Morgan Stanley Propped Up Money-Market Funds With $23 Billion

Morgan Stanley clients withdrew almost one- third of their cash from money-market accounts last month, forcing the firm to buy $23 billion of securities held by the funds to keep them afloat.

Redemptions were $46 billion in September, mostly from funds that invest in corporate debt, Morgan Stanley said in an Oct. 9 regulatory filing. The New York-based company made sure the money-market funds had enough cash to repay investors by acquiring some of their assets with financing from ``various available stabilization facilities.''

Morgan Stanley may have relied on one or more programs set up by the Federal Reserve in the past month to prop up the $3.54 trillion money- market fund industry, analysts said. The Fed has taken steps to restore investor confidence shattered by losses last month at the Reserve Primary Fund, the oldest U.S. money-market fund.

``The outflows in money-market funds were unprecedented, savage'' said Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts, firm that tracks the industry. ``Broker-dealers in particular got hard hit because of concerns about their parent companies.''

Morgan Stanley bought the fund assets to ``ensure that redemption obligations were met amidst illiquid trading markets,'' Erica Platt, a spokeswoman for the firm, said in an e-mailed statement. Fed spokeswoman Susan Stawick declined to comment on whether Morgan Stanley had used central bank financing to aid its money-market funds.

Run on Funds

Individuals and institutions use money-market funds to earn a yield until the cash is needed. They are considered the safest investments after bank deposits and U.S. Treasuries, in part because they buy only highly rated fixed-income securities with an average maturity of 90 days or less. That reputation was undermined by the Sept. 15 bankruptcy filing of Lehman Brothers Holdings Inc.

The following day, the $62.5 billion Reserve Primary Fund said it wrote down to zero the value of $785 million of debt issued by the investment bank. That caused its asset value to fall below the $1-a-share purchase price, the first money-market fund in 14 years to break the buck. New York-based Reserve Management Corp. froze the fund.

The news triggered a run on prime money-market funds, which buy both corporate and government debt. Shareholders yanked $488 billion during the month from prime funds, according to data compiled by Westborough-based iMoneyNet.

Morgan Stanley shares fell as much as 69 percent during the week of Lehman's bankruptcy filing to a low of $11.70. The company's money funds have remained at $1 a share ``during the unprecedented market turmoil,'' Platt said in the e-mail.

Two Solutions

BlackRock Inc., the biggest publicly traded U.S. asset manager, said last week that investors pulled $53.8 billion from its prime money-market and securities-lending funds during the last two weeks of September. The funds, which have regained $13.8 billion since Sept. 30, met the redemptions with cash on hand and securities sales, according to spokesman Brian Beades.

Morgan Stanley injected cash into its money-market funds by purchasing their investments in municipal debt, certificates of deposit and commercial paper, which had become difficult to sell on the open market, according to its 10-Q filing with the U.S. Securities and Exchange Commission. The move permitted Morgan Stanley's funds to repay shareholders without having to sell the securities at a loss.

Morgan Stanley, which had $134 billion of money-market assets as of Aug. 31, didn't specify in the filing which funds had outflows. According to monthly notices sent to investors, its Prime Portfolio dropped to $10.4 billion from $36 billion during September and its Money Market Portfolio fell to $5.8 billion from $14.7 billion.

Fed Role

Both Morgan Stanley funds had more than 55 percent of assets in commercial paper at the end of August, according to the investor notices. On average, prime money-market funds had about 45 percent of assets in the corporate IOUs at the end of August, according to iMoneyNet.

Platt declined to describe the ``stabilization facilities'' that primarily funded Morgan Stanley's securities purchases from the money- market funds. The most likely source was the Fed, which has set up at least five funding facilities to help ease the credit crunch, including one unveiled Sept. 19 to provide banks and some brokerages with loans to buy asset-backed debt from money-market funds.

`Only Choice'

In addition, the Fed two days later approved applications by Morgan Stanley and Goldman Sachs Group Inc. to become bank holding companies -- ending the era of stand-alone investment banks -- and increased the availability of loans to the two firms. The Fed announced a Money Market Investor Funding Facility last week that will provide up to $540 billion in loans to buy assets, including commercial paper and certificates of deposit from funds hit with redemptions.

``Morgan Stanley faced the same problem as every other firm: the markets were very illiquid,'' said Brad Hintz, a securities-industry analyst at Sanford C. Bernstein & Co. in New York. ``Its only choice for financing was to go to the Fed.''

Trichet Says ECB May Reduce Rates Again Next Week

European Central Bank President Jean- Claude Trichet said the bank may cut interest rates again at its next policy meeting on Nov. 6 as the financial market crisis damps inflation pressures.

``I consider it possible that the Governing Council would decrease interest rates once again at its next meeting,'' Trichet said in a speech in Madrid today. ``It is not a certainty, it is a possibility.''

Stock markets tumbled around the world today, extending the worst monthly plunge in 70 years, on concern the financial crisis will develop into a prolonged economic downturn. Europe's economy is on the brink of a recession, with the region's manufacturing and service industries contracting at a record pace in October and the Dow Jones Stoxx 600 index down 47 percent this year.

``Given the market stress we're seeing at the moment, it makes sense to frontload the rate cuts,'' said Guillaume Menuet, a senior European economist at Merrill Lynch & Co. in London.He expects the ECB to cut to 2.75 percent by June.

The ECB, which raised interest rates as recently as July, joined a globally coordinated rate cut on Oct. 8, reducing its benchmark by half a point to 3.75 percent. The price of oil, the main inflation driver, has more than halved from its peak of $147.11 a barrel in July.

Improving Inflation Outlook

``If you look at where commodity prices are going, then of course the inflation outlook is improving quite rapidly, so this is very consistent with their inflation target, which will clearly be met in 2010,'' Menuet said.

Trichet said next week's decision whether to cut rates again hinges on the assumption ``that the new information that is progressively coming available since then is likely to indicate a further alleviation of the upside risks to price stability in the medium term and a confirmation of a more solid anchoring of inflation expectations in line with our definition of price stability.''

Investors expect the ECB to cut the benchmark rate by at least another half point when policy makers meet in Frankfurt on Nov. 6, Eonia forward contracts show.

Ukraine Gets $16.5 Billion Loan From IMF; Hungary Next in Line

The International Monetary Fund will lend Ukraine $16.5 billion and give Hungary ``a substantial financing package'' as the turmoil in global credit markets and recession concerns sweep across eastern Europe's emerging markets.

The 24-month Ukrainian loan is conditional on parliamentary approval of legislation to support the country's banks, the Washington-based lender said yesterday in a statement. The Hungarian deal was reached in cooperation with European Union.

Eastern Europe is being buffeted as investors, stung by losses in developed nations, sell riskier emerging-market stocks, bonds and currencies. Ukraine is the first nation in the region to receive IMF help in the crisis. Details of Hungary's agreement will be announced in coming days. Belarus last week asked the IMF for at least $2 billion after its banks lost access to financing.

``The money is only half of the issue, conditionality is key,'' said Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London. ``We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.''

Ukraine will need to balance its budget by reining in social spending and narrow the current-account deficit, the Kiev-based central bank said in a statement.

Banks

President Viktor Yushchenko faces an economic meltdown as prices for Ukraine's main exports, including steel, drop and a weakening currency makes goods purchased abroad more costly. He has urged the cabinet to raise custom duties to curb imports and help domestic producers boost exports to counter the widening trade gap.

Ukraine agreed to set up a fund that will buy stakes in the nation's banks and pass legislation that forces lenders to halt dividend payments to retain capital, central bank official Serhiy Kruhlik said in a telephone interview in Kiev today.

The central bank took control of closely held Prominvestbank on Oct. 7 and promised an injection of 5 billion hryvnia ($830 million) to bail out Ukraine's sixth-biggest bank by assets after a run by depositors.

The government also plans to raise the state guarantee on bank deposits to 100,000 hryvnia from 50,000 now and will use proceeds from privatizations and bond sales for the bank bailout fund, according to Kruhlik. The parliament is scheduled to vote on the amended legislation on Oct. 28.

`Domino Effect'

``This has to be seen in the light of the risk of a larger- scale domino effect in the region,'' said Lars Christensen, senior analyst with Danske Bank A/S. ``It will need serious economic reform, a significant restoration package to justify this amount. With political uncertainty as in Ukraine, the country will have to go under the IMF's economic dictatorship.''

Ukraine's current-account deficit may widen to $15 billion this year, central bank governor Volodymyr Stelmakh said this month. The gap was $7.5 billion, or about 6 percent of gross domestic product, in the first eight months.

The former Soviet republic's currency tumbled 13 percent last week and touched a record 6.0812 per dollar on Oct. 24. the lowest since the hryvnia was introduced in 1996. Annual inflation accelerated to a record 31.1 percent in May before slipping to 24.6 percent in September.

Ukraine is the least creditworthy of Europe's transition economies measured by the cost of credit-default swaps, conceived to protect bondholders against default. Its economic predicament is complicated by a political crisis that led to collapse of the government and calling of early elections.

Yushchenko dissolved the parliament on Oct. 8 and a new one will be chosen on Dec. 14, the second national elections in as many years. His party, which seeks closer ties with the European Union and the North Atlantic Treaty Organization, quit the coalition on Sept. 3 after former ally, Prime Minister Yulia Timoshenko, joined with the pro-Russian opposition to strip the president of some powers.

Hungarian Woes

Hungarian stocks, bonds and the forint plunged in the past two weeks on concern the country will face difficulties financing its current account and budget deficits with global credit drying up. Markets continued to slide even after the European Central Bank and the International Monetary Fund pledged support in principle.

The central bank on Oct. 22 raised the benchmark interest rate by 3 percentage points, the biggest increase in five years, to 11.5 percent, signaling that its currency's defense was the biggest priority even at the expense of economic growth.

