The cost to protect the bonds of Iceland's three biggest lenders from default rose after central bank Governor David Oddsson said ``unscrupulous dealers'' are trying to break the country's financial system.
Credit-default swaps on Kaupthing Bank hf, the nation's largest lender, increased to a record 16.5 percent upfront and 5 percent a year to protect 10 million euros ($15.8 million) of bonds, CMA Datavision prices show. The cost rose from 15.8 percent in advance and implies a 59 percent risk of default within five years, according to a JPMorgan Chase & Co. valuation model.
Oddsson called for an international investigation into attempts to drive Iceland's economy ``to its knees,'' in a speech on March 28. The central bank was forced to raise its benchmark rate to a record 15 percent last week to defend the krona after a 30 percent slump against the euro this year.
``The longer this goes on, the worse it gets,'' said Olivia Frieser, a London-based bank analyst at BNP Paribas SA, France's biggest lender. ``It is a question of confidence.''
The nation of 300,000 has been among the hardest hit as the credit market freeze prompted investors to shun all but the safest assets. The financial sector's net $35.3 billion of debt represents 211 percent of the country's gross domestic product, according to Paul Rawkins, a senior director at Fitch Ratings in London.
``Iceland has been likened to a hedge fund because the banks borrowed to invest in equity assets,'' Rawkins said in an interview. ``It was a punt on getting higher returns to pay off the debt. They are exposed now, and sentiment has shifted against them.''
Default Cost
The cost to protect the country's lenders from default is the highest of 81 banks worldwide with credit-default swaps listed on Bloomberg.
Credit-default swaps on Glitnir Banki hf, Iceland's third- biggest bank, traded at 17 percent upfront and 5 percent a year, according to CMA, up from 16 percent in advance. The cost implies a 60 percent risk of default, according to the JPMorgan model. The contracts have soared from 2.02 percent, or 202 basis points, with no upfront payment at the start of the year.
Contracts on Landsbanki Islands hf, the second-largest lender, rose 25 basis points to 8.07 percent, CMA prices show. The credit-default swaps traded at 9.5 percent upfront and 5 percent a year before closing at 7.82 percent with no advance payment on March 28, according to CMA.
A basis point on a credit-default swap contract protecting 10 million euros of debt from default is equivalent to 1,000 euros a year.
`Unpleasant Odor'
Attacks on the country's Reykjavik-based banks ``give off an unpleasant odor of unscrupulous dealers who have decided to make a last stab at breaking down the Icelandic financial system,'' Oddsson said at the central bank's annual meeting in Reykjavik. ``They will not get away with it.''
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicate deterioration in the perception of credit quality; a decline, the opposite.
``Its very important that the Icelandic financial supervisory authority, in cooperation with other countries, investigates the market and determines whether the allegations are true,'' Glitnir spokesman Bjoern Richard Johansen in Reykjavik said in a phone interview today.
Landsbanki spokesman Andrew Walton and Kaupthing spokesman Jonas Sigurgeirsson were not immediately available for comment.
Legal Action
Kaupthing may take legal action against Bear Stearns Cos., the collapsed U.S. broker, which arranged a trip to Iceland in January by three of its own executives and representatives of four hedge funds, the Financial Times reported today. If Kaupthing decides to file a lawsuit, it will be able to subpoena e-mails and records from Bear Stearns and possibly the hedge funds, the newspaper said.
Bear Stearns London-based spokeswoman Jessica Shepherd- Smith didn't provide an immediate comment.
Credit-default swaps on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 25 basis points to 580 today, according to JPMorgan.
The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 6 basis points to 123.5, JPMorgan prices show.
The CDX North America Investment Grade Index increased 1.5 basis points to 143 in New York, according to broker Phoenix Partners Group.
Monday, March 31, 2008
Paulson Proposes U.S. Regulatory Overhaul, Broader Fed Role
Treasury Secretary Henry Paulson proposed the broadest overhaul of U.S. financial regulation since the Great Depression, saying the system for overseeing American capitalism needs to be better prepared for ``inevitable market disruptions.''
``Our major financial services companies are becoming larger, more complex and more difficult to manage,'' Paulson said in the text of remarks at the Treasury's headquarters in Washington.
Paulson's 218-page ``Blueprint for Regulatory Reform,'' commissioned two months before credit markets seized up in August, said more rules aren't ``the answer'' to the current period of turmoil. The former chairman of Goldman Sachs Group Inc. said the structure of regulating banks, securities firms and insurance companies is outmoded, and the Federal Reserve should expand its oversight of financial services beyond banks.
``We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions, one that will better protect investors and consumers,'' Paulson said.
The Fed, which earlier this month engineered JPMorgan Chase & Co.'s purchase of Bear Stearns Cos. and became lender of last resort to the biggest bond dealers, will oversee ``market stability,'' under proposals Paulson unveiled. The Securities and Exchange Commission, traditionally the main regulator of Wall Street firms, will be merged with the Commodity Futures Trading Commission.
Most of Paulson's proposals will require congressional approval.
New Fed Authority
The Treasury recommended that the Fed share authority over banks, securities firms and insurers in monitoring corporate disclosures, writing rules and stepping in to prevent economic crisis.
``To do its job as the market stability regulator, the Fed would have to be able to evaluate the capital, liquidity and margin practices across the financial system and their potential impact on overall financial stability,'' Paulson said.
The plan also suggests a distinction be made between the Fed's ``normal'' lender-of-last-resort discount window to help banks meet short-term funding needs and ``market stability'' lending to help stave off funding shortages and panics. In that function, loans could be extended to federally chartered insurers and financial institutions.
``The Fed must have the necessary information to perform its role as it temporarily provides liquidity to non-banks,'' Paulson said. ``But it would be premature to assume these institutions should have permanent access to the Fed's discount window and permanent supervision by the Fed.''
No `Comprehensive Design'
Changes to the U.S. regulatory system, parts of which date back to the Civil War, have been proposed in the past, only to be thwarted in Congress and frustrated by industry opposition. The Presidential election will make it harder for the Bush administration to push through changes in its final year, said Bill Isaac, who was chairman of the Federal Deposit Insurance Corp. between 1981 and 1985.
``It's a lame duck administration, so it automatically means they have less credibility than they would have if they were in their first year,'' said Isaac, who now heads The Secura Group, a financial consulting firm in Vienna, Virginia. ``And the known devil is better than the unknown devil in the minds of those who are regulated.''
Reich Bets on Survival
John Reich, director of the Office of Thrift Supervision, said he's skeptical that the combination of his agency with the Office of Comptroller of the Currency, as proposed by Paulson, will be easily achieved.
``Expect to see news stories and renewed questions about what the future will hold,'' Reich wrote in letter to employees on March 28. ``The 20th anniversary of the OTS is next year. We can all expect -- despite predictions over the years to the contrary -- to be celebrating it.''
The OTS, a Treasury division created in 1989 after the savings-and-loan crisis, oversees lenders including Calabasas, California-based Countrywide Financial Corp., the biggest U.S. mortgage lender, and Seattle-based Washington Mutual Inc., the largest U.S. savings and loan.
``The bulk of these regulatory responses made sense at the time they were created, but as we look at today's financial markets, the lack of a comprehensive design in clear,'' Paulson said. He added that ``with few exceptions, the recommendations in this blueprint should not and will not be implemented until after the present market difficulties are past.''
Political Obstacles
In his letter, Reich outlined obstacles to Paulson's plan, saying congressional debate and hearings could stretch into next year, when a new Congress and a new president ``may well have their own priorities and agendas.''
A dozen similar efforts by presidents, legislators and others over the last 60 years never ``became reality,'' Reich wrote. His office distributed the letter to reporters on the weekend.
He also said there was a lack of industry support for restructuring the regulatory system, including opposition from the American Bankers Association to merging the OTS with another agency.
Treasury's proposal would ``create a more coherent supervisory scheme'' by ending ``some of the inconsistencies arising from today's patchwork system,'' Lou Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm, said in a report.
`Moral Hazard'
Still, expanding the Fed's role to stabilize markets would exacerbate the ``moral hazard problems'' stemming from the central bank's decision to lend money to investment banks after the near-collapse of Bear Stearns, said Crandall, who used to work at the New York Fed.
So-called moral hazard is the notion that bailouts encourage financial companies to take risk because they assume the government will always come to the rescue.
``The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,'' Paulson said.
``The Fed will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity-pool operators,'' he added. Rather than focus on the health of the particular organization, it will focus on whether a firm's or industry's practices threaten overall financial stability.
Wall Street Awaits Government Plan
While Wall Street faces the biggest overhaul of its regulatory structure since the Great Depression, analysts are already wondering if the plan to be announced by Treasury Secretary Henry Paulson on Monday would help prevent the kind of risky investments that led to the near-collapse of Bear Stearns Cos.
The plan maps out a course for broader oversight of the nation's financial markets by consolidating power into the Federal Reserve. It will eliminate overlapping state and federal regulators and give the central bank an expanded role in looking at the books of investment banks and brokerages.
What remains unclear is exactly how much the Fed would be able to control Wall Street's freewheeling investment banks _ the banks including Bear Stearns that have lost billions of dollars over the past six months from buying risky mortgage-backed securities. While the proposal will for the first time impose regulation of hedge funds and private equity firms, some say it is lacking the kind of muscle to curb the Street's appetite for risk.
'This is a good start for the basis of discussion,' said Peter Morici, a business professor at the University of Maryland and former chief economist of the U.S. Trade Commission. 'But, this is bank reform written by an investment banker. ... There's nothing so far to improve the conduct of business on Wall Street to avoid another crisis.'
Paulson, the former chairman of the investment bank Goldman Sachs Group Inc., wants to streamline the regulatory system through steps such as merging the Securities and Exchange Commission and the Commodity Futures Trading Commission and incorporating the functions of the Office of Thrift Supervision into the office of the Comptroller of the Currency. But while the regulatory structure would be overhauled, there is little detail about how much actual power the Fed would have to force investment banks out of risky positions and prevent financial companies from failing.
The investment banks have been criticized not only for investing in risky mortgage-backed assets _ including loans to people with poor credit _ they've also been reproached for dealing in complex and often speculative products like structured investment vehicles and collateralized debt obligations.
'I think it is important to look at the Paulson plan as the beginning of the discussion, not necessarily its end,' said Harvey Pitt, a former chairman of the Securities and Exchange Commission. 'The critical ingredient in any plan, however, is total transparency, something that was sorely lacking in our markets and caused the current crisis.'
The plan, already backed by several financial industry trade organizations, would give the Fed some say over how much liquidity and capital that investment banks have on their books. But, as currently presented, action would be limited to instances 'where overall financial market stability was threatened,' according to a 22-page executive summary of the proposal obtained by The Associated Press.
While Paulson's proposal looks to shore up the nation's financial industry, it will also try to avoid putting investment banks at a competitive disadvantage with overseas investment firms. Still, analysts noted, this is an election year, and therefore Wall Street can expect to see regulation it hasn't had to comply with in the past.
Richard X. Bove, a bank analyst at Punk Ziegler & Co., questioned whether investment banks being forced to maintain more capital and higher reserves would limit their attempts to achieve high returns. Wall Street firms, unlike more regulated commercial banks, tend to use large amounts of leverage, or borrowed money, to magnify profit margins; while higher capital requirements would stem losses during economic downturns, they would also prevent investment banks from making the kind of profits they did during the recent bull run.
But ultimately, Bove said, Wall Street put itself in the position it now finds itself in.
