ratings

Zapatero Loses Credit at Home and Abroad as Fitch Dumps Spain’s AAA Rating

May 31, 2010

By Emma Ross-Thomas May 31 (Bloomberg) — Spanish Prime Minister Jose Luis Rodriguez Zapatero , isolated in parliament and his popularity slumping amid the biggest budget cuts in 30 years, is finding his efforts aren’t paying off internationally either. Fitch Ratings late last week stripped Spain of its top AAA credit grade and questioned the nation’s ability to grow its economy as the government reduces spending. U.S. stocks and the euro declined after the downgrade to AA+, on concern the European debt crisis will deepen. “It’s bad news for the government,” said Fernando Fernandez , a former International Monetary Fund economist at IE business school in Madrid. “It shows a lack of confidence in the government internationally. It looks like the budget cuts haven’t helped.” Zapatero, a Socialist running a minority government, faces strike threats from his traditional allies in the unions and risks being unable to pass next year’s budget because of opposition to his plans. His attempt to rein in the euro area’s third-largest budget deficit has also failed to reverse a surge in Spain’s risk premium amid concern that the European Union’s 750 billion-euro ($920 billion) bailout plan won’t solve the problems of its indebted nations. Wage Cuts In return for the European financial backstop, and urged on by U.S. President Barack Obama , Zapatero announced on May 12 the first cut to public wages in Spain’s 30-year democracy and a freeze on pensions. The measures are aimed at reducing the budget gap from 11.2 percent of gross domestic product last year to 6 percent in 2011. While they were initially welcomed by markets, pushing up bond prices and Spanish stocks , concerns have resurfaced. Spain’s Ibex-35 share index fell 0.6 percent at 9:40 a.m. in Madrid to 9,360 points. The Ibex has declined 22 percent this year amid concerns over the economic outlook. Even as bad loans are stabilizing after a two-year surge, shares in Banco Bilbao Vizcaya Argentaria SA have fallen by almost a third. The yield on Spain’s benchmark 10-year bond rose 4 basis points to 4.27 percent, while the 2-year bond yielded a three- week high of 2.60 percent, up 18 basis point. The extra yield that investors demand to hold Spanish debt rather than German equivalents rose 5 basis points to 158 basis points, 15 basis points less than the post-euro high of 173 basis points reached on May 7. The average spread over the last decade is 23 basis points. Close Vote “The outlook for the government is complicated precisely because of the lack of support for these measures but also the lack of effectiveness in terms of calming the markets,” said David Rueda , a professor of comparative politics at Oxford University. The prospect of Zapatero staying in office until the next general election in 2012 “doesn’t seem as certain as it was a few months ago,” he said. The austerity program scraped through parliament with a margin of one vote as smaller parties that lent Zapatero support in the past turned against him. The premier’s next challenge will be gathering enough support to get the budget through parliament by the end of this year, at a time when two parties are calling for early elections. Zapatero’s spending cuts aren’t helping the economy either as households pay down one of the largest private debt burdens in the euro region. Fitch cited the impact of Spain’s belt- tightening on the growth outlook for its credit-rating downgrade. Debt, Growth “The process of adjustment to a lower level of private sector and external indebtedness will materially reduce the rate of growth of the Spanish economy over the medium-term,” Brian Coulton , Fitch’s head of Europe, Middle East and Africa sovereign ratings in London, said in a statement on May 28. That may cast further doubt on the government’s growth assumptions, which show the economy expanding 1.3 percent next year and 2.7 percent in 2013. The IMF forecasts more modest growth of 0.9 percent in 2011 and 1.6 percent in 2013. IMF Managing Director Dominique Strauss-Kahn said Spain is taking the “necessary steps” to fix the economy, according to an interview published in ABC newspaper today. Retailers are bracing for a value-added tax increase in July, with Inditex SA , the owner of clothing retailer Zara, planning to absorb the hike rather than pass it on. Debt Burden Government debt, at 53 percent of GDP last year, is lower than that of Germany, France and the euro-region average. Still, weak growth may increase the burden as a proportion of the economy. Standard & Poor’s, which has downgraded Spain twice since the start of 2009, sees average annual growth of 0.7 percent from 2010 to 2016. “The debt’s not very big; the problem is that the economy isn’t going to grow,” said Juan Jose Dolado, an economics professor at Carlos III University in Madrid and former deputy chief economist at the Bank of Spain. The government “runs the risk of being far too optimistic,” further undermining its credibility, said Fernandez, previously chief economist at Banco Santander SA . “We’re not going to grow 1.3 percent in 2011 no matter what they do.” Zapatero’s reputation was damaged at the start of the financial crisis. His government predicted in October 2008, when the economy was already shrinking, that Spain would avoid a recession. It now forecasts a second year of contraction in 2010. A prediction of 19 percent unemployment this year was surpassed in the first quarter, as the jobless rate hit 20 percent, the highest among the 16 nations sharing the euro. Popularity Slumps Now, the austerity steps announced by Zapatero have undermined his support to the point where the opposition People’s Party could win an outright majority if elections were held today, according to a poll in El Periodico on May 29. It showed 60 percent of those surveyed thought the government’s performance was “bad” or “very bad,” even as the equivalent figure for the PP was 57 percent. Unions, which Zapatero has courted and tended to consult on policies that affect them, have threatened the first general strike since the Socialists came to power in 2004. They are set to clash again as Zapatero has said he will overhaul labor- market rules. Under pressure from all sides, it will be a challenge for the government to see out its term, said Pere Puig Bastard, a professor at ESADE business school in Barcelona. “We’ll have to see if they hang on many more months.” To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Bob Samuels: How the Bond Raters Took Over the World

May 26, 2010

With a single statement, a bond rating agency can determine the fate of an entire country and possibly the entire global economy. When Standard and Poor’s downgraded Greece’s bond status to “junk,” one of the oldest civilizations in the world was sent to fiscal purgatory. Now as Spain, Portugal, Italy, and Ireland await their fiscal destiny, we have to ask, who are these bond raters and how did they get so much power? Huge Profits for Bad Performances Let us first recall that these bond raters, Moody’s, Standard and Poor’s, and Fitch, are the same agencies that gave piles of subprime mortgages the highest ratings even though these securitized mortgages were about to tank. Moreover, these public companies are paid by the same companies that they rate, and it appears that they receive very little oversight. The result of this system is that although they have often made huge mistakes in their predictions and analysis, they have been raking in record levels of profit. In the first quarter of 2010, Standard and Poor’s brought in $451.5 million, up 15 percent from a year ago. Meanwhile, Moody’s first- quarter profit was $113.4 million . Rating Universities Not only do these agencies rate countries and businesses, but they also rate universities, and a careful examination of their rating reports shows that their seemingly neutral analysis is often full of neoliberal beliefs. For instance, in Moody’s latest rating of bonds for the University of California, the UC is warned that its financial status could be undermined by:” high susceptibility to regulatory and government pay or changes, coupled with unique stresses on California health care, including unionized labor.” In other words, the raters reveal their distaste for state regulation, unionized labor, and employee benefits, like health care. Like the IMF, Moody’s signals that if the university wants to continue to be able to borrow at low interest rates, it will have to accept the neoliberal strategy of fighting governmental regulation and resisting employee unionization. Moody’s has also informed the UC system that it should stop relying so much on the state and should move away from its traditional stress on accepting students from California: “In-state demand is so strong that UC does little recruiting of freshman from out-of-state. Moody’s views this as an untapped strategic asset because UC could easily increase its student demand further if it followed national recruiting practices similar to most peer universities.” Not only does Moody’s think that the university should accept more out-of-state students, but it should spend more money on marketing and recruiting. One reason why it is likely that the UC system, like so many other institutions, will follow advice of the bond raters is that the University of California has taken on so much debt that it is has become addicted to low interest rates: “debt outstanding has grown from $8.3 billion in FY2006 to over $13.2 billion in FY2009 and including new borrowings since the end of the fiscal year, a 56% increase.” Since the university cannot stop its many construction projects, even as it cuts salaries, lays off faculty, and increases tuition 32%, all it can do is to continue to borrow more money, and in order to borrow at a low rate, it must please the bond raters. It appears that no public or private institution can escape from the control of the bond raters. From small towns to large countries, everyone relies on borrowing so much money that they must march to the tune of the raters who always threaten to lower the ratings if the borrowers do not do things like shed jobs, decrease benefits, fight unionization, and resist governmental regulations. We can only hope that the U.S. Congress gets serious about its threat to rein in the raters.

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World’s Cheapest Greek Stocks Failing to Find Bottom as Default Risk Grows

May 25, 2010

By Natalie Weeks and Alexis Xydias May 26 (Bloomberg) — Europe’s biggest investors say the risk of default by Greece make equities trading with the developed world’s lowest valuations too expensive to own. Renaissance Asset Management said the Athens Stock Exchange General Index may fall more after a 30 percent slump in 2010 pushed its price to 8.6 times estimated 2010 profit. The earnings ratio, below the level where the Standard & Poor’s 500 Index began an 80 percent rally in 2009, is meaningless unless Greece cuts its deficit, Swisscanto Asset Management AG said. More than $78 billion of market value was erased in Greece since October as a budget shortfall equal to 13.6 percent of gross domestic product threatened to boost loan losses and provisions at banks, which stood at a combined 991 million euros ($1.23 billion) for the country’s four largest lenders in the fourth quarter. Hellenic Telecommunications Organization SA and Titan Cement Co. dropped at least 18 percent after the European Union unveiled a $1 trillion bailout for the region on May 9 to bolster the euro. The currency fell last week to its lowest level against the dollar in four years. “The perception among European investors is that Greece is still a risky market,” said Ben Hauzenberger , a Zurich-based fund manager at Swisscanto, which oversees $53 billion. His Euroland fund outperformed its benchmark by more than 3 percentage points in 2009, helped by investments in National Bank of Greece SA and Alpha Bank AE , the country’s largest- and third-biggest banks. “It’s very difficult to judge if it is too early to go in.” Balance Sheets The ASE’s price-to-earnings ratio is 33 percent below the multiple for the MSCI World Index of 23 developed markets. The gap isn’t attracting investors, who remain concerned Prime Minister George Papandreou won’t cut spending enough to prevent a default, said Colin McLean , who helps manage 650 million pounds ($937 million) at SVM Asset Management Ltd. in Edinburgh. “There is a great likelihood of debt rescheduling or default in Greece, and that will cause some damage to balance sheets, so I don’t think there is obvious value there,” McLean said. “The economy itself will be suffering contraction over the next coming years.” Under the EU’s Stability and Growth Pact, countries should limit deficits to 3 percent of gross domestic product or face fines. Greece forecast its budget shortfall will shrink to 4.9 percent in 2013 and fall below the EU limit in 2014. The nation’s economy will contract 4 percent this year, according to government and EU estimates. Workers Strike Greek workers staged the country’s fourth general strike last week and thousands of protestors marched to Parliament in Athens to block spending cuts that Papandreou must pass to qualify for an aid package from the EU and International Monetary Fund worth 110 billion euros. Three people were killed on May 5 as demonstrators set fire to a bank in the capital. Regulators banned short sales on the Athens stock exchange on April 28 for two months after shares slumped and Standard & Poor’s Ratings Services cut the nation’s credit rating to junk status. The ASE has fallen 9.2 percent since then. “We don’t hold Greek assets, and we consciously don’t,” said Adrian Harris , who helps oversee $1.5 billion at Renaissance Asset Management in London. “There will come a time when they will be attractive, but they are not attractive enough yet for the risk that is inherent. Greek banks carry the uncertainty of some sort of debt restructuring.” Earnings Reports Greece’s four biggest lenders are scheduled to report results this week. Bank of America Corp., based in Charlotte, North Carolina, cut recommendations on EFG Eurobank Ergasias SA and Piraeus Bank SA on May 19, and New York-based JPMorgan Chase & Co. followed May 25 with downgrades to “underweight” on all four stocks. Credit Suisse Group AG of Zurich lowered earnings estimates before this week’s releases while Nomura Holdings Inc. in Tokyo advised against holding Greek bank shares. Shares of Bank of Greece, the nation’s central bank, have tumbled 24 percent since Dec. 31. Stoxx Ltd. announced yesterday that the stock would be removed from the Stoxx Europe 600 Index, the benchmark measure of the region’s equities. Even after a “strong share price correction” in 2010, the risk associated with Greek banks is “unattractive,” JPMorgan analysts led by Paul Formanko wrote in a report, citing a “longer path to recovery,” fiscal measures that will hurt asset quality, increased funding costs, and the risks of capital requirements and of change in ownership structure. The market declines have been big enough to persuade Panagiotis Kladis , an analyst at National P&K Securities, that there are bargains among Greek lenders. ‘Attractive’ Valuations “Valuations are attractive,” said Kladis, who works in Athens. “However, we need some catalysts to see higher valuations, namely the proper implementation of the EU-IMF program, positive surprises in the budget deficit or government initiatives to stimulate growth.” Greece’s finance minister said May 18 that the government reduced its deficit in the first four months of 2010 by 42 percent. The aid package for Greece foresees the budget deficit falling to 8.1 percent of GDP this year. Hellenic Telecommunications , Greece’s biggest telephone services provider, said on May 12 that first-quarter profit fell 75 percent. Jumbo SA , the nation’s biggest toy and baby products retailer, a week later posted a 5.4 percent drop in nine-month net income, hurt by a one-time tax charge on the country’s biggest companies. Both businesses are based in Athens. Less Construction Titan Cement , Greece’s biggest producer of the building material, reported on May 17 that first-quarter net income rose 16 percent. The company, also based in the capital city, said it expects building activity in the country to drop as austerity measures reduce incomes. Argentina’s Merval Index jumped 78 percent in 2002, the year following the South American country’s record default on $95 billion in bonds. The MSCI All Country World Index dropped 21 percent in 2002. The Merval increased sevenfold through 2007 as the default improved the government’s accounts and a devaluation of the peso boosted exports. Renaissance’s Harris, who specializes in emerging markets and runs global funds for clients, says countries near Greece offer the same value with less risk. Turkey has $72 billion in international reserve assets, while Greece has $170 million, government and central banks data show. “Would you rather buy assets from a country with billions of dollars in foreign reserves, or would you rather buy it from a country that’s struggling to meet next month’s repayment?” he said. “‘Developed market’ doesn’t mean lower risk anymore. As a trader, we’d rather be in Turkey than Greece.” To contact the reporters on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net ; Alexis Xydias in London at axydias@bloomberg.net .

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Toyota Isn’t Ready for Credit Rating Upgrade This Year, Moody’s Usui Says

May 24, 2010

By Yuki Hagiwara and Takako Iwatani May 25 (Bloomberg) — Toyota Motor Corp. , the world’s largest carmaker, will have insufficient profit to warrant an upgrade of its credit rating this fiscal year, Moody’s Investors Service said. Toyota, which Moody’s rates the highest among global carmakers at Aa2, needs an annual operating profit of 1 trillion yen ($11 billion), more than triple its outlook for this year, before it can be considered for a higher rating, Tadashi Usui , senior analyst at the credit rating company , said in an interview in Tokyo. It also needs an operating margin of 5 percent, he said. Moody’s and Standard & Poor’s began cutting Toyota’s rating last year after the carmaker posted the first of three straight quarterly losses. Usui said recalls of more than 8 million Toyota vehicles worldwide in the past year have damaged the company’s reputation, threatening to slow an earnings rebound. “I cannot say confidently that Toyota’s operating profit will recover smoothly,” Usui said. Toyota fell 1.9 percent to 3,300 yen as of the 12:50 p.m. trading break in Tokyo, while the benchmark Nikkei 225 index fell 3.1 percent. The automaker has declined 15 percent so far this year. Profit Outlook Operating profit may increase 90 percent this fiscal year to 280 billion yen, from 147.5 billion yen in the 12 months ended March 31, the carmaker said May 11. The forecast is almost 90 percent smaller than the record 2.27 trillion yen Toyota posted in the year that ended in March 2008. Moody’s downgraded Toyota’s credit rating last month to Aa2, its third highest level, with a negative outlook, from Aa1. The automaker lost its top Aaa rating in February 2009. Toyota has about 5 trillion yen of debt maturing by the end of 2012, with 1.09 trillion yen due in 2010, according to data compiled by Bloomberg. Standard & Poor’s, which also rates Toyota’s debt at its third-highest grade, AA, removed the company from its “Credit Watch” list on May 14. The outlook may be raised to “stable ” from “negative” in the next one or two years, should Toyota’s recovery in profitability become clearer, Chizuko Satsukawa , a Tokyo-based analyst at S&P said today. ‘Gradual Recovery’ Fitch Ratings has Toyota on “rating watch negative,” according to Senior Director Jeong Min Pak . “We believe the company will still show gradual recovery, especially with our expectation of modest recovery in U.S. auto demand this year,” Pak said. “However, the scope of the recovery and profitability is expected to lag behind other Japanese makers.” Toyota’s earnings recovery may also be slowed by the introduction of better cars by rivals Hyundai Motor Co. and Ford Motor Co. in the U.S., traditionally the most profitable market for Japanese automakers, Usui said. Toyota also has excess capacity in the U.S., he said. Moody’s raised Ford’s credit rating to B1 from B2 on May 18. Toyota also faces at least 180 consumer and shareholder lawsuits in the U.S. stemming from vehicle recalls for defects linked to unintended acceleration. The National Highway Traffic Safety Administration fined Toyota a record $16.4 million last month for not promptly notifying it of the pedal defect. ‘Good Lesson’ Toyota President Akio Toyoda said May 22 that scrutiny from inside and outside the company has been a “good lesson” for Toyota, and he expects the carmaker to emerge stronger after the recalls. The difference in yield on Toyota’s 1.772 percent notes due June 2019 and government bonds of similar maturity narrowed to 20 basis points yesterday, matching the lowest since the automaker issued the debt, according to Japan Securities Dealers Association prices on Bloomberg. A basis point is 0.01 percentage point. Credit-default swaps tied to Toyota debt due in 5 years declined 3 basis points to 87 basis points yesterday, according to CMA DataVision prices in New York. The contracts, which reflect market perceptions of creditworthiness, traded at 50.5 basis points on April 16, this year’s lowest. Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Competitors Honda Motor Co. and Nissan Motor Co., Toyota’s largest Japanese competitors, must also increase profitability before Moody’s will consider raising their credit ratings, Usui said. For Honda, Japan’s second-largest automaker, an operating margin of 7 percent is necessary before Moody’s will consider raising its A1 rating, while a margin of less than 5 percent may trigger a downgrade. At Nissan, the nation’s third-biggest carmaker, an operating margin higher than 5 percent is the minimum necessary for Moody’s to consider raising the current Baa2 rating, Usui said. Rising raw-material prices and a strengthening yen also pose risks for Japanese carmaker earnings, he said. To contact the reporter on this story: Yukiko Hagiwara in Tokyo at Yhagiwara1@bloomberg.net

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Toyota Isn’t Ready for Credit Rating Upgrade This Year, Moody’s Usui Says

May 24, 2010

By Yuki Hagiwara and Takako Iwatani May 25 (Bloomberg) — Toyota Motor Corp. , the world’s largest carmaker, will have insufficient profit to warrant an upgrade of its credit rating this fiscal year, Moody’s Investors Service said. Toyota, which Moody’s rates the highest among global carmakers at Aa2, needs an annual operating profit of 1 trillion yen ($11 billion), more than triple its outlook for this year, before it can be considered for a higher rating, Tadashi Usui , senior analyst at the credit rating company , said in an interview in Tokyo. It also needs an operating margin of 5 percent, he said. Moody’s and Standard & Poor’s began cutting Toyota’s rating last year after the carmaker posted the first of three straight quarterly losses. Usui said recalls of more than 8 million Toyota vehicles worldwide in the past year have damaged the company’s reputation, threatening to slow an earnings rebound. “I cannot say confidently that Toyota’s operating profit will recover smoothly,” Usui said. Toyota fell 1.9 percent to 3,300 yen as of the 12:50 p.m. trading break in Tokyo, while the benchmark Nikkei 225 index fell 3.1 percent. The automaker has declined 15 percent so far this year. Profit Outlook Operating profit may increase 90 percent this fiscal year to 280 billion yen, from 147.5 billion yen in the 12 months ended March 31, the carmaker said May 11. The forecast is almost 90 percent smaller than the record 2.27 trillion yen Toyota posted in the year that ended in March 2008. Moody’s downgraded Toyota’s credit rating last month to Aa2, its third highest level, with a negative outlook, from Aa1. The automaker lost its top Aaa rating in February 2009. Toyota has about 5 trillion yen of debt maturing by the end of 2012, with 1.09 trillion yen due in 2010, according to data compiled by Bloomberg. Standard & Poor’s, which also rates Toyota’s debt at its third-highest grade, AA, removed the company from its “Credit Watch” list on May 14. The outlook may be raised to “stable ” from “negative” in the next one or two years, should Toyota’s recovery in profitability become clearer, Chizuko Satsukawa , a Tokyo-based analyst at S&P said today. ‘Gradual Recovery’ Fitch Ratings has Toyota on “rating watch negative,” according to Senior Director Jeong Min Pak . “We believe the company will still show gradual recovery, especially with our expectation of modest recovery in U.S. auto demand this year,” Pak said. “However, the scope of the recovery and profitability is expected to lag behind other Japanese makers.” Toyota’s earnings recovery may also be slowed by the introduction of better cars by rivals Hyundai Motor Co. and Ford Motor Co. in the U.S., traditionally the most profitable market for Japanese automakers, Usui said. Toyota also has excess capacity in the U.S., he said. Moody’s raised Ford’s credit rating to B1 from B2 on May 18. Toyota also faces at least 180 consumer and shareholder lawsuits in the U.S. stemming from vehicle recalls for defects linked to unintended acceleration. The National Highway Traffic Safety Administration fined Toyota a record $16.4 million last month for not promptly notifying it of the pedal defect. ‘Good Lesson’ Toyota President Akio Toyoda said May 22 that scrutiny from inside and outside the company has been a “good lesson” for Toyota, and he expects the carmaker to emerge stronger after the recalls. The difference in yield on Toyota’s 1.772 percent notes due June 2019 and government bonds of similar maturity narrowed to 20 basis points yesterday, matching the lowest since the automaker issued the debt, according to Japan Securities Dealers Association prices on Bloomberg. A basis point is 0.01 percentage point. Credit-default swaps tied to Toyota debt due in 5 years declined 3 basis points to 87 basis points yesterday, according to CMA DataVision prices in New York. The contracts, which reflect market perceptions of creditworthiness, traded at 50.5 basis points on April 16, this year’s lowest. Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Competitors Honda Motor Co. and Nissan Motor Co., Toyota’s largest Japanese competitors, must also increase profitability before Moody’s will consider raising their credit ratings, Usui said. For Honda, Japan’s second-largest automaker, an operating margin of 7 percent is necessary before Moody’s will consider raising its A1 rating, while a margin of less than 5 percent may trigger a downgrade. At Nissan, the nation’s third-biggest carmaker, an operating margin higher than 5 percent is the minimum necessary for Moody’s to consider raising the current Baa2 rating, Usui said. Rising raw-material prices and a strengthening yen also pose risks for Japanese carmaker earnings, he said. To contact the reporter on this story: Yukiko Hagiwara in Tokyo at Yhagiwara1@bloomberg.net

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CRE Exposure Still Weighing on Life Insurers

May 18, 2010

Despite raising more than $32 billion in new capital in the last five quarters, some life insurance companies didn’t catch a break this past week from bond rating agency Standard & Poor’s Ratings Services. S&P reasons that their elevated exposure to commercial…

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Junk Bonds’ Weakest Creditor Protection Since ’07 Doesn’t Deter New Issues

