Mumbai Deaths in Attacks Top 100; Injured Total 290

At least 101 people were killed in Mumbai in terrorist attacks on two luxury hotels as Indian commandos freed hostages held by gunmen at one of the buildings.

Militants armed with grenades and rifles stormed into the Taj Mahal Palace and Tower hotel and the Oberoi Trident complex at about 10 p.m. local time yesterday, saying they were targeting Americans and Britons. Three U.S. citizens were injured, the State Department said. Up to 125 people died in the attacks, Timesnow.tv reported, citing police.

People were still barricaded in their rooms after the hostage situation at the Taj Mahal Palace and Tower Hotel ended today, Mumbai Police Chief A.N. Roy said. The Oberoi Group said as many as 200 people may be in its two buildings, based on estimates of occupancy and staff.

A fire broke out on several floors at the Trident Hotel as Indian commandos engaged in an intense fight with terrorists, police official Hasan Gafoor said. Forty people were evacuated, he said. Roy said the Oberoi engagement would soon be over.

“We came up against highly motivated terrorists,” Vice- Admiral J.S. Bedi told the NDTV 24x7 television network. He said his commandos exchanged fire on the second floor of the Taj hotel with terrorists, and showed pictures of recovered hand grenades, tear gas shells, AK47 magazines, knives and credit cards.

Targeting foreign nationals at key tourist hotels and restaurants adds a new dimension to a wave of bombings in India this year that has killed more than 300 people. Multiple attacks have rocked India’s cities with bombs planted in markets, theaters and near mosques. The attacks left about 290 people injured.

Taj Manager

The wife and two sons of the general manager of the Taj were killed, the Press Trust of India reported. The manager’s kin lived at the hotel. His sons were aged five and 14, the news agency reported. The manager himself is safe.

Earlier, Mumbai police said 14 people were evacuated from the Trident hotel, where gunfire was heard, without saying whether they were hostages. The city, India’s financial center. closed its markets today.

And a new series of blasts was heard at the Taj, as commandos continued a sweep through the property. Ratan Tata, whose Tata Group owns the hotels, said the commandos had the Taj under control. A fire broke out on the fourth floor of the heritage wing of the hotel, with smoke seen billowing out of a window in television pictures.

‘New York of India’

“Mumbai is the New York of India and this is a clear attack on Westerners,” said Clive Williams, a terrorism specialist at the Australian National University in Canberra. “The targeting of British and Americans means there is a new modus operandi.”

There may be as many as 12 terrorists at the Oberoi and there is no proposal to negotiate with them, said R.R. Patil, deputy chief minister of the western Maharashtra state, after reports the militants were demanding the release of all Mujahedeen fighters held in India.

India will “go after” individuals and organizations behind the attacks, which were “well-planned with external linkages” Prime Minister Manmohan Singh said in a televised address to the nation. The government will take steps to ensure there is no repetition of the terrorist attacks, Singh said today.

Television pictures showed people who had gathered outside the Trident complex shouting “Bharat Mata Ki Jai (Long live the Motherland)” as commandos stepped out of trucks and walked toward the buildings.

‘Sheer Chaos’

“It was sheer chaos,” said Manuela Testolini, a Canadian businesswoman who was dining at the Oberoi when gunmen burst in hunting for foreign nationals. “Every time we heard gunshots they were right behind us,” Testolini, who escaped through the kitchen with guests and hotel workers, told CNN television.

“They told everybody to stop and put their hands up and asked if there were any British or Americans,” businessman Alex Chamberlain told Sky Television. “My friend said to me, ‘don’t be a hero, don’t say you are British.’”

A little known Islamist group called the Deccan Mujahedeen claimed responsibility for the Mumbai attacks, the Press Trust of India reported. Gunmen may have come from Pakistan, the Times Now television channel said, citing an unidentified intelligence official.

The Indian Navy captured a ship that is suspected to have dropped terrorists off the coast of Mumbai before attacking the city, IBN7 reported, citing unidentified intelligence officials.

Karachi Link

The Vietnam-registered ship, MV Alfa, allegedly came from Karachi and probably dropped the terrorists in speed boats in the Arabian Sea outside Indian territorial waters, the Hindi-language television channel said.

President-elect Barack Obama led global condemnation of the attacks as his transition team said the U.S. would work with “India and nations around the world to root out and destroy terrorist networks.”