'The financial industry blew it, did not exercise any restraint, and now the financial system is at risk,' he said. 'It is evident that there must be some kind of re-regulation.'
ISS backs Morgan Stanley board
Influential shareholder adviser ISS gave Morgan Stanley's John Mack a vote of confidence on Thursday when it recommended reelection of the bank chairman and the rest of his board at next month's annual meeting.
Several Morgan directors have been under fire in recent weeks from unions and other proxy advisers, who recommend shareholders withhold their votes to protest the bank's disappointing 2007 performance.
Mack, who is also CEO, was singled out by union group Change to Win, which argued he should be accountable for a lapse in risk management that led to $9.4 billion in fourth-quarter losses.
Institutional Shareholder Services also recommended that pensions and other big investors support a proposal to give shareholders an advisory vote on executive compensation.
M&A Bankers Suffer 35% Drop in Fees as Deals Dry Up From Record
Mergers and acquisitions bankers suffered a 35 percent drop in fees during the first quarter, just weeks after cashing bonuses from a record year.
Advisory fees fell to about $8.7 billion from $13.4 billion in the first three months of 2007, data compiled by analysts at New York-based Freeman & Co. show. Executives at Lehman Brothers Holdings Inc. and Bank of America Corp. predicted in December that takeovers would decline about 20 percent this year.
``As recently as three months ago, we thought we had seen the worst and it was going to begin to get slowly better,'' said Eduardo Mestre, 59, the former head of Citigroup Inc.'s investment banking unit and now vice chairman of New York-based advisory firm Evercore Partners Inc. ``It only got worse.''
The collapse of the U.S. subprime mortgage market threatens to stifle economic growth and further curb corporate purchases. New York-based Goldman Sachs Group Inc., the world's leading M&A adviser, reported a 47 percent decline in revenue from providing takeover advice in the first quarter from the fourth.
The value of announced mergers and acquisitions fell to $656.2 billion this quarter from $971 billion a year earlier, according to data compiled by Bloomberg. January and March were the slowest months for takeovers since November 2004. Rising financing costs have hampered leveraged buyouts, which dropped to $60 billion in the first quarter from $201 billion a year ago, the data show.
Clear Channel
A record $4 trillion of takeovers was announced in 2007, including the $50.6 billion buyout of Montreal-based BCE Inc., Canada's largest phone company, by a group including the Ontario Teachers' Pension Plan, Providence, Rhode Island-based Providence Equity Partners Inc. and Madison Dearborn Partners LLC of Chicago. LBO firms announced an unprecedented $748 billion of acquisitions last year, Bloomberg data show.
``The first half of 2007 was very, very unusual,'' said Frank Aquila, 51, a partner at Sullivan & Cromwell LLP in New York, the top legal adviser on mergers last year. ``The private equity guys are smart. There was plentiful cheap credit so they took that horse and rode with it.''
Now even some announced deals are in doubt. Clear Channel Communications Inc., the biggest U.S. radio broadcaster, said on March 28 its sale to private-equity firms may collapse after banks backed out of financing the $19.5 billion transaction.
Clear Channel can't estimate a closing date for the sale, the San Antonio-based company said in a filing with the Securities and Exchange Commission. Bank representatives didn't attend a March 27 meeting scheduled to complete the deal, Clear Channel said.
Subprime Losses
Banks are reeling after $208 billion in credit losses and writedowns linked to rising mortgage defaults in the U.S. They're also stuck with $200 billion in loans and bonds from leveraged buyouts after failing to find buyers.
The near collapse of New York-based Bear Stearns Cos., the fifth-largest U.S. securities firm, and its Federal Reserve- backed takeover by New York-based JPMorgan Chase & Co. heightened concern that some of the nation's largest financial institutions are at risk.
``Everybody has been affected,'' said Frederick Lane, 58, co-founder of Boston-based advisory firm Lane, Berry & Co. and a former co-head of mergers at Donaldson, Lufkin & Jenrette Inc., which Zurich-based Credit Suisse Group bought in 2000. ``We are seeing a lot less confidence among the investment banking firms.''
Freeman estimates investment banking fees, including revenue from providing M&A advice, may drop 7 percent in 2008 to $90.4 billion. The Freeman estimates for first-quarter merger advisory fees reflect deals through March 27, and will be revised as more transactions are reported.
China to Persian Gulf
An increase in takeovers involving Asian and Middle Eastern companies has cushioned the slowdown in Europe and the U.S. China and Persian Gulf states have almost doubled their volume of acquisitions to $55 billion this quarter from a year earlier, Bloomberg data show.
China, through its $200 billion wealth fund and companies that raised $126 billion in stock sales last year, has been one of the largest investors. Shenzhen, China-based Ping An Insurance (Group) Co., the nation's second-largest insurer, agreed in March to buy half of the asset-management unit of Brussels and Utrecht, the Netherlands-based Fortis for 2.15 billion euros ($3.39 billion).
The Gulf states, flush with cash from burgeoning oil revenue, are buying overseas assets at a record rate. Kuwait Investment Authority, which manages an estimated $250 billion, invested $5 billion in Citigroup and Merrill Lynch & Co. in January.
Job Cuts
The interest among European bankers to move to the Middle East ``is considerably higher today than it was last year,'' said Shaun Springer, 52, chief executive officer of London-based recruiting firm Napier Scott Executive Search Ltd.
Those purchases have slowed, rather than halted, a slump in merger fees, which accounted for about 8 percent of the combined revenue last year at Goldman, Morgan Stanley, Merrill and Lehman, the four biggest New York-based securities firms.
Shrinking profit has led financial companies to eliminate more than 34,000 employees in the past nine months, the most since the dot-com bust in 2001. Job losses may surpass 100,000 in the next few years, said Jo Bennett, a partner at executive search firm Battalia Winston International in New York.
Bankers were being fired even as Wall Street's five biggest firms were paying out an estimated $39 billion in record bonuses from 2007.
Goldman's backlog of investment banking transactions fell in the first quarter to 2006 levels, Chief Financial Officer David Viniar told investors on March 18 after the biggest U.S. securities firm said earnings slumped 53 percent.
Slowing Economy
Erin Callan, Lehman's CFO, told investors the same day that announced mergers dropped 24 percent in the quarter from a year earlier amid a ``very challenging'' investment banking landscape. Profit at the firm sank 57 percent. Callan, 42, said on Dec. 13 that M&A may fall 20 percent this year.
Stefan Selig, 45, the New York-based global head of mergers at Charlotte, North Carolina-based Bank of America, predicted in December a 15 percent to 20 percent drop in deals this year.
``Investment banking activity has clearly been influenced by broader market disruptions and an unclear economic outlook,'' said Goldman's Viniar, 52.
The U.S. economy lost jobs in February for a second straight month and consumer confidence declined in March to the lowest in five years. The economy will fail to grow for the first time in more than six years in the second quarter, the Paris-based Organization for Economic Cooperation and Development said on March 20.
`Raise the Bar'
``In this environment, it's difficult to see how anyone is going to launch a big strategic bid,'' said Nick Page, 39, a partner at PricewaterhouseCoopers LP in London who specializes in banking transactions. ``Acquisitions of more than 10 billion euros are off the agenda.''
Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, scaled back acquisition plans as a slowdown in U.S. construction spread beyond housing and extended to Europe.
``We are going to raise the bar,'' Chief Executive Officer Chip Hornsby said on a March 17 conference call after the Theale, England-based company reported a 68 percent decline in first-half profit. ``The acquisition situation will be more selective.''
`Cloudy' Outlook
London-based Anglo American Plc, the world's second-biggest mining company, delayed the sale of its construction materials unit Tarmac last month because of credit-market turmoil. Kaupthing Bank hf of Reykjavik, Iceland's largest bank, abandoned the 3 billion-euro purchase of The Hague-based NIBC Holding NV on Jan. 30, blaming ``instability'' in the financial markets.
``M&A is very quiet in sectors which have been affected the most in terms of confidence, such as real estate, construction and consumers,'' said Tom Cooper, London-based head of European mergers for UBS AG. ``It's a very patchy picture.''
The $147.1 billion hostile bid by Melbourne-based BHP Billiton Plc for London-based miner Rio Tinto Plc was the largest so far this year, and propelled Europe to the top region for deal-making with over $336 billion of announced transactions. The U.S. trailed with $245.5 billion, according to Bloomberg data. The largest deal announced in the U.S. was Redmond, Washington- based Microsoft Corp.'s $42.3 billion offer to buy Yahoo Inc. of Sunnyvale, California.
There have been 11 announced transactions larger than $5 billion this year, compared with 29 in the first quarter of 2007, and the slowdown doesn't look set to end soon.
``I do not think M&A volume will pick up significantly over the next six months because of the cloudy economic outlook,'' said Charles Geisst, 61, finance professor at Manhattan College in New York and author of ``100 Years on Wall Street.''
Advisory fees fell to about $8.7 billion from $13.4 billion in the first three months of 2007, data compiled by analysts at New York-based Freeman & Co. show. Executives at Lehman Brothers Holdings Inc. and Bank of America Corp. predicted in December that takeovers would decline about 20 percent this year.
``As recently as three months ago, we thought we had seen the worst and it was going to begin to get slowly better,'' said Eduardo Mestre, 59, the former head of Citigroup Inc.'s investment banking unit and now vice chairman of New York-based advisory firm Evercore Partners Inc. ``It only got worse.''
The collapse of the U.S. subprime mortgage market threatens to stifle economic growth and further curb corporate purchases. New York-based Goldman Sachs Group Inc., the world's leading M&A adviser, reported a 47 percent decline in revenue from providing takeover advice in the first quarter from the fourth.
The value of announced mergers and acquisitions fell to $656.2 billion this quarter from $971 billion a year earlier, according to data compiled by Bloomberg. January and March were the slowest months for takeovers since November 2004. Rising financing costs have hampered leveraged buyouts, which dropped to $60 billion in the first quarter from $201 billion a year ago, the data show.
Clear Channel
A record $4 trillion of takeovers was announced in 2007, including the $50.6 billion buyout of Montreal-based BCE Inc., Canada's largest phone company, by a group including the Ontario Teachers' Pension Plan, Providence, Rhode Island-based Providence Equity Partners Inc. and Madison Dearborn Partners LLC of Chicago. LBO firms announced an unprecedented $748 billion of acquisitions last year, Bloomberg data show.
``The first half of 2007 was very, very unusual,'' said Frank Aquila, 51, a partner at Sullivan & Cromwell LLP in New York, the top legal adviser on mergers last year. ``The private equity guys are smart. There was plentiful cheap credit so they took that horse and rode with it.''
Now even some announced deals are in doubt. Clear Channel Communications Inc., the biggest U.S. radio broadcaster, said on March 28 its sale to private-equity firms may collapse after banks backed out of financing the $19.5 billion transaction.
Clear Channel can't estimate a closing date for the sale, the San Antonio-based company said in a filing with the Securities and Exchange Commission. Bank representatives didn't attend a March 27 meeting scheduled to complete the deal, Clear Channel said.
Subprime Losses
Banks are reeling after $208 billion in credit losses and writedowns linked to rising mortgage defaults in the U.S. They're also stuck with $200 billion in loans and bonds from leveraged buyouts after failing to find buyers.
The near collapse of New York-based Bear Stearns Cos., the fifth-largest U.S. securities firm, and its Federal Reserve- backed takeover by New York-based JPMorgan Chase & Co. heightened concern that some of the nation's largest financial institutions are at risk.
