deals

Mike Lux: Which Retiring Senators Will Be Working for Wall Street Next Year?

April 5, 2010

The most unnerving part of the debate on financial reform is wondering which of the retiring senators spending time on crafting the legislation are thinking about, or even actively discussing, going to work for one of the Wall Street mega-banks. One of the great myths in American political theory is that once a politician gets ready to retire, or can’t run again because of term limits or other reasons, it makes him or her likely to be a “statesman” because he or she doesn’t have to worry about the voters anymore. The presumption that actual voters are unhelpful to getting good legislation passed is profoundly undemocratic because once voters don’t matter anymore, other things begin to matter too much: where you will work next, how much you will get paid, what your close friends (many of whom have raised all that money for you over the years) think, what the DC establishment that you will be hanging out with at cocktail parties in your retirement think. Things like that may start to matter a lot more to some retiring Senators than being able to defend the deals you are cutting to voters. It’s not like the kind of thing I’m talking about has never happened. The most obvious case is Billy Tauzin working on the prescription drug bill that was such a sweet deal for Pharma, and then going to work for them as a seven-figure salaried president after he retired. But there are many, many other cases of congresspeople and senators working on legislation affecting an industry the year they retire, then getting a great consulting gig with the industry trade association soon thereafter. The financial reform bill is way too important to let this happen. All of the senators and House members working on this bill should pledge right now that they will not go to work after they retire for Goldman Sachs, Citibank, JP Morgan Chase, any other of the other mega-banks, the American Bankers Association, or any of the other big industry players on this legislation. There are too many rumors swirling around on Capitol Hill right now of major players in this fight who are retiring this year starting to feel out industry players for jobs in 2011. The White House, Speaker Pelosi, and Senator Reid should demand that all the Senators working on this bill take such a pledge to not sell out the American public. The Dodd bill needs to be strengthened. Democrats need to draw a line in the sand and fight for a bill that really does something to take on the big banks. If the Republicans want to defend Wall Street by filibustering such a bill, God bless them, I’d be delighted to have that fight. But to get the best possible bill, we need the Senators negotiating it to not be preparing to work for the industry.

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Silicon Valley Companies Gear Up for Acquisitions Amid Improving Economy

April 3, 2010

By Ryan Flinn, Serena Saitto and Tim Mullaney April 4 (Bloomberg) — Silicon Valley companies looking to put their cash to work may drive a wave of mergers this year, bankers and venture capitalists say. Companies are eager to make acquisitions because many of them have cut research budgets, says Robert Ackerman , founder and managing director of Allegis Capital in Palo Alto, California. That means they’re not as able to fall back on their own ingenuity to fuel growth. More businesses are relying on acquisitions to find their next new product or service, he says. “The product cabinet is bare, but the market continues to move forward,” Ackerman said. “Wherever you see innovation sprint ahead, companies will have a product deficit, and will look to fill it.” Google Inc. , based in Mountain View, is currently one of California’s most acquisitive companies, buying at least five businesses in 2010. It agreed to buy Picnik Inc. last month, acquiring online photo-editing tools. Its purchase of DocVerse provided it with software that lets people share documents over the Internet. The value of the deals wasn’t disclosed. The state’s largest single deal this year was Shiseido Co.’s purchase of San Francisco-based Bare Escentuals Inc. for about $1.7 billion. California deal-making plummeted after 2007, when more than 2,670 transactions totaled almost $254 billion. So far this year, there have been about 530, worth $16.7 billion. That’s a higher number than in the first three months of 2009, although the value was greater in that year-ago period, at about $30 billion. McAfee, Tibco Local acquisition targets include Santa Clara’s McAfee Inc., Tibco Software Inc. in Palo Alto and Cupertino-based ArcSight Inc., according to Brent Thill , an analyst at UBS AG in San Francisco. McAfee and ArcSight both make programs that protect data, which could be more valuable as cyber threats mount. Tibco’s software helps programs of all kinds share information. Goldman Sachs Group Inc. also cited San Francisco’s Salesforce.com Inc. and Palo Alto-based VMware Inc. as possibilities — though those companies aren’t the most likely targets, the firm says. Salesforce.com makes online customer- relationship software, while VMware sells so-called virtualization programs, which help computers run more than one operating system. Representatives from all the targets declined to comment or didn’t respond to messages. Deal Volume In Northern California, there were 45 deals involving venture-backed startups during the first three months of 2010, according to the National Venture Capital Association. That was the highest number in any quarter in at least five years. More than 50 companies in California have at least $1 billion in cash and equivalents, which they could use for acquisitions. They’re led by a Bay area trio: San Francisco’s Wells Fargo & Co. , with $68 billion; Cisco Systems Inc. in San Jose, with $39.6 billion; and Cupertino-based Apple Inc. , with $24.8 billion, according to Bloomberg data. “There’s a lot of cash on people’s balance sheets, so I think it’s a great time for startups,” said Kate Mitchell , managing director at Scale Venture Partners in Foster City, California. “They see that the faster, better, cheaper venture- backed companies are still growing, and they’re not spending on R&D, so they can be accretive.” The value of deals in California topped out at $378.1 billion in 2000 during the Internet bubble, when there were more than 2,200 transactions. It took five years for the number of deals to surpass that earlier peak, and the dollar amount has never come close to recapturing the dot-com era’s glory. Internet Bust While the latest recession was the worst economic slump since the Great Depression, it actually wasn’t as devastating to California deal-making as the dot-com collapse. After having easy access to venture money and initial public offerings in the late-1990s and 2000, money dried up. The M&A industry hit bottom in 2002, when just 1,505 transactions accounted for $95.3 billion. The deals crept back up over the next four years, peaking again in 2006 and early 2007. There were 665 in the first quarter of 2007, valued at $59.8 billion. That’s more than three times the number reported last quarter. Tor Braham , head of technology mergers and acquisitions for Deutsche Bank AG in San Francisco, says mergers are ready to surge again for two reasons. Pressure’s On? “Private-equity funds have raised a lot of money before the financial crisis and there’s pressure on them to spend it before those commitments expire,” he said. Also: “Sellers want to get their deals done this year, before the expected increase in capital gains tax rate.” Private-equity firms raised $538 billion in 2006 and $587 billion in 2007, just before the recession, according to the Private Equity Council in Washington. Capital-gains taxes, meanwhile, could rise above 20 percent for people earning more than $250,000 under budget proposals before Congress. In the first quarter, Deutsche Bank advised Techwell Inc. in its $370 million takeover by Intersil Corp. The bank also worked with Nimsoft Inc. in its $350 million acquisition by CA Inc., and Francisco Partners on its sale of Numonyx BV to Micron Technology Inc. for about $1.3 billion. Even as mergers pick up, it may take until next year to get back to 2007 levels, Braham says. “Mergers-and-acquisition activity in the technology industry was very quiet in the first quarter,” he said. Matt Murphy , a partner at Kleiner Perkins Caufield & Byers in Menlo Park, is more bullish. The number of acquisitions this year will be close to the 2007 level, he says. “It feels like there is pent-up demand.” Mobile technology is one area where the big companies want to bulk up, leading to more acquisitions, Murphy says. “M&A is definitely picking up,” he said. “This is going to be a big year.” To contact the reporters on this story: Ryan Flinn in San Francisco at rflinn@bloomberg.net ; Serena Saitto in New York at ssaitto@bloomberg.net ; Tim Mullaney in New York at tmullaney1@bloomberg.net

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Global Economic Rebound: Week in Review

April 2, 2010

April 2 (Bloomberg) — Evidence of a global economic rebound leads a review of the week’s top stories. Reports showed a recovery in manufacturing in the U.S., China, Japan and Europe. American companies added 162,000 jobs in March, the most in three years . Read “ How Lou Lucido Let AIG Lose $35 Billion With Goldman Sachs CDOs ” for exclusive insight into how asset-management practices helped push American International Group Inc. toward insolvency. Bloomberg BusinessWeek’s cover story is “ Goldman Sachs: Don’t Blame Us. ” Also at BusinessWeek.com, see a slide show of early accessories for Apple Inc.’s iPad . Watch a Bloomberg Television interview with Treasury Secretary Timothy Geithner by clicking on the VIDEO tab above. Featured videos also include an in-depth profile of Russian billionaire Mikhail Prokhorov. Read the story here . Following is a selection of more top stories from the past week, chosen by senior editors at Bloomberg News. Losing Kennedy Made Obama Find Health Care in Homage to Cause March 31 (Bloomberg) — Five days after President Barack Obama’s inauguration, Tom Daschle requested a meeting with the new president. House Flippers in U.S. Crowd Courthouse Steps in Hunt for Deals March 31 (Bloomberg) — During the U.S. housing boom, even amateur investors could buy and sell a property within a couple of months and turn a profit. Today there’s nothing amateur about house flipping. Myriad Loses U.S. Court Ruling Over Breast Cancer-Gene Patents March 29 (Bloomberg) — Myriad Genetics Inc. lost a U.S. court ruling over its patents for a way to detect inherited breast cancer in a decision that may lead to other challenges to gene-related patents. Fighting Dumb People, Turtles, Power Lines, Woman Rehabs Birds March 30 (Bloomberg) — Suzie Gilbert is in her kitchen holding the corpse of a red-tailed hawk, frozen stiff and well- preserved. An entry wound under a claw and exit wound through the shoulder evince cause of death: electrocution by power line. The most-read opinion columns of the past week: 1. Bill Gross May Be Predicting Bull Run in Stocks: David Pauly 2. Apple’s IPad Targets Kindles, Might Hit Macs: Rich Jaroslovsky 3. In Strip Flap Steele Has No Clothes: Margaret Carlson 4. Roubini’s Collision Course Is Warning for Google: William Pesek 5. U.S. Decline, Sloth Look a Lot Like End of Rome: Mark Fisher Following are the most-read stories on Bloomberg.com from the past week: 1. ADP Says U.S. Companies Unexpectedly Cut Payrolls 2. Apple IPad a ‘Winner,’ ‘Game Changer,’ Reviewers Say 3. Goldman Capitulation on Dollar Shows Reversal on U.S. 4. Paulson’s $32 Billion Funds Prompt Too-Big Concerns 5. Treasuries Find Greenspan’s Canary Fainting in Mine 6. Northeast States Declare Emergency on Record Rainfall 7. Verizon Joins AT&T in Booking Costs From Health-Care Bill 8. Medvedev Seeks ‘Brutal’ Response to Terror Attacks 9. Fed Reveals Bear Stearns Assets It Swallowed in Firm’s Rescue 10. Irish Banks Need $43 Billion After ‘Appalling’ Lending # # -0- Apr/02/2010 17:47 GMT

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Sternlicht’s Starwood Said to Raise $2.8 Billion for Two Real Estate Funds

March 31, 2010

By Jonathan Keehner April 1 (Bloomberg) — Starwood Capital Group LLC, the investment firm founded by Barry Sternlicht , finished raising capital for two funds totaling about $2.8 billion that will invest in real estate. The Starwood Global Opportunity Fund VIII, which will target distressed debt and property, took in more than $1.8 billion, according to a person familiar with the effort. The Hospitality Fund II, which will invest in hotels, attracted almost $1 billion, said the person, who declined to be identified because the deal is private. Starwood had previously raised about $10 billion of equity for 11 funds and other investments, according to documents from JPMorgan Chase & Co., which helped the firm find investors. Starwood is leading a plan to bring Extended Stay Hotels Inc. out of bankruptcy and purchased loans in October from failed Chicago-based lender Corus Bankshares Inc. as the real estate market reels from a 40 percent drop in commercial property values from its 2007 peak. “Raising new capital in this environment speaks to the team at Starwood and the deals they’ve been able to get done,” said Dan Fasulo , managing director of New York research firm Real Capital Analytics Inc. “Barry and his team are one of the few that have been able to put money to work in the past few months.” Starwood Global Opportunity Fund VII, which closed in 2005 with commitments of $1.48 billion, was up 3 percent as of January, according to the person. Starwood Capital Hospitality Fund I, which closed in 2005 with commitments of $900 million, was up 10 percent, the person said. FDIC Loans Starwood plans to invest much of the new opportunity fund’s capital in the U.S., targeting distressed borrowers, lenders and banks taken over by the Federal Deposit Insurance Corp. “Everyone knows of somebody who’s in trouble with something in real estate today,” Sternlicht, 49, said on a Feb. 11 call with potential investors, a recording of which was obtained by Bloomberg News. “It’s a great opportunity for us.” Starwood, based in Greenwich, Connecticut, led a group in October that won part of a $4.5 billion portfolio of real estate assets that belonged to Corus before regulators took over the Chicago-based lender in September. Starwood and its partners outbid their nearest competitor for the portfolio by more than $100 million, or 20 percent, people familiar with the sale said at the time. Sternlicht said on the call that Starwood is “spending a lot of time with the FDIC.” Most regional banks in the U.S. are “effectively bankrupt,” Sternlicht said, providing an opportunity as $1.2 trillion of real-estate debt matures over the next four years. Carlyle Hotel Starwood Capital may also acquire distressed properties by taking positions in the debt, said Sternlicht, including the Carlyle Hotel on Manhattan’s Upper East Side. The firm bought mezzanine loans backed by the hotel for 50 cents on the dollar around January 2009, he said. The Carlyle, owned by Rosewood Hotels and Resorts LLC, has seen cash flow drop since Starwood Capital bought the note, Sternlicht said. “We’re just hoping they trigger a covenant,” Sternlicht said of the loan, which matures next March, adding that his firm could wind up owning the hotel for $400,000 per guest room, or about 30 percent of replacement cost. “We take over management; that would be a windfall.” Sternlicht is also trying to take over ailing Las Vegas casino-owner Riviera Holdings Corp. four years after a bid he backed was shot down by shareholders. Riviera Deal Starwood Capital, along with “some friends,” bought control of Riviera ’s first mortgage for about 50 cents on the dollar and is leading creditors negotiating a prepackaged bankruptcy, Sternlicht said. Riviera, which owns a Colorado casino in addition to the 55-year-old Las Vegas resort, defaulted on a $245 million loan in February 2009. “We are now working to take the company through a pre- pack,” Sternlicht said. “It’s going very well. We lead the creditors’ committee there.” Starwood Capital could own Riviera’s 26-acre resort for “about $5,000 a room, which is less than the cost of the furniture,” Sternlicht said on the call, without saying how much Riviera debt it held. “I’m thinking of it as a long-term parking lot. We’re just going to hold it and have very little invested in the deal.” Starwood Capital is also working on a restructuring with “a multi-billionaire who has a large real estate portfolio,” Sternlicht said on the call. He didn’t name the person. “Those are exciting opportunities when you have few competitors,” he said. “Most of our competitors are mortally wounded, especially the Street.” Sternlicht founded Starwood Hotels & Resorts Worldwide Inc. in 1995 and was that company’s chairman and chief executive officer for almost a decade. Brands include the W, Sheraton and Westin. He raised $810 million through an initial public offering of Starwood Property Trust Inc. , a REIT. Shares have since dropped 3.5 percent. To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net

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Greek Seven-Year Bond Demand Seen as Gauge to Measure Need for EU Support

March 30, 2010

By Caroline Hyde and Sonja Cheung March 30 (Bloomberg) — Greece’s prospects of raising 35 billion euros ($47 billion) of debt this year to avoid a bailout from the European Union may depend on how investors receive the nation’s seven-year bonds on their first day of trading. Greece’s 5 billion euros of notes fell after the country sold the securities yesterday without offering a yield premium over existing debt. The government got 6 billion euros of orders for the notes, compared with 15 billion euros for the 10-year bonds it issued on March 4, when it offered an extra 32 basis points, bankers involved in the deals said. “The market will be looking to see how this deal performs over the next few days, which is the real test,” said Georg Grodzki , head of credit research at Legal & General Investment Management in London, which oversees more than 300 billion pounds ($449 billion) of assets. “Greece needs to set the stage for its next issue and it won’t be a good signal if the spreads move out on this new seven-year issue.” Prime Minister George Papandreou ’s government must raise as much as 10.5 billion euros by the end of May if it’s to avoid re-igniting the budget crisis that prompted the EU to step in with a rescue plan March 25. Yesterday’s sale was Greece’s first since EU leaders drafted the financial safety net. Greece’s Public Debt Management Agency said in January it needs to raise 53 billion euros of bonds in 2010. It has sold 18 billion euros so far. Bonds Fall The yield on the new notes rose to 6.27 percent as of 4:15 p.m. in London, up from 6 percent when they were issued yesterday, ABN Amro Bank NV prices show. Yields move inversely to bond prices. “The crucial message to the market is that we successfully raised another decent benchmark-size new issue,” Petros Christodoulou , head of the PDMA in Athens, said yesterday in an e-mailed comment. “We have prefunded the whole of April. Once the market digests that, it will realize that our refinancing risk is largely gone.” The new notes stayed lower after Greece’s surprise auction of 5.9 percent bonds maturing October 2022 today attracted demand for less than half the debt on offer. The country’s increase of its existing 12-year issue raised 390 million euros, compared with an upper limit of 1 billion euros, the PDMA said. Greece needs an average of almost 2 billion euros a month to cover the budget gap and interest payments on debt, according to its deficit-reduction plan. The nation is aiming to cut the deficit by 4 percentage points in 2010 from last year’s 12.7 percent of gross domestic product, before satisfying the EU’s 3 percent limit by 2012. Spread ‘Risk’ “We may see the price of the latest bond fall a bit, as there’s still volatility in the market and in general a risk of widening spreads as Greece contends with refinancing existing debt,” Tim Brunne , a credit strategist at UniCredit SpA in Munich, said before the notes started trading. Greece priced the seven-year securities to yield 310 basis points more than the benchmark swap rate, according to data compiled by Bloomberg. The 6 percent yield at issue was the same as on the nation’s existing seven-year notes, according to composite prices on Bloomberg. That compares with 6.44 percent on the 10-year benchmark bonds it issued March 4 and 5.93 percent on five-year notes sold on Jan. 26, Bloomberg data show. A spokesman for ING Groep NV, one of the managers of the bond sale, couldn’t be reached for comment. Bankers from Bank of America Merrill Lynch also weren’t available. A London-based spokesman for Societe Generale SA declined to comment. Alpha Bank AE and Emporiki Bank SA were also hired to manage the transaction. Spain, Portugal While the seven-year bonds didn’t offer a yield premium over existing government debt, Greece paid investors switching out of comparable Spanish or Portuguese securities as much as five times the spread, according to prices on Bloomberg. The yield on the Greek bonds equates to 363 basis points more than benchmark seven-year German securities, compared with 334 basis points when the securities were issued. That compares with 63 basis points for similar-maturity Spanish debt and 115 basis points for Portugal’s bonds, Bloomberg data show. A basis point is 0.01 percentage point. Greece will pay about 570 million euros more in interest over the lifetime of the new bonds than on bonds due July 2017 issued January 2007, according to Bloomberg calculations. ‘Next to No Premium’ “The new issue is offering next to no premium over existing debt and is therefore not a compelling trade,” said Louis Gargour , chief investment officer at hedge fund LNG Capital LLP in London, who didn’t buy the securities. “However, Greece has probably priced it tightly because investors expect that, from here on in, their debt will tighten as a result of expected assistance from IMF and Europe.” EU backing for Greece was “significant” in clarifying the willingness of Greece’s euro-area partners to act as a “lender of last resort” and to support an International Monetary Fund program if required, Fitch Ratings said in a statement yesterday. The IMF will impose conditions on Greece if the debt- stricken euro-region economy asks for assistance, Managing Director Dominique Strauss-Kahn said in an interview. “If, and it’s a big if, Greece asks for support, we will provide support for Greece as one of our members, as we do with any other member,” Strauss-Kahn said. “The IMF will define the conditionality, as we do with any country.” Spread Widens The extra yield investors demand to hold 10-year Greek notes rather than benchmark German bunds has risen 28 basis points since before the bond sale was announced, to 333 basis points. The difference was 239 at the start of this year and as high as 396 in January, compared with an average of about 60 basis points in the past 10 years. The cost of default insurance on Greece’s debt also rose, with credit-default swaps on the nation climbing 20 basis points to 335.5 basis points, according to CMA DataVision prices. The contracts, which pay the buyer face value in exchange for the underlying securities or the cash equivalent in the event of default, rose to 428 basis points on Feb. 4. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net ; Sonja Cheung in London at scheung58@bloomberg.net

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U.S. Stocks Erase Gains on Concern Debt Will Derail Recovery; Dollar Rises

March 30, 2010

By Michael P. Regan and Rita Nazareth March 30 (Bloomberg) — U.S. stocks erased an early rally and the dollar rose as concern deteriorating government finances will derail the economic recovery overshadowed better-than- estimated data on American consumer confidence and home prices. The Standard & Poor’s 500 Index slipped less than 0.1 percent at 12:54 p.m. in New York after climbing as much as 0.4 percent. Greek stocks and bonds slid as the government sold debt. The Iceland krona fell against the dollar and the OMX Iceland All-Share Index of stocks slid 0.9 percent as S&P cut the nation’s credit rating. The euro fell versus the dollar for the first time in three days. London’s FTSE 100 Index lost 0.7 percent as Gartmore Group Ltd. suspended a fund manager. An unexpected auction of Greek 12-year bonds garnered demand for less than half the debt offered as the nation’s seven-year notes fell in the first day of trading. Iceland’s local currency credit ratings were cut by S&P on concern foreign-exchange controls will restrict monetary flexibility and investment prospects. “There are lots of things to worry about as it relates to the fiscal situation of the countries of Europe,” said Keith Wirtz , who oversees $18 billion as chief investment officer at Fifth Third Asset Management Inc. in Cincinnati. “The market will likely be volatile to any piece of news that comes in.” The Dollar Index, which gauges the currency against six major trading partners, climbed 0.1 percent after earlier dropping 0.5 percent. The euro weakened 0.5 percent to 1.3421 against the dollar. Greece’s prospects of raising 35 billion euros ($47 billion) of debt this year to avoid a bailout from the European Union may hinge on how investors receive the nation’s seven-year bonds on their first day of trading. Greek Debt The 5 billion euros of notes fell after the country sold the securities yesterday without offering a yield premium over existing debt. The government got 6 billion euros of orders for the notes, compared with 15 billion euros for the 10-year bonds it issued on March 4, when it offered an extra 32 basis points, bankers involved in the deals said. The ASE index of Greek stocks tumbled 2 percent. Greece’s 10-year bonds fell, sending yields up 16 basis points, or 0.16 percentage point, to a one-week high of 6.45 percent. The difference in yield between 10-year Greek debt and 10-year German bunds increased 19 basis points to 335 basis points. “Greek bonds are getting killed,” said David Lutz , managing director of equity trading at Stifel Nicolaus & Co. in Baltimore. “There’s a lot of concern on sovereign debt. People are worried that the situation is not resolved.” Gains Erased Earlier gains in U.S. equities came after reports showed home prices in 20 U.S. cities unexpectedly rose in January, indicating the housing market is stabilizing as the economy expands, and the Conference Board’s consumer sentiment index topped economist estimates. Most European stocks declined, erasing a 0.6 percent gain in the Stoxx Europe 600 Index. Gartmore Group tumbled 31 percent after suspending Guillaume Rambourg , who helps oversee the U.K. money manager’s two biggest hedge funds, amid an internal investigation. The probe relates “to breaches of internal procedures regarding directing trades,” the firm said in a statement today. It isn’t connected with last week’s arrests of seven people suspected of insider trading, Gartmore said. Stocks rallied around the world earlier amid speculation the global economic rebound is strengthening. The Dubai’s DFM General rallied 1 percent while Romania’s BET index rose 0.9 percent and Kazakhstan’s KASE index climbed 0.8 percent. The MSCI Asia Pacific Index climbed 0.7 percent to a 10- week high, the Shanghai Composite Index rose 0.2 percent and the Hang Seng China Enterprises Index of Hong Kong-traded shares jumped 1.6 percent. To contact the reporters for this story: Michael P. Regan in New York at mregan12@bloomberg.net ; Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net .

