European Bonds Post Monthly Decline as Inflation Accelerates

European government bonds fell on the month as signs German inflation is accelerating made it more likely the European Central Bank will lift interest rates again by year-end.
Benchmark 10-year bund yields touched a six-week high this past week after reports showed euro-region money-supply growth held near the fastest pace in 28 years in August and German inflation quickened to the highest rate in more than six years. Officials at the ECB this week said there are ``persisting'' risks to price growth among the 13 nations that share the euro.
The inflation ``data was exactly what the hawks on the ECB have been warning about for months,'' said Marcus Ostwald, a fixed-income strategist at Insinger de Beaufort SA in London. ``The risk on interest rates remains to the upside.''
The yield on the 10-year bund rose 11 basis points this past month to 4.33 percent by 4:15 p.m. yesterday in London.
The price of the 4.25 percent security due July 2017, which is more sensitive to inflation expectations than shorter-dated debt, dropped to 99.36.
Bunds returned investors 2.54 percent this quarter, compared with a return of 1.65 percent on two-year notes, according to indexes compiled by Merrill Lynch & Co.
Bunds pared their monthly decline after a German Federal Statistics report yesterday showed sales in Europe's biggest economy fell 1.4 percent in August, after gaining 0.6 percent the month before.
Benchmark debt was also buoyed yesterday after the Financial Times reported that Newcastle, England-based Northern Rock Plc had been forced to borrow a further 5 billion pounds ($10 billion) from the Bank of England since a Sept. 14 bailout.
German Inflation
Germany's inflation rate, measured using a harmonized European Union method, rose to 2.7 percent from 2 percent in August, the Federal Statistics Office said this week. That's the most since June 2001 and above than the 2.5 percent median forecast of 22 economist estimates in a Bloomberg News survey. Consumer prices rose 0.2 percent in the month.
M3 money supply, which the ECB uses to measure future inflation, grew 11.6 percent from a year earlier, after growing 11.7 percent in July, the central bank said this week.
ECB forecasts ``indicate continued growth and persisting risks for inflation,'' policy maker Guy Quaden, who is also governor of Belgian's central bank, said on Sept. 26.
Central bank President Jean-Claude Trichet this week told Dutch television it's ``too early'' to decide whether financial- market turmoil will hurt economic growth in the euro region.
This view was echoed by ECB Vice President Lucas Papademos who said in New York this week that ``so far, the effects of the market turbulence on the euro area economy have not been significant.''

Dollar Falls to All-Time Low Versus Euro on Fed Rate Outlook

The dollar fell to the lowest against the euro since the 13-nation currency's debut in 1999 as slowing growth and inflation increased speculation that the Federal Reserve will cut interest rates a second time this year.
The U.S. currency depreciated to an all-time low versus a basket of six of its major peers and posted the biggest monthly drop against the euro in almost four years. The dollar may decline further next week before a government report economists expect to show the U.S. unemployment rate rose in September to 4.7 percent, the highest in more than a year.
``Continued dollar weakness probably is still in the cards,'' said Ihab Salib, who helps oversee $3 billion in international bonds in Pittsburgh at Federated Investments Inc. ``I don't expect a meltdown in the dollar. It will be a moderate depreciation.''
The dollar fell 4.5 percent to $1.4267 per euro in September, reaching the record low of $1.4278 yesterday. It was the biggest monthly decline since December 2003. The U.S. currency reached all-time lows in each of the past seven trading days. The dollar posted a 5.1 percent drop in the third quarter, the biggest since the second quarter of 2006.
The New York Board of Trade's dollar index reached 77.66 yesterday, the weakest since the gauge began in 1973. The Fed's trade-weighted index comparing the dollar with major currencies dropped on Sept. 25 to the lowest since its inception in 1971.
Norway's krone was the biggest gainer this quarter, rising 9.4 percent against the dollar, while New Zealand's dollar lost the most, falling 1.9 percent. The dollar declined 6.8 percent to 114.81 yen over the same period.
U.S. Dollar Weakness
The U.S. dollar weakened against all of the 16 most actively traded currencies this month, falling 1.5 percent against the pound and 0.8 percent versus the yen. For the year, the dollar has lost 7.5 percent against the euro, 4.3 percent against the pound and 3.6 percent versus the yen.
The yen fell against all the major currencies except the dollar this month as the Fed's half-percentage-point rate cut on Sept. 18 encouraged carry-trade investors to resume borrowing in Japan to buy higher-yielding assets elsewhere. The yen lost 3.7 percent to 163.79 per euro, declining 7.1 percent against the Australian dollar and 6.6 percent versus the New Zealand dollar.
Japan's currency rallied on Aug. 17 to the highest against the dollar since June 2006 as higher borrowing costs related to subprime-mortgage losses led investors to avoid higher-yielding assets. The yen rose this quarter against all of the 16 most actively traded currencies except Norway's krone.
Consumer Confidence Plunges
Reports this week showed consumer confidence fell to almost a two-year low while new-home sales sank to the lowest in seven years. The price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 1.8 percent from August 2006, the smallest annual gain since February 2004.
Former Fed Chairman Alan Greenspan said yesterday in an interview with BBC Radio 4 that the chance of a U.S. recession is higher now than a few months ago.
The Labor Department will report on Oct. 5 that the unemployment rate rose to 4.7 percent this month from 4.6 percent a month earlier, according to the median forecast of 64 economists surveyed by Bloomberg News.
Futures contracts showed 86 percent odds yesterday that the central bank will cut its target to 4.5 percent at its next meeting Oct. 31, compared with a 14 percent likelihood a month ago.
Signs of Inflation
The euro also benefited this week as signs of rising inflation in Europe may increase speculation that the European Central Bank will boost interest rates before year-end.
Germany's inflation rate, measured using a harmonized European Union method, accelerated to 2.7 percent from 2 percent in August, the Federal Statistics Office said Sept. 27. That's the most since June 2001.
M3 money supply, which the ECB uses to measure future inflation, grew 11.6 percent from a year earlier after increasing 11.7 percent in July, the central bank said Sept. 27.
``This will get ECB concerned, and the expectation of an ECB ease was squashed,'' said Robert Sinche, head of global currency strategy in New York at Bank of America Corp. ``The euro-dollar move is a combination of dollar weakness and euro strength.''
The ECB is expected to keep its target rate at 4 percent when its board meets on Oct. 4, according to a Bloomberg survey. The Bank of England is expected to hold its rate at 5.75 percent the same day.
ECB President Jean-Claude Trichet yesterday told Dutch television it's ``too early'' to decide whether financial-market turmoil will hurt economic growth in the euro region.
The Euribor futures for delivery in December rose to 4.61 percent yesterday from 4.49 percent a week ago. The futures dropped to as low as 4.24 percent on Aug. 21 during the global credit crisis.

U.S. Stocks Have Biggest September Gain Since 1998 on Rate Cut

U.S. stocks rose this week to complete the steepest September advance since 1998 as the Federal Reserve's interest-rate cut helped energy and raw-material companies lead the market's recovery from a summer rout.
Exxon Mobil Corp., Freeport-McMoRan Copper & Gold Inc. and Monsanto Co. climbed after the falling dollar sent commodities to the biggest monthly gain in 32 years, led by crude oil, gold and wheat. Goldman Sachs Group Inc. rose the most during September in the Standard & Poor's 500 Index, which gained for the fifth straight quarter, after the securities firm reported the third- highest profit in its 138-year history.
The Fed's Sept. 18 reduction to 4.75 percent of its rate for overnight loans sustained the stock market's recovery from losses spurred by subprime-mortgage defaults. In July and August, the S&P 500 had the largest slump in four years.
``The Fed easing was the catalyst for everything,'' said Ed Peters, chief investment officer at PanAgora Asset Management in Boston, which manages $22 billion. ``Commodities will continue rising in price,'' lifting shares of their producers, because the rate cut may boost inflation.
The S&P 500 rose 0.1 percent to 1,526.75 this week, giving the benchmark a 3.6 percent September advance and a 1.6 percent third-quarter gain. The Dow Jones Industrial Average rose 0.6 percent to 13,895.63 this week, 4 percent in September and 3.6 percent during the past three months.
4.57 Percent
U.S. Treasuries completed the biggest quarterly rally in five years on expectations the Fed will cut interest rates even more in 2007. The yield on the benchmark 10-year note fell 0.05 percentage point to 4.57 percent this week, bringing its decline since June 29 to 0.45 point. Bond yields and prices move inversely.
Exxon, the world's largest oil company, surged 8 percent to $92.56 in September, for its steepest monthly gain since July 2006. Freeport, the world's second-largest copper producer, jumped 20 percent to $104.89. Monsanto, the world's largest seed producer, advanced 23 percent to $85.74 for the S&P 500's second- biggest September rally.
Energy shares in the S&P 500 rose 8 percent as a group, the most among 10 industries, followed by the 7.6 percent advance by raw-material stocks.
The 19-commodity Reuters/Jefferies CRB Index increased 8.1 percent in September, the most since July 1975. Wheat climbed to a record amid a global grain shortfall, boosting corn and soybeans. Oil also hit a record, and gold reached a 27-year high. The dollar's decline, which sent it to a new low against the euro this week, spurred the commodities rally.
$2.85 Billion Profit
Goldman surged the most in the S&P 500 in September, climbing 23 percent to $216.74. Goldman's third-quarter profit increased 79 percent to $2.85 billion after the company bet against the mortgage bonds that roiled credit markets. Earnings beat the highest analyst estimate by more than 20 percent.
General Motors Corp. had the biggest advance in the Dow average, rising 19 percent to $36.70. GM reached a contract agreement that takes $50 billion of future health-care obligations off GM's books and may transform the competitive landscape of the U.S. auto industry. The accord, ending a two-day strike, is designed to allow the Detroit automaker to operate with a cost structure closer to that of its Japanese rivals.
McDonald's Corp. gained 11 percent to $54.47. The world's largest restaurant company boosted its annual dividend by 50 percent as part of a plan to return as much as $17 billion to investors.
P&G Rises
Procter & Gamble Co. shares gained in 17 out of 19 trading sessions in September, rising 7.7 percent to $70.34.
Stocks may keep rising in the October-to-December period, if history is any guide. The S&P 500 has climbed in 11 of the past 12 fourth quarters.
``We'll continue to plod along,'' said Jack Ablin, who helps manage $52 billion as chief investment officer at Chicago-based Harris Private Bank. ``Earnings are still holding together.''
Unemployment in the U.S. rose to a one-year high in September and manufacturing slowed for a third month as the effects of the housing recession reverberated through the economy, economists expect reports next week to show.