``Everybody has been affected,'' said Frederick Lane, 58, co-founder of Boston-based advisory firm Lane, Berry & Co. and a former co-head of mergers at Donaldson, Lufkin & Jenrette Inc., which Zurich-based Credit Suisse Group bought in 2000. ``We are seeing a lot less confidence among the investment banking firms.''
Freeman estimates investment banking fees, including revenue from providing M&A advice, may drop 7 percent in 2008 to $90.4 billion. The Freeman estimates for first-quarter merger advisory fees reflect deals through March 27, and will be revised as more transactions are reported.
China to Persian Gulf
An increase in takeovers involving Asian and Middle Eastern companies has cushioned the slowdown in Europe and the U.S. China and Persian Gulf states have almost doubled their volume of acquisitions to $55 billion this quarter from a year earlier, Bloomberg data show.
China, through its $200 billion wealth fund and companies that raised $126 billion in stock sales last year, has been one of the largest investors. Shenzhen, China-based Ping An Insurance (Group) Co., the nation's second-largest insurer, agreed in March to buy half of the asset-management unit of Brussels and Utrecht, the Netherlands-based Fortis for 2.15 billion euros ($3.39 billion).
The Gulf states, flush with cash from burgeoning oil revenue, are buying overseas assets at a record rate. Kuwait Investment Authority, which manages an estimated $250 billion, invested $5 billion in Citigroup and Merrill Lynch & Co. in January.
Job Cuts
The interest among European bankers to move to the Middle East ``is considerably higher today than it was last year,'' said Shaun Springer, 52, chief executive officer of London-based recruiting firm Napier Scott Executive Search Ltd.
Those purchases have slowed, rather than halted, a slump in merger fees, which accounted for about 8 percent of the combined revenue last year at Goldman, Morgan Stanley, Merrill and Lehman, the four biggest New York-based securities firms.
Shrinking profit has led financial companies to eliminate more than 34,000 employees in the past nine months, the most since the dot-com bust in 2001. Job losses may surpass 100,000 in the next few years, said Jo Bennett, a partner at executive search firm Battalia Winston International in New York.
Bankers were being fired even as Wall Street's five biggest firms were paying out an estimated $39 billion in record bonuses from 2007.
Goldman's backlog of investment banking transactions fell in the first quarter to 2006 levels, Chief Financial Officer David Viniar told investors on March 18 after the biggest U.S. securities firm said earnings slumped 53 percent.
Slowing Economy
Erin Callan, Lehman's CFO, told investors the same day that announced mergers dropped 24 percent in the quarter from a year earlier amid a ``very challenging'' investment banking landscape. Profit at the firm sank 57 percent. Callan, 42, said on Dec. 13 that M&A may fall 20 percent this year.
Stefan Selig, 45, the New York-based global head of mergers at Charlotte, North Carolina-based Bank of America, predicted in December a 15 percent to 20 percent drop in deals this year.
``Investment banking activity has clearly been influenced by broader market disruptions and an unclear economic outlook,'' said Goldman's Viniar, 52.
The U.S. economy lost jobs in February for a second straight month and consumer confidence declined in March to the lowest in five years. The economy will fail to grow for the first time in more than six years in the second quarter, the Paris-based Organization for Economic Cooperation and Development said on March 20.
`Raise the Bar'
``In this environment, it's difficult to see how anyone is going to launch a big strategic bid,'' said Nick Page, 39, a partner at PricewaterhouseCoopers LP in London who specializes in banking transactions. ``Acquisitions of more than 10 billion euros are off the agenda.''
Wolseley Plc, the world's biggest distributor of plumbing and heating equipment, scaled back acquisition plans as a slowdown in U.S. construction spread beyond housing and extended to Europe.
``We are going to raise the bar,'' Chief Executive Officer Chip Hornsby said on a March 17 conference call after the Theale, England-based company reported a 68 percent decline in first-half profit. ``The acquisition situation will be more selective.''
`Cloudy' Outlook
London-based Anglo American Plc, the world's second-biggest mining company, delayed the sale of its construction materials unit Tarmac last month because of credit-market turmoil. Kaupthing Bank hf of Reykjavik, Iceland's largest bank, abandoned the 3 billion-euro purchase of The Hague-based NIBC Holding NV on Jan. 30, blaming ``instability'' in the financial markets.
``M&A is very quiet in sectors which have been affected the most in terms of confidence, such as real estate, construction and consumers,'' said Tom Cooper, London-based head of European mergers for UBS AG. ``It's a very patchy picture.''
The $147.1 billion hostile bid by Melbourne-based BHP Billiton Plc for London-based miner Rio Tinto Plc was the largest so far this year, and propelled Europe to the top region for deal-making with over $336 billion of announced transactions. The U.S. trailed with $245.5 billion, according to Bloomberg data. The largest deal announced in the U.S. was Redmond, Washington- based Microsoft Corp.'s $42.3 billion offer to buy Yahoo Inc. of Sunnyvale, California.
There have been 11 announced transactions larger than $5 billion this year, compared with 29 in the first quarter of 2007, and the slowdown doesn't look set to end soon.
``I do not think M&A volume will pick up significantly over the next six months because of the cloudy economic outlook,'' said Charles Geisst, 61, finance professor at Manhattan College in New York and author of ``100 Years on Wall Street.''
Saturday, March 29, 2008
Lehman to Sue Marubeni in Loan Fraud That May Total $403 Mln
Lehman Brothers Holdings Inc. said it plans legal action against Marubeni Corp. to recover funds ``fraudulently misappropriated.'' Marubeni said it's also a victim in the fraud that media reports put at as much as $403 million.
The Wall Street Journal reported today that Lehman loaned funds to a consulting company owned by LTT Bio-Pharma Co. to buy medical equipment. The loan appeared to be guaranteed by Marubeni and involved forged documents, the Journal said.
``We are confident in our legal claim, which we will pursue until we receive repayment from Marubeni,'' said Matthew Russell, head of corporate communications for the Asia-Pacific region at Lehman in Hong Kong. He declined to comment on the amount being sought or other companies involved.
Marubeni, Japan's biggest petrochemical importer, is also a victim of fraud and was not involved in the transaction, the company said in a Japanese-language statement faxed to Bloomberg News. Takashi Hashimoto, a spokesman for the Tokyo-based trading house, declined to comment on Lehman's planned legal action.
The funds loaned to the medical consulting company range from 24 billion yen to 40 billion yen ($242 million to $403 million), according the Nikkei and Tokyo newspapers. Both newspapers cited unidentified people familiar with the situation. The Wall Street Journal put the amount at about $250 million.
``After we became aware of the fraud, we launched a fact- finding investigation and then informed the appropriate authorities,'' Lehman said in an e-mailed statement earlier today. ``We are confident that we undertook all the appropriate measures on the transaction and will commence legal action against Marubeni.''
Criminal Complaint
Lehman officials said they have filed a criminal complaint with Japanese police, the Wall Street Journal reported.
The medical consulting company is called Asclepius Ltd., which initiated bankruptcy proceedings March 19, the Nikkei newspaper said. A call to the main switchboard at LTT Bio- Pharma reached a recorded message saying the office is closed today and tomorrow.
LTT Bio-Pharma is a Tokyo-based biotechnology company that researches and sells drug-delivery systems to treat arteriosclerosis. The company went public in November 2004 on the Tokyo Stock Exchange Mothers market. The shares have fallen 82 percent in the past 12 months.
The planned legal action by Lehman in Japan comes as U.S. regulators are investigating whether traders spread false rumors about the company's financial soundness to profit from a decline in its share price. The Securities and Exchange Commission inquiry isn't public.
Lehman, the fourth-largest U.S. securities firm, has tumbled 23 percent this month amid speculation that Wall Street firms can't fund their operations.
Sweden Will Cut Vin & Sprit Short-List to Two Bidders, SvD Says
Sweden's government will reduce the number of bidders for Absolut vodka maker Vin & Sprit AB to two within the next few days, Svenska Dagbladet reported without saying how it obtained the information.
The government will then negotiate with the two bidders over the coming week, Stockholm-based SvD said. The most likely finalists are the group containing Nordic Capital and Fortune Brands Inc. and the Investor AB, EQT Partners AB and Fourth AP- Fund group, the newspaper said.
Mia Widell, a spokeswoman for Financial Markets Minister Mats Odell, didn't immediately answer telephone calls today.
The government will then negotiate with the two bidders over the coming week, Stockholm-based SvD said. The most likely finalists are the group containing Nordic Capital and Fortune Brands Inc. and the Investor AB, EQT Partners AB and Fourth AP- Fund group, the newspaper said.
Mia Widell, a spokeswoman for Financial Markets Minister Mats Odell, didn't immediately answer telephone calls today.
IMF to Cut Euro-Area Growth Forecast Below 1.4%, De Tijd Says
The International Monetary Fund will pare its forecast for 2008 economic growth in the euro area to below 1.4 percent next month, De Tijd reported today, citing Luc Everaert, who heads the IMF's regional studies unit in Europe.
The new projection for economic growth in the 15 nations that share the euro currency will be ``slightly lower'' than the 1.4 percent the fund forecasts for economic growth in Belgium this year, the newspaper quoted Everaert as saying at a press conference in Brussels yesterday.
The IMF yesterday cut its forecast for economic growth in Belgium from an earlier prediction of 1.6 percent in January, citing a ``worsening'' international environment and ``less favorable'' financing conditions for businesses.
The fund, which on Jan. 29 projected euro-area growth of 1.6 percent this year, will publish its new growth forecast on April 9, according to a statement on its Web site.
The new projection for economic growth in the 15 nations that share the euro currency will be ``slightly lower'' than the 1.4 percent the fund forecasts for economic growth in Belgium this year, the newspaper quoted Everaert as saying at a press conference in Brussels yesterday.
The IMF yesterday cut its forecast for economic growth in Belgium from an earlier prediction of 1.6 percent in January, citing a ``worsening'' international environment and ``less favorable'' financing conditions for businesses.
The fund, which on Jan. 29 projected euro-area growth of 1.6 percent this year, will publish its new growth forecast on April 9, according to a statement on its Web site.
Paulson to Propose New Financial Overseers, SEC-CFTC Merger
Treasury Secretary Henry Paulson is likely to call for the creation of new regulatory agencies with broad powers over lending, the securities industry and business conduct, according to the draft of a study he commissioned.
The report, which recommends more power for the Federal Reserve, also proposes combining the Office of Comptroller of the Currency -- which dates back to the Civil War -- and the Office of Thrift Supervision into a single banking overseer. In addition, the draft, which was circulated to government agencies this week and obtained by Bloomberg News, calls for the merging of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
Such changes have been proposed in the past, only to be thwarted in Congress. ``We've had studies like this for the better part of 50 years, and nothing happens because there are a lot of vested interests in the status quo,'' said Bill Isaac, who was chairman of the Federal Deposit Insurance Corp. between 1981 and 1985 and now heads The Secura Group, a financial consulting firm in Vienna, Virginia.
At the same time, the credit crisis and market turmoil of the last half-year have fueled calls in Congress for an overhaul of the government's financial-regulatory apparatus by lawmakers who say the existing patchwork of regulators has proven inadequate to the task of monitoring a 21st-century financial system.
Overlapping Responsibilities
``With overlapping, multiple regulators supervising the same things, you've got three well-intentioned outfielders running after the same fly ball,'' said John Dearie, senior vice president of policy at the Financial Services Forum, a lobby group whose members include Wachovia Corp., Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc.