The IMF on Oct. 24 agreed to lend Iceland $2 billion. Pakistan may also need an emergency loan to help repay debt.

Capital One, Key Among 12 Banks Taking $28 Billion

Twelve regional U.S. banks, including SunTrust Banks Inc. and Capital One Financial Corp., accepted at least $28 billion in government cash as the Treasury rolled out the second half of its $250 billion package to shore up lenders and thaw frozen credit markets.

Treasury Secretary Henry Paulson is doling out cash to recapitalize struggling lenders and jump-start takeovers in an industry suffering from the worst housing crisis since the Great Depression. SunTrust, Capital One, KeyCorp and PNC Financial Services Group Inc. are among lenders that accepted cash in recent days by selling preferred shares to the government.

``This is just unprecedented,'' said BMO Capital Markets analyst Peter Winter. ``What the government has said is that you can't let the financial system fail, and if this doesn't work they'll come up with another plan.''

The U.S. capital infusions come as global governments do all they can to ensure the stability of banks. Kuwait's central bank said it will guarantee deposits at Gulf Bank KSC, which remains solvent after clients defaulted on currency derivatives contracts, the state-run Kuwait News Agency reported. Paulson already gave $125 billion to nine of the biggest U.S. lenders.

Some banks are raising money on their own. Mitsubishi UFJ Financial Group Inc., the Japanese bank investing $9 billion in Morgan Stanley, said it will sell as much as 990 million yen ($10.7 billion) of stock to replenish its capital. Japan's biggest bank may sell as much as 600 billion yen of common shares in the 12 months starting Nov. 4.

Niagara Falls, Beverly Hills

The latest U.S. banks to benefit from the government's Troubled Asset Relief Program, or TARP, spanned the nation, ranging from City National Corp., in Beverly Hills, California, to First Niagara Financial Group Inc., based in upstate New York near Niagara Falls. The banks were joined by State Street Corp., the world's largest money manager for institutions, which is selling a $2 billion stake. Northern Trust Corp., a custody bank that oversees $3.53 trillion, plans to sell the government a $1.5 billion stake.

``We're happy to do our part to support the financial and economic stability of the U.S.,'' Capital One spokeswoman Tatiana Stead said in an e-mailed statement. The McLean, Virginia-based bank, which is raising $3.6 billion, rose 3.3 percent in New York trading to $36.47 as of 10:13 a.m.

News of the infusions helped spur gains in U.S. financial stocks, as the 24-company KBW Bank Index jumped 4.5 percent. Fifth Third Bancorp, which expects $3.4 billion from the Treasury, surged as much as 20 percent. Regions Financial, which is selling a $3.5 billion stake, rose 17 percent, and Huntington Bancshares Inc. advanced as much as 16 percent.

Tennessee, Cleveland

Fifth Third, Ohio's second-largest lender, made no mention of previously announced plans to raise more than $1 billion selling non-core businesses.

First Horizon National Corp., Tennessee's largest bank, said Friday it received preliminary approval to receive about $866 million from the U.S. Treasury. PNC on Friday announced it was buying National City Corp. for $5.2 billion in stock after receiving $7.7 billion from the Treasury. Washington Federal Inc. and Valley National Bancorp said over the weekend they would receive a total of $560 million from the government. City National said it would sell $395 million in preferred stock and warrants.

Cleveland-based KeyCorp plans to sell $2.5 billion in equity. Huntington, of Columbus, Ohio, announced its application for $1.4 billion in a statement today.

Boost to Lending

The funds will help KeyCorp ``gain flexibility in managing our balance sheet'' and ``enhance our ability to lend to our relationship clients,'' Chief Executive Officer Henry L. Meyer said in a separate statement today.

The bank said that had the $2.5 billion capital increase been in place on Sept. 30, KeyCorp's Tier 1 ratio, measuring the ability to absorb losses, would have been about 10.76 percent, rather than 8.48 percent.

Another bank accepting funds was Comerica Inc. The Dallas- based bank, which also does business in Canada and Mexico, said today that it plans to sell $2.25 billion in preferred stock and warrants to the Treasury, boosting its Tier 1 ratio to 10.35 percent.

Lehman Bankruptcy Professional Fees May Reach $1.4 Billion:

Fees could reach a record $1.4 billion for lawyers, accountants and other professionals working on the Lehman Brothers Holdings Inc. bankruptcy, the largest in U.S. history.

The biggest winner will be New York-based law firm Weil, Gotshal & Manges, Lehman's adviser, with an estimated $209 million in fees, said Lynn LoPucki, who teaches bankruptcy law at Harvard University in Cambridge, Massachusetts. His projections are based on fees paid for other large bankruptcies, including the most expensive to date, Enron Corp.

Lehman, with debt of about $613 billion, will need a bankruptcy judge's approval for about $906 million in charges for professional services, LoPucki said. By comparison, court- approved expenses for the bankruptcy of Enron, the world's largest energy trader until its 2001 collapse, totaled $757 million, of which $149.4 million went to Weil.

``We're breaking new ground in the size of the fees,'' LoPucki said in an interview yesterday. ``Lehman is such a large case that there is a lot of money there. It's like the guy who robbed the banks because that's where the money was.''

LoPucki said the debtor will pay an additional $524 million of fees, most of which don't need prior court approval. These include fees to secured lenders and claims agents, as well as auditing fees unrelated to the restructuring.

Law firm Milbank, Tweed, Hadley & McCloy, also based in New York, could make as much as $58 million in its role advising the creditors' committee in the case, said LoPucki, who calculated the fees with Joseph Doherty, the director of the Empirical Research Group at the University of California, Los Angeles, law school, where LoPucki also teaches.

It breaks out this way:

Lehman asked Oct. 8 for court approval to pay Weil, led by bankruptcy partner Harvey Miller, $650 to $950 an hour for partners and counsel; $355 to $595 for associates; and $155 to $295 for paraprofessionals.

Milbank, as adviser to the creditors' committee, has requested $700 to $950 per hour for partners; $650 to $850 for of counsel; $275 to $670 for associates and senior attorneys; and $155 to $325 for legal assistants, according to court papers filed on Tuesday.

Quinn Emanuel Urquhart Oliver & Hedges, the law firm acting as special counsel to the creditors' committee, asked for $660 to $950 an hour for partners, $380 to $950 for other lawyers and $250 to $280 for professional staff.

Houlihan Lokey, as investment banker to the creditors' committee, requested $500,000 per month for the first six months and $400,000 for each month after. Houlihan also asked for deferred fees of 0.05 percent of the first $30 billion of unsecured recoveries and 0.035 percent of all unsecured recoveries in excess of $30 billion, according to the filings.

Lean, mean Goldman to cull 3,200 jobs

GOLDMAN Sachs Group Inc, the only firm among Wall Street's five biggest to remain profitable through the credit crisis, will shed about 3,200 workers, or 10 percent of its staff, as the revenue outlook worsens, industry sources said.

The cuts add to more than 130,000 jobs eliminated in the financial industry since mid-2007, eclipsing the cuts after the Internet bubble burst in 2001, according to Bloomberg News. Goldman had 32,569 employees at the end of August, up 3 percent from May and 9 percent for the year.

Banks worldwide are shelving deals and cutting jobs as the unprecedented turmoil in credit markets spreads and spurs concern the global economy may fall into a recession. Goldman, which converted to a bank holding company last month and is receiving US$10 billion from the United States Treasury, has dropped by almost 50 percent in New York trading this year.

"When a lean and mean firm starts trimming, they're cutting into muscle," said Shaun Springer, chief executive officer of Napier Scott Executive Search Ltd in London. "The fact that they are cutting 10 percent is quite indicative of the fact that there are still a lot of problems ahead."

The new job cuts signal a reversal in strategy at Goldman since September 16. At that time, Chief Financial Officer David Viniar told analysts he expected the number of Goldman employees to increase by a percentage "in the low single digits" this year, excluding the purchase of a mortgage servicing company.

Global Recession Concerns Prompt Governments to Act

After easing the financial-market panic by committing trillions of dollars to shore up their banking systems, governments are broadening their focus to buffering its economic aftershocks.

U.S. lawmakers are moving toward the second fiscal stimulus bill this year and Japanese Prime Minister Taro Aso is set to cut income taxes. In Europe, Britain's Gordon Brown plans to spend more on schools, Italy's Silvio Berlusconi looks to enact tax breaks for manufacturers and Angela Merkel of Germany mulls tax rebates. French President Nicolas Sarkozy today lifted a tax on business investment until the start of 2010

``Having taken action on the banking system, we must take action on the global recession,'' Prime Minister Brown told U.K. lawmakers yesterday. ``No country can insulate itself.''

Politicians are acknowledging the worst still lies ahead for their economies and their own electoral fortunes unless they act to cushion growth. World leaders will meet in the U.S. on Nov. 15 to review progress in combating the financial crisis and how to avoid a repeat of it.

The cost of borrowing money among banks has fallen after authorities in the U.S. and Europe acted to take stakes in their biggest banks as global stocks plunged and lending seized up. The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans fell 2 basis points to 4.92 percent today, the lowest level since June 5, according to the European Banking Federation.

`Meltdown' Averted

``A global meltdown has been averted and governments, while implementing their respective rescue plans, should now turn their attention to the economy and limit the effects of a global recession,'' said Geoffrey Yu, a London-based currency strategist at UBS AG.

Tensions are easing too late to prevent companies and consumers from retrenching. Economists at Deutsche Bank AG expect the Group of Seven economies to contract 1.1 percent next year, the worst since the Great Depression. Even with emerging markets lending support, they predict the weakest global growth since the 1980s.

``As growth slumps, fiscal policy should turn sharply expansionary,'' said Thomas Mayer, Deutsche Bank's co-chief economist in London.

