a basket of dollars and euros, accelerating the slide after spending 27 percent of reserves, or $162.7 billion, trying to defend the currency over four months. Oil, Russia’s biggest export earner, lost 4 percent to $37.43 on the New York Mercantile Exchange and is down nearly 75 percent since the July high. The government requires oil to average $70 to balance its 2009 budget.

“As long as oil remains depressed and at many year lows the central bank has no other choice but to carry on with its devaluation,” said Mikhail Galkin, head of fixed income research at MDM Bank in Moscow.

The currency has fallen 14 percent against the dollar and 11 percent versus the euro this year amid the plunge in oil, international condemnation of the country’s war with Georgia and the spreading global credit crisis. BNP Paribas SA estimates investors withdrew $211 billion from Russia since August. The nation’s oligarchs, who and took over assets of the biggest companies after the collapse of the Soviet Union in 1991, are vying for $78 billion of Kremlin loans to meet debt payments.

Recession

The economy, which recovered from the government’s 1998 debt default to expand an average 7 percent in the eight years to 2007, may slip into a recession in the first half of 2009, Kremlin economic adviser Arkady Dvorkovich told Bloomberg Television on Dec. 19.

The government will post a budget deficit next year for the first time in a decade and will use its $132.6 billion reserve fund, or extra oil revenue the government has set aside, to cover the financing gap, Dvorkovich told reporters in Moscow today.

An “accelerating” ruble devaluation is “detrimental” to economic growth because it stimulates currency speculation and limits new lending, Evgeny Gavrilenkov, chief economist at Troika Dialog in Moscow, wrote in a research note today. Troika Dialog earlier called for a one-time depreciation of as much as 20 percent.

“If in 2009 the oil price is between $30 and $40 and the state carries on with its strange policies on the money market, the possibility of an economic downturn will rise,” Gavrilenkov said.

Currency Basket

The ruble fell 1.2 percent against the basket of dollars and euros that the central bank uses to manage its fluctuations, and traded at 33.86 at 5:02 p.m. in Moscow.

Bank Rossii allowed the ruble to decline against its currency basket for the third time in four working days and the 10th time since Nov. 11, according to a central bank official who declined to be identified.

The Micex stock index fell for the first time in four days to 654.29, a drop of 1.1 percent.

Vietnam's Trade Deficit Widens to Record $17 Billion

2008-12-25T09:22:00.000-08:00

Vietnam's trade deficit widened to a record $17 billion in 2008, boosted by higher imports of equipment for projects such as the country's first oil refinery.

The gap expanded 21 percent from $14.1 billion a year earlier, according to preliminary figures from the General Statistics Office in Hanoi. Exports rose 29.5 percent to $62.91 billion and imports climbed 27.5 percent to $79.92 billion.

Vietnam's growing trade deficit created concern in the first half of a currency crisis. While the gap's slower growth since then has eased fears, analysts from companies including Credit Suisse Group AG and CLSA Asia-Pacific Markets forecast further trade deficits in years to come.

The government is pursuing ``an investment drive which continues to suck in imports,'' Anthony Nafte, a Hong Kong-based senior economist at CLSA Asia-Pacific Markets, wrote in a note sent last week. ``The current-account deficit will increase in 2009 as export revenues plummet and the investment drive prevents a steeper fall in imports.''

Morgan Stanley said on May 28 that Vietnam was heading for a ``currency crisis'' similar to that of Thailand's baht in 1997 because the current-account deficit was projected to widen to an ``unsustainably large'' level. The banking system and inflation rate are ``additional complicating factors,'' it had said.

Bank Lending

Vietnam's government tightened bank lending this year as part of an attempt to restrict imports and narrow the pace at which the trade shortfall was widening.

``The authorities have controlled the situation well,'' DWS Vietnam Fund Ltd. said in a note this month, referring to concern about the Vietnamese economy earlier in the year. There has been ``continued improvement in the balance of payments,'' DWS Vietnam said.

Imports in 2008 were led by foreign machinery and equipment purchases, which rose 22 percent to $13.61 billion. Vietnam's first oil refinery has been under construction all year at Dung Quat Bay in the central province of Quang Ngai, and is due to open in February 2009.

The refinery may reduce petroleum product imports, which rose 40 percent by value this year to $10.81 billion, while slipping 2 percent by volume. The average global price of crude oil has been 40 percent higher so far this year than in 2007.

Steel imports rose 24 percent by value to $6.34 billion while decreasing 5 percent by volume, based on the General Statistics Office figures.

Roads, Power Plants

``Even though economic growth is slowing, Vietnam still needs to develop infrastructure like its roads and power plants,'' said Alan Young, chief operating officer of Vietnam Industrial Investments Ltd., which operates steel plants in Vietnam. ``People will still need steel.''

Exports were paced in 2008 by crude oil, which climbed 23 percent by value to $10.45 billion while slipping 8 percent by volume. Garment shipments advanced 18 percent to $9.1 billion, the same pace of growth posted by Vietnamese footwear exports, which totaled $4.7 billion.

The impact of a tougher global economic environment may take as many as six months to show up in export figures, according to Shirley Justice, the Ho Chi Minh City-based chief Vietnam representative for Nike Inc., the world's largest athletic-shoe maker.

`We are already beginning to see the signs, through increased order cancellations,'' Justice said, in e-mailed comments.

BOJ May Consider ‘Extraordinary Steps,’ Kamezaki Says

2008-12-25T09:21:00.000-08:00

The Bank of Japan may consider “extraordinary steps” to counter financial-market turmoil and a deepening recession, policy board member Hidetoshi Kamezaki said.

“The Bank of Japan is committed to doing its utmost to contribute to stabilizing financial markets,” Kamezaki, 65, said today at a business meeting in Takamatsu, western Japan. “Extraordinary times demand extraordinary steps.”

The central bank lowered the overnight lending rate on Dec. 19 to 0.1 percent from 0.3 percent, the second cut in two months, and decided to buy corporate debt for the first time to pump money into the ailing economy. Kamezaki later told reporters that room for cutting the rate further is “limited” and the bank’s next policy steps should focus on improving funding for companies and influencing longer-term borrowing costs.

“The sense of crisis about the economy and financial markets mounted drastically within the central bank over the past month,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “We expect the bank to start buying corporate bonds, and it may resume purchasing stocks and even go further if credit markets face a crisis.”

Japanese companies have struggled to find investors who are willing to buy their debt since the global financial crisis intensified in September. Kamezaki said taking on businesses’ credit risk is a “very extraordinary step for a central bank.”

Credit Risk

Purchasing commercial paper, or short-term corporate securities, means the central bank assumes the risk that companies will default on the debt, a concern highlighted by board members at their November meeting, minutes showed today. Japan needs to discuss how far the bank should go to support funding for companies, Governor Masaaki Shirakawa said Dec. 22.

Central bank officials are examining the feasibility of buying a wider range of securities, including corporate bonds and stocks, and the policy board will make a decision based on their findings, Kamezaki said at today’s press conference.

Kamezaki echoed remarks by Shirakawa that a key rate at 0.1 percent barely keeps the money market working and the bank should avoid a policy that impedes its function. The former executive at trading company Mitsubishi Corp. said he has no preconceptions about future interest-rate policy.

The bank “has virtually exhausted what it can do with rates to support the economy,” said Mamoru Yamazaki, an international strategist at RBS Securities Japan Ltd. in Tokyo. “The question now is how far the BOJ can expand the range of assets it buys to provide money, particularly to companies.”

‘Aggressive Measures’

Japanese banks’ borrowing costs eased for a sixth day. The Tokyo three-month interbank offered rate, or Tibor, fell to 0.76 percent after reaching a decade-high 0.922 percent on Dec. 16.

“The Bank of Japan has implemented aggressive measures and we expect they will help to lower money market rates,” said Nobuto Yamazaki, an executive fund manager at Diam Asset Management in Tokyo.

The global economy will decline more sharply in the near future because markets will remain unstable, Kamezaki said.

He said he’s “very concerned” about the outlook for exports, referring to November trade numbers that showed overseas shipments tumbled a record 26.7 percent from a year earlier. Spending by consumers at home will keep weakening because job prospects and wages are deteriorating, he said.

Reports tomorrow are likely to show industrial production fell in November, unemployment climbed and inflation eased.

Factory output tumbled 6.8 percent from a month earlier, according to economists surveyed by Bloomberg News. Consumer prices excluding fresh food rose 1.1 percent from a year earlier, slower than the 1.9 percent in October, analysts predict.

Consumer-price inflation will keep slowing, even as a growing number of companies manage to pass costs on to households, Kamezaki said.

NYU Claims $24 Million Loss as Madoff-Related Lawsuits Mount

2008-12-25T09:20:00.000-08:00

New York University, the largest private university in the U.S. by number of students, became the latest known victim of Bernard Madoff’s alleged $50 billion Ponzi scheme when it sued a fund manager over $24 million in losses.

J. Ezra Merkin, his Gabriel Capital LP fund and Ariel Fund Ltd. invested NYU’s money with Madoff without telling investors or proper due diligence, according to a complaint filed yesterday in New York state court in Manhattan. NYU, which said it had $94 million invested in Ariel, alleged Merkin made all the investment and executive decisions for the fund.

When Merkin “proposed investing the university’s money with Mr. Madoff without telling us he had already done so, he was explicitly told this was not a proper investment vehicle,” NYU spokesman John Beckman said in a statement. Merkin didn’t “exercise reasonable judgment in investing NYU’s money.”

The claim adds NYU to a growing list of alleged victims of Madoff, including Liliane Bettencourt, the world’s wealthiest woman and the daughter of L’Oreal SA founder Eugene Schueller; Spanish billionaire Alicia Koplowitz; U.S. filmmaker Steven Spielberg; Nobel laureate Elie Wiesel; and Yeshiva University.

Madoff, 70, was arrested Dec. 11 at his Manhattan home after allegedly confessing to his sons that his business was a “giant Ponzi scheme” that may have cost investors $50 billion, according to an FBI complaint. Madoff has been charged by federal prosecutors with one count of securities fraud and faces as much as 10 years in prison if convicted. Clients of Madoff had about $36 billion with his firm, according to a Bloomberg tally that may include some double counting.

The Fallout

Since Madoff’s arrest, the fallout from the alleged fraud continues to spread. New York-based money manager Thierry Magon de La Villehuchet, who may have lost $1.4 billion of client funds invested with Madoff, was found dead in his Manhattan office on Dec. 23 in what police said was an apparent suicide.

The New York City Medical Examiner said yesterday it had completed an autopsy of De La Villehuchet, a co-founder and chief executive officer of Access International Advisors, and results will be returned next week.

Bettencourt, the L’Oreal heiress, invested part of her $22.9 billion fortune with Madoff through De La Villehuchet, according to two people familiar with the matter.

And Fairfield Greenwich Group, a hedge-fund firm that had $7.5 billion invested with Madoff, has been sued for allegedly failing to protect its clients’ assets.

$1.5 Billion Fund

Gabriel Capital, a $1.5 billion fund, plans to liquidate due to Madoff losses, Merkin said in a Dec. 18 investor letter. The fund lost 39 percent this year through Nov. 30, mirroring the drop in the S&P 500 Index. Merkin told Ariel investors it also plans to wind down in light of the losses from the Madoff fraud, according to the NYU lawsuit.

New York State Supreme Court Justice Herman Cahn in Manhattan yesterday issued a temporary restraining order barring Merkin “from taking any action to liquidate Ariel” prior to a Jan. 6 hearing before Justice Richard Lowe. Cahn is also prohibiting Merkin from taking any action to move assets of Ariel or Gabriel or to destroy any Madoff-related documents, according to the order.

Cahn’s order “will have no impact on the previously announced plans for Ariel Fund” to wind down, Merkin’s lawyer, Andrew Levander, said in a statement. “It is significant that the court rejected NYU’s request to prevent Ariel Fund from selling assets as part of its wind-down process, and we expect that process to continue.”

Yeshiva University

Merkin, the chairman of GMAC LLC, the finance arm of General Motors Corp. that is 51 percent owned by Cerberus Capital Management LLC, was also blamed by Yeshiva University for losses. The school alleged it lost about $110 million in investments tied to Madoff, most through Merkin’s Ascot Partners LP fund.

Merkin resigned as a school trustee and as its investment chairman on Dec. 12. Madoff was also a trustee. Additionally, Tufts University said last week that it lost $20 million, or less than 2 percent of its endowment, from investments through Ascot.

New York Law School sued Merkin and Ascot last week for investing in funds run by Madoff. That suit, filed in Manhattan federal court, seeks class action, or group, status on behalf of other Ascot investors. The law school allegedly had $3 million invested in Ascot.

In another lawsuit filed yesterday in Manhattan federal court, Family Management Corp. and Chief Executive Officer Seymour Zises were accused of fraud for allegedly investing most of the fund’s assets with Madoff, after claiming that no more than 35 percent of assets “would be allocated to any one investment vehicle,” according to the complaint. As of May 31, Family Management had about $1.3 billion under management, according to the complaint.

$610,000 Invested

The investor who sued, David Newman, alleged he had $610,000 invested in Zises’s New York-based fund. The suit also seeks class action status and unspecified damages. Zises declined to comment.

District Attorney Thomas Zugibe of Rockland County, New York, who had been probing Madoff’s auditors, said yesterday he had suspended his investigation of accountant David Friehling, leaving the matter to the U.S. attorney in Manhattan. Friehling & Horowitz operated out of a 550-square-foot space in New City, a northern suburb of New York City in Rockland County.

Madoff, who hasn’t formally responded to a securities fraud charge against him, is due to return to court Jan. 12, unless prosecutors indict him before then. Prosecutors and defense lawyers may also agree to postpone the court date.

In a Dec. 18 interview, Sorkin said Madoff’s company is �cooperating fully with the government. Madoff met with prosecutors earlier this month, according to people familiar with the case.

The cases are New York University v. Ariel Fund Ltd., 08- 8603803, New York State Supreme Court (Manhattan), and Newman v. Family Management, 08-cv-11215, U.S. District Court for the Southern District of New York (Manhattan).

Dai-Ichi Life Is Said to Hire Nomura, Merrill for IPO

2008-12-25T09:18:00.000-08:00

Dai-ichi Mutual Life Insurance Co. hired Nomura Holdings Inc., Merrill Lynch & Co. and Mizuho Financial Group Inc. to sell its shares in Japan’s biggest initial public offering in a decade, two people familiar with the sale said.

Nomura, Merrill and Mizuho’s securities unit are preparing to sell more than 1 trillion yen ($11 billion) of the insurer’s shares in Japan and overseas, said the people, who declined to be identified before a public announcement. Dai-ichi Life will list on the Tokyo Stock Exchange on April 1, 2010, the company said in a statement on its Web site today.

Japan’s second-biggest life insurer plans to convert to a joint-stock company with a market value of as much as 3 trillion yen, according to a document prepared by the company and obtained by Bloomberg News in December 2007. The deal would boost the sagging market for initial public offerings in Japan, which slumped 80 percent from a year earlier to 123.2 billion yen in 2008, according to T&C Financial Research Inc.

“Investors around the world will show interest in the life insurer’s public offering because it’s global and the stock will be big enough to be included in benchmark indexes,” said Kazumi Tanaka, a Tokyo-based analyst for initial public offerings at T&C Financial. “Still, it may face some difficulty if severe market conditions continue.”

Nomura spokesman Shuji Sato, Merrill Lynch’s Tokyo-based spokesman Tsukasa Noda and Mizuho spokeswoman Masako Shiono all declined to comment, as did Dai-ichi Life spokesman Makoto Atarashi. The company is owned by its 8.4 million policyholders.

Investment Strategy

“Competition in the life insurance market will increase further with the aging population and declining birth rate,” Dai-ichi Life President Katsutoshi Saito said in a document sent to policyholders in July. “We need the listing to make management strategy more flexible and to increase transparency.”

Japanese life insurers, mostly mutual societies owned by policyholders, need to boost returns because they sold policies in the 1980s with projected yields of as much as 6 percent. Dai- ichi in October was projecting returns of 3.1 percent this year.

Kazunori Sato, co-deputy head of the company’s investment planning division, said in October that Dai-ichi Life would hold fast to its present course after increasing investments in overseas bonds with currency hedges in the six months ended Sept. 30. Sato said Dai-ichi Life simultaneously cut holdings of domestic bonds during the first half.

Companies in the Asia-Pacific region made $87.8 billion worth of equity and equity-linked transactions this year, down from $217.7 billion a year earlier and $208.7 billion in 2006, according to data compiled by Bloomberg.

Nomura, Japan’s biggest brokerage, was the top-ranked underwriter for Japanese equity transactions this year while Mizuho ranked 10th, according to Bloomberg data. Merrill ranked fifth in the Asia-Pacific region.

Dai-ichi Life boosted ordinary revenue to 2.22 trillion yen for the six months ended Sept. 30, from 2.17 trillion yen a year earlier.

Japan Exports Plunge Record 27% as Recession Deepens

2008-12-22T10:27:00.000-08:00

Japan’s exports plunged the most on record in November as global demand for cars and electronics collapsed, signaling more factory shutdowns and job cuts are likely as the recession deepens.

Exports fell 26.7 percent from a year earlier, the Finance Ministry said today in Tokyo. That was more than the 22.3 percent decline estimated by economists and the sharpest since comparable data were made available in 1980.

Shipments to the U.S. slid an unprecedented 34 percent and sales to China slumped the most in 13 years, underscoring why the Bank of Japan lowered its key interest rate to 0.1 percent last week. The yen’s surge to a 13-year high is amplifying the woes of exporters including Toyota Motor Corp., which may announce a lower earnings forecast at a press briefing today.

“Japan’s export crash is finally upon us, and this is the worst thing that could happen,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. “The recession will be very severe as companies adjust investment, production and labor.”

The yen weakened and stocks rose on speculation emergency loans to General Motors Corp. and Chrysler LLC will stem a deeper U.S. downturn.

Japan’s currency fell to 90.02 per dollar as of 1:16 p.m. in Tokyo from 89.50 before the trade report was published and 87.14 on Dec. 17, the strongest since 1995. The Nikkei 225 Stock Average climbed 1 percent.

Getting Worse

The government today lowered its assessment of the world’s second-largest economy, saying it’s “worsening” for the first time since 2002. Gross domestic product shrank in the past two quarters, sending Japan into its first recession since 2001.

Toyota, Honda Motor Co. and Sony Corp. are among the companies that are shedding thousands of workers and closing production lines as profits dwindle. Car exports slid 32 percent last month, the most ever, and semiconductors slumped 29 percent, the ministry said.

Today’s report showed the global recession is spreading to the emerging markets that propped up exports as demand from the U.S. and Europe evaporated. Exports to Asia fell 27 percent, the most in 22 years. Shipments to China, Japan’s largest trading partner, tumbled 25 percent, the steepest decline since 1995.

“There are no markets that can make up for the drop in demand for Japanese-made goods,” Dai-Ichi Life’s Shinke said.

Exports to Europe slid 31 percent, the second-most ever.

Another Deficit

Imports fell 14.4 percent, the first decline in 14 months, as oil costs eased and the yen gained. That wasn’t enough to prevent a trade deficit of 223.4 billion yen ($2.5 billion), the third shortfall in four months.

The yen strengthened 25 percent against the dollar this year as the global financial crisis prompted investors to sell riskier assets purchased with money borrowed in the currency.

Honda President Takeo Fukui said last week that the carmaker may shift more manufacturing overseas if the yen strengthens further and urged government action to halt its ascent. Every 1 yen gain against the dollar cuts Honda’s annual operating profit by 18 billion yen, according to the company.

Finance Minister Shoichi Nakagawa said last week that he has “the means” to sell yen to stem its appreciation. Japan hasn’t intervened in the foreign-exchange market since 2004.

Companies are also struggling to obtain funding as the market turmoil dissuades investors from buying corporate debt. To help businesses get financing, the Bank of Japan last week decided to buy commercial paper for the first time.

Gloomy Households

Sales at home are unlikely to make up for the collapse in demand from abroad. Households, whose confidence is at a record low, pared spending in each of the eight months to October as wage growth stagnated and job prospects worsened.

The Finance Ministry last week submitted an extra budget for the year ending March that includes 2 trillion yen in cash handouts for households as Prime Minister Taro Aso tries to spur spending. That may be too little, too late, economists say.

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad.

China Cuts Key Rates for Fifth Time in Three Months

2008-12-22T10:26:00.001-08:00

China cut interest rates for the fifth time in three months after trade growth collapsed because of recessions in the U.S., Europe and Japan.

The one-year lending rate will drop by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent from tomorrow, the People’s Bank of China said on its Web site. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

Today’s measures are likely to be supplemented by a second stimulus plan aimed at spurring consumer spending following a 4 trillion yuan ($584 billion) package in November that was focused on infrastructure. China’s exports fell for the first time in seven years last month, imports plunged and manufacturing shrank by a record, threatening to push the world’s fourth-largest economy into its deepest slowdown in two decades.

“Monetary policy is now playing a supportive role to the main show in town: fiscal stimulus,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai

The reserve requirement will drop to 15.5 percent for big banks and to 13.5 percent for smaller ones effective Dec. 25. The reduction will release a further 300 billion yuan of possible lending, according to Green.

‘Less Aggressive’

“The surprise is how small the move is,” said Mark Williams, an economist with Capital Economics in London. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”

China’s economic growth may slow to 5 percent next year, less than half the 11.9 percent expansion in 2007, according to Royal Bank of Scotland Plc. The World Bank forecasts the economy will expand by 7.5 percent in 2009. The government is targeting an 8 percent expansion.

China cut interest rates by 1.08 percentage points last month, the biggest reduction in 11 years.

The Federal Reserve lowered the main U.S. interest rate to as low as zero for the first time on Dec. 16, as policy makers seek to revive credit and end the longest slump in a quarter- century. The Bank of Japan cut its benchmark rate to 0.1 percent from 0.3 percent three days later.

China’s CSI 300 Index fell for the first time in six days, closing 1.7 percent lower before the rate announcement. The yuan was little changed, closing 0.07 percent lower at 6.8510 per dollar in Shanghai.

Social Stability

China’s slowdown threatens to trigger unrest as factories close and unemployment climbs in the world’s most populous nation.

Uniden Corp., a Japanese maker of wireless communication gear including cordless phones, said Dec. 11 it will eliminate 6,200 jobs in China. Zhang Ping, China’s top economic planner, warned last month of the risk of “massive unemployment.”

China’s cabinet, the State Council, pledged yesterday to give more power to local governments to support their property markets and end a nationwide real-estate slump. The government said Dec. 13 it will boost money supply by 17 percent next year to encourage lending and buoy domestic consumption.

“The cuts are less aggressive than expected,” said Kevin Lai, an economist with the Daiwa Institute of Research in Hong Kong. “The central bank may want to save bullets until next quarter and wait to see how the policies announced so far work.”

Lai and economists at HSBC Holdings Plc and Capital Economics Ltd. had anticipated at least a 54-basis-point reduction.

‘Worst Case’

The government has switched from battling inflation in the first half of the year to guarding against the risk that falling prices will contribute to the economy spiraling down. Inflation was the slowest in 22 months in November.

Exports fell 2.2 percent last month after growing 19.2 percent in October. Imports plunged 17.9 percent.

China’s exporters are facing greater payment risks and rising shipment costs as some importers grow short of cash and trade finance costs surge, Vice Trade Minister Fu Ziying said over the weekend. Compensation payouts by China’s export credit insurance company almost tripled in the first 10 months of this year, Fu said.

China needs to prepare for a “worst case scenario” as the global economic slump deepens, central bank Governor Zhou Xiaochuan said Dec. 4.

The central bank may cut its benchmark rate by a further 27 basis points and reduce the bank reserve ratio by as much as 100 basis points in January to avert the risk of deflation and add liquidity before the Chinese New Year holiday, Daiwa’s Lai said.

The government aims for an 8 percent expansion to generate jobs and avoid social instability, China Banking Regulatory Commission Chairman Liu Mingkang said in Beijing on Dec. 13.

Oligarchs Seek $78 Billion as Credit Woes Help Putin

2008-12-22T10:25:00.000-08:00

Russian oligarchs are lining up for $78 billion of Kremlin loans to survive the credit squeeze, handing Prime Minister Vladimir Putin the opportunity to increase government control of the nation’s biggest companies.

Just 12 years after they gained ownership of the former Soviet Union’s industries by bailing out the government, the tables have been turned. More than 100 business leaders are vying for loans from Putin and the administration of President Dmitry Medvedev because Russian companies have about $110 billion of foreign obligations due next year, according to the central bank, double the total owed in Brazil, India and China.

Business leaders who tripled international debt in the past three years are putting up part of their stock as collateral for government support because they’ve been hobbled by tumbling commodity prices and the biggest drop in the ruble since Russia’s default in 1998. Putin already is aiding billionaires Roman Abramovich and Oleg Deripaska and considering requests from Dmitry Pumpyansky of pipemaker OAO TMK, OAO Severstal’s Alexei Mordashov and AFK Sistema’s Vladimir Yevtushenkov.

“Some of them will definitely lose their property, either to the state or to investors,” billionaire Alexander Lebedev, 49, said in a Dec. 8 interview, 11 days before Deutsche Bank AG demanded early repayment of a loan guaranteed by 3 percent of Moscow-based ZAO National Reserve Corp.’s 29 percent stake in OAO Aeroflot, the national airline. “They’ve been over- borrowing and sales of their companies have been falling.”

Loans-for-Shares

The oligarchs, Russian business leaders who used their political influence to help gain assets after the collapse of communism, essentially dictated the policies that allowed them to gain control of the nation’s biggest companies in the 1990s by providing financing to the government that was never repaid.

Anatoly Chubais, who oversaw the government’s sale of assets through the so-called loan-for-shares program, said in an interview in 2000 that the plan was necessary to create “big private capital” and help then-President Boris Yeltsin win reelection in 1996 to prevent a return to communism. Chubais, 53, is now chief executive officer of Moscow-based Russian Nanotechnology Corp.

Vnesheconombank, the Russian state lender known as VEB, is responsible for handling the bailouts. In return for one-year loans, VEB is requiring a representative at the company and the right to veto any debt or major asset sale, according to the bank’s Web site. Putin, 56, is head of its supervisory board. Borrowers offer shares, assets or export revenue as collateral.

Fewer Oligarchs

“It’s extremely unlikely they’ll all be able to repay in a year,” said Zina Psiola, a money manager at Clariden Leu AG in Zurich with $220 million in Russian equities. “Some oligarchs will no longer be oligarchs.”

At least 10 of the 25 wealthiest owners have faced margin calls from lenders since August as Russia’s worst financial crisis since 1998 wiped $230 billion from the value of their equity, according to data compiled by Deutsche Bank and Bloomberg.

Profits for four of Russia’s largest steel producers as well as Moscow-based TMK, the biggest maker of pipes for the oil and gas industry, will fall by about 50 percent to $10.5 billion next year as prices of the metal plunge, according to Clemens Grafe, an economist at UBS AG in London. That may leave the companies unable to pay for anything beyond their $10.3 billion of debt in 2009.

“If they have to pay this then they have no money for capital expenditure, no nothing,” Grafe said.

Shrinking Reserves

Prospects for refinancing debt are dwindling. Russia’s war with Georgia, a 75 percent drop in oil and the worsening credit crisis led investors to pull $211 billion from the country’s stocks, bonds and currency since August, according to BNP Paribas SA. The withdrawals weakened the ruble by 17 percent against the dollar, forcing the government to drain $163 billion, or 27 percent, from foreign-currency reserves. The ruble fell to the lowest level in almost three years against the dollar today.

Russian companies have about twice as much foreign debt due in 2009 than the $56 billion total owed by companies and the governments of China, India, and Brazil combined, according to data compiled by Commerzbank AG and RBC Capital Markets.

The leaders of Russia, Kazakhstan and three other former Soviet states agreed last week to form a $10 billion fund to help their economies weather financial turmoil, Kazakh President Nursultan Nazarbayev’s press service said on its Web site today, without providing more details.

State Control

Greater state involvement may reassure investors, said Jerome Booth, head of research at Ashmore Group Plc in London, which manages $32 billion of emerging-market assets including Russian corporate debt.