Paulson, 62, a former chairman of Goldman who spent three decades on Wall Street, commissioned the study in June with the aim of increasing the competitiveness of American capital markets. The secretary, who has scheduled a speech on financial markets for March 31, said March 26 that the Fed ought to have greater sway over Wall Street firms now overseen by the SEC.
Treasury Department spokeswoman Brookly McLaughlin said the draft report ``is not current,'' but wouldn't comment on whether the final report will differ significantly in its recommendations. Paulson's speech begins at 10 a.m. in Washington.
New Authorities
The recommendations urge the formation of a ``Prudential Financial Regulator'' to oversee financial institutions that have an explicit government guarantee such as deposit insurance. The Treasury calls for a ``Business Conduct Regulator'' to monitor disclosures, business practices, chartering and licensing. It also suggests a ``Corporate Finance Regulator'' with ``responsibilities for general issues related to corporate oversight in public securities markets.''
The Securities Industry and Financial Markets Association, Wall Street's biggest lobbying group, praised Paulson's proposals. The plans would replace a regulatory framework that was ``born of Depression-era events and is not well-suited for today's environment where billions of dollars race across the globe with a click of a mouse,'' Sifma President Timothy Ryan said in a statement late yesterday.
The executive summary of Paulson's draft report calls for legislation that creates ``uniform minimum licensing qualification standards for state mortgage market participants.'' The authority to draft mortgage regulations would remain at the Fed.
President's Working Group
The report breaks down its proposals into short-, intermediate- and long-term recommendations. Under short-term suggestions, Treasury proposes turning the President's Working Group on Financial Markets, which has advised the president since 1987, into a government-chartered ``interagency body'' to coordinate financial regulatory policy.
The group's focus should be ``broadened to include the entire financial sector, rather than solely financial markets,'' the draft said. The President's Working Group is chaired by the Treasury Secretary and includes the heads of the Fed, the SEC and the CFTC. The report recommends expanding the body to include the heads of the OCC, the FDIC, and the OTS.
Hal Scott, a professor at Harvard Law School who heads the Committee on Capital Markets Regulation, a group of executives and academics whose efforts Paulson has endorsed, said it will be ``very hard'' to implement any of the recommendations.
``The political reality is that the merits will get lost in the argument,'' Scott said. ``They recognize it won't be done soon.''
The draft calls for the merger of the SEC, which regulates investment banks, securities and stock exchanges, and the CFTC, which oversees about $4.2 trillion of daily trades in products ranging from orange juice to foreign currencies.
Turf Wars
The two authorities have fought turf wars over instruments such as derivatives, which share characteristics of both securities and futures. The Treasury report said ``regulatory bifurcation'' has made separate oversight of securities and futures ``untenable, potentially harmful and inefficient.''
Treasury also endorsed the CFTC's use of so-called principles-based regulation, in which overarching guidelines trump specific rules. Treasury said the SEC should apply the principles approach to its oversight of stock exchanges.
Greater Fed Role
The study envisions the Fed with broader oversight powers, especially in the area of market stability, and possibly less powers for bank supervision. The study suggests that the FDIC could take on the role of supervising state-chartered banks.
In other areas, the Fed gathers more power. The study proposes that the Fed become a ``market stability'' regulator, with powers over insurance companies and securities firms with federal charters.
The study also suggests a distinction be made between the Fed's ``normal'' lender-of-last resort discount window to help banks meet short-term funding needs and ``market stability'' lending to help stave off severe funding shortages and panics. In that function, the loans could be extended to federally chartered insurance companies and financial institutions, the study says.
Friday, March 28, 2008
Fed May Rethink Greenspan's Hands-Off Approach Towards Bubbles
Federal Reserve officials may be rethinking their aversion to acting against asset-price bubbles, an article of faith during former Chairman Alan Greenspan's 18 years at the helm.
After this month's near-collapse of Bear Stearns Cos., Minneapolis Fed Bank President Gary Stern -- the longest-serving policy maker -- said in a speech yesterday that it's possible ``to build support'' for practices ``designed to prevent excesses.'' New York Fed President Timothy Geithner, whose district bank took on almost $30 billion of Bear Stearns assets to rescue the firm, argued two years ago for a larger role for asset prices in decision-making, and there's no indication his views have changed.
For Fed policy makers, ``the consequences of their permissiveness have become so disastrous that they simply can't keep singing the same old tune in public,'' said Tom Schlesinger, executive director at the Financial Markets Center in Howardsville, Virginia.
While the soul-searching is unlikely to result in immediate changes to monetary policy, Stern's comments show how the credit freeze has forced officials to scrutinize long-held philosophies about the Fed's role in markets, and even ask how their current policies may undercut those views.
``As a risk manager, the Fed needs to take account of both directions, not just dealing with the aftermath,'' said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. ``We have had two asset-prices bubbles in the last 10 years that have had big implications for the Fed's desire for a more stable macroeconomy.''
Stern's Reflection
Stern, 63, has been president of the Minneapolis Fed since 1985 and is currently a voting member of the rate-setting Federal Open Market Committee. In his speech to the European Economics and Financial Centre in London yesterday, he said that ``while I have not yet changed my opinion that asset-price levels should not be an objective of monetary policy, I am reviewing this conclusion in the wake of the fallout from the decline in house prices and from the earlier collapse of prices of technology stocks.''
He added that ``it is well within the realm of possibility for policy makers to build support for, and at least obtain tolerance of, policies designed to address excesses.''
Fed officials have spent years wrestling with how to prevent bubbles without damaging the economy through high interest rates, and few have come up with an answer. That's partly because the debate focused on use of the main policy rate instead of regulatory tools.
Greenspan Philosophy
For two decades, the ruling philosophy has been Greenspan's. ``It is far from obvious that bubbles, even if identified early, can be pre-empted at a lower cost than a substantial economic contraction and possible financial destabilization,'' Greenspan told the American Economic Association in 2004.
``I have always said if we could defuse a nascent asset bubble, I would be all for it,'' Greenspan, 82, said in an e- mailed response to a question yesterday. ``The reason I am against is that in my experience it cannot be done. I know of no occasion when such actions have been successful.''
But his successor, Ben S. Bernanke, and his team now find themselves reconsidering their approach to everything from regulation to the fate of the world's largest securities dealers. The collapse of the U.S. subprime-mortgage market has led to $208 billion in writedowns and credit losses since the start of 2007, pushing Bear to the brink of bankruptcy before its purchase by JPMorgan.
In his public remarks, Bernanke, 54, has opposed using interest rates to rein in asset prices, favoring keeping the benchmark rate focused on managing growth and inflation.
Role For Regulation
At the same time, he does see a role for regulations to reduce the likelihood of bubbles and protect institutions when they pop. He is also open to using other tools, as his response to the seven-month credit crisis has shown. And if the Fed gets more supervisory responsibility for securities firms, officials are likely to take more interest in policies that can discipline markets and balance incentives, economists said.
``If it is the case that asset prices matter for the intermediation of credit, then they have to worry about it,'' said Vincent Reinhart, former director of the Fed's Monetary Affairs Division, and now a scholar at the American Enterprise Institute in Washington.
The Fed has cut the benchmark rate 2 percentage points this year, the fastest pace in two decades. Bernanke has also changed the composition of the Fed balance sheet, absorbing more mortgage bonds, and swapping Treasuries for even private-label and commercial mortgage-backed securities, in effect influencing prices of securities tied to housing.
Bailout `Hazards'
Stern has spoken publicly only seven times in the last year. The Minneapolis president co-authored a 2004 book called ``Too Big to Fail: the Hazards of Bank Bailouts,'' which concluded that while governments shouldn't avoid public support for creditors of failing banks, they should minimize that backing because of the distortions it produces.
``If someone like that, steeped in the Fed's traditions, opens the door to a new or different approach to policy, we have to take it seriously,'' said Robert McTeer, a former president of the Dallas Fed.
Nokia's Navteq Acquisition Faces In-Depth EU Probe
European Union regulators started an in-depth probe into plans by Nokia Oyj, the world's biggest mobile-phone maker, to buy Navteq Corp. over concern the deal will hurt competition in the personal navigation market.
The European Commission, the antitrust authority for the 27- member EU, said in a statement today that it will rule by Aug. 8 on Nokia's $8.1 billion purchase. Nokia said it remains ``strongly committed'' to the acquisition of the world's largest digital mapping company.
``It may diminish the chances of the deal going through,'' Greger Johansson, an analyst at Redeye AB in Stockholm, who recommends holding Nokia stock, said in a telephone interview. ``It's a small acquisition and isn't that important for Nokia. It seems like the European Commission is scrutinizing all acquisitions more carefully these days.''
The case is the second digital mapping deal to garner an in- depth EU review. The commission yesterday extended a review of TomTom NV's acquisition of Navteq competitor Tele Atlas NV for 10 working days until May 21.
``This operation raises some issues similar'' to TomTom and Tele Atlas, the commission said. At issue in the Nokia investigation is ``whether the transaction would increase the costs of navigable digital maps for other companies providing navigation services on mobile handsets or limit their access to these maps, and as a consequence harm consumers,'' it said.
`Common Understanding'
Nokia Chief Financial Officer Rick Simonson said in a statement that, ``We have listened to the commission's concerns, and look forward to finding a common understanding that will enable the transaction to be closed.''
Navteq shares fell 50 cents, or 0.7 percent, to $70.41 as of 12:15 p.m. in New York Stock Exchange composite trading. Nokia has agreed to pay $78 a share in cash for the Chicago-based company. Nokia climbed 25 cents, or 1.3 percent, to 20.10 euros in Helsinki.
The commission, which had a deadline of today to approve the transaction or extend the probe, now has 90 working days for a final decision, Nokia said. The Espoo, Finland-based company said it has received all other required regulatory approvals.
Nokia agreed to buy Navteq, the largest maker of maps used in car-navigation equipment, in October to add maps to its phones and compete with TomTom and Garmin Ltd. Worldwide sales of portable navigation devices will triple to $12.8 billion by 2010 from $4.23 billion in 2006, according to a report by researcher ISuppli Corp. published in September.
Amsterdam-based TomTom agreed in July to buy Tele Atlas, the world's second-largest maker of maps used in car navigation systems, for 2.9 billion euros ($4.6 billion). The EU started an in-depth review of the transaction in November.
Morgan Stanley Seeks Smaller Credit Line for Commercial Paper
Morgan Stanley is in talks with lenders to obtain a reduced credit backstop for its commercial paper after cutting the outstanding short-term debt to $16 billion at the end of March from an average of $25.3 billion last year, spokesman Mark Lake said.
``We do not need the amount of backup credit lines that we had previously,'' said Lake, declining to comment further on the loan negotiations. Morgan Stanley also boosted its pool of cash and liquid assets to $123 billion on average in the first quarter from $85 billion in 2007, he said.
The New York-based investment bank is seeking $7.5 billion to replace $11 billion of credit that expires on April 16, Reuters reported earlier today, citing unidentified sources close to the situation. Lenders are only willing to extend about $4.9 billion, Reuters said. JPMorgan Chase & Co. is arranging the financing.
Brian Marchiony, a spokesman for JPMorgan in New York, declined to comment.
Morgan Stanley fell 45 cents, or 1 percent, to $45.23 at 12:11 p.m. in New York Stock Exchange composite trading. The shares are down about 15 percent this year. The firm said March 19 that first-quarter earnings declined 42 percent to $1.55 billion, a less-severe drop than analysts had estimated. The company's profit and return on equity exceeded those of rivals Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc
``We do not need the amount of backup credit lines that we had previously,'' said Lake, declining to comment further on the loan negotiations. Morgan Stanley also boosted its pool of cash and liquid assets to $123 billion on average in the first quarter from $85 billion in 2007, he said.