President George W. Bush telephoned Singh today and offered U.S. support and assistance to India, his spokeswoman said.

British Prime Minister Gordon Brown said the “outrageous” attacks in India would be met with a “vigorous response.”

United Nations Secretary-General Ban Ki-moon called for the attackers to be “brought to justice swiftly,” while Indian President Pratibha Devisingh Patil, on an official visit to Vietnam, condemned the attacks as the “mindless” act of people “pursuing a path of destruction.”

And Pakistan President Asif Ali Zardari also condemned the attack, calling it “detestable.”

Six foreigners, 14 policemen, including the head of Mumbai’s anti-terrorism unit, and 81 members of the public were killed, according to police.

Western Deaths

Prime Minister Kevin Rudd said an Australian was killed in the attacks. One Japanese citizen was killed and another injured, the Foreign Ministry in Tokyo said. An Italian was also killed, the country’s Foreign Ministry said. And a Briton also died in the attack, the Foreign Office said.

Seven Britons were hurt in the attacks, British High Commissioner Sir Richard Stagg said in televised comments, adding he had no information on the nationality of the hostages. Twenty- six policemen were also hurt, Police Sub-Inspector S.D. Tarwadkar said in a telephone interview from Mumbai.

The attacks, the worst in the city since train blasts in July 2006 killed 187 people and injured more than 800, began with explosions and gunfire ringing out across the city.

Armed with AK-47 rifles and grenades, two terrorists entered the passenger hall of Chhatrapati Shivaji Terminus and opened fire, PTI said. Images on television showed blood-spattered luggage strewn across the floor.

Cafe Leopold

Shootings occurred outside Cafe Leopold, in the Colaba district of south Mumbai where the Taj is located, CNN-IBN television reported.

A rabbi and his wife were being held hostage in the Chabad- Lubavitch Center in Mumbai after gunmen attacked the Jewish facility, a spokesman for the group in Israel said in a telephone interview. Several Israelis were also being held in the building, said Menachem Brod, a spokesman for Chabad, a Brooklyn-based Hassidic group.

Brod said that a woman who worked in the Chabad building, located in the Colaba neighborhood, had escaped along with the rabbi’s two-year-old son and a cook. “She reported that the rabbi and his wife are alive but that they are unconscious,” Brod said, adding he didn’t know how many Israelis were being held hostage or how many gunmen were in the building.

One of the militants asked for talks with the Indian government, offering release of the hostages, Sky News said.

Taj Fire

The Taj was damaged as a fire broke out overnight, forcing emergency workers to evacuate guests by ladders. All 26 South Koreans at the hotel were rescued, according to the Foreign Ministry in Seoul.

The hotel is a landmark in the city and its owners, Indian Hotels Co., said they would “rebuild every inch that has been damaged.”

The hotel overlooks the historic Gateway of India monument, the scene of a car bomb explosion in August 2003 when attacks in Mumbai killed at least 50 people.

Like the Taj, the Oberoi is popular with international visitors to Mumbai. Previous guests have included News Corp. Chairman Rupert Murdoch and Microsoft Corp. co-founder Bill Gates, according to the hotel’s Web site. The Oberoi Group, founded in 1934, also operates the luxury Trident hotel brand.

Security Across India

Security was stepped up at other luxury hotels across India. In the capital, New Delhi, the Imperial Hotel posted extra guards and swung its gates half-closed to prevent cars from entering freely.

Schools and colleges in Mumbai will be closed today, the PTI news agency reported.

The attacks come as India accelerates efforts to prop up a slumping economy battered by the global financial crisis.

India’s central bank said last month that growth in the $1.2 trillion economy may be as little as 7.5 percent in the year ending next March, compared with 9 percent in the previous 12 months.

The attacks may affect tourism, which climbed 10 percent in the first nine months of the year to 3.87 million visitors, generating $8.8 billion in revenue.

Between January 2004 and March 2007 the death toll from terrorist attacks in India was 3,674, second only to Iraq during the same period, according to the National Counterterrorism Center in Washington.

The government has previously blamed terrorist attacks on organizations linked to foreign powers, without offering evidence or making arrests. Local media often blame the attacks on groups backed by Pakistan or Bangladesh, without identifying the security officials who provided the information.

India’s capital, New Delhi, was rocked by five blasts during an evening rush hour in September, killing as many as 26 people and injuring about 133. Indian Mujahadeen, which claimed responsibility for similar attacks in Ahmedabad and Jaipur, said it was behind the blasts.

