February 2010

Greece Risks Debt-Rating Downgrade Within Month on Struggle to Cut Budget

February 25, 2010
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Eddie the Eagle in Demand Two Decades After Calgary Olympics

February 25, 2010
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Parmalat’s Top Investor Seeks $1.5 Billion Payout From Lawsuit Settlements

February 25, 2010

By Armorel Kenna Feb. 25 (Bloomberg) — Parmalat SpA , Italy’s biggest dairy foods maker, should turn over the $1.5 billion it has left over from lawsuit settlements to shareholders in stock buybacks or dividends, the company’s largest investor said. “Mackenzie Cundill would prefer to see cash returned to shareholders in the form of share repurchases or dividends,” rather than being spent on mergers and acquisitions, said David Tiley , who helps manage $13.5 billion at Mackenzie Cundill Investment Management Ltd. in Vancouver. The fund holds more than 7.7 percent of Parmalat and may buy more, he said. Parmalat, which pioneered long-life milk in the 1960s and makes Omega3 milk , has recovered about 2 billion euros ($2.7 billion) in legal settlements from banks and auditors, whom it accused of sustaining the fraud that led to Italy’s biggest corporate bankruptcy in 2003. In bankruptcy proceedings, Parmalat disclosed more than 14 billion euros of debt , about eight times the amount reported by its former management. Parmalat’s ordinary dividend payout is fixed at 50 percent of net income. The Collecchio, Italy-based company posted 673 million euros in net income in 2008. The dairy company could pay an extraordinary dividend, which must be approved at a shareholders meeting, Tiley said. Investors failed to increase the payment at a meeting in 2008. Mackenzie Cundill would like to see the cash turned over “expeditiously,” Tiley said, adding that Parmalat should retain as much money as it needs to run its business. Laura Gilbert , a spokeswoman for Parmalat, declined to comment for this story. Returning Cash Parmalat is scheduled to report earnings today. Net income last year may have fallen more than 50 percent to 441 million euros, according to the average of seven analyst estimates compiled by Bloomberg. Parmalat faces declining income from legal settlements and growing competition from the private-label market that may curb earnings, according to analysts including James Targett at Consumer Equity Research in London. The branded-goods experience of Antonio Vanoli , Parmalat’s chief operating officer since December 2008 and former director of Tic Tac maker Ferrero SpA , is a plus for Parmalat, Tiley said. Parmalat confirmed its interest in the baby-food market in November and said it wanted to increase its presence in emerging markets and improve its product mix. “Anything that can be done to diversify Parmalat’s revenues from the low margin, highly commoditized, threatened milk business, we are open to,” Tiley said. “Private label is a reality, so it requires a creative, competitive response from branded players.” Competition Parmalat also faces competition from food companies including Groupe Danone SA and Dean Foods Co., which have branched out to baby food and soy-based products. Parmalat could pursue acquisitions in Australia, the company’s third-biggest market in 2008 after Canada and Italy, including cooperative dairies, Tiley said. The Italian company bought fresh milk assets from Australia’s National Foods in July, for about 70 million Australian dollars ($63 million). Expansion in other geographical areas including the U.S. and Spain wouldn’t give Parmalat any “scale” advantage, while the company could benefit as a private-label producer for an existing baby food maker, Tiley said. “The company is clearly overcapitalized today and shareholders, management, branded competitors and private equity all know it,” Tiley said. To contact the reporter on this story: Armorel Kenna in Milan at akenna@bloomberg.net

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Hindustan Petroleum Revives $4 Billion Refinery, Chemical Plan in India

February 25, 2010

By Archana Chaudhary Feb. 25 (Bloomberg) — Hindustan Petroleum Corp. , India’s third-biggest state-run refiner, revived plans to build a 200 billion-rupee ($4.3 billion) refinery and petrochemicals plant in southern India to benefit from rising Asian fuel demand. “This project is for meeting demand in the country as well as for exports to other Asian nations,” K. Murali , director of refineries, said in a telephone interview from Mumbai. “We are looking at the long term.” Asian refineries are expanding capacity to meet rising oil demand in the region even as companies in the developed world are halting operations as profits from processing fuel decline. Energy consumption in India, Asia’s third-largest fuel user, is expected to more than double to 833 million metric tons of oil equivalent by 2030, according to the International Energy Agency. “Hindustan Petroleum’s plans make sense considering the need to add refining capacity in India in the face of long-term rising demand,” said Neil Beveridge , a Hong Kong-based analyst at Sanford C. Bernstein. “There’s a clear continuous growth in India’s domestic fuels market at a time when refiners elsewhere are looking at a glut in the refining capacity.” Hindustan Petroleum last year postponed the plan to build a 15 million-ton refinery and a 2.5 million-ton petrochemicals plant near its existing 7.5 million-ton facility at Visakhapatnam, a city in Andhra Pradesh also known as Vizag. Partners Total SA and billionaire Lakshmi Mittal opted out as the recession crimped global fuel demand. FUND RAISING State-run Hindustan Petroleum may borrow as much as 70 percent of the funds needed to build the Vizag project, which will be part of a special economic zone planned by the Andhra Pradesh state government, Murali said. GAIL India Ltd ., the nation’s state-run monopoly natural gas distributor, and Oil India Ltd . will partner Hindustan Petroleum in building the project, he said without giving details. The refiner has been allocated 1,500 acres from the Andhra Pradesh government to build the plant, although the land has still to be transferred, he said. The refiner plans to shut its 6.5 million-ton unit at Mumbai in the western state of Maharashtra and may sell 340 acres on which the current refinery stands to raise funds for a new 20 million-ton refinery in the same province, Murali said. “The value we add from every barrel of crude oil processed will be the highest at the new plant,” he said. “The existing refinery doesn’t give us the kind of efficiency we have in mind.” Maharashtra Refinery The refiner may be able to raise 100 billion rupees through the land sale, enough to “partly finance” a 250 billion-rupee, 18 to 20 million ton-a-year refinery further down the west coast, Jal Irani and Amit Mishra , analysts at Macquarie Securities Ltd. wrote on Feb. 17. Hindustan Petroleum had cash and near cash of 12.8 billion rupees and short-term investments of 53.5 billion rupees as of March 2009, according to data compiled by Bloomberg. The refiner had debt of 240.61 billion rupees. Another 9 million ton-a-year refinery being built by Hindustan Petroleum in a venture with billionaire Lakshmi Mittal at Bhatinda in north India is expected to be ready by May 2011, Murali said. The refinery will cost $3 billion, the Indian company said in February 2007 after Mittal picked up a 49 percent stake in the company implementing the project. To contact the reporter on this story: Archana Chaudhary in New Delhi at achaudhary2@bloomberg.net .

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`Lepers’ in London Defend Their Right to Make Money as Election Approaches

February 25, 2010

By Simon Clark Feb. 25 (Bloomberg) — Under the stained-glass gaze of William Shakespeare, Charles Cara struggles to defend another British icon: the City of London. “How do you make the case that making money is good if losses get nationalized?” Cara, an analyst at Absolute Strategy Research Ltd. , said at a Jan. 14 conference in a Victorian school hall by the River Thames now occupied by JPMorgan Chase & Co. “The banking crisis has shown that there are costs, and those costs tend to get thrown onto the citizen.” Bankers in London’s financial center, which Mayor Boris Johnson called a “leper colony,” are battling to justify their right to make money and to prove their social value after British taxpayers assumed liabilities of more than 800 billion pounds ($1.23 trillion) to bail out the country’s lenders. With elections less than four months away, a debate once confined to universities and churches has become more than academic. Prime Minister Gordon Brown , whose ruling Labour Party wooed financiers before and after taking office in 1997, and opposition Conservative leader David Cameron are turning publicly on the City, Europe’s largest financial center and a focus of trade for almost 2,000 years. Brown lambasted the “bankrupt ideology” of free market “fundamentalism” at his party’s conference in September and pledged to make banks “the servant of people.” In October, Cameron vowed to promote “quality of life” as well as “quantity of money.” He wouldn’t change Brown’s decision to raise the rate of income tax for the highest earners to 50 percent. “The rich will pay their share,” he said. ‘Corroded Trust’ “There is a crisis of values and of value,” Ken Costa , chairman of investment bank Lazard International , said in a Jan. 19 lecture in the City. “Politically and socially it has corroded trust in financial institutions and those thought to run and regulate them.” Financial services employ 1 million Britons and accounted for 10.1 percent of the U.K.’s gross domestic product and 27.5 percent of corporate taxes in 2007, according to the government and PricewaterhouseCoopers LLP. Yet three decades after former Prime Minister Margaret Thatcher won power by campaigning for free markets and against labor unions, Britain’s main political parties are distancing themselves from the City. “For many, the City has been opaque, shrouded in mystery, revealing itself only to announce enormous profits or to deal with some form of scandal,” U.K. Treasury Minister Paul Myners , a former fund manager, said in a November debate organized by the Council of Christians and Jews. “Now the City is in the limelight again, and again for the wrong reasons.” ‘Leper Colony’ Bankers have been cast as “pariahs” working in a “leper colony,” Mayor Johnson told fellow members of the Conservative Party at their annual conference in October. Politically, the City is in a “very strange period,” Nick Anstee , the 682nd lord mayor of the City of London, said in an interview. Lawmakers are currying favor with the electorate by attacking the banks, he said. “And that is singularly unacceptable,” Anstee said. “Particularly in fact because some politicians need to look at themselves and wonder at the extent to which they were culpable and responsible for what has happened.” Politicians from both the Labour and Conservative parties are calling for tougher regulation after what the government once heralded as the U.K.’s “light touch” was later blamed for doing nothing to prevent rampant risk-taking. A Conservative government would transfer banking regulation to the Bank of England within a year, according to Cameron. Divided City City stalwarts are divided on what to do. Terry Smith , chairman of Collins Stewart Plc , Britain’s biggest independent stockbroker, said investment banks and retail banks must be separated to end the “insuperable conflict of interest” that he blames for causing the financial crisis. John Varley , chief executive officer of Barclays Plc, and Stephen Green , chairman of HSBC Holdings Plc, are among bankers who oppose bank breakups. Separating retail and investment banks will “simply put up the price of retail and commercial banking services,” British Bankers’ Association CEO Angela Knight said in an interview. Banks are solving their problems by holding more capital and increasing capital in their riskiest business units, she said. Taking Responsibility Brown must call the election by June and whoever wins needs to act to preserve the City as a place where Britons and non- Britons alike can make money, said Smith, who is also CEO of Tullett Prebon Plc , a London-based firm that matches securities trades between banks. The millionaire son of a London bus driver said City firms must take responsibility for failure. “Every year that the banks made a profit, a large part of it went to individuals who are now regarded badly by the general public,” said Smith, based in Tower 42 in the City. “As soon as banks made a loss, the general public had to pay.” The separation of investment banking and consumer banking is vital to reform the City, Smith said in an interview. “You can’t combine in the same organization research, broking, market making, mergers and acquisition advice and lending,” Smith said. “I would like to see politicians and regulators get to the root-cause of the problem so that our financial services center is better regulated than others.” Cash Injection The government now owns stakes in lenders including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc and has extended insurance guarantees too. The 45.5 billion-pound rescue of RBS was the world’s costliest bank bailout. In addition, Bank of England Governor Mervyn King has pumped new money into the economy through a process of buying assets called quantitative easing. King spelled out to lawmakers on Nov. 24 why the global financial crisis is so significant for the U.K. “The only hope we have of retaining an international banking sector” is if taxpayers and global bond investors “stop worrying about the fact the U.K. government might have to stand behind a banking sector that’s five times GDP,” King said. By contrast, the size of the U.S. banking industry is less than one times GDP, he said. London’s rise as a modern finance center accelerated in the 1980s under Thatcher. The City became the world leader in cross- border bank lending after her government introduced policies in 1986, known as the Big Bang, which allowed London Stock Exchange member firms to be bought by outsiders. International banks bought most of Britain’s major securities firms after that, including Citigroup Inc.’s purchase of Schroders Plc’s investment banking unit in 2000. It was also in 1986 when the City of London School for Boys moved out of the site now occupied by JPMorgan. Hosting Banks Allowing non-U.K. banks to dominate the City was termed “Wimbledonization” by former Bank of England Governor Eddie George . As with the tennis competition, Britain earned money from hosting the event even if it struggled to provide a winner. “It is the activity rather than the nationality of ownership which creates a competitive marketplace,” George said at a banking conference in Vienna in 2001. Brown embraced that in 10 years as chancellor of the exchequer. In a 2007 speech at Mansion House, the lord mayor’s residence, Brown celebrated that a third of the world’s currency trading took place in the City — more than in New York and Tokyo combined, he said, as he pledged to “maintain a competitive tax regime.” “This is an era that history will record as the beginning of a new golden age for the City of London,” Brown said. “Britain needs more of the vigor, the ingenuity, the aspiration that you demonstrate daily and is the hallmark of your success.” KPMG Report In 2009, Brown decided to raise the top rate of income tax and introduced a one-time levy on bankers’ bonuses, making London more expensive for residents earning 1 million pounds a year than New York, Hong Kong or Paris, according to accounting firm KPMG, whose U.K. headquarters is in the City. Mayor Johnson said in January that as many as 9,000 bankers may leave the U.K. as a result of the tax on their bonuses. So far, that hasn’t happened. Many Britons see the City as benefiting more from the nation than it contributes. “When the City got into trouble, it turned to the nation for help,” said Maurice Glasman , a politics lecturer at London Metropolitan University . “Before the crisis, the City was saying that it was a global player that needed to be free of national constraints.” ‘Part of the Problem’ Glasman is also a member of London Citizens, a non-profit that says it represents 150 organizations including schools and churches, which is campaigning for part of the bailout funds to be used to benefit British regions. For Terry Smith, just as City companies must take responsibility for mistakes, so must British citizens and the state, which has run up the biggest deficit among G-20 nations. “People have got to realize that they are part of the problem,” he said. “The City and banks were the instruments of their overindulgence.” In the old City of London School hall across the River Thames from Shakespeare’s Globe Theatre , where characters from Hamlet to the Merchant of Venice act out their fates, analyst Cara argues for the social utility of the banks, brokerages and other firms in London’s financial district. “Payment systems, insurance, pension funds, these are all very socially useful,” Cara said. “Look at ship broking: If you couldn’t get goods from the manufacturers on different continents, world trade would end,” he said. “You’ve got to make sure that state rescues come with a price for management, for the employees — and also for investors.” To contact the reporter on this story: Simon Clark in London at sclark4@bloomberg.net

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New York City May Get Up to 13 Inches of Snow, Making Travel `Hazardous’

February 25, 2010

By Brian K. Sullivan and Alex Morales Feb. 25 (Bloomberg) — New York City may receive more than a foot of snow in a storm that’s forecast to hit in rush hour, disrupting travel, the National Weather Service said. The service issued a winter storm warning that starts at 6 a.m. and runs through 6 p.m. tomorrow, and forecast as much as 13 inches (33 centimeters) of snow. “Snow is expected to develop around the start of rush hour Thursday morning then continue through Friday,” the National Weather Service said in a statement on its Web site. “This will make travel very hazardous or impossible.” Continental Airlines Inc. and Delta Air Lines Inc. canceled some of their flights into the area, while Amtrak canceled some trains. It was raining at about 5 a.m. in New York City. “Expect the steadiest and heaviest snow to fall from mid- morning Thursday through Thursday evening,” the weather service said. “Snow may mix with rain for brief periods of time on Thursday. If no mixing-in occurs, amounts will be up towards the higher end of the range, if not more.” Winter storm warnings, meaning heavy snow, ice and freezing rain are imminent, were issued for a swath of the Northeast, including parts of Maine, Vermont, New Hampshire, New York, Pennsylvania, New Jersey and Maryland. In Washington, snow was forecast before 10 a.m., and winds may gust as high as 37 miles (60 kilometers) an hour, the weather service said. The Washington-Baltimore corridor may receive as much as five inches of snow in the storm, according to Brandon Peloquin, a weather service meteorologist in Sterling, Virginia . Flights Canceled The system is the latest from an El Nino-driven weather pattern that has pushed moist air across the southern U.S., where it has mixed with colder air coming down from the Arctic, Matt Rogers , president of Commodity Weather Group in Bethesda, Maryland, said. The result has been record snows from Washington to Philadelphia. El Nino is a warming of the Pacific Ocean that occurs every two to five years and lasts about 12 months. Continental , the fourth-largest U.S. carrier, canceled all flights today from Newark Liberty International Airport by regional partners including Continental Express and Pinnacle Airlines Corp.’s Colgan unit, said Mary Clark , a spokeswoman for the Houston-based carrier. The cancellations involve “several hundred” flights, Clark said. She didn’t have a more specific number. Delta , the world’s largest carrier, canceled 65 flights in the New York area for today, said Susan Elliott , a spokeswoman for the Atlanta-based company. UAL Corp. ’s United Airlines scrapped 70 flights yesterday because of weather and was considering plans for today, Sarah Massier, a spokeswoman, said. The three airlines issued travel waivers allowing passengers to re-schedule their plans for free, according to statements on their Web sites. Canceled Trains Amtrak canceled eight trains on its Empire Service lines in the upstate New York area, said a spokeswoman, Karina Romero . In northern New Jersey , as much as 18 inches of snow may fall, the weather service said. Parts of Maine, Connecticut, Massachusetts, New York, New Hampshire and Rhode Island were issued with flood watches, with as much as 3 inches of rain forecast. Today’s will be from the second storm to hit the area this week. A system brought rain to New York City and almost two feet of snow to western Massachusetts starting Feb. 23, disrupting air traffic in Newark, Boston, Baltimore and New York. “The Northeast is being impacted by one storm now, and the monster storm is going to impact the region tomorrow into Friday,” Eric Wilhelm of private forecaster AccuWeather.com . said yesterday. “A really complex situation is developing in the Northeast.” Power Failures Likely On the Massachusetts coast, sustained winds of 30 mph are expected, with gusts as intense as 50 mph, according to a weather service high wind watch issued for the area. “There could be real problems with power outages,” Wilhelm said. “That could be the real legacy of this storm.” More than 50,000 customers in the Albany area and western Massachusetts were left without power by the storm that moving north through New England yesterday, according to utilities. High winds may also create wind-chill problems that will boost energy consumption, Rogers said. Temperatures in the region are expected to be in the 30s Fahrenheit, while the wind will make it feel colder. Demand for heating oil may be 8 percent higher than normal through March 3, according to Weather Derivatives , a Belton, Missouri, forecaster. Heating oil for March delivery rose 0.98 cent, or 0.5 percent, yesterday to settle at $2.0421 a gallon on the New York Mercantile Exchange. To contact the reporter on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net ; Alex Morales in London at amorales2@bloomberg.net

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Turkey Jails Eight More Army Officers as Erdogan Prepares to Meet Military

February 25, 2010

By Steve Bryant Feb. 25 (Bloomberg) — A Turkish court ruled that eight more army officers should be jailed pending charges of plotting a coup, in a case that has heightened tension between the Islamist-rooted government and the armed forces. The eight current and retired officers were remanded in custody by the Istanbul court last night, joining another 12 charged the previous day, the state-run Anatolian news agency said. Police detained about 50 officers in nationwide raids this week. President Abdullah Gul is hosting a meeting between top general Ilker Basbug and Prime Minister Recep Tayyip Erdogan in Ankara at 11 a.m. in a bid to ease tensions. Turkish stocks gained after falling the most in two weeks yesterday as the investigation widened divisions between Erdogan and the army, which has ousted four governments since 1960 and sees itself as the defender of Turkey’s secular rules. The prime minister, whose Justice and Development Party has roots in political Islam, says Turkey must reduce army influence in politics to qualify for European Union membership. Gul’s call for a meeting suggests he wants to “soothe the ongoing tension,” Inan Demir , chief economist for Finansbank AS in Istanbul, wrote in an e-mailed report. The meeting may “serve to ease the acute phase of the ongoing political conflict and provide the markets with a much-needed respite.” The main ISE National 100 index gained 1.1 percent at 10:20 a.m. after dropping 3.4 percent yesterday. Yields on two-year Turkish bonds fell 3 basis points after rising 7 points to 9.01 percent yesterday, the highest since Feb. 2. Ibrahim Firtina and Ozden Ornek , former heads of the Air Force and Navy, appeared before the Istanbul court today, the NTV news channel reported. ‘Uncharted Territory’ “Turkey is clearly in uncharted territory now and it is very difficult to predict how this crisis could evolve,” Wolfango Piccoli , analyst for Eurasia Group in London, said in an e-mailed report yesterday. “If the court decides to formally charge Firtina and Ornek and order them to be jailed pending trial, the crisis could further escalate.” Erdogan, who turns 56 tomorrow, has chipped away at the military’s powers since coming to power. He ended army control over the National Security Council in 2003 and that same year ignored the generals’ objections to a United Nations plan for the reunification of Cyprus. Opposition parties yesterday called for early elections to resolve the crisis. Erdogan called an election in 2007 after the army criticized his choice of Abdullah Gul as president because of his Islamist past. Justice won with 47 percent of the vote, the biggest share any Turkish party had drawn in almost 40 years, and promoted Gul to the presidency. Declining Support The party’s vote declined to 39 percent in local polls in March 2009. The next election is due by July 2011. Deputy Prime Minister Bulent Arinc said on Feb. 22 that the government intends to serve its full term. This week’s arrests are the latest in a two-year investigation that has seen scores of ex-officers, journalists and academics jailed and put on trial on charges of planning a coup. They follow a report in the Taraf newspaper on Jan. 21 that army officers drafted a plan in 2003 to stage bombings to undermine confidence in Erdogan’s government. Basbug said on Jan. 25 the allegations were part of a campaign of psychological warfare designed to undermine public trust in the forces. He said the army is committed to democracy and that coups are “a thing of the past.” To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net ;

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European Central Bank Rejects IMF Proposal to Raise Inflation Target to 4%