The New York-based investment bank is seeking $7.5 billion to replace $11 billion of credit that expires on April 16, Reuters reported earlier today, citing unidentified sources close to the situation. Lenders are only willing to extend about $4.9 billion, Reuters said. JPMorgan Chase & Co. is arranging the financing.
Brian Marchiony, a spokesman for JPMorgan in New York, declined to comment.
Morgan Stanley fell 45 cents, or 1 percent, to $45.23 at 12:11 p.m. in New York Stock Exchange composite trading. The shares are down about 15 percent this year. The firm said March 19 that first-quarter earnings declined 42 percent to $1.55 billion, a less-severe drop than analysts had estimated. The company's profit and return on equity exceeded those of rivals Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc
U.S. Economy: Spending Slows, Confidence Weakens
Spending by American consumers, who have sustained the economy amid housing's worst downturn in a generation, rose in February at the slowest pace in more than a year.
The 0.1 percent increase in purchases followed a 0.4 percent gain in January, the Commerce Department said today in Washington, matching economists' projections. The report also showed the Federal Reserve's most closely watched measure of inflation cooled. Meanwhile, the Reuters/University of Michigan index of consumer sentiment fell to a 16-year low.
Falling home prices, job losses and higher gasoline prices are driving down consumer spending, which accounts for more than two thirds of the economy. Just as the figures were released in Washington, J.C. Penney Co., the third-largest U.S. department- store chain, cut its sales and earnings forecasts.
``The momentum is still down and I expect we will see negative spending numbers in the second quarter,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``It's almost a done deal that inflation pressures will soon fade. Recessions invariably lead to lower inflation.''
The consumer sentiment index decreased to 69.5 in March, from 70.8 in February and down from a preliminary reading of 70.5. The figure was less than analysts anticipated.
Treasury notes strengthened after the reports, with the benchmark 10-year note yielding 3.49 percent at 11:13 a.m. in New York, down from 3.53 percent late yesterday. The Standard & Poor's 500 Retailing Index lost 2.2 percent to 381.4.
`Much Too Slow'
``Regardless of what you call it, it's a period of growth that's much too slow relative to what we'd like to see,'' Boston Fed President Eric Rosengren said today after a speech in Seoul.
Incomes rose 0.5 after a 0.3 percent increase the prior month, today's report showed. The median forecast was for a gain of 0.3 percent. An increase in government Medicare prescription- drug payments boosted the figure. Wages and salaries rose just 0.3 percent after a 0.5 percent gain in January.
The report's measure of overall prices rose 0.1 percent and was up a less-than-forecast 3.4 percent in the year ended in February.
The core price measure, which excludes food and fuel and is the Fed's preferred gauge, rose 0.1 percent last month and was up 2 percent from February 2007, Commerce said. The year-over- year increase matched the downwardly revised gain in January.
Price Increases Contained
The deceleration put it at the bottom of the Fed's 2 percent to 2.2 percent forecast for this year.
``It allows the Fed to cut rates, should they choose to, going forward,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said in a Bloomberg Television interview.
The savings rate improved to 0.3 percent from a minus a 0.1 percent the prior month. A negative rate indicates consumers drew down savings to maintain spending.
Adjusted for the increase in prices, spending was unchanged in February after increasing 0.1 percent.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, increased 0.2 percent. Purchases of non-durable goods decreased 0.1 percent and spending on services, which account for almost 60 percent of all outlays, was unchanged.
The biggest job losses in five years and record fuel costs are eroding confidence and spending. The economy lost 85,000 jobs in the first two months of the year, the biggest back-to- back drop since 2003.
Slowest Since 1991
Consumer spending will grow at a 0.5 percent pace in the first quarter, the slowest rate since the 1991 recession, according to a Bloomberg survey of economists taken the first week of March.
More and more economists are forecasting a recession as job, retail sales and manufacturing data have deteriorated this year. Martin Feldstein, the Harvard economics professor who heads the research group that determines when downturns begin, said this month that a contraction had already begun.
Seeking to ease credit, restore confidence in financial markets and cushion the slowdown, the Fed last week lowered the benchmark overnight lending rate between banks by three-quarters of a percentage point to 2.25 percent.
Consumer Concerns
``Consumers are growing increasingly concerned about the economic outlook and their future finances,'' Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, said in an interview with Bloomberg Television. ``They're concerned about the labor market, they are being hit by falling home prices, and financial markets have been quite turbulent.''
Wages also aren't keeping up with inflation. Adjusted for prices, hourly earnings for the 12 months through February fell 0.8 percent, according to figures from the Labor Department.
General Motors Corp. and Ford Motor Co. are among companies experiencing the slump in consumer demand first hand. Cars and light trucks sold at an average 15.25 million annual pace in the first two months of the year, the weakest two-month pace since 1998.
``It feels like there is a recession,'' Troy Clarke, GM's North American chief, told reporters in Atlanta on March 11.
Citigroup Hires Consumer Chief, Ousts Prime Brokerage Co-Heads
Citigroup Inc. hired Terri Dial from Lloyds TSB Group Plc to lead the bank's U.S. consumer unit and replaced the co-heads of prime brokerage, extending a management reshuffle following Vikram Pandit's appointment as chief executive officer.
Dial, 58, has overseen U.K. consumer banking for London- based Lloyds TSB, which announced her departure in a statement today. A person close to Citigroup confirmed that she is joining the New York-based company. Nick Roe, 42, who runs Citigroup's prime brokerage in Europe, will replace the departing co-heads of the business, Ali Hackett and Tom Tesauro, according to a memo from Steve Bowman, the bank's hedge fund services chief.
Pandit, who succeeded Charles O. ``Chuck'' Prince in December, has already promoted John Havens, 51, to oversee the bank's securities unit and named new heads of risk management and administration. Citigroup is reeling from $20 billion of writedowns that helped wipe out more than half of its market value in five months.
``For Pandit it's the case of a new broom sweeps clean,'' said Rupert Della-Porta, the chief operating officer at Atlantic Equities in London. ``You should expect a rotation of people.''
Citigroup fell 43 cents, or 2 percent, to $21.36 at 10:14 a.m. in New York Stock Exchange composite trading. The shares reached a 52-week high of $55.55 last May, and have fallen about 27 percent this year.
Dial, who joined Lloyds TSB in 2005, previously worked for almost 30 years at San Francisco-based Wells Fargo & Co., where she oversaw the firm's banking business in California.
Increased Earnings
Lloyds TSB Chief Executive Officer Eric Daniels hired Dial to help lift revenue. The company's U.K. division increased pretax profit 20 percent in the second half of 2007 by restraining costs, increasing mortgage lending and attracting more deposits as the economy weakened.
``Dial has done a terrific job streamlining the business, focusing on new sales and keeping a lid on costs,'' said MF Global Securities Ltd. analyst Mamoun Tazi in London. Tazi has a ``buy'' rating on Lloyds TSB stock.
Revenue at the Citigroup U.S. consumer unit Dial that will lead rose 6 percent to $8.4 billion in the fourth quarter, compared to a year earlier. Globally, the division's revenue climbed 21 percent to $15.5 billion.
Dial's appointment was reported earlier today by the Wall Street Journal. She's replacing Steven Freiberg, who will run Citigroup's global credit card business, the paper said. Citigroup spokesman Adrian Russell declined to comment.
Pandit's Plan
Roe, who will remain in London, joined Citigroup in 2005 from Deutsche Bank AG, where he ran global prime brokerage services. His appointment was reported late yesterday by the New York Times.
Pandit, 51, plans to tell shareholders in the next two months how he intends to rebuild Citigroup after the company lost about $150 billion of market capitalization since the start of 2007. The bank is cutting about 10 percent of the securities unit after the collapse of the subprime mortgage market triggered the biggest loss in its 196-year history.
Pandit, a former Morgan Stanley investment banker who joined Citigroup last July to oversee hedge funds and private equity, said in December that he's conducting a ``front-to- back'' review, scheduled to be completed in May. The review will help determine which assets should be sold.
More Losses
Citigroup posted a record loss in the fourth quarter of 2007 after rising defaults on home loans forced the company to write down $18 billion of subprime mortgage investments. The bank cut its dividend for the first time after reporting a loss of $9.83 billion, or $1.99 a share.
Oppenheimer & Co. analyst Meredith Whitney quadrupled her estimate of Citigroup's first-quarter loss this week to $1.15 a share on the expectation of additional writedowns. The bank is scheduled to report its quarterly results on April 18.
Citigroup lost the title of biggest bank by market value during the fourth quarter to Bank of America in Charlotte, North Carolina. New York-based JPMorgan Chase & Co. took the second spot in January.
More Government Bailouts May Be on Way
The economy is listing. So it must be time to bail. While there is little enthusiasm for government bailouts in general, voters are increasingly demanding immediate government relief as the economy ebbs.The Fed-engineered bailout of investment banker Bear Stearns and other assistance to financial institutions has further raised expectations. To some, the $30 billion JP Morgan-Bear Stearns deal also raised a fairness issue: Should the government bail out a prestigious investment bank while doing little to address the hardships of Americans facing foreclosures on their homes, or caught in other troubled segments of the economy, such as laid-off factory workers?
Members of Congress, particularly Democrats, will press the issue when they return from their spring break next week. Bailout proposals for homeowners abound, including several measures to get lenders to rework home loans. There are also bills to increase federal regulation over the nation's financial system.
"The big thing about the Bear Stearns bailout — if you want to call it that — is that it kind of opens the doors for other types of bailouts like for homeowners and individuals," said federal budget expert Stanley Collender.
"If the Fed is thinking about the business community, the lending community and the credit markets, then members of Congress are tending to think about individuals," said Collender, with Qorvis Communications, a Washington consulting firm.
All three major presidential candidates gave what their campaigns billed as major speeches on the economy this week.
Democratic Sens. Hillary Rodham Clinton and Barack Obama both called for direct federal intervention to help burdened homeowners. Sen. John McCain, the certain GOP presidential nominee, has called for caution.
Clinton wants a $30 billion fund for states and communities to assist those at risk of foreclosure. Obama is pushing a a $10 billion relief package and a simplification of the tax code to allow more families to claim a mortgage income tax deduction
McCain said that, while he would evaluate various rescue proposals put forth, it is "not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." He previously proposed cutting the corporate tax rate to 25 percent from 35 percent and making permanent the Bush administration's first-term tax cuts, cuts he initially opposed.
Budget hawks can only cringe at the raft of possible bailouts and expensive new federal programs that may be coming down the pike.
Controversy still swirls around some earlier big bailouts.
In the 1980s and 1990s, more than 1,000 savings and loan institutions failed, leading to a federal bailout totaling roughly $125 billion.
The 1998 collapse of hedge fund Long-Term Capital Management, amid the Asian financial crisis, rocked Wall Street and prompted the Federal Reserve to help arrange a $3.6 billion private bailout.
In 1975, President Ford first ignored pleas from a struggling New York City for help but later relented with a $7 billion loan package. President Clinton came to Mexico's aid in 1995 after a sharp devaluation of the peso, persuading countries and banks to lend the country $50 billion.
Congress bailed out what was then known as Lockheed Aircraft in 1971 and Chrysler in 1979 with loan guarantees. In 1984, the failing bank Continental Illinois was effectively taken over by the federal government.