GM Asks U.S. FAA to Bar Public Tracking of Leased Corporate Jet

General Motors Corp., criticized by U.S. lawmakers for its use of corporate jets, asked aviation regulators to block the public’s ability to track a plane it uses.

“We availed ourselves of the option as others do to have the aircraft removed” from a Federal Aviation Administration tracking service, a GM spokesman, Greg Martin, said yesterday in an interview. He declined to discuss why GM made the request.

Flight data show that the leased Gulfstream Aerospace G-IV jet flew Nov. 18 from Detroit to Washington, where Chief Executive Officer Richard Wagoner Jr. spoke to a Senate committee that day and a House panel the next day on behalf of a $25 billion auto-industry rescue plan.

Representatives at the Nov. 19 House hearing including Democrat Gary Ackerman of New York faulted Wagoner, Ford Motor Co. CEO Alan Mulally and Chrysler LLC CEO Robert Nardelli for taking private jets to Washington to plead their case.

“Couldn’t you all have downgraded to first class?” Ackerman said.

Symbol for Critics

Critics of a federal aid package for GM, Ford and Chrysler spotlighted the exchange to attack the money-losing companies as undeserving of a bailout. GM, the biggest U.S. automaker, has said it may run out of operating cash by year’s end without government loans.

The Gulfstream jet was leased from GE Capital Solutions in Danbury, Connecticut, a unit of General Electric Co. After the plane’s latest flight to Washington on Nov. 25, and from there to Dallas, its movements could no longer be tracked.

An FAA spokeswoman, Laura Brown, said she couldn’t immediately determine whether her agency had granted GM’s flight-privacy request. “We do this routinely” for aircraft owners, she said yesterday. “They don’t have to have a reason” for requesting the block, she said.

The FAA tracking data don’t identify who is aboard the flights.

GM also has seven planes in its own fleet. All were grounded yesterday, said a spokesman, Tom Wilkinson. Two are for sale and two are in the process of being listed for sale, while Detroit-based GM plans to keep three, he said.

The leased Gulfstream has made 10 trips to Washington this year, including three since October, according to data compiled by Houston-based flight-tracking service FlightAware.com.

GM said it often sub-leases the airplane to other users. GM officials said company employees weren’t aboard the jet on the final Nov. 25 flights before its movements ceased being tracked.

Bluebay Closes Hedge Fund, Falls the Most Since IPO

Bluebay Asset Management Plc dropped the most since its initial public offering two years ago after the manager of fixed-income investments said it will shut down its Emerging Market Total Return Fund.

The $1.2 billion hedge fund, which accounts for 6 percent of assets under management, had dropped 53 percent this year, Bluebay said today in a statement. Fund manager Simon Treacher resigned “following a breach of internal valuation policy,” it said. He couldn’t immediately be reached for comment.

“Marketing other funds may now become very difficult,” said Gurjit Kambo, a London-based analyst at Numis Securities Ltd. who tracks the industry. “People become more nervous about putting money into Bluebay.”

Bluebay won’t retreat from credit-market investments despite “extremely challenging” conditions, Chief Executive Officer Hugh Willis said in the statement. Satellite Asset Management LP and Artemis Asset Management joined the list this week of more than 75 hedge funds that have liquidated or restricted investor redemptions since the beginning of the year.

Bluebay declined 30 percent to 70 pence, valuing the London-based company at 135 million pounds ($208 million). The shares, which peaked at 568.25 pence in June 2007, have fallen 80 percent this year.

The Emerging Market Total Return Fund was hurt by “liquidity conditions” and is no longer viable on its own, Bluebay said. The closure means that revenue from funds that bet on both rising and falling share prices will probably be below analysts’ estimates, Bluebay said.

The fund was hurt by “a perfect storm” after two wrong bets on cash bonds and credit default swaps, Kambo said. The value of cash bonds failed to rise as Bluebay expected, and credit default swaps narrowed, meaning the perceived risk of default decreased, he said.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

European Stocks Rise for Fourth Day; Barclays, Siemens Advance

European stocks climbed, sending the Dow Jones Stoxx 600 Index to its fourth straight gain, as investors speculated government efforts to shore up banks and the economy will support profits.

