Goldman Sachs Group Inc (GS) said on Wednesday it has appointed Michael Evans and Michael Sherwood as vice chairmen of the firm effective immediately.
The firm said both Evans and Sherwood will continue to have global oversight of the securities business.
Evans will remain chairman of Goldman Sachs Asia and Sherwood will remain co-chief executive officer of Goldman Sachs International. Goldman Sachs said they join John Weinberg, who was appointed to that role in 2006.
Thursday, February 28, 2008
Treasurys Fall on Mortgage Relief Hopes
Treasury prices fell Wednesday after regulators said they will lift limits on the investment portfolios for mortgage companies Fannie Mae and Freddie Mac, a move expected to bring new capital into the ailing housing market.The higher investment caps for the two companies, seen as a step toward an easing of the credit crisis, overshadowed a warning from Federal Reserve Chairman Ben Bernanke to Congress that the economy is grappling with the triple stresses of strained financial markets, inflation and economic slowing.
The regulatory change should free up billions of dollars that the mortgage finance companies could then use to rejuvenate the badly wounded housing sector. "These are measures that will help bring down the default rate" in mortgages, said Tom di Galoma, head of Treasurys trading at Jefferies & Co.
The regulatory change should free up billions of dollars that the mortgage finance companies could then use to rejuvenate the badly wounded housing sector. "These are measures that will help bring down the default rate" in mortgages, said Tom di Galoma, head of Treasurys trading at Jefferies & Co.
The Office of Federal Housing Enterprise Oversight said it would put the higher caps in place on March 1.The housing market's problems in the past year have contributed to a vigorous Treasury rally, but the signs of new relief on Wednesday diminished demand for these safe assets.The benchmark 10-year Treasury note fell 3/32 to 96 29/32 with a yield of 3.88 percent, up from 3.86 percent late Tuesday, according to BGCantor Market Data. Prices and yields trade in opposite directions.The 30-year long bond fell 22/32 to 94 29/32 with a yield of 4.70 percent, up from 4.66 percent the day before.The 2-year note was flat at 100 7/32 with a 2.01 percent yield, unchanged from late Tuesday.Separately, Bernanke warned lawmakers that inflation risks have risen since the start of the year, but also seemed to hint that more interest rate cuts are on the way by asserting that risks to growth currently trump inflation worries.Investors had been on the alert for signals as to whether the Fed is more concerned about the sagging economy or the risk of inflation. That's because the Fed must choose whether to keep cutting rates to stimulate the economy, or halt rate reductions to cool inflation.Bernanke Wednesday, at least in his prepared text, appeared to be solidly in the camp that is most worried about the faltering economy.The Fed's next monetary policy meeting is on March 18. Pricing of federal funds futures contracts Wednesday showed that investors expect a 0.5 percentage reduction in the Fed funds rate soon.Numerous new records set for commodities prices in recent weeks have contributed to the anxiety in the bond market about inflation spiraling out of control. And there were new records set again on Wednesday, as commodities demand was spurred by a dollar plunge that sent the euro above $1.50 for the first time.In London, gold futures, which often rally on dollar weakness, set a new high of $961.30 an ounce. And oil prices broke above a new intraday of $102 a barrel in Singapore, although they later gave back some of their advance in New York trade.Wednesday's data reports reinforced Bernanke's other unpleasant truth, that the economy definitely is weakening.The Commerce Department reported durable goods orders dropped 5.3 percent in January, exceeding the forecast of Thomson/IFR analysts. January orders for transportation goods plunged 13.4 percent.Separately, the department reported that sales of new homes fell by 2.8 percent in January to just 588,000, below the 600,000 sales forecast by Thomson/IFR and beneath the 604,000 homes sold in December.
Most U.S. Stocks Fall, Led by Utilities, Drugmakers; Banks Gain
Most U.S. stocks fell for the first time in four days as a slump in utility and drugmaker shares overshadowed speculation Federal Reserve Chairman Ben S. Bernanke will cut interest rates to stave off a recession.
Dynegy Inc., owner of power plants in 13 states, tumbled the most in three years on earnings that missed estimates. Johnson & Johnson and Amgen Inc. declined after the Journal of American Medical Association reported their anemia drugs increased the risk of death in cancer patients. Bernanke's pledge to act quickly to boost growth sparked a rally in banks and eased concern over a drop in durable goods orders.
The Standard & Poor's 500 Index, which swung between gains and losses at least 25 times, slid 1.27 points, or 0.1 percent, to 1,380.02. The Dow Jones Industrial Average added 9.36, or 0.1 percent, to 12,694.28. The Nasdaq Composite Index rose 8.79, or 0.4 percent, to 2,353.78, led by Apple Inc. About four stocks fell for every three that rose on the New York Stock Exchange.
``It's a friendly Fed, but the market is torn,'' said Dean Gulis, part of a group that manages $3 billion in Bloomfield Hills, Michigan for Loomis Sayles & Co. ``Most people think we're in or on the edge of a recession. That's certainly being discounted to some degree, but not fully.''
The declines ended the market's biggest three-day rally of the year that was spurred by a rally in energy shares after oil surged to a record. Exxon Mobil Corp. led a retreat in the industry today as higher inventories sent crude lower.
Bernanke's testimony to Congress prompted traders to increase bets on larger rate cuts and sent the dollar to a record low against the euro. Financial shares also gained after regulators allowed Fannie Mae and Freddie Mac to buy more mortgages.
Dynegy Slumps
Dynegy fell 70 cents, or 8.5 percent, to $7.56, leading utilities in the S&P 500 to a 1.9 percent drop, the biggest decline among 10 industry groups. The company reported an unexpected fourth-quarter net loss of $46 million. Analysts expected a profit.
Utilities also dropped after Jonathan Golub, the New York- based chief investment strategist at Bear Stearns Cos., advised clients to sell shares of companies in the industry.
``The market is currently underestimating a number of potential risks,'' he said.
Amgen, J&J
Amgen lost $1.22 to $46.60. Johnson & Johnson, the world's biggest health-products maker, slipped 68 cents to $63.04. A study published in this week's Journal of the American Medical Association found that cancer patients who take anemia drugs sold by the companies have a 10 percent higher risk of dying than those who didn't take the treatments.
The risks of the anemia drugs are ``well-defined,'' and the newly published analysis ``looks exactly like what we've seen before,'' Roger Perlmutter, Amgen's head of research and development, said in an interview.
Goldman Sachs Group Inc., the largest securities firm, and Citigroup Inc., the biggest U.S. bank, led financial shares to their fourth straight gain. Goldman rose $8.10, or 4.7 percent, to $180.80 for the second-biggest gain in the S&P 500. Citigroup added 77 cents, or 3.1 percent, to $25.72 for the biggest gain in the Dow average.
Bernanke told Congress that the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy.
Fed Watch
Traders boosted bets that the Fed will cut interest rates by 0.75 percentage point to 2.25 percent by the central bank's next meeting on March 18. Futures trading showed 10 percent odds of a three-quarter-point cut, compared with no chance yesterday. The remaining bets are for a half-point reduction to 2.5 percent.
The dollar weakened to more than $1.51 per euro for the first time today, and an index that tracks the currency against six major counterparts fell to a record.
The Fed has lowered its target for the overnight lending rate between banks five times since September, most recently to 3 percent on Jan. 30. The rate cuts aimed to blunt the economic impact of bank and brokerage firm losses stemming from the worst U.S. housing decline in more than 20 years.
Freeport-McMoRan Copper & Gold Inc. led mining companies higher as bullion futures rose to a record $967.70 an ounce and copper reached a 21-month high of $3.85 a pound. Freeport- McMoRan rose $3.30, or 3.3 percent, to $103.62.
`Firming Up'
``This is a market which I think is firming up,'' Laszlo Birinyi, president of Westport, Connecticut-based research and investment firm Birinyi Associates Inc., said in an interview with Bloomberg Television. ``People are getting a little more optimistic.''
Technology shares also gained, led by Cisco Systems Inc., Apple Inc. and International Business Machines Corp. Cisco, the biggest maker of computer-networking equipment, rose 88 cents to $24.95 after being added to the ``buy list'' at Wells Fargo Investments. Juniper Networks Inc., the second-largest, rose $1.78, or 6.5 percent, to $29.29, the biggest gain in the S&P 500.
Apple added $3.81 to $122.96. The company said it plans to move up the release of a software kit that gives outside developers the ability to modify its iPhone.
IBM climbed for a fourth day, adding $2.08 to $116.46 after Chief Financial Officer Mark Loughridge said in a statement published on the company's Web site that U.S. business may improve this quarter. The company said there is ``strong customer demand'' in the U.S. for products and services that help customers save costs and improve productivity.
IBM, the world's biggest computer-services company, climbed to a four-month high yesterday and led the market higher after announcing plans to buy back up to $15 billion of its own stock.
Northwest, Delta
Northwest Airlines Corp. and Delta Air Lines Inc. led airline shares lower. Delta, in talks to merge with Northwest, said it hasn't reached a satisfactory agreement, while bargaining between the carriers' pilots unions stalled over seniority. Northwest fell 91 cents to $15.10. Delta dropped 91 cents to $15.
