August 2009

SEC’s Schapiro Says More Derivatives Information Is `Critical’ for Probes

August 28, 2009

By David Scheer and Joshua Gallu Aug. 28 (Bloomberg) — U.S. Securities and Exchange Commission Chairman Mary Schapiro said it’s “critical” for regulators to gain more access to information on derivative transactions in order to police market abuses. Regulators need “information that allows us to construct an audit trail, so that we can find insider trading, manipulation and other concerns that can reverberate through the entire marketplace,” Schapiro said in an interview for Bloomberg Television’s “Conversations with Judy Woodruff ” airing tonight. That ability “is really going to be critical.” Lawmakers are studying derivatives after price movements fueled concern last year that financial firms were approaching collapse. American International Group Inc. ’s bets on credit- default swap crippled the insurer, requiring a $182.5 billion U.S. bailout. In June, Schapiro told a Senate panel inquiries were being “seriously complicated” by difficulties identifying derivatives investors and determining the size of their trades. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. Credit- default swaps insure investors against bond defaults and can be used to speculate on a company’s creditworthiness. Obama’s Regulatory Revamp President Barack Obama ’s proposed regulatory overhaul would impose higher capital and margin requirements, move most derivatives to regulated exchanges and clearinghouses and impose supervision over all dealers. Such proposals go “quite far” toward improving oversight, Schapiro said in the interview. “We can bring a lot more stability and soundness to this marketplace through the regulation of these instruments,” she said. “The SEC should absolutely have a role in policing these instruments, particularly where these instruments are economic substitutes for securities.” Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler have suggested a dual regulatory structure for derivatives. Primary responsibility for derivatives tied to securities, such as credit-default swaps, should go to the SEC, Schapiro told lawmakers on June 22. Other derivatives, including those related to interest rates and commodities, should be regulated by the CFTC, Gensler said at the time. Though lawmakers decided in 2000 to exempt derivatives from government oversight, the financial industry now recognizes there is broad consensus in Washington to regulate the instruments, Gensler said in an interview yesterday. Clawbacks Eyed Schapiro also said she can’t predict how often the SEC may invoke a seven-year-old law forcing executives to pay back bonuses if their company has to restate earnings as a result of misconduct. The agency’s five commissioners voted 3-2 to approve the law’s first use last month against an executive who wasn’t accused of wrongdoing, prompting some lawyers and academics to question how aggressively the SEC will apply the rule. The law is intended to ensure top executives pay “careful attention to the financial statements and accounting issues,” Schapiro said, noting that each case depends on “individual facts and circumstances.” She also said the SEC is concerned that firms may violate rules by privately offering trading tips to preferred clients. The Wall Street Journal reported Aug. 24 that Goldman Sachs Group Inc.’s research analysts give short-term tips to the New York-based bank’s own traders, and later to its major clients. “There are lots of issues surrounding” such practices, and the SEC is looking “very closely” at them, she said, without referring specifically to Goldman Sachs. One concern is that a firm may privately share information with some clients that is inconsistent with its public research, she said. To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; David Scheer in New York at dscheer@bloomberg.net .

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Merkel Campaign Turns to East German Homeland to Swing September Election

August 28, 2009

By Tony Czuczka and Rainer Buergin Aug. 28 (Bloomberg) — Chancellor Angela Merkel brings her re-election campaign to the formerly communist east of Germany today before three state votes, seeking to shore up support in a region she lost to the Social Democrats in 2005. Merkel, the first chancellor to grow up in East Germany, needs to win in the east to head the coalition of her choosing in Sept. 27 elections. Votes in the eastern states of Thuringia and Saxony on Aug. 30 — plus one in western Saarland — mark the last major test of her appeal before the national contest. “This is one of the few events scheduled in the campaign that could still have an impact,” Holger Schmieding , chief European economist at Bank of America-Merrill Lynch in London, said in a phone interview on Aug. 26. “Opinion polls suggest it’s her election to lose,” yet “it could go either way. The potential for surprises in the eastern states is bigger.” Nineteen years after a wave of East German voters helped re-elect Christian Democratic Chancellor Helmut Kohl in reunified Germany’s first ballot in 1990, the East is again an election battleground. Both Merkel and her Social Democratic rival for the chancellery, Frank-Walter Steinmeier , are contesting eastern electoral districts and have drawn up special campaign pledges to appeal to eastern voters. Merkel, who served in Kohl’s Cabinet from 1990 to 1998, was forced into a coalition with the Social Democrats at the last election in 2005 after her Christian Democratic Union won in Germany’s nine western states yet was beaten into third place in the six eastern states. Capitalist Challenge The latest polls show the CDU leading the Social Democratic Party by as many as 15 percentage points nationwide; in the east the lead is half that amount. Oskar Lafontaine ’s anti-capitalist Left Party, which includes remnants of the old East German Communist Party, makes it a three-way race. “In the DDR we grew used over decades to deciding as little as possible for ourselves,” Merkel said in an interview with Emma magazine published Aug. 24, referring to East Germany by its acronym. “I can only keep encouraging people to take control of their own lives.” Eastern Germans are swing voters because political allegiances, irrelevant under communism, remain weaker than in the west, said Everhard Holtmann, a political scientist at Martin Luther University in the eastern city of Halle , about 170 kilometres (100 miles) southwest of Berlin. Marginal Seats “It’s not wrong to say that the east helped decide the last election and the one before that,” said Holtmann. “We’ve got a whole bunch of marginal seats” that can change hands with “even moderate swings, let alone major shifts.” Polls for this weekend’s state elections suggest the CDU may retain control of Saxony and be able to ditch their current Social Democratic coalition partner in favor of allying with the Free Democrats, mirroring Merkel’s plans nationally. The CDU may lose control of the second eastern state, Thuringia, as well as Lafontaine’s home state of Saarland, the polls show. Economically, the east has a way to go to catch up with the west. More than 1 trillion euros ($1.4 trillion) in transfers from west to east in the 20 years since the fall of the Berlin Wall on Nov. 9, 1989, has failed to bridge the divide. Unemployment was 13.1 percent in July, almost double the west’s 7 percent, while per-capita disposable income is about 80 percent of the western level, according to the Halle-based IWH economic institute. The east has lost almost 4 million people since 1989: the population will drop to an estimated 13 million this year out of Germany’s total of 82.5 million. Gap Is Narrowing Yet the gap is narrowing as the east’s lower dependence on industrial goods and foreign markets shields it from the worst of the global recession, the IW said Aug. 4. Unemployment, which has risen in the west by 92,000 since April, fell by 8,000 in the east over the same period. Polls suggest that’s helping Merkel. Backing for her CDU is 30 percent, up from 25.3 percent in 2005, an Infratest poll of eastern voters showed Aug. 21. The Social Democrats have 22 percent, down from 30.5 percent, while the Left has 23 percent after 25.4 percent in 2005. Infratest conducted the poll Aug. 18-19 without saying the sample. The margin of error was as much as 3.1 percentage points. The Christian Democrat platform calls for bringing the east to “self-sustaining economic development” and raising retirement benefits to western levels. SPD proposals include a nationwide minimum wage to help raise eastern pay to western levels. Eastern Germans are “more careful in their evaluations,” Merkel told Emma magazine. They’re “not so easily enthused.” To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net ; Rainer Buergin in Berlin at rbuergin1@bloomberg.net .

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Honda Redeploys Formula One `Warriors’ to Win Race for Fuel-Efficient Cars

August 28, 2009

By Makiko Kitamura and Kae Inoue Aug. 28 (Bloomberg) — Honda Motor Co. ’s withdrawal from Formula One racing in December to save money may give it an advantage over rivals: fresh blood from an elite cadre of engineers to improve its Civic compacts and Odyssey minivans. The automaker reassigned the racing team’s 400 engineers to speed up development of new technologies to improve fuel efficiency and emission levels for mass-produced cars. “F-1 was all about pursuing the best energy efficiency to achieve speed,” Kazuo Sakurahara, who led Honda’s team of F-1 engineers, said in an interview at the company’s research center in Tochigi prefecture, north of Tokyo. “In that sense, the approach to our new job is exactly the same as it was then.” Honda is boosting the brainpower of its research and development team as automakers hasten to meet stricter pollution regulations by moving away from cars powered solely by gasoline. Unlike Toyota Motor Corp. and Nissan Motor Co., Honda hasn’t announced plans for a plug-in hybrid or battery-powered car, even as emission regulations in California may force the Tokyo- based carmaker to do so in two years. “The pace of change in environmental technologies is getting faster and faster,” Honda President Takanobu Ito said in an interview. Sakurahara has moved from working on engines with more than 700 horsepower to those in hybrid systems that may take Honda past Toyota in overall efficiency. Fuel Economy U.S. fuel-economy rules set by the Obama administration will force carmakers to produce vehicles that get an average of 35.5 miles per gallon by 2016, four years sooner than previously planned. The Honda fleet’s average fuel economy ranked second at 29.6 mpg in 2008, behind Toyota at 29.7 mpg, according to the U.S. Environmental Protection Agency. The auto industry “isn’t going to shift immediately to battery-only electric vehicles, so the internal combustion engine will remain a core” technology, Sakurahara said. Honda , which employs about 13,000 engineers in Japan, is expanding its lineup of gasoline-electric hybrid models, bringing out a hybrid version of the CR-Z sports coupe in February and a hybrid Fit compact next year. Toyota plans to lease plug-in hybrid cars next year and plans to sell battery-powered electric car in 2012. Nissan unveiled its Leaf electric car on Aug. 2 and plans to sell it next year in Japan and the U.S. Honda gained 0.2 percent to 2,990 yen at the close of trading in Tokyo today. The shares have risen 57 percent this year compared with a 39 percent gain for Toyota. BMW Exits “Automakers that are able to spare their resources for advanced and environmental technologies will eventually become the winners at a time when one breakthrough technology will make a huge difference,” said Masayuki Kubota , a senior fund manager in Tokyo who helps manage about $37 million at Daiwa SB Investments Ltd. Honda quit Formula One racing late last year to cut costs as auto sales plunged amid the global recession. The company, which expects to post a profit of 55 billion yen ($588 million) in the year ending in March, spent about 20 billion yen a year operating the team, excluding engine and car development costs, then-President Takeo Fukui said. Last month, Bayerische Motoren Werke AG also said it would pull out of the race at the end of this season. Toyota, which forecasts a net loss of 450 billion yen for a second straight year, continues racing in Formula One. Toyota unit Fuji International Speedway Co. said in July it would stop hosting Japan’s Formula One Grand Prix race, citing the recession. It will be held this year at Honda’s Suzuka circuit starting October 2. Toyota President Akio Toyoda is a racer himself, supporting the sport as a way to “help groom talent by forcing them to solve all sorts of problems within the 24-hour time limit,” he told reporters in June. Flaming Engine Sakurahara was responsible for the engine of the car driven by Jenson Button that won the 2006 Hungarian Grand Prix, he said. The win, one of only three in the Honda team’s Formula One history, came a day after the engine spewed flames during a test run. “After we changed the engine, we knew we were in really good shape,” Sakurahara said, calling the win his proudest moment. Honda owned a Formula One team as early as 1964, even before it began making cars in 1967. It dropped out of Formula One in 1969 and returned in the 1980s as an engine supplier. In 2004, Honda purchased a stake in the BAR team from British American Tobacco Plc. It bought out the team a year later to form the Honda team for the 2006 season. ‘Warrior’ Engineers Teams using Honda’s engines won 69 races out of 151. Toyota, which started Formula One racing in 2002, has never won. When Honda announced it would pull out of Formula One on Dec. 5, Sakurahara’s team was working on a car for the current season that now is being used by Brawn GP. Instead, the former Formula One engineers will apply their experiences to bettering fuel efficiency, including improving aerodynamics and making components smaller or lighter. The engineers also developed an advanced regenerative brake system that stores energy. The system was tested on a pilot basis for possible use in Honda’s hybrid cars, Sakurahara said. Racing trained the engineers to objectively acknowledge what works and what doesn’t, he said. Those competitive instincts now are redirected toward building cars that outsell rivals. “These 400 are warriors, in a sense,” Sakurahara said. “If you don’t win, that means your technology lost.” To contact the reporters on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net ; Kae Inoue in Tokyo at kinoue@bloomberg.net

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Wall Street Betrayal in $4.8 Billion Loss Shown in Texas Instruments Suit

August 28, 2009

By Dunstan McNichol Aug. 28 (Bloomberg) — Eighteen months after investment banks quit supporting auction-rate securities that were once marketed as an equivalent to cash, companies from Dallas-based Texas Instruments Inc. to Israel’s Teva Pharmaceutical Industries Ltd. have more than doubled writedowns on the debt to $4.8 billion. While U.S. state and federal regulators have announced settlements with 23 banks since December 2008, obliging them to repurchase a total of $61 billion in the bonds from individual investors, almost all new sales are failures. More than 400 companies stuck with $22 billion worth of the debt are selling at losses of as much as 40 cents on the dollar to get cash, according to SecondMarket Inc., a New York-based brokerage firm. Others have decided to wait decades until the securities mature. “We’re not happy about this,” said James B. Flaws, chief financial officer of Corning Inc. The glass-fiber maker is one of two owners of Midland, Michigan-based Dow Corning Corp. , a manufacturer of silicone products that holds $1.1 billion of the securities in a market once worth $330 billion. Corning wrote down its share of the portfolio by $33 million and reclassified the assets as a long-term investment, according to a Securities and Exchange Commission filing for the quarter ended June 30. Its affiliate trusted the auction-rate market after functioning smoothly for more than two decades, Flaws said in a telephone interview. ‘Very Liquid Market’ “They invested in auction-rate securities based on the understanding that this was a lot like a money-market instrument, and there was a very liquid market for these,” he said. “There should be a market for this. We are appealing, pressuring, trying to get the banks to reopen the market.” While markets from mortgage to municipal debt have rebounded this year from the worst credit crisis since the Great Depression, with a record $875 billion in corporate bonds sold through Aug. 19, $160 billion of auction-rate securities haven’t been refinanced, according to Kevin O’Connor , a SecondMarket managing director. Of 449 publicly traded companies holding $22 billion in the debt, all but 45 have recognized a loss in their value, according to a survey of SEC filings by Pluris Valuation Advisors , a New York-based firm that analyzes illiquid assets and is affiliated with SecondMarket. ‘Pain Was Great’ “The pain was great,” said Anthony J. Carfang , partner at Treasury Strategies Inc., a Chicago firm that advises companies on working-capital management strategies. “These guys have had sleepless months, and you don’t soon forget that.” Bristol-Myers Squibb Co., the New York-based pharmaceutical company, took an 82 percent loss in 2008 when it sold a portion of its auction-rate debt with a $642 million face value. The maker of Plavix, the world’s second best-selling medicine behind Pfizer Inc.’s Lipitor, continues to hold $169 million worth of auction-rate bonds. It wrote them down by $75 million in the second quarter, according to regulatory filings. Rebecca Goldsmith, a Bristol-Myers spokeswoman, declined to discuss the actions. The market’s collapse also caused “staggering losses” to Teva , according to a lawsuit filed Aug. 6 against Bank of America ’s New York-based Merrill Lynch & Co. unit, which sold $273 million of obligations to the Petah Tikva, Israel-based drugmaker. ‘Elaborate Scheme’ The securities are now worth $10 million, according to the suit, which said that “Merrill Lynch was engaged in an elaborate scheme to deceive investors about its involvement in the auction-rate market.” Ayala Miller , a spokeswoman for Teva, did not immediately respond to questions e-mailed to the company. Bill Halldin , a Merrill Lynch spokesman, declined to comment. In April, Texas Instruments, the second-largest U.S. semiconductor maker, sued New York-based Citigroup Inc., Morgan Stanley and BNY Capital Markets Inc., now part of Bank of New York Mellon Corp., over $521 million in auction-rate securities bought since 2005. “They let us believe they would be liquid,” the Dallas- based company’s treasurer, Charlie Tobin, said in a telephone interview. “At the same time, within their institutions, they knew it was coming to an end.” During the first quarter of 2008 Texas Instruments reclassified its $533 million portfolio as a long-term asset and reported losses of $41 million as of June 30, according to regulatory filings. Security Question The chipmaker specifically asked Citigroup and Bank of New York whether the investments were secure after a series of sales failed in the summer of 2007, the company said in the lawsuit. “Both Citi and BNY assured Texas Instruments that the Student Loan Auction Rate Securities would not fail at auction,” the company said in the suit. In a June 8 court filing, Ellen Sessions , Carrie L. Huff and Michael L. Dinnin , attorneys for Morgan Stanley, Citigroup Global Markets and BNY Capital Markets, respectively, said Texas Instruments cannot allege any false or misleading statements and that the company hasn’t incurred any losses from the auction- rate portfolio. “Plaintiff was a sophisticated purchaser of auction-rate securities and other investments,” the lawyers said in their filing. “It knew and understood the nature and risks of those investments,” Danielle Romero-Apsilos of Citigroup, Christine Pollak at Morgan Stanley and Kevin Heine of Bank of New York Mellon each declined to comment. Short and Long For 25 years, auction-rate securities were popular with borrowers such as municipal governments, student-loan financing agencies and nonprofit organizations, which used them as a way to get short-term borrowing rates on long-term obligations. Some of the debt does not mature until 2047. Banks oversaw periodic bond auctions, generally conducted every 7, 28 or 35 days and supported the sales by purchasing unsold debt. They stopped buying in February 2008 as credit tightened. Auctions have failed regularly since. In July, only 408 of 3,035 auctions drew enough bids to allow bondholders to sell, meaning 87 percent failed, according to the Municipal Securities Rulemaking Board ’s Electronic Municipal Market Access Web site . There is little prospect the traditional auction-rate market will ever return, according to Espen Robak , Pluris’s president. ‘Dead Asset Class’ “This is a dead asset class,” said Robak, whose firm estimated corporate writedowns on the debt reached $4.8 billion in the second quarter, against $2.1 billion a year earlier. The 23 banks involved in the sale of the debt have negotiated settlements with state and federal regulators, paying $575 million in penalties and agreeing to buy back more than $61 billion of securities. Merrill Lynch announced a settlement in principle with the SEC in August 2008 obliging it to buy back $7 billion in auction-rate securities by the end of this year. The agreement is not yet final, said agency spokesman John Heine . Regulators are now focused on brokerages that sold auction- rate securities on behalf of originating investment banks. Boston-based Fidelity Investments, the world’s largest mutual fund company, and TD Ameritrade Holding Corp. of Omaha, Nebraska, the third-largest retail broker by client assets, have agreed to repurchase a total of $956 million in auction-rate securities from customers. ‘No Involvement’ Charles Schwab Corp. of San Francisco, the biggest independent broker by client assets, was sued in August by New York Attorney General Andrew Cuomo , who said the firm misled customers about the safety of auction-rate securities. “We did not create the products, actively market them, and had no involvement in the events that led to the collapse of the Auction Rate Securities market,” Charles Schwab , the broker’s chairman, wrote in an opinion article for the Wall Street Journal Aug. 19. Most of the agreements initially required buybacks only from investors with less than $10 million in holdings, according to settlement documents. By early next year, the banks must make their best efforts to buy back securities from investors with larger positions. Companies owning auction-rate debt often follow a 2007 Financial Accounting Standards Board ruling requiring holders of instruments for which there is no observable market to estimate a fair value. The price can be based on a formula the companies devise themselves and must be explained to investors. Richfield, Minnesota-based Best Buy Co . reported a $14 million loss on its $312 million in auction-rate holdings during the three months ended May 30, according to filings. Full Recovery The world’s largest electronics retailer classified the impairment as “temporary,” because “we intend to hold our ARS until we can recover the full principal amount,” it said in a filing. Sue Busch , a spokeswoman for Best Buy, declined to comment. Of the $298 million in auction-rate debt held by the company, $274 million are in student-loan bonds backed by the U.S., regulatory filings show. The balance is in municipal securities. UBS AG has promised to repurchase $89 million of the debt at face value by July 2, 2012, according to the retailer. Zurich-based UBS, unlike most banks reaching regulatory settlements, agreed to buy back auction-rate securities at face value from any purchaser regardless of the portfolio size, said Mark Arena , a spokesman in New York. No Need UBS held $16.34 billion in auction-rate securities as of June 30, and was scheduled to buy another $8.47 billion back from customers by July 2, 2012, according to an Aug. 2 filing. Not every company writing down the debt needs to draw on the assets immediately. US Airways Group Inc., the country’s sixth-largest carrier by traffic, wrote down its $214 million auction-rate portfolio by $34 million, according to a June 30 filing. The Tempe, Arizona-based company has $1.7 billion in unrestricted cash and needs only half of that currently, Doug Parker , its chief executive officer, said in a call with analysts July 23. Some auction-rate purchasers needing ready cash have sold the debt through specialty brokers such as SecondMarket for 60 cents to 80 cents on the dollar, according to the firm. Of 29 companies that sold auction-rate holdings during the second quarter of this year, 15 had a market value of $100 million or less, said Robak. Cable TV retailer ShopNBC, a unit of Eden Prairie, Minnesota-based ValueVision Media Inc. whose slogan is “Be Good to Yourself,” needed funds last month to load up on jewelry and beauty supplies for the Christmas selling season. With $26.8 million in frozen auction-rate securities on its books, the company took a $7.4 million loss to free the stranded assets and received about 72 percent of face value for the debt, according to a July 10 filing. The retailer, whose Web site offers 10 karat gold-and- diamond bracelets for $81.08, couldn’t afford to wait for the market to recover or the securities to mature, spokesman Anthony Giombetti said. “We wanted to get them off our books.” To contact the reporter on this story: Dunstan McNichol in Trenton at dmcnichol@bloomberg.net .