U.S. lawmakers are devising new spending plans after Federal Reserve Chairman Ben S. Bernanke endorsed the idea on Oct. 20 and the Bush administration dropped its opposition. The new push will aim to extend jobless benefits, fund infrastructure projects and help cash-strapped regional governments, according to House Budget Committee Chairman John Spratt.

Fading Fillip

The effect of measures totaling $168 billion that U.S. lawmakers passed in February has faded after they gave the economy a fillip in the second quarter.

Aso, with an election nearing, will next week unveil the government's second stimulus program since August. The plan will probably include income-tax cuts, deductions for people with home loans and an extension of breaks on capital gains, say economists.

European governments may bend their own rules that cap budget deficits in a bid to save their economies.

Brown's U.K. government will next month step up spending on housing, energy and small businesses, while bringing forward construction projects on schools and hospitals, say ministers including U.K. Chancellor of the Exchequer Alistair Darling.

German Budget Balance

Italian Prime Minister Berlusconi's government is indicating it will enact tax breaks for carmakers and appliance manufacturers. German Chancellor Merkel, who had focused on returning her budget to balance, is considering a 15 billion- euro ($19.3 billion) package of tax rebates. Sarkozy said from today ``any new investment made by companies'' in France will be tax-free.

Emerging markets, the growth engines of the global economy, are also looking for remedies to fading expansions.

China's State Council on Oct. 21 cut taxes for exporters and approved construction programs including new expressways and hydro-electric power stations. Thailand's Deputy Prime Minister Olarn Chaipravat and Jun Kwang Woo, chairman of South Korea's Financial Services Committee, said in separate interviews on Oct. 21 that their governments may ease fiscal policy.

Governments may prove more powerful than central bankers in the current environment, said Julian Jessop, chief international economist at Capital Economics Ltd. Lower interest rates are less effective when the financial system is frozen and have a lagging effect at the best of times, he said.

Fewer Obstacles

Governments also have fewer obstacles than usual, Jessop said. Public borrowing is unlikely to ``crowd out'' other spending given that consumers and companies are cutting back, while the inflationary byproduct of budget deficits will offset deflationary forces such as cheaper fuel and rising unemployment, he said.

``The greater use of discretionary fiscal policy will be an increasingly important global theme over the coming year,'' said Jessop, a former U.K. Treasury economist.

There are some barriers to how far governments can go, and in the longer term investors may punish those running the largest budget deficits, said Robert Lind, chief economist at ABN Amro NV. He calculates that among rich countries Finland, Sweden, Luxembourg and New Zealand have the greatest capacity to spend, while the U.S., U.K. and Japan have the least.

Biggest Post-War Deficit

The U.K. this week posted its biggest six-month budget deficit since World War II, while the annual deficit in the U.S. could exceed $1 trillion for the first time. In contrast, economies which have enjoyed commodity booms such as Australia or China have budget surpluses and currency reserves to tap.

For now, Lind said governments are rightly invoking the spirit of economist John Maynard Keynes, who died in 1946 after a career advocating activist government as the best solution to slumps such as the Great Depression.

``More government intervention should help to contain the severity of the economic downturn,'' said Lind. ``We are all Keynesians now.''

Greenspan Concedes to `Flaw' in His Market Ideology

Former Federal Reserve Chairman Alan Greenspan said a ``once-in-a-century credit tsunami'' has engulfed financial markets and conceded that his free-market ideology shunning regulation was flawed.

``Yes, I found a flaw,'' Greenspan said in response to a grilling from the House Committee on Oversight and Government Reform. ``That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.''

Greenspan said he was ``partially'' wrong in opposing regulation of derivatives and acknowledged that financial institutions didn't protect shareholders and investments as well as he expected. Forecasting is an inexact science, he said.

``If we are right 60 percent of the time in forecasting, we are doing exceptionally well; that means we are wrong 40 percent of the time,'' Greenspan said. ``Forecasting never gets to the point where it is 100 percent accurate.''

In May 2005 speech, Greenspan said that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''

Committee Chairman Henry Waxman, a California Democrat, said Greenspan had ``the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.''

``You were advised to do so by many others,'' he told Greenspan. ``And now our whole economy is paying the price.''

Waxman and other lawmakers repeatedly interrupted Greenspan as he answered their questions, in contrast to deference to his testimony while he was Fed chairman.

Writedowns, Losses

Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony. Other rules should address fraud and settlement of trades, he said.

Greenspan opposed increasing financial supervision as Fed chairman from August 1987 to January 2006. Policy makers are now struggling to contain a financial crisis marked by record foreclosures, falling asset prices and almost $660 billion in writedowns and losses tied to U.S. subprime mortgages.

Today, the former chairman asked: ``What went wrong with global economic policies that had worked so effectively for nearly four decades?''

Greenspan reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.

`Three Bill Buckners'

``As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,'' Greenspan said. That would give the companies an incentive to ensure the assets are properly priced for their risk, advocates say.

Securities and Exchange Commission Chairman Christopher Cox and former Treasury Secretary John Snow also appeared at the House committee hearing today.

Snow said the global ``financial architecture'' should be reorganized by focusing on increasing transparency of ``excessive'' leverage to prevent institutions from creating too much risk.

The U.S. needs ``one strong national regulator'' to oversee firms and fix what Snow called ``a fragmented approach'' to regulation. ``Steps to restore transparency and responsibility in the marketplace will go a long way towards restoring stability and confidence,'' he said.

Addressing the trio that oversaw the U.S. financial markets as the housing bubble developed, Representative John Yarmuth, a Democrat from Kentucky, characterized them as ``three Bill Buckners,'' referring to the Boston Red Sox first baseman whose fielding error some fans blame for the team's loss in the 1986 World Series.

Fannie, Freddie Have `Explicit Guarantee,' FHFA Says

The government seizure of Fannie Mae and Freddie Mac and the U.S. Treasury's pledge of $200 billion in funding represents explicit federal support of the companies' debt and mortgage-backed securities, Federal Housing Finance Agency Director James Lockhart said.

``The conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac,'' Lockhart told the Senate Banking Committee in testimony today from Washington.

The comments are Lockhart's strongest yet in his efforts to combat doubts by investors about his commitment and that of Treasury Secretary Henry Paulson in standing behind the debt. The extra yield investors demand to own Fannie and Freddie corporate debt versus U.S. Treasuries fell today after his comments.

``It's a clear move by the government to try to verbally reinforce the relationships with the government without taking any other action,'' Margaret Kerins, managing director of agency debt strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said. ``I think at some point the market will see through that, and force Paulson to say something, or fade it.''

The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries narrowed 3.7 basis points to 115.4 basis points at 12:32 p.m. in New York after reaching their highest levels on record last week, according to data complied by Bloomberg. The gap between Freddie's five-year notes and Treasuries narrowed 2.5 basis points to 120.3 basis points. A basis point is 0.01 percentage point.

Stop Trading

Jim Vogel, the head of agency debt research at FTN Financial Group in Memphis, Tennessee, urged his clients not to trade on the news until there is a legal clarification about a guarantee.

``You must NOT believe what Lockhart says'' until seeing more evidence, Vogel wrote in a note to clients. ``Lockhart might be reflecting some pending change in outlook, but the better conclusion is he is using language that means one thing in his mind but another to traders.''

E-mails to FHFA spokeswomen Stefanie Mullin and Corinne Russell seeking clarification on Lockhart's comments weren't immediately returned.

Yield spreads on Fannie and Freddie's five-year debt widened as much as 30 basis points, or 0.30 percentage point, last week as Paulson said the Federal Deposit Insurance Corp. will fully guarantee new bank debt, presenting investors with a potentially more attractive investment.

Though Paulson agreed to offer capital and financing to Fannie and Freddie to protect their debt and mortgage bonds from default as part of the September takeover, investors still say the federal backing is ambiguous.

Settle Down

``Up until this week, we haven't heard Lockhart say `explicit' before and we certainly haven't heard Paulson say `explicit,''' Kerins said. ``They're trying to put the GSEs back on par with where this FDIC-backed paper is coming.''

``Nothing has changed though,'' she added.

Lockhart tried to reassure investors on Oct. 20, telling lenders at the Mortgage Bankers Association's annual conference in San Francisco that the government has already ``effectively'' guaranteed the debt. The financial commitment ``provided the full support of all Fannie and Freddie securities,'' Lockhart said.

``It's my hope that as the markets settle down that investors will realize the strength of the U.S. government commitment'' to Fannie and Freddie, Lockhart said then.

While Paulson's agreement doesn't expressly give the companies' obligations the ``full-faith-and-credit'' of the U.S. government, it waives the Treasury's federal immunity from liability. That gives corporate debt and mortgage bondholders the right to sue the Treasury in the U.S. Court of Federal Claims on Fannie and Freddie's behalf in the event of a default.

Loan Modifications

Lockhart today also said FHFA is pushing Fannie and Freddie to work harder at modifying their troubled single- and multi- family mortgages to curtail foreclosures.

FHFA has taken on the role of a ``federal property manager,'' working to implement a plan with the Treasury that ``maximizes assistance for homeowners to minimize foreclosures'' Lockhart said in his testimony. He said FHFA will encourage mortgage servicing companies to modify troubled loans.

Fannie and Freddie, which own or guarantee 40 percent of the $12 trillion in U.S. residential mortgages, began pulling away from the market in August to preserve capital after $14.9 billion in losses over four quarters. Their inventory of foreclosed homes jumped 43 percent in the first half, their success in resolving delinquencies fell, and they took on fewer loan modifications and workout plans for borrowers, FHFA said in a report yesterday.

``A key reason for moving quickly to conservatorship was that the companies' abilities to serve their mission had been impaired,'' Lockhart said in his testimony. ``Ceasing new business activity and shedding assets was not acceptable.''