Carlyle Raises EU5.4 Billion for European Buyout Fund

Carlyle Group, the buyout firm run by David Rubenstein, raised 5.4 billion euros ($7.4 billion) for takeovers in Europe, exceeding its target even as the pace of buyouts slows.
``There remain significant opportunities across the continent.'' Rubenstein said in an e-mailed statement today. However, ``the European market is maturing and the investment environment has become more challenging,'' he said.
Carlyle, which had planned to raise 5 billion euros, and rivals Kohlberg Kravis Roberts & Co. and PAI Partners are amassing their largest European funds as the low-cost loans used to pay for deals dry up. The value of buyouts dropped 80 percent to $20 billion globally in August, data compiled by Bloomberg show, as rising U.S. subprime mortgage defaults disrupted credit markets.
``Investors are looking to invest more in private equity and won't be deterred by short-term difficulties,'' said Nick Arnott, a managing director at London-based Private Equity Intelligence, which tracks the performance of buyout funds. ``We're not seeing any problems so far'' in raising money, he said.
Carlyle's third fund dedicated to takeovers in Europe is three times bigger than the 1.8 billion-euro pool the Washington- based firm raised in 2005. New York-based competitor KKR is seeking 7.7 billion euros for its third European fund, Private Equity Intelligence said last month. Paris-based PAI is gathering 10 billion euros for its Europe V fund.
Private-equity companies raised a record $260 billion for new funds worldwide in the first half of 2007. New York-based Blackstone Group LP pulled in $21.7 billion for the world's biggest fund last month.
Buyout firms use a mix of their own funds and debt to pay for takeovers. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors

CPDOs Rated AAA May Risk Default, CreditSights Says

Credit derivatives awarded the top ratings by Moody's Investors Service and Standard & Poor's may be as vulnerable to default as high-risk, high-yield bonds, according to independent research firm CreditSights Inc.
Constant proportion debt obligations use credit-default swaps to speculate that a group of companies with investment- grade ratings will be able to repay their debt. An increase in credit rating downgrades for investment-grade companies may cause losses that CPDOs would struggle to recoup, CreditSights said in a report entitled ``Distressed CPDOs: We're Doomed!''
``If you assume defaults and downgrades come in bunches rather than being evenly spaced out, CPDOs' default rates are more what you would expect for low junk ratings than for AAA,'' David Watts, a CreditSights analyst in London, said in a telephone interview yesterday.
Investors and lawmakers have criticized Moody's and S&P, the two biggest ratings firms, for assigning their top Aaa or AAA grades to securities including those backed by U.S. mortgages, and failing to issue downgrades before prices plunged. U.S. Senate Banking Committee Chairman Christopher Dodd last month said credit rating companies must explain why they assigned ``AAA ratings to securities that never deserved them.''
Felicity Albert, a spokeswoman at S&P, and Moody's spokesman James Overstall, both in London, declined to comment on the CreditSights report.
Declining Value
CPDOs were first created last year by banks ranging from Amsterdam-based ABN Amro Holding NV, the largest Dutch lender, to New York-based Lehman Brothers Holdings Inc.
Banks set up at least $4 billion of CPDOs, promising annual interest as high as 2 percentage points above money-market rates.
The securities earn an income by selling credit-default swaps, a type of insurance contract that pays a buyer face value if the borrower can't meet payments on its debt. CPDOs typically provide debt insurance on a basket of 250 investment-grade companies by using the benchmark CDX North America Investment- Grade Index and the iTraxx index in Europe. The indexes rise when credit quality deteriorates.
Moody's and S&P assign their top credit ratings to CPDOs because of rules designed to ensure they never have to pay a debt insurance claim. The securities only reference investment- grade companies, ranked Baa3 or higher by Moody's and BBB- by S&P, and replace the contracts every six months when the indexes ``roll'' to weed out any companies cut to junk.
Dropping Out
The CPDO model is being challenged as worsening perceptions of credit quality reduce the value of the credit-default swap contracts included in the securities. Those CPDOs that provided insurance on the 125 companies in the CDX index in March for a premium of 36.75 basis points, or $36,750 for every $10 million of debt, will have to pay nearer 70 basis points to end the contract when the index rolls on Sept. 20, based on current prices.
To make matters worse, the CPDOs are likely to earn a lower premium on the new CDX Series 9 index because the credit risk will be lower as the downgraded companies drop out. At least five companies in the CDX and iTraxx indexes have lost investment grade ratings and will have to be replaced, according to Watts.
Without the downgraded companies, the new CDX index may be priced 11 basis points tighter than the current benchmark, JPMorgan Chase & Co. analysts led by Eric Beinstein in New York said in a report published this week.
Prices of CPDOs dropped to as little as 70 percent of face value last month.
``The removal of those five to eight names could cause spreads to tighten by more than CPDO models anticipated,'' said Watts. ``Even a relatively small number of downgrades in each index series means CPDOs will suffer and their ability to repay par at maturity will be far from certain.''

ECB Leaves Interest Rates Unchanged, Shelving Plan for Increase

The European Central Bank left interest rates unchanged today, shelving plans for an increase as the U.S. housing slump threatens to curb economic growth.
Policy makers meeting in Frankfurt kept the benchmark refinancing rate at 4 percent, as forecast by 44 of 56 economists in a Bloomberg News survey. The bank may raise the rate to 4.25 percent in October, a separate survey shows.
The collapse of the U.S. subprime-mortgage market has made banks reluctant to lend, pushing up the cost of credit and causing turmoil on world financial markets. The ECB earlier today added 42.2 billion euros ($57.7 billion) in emergency cash to ease a credit drought that had pushed overnight deposit rates to a six-year high.
``The ECB finds itself in a dilemma,'' said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. ``Economic fundamentals require at least one more rate increase and inflation concerns haven't eased. On the other hand, it needs to deal with market turbulence.''
Trichet will hold a press conference at 2:30 p.m. in Frankfurt to explain today's decision. ECB President Jean-Claude Trichet on Aug. 27 retreated from a stance of ``strong vigilance'' on inflation, language he used to signal previous rate increases.
Central banks worldwide are refraining from raising rates as they assess how the credit squeeze will affect economic growth.
The Bank of England today left its benchmark lending rate at 5.75 percent, and in Indonesia the central bank kept its key rate at 8.25 percent. The Australian and Canadian central banks also opted yesterday to keep borrowing costs unchanged. The Bank of Japan last month stepped back from plans to raise interest rates.
Bernanke's Pledge
U.S. Federal Reserve chairman Ben S. Bernanke said Aug. 31 the bank will do what's needed to prevent the credit rout from undoing America's six-year economic expansion.
Concern that defaults on U.S. home loans to people with poor credit histories would curb growth in the world's largest economy prompted a slide in stock and commodity markets and pushed up corporate borrowing costs in early August.
Central banks added more than $400 billion to money markets since Aug. 9 to ease lending between banks. Australia's central bank said today it will buy debt backed by home loans to add cash to the financial system.
While those actions succeeded in reducing money-market rates for a time, by yesterday the overnight deposit rate for euros had climbed to 4.68 percent, the highest in six years. It fell to 4.10 percent after the ECB's injection today.
`Finger on Trigger'
``The key question is now whether the ECB keeps its finger on the rate trigger, hoping conditions will return to normal quickly, or whether it thinks market volatility will spill over into the real economy,'' said James Nixon, an economist at Societe Generale SA in London.
The ECB will publish new growth and inflation forecasts today, its first estimate of how the credit squeeze may affect the economy.
In June, the ECB predicted economic growth of about 2.6 percent in 2007 and 2.3 percent in 2008, and said inflation would average about 2 percent this year and next. The bank aims to keep inflation below 2 percent. In 2006, growth reached 2.7 percent, the most since the turn of the decade.
Since then, Europe's economy has cooled. The expansion ebbed to 0.3 percent in the second quarter from 0.7 percent in the first. Manufacturing and service-industry growth slowed in August, and consumer and business confidence dropped more than economists forecast. German manufacturing orders dropped the most in at least 16 years in July, a government report showed today.
OECD Cuts Forecast
The Organization for Economic Cooperation and Development yesterday lowered its forecasts for U.S. and European economic growth and said they may be reduced further following the rout on financial markets. ``Downside risks have become more ominous,'' Jean-Philippe Cotis, the OECD's chief economist, said in Paris.
For now, ``the euro-area economy is still growing at an above-potential rate,'' said Kenneth Broux, an economist at Lloyds TSB Bank Plc in London. ``The current turbulence is a short-term issue, it's not going to derail economic expansion. Growth will re-accelerate in the third quarter.''
Klaus Baader, chief European economist at Merrill Lynch and Co. in London, said concerns that expensive credit will prevent companies from investing are misplaced.
``I don't believe that there is going to be an indiscriminate credit crunch where good companies won't get access to cash,'' he said. ``The only thing that may happen is that it slows credit growth, and that is not necessarily a bad thing.''
The ECB has cited credit growth as an inflation risk. Loans to the private sector grew 10.9 percent in July from a year earlier, the bank said Aug. 28. M3 money-supply growth, which the ECB uses as a gauge of future inflation, accelerated to the fastest pace in 28 years.
The bank is also concerned that economic growth will allow companies to pass on higher costs to consumers, boosting inflation. Oil prices have surged 51 percent since mid-January.
``The rate hike is just postponed, not canceled,'' said Guntermann.