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Subprime-Mortgage Debt Rallies as Treasury Boosts Loan Aid: Credit Markets

March 29, 2010

By Jody Shenn March 29 (Bloomberg) — Subprime-mortgage securities are rising at an accelerating pace as the U.S. begins to encourage reductions to homeowners’ balances, which may lead to fewer foreclosures and a quicker end to the housing slump. A Markit ABX index of credit-default swaps tied to 20 subprime-loan bonds rated AAA when created in the first half of 2006 climbed 3.2 percent last week to 49.1, the highest since January 2009, according to Markit Group Ltd. Senior-ranked bonds tied to borrowers with poor credit will mostly benefit after the Treasury Department said for the first time it would seek to cut the size of mortgages, reducing the likelihood that loan modifications will fail, according to JPMorgan Chase & Co., Morgan Stanley and Barclays Plc. The housing market will also be aided as the revised plan helps avert more foreclosures, Amherst Securities Group LP analyst Laurie Goodman said. The new U.S. policy “will dramatically improve the success rate on mortgage modifications,” Goodman, who is based in New York, wrote in a March 26 report. “This will, in turn, help cushion future home price depreciation and limit further housing market deterioration.” ABX-HE-AAA indexes tied to bonds from different periods also gained while remaining below levels reached in January. The gauges declined from 100 starting in 2007, suggesting similarly sized drops in the prices of the subprime securities. The ABX.HE.AAA 06-2 index rose today to 49.12. Treasury’s Program The Treasury announced March 26 the change to the federal Home Affordable program, which makes use of taxpayer subsidies and is aimed at helping as many as 4 million homeowners avert foreclosures through debt modifications. The initiative, which was announced 13 months ago, had focused on encouraging cuts to payments rather than balances. Elsewhere in credit markets, Ambac Financial Group Inc. may not make a payment to cover a cash shortage for bonds issued by Las Vegas Monorail Co. in July. Dubai World offered creditors a shortfall guarantee as part of a repayment plan and Deutsche Bank AG said asset-backed bond sales in Europe will outstrip the number of deals kept by banks this month for the first time since the start of the credit crisis in August 2007. The Las Vegas monorail, linking the city’s casinos, is seeking to reorganize under Chapter 11 bankruptcy and has minimal funds to cover its next scheduled debt payment of $9.6 million, Wells Fargo, the trustee for the bonds, said March 26. While insured by Ambac, the obligation has been transferred to a segregated account by Wisconsin insurance regulators, according to the filing. Dubai Guarantee If the sale of assets from Dubai World, the state-owned holding company seeking to restructure $14.2 billion of debt, doesn’t generate sufficient cash to repay loans, the government will make up the shortfall up to a certain level, said a person familiar with the matter who declined to be identified because the discussions are private. The guarantee clause wasn’t outlined in Dubai World’s press statement on March 25 when the restructuring plan was announced. About 3.5 billion euros ($4.7 billion) of notes backed by real estate, consumer debt or corporate loans were sold this month by banks in Europe, London-based Deutsche Bank analysts Conor O’Toole and Ivan Pahlson-Moller wrote in a report. A total 1.6 billion euros of notes were issued and retained. Banks kept the bonds as collateral for short-term loans from central banks when investors shunned asset-backed securities after the credit crunch took hold. As concerns eased, yield spreads on three-year prime residential mortgage-backed notes have dropped to 155 basis points more than benchmark rates from 350 basis points a year ago, Deutsche Bank data show. Commercial Mortgage Debt Investors should buy higher-yielding bonds backed by commercial mortgages as the economic recovery gains steam, according to JPMorgan. Yields on the safest debt backed by real estate loans have narrowed 1.3 percentage points to 3.7 percentage points more than benchmark swap rates this year, according to bank data. Buyers are seeking higher returns amid a lack of new bonds and will increasingly look for securities originally rated AAA that have less of a cushion insulating investors from losses, many of which have had ratings cuts, JPMorgan analysts led by Alan Todd wrote in a report. The cost to protect against defaults on corporate bonds fell, trading in benchmark credit derivatives indexes shows. The Markit CDX North America Investment Grade Index Series 14 declined 2 basis point to a mid-price of 85.2 basis points as of 5:02 p.m. in New York, according to Markit Group. Risk in Europe In London, the Markit iTraxx Europe Index, which investors use to speculate on creditworthiness or to hedge against losses on 125 investment-grade companies, fell 1.1 basis point to 77.5, Markit prices show. Credit-default swaps tied to Greece rose 23 basis points to 318 basis points, according to CMA DataVision. Greece, the European Union’s most indebted member, offered more than five times the yield premium of comparable Spanish debt to lure investors to its first bond sale since a bailout was agreed to for the nation. Greece priced the 5 billion euros of seven-year bonds to yield 310 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction, who declined to be identified before the sale is completed. The price of Greece’s credit swaps soared to as high as 428 basis points on Feb. 4 when it seemed likely Greece’s debt crisis would spread to its southern European neighbors. Home Affordable Program Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 annually on a contract protecting $10 million of debt for five years. A decrease indicates improvement in the perception of credit quality; an increase, the opposite. Under revisions to the Treasury’s Home Affordable program scheduled to take effect this year, mortgage servicers must consider reducing amounts owed by delinquent borrowers if their loans exceed 115 percent of the current value of their homes. Borrowers who haven’t missed payments may also qualify. “Until now, foreclosure mitigation efforts focused on the ‘ability of borrowers’ to make their mortgage payments,” Morgan Stanley analysts Vishwanath Tirupattur and James Egan wrote in a report today. “However, they did not address the ‘willingness of borrowers’ to default on their mortgages in view of their underwater (negative equity) status,” with about 23 percent facing balances greater than their properties’ values. Performance of Indexes ABX indexes indicate prices for credit-default swaps linked to 20 bonds. The swaps offer protection if the securities aren’t repaid as expected, in return for regular insurance-like premiums. In 2007, the indexes tumbled from at or near 100 as investors bet correctly that defaults on home loans would rise, with the ABX.HE.AAA 06-2 falling as low as 28.72, indicating that a investor buying protection on $10 million of debt would pay $7.3 million upfront as well as $110,000 a year. About 46 percent of subprime mortgages underlying securities without government-backed guarantees are at least 30 days late, in foreclosure or have already turned into seized properties, according to data compiled by Bloomberg. The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report March 25. The Home Affordable program had initially sought to lower re-defaults by encouraging larger decreases in borrowers’ payments relative to incomes. ‘Moral Hazard’ Senior securities backed by mortgages will benefit in part from the new plan because principal reductions will wipe out junior classes sooner and afterward the deals won’t “leak any cash flow” to holders of that debt, according to a March 26 report by Barclays Capital. Some of the benefits from the Treasury changes will be offset by the program extending how long investors must wait to get principal returned and may be overrun “if moral hazard sets in” as more borrowers seek forgiveness, the analysts wrote. At the same time, some senior-ranked subprime securities will be hurt because they must share in principal payments with others after losses begin to be realized, JPMorgan said. The bank forecast overall loan losses will “not dramatically decline,” in part because many borrowers won’t qualify and coordination between holders of first and second mortgages will be difficult. Biggest Beneficiaries Generally, “securities with high defaults and a low dollar price will benefit the most,” wrote Amherst’s Goodman. “This includes pay option ARMs, sloppy senior Alt A hybrid floaters and senior last-cash-flow subprime securities.” Option ARMs, or option adjustable-rate mortgages, allow borrowers to pay less than the interest they owe by increasing their balances, resulting in potential jumps in payments later on. Alt-A loans fall between prime and subprime in terms of projected defaults, often because borrowers didn’t document their incomes or plan to live in properties. Excluding subprime debt, prices for senior home-loan securities without government-backed guarantees in the $1.5 trillion non-agency market are generally lower over the past three months, failing to match gains in other credit markets, according to Barclays Capital data. Typical prices for the most-senior securities backed by option ARMs were unchanged last week, and are down 1 cent on the dollar at 54 cents from three months ago, according to the data. That’s still up from a record low of 33 cents a year ago. “Winston Churchill said it best,” Goodman wrote in her report, saying as many 12 million borrowers will default in the next few years unless the government changes their loans successfully. “‘The United States invariably does the right thing after exhausting every other alternative.’” To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

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CLO Market to End 12-Month Drought Through Citigroup Deal: Credit Markets

March 15, 2010

By Kristen Haunss and Caroline Salas March 15 (Bloomberg) — The market for collateralized debt obligations backed by high-yield, high-risk loans is poised to reopen in the U.S. for the first time in a year after losses on mortgages prompted investors to flee bundled securities. Citigroup Inc. is underwriting a $500 million fund managed by New York-based WCAS Fraser Sullivan Investment Management LLC, scheduled to price as soon as this week, according to people familiar with the offering, who declined to be identified because terms are private. The deal refinances an existing collateralized loan obligation and increases its size by more than 50 percent. The offering would mark the first new issue backed by widely syndicated loans in the $440 billion market for CLOs since last March and a return to investments that contributed to $1.76 trillion of writedowns and credit losses at the world’s largest financial institutions. Citigroup and WCAS Fraser Sullivan are marketing the deal after prices on CLO debt staged a record rally on signs of economic recovery. “This is the first baby step to getting the market going again,” said Matt Natcharian , head of Babson Capital Management LLC’s structured credit team in Springfield, Massachusetts. “There is a decent amount of investor interest throughout the capital structure and there are managers that want to do deals.” JPMorgan Chase & Co., Bank of America Corp. and Deutsche Bank AG have also been approaching managers of leveraged loans since last year to offer terms for new CLOs to restart the market, according to people familiar with the discussions. CLOs pool loans and slice them into securities of varying risk intended to provide higher returns than similarly rated investments. CLO Prices Prices on the highest-rated portions of CLOs have climbed to 90.5 cents on the dollar from a record low of 69 cents in April, according to Morgan Stanley data. Elsewhere in credit markets, MF Global Holdings Ltd. , Hexagon Securities LLC and at least 19 other firms are pressing regulators to force swaps clearinghouses to lower entry barriers to improve competition in a $605 trillion derivatives market dominated by the world’s biggest banks. Brokers formed an association last month that hired a Washington-based law firm to pursue the issue with lawmakers and regulators, said Mike Hisler , a partner at New York-based Hexagon. They also seek tougher conflict-of-interest laws to ensure that a bank’s derivatives desk doesn’t influence clearinghouse decisions that could shut out new competitors. International demand for long-term U.S. financial assets weakened in January as China and Japan, the two biggest holders of Treasuries, reduced their positions, according to U.S. Treasury Department data released today in Washington. Including short-term securities such as stock swaps, total investment flows show foreigners sold a net $33.4 billion after net buying of $53.6 billion the previous month. Islamic Bonds Kazakhstan, central Asia’s biggest energy producer, may sell Islamic bonds for the first time this year as it seeks to attract overseas money to finance its budget deficit. The government plans to become a “significant player” in the Islamic finance market by offering debt that complies with Muslim tenets as early as 2010, Finance Minister Bolat Zhamishev said. Phillips-Van Heusen Corp. will use two term loans totaling $2 billion and a $450 million undrawn revolving line of credit to help pay for its takeover of clothing maker Tommy Hilfiger BV, according to people familiar with the plan. Phillips-Van Heusen agreed to buy Hilfiger from private-equity firm Apax Partners LP for 2.2 billion euros ($3 billion). Bombardier Sells Debt Bombardier Inc. , the world’s third-largest commercial- airplane maker, sold $1.5 billion of senior notes in a two-part deal after withdrawing a similar offering a week ago, according to data compiled by Bloomberg. The Montreal-based company is returning to the U.S. corporate bond market after postponing an offering on Feb. 12 and later pulling it as the extra yield investors demanded to own speculative-grade debt instead of Treasuries rose amid global credit concerns that Greece couldn’t manage its budget deficit. Anheuser-Busch InBev NV , the world’s largest beer maker, seeks more lenders for $13 billion of loans, according to two people involved in the transaction. Banks joining the deal will get a fee of 45 basis points, or 0.45 percentage point, for providing $250 million or $500 million, the people said. An indicator of corporate credit risk in the U.S. rose. The Markit CDX North America Investment Grade Index, a credit- default swaps benchmark that investors use to hedge against losses on corporate debt, increased 0.8 basis point to 84 basis points, according to CMA DataVision. The index typically rises as confidence in debt markets deteriorates and falls as it improves. European iTraxx The Markit iTraxx Europe Index, tied to the debt of 125 investment-grade companies, rose 2.25 basis points to 76, JPMorgan prices show. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 a year on a contract protecting against default on $10 million of debt for five years. In the CLO market, banks are marketing deals after the S&P/LSTA U.S. Leveraged Loan 100 Index returned an unprecedented 52 percent in 2009. High-yield, or leveraged, loans are those rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. CLO Issuance Tumbles CLO issuance tumbled to $26.5 billion in 2009, the lowest in more than a decade, 94 percent of which were deals structured to remove assets from banks’ balance sheets, according to Moody’s. The WCAS Fraser-Sullivan deal being marketed, COA Tempus CLO Ltd., is partially a refinancing of COA CLO Financing Ltd., issued in January 2009 using some Citigroup-arranged loans, the people said. It’s the first deal S&P has rated since March 2009. Assets in the new WCAS Fraser Sullivan CLO will have a par value of about $500 million, compared with about $320 million for COA CLO when that deal was structured last year, according to one of the people familiar with the offering. COA Tempus CLO had acquired $219.8 million in face value of collateral as of March 11 and planned to acquire another $280.2 million, according to S&P, which assigned preliminary ratings to the transaction. “It seems like it is not all new collateral, but there is some new collateral so it falls in between a new deal and a refinancing,” said Vishwanath Tirupattur , an analyst at Morgan Stanley in New York. “Certainly people are watching this and it’s a positive step.” More CLO Deals John Fraser , chief investment officer of WCAS Fraser Sullivan, declined to comment. WCAS Fraser Sullivan was formed in 2007 with the backing of private equity firm Welsh, Carson Anderson & Stowe. The firm was formerly known as Fraser Sullivan Investment Management, which was founded in 2005. Alex Samuelson , a Citigroup spokesman, declined to comment. Tirupattur predicts there may be 10 or more new CLO deals this year. The extra yield, or spread, investors demand to own debt issued by CLOs above benchmark rates must narrow before issuance will pick up, he said. Spreads over the London interbank offered rate on CLO slices rated AAA have narrowed to 2.25 percentage points from 7.25 percentage points in April, Morgan Stanley data show. That’s still more than double the average spread of 0.9 percentage point in February 2008. Libor is the rate banks charge for loans to one another. ‘Not Quite There’ “At the moment the economics are not quite there,” Tirupattur said. “The recreation value of CLOs is lower than the value of the portfolio value of underlying loans,” he said, meaning there is no arbitrage between the cost of buying individual loans in the open market and bundling them together in a CLO. The $327 million AAA rated portion of COA Tempus CLO is being marketed at a spread of about 1.9 percentage points above three-month Libor, according to S&P. Libor was set at 0.26 percent today. The $15 million of AA rated slices may price at a spread of 2.25 percentage points and the $36.5 million of A rated notes may yield 2.5 percentage points more than benchmark rates, S&P said in a report last week. The CLO will also issue $102.1 million of so-called equity, the unrated piece first in line for losses. “Cash investors, insurance companies and banks will be attracted to higher coupons and well-structured investments,” Babson’s Natcharian said. “Eventually prices will start to tighten in the market, but it will take more than one deal to get there.” To contact the reporters on this story: Kristen Haunss in New York at khaunss@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Reggie Middleton: The Uncosted Rewards of Bankers’ Bonuses

March 11, 2010

This post originally appeared on the Financial Times’ website, thebanker.com A bank employee recently asked me: “As a trader, my bonus is derived directly from my profit and loss, which is accrued over the quarter and kept in a separate account. It does not go into the firm’s bottom line and then back out to me. Also, like most traders, I accrue 2% of my gains in a loss provision account in case I have a major write-down in the year. My bonus is 10% of my profit for the year. If I make $50m for the year my bonus is $5m. What does my bonus have to do with the mortgage-backed securities [MBS] trader who is sitting on losses? Did I or did I not show a profit of $40m to the firm’s bottom line?” Main Street is absolutely flabbergasted that bankers do not understand the core issues of this bonus question. Allow me to clearly outline the problem and propose a solution. Assuming this trader works for a prominent US bank that received a bailout, he is not entitled to a $5m bonus if he made $50m for the year. Why not? Because he generated that 10% return from taxpayer capital, not firm capital. For example, Goldman Sachs would have had the drawdown from purgatory had it not been rescued from a $30bn credit default swap deal with AIG. Let’s assume AIG would have negotiated a 40% payout to Goldman Sachs, which is realistic given that litigation with an insolvent company that had many more contingent and direct claims would probably have resulted in a lower net receipt to Goldman. This alone would have resulted in a hole of about $7.8bn for the bank. Taxpayer assistance Combined with the Troubled Asset Relief Program, Federal Deposit Insurance Corporation bond guarantees, Public-Private Investment Programme for legacy assets and other alphabet programmes, not to mention hundreds of billions of dollars in MBS purchases that have put an artificial bid under toxic assets that abound on big bank balance sheets, it is clear to see that banks were undercapitalised and benefited greatly from taxpayer assistance. Without that assistance, the trader would not have had $50m to trade and may not have had an employer at all. It really is that simple and there is no need to debate whether he deserves 10%. The real issue is 10% of what? He is relying on a 10% bookmakers’ fee for betting with taxpayer contingent capital – not pure bank capital, and that is where the great misunderstanding lies. Even if one could justify getting paid from taxpayer capital in lieu of firm capital, the taxpayer capital should (as a product of prudent business practice) have been pegged to an appropriate ‘cost’, whose hurdle rate the trader would need to overcome. In other words, management should say: “This $50m costs us 14% in coupons on government-owned preference shares, thus you will not have positive return on investment until you break that 14% mark.” If the trader failed to breach the 14% hurdle rate, he would not have received a bonus at all. Simplifying risk and return Now, I am sure many are quipping: “Well, how is a bank supposed to incentivise a trader if a negative return does not fund a bonus?” But think about it for just a moment, and you will see the implications. If the risk-adjusted cost of capital causes a business to become unprofitable – either for the employee or the firm – then neither the employee nor the firm should be in that particular line of business. The plan is ingenious in its simplicity and creates a self-regulating mechanism that prevents risks from being decoupled from rewards. This also applies to exotic derivatives transactions where in-built leverage allows for little or no upfront capital. You reserve properly for risks (counterparty, credit and market) and charge the cost of capital on the reserves. This plan works for bankers too. Mergers and acquisition bankers use minimal firm capital, thus have relatively minimal economic hurdles to overcome. Hence, the banker would likely get a higher payout than the trader because he risked less capital, but he would still have to be paid via staggered or cliff vesting (depending on the nature of the deal) with restricted stock. In this scenario, bankers would not put together deals in a fashion that runs counter to the interests of the firm’s stakeholders (at least not on purpose or through wilful negligence). Now bankers and traders become true economic partners in the firm, sharing both the reward and the risk of doing the deal – just like in the real world. Reggie Middleton is an independent investor and financial analyst with experience ranging from insurance-linked securities structuring to real estate investment. See boombustblog.com.

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AIG Agrees to Sell Alico Unit to MetLife for $15.5 Billion in Cash, Stock

March 8, 2010

By Hugh Son and Andrew Frye March 8 (Bloomberg) — American International Group Inc. agreed to sell a division to MetLife Inc. for $15.5 billion in the bailed-out company’s second divestiture of a non-U.S. life unit this month. MetLife will pay $6.8 billion in cash and $8.7 billion in equity securities for American Life Insurance Co., the buyer said today in a statement distributed by Business Wire. “This is a sizeable transaction,” Robert Haines , an analyst at CreditSights Inc. in New York, said in an interview before the deal was announced. “It demonstrates they’re making some tangible progress on their plan to divest assets.” AIG announced on March 1 that it would sell AIA Group Ltd. to Prudential Plc for $35.5 billion. Both the deals this month exceed the sum of more than 20 earlier asset sales announced by New York-based AIG since its September 2008 bailout. AIG has said that about $9 billion from a sale or initial public offering of Alico would go toward repaying Federal Reserve assistance . AIG previously struck deals to sell a U.S. auto insurer, an Israeli mortgage guarantor and a Canadian life business to help repay loans in its $182.3 billion bailout. Alico operates in more than 50 countries including Japan and parts of Europe, Latin America, the Caribbean and the Middle East. Return to Profit MetLife Chief Executive Officer Robert Henrikson shunned U.S. bailout cash and raised capital from debt and equity investors to weather the stock and bond slumps in 2008 and early 2009. The company had its first quarterly profit in a year in the three months ended Dec. 31, posting net income of $320 million as private equity and hedge fund holdings recovered. MetLife expanded the revenue it gets from outside the U.S. after buying Travelers Life & Annuity from Citigroup Inc. in 2005. That deal, which Henrikson worked on as MetLife’s president, gave the insurer an entrance into Japan, Australia and the U.K. The company recorded about $5.5 billion of operating revenue from outside the U.S. in 2009, accounting for about 11 percent of its total. MetLife acquired Odonto A Saúde Empresarial in 2008 to add dental insurance in Brazil, and the firm said in November of the same year that it planned to increase its sales force in India by 30,000 agents. Sales in Mexico and Chile account for the biggest share of MetLife’s revenue in Latin America. ‘Opportunities are Immense’ “Our performance in international is superb,” Henrikson said at a December meeting in New York with analysts and investors. “Our opportunities are immense.” MetLife used hedges to help post a $3.2 billion profit in 2008 before reporting losses in each of the first three quarters last year. Prudential Financial Inc. , the second-biggest U.S. life insurer, lost money in 2008 and returned to profit last year. MetLife has been looking for acquisitions outside the U.S. for more than a year. “Size is not a problem,” Henrikson told analysts at a December conference when Colin Devine of Citigroup asked if the company would consider spending $14 billion. AIG CEO Robert Benmosche previously led MetLife. Benmosche was prohibited from participating in negotiations with MetLife, AIG said in guidelines in August designed to prevent potential conflicts of interest. AIG said a committee of its board would name an executive officer or senior manager as the chief transaction officer to handle such talks. To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net ; Andrew Frye in New York at afrye@bloomberg.net .

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AIG Sells Asian Life Unit to Prudential Plc for $35.5 Billion

March 1, 2010

By Kevin Crowley and Zachary R. Mider March 1 (Bloomberg) — American International Group Inc. agreed to sell an Asian life insurance unit with 20 million customers to Prudential Plc for $35.5 billion in the company’s biggest divestiture since it was bailed out by the U.S. Prudential, Britain’s biggest insurer, will pay $25 billion in cash and $10.5 billion in stock and other securities for AIA Group Ltd., the London-based insurer said in a statement today. The insurer said it plans to raise $20 billion in a rights offering and sell about $5 billion of bonds to finance the cash part of its offer. The sum raised in the sale would exceed the total of more than 20 other deals announced by AIG since its 2008 rescue. The firm had planned an initial public offering for the unit after an auction of the business previously failed to turn up bids that matched what AIG executives thought the company was worth. That included a bid from Prudential that valued AIA at about $15 billion, according to a person with knowledge of the matter. The agreement is “very good news for AIG and a major step toward quickly repaying U.S. taxpayers at a time when, in our view, the company appeared resigned to carrying out a time- consuming IPO,” said Emmanuelle Cales , an analyst at Societe Generale SA. AIG gained $2.45, or 9.9 percent, to $27.22 at 9:42 a.m. in New York Stock Exchange composite trading. Prudential fell 12 percent to 533 pence in London trading. Prudential had more than doubled in 12 months through Feb. 26, giving the insurer a market value of 15.3 billion pounds before the purchase was announced. China, Australia Prudential’s purchase is Chief Executive Officer Tidjane Thiam’s first since he took over five months ago, and is the biggest announced by any company worldwide this year, according to data compiled by Bloomberg. New York-based AIG will own about 11 percent of Prudential following the transaction, Thiam told reporters today. Prudential is trying to boost sales in Asia as growth in the U.K declines. By acquiring AIA, Thiam gets a business with more than 90 years in Asia and more than $60 billion of assets in 13 markets spanning China to Australia. The price is about 50 percent greater than Prudential’s market value. Hong Kong-based AIA, founded in 1919, sells life, accident and health insurance policies, and private retirement planning and wealth management services, its Web site shows. “It shows the company is very bullish on the Asia market,” said Luo Yi , a Shenzhen-based analyst at China Merchants Securities Co. “The Chinese market has vast potential.” McKinsey & Co. has estimated that 40 percent of global life insurance premium growth will be in Asia in the next five years. ‘Faster Track’ “A sale to Prudential enables AIG to realize value on a faster track to repay U.S. taxpayer,” AIG CEO Robert Benmosche said in a statement today. AIG gave a $9 billion stake in American Life Insurance Co., known as Alico, and $16 billion in AIA, its biggest non-U.S. life insurance units, to the Federal Reserve in December. AIG will redeem the Fed’s $16 billion interest in AIA with proceeds from the sale and repay about $9 billion more on its Fed credit line , the insurer said today. The $10.5 billion in securities obtained from Prudential will be sold “over time, subject to market conditions, following the lapse of agreed-upon minimum holding periods,” AIG said in a statement. Proceeds will be used to repay debt on the credit line, the company said. Credit Line AIG owed about $25 billion on the line as of last week. The insurer had drawn more than $40 billion before reducing the sum in December when it turned over stakes in the units. The Federal Reserve Bank of New York agreed last year, as part of AIG’s fourth bailout, to allow the company to pay down its debt with an equity interest in the life units before completing a sale. The plan reduced pressure on AIG to sell in early 2009 when potential bidders were hobbled by losses and the inability to raise funds. Prudential is paying about 1.69 times the embedded value of AIA in 2009. Chinese insurers are trading for about 2.9 times embedded value, and Axa Asia Pacific Holdings trades at about 1.7 times, according to Thiam. Embedded value estimates a company’s net worth excluding new business. “Strategically it’s probably the right move” for Prudential, said Justin Urquhart Stewart , who oversees about $3.3 billion at 7 Investment Management in London, including Prudential shares. “It puts them into a different league.” The insurer plans to list its shares on both the Hong Kong Stock Exchange and the London Stock Exchange following the transaction. It will keep its headquarters in London. Rights Offering Credit Suisse Group AG, JPMorgan Cazenove and HSBC Holdings Plc agreed to underwrite the $20 billion rights offer in full. The shares are likely to be sold for 40 percent less than today’s price, Thiam told reporters. Prudential will pay about $1 billion in fees and other costs related to the offer. Lazard Ltd. is also advising Prudential on the deal. The offering would be the biggest since Lloyds Banking Group Plc’s 13.5 billion pounds ($20.4 billion) sale in December, still the U.K.’s largest. “If you’ve got backing from a few banks and a few major shareholders, there will be a way to make this deal happen,” said Marcus Barnard , a London-based analyst at Oriel Securities Ltd. with a “sell” rating on the stock. “The question is the cost and the risk involved.” The insurer may be forced to sell assets in India and China to comply with local foreign-ownership regulations, he said. India, China Talks Thiam said Prudential is in talks with regulators in India and China. The insurer intends to keep its stake in a joint venture with China’s Citic Group, he said. In India, where both Prudential and AIG have separate joint ventures, regulators have told the company it can’t have two licenses, Thiam said. MetLife Inc. has said it is in talks to buy AIG’s Alico, which operates in more than 50 countries outside the U.S. The insurers are discussing a price of about $15 billion, according to people with knowledge of the matter. AIG’s bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and $52.5 billion to buy mortgage-linked assets owned or backed by the insurer. AIG is getting advice on the AIA deal from Goldman Sachs Group Inc. and Citigroup Inc., and Blackstone Group LP is working with the AIG board on its overall restructuring plan. Morgan Stanley is counseling the New York Fed. Prudential Plc has no relation to Newark, New Jersey-based Prudential Financial Inc. and operates in the U.S. through its Jackson National Life Insurance Co. unit. To contact the reporter on this story: Kevin Crowley in London at kcrowley1@bloomberg.net ; Zachary Mider in New York at zmider1@bloomberg.net

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`Golden Era’ May Elude Private-Equity Investors as Deal Valuations Climb

