UBS Tax Probe Fallout Exacerbated by Swiss Pressure in Bailout

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

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

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

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

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

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

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.”