Barclays Plc and Siemens AG rallied more than 4 percent. President-elect Barack Obama yesterday picked former Federal Reserve Chairman Paul Volcker to head an economic advisory board and said he will implement a plan to bolster growth on “day one.” Air Berlin Plc advanced 15 percent after posting a better- than-estimated 43 percent jump in third-quarter profit.

The Stoxx 600 added 2.4 percent to 203.62, extending this week’s gain to 12 percent. The index is still down 44 percent in 2008, headed for its worst year since records began in 1987, as economies from Germany and the U.K. to the U.S. slip into recession.

“Investors see the market as discounting a truly cataclysmic event,” said Chirin Gill, a London-based fund manager at Daiwa SB Investments, which has about $60 billion. “They are gaining reassurance from governments and central banks who are beginning to understand the severity of the situation.”

Stocks rallied worldwide this week after China cut borrowing costs by the most in 11 years and the Federal Reserve’s pledge to buy $600 billion of debt sent mortgage rates down by the most in at least seven years.

Citigroup Inc. has jumped 87 percent since the U.S. government injected $20 billion of capital into the bank at the start of the week and guaranteed $306 billion of its mortgages and other troubled loans.

‘Reached a Bottom’

More than $30 trillion has been wiped off the value of global equities this year as credit losses and writedowns approached $1 trillion in the worst financial crisis since the Great Depression.

National benchmark indexes rose in all 18 western European markets today. The FTSE 100 gained 1.8 percent. Germany’s DAX added 2.3 percent as Allianz SE and Daimler AG advanced. France’s CAC 40 increased 2.5 percent, led higher by BNP Paribas SA.

“We have reached a bottom,” said Jacques Porta, who helps manage $180 million at Ofivalmo Patrimoine in Paris and has been buying shares of Hewlett-Packard Co. and Alstom SA. “There is a slight change of feeling in the newsflow we are getting, relative to what we saw in October. The problems are far from over, but the newsflow is more constructive.”

Banks and insurers shares were among the best performers in the Stoxx 600 today. Barclays added 4.3 percent to 166.9 pence. Allianz, Europe’s second-biggest insurer by market value, rallied 10 percent to 59.81 euros. BNP, France’s largest bank, rose 7.4 percent to 43.40 euros.

U.S. Sales

Siemens paced gains among companies that generate a large proportion of sales in North America. Europe’s largest engineering company, which relies on the U.S. for about 21 percent of its revenue, rose 4.6 percent to 48.93 euros. Daimler AG, the world’s second-biggest maker of luxury cars, advanced 3.6 percent to 25.58 euros.

Analysts have slashed earnings estimates this year as the credit turmoil spread. Profit for companies in the Stoxx 600 will slide 12 percent on average in 2008, compared with 11 percent growth forecast at the start of the year, Bloomberg data show.

“We are not that brave yet” to buy stocks, said Alan Beaney, who manages about $2 billion as head of investments at Principal Investment Management in Leeds, England. “Analysts’ expectations for profit forecasts are too high. We need to see these earnings numbers come down,” he told Bloomberg Television.

Earnings for the 325 companies in the Stoxx 600 that have reported results since Oct. 7 declined 15 percent on average, trailing expectations by 6.3 percent, Bloomberg data show.

Air Berlin

Air Berlin surged 15 percent to 3.46 euros. Europe’s third- biggest discount airline reported earnings before interest and taxes of 89.1 million euros ($115 million), beating analysts’ expectations of 71.9 million euros.

Irish Life & Permanent Plc and Allied Irish Banks Plc rallied after the Irish Association of Investment Managers approached the government about investing in the country’s banks to boost Tier 1 capital ratios. The ratio indicates a bank’s ability to cushion bad debts.

Irish Life & Permanent, the nation’s largest mortgage lender, soared 20 percent to 1.64 euros. Allied Irish Banks, the biggest bank by value, climbed 15 percent to 2.77 euros.

Separately, the Irish Times reported today that U.S. private equity companies Texas Pacific Group and Kohlberg Kravis Roberts have held talks with Bank of Ireland about a possible investment. The bank was already contacted by a consortium that includes J.C. Flowers & Co, the newspaper said.

ArcelorMittal added 5.8 percent to 19.85 euros. The world’s largest steelmaker said it may cut as many as 9,000 jobs globally after reducing output on falling demand.