May 18, 2010

By Tim Catts May 18 (Bloomberg) — Two years after suffering $213.2 billion of losses when debt markets froze, investors in junk bonds are accepting what Moody’s Investors Service calls the weakest creditor protections since 2007. Even with housing starts hovering at their lowest levels on record, Beazer Homes USA Inc. managed to sell bonds this month on terms that allow it to add more debt. The Atlanta-based builder couldn’t even do that when it issued debentures at the height of the housing bubble in 2006 and its credit rating was seven levels higher. In a report last week Moody’s singled out CF Industries Inc. , Standard Pacific Corp. , AK Steel Corp. as borrowers offering debt on terms historically available only to higher-rated companies. “We got ourselves in trouble with that in the past and here it is again,” James Kochan , the chief fixed-income strategist at Wells Fargo Fund Management in Menomonee Falls, Wisconsin, said of the trend toward looser debt covenants. “It’s not that surprising, but it is disturbing,” said Kochan, who helps oversee $179 billion. Lenders are letting down their guard just as worsening government finances raise doubts about the sustainability of the global economic recovery. Money managers say they have little choice but to go along. They need to find a home for the record $29.4 billion that has flowed into high-yield bond mutual funds the past 16 months from retail investors seeking to join in a rally that has produced an average 69 percent return since the market bottom in March 2009. Weaker Safeguards About 60 percent of high-yield borrowers this year offered weaker investor safeguards than on debt they issued previously, according to Covenant Review LLC, a New York-based research firm that analyzes bond offerings. Those include no limits on the amount of debt companies can have and few restrictions on using assets as collateral for future borrowing, reducing what’s available to satisfy creditor claims in a bankruptcy. “This trend represents more than an episode of ‘back to the future,’” Moody’s analysts including Alex Dill , the firm’s senior covenant officer, wrote in their report. “It reflects a weakening in covenant protections even below those existing at the peak of the market, in 2006 and 2007.” Beazer sold $300 million of 9.125 percent bonds due in 2018 on May 4 that carry lighter restrictions than its 2006 issue on the amount of debt the builder can add and how it can use money raised from selling assets. The terms also allow Beazer to double its capacity to pay dividends to shareholders even after a 90 percent drop in its stock, according to Covenant Review. ‘Poor Standing’ The company’s senior unsecured bonds are rated Caa2, which Moody’s defines as “judged to be of poor standing and are subject to very high credit risk.” Beazer was rated Ba1, one step below investment grade, in June 2006, when it issued $275 million of 8.125 percent 10-year notes. Jeffrey Hoza , a vice president and treasurer of Beazer, and Chief Financial Officer Allan Merrill didn’t return calls seeking comment. Junk bonds are rated below Baa3 by Moody’s and less than BBB- by Standard & Poor’s. Overseas Shipholding Group Inc. , the largest U.S.-based oil-tanker owner, sold $300 million of bonds in March, its first offering in six years. Debtholders gave the company the leeway to sell assets, new secured debt and pay dividends to equity holders, according to Covenant Review. The bonds, due in 2018, are rated Ba3 by Moody’s and an equivalent BB- by S&P. ‘No Resistance’ “We were not going to do a deal if we were not able to get that kind of flexibility,” said Morten Arntzen , the chief executive officer of the New York-based company. “We had no resistance to it” from potential investors, he said. Proceeds from the sale were used to repay debt under a revolving credit facility, the company said in a March 29 statement. Overseas Shipholding’s covenants are “nearly useless,” according to Covenant Review. Investors bid up the debt anyway, pushing the 8.125 percent notes to as high as 102.25 cents on the dollar last month, according to Trace, the Financial Industry Regulatory Authority’s bond-price reporting system. “They’re a high-yield issuer that’s getting away with investment-grade covenants,” said Adam Cohen , founder of Covenant Review. “You shouldn’t have a high-yield bond that gives you less protection than a lot of the high-grade bonds out there.” Cash is flowing into mutual funds that specialize in high- yield debt at an accelerating pace. EPFR Global, a research firm in Cambridge, Massachusetts, estimates that before last week, investors put $8.57 billion into the funds, up from $7.33 billion in the same period of 2009. Soaring Issuance That money helped push down yields on speculative-grade bonds to 8.23 percent on April 27, the lowest since July 2007, from 21 percent in March 2009, Bank of America Merrill Lynch indexes show. Yields averaged 8.77 percent as of yesterday. Borrowers are taking advantage of the demand, issuing $109.1 billion of debt this year, compared with the record $162.7 billion in all of 2009, data compiled by Bloomberg show. Investors are also snapping up junk bonds as Federal Reserve policy makers pledge to hold interest rates near zero for an “extended period” to stoke the economy. Of the 460 companies in the S&P 500 that reported first-quarter results, 77 percent said earnings exceeded analysts’ estimates, Bloomberg data show. Gross domestic product may expand 3.2 percent this year, after contracting 2.4 percent in 2009, according to the median estimate of 72 economists surveyed by Bloomberg. Housing starts climbed to an annual rate of 626,000 in March, up 1.6 percent from February’s 616,000 pace, though still half the level from October 2007, according to Commerce Department data. Ratings Raised For all the concern about weaker creditor protections, Moody’s has raised the ratings on 156 junk-rated companies this year and lowered 111, based on data compiled by Bloomberg. The 1.41-to-1 ratio is the highest for any two-quarter period since at least 1999. S&P said last week the corporate default rate for speculative-grade-rated borrowers was 0.97 percent at the end of the first quarter. Relative yields that are high by historical measures offer some protection from loose covenants, according to Richard Inzunza , a money manager at Northern Trust Global Investments in Chicago, with $647 billion of assets. Junk-bond spreads average 6.36 percentage points, compared with the record low of 2.41 percentage points in June 2007, based on Bank of America Merrill Lynch indexes. “There are some deals that may have weaker covenants but we think we’re getting paid enough to participate in the issue,” said Inzunza, whose firm owns bonds of Overseas Shipholding. No End Martin Fridson , the chief executive officer of New York- based money manager Fridson Investment Advisors, said the loosening of covenants isn’t at a level yet that would signal the end of the bull market in junk bonds. Covenants are typically strengthened following periods in which high-yield issuers are blocked from the market, “and at the end of that cycle, there’s an ‘anything goes’ mentality,” said Fridson, 57, who was Merrill Lynch’s head high-yield strategist before leaving to form his own firm in 2002. “We haven’t reached that final stage.” Cracks in the junk bond rally are emerging on speculation that rising budget deficits in European countries such as Greece, Spain and Portugal may cause lawmakers to curb spending, slowing the global economy. Bond Losses High-yield bonds in the U.S. have lost 2 percent this month, according to Bank of America Merrill Lynch index data. This would be the first down month since February 2009, when they fell 3.47 percent. CF Industries, the Deerfield, Illinois-based fertilizer maker, sold $1.6 billion of bonds on April 20, before the upheaval. The debt doesn’t restrict liens on the company’s property, plants and equipment worth less than 1 percent of its assets or located outside the U.S., according to Moody’s. Previously, covenants typically had tougher restrictions that affected property worldwide. That could allow CF to use the property as security for future borrowings, reducing what’s available to pay investors in the notes in a default, according to Dill. Terry Huch , a CF spokesman, declined to comment. The loosened provision, typically used by investment-grade borrowers, first began appearing in debt sold this year, Dill said. It was included in $400 million of securities offered last month by West Chester, Ohio-based AK Steel, the third-largest maker of the metal by sales after Nucor Corp. of Charlotte, North Carolina, and Pittsburgh-based United States Steel Corp., according to Dill. ‘Like a Meme’ “Once you get a structure into the market, it replicates itself like a meme and it survives because the investors keep buying it,” Dill said. Rising demand for junk bonds has also allowed companies emerging from bankruptcy , including Houston-based Lyondell Chemical Co., which sold $2.75 billion of debt in dollars and euros on March 24 and Lear Corp. of Southfield, Michigan, which issued $700 million of notes on March 23, to borrow with few restrictions, Covenant Review’s Cohen said. Lyondell’s covenants offer no clear limits on the amount of additional secured debt the company can sell and permit it to shift as much as $1.25 billion of assets to units that aren’t covered by the bonds’ limitations, reducing the collateral available to creditors, according to a Covenant Review report. “In 2008, all the companies that we said would screw the bondholders did it,” said Cohen of Covenant Review. “Now, it feels like 2007 to me. We’re telling them they’re going to get screwed and they’re not paying attention.” To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net

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UnitedHealth, Humana Need 5-Star Ratings for $2.5 Billion Medicare Bonus

May 18, 2010

By Drew Armstrong May 18 (Bloomberg) — Insurers led by UnitedHealth Group Inc. and Humana Inc. may share in an estimated $2.5 billion in yearly bonuses if their U.S-backed Medicare plans rate four or five stars under a system created to improve quality of care. The U.S. has ranked Medicare Advantage insurance plans that serve the elderly on a one- to five-star basis since 2007, weighing clinical outcomes, access to tests, preventive care and consumer satisfaction, among 33 criteria . Under the health law signed in March, those scores will be used to award bonuses that can boost U.S. subsidies for the plans by five percent. The money may help offset an estimated $136 billion , 10- year scheduled cut in U.S. payments for the plans. UnitedHealth has begun an improvement push because most of their customers are in plans now ranked from three to three-and-a-half stars, said spokesman Matthew Burns. At the same time, America’s Health Insurance Plans , the industry’s lobbyist, is urging changes in the system that may allow more plans to get higher ratings. It’s “health-care Darwinism,” said Nathan Goldstein, senior vice president of strategic development with Gorman Health Group , a Washington consulting firm that works with Medicare Advantage plans, in an interview. The program begins with a 1.5 percent bonus in 2012, then 3 percent in 2013 and 5 percent in 2014. Payments will be worth at least $700 million a year by 2014, said Brian Biles , a professor at George Washington University’s Department of Health Policy who wrote a study on the program. If all the three-star plans improved to four, the total bonus payments would be worth about $2.5 billion, according to a separate analysis by Biles. ‘Taking the Edge Off’ The bonuses “could be significant in taking the edge off cuts to Medicare Advantage,” said Ana Gupte , a Sanford C. Bernstein & Co. analyst in New York, in an e-mail. UnitedHealth, based in Minnetonka, Minnesota, gained 5 cents to $30.44 in New York Stock Exchange trading yesterday. Humana , of Louisville, Kentucky, increased 14 cents to $45.89. The Standard & Poor’s 500 Managed-Care Index has fallen 12 percent since President Barack Obama signed the health-care law on March 30, compared with a 3.1 percent decline in the S&P 500. Advantage plans compete with traditional Medicare by offering expanded benefits and different premiums. About 10.2 million of the 45 million Medicare recipients were Advantage members in 2009, according to the Kaiser Family Foundation , a Menlo Park, California, health-care research group. UnitedHealth Coverage UnitedHealth covered 2 million people in Advantage plans as of March 31 and Humana had 1.74 million, according to statements released last month. The Advantage program accounted for one- fifth of UnitedHealth’s $3.82 billion in earnings last year, said Matthew Borsch , a Goldman Sachs Group Inc. analyst in New York, in a May 3 note. In 2009, he U.S. paid insurers an estimated $110 billion to run the plans, according to Kaiser. The payments were about 14 percent higher per-patient than the cost of traditional Medicare, the U.S. government’s basic health program for those 65 and older, the Medicare Payment Advisory Commission said. In an effort to raise its ratings by 2014, UnitedHealth will encourage patients to use chronic and preventive care services more often, and the company plans to put resources into added call centers and customer support, said Rhonda Medows, the insurer’s chief medical officer for public and senior markets. “We believe we’ll achieve four or better in time,” Medows said in a telephone interview. Industry Lobbying The insurance industry has been lobbying to influence many parts of the health-care overhaul that will affect how companies do business, including rules about the proportion of premium dollars to be used for administrative costs and profits. The rating system is also at issue said Robert Zirkelbach , the group’s spokesman. The star system grades insurers against one another on some of the 33 measures. America’s Health Insurance Plans is challenging the objectivity of having the criteria rated on a curve, Zirkelbach said in a telephone interview. “We have raised concerns that some of the measures in the current star systems are not based on objective criteria, which could prevent some plans from moving up,” he said. That means companies will find it harder to improve their ratings unless the metrics grading them against one another are changed to allow measurements against universal standards, said Biles, who wrote the study about the bonus program. “For somebody as big as UnitedHealth, that all their plans could be four stars under the current system is impossible,” Biles said in a phone interview. No Decision on Changes Medicare hasn’t decided whether to change the criteria, said Peter Ashkenaz , a spokesman for the Centers for Medicare and Medicaid Services, in an e-mail. Biles said ending the grading curve might make the star rating system less meaningful. “They’ll set absolute values, but they’ll set them so low that everybody lives in the world of Lake Wobegon, where all the children and all the plans are above average,” he said, referring to radio show host Garrison Keillor’s fictional town in Minnesota. Nonprofit Medicare Advantage plans tend to have higher ratings than for-profit companies. The average nonprofit plan has 3.87 stars, compared with 3.02 stars for the for-profit insurers, according to the Kaiser foundation. Martin’s Point Health Care in Portland, Maine, a nonprofit insurer, is one of four plans in the U.S. with a five-star rating. The insurer had 2,652 Advantage patients that brought in $16.4 million in 2009. Martin’s Point competes locally against Humana among about 10 rivals, Chief Executive Officer David Howes said in a phone interview. 9 Percent Cut All the local Maine plans are facing about a 9 percent cut to their government payment rates next year. “But they’re not all going to be getting the quality bonuses. I think the quality bonuses may be critical for success going forward,” Howes said. Howes said Martin’s Point expects to double the number of Advantage customers in the next year. The plan relies on its existing relationships with doctors and hospitals to make sure they’re providing preventive care, one of Medicare’s metrics. “We’ve spent a lot of time thinking about, ‘Who do we want to have in that network?’” Howes said. “Who gives nice access? Who gives us the ability to touch our members and patients in a way that is positive?” Martin’s Point’s five-star ratings will help it win more customers from its competitors and perhaps eventually drive them from the market, said Goldstein, of Gorman Health Group, who has consulted with the Maine nonprofit. “To the victor goes the members,” Goldstein said. “Mr. CEO, what I’m here to tell you is that your payment rate is getting cut down, and you have two levers you can pull to increase it — your risk adjustment, and your star system.” To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net .

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Ratings Board for Asset-Backed Securities Is Approved in U.S. Senate Vote

May 13, 2010

By Jesse Westbrook and Alison Vekshin May 13 (Bloomberg) — The U.S. Senate approved a proposal to let regulators decide who rates asset-backed securities after investors said Standard & Poor’s and Moody’s Investors Service assigned inflated assessments to mortgage bonds because the companies were paid by Wall Street firms selling the debt. The Senate in a 64-35 vote today approved an amendment to the financial overhaul legislation that would create a ratings board overseen by the Securities and Exchange Commission. The panel would assign a credit-rating company to rank an offering. “There is a staggering conflict of interest affecting the credit-rating industry,” said Senator Al Franken , a Minnesota Democrat who offered the amendment. “Issuers of securities are paying for the credit ratings. They shop around for their ratings.” Public pension funds blame S&P, Moody’s and Fitch Ratings for helping cause the global financial crisis by giving top rankings to mortgage-linked securities that blew up when the housing market collapsed in 2007. Lawmakers and regulators have been debating for three years how to reduce conflicts at the companies. Shares of Moody’s and McGraw-Hill Cos., the parent company of Standard & Poor’s, fell initially on the news, though they have since rebounded. Moody’s fell as much as 6.8 percent to $20.77, a decline of $1.52, while McGraw-Hill dropped as much as 4 percent to $28.75, in New York Stock Exchange composite trading. Investors on Board Moody’s shares were down 3 cents to $22.26 as of 2:21 p.m. McGraw-Hill fell 58 cents to $29.38. Shares of Financiere Marc de Lacharriere SA , the Paris-based owner of Fitch Ratings, were unchanged in after-market trading in Paris. Under Franken’s amendment, the SEC would determine the size of the board. The majority of members would be investors, at least one member would be from a credit-rating company and at least one member would be from an investment bank. The board would conduct an annual assessment of each credit-rating company to scrutinize the firm’s accuracy in grading debt compared with competitors, according to the amendment. While credit-rating companies would set fees, the SEC would have authority to make sure payments are “reasonable.” For the proposal to form a credit-rating board to become binding, lawmakers would have to approve the broader financial reform measure and President Barack Obama would have to sign the legislation. The Senate also approved an amendment offered by Senator George LeMieux that would remove references to credit ratings in some federal rules. LeMieux said removing ratings from government regulations would reduce a “dangerous over- reliance” on the assessments by investors. Consequences S&P said the Franken amendment would have unintended consequences. “Credit-rating firms would have less incentive to compete with one another, pursue innovation and improve their models,” said Chris Atkins , a spokesman for S&P. “This could lead to a more homogenized rating opinion and, ultimately, deprive investors of valuable, differentiated opinions on credit risk.” Spokesmen for Moody’s and Fitch didn’t immediately return phone calls seeking comment. To contact the reporters on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net ; Alison Vekshin in Washington at avekshin@bloomberg.net .

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Gulf Spill Boosts BP, Transocean Debt Costs Amid Cleanup: Credit Markets

May 12, 2010

By John Glover May 13 (Bloomberg) — Energy companies’ borrowing costs are rising at the fastest pace in 17 months after an oil rig leased by BP Plc exploded, killing 11 people, spewing crude into the Gulf of Mexico and prompting a moratorium on new drilling. The extra yield investors demand to hold energy company bonds instead of benchmark government securities jumped 32 basis points since April 28, the biggest two-week increase since the period ended Dec. 4, 2008, according to Bank of America Merrill Lynch’s U.S. Corporates, Energy index. The notes are the worst performing industrial debt this month except for basic industries, losing 0.96 percent, the data show. Borrowing costs are rising as estimates of the cleanup reach $12.5 billion, with BP, Europe’s largest oil and gas company, on the hook for $8 billion, according to analysts at Sanford C. Bernstein. The London-based company’s bonds are suffering along with the debt of other firms involved including Transocean Ltd. and the U.S.’s Halliburton Co. Moody’s Investors Service and Standard & Poor’s say they may cut their ratings of BP’s debt. “This whole thing is a monster that’s going to take years to resolve,” said David Kotok , chairman and chief investment officer of Cumberland Advisors in Sarasota, Florida. “As we saw with the financial crisis, at the start estimates are small and they rise as more information is obtained.” The extra yield investors demand to own BP’s bonds instead of government debt has almost tripled to 115 basis points, or 1.15 percentage point since April 28, when BP increased its estimate of how much oil the damaged well was leaking. BP is rated Aa1 by Moody’s, its second-highest grade, and one level lower at AA by S&P. Rollover Costs BP would have to pay $182 million a year extra in interest to refinance its $24 billion of bonds were they to roll over at current rates. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt fell 1 basis point yesterday to 169 basis points, after soaring 28 basis points last week, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The spread peaked at 511 on March 30, 2009, and dropped to as low as 142 on April 21. Moody’s cut ratings on 22 billion euros ($28 billion) of Greek bonds backed by loans to consumers and companies and left the notes under review for further downgrades, as the country adopts austerity measures to qualify for European aid. Less Creditworthy The cuts “were prompted by Moody’s expectations of significant pool performance deterioration due to the stressed economic environment in Greece as well as increased operational risk due to the weakened financial strength of Greek banks,” the New York-based ratings company said in a statement. The bonds appear less creditworthy considering “Greece’s austerity package and the resulting impact on the Greek economy,” with higher taxes also likely to hurt underlying borrowers’ ability to keep paying, Moody’s said yesterday. Apollo Management LP won consent for a debt-for-equity swap in U.K. casino operator Gala Coral Group Ltd. giving it and other junior lenders full ownership of the company’s shares. The plan got 97 percent approval from senior lenders and unanimous consent from mezzanine investors, according to two people familiar with the situation. Leon Black ’s Apollo is leading a group of investors, including Goldman Sachs Group Inc., Cerberus Capital Management LP and Park Square Capital LLP, that plans to take over the Nottingham, England-based bingo chain in June, the people said. Gala said on March 13 that key lenders agreed to write down debt to 1.85 billion pounds ($2.8 billion) from 2.6 billion pounds and invest 200 million pounds. A spokesman for Gala and Kelly Nugent , a New York-based spokeswoman for Apollo, declined to comment. Bond Sales New issuance in the U.S. picked up, led by Citigroup Inc.’s $1.5 billion offering and Mylan Inc.’s $1.25 billion sale. Cigna Corp., the fifth-biggest U.S. health insurer by enrollment, sold $300 million of 10-year notes, according to data compiled by Bloomberg. The senior unsecured debt yields 5.192 percent, or 162.5 basis points more than similar-maturity Treasuries. The Philadelphia-based company last sold debt in May 2009, when it issued $350 million of 10-year notes at a spread of 537.5 basis points, the data show. “We’re always looking to improve our interest rates,” Chief Financial Officer Annmarie Hagan said yesterday at a conference in New York. Cigna has $222 million of debt maturing in January, Bloomberg data show. Emerging-Market Bonds The extra yield investors demand to own emerging-market bonds fell 14 basis points yesterday to 2.77 percentage points, the lowest since May 3, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Argentina gave institutional investors more time to turn over defaulted bonds in a $20 billion restructuring offer and said the government may scrap plans to sell new debt after borrowing costs surged. The country extended the deadline for swapping securities to May 14 from yesterday and said further extensions are possible, according to a government statement distributed by Barclays Capital, which is managing the offer. Economy Minister Amado Boudou said May 11 Argentina may scrap a $1 billion bond sale that formed part of the restructuring after yields rose to a two-month high on concern the Greek crisis was spreading. Delays in advancing the exchange over the past two years are costing President Cristina Fernandez de Kirchner , who could have sold new bonds at a yield of 7 percent in 2008, said Alberto Bernal , head of fixed-income research at Bulltick Capital Markets in Miami. Argentina’s dollar bonds yielded an average 11.06 percent at yesterday’s close, according to JPMorgan’s EMBI+ index. Move Against Drilling The spill from the BP well may curb offshore oil production and boost opposition to President Barack Obama ’s plan to open coastal waters to drilling, the International Energy Agency said. In addition to a temporary moratorium on new drilling permits, the spill has already resulted in the suspension of hearings on offshore development in Virginia, the Paris-based agency said yesterday in a report. “Operational and estimated environmental clean-up costs, which could exceed $3 billion, constitute the immediate financial risk to the companies’ credit profile,” S&P said yesterday in a report. “Costs and damages will continue to mount until the spill is controlled. However, potential non- environmental liabilities could pose longer-term risks to the credit profiles of the companies involved.” Transocean ’s largest investor as of Dec. 31, Marsico Capital Management LLC, liquidated its entire holding in the world’s biggest oil driller partly because of the fatal rig blast that triggered the Gulf of Mexico spill. ‘Accelerated’ Sales Marsico began selling some of its 20.96 million shares earlier this year as a glut of North American natural gas diminished demand for rigs built to extract the fuel from shallow coastal waters, Chief Executive Officer Thomas F. Marsico said in a Bloomberg Television interview. He said he “accelerated” the sales after the Geneva-based company’s Deepwater Horizon rig exploded April 20. “We were in the process of selling the position when the incident happened,” said Marsico, whose 6.25 percent stake in Transocean was worth $1.74 billion at the end of 2009. Bonds sold by Transocean, the owner of the rig that sank off the coast of Louisiana, have lost money this month, underperforming government bond benchmarks by 7.19 percentage points, the most among the 50 biggest companies in the Bank of America Merrill Lynch index. Halliburton Bonds Debt of Anadarko Petroleum Corp. , owner of 25 percent of the damaged well, lost 6.07 percent compared with government securities. So-called excess returns on bonds of Houston-based Halliburton, which provided cementing services to the well, are negative 4.27 percent below benchmarks, the index data show. The cost of insuring against a default on the companies’ bonds has surged. Credit-default swaps on BP’s debt jumped to 81 basis points from 46 basis points on April 28, according to CMA DataVision prices. An increase in the contracts, used to bet on a company’s creditworthiness, indicates a deterioration of investor perceptions of credit quality. The default-swap prices imply a rating for BP of Aa2, one level lower than the current grade, according to Moody’s Capital Market Research Group, a unit of the ratings company. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. Contracts on Transocean climbed to 185 basis points from 76 on April 28, while swaps tied to Halliburton’s debt advanced to 96.5 basis points from 58, according to CMA prices. ‘Significant Uncertainty’ Moody’s lowered its outlook on BP’s rating to “negative” on May 5. The ratings company said it’s “impossible at this stage to assess the full extent of the costs and business impact of this accident on BP’s results.” New York-based S&P followed suit two days later, citing “significant uncertainty over costs” of the calamity. Energy companies’ securities are falling faster than the debt of other borrowers. Energy bonds pay spreads 28 basis points higher than debt issued by the typical industrial company, the biggest difference since Nov. 20, Bank of America Merrill Lynch index data show. That compares with a gap of 12 basis points on April 19, the day before the offshore drilling rig exploded. The yield premium on BP’s $2 billion of 3.875 percent bonds due 2015 over government debt rose to 113 basis points, the biggest spread since May 28, up from 32 basis points on April 22, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Transocean’s $500 million of 5.25 percent bonds due 2013 also plunged, with the extra yield increasing to 206 basis points from about 82 basis points on April 28. The spread on Halliburton’s $400 million of 5.9 percent notes due 2018 was 131 basis points, up from 77 on April 28, according to Trace. Yields move inversely to bond prices. To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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Moody’s Downgrades $28 Billion of Greek Securities, Citing Austerity Plan