March 1, 2010

By Anne-Sylvaine Chassany and Cristina Alesci March 1 (Bloomberg) — Private-equity firms tell investors that the years following recessions offer the best opportunity to make money. This time may be different. Prices paid in leveraged buyouts last year, at the tail of the worst financial crisis in more than seven decades, are about 25 percent higher on average than in 2001 after the dot-com bubble burst, according to Standard & Poor’s Leveraged Commentary & Data. Some transactions in the past three months are valued at levels not seen since the peak of the market in 2007. In addition, buyout firms are using more equity in their deals, which may further limit returns for investors. Firms are eager to invest a record $507 billion in cash raised before the crisis, triple the comparable figure in December 2001, according to London-based researcher Preqin Ltd. That so-called dry powder, combined with a scarcity of assets for sale and recovering equity markets , means bargains are hard to find, executives at some buyout firms say. Those seeing another “golden era” are talking “nonsense,” said Christopher O’Brien , New York-based president for the U.S. and Europe at Investcorp Bank BSC, a buyout, hedge-fund and real estate firm that manages $17.6 billion. “There’s a lot of pressure to put investors’ money to work now, and valuations are still high. It’s a seller’s market.” Blackstone, Carlyle Buyout firms such as Blackstone Group LP and Carlyle Group are pointing to returns achieved in the years following previous recessions to appeal to investors. Funds that started investing in 1992, after the U.S. savings-and-loan crisis, delivered a median 21.2 percent annual rate of return, and those that began in 2001, after the dot-com market sell-off, yielded 24.5 percent, according to data compiled by Preqin. The best-performing 2001 funds had annual rates of return of up to 40 percent, a fivefold increase of their backers’ investments in five years. Yields went as low as 6.9 percent in 1998. The 2007 funds, with 34 percent of capital invested, are showing a 17 percent annual rate of loss, according to Preqin. It’s “a wonderful time to buy assets,” Blackstone Chief Executive Officer Stephen Schwarzman said in an interview at the World Economic Forum in Davos, Switzerland, in January. His New York-based firm is seeking to raise $10 billion for a new global buyout fund, according to a person familiar with the effort. “Valuations cycle up and down,” Schwarzman said. “They get as low as around five times cash flow. In the most frothy period that can get up to 10 times. There were some silly deals done at 12 times, and right now we’re in the five-to-seven-times zone,” he said. Higher Valuations U.S. private-equity-led transactions in 2009 were valued at 7.7 times earnings before interest, tax, depreciation and amortization, the usual benchmark for valuation in the private- equity world, according to S&P. That compares with six times Ebitda in 2001, when the technology bubble burst, and is more than in 2004. In Europe, buyout firms paid 8.9 times Ebitda last year compared with seven times in 2001. The European multiples are about the same as they were in 2006. Prices in Europe are “almost as high as they’ve ever been,” Blackstone President Tony James said on a call with reporters Feb. 25. “When there’s something in the right range, it’s very competitive.” The higher valuations are based on a smaller number of transactions — eight deals last year in Europe compared with 37 in 2001, and 23 in the U.S. compared with 53 in 2001, according to the S&P data. ‘Silly’ Zone Some deals are already nearing Schwarzman’s “silly” zone. KKR & Co. , the New York private-equity firm that has $14.5 billion to invest, in January bought U.K. retailer Pets at Home Ltd., owned by London-based Bridgepoint Capital Ltd., for 955 million pounds ($1.5 billion), two people with knowledge of the deal said. The price was between 11 and 12 times Ebitda, the people said. KKR paid at least 3 percent more than what Boston-based Bain Capital LLC offered for Pets at Home and about 10 percent more than TPG’s bid, three people familiar with the talks said. Bridgepoint bought the retailer for less than seven times Ebitda in 2004 and reaped eight times its investment from the sale, one of the people said. Pets at Home’s Ebitda tripled during the period it was owned by Bridgepoint, the person said. “We are enthusiastic about the significant further potential for Pets at Home to grow, develop and continue to deliver its unmatched breadth of products, store environment, competitive pricing and customer service,” KKR partner John Pfeffer said when the firm announced the acquisition. KKR spokeswoman Kristi Huller declined to comment about the terms of the deal. Marken, IMS Health In December, London-based Apax Partners LLP bought U.K. clinical logistics company Marken Ltd. for about 12 times Ebitda, or 175 million pounds more than Hellman & Friedman LLC in San Francisco bid, people with knowledge of the deal said. TPG and the Canada Pension Plan Investment Board paid more than nine times Ebitda for IMS Health Inc., the world’s biggest health-care software provider, when it purchased the Norwalk, Connecticut-based company for $5.2 billion in a deal that closed Feb. 26, according to data compiled by Bloomberg. “There’s big appetite for assets that have shown growth and resilience through the crisis, and since those are mostly the assets for sale today, it’s not surprising that prices are going up,” Bain Capital’s Managing Director Dwight Poler said. “Private-equity firms are more disciplined when evaluating lesser-quality assets.” More Equity Private-equity-led transactions increased 32 percent to $49.2 billion in the second half of last year from the first half as banks started to lend after a two-year drought, according to data compiled by Bloomberg. That still left transactions by buyout firms last year at a 10th of the $862.8 billion in 2007, the peak of the LBO boom, the data show. While banks are resuming lending , they are requiring buyout firms to put up more equity to fund their purchases. U.S. LBOs were 54 percent financed with debt in 2009 compared with 65 percent in 2001, according to S&P. In Europe, debt funding represented less than 47 percent of the acquisition price last year, down from 62 percent in 2001, S&P said. “Deals done with lower levels of debt will have lower risk than those done in the recent past,” Guy Hands , founder of London-based Terra Firma Capital Partners Ltd., said in a speech in Berlin on Feb. 10. “But, of course, there’s the corollary, which is that expected returns to equity will also be lower.” Andrea Auerbach , managing director and private-equity research consultant at Cambridge Associates LLC, an investment- consulting firm in Boston, has a similar view. “The more equity you put in, the better the company has to perform to achieve acceptable target returns,” Auerbach said in an interview. ‘Right Time’ While current valuations may have a negative impact on future returns, that could be offset if multiples drop as deal volume increases going forward. “This is probably the right time to be deploying money to private equity,” said William Atwood , who helps oversee about $10 billion as executive director of the Illinois State Board of Investment in Chicago and whose pension fund has money with Blackstone. “Keeping in mind that you make the commitment now and the fund won’t close for a year, and by the time managers actually start drawing it down, the world is going to change quite a bit.” The California Public Employees’ Retirement System, the biggest U.S. pension fund and one of the world’s largest private-equity investors, is equally upbeat. “Best private-equity investments have historically been made on the heels of recessions,” the pension fund said in a Feb. 16 presentation. ‘Spectacular’ Deals Calpers is one of the biggest backers of Carlyle, whose co- founder, David Rubenstein , made the same point in an interview with Bloomberg Radio on Jan. 27. “The deals done in 2009 will turn out to be spectacular because they were done at relatively low prices,” Rubenstein said. Leon Black , a co-founder of the Apollo Management LP, is more cautious. His New York-based firm is focusing on taking part in restructuring deals, rather than acquiring companies through “conventional LBOs,” Black said at a private-equity conference in Berlin on Feb. 9. “You need reasonable prices, attractive financing and a stable economic environment,” Black said. “Presently, I don’t think we have any of this.” To contact the reporters on this story: Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net ; Cristina Alesci in New York at calesci@bloomberg.net .

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Berkshire Profit Surges to $3.06 Billion as Buffett’s Derivatives Recover

February 27, 2010

By Andrew Frye and Jamie McGee Feb. 27 (Bloomberg) — Warren Buffett ’s Berkshire Hathaway Inc. said fourth-quarter profit jumped on improved investment results and the recovery of derivative bets tied to the world’s stock markets. Net income rose to $3.06 billion, or $1,969 a share, from $117 million, or $76, in the same period a year earlier, the Omaha, Nebraska-based company said today in its annual report . The profit increase, Berkshire’s third straight, helps rebuild a cash pile that diminished since 2007 as Buffett invested in financial firms bruised by the recession. Companies including Goldman Sachs Group Inc. that turned to Buffett for funding are now paying Berkshire interest of 10 percent or more. The shopping spree culminated with the November agreement to buy railroad Burlington Northern Santa Fe for $27 billion. “When the crisis hit full bore, he was the investor of last resort, so he got the terms he was looking for on the investments he made,” said Glenn Tongue , a partner at T2 Partners LLC, which owns Berkshire shares. Buffett is Berkshire’s chairman, chief executive officer and largest shareholder. Contracts linked to four equity indexes improved from the fourth quarter of 2008, when the global decline in stocks after the collapse of Lehman Brothers Holdings Inc . contributed to $4.61 billion in derivative losses at Berkshire. The losses reverse when the indexes, including the Standard & Poor’s 500 , climb closer to the levels they were at when Buffett made the deals near the market’s peak in 2006 and 2007. Stocks Soar Berkshire’s own stock has gained 52 percent in the past year as these so-called equity-index puts rebounded and the value of the firm’s top stocks rose. The Class A shares closed yesterday at $119,800, their highest since Oct. 21, 2008. The 20 largest holdings in its U.S. portfolio all increased in the past 12 months. Coca-Cola Co. , Berkshire’s top holding, climbed 29 percent. Wells Fargo & Co. doubled and American Express Co. tripled. The U.S. portfolio was valued at $57.9 billion at Dec. 31, a 12 percent rise from a year earlier. The surge helped increase Berkshire’s book value last year. Buffett typically highlights book value, the measure of assets minus liabilities, in the first sentence of his annual letter to shareholders. In his “ owner’s manual ” for Berkshire investors, Buffett says he considers the figure to be the best objective measure of a company’s success. Buffett added a $2.6 billion investment in Swiss Reinsurance Co., completed in March, to a portfolio of financing deals that he struck during the credit freeze as other investors were withholding funds. The Swiss Re transaction pays a 12 percent coupon, while Berkshire gets 10 percent annually on its $5 billion injection in Goldman Sachs and its $3 billion of preferred shares in General Electric Co . Railroad Replacement Berkshire joined the S&P this month after completing the takeover of Fort Worth, Texas-based Burlington Northern. The move prompted managers of funds that attempt to recreate the returns of the index to add Buffett’s company to their portfolios. Buffett cut jobs and reshuffled managers at Berkshire’s operating companies last year as retail and industrial demand suffered in the recession. He replaced the CEOs of NetJets, the money-losing luxury flight provider, and jeweler Helzberg Diamond Shops Inc. This month, Berkshire reported its workforce fell by 9.8 percent since the end of 2008 to 222,000 employees. Buffett was stripped of his final AAA credit grade from a major rating firm this month when Standard & Poor’s downgraded Berkshire. The cut, which followed reductions last year by Fitch Ratings and Moody’s Investors Service, came as Berkshire neared the completion of the Burlington Northern takeover. To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net ; Jamie McGee in New York at jmcgee8@bloomberg.net .

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Obama Bipartisan Summit to Fix Health Care Clears Path to Party-Line Vote

February 26, 2010

By Kristin Jensen and Roger Runningen Feb. 26 (Bloomberg) — President Barack Obama began yesterday’s health-care summit saying he wanted to find bipartisan ways to fix the health-care system. By the end, he said he might be left with a partisan path forward. The question is, “is there enough serious effort that in a month’s time, or a few week’s time, or six weeks’ time, we could actually resolve something?” Obama said. “If we can’t, we’ve got to go ahead and make some decisions, and then that’s what elections are for.” Tennessee Senator Lamar Alexander , who opened for Republicans, asked Obama to renounce the idea of “jamming through” legislation along party lines. Within minutes, Senate Democratic Leader Harry Reid defended the possibility of using a tactic called budget reconciliation to sidestep the opposition. Almost every Republican told Obama that lawmakers should start over and draft a new bill, an idea that White House officials have ruled out. Illinois Senator Dick Durbin summed up the chance of agreement during a midday break in the more than six-hour meeting: “It’s a long shot.” “If nothing comes of this, we’re going to press forward,” said Durbin, the No. 2 Senate Democrat. “We just can’t quit.” At stake is a plan that would give insurers such as Hartford, Connecticut-based Aetna Inc. and drugmakers including Whitehouse Station, New Jersey-based Merck & Co. millions of new customers while requiring them to contribute to the biggest U.S. health-care overhaul in 45 years. Insurers would accept all customers, even with preexisting conditions; drugmakers said they would help the elderly afford medicines. The plan would require Americans to get insurance, with new purchasing exchanges and government aid to help. The White House said a proposal Obama released on Feb. 22 would cost about $950 billion over 10 years and cover 31 million uninsured Americans. ‘Too Big’ a Gulf? Before yesterday’s summit, attended by more than three- dozen lawmakers, Republicans said they feared Democrats would use the meeting to try to paint them as obstructionists and argued they were upholding the views of Americans who have rejected bills passed by House and Senate Democrats. Obama said the forum would at least provide clarity. “We might surprise ourselves and find out that we agree more than we disagree,” Obama said. “It may turn out, on the other hand, there’s just too big of a gulf, and then we’ll have to figure out how we proceed from there.” Obama’s plan relies mostly on a Senate bill passed in December. With reconciliation, Senate Democrats could pass changes to the measure with 51 votes. The House would also pass the so-called fix, along with the original Senate bill. Democrats control 59 votes in the 100-member Senate. No Incentive Passage isn’t assured. Some Senate Democrats don’t like the idea of using reconciliation, and House Speaker Nancy Pelosi may not be able to count on as many votes as she had when the House passed its bill 220-215. Still, it may be the easiest option. “The discussion reinforces the underlying reality that if health reform is to pass, it will do so with only Democratic support,” said Thomas Mann , a scholar at the Brookings Institution in Washington. “Republicans believe they are winning the issue in the public domain and they have no incentive to help the Democrats pass a bill.” Obama tried to find areas of accord, saying Republicans and Democrats agree that health-care costs are out of control. Both parties want to prohibit insurers from dropping people who are covered and become sick, and they want to extend the coverage of dependent children to a higher age. At times, both sides offered the possibility of compromise. Republican Senator Mike Enzi of Wyoming said he liked the idea of purchasing exchanges and suggested they be open to all policies, with special markings for ones that meet minimum standards set by the Democrats’ legislation. Medical Malpractice Obama told Oklahoma Senator Tom Coburn , a Republican who’s also a medical doctor, he would be open to proposals to curb malpractice lawsuits. New Jersey Representative Robert Andrews , a Democrat, said there may be “common ground” between the plans for exchanges and a Republican suggestion that small businesses be allowed to band together to buy insurance. Much of the meeting sounded more like congressional debate. West Virginia Senator Jay Rockefeller , a Democrat, railed against insurers, saying they put profits above people. House Republican Leader John Boehner of Ohio told Obama the Democrats’ plan was a “dangerous experiment;” Virginia Representative Eric Cantor complained of the bill’s budgeting “gimmicks.” Obama frequently used his role as moderator to respond to criticism, allowing him to control the discussions. Republicans sent an e-mail to reporters saying Obama spoke for 119 minutes during the session, compared with 110 for Republicans and 114 for the other Democrats. ‘Unsavory’ Deals Senator John McCain , who lost to Obama in the 2008 election, used his time to detail “unsavory” deals in the Democratic legislation. “We’re not campaigning anymore,” Obama told McCain, an Arizona Republican, when he finished. “The election’s over.” McCain replied, “I’m reminded of that every day.” The Arizona senator took another turn at the microphone later, saying he believed there was a subtext to the meeting. “There’s an issue that’s overhanging this entire conversation,” McCain said. “It’s whether the majority leader of the Senate will impose the ‘reconciliation,’ the 51 votes.” Such a move, he said, “could harm the future of our country and our institution, which I love a great deal.” To contact the reporters on this story: Kristin Jensen in Washington at kjensen@bloomberg.net ; Roger Runningen in Washington at rrunningen@bloomberg.net

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Mike Stark: Chris Dodd on "Jingle Mail"

February 25, 2010

Late last year, Morgan Stanley, in essence, defaulted on a 10-digit mortgage debt they were carrying. They looked at a tanking commercial real estate market and realized they’d never get the return they assumed when they ran the numbers before borrowing the money to purchase the buildings. They made a business decision, mailed the keys to their creditors, and walked away from the deal when it soured for them. Soon afterward, in New York City, Tishman Speyer Properties and BlackRock Realty returned one of the country’s largest apartment complexes to its creditors under similar circumstances. They had purchased the property for $5.4 billion; today it’s worth only about $1.8 billion. In both these cases, contracts were signed. One could say that both Morgan Stanley and Tishman Speyer Properties/BlackRock Realty took out real estate loans (or mortgages) and promised to pay them back. When they mailed their creditors the keys and walked away from their promise to pay, one could say they broke their word, right? Well… In a word: No. You see, the contract they signed provided for exactly what happened. The money they borrowed was secured by the properties. If they failed to pay, the creditors got to keep everything they had paid to that point, and they got the buildings. In these cases, you can be pretty sure that the borrowers were “under water”; they owed more on the properties than they could possibly hope for in an open market sale (added to the equity, if any, they already had in the properties). After all, if their equity plus the sale price exceeded what they owed, they’d be better off selling and keeping the difference. Why do I bring all of this up? Well, because right now, hundreds of thousands of home-owners are under water. In late 2006 they bought a house for, say, $250K with nothing down. They have an exotic mortgage – let’s say they bought the house with a “balloon mortgage” and their payments were pretty low for the first three years, but have doubled in the last month or so. Let’s say they bought their home in Las Vegas or Arizona – markets that have been hit especially hard by the real estate bust. And let’s say a home identical to theirs, right next door, was sold yesterday in a foreclosure sale for $130K. Why in the world should these homeowners pay that mortgage? After all, their debt was secured by the property, just like the commercial cases cited above. In most cases, they’d be fulfilling the terms of their contract by mailing in the keys and walking away from the house. In fact, by doing this, they’d save almost enough money to purchase the next house that sells in a foreclosure sale – perhaps even the one they’re in! A word of caution: none of this is legal advice. Talk to a lawyer, accountant and financial advisor before considering this route. In some places (but not most), mortgage-holders are allowed to seize property above and beyond the real estate that secured the loan. The point I’m making here is that we only hear about “moral obligations to pay debts” in the context of consumer conditioning. Such nonsense doesn’t apply to big business. The John Galts on Wall Street don’t constrain themselves with morality considerations; they look at the numbers with lizard-eyes and make the decision that ensures the number at the bottom of the page is as big as it can be. An ugly truth is that corporate law establishes a fiduciary responsibility – corporate decisions must be based on the what will return the largest profit to shareholders. If that means welshing on a debt, then welsh they must. I personally believe it is time for consumers to understand that they have a similar responsibility to themselves and their families. If faced with a choice of enriching a bunch of lizard-eyed bankers or putting their kids through college, I hope more Americans do what is best for them and their family in the long run. I asked Chairman of the Senate Banking Committee Chris Dodd about this earlier this evening (I mistook JP Morgan for Morgan Stanley, please forgive the error). As Chairman of the Banking Committee, he was careful about what he said, but what he said was sensible: talk to counsel and determine what is best for you. Dodd’s response may very well send shock waves through the banking community. Wall Street’s biggest fear is that the cultural norm of “pay your mortgage (and other debts)” falters. But, as I said, bankers and other businesses walk away from sour deals all the time. If it makes sense for you, you should learn a lesson from the “Masters of the Universe” and do the same. Just be careful and, at a minimum, consult a lawyer that can walk you through the costs and benefits first.

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Brain-Eating Zombies Invade Disney in Iger Spending Spree to Win Boy Fans

February 24, 2010

By Seth Lubove and Andy Fixmer Feb. 24 (Bloomberg) — When Walt Disney Co. asked publisher Dan Vado to make a series of comic books based on its Haunted Mansion theme-park ride, he worried that the empire built on the likes of Snow White and Tinker Bell would reject his brand of creepy humor. Vado gave Disney skeletons dangling from nooses, scattered corpses and a ghostly poodle that says “crap.” To his surprise, Disney signed off on his vision. “Everything we did was really strange,” says Vado, founder of San Jose, California-based SLG Publishing , as in Slave Labor Graphics. “The interesting thing about Disney is, for a company perceived as being stodgy, they do a good job of reinventing themselves.” Disney Chief Executive Officer Robert Iger , 59, is on a spending spree at the world’s biggest media company to transform his film studio, amusement parks and stores. In fiscal 2009 , net income at Disney fell 25 percent to $3.3 billion — the worst annual performance in Iger’s five-year reign — and was almost flat in the first quarter of 2010 compared with a year earlier. The global recession has hammered the company’s 11 theme parks, which are offering promotions and discounts. The Burbank, California-based company’s studio is also struggling: In 2009, it churned out box office flops such as “G-Force,” which featured wisecracking guinea pigs. Iger is pouring billions into attracting a new generation of kids — boys especially — raised on violent video games and reality shows. Buying Marvel In December, Disney completed its $4.3 billion purchase of Marvel Entertainment Inc., home of Iron Man, Spider-Man and the X-Men, paying a 40 percent premium over the stock price. The company is now building two additional cruise ships, one of which includes an AquaDuck water coaster that plunges four decks. Park guests will see more-complex, life-size electronic robots made to look like U.S. presidents and Disney characters. And with input from Apple Inc. CEO Steve Jobs , Disney’s largest shareholder , Iger is giving his 350 retail stores a high-tech makeover and opening a new one in New York’s Times Square in the fall. The total price tag for all of the upgrades through 2014: more than $12.3 billion, according to New York-based Soleil Securities Corp. analyst Alan Gould , a 59 percent increase over the prior five years. Investors give mixed reviews of Iger’s moves to refresh the entertainment giant, which was founded as a cartoon studio by Walt Disney and his brother Roy Disney in 1923. Beating S&P After Iger took over in October 2005, the stock rose 53 percent to a seven-year peak of $36.30 in May 2007 before crashing in 2009 during the credit crisis to a low of $15.59. From that bottom last March through Feb. 23, the shares jumped 98 percent to $30.92, beating the Standard & Poor’s 500 Index gain of 62 percent but lagging behind rival News Corp.’s 164 percent rise . “What we look for is a company that is constantly refreshing its operations, improving and continuing to build a business, and that’s true of Disney,” says Michael Cuggino , president of San Francisco-based Permanent Portfolio Family of Funds Inc., which owns 720,000 Disney shares. In December, S&P affirmed its earlier revised outlook on Disney’s debt to negative from stable, citing concerns about the company’s recovery, the growth in spending and threats from deep-pocketed rivals. “Disney is going to be basically doubling what they are spending,” says James Tarkenton , a managing director at Lateef Investment Management. Greenbrae, California-based Lateef has sold all of the 149,984 Disney shares it held in April 2009. Disney spokeswoman Zenia Mucha declined a request for an interview with Iger. Iger’s Deals Iger, who came to Disney in 1996 as part of the company’s $19 billion purchase of Capital Cities/ABC Inc., has proved to be a serial acquirer. Three months after taking the helm as CEO, he agreed to pay $7.4 billion for Pixar, which was co-founded by Jobs, to improve Disney’s flagging animation pipeline. In all, the CEO has snapped up 28 companies in whole or part, according to data compiled by Bloomberg. When announcing the deal for Marvel and its cast of superheroes in August, Iger said they would add to Disney’s stable of characters and attract more boys to its cable cartoon offerings. While some Disney entertainment such as Pixar’s “Cars” and the “Pirates of the Caribbean” action films may be popular with boys, most of its movies, cable shows and characters appeal to young children and adolescent girls, says UBS AG analyst Michael Morris in New York. ‘High School Musical’ The Disney Channel is the leading cable network in reaching girls age 6 to 14 with hits such as “Hannah Montana,” about a teenage pop singer, Disney has said. “Content and products for boys have been less consistent for Disney than those for girls,” Morris says. “When Disney looks for growth opportunities, it sees big potential with boys.” Last year, Disney also bought Wideload Games Inc. , maker of the violent video game “ Stubbs the Zombie in Rebel Without a Pulse ,” featuring brain-eating zombies. And the company rebranded its Toon Disney cable cartoon channel into Disney XD. The channel’s new programming features shows such as “Kick Buttowski” aimed at boys age 6 to 14, the company said. When Disney creates a franchise — such as “High School Musical,” which features teen heartthrob Zac Efron — Iger tries to exploit it across the company’s empire. The Disney Channel movie also found life in theaters, a stage musical, CDs, DVDs, video games, an ice-skating show and at parks. ‘Up’ “When they get a hit, they can really leverage that for big profits,” says Cuggino. “But when they miss, they miss on many levels. That makes for a rough and volatile business.” While Pixar’s “Toy Story” and “Finding Nemo” films have produced some synergy, the Academy Award-nominated “Up” has not. The lead character, a grumpy old man, would be unappealing in other venues, analysts say. Iger said in July that while he was satisfied with the movie’s box office sales, he didn’t consider it a franchise. “Disney needs to figure out how to develop those properties,” says Janna Sampson , co-chief investment officer of Lisle, Illinois-based OakBrook Investments LLC, which has 300,000 Disney shares. “That’s why I thought they paid all that money for Pixar.” Iger took over from Michael Eisner, who in 2004 was stripped of his chairmanship by Disney’s board while he was embroiled in feuds, including one with Jobs over a Pixar distribution deal. Eisner, 67, retired the following year, after Walt Disney’s nephew, Roy Disney, led a shareholder revolt, claiming Eisner was a micromanager who had caused a creative brain drain. ‘Most Enthusiastic’ Eisner’s strategic planning division applied so much scrutiny to business proposals that managers were reluctant to pitch ideas, Iger said in a 2005 analyst meeting after disbanding the group. “Where Eisner micromanaged, Iger gives his managers much more freedom,” says Soleil Securities’ Gould. “The strategic planning division was really disliked under Eisner.” Born in Brooklyn and raised on Long Island, New York, Iger honed his diplomacy on the student council at Oceanside High School, where he was voted the “most enthusiastic” member of the class of 1969. At ABC, he ascended in rank as the entertainment industry consolidated: In 1987, the one-time studio supervisor became vice president of programming at ABC Sports. After the Disney deal, he rose to chairman of ABC Group, president of Walt Disney International and president of Disney in 2000. Dick Cook Resigns “Iger manages people extraordinarily well,” says Laura Martin , an analyst at Needham & Co. in Pasadena, California. As CEO, Iger named Pixar creative director John Lasseter the chief creative officer of both Walt Disney and Pixar Animation studios. Lasseter also offers advice to executives involved with theme parks, video games and merchandising. And he appears in corporate videos expounding on changes he has made, such as creating realistic Pixar toys by using digital data from movies to craft the face of Woody from the “Toy Story” films, for example. After years of executive turnover under Eisner, Iger’s top lieutenants have mostly stayed put — until recently. During a conference call in May, Iger criticized his studio, led by 40- year Disney veteran Dick Cook, which had produced clunkers such as “Bedtime Stories” about a hotel handyman. “It’s about choice of films and the execution of the films that have been chosen for production, and we’ve had a rough year in terms of the performance,” Iger said. Four months later, Cook resigned, replaced by Rich Ross , then president of Disney Channels Worldwide. Captain America Soon after, Ross named new heads of studio production and distribution. “Everyone liked Dick Cook, but the results weren’t coming through,” Gould says. In 2009, Disney finished No. 5 in box office sales among the six major studios, according to Box Office Mojo . The studio’s operating income dropped 84 percent in fiscal 2009, its worst showing in a decade, before rebounding in the first quarter, which ended on Jan. 2. To fill theaters, Ross, 48, can’t yet rely on several of Marvel’s most popular comic-book characters. They’re tied up in licensing deals: News Corp. has the rights to the X-Men, Sony Corp. controls Spider-Man and Universal Studios Inc. claims several Marvel characters for exclusive use in its Orlando theme parks. Ross has to mine the likes of Captain America, Thor and lesser-known figures like Ant-Man until the bigger superhero licenses expire beginning in 2013. The licensing deals soured some analysts on the Marvel purchase. ESPN “Over the long run, we suspect this will be viewed as Mr. Iger’s first major mistake as CEO,” Citigroup Inc. analyst Jason Bazinet wrote in September. Iger’s best-performing business is the one that bears no resemblance to Disney’s iconic brands: ESPN . Disney picked up ESPN, the No. 1 U.S. sports network by ratings, in the Capital Cities/ABC deal. ESPN has become the workhorse in the company’s media division , its largest, composed of broadcast and cable networks. Buoyed by growing subscriber fees, cable generated 29 percent of Disney’s revenues in 2009, up from 23 percent three years earlier, and produced 64 percent of the company’s total operating profit in fiscal 2009. “Disney should be called ESPN Co.,” Gould says. ABC’s Decline ABC , the third-ranked broadcast network, according to Nielsen Co., is dwarfed by cable. Gould estimates that ABC, including its local stations and production operations, is worth about $5.3 billion, or about 14 percent of ESPN’s value. Iger may consider selling the 66-year-old broadcaster, says analyst Michael Nathanson of New York-based Sanford C. Bernstein & Co. “ABC is a good question,” Nathanson says. “I would ask the company if ABC fits in.” As ABC’s advertising revenue falls, Iger is demanding an increased share of the fees paid by cable and satellite companies to the broadcaster’s independent affiliate stations that carry its programming. “We should get paid for the value we deliver,” Iger said in December. Nexstar Broadcasting Group Inc. , an Austin, Texas-based affiliate of ABC and other networks, plans to resist Iger’s demand for a bigger slice of fees. CEO Perry Sook says he needs the fees — $22.5 million in the first nine months of 2009 — to subsidize the decline in ad sales from the 63 local stations Nexstar owns and works with. Theme Parks “I have a company car. Do the networks also feel they’re entitled to drive that for two days a week?” Sook asks. Iger’s biggest financial bet is on his theme park, resort and cruise ship business, which in fiscal 2009 posted its steepest decline in operating income since the 2001 terrorist attacks in the U.S. Disney has used discounts , including as much as 45 percent off hotel rates at Walt Disney World in Florida, to lure visitors. In keeping with the CEO’s edict to apply technology wherever possible, new rides at Epcot in Florida include a motion simulator called the “Sum of All Thrills.” Using a touchscreen monitor, kids customize their ride by programming simulated corkscrews, inversions and hills. At Disneyland in California and Walt Disney World, the “Star Tours” rides, using scenes based on the original “Star Wars” movies, will be updated next year with 3-D versions of the more-recent trilogy of movies. Walt Disney World will have to work harder for visitors after the nearby Universal Studios Florida park opens a new “Wizarding World of Harry Potter” area this spring. It will feature a replica of Hogwarts School of Witchcraft and Wizardry. Executive Shuffle “Look out, Cinderella Castle, here comes Hogwarts castle,” says Dennis Speigel , president of Cincinnati-based consulting firm International Theme Park Services Inc. Even in Asia, Disney is finding it hard to make a buck. Five years ago, the company and the local government in Hong Kong formed a joint venture to open a Disneyland in the region, where Ocean Park , a sea-themed venue, has proven tough competition. Disney’s venture is still losing money. “They missed the mark in Hong Kong in underestimating the competition,” Speigel says. Disney is now moving into Shanghai after the Chinese government in November gave its approval to build an amusement park. In leaving his mark on the Magic Kingdom, Iger is also shuffling his top managers. In November, he switched Chief Financial Officer Thomas Staggs , 49, with James Rasulo , 54, head of the theme parks. Bloodthirsty Zombies Iger said he was handing them new challenges, not preparing for succession. But Gould says Staggs, a former Morgan Stanley & Co. investment banker, is likely being given operational experience to groom him for the top job. Cuggino, the Disney investor, praises Iger’s moves. “I like companies that invest in their business when economic times are tough,” Cuggino says. “That means they’ll be stronger when the economy improves.” If Iger gets a fairy tale ending to his tenure as CEO, it will at least partly come from muscle-bound superheroes and bloodthirsty zombies — a far cry from the characters Walt Disney made famous at Disneyland, the Happiest Place on Earth. To contact the reporters on this story: Seth Lubove in Los Angeles at slubove@bloomberg.net ; Andy Fixmer in Los Angeles at afixmer@bloomberg.net