Lehman Sees `Material Hit' to Europe Investment Banks

European investment banks will take a ``material hit'' to earnings from the fallout of rising U.S. subprime-mortgage defaults, according to Lehman Brothers Holdings Inc. analysts.
Deutsche Bank AG and Credit Suisse Group were downgraded and had their share price estimates cut by London-based Jon Peace and Robert Law, who predicted that European banks will suffer after- tax writedowns of as much as 25 percent of full-year earnings this year, based on the pace of first-half gains. The impact would not threaten the solvency of the banks, the analysts wrote.
Central banks have pumped more than $350 billion into the world's money markets in the past month after U.S. subprime mortgage delinquencies sparked an increase in credit costs. Deutsche Bank Chief Executive Officer Josef Ackermann yesterday said markets are stabilizing, a day after UBS AG analysts cut their 2008 earnings estimates for firms including Deutsche Bank.
``The year 2007 has been a rollercoaster year,'' the Lehman analysts wrote in a note to clients yesterday. ``While we expect more earnings downgrades and negative news flows near term, we note that, once greater certainty over loss potential and revenue generation emerges, if markets do start to recover, the investment banks are typically quick to react.''
Investment-banking divisions may see a 40 percent decline in second-half revenue from the first six months, as income from fixed-income trading drops and debt issuance and mergers and acquisitions slow, they said in the report.
`Turbulent Market Conditions'
Ackermann said ``turbulent market conditions'' in August crimped the value of holdings in the sales and trading division, which accounts for about half of revenue. ``Market corrections, triggered in part by the drying-up of liquidity, have been significant and impacted mark-to-market valuations in our trading books and leveraged loan book,'' Ackermann said in a statement.
Companies that depend on commercial paper, debt due in 270 days or less, are facing funding shortages as investors refuse to buy debt secured by assets including subprime mortgages. IKB Deutsche Industriebank AG and Landesbank Sachsen Girozentrale had to receive emergency funding last month to keep them afloat after vehicles that they supported couldn't refinance in the markets.
The European Central Bank added more than 200 billion euros of extra cash to stabilize the money market between Aug. 9 and Aug. 14. It said today it may act tomorrow to soothe money markets if needed. The U.S. Federal Reserve and the Bank of England have also taken steps to address the credit crunch.
`Bad to Non-Existent'
Disclosure by European banks about subprime-related assets, collateralized debt obligations, leveraged lending obligations and asset-backed commercial-paper conduits ``ranges from the bad to the non-existent,'' the Lehman analysts wrote.
The analysts cut their recommendation on Frankfurt-based Deutsche Bank, the biggest German bank, to ``underweight'' from ``overweight.'' They slashed their price estimate to 94 euros ($127.7) from 146 euros.
They also reduced their recommendation on Zurich-based Credit Suisse, the second biggest Swiss bank after UBS, to ``equal weight'' from ``overweight'' and their price estimate to 90 Swiss francs ($74.28) from 123 francs. They kept their ``equal weight'' recommendation on UBS and reduced the price estimate to 71 francs from 91 francs.
Deutsche Bank fell 2.1 percent to 92.22 euros in Frankfurt trading. Credit Suisse declined 1.5 percent to 79.7 francs in Zurich and UBS dropped 1.3 percent to 63.45 francs.
New York-based Lehman itself, along with Morgan Stanley, will report lower third-quarter earnings because of declining fixed-income revenue, Citigroup Inc. analyst Prashant Bhatia wrote to clients today. Goldman Sachs Group Inc.'s profit will rise, in part because of an asset sale. Shares of New York-based Morgan Stanley, the No. 2 securities firm by market value after Goldman, offer the best risk-reward ratio for investors, he said.
The following is a table of Lehman's other changes to the ratings of European bank stocks. Bank New rating Old rating
Credit Suisse 2-equalweight 1-overweight
Deutsche 3-underweight 1-overweight
UBS 2-equalweight 2-equalweight
Banco Espirito Santo SA 1-overweight 2-equalweight
Credit Agricole SA 1-overweight 2-equalweight
HBOS Plc 1-overweight 3-underweight
Banco Popolare Scrl 3-underweight 1-overweight
Banco Comercial
Portugues SA 3-underweight 2-equalweight
Bradford & Bingley Plc 3-underweight 1-overweight
Northern Rock Plc 3-underweight 2-equalweight
Societe Generale SA 3-underweight 2-equalweight
Unione di Banche
Italiane Scpa 3-underweight 1-overweight

NextStudent Inc. Announces $1.4 Billion Securitization

NextStudent Inc., a leading Phoenix-based education funding company, announced today that, through its affiliate companies, it will be coming to the domestic and international capital markets next week with its second securitization when NextStudent Master Trust I issues $1.4 billion in auction-rate student loan-backed notes.
J.P. Morgan Securities Inc. will be the lead investment banker on the deal. Co-managers include Goldman, Sachs & Co., Morgan Stanley & Co. Inc. and Banc of America Securities LLC.
"We look forward to the successful launch of our second securitization as NextStudent continues its transformation from a student loan scholarship search and marketing company to a full-service student loan finance company," says John F. (Jack) Wallace, III, Executive Vice President of Finance.
The proceeds from the securitization will be used to purchase federally guaranteed consolidation loans previously held in an asset-backed commercial paper conduit. An additional $350 million "will be used to provide additional student loan capital and purchase Federal Consolidation Loans originated during the next six months," according to Wallace.

Recession Risk Rises as Consumers Feel Credit Tighten

The pain from higher borrowing costs may be spreading as consumers and businesses follow investors in shying away from risk, increasing the odds of a recession.
``While there is no basis for predicting a recession right now, the risks have surely gone up,'' says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Massachusetts. ``The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now.''
Economists at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are among those lowering economic forecasts as the rising cost of credit prolongs the worst housing recession in 16 years. Now, two areas of the economy that have held up well so far, jobs and consumer spending, no longer appear immune to the fallout.
Already, the financial turmoil has put a dent in consumer and business confidence, according to surveys taken in August. Wal-Mart Stores Inc., the world's largest retailer, lowered its earnings forecast for this year. Financial-services companies including Atlanta-based SunTrust Banks Inc. announced plans to eliminate thousands of jobs.
Though reports show a strong start to this year's third quarter, economists will be watching this week for U.S. auto sales and August employment to see whether spending and the job market might follow housing into a slump.
`Fear in the Markets'
``We're taking the pulse of the economy a little more frequently,'' says Jonathan Basile, an economist at Credit Suisse Holdings in New York. ``If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets.''
Federal Reserve Chairman Ben S. Bernanke is under pressure to cut interest rates this month after the central bank said Aug. 17 that ``downside risks to growth have increased appreciably.'' Futures trading shows investors are betting the Fed will cut its benchmark rate at least a quarter percentage point, to 5 percent, at its Sept. 18 policy meeting.
The Fed ``continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,'' Bernanke said at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, on Aug. 31.
More Pessimistic
Confidence is critical at key junctures in the economy. If consumers and companies turn more pessimistic about the outlook and cut back on their spending, such gloominess can prove to be self-fulfilling, triggering a recession.
A sudden drop in consumer confidence at the end of 2000, coupled with a contraction in manufacturing and a two-year-low in motor-vehicle sales, helped set the stage for the last recession, which began in March 2001.
The omens today aren't particularly promising. An index of global business confidence compiled by Moody's Economy.com in West Chester, Pennsylvania, fell in late August to its lowest level since the middle of the U.S.-led invasion of Iraq in 2003.
Spending on U.S. construction projects unexpectedly fell in July by the most since January, a government report today showed.
Consumers are also showing signs of being spooked by the turmoil in financial markets. U.S. consumer confidence tumbled last month by the most since Hurricane Katrina struck two years ago, according to the Conference Board, a private research group in New York.
`Significant Risk'
``I think there's a significant risk of recession now,'' says Martin Feldstein, president of the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end. ``The consumer will be spending less. The most recent consumer confidence numbers are down. That's going to be reinforced by everything happening in the housing market.''
Americans have ``pulled back on buying big-ticket items; and pulling back means that unless there is a rate cut, you will have a recession,'' Michael Jackson, chief executive officer of AutoNation Inc., said in an interview Aug. 29. AutoNation, based in Fort Lauderdale, Florida, is the largest U.S. auto retailer.
The pace of car and truck sales in the U.S. has dropped for seven consecutive months, the biggest string of declines in at least 31 years, according to data compiled by Bloomberg. Economists forecast little change for August when car makers report sales figures today.
Incentives
General Motors Corp., the biggest U.S. automaker, raised incentives on pickup trucks and sport-utility vehicles in August after its U.S. sales dropped 22 percent in July. The Detroit- based automaker also slowed production at six North American plants that assemble these vehicles.
``U.S. consumers continue to be under difficult pressure economically,'' Wal-Mart Chief Executive Officer H. Lee Scott said on Aug. 14. The Bentonville, Arkansas-based company blamed the housing slump and high gasoline prices when it reduced its profit forecast.
The pressure on consumers may increase if jobs become harder to get. First-time applications for jobless benefits have risen for five straight weeks, the longest streak since May last year.
``Employers are turning more cautious about taking on workers,'' says Steven Director, a professor at the School of Management and Labor Relations at Rutgers University in New Brunswick, New Jersey. ``The jobs market is softening.''
Payroll growth may slow in September to 50,000 jobs from more than 100,000 in August as businesses pull back on hiring, according to Kurt Karl, chief U.S. economist at Swiss Reinsurance, the world's largest reinsurer, in New York.
Rising Incomes
Still, Karl, who estimates the chances of a recession at about 35 percent, says the effect of the credit crunch on jobs will be temporary. He expects that consumers are more likely to pause than retreat for as long as incomes continue to rise. Earnings increased 3.9 percent in July from a year earlier, according to the Labor Department.
The economy chalked up its highest growth rate in more than a year during the second quarter, and there is evidence the strength carried over into the third quarter. Retail sales, durable-goods orders and new-home sales all surpassed economists' estimates in July. Those figures show the economy was strong before credit markets seized up in August.
More recent indicators ``are going to be looming larger as people try to get a handle on what's happening in the financial markets,'' says Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York.
The expansion may hinge on how business reacts to the curtailment of credit, economists say. U.S. business capital spending helped sustain growth in the second quarter.
A report today from the Tempe, Arizona-based Institute for Supply Management showed manufacturing cooled in August as factories trimmed orders.
``Business spending is the big concern,'' Swiss Reinsurance's Karl says. ``If that tanks, we could be heading for a recession.''