May 12, 2010

By Jody Shenn May 12 (Bloomberg) — Moody’s Investors Service lowered 22 billion euros ($28 billion) of Greek bonds backed by loans to consumers and companies as the country adopts austerity measures to qualify for European aid, leaving the notes under review for further downgrades. The cuts “were prompted by Moody’s expectations of significant pool performance deterioration due to the stressed economic environment in Greece as well as increased operational risk due to the weakened financial strength of Greek banks,” the New York-based ratings company said today in a statement. The securities, which are part of 23 transactions, included 10.7 billion euro of notes backed by residential mortgages, 3.9 billion euro of collateralized loan obligations, and an additional 7.2 billion euro of other asset-backed debt, according to the statement. The bonds appear less creditworthy considering “Greece’s austerity package and the resulting impact on the Greek economy and collateral performance,” Moody’s said. Ratings reductions typically boost the capital needs of bondholders such as banks and insurers and force some investors to sell the debt. Greece’s economy contracted in the first quarter as the government cut spending and raised taxes in a bid to trim the European Union’s second-biggest budget gap, the Athens-based Hellenic Statistical Authority said today. Moody’s said May 10 it may cut the nation’s A3 grade to junk, citing the country’s “dismal” economic prospects. Prime Minister George Papandreou , amid soaring borrowing costs, this month promised further wage cuts and tax increases on alcohol, fuel and tobacco in return for emergency loans from the International Monetary Fund and the European Union to stave off default. Rescue Plan Under a support package announced this week for troubled European countries, the region’s governments would offer guarantees of 440 billion euros to a special fund, which would then sell debt and use that cash to buy the bonds of nations in need. Another 60 billion euros will come from the EU’s budget and as much as 250 billion euros from the IMF. As part of that broader plan, Spain and Portugal also pledged deeper budget cuts to be outlined this month. “The Eurozone support measures together with the austerity program will cause the transfer of wealth and income from the household and private sectors to the government sector via the assessment and collection of taxes and is likely to reduce the ability of the underlying borrowers to meet their debt obligations,” Moody’s said. The package announced by European policy makers and the European Central Bank’s plan to buy sovereign debt “have removed the risk of sponsors facing an immediate liquidity crisis,” Moody’s said. The health of banks is important to the asset-backed securities because they “act in various roles in the transactions, including servicer, cash managers and swap counterparties,” the ratings firm said. “A servicing transfer would be extremely difficult in the context of the current crisis.” High-yield, or junk debt is rated below Baa3 by Moody’s and BBB- by Standard & Poor’s. To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

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EU Readies Emergency Fund Said to Be $645 Billion to Fight Off `Wolfpack’

May 9, 2010

By James G. Neuger and Meera Louis May 9 (Bloomberg) — European Union finance ministers pledged to stop a sovereign-debt crisis from shattering confidence in the euro as they held an emergency summit to hammer out a lending mechanism that may be worth around $645 billion. Jolted into action by last week’s slide in the currency to a 14-month low and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed on the backstop yesterday and told ministers to get it ready before Asian markets open. The European facility may be worth around 500 billion euros, said an official familiar with the talks. “We are going to defend the euro,” Spanish Economy Minister Elena Salgado told reporters as she arrived to chair today’s Brussels meeting. “We think we have a duty for more stability for our currency. We will do whatever is necessary.” Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro last week, the biggest weekly decline since the aftermath of Lehman Brothers Holdings Inc.’s collapse. It prompted the U.S. and Asia to urge broader steps to prevent a debt crisis from pitching the world back into a recession. President Barack Obama spoke by phone with German Chancellor Angela Merkel for the second time in three days, adding to the international pressure Europe has faced since a hurriedly arranged conference call of Group of Seven finance chiefs on May 7. Obama today emphasized “the importance of the members of the European Union taking resolute steps to build confidence in the markets,” White House spokesman Bill Burton told reporters in Hampton, Virginia. ‘Wolfpack Behavior’ “In the night, when the markets are opening, we cannot afford a disappointment,” said Finance Minister Anders Borg of Sweden, one of 11 EU nations not in the euro. “We now see herd behavior in the markets that are really pack behavior, wolfpack behavior.” European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities with guarantees by national governments. The meeting started just after 3 p.m. Expectations of decisive action buoyed the euro as trading began in Asia. It jumped more than 1 percent to $1.2897 as of 6:11 a.m. in Sydney, according to pricing from Westpac Banking Corp. Several Alternatives Germany, the bloc’s largest economy, is being represented by Interior Minister Thomas de Maiziere after wheelchair-bound Finance Minister Wolfgang Schaeuble , 67, was rushed to a Brussels hospital due to an adverse reaction to new medication. Part of a new lending mechanism could be based on the balance-of-payments aid model that the EU granted to Hungary, Romania and Latvia when their budgets buckled in the financial crisis, said Jacques Cailloux , chief European economist at Royal Bank of Scotland Group Plc in London. The initial funding available could be 70 billion euros, he said. “There is some discussion about what the solution will be,” Dutch Finance Minister Jan Kees de Jager said. “There are several alternatives at the moment.” Separately, European Central Bank council members were slated to hold a teleconference today. “Europe is getting its act together,” said Chris Rupkey , chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Time will tell if this statement is enough to satisfy the European bond market vigilantes.” Stiffest Test Government officials said they won’t push the independent ECB to, for example, buy government bonds. President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. Trichet is in Basel, Switzerland, today for a scheduled meeting of central bankers from the Group of 10 nations. Vice President Lucas Papademos is attending the Brussels talks. With the euro facing the stiffest test since its debut in 1999, the weekend turned into a crisis-management exercise to restore faith in the currency and prevent a European debt crisis from cascading around the world. The purpose is to “decide on a mechanism that enables us to assure the stability of the euro, stability in the zone and, beyond that, stability in financial markets,” French Finance Minister Christine Lagarde said. The euro slid to $1.2715 from $1.3293 in the past week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18. Stability The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Britain, the EU’s third-largest economy, won’t contribute to a fund to shore up euro countries, though it backs efforts to restore stability, Chancellor of the Exchequer Alistair Darling said. “When it comes to supporting the euro, that is for the eurogroup countries,” Darling told Sky News. “We need to show again today that by acting together we can stabilize the situation.” At yesterday’s leaders’ summit in Brussels, Germany stepped up calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules. The vow to push budget shortfalls below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011. Consideration Plans for a European credit-rating authority are already under consideration at the European Commission, the bloc’s Brussels-based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, European Commission President Jose Barroso said “some of the points you have mentioned will be contemplated.” The political leadership of the $12 trillion economy yesterday also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens. To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Meera Louis in Brussels at mlouis1@bloomberg.net .

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EU Finance Chiefs Race to Ready Euro Stability Fund

May 9, 2010

By James G. Neuger and Gregory Viscusi May 9 (Bloomberg) — European Union finance ministers meet today to hammer out the details of an emergency fund to prevent a sovereign debt crisis from shattering confidence in the 11- year-old euro. Jolted into action by last week’s slide in the currency to the lowest in 14 months and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed to the financial backstop at a May 7 summit. They assigned finance chiefs to get it ready before Asian markets open later today European time. “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters in the early hours yesterday after the leaders met in Brussels. Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro last week, the biggest weekly decline since October 2008. It prompted the U.S. and Asia to urge broader steps to prevent a global sovereign-debt crisis from pitching the world back into a recession. “Europe is getting its act together,” said Chris Rupkey , chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Time will tell if this statement is enough to satisfy the European bond market vigilantes.” European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities with guarantees by national governments. Finance ministers will meet at about 3 p.m. in Brussels. A press briefing is scheduled for 6 p.m. ‘That’s Significant’ “When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.” Sarkozy cancelled a planned trip to Moscow today to deal with the crisis. Britain, the EU’s third-largest economy, won’t contribute to the fund aimed at euro countries that essentially duplicates the work of the International Monetary Fund, a U.K. official said yesterday. Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. With the euro facing its stiffest test since its debut in 1999, the summit — called to discuss efforts to coordinate economic policies — turned into a crisis-management session that dragged past midnight. Euro’s Drop The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs before the summit. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty , who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.” The spreading contagion also drew the attention of President Barack Obama , who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back. ‘Speedy Resolution’ “There are impacts on financial markets, including share markets, from the events in Europe and in Greece more specifically,” Australian Treasurer Wayne Swan told reporters in Canberra. “We are urging as speedy a resolution as is possible in the circumstances.” In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s. Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said. With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. Rating Firms Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.” The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens. Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line with endorsements in the lower and upper houses of parliament on May 7. A group of German academics filed a lawsuit to try to halt the payout. Germany’s highest court yesterday rejected the challenge. A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.” To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Gregory Viscusi in Brussels at gviscusi@bloomberg.net

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EU Finance Ministers Race to Ready Euro Fund Before Asia Opens

May 8, 2010

By James G. Neuger and Gregory Viscusi May 9 (Bloomberg) — European Union finance ministers meet today to hammer out the details of an emergency fund to prevent a sovereign debt crisis from shattering confidence in the 11- year-old euro. Jolted into action by last week’s slide in the currency to the lowest in 14 months and soaring bond yields in Portugal and Spain, leaders of the 16 euro nations agreed to the financial backstop at a May 7 summit. They assigned finance chiefs to get it ready before Asian markets open later today European time. “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters in the early hours yesterday after the leaders met in Brussels. Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro last week, the biggest weekly decline since October 2008. It prompted the U.S. and Asia to urge broader steps to prevent a global sovereign-debt crisis from pitching the world back into a recession. “Europe is getting its act together,” said Chris Rupkey , chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Time will tell if this statement is enough to satisfy the European bond market vigilantes.” European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities with guarantees by national governments. Finance ministers will meet at about 3 p.m. in Brussels. A press briefing is scheduled for 6 p.m. ‘That’s Significant’ “When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.” Sarkozy cancelled a planned trip to Moscow today to deal with the crisis. Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. With the euro facing its stiffest test since its debut in 1999, the summit — called to discuss efforts to coordinate economic policies — turned into a crisis-management session that dragged past midnight. The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18. Surging Spreads The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds rose to euro-era highs. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs before the summit. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty , who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.” The spreading contagion also drew the attention of President Barack Obama , who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back. “There are impacts on financial markets, including share markets, from the events in Europe and in Greece more specifically,” Australian Treasurer Wayne Swan told reporters in Canberra. “We are urging as speedy a resolution as is possible in the circumstances.” Merkel’s Call In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s. Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said. With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Restrictions Considered Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.” The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens. Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line with endorsements in the lower and upper houses of parliament on May 7. A group of German academics filed a lawsuit to try to halt the payout. Germany’s highest court yesterday rejected the challenge. A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.” To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Gregory Viscusi in Brussels at gviscusi@bloomberg.net

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Europe’s Leaders Agree on Emergency Fund to Defend Euro as Crisis Spreads

May 8, 2010

By James G. Neuger and Gregory Viscusi May 8 (Bloomberg) — European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro. Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before the markets open on May 10. “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels. Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid to prevent a global sovereign-debt crisis from pitching the world back into a recession. European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details. “When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.” Independent ECB Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. With the euro facing its stiffest test since its debut in 1999, the summit — called to discuss longer-term efforts to coordinate economic policies — turned into a crisis-management session that dragged past midnight. The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Spreading Contagion Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs yesterday. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty , who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.” The spreading contagion also drew the attention of President Barack Obama , who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back. “There are impacts on financial markets, including share markets, from the events in Europe and in Greece more specifically,” said Australian Treasurer Wayne Swan, speaking to reporters in Canberra today. “We are urging as speedy a resolution as is possible in the circumstances.” In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s. Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said. Credit-Rating Authority With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.” The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens. Biggest Contributor Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line yesterday with endorsements in the lower and upper houses of parliament. A group of German academics filed a lawsuit to try to halt the payout. A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.” Europe’s unprecedented lending pledge has “proven insufficient to stop market contagion to the rest of the euro- zone periphery,” Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit. “Different kinds of solutions are necessary to fix the underlying problems of the rest of the euro periphery other than Greek-style packages, and these are unlikely to come in the very short term.” To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Gregory Viscusi in Brussels at gviscusi@bloomberg.net .

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EU to Set Up Fund to Prevent Spread of Greek Crisis

May 7, 2010

By James G. Neuger and Gregory Viscusi May 8 (Bloomberg) — European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro. Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before the markets open on May 10. “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels. Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid to prevent a global sovereign-debt crisis from pitching the world back into a recession. European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details. “When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.” Independent ECB Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. With the euro facing its stiffest test since its debut in 1999, the summit — called to discuss longer-term efforts to coordinate economic policies — turned into a crisis-management session that dragged past midnight. The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Spreading Contagion Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs yesterday. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty , who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.” The spreading contagion also drew the attention of President Barack Obama , who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back. In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s. Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said. Credit-Rating Authority With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.” The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens. Biggest Contributor Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line yesterday with endorsements in the lower and upper houses of parliament. A group of German academics filed a lawsuit to try to halt the payout. A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.” Europe’s unprecedented lending pledge has “proven insufficient to stop market contagion to the rest of the euro- zone periphery,” Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit. “Different kinds of solutions are necessary to fix the underlying problems of the rest of the euro periphery other than Greek-style packages, and these are unlikely to come in the very short term.” To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Gregory Viscusi in Brussels at gviscusi@bloomberg.net .

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EU to Set Up Emergency Fund to Defend Euro, Halt Spread of Greek Crisis

May 7, 2010

By James G. Neuger and Gregory Viscusi May 8 (Bloomberg) — European leaders agreed to set up an emergency fund to halt the spread of Greece’s fiscal woes, seeking to prevent a sovereign debt crisis from shattering confidence in the 11-year-old euro. Jolted into action by the sliding currency and soaring bond yields in Portugal and Spain, leaders of the 16 euro countries said the workings of the financial backstop will be hammered out before the markets open on May 10. “We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters early today after the leaders met in Brussels. Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid to prevent a global sovereign-debt crisis from pitching the world back into a recession. European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the European Union’s central authorities with guarantees by national governments. Finance ministers will meet at 4 p.m. tomorrow in Brussels to flesh out the details. “When the markets re-open Monday, we will have in place a mechanism to defend the euro,” French President Nicolas Sarkozy said. “If you don’t think that’s significant, you haven’t been to many EU summits.” Independent ECB Barroso said he wouldn’t push the independent European Central Bank to, for example, buy government bonds. ECB President Jean-Claude Trichet accelerated the market selloff on May 6 by rejecting that measure. With the euro facing its stiffest test since its debut in 1999, the summit — called to discuss longer-term efforts to coordinate economic policies — turned into a crisis-management session that dragged past midnight. The euro slid to $1.2715 from $1.3293 during the week, and is down 15 percent since late November. European stocks sank the most in 18 months, with the Stoxx Europe 600 Index tumbling 8.8 percent to 237.18. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of safer German bonds rose to euro-era highs yesterday. The premium on 10-year government bonds jumped as high as 973 basis points for Greece, 354 basis points for Portugal and 173 basis points for Spain. Spreading Contagion Europe came under pressure on a hastily arranged conference call of Group of Seven finance chiefs yesterday. All agreed on “the need for a clear, timely and strong response,” Canadian Finance Minister Jim Flaherty , who chaired the call, told reporters in Ottawa. “We hope to see a strong, early policy response in Europe.” The spreading contagion also drew the attention of President Barack Obama , who said in Washington that U.S. regulators will examine the “unusual market activity” that on May 6 briefly drove the Dow Jones Industrial Average down by almost 1,000 points, erasing more than $1 trillion in wealth before the market bounced back. In Brussels, German Chancellor Angela Merkel stepped up German calls for a closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules, originally drafted by Germany in the 1990s. Europe will send “a very clear signal against those who want to speculate against the euro,” Merkel said. Credit-Rating Authority With the euro region’s overall deficit forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011, the vow to bring budget shortfalls back below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. Plans for a European credit-rating authority are already under consideration at the EU Commission, the bloc’s Brussels- based executive agency. It also is investigating whether ratings companies such as Standard & Poor’s wield too much power over investors’ perceptions of governments. Asked whether steps to stem speculation against government bonds would include restrictions on short sales or credit default swaps, Barroso said “some of the points you have mentioned will be contemplated.” The political leadership of the $12 trillion economy also signed off on a 110 billion-euro ($140 billion) aid package for Greece negotiated by finance ministers last week. So far nine governments have cleared the way for funds to be sent to Athens. Biggest Contributor Germany, the biggest contributor with as much as 22.4 billion euros over three years, fell in line yesterday with endorsements in the lower and upper houses of parliament. A group of German academics filed a lawsuit to try to halt the payout. A day after whisking a three-year, 30 billion-euro program of deficit cuts through parliament, Greek Prime Minister George Papandreou ruled out further belt-tightening steps for the time being, saying the point of the summit was to “reaffirm our confidence in our economies and our common currency and this I believe is a very important message for the global economic recovery.” Europe’s unprecedented lending pledge has “proven insufficient to stop market contagion to the rest of the euro- zone periphery,” Michael Saunders and other economists at Citigroup Inc. said in an e-mailed note before the summit. “Different kinds of solutions are necessary to fix the underlying problems of the rest of the euro periphery other than Greek-style packages, and these are unlikely to come in the very short term.” To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net ; Gregory Viscusi in Brussels at gviscusi@bloomberg.net .

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Alan Fein: Goldman: Not So Smart, But Well-Connected

May 7, 2010

The firestorm coming down on Goldman Sachs is puzzling. The firm is getting what it deserves, but for the wrong reasons. Goldman Sachs is being vilified for being smarter than everyone else. In fact, they deserve what they are getting, not because they were so smart, but because they were not so smart. But unlike most everyone else, Goldman was rescued by the government for their profound miscalculations, and that is the scandal that should upset people. Let me explain. The SEC’s case against Goldman and last week’s Senate beat-down are based on the charges that Goldman failed to disclose to its clients that the derivatives their clients were buying were designed to fail. More broadly, it is alleged that Goldman had essentially concluded that the mortgage derivative market was crashing and kept that knowledge to itself. The SEC and a parade of bloviating Senators rightly pilloried Goldman for ignoring its duties to its clients. Wall Street’s general defense of Goldman has been that Goldman was selling these garbage derivatives to other big boys – really big boys – who should have known better, but weren’t as smart as Goldman. Goldman, the theory goes, shouldn’t be punished for being smart. Along these lines, Warren Buffett, who I usually agree with, has come to Goldman’s defense. “It’s very strange to say, at the end of the transaction, that if the other guy is smarter than you, that you have been defrauded,” Buffett said last week. Andrew Ross Sorkin, who I usually agree with, opined that plain-spoken Warren might be right: “it does seem odd that the government, and the public, has chosen to vilify one of only a couple of firms that made fewer mistakes than the rest.” What seems to be missing here is that when you play it out, Goldman made at least one mistake that was a doozy. Goldman was using its superior intellect not only against its clients, but against those who agreed to insure the other side of Goldman’s own bets against the mortgage industry, most notably AIG. The sharpies at Goldman convinced the insurers at AIG that the garbage AIG agreed to insure would never go belly up, and that AIG could take in a couple points of “premiums” and never have to worry about paying off. AIG believed the instruments were good as gold. After all, the same sharpies had already convinced the dolts at the ratings agencies to rate the garbage AAA. So what was Goldman’s doozy of a mistake? They failed to underwrite their own underwriters at AIG. It now appears that by 2007, the really smart guys in the room had already concluded that the mortgage derivative market would end badly. Yet Goldman kept creating more derivative instruments that required a counterparty to bet in favor of the market. In the past they actually bought a lot of the instruments on their own account, but by 2007 – knowing what they knew – they were buying insurance from AIG as a “hedge” against the inevitable downside. They were dumb, I would argue, because they knew or should have known that AIG had issued billions and billions of dollars of coverage on the bonds, and if (when) the market burst, AIG would never be able to satisfy its obligations. What happens if you or I fail to underwrite our underwriters? What if we buy flood insurance from a company that’s overcommitted when the flood comes? Too bad for us. Not so bad for Goldman. It appears that in the months leading up to AIG’s collapse, Goldman saw where this was heading and fought daily with AIG to protect its positions. During this period, Goldman certainly wasn’t telling its stockholders, or the SEC, or anyone else, that it faced a catastrophic loss if AIG was unable to meet its insurance obligations. But in September, 2008, when AIG failed, Goldman convinced its alum, Treasury Secretary Paulson, that the United States Government should honor AIG’s commitment to Goldman Sachs! Not part of AIG’s commitment, but all of it. One hundred cents on the dollar – a total of $16 billion. So Goldman, the group of geniuses who failed to underwrite their underwriter, was fully protected from its profound risk and folly. It appears that Goldman successfully convinced Secretary Paulson that they were in extremis, and that Goldman’s failure could bring down the entire economy. Once Goldman was saved, however, the bounce was immediately back in their step, and hubris returned. Goldman’s leaders blew off a meeting at the White House. They reveled in their reputation as the smartest guys on the Street. They announced that they were never in trouble, and didn’t want or need any loans from the government. Of course, Goldman didn’t offer to pay back the billions we taxpayers paid them to cover all of AIG’s debt. Instead, Goldman waited a few months, and then deemed themselves worthy of nearly all that money in bonuses, the lion’s share going to the Goldman principals who oversaw the failure to underwrite their underwriters. And that is the scandal no one is really talking about.

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Pound Slides After Election Deadlock Suggests Deficit Won’t Be Tamed Soon

May 7, 2010

By Lukanyo Mnyanda and Paul Dobson May 7 (Bloomberg) — The pound sank the most in a year and a half against the euro and British bonds tumbled as the U.K. election failed to produce an outright winner, fueling concern that measures to tame the budget deficit will be delayed. The currency fell to a 13-month low against the dollar and gilts dropped after David Cameron ’s Conservatives fell more than 30 seats short of winning a majority in Parliament. Losses on 10-year gilts pushed the yield up by the most since October. Business Secretary Peter Mandelson said his Labour Party government should have a “first go” trying to remain in power, while Cameron said Labour had lost its “mandate to govern.” The FTSE 100 Index of stocks slumped 1.1 percent. “People are increasingly taking fright as to the unfolding political backdrop,” said Jeremy Stretch , a senior currency strategist at Rabobank International in London. “Gilt yields have rocketed. That’s not a particularly ringing vote of confidence, and sterling is reacting accordingly as well.” The pound fell 2.1 percent to 86.86 pence per euro as of 12:47 p.m. in London, the most since December 2008, after plunging as much as 3.5 percent. It dropped 1 percent to $1.4683, after slipping to the lowest level since April 2009. The currency pared its decline after Liberal Democrat leader Nick66 Clegg said the Conservatives, who have pledged to cut the deficit more quickly than the other parties, deserve the first chance at forming a government. Clegg’s party is Britain’s third-largest and may hold the balance of power. The difference in yield, or spread , between 10-year gilts and equivalent-maturity German bonds widened to as much as 119 basis points, the most since August 1998, according to Bloomberg generic data. It was 112 basis points, from 101 basis points yesterday. IMF Specter The Conservatives raised the specter last week of an International Monetary Fund bailout if the election produced an indecisive result. The pound has declined 4.9 percent this year, Bloomberg Correlation-Weighted Currency Indexes show, amid concern a hung parliament would bring a government too weak to manage Britain’s 167 billion-pound ($245 billion) shortfall. All but the safest government debt in Europe has faced greater investor scrutiny in the wake of Greece’s budget crisis and IMF-led bailout. The U.K.’s budget deficit is more than 11 percent of gross domestic product, the biggest in the Group of Seven nations. Credit-Default Swaps The cost of insuring against losses on U.K. sovereign debt jumped, with credit-default swaps tied to the securities rising 11 basis points to 102, the highest in three months, according to CMA DataVision prices. The increase signals investors’ perception of the nation’s credit quality has deteriorated. “Any excuse to sell sterling, traders will take it,” said Harry Adams , a currency trader at Schneider Foreign Exchange in London. “Ultimately markets don’t like uncertainty and we have a lot of it here. I don’t see this being sorted out quickly.” In the first election since 1974 with no party gaining a majority, the Conservatives have taken 294 seats in the 650-seat House of Commons with 625 results declared so far, making it impossible for them to gain outright control. Labour had 252 and Clegg’s Liberal Democrats 52. The Conservatives gained a net 97 seats and Labour lost 90. Yields Surge Standard & Poor’s affirmed its “negative” outlook on the U.K.’s AAA rating on March 29 “in the absence of a strong fiscal consolidation plan.” Moody’s Investors Service said Britain has moved “substantially” closer to losing the top rank as debt costs climb. Fitch Ratings said on March 24 that the pace of deficit reduction is too slow. The 10-year gilt yield increased 11 basis points to 3.92 percent, while the yield on the two-year note rose 3 basis points to 1.11 percent. “We’re probably going to get less fiscal consolidation than the market hoped for, and that’s clearly a negative for gilts,” said Elisabeth Afseth , an analyst at Evolution Securities Ltd. in London. “This can’t be seen as a good result for anybody.” The last time the U.K. had a hung parliament it took four days before Conservative Edward Heath resigned as premier, allowing the Queen to name Labour’s Harold Wilson to lead a minority government. “Sterling is as clear a barometer as you can get about the need for a government with a clear mandate,” said Simon Derrick , chief currency strategist at Bank of New York Mellon Corp. in London. “It’s that level of uncertainty that’s weighing on sterling. The results have been so erratic it’s difficult to get anything meaningful from them.” The unpredictability of the election prompted London’s Liffe derivatives exchange to allow futures contracts on gilts, the FTSE 100 Index and short-sterling to be traded from 1 a.m. London time. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net ; Paul Dobson in London at pdobson2@bloomberg.net .