“There’s less chance of mass defaults in Russia than in Western Europe,” Booth said. “There’s a degree of state control in the economy already, so this will be more of the same.”

The prime minister, saying he has no intention of nationalizing the economy, pledged on Dec. 4 to offer loans and buy stakes in companies that solicit help, releasing collateral and selling back the holdings later.

Putin, who served eight years as president before becoming prime minister, provided $12 billion of loans since October to companies such as those backed by Abramovich, 42, and Deripaska, 40, and pledged $38 billion more. That covers only half the amount sought. Among the applicants is Pumpyansky, 44, of TMK, which owes $1.7 billion in 2009, more than forecast earnings. Yields on TMK’s dollar bonds due September 2009 topped 80 percent last month. TMK plans to delay some investments and is seeking to refinance with longer-term debt, according to an e- mailed statement.

Deripaska Selling

Deripaska is selling Moscow-based Soyuz Bank and may part with control of insurer OAO Ingosstrakh in Moscow, Vedomosti reported last week. Named Russia’s richest man by Forbes in April, Deripaska ceded stakes in auto-parts maker Magna International Inc. in Canada and German builder Hochtief AG to banks in October after the stocks lost more than half of their market value.

VEB’s $4.5 billion loan allowed Deripaska’s United Co. Rusal to keep a 25 percent stake in OAO GMK Norilsk Nickel, Russia’s biggest metals producer. A further $1.8 billion went to Evraz, the steelmaker part-owned by Abramovich.

Deripaska said he’s seeking to sell stakes in “practically all” his companies including Rusal, the world’s biggest maker of aluminum, to pay off loans, according to comments in the Wall Street Journal confirmed by spokesman Sergei Babichenko today. Deripaska said he hopes to have new investors in the companies by end of March.

Sistema, Evraz

Yevtushenkov’s Sistema in Moscow may seek as much as $2 billion from Moscow-based VEB to pay debts next year.

Moscow-based Evraz and Cherepovets-based Severstal didn’t respond to requests for comments.

“Not all of them are going to be helped out,” said Kieran Curtis, who helps manage $787 million in emerging market debt at Aviva Investors Ltd. in London. “I’m not convinced we know who is going to get state funds and that will be a major factor in terms of rollovers and redemptions.”

Vladimir Potanin, the biggest owner of OAO GMK Norilsk Nickel shares, may lose them to the government within a year, Vedomosti reported today, citing an unidentified Kremlin official. The shares are pledged against a $3 billion loan from state-controlled lender OAO VTB Group. Potanin has received margin calls on the debt after the stock lost value this year, the Moscow-based newspaper said.

Without a revival in commodity prices or state help, some Russian companies risk failing, according to Pacific Investment Management Co., which runs the world’s largest bond fund.

“It really depends on whether they can weather the storm with metals prices,” said Tim Haaf, Pimco emerging-market fund manager in Munich, who helps oversee $50 billion of emerging- market debt including Russian bonds. “We’re very conservative on Russia.”

TED Spread Narrows to Least Since Lehman on Rates, Cash Flood

2008-12-22T10:24:00.000-08:00

The TED spread, a gauge of banks’ willingness to lend, slipped below 150 basis points for the first time since before the collapse of Lehman Brothers Holdings Inc. amid speculation U.S. borrowing costs near zero and promises of further government cash will help unfreeze credit.

The spread, the difference between what banks and the U.S. government pay to borrow money, narrowed as the London interbank offered rate, or Libor, for three-month dollar loans fell and Treasury borrowing costs rose. The Libor dropped three basis points, or 0.03 percentage point, to 1.47 percent, the British Bankers’ Association said today. The rate on the three-month Treasury bill added 4 basis points to minus 0.009 percent.

“There are expectations central banks will keep liquidity in the market and we have more or less a zero rate in the U.S., so over time the fixings should ease off,” said Jan Misch, a money-market trader in Stuttgart at Landesbank Baden- Wuerttemberg, Germany’s biggest state-owned lender. “After the turn of the New Year we should see a softening of these rates.”

Central banks are pumping money into the financial system to combat the worst economic slump since the Great Depression. Credit markets, which seized up after Lehman’s bankruptcy, remain locked amid almost $1 trillion in losses and writedowns tied to mortgage-related securities. The Federal Reserve cut its benchmark rate to as low as zero last week and said it will flood the economy with cash.

TED Spread

The TED spread decreased three basis points to 148 basis points, the least since Sept. 12. The measure remains historically high, having averaged 38 basis points in the year before the credit crisis began in August 2007.

The Libor-OIS spread, a gauge of cash scarcity favored by former Fed Chairman Alan Greenspan, narrowed three basis points to 126 basis points. The spread averaged 8 basis points in the year before the start of crunch and will narrow to 92 basis points by March, forwards contracts show.

Lower interest rates aren’t being passed onto consumers. While the average cost of a fixed 30-year mortgage fell to 5.19 percent on Dec. 18, that’s 371 basis points higher than the three-month dollar Libor, compared with an average 97 basis points in the 12 months before the crisis.

Banks increased deposits with the European Central Bank in its overnight facility Dec. 19 even after the interest rate paid was reduced a day earlier. Deposits rose to 230.7 billion euros ($322.9 billion), the third straight day they exceeded 200 billion euros. The daily average in the first eight months of the year was 427 million euros.

‘Getting Worse’

“There’s no pickup in actual volumes of lending in the interbank market,” Misch said. “It is probably getting worse because of the year-end, as banks try to keep their balance sheets as small as possible. There’s no guarantee volumes will pick up in the New Year.”

The Tokyo three-month interbank offered rate, or Tibor, slipped almost 11 basis points, the most in a decade, to 0.796 percent, after the Bank of Japan last week cut its benchmark rate and said it would adopt new ways of adding money to the system. Hong Kong’s interbank offered rate, or Hibor, for three- month loans fell five basis points to 1.05 percent, the lowest level since January 2005. The euro interbank offered rate, or Euribor, for three-month loans fell three basis points to 5.05 percent, the lowest level since June 27, 2006.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a survey by the BBA before noon each day in London. Euribor is set earlier in the day by members of the European Banking Federation.

Libor may suffer a “re-explosion” by June should the financial crisis worsen, ING Groep NV said Dec. 19.

“The systemic risk hasn’t gone away, and it’s entirely possible that the risk may re-elevate in the next six months,” Padhraic Garvey, head of investment-grade debt strategy at ING in Amsterdam, said in an interview. “The risk is if something happens -- banking sector troubles, hedge funds troubles -- and leads to a breakdown in trust again, then Libor will go up.”

BNP Paribas suspends takeover of Fortis of Belgium

2008-12-22T10:23:00.000-08:00

BNP Paribas bowed to the inevitable on Thursday and said that it was suspending its takeover of the Belgian financial services company Fortis after a court ruling that effectively froze the deal.

BNP Paribas, one of the largest French banks, had offered €14.5 billion, or $21 billion, for Fortis after the Belgian company neared collapse in the aftermath of the implosions of American International Group and Lehman Brothers.

But the Brussels Court of Appeals found on Dec. 12 that the Belgian government had not fully considered the interest of Fortis shareholders when it sought to sell the company in early October, a move that effectively wiped out the company's equity. The court said shareholders must be allowed to vote on the deal by mid-February.

That ruling, which the government has said it will try to overturn, effectively ended BNP's chances of closing the deal quickly. Lawyers in Brussels representing Dutch and Belgian shareholders of Fortis have said that the case could drag on for months or even years.

Under the circumstances, "the acquisition of a stake by BNP Paribas in Fortis Banque cannot proceed as initially planned," BNP said. As a result, a BNP shareholder meeting set for Friday to approve the deal has been canceled.Céline Castex, a BNP spokeswoman, said the bank nonetheless remained interested in pursuing a deal for Fortis.

Shares of Fortis have risen 25 percent since the court ruling last week amid hope that the deal would be renegotiated.

BNP might have been seeking to reduce uncertainty surrounding its business after its shares came under heavy selling pressure this week.

The bank revealed Tuesday that its corporate and investment banking unit lost €710 million in the first 11 months of 2008, partly from €350 million of exposure to the fraud allegedly perpetrated by Bernard Madoff in New York. BNP shares, which fell 17 percent Wednesday, fell 3.6 percent in Paris on Thursday.

Previously a Dutch-Belgian company, Fortis neared collapse at the end of September. A deal between the Dutch, Belgian and Luxembourg governments to salvage the bank collapsed, and the Dutch decided on Oct. 3 to nationalize the Netherlands operations at a price of €16.8 billion. On Oct. 5, BNP Paribas agreed to acquire Fortis's banking and insurance operations in Belgium and Luxembourg for €14.5 billion.

"I think the deal with BNP will probably go through in the end," Jaap Meijer, a banking analyst at Dresdner Kleinwort in London, said. The deal makes sense for BNP and Fortis debt holders, if not for Fortis shareholders, he added.

Fortis appears to be fairly well capitalized after proceeds from the sale of the Dutch arm were injected into Belgium arm, he said, and BNP had been depending on the acquisition to bolster its capital ratio.

Without a deal, he said, it might have to seek funding from the French government.

Fortis's Belgian business might be attractive to another bidder, like ING Group, the Dutch financial services company, Meijer said, though he noted that mustering funding for a bid could be difficult under current conditions.

Castex declined to comment on any plans BNP might have to raise funds.

In the Netherlands, a commercial court on Nov. 24 granted the request of the VEB shareholders group for an investigation of all activities of the company going back to mid-2007, when it began to pursue the ill-fated acquisition of ABN AMRO, a deal that left it saddled with an onerous debt at the height of the credit crisis.

Niels Lemmers, legal counsel for the VEB, said Thursday that Dutch shareholders would decide whether to pursue their own lawsuits after the investigators issue their findings next year.

Shareholders in the Netherlands believe Fortis's parts were sold off much too cheaply, he said, citing a Morgan Stanley estimate that the Dutch business was worth €22.5 billion, far more than the €17.8 billion the Dutch government had paid for it.

"In the end, the Dutch and Belgian governments saved the bank, they saved the financial system," Lemmers said. "We don't question that, but we do question the terms and the conditions."

AP study finds $1.6B went to bailed-out bank execs

2008-12-22T10:22:00.000-08:00

Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.
The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.
Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe 'to get them to do the jobs for which they are well paid in the first place.
'Most of us sign on to do jobs and we do them best we can,' said Frank, a Massachusetts Democrat. 'We're told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!'
The AP compiled total compensation based on annual reports that the banks file with the Securities and Exchange Commission. The 116 banks have so far received $188 billion in taxpayer help. Among the findings:
_The average paid to each of the banks' top executives was $2.6 million in salary, bonuses and benefits.
_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home nearly $54 million in compensation last year. The company's top five executives received a total of $242 million.
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives 'whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels.' Goldman spokesman Ed Canaday declined to comment beyond that written report.
The New York-based company on Dec. 16 reported its first quarterly loss since it went public in 1999. It received $10 billion in taxpayer money on Oct. 28.
_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the chairman of Capital One Financial Corp., took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options. The McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.
_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.
Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.
The AP review comes amid sharp questions about the banks' commitment to the goals of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages and other troubled assets. Last month, the Bush administration changed the program's goals, instructing the Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.
The program set restrictions on some executive compensation for participating banks, but did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from giving golden parachutes to departing executives and deducting some executive pay for tax purposes.
Banks that got bailout funds also paid out millions for home security systems, private chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top executives up to $20,000 each to pay personal financial planners.

JPMorgan Adds to $14 Billion CLO Bet Amid Downgrades

2008-12-19T10:44:00.000-08:00

JPMorgan Chase & Co. is adding to a $14 billion bet on collateralized loan obligations while other investors flee the market amid plummeting prices.

Within the past month, the largest U.S. bank by assets bought about $1.1 billion of the AAA rated portions of the securities for about 80 cents on the dollar, according to a person familiar with the transactions who declined to be identified because the trades were private. The bonds are typically backed by speculative-grade loans used to finance leveraged buyouts.

JPMorgan, based in New York, is buying even as the worst economy since World War II forces Chicago-based newspaper owner Tribune Co. and other companies to default. Standard & Poor’s said this month that lower-rated portions of scores of CLOs may face downgrades due to the “rapid deterioration in the credit quality” of the corporate loans.

“If everything’s fine and the companies pay back their loans, the AAA is paid back at par,” said David Preston, an analyst at Wachovia Corp. in Charlotte, North Carolina. “If the situation gets worse, the bonds get paid back quicker and the yield rises.”

That’s because downgrades may trigger a clause in CLO contracts forcing managers to pay off top-ranked bonds faster, at the expense of lower-rated debt. Those managers include firms such as New York-based Kohlberg, Kravis Roberts & Co., which may see investments and fees decline as underlying loan prices fall.

In Better Shape

JPMorgan, under Chief Executive Officer Jamie Dimon, wrote down $20.5 billion since the start of the credit crisis, less than a third of Citigroup Inc.’s total. It also received $25 billion from the U.S. government’s $700 billion bailout fund.

Dimon, 52, is using this financial strength relative to competitors to bulk up on the best pieces of the high-yield loan pools, just as he took advantage of market turmoil by taking over troubled financial companies Bear Stearns Cos. in March and Washington Mutual Inc. in September. Brian Marchiony, a spokesman for JPMorgan in New York, declined to comment.

“There aren’t enough people with the cash to buy these securities,” said Colin Fleury, a portfolio manager at Henderson Global Investors Ltd. in London, which oversees $80 billion of assets including CLOs. “You need to have a medium- term view because if you want to get your cash back you may struggle to find someone to take you out of the position.”

$14 Billion Stake

JPMorgan bought $200 million of top-rated CLOs last week, after purchasing $900 million in the previous month, according to people familiar with the transaction, who declined to be identified because the details are private. That’s on top of at least $14 billion of such investments the bank already held, according to a third-quarter regulatory filing.

CLOs are a kind of collateralized debt obligation, debt instruments that repackage loans into securities of varying risk that pay investors different yields. The safest AAA notes, as designated by rating companies, yield the lowest returns. The latest purchase by JPMorgan yields between 2.8 percentage points and 4.7 percentage points more than the benchmark London interbank offered rate, or Libor.

The market for the securities ballooned amid the record number of buyouts, with $605.5 billion issued since 2001, according to JPMorgan. The bank has been the biggest arranger of high-risk, high-yield loans from 2001 through 2007, according to Bloomberg data. Money managers, including private equity firms, hedge funds and insurance companies, set up teams to manage the loan pools, growing revenue by charging management fees and earning a return on the stakes of the debt that they kept.

Sales Fell

Then the seizure in credit markets hit and CLO sales fell to $64 billion this year as investors moved to safer government debt. Financial institutions have taken losses and writedowns of about $1 trillion since the start of 2007, according to Bloomberg data.

Yields on top-rated portions of loan pools have climbed to 5 percentage points more than the Libor from 1.85 percentage points in July, JPMorgan data show. Yields rose as loan prices dropped 31 cents this year to a record 63.5 cents on the dollar, according to S&P’s Leveraged Commentary and Data unit.

S&P said Dec. 5 that the lower-rated portions of 127 CLOs managed by firms including KKR and Carlyle Group of Washington may face downgrades.

Even with downgrades rising at a record pace, according to S&P, AAA rated portions of the pools are likely to survive the credit crunch, said James Finkel, chief executive officer of Dynamic Credit Partners, a New York-based investment adviser with $5 billion in assets.

“As the economy worsens, the market may love the CLOs less and the tranches may be downgraded” he said. “But they’re still likely to be paid back.”

Recommending CLOs

More than 90 percent of U.S. companies with ratings below BBB- by S&P and Baa3 by Moody’s Investors Service would need to default before an investor buying top-ranked CLO bonds at 80 cents on the dollar lost money, said Finkel. He said he’s buying AAA rated portions and is recommending the trade to clients.

CLOs can typically hold no more than 7.5 percent of their assets in loans rated CCC or lower without having to book them at market value rather than face value. Falling loan prices and increasing downgrades are causing some loan pools to breach those limits, forcing managers to divert cash or repay senior debt.

Wachovia’s Preston said 14 CLOs are failing tests in this way. The proportion of companies rated lower than CCC+, seven grades below investment grade, nearly doubled to 8.2 percent this month from 4.4 percent in October, according to New York- based S&P. It was 2.7 percent at the end of 2007.

High Default Rates

“It’s not a given that any investors in CLOs will be paid back,” said Preston. “There are extreme scenarios that could produce losses on even the AAA bonds.”

Recent bankruptcies helped send corporate default rates to their highest level since May 2002, according to S&P. The percentage of loans defaulting rose to 4.11 percent this month, from 0.97 percent last December, S&P said.

Loan downgrades to CCC may increase to 15 to 20 percent of the total outstanding, said Jeffrey Kushner, managing director at investment firm BlueMountain Capital Management LP, whose London unit oversees $5 billion of assets, including corporate loans.

“No CLO manager in the world will be unaffected by the CCC issue,” said Kushner. “Most CLO equity right now is probably worth close to zero.”

The equity portion is the unrated piece that loses money first and is typically owned by pension funds, hedge funds and private-equity firms, because it pays more.

‘Historic’ Declines

KKR’s debt-management unit, KKR Financial Holdings LLC, said in a regulatory filing last month that it expects three of five CLOs it issued in 2006 and 2007 to fail valuation tests after declines in loan prices of “historic magnitude.” The San Francisco-based company sold pools of high-yield loans to fund the purchase of more than $8 billion of leveraged, or speculative grade, loans.

A KKR affiliate invested $525.4 million in the “junior notes,” the company’s November regulatory filing said. Interest payments from the loans the private-equity firm bought will likely be directed to paying down the top-rated slices of the CLOs, according to a KKR Financial conference call with analysts on Dec. 16.

KKR Financial replaced Chief Executive Officer Saturnino Fanlo Dec. 15 after losing 95 percent of its value this year on the New York Stock Exchange. David Lilly, a New York-based spokesman for KKR, declined to comment.

Carlyle “assembled the assets in the CLO portfolios in a way to perform through a recession,” said Michael Zupon, head of the company’s U.S. leveraged finance team in New York. He wouldn’t comment on the performance of the loan pools.

GM and Chrysler Will Get $13.4 Billion in U.S. Loans

2008-12-19T10:43:00.000-08:00

General Motors Corp. and Chrysler LLC will get $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, President George W. Bush announced.

Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion Troubled Asset Relief Program fund originally set up to bail out financial institutions. The automakers have until March 31 to meet the conditions of the loans, including demonstrating they have a plan to become profitable, or be forced to repay.

Winning the assistance is a reprieve for GM, the biggest U.S. automaker, and No. 3 Chrysler after they said they would run out of operating funds as soon as this month. Bush is stepping in after Senate Republicans’ refusal last week to take up a House- approved rescue raised the prospect that the companies would fail, costing millions of jobs.

“These are not ordinary circumstances,” Bush said at the White House today. “In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action.”

The United Auto Workers are “disappointed” that Bush added “unfair conditions singling out workers,” the union’s president, Ronald Gettelfinger, said in a statement.

“We will work with the Obama administration and the new Congress to ensure that these unfair conditions are removed,” Gettelfinger said.

‘Necessary Step’

President-elect Barack Obama endorsed the plan, calling it a “necessary step” to avoid a major blow to the economy.

“The auto companies must not squander this chance to reform bad management practices and begin the long-term restructuring that is absolutely required to save this critical industry,” Obama said in a statement.

GM is reeling from almost $73 billion in losses since 2004 and a 22 percent slump in U.S. sales this year, while the drop at Auburn Hills, Michigan-based Chrysler is 28 percent, the steepest among the major automakers.

The package is intended for GM and Chrysler initially. Ford Motor Co., the second-biggest U.S. automaker, has said it can continue operating without aid for now.

The loan term is three years. Of the initial $13.4 billion, GM would get $9.4 billion and Chrysler $4 billion, said Joel Kaplan, Bush’s deputy chief of staff.

Debt Priority

Under the terms of the plan, the government’s debt would have priority over any other creditors. The automakers also must provide warrants for non-voting stock, accept limits on executive pay, and give the government access to financial records.

No dividends may be issued until the loans are repaid. In addition, the automakers must cut their debt by two-thirds in an equity exchange.

For workers, GM and Chrysler would be required to make half of the payments to a union retirement fund in equity and eliminate a program that pays union workers when they don’t have work. Unions and management would have to negotiate a plan to have compensation and work rules in place by Dec. 31, 2009, that will make the U.S. companies competitive with foreign automakers. The requirements could be modified by negotiations with the union and debt holders.

GM shares rose 40 cents, or 11 percent, to $4.06 at 12:46 a.m. in New York Stock Exchange composite trading. Ford gained 5 cents, or 1.8 percent, to $2.89. Before today, the companies’ shares had tumbled 85 percent and 58 percent this year.

Cerberus

Cerberus Capital Management LP, the New York-based buyout firm that owns Chrysler, said today it will hand over equity in the company’s automotive operations to labor and creditors as part of the loan agreement. “Concessions by all relevant constituencies” are needed to restructure Chrysler, Cerberus said in an e-mailed statement.

Democratic Senator Carl Levin of Michigan said the plan “gives the industry breathing room.” In a conference call with reporters, he said Bush was wise to set the automakers’ restructuring targets “as non-binding goals which are subject to negotiations.”

Republican Senator John McCain of Arizona, his party’s presidential nominee this year, said he regretted that the president decided to “give away” $17 billion to the automakers “while failing to receive any serious concessions from the industry.”

The conditions are largely those set out in the legislation passed by the House and blocked in the Senate.

‘Huge Amount of Work’

“We’ve got a huge amount of work to do over the next 90 days and beyond,” GM Chief Executive Officer Rick Wagoner said at a Detroit news conference.

“Chrysler is committed to meeting these requirements,” the company’s chief executive officer, Bob Nardelli, said in a statement.

The government rejected letting the companies go bankrupt, as had been urged by some lawmakers opposed to a bailout.

Bankruptcy would “worsen a weak job market and exacerbate the financial crisis,” Bush said. “It could send our suffering economy into a deeper and longer recession.”

The terms of the loans represent a major challenge for the automakers, Maryann Keller, an independent auto analyst and consultant in Greenwich, Connecticut, said in a Bloomberg Television interview.

“The restructuring they’re going to have to go through will be huge,” Keller said. “I can’t see a way for GM to operate properly with the capital structure they have.”

Kaplan said representatives of Obama, who takes office Jan. 20, have been kept informed of the administration’s actions.

‘Car Czar’

The Treasury secretary would in effect be a “car czar,” making sure the automakers meet deadlines and having the authority to revoke the loans, Kaplan said. The Bush administration didn’t want to designate an independent overseer with a month left in office.

Kaplan, asked if Chrysler should merge with GM, sidestepped the question.

“We are not going to tell the manufacturers what the right structure is for them to be viable; we’re just going to tell them that if you want taxpayers’ assistance, you’re going to have to make those decisions, and you’re going to have to prove it,” he said.

Treasury will need to go to Congress to get the remaining $350 billion in TARP funds released, including the $4 billion in additional loans to the automakers, Kaplan said. That may be left for Obama’s administration, he said.

British Airways Risks Becoming Also-Ran After Qantas Deal Fails

2008-12-19T10:41:00.000-08:00

British Airways Plc, once the world's most profitable airline, risks falling from the first rank of global carriers following the breakdown of merger talks with Qantas Airways Ltd.

London-based BA must now revive flagging negotiations with Spanish carrier Iberia and win approval for a long-delayed alliance with American Airlines if it's to match competitors after failing in a dozen transactions in the past decade.

While the U.K. carrier pursued deals that were potentially lucrative but tough to execute, rivals pulled off a series of acquisitions that gave them broader networks and higher earnings. Air France bought Dutch carrier KLM in 2004 to become world No. 1 by sales and may soon get a chunk of Alitalia SpA. Deutsche Lufthansa AG purchased Swiss International in 2007 and this year added Brussels Airlines and Austrian Airlines AG before striking at British Airways' London Heathrow base by buying BMI.

``BA is getting left behind,'' said Geoff van Klaveren, an analyst at Exane BNP in London. ``They're playing a desperate game of catch-up because they've missed out on quality mergers over the years. Lufthansa and Air France have played the game much better. They always knew what they wanted. BA spent too much time milking the market across the north Atlantic.''

British Airways' failure to seal purchases has seen a carrier that once billed itself as ``The World's Favorite Airline'' slip from first to third place in Europe over the past two decades. The gap is no longer even close, with the carrier generating the equivalent of $17.6 billion in annual revenue, compared with $34 billion at Air France-KLM and $30.7 billion at Cologne, Germany-based Lufthansa.

Qantas Flop

The reduced size of British Airways was also a factor in the failure yesterday of talks with Sydney-based Qantas. The merger stalled because the carriers couldn't agree on who would control the new company, BA spokesman Tony Cane said, with the U.K. airline's market value having fallen to less than that of its potential partner.

``There's a danger that British Airways will get left behind,'' said Nick Cunningham, an analyst at Evolution Securities in London with an ``add'' recommendation on the stock following its 44 percent decline this year. ``This puts pressure on them to do the Iberia deal and also to complete the cooperation agreement with American.''

The pressure to secure partners has increased as British Airways suffers more than most in a recession that's wiping out the London business travel on which the airline overwhelmingly relies. Financial institutions account for 13 of its top 50 clients, Chief Executive Officer Willie Walsh said Sept. 24.

Traffic Tumbles

BA's passenger traffic plunged 5.9 percent last month, led by an 11 percent fall in business- and first-class sales. Air France-KLM reported a 1.8 percent increase, excluding a four-day strike, and Lufthansa posted a gain of 0.7 percent.

Consolidation may help airlines survive the global slump by reducing shared costs and feeding more passengers through hubs. Better networks also attract larger company accounts with guaranteed custom, said Henri Courpron of Washington-based consultant Seabury Aviation and Aerospace.

Already the biggest carrier across the north Atlantic, in good times the industry's most profitable market, British Airways has long viewed securing a U.S. partner as the top priority as it seeks to better tap the world's largest economy.

In 1989 the U.K. carrier failed in an attempt to buy a 20 percent stake in UAL Corp.'s United Airlines and in 1992 missed out on 21 percent of US Airways Group Inc.

AMR Saga

BA has expended most effort in seeking a tie-up with AMR Corp.'s American. The pair announced plans for an alliance in 1996, only to be refused the U.S. antitrust immunity they needed to share revenue and coordinate pricing. They tried again before scrapping a proposal in 2002 after regulators said they must surrender flights at Heathrow.

British Airways' focus on winning an alliance with AMR left it at a disadvantage after Lufthansa won clearance to cooperate with Star Alliance ally United and Air France secured approval for partnerships first with Northwest Airlines Corp. and later with Delta Air Lines Inc.

BA and AMR renewed their antitrust application on Aug. 14, buoyed by an Open Skies agreement that freed up trans-Atlantic flights to increased competition, and analysts say the venture now has a better than even chance of succeeding. U.S regulators are likely to rule on the application in the first quarter.

In Europe, British Airways concentrated on establishing overseas units rather than bidding for existing carriers. The units were later closed or sold and BA tried four times to merge with KLM before Paris-based Air France finally secured a deal.

Last Chance

Short of intervening in the bidding for Italy's unprofitable Alitalia, Iberia represents BA's last chance of combining with a major European airline. The carriers announced a merger in August, when Walsh said the deal would allow his company to ``compete much better on a global scale'' and particularly in Latin America, where Iberia -- along with AMR -- is the dominant foreign carrier.

The deal, though, is being jeopardized by British Airways' widening pension deficit, which Iberia shareholder Caja Madrid has cited as the main obstacle to negotiations. This week's failure to reach agreement with Qantas could also weaken BA's negotiating position over the balance of ownership.

``British Airways is in a difficult position,'' said Exane's van Klaveren, who has an ``underperform'' rating on the company. ``They have no other options and Iberia knows it.''

The U.K. airline has completed just two purchases this decade; this year's 54 million-pound ($81 million) acquisition of L'Avion, a French carrier with one route, and the takeover of franchise operator British Regional Airlines in March 2001.