Regulators Urge Refinancing of Securitized Mortgages

U.S. bank regulators urged mortgage lenders to ease terms on the subprime loans they packaged into bonds, seeking to stem foreclosures that may aggravate what's already the worst housing slump in 16 years.
The Federal Reserve and other bank regulators asked lenders to review their authority under pooling and servicing agreements to identify borrowers at risk of default and offer to refinance to help them keep their homes, the agencies said in a joint statement released today in Washington.
``We encourage servicers of securitized mortgages to reach out to financially stressed homeowners,'' Fed Governor Randall Kroszner said in a statement.
The regulators' recommendation is part of a broader push by the federal government to stem the growing rate of foreclosures among borrowers with weak credit or high debt and to quell the recent turmoil in the credit markets.
Last week, President George W. Bush unveiled his plan to help homeowners avoid foreclosure, including a new initiative that would allow the Federal Housing Administration to help borrowers facing rising mortgage payments stay in their homes.
The number of U.S. homes under foreclosure almost doubled in July from a year earlier as property owners with adjustable-rate mortgages faced larger monthly payments, according to RealtyTrac Inc., the Irvine, California-based seller of foreclosure data.
The regulators urged lenders to use their authority under the securitization documents to identify borrowers at risk of delinquency or default, including those facing interest-rate increases on their loans, and contact them to assess their ability to repay.
They should consider helping borrowers avoid foreclosure by deferring payments, converting loans to a fixed-rate mortgages and other ways that help homeowners manage payments, the regulators said.

General Electric linked to £4bn Southern Water bid

The US conglomerate General Electric has reportedly joined Goldman Sachs in a £4bn bid for Southern Water, which supplies about 1m households in south-east England.
Southern was put up for sale by its owner, the Royal Bank of Scotland's private equity division, earlier this year.
GE joins other big hitters in the Goldman consortium, including the Australian firm Babcock & Brown. The consortium is said to be up against rivals led by the investment bank Morgan Stanley, and funds led by JP Morgan and Merrill Lynch.

The asset-rich utility sector has become a prime target for takeover activity.

India’s economy set for more strong growth, say analysts

India looks set for another year of strong growth after the economy unexpectedly accelerated by a scorching 9.3% during the first three months, analysts say.Last Friday’s first-quarter data, driven by robust manufacturing and services output, surprised many analysts who had forecast growth as low as 8.5% after five interest rate hikes in a year.The aggressive monetary tightening and a stronger rupee, which has hit exports, means it is unlikely India will repeat last year’s torrid 9.4% expansion, the fastest in 18 years, analysts say.But India’s “growth story,” which has prompted foreigners to pump billions of dollars into shares, infrastructure and other investments, remains intact.Expansion is being “consumption led” with “rising incomes and a growing middle class” in the country of 1.1bn people, said Deepak Lalwani, director at London investment house Astaire and Partners.“The economy has gained its own strong momentum due to cumulative reforms,” said Lalwani, who sees growth of 8.5-9% in the fiscal year to March 2008.Agriculture, which has pulled down the broader economy, also fared better than expected during the first quarter, posting 3.8% growth.While 9% is at the upper end range of most full-year forecasts, economists have raised their expectations following the quarterly figures.JP Morgan boosted its growth estimate from eight to 8.6% and Morgan Stanley from 7.7% to 7.8%. India’s HDFC bank said it was looking at “8.5% plus” from an earlier 8.3%. Other investment houses said they were considering hiking their forecasts.Finance Minister P Chidambaram said he was “confident GDP growth will remain close to 9% this year” even though first-quarter growth was “a shade below” the 9.6% expansion logged in the year-ago period.India’s economy, which has expanded by an average annual 8.6% in the past three years, is the fastest growing after neighbouring China. China’s economy expanded by a roaring 11.9% in the second quarter.Analysts say India’s growth would cool in coming quarters as the central bank’s tight money policy, which has pushed interest rates to five-year highs, crimps capacity expansion and hurts credit growth.Sales of cars are already slowing due to higher loan costs and spending on consumer durables has fallen.“There is some softness already in credit growth and rail freight and exports,” said Abheek Barua, chief economist at HDFC Bank.But the central bank is unlikely to ease its hawkish monetary policy stance rapidly.Data on Friday showed inflation fell to below four% for the first time in over 15 months to 3.96% but the strong first-quarter growth means that fears of overheating are still alive, analysts said.“It does not seem likely the central bank will loosen rates in a hurry... (as) the economy continues to grow at an above trend pace,” said Manika Premsingh at Edelweiss Capital brokerage.The new inflation rate is far below the bank’s annual target of “close” to five%. But economists say the drop was mainly due to a high base effect from a year earlier when inflation stood at 5.6%.“The bank won’t be lulled,” said Soumitra Chaudhuri, economic advisor to credit rating agency ICRA.“Inflation isn’t dead, the economy is growing fast, and if you don’t watch inflation it will come back with a vengeance

Mailbag Mailbag: Three Reasons Credit Levels Will Stay High

Minyan Peter,With respect to the potential for banks being forced to move loans back onto their balance sheets and shore up $60-80 bln in liquidity, my understanding is that Goldman Sachs (GS), as one example, assembled a distressed fund and raised $20 bln for it in about a week.I cannot imagine it is alone and have to believe that others are not sitting back waiting for their flagships to come unglued without some new storied distressed guy sitting around waiting to take advantage of the blood in the streets. Am I getting those issues confused, or couldn't those distressed funds buy and provide liquidity for exactly that kind of fall out?Prof. Katz,There is no doubt that there is a rapid move underway from "sell side" focus to "distressed buy side" among the banks. I think the issue is one of timing. My guess is that the distressed teams have their hands full right now with just the available subprime paper in the market. If you go back to the RTC days, the distressed teams waited until the government took the bad loans from failing institutions and then sold them at a discount. And my guess is that we are too early for many of the distressed teams to act.I would also add that Goldman's $20 bln is not comparable to the $60-80 bln figure I presented. I doubt that Goldman will be able to leverage the fund 10:1 the way the banks can. Then again, I have seen more crazy leverage of late than I ever imagined. Minyan Peter,When I talk to friends in the distressed market, they are indeed twiddling their proverbial thumbs. Their fear is that there are several reasons that may suggest credit may never trade down to levels where they would feel enticed, and consequently won’t get paid. The three reasons I get for this are:
i) Fed will bail out the credit markets (although I think people are kidding themselves when they think that a FF rate cut will help – this issue in subprime in my mind is that the lies a lot of people told to get the loans in the first place would never be accepted today as ‘evidence’ of one’s financial ability to repay). Getting a loan based on your ‘stated income’ is a thing of the past. Obviously their revised debt to income ratios will not help them either.ii) Opportunistic hedge funds will front run the distressed guys and pay higher prices than the distressed funds would – we’ve already seen some evidence a la Citadel/ Sowood. Most of my distressed friends saw that as being a very risky and premature bid by Citadel given what’s been transpiring. iii) Lastly, there is so much money bet against the credit markets right now. Credit derivatives are supposedly 8x the size of the entire credit markets. ( I’m getting that from people who are much smarter and more in touch with that market than myself). Prof. Succo has done a great job in pointing out the inherent counterparty/credit risk in this equation, but I believe one has to respect the potentially contrarian nature of a bet that size, and the incentive by the banks to defend certain asset pricing levels… otherwise, someone is going to be left without a seat in this game of musical chairs.
The reason I’m pointing out the GSCO distressed fund is because I do believe they very well can get that kind of leverage. In April of this year, the margin rules on institutional accounts changed: funds are now able to obtain margin based on the net exposure of the portfolio as opposed to having margin requirements on individual positions. It’s the reason we’ve seen some betas at large, global macro funds, skyrocket… because some of them were indeed using leverage in the neighborhood of 10-1. We’ve seen funds up 30% gross on the year that were actually up more like 3% on their invested assets. So a 5% reversal in invested assets crushed them. It’s a big bone of contention right now among institutional investors who have been doing a better job educating themselves about how the hedgies eek out their results and how they do or don’t manage risk.Now based on the current environment, I believe to a certain extent you are probably right and they won’t get the leverage that they were getting as recently as three months ago, but they will still get to leverage that money beyond 2:1. It’s one of the revenue streams by the big IBs that is at risk and I don’t hear anyone talking about: their margin lending revenue. Anyway, I am tremendously grateful for the contributions that are offered from members of the community such as yourself. Thank you for pointing out where the rubber is meeting the road in consumer spending. It is one of the biggest wild cards right now and your example on Target (TGT) was some of the first "apples to apples" empirical evidence that I’ve seen about the quality of the consumer’s dollar and the pitfalls in earnings quality of some retailers

Microsoft Showdown With Google Gets Runway as Court Rule Ends

Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.
Lehman analyst Roger Freeman trimmed his share price estimates for Goldman to $214, for Morgan Stanley to $81, for Merrill to $106 and for Bear Stearns to $142 in a note sent to clients today. He cut his third- and fourth-quarter and 2008 earnings estimates for the New York-based firms.
``Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' New York-based Freeman said in the note. He has an ``equal-weight'' rating on Goldman and Morgan Stanley, the two biggest U.S. securities firms by market value, and an ``overweight'' rating on Merrill and Bear Stearns.
Wall Street firms have posted three straight years of record earnings, fueled by fixed-income trading. Defaults on U.S. housing loans to subprime borrowers with poor credit histories have reached a 10-year high, driving down the value of bonds backed by mortgages and prompting a global slide in stocks.
Goldman, Morgan Stanley, Lehman and Bear Stearns end their fiscal third quarter tomorrow and are scheduled to report results next month. Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, will finish its quarter at the end of September.
Worse than 1998
Two days ago, Merrill Lynch analyst Guy Moszkowski, cut his stock recommendation on Lehman, Bear Stearns and Citigroup Inc. to ``neutral'' from ``buy,'' citing a likely slowdown in revenue from investment banking. Standard & Poor's said yesterday that business conditions for securities firms are worse than in the second half of 1998, after Russia defaulted on its debt. S&P predicted that revenue from investment banking and trading could fall 47 percent in the last six months of the year.
``We believe 1998 is a relevant comparison period because it was also characterized by a liquidity crisis in an otherwise pretty favorable economic and corporate earnings environment,'' Lehman's Freeman wrote today.
The 12-member Amex Broker/Dealer Index had fallen 9.5 percent this year through yesterday. At 9:51 a.m. in New York Stock Exchange composite trading, Morgan Stanley was down 1.9 percent to $60.02, while Goldman declined 1.3 percent to $171.45. Merrill stock slipped 1.2 percent to $72.21 and Bear Stearns fell 0.6 percent to $106.47. Lehman dropped 1.1 percent.
Time to Buy
Analysts still expect the firms to earn more than they did last year. The average estimate of analysts surveyed by Bloomberg News is for earnings per share at Goldman, Morgan Stanley, Lehman Brothers and Bear Stearns to rise in the third-quarter from a year earlier.
For Douglas Ciocca, who helps manage about $1.4 billion at Renaissance Financial in Leawood, Kansas, the drop in stock prices and earnings estimates make the shares more attractive. He owns stock in Goldman, Morgan Stanley and is considering buying shares in Merrill Lynch, which he said could win customers as investors seek guidance amid declining markets.
``It makes sense to consider initiating positions in these companies with the appropriate time frame,'' he said in an interview today. ``Down markets are really good for our business -- Merrill is going to gather a lot of assets.''
`Wall of Worry'
Earnings from most divisions at the banks are likely to be little changed next year, with ``slight increases'' in equities and fixed-income trading and from faster-growing economies, Lehman's Freeman wrote. ``We admittedly have limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October,'' he wrote.
Freeman halved his third-quarter estimate for Bear Stearns to $1.45 a share from $3.28. He cut his estimate for Goldman to $4.26 from $4.47, for Merrill to $1.74 from $1.90 and for Morgan Stanley to $1.43 from $1.80.
Two Bear Stearns hedge funds collapsed in the past two months because of bad subprime-mortgage bets. Goldman, the world's second-largest hedge fund manager, was forced to put $2 billion of its own cash into one of its funds and waive some fees after it lost money.
Lehman Brothers and Bear Stearns are the fourth- and fifth- biggest U.S. securities firms.