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Pound Weakens to 13-Month Low as Election Results Signal Hung Parliament

May 7, 2010

By Lukanyo Mnyanda and Paul Dobson May 7 (Bloomberg) — The pound fell to a 13-month low against the dollar and gilts dropped as the U.K. election failed to produce a clear winner, fueling concern that a new government won’t be strong enough to tackle the budget deficit. The currency fell for a sixth day as exit polls put David Cameron ’s Conservatives on course to win the most seats without gaining an overall majority. Ten-year gilts snapped five days of gains as Business Secretary Peter Mandelson said the sitting government should have the “first go” in trying to remain in power and Cameron said the Labour Party had lost its “mandate to govern.” The FTSE 100 Index of stocks slumped 1.3 percent. “Any excuse to sell sterling, traders will take it,” said Harry Adams , a currency trader at Schneider Foreign Exchange in London. “Ultimately markets don’t like uncertainty and we have a lot of it here. I don’t see this being sorted out quickly.” The pound fell 0.9 percent to $1.4706 as of 8:38 a.m. in London, after dropping to $1.4597, the lowest since April 2009. It lost 1.7 percent to 86.53 pence per euro. The pound has declined 4.2 percent this year, Bloomberg Correlation-Weighted Currency Indexes show, amid concern a hung parliament would leave the nation with a government too weak to manage its 167 billion-pound ($244 billion) shortfall. The U.K.’s budget deficit is more than 11 percent of gross domestic product, the biggest in the Group of Seven nations. IMF Specter In the first election since 1974 with no party gaining a majority, Cameron’s Conservatives had 285 seats in the 650-seat House of Commons with 600 results declared. Labour had 237 and Nick Clegg ’s Liberal Democrats 51. The Conservatives had gained a net 90 seats and Labour lost 83. The count won’t be completed until late afternoon. The Conservatives have pledged to make bigger cuts than Labour and the Liberal Democrats, Britain’s third main party. They raised the specter last week of an International Monetary Fund bailout if the election produces an indecisive result. Standard & Poor’s affirmed its “negative” outlook on the U.K.’s AAA rating on March 29 “in the absence of a strong fiscal consolidation plan.” Moody’s Investors Service said Britain has moved “substantially” closer to losing the top rank as debt costs climb. Fitch Ratings said March 24 the pace of deficit reduction is too slow. Four Days The last time the U.K. had a hung parliament it took four days before Conservative Edward Heath resigned as premier, allowing the Queen to name Labour’s Harold Wilson to lead a minority government. “Sterling is as clear a barometer as you can get about the need for a government with a clear mandate,” said Simon Derrick , chief currency strategist at Bank of New York Mellon Corp. in London. “It’s that level of uncertainty that’s weighing on sterling. The results have been so erratic it’s difficult to get anything meaningful from them.” The unpredictability of the election prompted London’s Liffe derivatives exchange to allow futures contracts on gilts, the FTSE 100 Index and short-sterling to be traded from 1 a.m. London time. The 10-year gilt yield increased 4 basis points to 3.84 percent, while that on the two-year note was little changed at 1.08 percent. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net ; Paul Dobson in London at pdobson2@bloomberg.net .

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Euro Value Slides – And Europe Is Faced With Mounting Debt Crisis

May 6, 2010

LONDON — The euro slid further amid fears that Greece’s debt crisis would spread across the continent after a ratings agency warned Thursday that contagion could hit banks in weaker countries. Spain saw its borrowing costs rise ominously at a debt auction, and markets looked for some form of extra help from the European Central Bank. Credit ratings agency Moody’s Investor Service said the banking systems in Portugal, Italy, Spain, Ireland and Britain could all be hurt by a widening debt crisis. With Spain seeing its borrowing costs jump in its latest bond issue – a clear sign of market fear, since investors demand higher rates from borrowers they see as riskier – Europe remained delicately poised at a juncture. Moody’s said much depended on bailout loans agreed for Greece, and whether markets believed they would be decisive in keeping the country away from bankruptcy. Greece faces a May 19 repayment date and the loan money is expected to get there after approval by national parliaments, but its longer term prospects are less certain. “A key factor determining whether contagion risk continues in this case will be the market’s view of the likely success or otherwise of the recently agreed International Monetary Fund and European Union support package for Greece,” Moody’s said. That bailout offers the debt-ridden country euro110 billion ($142 billion) in loans over three years from the IMF and the other 15 countries that use the euro. Greek lawmakers were to vote Thursday on austerity measures required by the rescue, and the bill was widely expected to pass despite violent protests that culminated in three deaths Wednesday when protesters torched a bank. Parliament in Germany, where the bailout is unpopular, is expected to vote Friday and Chancellor Angela Merkel’s governing coalition appeared to have the votes to pass it, with even opposition politicians signaling support. The euro, which would take a severe blow in case of a government default, sagged 0.7 percent to $1.2739. It was as high as $1.51 late last year before the Greek crisis worsened. Against that sort of backdrop, and after months of delay in which Greece’s debt crisis threatened to spiral out of control, European leaders have been stressing their willingness to act in support of their 11-year-old project in sharing a currency. Merkel and French President Nicolas Sarkozy said in a letter published in daily Le Monde that they were “fully committed to preserve the solidity, stability and unity of the euro zone.” They said Europe must take “all measures necessary” to ensure such a Greek-style crisis doesn’t happen again. In the short-term, however, experts believe that the immediate task of containing the crisis depends on the bailout and whatever new policies the European Central Bank adopts Thursday. After the ECB announced, as widely expected, that it had left interest rates at a record low, analysts are waiting for comments from President Jean-Claude Trichet at a press conference. They are keen to see whether the bank decides to take bolder steps, such as buying government bonds to prop up debt markets and banks. It has already dropped the ratings requirement for banks to use Greek bonds to get short-term central bank credits, key support for Greece and the banking system in case Greece’s credit is downgraded further. “No doubt that today’s ECB meeting will be centered on Greece and the growing contagion effect that is taking place in the euro sovereign bond market,” said analyst at Credit Agricole CIB. They do not expect the bank to announce bond purchases “but Trichet’s responses to questions at the press conference will be examined even closer than usual.” An improvement in market sentiment will be needed if borrowing costs are to be kept in check – Spain’s latest 5-year bonds were issued at an interest rate of 3.58 percent, up from 2.84 percent in the last auction as recently as March. Moody’s warning on contagion came only a day after it put Portugal on watch for a possible downgrade of its sovereign debt and a week after rival Standard & Poor’s downgraded Greece’s government bonds to junk status. Moody’s said the banking systems of Portugal, Italy, Spain, Ireland and Britain all face challenges of different types, but warned that “contagion risk could dilute these differences and impose very real, common threats on all of them.” The banking systems of Portugal and Italy, like that of Greece, were not hit too hard by the global financial crisis, but their huge public debt load remains a threat. Banks in Spain, Ireland and the U.K. were more exposed to the credit crunch and have weakened their countries’ finances significantly over the past year, the agency said.

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Blankfein Bonds Riskier Than Pandit’s; Junk Bonds Tumble: Credit Markets

May 5, 2010

By John Detrixhe and Bryan Keogh May 5 (Bloomberg) — Goldman Sachs Group Inc. bond yields show the firm’s credit is more hazardous than Citigroup Inc.’s for the first time since February 2009 as speculation grows that legal and regulatory risks will depress its revenue. Debt from the most profitable Wall Street firm yielded 2.73 percentage points more than Treasuries on average as of May 4, according to Bank of America Merrill Lynch indexes. That compares with a spread of 2.29 percentage points for Citigroup, which had to get a $45 billion bailout in 2008 and repaid $20 billion of the funds in December. At the end of March, Citigroup spreads were 0.45 percentage point wider than Goldman Sachs’s. Fitch Ratings revised Goldman Sachs’s A+ ranking outlook to “negative” from “stable” today on concern its reputation may be tarnished. Wider spreads mean the New York-based investment bank, with $180.4 billion of unsecured long-term borrowing, may pay an extra $7.6 million in annual interest on every billion of debt it issues. “With Goldman and the investigation going on, you have to build a bit more risk premium into that,” said Michael Donelan , director of trading and head portfolio manager who oversees $3.5 billion of bonds at Ryan Labs Inc., a money management and research firm in New York that sold two-thirds of its position in Goldman Sachs debt on April 30. “Citigroup actually could be further down the line as far as regulatory risk concern.” Federal Investigation U.S. prosecutors are investigating Goldman Sachs, where Lloyd Blankfein has served as chief executive officer since 2006. The Securities and Exchange Commission filed a civil lawsuit on April 16 alleging fraud tied to collateralized debt obligations. The firm called the SEC’s claims “unfounded.” “No one’s attacking Citigroup over anything anymore, and everyone’s attacking Goldman Sachs over everything,” said Richard Bove , a banking analyst at Rochdale Securities in Lutz, Florida. “It logically tells you that Citigroup should have a lower spread to Treasury than Goldman Sachs does.” Elsewhere in credit markets, turmoil in Europe’s financial system led banks to borrow the most in two months from the European Central Bank, junk bonds tumbled and relative yields on emerging-market bonds jumped to the most since February. California bucked the trend, boosting the size of a bond sale twice. Banks in the euro region borrowed 2.63 billion euros ($3.4 billion) from the ECB’s marginal loan facility on May 3, the most since March 10, ECB data show, while the amount of overnight deposits held at the central bank rose to 268.7 billion euros on May 4, the highest since July. Junk Bonds Financial institutions may be growing more reluctant to lend to each other in the so-called interbank market on concern that Greece’s debt crisis will hurt the quality of loan collateral. “There are echoes here of the July-August 2007 period, when people became very suspicious of what everyone else has on their books,” said Marc Ostwald , a fixed-income strategist at Monument Securities Ltd. in London. “This reinforces the idea that there’s less going in the interbank market. This will depress the ECB, but they’ll fully understand it in the current situation.” Yields over benchmark rates on high-yield bonds rose 23 basis points today, the most since June 2009, to 591 basis points, according to Bank of America Merrill Lynch index data. High-yield, high-risk, or junk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. Credit-Default Swaps A benchmark indicator of U.S. corporate credit risk soared to the most in three months. The Markit CDX North America Investment Grade Index Series 14 increased 7.3 basis points to 105.1, the highest since Feb. 8, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The extra yield investors demand to own emerging-market bonds over U.S. Treasuries rose 10 basis points to 290, the highest since Feb. 26, according to JPMorgan’s EMBI+ Index. Brazilian traders are betting for the first time that the central bank will raise the benchmark lending rate by 1 percentage point next month after last week’s increase failed to tame rising inflation expectations. Yields on overnight interest rate futures contracts due in July held at an 11-month high of 9.7 percent. The futures rose 14 basis points since central bank President Henrique Meirelles raised the overnight Selic rate by a bigger-than-forecast 75 basis points from a record low 8.75 percent on April 28. California Offering California ’s treasurer boosted the size of a bond sale for the state’s Department of Water Resources by 46 percent to $2.97 billion, after orders from individual investors exceeded $1.2 billion. The issue, now the largest offering of tax-exempt debt this year, was increased twice in response to investor demand, Treasurer Bill Lockyer said in a statement. The bonds, being sold to refinance debt from the state’s power crisis of 2001-2002, were offered at preliminary yields of 0.92 percent on two-year notes, to 3.8 percent on bonds maturing in 2022, according to data compiled by Bloomberg. Goldman Sachs’s 6.15 percent notes due in April 2018 yield 5.92 percent, compared with 5.71 percent for Citigroup’s 6.125 percent debt due a month later, according to data from Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The average bond yield for Goldman Sachs increased to 5.39 percent as of May 4, from 4.63 percent at the end of last year, Bank of America Merrill Lynch index data show. Michael DuVally, a Goldman Sachs spokesman, and Danielle Romero-Apsilos of Citigroup, declined to comment. ‘Loyalty and Relationships’ Credit-default swaps traders are charging 53 basis points more to protect Goldman Sachs bonds for one year than they are for bonds from New York-based Citigroup, run by Chief Executive Officer Vikram Pandit , according to CMA DataVision. Before the SEC filed its fraud suit, Goldman Sachs one-year swaps cost 15 basis points less than Citigroup’s. That means it would cost an extra $55,000 to protect $10 million of Goldman bonds rather than Citigroup’s. Goldman Sachs’s “reputation, their loyalty and relationships is what everyone talks about,” said James Barnes , money manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., where he helps oversee $1 billion in fixed- income assets. “If that becomes challenging to maintain, that’s where you can see a continuation in spreads widening.” To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net ; Bryan Keogh in London at bkeogh4@bloomberg.net

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Goldman Sachs Credit Rating Threatened By Fitch

May 5, 2010

NEW YORK — Fitch Ratings said Wednesday that Goldman Sachs’ recent legal troubles and the evolving regulatory landscape might lead the agency to eventually review the bank’s top-tier credit rating. Fitch Ratings, a major credit ratings agency, said in a release that it left Goldman Sachs Group Inc.’s rating of “A+” alone for now given its strong performance. Fitch noted that Goldman “consistently” outperforms its global banking peers. However, Fitch said it lowered its long-term view of Goldman’s debt ratings because of the legal issues Goldman is facing, which could hurt its reputation and ability to generate revenue. “Goldman’s franchise and market position are potentially vulnerable to scrutiny by stakeholders” and, like its peers, “may be affected by the industry’s regulatory evolution,” Fitch said in a statement. A spokesman for Goldman declined to comment. Investors seemed to show little concern about Fitch’s view. Goldman shares rose $1.25 to $150.70 in afternoon trading. Congress is currently debating a potential overhaul of financial regulations that could include restricting trading by big Wall Street banks. Goldman Sachs was one of the most profitable banks throughout the credit crisis and during the ongoing recovery. It has used what some consider aggressive trading strategies to increase earnings. Such strategies have resulted in scrutiny by the Securities and Exchange Commission. The SEC accused Goldman of fraud in its dealings of mortgage securities that it created before the credit crisis erupted. Many blame risky securities like those tied to subprime mortgage securities for worsening the financial crisis. The Justice Department has opened a criminal investigation in Goldman’s packaging of the securities.

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Pound Rally Supports Cameron Victory as U.K. Polls Suggest Hung Parliament

May 4, 2010

By Paul Dobson May 5 (Bloomberg) — The U.K. pound is strengthening against its most-active counterparts and gilts are rebounding as polls show David Cameron ’s Conservative Party may come closest to winning tomorrow’s election. The currency has risen 3.2 percent against the Group of 10 currencies from this year’s low on March 10, after falling 7.4 percent in the previous six weeks, according to Bloomberg correlation-weighted indexes. The yield on the 10-year gilt dropped yesterday to the lowest level since December. Traders are betting that whichever party forms a government after the May 6 vote will deliver a plan to reduce the record budget deficit. The euro tumbled to a one-year low against the dollar following reductions in the credit ratings of Greece, Portugal and Spain by Standard & Poor’s last week. S&P and Moody’s Investors Service signaled they may remove Britain’s AAA grade depending on the new government’s measures. “What’s happening in the euro zone with the rating downgrades are most likely being followed by the U.K. candidates,” said Audrey Childe-Freeman , a senior currency strategist at Brown Brothers Harriman Ltd. in London. “No leader or no coalition government would like to experience a downgrade for U.K. debt.” A ComRes Ltd. poll for ITV News and the Independent newspaper on May 4 showed Conservative support at 37 percent, Labour at 29 percent, and the Liberal Democrats at 26 percent. That would give the Conservatives 294 seats, 32 short of a majority, ComRes said. No margin of error was given. ‘Defensive Trading’ Still, the pound declined 1 percent against the dollar this week on speculation the election will result in a coalition government. “You’re going to see more defensive trading the closer we get to the election with a lack of a change in the prospect of a hung parliament,” Peter Frank , a strategist at Societe Generale SA in London, said yesterday. “That’s a slight negative for the pound. It’s going to be a cliff-hanger.” Sterling was dropped for a fourth day, falling to $1.5126 today from $1.5143 in New York yesterday. The currency traded at 85.744 pence per euro from 85.758. The U.K. deficit, the largest in the Group of Seven nations at more than 11 percent of gross domestic product, has dominated the election campaign. ‘Ludicrous’ The Conservatives, who have pledged to make bigger cuts to the 167 billion pound ($252.7 billion) shortfall than Labour and the Liberal Democrats, raised the specter last week of an International Monetary Fund bailout if the vote produces an indecisive result. Liberal Democrat Leader Nick Clegg criticized the idea as “ludicrous” and said there will be no “Armageddon” if there is a hung parliament. Bloomberg’s Correlation-Weighted Index that measures the pound against a basket of currencies based on variances in exchange rates closed yesterday at 63.9116 in New York. While that is up from 61.8930 on March 10, it’s below the high this year of 66.8641 on Jan. 28. The index has a start date of Jan. 2, 1975, and a base value of 100. The yield on the benchmark 10-year gilt, a 4.75 percent note due in March 2020, fell 7 basis points, or 0.07 percentage point, to 3.84 percent. This year’s closing high was 4.28 percent on Feb. 19. Stock traders aren’t as optimistic. The benchmark FTSE 100 Index has fallen 4.7 percent this quarter, compared with a 2.4 percent drop in Germany’s DAX Index. Short Positions The difference in the number of bets the pound will fall compared with wagers on a gain — so-called net shorts — shrank to 54,666 last week from a record 71,624 on March 23, data from the Commodity Futures Trading Commission show. “The worst scenario is priced in,” said Neil Jones , head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “If we get anything but a hung parliament, which is quite possible, then, given the overwhelming short position on the pound, whoever it is, it should be good for the currency.” Even with a U.K. parliamentary deadlock “the one area where there is a synchronization is with regard to the deficit,” Jones said. It may be possible “to push these measures through,” he said. Greek Crisis The Greek debt crisis may be muddying the message the market is sending on the election, according to David Bloom , global head of currency strategy at HSBC Holdings Plc in London. Concern that Greece’s debt woes will spill over to other members of the European Union drove the euro lower against all 16 of the major currencies the past month except the Swiss franc and South African rand, according to data compiled by Bloomberg. “The whole situation with Greece and the euro has obscured the situation,” Bloom said. “A hung parliament is probably priced in by now and people are selling the euro because of Greece.” S&P affirmed its “negative” outlook on the U.K.’s AAA rating on March 29 “in the absence of a strong fiscal consolidation plan.” Moody’s said Britain has moved “substantially” closer to losing the top rank as debt costs climb. Fitch Ratings said March 24 the pace of deficit reduction is too slow. ‘Worst’ Scenario The Liberal Democrats, Britain’s third party, gained support following Clegg’s performance in three live televised debates with Cameron and Brown. Polls suggest Brown’s Labour Party could stay in power with Liberal Democrat backing. Two of Brown’s Cabinet ministers suggested in newspaper interviews that Labour supporters should consider backing the Liberal Democrats in districts Labour can’t win to keep the Conservatives out. Former Bank of England policy maker Charles Goodhart said the “worst type” of hung parliament for the pound and the U.K. economy would be a scenario where the Conservatives have a “clear lead in the popular vote, Labour having just a tiny majority in seats over the Conservatives and nobody quite knowing what the Liberals are going to do.” “Nobody would know who the government would be, or what they would do, or what its policies would be and markets don’t like that sort of uncertainty,” Goodhart said in an interview with Bloomberg News. To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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Bond Rally Teeters as Yield Spreads Blow Out: Credit Markets

April 30, 2010

By Bryan Keogh and Sonja Cheung April 30 (Bloomberg) — The record rally in corporate bonds is showing signs of cracking, with yields rising the most in 13 months relative to government debt and new sales falling to the lowest level this year. The extra interest investors demand to own company bonds widened 6 basis points this week to 149 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Global company bond issuance tumbled 56 percent from last week to $19.6 billion, data compiled by Bloomberg show. Ratings downgrades in Greece, Portugal and Spain drove investors from credit markets on concern worsening government finances may undermine the global recovery, curbing revenue and providing less cushion for borrowers to meet debt payments. Company bond spreads were at a 2 1/2-year low before this week, generating total returns of about 22 percent including reinvested interest since the market bottomed in March 2009. “Corporate bonds could only defy gravity for so long,” said Eric Cherpion , deputy head of syndicate at Societe Generale SA in London. “The volatility from Greece is pushing spreads out, which have remained tight despite the credit risks in the market.” The pullback was sharpest in Europe, where spreads widened 11 basis points to a six-week high of 152 basis points, according to Bank of America’s EMU Corporate index. U.S. investment-grade spreads rose 4 basis points to 155 basis points, or 1.55 percentage points. Global corporate bond spreads are still down from the record 511 basis points in March 2009 and 176 at the end of last year, the data show. Toyota, GMAC Elsewhere in credit markets, Toyota Motor Corp. sold $1.25 billion of bonds backed by auto loans and GMAC Inc.’s Ally Bank issued $703 million of debt backed by payments from auto dealers, according to people familiar with the transactions, who declined to be identified because terms aren’t public. U.S. commercial paper outstanding jumped the most in five months, the Federal Reserve said yesterday on its website. The market for short-term IOUs without seasonal adjustment rose $19.7 billion to $1.1 trillion in the week ended April 28, the biggest surge since the period ended Nov. 18 and the highest level since March 10, according to data compiled by Bloomberg. On a seasonally adjusted basis, the amount soared $32.9 billion to $1.11 trillion, the highest level since March 31. The Fed’s holdings of bonds of government-chartered agencies such as Fannie Mae and Freddie Mac on behalf of foreign institutions and central banks increased for a sixth straight week to $788 billion, up from last year’s low of $760 billion in November and below the peak of $984 billion in July 2008. Covered Bonds Spreads on covered bonds, which are mainly issued by banks in Europe, widened 2 basis points to 106 more than government debt as of yesterday, the biggest gap since Aug. 12, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Greek covered bonds had their ratings cut for the second time in a week by Moody’s Investors Service, which cited the expensive refinancing rates issuers face as a result of the nation’s soaring funding costs. Greek bonds plunged this week after Standard & Poor’s slashed its credit rating three steps to BB+, or below investment grade. Emerging-market bonds fell, as spreads widened 3 basis points to 259 basis points, up from 230 on April 15, JPMorgan Chase & Co.’s EMBI+ Index shows. In Brazil, Fibria Celulose SA sold $750 million of 10-year bonds to yield 7.625 percent, Bloomberg data show, while Sao Paolo-based Marfrig Alimentos SA, the world’s fourth-largest meatpacker, issued $500 million of similar-maturity notes to yield 9.75 percent. Bond Spreads Brazil’s real surged to the strongest level in more than three months after the central bank lifted its benchmark interest rate for the first time in more than a year to 9.5 percent from a record low of 8.75 percent. Average spreads on global corporate bonds widened the most this week since the five-day period ended March 13, 2009, when they jumped 14 basis points, the Bank of America index shows. The index has narrowed in 42 of the past 54 weeks. Spreads finished last week at 143 basis points, after dropping to 142 on April 21, the lowest since November 2007. The last time spreads rose in a week was in the period ended Feb. 12. The widening may not last, as profits are still growing, said Guy Lebas , chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “What we’re seeing is a short-lived widening rather than an end to the rally,” Lebas said in an e-mail. “Investor risk aversion appears to be increasing in response to sovereign credit concerns.” Credit-Default Swaps In the U.S., the Markit CDX North America Investment Grade Index of credit-default swaps dropped 4.5 basis points to a mid- price of 94 basis points. The Markit iTraxx Europe Index of 125 investment-grade companies fell 8 basis points to 90, according to Markit Group Ltd. The indexes are a benchmark for the cost of insuring company bonds against default. A decline signals an improvement in investor perceptions of credit quality. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 99 basis points today, while the Markit iTraxx Japan index declined 9 basis points to 99, according to prices from Royal Bank of Scotland Group Plc and Morgan Stanley. Japanese markets were shut yesterday. Daiwa Loans Daiwa Securities Group Inc. , Japan’s second-largest brokerage, borrowed 50 billion yen ($531 million) to fund expansion in Asia. The company got a 30 billion yen three-year loan and a 20 billion yen five-year loan from 30 banks led by Mitsubishi UFJ Financial Group Inc., said Daiwa spokesman Ryoji Fuchinoue , without elaborating. Global corporate bond issuance fell from $44.8 billion last week, with the monthly total at $164.2 billion compared with $311 billion in March, Bloomberg data show. In the U.S., sales fell to $12.9 billion from $23.1 billion last week, while European issuance dropped to 2.4 billion euros from 4.5 billion euros. Smiths Group Plc , the world’s biggest maker of airport scanners, was the only investment-grade issuer to tap the European debt market. Sales Pulled Casino Guichard-Perrachon SA , the biggest supermarket owner in Paris, withdrew initial yield guidance for its sale of 8 1/2- year notes, while U.K. rail and bus operator National Express Group Plc delayed its debut euro debt issue. The Czech government also postponed offerings of euro-denominated notes. High-yield companies sold $7.23 billion in debt globally, matching the weekly average for the year and down from $10.2 billion last week. Ziggo, the Dutch cable television operator, sold 1.2 billion euros of non-investment grade, 8 percent notes, while blue jeans maker Levi Strauss & Co. issued 300 million euros of 7.75 percent bonds due 2018. High-yield, or junk, bonds are ranked lower than Baa3 by Moody’s and below BBB- by S&P. Spreads on junk debt widened 13 basis points to 569 basis points, the first increase in eight weeks, according to Bank of America’s Global High-Yield Index. “The high-yield market seems to be trading in its own parallel universe” and is unaffected by the Greek debt crisis because it’s used to volatility, said Alex Moss , a fund manager at Insight Investment Management in London. “There’s been a lot of inflow into the market recently and investors have committed money for the long term and are not inclined to sell at the moment.” To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Sonja Cheung in London at scheung58@bloomberg.net