February 25, 2010

By Simon Kennedy and Jana Randow Feb. 25 (Bloomberg) — European Central Bank officials dismissed a proposal by International Monetary Fund economists that monetary-policy makers increase inflation targets to 4 percent, arguing that such a shift would damage economies. “I can only reject the idea of raising inflation rates permanently,” ECB Executive Board member Juergen Stark said in a speech in Seoul today. Bundesbank President Axel Weber wrote in a newspaper column today that the Washington-based lender is “playing with fire.” The criticisms suggest the Frankfurt-based ECB will ignore this month’s suggestion by IMF economists led by Olivier Blanchard that central banks raise their inflation targets so that they have more scope to react to shocks such as the recent financial crisis. The ECB currently seeks to keep annual inflation rates at just below 2 percent in the medium term. “The ECB is the most hawkish inflation targeter out there, so it’s unsurprising it doesn’t look at higher inflation targets too kindly,” said Geoffrey Yu , a currency strategist at UBS AG in London. Stark called the IMF’s proposal “most unhelpful” and calculated a 4 percent inflation goal would shave “no less than” 0.5 percentage point off trend growth in the euro region. ‘More Damage’ Weber, a contender to succeed ECB President Jean-Claude Trichet next year, said in the Financial Times Deutschland that faster inflation causes “more damage than good” and warned the IMF’s discussion threatens to undermine the credibility of central banks. Executive Board member Lorenzo Bini Smaghi yesterday said the proposal to raise the inflation target “backward looking.” Cypriot central banker Athanasios Orphanides this month called the proposition “counter-productive” and a “most unfortunate suggestion” as it may weaken the “hard-fought achievement” of anchoring inflation expectations. Pioneered by the Reserve Bank of New Zealand two decades ago and now followed by more than 20 central banks globally, inflation targets are aimed at controlling expectations of future price pressures and providing clarity about the direction of interest rates. More Leeway The IMF’s Feb. 12 report said an increase in inflation goals may grant central bankers more leeway to respond in the event of turmoil such as a global recession, terrorist attack or pandemic. The argument goes that if inflation and interest rates are higher entering a crisis, policy makers are able to cut borrowing costs more deeply and keep them lower for longer to revive their economy. “Should policy makers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks?” the report said. “To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?” Asked about the study by U.S. lawmakers yesterday, Federal Reserve Chairman Ben S. Bernanke said while he understood “the argument and it’s not without its appeal” it carries “certain risks.” “If the Federal Reserve says we’re going to raise inflation to 4 percent, how do we know that later it won’t go to 5 or 6 or 7 percent, and a lot of time to get inflation down,” he said. Bernanke’s Background Prior to becoming Fed chief in 2006, former Princeton University professor Bernanke advocated the Fed follow an inflation aim and he has since overseen the introduction of long-term inflation projections that serve as a gauge of the U.S. central bank’s target. The ECB’s Governing Council decided to establish an inflation goal during its first year of existence as a way of maintaining the inflation-fighting credibility of Germany’s Bundesbank. There is precedent for it to change its inflation target. In 2003, the ECB’s council modified its goal from seeking an inflation rate between zero and 2 percent. Inflation in the 16-nation euro area has still been above the ECB’s aim in all but one of the last 10 years and its focus on prices has been criticized by economists including Morgan Stanley Asia Chairman Stephen Roach and Nobel laureate Robert Solow . In July 2008, an inflation rate of 4 percent led the ECB to raise its benchmark interest rate to a record 4.25 percent even as signs were emerging that the economy was slumping along with the U.S. Trichet has since argued that decision allowed the central bank to keep control of inflation expectations while its counterparts fought deflation worries. To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net . Simon Kennedy in Paris at skennedy4@bloomberg.net

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Deutsche Telekom Reports Surprise Loss as Greek Budget Crisis Raises Costs

February 25, 2010

By Ragnhild Kjetland Feb. 25 (Bloomberg) — Deutsche Telekom AG , Europe’s biggest phone company, posted a loss in the fourth quarter, primarily on a writedown in the value of its Greek unit. The Bonn-based company reported a net loss of 3 million euros ($4.04 million) on a 500 million-euro impairment charge, it said in a statement today. Analysts had predicted a profit of 597.6 million euros, the average of seven estimates compiled by Bloomberg. The company sees lower 2010 earnings before interest, taxes, depreciation and amortization. “The outlook was slightly disappointing,” said Theo Kitz , an analyst at Merck Finck & Co. in Munich. “The company had given the impression that we might get a forecast for unchanged Ebitda. Instead they guided for a slight decrease.” A Greek writedown had been widely expected, Kitz said, although analysts hadn’t known when it would be booked. The Greek financial crisis and the rise in the country’s interest rates led to a reduction in the value of Hellenic Telecommunications Organization, which is about 30 percent owned by Deutsche Telekom. Deutsche Telekom paid 3.8 billion euros for its stake, which is now valued at 1.31 billion euros based on Hellenic’s market value. Fourth-quarter sales rose 0.6 percent to 16.2 billion euros. In the year-earlier period, Deutsche had a net loss of 730 million euros on 1.1 billion euros in impairment charges and one-time expenses related to job cuts. Cost Cuts Deutsche Telekom slid 0.1 percent to 9.51 euros at 10:55 a.m. in Frankfurt trading. Before today, the stock had lost 7.5 percent this year. Chief Executive Officer Rene Obermann is banking on cost cuts to stem declining profit as the economic slump slows demand for phone services. He slashed expenses by 5.9 billion euros between 2005 and 2009. Deutsche Telekom said today it plans to cut costs by 4.2 billion euros by the end of 2012. “Cost discipline was key to getting through economically challenging times,” he said in the statement. The group’s investments in 2010 will be slightly higher than in 2009, he said at a briefing today. “We expect to largely maintain this level of investment over the next two years,” he said. “At the same time, we will not be making any multi-billion-euro acquisitions.” Expense cuts and rising sales in emerging markets led Vodafone Group Plc , the world’s largest mobile-phone company, this month to raise its full-year cash flow forecast. BT Group Plc, the U.K.’s biggest fixed-line operator, said earnings rose 11 percent in the fourth quarter before interest, taxes, depreciation, amortization and costs to cut jobs. Outlook Deutsche Telekom predicts adjusted earnings before interest, taxes, depreciation and amortization in 2010 of 20 billion euros, down from 20.67 billion euros in 2009. It expects free cash flow of about 6.2 billion euros, compared with 7 billion euros in 2009. “The outlook is a little more cautious than I expected,” said Guy Peddy , an analyst with Macquarie Securities Group in London. Fourth-quarter adjusted earnings before interest, taxes, depreciation and amortization rose 8.6 percent to 5.07 billion euros. Analysts had estimated 16.3 billion euros in sales and adjusted Ebitda of 5.04 billion euros. Yesterday, the company proposed a dividend of 0.78 euros per share for 2009, unchanged from the last two years. It said for the years 2010 through 2012 it is proposing a dividend of at least 0.70 euros per share and share buyback, with up to a total amount of 3.4 billion euros per year. U.S. Operations In the U.S., the company expanded its network and added new handsets to win back customers. Amid the economic slump, T- Mobile USA has faced competition from discount operators and companies offering faster data transfer on smartphones. In the fourth quarter, T-Mobile USA returned to customer growth, adding 371,000, after having lost 77,000 customers in the third quarter. In the fourth quarter of 2008, it had added 621,000 new customers. Sales at the U.S. business fell 5.4 percent in the fourth quarter and operating income before depreciation and amortization fell 12 percent. On Feb. 16, board member Guido Kerkhoff said in an interview that the U.S. business was “back on track” and able to “compete.” Earlier in the month, the company was reported to be considering all options for T-Mobile USA Inc., including an initial public offering, according to three people familiar with the matter. To contact the reporter on this story: Ragnhild Kjetland in Frankfurt rkjetland@bloomberg.net

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Royal Bank of Scotland Net Loss Beats Estimates; Pay, Bonuses Increase 44%

February 25, 2010

By Andrew MacAskill and Jon Menon Feb. 25 (Bloomberg) — Royal Bank of Scotland Group Plc , Britain’s biggest government-controlled lender, reported a narrower-than-estimated full-year net loss, and increased its pay and bonuses for investment bankers by 44 percent. The loss narrowed to 3.6 billion pounds ($5.5 billion) from 24.3 billion pounds a year earlier, the Edinburgh-based lender said in a statement today. That beat the 6.01 billion-pound estimate of nine analysts surveyed by Bloomberg. RBS’s investment-banking unit swung into profit, and impairments “appear likely to have peaked,” the company said. The stock jumped as much as 8.6 percent. “We have a long and tough job ahead of us but we do believe that the worst is behind us,” Chief Executive Officer Stephen Hester said in a conference call with reporters today. There would be “difficult times ahead,” he said. RBS , which needed 45.5 billion pounds in taxpayer-funded support, is undergoing the most complicated restructuring of any company in history, Hester said last month. The bank’s 2009 loss is slightly more than the cost of Britain’s war in Afghanistan, which cost about 3.5 billion pounds in 2009, according to House of Commons Defence Committee figures last year. The bank will pay about 1.3 billion pounds or 27 percent of revenue, compared with about 900 million pounds for the previous year, said two people briefed on the discussions. Barclays Capital, the investment banking unit of Barclays Plc, paid 38 percent of revenue in remuneration, while Goldman Sachs Group Inc. paid 36 percent. Assets Decline RBS’s loss was reduced by a one-time 2.15 billion-pound gain from a reduction in the pension plan over the third and fourth quarters. The bank, which is 84 percent owned by the U.K., also benefitted from rising profit at its investment banking unit and slowing impairments in the second half. “The numbers are more positive than the bears would have had you believe beforehand,” said Julian Chillingworth , who helps manage $21 billion including RBS stock at Rathbone Brothers Plc. “People are more interested in how quickly Hester can get the stock back to health.” The RBS loan-to-deposit ratio declined to 135 percent, compared with 151 percent, indicating the bank is becoming less reliant on wholesale markets for funding. Total assets declined to 1.52 trillion pounds from 2.22 trillion pounds, the bank said. That’s still greater than British 2008 GDP of about 1.44 trillion pounds. Hester has pledged to cut the balance sheet. RBS rose 7.2 percent to 38.72 pence at 10:25 a.m. in London for a market value of 21.9 billion pounds. Likely 2010 Loss Hester told reporters the bank is likely to make a loss in 2010 and return to profit in 2011. Attracting and retaining staff because of restrictions on bonuses is the biggest business problem that the bank faces, he said. “The road to recovery will be long and difficult, there is no sign of a resumption of the dividend, and the stock overhang of the government stake will remain a millstone around its neck for some time to come,” said Richard Hunter , Head of UK Equities at Hargreaves Lansdown Stockbrokers. The investment bank had done better than rivals, while the retail and commercial units “had their worst year” because of the recession, Hester told reporters. RBS has cut almost 20,000 jobs since Hester was appointed CEO in November 2008, replacing Fred Goodwin . Operating profit at RBS’s investment bank was 6.35 billion pounds compared with a loss of 1.27 billion pounds last year, the bank said. For the fourth quarter, operating profit rose to 1 billion pounds, compared with a 2.8 billion-pound loss in the year-earlier period. Impairments Rise ‘Sharply’ Operating profit at its U.K. consumer banking unit fell 68 percent to 229 million pounds. Profit fell 37 percent at its British corporate lending division to 1.1 billion pounds. The bank took a 335 million pound charge for bodily injury claims and weather claims at its insurance division, where profit fell 90 percent to 58 million pounds. Impairments on bad debt rose “sharply” to 13.9 billion pounds, almost matching the median estimate of 14.17 billion pounds of four analysts surveyed by Bloomberg. Hester, 49, will waive his right to a bonus of 1.6 million pounds amid public anger over such payments after taxpayers bailed out the banking system. The bank said its CEO had “significantly outperformed” his 2009 targets and that he would be rewarded “fairly, appropriately and at market levels.” Executives at Barclays Plc and Lloyds Banking Group Plc are also forgoing bonuses. RBS has fallen 37 percent in London trading since the end of August to yesterday, making it the worst-performer in the five-member FTSE 350 Banks Index , which has fallen 2.8 percent. Barclays, Britain’s second-largest bank, more than doubled second-half profit to 7.5 billion pounds when it reported results. Lloyds Banking Group Plc, Britain’s biggest mortgage lender, reports tomorrow and HSBC Holdings Plc on March 1. To contact the reporter on this story: Andrew MacAskill in London at amacaskill@bloomberg.net

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European Economic Confidence Unexpectedly Worsens After Recovery Stumbles

February 25, 2010

By Simone Meier Feb. 25 (Bloomberg) — European confidence in the economic outlook unexpectedly worsened in February after the euro region’s recovery almost stalled in the fourth quarter. An index of executive and consumer sentiment in the 16 nation using the euro slipped to 95.9 from a revised 96 in January, the European Commission in Brussels said today. Economists projected an increase to 96.4 from a previously reported January reading of 95.7, according to the median of 25 forecasts in a Bloomberg News survey. The euro-area economy may struggle to gather strength after growing just 0.1 percent in the fourth quarter as companies continue to cut jobs, discouraging consumer spending . While European governments are seeking to bolster a recovery, they also are trying to stem investor concern about budget deficits in Greece and other nations, which is pushing the euro lower versus the dollar. “The economic dynamic has definitely weakened over the past months,” said Stefan Bielmeier , an economist at Deutsche Bank AG in Frankfurt. “The recovery will hold up with the economy expanding at a weaker pace . It will be a bumpy path.” The euro declined against the dollar after the data, trading at $1.3496 at 10:01 a.m. in London, down 0.3 percent on the day. The yield on the German 10-year benchmark bond fell 0.2 basis point to 3.11 percent. IMF Forecast Europe’s economy may grow 1.6 percent this year, lagging behind a global expansion of 3.9 percent, the International Monetary Fund said last month. The U.S. economy, the world’s largest, will probably expand 2.4 percent in 2010, the Washington-based IMF forecast. A recovery is already losing some momentum as governments phase out stimulus measures just as rising unemployment and surging energy costs erode households’ willingness to spend. Growth in Europe’s service industry weakened in February and consumers grew more pessimistic. In France, Europe’s third- largest economy, consumer confidence unexpectedly fell in February, the national statistics office said today. European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo told Dublin-based Newstalk radio in an interview broadcast last night that the euro-area economy will show “some uneven behavior” while “big uncertainty” remains. Bank of England Governor Mervyn King said on Feb. 23 that the euro region “appears to have stalled,” threatening U.K. exports. Economic Expansion Loans to households and companies in Europe declined in January from a year earlier after the economic expansion curbed demand for credit, the ECB said today. Unemployment in Germany, the region’s largest economy, increased for a second month in February, separate data showed. Lars Olofsson , chief executive officer of Carrefour SA, said on Feb. 19 that he doesn’t “see any change in the European environment for the next six months at least” after Europe’s largest retailer reported a 70 percent drop in full-year profit. The Dow Jones Stoxx 50 Index of European companies has dropped 8.1 percent this year and Germany’s benchmark DAX index has lost 5.8 percent. The euro has fallen 10.9 percent against the dollar over the past three months on investor concern that a Greek debt crisis may spread across the region. Moody’s Investors Service may lower its Greek debt rating within months unless the government manages to push down the European Union’s largest shortfall, Pierre Cailleteau , managing director of sovereign risk said today in an interview. Standard & Poor’s said yesterday that it may also lower its Greek rating. ‘Must Be Credible’ “Greece must be credible toward markets,” Otmar Issing , the ECB’s former chief economist, said in an interview on Feb. 24. “Then, speculation on Greece’s fall will end.” A 3.2 percent surge in oil prices over the past three months is adding to pressure on companies’ profit margins by making raw materials more expensive. M3 money supply , which the ECB uses as a gauge of future inflation , rose an annual 0.1 percent in January after declining in December. A gauge of consumers’ price expectations over the next 12 months rose to zero in February from minus 2 in the previous month, today’s report showed. That’s the highest since March 2009. An indicator measuring households’ assessment of the economic outlook dropped to minus 12 from minus 9 in January. Companies across Europe are already seeking ways to expand in faster-growing economies to help boost sales. Paris-based Pernod Ricard SA, the world’s second-largest liquor maker, said on Feb. 18 that sales from China will shortly overtake those in Spain, and emerging markets such as Russia are “starting to turn around.” Emerging Markets Schneider Electric SA , the world’s largest maker of circuit breakers, on Feb. 18 forecast a rebound in sales this year led by emerging markets such as China and India. Markets such as Europe remain “uncertain,” Schneider Chief Executive Officer Jean-Pascal Tricoire said on that day. “The start of 2010 has been very positive and confirms our positive assessment of business development for the year,” Elmar Degenhart , CEO of Continental AG , Europe’s second-biggest auto-parts maker, said on Feb. 23. Rising exports helped pull the euro-area economy out of its worst economic slump in more than six decades in the third quarter as households held back spending. The European Union’s statistics office will release a breakdown of fourth-quarter gross domestic product on March 4. “We believe that a healthy global expansion is under way,” said Alan McQuaid , chief economist at Bloxham Stockbrokers in Dublin. “But it will take time to reduce economic slack and repair damaged balance sheets.” The ECB earlier this month kept borrowing costs at a record low of 1 percent to bolster a recovery. The Frankfurt-based central bank next month will decide on a further “gradual” phasing-out of emergency measures introduced to fight the crisis, ECB council member George Provopoulos said. “We will continue to monitor very closely all developments over the period ahead,” he said in an interview on Feb. 19. “The situation is showing signs of normalizing, but we have not yet reached the end of the road.” To contact the reporter on this story: Simone Meier in Dublin at smeier@bloombert.net

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Greece Risks Debt-Rating Downgrade Within Month on Struggle to Trim Budget

February 25, 2010

By Simon Kennedy and Keiko Ujikane Feb. 25 (Bloomberg) — Greece’s debt rating may be cut within a month as it struggles to pare the European Union’s largest budget deficit, driving up borrowing costs and renewing pressure on the euro. Standard & Poor’s said late yesterday it may lower its BBB+ rating by the end of March and Moody’s Investors Service said today it may reduce its A2 grade in a few months. The warnings further complicate the government’s effort to persuade investors that it can slash its fiscal shortfall from last year’s 12.7 percent of gross domestic product. The euro slumped to a one-year low against the yen, Asian stocks dropped and the cost to protect against a default of Greek government bonds climbed on concern that the country may need the EU’s assistance to avoid missing debt payments. Unions yesterday staged a strike to resist Prime Minister George Papandreou ’s drive to slash spending. “It’s getting more difficult than anticipated for the Greek government to implement the spending cuts it promised,” said Susumu Kato , chief economist in Tokyo at Credit Agricole Securities Asia. Further downgrades “may spread sovereign concerns through other European nations,” he said. The country’s willingness to keep funding itself in the commercial bond market is key to S&P’s assessment, the company said. The rating could be pressured by lower profitability at the country’s banks or a decline in public support for the budget plan, it said. EU assistance could help if it was likely to lead to a “sustained reduction” in borrowing costs. Two Notches “We believe that a further downgrade of Greece of one to two notches is possible within a month,” S&P analysts led by Marko Mrsnik in London said in a statement. Pierre Cailleteau, managing director of sovereign risk at Moody’s, said in an interview in Tokyo today it may act “in a few months” if policy makers appear to be deviating from their deficit-reduction plan. At the same time, Moody’s may stabilize its rating if Greece follows through with its austerity measures, he said. “We have to let the government implement its plans,” Cailleteau said. “You can’t expect a government to be able to turn around public finances in a few days.” S&P cut Greece’s rating in December from A- and signaled at the time it may reduce it again from BBB+. Moody’s lowered its rating by one step the same month. ECB Rules If Moody’s cuts its credit rating to the same level as the other major ratings companies, it could exacerbate Greece’s financial distress at the end of this year when the European Central Bank is due to revert to old collateral rules that were loosened during the global recession. Greek government bonds would then no longer be eligible as collateral at the ECB, making it even more difficult for the nation to borrow. The euro dropped to 120.55 yen as of 4:24 p.m. in Tokyo from 122.03 yen in New York yesterday. It earlier touched 120.24 yen, the lowest since Feb. 24, 2009. The single currency has fallen about 6 percent against the dollar this year on concern Greece’s fiscal woes may extend to Spain, Portugal and other European nations seeking to pare budget gaps. Credit-default swaps protecting the debt of Greece were quoted 10 basis points higher at 375 basis points, according to Royal Bank of Scotland Group Plc prices. The contracts have risen 19 basis points this week, according to prices from CMA DataVision in New York. Tear Gas Papandreou’s government is running into opposition at home to its strategy. Air-traffic controllers, customs and tax officials, train drivers, doctors at state-run hospitals and school teachers walked off the job yesterday to protest spending cuts. Police fired tear-gas and clashed with demonstrators in central Athens after a march organized by labor unions. Greek bonds have slumped, driving up borrowing costs, as investors fear the government will fail to meet its pledge to cut its budget gap to 8.7 percent of GDP this year. It aims to cut the deficit below the EU’s 3 percent limit in 2012. The premium investors demand to hold Greece’s 10-year securities instead of Germany’s rose to the most in more than two weeks. The government needs to sell 53 billion euros ($72 billion) of debt this year, the equivalent of 20 percent of GDP. The yield on the country’s two-year note yesterday rose to the most since Feb. 9. EU governments are looking for guarantees that Papandreou will slash spending before they spell out what help they may offer. EU and ECB officials visited Athens this week to verify that budget cuts are being implemented. Additional Measures Under proposals adopted this month by euro-area finance ministers, the Greek government will have to take additional measures to cut its budget gap if it fails to satisfy the European Commission next month that its current strategy is on track. These may include higher value-added tax, a levy on luxury goods, higher energy taxes and spending cuts, they said. “There will be some conditions attached” to European assistance for Greece, Cailleteau said. “I don’t see the evidence that would justify these kinds of assertions that Europe will not help Greece.” German, French and Greek voters are “in denial” about Greece’s ability to get its deficit under control without external aid, Barry Eichengreen , an economics professor at the University of California at Berkeley and author of a 2006 history of the European economy, said in a Bloomberg Television interview yesterday. Finance Minister George Papaconstantinou said Feb. 23 that the government will do “everything it needs to meet” its targets and that any decisions on possible new measures will be announced after talks with European governments. To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Keiko Ujikane in Tokyo at kujikane@bloomberg.net

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Euro Weakens, Greek Bonds Decline on Downgrade Concern; U.S. Futures Drop