After the Sept. 11, 2001, terror attacks, Congress quickly authorized $5 billion in cash to help shore up the airline industry and followed up with $10 billion in loan guarantees. It set up a compensation fund for victims of the attacks.
While complaints of unfairness can always be raised, government bailouts can generally be defended when the government's failure to act could have dire consequences on society or the nation's financial system, said William Galston, a former domestic policy adviser to President Clinton and now a senior fellow at Washington's Brookings Institution.
"Sometimes, you have to act in a very broad way, a way that's not very sensitive to the distinction between the innocent and the guilty, in order to bring about a broader public good. And then you sort it out later if you can," Galston said.
Even President Bush seems torn between not interfering with market forces and wanting to keep the financial crisis from deepening.
On March 14, he inveighed against government bailouts. "The temptation of Washington is to say that anything short of a massive government intervention in the housing market amounts to inaction. I strongly disagree with that sentiment," he told the Economic Club of New York. "I believe there ought to be action. But I'm deeply concerned about law and regulation that will make it harder for the markets to recover."
But, a week later, Bush applauded the series of dramatic government interventions undertaken by Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, claiming they had "acted swiftly to promote stability in our financial markets at a crucial time." He even thanked Bernanke for "working over the weekend."
Shares slip on US fears
The Australian share market closed marginally lower today, dragged back by more fears over the health of the banking sector.
At the 4.15pm close, the benchmark S&P/ASX200 index was down 20.5 points, or 0.38%, at 5351.1, while the broader All Ordinaries fell 17.3 points, or 0.32%, to 5401.2.
On the Sydney Futures Exchange, the June share price index futures contract was 17 points lower at 5408 on a volume of 20,238 contracts, according to preliminary calculations.
CMC Markets senior dealer Matt Lewis said the the big weight today on the local bourse was the finance sector, which followed banks in the US downwards.
Leading US banks fell overnight on speculation that Lehman Brothers faces funding shortages. Lehman said the speculation was unfounded.
''It's the same theme of negative sentiment globally and recession fears, but the comment from Lehman Brothers overnight put the negative to the forefront,'' Mr Lewis said.
He said the ANZ bank was put under pressure locally, on the back of investor concerns about the banks's corporate lending exposure to financial services group Opes Prime, which has been placed in receivership.
The ANZ said today that it was unlikely to experience a material loss on its exposure. ANZ dropped 67 cents to $23.18.
National Australia Bank declined 79 cents to $29.96 as it said it expected an after-tax gain of about $221 million from its shareholding in Visa, following the credit card giant's float on the New York Stock Exchange.
Westpac dumped 68 cents to $23.90 but Commonwealth Bank added 40 cents to $42.71.
On Wall Street overnight, the Dow Jones industrial average fell 120.40 points to 12,302.46.
In the resources sector, global miner BHP Billiton was 29 cents richer at $36.05, and Rio Tinto lifted $2.00 to $122.90.
Oil and gas producer Woodside Petroleum firmed three cents at $53.50, and Santos added 29 cents to $14.38.
In the gold sector, Newmont eased two cents to $5.10, Newcrest jumped 76 cents to $34.11, and Lihir found 12 cents at $3.72.
Oceanagold, which is building a gold-copper mine in the Philippines, fell 11 cents to $2.67 as it defended its procedures after a villager was shot during an encounter with a security contractor.
The price of gold at 4.33pm was $US943.50 per fine ounce, down $US9.10 on yesterday's close of $US943.60.
Telco Telstra was steady at $4.38 and its instalment receipts were up three cents at $2.80.
Optus-owner Singapore Telecommunications dipped two cents to $3.10.
In the media sector, News Corp lost 24 cents to $20.77, and its non-voting scrip sagged 30 cents to $20.35.
Consolidated Media retreated three cents to $3.70 and Fairfax backtracked five cents to $3.50.
Among retail stocks, Woolworths was 54 cents heavier at $29.30 and Wesfarmers, which owns Coles, added 66 cents to $39.01.
Among other stocks, troubled Centro Properties Group picked up four cents to 28.5 cents as it said it was working to extend its April 30 deadline to refinance a $2.3 billion debt owed to its Australian lenders.
Drugs developer Pharmaxis fell three cents to $2.24 as it said Australian-made asthma test Aridol had been approved by the International Olympic Committee to be used by athletes in Beijing.
The top-traded stock by volume was Telstra, with 96.4 million shares worth $419.35 million changing hands.
Preliminary national turnover was 1.79 billion shares worth $9.1 billion, with 578 stocks down, 556 up and 339 unchanged.
U.S. stocks plummet, Dow loses 120, Nasdaq 44
U.S. stocks were on the nose again Thursday, with losses intensifying towards the close.
Financials led the way lower after traders sold Lehman Brothers on rumors the investment bank was experiencing similar liquidity problems to those that brought down Bear Stearns. The stock recovered somewhat from a more than 10% fall after a Lehman Brothers spokeswoman denied the rumors.
Kerrie Cohen, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."
At the close of the days's trading, the Dow Jones Industrials were down 120.40 points or 0.97% at 12,302.46.
The Nasdaq Composite was off 43.53 points or 1.87% at 2,280.83.
The Standard and Poor's 500 was down 15.37 points or 1.15% at 1,325.76.
Regulators are believed to be investigating the possibility that rumors about Lehmans were circulated deliberately as part of a process to drive down the company's stock to assist short-sellers.
Last week Lehman Brothers reported a net profit of $489 million for the quarter ending February 29 2008. In an announcement Lehman Brothers then said it had, "maintained a strong liquidity position, with the holding company having a liquidity pool of $34 billion and unencumbered assets of $64 billion, with an additional $99 billion at our regulated entities, at quarter end."
Lehman Brothers shares ended the day down $3.78 or 8.90% at $38.71.
The U.S. dollar clawed back some losses but remained weak. Around the New York close the euro was quoted at 1.5776. The Japanese yen was changing hands at 99.72, and the British pound at 2.0034.
The Swiss franc remained strong at 99.41, while the Australian dollar fell to .9181. The Canadian dollar was a tad stronger at 1.0180.
Financials led the way lower after traders sold Lehman Brothers on rumors the investment bank was experiencing similar liquidity problems to those that brought down Bear Stearns. The stock recovered somewhat from a more than 10% fall after a Lehman Brothers spokeswoman denied the rumors.
Kerrie Cohen, said, "There are a lot of rumors in the marketplace that are totally unfounded. We are suspicious that the rumors are being promulgated by short sellers of our stock that have an economic self interest."
At the close of the days's trading, the Dow Jones Industrials were down 120.40 points or 0.97% at 12,302.46.
The Nasdaq Composite was off 43.53 points or 1.87% at 2,280.83.
The Standard and Poor's 500 was down 15.37 points or 1.15% at 1,325.76.
Regulators are believed to be investigating the possibility that rumors about Lehmans were circulated deliberately as part of a process to drive down the company's stock to assist short-sellers.
Last week Lehman Brothers reported a net profit of $489 million for the quarter ending February 29 2008. In an announcement Lehman Brothers then said it had, "maintained a strong liquidity position, with the holding company having a liquidity pool of $34 billion and unencumbered assets of $64 billion, with an additional $99 billion at our regulated entities, at quarter end."
Lehman Brothers shares ended the day down $3.78 or 8.90% at $38.71.
The U.S. dollar clawed back some losses but remained weak. Around the New York close the euro was quoted at 1.5776. The Japanese yen was changing hands at 99.72, and the British pound at 2.0034.
The Swiss franc remained strong at 99.41, while the Australian dollar fell to .9181. The Canadian dollar was a tad stronger at 1.0180.
U.S. stocks plummet, Dow loses 120, Nasdaq 44
Lehman Brothers Holdings Inc. was upgraded to ``buy'' at Citigroup Inc., which said concern the securities firm lacks adequate access to cash was misplaced and the stock's 41 percent plunge this year had gone too far.
Lehman's profitable first quarter and backing from the U.S. Federal Reserve provide ``excellent'' protection against a further drop in the share price, Citigroup analyst Prashant Bhatia wrote in a report about the New York-based firm today.
``Reality will trump fear,'' Bhatia wrote. ``Lehman has ample liquidity to run its business.''
Speculation that Wall Street firms can't fund their operations contributed to the collapse of Lehman rival Bear Stearns Cos. earlier this month. A run on Bear Stearns, formerly the fifth-largest U.S. securities firm, forced the New York-based company to sell itself to JPMorgan Chase & Co. at a fraction of its market value with financial support from the Fed.
Lehman, the fourth-biggest U.S. securities firm, fell 8.9 percent yesterday in New York Stock Exchange trading as options traders increased bearish bets and speculation about the bank's liquidity intensified. The stock rose 1.2 percent to $39.16 at 9:46 a.m. today.
Nine analysts surveyed by Bloomberg recommend buying Lehman shares, and nine say investors should ``hold'' the stock. Bigger rival Goldman Sachs Group Inc., the most profitable Wall Street firm, has seven buys versus 14 holds. Morgan Stanley's 12 hold ratings outnumber buys by three. All three firms are rated ``sell'' by Portales Partners LLC analyst Charles Peabody.
Cash Access
Lehman said on March 18 that it had $30 billion of cash and $64 billion in assets that could easily be turned into cash. Lehman's stockpile of cash, money-market instruments, corporate bonds and equities available for sale is the largest among the five biggest brokers, according to Sanford C. Bernstein & Co. analyst Brad Hintz.
The securities firm has access to an additional $200 billion from a Fed credit facility, according to Citigroup's Bhatia, who kept his share-price estimate at $65. He said he sees a 70 percent ``upside'' in Lehman's stock.
``It's tough to have a liquidity-driven meltdown when you're being backed by government entities that have the ability to print money,'' Bhatia wrote. ``The liquidity backstop buys the time necessary to restore confidence and quell fears that are not based on fundamentals.''
Earnings Report
Lehman stock fell as much as 48 percent on March 17 on speculation it would face the same cash shortage that broke Bear Stearns. The shares gained 46 percent the next day, when Lehman announced first-quarter earnings and its cash position.
The firm's net income declined 57 percent in the quarter because of a $1.8 billion writedown on mortgage assets. Merger advisory fees jumped 34 percent, investment-management revenue surged 39 percent and equities rose 6 percent.
The collapse of the subprime mortgage market and subsequent asset writedowns may force Citigroup, Wachovia Corp., Bank of America Corp. and Wells Fargo & Co. to reduce dividends, Oppenheimer & Co. analyst Meredith Whitney said in a separate report on the biggest U.S. banks today.
Citigroup already reduced its dividend once this year. Whitney expects the New York-based company to post a loss of 15 cents a share in 2008 on further asset writedowns.
Wednesday, March 26, 2008
Taxpayers May Be Liable From Bear, Mortgage Rescue
Even as the Bush administration insists it won't risk public funds in a bailout, American taxpayers may already be liable for billions of dollars stemming from Federal Reserve and Treasury efforts to quell a financial crisis.
History suggests the Fed may not recover some of the almost $30 billion investment in illiquid mortgage securities it received from Bear Stearns Cos., said Joe Mason, a Drexel University professor who has written on banking crises. Treasury's push to have Fannie Mae and Freddie Mac buy more mortgage bonds reduces the capital the government-chartered companies hold in reserve at a time when foreclosures and defaults are surging.
Regulators ``are playing with fire,'' said Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh. ``With good luck, none of these liabilities will come due. We can't expect that good luck, and we haven't had it.''