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Bond Rally Teeters as Yield Spreads Expand, Offerings Slow: Credit Markets

April 30, 2010

By Bryan Keogh and Sonja Cheung April 30 (Bloomberg) — The record rally in corporate bonds is showing signs of cracking, with yields rising the most in 13 months relative to government debt and new sales falling to the lowest level this year. The extra interest investors demand to own company bonds widened 6 basis points this week to 149 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Global company bond issuance tumbled 56 percent from last week to $19.6 billion, data compiled by Bloomberg show. Ratings downgrades in Greece, Portugal and Spain drove investors from credit markets on concern worsening government finances may undermine the global recovery, curbing revenue and providing less cushion for borrowers to meet debt payments. Company bond spreads were at a 2 1/2-year low before this week, generating total returns of about 22 percent including reinvested interest since the market bottomed in March 2009. “Corporate bonds could only defy gravity for so long,” said Eric Cherpion , deputy head of syndicate at Societe Generale SA in London. “The volatility from Greece is pushing spreads out, which have remained tight despite the credit risks in the market.” The pullback was sharpest in Europe, where spreads widened 11 basis points to a six-week high of 152 basis points, according to Bank of America’s EMU Corporate index. U.S. investment-grade spreads rose 4 basis points to 155 basis points, or 1.55 percentage points. Global corporate bond spreads are still down from the record 511 basis points in March 2009 and 176 at the end of last year, the data show. Toyota, GMAC Elsewhere in credit markets, Toyota Motor Corp. sold $1.25 billion of bonds backed by auto loans and GMAC Inc.’s Ally Bank issued $703 million of debt backed by payments from auto dealers, according to people familiar with the transactions, who declined to be identified because terms aren’t public. U.S. commercial paper outstanding jumped the most in five months, the Federal Reserve said yesterday on its Web site. The market for short-term IOUs without seasonal adjustment rose $19.7 billion to $1.1 trillion in the week ended April 28, the biggest surge since the period ended Nov. 18 and the highest level since March 10, according to data compiled by Bloomberg. On a seasonally adjusted basis, the amount soared $32.9 billion to $1.11 trillion, the highest level since March 31. The Fed’s holdings of bonds of government-chartered agencies such as Fannie Mae and Freddie Mac on behalf of foreign institutions and central banks increased for a sixth straight week to $788 billion, up from last year’s low of $760 billion in November and below the peak of $984 billion in July 2008. Covered Bonds Spreads on covered bonds, which are mainly issued by banks in Europe, widened 2 basis points to 106 more than government debt as of yesterday, the biggest gap since Aug. 12, according to Bank of America Merrill Lynch’s EMU Covered Bonds Index. Greek covered bonds had their ratings cut for the second time in a week by Moody’s Investors Service, which cited the expensive refinancing rates issuers face as a result of the nation’s soaring funding costs. Greek bonds plunged this week after Standard & Poor’s slashed its credit rating three steps to BB+, or below investment grade. Emerging-market bonds fell, as spreads widened 3 basis points to 259 basis points, up from 230 on April 15, JPMorgan Chase & Co.’s EMBI+ Index shows. In Brazil, Fibria Celulose SA sold $750 million of 10-year bonds to yield 7.625 percent, Bloomberg data show, while Sao Paolo-based Marfrig Alimentos SA, the world’s fourth-largest meatpacker, issued $500 million of similar-maturity notes to yield 9.75 percent. Bond Spreads Brazil’s real surged to the strongest level in more than three months after the central bank lifted its benchmark interest rate for the first time in more than a year to 9.5 percent from a record low of 8.75 percent. Average spreads on global corporate bonds widened the most this week since the five-day period ended March 13, 2009, when they jumped 14 basis points, the Bank of America index shows. The index has narrowed in 42 of the past 54 weeks. Spreads finished last week at 143 basis points, after dropping to 142 on April 21, the lowest since November 2007. The last time spreads rose in a week was in the period ended Feb. 12. The widening may not last, as profits are still growing, said Guy Lebas , chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “What we’re seeing is a short-lived widening rather than an end to the rally,” Lebas said in an e-mail. “Investor risk aversion appears to be increasing in response to sovereign credit concerns.” Credit-Default Swaps In the U.S., the Markit CDX North America Investment Grade Index of credit-default swaps dropped 4.5 basis points to a mid- price of 94 basis points. The Markit iTraxx Europe Index of 125 investment-grade companies fell 8 basis points to 90, according to Markit Group Ltd. The indexes are a benchmark for the cost of insuring company bonds against default. A decline signals an improvement in investor perceptions of credit quality. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 99 basis points today, while the Markit iTraxx Japan index declined 9 basis points to 99, according to prices from Royal Bank of Scotland Group Plc and Morgan Stanley. Japanese markets were shut yesterday. Daiwa Loans Daiwa Securities Group Inc. , Japan’s second-largest brokerage, borrowed 50 billion yen ($531 million) to fund expansion in Asia. The company got a 30 billion yen three-year loan and a 20 billion yen five-year loan from 30 banks led by Mitsubishi UFJ Financial Group Inc., said Daiwa spokesman Ryoji Fuchinoue , without elaborating. Global corporate bond issuance fell from $44.8 billion last week, with the monthly total at $164.2 billion compared with $311 billion in March, Bloomberg data show. In the U.S., sales fell to $12.9 billion from $23.1 billion last week, while European issuance dropped to 2.4 billion euros from 4.5 billion euros. Smiths Group Plc , the world’s biggest maker of airport scanners, was the only investment-grade issuer to tap the European debt market. Sales Pulled Casino Guichard-Perrachon SA , the biggest supermarket owner in Paris, withdrew initial yield guidance for its sale of 8 1/2- year notes, while U.K. rail and bus operator National Express Group Plc delayed its debut euro debt issue. The Czech government also postponed offerings of euro-denominated notes. High-yield companies sold $7.23 billion in debt globally, matching the weekly average for the year and down from $10.2 billion last week. Ziggo, the Dutch cable television operator, sold 1.2 billion euros of non-investment grade, 8 percent notes, while blue jeans maker Levi Strauss & Co. issued 300 million euros of 7.75 percent bonds due 2018. High-yield, or junk, bonds are ranked lower than Baa3 by Moody’s and below BBB- by S&P. Spreads on junk debt widened 13 basis points to 569 basis points, the first increase in eight weeks, according to Bank of America’s Global High-Yield Index. “The high-yield market seems to be trading in its own parallel universe” and is unaffected by the Greek debt crisis because it’s used to volatility, said Alex Moss , a fund manager at Insight Investment Management in London. “There’s been a lot of inflow into the market recently and investors have committed money for the long term and are not inclined to sell at the moment.” To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Sonja Cheung in London at scheung58@bloomberg.net

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Stocks in U.S. Advance on Earnings, Fed Pledge to Keep Interest Rates Low

April 28, 2010

By Elizabeth Stanton April 28 (Bloomberg) — U.S. stocks rose as better-than- estimated earnings and the Federal Reserve’s pledge to keep interest rates near zero overshadowed a downgrade of Spain’s credit rating. Dow Chemical Co., the largest U.S. chemical maker, and insulation producer Owens Corning Inc. rallied at least 5.9 percent as profits topped the average analyst forecasts. Goldman Sachs Group Inc. rose 2.4 percent, leading banks to the largest gain in the S&P 500, after defending its dealings with clients at a Senate hearing yesterday. Equities extended gains as the Fed said it will keep its benchmark interest rate near zero for an extended period even as the labor market begins to improve. The S&P 500 increased 0.9 percent to 1,194.6 at 2:28 p.m. It fell as much as 0.2 percent today after S&P cut Spain to AA from AA+. Stocks plunged around the world yesterday after the ratings firm reduced ratings for Greece and Portugal. The Dow Jones Industrial Average climbed 78.67 points, or 0.7 percent, to 11,070.66. “Earnings season is going exceptionally well,” said David Katz , chief investment officer at Matrix Asset Advisors Inc. in New York, which manages $1.2 billion. “A better economy and better earnings should continue to drive the market higher as the year progresses.” Europe “is going to muddle through” its debt crisis, he said. Earnings Season Profit for companies in the S&P 500 surged 176 percent during the final three months of 2009, the most in Bloomberg data going back to 1998, and analysts estimate a 44 percent increase for the first quarter of 2010. Earnings estimates for companies in the index rose 9.1 percent on average in April, twice the gain in prices and the largest monthly increase since at least 2006. Income for the first three months of this year is beating estimates at near the fastest rate ever for the third time in a year, with 79.4 percent of the 219 companies that have reported topping projections. That compares with 79.5 percent in the third quarter and 72.3 percent in the period before that. “Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” the Federal Open Market Committee said in a statement today in Washington. S&P said in a statement today that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009. “While Greece doesn’t have huge implications in the global economy, and Portugal doesn’t either, Spain does,” said John Massey , a money manager at SunAmerica Asset Management Corp. in Jersey City, New Jersey. “Europe represents a fair amount of sales for most global companies.” To contact the reporters on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

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Euro Drops to One-Year Low Against Dollar as S&P Cuts Spain’s Debt Rating

April 28, 2010

By Ben Levisohn April 28 (Bloomberg) — The euro dropped to a one-year low against the dollar as Standard & Poor’s cut the debt rating of Spain in a sign the deficit crisis is spreading. “There’s a tremendous amount of uncertainty at the moment,” said Sebastien Galy , a currency strategist at BNP Paribas SA in New York. “The euro should break below $1.30.” European Central Bank Jean-Claude Trichet said at a press conference the stability of the “euro zone is impacted” by the crisis and Germany’s Chancellor Angela Merkel told reporters the nation accepts its responsibility to support the euro. The euro fell 0.2 percent to $1.3146 at 11:41 a.m. in New York, from $1.3175 yesterday, after touching $1.3129, the lowest level since April 2009. The euro advanced 0.5 percent to 123.48 yen, from 122.88. The dollar appreciated 0.8 percent to 94.02 yen, from 93.26. International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers Greece may need as much as 120 billion euros ($158 billion), Green Party spokesman Michael Schroeren said today. That’s almost three times the 45 billion euro value of the aid package initially proposed. Germany may be able to make a final decision on aid for Greece as soon as May 7, when the upper house of parliament mamy approve a support package, Finance Minister Wolfgang Schaeuble said. Spain’s credit rating was cut to AA from AA+ by Standard & Poor’s Ratings Services. The outlook is negative, S&P said. To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net

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Greek Junk Contagion Presses EU to Broaden Bailout

April 28, 2010

By Simon Kennedy and Emma Ross-Thomas April 28 (Bloomberg) — Europe’s worsening debt crisis is intensifying pressure on policy makers to widen a bailout package beyond Greece after a cut in the nation’s rating to junk drove up borrowing costs from Italy to Portugal and Ireland. As German Chancellor Angela Merkel delays approval of a 45 billion-euro ($59 billion) Greek rescue, the crisis is spreading. Portugal’s benchmark stock index yesterday fell the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse, while the extra yield that investors demand to hold Italian and Irish debt over bunds remained near yesterday’s 10-month high. The danger for European officials is that the fiscal turmoil which started six months ago with fudged Greek budget data will spin out of their control. As Greece waits for its euro-region partners to disperse funds, the European Union has announced no concrete plans to help other nations should aid be needed. The euro yesterday weakened to the lowest in a year. “Policy makers need to get ahead of the curve,” Eric Fine , who manages Van’s Eck’s G-175 Strategies emerging-market hedge fund. “This is no longer a problem about Greece or Portugal, but about the euro system.” Governments will hold a summit by around May 10 to discuss Greece, EU President Herman Van Rompuy said today in Tokyo. ‘Well on Track’ “Negotiations are going on and they are well on track and there is no question about the restructuring of the debt,” he said at a press conference. The spread on Italy’s debt fell 1.3 basis points to 114.4 from 115.7 yesterday after the ratings cut, the highest since July. Portugal’s PSI-20 stock index dropped 5.6 percent, the most since October 2008. The yield on two-year Greek notes surged to more than 23 percent today, and the nation’s securities regulator imposed a two-month ban on short sales on the Athens stock exchange. The euro gained today after the Financial Times reported the International Monetary Fund may increase its financial assistance in the first year to Greece by 10 billion euros from the current 15 billion euros, citing unidentified bankers and officials in Washington. The currency was trading at $1.3195 at 12:45 p.m. in Tokyo, having earlier traded at $1.3145, the lowest since April 29, 2009. Haggling Erik Nielsen , chief European economist at Goldman Sachs Group Inc., said the Athens talks were likely focused on assistance in the first year of between 55 billion euro and 75 billion euros. “I suspect that some haggling is now going on between the IMF and the Europeans on the burden sharing of a bigger program,” he said in a note to clients from Washington yesterday. “Investors should focus on the conditionality attached because that’s what will determine the sustainability of the program.” Bonds plunged as Standard & Poor’s lowered its rating on Greece by three steps to BB+ from BBB+ and warned that investors could recover as little as 30 percent of their initial outlay if the country restructures its debt. The shift came minutes after the rating company reduced Portugal by two steps to A- from A+. Sovereign ‘Crisis’ The moves exacerbated concern that Portugal and other nations trying to cut budgets will be left to fend for themselves by an EU that took two months to agree on a plan for Greece. “The biggest risk now is that the market speculates against every single indebted peripheral country, and that could lead to a sovereign debt crisis,” said Axel Botte , a fixed- income strategist at AXA Investment Managers in Paris. “The contagion risk is real.” Portuguese Finance Minister Fernando Teixeira dos Santos said yesterday his country must react to “attacks by markets.” The crisis is deepening as German lawmakers debate whether to put taxpayers’ money at risk in the face of public opposition and an election in the state of North Rhine-Westphalia on May 9. Bild Zeitung , Germany’s biggest-selling tabloid, yesterday ran a front-page headline asking: “Why do we have to pay Greece’s luxury pensions?” European Central Bank President Jean-Claude Trichet, who declined to comment to reporters on yesterday’s downgrades, is in Berlin today to brief lawmakers on Greece’s deficit-cutting plans. The country is struggling to convince investors it can push its shortfall below the EU’s limit of 3 percent of gross domestic product from 13.6 percent last year. Surge in Yields The yield on the Greek two-year note rose 492 basis points to 23.9 percent today, more than 20 times the comparable German bond and 10 percentage points more than similar-maturity notes from Pakistan. Greece, which faces 8.5 billion euros in bonds coming due on May 19, must still agree on terms for its rescue package, which will be co-financed by the euro region and the IMF. Greek Prime Minister George Papandreou last week activated the aid package and is facing fire from investors who say his budget steps need to go further and from voters who are staging strikes to protest further austerity measures. As the turbulence exposes the weakness of having a currency area without a single fiscal authority, some economists said policy makers need to create a lending mechanism that will help other euro areas members through fiscal crises. Authority Needed “What is missing in Europe is an authority that can back sovereigns through a crisis,” James Nixon , co-chief European economist at Societe Generale SA in London. “We desperately need this.” The ECB should consider the “nuclear option” of buying government bonds to fight the crisis, said Jacques Cailloux , chief European economist at Royal Bank of Scotland Group Plc. While the central bank is prohibited from buying assets directly from governments, it can do so on the secondary market. “It sends a signal to investors that the ECB is confident member states won’t default,” said Cailloux. “It’s a powerful confidence shock.” ECB officials including Trichet have down played the risk of contagion from Greece, arguing other economies are in better shape even if they need to cut deficits. Still, Ireland’s deficit was 14.3 percent of GDP last year, the highest in the EU. Spain’s was 11.2 percent and Portugal’s 9.4 percent. Marc Faber , the publisher of the Gloom, Boom & Doom report, said the time had come to eject euro members that repeatedly violated the region’s budget rules, even though no mechanism for such steps yet exists. “The best would be to kick out Greece and the countries that abuse the system,” Faber said in an interview. “They didn’t have the fiscal discipline that was essentially imposed by EU.” To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net ;

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Junk Bonds Poised for Par as Profit Growth Spurs Upgrades: Credit Markets

April 27, 2010

By John Detrixhe April 27 (Bloomberg) — Junk bonds are trading within a half cent of face value for the first time since June 2007 in a sign that investors are convinced the economic recovery and profit growth will keep the neediest borrowers from defaulting. High-yield bonds rose to 99.67 cents on the dollar, up from a low of 54.78 cents in December 2008, according to Bank of America Merrill Lynch index data. The debt last reached par on June 11, 2007, just before credit markets began to seize up as losses on subprime mortgages spread. Even after returning 86 percent since the market bottomed in 2008, JPMorgan Chase & Co. and Morgan Stanley Investment Management are recommending that investors buy the debt. Rising earnings are making it easier for companies to meet payments, leading Moody’s Investors Service to lift the ratings on 142 junk bonds and cut 105, data compiled by Bloomberg show. Last year, it boosted 229 and lowered 902. “New issue prices and structures now are favoring the issuer,” Mark Shenkman , who became the first high-yield bond portfolio manager at Fidelity Investments in 1977, told investors this week at the Milken Institute Global Conference in Beverly Hills, California. “It was a buyers’ market for most of last year. Now clearly it is a sellers’ market,” said Shenkman, president of Shenkman Capital Management Inc. in New York. Issuance Soars Companies have issued $96 billion of junks bonds this year, or 59 percent of the record $162.7 billion sold in all of last year, Bloomberg data show. The ability to sell bonds is helping companies rated below Baa3 by Moody’s and less than BBB- by Standard & Poor’s to refinance debt and extend maturities. Elsewhere in credit markets, the cost to protect European sovereign debt from default surged after S&P cut its ratings on Greece to junk status and downgraded Portugal. American Express Co. joined Toyota Motor Corp. in marketing asset-backed bonds, the subordinated debt of Synovus Financial Corp. soared and developing-nation bonds tumbled. Credit-default swaps tied to Greek government bonds climbed 114 basis points to 824.5, while those on Portugal rose 67.4 to 383, according to CMA DataVision. S&P reduced Greece’s rating three levels to BB+, and slashed Portugal to A- from A+. S&P has a “negative” outlook on both nations, meaning more downgrades may come. ‘Contagion Risk’ “The biggest risk now is that the market speculates against every single indebted peripheral country, and that could lead to a sovereign debt crisis,” said Axel Botte , a strategist at AXA Investment Managers in Paris. “The contagion risk is real. It’s much easier to bail out a bank than to bail out a country.” In the U.S., credit-default swaps on the Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 7.5 basis points to a nine-week high of 98.4 basis points, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves. Swaps on Goldman Sachs Group Inc. climbed for a fifth day as a U.S. Senate panel questioned bank executives and employees about the New York-based firm’s role in the financial crisis. The contracts jumped 6 basis points to 173 basis points, CMA DataVision prices show. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Toyota, American Express Toyota boosted its planned sales of bonds backed by auto loans to $1.25 billion from $775 million, according to a person familiar with the offering who declined to be identified because terms aren’t set. American Express is marketing $804.5 million of securities backed by credit-card payments, according to people familiar with the offerings. Both offerings may be priced tomorrow, the people said. Borrowers are selling asset-backed debt as demand holds up following the end last month of the Federal Reserve’s Term Asset Backed Securities Loan Facility. Ford Motor Co., through its finance arm, sold $1.09 billion of bonds backed by auto loans last week. Daimler AG, Bayerische Motoren Werke AG and Deere & Co. sold similar debt this month, Bloomberg data show. Top-rated securities backed by credit cards are yielding about 0.53 percentage point more than Treasuries, compared with a spread of 3.50 percentage points a year ago, based on a Bank of America Merrill Lynch index. Synovus Bonds Synovus Financial’s bonds were among the most active in the U.S. corporate high-yield bond market today. The company’s 5.125 percent notes due in 2017 soared 8.5 cents on the dollar to 90.5 cents after Synovus said it would repay the securities with stock, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. NBC Universal Inc., the media company in which Comcast Corp. has agreed to acquire a majority stake from General Electric Co., sold $4 billion of notes, Bloomberg data show. Proceeds will be used to help pay down a portion of NBC Universal’s $6.1 billion bridge loan to finance the Comcast deal, GE spokeswoman Anne Eisele said yesterday in an e-mail. Concern that Europe’s worsening government finances may spread led investors to push relative yields on emerging-market bonds wider by 0.22 percentage point to 2.63 percentage points, the widest in more than a month, according to the JPMorgan Emerging Market Bond Index. In Brazil, futures show policy makers are poised to raise borrowing costs at the fastest pace since President Luiz Inacio Lula da Silva took office in 2003 after central bank chief Henrique Meirelles pledged “vigorous action” on inflation.     The biggest two-day surge in six months on yields of the overnight interest rate futures contract due in July reflects speculation Meirelles will raise the benchmark Selic rate 2.25 percentage points to 11 percent by the June policy meeting, according to data compiled by Bloomberg. Junk Bond Spreads Yield spreads on junk bonds shrank to 5.42 percentage points on April 26, down from the record 13.2 percentage points in December 2008 and the narrowest since June 17, 2008, Bank of America Merrill Lynch index data show. Spreads widened today to 5.55 percentage points. Further evidence of the economic recovery came today, as confidence among U.S. consumers increased in April to the highest level since September 2008. The Conference Board’s index rose more than forecast, to 57.9 from 52.3 in March, according to the New York-based private research group. Of the 193 companies in the S&P 500 Index that have reported first-quarter earnings, 85 percent have exceeded analysts’ per-share estimates, Bloomberg data show. With profits rising, the number of distressed companies, or those with yield spreads of more than 10 percentage points, relative to all high-yield U.S. credit fell to 6.7 percent as of April 15, S&P said in a statement. That’s down from 9.7 percent the previous month. ‘Sharp Retreat’ Junk bond prices approaching par “reflects the more favorable fundamental outlook, including lower default expectations, while for borrowers it implies more attractive rates,” said Eric Takaha , director of corporate and high-yield for the Franklin Templeton Fixed Income Group, which manages more than $230 billion. In the first quarter, 1.3 percent of companies with speculative-grade liquidity were downgraded, a “sharp retreat” from the 13.6 percent a year earlier, Moody’s said in a report. The firm predicts the U.S. speculative-grade default rate will fall to 3.1 percent by the end of the year, a from the trailing 12-month rate of 9.9 in the first quarter and 13 percent in December. ‘Tilted’ JPMorgan Chase & Co. analysts led by Peter Acciavatti , the top-ranked high-yield strategist in Institutional Investor magazine’s annual survey for the past seven years, said in an April 23 report to the bank’s clients that investors should remain “overweight” junk bonds. In their monthly report to clients, Morgan Stanley Investment Management said its portfolios are “tilted” toward investment-grade and high-yield debt. The firm pointed out that the average spread for junk bonds as measured by the Citi High Yield Market Index is 5.79 percentage points, compared with the average of 5.63 percentage points over the past 20 years. “Companies are starting to see the pickup in the economy translate into better earnings prospects,” said John Puchalla , an analyst at Moody’s. “We’ve seen likely the worst for a number of industries and if the cycle starts to pick up, then that’s translating into better cash flow projections.” To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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Kim Davis: PRODUCT WARRANTY PROPOSAL FOR THE RATINGS AGENCIES

April 27, 2010

PRODUCT WARRANTY PROPOSAL FOR RATINGS AGENCIES An enduring mystery of the debate about regulatory reform is the extent to which the ratings agencies are a second order issue of concern. Firms like S&P and Moody’s are Nationally Recognized Statistical Rating Organizations (or “NRSRO”) and issue credit ratings that the SEC permits other financial firms to use for certain regulatory purposes. This imprimatur of legitimacy creates a lucrative revenue base for these firms; but they are fundamentally unregulated and unsupervised. Their reckless issuance of AAA ratings in combination with their quasi official status fueled the permissive atmosphere that led to an explosion in the issuance of worthless mortgage backed securities – perhaps the most immediate single cause of our financial system meltdown. I believe that there is a simple solution if we want the managements of these firms to administer the ratings process with the degree of intellectual integrity and analytical rigor that the investing public should have expected and now should demand. Specifically, any financial system regulatory overhaul bill should include a provision that would impose a defined liability for the rating agencies when a bond defaults. Essentially, this would be mandated product warrantly. The amount of warranty coverage provided by a ratings firm would vary depending on whether a bond had been rated AAA ( in which case, if it defaults, they were really, really wrong and should have a large warranty exposure) or BB ( in which case, if it defaults, they were perhaps only slightly wrong). No warranties would be required for any bonds rated below BB on the theory that those types of bonds are, by definition, speculative and the fact that no warranty would be applicable would be a proper admonition to any potential buyer with respect to the due diligence that should be performed in connection with a purchase of such a security. If the warranty were calculated as a variable percentage of the face value of the bond with the percentage dependent upon the initial rating ( the higher the rating, the higher the percentage) then the agencies would have a strong economic interest to get the ratings right. The ratings agencies probably would raise the prices they charge for issuing ratings due to the “product warranty” exposure. However, those price increases will be limited both by natural competition between the firms and by the fact that, over time, the very presence of the warranty exposure will lead to higher quality ratings and minimal payouts. Nonetheless, even if the cost of ratings rises somewhat, our financial system will be a lot sounder if we have a systemically higher quality ratings process. The point of this proposal is to create a system that does not rely on a lengthy court process to determine whether the ratings agencies acted in good faith when a bond turns out to have been materially misrated; rather it is to implement a system where the ratings agencies, in return for the right to benefit from the revenue that they generate as a result of their status as an NRSRO, should bear clear liability for the quality of their work.