February 25, 2010

By Stuart Wallace Feb. 25 (Bloomberg) — The euro weakened to a one-year low against the yen and most stocks fell after Moody’s Investors Service and Standard & Poor’s said they may cut Greece’s rating. Bonds rose, driving German two-year yields to a record low. The yen strengthened against all 16 of the most-traded currencies and the dollar gained compared with 13 at 10:34 a.m. in London. The MSCI World Index of 23 developed nations’ stocks and futures on the Standard & Poor’s 500 Index dropped 0.3 percent. The premium on Greek 10-year bonds over German debt widened to the most since Feb. 8. The warnings by Moody’s and S&P rattled investors who had driven the euro down 8.3 percent against the yen in the past two months on concern Greece’s fiscal woes may spread to other nations in the currency group. Federal Reserve Chairman Ben S. Bernanke testifies to Congress today after saying yesterday that the U.S. economy is in a “nascent” recovery and requires low interest rates to feed demand. “Signs of discomfort with sovereign debt are surfacing, with investors putting upward pressure on interest rates in developed nations in Europe,” Tony Crescenzi , a strategist and fund manager at Pacific Investment Management Co. in Newport Beach, California, wrote in a research note. The cost of protecting Greek government debt from default using derivatives rose 10 basis points to 392 basis points, up from 130 at the end of October. The yield on Greek two-year notes rose 35 basis points to 6.05 percent, up from 1.42 percent at the end of October. Greek Turmoil Greece’s ASE Index slumped 1.3 percent, the biggest decline among 18 western European benchmarks. The premium that investors demand to hold Greek 10-year bonds over German debt widened 11 basis points to 350 basis points, more than four times the average over the last five years. Greece has to repay more than 20 billion euros ($27 billion) of maturing bonds and bills by the end of May, according to data compiled by Bloomberg. A Moody’s downgrade may make it harder for the nation’s banks to fund themselves by making Greek government debt ineligible as collateral for European Central Bank loans. The yield on 10-year Treasuries fell 3 basis points to 3.66 percent, the lowest since Feb. 10. The Treasury plans to sell $32 billion of seven-year notes today, the last of four auctions this week totaling a record $126 billion. The two-year German government bond yield dropped 5 basis points to 0.94 percent, the lowest since at least 1990 when Bloomberg began collecting the data. Xstrata, BASF Europe’s Dow Jones Stoxx 600 Index fluctuated between gains and losses. Xstrata Plc led declines in basic-resource shares, falling 1.6 percent in London. British American Tobacco Plc, Europe’s second-largest largest cigarette maker, declined 2 percent after reporting net income that missed forecasts. Declines were limited as BASF SE, the world’s biggest chemical company, gained 4.4 percent in Frankfurt after saying earnings will improve this year. Royal Bank of Scotland Group Plc rallied 6.2 percent after posting a narrower-than-estimated loss. The MSCI Asia Pacific Index fell 0.8 percent. Toll Holdings Ltd. slumped 18 percent in Sydney after the air-freight and logistics company posted lower profit. Hynix Semiconductor Inc., the world’s second-largest computer-memory chipmaker, fell 2.3 percent in Seoul after Yonhap News reported that creditors will sell as much as 13 percent of the company this year. U.S. Futures The decline in U.S. futures indicated the S&P 500 may pare some of yesterday’s 1 percent gain. Orders for durable goods probably rose in January by the most in four months, indicating manufacturing is powering the U.S. recovery, economists said before a report from the Commerce Department due at 8:30 a.m. in Washington. Another report from the Labor Department may show initial claims for unemployment benefits fell last week. Bernanke said slack labor markets and subdued inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low “for an extended period.” He said the Fed will need to start tightening policy “at some point.” The MSCI Emerging Markets Index fell for a third day, sliding 0.8 percent. Stocks in Kazakhstan , owner of 3.2 percent of the world’s oil reserves, dropped 2.3 percent. Russia’s Micex index declined 0.7 percent. South African bonds rallied, cutting yields to a five-month low on the benchmark 13.5 percent bond due September 2015, as smaller-than-expected power-price increases boosted the odds of a cut in interest rates. The rand weakened 0.7 percent against the dollar. Turkey’s ISE National 100 stocks index rose for the first time in four days, climbing 1.4 percent, on optimism a meeting today between Prime Minister Recep Tayyip Erdogan , President Abdullah Gul and army chief Ilker Basbug will ease tensions between the government and the army after police detained about 50 serving and retired officers in nationwide raids this week. Options trading showed investors are betting the lira will weaken more than any other currency, based on a one-month risk- reversal rate of 3 percentage points. The currency was 0.1 percent lower against the dollar today. Copper declined 0.9 percent to $7,085 a metric ton on the London Metal Exchange as the dollar strengthened. Silver fell 1.5 percent in London and April crude oil declined 0.7 percent to $79.48 a barrel on the New York Mercantile Exchange. To contact the reporter on this story: Stuart Wallace in London at swallace6@bloomberg.net

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Nokia CEO, Stung by IPhone, Aims to Outdo Jobs

February 25, 2010

By Diana ben-Aaron Feb. 25 (Bloomberg) — Sitting in a meeting room that looks out on a frozen Baltic bay, Nokia Oyj Chief Executive Officer Olli-Pekka Kallasvuo mentions a biography he’s reading. It’s about Mauno Koivisto , the president who butted heads with his own Social Democratic Party en route to opening Finland’s 1992 bid to join the European Union. “He didn’t always pay too much attention to what people were saying,” Kallasvuo says, warming to the point. “He believed in what he was doing.” Like the former president, Kallasvuo, 56, has had to develop a thick skin in his struggle to pull Nokia out of its swoon, Bloomberg Markets reports in its April issue. Since “OPK,” as he’s known inside the company , took over the world’s largest mobile phone maker in 2006, he has been hit by challenges on every front. Nokia, which put a Web browser on a phone during the Netscape era in 1996 and emerged as the must- have brand after its sleek 8110 model appeared in the 1999 movie “The Matrix,” has stumbled in modern smartphones. Apple Inc. ’s iPhone has been a particular bane. In 1999, under CEO Jorma Ollila , Nokia reached the highest market value of any European company: 203 billion euros ($275 billion at the Feb. 24, 2010, exchange rate). In 2007, the one-time rubber and paper maker from the icy realms of Finland posted a record 7.2 billion euro profit . By 2009, earnings had shrunk 88 percent to 891 million euros. Nokia shares tumbled 66 percent from 28.60 euros on Nov. 7, 2007, to 9.84 euros on Feb. 24. Who’s the Biggest? Apple CEO Steve Jobs added to the pain in January. He proclaimed his company to be the world’s biggest mobile device maker by revenue, saying that iPhones, iPods and laptops made up most of Apple’s $15.68 billion in sales during the fiscal first quarter that ended on Dec. 26, 2009. Jobs’ remark was enough to set the “ Nokia Conversations ” blog ablaze with comments — some agreeing that the U.S. upstart had an edge, at least in style points. “I’ve been pretty down on the Nokia story for a while, partly because of their inability to come up with new devices,” says Jeremy Gleeson , a London-based fund manager at AXA Framlington , who sold his Nokia shares in mid-July. “Their best days are behind them, and it’s going to take a lot to get them back on track.” Kallasvuo is clawing back in smartphones, the palm-sized devices that typically cost $200 to $700 and can be used to place a call, edit a document or download a TV show. Smartphones Industrywide smartphone sales are forecast to surge 60 percent from 2008 to 2010 to account for $80 billion of the $188 billion handset market, according to research firm Gartner Inc. The day after Jobs took his swipe, Nokia reported fourth- quarter sales of 8.18 billion euros ($11.24 billion) in its devices division, which, unlike Apple, has only one laptop model. “Nokia is the world’s largest maker of mobile devices, using the generally accepted and established definition,” Kallasvuo told Helsingin Sanomat , Finland’s biggest newspaper. Nokia’s share of smartphones worldwide rebounded to 40 percent in the fourth quarter from 35 percent in the third. Net income jumped 65 percent to 948 million euros, sending the stock up 9.9 percent on Jan. 28. Smartphones make up about 15 percent of Nokia’s stable and contribute roughly half of its annual handset gross profit of 9.27 billion euros, according to Credit Suisse Group AG. Playing Catch-Up Kallasvuo is playing catch-up. In 2007, when Apple unveiled its touch-screen iPhone, most Nokia models featured 12-key telephone keypads. When Nokia introduced its touch screens the next year, they had cheaper hardware and menus designed for older models. “What takes two to three steps to do on an iPhone or BlackBerry takes four to five on Nokia’s N97,” Francisco Jeronimo , a London-based analyst for research firm IDC , says. Nokia has also struggled to offer the breadth of software that Apple fans enjoy. In January, Jobs bragged that a user had downloaded the 3-billionth iPhone application. “Nokia smartphones don’t have the applications that iPhone and Android do,” says Yu Ji, a T-Mobile USA dealer in the Boston suburb of Burlington. “There’s no wow feature. If I’m going to spend that kind of money, there’s no reason I wouldn’t get an iPhone.” Back in the Game Meantime, Research In Motion Ltd. ’s BlackBerry remains the top-selling QWERTY keyboard phone brand. And products by HTC Corp. , Motorola Inc. and others using Google Inc. ’s Android software are emerging as alternatives to the iPhone. At the end of 2009, almost half of Nokia’s smartphones still had telephone keypads only. Kallasvuo says he has a plan to put Nokia, based in the Helsinki suburb of Espoo, back in the game. The CEO, whose square face and black hair bring to mind Garrison Keillor of radio variety show “A Prairie Home Companion,” says Finland’s biggest company is changing from a phonemaker to an Internet leader that connects people through social networking and services tied to a user’s location. Touch-screen smartphones are just the beginning. “We’re now in a combination of several industries: mobility, Internet, PCs, media, content,” he says. Beefing Up In July 2008, Kallasvuo forked out $8.1 billion for mapmaker Navteq so Nokia wouldn’t have to license maps from Tele Atlas NV or Google to let customers search for the nearest sushi restaurant. He has bought Loudeye Corp. for its music catalog, Cellity AG to manage contacts and Twango Inc. for photo sharing. Downloads on Nokia’s Ovi Store — the word means door in Finnish — are up to a million a day. On Feb. 15, Nokia said it would work with Intel Corp. to make it easier to create applications for devices — from phones to tablet computers — from various manufacturers. “The No. 1 priority is to improve the user experience,” says Alberto Torres , whom Kallasvuo tapped to lead design and testing for new phones and software. Torres says his boss isn’t shy in meetings. “One of his favorite sayings is ‘That’s not enough,’” Torres, 44, says. Marko Ahtisaari , 41, who is in charge of the look of everything from packaging to software, says it’s imperative to make smartphones simple and “kung fu smooth.” Recruiting in U.S. Kallasvuo isn’t hanging everything on smartphones. Altogether, Nokia shipped about 431.8 million phones last year to more than 150 countries, including Bangladesh and the Republic of the Congo. A 20-euro model has a flashlight for villages with scarce electricity. The $5,000-and-up Vertu line, sold in jewelry stores , features titanium and sapphire crystal. The CEO is pledging a comeback in the U.S., where the once- hot Nokia brand is offered with cheap prepaid calling plans. He jets to the U.S. almost monthly to meet executives at U.S. headquarters in White Plains, New York. Nokia developers work in San Diego. Researchers are in Silicon Valley and Hollywood, California, and near the Massachusetts Institute of Technology. One of Kallasvuo’s four mobile phones has a U.S. number. “We’ve been very actively recruiting from Internet services: the Yahoos, Microsofts and Googles,” says Niklas Savander , 47, one of two Nokia services chiefs. “It is of course frustrating for us who have long been in the industry that newcomers like Apple and RIM needed to teach us how to do it.” Taking on Apple and Google on their turf is one way to revive Nokia’s buzz. In 1976, the year Jobs co-founded Apple , Nokia was making toilet paper and boots for Finns and phone cables for the Soviet Union. ‘Friendly But Competitive’ Ollila shed nonphone businesses, pushed industrial design and built factories in Hungary and China . Ericsson AB and Motorola couldn’t keep up. Nokia customers embraced their phones as fashion statements. The chrome-plated 8810 designed by Frank Nuovo was a style icon. In 1998, Nokia became the world’s top mobile phone maker by market share. During those heady days, Kallasvuo returned from two and a half years of running Nokia’s Americas business from Dallas. “I loved that,” he says. “I would have stayed, but the assignment was not forever.” The U.S. tech industry was a far cry from Finland. Biology teacher Kaarina Valkealahti recalls young Olli-Pekka riding his bicycle past pastel-tinted houses in Raahe , about 175 miles (280 kilometers) from the Arctic Circle. “He was a very determined student, friendly but competitive,” she says. Not a fan of cold nor of four-hour twilit days, Kallasvuo escaped south to study law at the University of Helsinki in 1972. ‘Earn My Living’ “I just wanted to earn my living and not disappoint my parents,” Kallasvuo says before pausing. “I’m not really comfortable talking about myself.” Kallasvuo joined Nokia’s legal department in 1980 and made an immediate impression on Kari-Pekka Wilska , who was running Nokia’s mobile phone business. “KP” was upset at first that headquarters had sent a rookie to help draft an agreement with a Swedish company bringing its managers on as partners. “When I was walking him out, he stopped me and said, ‘If I were heading this business, I wouldn’t sign that contract,’” Wilska says, recalling that Kallasvuo didn’t like the partnership idea. Wilska backed out of the partner deal and brought on the Swedes as employees instead. “I never forgot that, because it’s very rare that you get good business advice from a legal adviser,” he says. ‘A Kind of Jockeying’ Kallasvuo shifted to finance in 1988. The board made him chief in 1990. When Ollila became CEO in 1992, he and his reserved CFO slimmed Nokia to its mobile phone units and traveled to convince investors beyond Finland to buy its new shares. “Olli-Pekka told me they talked every day at the same time for like 10 years,” says Mary McDowell , 45, an American executive vice president at U.S. headquarters and Nokia’s highest-ranking non-Finn. McDowell, who spent 17 years at Compaq Computer Corp. and Hewlett-Packard Co., says Nokia embodies Nordic taboos against overt power displays. “In American companies, there’s a kind of jockeying: how am I doing, here’s my new car, here’s my new house on the golf course,” she says. “You don’t see any of that here.” Kallasvuo fit the egalitarian mold. In February 2007, less than a year after he took over, some employees in Finland walked out to protest job cuts and reduced bonuses. ‘Behind the Screen’ “Engineers and programmers went on strike, which was remarkable in Finland,” says Ari Hakkarainen , a former Nokia manager and author of a history called “ Behind the Screen .” Kallasvuo apologized in a video blog entry, saying the rules would be rewritten, and gave up part of his annual bonus. “People responded very well, and it was immediately solved,” Hakkarainen says. Kallasvuo had bigger troubles outside Finland. Customers increasingly viewed Nokia’s bar-style phones as boring. Motorola’s Razr flip model pushed Nokia phones off U.S. shelves. BlackBerry grabbed Wall Street and the corporate market. Then came Apple, which, as Jobs promised, reinvented the phone. Users who expected a quick response were disappointed. British actor Stephen Fry , a self-described Nokia fan, called the company’s first high-end touch-screen model “a crushing disappointment.” “No one who has used an iPhone would do anything other than laugh, weep or bray with contempt,” he wrote on his blog in June. Plowing Ahead Kallasvuo plowed ahead. He added phone features to a minor line of tablet computers that connected to the Internet via Wi- Fi. The resulting N900 runs several applications simultaneously on its touch screen and also has a slide-out keyboard, countering some Apple shortcomings. “The screen has a lot more resolution than the iPhone; the keyboard is much better than Motorola’s Droid,” Silicon Valley radio show host Leo Laporte said in December. Kallasvuo is also fighting in court. Nokia sued Apple in October, saying that the U.S. company infringed patents and seeking back royalties on every iPhone sold. Apple countersued in December, saying Nokia infringed its patents. The two have filed complaints with the International Trade Commission to stop the sale of each other’s products in the U.S. Active Users As the legal battles play out, Kallasvuo is tracking how many of Nokia’s more than 1 billion customers tap the Ovi portal. He wants 300 million active users by the end of 2011 so he can sell them more downloads and show them ads. Video screens around the company remind workers of the goal, which influences 10 percent of their individual bonuses. Nokia had about 65 million active users in mid-February after adjusting its measurement methods. McDowell notes that bonuses now depend on the success of complete products rather than just on finishing hardware on time. While Kallasvuo has his sights on competitors like Apple, he talks more willingly about what’s going on inside Nokia. “There is so much commentary,” he says of posts — both signed and unsigned — on internal blogs that are reserved for employee comments. “People can say a lot without fear, and they say stuff because they want to change Nokia.” The company extended the dialogue to outsiders in April 2008 with the Nokia Conversations blog, which is available to anyone. One comment posted in January observes: “Why are Europeans and other high-income populations abandoning Nokia and buying Apple? Because they have better phones.” After meeting with Bloomberg News in December, Kallasvuo bustled off to talk about software with 250 employees. “These people are not shy,” he says. Nor are investors. “A year from now, iPhone, Android, RIM will have evolved,” says Kulbinder Garcha , a London-based analyst at Credit Suisse. “Investors don’t want to be having the same conversation next year about whether Nokia can come back.” To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

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Delphi Announces Leadership Changes

February 25, 2010

CFO Sheehan to Pursue New Opportunity; Stipp to Be Appointed Acting CFO

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India’s Economy May Grow 8.2% Next Year, Creating Room for Stimulus Exit

February 25, 2010

By Cherian Thomas and Kartik Goyal Feb. 25 (Bloomberg) — India’s economic growth may accelerate to as much as 8.2 percent in the year starting April 1, providing room for a “gradual rollback” of fiscal stimulus, the finance ministry said before tomorrow’s budget. “The economy has posted a remarkable recovery from the global recession,” according to the annual Economic Survey prepared by officials advising Finance Minister Pranab Mukherjee , which was released in New Delhi today. “The recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last 15 to 18 months.” Mukherjee may raise excise tax by 2 percentage points and the service tax to 12 percent from 10 percent, Goldman Sachs Group Inc. said last week. India and China, the world’s fastest growing major economies, are withdrawing stimulus as consumer demand strengthens, stoking inflation and asset bubble concerns. India’s benchmark wholesale-price inflation accelerated to 8.6 percent in January, the fastest pace since October 2008. In China, where the economy grew 10.7 percent last quarter, property prices have surged 9.5 percent in January, the most in 21 months, as total new loans surged to 1.39 trillion yuan ($204 billion), more than in the previous quarter combined. Sixty percent of India’s inflation reading is contributed by food items after monsoon rains were deficient last year, the ministry said. Since December 2009, there have been signs of food-price inflation spreading to manufactured goods and services, the ministry said. “Inflation management therefore should involve controlling the demand situation as well as reining in inflationary expectations through various monetary measures,” the Indian finance ministry said. Budget Deficit Mukherjee is scheduled to unveil the budget for the fiscal year starting April 1 tomorrow at 11 a.m. in parliament in New Delhi. He had cut excise tax by 4 percentage points and stepped up government spending on roads and power since December 2008 to support the economy amid a global recession. The budget deficit may widen to 6.5 percent of GDP in the year ending March 31, a 16-year high, the ministry estimated today. India’s central bank governor Duvvuri Subbarao last month said the government must withdraw fiscal stimulus steps and cut the budget deficit to help cool inflation. The central bank, on its part, last month raised the proportion of deposits that lenders need to maintain as cash reserves to 5.75 percent from 5 percent to contain inflation. India must cut its debt to 68 percent of GDP by March 2015 from the current 82 percent, the ministry said, citing recommendations of the 13th Finance Commission, a government panel appointed to suggest a roadmap to reduce government debt. Savings Rate Mukherjee can start to reverse tax cuts as India’s $1.2 trillion economy may “breach” the 9 percent growth pace by March 2012, the finance ministry said, citing the country’s savings rates that now match those in Japan, South Korea and Malaysia. The economy may grow 7.2 percent in the year ending March 31, the nation’s statistics department said today. India’s savings rate is at 32.5 percent of gross domestic product compared with 28 percent in Japan, 30 percent in South Korea and 38 percent in Malaysia, according to the report. “Since these indicators are some of the strongest correlates of growth and do not fluctuate wildly, they speak well for India’s medium-term growth prospects,” the ministry said. “The savings rate is likely to rise further as the demographic dividend begins to pay off in India.” The finance ministry estimates 440 million Indians out of a total population of 1.2 billion are under the age of 18. India’s population will rise to 1.7 billion by 2050 and will overtake China as the world’s most populous nation, according to the United Nations. Rising Demand “It is entirely possible for India to move into the rarified domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years,” the finance ministry said. Rising demand helped Tata Motors Ltd. , India’s largest truckmaker, post a 68 percent gain in sales in the three months ended December, while sales at Bajaj Auto Ltd, the second- largest motorcycle maker, more than doubled in January. Still, expansion in gross capital fixed formation, a proxy for investment growth, is at 5.2 percent, below the economic growth rate. That makes it necessary to watch the growth recovery in private investment in the fiscal third and fourth quarters while scaling back fiscal stimulus, the ministry said. To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net ; Kartik Goyal in New Delhi at kgoyal@bloomberg.net .