Lufthansa Expansion

Lufthansa, meanwhile, has been doing deals right and left. Swiss International added Zurich as a third hub with Frankfurt and Munich, while the addition of BMI will make the airline the second-biggest slot holder after British Airways at Heathrow.

Virgin Atlantic Airways Ltd., BA's biggest U.K. competitor, has since expressed interest in a tie-up with BMI, while Nordic carrier Scandinavian Airlines said Sept. 23 it was seeking a ``structural solution'' in response to reports that it would be bought by the German carrier.

For British Airways, the concern is that there may be precious little left to purchase if the AMR and Iberia tie-ups founder, said Andrew Lobbenberg, an analyst at Royal Bank of Scotland in London with a ``buy'' rating on the stock.

``They were skeptical about Air France and KLM and about Lufthansa and Swiss, but they've seen those work and now they're converts,'' he said. ``The problem is that they're so late to the game.''

Goldman, UBS, Deutsche, Morgan Stanley Lowered by S&P

2008-12-19T10:40:00.000-08:00

Goldman Sachs Group Inc., UBS AG and Morgan Stanley are among a dozen financial firms whose ratings or outlooks were cut by Standard & Poor’s because of funding volatility and “significantly pressured” earnings potential.

S&P reduced ratings on 11 banks by as many as two levels, saying they faced more operational risk amid a worsening financial meltdown, according to a statement today. The agency said it “wouldn’t rule out” cutting the lenders’ ratings further if the global credit crisis and economic outlook worsen.

“The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions’ future performance due to increasing bank industry risk and the deepening global economic slowdown,” S&P said.

Banks worldwide have reported more than $745 billion of writedowns and losses since the credit crisis began, according to data compiled by Bloomberg. S&P expects banks to face more uncertainty in funding markets and a higher level of stress than in a “typical business-cycle trough.”

“The macro outlook in the U.K. and U.S. banking sector has worsened materially,” said Sandy Chen, a London-based banking analyst at Panmure Gordon & Co. “They’re looking at the risk of what the combination of deleveraging and deflation could do to banks’ earnings.”

Banking shares closed little changed in European trading, while UBS, Switzerland’s largest lender, fell 3.7 percent in Zurich. The Bloomberg Europe Banks and Financial Services Index has declined 66 percent this year.

Goldman Cut

Goldman earlier this week reported its first quarterly loss since the company went public in 1999. While the loss isn’t considered indicative of the bank’s profit potential, “the timing and extent of earnings recovery are currently highly uncertain,” S&P said. It cut the New York-based firm’s rating by two grades to A from AA- and kept a “negative” outlook.

Morgan Stanley, which posted a net loss for the fourth quarter this week, had its long-term counterparty rating lowered to A from A+. “The cyclical downturn in Morgan Stanley’s core investment banking, trading, asset management, and wealth management businesses could well be far more pronounced and extended than we had previously assumed,” S&P said. Citigroup Inc. had its credit rating cut to A from AA-.

“Goldman Sachs and Morgan Stanley have adequate amounts of liquidity -- for now,” S&P told analysts in a conference call today. “We’ve learned that no amount of capital can prevent illiquidity for a bank.’

Losses

UBS’s writedowns and losses of $48.6 billion since the beginning of the credit crisis, the most of any European bank, reflect “larger risk concentrations and weaker risk management than we had previously perceived,” the rating company said. Next year the bank’s “performance will be relatively subdued.”

Credit Suisse Group AG, UBS’s largest Swiss competitor, earlier this month reported a 3 billion-franc ($2.7 billion) net loss for October and November. S&P reduced its long-term rating today to A from A+.

Deutsche Bank AG’s rating was lowered to A+ from AA- on expectations of “weak” trading results in the fourth quarter and a potential “significant” reduction in 2009 pretax profits compared with 2007 levels, S&P said.

Rating cuts come at a time when banks worldwide are increasingly relying on their central banks for funding after the interbank lending market nearly ground to a halt this year. Zurich-based UBS had to accept a $59.2 billion government aid package in October to help it split off risky assets and get extra cash.

‘Get Tougher’

The downgrades “will increase the price of interbank lending,” said Michael Trippitt, a London-based analyst at Oriel Securities Ltd. “This is confirmation that in the corporate and commercial world life is going to get tougher.”

Royal Bank of Scotland Group Plc, 58 percent owned by the U.K. government, had its rating cut to A from A+. The Edinburgh- based bank’s “market position, diversity, and our view of its strategy and management, has been somewhat impaired,” S&P said.

London-based Barclays Plc had its rating lowered to A+ from AA- in light of “significant exposure” to risky assets and expectations that markdowns in the commercial mortgage portfolio may increase as the economy deteriorates.

HSBC Holdings Plc was given a “negative” outlook, while its rating was kept at AA-. Europe’s biggest bank will likely “remain capital generative,” although impairments will probably stay “elevated” in the U.S. and increase in the U.K., the rating company said.

Counterparty

Bank of America Corp.’s long-term counterparty rating was cut to A+ from AA- and that of Wells Fargo & Co. to AA from AA+ in the light of expected “credit deterioration” in the U.S. banking industry.

JPMorgan Chase & Co. had its senior unsecured debt rating lowered to A+ from AA-, and the counterparty rating on JPMorgan Chase Bank N.A. was cut one level to AA-, as the rating company said “loan quality issues” will probably depress earnings next year.

Bank of Japan Cuts Rate to 0.1%, Adds Funds to Ease Credit Woes

2008-12-19T10:37:00.000-08:00

The Bank of Japan cut its benchmark interest rate to 0.1 percent, increased purchases of government debt and announced plans to buy commercial paper for the first time as the deepening recession starves companies of funds.

Governor Masaaki Shirakawa and his colleagues lowered the target for the overnight lending rate from 0.3 percent, the central bank said in a statement today in Tokyo, a decision that was predicted by futures traders after the Federal Reserve reduced U.S. rates this week. Government bonds rallied on the plan to buy more debt.

Purchasing corporate debt and assuming credit risks of companies is an “exceptional step taken by a central bank,” the statement said. The decision followed a report this week that showed the sharpest drop in business confidence in 34 years and a surge in the yen to a 13-year high.

“The Bank of Japan decided to use all available tools to prevent the economy from falling off a cliff now, rather than save them for the future,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. in Tokyo and a former Bank of Japan official. “Like the Fed, the BOJ’s focus is not on rates but on buying debt and pumping cash into financial markets.”

The yen rose to 88.66 per dollar as of 9:35 a.m. in London from 89.28 shortly before the decision. Bonds rose, reversing earlier declines, sending the yield on the 10-year bond down 4 basis points to 1.22 percent. The Nikkei 225 Stock Average slid 0.9 percent and has lost 44 percent this year.

Noda’s Dissent

The policy board voted 7-to-1 to lower the key rate, with Tadao Noda the sole dissenter. Shortly before the announcement, investors saw a 50 percent chance of a cut, according to JPMorgan calculations based on interest-rate swaps trading.

“I’ve never experienced such a sudden change in conditions,” Shirakawa said at a news conference. He said the reduction doesn’t mean a return to the bank’s 2001-2006 zero- rate policy, while adding that he couldn’t rule out the possibility of another cut.

The central bank said it will raise its monthly government bond purchases from lenders, its main tool for adding funds into the banking system, to 1.4 trillion yen ($15.6 billion) from 1.2 trillion yen, the first increase since October 2002. It will broaden the range of debt it buys to include 30-year, floating- rate and inflation-indexed bonds.

The bank may start buying other assets as well. Staff will “investigate how other corporate financing instruments may be employed” and report their findings to the policy board “as swiftly as possible,” the statement said.

Support for Companies

“Whereas the Fed is dramatically expanding its balance sheet to offer support to financial institutions, the Bank of Japan is now expanding its balance sheet to support the corporate sector,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong.

The government also decided to purchase commercial paper last week, and today said it would buy as much as 20 trillion yen of shares held by banks to boost their capital.

Chief Cabinet Secretary Takeo Kawamura said the central bank’s decision was “timely and appropriate.” Prime Minister Taro Aso and Finance Minister Shoichi Nakagawa said over the past week they wanted the bank to play its part in helping companies borrow. Commercial paper markets this month touched the highest in at least the past four years.

Japanese banks’ borrowing costs fell for a third day today on speculation the central bank would cut. The Tokyo three-month interbank offered rate, or Tibor, declined to 0.905 percent after reaching a decade-high 0.922 percent on Dec. 16.

ECB May Pause

The moves by Japan and the U.S. contrast with the European Central Bank, which this week signaled it may keep the benchmark rate at 2.5 percent for the time being. ECB President Jean- Claude Trichet said further reductions may fail to spur lending.

Japan’s central bank cut its assessment of the economy, saying “conditions have been deteriorating and are likely to increase in severity.” In November, it said growth had become “increasingly sluggish.”

The Fed’s reduction brought the U.S. key rate below Japan’s benchmark for the first time since February 1993, making the yen a higher-yielding currency. The yen has gained 25 percent this year, eroding profits for exporters that are already cutting jobs, production and spending as global demand collapses.

Honda Motor Co. cited the currency’s gains and slumping sales as reasons for slashing its profit forecast by 62 percent this week. President Takeo Fukui described the yen’s level as “abnormal” and called on the government and central bank to take “swift action.”

The Fed’s move “prompted the BOJ to take measures to prevent further yen appreciation,” said Kanno at JPMorgan. Shirakawa “simply had no choice but to realize this historical deterioration in the economy.”

Confidence among Japan’s major manufacturers fell the most since 1975, the bank’s quarterly Tankan survey showed this week, indicating the first recession since 2001 is likely to deepen.

The world’s second-largest economy could shrink 0.8 percent next fiscal year if the government doesn’t implement stimulus measures, Economic and Fiscal Policy Minister Kaoru Yosano said today. The Cabinet Office today predicted zero growth for the year starting April 1.

Credit Suisse to Use Illiquid Assets to Pay Bonuses

2008-12-18T10:29:00.000-08:00

Credit Suisse Group AG’s investment bank has found a new way to reduce the risk of losses from about $5 billion of its most illiquid loans and bonds: using them to pay employees’ year-end bonuses.

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

“While the solution we have come up with may not be ideal for everyone, we believe it strikes the appropriate balance among the interests of our employees, shareholders and regulators and helps position us well for 2009,” Chief Executive Officer Brady Dougan and Paul Calello, CEO of the investment bank, said in the memo.

The securities will be placed into a so-called Partner Asset Facility, and affected employees at the bank, Switzerland’s second biggest, will be given stakes in the facility as part of their pay. Bonuses will take the first hit should the securities decline further in value.

“It’s monstrously clever,” said Dirk Hoffman-Becking, an analyst at Sanford C. Bernstein Ltd. in London who has a “market perform” rating on Credit Suisse stock. “From a shareholders’ perspective it’s great because you’ve got rid of some of the assets and regulators will be pleased because you’ve organized a risk transfer.”

‘Better Than Nothing’

For employees, “there’s some upside in there and if the alternative is nothing, it’s a lot better than nothing,” Hoffman-Becking said.

Credit Suisse said earlier this month it would eliminate 5,300 jobs and cancel bonuses for top executives after it had about 3 billion Swiss francs ($2.8 billion) of losses in October and November. Unlike larger Swiss rival UBS AG, Credit Suisse hasn’t received a government rescue. Banks and securities firms are struggling to pay employee bonuses after taking more than $800 billion of losses on mortgages and corporate loans.

Writedowns on leveraged finance commitments at Credit Suisse have amounted to 3.5 billion francs since the beginning of the crisis, while the bank marked down its commercial mortgage holdings by 2.9 billion francs.

Outside Investors

Credit Suisse is the first to use the debt to pay employees. Outside investors may also be permitted to invest in the facility, according to the people familiar with the matter, who declined to be identified because the plan hasn’t been made public. The bank will boost the potential for returns by providing leverage to the facility, and will be paid back first, according to the people.

Leveraged-loan commitments on Credit Suisse’s books fell to between 2.5 billion Swiss francs and 3 billion francs by the end of November from 11.9 billion francs at the end of September, Dougan said on a conference call on Dec. 4. He said the bank had also “somewhat reduced” its commercial real estate positions. Credit Suisse had 12.8 billion francs in commercial mortgages at the end of September.

Assets in the facility will remain on Credit Suisse’s balance sheet and will be held in the company’s fund management division, the people familiar with the plan said. The new structure will mean that any mark-to-market losses or gains on the assets will be offset by identical gains, or losses, on the bank’s liability to employees.

Coupon Payments

Employees will receive semi-annual coupon payments on their investment in the Partner Asset Facility at the London Interbank Offered Rate plus 2.50 percentage points. The ultimate value of the facility will be determined over the next eight years as the loans and securities mature or default, the people said.

“Cash payments representing distributions of a portion of the award may be made to participants in the future contingent on the performance of the underlying assets,” Dougan and Calello said in the memo. “Cash distributions will not be made for several years.”

The bank said it expects to begin annual payments after five years.

While Credit Suisse doesn’t say how many managing directors and directors work at the investment bank, the number is in the thousands.

Credit Suisse said it will also change the cash portion of bonuses for all of the bank’s managing directors and for directors in the investment bank. Under the new system, the bank will have the right to recoup some of the cash bonus in the two years after it’s paid if an employee resigns.

Fed Loans Guided by Raters Grading Subprime Debt AAA

2008-12-18T10:23:00.000-08:00

Federal Reserve Chairman Ben S. Bernanke is basing hundreds of billions in emergency lending on credit ratings from companies that gave AAA grades to toxic securities.

The Fed has purchased $308.5 billion in commercial paper and lent $631.8 billion under eight credit programs, most of which require appraisals of short-term debt and loan collateral by “major nationally recognized statistical ratings organizations.” That, in effect, means Moody’s Investors Service, Standard & Poor’s and Fitch Ratings.

It is foolhardy to rely on the three New York-based companies, said Keith Allman, chief executive officer of Enstruct Corp., which trains investors in financial modeling and asset valuation. The major raters issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis.

“They’re outsourcing the credit assessment to a group of people whose recent performance has been unbelievably bad,” said Allman, the New York-based author of three books on structured finance and a former vice president in Citigroup Inc.’s securitized markets unit. “If their goal is to not take a loss on these assets, they should be hiring independent analysts.”

Rating companies are hired by debt issuers to analyze the quality of securities and the likelihood the borrowings will be repaid. Lenders demand higher interest when a rating is low. If the Fed is relying on unrealistic valuations, it may be charging too little and taking on greater risk than it intends, said Donald van Deventer, CEO of Honolulu-based Kamakura Corp., which provides financial software and consulting.

‘Favored Arbiters’

It’s impossible to gauge the analysis of debt in the Fed programs because the bank won’t reveal whom it’s lending to or the assets accepted as collateral.

Bloomberg News requested details under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure. In its Dec. 8 response to the lawsuit, the central bank said it was allowed to withhold information about trade secrets and commercial information.

Fitch and Moody’s declined to comment specifically on the Fed’s use of their evaluations.

Fed reliance on major rating companies is an important part of “restoring confidence in the financial markets,” said Chris Atkins, an S&P spokesman.

S&P and Moody’s said in statements e-mailed to Bloomberg that they had taken steps to improve the transparency of their ratings systems. Fitch CEO Stephen Joynt told a Congressional hearing on Oct. 22 that the company has become more conservative in its ratings.

Retaining Flexibility

Now is the time to end the trio’s “official status as the government’s favored arbiters of credit quality,” said Michael Aronstein, chief investment strategist for New York-based Oscar Gruss & Son Inc., a closely held broker and dealer.

“From my perspective, their assessments are not worth any more than any other form of advertising,” Aronstein said.

The Fed is confident it’s limiting the risks, said Andrew Williams, a spokesman for the Federal Reserve Bank of New York.

“Reserve banks are never obligated to lend,” Williams said. “We retain flexibility to decline an issuer if we do not feel secured to our satisfaction or otherwise comfortable with the credit.”

The Fed’s main goal in the rescue programs is to stabilize the banking system and get credit markets working again, Bernanke said in a December 1 speech to the Greater Austin Chamber of Commerce in Texas.

‘Last Resort’ Lender

The emergency loans are “consistent with the central bank’s traditional role as the liquidity provider of last resort,” he said.

“It should be emphasized that the loans that we make to banks and primary dealers through our standing facilities are both overcollateralized and made with recourse to the borrowing firm, which serves to minimize the Federal Reserve’s exposure to credit risk,” Bernanke said.

A senior Fed official told a conference call with reporters on Dec. 16 that the central bank is considering buying lower- rated securities in some of its lending programs to further boost liquidity.

The central bank is discussing with two independent analysis companies, Egan-Jones Ratings of Haverford, Pennsylvania, and Realpoint LLC of Horsham, Pennsylvania, how it might use their services, according to their CEOs. Williams said he couldn’t confirm the talks.

‘Dominant Ratings Agencies’

Policy makers should take the opportunity to spearhead a change in the system by elevating the independents, said Alex Pollock, a resident fellow at the American Enterprise Institute in Washington.

Unlike the top three, they are paid by investors who subscribe to their services, rather than by businesses whose products they rate. That makes them less likely to grade securities favorably, Pollock said.

“Why would you limit this to the dominant ratings agencies that helped get us into this situation?” he said.

While the Fed can look at appraisals from any of 10 companies certified by the Securities and Exchange Commission, the three biggest rate the vast majority of instruments.

The Fed also requires that the ratings be publicly available through third parties such as Bloomberg LP, owner of Bloomberg News, which provides assessments from seven certified companies, including Moody’s, S&P and Fitch.

Investment Grade

S&P, a unit of McGraw-Hill Cos. with 8,500 employees, last year rated 93.6 percent of the $707 billion of U.S. non-agency mortgage-backed securities. Moody’s, which employs 3,000, graded 80.2 percent and Fitch, with a payroll of about 2,100, judged 47.3 percent.

The fourth-busiest rater, DBRS Ltd. of Toronto, analyzed 6.8 percent, according to the newsletter Inside MBS & ABS based in Bethesda, Maryland.

Egan-Jones’s ratings for Bear Stearns Cos., which the Fed propped up with emergency funding in March, and on Lehman Brothers Holdings Inc., which filed for bankruptcy in September, were consistently lower than those from the major companies, according to Sean Egan, president of the service. Egan-Jones has 19 employees.

While Moody’s and S&P classified Lehman debt as A1 and A, respectively, Egan-Jones placed the bank several grades lower, at BBB, as early as May.

A Matrix

Under the emergency programs, the Fed is buying commercial paper that carries at least the equivalent of an A-1 rating, the second-highest for short-term credit. It is lending to banks that can post collateral the major raters deem to be investment grade, or eligible for bank investment. The central bank can reject collateral or commercial paper if it has doubts about creditworthiness or value.

In addition, policy makers reduce the risk of losing money on a declining asset by loaning as little as 75 percent of the market value. They value some securities according to a matrix and use outside firms to appraise the rest, Williams said. The Fed then cuts that figure by as much as 25 percent before lending, according to its Web site.

General Electric Co., Korea Development Bank and Morgan Stanley are among companies that have said they signed up for the commercial paper program.

GMAC LLC, the largest lender to General Motors Corp. car dealers, said in October that it was granted access to the commercial paper facility through its New Center Asset Trust unit. The unit’s paper earned top ratings of P-1 from Moody’s and F1+ from Fitch, though GMAC itself is rated 11 levels below investment grade by Moody’s. S&P on Dec. 5 put the New Center Asset Trust on watch for a possible downgrade.

‘Imprudent’ Lending

Former executives of the three major raters told a House Oversight and Government Reform Committee hearing Oct. 22 that they had relied on outdated models to maximize profits.

Originators of mortgage-backed and asset-backed securities and collateralized debt obligations “typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality,” Jerome Fons, a former managing director of credit policy at Moody’s, testified.

The U.S. Department of Housing and Urban Development said Dec. 4 that it would investigate a Nov. 18 complaint by the National Community Reinvestment Coalition, a Washington-based advocate for affordable housing. Moody’s and Fitch made “public misrepresentations” about the soundness of subprime securities that led to “imprudent” mortgage lending, the coalition said.

No Discussions

Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, is conducting a “preliminary inquiry” into the companies’ role in the financial crisis, he said Dec. 5.

The SEC voted Dec. 3 to bar ratings services from discussing compensation with bankers seeking assessments and to limit gifts to their employees from the underwriters.

From 2002 to 2007, Moody’s and S&P provided top ratings on debt pools that included $3.2 trillion of loans to homebuyers with low credit scores and undocumented incomes, according to data compiled by Bloomberg.

$997.1 Billion

As subprime borrowers defaulted, the companies downgraded more than three-quarters of the structured investment securities known as CDOs that had been rated AAA.

Writedowns and losses on that debt incurred by banks, brokers, insurers and Fannie Mae and Freddie Mac totaled $997.1 billion worldwide, Bloomberg data show.

The central bank wants to stabilize financial markets and mitigate the effects of the recession, as well as “support the functioning of credit markets,” Bernanke said Dec. 1 in a speech in Austin, Texas. He didn’t address the credit rating system.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

BNP Paribas shares plunge as bank reveals losses

2008-12-18T10:17:00.000-08:00

Shares of BNP Paribas plunged Wednesday after the French bank said extreme market volatility triggered steep losses in its investment banking operations over the last two months.
In midday trading in Paris, BNP Paribas stock was down 16 percent at euro34.60 ($47.37).
The bank said that as a result of the loss it is considering cutting its corporate and investment banking staff by 5 percent, about 800 jobs out of the unit's existing work force of 16,000.
In a statement late Tuesday BNP Paribas said its investment banking division has lost euro710 million ($972 million) over the first 11 months of the year. The bank had previously said that in the first nine months of the year, the unit had recorded a pretax profit of euro879 million _ suggesting massive losses in October and November.
The bank as a whole, which also has large French and international retail banking operations as well as an asset management division, remained 'largely profitable' over the first 11 months of the year, BNP Paribas said.
The investment bank's losses included some euro350 million in exposure to the Madoff investment scandal, which the bank had already disclosed, BNP Paribas said.
Last month BNP Paribas said its investment banking division's pretax profit had plunged to euro38 million in the third quarter from euro760 million a year earlier due to the global financial crisis. Earlier this year the bank had vaunted its own performance during the market turmoil that began with last year's subprime mortgage market collapse.
Presenting its first half earnings in August, BNP Paribas Chief Executive Baudoin Prot had said the results showed BNP Paribas' strength in coping with the financial industry's 'major turbulence' compared with competitors.
BNP Paribas 'is, along with Goldman Sachs, one of only two investment banks in the world to remain profitable since the start of the crisis' last summer, Prot had said at the time.
On Tuesday the crisis finally caught up with both banks. Goldman Sachs Group Inc. reported its first quarterly loss since it went public in 1999, losing $2.29 billion during its fiscal fourth quarter.
The investment banking sector was turned on its head in September when Lehman Brothers filed for bankruptcy and Goldman and Morgan Stanley became bank holding companies. Like most banks, Goldman was hurt by the plunging value of its investments, especially at its principal trading desk.

Crude Oil Falls Below $40 on OPEC Skepticism, U.S. Supply Gain

2008-12-17T12:41:00.000-08:00

Oil fell below $40 a barrel for the first time in more than four years as OPEC failed to convince traders that the glut in crude will diminish and the U.S. government said supplies climbed for the 11th time in 12 weeks.

The Organization of Petroleum Exporting Countries agreed that the group’s 11 members with quotas will trim current production by 2.46 million barrels a day to 24.845 million barrels a day, OPEC president Chakib Khelil said in Oran, Algeria. OPEC has held four meetings in as many months.

“It’s less than meets the eye,” said Lawrence Eagles, global head of commodities research at JPMorgan Chase & Co. in New York. “This may stem the bloating in stocks but isn’t enough to get rid of the surplus.”

Crude oil for January delivery declined $3.45, or 7.9 percent, to $40.15 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $39.88, the lowest since July 2004. Prices have tumbled 73 percent from a record $147.27 on July 11.

Inventories rose 525,000 barrels to 321.3 million barrels last week, the U.S. Energy Department said today in a weekly report. Supplies have climbed 11 percent since Sept. 19.

“They are facing the distinct possibility of oil falling to $30 a barrel and even lower,” said Addison Armstrong, director of market research for Tradition Energy in Stamford, Connecticut. “They have to bring supply down further because they aren’t getting any help on the demand front until the second half of next year at the earliest.”

Larger Cut

The cut is larger than a 2 million-barrel reduction indicated yesterday by Saudi Arabian Oil Minister Ali al-Naimi.

OPEC’s rate of compliance with a previous output cut is more than 85 percent, al-Naimi told reporters today before the ministerial meeting that decided production targets.

“I think the market gave every signal that there had to be an additional cut of at least 2.5 million barrels if OPEC expected to bolster prices,” Armstrong said. “There is such a lack of trust when it comes to compliance that it was impossible to agree to what was needed. This lack of trust gives members every incentive to cheat on quotas.”

Russia cut oil exports by 350,000 barrels a day last month and may reduce supply a further 320,000 barrels a day next year, in collaboration with OPEC, if prices remain weak, Russian Deputy Prime Minister Igor Sechin told OPEC ministers during opening speeches at today’s meeting.

Other Producers

Other non-OPEC producers, including Kazakhstan, may trim production as well, Sechin said. Azerbaijan may lower production as much as 300,000 barrels a day, Azeri Energy Minister Natig Aliyev said in Oran.

OPEC will next meet in March and has no official price target, Khelil said.

“I think the jury should still be out,” said Sarah Emerson, managing director of Energy Security Analysis Inc., a consulting firm in Wakefield, Massachusetts. “We will have to see their compliance. If they come close to their objective, we believe they will forestall a further decline in prices.”

Brent crude oil for February settlement declined 37 cents, or 0.8 percent, to $46.28 a barrel on London’s ICE Futures Europe exchange.

U.S. gasoline inventories rose 1.3 million barrels to 204 million barrels in the week ended Dec. 12, the Energy department report showed. Supplies of distillate fuel, a category that includes heating oil and diesel, climbed 2.94 million barrels to 133.5 million barrels, the highest since November 2007.

‘Nothing Bullish’

“There is nothing bullish in these numbers,” said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. “The OPEC announcement looks big on first glance but really isn’t. They are playing with smoke and mirrors.”

Inventories have gained because the oil market is in contango, where crude for future delivery is more expensive than near-month prices, encouraging stockpile increases.

Supplies at Cushing, Oklahoma, where oil that’s traded in New York is stored, climbed 21 percent to 27.5 million barrels, the highest since May 2007.

“The big build at Cushing shows that in a contango market everyone who can is taking delivery, which makes it much more difficult for OPEC to hold it together,” Barakat said.

Madoff Put Under House Arrest as SEC Admits Failures

2008-12-17T12:38:00.000-08:00

Bernard Madoff, accused mastermind of a $50 billion investment fraud, was placed under house arrest as pressure mounted on the Securities and Exchange Commission to explain its failure to detect his financial wrongdoing for almost a decade.

Madoff, 70, will be subject to electronic monitoring and a 7 p.m. curfew while his wife, Ruth, agreed to give up homes in Montauk, New York, and Palm Beach, Florida, if her husband flees. Madoff, who appeared briefly today with his wife in Manhattan federal court, was arrested Dec. 11 after telling his sons that his firm was “one big lie,” the SEC said.

The legal developments came after SEC Chairman Christopher Cox said yesterday the agency failed to act on “credible, specific” allegations about Madoff dating back to 1999. The Madoff affair will be at the center of planned congressional hearings on the reform of the SEC, said a senior Senate official, speaking on condition of anonymity.

The allegations “were repeatedly brought to the attention of SEC staff, but were never recommended to the commission for action,” Cox, 56, said in a statement yesterday, without detailing the allegations. He announced an internal probe to review the “deeply troubling” revelations. Cox today said the agency has no evidence of any wrongdoing by SEC personnel.

The SEC, already faulted in connection with the collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc., now faces criticism for failing to detect what Madoff termed “a giant Ponzi scheme.” Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Senator Charles Grassley, an Iowa Republican, have questioned its vigilance in enforcing securities laws. A House panel will hold a hearing next month.