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Kim Davis: PRODUCT WARRANTY PROPOSAL FOR THE RATINGS AGENCIES

April 27, 2010

PRODUCT WARRANTY PROPOSAL FOR RATINGS AGENCIES An enduring mystery of the debate about regulatory reform is the extent to which the ratings agencies are a second order issue of concern. Firms like S&P and Moody’s are Nationally Recognized Statistical Rating Organizations (or “NRSRO”) and issue credit ratings that the SEC permits other financial firms to use for certain regulatory purposes. This imprimatur of legitimacy creates a lucrative revenue base for these firms; but they are fundamentally unregulated and unsupervised. Their reckless issuance of AAA ratings in combination with their quasi official status fueled the permissive atmosphere that led to an explosion in the issuance of worthless mortgage backed securities – perhaps the most immediate single cause of our financial system meltdown. I believe that there is a simple solution if we want the managements of these firms to administer the ratings process with the degree of intellectual integrity and analytical rigor that the investing public should have expected and now should demand. Specifically, any financial system regulatory overhaul bill should include a provision that would impose a defined liability for the rating agencies when a bond defaults. Essentially, this would be mandated product warrantly. The amount of warranty coverage provided by a ratings firm would vary depending on whether a bond had been rated AAA ( in which case, if it defaults, they were really, really wrong and should have a large warranty exposure) or BB ( in which case, if it defaults, they were perhaps only slightly wrong). No warranties would be required for any bonds rated below BB on the theory that those types of bonds are, by definition, speculative and the fact that no warranty would be applicable would be a proper admonition to any potential buyer with respect to the due diligence that should be performed in connection with a purchase of such a security. If the warranty were calculated as a variable percentage of the face value of the bond with the percentage dependent upon the initial rating ( the higher the rating, the higher the percentage) then the agencies would have a strong economic interest to get the ratings right. The ratings agencies probably would raise the prices they charge for issuing ratings due to the “product warranty” exposure. However, those price increases will be limited both by natural competition between the firms and by the fact that, over time, the very presence of the warranty exposure will lead to higher quality ratings and minimal payouts. Nonetheless, even if the cost of ratings rises somewhat, our financial system will be a lot sounder if we have a systemically higher quality ratings process. The point of this proposal is to create a system that does not rely on a lengthy court process to determine whether the ratings agencies acted in good faith when a bond turns out to have been materially misrated; rather it is to implement a system where the ratings agencies, in return for the right to benefit from the revenue that they generate as a result of their status as an NRSRO, should bear clear liability for the quality of their work.

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Bankers Would Say `Anything’ to Get High Rating, Former S&P Analyst Says

April 26, 2010

By Elliot Blair Smith April 26 (Bloomberg) — Just past midnight on May 3, 2005, Standard & Poor’s analyst Chui Ng e-mailed co-workers to broker a solution to demands by Goldman Sachs Group Inc. bankers that he said violated two or more of the ratings company’s internal guidelines. Goldman Sachs was adding $200 million in debt at the “last minute” to a $1.5 billion bond pool called Adirondack Ltd., Ng wrote. That meant the New York investment bank would originate 13 percent of the pool itself, two-and-a-half times the 5 percent limit set by S&P. Goldman Sachs also balked at Ng’s request to pay in advance for an insurance policy known as a credit default swap, which was being used to create the additional debt obligation. The e-mails from Ng, who negotiated a compromise on Goldman Sachs’s requests, provide a rare window into the back-and-forth between the bank and a rating company assessing the risks in a financial product linked to subprime mortgages . The exchange was among 581 pages of private communications released last week by Senate investigators. Ng, who no longer works in the rating business, said in a telephone interview April 23 that while the Senate documents contain an “incomplete record,” they show how banks pressured credit raters to lower standards as they created collateralized debt obligations, or CDOs, during the housing boom. ‘Strong-Arm’ “The bankers would say anything to get what they needed into their deals,” Ng, 47, said. “Goldman is very good at looking at every deal; every CDO that’s ever been issued.” Ng said the perception among professionals in the ratings business was that the bank had a team that would look for “inconsistencies across different deals and use that to strong- arm Moody’s, Fitch and S&P to change their criteria.” Asked about Ng’s comments, Goldman Sachs spokesman Michael DuVally said in an e-mail, “Goldman Sachs and others relied upon the rating agencies to supply independent analysis and ratings.” He declined to elaborate. S&P spokesman Chris Atkins declined to comment for this story. Moody’s Corp, Fitch Inc., a unit of Paris-based Fimalac S.A., and S&P, a unit of McGraw-Hill Cos., are the three largest rating firms in global debt markets. Senator Carl Levin , a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations, said at a panel hearing April 23 that the raters compromised “their analysis, their independence and their reputation for reliability. And they did it for money.” Abacus The SEC sued Goldman Sachs on April 16, alleging it had defrauded investors when selling debt tied to mortgages on another deal known as Abacus 2007-AC1. The SEC alleges that Goldman Sachs and executive director Fabrice Tourre failed to inform investors that a hedge fund led by billionaire John Paulson played a role in choosing Abacus securities that Paulson was betting would fail. Goldman Sachs denies wrongdoing. Paulson isn’t a defendant in the lawsuit. Goldman Sachs Chief Executive Officer Lloyd Blankfein , 55, along with Tourre and five current and former employees are set to appear before Levin’s panel Tuesday. Ng rated several previous Abacus deals before resigning from S&P in March 2006. Two days after his first e-mail on Adirondack to fellow members of an S&P criteria panel, Ng wrote that the firm’s modeling now accommodated Goldman’s demands. In return, the bank would put up more collateral, or find a replacement guarantor, if its own credit rating were downgraded, he wrote. Compromise Wins Ng’s compromise carried by a 4-3 vote while provoking sharp dissent, in part because the only one speaking up for the proposal in the released e-mails was Ng himself, Senate documents show. “I would vote NO on this one,” wrote Lapo Guadagnuolo, a senior director of S&P’s structured finance office in London. Kenneth Cheng, then a director in S&P’s CDO group, wrote that the compromise “opens up abuse of our criteria, devoiding it of much meaning.” Michael Drexler , an S&P analyst in New York, also objected. “Ignoring for a moment my stupid (and arrogant!) irritation that the correct side lost, in my mind this is a great example of how the criteria process is NOT supposed to work. Being outvoted is one thing (and a good thing, in my view) but being out-voted by mystery voters with no ‘logic trail’ to refer to is another. How can we possibly reconstruct the argument of the winning side for our future deals if it does not exist in writing for general reference?” Drexler wrote. ‘Backroom Decision’ “This is exactly the kind of backroom decision-making that leads to inconsistent criteria, confused analysts and pissed-off clients,” he added. Reached by telephone Friday, Drexler said, “That’s exactly the kind of thing a young analyst shouldn’t put in writing. Thank God I was right.” Ng, in the interview, defended his work on the Adirondack CDO, which S&P downgraded from AAA to AA in October 2008 and further reduced to BB+, below investment grade, in June 2009. He denied that he had led “mystery voters” to support the compromise. He said that votes on criteria often were made without identifying names to avoid pressuring ratings panelists. “There were a lot of these one-off deals, different team leaders, different managers,” Ng said. “If they got approved, you can’t keep that a secret. After you issue it, bankers can reverse engineer the deals and everybody would ask for it.” Among the e-mails published by the Senate committee was one from Moody’s CEO Raymond McDaniel , who ruminated about banker- rater tension in a memorandum he sent to himself shortly before midnight on Oct. 21, 2007. “Analysts and MDs” managing directors “are continually ‘pitched’ by bankers, issuers, investors — all with reasonable arguments — whose views can color credit judgment, sometimes improving it, other times degrading it (we ‘drink the kool- aid’),” McDaniel wrote, incorporating remarks that he’d heard from some of his employees in recent weeks. “Coupled with strong internal emphasis on market share & margin focus, this does constitute a ‘risk’ to ratings quality.” To contact the reporter on this story: Elliot Blair Smith in Washington at esmith29@bloomberg.net .

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Sen. Carl Levin: Credit Rating Agencies Escaping Reform In Latest Bill

April 23, 2010

WASHINGTON — Former credit rating industry executives told a Senate panel Friday that competitive pressures and poor internal communications led their analysts to award safe ratings to risky investments. The highly rated investments turned out to be toxic, contributing to the financial crisis. The chairman of a panel investigating the industry proposed Friday that Congress should address a conflict of interest that arises from credit rating agencies being paid by the same banks whose bonds they rate. “It’s like one of the parties in court paying the judge’s salary,” said Sen. Carl Levin, D-Mich. He said the financial regulatory overhaul the Senate will take up Monday should include a solution to that problem. Levin was chairing a hearing of the Permanent Subcommittee on Investigations, which has been investigating the causes of the financial crisis. He said credit rating agencies gave high ratings to risky investments before the financial crisis in part because they were competing for business from the banks. Frank Raiter, a former managing director for Standard & Poor, said there was a “disconnect” between senior managers and the analytical managers responsible for assigning bond ratings. He said that, along with weak government regulation, led agencies to award high ratings to risky investments. Raiter said management placed increasing pressure on analysts to earn fees by attracting business from banks. He said many former colleagues had quit after clashing with management. When analysts “show the benefits of higher-quality rating criteria, and they come back and say, ‘Revenues will go down,’ you either (drop the issue and) continue to work there, or you quit,” said former Standard & Poor managing director Frank Raiter. Raiter also said weak government regulation led agencies to award high ratings to risky investments. The Securities and Exchange Commission is prohibited by law from overseeing credit rating agencies. The agencies have escaped legal liability by claiming their ratings are protected by the First Amendment right to free speech.

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Euro, Asian Finance Stocks Fall on Greece Concerns; Baht Drops After Blast

April 22, 2010

By Clyde Russell and Yoshiaki Nohara April 23 (Bloomberg) — The euro fell to near the lowest in a year against the dollar and Asian stocks declined as concern about Greece’s deficit added to pressure on Group of 20 finance ministers meeting in Washington to stem the crisis. The euro fell to as low as $1.3202 in Tokyo, the weakest since April 30 last year, from $1.3295 in New York yesterday. The euro dropped to 123.58 yen from 124.28 yen. The MSCI Asia Pacific Index lost 0.4 percent to 125.83 at 12:25 p.m. in Tokyo. The Thai baht dropped the most in 10 months, weakening 0.4 percent to 32.35 per dollar, after grenade blasts killed three people and injured 75 others at anti-government protests in Bangkok. Thailand’s benchmark SET Index plunged 1.6 percent. The Group of 20 industrial and developing nations meets today and is expected to discuss Greece amid concern the Euro member will be forced to restructure its debt . Greek bonds and stocks plunged yesterday, dragging down European markets, as Moody’s Investors Service cut its rating on Greek debt one notch to A3 and the EU revised the country’s budget deficit higher. “Chances are G-20 officials will discuss Greece because it could lead to a global financial issue,” said Takashi Kudo , general manager of market information at NTT SmartTrade Inc. in Tokyo. “Markets seem to be mounting pressure on Greece to get a bailout, with the euro weakening. Risk aversion is causing the dollar and yen to be bought.” The dollar rose against 13 of its 16 major peers before reports forecast to show improving orders for long-lasting goods and new home sales in the U.S. Won Retreats South Korea’s won fell 0.2 percent to 1,110.45 per dollar, retreating from a 19-month high, as mounting concern about Greece’s ability to pay its debt cooled demand for emerging- market assets and bolstered support for the dollar . The Philippine peso weakened 0.3 percent to 44.45 per dollar. The difference in yield to own bonds in developing nations instead of Treasuries climbed 2 basis points to 2.45 percentage points yesterday, according to the EMBI Plus Index compiled by JPMorgan Chase & Co. It has widened from 231 basis points on April 15, the lowest since Dec. 27, 2007. Hong Kong’s Hang Seng Index sank 0.7 percent. Japan’s Nikkei 225 Stock Average lost 0.3 percent. Financial companies were the biggest drag on the MSCI Asia Pacific Index amid sovereign debt concerns. Fitch Ratings said yesterday Japan’s swelling debt burden may put pressure on the nation’s sovereign AA-rating. MUFJ, Woori Mitsubishi UFJ Financial Group Inc. , Japan’s largest bank by market value, dropped 0.8 percent to 504 yen. Commonwealth Bank of Australia fell 1.2 percent to A$58.29, and Woori Finance Holdings Co. lost 1.7 percent to 17,7000 won in Seoul. “Uncertainty surrounding sovereign credit risk is too high, so people are avoiding risk,” said Tomomi Yamashita , a Tokyo- based fund manager at Shinkin Asset Management Co., which oversees the equivalent of $3.81 billion. Gold, which typically trades inversely to the U.S. currency, declined as the dollar gained on concern about Greece. The metal for immediate delivery fell as much as 0.3 percent to $1,138.70 an ounce. Silver also dropped, while crude oil traded below $84 a barrel in New York, paring gains for the week, as the stronger dollar curbed demand for commodities. “The big picture has still got to be a concern of what’s going on in Europe,” said Chad Walls , head of precious metals trading at Fortis Bank in Hong Kong. The Dollar Index , a gauge against six counterparts, gained as much as 0.5 percent. Deficit Rises The EU yesterday lifted its estimate for Greece’s deficit to 13.6 percent of gross domestic product. Ireland overtook the southern European nation as the EU member with the largest deficit, at 14.3 percent. “There are a number of countries who could easily go down the same path, and the ability for Europe to bail out all of those economies is, I would imagine, quite limited,” said Adam Carr , a senior economist at ICAP Australia Ltd. in Sydney. “A resolution is needed quite quickly. Otherwise, the euro is going to continue to weaken.” Moody’s lowered Greece’s credit rating to A3 from A2, four grades above junk, while credit-default swaps tied to the debt climbed to a record 644 basis points, CMA DataVision prices showed. Greece is prepared to ask euro-region governments for a bridge loan, a Greek government official said, as debt worth $11.3 billion comes due next month and borrowing costs surge to the highest since 1998. To contact the reporters on this story: Clyde Russell in Singapore at crussell7@bloomberg.net ; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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Sheldon Filger: Greek Debt and Fiscal Crisis Gets Steadily Worse Amid a Sea of Deception

April 22, 2010

If you thought the revised Greek government ‘s fiscal deficit projection for 2009 was disastrous at 12.3 percent of GDP, fasten your seat belt and hold onto your hat. As awful as that figure was when Prime Minster George Papandreou revealed that the previous government in Athens had deliberately lied about the deficit so that Greece would be admitted into the Eurozone, in retrospect the powers that be in Brussels, joined by the IMF, wish to God that 12.3 percent was the number. Now, we learn, the actual deficit figures are even worse, though nobody can be certain at this point how bad they really are. Eurostat, the statistical department of the EU, has released its own evaluation of Greece’s fiscal reality, and has concluded that, at a minimum, the actual deficit to GDP accrued by Athens in 2009 was 13.6 percent and might even be as high as 14.1 percent. Due to deliberate bookkeeping chicanery by previous Greek governments, apparently facilitated at least in some measure by the unique financial engineering of Goldman Sachs, the true state of Greek fiscal reality is hidden by a thick layer of artfully contrived opacity. In the light of this latest revelation, courtesy of Eurostat, yields on Greek government bonds continue their upward climb. For example, yields on ten-year Greek bonds now exceed nine percent, nearly 600 basis points higher than the equivalent bonds being offered by Germany. Clearly, the sovereign debt market is far from reassured by the latest version of the ever-changing Greek bailout package, which in its latest manifestation was cobbled together by the Euzozone countries and the IMF. In response to the ever-worsening truth now emerging about how dire the Greek debt crisis really is, the ratings agencies are again weighing in with a downgrade of Greek sovereign debt. Moody’s has lowered its rating on Greece by another notch, and likely the other ratings agencies will soon weigh in. This will inevitably further expand the spread in bond yields, and only add to the complication of even a short-term bailout. When Lehman Brothers collapsed in September of 2008, there was an immediate freeze in the global credit market, reflecting acute distrust by counterparties spooked by misleading financial representations by major investment firms, especially with regard to mortgage backed securities. The latest revelations concerning the Greek fiscal crisis point to a similar phenomenon that is increasingly likely. As the sovereign debt crisis currently afflicting Greece not only worsens but spreads to other countries with large deficit to GDP correlations, the risk of a type of Lehman Brothers scenario with respect to the sovereign debt market becomes increasingly probable, with one important difference. When Lehman Bothers collapsed and credit markets froze, sovereigns borrowed massively and bailed out their financial systems. However, if this time sovereigns are the actors frozen out of the credit market, who bails them out? Answer than one, Ben Bernanke and Timothy Geithner.

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Toyota Rating Cut to Aa2 by Moody’s on Risk Record Recall Will Curb Profit

April 21, 2010

By Makiko Kitamura April 22 (Bloomberg) — Toyota Motor Corp. ’s credit rating was cut by Moody’s Investors Service because it expects profit to remain at “a low level” through at least 2012. Moody’s downgraded Toyota to Aa2 from Aa1, the ratings agency said today in a statement. The world’s largest carmaker has recalled more than 8 million vehicles globally and has predicted this will cost it at least $2 billion in lost sales and warranty repairs. The Toyota City, Japan-based company also faces 180 consumer and shareholder lawsuits stemming from the recalls. Toyota faces a “material risk that its operating profit margin will remain well below that appropriate for its rating level until 2012 at the earliest and possibly beyond,” Moody’s analyst Tadashi Usui wrote. Toyota has predicted it will post net income of 80 billion yen ($862 million) for the year ended in March 31. The company’s shares fell 1.9 percent to 3,580 yen as of 12:44 p.m. in Tokyo. To contact the reporter on this story: Makiko Kitamura in Tokyo at mkitamura1@bloomberg.net .

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Analysts Bullish On Goldman’s Stock, Citing Political Relationships

April 19, 2010

NEW YORK — Shares of Goldman Sachs Group Inc. turned positive Monday, having spent most of the trading session down slightly following Friday’s plunge. Goldman Sachs shares added $2.62, or 1.6 percent, to close at $163.32 after trading as low as $155 earlier in the session. The modest gain comes after shares tumbled $23.57, or 12.8 percent, to close at $160.70 on Friday. The Securities and Exchange Commission filed civil charges Friday against Goldman Sachs, claiming the New York investment bank misled investors about the risks surrounding securities backed by subprime mortgages that it managed. Those types of securities have been blamed for helping push the country into recession and creating the credit crisis. Britain’s Prime Minister Gordon Brown called on regulators there to investigate the bank as well to determine if it misled investors in Great Britain. German regulators said they are looking into the case and will not rule out any option. The European Union is also keeping a close eye on the U.S. investigation. Fitch Ratings said the charges and ongoing investigations would not affect the bank’s long-term credit default rating. Goldman Sachs currently carries an investment-grade “A+” rating from Fitch. Despite the charges and more potential investigations, FBR Capital Markets analyst Steve Stelmach maintained an “Outperform” rating on the stock with a price target of $190. He did however, remove Goldman from the “FBR Top Picks” list because the charges could potentially alter banking regulations. Uncertainty surrounding possible new financial regulation legislation could limit a rise in Goldman and other financial companies’ stock prices, Stelmach said in a note to investors. Goldman’s shares, in particular, will face pressure because of headlines surrounding the charges and because the SEC case could alter the financial regulatory reform legislation currently being discussed by Congress. Analysts say the timing of the Goldman Sachs charges could give Congress a chance to add more oversight to the banking sector. Bernstein Research analyst Brad Hintz echoed Stelmach’s comments, saying regulatory uncertainty could scare off some investors. However, the bank’s long-term potential remains “attractive.” Rochdale Securities analyst Richard Bove also said the stock is still worth buying even though it is under a cloud of scrutiny. In a research note, Bove said that the charges will not keep other companies from working with Goldman. The bank has long been considered one of the strongest on Wall Street. If Goldman Sachs maintains those relationships, which would keep it solidly profitable, the recent dip in the stock price makes Goldman shares “a compelling buy,” Bove wrote in the note. The one major repercussion for Goldman could be that the bank might be forced to shake up its management. Bove said CEO Lloyd Blankfein or chief financial officer David Viniar might have to leave the company for public relations reasons. Bove did not name any potential replacements, but said there are capable executives that could step in and continue to run the bank and produce big profits. A new CFO might have to come from outside the company, Bove added. Goldman Sachs reports first-quarter results on Tuesday. Analysts polled by Thomson Reuters, on average, forecast the bank will report a quarterly profit of $4.01 per share.

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Goldman Used Abacus to Shuffle Debt Risk Like Beads

April 16, 2010

By Jody Shenn and Bob Ivry April 16 (Bloomberg) — From July 2004 through April 2007, as credit markets boomed, Goldman Sachs Group Inc. created 23 financial transactions called Abacus, the word for a relatively crude counting tool involving the shuffling of beads. Today, the Securities and Exchange Commission sued the bank for securities fraud in what would be the penultimate offering in the series, according to Bloomberg data. The bank used the deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors, either as hedges for similar positions or to bet against securities itself. While the data show New York-based Goldman Sachs issued at least $7.8 billion of Abacus notes, the risk passed to investors was multiples higher. The Abacus transactions are so-called synthetic collateralized debt obligations, which marry two financial innovations that contributed to the worst collapse in financial markets since the Great Depression. The financial tools, often called technologies, are credit- default swaps , used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities. Abacus deals were filled with default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn’t pay as promised, in return for regular premiums from the bank. Upfront Cash Some of the cash needed for the potential payouts to Goldman Sachs would be raised upfront, and essentially placed in escrow, by selling Abacus CDO notes with varying ratings. The grades were tied to how many of the underlying securities needed to default before the CDO classes would. Such securitization enabled debt with the lowest investment-grade ratings to be transformed, in part, into AAA securities that turned out to not be as safe as that ranking suggested. At least $5 billion now carries junk ratings, below BBB-, from Standard & Poor’s, or has defaulted, Bloomberg data show. The SEC said today that Goldman Sachs created and sold Abacus 2007-AC1 without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and also bet the CDO would default. Paulson was proved correct, and his hedge fund eventually turned a $1 billion profit and CDO investors lost a similar amount, according to the SEC. The deal was different from most Abacus CDOs in that Goldman Sachs said that a third-party, ACA Management LLC, was choosing the underlying debt instead of the bank itself, according to prospectuses. At least $192 million of the debt was granted top grades by credit-rating companies, and an additional $1.1 billion was supposedly even safer, according to Bloomberg data. “This would never have been possible if the ratings had been correct,” said Gene Phillips , director of PF2 Securities Evaluations, a New York-based advisory firm. “For these trades to come out so well for Paulson, the ratings agencies would not have been able to identify as well as Paulson did that these were crappy assets.” To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net Bob Ivry in New York at bivry@bloomberg.net .

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Neil K. Shenai: Free Fraudin’ at Goldman

April 16, 2010

The SEC sued Goldman Sachs today claiming that it intentionally created a mortgage investment that was designed to fail. Goldman Sachs issued a press release in response, tersely dismissing the charges as ” completely unfounded in law and fact .” Before considering the merits of this charge, it is important to understand the nature of Goldman’s business offerings. In short, Goldman and other large financial institutions make money by putting themselves between both sides of large financial transactions. The transaction in question – an aptly ambiguously-named synthetic collateralized debt obligation (CDO) called Abacus 2007-AC1 – positioned the billionaire hedge fund manager John A. Paulson against several large pension funds, mutual funds, and other asset management companies. Paulson hand-selected a bundle of mortgage backed securities, backed by residential mortgages of dubious credit quality, against which he wanted to bet. Specifically, he wanted to purchase insurance policies, known as credit default swaps, which would pay off handsomely if the cash flows on the underlying mortgage backed securities ceased. Paulson sought Goldman’s help to structure this deal, using Goldman’s franchise to find sellers of the insurance. In order to find investors willing to insure Paulson’s target mortgage backed securities, Goldman told prospective investors that they would be investing in a pool of securities hand picked by an independent manager. The lawsuit alleges that Goldman misrepresented Paulson’s involvement in the Abacus deal. Time will tell if Goldman’s failure to disclose Paulson as the deal’s counter-party will constitute fraud. Still, there are several aspects of this transaction that get to the heart of the causes of the financial crisis. It is my central contention that suing Goldman Sachs does not address any of the following underlying causes, potentially distracting regulators from the real problems in our financial system outlined below: 1) Ratings agencies fueled moral hazard A brief glance at the offering document prepared by Goldman for their prospective investors shows that Paulson targeted mortgage backed that received some of the highest ratings from the various ratings agencies. Such gamesmanship of the ratings agencies is well documented . Investors relied on the ratings provided by Moody’s, S&P, and Fitch instead of doing their own due diligence on the mortgages in question. Investors are responsible for their own bad decisions. My own brief look into the offering document shows that investors were aware of the composition of their portfolio, as is required by law. Regardless of who chose the portfolio, investors had the same information that led Paulson to make his bearish bet on the housing market. In this sense, the SEC lawsuit ignores an age-old adage of free enterprise – caveat emptor. 2) Goldman routinely profited from the ignorance of their counter-parties Conventional wisdom holds that Goldman Sachs left the financial crisis relatively unscathed. Indeed, they repaid their TARP warrants with interest. Such an account neglects that Goldman’s various counter-parties, often rendered insolvent because of deals struck with Goldman, needed massive amounts of Federal aid to remain solvent themselves. In pursuing individual firm-level rational behavior, Goldman destabilized the entire financial system by bankrupting their business partners. Even if Goldman Sachs had enough foresight to hedge themselves against idiosyncratic credit risk, they failed to account for counter-party risk, forcing firms like AIG into the hands of government receivership. The suit in question is a case study in how Goldman readily feasted on the ignorance of their counter-parties. If Darwinian free market principles were to hold, Goldman’s counter-parties would have gone bankrupt, thereby eliminating the very system from which Goldman benefited. Alas, free market principles did not hold, unconditional bailouts occurred en masse , and Goldman’s counter-parties were free to fight another day. 3) Such transactions have little to do with a fully-functioning capital market Critics of financial reform contend that any attempt to reign in the country’s financial institutions will undermine the health of a fully-functioning capital market. Notice how the transaction in question was purely synthetic. There were no underlying cash instruments backing the deal. Moreover, Paulson’s use of credit default swaps were not used to hedge against pre-existing exposure. Instead, these derivatives were used for speculation. As long as the everyday functions of borrowing and lending stand conflated with casino speculation, systemic actors will find ways to defy financial market stability at disastrous costs. Ultimately, if the SEC were to apply the “Goldman Standard” of this lawsuit to other transactions of this type, numerous other financial institutions will have suit brought against them. Suing financial institutions for defrauding investors will never go out of style, especially in this hostile political environment. As an earnest believer in financial reform, I sincerely hope that lawsuits of this type will not supplant the passage of real useful reform of the financial system. In either event, Goldman will surely fight the charges. In that likely case, this lawsuit will ideally help jump-start a national dialog about what kind of financial system we want, and to what ends. It’s about time.

