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ANOTHER Fed Official Says Senate Bill Doesn’t End ‘Too Big To Fail’

June 11, 2010

The Senate financial reform bill serving as the base text for Congressional negotiations doesn’t end the perception that the nation’s largest financial firms are Too Big To Fail, another top Federal Reserve official said Friday. Federal Reserve Bank of Philadelphia President Charles I. Plosser is the latest regional Fed chief to criticize the bill for its apparently inadequate attempt to forever end Too Big To Fail, joining a growing group that includes Dallas Fed President Richard W. Fisher and Kansas City Fed President Thomas M. Hoenig . “We must work to restore the prospect of failure,” Plosser said in prepared remarks to a gathering in Altoona, Penn. “To do so, we must establish a credible commitment by the government to not intervene or bail out firms on the verge of bankruptcy.” That’s what happened in 2008 as the federal government propped up investment firm Bear Stearns, insurer AIG, mortgage giants Fannie Mae and Freddie Mac, as well as the nation’s largest banks. More than 800 companies have either received or have been promised hundreds of billions of dollars in taxpayer cash. But, Plosser said, the approach favored by the Democratic leadership in the Senate as well as by top officials in the Obama administration to ensure that never happens again doesn’t go far enough, and leaves taxpayers on the line should the financial system near another crash. “I believe the best approach is amending the bankruptcy code for nonbank financial firms and bank holding companies, rather than expanding the bank resolution process under the FDIC Improvement Act as both versions of the reform legislation appear to do,” he said. “Resolution processes can be highly inefficient and arbitrary — granting far too much discretion to regulators or politicians to rescue some stakeholders and not others. “[I]t is important that we recognize that rules and regulations can have unintended and often undesirable consequences,” Plosser continued. “While the proposals now before Congress claim to have solved the Too Big To Fail problem, I am less convinced.” The House and Senate have each passed a financial reform bill, which the Democratic leadership in both chambers as well as the Obama administration claim will fix the ailments in the financial system that led to the worst financial crisis since the Great Depression. Lawmakers are in the process of reconciling these bills into a single version acceptable to both houses of Congress before sending the final version to President Barack Obama. The importance of forever ending Too Big To Fail can not be understated, according to Plosser and his counterparts across the Fed’s regional banks. “I believe that one of the most important objectives of financial regulatory reform is to address the notion that some firms are Too Big To Fail,” Plosser said. “The recent crisis and actions by policymakers have exacerbated moral hazard and expanded the safety net for failing firms. This is a huge problem that if not adequately addressed will sow the seeds of the next crisis. “If a firm’s creditors believe that the government will rescue them in the event of an impending failure, they will have little incentive to discourage the firm from taking excessive risk. Failure is the ultimate form of market discipline and an essential element of free enterprise. “Individuals must have the freedom to reap the rewards of their success, but they must also be free to fail. As my friend and fellow economist Allan Meltzer has said, “Capitalism without failure is like religion without sin. It doesn’t work.” Meanwhile, administration officials, like Obama’s top economic adviser, Larry Summers, argue that had the proposed resolution process been in place around the time taxpayers were bailing out AIG, the bailout wouldn’t have been necessary. Officials at the New York Fed and the Fed’s Board of Governors in Washington make similar claims. Analysts at Moody’s Investors Service said in a report last week that they doubted whether the proposed legislation truly ends Too Big To Fail, noting that regulators and policymakers would inevitably step in if a systemically-important firm was on the verge of collapse, since by definition such a firm’s dissolution would threaten the broader financial system. Such financial behemoths — which many observers believe to be Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley , among others — enjoy the support of an implicit government backstop. This allows them to issue debt at lower costs than their competitors because their creditors credibly believe that they’ll be bailed out should times get rough. Collectively, the firms save billions of dollars a year thanks to this implicit government guarantee. Fisher, the Dallas Fed chief, and Hoenig, of the Kansas City Fed, argue that the best way to end Too Big To Fail is to break up the nation’s megabanks. In a speech last week, Fisher said the nation doesn’t need ” a few gargantuan institutions capable of bringing down the very system they claim to serve .”

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ANOTHER Fed Official Says Senate Bill Doesn’t End ‘Too Big To Fail’

June 11, 2010

The Senate financial reform bill serving as the base text for Congressional negotiations doesn’t end the perception that the nation’s largest financial firms are Too Big To Fail, another top Federal Reserve official said Friday. Federal Reserve Bank of Philadelphia President Charles I. Plosser is the latest regional Fed chief to criticize the bill for its apparently inadequate attempt to forever end Too Big To Fail, joining a growing group that includes Dallas Fed President Richard W. Fisher and Kansas City Fed President Thomas M. Hoenig . “We must work to restore the prospect of failure,” Plosser said in prepared remarks to a gathering in Altoona, Penn. “To do so, we must establish a credible commitment by the government to not intervene or bail out firms on the verge of bankruptcy.” That’s what happened in 2008 as the federal government propped up investment firm Bear Stearns, insurer AIG, mortgage giants Fannie Mae and Freddie Mac, as well as the nation’s largest banks. More than 800 companies have either received or have been promised hundreds of billions of dollars in taxpayer cash. But, Plosser said, the approach favored by the Democratic leadership in the Senate as well as by top officials in the Obama administration to ensure that never happens again doesn’t go far enough, and leaves taxpayers on the line should the financial system near another crash. “I believe the best approach is amending the bankruptcy code for nonbank financial firms and bank holding companies, rather than expanding the bank resolution process under the FDIC Improvement Act as both versions of the reform legislation appear to do,” he said. “Resolution processes can be highly inefficient and arbitrary — granting far too much discretion to regulators or politicians to rescue some stakeholders and not others. “[I]t is important that we recognize that rules and regulations can have unintended and often undesirable consequences,” Plosser continued. “While the proposals now before Congress claim to have solved the Too Big To Fail problem, I am less convinced.” The House and Senate have each passed a financial reform bill, which the Democratic leadership in both chambers as well as the Obama administration claim will fix the ailments in the financial system that led to the worst financial crisis since the Great Depression. Lawmakers are in the process of reconciling these bills into a single version acceptable to both houses of Congress before sending the final version to President Barack Obama. The importance of forever ending Too Big To Fail can not be understated, according to Plosser and his counterparts across the Fed’s regional banks. “I believe that one of the most important objectives of financial regulatory reform is to address the notion that some firms are Too Big To Fail,” Plosser said. “The recent crisis and actions by policymakers have exacerbated moral hazard and expanded the safety net for failing firms. This is a huge problem that if not adequately addressed will sow the seeds of the next crisis. “If a firm’s creditors believe that the government will rescue them in the event of an impending failure, they will have little incentive to discourage the firm from taking excessive risk. Failure is the ultimate form of market discipline and an essential element of free enterprise. “Individuals must have the freedom to reap the rewards of their success, but they must also be free to fail. As my friend and fellow economist Allan Meltzer has said, “Capitalism without failure is like religion without sin. It doesn’t work.” Meanwhile, administration officials, like Obama’s top economic adviser, Larry Summers, argue that had the proposed resolution process been in place around the time taxpayers were bailing out AIG, the bailout wouldn’t have been necessary. Officials at the New York Fed and the Fed’s Board of Governors in Washington make similar claims. Analysts at Moody’s Investors Service said in a report last week that they doubted whether the proposed legislation truly ends Too Big To Fail, noting that regulators and policymakers would inevitably step in if a systemically-important firm was on the verge of collapse, since by definition such a firm’s dissolution would threaten the broader financial system. Such financial behemoths — which many observers believe to be Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley , among others — enjoy the support of an implicit government backstop. This allows them to issue debt at lower costs than their competitors because their creditors credibly believe that they’ll be bailed out should times get rough. Collectively, the firms save billions of dollars a year thanks to this implicit government guarantee. Fisher, the Dallas Fed chief, and Hoenig, of the Kansas City Fed, argue that the best way to end Too Big To Fail is to break up the nation’s megabanks. In a speech last week, Fisher said the nation doesn’t need ” a few gargantuan institutions capable of bringing down the very system they claim to serve .”

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Bernanke Student Borrows Page From Fischer as Protege Writing Fed Policies

June 11, 2010

By Scott Lanman June 11 (Bloomberg) — William English took up fencing as a sophomore at Yale University in 1980, practicing a sport that has been likened to “physical chess” for its strategy and precision. Those skills will come in handy when he takes over next month as Federal Reserve Chairman Ben S. Bernanke ’s top adviser on monetary policy, a job that puts him in charge of crafting the statements the central bank will use to signal a withdrawal of the most expansive monetary policy in its 96-year history. The task is “about as challenging as any director of that post has ever had,” said former Fed Governor Lyle Gramley , now senior economic adviser at Potomac Research Group in Washington. “Markets have become extremely sensitive to every word the Fed puts out, so a slight mishap and he could send markets for a reel.” English takes over as central bankers debate when to start raising interest their benchmark interest rate from close to zero. They must also decide on the pace and timing of sales of $1.1 trillion of housing debt the Fed bought up in the course of fighting the financial crisis. “These are economic issues that academics are going to be thinking about for generations,” English said in an interview last month at the Fed’s Depression-era Washington headquarters. “I’m sitting in the middle of it, trying to make sense of it in real time.” One of the first steps for policy makers will be to alter the Fed’s pledge to keep its main rate low for “an extended period,” said John Ryding , a former Fed researcher who’s now chief economist at RDQ Economics LLC in New York. In March, Kansas City Fed President Thomas Hoenig , who’s dissented from the panel’s language this year, proposed saying the rate “would be low for some time.” ‘Considerable Period’ Central bankers faced a similar choice in 2003 and 2004, when they cut the federal funds rate to 1 percent and said low borrowing costs were warranted for a “considerable period.” The Fed surprised investors by removing the language in January 2004, sending Treasury and stock prices lower, while the dollar strengthened against the euro and yen. As monetary affairs director, English will oversee about 87 staffers and be responsible for compiling the confidential Bluebook, which outlines policy choices for Fed governors and regional presidents five days before meetings of the rate- setting Federal Open Market Committee. The 49-year-old English, whose 6-foot, 10-inch (2.08-meter) frame has earned him the nickname “Big Bill,” is no stranger to his duties. Since 2008 he has helped draft the statements issued by the FOMC as a deputy director of the Monetary Affairs division under Brian Madigan , who is retiring. Drafting Options English has also worked with Madigan to draft options for policy makers during the financial crisis while collaborating with officials at the Treasury Department and Federal Deposit Insurance Corp. on emergency aid to banks including Citigroup Inc. English “strikes me as a pretty natural successor to Brian Madigan,” said New York University Professor Mark Gertler , who’s collaborated on research with Bernanke. “I don’t think there’s any reason to think there will be a radical shift in policy.” Allan Meltzer , a historian of the Fed, has said its involvement in bailouts and emergency lending programs during the crisis has compromised its independence. He faulted the Monetary Affairs staff for being “far too supportive” of actions by Bernanke and other policy makers. “It’s a difficult job in the best of times,” Meltzer, a professor at Carnegie Mellon University in Pittsburgh, said of English’s new post. “And these are not the best of times.” Mahogany Table English will work with Bernanke before meetings to craft possible decisions and statements. He will then face Bernanke across a 27-foot mahogany-and-granite table, with Fed governors and presidents arrayed on either side. Officials can modify the proposed language of the policy statement before voting on it and releasing it to the public. At the last Fed meeting April 27-28, the FOMC voted 9-1 to leave the target for overnight lending among banks close to zero and retain the “extended period” pledge. The FOMC next meets June 22-23 in Washington. Economists surveyed by Bloomberg News this month expect the Fed to start raising its main rate in the first quarter of 2011, based on the median estimate. The Monetary Affairs division is also responsible for producing minutes of FOMC meetings, the discount lending window for banks and a quarterly survey of senior loan officers at banks. The Fed holds regular meetings eight times a year. Dinner Table Conversation The youngest of four children, English grew up in West Hartford, Connecticut. His interest in finance was spurred by dinner-table conversation with his father, James, who was chief executive officer of Connecticut Bank & Trust Co. in the 1970s and served on the Federal Advisory Council, a group of bank executives that advises the Fed. At Yale in New Haven, Connecticut, English wandered into a gym where the fencing team was practicing and was recruited on the spot because of this height. He earned a bachelor’s degree in economics and mathematics in 1982 and entered graduate school at the Massachusetts Institute of Technology. Among his teachers at MIT in Cambridge was Bernanke, then a 29-year-old visiting professor from Stanford University. His thesis adviser was Stanley Fischer , who now heads Israel’s central bank and who advised Bernanke on his dissertation at MIT in the 1970s. Mervyn King , now Bank of England governor, was also a visiting professor at MIT while English was there. English taught economics at the University of Pennsylvania for six years before joining the Fed in Washington as a banking economist in 1992. He helped Donald Kohn , the Fed’s monetary- affairs director from 1987 to 2001, analyze bank-capital rules. Kohn is retiring this month as Fed vice chairman. “Bill had an enormous capacity for detail and getting into the weeds and understanding the balance sheets of financial institutions,” said Vincent Reinhart , the Fed’s monetary- affairs director from 2001 to 2007 who is now a resident scholar at the American Enterprise Institute in Washington. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

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Builders Rush to Finish Houses as Deadline for U.S. Buyer Tax Credit Loom

June 11, 2010

By Kathleen M. Howley June 11 (Bloomberg) — Construction crews for LGI Homes begin work at 4 a.m., pouring concrete slabs for houses before the heat of a Texas day. They don’t stop until 6 p.m., and usually work six days a week. U.S. builders such as LGI Homes are on a tight deadline to finish houses by the end of June so purchasers can get a federal tax credit of as much as $8,000. Buyers had to sign a contract by April 30 and must complete the transaction by July 1 to qualify. That’s speeding up a construction process that for some builders can take five to six months. “We have people we need to get closed by the end of the month,” said Eric Lipar , 39, chief executive officer of Conroe, Texas-based LGI Homes. “There is a sense of urgency.” Senate Majority Leader Harry Reid proposed a three-month deadline extension yesterday amid concern that a rush of buyers created too big of a backlog. New-home contracts rose 30 percent in March and 15 percent in April, the biggest two-month gain in records dating to 1963, according to the Commerce Department. About a third of the April signings were for homes under construction, and a quarter were for those that weren’t started. Waiting to see if a new home will be finished by the credit deadline can be nerve-racking for buyers, said Charlie Li, a civil engineer in Kansas City, Missouri, who is purchasing a property in the nearby suburb of Overland Park, Kansas. Li drives by the building site every day after work. The four- bedroom house probably will be finished in two weeks, he said. ‘Under the Gun’ “We’re under the gun, because you never know if the weather will impact the schedule,” Li said. “If I don’t see that progress has been made, it makes me nervous.” To complete a sale, builders in most of the U.S. are required to have a certificate of occupancy from local officials attesting the house is finished or at least conforms to building codes. Mortgage lenders usually require the document before closing on a loan. “I’ve seen some building officials require that a house be completely finished before issuing a certificate of occupancy — even the carpets installed,” said Richard Wildermuth, president of Connecticut Valley Homes in East Lyme, Connecticut. “In other towns, all they require is the house conforms to code — things like installed windows, stair railings, a functional bathroom and a working furnace.” Construction Employment Builders are snapping up workers to make the deadline. The jobless rate in the construction industry dropped to 20 percent in May from a high of 27 percent in February. The national unemployment rate for May was 9.7 percent, according to the Bureau of Labor Statistics. The number of people working in residential construction rose to 579,700 in May, up from a 17-year low of 549,800 in February, according to Bureau of Labor Statistics data. That doesn’t include sub-contractors who aren’t on payrolls, such as self-employed plumbers. New-home sales in March and April were concentrated in houses costing less than $300,000, signaling a rise in first- time buyers seeking the tax credit. The maximum benefit of $8,000 is reserved for people who have never owned property, while current homeowners can qualify for as much as $6,500. Entry-level houses tend to be smaller and many can be finished in three months or less, compared with five to six months for larger homes, said David Crowe , chief economist of the National Association of Home Builders in Washington. Still, it’s not easy to build a house that quickly, he said. “Finishing a home in a few months can be done, but the builder would have to work fast,” Crowe said. 45 Days In Texas, the LGI Homes crews have it down to a science, according to Lipar. They can complete a home in about 45 days with a crew of 10 to 12 people on site, including framers, drywallers and electricians, he said. The builder’s entry-level properties cost $110,000 to $170,000 for homes that are 1,100 to 2,500 square feet (102 to 232 square meters), Lipar said. The most popular model is a ranch-style house with three bedrooms, two bathrooms and an attached two-car garage for about $130,000, he said. The National Association of Realtors asked members of Congress to consider extending the tax credit deadline to allow people more time to complete sales, said Lucien Salvant, head of public affairs for the Chicago-based trade group. Reid, a Nevada Democrat whose state has been among the nation’s worst-hit housing markets, proposed moving the date to Sept. 30. “The bulk of the delays are coming from people doing short sales, but we’re also seeing people having problems closing on homes they’re having built,” said Salvant. Short sales are transactions in which a bank accepts less than the balance owed on a property. California Credit In California, the federal tax benefit has been eclipsed by a $10,000 state tax credit for real estate purchased between May 1 and the end of the year. The credit applies to people who buy a new home and first-time homebuyers who purchase either a new or existing property. “We think the California tax credit will be more helpful than the federal,” said Jim Warmington Jr., president and CEO of the Warmington Group, a homebuilder in Costa Mesa, California. The rest of the U.S. may see a sales slump after the end of the federal credit, said John Burns , chairman of John Burns Real Estate Consulting in Irvine, California. Permits, a sign of future construction, fell in April by the most since December 2008, the Commerce Department said in a report last month. “The federal tax credit got people off the fence and pulled a lot of sales forward,” Burns said. “We’re now entering a period where we’ll see the U.S. new-home market trending down.” To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net .

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Simon Johnson: Richard Fisher, Senior Fed Official: White House Is Dead Wrong

June 6, 2010

Richard Fisher, president of the Dallas Fed, has long been a proponent of serious financial sector reform.

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The Top 10 Cities Where It’s Cheaper To Rent Than Buy A Home (PHOTOS)

June 3, 2010

If you’re enamored of the age-old wisdom that renting a home is akin to throwing your money away, think again. A simple calculation called the price-to-rent ratio can give you an indication of whether it’s a better move to rent or buy a home. Trulia, the online real estate data provider , evaluated the price-to-rent ratio in the 50 largest U.S. cities by population. By comparing the average purchase price of a 2-bedroom home — including mortgage fees and maintenance expenses — with the average rental price for 2 bedroom apartments, condos, and townhouses, Truilia came up with a handy, back-of-the-envelope way to gauge a local market. Cities with price-to-rent ratios between 16 and 20 indicate that is cheaper to rent than purchase a home, but certain financial situations may make ownership a viable option. In cities with price-to-rent ratios of 21 and above, it is much more expensive to buy than rent. “It is not a surprise to see cities like New York and San Francisco on the ‘Rent’ cities but I was surprised to see areas like Omaha, Oklahoma City and Kansas City on our rental list, “said Pete Flint, co-founder and CEO of Trulia. “We’re not suggesting that it’s unwise to buy in these areas though — just that it’s significantly more expensive than renting.” “In many of these cities, even though home buying is much more costly than renting, prices are still much lower than they have been in a long, long time,” Flint added. Check out Truila’s list of U.S. cities in which it’s cheaper to rent than buy a home:

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Discount Rate Rise Was Sought by Three Fed Banks Last Month, Minutes Show

May 25, 2010

By Joshua Zumbrun May 25 (Bloomberg) — Directors at three Federal Reserve banks called for an increase in the rate charged on direct loans to banks, according to minutes of Board of Governors meetings released today in Washington. The Fed banks in Kansas City, St. Louis and Dallas called for an increase in the so-called discount rate by a quarter- point to 1 percent. They said the raise would represent “another step toward restoring a pre-crisis discount-rate structure,” according to the minutes. The Board of Governors left the rate unchanged, at the request of the other nine regional Fed boards , which voted last month to keep the discount rate at 0.75 percent. Directors of Fed banks viewed economic data in April as “consistent with a moderate pace of recovery” and saw “persistent downside risks,” according to the minutes. The central bank last raised the rate in February. The Fed has said the February increase represented a “normalization” of lending rather than a change in policy. The central bank has closed almost all of its emergency-loan programs created during the financial crisis. Prior to August 2007, the Fed kept the rate, also known as the primary credit rate, 1 percentage point above the target for the benchmark federal funds rate. The Fed’s Washington-based governors expressed “no sentiment” for changing the discount rate before the next meeting of the Federal Open Market Committee, which took place on April 27-28, according to the minutes. Consumer Spending In their discussions of the economy, regional Fed bank directors saw mixed signals. They said “consumer spending, while still restrained, had been somewhat stronger than anticipated.” Some directors “cited a slight pickup in home sales and construction and improved conditions in financial markets.” Even so, “directors were cautious about the economic outlook,” the minutes said. “Despite recent job growth, companies continued to be tentative about major staffing initiatives.” The economy added 290,000 jobs in April and 230,000 jobs in March, according to a May 7 Labor Department report. To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net .

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`Nervous’ Wall Street Waits for Congress to Kill Limits on Swaps Trading

May 21, 2010

By Christine Harper and Dawn Kopecki May 21 (Bloomberg) — Wall Street banks , surprised that the Senate’s financial overhaul passed with language that could curtail their derivatives trading, are now hoping the rule can be killed in Congressional negotiations. Lawmakers have been telling Wall Street the Senate provision would fail, “but it passed, so people are nervous ,” said Paul Miller , analyst at FBR Capital Markets in Arlington, Virginia. “The problem is that everybody in Congress wants it out, but nobody wants the responsibility of taking it out.” The Senate bill demands that companies like Bank of America Corp. , JPMorgan Chase & Co. , and Goldman Sachs Group Inc. conduct derivatives trading outside of their commercial banking units that benefit from federal support. They could still escape the impact if the rule is stripped out during a conference committee to resolve differences between the Senate bill and one passed by the House of Representatives in December. “There’s a reasonable chance it will remain only because anti-bank sentiment has increased since the House bill was passed,” said Robert Litan , vice president of research and policy at the Kansas City-based Kauffman Foundation, which promotes entrepreneurial economic growth. While the likelihood is hard to handicap, he said, “it’s certainly not zero.” Raj Date , a former Deutsche Bank managing director and now executive director of New York-based research group Cambridge Winter Center for Financial Institutions Policy, said he expects the rule to get watered down in conference. ‘Unmitigated Negative’ “I think that gets eliminated and we end up closer to where the House is,” Date said. Otherwise, “It’s a sort of unmitigated negative for the biggest swaps dealers.” The most likely compromise is that House and Senate members agree to conduct a study of the swaps provision, which may result in killing it eventually, said Brian Gardner , a former congressional staffer who is now senior vice president for Washington research at KBW Inc. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. They include credit-default swaps, which act like insurance for investors in case a debt issuer can’t repay. Swaps sold by American International Group Inc. that later went sour helped push the insurer to the brink of bankruptcy and triggered a $182 billion federal bailout of the New York-based company during the near-collapse of the financial system in 2008. The new swaps rule was drafted by two-term Arkansas Democrat Blanche Lincoln , head of the Senate Agriculture Committee. Earlier this week Lincoln failed to win the Democratic primary and faces a June 8 runoff against Lieutenant Governor Bill Halter for her party’s nomination. Regulators Opposed “The conventional wisdom has been that if she gets the nomination, she has the political room to drop the provision, but as long as she’s running for re-election she’s going to want to continue to take a tough-on-banks stance,” Litan said. Regulators including Federal Reserve Chairman Ben S. Bernanke , Federal Deposit Insurance Corp. Chairman Sheila Bair , and former Fed Chairman Paul Volcker , now an adviser to President Barack Obama , oppose the provision because it could drive derivatives into unregulated parts of the market and to foreign competitors. Moving Trades Customers will move their most complex derivatives trades to European banks such as Deutsche Bank AG , Credit Suisse Group AG or Barclays Capital if the legislation passes, say analysts including Brad Hintz at Sanford C. Bernstein & Co. in New York. Clients who want to buy protection will see a European bank as a stronger, better-backed credit than a U.S. derivatives subsidiary, Hintz said. U.S. commercial banks held derivatives with a notional value of $212.8 trillion in the fourth quarter, according to the Office of the Comptroller of the Currency. The five banks with the biggest holdings of derivatives — JPMorgan, Goldman Sachs, Bank of America, Citigroup Inc. , and Wells Fargo & Co. — hold $206.2 trillion, or 97 percent, of that total, the OCC said. JPMorgan, the second-biggest U.S. bank by assets and the biggest dealer in the over-the-counter derivatives market, would be the most affected by the new rule, Barclays Capital analyst Jason Goldberg wrote in a note to investors today. On April 14, JPMorgan Chief Executive Officer Jamie Dimon estimated the legislation’s new trading and capital requirements for derivatives could affect revenue by anywhere from “several hundred million to a couple billion dollars.” Capital Impact The Securities Industry and Financial Markets Association, which represents JPMorgan and other large derivatives dealers, estimated the provision would require banks to find as much as $250 billion in new capital for the subsidiaries. “It’s hard for me to come up with what’s a worse argument than that,” Date said. “That’s tantamount to saying, ‘Well, we’re undercapitalized today and we prefer to remain undercapitalized, thank you.” Instead, he said, the industry’s argument should focus on the role that banks play in society. “The whole reason for having a banking system is you want banks to be the primary intermediaries for credit risk and interest-rate risk,” he said. To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