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Constituents Line Up to Pay Final Respects to Kennedy at `End of an Era’

August 28, 2009

By Brian K. Sullivan and Sree Vidya Bhaktavatsalam Aug. 28 (Bloomberg) — Thousands of Massachusetts residents waited in line last night and more are expected today for a chance to pay their last respects to Senator Edward M. Kennedy . Kennedy, who was first elected to the post in 1962, lay in repose at Boston’s John F. Kennedy Presidential Library and Museum . The public was invited to view his flag-draped casket in the museum that honors his late brother, former U.S. President John F. Kennedy. “It’s the end of an era,” said Debbie Klapp, 55, a small business owner from the Boston suburb of Stoughton, who came to pay her respects to the senator, who died of brain cancer Aug. 25. “He has done so much for the common good of everybody.” Kennedy’s body was brought to the museum yesterday from his family’s compound in Hyannis Port, Massachusetts, about 70 miles (112 kilometers) south of Boston. Thousands of people lined the roads and overpasses to catch a glimpse of the black hearse bearing his body. Traffic on highways came to a halt in many places as motorists on the opposite sides of the road would just stop to watch the motorcade, which included about 85 family members. Kennedy’s wife, Victoria Reggie Kennedy , spoke briefly to reporters at the museum, thanking people for turning out to support her husband. In remarks carried on CNN, she said the sight of people lining the streets was “deeply, deeply moving for all of us.” ‘Extraordinary Thing’ “It is an extraordinary thing to have three brothers and as many sisters from one family make a contribution not only to this state but to this country,” former Massachusetts Lieutenant Governor Thomas P. O’Neill III said. “It is totally recognized on every street and every bridge crossing.” Kennedy’s funeral will be held tomorrow at Our Lady of Perpetual Help Basilica. President Barack Obama , vacationing this week on the Massachusetts island of Martha’s Vineyard, is scheduled to speak. Obama is “still working” on the eulogy, White House spokesman Bill Burton told reporters yesterday on Martha’s Vineyard. “It’s obviously going to be very personal.” Kennedy will be buried at Arlington National Cemetery near his two brothers — President Kennedy, assassinated in 1963, and New York Senator Robert F. Kennedy , killed by a gunman in 1968. Victoria Kennedy , Kennedy’s son Patrick , a congressman from Rhode Island , and his nephew Joseph Kennedy , a former congressman, were among the family members accompanying the senator’s body from his home in Hyannis Port. Honor Guard A military honor guard stood watch outside the home and escorted his body into the museum when it arrived in Boston. Before arriving at the museum, the motorcade toured Boston, the city his grandfather John F. Fitzgerald once served as mayor. Among the locations the motorcade passed were the federal building named for his brother John, the office where he served as a Suffolk County Assistant District Attorney and the church where his mother Rose was baptized. The hearse also passed City Hall, where Boston Mayor Thomas Menino and his wife, Angela, were among the thousands of people lining the street. “Today, the city of Boston will celebrate the life of Senator Kennedy,” Menino said in a statement. “I urge everyone to take a few minutes to remember his service to our city, state and country.” The bell atop Boston’s Faneuil Hall rang out 47 times, once for each year of Kennedy’s service in the U.S. Senate, as the hearse passed by. New Deal Kennedy represented one of the last generational links to Franklin D. Roosevelt ’s New Deal, said O’Neill, who is the son of former U.S. House Speaker Thomas P. “Tip” O’Neill Jr. “The ideals of the New Deal must stay in place,” said O’Neill, who went to view the casket of his friend last night. “People must understand the contribution he and my father made. They believed in a government of helping people.” People held U.S. flags, wore red, white and blue hats and some hung Irish flags in honor of Kennedy’s heritage. “They were really the last of the great Irish-American stories,” O’Neill said. “The Irish-Americans have made it, and now it is their obligation to look behind to anyone left behind.” To contact the reporters on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net ; Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

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U.S. Stake in AIG Deemed `Highly Speculative’ in Draft Treasury Document

August 28, 2009

By Hugh Son Aug. 28 (Bloomberg) — The U.S. Treasury said in a draft of a presentation that its $40 billion investment in the American International Group Inc. bailout was “highly speculative.” A slide with the phrase was included in documents obtained in a Freedom of Information Act request by Judicial Watch , a group that advocates government transparency. The sentence was omitted from another version of the slide in a presentation describing the November revision to AIG’s rescue in which the insurer got $40 billion from the Treasury. “The prospects of recovery of capital and a return on the equity investment to the taxpayer are highly speculative,” according to the first of the two Treasury slides. Treasury Secretary Timothy Geithner told Congress in March that New York-based AIG, once the world’s largest insurer, was saved last year to prevent “catastrophic damage” to economic markets. The company still owes the Federal Reserve about $39 billion on a credit line after announcing more than $9 billion in asset sales. “Why do you take out the fact that we are taking on risks for the taxpayers that are both huge and highly uncertain?” said William Black , associate professor of economics and law at the University of Missouri-Kansas City and a former U.S. bank regulator. “The last thing you want to spread is a culture in which people aren’t being absolutely blunt.” Andrew Williams , a spokesman for Treasury, said the document with the “highly speculative” phrase was a draft created by the previous administration. It isn’t clear who at Treasury created the slides, entitled “Investment Considerations,” and who the intended audience was. ‘Greater Stability’ “We are confident that Treasury’s investment in AIG has helped strengthen the institution for the greater stability of the American economy and appreciate Chief Executive Officer Robert Benmosche ’s commitment to the objective of repaying us in full,” Williams said, declining to comment further. AIG stock surged this month after the insurer on Aug. 7 posted its first quarterly profit since 2007 and Benmosche, who replaced Edward Liddy as CEO, said Aug. 20 he expects to repay the U.S. The shares closed yesterday at $47.84 on the New York Stock Exchange, more than three times the July 31 price. “We believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well,” Benmosche said in a Bloomberg Television interview on Aug. 20. AIG will rebuild assets and won’t be pressured by regulators to sell businesses at unfavorable prices, he said in the interview. The Treasury documents were turned over last month in response to a March FOIA request from Judicial Watch, according to Chris Farrell , director of investigations at the Washington- based organization. Christina Pretto , an AIG spokeswoman, declined to comment. $182.5 Billion Bailout “They incorporated the ‘highly speculative’ line onto that slide for a reason, and someone elected to have it removed,” said Farrell. “Both of those pieces of information let the reader draw conclusions about what went on at Treasury.” In the latest revision to AIG’s rescue in March, Treasury’s commitment swelled to as much as $70 billion, bringing the bailout package to $182.5 billion. That includes a $60 billion Federal Reserve credit line and $52.5 billion to buy mortgage- linked assets owned or backed by AIG. AIG posted a $1.82 billion second-quarter profit on Aug. 7 on narrowing investment losses and a rebound in the value of some derivatives. The company also benefited from gains in hedge-fund holdings. The insurer has used proceeds from some asset sales to shore up its property-casualty operations rather than repay the U.S. The company retained $2.4 billion from the sale of auto insurer 21st Century to Zurich Financial Services AG and from the public offering of reinsurer Transatlantic Holdings Inc. to improve the “quality of capital” at its Chartis Inc. division. Life Insurance AIG won access in November to the $40 billion Treasury investment. Geithner committed as much a $30 billion more in March when the company announced a record fourth-quarter loss. AIG said this month that it tapped $1.2 billion from the second facility to shore up its U.S. life insurance and retirement services operations. The funds helped the units maintain “solid” risk-based capital ratios, a measure of an insurer’s strength, AIG said. The insurer agreed in September to turn over a stake of almost 80 percent in exchange for the bailout. AIG said in November, when it announced the $40 billion investment, that Treasury would get preferred shares with a 10 percent coupon. The company said in March that Treasury’s investment would be modified to “more closely resemble common equity and improve AIG’s financial leverage.” AIG also won a lower interest rate on its credit line. To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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L’Oreal Jumps Most in Nine Months on Smaller-Than-Estimated Drop in Profit

August 28, 2009

By Keith Campbell Aug. 28 (Bloomberg) — L’Oreal SA , the world’s largest cosmetics maker, rose the most in nine months in Paris trading after posting a smaller-than-estimated earnings decline and forecasting a recovery, prompting upgrades from three banks. Operating profit fell 8.3 percent to 1.37 billion euros ($1.96 billion) in the six months through June, the Paris-based company said yesterday after markets closed, above the 1.27 billion-euro median analyst estimate. The maker of Armani makeup and Lancome scents said sales improved in July and will keep gradually improving throughout the second half. Oddo Securities, Bank of America-Merrill Lynch and UBS AG all upgraded L’Oreal today, and the shares jumped as much as 10 percent, the most since November. The stock plunged 36 percent in 2008 as U.S. department stores pared inventories. “We now consider the risk of further downside to the numbers as very remote,” UBS analysts including Eva Quiroga said in an e-mailed note this morning, raising the stock to “neutral” from the previous “sell” recommendation. L’Oreal’s profitability shrank less than the UBS analysts expected. L’Oreal stock rose 6 euros, or 9.3 percent, to 70.69 euros at 9:05 a.m. in Paris trading today. It’s up about 12 percent so far this year. Merrill analysts including Antoine Colonna raised L’Oreal to “buy” from “neutral” today, saying sentiment on the stock had been “excessively negative.” Oddo’s Vanessa Laurence raised the shares to “buy” from “add,” saying investors had underestimated the benefits from L’Oreal’s cost-cutting plan. To contact the reporter on this story: Ladka Bauerova in Paris at lbauerova@bloomberg.net .

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Gilts’ Biggest Rally of 2009 to End as U.K. Debt Sales Mount, Dealers Say

August 28, 2009

By Matthew Brown and Anchalee Worrachate Aug. 28 (Bloomberg) — U.K. gilts are about to lose their allure after the best month this year as investors turn their focus to increasing debt sales by the government , according to the firms that bid at bond auctions. The 10-year government bond yield will rise to 4 percent by year-end, according to the median forecast of 14 of the 15 primary dealers in a Bloomberg News survey. The yield was at 3.58 percent as of 8:41 a.m. in London today, from 3.80 percent at the end of July, While the Bank of England extended its so-called quantitative-easing program of asset purchases this month, the 175 billion-pound plan is set to expire in October, sending net government-debt issuance up to 180 billion pounds ($293 billion) in the year ended March 31, 2011, from 28.4 billion pounds this fiscal year. “The market is fretting over the lack of a credible roadmap for fiscal sustainability,” said Richard McGuire , head of European fixed-income strategy at Royal Bank of Canada in London. It “stems purely from supply-side concern.” Bond yields fell after the Bank of England unexpectedly extended its asset purchases on Aug. 6 and Governor Mervyn King said on Aug. 12 that he may lower the interest rate the central bank pays on reserves to encourage commercial banks to buy more of the securities. Policy makers voted 6-3 to spend an additional 50 billion pounds on quantitative easing, bringing the total to 175 billion pounds, the minutes of the Monetary Policy Committee’s meeting showed. King backed a 75 billion-pound increase. The central bank will complete the program at the end of October, and will decide whether to extend it at a meeting on Nov. 5. Best of G-10 British government bonds returned 3.79 percent this month, including reinvested interest, the most since December and better than any of the other Group of 10 nations, according to Merrill Lynch & Co.’s U.K. Gilts Index. Of the G-10 countries, Italy came closest, gaining 0.85 percent. German debt returned 0.37 percent and U.S. Treasuries 0.56 percent. The rally pushed the yield on the two-year gilt to a record low of 0.83 percent on Aug. 25, before rising to 0.91 percent today. The yield fell 279 basis points, or 2.79 percentage points, below that of 10-year notes on Aug. 13, the most in at least 17 years. Gilt yields “appear to be some 50 to 75 basis points lower than they would otherwise be,” as a result of quantitative easing, Deputy Governor Charles Bean said in a speech in Barcelona, Spain, on Aug. 25. Expanding Deficit “The rally has gone too far,” said Francis Diamond , a fixed-income strategist at JPMorgan Chase & Co. in London. “The very front end of the gilt market has outperformed too much on the back of concern around the Bank of England’s possibly lowering the bank rate or introducing a lower rate for deposit on reserves.” Prime Minister Gordon Brown’s government is pumping unprecedented amounts of cash into the economy to drag Britain out of its worst recession since World War II and rescue banks from Bradford & Bingley Plc, the biggest lender to U.K. landlords before it was nationalized, to Edinburgh-based Royal Bank of Scotland Group Plc, the 280-year-old lender that was once Europe’s biggest bank by assets. The Treasury plans to sell 220 billion pounds of gilts in the year through March 2010, up from 146.5 billion pounds last year. Falling government tax revenue and rising spending drove Britain’s budget deficit to 8 billion pounds in July, the largest for the month since records began in 1993, according to the Office for National Statistics. Yield ‘Uncertainty’ The 10-year gilt yield was 3.66 percent when the Bank of England announced the start of the program on March 5. It rose as high as 4.08 percent on June 11 amid growing evidence that the worst of the U.K. recession was over. “There’s a lot of uncertainty about what effect the quantitative easing has had on bond yields,” said Sean Maloney , a fixed-income strategist in London at Nomura International Plc. “It’s very hard to say what the net impact is going to be when it’s withdrawn.” Gross domestic product shrank 5.6 percent in the second quarter from a year ago, more than the U.S. and the euro zone , which declined 3.9 percent and 4.6 percent, respectively. The sputtering economy will create demand for government bonds, driving two-year gilt yields down to 0.75 percent by year-end, according to HSBC Holdings Plc. The 10-year yield will fall to 3.3 percent, the bank said. Yields ‘Anchored’ “The short end of the gilt curve should remain anchored and is unlikely to deviate for quite a while,” said Andre de Silva , HSBC’s deputy head of fixed-income research in London. “We have some question marks on the view of a very pronounced recovery.” The U.K. will exit the recession in the three months ended September, posting 0.2 percent quarterly growth, according to the median estimate of 13 economists in a Bloomberg survey. The economy will expand 0.3 percent in the fourth quarter and 0.4 percent in each of the first two quarters of 2010, the survey showed. Evidence of growth will push the yield on the 10-year note up to 4 percent by year-end as traders increase bets that the central bank will raise its benchmark interest rate from a record low 0.5 percent, according to Deutsche Bank AG. “Our forecasts for higher yields reflect our view that the economy is recovering,” said George Buckley , chief U.K. economist at Deutsche Bank in London. “The Bank of England will have to raise interest rates at some point, and they will have to take back quantitative easing.” The 14 primary dealers in the survey were Barclays Capital, BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank, Goldman Sachs Group Inc., HSBC, JPMorgan, Merrill Lynch, Morgan Stanley, Nomura, Royal Bank of Canada, Royal Bank of Scotland and UBS AG. Winterflood Securities didn’t participate. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net ; Anchalee Worrachate in London at aworrachate@bloomberg.net