Kingfisher Plc dropped 2.4 percent to 116.6 pence after Europe’s biggest home-improvement retailer said consumer confidence has been “shaken” in all its markets and reported a 4 percent decline in third-quarter profit.

Study: Business-to-Business Media Shows Three-Year Decline

The slumping economy and ongoing reader and advertiser shift to online sources continue to impact business-to-business media, which held their revenue flat from 2005 to 2007, according to American Business Media’s “ABM Financial Trend Report, Three-Year Analysis, 2005-2007.”

All three measured revenue streams showed declines over the three-year period. The report, by The Jordan, Edmiston Group Inc., was based on data provided by 18 B2B media companies representing 118 publications. Key findings were presented at ABM’s Top Management Meeting, held last month in Chicago.

The biggest of the three revenue streams, advertising, declined at a compound annual rate of 0.5 percent to $4.1 million for the average publication.

Circ revenue declined 2.2 percent to $480,000 on the same basis as the expansion of online information eroded readers’ need for paid subscriptions to print magazines. Meanwhile, high-margin ancillary revenue, from sources like licenses, collateral products and list rentals, slipped 5.8 percent to $361,000.

On the cost side, expenses rose at a 2 percent compound annual growth rate over the period, with lower ancillary and production expenses offset by higher postal and editorial costs.

AIG Freezes Executive Salaries, Liddy’s Pay Set at $1

American International Group Inc., under pressure to limit executive compensation after a U.S. bailout, froze pay and scrapped bonuses for seven top leaders and said chief executive officer Edward Liddy will get a $1 salary.

The insurer’s next 50 highest-ranked executives will forgo pay raises through 2009, New York-based AIG said today in a statement. New York Attorney General Andrew Cuomo, who demanded last week that AIG disclose compensation plans, said the insurer took a “positive step” and called on other firms to follow.

Liddy is cutting costs after lawmakers and regulators criticized the insurer for bad bets that forced the insurer to take a taxpayer rescue that was almost doubled this month to more than $150 billion. AIG, crippled by losses tied to mortgages, follows Wall Street firm Goldman Sachs Group Inc. in limiting executive compensation after receiving commitments of capital from the U.S.

“It is only fair that top executives, who benefit the most when firms do well, should also bear the burden of the difficult economic consequences their firms now face,” Cuomo said today in a statement. “Taxpayers have been slammed with a one-two punch, seeing their investments dwindle while simultaneously having to fund the Wall Street bailout.”

AIG shares have declined about 97 percent this year. The insurer slipped 7 cents to $1.70 at 12:11 p.m. in New York Stock Exchange composite trading.

Show of Confidence

Liddy, who was appointed by the government in September after AIG agreed to hand over an 80 percent stake to the U.S., will collect the $1 salary through 2009 and an unspecified number of equity grants that “show his confidence” in the insurer, the company said. Liddy will also be eligible for a bonus in 2010 and won’t get any severance.

“We understand our obligation to taxpayers and shareholders,” Liddy said in the statement.

His compensation at Allstate Corp. in 2006, his last year as CEO of the insurer, was $24 million.

Liddy’s predecessor, Robert Willumstad, rejected a $22 million severance package after leaving AIG in September. Willumstad had to step down as one of the conditions for AIG to receive government help. Martin Sullivan, who was forced out in June, received 2007 compensation valued at $14.3 million, a 32 percent decrease from the year before as profit dropped on writedowns tied to the housing slump.

Bad Trips

Liddy previously agreed with Cuomo to freeze $19 million due to Sullivan and $600 million in compensation for other executives. AIG also agreed in October to immediately cancel trips for conferences after the company was criticized for spending $440,000 to send employees to a resort days after the bailout.

Liddy had been working without a salary or other compensation, spokesman Nicholas Ashooh said last week.

“You could say it’s been both thankless and payless so far,” he said Nov. 18.

U.S. Economy: Home-Price Decline Accelerates, GDP Contracts

The decline in U.S. house prices accelerated in September and the economy shrank in the third quarter at a faster pace than first estimated as the grip of the credit crunch tightened.

The S&P/Case-Shiller home-price index fell 17.4 percent from a year earlier. The Commerce Department said gross domestic product dropped an annual 0.5 percent as household spending slid the most since 1980. While consumer confidence rose this month, the Conference Board’s gauge remained near the lowest on record.