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson were forced to respond after capital markets seized up and Bear Stearns faced a run by creditors. In an emergency action that jeopardizes the dividend it pays the Treasury, the Fed authorized a $29 billion loan against illiquid mortgage- and asset-backed securities from Bear Stearns that will be held in a Delaware corporation. JPMorgan Chase & Co. contributed $1 billion.
Dividend Jeopardized
The Delaware company will liquidate the assets over 10 years, with JPMorgan absorbing the first $1 billion in losses, with the Fed bearing any that remain. Any such losses would hurt the Fed's balance sheet, and ultimately the taxpayer, because they would reduce the stipend the Fed pays to the Treasury from earnings on its portfolio. The dividend was $29 billion in 2006.
``The fact that Treasury and Congress have been unwilling or unable to be proactive and provide a solution that involves putting taxpayer money at risk means that the Fed has had to take more measures itself, also putting taxpayer money at risk,'' said Laurence Meyer, a former Fed governor, and now vice chairman of Macroeconomic Advisers LLC in Washington.
The Treasury is counting on voluntary loan restructurings and $117 billion in tax rebates to support the economy through the worst housing recession in a quarter century.
Scrutinizing Proposals
Treasury spokeswoman Jennifer Zuccarelli referred to remarks Paulson made March 16 that he is ``looking very carefully'' at additional proposals, ``but all the ones I've seen call for much more government intervention.''
A day earlier, President George W. Bush said some of the ``sweeping government solutions'' proposed in Washington ``would make a complicated problem even worse.''
Republican presidential candidate John McCain said in a speech yesterday that ``when we commit taxpayer dollars as assistance, it should be accompanied by reforms'' to ensure ``transparency and accountability.''
The average recovery on failed bank assets is 40 cents on the dollar over a six-year period, according to Drexel's Mason, a former official at the Treasury's Office of the Comptroller of the Currency. Nobody knows if that historical benchmark will hold for the Fed portfolio because the assets haven't been disclosed, they have already been marked down and the Fed has 10 years to recover value.
``Over 10 years, you might eventually get your money back,'' said Janet Tavakoli, president of Tavakoli Structured Finance Inc. in Chicago.
`Going to Be Lucky'
Still, ``that isn't costless to the Fed, it isn't the same as holding Treasuries,'' she said. On some low-documentation loans, ``you are going to be lucky to get 40 percent.''
Paulson reversed Treasury's stand of the previous three years in approving the decision to direct Fannie Mae and Freddie Mac to expand their $1.5 trillion mortgage assets. Previously, Treasury and the Fed had called for cuts in the portfolios held by the government-chartered companies.
Fannie Mae and Freddie Mac will buffer against more risk by raising ``significant'' capital, Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac Chief Executive Officer Richard Syron said at a press conference with James Lockhart, director of the Office of Federal Housing Enterprise Oversight that regulates the two companies.
Profits Eroded
The companies reported record fourth-quarter losses totaling $6 billion and warned days before announcing the additional purchases that credit losses will rise this year.
Lockhart dismissed the view that taxpayers could be liable for such losses. ``Certainly not,'' he said. The companies ``have the capital, they support their own'' mortgage-backed securities.
Yet the Treasury's authority to buy $2.25 billion in each of the companies' securities has created investor expectations that the firms hold an implicit federal guarantee against losses.
Lenders allow Fannie Mae and Freddie Mac to borrow more cheaply than rival companies because they expect Treasury would provide a bailout before letting them default.
Because Fannie Mae and Freddie Mac own or guarantee about 40 percent of the $11.5 trillion home loan market, the cost of a bailout would be ``in the hundreds of billions of dollars,'' said Andrew Laperriere, managing director at International Strategy & Investment Group in Washington. ``Taxpayers should be increasingly concerned about the contingent liability.''
U.S. Stocks Fall on Banking Outlook, Durable Goods Orders Slump
U.S. stocks fell for the first time in four days on a worsening outlook for bank profits, an unexpected drop in durable goods orders and concern that financing for buyouts will collapse.
Citigroup Inc. tumbled the most in the Dow Jones Industrial Average after Oppenheimer & Co.'s Meredith Whitney said the largest U.S. bank's first-quarter loss will be four times bigger than previously forecast. General Electric Co. and United Technologies Corp. declined on the worst-ever slump in machinery demand. Clear Channel Communications Inc. posted its steepest drop in 19 years on concern banks will pull loans for the broadcaster's $19.5 billion takeover.
The Standard & Poor's 500 Index lost 15.69, or 1.2 percent, to 1,337.3 at 10:51 a.m. in New York. The Dow decreased 144.83, or 1.2 percent, to 12,387.77. The Nasdaq Composite Index declined 33.52, or 1.4 percent, to 2,307.53. Four stocks fell for every one that rose on the New York Stock Exchange.
``The challenges and headwinds financials face now are many and have direct implications for the average consumer,'' said Michael Barron, chief executive officer and portfolio manager at Knott Capital Management in Exton, Pennsylvania, which oversees $1 billion. The drop in durable goods orders is ``yet another indication that the economy is in a recession.''
Nine of 10 S&P 500 industry groups fell following the unexpected 1.7 percent decline in orders for goods meant to last several years in February. The S&P 500 is down 14 percent from its Oct. 9 record after banks around the world racked up $195 billion in credit losses and writedowns from mortgage debt since the beginning of 2007.
European shares fell, while Asia's regional benchmark index climbed for a fourth day.
'Further Downside'
Citigroup lost $1.15, or 4.9 percent, to $22.27. Whitney cut her full-year estimate to a loss of 15 cents a share from profit of 75 cents to reflect potential first-quarter writedowns on leveraged loans and collateralized debt obligations of $13.1 billion. In the first quarter, the bank may lose $1.15 a share, compared with an earlier loss estimate of 28 cents, she said.
As ``the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices,'' Whitney wrote in a report dated yesterday.
Bank of America Corp. fell 97 cents, or 2.4 percent to $40. Goldman Sachs Group Inc. analysts reduced their earnings-per- share estimate for this year to $3.35 from $4.05, citing an estimated $3 billion first-quarter writedown.
GE, the world's third-largest company by market value, slipped 34 cents to $36.93. United Technologies, the maker of Otis elevators and Chubb security systems, dropped 84 cents to $69.32.
Clear Channel LBO
Clear Channel plunged $5.93, or 18 percent, to $26.63 for the biggest decline in the S&P 500. The Wall Street Journal said banks financing the deal for Thomas H. Lee Partners LP and Bain Capital LLC haven't been able to agree with the buyers on terms. The report cited unidentified people familiar with the matter.
Lehman Brothers Holdings Inc. cut its price estimate on the stock by 36 percent to $25.
Jabil Circuit Inc., the maker of phones for Nokia Oyj and electronics for Hewlett-Packard Co., declined $2.11 to $9.27 after third-quarter and full-year profit and sales forecasts trailed analysts' estimates. JPMorgan Chase & Co. downgraded the stock to ``underweight'' from ``overweight.''
Motorola Inc., the biggest U.S. maker of mobile phones, climbed 15 cents to $9.91 after announcing plans to split into two publicly traded companies. One company will focus on handsets and the other will sell broadband networking devices, according to a PR Newswire statement.
Sprint Nextel Corp. rose 36 cents, or 5.6 percent, to $6.78. Comcast Corp. and Time Warner Cable Inc., the two largest U.S. cable providers, are discussing providing funding for a new wireless company run by Sprint Nextel and Clearwire Corp., the Wall Street Journal reported, citing people familiar with the talks. Clearwire rose $1.62, or 12 percent, to $15.01.
Most U.S. stocks rose for a third day yesterday as a rally in commodity producers helped the market overcome weakening consumer confidence and a record drop in home prices.
Citigroup Inc. tumbled the most in the Dow Jones Industrial Average after Oppenheimer & Co.'s Meredith Whitney said the largest U.S. bank's first-quarter loss will be four times bigger than previously forecast. General Electric Co. and United Technologies Corp. declined on the worst-ever slump in machinery demand. Clear Channel Communications Inc. posted its steepest drop in 19 years on concern banks will pull loans for the broadcaster's $19.5 billion takeover.
The Standard & Poor's 500 Index lost 15.69, or 1.2 percent, to 1,337.3 at 10:51 a.m. in New York. The Dow decreased 144.83, or 1.2 percent, to 12,387.77. The Nasdaq Composite Index declined 33.52, or 1.4 percent, to 2,307.53. Four stocks fell for every one that rose on the New York Stock Exchange.
``The challenges and headwinds financials face now are many and have direct implications for the average consumer,'' said Michael Barron, chief executive officer and portfolio manager at Knott Capital Management in Exton, Pennsylvania, which oversees $1 billion. The drop in durable goods orders is ``yet another indication that the economy is in a recession.''
Nine of 10 S&P 500 industry groups fell following the unexpected 1.7 percent decline in orders for goods meant to last several years in February. The S&P 500 is down 14 percent from its Oct. 9 record after banks around the world racked up $195 billion in credit losses and writedowns from mortgage debt since the beginning of 2007.
European shares fell, while Asia's regional benchmark index climbed for a fourth day.
'Further Downside'
Citigroup lost $1.15, or 4.9 percent, to $22.27. Whitney cut her full-year estimate to a loss of 15 cents a share from profit of 75 cents to reflect potential first-quarter writedowns on leveraged loans and collateralized debt obligations of $13.1 billion. In the first quarter, the bank may lose $1.15 a share, compared with an earlier loss estimate of 28 cents, she said.
As ``the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices,'' Whitney wrote in a report dated yesterday.
Bank of America Corp. fell 97 cents, or 2.4 percent to $40. Goldman Sachs Group Inc. analysts reduced their earnings-per- share estimate for this year to $3.35 from $4.05, citing an estimated $3 billion first-quarter writedown.
GE, the world's third-largest company by market value, slipped 34 cents to $36.93. United Technologies, the maker of Otis elevators and Chubb security systems, dropped 84 cents to $69.32.
Clear Channel LBO
Clear Channel plunged $5.93, or 18 percent, to $26.63 for the biggest decline in the S&P 500. The Wall Street Journal said banks financing the deal for Thomas H. Lee Partners LP and Bain Capital LLC haven't been able to agree with the buyers on terms. The report cited unidentified people familiar with the matter.
Lehman Brothers Holdings Inc. cut its price estimate on the stock by 36 percent to $25.
Jabil Circuit Inc., the maker of phones for Nokia Oyj and electronics for Hewlett-Packard Co., declined $2.11 to $9.27 after third-quarter and full-year profit and sales forecasts trailed analysts' estimates. JPMorgan Chase & Co. downgraded the stock to ``underweight'' from ``overweight.''
Motorola Inc., the biggest U.S. maker of mobile phones, climbed 15 cents to $9.91 after announcing plans to split into two publicly traded companies. One company will focus on handsets and the other will sell broadband networking devices, according to a PR Newswire statement.
Sprint Nextel Corp. rose 36 cents, or 5.6 percent, to $6.78. Comcast Corp. and Time Warner Cable Inc., the two largest U.S. cable providers, are discussing providing funding for a new wireless company run by Sprint Nextel and Clearwire Corp., the Wall Street Journal reported, citing people familiar with the talks. Clearwire rose $1.62, or 12 percent, to $15.01.
Most U.S. stocks rose for a third day yesterday as a rally in commodity producers helped the market overcome weakening consumer confidence and a record drop in home prices.