Autodesk Inc. retreated $6.11 to $32.99, the biggest drop in the S&P 500. The software maker reported fourth-quarter profit, excluding compensation and acquisition costs, of 52 cents a share. That missed the 54-cent average of analysts' estimates.
Dynegy Inc., owner of power plants in 13 states, tumbled the most in three years on earnings that missed estimates. Johnson & Johnson and Amgen Inc. declined after the Journal of American Medical Association reported their anemia drugs increased the risk of death in cancer patients. Bernanke's pledge to act quickly to boost growth sparked a rally in banks and eased concern over a drop in durable goods orders.
The Standard & Poor's 500 Index, which swung between gains and losses at least 25 times, slid 1.27 points, or 0.1 percent, to 1,380.02. The Dow Jones Industrial Average added 9.36, or 0.1 percent, to 12,694.28. The Nasdaq Composite Index rose 8.79, or 0.4 percent, to 2,353.78, led by Apple Inc. About four stocks fell for every three that rose on the New York Stock Exchange.
``It's a friendly Fed, but the market is torn,'' said Dean Gulis, part of a group that manages $3 billion in Bloomfield Hills, Michigan for Loomis Sayles & Co. ``Most people think we're in or on the edge of a recession. That's certainly being discounted to some degree, but not fully.''
The declines ended the market's biggest three-day rally of the year that was spurred by a rally in energy shares after oil surged to a record. Exxon Mobil Corp. led a retreat in the industry today as higher inventories sent crude lower.
Bernanke's testimony to Congress prompted traders to increase bets on larger rate cuts and sent the dollar to a record low against the euro. Financial shares also gained after regulators allowed Fannie Mae and Freddie Mac to buy more mortgages.
Dynegy Slumps
Dynegy fell 70 cents, or 8.5 percent, to $7.56, leading utilities in the S&P 500 to a 1.9 percent drop, the biggest decline among 10 industry groups. The company reported an unexpected fourth-quarter net loss of $46 million. Analysts expected a profit.
Utilities also dropped after Jonathan Golub, the New York- based chief investment strategist at Bear Stearns Cos., advised clients to sell shares of companies in the industry.
``The market is currently underestimating a number of potential risks,'' he said.
Amgen, J&J
Amgen lost $1.22 to $46.60. Johnson & Johnson, the world's biggest health-products maker, slipped 68 cents to $63.04. A study published in this week's Journal of the American Medical Association found that cancer patients who take anemia drugs sold by the companies have a 10 percent higher risk of dying than those who didn't take the treatments.
The risks of the anemia drugs are ``well-defined,'' and the newly published analysis ``looks exactly like what we've seen before,'' Roger Perlmutter, Amgen's head of research and development, said in an interview.
Goldman Sachs Group Inc., the largest securities firm, and Citigroup Inc., the biggest U.S. bank, led financial shares to their fourth straight gain. Goldman rose $8.10, or 4.7 percent, to $180.80 for the second-biggest gain in the S&P 500. Citigroup added 77 cents, or 3.1 percent, to $25.72 for the biggest gain in the Dow average.
Bernanke told Congress that the Fed ``will act in a timely manner'' to insure against ``downside risks'' to the economy.
Fed Watch
Traders boosted bets that the Fed will cut interest rates by 0.75 percentage point to 2.25 percent by the central bank's next meeting on March 18. Futures trading showed 10 percent odds of a three-quarter-point cut, compared with no chance yesterday. The remaining bets are for a half-point reduction to 2.5 percent.
The dollar weakened to more than $1.51 per euro for the first time today, and an index that tracks the currency against six major counterparts fell to a record.
The Fed has lowered its target for the overnight lending rate between banks five times since September, most recently to 3 percent on Jan. 30. The rate cuts aimed to blunt the economic impact of bank and brokerage firm losses stemming from the worst U.S. housing decline in more than 20 years.
Freeport-McMoRan Copper & Gold Inc. led mining companies higher as bullion futures rose to a record $967.70 an ounce and copper reached a 21-month high of $3.85 a pound. Freeport- McMoRan rose $3.30, or 3.3 percent, to $103.62.
`Firming Up'
``This is a market which I think is firming up,'' Laszlo Birinyi, president of Westport, Connecticut-based research and investment firm Birinyi Associates Inc., said in an interview with Bloomberg Television. ``People are getting a little more optimistic.''
Technology shares also gained, led by Cisco Systems Inc., Apple Inc. and International Business Machines Corp. Cisco, the biggest maker of computer-networking equipment, rose 88 cents to $24.95 after being added to the ``buy list'' at Wells Fargo Investments. Juniper Networks Inc., the second-largest, rose $1.78, or 6.5 percent, to $29.29, the biggest gain in the S&P 500.
Apple added $3.81 to $122.96. The company said it plans to move up the release of a software kit that gives outside developers the ability to modify its iPhone.
IBM climbed for a fourth day, adding $2.08 to $116.46 after Chief Financial Officer Mark Loughridge said in a statement published on the company's Web site that U.S. business may improve this quarter. The company said there is ``strong customer demand'' in the U.S. for products and services that help customers save costs and improve productivity.
IBM, the world's biggest computer-services company, climbed to a four-month high yesterday and led the market higher after announcing plans to buy back up to $15 billion of its own stock.
Northwest, Delta
Northwest Airlines Corp. and Delta Air Lines Inc. led airline shares lower. Delta, in talks to merge with Northwest, said it hasn't reached a satisfactory agreement, while bargaining between the carriers' pilots unions stalled over seniority. Northwest fell 91 cents to $15.10. Delta dropped 91 cents to $15.
Autodesk Inc. retreated $6.11 to $32.99, the biggest drop in the S&P 500. The software maker reported fourth-quarter profit, excluding compensation and acquisition costs, of 52 cents a share. That missed the 54-cent average of analysts' estimates.
Giants may discover credit crisis is not over
The credit crunch has introduced terms such as CDO - collateral debt obligation – and SIV – structured investment vehicle. Now, meet another potential troublemaker: variable interest entities, or VIEs
Even Goldman Sachs and Lehman Brothers may find they haven't dodged the credit crisis.
The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights.
Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.
The potential for a fire-sale of the assets that would bring another round of charges has “always been our greatest fear,” said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.
VIEs, known as special purpose vehicles before Enron's collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.
Insurers lose strength:
Now that Ambac Financial Group and other guarantors have started to lose their AAA financial strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA, the biggest insurer, said on Monday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.
Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to the Federal Reserve.
“There's a big number at work here and it will have significant consequences,” said J. Paul Forrester, the Chicago-based head of the CDO practice at law firm Mayer Brown. “The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.”
Waiting to unwind:
CreditSights has one of the highest projections for additional losses. Moody's says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.
One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.
Ambac, the world's second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor's on Monday affirmed the AAA of MBIA, the largest “monoline” in the industry, though said the outlook is “negative.”
The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.
Capital injection:
New York-based Ambac may get $3 billion in new capital with the help of Citigroup and Dresdner Bank as early as this week, the Wall Street Journal reported Monday.
“The lightning rod of the monoline fix is so important to so many banks,” said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.
Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they're not the ones that stand to gain or lose the most from the entity's activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the banks is forced to provide financing.
Goldman, the most profitable Wall Street firm, and Lehman, biggest commercial paper dealer, have avoided much of the pain so far.
Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29.
Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $7.5 billion of VIE assets as of Nov. 30, according to a filing also made on Jan. 29. “We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,” Lehman said in the filing.
Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in “significant unconsolidated VIEs,” according to a Feb. 22 filing by the bank. Merrill Lynch, which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSig
Even Goldman Sachs and Lehman Brothers may find they haven't dodged the credit crisis.
The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights.
Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.
The potential for a fire-sale of the assets that would bring another round of charges has “always been our greatest fear,” said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.
VIEs, known as special purpose vehicles before Enron's collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.
Insurers lose strength:
Now that Ambac Financial Group and other guarantors have started to lose their AAA financial strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA, the biggest insurer, said on Monday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.
Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to the Federal Reserve.
“There's a big number at work here and it will have significant consequences,” said J. Paul Forrester, the Chicago-based head of the CDO practice at law firm Mayer Brown. “The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.”
Waiting to unwind:
CreditSights has one of the highest projections for additional losses. Moody's says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.
One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.
Ambac, the world's second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor's on Monday affirmed the AAA of MBIA, the largest “monoline” in the industry, though said the outlook is “negative.”
The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.
Capital injection:
New York-based Ambac may get $3 billion in new capital with the help of Citigroup and Dresdner Bank as early as this week, the Wall Street Journal reported Monday.
“The lightning rod of the monoline fix is so important to so many banks,” said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.
Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they're not the ones that stand to gain or lose the most from the entity's activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the banks is forced to provide financing.
Goldman, the most profitable Wall Street firm, and Lehman, biggest commercial paper dealer, have avoided much of the pain so far.
Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29.
Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $7.5 billion of VIE assets as of Nov. 30, according to a filing also made on Jan. 29. “We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,” Lehman said in the filing.
Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in “significant unconsolidated VIEs,” according to a Feb. 22 filing by the bank. Merrill Lynch, which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSig
AIG Seen Easily Absorbing Mark-to-Market Hit
American International Group Inc. is an "unsinkable ship" because the giant insurer has enough extra capital to absorb a potential mark-to-market hit of $5 billion to $20 billion from its credit derivatives business, analysts at Friedman Billings Ramsey said Wednesday.AIG AIG, part of the Dow Jones Industrial Average, had $20.2 billion of excess capital at the end of September, $3 billion of which was generated during the first three quarters of 2007, according to estimates of Bijan Moazami and his FBR colleaguesThe New York-based company also produces roughly $16 billion of annual operating income, the said in a note to clients.These financial cushions may come in handy when AIG reports fourth-quarter results on Thursday. Earlier in February, the insurer disclosed disagreements with its auditor about how it values some derivative exposures. See full story.The problems are centered on collateralized debt obligations, or CDOs. These complex securities are partly backed by mortgage securities.As house prices have fallen and as delinquencies and foreclosures surge, the market value of these securities have dropped sharply.AIG Financial Products, the insurer's derivatives unit, has a large exposure to these securities. The unit's portfolio of credit derivatives had a net notional exposure of $505 billion at the end of September.More than $62 billion of that was related to CDOs, mainly backed by subprime U.S. residential mortgage-backed securities, Fitch Ratings said.AIG Financial Products sold guarantees on CDOs, using credit-default swaps, a type of derivative-based insurance that pays out in the event of a default. It sold "super senior" credit-default swaps that guaranteed higher-quality parts of CDOs.
Sunday, February 24, 2008
Wall St. futures up; eyes on Merrill, MBIA, Lehman
U.S. stock index futures edged up before the start of Wall Street trading on Friday, with the focus on financial groups Merrill Lynch (MER.N), MBIA (MBI.N) and Lehman Brothers (LEH.N).Only two S&P 500 companies -- natural-gas distributor Nicor (GAS.N) and utility company PG&E (PCG.N) -- are scheduled to report quarterly earnings, and the economic data diary is thin.
At 1040 GMT, Dow Jones futures (DJc1) were up 0.03 percent, S&P 500 futures (SPc1) crept up 0.04 percent and Nasdaq futures (NDc1) gained 0.2 percent.
The indicative Dow Jones index (.DJII), which tracks how the Dow stocks trade in Frankfurt, was 0.2 percent lower.
Shares in Merrill Lynch, the world's largest brokerage, traded 3.8 percent lower in Frankfurt (MER.F) at 1040 GMT.
Merrill President and Chief Operating Officer Greg Fleming said in an interview on Thursday that strategic mergers could pick up again in the second half of this year, but that leveraged buyouts might stay in the doldrums until 2009.
MBIA's Frankfurt-listed shares (MBI.F) were down 0.9 percent. The world's largest bond insurer on Thursday left the Association of Financial Guaranty Insurers, a trade group, after 22 years citing disagreement over the proper direction for the industry.
Coming days and weeks would "probably bring key decisions that will determine the future of the U.S. monoline insurers. A break-up would mean risks of new write-downs on financial products and, therefore, strains for the equity market," Italian bank UniCredit said in a strategy note.
Shares in U.S. investment bank Lehman Brothers (LEH.N) fell 1.8 percent in Frankfurt (LHMH.F), with traders in Europe citing market talk of additional writedowns of up to $15 billion.
SUBPRIME LOSSES
Aioi Insurance Co (8761.T), Japan's fourth-largest non-life insurer, said on Friday it expects to fall into the red this year, with losses on subprime-related investments expected to balloon to about $857 million.
With financial stocks in the spotlight, eyes will also be on the Federal Reserve's announcement due at 1700 GMT of the minimum bid rate for its $30 billion term facility auction (TAF) to be held on February 25.
Federal Reserve Bank of Dallas President Richard Fisher is scheduled to give "An Overview of the U.S. Economy from a Texas Perspective" before the Fort Worth Petroleum Club at 1830 GMT.
Citigroup said in an equity strategy note that recent weak U.S. economic data "is weighing on asset prices, which in turn are making it more expensive for firms to borrow or to invest in expansion."
"This is a dangerous vicious cycle which needs to be broken," Citigroup said, adding that lower interest rates would be necessary to reduce the risk of a drawn-out U.S. recession.
"With further aggressive policy action from the Fed, we suspect that the earliest at which there may be signs of a trough in the U.S. economy is 3-6 months out," said Citigroup, which expects the Fed to cut key rates towards 2 percent over the coming months.
Recession worries contributed to a fall in U.S. stocks on Thursday. The Dow Jones (.DJI) lost 1.2 percent, The S&P 500 (.SPX) slid 1.3 percent and the Nasdaq (.IXIC) dropped 1.2 percent
U.S. Stocks Rise for a Second Week, Led by Energy, Bank Shares
U.S. stocks gained for a second week, led by energy and financial companies, after oil climbed to a record and investors speculated that bond insurers will keep their credit ratings.
Exxon Mobil Corp. and Chevron Corp., the largest U.S. oil producers, led all 36 energy companies in the Standard & Poor's 500 Index higher after oil rose to $101.32 a barrel on Feb. 20. American International Group Inc., the world's largest insurer by assets, and Morgan Stanley, the second-biggest securities firm by market value, gained on a plan to save Ambac Financial Group Inc.'s AAA credit rating and avoid losses on $556 billion of securities it guarantees.
``The financial companies are at the very core of global infrastructure, and they must be stabilized before you see the economy moving forward,'' said Quincy Krosby, chief investment strategist at the Hartford in Hartford, Connecticut, which manages $330 billion. ``When financials lead a downturn, they've got to bring you out.''
The S&P 500 added 0.2 percent to 1,353.11 for the week. The Dow Jones Industrial Average gained 0.3 percent to 12,381.02. The Nasdaq Composite Index decreased 0.8 percent to 2,303.35.
243-Point Turnaround
Rescue talks for the bond insurers sparked a 243-point turnaround in the Dow average during the week's final hour, erasing losses for the holiday-shortened period. The gains overshadowed a drop in industrial shares, including General Electric Co., after the Federal Reserve Bank of Philadelphia's general economic index slumped to the lowest level in seven years. The measure dropped to minus 24, a reading that has always corresponded with a U.S. recession, according to data since 1968 compiled by Bespoke Investment Group LLC.
Exxon gained 2.1 percent to $87.17. Chevron added 2.2 percent to $85.42. Oil climbed 3.5 percent for the week on speculation interest rate cuts will bolster fuel consumption and after Turkish soldiers crossed into northern Iraq, the first major incursion in 11 years.
Ambac climbed 4.8 percent to $10.71. The bond insurer may announce an agreement early next week, according to a person familiar with the discussions. Banks may invest about $3 billion in the company, said the person, who declined to be named because no details have been set.
AAA Rating
A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guaranty units would help banks and municipal debt investors avoid losses on securities it guarantees. Banks stood to lose as much as $70 billion if the top-rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.
Hewlett-Packard Co. posted its steepest weekly advance in 20 months, climbing 8.1 percent to $47.40 after the biggest maker of personal computers reported profit that topped analysts' estimates and raised its annual sales forecast on increasing demand overseas.
Telephone companies in the S&P 500 fell 6.2 percent, the most among 10 industry groups, after Verizon Communications Inc. set off a price war by announcing it will sell unlimited calls for a flat fee of $99.99 a month. AT&T matched it five hours later and Deutsche Telekom AG's T-Mobile USA Inc. followed. Verizon dropped 4.3 percent to $36.20 and AT&T slid 7.7 percent to $34.98. Deutsche Telekom's American depositary receipts fell 1 percent to $18.99.
S&P 500
Companies in the S&P 500 scheduled to report earnings next week include Home Depot Inc., the world's largest home- improvement chain, and Target Corp., the second-largest U.S. discount chain.
Intuit Inc. fell the most in the S&P 500, losing 11 percent to $27.05. The largest maker of tax-preparation software trimmed its annual profit forecast because of slowing sales growth to small companies and a higher tax rate.
Consumer spending in the U.S., which grew at the weakest rate in six months during December's holiday season, probably increased at that pace in January as income growth slowed and Americans struggled with a deepening housing slump, economists surveyed by Bloomberg expect reports this week will show.
Treasury two-year notes posted their first weekly drop this year as traders eliminated bets the Federal Reserve will cut the target lending rate by three-quarters of a percentage point next month. All bets are now for a quarter- to a half-percentage point reduction.
The decline ended a nine-week streak of gains, the longest stretch of advances since 1998. The difference between the two- year note's yield and the 10-year rate narrowed this week for the first time in eight weeks after the central bank stopped short of forecasting a recession.