“The economy is turning down pretty dramatically,” Treasury Secretary Henry Paulson said at a press conference in Washington to outline new government efforts to unfreeze credit. “It’s very important that lending continue to be available.”

Today’s reports underscore concerns that the economy is at risk of a contractionary spiral as lenders cut back credit, causing spending to fall and companies to slash investments and payrolls. The Treasury and Federal Reserve today began two new programs to bring down interest rates on mortgages and consumer loans, committing at least $800 billion.

Stocks were little changed, with the Standard & Poor’s 500 Stock Index up 0.2 percent at 853.37 at 11:51 a.m. in New York, after rallying more than 6 percent the past two days. Treasuries rose after the Fed’s plan to buy up to $600 billion of debt issued or backed by housing-finance companies spurred some investors to buy government securities as a hedge.

Economists anticipate that the drop in GDP worsened in the current quarter because of the deepening credit crunch. The collapse of Lehman Brothers Holdings Inc. in September triggered a renewed bout of turmoil, forcing the Fed to step up as a lender of last resort.

‘Ugly’ Quarter

“It’s the fourth-quarter numbers that are really going to look ugly,” Joel Naroff, president of Naroff Economic Advisors Inc. and most accurate forecaster in a 2008 Bloomberg News survey of economists, said in a Bloomberg Television interview.

Home prices decreased 1.8 percent in September from the prior month, the biggest one-month drop since March, the S&P/Case-Shiller report showed.

S&P/Case-Shiller also released quarterly figures for nationwide home prices. That measure showed a 16.6 percent drop in the three months through September from the same time last year, compared with a 15.1 percent drop in the second quarter.

Economists forecast the 20-city index would fall 16.9 percent from a year earlier, according to the median of 28 estimates in a Bloomberg News survey. Projections ranged from declines of 16 percent to 17.2 percent.

Broad Decline

Compared with a year earlier, all areas in the 20-city survey showed a decrease in prices in September, led by a 31.9 percent drop in Phoenix and a 31.3 percent decline in Las Vegas.

A separate government report confirmed the decline in property values accelerated. Home prices fell 1.3 percent in September from the previous month, the biggest one-month drop since records began in 1991, the Federal Housing Finance Agency said today.

The GDP report showed consumer spending, which accounts for more than two-thirds of the economy, dropped at a revised 3.7 percent annual rate in the third quarter, more than the 3.1 percent decrease estimated by Commerce last month.

Wage figures showed a smaller gain than previously estimated in the second quarter, reflecting the weakening job market. Salaries grew $13.3 billion, $37.3 billion less than Commerce had projected.

Retailers ranging from Best Buy Co. to Nordstrom Inc. are cutting revenue forecasts ahead of what may be the worst holiday shopping season in years.

‘Difficult Times’

“In 42 years of retailing, we’ve never seen such difficult times for the consumer,” Brian Dunn, Best Buy’s president and chief operating officer, said in a statement last week. “People are making dramatic changes in how much they spend, and we’re not immune from those forces.”

The Conference Board’s index of consumer confidence climbed to 44.9, the second-lowest reading since 1974, from a record low 38.8 the prior month, the private New York-based research group said today.

The improvement reflected expectations that the economic situation wouldn’t get much worse. The gauge of the outlook for the next six months increased to 46.7 from 35.7. The Conference Board’s measure of present conditions dropped to 42.2, the lowest since June 1993, from 43.5.

“The consumer is hunkered down,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. “We are still expecting a contraction in consumer spending in the fourth quarter.”

Americans may pull back further after employers fired 240,000 workers in October and the unemployment rate jumped to the highest level since 1994.

Xerox Corp., the world’s largest maker of high-speed color printers, is eliminating 3,000 jobs and trimming manufacturing costs to save $200 million next year. Chief Executive Officer Anne Mulcahy yesterday said at a conference that Xerox isn’t projecting “any quick economic turnaround” in 2009.

Fed Commits $800 Billion More to Unfreeze Lending

The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion.

The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a program of $200 billion to support consumer and small-business loans, the Fed said in statements today in Washington.

With today’s announcement, the central bank is starting to use some of the unorthodox policy tools that Chairman Ben S. Bernanke outlined as a Fed governor six years ago. Policy makers are aiming to prevent a financial collapse and stamp out the threat of deflation.