Goldman, Wall Street Firms' Estimates Cut by Lehman

Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Bear Stearns Cos., four of the five largest securities firms, will earn less than expected through next year after a rout in U.S. subprime mortgages, according to Lehman Brothers Holdings Inc.
Lehman analyst Roger Freeman trimmed his share price estimates for Goldman to $214, for Morgan Stanley to $81, for Merrill to $106 and for Bear Stearns to $142 in a note sent to clients today. He cut his third- and fourth-quarter and 2008 earnings estimates for the New York-based firms.
``Third-quarter earnings will be significantly impacted by the dislocation in the credit and asset-backed and mortgage markets,'' New York-based Freeman said in the note. He has an ``equal-weight'' rating on Goldman and Morgan Stanley, the two biggest U.S. securities firms by market value, and an ``overweight'' rating on Merrill and Bear Stearns.
Wall Street firms have posted three straight years of record earnings, fueled by fixed-income trading. Defaults on U.S. housing loans to subprime borrowers with poor credit histories have reached a 10-year high, driving down the value of bonds backed by mortgages and prompting a global slide in stocks.
Goldman, Morgan Stanley, Lehman and Bear Stearns end their fiscal third quarter tomorrow and are scheduled to report results next month. Merrill Lynch, the third-biggest U.S. securities firm after Goldman and Morgan Stanley, will finish its quarter at the end of September.
Worse than 1998
Two days ago, Merrill Lynch analyst Guy Moszkowski, cut his stock recommendation on Lehman, Bear Stearns and Citigroup Inc. to ``neutral'' from ``buy,'' citing a likely slowdown in revenue from investment banking. Standard & Poor's said yesterday that business conditions for securities firms are worse than in the second half of 1998, after Russia defaulted on its debt. S&P predicted that revenue from investment banking and trading could fall 47 percent in the last six months of the year.
``We believe 1998 is a relevant comparison period because it was also characterized by a liquidity crisis in an otherwise pretty favorable economic and corporate earnings environment,'' Lehman's Freeman wrote today.
The 12-member Amex Broker/Dealer Index had fallen 9.5 percent this year through yesterday. At 9:51 a.m. in New York Stock Exchange composite trading, Morgan Stanley was down 1.9 percent to $60.02, while Goldman declined 1.3 percent to $171.45. Merrill stock slipped 1.2 percent to $72.21 and Bear Stearns fell 0.6 percent to $106.47. Lehman dropped 1.1 percent.
Time to Buy
Analysts still expect the firms to earn more than they did last year. The average estimate of analysts surveyed by Bloomberg News is for earnings per share at Goldman, Morgan Stanley, Lehman Brothers and Bear Stearns to rise in the third-quarter from a year earlier.
For Douglas Ciocca, who helps manage about $1.4 billion at Renaissance Financial in Leawood, Kansas, the drop in stock prices and earnings estimates make the shares more attractive. He owns stock in Goldman, Morgan Stanley and is considering buying shares in Merrill Lynch, which he said could win customers as investors seek guidance amid declining markets.
``It makes sense to consider initiating positions in these companies with the appropriate time frame,'' he said in an interview today. ``Down markets are really good for our business -- Merrill is going to gather a lot of assets.''
`Wall of Worry'
Earnings from most divisions at the banks are likely to be little changed next year, with ``slight increases'' in equities and fixed-income trading and from faster-growing economies, Lehman's Freeman wrote. ``We admittedly have limited conviction about 2008 ourselves sitting here at the end of August with a wall of worry to climb between now and October,'' he wrote.
Freeman halved his third-quarter estimate for Bear Stearns to $1.45 a share from $3.28. He cut his estimate for Goldman to $4.26 from $4.47, for Merrill to $1.74 from $1.90 and for Morgan Stanley to $1.43 from $1.80.
Two Bear Stearns hedge funds collapsed in the past two months because of bad subprime-mortgage bets. Goldman, the world's second-largest hedge fund manager, was forced to put $2 billion of its own cash into one of its funds and waive some fees after it lost money.
Lehman Brothers and Bear Stearns are the fourth- and fifth- biggest U.S. securities firms.

Bank of England Loaned 1.6 Billion Pounds at 6.75%

The Bank of England, acting as the lender of last resort, extended 1.6 billion pounds ($3.2 billion) at its highest rate, suggesting commercial banks are reluctant to provide credit after the collapse of the U.S. subprime-mortgage market.
The money loaned at the 6.75 percent penalty rate yesterday was the most since July 2, when the central bank advanced 1.93 billion pounds under the standing facility. The facility was last tapped on Aug. 20, when Barclays Plc borrowed 314 million pounds after a loan from HSBC Holdings Plc was delayed. The central bank declined to identity the borrower or borrowers.
The pound fell after the announcement on concern U.K. lenders are finding it harder to borrow money. The Bank of England hasn't auctioned any additional money or changed any of its lending rates, unlike the Federal Reserve or the European Central Bank.
``When people tap into this facility, it can mean only one thing: liquidity is gone,'' said John Anderson, who manages the equivalent of $3 billion of assets denominated in pounds as head of fixed income at Rensburg Fund Management in London.
Euroclear's CrestCo, which settles trades in London, said in a statement there was a ``processing disruption'' with the Bank of England yesterday. Still, no client reported any ``settlement issues'' to the agency.
A Bank of England spokeswoman declined to comment, when asked whether the demand for funds was linked to the disruption.
Overnight Rates
The overnight interbank offered rate charged by banks for pounds rose to 6.13 percent from 5.90 percent yesterday and the three-month sterling rate increased to 6.63 percent from 6.61 percent. The pound fell to $2.0153 by 4:33 p.m. in London, from $2.0177 yesterday.
``Lending conditions are still very tight,'' said Jonathan Said, an economist at the Centre for Economics and Business Research in London. ``We will see this credit crunch unfold for a while longer. I wouldn't be surprised if we saw more emergency lending by the Bank of England.''
The loan ``is another sign that money markets remain dislocated,'' said Stuart Thomson, who helps oversee the equivalent of $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. ``It is month-end, and there's bound to be a need'' for finance.
The Bank of England announced the loan in its daily report on money market operations in London today. Fifty-seven banks are eligible to tap the standing lending facility.
Standing Facility
Bradford & Bingley Plc spokeswoman Siobhan O'Shea said the Bingley, England-based bank didn't use it. Barclays spokesman Alistair Smith, HSBC spokesman Richard Lindsay, Deutsche Bank AG spokesman Ronald Weichert and Commerzbank AG spokesman Maximilian Bicker declined to comment.
Royal Bank of Scotland Group Plc spokeswoman Carolyn McAdam, HBOS Plc spokesman Mark Hemmingway, Lloyds TSB Group Plc spokeswoman Kirsty Clay, Northern Rock Plc spokesman Brian Giles and Alliance & Leicester Plc spokesman Stuart Dawkins declined to comment.
The standing facility allows banks to borrow unlimited funds from the central bank at 1 percentage point above the benchmark interest rate, currently at 5.75 percent. The bank repeated that its standing facilities are available every day.
The facility has been tapped 19 times since the middle of 2006, according to the Bank of England Web site. Only four of those loans were for more than 1 billion pounds.
The biggest use of the facility to date was when banks borrowed a total of 5.93 billion pounds over three consecutive business days June 28 through July 2.
Sign of Stress
``It's clearly more of a sign of stress than stability,'' said Andreas Meurer, head of global fixed-income strategy at Deka Investment GmbH, which oversees the equivalent of $260 billion in assets, in Frankfurt. ``Some banks needed cash and had to pay 100 basis points more for it, which is not a good sign.''
Losses in the U.S. subprime mortgage market have spurred a global credit crunch. Companies that depend on commercial paper, debt due in 270 days or less, face fund shortages as investors refuse to buy debt secured by assets.
The crisis has prompted the U.S. Federal Reserve and the European Central Bank to pump extra money into markets since Aug. 9 to avert a breakdown in lending. The Fed cut its discount rate on loans to banks by a half-point to 5.75 percent Aug. 17.
Investors have pared bets the Bank of England will add to its five interest-rate increase since August last year, as financial-market losses and tighter lending conditions threaten to hamper economic growth.
Economic Impact
The implied rate on the December U.K. interest-rate futures contract was 6.31 percent today, compared with 6.35 percent on July 17. The contract settles to the three-month London interbank offered rate for the pound, which for the past decade averaged about 15 basis points more than the benchmark rate.
``It's too soon to tell if these problems are going to be restricted to the financial markets,'' said Brian Hilliard, economist at Societe Generale in London. ``The Bank of England is going to be watching very carefully to see if they leak through to the real economy and start affecting growth.''
The Fed is due to announce how much it loaned U.S. banks in the past week, at 4:30 p.m. in Washington. Banks borrowed a daily average of $1.2 billion in the previous week, as the four biggest lenders sought to show support for the Fed's discount- rate cut.