Victims

Victims of Madoff’s fraud stretch from Tokyo to Paris, encompassing foundations set up by Boston philanthropist Carl Shapiro and Nobel laureate Elie Wiesel and clients of global banks such as Banco Santander SA of Spain, Nomura Holdings Inc of Japan, and HSBC Holdings Plc of the U.K. Yeshiva University in New York lost $110 million, mostly through hedge funds controlled by trustee J. Ezra Merkin.

Madoff’s responses during a 2005 SEC inspection of his brokerage operation should have raised suspicions and prompted further inquiries, said two people familiar with the matter.

Two years later, the agency closed a separate probe into tips and press reports suggesting his investment returns were too good to be true. Money manager Harry Markopolos helped trigger that inquiry by suggesting Madoff may be running a Ponzi scheme or front-running, in which traders buy shares for their account before filling customers’ orders, a person with knowledge of the case said.

Front-Running

Investigators focused on the front-running theory and, after encountering obstacles, didn’t finish verifying trades Madoff claimed were for advisory clients, the person said. His company’s trades had been cleared through a single account at the Depository Trust & Clearing Corp., making it difficult to distinguish transactions specifically for Madoff’s advisory business. Others transactions were completed through foreign brokerages, forcing the SEC to persuade foreign regulators to collect the data. Instead, investigators closed the case.

Cox, a Republican appointed by President George W. Bush, has said he will leave office when Bush leaves office Jan. 20. Cox’s term ends in June 2009 after taking over in August 2005. President-elect Barack Obama may name Cox’s successor as soon as tomorrow, people familiar with the matter said.

Instead of wielding subpoena power to obtain information, SEC staff “relied upon information voluntarily produced by Mr. Madoff and his firm,” Cox said.

Recusals

The internal review will include “all staff contact and relationships with the Madoff family and firm,” he said, and mandate the recusal of any SEC employee with more than an “insubstantial personal” contact with Madoff and his family.

Eric Swanson, a former assistant director of compliance and examinations at the SEC, is married to Madoff’s niece, Shana, who was a compliance lawyer at the Madoff firm. Swanson left the SEC in August 2006 and is now general counsel of Bats Trading Inc., the third-largest U.S. equity exchange by trading volume.

Cox, speaking after a commission meeting today, said determining what happened is of “utmost’ importance and he had “no reason” to think staff suppressed the Madoff allegations. Cox declined to discuss possible action against any employees.

“We have thus far found no evidence of any wrongdoing by any SEC personnel,” Cox told reporters.

DiPascali

Besides talking with Madoff, who met with federal prosecutors yesterday, authorities are scrutinizing the role of Frank DiPascali, a senior official in Madoff’s investment advisory firm, according to people familiar with the case.

Janice Oh, a spokeswoman for acting Manhattan U.S. Attorney Lev Dassin, declined to comment. Madoff’s lawyer, Ira Sorkin, didn’t return a call seeking comment.

“Like everyone else, we’re trying to sort out everything and learn the facts,” DiPascali’s lawyer, Marc Mukasey of Bracewell & Giuliani in New York, said in an interview, declining further comment.

U.S. Attorney General Michael Mukasey, Marc Mukasey’s father, has recused himself from the Justice Department’s investigation into Madoff because his son represents someone involved in the case, a department spokesman said today.

Michael Mukasey is a 1959 graduate of the Ramaz School, a modern Orthodox Jewish school in New York that invested as much as $6 million in a fund that invested with Madoff, said Kenny Rochlin, Ramaz’s director of institutional advancement. Mukasey’s wife, Susan, was headmistress of Ramaz’s Lower School for children in primary grades, Rochlin said.

Passports Surrendered

U.S. Magistrate Judge Gabriel Gorenstein in Manhattan also ordered Madoff and his wife, Ruth, to surrender their passports. The ruling came as a bail hearing for her husband was postponed for a second time in as many days.

The number of co-signers on his $10 million bond was reduced by Gorenstein from four to two after Madoff was unable to find two additional guarantors. Madoff’s wife and brother, Peter, have co-signed the bond.

Madoff and his wife were in court today to sign a confession of judgment to properties they in Montauk, Palm Beach and on Manhattan’s Park Avenue.

The case is U.S. v. Madoff, 08-mag-2735, U.S. District Court, Southern District of New York (Manhattan).

American rate cut forcing the world's hand

2008-12-17T12:37:00.000-08:00

0.25 percent raised expectations the Bank of Japan and other central banks will follow with their own moves to support the stumbling global economy.

Asian markets rallied on news of the larger-than-expected cut from 1 percent, which virtually exhausts the traditional Fed tools to battle the year-long recession. Asian stocks took cues from Wall Street, where shares closed up 5 percent on Tuesday.

The Fed said it would employ "all available tools," echoing a policy pursued by Japan earlier this decade when it flooded banks with money to promote lending.

Its move could push the Bank of Japan (BOJ) to cut interest rates to almost zero from 0.3 percent when it meets on Thursday and Friday and possibly follow the Fed into buying commercial paper outright or purchasing asset-backed securities, reviving a scheme it put in place five years ago during the bank crisis.

Other central banks could follow, analysts said.

"I think it's more and more likely that key rates in Asia are going to converge at a level much lower than previously forecast," said Glenn Maguire, Asia chief economist with Societe Generale in Hong Kong.

"We will see an ultra-low interest rate policy across Asia and central banks on a case by case basis will target liquidity in the banking system where needed."

Hong Kong, which pegs its currency to the U.S. dollar, cut its discount window base rate by 100 basis points on Wednesday.

STRONG YEN PRESSURES EXPORTERS

U.S. Treasury debt rallied sharply after what Japan's top financial diplomat Naoyuki Shinohara called the Fed's "bold" move, pushing the benchmark note's yield down to five-decade lows.

Japanese government bonds surged on Wednesday, with the two-year yield hitting its lowest level in nearly three years on expectations for a BOJ rate cut.

The dollar plumbed 13-year lows against the yen and 2- month lows versus the euro on Wednesday, extending a slide on Tuesday.

The strong yen has put additional pressure on Japanese exporters, who are already facing a slump in overseas demand. This includes Honda Motor Co Ltd, whose shares slid nearly 8 percent on expectations it will announce a profit warning later on Wednesday.

Adding pressure on the BOJ, Japan's top government spokesman said that he hoped that the BOJ would consider the impact of the strong yen -- at a 13-year high against the dollar -- when considering monetary policy.

"The abnormal rise in the yen could affect export industries and I hope that the BOJ will make a comprehensive consideration, including those factors to decide its monetary policy," Chief Cabinet Secretary Takeo Kawamura told a news conference.

Yet Japanese Finance Minister Shoichi Nakagawa said he was not considering intervention in currency markets for now and that the yen's recent gains were not bad, the Nikkei newspaper reported on its website.

He later told reporters that the government would take all necessary steps to support the economy, including steps to deal with rapid foreign exchange moves.

The extent of the global turmoil was all too apparent in corporate results.

Wall Street titan Goldman Sachs Group Inc posted its first quarterly loss since going public nine years ago, though the fourth-quarter net loss of $2.12 billion was less than the market feared, prompting Goldman shares to shoot up more than 16 percent.

AUTO BAILOUT, OPEC IN FOCUS

As the impact of the sagging U.S. auto industry spread around the world, investors hoped to see the Bush administration approve loans for carmakers with funds from the bank rescue.

"The automakers will get the money as quickly as we can prudently do it," U.S. Treasury Secretary Henry Paulson said in an interview on CNBC television. "We need to do this but we need to do it right."

Investors will also be looking on Wednesday to an OPEC meeting in Algeria, where major oil producers are expected to announce the biggest oil supply cut ever to address the first drop in world oil demand in 25 years.

Oil prices have plunged $100 from their all-time high in July because of slumping demand. Prices rose over 1.5 percent on Wednesday above $44 per barrel, after falling more than 3 percent the previous day.

Despite a continuous flow of negative economic news, the U.S. Treasury's point man on international economic affairs said the risks of a global collapse were easing.

"While the outlook for 2009 is exceptionally challenging, the coordinated actions of U.S. policy-makers and many of their international counterparts have decreased the chances of systemic collapse that appeared all-too-possible several months ago," said David McCormick, Treasury's undersecretary for international affairs.

European Inflation Rate Declines Most Since 1991

2008-12-17T12:35:00.000-08:00

Europe’s inflation rate fell the most in almost two decades last month as oil prices plunged, giving the European Central Bank more leeway to cut interest rates.

The inflation rate in the euro area declined to 2.1 percent from 3.2 percent in October, the biggest drop since at least 1991, the European Union statistics office in Luxembourg said today. That matched the initial estimate published Nov. 28.

ECB President Jean-Claude Trichet said yesterday there’s a limit to how far the bank can cut interest rates even as economic growth slumps and inflation cools. By comparison, the U.S. Federal Reserve yesterday cut its main rate to “a target range” of between zero and 0.25 percent and said it will use “all available tools” to battle the recession. The ECB has reduced the rate by 175 basis points to 2.5 percent since early October.

“For the ECB, the outlook is rather grim and they should act further as we have seen a strong deceleration in inflation rates,” Alexander Koch, an economist UniCredit MIB in Munich said on Bloomberg Television. “There is no need to wait. The situation requires tough action.”

‘Harsh Reality’

The dollar dropped to $1.4192 per euro today, the weakest in 11 weeks, after the Fed cut. The British pound also weakened, falling to a record low of 91.33 pence per euro after data showed U.K. unemployment rose in November at the fastest since 1991.

Trichet yesterday signaled the ECB may pause in January after making a record cut of 75 basis points this month. ECB council member Axel Weber has said he “would like to avoid” taking the rate below 2 percent.

“The Fed is going all out,” said Marco Annunziata, chief economist at UniCredit in London. “I still believe the harsh macro reality will eventually force the ECB’s hand.”

Euro area consumer prices fell 0.5 percent in November from the previous month, according to today’s report, with transport fuels knocking 0.41 percentage points off the monthly index.

The rate of annual energy-price inflation plunged to 0.7 percent from 9.6 percent and food-price inflation also eased. The core rate of inflation, which excludes food and energy prices, remained at 1.9 percent in November.

Inflation peaked at 4 percent in July after oil prices surged to a record $147 a barrel. Crude has since dropped by more than two-thirds to around $45 a barrel.

The drop in commodity prices and a deteriorating economic outlook has raised concern about the emergence of deflation. The ECB has discounted the threat, saying it sees disinflation, a slowing of price increases, rather than deflation, a period of sustained price declines.

“It looks odds-on that euro-zone consumer price inflation will fall well below 1 percent during 2009, and a brief period of deflation certainly cannot be ruled out,” said Howard Archer, chief European economist at IHS Global Insight in London.

Deflation is also emerging as a risk in the U.S., where consumer prices fell the most on record in November. In the U.K., the inflation rate fell to 4.1 percent in November from 4.5 percent the previous month, according to data yesterday, and Bank of England Governor Mervyn King has signaled that the bank will cut the interest rate further if needed.

AIG Writedowns May Rise $30 Billion on Swaps Not in U.S. Rescue

2008-12-17T12:33:00.000-08:00

American International Group Inc., which already has suffered more than $60 billion in writedowns and losses, may have to absorb almost $30 billion more because of flaws in the way its holdings are valued.

An examination of AIG’s credit-default swaps guaranteeing more than $300 billion of corporate loans, mortgages and other assets not covered by a $152.5 billion federal rescue shows the New York-based insurer may value some of its positions at levels that don’t reflect distress in the markets, according to an analyst at Gradient Analytics Inc. and a tax consultant who teaches at Columbia University Business School in New York. Executives at two firms that have similar investments say they account for the securities differently than AIG does.

“Every time I look at their statements I find something new,” said Donn Vickrey, executive vice president of Gradient Analytics in Scottsdale, Arizona. He estimated that AIG may need to take at least $28 billion in additional writedowns on swaps covering European corporate loans and prime residential mortgages, as well as collateralized loan and debt obligations.

“It looks like they haven’t written down these positions fully yet, and that could be a real problem,” said Vickrey, who predicted correctly, as early as February 2008, that the company would have to report increases in its writedowns on its swaps.

Robert E. Lewis, AIG’s chief risk officer, said the company has properly valued all of its swaps and underlying assets and doesn’t need to take additional writedowns.

Rescue Package

The U.S. rescue plan announced in November, the government’s second effort to save AIG, covers only its most troubled credit-default swaps, about 20 percent of the $377 billion on the insurer’s books as of Sept. 30. Under the plan, a new government-backed entity will acquire collateralized debt obligations with a face value of $72 billion that had been insured by AIG swaps. An initial transfer of $46.1 billion of CDOs was announced on Dec. 2. A second fund bought troubled residential mortgage-backed securities with a face value of $39.3 billion, AIG said on Dec. 15.

Wider losses may cast new doubt on whether the federal funds will be enough to prop up AIG, the biggest U.S. insurer by assets. The U.S. package almost doubled from the $85 billion approved in September to save the company from bankruptcy. Previous miscalculations about the swaps contributed to the ouster of Chief Executive Officer Robert Willumstad and his predecessor, Martin Sullivan.

In November 2007, when AIG reported a $352 million loss on its swaps, it said it was “highly unlikely” the insurer would have to make payments on them. And last December Sullivan assured investors that losses from swaps on U.S. subprime mortgages were “manageable.”

European Banks

Credit-default swaps are contracts that protect investors who buy bonds or other securities. If a debt issuer or borrower misses payments, the seller of the contract -- in this case, AIG -- covers some or all of the losses. Even if a borrower doesn’t default, accounting rules may require insurers to write down the swap contracts when the value of the underlying assets drops.

AIG swaps not covered by the government program include guarantees on $249.9 billion of corporate loans and residential mortgages, most of them made by banks in Europe, according to the company’s third-quarter 10-Q filing. There are also swaps covering $51 billion of collateralized loan obligations, or CLOs, and $5 billion of lower-rated mezzanine tranches.

Writedowns on these AIG holdings total less than $1.5 billion so far this year, according to company filings, compared with $20 billion for the swaps guaranteeing the $72 billion of CDOs being acquired under the federal rescue.

Record Swap Prices

The declining market value of many of the underlying assets and a deepening recession may force AIG to take further writedowns, Vickrey said. Credit-default swap prices on the Markit iTraxx Europe index of 125 investment-grade companies set a record on Dec. 5, indicating increased investor concern about possible defaults.

Based on the loss AIG has reported, as well as indexes showing declines in the value of European corporate loans and prime mortgages, Vickrey estimated that AIG may face at least $15.6 billion of additional writedowns on its swaps with the banks. He said other swaps not covered by the government rescue, including those on CLOs and mezzanine tranches, may result in another $12.6 billion of losses.

“That’s based on what we know currently, and it could be higher,” he said.

‘Limited Information’

Estimating the size of future writedowns is difficult because AIG doesn’t disclose details about many of the underlying assets.

Lewis, the AIG risk officer, said in an interview that the company has “limited information” on which to base the value of most of the European loans and mortgages it has guaranteed. Though some assets underlying the swaps appeared to be declining in value, Lewis said the insurer followed accounting rules in providing its best estimates for the value of the assets and other securities on its books.

“Our methods have been thoroughly vetted and externally evaluated,” Lewis said.

AIG’s view on valuing its swaps with European banks turns on an interpretation of accounting rules involving risk transfer.

Lewis said the insurer normally marks the value of the assets underlying swaps to market levels since it is taking some risk in the transactions. The swaps with the European banks are different because they didn’t insure against losses, he said. Instead, they were bought to take advantage of European accounting rules that allow the banks to use the swaps to reduce the capital they’re required to set aside as loss reserves.

Accounting Rules

The swaps are kept in place only until new accounting rules, known as Basel II, are phased in. Those rules eliminate the ability of financial institutions to reduce the capital they need to set aside by buying swaps. Once the rules kick in, Lewis said the swaps will be terminated.

Lewis said the insurer had unwound $95 billion of these regulatory-capital swaps without any losses as of the end of the third quarter. And Gerry Pasciucco, hired from Morgan Stanley on Nov. 12 as interim chief operating officer of AIG’s financial- products subsidiary, said the company continues to “experience early terminations according to our schedule at par.”

As a result, Lewis said, even if the assets underlying the remaining swaps fall in value, AIG isn’t required to mark them to lower market levels.

Fair Value

That’s because, as the insurer said in its third-quarter filing, it “estimates the fair value of these derivatives by considering observable market transactions.” And the only relevant transactions are the swaps AIG has successfully unwound with the European banks, according to the filing.

AIG’s interpretation of accounting rules is different than that of Robert Willens, CEO of Robert Willens LLC, a corporate tax and accounting advisory firm in New York, and a professor at Columbia. He said AIG can’t have it both ways, calling the transactions swaps and then saying there’s no risk.

“If these are bona fide swaps, you look at them like any other transaction of this type with a transfer of risk,” Willens said. “If they do that, there would probably be very substantial writedowns because of what we’re seeing in the markets. If you’re using a different paradigm and saying there’s no risk transfer, these aren’t credit-default swaps. You’re getting a fee for renting the counterparty your name. There’s no third approach. The purpose of the swap is totally irrelevant.”

Transfer of Risk

Stephen Ryan, a professor of accounting at the Stern School of Business at New York University, said that if the swaps reduce potential losses faced by European banks there must be some transfer of risk and AIG must mark the assets to market by looking at a broad array of similar credit-default swaps, not just other swaps that were unwound without losses.

“I can’t believe the banks’ intent affects the contractual terms” of the swaps, Ryan said.

While Elias Habayeb, chief financial officer of AIG’s financial-services division, acknowledged that valuing the underlying assets by referring to market indexes could produce writedowns, it would be misleading to do so because the swaps were intended to be terminated in a short period of time.

“Had we marked them down to the iTraxx or CDX indexes in our accounting,” he said, “that would not have made sense because we would have had to book a gain on redemption.”

Radian, Primus

Two other companies that sold swaps to European banks also disputed AIG’s interpretation of accounting rules. C. Robert Quint, chief financial officer of Radian Group Inc. in Philadelphia, and Steven Kennedy, a spokesman for Bermuda-based Primus Guaranty Ltd., both rejected the idea that how a swap is used can affect its accounting treatment. They said their firms mark their swaps to market to reflect price declines.

“We did some of that business, but we’re an insurance company, so we don’t care what purpose the counterparty is using the swap for,” Quint said.

Lewis said AIG would only have to revalue the underlying assets if the banks that bought the swaps no longer used them to meet capital requirements.

That’s what happened in this year’s second quarter with one European bank that purchased a swap to cover $1.6 billion of mortgage-backed securities. When AIG determined the purpose of the swap wasn’t to reduce capital requirements, it took a loss of $397 million, equal to about 25 percent of the face value of the assets, according to company filings.

‘Significant Deterioration’

AIG spokesman Nicholas Ashooh said the case was unusual because the swap covered mortgage-backed securities, not just pools of mortgages like the other European swaps. He added that even if other swaps required writedowns, the losses wouldn’t necessarily be 25 percent of face value.

Ashooh also explained that, under the terms of most of the swaps, the European banks would have to absorb about 10 percent to 15 percent of any losses from defaults before they could turn to AIG. That also reduces the insurer’s risk, he said.

That’s not how Vickrey of Gradient Analytics sees it. While the logic might be sound under normal circumstances, he said these aren’t ordinary times. With economies shrinking and markets falling, the European banks that bought the swaps may face such high levels of defaults on their corporate loans and mortgages that they would need to alter the purpose of the swaps, requiring revaluations.

AIG acknowledges such a possibility in its 10-Q filing. “Given the significant deterioration in the credit markets and the risk that AIGFP’s expectations with respect to the termination of these transactions by its counterparties may not materialize, there can be no assurance that AIG will not recognize unrealized market valuation losses,” the company said. AIGFP is the insurer’s AIG Financial Products unit that sold the swaps.

Flawed Models

Valuing mortgage-backed securities and collateralized debt obligations was a challenge even before the credit crisis. The bankers who originated the securities and the agencies that rated them used sophisticated models that relied on assumptions about the future, including market liquidity, default rates and the risks of markets moving in tandem in the event of a credit squeeze. Calculations in the models have proven flawed, meaning many of the securities were improperly rated and priced long before the current crunch hit.

Traders and salesmen had little understanding of the assumptions used in the models -- among them that house prices wouldn’t drop across the U.S. -- or how they might affect the performance of the securities.

“It’s not that all of the models are wrong,’ said Tanya Styblo Beder, chairman of risk-management adviser SBCC Group in New York. “The problem is that people made simplifying assumptions so the calculations were manageable and then had no warning labels to help the users understand the ramifications of these assumptions.”

‘Blind Faith’

Gerald Rosenfeld, deputy chairman of Rothschild North America Inc. and co-director of New York University’s program in business and law, said the current market meltdown is the fourth in 20 years exacerbated by a reliance on flawed computer models.

The first was the stock market crash of 1987, when a computerized product called portfolio insurance contributed to an unanticipated cascade of selling, he said.

“We’ve had something like four 50-year events in the last 20 years because of this blind faith people put in the supposed accuracy and precision of models that, for the most part, their creators never intended,” Rosenfeld said. “I don’t think we’ve really identified the over-reliance on the models and the way they were the trigger points in all of this.”

Inflated Prices

In a paper titled “The Economics of Structured Finance” that will be published in the Journal of Economic Perspectives, a group of Harvard Business School professors says the greatest problem in the market for CDOs and other structured securities isn’t the decline in value of the underlying assets because of the credit crunch. It is that the securities were overpriced from the start because the models failed to assess the risks, the professors said.

“Almost lost in the shuffle and the talk of default rates has been the initial mispricing of these securities,” said Joshua Coval, a professor of business administration at the Harvard Business School and one of the paper’s authors.

In effect, Coval said, investors bought the CDOs and related assets at inflated prices from the start. The mispricing also increased losses for companies that sold credit-default swaps, since they guaranteed that values would not decline significantly from their inflated levels.

“The drop in price is due to market awareness that credit risk was mispriced at the outset,” said Janet Tavakoli, president of Tavakoli Structured Finance in Chicago. “The practice was widespread.”

Even if the credit markets were to stabilize, the valuations of structured securities are still far from where they should be, said Laurie Goodman, a former head of fixed- income research at UBS Securities LLC, who recently left to join Amherst Holdings LLC in Austin, Texas.

“The losses we’ve seen so far are a fraction of what we’ll be seeing,” she said.

Dollar Falls Most Against Euro Since 1999 Debut on Fed’s Rate

2008-12-17T12:31:00.000-08:00

The dollar declined the most against the euro since the 15-nation currency’s 1999 debut and sank to a 13-year low versus the yen as near-zero interest rates and rising budget deficits led traders to abandon the greenback.

The greenback extended its drop against a gauge of currencies of six U.S. trading partners, falling 11 percent from a 2 1/2-year high reached Nov. 21. Investors including hedge funds reversed bets that the dollar will appreciate to minimize losses as the end of the year approached, traders said.

“This move is historic,” said Russell LaScala, New York- based head of North American foreign exchange at Deutsche Bank AG, the world’s biggest currency trader. “It’s just going to keep going until the last bit of pain stops. I would not be shocked to see $1.50.”

The dollar fell as much as 3 percent to $1.4437 per euro, the weakest level since Sept. 29, from $1.4002 yesterday, before trading at $1.4345 at 2:57 p.m. in New York. It was the biggest intraday drop since the euro’s inception. The U.S. currency decreased 1.3 percent to 87.93 yen from 89.05 and reached 87.14, the lowest since July 1995. The euro increased 1.1 percent to 126.08 yen from 124.71.

The pound weakened for the first time beyond 93 pence per euro after the Office for National Statistics said the number of people receiving jobless benefits increased by 75,700 to 1.07 million. Bank of England policy makers voted 9-0 to cut the nation’s benchmark on Dec. 4 to 2 percent, minutes showed. Sterling slid as much as 3.5 percent to 93.27 pence per euro. The pound dropped 0.8 percent to $1.5451.

Dollar Index

The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 2.1 percent to 78.961. It increased 24 percent from a low of 71.314 on July 15 to 88.463 on Nov. 21. The dollar gave back about half of that rally.

The Fed lowered its target rate yesterday to a range of zero to 0.25 percent, from 1 percent, below the Bank of Japan’s 0.3 percent rate. The central bank reiterated plans to buy agency debt and mortgage-backed securities and said it will study buying Treasuries, a policy known as quantitative easing.

“This is a very much a panic exodus from the dollar,” said Brian Dolan, chief currency strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The primary reason is the Fed’s embrace of quantitative easing, in which they start printing dollars and start flooding the market with U.S. assets.”

The federal budget deficit widened last month to $164.4 billion, compared with a gap of $98.2 billion in November a year earlier, the Treasury Department reported last week.

Yen’s Gain

The U.S. currency depreciated 21 percent against the yen this year, the most since 1987, as more than $1 trillion of credit-market losses sparked a seizure in money markets and threw the world’s largest economy into a recession.

Japan’s Finance Minister Shoichi Nakagawa said the government is ready to take steps in the currency market to help the economy, Dow Jones Newswires reported. Nakagawa earlier told reporters he isn’t considering intervention now.

The government needs to take action on the yen “swiftly,” Honda Motor Co. President Takeo Fukui said at a press conference today. The country’s second-largest automaker cut its operating profit forecast for a third time for the year ending March 31 to 180 billion yen ($2.03 billion) from a prior estimate of 550 billion yen as the currency’s gains pushed up prices for overseas customers.

G-7 Intervention

Central banks intervene when they buy or sell currencies to influence exchange rates. The Group of Seven, which comprises the U.S., Japan, Germany, the U.K., France, Italy and Canada, propped up the dollar in 1995, when it declined to a post-World War II low of 79.75 yen.

The fed funds target was cut to below the BOJ’s rate for the first time since 1993. Japanese policy makers struggled in the 1990s to revive growth as deflation and recessions stranded the nation in what is known as the Lost Decade.

A dollar turnaround could come as early as the first quarter of next year as other central banks lower their interest rates, according to Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.

“The Federal Reserve remains ahead of the curve or more aggressive than most central banks with what it’s doing with its monetary policy,” said Bennenbroek, who forecast the euro will reach $1.45 and possibly $1.50 against the dollar. “Given how severe conditions are, a lot of other central banks are also very rapidly moving their interest rates down toward zero.”

Expectations for currency appreciation were the highest in Japan, Mexico and Germany, a monthly survey of 2,991 Bloomberg users last week showed.

Currency Outlook

The Bloomberg Professional Global Confidence Index for the yen was 67.16, compared with 71.23 last month. For Mexico it was little changed at 61.96, from 61.95 in November. In Germany, a proxy for the euro, it jumped to 63.67 from 46.56. A reading above 50 indicates participants expect a currency to gain.

Mexico’s peso declined for the first time in three days, dropping 0.2 percent to 13.0794 per dollar on concern the Fed may have few tools left to boost the global economy.

GMAC Debt Swap May Get 75% Participation, Lawyer Says

2008-12-17T12:28:00.000-08:00

GMAC LLC may reach its goal of getting 75 percent of bondholders to participate in a debt swap designed to avert a collapse of the auto and home lender, said a lawyer for bankers handling the exchange.

“I’m cautiously optimistic,” said James Clark, partner at Cahill, Gordon & Reindel LLP in New York, who represents firms including Bank of America Corp. and Citigroup Inc. that are managing the deal. Additional holders have tried to tender and their transactions weren’t able to be processed by the bonds’ custodians in time for the last early deadline, which expired yesterday, Clark said. GMAC was “well short” of its goal when the deadline passed and “significant additional tenders are necessary,” he said.

GMAC, the primary lender to General Motors Corp. dealers, extended the $38 billion exchange’s early delivery deadline yesterday to Dec. 19, the fifth extension since announcing the deal. The Detroit-based company said 58 percent, or $16.6 billion, of GMAC notes, and $3.5 billion, or 37 percent, of securities issued by its Residential Capital LLC mortgage unit have been tendered now that terms were improved. As of Dec. 12, holders of only about a quarter of the debt had signed up.

The exchange is part of GMAC’s plan to convert to a bank holding company and gain access to the Treasury’s $700 billion rescue fund and a program that would allow it to sell bonds backed by the government. If the exchange isn’t completed by the end of the year, there is a “significant risk” it will default on its debt, GMAC said in a filing last month.