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Lilly CEO Tests Assembly-Line Drug Search to Offset $10 Billion Sales Loss

February 25, 2010

By Arlene Weintraub and Meg Tirrell Feb. 25 (Bloomberg) — Shortly after he became chief executive officer of Eli Lilly & Co. in April 2008, John Lechleiter , a former lab scientist, sent his senior executives a gift. It was a small digital clock counting down, second-by- second, to Oct. 23, 2011. That’s the day the drugmaker’s $5- billion-a-year schizophrenia pill, Zyprexa, goes off patent. Next to the countdown were four words: “Do what we do.” The message: Lilly must pick up the pace of drug development so it can replace revenue lost when three top- selling medicines lose patent protection in the next few years, Lechleiter said in an interview in his Indianapolis office. The company stands to lose $10 billion in annual sales to generic competition by the end of 2016, almost half of its 2009 revenue, one of the steepest percentage losses resulting from patent expirations among the six biggest U.S. drugmakers . Pfizer Inc. , the buyer of Wyeth, and Merck & Co. , which acquired Schering-Plough Corp., turned to consolidation to help solve their patent issues, to mixed reviews from investors. Lechleiter said he’s taking a different path, even as Lilly’s stock fell 11 percent last year. His push isn’t to get bigger, it’s to get faster, he said. When Lilly faced challenges before, “each and every time the answer has been new, innovative products,” said Lechleiter, whose office wall displays the Periodic Table of Elements, the foundation tool for chemists, his first career as a Ph.D. from Harvard University in Cambridge, Massachusetts. Two-Product Mission Lechleiter’s mission is to introduce two new products a year starting in 2013, helped by a restructured development process based on an assembly line of tasks, roughly akin to the automobile manufacturing process. Each step is designed to work in concert to make the final product quickly and efficiently. Shareholders say they aren’t convinced, an opinion supported by the stock’s worst-in-the-industry performance last year in the Standard & Poor’s 500 Pharmaceuticals Index , which rose 14.2 percent in 2009. “Investors seem to price Lilly’s stock as if it will never develop another drug,” said Michael P. Krensavage , manager of Krensavage Partners LP, a hedge fund that owns Lilly shares, in a telephone interview. Lilly rose 8 cents to $34.04 yesterday in New York Stock Exchange composite trading. The shares have dropped 4.7 percent in 2010. Lilly suffered two high-profile failures in July and August, when a multiple sclerosis drug candidate and an osteoporosis product fell short of expectations in clinical trials. Lilly’s blood-thinner Effient, approved in July, only pulled in $27 million in revenue in 2009, competing against Bristol-Myers Squibb Co. ’s $6 billion-a-year Plavix. ‘Late-Stage Research’ Lechleiter’s efficiency-focused initiative is “clever, but how much money will it save?” said Tony Butler , an analyst at Barclays Capital in New York who recommends holding Lilly stock. “We need to see the fruits of late-stage research in risky areas like Alzheimer’s.” Butler is one of 12 analysts who rate Lilly as a hold, according to Bloomberg data. Six recommend selling the stock, and five rate it as a buy, the data show. “There’s always the risk — will these molecules make it or not?” Lechleiter said, referring to Lilly’s 64 drugs in development. “But my response and, I believe, Lilly’s has to be, ‘Where do we find and how do we bring forth new innovation as quickly and cost-effectively as possible?’ That’s what we’re working on.” As a first step, Lechleiter in September placed every department that plays a role in turning molecules into medicines under one roof, from the people who assess side effects to those who deal with the U.S. Food & Drug Administration in getting final marketing approval. Intent on Speed The unit, dubbed the Development Center of Excellence, is intent on speed and willing to try new strategies, Lechleiter said. While testing drugs is usually carried out in three phases, Lilly plans to use just two in some cases. Last year, instead of having one clinical trial determine the best dose for a new diabetes drug, then a second to determine effectiveness, Lilly tested several doses at once. Statisticians assessed the data in real time, allowing researchers to drop dosages that weren’t working. Once the best dose was known, researchers tested it on the same group of patients, rather than recruiting new ones for a separate study. The company may save 14 months on projects streamlined in this manner, said Timothy J. Garnett , Lilly’s chief medical officer. ‘Critical Chain’ Lilly is also adopting a technique known in industrial manufacturing as “critical chain,” which prioritizes individual tasks to save time, Garnett said in an interview. Previously, people working on a 30-page report might also be involved in other projects at the same time, so they might be given three weeks to return a finished project. Now, they may get seven days to complete the task, with specific instructions on their schedule and which person in the chain they need to pass the project along to next. “If we say, ‘you only have a week, but that’s your No. 1 priority,’ it will only take a week. There’s a self-fulfilling element to it,” Garnett said. In the past, Lilly’s drug-development process worked under a single umbrella system. Lechleiter has created five independent business units with top managers of each responsible for data and determining whether they want to bring products through clinical development. In this, Lilly is joining Pfizer and Bristol-Myers, both based in New York, in trying to narrow potential product targets. Lilly’s units focus on cancer, diabetes, established markets, emerging markets and animal health. ‘Giving License’ “We’re trying to give license to our discovery and development scientists to really think about how you do these things in different ways,” Lechleiter said. “We’ve got to see timelines speed up.” Critics say critical chain may be a bad fit with drugmaking. Assembly line processes “work better in jobs that are predictable,” said Richard “Erik” M. Gordon , assistant professor at the University of Michigan’s Ross School of Business in Ann Arbor. The process of developing a medicine is filled with uncertainties, and timelines can be thrown off- kilter by external forces, such as delays at the FDA. For Lechleiter, the changes at Lilly reflect a lifetime built around his fascination with the promise of science. He received his bachelor’s degree from Xavier University in Cincinnati, graduating summa cum laude with a degree in chemistry in 1975. He received his doctorate in 1980. ‘Loved Problem Solving’ Paul A. Wender , now a chemistry professor at Stanford University near Palo Alto, California, was Lechleiter’s mentor and Ph.D. adviser at Harvard. He remembers a young man who “loved problem-solving.” Wender’s lab was focused on reducing the number of steps needed to make new compounds — experience Lechleiter found useful when straight out of graduate school he joined Lilly’s agricultural division making herbicides. One of Lechleiter’s first challenges was to develop a more cost-effective way to make a particular molecule, Wender recalled. “He solved that problem, and simultaneously developed an enabling technology that allowed others to progress with their research,” Wender said. Three years after he joined Lilly, Lechleiter’s career path changed. He was pegged as a budding manager and placed on a track designed to broaden his skills. Built Persona Since becoming CEO, Lechleiter has developed a persona as a communicator within the company. He maintains two blogs on Lilly’s intranet and attends Wednesday morning meetings where Lilly scientists present their work. Though it has been more than two decades since he worked at a lab bench, he said he’s not afraid to ask a question or two. “Usually I preface it by saying something like, ‘Excuse me if I’m really ignorant,’” Lechleiter said. Tall (6 feet, 1 inch) and affable, Lechleiter uses his hands when making a point, and smiles as he touts Lilly’s pipeline. He’s a devoted fan of the Indianapolis Colts , sharing that passion with many of his employees. The company dyed the water in the fountain in front of its headquarters the hometown team’s shade of blue the week before the Feb. 7 Super Bowl in support of the Colts’ effort to win a National Football League championship. Lilly Endowment Lechleiter’s Indianapolis pride may put him in good stead with the company’s No. 1 shareholder: the Lilly Endowment , a foundation that supports the city and state through charitable grants. The Endowment, founded in 1937 by the Lilly family through gifts of company stock, owns 135.7 million shares, or about 12 percent of Lilly, according to Bloomberg data. The CEO is also unafraid to challenge Wall Street. Lilly spent 21 percent of revenue on research and development in the most recent quarter — outpacing the industry’s average R&D spend, which is closer to the mid-teens. “A lot of investors say: ‘Unless you cut back, you may be spending 24 percent of sales on R&D,’” Lechleiter said. “I say: ‘So what? That’s what we’re here to do.’” Meanwhile, Lechleiter’s Zyprexa countdown clock keeps ticking. He’s got about 600 days to prove his strategy will help cushion Lilly when it hits the patent cliff. To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net ; Arlene Weintraub in New York at Aweintraub1@bloomberg.net

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Yanukovych’s Inauguration Sets Stage for Parliamentary Battle With Premier

February 25, 2010

By Daryna Krasnolutska and Kateryna Choursina Feb. 25 (Bloomberg) — Viktor Yanukovych today will be sworn in as Ukraine’s fourth president since the collapse of the Soviet Union two decades ago, eradicating the memory of his first bid for the post in 2004 that triggered the Orange Revolution. Yanukovych, 59, will receive a blessing at the Kyiv Pechersk Lavra monastery and will be inaugurated in the parliament at about 10 a.m. He’ll later meet foreign guests including U.S. National Security Adviser James L. Jones and European Union foreign policy chief Catherine Ashton . Russia will be represented by parliamentary speaker Boris Gryzlov and President Dmitry Medvedev ’s chief of staff Sergei Naryshkin . The new president beat Prime Minister Yulia Tymoshenko in the Feb. 7 runoff election and, unlike five years ago, survived a court challenge against the result. He now must piece together a majority to remove his rival from the premiership. As president, he can replace the foreign and defense ministers and with the backing of 300 deputies would also be able to oust the central bank governor. Tymoshenko yesterday reiterated her refusal to form a coalition with lawmakers loyal to Yanukovych. “Tymoshenko is now doing her best to hamper Yanukovych’s attempts to set up a new majority,” said Anastasia Golovach , an analyst at Renaissance Capital in Kiev. “It is difficult to predict when Yanukovych will be able to set up a new coalition. I think it will be next week. If by the end of next week he has reached a dead end, he will try to push early parliamentary elections.” The prime minister has refused to concede she was beaten by her rival in the Feb. 7 presidential election and claims the results were falsified. The premier retracted an appeal to the Higher Administrative Court after a one-day hearing, accusing it of being biased. New Majority Yanukovych said on Feb. 21 he hopes a new majority will be created this week. The current coalition of 244 seats includes Tymoshenko’s bloc, outgoing President Viktor Yushchenko ’s bloc and parliamentary speaker Volodymyr Lytvyn ’s party. Yanukovych, with 171 seats, will need to secure 27 seats from the communist party, 20 seats from Lytvyn’s party and at least 8 lawmakers from Tymoshenko or Yushchenko’s blocs for a majority. The parliamentary tussle is a far cry from the demonstrations that characterized the Orange Revolution. Yanukovych was initially declared winner in the 2004 election, provoking millions to take to the streets in protest at what they considered falsified results . The Supreme Court canceled the outcome and called a third round, which brought Viktor Yushchenko into office with Tymoshenko as his partner and first prime minister. Yanukovych has campaigned to erase his reputation as favoring Russia over the West and stressed that he is as enthusiastic about integration into the European Union as Tymoshenko. He also pledged to set up a stable government. Ukraine’s economy needs political stability to combat an economic recession, which is the deepest since 1994, and restore investor confidence. The hryvnia lost 42 percent against the dollar since September 2008 and was the world’s second worst performer after the Venezuelan Bolivar. The yield on Ukraine’s 2016 Eurobond fell 18 basis points to 10.07 percent at 8:33 a.m. in Kiev. The credit default swap spread on the country’s five-year debt narrowed to 936 basis points yesterday from 944 the previous day, according to Bloomberg data. A narrower CDS spread signals improved investor perceptions of credit risk. Ukraine’s benchmark index of stocks is up 23 percent this year, and soared 90 percent in 2009. To contact the reporters on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net ; Kateryna Choursina in Kiev at kchoursina@bloomberg.net

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General Motors Plans to Shut Hummer After China’s Government Blocks Sale

February 25, 2010

By Katie Merx Feb. 25 (Bloomberg) — General Motors Co. said it will close Hummer after Chinese regulators blocked Sichuan Tengzhong Heavy Industrial Machinery Co. ’s purchase of the brand, whose military-style vehicles clash with government policy. A Tengzhong purchase of Hummer would have bucked China’s promotion of fuel-sipping small cars, which includes cutting the sales tax on vehicles with engine displacements of less than 1.6 liters. The H2 Hummer has a 6.2-liter V-8 engine . “The government still wants overseas acquisitions as long as it fits into its plans,” said Wang Liusheng , Shenzhen-based analyst at China Merchants Securities. “This is a standalone case.” Winding down the brand will take several months, Nick Richards , a GM spokesman, said yesterday. Some of the 3,000 people now employed at Hummer work on other vehicles, so GM doesn’t know how many jobs will be lost, he said. Tengzhong hasn’t provided China’s Ministry of Commerce with a reasonable purchase plan and the government seeks to encourage renewable, green and environmentally friendly energy consumption, Yao Jian , spokesman for the ministry, said at a briefing today in Beijing, without elaborating. Tengzhong’s proposal failed to provide information about its investment model and fund raising plans, Yao said. ‘Doesn’t Fit’ “The Hummer brand was very much a product of its time,” said Aaron Bragman , an analyst at IHS Global Insight in Troy, Michigan. “In today’s much more environmentally conscious world, it’s a brand that just doesn’t fit in.” The company had planned to finance the deal using cash and loans, Chief Executive Officer Yang Yi said in June. He didn’t say how much the SUV-maker would cost. Chinese and Western banks are backing away from funding the deal, the New York Times reported yesterday, citing people close to the transaction. Tengzhong was “unable to obtain clearance of the transaction from the Chinese regulators within the proposed deal time frame,” according to a statement from the Chengdu-based company. The sale was worth $150 million, people familiar with the matter said on Oct. 8, a day before GM and Tengzhong announced a deal. Bridge Parts Tengzhong, a closely held manufacturer whose products include bridge parts, would have vaulted into the passenger-auto industry by buying Hummer. The company had said it wanted to expand the unit into China and other markets outside the U.S., which accounted for about two-thirds of Hummer’s sales under GM. Richards, the Hummer spokesman, said GM would consider “viable alternatives for all or part of the brand during wind down.” GM also had said in December it would shut Saab, only to revive talks and reach an agreement with Spyker Cars NV on Feb. 23. Unloading Hummer was part of GM’s plan to cut its U.S. brands to four from eight after bankruptcy. Absent a last-minute buyer Hummer will join Saturn and Pontiac in being shut as GM focuses on its top-selling domestic vehicle lines. China is encouraging automakers to build more fuel- efficient cars including hybrids to help win sales overseas and to reduce oil imports and pollution at home. Incentives for smaller vehicles combined with rural subsidies boosted nationwide sales in China last year to 13.6 million, helping it supplant the U.S. as the world’s largest auto market. Government Agency A Chinese government agency indicated that it wouldn’t give approval for Tengzhong to buy Hummer, said three people briefed on the deal, who asked not to be identified because the talks weren’t public. GM first said it planned to sell Hummer at its June 2008 annual meeting as record fuel prices prompted the biggest U.S. automaker to focus on developing more fuel-efficient cars. U.S. sales for the unit fell 67 percent last year as the economy faltered, GM slid into a 40-day government-backed bankruptcy and Hummer’s fate was unresolved. Hummer sales began in 1999 with the $140,000 H1, a 7,600- pound SUV (3,400 kilograms) patterned after the all-terrain military vehicle popularized for road use by actor Arnold Schwarzenegger , now California’s governor. The 6,600-pound H2 debuted in 2002, followed by the 4,700-pound H3 in 2005. ‘Rest in pieces’ “Closing Hummer simultaneously improves the health of GM, China and the planet,” said Daniel Becker , director of the Safe Climate Campaign at the Center for Auto Safety, an advocacy group in Washington. “Hummer should rest in pieces.” U.S. deliveries for Hummer peaked at 71,524 in 2006, according to Autodata Corp., an industry researcher based in Woodcliff Lake, New Jersey. Last year’s total was 9,046. To contact the reporter on this story: Katie Merx in Detroit at kmerx@bloomberg.net ; Stephanie Wong in Shanghai at swong139@bloomberg.net

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France Telecom Full-Year Profit Beats Analysts’ Estimates on IPhone Demand

February 25, 2010

Feb. 25 (Bloomberg) — France Telecom SA , the country’s biggest phone company, posted better-than-expected full-year profit, aided by strong demand for Apple Inc.’s iPhone. Adjusted net income fell to 4.85 billion euros ($6.53 billion) from 5.18 billion euros a year earlier, the Paris-based company said in an e-mailed statement today. Analysts had predicted profit of 4.6 billion euros, the average of 31 estimates compiled by Bloomberg. Revenue declined to 45.94 billion euros from 47.7 billion euros. France’s largest phone company is looking to make peace with unions angered by a series of employee suicides and drive growth in emerging markets such as Africa. New Chief Executive Officer Stephane Richard , whose appointment has been welcomed by labor groups, takes over on March 1. “The group’s performance in 2009 confirms the strategy undertaken in 2005 to position the group as an integrated operator,” Chairman Didier Lombard said in the statement. This month, BT Group Plc, the U.K.’s biggest fixed-line operator, said earnings rose 11 percent in the fourth quarter before interest, taxes, depreciation, amortization and costs to cut jobs. On Feb. 4, Vodafone Group Plc, the world’s largest mobile-phone company, raised its full-year cash flow forecast, on cost cuts and rising sales in emerging markets. France Telecom said it is proposing an annual dividend of 1.4 euros per share. For Related News and Information: France Telecom relative value: FTE FP RVC France Telecom revenue breakdown: FTE FP PGEO Stories on European telecoms: TNI EUROPE TEL BN Today’s top technology stories: TTOP

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Fed Fails to Get Credit-Default Swap Users to Accept Clearinghouse Target

February 25, 2010

By Shannon D. Harrington and Matthew Leising Feb. 25 (Bloomberg) — The biggest credit-default swaps investors oppose targets for clearing trades as regulators attempt to curb risk in the $25 trillion market. Pacific Investment Management Co., BlueMountain Capital Management LLC and AllianceBernstein LP are among asset managers and hedge funds that won’t agree to specific goals before the Federal Reserve Bank of New York’s March 1 deadline requiring them to outline the industry’s next steps to move swaps through clearinghouses, according to people familiar with the matter who declined to be identified because the talks are private. While the New York Fed prodded JPMorgan Chase & Co., Deutsche Bank AG, Goldman Sachs Group Inc. and other dealers into clearing more than 90 percent of eligible trades by the end of 2009, their clients are resisting on concern that the potential added costs would outweigh benefits. Clearinghouses are designed to contain losses if a major dealer or investor collapses. Investors “have a fiduciary duty to their clients,” said Brian Yelvington , head of fixed-income strategy at Knight Libertas LLC, a broker-dealer in Greenwich, Connecticut,. “If they have any doubts as to the efficacy of a program or as to the safety of money involved in such a program, they can’t really do it.” Bear Stearns, Lehman The Fed demanded the industry clear the privately negotiated derivatives when the near-collapse of American International Group Inc. and Bear Stearns Cos. and the bankruptcy of Lehman Brothers Holdings Inc. in 2008 sparked concern that a surge of unregulated trading threatened to create a cascade of failures. The asset managers, while backing efforts to broaden the use of clearinghouses, want assurances that cleared trades would be protected under bankruptcy laws, the people said. They’re also concerned they may be saddled with collateral costs that are double or triple what they’re paying now because they could lose benefits now granted by prime brokers that give credit for offsetting trades, the people said. For example, hedge funds and other asset managers often will perform trades that seek to profit from price dislocations between index contracts and swaps on companies included in the index. Prime brokers typically will demand collateral on the net amount at risk from offsetting trades. Tying Up Cash If one leg of the trade were required to be cleared, while the other contracts aren’t eligible, fund managers may be forced to increase the amount they have to post, tying up cash, the people said. The New York Fed has led regulators including the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, the U.K.’s Financial Services Authority and Germany’s Federal Financial Supervisory Authority in seeking increased transparency and less risk from over-the-counter derivatives markets. Some $605 trillion in contracts were outstanding at the end of June 2009, according to the Bank for International Settlements. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on or hedge a company’s ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Clearing More Trades Dealers have been clearing a growing number of trades between themselves. By the end of 2009, $5.1 trillion of the $5.5 trillion in contracts that were eligible had been moved through clearinghouses, Athanassios Diplas , co-chairman of the credit-steering committee for the International Swaps and Derivatives Association, said in a January interview. Diplas is head of systemic risk management for global credit trading at Deutsche Bank in New York. That surpassed a dealer commitment made last year to clear 80 percent of all eligible credit swaps. During a Jan. 14 meeting hosted by the New York Fed, dealers promised to expand the types of contracts that can be accepted by the two leading clearinghouses, which are run by Atlanta-based Intercontinental Exchange Inc. and CME Group Inc . of Chicago. The companies primarily have only been accepting contracts tied to credit indexes, which make up $7.55 trillion, or 30 percent of the outstanding contracts, New York-based Depository Trust & Clearing Corp. data show. Continued Negotiations The group of at least 15 dealers, 9 investment firms and 3 trade associations will commit to continued negotiations with the central bank to resolve obstacles preventing more contracts from being cleared, according to the people familiar with the discussions. David Kaiyalethe, a spokesman for BlueMountain in New York, declined to comment. Pimco spokesman Mark Porterfield didn’t return a telephone call, and AllianceBernstein spokesman John Meyers didn’t return e-mail or phone messages seeking comment. David Girardin , a spokesman for the New York Fed, declined to comment. Derivatives are contracts used to protect against changes in stocks, bonds, currencies, commodities, interest rates and weather. “There is a lot of hassle involved, and it’s costly” to clear credit swaps, said Darrell Duffie , a finance professor at Stanford University in Palo Alto, California. “I don’t think they’ve pointed out any unintended consequences that regulators have overlooked.” Duffie co-wrote a report last month on increasing price transparency in swaps markets and improved oversight with Theo Lubke , the New York Fed official responsible for the central bank’s efforts to curb risks in the derivatives markets. Proposal Before Congress Market participants may also hesitate to make promises before Congress acts on proposed legislation that may force most swaps traders to clear actively traded contracts. “There’s still quite a bit of legislative and regulatory maneuvering before we are left with a standardized clearing mechanism,” Yelvington said. “They don’t know six months, nine months down the road what it’s going to look like. So if they commit to something now, they essentially commit in a vacuum.” BlueMountain pushed in June for more access to clearinghouses so hedge funds could have the same protections that banks are afforded. “The dealer community may be filibustering to protect its oligopoly and not seriously engaged in working with the buy side to develop a clearing solution,” Samuel Cole , the chief operating officer at New York-based BlueMountain, the hedge fund whose founders helped pioneer credit-default swaps, said in a June 1 letter to banks. Now, some firms may be having second thoughts, said Kevin McPartland , a senior analyst at Tabb Group in New York. “They want the ability, but on the other hand, they don’t want to be forced” to clear credit swaps, he said. To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net ; To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net .