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Bank Bailout in Ireland Gets Lucky Break From Real Estate Prices in London

February 16, 2010

By Dara Doyle Feb. 16 (Bloomberg) — It was the collapse of Ireland’s real estate market that crippled the country’s banks. It may be the British property market that helps save them. The Irish government plans to start buying 80 billion euros ($109 billion) of real estate loans from banks this month as part of a bailout. About 21 percent of the loans, including one for developing London landmark Battersea Power Station, are across the Irish Sea, according to the National Asset Management Agency , the group in Dublin set up to oversee the debt. “Almost accidentally, the U.K. is helping Ireland,” said Eoin Fahy , an economist at KBC Asset Management, which oversees about 8 billion euros in Dublin. “Significant profits on U.K. assets could offset heavy Irish losses.” As Ireland takes its biggest financial gamble since winning independence from Britain almost nine decades ago, a rebound in the U.K. real estate market has become the unlikely source of a boost to the value of loans included in the rescue package. Prices for commercial properties rose a record 8.1 percent in the U.K. in the fourth quarter from the previous three months, according to Investment Property Databank Ltd, a research company based in London. Irish prices fell 4.9 percent over the same period, it said. About 23 percent of office space in Dublin is vacant, compared with 7 percent in central London, according to CB Richard Ellis Group Inc ., the world’s largest property broker. “It increases the chances that the agency ends up certainly not making a loss but actually making a profit,” said Mike Turner , head of strategy at Aberdeen Asset Management Plc in Edinburgh. “It spells good news for the Irish Treasury.” London Allure Central London, the world’s most expensive office rental market, is the best place in Europe for new property investments, according to a PricewaterhouseCoopers LLP survey dated Feb. 1. For the second straight year, Dublin offered the worst prospects, the accounting firm said. The asset agency, known as NAMA, may have to move quickly. The market’s recovery is “unsustainable,” with banks vulnerable to property companies defaulting on loans and the Bank of England halting its 200 billion-pound ($313 billion) of bond purchases, according to Ernst & Young LLP’s Item Club, an economic forecasting group. “My sense is that, with fiscal tightening coming after the election, the recovery has run its course,” said Peter Sceats, director of real estate at broker Tradition Financial Services in London. “We could see a dip in prices in 2010.” Bank Losses In the meantime, Bank of Ireland Plc will incur a smaller loss on loans transferred to the asset agency than rival Allied Irish Banks Plc, NCB Stockbrokers in Dublin said. The buoyancy in the U.K. means Bank of Ireland will make a 27 percent loss on loans it’s selling to the asset agency compared with a 35 percent discount for Allied Irish, according to Davy, another Dublin-based securities firm. “For Bank of Ireland, the U.K. uplift has a massive benefit,” said Stephen Lyons , an analyst at Davy. Spokesmen at both banks declined to comment. Bank of Ireland shares have more than tripled over the past year, while Allied Irish has doubled in the same period. Over three years, the ISEF Index of Irish financial companies has slumped 95 percent on concern about property loans. Between 2004 and 2006, Irish investors spent 15 billion euros on real estate in the U.K., CB Richard Ellis said. “The similarities between the two countries with regards to legal framework, lease structures and taxation make it a very attractive location for the Irish,” said Patrick Koucheravy, an economist at CB Richard Ellis in Dublin. Half of Economy Ireland’s biggest banks financed many of the deals and, as such, some of the loans are ending up at NAMA. It will buy the loans at a discount of about 30 percent, taking both good and bad debt. Should any of the borrowers default, the agency can seize the buildings on which they are secured. Altogether, the debt amounts to about half of Ireland’s gross domestic product. In addition to the portion in Britain, loans tied to property in Northern Ireland account for about 6 percent of the total, NAMA said. “In Ireland, NAMA will be a price maker,” said John Corrigan , head of the National Treasury Management Agency, which controls NAMA. “In the overseas market, it will be a price taker. The uplift in the U.K. property market is very welcome.” Allied Irish is transferring 24 billion euros worth of loans to NAMA. Of that, 3.3 billion euros is tied to the U.K., the bank said in a letter to shareholders dated Nov. 30. In Bank of Ireland’s case, U.K. loans account for 7 billion euros of 16 billion euros heading to NAMA, the company said the same day. That includes a Bank of Ireland loan to Real Estate Opportunities Plc , the latest company planning to transform Battersea Power Station, Europe’s largest brick building, into new homes and offices. REO, which is looking for a partner for the project, said in November the loan continues to perform. “Bank of Ireland isn’t really getting the credit from investors for the fact that 43 percent of its property-backed assets are in the U.K.,” said Ciaran Callaghan , an NCB analyst. To contact the reporter on this story: Dara Doyle at ddoyle1@bloomberg.net

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Richard (RJ) Eskow: Greeks, Beware of Goldman Bearing Gifts

February 15, 2010

Like a cat burglar, Goldman Sachs leaves its fingerprints in the most unusual places. The news of Goldman’s role in the Greek financial crisis isn’t just a black eye for Wall Street. It’s also a diplomatic disaster for the United States, whose government has become so intertwined with Goldman that this incident could endanger our relationship with the European Union. Failure to act aggressively could undermine the President’s efforts to strengthen our relationships with that part of the world. The New York Times succinctly summarizes the situation in its article, ” Wall Street Helped to Mask Debt Fueling Europe’s Crisis ,” when it writes: “Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.” While the underlying financial mechanisms can be complex to follow, the basic situation is this: Nations in the European Union are bound by treaty to keep their indebtedness within certain limits. Goldman Sachs helped structure a deal in which the Greek government was able to conceal its borrowing by labeling the transaction as a “currency trade.” So it appears that Goldman may have helped the Greeks evade their treaty obligations with a shady deal. And this is not unusual behavior for American institutions. JP Morgan Chase did something similar for the government of Italy and, as the Times report suggests, other deals may have been done elsewhere in Europe. These nations have bound their economic fates together in a single union. To undermine one is to potentially undermine all of them. Here’s where it gets tricky for the United States: Goldman Sachs continued its rapacious behavior even after the Federal government bailed them out — directly (using TARP funds) and indirectly (by paying 100 cents on the dollar for AIG debts that some analysts think were overstated). Like a drug dealer who hates to see a client get clean, Goldman sent executives to Greece in November of 2009 with another tempting offer that would have deepened the government’s debt even further. This time the Greeks said no. They had already used revenue generators such as lottery income and airport usage fees as collateral on previous loans. (Lottery fees make a dark kind of sense in this case; if there’s one thing Goldman executives understand, it’s gambling.) What does it look like for an institution that has been rescued by the US Government to encourage over-leveraged governments to go even more deeply into debt? Goldman executives have been embedded in the government for years and enjoy close relationships with the President’s two senior financial officials, Tim Geithner and Larry Summers. (Summers received $135,000 from Goldman for a one-day visit in April of 2008 when, as Glenn Greenwald observed, it was assumed he would be a senior financial official in the next Administration.) As Simon Johnson points out, the Federal Reserve may give Goldman the usual soft treatment for its behavior in the European Union. But Johnson points out that the European Commission, which has jurisdiction over this issue, isn’t likely to be so forgiving. He expects an audit, and offers some suggested lines of inquiry. This could prove to be a major embarrassment for the US, and an impediment to winning support the US will need from Europe on a range of diplomatic initiatives. We’re told that one of the Greek banking deals was named after Aeolos, the Greek god of the winds. Other gods are available for future Goldman deals: There’s always Hermes, who’s known for representing flight and speed but is also responsible for commerce. Even more aptly, he’s the god of mischief and theft. Or there’s the more minor figure of Adephagia, the goddess of gluttony. And if our government doesn’t take a firmer hand with rogue bankers like Goldman they may find themselves in the hands of Ate. Haven’t heard of her? She’s the goddess of foolish actions. Richard (RJ) Eskow, a consultant and writer, is a Senior Fellow with the Campaign for America’s Future. He blogs at: No Middle Class Health Tax A Night Light Website: Eskow and Associates

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Greek Finance Minister Begs For Bailout Details, Says Markets Are ‘Attacking’ Greece

February 15, 2010

BRUSSELS (By AOIFE WHITE, AP ) – Greece’s finance minister said a detailed rescue plan from other eurozone nations would be the best way to soothe the crisis over market fears that Greece could default on debt payments. Eurozone nations pledged last week to aid Greece “if needed to guard financial stability in the euro area” — but did not say how they would help the country. Greece’s debt problem has shaken the entire euro zone and undermined the shared currency. “My guess is that what will stop markets attacking Greece at the moment is a further more explicit message that makes operational what has been decided last Thursday,” at a meeting of EU leaders, Greek Finance Minister George Papaconstantinou said. Market worries of a default have hiked the cost of Greek government borrowing in recent months and caused the euro to slide to a near nine-month low against the dollar. Papaconstantinou said the 16 countries that use the euro need to go beyond that to “work out a mechanism so that if necessary the mechanism will be there” for any member that cannot pay its debts. “I think this is the logical way of addressing the issue,” he told an audience of European Union policy makers at a European Policy Centre think-tank event in Brussels. However, Papaconstantinou said last week’s statement was a “watershed” because it showed that “in the eurozone, no one country is alone and when it comes down to it they stick together.” He blamed financial markets for exaggerating Greece’s debt worries, saying Greece’s economic output is just over 2 percent of the euro area’s and a default “would not … create a problem for the euro area.” “Any country is prey and will be prey to speculative forces,” he said. “Today it’s Greece, tomorrow it could be another country.” Eurozone finance ministers meet for talks later Monday to discuss whether they think Greece’s austerity program will be enough to reduce its massive deficit over the next three years. Ministers from all 27 EU countries then meet Tuesday. Luxembourg Prime Minister Jean-Claude Juncker, who leads the talks, said “it will be up to the Greeks to prove that the existing adjustment program will be sufficient” and that “we will check in March to see if Greece is on that track.” He rejected any suggestion that the debt crisis would force Greece to abandon the euro, saying “I don’t think that this absurd theory of expelling Greece from the eurozone has any chance of being taken seriously.” The European Commission has already warned that it will ask Greece to do more if it can’t implement promised spending cuts and tax hikes — which have already sparked protests and a sweeping public sector strike in Greece. It wants to keep Greece on a tight rein, ordering the government to report back in mid-March to show what kind of cuts it has made. The EU could then demand tougher action. The Greek government has promised to do everything necessary to reduce its deficit from 12.7 percent of gross domestic product last year to 8.7 percent this year — and under a 3 percent limit set by EU rules by the end of 2012. Greece’s credibility also came under fire from the European Commission on Monday, which said it wants Greece to explain by the end of February how it used complex financial deals that allegedly made its debt limits look lower. The EU executive is seeking the power to audit the Greek public finances following a damning report from the EU statistics agency Eurostat that said Greece falsified data to hide the extent of last year’s deficit. EU spokesman Amadeu Altafaj Tardio says the EU has given Greece an end-of-February deadline to give details on how the deals, called currency swaps, affected government accounts since 2001. He said such swaps weren’t illegal unless the Greece was not using market rates to calculate the exchange rates used for the swaps. Greece never told the EU that it was using the swaps to mask debt, he said. Papaconstantinou said some of the derivative contracts used in the past “were at the time legal and Greece was not the only country” using them. He said they have now “been made illegal and Greece has not used them since.” He said the government now does not want to use financing that is not approved by Eurostat. “We do want to restore credibility,” he said. “We have enough trouble as it is convincing people that our numbers are real.” Greek finance ministry officials, speaking on condition of anonymity, told the Associated Press on Sunday that the government has met with most major international banks over the last months “to explore options and discuss their involvement in financing Greek national debt.” They said any debt financing proposals would be conducted transparently and in line with rules on government debt set by Eurostat. Associated Press writer Robert Wielaard contributed to this story. “My guess is that what will stop markets attacking Greece at the moment is a further more explicit message that makes operational what has been decided last Thursday,” at a meeting of EU leaders, Greek Finance Minister George Papaconstantinou said. Market worries of a default have hiked the cost of Greek government borrowing in recent months and caused the euro to slide to a near nine-month low against the dollar. Papaconstantinou said the 16 countries that use the euro need to go beyond that to “work out a mechanism so that if necessary the mechanism will be there” for any member that cannot pay its debts. “I think this is the logical way of addressing the issue,” he told an audience of European Union policy makers at a European Policy Centre think-tank event in Brussels. However, Papaconstantinou said last week’s statement was a “watershed” because it showed that “in the eurozone, no one country is alone and when it comes down to it they stick together.” He blamed financial markets for exaggerating Greece’s debt worries, saying Greece’s economic output is just over 2 percent of the euro area’s and a default “would not … create a problem for the euro area.” “Any country is prey and will be prey to speculative forces,” he said. “Today it’s Greece, tomorrow it could be another country.” Eurozone finance ministers meet for talks later Monday to discuss whether they think Greece’s austerity program will be enough to reduce its massive deficit over the next three years. Ministers from all 27 EU countries then meet Tuesday. Luxembourg Prime Minister Jean-Claude Juncker, who leads the talks, said “it will be up to the Greeks to prove that the existing adjustment program will be sufficient” and that “we will check in March to see if Greece is on that track.” He rejected any suggestion that the debt crisis would force Greece to abandon the euro, saying “I don’t think that this absurd theory of expelling Greece from the eurozone has any chance of being taken seriously.” The European Commission has already warned that it will ask Greece to do more if it can’t implement promised spending cuts and tax hikes – which have already sparked protests and a sweeping public sector strike in Greece. It wants to keep Greece on a tight rein, ordering the government to report back in mid-March to show what kind of cuts it has made. The EU could then demand tougher action. The Greek government has promised to do everything necessary to reduce its deficit from 12.7 percent of gross domestic product last year to 8.7 percent this year – and under a 3 percent limit set by EU rules by the end of 2012. Greece’s credibility also came under fire from the European Commission on Monday, which said it wants Greece to explain by the end of February how it used complex financial deals that allegedly made its debt limits look lower. The EU executive is seeking the power to audit the Greek public finances following a damning report from the EU statistics agency Eurostat that said Greece falsified data to hide the extent of last year’s deficit. EU spokesman Amadeu Altafaj Tardio says the EU has given Greece an end-of-February deadline to give details on how the deals, called currency swaps, affected government accounts since 2001. He said such swaps weren’t illegal unless the Greece was not using market rates to calculate the exchange rates used for the swaps. Greece never told the EU that it was using the swaps to mask debt, he said. Papaconstantinou said some of the derivative contracts used in the past “were at the time legal and Greece was not the only country” using them. He said they have now “been made illegal and Greece has not used them since.” He said the government now does not want to use financing that is not approved by Eurostat. “We do want to restore credibility,” he said. “We have enough trouble as it is convincing people that our numbers are real.” Greek finance ministry officials, speaking on condition of anonymity, told the Associated Press on Sunday that the government has met with most major international banks over the last months “to explore options and discuss their involvement in financing Greek national debt.” They said any debt financing proposals would be conducted transparently and in line with rules on government debt set by Eurostat. Associated Press writer Robert Wielaard contributed to this story.

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Default Rate Declines to 0.3% as Seen in Junk Bond Yields: Credit Markets

February 8, 2010

By Caroline Salas and Pierre Paulden Feb. 9 (Bloomberg) — Investors in the lowest rated corporate bonds are looking past concern that worsening government finances will derail the economy, paying prices that imply the fastest drop in defaults in more than a decade. The amount of so-called distressed securities, or bonds yielding at least 10 percentage points above benchmark rates, fell to $117 billion from $250 billion six months ago, according to Bank of America Merrill Lynch index data. The market is pricing in a default rate of 0.3 percent in a year, down from 10.2 percent in December, JPMorgan Chase & Co. says. The neediest borrowers are raising record amounts of debt, allowing them to refinance obligations even as relative borrowing costs rise on concern that European governments will struggle to close budget deficits. Speculative-grade companies have issued $21.6 billion in 2010, the fastest start to a year on record, after selling an unprecedented $162 billion in 2009, according to data compiled by Bloomberg. “Recent trends in asset prices will not change the trend in the default rate,” said Peter Acciavatti , head of U.S. high yield and leveraged loan credit strategy at JPMorgan. “Our view is default rates will continue to fall due to the improvement in capital markets over the last year, even as markets have become a little choppy of late. We still like the asset class.” Acciavatti, the top-ranked high-yield strategist in Institutional Investor magazine’s annual poll for the past seven years, cut his forecast for junk-bond defaults to 2 percent by year-end from 4 percent. Extra Spread The extra yield investors demand to own corporate bonds overall instead of similar-maturity Treasuries widened to 170 basis points yesterday from 169 on Feb. 5, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread on U.S. high-yield bonds grew to 685 basis points from this year’s low of 599 basis points, or 5.99 percentage points, on Jan. 11, according to the Bank of America Merrill Lynch U.S. High-Yield Master II Index. Elsewhere in credit markets, the cost to protect bonds issued by Portugal and Spain from losses surged to a record high, the proportion of securitized U.S. prime jumbo mortgages at least 60 days delinquent rose for a 32nd straight month and Las Vegas-based casino operator MGM Mirage says it’s seeking to push out the maturities on a “substantial portion” of its bank debt. ‘Tightening to Come’ Wider high-yield spreads make junk bonds even more attractive than they were at the start of the year because defaults will decline in 2010, according to Martin Fridson , chief executive officer of money-management firm Fridson Investment Advisors in New York. Junk bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s. “There’s much more tightening to come,” said Fridson, who predicts spreads may narrow to 532 basis points in a year. “The case is getting stronger for a solid double-digit return this year.” Junk bonds have returned 0.61 percent this year, after gaining a record 57.5 percent in 2009, according to Merrill Lynch index data. The securities are underperforming investment- grade bonds, which have handed investors 1.8 percent in 2010, the index data show. McClatchy Sells The number of issuers with bonds trading at distressed levels has shrunk to 169 from a high of 761 in December 2008, according to data compiled by Bloomberg. The spread on speculative-grade securities has narrowed from a record 21.8 percentage points in December 2008, making it more affordable for companies to refinance their debt. McClatchy Co., publisher of the Miami Herald and the Sacramento Bee newspapers, sold $875 million of senior secured notes due 2017 this month to refinance bank loans. Fitch Ratings increased Sacramento, California-based McClatchy’s credit ranking two levels to CCC from C because the offering postponed the risk of the company being unable to refinance debt until 2013. “While companies are paying more than a few weeks ago to borrow, the ability to refinance debt is open,” said Eric Takaha , director of corporate and high-yield for the Franklin Templeton Fixed Income Group, which manages more than $213 billion. “Trends are still positive for this year. Absent any major change, defaults will come down,” Takaha said in a telephone interview from his San Mateo, California, office. Freescale Offerings Freescale Semiconductor Inc. is marketing $750 million of 10-year notes this week to repay bank debt. The Austin, Texas- based chipmaker was taken private in 2006 and is rated Caa1 by Moody’s and B- by S&P. Freescale has more than $7 billion of debt maturing through 2014, according to Bloomberg data. “It is justified that the number of issues trading as if they’re going to default within a year has come down sharply because with the refinancing that happened on such a large scale in 2009, companies have pushed out their crisis point to 2012 and beyond,” Fridson said. Credit-default swaps on Portugal, Greece and Spain surged yesterday amid growing concern the nations will struggle to cut budget deficits. The Markit iTraxx SovX Western Europe Index of credit- default swaps on the debt of 15 governments jumped 6.25 basis points to an all-time high of 112.75 basis points, CMA DataVision prices show. Swaps on Portugal soared 17.5 basis points to 244.5, while contracts on Greece jumped 18 basis points to 426 and Spain increased 7 to 173. Crossover Index Concern that governments within the euro region may struggle to meet their debt commitments is hurting confidence in the region’s companies and banks. The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies climbed 3 basis points to 497, according to JPMorgan. Swaps on Banco Comercial Portugues SA, Portugal’s second- largest bank, jumped 8 basis points to 250, an all-time high, and contracts on Banco Santander SA rose 11.5 basis points to 148, the highest since April, CMA prices show. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13 rose to the highest in three months amid investor concern that “contagion” from risks posed by rising deficits in Europe to government debt may spread to other assets. The index, linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, climbed 5.25 basis points to a mid-price of 107 basis points, according to broker Phoenix Partners Group. The index is at its highest since reaching 107.02 basis points on Nov. 3, according to CMA prices. The gauge typically rises as investor confidence deteriorates. ‘Like a Contagion’ “This is looking more and more like a contagion that can only be stopped via outside intervention,” Guy Lebas , chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia, wrote in an e-mail. U.S. prime jumbo mortgages at least 60 days late backing securities reached 9.6 percent in January from 9.2 percent in December, the 32nd straight increase for “serious delinquencies,” Fitch said yesterday. “The trend line for delinquencies indicates the 10 percent level could be reached as early as next month,” Vincent Barberio , a Fitch managing director in New York, said in a statement. The rate almost tripled in 2009, Fitch said. In Europe, the Co-operative Bank Plc, a unit of the U.K.’s largest customer-owned retailer, plans to issue as much as 2.5 billion pounds ($3.9 billion) of mortgage-backed securities, according to a banker with knowledge of the deal. Europe CMBS Ratings of European commercial mortgage-backed securities will remain “under pressure” as the credit quality of the loans in the deals deteriorates, according to Moody’s. The New York-based ratings company downgraded 216 portions of commercial mortgage-backed bonds, or 63 percent of the securities that it rates, between October 2008 and December 2009, according to the report. Only three pieces were revised higher in the period. MGM Mirage , the Las Vegas Strip’s largest casino owner, proposed pushing out maturities on $5.55 billion of senior credit facilities. About half of its $12.9 billion in long-term debt comes due through next year, according to filings with the U.S. Securities and Exchange Commission. The casino operator is also working to cut borrowings to $10 billion after losing money in three of the past four quarters. “This extension will provide the company with ample time that will be needed to navigate through challenging business conditions in Las Vegas, while management works to improve Ebitda,” Deutsche Bank AG analysts Andrew Zarnett and Sri Rajagopalan said in a report yesterday, referring to earnings before interest, taxes, depreciation and amortization. NewPage Tumbles NewPage Corp. bonds continued to tumble amid weakening demand for coated paper. The Miamisburg, Ohio-based company’s five-year, senior secured 11.375 percent notes dropped 4.875 cents on the dollar to 90.625 cents to yield 14.04 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds of NewPage, which is owned by New York- based Cerberus Capital Management LP, traded at 98.25 cents as recently as Feb. 2. “The coated paper market had been showing some pickup in demand in recent months, and that seems to be fading,” said Brian Bogart , analyst at KDP Investment Advisors in Montpelier, Vermont. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Macquarie Group Shares Tumble as Profit Forecast Misses Analyst Estimates

February 8, 2010

By Angus Whitley and Shani Raja Feb. 9 (Bloomberg) — Macquarie Group Ltd. , Australia’s largest investment bank, slumped in Sydney trading after its second-half profit forecast failed to match analyst estimates. The shares dropped 6.6 percent to A$47.05 at 11:10 a.m. local time, the most since May. Net income in the six months to March 31 might climb 10 percent from the first half’s A$479 million ($414 million), Macquarie said, shy of analyst estimates and up from the company’s October prediction that earnings would be “broadly in line” with the first half. Today’s forecast is “slightly below the more bullish analysts,” said Angus Gluskie , who oversees $300 million at White Funds Management Pty in Sydney. “Some investors were looking for a greater upgrade, so on a short-term basis are happy to close out positions given the softness in the market.” Other Australian financial companies such as Commonwealth Bank of Australia and Axa Asia Pacific Holdings Ltd. have reported profits that beat analyst estimates as markets recover from the global financial crisis. Macquarie said its forecast for earnings growth is “subject to market conditions, significant swing factors and unexpected one-off items.” Profit at Macquarie is set to climb to A$1.05 billion in the year ending March 2010 from A$871 million, and to A$1.51 billion in the following 12 months, according to the mean of five analyst estimates compiled by Bloomberg. Bulls Disappointed Sydney-based Macquarie, with capital of A$4.5 billion above the regulatory minimum at the end of December, said today the completion of acquisitions will add to services on offer worldwide, without detailing any earnings contributions. “They’ve issued an outlook statement that is qualified with a number of items, which seems to have muddied the water a bit instead of providing the clarity that a statement of this nature seeks to provide,” said Prasad Patkar , who helps manage about $1.5 billion at Platypus Asset Management in Sydney. Chief Executive Officer Nicholas Moore has used the slowdown to spend more than $770 million on acquisitions last year in North America, ranging from energy advisory and asset management units to brokerages. “There’s a fair bit more to come,” said Hugh Dive , who helps manage about $3 billion at Investors Mutual Ltd. in Sydney. Moore is performing a “balancing act” between buying assets and keeping a capital cushion against volatility, said Dive. Macquarie last week agreed to buy the equity trading and research operations of Sal. Oppenheim Jr. & Cie KGaA to expand its business in Europe, following a December agreement to buy Sal.’s derivatives business. ‘Back to Normal’ “I am not ruling out any acquisitions, but in terms of normal trends, you’d expect those to be going back to normal rates as markets settle down,” Moore said on a call with investors today. “We have sufficient capital for the plans we are working on at the moment.” Moore said in an interview last October that any expansion through acquisitions would be “incremental” and that he was adopting a “conservative stance.” “Despite improving trends in a number of major markets, we continue to maintain a conservative approach to funding and capital,” Moore said today in the statement. Profit at Macquarie may almost double in the next two years as such takeovers pay off and fees swell from advising on mergers and acquisitions, Bank of America Merrill Lynch said in a Jan. 28 report. Macquarie Capital, which arranges debt and equity sales, and gives corporate advice, will drive growth, Bank of America said. Macquarie Capital Moore said today the operating result at that unit in the three months ended December fell from the previous quarter, but was higher than the three months ended June. That matched the trend at the securities division, the corporate and asset finance business, and the fixed-income, currencies and commodities division, he said. In Australia, where Macquarie makes about half its income, the benchmark S&P/ASX 200 has climbed for three consecutive quarters. If that trend continues, companies are more likely to attempt takeovers, boosting earnings at the banks advising on the deals, said Peter Swan, finance professor at the Australia School of Business at the University of New South Wales. “There’s always a cyclical effect,” said Swan. “M&A is much more successful when investors are more optimistic. That’s what Macquarie is relying on.” Australia’s government said on Feb. 7 that it will withdraw on March 31 a guarantee on large deposits and wholesale funding that helped banks access credit after the global financial crisis. That removal is “not expected to impact” Macquarie’s funding position, the bank said today. Moore is returning to more traditional investment banking, shifting away from a so-called satellite model which involved buying and pooling assets, listing them, and extracting fees for managing the businesses. Impairment charges on those assets put an end to 16 years of profit growth at Macquarie in the year ended March 2009. To contact the reporter on this story: Angus Whitley in Canberra at awhitley1@bloomberg.net