U.S. Economy: Expansion Was Faster Than Estimated

Surging exports and business spending propelled U.S. growth to the fastest pace in more than a year before turmoil in the credit markets forced the Federal Reserve to warn of a bleaker outlook.
Gross domestic product rose at a 4 percent annual rate in the second quarter, the Commerce Department said in Washington, up from an initial estimate of 3.4 percent. The median forecast of economists polled by Bloomberg News was 4.1 percent.
The figures may be the peak of the expansion for this year as the cost of borrowing increased in August and the Fed said that risks to growth ``increased appreciably.'' In a sign that the job market is weakening, the Labor Department said today showed claims for unemployment benefits climbed to the highest level since April. A further report showed house prices in the second quarter rose at the slowest pace in a decade.
``The underlying economy was growing in the first half,'' said Peter Kretzmer, a senior economist at Banc of America Securities LLC in New York. ``We expect it to slow modestly, but not in such a pronounced way. It will slow enough, though, that the Fed will find an excuse'' to reduce interest rates, he said.
Kretzmer accurately predicted the pace of expansion.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 1.3 percent annual rate. The pace of increase was the slowest in four years.
Treasury notes remained higher after the reports. The yield on the benchmark 10-year note declined 4 basis points to about 4.53 percent at 11:51 a.m. in New York. A basis point is 0.01 percentage point.
Trade Deficit
A bigger jump in exports and smaller gain in imports contributed to a reduction in the trade deficit, the report on gross domestic product showed. Trade contributed 1.4 percentage points to growth, the most since 1996.
Spending on corporate construction projects and new equipment also boosted growth. Commercial construction jumped 28 percent, the most since 1981. Investment in equipment increased at a 4.3 percent pace, almost double the previous estimate.
Inventories, which were forecast to play a role in the projected increase in growth, were little changed from the initial GDP estimate published in July.
Jobless Claims
Initial unemployment claims climbed by 9,000 to 334,000 in the week that ended Aug. 25, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, increased to 324,500 from 318,250.
Help-wanted advertising in American newspapers fell in July to the lowest level since 1958, and online job postings also declined. The Conference Board's index dropped to 25 last month, matching analysts' forecasts, from 26 in June. The trend in the help-wanted measure has fallen since 2000 as print media have been losing advertising to the Internet.
The deepest housing slump in 16 years is prompting builders and mortgage-lending companies such as American Home Mortgage Investment Corp. to fire workers. That may weigh on consumer spending, which accounts for more than two-thirds of the economy.
``Business psyche is being more and more affected by what's been going on in the credit markets,'' said Zoltan Pozsar, a senior economist at Moody's Economy.com in West Chester, Pennsylvania. ``If this continues for the next few weeks, it'll definitely be a sign that hiring is being affected by the credit-market problems.''
Home Prices
Prices for previously owned single-family homes rose an average of 3.2 percent from a year earlier, the smallest gain since 1997, the Office of Federal Housing Enterprise, said today in Washington. Prices gained 0.08 percent from the first quarter, the slowest since a decline in the final three months of 1994.
About 14 percent of banks raised standards for mortgages to their most creditworthy borrowers and 56 percent made it more difficult for people with limited or tainted records to get loans, according to a Federal Reserve survey of senior loan officers in mid-July.
In highlighting risks to growth, policy makers reversed their stance from their last meeting on Aug. 7 that inflation was the biggest risk to the economic expansion.
Traders and economists expect the Fed to lower its benchmark overnight lending rate between banks at or before policy makers next meet on Sept. 18. Chairman Ben S. Bernanke will discuss housing and monetary policy tomorrow, when he addresses the Kansas City Fed's annual symposium in Jackson Hole, Wyoming.
Residential Construction
Declines in residential construction subtracted 0.6 percentage point from growth in the second quarter, more than previously estimated.
Housing will probably deduct about a percentage point from GDP at least through early 2008, according to economists at JPMorgan Chase & Co.
As a result, growth will average 2.25 percent in the six months starting in October, a percentage point less than previously projected, Bruce Kasman, JPMorgan's chief economist, said in a note to clients last week.
Lehman Lowers Forecast
Lehman Brothers Holdings Inc. lowered its forecast last week for the period covering October through June 2008 to 1.8 percent, almost a half percentage point less than previously thought.
In one of the earliest economic readings to cover August, consumer confidence dropped by the most in two years, the Conference Board said this week. The measure retreated to 105 this month and the share of people who said jobs are plentiful declined.
In today's report, consumer spending, which accounts for about 70 percent of the economy, was revised up to an annual rate of 1.4 percent from an initial estimate of 1.3 percent. The gain was still the smallest in a year.
``Our consumer is impacted obviously because they see the value of their homes go down, there's a sort of wealth effect,'' Farooq Kathwari, chief executive officer of Ethan Allen Interiors Inc., said in an interview on Aug. 28. ``Yet they're still interested in furnishing their homes, they're still buying.''
Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 6.4 percent, the most in more than a year, to an annual rate of $1.65 trillion. Compared with a year earlier, profits were up 4.5 percent.

JPMorgan Faces $1.4 Billion Loss on LBO Loans, Citigroup Says

JPMorgan Chase & Co., the biggest lender in the leveraged buyout market, may lose about $1.4 billion on loans it can't sell because of the credit crunch, according to an analyst at Citigroup Inc.
Goldman Sachs Group Inc., Deutsche Bank AG and other underwriters of loans to finance leverage buyouts face similar shortfalls, based on the formula that Citigroup analyst Keith Horowitz in New York used to calculate JPMorgan's loss.
JPMorgan is stuck with $40.8 billion of LBO debt, according to Horowitz's estimates, while Goldman is holding $31.9 billion and Deutsche Bank has $27.3 billion. JPMorgan and Goldman were among banks that last month failed to sell $20 billion of loans for the LBOS of U.K. drugstore chain Alliance Boots Plc and carmaker Chrysler LLC.
``The backlog of unsold deals is going to take banks the rest of the year to clear, if not longer,'' said Robin Doumar, who oversees $3 billion of loan funds as managing partner at Park Square Capital LLP in London.
To calculate the mark-to-market losses, Citigroup assumed a 7 percent decline in the price of the high-yield, or leveraged, loans. The bank then assumed half of the loss was offset by hedge gains, underwriting fees and interest from the loans.
The estimates are ``conservative,'' Citigroup said, and assume an equal share to all arrangers in a loan, even though banks leading a deal typically agree to underwrite more than other managers. The estimates also assume prices of the debt remain the same or aren't resold at discounted prices.
Citigroup didn't include Barclays Capital, Royal Bank of Scotland Group Plc or itself in its calculations.
Arrangers of loans seek to reduce the amount they lend by syndicating the credit to a wider group of banks and money managers. The lenders must keep the debt they can't sell.
Citigroup spokesman Duncan Smith said the bank hasn't changed its estimates since the July 26 report, while Horowitz yesterday declined to elaborate on its conclusions.
JPMorgan spokesman Michael Golden in London declined to comment. Goldman Sachs' London-based spokesman Erlendas Grigorovic declined to comment. Deutsche Bank spokeswoman Oonagh Baerveldt in London couldn't immediately comment.

Citigroup's estimates of LBO loansJPMorgan (JPM) $40.76 billionGoldman Sachs (GS) $31.88 billionDeutsche Bank (DB) $27.27 billionCredit Suisse (CS) $27.16 billionLehman (LEH) $21.73 billionMorgan Stanley (MS) $20.08 billionBank America (BAC) $17.84 billionMerrill Lynch (MER) $16.12 billionSource: Citigroup, Loan Pricing Corp.Company Total Debt ArrangersAlliance Boots $13.5 billion DB, UniCredit, JPMAlliance Data $6.61 billion CSAlltel $23.2 billion Barclays, Citi, GS, RBSAvaya $6.05 billion Citi, JPM, MSBausch & Lomb $3.28 billion BAC, Citi, CS, JPMBCE $33.35 billion Citi, GS, JPM, LEH, MSBiomet $6.87 billion BAC, BS, GS, LEH, MER, WBCablevision $21.16 billion DB, JPMCDW Corp $4.88 billion DB, JPM, LEH, MSCeridian $2.3 billion CS, DBChrysler $20 billion BSC, Citi, GS, JPM, MSClear Channel $21.48 billion Citi, CS, DB, MS, RBS, WBDollar General $5.4 billion Citi, CIT, GS, LEH, WBFirst Data $24 billion Citi, CS, DB, GS, HSBC, LEH, MERHarman $8 billion BAC, CS, GS, LEHHarrahs $20.28 billion BAC, Citi, CS, DB, JPM, MERSallie Mae $16.5 billion BAC, JPMService Master $4.5 billion BAC, Blue Ridge, Citi, GS, JPM, MSStation Casinos $3.23 billion DB, German AmericanThomson $4.94 billion Citi, JPM, RBS and UBSTXU $37.15 billion Citi, CS, GS, JPM, LEH, MSUS Foodservice $4.92 billion Citi, DB, GS, JPM, MS, RBSTotal: $291.6 billion

Rimrock Energy Receives $250 Million Equity Commitment

Rimrock Energy, LLC (“Rimrock” or the “Company”), a private oil and gas company headquartered in Denver, Colorado, today announced equity commitments of $250 million from Bear Stearns Merchant Banking (“BSMB”) and Natural Gas Partners (“NGP”). Rimrock is a newly-formed natural gas exploration and production company focused on onshore unconventional resources in North America, including shale gas, tight gas and coalbed methane. Rimrock was founded in July 2007 by Terrell A. Dobkins, Sanford E. McCormick and Wallace G. Wilson, who have made equity commitments to the Company alongside the investor group. Terrell A. Dobkins will serve as Chief Executive Officer of Rimrock. With over 30 years of experience in the oil and gas industry, Mr. Dobkins previously served as Vice President of Production at Antero Resources Corporation, where he focused on resource plays in the Barnett Shale, Arkoma Basin and Piceance Basin. Sanford E. McCormick will serve as Chairman of Rimrock. Mr. McCormick has over 40 years of experience in the oil and gas industry, including CEO positions at private and publicly-traded companies. Wallace G. Wilson will serve as Chief Financial Officer of Rimrock. Mr. Wilson has served as Chief Financial Officer of several companies in addition to his 16 years of experience in public accounting. “We created Rimrock to capitalize on the growing opportunities in unconventional oil and gas in a well-capitalized venture with strong partners,” said Mr. Dobkins. “I feel very fortunate to have such a strong team of professionals, from top to bottom. In addition, BSMB and NGP both have established track records for working closely with management teams to help develop and grow companies, and we look forward to working with them.”