Loss Mitigation

The companies are expected to post more losses when they report third-quarter earnings next month, and analysts surveyed by Bloomberg don't expect either Fannie or Freddie to turn a profit at least through the end of next year.

The companies' inventory of foreclosed homes jumped to 76,154 at the end of June from 53,187 properties, according to the report released by FHFA yesterday. The number of borrowers entering so-called workout plans to bring their mortgages current dropped 10.4 percent from the first quarter to 10,740.

The success rate of loans in loss mitigation declined to a 37.2 percent rate from 43.7 percent in the first quarter, the report shows. Loss mitigation includes temporarily restructuring payments, modifying loan terms and charging off a portion of the principal.

``While FHFA commends the enterprises for their efforts, it is evident more can be done,'' Lockhart said.

Lockhart, who sits on a five-member board overseeing Treasury's $700 billion Troubled Asset Relief Program, said the companies can use the TARP's insurance program to help ``facilitate'' even more loan modifications.

Leftist France gloats at capitalism’s failings as free market model melts

When storied Wall Street firm Lehman Brothers Holdings Inc. fell, France looked on in disbelief as the U.S. government refused to rescue the 158-year old firm and its 25,000 employees.

Uncle Sam was pictured in a front page cartoon in Le Monde chucking a wreath at the bank’s headquarters as it sank in turbulent waters.

Then, in the financial maelstrom unleashed after Lehman’s failure, the United States and other bastions of free market capitalism changed tack, embarking on what many have called a semi-socialist path of nationalizing banks.

For many in France, the meltdown of the long despised and envied “Anglo-Saxon” capitalist model has been cause for grim satisfaction.

While fearful of the global economic downturn, French commentators in cafes, dinner parties, newspaper columns and beyond have been quietly gloating that maybe their much-criticized system of heavy government involvement in the economy isn’t so bad after all.

In the Nouvel Observateur weekly, columnist Jacques Julliard rejoiced that France was no longer hearing “diatribes” against its “archaic” system.

“Where have the (economic) liberals gone?” he asked. “Since Bush nationalized the American banking system we don’t hear from them anymore.”

That the dramatic events of the past few months have provoked such a reaction is not surprising, as opinion polls over the years show a lot of French voters are wary of capitalism. According to a 2007 survey of 18 developed and developing countries by Globescan, an international pollster, France is one of only two countries along with Turkey where a majority disapprove of the market economy.

The irony of France’s satisfaction over Wall Street’s troubles is that the French economy is very much part of the capitalist system, too. Its workers, while better protected by hiring and firing laws than in the United States or Britain, are among the world’s most productive. Some of its leading banks have been key players in cutting-edge financial markets. And in electing Nicolas Sarkozy as president in May 2007, the French put in power a reformist who vowed to make them work longer hours for more money.

But France also has long been a spiritual homeland for leftism, from the revolutionaries of 1789 to Jean-Paul Sartre and other 20th century intellectuals.

The financial meltdown has confirmed people’s doubts, says Stephane Rozes, head of French polling firm CSA.

“For 15 years French people have been hostile to economic liberalism,” he said. “In the past, it was a theoretical perception, a question of culture. Now they feel they are dealing with something real.”

Even Sarkozy, nicknamed “The American” for his admiration of the U.S. entrepreneurial spirit, is changing his tune.

Elected on promises to shake up stagnant, interventionist French traditions, he has now teamed up with British Prime Minister Gordon Brown to call for a new global economic order that will rein in the perceived excesses of the free market.


Sarkozy was in Camp David this weekend arguing the case for “a new capitalism” with U.S. President George W. Bush. He wants a rethink of tax havens, hedge and sovereign wealth funds, and the “folly” of big pay bonuses for risk-taking executives.

Sarkozy declared last month that the world of “all powerful markets which are always right” to be “finished” and he has stopped talking about freeing up mortgage lending and hiring and firing.

On Tuesday, Sarkozy suggested that EU countries should set up their own sovereign wealth funds to prevent European companies from falling into foreign hands as share prices plummet.

“I don’t want European citizens to wake up in several months and find European companies belonging to non-European capital, which bought at the share price’s lowest point,” he said.

Many of the French bankers Sarkozy wanted to woo back from lucrative jobs in London have returned to take advantage of the generous social benefits after they found themselves out of jobs.

Le Point weekly said a loophole allows the unemployed former London-based French traders to claim more than half of their salary if they work for more than one day or less than a month on their return to France. Many of them are serving fries in McDonalds, temporarily at least, according to the magazine.

The French are saying the crisis is bigger than a financial or banking problem that can be fixed with more or better regulation or with wads of taxpayer money. It’s the system itself that is broken. Just like a junkie, they say, the world has lost control and allowed its appetites to overwhelm it.

“A page is being turned,” declared Olivier Besancenot, leader of France’s Revolutionary Communist League, as printing presses churned out revolutionary leaflets one floor below his offices.

Polls place Besancenot as one of the most well-liked politicians on the left, even if people aren’t ready to vote for his radical left solution at the ballot box: a planned global economy, with stabilized prices.

Segolene Royal, the Socialist presidential candidate who lost to Sarkozy, blames Ronald Reagan for having “contaminated” Europe with his belief that big government was a problem.

“What do we see today?” she asked in a speech Oct. 15. “We see that state intervention is an essential part of the solution while unregulated markets are precisely the problem.”

That view is shared at Les Deux Magots, a cafe once associated with Sartre and his existential friends and now a respite for high-end shoppers.

“We are victims of capitalism,” said Thierry d’Olivera, 50, a lighting engineer said as he sipped his afternoon coffee. “It’s the hunt for profits, the need to get as much money as quickly as possible, the greed that has brought us here.

Goldman Sachs tipping recession in Aust by Christmas

Australia could be in recession for the first time in 17 years by Christmas, financial services firm Goldman Sachs JBWere says.

September quarter economic indicators point to an ongoing deterioration in growth on the back of a very weak June quarter, Goldman's chief economist Tim Toohey said on Australia's ABC TV last night.

"We think it's quite likely that by the time Christmas rolls around, Australia will be in its first recession since this expansion began 17 years ago," he said.

But with more interest rate cuts on the horizon, any recession was likely to be relatively short by historical standards, he said.

He predicted a further cut in the official cash rate of 1.5 percentage points to 4.5 per cent by March 2009.

Borrowers could see more relief from the US markets allowing Australia banks to pass on most of the predicted rate cut, he said.

"There's a very important development that's occurring in terms of opening up of the commercial paper markets in the US. If those spreads start to come in, we actually do think that the spreads that matter for the banks or the banking system will in time start to come down as well."


The Australian federal government's A$10.4 billion (A$11.82 billion) spending package for pensioners, families and first home buyers - amounting to slightly less than one per cent of GDP - would make an impact from December.

"It starts really en masse on December 8 ... by then we think the economy ought to be slowing quite sharply," Toohey said.

Goldman is also tipping business investment to be "slightly negative" during 2009.

DBS Declines on Concern Compensation to Hurt Profit

DBS Group Holdings Ltd., Southeast Asia's biggest bank by assets, fell to the lowest in five years on concern its compensation to customers of structured products tied to Lehman Brothers Holdings Inc. will reduce profit.

DBS shares fell as much as 7.8 percent to S$10.70, the lowest since July 7, 2003. The stock traded at S$10.96 at the midday break in Singapore, down 47 percent this year.

The bank said late yesterday it expects compensation to customers in Singapore and Hong Kong to amount to as much as S$80 million ($53 million). More than 500 investors held public rallies in Singapore for two straight weeks to seek compensation for losses on Lehman-linked products.

``Whilst the earnings impact from the Lehman Minibond sales is seen to be small, we continue to be cautious on DBS,'' Leng Seng Choon, an analyst at DMG & Partners Securities Pte, said in a note today, estimating the compensation will lower DBS's profit by about 3 percent. ``We are reviewing our DBS earnings forecast.''

DBS and lenders including Malayan Banking Bhd. and BOC Hong Kong (Holdings) Ltd. sold structured products such as those guaranteed by Lehman, some of which defaulted following the New York-based firm's collapse. A backlash among investors who bought the securities prompted central banks in Hong Kong and Singapore to investigate how the products were marketed.

`Not Large'

``We have found that a number of cases did not meet the standards DBS upholds and the bank will be compensating these customers with effect from tomorrow,'' DBS said in a statement to the Singapore exchange yesterday.

DBS said 4,700 customers in Singapore and Hong Kong invested S$360 million in these products. In Singapore, 1,400 customers invested S$103 million in High Notes 5.

While the compensation ``is not large versus a profit base of over S$2 billion, we believe there will be further negative earnings news over the next few quarters as the downtown deepens,'' Citigroup Inc. said in a note today, retaining its ``sell'' recommendation on DBS shares.

Along with DBS's High Notes 5, Merrill Lynch & Co.'s Jubilee Series 3 and the so-called Minibond program were also tied to Lehman. Lehman, once the No. 4 U.S. securities firm, filed for bankruptcy protection on Sept. 15, falling victim to the global financial crisis that has generated $658.5 billion of writedowns and credit losses.

Restructuring Minibonds

The Monetary Authority of Singapore said yesterday two international financial institutions have offered to restructure the notes to allow them to run to maturity, a move that could help investors recoup some losses. It didn't release the terms of the proposals, saying talks are confidential.

Other financial companies have also said they plan to compensate some investors. Malayan Banking or Maybank, the largest Malaysian bank by assets, said yesterday it will pay ``deserving'' customers who purchased minibonds. The company has interviewed some of the investors and is working out details of the compensation plans, the bank said in an e-mailed statement.

Hong Leong Finance Ltd. said in a statement it will buy back minibonds from customers who were at Singapore's retirement age of 62 at the time of the purchase and aren't educated beyond grade school.