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Stocks Rise in Europe, Asia, After Dell Earnings; Infineon, L’Oreal Gain

August 28, 2009

By Adria Cimino Aug. 28 (Bloomberg) — European and Asian shares climbed, extending the MSCI World Index’s seventh straight weekly gain, as Dell Inc. ’s earnings beat estimates and higher metal prices lifted commodity producers. U.S. index futures fluctuated. Infineon Technologies AG , Europe’s second-biggest maker of semiconductors, added 2.1 percent, while Dell gained 2.6 percent in Germany. BHP Billiton Ltd., the world’s largest mining company, added 1.6 percent in London as copper climbed. The MSCI World of 23 developed countries gained 0.6 percent at 8:10 a.m. in London, bringing its weekly advance to 1.1 percent. The gauge rallied 59 percent since March 9 as the German and French economies unexpectedly expanded and earnings at companies from Goldman Sachs Group Inc. to Roche Holding AG spurred speculation the worst of the recession is over. Europe’s Dow Jones Stoxx 600 Index climbed 0.6 percent, extending its weekly increase to 0.7 percent. The rally has left the Stoxx 600 valued at 47.6 times the earnings of its companies, the most expensive level since 2003, according to weekly data compiled by Bloomberg. U.S. stocks rose yesterday after a rebound in oil and natural gas spurred investors who pushed the Standard & Poor’s 500 Index up 52 percent since March into bets on riskier assets. S&P 500 S&P 500 futures slipped less than 0.1 percent today, while the MSCI Asia Pacific Index added 0.5 percent. Infineon gained 2.1 percent to 3.43 euros, while Dell added 2.6 percent to $16.05. Dell topped profit and revenue estimates yesterday after slashing costs by contracting out production. Second-quarter profit at the world’s second-biggest maker of personal computers was 28 cents a share, excluding some expenses. Analysts had predicted 22 cents on average, according to a Bloomberg survey. Dell climbed 6.7 percent in regular New York trading yesterday after accidentally posting the earnings report on its Web site early. BHP added 1.6 percent to 1,627.5 pence. Copper gained 2.7 percent on the London Metal Exchange. L’Oreal SA climbed 7.4 percent to 69.46 euros after Bank of America Corp. raised the world’s largest cosmetics maker to “buy” from “neutral.” UBS AG lifted its recommendation to “neutral” from “sell.” The Paris-based cosmetics maker yesterday said operating profit in the six months through June fell 8.3 percent to 1.37 billion euros ($1.97 billion), beating the median analyst estimate of 1.27 billion euros. To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net .

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U.K. Economy Shrank 0.7% in Second Quarter as Investment, Spending Dropped

August 28, 2009

By Jennifer Ryan Aug. 28 (Bloomberg) — The U.K. economy contracted 0.7 percent in the second quarter as the recession prompted companies to cut investment and inventories while consumers scaled back spending. The fall in gross domestic product was less than the 0.8 percent calculated last month, the Office for National Statistics said today in London. The median forecast of 28 economists in a Bloomberg News survey was for no revision. The economy shrank 5.5 percent from a year ago, the most since records began in 1955. The Bank of England this month extended its bond purchase program to 175 billion pounds ($285 billion) after the recession proved worse than it predicted in May. While growth may resume this year, it will likely take until almost 2012 to recover the output lost in the sharpest contraction since the World War II, policy makers say. “There’s such a huge amount of spare capacity it doesn’t make sense to extend investment spending, and firms are finding it difficult to get access to funds from banks to finance expansion,” said Peter Dixon, an economist at Commerzbank AG in London. “The economy may have bottomed out but the recovery will slow. It’s going to be a long haul.” The statistics office said the upward revisions to GDP last quarter were due to manufacturing, energy extraction and wholesale and motor vehicle services. There is anecdotal evidence that car sales were boosted by a government scrappage program. Bank of England forecasts published this month show output expanding in the third and fourth quarters with growth resuming on an annual basis from the first quarter next year as businesses replenish stocks and monetary easing begins to work. Unemployment in Britain climbed to a 14-year high in the second quarter, and companies facing sluggish demand and tight credit conditions will continue to cut jobs well into 2010, limiting the pace of recovery, economists predict. The U.K. is lagging some other economies in shaking off the recession. In Germany and France, GDP rose 0.3 percent in the second quarter from the first three months of the year. Japan’s economy expanded at an annual 3.7 percent pace and the U.S. economy shrank 1 percent in the period, less than anticipated. “We feel that the worst is over, but were not shouting about green shoots,” said Diageo Plc Chief Financial Officer Nick Rose after the London-based maker of Johnnie Walker whisky and Guinness stout yesterday gave lower profit guidance for 2010 on concern over the speed and sustainability of the economic recovery. Prime Minister Gordon Brown is counting on an economic revival to boost his political fortunes before a general election he has to hold by June 2010. His Labour Party trailed behind the opposition Conservatives by 16 points in an ICM Ltd. poll that ended Aug. 23. To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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US economy drops slightly in Q2

August 28, 2009

US economy drops slightly in Q2

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South Africa’s CPI slows to two-year low

August 28, 2009

South Africa’s CPI slows to two-year low

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Japan’s Toyota to slash 10% of global output

August 28, 2009

Japan’s Toyota to slash 10% of global output

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Consumer Spending in U.S. Probably Climbed in July on `Cash for Clunkers’

August 27, 2009

By Shobhana Chandra Aug. 28 (Bloomberg) — Consumer spending probably increased in July at half the pace of the previous month, a sign the biggest part of the economy will be slow to rebound, economists said ahead of reports today. Purchases rose 0.2 percent after gaining 0.4 percent in June, according to the median forecast of 75 economists surveyed by Bloomberg News. Another report may show consumer sentiment fell in August for a second month. Spending is projected to rise this quarter as auto dealers benefit from the government’s “cash-for-clunkers” plan, while retailers such as Kohl’s Corp. and J.C. Penney Co. struggle to lure households shaken by mounting job losses. A record drop in wealth may prompt Americans to reduce debt and boost savings , signaling consumers will play a smaller role in the recovery. “Consumer spending is going to be pretty lackluster,” said Robert Mellman , an economist at JPMorgan Chase & Co. in New York. “Employment is contracting, and people are still pretty shell-shocked from the past decline in stock prices and home prices. The recovery is on track the rest of this year, but we really need the consumer to come on in 2010.” The Commerce Department report is due at 8:30 a.m. in Washington. Spending estimates in the Bloomberg survey ranged from no change to a 0.6 percent increase. The report is also projected to show incomes rose 0.1 percent in July after decreasing 1.3 percent the previous month, the most in four years. The drop reflected the fading boost from government stimulus-related tax cuts and transfers. Sentiment Falls At 10 a.m., Reuters/University of Michigan figures may show the index of consumer sentiment dropped to 64 from 66 in July, according to the Bloomberg survey median. Estimates ranged from 62 to 68. The measure would be up from a preliminary reading of 63.2 issued earlier this month. Stocks are rising as reports indicate the economy is pulling out of the recession. The Dow Jones Industrial Average advanced 0.4 percent yesterday, rallying for the eighth straight day, the longest winning streak since April 2007. Consumer spending, which accounts for about 70 percent of the economy, fell at a 1 percent pace in the second quarter , revised figures from the Commerce Department showed yesterday. Economists in a Bloomberg survey anticipated a 1.3 percent drop. The economy shrank at a 1 percent annual rate from April to June, also less than analysts’ median forecast. While economists project that spending will start growing again this quarter, much of the gain will be driven by programs such as the Obama administration’s cash-for-clunkers plan. Trade in Clunkers Auto industry data showed sales of cars and light trucks rose to an 11.2 million unit annual pace in July, the most since September, after the government offered credits of as much as $4,500 to trade in gas-guzzlers for more fuel-efficient cars. Sales at retailers in July fell 0.1 percent, the first drop in three months, as the boost from the automobile plan failed to overcome cuts at other merchants, according to government figures released on Aug. 13. Forecasts call for below-average gains in spending due to stagnant incomes, a lack of jobs and an unemployment rate that may reach 10 percent early next year for the first time since 1983, according to a Bloomberg survey taken this month. Purchases will probably climb at an average 1.6 percent quarterly rate through June 2010, compared with a 2.8 percent gain on average during the six-year expansion that ended in December 2007, the survey showed. Company results signal shoppers are under pressure. J.C. Penney, the third-largest U.S. department-store chain, issued a third-quarter earnings forecast that trailed analysts’ estimates and said sales may fall 3 percent to 5 percent from the same period last year. Smaller rival Kohl’s said second- quarter profit fell 3 percent as sales at stores open for at least a year declined. “People are still going to shop a little less and spend a little less than they have in the past,” Kevin Mansell , chief executive officer of Menomonee Falls, Wisconsin-based Kohl’s, said in a telephone interview on Aug. 13. To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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Euro Rises, Set for Second Monthly Gain Versus Dollar on Recovery Optimism

August 27, 2009

By Yasuhiko Seki and Ron Harui Aug. 28 (Bloomberg) — The euro rose, headed for its first two-month advance against the dollar since March 2008, on growing evidence Europe is emerging from its worst recession. The 16-nation currency gained for an eighth day versus the pound, its longest streak in four years, before a European report forecast to show business and consumer confidence rose to the highest level in 10 months. The yen fell against 15 of 16 major counterparts after Japanese government reports showed unemployment rose to a record and consumer prices slumped. Japan’s opposition party may win elections on Aug. 30, polls show, halting the ruling party’s half-century grip on power. “The euro-zone economies look like they’re starting to recover,” said Masanobu Ishikawa , general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The euro is easy to buy, given higher interest rates there than in the U.S. and Japan.” The euro rose to $1.4355 as of 1:14 p.m. in Tokyo from $1.4341 in New York yesterday, when it reached $1.4406, the highest level since Aug. 7. The currency has advanced 0.7 percent this month. It climbed to 134.53 yen from 134.14 yen, and strengthened to 88.24 British pence from 88.07 pence. The yen weakened to 93.71 per dollar from 93.52 yesterday. It declined to 64.34 versus New Zealand’s dollar from 64.28 yesterday, and fell to 78.63 per Australian dollar from 78.48. Executive, Consumer Sentiment Europe’s single currency strengthened as an index of executive and consumer sentiment in the 16-nation region climbed to 78 in August, the highest since October, from 76 in July, according to a Bloomberg News survey of economists. The European Commission will release the data today in Brussels. European Central Bank board member Mario Draghi said on Aug. 26 that the global economy appears to be recovering from its first recession since World War II even though “strong uncertainties” remain. The yen may decline for a second-straight week versus the New Zealand dollar on speculation investors sold the Japanese currency to buy higher-yielding assets. Japan’s jobless rate rose to 5.7 percent in July, eclipsing the previous worst of 5.5 percent seen in April 2003, the statistics bureau said today in Tokyo. Consumer prices excluding fresh food declined 2.2 percent in July from a year earlier after dropping 1.7 percent in the previous month, the statistics bureau also said today. “The markets seem to be perceiving the data as a negative for the safe-haven status of the currency,” said Takashi Kudo , director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “This is probably why the yen is being sold.” U.S. Confidence The benchmark interest rate is 0.1 percent in Japan and as low as zero in the U.S., compared with 2.5 percent in New Zealand and 3 percent in Australia, attracting investors to the South Pacific nations’ assets. The dollar may head for a third weekly loss versus the Swiss franc before a U.S. report forecast to show a gauge of consumer confidence rose this month, sparking an increase in risk appetite. A Bloomberg News survey of economists showed that the Reuters/University of Michigan gauge on Aug. 28 is projected to rise. The barometer of confidence among U.S. consumers probably rose to 64.0 in August from 63.2 in the previous month. The dollar was at 1.0588 francs, down from 1.0594 francs yesterday, holding near the year-to-date low of 1.0531 touched on Aug. 27. ‘Gradually Improving’ “The overall picture that the global economy is gradually improving remains intact,” said Tomokazu Matsufuji , a dealer in Tokyo at SBI Liquidity Markets Co., a unit of financier SBI Holdings Inc. “The safe-haven currencies are likely to weaken against higher-yielding ones as risk sentiment is on the mend.” Adding to signs the recession is easing, the U.S. economy, the world’s largest, contracted less than economists forecast as companies reduced inventories, spending started to climb and profits grew, a Commerce Department report said yesterday. Gross domestic product shrank 1 percent in the three months ended in June, matching the initial estimate on July 31. The contraction was less than the 1.5 percent median forecast in a Bloomberg News survey of 75 economists. The main opposition Democratic Party of Japan may win more than 320 of the 480 seats at the election Aug. 30, the Asahi newspaper reported yesterday. Prime Minister Taro Aso dissolved parliament on July 21, triggering the general election. “The DPJ lacks policies which can re-invigorate the corporate sector as it focuses on households,” said Kazuto Uchida , chief economist in Tokyo at Bank of Tokyo Mitsubishi UFJ Ltd., a unit of Japan’s biggest banking group. “The limited prospect of an acceleration in growth expectations may prevent foreign investors from buying into Japanese assets.” Spending Policies DPJ President Yukio Hatoyama and his party have pledged cash for child care and an abolition of highway tolls among their spending policies. A convincing victory by the DPJ may turn out be positive for the yen in the short term, according to Koji Fukaya , a senior currency strategist at the Tokyo unit of Deutsche Bank AG, the world’s largest currency trader. “The DPJ won’t block the Bank of Japan from hiking interest rates when the right time comes, and it will be reluctant to intervene currency markets,” he said. The Bank of Japan , which gained independence from the government in 1998, has kept its benchmark overnight lending rate at 0.1 percent since December. The rate has remained at 0.5 percent or lower since 1995. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net ; Ron Harui in Singapore at rharui@bloomberg.net .