Amended Terms

The original proposal, announced Nov. 20, asked holders to swap for as little as 55 cents on the dollar in cash or a combination of new notes and preferred stock. Preferred securities count as regulatory capital, so swapping bonds for stock would help GMAC reach its goal.

If the exchange fails, GMAC will come up short of the $30 billion in regulatory capital demanded by the Federal Reserve to win approval as a bank holding company.

“It is extremely important that every bondholder of GMAC and ResCap tender their bonds as soon as possible in order to satisfy the government’s regulatory capital position,” Clark said. “Until we know we have the bonds in we don’t know we’re going to get there.”

GMAC amended the terms of the swap after holders of $10.5 billion of GMAC bonds formed a committee to oppose the exchange and hired Andrew Rosenberg, partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. GMAC increased the dividend on the preferred stock, made the deal contingent upon its becoming a bank, and added restrictions on liens, subsidiary guarantees and asset sales.

Back-Office Issues

Rosenberg said Dec. 15 the committee had agreed to tender their bonds. Another $5 billion of holders have indicated they would follow the committee’s recommendation, Clark said. Including the $6.8 billion of GMAC notes that participated before Dec. 12, that would bring the amount of GMAC debt tendered to $22.3 billion, or more than 75 percent of those notes.

Clark said the goal may be within reach, based on the number of calls banks have received from bondholders who couldn’t tender on time.

“It’s a back-office, mechanical issue,” Clark said. “It just takes time for them to get the instructions, find the bonds in the system, and make arrangements.”

GM sold 51 percent of GMAC in 2006 to a group led by private equity firm Cerberus Capital Management LP. GM is also seeking a federal bailout to avert bankruptcy.

Court: Lehman Can Resolve Derivatives Contracts

2008-12-17T12:27:00.000-08:00

Lehman Brothers can begin resolving billions of dollars worth of derivatives contracts, after U.S. Bankruptcy Judge James Peck said Tuesday he would approve procedures to streamline the process.
About 900,000 derivatives contracts have been terminated since Lehman Brothers filed for bankruptcy protection on Sept. 15. But the bank is still a party to about 30,000 derivatives contracts -- valued in the billions of dollars -- that have thousands of counterparties, said Robert Lemons, a Lehman attorney, during a hearing in New York on Tuesday.
By streamlining the procedures to resolve the contracts, Lehman would not be required to bring each resolution before the court for approval.

Lehman received 101 objections to its motion to approve the procedures, but was able to resolve 65 of those objections as of Monday night, Lemons said.

Peck approved that the remaining objections be heard at a hearing on Jan. 14, if not resolved earlier.

Lehman has hired hundreds of employees dedicated to untangling and valuing the derivatives contracts.

In court on Tuesday, Peck also approved a formal request to officially hire Alvarez & Marsal as bankruptcy advisers, and to hire Lazard Freres & Co. as investment banker. Peck approved a request by the U.S. Trustee that payment of any fees to Lazard must first receive court approval.

Lehman also got permission to hire Bortstein Legal LLC and McKenna Long & Aldridge LLP as special counsel. Peck also approved the hire of Natixis Capital Markets Inc. as strategic adviser.

The bankruptcy of the storied Wall Street firm was the biggest in U.S. history; Lehman had assets of $639 billion and debt of $613 billion.

NICHOLAS KRISTOF: A FINGER IN THE DIKE

2008-12-17T12:26:00.000-08:00

The arguments against an auto bailout are good ones. Now ignore them.

For the first time in human history, I agree with Dick Cheney. According to The Los Angeles Times, he warned Republican senators that if they refused to bail out the auto companies, “we will be known as the party of Herbert Hoover forever.”

The senators from the Herbert Hoover Party promptly fumbled, but President Bush seems poised to rescue the car companies anyway. Thank heaven!

Look, there are plenty of sound arguments against a bailout. But there’s a practical argument that trumps everything: When conditions are so fragile, we can’t risk a staggering blow to the national economy. When you see a hole in the dike, don’t discuss the virtues of laissez-faire policies — plug it!

There were also sound arguments for not rescuing Lehman Brothers. So the government allowed Lehman to collapse — and almost everybody now recognizes that it was a mistake that cost taxpayers more than a bailout would have.

Lehman Brothers was small potatoes — a tiny french fry — compared with America’s automakers. Lehman Brothers had 25,000 employees worldwide; General Motors alone has 250,000.

The Big Three have almost 400,000 employees worldwide, including about 230,000 in the United States. In addition, several hundred thousand people make car parts for the Big Three, and a half-million more sell or distribute cars from them. All told, considerably more than 1 million jobs in the United States depend directly on the American automakers, and many more indirectly.

Fed Refuses to Disclose Recipients of $2 Trillion

2008-12-14T11:24:00.000-08:00

The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

‘Been Bamboozled’

Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”

Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.

On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7.

In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

Data Provider

The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.

While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as “IDC.” One of the e-mails’ subject lines refers to “Interactive Data -- Auction Rate Security Advisory May 1, 2008.”

Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment.

“Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.

‘Dangerous Step’

“In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.

New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

‘Right to Know’

“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said.

The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.

“This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”

The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.

Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets.

Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month.

‘Complete Truth’

“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.

“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

Chancellor Angela Merkel called on German industry to help her government come up with ways of strengthening Europe’s biggest economy in preparation f

2008-12-14T11:23:00.000-08:00

Boeing Co.’s latest delay means the 787 Dreamliner will take almost as long to develop as the planemaker’s original model that ushered the U.S. into the Jet Age more than a half-century ago.

The schedule Boeing announced yesterday would start 787 shipments to airlines in 2010, almost six years after the first order. That’s about two years more than the average for other Boeing planes and rivals the six years and two months spent on the 707 in the 1950s. That aircraft, which started out as the Dash 80, was the forerunner of the more than 16,000 commercial jets the company has built since.

Punsters have had their way with the 787 Dreamliner amid the four delays since October 2007: It’s the “7-Late-7” and the “Lateliner” in reports by Rob Stallard, an analyst in New York with Macquarie Research Equities. Newspapers including London’s Daily Telegraph quipped about the Dreamliner turning into a nightmare. Chicago-based Boeing has lost 61 percent of its market value since the first delay.

“The 787 has seriously undermined the confidence that all stakeholders previously had in Boeing,” Stallard said in an e- mail interview. “We think it will take a very long time to overcome the erosion to goodwill that has occurred.”

Boeing fell $1.07, or 2.7 percent, to $39.20 at 4 p.m. in New York Stock Exchange composite trading.

‘Phenomenal Leap’

The 787 remains Boeing’s most successful new sales program based on orders and dollar value, with 910 on the books valued at $157 billion. Boeing has been counting on the jet to help it win back the position of world’s largest commercial-plane maker, which it lost to Toulouse, France-based Airbus SAS in 2003.

The new model will be the first commercial aircraft to be built mainly of lightweight composites, rather than aluminum, to increase fuel efficiency and help airline clients cut costs. The new materials further complicated an assembly process that depends on vendors to build large sections of the 787, which are then shipped to Boeing for final assembly in Everett, Washington.

The Dreamliner “will be a phenomenal leap, but not without its problems,” said spokeswoman Liz Verdier in Seattle, where Boeing has built aircraft for almost a century.

The Dash 80 made its first flight from Renton Field, south of Seattle, just two months after it rolled from the factory in 1954. The Dreamliner, in contrast, now isn’t expected to have its first test flight until next year’s second quarter, almost two years after it was unveiled to the public. The plane was supposed to have been delivered in May of this year to Japan’s All Nippon Airways Co., the inaugural customer.

Airbus Delays

Airbus has also suffered program delays, with its 525-seat A380 needing almost seven years before its first delivery last year. The superjumbo jet completed a test flight just three months after its roll-out, however, and encountered setbacks only once it entered production. The unit of European Aeronautic, Defence & Space Co. also had to redesign its A350, Airbus’s answer to the 787, pushing deliveries back to 2013 from as early as 2010.

“The Dreamliner delays are likely to be as bad as the A380, or as some people called it, the A-3-Turkey,” said Richard Aboulafia, an analyst with aviation consulting firm Teal Group in Fairfax, Virginia. “But it entered service successfully, and so will the 787.”

Merkel Urges German Industry to Share Burden as Crisis Deepens

2008-12-14T11:22:00.000-08:00

Chancellor Angela Merkel called on German industry to help her government come up with ways of strengthening Europe’s biggest economy in preparation for a worsening of the economic outlook next year.

Merkel, who is hosting talks of her key ministers with industry leaders and economic experts at the chancellery in Berlin today, said the meeting is the first of a series of consultations aimed at assessing the impact on Germany of the global recession.

“We need to act together,” Merkel said going into the talks. “This is the common responsibility of politics, industry, unions and the banking sector.” The government “can’t support the economy on its own.”

Merkel faces persistent calls for more action to bolster Europe’s biggest economy going into 2009, an election year, as the global recession hurts demand for German exports. Paul Krugman, the Nobel Prize-winning economist, joined the critics, saying in an interview with Der Spiegel magazine that Merkel and Finance Minister Peer Steinbrueck are “misjudging the severity” of the crisis and “wasting precious time.”

Krugman’s warning follows economic data suggesting that the downturn may be accelerating in Germany, the world’s biggest exporter, where one in three jobs relies on foreign trade.

The Munich-based Ifo institute forecast on Dec. 11 that the economy will shrink 2.2 percent next year, the second assessment in as many days to predict the worst recession since World War II. The Essen-based RWI institute forecast a contraction of 2 percent on Dec. 10, forcing the government to reiterate its own outlook for next year of 0.2 percent growth.

‘Flashing Red’

“Signals for the German economy are flashing red for 2009,” Ifo said. The Ifo and RWI institutes are both members of a group that advise the government.

Economy Minister Michael Glos today denied as “pure speculation” a Spiegel report that the government already concedes that the economy will contract 2 percent next year as Germany enters a “deep recession.” Glos is scheduled to review the economic outlook on Jan. 15.

Merkel has scheduled a further meeting on Dec. 18 with representatives of Germany’s 16 states, she said. Those talks will focus on public infrastructure projects that are ready to roll out, as well as the coordination of action between the federal government and the states “in these extraordinary times,” she told the newspaper Bild and Sonntag today.

Schools Investment

Foreign Minister and Vice Chancellor Frank-Walter Steinmeier told Bild that renovating schools, better equipping kindergartens and modernizing sports grounds would all be means of securing jobs while “investing in the future.” Steinmeier will lead the Social Democratic Party, part of the governing grand coalition, against Merkel’s Christian Democratic Union at the national election in September 2009.

“Our aim is to preserve jobs,” Steinmeier told reporters outside the chancellery. “Yet every euro that we spend must be spent sensibly.”

Lawmakers passed the government’s 32 billion-euro ($43 billion) stimulus package on Dec. 5 in the face of opposition from Merkel’s Bavarian allies in the Christian Social Union, the sister party to Merkel’s CDU. The CSU demanded income-tax cuts on top of the measures on construction investment and tax relief included in the plan.

Forty-eight percent of respondents to a poll by FG Wahlen for ZDF television published Dec. 12 said that the stimulus package doesn’t go far enough. Twenty-six percent said it was sufficient, while 10 percent said it went too far, according to the poll of 1,286 voters conducted Dec. 9-11.

Merkel has set a deadline of a Jan. 5 coalition meeting before announcing any new measures.

“Germany is a strong country,” Merkel said. “I am deeply convinced that we Germans can overcome these challenges.”

Deutsche Bank Woes Said to Persist on Credit Bets

2008-12-14T11:20:00.000-08:00

Deutsche Bank AG, shaken last quarter by a $1.68 billion loss trading for the firm’s account, is reeling again, this time from about $1 billion of bad bets in a unit led by credit-trader Boaz Weinstein in New York, people familiar with the matter said.

The magnitude of the group’s loss, and its impact on the firm’s fourth-quarter results, may change as the value of some stakes fluctuate with the markets and the Frankfurt-based bank seeks to unwind positions, according to the people, who declined to be identified because the circumstances haven’t been disclosed.

As of mid-December, some executives gauged the loss to be in the $1 billion range, the people said, noting that the figure may be smaller by the end of the quarter, and cushioned by gains in other units. Deutsche Bank, Europe’s biggest investment bank, posted a profit of 435 million euros ($579 million) last quarter after suffering losses of 1.26 billion euros on proprietary credit and equity trades.

The worst financial crisis since the Great Depression exacerbated losses on trades involving convertible bonds and securities hedged with credit-default swaps, particularly after Lehman Brothers Holdings Inc.’s bankruptcy in September. Deutsche Bank, led by Chief Executive Officer Josef Ackermann, said last month that the operating environment had “significantly deteriorated.”

Jain, Cohrs

“Trading in the fourth quarter is going to be bad because after the Lehman collapse all hell broke loose,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “It isn’t a surprise that Deutsche Bank faces losses in this financial tsunami.”

Deutsche Bank declined 4.9 percent to 26.52 euros in Frankfurt trading, after sinking as much as 10 percent earlier in the day.

Michele Allison, a New York-based spokeswoman for the firm, declined to comment, as did Weinstein when reached on his phone.

Deutsche Bank’s investment bank, led by Anshu Jain, 45, and Michael Cohrs, 52, reported a third straight quarterly pretax loss on Oct. 30, tied to trades made for the bank’s account and writedowns. In the third quarter, it lost 873 million euros in proprietary credit trading and 386 million euros at the equities desk.

Deutsche Bank generated more than half of investment banking net revenue from debt sales and trading in 2007 and 2006, while equities accounted for about a quarter of revenue at the corporate banking and securities division.

Trading Desks

The German bank, whose shares tumbled 70 percent this year, has scaled back staff on proprietary trading desks in Hong Kong and London, said the people, who declined to be identified because the bank hasn’t disclosed the loss.

Deutsche Bank is already cutting about 900 jobs at Jain’s global markets division, mostly in London and New York, in proprietary trading, so-called exotic structured products and credit origination, two people briefed on the plan said on Nov. 19. The bank said on Nov. 24 it planned to scale back proprietary trading, while investing more in “flow” trading and commodities.

Weinstein, 35, runs Deutsche Bank’s global credit trading business with Colin Fan. The two in June replaced Rajeev Misra, who left the bank. Weinstein was previously in charge of global credit trading in North America and Europe.

Traders who now work for Weinstein, including Greg Lippmann, helped Deutsche Bank skirt the worst of the U.S. subprime mortgage writedowns by shorting the bonds that contributed to more than $985 billion of losses and writedowns at the world’s largest financial companies.

JPMorgan, Credit Suisse

Germany’s biggest bank has booked markdowns of about 8.5 billion euros on loans for leveraged buyouts, residential- mortgage-backed securities, assets secured by bond insurers and commercial real estate since last year. Swiss rival UBS AG has had $49 billion of writedowns and Citigroup $67 billion.

Deutsche Bank last quarter took advantage of new accounting rules to reduce by 845 million euros writedowns on assets such as leveraged loans and debt-related investments.

Other banks have weighed or started cuts in proprietary trading, including JPMorgan Chase & Co., the largest U.S. bank by market value, which is shutting a stand-alone global proprietary trading desk, a person familiar with the matter said last month.

Credit Suisse Group AG, Switzerland’s second-largest bank, said earlier this month it will cut 5,300 jobs and exit some proprietary trading.

Citadel Funds

Citadel Investment Group LLC, the Chicago-based hedge-fund firm run by Kenneth Griffin, lost 13 percent last month in its two biggest funds from bets on high-yield bonds, bank loans and investment-grade bonds, which were hedged with credit-default swaps that protect the buyer in the event of a default. The funds, which manage $10 billion in total, have tumbled 47 percent this year.

Deutsche Bank last month announced a shift in strategy after its stock fell to its lowest level in at least 16 years in Frankfurt trading. Steps include scaling back unprofitable businesses, bolstering capital and cutting debt following a plunge in the company’s stock.

“In the last few days, confidence has eroded significantly across financial markets, and consequently our operating environment has significantly deteriorated,” CEO Ackermann, 60, said in a Nov. 21 letter to employees obtained by Bloomberg News.

“We have agreed a number of immediate initiatives which address the near-term challenges of our current market,” the Swiss native said in the letter.

The bank last week cut more jobs in Hong Kong, including six employees in credit proprietary trading, two people at the firm said this week. The cuts included Bing Wang, head of the Asian team, the people said. The cuts also included Charles McLaughlin, chief operating officer of Asian equities at Deutsche Bank.

The man who is unwinding Lehman Brothers

2008-12-14T11:19:00.000-08:00

These days, it's awfully hard to get on Harvey Miller's calendar.

A 75-year-old lion of the bankruptcy bar, Miller has been consumed by the largest corporate liquidation in American history: Lehman Brothers, the storied investment bank that set off one of the most harrowing episodes in the financial crisis when it collapsed in mid-September.

Miller's workdays begin around 8 in the morning and, if he is lucky, end near 11 at night. This combative, outspoken lawyer says that some days don't seem to end at all, but merely expand into the next, dissolving into tense meetings and complicated hearings in overheated courtrooms.

Although Miller has been involved in landmark bankruptcy cases before — including those of Eastern Airlines, R. H. Macy and Global Crossing — Lehman's is in a class by itself because of volatile markets, continuing government investigations, the involvement of federal regulators and a possible wave of other corporate implosions.

From his perspective as Lehman's undertaker, Miller believes that the fallout from the firm's messy bankruptcy could have been avoided. Regulators could have stepped in, he says, not necessarily to save Lehman, perhaps, but to head off the meltdown that followed. "They totally missed it," he says. "Look what happened."When companies rushed to terminate contracts with Lehman, he says, investor confidence plummeted in just about everything — securities and the markets they trade on, corporate debts and the assets backing them, the power of the government and its readiness to use it. In the days after Lehman filed for bankruptcy, he notes, demand for corporate debt utterly evaporated.

The failure of a Wall Street firm poses its own special risks, because other companies that rely on it — such as counterparties to complex financial contracts known as derivatives — are all financially exposed to its collapse.

That's why Miller says it was crucial for the government to head off the wholesale termination by counterparties of all their transactions with Lehman before the firm was forced into bankruptcy. "If the Fed or the Treasury said, 'Let's say to Lehman, there's no bailout, we're not going to save the company,' they could have supported an orderly unwinding of all the transactions over a period of months," he says. "It probably would've cost the economy a lot less money."

THE severity of the economic downturn is leading many analysts to predict a wave of bankruptcies over the next year. And for bankruptcy experts and lawyers who specialize in the trade, all the bad news may be good news for their own business. For one firm in particular, it represents a windfall.

Weil Gotshal & Manges, the firm where Miller is a partner, is widely believed to be first on a short list to represent General Motors if it seeks bankruptcy protection. Ira Millstein, another partner at the firm, has long been a trusted adviser to GM's board.

Weil is also handling bankruptcy filings by Washington Mutual, Pilgrim's Pride, Sharper Image and others, and Weil lawyers say representatives of other teetering companies are calling all the time.

In addition to advising the American International Group, the insurance giant that needed a huge federal bailout to stave off collapse, Weil is handling 13 bankruptcy filings this year alone.

Still, none of the failures so far compare to Lehman's. The combined debt of the 13 bankrupt companies represented by Weil totals $684 billion, according to the firm, but a stunning $640 billion is owed by Lehman alone.

Lawyers involved in the case say it has been a brutal sprint, in which any delay can result in billion-dollar losses.

"Events move with the velocity that almost defies comprehension," Miller said in mid-September at a hearing at the United States Bankruptcy Court for the Southern District of New York. In one 24-hour period, he pointed out, Lehman lost $1.6 billion when the Chicago Mercantile Exchange closed out all of Lehman's positions.

Since Lehman filed for bankruptcy protection early in the morning of Sept. 15, the Dow Jones industrial average has fallen more than 18 percent. Investors worldwide have watched helplessly as billions of dollars they sank into stock markets have evaporated. Tens of thousands of people have already lost jobs in sweeping corporate cutbacks, and countless additional jobs are at risk.

With the fate of whole industries — financial services, automaking, airlines, retailers, real estate, media — looking shaky, demand for bankruptcy gurus is likely to remain high for some time.

For Miller, this moment offers an opportunity, but he does not want for glory, says Sandra Mayerson, head of the New York restructuring practice at Holland & Knight. "His reputation was secure without Lehman, but I think he lives for the thrill of his work," Mayerson says. "He didn't need a moment."

What If Lehman Brothers Was Saved?

2008-12-14T11:18:00.000-08:00

Over the past week, I’ve been interviewing investors, economists, and other financial experts for BusinessWeek’s upcoming Investment Outlook issue. Again and again, many of these informed folks bring up the Lehman Brothers bankruptcy as the watershed moment/inflection point in the recent financial crisis. Some even muse how different the world might be if the venerable investment bank had not been left for dead. As we all know now, the ripple effect of Lehman’s bankruptcy on money market funds, the banking sector, you name it, was devastating to the financial world.

I’ve been thinking about this a lot, and then I thought about it some more last night after I read a few of the comments from the recent New York Magazine profile of Lehman CEO Richard Fuld. (If you haven’t read that haunting article by Steve Fishman, do it now. It’s a terrific read.) As Fishman wrote:

Fuld understands the political usefulness of Lehman’s collapse. The resentful public got to witness the devastating consequences of a financial failure. Four days after Lehman’s collapse, the government had to bolster the money markets, once the most secure of investments. Two weeks later, a frightened Congress handed [Treasury Secretary Hank] Paulson $700 billion, part of which he quickly doled out to the country’s largest investment banks at advantageous interest rates. If only he’d had that money before, he might have been able to save Lehman, Paulson told interviewers. To those close to Fuld, Paulson was simply covering his ass, doctoring the story post facto. “They could have found a way to save Lehman,” says a person involved with both the Bear Stearns rescue and the Lehman failure.
The Lehman bankruptcy hits especially close to home because the former Lehman Brothers building is literally across the street from BusinessWeek’s offices. I walk by there a lot. Although I bring lunch to work more often than not these days, my favorite soup takeout restaurant is on the ground floor. In fact, my colleague and I just said hi to the Lehman-cum-Barclay’s security guard who stood vigil at the company’s front doors amid the bankruptcy mayhem. He’s a big guy, but exceptionally polite. Maybe he is an ex-New York cop?

“Glad to see you are still here,” I said. “I’m glad I’m still here, too,” he replied.

But Lehman is not here any more, which begs the question: What would the global markets be like if Lehman Brothers, like Bear Stearns before it, and others after it, was deemed too big to fail? Would my 401(k) plan be in better shape? (Not that I would know. I haven’t checked account balances since August.)

I realize this is a Sliding Doors-type of question, and that we cannot change the past, but it’s still instructive to imagine “What If…?”

You’re so Thain!

2008-12-09T10:44:00.000-08:00

In one of the most tone deaf and arrogant moves of all time, Merrill Lynch CEO John Thain went to the board of directors and demanded that he receive his $10 million bonus. In this environment? Unbelieveable.
What makes it even more disgraceful is that John Thain was the highest paid CEO in the S&P 500 in 2007, taking home $83.1 million last year. I know, that’s only about $40 million after taxes, but still! To be asking for a $10M bonus right now is about the most arrogant thing I have ever heard. Let’s not forget, during his time at Goldman Sachs, he accumulated more than $300 million in stock. What a pig!
This move was so stupid he made Senate Majority leader Harry “The War is Lost” Reid sound smart
Because of public pressure, Thain is not getting his bonus, but it’s not for lack of trying.
And what exactly had John Thain done this year to demand his $10M bonus? The image below comes from an April New York Post article. As you can see, the stock was then in the high 40’s. At the time of the fire sale, it was in the teens and heading for the big donut.
Because of public pressure, Thain is not getting his bonus, but it’s not for lack of trying.
And what exactly had John Thain done this year to demand his $10M bonus? The image below comes from an April New York Post article. As you can see, the stock was then in the high 40’s. At the time of the fire sale, it was in the teens and heading for the big donut.

RBI to cut CRR by 150 bps more: Goldman

2008-12-09T10:42:00.000-08:00

The Reserve Bank of India could cut its repurchase auction rate, at which it infuses cash into the banking system, by 150 basis points more by mid-2009, Goldman Sachs said on Monday.
The reverse repo rate, at which the central bank absorbs surplus cash, could be cut by a further 100 basis points, the financial firm said in a note.

The Reserve Bank of India on Saturday cut both its key short-term rates by 100 basis points each to boost economic growth in the wake of a global credit crisis and recession in some major economies.

The repo rate is now at 6.5 per cent, and the reverse repo rate has been reduced to 5 per cent, its lowest in more than three years. Goldman expects a corridoor between 4 per cent and 5 per cent between the reverse repo and repo rate by mid-2009.

"The risks are clearly towards even more aggressive cuts as growth continues to falter, and Inflation declines rapidly", Tushar Poddar, economist at Goldman, said in the note.

Cisco Becomes Infrastructure Play on Obama Tech Focus

2008-12-09T10:38:00.000-08:00

Cisco Systems Inc., General Electric Co. and Emcor Group Inc. may be winners as President-elect Barack Obama seeks to revive the U.S. economy by rewiring classrooms and libraries for high-speed Internet service and repairing bridges and highways.

While industrial giants such as U.S. Steel Corp. and Caterpillar Inc. were called on to build 47,000 miles of roads, bridges and tunnels under President Dwight Eisenhower in the 1950s, technology companies will be tapped under Obama to improve efficiency at hospitals and schools, ease congested traffic and make alternative fuels work, said analysts and company executives.

The president-elect’s transition team hasn’t put a number on the package. Economist James Galbraith, a Democratic Party adviser, recommends spending of more than $900 billion.

“This is a non-traditional stimulus,” said Frank MacInnis, chief executive officer of Emcor Group Inc., a Norwalk, Connecticut-based maker of systems for voice and data, electrical power and lighting. “These new priorities of the Obama administration are indicative of the way that systems installation is capable of improving the efficiency of existing facilities.”

Investors drove up shares of construction companies and steelmakers including Cemex SAB, Fluor Corp. and Olympic Steel Inc., by close to one-quarter yesterday after Obama said in a Dec. 6 radio address he’d launch “the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s.”

Cisco Stock Increase

Cisco, the world’s biggest maker of networking equipment, rose 8.2 percent in trading on the Nasdaq Composite Index yesterday. That was twice the increase the Nasdaq 100 recorded that day, and it may still underestimate the benefit such suppliers of technology products and services could realize under the Obama plan, said Dan Kusnetzky, founder of Kusnetzky Group, a research firm in Sarasota, Florida.

Just as the highway program moved the U.S. into a new era in the 1950s, the federal government can lead the way toward an information-based economy, said Terry Alberstein, senior director of corporate public relations for Cisco in San Jose, California.

“It’s critical that government and industry work together to create a 21st century digital infrastructure that ensures U.S. economic competitiveness and job growth in areas like science and engineering,” Alberstein said.

‘Smart’ Highways

Even something as basic as highways now have the capability of being “smart” by alerting motorists to congestion and helping re-route automobiles to keep traffic flow smooth, Emcor’s MacInnis said.

The 1956 investment program reflected an era of rapidly increasing automobile use as well as Eisenhower’s desire to improve domestic defenses during the Cold War. Obama’s infrastructure plans resemble the interstate highway program in ambition and scope; its components, on the other hand, reflect a computer and Web-driven economy.

Manufacturing accounted for 27 percent of the U.S. economy during the 1950s and 30 percent of employment. Today, manufacturing has shrunk to about 12 percent of the economy and provides one out of every 10 jobs.

35,000 Jobs

Upgrades of roads and bridges that have fallen into disrepair after years of under-spending on maintenance will be one way to create jobs quickly. Every $1 billion spent on road work creates about 35,000 jobs, according to October congressional testimony submitted by the U.S. unit of Ireland’s CRH Plc.

European building-materials companies, such as CRH, are poised to benefit from a U.S. stimulus package. To create an additional 2.5 million jobs via construction over the next two years, the U.S. will need to spend an additional $90 billion to $100 billion, according to Tobias Woerner, an analyst at MF Global Ltd. in London. That level of spending could result in a net increase in building-material volumes of as much as 20 percent for next year and 2010, the analyst said, with the main beneficiaries being CRH, as well as Lafarge SA of France, Holcim Ltd. of Switzerland, and Buzzi Unicem SpA of Italy.