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Macquarie Group Shares Tumble as Profit Forecast Misses Analyst Estimates

February 8, 2010

By Angus Whitley and Shani Raja Feb. 9 (Bloomberg) — Macquarie Group Ltd. , Australia’s largest investment bank, slumped in Sydney trading after its second-half profit forecast failed to match analyst estimates. The shares dropped 6.6 percent to A$47.05 at 11:10 a.m. local time, the most since May. Net income in the six months to March 31 might climb 10 percent from the first half’s A$479 million ($414 million), Macquarie said, shy of analyst estimates and up from the company’s October prediction that earnings would be “broadly in line” with the first half. Today’s forecast is “slightly below the more bullish analysts,” said Angus Gluskie , who oversees $300 million at White Funds Management Pty in Sydney. “Some investors were looking for a greater upgrade, so on a short-term basis are happy to close out positions given the softness in the market.” Other Australian financial companies such as Commonwealth Bank of Australia and Axa Asia Pacific Holdings Ltd. have reported profits that beat analyst estimates as markets recover from the global financial crisis. Macquarie said its forecast for earnings growth is “subject to market conditions, significant swing factors and unexpected one-off items.” Profit at Macquarie is set to climb to A$1.05 billion in the year ending March 2010 from A$871 million, and to A$1.51 billion in the following 12 months, according to the mean of five analyst estimates compiled by Bloomberg. Bulls Disappointed Sydney-based Macquarie, with capital of A$4.5 billion above the regulatory minimum at the end of December, said today the completion of acquisitions will add to services on offer worldwide, without detailing any earnings contributions. “They’ve issued an outlook statement that is qualified with a number of items, which seems to have muddied the water a bit instead of providing the clarity that a statement of this nature seeks to provide,” said Prasad Patkar , who helps manage about $1.5 billion at Platypus Asset Management in Sydney. Chief Executive Officer Nicholas Moore has used the slowdown to spend more than $770 million on acquisitions last year in North America, ranging from energy advisory and asset management units to brokerages. “There’s a fair bit more to come,” said Hugh Dive , who helps manage about $3 billion at Investors Mutual Ltd. in Sydney. Moore is performing a “balancing act” between buying assets and keeping a capital cushion against volatility, said Dive. Macquarie last week agreed to buy the equity trading and research operations of Sal. Oppenheim Jr. & Cie KGaA to expand its business in Europe, following a December agreement to buy Sal.’s derivatives business. ‘Back to Normal’ “I am not ruling out any acquisitions, but in terms of normal trends, you’d expect those to be going back to normal rates as markets settle down,” Moore said on a call with investors today. “We have sufficient capital for the plans we are working on at the moment.” Moore said in an interview last October that any expansion through acquisitions would be “incremental” and that he was adopting a “conservative stance.” “Despite improving trends in a number of major markets, we continue to maintain a conservative approach to funding and capital,” Moore said today in the statement. Profit at Macquarie may almost double in the next two years as such takeovers pay off and fees swell from advising on mergers and acquisitions, Bank of America Merrill Lynch said in a Jan. 28 report. Macquarie Capital, which arranges debt and equity sales, and gives corporate advice, will drive growth, Bank of America said. Macquarie Capital Moore said today the operating result at that unit in the three months ended December fell from the previous quarter, but was higher than the three months ended June. That matched the trend at the securities division, the corporate and asset finance business, and the fixed-income, currencies and commodities division, he said. In Australia, where Macquarie makes about half its income, the benchmark S&P/ASX 200 has climbed for three consecutive quarters. If that trend continues, companies are more likely to attempt takeovers, boosting earnings at the banks advising on the deals, said Peter Swan, finance professor at the Australia School of Business at the University of New South Wales. “There’s always a cyclical effect,” said Swan. “M&A is much more successful when investors are more optimistic. That’s what Macquarie is relying on.” Australia’s government said on Feb. 7 that it will withdraw on March 31 a guarantee on large deposits and wholesale funding that helped banks access credit after the global financial crisis. That removal is “not expected to impact” Macquarie’s funding position, the bank said today. Moore is returning to more traditional investment banking, shifting away from a so-called satellite model which involved buying and pooling assets, listing them, and extracting fees for managing the businesses. Impairment charges on those assets put an end to 16 years of profit growth at Macquarie in the year ended March 2009. To contact the reporter on this story: Angus Whitley in Canberra at awhitley1@bloomberg.net

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Cisco May Hire 3,000 as Customers Increase Spending on Network Equipment

February 4, 2010

By Rochelle Garner Feb. 4 (Bloomberg) — Cisco Systems Inc. , the biggest maker of networking equipment, predicted accelerating sales growth and said it will boost its workforce by as much as 3,000 as customers resume spending to deal with surging data traffic. Third-quarter revenue will rise 23 percent to 26 percent from a year earlier, the company said yesterday. That means sales will be at least $10 billion, topping the $9.49 billion average estimate of analysts in a Bloomberg survey. Chief Executive Officer John Chambers , citing stronger sales in every customer segment and almost every region, said the global economy has entered a new phase of recovery. The San Jose, California-based company is a bellwether for technology spending because it dominates the market for routers and switches, which direct Internet traffic. “Almost every country is saying their momentum is better than it was before, and almost every business is saying it’s more optimistic,” Chambers, 60, said in an interview. “It shows a capital spending trend that’s hard to deny, on a global basis.” Cisco will hire 2,000 to 3,000 people in the next several quarters and plans to be “aggressive” with internal innovation and acquisitions, Chambers said on a conference call yesterday. Cisco rose 44 cents, or 1.9 percent, to $23.51 in Nasdaq Stock Market trading at 9:40 a.m. New York time. The shares advanced 47 percent last year. Second-quarter earnings , excluding costs such as stock- based compensation, rose to 40 cents a share, the company said yesterday. Analysts had estimated 35 cents on average. Sales increased for the first time in a year. ‘Macro Recovery’ “It probably was about as good a quarter as people could have hoped for,” said John Marchetti , an analyst with Cowen & Co. in New York. He has an “outperform” rating on the shares, which he doesn’t own. “Investors wanted to see multiple areas of Cisco’s business benefit from the macro recovery. This was the first quarter since the recession began where I think you can say that.” Second-quarter net income rose 23 percent to $1.85 billion, or 32 cents a share, from $1.5 billion, or 26 cents, a year earlier. Sales climbed 8 percent to $9.82 billion in the period, which ended Jan. 23. Analysts had predicted $9.41 billion. As the economy rebounds, Chambers aims to make more acquisitions. The company bought Starent Networks Corp. for about $2.9 billion last quarter, gaining gear that wireless carriers use to help route mobile traffic. More Deals? Cisco ended the second quarter with $39.6 billion in cash , up from $35 billion at the end of fiscal 2009. “This highlights Cisco’s ability to execute through the economic cycle,” said Joel Levington , director of corporate credit at Brookfield Investment Management Inc. in New York. “Cisco’s balance sheet remains pristine, setting the stage for additional acquisitions.” Global data traffic probably will more than double every year through 2013, according to Cisco. The company aims to add technologies such as videoconferencing that boost Internet traffic, increasing demand for its routers and switches. In January, Goldman Sachs Group Inc. forecast worldwide spending on technology products will rise 5 percent this year, fueled mostly by countries in emerging markets. Technology spending in the U.S., Western Europe and Japan will advance 2 percent, Goldman Sachs estimated. “While we believe the recovery is now occurring, no one knows for sure how strong it will be, how long it will last or the extent of new-job creation,” Chambers told analysts yesterday. “We are going to continue to be very aggressive to position ourselves for an optimistic view of global economic growth.” To contact the reporter on this story: Rochelle Garner in San Francisco at rgarner4@bloomberg.net

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David Fiderer: Sham Transactions That Led to AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight

January 29, 2010

If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed . In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments – Max 2008-1, Max 2007-1, and TRIAXX 2006-2A – acquired from AIG’s banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio. Initially, the business deal between AIG and the banks was that AIG sold credit default swap protection. Banks buy credit default swaps for two reasons: They want to slice and their dice credit risk, and/or they want to hide something. Here’s a simple, fairly innocuous, illustration: Suppose you’re a banker who tells his client, Procter & Gamble, “We want to expand the relationship and do more business with you.” P&G then says, “Fine, lend us $100 million.” Back at the office, your senior credit management says, “The maximum risk exposure we approve for P&G is $80 million.” How do you keep in P&G’s good graces? You lend the company $100 million, and simultaneously offload $20 million in risk exposure by purchasing a credit default swap from another bank. P&G’s understanding is that you’ve lent them $100 million. When Deutsche Bank bought a credit default swap from AIG in 2008, its primary motivation was not to slice up the credit risk, but to hide virtually all of it. Max 2008-1 , a CDO that Deutsche arranged and closed on June 25, 2008, was huge. The total debt issue was $5.8 billion, of which 94%, or the entire $5.4 billion Class A-1 tranche, was covered by one credit default swap issued by AIG Financial Products. The Class A-1 tranche was considered “supersenior” because it was ahead of two other tranches, both originally rated Aaa, which totaled $200 million. (The remaining debt $200 million worth of debt was rated Aa, a and Baa at closing.) Put another way, Deutsche Bank did not bring Max 2008-1 to “the marketplace,” where investors might consider buying the deal on its own merits. By normal standards, the “market” for this CDO never really existed. Nor did Deutsche sell the deal to AIG, which could have assumed both the risks and rewards of owning a huge CDO. (In all fairness, we do not know where the remaining 6%, or $400 million, of less-senior tranches ended up. Deutsche could have kept them in inventory to be stuffed into a yet another CDO.) Almost all circumstances surrounding Max 2008-1 seem weird. We do not know much about the $5.4 billion Class A-1 tranche, except that it was never downgraded below its initial Aaa rating. Yet, according to Deutsche Bank, AIG and Maiden Lane III’s accountants, the underlying value of Max 2008-1 collapsed within a matter of months. By the time that the government agreed to acquire the CDO at par, the Class A-1 tranche purportedly had a negative “mark-to-market” of $2.5 billion . (As noted earlier , accountants, both for AIG and the Fed, determined that that there was no market benchmark for valuing any of the CDOs.) So did AIG turn over $2.5 billion in cash collateral to Deutsche? No. It turned over $4 billion, as revealed in AIG’s filing with the SEC , dated May 15, 2009. Among the hundred plus CDO deals to which AIG extended credit protection, the only ones which received collateral postings in excess of the “negative market-to-market” were the two biggest: Max 2008-1 and Max 2007-1, as revealed in the SEC filing of May 15, 2009 . Together, those two CDO tranches had a par value of $7.5 billion and a “negative market-to-market” of $3.5 billion at the time Maiden Lane III closed. But AIG had already turned over $5.6 billion in collateral to Deutsche Bank, $2 billion more than what anyone thought to be necessary. Everything about Max 2008-1 suggests that the parties were not acting on an arms-length basis, that they had something to hide. A deal rated Aaa doesn’t decline in value by 40% within months after closing and still retain its Aaa rating. (The more junior tranches received moderate downgrades on March 19, 2009.) A cash-strapped insurance conglomerate does not turn over $2 billion in excess cash collateral for no reason. AIGFP had unsuccessfully struggled for the better part of a year to establish an agreed-upon method for calculating the amounts of cash collateral postings on these credit default swaps. It seems more than a little odd that it would choose to expand this problem with a credit derivative more than twice the size of its next largest CDO exposure. And it seems especially odd that it would close such a deal in June 2008, one month after Moody’s and S&P had downgraded AIG, and issued warnings that further downgrades could be coming. What becomes obvious, after reviewing Max 2008-1, Max 2007-1, and TRIAXX 2006-2A, is that these deals never could have been done but for AIG’s willingness to assume the lion’s share of the credit risk. TRIAXX 2006-2A was a $5 billion deal, of which AIGFP assumed $3.2 billion, or 64%, of the credit risk. AIGFP provided credit protection in three different tranches, all of which were rated AAA at closing. The sole underwriter and arranger for the $5 billion CDO, which closed in December 2006, was an outfit called ICP Securities LLC , a private firm owned by its employees. In retrospect, it seems remarkable that AIG would have assumed such a large exposure in a deal structured by a relatively small private company. Nonetheless, ICP was able to sell its deal into the marketplace, if that’s the correct way to characterize it. Of the $3.2 billion in credit protection sold by AIG, $2.5 billion was purchased by Goldman Sachs, another $0.4 billion was acquired by an affiliate of Dresdner bank, and $.03 billion was acquired by a company of unknown origin, called CORAL Purchasing (Ireland) Limited. All of this information was disclosed by AIG to the SEC on May 15, 2009. The Aaa ratings at TRIAXX 2006-2A remained in effect at the time AIG collapsed, and at the time the CDOs were sold at par to Maiden Lane III. Nonetheless, Goldman had demanded, and received about $1 billion in cash collateral postings prior to the date when the New York Fed took the exposure off of AIG’s books. About a month after Maiden Lane III closed out its books for the year, on December 31, 2008, TRIAXX 2006-2A suffered a downgrade, to Caa . Those eight-month-old public disclosures are very incomplete, but they reveal a lot. They indicate that these CDO deals were not, by any stretch of the imagination, conducted on an arms-length basis, and that the these transactions took forms that were designed to conceal the true economic interests of the parties. I’m always amazed by what people, especially people not from the financial world, don’t know. Big banks are not like the Pentagon or the Coalition Provisional Authority. Billion dollar amounts do not just slip through the cracks. There is no way that the very top people at AIG and Deutsche Bank would not be thoroughly briefed about every aspect of a $5.4 billion credit default swap for a CDO called Max 2008-1. The newly disclosed information , which reveals the redacted parts of AIG’s May 15, 2009 filing, serves to confirm what we already realized. At AIGFP’s CDO business, nothing was what it seemed.

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David Fiderer: Sham Transactions That Led to AIG’s Downfall: The Ugly Truth Was Hiding In Plain Sight

January 29, 2010

If you want to understand the deals that wiped out AIG, the best place to start is the website of the New York Fed . In the financial statement of Maiden Lane III, published last April, we see the gory details of the three largest CDO investments – Max 2008-1, Max 2007-1, and TRIAXX 2006-2A – acquired from AIG’s banks at par. Those deals, which totaled $10.7 billion, offer a template for evaluating the other sham transactions in the portfolio. Initially, the business deal between AIG and the banks was that AIG sold credit default swap protection. Banks buy credit default swaps for two reasons: They want to slice and their dice credit risk, and/or they want to hide something. Here’s a simple, fairly innocuous, illustration: Suppose you’re a banker who tells his client, Procter & Gamble, “We want to expand the relationship and do more business with you.” P&G then says, “Fine, lend us $100 million.” Back at the office, your senior credit management says, “The maximum risk exposure we approve for P&G is $80 million.” How do you keep in P&G’s good graces? You lend the company $100 million, and simultaneously offload $20 million in risk exposure by purchasing a credit default swap from another bank. P&G’s understanding is that you’ve lent them $100 million. When Deutsche Bank bought a credit default swap from AIG in 2008, its primary motivation was not to slice up the credit risk, but to hide virtually all of it. Max 2008-1 , a CDO that Deutsche arranged and closed on June 25, 2008, was huge. The total debt issue was $5.8 billion, of which 94%, or the entire $5.4 billion Class A-1 tranche, was covered by one credit default swap issued by AIG Financial Products. The Class A-1 tranche was considered “supersenior” because it was ahead of two other tranches, both originally rated Aaa, which totaled $200 million. (The remaining debt $200 million worth of debt was rated Aa, a and Baa at closing.) Put another way, Deutsche Bank did not bring Max 2008-1 to “the marketplace,” where investors might consider buying the deal on its own merits. By normal standards, the “market” for this CDO never really existed. Nor did Deutsche sell the deal to AIG, which could have assumed both the risks and rewards of owning a huge CDO. (In all fairness, we do not know where the remaining 6%, or $400 million, of less-senior tranches ended up. Deutsche could have kept them in inventory to be stuffed into a yet another CDO.) Almost all circumstances surrounding Max 2008-1 seem weird. We do not know much about the $5.4 billion Class A-1 tranche, except that it was never downgraded below its initial Aaa rating. Yet, according to Deutsche Bank, AIG and Maiden Lane III’s accountants, the underlying value of Max 2008-1 collapsed within a matter of months. By the time that the government agreed to acquire the CDO at par, the Class A-1 tranche purportedly had a negative “mark-to-market” of $2.5 billion . (As noted earlier , accountants, both for AIG and the Fed, determined that that there was no market benchmark for valuing any of the CDOs.) So did AIG turn over $2.5 billion in cash collateral to Deutsche? No. It turned over $4 billion, as revealed in AIG’s filing with the SEC , dated May 15, 2009. Among the hundred plus CDO deals to which AIG extended credit protection, the only ones which received collateral postings in excess of the “negative market-to-market” were the two biggest: Max 2008-1 and Max 2007-1, as revealed in the SEC filing of May 15, 2009 . Together, those two CDO tranches had a par value of $7.5 billion and a “negative market-to-market” of $3.5 billion at the time Maiden Lane III closed. But AIG had already turned over $5.6 billion in collateral to Deutsche Bank, $2 billion more than what anyone thought to be necessary. Everything about Max 2008-1 suggests that the parties were not acting on an arms-length basis, that they had something to hide. A deal rated Aaa doesn’t decline in value by 40% within months after closing and still retain its Aaa rating. (The more junior tranches received moderate downgrades on March 19, 2009.) A cash-strapped insurance conglomerate does not turn over $2 billion in excess cash collateral for no reason. AIGFP had unsuccessfully struggled for the better part of a year to establish an agreed-upon method for calculating the amounts of cash collateral postings on these credit default swaps. It seems more than a little odd that it would choose to expand this problem with a credit derivative more than twice the size of its next largest CDO exposure. And it seems especially odd that it would close such a deal in June 2008, one month after Moody’s and S&P had downgraded AIG, and issued warnings that further downgrades could be coming. What becomes obvious, after reviewing Max 2008-1, Max 2007-1, and TRIAXX 2006-2A, is that these deals never could have been done but for AIG’s willingness to assume the lion’s share of the credit risk. TRIAXX 2006-2A was a $5 billion deal, of which AIGFP assumed $3.2 billion, or 64%, of the credit risk. AIGFP provided credit protection in three different tranches, all of which were rated AAA at closing. The sole underwriter and arranger for the $5 billion CDO, which closed in December 2006, was an outfit called ICP Securities LLC , a private firm owned by its employees. In retrospect, it seems remarkable that AIG would have assumed such a large exposure in a deal structured by a relatively small private company. Nonetheless, ICP was able to sell its deal into the marketplace, if that’s the correct way to characterize it. Of the $3.2 billion in credit protection sold by AIG, $2.5 billion was purchased by Goldman Sachs, another $0.4 billion was acquired by an affiliate of Dresdner bank, and $.03 billion was acquired by a company of unknown origin, called CORAL Purchasing (Ireland) Limited. All of this information was disclosed by AIG to the SEC on May 15, 2009. The Aaa ratings at TRIAXX 2006-2A remained in effect at the time AIG collapsed, and at the time the CDOs were sold at par to Maiden Lane III. Nonetheless, Goldman had demanded, and received about $1 billion in cash collateral postings prior to the date when the New York Fed took the exposure off of AIG’s books. About a month after Maiden Lane III closed out its books for the year, on December 31, 2008, TRIAXX 2006-2A suffered a downgrade, to Caa . Those eight-month-old public disclosures are very incomplete, but they reveal a lot. They indicate that these CDO deals were not, by any stretch of the imagination, conducted on an arms-length basis, and that the these transactions took forms that were designed to conceal the true economic interests of the parties. I’m always amazed by what people, especially people not from the financial world, don’t know. Big banks are not like the Pentagon or the Coalition Provisional Authority. Billion dollar amounts do not just slip through the cracks. There is no way that the very top people at AIG and Deutsche Bank would not be thoroughly briefed about every aspect of a $5.4 billion credit default swap for a CDO called Max 2008-1. The newly disclosed information , which reveals the redacted parts of AIG’s May 15, 2009 filing, serves to confirm what we already realized. At AIGFP’s CDO business, nothing was what it seemed.

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Goldman Sachs Seen as Favored by Regulators, New York Fed’s E-mail Shows

January 28, 2010

By Hugh Son Jan. 28 (Bloomberg) — Goldman Sachs Group Inc. , one of the biggest recipients of funds from the U.S. bailout of American International Group Inc., was seen by the public as favored by regulators, according to an internal Federal Reserve Bank of New York e-mail. The public perception was a reason to reject a December 2008 media request for the names of securities purchased from banks during AIG’s rescue, according to the e-mail released yesterday. If the names of the assets were released, the banks, including Goldman Sachs, would be identified as beneficiaries, New York Fed employee Danielle Vicente wrote in the Dec. 4, 2008, e-mail to Fed counsel James Hennessy. The New York Fed has said that releasing the names of banks that were paid to tear up $62.1 billion in AIG guarantees could hurt the insurer and its counterparties. The internal e-mail, obtained this month by a House oversight committee, indicates Vicente was also concerned that the AIG rescue would be viewed unfavorably by taxpayers and lawmakers if it was known that Goldman Sachs and non-U.S. banks received funds. “A major U.S. counterparty was Goldman, which has already been seen as favored by the Fed/Treasury in the public’s eye,” Vicente wrote. Regarding the non-U.S. banks, “it would be hard to sell the public on U.S. funds to buy foreign entities out of AIG risk.” AIG disclosed counterparty names last March after lawmakers criticized Fed Vice Chairman Donald Kohn , 67, who testified in a hearing that month that releasing bank names would harm the New York-based insurer’s ability to do business. Goldman Sachs, the most profitable securities firm in Wall Street history, and Societe Generale SA, the second-largest French bank, were the biggest beneficiaries of payments to retire credit-default swaps. ‘You Just Can’t Explain’ Another reason that Vicente said the New York Fed wanted details of the payments withheld: The banks got 100 cents on the dollar for real-estate linked assets, called collateralized debt obligations, that had declined in value. “Counterparties received par — which is politically sensitive — but necessary given the economics of the deals,” Vicente wrote. “That’s something you just can’t explain in a press release because it involves understanding of why the deals don’t have isolated risks (for example, I believe one counterparty had shorted AIG risk in order to balance their AIG exposure on the CDS deals, so tearing up the trades left them exposed with no hedge, etc.)” Deborah Kilroe , a spokeswoman for the New York Fed, and Lucas van Praag of Goldman Sachs declined to comment yesterday. Vicente didn’t return a call for comment. Request for Names The request for the names was initiated by Forbes magazine, according to a copy of the e-mails. Andrew Williams , then a New York Fed spokesman, asked colleagues why the agency couldn’t provide the data, writing that it was “useful if I can understand why, even if I can’t use it publicly.” Lawmakers questioned Treasury Secretary Timothy F. Geithner , 48, yesterday during a House Oversight and Government Reform Committee hearing about his decision to fully reimburse counterparties when he ran the New York Fed. Also testifying was Henry Paulson , Geithner’s predecessor as head of Treasury and former chief executive officer of Goldman Sachs. The hearing was called after e-mails released this month by Representative Darrell Issa , the ranking member of the House oversight panel, indicated the New York Fed asked AIG to limit what the public knew about the bank payments. The New York Fed handed 250,000 pages of documents to committee investigators. Friedman Also yesterday, Goldman Sachs board member Stephen Friedman was asked about his tenure as New York Fed chairman and his purchase of Goldman Sachs shares while in that role. Friedman, who spent a career at Goldman Sachs, said the bank didn’t gain any unfair advantage because of his involvement. Friedman, 72, was asked whether Goldman Sachs encourages employees to work for government agencies. “What there has been over the years is a certain tradition that you work here, you try to do well for yourself and your family and then you give back and you do public service,” Friedman said. “For many years this was regarded as a very constructive and positive thing. Recently it’s gone the other way and people are thinking, ‘Is there some ulterior motive?’” AIG’s chief executive officer when Vicente wrote the e-mail was Edward Liddy , who was installed by the government after the bailout and is a former board member at Goldman Sachs. Liddy, who turned 64 today, agreed to work for a salary of $1 a year. To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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Getting Started In Commercial Real Estate Investing | Real Estate …

January 17, 2010

So, real estate is the best option available and profitable too. Real estate deals allow you to live a luxurious life. However, at times you may end up with nothing if you are not conscientious about the intricacies of the various deals …

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Tishman Completes 1 Million SF in NY-Area Office Renewals

January 10, 2010

Tishman Speyer said last week that it closed on more than 1.05 million square feet in New York-area office renewals in December. A single-month record for the real estate firm, the deals included five top-tier tenants. The most activity occurred in…

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Susanna Speier: New Year’s Neuroeconomics Politiku