“They’re trying to put funds into the system, trying to unfreeze these markets,” said William Poole, the former St. Louis Fed president, in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

The Fed will purchase up to $100 billion in direct debt of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to $500 billion of mortgage-backed securities backed by Fannie, Freddie and Ginnie Mae, the statement said. Treasury Secretary Henry Paulson said at a press conference that $200 billion is just the “starting point” for the asset-backed securities program.

“The economy is turning down pretty dramatically,” he said. “It’s very important that lending continue to be available.”

Help for Housing

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed said.

Fannie and Freddie bonds rallied. The yield premium on Fannie Mae’s five-year debt over similar-maturity Treasuries tumbled 21.5 basis points to 114.7 basis points as of 8:35 a.m. in New York, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

“The cheaper that they could issue their debt, the more aggressively they should be able to buy mortgages in the secondary market,” said Alan Bosworth, director of agency trading at Vining Sparks in Memphis, Tennessee.

The Fed may hold the Fannie and Freddie debt and securities until they mature or sell them, with plans to be determined, government officials said on a conference call with reporters.

Low Rates

The U.S. officials, speaking on condition of anonymity, said they don’t see the Fed purchases of mortgage bonds as a way of “quantitative easing,” or using central bank policy to add reserves to the banking system when interest rates are very low, even though the purchases will have that effect.

Separately, under the new Term Asset-Backed Securities Loan Facility, the Fed will lend up to $200 billion on a non-recourse basis to holders of AAA rated asset-backed securities backed by “newly and recently originated” loans, such as for education, automobiles, credit cards and loans guaranteed by the Small Business Administration, the Fed said.

The Fed hopes to have the TALF running by February. Traditional investors in the asset-backed securities include securities lenders and bank-affiliated conduits, the government officials said.

The asset-backed securities program is similar to the Fed’s effort to bring down the cost of financing for commercial paper, the short-term debt companies issue to finance payrolls and other expenses, because it goes beyond banks.

‘What Works’

“What the Fed has been trying to do is get a sense of what works and what doesn’t work,” said Derrick Wulf, who helps manage $70 billion in mostly fixed-income assets at Dwight Asset Management Co. in Burlington, Vermont. “One of the things that has worked is the commercial paper facility.”

Wulf added that “it can certainly improve credit conditions for consumers.”

The Treasury will provide $20 billion of “credit protection” to the Fed in the lending program, using funds from the $700 billion financial-rescue package. The Treasury said in a statement that the facility may expand over time and cover other assets, such as commercial and private residential mortgage- backed debt.

Treasury staffers are in regular communication with President-elect Barack Obama’s team, officials said. New York Fed President Timothy Geithner, Obama’s pick to be Treasury secretary, was involved in today’s plans, though not in a capacity with the new administration, officials said.

Weakening Economy

With the asset-backed securities program, the Fed is trying to avoid having “continued disruption of these markets” that would limit lending and “thereby contribute to further weakening of U.S. economic activity,” the central bank said.

Under the new lending program, known as the TALF, the New York Fed will auction a fixed amount of loans each month for a one-year term. Assets will be held in a special-purpose vehicle to be created by the Fed. The program will stop making new loans on Dec. 31, 2009, unless the Fed Board of Governors extends it.

Lenders providing credit under the TALF “must have agreed to comply with, or already be subject to,” executive- compensation restrictions in the October bailout law, the statement said.

The Fed will start buying the direct debt of government- sponsored enterprises -- Fannie, Freddie and a dozen federal home loan banks -- through primary dealers in government debt from next week. The purchases of mortgage-backed securities will be done through asset managers, and officials aim to begin the effort by year-end.

Purchases of both types of debt “are expected to take place over several quarters,” the Fed said.

Citigroup gets massive government bailout

The U.S. rescued Citigroup Inc, agreeing to shoulder most losses on about $306 billion of the bank's risky assets, and inject new capital, bolstering investor hopes that the government will support big banks as the economy sinks into recession.

The bailout, announced late Sunday, gives the government the right to buy an equity stake, and marks its latest effort to contain a widening financial crisis that has already brought down Bear Stearns Cos, Lehman Brothers Holdings Inc and Washington Mutual Inc.

U.S. President George W. Bush called the bailout necessary "to safeguard our financial system," and said the government would, "if need be," make similar decisions in the future.

Shares of Citigroup rose 58 percent on Monday. The price of insuring Citigroup bonds against default fell by half.