Exxon Mobil Corp. and Chevron Corp., the largest U.S. oil producers, led all 36 energy companies in the Standard & Poor's 500 Index higher after oil rose to $101.32 a barrel on Feb. 20. American International Group Inc., the world's largest insurer by assets, and Morgan Stanley, the second-biggest securities firm by market value, gained on a plan to save Ambac Financial Group Inc.'s AAA credit rating and avoid losses on $556 billion of securities it guarantees.
``The financial companies are at the very core of global infrastructure, and they must be stabilized before you see the economy moving forward,'' said Quincy Krosby, chief investment strategist at the Hartford in Hartford, Connecticut, which manages $330 billion. ``When financials lead a downturn, they've got to bring you out.''
The S&P 500 added 0.2 percent to 1,353.11 for the week. The Dow Jones Industrial Average gained 0.3 percent to 12,381.02. The Nasdaq Composite Index decreased 0.8 percent to 2,303.35.
243-Point Turnaround
Rescue talks for the bond insurers sparked a 243-point turnaround in the Dow average during the week's final hour, erasing losses for the holiday-shortened period. The gains overshadowed a drop in industrial shares, including General Electric Co., after the Federal Reserve Bank of Philadelphia's general economic index slumped to the lowest level in seven years. The measure dropped to minus 24, a reading that has always corresponded with a U.S. recession, according to data since 1968 compiled by Bespoke Investment Group LLC.
Exxon gained 2.1 percent to $87.17. Chevron added 2.2 percent to $85.42. Oil climbed 3.5 percent for the week on speculation interest rate cuts will bolster fuel consumption and after Turkish soldiers crossed into northern Iraq, the first major incursion in 11 years.
Ambac climbed 4.8 percent to $10.71. The bond insurer may announce an agreement early next week, according to a person familiar with the discussions. Banks may invest about $3 billion in the company, said the person, who declined to be named because no details have been set.
AAA Rating
A rescue that enabled Ambac to retain its AAA rating for the municipal and asset-backed securities guaranty units would help banks and municipal debt investors avoid losses on securities it guarantees. Banks stood to lose as much as $70 billion if the top-rated bond insurers, which include MBIA Inc. and FGIC Corp., lose their credit ratings, Oppenheimer & Co. analysts estimated.
Hewlett-Packard Co. posted its steepest weekly advance in 20 months, climbing 8.1 percent to $47.40 after the biggest maker of personal computers reported profit that topped analysts' estimates and raised its annual sales forecast on increasing demand overseas.
Telephone companies in the S&P 500 fell 6.2 percent, the most among 10 industry groups, after Verizon Communications Inc. set off a price war by announcing it will sell unlimited calls for a flat fee of $99.99 a month. AT&T matched it five hours later and Deutsche Telekom AG's T-Mobile USA Inc. followed. Verizon dropped 4.3 percent to $36.20 and AT&T slid 7.7 percent to $34.98. Deutsche Telekom's American depositary receipts fell 1 percent to $18.99.
S&P 500
Companies in the S&P 500 scheduled to report earnings next week include Home Depot Inc., the world's largest home- improvement chain, and Target Corp., the second-largest U.S. discount chain.
Intuit Inc. fell the most in the S&P 500, losing 11 percent to $27.05. The largest maker of tax-preparation software trimmed its annual profit forecast because of slowing sales growth to small companies and a higher tax rate.
Consumer spending in the U.S., which grew at the weakest rate in six months during December's holiday season, probably increased at that pace in January as income growth slowed and Americans struggled with a deepening housing slump, economists surveyed by Bloomberg expect reports this week will show.
Treasury two-year notes posted their first weekly drop this year as traders eliminated bets the Federal Reserve will cut the target lending rate by three-quarters of a percentage point next month. All bets are now for a quarter- to a half-percentage point reduction.
The decline ended a nine-week streak of gains, the longest stretch of advances since 1998. The difference between the two- year note's yield and the 10-year rate narrowed this week for the first time in eight weeks after the central bank stopped short of forecasting a recession.
Saturday, February 23, 2008
Dollar Falls to 3-Week Low Against Euro on Recession Concern
The dollar fell to a three-week low against the euro on speculation the Federal Reserve will cut borrowing costs next month to avert a recession.
The U.S. currency declined for a second straight week against the euro after a report showed manufacturing in the Philadelphia region contracted the most last month since 2001. Currencies from commodity exporters such as Brazil, Australia and New Zealand gained against the dollar this week after crude oil and gold rose to records.
``The market is seeing increasing risks of a recession, and more Fed rate cuts are coming,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of Man Group Plc. ``It's not a good environment for the dollar.''
The dollar fell 1 percent this week to $1.4827 per euro, and touched the weakest level since Feb. 1. The dollar declined 0.6 percent this week to 107.17 yen from 107.82 on Feb. 15. The euro rose to 158.99 yen, from 158.25 a week earlier.
Brazil's real strengthened to more than 1.70 per dollar for the first time since May 1999 yesterday on speculation that soaring commodity prices and investment in local financial assets will accelerate. Crude oil futures increased to an all-time high of $101.32 a barrel this week.
Australia's dollar reached 92.51 U.S. cents yesterday, the highest level since Nov. 9, and the New Zealand dollar rose to a seven-month high of 81 cents.
Growth Push
The U.S. currency fell 0.7 percent against the euro on Feb. 21, the most in three weeks, after the Federal Reserve Bank of Philadelphia's general economic index declined to minus 24, from minus 20.9 in January.
``The Fed is pushing growth at any cost,'' said Axel Merk, who helps manage the $285 million Merk Hard Currency Fund in Palo Alto, California. ``The dollar will continue to weaken.''
The Fed has lowered its target for the benchmark overnight interest rate by 2.25 percentage points since Sept. 18 to 3 percent as the housing slump threatens to trigger a recession.
Sales of existing homes in the U.S. probably fell for the 10th time in 11 months in January, to an annual rate of 4.8 million, from 4.89 million the previous month, according to the median forecast in a Bloomberg News survey. The National Association of Realtors releases the report on Feb. 25.
Fed Chairman Ben S. Bernanke will testify before Congress on Feb. 27-28, giving his semiannual monetary policy report. Fed officials cut their 2008 U.S. growth forecasts on Feb. 20 and said in the minutes of their last meeting that rates should be held down ``for a time.''
Euro, Fed Futures
Futures on the Chicago Board of Trade show traders see a 96 percent chance of a half-point cut in the Fed's target rate to 2.5 percent on March 18. The balance of bets is on a cut of 0.25 percentage point.
Hedge funds and other large speculators this week increased their futures bets that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed yesterday.
The difference in the number of wagers on an advance in the euro compared with those on a drop -- so-called net longs -- was 14,730 on Feb. 19, rising from a two-year low of 10,295 a week earlier, the data showed.
The euro got a boost this week as rising inflation cooled speculation the European Central Bank will lower its benchmark rate from 4 percent. Inflation in the 15-nation euro region will average 2.6 percent this year, the highest since the common currency's inception in 1999 and up from a previous estimate of 2.1 percent, the European Commission said.
At 3.33 percent, the two-year German bund yields 1.32 percentage points, or 132 basis points, more than similar- maturity Treasuries. The yield gap touched 139 basis points on Jan. 22, the widest since 2002
The U.S. currency declined for a second straight week against the euro after a report showed manufacturing in the Philadelphia region contracted the most last month since 2001. Currencies from commodity exporters such as Brazil, Australia and New Zealand gained against the dollar this week after crude oil and gold rose to records.
``The market is seeing increasing risks of a recession, and more Fed rate cuts are coming,'' said Michael Malpede, a senior currency analyst in Chicago at Man Global Research, part of Man Group Plc. ``It's not a good environment for the dollar.''
The dollar fell 1 percent this week to $1.4827 per euro, and touched the weakest level since Feb. 1. The dollar declined 0.6 percent this week to 107.17 yen from 107.82 on Feb. 15. The euro rose to 158.99 yen, from 158.25 a week earlier.
Brazil's real strengthened to more than 1.70 per dollar for the first time since May 1999 yesterday on speculation that soaring commodity prices and investment in local financial assets will accelerate. Crude oil futures increased to an all-time high of $101.32 a barrel this week.
Australia's dollar reached 92.51 U.S. cents yesterday, the highest level since Nov. 9, and the New Zealand dollar rose to a seven-month high of 81 cents.
Growth Push
The U.S. currency fell 0.7 percent against the euro on Feb. 21, the most in three weeks, after the Federal Reserve Bank of Philadelphia's general economic index declined to minus 24, from minus 20.9 in January.
``The Fed is pushing growth at any cost,'' said Axel Merk, who helps manage the $285 million Merk Hard Currency Fund in Palo Alto, California. ``The dollar will continue to weaken.''
The Fed has lowered its target for the benchmark overnight interest rate by 2.25 percentage points since Sept. 18 to 3 percent as the housing slump threatens to trigger a recession.
Sales of existing homes in the U.S. probably fell for the 10th time in 11 months in January, to an annual rate of 4.8 million, from 4.89 million the previous month, according to the median forecast in a Bloomberg News survey. The National Association of Realtors releases the report on Feb. 25.