January 5, 2010

In 2010, the frequency of Politiku I post will be determined exclusively by the success and/or failure of my New Year’s resolution to balance the number of unpaid writing projects with the number of paid writing project I take on. The rush I get by hitting the “submit” button that forwards my post on to the Huffington Post ‘s round the clock editorial staff is addictive. This is, in part, because the rush doesn’t end with, submit . I go to sleep only to wake to discover that the round the clock editorial elves have transmitted by post around the globe and back. A post, lovingly syndicated by the New York Times , the Wall Street Journal and Business Week sustains my buzz. The re-tweets, follow up comments and spikes in my own blog traffic, only further sustain me. I’m not saying that blogging for HuffPost isn’t a worthy passion project, in and of itself. Nor am I saying that I don’t genuinely benefit from the distinguished community to which the website connects me. I am simply saying that the disproportionately exhaustive process of pitching to editors, querying potential clients and calling to follow up on the status of unreceived paychecks, is far too undesirable by contrast. In effort to avoid agonizing the pain caused by job scarcity, combined with the pain of MFA loans with metrics, I am resolving to only allow myself to indulge in the pleasurable Politiku process after successfully securing and completing a writing project or assignment that pays market rates. Neuroeconomics, the study of how irrational financial decisions are made, tracks the neuropathways of consumers, investors and gamblers. As far as I know, it has not yet been discussed in conjunction with the neuropathways that light up during the blogging process. Thanks to the behavioral specialists who generously contributed to my Neuroeconomics Politiku shout-out, we do now! Joseph Weiner Politiku Empty wallet. So? “Life is short,” wise people say. Don’t waste minutes, spend. Joesph Weiner is Chief of Consultation Psychiatry at North Shore University Hospital in Manhasset, NY and Associate Professor of Clinical Psychiatry and Medicine at Albert Einstein College of Medicine. Barbara J. Rubin Politiku There’s more than enough. Recession? Conspiracy. Bacchanalia. Barbara J. Rubin, PsyD, is an Atlanta-based Licensed Psychologist and Member, American College of Forensic Examiners. Alan Hall Politiku MRI’s don’t lie Tyrannical consumption Now clouds my cortex Alan Hall is a socionomist, researcher, writer and forecaster for The Socionomics Institute, founded by Robert Prechter. The Institute studies how waves of social mood produce patterns in financial and social behavior. Mollie M. Marti Politiku Simple pleasures free Deals hidden in crowded malls Back to the basics Mollie Marti, PhD is the Founder of Best Life Design and Adjunct Professor of Psychology, The University of Iowa. Georgia Witkin Politiku Shorter lines, more help, Early discounts, later hours, Recession? Not bad! Georgia Witkin, Ph.D., is an acclaimed professor of psychiatry at The Mount Sinai Medical Center in New York City. An expert on family relationships and stress management, national health correspondent, author of ten books, and a TV personality. Physko Politiku It amazes me Neuroeconomics claims What Cro-Magnon knew Trulyfool Politiku High priests will tell us – Econ gurus know it all – Impulse is cold cash Susanna Speier Politiku Earn more and blog less: My New Year’s Resolution moderates the buzz

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Susanna Speier: New Year’s Neuroeconomics Politiku

January 5, 2010

In 2010, the frequency of Politiku I post will be determined exclusively by the success and/or failure of my New Year’s resolution to balance the number of unpaid writing projects with the number of paid writing project I take on. The rush I get by hitting the “submit” button that forwards my post on to the Huffington Post ‘s round the clock editorial staff is addictive. This is, in part, because the rush doesn’t end with, submit . I go to sleep only to wake to discover that the round the clock editorial elves have transmitted by post around the globe and back. A post, lovingly syndicated by the New York Times , the Wall Street Journal and Business Week sustains my buzz. The re-tweets, follow up comments and spikes in my own blog traffic, only further sustain me. I’m not saying that blogging for HuffPost isn’t a worthy passion project, in and of itself. Nor am I saying that I don’t genuinely benefit from the distinguished community to which the website connects me. I am simply saying that the disproportionately exhaustive process of pitching to editors, querying potential clients and calling to follow up on the status of unreceived paychecks, is far too undesirable by contrast. In effort to avoid agonizing the pain caused by job scarcity, combined with the pain of MFA loans with metrics, I am resolving to only allow myself to indulge in the pleasurable Politiku process after successfully securing and completing a writing project or assignment that pays market rates. Neuroeconomics, the study of how irrational financial decisions are made, tracks the neuropathways of consumers, investors and gamblers. As far as I know, it has not yet been discussed in conjunction with the neuropathways that light up during the blogging process. Thanks to the behavioral specialists who generously contributed to my Neuroeconomics Politiku shout-out, we do now! Joseph Weiner Politiku Empty wallet. So? “Life is short,” wise people say. Don’t waste minutes, spend. Joesph Weiner is Chief of Consultation Psychiatry at North Shore University Hospital in Manhasset, NY and Associate Professor of Clinical Psychiatry and Medicine at Albert Einstein College of Medicine. Barbara J. Rubin Politiku There’s more than enough. Recession? Conspiracy. Bacchanalia. Barbara J. Rubin, PsyD, is an Atlanta-based Licensed Psychologist and Member, American College of Forensic Examiners. Alan Hall Politiku MRI’s don’t lie Tyrannical consumption Now clouds my cortex Alan Hall is a socionomist, researcher, writer and forecaster for The Socionomics Institute, founded by Robert Prechter. The Institute studies how waves of social mood produce patterns in financial and social behavior. Mollie M. Marti Politiku Simple pleasures free Deals hidden in crowded malls Back to the basics Mollie Marti, PhD is the Founder of Best Life Design and Adjunct Professor of Psychology, The University of Iowa. Georgia Witkin Politiku Shorter lines, more help, Early discounts, later hours, Recession? Not bad! Georgia Witkin, Ph.D., is an acclaimed professor of psychiatry at The Mount Sinai Medical Center in New York City. An expert on family relationships and stress management, national health correspondent, author of ten books, and a TV personality. Physko Politiku It amazes me Neuroeconomics claims What Cro-Magnon knew Trulyfool Politiku High priests will tell us – Econ gurus know it all – Impulse is cold cash Susanna Speier Politiku Earn more and blog less: My New Year’s Resolution moderates the buzz

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In Goldman Sachs’ Cayman Islands Deals, Investors Could Only Lose

December 30, 2009

When financial titan Goldman Sachs joined some of its Wall Street rivals in late 2005 in secretly packaging a new breed of offshore securities, it gave prospective investors little hint that many of the deals were so risky that they could end up losing hundreds of millions of dollars on them.

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U.S. Consumer Sentiment Gains in Signal Economy Will Expand Into Next Year

December 29, 2009

By Courtney Schlisserman and Bob Willis Dec. 29 (Bloomberg) — Confidence among U.S. consumers improved in December for a second month as Americans grew less concerned about the immediate future, pointing to an economy that will keep expanding into 2010. The Conference Board’s sentiment index increased to 52.9 in December, in line with the median forecast of economists surveyed by Bloomberg News, according to figures from the New York-based research group today. Another report showed home prices climbed in October for a fifth consecutive month. Attitudes about current conditions decreased to the lowest level in 26 years and wage expectations also fell, a reminder that the worst employment slump in the post-World War II era has shaken consumers. Gains in home and stock prices are helping households recover some of the record $17.5 trillion plunge in wealth, which may help sustain spending next year. “We’re going to need a more definitive improvement in the labor market before confidence improves more than it has,” said Michael Moran , chief economist at Daiwa Securities America Inc. in New York, who forecast a rise to 53 for confidence. “The housing numbers are encouraging, but apparently they’re not having much influence on consumer attitudes. Consumers are focusing more on the job market than the housing market.” Stocks fluctuated between gains and losses following the reports. The Standard & Poor’s 500 Index declined 0.1 percent to 1,127.24 at 12:18 p.m. in New York. Prices Improve Retailers such as Toys “R” US Inc. are among those extending discounts beyond Christmas to lure customers. “We are going to be very aggressive, we’ve been aggressive all season,” Toys “R” Us Chief Executive Officer Jerry Storch said by telephone Dec. 23 from Wayne, New Jersey, where the largest U.S. toy chain is based. The S&P/Case-Shiller index of home prices in 20 U.S. cities rose 0.4 percent in October from the prior month on a seasonally adjusted basis, the group said today. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007. Economists surveyed by Bloomberg News forecast the confidence measure would increase to 53, according to the median of 64 projections, from a previously reported 49.5 in November. Estimates ranged from 46 to 56.5. The group’s index averaged 45.2 this year, the lowest annual rate since records began in 1967. The measure averaged 58 in 2008 and 103.4 in 2007. Job Market The Conference Board’s measure of present conditions decreased to 18.8, the lowest level since February 1983, from 21.2 the prior month. Fewer people said jobs are plentiful, while the proportion of those who said jobs are hard to get also decreased. The gauge of expectations for the next six months climbed to 75.6, the highest since the recession began two years ago, from 70.3 the prior month. The share of people who expect their incomes to rise over the next six months decreased, while more Americans anticipated employment will improve. “If consumers are worried about income, they’re not going to be out there spending a whole lot,” said Joel Naroff , president of Naroff Economic Advisors in Holland, Pennsylvania. “The economy is moving forward, but not at a particularly great pace.” A jobless rate that is forecast to exceed 10 percent through the first half of next year may prompt policy makers and retailers to maintain tax breaks and incentives to entice buyers. Buying Plans Consumer buying plans for automobiles and real estate dropped this month, today’s Conference Board report showed. Home-buying expectations fell to the lowest level since 1982. “It’s clear that consumer concerns about unemployment levels and the economic climate are weighing on spending,” Walgreen Co. Chief Executive Officer Gregory Wasson said on a conference call with analysts Dec. 21. “Consumers are focused on value and discretionary items.” To help ensure housing doesn’t weaken again, President Barack Obama and Congress last month extended a tax credit for first-time buyers until April 30 from Nov. 30, and expanded it to include some current owners. A surge in home purchases by first-time U.S. buyers is doing little to help real estate agents and brokers who close the deals. Fewer Commissions Commissions in 2009 fell to the lowest level in seven years, driven down by sales of low-priced homes to first-time buyers using the federal tax credit. Commissions through November dropped 6.2 percent from a year earlier to $40.6 billion, according to Bloomberg calculations based on the average commission rates from Real Trends Inc. and on home price and sales data from the National Association of Realtors . The S&P/Case-Shiller report showed prices in 11 of the 20 areas covered increased on a seasonally adjusted basis compared with the prior month, while eight had a decline. The biggest month-to-month gain was in San Francisco, which climbed 1.7 percent. All of the 20 cities in the S&P/Case-Shiller index showed a smaller year-over-year decline than in September. “We’re starting to get a little bit of a turnaround, things are stabilizing,” said John Silvia , chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. “People aren’t in a panic in terms of selling their homes.” To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net ; Bob Willis in Washington at bwillis@bloomberg.net

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Budding Housing Recovery Fails to Bolster Real Estate Broker Commissions

December 29, 2009

By Kathleen M. Howley Dec. 29 (Bloomberg) — A surge in home purchases by first- time U.S. buyers is doing little to help real estate agents and brokers who close the deals. Commissions in 2009 fell to the lowest level in seven years, driven down by sales of low-priced homes to first-time buyers using the federal tax credit. Commissions through November dropped 6.2 percent from a year earlier to $40.6 billion, according to Bloomberg calculations based on the average commission rates from Real Trends Inc. and on home price and sales data from the National Association of Realtors . The tax credit strengthened only the low end of the market and reduced agents’ pay, according to Steve Murray , president of Real Trends, a residential property research company. The tax benefit and foreclosure sales may lower the national median home price by a record 13 percent this year to $172,700, according to the Chicago-based Realtors’ group. Last month almost 75 percent of sales were for $250,000 or less, the Realtors said. “The impact of the tax credit has been huge,” Murray said in an interview. “The average commission rate inched up this year and the number of real estate sales have gone up too, but the average price has dropped significantly because of the bulge of first-time buyers .” The dollar value of commissions fell to the lowest amount since 2002 even as the average U.S. rate per transaction rose to about 5.29 percent this year, the fourth consecutive annual gain. The average commission rate was 5.26 percent in 2008, according to Real Trends , based in Castle Rock, Colorado. ‘No Trivial Number’ Commissions earned by real estate agents typically are computed as a percentage of a property’s sale price . Agents negotiate with sellers to set the rate and are required to pay a portion of it to the brokerage they work for. Income from commissions at Realogy Corp., the largest U.S. residential brokerage and franchiser, fell to $2.1 billion during the first nine months of 2009 from $2.8 billion a year earlier, the Parsippany, New Jersey-based company said in a Nov. 10 regulatory filing. “Income from real estate commissions is not a trivial number,” Patrick Newport , an economist at IHS Global Insight in Lexington, Massachusetts. “In a very weak economy, every little bit helps strengthen GDP.” During the five-year real estate boom, commission rates dropped as agents competed for clients and surging prices boosted income from each transaction, according to Murray. By 2005’s record low of 5.02 percent, the average commission had tumbled more than a percentage point from 1992’s 6.04 percent. Charging More When home prices declined in 2006 and properties began sitting on the market for longer periods, agents started charging more, Murray said. Real Trends commission data is based on surveys of the largest 500 U.S. real estate brokerages. “When the market was super-hot, getting a listing was like cash in the bank and there was a huge amount of competition,” Murray said. “Listings are not scarce anymore and, even if priced right, they’re not easy to sell.” Sales of previously owned homes probably will total 5.15 million this year, a 4.8 percent gain from 2008, according to an estimate on NAR’s Web site. In November, sales rose 7.4 percent to a 6.54 million annual rate, the highest level in almost three years, as buyers rushed to meet the tax credit’s original Nov. 30 deadline, the trade group said in a Dec. 22 report. Leaving the Business “I had the busiest November I’ve had in five years, which made up for lower prices and lower commissions, but I know some people who left the business altogether or took second jobs because they were making so much less for each transaction,” said Karen McCormack, co-owner of McCormack & Scanlan Real Estate in Jamaica Plain, a Boston neighborhood. The number of U.S. real estate brokers and salespeople as of Sept. 30 fell 9.2 percent from a year earlier to 850,000, according to the Bureau of Labor Statistics in Washington. Housing demand probably will drop in December, even though Congress extended the home-buying tax credit to April and expanded it to include some move-up buyers, according to Lawrence Yun , chief economist at the National Association of Realtors. “We expect a temporary sales drop while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit,” Yun said in last week’s NAR report. There are already signs that the real estate market is slowing again. The Mortgage Bankers Association’s index of loan applications decreased 11 percent to 595.8 the week ended Dec. 18, the lowest level since October, from 667.3 the prior week, the bankers’ trade group said last week. “Starting this month, home sales are going to take a hit,” said Global Insight’s Newport. “The first credit used up the pool of first-time buyers by moving 2010 sales into 2009. We may not get much of a kick from the extension.” To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net .

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Budding U.S. Housing Recovery Fails to Lift Real-Estate Broker Commissions

December 29, 2009

By Kathleen M. Howley Dec. 29 (Bloomberg) — A surge in home purchases by first- time U.S. buyers is doing little to help real estate agents and brokers who close the deals. Commissions in 2009 fell to the lowest level in seven years, driven down by sales of low-priced homes to first-time buyers using the federal tax credit. Commissions through November dropped 6.2 percent from a year earlier to $40.6 billion, according to Bloomberg calculations based on the average commission rates from Real Trends Inc. and on home price and sales data from the National Association of Realtors . The tax credit strengthened only the low end of the market and reduced agents’ pay, according to Steve Murray , president of Real Trends, a residential property research company. The tax benefit and foreclosure sales may lower the national median home price by a record 13 percent this year to $172,700, according to the Chicago-based Realtors’ group. Last month almost 75 percent of sales were for $250,000 or less, the Realtors said. “The impact of the tax credit has been huge,” Murray said in an interview. “The average commission rate inched up this year and the number of real estate sales have gone up too, but the average price has dropped significantly because of the bulge of first-time buyers .” The dollar value of commissions fell to the lowest amount since 2002 even as the average U.S. rate per transaction rose to about 5.29 percent this year, the fourth consecutive annual gain. The average commission rate was 5.26 percent in 2008, according to Real Trends , based in Castle Rock, Colorado. ‘No Trivial Number’ Commissions earned by real estate agents typically are computed as a percentage of a property’s sale price . Agents negotiate with sellers to set the rate and are required to pay a portion of it to the brokerage they work for. Income from commissions at Realogy Corp., the largest U.S. residential brokerage and franchiser, fell to $2.1 billion during the first nine months of 2009 from $2.8 billion a year earlier, the Parsippany, New Jersey-based company said in a Nov. 10 regulatory filing. “Income from real estate commissions is not a trivial number,” Patrick Newport , an economist at IHS Global Insight in Lexington, Massachusetts. “In a very weak economy, every little bit helps strengthen GDP.” During the five-year real estate boom, commission rates dropped as agents competed for clients and surging prices boosted income from each transaction, according to Murray. By 2005’s record low of 5.02 percent, the average commission had tumbled more than a percentage point from 1992’s 6.04 percent. Charging More When home prices declined in 2006 and properties began sitting on the market for longer periods, agents started charging more, Murray said. Real Trends commission data is based on surveys of the largest 500 U.S. real estate brokerages. “When the market was super-hot, getting a listing was like cash in the bank and there was a huge amount of competition,” Murray said. “Listings are not scarce anymore and, even if priced right, they’re not easy to sell.” Sales of previously owned homes probably will total 5.15 million this year, a 4.8 percent gain from 2008, according to an estimate on NAR’s Web site. In November, sales rose 7.4 percent to a 6.54 million annual rate, the highest level in almost three years, as buyers rushed to meet the tax credit’s original Nov. 30 deadline, the trade group said in a Dec. 22 report. Leaving the Business “I had the busiest November I’ve had in five years, which made up for lower prices and lower commissions, but I know some people who left the business altogether or took second jobs because they were making so much less for each transaction,” said Karen McCormack, co-owner of McCormack & Scanlan Real Estate in Jamaica Plain, a Boston neighborhood. The number of U.S. real estate brokers and salespeople as of Sept. 30 fell 9.2 percent from a year earlier to 850,000, according to the Bureau of Labor Statistics in Washington. Housing demand probably will drop in December, even though Congress extended the home-buying tax credit to April and expanded it to include some move-up buyers, according to Lawrence Yun , chief economist at the National Association of Realtors. “We expect a temporary sales drop while buying activity ramps up for another surge in the spring when buyers take advantage of the expanded tax credit,” Yun said in last week’s NAR report. There are already signs that the real estate market is slowing again. The Mortgage Bankers Association’s index of loan applications decreased 11 percent to 595.8 the week ended Dec. 18, the lowest level since October, from 667.3 the prior week, the bankers’ trade group said last week. “Starting this month, home sales are going to take a hit,” said Global Insight’s Newport. “The first credit used up the pool of first-time buyers by moving 2010 sales into 2009. We may not get much of a kick from the extension.” To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net .

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Senate Health Measure Clears Last Procedural Hurdle, Setting Up Final Vote

December 23, 2009

By James Rowley and Catherine Dodge Dec. 23 (Bloomberg) — The Senate cleared the third and final procedural hurdle for a U.S. health-care overhaul, putting the landmark legislation on the brink of passage just in time to meet Democrats’ Christmas deadline. As they did in two previous test votes this week, Democrats united along with the two independents who caucus with them on a 60-39 vote, with Republicans opposed. The move opens the way for a final vote on passage, scheduled for 7 a.m. tomorrow, Christmas Eve. The 10-year, $871 billion measure is designed to cover 31 million uninsured Americans, curb medical expenditures and place new restrictions on insurers. After passage, it will need to be combined with a bill the U.S. House passed on Nov. 7. “We stand on the doorstep of history,” Senate Majority Leader Harry Reid , a Nevada Democrat, said at a press conference after the vote. The Senate bill, the biggest change to the health-care system since the Medicare program for the elderly was started in 1965, would cover 94 percent of eligible Americans under 65 and reduce the federal budget deficit by $132 billion over its first decade, the Congressional Budget Office estimated. Insurance Mandate Both bills in the House and Senate require that Americans get insurance or pay a penalty, while requiring insurance companies to accept all comers regardless of preexisting medical conditions. They also offer more government aid for the poor and set up online purchasing exchanges so the uninsured can shop for policies. “Today is a victory,” said Senator Max Baucus , a Montana Democrat who helped write the legislation. “Today we can all be proud of what this bill accomplishes.” By a 60-39 vote, Democrats also scuttled an objection raised by Nevada Republican John Ensign that requiring individuals to purchase health insurance was unconstitutional. Republicans are united against the legislation, saying new rules and programs might crowd out private insurers, raise taxes and explode the federal budget deficit . They kept up their attacks today, seizing on a CBO letter that challenged claims by overhaul proponents that Medicare savings in the Senate bill would help finance expanded coverage and postpone the bankruptcy of the medical program for the elderly. Can’t Do Both The nonpartisan agency said the $246 billion it projected the legislation would save Medicare can’t both finance new programs and help pay future expenses for elderly covered under the federal program. Nor could those savings be used to extend the solvency of Medicare, set to run out of money in 2017, the budget office said in a letter to Senate Republicans. “What we’ve seen is a colossal manipulation” by Democrats “of the accounting scores of CBO” and the independent actuary of the Centers for Medicare & Medicaid Services, said Alabama Senator Jeff Sessions , the Republican who requested the CBO analysis. The estimated Medicare savings in the legislation overstate “the improvement in the government’s fiscal position,” the CBO said in the letter . A spokesman for Reid said the CBO letter doesn’t reflect on the overall health-care bill. The letter “deals explicitly with Medicare, not the overall short and long-term budgetary impact of the legislation,” spokesman Jim Manley said in an e-mail. ‘Sweetheart Deals’ As tomorrow’s final vote drew closer, Republicans also accused Democrats of making “sweetheart deals” to win the votes of lawmakers such as Nebraska Senator Ben Nelson . Nelson provided the 60th vote Democrats needed to get the bill past the three procedural hurdles. Democrats were “playing ‘ The Price Is Right ’ by offering sweetheart deals” to Nelson and other lawmakers to get their votes, Texas Republican John Cornyn told reporters yesterday. Republicans attacked an agreement Nelson made to exempt his state from paying its share of a plan to expand the Medicaid insurance program for low-income Americans. Nelson yesterday took the floor to denounce the attacks, telling Republicans “you can twist and you can turn and you can try to distort what happens, but it doesn’t change the underlying fact.” Opting Out He said he had sought a provision that would have allowed any state to opt out of the plan to broaden Medicaid eligibility. To reach a deal with Senate Democratic leaders, Nelson said he accepted making his own state exempt from paying its share of the cost of the proposal. South Carolina Attorney General Henry McMaster , at the request of his state’s Republican Senators Lindsey Graham and Jim DeMint , said he is investigating the constitutionality of giving Nebraska an exemption from paying its share of the Medicaid expansion. McMaster’s office said attorneys general in nine other states are joining the effort. To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net Nicole Gaouette in Washington at ngaouette@bloomberg.net .

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Pennsylvania’s Perfidy Never Happens in Singapore: Joe Mysak

December 22, 2009

Commentary by Joe Mysak Dec. 23 (Bloomberg) — State and local finances are in the worst shape since the Great Depression, according to the National Association of State Budget Officers , and you can’t blame it all on the economy. Irresponsible and negligent borrowing practices that wouldn’t be tolerated in Singapore are costing school districts and municipalities across the nation millions of dollars in extra financing costs and termination fees. Nobody wants to talk about it. This was illustrated in a report published in November by Auditor General Jack Wagner of Pennsylvania. The report shows how the Bethlehem Area School District used swaps . Since the state authorized school districts and local governments to use swaps and derivatives in 2003, Bethlehem has entered into 13 Qualified Interest Rate Management Agreements, the most of any school district in the state. Like so many municipalities across the nation, Bethlehem’s swaps have wound up costing it money. On the two swap agreements examined by the auditor (they have been terminated, the bonds refinanced), the district paid $10.2 million more than if it had sold a fixed-rate bond, $15.5 million more than variable-rate debt without a swap. That $15.5 million would buy a new Dell Studio 15 model laptop for each of the district’s approximately 15,000 students. People, even those who had nothing to do with the original transactions, don’t want to talk about it. Edit Out The auditor’s Office of Special Investigations interviewed the school district’s current financial adviser, Scott Shearer of Public Financial Management in Harrisburg, who had nothing to do with the deals in question. He called one transaction extremely complicated and risky. Upon reviewing a draft of the report, he asked that the words “and risky” be edited out. Shearer called some fees paid by Bethlehem “almost unheard of and not normal.” After reviewing a draft of the report, he asked that this be changed to “above average.” The auditor also interviewed Jens Damgaard of Rhoads & Sinon, Bethlehem’s current bond counsel. He said the district “crossed any and all normal lines” of debt structure. Upon reviewing a draft, he retreated, and asked that this sentence be cut. Auditor Wagner writes that he accepted most of the district’s requests on behalf of its professionals for changes, and footnoted other instances where to do so would result in a material change to their original statements, which is why we have this little collection of second thoughts. Why is everyone so afraid of offending everybody else? Thin-Skinned The municipal market is conflicted. Bankers don’t want to criticize other bankers, because they might work with them or for them some day. Lawyers and financial advisers don’t want to upset the bankers or their issuer clients. Analysts work for the banks selling stuff to the issuers, and the final product to bond buyers. They like to be agreeable: All is well! The same goes for the analysts who work for the rating companies, who are, after all, paid by the issuers. Even the institutional buyers, who used to be forthcoming, are afraid that if they say something untoward, they might not get allotments of bonds they can then flip out to the market at a tidy profit. The issuers are in thrall to the industry that pays to play, and offers the prospect of high-paying jobs, post- politics. It’s no wonder everybody declines to comment. Amateur Financiers The height of the swaps mania that is wreaking such damage in Muniland can be traced to Sept. 25, 2003. That’s when Governor Ed Rendell of Pennsylvania signed a bill amending the Local Government Debt Act to allow the state’s 501 school districts to engage in swaps. Can we all agree that this experiment of allowing the most amateurish issuers to use some of the municipal bond industry’s most complicated products was a bad idea for everyone except the financial services industry? Of course not. Even as swaps were blowing up in 2008, ex- treasurer of Pennsylvania Robin Wiessmann (also an ex-banker) said the problem wasn’t with swaps, but in how they were used. Auditor General Wagner is having none of it. He says the problem is with swaps themselves, and he asks that the General Assembly “clearly and unequivocally” prohibit municipalities from engaging in swaps, or as state law terms them, “Qualified Interest Rate Management Agreements.” ‘Immediate Profits’ The 73-page Wagner report concludes that small governments and school districts should never have been allowed to play the swaps and derivatives game. “We conclude that QIRMAs are highly risky and impenetrably complex transactions that, quite simply, amount to gambling with public money,” Wagner writes. “Moreover, they are susceptible of being marketed deceptively, and they principally benefit the investment banks and the multitude of intermediaries who sell them to relatively unsophisticated public officials.” Among the things that Wagner found in his study of the school district’s use of swaps were hidden fees, conflicts of interest, big profits. “Obviously, the huge fees and immediate profits generated by these agreements, in combination with their inherent complexity, present a powerful temptation to sell them in a fashion that over-emphasizes the financial benefits and minimizes the risks,” writes Wagner. No weasel words here! It would have been nice to hear and read more of them back in 2003, as Pennsylvania was considering “a statute written primarily for the benefit and protection of the financial services industry,” as Wagner puts it. “Where seldom is heard a discouraging word, and the skies are not cloudy all day,” as the old song has it, may be fine for the range, not for public finance. ( Joe Mysak is a Bloomberg News columnist. 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: Joe Mysak in New York at jmysakjr@bloomberg.net

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Tishman Group’s $5 Billion Property Boomerang Costly Lesson for Rob Speyer