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Video: Paul Barrett Says Exchanges Need Consistent Rules: Video

May 21, 2010

May 21 (Bloomberg) — Bloomberg Businessweek’s Paul Barrett talks with Deidre Bolton about the possible causes of the May 6 U.S. stock selloff and the outlook for exchanges’ operations and rules. Almost 1.3 billion shares traded on U.S. markets in a 10-minute span starting at 2:40 p.m., six times the average, sending prices lower on platforms from New York to Kansas City, while the Dow Jones Industrial Average slumped almost 1,000 points intraday before paring losses. (Source: Bloomberg)

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Fed’s `Main Street’ Message to Senators Protected Powers in Financial Bill

May 20, 2010

By Scott Lanman and Craig Torres May 21 (Bloomberg) — Senator John Ensign went into a Capitol Hill meeting with four Federal Reserve bank presidents and emerged to say he was convinced of their “concern for Main Street.” The presidents “argued very vociferously” that a Senate proposal to limit the Fed’s supervisory authority to banks with assets of $50 billion or more would make it “too New York- centric,” the Nevada Republican said after he and other lawmakers attended the May 5 meeting. A week later, Ensign joined 89 senators in voting to let the central bank keep its authority over 5,000 banks. The vote was another victory for the Fed, which months ago faced one of the biggest challenges to its power and independence in its 96- year history as lawmakers responded to public anger over bailouts of Wall Street firms. The amendment Ensign supported was included in the financial regulatory bill the Senate approved yesterday. “The Fed’s authorities seemed to be under serious threat,” said David Nason , a former assistant U.S. Treasury secretary who’s now a managing director at Promontory Financial Group LLC, a Washington-based consulting firm. Instead, the Fed “appears to have regained its footing and now appears to be emerging with at least as much authority and likely more.” The Senate voted 59-39 to approve a sweeping overhaul of Wall Street regulation that would create a consumer protection agency, a mechanism for liquidating large failing financial firms and a council of regulators to monitor companies for threats to the economy. The measure next goes into negotiations designed to reconcile differences with the House bill approved in December. Audits Avoided The Senate bill contains most of what Fed officials sought. In addition to preserving their bank-supervisory powers, it maintains a ban on congressional audits of interest- rate decisions that some lawmakers had sought to strip away. Ensign joined most Republicans in opposing the final legislation, saying in a floor speech that it failed to deal with Fannie Mae and Freddie Mac, the housing-finance companies seized by the government in 2008, and “does nothing to address real reform.” The outcome puts Fed Chairman Ben S. Bernanke in a stronger position to withdraw record monetary stimulus as the economy recovers from the deepest recession since the 1930s, said Senator Claire McCaskill of Missouri, a state that is home to the Federal Reserve banks of Kansas City and St. Louis. ‘Not as Informed’ “They’ve done a good job of educating without lobbying,” said McCaskill, 56, a first-term Democrat who spoke with Kansas City Fed President Thomas Hoenig and St. Louis’s James Bullard during the debate. “A lot of members of Congress were not as informed as they should have been about what the Federal Reserve is and how it works.” The Fed didn’t get everything it wanted. The bill would make the New York Fed president a political appointee, a move opposed by Hoenig and Bullard, and put the consumer-protection agency inside the central bank without giving it a direct role in running the new bureau. Another change for the Fed: the Senate bill would create a second vice chairman in charge of supervision. Hoenig, a veteran of a 1980s crisis sparked by an Oklahoma bank failure, played a leading role in the Fed victories. The longest-serving regional president, Hoenig, 63, was among the officials who met with Ensign and other lawmakers on May 5. He took two more trips to Washington than planned this year and used extra time on other visits to meet legislators. Letters to Senators He kicked off the presidents’ efforts to keep their authority to supervise banks with a letter to senators in February, persuaded colleagues to speak up and worked with state regulators and community lenders to get the message across: removing the oversight of small banks would harm the Fed’s ability to respond to a financial crisis. “We spoke our mind on the importance of our role in supervision and for the role of the regional reserve banks,” Hoenig said in an interview. “A lot of senators said, ‘I didn’t understand this, this is helpful.’” The Fed suffered a setback on Nov. 10, when Senate Banking Committee Chairman Christopher Dodd , a Connecticut Democrat, introduced a financial-overhaul proposal that included stripping the Fed of all bank oversight. Then the Fed Board’s legislative-affairs chief, Linda Robertson, began to call on the regional Fed bank presidents for help, according to a person familiar with the matter. Enlisting Bankers Robertson asked regional Fed chiefs to enlist directors and local bankers to contact senators who were reluctant to back Bernanke for a second four-year term. The Fed chief was confirmed Jan. 28 in a 70-30 vote, the most opposition since the chamber started confirming the chairman in 1978. Bernanke’s supporters, including New York Democrat Charles Schumer , said the 56-year-old former Princeton University economist helped save the nation from another depression. Opponents such as Alabama Republican Richard Shelby faulted him for failing to curb the lending practices that helped trigger the crisis and for his bailouts of Bear Stearns Cos. and American International Group Inc . At the same time, the fight was on to preserve the Fed’s supervision powers. In a January letter to Dodd and other members of the Senate Banking Committee, Bernanke argued that the Fed needs the authority to effectively conduct monetary policy and provide emergency loans to banks. Bernanke made the same argument in testimony to Congress in February and March. Regional Fed presidents began writing letters and visiting legislators while stepping up their attacks on the Dodd legislation in public comments. Local Knowledge In one-on-one meetings, the presidents stressed their local knowledge, or what Richmond Fed President Jeffrey Lacker calls “retail central banking.” “I can talk about real estate on the North Carolina and South Carolina coasts, and the economy in Danville, Virginia,” Lacker said in an interview. Such anecdotes provided “vivid examples of what our connection with the district really is.” The Fed also enlisted banking associations to send hundreds of bankers to Capitol Hill March 17. Their message: The Fed should keep its power to regulate smaller state-chartered banks to avoid developing a bias toward Wall Street firms. By April, several Republican senators started to show support for the Fed’s stance, including Shelby and Kay Bailey Hutchison of Texas. Hutchison filed an amendment to Dodd’s bill, retaining the Fed’s power to oversee small banks. The amendment was approved in a 90-9 vote. Audit Measure On a separate front, Fed officials wanted to head off the Senate version of the House-passed measure to audit the Fed, saying removing the shield from monetary-policy reviews would open the door to political meddling in interest rates. Senator Bernard Sanders , a Vermont independent and a self-declared socialist, had one-third of his colleagues as co-sponsors for the measure. Sanders demanded transparency on $2 trillion of emergency aid from the Fed, while the Obama administration, along with senators such as Dodd and New Hampshire Republican Judd Gregg , opposed removing the shield. To secure passage, Sanders agreed to rewrite the amendment to provide for only a one-time audit of the Fed’s emergency lending programs. Representative Ron Paul , the Texas Republican who wrote the original House measure, said Sanders “sold out.” The compromise, along with lobbying by Bernanke, won over enough Senators to vote against a separate amendment, offered by Louisiana Republican David Vitter and patterned after the House language. The Fed “gave a little ground,” said Senator Sam Brownback , a Kansas Republican. Senator Bob Corker , a Tennessee Republican, said the Fed “ended up negotiating something that really did create more transparency. And yet it’s the kind of transparency that won’t really undermine their ability to do things in their Open Market Committee.” To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Small-Bank Authority of Federal Reserve Is Preserved in U.S. Senate Vote

May 12, 2010

By Alison Vekshin and Scott Lanman May 12 (Bloomberg) — The U.S. Senate today approved an amendment to the financial-overhaul bill to retain the Federal Reserve’s powers to supervise small banks, in a victory for the central bank and industry lobbyists. Lawmakers voted 90-9 for the amendment offered by Senator Kay Bailey Hutchison . The Senate bill, as written by Banking Committee Chairman Christopher Dodd , would have limited the Fed’s jurisdiction to banks with more than $50 billion in assets, including Goldman Sachs Group Inc. and Morgan Stanley . The Fed should keep its powers so Fed banks “all over the country will have the input of the community banks in our system rather than making monetary policy from New York and Washington,” Hutchison, a Texas Republican, said yesterday. The vote marked the second day in a row that the Fed dodged attempts to rein in its powers. Senators yesterday rejected a plan for continuous congressional inquiries into central bank policy, approving instead a one-time audit of Fed emergency actions since December 2007. The sponsor, Senator Bernard Sanders , a Vermont Independent, narrowed his original audit plan amid concerns it threatened the Fed’s independence. Dodd, a Connecticut Democrat who voted against the Hutchison amendment, is among lawmakers who have criticized the central bank for failing to curb lending abuses that led to the financial crisis. “My concern has been that the Fed did not exactly live up to its reputation” and “contributed in major ways to the problems we are in today,” he said during debate. Bernanke’s Argument Dodd’s bill would have moved oversight of smaller banks now supervised by the Fed to the Federal Deposit Insurance Corp., which oversees smaller banks, and the Office of the Comptroller of the Currency, the regulator of national banks. The Fed urged senators to remove that language from the bill, saying the central bank needs an overview of the entire system to set monetary policy. Fed Chairman Ben S. Bernanke said in March that the Fed’s “participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions.” Presidents of the regional Fed banks, including Thomas Hoenig of the Kansas City Fed and the Dallas Fed’s Richard Fisher , stepped up their lobbying efforts in February, writing and visiting senators to make their case for keeping supervision. Under Dodd’s bill, 11 of the 12 regional Fed banks would see their supervision reduced to just a few or no banks. Fisher “came to my office to make this point most affirmatively, that he wanted to make sure he still had the supervisory power and the ability to learn from the state banks, the community banks in the whole region,” Hutchison said yesterday. Visiting Congress Financial-industry lobbying groups, including the Washington-based Independent Community Bankers of America and the American Bankers Association, have blanketed congressional offices with visits from small-bank executives to urge senators to allow the Fed to keep its powers. “Without a window into the nation’s community banks, monetary policy and Federal Reserve bank operations would become badly skewed to a Wall Street bias,” ICBA president Camden Fine said today in an e-mail. “That serves neither Main Street nor Wall Street’s interests.” Lyle Gramley , a former Fed governor, now senior economic adviser at Potomac Research Group in Washington, said after the vote: “This is important in terms of retaining the kind of strength that the reserve banks have in the policy-making process.” Without the supervisory powers, Gramley said, the regional banks’ influence could have diminished over time and “created a Federal Reserve system dominated by what’s going on in Washington.” To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .

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Sprint Retreats From Plan to Offer Google Nexus One in Favor of HTC’s Evo

May 10, 2010

By Greg Bensinger May 10 (Bloomberg) — Sprint Nextel Corp. retreated from plans to offer Google Inc. ’s Nexus One mobile phone, the second U.S. carrier within two weeks to abandon the device in favor of other handsets powered by the Android operating system. Sprint will instead focus on the HTC Corp. Evo phone, which is set to debut this year and will run on fourth-generation, or 4G, networks, said Stephanie Vinge-Walsh, a spokeswoman for the third-largest U.S. wireless carrier. “We really feel that it’s better than Nexus One,” she said in an interview today. Verizon Wireless , the largest U.S. mobile-phone company, last month backed off from plans to carry the Nexus One, which was released this January. The phone competes with Apple Inc.’s iPhone and Research In Motion Ltd.’s BlackBerry. Mike Nelson, a spokesman for Mountain View, California- based Google, didn’t immediately return a call seeking comment. Sprint, based in Overland Park, Kansas, added 20 cents, or 5.1 percent, to $4.04 at 4:15 p.m. in New York Stock Exchange composite trading . The shares have gained 10 percent this year. Google climbed $28.51, or 5.8 percent, to $521.65 in Nasdaq Stock Market trading and has declined 16 percent this year. To contact the reporter on this story: Greg Bensinger in New York at gbensinger1@bloomberg.net

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Fed Hinting of Mortgage Bond Sales Brings Bernanke to Brink of Tightening

May 10, 2010

By Scott Lanman and Caroline Salas May 10 (Bloomberg) — Words may speak louder than actions for Federal Reserve Chairman Ben S. Bernanke when the time comes to outline plans to raise interest rates and shrink the central bank’s balance sheet . Altering a pledge to keep short-term borrowing costs low or articulating plans to begin selling the $1.1 trillion in mortgage-backed securities it now holds will amount to a tightening of monetary policy because the announcements will send bond yields higher, raising borrowing costs, said Mitch Stapley , chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan. That means Fed officials may be more likely than traders anticipate to keep the benchmark federal funds target rate near zero through the end of the year, according to former Fed Governor Laurence Meyer . Bernanke’s challenge is to calibrate communications so he and his colleagues retain the flexibility to pace and time their actions to the strength of the recovery. “This market is going to discount anything they do from the immediate moment that the words pass their lips,” said Stapley, who manages $13 billion in fixed-income assets. “The problem is the Fed needs the ability to work within shades of gray, and the market sees things in black and white.” As the economy rebounds from the worst financial crisis since the Great Depression, the Fed must decide when to cease saying that economic conditions “warrant exceptionally low levels of the federal funds rate for an extended period,” a phrase it introduced in March 2009. It also must determine how to normalize a balance sheet that ballooned to a record $2.34 trillion after the purchase of $1.25 trillion of mortgage-backed securities. Unwind Portfolio An announcement outlining how the Fed plans to unwind its portfolio will likely widen by as much as 50 basis points the yields on agency mortgage bonds relative to benchmark rates, according to Scott Buchta , head of investment strategy at Guggenheim Securities LLC in Chicago. Removing the “extended period” language would cause yields on two-year Treasury notes to increase by as much as 50 basis points in the following two weeks, said Paul Gifford , chief investment officer at 1st Source Investment Advisors in South Bend, Indiana. The notes yielded 81 basis points , or 0.81 percentage point, last week, according to Bloomberg data. “You’re obviously going to see rates back up,” said Gifford, who manages $1 billion in fixed-income assets. Asset-Bubble Risk A majority of Fed officials, led by Bernanke, has resisted changing key phrases in the Federal Open Market Committee’s statement, even with three consecutive dissents from Thomas Hoenig , president of the Federal Reserve Bank of Kansas City. He says the “exceptionally low” for an “extended period” pledge risks creating asset bubbles and limits the central bank’s ability to raise rates. The Fed will release minutes of its April 27-28 meeting next week, including updated projections of economic growth, inflation and unemployment from the 17 central bankers. In January, they projected a fourth-quarter jobless rate of 9.5 percent to 9.7 percent and expansion for the year ranging from 2.8 percent to 3.5 percent. The economy contracted 2.4 percent in 2009. Employers added 290,000 jobs last month, the most in four years, as the unemployment rate rose to 9.9 percent from 9.7 percent, the Labor Department said May 7. The payrolls increase exceeded the median estimate of economists surveyed by Bloomberg News and followed a 230,000 gain in March that was larger than initially estimated. ‘Policy Instrument’ The Fed introduced occasional public statements after interest-rate decisions in 1994, and since then its announcements have become “more of a policy instrument,” said J. Alfred Broaddus Jr. , who served as Richmond Fed president from 1993 to 2004. While the statements became a regular feature in 1999, the wording wasn’t subject to a vote until 2000 and then only for a portion dealing with risks to the economy. FOMC members began voting on the entire statement in 2007. The Fed sees “the communication as having a greater degree of flexibility than an actual move with the funds rate,” Broaddus said. If market reaction to a plan for higher rates or home-loan bond sales were “really adverse and it shot mortgage rates from 5 percent to 6.5 percent, they could come out and say, ‘On second thought, we’re going to hold them,’” Fifth Third’s Stapley said. The Fed will start selling mortgage-backed bonds by the end of 2010, Guggenheim’s Buchta predicted. That’s because the central bank owns a lot of lower-coupon securities exposed to so-called extension risk, when bonds remain outstanding longer than investors expect, he said. Fannie, Freddie Higher bond yields would raise borrowing costs for Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac , which have been surviving on government aid since regulators seized the mortgage companies in September 2008. “It’s important that they handle the announcing properly,” Buchta said. Fed officials know from prior experience that they need to be careful. The central bank was in a similar situation in January 2004, when the federal funds target was 1 percent and policy makers had been saying since August 2003 it would stay low for a “considerable period.” On Jan. 28, 2004, the Fed roiled markets when it unexpectedly dropped that phrase. Investors interpreted the change to mean a rate increase would come sooner than they anticipated, sparking a 1.4 percent decline in the Standard & Poor’s 500 stock index and a slump in Treasury prices. ‘Expectations-Sensitive’ “Language is more important than actions at this point, because the markets are very expectations-sensitive now, and language now has enormous impact on expectations,” said Gregory Hess , a former Fed researcher who’s an economics professor at Claremont McKenna College in California and a member of the Shadow Open Market Committee , a group of economists that critiques the Fed. After the collapse of Lehman Brothers Holdings Inc. in September 2008 intensified the financial crisis, the central bank cut the federal funds rate target on overnight loans between banks to a record-low range of zero to 0.25 percent in December 2008 and has left it there ever since. The Fed unveiled its program to buy agency mortgage bonds in November 2008 in an effort to bolster the housing market by reducing financing costs. The announcement sent yields on the securities down before the central bank actually began buying the debt in January 2009. Yields on Fannie Mae’s 4.5 percent mortgage bonds tumbled to 4.15 percent on Dec. 31, 2008, from 5.47 percent on Nov. 24, 2008, the day before the plan was revealed, Bloomberg data show. Home Loans The program succeeded in helping trim costs on new-home loans, with the average rate on a typical U.S. fixed-rate mortgage dropping to 5.12 percent on March 31, 2010, the day the program ended, from 5.98 percent on Nov. 24, according to Bankrate.com data. As the economy has shown signs of recovering, the FOMC has already tweaked the tone of its statements. It added in November that its commitment to keeping rates at record lows depends on when the labor market, inflation and price expectations pick up. Minutes of the March 2010 meeting said the pledge wouldn’t prevent officials from taking action when needed to keep inflation in check, while a few officials warned of the risks of increasing borrowing costs too soon. No Rush Bernanke has signaled he’s in no rush to raise rates. In April 14 congressional testimony, he said the U.S. expansion will remain moderate as the economy contends with weak construction spending and unemployment near a 26-year high . The FOMC last month also reiterated that price growth is “likely to be subdued for some time,” which allows policy makers to delay any rate increases. The Fed’s preferred inflation gauge — the core personal- consumption expenditures price index , which strips out food and energy — rose at an annual rate of 0.6 percent in the first quarter, the slowest pace since records began in 1959, according to an April 30 Commerce Department report. “The life expectancy of ‘extended period’ is a lot longer than the markets think,” said Meyer, who served at the Fed from 1996 to 2002 and is now vice chairman at St. Louis-based Macroeconomic Advisers LLC. He expects the Fed will wait until the first quarter of 2011 to change the phrase and then raise the benchmark rate in the middle of next year. “You change the language when you want the markets to believe that the rate increase is now very close,” he said. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net Caroline Salas in New York at csalas1@bloomberg.net

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Electronic Trading to Blame for Stock Market Plunge, NYSE’s Leibowitz Says

May 6, 2010

By Chris Nagi and Matt Miller May 6 (Bloomberg) — Computerized trades sent to electronic networks turned an orderly stock market decline into a rout today, according to Larry Leibowitz , the chief operating officer of NYSE Euronext. While the first half of the Dow Jones Industrial Average’s 998.5-point plunge probably reflected normal trading, the selloff snowballed because of orders sent to venues with no investors willing to match them, Leibowitz said in an interview on Bloomberg Television. “If you look at the charts you can see fairly clearly where the trades came in,” he said from New York. “It’s that V-shaped drop where it came down and snapped right back up. You had some very high-cap stocks trading down 50 percent or large percentages in a split instant because there really was no liquidity in electronic markets.” The selloff briefly erased more than $1 trillion in market value as the Dow average tumbled 9.2 percent, its biggest intraday percentage loss since 1987, before paring the drop. More than 29.4 billion shares changed hands on all U.S. venues today, including traditional exchanges such as the NYSE, rivals Bats Global Markets Inc. in Kansas City and Jersey City, New Jersey-based Direct Edge, and other electronic platforms. The level compares with 2.58 billion traded on the NYSE, making it the biggest gap in more than three years, data compiled by Bloomberg show. More Venues Increasing automation and competition have reduced the Big Board and Nasdaq’s volume in securities they list from as much as 80 percent in the last decade. Now, two-thirds of trading in their companies takes place off their networks because orders are dispersed across dozens of competing venues. Nasdaq OMX Group Inc. said it will cancel stock trades that were more than 60 percent above or below prices at 2:40 p.m. New York time, just before U.S. equities plummeted. The New York-based firm, which investigated trades between 2:40 p.m. and 3 p.m., said it will provide a list of stocks affected and the prices at which the trades will be canceled. “The fact that it snapped back so quickly made it clear that it was an aberration,” Leibowitz said. “When a large order or series of orders comes into electronic markets, they don’t really have any way to recognize either that they’re a mistake or to slow them to down to attract the proper liquidity on the other side. And so the electronic markets actually traded all the way through the slower New York Stock Exchange markets where we were trying to slow down trading.” To contact the reporters on this story: Chris Nagi in New York at chrisnagi@bloomberg.net ; Matt Miller in New York at mtmiller@bloomberg.net

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Bernanke Says Bank Attitudes Toward Lending May Be Shifting Amid Recovery

May 6, 2010

By Scott Lanman and Vivien Lou Chen May 6 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said he’s optimistic that U.S. banks may start making it easier for customers to get credit after the financial crisis led lenders to tighten standards. “Although bank credit remains tight, I see some reasons for optimism,” Bernanke said today in a speech in Chicago. The economy is recovering, and banks’ senior loan officers expect a “modest reduction in their troubled loans” over the next year, outside of commercial real estate, he said. “As a result, bank attitudes toward lending may be shifting.” Fed policy makers last week reiterated their assessment that “tight credit” is restraining consumer spending, which represents about 70 percent of the U.S. economy. On the business side, banks’ commercial and industrial loans have declined to $1.27 trillion from $1.65 trillion in October 2008, according to data from the central bank. The latest quarterly survey of banks’ senior loan officers, released May 3, showed that most banks reported unchanged lending standards over the past three months and “no net tightening” of standards for small businesses, Bernanke said in his remarks to an annual banking conference hosted by the Chicago Fed. He devoted most of his speech to the Fed’s 2009 stress tests of the 19 biggest U.S. banks. Bernanke and other Fed officials say the project helped stabilize financial markets. Tomorrow marks one year since the examination showed that 10 firms needed to raise a total of $74.6 billion in capital. Identifying Risks Central bankers are trying to apply lessons from the project to better identify emerging risks in the financial system. With the stress tests, “we hoped also to hasten the return to a better lending environment,” Bernanke said today. “Clearly that objective has not yet been realized, as bank lending continues to contract and terms and conditions remain tight. Consequently, restoring the flow of credit through the banking system remains a central objective of the Federal Reserve.” Bernanke, 56, said credit demand remains “tepid” and the economy is “still under stress.” He didn’t elaborate on the outlook for the economy or monetary policy. Last week, the Fed’s Open Market Committee reiterated its pledge to keep the benchmark lending rate at a record low for an “extended period,” saying that while the labor market is showing signs of life, employers remain reluctant to hire, and consumer spending is restrained by tight credit and limited wage gains. Additional Capital Many smaller banks across the country may need additional capital in the next few years because of potential losses from residential and commercial real estate loans, Bernanke said. “We will continue to work closely with smaller banks as they rebuild their financial strength,” he said. The Fed has approved many proposals over the past two years from private-equity investors to take stakes in regional and community banks, Bernanke said. The central bank is fighting a measure in proposed Senate financial-overhaul legislation that would strip the central bank of oversight of 5,000 firms with less than $50 billion in assets. Republican Senator Kay Bailey Hutchison of Texas and Democrat Amy Klobuchar of Minnesota are sponsoring an amendment to the bill to let the Fed keep the powers. Yesterday, Kansas City Fed President Thomas Hoenig and three other regional Fed presidents met with lawmakers to make their case. Nevada Senator John Ensign , a Republican, said the Fed officials “argued very vociferously” to retain oversight. “That concept certainly seemed to have a lot of merit,” Ensign told reporters after the meeting. Senate Banking Committee Chairman Christopher Dodd , the Connecticut Democrat who proposed removing the authority, has called the Fed’s record on bank supervision “abysmal” and has said its reduced role would it allow it to focus on monetary policy. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net .