Pol/Econ: GS Fund Loses 30%, Wall Street Math Fails to Predict Future

Each era has its own delusions…its own magicians and its own mountebanks. If you had told an investor in the 19th century that he could make a lot of money by applying higher mathematics to market situations, he would have regarded you as a fool. The mathematics of investing was very simple back then. A company either made a profit or it didn’t. You didn’t need fancy arithmetic to figure that out. Besides, investors knew that the secret to making money was not mathematics; it was metallurgy. The whole world was getting hammered out in steel and iron - ships, engines, bridges, railroads…even the wires that brought the latest in telegraphic communications were made of metal.
Up until the 1980s…there was no particular use for mathematicians on Wall Street. The maths was basic. Besides, stock prices were quoted in fractions that still had an archaic, pre-digital air about them.But then came computers…and computer models…and decimals. And then came the mathematicians who knew how to use them. And then came an explosion of new math-based products - whose actual value had to be tracked by complicated computer formulae. Billions of dollars in speculative positions were no longer “marked to market”. They were now “marked to model”. “What are those things really worth?” asked the old coots who still ran Wall Street firms. “What is our real risk?” they wanted to know. “Don’t worry JB,” came the answers. “The geeks who run the models tell me that it would take a 25-sigma event to cause any real problem.” “What the f…” “You know, they talk this lingo…25-sigma means 25 standard deviations from the norm…which, as near as I can figure is about as likely as hell freezing over.” “Oh…” Well, dear reader. Last week, hell froze. Clients in Goldman Sachs’ (NYSE:GS ) global equity fund must be asking themselves what is going on, after hearing that the fund lost 30% of its value in the last week. It must be what shareholders of the building stocks are wondering too…and what a lot of homeowners want to know.
A few weeks ago, they had scarcely ever met a question mark. Now they’re finding it essential…taking it wherever they go…and keeping it next to the bedside in case they need it in the middle of the night. Goldman dropped the fees on its fund to 10% of profits. Still, an investor might want to ask questions: What if there aren’t any profits? What if there are more losses? Investors in the giant private equity firm Blackstone (NYSE:BX ) are probably asking themselves when the stock, now trading at US$26, will get back to where it was when they bought it - US$31. And the fellows who run rival takeover firm, KKR (AMS:KPE ), are probably asking themselves if they want to bother to go public at all. They already had to amend their offer documents, letting investors know that since the low-hanging fruit had been picked, they would have to skinny up a few trees to get the money they were looking for…and that might mean lower operating margins. The Financial Times reports: “In a rare unplanned investor call, the bank revealed that a flagship global equity fund had lost over 30 per cent of its value in a week because of problems with its trading strategies created by computer models. In particular, the computers had failed to foresee recent market movements to such a degree that they labelled them a ‘25-standard deviation event’ - something that only happens once every 100,000 years or more. “‘We are seeing things that were 25-standard deviation events, several days in a row,’ said David Viniar, Goldman’s chief financial officer.”
Losses in the Goldman fund could go over US$1.5 billion. But heck, everyone makes mistakes. And even a great mathematician such as James Simons, founder of Renaissance Technologies, takes a loss from time to time. Simons used to do maths for the Pentagon. Then, he discovered that he could make billions running a maths-based hedge fund. But last week, Simons was forced to write a letter to his investors. His fund lost about 9% in the first few days of August…and now Simons says, “we cannot predict the duration of the current environment”. Ah…question marks. Even the maths whizzes find they cannot live without them when the markets turn down. And no matter what kind of math you do, sometimes things take you by surprise. This is the premise of our friend Nassim Nicholas Taleb’s latest best seller, The Black Swan: The Impact of the Highly Improbable. As he told the attendees at the AF Investment Symposium in Vancouver last month, a ‘black swan’ event is an unexpected event that has grave consequences. Hmmm…sound familiar? The title of Taleb’s speech at the Symposium was “The Scandal of Prediction: How We Can’t Predict and Why We Don’t Know It.” “We don’t listen to negative advice – what doesn’t work – we listen to what works – but this means we ignore then the ‘silent evidence’ of what doesn’t work – which is often more instructive,” he told the crowd. “We are unable to look at data without trying to make a causative link – it’s human nature – but it doesn’t serve us…” “Models (ours including) are behaving in the opposite way we would predict and have seen and tested for over very long time periods,” said Lehman Brothers (NYSE:LEH) last week

Emerging-Market Stocks Grow Richer Than U.S., Europe

Brazil's annual inflation averaged more than 1,000 percent in the 1990s, South Korea needed a $57 billion bailout from the International Monetary Fund and Poland went through nine prime ministers.
Now, investors say emerging markets are just as stable as the U.S., Europe and Japan, and deserve a premium because their economies are growing three times as fast. Stocks in developing nations traded this month at 15.2 times estimated profit versus 14.9 times for equities in industrialized countries, data compiled by Bloomberg show. In 2005, the ratios were 8.45 and 17.3, respectively.
The shift has given Brazil's Banco Bradesco SA a higher valuation than Citigroup Inc., and made South Korean steelmaker Posco pricier than its German rival, ThyssenKrupp AG. Indian, Peruvian and Czech stocks all fell less than those in the U.S. and Western Europe in the latest global sell-off.
``We're in a different place,'' said Robert Weissenstein, the New York-based chief investment officer for private banking in the Americas at Credit Suisse Group, which oversees $1.33 trillion. Shares in emerging markets ``could and should trade at a premium as those markets develop. You pay up for growth.''
Developing countries account for more than half of the world's estimated 5.2 percent economic growth this year and $5.68 trillion of foreign-currency reserves, according to IMF and Bloomberg data. Inflation in Brazil has dropped to less than 4 percent and South Korea is now a net creditor.
The changes aren't enough to warrant the prices emerging- market stocks are commanding, said the Gloom, Boom & Doom Report's Marc Faber. Developing nations' shares have outperformed developed markets for six straight years.
Tom, Dick, Harry
``Every Tom, Dick and Harry in the world knows that China is growing at 9 to 11 percent, that India is expanding rapidly,'' Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd., said in Vancouver. ``But the valuations are not very compelling at the moment.''
The rise in emerging market valuations shows that investors believe there is less risk to their earnings, said Allan Conway of Schroders Plc. Governments have built up currency reserves and cut debt, insulating emerging-market companies from shocks that have depressed valuations in the past.
``This idea, `sell risky assets, sell emerging,' is complete nonsense,'' said Conway, the London-based head of emerging-market equities at Schroders, which oversees $276 billion. ``They are not risky assets. That's a sentiment view and it's a view of times gone by. It is not a view for today.''
Eventually Rebound
The Morgan Stanley Capital International Emerging Markets Index will eventually rebound from the 10 percent decline it has suffered after reaching a record July 23, and will beat developed markets in 2007, according to Conway. The index rose 0.8 percent to 1052.19 at 7:15 a.m in New York.
Since global stocks peaked on July 13, the Standard & Poor's 500 Index dropped 6.4 percent and the Dow Jones Stoxx 600 Index of European shares lost 9.8 percent in dollar terms. India, Peru and the Czech Republic fell between 3.1 percent and 6.3 percent.
Less-developed economies have a combined $484 billion in current-account surpluses, compared with deficits of $81 billion in 1997, IMF data showed.
Foreign-currency reserves ballooned almost 500 percent to $3.87 trillion in the last 10 years, according to Roubini Global Economics LLC, the research firm of Nouriel Roubini, a professor at New York University's Stern School of Business. Government debt totals 39 percent of the gross domestic product in emerging markets, compared with 89 percent for developed nations, according to Schroders.
Taking Down Risk
``Emerging countries, by and large, are stockpiling either trade dollars or petrodollars, in such a degree that they've taken the financial risk way down,'' said James Swanson, who helps oversee $200 billion as chief investment strategist at MFS Investment Management in Boston.
China, Russia and India will account for half of the world's economic growth this year, the IMF said last month. Developing countries are forecast to expand 8 percent this year, compared with 2.6 percent for advanced economies, the IMF said in July.
The Washington-based fund boosted its 2007 growth forecast for China the most of any country, raising it 1.2 percentage point to 11.2 percent. The Russian economy is also beating forecasts and is set to grow 7 percent this year, more than the 6.4 percent predicted in April. For the U.S., the IMF trimmed its 2007 growth forecast to 2 percent from 2.2 percent.
`Far More Attractive'
``In the past, you wanted a PE discount and needed a risk premium because the economic fundamentals were worse,'' said Conway. ``Because that's changed, there should be a switch around. The price you pay for the growth you're getting is far more attractive in emerging markets.''
Two years ago, the MSCI Emerging Markets Index traded at a 51 percent discount to the MSCI World Index of 23 developed markets. The discount has narrowed to 1.4 percent this month.
On the basis of estimated earnings for the next year, emerging markets traded at a 1.6 percent premium to developed countries this month. That would mark the first time emerging markets are more expensive than developed nations since March 2000, if analysts' earnings estimates prove correct.
For Brazilian stocks, the discount narrowed to 15 percent from 43 percent two years ago as their price-to-earnings ratio rose to 13.4 from 9.8. Investors are also paying as much for earnings of South Korean companies as they are for those in developed markets, after demanding a 47 percent discount in 2005.
Rising Valuations
Pohang, South Korea-based Posco, Asia's third-biggest steelmaker, trades at 11.6 times profit, up from 4.57 two years ago. The ratio for Dusseldorf-based ThyssenKrupp AG, Germany's largest steelmaker, rose to 8.94 from 7.1. Osasco, Brazil-based Bradesco, Brazil's second-biggest non-state bank, is valued at 16.8 times earnings, from 10.5 two years ago. Citigroup, the biggest U.S. bank and located in New York, trades at 10.4 times earnings.
Citigroup's price-to-earnings ratio has dropped from 13.2 at the start of the year on growing concern subprime mortgage losses would curb the earnings of banks and brokerages.
``Whenever the U.S. financial markets catch a cold, emerging markets essentially get a very serious case of pneumonia --that's one of the key assumptions that maybe we may need to reconsider,'' Mauro Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School in Philadelphia, said. ``If there's volatility right now, it's in U.S. and European markets.''