"All in all, these actions should settle market jitters surrounding the company for now," CreditSights Inc analyst David Hendler wrote.

The bailout could also boost investor confidence in the largest U.S. banks, which are expected to suffer billions of dollars in credit losses in the coming quarters.

"The government is trying to restore trust to the financial system. There are big banks that are central to the economy that the government will support," said Thomas Russo, portfolio manager at Gardner Russo & Gardner, which does not own Citigroup shares.

Bank of America Corp rose 27.2 percent to $14.59, JPMorgan Chase & Co advanced 21.4 percent to $27.58, and Wells Fargo & Co rose 20 percent to $26.02, all on the NYSE.

The package gives Chief Executive Vikram Pandit more time to shed assets, slash payroll and boost efficiency after soaring losses from toxic debt led to $20.3 billion in losses in the last year. Analysts expect billion of dollars of further losses. Pandit became CEO in December.

Pandit "deserves a vote of confidence," Saudi Prince Alwaleed bin Talal, Citigroup's largest individual investor, told CNBC television. "I am personally committed to Citigroup. No doubt about that." Alwaleed agreed last week to increase his Citigroup stake to 5 percent from less than 4 percent.

The stock rose $2.18, or 58 percent, to close at $5.95 on the New York Stock Exchange, where it jumped as high as $6.50. The annual cost to insure $10 million of Citigroup debt against default for five years fell to about $240,000 from $500,000.

Still, not every investor was as gung-ho on the decision to let Pandit keep his job.

"You're seeing an inept management team being rewarded by the U.S. government," said William Smith, whose Smith Asset Management in New York has seen its Citigroup stock plunge in value over the years.

PLUNGING SHARES

Citigroup received the latest government infusion, which includes a $20 billion capital injection, after its shares plunged 60 percent last week amid growing concern it would need large amounts of capital to survive the recession. and less than a week after it set plans to slash 52,000 jobs, leaving it with 300,000 employees.The $20 billion of government capital comes after the U.S. injected $25 billion last month. In this round, the government is buying preferred stock that will pay an 8 percent dividend.

In exchange for the bailout, Citigroup slashed its quarterly dividend to a penny per share from 16 cents. It cannot raise the payout for three years without U.S. consent.

Even so, taxpayers are now on the hook for nearly $250 billion in potential losses in the $306 billion portfolio, including commercial real estate loans, leveraged loans, and other assets, representing 15 percent of Citigroup's $2.05 trillion balance sheet.

Citigroup will absorb the first $29 billion in losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion. The Treasury Department, the Federal Deposit Insurance Corp and the Federal Reserve would absorb the rest.

In return, Treasury and the FDIC will get $27 billion in preferred shares, of which $7 billion are a fee that Citigroup pays in exchange for the government guarantee.

The government is also getting warrants to buy $2.7 billion in Citigroup common stock at $10.61 per share for a potential stake of about 4.5 percent. That's on top of the roughly 3.3 percent the government is entitled to buy under a previous deal.

"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview on Monday.

Citigroup estimated the injection will give it a Tier 1 capital ratio of 14.8 percent, more than twice what the government requires. The government also increased Citigroup's access to the Fed's discount window, adding liquidity.

TEMPLATE

The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

Citigroup has one of the farthest international reaches of any U.S. bank, with operations in more than 100 countries. Investors have long speculated the government deemed it too big to fail because a collapse could cause global financial havoc.

The government package may become a template for other U.S. banks expected to face growing losses as the economy contracts. Losses once concentrated in mortgages are bleeding into other areas such as credit cards and commercial real estate.

The rescue magnifies the U.S. government's burden following bailouts of insurer American International Group Inc, Bear Stearns and mortgage finance giants Fannie Mae and Freddie Mac. Treasury also has injected more than $300 billion into banks and other financial institutions.

Already, more than $1 trillion of taxpayer money is at risk, and the Big Three automakers are seeking $25 billion more to avert bankruptcy. President-elect Barack Obama may also seek up to $700 billion for economic stimulus.

Earlier this month, U.S. Treasury Secretary Henry Paulson said a $700 billion industry rescue package to soak up toxic assets from troubled banks, like Citigroup, will instead only be used to inject capital into banks.

That decision sent mortgage and other debt markets into a steep decline.The bank's market value on Friday was just $20.5 billion, down from more than $270 billion two years ago -- and even below the $25 billion initial U.S. capital injection.