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Yellen Anti-Inflation Credentials at Fed Are Defended by Gramley, Blinder

April 30, 2010

By Vivien Lou Chen April 30 (Bloomberg) — When Janet Yellen was first reported to be President Barack Obama ’s choice for Federal Reserve vice chairman early last month, the dollar weakened on speculation she would help keep interest rates at a record low through the end of the year. Less than two weeks later, the former professor at the University of California, Berkeley told reporters that she’d be ready to tighten policy to avoid kindling inflation. She pointed out that she had supported interest-rate increases 20 times in her years as a Fed governor from 1994 to 1997 and as president of the San Francisco Fed starting in 2004. “The Fed has to be ready to take away the punch bowl when it’s necessary,” Yellen, 63, said after a speech on March 23. “When the time has come, am I going to support raising interest rates ? You bet.” Investors should take her words at face value, say economists including Lyle Gramley , a former Fed governor, and Alan S. Blinder , a former vice chairman. “When inflation pops its ugly head up, Janet will be there as strongly anti-inflationary as anybody on the committee,” said Gramley, a senior economic adviser for Potomac Research Group in Washington. Obama yesterday announced he will nominate Yellen to the Fed’s seven-person Board of Governors, along with Sarah Bloom Raskin , Maryland’s commissioner of financial regulation, and Peter Diamond , an economics professor at the Massachusetts Institute of Technology. ‘Extended Period’ Yellen, if confirmed by the Senate, would join the Fed board as it considers when to signal an end to its policy of keeping interest rates low for an “extended period.” The Federal Open Market Committee this week renewed that pledge, prompting Kansas City Fed President Thomas Hoenig to dissent for a third straight meeting, saying the language limits the Fed’s ability to increase rates “modestly.” The Brooklyn-born economist would replace Donald Kohn , a 40-year veteran of the central bank. She would preside over board meetings in Chairman Ben S. Bernanke ’s absence and get a permanent vote on monetary policy, instead of having a vote one year out of every three as a regional Fed chief. Yellen would have a four-year term as vice chairman and a separate term as a governor. Yellen, in a statement yesterday, said she’s “strongly committed” to the central bank’s dual mandate from Congress to keep inflation low and stable while promoting maximum employment. Job Creation “If confirmed, I will work to ensure that policy promotes job creation and keeps inflation in check,” Yellen said. In an April 15 speech, Yellen said she’s increasingly certain the U.S. economy is “on the right track,” and that officials will “at some point” need to lift borrowing costs. Still, “it’s important not to lose sight of just how fragile this recovery is,” she said. Policy makers are contending with an unemployment rate that has been stuck at 9.7 percent for three straight months even as payrolls started to grow. Fed officials this week repeated that inflation is likely to be “subdued” and that consumer spending is held back by tight credit and weak income growth. U.S. central bankers have kept the benchmark lending rate in a range of zero to 0.25 percent since December 2008. Their purchases of $1.25 trillion in mortgage-backed securities, which ended last month, boosted the balance sheet to a record $2.34 trillion, creating concern among some officials that aggressive monetary stimulus could lead to imbalances later. Growth Forecast Gross domestic product grew at a 3.3 percent annual pace in the first quarter, according to the median forecast of economists surveyed by Bloomberg News ahead of a report today from the Commerce Department. After a 5.6 percent expansion in the prior three months, such growth would mark the best back-to- back performance since the last six months of 2003. Conditions in financial markets have also improved. Raytheon Co ., the world’s largest missile maker, and the finance unit of Royal Dutch Shell PLC led a drop in U.S. industrial company debt yields to 129 basis points more than similar- maturity Treasuries last week, according to Bank of America Merrill Lynch index data. Yellen spent most of her career teaching economics and researching labor markets, joining the University of California at Berkeley in 1980. She and her husband, George Akerlof , a Nobel Prize-winning economist, have written more than a dozen papers that included studies on unemployment, wages, street gangs and out-of-wedlock births. Goes to Washington In 1994, then-President Bill Clinton appointed Yellen to be a Fed governor in Washington, where she served until 1997, when she was moved to the White House to chair the Council of Economic Advisers. She left the position in 1999 to return to Berkeley. “You can’t put her in a box,” said University of California professor Aaron Edlin, who has known Yellen for 22 years and worked with her on the Council of Economic Advisers. “If dove means she cares about people who are unemployed, I suppose you can say she’s a dove. But it’s not the case that she doesn’t care about inflation.” Yellen rejoined the Fed in 2004 as president of its San Francisco district bank, which represents the largest region by area and economic output. In her years as a policy maker, she has never dissented from the FOMC’s majority on an interest-rate decision. Rate Risks In April 2006, Yellen became the first Fed official to warn about the risks of raising the overnight lending rate between banks too far. Her remarks foreshadowed an end to a two-year long campaign to lift the federal funds rate in quarter-point increments from a low of 1 percent. The committee stopped at 5.25 percent after its June 2006 meeting and left borrowing costs at that level for more than a year. “Janet’s very cognizant of the dangers of overstaying tightening or easing because of the failure to take into account long lags in policy,” said Blinder, a co-author of a 2001 book with Yellen called “The Fabulous Decade: Macroeconomic Lessons from the 1990s.” Then, in a September 2007 speech in San Francisco, Yellen appeared to signal another shift, saying that the U.S. economy was under “significant downward pressure” from turmoil in credit and housing markets. The Fed lowered the fed funds rate target a week later by a half point to 4.75 percent, the first cut in four years, to protect the U.S. from sinking into a recession. “If I were on the board right now, I would be as dovish in my remarks as she is,” Gramley said. “I don’t worry about her dovishness. She is an intellectual powerhouse. She has the enormous respect of her colleagues. She’s going to be a huge asset as the vice chairman of the Fed.” To contact the reporters on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

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Obama’s Fed Choices Will Help Bernanke Engineer Exit From Record Stimulus

April 28, 2010

By Scott Lanman and Hans Nichols April 29 (Bloomberg) — President Barack Obama’s appointment of three Federal Reserve governors will bring the board to full strength for the first time in four years, helping Chairman Ben S. Bernanke manage a withdrawal of record monetary stimulus and an overhaul of bank supervision. Obama today plans to announce his choice of San Francisco Fed President Janet Yellen to be vice chairman of the Board of Governors under Bernanke, according to two people familiar with the decision. Obama will also name Sarah Bloom Raskin , Maryland’s commissioner of financial regulation, and Peter Diamond , an economics professor at the Massachusetts Institute of Technology, to the seven-person board. The three, who are subject to Senate confirmation, join the board as it considers when to signal an end to its policy of keeping interest rates low for an “extended period.” The Federal Open Market Committee yesterday renewed that pledge, prompting Kansas City Fed President Thomas Hoenig to dissent for a third straight meeting, saying the language limits the Fed’s ability to increase rates “modestly.” “This will be a group of doves slanted toward job creation and growth, increasing the likelihood of rates staying low for a long time,” said former Atlanta Fed research director Robert Eisenbeis , now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey. Yellen, 63, would replace Donald Kohn , who said in March he would step down June 23 after a 40-year Fed career. She would gain a more prominent role in Fed policy with a permanent vote on the FOMC, instead of having a vote one year out of every three as a regional Fed chief. All governors have a vote on rate decisions. ‘Right Track’ In an April 15 speech, Yellen said she’s increasingly certain the U.S. economy is “on the right track,” and that officials will “at some point” need to lift borrowing costs. Still, “it’s important not to lose sight of just how fragile this recovery is,” she said. Yellen spent most of her career teaching economics and researching labor markets, joining the University of California at Berkeley in 1980. She and her husband, George Akerlof , a Nobel Prize-winning economist, have written more than a dozen papers that included studies on unemployment, wages, street gangs and out-of-wedlock births. In 1994, then-President Bill Clinton appointed Yellen to be a Fed governor in Washington, where she served until 1997, when she was moved to the White House to chair the Council of Economic Advisers. She left the position in 1999 to return to Berkeley. Yellen rejoined the Fed in 2004 as president of its San Francisco district bank, which represents the largest region by area and economic output. She has always voted with the majority of policy makers on interest-rate decisions. Regional Banks The Fed has 12 regional Fed banks. The president of the New York Fed, currently William Dudley , has a permanent vote on the FOMC; the heads of the other regional banks rotate. The San Francisco Fed president doesn’t vote again until 2012. Raskin, a 49-year-old attorney, was appointed in August 2007 as Maryland’s top banking regulator. She was previously managing director of Promontory Financial Group, a consulting firm, and worked at the New York Fed and as a counsel for the Senate Banking Committee. She graduated from Harvard Law School in 1986. Her husband, Jamie Raskin , is a law professor and a Democratic Maryland state senator. Diamond, a specialist in taxation and behavioral economics who turns 70 today, has written widely on overhauling entitlement programs. His 2003 book “Saving Social Security” was co-written with Peter Orszag , director of the Office of Management and Budget. He joined MIT’s faculty in 1966. ‘Widely Respected’ “The new nominees, particularly Yellen and Diamond, are widely respected centrists who will help the chairman ensure that reason prevails in FOMC decisions,” said New York University economist Mark Gertler , who co-wrote research with Bernanke. The Senate agreed yesterday to begin debate on a Democratic proposal for the biggest restructuring of financial-market oversight since the 1930s as Republicans abandoned their effort to stall the bill’s progress. The legislation is aimed at strengthening regulations in response to the financial crisis that led to bailouts for firms such as Citigroup Inc. and Bank of America Corp. The bill, sponsored by Senate Banking Committee Chairman Christopher Dodd of Connecticut, would set up a new consumer- protection regulator, create a mechanism to dismantle firms whose failure threatens the financial system, and strengthen oversight of derivatives and hedge funds. Reduced Oversight Dodd’s bill would also strip the Fed of oversight of about 5,000 banks across the U.S. and focus its role on supervising about 36 large firms with assets of more than $50 billion. Dodd has called the Fed’s record on bank supervision “abysmal” and has said its reduced role would it allow it to focus on monetary policy. Bernanke has said that supervising a larger number of banks allows the Fed to keep its finger on the pulse of the economy, helping its interest rate decisions. At the same time, Fed Governor Daniel Tarullo is leading an internal revamping of Fed supervision. If confirmed by the Senate, Yellen, Diamond and Raskin would give the Fed a full seven-member complement of governors for the first time since April 2006. President George W. Bush tried to fill the slots with three nominees in 2007: Elizabeth Duke was approved in 2008, while Larry Klane and Randall Kroszner were blocked by Senate Democrats. Obama appointed Tarullo in January 2009. The timing of the announcement fits Yellen’s schedule: She was in Washington attending the FOMC’s meeting this week. The central bank’s policy panel yesterday restated its intention to keep the benchmark interest rate near zero for an “extended period.” While Yellen doesn’t have an FOMC vote this year, all 12 regional-bank presidents participate at each meeting. To contact the reporters on this story: Hans Nichols in Washington at hnichols2@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net

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Euro Slide Leaves U.S. CEOs Wringing Hands With Profit Forecasts at Risk

April 28, 2010

By Rachel Layne and Carol Wolf April 29 (Bloomberg) — United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated. The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009. “It’s one of those things that you can’t control,” Hayes said in an interview April 23. “In fact, I think our stock is actually down the last couple of days because of this Greece crisis.” Terex Corp., DuPont Co. , McDonald’s Corp. and Johnson & Johnson also said in the past two weeks that the euro’s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy. Analysts, who have cut their second-quarter forecast for Europe’s common currency every month this year, expect it to trade at $1.35 in June and $1.32 by December. The euro will weaken to $1.30 by the first quarter of 2011, according to the median of economists’ estimates compiled by Bloomberg. ‘Hand-Wringing’ “U.S. CEOs are going to be doing a lot of hand-wringing over the next couple of quarters,” said Thomas Laming , a money manager with Scout Investment Advisors in Kansas City, Missouri, which manages $10 billion in assets. “There is going to be an impact on U.S. multinationals. It may cause some companies to miss the earnings estimates that are out there.” DuPont, the third-biggest U.S. chemical maker, is expecting the euro to average $1.34 this year, Chief Financial Officer Nicholas Fanandakis said. Currency exchange added 10 cents to per-share earnings in the Wilmington, Delaware-based company’s first quarter, and that may deteriorate to as little as 5 cents for the year, he said. “As the dollar strengthens, for us it is a headwind,” Fanandakis said this week in a telephone interview. More Expensive Goods McDonald’s recorded a 5 cent benefit to earnings per share in the first quarter. That was at the low end of a 5 cent to 6 cent forecast the company gave in January because of the strengthening U.S. dollar against the euro and the pound. Currency fluctuations will hurt earnings in the second half of the year, based on current exchange rates and McDonald’s business outlook, Chief Financial Officer Peter Bensen said on an April 21 conference call with analysts. For the year, the company still anticipates exchange rates will add to earnings, he said. Bensen said his outlook could change. “We recognize this estimate becomes outdated within days,” Bensen said. McDonald’s, based in Oak Brook, Illinois, got about 40 percent of its $5.61 billion in revenue from Europe in the first quarter. Lizzie Roscoe, a spokeswoman for McDonald’s, declined to comment beyond Bensen’s statements. “McDonald’s sells more hamburgers overseas than they do in the U.S.,” Marc Chandler , global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a April 27 phone interview. “That will have a notable impact, especially when you couple that with the fact that the euro has been falling for the better part of six months.” Air Conditioners, Helicopters At Hartford, Connecticut-based United Technologies , Hayes had a “contingency plan” — a cushion in his forecast — of $250 million because he was concerned about the euro. In March, he told investors he cut it in half, to $125 million, with the euro at a rate of $1.35. He says that by controlling costs he can still make the profit forecast — for $4.50 to $4.65 a share this year — if the euro were to drop to $1.25. Because most of its goods, which also include Carrier air conditioners and Sikorsky helicopters, are made or assembled in the countries where they are sold, the unknown is the quarterly reconciliation to translate sales back to dollars. “The dollar ought to weaken over time versus the euro just because of the deficit spending we have in the U.S.,” Hayes said in the interview, barring a financial meltdown in Portugal, Ireland, Greece and Spain. “So the view long-term is bearish on the dollar. The problem is, on a quarter-to-quarter basis, it gets bumped around a little.” Spain had its credit rating lowered one step to AA by Standard & Poor’s yesterday as Greece’s debt crisis spread through the euro region. The ratings company cut its rankings on Portugal and Greece earlier this week as European policy makers pushed to speed distribution of emergency aid. Smaller Benefit Johnson & Johnson, the world’s biggest health-products company, said last week its sales growth for 2010 would have a positive currency benefit of about 1 percent based on where the euro is now, below its previous projection. The company said a weaker euro was the primary reason for its lower forecast. The New Brunswick, New Jersey-based company also reduced its annual earnings forecast to as much as $4.90 a share, adjusted for some items, from a January projection of as much as $4.95. Bill Price , a spokesman for Johnson & Johnson, declined to comment beyond last week’s predictions. Terex, the maker of heavy-duty trucks and cranes, has a forecast for revenue to rise to about $5 billion this year from $4.04 billion last year, when 38 percent of sales came from Western Europe. “Our net sales outlook will be slightly reduced due to lower anticipated benefits coming from currency translation,” Chief Executive Officer Ronald DeFeo said during a conference call April 22. DeFeo wasn’t available for an interview. Net sales at Terex fell 3.1 percent to $935.9 million in the first quarter, the Westport, Connecticut-based company said in a statement April 21. The decline was 17 percent excluding about $56 million from the favorable impact of foreign currency rate changes and sales from a port equipment business. “For right now, on a year-over-year basis, the euro is about flat,” Scout Investment’s Laming said. “Earnings reports for this quarter and next won’t be hugely impacted. The real impact will show up in the third and fourth quarters.” To contact the reporters on this story: Rachel Layne in Boston at rlayne@bloomberg.net ; Carol Wolf in Washington at cwolf@bloomberg.net

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George Goehl: Not a Time to Compromise

April 27, 2010

So, a Showdown in the Senate is officially on. The question is, who’s winning? Yesterday Republicans succeeded in blocking a vote to begin debate on a Wall Street reform bill. Democrats lost a vote, but may have won in doing so. Meanwhile the American people are still facing a tidal wave of foreclosures, cresting unemployment, and state budget shortfalls that mean cuts in jobs and services when we most need jobs and services. Democrats are scoring some needed political points by adopting an anti-Wall Street stance. According to a Washington Post report , two-thirds of all Americans support stricter reform of Wall Street. Republicans appear to be scoring financial points, building a big bank war chest for the 2010 elections. And, two years since the bailouts began, the American people have seen absolutely no reform of Wall Street. That said, bad reform is worse than no reform. Though Senate Banking Chairman Chris Dodd’s financial reform bill trends in the right direction, it needs to get stronger, not weaker, moving forward. A critical improvement would be approval of the Brown-Kaufman amendment that would break up the megabanks that have grown so enormous that they pose incredible risk to our entire economy. With the big banks spending millions to block this and other reforms, the only way average Americans can change the score is by moving to action. That’s exactly what thousands of people from coast to coast are doing this week. Retirees and workers, family farmers and veterans, homeowners and renters will join together to take the fight directly to the big banks that created the foreclosure crisis, sank the economy, and are now trying to block financial reform. Starting today in San Francisco and Kansas City , then to the South , culminating in a Showdown on Wall Street on April 29. Everyday Americans will challenge both parties to fight for real Wall Street reform. The message to Senate Democrats will be clear: Now is not the time for compromise. Do not weaken reform in an effort to appease your Republican colleagues, or to appease Wall Street. Elected officials from both parties have compromised (if not co-conspired) with Wall Street for too long, and we’re all paying the price for it. With a grassroots movement to hold banks accountable gaining steam, now is the time to stand strong for real Wall Street reform and put a victory in the America’s people column. Those senators with the guts to go the extra mile with a vote to break up the big banks just might be rewarded by the American people this November. For more information on the Showdowns in America happening in San Francisco, Kansas City, Charlotte, N.C., New York City and Washington, D.C., go to www.showdowninamerica.org .

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Video: Black Says Goldman Sachs Suit to Give Rules Bill `Push’: Video

April 16, 2010

April 16 (Bloomberg) — William Black, a professor at the University of Missouri at Kansas City, talks with Bloomberg’s Lori Rothman about the impact of a U.S. Securities and Exchange lawsuit against Goldman Sachs Group Inc. on legislation overhauling the financial regulatory system. Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them, the SEC said in a statement today. (Source: Bloomberg)

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Bill Donius: Financial Reform: Too Big to Fail….Quickly!, What to do next?

April 16, 2010

Reform is needed in the financial services area. More specifically, we cannot afford them to fail quickly! We can afford them to fail and unwind slowly however. TARP is proof the Federal Reserve acted correctly by stepping in quickly to prevent a massive meltdown over the past two years. Even though it is unpopular with many, history will show the plan was not nearly as expensive as initially projected. We will never know just how bad it could have been, but time will give us some idea. Speaking about quick actions, the current reform legislation moving toward a vote is not worthy of support. Granted, reform is needed. This process was too rushed and as a consequence needs to be vetted better. The spirit of the bill may be good, but there are tactical problems. It would be a big mistake to remove the Federal Reserve from their oversight and supervisory duties of small banks. It will be considerably more difficult for the Fed to understand what is truly occurring in the small business and housing sectors without directly supervising small banks. The consumer protection concept although well intended will compete and cause channel conflicts with the other banking regulatory agencies. The bill will also raise costs for small banks to conduct business. Community banks did not cause the financial crisis and should not have to suffer as a result of new legislation. A pause is needed to get all the approriate players to the table to create legislation that makes sense for the consuming public, banking sector as well as the non regulated non bank financial sector. Let’s get it done right the first time! Note: William A. Donius is the former Chairman and CEO of Pulaski Bank and Pulaski Financial Corp. in St. Louis, Mo. He remains a Director and Consultant to the bank. In retirement, he is an active board volunteer in the STL community and is writing a book. This essay represents his personal view and may not represent the view of the bank. Donius was elected CEO of Pulaski Bank in 1997. He took the bank public in 1998 with Pulaski Financial Corp. NASDAQ listed PULB as the holding company. Under his leadership the bank grew from $168 million to $1.3 billion. Pulaski Bank is the largest purchase market, mortgage originator in St. Louis and one of the top three in Kansas City. Pulaski Bank was voted the Best Place to Work in St. Louis in 2007, received a Torch Award from the Better Business Bureau in 2008 and is ranked as one of the best performing smaller banks/thrifts by industry publication SNL. Donius was appointed to a two-year term on the U.S. Federal Reserve Board TIAC Council in 2008. Donius served a four-year term on the Board of Directors of America’s Community Bankers ending in 2007. In addition, he served as Chairman of for profit subsidiary, America’s Community Bankers-Partners for two years.

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UnitedHealth, WellPoint Fight Obama’s Mandate on Medical Costs

April 13, 2010

By Drew Armstrong April 13 (Bloomberg) — A U.S. mandate forcing insurers led by UnitedHealth Group Inc. and WellPoint Inc. to spend 85 percent of revenue from premiums on medical care is the newest front in the battle between the Obama administration and companies over industry profits. In 2009, UnitedHealth spent 82.3 percent of revenue from premiums to pay customers’ medical expenses and WellPoint spent 82.6 percent, according to company filings. While individual insurers now decide what categories to include in this ratio, the health law signed in March demands that all companies define medical costs the same way beginning in 2011. Many insurers include only customer claims in their current ratios. They want to keep the number low to impress investors, said Sandy Praeger , of the National Association of Insurance Commissioners . Under the new law, lobbyists would include technology expenses, wellness programs and pay-for-performance incentives. That would make it easier to reach the 85 percent threshold, and free up revenue to boost profit. “This has the potential to be a big issue for the industry next year,” said Carl McDonald , an analyst at Oppenheimer & Co. in New York, in an April 8 note to clients. “Because the details of the calculation are left up to an administration that has been blatantly anti-managed care, it will be difficult for many commercial plans to outperform until this is cleared up.” The law sets two thresholds for 2011: 85 percent for policies involving large companies, and 80 percent for small groups and individuals. Input From States State officials represented by the Kansas City, Missouri- based insurance commissioners’ group, or NAIC, were initially asked by U.S. regulators to recommend by the end of 2010 what should be covered under the thresholds. That timing was shortened yesterday to June 1. Lobbyist organizations led by America’s Health Insurance Plans, or AHIP, a Washington-based group representing 1,300 insurers, and the Chicago-based Blue Cross and Blue Shield Association, with 39 members, are negotiating over how to shape the bill, Praeger said. “We’ve begun the discussions with some of the industry, or they’ve begun the discussion with us, because they’re nervous about how this is going to be defined,” Praeger said in a telephone interview. “They want to be able to say — when they go to Wall Street — that they’re really reserving a lot for profit. When they come to us they want to say the reverse, that they’re paying a lot for medical.” Final regulations for the provision will be approved by Health and Human Services Secretary Kathleen Sebelius . Company Shares UnitedHealth, based in Minnetonka, Minnesota, was unchanged at $32.26 in New York Stock Exchange composite trading yesterday. The company, the biggest U.S. insurer by sales, jumped 35 percent in the last year, boosted by the law’s promise to add millions of customers. WellPoint rose 8 cents to $61.34. Insurers believe wellness programs and technology systems to manage records should be categorized as medical care because they help improve overall health, said Justine Handelman, executive director for policy for the Blue Cross group. Robert Zirkelbach , a spokesman for AHIP, said his group’s members are concerned that refusing to include wellness programs under the thresholds may lower interest among companies in supporting these efforts, hurting consumers rather helping them. “We want to make sure that, however the regulations are structured, they aren’t going to disrupt those types of initiatives,” Zirkelbach said. Insurers have already made some changes in how they classify costs on their own. WellPoint Change WellPoint , the largest U.S. insurer by enrollment, last month announced it would count nurse call-in centers and wellness programs as medical costs. That move increased the Indianapolis-based company’s projected ratio to 84.3 percent in 2010 from 82.6 percent in 2009, the company said. Kristin Binns , a spokeswoman for WellPoint, said in an e- mail that company officials are “closely watching the NAIC recommendation process, and are looking at the impacts depending on how various expenses are classified.” UnitedHealth spokesman Tyler Mason said the insurer was “following discussions closely.’ He declined further comment.      Cigna CEO David Cordani said he was confident the administration will allow insurers to count spending on nurses who advise customers as a medical expense. Sebelius and congressional staff indicated a willingness to do so in conversations over the past six weeks, Cordani said in an interview yesterday. More Patient Value Democrats want to use the new rules to deliver on their promise that patients will get more value from their premiums, Senator Jay Rockefeller , a West Virginia Democrat, has said. President Barack Obama and Democrats in Congress repeatedly criticized insurers in the run-up to the law’s signing last month. They attacked WellPoint’s proposed 39 percent premium increase on some California customers as a preview of what might happen if the overhaul wasn’t passed. The regulations will require “insurance companies to dedicate more of the premiums dollars they collect to actual care instead of profits, bonuses, advertising and other overhead costs,” said Nicholas Papas, a Sebelius spokesman, in an e- mailed statement. Robert Laszewski , a Washington, D.C. policy analyst who consults with the industry, predicts that the insurance commissioners’ recommendations won’t put excessive pressure on industry profits. “This medical-cost ratio is a game,” he said. “What the regulators are now going to do is come up with rules of the game,” Laszewski said. “Hire some lobbyists and make some really good arguments.” No Political Pressure Praeger said there has been no political pressure from the Obama administration to squeeze insurers. “We would not do that,” she said. “We want to be accurate and the authority and the expert. We can’t get caught up in the political side.” The insurance commissioners will focus their recommendations on making sure there is a consistent and fair definition, she said, that “doesn’t get gamed.” To contact the reporters on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net .