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Asian Stocks Gain as Harvey Norman, Dell Earnings Beat Analyst Estimates

August 27, 2009

By Jonathan Burgos and Shani Raja Aug. 28 (Bloomberg) — Asian stocks rose, sending the MSCI Asia Pacific Index to its second weekly advance in three, as increased commodity prices and Dell Inc.’s better-than-estimated profit added to signs that the global economy is recovering. Inpex Corp., Japan’s largest oil explorer, gained 1.9 percent. Acer Inc., the world’s third-largest computer maker, climbed 3.1 percent. Casio Computer Co. surged 6.9 percent in Tokyo after the Yomiuri newspaper reported the company is merging its mobile phone business with NEC Corp. and Hitachi Ltd. Japanese equities rose before an election that opinion polls suggest will end the ruling coalition’s 50-year hold on power. “Risk appetite has recovered from the depths that we had in March and people are looking at fundamentals,” said Prasad Patkar , who helps manage about $1.1 billion at Platypus Asset Management in Sydney. “Confidence is there for the right reasons. Economies are stabilizing and things are starting to normalize.” The MSCI Asia Pacific Index advanced 0.4 percent to 113.43 as of 1:52 p.m. in Tokyo, taking its gain this week to 2.5 percent. The gauge has climbed 61 percent from a more than five- year low on March 9 on speculation government stimulus packages and lower borrowing costs will revive the global economy. Japan’s Nikkei 225 Stock Average added 0.3 percent. The country holds parliamentary elections on Aug. 30, in which the opposition Democratic Party of Japan is expected to win by a landslide, newspaper polls show. The ruling Liberal Democratic Party has governed Japan for all but 10 months since 1955. Shanghai Composite Australia’s S&P/ASX 200 Index gained 0.4 percent, while South Korea’s Kospi Index added 0.4 percent. Harvey Norman Holdings Ltd., Australia’s biggest electronics retailer, surged 16 percent, while BOC Hong Kong Holdings Ltd., Hong Kong’s second-largest publicly traded bank by market value, climbed 6.1 percent on better-than-estimated earnings. China’s Shanghai Composite Index dropped 2.5 percent and Hong Kong’s Hang Seng Index fell 0.5 percent on concern Chinese measures to curb lending and overcapacity in some industries will slow economic growth. China Cosco Holdings Ltd., Asia’s biggest shipping company by market value, sank 3.8 percent in Shanghai after posting a first-half loss. Futures on the U.S. Standard & Poor’s 500 Index lost 0.1 percent. The gauge rose 0.3 percent yesterday as oil futures climbed for the first time in three days with a 1.5 percent gain. Separately, a Commerce Department report showed the U.S. economy contracted at a 1 percent annual rate from April to June, less than the 1.5 percent contraction estimated by economists. Global Recovery Signs the global recovery is gaining traction has fueled the MSCI Asia Pacific Index’s rally since March. Malaysia’s gross domestic product shrank less than estimated in the three months to June 30, data released on Aug. 26 show. The Philippine economy expanded in the second quarter at three times the pace expected by economists, the government reported yesterday. Inpex gained 1.8 percent to 748,000 yen in Tokyo. Woodside Petroleum Ltd., Australia’s second-largest oil producer, added 1.2 percent to A$49.39 in Sydney. “Investors are putting their money in risk assets such as oil and stocks,” said Kiichi Fujita , a strategist at Nomura Holdings Inc. in Tokyo. BHP Billiton Ltd., the world’s biggest mining company, added 0.5 percent to A$37.82. Copper for September delivery in New York increased 1.7 percent in after-hours trading. Dell Earnings Samsung Electronics Co., the world’s largest maker of computer-memory chips, rose 0.5 percent to 771,000 won in Seoul. Dell, the world’s No. 2 maker of personal computers, reported second-quarter sales and profit that beat estimates after the Texas-based company cut manufacturing costs and attracting buyers with low-priced notebooks. Dell suppliers in Taiwan gained. Quanta Computer Inc., the world’s largest laptop maker, climbed 2.7 percent to NT$69.1. Compal Electronics Inc., the world’s second-largest laptop maker, advanced 1.9 percent to NT$32.60. Acer climbed 3.1 percent to NT$73. HSBC Holdings Plc upgraded the stock to “neutral” from “underweight” and Goldman Sachs Group Inc. raised its share-price estimate by 19 percent to NT$74. In Sydney, Harvey Norman surged 16 percent to A$3.71, the most in more than 20 years. The company’s net income of A$214.4 million ($180 million) in the year ended June beat the A$199.3 million average of analyst estimates in a Bloomberg survey. Beating Estimates Some 34 percent of the 586 companies in the MSCI Asia Pacific Index that have reported net income since early July have beaten analyst estimates , while 19 percent have missed, according to data compiled by Bloomberg. BOC Hong Kong advanced 6.1 percent to HK$16.04. The bank said yesterday first-half profit fell 5.6 percent to HK$6.69 billion ($863 million). That topped the HK$4.49 billion average estimate of four analysts surveyed by Bloomberg. Casio Computer Co., the maker of digital cameras and mobile phones, surged 6.9 percent to 905 yen in Tokyo. Casio, NEC Corp. and Hitachi Ltd. are in talks to merge their mobile-phone businesses by April, the Yomiuri newspaper reported. The venture, of which NEC may own more than a half, would have more than 20 percent of Japan’s mobile-phone market, the newspaper said. NEC added 0.9 percent to 334 yen. Hitachi gained 1.6 percent to 327 yen. In Shanghai, China Cosco sank 3.8 percent to 13.82 yuan. The company said it may cancel container-vessel orders after reporting a first-half net loss. To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net .

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Asian Stocks Gain as Harvey Norman, Dell Earnings Beat Analyst Estimates

August 27, 2009

By Jonathan Burgos and Shani Raja Aug. 28 (Bloomberg) — Asian stocks rose, sending the MSCI Asia Pacific Index to its second weekly advance in three, as increased commodity prices and Dell Inc.’s better-than-estimated profit added to signs that the global economy is recovering. Inpex Corp., Japan’s largest oil explorer, gained 1.9 percent. Acer Inc., the world’s third-largest computer maker, climbed 3.1 percent. Casio Computer Co. surged 6.9 percent in Tokyo after the Yomiuri newspaper reported the company is merging its mobile phone business with NEC Corp. and Hitachi Ltd. Japanese equities rose before an election that opinion polls suggest will end the ruling coalition’s 50-year hold on power. “Risk appetite has recovered from the depths that we had in March and people are looking at fundamentals,” said Prasad Patkar , who helps manage about $1.1 billion at Platypus Asset Management in Sydney. “Confidence is there for the right reasons. Economies are stabilizing and things are starting to normalize.” The MSCI Asia Pacific Index advanced 0.4 percent to 113.43 as of 1:52 p.m. in Tokyo, taking its gain this week to 2.5 percent. The gauge has climbed 61 percent from a more than five- year low on March 9 on speculation government stimulus packages and lower borrowing costs will revive the global economy. Japan’s Nikkei 225 Stock Average added 0.3 percent. The country holds parliamentary elections on Aug. 30, in which the opposition Democratic Party of Japan is expected to win by a landslide, newspaper polls show. The ruling Liberal Democratic Party has governed Japan for all but 10 months since 1955. Shanghai Composite Australia’s S&P/ASX 200 Index gained 0.4 percent, while South Korea’s Kospi Index added 0.4 percent. Harvey Norman Holdings Ltd., Australia’s biggest electronics retailer, surged 16 percent, while BOC Hong Kong Holdings Ltd., Hong Kong’s second-largest publicly traded bank by market value, climbed 6.1 percent on better-than-estimated earnings. China’s Shanghai Composite Index dropped 2.5 percent and Hong Kong’s Hang Seng Index fell 0.5 percent on concern Chinese measures to curb lending and overcapacity in some industries will slow economic growth. China Cosco Holdings Ltd., Asia’s biggest shipping company by market value, sank 3.8 percent in Shanghai after posting a first-half loss. Futures on the U.S. Standard & Poor’s 500 Index lost 0.1 percent. The gauge rose 0.3 percent yesterday as oil futures climbed for the first time in three days with a 1.5 percent gain. Separately, a Commerce Department report showed the U.S. economy contracted at a 1 percent annual rate from April to June, less than the 1.5 percent contraction estimated by economists. Global Recovery Signs the global recovery is gaining traction has fueled the MSCI Asia Pacific Index’s rally since March. Malaysia’s gross domestic product shrank less than estimated in the three months to June 30, data released on Aug. 26 show. The Philippine economy expanded in the second quarter at three times the pace expected by economists, the government reported yesterday. Inpex gained 1.8 percent to 748,000 yen in Tokyo. Woodside Petroleum Ltd., Australia’s second-largest oil producer, added 1.2 percent to A$49.39 in Sydney. “Investors are putting their money in risk assets such as oil and stocks,” said Kiichi Fujita , a strategist at Nomura Holdings Inc. in Tokyo. BHP Billiton Ltd., the world’s biggest mining company, added 0.5 percent to A$37.82. Copper for September delivery in New York increased 1.7 percent in after-hours trading. Dell Earnings Samsung Electronics Co., the world’s largest maker of computer-memory chips, rose 0.5 percent to 771,000 won in Seoul. Dell, the world’s No. 2 maker of personal computers, reported second-quarter sales and profit that beat estimates after the Texas-based company cut manufacturing costs and attracting buyers with low-priced notebooks. Dell suppliers in Taiwan gained. Quanta Computer Inc., the world’s largest laptop maker, climbed 2.7 percent to NT$69.1. Compal Electronics Inc., the world’s second-largest laptop maker, advanced 1.9 percent to NT$32.60. Acer climbed 3.1 percent to NT$73. HSBC Holdings Plc upgraded the stock to “neutral” from “underweight” and Goldman Sachs Group Inc. raised its share-price estimate by 19 percent to NT$74. In Sydney, Harvey Norman surged 16 percent to A$3.71, the most in more than 20 years. The company’s net income of A$214.4 million ($180 million) in the year ended June beat the A$199.3 million average of analyst estimates in a Bloomberg survey. Beating Estimates Some 34 percent of the 586 companies in the MSCI Asia Pacific Index that have reported net income since early July have beaten analyst estimates , while 19 percent have missed, according to data compiled by Bloomberg. BOC Hong Kong advanced 6.1 percent to HK$16.04. The bank said yesterday first-half profit fell 5.6 percent to HK$6.69 billion ($863 million). That topped the HK$4.49 billion average estimate of four analysts surveyed by Bloomberg. Casio Computer Co., the maker of digital cameras and mobile phones, surged 6.9 percent to 905 yen in Tokyo. Casio, NEC Corp. and Hitachi Ltd. are in talks to merge their mobile-phone businesses by April, the Yomiuri newspaper reported. The venture, of which NEC may own more than a half, would have more than 20 percent of Japan’s mobile-phone market, the newspaper said. NEC added 0.9 percent to 334 yen. Hitachi gained 1.6 percent to 327 yen. In Shanghai, China Cosco sank 3.8 percent to 13.82 yuan. The company said it may cancel container-vessel orders after reporting a first-half net loss. To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net .

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Dell’s Q2 profit drop 23%

August 27, 2009

Dell’s Q2 profit drop 23%

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Virginia Residential Project on Foreclosed Home List …

August 27, 2009

A commercial and residential development project in Virginia has been placed on foreclosed home list. The property is scheduled to be auctioned off on September 17.

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Eric Schurenberg: The Hidden Payoff from Cash for Clunkers

August 27, 2009

The final scorecard is out on the cash for clunkers program: In return for taking on $2.88 billion in additional debt, Uncle Sam helped the auto industry sell 690,000 new vehicles. Whether this was a winning trade is debatable, as this MoneyWatch story points out and this post How Would We Figure Out Whether Cash For Clunkers Makes Sense? by economist Brad DeLong. But as a morale builder, it was hard to fault. Economists note that almost all transactions that happened under Cash for Clunkers would eventually have happened anyway. Maybe the program converted some used-car sales into new-car sales, which means a little more use for the car makers’ factory capacity and a few more laid off autoworkers put back to work. And as White House economic adviser Brian Deese puts it in this WSJ interview , there may be some stimulus value to drawing some sales from the future when (we hope) the economy won’t need juicing, into the present, when it desperately does. But all that is at least equally offset by the increased budget deficit, the destruction of usable cars, and the heavier debt burden on new car owners. For my money, though, the uncounted benefit of the program has been its effect on the intangible economic force John Maynard Keynes calls “animal spirits.” For weeks, the news and blogosphere have been loaded with images of busy car salespeople explaining that they were selling out of the Ford Focus (when did you think you’d hear that?). Car shoppers appeared on camera with an acquisitive gleam in their eyes that has been in hiding since 2007. And we were treated to the vision of a federal stimulus program that actually seemed to be working. If you wanted to persuade consumers that the economy really is starting to recover, you couldn’t buy more convincing advertising. Animal spirits, by their nature, aren’t easily measured. But Tuesday’s consumer confidence survey results did register a far greater rebound in optimism than economists expected. (The survey was taken in early to mid-August, when it was becoming clear that Cash for Clunkers would burn through another $2 billion, easy.) Interestingly, consumers say they believe that the economy is still in terrible shape. But their faith in the future has risen to levels not seen since before the recession began. Faith doesn’t easily yield to a cost-benefit analysis, but It’s hard to overstate its economic importance, as Nobel prize-winning economist George Akerlof points out in this MoneyWatch.com video . Obviously, Cash for Clunkers didn’t account entirely for the jump in consumer confidence, and there’s no guarantee that it won’t fade again, especially if unemployment refuses to fall. And while confidence can’t cause a recovery, a recovery can’t happen without it. So to the extent that the clunkers program gave Americans a reason to believe that things can eventually return to normal and to have some faith that government has a handle on recovery, it was a pretty good investment. Continue reading on CBS MoneyWatch.com

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India widens foreign VC funds' investment options

August 27, 2009

According to private equity circles, FVCFs have interest in businesses like BPOs, telecom, media and entertainment, among other segments. RBI’s latest stand, however, does not pave the way for FVCF investment in the real estate space …

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Banks ‘Too Big to Fail’ Have Grown Even Bigger

August 27, 2009

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system. Today, the biggest of those banks are even bigger.

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AIG’s Swaps Blunder Now Replaying on Wall Street: David Reilly

August 27, 2009
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Schoolgirls, Comic Books Are Hollow Economics: William Pesek

August 27, 2009
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Massachusetts Democrats Pushing Interim Kennedy Successor by Next Month

August 27, 2009

By Tom Moroney Aug. 27 (Bloomberg) — Massachusetts Governor Deval Patrick could temporarily replace the late U.S. Senator Edward Kennedy as early as the fourth week in September under a timetable being considered by Democratic members of the Legislature, a key committee chairman said today. “It is possible to get it done” by Sept. 24 or 25, said state Representative Michael Moran , a Boston Democrat and co- chairman of the Joint Committee on Election Laws. “Is it likely? I can’t answer that,” he said in an interview today. “There are too many moving parts.” Allowing the governor to name an interim replacement would mean changing current law, which calls for a special election within five months of a Senate vacancy. There are no provisions for a temporary appointment. When John Kerry , then the junior senator from Massachusetts, was running for president in 2004, the governor was Mitt Romney , 62, a Republican. The law at the time empowered the governor to appoint a replacement. The Democrat-controlled legislature changed the law to require a special election to keep Romney from appointing a Republican. Then Kerry lost the election to incumbent President George W. Bush , 63. Kennedy Letter The week before his death, Kennedy sent a letter to Patrick, a fellow Democrat, urging him to persuade lawmakers to change the law so that someone could fill in before the special election. Kennedy argued in the letter that Massachusetts should have a mechanism to allow for the full complement of two senators as soon as possible after a resignation or death. Possible candidates in the special election include Democratic U.S. Representatives Stephen Lynch , Michael Capuano , Edward Markey , James McGovern and William Delahunt . State Attorney General Martha Coakley and former Representative Martin Meehan , both Democrats, could also contend as well as former Lieutenant Governor Kerry Healey , a Republican. A Democratic interim appointee would help keep the party’s 60-vote majority needed to maintain U.S. Senate support for health-care legislation, a top priority for President Barack Obama . Sixty votes are the minimum needed to end debate and force a vote on a bill. Kennedy had called health care “the cause of my life.” “Any time you get a letter from Ted Kennedy , you certainly read it and consider whether you can accommodate him,” Moran said. Sept. 17 Hearing The timetable outlined by Moran starts with a possible Sept. 17 hearing by the committee he co-chairs with state Senator Thomas Kennedy. “That’s the date that’s been under discussion,” Kennedy, a Democrat who isn’t related to Edward Kennedy, said. “I caution that there is no agreement on this, but it’s the one we’ve been talking about.” Procedurally, the bill would be heard by the committee on that Thursday. The panel would then go into executive session to poll the members. A report would be issued and the entire Legislature could vote within days, possibly by the end of the next week, Sept. 24 or 25. Patrick, in an interview with the Boston public radio station WBUR yesterday, said he would sign such a bill when it lands on his desk. As soon as he signs, Moran said, he could choose the interim replacement. ‘Biggest Hurdle’ “The biggest hurdle is that nobody, including me, wants to see this is as a handoff,” that is, having the governor appoint someone temporarily who then becomes the frontrunner in the special election for the permanent seat, Moran said. Lawmakers are negotiating the final language, trying to decide what wording best prevents that from happening, said state Representative Robert Koczera , a Democrat who represents the New Bedford area. Koczera filed a bill in January to change the current law and allow for an interim U.S. senator. Koczera said he had heard legislative leaders were working to schedule a hearing by mid-September. It was unlikely there would be any official announcement “out of respect” until after Kennedy’s Aug. 29 funeral. Democrats control both the Massachusetts House and Senate. Republican leaders who oppose the change could stall the process, said state Senator Robert O’Leary, a Cape Cod Democrat. The timetable Moran described is possible, “but if Republicans wanted to slow it down, they could,” O’Leary said from his cell phone as he was stationed on a road in Hyannis watching the Kennedy motorcade leave for Boston with the senator’s casket and family members. Republican Opposition “In all honesty, if they think they want to do that, they can get it through,” said Massachusetts House Minority Leader Bradley Jones , a North Reading Republican who has been outspoken in his opposition. There are only 16 Republicans in the 160-member Massachusetts House and five in the 40-member Senate. Jones said the Democrats were being hypocritical because his party tried in vain to change the law for an interim appointee as early as 2004. “It shows Democrats don’t care about principle. They don’t care about debate. They don’t care about the rules,” he said. “It really is disgusting.” Moran disputed the charge, saying the Republicans were after a long-term appointment whereas the Democrats now are looking for a temporary measure. Obama will stay out of the debate, Bill Burton , deputy White House press secretary, told reporters in Oak Bluffs, Massachusetts, where the president is vacationing with his family. “It’s not a scale he’s going to put his thumb on,” Burton said. Selecting a replacement for Kennedy is “for the people, legislature and the governor of Massachusetts to decide.” To contact the reporter on this story: Tom Moroney in Boston at tmorrone@bloomberg.net