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Greece Risks Debt-Rating Downgrade if Fiscal Targets Missed, Moody’s Says

February 25, 2010

By Keiko Ujikane and Aki Ito Feb. 25 (Bloomberg) — Greece’s sovereign debt rating may be cut within months unless the country meets the objectives of its fiscal deficit reduction plan, Moody’s Investors Service said. “If in a few months it appears there are significant deviations from the plan, then it is pretty likely that we would adjust the rating accordingly,” Pierre Cailleteau, managing director of sovereign risk at the ratings company, said in an interview in Tokyo today. Such a departure may merit a cut of “a couple of notches,” he said. Cailleteau spoke a day after Standard & Poor’s said it may lower Greece’s credit rating again by the end of March as a weak economy and political opposition threaten the country’s ability to cut the European Union’s largest budget deficit. At the same time, Moody’s may stabilize the A2 rating should Greece follow through with its austerity measures, Cailleteau said. Greece’s fiscal position is unchanged from December, when Moody’s cut the debt rating to A2, he said. Moody’s rating of Greece is the sixth highest, two notches above the BBB+ held by Standard & Poor’s and Fitch Ratings. If Moody’s cuts its credit rating to the same level as the other major ratings companies, Greek government bonds would no longer be eligible as collateral at the European Central Bank, making it more difficult for the nation to borrow. To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net Aki Ito in Tokyo at aito16@bloomberg.net

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Wall Street Bankers Are Overpaid, Says Morgan Stanley Chairman John Mack

February 24, 2010

Morgan Stanley Chairman John Mack said investment bankers are overpaid and Wall Street compensation won’t decrease much because firms don’t want to lose their best performers. “I still don’t think the industry gets it,” Mack said yesterda

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Goldman Sachs Is Innocent of Greece’s Swap Crimes: Mark Gilbert

February 24, 2010

Commentary by Mark Gilbert Feb. 25 (Bloomberg) — For once, the whipping boys and girls of finance are innocent. The European Union is investigating Goldman Sachs Group Inc.’s role in the financial sleight of hand that helped Greece use swaps to postpone the day of economic reckoning past its ascension to euro membership. Goldman says, rightly, there was “nothing inappropriate” in the transactions it facilitated. Most of the elements of a crime are present. There’s a victim — trust in the common-currency project. There’s a weapon, in the form of the derivatives that trimmed 2.37 billion euros ($3.2 billion) off the nation’s debt burden. And there’s a perpetrator, the Greek government, which knew its finances were too shaky to ditch its currency, the drachma. There also seems to be an accomplice — Goldman Sachs , which had the financial-engineering skills to crack open Greece’s budget deficit and spirit enough of its obligations away to a future date to ensure it qualified to join the euro. What’s missing is any broken law. The architects of European integration knowingly and with malice aforethought added the words “additional measures” in a footnote to the blueprint, letting Italy fudge its numbers to get into the club. Slapping Kittens That’s the same loophole Greece was able to exploit, in line with the rules, aided and abetted by Goldman Sachs. So while German Chancellor Angela Merkel said this month “it’s a scandal if it turned out that the same banks that brought us to the brink of the abyss helped fake the statistics,” she’s wagging her finger at the wrong party. The DNA of investment bankers drives them to find and exploit malleable clauses, bend rules, take maximum advantage of the unintended consequences of legislation. Chastising Goldman Sachs for flexing its muscles on behalf of a customer is akin to slapping a kitten for its adventures with a ball of wool, or admonishing a killer whale for playing with its lunch by tossing a baby seal in the air before ingesting the pup. Society doesn’t want to outlaw investment banking (not yet, anyway), any more than it wants to euthanize wool-bothering kittens. The trick is to keep the knitting supplies locked in a cupboard; the EU cannot leave the door ajar for reasons of Italian political expediency, and then complain when the floor ends up resembling a Jackson Pollock . Balance-Sheet Shifts Creative accounting — which is just a polite way to talk about cooking the books — is nothing new for countries. Italy used a yen-denominated swap to give its finances a one-time puff and avoid the ignominy of failing to qualify for the euro. In the U.K., so-called public-private partnerships and private finance initiatives allow the government to shift the burden of costly infrastructure onto the balance sheets of companies that tender successfully to manage and build the projects. The companies get access to rampant profit potential, in return for the government suppressing its debt burden. Greece is a particularly apt subject for the old joke about lies, damned lies and statistics. In September 2004, the nation had to revise up its deficits for 2000, 2001 and 2002. The gap for the first year was more than doubled to 4.1 percent, while that of the two later years almost tripled to 3.7 percent. Put bluntly, it turned out that the country had missed the 3 percent deficit threshold for euro membership in every single year since joining the common currency — transgressions that went unpunished. So no one should be surprised that Greek Finance Minister George Papaconstantinou confessed to “some sleight of hand” in Greece’s 2009 deficit numbers. Sovereign Risk The Greece debacle is likely to hasten and worsen increased oversight of the derivatives market. In particular, contracts where the buyer doesn’t have any skin in the game are akin to writing auto insurance for people who don’t own a car and don’t even have a driver’s license, but who nevertheless fancy a bet on the likelihood of a car crash. Financial authorities will probably outlaw such behavior, ignoring the difficulties of differentiating between efficient risk management and risk creation. Moreover, governments are clearly uncomfortable with the concept of investors being able to bet against a country’s creditworthiness in the credit- default swaps market. This may spur an unwelcome and unnecessary intervention by the dead hand of regulation. The trick Goldman Sachs employed to help Greece massage its debt figures hinged on using historical, rather than prevailing, currency rates in a series of swap transactions. While that undoubtedly comes under the heading of fast-and-loose, it’s not illegal; swaps are over-the-counter contracts between consenting adults, so no matter how divorced the values are from reality, it really isn’t anybody else’s business. Goldman Sachs has become the lightning rod for public anger about the global bailout of the finance industry. The vexation is appropriate; there’s too little humility and too much arrogance, and scant recognition that every financial firm, no matter how clever its partners, would be dead without an ocean of taxpayers’ money keeping the system afloat. In the case of Greece’s swaps, though, Goldman Sachs has done nothing wrong. The EU’s forensics squad should be looking closer to home for its culprit. ( Mark Gilbert , author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a columnist for Bloomberg News. The opinions expressed are his own.) Click on “Send Comment” in the sidebar display to send a letter to the editor. To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

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Mukherjee May Raise India Taxes to Avoid `China-Like’ Economic Overheating

February 24, 2010

By Cherian Thomas and Kartik Goyal Feb. 25 (Bloomberg) — India’s government may tomorrow raise excise taxes and slow spending in an effort to shrink a 16-year-high budget deficit and foster sustainable growth that avoids the asset bubbles emerging in China. Finance Minister Pranab Mukherjee will promise to cut the deficit to 5.5 percent of gross domestic product from 6.8 percent in his budget speech, according to the National Council of Applied Economic Research in New Delhi and Morgan Stanley economist Chetan Ahya. The challenge for Mukherjee is to unwind 7.5 trillion rupees ($162 billion) of fiscal stimulus and curb consumer-price inflation that’s the highest in the Asia-Pacific region, according to data compiled by Bloomberg. The payoff may be cheaper debt-financing costs and averting investor concerns at the sustainability of faster economic growth such as in China. “India wants to avoid a China-like overheating problem,” said Shashanka Bhide , chief economist at the National Council, a corporate-funded analysis group. “Mukherjee has a tough balancing act — to support growth and cut the budget deficit to control inflation.” Prime Minister Manmohan Singh ’s administration, which won reelection last year, will also aim to avoid stifling an economic rebound that’s yet to produce earnings gains for DLF Ltd. , India’s largest real-estate developer, and has left out an agriculture industry hammered by a poor monsoon. Growth to Quicken The government may tomorrow report GDP growth slowed to 6.9 percent last quarter from a year ago, compared with a 7.9 percent rate the previous three months, the median of 19 forecasts in a Bloomberg News survey shows. At the same time, a waning impact from the hit to farming and strengthening domestic demand is forecast to see the expansion approach 8 percent this year, according to the International Monetary Fund. “You can’t maintain your policy settings at crisis levels” when growth rebounds, Stephen Roach , chairman of Morgan Stanley Asia Ltd., said in an interview in Mumbai Feb. 12. “If monetary and fiscal accommodation persists for an indefinite period, you run the risk” of consumer and asset-price inflation, he said. Roach’s Singapore-based colleague Ahya expects the government to lift excise taxes by 2 percentage points on almost all products and cut expenditure by 0.6 percentage points of India’s GDP, Asia’s third largest. Mukherjee wrote off farm loans, raised government salaries and cut excise taxes by 4 percentage points as the global recession deepened, providing fiscal stimulus worth 3.5 percent of GDP. The budget for the fiscal year beginning April 1 is scheduled for presentation to parliament at 11 a.m. in New Delhi. Debt Burden With a debt level almost quadruple China’s — at an estimated 86 percent of GDP this year according to the IMF — fiscal restraint may help stoke India’s bonds and currency, Goldman Sachs Group Inc. analysts said this month. It may also aid a sovereign-debt rating that’s the lowest among the BRIC nations, which include Brazil, Russia and China. “If the exit path is well articulated and well executed, the local-currency rating could be upgraded,” Moody’s Investors Service sovereign analyst Aninda Mitra said in a Feb. 19 interview. Moody’s ranks India’s rupee-denominated debt at Ba2, two levels below investment grade. Mukherjee may accelerate sales of state-run companies including Coal India Ltd., India’s monopoly coal producer, and Steel Authority of India Ltd. , the nation’s second-largest steelmaker, to boost revenue. India is also aiming to pare a subsidy bill that amounts to 10 percent of spending, by reducing aid to fertilizer producers. Hit to Stocks Debt woes have become an investor focus after a Greek rating downgrade spurred a sell-off in the euro. India’s Sensitive stocks index declined 6.6 percent since Jan. 1, while China’s Shanghai Composite Index fell 8.5 percent this year. Bonds have retreated, with benchmark 10-year Indian government note yields climbing 20 basis points to 7.79 percent this month. Bond sales may rise 2 percent in the fiscal year to a record 4.6 trillion rupees, according to the median forecast in a Bloomberg survey, reflecting the need to refinance a surge in maturing debt. Central bank Governor Duvvuri Subbarao said last month that India’s budget deficit was a “bigger risk” to the economy than any other factor and called on the finance ministry to trim it to help curb inflation. Inflation Rate Prices paid by industrial workers rose almost 15 percent in December from a year earlier, the most in 11 years. Consumer- price inflation for farm workers is 17.2 percent, hurting the purchasing power of the 700 million people who live in the countryside. Industrial production grew 16.8 percent in December, the most since at least 1994, prompting the central bank to say manufacturers are nearing capacity. Even so, earnings have been mixed. New Delhi-based Hero Honda Motors Ltd. , India’s biggest motorcycle maker, reported a better-than-estimated 79 percent increase in profit last quarter. Gurgaon-based DLF’s earnings fell for the sixth straight quarter on subdued office demand. “We have seen some growth in the last two quarters,” Ravi Sud , chief financial officer at Hero Honda, said in an interview. “But is a two-quarter period sufficient to take a call on withdrawal of all the stimulus packages? One is not too sure.” To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net ; Kartik Goyal in New Delhi at kgoyal@bloomberg.net .

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Jaguar Slump Weighs Down India’s Tata as Carmaker Hires First Foreign CEO

February 24, 2010

By Vipin V. Nair Feb. 25 (Bloomberg) — Tata Motors Ltd. ’s first foreign chief executive, Carl-Peter Forster, has dealt with failed takeovers and plunging sales in his previous jobs, experience he can draw on as he seeks to revive the maker of Jaguar sedans and Land Rover SUVs. Forster , who previously led General Motors Co. ’s Adam Opel GmbH unit and served as manufacturing head at Bayerische Motoren Werke AG , took over last week after Jaguar reported a 20 percent slump in vehicle sales in the 10 months to January amid the global recession. Tata’s strategy of straddling luxury and entry-level segments has led to the carmaker being downgraded at least three times each by Standard & Poor’s and Moody’s Investors Service since buying Jaguar in 2008 as it struggles with $4.9 billion in debt. Forster, 55, will also need to develop exports of small cars amid rising competition from Toyota Motor Corp. and Volkswagen AG in India, where more than 90 percent of Tata-brand vehicles are sold. “It is impossible to make a lot of money with Jaguar,” said Juergen Maier , who helps manage 860 million euros ($1.1 billion), including Indian equities, at Raiffeisen Capital Management in Vienna. “For Forster, the important focus will be how to build Tata Motors’ future as a global player.” Raiffeisen doesn’t hold Tata Motors shares . Forster, who will be based in Mumbai, declined to be interviewed, company spokesman Debasis Ray said. Nano Tata, which also makes the $2,500 Nano, the world’s cheapest car, tomorrow will report consolidated earnings for the quarter ended December. It already announced a profit of 4 billion rupees ($87 million), excluding Jaguar, for the period, compared with a loss of 2.63 billion rupees a year earlier. Sales of Jaguar’s vehicles, including the $72,500 XJ sedan , tumbled last year as business and consumers pared spending on luxury cars. Jaguar Land Rover, which Tata bought for $2.5 billion in 2008 from Ford Motor Co. , posted a loss of 60 million pounds ($93 million) in the quarter ended September. In the preceding fiscal year, it contributed to Tata’s first annual loss in seven years. “The Jaguar Land Rover investments haven’t really worked,” said Mahantesh Sabarad, a Mumbai-based analyst at Centrum Broking Pvt., who has a “sell” rating on Tata Motors shares. “Forster has to get the turnaround plan for Jaguar Land Rover going.” Tata hired Ralf Speth , an ex-Ford and BMW executive, to spearhead the turnaround as Jaguar Land Rover’s CEO earlier this month. The unit, which already shed 2,200 jobs, said last year it may close one of its three plants. The automaker introduced a revamped XJ sedan last year to in a bid to revive demand. Career History Forster was forced out of BMW along with two other board members in 2000 when the Munich-based company sold MG Rover Group for a nominal 10 pounds. He departed Opel in November after GM reversed plans to sell the unit. During Forster’s eight years at GM, Opel developed new models such as the Insignia, which was named 2009 European Car of the Year . It was the first model made by the GM unit to win that title in more than two decades. “Forster led a product turnaround, with models such as the Insignia,” said Klaus Franz , the top labor leader at Opel. “He focused on quality.” The new models weren’t enough to stem tumbling sales amid the global recession and concerns about Opel’s future following GM’s bankruptcy last year. Opel’s annual sales in Western Europe totaled 1.1 million last year, 31 percent lower than in 2001. Tata Group Chairman Ratan Tata expects Forster to lead the automaker’s “ambition towards being a truly international company,” he said in a Feb. 15 statement . Ratan Tata, whose approximately 100 companies make products including cars, salt, software, steel and watches, has hired foreign CEOs before. Raymond Bickson was brought in to head Indian Hotels Co., which runs the Taj chain, in 2003. The challenge for Forster is to keep the support of executives and workers as he tries to transform a largely domestic player into a global company, said Ashvin Chotai , London-based managing director of Intelligence Automotive Asia Ltd., an industry consultant. “If he gets heavy-handed, and if he starts bringing in his own people to run key functions, we might be looking at a bit of a failure,” Chotai said. “Tata Motors’ future lies in how successfully they globalize.” In India, Tata’s best-selling Indica hatchback faces its biggest test since its 1998 debut as Toyota, Volkswagen, Ford, GM and Honda Motor Co. all introduce small cars. Maruti Suzuki India Ltd. , the nation’s biggest carmaker, is also expanding capacity and adding new models. To boost Indian sales, Tata introduced the Nano in July to lure consumers from motorcycles. The company had delivered 21,535 by the end of January. More than 200,000 orders were received in the initial sales period. Forster will oversee plans to introduce the Nano in overseas markets, including in Europe next year and in the U.S. in around 2012. “Tata has taken a strong step into the global automotive industry,” said Tim Armstrong , Paris-based director of IHS Global Insight Inc. “It makes sense to hire somebody who has got a truly global view.” To contact the reporter on this story: Vipin V. Nair in Mumbai at Vnair12@bloomberg.net .

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Anti-Taliban Campaign May Be Bolstered by Revival of India-Pakistan Talks

February 24, 2010

By Jay Shankar and Khalid Qayum Feb. 25 (Bloomberg) — India and Pakistan hold their first formal talks today since the 2008 terrorist assault on Mumbai, reviving regional peace moves the U.S. is counting on to support its strategy to defeat Afghanistan’s Taliban. After a 15-month impasse, the two sides’ senior foreign ministry officials meet in New Delhi far apart on an agenda India wants to focus on security and Pakistan insists must be broadened to include disputed Kashmir and water rights. Further attacks like the Feb. 13 bombing of an Indian cafe that killed 15 people may shatter even this new beginning. Terrorism is the priority, an official at India’s foreign ministry who asked not to be named said in a Feb. 18 interview, adding that the talks between Foreign Secretary Nirupama Rao and her Pakistani counterpart Salman Bashir aren’t a revival of the overall dialogue paused after the Mumbai killings. Ties must not become “hostage” to terrorists attacking both nations, Pakistan Prime Minister Yousuf Raza Gilani said the same day. A relationship bedeviled by 60 years of mistrust and three wars is a matter of concern to the U.S. as it seeks to prevail in a war with Afghan Taliban fighters in which 994 American troops have died. “The U.S. must have Pakistani cooperation if it hopes to gain an intelligence edge on al Qaeda and Taliban militants,” Stratfor , an Austin, Texas-based intelligence group, said in a report. “The last thing Washington needs is for Pakistan to be distracted from its counterterrorism obligations by a conflict with India.” ‘Indispensable Player’ For the U.S., Pakistan is an “indispensable player as far as a resolution in Afghanistan is concerned,” Zorawar Daulet Singh, an international relations analyst at the New Delhi-based Centre for Policy Alternatives , said. “This gives Pakistan a significant amount of leverage that they are trying to use to seek concessions” in disputes with India, he said. U.S. Defense Secretary Robert Gates last month praised India’s restraint after the Mumbai raid while saying a repeat attack would test its patience. “While we would like to see India and Pakistan reach a stable relationship, they will do so on their own terms at the appropriate time,” Robert Blake , the U.S. assistant secretary of state for South and Central Asia, said in a Feb. 18 speech to the Chicago Council on Global Affairs. Indian Prime Minister Manmohan Singh scrapped five years of peace talks after a rampage by 10 Pakistani gunmen killed 166 people in the November 2008 raid on India’s financial center. Singh demanded Pakistan close down militant groups plotting against India, including the Lashkar-e-Taiba organization India blamed for the three-day assault on Mumbai. Trade Boom Negotiations might help reignite growth in annual bilateral trade that had almost quadrupled to $2.24 billion four years after talks on Kashmir , economic and commercial cooperation, terrorism and drug trafficking began in 2003. Diplomatic, transport and sporting links between the two cricket-loving nations flourished. India is returning to talks despite making little progress in its efforts to get Pakistan to crack down on anti-India militants based there, Stratfor said Feb. 4. Pakistan has begun a secret trial of Lashkar members, one of the groups its military covertly used as proxies to destabilize India. “Under pressure and facing the threat of terrorism in its own country” Pakistan has taken some initiatives to “fight this scourge,” Indian Foreign Secretary Rao said in a Feb. 22 speech in London . “But these steps are selective.” She warned that drawing distinctions between the Taliban, al-Qaeda and terrorist groups like Lashkar was meaningless as the groups are “fused both operationally and ideologically.” Taliban Arrest Pakistan’s arrest of the Afghan Taliban’s No. 2 commander, Abdul Ghani Baradar , near Karachi may signal it’s ceding to U.S. pressure for tougher action against top guerrillas hiding there, analysts such as Michael Semple , who served as the European Union’s top political officer in Afghanistan, say. Still, banned militant groups are preaching their ideology with “full freedom” in their Punjab stronghold, Sherry Rehman , a lawmaker from Pakistan’s ruling party, said in Parliament on Feb. 23, the Daily Times reported. Today’s talks come almost two weeks after the bombing of a bakery popular with foreigners in the western Indian city of Pune triggered opposition calls to halt talks with Pakistan. Prime Minister Singh, who has stressed the inevitability of dialogue with Pakistan after meeting its leaders on the sidelines of regional summits, didn’t point fingers at India’s neighbor. Responsibility for deadly bombings in major Indian cities in 2008 was claimed by local militant group Indian Mujahideen, a group Rand Corp. analyst Christine Fair said has links with Lashkar. Beijing Postings Rao and Bashir are not strangers, overlapping as their countries’ respective ambassadors in Beijing for two years. “The two foreign secretaries go with different agendas and different approaches,” Lalit Mansingh , a former Indian foreign secretary and ambassador to the U.S., said in a phone interview from New Delhi. “Informal discussions outside the formal sessions,” will help develop relations. Not talking only “widens the communication gap and increases mistrust,” Rashid Ahmad Khan, former chairman of the Department of Political Science at Punjab University said in an interview. That will only benefit hardliners on both sides, he said. For Related News and Information: Regional News: TOP INDIA India’s General News: TNI INDIA GEN BN Stories on Pakistan and India: TNI INDIA PAK BN Stories on terrorism in India: TNI INDIA TERROR Stories on Mumbai attacks: STNI MUMBAIATTACKS

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Woodside in Talks to Sell PetroChina LNG After $40 Billion Accord Lapsed