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HCA Said to Plan $3 Billion Public Offering Four Years After Record Buyout

April 8, 2010

By Cristina Alesci, Zachary R. Mider and David Olmos April 8 (Bloomberg) — HCA Inc ., the hospital chain bought four years ago in a $33 billion leveraged buyout led by KKR & Co. and Bain Capital LLC, is preparing an initial public offering that may raise $3 billion, said two people with knowledge of the matter. HCA plans to interview banks to underwrite the sale in the coming weeks, according to the people, who asked not to be identified because the information isn’t public. The sale, slated for this year, may fetch $2.5 billion to $3 billion, the people said. HCA’s owners, which include Bank of America Corp. and Tennessee’s Frist family, may seek $4 billion, said another person familiar with the plans. The stock offering would be the biggest U.S. IPO in two years and help HCA pay off debt, the people said. The hospital operator may profit from the health-care legislation President Barack Obama signed into law on March 23 that provides for coverage for millions of uninsured patients, said Sheryl Skolnick , an analyst at CRT Capital Group LLC in Stamford, Connecticut. HCA is “extremely well-positioned to benefit from health reform because their hospitals tend to be concentrated in significant markets” including Denver, Dallas, Houston, Kansas City, Missouri, and Salt Lake City, Skolnick said yesterday in a telephone interview. “Health reform was very important to this decision.” Kristi Huller , a spokeswoman for KKR, and Alex Stanton , a Bain spokesman, declined to comment, as did Jerry Dubrowski , a Bank of America spokesman. Ed Fishbough , a spokesman for HCA, didn’t immediately respond to a phone call and e-mail seeking comment. Buyout Surge Private-equity firms spent $2 trillion, most of it borrowed, to buy companies ranging from Hilton Hotels Corp. to Clear Channel Communications Inc. in the leveraged-buyout boom that ended in 2007 and are now seeking to cut that debt before it matures. U.S. IPO investors have been leery of companies backed by private equity this year. In the biggest offering so far, Bain’s Sensata Technologies Holding NV sold $569 million of shares last month at the low end of its estimated price range. In February, Blackstone Group LP’s Graham Packaging Co. and CCMP Capital Advisors LLC’s Generac Holdings Inc. were forced to cut the size of their offerings. HCA may file for the IPO with the U.S. Securities and Exchange Commission as early as next month, said one of the people. The IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion. HCA would be the biggest IPO of a private-equity backed company in the U.S. since at least 2000, according to Greenwich, Connecticut-based Renaissance Capital LLC, which has followed IPOs since 1991. Debt Load HCA’s owners put up about $5.3 billion to buy the company, according to a regulatory filing, funding the rest with loans from banks including Bank of America, Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc. The IPO would lower HCA’s debt load rather than allowing owners to reduce their stakes, said the people. The hospital chain’s purchase in 2006 shattered the record for the largest leveraged buyout, held since 1989 by KKR’s acquisition of RJR Nabisco Inc. HCA’s record was eclipsed by Blackstone’s acquisition of Equity Office Properties Trust and again by the 2007 takeover of Energy Future Holdings Corp ., by KKR and TPG Inc., for $43 billion including debt. Later that year, the global credit contraction cut off the supply of loans necessary to arrange the largest LBOs. A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007. $25.7 Billion Debt HCA, the largest U.S. hospital operator, had about $25.7 billion of debt as of Dec. 31, about 4.8 times its earnings before interest, taxes, depreciation and amortization, even before HCA’s owners tapped credit lines in January to pay themselves a $1.75 billion dividend. Tenet Healthcare Corp.’s ratio was 4.4 and LifePoint Hospitals Inc.’s was 2.85 at year- end, according to data compiled by Bloomberg. Health-care companies have fared better than the average private-equity investment during the economic decline. KKR said in February that its holding in the company had gained as much as 90 percent in value as of Dec. 31, while stakes in Energy Future Holdings Corp. and First Data Corp. were worth less than their initial cost. Hospitals will probably be “net winners” in the health- care legislation, said Adam Feinstein , a New York-based analyst at Barclays Capital, in a March 26 note to investors. HCA, Dallas-based Tenet and Brentwood, Tennessee-based LifePoint may gain because the legislation will reduce hospitals’ losses from providing charity care to the poor and uncollectible bills. Frist Family HCA has 163 hospitals and 105 outpatient-surgery clinics in 20 states and England, according to the company’s Web site. The company was founded in 1968, when Nashville physician Thomas Frist Sr ., and his son, Thomas Frist Jr ., and Jack Massey built a hospital there and formed Hospital Corp. of America. By 1987, the company had grown to operate 463 hospitals, according to the company’s Web site . Thomas Frist Sr. is also the father of Bill Frist , a physician and the former Senate majority leader. HCA went private in a $5.1 billion leveraged buyout in 1989, then went public again in 1992, according to the company Web site. In 1994, HCA merged with Louisville, Kentucky-based Columbia Hospital Corp. In the mid-1990s the company, then called Columbia/HCA Healthcare Corp., operated 350 hospitals, 145 outpatient clinics and 550 home-care agencies, according to the company. Overbilling Settlement In December 2000, HCA agreed to pay $840 million in criminal and civil penalties to settle U.S. claims that it overbilled states and the federal government for health-care costs. It was the largest government fraud settlement in U.S. history at the time, according to a U.S. Justice Department news release on Dec. 14, 2000. A credit-market rally has helped HCA extend maturities on some of its debt. HCA has sold $4.46 billion of bonds since February 2009 in a bid to repay bank debt and delay maturities, according to data compiled by Bloomberg. The company still has about $11 billion coming due over the next three years, according to Bloomberg data. It is also negotiating with lenders to amend the terms of a bank loan. HCA offered earlier this month to pay an increased interest rate to lengthen maturities on $1 billion of bank debt, according to two people familiar with the matter. The amendment would allow HCA to move part of the money due under its term loan B to 2017 from 2013. Even after the refinancing and debt pay downs, the company will still have to access the “capital markets to address remaining maturities,” said Moody’s Investors Service Inc. in a note last month. “It will be difficult for the company to meaningfully reduce the amount of debt outstanding through operations due to limited free cash flow generation,” Moody’s said. To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net ; Cristina Alesci in New York at calesci2@bloomberg.net David Olmos in San Francisco at dolmos@bloomberg.net

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Big Banks Dominate U.S. Banking System: Study

April 5, 2010

Just 16 banks account for more than half of the assets in the nation’s banking system, new data show. The banks — all of which have more than $100 billion in assets — control nearly 56 percent of all assets in the banking system, according to an analysis of fourth quarter Federal Deposit Insurance Corp. data by Dennis Santiago , CEO and managing director of Institutional Risk Analytics, a California-based consultancy. The concentration of power among the nation’s megabanks is more than double what it was just nine years ago, and has more than tripled since 1995. The consolidation among banks and the growth of the big ones is of particular concern to policymakers and economists who are pushing to fundamentally reform the nation’s broken financial system. Leading voices like Federal Reserve Bank of Kansas City President Thomas M. Hoenig and U.S. Senator Ted Kaufman (D-Del.) want to bust up the megabanks, arguing that the firms played a big role in causing a near-meltdown of the financial system and the subsequent Great Recession. The firms benefit from their size by being implicitly — if not explicitly — backed by the U.S. government, giving them a huge advantage over traditional Main Street banks, which harbor no illusions about U.S. taxpayers possibly bailing them out. The prospect of potential bailouts has allowed these firms to enjoy lower borrowing costs, allowing them to grab more market share and get bigger. In 2008, the firms were all bailed out by taxpayers. Meanwhile, small banks are failing at the fastest rate since the early 1990s. In 1999, there were eight banks with more than $100 billion in assets, Santiago’s analysis shows. They had a combined $2.5 trillion in assets. As of Dec. 31, 2009, there were 16 banks with more than $100 billion in assets. Together, they have about $8 trillion in assets. (Check out the chart below – or for a bigger version click here .)

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Steve Parker: Road Test – 2010 Buick LaCrosse

April 1, 2010

Let’s kick-off our road test series with the 2010 Buick LaCrosse, an all-new car which is one of the prime examples of how far American-made car quality and attention to detail has come. And I see nothing wrong with sometimes rooting for the home team, especially when it’s well-deserved. Buick has had growing sales (comparing month-by-month to the past year) for six straight months and in March sales were up an impressive 76%. And collaboration between designers in the United States and China, in partnership with the GM’s Pan Asia Technical Automotive Center (PATAC) as well as chassis and body engineers in Europe, has resulted in the first General Motors vehicle to be created on three continents. Buick’s 2010 LaCrosse is a perfect competitor for the Lexus ES 350 and Chrysler 300 (which is pretty long in the tooth), thanks to its looks, a choice of three direct-injected engines, optional Haldex all-wheel drive (on CXL) and a healthy mix of standard and optional interior gadgets, including in-dash nav, rear entertainment system and a rearview camera. Another thing LaCrosse has over the Lexus is its styling. Buick says the car’s styling, a continuation of what started with their Enclave cross-over, is “seductive and uninterrupted”. That may be so to some eyes, but I find LaCrosse’s appearance to be aggressive and powerful, not quite intimidating but certainly muscular for a pretty big four-door sedan. The Chrysler 300? We’ve seen it for a long while now; nothing really new. And Lexus makes a point of not changing styling on an annual basis; they know their buyers don’t like a lot of change in existing models. Two design cues harkening back to Buick back in the day is the large grille with vertical louvers. In years past people would say about Buick’s signature big grille that, “I don’t know whether to drive it or shave with it.” The distinctive Buick portholes are back, too Now they’re found next to the engine compartment on the inside top of the fenders. You have three engine choices: for the first time in a decade, Buick offers a four-cylinder engine standard on the CX. It’s a direct injected Ecotec 2.4L which pumps out 182 horsepower. The CX has a new 3.0L V-6 powerplant which make 255 horsepower. The high-zoot CXL comes with a 3.6L V-6 liter providing 280 horses. All engines are direct injection, which increases power and mileage and can decrease pollutants. Six speed automatics come on all three cars and they have a center console stick with a now-taken-for-granted tap-to-change-gear feature found on so many cars and trucks (no paddle shifters, though). For 2010, only the 3L CXL model will have AWD available; in 2011, the CXS standard with the 3.6 V-6 will have the option. That’ll do away with any nasty understeer (more later). Buick will stop offering the 3L V-6 in North American LaCrosses at the end of the 2010 model year, leaving just the four-cylinder and the 3.6 liter V-6. The reason for killing the 3L engine is that the 2011 model will now be able to offer all-wheel drive paired with the direct-injection 3.6-liter LaCrosse 2011 models start production on June 14th of this year and will be available about six to eight weeks after that. If it were me and I had the kick I’d wait a few months for the CXS AWD. Inside, it’s Buick-level plush and quiet, and that says a lot. It has one of the best dashboards, switchgear, gauges and driver positioning in the industry. It’s all very easy to use and quite instinctive. Most people will feel right at home in the driver’s seat in just a few minutes. Precise detail and fit and finish inside (and out) shows GM is paying attention to details which the old GM would have let slide. “Ship it and let the dealer fix it” was the long-time GM mantra and thankfully those days are gone. Driving LaCrosse on either the 17″ (CX), 18″ or optional 19″ wheels is mostly a pleasure and can be fun. Front-drive cars sometimes have a lot of torque steer, also called understeer, what NASCAR drivers call “push”. You’ve experienced it, too, every time you adjust the steering wheel at moderate or higher speeds and it seems the front wheels simply won’t turn. Engineers worldwide have done a good job of reducing this phenomenon (especially Honda) and LaCrosse, while it has its share of understeer, is fairly predictable and controllable. If you want no understeer, order the AWD option. The HiPer Strut front suspension, standard on the CXL, is a modified MacPherson strut system which allows the car to launch without too much understeer. The HiPer Strut suspension will come standard on all 2010 CSX models produced after May with no price increase. The car, despite its luxury look, feels taut and surprisingly sporty. Fuel mileage, GM says, ranges between 17 and 26 mpg depending on the engine ordered, though I found my mileage quite a bit lower. Around town mileage was between 12 and 15 mpg, and on the open highway was in the 21 to 23 mpg category, but not 26. The 2.4-L is EPA-rated 30 mpg on the highway and 19 mpg in the city. Still all fairly impressive for a 3,929 pound automobile (yep, just a tad short of two tons). Base price for the 4-cylinder is $26,995, for the V-6 CX $27,835, $30,395 for CXL and $33,765 for the top-line CSX with the big 3.6L V-6. Our tester, a CSX with a sunroof, Xenon headlamps, heads-up info display and optional paint, Red Jewel Tintcoat, came in at $36,130. LaCrosse is built at GM’s Fairfax Assembly facility in Kansas City, KS. Buick was always known as the “doctor’s car” because, in the days of yore and house calls, no doctor wanted to pull up to your home in a Cadillac; a Buick was perceived as more conservative, less expensive and more sensible than its big bro Caddy. But they’d take the Cadillac to the country club on Wednesdays (the traditional doctor day off in the old days). LaCrosse signals Buick sedans are headed into a much higher realm. If this is your kind of car, there’s little to complain about, including not much rear seat legroom, the aforementioned torque steer, not the greatest sound system and some other problems. But there’s plenty to enjoy, too, and that’s right for a car which tops out at nearly $40,000. Buick may find itself gone at some point, melded into Cadillac (in the 1920s and ’30s, Caddy offered a less expensive model called La Salle). I’ve said that GM should consist of Chevrolet, Cadillac and nothing more. LaCrosse is a car which could make the quality argument for consumers and the money argument for GM to keep the division right where it is. And as I said, nothing wrong with rooting for the home team. On my scale of one to five, four tires and a spare, LaCrosse rates a 3+ to 4.

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Fed Reveals Bear Stearns Assets Swallowed in Rescue

April 1, 2010

By Craig Torres, Bob Ivry and Scott Lanman April 1 (Bloomberg) — After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout. In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information. The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating. Jumbo loans were larger than government-sponsored mortgage buyers such as Fannie Mae could finance — $417,000 at the time. “The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart , a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.” The Bear Stearns deal marked a turning point in the financial crisis for the Fed. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend , a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh. ‘Panic’ Cause “Lack of clarity on the boundary between responsibilities of the Fed and of the Congress as much as anything else created panic in the fall of 2008,” Goodfriend said. “That created a situation in which what had been a serious recession became something near a Great Depression.” Central bankers also created moral hazard, or a perception for investors that any financial firm bigger than Bear Stearns wouldn’t be allowed to fail, said David Kotok , chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. Policy makers’ resolve was tested months later by runs against the largest financial companies. Lehman Brothers Holdings Inc. collapsed into bankruptcy in September 2008. The ensuing panic caused the Fed to take even more emergency measures to push liquidity into markets and institutions. It rescued American International Group Inc. from collapse and allowed Goldman Sachs Group Inc. and Morgan Stanley to convert into bank holding companies, putting them under greater oversight by the central bank. Early Failure “Letting somebody fail early would have been a better choice,” Kotok said. “You would have ratcheted moral hazard lower and Lehman wouldn’t have been so severe.” The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts. The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages. More than a year after Washington Mutual, the largest U.S. savings and loan, was purchased by JPMorgan Chase in a distressed sale arranged by the Federal Deposit Insurance Corp., the home loans that helped bring down the Seattle-based thrift live on in the Maiden Lane portfolio. Lending Standards For example, 94 percent of the mortgages in one security, called WAMU 06-A13 2XPPP, required limited documentation from borrowers, meaning the lender often didn’t ask customers for proof of their incomes. Almost 10 percent of the borrowers whose mortgages make up the security have been foreclosed on, and almost a quarter are more than two months late with payments, according to data compiled by Bloomberg. The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade. All the underlying loans are adjustable- rate mortgages, with about 88 percent requiring only limited borrower documentation, according to Bloomberg data. About 33.6 percent of the borrowers are at least 60 days late. Countrywide is now part of Charlotte, North Carolina-based Bank of America Corp. CDO Holdings Maiden Lane has $19.5 million of securities from a series of collateralized debt obligations called Tropic CDO that are backed by trust preferred securities of community banks and thrifts. CDOs are investment pools made up of a variety of assets that provide a flow of cash. Trust preferred securities, or TruPS, have characteristics of debt and equity and their interest payments are tax- deductible. The securities created by Bear Stearns are rated C, one level above default, by Moody’s Investors Service and Fitch Ratings. CDO securities have tumbled in value as banks are failing at the fastest rate in 17 years, according to data compiled by Bloomberg. The average price of TruPS CDO debt of this rating is pennies on the dollar, according to Citigroup Inc. “The trust of the taxpayer was abused,” said Janet Tavakoli , president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. CDOs rated CCC and lower “have a high likelihood of default,” she said. Bernanke Defense Chairman Ben S. Bernanke defended the Bear Stearns deal as a rescue of the financial system. He said in a speech at the Kansas City Fed’s annual Jackson Hole, Wyoming conference in August 2008 that a sudden Bear Stearns failure would have caused a “vicious circle of forced selling” and increased volatility. “The broader economy could hardly have remained immune from such severe financial disruptions,” Bernanke said in the speech. The Fed chief, who took office in 2006 and began his second term as chairman this year, also has repeatedly called for an overhaul of financial regulations that would allow authorities to take over a failing financial institution and oversee an orderly unwinding of its positions. Bernanke said last year that nothing made him “more angry” than the AIG case, blaming the insurer for making “irresponsible bets” and a lack of regulatory oversight for the debacle. Officials “had no choice but to try and stabilize the system” by aiding the firm in September 2008, he said. Yesterday’s release by the Fed, through its New York regional bank, also identified securities acquired in the bailout of AIG held in vehicles known as Maiden Lane II and III. Market Value Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed. Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades. “The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement. Deal With Chase The central bank said it reached agreement on “issues of confidentiality” for the assets with JPMorgan Chase, which bought Bear Stearns in 2008, and AIG. New York-based JPMorgan and AIG would incur the first losses on the portfolios. Joe Evangelisti , a spokesman for JPMorgan, and Mark Herr , a spokesman for AIG, declined to comment. In April 2008, Bloomberg News requested records under the federal Freedom of Information Act from the Fed’s Board of Governors related to JPMorgan’s acquisition of Bear Stearns. The central bank responded that records retained by the New York Fed “were proprietary records of the Reserve Bank, and not Board records subject” to the request, court records show. Bloomberg filed suit in November 2008 in U.S. District Court in New York, challenging the Fed’s denial, as well as the denial of a separate request made in May 2008, seeking records of four other emergency lending programs. The district court held that the Fed should release documents related to those four programs, and should search documents held by the New York regional bank to determine whether any of them should be considered records of the board of governors. The U.S. Court of Appeals on March 19 upheld the district court’s ruling on the lending programs. Representative Darrell Issa of California said in a statement that yesterday’s disclosure may “signal a new willingness to cooperate with Congress as we investigate how these bailout deals were structured and what the decision making process entailed.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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Leo W. Gerard: End the Denial: Label China a Currency Manipulator

March 31, 2010

America and China share a terrible delusion. They are in denial about currency manipulation. Both officially state that China is not devaluing its currency. In mid-March, Chinese Prime Minister Wen Jiabao flatly denied that China deliberately suppresses the value of its currency against the dollar, a practice that decreases the price of its exports and increases the cost of America goods imported into China. Similarly, the U.S. Treasury Department, which is required by the Omnibus Trade and Competitiveness Act of 1988 to name foreign currency manipulators in bi-annual reports, has not in the past decade and a half called out China — including in the past two reports submitted during the Obama administration. China and America decline to acknowledge what everyone else knows: China suppresses the value of its currency to gain a trade advantage over America. The New York Times reported on the practice in a story published March 14 describing how currency manipulation has worked wonders for Chinese industry while killing American manufacturing. Treasury Secretary Timothy Geithner came to Pittsburgh, home of the United Steelworkers’ International Headquarters, this week to talk about the competitiveness of U.S. manufacturing. He visited a modern Allegheny Technologies Inc. specialty steel mill and met privately with business and union leaders. We deeply appreciate his time and attention. What he must do now, as a first step in leveling the playing field with China, is insist that the Treasury label China as a currency manipulator in the next report, which is due April 15. That would end the denial – at least on the U.S. side — and could set in motion sanctions to reduce the manipulation or at least the effects of it. Ending the imbalance would create between 1.5 million and 3 million U.S. jobs, without Congress passing a new stimulus bill, without adding a dollar to the national debt. America has talked to China about this problem for too long. Three years ago, AFL-CIO President Rich Trumka, who was then the federation’s secretary-treasurer, wrote that over the previous seven years warnings had proved worthless: “The script is always the same. The Treasury Department admits there is a problem but can’t find a technical violation of the law. Then comes a warning against Congress taking action that is followed by a promise of increased dialogue with the Chinese government.” That dialogue never produced effective results. China briefly allowed its currency value to increase by about 15 percent against the dollar from July 2005 to July 2008. China stopped the revaluation at the height of the world economic crisis. The 15 percent rise now has been offset by increased productivity in China, according to conservative economist C. Fred Bergsten , the free-trader and currency expert from the Peterson Institute for International Economics. So the net effect of the brief Chinese currency float is zero. Still, U.S. Trade Representative Ron Kirk is suggesting more dialogue. He told the Associated Press in Brussels late in March, “. . .my first preference is always to see if we can’t build a partnership to work with China to see if we can’t get a resolution sooner rather than later.” This inexplicable response came after Chinese premier Wen Jiabao denied that China’s currency – called renminbi and traded in a denomination called yuan — was undervalued. And China’s Vice Commerce Minister Zhong Shan said , “It is wrong for the United States to jump to the conclusion that China is manipulating currency from the sheer fact that China is enjoying a trade surplus. . .Besides, it’s wrong for the United States to press for the appreciation of the renminbi and threaten to impose punitive tariffs on Chinese exports. That is unacceptable to China.” It is unacceptable to America to continue countenancing China’s currency manipulation. It’s too costly to America. It works like this. Chinese exporters are paid in dollars. They exchange them for yuan in Chinese banks. No matter the value of the dollar on the international free market, the state-controlled market in China pays 6.83 yuan for every dollar. While the value of the dollar fluctuates against the Euro and other market-based currencies from day to day, China determines its exchange rate to be 6.83 every day. In a market-based economy, the value of currency in an export-strong country increases. That is what would happen to the yuan if China stopped interfering in the exchange rate. Essentially, demand for Chinese goods would raise their prices. But that doesn’t happen in China because the government stops it. China’s manipulation has caused the yuan to be undervalued by between 20 and 40 percent, according to even the most conservative economists. The result is that every time a Chinese company sells a $1 product in the U.S., it has received a subsidy from the Chinese government of as much as 40 cents. That makes competition extremely difficult for U.S. companies that don’t get such subsidies. It is a primary cause of the U.S. trade deficit. China’s share of the U.S. non-oil goods trade deficit tripled since 2005. China accounted for 80.2 percent of the entire U.S. non-oil trade deficit with all countries in the world in 2009. That costs the U.S. jobs. The Economic Policy Institute released a study in March showing that since 2001 when China joined the World Trade Organization, 2.4 million jobs have been lost or displaced in the U.S. as a result of the growing trade deficit with China. Unions, industry leaders, and both Republican and Democratic politicians are all sick of the talking about manipulation. During a Congressional hearing on the undervalued yuan in March, Nucor Corp. Chief Executive Officer Dan DiMicco complained about U.S. inaction, saying, “We are in a trade war. We just haven’t shown up for it.” In mid-March, 130 Congressmen, including 40 Republicans, sent a letter to Secretary Geithner asking him to label China a currency manipulator in the April 15 report. They also asked Commerce Secretary Gary Locke to apply countervailing duties on Chinese imports. That would be legal if China’s devalued currency is deemed an export subsidy, and they said that has been clearly demonstrated. Just a day later, a group of U.S. senators, including Republicans Lindsey Graham of South Carolina and Sam Brownback of Kansas, introduced the Currency Exchange Rate Oversight Reform Act of 2010 to penalize countries like China that undervalue their currency to artificially discount their products exported to the U.S. The legislation, if passed, would effectively compel the Treasury Department to cite China for manipulation. “We’re fed up,” Graham told the New York Times: “China’s mercantilist policies are hurting the rest of the world, not just America. It helped create the global recession that we’re in. The Chinese want to be treated as a developing country, but they’re a global giant, the leading exporter in the world.” China remains in denial. They’re so far in denial, this is what Mr. Wen said: “I understand some economies want to increase their exports, but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose of increasing their own exports.” That is exactly what China has done to increase its exports. It requires China to essentially buy $1 billion worth of dollars a day. If the Chinese stopped currency manipulation, the value of those dollars would decline against the Chinese yuan, and the Chinese Treasury would suffer a significant loss on its investment – at the same time Chinese exports would rise in price. That is why China continues to deny manipulation. But every day America remains in denial costs the U.S. additional manufacturing bankruptcies and unemployment. Secretary Geithner raised hopes that Treasury would end the denial when he said of China during his visit to Pittsburgh, “It is important that they take the steps they said they would to take their currency to a more flexible system.” *** Click here to join Campaign for America’s Future in telling the Treasury Department to stop denying that China is manipulating its currency.