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Japan Polls Indicate DPJ Will End Ruling Coalition’s 50-Year Grip on Power

August 27, 2009

By Stuart Biggs Aug. 28 (Bloomberg) — Japan’s opposition led in three public opinion polls two days before lower-house elections that may end the ruling coalition’s more than 50-year hold on power. The Democratic Party of Japan ’s support rose 3.3 points from last week to 35.9 percent for proportional-representation seats, a Kyodo News survey showed, and 1.9 points to 36 percent in single-seat constituencies. The Diet comprises 300 members elected in single-seat constituencies and 180 through each party’s share of the national vote. The opposition may win more than 300 seats, up from the 112 it holds now, the Yomiuri newspaper said today. A Mainichi newspaper survey showed support for the DPJ at 44 percent, down from 45 percent. Voter preference for the ruling Liberal Democratic Party rose 3 points to 21 percent, the Mainichi reported today. Today’s polls coincided with a government report showing Japan’s unemployment rate rose to a record in July, signaling households are unlikely to help sustain a recovery from the country’s worst postwar recession. The jobless rate advanced to 5.7 percent, eclipsing the previous worst of 5.5 percent last seen in April 2003, the statistics bureau said today in Tokyo. Kyodo’s survey of 1,229 eligible voters was taken Aug. 26- 27. The Yomiuri telephone poll of 85,777 people was conducted Aug. 25-27 and Mainichi polled 1,026 people Aug. 26-27. The surveys didn’t provide a margin of error. The LDP gained 1.4 percent to 17.9 percent in proportional representation, Kyodo said, and rose 3.8 percent to 22.6 percent in single-seat constituencies. Prime Minister Taro Aso ’s support rose to 23.6 percent from 18.5 percent and 22.7 percent of respondents said he was most suited to be Japan’s leader, up from 19.5 percent, Kyodo said. Support for opposition leader Yukio Hatoyama remained almost unchanged at 48.7 percent, according to Kyodo. The LDP has also gained in some constituencies according to the Yomiuri, with the number of “closely fought” seats rising to 67 from 53 in a poll conducted Aug. 18-20. To contact the reporters on this story: Stuart Biggs in Tokyo at sbiggs3@bloomberg.net .

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Caltex Australia Shares Slump as Refiner Skips Dividend, Warns on Outlook

August 27, 2009

By Ben Sharples Aug. 28 (Bloomberg) — Caltex Australia Ltd. , the nation’s biggest oil refiner, fell the most in five months in Sydney trading after skipping its first-half dividend and warning the outlook is weaker. Caltex dropped as much as 7.8 percent to A$12.54, the most since March 31, and traded at A$12.60 at 1:11 p.m. local time. Operating profit rose 52 percent to A$298 million ($250 million) in the six months ended June 30, Sydney-based Caltex said today. Paying no interim dividend is “prudent” given the planned purchase of 302 Australian filling stations from Exxon Mobil Corp. , Caltex said. The second half is expected to be “challenging,” with global refining margins depressed by weaker demand and surplus fuel-producing capacity. Chief Executive Officer Julian Segal , appointed in April, said the company would explore “inorganic” growth opportunities. “It may have taken the market by surprise that there was no dividend,” said Lafitani Sotiriou, an analyst at Southern Cross Equities Ltd. in Sydney. “The result was decent and the key takeaways are that the new CEO seems quite keen to move the company in a different direction.” Caltex, which paid a dividend of 36 Australian cents a year ago, has gained 75 percent in Sydney this year, compared with the 20 percent advance in the benchmark S&P/ASX 200 Index . Profit Beats Forecast Profit excluding the effect of changes in oil prices on the value of stockpiles beat the company’s June profit forecast of as much as A$295 million after A$55 million of foreign currency gains. Net income rose 2 percent to A$362 million. Sales fell 27 percent to A$8.9 billion. The refiner’s margin from processing crude increased to 8 Australian cents a liter in May from 7.02 cents a year earlier, Caltex Australia said today. Caltex Australia, half owned by Chevron Corp. , said in May it would buy 302 filling stations from Exxon for A$300 million, funded from its own cash. The Australian Competition and Consumer Commission will make a ruling on the transaction on Sept. 2, the regulator said on its Web site. “We will be very carefully scanning the horizon for inorganic growth opportunities,” Segal said on a conference call. He declined to comment when asked whether the company was interested in bidding for Exxon refining and fuel retail assets in New Zealand. Irving, Texas-based Exxon, the biggest U.S. oil company, has hired Goldman Sachs JBWere Ltd. to find a buyer for its 19 percent stake in New Zealand Refining Co. and 183 filling stations in the South Pacific nation, the Auckland-based Independent reported July 23. To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net .

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China’s Baosteel Buys 15% Stake in Australian Iron Ore, Coal Miner Aquila

August 27, 2009

By Jesse Riseborough Aug. 28 (Bloomberg) — Baosteel Group Corp., China’s largest steelmaker, agreed to buy a 15 percent stake in iron ore and coal company Aquila Resources Ltd. , adding to investments in Australia, the biggest producer of the materials. State-owned Baosteel will pay A$286 million ($240 million) for the stake, the Perth-based company said today in a statement. It will also help Aquila get “low-cost” Chinese financing for some of its projects, according to the statement. China, the biggest buyer of iron ore, has invested in $56 billion of projects globally to try to reduce dependence on Vale SA, Rio Tinto Group and BHP Billiton Ltd. , the world’s three largest suppliers. Aquila has announced plans to develop a A$4.1 billion iron ore mine, port and rail project in Western Australia and coal mines in Queensland. “It’s a good news for Baosteel as it will help secure iron ore and coal resources,” Zhou Xizeng , Beijing-based analyst with Citic Securities Co., said today by phone. “It’s difficult for Chinese steelmakers to buy stakes in large iron ore miners, so a stakeholding in a medium-sized or a small-sized mine would also be welcome.” Aquila shares jumped 9.2 percent to A$7.15 at 11:21 a.m. Sydney time on the Australian stock exchange. The stock has more than doubled this year amid a rebound in demand and prices of the steelmaking raw materials. The company has a market value of A$1.8 billion. Funding Help Baosteel overtook Japan’s JFE Holdings Inc. and South Korea’s Posco to become the world’s third-largest steelmaker last year as China’s economic expansion fuelled demand for construction and automobiles. Steel production in China rose to record in July as fixed-asset investment increased 33.5 percent in the first half. Local banks made a record $1.1 trillion of new loans in the first six months. “They are going to be a supportive shareholder and will help Aquila source funding over time for what is a pretty capital intensive development pipeline,” Alex Passmore , head of metals and mining research at Patersons Securities Ltd. in Perth, said today by phone. Aquila’s share of capital spending for its three biggest projects, including West Pilbara iron ore, is about A$2.9 billion over the next five years, said Passmore, who has a “buy” rating on the stock and a A$9.35 target price. Development Prospects Aquila’s development projects include iron ore, steelmaking coal and manganese prospects in Australia and South Africa. Australia is the biggest exporter of coal and iron ore, the two key ingredients of steel. The company’s Eagle Downs coking coal project will cost A$977 million to build and the mine could start production in 2012, Aquila said Aug. 17. Baosteel agreed to buy 43.95 million new Aquila shares at A$6.50 each, little changed from Aquila’s closing price of A$6.55 on Aug. 25. The Chinese steelmaker already has a 46 percent in Rio Tinto’s Eastern Range iron ore mine in Western Australia, according to the Register of Australian Mining. It also has a joint venture exploration agreement with Australia’s third- largest iron ore producer Fortescue Metals Group Ltd., said last year that it wanted to invest in raw materials overseas to help double production capacity by 2012. Aquila and Fortescue said in June they were studying sharing the cost of building a port at Anketell Point in Western Australia. Baosteel nominated Vice President Dai Zhihao to Aquila’s board as part of the investment agreement, Aquila said. To contact the reporters on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net Xiao Yu in Beijing on yxiao@bloomberg.net ;

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Nikkei Gaining on DPJ Victory Means Japan’s Bond Yields Poised to Increase

August 27, 2009

By Theresa Barraclough and Oliver Biggadike Aug. 28 (Bloomberg) — Japanese stocks may rise and bonds fall with a victory in this weekend’s election by the opposition party, if returns after the previous vote are any guide. The Nikkei 225 Stock Average surged 25 percent through the remaining year after the last general election in 2005. Bonds fell for six-straight weeks, the longest stretch in more than a year. A similar result may emerge as the Democratic Party of Japan, which polls indicate will win, carries out plans to increase consumption, according to investors and strategists. “Long-term yields and stocks will rise as the political situation stabilizes,” said Hidenori Suezawa , the Tokyo-based chief strategist at Daiwa Securities SMBC Co., a unit of Japan’s second-largest brokerage. “There are concerns that government expenditures will swell.” DPJ President Yukio Hatoyama and his party have pledged cash for child care and an abolition of highway tolls among their spending policies as they try to break the rule of Prime Minister Taro Aso ’s Liberal Democratic Party. The LDP has governed the nation for all but 10 months since 1955. Japan emerged from its deepest postwar recession last quarter, helped by 25 trillion yen ($267 billion) in government spending, while setting up bondholders for the first annual loss since 2003. Debt maturing in more than 10 years has lost 2.9 percent, Merrill Lynch & Co. indexes show. Yields on benchmark 10-year government bonds will rise toward 1.7 percent by the end of the year, from 1.3 percent yesterday and the low this year of 1.185 percent in January, Suezawa said. Investors would lose 2.8 percent if his prediction is correct, according to data compiled by Bloomberg. Suezawa’s forecast is higher than the 1.42 percent projection in a Bloomberg survey of 14 analysts. Snap Election The DPJ may win more than 320 of the 480 seats at the election Aug. 30, the Asahi newspaper reported yesterday. Aso dissolved parliament on July 21, triggering the general election. The previous lower house vote on Sept. 11, 2005, came after former Prime Minister Junichiro Koizumi called a snap election to secure his plan to sell the government’s stake in Japan Post, which ran the world’s largest savings bank at the time. Koizumi’s victory preceded an increase in foreign funds that helped drive the Nikkei that year to the highest since 2000, sapping demand for government debt. Investors in Japanese notes lost 1 percent from the election in 2005 to the end of the year, Merrill Lynch’s index for the debt shows. Rising bond yields indicate investors don’t expect the DPJ, which says it seeks to reduce the government’s dependency on bond sales to fund spending, to curb the swelling public debt that is almost double the size of the nation’s $4.9 trillion gross domestic product. Policy Doubts “People are worried that if the DPJ wins, Hatoyama will increase issuance of bonds because his policies involve giving money to people,” said Yuuki Sakurai , chief executive officer at Tokyo-based Fukoku Capital Management Inc., which overseas $10 billion. “There’re concerns over whether he can achieve that by just cutting costs, so there’s a lot of doubt about whether he can keep his word.” Companies whose profits rise with domestic spending may benefit as the DPJ focuses on stimulating demand. That’s in contrast to the current administration’s focus on public works spending and keeping the yen weak to help exporters. Canon Corp., the world’s biggest maker of office equipment, said in its latest financial report every 1 yen change against the dollar would alter its second-half operating profit by 4.2 billion yen. The Nikkei recovered faster than the Dow Jones Industrial Average this year, delivering an 18 percent return versus 9 percent for the U.S. index. Investor Sentiment “The Japanese equity indexes could yet see another leg up if the politics align with investor sentiment,” said Samarjit Shankar , a managing director for the foreign exchange group in Boston at BNY Mellon, which administers more than $20 trillion in assets. The DPJ has pledged to increase consumer spending and give the Bank of Japan more freedom with monetary policy. There is a 17 percent chance the central bank will raise interest rates by the end of July next year, according to JPMorgan Chase & Co. data based on overnight interest-rate swaps. “The fiscal stimulus plan of the DPJ is far more aggressive, which I think will help bolster the overall economy,” said Paresh Upadhyaya , who helps manage $21 billion in currency assets at Putnam Investments in Boston. “The DPJ is going to give the BOJ more autonomy in following monetary policy. With that type of autonomy the BOJ is more likely to tighten sooner than later.” Yen Expectations The outlook for Japan’s currency following the election is mixed. Japanese companies forecast the yen, which traded at 93.77 per dollar as of 9:16 a.m. in Tokyo, may average 94.85 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released July 1. The average of the 10 most recent analyst forecasts is for the yen to end the year at 97.3, and finish March at 99.4, according to data compiled by Bloomberg. “The general election will have a negative impact on the yen,” said Hidetoshi Yanagihara , a senior currency trader at Mizuho Corporate Bank in New York. “There might be turmoil in terms of the feasibility of their policies.” Increased supply of government bonds will drive yields higher, attracting foreign investment that tends to push the yen higher, said Ray Attrill , global research director at Forecast Ltd. in Sydney. “In the context of a falling savings ratio, Japan may be more dependent on foreign sources of funding for its swelling budget deficits,” Attrill said in an interview with Bloomberg Television. “And that potentially is going to mean a weaker yen. So it’s a really difficult call here as to whether we should be buying or selling the yen in sort of knee-jerk response to the election outcome.” To contact the reporters on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net ; Oliver Biggadike in New York at obiggadike@bloomberg.net

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Pimco Says Asian Financial Company Bonds `Attractive’ as Economies Rebound

August 27, 2009

By Garfield Reynolds and Wes Goodman Aug. 28 (Bloomberg) — Asian bank bonds “look attractive” as markets recover from the financial crisis, said Koyo Ozeki , head of credit research for the region at Pacific Investment Management Co. , which runs the world’s biggest bond fund. “The worst is over,” Tokyo-based Ozeki said in a telephone interview today. “Asian countries managed to maintain stability in the banking system. Banks are still facing headwinds but the risk of systemic crisis seems to be behind us.” The difference between yields on financial company bonds in Asia and benchmark government securities widened to desirable levels because of the financial crisis, Ozeki wrote in an article on Pimco’s Web site. In the U.S. and Europe, the potential for credit spreads to narrow “is limited,” according to the report. The extra yield investors demand to hold Asian financial company bonds rather than government securities stands at 512 basis points, down from 1,065 points on Dec. 12, according to JPMorgan Chase & Co.’s Asia Financial Bond Index . The spread is averaging 356 basis points in the U.S. and 271 basis points in Europe this year, Merrill Lynch data show. A basis point is 0.01 percentage points. “During the first half of this year Pimco has invested actively in bonds and securities of issuers whose credit qualities remained high and stable in our opinion, even as the sovereign risk premium widened,” Ozeki said in his report. Narrower Spreads Still, investors should “make rigorous and prudent bond selection” since, though Asia financial bond spreads have narrowed since April there is a chance that the market may reverse, Ozeki said in the report. The crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.61 trillion of writedowns and credit losses at financial institutions and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE. To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net ; Wes Goodman in Singapore at wgoodman@bloomberg.net .