Hong Kong banks last week said they agreed to a government plan to buy back the products, some of which were sold as ``minibonds,'' at market value. Singapore's Monetary Authority said banks ``should take responsibility'' and it's investigating investors' claims that they were misled on the sale of the Lehman- linked structured products.

Goldman's 10% layoffs reflect debt's dangers

The Goldman Sachs Group plans to can 10% of its 32,500 person staff. Despite its glorious reputation, Goldman is not that different from other financial institutions (FIs). It earned high returns by borrowing too much and now that over-borrowing is causing a painful implosion. As I pointed out last night at The Wharton Club of Boston, the current debt-led bubble has cost $37 trillion so far -- six times more than the equity-led dot-com bubble.

The cost of debt is clear from a quick examination of Goldman's financial statements under current CEO Lloyd Blankfein. When he took over from current Treasury Secretary Hank Paulson, Goldman's ratio of assets to shareholder equity was 18.7 but by the end of 2007, the ratio peaked at 26.2 as assets more than doubled to $1.1 trillion and its return on equity (ROE) climbed to 32%.

Much of the increase in Goldman's ROE was due to debt. In particular, 65% of the increase in Goldman's ROE from 2003 to 2006 was a result of its industry-leading use of borrowed money to increase its assets. While high leverage amplifies returns when asset values climb, it causes even more offsetting pain when asset values decline. For example, the $305 billion in profits earned by the top nine investment banks over the last three years has been wiped out by $323 billion in write-downs in the last year.

With Goldman's 2007 leverage ratio of 26, a 4% decline in the value of its assets would wipe out Goldman's capital, and with losses spreading from mortgages to stocks, corporate debt, commodities, emerging markets and real estate, it should come as no surprise that Goldman is trying to raise capital and cut staff. Goldman's frantic efforts to raise capital and reduce assets are designed to ensure its survival.

But for investors the real question is where Goldman will look for growth in this treacherous market. I think there will be clues about what Goldman thinks about these opportunities when it becomes clear which parts of Goldman lose the fewest people in the now-looming layoffs.

World markets mixed after Wall Street rebound

ebounded strongly overnight, with Japanese shares recovering from a historic fall in the previous session.
Tokyo's Nikkei 225 stock average advanced 235.27 points, or 2.78 percent, at 8,693.82. The index was still far from recouping Thursday's 11.4 percent loss _ its biggest one-day percentage drop since the stock market crash of October 1987.
For the week, the Nikkei gained 5 percent, much better than the 24 percent it lost last week.
Compared to the gyrations earlier this week, Asian markets were moderately more stable.
Shanghai's index rose for the first time in a week. But Hong Kong's Hang Seng index dropped over 4 percent to 14,554.21, its lowest level in almost three years as selling accelerated late in the day after banks said they would help investors in Lehman Brothers-backed bonds recouped some of their money. Australia, Singapore and South Korea also closed lower.
European stocks fared better in early trading as Britain, German and French indices gained more than 2 percent. Russian stocks lost ground.
Friday's mixed session closed out an extremely volatile week that began with a two-day rally. Then, on Thursday, global stock markets plunged as weaker-than-expected U.S. retail sales data and a downbeat assessment from the U.S. Federal Reserve showed the world's largest economy, so critical to Asia's export countries, was heading into a recession.
'Within Asia, people are getting worried about a recession,' said Daniel McCormack, a strategist for Macquarie Securities in Hong Kong. 'Today people are trying to work out which sector, which stocks, which companies are going to get hit and starting to position themselves accordingly.'
Overnight in New York, a late wave of buying lifted the Dow Jones industrials 4.7 percent, or 400 points, to 8,979.26 in a yet another volatile session that saw the benchmark swing more than 800 points.
The Dow remains up 528 points, or 6.3 percent, for the week.
Governments across Asia remained focused on the financial crisis. Late Thursday, Malaysia said it would guarantee all bank deposits for the next two years, following similar moves by Hong Kong and Singapore amid fears about the health of banks.
In Australia, Prime Minister Kevin Rudd gave a reassurances that the country would pull through the crisis 'in good shape. He said he would soon present a proposal in response to the crisis that would include a review of executive pay at financial institutions.
With crisis and recession talk still weighing heavily, Japan investors bought targeted sectors such as utilities and telecommunications, whose earnings are considered somewhat insulated from global downturns. Nippon Telegraph and Telephone Corp. soared 9.82 percent and Tokyo Gas Co. jumped 5.85 percent.
'Investors are seeing stocks undervalued now, but they're still scared of the downside,' said Tomochika Kitaoka, strategist with Mizuho Securities in Tokyo. 'So they are buying into relatively safe stocks.'
In Hong Hong, banks were hit with a late-day bout of selling after the territory's banking association agreed to help repay investors in Lehman-backed bonds whose values have been in doubt since the Wall Street firm collapsed last month.
Top China lender ICBC lost 5.3 percent, while China Construction Bank tanked more than 9 percent.
Mainland Chinese shares rebounded, though, helped by a surge in brokerages amid reports they soon may be allowed to test-trial margin trading.
Oil prices rose. Light, sweet crude for November delivery was $1.43 higher a $71.28 a barrel in Asian trade. Oil prices are now half of their peak price in July.
In currencies, the dollar declined slightly to 101.23 yen Friday from 101.30 yen late Thursday. The euro stood at $1.3457 from $1.3492.
In signs the credit markets were loosening, the Hong Kong interbank offered rate, known as Hibor, for three-month loans declined to 4.19 from 4.35 percent.
U.S. stock futures were down more than 2 percent, suggesting Wall Street would decline when it opened.

Bernanke Backs More Stimulus, Citing `Weak' Outlook

Federal Reserve Chairman Ben S. Bernanke endorsed consideration of a fiscal stimulus package, citing the chance of a ``protracted slowdown'' and a ``weak'' outlook for the U.S. economy into next year

Lawmakers ``should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,'' Bernanke said in testimony to the House Budget Committee. ``Such actions might be particularly effective at promoting economic growth and job creation,'' he said, calling consideration of a stimulus ``appropriate.''

Bernanke's remarks differ with the Bush administration's position and may give momentum to legislation being proposed by House Democrats; in January Bernanke told the same panel a stimulus ``could be helpful'' and urged lawmakers to act ``quickly.'' The impact of that $168 billion measure faded by July, and economists anticipate the economy will contract in the current quarter.

The Bush administration has been cool to the prospect of another stimulus. Press Secretary Dana Perino, responding to reporters' questions Oct. 16, said that ``a lot of conversations about a second stimulus took place just last month'' with Congress, but ``we didn't think'' the proposals put forward ``would help bring money into the economy.''

House Speaker Nancy Pelosi has proposed a fiscal stimulus of as much as $150 billion to aid the economy after the credit crunch deepened in recent months and the impact of the first stimulus package wore off.

Wisconsin Representative Paul Ryan, the budget panel's ranking Republican, said in the hearing that the Democratic plan is ``bloated'' and may balloon the budget deficit to $1 trillion.

Giving `Validity'

Bernanke's support would lend the Democrats' plan both ``validity'' and bipartisan sheen that would make it easier to approve, Representative Scott Garrett, a New Jersey Republican on the committee, said before the testimony. Garrett said he intends to ask Bernanke why ``we didn't see more of a lasting positive result'' from the first stimulus.

The plan floated by Pelosi, a California Democrat, includes increased federal spending on unemployment benefits, food stamps, highway-construction projects and aid to cash-strapped state governments. No vote has been set.

``Any fiscal action inevitably involves tradeoffs'' that may ``burden future generations,'' Bernanke said. Yet ``with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.''

Evidence of a recession increased last week, as confidence among Americans fell by the most on record and single-family housing starts hit a 26-year low. Industrial output fell 6 percent in the third quarter, the most since 1991, and a factory index for the Philadelphia region hit an 18-year low this month.

Below Potential

``The pace of economic activity is likely to be below that of its longer-run potential for several quarters,'' Bernanke said in today's testimony. ``The slowing in spending and activity spans most major sectors.''

The Fed lowered its benchmark interest rate a half point on Oct. 8 to 1.5 percent in an unprecedented coordinated action with other central banks. Traders see about a 46 percent chance of a half-point cut at or before the Federal Open Market Committee's Oct. 28-29 meeting, futures prices show. The contracts indicate 100 percent probability of a quarter-point move.

As the credit crisis intensified into a freeze in early September, the Fed took unprecedented actions: rescuing insurer American International Group Inc. with an $85 billion loan, later supplemented by $38 billion of additional credit; backing legislation to spend up to $700 billion on recapitalizing banks and buying distressed assets; and setting up a short-term funding backstop for U.S. companies through commercial-paper purchases.

Aiding Banks

U.S. regulators last week announced fresh efforts to jump- start lending. The Treasury committed $250 billion in taxpayer funds to private banks and the Federal Deposit Insurance Corp. extended its insurance to include new debt sold by banks.

``These measures were announced less than a week ago, and, although there have been some encouraging signs, it is too early to assess their full effects,'' Bernanke said.

Still, the actions ``should help rebuild confidence in the financial system,'' Bernanke said. While the rescue legislation was ``critical'' for helping to contain ``damage to the broader economy,'' stabilizing the financial system ``will not quickly eliminate the challenges still faced by the broader economy,'' he said.

Business spending may decline further in coming months, and homebuilding may keep contracting into 2009, Bernanke said. Lower commodity prices and the slowing economy ``should bring inflation down to levels consistent with price stability,'' he said.

Today's comments echo Bernanke's warning last week that the economy may be in for a prolonged period of sub-par growth. ``A broader economic recovery will not happen right away,'' and ``economic activity will fall short of potential for a time,'' he said in an Oct. 15 speech.