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OPEC, Energy Agencies to Unveil Action Plan to Combat Oil-Price Volatility

March 30, 2010

By Margot Habiby and Peter Millard March 30 (Bloomberg) — OPEC, the International Energy Agency and the International Energy Forum will announce a “joint action plan” this week to combat oil-market volatility, IEA Executive Director Nobuo Tanaka said. The plan will tackle “volatility of the price and other issues like the outlook of the energy market,” he told reporters yesterday before the biennial IEF ministerial meeting that starts today in Cancun, Mexico. “We’ll have closer dialogue with our organizations and we’ll see what we can do.” The accord involves pooling expertise and sharing data to improve transparency, two people with direct knowledge of the plan said. They declined to be identified because the information hadn’t been made public. Details of the agreement will be announced March 31 at the end of the meeting. Saudi Arabian Oil Minister Ali al-Naimi and U.S. Deputy Energy Secretary Daniel Poneman , representing the world’s biggest oil exporter and the largest consumer, are among officials from more than 60 countries attending the gathering. Chief executive officers from some of the largest oil companies, including Exxon Mobil Corp. ’s Rex Tillerson and Royal Dutch Shell Plc ’s Peter Voser , will join a concurrent business forum. IEF Secretary General Noe van Hulst said in an interview on March 28 in Cancun that oil producers and consumers, trying to avoid a repeat of the $115 a-barrel price swing in 2008, will seek a “broad agreement” to combat volatility. “The better the market is informed about what happened in the past, what’s happening in the present and what will happen in the future, the less room there will be for, say, unfounded speculation and second-guessing,” he said. G-8 Mandate The Group of Eight nations called for measures to curb volatility in energy prices in July at its L’Aquila, Italy, meeting, to enable oil producers to plan their spending. The G- 8’s formal statement called for continued dialogue between energy producing, consuming and transit countries through the Riyadh-based IEF. Members account for more than 90 percent of global oil and gas supply and demand. The Organization of Petroleum Exporting Countries, the IEA and IEF “should work hard together to reduce volatility,” OPEC Secretary-General Abdalla El-Badri told reporters in Cancun yesterday. He called the IEF “a good vehicle” for dialogue. El-Badri also applauded the U.S. for “putting some brakes on speculation. It’s a positive step in the right direction.” Oil’s climb to a record $147.27 a barrel in 2008 led regulators in the U.S. and U.K., home to the world’s two major oil exchanges, to consider trading limits on the commodity. CFTC Limits The U.S. Commodity Futures Trading Commission, which oversees more than $5 trillion in daily trading, in January proposed adding limits to the energy markets as part of a government campaign to prevent individuals or companies from gaining too much control of a commodity market. The market needs better data on supply, demand and output levels from all producing and consuming countries, particularly those from nations outside the Organization for Economic Cooperation and Development, Van Hulst said. Improvements in futures-market transparency are also needed, he said. Non-OECD countries such as China and India are forecast to drive energy-demand growth after the global economic recession. “Transparency is one of the themes of the times, particularly after 2008,” Daniel Yergin , chairman of IHS Cambridge Energy Research Associates, said in an interview earlier this month in Houston. “Understanding demand better on a global basis, particularly where the growth is, and at the same time better understanding supply would at least ground markets more in the realities of supply and demand.” Implied Volatility Oil prices traded between $32.40 a barrel and $147.27 a barrel in 2008. Implied volatility for at-the-money options expiring in 30 days, a measure of expected price swings in the futures contract and a key gauge of options prices, climbed to 105 percent at the end of 2008. Implied volatility fell to 27.8 percent on March 26, the lowest level since Dec. 24, 2007. Oil has traded in a $68-to-$84 range since October. Sudden accelerations in oil prices hurt consumers because they cause inflation and reduce spending, curbing economic growth. A plunge in prices affects investment in future supplies by both publicly traded and state-owned oil companies. “Being against excess volatility is kind of like being against world hunger,” said David Kirsch , the Kansas City, Kansas-based director of oil markets at consultant PFC Energy. “Who’s for it? At the end of the day, what are you going to do about it?” Crude for May delivery rose $2.17, or 2.7 percent, to $82.17 a barrel on the New York Mercantile Exchange yesterday, the highest settlement since March 18 and the biggest gain since Feb. 16. The increase caused implied volatility to rebound to 28.5 percent. Oil was at $82.12 in after-hours trading at 10:46 a.m. in Singapore. To contact the reporters on this story: Margot Habiby in Cancun, Mexico at mhabiby@bloomberg.net ; Peter Millard in Cancun, Mexico, at pmillard1@bloomberg.net .

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Boeing’s Four Strikes Send Union Seeking Peace Path With Spirit in Wichita

March 23, 2010

By Susanna Ray March 23 (Bloomberg) — Boeing Co. , the target of four machinist strikes in two decades, may find the road to labor peace starts in Kansas, where a supplier and the union are working on a contract they say may set an industry blueprint. Spirit AeroSystems Holdings Inc. Chief Executive Officer Jeff Turner and Tom Buffenbarger , president of the International Association of Machinists and Aerospace Workers , started meeting in January to lay the framework for longer accords that protect workers while giving companies flexibility in changing markets. One goal as formal negotiations begin today in Wichita is to reduce rancor farther up the chain at former parent Boeing, Spirit’s biggest customer and the IAM’s largest employer. Spirit profit was hurt by the last Boeing strike in 2008 and the union is smarting from the planemaker’s decision last year to build a 787 Dreamliner plant at a non-union site in South Carolina. “Boeing’s always telling them, ‘What we need are reliable suppliers,’” Buffenbarger said in an interview. “This could turn the question around where the suppliers say to Boeing, ‘What we need is a reliable customer.’” Buffenbarger, 59, says he wants to see a model agreement reached with Spirit and then followed by other suppliers and aerospace companies whose contracts are coming up for renewal, such as Textron Inc.’s Cessna. That may then steer Boeing into productive talks rather than waging “war on their workers” when the current contract expires in 2012, he said. Talks Begin Tim Healy , a spokesman for Chicago-based Boeing, declined to comment. Boeing employs 157,000 and trails only Toulouse, France-based Airbus SAS in commercial-plane making and Bethesda, Maryland’s Lockheed Martin Corp. in defense contracting. “It’s premature to speculate on whether this approach could work because there are so many gray areas attached with production and where planes will even be built,” said Michel Merluzeau , an aerospace analyst with G2 Solutions in Seattle. Neither union leaders nor Spirit officials would specify what their side will seek in talks that started today with a press conference including Buffenbarger, Turner and Spirit board member Richard Gephardt , the Missouri Democrat who is a former U.S. House of Representatives majority leader. The IAM’s contract covering about 5,900 Spirit workers ends June 25. “In a market that’s so volatile, a classical set of negotiations is going to set us up to butt heads,” Spirit CEO Turner, 57, said in an interview. If the company has a pessimistic view of the business and tries to win concessions that turn out to have been unnecessary, it breeds distrust, Turner said. Yet an unforeseen slump when wages and job levels are locked could ruin the company, he said. Starting With Spirit “We’re going to embark on a whole new model of labor negotiations” instead of “still negotiating like it’s the 1930s,” said Ron Eldridge, who leads the IAM’s effort. The IAM says it’s trying to build the new contract model with Spirit because they already have a close relationship. CEO Turner and the union’s Buffenbarger showed up together to discuss goals at a January training session for IAM negotiators in Maryland, and the pair met yesterday with shop stewards and managers in Wichita to explain each side’s needs ahead of talks. Spirit, which was formed in 2005 when Boeing sold its commercial operations in Wichita, makes parts of the fuselage and other sections for every Boeing airliner. The supplier received 85 percent of its revenue from the former parent in 2009 and 11 percent from Airbus SAS, regulatory filings show. Since the beginning of 2009, Spirit shares have more than than doubled while Boeing rose 69 percent. Spirit today gained 32 cents to $22.95 at 4:15 p.m. in New York Stock Exchange composite trading, while Boeing rose 27 cents to $72.18 Market Reaction About 4,300 call options to buy Spirit changed hands, more than 12 times the four-week average. That was about 45 times the number of put options to sell that traded today. The most-active contracts, July $25 calls, were unchanged at 80 cents. Both sides are entering talks with the same ultimate goal, Turner said: “To keep our company healthy and keep our team intact for the future.” Spirit needs an experienced, consistent workforce to succeed with complex aircraft-development programs and can’t tolerate cycles of layoffs or strikes, he said. The IAM’s offer last year to extend Boeing’s four-year contract covering 27,000 workers by an additional eight years gives some sense of the timeframe the union might consider, negotiator Eldridge said. The offer was part of the IAM’s unsuccessful effort to have the company build the new 787 line at its Seattle-area factory hub instead of in South Carolina. South Carolina Debate Boeing at the time said the union’s offer, which included raises of 3 percent a year through 2020 and work guarantees, was too expensive amid burgeoning competition from countries such as China and Canada. The union’s 57-day strike at the end of 2008 cost Boeing more than $10 million a day and incurred the ire of customers whose planes were delayed and suppliers who had to scale back their own production until Boeing’s assembly lines restarted. It also coincided with the start of a global recession that prompted the deferral and cancellation of hundreds of orders from Boeing as well as business-jet makers such as Cessna, which had to cut its Wichita workforce in half. “A three-year contract where everything is nailed down and can’t change — that’s got to go,” CEO Turner said. “But it can’t be replaced with nothing. So we want to create a longer contract that’s flexible.” To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net .

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AusTex Oil Limited (ASX:AOK) Announce An Underwritten Rights Issue To Raise A$5 Million To Fund Oil And Gas Interests in Kansas And Oklahoma

March 23, 2010

AusTex Oil Limited (ASX:AOK) Announce An Underwritten Rights Issue To Raise A$5 Million To Fund Oil And Gas Interests in Kansas And Oklahoma

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Fed Will Keep Rates Low for `Extended Period’

March 16, 2010

By Craig Torres and Scott Lanman March 16 (Bloomberg) — Federal Reserve officials repeated their pledge to keep the main interest rate near zero for an “extended period” and confirmed that emergency measures to prop up the housing market will end as planned this month. While the economy has “continued to strengthen,” policy makers noted that “ housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.” Treasuries and stocks extended gains as some traders trimmed bets the central bank will raise interest rates over the next 12 months. Fed Chairman Ben S. Bernanke is trying to determine how long to hold down borrowing costs to generate a self-sustaining recovery from the worst slump since the 1930s. “The recovery continues and remains on track to be subpar, at best,” said Diane Swonk , chief economist at Mesirow Financial in Chicago. “Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.” The yield on the 10-year note Treasury note fell five basis points, or 0.05 percentage point, to 3.65 percent. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,159.46. An earlier report from the Commerce Department showed that housing starts fell 5.9 percent in February, hampered by snowstorms in some parts of the country, and Obama administration officials told a congressional hearing that unemployment is likely to “remain elevated for an extended period.” Growth Outlook The economy will probably grow by 2.8 percent in the first quarter of 2010, according to the median estimate of a Bloomberg News survey of economists this month, after a 5.9 percent pace of expansion in the fourth quarter of 2009 that got a boost from a slower pace of inventory reductions. Policy makers are “still a little concerned about the handoff from the swing in the inventory cycle and fiscal policy to private final demand,” said Michael Feroli , an economist at JPMorgan Chase & Co. in New York. Fed officials repeated that their program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt will be completed by the end of March. “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability,” the FOMC statement said. Retail Sales Retail sales unexpectedly climbed in February, consumer borrowing rose in January for the first time in a year and commercial mortgage-backed bond returns are accelerating. Meanwhile, the Fed’s preferred gauge of inflation, which excludes food and energy, has stayed tame. Thomas Hoenig , president of the Kansas City Fed, dissented for the second straight meeting and said “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the statement said. The Fed has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then. Job Losses Economic growth is helping to stanch job losses. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October. The U.S. may add as many as 300,000 jobs this month, the most in four years, said David Greenlaw , chief fixed- income economist at Morgan Stanley in New York. The unemployment rate was unchanged at 9.7 percent in February. “Things are definitely getting better,” Jeffrey Immelt , chief executive officer of General Electric Co., said at a conference on March 11 in Washington. “The credit markets are much improved. Most indicators are firming or heading up.” “But there’s a long road ahead,” with high unemployment and “big structural issues” in the economy, said Immelt, who is also a member of the New York Fed board. Borrowers raised a record $1.24 trillion in the U.S. corporate bond market last year, according to data compiled by Bloomberg. While down from that pace, issuance this year remains elevated, with $248.3 billion raised. Extra Yield The extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 267 basis points, or 2.67 percentage points, from the peak during the credit crisis of 888 basis points in December 2008, according to Bank of America Merrill Lynch indexes. The narrower spread represents annual interest savings of about $60 million for every $1 billion of bonds sold. Inflation is showing little sign of taking off. The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long- run range of 1.7 percent to 2 percent policy makers want for total inflation. Policy makers believe the risk of inflation is low, with some still worried about deflation. Inflation expectations have remained stable in recent months, even with the excess capacity in the economy. Readings on one year-ahead inflation expectations tracked by the Thomson Reuters University of Michigan Survey have averaged 2.7 percent for the past six months, compared with 2.8 percent for the prior six months. Labor Costs Officials may also be concerned about the falling cost of labor , said Marvin Goodfriend , a former research director at the Richmond Fed. Labor costs dropped at a 5.9 percent pace in the fourth quarter, according to a report earlier this month. “Today we cannot say we’re past the period of risk of deflation in unit labor costs,” said Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. In recent months, the scheduled end this month to Fed purchases of mortgage debt has prompted little change in mortgage rates. The rate for 30-year fixed mortgages fell to 4.95 percent for the week ended March 11 from 4.97 percent, compared with a record low of 4.71 percent in December. Sales of previously owned U.S. homes unexpectedly declined in January for a second month, falling 7.2 percent to an annual pace of 5.05 million, the National Association of Realtors said Feb. 26. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .

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Fed Will Keep Rate Low for `Extended Period’

March 16, 2010

By Craig Torres and Scott Lanman March 16 (Bloomberg) — Federal Reserve officials repeated their pledge to keep the main interest rate near zero for an “extended period” and confirmed that emergency measures to prop up the housing market will end as planned this month. While the economy has “continued to strengthen,” policy makers noted that “housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.” Treasuries and stocks extended gains as some traders trimmed bets the central bank will raise interest rates over the next 12 months. Fed Chairman Ben S. Bernanke is trying to determine how long to hold down borrowing costs to generate a self-sustaining recovery from the worst slump since the 1930s. “The recovery continues and remains on track to be subpar, at best,” said Diane Swonk , chief economist at Mesirow Financial in Chicago. “Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.” The yield on the 10-year note Treasury note fell five basis points, or 0.05 percentage point, to 3.65 percent at 3:44 p.m. in New York. The Standard & Poor’s 500 Index climbed 0.7 percent to 1,158.51. The June 2011 eurodollar contract rose three basis points to 98.475. An earlier report from the Commerce Department showed that housing starts fell 5.9 percent in February, hampered by snowstorms in some parts of the country, and Obama administration officials told a congressional hearing that unemployment is likely to “remain elevated for an extended period.” Growth Outlook The economy will probably grow by 2.8 percent in the first quarter of 2010, according to the median estimate of a Bloomberg News survey of economists this month, after a 5.9 percent pace of expansion in the fourth quarter of 2009 that got a boost from a slower pace of inventory reductions. Policy makers are “still a little concerned about the handoff from the swing in the inventory cycle and fiscal policy to private final demand,” said Michael Feroli , an economist at JPMorgan Chase & Co. in New York. Fed officials repeated that their program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt will be completed by the end of March. “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability,” the FOMC statement said. Retail Sales Retail sales unexpectedly climbed in February, consumer borrowing rose in January for the first time in a year and commercial mortgage-backed bond returns are accelerating. Meanwhile, the Fed’s preferred gauge of inflation, which excludes food and energy, has stayed tame. Thomas Hoenig , president of the Kansas City Fed, dissented for the second straight meeting and said “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the statement said. The Fed has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then. Job Losses Economic growth is helping to stanch job losses. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October. The U.S. may add as many as 300,000 jobs this month, the most in four years, said David Greenlaw , chief fixed- income economist at Morgan Stanley in New York. The unemployment rate was unchanged at 9.7 percent in February. “Things are definitely getting better,” Jeffrey Immelt , chief executive officer of General Electric Co., said at a conference on March 11 in Washington. “The credit markets are much improved. Most indicators are firming or heading up.” “But there’s a long road ahead,” with high unemployment and “big structural issues” in the economy, said Immelt, who is also a member of the New York Fed board. Borrowers raised a record $1.24 trillion in the U.S. corporate bond market last year, according to data compiled by Bloomberg. While down from that pace, issuance this year remains elevated, with $248.3 billion raised. Extra Yield The extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 267 basis points, or 2.67 percentage points, from the peak during the credit crisis of 888 basis points in December 2008, according to Bank of America Merrill Lynch indexes. The narrower spread represents annual interest savings of about $60 million for every $1 billion of bonds sold. Inflation is showing little sign of taking off. The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long- run range of 1.7 percent to 2 percent policy makers want for total inflation. Policy makers believe the risk of inflation is low, with some still worried about deflation. Inflation expectations have remained stable in recent months, even with the excess capacity in the economy. Readings on one year-ahead inflation expectations tracked by the Thomson Reuters University of Michigan Survey have averaged 2.7 percent for the past six months, compared with 2.8 percent for the prior six months. Labor Costs Officials may also be concerned about the falling cost of labor , said Marvin Goodfriend , a former research director at the Richmond Fed. Labor costs dropped at a 5.9 percent pace in the fourth quarter, according to a report earlier this month. “Today we cannot say we’re past the period of risk of deflation in unit labor costs,” said Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. In recent months, the scheduled end this month to Fed purchases of mortgage debt has prompted little change in mortgage rates. The rate for 30-year fixed mortgages fell to 4.95 percent for the week ended March 11 from 4.97 percent, compared with a record low of 4.71 percent in December. Sales of previously owned U.S. homes unexpectedly declined in January for a second month, falling 7.2 percent to an annual pace of 5.05 million, the National Association of Realtors said Feb. 26. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .

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Fed Will Keep Rate Low for `Extended Period’

March 16, 2010

By Craig Torres and Scott Lanman March 16 (Bloomberg) — Federal Reserve officials repeated their pledge to keep the main interest rate near zero for an “extended period” and confirmed that emergency measures to prop up the housing market will end as planned this month. While the economy has “continued to strengthen,” policy makers noted that “housing starts have been flat at depressed levels” and “employers remain reluctant to add to payrolls.” Treasuries and stocks extended gains as some traders trimmed bets the central bank will raise interest rates over the next 12 months. Fed Chairman Ben S. Bernanke is trying to determine how long to hold down borrowing costs to generate a self-sustaining recovery from the worst slump since the 1930s. “The recovery continues and remains on track to be subpar, at best,” said Diane Swonk , chief economist at Mesirow Financial in Chicago. “Businesses are finally stepping up to the plate and spending their cash flow, but the housing market and prospects for a broader-based recovery remain dim.” The yield on the 10-year note Treasury note fell five basis points, or 0.05 percentage point, to 3.65 percent at 3:44 p.m. in New York. The Standard & Poor’s 500 Index climbed 0.7 percent to 1,158.51. The June 2011 eurodollar contract rose three basis points to 98.475. An earlier report from the Commerce Department showed that housing starts fell 5.9 percent in February, hampered by snowstorms in some parts of the country, and Obama administration officials told a congressional hearing that unemployment is likely to “remain elevated for an extended period.” Growth Outlook The economy will probably grow by 2.8 percent in the first quarter of 2010, according to the median estimate of a Bloomberg News survey of economists this month, after a 5.9 percent pace of expansion in the fourth quarter of 2009 that got a boost from a slower pace of inventory reductions. Policy makers are “still a little concerned about the handoff from the swing in the inventory cycle and fiscal policy to private final demand,” said Michael Feroli , an economist at JPMorgan Chase & Co. in New York. Fed officials repeated that their program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt will be completed by the end of March. “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability,” the FOMC statement said. Retail Sales Retail sales unexpectedly climbed in February, consumer borrowing rose in January for the first time in a year and commercial mortgage-backed bond returns are accelerating. Meanwhile, the Fed’s preferred gauge of inflation, which excludes food and energy, has stayed tame. Thomas Hoenig , president of the Kansas City Fed, dissented for the second straight meeting and said “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability,” the statement said. The Fed has kept the federal funds rate target for overnight loans between banks in a range of zero to 0.25 percent since December 2008. Policy makers began using the “extended period” language in March 2009 and have repeated it at each meeting since then. Job Losses Economic growth is helping to stanch job losses. Payroll declines have slowed to an average 27,000 a month from November through February, compared with an average 252,000 from July through October. The U.S. may add as many as 300,000 jobs this month, the most in four years, said David Greenlaw , chief fixed- income economist at Morgan Stanley in New York. The unemployment rate was unchanged at 9.7 percent in February. “Things are definitely getting better,” Jeffrey Immelt , chief executive officer of General Electric Co., said at a conference on March 11 in Washington. “The credit markets are much improved. Most indicators are firming or heading up.” “But there’s a long road ahead,” with high unemployment and “big structural issues” in the economy, said Immelt, who is also a member of the New York Fed board. Borrowers raised a record $1.24 trillion in the U.S. corporate bond market last year, according to data compiled by Bloomberg. While down from that pace, issuance this year remains elevated, with $248.3 billion raised. Extra Yield The extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 267 basis points, or 2.67 percentage points, from the peak during the credit crisis of 888 basis points in December 2008, according to Bank of America Merrill Lynch indexes. The narrower spread represents annual interest savings of about $60 million for every $1 billion of bonds sold. Inflation is showing little sign of taking off. The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long- run range of 1.7 percent to 2 percent policy makers want for total inflation. Policy makers believe the risk of inflation is low, with some still worried about deflation. Inflation expectations have remained stable in recent months, even with the excess capacity in the economy. Readings on one year-ahead inflation expectations tracked by the Thomson Reuters University of Michigan Survey have averaged 2.7 percent for the past six months, compared with 2.8 percent for the prior six months. Labor Costs Officials may also be concerned about the falling cost of labor , said Marvin Goodfriend , a former research director at the Richmond Fed. Labor costs dropped at a 5.9 percent pace in the fourth quarter, according to a report earlier this month. “Today we cannot say we’re past the period of risk of deflation in unit labor costs,” said Goodfriend, now a professor at Carnegie Mellon University’s Tepper School of Business in Pittsburgh. In recent months, the scheduled end this month to Fed purchases of mortgage debt has prompted little change in mortgage rates. The rate for 30-year fixed mortgages fell to 4.95 percent for the week ended March 11 from 4.97 percent, compared with a record low of 4.71 percent in December. Sales of previously owned U.S. homes unexpectedly declined in January for a second month, falling 7.2 percent to an annual pace of 5.05 million, the National Association of Realtors said Feb. 26. To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Scott Lanman in Washington at slanman@bloomberg.net .