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Asian Stocks Rise on Higher Commodity Prices, Dell Earnings; Casio Climbs

August 27, 2009

By Jonathan Burgos Aug. 28 (Bloomberg) — Asian stocks rose, led by materials producers and technology companies, on higher commodity prices and better-than-estimated profit at Dell Inc. Treasuries fell. Inpex Corp., Japan’s largest oil explorer, gained 1.5 percent. BHP Billiton Ltd., the world’s biggest mining company, added 0.8 percent. Samsung Electronics Co., the world’s largest maker of computer-memory chips, climbed 1.6 percent in Seoul. Casio Computer Co. surged 7.7 percent in Tokyo after the Yomiuri newspaper reported the company is merging its mobile phone business with NEC Corp. and Hitachi Ltd. “Investors are putting their money in risk assets such as oil and stocks,” said Kiichi Fujita , a strategist at Nomura Holdings Inc. in Tokyo. The MSCI Asia Pacific Index advanced 0.6 percent to 113.61 as of 10:06 a.m. in Tokyo, taking its gain this week to 2.7 percent. The gauge has climbed 61 percent from a more than five- year low on March 9 on speculation government stimulus packages and lower borrowing costs will revive the global economy. Japan’s Nikkei 225 Stock Average added 0.6 percent. The country holds parliamentary elections on Aug. 30, in which the opposition Democratic Party of Japan is expected to win by a landslide, newspaper polls show. The ruling Liberal Democratic Party has governed Japan for all but 10 months since 1955. Australia’s S&P/ASX 200 Index gained 0.6 percent. New Zealand’s NZX 50 Index rose 0.8 percent. South Korea’s Kospi Index climbed 1 percent. Futures on the U.S. Standard & Poor’s 500 Index were little changed. The yield on the 10-year Treasury note rose two basis points to 3.47 percent, according to BGCantor Market Data. Samsung, Casio The S&P 500 rose 0.3 percent yesterday as crude oil futures rose for the first time in three days with a 1.5 percent climb. Separately, a Commerce Department report showed the U.S. economy shrank at a 1 percent annual rate from April to June, less than the 1.5 percent contraction estimated by economists. Inpex gained 1.5 percent to 746,000 yen in Tokyo. BHP Billiton, Australia’s biggest oil producer, added 0.8 percent. Samsung Electronics rose 1.6 percent to 779,000 won in Seoul. Dell Inc., the world’s second-largest maker of personal computers, reported sales and profit that beat estimates after cutting manufacturing costs and attracting buyers with low- priced notebooks. Casio Computer Co., the maker of digital cameras and mobile phones, surged 7.7 percent to 912 yen in Tokyo. Casio, NEC Corp. and Hitachi Ltd. are in talks to merge their mobile-phone businesses by April, the Yomiuri newspaper reported. The venture, of which NEC may own more than a half, would have more than 20 percent of Japan’s mobile-phone market, the newspaper said. NEC added 0.3 percent to 332 yen. Hitachi gained 1.2 percent to 326 yen. To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net .

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Toyota Shuts First Plant in 72-Year History as GM California Venture Fails

August 27, 2009

By Alan Ohnsman and Makiko Kitamura Aug. 28 (Bloomberg) — Toyota Motor Corp. said it will shut a California auto-assembly plant that operated as a joint venture with General Motors Corp. for 25 years, the first time Japan’s largest carmaker has closed a factory at home or abroad. New United Motor Manufacturing Inc . in Fremont, California, will end production of Corolla cars and Tacoma pickups in March 2010, Toyota said in a statement. GM in June said it would end assembly of Pontiac Vibes at the plant, known as Nummi, and quit the venture as part of its bankruptcy reorganization. A collapse in U.S. auto sales to the lowest level since 1976 has left Toyota, the world’s largest automaker , struggling to keep North American plants running at capacity. Closing the San Francisco Bay area plant, where Toyota President Akio Toyoda spent two years, compounds economic woes in California, suffering from an 11.9 percent unemployment rate. “Toyota wouldn’t be able to sustain the plant by itself,” said Yuuki Sakurai , chief executive officer of Fukoku Capital Management Inc. in Tokyo, which manages about 800 billion yen ($8.5 billion) in assets. “Nummi is unionized and expensive to operate. It’s a good decision.” Nummi employs 5,400 people, including 4,550 United Auto Workers union positions. More than 1,000 suppliers work with the factory, which has annual payroll and benefits of $523 million, according to a plant publication. Possible severance packages for the workers have not been decided on, according to Toyota spokesman Yuta Kaga . Nummi, set up as a joint venture, will make the decision, he said. Toyota gained 0.3 percent to 4,050 yen as of 9:15 a.m. in Tokyo. The shares have risen 39 percent so far this year, outpacing the 19 percent gain in the Nikkei 225 Stock Average. Texas, Ontario Toyota will shift production of Tacoma pickups to San Antonio and Corollas to its factory in Ontario, Canada. “It just would not be economically viable to continue the production contract with NUMMI,” Toyota Executive Vice President Atsushi Niimi said in a statement. In the U.S., the carmaker’s largest source of revenue, the Toyota City, Japan-based company’s sales fell 38 percent in the first half, following a 15 percent decline last year. Toyota had a record 436.9 billion yen loss in the fiscal year that ended in March, its first in six decades, and forecasts an even bigger 450 billion yen loss in the current business year. Unprofitable Plant Nummi has the capacity to make 420,000 cars and pickups each year. It only made money in 1992, the result of California’s taxes and labor and pollution rules, as well as the plant’s UAW contracts, according to an estimate by Tokyo-based Credit Suisse Group AG analyst Koji Endo . Shared by GM and Toyota since 1984, Nummi was Toyota’s first U.S. auto-assembly factory. It’s the only large auto- assembly plant on the U.S. West Coast. “We continue work already in progress with the U.S. Departments of Labor and Commerce, local government officials, Toyota, GM and the Japanese government to ensure appropriate employee severance, proper environmental remediation and assistance in transforming the site to alternative uses,” California Governor Arnold Schwarzenegger said in a statement. GM was the factory’s sole owner from 1963 until 1982, when it closed the Fremont Assembly plant owing to escalating costs and labor conflicts with union workers. Toyota initially invested about $150 million to renovate the plant and GM contributed the property and original factory building to create the joint venture. To contact the reporters on this story: Alan Ohnsman in Tokyo at aohnsman@bloomberg.net ; Makiko Kitamura in Tokyo at

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Japan’s Jobless Rate Climbs to Record 5.7% in Blow to Aso on Election Eve

August 27, 2009

By Toru Fujioka and Mayumi Otsuma Aug. 28 (Bloomberg) — Japan’s unemployment rate rose to a record 5.7 percent in July and deflation worsened, dealing a blow to Prime Minister Taro Aso on the eve of an election that polls indicate his ruling Liberal Democratic Party will lose. The jobless rate surpassed the previous worst of 5.5 percent last seen in April 2003, the statistics bureau said today in Tokyo. Economists surveyed by Bloomberg predicted an increase to 5.5 percent from 5.4 percent in June. Consumer prices dropped an unprecedented 2.2 percent from a year earlier. Yukio Hatoyama ’s Democratic Party of Japan may end the LDP’s 54-year grip on power as jobs vanish in the wake of the country’s worst postwar recession. Household spending slid 2 percent last month, indicating Aso’s cash handouts as part of a 25 trillion yen ($267 billion) stimulus plan are failing to spur demand among consumers whose wages are falling. “The economy is the key factor for the election,” said Masamichi Adachi , senior economist at JPMorgan Chase & Co. in Tokyo. “Voters naturally direct their frustrations about the slumping economy at the incumbent government.” The yen traded at 93.77 per dollar at 10:28 a.m. in Tokyo from 93.60 before the reports were published. The Nikkei 225 Stock Average gained 0.6 percent. The yield on Japan’s 10-year bond rose two basis points to 1.32 percent. The DPJ is projected to win more than 320 of 480 seats in the Aug. 30 lower-house election, according to an Asahi newspaper survey published yesterday. Finance Minister Kaoru Yosano said this week the opposition party is “engulfing Tokyo like a massive wave.” Exports Tumble Companies from Toyota Motor Corp. to Japan Airlines Co. are scaling back and cutting jobs as sales weaken at home and abroad. Exports fell 36.5 percent in July, a tenth monthly drop, as demand from all of the nation’s major markets deteriorated. The unemployment rate is the highest since the government began collecting the data in 1953, a year after the U.S. military occupation ended. The LDP has governed Japan for all but 10 months since 1955. More than $2 trillion in stimulus plans worldwide helped the world’s second-largest economy grow at an annual 3.7 percent pace last quarter, the first expansion in more than a year. Economists expect growth will weaken in coming quarters once the government cash injections are exhausted. The jobs-to-applicants ratio , a leading indicator of employment trends, fell to a record 0.42 in July, meaning there are only 42 positions for every 100 candidates, the Labor Ministry said today. The unemployment rate will reach 5.9 percent next year, according to economists Bloomberg surveyed. The number of unemployed rose by 200,000 from June, the biggest increase since March, today’s report showed. Distant Recovery “We are very far from a solid recovery,” said Yuichi Kodama , chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “There’s a high risk for a more serious labor adjustment going forward” as companies offload workers they no longer need, he said. Toyota, Japan’s biggest automaker, said this week that it will shut down a domestic assembly line as sales plunge. Japan Airlines, Asia’s largest carrier by sales, may cut 5,000 jobs in three years, Kyodo News reported. Isetan Mitsukoshi Holdings Ltd. , Japan’s largest department store chain, plans to eliminate 1,000 jobs by March, Nikkei English News said. The jobless rate would be around 12 percent if all of Japan’s excess workers were considered unemployed, according to Takahide Kiuchi , chief economist at Nomura Securities Co. in Tokyo. Hisako Abe, 53, signed up for a computer-training course in an effort to find regular work. ‘Want a Promise’ “I want to be a full-time employee, or at least have a part-time job that’s stable,” Abe, who was laid off in April, said at an unemployment office in Tokyo. “I want a promise that they won’t fire me right away.” Deflation is also threatening the recovery. Last month’s drop in prices excluding fresh food, which matched economists’ estimates, was the steepest since the survey began in 1971. “Nothing can stop prices from falling now, given that demand has deteriorated so much,” said Masaaki Kanno , a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to keep cutting wages , which tumbled an unprecedented 7 percent in June. Bank of Japan board member Atsushi Mizuno said last week that policy makers should “be prepared to fight a long-term battle” with deflation. The central bank, which has cut the key interest rate to 0.1 percent, has few tools to prop up inflation and economic growth in the short term, he said. To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net ;

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Real Property Alpha » FDIC Loan Auctions – CRE vs Residential Debt

August 27, 2009

One of the things I’ve been fascinated by recently has been the discount applied to performing debt for commercial real estate and residential real estate in FDIC loan auctions. The following chart shows the sale price of loans as a …

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Insurance Giant Anthem Blue Cross Attacks Democratic Plans

August 27, 2009

The California insurer Anthem Blue Cross — a subsidiary of the insurance giant WellPoint — today blasted out an email to its customers, attacking the Democrats’ health reform plans and asking customers to help fight them.

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China Passes Law Curbing Power of Local Officials to Deploy Armed Police

August 27, 2009

By Bloomberg News Aug. 28 (Bloomberg) — Chinese lawmakers curbed the power of local officials to call out the country’s more than 600,000- strong People’s Armed Police to quell disturbances. The new law governing the deployment of the force, passed yesterday in Beijing by the National People’s Congress, comes as the number of protests and riots by farmers, workers and ethnic minorities is on the rise. Police should refuse orders that they consider unlawful, the law states. The government in China has made maintaining social stability a key policy aim at the same time as cracking down on the corruption and abuse of power that is a cause of much of the unrest. Local officials under orders from Beijing to maintain the peace are likely to put pressure on the police to act, said Murray Scot Tanner , a China analyst at CNA , an Alexandria, Virginia-based research group. “This clause represents a striking critique of some officials’ misuse of security forces,” said Tanner. “But these local leaders remain powerful. It may prove difficult for Armed Police commanders and higher level officials to stick to their guns and resist this kind of pressure.” The new law also states that only officials above the county level can request the armed police. The police force, used to quell riots last year in Tibet and last month in the western region of Xinjiang, is to “participate in the handling of riots, chaos, serious violent crimes and terrorist attacks,” according to the text of the legislation given to journalists in Beijing yesterday. Mass Incidents Wang Erping , a scholar at the Chinese Academy of Sciences who studies unrest, said the number of so-called mass incidents rose to about 90,000 last year from more than 80,000 in 2007. Last month steel workers in northeastern China’s Jilin Province murdered an executive, causing authorities to put off a buyout of their mill. On Aug. 8, villagers in Hunan province rioted after they learned their children had been exposed to excessive levels of lead, the Associated Press reported. The legislation also bans the force from detaining or searching people illegally and forbids police officers from leaking state secrets. China’s national legislature also passed a resolution that codifies the country’s policy on combating climate change. The text urges rich countries to help developing countries such as China by transferring technology and providing financial support to help counter global warming. The resolution blames developed countries for the emissions which led to climate change. “Since the Industrial Revolution, the activities of mankind, particularly the economic activities of developed countries during their industrialization, is the main cause of climate change,” the resolution read. To contact the reporter on this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net .

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China Cosco May Cancel Container-Vessel Orders After Second Straight Loss

August 27, 2009

By Wendy Leung Aug. 28 (Bloomberg) — China Cosco Holdings Co., Asia’s biggest shipping company by market value, may cancel container- vessel orders after posting a second straight loss on slumping world trade. The company, also the world’s largest operator of dry-bulk ships, reported a 4.59 billion yuan ($672 million) first-half net loss, compared with a restated 15.1 billion yuan profit a year earlier, in a Hong Kong stock exchange statement late yesterday. China Cosco’s container-shipping business, the nation’s biggest, had a 4.32 billion yuan operating loss as U.S. and European consumers pared spending on Asian-made goods, hammering rates. Its commodity-ship operations also posted a loss after sales tumbled 72 percent on overcapacity in the global fleet. Container lines “will still be under pressure in the second half as rates won’t cover costs,” said Johnson Leung , a Hong Kong-based analyst at Tufton Oceanic Ltd., the world’s largest shipping hedge-fund group. “The rate increase for the peak season may only be sustainable for a couple of months.” China Shipping Container Lines Co., the nation’s No. 2 cargo-box carrier, also said yesterday it will “tackle the crisis” through steps including accelerating the sale of obsolete vessels. The company posted a 3.42 billion yuan first- half loss. China Cosco will also pay 2 billion yuan to buy the outstanding 49 percent stake in a logistics venture from unit Cosco Pacific Ltd., it said. Volume Slump The shipping line’s first-half container volume tumbled 22 percent to 2.35 million twenty-foot equivalent units. Revenue dived 52 percent, led by a 70 percent plunge on Asia-Europe routes. The company also plans to delay new ships, terminate charters earlier and lease or sell vessels to pare growth, it said. China Cosco’s container fleet comprised 149 vessels as of June 30 with another 57 on order. Last month, it canceled a $299 million contract for eight dry-bulk ships and postponed deliveries of three others. The shipping line’s first-half dry-bulk volume fell 4.8 percent. Revenue plunged 72 percent to 11.1 billion yuan. The company operated 431 dry-bulk ships as of June 30, with another 44 on order. China Cosco, controlled by China Ocean Shipping (Group) Co., fell 3.1 percent to HK$10.14 in Hong Kong yesterday before the earnings announcement. It’s gained 88 percent this year, outperforming the benchmark Hang Seng Index’s 41 percent increase. The company, the world’s second-biggest shipping line by market value behind A.P. Moeller-Maersk A/S, won’t pay an interim dividend. All 10 of the world’s largest listed container-shipping companies have posted losses this year, triggering industrywide efforts to raise rates through coordinated increases and capacity cuts. China Cosco plans to “actively drive the market by promoting a raise in freight rates,” it said. Attempts to raise rates have stumbled amid excess capacity caused by plunging demand and the launch of new vessels ordered during a trade boom that ended last year. Maersk, the world’s largest container line, is ready to slash rates if rivals attempt to win market share by undercutting prices, Danish newspaper Dagbladet Borsen said earlier this week, citing Chief Executive Officer Nils Smedegaard Andersen . To contact the reporters on this story: Wendy Leung in Hong Kong at wleung12@bloomberg.net

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Japan’s Consumer Prices Decline Record 2.2% as Deflation Hampers Recovery

August 27, 2009

By Mayumi Otsuma Aug. 28 (Bloomberg) — Japan’s consumer prices fell at a record pace in July, adding to signs that deflation will hamper a rebound from the nation’s worst postwar recession. Consumer prices excluding fresh food declined 2.2 percent from a year earlier after dropping 1.7 percent in the previous month, the statistics bureau said today in Tokyo. It was the sharpest decrease since the survey began in 1971. Japan is once again facing deflation, a sustained bout of falling prices that plagued the economy for a decade until 2005. Stemming the declines and sustaining a recovery will be a challenge for the winner of this weekend’s general election. “Nothing can stop prices from falling now, given that demand has deteriorated so much,” said Masaaki Kanno , a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. “Consumer-price declines threaten to squeeze corporate profits because material costs are edging up” and companies are unable to pass them onto customers, he said. Consumers, whose spending accounts for more than half of the economy, may delay purchases if they expect goods to get cheaper. That would erode profits and force companies to keep cutting wages , which tumbled an unprecedented 7 percent in June. Even when excluding food and energy , consumer prices fell 0.9 percent in July, the fastest pace in seven years, the statistics bureau said. Core prices in Tokyo , a harbinger of nationwide price trends, fell 1.9 percent in August. ‘Long-Term Battle’ Atsushi Mizuno , a Bank of Japan policy maker, said last week that price declines will “ease only at a moderate pace” through the year ending March 2012. Central bankers have already predicted prices will slide 1.3 percent in the current fiscal year and 1 percent in the following 12 months. The bank should “be prepared to fight a long-term battle” with deflation because it has cut the key interest rate to 0.1 percent and has few tools to prop up inflation and economic growth in the short-term, Mizuno said. “The pace of core price declines may be approaching a peak because the effect of last year’s oil-price gains will start to fade soon,” said Hiroaki Muto , a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “But it’ll still take time before prices stop dropping.” Crude oil has lost half of its value since peaking at $147.27 a barrel in July 2008. It has rebounded in recent months, climbing 61 percent since the start of this year on expectations that demand for energy will pick up as a global recovery takes hold. Price Expectations Central bank Governor Masaaki Shirakawa said this month that price declines will moderate in the second half of this fiscal year, though he added the bank will monitor the risk that inflationary expectations may wane. “We’ll start to see if there’s real deflation once the August CPI comes out,” because that figure will be less skewed by last year’s oil surge, said Junko Nishioka , an economist at RBS Securities Japan Ltd. in Tokyo. The result of the Aug. 30 lower-house election may also affect Japan’s inflation, some economists say. The opposition Democratic Party of Japan, which opinion polls show will likely take power, has promised to abolish some taxes on gasoline and auto purchases next year and make highway tolls free. The tax exemptions would cut core prices by 0.53 percentage point and the highway toll removal would shave off 0.34 percentage point, according to an estimate by Ryutaro Kono , chief economist at BNP Paribas in Tokyo. To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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Bank of China Plans to Slow Lending, Boost Credit Quality in Second Half