December 21, 2009

By Oshrat Carmiel and David M. Levitt Dec. 21 (Bloomberg) — Rob Speyer showed little interest in his family’s real estate business until his father began talking about buying Manhattan’s Rockefeller Center. It was 1995. Speyer, then 26, was a reporter for the New York Daily News, covering fires and events like the Puerto Rican Day Parade. His dad’s plans to purchase the art-deco complex for $1.2 billion changed everything. “I caught the bug,” Speyer said of joining Tishman Speyer Properties LP, the firm co-founded in 1978 by his father, Jerry, and Robert Tishman . “Until that moment, I had other ideas and ambitions and it was really hearing about that transaction that flipped the switch in my head and made me say: ‘I want to learn this business.’” Speyer, now co-chief executive officer of Tishman Speyer, is getting another lesson, one on enduring the global commercial property rout. Tishman Speyer and BlackRock Realty LP’s $5.4 billion purchase of New York’s Stuyvesant Town and Peter Cooper Village apartments is unraveling, testing the young Speyer and his father, a 30-year real estate veteran. “A default is expected” on the complex, according to Fitch Ratings, which has estimated the property’s value at $1.8 billion. The transaction is among at least four — including the $13.6 billion purchase of Archstone-Smith Trust with Lehman Brothers Holdings Inc. in October 2007 — that the company made as values rose and Jerry Speyer was giving his son increasing responsibility for running the company. Prices fall Tishman Speyer is in talks to overhaul debt on five downtown Chicago office buildings. Partnerships including the company have been sued for foreclosure on a 56-acre California office park purchased with another parcel for $200 million. And on Dec. 18, Standard & Poor’s withdrew its credit rating on a group of Washington-area properties with debt payments that Tishman and its partners have been trying to restructure. The Speyers are being hurt in part by U.S. commercial real estate prices that have fallen 43 percent since late 2007. The fallout represents the biggest challenge for Rob Speyer since he became co-CEO with his father in June 2008, said Lawrence Longua , director of the REIT Center at New York University’s Schack Institute of Real Estate. “It’s going to be a long time before he can overcome this,” Longua said. “This has really been quite damaging.” Big Buyers Since 2001, Tishman Speyer has been the biggest U.S. commercial real estate buyer after Blackstone Group LP, according to the New York research firm Real Capital Analytics . Rob Speyer is part of a multi-generational group of New Yorkers whose families made fortunes in real estate, including the Milsteins, Zeckendorfs and LeFraks. Jerry Speyer was named the world’s No. 1 developer in a 1998 New York Times article that referred to him as the anti-Donald Trump. A 1992 graduate of Columbia College, Rob Speyer runs a company that has managed, owned or developed more than $54 billion in assets on four continents, including 116 million square feet of space and 92,000 residential units, according to its Web site. Its current portfolio is worth $33.5 billion, including distressed assets written down to zero, company spokesman Steven Rubenstein said in an e-mail. Holdings include the MetLife Building in New York, the Civic Opera Building in Chicago, the Paris Bourse in France and properties in Germany. ‘Low Man’ Speyer’s first job in the business was in management and leasing at Tishman Speyer. He worked on revamping Rockefeller Center, the 6.2 million-square-foot complex built by John D. Rockefeller Jr. in the 1930s as a show of faith in America during the Great Depression. Rob Speyer described himself as “the low man on the totem pole” when he first joined the New York-based firm. His first lease brought the luxury Reebok Sports Club to the center, replacing a U.S. passport office. “That was a very exciting negotiation,” Speyer said. “The passport office created these lines that literally created a circumference around the building and it was not great for the repositioning of the center.” Sandy Lindenbaum , a lawyer with Kramer Levin Naftalis & Frankel LLP, said Rob Speyer attended city planning and landmark hearings while the company was revitalizing Rockefeller Center. “I would tell him: ‘There’s a meeting downtown, you don’t have to come,’” Lindenbaum said. “He said: ‘No, no, no. I want to learn, I want to be there.’ He would insist.” Chicago Talks In 1998, Rob Speyer joined the company’s redevelopment unit and modernized 300 Park Ave., the Colgate-Palmolive Co . headquarters Tishman Speyer bought for $180 million, Jerry Speyer said. An appraisal last month valued the property at $650 million, Jerry Speyer said. Things have turned out differently elsewhere. In Chicago, the company is trying to restructure debt on office properties it bought in 2007 for $1.72 billion. The Federal Reserve Bank of New York oversees $1.4 billion of loans made by Bear Stearns Cos. In Los Angeles, KeyBank National Association sued to foreclose on the Playa Vista industrial, office and film production property Tishman Speyer and Walton Street Capital LLC bought in 2007. The owners failed to repay $154 million of debt on the complex due in July, KeyBank said in a complaint filed on Oct. 20. Broker CB Richard Ellis Group Inc. was hired to sell the property, according to manager Trigild Corp. A foreclosure won’t affect any of Tishman Speyer’s other properties, spokesman Rick Matthews said in October. Facing Default In New York, the company is facing default on Stuyvesant Town and Peter Cooper Village, Manhattan’s biggest apartment complex. The property is a World War II-era, 80-acre development housing about 25,000 people. The $3 billion in debt used to buy it was bundled with other commercial mortgages and sold as bonds. Tishman Speyer is trying to win a forbearance agreement, according to a person familiar with the financing who declined to be identified because the talks are private. Such an accord would halt default proceedings and allow negotiations on a restructuring. When Tishman Speyer and BlackRock Realty bought the 11,200- unit property in 2006, they planned to raise rents, evict illegal occupants and upgrade the complex with amenities including a gym, concierge service and new gardens. Tenants’ Lawsuit Those plans were challenged by a recession, slackening demand for rentals and a legal victory for tenants who claimed some rent increases were illegal. Average rents for a two- bedroom Manhattan apartment fell 16 percent after peaking in May 2007 at $3,907, according to Gary Malin , president of property broker Citi-Habitats Inc. “Rob is a first-class smart guy, but the overriding thing in real estate is timing,” said Peter Hauspurg , president of Eastern Consolidated Properties Inc., an investment sales brokerage that handles apartment deals. “No matter how strong your skill sets are, if you buy at the wrong time, there’s no way you can make it work out.” Tishman Speyer has ceased signing new leases at the complex, Bud Perrone , a company spokesman, said. It reached a temporary agreement with tenants this month that will reduce some rents starting in January. Investors including the Florida State Board of Administration, the California Public Employees’ Retirement System and the Church of England put money into the Stuyvesant Town deal. U.S. government-owned mortgage finance companies Fannie Mae and Freddie Mac own the biggest portion of the debt. Florida and BlackRock have written down their stakes to zero, according to Dennis MacKee , a spokesman for the Florida State Board , and Brian Beades , a BlackRock spokesman. Pension Investments Doug Bennett, the senior investment officer for real estate at the Florida State Board, the fourth largest U.S. pension fund, recommended the organization invest $250 million, according to a March 2007 memo released by the agency. Bennett made that call based on a 17-page analysis which detailed Tishman Speyer and BlackRock’s “aggressive” plans to reduce the number of rent-stabilized apartments in the complex, according to the memo. Florida anticipated a return of almost 14 percent on its investment, according to the memo. Calpers, the California state pension fund, projected a 13.5 percent rate of return on its $500 million investment, according to a document provided by agency spokesman Clark McKinley . Stuyvesant Town may hurt Tishman Speyer’s efforts to raise money in the future, said Longua , of New York University. “They’re going to have a lot of ‘I’m sorrys’ to deal with,” he said. Evictions In the year after the purchase, Tishman Speyer filed “hundreds” of non-renewal notices against rent-stabilized tenants, accusing them of having a residence elsewhere, according to Jack Lester, the attorney representing the Stuyvesant Town-Peter Cooper Tenants Association in a class- action lawsuit. “They were engaged to evict as many tenants as they could,” Lester said. New York City rent stabilization protects tenants of about 1 million apartments from sharp rent increases, according to the New York City Rent Guidelines Board. A unit remains stabilized as long as the rent is less than $2,000 a month or the tenant’s income is less than $175,000 for two consecutive years, according to the board’s Web site . Since acquiring the property, Tishman Speyer served 1,062 non-renewal notices to Stuyvesant Town-Peter Cooper residents who own or reside in a second home, the company said. Those notices were backed by evidence that the home was their primary residence. The company has had a total of 10,595 expiring leases in that period. Tenants gave up their apartments in 45 percent of cases resolved to date, the company said. Since March, 72 non-renewal notices have been served for the same issues. ‘Tough Deal’ Tishman Speyer’s losses will be limited to the $112 million equity investment the firm made in the complex, a person familiar with the structure of the deal said. The company has about $2 billion in cash on its balance sheet, said the person. That doesn’t mean the company isn’t looking back, Rob Speyer said. “It’s clearly been a tough deal,” he said of Stuyvesant Town. “We’re not in a great position.” Both Speyers said they don’t think the purchase will hinder their standing or ability to buy and sell buildings. “It’s just unfortunate that we hit this boomerang on this deal,” co-CEO Jerry Speyer said in the interview. “But is this deal going to change the reputation of Tishman Speyer, or what people think of either Rob or myself? I don’t think so, honestly. I certainly would hope not.” Sitting side-by-side in a conference room at Bloomberg LP’s headquarters in Midtown Manhattan , Rob Speyer takes the lead in discussing Stuyvesant Town and his father sits silently for almost an hour. Rob’s Deals It’s only when the subject of the firm’s reputation is raised that Jerry Speyer speaks. “Even in this really dreadful period that we’ve been through, we sold this incredible amount of real estate thanks to Rob’s foresight,” he said. “I jotted down some specifics if you’re curious,” the elder Speyer said, removing a folded paper from his suit pocket. It contained a handwritten list of well-timed property sales his son arranged. They include the sale of the New York Times Building in 2007 to Africa Israel Investments Ltd. for $525 million. Tishman Speyer bought it three years earlier for $175 million. The company also sold 666 Fifth Ave. to Kushner Cos. for $1.8 billion in 2007. It was the highest price ever paid for a single U.S. building at the time. Demand Changed Rob Speyer said he made these sales after noticing a “dramatic pick-up” in demand in 2004. Jonathan Mechanic , chairman of the real estate practice at Fried Frank Harris Shriver & Jacobson LLP, said Rob Speyer shouldn’t be blamed for deals that have lost value. “The world turned upside down,” said Mechanic, who has represented Tishman Speyer. “If I told you Lehman wouldn’t exist or Bear Stearns wouldn’t exist, you would have asked me if I was out of my mind,” he said. “Tishman Speyer and Rob were part of that world, and they’re one of many that suffered.” “When you go back to the history of the deals he’s done and the profits he’s made for investors, you had years of tremendous returns,” Mechanic said. No matter how the Stuyvesant Town transaction is judged, Rob Speyer will one day take over the company, Jerry Speyer said. For now, they work together from seventh-floor offices linked by a conference room at 45 Rockefeller Plaza. Only One Rule Jerry Speyer said the father-son partnership is free of conflict. There’s only one rule: If either opposes a transaction, the company passes on it. “I don’t think there can be any greater pleasure for a father than to see his son go way past him. And I have every confidence that Rob is going to be a hell of a lot more successful than I ever was,” Jerry Speyer said. “He’s got more curiosity, more intellect, and more drive.” “Rob came, he learned, he executed and developed a following in the company that was absolutely unique.” The Speyers said they are proud of their work revitalizing Stuyvesant Town and Peter Cooper Village. Tishman Speyer has spruced up the grounds, adding bushes and flowers, new intercoms, a fitness center and a movie screening room . The tenants of the development are now waiting to see how their landlord resolves the debt restructuring. Both Speyers said it was too early to comment. Whatever the outcome, the tenants group that bid against Tishman Speyer to buy the complexes in 2006 also learned a lesson about real estate. “I’m glad we didn’t win,” said life-long tenant Jim Roth. “We probably would have overpaid.” To contact the reporters on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net ; David M. Levitt in New York at dlevitt@bloomberg.net .

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Heads Of Financial Crisis Commission Call Wall Street Bonuses Unjustifiable, Vow To Investigate (EXCLUSIVE)

December 8, 2009

The chair and vice chair of the federal commission charged with investigating the causes of the financial crisis had harsh words on Tuesday for the Wall Street banks that are preparing to grant their executives enormous bonuses. And they said that the huge profits some banks have made as a direct result of a massive infusion of taxpayer funds are going to be part of the panel’s investigation. “This dichotomy of record profits and bonuses on Wall Street while you have real unemployment of 15 percent-plus in this country is very striking,” Financial Crisis Inquiry Commission Chairman Phil Angelides said during a visit to The Huffington Post’s Washington bureau. “Our primary mission is not to re-litigate TARP, but I do think in examining the crisis it’s legitimate to look at where things stand today, and we’re going to do that.” Angelides, a Democrat and former California state treasurer, and the commission’s vice chair, former longtime Republican Congressman Bill Thomas, said the commission will produce a report on the causes of the crisis by next December. But in the meantime, they are plenty frustrated by what’s happening on Wall Street. “I think a legitimate question is: the bonuses are based on what? The ability to borrow cheap? And the ability to make money on that spread?” Angelides asked. The Federal Reserve’s near-zero borrowing rate has enabled banks to borrow for basically nothing yet lend it out at normal rates to households and businesses, pocketing the difference. “I’m not running those businesses, but the bonuses are offensive to me and to a broad segment of the American public,” he said. Angelides added: “Our job is to examine the meltdown. From a personal viewpoint, this disconnect between how Americans are faring and what’s happening on Wall Street with respect to bonuses is extraordinarily disconcerting.” Thomas lashed out at the Wall Street titans he mockingly called the “Masters of the Universe,” saying: “I am absolutely outraged at people who took government money, went to bed that night, woke up, and [then could say] that they didn’t need to take it.” He said the bailout has had the effect of encouraging the same kind of behavior that got the country into its current economic mess. “And now they’re making a lot of money, and they’re going to go back to the same old behavior that encouraged people to take inordinate risks with other people’s money,” he said. “What difference does it make if it comes from private [funds] or taxpayers? It’s money that can be fed into the mill that produced bonuses for me,” he said channeling a Wall Streeter. Angelides said the bonuses are “unjustifiably wrong,” to which Thomas quickly added, “And dumb! I mean, why do you draw attention to yourself right now?” he asked. Angelides said the banks benefited enormously from government intervention, including the ability to borrow cheaply and the deals they got in the taxpayer-funded bailout known as TARP: “The deal that those banks got was a stunning deal, un-gettable in the private sector,” he said. “The notion that a corporation could be on its knees, about to go to bankruptcy, and get money that they could effectively borrow at seven or eight percent is, you know, it’s just nothing that any private equity firm would have done, that any private source of capital would have done. And so I think it’s fair to say the American taxpayer enabled many of these companies to survive and be in the position they’re in today — and that’s not unnoticed.” Private investors, he said, would have wanted more like 30 percent interest. “Bank of America — they took $45 billion, right?” Angelides said. “They’re talking about a payoff. The government is saying they’re going to make two-and-a-half billion [in profit]. Annualized, that’s probably seven to eight percent interest.” To which Angelides exclaimed, “What a deal!”

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MGM Mirage Bets on CityCenter to Lower Debt as Partner Dubai World Teeters

November 30, 2009

By Beth Jinks Nov. 30 (Bloomberg) — MGM Mirage , the Las Vegas Strip’s largest casino owner, is counting on tomorrow’s unveiling of the $8.5 billion CityCenter resort to mark the end of the city’s losing streak and the debt crisis that almost sank the company. CityCenter, 67 acres of hotels, condominiums, gambling and shopping linked by monorail, opens as Las Vegas’s two-year recession eases. The cost, along with the global credit crunch, drove MGM Mirage stock to less than $2 in March and forced a share sale that loosened founder Kirk Kerkorian’s control. The project’s co-owner, state-owned Dubai World, added a new twist last week when it sought to delay payment on its own debts. The partners have planned to increase CityCenter’s borrowings to retrieve cash as early as mid-2010, according to MGM Chairman and Chief Executive Jim Murren . The casino company would use its share to help reduce $13 billion in long-term debt . CityCenter is inoculated against any default by its owners, and future borrowings would be based on the project’s credit rating and projected cash flow, Murren said. “We already have all our money” to open, Murren, 48, said in a Nov. 27 interview. “All the cross-defaults were eliminated. If we have a default at either parent it could not trigger a default at the joint venture.” Murren wants to pare long-term debt to $10 billion within five years and raise MGM Mirage’s credit rating to an investment grade from today’s CCC+ junk level by Standard & Poor’s. The Las Vegas-based company also plans to sell stock in its Macau, China, venture next year and has assets that may serve as collateral for additional refinancing. Cash Withdrawal With $1.8 billion in debt, CityCenter may support more loans once it opens. Annual cash flow of $400 million to $500 million would let MGM Mirage and Dubai World withdraw about $600 million each, said Dennis Farrell , a casino debt analyst at Wells Fargo Securities LLC in Charlotte, North Carolina. “Down the road if they want to try and take it public, or try and recapitalize the entity, it could send cash out to both parties,” Farrell said. Dubai World, an investment company for the Persian Gulf emirate, is trying to delay payments on $59 billion of liabilities. Should it seek to sell its interest in CityCenter, MGM Mirage has first right of refusal to buy out its partner, corporate filings show. Each partner’s stake is worth almost $2.45 billion, based on MGM Mirage’s third-quarter assessment as it wrote down its CityCenter investment by $1.16 billion. Dubai World also owns MGM Mirage stock valued at about $275 million. MGM Options MGM Mirage could seek bank loans, equity financing or tap credit markets should Dubai World seek to be bought out, according to a person familiar with the company’s options. Other possibilities include an investor replacing Dubai World in the joint venture, or an investor buying the stake and trading it for MGM Mirage stock, said the person, who sought anonymity because discussions are private. Dubai World spokespeople didn’t immediately respond to e- mails sent outside of local business hours. The global credit crisis and recession almost cut off CityCenter construction funding. In May, MGM Mirage issued $2.1 billion in stock and secured bonds, paying off some debt and restructuring other loans. Kerkorian’s stake fell to 37 percent from 54 percent. MGM Mirage took steps to protect CityCenter in April, Murren said. The partners, resolving a legal conflict, eliminated all cross-default provisions, he said. Las Vegas ‘Neighborhood’ Murren, a former Wall Street analyst, says CityCenter’s “neighborhood” of unique architecture, art and dining will be a must-see for tourists and locals, giving MGM Mirage a greater share of visitors’ spending. “We will get our rightful majority share of that incremental revenue,” Murren said to reporters in Las Vegas on Nov. 18. “We’ve developed the thing that everyone has to see.” Travel to the city will rise 7 percent to at least 38 million visitors in 2010, Murren said. CityCenter’s almost 6,000 rooms may steal guests from the company’s nine other Strip resorts, hold down room rates and hurt Las Vegas Sands Corp. , Wynn Resorts Ltd. and Harrah’s Entertainment Inc. , some analysts say. “The threshold for success now is simply that MGM doesn’t cannibalize itself after this year’s survival roller-coaster,” said Bill Lerner , a Las Vegas-based analyst at Union Gaming Group LLC. “We’re starting to now see visitation stabilize and grow again in Las Vegas, so it could be a decent year.” Condo Price Cuts Work on CityCenter, between the company’s Bellagio and Monte Carlo casinos, started five years ago. An official grand opening is scheduled Dec. 16. The company shows off CityCenter in media events starting tomorrow with Vdara, a 1,500-suite condo-hotel, according to a company statement. On Dec. 3, MGM Mirage opens Crystals , with 500,000 square feet of retail space including Tiffany & Co., Louis Vuitton and Bulgari. On Dec. 4, the company showcases the Mandarin Oriental Hotel , with 619 guest rooms and residences on 47 floors. The Aria Resort & Casino opens Dec. 16, adding 4,004 rooms. MGM Mirage cut contracted prices on condominiums in CityCenter’s Veer towers and other apartments by 30 percent after the financial crisis and plunging real estate values made it unlikely existing buyers would close sales. The Harmon Hotel, with an additional 400 rooms, is scheduled to open in late 2010, according to the Web site. The December openings will add 27 percent more high-priced rooms to the 20,000-plus available now, Farrell said. Citywide, Las Vegas already has more than 140,000 rooms and will add almost 4,000 in 2010, according to the Las Vegas Convention & Visitors Authority. Travel to Vegas Well’s Fargo’s Farrell recommends bond investors purchase MGM Mirage secured notes and ones that mature by the end of next year. He rates the company’s unsecured debt maturing in 2011 and later “underperform,” partly because CityCenter may cannibalize its older properties. MGM Mirage fell 45 cents, or 4.1 percent, to $10.56 in New York Stock Exchange composite trading on Nov. 27. On that day, the S&P 500 Index tumbled 1.72 percent on concerns Dubai’s debt crisis could spread. The shares sank as low as $1.81 in March. Kerkorian, 92, said last month he’s seeking a partner for his stake or other deals, calling the shares undervalued. Las Vegas’s two-year plunge in travel and gambling is abating. In September, visits rose 4.3 percent, the first increase in 18 months. Strip gambling slid 3.6 percent, the smallest drop since June 2008. Mothballs Six projects are halted on the north end of the Strip. Boyd Gaming Corp. mothballed the Echelon Resort, and Fontainebleau is broke and unfinished. Four others, including one by MGM Mirage and Kerzner International Ltd., owner of the Atlantis casino in the Bahamas, remain empty lots. Projects around CityCenter are being finished. Next door, Deutsche Bank AG’s Cosmopolitan Resort & Casino is set to open in September, and Planet Hollywood Resort is preparing to open the first of two PH Towers. Nearby, Hard Rock Hotel opened the Paradise Tower in July and its all-suite HRH opens Dec. 28. “We were not set up for the economic tsunami we experienced and the financial meltdown. That one-two punch brought us to our knees,” said Murren. “It’s now my responsibility to make sure this company’s never in a position to be as vulnerable.” To contact the reporter on this story: Beth Jinks in New York at bjinks1@bloomberg.net

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iSOFT Business Solutions (ASX:ISF) Wins New Deals Worth A$10 Million

November 23, 2009

iSOFT Business Solutions (ASX:ISF) Wins New Deals Worth A$10 Million

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Commercial Real Estate Slide Kills City Budgets | Investing to Wealth

November 22, 2009

Join the conversation about this story »See Also:The Court System Deals The Commercial Real Estate Death BlowSam Zell Slams Wilbur Ross, Calls Him A Commercial Real Estate WannabeMichael Panzner: Commercial Real Estate Is A “Tsunami …

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Janet Tavakoli: Goldman Sachs Nearly Bankrupted AIG

November 17, 2009

Goldman wasn’t the only contributor to the systemic risk that nearly toppled the global financial markets, but it was the key contributor to the systemic risk posed by American International Group, Inc.’s (AIG) near bankruptcy in September 2008. When it came to the credit derivatives AIG was required to mark-to-market, Goldman was the 800-pound gorilla. Calls for billions of dollars in collateral pushed AIG to the edge of disaster. The entire financial system was imperiled, and Goldman Sachs would have been exposed to billions in devastating losses . A Goldman spokesman told me its involvement in AIG’s trades was only as an “intermediary,” but Goldman underwrote some of the collateralized debt obligations (CDOs) comprising the underlying risk of the protection Goldman bought from AIG. Goldman also underwrote many of the (tranches of) CDOs owned by some of AIG’s other trading counterparties. Goldman was AIG’s largest counterparty, and its trades made up one-third of AIG’s approximately $62.1 billion in transactions requiring market prices. Societe Generale (SocGen) was AIG’s next largest counterparty with $18.7 billion. SocGen, Calyon, Bank of Montreal, and Wachovia bought several (tranches) of Goldman’s CDOs and hedged them with AIG. On November 27, 2007, Joe Cassano, the former head of AIG’s Financial Products unit, wrote a memo about the collateral AIG owed to its counterparties. Goldman, Soc Gen, Calyon and others required more than $4 billion. Goldman asked AIG for $3 billion of the $4 billion required in collateral calls. (Click here to view the nine-page memo uncovered by CBS News in June 2009.) By September 2008, Goldman had called $7.5 billion in collateral from AIG. SocGen bought protection from AIG on two tranches of Davis Square VI, a deal Goldman underwrote. According to AIG’s documentation, SocGen got its prices for marking purposes for Goldman’s deals from Goldman. As of November 2007, Goldman marked down these originally “AAA-rated” tranches to 67.5%, down by almost one-third. SocGen’s list includes other deals underwritten by Goldman: Altius I, Davis Square II, Davis Square IV, the previously mentioned Davis Square VI, Putnam 2002-1, Sierra Madre, and possibly more. SocGen hedged this risk by purchasing protection from AIG. Calyon had $4.5 billion of transactions with AIG. Calyon and Goldman were co-lead on at least two deals: Davis Square II and Davis Square V. According to AIG’s memo, Calyon got its prices for these deals from Goldman. Bank of Montreal had $1.6 billion in negative basis trades with AIG, and at least two Goldman transactions (Davis Square I and Putman 2002-1) made up 6 of its 9 positions with AIG. Wachovia had 6 trades with AIG, all related to Davis Square II, a deal that Goldman underwrote. Goldman was right to question the prices, make calls for collateral, and protect itself. Goldman may not have been an arsonist buying fire insurance, but its trading activities with AIG and others were accelerants of AIG’s problems. During AIG’s bailout, Goldman had influence over the decision to use public funds to pay 100 cents on the dollar for these CDOs (the underlying risk of the credit derivatives), but none of the information about the volume of Goldman’s trades with AIG–or the Goldman CDOs hedged by AIG’s other counterparties–was made public. Goldman’s public disclosures in September 2008 obscured its contribution to AIG’s near bankruptcy and the need to bailout Goldman’s trading partners in AIG related transactions. Goldman’s trading activities played a starring role in the near collapse of the global markets.