Treasury Secretary Henry Paulson is scheduled at 11:30 a.m. in Washington today to present further details on how banks may participate in the government's plan to inject capital into the financial system.

The House budget panel is chaired by Representative John Spratt, a South Carolina Democrat who represents Dillon County, where Bernanke grew up.

U.S. Prosecutors, Cuomo Open Credit Default Swap Investigation

The U.S. government and New York Attorney General Andrew Cuomo have opened a joint investigation into the credit-default swap market ``for potentially improper activity,'' the top federal prosecutor in New York said.

U.S. Attorney Michael Garcia said in a statement today that his office will try to ``determine whether any federal laws have been violated'' and will complement a probe by Cuomo's office.

``By combining the resources, expertise, and legal authorities of the two offices, we are taking a comprehensive approach to this important issue,'' Garcia said.

Federal prosecutors in Manhattan are also investigating Lehman Brothers Holdings Inc., according to the firm's lawyer, Harvey Miller.

Exelon Offers $6.2 Billion for NRG After Shares Sink

Exelon Corp., the biggest U.S. utility company, offered $6.2 billion for NRG Energy Inc., following Warren Buffett in trying to acquire cheapened power assets after the credit freeze dragged down stock prices.

Exelon's unsolicited, all-stock bid comes after Princeton, New Jersey-based NRG lost half of its market value in two months. Buffett's MidAmerican Energy Holdings Co. agreed on Sept. 18 to buy Constellation Energy Group Inc. for $4.7 billion, less than half the company's market capitalization just a week earlier. Buffett also invested in NRG this year.

Buying NRG, the second-biggest power producer in Texas, would give Chicago-based Exelon more generation outside its Illinois and Pennsylvania operating bases, including a nuclear plant stake southwest of Houston. Nuclear power is about 70 percent cheaper to produce in the U.S. than electricity from the most efficient natural-gas-fueled plants, according to Natixis Bleichroeder Inc. NRG, Exelon and other power producers have proposed 24 new reactors to help add needed generation capacity without increasing greenhouse-gas emissions.

``Exelon couldn't build the plants for the same price it would buy NRG for,'' said Nathan Judge, an analyst at Atlantic Equities in London who rates Exelon shares ``underweight'' and owns none. ``It also gives them access to a bigger balance sheet to fund things like new nuclear plants.''

Premium Is 37%

NRG's owners would get 0.485 share of Exelon for each of their shares, valuing the company at $26.43 a share, Exelon said in a statement late yesterday. The offer is 37 percent higher than NRG's closing price on Oct. 17. NRG traded above $39 as recently as Aug. 28.

Exelon fell $1.55, or 2.8 percent, to $52.95 at 9:56 a.m. in New York Stock Exchange composite trading. The stock has dropped 41 percent since the end of June. NRG jumped 27 percent to $24.52.

NRG's power plants alone are worth $63 a share, more than double Exelon's offer, based on transactions over the past two years, said Gordon Howald, an analyst at Calyon Securities USA Inc. in New York. Buffett's Berkshire Hathaway Inc. acquired its NRG stake in the second quarter, when the stock averaged $42.55.

``Exelon is offering a pretty substantial discount to what Berkshire Hathaway paid,'' said Howald, who rates NRG shares at ``buy'' and owns none. ``The upside potential for NRG as a standalone company is much higher, assuming they can get through this credit crisis. I think they have enough strength to say, `This is not good enough.'''

NRG's Response

The transaction will add to profit in the first full calendar year after its completion, excluding merger-related costs, Exelon said in its statement. NRG said it will review the bid and urged shareholders to take no action.

Exelon Chief Executive Officer John W. Rowe met with NRG's CEO, David Crane, on Sept. 30 to discuss a possible merger, according to Exelon's statement.

NRG rejected a $7.86 billion takeover offer from Atlanta- based Mirant Corp. in 2006. NRG was spurned itself in May on an $11 billion, unsolicited offer for power producer Calpine Corp.

NRG has proposed building two new reactors at its South Texas Project nuclear station by 2015, about a year ahead of a Texas project proposed by Exelon.

``The NRG plant has more political backing than the Exelon plant'' because San Antonio's municipal utility owns 40 percent of the project and the city of Austin owns 16 percent, said Judge of Atlantic Equities.

Credit Rating

Exelon said it would bring a superior credit rating to the table and would reduce NRG's debt leverage.

NRG, which emerged from bankruptcy protection in December 2003, has a rating of Ba3, three levels below investment quality, from Moody's Investors Service. Exelon is rated Baa1, three levels above junk status.

Judge said Exelon's proposed takeover is predicated on expectations of reducing debt costs by financing much of NRG's $8 billion in debt.

``There's refinancing risk, and this is the biggest credit crunch since the Great Depression,'' Judge said. ``This is going to be a real nervous spot for investors.''

Among other transactions this year, National Grid Plc sold its Ravenswood power plant in New York City to TransCanada Corp. for $2.9 billion in April after the U.K. company bought U.S. utility KeySpan Corp. last year for $7.3 billion. Reliant Energy Inc., owner of power plants in nine U.S. states, made a deal this month on preferred stock deal that leaves it open to a takeover.

Stock Offer

For Exelon, buying NRG would increase generation capacity to 47,000 megawatts, most in the U.S., and diversify its holdings, CEO Rowe said in the statement. Exelon, already the largest U.S. nuclear power producer, would have 18,000 megawatts of nuclear capacity. That's enough power for about 14.4 million average U.S. homes, based on an Energy Department estimate.

NRG said in a statement that it's being advised by Citigroup Global Markets Inc. and Credit Suisse Securities (USA) LLC. Kirkland & Ellis LLP is legal counsel.

The value of takeovers and asset deals announced by U.S. power companies so far this year has tumbled 67 percent from a year earlier, when buyers led by KKR & Co. LP bought the biggest Texas power producer, the former TXU Corp., in a record leveraged buyout, according to Bloomberg data.

This year's data excludes the Exelon offer and NRG's unsuccessful offer for Calpine.

Berkshire Hathaway, based in Omaha, Nebraska, had 3.24 million NRG shares as of June 30, according to a public filing. Ranked the world's richest man by Forbes magazine, Buffett built Berkshire by investing in out-of-favor securities and buying businesses whose prospects and management he deemed superior.

Turmoil May Make Americans Savers, Worsening `Nasty' Recession

The U.S. may be on its way to becoming a nation of savers, whether Americans like it or not.

With home and stock prices declining and credit hard to come by, consumers who have fallen out of the savings habit are being forced to curb borrowing and rein in spending.

That is bad news for companies catering to them, which will have to retrench as well. Detroit automakers may need to slash costs and merge as Americans hold onto their cars longer. Shopping malls might be forced to shut as retail traffic trails off. Hotels may have to shelve expansion plans as vacationers become stingier with their dollars.

The big concern is that households, spooked by the turmoil in financial markets, will cut back rapidly and sharply, plunging companies into bankruptcy and deepening a recession that many economists say has already begun.

``If we did have a quick cut in spending, it could turn a pretty nasty recession into possibly the worst downturn we've seen in the postwar period,'' says Michael Feroli, a former Federal Reserve official now at JPMorgan Chase & Co. in New York. Even without a collapse of consumer spending, Feroli expects the economy to contract by 2 percent in both this quarter and the next.

There are signs that consumer spending is already giving way. U.S. retail sales fell in September for the third straight month, the longest slump since the government began keeping records in 1992. And consumer confidence as measured by the Reuters/University of Michigan index fell by the most on record this month. Fed Chairman Ben S. Bernanke will give the central bank's latest assessment of the risks to the economy when he testifies before the House Budget Committee today.

`A Quantum Downward Shift'

``We are going through a quantum downward shift in consumer spending,'' says Allen Sinai, chief economist at Decision Economics in New York. ``Any industry that is tied to the consumer will have to downsize and consolidate.''

From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, Commerce Department figures show. But Americans got out of the saving habit starting in the 1990s as they saw their wealth build up in other ways, first through surging stock prices and later through soaring home values.

Meantime, looser credit standards made it easier for people to afford major purchases without having to save up to pay for them. The result: Since 1990, they have set aside less and spent more, pushing the savings rate down to an average of 3.5 percent. It was less than 1 percent in each of the last three years.

Nosedive

That may be about to change as wealth and credit evaporate. Household net worth, as measured by the Fed, fell $2 trillion in the second quarter from a year earlier -- and that was before the stock market's nosedive wiped about $3.9 trillion off investors' portfolios in the past month and a half.

Credit is also harder to get. Borrowing by U.S. consumers fell in August by $7.9 billion, the most since statistics began in 1943, to $2.58 trillion as lenders curbed access to loans, according to Fed data.

Add to that a cyclical rise in the unemployment rate -- it already stands at a five-year high of 6.1 percent and could increase to 9 percent, according to Microsoft Corp. co-founder Bill Gates -- and it is no wonder households are retrenching.

`A Fantasy World'

``Consumers are starting to realize that they've been living in a fantasy world,'' says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington. ``They will have to begin salting away money for retirement, their children's education and other reasons.''

Americans have a way to go to catch up with their counterparts in other countries. The 0.4 percent of disposable income that U.S. households saved last year compares with 10.9 percent for Germany and 3.1 percent for Japan, according to the Paris-based Organization for Economic Cooperation and Development.

In the long run, higher savings would be good news for the U.S. economy, because the extra money would help put household finances on a sounder footing and lessen U.S. dependence on investment by China and other foreign countries to finance economic growth.

In the shorter run, though, it will likely mean wrenching changes for companies that have become reliant on rapidly growing consumer spending. Some firms have already begun cutting back to bring operations in line with lower demand.

Excess Capacity

``Companies built up a lot of capacity,'' says David Wyss, chief economist at Standard & Poor's in New York. ``They may not need all of it.''