Peoria, Illinois-based Caterpillar Inc. generated 63 percent of its revenue in 2007 through sales of mining and road- building gear. It estimates the U.S. will need as much as $700 billion in infrastructure spending to compete against China, where new roads, bridges, ports and airports are giving companies an edge, Group President Doug Oberhelman said in an October interview.

Cement and Steel

Whether building networks or highways, makers of steel and cement and other basic materials are in line to benefit, Michael Siegal, Olympic Steel’s chief executive officer, said in an interview.

“We are so far behind where we need to be, whether you’re talking about roads, bridges, sewage plants, wind-power plants, ethanol plants or nuclear plants,” he said.

Bedford Heights, Ohio-based Olympic surged $3.83, or 25 percent, to $19.02 in New York Stock Exchange composite trading yesterday. The American depositary shares of Cemex, the largest cement producer in the U.S., jumped $2.07, or 28 percent, to $9.40.

Along with upgrading highways and bridges, Obama is focusing on the needs of schools and the nation’s information network. The president-elect proposes putting more computers in schools and extending and improving Internet broadband coverage.

More Complex Economy

“Given the increased complexity of the economy, those things are more of a focus and they reflect the technological sophistication of where the economy is today,” said Alec Phillips, an economist with Goldman Sachs Group Inc. in Washington and a former Senate Finance Committee staffer.

Obama also said he “will launch a massive effort to make public buildings more energy-efficient.”

Fairfield, Connecticut-based General Electric began gearing up for a transition to a green economy in 2005 with a program called “ecomagination.” The company spends $1.4 billion annually to develop energy-efficient product lines such as locomotives, jet engines and power-plant equipment, including wind turbines and solar power.

GE may also benefit from investment in water treatment, lighting efficiency and so-called “smart grid” electrical distribution, said Peter O’Toole, a spokesman. The Obama focus on modernizing the health-care system could also mean business for the company, he said.

Electronic Records

That said, not all of the infrastructure improvement will have to be paid for by tax dollars. Allscripts-Misys Healthcare Solutions Inc. has already seen a fivefold increase in the number of U.S. doctors using its electronic prescribing software, before any federal money has been appropriated, according to Chief Executive Officer Glen Tullman.

The health-care industry’s “dramatic acceleration” toward electronic records for cost-savings and increased accuracy may lessen the need for $50 billion in public financing, said Tullman, whose company is the largest U.S. provider of software to doctors. The CEO, who was speaking yesterday to a forum in New York sponsored by Nasdaq OMX Group Inc. and Leerink Swann & Co., is a member of the Obama campaign’s health-care advisory committee.

While a technology-based economy will mean funds are spent differently than 50 years ago, the political wrangling over who gets the money will likely remain the same.

Solar Value

“Solar can help the economy, the environment and energy security faster than any other industry,” said Barry Cinnamon, chief executive officer of Akeena Solar Inc., a rooftop power- system maker, based in Los Gatos, California. He said his company can create jobs in two weeks and add $40,000 to the value of a home for every $10,000 spent on sun-powered panels.

Obama’s plan could also help the U.S. catch up to the European Union in the use of light rail networks to help ease traffic in major cities and reduce carbon emissions, according to Dwayne Wilson, president of Fluor’s industrial and infrastructure group, based in Irving, Texas.

“Those are opportunities that the funding in the stimulus plan could support,” Wilson said. “With light-rail programs, that’s something the country can benefit from in the short term.”

The U.S. still remains behind the European Union in the use of privately funded projects with government participation to address infrastructure spending constraints, he said.

Behind the EU

Fluor owns 25 percent of a company that’s widening and rebuilding 37 kilometers of highway by 2010 and operating and maintaining 52 kilometers of German highway between Munich and Augsburg at a cost of $340 million. The company has participated in public-private highway and rail projects in the Netherlands and the U.K.

Obama’s immediate goal is to create jobs, regardless of which industry they’re in, said Ron Hira, a public-policy professor at the Rochester Institute of Technology in Rochester, New York. His secondary goal is “putting money into tools, technologies and infrastructure that help Americans become more productive in the long term.”

Global Trade to Decline Next Year, World Bank Says

2008-12-09T10:37:00.000-08:00

International trade will shrink in 2009 for the first time in more than 25 years as economic growth slows and commodity prices slide, the World Bank said.

World trade volumes will probably contract next year by 2.1 percent, hampered by exchange rate volatility, flagging import demand and a decline in export financing stemming from the credit crisis, the bank said today in its annual Global Economic Prospects report.

“Urgent steps are needed to help reduce fallout from the crisis on the real economy and on the poorest,” World Bank Chief Economist Justin Lin said today in a press release.

Fiscal stimulus and coordinated interest-rate cuts by governments in the U.S., Europe and other regions have failed to reverse a worldwide economic slowdown and the worst credit crunch in seven decades.

Gross domestic product in developing countries will increase 4.5 percent in 2009 compared with 6.3 percent this year, while global growth will slow to 0.9 percent, or the weakest rate since records became available in 1970, the World Bank said.

“If the freeze in credit markets does not thaw” as predicted by the World Bank, “the consequences for developing countries could be catastrophic,” the Washington-based lender said in the report released in Washington. The bank is forecasting growth in China to slow to 7.5 percent next year from 9.4 percent in 2008.

Triple Loans

The World Bank has said it plans to nearly triple loans to poor countries to $35 billion in the year ending June 2009, while pledging $100 billion over the next three years.

The collapse in global economic growth will continue to weigh on commodity prices, the report said.

The price of a barrel of oil will probably average $75 next year, a decline of more than 30 percent from 2008, the bank said. Food prices are expected to decline by 23 percent compared with their average in 2008, a trend that won’t necessarily help African countries where food production lags population growth.

Moreover, economic growth in some African countries “may slow to the point where it is no longer keeping pace with population growth,” Lin said at a press conference in Washington.

Export growth for developing countries will slow to 3 percent next year from an average of 15 percent during the past five years, the World Bank said.

Developing “countries will not only sell less, but there is a price shock too” from the declining prices of export commodities, Hans Timmer, a World Bank economist, said at the press conference.

The outlook for the global economy is unusually difficult to predict, the World Bank said.

“The freezing of credit markets, collapse of stock markets, large shifts in exchange rates and commodities prices and unprecedented policy actions have combined to create an extremely uncertain environment for market participants and forecasters alike,” the lender said.

Bernanke Opposes Fed Loans for GM, Ford, Chrysler

2008-12-09T10:34:00.000-08:00

Federal Reserve Chairman Ben S. Bernanke signaled opposition to extending central bank loans to automakers, saying that would fall outside its traditional duties and suggesting options including a bankruptcy reorganization.

“Congress is best suited” to determine the viability of the car companies, Bernanke said in a Dec. 5 letter to Senate Banking Committee Chairman Christopher Dodd, obtained by Bloomberg News today. It’s “unclear” whether the companies have strong enough collateral for the Fed to lend to them, he also said.

While the Fed chief didn’t rule out using emergency-lending authority to aid carmakers, he made clear that Congress should determine whether to assist a specific U.S. industry. The letter indicates he’s trying to draw a line on Fed rescues, after the central bank prevented the bankruptcies of Bear Stearns Cos. and American International Group Inc. this year.

Congress may wrap up a $15 billion aid package tonight or tomorrow, Senate Majority Leader Harry Reid said today. General Motors Corp. and Chrysler LLC say they need at least $14 billion in combined aid to keep from running out of cash by early next year. Bernanke said in his letter that the Fed is “not able to verify those assessments.”

Bernanke also underscored that the Fed is against extending credit to the industry in the absence of any plan endorsed by Congress.

‘Extremely Reluctant’

“The Federal Reserve would be extremely reluctant to extend credit where Congress has actively considered providing assistance but, after due consideration, has decided not to act,” he said in the letter, a copy of which the Senate banking panel forwarded to Bloomberg.

The comments represent Bernanke’s first public remarks on whether the Fed would lend to the beleaguered industry. Dodd, a Connecticut Democrat, asked Bernanke Dec. 3 for his position and the scope of the Fed’s authority to lend to automakers.

GM, Chrysler and Ford Motor Co. and have asked U.S. lawmakers for as much as $34 billion in aid. Congress is discussing a $15 billion rescue proposal where the Treasury would get warrants for stock equivalent to 20 percent of any government loans.

Reid, a Nevada Democrat, said on the Senate floor today that remaining disagreements could be resolved within a few hours. The Senate’s top Republican, Mitch McConnell, today called the plan “deeply flawed” because it fails to ensure taxpayers won’t be forced to provide additional aid in coming months and years.

Bankruptcy Option

Congress should also consider a “range of possible policy actions” besides direct aid, including a government-assisted “orderly bankruptcy reorganization” or company mergers, Bernanke said in the letter.

Senator Charles Schumer, a New York Democrat and member of the Senate Banking Committee, asked the Fed in a letter last month to begin lending to the automakers’ credit arms while Congress considered a rescue plan.

Bernanke said in the letter to Dodd that the central bank can only lend in emergency circumstances when the financing can “be secured to its satisfaction.” It’s “unclear” whether the three U.S. automakers could “meet this requirement.”

Industrial Policy

“Even if the companies have sufficient collateral, lending to an auto manufacturing company would represent a marked departure from that policy, and would take us into distinctly new realms of policymaking,” Bernanke said. “In particular, it would raise the question as to whether the Federal Reserve should be involved in industrial policy, which has traditionally been outside the range of our responsibilities.”

The “critical unknown” in the automakers’ plans is “their ability to develop and produce vehicles that the public wants to buy,” Bernanke said.

Dodd said in a statement that the Fed “plays a crucial role in maximizing jobs and economic growth for all Americans.”

“I believe that American manufacturing is just as important to our nation’s economy as a healthy financial sector,” Dodd said. “I look forward to continuing my oversight and work with the Fed to accomplish the goals that we both agree will secure American jobs and stabilize our economy.”

Bank of Canada Cuts Lending Rate to Lowest Since 1958

2008-12-09T10:30:00.000-08:00

The Bank of Canada lowered its benchmark interest rate by more than anticipated to a half- century low and signaled more action may be needed as economic growth sputters amid a “broader and deeper” global slump.

Governor Mark Carney and his rate-setting panel slashed the target rate for overnight loans between commercial banks by three-quarters of a point to 1.5 percent, the lowest since 1958. Two of 23 economists surveyed by Bloomberg predicted the move, with 20 calling for a half-point cut and one calling for a quarter of a point.

Canada’s economy “is now entering a recession,” the central bank said in a statement from Ottawa today, the first time it has made that assessment outright. “The Bank will continue to monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required.”

Since Carney said Nov. 19 that a recession was a possibility, reports have shown employment fell by 70,600 in November and housing starts on an annualized basis plunged 19 percent. Meanwhile, manufacturers such as General Motors Corp. are scaling back operations in Ontario, Canada’s industrial heartland, and lower commodity prices are paring investment in the western province of Alberta’s oil fields.

One More?

“They are indicating that if the economic data warrants it they are prepared to move further, but they would need to see a worsening of economic conditions,” said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto, the country’s biggest lender.

The Canadian dollar weakened as much as 1.9 percent to C$1.2745 per U.S. dollar today from C$1.2504 late yesterday. It traded for C$1.2635 at 11:13 a.m. in Toronto. The currency has dropped 21 percent this year, which the central bank said will help offset weaker global demand.

The European Central Bank trimmed its main rate by three- quarters of a point to 2.5 percent on Dec. 4, the biggest reduction in its 10-year history. The Bank of England that day chopped its rate by one percentage point to 2 percent. Canada’s decision comes a week before the U.S. Federal Reserve’s next meeting, followed by the Bank of Japan two days later.

Carney’s rate cut today was the Bank of Canada’s biggest since October 2001. He had already surprised economists with his decisions four times this year including twice in October.

The rate was 4.5 percent at the start of last December. Policy makers haven’t cut it below their 2 percent inflation target since that benchmark was established in 1993.

Global Recession

The International Monetary Fund sees recessions next year in the U.S., Japan and the euro area, and economists in a separate Bloomberg survey say Canada will follow suit.

Economic growth will shrink at a 1.2 percent annualized pace for the October-through-December period and at a 0.5 percent rate in the first quarter of 2009, according to the median of 10 estimates gathered by Bloomberg News Nov. 6-12. Canada hasn’t had a recession since 1992.

“Canada will likely remain in recession for at least another couple of quarters, so it’s very possible the bank will cut rates further,” said Sal Guatieri, an economist with BMO Capital Markets in Toronto. “We are dealing with an unprecedented financial crisis globally and possibly the worst economic downturn in the postwar era.”

The Bank of Canada will ease by another half-point in January, Scotia Capital Inc. economist Derek Holt said in a note to investors.

Waning Expansion

The central bank today didn’t lay out a detailed growth forecast. Policy makers said waning expansion means their measure of so-called core inflation will be slower than they predicted in an October report. The central bank said then that inflation excluding eight volatile items would slow to a 1.6 percent year-over-year pace in the second half of 2009.

Canada sends three-quarters of its exports to the U.S., where a global credit squeeze spurred by the subprime mortgage meltdown is sapping demand for shipments of automobiles and lumber.

Still, signs of weakness have spread beyond exports to the domestic spending that propped up the economy for much of this decade.

“There certainly is a nervousness,” George Fraser, president of Fraser & Hoyt, a company offering insurance and travel services, said in Pictou, Nova Scotia. “People aren’t going to be spending the way we have.”

Canadian Banks

Before the drops in employment and housing starts, home sales fell 14 percent in October from September, the biggest 1- month decline since 1994.

Canadian banks, rated the soundest by the World Economic Forum, are reluctant to lend after the worst financial malaise since the Great Depression toppled institutions such as Lehman Brothers Holdings Inc. in the U.S. and Fortis in Europe.

The Bank of Canada stimulus comes as government aid for the economy is on hold until Parliament re-opens in January. Prime Minister Stephen Harper last week “prorogued” or shut down the country’s legislature for seven weeks in a bid to stave off a challenge from opposition parties seeking to bring down his government. The opposition proposed to form a coalition government to speed up an economic stimulus package.

The record low for Canada’s key rate was 1.12 percent in 1958, a time when it was based on treasury yields rather than actions by policy makers. During that year, Canadian-born economist John Kenneth Galbraith coined the term “conventional wisdom” in his book “The Affluent Society” and the country saw its first live nationwide television show.

Retailers’ U.S. Sales Tumble in Worst Month in Four Decades

2008-12-04T09:22:00.000-08:00

Sales at U.S. retailers tumbled in November, the worst monthly performance in almost four decades, after the Wall Street meltdown caused consumers to postpone shopping until the Black Friday holiday-sales kickoff.

J.C. Penney Co., Nordstrom Inc. and Gap Inc. all reported sales drops of 10 percent or more at stores open at least a year. The decreases were less than some analysts estimated after 50 percent-off discounts on clothing lured customers grappling with the U.S. recession. Wal-Mart Stores Inc. posted a 3.4 percent gain.

Declines in consumer spending in October persisted into the first part of November before rebounding on Black Friday, the unofficial start to the holiday-shopping season. Macy’s Inc. lowered prices by half on some coats, while Gap offered sweaters in a two-for-one promotion. The markdowns may hurt retailers during a period when they make a third or more of their annual profit.

“The promotions are pretty much across the board in retail, and some are the biggest you’ve seen in years, especially at the high end,” said David Abella, a portfolio manager at Rochdale Investment Management LLC in New York, with $2 billion in assets including Wal-Mart shares. “They will need to keep that up through December to draw traffic and sales, and that may erode margins.”

November same-store sales fell 2.7 percent, the International Council of Shopping Centers said, based on a survey of 37 chains. That’s the worst since the ICSC began tracking data in 1969. The New York-based ICSC said purchases during the final two months of the year may fall as much as 1 percent, worse than its forecast of a 1 percent gain.

Wal-Mart Gain

The comparable-store sales gain by Wal-Mart beat the world’s largest retailer’s forecast for a 1 percent to 3 percent increase. Limited Brands Inc., the owner of the Victoria’s Secret chain, dropped 12 percent, while Costco Wholesale Corp.’s global sales declined 5 percent.

Wal-Mart climbed $1.21, or 2.2 percent, to $55.59 at 11:07 a.m. in New York Stock Exchange composite trading. Nordstrom rose 14 percent, while Gap increased 5.5 percent.

“The news out of Costco and Wal-Mart wasn’t really that bad,” Jessica Hoversen, a foreign-exchange and fixed-income analyst at MF Global Inc. in Chicago, said in a Bloomberg Television interview. “That’s definitely a positive, and Black Friday sales weren’t as bad as everyone thought they would be.”

The 27-company Standard & Poor’s 500 Retailing Index declined 36 percent this year through yesterday, with only discount retailers Family Dollar Stores Inc. and Big Lots Inc. posting gains. Wal-Mart, which isn’t an index component, has advanced 14 percent.

Retail Metrics

Retail Metrics Inc. said November same-store sales fell 1.8 percent, the worst monthly figure since the research group starting tracking results in 2000. Excluding Wal-Mart, sales plummeted 7.3 percent, the firm said.

The later Thanksgiving holiday in 2008 compared with last year, resulting in five fewer shopping days before Christmas, may push more sales into December, according to Retail Metrics.

Total sales at U.S. retailers rose less than 1 percent during the three days after Thanksgiving compared with a year earlier, ShopperTrak RCT Corp. said. A 0.8 percent decline on Nov. 29 further damped the smallest gain in three years on the day after the holiday, called Black Friday because retailers were said to turn a profit for the year because of increased sales.

“Consumers were bargain-hunting and therefore if you had better bargains, you had more customers,” Amy Wilcox Noblin, a retail analyst at Pali Capital Inc. in Larkspur, California, said in a Dec. 2 interview.

U.S. Recession

The National Bureau of Economic Research said earlier this week that the U.S. economy entered a recession in December 2007. The jobless rate probably increased to 6.8 percent last month, the highest level since 1993, the median estimate in a Bloomberg News survey showed.

Wal-Mart’s increase beat the average analyst estimate of 2 percent, according to Swampscott, Massachusetts-based Retail Metrics.

Costco, the largest U.S. warehouse-club chain, trailed projections of a 1.3 percent drop. Comparable-store sales are considered by some investors to be the best measure of retail health because they exclude the effect of location openings and closings in the past year.

Gap, the largest U.S. apparel retailer, posted a 10 percent comparable-store sales decline, exceeding analysts’ estimates for a 17.6 percent drop. The owner of the Banana Republic and Old Navy chains said it had “more aggressive offers” to attract customers, hurting profit margins.

28 Percent

Abercrombie & Fitch Co.’s same-store sales plunged 28 percent. The teen apparel retailer, known for its shirtless male models, said last month it won’t use promotions to lure shoppers to protect its brand image. Analysts projected a 26 percent drop.

American Eagle Outfitters Inc. posted an 11 percent decline as the retailer discounted clothes. Fourth-quarter profit will be 30 cents to 36 cents a share, it said. Analysts surveyed by Bloomberg estimated an average of 39 cents.

Sears Holding Corp., the largest U.S. department-store chain, said Dec. 2 that November comparable-store sales declined 8.7 percent. Macy’s, the second-biggest, said today that same-store sales fell 13 percent.

J.C. Penney’s sales dropped 12 percent, within its forecast and better than analysts predicted. Kohl’s Corp. dropped 18 percent. Target Corp., the second-largest U.S. discount retailer, lost 10 percent, worse than it had forecast.

‘Cautious’ Consumers

“Results from post-Thanksgiving holiday sales, particularly Friday, were stronger than the rest of the month, but were insufficient to offset earlier weakness,” Target Chief Executive Officer Gregg Steinhafel said in a statement. “Consumers remain very cautious and event-driven in their purchasing behavior.”

Neiman Marcus Group Inc. sales fell 12 percent, while Saks had a 5.2 percent drop, better than the 20 percent fall estimated by analysts. Nordstrom Inc. sales retreated 16 percent. Analysts projected a deceleration of 19 percent.

Victoria’s Secret Chief Executive Officer Sharen Jester Turney said in a Dec. 2 interview that the retailer was a little more promotional on Black Friday this year than in the past. The company may take additional steps, marking down some beauty gift sets 40 percent, for example, she said.

“The remaining three weeks are incredibly important,” Bill Dreher, director and senior retail analyst at Deutsche Bank Securities Inc. in New York, said in a Dec. 2 interview. “The last week before Christmas is perhaps more important than it’s been in years. Will it pay off? It’s unlikely.”

AT&T, DuPont, Viacom Fire 15,000 Workers as U.S. Slump Worsens

2008-12-04T09:21:00.000-08:00

AT&T Inc., DuPont Co. and Viacom Inc. are firing more than 15,000 people, buckling under the strain of a recession that may already have pushed the U.S. jobless rate to the highest level in 15 years.

AT&T, the biggest U.S. phone company, announced plans today to slash 12,000 jobs, or 4 percent of the workforce. Chemical maker DuPont will dismiss 2,500 workers, and Viacom, which owns MTV Networks and Paramount Pictures, announced 850 job cuts.

More than 1 million people in the U.S. have lost their jobs this year as the economic slump deepens, bringing the amount of people collecting jobless benefits to a 26-year high as of last month. Companies probably will slash payrolls further in the next two months, said John Challenger, chief executive officer of Challenger, Gray & Christmas Inc.

“We’re probably in for some months ahead that are going to be some very tough sledding,” Challenger told Bloomberg Television today from Chicago. “There used to be a taboo that companies did not lay off a lot between Thanksgiving and the New Year. That’s all changed, and those have been very heavy over the last few years.”

AT&T joined State Street Corp. and mining company Freeport- McMoRan Copper & Gold Inc. in cutting jobs this month to cope with the deepening economic crisis, spurred by a spate of bank failures that froze up credit. Financial-services firms have posted almost $1 trillion in credit losses or writedowns tied to the collapse of the subprime-mortgage market.

A larger-than-anticipated 4.09 million Americans are getting jobless benefits, the most since 1982, the Labor Department said today in Washington. A Labor report tomorrow may show payrolls fell by 330,000 in November, the biggest one-month drop since 1982, according to a Bloomberg survey. The unemployment rate probably climbed to 6.8 percent, the highest since 1993.

Being Cautious

U.S. job cuts more than doubled in November from a year earlier, Challenger, Gray & Christmas said yesterday in a report. Companies have announced 1,057,645 cuts this year, the first time they’ve surpassed that total since 2005, the job-placement firm said.

While financial companies had the biggest number of job cuts last month, with 91,356 reductions, the retail industry showed the second-worst performance, with 11,073, and probably will deteriorate, Challenger said.

“Retailers are being very cautious on hiring,” he said. “As we move into December and January, the cuts are likely to be larger in those areas as more companies close stores or even file for bankruptcy.”

AT&T is shifting its focus to a growing wireless business as customers get rid of their home-phone lines, favoring mobile devices. Companies have curbed spending on phones and service as they shed employees, leading to a ripple effect at carriers like AT&T, said Christopher King, an analyst at Stifel Nicolaus & Co.

Companies Exposed

“These companies have never been as exposed to the enterprise segment as they are now,” said King, who is based in Baltimore. “Companies are simply going to be spending less.”

DuPont’s reductions equal about 4 percent of its workforce. The company forecast a fourth-quarter loss of about 20 cents to 30 cents a share, leaving out reorganization costs, down from an earlier prediction of a profit. The firings will come mostly in units that serve the automotive and construction markets in the U.S. and Western Europe, the Wilmington, Delaware-based company said today.

Viacom’s cuts will be spread across all divisions of the company, the New York-based company said today. Viacom will also write down the value of some assets.

AT&T fell 33 cents to $28.75 at 11:32 a.m. in New York Stock Exchange composite trading. DuPont rose 21 cents to $23.82, and Viacom advanced 6 cents to $14.56.

ECB’s Trichet Says Euro-Region Economy Will Contract

2008-12-04T09:20:00.000-08:00

European Central Bank President Jean- Claude Trichet said the euro region’s economy will shrink next year for the first time since 1993 after the bank delivered the biggest interest rate cut in its 10-year history.

“Global and euro-area demand are likely to be dampened for a protracted period of time,” Trichet said at a press conference in Brussels today. The ECB lowered its benchmark by three quarters of a percentage point to 2.5 percent. Trichet declined to give clues on further moves, saying only that the ECB shouldn’t get “trapped” by cutting rates too low.

The ECB’s decision came after the Bank of England today cut its key rate by one percentage point to 2 percent and Sweden’s central bank lowered borrowing costs by the most since 1992. The Federal Reserve’s benchmark rate now matches a five-decade low as central banks rush to respond to the global recession.

“The level of uncertainty remains exceptionally high,” Trichet said. The euro rose after his comments and traded at $1.2681 at 3:50 p.m. in Brussels.

As well as cutting rates, the ECB has flooded money markets with cash and widened its collateral rules to unfreeze credit markets. Trichet said today it may be possible for the bank to purchase financial assets outright to reflate the economy, although he declined to say if it would.

Trapped

Trichet said the euro region’s gross domestic product will shrink around 0.5 percent next year as the financial turmoil takes its toll, the first time the ECB has ever predicted a contraction. In September, the bank forecast a 1.2 percent expansion next year.

“The ECB is moving towards an acceptance of reality but the growth projections are still not low enough,” said Ken Wattret, euro area chief economist at BNP Paribas in London.

Trichet refused to be drawn on further moves, saying only that policy makers must avoid getting “trapped at nominal levels that would be too low.” The ECB’s benchmark compares with the Fed’s rate of 1 percent.

On inflation, Trichet said it will slow to about 1.4 percent in 2009 from 3.3 percent this year.

“Overall, since our last meeting, evidence that inflation pressures are diminishing has increased,” Trichet said. “Inflation rates are expected to be in line with price stability over the relevant policy horizon.”

Anchor

Until today, the ECB had restricted itself to two 50-point cuts since October, with Trichet stressing its role as an “anchor of stability.”

Some ECB policy makers have advocated a steady-hand approach to tackling the recession. Executive Board member Lorenzo Bini Smaghi said on Nov. 25 that “sharp” rate reductions “may contribute to, rather than obviate, a worsening of market sentiment,” prompting speculation the bank would limit itself to a half-point cut today.

Trichet said today’s decision was made by consensus and declined to divulge if there were calls for smaller or bigger cuts.

“This suggests to us that the decision might have been more difficult to reach than at the last meeting with possibly some members favoring a smaller cut,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London.

Manufacturing and service industries contracted at the fastest pace on record in November and economic confidence plunged to a 15-year low. With oil prices collapsing, the inflation rate fell the most in almost 20 years last month, to 2.1 percent from 3.2 percent in October.

Contraction

The International Monetary Fund predicts the euro-region economy will contract 0.5 percent in 2009.

Trichet declined to follow Fed Chairman Ben S. Bernanke in outlining what his strategy would be should the ECB’s key interest rate fall close to zero or whether he’d pursue so-called “quantitative easing.”

He noted the bank had already cut rates at the fastest pace in its history and offered unlimited cash to the region’s banks. “If new decisions are needed we will take new decisions, but I can’t say anything else at this stage” he said. “We continue to look very carefully at the situation of the market and the situation of the economy.”

U.S. Auto Chiefs Appeal to Congress for Emergency Aid

2008-12-04T09:19:00.000-08:00

The Big Three automakers renewed their plea for an emergency federal bailout, as the head of General Motors Corp. told a deadlocked Congress the industry has made some wrong turns and economic forces have pushed it “to the brink.”

GM Chief Executive Rick Wagoner said time is running short and his company could be out of funds by the end of the year. “We’re here today because we made mistakes,” he said in written testimony to the Senate Banking Committee in Washington. “And we’re here because forces beyond our control have pushed us to the brink.”

Wagoner, Chrysler LLC Chief Executive Robert Nardelli and Ford Motor Co.’s Alan Mulally are asking for as much as $34 billion in federal aid. “I am sorry to be asking for this support,” Wagoner told reporters before the hearing began.

The three men are trying to recover from their appearance before Congress two weeks ago when they were ridiculed for arriving in Washington in separate private jets to plea for funds and left empty-handed. They demonstrated contrition today, pledging to work for $1 a year, traveling to Washington by car and providing specific plans for viability.