February 24, 2010

By Heidi Couch and James Paton Feb. 25 (Bloomberg) — Woodside Petroleum Ltd. remains in talks to sell PetroChina Co. liquefied natural gas from the $30 billion Browse project off Australia, after an initial supply agreement lapsed, Chief Executive Officer Don Voelte said. Australia’s second-largest oil and gas producer was also contacted by as many as five other potential buyers when the PetroChina accord wasn’t renewed, Voelte said in a Bloomberg Television interview today. “Two people can pull out of the deal,” Voelte said. “Maybe as we progressed, maybe we kinda fell out of love with the deal.” An agreement to supply CPC Corp of Taiwan remains in place, he said. The preliminary agreement with China’s largest oil and gas company to supply as much as 3 million metric tons of LNG a year was valued at about A$45 billion ($40 billion), Voelte said in August. Woodside expects Chinese demand for its LNG to increase, he said today in Sydney. “Very little LNG goes to China at this time,” Voelte said. “It’s a growing market. Most LNG from our company goes to Japan, a little to Korea. We see China to be a growth market, but we don’t count on it to be the only growth market.” PetroChina’s Hong Kong-based spokesman Mao Zefeng wasn’t immediately available to comment. Supply Guarantee Woodside rose 1.3 percent to A$43.86 at 1:40 p.m. in Sydney, compared with the 0.3 percent drop in the benchmark S&P/ASX 200 Index . The oil and gas producer has gained 29 percent in the past year, lagging behind the index’s 39 percent advance. Woodside is in discussions with at least three possible customers, including a company in China, to sell Browse LNG, Voelte said Feb. 9. PetroChina ’s initial accord to buy gas from Browse expired because the Australian gas producer couldn’t guarantee it would meet the original timeline for supplying the fuel, the Chinese energy company’s parent said Jan. 5. Woodside and partners Chevron Corp. , Royal Dutch Shell Plc, BP Plc and BHP Billiton Ltd. this month opted to process the fuel at a hub in the Kimberley region of Western Australia after accepting a government deadline to decide how to develop the venture. A final investment decision for Browse is due in 2012. The Browse fields, off Western Australia, are estimated to contain 13 trillion cubic feet of sales gas and 355 million barrels of condensate, a type of light oil, Macquarie Group Ltd. said in a client note today. Strike Threat The first stage of Woodside’s Pluto LNG project is more than 80 percent complete and initial LNG is expected in early 2011. That depends on “a productive industrial relations environment,” Woodside said yesterday. The Australian energy company has agreements with “sister plants” to supply LNG to customers should strikes delay the A$13 billion venture in Western Australia, Voelte said today. Woodside devised the “risk mitigation” measures after talks with customers, the Perth-based company said yesterday. “We don’t have to put the plans in place if we don’t need them,” Voelte said. “It’s not uncommon in the industry because LNG plants are so costly and so big that when you shut them down for maintenance or to replace equipment your customers just can’t go without. So if you are planning a big shutdown, let’s say in 2012, the other plant is there to supply volumes to match it.” Woodside aims to allocate about 55 percent of the budget to build Pluto to Australian companies, Voelte said. “What we can build in Australia, we will build in Australia.” Local Content LNG developers in Australia are having gas processing units built in cheaper Asian locations and shipped in, and engineering and design work done overseas, economists at Goldman Sachs JBWere said in a report this month. In Australia, a skills shortage and higher wages will make it difficult for companies to build multiple LNG plants at the same time, Voelte said. And “there are an awful lot of goods and services that Australia doesn’t make for LNG plants.” Voelte said he is “comfortable” with two or three people within the company to potentially replace Chief Financial Officer Mark Chatterji . Chatterji will leave Woodside at the end of 2010 to return to the U.S., the company said yesterday. “The board will want to make sure we compare internal candidates to outsiders, but my first instinct is we have a pool of people who are future CFOs, pick one of them,” he said. Woodside yesterday reported a 2.1 percent increase in 2009 net income to A$1.82 billion. Sales fell 27 percent to A$4.35 billion because of lower commodity prices, while output declined 0.5 percent to 80.9 million barrels of oil equivalent. To contact the reporters on this story: Heidi Couch in Sydney hcouch@bloomberg.net ; James Paton in Sydney jpaton4@bloomberg.net

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Turkey Risks World’s Worst Currency Slump Amid Army Tension, Options Show

February 24, 2010

By Seda Sezer and Laura Cochrane Feb. 25 (Bloomberg) — Investors are betting political turmoil will weaken Turkey’s lira more than any other currency as the arrest of more than 40 army officers over an alleged coup plot raises tension between the government and the military. One-month put options that grant the right to sell the lira against the dollar have surged to a 3.4 percentage-point premium over equivalent call options to buy the currency. The gap, known as the risk-reversal rate, widened from 2.25 percentage points a week ago and is the highest of 48 currencies on Bloomberg. Turkey’s stocks, bonds and currency slumped this week as the detention of serving and retired officers reignited clashes between Prime Minister Recep Tayyip Erdogan and an army that ousted four governments since 1960. The selloff reversed a trend in which its stocks and bonds outperformed every European market during the height of the global credit crisis as Erdogan reduced debt and avoided an international bailout. “It’s a nauseous situation,” said Sinan Akiman , deputy chief executive at Garanti Asset Management, Turkey’s third- largest fund manager with the equivalent of $4.1 billion in assets. Akiman said he’s betting on the lira’s depreciation and stock declines on concern the clash may trigger early elections or push the courts to seek the closure of Erdogan’s Justice & Development Party. The dispute risks diverting the government’s focus from reviving the economy as it seeks to make constitutional changes, according to Christian Keller , an emerging Europe economist at Barclays Capital in London and former International Monetary Fund official in Turkey. The currency will weaken as much as 8 percent to 1.68 per dollar, Keller wrote in a research report yesterday. Default Swaps The lira has depreciated 2.1 percent against the dollar this week and the equity benchmark, the ISE National 100 index , lost 7 percent. Yields on two-year Turkish government bonds rose seven basis points to 9.01 percent yesterday, the biggest jump in three weeks. The cost of contracts to protect debt payments from Turkey rose 4 basis points to a two-week high of 202 basis points yesterday, credit-default swap prices from CMA Datavision show. Investors are selling Turkish assets after the country weathered the worst global recession since the 1930s better than some European Union members, as Hungary required a bailout and Greece’s and Spain’s borrowing costs soared. Turkey’s dollar bonds rallied 16 percent in the 12 months after the collapse of Lehman Brothers Holdings Inc. in September 2008, the biggest gain among European benchmarks. Turkey’s ISE shares index jumped 31 percent, the world’s fourth-best performing equity gauge for the period, Bloomberg data show. Military Probe The lira is likely to weaken at least 3 percent to 1.60 per dollar in the “near-term,” Bartosz Pawlowski , BNP Paribas SA’s senior emerging market strategist in London, said in an interview. Erdogan, 55, has chipped away at the military’s power since he was elected in 2002. He ended army control over the National Security Council in 2003 and called an early election in 2007 after the army criticized his choice of Abdullah Gul as president because of his Islamist past. Erdogan won that election by the biggest margin any Turkish party had drawn in almost 40 years. The arrests this week, the latest phase in a two-year investigation, follow a report in Taraf newspaper on Jan. 21 that army officers drafted a plan in 2003 to stage bombings in order to undermine confidence in Erdogan’s government. Rule of Law The arrests may be a positive development in establishing the rule of law in Turkey, said Ari Metso , chief executive officer of Helsinki-based fund manager Taaleritehdas East Asset Management, who helps oversee 1.2 billion euros ($1.6 billion) of assets including Turkish equities. He hasn’t changed his investments because of the detentions. “If somebody has committed a crime there should be punishment, for the long term it’s good that this can be investigated through the civil court,” said Metso. “At the same time we have seen quite promising developments on the economic side.” The government expects the economy to expand 3.5 percent this year, more than double the 1 percent growth rate the IMF forecasts for the EU. Growth of as much as 5 percent wouldn’t be a surprise, central bank Governor Durmus Yilmaz said on Jan. 20. Turkey avoided an international bailout after reducing debt to 47 percent of gross domestic product last year from 67 percent in 2003. ‘Extremely Dangerous’ Turkey’s top general Ilker Basbug will meet Erdogan and President Gul at 11 a.m. in Ankara, the NTV news channel reported yesterday. The meeting may help “normalize” the situation, Goldman Sachs Group Inc. economist Ahmet Akarli said. Opposition parties are calling for the government to go to the polls. Early elections are the only escape from the “extremely dangerous developments,” nationalist opposition leader Devlet Bahceli said in a statement published on his party’s Web site. “If both sides don’t soften the stress we may see some permanent damage on the markets,” said Hakan Kalkan , who helps manage about $600 million of assets at Autonomy Capital in London, including Turkish assets. “Early elections or a referendum would create disturbances in society and will of course weaken markets.” To contact the reporter on this story: Seda Sezer in Istanbul at ssezer2@bloomberg.net . Laura Cochrane in London at lcochrane3@bloomberg.net

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Toyoda Pledges to Restore Consumers’ Trust, Sheds Little Light on Recall

February 24, 2010

By Angela Greiling Keane, Jeff Green and Jeff Plungis Feb. 25 (Bloomberg) — Toyota Motor Corp. ’s president endured three hours of questioning by U.S. lawmakers, pledging to restore consumers’ trust without shedding new light on the company’s handling of safety recalls. “My name is on the company,” Akio Toyoda , 53, grandson of the automaker’s founder, told the House Oversight and Government Reform Committee yesterday, making his first U.S. appearance since record recalls of about 8 million cars and trucks worldwide for defects that may cause sudden acceleration. Toyota is struggling to repair a reputation damaged by the recalls. The company was “more concerned with profit than with customer safety,” committee chairman Edolphus Towns said in opening the hearing. Toyoda faced the U.S. ritual of congressional questioning familiar to bank chiefs challenged over their bonuses and tobacco executives grilled about their products. “He couldn’t possibly fix anything” through his testimony, said Maryann Keller , president of Maryann Keller & Associates in Stamford, Connecticut. “All he could do was answer the question that the company was wrong and take the blame for it.” Toyota shares rose 0.3 percent to 3,285 yen as of 12:43 p.m. in Tokyo. The Toyota City, Japan-based automaker has lost about $35 billion in market value since Jan. 21, when it recalled about 2.3 million vehicles in the U.S. to fix sticking accelerator pedals. ‘Personal Commitment’ “You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers,” Toyoda said in his remarks to the panel. Towns, a New York Democrat, told Toyoda at the conclusion of his appearance that the lawmaker was “impressed with the fact that you came, voluntarily, to testify before the committee.” The testimony “went well,” Japanese Prime Minister Yukio Hatoyama told reporters today in Tokyo. The automaker now must work to improve its image, Hatoyoma said. Appearing on CNN’s Larry King Live program later in the evening, Toyoda said he and the company should have responded sooner to complaints. He said he felt “sadness” that people died in Toyota cars and vowed to focus on the “basics” as the automakers recovers. ‘Right Tone’ Toyoda’s remarks “introduced the right tone and sense of candor, said James Bell, executive market analyst with Kelley Blue Book , an Irvine, California-based vehicle-data service, in an e-mailed statement. “Our sense is that, barring new technical revelations or driver deaths, this day could be seen as a small step toward image recovery,” Bell said. After appearing on Capitol Hill, Toyoda and Yoshimi Inaba , the automaker’s North American president, arrived to a standing ovation at a “town hall” of Toyota workers, executives and dealers in downtown Washington. Paul Atkinson, chairman of the national council of the company’s dealers, said the crowd “respected and supported” Toyoda, “no matter how members of Congress treated you.” ‘Not Alone’ “At the hearing, I was not alone,” Toyoda, reading in English from a prepared statement, said as he held back tears. “You and your colleagues across America and across the world were with me. Words cannot express my gratitude. We at Toyota are at a crossroads. We need to rethink everything about our operation.” During the testimony, some members of Congress told Toyoda his answers fell short. Representative John Duncan , a Tennessee Republican, questioned why Toyota didn’t respond sooner to customer complaints of sudden acceleration. “I’m not sure I’ve seen a good answer today as to why it took your company so long to respond to these complaints,” Duncan told Toyoda. “Why was there not a response before now when you had all these complaints?” Lawmakers such as Representative Brian Bilbray , a California Republican, pressed Toyoda to give “yes or no” answers to questions, such as Bilbray’s inquiry about whether the company supports U.S. regulators requiring manufacturers to report to them on all malfunctions worldwide. ‘Full Cooperation’ Toyoda, who said his company knew about reports of sticky accelerator pedals in Europe a year before it did in the U.S., told Bilbray “we would like to extend full cooperation.” “I’ll consider that a yes,” Bilbray said. “Or should I?” Toyoda linked the defects to the expansion that made his company the world’s biggest automaker. The company has “fully shared the information we have” with U.S. auto safety regulators, Toyoda, speaking through a translator, told Towns. The company has recalled cars and trucks to fix accelerator pedals that it says could become stuck or be jammed by floor mats. “I’m absolutely confident” that electronic throttle controls in the company’s vehicles aren’t a cause of unexpected surges in acceleration, Toyoda said. U.S. regulators have said they are investigating that possibility. Unknown Cause Toyota may not know the cause of unintended acceleration in as many as 70 percent of reported incidents, Jim Lentz , the company’s U.S. sales chief, told a congressional committee on Feb. 23. The recalls to fix accelerator pedals and replace floor mats will “not totally” mitigate sudden acceleration in Toyota vehicles, linked to 34 deaths, Lentz told a House Energy and Commerce panel . A Toyota internal document sent to the House oversight panel and dated July 6, 2009, said the company saved $100 million through a “negotiated” vehicle recall. The document, obtained Feb. 21, showed the company outlining accomplishments described as “Wins for Toyota,” including the savings. Toyoda told lawmakers at the hearing yesterday that he didn’t have knowledge of such a document. ‘No Cozy Relationship’ U.S. Transportation Secretary Ray LaHood , who oversees the National Highway Traffic Safety Administration, testified yesterday before the same committee, saying regulators have “no cozy relationships” with the auto industry. At least four NHTSA investigations into unintended acceleration by Toyota vehicles were ended with the help of former regulators hired by the automaker, warding off possible recalls, court and government documents show. Asked about reports that Toyota executives who used to work at NHTSA influenced decisions to limit sudden-acceleration recalls, LaHood said restrictions prevent former employees from working directly on issues they handled while with the government. LaHood said he’d be willing to assist lawmakers on writing legislation to tighten those lobbying rules. “I don’t want any ethical problems with anyone,” LaHood said. While all automakers have employees who handle NHTSA issues, Toyota may be alone among the major companies in employing former agency staffers to do so. Spokesmen for General Motors Co., Ford Motor Co., Chrysler Group LLC and Honda Motor Co. all have said their companies have no ex-NHTSA people who deal with the agency on defects. To contact the reporters on this story: Angela Greiling Keane in Washington at agreilingkea@bloomberg.net ; Jeff Plungis in Washington at jplungis@bloomberg.net ; Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net .

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Moody’s Says Greece Risks Downgrade Within Months If Fiscal Plan Is Missed

February 24, 2010

By Keiko Ujikane and Aki Ito Feb. 25 (Bloomberg) — Greece may see its sovereign debt rating cut within months should it fail to meet the objectives in its fiscal deficit reduction plan, Moody’s Investors Service said. “If in a few months it appears there are significant deviations from the plan, then it is pretty likely that we would adjust the rating accordingly,” Pierre Cailleteau, managing director of sovereign risk at the ratings company, said in an interview in Tokyo today. Such a departure may merit a cut of “a couple of notches,” he said. Cailleteau spoke a day after Standard & Poor’s said it may lower Greece’s credit rating again by the end of March as a weak economy and political opposition threaten the country’s ability to cut the European Union’s largest budget deficit. At the same time, Moody’s may stabilize the A2 rating should Greece follow through with its austerity measures, Cailleteau said. Greece’s fiscal position is unchanged from December, when Moody’s cut the debt rating to A2, he said. Moody’s rating of Greece is the sixth highest, two notches above the BBB+ held by Standard & Poor’s and Fitch Ratings. If Moody’s cuts its credit rating to the same level as the other major ratings companies, Greek government bonds would no longer be eligible as collateral at the European Central Bank, making it more difficult for the nation to borrow. To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net Aki Ito in Tokyo at aito16@bloomberg.net

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Coca-Cola Said to Be Near Purchase of Bottler Stake for Up to $15 Billion

February 24, 2010

By Zachary R. Mider and Duane D. Stanford Feb. 24 (Bloomberg) — Coca-Cola Co. , the world’s biggest soda maker, is in talks to buy the North American operations of bottler Coca-Cola Enterprises Inc. for almost $15 billion including debt, according to two people with knowledge of the discussions. The sides may reach an agreement within days or the talks may fall apart, said the people, who declined to be identified because the negotiations are private. In the transaction under discussion, Coca-Cola would sell bottling operations in Scandinavia and Germany to Coca-Cola Enterprises, its largest bottler, the people said. A purchase would follow a similar move by PepsiCo Inc. to bring its bottling operations in-house as both companies try to turn around the U.S. market, where soft-drink volume sales have declined since 2005. “We expect that Coca-Cola Enterprises will not grow revenue significantly,” Sachin Shah , a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York, said today in a telephone interview. Buying the bottler “extracts synergies and cost savings,” he said. Ben Deutsch , a Coca-Cola spokesman, didn’t immediately return a call seeking comment. John Downs , a spokesman for Coca- Cola Enterprises, declined to comment. The Wall Street Journal reported the talks earlier today. Coca-Cola Enterprises soared 27 percent in extended trading. The shares climbed $5.17 to $24.35 at 7:36 p.m. New York time. As of today’s close, the company had a market value of $9.4 billion. Coca-Cola, based in Atlanta, rose 33 cents to $55.16 in New York Stock Exchange composite trading . The stock rose 26 percent last year, while PepsiCo advanced 11 percent. Beverage Concentrate Coca-Cola and PepsiCo sell beverage concentrate and syrup to licensed bottlers, which add water and other ingredients, put the mixture in bottles and cans, and sell it. In 1999, PepsiCo followed Coca-Cola’s lead by spinning off its capital-intensive bottling operations to create Pepsi Bottling. Coca-Cola currently owns about 34 percent of Coca-Cola Enterprises. PepsiCo’s takeovers of its bottlers will give it control of about 80 percent of its North American beverage market. The acquisitions are expected to be completed by the end of the first quarter, PepsiCo, based in Purchase, New York, said in a regulatory filing Jan. 11. Volume Growth North American volume at Coca-Cola Enterprises declined 5 percent last year, while net pricing per case increased 6.5 percent, the company said in a Feb. 10 earnings report. Coca-Cola Enterprises is committed to a return to volume growth in North America, Chief Executive Officer John F. Brock said in a Feb. 17 presentation at the Consumer Analyst Group of New York conference in Boca Raton, Florida. Results improved in the fourth quarter of last year compared with the third quarter, he said. “Overall, we must continue to manage our North American business in a way that does deliver improving results and provides the resources we need to invest in the business,” he said at the time. To contact the reporter on this story: Zachary R. Mider in New York at mider1@bloomberg.net ; Duane D. Stanford in Atlanta at dstanford2@bloomberg.net

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Euro Falls, Asian Stocks Drop on Possible Greece Downgrade; Oil Pares Gain

February 24, 2010

By Linus Chua and Saeromi Shin Feb. 25 (Bloomberg) — The euro fell to a one-year low against the yen and Asian stocks declined for a second day after Standard & Poor’s said it may downgrade Greece’s credit rating again. Oil and copper pared earlier gains. The euro dropped to 120.68 yen as of 1:35 p.m. in Tokyo from 122.03 yen yesterday, after earlier dropping to 120.62, the weakest level since Feb. 24, 2009. The MSCI Asia Pacific Index lost 0.8 percent to 116.74 and S&P 500 futures slid 0.7 percent. S&P’s warning raises concerns that Greece’s fiscal woes may spread to other nations and extend losses in the euro, which has fallen 8.3 percent against the yen in the past two months. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. economy is in a “nascent” recovery that still requires low interest rates. “The impact of the Greece issue should be felt even stronger if there are signs of bumps to the global recovery,” Kim Yong Tae , a Seoul-based fund manager at Yurie Asset Management, which manage $3 billion. “If another downgrade comes, I think that should affect markets in the short term and raise concern about other struggling countries in the region.” The euro dropped against 11 of its 16 major counterparts as S&P raised concerns the weak Greek economy and political opposition threaten the nation’s ability to reduce the European Union’s largest budget deficit. The euro fell to $1.3469 from $1.3538 in New York yesterday. It touched $1.3444 on Feb. 19, the lowest since May 18. Dollar Gains The dollar has risen 2.7 percent versus the euro this month, heading for a third monthly gain, its longest stretch since November 2008. The Philippine peso declined 0.2 percent to 46.252 per dollar as S&P’s warning damped appetite for emerging-market currencies. South Korea’s won weakened 0.2 percent to 1,155.65 per dollar on concern exports haven’t fully recovered as the nation posted its first current-account deficit in a year. The current-account gap reached $448 million in January from a $1.52 billion surplus in December, the Bank of Korea said. The Kospi index lost 1.3 percent. Goodman Fielder Ltd. , Australia’s largest baker, slumped 4.5 percent after first-half earnings missed analyst estimates. Toll Holdings Ltd. shares tumbled 16 percent after the air- freight and logistics company reported lower profit. ‘Too Optimistic’ Asian stocks outside of Japan may fall 12 percent this year because valuations have become too expensive and as developed economies such as the U.S. recover at a faster pace, Royal Bank of Scotland Group Plc said. China , India and Indonesia are among “overpriced” and “over-owned” markets that may fall even further, Emil Wolter , Singapore-based head of Asian regional strategy at RBS, said in a Bloomberg Television interview today. They are also among markets that may face greater risks as governments exit their monetary and fiscal stimulus, he said. “Initially we started the year with an expectation of a modest 3 percent absolute return gain, but I think at this point that’s proven to be a little too optimistic,” Wolter said. Crude oil pared gains, dropping below $80 a barrel as the dollar rose against the euro. Copper for three-month delivery was little changed at $7,145 a metric ton after erasing a gain of as much as 1.2 percent on concern Standard & Poor’s may lower Greece’s credit rating again by the end of March. Aluminum was little changed at $2,135 a ton. Zinc was up 0.3 percent at $2,210 a ton, trimming an increase of as much as 2.1 percent. To contact the reporters for this story: Linus Chua in at lchua@bloomberg.net ; Saeromi Shin in Seoul at sshin15@bloomberg.net

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‘Tort Reform’ Means Less Accountability For The Medical Profession

February 24, 2010

President Obama is widely expected to toss Republicans a bone at Thursday’s health care summit, by publicly embracing what’s known as “tort reform”. By tort reform, Republicans and medical professionals mean caps on non-economic punitive damages in lawsuits where patients or their survivors have proven in court that they were the victims of gross medical malpractice. Proponents have long dominated the framing of the issue with their arguments that tort reform will lead to lower health care costs and will free doctors from practicing defensive medicine. But that narrative is flawed. And it completely neglects how punitive damages essentially the only way that patients have of holding medical professionals and organizations accountable when they kill, maim or injure people through their negligence, ignorance or even malice. In a letter addressed to President Obama on Tuesday, the American Medical Association (AMA) maintained that tort reform would lower health care costs directly –by lowering insurance premiums, jury awards and administrative costs not covered by insurance– and indirectly, by curbing the use of unwarranted tests and medical procedures to guard against lawsuits. Citing the nonpartisan Congressional Budget Office, the AMA added that tort reform “would reduce federal budget deficits by about $54 billion during the 2010-2019 period.” What the association left out, however, was an earlier statement by the Congressional Budget Office putting that amount in context: Limiting malpractice payouts “would reduce total national health care spending by about 0.5 percent (about $11 billion in 2009),” :the office concluded in a letter to Sen. Orrin Hatch (R-Utah). The CBO has also concluded that “so-called defensive medicine may be motivated less by liability concerns than by the income it generates for physicians or by the positive (albeit small) benefits to patients.” And what about those irrevocably and traumatically affected by gross medical negligence? Big-money malpractice verdicts are reached for a reason: The facts are horrible and the victims have no other recourse. Consider Merlyna Adams , a school principal in Louisiana, who on account of a botched kidney stone extraction, subsequently experienced pulmonary, renal and congestive heart failure, resulting in the amputation of both her hands and her legs. Or two-year-old Steven Olsen of California, who after being denied a CAT scan by an HMO after a hiking accident, incurred permanent brain damage and lost his sense of sight. Although initially awarded $7.1 million in non-economic compensation, an existing malpractice law forced his presiding judge to lower the amount to $250,000. Consider the dependents of the 98,000 men and women who die every year on account of preventable medical errors, a figure put forward by the Institute of Medicine. According to the American Association for Justice, the official trade group for trial lawyers, legislators ought to be focused primarily on reducing the frequency of malpractice, rather than malpractice litigation, since a mere 2 to 3 percent of all instances of malpractice lead to claims. “The idea of bargaining away the life of injured patients is a very, very bad idea,” President of the Association Anthony Tarricone told HuffPost. “Opponents of health care have seized on tort reform as a panacea….They’re bankrupt of any real reforms. The only real solution is eliminating malpractice itself.”