The construction industry has been decimated by the collapse of the housing market. At least a dozen homebuilders have sought bankruptcy protection as conditions deteriorated, including billionaire Carl Icahn's WCI Communities Inc., Tousa Inc., Kimball Hill Inc., Levitt & Sons and Neumann Homes Inc.

Automakers are also hurting, especially Detroit's Big Three: General Motors Corp., Ford Motor Co. and Chrysler LLC. U.S. car and truck sales this month may fall to a seasonally adjusted annual rate of 11 million, the lowest in at least 25 years, Deutsche Bank AG analyst Rod Lache wrote in an Oct. 14 note to clients. That compares with a 14.1 million average through the first nine months of this year and a 16.7 million average from 2002 through 2007.

``The industry needs desperately a dramatic rationalization; there are too many plants, too many employees,'' John Casesa, managing partner of Casesa Shapiro Group in New York, said in an interview Oct. 10. ``It will be a radical change: far fewer suppliers, possibly not three U.S. companies, maybe three that become two or one.''

Shuttered Dealerships

As many as 600 new-vehicle dealerships may close or consolidate with others this year, the National Automobile Dealers Association said Sept. 30. That is about 3 percent of the total, and up from 430 last year. ``There are more dealerships out there than there are cars to sell,'' says Paul Taylor, an economist at the McLean, Virginia-based group.

Retailers are also suffering a shakeout. A number have already filed for bankruptcy, including Mattress Discounters Corp., Marty Shoes Inc., cookie-maker Mrs. Fields Famous Brands LLC and Linens 'n Things Inc.

As stores closed, vacancies at neighborhood and community shopping centers rose to a 14-year high in the third quarter, according to New York-based real-estate research firm Reis Inc.

More Trauma

More trauma is likely. The Washington-based National Retail Federation says this may be the worst holiday selling season in six years, with sales rising 2.2 percent in the last two months of the year from the same period in 2007.

``The consumer is dead in the water,'' says Howard Davidowitz, chairman of Davidowitz & Associates, a New York- based retail-consulting and investment-banking firm. ``We expect to see 10,000 to 12,000 stores shut next year,'' on top of almost 8,000 this year.

The tourist industry faces tough times as well. Host Hotels & Resorts Inc., the largest U.S. lodging real-estate investment trust, said third-quarter profit fell 44 percent after cash- strapped consumer and corporate groups cut back on trips to Hawaii. U.S. hotels revenue per available room fell 8.1 percent in the week ended Oct. 11 from a year earlier, according to Smith Travel Research, a Hendersonville, Tennessee-based marketing firm that tracks lodging data.

Not surprisingly, many hospitality companies are putting expansion plans on hold, especially with credit becoming scarcer and costlier. More than $10 billion in hotel and casino projects with a total of 10,000 rooms have been delayed on Las Vegas Boulevard, better known the world over as the Strip, according to locally based real-estate and economic consulting firm Applied Analysis LLC.

They may be on hold for a while. ``The economic and financial crisis will have long-lasting effects on the consumer,'' Gramley says. ``The personal-savings rate is going to increase over the next five to 10 years.''

OPEC Plans Supply Cut as Crude Oil Heads Toward $50

OPEC, the supplier of more than 40 percent of the world's oil, plans to cut output for the first time in almost two years as the worst financial crisis since the 1930s sends crude toward $50 a barrel.

Options contracts to sell oil at $50 by December soared 50- fold in the past two weeks on the New York Mercantile Exchange. Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts say crude, which fell more than 50 percent from a record high in July to a 14-month low last week, may drop another 44 percent should the world economy slip into a recession.

The Organization of Petroleum Exporting Countries, which meets Oct. 24 in Vienna, three weeks earlier than planned, is facing the weakest growth in demand since 1993 just as new fields come on line from Angola to the Gulf of Mexico. Members may cut daily output by as much as 2 million barrels, President Chakib Khelil said yesterday.

``OPEC is going to try to prevent some of the price decline,'' Francisco Blanch, head of global commodities research at Merrill in London, said in a Bloomberg television interview. ``It's going to be very difficult to stem a price fall.''

Options contracts that allow holders to sell 1,000 barrels of oil for $50 each by December traded for $500 on the Nymex on today, up from $10 on Oct. 3. Oil rose a second day today, gaining 2.4 percent to $73.60 a barrel at 10:53 a.m. in London.

Budget Pressures

Even at today's prices, Venezuela and Iran, two of the organization's 13 members, may struggle to balance budgets because they rely on energy sales for more than half of their revenue, according to estimates compiled by the U.S. Central Intelligence Agency.

``Some countries like Venezuela and Iran need prices above $80 a barrel,'' said Leo Drollas, deputy director of the Centre for Global Energy Studies, a London-based consulting company. ``The Saudis have a bottom price of about $65 a barrel, but they might go ahead with a cut to keep solidarity within OPEC.''

Gross domestic product in the six-member Gulf Cooperation Council of Saudi Arabia, United Arab Emirates, Kuwait, Oman, Qatar and Bahrain would shrink 25 percent if oil averaged $50 next year, ING Bank NV estimates.

Multiple Cuts

Ministers from Algeria, Libya, Iran and Venezuela already called for a reduction in supplies from the current quota of 28.8 million barrels a day. Khelil, also Algeria's oil minister, said that while there is consensus for a cut, there is no agreement on its size. It may be necessary to make the cuts in two stages to ensure price stability, he told Algerian state television yesterday.

OPEC is likely to cut by a million barrels a day on Oct. 24 and will need to announce further reductions to prevent prices falling below $60 a barrel, Goldman Sachs said on Oct. 17. Merrill Lynch analysts said the group may trim supplies by 2.4 million barrels a day over 12 months if economic conditions deteriorate.

Qatari Oil Minister Abdullah bin Hamad al-Attiyah told Al Jazeera TV the cut will likely be 1 million barrels a day, or 14 percent more than his nation pumps. Saudi Arabia, which dominates OPEC proceedings as the group's largest producer, has yet to comment on its intentions.

Attempts to support prices when the Standard & Poor's 500- Index is down 36 percent this year may sour relations between OPEC and its customers. Both U.S. presidential candidates, John McCain and Barack Obama, have called for greater energy independence to limit reliance on foreign oil.

U.K. Prime Minister Gordon Brown described potential supply cuts as ``absolutely scandalous'' on Oct. 17, Agence France- Presse reported.

Reducing Estimates

The world's industrialized economies will expand next year at the slowest pace since 1982, the International Monetary Fund said Oct. 8. Growth will weaken to 0.5 percent in 2009, from 1.5 percent this year, sending U.S. unemployment to its highest level in 16 years, the agency said.

While OPEC already agreed to curb production by observing output quotas after a Sept. 10 meeting to lower supplies by 500,000 barrels a day, members routinely pump more than their allocation, according to data compiled by Bloomberg. Since that session, Credit Suisse Group pared its forecast for oil next year by 32 percent to $75 a barrel. Deutsche Bank AG cut its 2009 assessment by 23 percent to $92.50 on Sept. 29. BNP Paribas SA lowered its outlook by 18 percent to $92.50 on Oct. 10.

Oil Stocks Plunge

At the same time, Exxon Mobil Corp.'s Saxi-Batuque fields off Angola's shore started pumping in August, while BP Plc's Thunder Horse field in the Gulf of Mexico is scheduled to increase supplies by the end of the year. World oil capacity will rise 1.45 million barrels a day in 2009, twice the rate of growth in demand, according to the International Energy Agency.

``Prices could fall as low as $50 a barrel during the fourth quarter if OPEC can't find a way to offset the financial meltdown,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

The prospect of OPEC cuts, slowing economic growth and falling prices drove the Dow Jones Europe Stoxx Oil & Gas Index down 25 percent in the past five weeks. Irving, Texas-based Exxon Mobil, the world's biggest oil company, fell 37 percent this year, while The Hague-based Royal Dutch Shell Plc, the second-biggest, lost 33 percent.

Falling Demand

OPEC lowered its forecast for demand in 2009 last week, saying consumption will be 450,000 barrels a day less than expected at 87.21 million a day. The Paris-based International Energy Agency shaved its 2009 outlook the previous week and said this year's demand growth of 0.5 percent will be the weakest since 1993.

U.S. motorists are driving less after gasoline pump prices topped $4 a gallon in July. Vehicle-miles traveled on all U.S. roads that month were 3.7 percent lower than a year earlier, Federal Highway Administration data show. Prices fell to an average of $3.21 a gallon last week, according to the Department of Energy.

As demand declined, OPEC trimmed supplies 3.8 percent to 31.8 million barrels a day in September, according to Geneva- based tanker-tracking service PetroLogistics Ltd. Saudi Arabia's volume fell 520,000 barrels a day to 9.18 million, PetroLogistics said.

``This may be OPEC's toughest balancing act in their history,'' said Tetsu Emori, the fund manager at Astmax Co. in Tokyo, Japan's biggest commodities asset manager with $200 million under management. ``By the time OPEC announces a cut, they would be hoping to have seen the bottom of the price.''

The last time OPEC slashed quotas was at a December 2006 meeting in Abuja, Nigeria. That 500,000 barrel-a-day cut took effect in February 2007 and followed an earlier, 1.2 million- barrel reduction in October 2006. Those actions were reversed later in 2007 as prices rallied.

``The situation has gotten dire enough that they're willing to move and even become a topic of conversation'' during the U.S. election campaign, Ronald Smith, chief strategist at Alfa Bank in Moscow, said in a Bloomberg television interview. OPEC will cut by 1 million barrels a day ``at the very minimum'' and potentially ``wait until after the election, then add another million on top of it, or half a million,'' he said.

Lehman faces criminal probes

Lehman Brothers Holdings is the subject of three US federal criminal probes and at least 12 subpoenas of individuals to testify before grand juries, according to a lawyer for the bank that last month filed the largest bankruptcy in history.