Fed Chairman Ben S. Bernanke will testify before Congress on Feb. 27-28, giving his semiannual monetary policy report. Fed officials cut their 2008 U.S. growth forecasts on Feb. 20 and said in the minutes of their last meeting that rates should be held down ``for a time.''
Euro, Fed Futures
Futures on the Chicago Board of Trade show traders see a 96 percent chance of a half-point cut in the Fed's target rate to 2.5 percent on March 18. The balance of bets is on a cut of 0.25 percentage point.
Hedge funds and other large speculators this week increased their futures bets that the euro will gain against the dollar, figures from the Washington-based Commodity Futures Trading Commission showed yesterday.
The difference in the number of wagers on an advance in the euro compared with those on a drop -- so-called net longs -- was 14,730 on Feb. 19, rising from a two-year low of 10,295 a week earlier, the data showed.
The euro got a boost this week as rising inflation cooled speculation the European Central Bank will lower its benchmark rate from 4 percent. Inflation in the 15-nation euro region will average 2.6 percent this year, the highest since the common currency's inception in 1999 and up from a previous estimate of 2.1 percent, the European Commission said.
At 3.33 percent, the two-year German bund yields 1.32 percentage points, or 132 basis points, more than similar- maturity Treasuries. The yield gap touched 139 basis points on Jan. 22, the widest since 2002
Goldman, U.S. brokers may earn 40% less profit, Bernstein says
Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Bear Stearns Cos. may earn 40 percent less profit than estimated in the first quarter because of lower investment banking revenue, said Sanford C. Bernstein & Co.Morgan Stanley may report 12 percent less profit, according to New-York based analyst Brad Hintz, who also cited "challenging" fixed income markets for reduced earnings.Fixed income and trading "will be the center of investor concern this quarter," Hintz wrote in a note. "Market conditions remained challenging through February as troubles spread through a variety of areas within the fixed income market."Investment banking revenue may decline 35 percent on average for the firms, he wrote. "The high margin businesses of equity underwriting and M&A had their weakest quarters since 2005."Hintz cut Bear Stearns' first-quarter profit forecast by 41 percent to $1.59 a share and lowered Lehman's earnings estimate by 42 percent to $1.15. Goldman's profit estimate was cut 45 percent to $3.03 and Morgan Stanley's earnings forecast was reduced 12 percent to $1.49.Morgan Stanley may be hurt the least among the four brokers because it has the most diverse business mix, Hintz wrote. He rates Morgan Stanley at "outperform" and holds "market perform" ratings on Bear, Lehman and Goldman.Wall St. futures up; eyes on Merrill, MBIA, Lehman
U.S. stock index futures edged up before the start of Wall Street trading on Friday, with the focus on financial groups Merrill Lynch , MBIA and Lehman Brothers .
Only two S&P 500 companies -- natural-gas distributor Nicor and utility company PG&E -- are scheduled to report quarterly earnings, and the economic data diary is thin.
At 1040 GMT, Dow Jones futures were up 0.03 percent, S&P 500 futures crept up 0.04 percent and Nasdaq futures gained 0.2 percent.
The indicative Dow Jones index , which tracks how the Dow stocks trade in Frankfurt, was 0.2 percent lower.
Shares in Merrill Lynch, the world's largest brokerage, traded 3.8 percent lower in Frankfurt at 1040 GMT.
Merrill President and Chief Operating Officer Greg Fleming said in an interview on Thursday that strategic mergers could pick up again in the second half of this year, but that leveraged buyouts might stay in the doldrums until 2009.
MBIA's Frankfurt-listed shares were down 0.9 percent. The world's largest bond insurer on Thursday left the Association of Financial Guaranty Insurers, a trade group, after 22 years citing disagreement over the proper direction for the industry.
Coming days and weeks would "probably bring key decisions that will determine the future of the U.S. monoline insurers. A break-up would mean risks of new write-downs on financial products and, therefore, strains for the equity market," Italian bank UniCredit said in a strategy note.
Shares in U.S. investment bank Lehman Brothers fell 1.8 percent in Frankfurt , with traders in Europe citing market talk of additional writedowns of up to $15 billion.
SUBPRIME LOSSES
Aioi Insurance Co , Japan's fourth-largest non-life insurer, said on Friday it expects to fall into the red this year, with losses on subprime-related investments expected to balloon to about $857 million.
With financial stocks in the spotlight, eyes will also be on the Federal Reserve's announcement due at 1700 GMT of the minimum bid rate for its $30 billion term facility auction (TAF) to be held on February 25.
Federal Reserve Bank of Dallas President Richard Fisher is scheduled to give "An Overview of the U.S. Economy from a Texas Perspective" before the Fort Worth Petroleum Club at 1830 GMT.
Citigroup said in an equity strategy note that recent weak U.S. economic data "is weighing on asset prices, which in turn are making it more expensive for firms to borrow or to invest in expansion."
"This is a dangerous vicious cycle which needs to be broken," Citigroup said, adding that lower interest rates would be necessary to reduce the risk of a drawn-out U.S. recession.
"With further aggressive policy action from the Fed, we suspect that the earliest at which there may be signs of a trough in the U.S. economy is 3-6 months out," said Citigroup, which expects the Fed to cut key rates towards 2 percent over the coming months.
Recession worries contributed to a fall in U.S. stocks on Thursday. The Dow Jones lost 1.2 percent, The S&P 500 slid 1.3 percent and the Nasdaq dropped 1.2 percent.
Only two S&P 500 companies -- natural-gas distributor Nicor and utility company PG&E -- are scheduled to report quarterly earnings, and the economic data diary is thin.
At 1040 GMT, Dow Jones futures were up 0.03 percent, S&P 500 futures crept up 0.04 percent and Nasdaq futures gained 0.2 percent.
The indicative Dow Jones index , which tracks how the Dow stocks trade in Frankfurt, was 0.2 percent lower.
Shares in Merrill Lynch, the world's largest brokerage, traded 3.8 percent lower in Frankfurt at 1040 GMT.
Merrill President and Chief Operating Officer Greg Fleming said in an interview on Thursday that strategic mergers could pick up again in the second half of this year, but that leveraged buyouts might stay in the doldrums until 2009.
MBIA's Frankfurt-listed shares were down 0.9 percent. The world's largest bond insurer on Thursday left the Association of Financial Guaranty Insurers, a trade group, after 22 years citing disagreement over the proper direction for the industry.
Coming days and weeks would "probably bring key decisions that will determine the future of the U.S. monoline insurers. A break-up would mean risks of new write-downs on financial products and, therefore, strains for the equity market," Italian bank UniCredit said in a strategy note.
Shares in U.S. investment bank Lehman Brothers fell 1.8 percent in Frankfurt , with traders in Europe citing market talk of additional writedowns of up to $15 billion.
SUBPRIME LOSSES
Aioi Insurance Co , Japan's fourth-largest non-life insurer, said on Friday it expects to fall into the red this year, with losses on subprime-related investments expected to balloon to about $857 million.
With financial stocks in the spotlight, eyes will also be on the Federal Reserve's announcement due at 1700 GMT of the minimum bid rate for its $30 billion term facility auction (TAF) to be held on February 25.
Federal Reserve Bank of Dallas President Richard Fisher is scheduled to give "An Overview of the U.S. Economy from a Texas Perspective" before the Fort Worth Petroleum Club at 1830 GMT.
Citigroup said in an equity strategy note that recent weak U.S. economic data "is weighing on asset prices, which in turn are making it more expensive for firms to borrow or to invest in expansion."
"This is a dangerous vicious cycle which needs to be broken," Citigroup said, adding that lower interest rates would be necessary to reduce the risk of a drawn-out U.S. recession.
"With further aggressive policy action from the Fed, we suspect that the earliest at which there may be signs of a trough in the U.S. economy is 3-6 months out," said Citigroup, which expects the Fed to cut key rates towards 2 percent over the coming months.
Recession worries contributed to a fall in U.S. stocks on Thursday. The Dow Jones lost 1.2 percent, The S&P 500 slid 1.3 percent and the Nasdaq dropped 1.2 percent.
Thursday, February 21, 2008
Oil Retreats on Supply View, Economy
Oil futures retreated from record levels Wednesday as investors, rethinking crude's ability to keep climbing past $100, decided to cash in some of their profits from the market's huge advance.
Expectations that domestic oil supplies rose last week and hints that oil's latest trip into record territory may prompt OPEC to hold production steady weighed on prices. Goldman Sachs advised investors to sell oil futures to lock in profits, although the investment bank said it expects oil to rise to $105 a barrel by the end of the year.
New economic data Wednesday gave investors new reason to doubt oil's ability to sustain such high prices. The Labor Department said its Consumer Price Index, a measure of inflation, rose by 0.4 percent last month, more than economists expected. That jump may mean the Federal Reserve will limit the size of future interest rate cuts.
The Commerce Department, meanwhile, said construction of new homes and apartments rose by 0.8 percent in January, but that applications for building permits, an indicator of future activity, fell by 3 percent.