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Housing Woes To Continue, More Losses Coming

February 24, 2010

The nation’s second-largest bank expects the number of delinquent home loans to skyrocket over the next year, echoing analysts’ expectations of a gloomy housing market that is nowhere near recovery. JPMorgan Chase’s pessimistic outlook cuts across the entire housing market. In its annual report filed Wednesday with the Securities and Exchange Commission, the lender says its writeoffs — those loans so delinquent they’re uncollectible — could jump 26 percent for its prime mortgage loans, 25 percent for subprime loans, and 19 percent for home equity loans. More homeowners with JPMorgan Chase mortgages will lose their homes this year compared to last year, the bank says. “Given the potential stress on consumers from rising unemployment and continued downward pressure on housing prices, management remains cautious” about its home mortgage loans, the bank said in its filing. The estimates are based on “management’s current economic outlook.” In 2009, the firm wrote off $1.9 billion in prime mortgage loans. In 2010, it expects to write off $2.4 billion. For subprime loans, it wrote off $1.6 billion. This year, it expects $2 billion to be written off. And the lender expects home equity loan losses, a $4.7 billion hit last year, to reach $5.6 billion in 2010. The numbers are based off the firm’s quarterly estimates for the “next several quarters.” Because of the firm’s size and extensive lending operations across the country, its numbers and outlook are reliable signs for where the nation’s consumers — and the economy — are headed. It’s not pretty. While housing prices have temporarily stabilized, giving some homeowners some relief, Patrick Newport, an economist with IHS Global Insight , said he expects housing prices to decrease again later this year. He also said he expects a substantial number of home foreclosures (which would drive down housing prices) — perhaps as much if not more than last year’s record total of 2.8 million . More than 3 million homeowners could lose their homes this year, analysts predict. Newport points out that while the high unemployment rate is largely behind borrowers increasingly falling behind on their mortgage payment, “the one wildcard that no one has a good handle on right now…is strategic defaults.” Those are also known as walkaways. As the Huffington Post has previously reported , homeowners are increasingly walking away from their mortgages. Some can afford to make their payments; others are drowning in debt. But both groups are starting to realize it makes more sense to mail the house keys to their lenders than make payments on a house that’s worth much less than the mortgage. This week, real estate research firm First American CoreLogic reported that at the end of last year, more than 11.3 million, or 24 percent, of all homeowners with a mortgage owed more on their mortgage than their home is worth. The number of “underwater” homeowners is up six percent from Sept. 30. An additional 2.3 million homeowners had less than 5 percent equity in their homes, meaning they owed at least 95 cents for every $1 in the house’s value. That makes nearly 29 percent of all homeowners with a mortgage either underwater or nearly underwater. Newport said he wonders why more homeowners aren’t walking away. “The price that you pay for walking away is you probably won’t be able to borrow to buy a home for about four to five years [and] you probably won’t be able to use your credit card for two to three years,” he said. “But, you’ll have this big weight off your shoulders and you’ll probably save tens of thousands — and in come cases hundreds of thousands — of dollars by walking away. “The puzzle right now is why more people aren’t doing that,” Newport said. If walkaways increase substantially, bank losses — like those expected at JPMorgan Chase — would be enormous, as firms would be forced to swallow losses on loans they thought would be repaid. Which is why JPMorgan Chase’s expected losses, while grim, could actually be worse.

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Distressed CRE Assets Jump 15% at Nation’s Banks

February 24, 2010

The amount of distressed commercial real estate assets on the books of the nation’s banks and thrifts approached $60 billion as of year-end 2009. That is up from $52 billion just three months earlier, a 15% increase. The $59.9 billion includes loans…

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Starwood Buying a Half Billion Dollars in Performing Loans from Teachers

February 24, 2010

Starwood Property Trust agreed to acquire a $503 million portfolio of performing commercial mortgages from TIAA-CREF for approximately $510 million, plus accrued interest. The fixed-rate portfolio consists of 18 senior first mortgage A-notes and two…

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Kennedy Wilson Completes Largest Buy in its History – A Loan Portfolio

February 24, 2010

International real estate investment and services investment firm Kennedy Wilson has acquired a $342 million loan portfolio from a large regional bank. The loan portfolio is composed of residential, hotel, retail, office, land, multifamily and other…

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Bank Watch: Citizens First: Squeezing and Being Squeezed

February 24, 2010

In an attempt to hang on to every penny Citizens First Bancorp Inc., the Port Huron, MI-based holding company for CF Bancorp, has voluntarily delisted its common stock from the NASDAQ stock exchange. The decision to delist is part of the company’s…

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Eagles Pinch Concert Scalpers as Live Nation Raises Prices for Best Seats

February 24, 2010

By Adam Satariano Feb. 24 (Bloomberg) — The Eagles were the first band to charge $100 for a concert ticket 16 years ago. Now the group with the all-time best-selling album is raising prices on prime seats, making the cheap ones cheaper and squeezing scalpers. The band’s April 27 show in Sacramento, California, uses Live Nation Entertainment Inc. ’s “dynamic” ticketing service that mimics airlines’ approach — a first for a major group. By setting 10 prices based on anticipated demand, instead of the usual two to four, the Eagles are selling seats closer to what they fetch on resale sites such as EBay Inc. ’s StubHub. The aim is to make tickets affordable for more fans and to fill seats, according to Marc Robbins, who helped design the system for the Eagles’ manager, Live Nation’s Front Line. The result lifts food and merchandise sales while slicing into the markup of scalpers who profit from tickets initially priced too low in the $4.4 billion worldwide concert market. “The idea is to shift the economic value from the brokers, who get the difference between the face value and the resale value, to the primary market where it can go to the artists, promoters and venue operators,” said Brett Harriss , an analyst with Gabelli & Co. in Rye, New York, which owns the shares. Concerts are increasingly important for the music industry. Worldwide ticket sales more than doubled in 2009 from $1.7 billion in 2000, while compact disc sales fell 65 percent, according to Billboard magazine. The average ticket price rose 54 percent to $62.57 from 2000 to 2009, according to Pollstar, which tracks the concert business. More Clout The Eagles test highlights ticketing changes made possible by Live Nation’s merger last month with Ticketmaster Entertainment, a deal opposed by consumer groups. As the world’s largest concert promoter, venue operator, ticket seller and manager of artists, the Beverly Hills, California-based company has more leverage to make changes that drive revenue and profit. Dynamic pricing has been tried by professional baseball teams including the San Francisco Giants. It uses technology to continually adjust ticket prices for some seats based on demand. At the 17,000-seat Arco Arena, the Eagles are testing a limited version that set prices in advance. Aisle seats are worth more than those in the middle of a row, for example. In some systems, changes can be made in real time. The band and show organizers are keeping total ticket revenue comparable to other stops on the tour, said Robbins. Eagles tickets priced as high as $250 are being used to reduce others to as little as $32, the lowest for the band since 1980. Industry’s ‘Gain’ Tickets went on sale Feb. 8 and more than half sold for less than $52, the lowest price on other stops, according to Robbins. He declined to say how many seats were involved in the public sale and said the system needs additional testing. The $32 seats in Sacramento use a paperless system that limits ticket transfers and further shuts out resellers. “We’re pricing the tickets, not just at what the market will bear, but according to people’s budgets,” Robbins said. Demand will determine the revenue at future concerts using dynamic pricing, according to Robbins. Getting more people in the door addresses a longstanding problem in the live concert business: empty seats. Live Nation CEO Michael Rapino told Congress last year 40 percent of seats go unsold. Ancillary sales average $12 to $14 per concertgoer, Rapino said then. More ticket sales also add to commissions. “If you can put somebody in there for $20 where it would have been empty, it’s a gain for the industry,” said Harriss. ‘Maximum’ Prices As with other shows, some seats are separately sold to fans paying as much as $995 for a VIP package that includes a ticket in the first four rows, a pre-show party and other perks, according to Live Nation’s I Love All Access , which organizes the packages. The band and concert organizers also experimented by auctioning 50 seats, with $360 the highest winning bid, according to Robbins. “The ultimate goal is to price the tickets at the maximum amount of what the consumers will pay,” said Don Vaccaro, chief executive officer of TicketNetwork , a Vernon, Connecticut-based resale Web site with 240 employees and sales above $120 million. Forty percent of concert tickets sell for less than face value on resale sites, Vaccaro said. Glenn Lehrman, a spokesman for San Francisco-based StubHub, said ticket sales are “extremely volatile” and the secondary market is necessary to capture fluctuations after the original sale. On the company’s Web site, two tickets for the Sacramento show are being sold for $1,500 each. Stubhub provides a Web-based platform, collecting fees from transactions, and doesn’t own the tickets. A 2008 study by Forrester Research Inc. said the U.S. resale market will reach $4.5 billion by 2012. First to $100 Live Nation fell 6 cents to $12.48 at 9:38 a.m. in New York Stock Exchange composite trading. The shares gained 48 percent in 2009. This month, Live Nation announced an agreement to sell tickets in 500 Wal-Mart Stores Inc. outlets. In 1994, the Eagles became the first rock band to charge more than $100 for a concert ticket, according to Gary Bongiovanni , editor-in-chief of Pollstar. “Their Greatest Hits (1971-1975)” has sold more than 29 million copies and is tied with Michael Jackson’s “Thriller” as all-time best-seller, according to the Recording Industry Association of America . Eagles shows over the past decade have averaged $1.8 million in ticket revenue, according to Pollstar . The 14-date tour runs from April 16 to May 18. Live Nation also owns TicketsNow , a resale Web site used by brokers. The company last week settled a complaint brought by U.S. regulators, agreeing to pay refunds to Ticketmaster customers who sought seats to Bruce Springsteen shows and were routed to the TicketsNow site, where prices were higher. The Eagles event may presage future changes. Technical advances allow prices for live entertainment to be adjusted in real-time, said Barry Kahn, CEO of Qcue Inc. , an Austin, Texas- based ticketing company that works with baseball’s Giants. “Tickets in the concert industry have been very poorly priced, and there is no better evidence than seeing what tickets get sold for on the secondary market,” said Kahn. To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

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Obama Will Work With Congress on Plan to Send Astronaut to Mars, NASA Says

February 24, 2010

By Jeff Bliss Feb. 24 (Bloomberg) — The Obama administration will work with Congress in developing a plan for sending astronauts to Mars and will release it in the “coming months,” the head of the National Aeronautics and Space Administration said today. NASA Administrator Charles Bolden , a former space shuttle commander, resisted senators’ efforts at a Washington hearing on the agency’s fiscal 2011 budget to announce specific missions and deadlines. The administration has drawn opposition for proposing to scrap a program to return astronauts to the moon and describing a Mars mission as only a long-range goal. “The steps are pretty complex and complicated” to go to Mars, Bolden told a Senate Commerce, Science and Transportation subcommittee. “Two weeks after budget rolling out, I’m not capable of giving you a plan.” After the hearing, Bolden told reporters that development of the plan would be “evolutionary.” He declined to elaborate. The U.S. already operates robotic rovers on the Martian surface and has put unmanned craft in orbit around the planet. Obama plans to fund an expansion of that exploration work. Bolden faced opposition at the hearing from Democrats and Republicans to President Barack Obama ’s plan to end the Constellation program to develop rockets and spacecraft for a return to the moon by 2020. Constellation would have set the stage for an eventual Mars trip. With the scheduled end of the space shuttle program this year, the administration risks ceding U.S. space leadership without a firm plan, senators said. “By eliminating plans for a heavy-lift vehicle and a spacecraft” in the proposed budget, “the U.S., this senator fears, will be on the sidelines,” said Senator Bill Nelson , a Florida Democrat who is the panel’s chairman. Space Station Ferry Bolden highlighted one deadline: he said it was NASA’s plan to assist U.S. commercial companies in developing space vehicles that could be used to ferry astronauts to the International Space Station as soon as 2015. The administration’s spending plan sets aside $6 billion for the commercial effort. If Congress agrees to shut down Constellation, NASA should continue some rocket and capsule development, Bolden said. Nelson has said he is concerned about relying solely on commercial companies to fly astronauts to the space station. Obama’s budget supports the development of rocket systems that eventually might take U.S. astronauts back into deep space. In preparation for those trips, the administration envisions using robotic ships to find locations for future landings and test out new technology. Destination Sought Americans need specific goals and missions to be inspired, said Senator David Vitter of Louisiana, the subcommittee’s senior Republican. “You don’t accomplish great things without a clearly defined mission, and this budget has no clearly defined mission,” he said. The U.S. may lose valuable workers with needed skills if NASA employees and contractors aren’t given a better idea of how the agency will proceed on human space flight, said Michael Snyder, a space shuttle engineer. “You’re looking at a significant net loss of experience that won’t be re-established,” he said. Major contractors for Constellation’s primary rockets, the Ares I and Ares V, include Minneapolis-based Alliant Techsystems Inc. , Los Angeles-based Northrop Grumman Corp . and the Pratt & Whitney Rocketdyne Inc. unit of Hartford, Connecticut-based United Technologies Corp . Skepticism about Constellation grew after a presidential commission concluded last year that NASA would need $3 billion more a year for the program and wouldn’t get back to the moon until 2028. Use of Technology Commercial spacecraft companies already are using technology developed in the Constellation program, Bolden said. Hawthorne, California-based Space Exploration Technologies Corp. is applying the lessons of a Constellation thermal protection study to its Falcon 9 vehicle, Bolden said. Earlier this month, NASA awarded $50 million to companies to develop concepts for the astronaut taxi service. The winners included Chicago-based Boeing Co .; United Launch Alliance of Centennial, Colorado; Paragon Space Development Corp. of Tucson; Kent, Washington-based Blue Origin LLC and Louisville, Colorado-based Sierra Nevada Corp. To contact the reporter on this story: Jeff Bliss in Washington jbliss@bloomberg.net .

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Nokia CEO Stinging From IPhone Aims to Out-Jobs Apple With Apps and Maps

February 24, 2010

By Diana ben-Aaron

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Canada Gold Stocks Fail to Tap Metal’s Nine-Year Surge: Chart of the Day

February 24, 2010

By Matt Walcoff Feb. 24 (Bloomberg) — The adage that all that glitters isn’t gold is all too familiar to investors in Canadian producers of the precious metal, whose holdings have lagged behind as the commodity soared. The CHART OF THE DAY shows the gap between gains in the metal and an index of Toronto-traded gold stocks widened to a record last month as investors took advantage of new opportunities to invest in the commodity directly. Since the end of 2000, the last year gold declined, futures on the metal surged almost 300 percent in New York, about double the advance by the Standard & Poor’s/TSX Gold Index. “Investors are saying, ‘We would want to buy a gold company because of the exposure to the price of gold. Let’s just skip that and buy gold directly,’” said Paul Vaillancourt , director of portfolio strategy for Franklin Templeton Managed Investment Solutions in Calgary. Direct investment in gold has become easier because of the proliferation of gold exchange-traded funds, said Vaillancourt, who helps oversee about $27 billion. From the listing of the first such fund in Australia in March 2003 to the end of last year, gold ETFs grew to at least $62.3 billion in collective value, according to the World Gold Council. Canada is home to 8 of the world’s 20 biggest gold producers, including the biggest, Barrick Gold Corp. They haven’t taken full advantage of record bullion prices in part because the credit crunch has driven up costs, Vaillancourt said. With credit easing and costs for labor and equipment coming down, he is pushing Franklin Templeton money managers to invest in the stocks this year. “We have a preference right now for late-stage cyclicals in Canada, and gold stocks are fitting the bill,” he said. (To save a copy of the chart, click here.) To contact the reporter on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net .

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New York City May Get as Much as 13 Inches of Snow Starting Early Thursday

February 24, 2010

By Brian K. Sullivan Feb. 24 (Bloomberg) — The National Weather Service boosted its forecast for tomorrow’s snowstorm in New York City, saying that as much as 13 inches may fall and that travel in the region may be “very hazardous or impossible.” A winter storm warning goes into effect at 6 a.m. tomorrow. It calls for 7 to 13 inches (18 to 33 centimeters), up from earlier predictions of 5 to 10 inches, according to a weather service bulletin . The storm may be accompanied by wind gusts as high as 30 mph before it abates about 36 hours later. “Expect the steadiest and heaviest snow to fall from mid- morning Thursday through Thursday evening,” according to the statement. “Snow may mix with rain for brief periods of time on Thursday. If no mixing-in occurs, amounts will be up towards the higher end of the range, if not more.” The storm is the latest in an El Nino-driven weather pattern that has pushed moist air across the southern U.S., where it has mixed with colder air coming down from the Arctic, said Matt Rogers , president of private forecaster Commodity Weather Group in Bethesda, Maryland. The result has been record-breaking seasonal snows from Washington to Philadelphia. El Nino is a warming of the Pacific Ocean that occurs every two to five years and lasts about 12 months. Flights Canceled Continental Airlines Inc. , the fourth-largest U.S. carrier, canceled all flights tomorrow from Newark Liberty International Airport by regional partners including Continental Express and Pinnacle Airlines Corp.’s Colgan unit, said Mary Clark , a spokeswoman for the Houston-based carrier. The cancellations involve “several hundred” flights, Clark said. She didn’t immediately have a more specific number. Delta Air Lines Inc. , the world’s largest carrier, scrubbed 65 flights in the New York area for tomorrow, said Susan Elliott , a spokeswoman for the Atlanta-based company. UAL Corp. ’s United Airlines scrapped 70 flights today because of weather and is “still evaluating our plan for tomorrow,” said Sarah Massier, a spokeswoman. Amtrak canceled 8 trains for tomorrow on its Empire Service lines in the upstate New York area, said a spokeswoman, Karina Romero . A winter storm warning, meaning heavy snow, ice and freezing rain are imminent, has been issued from Maryland to Maine, according to the weather service. In northern New Jersey , as much as 18 inches of snow may fall, the agency said. ‘Strong Winds’ Possible “Strong winds are also possible,” the weather service statement for New York and New Jersey said. “This will make travel very hazardous or impossible.” In Massachusetts, southern New Hampshire, Rhode Island and Connecticut, where as much as 3 inches of rain may fall, flood watches have been issued. “It is a really complicated system, it is like a three- part deal,” Rogers said. “It is definitely going to be what they call a bomb in meteorology.” Tomorrow’s snow will be from the second storm to hit the area this week. A system brought rain to New York City and almost two feet of snow to western Massachusetts starting yesterday, disrupting air traffic in Newark, Boston, Baltimore and New York. “The Northeast is being impacted by one storm now, and the monster storm is going to impact the region tomorrow into Friday,” Eric Wilhelm of private forecaster AccuWeather.com . said earlier today. “A really complex situation is developing in the Northeast.” Power Failures Likely On the Massachusetts coast, sustained winds of 30 mph are expected with gusts as intense as 50 mph, according to a weather service high wind watch issued for the area. “There could be real problems with power outages,” Wilhelm said. “That could be the real legacy of this storm.” More than 50,000 customers in the Albany area and western Massachusetts are already without power from the storm moving north through New England today, according to utilities. High winds may also create wind-chill problems that will drive energy consumption, Rogers said. Temperatures in the region are expected to be in the 30s Fahrenheit, while the wind will make it feel colder. Demand for heating oil may be 8 percent above normal through March 3, according to Weather Derivatives , a Belton, Missouri, forecaster. Heating oil for March delivery rose 0.98 cent, or 0.5 percent, today to settle at $2.0421 a gallon on the New York Mercantile Exchange. Snowfall for Washington The Washington-Baltimore corridor has the potential to receive as much as 5 inches of snow in the storm, according to Brandon Peloquin, a weather service meteorologist in Sterling, Virginia . “There is some uncertainty with this storm,” Peloquin said by telephone. “There is some wiggle room. The track is critical.” The storms will add to what’s already been a benchmark winter in the eastern U.S., where seasonal snowfall records were broken in Washington and Baltimore. Most of that snow has melted away, Peloquin said. The heavy snow will taper off the day after tomorrow, although snow flurries and clouds will linger over much of the Northeast through the weekend, Wilhelm said. To contact the reporter on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net ;

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U.S. Negotiator `Confident’ Six-Nation Talks With North Korea Will Resume