Lead Lehman bankruptcy lawyer Harvey Miller said on Thursday in federal court in Manhattan that the investigations had been launched by New York US attorneys in Brooklyn and Manhattan as well as in Newark, New Jersey.

They are focusing in part on Lehman's role in the $330 billion (R3.33 trillion) auction-rate securities market and possible crimes associated with its $6 billion June stock issue, according to a person familiar with the case, who requested anonymity.

"It's clear they have given it some urgency and priority," said former justice department attorney Robert Plotkin.

"Given the notoriety and the headlines, this would be one of the ones that would be on a faster track," said the lawyer, who now handles white-collar defence cases.

The demise of Lehman, which sought court protection on September 15, accelerated a global credit crisis that has wiped out $30 trillion of equity value in the past year. The US has begun investigations of mortgage lending, securitisation and failed banks, including Lehman. The FBI was looking into 26 firms, including American International Group, said a law enforcement official.

Goldman cuts growth forecasts for several emerging markets

Goldman Sachs has lowered its 2009 economic growth forecasts for several emerging markets, including Russia, Turkey, South Africa and Kazakhstan, citing falling oil prices, the worsening outlook for growth in major markets and the recent deepening of the global financial turmoil. Goldman cut its forecast for Russia's 2009 GDP growth from 7% to 4%, while making more modest changes to the growth forecasts for Turkey, South Africa, Poland, the Czech Republic, Hungary, and Kazakhstan, according to a Goldman Sachs report published late Thursday. Goldman cut its forecast for South Africa's 2009 GDP growth to 2.4% from 3.5% previously. It also lowered its forecast for Turkey's economic growth next year to 1.7% from 3.0%. In Kazakhstan, Goldman expects growth of 3.5% next year compared with an earlier forecast of 5%. Goldman also cut its forecast for Poland's 2009 growth to 3.6% from 4.2%, for the Czech Republic to 2.5% from 3.8%, and for Hungary to 1.5% from 2.5%

Switzerland Bails Out UBS; Credit Suisse Raises Funds

Switzerland provided UBS AG, the European bank with the biggest losses from the credit crisis, a $59.2 billion rescue and pushed Credit Suisse Group AG to raise funds, joining authorities around the world in shoring up banks.

UBS will get 6 billion Swiss francs ($5.2 billion) from the government and split off as much as $60 billion of risky assets into a fund backed by the central bank, the Zurich-based company said. Credit Suisse declined government assistance and raised 10 billion francs from investors including Qatar.

Switzerland is the last of the world's financial centers to bolster ailing financial institutions after losses on bad debts surpassed $650 billion globally and credit markets froze. The Swiss government plans to raise deposit guarantees and to back the short- and medium-term interbank loans of the nation's banks, after countries across Europe took similar measures.

``At last the Swiss are doing something,'' said Peter Thorne, an analyst at Helvea in London. ``They risked getting left behind their European rivals and paying the price for slowness.''

UBS fell 99 centimes, or 4.9 percent, to 19.09 francs in Swiss trading. The stock has declined 59 percent this year, compared with a 54 percent drop in the 69-company Bloomberg Europe Banks and Financial Services Index. Credit Suisse, which reported a third-quarter loss, dropped 40 centimes, or 0.9 percent, to 45.50 francs.

Government Stake

UBS, the world's biggest money manager for the wealthy, is seeking to stem client defections after wrong-way bets at its investment-banking unit led to $44.2 billion of credit losses and writedowns since the start of last year, the most by any bank in Europe. Wealth management and business banking clients removed a net 49.3 billion francs in the third quarter.

UBS spokeswoman Larissa Alghisi said the government help wasn't a bailout. ``UBS is and was by no means in financial distress,'' she said in an e-mailed statement. ``What has been agreed with the SNB and the government is a commercial solution at economic terms.''

UBS asked the government on Oct. 12 to provide the $6 billion needed to set up the fund, after it couldn't raise the capital from private investors, acting Finance Minister Eveline Widmer-Schlumpf told DRS Radio in an interview.

`Difficulties'

``UBS as such is a healthy, stable bank,'' Widmer-Schlumpf said. ``At the moment it has difficulties getting liquidity and above all recapitalizing itself.''

The measures were taken after the worsening situation in financial markets and aid packages in other countries hurt Swiss banks' ability to get liquidity, the Federal Banking Commission said. UBS deposits were never in danger and the bank fulfilled all capital requirements, the regulator said.

UBS will sell 6 billion francs in mandatory convertible notes to the government, with a coupon of 12.5 percent. The state will have a 9.3 percent stake in UBS after the securities are converted into stock. The Swiss bank already turned to private investors for $27 billion this year to boost capital.

``The Swiss banks were already well capitalized and this puts them in a stronger position,'' wrote Merrill Lynch & Co. analyst Derek De Vries in a note to investors. Still, UBS reported ``very bad news on net new money,'' he wrote.

Capital Rules

The capital increase will lift UBS's Tier 1 ratio, a measure of financial strength, to 11.5 percent by year-end from 10.4 percent on Sept. 30, leaving aside any changes in the fourth quarter. Taking into account its fund-raising, Credit Suisse's Tier 1 ratio would have been 13.7 percent at the end of September, compared with the 10.8 percent the bank reported.

That ratio would exceed the Swiss regulator's increased capital requirements for 2013, Credit Suisse said. UBS hasn't yet reached an agreement on new capital targets.

``It appears likely that UBS will need to raise its capital ratios substantially more'' to satisfy the Swiss regulator's requirements, Citigroup Inc. analysts led by Jeremy Sigee said in a note to clients today.

The Swiss Federal Banking Commission hasn't made its new regulations public.

The Swiss National Bank, the country's central bank, will support the fund holding the risky assets with as much as $54 billion in loans, the government said. The SNB will receive interest on the loans of 2.5 percentage points above the one- month London Interbank Offered Rate and is entitled to a share in any profits.

`Orderly Fashion'

Credit Suisse declined to participate in the fund because it would be too complex a solution given that the bank had ``not much'' to put in, Chief Executive Officer Brady Dougan said. The bank started considering a capital increase a month or two ago ``before any of all this came along,'' he added.

The measures announced today will help the banks meet tighter capital rules that the Swiss Federal Banking Commission is planning to introduce, the regulator said, and reduce risky assets on UBS's balance sheet.

``A better functioning of the financial markets is essential,'' said SNB President Jean-Pierre Roth at a briefing in Bern. It's ``preferable that we go ahead with this operation now, in an orderly fashion -- despite the fact that the markets have regained a certain degree of optimism in the past few days -- rather than at a later point under potentially more adverse conditions.''

Swiss National Bank shares, which trade on Switzerland, fell 64 francs, or 4.8 percent, to 1,280 francs.

Global Bailouts

Governments from Washington to London to Berlin have been rushing to shore up banks, unlock lending and avert a financial catastrophe since credit markets froze up following the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

In the U.S., Treasury Secretary Henry Paulson plans to spend $250 billion of a $700 billion financial rescue package on buying non-voting preferred equity stakes in banks. Britain, France and Germany have also announced plans to make funds available to purchase equity in financial firms.

UBS will transfer about $31 billion in U.S. assets, including subprime and Alt-A securities, as well as about $18 billion in non-U.S. debt investments to the central bank fund in the fourth or first quarters. The bank can also transfer $9 billion of additional holdings later, including up to $5 billion of auction-rate securities that UBS may buy back from clients.

`Zero' Subprime Risk

The transactions will leave UBS with ``essentially zero'' risk related to U.S. subprime, Alt-A, prime, commercial real estate and mortgage-backed securities, as well as student loan- backed securities and reference-linked notes, Chief Executive Officer Marcel Rohner said on a conference call. The bank will still have $4.3 billion in risk related to bond insurers and $4.7 billion in loans pledged for leveraged buyouts, he said.

UBS posted third-quarter net income of 296 million francs today after booking tax credits of 912 million francs. The bank will take a charge of about 4 billion francs in the fourth quarter from the transactions announced, which will probably result in a net loss, Rohner said. He reiterated that UBS expects a profitable 2009 and plans to pay a dividend for that year.

Credit Suisse's Dougan said the bank decided to raise money now to satisfy new capital rules for 2013 and avoid investors questioning its financial strength.

``Our view is that in these markets being in a position of unquestioned capital strength will be paramount,'' he said. ``We didn't have to raise this capital. This is our view of how to manage the business conservatively.''

Credit Suisse Loss

Dougan said in an interview that markets remain ``challenging,'' although he hopes that fourth-quarter business conditions will be better. For next year, ``we are probably a little bit more optimistic about what business conditions may be in 2009 than many in the markets,'' he said.

Credit Suisse reported a loss of 1.3 billion francs in the three months ending Sept. 30 after a pretax loss of 3.2 billion francs from its investment banking division. It had writedowns of 2.4 billion francs in leveraged finance and structured products.

The bank's wealth management and retail units added 11 billion francs and 3 billion francs of net new assets in the quarter, respectively.

``We continue to believe that a 20 percent return on equity level over the cycle is achievable,'' Dougan said, adding that this would translate into annual net income of about 8.4 billion francs. Credit Suisse had ROE of 18 percent last year and 28 percent in 2006.

Existing shareholders Qatar Holding LLC, Tel-Aviv-based Koor Industries Ltd. and Olayan Investments Co. of Athens took part in the capital increase, Dougan said, declining to elaborate on the stakes each investor acquired. Credit Suisse didn't talk to ``many more than these three'' investors, he added.

The bank is selling 93 million treasury shares for about 3.2 billion francs, a bond that will convert into about 50 million new shares for about 1.7 billion francs, and a hybrid tier 1 bond for 5.5 billion francs. The bank will get funds from the capital increase on Oct. 22.