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Iberiabank Buys Two U.S. Banks as Failure Tally Increases to 123 This Year

November 13, 2009

By Dakin Campbell Nov. 13 (Bloomberg) — Iberiabank Corp. , the Louisiana- based lender that exited a federal government assistance program this year, purchased two banks as the U.S. economy’s expansion fails to halt financial-firm collapses . Iberiabank added about $2.5 billion in deposits and more than 30 branches by acquiring Florida-based lenders Orion Bank and Century Bank, the company said today in a statement. The growth in southern Florida will boost earnings in coming years, Iberiabank said. Orion and Century “possess very strong deposit market- share positions in five very attractive Florida” areas, Iberiabank Chief Executive Officer Daryl Byrd said in the statement. Banks are failing at the fastest pace in 17 years even as the U.S. economy shows signs of pulling out of the recession. The world’s largest economy grew at a 3.5 percent annual pace in the third quarter, the first gain in more than a year, according to the Commerce Department. The number of failed banks reached 179 in 1992. Iberiabank rose 64 cents to $44.40 in regular Nasdaq trading today before the deals were announced. The Lafayette, Louisiana-based company has fallen 15 percent in the past year. Sunwest Bank of Tustin, California, also purchased a failed bank in its home state today, according to the Federal Deposit Insurance Corp., which was named receiver for all three transactions. Sunwest assumed the $130.9 million in deposits and $134.4 million in assets at Pacific Coast National Bank of San Clemente, California. Adding Bank Branches Iberiabank boosted its number of branches to 204 in 11 U.S. states with today’s acquisitions and added $3.1 billion in assets, the company said. It will share losses with the FDIC on abut $2.6 billion of assets. After today’s deals, the bank will remain well-capitalized by regulatory standards, it said. The acquisitions aren’t the first this year for the 122- year-old bank. The company took over CapitalSouth Bank and its $546 million of deposits in August. Earlier this year, Iberiabank paid back $90 million it had taken as part of the Troubled Asset Relief Program. The bank paid 46 cents on the dollar for the government’s warrants. The three failures cost the FDIC’s deposit-insurance fund more than $980 million. To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

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Ex-Galleon Worker, 13 Others Charged by U.S. in $53 Million Insider Scheme

November 5, 2009

By David Glovin, Bob Van Voris and Joshua Gallu Nov. 6 (Bloomberg) — U.S. prosecutors charged 14 people, including hedge fund managers, lawyers and an ex-Galleon Group employee, for using the methods of “drug dealers” and “common criminals” to profit on insider data from deals involving firms such as 3Com Corp. and Alliance Data Systems Corp. The charges, brought as part of a wide U.S. probe of Galleon founder Raj Rajaratnam , bring the illicit profits in the case to as much as $53 million. Five of those whose cases were unsealed yesterday have pleaded guilty and are cooperating in the investigation, prosecutors said. At the center of a new insider trading ring are Zvi Goffer , 32, a former Galleon employee who sought tips, and Arthur Cutillo , 33, an attorney at Ropes & Gray LLP and the ring’s key source of information, federal officials said. Goffer, founder of Incremental Capital LLC, paid tipsters including Cutillo for information on mergers and acquisitions, giving them pre-paid mobile phones so they could avoid surveillance, the U.S. said. The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming. As with Rajaratnam, investigators used wiretaps, data- mining and surveillance to target the ring. Authorities have struggled to build cases against large institutional investors such as hedge-fund managers, who often seek to deflect regulatory queries about suspiciously timed bets by arguing they’re statistical flukes amid millions of trades. Largest Ever “If you’re a wealthy trader, you aren’t special,” Bharara said, urging Wall Street professionals to come forward to disclose crimes. “Knock on our door before we come knocking on yours.” Yesterday’s arrests add to last month’s charges against Rajaratnam , 52, and five others in what the government said was the largest hedge fund insider-trading ring ever prosecuted. The U.S. says Rajaratnam received tips from a network of high- ranking executives including co-defendants Rajiv Goel , who worked at Intel Capital, and Anil Kumar , who was a director at McKinsey & Co. All have denied any wrongdoing. “We’re not just talking about aggressive hedge fund traders who were trying to get an edge,” Bharara said at the press conference. “Someone had to give them that illegal edge. It takes two to tango.” Roomy Khan Also arrested yesterday were Craig Drimal, 53, who worked at Galleon’s offices; Brooklyn, New York-based attorney Jason Goldfarb, 31; Zvi Goffer’s brother Emanuel Goffer , 31; Atheros Communications Inc. Vice President Ali Hariri ; and Incremental Capital employees David Plate, 34; and Michael Kimelman , 38. Another man, Deep Shah, a former analyst at Moody’s Investors Service, remained at large. Charges against the defendants include conspiracy and fraud. The eight people arrested yesterday, after appearing in federal courts in Manhattan and San Francisco, were released on bonds of $100,000 to $500,000. Prosecutors disclosed yesterday that Roomy Khan, a former Intel Corp. employee, was among five people who pleaded guilty last month. Khan is a key government witness in the Rajaratnam case, a person familiar with the matter said. Khan, who was previously convicted of funneling tips to Galleon, earned $1.6 million in the latest scheme, according to court papers. Khan’s lawyer, Stanislao German, didn’t return a call seeking comment. ‘Accepts Responsibility’ The others pleading guilty and cooperating with prosecutors are Steven Fortuna , a managing director at hedge fund S2 Capital in Boston; Gautham Shankar , 35, of New Canaan, Connecticut, a former trader at Schottenfeld Group LLC, where Zvi Goffer once worked; and Richard Choo-Beng Lee, a portfolio manager at an unidentified hedge fund. Lee and Ali Far , who also pleaded guilty, formed the hedge fund Spherix Capital. “Fortuna has pled guilty and accepts responsibility for his conduct,” Richard Schaeffer, his lawyer, said in a phone interview. Zvi Goffer, who now works at Incremental Capital, was at the heart of the scheme, prosecutors allege. He and others paid for secret tips and tried to hide their trades by having accomplices use prepaid telephones, they say. His attorney, Cynthia Monaco, declined to comment. ‘Octopussy’ Within the ring, Goffer was known as “the Octopussy,” a reference to the 1983 James Bond film starring Roger Moore , the U.S. Securities and Exchange Commission alleged in a related civil lawsuit filed yesterday. The nickname stemmed from his reputation for having multiple sources of inside information, the SEC said. “There should be a moment — hopefully before you’re holding a bag of cash delivered to you by somebody code-named ‘the Octopussy’ — that causes anyone in a position to tip or trade on inside information to think twice before taking such a misguided step,” SEC Enforcement Director Robert Khuzami said at yesterday’s press conference. Goffer gave one of his sources a disposable mobile phone before Bain Capital LLC’s proposed buyout of 3Com, authorities said. The phone had two programmed numbers labeled “you” and “me.” After the deal was announced, Goffer removed the phone’s SIM card, bit it, and broke the phone in half, they said. “And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said. Cutillo passed news about deals Ropes & Gray was working on to Goldfarb, another New York lawyer, who gave it to Goffer, prosecutors said. Cutillo, who no longer works at the firm, got kickbacks for his tips on four deals including the purchase of Hilton Hotels Corp., authorities said. ‘Sad Mistake’ Cutillo’s lawyer, Bryan Blaney, said in an interview that his client did “nothing wrong. His being included in this was just a sad mistake we hope to quickly cure.” “We are deeply disappointed to learn about this situation, which suggests an extreme breach of this person’s duty of trust,” John Tuerck , a spokesman for Boston-based Ropes & Gray, said in a statement. “We are moving quickly to protect our clients and are cooperating fully with authorities.” The SEC, which said profits in the overall Galleon probe were as much as $53 million, filed a civil complaint against those arrested yesterday. Also sued was the Schottenfeld Group, a New York-based broker-dealer where several defendants works. Schottenfeld Group said in a statement that it was “shocked by the criminal allegations” against some of its former employees and that it will cooperate with the government. Wiretaps Dan Gagnier , a spokesman for Galleon, declined to comment. According to court papers, Zvi Goffer passed along the tips he got from Cutillo to Kimelman, Shankar, Plate, Drimal and his brother Emmanuel. Drimal and Shankar leaked the information to others, authorities said. Declining to comment were Kimelman’s attorney Michael Sommer, Emmanuel Goffer’s lawyer Matthew Levine, Goldfarb’s attorney Harvey Greenberg, and Plate’s lawyer Frank Handleman. Drimal’s attorney JaneAnne Murray didn’t return a call seeking comment. Wiretaps provided much of the government’s evidence, as it did in the Rajaratnam case. Investigators said in court papers that they tapped Drimal’s mobile phone. Zvi Goffer’s phone calls were intercepted at Galleon almost as soon as he joined the hedge fund, where he worked from January to August 2008, according to court papers. ‘Three Times Bigger’ On Jan. 2, 2008, Goffer had a call from Goldfarb, who had provided inside information on mergers the previous year. At Galleon, Goffer told him, his buying power was “more than three times bigger” than at his previous employer, according to the complaint. The government’s cooperators pleaded guilty to crimes involving a series of leaks. Steven Fortuna, formerly the managing director of hedge fund S2 Capital, got tips about the quarterly earnings of a technology company, prosecutors said. Le, the former president of California-based hedge fund Spherix Capital, and Far, the fund’s founder, admitted they paid kickbacks to their sources of inside information, prosecutors said. Shankar got tips from a friend and a trader at Schottenfeld and passed along the information, they said. Khan conspired with eight others on illegal trades, prosecutors said. Far’s lawyer Steven Kobre, Lee’s lawyer Jeffrey Bornstein and Shankar’s lawyer Frederick Sosinsky also didn’t immediately return phone messages seeking comment. The criminal case is U.S. v. Rajaratnam, 1:09-mj-02306, U.S. District Court, Southern District of New York (Manhattan). To contact the reporters on this story: David Glovin in New York federal court at dglovin@bloomberg.net and; Bob Van Voris in New York federal court at rvanvoris@bloomberg.net ; Joshua Gallu in Washington at jgallu@bloomberg.net .

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Real estate firms defend profits in Detroit Public Schools deals (Crain’s Detroit Business)

October 25, 2009

As Detroit Public Schools officials take on a handful of real estate firms on an accusation of taking exorbitant profit, companies involved say the deals were on the up-and-up and approved by the school district.

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Property Bondholders May Lose $1.6 Billion in U.K.’s First Forced Sales

October 22, 2009

By Chris Bourke Oct. 22 (Bloomberg) — Investors in the first U.K. commercial mortgage bonds to be liquidated since the financial crisis began may lose as much as 1 billion pounds ($1.6 billion) after values of properties backing the two deals collapsed. Epic (Industrious) Plc issued bonds on 1,500 warehouses, which fetched 44 percent of their peak value in sales that completed this month. White Tower 2006-3 Plc packaged bonds against nine London office buildings owned by Simon Halabi , six of which went into administration this week. Banks, insurers and pension funds that hold the bonds face losses from the 35 billion euros ($52 billion) in European commercial mortgage-backed securities that are set to expire over the next three years. Bank lenders have been willing to extend loans to help borrowers avoid default, while commercial mortgage bond issuers must repay investors by a set deadline. “If they’re not nervous now, then they’ve been hiding under a rock,” said Hans Vrensen , interviewed in his role as head of European securitization research at Barclays Capital Inc, which he left last week. Loans against hundreds of buildings were securitized throughout Europe, with more than 60 percent packaged near the market’s peak. They include Paris’s Coeur Defense, the largest office complex in Europe; London’s city hall; German apartment blocks; and British hospitals and care homes. “There’s very little appetite among banks to recognize losses on their property loans, but CMBS doesn’t have that luxury,” said Jeffrey Rubinoff, a London-based real estate finance lawyer at Freshfields Bruckhaus Deringer LLP. “If maturity is looming, you’re up against a hard date.” Banks, Funds, Insurers Owners of European commercial mortgage bonds include Citigroup Inc. , Merrill Lynch & Co Inc. , DekaBank Deutsche Girozentrale, the fund manager for Germany’s savings banks, insurer Allianz SE , BlackRock Inc . and Banco Santander SA , according to Bloomberg data. Royal Bank of Scotland Group Plc , which manages the Epic bonds, owns 2.2 billion pounds of European CMBS, according to its half-year results. By splitting the loans into layers of differing risk, the banks could sell them to investors and profit from the difference between the interest received from borrowers and its payout to CMBS investors. Other loans tied to the assets, but ranking beneath the bonds for repayment, were also sold. Canada’s biggest pension fund manager, Caisse de Depot et Placement du Quebec, is likely to lose 285 million pounds as the holder of a loan subordinate to the White Tower bonds, two people familiar with the situation said in a Bloomberg story published Aug. 26. Typical Deals Epic and White Tower are similar to most CMBS issues, which packaged loans equal to about 80 percent of the properties’ value near the market’s peak in 2006 and 2007. Property values have since slumped — by almost half in the U.K., according to Investment Property Databank Ltd. — shrinking the collateral needed for refinancing as loans expire or come near default. British commercial property prices may not rise for at least five years, according to CB Richard Ellis Group Inc.’s derivatives unit. More than half of the 140 billion euros in European CMBS bonds outstanding are held against U.K. properties. “The market’s very worried about the mountain of property loans to be refinanced post 2010,” said Michel Heller , head of strategy at CBRE-GFI. Property derivatives indicate an 8 percent fall in U.K. building values from 2010 to 2014, said Heller. The losses won’t be shared equally. Senior bonds are the safest in a CMBS deal because they rank first for repayment. Holders of junior bonds and loans backed by the properties may lose all their money. Varying Risk Investors in Epic will lose about 60 percent of their money after the warehouses are sold, Standard & Poor’s said in an Aug. 11 report. Royal Bank of Scotland funded the purchase of the buildings in 2006 with a 585 million-pound loan, before securitizing most of the debt. The bonds defaulted last year. The buildings were sold from July to October. Senior bondholders will get 51 percent to 70 percent of their 300 million pounds, Fitch said in an Aug. 6 report. Junior bondholders will lose all of their 173 million-pound investment, according to Fitch Ratings. Another 170 million pounds of loans tied to the deal rank beneath all bondholders for repayment. Aoife Reynolds, a spokeswoman for RBS, declined to comment when contacted by Bloomberg. Nigel Woods, a spokesman for Epic (Industrious), also declined to comment. “It’s just the tip of the iceberg,” said Vrensen, who was appointed this month as global head of research for DTZ Holdings Plc. “Most investors are expecting further defaults and further losses.” Maturities Loom About 6.5 billion euros of European commercial mortgage bonds are due to mature by the end of next year, according to Barclays Capital. That will rise to 16.5 billion euros in 2011 and 12.1 billion euros in 2012. “The focus is increasingly shifting to loans maturing during 2010 to 2012,” Moody’s Investors Service Ltd. said in an August report. It will be difficult to refinance or repay most of those loans, the ratings company said. White Tower packaged 1.15 billion pounds of bonds against nine London properties. The buildings, valued at 1.83 billion pounds at the time include offices leased by JPMorgan Chase & Co. at 125 London Wall and 60 Victoria Embankment. The bonds defaulted in June after the value of the offices fell by 50 percent. The properties would probably fetch about 900 million pounds on the market, Barclays Capital Inc. estimated in July. Junior bondholders are likely to lose about 300 million pounds in a sale at that value, the bank said. Liquidation CB Richard Ellis Group Inc. , the debt’s manager, has placed six of the buildings into administration. CBRE must liquidate White Tower within three years, said David Martin, a director of the broker’s real estate finance unit. The sale is likely to start next year, he said. “The properties, or their holding companies, will eventually be sold,” Martin said in an interview. “Some interest is already being shown.” Prior to Epic, the only European CMBS deal to be liquidated was HOTELoC, which in 2002 packaged mortgages of 28 U.K. hotels. The properties loss almost half their value by the time they were sold in 2007. The securitization market shut down in the second half of 2007 as the credit crunch froze bank lending. The highest-rated CMBS bonds sold for as little as 70 pence on the pound this year, before recovering to around 85 pence as confidence grew that the worst of the slump had passed. Prices of BBB-rated bonds are at about 40 pence in the pound, the lowest ever. More to Come Glastonbury Finance 2007-1 is a derivatives product that sold about 350 million pounds of notes secured against a pool of 19 CMBS transactions, according to its prospectus. Standard & Poor’s downgraded the most junior notes to junk status on Aug. 20, saying some creditors were unlikely to be repaid in full. “Where an investor hasn’t been making realistic mark- downs, a crystallization of the position and an actual loss will come as a wake-up call,” said Paul Rivlin , joint chief executive of Palatium Investment Management Ltd, which manages Glastonbury. To contact the reporter on this story: Chris Bourke in London at cbourke4@bloomberg.net .

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U.S. Plans to Charge 10 More With Insider Trading After Rajaratnam Arrest

October 19, 2009

By Joshua Gallu and David Scheer Oct. 19 (Bloomberg) — Federal investigators plan to charge at least 10 securities professionals with insider trading, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said. The pending crackdown, more than two years in the making and among the biggest undercover operations into insider trading, may yield charges against hedge-fund managers and their associates as early as this week, the people said, declining to be identified because the cases aren’t public. Authorities had planned to arrest Rajaratnam this week as part of a broader sweep, expediting it after learning he had bought a plane ticket to travel to London on Oct. 16, one person said. The case against Rajaratnam, built on recorded conversations within a web of alleged conspirators, offers a glimpse of how U.S. investigators are using more aggressive tactics to identify illegal trades hidden within a blizzard of hedge-fund investments. Additional probes stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments. Some probes, like the one against Rajaratnam, rely on wiretaps. “If you’re going to shoot the king, you better shoot to kill,” said Bradley Bennett , a law partner at Baker Botts LLP in Washington who formerly focused on insider-trading cases as an SEC investigator. “If they’re going to take on a billionaire, they need to have the strongest possible cases. The defendant’s own words are the strongest possible evidence.” Intel, McKinsey, IBM SEC spokesman John Heine declined to comment, as did Alejandro Miyar , a spokesman for the Justice Department. Rajaratnam , who founded the Galleon Group in 1997, was arrested with five alleged conspirators on Oct. 16 in what prosecutors called the biggest insider-trading ring targeting a hedge fund. Prosecutors said he and his firm reaped as much as $18 million by investing on tips from a hedge fund, a credit- rating firm and employees within companies including Intel Capital, McKinsey & Co. and IBM Corp. IBM said today it put executive Robert Moffat , one of Rajaratnam’s alleged conspirators, on temporary leave following the charges. Rajaratnam, born in Sri Lanka’s capital of Colombo, has a net worth of $1.3 billion, making him the 559th richest person in the world, according to Forbes Magazine. In the early years of this decade, Galleon ranked among the world’s 10 largest hedge funds, managing $7 billion at its peak in 2008. No Plea Entered Rajaratnam hasn’t yet entered a plea. His lawyer, Jim Walden , said last week that prosecutors are misconstruing the evidence and that the case isn’t as strong as they allege. U.S. senators including Pennsylvania Democrat Arlen Specter have pressed regulators to more aggressively scrutinize hedge funds. Some of those concerns were spurred by the SEC’s decision in 2006 to close an insider-trading probe of Pequot Capital Management Inc., once the world’s biggest hedge- fund manager, after investigators said they lacked evidence to bring the case. The SEC later reopened part of the inquiry focusing on whether Pequot abused information from a former Microsoft Corp. employee. In August, Pequot and founder Arthur Samberg , 68, said they may be sued by the agency. Insider-trading claims would be “without merit,” they said. The SEC has also expressed concern that hedge funds may engage in insider trading based on information from their own investors. Many cases begin when stock exchanges send the SEC reports on traders who place profitable bets shortly before corporate announcements. Someone who rarely trades may have difficulty explaining later what prompted an uncharacteristic investment. Hedge funds, on the other hand, can more plausibly attribute their windfalls to skill or chance. Blue Sheets To overcome that hurdle, the SEC began using computer software about two years ago to sift hundreds of millions of electronic trading records, known as blue sheets, attached to the stock exchange reports about suspicious incidents, according to people familiar with the project. By looking for patterns in the library of data, they identified groups of traders who repeatedly made similar well-timed bets. Once investigators find a cluster of correlated trades, they tap other sources of information to unravel how its members obtain and share tips, the people said. For example, if a group profits on trades before a series of corporate takeovers, the SEC may check so-called league tables listing which investment banks or law firms advised the deals. If one firm was involved in all of them, an employee there may be the source of the leak. Data Mining The data-mining strategy yielded one of its first cases in February, when the SEC and U.S. prosecutors charged takeover advisers at UBS AG and Blackstone Group LP with taking part in an $8 million insider-trading case, people familiar with the inquiry said. Authorities used a “novel” technique to detect the scheme, the SEC’s lead investigator on the case, Daniel Hawke , said at the time, without elaborating. While the investigation of Rajaratnam didn’t stem from the data-mining project, it did start with the SEC’s identification of suspicious trades, people with knowledge of the case said. Investigators developed at least one informant in the ring, who began meeting in November 2007 with agents from the Federal Bureau of Investigation, according to charging documents. Prosecutors also obtained warrants for wiretaps, a level of surveillance typically reserved for organized crime, drug syndicates and terrorism prosecutions. Prosecutors are also being helped by at least three of Rajaratnam’s former colleagues, the Wall Street Journal reported today, citing people familiar with the criminal investigation. Those people include California hedge-fund managers Ali Far and Choo Beng Lee , the Journal said. Further Surveillance Surveillance during the probe of Rajaratnam, 52, led investigators to other suspects and more charges are likely, people familiar with the matter said. U.S. Attorney Preet Bharara said Oct. 16 the Justice Department will continue using wiretaps to root out insider-trading. The SEC is adopting other strategies to crack difficult cases. SEC Enforcement Director Robert Khuzami , a former federal prosecutor who joined the agency in March, said last week that he’s seeking greater access to grand-jury evidence and wants to expand deal-making and cooperation with informants. “Insider-trading cases are notoriously difficult to prosecute because the evidence is often circumstantial,” said Bill Mateja , a former Justice Department lawyer now at Fish & Richardson PC in Dallas. “If law enforcement is actively going to go out and target this with covert investigative techniques, I think it’s going to keep people on their toes.” The filed cases are U.S. v. Rajaratnam, 09-02306, and U.S. v. Chiesi, 09-02307, U.S. District Court for the Southern District of New York (Manhattan). To contact the reporters on this story: Joshua Gallu in Washington at jgallu@bloomberg.net ; David Scheer in New York at dscheer@bloomberg.net .

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London Financiers See Bonuses Rising or Matching 2008 Payout, Survey Says

October 14, 2009

By Ambereen Choudhury Oct. 14 (Bloomberg) — Four out of five workers in London’s financial services industry expect their bonus to increase or at least match last year’s payout, according to a report by Morgan McKinley. About 40 percent of London executives surveyed said they will get a similar bonus to 2008 and 39 percent said they would receive a larger payout, the survey of 200 financial services professionals found. About 60 percent said their bonus will equal a quarter of their base salary, the recruitment firm said. “By no means do these bonus expectations imply a return to the boom times,” said Andrew Evans , a managing director at Morgan McKinley in London. Bonuses are under heightened scrutiny after leaders from the Group of 20 countries agreed to limits on compensation that encourage risky trades or weaken their capital position. The U.K.’s five biggest lenders signed up to the plan last month, which restricts the amount they can devote to their bonus pools and how much they can set aside for deferred payments to executives and traders. They also allow the institutions to claw backs pay if the deals arranged by individual bankers go sour. “Over a quarter of financial services professionals surveyed said that their employer has already, or is planning to, restructure the components of total compensation packages,” Evans said. About 82 percent of those surveyed expect to receive a payout for 2009, the firm said. Most individuals surveyed by telephone between Sept. 24 and Oct. 6 earned 35,000 pounds ($55,100) to 80,000 pounds in base pay. Separately, Morgan McKinley said new job openings in London’s financial services industry fell 8 percent in September from the previous month. The average city salary rose 3 percent to 52,142 pounds in the same period. To contact the reporter on this story: Ambereen Choudhury in London achoudhury@bloomberg.net

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Russia’s Energy Reach Embraces Beijing, Berlin After Putin’s China Visit

October 13, 2009

By Lucian Kim Oct. 14 (Bloomberg) — Prime Minister Vladimir Putin used a trip to China to clinch oil, natural-gas and nuclear agreements, helping turn Russia into a global energy supplier with pipelines stretching from Berlin to Beijing. Russian companies signed deals on starting gas deliveries, jointly refining Siberian crude and building Chinese nuclear reactors on a two-day visit to Beijing that started yesterday. “China is Russia’s economic future,” said Roland Nash , chief strategist at Renaissance Capital in Moscow. “If this relationship works out, it will be a major contributor to the stability and speed of global economic growth.” Asia’s largest energy consumer is crucial for diversifying Russian energy exports away from traditional markets in Europe. Enemies for most of the Cold War, the two countries are now building relations across their 4,000-kilometer (2,500-mile) border based on China’s appetite for resources and Russia’s ability to deliver them as the world’s biggest energy producer. OAO Gazprom , the Russian state-run gas exporter, signed a framework agreement with China National Petroleum Corp. that could turn China into Russia’s biggest single gas customer. The country currently imports no gas from Gazprom, whose web of pipelines still reaches out to Europe. Igor Sechin , Putin’s deputy for energy, signed an additional accord setting deadlines on future gas supplies. A contract may be ready in June 2010 with deliveries in 2014 or 2015, Sechin told reporters. Shipments could reach China by new pipelines or as liquefied natural gas aboard tankers, he said. ‘Game Changer’ “This potential deal could be a game changer in the Russian gas sector, moving it towards Asia,” said Cliff Kupchan of New York-based Eurasia Group. “Price is the key. No agreement, no deal.” Gazprom Chief Executive Officer Alexei Miller told reporters the company is seeking a pricing formula similar to the one it uses in Europe, where the cost of gas is pegged to the price of crude. China, the world’s largest user of coal, relies on the comparatively cheap, dirty fuel to power its factories and generate electricity. Gas is not the only energy source Russia can offer its neighbor, Sechin said. China yesterday agreed to use Russian expertise to construct two additional reactors at its Tianwan nuclear plant. Russia has also started selling electricity to China from its Far East region. Coal exports to the country will total at least $1 billion by the end of the year, Sechin added. Oil Deals Russia agreed in February to supply China with oil for 20 years in return for a $25 billion credit to state oil company OAO Rosneft and the government’s oil pipeline monopoly OAO Transneft. The total value of oil deals signed with Chinese companies this year is about $100 billion, according to the Russian government. The first segment of an oil pipeline reaching the Chinese border is planned to be finished this year. Sechin, also chairman of Rosneft, said the company reached an agreement with CNPC yesterday on building a refinery in Tianjin, 100 kilometers southeast of the Chinese capital. The joint project may also involve as many as 500 filling stations, he said. Chinese money has helped transform Rosneft from a second- tier oil company into Russia’s largest crude producer. CNPC bought $500 million of shares during Rosneft’s initial public offering in July 2006. Earlier, the Chinese company extended a $6 billion loan-for-oil deal to Rosneft in December 2004, at a time when OAO Yukos Oil Co. was being dismembered under back-tax claims. Rosneft denied that loan was used to buy OAO Yuganskneftegaz, Yukos’s main production unit. Yukos, once Russia’s largest oil exporter, pushed the construction of a pipeline to China during the 1990s. The plan was never realized after Yukos CEO Mikhail Khodorkovsky was jailed on fraud and tax evasion charges that he claimed were politically motivated. Rosneft acquired most of Yukos’s assets at auctions after the company was declared bankrupt in 2006. To contact the reporter on this story: Lucian Kim in Beijing at lkim3@bloomberg.net

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Morgan Stanley Property Group Said to Plan Australian Initial Share Sale

October 12, 2009

By Angus Whitley Oct. 13 (Bloomberg) — Investa Property Group , an Australian real estate company owned by Morgan Stanley funds, plans to raise as much as A$750 million ($680 million) in an initial public offering of some assets, two people familiar with the matter said. Investa plans to bundle several office towers into a fund to be listed in Sydney, the people said, declining to be identified because the proposed transaction isn’t public. Investa may sell shares this year, one of the people said. An offering would follow IPOs planned this year in Australia by Myer Group Pty , the country’s largest department store chain, and outdoor equipment retailer Kathmandu, after the benchmark S&P/ASX 200 Index surged 52 percent from a March low. “A lot of people have been underweight property and are looking to rebuild their exposure,” said Angus Gluskie , who manages about $300 million at White Funds Management Pty in Sydney. “Cyclically, we’re getting to the end of the downward property spiral.” The Investa deal may be the first Australian real estate IPO since Macarthurcook Industrial Property Fund sold shares in December 2007, according to data compiled by Bloomberg. The S&P/ASX 200 A-REIT index , which tracks real-estate investment trusts traded in Australia, has climbed for two quarters, after declining for six quarters. Nick Footitt , a spokesman for Morgan Stanley in Hong Kong, was unable to comment immediately. A message left at Investa’s media office in Sydney wasn’t immediately returned. Property Deals Morgan Stanley Real Estate funds agreed to buy Investa, based in Sydney, in May 2007 in an A$6.6 billion takeover. Investa was the country’s biggest publicly traded property owner and the deal was the largest overseas acquisition of Australian real estate. It’s not yet clear which offices will be included in the IPO, according to the Australian Financial Review, which reported Investa’s plans earlier today. Investa owns and manages 47 office blocks across Australia, and controls about A$8.1 billion of real estate assets, the company’s Web site says. Sydney properties include the Norman Foster -designed 126 Phillip Street. Morgan Stanley had $70.4 billion of real-estate assets under management at March 31, of which $20.2 billion were in Asia, according to the New York-based bank’s Web site . Australia’s economy grew more than expected in the first two quarters of 2009, and the central bank this month became the first to raise interest rate among G-20 nations since the height of the financial crisis. To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

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