U.S. Stocks Gain on Retail Sales, Goldman Hedge-Fund Infusion

U.S. stocks rose after retail sales exceeded economists' estimates and Goldman Sachs Group Inc. shored up one of its hedge funds with $3 billion in new capital.
Goldman, JPMorgan Chase & Co. and Bear Stearns Cos. helped lift the Standard & Poor's 500 Index for a second day. Target Corp., the second-largest U.S. discount chain, led consumer shares to their biggest gain in a week.
The advance followed a rebound in stock markets across Europe and Asia from a two-day slump as the European Central Bank said credit markets are returning to normal.
The S&P 500 added 7.46, or 0.5 percent, to 1461.1 as of 10:11 a.m. in New York. The Dow Jones Industrial Average gained 59.75, or 0.5 percent, to 13,299.29. The Nasdaq Composite Index increased 15.34, or 0.6 percent, to 2560.23.
``Retail sales is a building block number, it's a pretty good indication about where the consumer stands,'' said David Doll, who helps manage about $2 billion as chief executive officer of Kanaly Trust Co. in Houston. ``The market is going to get carried at least early on today by the Fed's actions last week and other central banks.''
U.S. retail sales rose 0.3 percent in July after a 0.7 percent drop in June that was smaller than previously estimated, the Commerce Department said. Economists expected an increase of 0.2 percent, according to a Bloomberg survey.
Retail Rally
Target increased $1.14 to $63.50, leading the S&P 500 Retailing Index to a 1 percent gain. Wal-Mart Stores Inc., the world's largest retailer, advanced 49 cents to $46.56.
Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash.
Goldman climbed $2.70 to $183.20. Goldman and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm's Global Equity Opportunities Fund after it fell 28 percent in August.
``We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said.
JPMorgan gained 53 cents to $44.78. Deutsche Bank raised its recommendation on the shares to ``buy'' from ``hold.''
``We're increasing ratings on select banks given a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage,'' Deutsche Bank analysts including Mike Mayo in New York wrote in a note to investors. ``Also, major financial firms, such as JPMorgan, are more diverse versus times past.''
Bear Stearns
Bear Stearns advanced $5.80 to $116. Shares of the underwriter of mortgage bonds may sell at double their current price should Bear Stearns consider merging with or being acquired by a larger company, Barron's reported, citing unidentified sources.
The S&P 500 Investment Banking & Brokerage Index has lost 18 percent in the last month as difficulties stemming from subprime mortgages spread through credit markets. That is almost three times the drop of the S&P 500 Index.
Blackstone Group LP, the private equity firm, added $1.64 to $26.92 after its second-quarter earnings more than tripled as revenue at its four main units increased during a record year for leveraged buyouts. Morgan Stanley began coverage of the stock with an ``overweight'' recommendation.
Corning, Novell
Corning Inc. climbed 55 cents to $24. Shares of the biggest maker of glass for liquid-crystal displays may gain 24 percent next year because of LCD product demand, Barron's reported, citing no one.
Novell Inc. added 27 cents to $6.69 in Germany. The software developer owns the copyrights covering the Unix computer operating system and not SCO Group Inc., a judge ruled in a lawsuit over royalties from users of the Linux computer operating system. The ruling by U.S. District Judge Dale Kimball in Salt Lake City on Aug. 10 is a setback for SCO in its lawsuits against Novell and International Business Machines Corp.
BEA Systems Inc. rose 62 cents to $12. The maker of software that helps Internet-based programs exchange information were upgraded at Bear Stearns & Co., Banc of America Securities LLC and UBS Investment Research. The company may be a ``strategic asset'' for a private equity firm, wrote UBS analyst Heather Bellini.
Europe's Dow Jones Stoxx 600 Index climbed 2.1 percent. Japan's Nikkei 225 Stock Average rose 0.2 percent.
ECB Infusion
The European Central Bank added an extra 47.7 billion euros ($65 billion) in emergency money and the Bank of Japan injected 600 billion yen ($5.1 billion) into its system. Last week, central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system.
Axa SA, Europe's second-biggest insurer, climbed 4.1 percent to 29.16 euros. Credit Suisse, the second-largest Swiss bank, advanced 3.7 percent to 83.8 Swiss francs.
European financial stocks were raised to ``overweight'' from ``underweight'' at Morgan Stanley.
``We think that the current financial trouble is properly reflected in valuations and sentiment alike,'' Teun Draaisma, a strategist at Morgan Stanley, wrote in a note today. ``Fundamentals are solid with no recession in sight, and we welcome the fact that central banks globally are clearly stepping up to the plate.''
Draaisma also increased European equities to ``overweight'' from ``neutral.''

U.S. Stocks Gain on Retail Sales, Goldman Hedge-Fund Infusion

U.S. stocks rose after retail sales exceeded economists' estimates and Goldman Sachs Group Inc. shored up one of its hedge funds with $3 billion in new capital.
Goldman, JPMorgan Chase & Co. and Bear Stearns Cos. helped lift the Standard & Poor's 500 Index for a second day. Target Corp., the second-largest U.S. discount chain, led consumer shares to their biggest gain in a week.
The advance followed a rebound in stock markets across Europe and Asia from a two-day slump as the European Central Bank said credit markets are returning to normal.
The S&P 500 added 7.46, or 0.5 percent, to 1461.1 as of 10:11 a.m. in New York. The Dow Jones Industrial Average gained 59.75, or 0.5 percent, to 13,299.29. The Nasdaq Composite Index increased 15.34, or 0.6 percent, to 2560.23.
``Retail sales is a building block number, it's a pretty good indication about where the consumer stands,'' said David Doll, who helps manage about $2 billion as chief executive officer of Kanaly Trust Co. in Houston. ``The market is going to get carried at least early on today by the Fed's actions last week and other central banks.''
U.S. retail sales rose 0.3 percent in July after a 0.7 percent drop in June that was smaller than previously estimated, the Commerce Department said. Economists expected an increase of 0.2 percent, according to a Bloomberg survey.
Retail Rally
Target increased $1.14 to $63.50, leading the S&P 500 Retailing Index to a 1 percent gain. Wal-Mart Stores Inc., the world's largest retailer, advanced 49 cents to $46.56.
Federal funds began trading at 5.25 percent, matching the Federal Reserve's target and suggesting the central bank's injection of $62 billion at the end of last week met banks' demand for cash.
Goldman climbed $2.70 to $183.20. Goldman and investors including C.V. Starr and Perry Capital LLC will invest $3 billion in the firm's Global Equity Opportunities Fund after it fell 28 percent in August.
``We believe the current values that the market is assigning to the assets underlying various funds represent a discount that is not supported by the fundamentals,'' Goldman said.
JPMorgan gained 53 cents to $44.78. Deutsche Bank raised its recommendation on the shares to ``buy'' from ``hold.''
``We're increasing ratings on select banks given a combination of lower stock prices along with our belief that fundamental conditions remain favorable aside from subprime mortgage,'' Deutsche Bank analysts including Mike Mayo in New York wrote in a note to investors. ``Also, major financial firms, such as JPMorgan, are more diverse versus times past.''
Bear Stearns
Bear Stearns advanced $5.80 to $116. Shares of the underwriter of mortgage bonds may sell at double their current price should Bear Stearns consider merging with or being acquired by a larger company, Barron's reported, citing unidentified sources.
The S&P 500 Investment Banking & Brokerage Index has lost 18 percent in the last month as difficulties stemming from subprime mortgages spread through credit markets. That is almost three times the drop of the S&P 500 Index.
Blackstone Group LP, the private equity firm, added $1.64 to $26.92 after its second-quarter earnings more than tripled as revenue at its four main units increased during a record year for leveraged buyouts. Morgan Stanley began coverage of the stock with an ``overweight'' recommendation.
Corning, Novell
Corning Inc. climbed 55 cents to $24. Shares of the biggest maker of glass for liquid-crystal displays may gain 24 percent next year because of LCD product demand, Barron's reported, citing no one.
Novell Inc. added 27 cents to $6.69 in Germany. The software developer owns the copyrights covering the Unix computer operating system and not SCO Group Inc., a judge ruled in a lawsuit over royalties from users of the Linux computer operating system. The ruling by U.S. District Judge Dale Kimball in Salt Lake City on Aug. 10 is a setback for SCO in its lawsuits against Novell and International Business Machines Corp.
BEA Systems Inc. rose 62 cents to $12. The maker of software that helps Internet-based programs exchange information were upgraded at Bear Stearns & Co., Banc of America Securities LLC and UBS Investment Research. The company may be a ``strategic asset'' for a private equity firm, wrote UBS analyst Heather Bellini.
Europe's Dow Jones Stoxx 600 Index climbed 2.1 percent. Japan's Nikkei 225 Stock Average rose 0.2 percent.
ECB Infusion
The European Central Bank added an extra 47.7 billion euros ($65 billion) in emergency money and the Bank of Japan injected 600 billion yen ($5.1 billion) into its system. Last week, central banks in the U.S., Europe, Japan, Australia and Canada added about $136 billion to the banking system.
Axa SA, Europe's second-biggest insurer, climbed 4.1 percent to 29.16 euros. Credit Suisse, the second-largest Swiss bank, advanced 3.7 percent to 83.8 Swiss francs.
European financial stocks were raised to ``overweight'' from ``underweight'' at Morgan Stanley.
``We think that the current financial trouble is properly reflected in valuations and sentiment alike,'' Teun Draaisma, a strategist at Morgan Stanley, wrote in a note today. ``Fundamentals are solid with no recession in sight, and we welcome the fact that central banks globally are clearly stepping up to the plate.''
Draaisma also increased European equities to ``overweight'' from ``neutral.''