“We need to act,” said Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat. Letting automakers fail would amount to playing “Russian roulette with our entire economy.”

Senator Charles Schumer, a New York Democrat, said that if the industry fails, “millions of workers lose their jobs.”

Opposing a Bailout

The senior Republican on the panel, Senator Richard Shelby of Alabama, said he still opposes a bailout. “Each of the automakers have based their plans on what I believe are optimistic sales forecasts,” he said.

Democrat Senator Carl Levin, from the carmakers’ home state of Michigan, said “it’s essential” that President George W. Bush and President-elect Barack Obama “become more active” in talks to rescue the carmakers.

White House spokeswoman Dana Perino said it is up to the automakers to show that their plans for revamping their companies will work.

“It’s too early to give these plans a grade,” Perino said. “The linchpin of our support has been that we would not provide taxpayer dollars unless they could prove viability.”

GM and Chrysler say they need the first installments on a rescue package this month to avoid running out of cash. Ford has requested a $9 billion credit line it said it may not need to tap.

Public Money

“I recognize this is a significant amount of public money,” Nardelli said in written testimony. “We believe this is the least costly alternative considering the depth of the economic crisis and the options we face.”

U.S. lawmakers have said they may schedule votes next week to aid automakers after hearings today and tomorrow. Leaders haven’t resolved a deadlock over how to provide aid, with Republicans backing use of Energy Department loans that were intended to help retool the industry and Democrats preferring to tap a $700 billion rescue package targeted for financial institutions.

“The collapse of one or both of our domestic competitors would threaten Ford because we have 80 percent overlap in supplier networks and nearly 25 percent of Ford’s top dealers also own GM and Chrysler franchises,” Mulally said.

GM and Chrysler executives have held private discussions on possibly accepting a pre-arranged bankruptcy as the last-resort price of securing the bailout, according to a person familiar with the talks.

Leading to Liquidation

The executives have said publicly that bankruptcy would lead to liquidation as customers abandon the companies. Wagoner said today bankruptcy isn’t in his plan.

Staff for three members of Congress have asked restructuring experts if a pre-arranged bankruptcy -- negotiated with workers, creditors and lenders -- could be used to reorganize the industry without liquidation, a person familiar with that matter said.

“The situation at GM, Ford and Chrysler is extremely dire,” United Auto Workers President Ronald Gettelfinger said in written testimony. “It is imperative that the federal government act this month.”

Gene Dodaro, acting comptroller of Congress’s Government Accountability Office, said lawmakers should consider creating a board to oversee distribution of any aid the car companies receive. Any money could be phased in over time, he said.

Bidding begins for Lehman division

2008-12-04T09:16:00.000-08:00

Three bidders are competing in an auction Wednesday of Lehman Brothers Holdings Inc.'s investment management unit, which includes its Neuberger Berman money management business.

The auction was expected to start at midday and could last most of the day, Lehman lawyer Shai Waisman said.

Lehman filed for Chapter 11 protection on Sept. 15 in the biggest bankruptcy in U.S. history. The filing marked the end of what was once the fourth-largest U.S. investment bank.

One of the bidders for the investment management business is a group that includes private equity firms Bain Capital Partners and Hellman & Friedman. That group had proposed paying $2.15 billion.

Mr. Waisman declined to say who the other two bidders are or what they bid.

U.S. Bankruptcy Judge James Peck approved a break-up fee and bidding procedures in mid-October for the bid from the two private equity firms over objections from the Carlyle Group, which was then a rival bidder. The break-up fee would be $52.5 million, reduced from $70 million.

Neuberger is a 69-year-old name on Wall Street that now manages more than $130 billion of investments.

Lehman has already agreed to sell key U.S. assets to Britain's Barclays Capital for $1.35 billion and its Asian, European and Middle Eastern businesses to Japan's largest brokerage, Nomura Holdings Inc., for $2 billion.

J.P. Morgan sees Fed cutting rates to zero in Jan

2008-12-04T09:15:00.000-08:00

The Federal Reserve will lower its policy rate to zero percent by January in its attempt to avert a prolonged recession and to revive the struggling credit market, according to J.P. Morgan Securities analysts.

The Fed will likely hold its target rate on benchmark federal funds -- the overnight cost banks charge each other to borrow surplus reserves -- at zero at least through the end of 2009, J.P. Morgan analysts wrote in a research note published on Monday.

The Fed's fed fund target rate is currently 1.00 percent. The U.S. central bank began its rate-cutting campaign in September 2007 when the fed funds target was at 5.25 percent.

A number of analysts widely expect the Fed to lower the policy target rate to 0.50 percent at the end of its December 15-16 meeting. Some predict the U.S. economy may contract by an annualized 4.0 percent in the fourth quarter.

J.P. Morgan analysts now see the Fed stepping up its rate easing in conjunction with its various financing programs and proposed fiscal stimuli in the coming months.

They predicted the Fed will pare the fed funds target rate by half a percentage point at its December meeting and by another half point at its January 27-28 meeting.

This compared with their forecast of a quarter-point cut in a Reuters poll conducted on Nov 10.

Aggressive monetary and fiscal stimuli will be much needed, as many economists believe a U.S. recession will continue into the middle of next year.

J.P. Morgan analysts expect an upturn in the second half of next year, with gross domestic product posting a 1.5 percent annualized increase in the third quarter of 2009.

Merrill Said to Cut Bonuses by 50% as Revenue Slumps

2008-12-03T10:00:00.002-08:00

Merrill Lynch & Co. plans to cut year- end bonuses in half after more than $20 billion of losses that forced the U.S. securities firm to sell itself to Bank of America Corp., two people with knowledge of the situation said.

The average bonus reduction will be about 50 percent at the New York-based company, and some traders and investment bankers will face steeper cuts, said the people, who declined to be identified because the plans aren't public. While employees won't find out their bonuses until later this month, division managers are being told now how much they'll get to distribute.

Merrill's revenue through September fell 96 percent from a year earlier, forcing Chief Executive Officer John Thain to slash compensation -- the firm's biggest expense. Congressmen and regulators scrutinizing Wall Street pay have sought to ensure that economic-rescue funds from the U.S. government are used to stimulate lending and not to enrich executives.

The drop in bonuses at Merrill would be less severe than the 70 percent average cut for senior Wall Street executives that compensation consultant Johnson Associates predicted last month. Bonuses for rank-and-file workers may fall by 10 percent to 45 percent, according to Johnson.

Bonuses account for the bulk of a year's pay for most traders and investment bankers, and usually fall when markets sour.

Merrill spokeswoman Selena Morris declined to comment. The shares slipped 4.3 percent to $11.06 in New York trading today.

Shareholder Vote

A crisis of confidence sent Merrill shares plunging 36 percent in a single week during September, forcing the firm to sell itself to Charlotte, North Carolina-based Bank of America. Shareholders of both companies are scheduled to vote on the deal this week, with the closing targeted for the end of December.

Merrill and Bank of America were allotted a combined $25 billion of government money in October, when the Treasury Department agreed to invest $125 billion in nine of the biggest U.S. banks to bolster their dwindling capital.

Hit with mortgage-bond writedowns and plunging investment- banking fees, Merrill may report a loss this year of $13.3 billion, based on the average estimate of nine analysts surveyed by Bloomberg. That would be almost twice as wide as the $7.8 billion loss for 2007, then a record for the 94-year-old firm.

The company has dropped 78 percent this year in New York Stock Exchange composite trading and closed yesterday at $11.56.

Compensation Costs

Merrill's costs for compensation and benefits this year through September totaled $11.2 billion, down 3 percent from a year earlier. Although bonuses aren't paid until the end of the year, Wall Street firms usually estimate them in advance and account for a portion of the payout costs in each quarter.

Even if Merrill set aside nothing for compensation in the fourth quarter, the firm's 60,900 employees still would reap an average of $184,000 in compensation and benefits for the full year.

In 2007, Merrill paid out a total of $15.9 billion in compensation, or about $248,000 per employee.

Merrill's net revenue for the first nine months of this year totaled $834 million, or $13,695 per employee, compared with $19.4 billion in the 2007 period. The plunge in revenue stemmed from trading losses on bonds and other assets. The bulk of Merrill's writedowns came in the fixed-income-trading division, which contributed negative net revenue of $21.4 billion. Investment-banking net revenue plunged 25 percent to $2.58 billion.

Advisers' Commissions

Merrill's brokerage division, the biggest of its kind in the U.S. with 16,850 financial advisers, generated $10.2 billion of net revenue during the first nine months, down 2 percent from the prior year. Brokers don't depend on bonuses as traders and investment-bankers do, because their annual pay is based on a formula that's linked to sales.

Goldman Sachs Group Inc., Wall Street's most profitable firm, said last month Chief Executive Officer Lloyd Blankfein and six deputies would forgo year-end bonuses. Executives at Frankfurt-based Deutsche Bank AG and UBS AG in Zurich also have agreed to waive pay.

Merrill officials have declined to comment on bonuses for top executives, saying the payouts hadn't been set. Thain, 53, a former Goldman Sachs executive, received a $15 million bonus when he joined Merrill last December.

Corporate Debt Protection Costs Climb Amid Depression Concern

2008-12-03T10:00:00.001-08:00

The cost of protecting corporate debt from default jumped to a record in Europe and neared a high in the U.S. amid concern that the global recession will sink into a depression.

Credit-default swaps on a benchmark index tied to below- investment grade companies in Europe reached levels considered distressed for the first time. The cost to protect U.S. leveraged loans from default neared a record, and a benchmark gauge of credit risk tied to investment-grade companies including retailer J.C. Penney Co. and Alcoa Inc., the largest U.S. aluminum producer, also jumped as a private report showed the nation’s companies last month cut the most jobs in seven years.

“Markets are pricing somewhere between a recession and a depression, and that is what we are faced with,” said Philip Gisdakis, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. “We are already in a recession. The next economic phase will not be recession, but depression.”

Credit-default swaps on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada climbed 8 basis points to 267 basis points as of 10:10 a.m. in New York, according to Barclays Capital. The index is at the highest since Nov. 20, when it traded at a record 284 basis points, prices from broker Phoenix Partners Group show.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly sub-investment grade credit ratings increased 65 basis points to 1,005 and earlier reached a record 1,010, JPMorgan Chase & Co. prices show. The index traded above 1,000 basis points for the first time, a level investors consider distressed.

European iTraxx

The Markit iTraxx Europe index of 125 investment-grade companies rose 9 basis points to 195 after earlier trading at 198, which matched a record reached yesterday, according to JPMorgan.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should borrowers fail to adhere to their debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

UniCredit is forecasting a 35 percent chance of a global depression as deteriorating labor markets undermine consumer confidence.

Jobs Cut

Companies in the U.S. cut an estimated 250,000 jobs last month, according to an ADP Employer Services report. The decline, more than economists had forecast, was the most since November 2001. The U.S. economy has lost 1.2 million jobs in the first 10 months of the year, government reports show.

U.S. service industries contracted in November at the fastest pace on record, according to the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the nation’s economy. A survey of about 700 service companies in the U.K. showed that services from banks to recruiters contracted at the fastest pace in at least 12 years last month, Markit and Chartered Institute of Purchasing and Supply said today.

The price of the Markit LCDX index linked to U.S. leveraged loans, which falls as investor confidence deteriorates or as they hedge against losses, reached a record low. The index, tied to the loans of 100 companies including General Motors Corp. and Ford Motor Co., fell 0.9 percentage point to 75.9 percent of face value after earlier trading as low as 75.5, according to Goldman Sachs. The index reached a record low of 75.25 on Nov. 21.

Credit-default swaps on U.K. gilts and U.S. Treasuries also rose to records, according to CMA Datavision. Five-year contracts used to hedge against losses on U.K. government debt increased 6 basis points to 113.5 and 10-year contracts climbed 9 to 116.5. Five-year contracts on Treasuries rose 2.5 basis points to a record 60.5, CMA prices show.

Analyst rates Goldman, Morgan Stanley a 'buy'

2008-12-03T09:58:00.000-08:00

Despite the ongoing credit crisis and market volatility, an analyst on Tuesday initiated coverage of Goldman Sachs Group Inc. and Morgan Stanley with "buy" ratings.

Sterne Agee analyst Ada Lee said Goldman Sachs' share price has been hit too hard, even though it is likely to report its worst-ever fiscal quarter for the period ending Nov. 30. Ms. Lee estimates Goldman Sachs will lose $1.68 per share during the quarter.

Analysts polled by Thomson Reuters, on average, forecast a loss of 28 cents per share for the quarter.

In a research note, Ms. Lee said Goldman Sachs has reduced the risk of a liquidity squeeze since competitor Lehman Brothers Holdings Inc. filed for bankruptcy protection in September. Since that time, Goldman has received an investment from Warren Buffett, tapped the government's $700 billion bank relief program and gained wider and permanent access to Federal Reserve financing by becoming a bank holding company.

Goldman's current stock price "reflects an unrealistically high probability of failure in light of the fresh capital raised from deep pockets and government funding programs," Ms. Lee wrote in the note.

Ms. Lee set a 12-month price target of $80.

In the near term, Ms. Lee said losses on principal investments will likely lead to the fourth-quarter loss because of the sharp declines in equity markets since the beginning of September.

For Morgan Stanley, Ms. Lee said in a separate note that it has embraced the change to a bank holding company — which it made at the same time as Goldman Sachs. Morgan Stanley, more so than Goldman, is using the change in its structure to alter its business model and is aggressively moving to grow its deposit base.

A bank holding company is the traditional structure most commercial banks take, and allows for large deposit bases, which provide a steady, stable form of financing for operations.

Morgan Stanley is likely to continue to push to increase its deposit base, which will help reduce its leverage, Ms. Lee wrote in the note.

Like Goldman Sachs, Ms. Lee said Morgan Stanley's current price places too high an expectation for failure. She set a 12-month price target for Morgan Stanley of $21.
Morgan Stanley shares advanced 6.7% Tuesday to close at $14.27.

Goldman Sachs shares rose 6.5% to close at $71.78

China reluctant to invest in foreign banks

2008-12-03T09:55:00.000-08:00

China's sovereign wealth fund, which last year poured $5 billion into Morgan Stanley, is reluctant to plow more money into foreign banks until governments hash out coherent policies to cope with the global economic and financial turmoil, the fund's head said Wednesday.
The remarks by Lou Jiwei, chairman of the $200 billion China Investment Corp., represent a new blow for ailing banks that were hoping the Chinese government investment fund would use its deep pool of cash to bail them out.
Lou said that he was unwilling to invest in foreign banks amid so much turbulence and uncertainty. Confidence in financial institutions is lacking because foreign governments seem to be changing their policies every week, he said.
'Right now, we do not have the courage to invest in financial institutions,' said Lou, speaking on a panel discussion in Hong Kong at a conference organized by former President Bill Clinton.
He added, 'We have to wait for the time when there won't be massive collapses of financial institutions.'
The Chinese government investment arm was set up to make profitable use of Beijing's foreign reserves, which totaled $1.9 trillion by the end of September.
Most of those funds are kept in U.S. Treasuries and other safe but low-yielding securities. But there have been complaints about the performance of some of the fund's higher profile investments amid the recent market turmoil.
CIC's biggest investment to date was a $5 billion investment in Morgan Stanley in December 2007 _ one of nine major banks that subsequently sought relief from the deepening credit crisis through the U.S. government's $700 billion banking bailout. That investment gave CIC a 9.9 percent stake in the investment bank.
The Chinese sovereign wealth fund was also said by Chinese media to have invested more than $100 million in Visa Inc.'s $19.1 billion initial public offering in March and has invested in a fund managed by J.C. Flowers, a U.S. private equity firm.
Last month, the private equity firm Blackstone Group said in a regulatory filing that it has agreed to raise CIC's ownership limit from 9.9 percent to 12.5 percent. CIC paid $3 billion for a stake in Blackstone's June 2007 initial public offering, but it has seen the value of that investment plunge _ a major sore point for many Chinese officials and citizens.
Also speaking on Wednesday's panel, called 'Moving Forward: Coping with the Financial Crisis,' was Laura Tyson, professor of the Haas School of Business at the University of California, Berkeley. Tyson argued that governments needed to spend more money to stimulate the global economy and speed up recovery.
'China is one of the countries in the world that is well positioned to be part of the solution,' she said.
Lou said China's fund would help soften the bite of the ongoing global crisis by continuing to invest in wealthy countries as well as in developing nations. But he said people should not count on China to pull the world out of the economic crisis.
'China can't save the world. It can only save itself,' he said.
Lou said China's economy, the world's fourth largest, is in relatively good shape, but is facing several major challenges, such as boosting domestic consumption and becoming less dependent on exports.
'This will be very difficult and requires a lot of reforms,' he said. 'It might take one to two years.'
Another panelist, Stephen Roach, chairman of Morgan Stanley Asia Ltd., said that the financial crisis will help accelerate the shift of economic power to Asia. But he said that Asian economies still had much more to do before the region can stand on its own as an economic force.
For example, Roach said, Asia is more dependent on exports than ever before. He also said Asian consumers aren't spending enough because they believe they need to save money for emergencies in societies lacking safety nets, like health insurance, pensions and unemployment funds.
'I think there's a lot of heavy lifting that still needs to take place in Asia,' he said.

Mumbai Deaths in Attacks Top 100; Injured Total 290

2008-11-27T09:57:00.000-08:00

At least 101 people were killed in Mumbai in terrorist attacks on two luxury hotels as Indian commandos freed hostages held by gunmen at one of the buildings.

Militants armed with grenades and rifles stormed into the Taj Mahal Palace and Tower hotel and the Oberoi Trident complex at about 10 p.m. local time yesterday, saying they were targeting Americans and Britons. Three U.S. citizens were injured, the State Department said. Up to 125 people died in the attacks, Timesnow.tv reported, citing police.

People were still barricaded in their rooms after the hostage situation at the Taj Mahal Palace and Tower Hotel ended today, Mumbai Police Chief A.N. Roy said. The Oberoi Group said as many as 200 people may be in its two buildings, based on estimates of occupancy and staff.

A fire broke out on several floors at the Trident Hotel as Indian commandos engaged in an intense fight with terrorists, police official Hasan Gafoor said. Forty people were evacuated, he said. Roy said the Oberoi engagement would soon be over.

“We came up against highly motivated terrorists,” Vice- Admiral J.S. Bedi told the NDTV 24x7 television network. He said his commandos exchanged fire on the second floor of the Taj hotel with terrorists, and showed pictures of recovered hand grenades, tear gas shells, AK47 magazines, knives and credit cards.

Targeting foreign nationals at key tourist hotels and restaurants adds a new dimension to a wave of bombings in India this year that has killed more than 300 people. Multiple attacks have rocked India’s cities with bombs planted in markets, theaters and near mosques. The attacks left about 290 people injured.

Taj Manager

The wife and two sons of the general manager of the Taj were killed, the Press Trust of India reported. The manager’s kin lived at the hotel. His sons were aged five and 14, the news agency reported. The manager himself is safe.

Earlier, Mumbai police said 14 people were evacuated from the Trident hotel, where gunfire was heard, without saying whether they were hostages. The city, India’s financial center. closed its markets today.

And a new series of blasts was heard at the Taj, as commandos continued a sweep through the property. Ratan Tata, whose Tata Group owns the hotels, said the commandos had the Taj under control. A fire broke out on the fourth floor of the heritage wing of the hotel, with smoke seen billowing out of a window in television pictures.

‘New York of India’

“Mumbai is the New York of India and this is a clear attack on Westerners,” said Clive Williams, a terrorism specialist at the Australian National University in Canberra. “The targeting of British and Americans means there is a new modus operandi.”

There may be as many as 12 terrorists at the Oberoi and there is no proposal to negotiate with them, said R.R. Patil, deputy chief minister of the western Maharashtra state, after reports the militants were demanding the release of all Mujahedeen fighters held in India.

India will “go after” individuals and organizations behind the attacks, which were “well-planned with external linkages” Prime Minister Manmohan Singh said in a televised address to the nation. The government will take steps to ensure there is no repetition of the terrorist attacks, Singh said today.

Television pictures showed people who had gathered outside the Trident complex shouting “Bharat Mata Ki Jai (Long live the Motherland)” as commandos stepped out of trucks and walked toward the buildings.

‘Sheer Chaos’

“It was sheer chaos,” said Manuela Testolini, a Canadian businesswoman who was dining at the Oberoi when gunmen burst in hunting for foreign nationals. “Every time we heard gunshots they were right behind us,” Testolini, who escaped through the kitchen with guests and hotel workers, told CNN television.

“They told everybody to stop and put their hands up and asked if there were any British or Americans,” businessman Alex Chamberlain told Sky Television. “My friend said to me, ‘don’t be a hero, don’t say you are British.’”

A little known Islamist group called the Deccan Mujahedeen claimed responsibility for the Mumbai attacks, the Press Trust of India reported. Gunmen may have come from Pakistan, the Times Now television channel said, citing an unidentified intelligence official.

The Indian Navy captured a ship that is suspected to have dropped terrorists off the coast of Mumbai before attacking the city, IBN7 reported, citing unidentified intelligence officials.

Karachi Link

The Vietnam-registered ship, MV Alfa, allegedly came from Karachi and probably dropped the terrorists in speed boats in the Arabian Sea outside Indian territorial waters, the Hindi-language television channel said.

President-elect Barack Obama led global condemnation of the attacks as his transition team said the U.S. would work with “India and nations around the world to root out and destroy terrorist networks.”

President George W. Bush telephoned Singh today and offered U.S. support and assistance to India, his spokeswoman said.

British Prime Minister Gordon Brown said the “outrageous” attacks in India would be met with a “vigorous response.”

United Nations Secretary-General Ban Ki-moon called for the attackers to be “brought to justice swiftly,” while Indian President Pratibha Devisingh Patil, on an official visit to Vietnam, condemned the attacks as the “mindless” act of people “pursuing a path of destruction.”

And Pakistan President Asif Ali Zardari also condemned the attack, calling it “detestable.”

Six foreigners, 14 policemen, including the head of Mumbai’s anti-terrorism unit, and 81 members of the public were killed, according to police.

Western Deaths

Prime Minister Kevin Rudd said an Australian was killed in the attacks. One Japanese citizen was killed and another injured, the Foreign Ministry in Tokyo said. An Italian was also killed, the country’s Foreign Ministry said. And a Briton also died in the attack, the Foreign Office said.

Seven Britons were hurt in the attacks, British High Commissioner Sir Richard Stagg said in televised comments, adding he had no information on the nationality of the hostages. Twenty- six policemen were also hurt, Police Sub-Inspector S.D. Tarwadkar said in a telephone interview from Mumbai.

The attacks, the worst in the city since train blasts in July 2006 killed 187 people and injured more than 800, began with explosions and gunfire ringing out across the city.

Armed with AK-47 rifles and grenades, two terrorists entered the passenger hall of Chhatrapati Shivaji Terminus and opened fire, PTI said. Images on television showed blood-spattered luggage strewn across the floor.

Cafe Leopold

Shootings occurred outside Cafe Leopold, in the Colaba district of south Mumbai where the Taj is located, CNN-IBN television reported.

A rabbi and his wife were being held hostage in the Chabad- Lubavitch Center in Mumbai after gunmen attacked the Jewish facility, a spokesman for the group in Israel said in a telephone interview. Several Israelis were also being held in the building, said Menachem Brod, a spokesman for Chabad, a Brooklyn-based Hassidic group.

Brod said that a woman who worked in the Chabad building, located in the Colaba neighborhood, had escaped along with the rabbi’s two-year-old son and a cook. “She reported that the rabbi and his wife are alive but that they are unconscious,” Brod said, adding he didn’t know how many Israelis were being held hostage or how many gunmen were in the building.

One of the militants asked for talks with the Indian government, offering release of the hostages, Sky News said.

Taj Fire

The Taj was damaged as a fire broke out overnight, forcing emergency workers to evacuate guests by ladders. All 26 South Koreans at the hotel were rescued, according to the Foreign Ministry in Seoul.

The hotel is a landmark in the city and its owners, Indian Hotels Co., said they would “rebuild every inch that has been damaged.”

The hotel overlooks the historic Gateway of India monument, the scene of a car bomb explosion in August 2003 when attacks in Mumbai killed at least 50 people.

Like the Taj, the Oberoi is popular with international visitors to Mumbai. Previous guests have included News Corp. Chairman Rupert Murdoch and Microsoft Corp. co-founder Bill Gates, according to the hotel’s Web site. The Oberoi Group, founded in 1934, also operates the luxury Trident hotel brand.

Security Across India

Security was stepped up at other luxury hotels across India. In the capital, New Delhi, the Imperial Hotel posted extra guards and swung its gates half-closed to prevent cars from entering freely.

Schools and colleges in Mumbai will be closed today, the PTI news agency reported.

The attacks come as India accelerates efforts to prop up a slumping economy battered by the global financial crisis.

India’s central bank said last month that growth in the $1.2 trillion economy may be as little as 7.5 percent in the year ending next March, compared with 9 percent in the previous 12 months.

The attacks may affect tourism, which climbed 10 percent in the first nine months of the year to 3.87 million visitors, generating $8.8 billion in revenue.

Between January 2004 and March 2007 the death toll from terrorist attacks in India was 3,674, second only to Iraq during the same period, according to the National Counterterrorism Center in Washington.

The government has previously blamed terrorist attacks on organizations linked to foreign powers, without offering evidence or making arrests. Local media often blame the attacks on groups backed by Pakistan or Bangladesh, without identifying the security officials who provided the information.

India’s capital, New Delhi, was rocked by five blasts during an evening rush hour in September, killing as many as 26 people and injuring about 133. Indian Mujahadeen, which claimed responsibility for similar attacks in Ahmedabad and Jaipur, said it was behind the blasts.

GM Asks U.S. FAA to Bar Public Tracking of Leased Corporate Jet

2008-11-27T09:56:00.000-08:00

General Motors Corp., criticized by U.S. lawmakers for its use of corporate jets, asked aviation regulators to block the public’s ability to track a plane it uses.

“We availed ourselves of the option as others do to have the aircraft removed” from a Federal Aviation Administration tracking service, a GM spokesman, Greg Martin, said yesterday in an interview. He declined to discuss why GM made the request.

Flight data show that the leased Gulfstream Aerospace G-IV jet flew Nov. 18 from Detroit to Washington, where Chief Executive Officer Richard Wagoner Jr. spoke to a Senate committee that day and a House panel the next day on behalf of a $25 billion auto-industry rescue plan.

Representatives at the Nov. 19 House hearing including Democrat Gary Ackerman of New York faulted Wagoner, Ford Motor Co. CEO Alan Mulally and Chrysler LLC CEO Robert Nardelli for taking private jets to Washington to plead their case.

“Couldn’t you all have downgraded to first class?” Ackerman said.

Symbol for Critics

Critics of a federal aid package for GM, Ford and Chrysler spotlighted the exchange to attack the money-losing companies as undeserving of a bailout. GM, the biggest U.S. automaker, has said it may run out of operating cash by year’s end without government loans.

The Gulfstream jet was leased from GE Capital Solutions in Danbury, Connecticut, a unit of General Electric Co. After the plane’s latest flight to Washington on Nov. 25, and from there to Dallas, its movements could no longer be tracked.

An FAA spokeswoman, Laura Brown, said she couldn’t immediately determine whether her agency had granted GM’s flight-privacy request. “We do this routinely” for aircraft owners, she said yesterday. “They don’t have to have a reason” for requesting the block, she said.

The FAA tracking data don’t identify who is aboard the flights.

GM also has seven planes in its own fleet. All were grounded yesterday, said a spokesman, Tom Wilkinson. Two are for sale and two are in the process of being listed for sale, while Detroit-based GM plans to keep three, he said.

The leased Gulfstream has made 10 trips to Washington this year, including three since October, according to data compiled by Houston-based flight-tracking service FlightAware.com.

GM said it often sub-leases the airplane to other users. GM officials said company employees weren’t aboard the jet on the final Nov. 25 flights before its movements ceased being tracked.