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Goldman Sachs Boosts Nashville’s Debt 40% for Convention Center

April 13, 2010

By Darrell Preston April 13 (Bloomberg) — Nashville , home of country-music stars such as Taylor Swift and the Grand Ole Opry, will boost city-backed debt by almost 40 percent to borrow $633 million for a new convention center three times the size of the Tennessee municipality’s current one. Bonds to be sold today by Nashville and Davidson County’s Convention Center Authority through investment banks led by Goldman Sachs Group Inc. pledge general-fund revenue if hotel, airport and rental-car taxes and use of the Music City Center aren’t enough to repay investors. The tourism revenue won’t be adequate, said Councilwoman Emily Evans , a former municipal bond underwriter. “It’s a riverboat gamble with very little upside,” said Evans, who worked for 15 years at J.C. Bradford & Co., the Nashville firm acquired by Paine Webber in 2000. “It just doesn’t seem like a good bet to me.” Nashville, the home of the Country Music Hall of Fame , hopes to enhance tourism by creating retail and parking areas, tripling exhibit space to 350,000 square feet and adding 64,000 square feet of ballrooms, according to the preliminary official statement. The $415 million Music City Center will enable the city to compete for larger meetings, add 1,524 jobs and generate almost $135 million of new annual spending by 2017, according to a study by HVS Convention, Sports & Entertainment in Chicago on Jan. 6. The facility is forecast to yield almost $12 million in new tax revenue beyond tourism levies dedicated to the $40 million-a-year of debt service, said consulting firm HVS. Attendance Down With convention center attendance down nationwide — a 30 percent decline in Las Vegas and 28 percent in Orlando, Florida, two of the largest convention markets in the U.S. — Nashville’s taxpayers may wind up paying part of the cost if use of the new center falls short, said Heywood Sanders , professor of public administration at the University of Texas in San Antonio, who has studied convention centers. “It’s quite a leap of faith,” said Sanders, who’s writing a book on convention center financing. “It’s a pretty large chunk of debt.” The city is selling in four parts, with about $605 million as taxable Build America Bonds, which come with a 35 percent subsidy from the U.S. government under economic stimulus legislation passed last year by Congress. The average yield on Build America securities fell 6 basis points to a three-week low of 6.17 percent yesterday, according to the Wells Fargo Build America Bond Index . Tourism Boost A larger convention center is forecast to increase hotel room-tax receipts for the city to $30.5 million in 2014 from just over $28 million in 2009, according to a feasibility study released by HVS on March 26. By 2019, it’s estimated to exceed $40 million a year. At the same time the new borrowings will increase debt backed by the city’s general fund by 39.6 percent to $2.23 billion. “We have an opportunity to take visitor taxes and fees, and invest them in a way that creates jobs and grows our local economy,” Mayor Karl Dean said in a Jan. 6 statement. A new facility was needed to attract conventions, said Marty Dickens , chairman of the convention center authority, in a phone interview. The city is using the same financial model it employed for the existing site in 1987, which is now too small to compete in luring events, he said. ‘Untested’ Projections Fitch Ratings, which ranks the bonds being sold at A+, in evaluating the convention center debt, lowered the city’s general obligation grade by one rung on April 6 to AA-, its fourth-highest level, citing the “potential additional fiscal strains of the debt-financed convention center upon an already pressured general fund,” the company said. Projections on two tourism taxes “are untested” and “heavily dependent upon increased tourism” at the convention center, Fitch said. “We realized the city feels it will be vital to increasing the desirability of downtown,” said Amy Laskey , an analyst at Fitch, in a phone interview. “The city already operated on a thinly balanced budget, so the debt does increase the risk for the general fund.” The new bond issue is structured with reserves and revenue projections that exceed what is needed to cover payments to investors to protect the city’s general fund, said Dickens. “The convention market would have to seriously go to pieces before we would need general fund dollars,” Dickens said. “A lot of conventions like to come here because of our reputation as a music city.” Moody’s Rating The biggest portion of the obligations is rated Aa3 by Moody’s Investors Service and A by Standard & Poor’s, the fourth- and sixth-highest rankings, respectively. Ten-year, A rated municipal bonds traded at yields of 4.16 percent yesterday, according to data collected by Bloomberg. That compares with yields of 3.3 percent for AAA rated debt. Richard Riebeling, the city’s director of finance, didn’t return a phone call seeking comment. Wayne Placide, the city’s financial adviser with First Southwest Co. in Dallas, referred a request for comment to Jeff Scruggs , a managing director with Goldman Sachs. The firm’s spokesman, Michael DuVally , said Scruggs couldn’t be reached for comment. To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net .

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Maturity Wall Shrinks $196 Billion in 15 Months: Credit Markets

April 13, 2010

April 13 (Bloomberg) — Record U.S. junk bond sales and a rally in leveraged loans are chipping away at the $1.2 trillion wall of maturing debt that’s threatened to cause a surge in defaults. Cablevision Systems Corp. , the New York-area cable-TV provider, sold $1.25 billion of bonds yesterday to refinance notes and has extended loan maturities. Since the start of last year, borrowers with high-yield bonds and leveraged loans maturing through 2015 have cut the amount due in the next four years by $196 billion, according to JPMorgan Chase & Co. Last year’s recovery in credit markets prompted $239.3 billion of speculative-grade bond sales, reducing chances that debt-laden companies would be trapped as their securities matured. The 12-month global default rate for junk debt fell to 9.9 percent in the first quarter from 13 percent at the end of 2009 and will drop to 2.4 percent a year from now, New York- based Moody’s Investors Service said in a report. “The openness of the high-yield bond market has been the major force here,” said Gautam Kakodkar , a New York-based credit strategist at Barclays Plc. “What we’ve seen so far is an incredible flow of money to high-yield bonds and loans, creating a lot of pent up demand.” The S&P/LSTA US Leveraged Loan 100 Index rose 0.12 cent to 92.37 cents on the dollar yesterday, the highest since June 22, 2008. Borrowers have $537 billion of the loans due between 2012 and 2014, or 77 percent of the total, JPMorgan analysts led by Peter Acciavatti wrote April 9 in a report. Fund Flows Junk sales are “really mitigating that wall of maturity risk,” Martin Fridson , chief executive officer of New York-based money manager Fridson Investment Advisors, said yesterday in a telephone interview. Market watchers from Fridson to Bank of America Merrill Lynch strategist Oleg Melentyev to Robert Khuzami , the director of enforcement at the U.S. Securities and Exchange Commission, have used the term ”maturity wall” to describe the wave of bonds that need to be refinanced in coming years. Investors pumped $417 million into high-yield bond mutual funds last week, the seventh-straight increase, and loan funds received $290 million, JPMorgan said. The funds focus on debt rated lower than Baa3 by Moody’s and below BBB- by Standard & Poor’s. High-yield bond spreads narrowed 14 basis points last week to 568 basis points, or 5.68 percentage points, Bank of America Merrill Lynch index data show. The spread fell to 565 basis points on April 6, the tightest since the end of 2007. The extra yield investors demand to own corporate bonds rather than government debt was 146 basis points yesterday, the lowest since November 2007, the Merrill Global Broad Market Corporate Index shows. Yields averaged 4.013 percent, the lowest since March 30. Yankee Bonds Elsewhere in credit markets, Bank of China’s Hong Kong unit, Hyundai Motor Co. and a division of Telefonica SA , the Spanish wireless provider, tapped U.S. investors as so-called Yankee issuers made up a record share of dollar-denominated debt offerings, data compiled by Bloomberg show. SLM Corp., the student lender known as Sallie Mae, sold $1.22 billion of bonds backed by student-loans, according to a person familiar with the sale. Lowe’s Cos. issued $1 billion of notes. Bank of China (Hong Kong) Ltd., part of the country’s third-largest lender by market value, sold $900 million of additional 5.55 percent bonds due in 2020. Hyundai, South Korea’s biggest carmaker, issued $500 million of five-year notes through its capital services unit, its first benchmark sale in the currency since October, Bloomberg data show. Madrid-based Telefonica Emisiones SAU was marketing $3.5 billion of debt. Dollar Record Yankee issuers sold $6.7 billion of U.S. investment-grade bonds last week, or 60 percent of the total, after a record $132 billion in the first quarter, or 52 percent of all offerings, the data show. That compares with $95.3 billion, or 25 percent of U.S. investment-grade sales, in the year-earlier quarter. Sallie Mae’s offering was the largest of asset-backed securities since the U.S. government withdrew from the market last month. The top-rated securities maturing in 3.34 years yield 40 basis points more than the 30-day London interbank offered rate, said the person, who declined to be identified because the terms aren’t public. Daimler, Deere Daimler AG, the world’s second-biggest maker of luxury cars, is marketing $992.8 million of bonds backed by auto loans. Deere & Co., the world’s largest maker of farm machinery, plans to sell $708.2 million of securities supported by equipment loans. Lowe’s , the No.2 U.S. home-improvement retailer, sold $500 million of 10-year notes and $500 million of 30-year bonds, in its first U.S. offering since 2007, Bloomberg data show. Cablevision issued $750 million of 8-year senior notes and $500 million of 10-year bonds, as U.S. corporate bond sales totaled at least $7.85 billion yesterday. Credit ratings on investment-grade companies were cut about three times for every two that were raised in the first quarter, Standard & Poor’s said in a report. “We are seeing a bit of re-leveraging on the part of relatively stronger issuers,” S&P credit analyst Andrew Watt wrote yesterday. “A closer look at the ratings activity for investment-grade or near investment-grade issuers shows that about half of the downgrades in this category were due to a merger or acquisition.” Upgrades were twice downgrades among speculative-grade companies, according to S&P. Mortgage Bonds U.S. home-loan bonds without government-backed guarantees rose for a second week, after falling while credit markets gained in February and March. The most-senior securities backed by option adjustable-rate mortgages rose 1 cent on the dollar to 56 cents last week, compared with a record low of 33 cents in March 2009 and 58 in early January, adding to a similar gain the previous week, according to Barclays. Some subprime-loan securities have jumped almost 10 percent since mid-March. The cost to protect against default on corporate bonds fell today with the Markit iTraxx Crossover Index of credit-default swaps on 50 European companies dropping 12 basis points to 396, the lowest since January, JPMorgan prices show. Greece’s auction of Treasury bills today drew stronger demand than at a previous sale, signaling renewed investor appetite at the government’s first offering of debt since winning an aid package from the European Union. Euro-region finance ministers and the International Monetary Fund offered the country as much as 45 billion euros ($61 billion) in loans two days ago. The nation’s bonds rose for a third day as the lifeline boosted confidence the government will honor its debt payments. Credit-default swaps on Greek sovereign debt fell 9 basis points to 356.5, having tumbled 62 basis points yesterday, according to CMA DataVision. For Related News and Information: New issues: PREL Top bond stories: TOP BON Corporate bond new issue monitors: NIM Credit market wraps: NI CMW BN Trace system: TACT

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Maturity Wall Shrinks by $196 Billion as Junk Bonds Surge: Credit Markets

April 12, 2010

By John Detrixhe and Emre Peker April 12 (Bloomberg) — Record high-yield , high-risk U.S. corporate bond sales and a rally in the leveraged loan market are chipping away at the so-called maturity wall that’s threatened to cause a surge in defaults. Cablevision Systems Corp. , the New York-area cable-TV provider, sold $1.25 billion of bonds today to refinance notes and has extended loans. Borrowers, which have $1.2 trillion of high-yield bonds and leveraged loans maturing through 2015, have reduced the amount due in the next four years by $196 billion since the start of last year, according to JPMorgan Chase & Co. Maturing debt has been chiseled down by a record $161.6 billion of junk bond offerings in 2009 and $77.7 billion this year, according to data compiled by Bloomberg. Leveraged loan prices surged to the highest in almost two years and default rates have plunged amid an opening in the corporate bond market. “The openness of the high-yield bond market has been the major force here,” said Gautam Kakodkar , a New York-based credit strategist at Barclays Plc. “The high-yield bond market definitely has capacity to do more in the future.” The S&P/LSTA US Leveraged Loan 100 Index rose 0.12 cent to 92.37 cents on the dollar today, the highest since June 22, 2008. Borrowers have $537 billion of leveraged loans due between 2012 and 2014, or 77 percent of all loans outstanding, JPMorgan analysts led by Peter Acciavatti wrote April 9 in a report. High-yield, or junk, bonds are ranked lower than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s. Junk bond sales are “really mitigating that wall of maturity risk,” Martin Fridson , chief executive officer of New York-based money manager Fridson Investment Advisors said today in a telephone interview. Yankee Bond Sales Elsewhere in credit markets, Bank of China, Hyundai Motor Co. and a unit of Telefonica SA , the Spanish wireless provider, tapped U.S. bond investors for cash today as so-called Yankee issuers made up a record share of dollar-denominated debt offerings, Bloomberg data show. SLM Corp., the student lender known as Sallie Mae, sold $1.22 billion of bonds backed by student-loans, according to a person familiar with the sale. Lowe’s Cos. issued of $1 billion of notes. Bank of China, the country’s third-largest lender by market value, sold $900 million of additional 5.55 percent bonds due in 2020 and Hyundai, South Korea’s biggest automaker, issued $500 million of five-year notes through its capital services unit, its first benchmark sale in the currency since October, Bloomberg data show. Madrid-based Telefonica Emisiones SAU was marketing $3.5 billion of debt. Sallie Mae Offering Yankee issuers sold $6.7 billion of U.S. investment-grade bonds last week, or 60 percent of the total, after a record $132 billion in the first quarter, or 52 percent of all offerings, Bloomberg data show. That compares with $95.3 billion, or 25 percent of all U.S. investment-grade sales, in the year-earlier quarter. Sallie Mae’s debt offering was the largest sale of asset- backed securities since the U.S. government withdrew from the market last month. The top-rated securities maturing in 3.34 years yield 40 basis points more than the 30-day London interbank offered rate said the person who declined to be identified because the terms aren’t public. A basis point is 0.01 percentage point. Daimler AG, the world’s second-biggest maker of luxury vehicles is marketing $992.8 million of bonds backed by auto loans and Deere & Co., the world’s largest maker of farm machinery, plans to sell $708.2 million of securities backed by equipment loans, according to people familiar with those sales. Corporate Bond Issuance Lowe’s , the second-largest U.S. home-improvement retailer, sold $500 million of 10-year notes and $500 million of 30-year bonds, tapping the U.S. corporate debt market for the first time since 2007, Bloomberg data show. Cablevision sold $750 million of 8-year senior notes and $500 million of 10-year bonds, Bloomberg data, as U.S. corporate bond issuance today reached at least $7.85 billion. Credit ratings on investment-grade companies were cut about three times for every two they were raised in the first quarter, Standard & Poor’s said in a report. “We are seeing a bit of re-leveraging on the part of relatively stronger issuers,” S&P credit analyst Andrew Watt wrote in the report today. “A closer look at the ratings activity for investment-grade or near investment-grade issuers shows that about half of the downgrades in this category were due to a merger or acquisition.” Among high-yield, high-risk companies, upgrades were twice downgrades, according to S&P. Mortgage-Bond Rally U.S. home-loan bonds without government-backed guarantees rose for a second week, after falling as other credit markets gained in February and March. The most-senior securities backed by option adjustable-rate mortgages rose 1 cent on the dollar to 56 cents last week, compared with a record low of 33 cents in March 2009 and 58 cents in early January, adding to a similar gain the previous week, according to Barclays Plc. Some subprime-loan securities have jumped almost 10 percent since mid-March. The cost to protect against default on corporate bonds fell around the world as a rescue plan to stem Greece’s budget woes eased concern of a wider debt crisis. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1.3 basis point to a mid-price of 84.1 basis points at 5:05 p.m. in New York, according to Markit Group Ltd. The index, which falls as investor confidence improves, is trading at the lowest level since April 6. Swaps on Greece Credit-default swaps on Greek sovereign debt tumbled 62 basis points to 364, according to CMA DataVision prices at 3:30 p.m. in London. The Markit iTraxx Crossover Index of swaps on 50 European companies dropped 8 basis points to 410, the lowest since March 17, JPMorgan Chase & Co. prices show. Cash flowing into high-yield mutual funds has helped provide demand for record junk bond issuance, as investors bet on riskier assets while interest rates are at record lows. Speculative-grade bond funds had $417 million of inflows last week, the seventh-straight increase, and loan funds had $290 million of inflows, the 19th in a row and the longest stretch ever, JPMorgan said. “What we’ve seen so far is an incredible flow of money to high-yield bonds and loans, creating a lot of pent up demand,” Kakodkar at Barclays said in a telephone interview. CLO Revival The “cliff” of maturities in 2010 to 2014 may be “far less precipitous than the absolute debt amount suggests,” Fitch Ratings analysts led by Darin Schmalz wrote last month in a report. Longer-term debt coming due can be absorbed by amending and extending loans, a “slowly improving” leveraged loan market and a revival of collateralized loan obligations. Energy Future Holdings Corp. , the Texas electricity provider formerly known as TXU Corp., has $21.1 billion of debt coming due in 2014, the most of any speculative-grade borrower in a year, JPMorgan wrote. The company’s 5.55 percent notes due in 2014 traded at 75 cents on the dollar to yield 12.9 percent on April 8, up 41.5 cents on the dollar from a year ago, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Energy Future was bought by KKR & Co. and TPG for $43 billion in October 2007 in the biggest ever buyout. High-yield bond spreads tightened 14 basis points last week to 568 basis points as of April 9, Bank of America Merrill Lynch index data show. The spread on junk-rated securities narrowed to 565 basis points on April 6, the tightest since Dec. 27, 2007. Falling Default Rate The 12-month global default rate for high-yield debt fell to 9.9 percent in the first quarter, from 13 percent at the end of 2009, according to Moody’s. The rate will drop to 2.8 percent by year-end, and 2.4 percent by next April, the New York-based ratings company predicted in a report. That’s lower than the 3 percent rate it forecast in February. “Companies that have these maturities in 2012, 2013 and 2014, they still need to generate top line growth, but market conditions have clearly eased,” said Diane Vazza , head of S&P’s global fixed income research. “The level of concern has eased as well.” To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net ; Emre Peker in New York at epeker2@bloomberg.net .

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Facing Crackdown, Credit Raters Bring On Heavy Hitters

April 8, 2010

Credit rating companies have long seemed the Wall Street equivalent of the New York Yankees: controversial but virtually unbeatable. Again and again, disgruntled investors have taken the raters to court – and lost. Now facing a crackdown for their role in the financial crisis, the raters worry that Congress will leave them vulnerable to a barrage of lawsuits that are harder to defend. In response, the raters are stepping up their game on Capitol Hill. They are breaking their own spending records as they deploy some of the heaviest hitters in lobbying and lawyerly persuasion. Financial reform legislation now making its way through Congress includes provisions that would make it easier for investors to sue the companies when they award top marks to bonds that turn out to be toxic. Investors rely on rating companies to judge the quality and safety of bonds by assigning the investments a letter grade. During the financial crisis, people lost billions on highly rated subprime investments. Recent disclosure reports filed by lobbyists and their clients show that in 2009, the top rating companies –Standard and Poor’s, Moody’s and Fitch — collectively spent almost $4 million on lobbying. That’s a record for the rating industry, and about 56 percent more than in 2008. Of the big three raters, S&P spent the most last year on lobbying –about $2.2 million–though that amount includes some lobbying for other business units of S&P parent company McGraw-Hill. And S&P is not missing an opportunity to pitch their cause: Representatives for S&P have had “direct meetings” with most all 23 senators on the Senate banking committee or their staff members, Ted Smyth, a McGraw-Hill vice president, told the Huffington Post Investigative Fund. Smyth wouldn’t say which, if any, senators have been receptive to S&P’s attempts to kill the increased liability provision. “We’re hearing from Democrats and Republicans who don’t want unnecessary lawsuits” for the ratings companies, he said. S&P’s lobbyists also have taken their case to the White House, Securities and Exchange Commission, FDIC, Federal Reserve, the Treasury Department, and even the Government Accountability Office, the investigative arm of Congress, records show. In July 2009, McGraw-Hill hired the Podesta Group and its owner, Tony Podesta, one of Washington’s most influential lobbyists, to tackle “liability provisions in credit rating agency reform,” the group’s lobbying disclosure reports show. Tony’s brother, John Podesta, was President Clinton’s chief-of-staff and co-chairman of President Obama’s transition committee. S&P also has hired the lobbying firm Nappi and Hoppe, which represents an array of financial interests including the Chamber of Commerce. A principal in the firm, Douglas Nappi, was chief counsel to the Senate banking committee from 2003 to 2005. For years, the big three credit raters have faced lawsuits from state attorneys general and investors who claim to have lost billions by relying on credit ratings. S&P alone now faces roughly 50 lawsuits. The investors typically accuse the raters of awarding inflated safety grades to dangerous investments. But the raters, who argue that ratings are only an opinion and that investors assume their own risk, remain undefeated in court. Many congressional Democrats are trying to break that winning streak. A bill passed late last year in the Democratically controlled House would make it easier to sue the raters. Instead of having to prove that a rating company committed fraud, investors would only have to show the raters were “grossly negligent” – a lower standard. Floyd Abrams, a renowned First Amendment attorney who has represented Standard & Poor’s for more than 20 years, said in an interview last year that switching to a so-called negligence standard could “be a very major threat to rating agencies being able to go about their business.” Senate Democrats didn’t go quite as far as their colleagues in the House. The Senate banking committee last month approved a bill allowing investor lawsuits only when the facts strongly infer that a rating company “knowingly or recklessly failed to conduct a reasonable investigation” of the investments before giving them a grade. S&P’s Smyth objects even to the weaker Senate provision. He said the language is vague and subject to interpretation by the judiciary and juries. “This ill defined provision introduces a degree of uncertainty,” said Smyth. “It’s like in football, they’re punting” to the courts. Raters also complain that other market participants such as accountants face less onerous standards. The ultimate shape of the legislation won’t be known until later this summer. Meanwhile, McGraw-Hill’s in-house lobbyists are reaching out to key Republican lawmakers on the banking committee. One McGraw-Hill lobbyist, Cynthia Braddon, met last month with Republican Sens. Bob Corker of Tennessee and Judd Gregg of New Hampshire. Corker joined the committee’s chairman Christopher Dodd (D-Conn.) in writing many of the bill’s provisions. Gregg, along with Democratic Sen. Jack Reed of Rhode Island, helped construct the rating agency provisions. At the March meeting, Braddon pushed Corker and Gregg to oppose the committee’s provision that would make it easier to sue the raters, according to an e-mail Braddon sent to Hill staffers on March 22, first reported by Bloomberg . That provision “remains a bone of contention,” Braddon’s e-mail said. Smyth said that Braddon’s e-mail “miscommunicates our bipartisan approach to the Bill.” According to one congressional source, nothing was agreed to at Braddon’s meeting with Corker and Gregg. The committee approved the bill along party lines, with Corker, Gregg and the committee’s other Republicans voting against it. In a statement released Wednesday , Reed attacked the March meeting as a “cynical attempt by Wall Street lobbyists to kill Wall Street reform before it has a chance to see the light of day.” Reed called on Republicans to ignore S&P’s attempts to influence the bill. “I hope these overtures from the banking industry will be resoundingly rejected and that we can get several Republican senators to join us in passing comprehensive Wall Street reform that increases transparency and protects taxpayers,” he said. Gregg’s office did not return a call requesting comment. Corker’s spokeswoman, Laura Herzog, said in e-mail: “Sen. Corker believes credit rating agencies were a big part of the problem and need to be part of the reforms.” The rating agencies say they support most proposed reforms, including an SEC office to oversee them. When faced with previous threats from Capitol Hill, the rating agencies mostly have fended them off. An Investigative Fund review last year of congressional testimony, SEC documents and lobbying reports revealed that the raters frequently have quashed or watered down potential government oversight by arguing that, much like a newspaper editorial, ratings are protected by the constitutional right to free speech. Follow the Huffington Post Investigative Fund on Twitter or fan us on Facebook . Do you have information about this story? Send us a tip or submit a correction . REPUBLISH THIS STORY FOR FREE: The Huffington Post Investigative Fund licenses its content through Creative Commons. We encourage you to republish our stories in full with proper attribution.