August 27, 2009

By Bloomberg News Aug. 28 (Bloomberg) — Bank of China Ltd., the nation’s third-largest by assets, plans to slow credit growth in the second half of the year and improve loan quality after posting an unexpected profit gain in the second quarter. Net income climbed 10 percent to 22.6 billion yuan ($3.3 billion) from 20.49 billion yuan a year earlier, the Beijing- based company said yesterday. That exceeded the 19.51 billion yuan average estimate of five analysts compiled by Bloomberg. Bank of China joined rivals China Construction Bank Corp., Industrial & Commercial Bank of China Ltd. and Bank of Communications Ltd. in reporting better-than-estimated profits in the first half after advancing a record amount of loans to revive an economy growing at the weakest pace in almost a decade. Plans to rein loan growth may relieve investors concerned that asset bubbles may form and bad loans will rise. The profit growth “confirms our belief that the worst is over for Chinese banks,” said Lv Xiaojiu, an analyst in Beijing at BOCOM International Ltd. who expects the lenders to post a 12 percent rise in full-year profit. “Bank of China has narrowed the gap with ICBC and CCB in terms of volume growth, but whether it will translate into quality growth is yet to be seen.” Bank of China advanced 1 trillion yuan of new loans in the first half, more than any other Chinese bank, taking total outstanding advances to 4.2 trillion yuan, an expansion of 32 percent from the beginning of the year. Credit Growth Slows Lending in the second half will be “much smaller,” with new credit in July and August dropping from the monthly averages of the first half, President Li Lihui told reporters yesterday. Bank of China was the last of the country’s four biggest publicly traded lenders to report earnings. Shares of the company were unchanged at HK$3.81 yesterday, before the results were announced. The stock has gained 80 percent in Hong Kong this year, outperforming Construction Bank, ICBC and Bank of Communications. Chinese Premier Wen Jiabao in March set a new loan growth target of 5 trillion yuan in 2009 for the banking industry to revive economic growth that dropped to 6.1 percent in the first quarter, the slowest pace in almost a decade. New loans, which reached a record 7.73 trillion yuan as of July 31, may top 11 trillion yuan by the end of the year, BNP Paribas SA estimates. Construction Bank this week warned of asset bubbles in capital markets after posting a 4.9 percent drop in net income in the first six months. ICBC, the world’s biggest bank by market value, last week said its profit in the period rose 2.9 percent on record lending. Equities Rally China’s regulators are changing tack after gross domestic product expanded 7.9 percent in the second quarter and the benchmark Shanghai Composite Index rallied 25 percent. The China Banking Regulatory Commission last month required the nation’s lenders to raise reserves to 150 percent of non- performing loans by the end of this year, and on July 27 told banks to ensure loans intended for investment in fixed assets go to projects that support the real economy. Three days later, it announced plans to tighten rules on working capital loans. The regulator also sent draft rule changes to banks on Aug. 19 requiring them to deduct all existing holdings of subordinated and hybrid debt from supplementary capital, people familiar with the matter said last week. As a result, banks may need to rein in lending to meet capital requirements. Bank of China is considering plans to replenish capital and maintain the capital adequacy ratio at an “appropriate” level, Li said yesterday. Net Interest Income The lender posted an 8.3 percent drop in first-half net interest income, or the difference between revenue from lending and payments to depositors, as the profitability of loans worsened. Income from fee-based services, such as trade finance and distribution of insurance policies, gained 2.6 percent to 22.98 billion yuan. Bank of China set aside 7 billion yuan to cover potential loan defaults in the first half, an increase of 7.8 percent from a year earlier. Its impaired-loan ratio narrowed to 1.83 percent from 2.29 percent three months earlier. Impairment losses on Bank of China’s subprime-related investments and other securities holdings stood at $4.67 billion as of June 30, down from $4.84 billion three months earlier. The loss remains more than that suffered by all the other Chinese banks combined. The bank still held $2.2 billion of subprime-mortgage investments, $1.05 billion of securities backed by so-called Alt-A home loans and $3.2 billion of other “non-agency” mortgage investments as of June 30. For Related News and Information: Top financial stories: FTOP Stories on China Banks: TNI CHINA BNK Banking industry debt and equity monitor: BANK Relative value comparison: 3988 HK RVC Earnings summary: 3988 HK ERN China’s new loans: CNLNNEW HP

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Japanese, Australian Futures Advance on Oil Prices; Mitsubishi, BHP Climb

August 27, 2009

By Masaki Kondo and Toshiro Hasegawa Aug. 28 (Bloomberg) — Japan’s and Australia’s stock futures rose after oil prices advanced for the first time in three days. U.S.-traded securities of Mitsubishi Corp. , a Japanese trading company that gets more than a third of its sales from commodities, gained 0.5 percent from the Tokyo close. Those of BHP Billiton Ltd. , the world’s biggest mining company, climbed 0.8 percent from the Sydney close. “Investors are putting their money in risk assets such as oil and stocks,” said Kiichi Fujita , a strategist at Nomura Holdings Inc. in Tokyo. “People are preferring to stay on the sidelines ahead of Japan’s national election” this weekend. Futures on Japan’s Nikkei 225 Stock Average expiring in September closed at 10,555 in Chicago yesterday, 0.4 percent higher than 10,510 in Osaka. Australia’s S&P/ASX 200 Index futures contract due in September rose 0.1 percent today. New Zealand’s NZX 50 Index added 0.5 percent in Wellington. In New York, the Standard & Poor’s 500 Index rose 0.3 percent yesterday as crude oil advanced for the first time in three days with a 1.5 percent climb. Separately, a Commerce Department report showed the U.S. economy shrank at a 1 percent annual rate from April to June, less than the 1.5 percent contraction estimated by economists. At 8:30 a.m. Tokyo time, Japan’s statistics bureau is scheduled to report the nation’s joblessness rate . The rate probably rose to 5.5 percent last month, a level last seen in April 2003, according to economists. Mobile-Phone Alliance NEC Corp., Hitachi Ltd., and Casio Computer Co., Japanese electronics manufacturers, are in talks to merge their mobile- phone businesses by April, the Yomiuri newspaper reported. The venture, of which NEC may own more than a half, would have more than 20 percent of Japan’s mobile-phone market, the newspaper said. Shipments of mobile phones in Japan dropped by a fourth in June, marking a 12th month of declines, according to the latest data compiled by the Japan Electronics and Information Technology Industries Association. On Aug. 30, Japan will hold parliamentary elections, in which the opposition Democratic Party of Japan is expected to win by a landslide, newspaper polls show. The ruling Liberal Democratic Party has governed Japan for all but 10 months since 1955. To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net ; Toshiro Hasegawa in Tokyo at thasegawa6@bloomberg.net .

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Toyota to Shut GM-Venture California Car Plant in First Factory Closure

August 27, 2009

By Mike Ramsey and Alan Ohnsman Aug. 28 (Bloomberg) — Toyota Motor Corp. said it will shut a California auto-assembly plant that operated as a joint venture with General Motors Corp. for 25 years, the first time Japan’s largest carmaker has closed a factory at home or abroad. New United Motor Manufacturing Inc . in Fremont, California, will end production of Corolla cars and Tacoma pickups in March 2010, Toyota said in a statement. GM in June said it would end assembly of Pontiac Vibes at the plant, known as Nummi, and quit the venture as part of its bankruptcy reorganization. A collapse in U.S. auto sales to the lowest level since 1976 has left Toyota, the world’s largest automaker , struggling to keep North American plants running at capacity. Closing the San Francisco Bay area plant, where Toyota President Akio Toyoda spent two years, compounds economic woes in California, which struggled this month to close a $26 billion budget deficit. Yoshimi Inaba , Toyota’s North American chief executive, said July 20 its decision depended on possible aid from California lawmakers, labor contracts for the factory’s union workers that expire in August and Nummi’s financial viability. It’s the only large auto-assembly plant on the U.S. West Coast. In the U.S., the carmaker’s largest source of revenue, the Toyota City, Japan-based company’s sales fell 38 percent in the first half, following a 15 percent decline last year. Toyota had a record 436.9 billion yen ($4.7 billion) loss in the fiscal year that ended in March, its first in six decades, and forecasts an even bigger 450 billion yen loss in the current business year. Nummi has the capacity to make 420,000 cars and pickups each year. It only made money in 1992, the result of California’s taxes and labor and pollution rules, as well as the plant’s UAW contracts, according to an estimate by Tokyo-based Credit Suisse Group AG analyst Koji Endo . Shared by GM and Toyota since 1984, Nummi was Toyota’s first U.S. auto-assembly factory. GM was the factory’s sole owner from 1963 until 1982, when it closed the Fremont Assembly plant owing to escalating costs and labor conflicts with union workers. Toyota initially invested about $150 million to renovate the plant and GM contributed the property and original factory building to create the joint venture. Nummi employs 5,400 people, including 4,550 United Auto Workers union positions. More than 1,000 suppliers work with the factory, which has annual payroll and benefits of $523 million, according to a plant publication. To contact the reporters on this story: Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net Alan Ohnsman in Tokyo at aohnsman@bloomberg.net

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Japan’s Jobless Rate Climbs to Record 5.7% in Blow to Aso Before Election

August 27, 2009

By Toru Fujioka Aug. 28 (Bloomberg) — Japan’s unemployment rate rose to a record in July, signaling households are unlikely to help sustain a recovery from the country’s worst postwar recession. The jobless rate advanced to 5.7 percent, eclipsing the previous worst of 5.5 percent last seen in April 2003, the statistics bureau said today in Tokyo. Economists predicted 5.5 percent. Companies from Toyota Motor Corp. to Japan Airlines Co. are scaling back and cutting jobs as demand weakens at home and abroad. Today’s report deals a blow to Prime Minister Taro Aso two days before an election that may oust his ruling Liberal Democratic Party for the second time in 54 years. “The economy is the key factor for the election,” said Masamichi Adachi , senior economist at JPMorgan Chase & Co. in Tokyo. “Voters naturally direct their frustrations about the slumping economy at the incumbent government.” The opposition Democratic Party of Japan, which has never governed, is projected to win more than 320 of 480 seats in the Aug. 30 lower-house election, according to an Asahi newspaper survey published yesterday. Finance Minister Kaoru Yosano said this week the DPJ is “engulfing Tokyo like a massive wave.” More than $2 trillion in stimulus plans worldwide helped Japan’s economy grow at an annual 3.7 percent pace last quarter, the first expansion in more than a year. Economists expect growth will weaken in coming quarters once the government cash injections are exhausted and the labor market worsens. Job to Applicants The jobs-to-applicants ratio , a leading indicator of employment trends, fell to a record 0.42 in July, meaning there are only 42 positions for every 100 candidates, the Labor Ministry said today. The unemployment rate will reach 5.9 percent next year, according to economists Bloomberg surveyed. “We are very far from a solid recovery,” said Yuichi Kodama , chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “There’s a high risk for a more serious labor adjustment going forward” as companies offload workers they no longer need, he said. Toyota, Japan’s biggest automaker, said this week that it will shut down a domestic assembly line as sales plunge. Japan Airlines, Asia’s largest carrier by sales, may cut 5,000 jobs in three years, Kyodo News reported. Isetan Mitsukoshi Holdings Ltd. , Japan’s largest department store chain, plans to eliminate 1,000 jobs by March, Nikkei English News said. The jobless rate would be around 12 percent if all of Japan’s excess workers were considered unemployed, according to Takahide Kiuchi , chief economist at Nomura Securities Co. in Tokyo. Hisako Abe, 53, signed up for a computer-training course in an effort to find regular work. “I want to be a full-time employee, or at least have a part-time job that’s stable,” Abe, who was laid off in April, said at an unemployment office in Tokyo. “I want a promise that they won’t fire me right away.” To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net ;

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Les Leopold: Do We Really Need Uncle Henry’s Fantasy Finance Eggs?

August 27, 2009

(Neighbor 1) “My Uncle Henry thinks he’s a chicken.” (Neighbor 2) “So why don’t you have him institutionalized? (Neighbor 1) “We need the eggs.” Uncle Henry is still clucking away on Wall Street even though we know his imaginary financial eggs crashed the world financial system — fantasy finance eggs that turned into trillions of dollars of financial toxic waste. To prevent the Great Depression II, we could not afford to institutionalize all the Uncle Henrys. In fact, we had to bail out their institutions with trillions of dollars of tax payer money. Uncle Henry is still laying his imaginary eggs. Goldman Sachs, for example, recently announced it was selling synthetic CDOs again even though these are the most prone-to-disaster financial instruments ever created by Wall Street’s financial engineers in the run up to the crash of 2008. (Of course, they are still unregulated.) Even more importantly, Uncle Henry wants to be paid in full for those eggs, just like he was paid before the crash, a time when everyone thought the eggs were golden. Andrew J. Hall, for example, an oil speculator, expects to receive a $100 million paycheck from CitiGroup — the same bank that has received more than $350 billion in taxpayer funds and asset guarantees. When we object to this obscene payday, we are told that Hall lays the best golden eggs, that he has a valid contract to be compensated for his eggs, and that CitiGroup needs the eggs so that it can repay the taxpayer. While Uncle Henry would certainly feel comfortable with this logic, it drives me insane. After all, Hall’s contract would have been worthless had we not bailed out CitiGroup. (Beyond that is the critical question of whether or not Hall’s eggs represent any real value to our economy, or just pure speculative actions that actually just transfer money from the rest of us to him, as I argue here . France also is questioning the logic of paying astronomical sums to its own Oncle Henris . They are calling for new regulations that would allow no more than one third of any bonus to be paid out in the first year. The balance would be payable over the next two years. Also, at least a third of the bonus must be paid in stock. And here’s the kicker: If the trader’s department loses money in any of those next two years, the trader with the big, fat bonus would lose part of his deferred bonus. Critics already are blasting away at these modest restrictions. They seem outraged by the idea that a trader could be punished for his group’s performance: “Regardless of the performance of an individual trader, if his group loses money because some imbecile makes a bad bet then the trader gets hammered .” Amazing! Just imagine how often regular workers suffer, regardless of their performance, because some management “imbecile makes a bad bet.” I wonder how this sounds to the 30 million unemployed and underemployed who lost their jobs because “some imbeciles” on Wall Street crashed the system. France doesn’t want to lose Oncle Henri to our banks, so it’s threatening not to give foreign banks government business if we don’t also slap on similar pay restrictions. Of course, France would prefer if the world’s leading industrial nations during the next G-20 meeting agreed upon similar restrictions. But the odds are slim. It is likely that more than a few countries will see an opportunity to lure Oncle Henri and his eggs into its banks. But this is truly insane. All evidence suggests that Uncle Henry’s speculative plays on Wall Street and elsewhere destabilized the world economy. The so-called financial innovations that made us believe that the eggs were gold turned out to be fool’s gold. Rather than dispersing risk, they linked it together all over the globe. I have yet to see any evidence to suggest that these fantasy finance “innovations” (CDOs, CDO squared, synthetic CDOs and the like) added any value at all to the real economy — and I’ve been looking! The Uncle Henrys of this world make and profit from casino games, not from creating economic value. Worse still, it seems that too many of us still believe that Uncle Henry deserves to be paid astronomical sums. But these pay packages cannot be justified by any economic theory — the only justification comes from the cynical theory of the golden rule: he with the gold rules. As far as I’m concerned France’s proposals don’t go nearly far enough. Vast sums can still go to Uncle Henry. All they are asking is that most of the eggs that are produced won’t disappear in three years, and that they are a little less poisonous. My preference would be to slap on a hard cap that limited salaries and bonuses to no more than what the president of the U.S. receives — $400,000 — at least until the unemployment rate comes down below 5 percent. Of course Uncle Henry won’t like that. But I’d like to find out what would happen if he took his imaginary eggs and waddled off into the sunset. Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It , Chelsea Green Publishing, June 2009.