The latest signs that the economy is cooling come a week after the Energy Department, the Organization of Petroleum Exporting Countries and the International Energy Agency all lowered their oil demand growth forecasts for this year.
"Everybody's saying demand is going to fall off a cliff," said Fadel Gheit, an analyst at Oppenheimer & Co., in New York.
The contract for March delivery of light sweet crude, which expires later Wednesday, fell $1.10 to $98.91 on the New York Mercantile Exchange. On Tuesday, the contract jumped $4.51 to settle at a record $100.01 after earlier rising to a new trading record of $100.10. April crude oil, which will become the front-month contract on Thursday, fell $1.25 to $98.45 a barrel.
Tuesday's rally came on a paucity of solid news about oil supply and demand fundamentals. Many analysts blamed the spike on speculative investment flows into the oil market driven by a falling dollar. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling. Falling interest rates tend to weaken the dollar; the prospect that Wednesday's inflation number may limit future Fed rate cuts boosted the dollar Wednesday, giving energy investors another reason to sell oil futures.
There are also concerns that high oil prices _ and the higher gasoline and heating oil prices they spawn _ are sewing the seeds of their own destruction by contributing to the economic slowdown.
"The price gains raise questions about their sustainability in the face of eroding fundamental strength," said Antoine Halff, an analyst a Newedge USA LLC in a research note.
At the pump, gas prices rose 2.1 cents to a national average of $3.053 a gallon Wednesday, according to AAA and the Oil Price Information Service. In it weekly survey, the Energy Department said regular gasoline rose 8.2 cents last week to an average of $3.042 a gallon. Retail gas prices, which typically lag the futures market, are following oil higher. Analysts and the Energy Department expect prices to peak this spring well above last May's record $3.227 a gallon.
Other energy futures also fell Wednesday. March gasoline slipped 4.34 cents to $2.5597 a gallon on the Nymex, while March heating oil fell 3.99 cents to $2.7215 a gallon. March natural gas fell 0.9 cent to $8.968 per 1,000 cubic feet.
In London, April Brent crude fell $1.51 to $97.05 a barrel on the ICE Futures exchange.
Expectations that domestic oil supplies rose last week and hints that oil's latest trip into record territory may prompt OPEC to hold production steady weighed on prices. Goldman Sachs advised investors to sell oil futures to lock in profits, although the investment bank said it expects oil to rise to $105 a barrel by the end of the year.
New economic data Wednesday gave investors new reason to doubt oil's ability to sustain such high prices. The Labor Department said its Consumer Price Index, a measure of inflation, rose by 0.4 percent last month, more than economists expected. That jump may mean the Federal Reserve will limit the size of future interest rate cuts.
The Commerce Department, meanwhile, said construction of new homes and apartments rose by 0.8 percent in January, but that applications for building permits, an indicator of future activity, fell by 3 percent.
The latest signs that the economy is cooling come a week after the Energy Department, the Organization of Petroleum Exporting Countries and the International Energy Agency all lowered their oil demand growth forecasts for this year.
"Everybody's saying demand is going to fall off a cliff," said Fadel Gheit, an analyst at Oppenheimer & Co., in New York.
The contract for March delivery of light sweet crude, which expires later Wednesday, fell $1.10 to $98.91 on the New York Mercantile Exchange. On Tuesday, the contract jumped $4.51 to settle at a record $100.01 after earlier rising to a new trading record of $100.10. April crude oil, which will become the front-month contract on Thursday, fell $1.25 to $98.45 a barrel.
Tuesday's rally came on a paucity of solid news about oil supply and demand fundamentals. Many analysts blamed the spike on speculative investment flows into the oil market driven by a falling dollar. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling. Falling interest rates tend to weaken the dollar; the prospect that Wednesday's inflation number may limit future Fed rate cuts boosted the dollar Wednesday, giving energy investors another reason to sell oil futures.
There are also concerns that high oil prices _ and the higher gasoline and heating oil prices they spawn _ are sewing the seeds of their own destruction by contributing to the economic slowdown.
"The price gains raise questions about their sustainability in the face of eroding fundamental strength," said Antoine Halff, an analyst a Newedge USA LLC in a research note.
At the pump, gas prices rose 2.1 cents to a national average of $3.053 a gallon Wednesday, according to AAA and the Oil Price Information Service. In it weekly survey, the Energy Department said regular gasoline rose 8.2 cents last week to an average of $3.042 a gallon. Retail gas prices, which typically lag the futures market, are following oil higher. Analysts and the Energy Department expect prices to peak this spring well above last May's record $3.227 a gallon.
Other energy futures also fell Wednesday. March gasoline slipped 4.34 cents to $2.5597 a gallon on the Nymex, while March heating oil fell 3.99 cents to $2.7215 a gallon. March natural gas fell 0.9 cent to $8.968 per 1,000 cubic feet.
In London, April Brent crude fell $1.51 to $97.05 a barrel on the ICE Futures exchange.
Lehman Will Revise First-Quarter Oil Price Forecast
Lehman Brothers Holdings Inc. will revise its first-quarter New York crude oil price forecast of $86 a barrel, chief energy economist Edward Morse said.
``We will be revising it up,'' Morse said in an interview with Bloomberg television. Oil prices, which rose to a record $100.10 a barrel on the New York Mercantile Exchange yesterday, are being driven by financial markets rather than supply-demand fundamentals, he said.
The Organization of Petroleum Exporting Countries is unlikely to reduce output at its March 5 meeting with prices at current levels, Morse said. The 13-member group, which produces more than 40 percent of the world's oil, left production targets unchanged at its previous Feb. 1 conference.
``It's unlikely that at $100 a barrel anybody's going to be in the mood for a cut,'' said Morse. ``The Saudis are uncomfortable at $100 oil.''
Consumption in export-driven emerging markets won't be immune to a slowdown in the U.S., the world's biggest energy user, Morse said. Some analysts have said that Asian markets are ``decoupled'' from the U.S. and so demand there can weather a U.S. recession.
``We will be seeing an impact on Chinese demand, probably after the Olympics, and that's because of what's happening in the U.S. economy,'' he said.
Yesterday's price record was part of a broader flow of investment into commodities rather than the result of any genuine threat to crude supplies, Morse said.
``It's certainly not oil market fundamentals and nothing to do with geopolitics,'' he said. ``This is a commodities issue rather than an oil market issue.''
``We will be revising it up,'' Morse said in an interview with Bloomberg television. Oil prices, which rose to a record $100.10 a barrel on the New York Mercantile Exchange yesterday, are being driven by financial markets rather than supply-demand fundamentals, he said.
The Organization of Petroleum Exporting Countries is unlikely to reduce output at its March 5 meeting with prices at current levels, Morse said. The 13-member group, which produces more than 40 percent of the world's oil, left production targets unchanged at its previous Feb. 1 conference.
``It's unlikely that at $100 a barrel anybody's going to be in the mood for a cut,'' said Morse. ``The Saudis are uncomfortable at $100 oil.''
Consumption in export-driven emerging markets won't be immune to a slowdown in the U.S., the world's biggest energy user, Morse said. Some analysts have said that Asian markets are ``decoupled'' from the U.S. and so demand there can weather a U.S. recession.
``We will be seeing an impact on Chinese demand, probably after the Olympics, and that's because of what's happening in the U.S. economy,'' he said.
Yesterday's price record was part of a broader flow of investment into commodities rather than the result of any genuine threat to crude supplies, Morse said.
``It's certainly not oil market fundamentals and nothing to do with geopolitics,'' he said. ``This is a commodities issue rather than an oil market issue.''
JPMorgan earmarks $750 million for Asia private equity
JP Morgan said on Tuesday it had earmarked $750 million for private equity investment in Asia, aiming to take minority stakes in businesses in a region where buyouts are notoriously difficult.
The U.S. investment bank said in a statement that it wanted to invest in ventures with existing corporate clients in several areas, including the consumer, retail, industrial, health care and natural resources sectors.
The expansion will be headed by Varun Bery and John Troy, co-founders of TVG Capital Partners, which invested in telecommunications in China, Australia, South Korea and India.
TVG Capital is being wound down, a person familiar with the matter told Reuters.
"This investment is part of our intensified growth strategy in Asia Pacific," JPMorgan Asia Pacific chief executive Gaby Abdelnour said in the statement.
The new team will be the Asia arm of JPMorgan's Private Equity Principal Investments business, which is led by Bob Case from New York.
JPMorgan has also invested in Asian private equity through its units One Equity Partners and Principal Investment Management.
Private equity funds run by the likes of Morgan Stanley (MS.N), Blackstone Group LP (BX.N) and Carlyle Group (CYL.UL) are ratcheting up their investments in the fast-growing Indian and Chinese markets as a global credit crunch hampers big buyouts in Europe and the United States.
But in a region where full-scale buyouts are often frowned upon and are difficult because families are still the main players in business, funds have had to settle mostly for taking minority stakes.
"We see a big opportunity to enhance JPMorgan's private equity base in the region," Troy said in the statement.