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Jim Luce: C.E.O. Brooke Partridge Helps Lead Technology Thought in Developing World

March 14, 2010

Despite our best efforts to meet in Barcelona, at the GSM World Congress , with 49,000 participants spread between 1,300 vendors, C.E.O. Brooke Partridge and I missed each other. We succeeded in connecting between New York and Palo Alto by phone a week later. It had been my impression that she was someone I had to interview, but I did not realize how integral she was to thought leadership on technology in the developing world until we spoke. Brooke Partridge of Vital Wave Consulting helps steer the direction of technology in emerging markets. She’s been moving in this space for a long time. Brooke started Vital Wave Consulting nearly five years ago after a decade at HP as a leader in emerging technologies and emerging markets. She was key in dragging the emerging-market focus from the realm of corporate social responsibility (CSR) into the business units. During that period, HP had a head start on emerging markets, and Brooke saw that other companies getting into the space were looking for strategic support and guidance. She started Vital Wave Consulting to serve a wider base of companies, and Brooke and the rest of her firm became advisors for some of the biggest tech companies in the world. This “wag the dog” approach had a strong impact on several multinational organizations that were able to maximize their impact on global business and the developing world with her firm’s advice. Brooke has been quietly moving behind the scenes for many years now helping technology companies strategize and tool up for successful revenue growth in emerging markets. Indeed, she counts Intel, Microsoft, and other Fortune 500 firms among Vital Wave’s customers. “One of the reasons our company has survived in this economy is because of this role. We go beyond talking about the size and importance of these markets. We really quantify and characterize the opportunity, creating specific plans to help companies capture it.” Initially, Brooke saw the need for a firm that would specialize in helping companies grow profitably in these countries. Up until then, technology corporations either ignored emerging markets or dealt with them in their philanthropic or CSR areas. Not always, anymore. Brooke Partridge and David Lehr with the Xian Province Ministry of Commerce in China. “But if you want financially sustainable investments in poor countries,” she says, “you have to talk about the P word.” Profitability, that is. Among many who work in the NGO and development communities, the idea of making money from people in poor countries remains taboo, but Brooke sees it as vital. “If you want companies to invest in these markets for the long term, you have to demonstrate that they can make money in them. And that’s what we help to do,” she says. Yet a funny thing happened along the way. “A few years ago, the development community came to us,” says Brooke. Leading foundations such as the Gates Foundation , the U.N. Foundation , the GSMA Development Fund , and the Cherie Blair Foundation for Women liked Vital Wave’s approach to the challenge of financially sustainable development – and began working with the company. It was organic growth. What Vital Wave Consulting does for the private sector has proved valuable for NGOs, and they reached out to Vital Wave Consulting themselves. The company has since authored several reports in collaboration with these foundations, on topics such as Mobile Healthcare , Health Information Systems , and Mobiles and Women in the Developing World. The reports stress multi-sector collaboration and highlight the need for the private sector to be involved in these solutions. A seasoned globe-trotter, Brooke enjoys a moment to relax with kids in Egypt. Brooke’s personal background, how she got here, is an integral piece of the picture. Brooke grew up in Silicon Valley as it grew up – when San Jose and Santa Clara were known for agriculture not computer chips. She was in one of the first middle schools to have an Apple Macintosh and a computer programming class (two computers shared among 30 programming students!). She grew up a few miles from Apple and HP offices in Cupertino. There were entrepreneurs all around. What Brooke calls “A heritage of entrepreneurship.” Then, when she was 15, she went to Peru for a summer – her first exposure to both poverty in the developing world and the innovative ways that poor people earn money. She watched what people do every day in low-income areas to creatively increase their income, utilize what assets they have to make extra revenue. People maximize and monetize whatever assets they have available. Own a wheelbarrow? Use it! Move things for people and charge money for it. Eventually, one has to ask, “How could someone make more money with a computer, a cell phone, a server?” Not long after, she found herself living in Mexico, and Chile, plus a year living in Madrid. Eventually, she was focused heavily on markets like South Africa, China, and India. With her unusual background, no wonder Brooke landed at the intersection of technology, entrepreneurship, business growth, and emerging markets. Brooke Partridge and China Specialist, David Lehr, visit the Rural China Rain Gold Junior Middle School. When Brooke Partridge was in high school, her guidance counselor asked her what she wanted to do as a career. When Partridge replied that she wanted to work internationally, the guidance counselor said “Oh, that just means you want to travel. But what do you want to do for work?” Little did he know just how serious Brooke was. Partridge’s early experiences led her to study international affairs and economics in her undergraduate and graduate studies, but her early corporate experiences left her wanting more. Brooke was nearly always working on new, “disruptive” technology solutions – for both developed and developing-country markets. Disruptive means that the new technological solution would disrupt existing but weaker solutions. Ultimately, she became the business director of HP’s Emerging Market Solutions organization where her passion for and experience in disruptive technology, international business and development came together. Brooke presents “Best Practices” at HOIT 2007, IIT in Madras, India. From her early days in developing countries, she had always been convinced of the connection between profitable business and economic development. This was her first opportunity to demonstrate it. And through Vital Wave Consulting, those opportunities keep coming. “That is really my guiding philosophy, and that of Vital Wave Consulting. I don’t apologize appealing to corporations’ profit motive. I think that even the development community is seeing that profit – i.e., sustainable business models – is essential for scaling their programs. “There is big money in making products for emerging markets, and it results in good development. People in emerging markets want choices, they spend their money wisely, and the market economy can work for them.” Paul Stevers, founder of CharityHelp International ( CHI ), agrees with the view that profitability is good for development. Paul told me, “Thought leaders like Brook Partridge and Muhammad Yunus ( Grameen Bank ) are leading the way on how to develop sustainable business models that can be scaled up significantly and benefit millions of people in developing countries.” Brooke’s vision stems from her total emersion in local cultures – here, in China. C.E.O. Brooke Partridge of Vital Wave Consulting does not believe in hand-outs. She is involved in developing the world hands-on. Through her global vision, multi-national corporations and international philanthropic organizations will be able to assist the developing world develop itself. That, my friends, is true leadership. Other Stories by Jim Luce : Peter Buffett and Angelique Kidjo Release Single to Support Girls in Africa (HuffPo) From Kansas to Cairo: Introducing Soliya’s World-Changing “Terana” (HuffPo) U.S. Congresmember Carolyn Maloney on Abhorrent Anti-Gay Legislation in Uganda (HuffPo) Goldman Sachs Helps 10,000 Women, Including Andeisha Farid (HuffPo) Chatting with UNICEF’s Director Ann Veneman (HuffPo) NBC’s Brian Williams: Changing the World for the Better (HuffPo) Sweden’s Queen on “Fire Souls” – Leaders in Child Protection (HuffPo) Asia Society’s Prez on Global Citizens Like Obama (HuffPo ) Interview with the Red Cross Secretary General in Geneva (HuffPo) Pending: Earth Institute at Columbia Takes Leading Role on Cell Phones for Social Change Pending: Gates Foundation’s Ignacio Mas on eFinance in the Developing World Pending:GSMA and the Cherie Blair Foundation for Women Publish Women & Mobile: A Global Opportunity Report Pending:mHealth: Alliance: Partnership Between the U.N. and Vodafone Pending:Queen Rania on the Role of Cell Communications in Advancing Education Around the World Pending:Rockefeller Foundation Leads Panel on Mobile Transformation of Developing World

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Fed Says Economy Improved This Year at `Modest’ Pace in Nine of 12 Regions

March 3, 2010

By Scott Lanman March 3 (Bloomberg) — The U.S. economy improved in nine of the Federal Reserve’s 12 regions in January and February while being hampered by snowstorms in the eastern U.S., the central bank said today. “In most cases the increases were modest,” the Fed said in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. Consumer spending increased in many regions, while commercial real estate and loan demand were “weak” and labor markets “soft,” the Fed said. The report informs Fed policy makers ahead of their next meeting on March 16. While Chairman Ben S. Bernanke reiterated the Fed would leave rates very low for an “extended period” in congressional testimony last week, Kansas City Fed President Thomas Hoenig , the longest-serving policy maker, wants to eliminate the phrase because the financial crisis is fading. “Consumer spending improved slightly in many districts since the last survey, but severe snowstorms in early February limited activity in some districts,” the Fed said today. The Atlanta and St. Louis regions reported “mixed” economies, while the Richmond district said the economy “slackened or remained soft across most sectors” owing to the weather. Today’s Beige Book reflects information collected on or before Feb. 22 and summarized by staffers at the Kansas City Fed. The U.S. economy expanded at a 5.9 percent annual rate in the fourth quarter, the most in six years, as the country recovers from the worst recession since the 1930s. ‘Soft’ Hiring While payroll reductions slowed in most areas, “hiring plans still remained generally soft,” and pressures on employers to raise wages were “minimal,” the Fed said. Economists surveyed by Bloomberg News anticipate a government report March 5 will show U.S. payrolls declined by 63,000 in February, in part because snowstorms caused some businesses to close. The jobless rate probably increased to 9.8 percent from 9.7 percent, based on the median estimate, remaining close to a 26-year high. The U.S. has lost 8.4 million jobs since the start of the recession in December 2007, the most of any slowdown in the post-World War II era. A private report today said U.S. companies last month cut 20,000 jobs, the fewest in two years, according to data from ADP Employer Services, following a revised 60,000 drop the prior month. Retail Sales Retail sales rose in many areas, while the Atlanta, Kansas City and St. Louis districts reported lower-than-expected figures or declines, the Beige Book said. The Commerce Department said this week that personal spending rose 0.5 percent in January, the fourth straight increase. Household purchases account for about 70 percent of the economy. Atlanta-based Home Depot Inc., the largest U.S. home- improvement retailer, last month projected comparable-store sales will climb 2.5 percent from February 2010 to January 2011 after dropping 6.6 percent last year. Cincinnati-based Macy’s Inc. said sales at established stores will grow by as much as 2 percent after slumping 5.3 percent in the 12 months through January. The Fed’s Beige Book said non-financial services were “steady or improved” in the majority of districts, and manufacturing “increased further” in most areas. A separate report today showed service industries in the U.S. expanded in February at the fastest pace since October 2007. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 53 from 50.5 the prior month. Readings higher than 50 signal growth. Housing Improves The Fed said housing markets improved in some areas, were “weak or softened further” in three districts, including New York, and little changed or mixed in two other regions. The weather hampered the market along the East Coast. Sales of previously owned U.S. homes unexpectedly declined in January for a second month, falling 7.2 percent to an annual pace of 5.05 million, while the median sales price was unchanged from the same month last year, the National Association of Realtors said Feb. 26. In December, sales decreased a record 16.2 percent. The government extended a tax credit in November aimed at boosting home purchases. At the same time, the Fed this month plans to complete purchasing $1.25 trillion of mortgage-backed securities and $175 billion of federal agency debt, a program aimed at reducing home-loan rates over the past year. Tax Credit “Most districts attributed stronger home sales to the home-buyer tax credit, with several contacts apprehensive about future sales once the credit expires on April 30,” the Fed said. In commercial real estate, the Fed said the market “remained weak or declined further in most districts,” and all areas said construction was “weak or slow, except for some moderate boost” from federal stimulus and public construction. Some regions “noted slight stabilization or modest signs of improvement,” the Fed said. Bernanke said last week that commercial property is the biggest credit issue in the U.S. The default rate for commercial property mortgages held by U.S. banks more than doubled in the fourth quarter and may reach a peak of 5.4 percent at the end of next year, according to Real Capital Analytics Inc. Many companies were unable to raise selling prices, even with higher costs for metals and lumber, the Beige Book said. The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation. “Districts generally expected stable prices overall heading forward,” the Fed said. Bernanke told Congress last week that “most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets.” To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

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Kohn to Leave Fed After 40 Years When Term as Vice Chairman Ends in June

March 1, 2010

By Scott Lanman March 1 (Bloomberg) — Donald Kohn will leave the Federal Reserve at the end of his four-year term as vice chairman after helping Ben S. Bernanke and Alan Greenspan steer the U.S. through recessions and crises. Kohn, 67, said he is resigning June 23 after 40 years at the central bank. History will judge Chairman Bernanke and the Fed to have met challenges over the last several years “with great speed, imagination and effectiveness,” Kohn said in his resignation letter to President Barack Obama , released today by the Fed. The departure opens a third vacancy on the seven-member Fed Board of Governors, giving Obama the chance to pick a majority of the panel after appointing Daniel Tarullo in 2009. It leaves the central bank without one of its chief policy architects and sources of institutional knowledge as the Fed prepares to unwind a record expansion of credit. “This will be a loss in the sense that it continues the drain of experience from the central bank,” said former Atlanta Fed research director Robert Eisenbeis , now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey. “I am concerned that we will see businessmen and others more sensitive to political pressures in D.C. be appointed by this current administration.” Possible successors, according to Fed watchers and former officials, include Tarullo, 57, who’s backed tougher bank regulation; Christina Romer , 51, an architect of the administration’s 2009 fiscal stimulus; and San Francisco Fed President Janet Yellen , 63, one of the central bank’s top advocates of lower interest rates. ‘Very Possible’ It’s “very possible” for Obama to name Tarullo vice chairman and appoint economists or academics to the other vacancies, said Camden Fine , president of the Independent Community Bankers of America, a Washington group representing about 5,000 firms with $1 trillion in assets. Romer or Yellen “would be terrific if they wanted to do it,” said Alice Rivlin , Fed vice chairman from 1996 to 1999. Obama wants to get a replacement for Kohn confirmed by the Senate before his term expires, White House press secretary Robert Gibbs said. The president also is seeking nominees for the other open positions on the Fed, he said. A White House official said Kohn’s decision was his alone. ‘Most Influential’ Kohn is “probably the most influential non-chairman” in Fed history, being “especially important” on monetary policy and financial stability, said Laurence Meyer , a Fed governor from 1996 to 2002. “I would never, ever think of going into that FOMC room without having had an in-depth discussion with Don Kohn about the options and pros and cons of particular policy decisions,” said Meyer, who’s now vice chairman of consultant Macroeconomic Advisers LLC in Washington. The departure of Kohn, who had been contemplating leaving for months, wasn’t a surprise in Fed circles. He and his wife, Gail, sold their Washington-area home in 2008 and spend weekends at a waterfront house in Annapolis, Maryland. They live during the week with their son in a Washington suburb; Gail Kohn runs a non-profit organization that helps senior citizens stay in their homes in the Capitol Hill neighborhood. Kohn, appointed by President George W. Bush as a Fed governor in 2002 and as vice chairman in 2006, could have continued to serve out his term as governor, which ends in January 2016, had Obama picked a different No. 2 for Bernanke. Most Opposition Obama in August nominated Bernanke for a second term, and the Senate approved him in a 70-30 January vote that represented the most opposition since the chamber began confirming central- bank chiefs in 1978. Along with Bernanke, then-New York Fed President Timothy F. Geithner and Fed Governor Kevin Warsh , Kohn in 2008 helped coordinate the central bank’s response to the worst financial crisis in 70 years. “He brought his deep knowledge, experience and wisdom to bear in helping to coordinate the Federal Reserve’s response to the economic and financial crisis,” Bernanke, 56, said in a statement. Lawmakers are debating removing some or all of the Fed’s bank-supervision and emergency-lending powers. Senate Banking Committee Chairman Christopher Dodd has said the Fed’s performance before the financial crisis was an “abysmal failure.” ‘Unique Blend’ “The Federal Reserve has a unique blend of expertise on the economy, financial markets, and financial institutions and a longer-term perspective,” Kohn said in his resignation letter. “I am also confident that, by applying this expertise and perspective to the regulation of banks and consumer transactions, to the oversight of payments systems, and to the conduct of monetary policy, the Federal Reserve will continue to contribute to the stability and prosperity of our country in the years ahead.” Richmond Fed President Jeffrey Lacker said Kohn “has been an absolute rock within the Federal Reserve System, and his contributions are going to be greatly missed.” Lacker spoke to reporters after a speech today. Born in Philadelphia, Kohn received a bachelor’s degree in economics in 1964 from the College of Wooster in Wooster, Ohio, and a doctorate in 1971 from the University of Michigan. He began his career as a financial economist at the Kansas City Fed in 1970 and transferred to the Fed’s Washington headquarters five years later. He quickly moved up, becoming chief of capital markets in the board’s division of research and statistics in 1978, associate director in 1981 and deputy staff director of the division of monetary affairs in 1983. He headed the division from 1987 to 2001, when he became an adviser to the board. He was secretary of the Federal Open Market Committee from 1987 through 2002. In addition to Tarullo, a former economic adviser to President Bill Clinton , the remaining members of the Fed board are Bush Appointees Elizabeth Duke , 57, a former community banker and Warsh, 39, a former investment banker nominated by Bush in 2006. To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net .

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American Italian Pasta Company Announces Results of Its 2010 Annual Stockholder Meeting

February 25, 2010

KANSAS CITY, MO–(Marketwire – February 25, 2010) –  American Italian Pasta Company ( NASDAQ : AIPC ), the largest producer of dry pasta in North America, announces results from its 2010 Annual Stockholder Meeting held today in Kansas City, MO.

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Obama to Endorse New Rules to Limit Health-Insurance Premium Increases

February 22, 2010

By Nicholas Johnston and Kristin Jensen Feb. 22 (Bloomberg) — President Barack Obama will endorse new rules giving the government power to stop insurance-rate increases it deems unreasonable, as part of a plan to revamp the health-care system, an administration official said. Obama’s proposal, which would give the U.S. Department of Health and Human Services the new authority over insurers, is to be unveiled today. The move is a reversal from months of the White House leaving details of the largest U.S. medical overhaul in more than four decades largely up to congressional Democrats. The president has invited Republican leaders and top congressional committee members to a Feb. 25 meeting at Blair House, across from the White House, calling on them to release a “comprehensive bill” of their own that would cover millions of uninsured Americans and reduce rising medical-care costs . Obama on Feb. 20 urged lawmakers to attend the meeting in “good faith” as he decried “jaw-dropping” insurance-rate increases that he said underscore the need for remedies. On Feb. 9, he singled out for criticism proposed insurance premium increases by a California subsidiary of Indianapolis- based WellPoint Inc . that the company later delayed. In his weekly radio address Feb. 20, he said customers of Anthem Blue Cross of California recently “opened up their mailboxes to find a letter” containing news that the company wanted to raise premiums “by an average of 25 percent, with about a quarter of folks likely to see their rates go up anywhere from 35 to 39 percent.” Widening Concern Obama also expressed concern about similar rate increases that either have been put into effect or are proposed in Michigan, Kansas and Maine. “The bottom line is that the status quo is good for the insurance industry and bad for America,” he said. Obama’s legislative proposal will include the creation of a government panel to set rules for reasonable rate increases, the official said on condition of anonymity ahead of today’s announcement. The proposal, first advanced in legislation introduced by Democratic Senator Dianne Feinstein of California, would create a seven-member Health Insurance Rate Authority to make recommendations on rate reviews and approvals. The members would include consumer representatives, an insurance industry representative, a physician, and experts in health economics, actuarial science, and related fields. It would publish an annual report on insurance-market behavior, the official said. Delegating to States Under the proposal, the health secretary could also delegate enforcement to a state insurance regulator to block the premium hike or order its modification, the official said. Obama is disclosing his legislative proposal on health care after legislation that would require all Americans to have insurance stalled in Congress amid Republican opposition. Republicans have criticized the Democratic legislation, saying it’s too expensive at about $1 trillion over 10 years, that it unfairly forces people to obtain insurance, and will lead to a government takeover of health care. Senate Republican leader Mitch McConnell of Kentucky said yesterday the American people “really want to us to shelve this bill and start over.” “It strikes me as rather arrogant to say, ‘Well, we’re going to give it to you anyway, and we’ll use whatever device is available to achieve that end,’” McConnell said on the “Fox News Sunday” television program. To sidestep Republican opposition, the Democrats may use a procedure called reconciliation, which would require just 51 Senate votes to pass. That may pose a problem because Senate rules require reconciliation measures to only deal with revenue and spending issues, which would mean the bill might have to be stripped down. House and Senate lawmakers were days away from overcoming differences and melding their bills when the Jan. 19 special Senate election in Massachusetts deprived Democrats of the 60th vote they needed to get the new compromise through that chamber. Now, lawmakers are looking to Obama to finish the job. To contact the reporters on this story: Nicholas Johnston in Washington at njohnston3@bloomberg.net Kristin Jensen in Washington at kjensen@bloomberg.net .

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Obama Will Endorse New Rules to Limit Health-Insurance Premium Increases

February 22, 2010

By Nicholas Johnston and Kristin Jensen Feb. 22 (Bloomberg) — President Barack Obama will endorse new rules giving the government power to stop insurance-rate increases it deems unreasonable, as part of a plan to revamp the health-care system, an administration official said. Obama’s proposal, which would give the U.S. Department of Health and Human Services the new authority over insurers, is to be unveiled today. The move is a reversal from months of the White House leaving details of the largest U.S. medical overhaul in more than four decades largely up to congressional Democrats. The president has invited Republican leaders and top congressional committee members to a Feb. 25 meeting at Blair House, across from the White House, calling on them to release a “comprehensive bill” of their own that would cover millions of uninsured Americans and reduce rising medical-care costs . Obama on Feb. 20 urged lawmakers to attend the meeting in “good faith” as he decried “jaw-dropping” insurance-rate increases that he said underscore the need for remedies. On Feb. 9, he singled out for criticism proposed insurance premium increases by a California subsidiary of Indianapolis- based WellPoint Inc . that the company later delayed. In his weekly radio address Feb. 20, he said customers of Anthem Blue Cross of California recently “opened up their mailboxes to find a letter” containing news that the company wanted to raise premiums “by an average of 25 percent, with about a quarter of folks likely to see their rates go up anywhere from 35 to 39 percent.” Widening Concern Obama also expressed concern about similar rate increases that either have been put into effect or are proposed in Michigan, Kansas and Maine. “The bottom line is that the status quo is good for the insurance industry and bad for America,” he said. Obama’s legislative proposal will include the creation of a government panel to set rules for reasonable rate increases, the official said on condition of anonymity ahead of today’s announcement. The proposal, first advanced in legislation introduced by Democratic Senator Dianne Feinstein of California, would create a seven-member Health Insurance Rate Authority to make recommendations on rate reviews and approvals. The members would include consumer representatives, an insurance industry representative, a physician, and experts in health economics, actuarial science, and related fields. It would publish an annual report on insurance-market behavior, the official said. Delegating to States Under the proposal, the health secretary could also delegate enforcement to a state insurance regulator to block the premium hike or order its modification, the official said. Obama is disclosing his legislative proposal on health care after legislation that would require all Americans to have insurance stalled in Congress amid Republican opposition. Republicans have criticized the Democratic legislation, saying it’s too expensive at about $1 trillion over 10 years, that it unfairly forces people to obtain insurance, and will lead to a government takeover of health care. Senate Republican leader Mitch McConnell of Kentucky said yesterday the American people “really want to us to shelve this bill and start over.” “It strikes me as rather arrogant to say, ‘Well, we’re going to give it to you anyway, and we’ll use whatever device is available to achieve that end,’” McConnell said on the “Fox News Sunday” television program. To sidestep Republican opposition, the Democrats may use a procedure called reconciliation, which would require just 51 Senate votes to pass. That may pose a problem because Senate rules require reconciliation measures to only deal with revenue and spending issues, which would mean the bill might have to be stripped down. House and Senate lawmakers were days away from overcoming differences and melding their bills when the Jan. 19 special Senate election in Massachusetts deprived Democrats of the 60th vote they needed to get the new compromise through that chamber. Now, lawmakers are looking to Obama to finish the job. To contact the reporters on this story: Nicholas Johnston in Washington at njohnston3@bloomberg.net Kristin Jensen in Washington at kjensen@bloomberg.net .