Bluebay Closes Hedge Fund, Falls the Most Since IPO

2008-11-27T09:52:00.000-08:00

Bluebay Asset Management Plc dropped the most since its initial public offering two years ago after the manager of fixed-income investments said it will shut down its Emerging Market Total Return Fund.

The $1.2 billion hedge fund, which accounts for 6 percent of assets under management, had dropped 53 percent this year, Bluebay said today in a statement. Fund manager Simon Treacher resigned “following a breach of internal valuation policy,” it said. He couldn’t immediately be reached for comment.

“Marketing other funds may now become very difficult,” said Gurjit Kambo, a London-based analyst at Numis Securities Ltd. who tracks the industry. “People become more nervous about putting money into Bluebay.”

Bluebay won’t retreat from credit-market investments despite “extremely challenging” conditions, Chief Executive Officer Hugh Willis said in the statement. Satellite Asset Management LP and Artemis Asset Management joined the list this week of more than 75 hedge funds that have liquidated or restricted investor redemptions since the beginning of the year.

Bluebay declined 30 percent to 70 pence, valuing the London-based company at 135 million pounds ($208 million). The shares, which peaked at 568.25 pence in June 2007, have fallen 80 percent this year.

The Emerging Market Total Return Fund was hurt by “liquidity conditions” and is no longer viable on its own, Bluebay said. The closure means that revenue from funds that bet on both rising and falling share prices will probably be below analysts’ estimates, Bluebay said.

The fund was hurt by “a perfect storm” after two wrong bets on cash bonds and credit default swaps, Kambo said. The value of cash bonds failed to rise as Bluebay expected, and credit default swaps narrowed, meaning the perceived risk of default decreased, he said.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

European Stocks Rise for Fourth Day; Barclays, Siemens Advance

2008-11-27T09:47:00.000-08:00

European stocks climbed, sending the Dow Jones Stoxx 600 Index to its fourth straight gain, as investors speculated government efforts to shore up banks and the economy will support profits.

Barclays Plc and Siemens AG rallied more than 4 percent. President-elect Barack Obama yesterday picked former Federal Reserve Chairman Paul Volcker to head an economic advisory board and said he will implement a plan to bolster growth on “day one.” Air Berlin Plc advanced 15 percent after posting a better- than-estimated 43 percent jump in third-quarter profit.

The Stoxx 600 added 2.4 percent to 203.62, extending this week’s gain to 12 percent. The index is still down 44 percent in 2008, headed for its worst year since records began in 1987, as economies from Germany and the U.K. to the U.S. slip into recession.

“Investors see the market as discounting a truly cataclysmic event,” said Chirin Gill, a London-based fund manager at Daiwa SB Investments, which has about $60 billion. “They are gaining reassurance from governments and central banks who are beginning to understand the severity of the situation.”

Stocks rallied worldwide this week after China cut borrowing costs by the most in 11 years and the Federal Reserve’s pledge to buy $600 billion of debt sent mortgage rates down by the most in at least seven years.

Citigroup Inc. has jumped 87 percent since the U.S. government injected $20 billion of capital into the bank at the start of the week and guaranteed $306 billion of its mortgages and other troubled loans.

‘Reached a Bottom’

More than $30 trillion has been wiped off the value of global equities this year as credit losses and writedowns approached $1 trillion in the worst financial crisis since the Great Depression.

National benchmark indexes rose in all 18 western European markets today. The FTSE 100 gained 1.8 percent. Germany’s DAX added 2.3 percent as Allianz SE and Daimler AG advanced. France’s CAC 40 increased 2.5 percent, led higher by BNP Paribas SA.

“We have reached a bottom,” said Jacques Porta, who helps manage $180 million at Ofivalmo Patrimoine in Paris and has been buying shares of Hewlett-Packard Co. and Alstom SA. “There is a slight change of feeling in the newsflow we are getting, relative to what we saw in October. The problems are far from over, but the newsflow is more constructive.”

Banks and insurers shares were among the best performers in the Stoxx 600 today. Barclays added 4.3 percent to 166.9 pence. Allianz, Europe’s second-biggest insurer by market value, rallied 10 percent to 59.81 euros. BNP, France’s largest bank, rose 7.4 percent to 43.40 euros.

U.S. Sales

Siemens paced gains among companies that generate a large proportion of sales in North America. Europe’s largest engineering company, which relies on the U.S. for about 21 percent of its revenue, rose 4.6 percent to 48.93 euros. Daimler AG, the world’s second-biggest maker of luxury cars, advanced 3.6 percent to 25.58 euros.

Analysts have slashed earnings estimates this year as the credit turmoil spread. Profit for companies in the Stoxx 600 will slide 12 percent on average in 2008, compared with 11 percent growth forecast at the start of the year, Bloomberg data show.

“We are not that brave yet” to buy stocks, said Alan Beaney, who manages about $2 billion as head of investments at Principal Investment Management in Leeds, England. “Analysts’ expectations for profit forecasts are too high. We need to see these earnings numbers come down,” he told Bloomberg Television.

Earnings for the 325 companies in the Stoxx 600 that have reported results since Oct. 7 declined 15 percent on average, trailing expectations by 6.3 percent, Bloomberg data show.

Air Berlin

Air Berlin surged 15 percent to 3.46 euros. Europe’s third- biggest discount airline reported earnings before interest and taxes of 89.1 million euros ($115 million), beating analysts’ expectations of 71.9 million euros.

Irish Life & Permanent Plc and Allied Irish Banks Plc rallied after the Irish Association of Investment Managers approached the government about investing in the country’s banks to boost Tier 1 capital ratios. The ratio indicates a bank’s ability to cushion bad debts.

Irish Life & Permanent, the nation’s largest mortgage lender, soared 20 percent to 1.64 euros. Allied Irish Banks, the biggest bank by value, climbed 15 percent to 2.77 euros.

Separately, the Irish Times reported today that U.S. private equity companies Texas Pacific Group and Kohlberg Kravis Roberts have held talks with Bank of Ireland about a possible investment. The bank was already contacted by a consortium that includes J.C. Flowers & Co, the newspaper said.

ArcelorMittal added 5.8 percent to 19.85 euros. The world’s largest steelmaker said it may cut as many as 9,000 jobs globally after reducing output on falling demand.

Kingfisher Plc dropped 2.4 percent to 116.6 pence after Europe’s biggest home-improvement retailer said consumer confidence has been “shaken” in all its markets and reported a 4 percent decline in third-quarter profit.

Study: Business-to-Business Media Shows Three-Year Decline

2008-11-27T09:44:00.000-08:00

The slumping economy and ongoing reader and advertiser shift to online sources continue to impact business-to-business media, which held their revenue flat from 2005 to 2007, according to American Business Media’s “ABM Financial Trend Report, Three-Year Analysis, 2005-2007.”

All three measured revenue streams showed declines over the three-year period. The report, by The Jordan, Edmiston Group Inc., was based on data provided by 18 B2B media companies representing 118 publications. Key findings were presented at ABM’s Top Management Meeting, held last month in Chicago.

The biggest of the three revenue streams, advertising, declined at a compound annual rate of 0.5 percent to $4.1 million for the average publication.

Circ revenue declined 2.2 percent to $480,000 on the same basis as the expansion of online information eroded readers’ need for paid subscriptions to print magazines. Meanwhile, high-margin ancillary revenue, from sources like licenses, collateral products and list rentals, slipped 5.8 percent to $361,000.

On the cost side, expenses rose at a 2 percent compound annual growth rate over the period, with lower ancillary and production expenses offset by higher postal and editorial costs.

AIG Freezes Executive Salaries, Liddy’s Pay Set at $1

2008-11-25T10:15:00.000-08:00

American International Group Inc., under pressure to limit executive compensation after a U.S. bailout, froze pay and scrapped bonuses for seven top leaders and said chief executive officer Edward Liddy will get a $1 salary.

The insurer’s next 50 highest-ranked executives will forgo pay raises through 2009, New York-based AIG said today in a statement. New York Attorney General Andrew Cuomo, who demanded last week that AIG disclose compensation plans, said the insurer took a “positive step” and called on other firms to follow.

Liddy is cutting costs after lawmakers and regulators criticized the insurer for bad bets that forced the insurer to take a taxpayer rescue that was almost doubled this month to more than $150 billion. AIG, crippled by losses tied to mortgages, follows Wall Street firm Goldman Sachs Group Inc. in limiting executive compensation after receiving commitments of capital from the U.S.

“It is only fair that top executives, who benefit the most when firms do well, should also bear the burden of the difficult economic consequences their firms now face,” Cuomo said today in a statement. “Taxpayers have been slammed with a one-two punch, seeing their investments dwindle while simultaneously having to fund the Wall Street bailout.”

AIG shares have declined about 97 percent this year. The insurer slipped 7 cents to $1.70 at 12:11 p.m. in New York Stock Exchange composite trading.

Show of Confidence

Liddy, who was appointed by the government in September after AIG agreed to hand over an 80 percent stake to the U.S., will collect the $1 salary through 2009 and an unspecified number of equity grants that “show his confidence” in the insurer, the company said. Liddy will also be eligible for a bonus in 2010 and won’t get any severance.

“We understand our obligation to taxpayers and shareholders,” Liddy said in the statement.

His compensation at Allstate Corp. in 2006, his last year as CEO of the insurer, was $24 million.

Liddy’s predecessor, Robert Willumstad, rejected a $22 million severance package after leaving AIG in September. Willumstad had to step down as one of the conditions for AIG to receive government help. Martin Sullivan, who was forced out in June, received 2007 compensation valued at $14.3 million, a 32 percent decrease from the year before as profit dropped on writedowns tied to the housing slump.

Bad Trips

Liddy previously agreed with Cuomo to freeze $19 million due to Sullivan and $600 million in compensation for other executives. AIG also agreed in October to immediately cancel trips for conferences after the company was criticized for spending $440,000 to send employees to a resort days after the bailout.

Liddy had been working without a salary or other compensation, spokesman Nicholas Ashooh said last week.

“You could say it’s been both thankless and payless so far,” he said Nov. 18.

U.S. Economy: Home-Price Decline Accelerates, GDP Contracts

2008-11-25T10:14:00.000-08:00

The decline in U.S. house prices accelerated in September and the economy shrank in the third quarter at a faster pace than first estimated as the grip of the credit crunch tightened.

The S&P/Case-Shiller home-price index fell 17.4 percent from a year earlier. The Commerce Department said gross domestic product dropped an annual 0.5 percent as household spending slid the most since 1980. While consumer confidence rose this month, the Conference Board’s gauge remained near the lowest on record.

“The economy is turning down pretty dramatically,” Treasury Secretary Henry Paulson said at a press conference in Washington to outline new government efforts to unfreeze credit. “It’s very important that lending continue to be available.”

Today’s reports underscore concerns that the economy is at risk of a contractionary spiral as lenders cut back credit, causing spending to fall and companies to slash investments and payrolls. The Treasury and Federal Reserve today began two new programs to bring down interest rates on mortgages and consumer loans, committing at least $800 billion.

Stocks were little changed, with the Standard & Poor’s 500 Stock Index up 0.2 percent at 853.37 at 11:51 a.m. in New York, after rallying more than 6 percent the past two days. Treasuries rose after the Fed’s plan to buy up to $600 billion of debt issued or backed by housing-finance companies spurred some investors to buy government securities as a hedge.

Economists anticipate that the drop in GDP worsened in the current quarter because of the deepening credit crunch. The collapse of Lehman Brothers Holdings Inc. in September triggered a renewed bout of turmoil, forcing the Fed to step up as a lender of last resort.

‘Ugly’ Quarter

“It’s the fourth-quarter numbers that are really going to look ugly,” Joel Naroff, president of Naroff Economic Advisors Inc. and most accurate forecaster in a 2008 Bloomberg News survey of economists, said in a Bloomberg Television interview.

Home prices decreased 1.8 percent in September from the prior month, the biggest one-month drop since March, the S&P/Case-Shiller report showed.

S&P/Case-Shiller also released quarterly figures for nationwide home prices. That measure showed a 16.6 percent drop in the three months through September from the same time last year, compared with a 15.1 percent drop in the second quarter.

Economists forecast the 20-city index would fall 16.9 percent from a year earlier, according to the median of 28 estimates in a Bloomberg News survey. Projections ranged from declines of 16 percent to 17.2 percent.

Broad Decline

Compared with a year earlier, all areas in the 20-city survey showed a decrease in prices in September, led by a 31.9 percent drop in Phoenix and a 31.3 percent decline in Las Vegas.

A separate government report confirmed the decline in property values accelerated. Home prices fell 1.3 percent in September from the previous month, the biggest one-month drop since records began in 1991, the Federal Housing Finance Agency said today.

The GDP report showed consumer spending, which accounts for more than two-thirds of the economy, dropped at a revised 3.7 percent annual rate in the third quarter, more than the 3.1 percent decrease estimated by Commerce last month.

Wage figures showed a smaller gain than previously estimated in the second quarter, reflecting the weakening job market. Salaries grew $13.3 billion, $37.3 billion less than Commerce had projected.

Retailers ranging from Best Buy Co. to Nordstrom Inc. are cutting revenue forecasts ahead of what may be the worst holiday shopping season in years.

‘Difficult Times’

“In 42 years of retailing, we’ve never seen such difficult times for the consumer,” Brian Dunn, Best Buy’s president and chief operating officer, said in a statement last week. “People are making dramatic changes in how much they spend, and we’re not immune from those forces.”

The Conference Board’s index of consumer confidence climbed to 44.9, the second-lowest reading since 1974, from a record low 38.8 the prior month, the private New York-based research group said today.

The improvement reflected expectations that the economic situation wouldn’t get much worse. The gauge of the outlook for the next six months increased to 46.7 from 35.7. The Conference Board’s measure of present conditions dropped to 42.2, the lowest since June 1993, from 43.5.

“The consumer is hunkered down,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. “We are still expecting a contraction in consumer spending in the fourth quarter.”

Americans may pull back further after employers fired 240,000 workers in October and the unemployment rate jumped to the highest level since 1994.

Xerox Corp., the world’s largest maker of high-speed color printers, is eliminating 3,000 jobs and trimming manufacturing costs to save $200 million next year. Chief Executive Officer Anne Mulcahy yesterday said at a conference that Xerox isn’t projecting “any quick economic turnaround” in 2009.

Fed Commits $800 Billion More to Unfreeze Lending

2008-11-25T10:12:00.000-08:00

The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a program of $200 billion to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said. Treasury Secretary Henry Paulson said at a press conference that $200 billion is just the “starting point” for the asset-backed securities program.

“The economy is turning down pretty dramatically,” he said. “It’s very important that lending continue to be available.”

Help for Housing

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said.

Fannie and Freddie bonds rallied. The yield premium on Fannie Mae’s five-year debt over similar-maturity Treasuries tumbled 21.5 basis points to 114.7 basis points as of 8:35 a.m. in New York, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

“The cheaper that they could issue their debt, the more aggressively they should be able to buy mortgages in the secondary market,” said Alan Bosworth, director of agency trading at Vining Sparks in Memphis, Tennessee.

The Fed may hold the Fannie and Freddie debt and securities until they mature or sell them, with plans to be determined, government officials said on a conference call with reporters.

Low Rates

The U.S. officials, speaking on condition of anonymity, said they don’t see the Fed purchases of mortgage bonds as a way of “quantitative easing,” or using central bank policy to add reserves to the banking system when interest rates are very low, even though the purchases will have that effect.

Separately, under the new Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA rated asset-backed securities backed by “newly and recently originated” loans, such as for education, automobiles, credit cards and loans guaranteed by the Small Business Administration, the Fed said.

The Fed hopes to have the TALF running by February. Traditional investors in the asset-backed securities include securities lenders and bank-affiliated conduits, the government officials said.

The asset-backed securities program is similar to the Fed’s effort to bring down the cost of financing for commercial paper, the short-term debt companies issue to finance payrolls and other expenses, because it goes beyond banks.

‘What Works’

“What the Fed has been trying to do is get a sense of what works and what doesn’t work,” said Derrick Wulf, who helps manage $70 billion in mostly fixed-income assets at Dwight Asset Management Co. in Burlington, Vermont. “One of the things that has worked is the commercial paper facility.”

Wulf added that “it can certainly improve credit conditions for consumers.”

The Treasury will provide $20 billion of “credit protection” to the Fed in the lending program, using funds from the $700 billion financial-rescue package. The Treasury said in a statement that the facility may expand over time and cover other assets, such as commercial and private residential mortgage- backed debt.

Treasury staffers are in regular communication with President-elect Barack Obama’s team, officials said. New York Fed President Timothy Geithner, Obama’s pick to be Treasury secretary, was involved in today’s plans, though not in a capacity with the new administration, officials said.

Weakening Economy

With the asset-backed securities program, the Fed is trying to avoid having “continued disruption of these markets” that would limit lending and “thereby contribute to further weakening of U.S. economic activity,” the central bank said.

Under the new lending program, known as the TALF, the New York Fed will auction a fixed amount of loans each month for a one-year term. Assets will be held in a special-purpose vehicle to be created by the Fed. The program will stop making new loans on Dec. 31, 2009, unless the Fed Board of Governors extends it.

Lenders providing credit under the TALF “must have agreed to comply with, or already be subject to,” executive- compensation restrictions in the October bailout law, the statement said.

The Fed will start buying the direct debt of government- sponsored enterprises -- Fannie, Freddie and a dozen federal home loan banks -- through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.

Purchases of both types of debt “are expected to take place over several quarters,” the Fed said.

Citigroup gets massive government bailout

2008-11-25T10:09:00.000-08:00

The U.S. rescued Citigroup Inc, agreeing to shoulder most losses on about $306 billion of the bank's risky assets, and inject new capital, bolstering investor hopes that the government will support big banks as the economy sinks into recession.

The bailout, announced late Sunday, gives the government the right to buy an equity stake, and marks its latest effort to contain a widening financial crisis that has already brought down Bear Stearns Cos, Lehman Brothers Holdings Inc and Washington Mutual Inc.

U.S. President George W. Bush called the bailout necessary "to safeguard our financial system," and said the government would, "if need be," make similar decisions in the future.

Shares of Citigroup rose 58 percent on Monday. The price of insuring Citigroup bonds against default fell by half.

"All in all, these actions should settle market jitters surrounding the company for now," CreditSights Inc analyst David Hendler wrote.

The bailout could also boost investor confidence in the largest U.S. banks, which are expected to suffer billions of dollars in credit losses in the coming quarters.

"The government is trying to restore trust to the financial system. There are big banks that are central to the economy that the government will support," said Thomas Russo, portfolio manager at Gardner Russo & Gardner, which does not own Citigroup shares.

Bank of America Corp rose 27.2 percent to $14.59, JPMorgan Chase & Co advanced 21.4 percent to $27.58, and Wells Fargo & Co rose 20 percent to $26.02, all on the NYSE.

The package gives Chief Executive Vikram Pandit more time to shed assets, slash payroll and boost efficiency after soaring losses from toxic debt led to $20.3 billion in losses in the last year. Analysts expect billion of dollars of further losses. Pandit became CEO in December.

Pandit "deserves a vote of confidence," Saudi Prince Alwaleed bin Talal, Citigroup's largest individual investor, told CNBC television. "I am personally committed to Citigroup. No doubt about that." Alwaleed agreed last week to increase his Citigroup stake to 5 percent from less than 4 percent.

The stock rose $2.18, or 58 percent, to close at $5.95 on the New York Stock Exchange, where it jumped as high as $6.50. The annual cost to insure $10 million of Citigroup debt against default for five years fell to about $240,000 from $500,000.

Still, not every investor was as gung-ho on the decision to let Pandit keep his job.

"You're seeing an inept management team being rewarded by the U.S. government," said William Smith, whose Smith Asset Management in New York has seen its Citigroup stock plunge in value over the years.

PLUNGING SHARES

Citigroup received the latest government infusion, which includes a $20 billion capital injection, after its shares plunged 60 percent last week amid growing concern it would need large amounts of capital to survive the recession. and less than a week after it set plans to slash 52,000 jobs, leaving it with 300,000 employees.The $20 billion of government capital comes after the U.S. injected $25 billion last month. In this round, the government is buying preferred stock that will pay an 8 percent dividend.

In exchange for the bailout, Citigroup slashed its quarterly dividend to a penny per share from 16 cents. It cannot raise the payout for three years without U.S. consent.

Even so, taxpayers are now on the hook for nearly $250 billion in potential losses in the $306 billion portfolio, including commercial real estate loans, leveraged loans, and other assets, representing 15 percent of Citigroup's $2.05 trillion balance sheet.

Citigroup will absorb the first $29 billion in losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. The Treasury Department, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest.

In return, Treasury and the FDIC will get $27 billion in preferred shares, of which $7 billion are a fee that Citigroup pays in exchange for the government guarantee.

The government is also getting warrants to buy $2.7 billion in Citigroup common stock at $10.61 per share for a potential stake of about 4.5 percent. That's on top of the roughly 3.3 percent the government is entitled to buy under a previous deal.

"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview on Monday.

Citigroup estimated the injection will give it a Tier 1 capital ratio of 14.8 percent, more than twice what the government requires. The government also increased Citigroup's access to the Fed's discount window, adding liquidity.

TEMPLATE

The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

Citigroup has one of the farthest international reaches of any U.S. bank, with operations in more than 100 countries. Investors have long speculated the government deemed it too big to fail because a collapse could cause global financial havoc.

The government package may become a template for other U.S. banks expected to face growing losses as the economy contracts. Losses once concentrated in mortgages are bleeding into other areas such as credit cards and commercial real estate.

The rescue magnifies the U.S. government's burden following bailouts of insurer American International Group Inc, Bear Stearns and mortgage finance giants Fannie Mae and Freddie Mac. Treasury also has injected more than $300 billion into banks and other financial institutions.

Already, more than $1 trillion of taxpayer money is at risk, and the Big Three automakers are seeking $25 billion more to avert bankruptcy. President-elect Barack Obama may also seek up to $700 billion for economic stimulus.

Earlier this month, U.S. Treasury Secretary Henry Paulson said a $700 billion industry rescue package to soak up toxic assets from troubled banks, like Citigroup, will instead only be used to inject capital into banks.

That decision sent mortgage and other debt markets into a steep decline.The bank's market value on Friday was just $20.5 billion, down from more than $270 billion two years ago -- and even below the $25 billion initial U.S. capital injection.

Morgan Stanley Propped Up Money-Market Funds With $23 Billion

2008-10-27T08:16:00.001-07:00

Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

Redemptions were $46 billion in September, mostly from funds that invest in corporate debt, Morgan Stanley said in an Oct. 9 regulatory filing. The New York-based company made sure the money-market funds had enough cash to repay investors by acquiring some of their assets with financing from ``various available stabilization facilities.''

Morgan Stanley may have relied on one or more programs set up by the Federal Reserve in the past month to prop up the $3.54 trillion money- market fund industry, analysts said. The Fed has taken steps to restore investor confidence shattered by losses last month at the Reserve Primary Fund, the oldest U.S. money-market fund.

``The outflows in money-market funds were unprecedented, savage'' said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts, firm that tracks the industry. ``Broker-dealers in particular got hard hit because of concerns about their parent companies.''

Morgan Stanley bought the fund assets to ``ensure that redemption obligations were met amidst illiquid trading markets,'' Erica Platt, a spokeswoman for the firm, said in an e-mailed statement. Fed spokeswoman Susan Stawick declined to comment on whether Morgan Stanley had used central bank financing to aid its money-market funds.

Run on Funds

Individuals and institutions use money-market funds to earn a yield until the cash is needed. They are considered the safest investments after bank deposits and U.S. Treasuries, in part because they buy only highly rated fixed-income securities with an average maturity of 90 days or less. That reputation was undermined by the Sept. 15 bankruptcy filing of Lehman Brothers Holdings Inc.

The following day, the $62.5 billion Reserve Primary Fund said it wrote down to zero the value of $785 million of debt issued by the investment bank. That caused its asset value to fall below the $1-a-share purchase price, the first money-market fund in 14 years to break the buck. New York-based Reserve Management Corp. froze the fund.

The news triggered a run on prime money-market funds, which buy both corporate and government debt. Shareholders yanked $488 billion during the month from prime funds, according to data compiled by Westborough-based iMoneyNet.

Morgan Stanley shares fell as much as 69 percent during the week of Lehman's bankruptcy filing to a low of $11.70. The company's money funds have remained at $1 a share ``during the unprecedented market turmoil,'' Platt said in the e-mail.

Two Solutions

BlackRock Inc., the biggest publicly traded U.S. asset manager, said last week that investors pulled $53.8 billion from its prime money-market and securities-lending funds during the last two weeks of September. The funds, which have regained $13.8 billion since Sept. 30, met the redemptions with cash on hand and securities sales, according to spokesman Brian Beades.

Morgan Stanley injected cash into its money-market funds by purchasing their investments in municipal debt, certificates of deposit and commercial paper, which had become difficult to sell on the open market, according to its 10-Q filing with the U.S. Securities and Exchange Commission. The move permitted Morgan Stanley's funds to repay shareholders without having to sell the securities at a loss.

Morgan Stanley, which had $134 billion of money-market assets as of Aug. 31, didn't specify in the filing which funds had outflows. According to monthly notices sent to investors, its Prime Portfolio dropped to $10.4 billion from $36 billion during September and its Money Market Portfolio fell to $5.8 billion from $14.7 billion.

Fed Role

Both Morgan Stanley funds had more than 55 percent of assets in commercial paper at the end of August, according to the investor notices. On average, prime money-market funds had about 45 percent of assets in the corporate IOUs at the end of August, according to iMoneyNet.

Platt declined to describe the ``stabilization facilities'' that primarily funded Morgan Stanley's securities purchases from the money- market funds. The most likely source was the Fed, which has set up at least five funding facilities to help ease the credit crunch, including one unveiled Sept. 19 to provide banks and some brokerages with loans to buy asset-backed debt from money-market funds.

`Only Choice'

In addition, the Fed two days later approved applications by Morgan Stanley and Goldman Sachs Group Inc. to become bank holding companies -- ending the era of stand-alone investment banks -- and increased the availability of loans to the two firms. The Fed announced a Money Market Investor Funding Facility last week that will provide up to $540 billion in loans to buy assets, including commercial paper and certificates of deposit from funds hit with redemptions.

``Morgan Stanley faced the same problem as every other firm: the markets were very illiquid,'' said Brad Hintz, a securities-industry analyst at Sanford C. Bernstein & Co. in New York. ``Its only choice for financing was to go to the Fed.''

Trichet Says ECB May Reduce Rates Again Next Week

2008-10-27T08:15:00.001-07:00

European Central Bank President Jean- Claude Trichet said the bank may cut interest rates again at its next policy meeting on Nov. 6 as the financial market crisis damps inflation pressures.

``I consider it possible that the Governing Council would decrease interest rates once again at its next meeting,'' Trichet said in a speech in Madrid today. ``It is not a certainty, it is a possibility.''

Stock markets tumbled around the world today, extending the worst monthly plunge in 70 years, on concern the financial crisis will develop into a prolonged economic downturn. Europe's economy is on the brink of a recession, with the region's manufacturing and service industries contracting at a record pace in October and the Dow Jones Stoxx 600 index down 47 percent this year.

``Given the market stress we're seeing at the moment, it makes sense to frontload the rate cuts,'' said Guillaume Menuet, a senior European economist at Merrill Lynch & Co. in London.He expects the ECB to cut to 2.75 percent by June.

The ECB, which raised interest rates as recently as July, joined a globally coordinated rate cut on Oct. 8, reducing its benchmark by half a point to 3.75 percent. The price of oil, the main inflation driver, has more than halved from its peak of $147.11 a barrel in July.

Improving Inflation Outlook

``If you look at where commodity prices are going, then of course the inflation outlook is improving quite rapidly, so this is very consistent with their inflation target, which will clearly be met in 2010,'' Menuet said.

Trichet said next week's decision whether to cut rates again hinges on the assumption ``that the new information that is progressively coming available since then is likely to indicate a further alleviation of the upside risks to price stability in the medium term and a confirmation of a more solid anchoring of inflation expectations in line with our definition of price stability.''

Investors expect the ECB to cut the benchmark rate by at least another half point when policy makers meet in Frankfurt on Nov. 6, Eonia forward contracts show.