Orders for Durable Goods in U.S. Unexpectedly Fell
Orders for U.S. durable goods unexpectedly fell in February, led by the biggest slump ever in demand for machinery that indicates companies are becoming more reluctant to invest as the economy heads into a recession.
The 1.7 percent drop followed a 4.7 percent decrease in the prior month, the Commerce Department said today in Washington. Excluding orders for transportation equipment, which tend to be volatile, bookings fell 2.6 percent, the most since January 2007.
Businesses are cutting back on equipment purchases as the biggest housing downturn in a quarter century hurts sales, and rising fuel costs erode profit. Improving demand from overseas is the only thing preventing manufacturing from declining even more.
``Businesses definitely have shown they are beginning to retrench,'' said Aaron Smith, senior economist at Moody's Economy.com in West Chester, Pennsylvania, in an interview with Bloomberg Television. ``Demand is weakening and investment intentions are showing a bit of fatigue.''
Treasuries rose after the report, pushing yields lower. The benchmark 10-year note yielded 3.46 percent as of 8:51 a.m. in New York, down 4 basis points from yesterday.
Economists projected orders would rise 0.7 percent, according to the median of 69 forecasts in a Bloomberg News survey, after a previously reported 5.3 percent slump in January. Estimates ranged from an increase of 3 percent to a 1 percent drop.
Excluding transportation equipment, orders were forecast to fall 0.3 percent after a decline of 1.6 percent.
Durable Goods Sales
Sales of durable goods, those made to last several years, dropped 2.8 percent in February, the most since September 2006. The decline was led by a 31 percent slump in shipments of semiconductors.
Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, decreased 2.6 percent, the most since October. Shipments of those items, used in calculating gross domestic product, dropped 2.1 percent, the most since January 2007.
Orders excluding defense equipment decreased 1.6 percent and bookings for military gear dropped 10 percent.
The slump in orders was paced by a 13 percent decline in demand for machinery that was the biggest since comparable records began in 1992. Bookings for fabricated metals and automobiles also fell.
Vehicle makers may see little relief ahead as softer sales lead to bigger discounts.
Uncertainty at GM
``There's a lot more economic uncertainty than we thought,'' Mark LaNeve, North American marketing chief for General Motors Corp., the world's largest automaker, said in a Bloomberg Television interview on March 19. ``With consumers in a pinch and some of the liquidity and credit issues we are experiencing in the economy, we are being more aggressive with incentives.''
A strike at auto-parts supplier American Axle & Manufacturing Holdings Inc. that has idled several automobile plants may also be contributing to the decline at vehicle makers. The four-week walkout has led to slowdowns at GM plants and at companies that supply parts and ship vehicles.
Orders for computers, communications equipment and electrical appliances improved last month.
Manufacturing Weakness
Other factory surveys signal weakness. The Fed Bank of Philadelphia's index of business activity showed manufacturing contracted in March for the fourth month in a row. A similar measure from the New York Fed showed manufacturing shrank this month at the fastest pace since records began in 2001.
The Federal Reserve cut its main lending rate by three- quarters of a percentage point to 2.25 percent on March 18 in an attempt to prop up the faltering economy and restore faith in the U.S. financial system.
``Recent information indicates that the outlook for economic activity has weakened further,'' policy makers said in a statement after the meeting.
Manufacturers are getting help from growth in emerging markets. Terex Corp., the world's third-largest maker of construction equipment, is facing a record backlog in crane orders on surging overseas demand. The Westport, Connecticut- based company said it plans to expand facilities in China and India and expects to meet a goal of $12 billion in sales by 2010.
``Accelerated growth in developing markets'' is driving growth, Chief Executive Officer Ron DeFeo said at a trade show in Las Vegas on March 12. ``We're running as fast as we can to add as much capacity as we can.''
Motorola to Split Into Two After Phone Sales Slide
Motorola Inc. plans to split into two companies next year amid pressure from billionaire investor Carl Icahn to break off the money-losing mobile-phone business that it pioneered 25 years ago.
One company will focus on handsets and the other will sell network equipment, cable TV set-top boxes and two-way radios -- businesses that are profitable and growing faster. The board is looking for a new leader for the phone business, Motorola said in a statement today.
The decision buys time for Chief Executive Officer Greg Brown to revitalize the handset unit before the split. Icahn has said the division is undervalued and demanded that it be separated with new management. Brown was looking for a buyer after sales slid for four straight quarters as consumers snapped up phones from Apple Inc. and Nokia Oyj.
``If they had been forced to sell it off, shareholders would have been forced to accept a bargain basement price,'' said Richard Windsor, a Nomura International analyst in London who recommends holding on to the stock. The move is ``the one that makes the most sense for shareholders.''
Motorola hasn't decided which business will be spun off to shareholders, though the current managers will stay with the home entertainment business, Brown said on a conference call. The Schaumburg, Illinois-based company wants the move to be a tax- free way to create two independent, publicly traded companies.
Motorola rose 42 cents, or 4.3 percent, to $10.18 at 9:32 a.m. in New York Stock Exchange trading. The stock had declined 45 percent in the past year before today.
Phone messages left with Icahn and his assistant Susan Gordon weren't immediately returned. He owns about 6 percent of Motorola's stock and is the No. 2 shareholder.
Brown's Goals
The breakup will help speed up the recovery in the handset business and provide ``clarity of direction'' for customers and employees, Brown said. Motorola has shed businesses in tough times before, including its Freescale chip division in 2004.
``Each company would benefit from improved flexibility, a capital structure more tailored to its individual business needs and increased management focus,'' said Brown, who took over after Ed Zander stepped down at the start of this year.
He declined to comment on the impact on earnings or what will happen to the Motorola brand name.
The handset business lost $388 million last quarter. The networks and set-top box unit had a profit of $192 million on 11 percent sales growth, while the unit making radios and scanners had a profit of $451 million on a 35 percent revenue increase.
Motorola made 19 acquisitions in two years to bolster the units. Its purchase of Symbol Technologies Inc. last year for $3.9 billion made it the biggest seller of handheld scanners with built-in computer features to track goods.
`Underlying Problems'
Motorola lost market share in phones last year after failing to come up with a hit successor to its Razr, which created the category of slim phones when it was introduced in 2004. The Razr, which initially sold for $500, has since lost its cachet. In some cases it's available for free with a contract. While all its main rivals boosted sales in the fourth quarter, Motorola's phone shipments plunged 38 percent.
``The Razr was so successful as a unique product that it masked a lot of the underlying problems,'' said Michael Walkley, an analyst at Piper Jaffray & Co. in Minneapolis. ``Once Razr sales started to fade, their cost structure wasn't competitive, especially now that they don't have the right products for the market.''
Apple introduced its Web-browsing iPhone, which combines a touch-screen mobile phone with an iPod, in June. The company sold 2.3 million of the devices in the holiday quarter. Motorola's Razr sequel sold 1.5 million units in that period.
Sales Plunge
Motorola started selling the world's first commercial mobile phone, the DynaTac, in 1984, after gaining regulatory approval for the device the year earlier. It created the first prototype for the product in 1973.
The phone acquired further cachet in 1987, when fictional financier Gordon Gekko, played by Michael Douglas, used the model to make deals in the movie ``Wall Street.''
In 1996, Motorola introduced the $1,000 StarTac, among the first handsets to flip fully open. After its appeal faded, the company lost its No. 1 position in 1998 to Nokia, whose candy- bar-shaped phones won over customers in Europe and Asia.
To revive sales, Motorola brought in Zander in 2004. He introduced the Razr later that year.
The device, which sold more than 110 million units, helped Motorola cement its position as the second-largest handset maker and fend off Asian competition until last year. Samsung Electronics Co. took over the No. 2 spot from Motorola in the second quarter with its sleek Sync and BlackJack devices. Sony Ericsson Mobile Communications Ltd. may steal the No. 3 position this year, demoting Motorola to fourth, analysts say.
U.S. Home Prices See Record Decline
Prices of existing U.S. single-family homes slumped in January, with 16 of 20 regions measured posting record annual declines, according to the Standard & Poor's/Case-Shiller home price index reported Tuesday.
The composite month-over-month index of 20 metropolitan areas fell 2.4 percent to 180.65 from December, bringing the measure down 10.7 percent from a year earlier and 12.5 percent from its July 2006 peak.
"It shows that the housing correction is still under way," said Michelle Meyer, an economist at Lehman Brothers in New York. "The weakness is not contained to the bubble areas."
Home prices in Las Vegas and Miami fell the most of any region, at 19.3 percent year-over-year, while Phoenix, San Diego and Los Angeles also suffered double-digit drops.
&P said its composite month-over-month index of 10 metropolitan areas fell 2.3 percent to 196.06 for an 11.4 percent year-over-year drop.
Goldman Sachs: Global Credit Losses to Reach $1.2 Trillion
Wall Street is expected to account for nearly 40% of an estimated $1.2 trillion in credit losses stemming from the market crisis, Goldman Sachs reported.
The research arm of the investment bank made the forecast in a note released on March 24.
According to economists at the investment bank’s Global Economic unit, U.S. leveraged institutions, including banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions. Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer.
Residential mortgage losses will represent about half the damage, with another 15% to 20% coming from commercial mortgages, Goldman Sachs said.
The rest of the losses will come from credit card loans, car loans, commercial and industrial lending and non-financial corporate bonds, Goldman economists said
The research arm of the investment bank made the forecast in a note released on March 24.
According to economists at the investment bank’s Global Economic unit, U.S. leveraged institutions, including banks, brokers-dealers, hedge funds and government-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions. Goldman estimated $120 billion in write-offs have been reported by these leveraged institutions since the credit crunch began last summer.
Residential mortgage losses will represent about half the damage, with another 15% to 20% coming from commercial mortgages, Goldman Sachs said.
The rest of the losses will come from credit card loans, car loans, commercial and industrial lending and non-financial corporate bonds, Goldman economists said
Tuesday, March 25, 2008
Clinton's housing crisis plan
Hillary Clinton proposed steps on Monday to boost the ailing U.S. economy and ease the housing crisis.
Showing a lack of confidence in President Bush's economic team, Clinton said former Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin should determine whether the U.S. government needs to buy up homes to stem the country's housing crisis.
Wall Street May Face $460 Billion Credit Losses, Goldman Says
Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said.
``There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.
Earnings and share prices at U.S. financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. earlier this month.
Goldman's own share-price estimate was cut 3.7 percent to $210 at Fox-Pitt Kelton Cochran Caronia Waller. The research firm also reduced its profit estimates for the world's biggest securities firm for the rest of this year and all of 2009.
Merrill Lynch & Co. had its 2008 profit estimates cut by 45 percent at JPMorgan on concern the third-largest U.S. securities firm by market value may disclose further writedowns on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages and commercial mortgages, New York-based analyst Kenneth Worthington said.
Bank of America
Bank of America Corp., the second-biggest U.S. bank by assets, was downgraded to ``sell'' from ``neutral'' at Merrill Lynch. The company, based in Charlotte, North Carolina, also had its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4.00 from $4.40 in 2009, analysts including New York-based Edward Najarian wrote in a note to clients today.
Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, had its share-price forecast cut 16 percent to $70 at Fox-Pitt. The brokerage's 2008 and 2009 profit estimates were also reduced.
Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''
Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.
Goldman, which has lost 17 percent this year on the New York Stock Exchange, rose 36 cents to $179.24 in composite trading at 11:50 a.m. Merrill fell $1.13 to $47.25, Lehman declined $2.16 to $44.48 and Bank of America dropped $1.47 to $40.98.
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