The U.S. investment bank said in a statement that it wanted to invest in ventures with existing corporate clients in several areas, including the consumer, retail, industrial, health care and natural resources sectors.
The expansion will be headed by Varun Bery and John Troy, co-founders of TVG Capital Partners, which invested in telecommunications in China, Australia, South Korea and India.
TVG Capital is being wound down, a person familiar with the matter told Reuters.
"This investment is part of our intensified growth strategy in Asia Pacific," JPMorgan Asia Pacific chief executive Gaby Abdelnour said in the statement.
The new team will be the Asia arm of JPMorgan's Private Equity Principal Investments business, which is led by Bob Case from New York.
JPMorgan has also invested in Asian private equity through its units One Equity Partners and Principal Investment Management.
Private equity funds run by the likes of Morgan Stanley (MS.N), Blackstone Group LP (BX.N) and Carlyle Group (CYL.UL) are ratcheting up their investments in the fast-growing Indian and Chinese markets as a global credit crunch hampers big buyouts in Europe and the United States.
But in a region where full-scale buyouts are often frowned upon and are difficult because families are still the main players in business, funds have had to settle mostly for taking minority stakes.
"We see a big opportunity to enhance JPMorgan's private equity base in the region," Troy said in the statement.
Ubicom Secures $18 Million in Series 4 Financing Led by Lehman Brothers Venture Partners and Samsung Venture Investment Corporation
Ubicom INC, a leading provider of communications processor and software solutions, announced the completion of its Series 4 financing round totaling $18 million. Led by Lehman Brothers Venture Partners and Samsung Venture Investment Corporation, this financing also includes the company's existing investors. Brian Melton, a partner in Lehman Brothers Venture Partners, will join the board of directors.
“With their innovative and proven processor and software platform, Ubicom is well positioned to take advantage of the transition to higher speed networks and the proliferation of network connected media devices in the home,” said Brian Melton of Lehman Brothers. “We see many opportunities where this technology can be applied both now and in the future.”
“This new round of funding will allow us to scale in our engineering, sales and marketing efforts, as we continue our rapid revenue growth and expansion into new markets,” said Cathal Phelan, CEO of Ubicom. “The next couple of years promise to be exciting times for Ubicom as the adoption of our StreamEngine® 5000 family of processor and software platforms take a firm hold in the marketplace.”
“With their innovative and proven processor and software platform, Ubicom is well positioned to take advantage of the transition to higher speed networks and the proliferation of network connected media devices in the home,” said Brian Melton of Lehman Brothers. “We see many opportunities where this technology can be applied both now and in the future.”
“This new round of funding will allow us to scale in our engineering, sales and marketing efforts, as we continue our rapid revenue growth and expansion into new markets,” said Cathal Phelan, CEO of Ubicom. “The next couple of years promise to be exciting times for Ubicom as the adoption of our StreamEngine® 5000 family of processor and software platforms take a firm hold in the marketplace.”
Tuesday, February 19, 2008
Barclays writedown raised to $3.1-billion
Barclays Plc, Britain's third-biggest bank, raised its 2007 writedown on the value of risky assets to £1.6-billion pounds ($3.1-billion U.S.) but reported profits broadly in line with analysts' expectations.
Barclays is the first big U.K. bank to report earnings after a turbulent year and analysts said Tuesday's numbers — including a lower-than-expected 300 million pound increase in writedowns and a 10 per cent dividend rise — were good news for the sector.
Profits at Barclays Capital (BarCap), its investment bank arm, rose 5 per cent to a record £2.34-billion, above expectations.
“Overall, the numbers came in broadly in line with our expectations and consensus, and that's a relief,” said Mamoun Tazi, analyst at MF Global. “BarCap performed in line despite the writedowns, which highlights the fact the underlying business is very strong.”
Barclays reported a 2007 pretax profit of £7.08-billion, down from £7.14-billion in 2006 but just above an average forecast of £7.05-billion from Reuters Estimates. Underlying profits, which exclude sales of businesses, rose 3 per cent.
The bank said it is confident it knows where its risks are and is comfortable with the current levels of writedowns, reassuring investors after Credit Suisse announced earlier on Tuesday a shock $2.85-billion (U.S.) write-down for the first quarter of 2008.
Barclays shares fell as much as 4.5 per cent in early trade, but by 1210 GMT had bounced back to trade up 3.3 per cent at 475.25 pence, valuing it at about £29-billion.
Its U.K. banking business was in line with expectations and both retail banking and Barclaycard, where profits rose 18 per cent, benefited from a drop in bad-debt charges, although there was a jump in impairments on U.S. subprime mortgages.
Barclays is striving to reassure investors it can grow its domestic and international retail arm and has a clear strategy after losing a bid battle to buy Dutch rival ABN AMRO last year which would have made it a top 10 global bank.
Overseas businesses contributed two-thirds of group profit, compared with just 20 per cent in 2003, and the bank added 600 international branches, boosting distribution by a third.
“Our performance in 2007 gives us a lot of confidence,” John Varley, chief executive, told reporters on a conference call.
“The market threw pretty much everything it could do at the capital markets businesses and you can see the results that Barclays has generated.”
An immediate concern is the impact of the credit crunch. Global banks have lost over $140-billion (U.S.) from their exposure to risky assets, and capital markets business has slowed sharply.
Mr. Varley said BarCap had seen “good performance on the income line” in capital markets businesses in the first weeks of 2008.
Bob Diamond, head of BarCap, said “very difficult and challenging market conditions” would continue for the next six months, but said a U.S. economic slowdown could be “shorter and shallower” than the consensus forecast.
He said the threat of further writedowns would largely depend on economic and market conditions, but he was comfortable with the risks facing the bank, including potential losses from trouble in the U.S. bond insurance sector.
BarCap's losses arising from credit-market turbulence were £1.64-billion last year, net of gains of £658-million from widening credit spreads which reduced the carrying value of notes held on its balance sheet.
Barclays had previously announced a £1.3-billion net writedown on assets linked to U.S. subprime mortgages, which included £400-million in gains on valuation of notes.
The bank said its exposure to collateralized debt obligations stood at £6-billion before hedging, while its exposure to Alt-A mortgages — which are of higher quality than subprime loans but also considered risky — rose to £4.9-billion and its exposure to U.S. monoline insurers totals £1.3-billion.
“I can't predict where the markets are going this year but I'm confident that we know where our risks are,” Mr. Diamond told Reuters in an interview.
BarCap would use the tough market conditions to build up in the United States, he said. Barclays lifted its final dividend to 22.5 pence per share, raising its full-year payout to 34 pence, up 10 per cent.
Barclays is the first big U.K. bank to report earnings after a turbulent year and analysts said Tuesday's numbers — including a lower-than-expected 300 million pound increase in writedowns and a 10 per cent dividend rise — were good news for the sector.
Profits at Barclays Capital (BarCap), its investment bank arm, rose 5 per cent to a record £2.34-billion, above expectations.
“Overall, the numbers came in broadly in line with our expectations and consensus, and that's a relief,” said Mamoun Tazi, analyst at MF Global. “BarCap performed in line despite the writedowns, which highlights the fact the underlying business is very strong.”
Barclays reported a 2007 pretax profit of £7.08-billion, down from £7.14-billion in 2006 but just above an average forecast of £7.05-billion from Reuters Estimates. Underlying profits, which exclude sales of businesses, rose 3 per cent.
The bank said it is confident it knows where its risks are and is comfortable with the current levels of writedowns, reassuring investors after Credit Suisse announced earlier on Tuesday a shock $2.85-billion (U.S.) write-down for the first quarter of 2008.
Barclays shares fell as much as 4.5 per cent in early trade, but by 1210 GMT had bounced back to trade up 3.3 per cent at 475.25 pence, valuing it at about £29-billion.
Its U.K. banking business was in line with expectations and both retail banking and Barclaycard, where profits rose 18 per cent, benefited from a drop in bad-debt charges, although there was a jump in impairments on U.S. subprime mortgages.
Barclays is striving to reassure investors it can grow its domestic and international retail arm and has a clear strategy after losing a bid battle to buy Dutch rival ABN AMRO last year which would have made it a top 10 global bank.
Overseas businesses contributed two-thirds of group profit, compared with just 20 per cent in 2003, and the bank added 600 international branches, boosting distribution by a third.
“Our performance in 2007 gives us a lot of confidence,” John Varley, chief executive, told reporters on a conference call.
“The market threw pretty much everything it could do at the capital markets businesses and you can see the results that Barclays has generated.”
An immediate concern is the impact of the credit crunch. Global banks have lost over $140-billion (U.S.) from their exposure to risky assets, and capital markets business has slowed sharply.
Mr. Varley said BarCap had seen “good performance on the income line” in capital markets businesses in the first weeks of 2008.
Bob Diamond, head of BarCap, said “very difficult and challenging market conditions” would continue for the next six months, but said a U.S. economic slowdown could be “shorter and shallower” than the consensus forecast.