February 24, 2010

By Bloomberg News Feb. 25 (Bloomberg) — U.S. special envoy for North Korea Stephen Bosworth said he is “confident” that six-nation talks on the country’s nuclear program will resume following discussions yesterday with his Chinese counterpart. “I’m confident at some point we’ll have a resumption of talks,” Bosworth said in an interview late yesterday evening in Beijing. “I think the interests of all six countries converge to make that a very optimal outcome.” Bosworth met with Wu Dawei , his Chinese counterpart, in Beijing yesterday. The visit comes amid a surge in diplomatic activity aimed at restarting six-nation talks aimed at dismantling North Korea’s nuclear weapons program. Chinese President Hu Jintao met a North Korean delegation in Beijing on Feb. 23, and Bosworth’s visit coincided with a trip to the Chinese capital by Wi Sung Lac , South Korea’s top nuclear negotiator. Hu held “friendly talks” with Kim Yong Il , director of the international affairs department of the Workers’ Party, and others in the visiting group, North Korea’s official Korean Central News Agency reported yesterday. The report, and one by China’s state-controlled Xinhua News Agency, didn’t say whether the parties discussed North Korea’s nuclear program. North Korea has said it will return to talks only after sanctions by the United Nations Security Council are removed, a demand rejected by the U.S. The communist country has been under stricter UN sanctions, which ban arms trading and restrict financial transactions, since it detonated a second nuclear device in May 2009. Third Test Yan Xuetong , director of the Institute of International Studies at Tsinghua University in Beijing, said he doesn’t expect North Korea will return to the talks until after it detonates a third nuclear device. This would lead the U.S to view the country as a more immediate threat and mean that negotiations would take on greater importance, he said. “Resuming the six-party talks will benefit the regional security interests for everyone,” Yan said in an interview. “But unfortunately at this moment North Korea can’t see eye-to- eye with other countries on their shared interests.” The U.S. is still waiting for a “signal” from North Korea on how to resume the nuclear discussions, State Department spokesman Philip J. Crowley said this week. Bosworth’s trip to Asia comes after he traveled to Pyongyang in December. Sung Kim , the chief U.S. negotiator to the six-party talks, is traveling with Bosworth on this week’s trip that includes stops in Seoul and Tokyo. South Korea and Japan are participants in the talks, which also involve Russia. — Michael Forsythe , Stephen Engle . With assistance from Bomi Lim in Seoul. Editors: Ann Hughey , Bill Schmick To contact Bloomberg News staff on this story: Michael Forsythe in Beijing at +8610-6649-7580 or mforsythe@bloomberg.net

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Hedge Funds Lure More Cash From Pensions Seeking to Fix Benefit Shortfall

February 24, 2010

By Saijel Kishan and Katherine Burton Feb. 25 (Bloomberg) — Florida’s state pension system , manager of $112 billion for a million firefighters, teachers and garbage collectors, is set to decide next week on the size of its first investment in hedge funds. Executives of the fourth-largest state retirement program in the U.S., who have considered putting money into the private pools of capital since 2007, will make the move amid a 7 percent shortfall in its ability to pay future benefits, the first in 13 years. Wisconsin’s pension also plans its initial allocation this year, while Boeing Co. ’s probably will raise its holdings. Public and private pensions are increasing hedge-fund commitments after slowing the flow of cash at the end of 2008. About 15 percent of U.S. institutions plan to boost their allocations, and 80 percent will keep them steady, according to a survey by SEI Investments Co. The investors are seeking to accelerate returns after losses during the financial crisis. “In 2008, everyone stopped allocating,” said David McMillan , director of hedge funds at Hammond Associates Inc. , a St. Louis, Missouri-based consultant that advises pension funds with $23 billion in assets. “I expect to see the pace of investing pick up.” Pension managers with hedge-fund holdings oversee about $3.2 trillion, according to Casey, Quirk & Associates LLC , a consulting firm based in Darien, Connecticut. While no estimates are available for how much money these funds might allocate in 2010, a 1 percent increase would translate to about $32 billion in inflows for the $1.6 trillion industry. Below Targets Corporate pensions are about half a percentage point below their average hedge-fund target of 10.2 percent of assets, while public systems are 1.4 percentage points below their 7.8 percent goal, according to SEI , an Oaks, Pennsylvania-based investment manager and consultant. Both groups raised their targets in 2009, setting the stage for new investments this year. U.S. states face a gap of more than $1 trillion between what they have saved and what they have promised to retired workers in pension and health-care benefits, according to a report released this month by the Pew Center on the States, a Washington-based research and advocacy group. The 100 largest corporate pension funds had a $324 billion shortfall as of January, according to a statement by Seattle-based consultant Milliman Inc. Equities Not Enough “Pension funds want to reduce the volatility of returns, and they don’t think equities will get them to their return targets,” said John Haugh , head of U.S. pensions and endowments research at Bank of America Merrill Lynch Global Research in New York. U.S. stocks, as measured by the Russell 3000 Index , are about 20 percent below their level in 2000. With interest rates just above record lows, returns on government bonds, a staple of pension-fund holdings, have declined. Public pensions rose an average of 3.7 percent annually in the past 10 years, while corporate plans gained 3.6 percent, Haugh said. Both have a target of 8 percent. Haugh said pensions also will invest in commodities, real estate, Treasury Inflation Protected Securities and natural resources such as timberland to counter their expectations of rising inflation. Hedge funds gained an average of 6.6 percent a year in the past decade through Jan. 31, according to the Credit Suisse Tremont Index. That compares with an average annual loss of about 1 percent by the Standard & Poor’s 500 Index and a 6.6 percent return by U.S. bonds, based on the Barclays Capital U.S. Aggregate Index. Redemptions End Investors pulled $298 billion out of hedge funds from Oct. 1, 2008, through June 30, 2009, according to Hedge Fund Research Inc. A net $15 billion flowed back in during the second half of last year, data from the Chicago-based research firm show. Funds attracted $140 million in inflows in January, Eurekahedge Pte, a Singapore-based research firm, said yesterday. “The majority of dollars coming into hedge funds in the next 12 months will primarily come from pension plans,” said David Harmston , head of the client group at London-based Albourne Partners Ltd., which advises 36 pension plans with $40 billion invested in the funds. The biggest funds, with extensive infrastructure and risk- management systems, are benefiting the most. Steven Cohen’s SAC Capital Advisors LP pulled in $1.3 billion between June and December, and Tudor Investment Corp.’s BVI Global Fund Ltd. raised the same amount between March and July before closing to new cash. SAC is based in Stamford, Connecticut, while Tudor is run by Paul Tudor Jones in Greenwich, Connecticut. Florida, Wisconsin Pension funds and endowments invested $7.67 billion in hedge funds last year, a decline of 47 percent from 2007, according to Eager, Davis & Holmes LLC, a consultant based in Louisville, Kentucky, that tracks money-management hiring. In Florida, the retirement system designated $1.75 billion during the year ending in June for assets that include timberland and infrastructure, Dennis MacKee , a spokesman for the State Board of Administration in Tallahassee, said in a telephone interview. Its investment advisory council will discuss how much of that money to steer into hedge funds when it meets March 3. Wisconsin Retirement System , which oversees $72 billion and was 88 percent funded at the end of 2009, is planning to invest in hedge funds for the first time this year, according to Vicky Hearing , a spokeswoman for the Madison, Wisconsin-based plan. “We are looking to diversify to reduce volatility in our overall portfolio,” she said in a telephone interview. The pension fund plans to initially invest in 15 managers and increase that number to 25, according to a December report. More Direct Investments In 2009, about 80 percent of the money invested in hedge funds went through middlemen known as funds of funds, according to Eager Davis. Some pensions are looking to deal directly with fund managers. Boeing, the second-largest U.S. defense contractor, expects to add about $400 million this year to the $1.3 billion it has with hedge funds, according to Todd Blecher , a spokesman for the Chicago-based company. Hedge-fund holdings of the plan, which oversees $46 billion, are done through middlemen, though the company may begin making direct investments, he said. Universities Superannuation Scheme , which oversees 30 billion pounds ($46 billion) for U.K. university employees, is one of the pension managers that first invested directly when it started allocating to hedge funds last year. “We want to have control, transparency and responsibility over picking managers,” Mike Powell , who oversees the organization’s alternative assets out of London, said in a telephone interview. “While fund of funds may add value on a gross basis, the fee drag means that the net returns are not enough to justify the risk.” Adding Fund Managers The pension plan has about 300 million pounds in hedge funds and expects to increase that to 1.5 billion pounds by investing on average as much as 75 million pounds in one manager a month, Powell said. Hedge-fund managers bet on falling and rising assets prices and take a cut of profits. They charge investors fees of about 2 percent of assets and 20 percent of investment gains. Funds of funds charge 1 percent of assets and 10 percent of profits on top of those fees. In the Netherlands, PGGM , a nonprofit that manages funds for Pensioenfonds Zorg en Welzijn, plans to move away from funds of funds and invest the 1.7 billion euros ($2.3 billion) it has in directly, according to an e-mail from Diana Abrahams, a spokeswoman. Zeist, Netherlands-based PGGM manages 87 billion euros. Skeptics Remain As of September 2009, public funds had about 52 percent in stocks, 29.5 percent in bonds, 16.8 percent in alternatives and 1.5 percent in cash, according to Bank of America Merrill. Corporate funds had 45.1 percent in stocks, 36.9 percent in bonds, 15.9 percent in alternatives and 2.1 percent in cash. Most pension managers include hedge funds in the alternative category. Not all retirement plans are convinced that the funds are for them. “We’re a conservative investor and hedge funds are too risky and flashy for our portfolio,” Ricardo Duran , a spokesman for the $134 billion California State Teachers’ Retirement System in West Sacramento, California, said in a telephone interview. Calsters is the second-largest state retirement program after the $200 billion California Public Employees’ Retirement System. Seeking Comfort Level Among the reasons why pension funds are hesitant to put money with hedge funds is that they lack an understanding of what they are invested in, said Daniel Celeghin , a partner at Casey Quirk. “Some of the investment strategies that hedge-fund managers use are so esoteric that board members are saying, ‘I don’t understand this 100 percent, so let’s go slowly,’ ” he said. Among those still reviewing the level of hedge-fund holdings is the School Employees Retirement System of Ohio , which invests about 3.3 percent of the $9 billion it manages in the private partnerships. “Hedge funds are new to us and so we’re still trying to get comfortable with them,” said Tim Babour , a spokesman for the Columbus-based plan, which made its first investment in hedge funds in 2008. To contact the reporters on this story: Saijel Kishan in New York at skishan@bloomberg.net ; Katherine Burton in New York at kburton@bloomberg.net

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Larsen & Toubro to Borrow $2.2 Billion to Fund New Roads, Power Projects

February 24, 2010

By Suprotip Ghosh Feb. 25 (Bloomberg) — Larsen & Toubro Ltd. , India’s largest engineering company, said it units plan to borrow at least 100 billion rupees ($2.2 billion) this year to fund road- building and power projects. “We will have to raise this money through special purpose vehicles and it will all be within the Indian financial system without any recourse to L&T,” Chief Financial Officer Yeshwant M. Deosthalee said in an interview at his Mumbai office. Mumbai-based Larsen will use half the money for five road projects and the rest to finance a 1,600 megawatt thermal power project in Rajpura, Punjab, he said. Infrastructure Development Projects Ltd., a Larsen unit, will own a special company set up to build roads. Indian utilities are planning to almost double generation capacity in the next seven years as the world’s second fastest- growing major economy expands its public infrastructure. Prime Minister Manmohan Singh has pledged to build power plants to cut peak-hour shortages and the Ministry of Road Transport and Highways has said it aims to build 20 kilometers of roads a day. Three Larsen units, L&T Ahmedabad Maliya Tollways Ltd., L&T Rajkot Vadinar Tollway Ltd. and CSJ Infrastructure Ltd., have a combined 30 billion rupees in project finance loans outstanding, according to data compiled by Bloomberg. The company has 115 billion rupees in total debt, the data show. Larsen won the bid for the Rajpura power project this year and is working on the project’s funding, Deosthalee said, without being more specific. Money raised for road-building will go to the company’s three projects in Gujarat, one in Maharashtra and one in Chennai, Tamil Nadu, he said. Larsen, which has declined 3.2 percent this year, gained 0.8 percent to 1,501.15 rupees in Mumbai yesterday. The stock slumped in January after the company reported its first quarterly sales decline in seven years. To contact the reporter on this story: Suprotip Ghosh in Mumbai sghosh47@bloomberg.net .

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China IPOs in U.S. Suffer Longest Slump in Five Years as Buyers Evaporate

February 24, 2010

By Michael Tsang and Nikolaj Gammeltoft Feb. 25 (Bloomberg) — Initial public offerings by Chinese companies in the U.S. are suffering their longest slump since at least 2004 after providing twice the return of American IPOs over the past five years. IPOs by Chinese companies on American exchanges fell 4.8 percent on average last quarter and 6.7 percent in January and February , the most consistent retreat since Bloomberg began tracking the data. Demand is waning after investors paid more than twice the so-called tangible net assets to buy shares of companies from China Nuokang Bio-Pharmaceutical Inc. , whose profits stagnated in 2009, to China Hydroelectric Corp., which has reported four straight years of losses. While the country’s economy is forecast to expand more than three times as much as the U.S. this year, the central bank is moving to rein in lending and growth just as a global slump in IPOs deepens. “If you’re looking to reduce risk it’s probably the first market to exit,” said Madelynn Matlock , the Cincinnati-based manager of the Huntington International Equity Fund at Huntington Asset Advisors, which oversees $15 billion. “Too many public offerings from China coming too quickly to market, combined with less risk appetite and the monetary tightening in China, have spooked investors.” Consumer Confidence The Bloomberg IPO Index of 63 companies on American exchanges has slipped 3.5 percent in 2010 as U.S. consumer confidence slumped to the lowest level since April and investors speculated that Europe’s widening budget deficits will slow the global economic recovery. The MSCI AC World Index of developed and emerging equity markets completed its longest stretch of weekly declines in almost a year this month and is down 3.4 percent in 2010. U.S. companies from Imperial Capital Group Inc. in Los Angeles to Fort Lauderdale, Florida-based Patriot Risk Management Inc. have postponed IPOs this year, while New York- based Blackstone Group LP’s Travelport Ltd. and New Look Group Plc of Weymouth, England, pulled London offerings this month. Moscow-based United Co. Rusal , the world’s largest aluminum producer, has retreated 24 percent since completing the first Hong Kong listing of a Russian company in January. The performance of Chinese IPOs in the U.S. began to deteriorate last quarter. Investors in five of the seven companies that completed deals suffered losses in the first month of trading, while buyers of 16 of the 24 offerings by American companies made money, data compiled by Bloomberg show. Snake Venom China Nuokang , based in Shenyang in China’s northeastern province of Liaoning, raised $45 million selling ADRs, according to a Dec. 9 filing with the U.S. Securities and Exchange Commission. The IPO valued the company at a 135 percent premium to its $3.83 in per share tangible book value, a measure of shareholder equity that excludes assets that can’t be sold in liquidation, the SEC filing and Bloomberg data show. The maker of blood coagulants derived from snake venom reported that net income in the first nine months of 2009 was little changed from the previous year at 41.6 million yuan ($6.1 million), the filing showed. The company’s ADRs, which represent eight common shares, fell 16 percent in the first month on the Nasdaq Stock Market. ADRs represent ownership stakes in overseas companies that are issued by U.S. banks and usually trade on American exchanges. ‘Speculative Money’ “There’s more risk in Chinese IPOs,” said Jim Porter , founder of Hinsdale, Illinois-based New Century Capital Management LLC. “You’re buying with less knowledge and less experience with IPOs from that country and a lot of the time people barely get a chance to see what’s in the prospectus. It’s more speculative money.” Losses have accelerated as China’s central bank increased banks’ reserve requirements twice this year to curb inflation and damp asset prices. The mandatory level will rise 50 basis points, or 0.5 percentage point, effective today, the People’s Bank of China said on its Web site on Feb. 12. Policy makers are reining in credit after banks extended 19 percent of this year’s 7.5 trillion yuan lending target in January and property prices climbed the most in 21 months. Record lending and a 4 trillion yuan stimulus package had helped China lead the recovery from the first global recession since World War II. The economy is forecast to expand 9.5 percent this year, according to economists surveyed by Bloomberg, after increasing 8.7 percent in 2009. The U.S. is projected to grow 3 percent. Daqo, JinkoSolar So far this year, only one of the four Chinese companies that have completed IPOs gained, Bloomberg data show. Chongqing, China-based Daqo New Energy Corp. and JinkoSolar Holding Co. of Shangrao in China’s southeastern province of Jiangxi have shelved plans to sell shares in the U.S. China Hydroelectric , the Beijing-based operator of small- scale hydropower plants on the mainland, raised $96 million selling ADRs and warrants at $16 per unit last month. The biggest of the Chinese offerings this year valued the company at a 188 percent premium to its tangible book value. The ADRs have since fallen 36 percent. Chinese offerings on U.S. exchanges from Baidu Inc. to Suntech Power Holdings Co. enriched investors over the past five years. Shares of 67 mainland and Hong Kong companies gained 22 percent on average in the first four weeks of trading during that period, beating the 11 percent advance for U.S. IPOs, Bloomberg data show. Baidu, Suntech ADRs of Beijing-based Baidu , the owner of China’s most popular Internet search engine, almost tripled in the month after its $122 million IPO in 2005. Suntech, the world’s largest maker of polysilicon solar- power modules, advanced 95 percent in its first month of trading after selling shares in December 2005. The company is located in Wuxi in eastern China’s Jiangsu province. “We’ve had a period where there has been a lot of talk about China being more restrictive from a spending and a monetary policy perspective,” said Thomas S. Caldwell , who oversees more than $1 billion as chairman of Caldwell Investment Management Ltd. in Toronto. “The perception right now is that the Chinese venue doesn’t look attractive in the short-term.” To contact the reporters on this story: Michael Tsang in New York at mtsang1@bloomberg.net ; Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net .

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General Motors Plans to Shut Hummer After Sale to Sichuan Tengzhong Fails

February 24, 2010

By Katie Merx Feb. 24 (Bloomberg) — General Motors Co. said it will close Hummer, the maker of military-inspired sport-utility vehicles, after Sichuan Tengzhong Heavy Industrial Machinery Co. couldn’t win Chinese approval to buy the unit. GM doesn’t know how many jobs will be lost among the 3,000 people now employed at Hummer, because some employees work on other vehicles, Nick Richards , a spokesman, said today. Richards said winding down the brand would take several months. Unloading Hummer was part of GM’s plan to cut its U.S. brands to four from eight after bankruptcy. The Detroit-based automaker sold its Saab unit yesterday, and absent a last-minute buyer Hummer will join Saturn and Pontiac in being shut as GM focuses on its top-selling domestic vehicle lines. “The Hummer brand was very much a product of its time,” said Aaron Bragman , an analyst at IHS Global Insight in Troy, Michigan. “In today’s much more environmentally conscious world, it’s a brand that just doesn’t fit in.” Tengzhong was “unable to obtain clearance of the transaction from the Chinese regulators within the proposed deal time frame,” according to a statement from the Chengdu-based company. GM and Tengzhong announced a sales agreement on Oct. 9. A Chinese government agency indicated that it wouldn’t give approval for Tengzhong to buy Hummer, said three people briefed on the deal, who asked not to be identified because the talks weren’t public. Wang Chao , China’s assistant commerce minister, said today that China didn’t block the bid. Small-Car Policy A Tengzhong purchase of Hummer would have bucked China’s government policy of promoting fuel-sipping small cars, which includes cutting the sales tax on vehicles with engine displacements of less than 1.6 liters. The H2 Hummer has a 6.2- liter V-8 engine, according to GM’s Hummer Web site. Richards, the Hummer spokesman, said GM would consider “viable alternatives for all or part of the brand during wind down.” GM also had said in December it would shut Saab, only to revive talks and reach the agreement that was completed yesterday with Spyker Cars NV . GM first said it planned to sell Hummer at its June 2008 annual meeting as record fuel prices prompted the biggest U.S. automaker to focus on developing more fuel-efficient cars. U.S. sales for the unit fell 67 percent last year as the economy faltered, GM slid into a 40-day government-backed bankruptcy and Hummer’s fate was unresolved. Hummer sales began in 1999 with the $140,000 H1, a 7,600- pound SUV (3,400 kilograms) patterned after the all-terrain military vehicle popularized for road use by actor Arnold Schwarzenegger , now California’s governor. The 6,600-pound H2 debuted in 2002, followed by the 4,700-pound H3 in 2005. “Closing Hummer simultaneously improves the health of GM, China and the planet,” said Daniel Becker , director of the Safe Climate Campaign at the Center for Auto Safety, an advocacy group in Washington. “Hummer should rest in pieces.” To contact the reporter on this story: Katie Merx in Detroit at kmerx@bloomberg.net

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Japanese Stocks Rise After Bernanke Comments on Rates; Mazda, Toyota Climb

February 24, 2010

By Kana Nishizawa Feb. 25 (Bloomberg) — Japanese stocks rose after Federal Reserve Chairman Ben S. Bernanke said the U.S. economy requires low interest rates to spur demand. Toyota Motor Corp. , the world’s largest automaker, climbed. Mazda Motor Corp., Japan’s second-largest car exporter, advanced after Merrill Lynch & Co. raised its rating to “buy” from “underperform.” Canon Inc. , the world’s largest camera maker, gained. Mitsui & Co., whose biggest source of profit is commodities, advanced after oil rose in New York yesterday. “Bernanke’s comment gave the market a sense of relief,” said Mitsushige Akino , who oversees about $450 million at Tokyo- based Ichiyoshi Investment Management Co. The Nikkei 225 Stock Average rose 0.3 percent to 10,225.40 in Tokyo as of 9:21 a.m. The broader Topix index gained 0.2 percent to 896.84, with about nine stocks advancing for every five that fell. The Topix index fell 1.3 percent this year to yesterday on speculation central banks will tighten monetary policy, and that Greece, Spain and Portugal will struggle to curb deficits. The Standard & Poor’s 500 Index rose 1 percent in New York yesterday after Bernanke said the economy still needs low interest rates. He said a slack labor market and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate low “for an extended period.” Crude oil for April delivery advanced 1.5 percent in New York yesterday, its biggest gain in a week. The London Metal Exchange Index of six metals including copper and zinc rose 0.3 percent yesterday, its first increase in three days. To contact the reporter for this story: Kana Nishizawa in Tokyo at knishizawa5@bloomberg.net .

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