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Fed Officials Debated Shrinking Balance Sheet, January FOMC Minutes Show

February 17, 2010

By Scott Lanman and Craig Torres Feb. 17 (Bloomberg) — The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.” The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Stocks Rise The Standard & Poor’s 500 Index climbed 0.4 percent to 1,099.51 at 4:10 p.m. in New York. The yield on the 2-year Treasury note rose five basis points to 0.85 percent, and the 10-year yield increased eight basis points to 3.73 percent. “The Fed is trying to figure out its task in a more normal operating environment,” said Paul Ballew , chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “That includes reducing their balance sheet and moving back toward more traditional securities.” The minutes said all Fed officials agreed that raising the interest on excess reserves rate and the target for the federal funds rate “would be a key element” in a move toward tighter policy. Most officials thought it would be appropriate to begin draining reserves before raising the rates, the minutes said. A majority of officials also “saw benefits” in continuing to use the federal funds rate as a target for policy in the long run, “so long as other money market rates remained closely linked” to the target. First Time In the statement issued Jan. 27, the Fed declared for the first time the U.S. economy is in “recovery” while reaffirming it would end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities. Bernanke said last week the U.S. still requires a “highly accommodative” Fed policy, reiterating that low rates are warranted for an “extended period.” The minutes gave more information on Kansas City Fed President Thomas Hoenig ’s vote against the “extended period” language in the statement. Hoenig proposed the FOMC “express an expectation that the federal funds rate would be low for some time” and said he wanted the Fed to set a “modestly higher” rate soon, the minutes said. At the meeting, Fed staff officials proposed widening the spread between the discount rate and federal funds rate initially to a half percentage point from a quarter point, the minutes said. Discount Rate While policy makers “agreed that it would soon be appropriate” to raise the discount rate and shorten the term of discount window loans to overnight, the limit before the financial crisis, some officials said the “optimal spread could depend, in part,” on Fed decisions about longer-term policy, the report said. Bernanke, 56, who won a 70-30 Senate vote last month for a second four-year term, laid more groundwork on Feb. 10 for exiting his record expansion of credit without saying when he’ll take the first step. In congressional testimony, Bernanke described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” He also said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long,” and wouldn’t signal a change in the outlook for monetary policy. Economic Forecasts Policy makers at their meeting last month also raised the low end of their forecasts for economic growth and the unemployment rate , the Fed said. The U.S. economy will expand by a range of 2.8 percent to 3.5 percent this year, compared with a median projection of 2.5 percent to 3.5 percent in November, when officials last gave forecasts. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, compared with the forecasts of 9.3 percent to 9.7 percent from November, the central bank said. The jobless rate fell to 9.7 percent last month from 10 percent in December, close to a 26-year high. Officials predicted prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, after previous projections of 1 percent to 1.5 percent. At the previous meeting, which took place Dec. 15-16, Fed officials discussed whether the economy was strong enough to allow their asset purchases to end in March and differed over the risk of inflation. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates , while one person sought a reduction, according to minutes of the December session. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Fed Officials Debated Reducing Balance Sheet at Last Meeting, Minutes Show

February 17, 2010

By Scott Lanman and Craig Torres Feb. 17 (Bloomberg) — The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.” The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Stocks Rise The Standard & Poor’s 500 Index climbed 0.4 percent to 1,099.51 at 4:10 p.m. in New York. The yield on the 2-year Treasury note rose five basis points to 0.85 percent, and the 10-year yield increased eight basis points to 3.73 percent. “The Fed is trying to figure out its task in a more normal operating environment,” said Paul Ballew , chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “That includes reducing their balance sheet and moving back toward more traditional securities.” The minutes said all Fed officials agreed that raising the interest on excess reserves rate and the target for the federal funds rate “would be a key element” in a move toward tighter policy. Most officials thought it would be appropriate to begin draining reserves before raising the rates, the minutes said. A majority of officials also “saw benefits” in continuing to use the federal funds rate as a target for policy in the long run, “so long as other money market rates remained closely linked” to the target. First Time In the statement issued Jan. 27, the Fed declared for the first time the U.S. economy is in “recovery” while reaffirming it would end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities. Bernanke said last week the U.S. still requires a “highly accommodative” Fed policy, reiterating that low rates are warranted for an “extended period.” The minutes gave more information on Kansas City Fed President Thomas Hoenig ’s vote against the “extended period” language in the statement. Hoenig proposed the FOMC “express an expectation that the federal funds rate would be low for some time” and said he wanted the Fed to set a “modestly higher” rate soon, the minutes said. At the meeting, Fed staff officials proposed widening the spread between the discount rate and federal funds rate initially to a half percentage point from a quarter point, the minutes said. Discount Rate While policy makers “agreed that it would soon be appropriate” to raise the discount rate and shorten the term of discount window loans to overnight, the limit before the financial crisis, some officials said the “optimal spread could depend, in part,” on Fed decisions about longer-term policy, the report said. Bernanke, 56, who won a 70-30 Senate vote last month for a second four-year term, laid more groundwork on Feb. 10 for exiting his record expansion of credit without saying when he’ll take the first step. In congressional testimony, Bernanke described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” He also said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long,” and wouldn’t signal a change in the outlook for monetary policy. Economic Forecasts Policy makers at their meeting last month also raised the low end of their forecasts for economic growth and the unemployment rate , the Fed said. The U.S. economy will expand by a range of 2.8 percent to 3.5 percent this year, compared with a median projection of 2.5 percent to 3.5 percent in November, when officials last gave forecasts. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, compared with the forecasts of 9.3 percent to 9.7 percent from November, the central bank said. The jobless rate fell to 9.7 percent last month from 10 percent in December, close to a 26-year high. Officials predicted prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, after previous projections of 1 percent to 1.5 percent. At the previous meeting, which took place Dec. 15-16, Fed officials discussed whether the economy was strong enough to allow their asset purchases to end in March and differed over the risk of inflation. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates , while one person sought a reduction, according to minutes of the December session. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Fed Unemployment Projection: Jobless Rate Will Stay High For Next 2 Years

February 17, 2010

WASHINGTON — With the economy healing, Federal Reserve officials debated last month when to reel in the extraordinary stimulus aid they injected into the economy. Some officials wanted to start selling assets on its books “in the near future,” documents released Wednesday show. Selling assets would sop up some of the stimulus money and shrink the Fed’s $2.2 trillion balance sheet. But many members expressed concern that such transactions could drive up interest rates and hurt the economic recovery. Last week, Fed Chairman Ben Bernanke said he didn’t expect any asset sales soon. The documents on the Fed’s closed-door meeting last month pointed to divergent thoughts about the timing and tools to reverse course and start tightening credit. The Fed also released a forecast Wednesday predicting unemployment will stay high over the next two years because recession-scarred Americans are likely to stay cautious. At the Jan. 26-27 meeting, the Fed left rates at a record low near zero to help nurture the recovery and drive down unemployment. And it pledged to hold rates at “exceptionally low” levels for an “extended period.” One Fed official, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, objected to maintaining that pledge. He feared it would increase inflationary pressures, the documents show. Instead, Hoenig wanted to change the language to say rates would stay low for “some time.” Hoenig said he thought such a change would give the Fed more flexibility to start raising rates, the documents said. Hoenig also thought a move toward “modestly higher” interest rates should happen soon. Bernanke, in remarks last week, suggested the Fed is still months away from raising rates and draining money out of the financial system. The recovery is still fragile and unemployment, now at 9.7 percent, is high. In its economic forecast, Fed policymakers said it will take “some time” for the economy and the jobs market to get back to normal. They did not spell out how long that would be. Previously, they suggested it could take five or six years for economic conditions to return to full health. A “sizable minority,” though, said they thought it could take more than five or six years for the economy and the job market to return to normal. The Fed said the unemployment rate this year could hover between 9.5 percent and 9.7 percent and between 8.2 percent and 8.5 percent next year. By 2012, the rate will range between 6.6 percent and 7.5 percent, it predicted. Those forecasts are little changed from projections the Fed released in late November. But they suggest unemployment will remain elevated heading into this year’s congressional elections and the presidential election in 2012. A more normal unemployment rate would be between 5.5 percent and 6 percent. Fed policymakers “expect that the pace of the economic recovery will be restrained by household and business uncertainty, only gradual improvement in labor market conditions and a slow easing of credit conditions in the banking sector,” according to the forecast. Against that backdrop, the Fed expects the economy will grow between 2.8 percent and 3.5 percent this year. Growth will pick up to between 3.4 percent and 4.5 percent next year and log similar growth in 2012. The economy would need to grow by at least 5 percent a year to make a dent in the unemployment rate, analysts say. As Fed policymakers debated ways to bring policy closer to normal, most thought that a future program of “gradual” asset sales could be helpful in shrinking the Fed’s balance sheet.Among those the Fed’s assets are mortgage securities it has bought from Fannie Mae and Freddie Mac. The Fed is scheduled to end $1.25 trillion worth of such purchases at the end of March. The purchases are aimed at lowering mortgage rates and bolstering the housing market. The Fed has held the door open to extending the program if the economy weakened. Some analysts fear that once the program ends, mortgage rates could rise, hurting the recovery in housing and the overall economy. Last week, Bernanke said the central bank will likely start to tighten credit by boosting the rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Fed officials said that bumping up the interest on bank reserves would be a key element of their exit strategy, according to Wednesday’s documents. Officials offered a range of strategies on how this and other tools could be used.

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Fed Unemployment Projection: Jobless Rate Will Stay High For Next 2 Years

February 17, 2010

WASHINGTON — With the economy healing, Federal Reserve officials debated last month when to reel in the extraordinary stimulus aid they injected into the economy. Some officials wanted to start selling assets on its books “in the near future,” documents released Wednesday show. Selling assets would sop up some of the stimulus money and shrink the Fed’s $2.2 trillion balance sheet. But many members expressed concern that such transactions could drive up interest rates and hurt the economic recovery. Last week, Fed Chairman Ben Bernanke said he didn’t expect any asset sales soon. The documents on the Fed’s closed-door meeting last month pointed to divergent thoughts about the timing and tools to reverse course and start tightening credit. The Fed also released a forecast Wednesday predicting unemployment will stay high over the next two years because recession-scarred Americans are likely to stay cautious. At the Jan. 26-27 meeting, the Fed left rates at a record low near zero to help nurture the recovery and drive down unemployment. And it pledged to hold rates at “exceptionally low” levels for an “extended period.” One Fed official, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, objected to maintaining that pledge. He feared it would increase inflationary pressures, the documents show. Instead, Hoenig wanted to change the language to say rates would stay low for “some time.” Hoenig said he thought such a change would give the Fed more flexibility to start raising rates, the documents said. Hoenig also thought a move toward “modestly higher” interest rates should happen soon. Bernanke, in remarks last week, suggested the Fed is still months away from raising rates and draining money out of the financial system. The recovery is still fragile and unemployment, now at 9.7 percent, is high. In its economic forecast, Fed policymakers said it will take “some time” for the economy and the jobs market to get back to normal. They did not spell out how long that would be. Previously, they suggested it could take five or six years for economic conditions to return to full health. A “sizable minority,” though, said they thought it could take more than five or six years for the economy and the job market to return to normal. The Fed said the unemployment rate this year could hover between 9.5 percent and 9.7 percent and between 8.2 percent and 8.5 percent next year. By 2012, the rate will range between 6.6 percent and 7.5 percent, it predicted. Those forecasts are little changed from projections the Fed released in late November. But they suggest unemployment will remain elevated heading into this year’s congressional elections and the presidential election in 2012. A more normal unemployment rate would be between 5.5 percent and 6 percent. Fed policymakers “expect that the pace of the economic recovery will be restrained by household and business uncertainty, only gradual improvement in labor market conditions and a slow easing of credit conditions in the banking sector,” according to the forecast. Against that backdrop, the Fed expects the economy will grow between 2.8 percent and 3.5 percent this year. Growth will pick up to between 3.4 percent and 4.5 percent next year and log similar growth in 2012. The economy would need to grow by at least 5 percent a year to make a dent in the unemployment rate, analysts say. As Fed policymakers debated ways to bring policy closer to normal, most thought that a future program of “gradual” asset sales could be helpful in shrinking the Fed’s balance sheet.Among those the Fed’s assets are mortgage securities it has bought from Fannie Mae and Freddie Mac. The Fed is scheduled to end $1.25 trillion worth of such purchases at the end of March. The purchases are aimed at lowering mortgage rates and bolstering the housing market. The Fed has held the door open to extending the program if the economy weakened. Some analysts fear that once the program ends, mortgage rates could rise, hurting the recovery in housing and the overall economy. Last week, Bernanke said the central bank will likely start to tighten credit by boosting the rate it pays banks on money they leave at the central bank. Doing so would raise rates tied to commercial banks’ prime rate and affect many consumer loans. Fed officials said that bumping up the interest on bank reserves would be a key element of their exit strategy, according to Wednesday’s documents. Officials offered a range of strategies on how this and other tools could be used.

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Gundlach’s Grudge Match With TCW Might Cost `The Godfather’ $500 Million

February 17, 2010

By Edward Robinson and Sree Vidya Bhaktavatsalam Feb. 17 (Bloomberg) — Jeffrey Gundlach has a black eye and a cut on the bridge of his nose, and he winces as he rubs his side. “I think I cracked a rib,” Gundlach, 50, says as he gingerly takes a seat in a conference room in a Los Angeles high-rise in January. Gundlach, a money manager who ran the second-largest mortgage bond fund worldwide, got hurt tripping over a computer cable in his office, not in a fist fight. But he is exchanging blows with his former investment firm, TCW Group Inc., in a brawl that has shocked the bond-trading world with allegations of double-dealing, drug use and workplace pornography, Bloomberg Markets magazine reports in its April issue. The feud reaches from TCW’s headquarters in Los Angeles to Paris, where Societe Generale SA, the firm’s corporate parent, has been pummeled in the global credit crisis. France’s No. 2 bank has written down at least 11 billion euros ($15 billion) after losing additional billions in a 2008 trading scandal. A relentless self-promoter who describes himself as a “money machine,” Gundlach outperformed 99 percent of his rival fixed-income money managers from 2005 to 2009, according to data compiled by Bloomberg. His lieutenants call him “the Godfather” for the loyalty he commands and the rich stream of asset management fees he brings in. ‘Amazingly Brilliant’ “I am amazingly brilliant analytically,” says Gundlach, a wiry man whose short brown hair hugs his skull like a helmet. “I’m the guy who makes it rain in the desert.” TCW Chief Executive Officer Marc Stern fired his rainmaker on Dec. 4. Stern, 65, who former colleagues say is as hard- charging a figure as Gundlach, referred to the ousted money manager as a “prima donna” on a conference call with TCW employees on Dec. 7. A month later, TCW accused Gundlach in a lawsuit of stealing trading and contact data for thousands of clients so he could open his own firm, Los Angeles-based DoubleLine Capital LP. Gundlach, who during 24 years rose from a junior analyst to manage about 70 percent of TCW’s $110 billion in assets, denies the allegations in the lawsuit. In a countersuit filed on Feb. 10, Gundlach contends TCW ousted him largely to take control of the 15 funds he ran and keep $600 million to $1.25 billion in fees his team was due to be paid over the next few years. Bitter Divorce The feud has wounded TCW, which in February took the unusual move of slashing its fees in two of Gundlach’s former funds to induce investors to keep their assets at TCW. With years of bad blood between Gundlach and Stern, this battle isn’t just business — it’s personal. “It’s a bitter divorce,” says Neil Rue , a managing director at Pension Consulting Alliance Inc., a Portland, Oregon-based firm that advises institutional investors. This is a story rooted in old grudges over money and the perennial tension between the suits in the executive suite and the investment wizards on the trading floor. It begins in July 2001, when Societe Generale pushed into U.S. asset management by acquiring TCW. Originally known as Trust Company of the West, the firm went on to invest money for institutions such as the California State Teachers’ Retirement System and Cornell University and counted Henry Kissinger and Enron Corp. founder Kenneth Lay as directors in the 1980s and 1990s. The French bank awarded fresh equity in TCW to its senior officers and skipped over the money managers, former TCW executives say. The move diluted Gundlach’s existing stake, and the money manager says he never forgot the snub. Kerviel’s Losses Paris-based SocGen, a 146-year-old retail bank that had long lagged behind rivals in mergers advice and underwriting, became one of the world’s top issuers of equity derivatives after 2000. Then in January 2008, as the credit crisis was picking up momentum, SocGen disclosed that it had lost 4.9 billion euros unwinding unauthorized bets that trader Jerome Kerviel had made on stock index futures. Kerviel, 33, maintains he acted with the knowledge of his supervisors and hasn’t been accused of personally profiting from the trades. Following the scandal, CEO Daniel Bouton resigned and his successor, Frederic Oudea , moved to spin off far-flung asset management units such as TCW. For Gundlach, who ran his investment team as a quasi- autonomous fiefdom and who has personally earned $134 million since 2005, Oudea’s course augured the end of his independence. Last September, the money manager, who specializes in mortgage- backed securities, threatened to lead a mass defection of his 65-member investment team to his own firm, Stern wrote in January in an e-mail to Bloomberg News. Rocked Washington’s Boat “This would have had an adverse and negative reaction on our fixed-income business,” said Stern, who declined to comment further. Gundlach denies the allegation, saying he wanted to protect his TCW business, not quit. On the same day in December that Gundlach was sacked for allegedly stealing client information, TCW announced it was acquiring Metropolitan West Asset Management LLC, a crosstown rival, to take over his funds. On a conference call with TCW’s 700 employees on Dec. 7, Robert Day , the firm’s founder and chairman, said terminating Gundlach was necessary for the good of the company, according to a recording of the meeting. Day, 66, had been a father figure to Gundlach early in the money manager’s career. Now, three days after Gundlach’s termination, Day likened his one-time protege to a soldier who rocked George Washington ’s boat as it crossed the Delaware River in 1776. ‘Shoot The Soldier’ “Your choices are very simple,” Day told his employees. “You shoot the soldier and throw him overboard, otherwise everybody in the boat goes down.” Day declined to comment for this article. Hours after he was fired, Gundlach returned to a private office he used in Santa Monica to find the lock on the front door removed. Inside, he says, about seven private investigators hired by TCW were searching through his desk and had broken open his filing cabinets. Gundlach says he protested the intrusion and one of the investigators told him to leave the office immediately. The TCW men discovered marijuana stored in jars, drug paraphernalia, pornographic DVDs and a dozen “sexual devices,” according to the company’s lawsuit. TCW alleges that Gundlach’s possession of the material at an office it considered part of the firm’s workplace violated its employment rules and showed he wasn’t fit to manage money for clients or supervise employees as the chief investment officer of the company. Drugs, Porn and Sex Toys Gundlach says the drugs, porn and sex toys are relics from a closed chapter in his life and were stored in a crate. He says TCW disclosed their existence to damage his reputation with investors. “It’s ancient stuff, like a box in an attic,” he says. “But they figured, ‘Let’s try and destroy the guy and throw some slander and sleaze on him.’” Gundlach, who favors custom-made Brioni suits, is equally at home opining on the nuances of the yield curve or the geometry of Piet Mondrian ’s gridlike paintings, which he collects. He’s also blunt and prone to pounding the table when making a point. On the trading floor, Gundlach openly chastises co-workers for mistakes or even their choice of necktie, former colleagues say. “He’s a principled and honest guy, but sometimes he gets himself into trouble by speaking his mind without any sugarcoating,” says Frederick Horton , a money manager at TCW from 1993 to 2005 and now a managing director in New York at Strategos Capital Management LLC. “It can come off as arrogance, but I don’t think he means it that way; it’s just part of his makeup.” Tops Bill Gross Investors say Gundlach’s performance backs up his bluster. His former flagship mutual fund, the TCW Total Return Bond Fund, gained 20 percent in 2009, more than double his peers’ average of 8.6 percent, according to Bloomberg data. The portfolio’s 7.8 percent annual return during the decade ended on Dec. 4 beat the 7.6 percent performance of the PIMCO Total Return Fund run by Bill Gross, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, according to Morningstar Inc. In July, the U.S. Treasury selected TCW largely on the strength of Gundlach’s record as one of nine managers for its Public-Private Investment Program to buy distressed mortgage assets. Theoretical Mathematics Gundlach got into the investing business by chance. He was born in 1959, in Buffalo, New York, into a German-American family of scientists. His father, Arthur, was a chemist at a paint manufacturer, and his uncle Robert Gundlach, a physicist, was the primary inventor of the modern photocopier at Xerox Corp., according to the National Inventors Hall of Fame. After graduating from Dartmouth College in New Hampshire with a bachelor’s degree in philosophy and mathematics, Gundlach enrolled in Yale University’s Ph.D. program in theoretical mathematics. His thesis, “The Probabilistic Implications of the Non-Existence of Infinity,” went against 20th-century mathematical canon, which is based on the assumption that infinity exists. He left Yale before completing his degree and moved to Los Angeles in 1983. Gundlach led a carefree existence on the West Coast, playing drums for a rock band called Nuisance. One evening in 1985, he watched the TV program Lifestyles of the Rich and Famous and saw that investment bankers were the top-paid professionals in America. Inspired, he flipped through the Yellow Pages, calling investment firms. Gundlach, then 26, landed a 90-day probationary position as a quantitative analyst in the fixed-income unit at Trust Company of the West for $30,000 a year. Inside the Yield Book Day founded TCW in 1971. He’s the grandson of William Keck, the founder of Superior Oil Co. in Coalinga, California, which was sold to Mobil Corp. in 1984 for $5.7 billion. Day structured TCW as a confederation of semiautonomous boutiques rather than a highly centralized firm, says a former TCW executive who knows him. Day played a paternal role at TCW by bestowing autonomy and generous fee-sharing agreements on his favored money managers, with some keeping more than half the revenue their teams generated, the executive says. Every Christmas, he threw a gala at his Beverly Hills home for his top people and their families. A 10-piece band and circus clowns entertained guests. At TCW, Gundlach says he devoured the 1972 classic primer on bonds, Inside the Yield Book, and studied its formulas. He embraced mortgage bonds and set out to solve what he called “the conundrum of pre-payment risk.” ‘Scenario Analysis’ Many investors avoided mortgage bonds in those days because whenever interest rates fell, borrowers refinanced to settle home loans long before their terms expired. That wiped out gains, including those based on higher interest payments. Gundlach says most money managers erred by using past patterns to predict rate moves and prepayment levels. There are too many variables to make accurate forecasts, from Federal Reserve policy to the housing market, he says. So working with fellow money manager Philip Barach , Gundlach developed a system called “scenario analysis.” It mixed bonds of varying credit risk and duration together to accommodate any rate move. Those bonds that underperformed when rates fell were offset by enough winners to produce profits, Gundlach says. In March 1989, Day agreed to let Gundlach lead his own mortgage-backed securities investment team and retain about half of its asset management fees to distribute to his people as compensation, the money manager says. By late 1992, Gundlach had attracted $10 billion in investor assets and the following June unveiled the TCW Total Return Bond Fund. Secretary of State Kissinger Day offered Gundlach the option to buy an equity stake in TCW, which was coveted by money managers and senior executives. And the chairman sat his prized pupil next to former U.S. Secretary of State Kissinger, a TCW director from 1981 to 2003, at luncheons following periodic board meetings, Gundlach says. “I was happy,” he says. “I believed.” Across the Atlantic, Societe Generale CEO Bouton was moving in 2001 to become a global player after losing his bid to acquire rival Paribas SA to Banque Nationale de Paris SA. SocGen, which was privatized in 1987 following 42 years as a state-run institution, bought banks in the Czech Republic and Slovenia. In July 2001, SocGen purchased 51 percent of TCW for $784 million and agreed to pay about $425 million to increase the stake to 70 percent over five years; Day and TCW retained the remaining 30 percent of equity. Gundlach Diluted Stern, a lawyer who joined TCW in 1990 after serving as president of life insurer SunAmerica Inc., played a key role in negotiating the deal, say two former TCW money man­agers. SocGen granted new equity stakes in TCW only to senior operating executives, the money managers say. Gundlach says he was furious because the issuance of new equity diluted his existing stake by a quarter, decreasing its value by $15 million. Stern had violated a pledge to never diminish his holding, Gundlach says. “That’s absurd,” TCW spokeswoman Erin Freeman says. “Societe Generale’s acquisition of TCW did involve some dilution, and it was the same for each shareholder commensurate with the shares owned.” In September 2005, the TCW board elevated Gundlach to chief investment officer as part of a move to bring the next generation to power at the firm. Day relinquished his CEO title to Robert Beyer, then 45, a former fixed-income money manager, and Stern stepped aside as president to become vice chairman. SocGen’s AIG Exposure When the Kerviel scandal hit SocGen in January 2008, TCW was immediately affected. French regulators opened an insider- trading probe of Day, then a SocGen director, after he and his foundation sold 148 million euros worth of the bank’s stock before SocGen publicly disclosed the trading losses on Jan. 24, according to regulatory records. Josh Pekarsky, a spokesman for Day, says Day used no inside information with respect to the stock sales and is cooperating with the investigation. Day resigned from SocGen’s board on Dec. 31. Oudea, 46, SocGen’s former chief financial officer, took the helm in May 2008 with a mandate to staunch the bank’s losses. The carnage would have been far worse for SocGen had Washington failed to execute a $182 billion bailout of American International Group Inc. in 2008. SocGen held held $16.5 billion in credit-default swaps issued by AIG, the largest such exposure, according to filings with the Securities and Exchange Commission. Backdoor Bailout Under a deal arranged by the Federal Reserve Bank of New York, then led by Timothy F. Geithner , the insurer settled the swaps with SocGen and other AIG trading partners at 100 cents on the dollar. The decision spurred accusations from U.S. Congress members that Geithner, who is now the U.S. Treasury secretary, gave the banks a “backdoor bailout” at the expense of taxpayers. Gundlach, too, was investing in the exotic instruments that helped fuel the crash. Under his direction, TCW became the No. 1 manager in collateralized debt obligations, with $41.3 billion under management as of Sept. 30, 2007, according to data from Standard & Poor’s. That included $35.1 billion of CDOs composed of asset-backed securities, including mortgages. Gundlach says his CDOs rotated out of high-risk home loans early in the credit crisis and escaped the worst of it. In January 2009, Societe Generale said TCW would be spun off in a stock offering sometime in the next five years as part of a reorganization of its asset management division. Gundlach says he assumed the French would sell TCW if the right offer was made. Gundlach Blows Up At the end of May, Day summoned Gundlach to his home to meet with him and Stern. The two men told Gundlach that Beyer, TCW’s CEO, was about to announce his retirement at the age of 49 and Stern was to be named CEO. Gundlach blew up. “I was like, ‘No! No! What do you mean you’re coming back? You turned this over to the next generation. This is all completely the opposite of what I was led to expect,’” Gundlach says. Beyer declined to comment. The two men offered to make Gundlach president, which he says he rejected. Gundlach had never forgotten the dilution of his equity stake in 2001, and he says he accused Stern of stealing $15 million from him. The meeting ended badly. “Gundlach’s claims are without merit,” TCW spokeswoman Freeman says. In late August, Gundlach says, he heard rumors that Stern had convened a team of lawyers to fire him. On Sept. 3, the money manager asked Stern to join him and members of his team in a conference room off the trading floor to clear the air. The mood was tense as the money manager and the CEO faced one another, according to an account by Gundlach and Barach. Threat to TCW Gundlach asked Stern whether he was planning to fire him. Stern replied no. Gundlach asked whether SocGen was going to sell the firm. Stern again answered no. Gundlach then made an oral offer to buy 51 percent of TCW for $350 million. And several of his top lieutenants, including Barach and money manager Louis Lucido , voiced support for their boss. “Just so you know, if anything happens to Jeffrey, we’re going with him,” Lucido, now executive vice president at DoubleLine, says he told Stern. Stern considered Gundlach’s behavior confrontational and insubordinate and came away convinced the money manager now posed a threat to the welfare of the firm, says a TCW executive familiar with Stern’s views. Gundlach’s informal buyout bid was rejected, Jacques Ripoll , head of SocGen’s global investment group , wrote in a January e-mail to Bloomberg News. TCW lawyers started reading Gundlach’s e-mails and allegedly found some in which he declared war on TCW and solicited his subordinates’ allegiance to him, according to the company’s lawsuit. TCW investigators monitored and recorded his team’s computer activity. Firing Gundlach Beginning in early September, members of Gundlach’s team allegedly started downloading data on every holding of every client in the mortgage-backed-securities group and contact information for more than 24,000 TCW clients firm-wide, according to the suit. Gundlach’s deputies also engaged a commercial real estate agent to find an office that could accommodate a 50-desk trading floor and registered the name DoubleLine on Nov. 22 in Delaware, the complaint says. At the end of the month, Stern briefed Ripoll and received his blessing to take the next step, the TCW executive says. After lunch on Friday, Dec. 4, Gundlach was at his desk on the 16th floor when he got a call from Michael Cahill , TCW’s general counsel, asking him to come up one flight to the executive suite. Stern wasn’t there. Cahill told Gundlach his TCW career was over, the money manager says. Stairwell Chase The attorney tried to give Gundlach a legal document describing how he and his team took confidential information. Gundlach says he refused to take it and turned to go, saying he had trades to complete. Cahill told him he couldn’t return to his desk. Gundlach says he ducked into a stairwell and Cahill and another lawyer followed him down 17 flights to the street, demanding he take the papers. They gave up as Gundlach took off along Figueroa Street in downtown Los Angeles. Cahill declined to comment. Gundlach says he did ask deputies to find office space and register DoubleLine in case TCW fired him. He denies directing employees to steal client data or any other trade secrets. In the two weeks after Gundlach was ousted, more than 40 members of his TCW team quit to join DoubleLine. Barach is now DoubleLine’s president. Oaktree Capital Management LP, a Los Angeles firm with $67 billion in assets, invested an undisclosed sum in DoubleLine for a 22 percent stake. $500 Million in Fees In his Feb. 10 answer to TCW’s lawsuit, Gundlach says DoubleLine has hired a firm to search computers belonging to former TCW employees and return any data that might be in their possession. “DoubleLine’s establishment has not involved the use of any TCW information whatsoever,” Gundlach says. Gundlach contends that TCW canned him largely to capture all of the fees from funds that he and Barach set up in 2007 to invest in distressed mortgage-backed securities, including two with $3 billion in assets. Gundlach says the strategy returned 60 percent in 2009. Along with revenue from his other funds, Gundlach says he was personally eyeing a payday of about $500 million over the next few years. “They just wanted to broom-sweep me out and shanghai my business,” he says. Freeman disputes that allegation. “He was let go because he stole from the company,” she says. Investors Flee TCW said it planned to start an equity-based compensation plan in the first quarter to retain employees. “The priority now is to concentrate on moving the business forward,” Ripoll wrote in an email on Feb. 11. TCW’s standing with clients has been shaken by its firing of Gundlach: In December, TCW said it would liquidate its $1 billion PPIP fund for distressed assets after Gundlach’s dismissal triggered a so-called key-man clause and prompted the Treasury to freeze the firm’s participation in the program. Investors pulled more than $6 billion in assets from the Total Return fund between Dec. 4 and Feb. 8, according to Morningstar. In January, pension funds in Colorado, Kansas and Texas withdrew a total of $1.2 billion from TCW. “We decided to terminate because we’re no longer getting the team we signed up for,” says Robert Smith, chief investment officer at the Kansas Public Employees Retirement System. Investors in TCW’s distressed funds are livid that their holdings have become pawns in the dispute, says Tania Modic , CEO of Western Investments Capital LLC in Incline Village, Nevada, which put $10 million in the funds. Clients asked TCW to permit them to make so-called in-kind transfers of assets to another firm so they don’t have to liquidate the securities into cash. TCW Slashes Fees TCW says it declined, offering an option to slash fees to 1 percent on assets and 5 percent on profits from 2 percent and 20 percent. Modic says it appears TCW would rather alienate its clients than see them transfer their assets to DoubleLine, which is what she wants to do. “Something happened to get their panties in a twist because their behavior is bizarre,” Modic says. “This shows gross disrespect for investors.” Freeman says TCW is treating its investors fairly. Gundlach is also feeling the fallout. TCW is seeking at least $200 million in damages from DoubleLine and wants it to relinquish its revenue. The lawsuit has hindered DoubleLine’s ability to raise assets beyond the $3 billion it has brought in so far, Gundlach says. Pension consultant Rue says he’s advised institutional investors not to commit capital to DoubleLine until the litigation plays out. Starting Over At DoubleLine’s offices, located a few blocks from TCW, Gundlach strides past electricians working on his half-completed trading floor and points to a spot where he plans to blow a hole in the ceiling and install a minimalist sculpture by the late artist Donald Judd . Gundlach, after more than two decades managing money, is now starting over. This time around, with a lawsuit threatening his new firm, he may find that repairing a career can be harder than building one. To contact the reporters on this story: Edward Robinson in San Francisco at edrobinson@bloomberg.net Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