He said the threat of further writedowns would largely depend on economic and market conditions, but he was comfortable with the risks facing the bank, including potential losses from trouble in the U.S. bond insurance sector.
BarCap's losses arising from credit-market turbulence were £1.64-billion last year, net of gains of £658-million from widening credit spreads which reduced the carrying value of notes held on its balance sheet.
Barclays had previously announced a £1.3-billion net writedown on assets linked to U.S. subprime mortgages, which included £400-million in gains on valuation of notes.
The bank said its exposure to collateralized debt obligations stood at £6-billion before hedging, while its exposure to Alt-A mortgages — which are of higher quality than subprime loans but also considered risky — rose to £4.9-billion and its exposure to U.S. monoline insurers totals £1.3-billion.
“I can't predict where the markets are going this year but I'm confident that we know where our risks are,” Mr. Diamond told Reuters in an interview.
BarCap would use the tough market conditions to build up in the United States, he said. Barclays lifted its final dividend to 22.5 pence per share, raising its full-year payout to 34 pence, up 10 per cent.
Paulson, Bernanke: Slow growth ahead
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson both acknowledged problems in the U.S. economy Thursday, but both said they believe the nation will avoid falling into recession.The two made their comments at a hearing before the Senate Banking Committee about the economy. Their testimony comes in the wake of troubling economic readings that have raised recession fears on Wall Street.
But while Paulson and Bernanke repeatedly insisted they expect the economy to avoid shifting into reverse - thanks in part to a series of interest rate cuts by the Fed and a $170 billion economic stimulus package signed by President Bush Wednesday - they conceded the economy faces additional headwinds.
Bernanke and Paulson both said the outlook for the economy is noticeably worse than it was as recently as a few months ago, and both expect cuts in official growth forecasts from the administration and the Fed in upcoming months.
The Fed is currently predicting 1.8% growth for this year, but Bernanke said a new forecast would be finalized next week. The Council of Economic Advisors' most recent estimate was for the economy to grow by 2.7% in 2008.
More losses, tight credit ahead
Bernanke said he believes major banks and Wall Street firms are likely to take additional earnings hits tied to bad investments in subprime mortgages. That could lead to tighter lending standards and contribute to an overall slowdown.
"More expensive and less available credit seems likely to continue to be a source of restraint on economic growth," Bernanke said.
But he added he's not worried about bank failures because he thinks banks entered the current downturn with sufficient capital and have been able to raise additional funds.
Some of the panel members praised the two for the steps taken so far to spur the economy.
The Fed last month made two significant interest rate cuts: three-quarters of a percentage point at an emergency meeting, followed by half a point eight days later.
Bernanke said Thursday that the Federal Open Market Committee, its rate-setting body, was ready to act again if further economic readings justify it.
But some senators criticized the pair, suggesting the administration and the central bank are at least partly to blame for the current economic problems, due to lax oversight and lack of early response to the downturn in housing.
Sen. Charles Schumer, D-N.Y., suggested the problems in credit and financial markets pose a greater threat to the economy than a slowdown in consumer spending.
"Aren't you underestimating, not giving enough attention to, the severity of the problem in the credit markets?" asked Schumer. He said Wall Street executives he's talked to "seem much more worried" about credit woes than Paulson and Bernanke.
Paulson, a former CEO of Goldman Sachs (GS, Fortune 500), responded that he also spoke regularly with top Wall Street executives, adding "some are more worried than others."
Paulson on defensive
Sen. Robert Menendez, D-N.J., pointed out that Goldman Sachs is one of the growing number of investment banks forecasting a recession this year and suggested that Paulson and Bernanke "hit the snooze button" when alarm bells about the economy first went off last year.
Menendez said he wasn't trying to talk down the economy, but that he was looking for "honest assessments" from Paulson.
Paulson bristled at the comments, telling Menendez, "If you're trying to talk the economy up, I'd hate to see you talk it down."
Menendez shot back, "I'm just trying not to hide my head in the sand."
"I'm not either," responded the Treasury Secretary.
The two also were asked to explain why investments in many major banks and Wall Street firms by sovereign wealth funds should not be a concern.
Sovereign wealth funds - large pools of money controlled by foreign countries - have taken stakes in recent months in Citigroup, Merrill Lynch and Morgan Stanley .
Paulson said these investments are an important endorsement of the U.S. financial system and that they do not pose a risk of foreign governments having undue influence on major banks here.
"I think we need to be vigilant. I don't think we need to be fearful," said Paulson.
Paulson says economy 'fundamentally strong'
Throughout the hearing, Paulson and Bernanke repeated that they expect slower growth and not a recession.
Paulson said the economy "is fundamentally strong, diverse and resilient" and that the main problem is that it is "undergoing a significant and necessary housing correction."
But Senate Banking Chairman Christopher Dodd, D-Conn., said the slowdown is due to a crisis of confidence among both consumers and investors.
Dodd was critical of some of the Bush administration's housing efforts, including the freeze on foreclosures announced this week by Paulson and some of the country's leading mortgage lenders.
"It is a lifeline more to lenders than to borrowers in my view," said Dodd.
Sen. Richard Shelby of Alabama, the ranking Republican on the committee, said he's concerned that the mortgage meltdown is spreading to the rest of the economy.
"One thing that is now clear to all of us is the subprime mortgage problems are not contained," said Shelby.
He added that he doubts whether the stimulus package would prove to be effective.
"Even if every consumer spends their $600 tax rebate, I've equated it to pouring a glass of water in the ocean and expecting it to make a difference," Shelby said. "I hope I'm wrong."
Pittsburgh Hospital Redeems `Loan Shark' Auction Debt
The University of Pittsburgh Medical Center plans to redeem $430 million of its bonds to stem as much as $500,000 a week in losses caused by a crisis roiling the market for so-called auction-rate securities.The hospital offered to buy back $91 million of its debt yesterday, and will make similar offers for almost $340 million more, according to Tal Heppenstall, UPMC's treasurer. Holders have until March 19 to sell the bonds back for $100.01 of par value plus accrued interest, according to a notice posted on Bloomberg.
Funding costs soared nationwide in the $330 billion market for auction-rate securities as banks from Citigroup Inc. to Goldman Sachs Group Inc. stopped bidding for the debt at the periodic sales they organize. New York state, with $4 billion of auction debt, may convert the bonds to a fixed rate or a different type of variable-rate security, state budget director Laura Anglin said in an interview in Albany last week.
``It's outrageous,'' Heppenstall said. ``We're a AA rated credit. We don't need to get financing from loan sharks.''
Auction-rate securities are long-term bonds on which the interest resets after auctions held every 7, 28 or 35 days. The bonds go to the bidder willing to accept the lowest rate, or remain with current holders and pay the maximum, or so-called penalty, rate if there are no bidders.
Record Rates
The average rate for seven-day municipal auction bonds rose to a record 6.59 percent on Feb. 13 from 4.03 percent the previous week, according to indexes compiled by the Securities Industry and Financial Markets Association.
New York state taxpayers' weekly borrowing costs increased $2.3 million after rates on Dormitory Authority bonds sold for the City University of New York rose to as high as 6.26 percent last week from 3.42 percent. Buffalo's rate on water system revenue bonds soared to 11 percent from 3.30 percent.
Scores of counties, hospitals and colleges are rushing to convert auction-rate securities to lower borrowing costs. On Feb. 15, the Children's Hospital of Philadelphia notified bondholders that it intended to convert $170 million of debt insured by MBIA Inc. with rates that surged as high as 10.05 percent.
St. Louis-based BJC Health System yesterday filed notice that it intends to refund or convert $243.6 million of auction- rate debt insured by FGIC Corp. Rates on the debt have increased as high as 11.99 percent.
Rigged Bids
Until this month, bankers who ran auctions prevented failures by buying bonds. Regulators allow dealers to bid when they choose, and to control auction information as long as they disclose that they might submit bids. Bankers aren't required to buy the bonds and don't have to disclose their purchases, the range of bids or when auctions fail.
Information on auction bonds is scarce. Local governments don't make results or bidding details publicly available as is done with traditional competitive bond sales.
The Securities and Exchange Commission fined banks in a settlement over bid-rigging two years ago. The U.S. municipal bond market's main regulator, the Municipal Securities Rulemaking Board, plans rules requiring banks to disclose more, including the interest rate, bidding details and information about failures.
`That's Enough'
Buyers at last week's auctions for UPMC debt bid just less than the 18 percent penalty rate set for the hospital's bonds. On Feb. 14, $41 million in UPMC securities, which previously sold for a yield of 3.5 percent, were bid at 17.23 percent.
Heppenstall said he believes hedge funds are buying the debt. Other UPMC securities were being bid at 14.99 percent versus a penalty rate of 15 percent, he said.
``We're stuck in a position where high interest rates are costing us half a million a week,'' Heppenstall said. ``So we came up with a proposal for UPMC that we think has wide applications.''
After repurchasing the auction-rate securities using local bank credit lines, the Pittsburgh hospital plans to issue long- term, fixed-rate debt, Heppenstall said.
``We put up with this for a week, but that's enough.''
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