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Former Stanford CFO: Firm Had Blood Oaths, Bribes, Fake Profits

August 27, 2009

HOUSTON (AP) — The former finance chief for jailed Texas financier R. Allen Stanford said his boss created a business empire where blood oaths were taken to secure loyalty, bribes were paid from a secret Swiss bank account and investor profits were more fiction than financial genius. New details about how Stanford allegedly bilked investors out of $7 billion were made public Thursday after James M. Davis, Stanford’s former chief financial officer, became the first person to plead guilty in the case. Davis pleaded guilty in Houston federal court to three counts: conspiracy to commit mail, wire and securities fraud; mail fraud; and conspiracy to obstruct a Securities and Exchange Commission investigation. The plea is part of a deal Davis, who has been helping prosecutors, made with the Justice Department in exchange for a possible reduced sentence. His plea came hours after Stanford was taken from the privately run prison where he is being held outside Houston to a local hospital with an irregular heartbeat and high pulse. Stanford had been set to appear in the same courtroom for a hearing on whether he can get a new attorney. U.S. Marshals spokesman Alfredo Perez said Stanford was undergoing tests at the hospital but declined to give more details. Davis, 60, only made a brief statement after his hearing. “I did wrong. I’m sorry. I apologize. I take responsibility for my actions,” he told reporters outside the courthouse. But Davis’ 23-page plea agreement provided new details of how Stanford’s business began; how he, Stanford and others manufactured profits; and how panic set in as they tried to hold off federal investigators who were closing in on their scheme. Stanford, Davis and other executives of the now defunct Houston-based Stanford Financial Group are accused of orchestrating a massive Ponzi scheme by advising clients to invest more than $7 billion in certificates of deposit from the Stanford International Bank in the Caribbean island of Antigua. Investors were promised their investments were safe and were scrutinized by Antigua’s bank regulator and an independent auditor. Stanford claimed higher rates of return on his CDS than those offered by commercial banks in the U.S. and consistent double-digit returns on his bank’s investment portfolio. But Davis said in the court documents that the bank’s balance sheets were made up and the work of “reverse engineering.” “Stanford was insistent that (the bank) appear to show a profit each year. Stanford and Davis would collaborate to select a false revenue number … Stanford, Davis (and other conspirators) would then use the ‘budgeted’ numbers to develop falsely inflated revenue numbers which would be claimed as the ‘actual’ revenue numbers to generate the desired Return on Investment,” according to the plea agreement. Asked why Davis defrauded investors for years, David Finn, his attorney, said it was greed. To protect his scheme, Stanford paid more than $200,000 in bribes, as well as $8,000 for two tickets to the Super Bowl in Houston in 2004, to Leroy King, the former chief executive officer of Antigua’s Financial Services Regulatory Commission or FSRC. King has also been indicted with Stanford and is awaiting extradition to the United States. Davis said Stanford secured King’s loyalty in a most unusual way. “Sometime in 2003, Stanford performed a ‘blood oath’ brotherhood ceremony with King and another employee of the FSRC … This brotherhood oath was undertaken in order to extract an agreement from both King and the other FSRC employee that they, in exchange for regular cash bribe payments, would ensure that the Antiguan bank regulators would not ‘kill the business’ of” the bank,” according to the plea agreement. Stanford had Davis get the bribe money from a secret Swiss bank account that was funded by investors’ money. The account was also used to make bribes to the bank’s outside auditor. When the U.S. Securities and Exchange Commission began investigating Stanford’s bank and contacted King by letter in 2005 and 2006 about its probe, Stanford and others in his company helped King write false and misleading response letters. “King appeared very stressed. King related that he had again been contacted by the SEC. King asked Davis if ‘we were going to make it?’ which meant whether the fraud they had been engaged in was going to be exposed. Davis informed King that he thought they were going to be OK,” according to the plea agreement. By mid-2008, Stanford, Davis and other conspirators were “desperately seeking a fraudulent mechanism whereby they could artificially inflate (the bank’s) assets” and hide that Stanford had used $2 billion of investor money to make loans to himself, said the plea agreement. They came up with a bogus real estate deal that falsely inflated a $65 million real estate sale in Antigua into a $3.2 billion bank asset. By January 2009, the SEC had served subpoenas to Davis, Stanford and other executives about the bank’s CD investments. In February, Davis, Stanford, company lawyers and other executives met in Miami to discuss testimony that Chief Investment Officer Laura Pendergest-Holt and another executive would give to the SEC. At that meeting, Davis revealed that 80 percent of the bank’s investment portfolio was made up of grossly overvalued real estate and of $1.6 billion in loans to Stanford, meaning the bank was insolvent. Stanford at first said the bank had more assets and liabilities but later in private “acknowledged that (the bank’s) assets and financial health had been misrepresented to investors and were overstated in (the bank’s) financials,” according to the plea agreement. Davis faces up to 30 years in prison when he is sentenced. While a sentencing date of Nov. 20 was set, Finn said he believes that will be delayed. As part of his plea agreement, Davis was also ordered to forfeit $1 billion in proceeds he made from his illegal actions, although there’s little hope Davis can ever retrieve the funds. Finn said authorities have seized all his client’s assets and Davis, who had made between $5 million and $6 million in the last decade, is broke and now doing manual labor on a relative’s farm in Michigan, making $10 an hour. Hittner postponed a hearing scheduled for Thursday in which he would hear arguments about Stanford’s legal representation. DeGuerin has asked for permission to quit the case because he doesn’t have assurances he will be paid. Stanford was considered one of the richest men in the U.S. with an estimated net worth of more than $2 billion. But he claims he is now penniless. Stanford, along with three former company executives, have pleaded not guilty to various charges, including wire and mail fraud, in a 21-count indictment issued June 18. Stanford has been jailed without bond since then, considered a flight risk by Hittner.

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Jonathan Littman: Want Customer Love? Give A Tour

August 27, 2009

On vacation recently in Boulder, Colorado, I discovered what every business needs to be loved — and not hated. A tour. This summer I had two contrasting weeks that help you to clearly see business opportunities. One week I was in New York helping a venerable brand try to regain the number one spot it had taken for granted. The next I was on vacation in Boulder, Colorado, discovering part of the solution to the East Coast firm’s challenge. Boulder is a beautiful town, perched dramatically on the shoulder of the dramatic Flatirons and home to the University of Colorado. The world’s greatest marathon runners and cyclists train here, and nearly everyone seems vibrant, or at least incredibly fit, biking, running, climbing and hiking at all hours. But there’s another reason you or your company needs to visit. Seven days a week, Celestial Seasons, the tea maker, demonstrates how vital it is for enterprises to have a real story that nourishes and drives your company. Unlike so many firms where employees don’t even pretend to use their own products – and no one could imagine customers wanting to tour their facilities — Celestial Seasons shows what is possible. How good is the tour? My wife and kids are eager to return for a second round. The experience begins before you arrive. The road to the factory is named “Sleepytime Drive,” after the company’s bestselling herbal tea, the sign a colorful picture of the company’s trademark cuddly bear. At the tour entrance, you are handed your ticket, a sampler packet of teas and herbal infusions. The tour kicks off with a short movie recounting the company’s local roots and traditions that stretch back to 1969, when the founders began blending fresh herbs picked in the Rocky Mountains. Today Celestial’s herbs and teas are sourced around the world, exotic locales from Chile to Madagascar. Rituals can help make brands catch fire, and what’s most remarkable here is that there are no pricey gimmicks. The tour is essentially a guided walk through the company’s sole factory. It begins with a quirky ritual that brings smiles of amusement: everyone has to slip on hairnets to tour the plant, and the extra hirsute must pull on beardnets. Then while navigating zipping forklifts and toeing the yellow safety line, you see up close how hibiscus and chamomile petals and teas from distant lands are milled, refined, blended, bagged, boxed and sealed. Along the journey you learn key parts of the Celestial story, now part of the Hain Celestial Group. The company’s bestselling products are herbal infusions and caffeine free teas. Not surprisingly in this company that has mastered storytelling and words to propel it’s brands there is a plot twist. In America you can only sell something labeled as “tea” if it has the leaves and leaf buds of the camillus sinensis plant. Hence every Celestial box that is not technically tea is labeled as a “Caffeine Free Herbal Tea.” But this story also has a sensory heart. At one point, the guide throws open a warehouse door and beckons us in. The aroma floods our sinuses and tears our eyes. The reason: Bags upon bags of peppermint stacked 25 feet high. Most of the group can’t stand it for more than a few seconds. We learn that without the heavy door every other herb or tea in the building would stink like peppermint. The herb, we are told, is so strong that it can be smelled a mile away. But a hard core few “Mint Junkies” remain. “We have some locals with bad sinuses,” our guide chuckles. “They take the tour regularly.” The tour follows the herbs and teas through a maze of machines and robots that bag, box and seal enough boxes to deliver 1.6 billion cups of tea a year. We learn why Celestial is that rare tea producer without strings, tags, staples or individual wrappers. Workers at the plant ruled that with their unique “pillow” style tea bag – they didn’t need a string or plastic. Today by eschewing stings and plastic and using recycled paperboard for the box, Celestial claims it annually saves more than 3.5 million pounds of waste from entering landfills. But the best part of the tour is the Celestial cafe. There are no brochures laying around or handed out. In the cafe we are greeted by a line of several teas to taste for free in handsome silver coffee urns. There are inviting couches and chairs, and a series of enclaves, each with a table and chairs nestled among photographs and maps, and the original paintings that enliven the boxes. Sit at each table and you are immersed in the unfolding, international story of the herbs and teas. The trademark witty Celestial sayings are even inscribed on the table tops. After the tour, I visited Celestial’s intuitive website and was not surprised to learn that that they’ve won national awards for innovation. Your journey has a bit of adventure, two pots of tea identified only by numbers next to a little computerized device that prompts you about your impression of each mystery tea. Visitors gladly line up to taste — and rate — these new teas. There is even grace in the departure. A transparent box near the door to collect donations for local charities, stuffed with cash, a gentle reminder that the tour is free and Celestial has its heart in the right place. The tour made me think of that East Coast brand, struggling to find direction. They have the punch of one of the world’s most famous advertising firms touting their products. But no tour to speak of, and the executives and managers I met with confessed that few at the company partake of their products. Perhaps you’re thinking no one would want to go on your tour. That they’d find more to hate than love? But what if you think of your company as your home. Find the story within. It might be a tale of hard work or inspiration. Simple or something more layered. Don’t worry whether it meets the formal requirement of a tour. Consider how a visit to your office or company might be a journey that people will enjoy and remember. You’ll know you’ve succeeded when they want to come back. Jonathan Littman is the co-author of the new book I HATE PEOPLE! (Little, Brown and Company; June 2009) with Marc Hershon. A Contributing Editor at Playboy, Jonathan is the co-author of the best selling Art of Innovation.

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Bank Numbers Reveal Troubling Trend On Main Street

August 27, 2009

More than one in four U.S. banks are unprofitable, a number fueled by rising numbers of bad loans, the FDIC announced Thursday. The percent of banks losing money has quadrupled since 2005. The U.S. added 111 banks to its “Problem List” for a total of 416, a 15-year high (the FDIC doesn’t publicly identify those banks). And the rate of loans that are at least 90 days late or are so late they’re no longer accruing interest is the highest recorded in U.S. history. A look inside the FDIC’s numbers also sheds light on how U.S. consumers are managing the recession. The health of banks is not just a Wall Street problem, or one for federal bank regulators in Washington, D.C. It’s not a pretty picture. The amount of loans banks are charging off is rising (when banks charge off a loan it means they don’t expect the borrower to repay). There have been more charge-offs on multifamily home loans (apartment buildings) so far this year than all of 2008. [See Figure 1 below] Looking at the past two quarters, overall charge-offs have increased 28 percent; on home loans they’ve increased 25 percent; and credit card charge-offs are up 21 percent. The financial armageddon many feared last fall never materialized, but these numbers show that the expected losses continue to rack up, especially among homeowners. [See Figure 2 below] As the Huffington Post reported earlier this year in our series, Dispatches from the Displaced , homeowners are struggling. Home mortgages at least 90 days delinquent have quadrupled to about $65 billion since the same period last year. [See Figure 3 below] But it’s not just homeowners. All borrowers are hurting. Loans late at least 90 days have doubled since September 2008. [See Figure 2 below] As for the type of banks taking these losses, it’s the big banks that are suffering the most. Nearly half of banks with more than $10 billion in assets are unprofitable through the first six months of the year (41%); for smaller banks, it’s just 26 percent (banks with less than $100 million in assets). Then again, the biggest banks have received the biggest government bailouts . Figure 1 Figure 2 Figure 3

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Key to Bacterial Resistance to Drugs May Be in Your Stomach, Study Finds

August 27, 2009
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Keith Ferrazzi: How to Win Friends and Influence People by Practicing Social Arbitrage

August 27, 2009

Friendship makes prosperity brighter. – Cicero Real power comes from being indispensable. Indispensability comes from being a switchboard, parceling out as much information, contacts, and goodwill to as many people — in as many different worlds — as possible. Engaging in this constant and open exchange of favors and intelligence is what I call social arbitrage. Think of well-executed social arbitrage as a sort of career karma. How much you give to the people you come into contact with determines how much you’ll receive in return. In other words, if you want to make friends and get things done, you have to put yourself out to do things for other people — things that require time, energy, and consideration. Here’s a few rules to become a master: Think of social arbitrage as a game. When someone mentions a problem, try to think of solutions. The solutions come from my experience and knowledge, and my tool kit of friends and associates. Think: How can my network help? It’s a sort of ongoing puzzle, matching up the right people and the right opportunities. Just do it. Don’t wait to be asked. People aren’t used to looking for others for help, beyond a small circle, and usually either won’t think of it or will be too polite to ask. Don’t limit yourself to one clique. Make a point of knowing as many people from as many different professions and social groups as possible. The ability to bridge different worlds, and even different people within the same profession, is a key attribute in managers who are paid better and promoted faster. Become a knowledge broker. Knowledge is free — it can be found in books, in articles, on the Internet, pretty much everywhere, and it’s precious to everyone. Expertise will not only allow you to grow your connections, it helps you solve problems in situations where there’s a gap in your network. Carpe Diem. When you see a way that someone else in your network can help a friend, don’t wait. Pick up the phone mid-conversation to make the introduction — “I’m here with my friend so-and-so and they need x and may call you, if it’s alright” – then give your friend the information so they can follow up as they choose. Not only have you made it completely comfortable for them to reach out, you’ve also pinged someone else in your network — double score. Successfully connecting with others is never about simply getting what you want. It’s about getting what you want and making sure that people who are important to you get what they want first — and having fun while doing it. Read more articles like this one at Keith Ferrazzi’s blog .

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Bo Obama’s Fur Coat Is Three Genes Away From Short Hair of Wolf Ancestors

August 27, 2009
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Teamster’s Hoffa Weighs Opposing Specter for Re-election as a Democrat

August 27, 2009

By Holly Rosenkrantz Aug. 27 (Bloomberg) — James Hoffa , president of the International Brotherhood of Teamsters, said his union may not support Senator Arlen Specter in his re-election bid because the Pennsylvania Democrat has wavered on legislation making it easier for workers to organize. “We’re looking at both candidates right now” and “it’s time for him to stand up,” Hoffa said in an interview today, referring to Specter and his Democratic primary fight with Representative Joe Sestak . Hoffa said Specter, who switched from Republican to Democrat in April, needs to do more to help pass the so-called card-check legislation that is one of organized labor’s top priorities. Hoffa, who has led the Teamsters since 1998, also said in the interview that President Barack Obama “should have been tougher” in a dispute over the U.S. banning trucks from Mexico. The 1.4 million-member union, which backed Obama’s election, is sending a letter to the president and U.S. Trade Representative Ronald Kirk asking them to challenge tariffs Mexico imposed in retaliation for banning its trucks from U.S. roads, Hoffa said. Specter, who is seeking his sixth term, is the self- described “decisive vote” on the union organizing bill stalled in Congress. His defection from the Republican Party gave President Barack Obama and the Democrats the 60 votes needed in the Senate to force action on legislation over Republican objections. Specter will face Sestak in the Democratic primary in May 2010. Obama has said Specter would have his “full support” in running as a Democrat. Specter, 79, this month reversed his opposition to the card-check bill and told a bloggers convention in Pittsburgh he will support efforts to bring a “modified” version of the bill to a vote. He hasn’t said whether he would vote for final passage. “This is a litmus test,” Hoffa said. “Arlen Specter should step up, and he’s not doing it.” ‘Wrong Thing to Do’ Hoffa, 68, was asked about Obama’s comments on the trucking dispute during a visit this month to Mexico. The president said he is committed to resolving the issue and dealing with safety concerns raised by the U.S. Congress over permitting Mexican trucks on U.S. roads. “He should have been tougher,” Hoffa said of Obama. “We should put tariffs on their goods.” “Everyone knows this is the wrong thing to do, putting tariffs on America after all we do for them,” Hoffa said. “We let their illegals come across the border, we send money to them, we have a tremendous, huge trade imbalance with them, and that they would put a tariff on us.” Mexico wants the U.S. to remove restrictions that prevent Mexican trucks from delivering goods across the border. U.S. exporters such as Appleton Papers Inc. of Appleton, Wisconsin and Mary Kay Inc., the Dallas-based cosmetics seller, have urged Obama to reach an agreement to put Mexican trucks back on the U.S. road and end the tariffs imposed on makers of paper, batteries, toothpaste and grapes. To contact the reporter on this story: Holly Rosenkrantz in Washington at hrosenkrantz@bloomberg.net .

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