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Kansas Officials Green-Light Speedway Casino Project

February 17, 2010

In January, In The Pipeline reported that ground work has begun on a $400 million, 18,500-seat stadium for the Kansas City Wizards soccer team near the Kansas Speedway in the Village West district of Kansas City, KS. This month, the state has given the…

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Maggie Van Ostrand: Small Town America

February 15, 2010

Some of us are already planning summer vacations to exotic, foreign places, but the smart money will go with small towns in the U.S. They not only afford more fun, but help our economy. Always eager to be of service to my country, I offer the following generous selection of stuff to do in American small towns. The folks of Victor, Colorado, which calls itself “One of those places that time likes to forget,” have an annual pothole update and all are invited to join in the count. Tourists are welcome. Pioche, Nevada, snorts at claims by both Tombstone, Arizona, and Dodge City, Kansas that they were the baddest of the wild west mining camps. Mind you, Pioche was “so tough we imported 20 hired killers each day” and “75 men were killed in gun fights and already buried in the cemetery long before anyone died of natural causes.” The town was said to be peaceful only “if you stayed out of the way of the bullets.” Glen Rose, Texas, proudly referred to as the Whiskey Woods Capital of Texas, is the only American town where you can get a Dinosaur Hunting License. Erick, Oklahoma, features a Roger (“King of the Road”) Miller Museum. You can visit Glenda in the bank and talk about it, or visit one of the ladies sewing his likeness into the first-prize quilt to be raffled off this summer. Earlville, Illinois, claims to be the source of “The World’s Best Dirt,” though it’s most eagerly anticipated event is the annual Find-A-Pig Contest held at The Crazy Horse Saloon. Morehead City, North Carolina, hosts a Bald Men’s Convention each September, which generously offers self-help sessions for the wives. The convention’s motto is: “If you haven’t got it, flaunt it.” Booger Hollow, Arkansas, Population 7 (“countin’ one coon dog”), boasts the only two-story outhouse in the land. You can get a Boogerburger at the Trading Post. Livingston, Montana, has a Duck Derby, where rubber ducks are released into the water for a two-furlong (1/4 mile) race, with a grudge match to be held in the event of a tie. Face off will take place at the pond. Montpelier, Vermont, holds an annual Rotten Sneaker Contest, spotlighting “stinky feet.” A search for the “best of the worst” in rotten sneakers, this Odor-Eaters-sponsored contest was created over two decades ago, and has become a traditional Rite of Spring in Montpelier. The teeming metropolis of Park Falls, Wisconsin, is more than just the Ruffed Grouse Capital of the World. Residents are mighty proud of the fact that Park Falls is the only town in all of Price County with two traffic lights. Jefferson, Texas, each year hosts a reenactment of the “Trial of the Century,” based on an 1870′s local murder trial. “Diamond Bessie” Moore, rumored to have once been a high-priced “soiled dove” out of Arkansas, was traveling with one Mr. A. Rothschild. Suspicions of foul play were aroused when Mr. Rothschild, who had left on a picnic with Bessie, returned alone that evening, sporting Bessie’s diamond rings on his fingers. Two weeks later, Bessie’s body was discovered and, it was graciously noted by the ladies of Jefferson, “She was very well dressed, considering the hole in her forehead.” After fleeing to Cincinnati, Mr. Rothschild was subsequently returned by Ohio authorities to Jefferson where he unsuccessfully attempted suicide with the same BB gun he had used on poor dead Bessie. In Loda Cemetery Prairie in Iroquois County, Illinois, a visitor might partake of The Hairy-Jointed Meadow Parsnip. Mike “Chainsaw” Elmer fondly remembers his youth in Sunnymeade, California, where the local children found a unique way to fight boredom. They lifted up the eyelids of the bull sleeping in grandpa’s pasture, then ran like hell. Can’t really beat that for down home entertainment. I haven’t even told you about the bareback ostrich races, pumpkin-flinging contests, tombstone tilting races, bayonet-polishing competitions, and the Byron, Illinois, Annual Turkey Testicle Festival. (All true, my friends.) Perhaps you already live in a small town that’s not famous for anything, and you want to attract tourists. You could have a television-watching contest, or a drywall buckling night, or build a triple-decker outhouse, thereby outdoing Booger Hollow, AR.

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Buffett Confronts Chicago Chokepoint Amid Skepticism Over Burlington Deal

February 10, 2010

By John Lippert Feb. 10 (Bloomberg) — Warren Buffett and Bill Gates face a roadblock on the route toward payoff on their investment in U.S. freight transportation. Chicago, whose railroads made it hog butcher for the world a century ago, is a tangle of bottlenecks where a quarter of the nation’s rail freight stalls while trying to navigate the city. “We can’t keep running trains from Los Angeles to Chicago in 55 hours and then take 36 hours to get a rail car from one side of Chicago to the next,” said Matt Rose , chief executive officer of Burlington Northern Santa Fe Corp. “We either need to fix Chicago or avoid it.” For Buffett, 79, a solution could help overcome skepticism about his $26 billion bid for Burlington , which shareholders are to vote on tomorrow. For the Chicago area, speedier passage could head off a loss of rail traffic, jobs and tax revenue when the city is coping with a drop in trade-show business. Part of the answer may come from Calpers. The California Public Employees’ Retirement System is backing two and possibly three rail yards outside Chicago to handle intermodal freight — containers that switch between ships, trains and trucks. The yards would help reduce the typical day-and-a-half slog across the city’s intersecting Amtrak, commuter train and freight tracks, helping railroads in their quest to take more shipping from the trucking industry. The first is a $1 billion Burlington yard that opened in 2002. Calpers’s real estate unit, CenterPoint Properties Trust, is scheduled to open a $2 billion Union Pacific Corp. facility nearby in September. Negotiations are under way with Canadian National Railway Co. for a third yard, said Michael Mullen , CenterPoint’s chief executive. Gates’s Stake The Bill & Melinda Gates Foundation is one of Montreal- based Canadian National’s 10 biggest shareholders, with 1.8 percent of the stock, according to data compiled by Bloomberg. Michael Larson of Cascade Investment LLC in Kirkland, Washington, investment manager for Gates, 54, didn’t return calls seeking comment. Amy Enright, a spokeswoman for the foundation, referred calls to Larson. A train ride through Burlington’s new yard caught Buffett’s attention, Rose said. He briefed the Berkshire Hathaway Inc. chairman on the rail connections to the West Coast and on a surrounding network of distribution centers in April 2008, a year after Buffett first invested in Burlington. “He loved it,” said Rose, 50. Nineteen months later, Buffett offered to buy the rest of the Fort Worth, Texas-based company. Buffett didn’t respond to a request for comment e- mailed to his assistant Carrie Kizer . Efficient Deliveries Buffett was impressed by how the facility works with big retailers such as Wal-Mart Stores Inc., Rose said. Bentonville, Arkansas-based Wal-Mart owns a distribution center half a mile away to receive goods arriving from Asia. Being so close to the yard slashes shipping costs: Retailers spend about $2,000 to send each container from Shanghai to Joliet, Illinois, then $25 more to reach nearby distribution facilities, Mullen said. The additional cost would shoot to $200 a container for a facility 5 miles away, he said. What Buffett called his “all-in wager” on the U.S. economy’s future prompted Standard & Poor’s to strip Berkshire of its last AAA credit rating. Oil prices in the $70 to $80 range favor railroads over long-haul trucking as an investment, said Eric Marshall , research director of Dallas-based Hodges Capital Management. Berkshire’s Class A shares have gained 15 percent to $111,700 since Nov. 2, the day before the Burlington deal was announced. “All the railroads will do well because they’re the low- cost provider of transportation,” said Marshall, whose firm sold 500,000 Burlington shares after Buffett’s offer and used the proceeds to acquire 556,000 shares in Kansas City Southern. “When oil was at $20 a barrel, that was not the case.” Mexico Connection Kansas City Southern , based in Kansas City, Missouri, is installing new intermodal technology to connect Chicago and other U.S. cities with Mexico, Marshall said. Its shares have risen 26 percent to $30.33 since Nov. 2. Burlington is the largest purchase ever for Berkshire Hathaway, which agreed to pay 60 percent of the $100-a-share price in cash and the rest in stock. The market capitalization of Burlington, Union Pacific and Canadian National more than tripled in the past decade as the Standard & Poor’s 500-stock index dropped 21.4 percent. Their shares rose as railroads rediscovered customer service, said Dan Ortwerth , an Edward Jones analyst in St. Louis. For a century, government told railroads where to lay track and what to charge. Customers accepted lousy service or paid more to move their freight on trucks, he said. After mergers spawned by President Jimmy Carter’s deregulation of the industry in 1980, railroads began thinking about customers in the past decade, Ortwerth said. Intermodal Success Success in railroads now hinges on which companies best take advantage of intermodal shipments, which produce more revenue per carload than other freight. Donald Broughton , a St. Louis-based analyst for Avondale Partners LLC, has a “buy” rating on Union Pacific because it’s winning intermodal freight from Burlington. By the end of 2009, Burlington’s weekly lead over Union Pacific in intermodal container shipments had dwindled to 11,355 from 32,500 in late 2008, Broughton said in a report. Omaha, Nebraska-based Union Pacific is the biggest U.S. railroad by sales. It had revenue of $14.1 billion last year, compared with $14 billion for Burlington. Union Pacific’s Yard Union Pacific is likely to capture even more business from Burlington, Broughton said, when its intermodal yard opens in September about 40 miles (60 kilometers) southwest of Chicago in Joliet. Union Pacific shares have gained 12 percent in the wake of the Burlington agreement, while Canadian National’s have gained 2.4 percent. Buffett’s investment in Burlington opens doors for the entire railroad industry on Wall Street and in Washington, Rose said. “It’s a vote of confidence that railroads can provide significant value to the capital markets and great social value,” he said. One gallon of diesel fuel moves a ton of freight 415 miles by rail, compared with 155 miles by truck, and generates a quarter as much greenhouse gases, Mullen said. After the recession ends, population growth and economic expansion will spur U.S. freight shipments to rise at a compounded annual rate of 2.2 percent for the next decade, and intermodal traffic to increase 3.6 percent per year, estimated Charles Clowdis , an IHS Global Insight analyst in Lexington, Massachusetts. Bigger Moves Needed The new intermodal freight yards near Chicago will digest some of this growth, said Hani Mahmassani , director of Northwestern University’s Transportation Center , in Evanston, Illinois, which studies global transportation systems. But they’re not big enough to shift large volumes of traffic out of the central city, so they won’t solve all its rail traffic problems, he said. “As we see an uptick in the economy, congestion is going to be totally unbearable,” Mahmassani said. “If we don’t solve it, freight will go elsewhere.” Losing its role as the nation’s premier rail hub would harm the regional economy for generations, said Jeffery Sriver , director of rail infrastructure at the Chicago Department of Transportation. Chicago faces growing competition from new intermodal switching yards planned or built by Burlington near Kansas City and by Canadian National in Memphis, Tennessee. Chicago’s Challenges Unemployment in the Chicago metropolitan area rose to 10.6 percent in December from 6.9 percent a year earlier. The Society of the Plastics Industry Inc. and the Healthcare Information and Management Systems Society both informed Chicago last year that they’re moving their trade shows to cities in the South. Chicago’s first railroad was built in 1848 by a former mayor, William B. Ogden, said Dominic Pacyga, author of “Chicago: A Biography” (University of Chicago Press, 462 pages, $35). Unable to find investors in New York, Ogden sold stock subscriptions to farmers along the proposed route to Galena in northwestern Illinois. The line was so successful that by 1855, 17 railroads converged on Chicago from all directions. The railroads helped Chicago become a center for slaughterhouses, mail-order retail and steelmaking. In the process, Chicago developed expertise that allows it to compete as a global city today, said Saskia Sassen , a Columbia University sociologist. “New York does finance,” Sassen said. “Chicago has legal, financial and transportation skills that are rooted in the material practice of making things.” Calpers’s Strategy Calpers bought CenterPoint, an Oak Brook, Illinois-based real estate investment trust, for $3.4 billion in 2006. Starting in 2001, CenterPoint purchased 6,000 acres of land on an abandoned U.S. Army arsenal in Joliet. The core of the Burlington yard is a set of parallel tracks where four trains, each 1.5 miles long, are loaded and unloaded simultaneously. Workers need 10 hours to unload trains onto tractor- trailers — half as much time as a decade ago — for companies such as Wal-Mart, which uses global positioning satellites to track each container, dispatching truck drivers via e-mail as trains approach. Such improvements grew out of a crisis. After winter storms snarled traffic in 1999, Chicago Mayor Richard Daley formed a coalition of six freight railroads, plus city and state officials and Amtrak. The group wants to fix 78 local bottlenecks at a cost of $2.5 billion, according to its Web site. The coalition has secured $761 million so far, about a quarter from railroads and the rest from government. Federal Funds It has applied for $300 million of the $1.5 billion in rail infrastructure grants President Barack Obama’s administration will award later this month. The group also is seeking $700 million from a transportation bill pending in Congress. When Obama announced $8 billion in high-speed rail grants Jan. 28, he included $133 million for a new overpass near 63rd Street and Interstate Highway 94 on Chicago’s south side. Each day, the overpass will allow 82 passenger trains and 46 freight trains to pass by at different levels, instead of having to take turns for a clear track. Federal Railroad Administrator Joseph Szabo called Chicago infrastructure the most significant freight bottleneck in the U.S. “You don’t achieve much traveling 110 miles an hour in a cornfield if you can’t get into the city,” Szabo told reporters last month. “Chicago has to get fixed.” To contact the reporter on this story: John Lippert in Chicago at jlippert@bloomberg.net

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JPMorgan Said to Raise Almost $700 Million to Equip Digital Movie Theaters

February 6, 2010

By Michael White Feb. 6 (Bloomberg) — JPMorgan Chase & Co. raised almost $700 million to equip the three biggest U.S. theater chains with digital screens and projectors that can show 3-D movies, according to a person with knowledge of the plan. Digital Cinema Implementation Partners, a collaboration between Regal Entertainment Group , AMC Entertainment Holdings Inc. and Cinemark Holdings Inc. , is likely to announce the funding in about two weeks, said the person, who requested anonymity because the details are private. The financing, delayed since 2008 because of the credit crunch, will speed theater conversions as Hollywood studios increase production of 3-D films, which command premium ticket prices. News Corp. ’s “Avatar” has taken in $2.1 billion, the most of any picture, since it opened Dec. 18, according to researcher Box Office Mojo. Brian Marchiony , a spokesman for New York-based JPMorgan, declined to comment. Dick Westerling , a spokesman for Nashville, Tennessee-based Regal, Robert Copple , a spokesman for Plano, Texas-based Cinemark, and Sun Dee Larson, a spokeswoman for AMC, didn’t immediately return calls seeking comment after business hours. Distributing movies digitally allows studios to save money on printing shipping reels. It also enables theaters to adjust lineups more quickly based on demand. Studios will contribute funds to repaying the financing based on the number of digital films shown. 3-D Films The equipment can also be upgraded to show 3-D films, which Hollywood studios are relying on to bolster revenue as DVD sales decline. At least 16 pictures are planned this year, including DreamWorks Animation SKG’s “How to Train Your Dragon,” according to researcher Hollywood.com Box-Office. The funding will supply equipment for 12,000 screens and is awaiting sign-off by studios, the Los Angeles Times reported yesterday. DCIP resumed its effort to raise the money last year after putting it on hold amid the credit crisis. The group was seeking $525 million in senior debt and $200 million in equity through its jointly owned Digital Cinema Implementation Partners , two people with knowledge of the situation said in September. The plans were scaled back from August 2008, when DCIP Chief Executive Officer Travis Reid said the group aimed to raise $1 billion to refit more than 14,000 U.S. and Canadian theaters. Regal fell 25 cents to $14.70 yesterday in New York Stock Exchange composite trading . Cinemark was little changed at $14.33. Closely held AMC is based in Kansas City, Missouri. To contact the reporter on this story: Michael White in Los Angeles at mwhite8@bloomberg.net .

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JBS Puts Off $2 Billion IPO of U.S. Unit, Citing Deterioration of Market

January 28, 2010

By Lucia Kassai and Rodrigo Orihuela Jan. 28 (Bloomberg) — JBS SA , the world’s biggest beef producer, delayed the $2 billion initial public offering of its U.S. unit amid market conditions that have “deteriorated.” The share sale won’t take place until after fourth-quarter earnings are released and may occur in the first half of the year if conditions improve, Chief Executive Officer Joesley Batista told reporters today at an event in Sao Paulo. JBS had said it would price the IPO this month. “I think it is still possible to put it out in the first half of 2010,” Batista said. “But it really depends on market conditions that have recently deteriorated.” JBS is raising cash through bond and share sales to pay for the takeover of Pilgrim’s Pride Corp. and to fund a $2 billion distribution network. The Sao Paulo-based company now controls about 10 percent of global beef processing following about 30 acquisitions since 1993, including that of Swift & Co. in 2007. Brazilian regulators asked JBS to include the acquisitions of Pilgrim’s Pride and Bertin SA into its fourth-quarter earnings results, which is delaying the process, Batista said. JBS rose 1 percent to 9.24 reais at 3:10 p.m. in Sao Paulo trading. The stock has almost doubled in the past year. Market ‘Not Ideal’ “Investors welcomed the IPO delay because market conditions are not ideal,” Rafael Cintra , an analyst with Link Investimentos in Sao Paulo, who has a “buy” recommendation on the stock, said today in a telephone interview. A bond buyback announced today “signaled they are concerned about improving debt profile,” he said. The meatpacker said today in a regulatory filing that it is buying back $275 million of its 9.375 percent senior notes due in 2011. Poultry producer BRF Brasil Foods SA sold $750 million of 10-year bonds to yield 7.375 percent last week. Last month, JBS concluded a $2 billion bond sale to finance the takeover of Pilgrim’s Pride and Bertin. The IPO delay comes after National Beef Inc., the Kansas City-based meatpacker that accounts for 14 percent of the U.S. federally inspected steer and heifer slaughter, postponed its initial share sale last month. The company cited the “weakness in the IPO market.” National Beef was one of seven American companies that have shelved IPOs since the start of November, data compiled by Bloomberg show. Cellu Tissue Holdings Inc. cut its price by 24 percent last week, while Chesapeake Lodging Trust raised 40 percent less than it originally sought. In Brazil, Metalfrio Solutions SA, the nation’s biggest maker of commercial refrigerators, canceled its planned share sale. M. Dias Branco SA, the biggest maker of cookies and pasta, also postponed an offering in the past week as the Bovespa index fell 8.4 percent since Jan. 6, the worst slump since October. Batista had said Nov. 16 that the company was planning to give presentations to U.S. investors between Jan. 4 and Jan. 8, before setting the price for the sale in the week of Jan. 11. To contact the reporters on this story: Lucia Kassai in Sao Paulo at lkassai@bloomberg.net ;

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