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David Fiderer: Bloomberg Takes a First Step at Piercing the Veil of Secrecy Surrounding CDOs

April 5, 2010

A recent Bloomberg story about one of the CDOs insured by AIG, Davis Square Funding III, is a stark reminder of one of the bedrock principles of real estate lending: Timing is everything. Davis Square III, originally underwritten by Goldman Sachs, was comprised of pieces of mortgage bonds issued in 2004, two years before the home prices peaked. As the chart from Moody’s demonstrates, when home prices stopped rising in 2006, loan losses soared. So when Davis Square III’s investment manager, Trust Company of the West, substituted 2004-vintage bonds with subprime deals issued in 2006 and 2007, AIG got stuck insuring an obligation far more toxic than one it had bargained for. The basic tenet of structured finance–what you see is what you get–seems to have been short-circuited. And the ultimate cost was borne by the taxpayers, who now own a slice of Davis Square III in an AIG bailout vehicle called Maiden Lane III. The asset substitutions may look like a bait-and-switch, but Trust Company of the West, or TCW, had simply exercised the latitude afforded it under the documentation. And Davis Square III is not unique. Davis Square Funding VI, and VII, also underwritten by Goldman and managed by TCW, were also designed to allow for similar asset substitutions. But except for Davis Square III, we don’t know whether any asset substitutions occurred. Virtually all CDOs remain shrouded in secrecy. Their financial reports remain hidden from public view, unavailable to anyone except actual CDO investors, who are bound by a non-disclosure agreements. Bloomberg’s coup was to pierce that veil of secrecy, and to drill down into the details of one CDO. Credit Ratings and Deep Subordination It’s easy to see how the Davis Square CDOs seemed like low-risk propositions five years ago. If you only looked at the historical loss rates on subprime mortgages issued prior to 2005, and relied on the underlying bonds’ credit ratings, then everything looked fine. In both Davis Square VI and Davis Square VII , the most important portfolio criteria pertained to credit ratings. At least 55% of the investments held by the CDO had to be rated AA- or higher, and none of the investments could be rated below A-. If you are unfamiliar with mortgage bonds, you may not realize that a tranche rated AA- is very deeply subordinated. Subprime mortgage bonds all have pretty much the same capital structure. Anything that isn’t rated AAA ranks in the bottom 20% of seniority. Anything rated below AA- ranks in the bottom 10% of seniority. The capital structure of Structured Asset Investment Loan Trust 2005-HE3 , or SAIL 2005-HE3, a deal underwritten by Lehman, followed the standard template: SAIL 2005-HE3 was a microcosm of the broader market, in that the amount of bonds rated AAA was about six times as large as those rated between AA+ and A-. Consequently, it seems likely that the Davis Square deals were initially stuffed with many subprime tranches rated AAA, which initially improved those portfolios’ blended credit ratings. But the AAA tranches get paid down first. And if the underlying home loans are prepaid quickly, the AAA tranches tended to shrink dramatically, thereby affording TCW the flexibility to insert later-vintage AA- tranches into the portfolio. Again, SAIL 2005-HE3 example was typical; 30% of the principal had been prepaid within a year of the deal’s initial closing. Why Subprime Borrowers Were So Quick to Prepay But why would so many homeowners with bad credit who were stretched thin decide to rapidly prepay their mortgages? At that point, they weren’t refinancing to take advantage of lower interest rates, and almost all of them faced prepayment penalties. The answer reflects the dirty little secrets of the subprime sector. SAIL was also typical in that about 33% of its mortgages were no doc loans, otherwise aptly named liar loans . After the subprime market began collapsing in 2007, Fitch reviewed a sampling of subprime mortgages with characteristics similar to those held by SAIL 2005-HE3. Fitch found that the vast majority of loans in its sampling were secured by fraud. About 2/3 of the loans involved occupancy fraud. In other words the borrowers claimed the property has their home but lived somewhere else. Almost half of the borrowers falsely claimed to be first-time homebuyers, who, in fact, had held mortgages somewhere else. A slight majority of the loans involved some kind of appraisal fraud. Clearly, a lot of these borrowers were seeking to make quick money by flipping a piece of real estate financed by a lender who didn’t ask too many questions. Almost half of the mortgages in the Fitch sampling were in the state with the biggest bubble, California. Of course, none of this was news. Back in 2000, HUD Secretary Andrew Cuomo was alerting everyone that fraud had gone viral in the subprime mortgage sector. Quick prepayments were also prompted by crooked lenders like Ameriquest , which engaged in loan flipping schemes, designed to get borrowers to refinance within two years so the firm could earn upfront fees. Another other dirty little secret of the industry was a euphemism known as “distressed prepayments.” If a borrower became delinquent in his monthly payments, he either sold his house and downsized, or covered the deficiency with a larger cash-out mortgage attained with a higher home appraisal. Almost half of all subprime loans were for cash-outs. Flipping schemes and distressed prepayments may have harmed consumers, but they did not cause loan losses so long as home prices kept rising . And home prices continued to rise so long as Alan Greenspan and Wall Street kept up their easy money policies. When home price appreciation stalled in 2006, those flipping schemes and distressed prepayments suddenly became problem loans. That’s why mortgage bonds that closed in 2006 performed so much worse than those issued one year earlier. From early 2006 onward, worsening delinquency statistics showed that a lot of subprime investors would get wiped out. But TCW, as the investment manager for the Davis Square CDOs, was not bound by any due diligence standard. Ratings from Moody’s and Standard & Poor’s were used as a substitute for due diligence. TCW could replace a solid AAA 2004-vintage investment with a toxic AA- tranche of a 2007 subprime deal, in accordance with the discretion afforded TCW under the “structure.” The Truth About CDOs Remains Hidden Whatever happened with Davis Square VI or VII or the CDOs underwritten by Goldman and managed by TCW remains a mystery. All of the players tied to subprime CDOs, acted with the expectation that their decisions would never be subjected to public scrutiny. It’s high time that the government required all mortgage securitizations, including privately placed CDOs, to disclose all of their monthly performance reports. There is no legitimate business purpose for keeping that information secret. Finally, the investors who reaped billions by betting against CDOs utilized that other financial instrument of secrecy, credit default swaps. Nothing better reflects Wall Street’s culture of secrecy that the position taken by The Depository Trust & Clearing Corporation, which operates a clearing house for credit default swaps. Prior to March 23, 2010 the DTCC refused to provide regulators access to specific counterparty information.

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David Fiderer: Bloomberg Takes a First Step at Piercing the Veil of Secrecy Surrounding CDOs

April 5, 2010

A recent Bloomberg story about one of the CDOs insured by AIG, Davis Square Funding III, is a stark reminder of one of the bedrock principles of real estate lending: Timing is everything. Davis Square III, originally underwritten by Goldman Sachs, was comprised of pieces of mortgage bonds issued in 2004, two years before the home prices peaked. As the chart from Moody’s demonstrates, when home prices stopped rising in 2006, loan losses soared. So when Davis Square III’s investment manager, Trust Company of the West, substituted 2004-vintage bonds with subprime deals issued in 2006 and 2007, AIG got stuck insuring an obligation far more toxic than one it had bargained for. The basic tenet of structured finance–what you see is what you get–seems to have been short-circuited. And the ultimate cost was borne by the taxpayers, who now own a slice of Davis Square III in an AIG bailout vehicle called Maiden Lane III. The asset substitutions may look like a bait-and-switch, but Trust Company of the West, or TCW, had simply exercised the latitude afforded it under the documentation. And Davis Square III is not unique. Davis Square Funding VI, and VII, also underwritten by Goldman and managed by TCW, were also designed to allow for similar asset substitutions. But except for Davis Square III, we don’t know whether any asset substitutions occurred. Virtually all CDOs remain shrouded in secrecy. Their financial reports remain hidden from public view, unavailable to anyone except actual CDO investors, who are bound by a non-disclosure agreements. Bloomberg’s coup was to pierce that veil of secrecy, and to drill down into the details of one CDO. Credit Ratings and Deep Subordination It’s easy to see how the Davis Square CDOs seemed like low-risk propositions five years ago. If you only looked at the historical loss rates on subprime mortgages issued prior to 2005, and relied on the underlying bonds’ credit ratings, then everything looked fine. In both Davis Square VI and Davis Square VII , the most important portfolio criteria pertained to credit ratings. At least 55% of the investments held by the CDO had to be rated AA- or higher, and none of the investments could be rated below A-. If you are unfamiliar with mortgage bonds, you may not realize that a tranche rated AA- is very deeply subordinated. Subprime mortgage bonds all have pretty much the same capital structure. Anything that isn’t rated AAA ranks in the bottom 20% of seniority. Anything rated below AA- ranks in the bottom 10% of seniority. The capital structure of Structured Asset Investment Loan Trust 2005-HE3 , or SAIL 2005-HE3, a deal underwritten by Lehman, followed the standard template: SAIL 2005-HE3 was a microcosm of the broader market, in that the amount of bonds rated AAA was about six times as large as those rated between AA+ and A-. Consequently, it seems likely that the Davis Square deals were initially stuffed with many subprime tranches rated AAA, which initially improved those portfolios’ blended credit ratings. But the AAA tranches get paid down first. And if the underlying home loans are prepaid quickly, the AAA tranches tended to shrink dramatically, thereby affording TCW the flexibility to insert later-vintage AA- tranches into the portfolio. Again, SAIL 2005-HE3 example was typical; 30% of the principal had been prepaid within a year of the deal’s initial closing. Why Subprime Borrowers Were So Quick to Prepay But why would so many homeowners with bad credit who were stretched thin decide to rapidly prepay their mortgages? At that point, they weren’t refinancing to take advantage of lower interest rates, and almost all of them faced prepayment penalties. The answer reflects the dirty little secrets of the subprime sector. SAIL was also typical in that about 33% of its mortgages were no doc loans, otherwise aptly named liar loans . After the subprime market began collapsing in 2007, Fitch reviewed a sampling of subprime mortgages with characteristics similar to those held by SAIL 2005-HE3. Fitch found that the vast majority of loans in its sampling were secured by fraud. About 2/3 of the loans involved occupancy fraud. In other words the borrowers claimed the property has their home but lived somewhere else. Almost half of the borrowers falsely claimed to be first-time homebuyers, who, in fact, had held mortgages somewhere else. A slight majority of the loans involved some kind of appraisal fraud. Clearly, a lot of these borrowers were seeking to make quick money by flipping a piece of real estate financed by a lender who didn’t ask too many questions. Almost half of the mortgages in the Fitch sampling were in the state with the biggest bubble, California. Of course, none of this was news. Back in 2000, HUD Secretary Andrew Cuomo was alerting everyone that fraud had gone viral in the subprime mortgage sector. Quick prepayments were also prompted by crooked lenders like Ameriquest , which engaged in loan flipping schemes, designed to get borrowers to refinance within two years so the firm could earn upfront fees. Another other dirty little secret of the industry was a euphemism known as “distressed prepayments.” If a borrower became delinquent in his monthly payments, he either sold his house and downsized, or covered the deficiency with a larger cash-out mortgage attained with a higher home appraisal. Almost half of all subprime loans were for cash-outs. Flipping schemes and distressed prepayments may have harmed consumers, but they did not cause loan losses so long as home prices kept rising . And home prices continued to rise so long as Alan Greenspan and Wall Street kept up their easy money policies. When home price appreciation stalled in 2006, those flipping schemes and distressed prepayments suddenly became problem loans. That’s why mortgage bonds that closed in 2006 performed so much worse than those issued one year earlier. From early 2006 onward, worsening delinquency statistics showed that a lot of subprime investors would get wiped out. But TCW, as the investment manager for the Davis Square CDOs, was not bound by any due diligence standard. Ratings from Moody’s and Standard & Poor’s were used as a substitute for due diligence. TCW could replace a solid AAA 2004-vintage investment with a toxic AA- tranche of a 2007 subprime deal, in accordance with the discretion afforded TCW under the “structure.” The Truth About CDOs Remains Hidden Whatever happened with Davis Square VI or VII or the CDOs underwritten by Goldman and managed by TCW remains a mystery. All of the players tied to subprime CDOs, acted with the expectation that their decisions would never be subjected to public scrutiny. It’s high time that the government required all mortgage securitizations, including privately placed CDOs, to disclose all of their monthly performance reports. There is no legitimate business purpose for keeping that information secret. Finally, the investors who reaped billions by betting against CDOs utilized that other financial instrument of secrecy, credit default swaps. Nothing better reflects Wall Street’s culture of secrecy that the position taken by The Depository Trust & Clearing Corporation, which operates a clearing house for credit default swaps. Prior to March 23, 2010 the DTCC refused to provide regulators access to specific counterparty information.

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Jim Randel: Understanding the Economic Crisis in 800 Words

March 31, 2010

If you want to understand the economic crisis, there are several hundred 250-page books for you to read. If, on the other hand, you want a one-page explanation, this is it. Beginning in the 1990′s, the U.S. became infatuated with homes as investments. The government encouraged home ownership. Private entities — Fannie Mae and Freddie Mac — were pushed to provide liquidity to the residential mortgage market. In return, the government provided an implicit backing (now $400 billion explicit) for Fannie and Freddie’s borrowings. All the smart journalists and financial writers advised Americans to drop everything they were doing and buy a house. Really smart people — let alone ordinary Joe’s — began to believe that housing prices were like flubber — working against gravity. A commodity that had basically bounced along at a point or two over inflation for 50 years began to appreciate at 10% per year or more. With +/- 90% financing, the result was a doubling of equity every year. With Americans wanting more and bigger houses, banks and non-banks found ways to lend them money. Lender creativity in making loans to people who could never afford them was exceeded only by lender greed. Loan officers and mortgage brokers were incented to just move money out the door. Lenders had little reason to worry about loan repayment. Loans were sold to investment bankers. The lenders made a profit on these sales and had no ongoing risk of repayment. Then the lender went back to doing what it did well… making more ridiculous loans. Unfortunately, many banks got caught holding mortgage loans or securities before they could be foisted on others (think Citibank). The investment bankers bundled these loans into mortgage securities (a financial instrument divided into risk levels) and sold them off into the investment community, making money in the process of course. However, these sales would not have been possible without the compliance of the ratings agencies who blessed these toxic packages with AAA ratings, and oh yes, collected their fees from the investment banks selling the mortgage securities. All the while, the government slept well believing that housing prices never fall and as long as prices rise, people can refinance if they get into trouble. As a result, no one in Washington bothered to investigate the kind of loans people were receiving or, the awful processes by which these loans were being underwritten and marketed. The proverbial poopy hit the fan when housing prices started to flatten and refinancings became increasingly difficult. Even crazy lenders could not loan more than houses were worth and when prices flattened, there was no new equity to lend against. As a result, people actually had to pay (instead of repay) their mortgages. And the trouble began. As people started to default on their mortgages (2nd half of 2006), mortgage securities dropped in value and the entire system of credit default swaps was engaged. What’s a credit default swap? It’s insurance against a default. Some smart people not only bought these swaps to insure against their investment in mortgage securities, they also bought them naked. The investors were clothed, it’s just that the swaps were purchased without any corresponding investment in a mortgage security. In other words, the swaps were nothing more than a high-stakes gamble that the U.S. housing market would go bust. And who in the world was selling these credit default swaps? Can you spell A.I.G.? I hope so because you own about $200 billion worth of it. And by 2007 – 2008 the whole system starts to fail. Like the body shutting down after a long night of too much alcohol. Banks and investment banks realize they are holding lots of toxic (worthless?) debt instruments, and so they hang on to their capital for dear life. They stop trusting each other and the U.S. economy starts to freeze up. Finally, an alarm clock goes off in Washington. It decides to help Bear Stearns survive but not Lehman Brothers. It decides to borrow $700 billion from U.S. children and their children (our kids and grandkids) to help the banking world survive. I for one felt it was only right to ask my granddaughter about this, and she confirmed that she wanted to help out Goldman Sachs. In short, the economic crisis was caused by DNA – the genetic code of human beings prodding them toward pleasure (easy money) and away from pain (clear-headed analysis, fiscal discipline, patience). Let’s never expect human beings to act any differently. Let’s just tell this tale to our kids and grandkids so that they will be better able to see the train coming at them the next time around. Jim Randel is the founder of The Skinny On™ book series. www.theskinnyon.com.

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Damien Hoffman: Are Ratings Agencies Protecting the UK and US Like They Did With Mortgage Debt?

March 31, 2010

Yesterday, S&P (MHP) reiterated the UK’s AAA credit rating while adding a rhetorical threat to downgrade in the future. Really? The UK is AAA? That rating alone shows just how little the ratings agencies — including Moody’s (MCO) and Fitch — have changed since they abetted the CDO scams. Ratings Agencies Agree with the Private Market: they have failed In February, I posted a list of country credit ratings . The common theme: comments and emails noted that Greece, Portugal, Ireland, the UK, and US were recipients of grade inflation. So, if the ratings agencies are either doing a shitty job or purposefully protecting certain countries, aren’t they worthless? An S&P spokesperson seems to have said so : …Are the ratings agencies always the last to know, or just the last to acknowledge a problem? The agencies point out that they rely on facts presented by issuers, and that they are not responsible for conducting due diligence. An S&P spokesperson tells us, “We are not auditors; we are not accounting firms.” So if all the information about the assets underlying these bonds comes from the person selling them, and the credit rating agency never verifies any of it, investors might ask, what exactly does the rating agency provide? An opinion… Recently, Paul Taylor, president of Fitch Ratings, admitted the same failures : “The criticism is certainly justified,” he says. “In certain areas our analysis did not live up to the expectations we had.” And the private marketplace agrees . “Alan Brown, the chief investment officer at the major fund management company Schroders, says, ‘They have not fulfilled the function they have set themselves. They have not protected investors from defaults. And they have been far too late in keeping up with rapidly changing times.’” The SEC Needs to Rate Securities The issue here is the Securities and Exchange Commission has outsourced their oversight responsibilities, and the move has been a complete failure. Thus, the ratings agencies must be shuttered and the SEC needs to start rating securities. First, the SEC would benefit from getting into the weeds and understanding financial instruments from the ground up. Clearly, this level of enlightenment would have saved the world from chop-shop CDOs and uncollateralized credit default swaps. Second, the cost to securities originators would be cheaper. The SEC model would be nonprofit, so fees would not include hefty profits which ratings agencies currently rake in. By eliminating the profit motive, the incentive to favorably inflate ratings would nearly disappear. Investors Deserve the Truth Underlying all the ratings manipulation is not only hefty kick backs (in the form of fees and other business relations) but also the assumption that investors are not entitled to accurate ratings. In other words, the truth . The government admitted to lying during the Great Crash of 2008. (See ” The Treasury Department Endorses Lying to the Public “) And now the ratings agencies are rubber stamping G8 countries with AAA ratings despite some of the greatest deficits and debts in history. It’s time investors demanded the truth so we can make informed and educated decisions with our life savings. And since the ratings agencies admit they suck, let’s throw them in the trash where they belong. What do you think about the ratings agencies? Let us know in the comments below …

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Ireland Breaks From Greece, Spain, Portugal to Lead Bond Gains in Europe

March 30, 2010

By Paul Dobson March 30 (Bloomberg) — Ireland’s bonds are poised to outperform those of every other euro member except Austria this quarter as investors bet it will be more successful than countries such as Greece in cutting its budget deficit. The nation’s debt returned 3.2 percent this year, according to Bloomberg/EFFAS indexes. Yields on 10-year Irish bonds fell to within 128 basis points of those on German bunds on March 12, a 14-month low. Credit Agricole Corporate and Investment Bank and Royal Bank of Scotland Group Plc anticipate that spread may drop to about 65 basis points by the end of 2010 as the bonds keep rising. Prime Minister Brian Cowen ’s plans to cut pay for teachers, nurses and police and set up a bank to purge lenders of toxic property loans have helped cut the yield premium investors demand to hold Irish debt over bunds by more than 50 percent from a 16-year high. A year ago, credit downgrades and concern the nation would be unable to curb its budget gap prompted investors to include the country in a group they called PIIGS, for Portugal, Italy, Greece and Spain. “Ireland has left the pigsty for the time being and it has come out smelling of roses,” said Stuart Thomson , who helps oversee more than $100 billion as chief market economist at Ignis Asset Management in Glasgow, Scotland. “It doesn’t face the same problems that the southern Mediterraneans face this year.” Bond Returns Only Austrian bonds have performed better than Ireland’s this quarter, returning 3.3 percent, Bloomberg/EFFAS indexes show. Italian debt has returned 1.7 percent, Portugal’s bonds have made 0.6 percent, Spanish debt has gained 2 percent and Greece’s bonds have lost 0.1 percent. Germany’s have gained 2.3 percent. Ignis increased its holdings of Irish bonds to “overweight” last month, meaning it owns a greater percentage of the debt than in the indexes it uses to measure performance, Thomson said. It has an “underweight” holding of Greek, Italian, Portuguese and Spanish securities. A slump in Ireland’s real-estate market may still force the government to increase aid to the nation’s banks, widening a budget deficit that was 11.7 percent of gross domestic product in 2009, said Nick Stamenkovic , a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors. Dublin-based Allied Irish Banks Plc said yesterday it’s in talks to agree capital requirements with the country’s financial regulator. Finance Minister Brian Lenihan will lay out his plan for the financial system today as the National Asset Management Agency begins taking over toxic loans from lenders. Euro Slide “Our biggest concern is that the weak property market could prompt further writedowns by Irish banks, prompting more sovereign support,” Stamenkovic said. The euro has slid 6 percent against the dollar this year on concern some of Europe’s most recession-hit economies will struggle to narrow deficits and pay debt. The Irish-German 10- year spread rose to 284 basis points in March 2009, the highest since 1993. It was 139 basis points yesterday, compared with an average of 33 basis points in the past decade. Standard & Poor’s lowered Ireland’s credit rating twice last year, cutting it one step to AA+ from AAA in March and to AA in June. Fitch Ratings reduced the nation to AA+ from AAA in April and two levels to AA- in November. Moody’s Investors Service cut it by a single grade to Aa1 in July. Lenihan said in December he would reduce spending by 6 billion euros over two years to help tackle the deficit. The country’s economy will return to growth in the second half of 2010, Cowen said March 15. GDP shrank 7.1 percent last year. ‘Committed to Measures’ “Ireland has shown its government is committed to austerity measures,” said Luca Franchi , who helps manage 22 billion euros as head of fixed income and currencies at UBI Pramerica SGR SpA in Milan. “The commitment shown by the Irish government puts them in a better situation.” While Ireland has pressed ahead with implementing budget measures, Greece has been criticized for not doing enough. European Union Economic and Monetary Affairs Commissioner Olli Rehn said on March 1 Greece needed to step up action to rein in the deficit, the largest in the euro region at 12.9 percent of GDP and more than four times the EU limit. The premium investors demand to hold Greek 10-year bonds instead of German bunds reached 396 basis points in January, the most since before the euro’s debut in 1999. It was 316 basis points yesterday, more than five times the 60 basis points it averaged in the past decade and 178 basis points wider than Ireland’s. Greece’s Role Model “Greece has a role model and the role model is Ireland,” European Central Bank President Jean-Claude Trichet told the European Parliament in Brussels March 25. “Ireland had extremely difficult problems and Ireland took very seriously its problems. This has been recognized by all.” The Irish 10-year bond yield will drop to about 100 basis points more than the bund by the end of June and to 65 basis by 2011, according to Harvinder Sian , a senior fixed-income strategist at Royal Bank of Scotland. Credit Agricole forecasts the year-end spread at 60 basis points. Ireland plans to raise about 21 billion euros in debt this year, John Corrigan , chief executive officer of the Dublin-based National Treasury Management Agency, said this month. The agency said March 16 it had raised 10.2 billion euros in 2010 after selling almost 34 billion euros of debt in 2009. Ireland had about 77.6 billion euros of outstanding debt at the end of February, according to debt agency’s Web site. To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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Darling to Stay On as U.K. Chancellor If Labour Is Re-Elected, Brown Says

March 26, 2010

By Kitty Donaldson March 27 (Bloomberg) — Alistair Darling will stay on as U.K. chancellor of the exchequer if the Labour Party wins this year’s election, Prime Minister Gordon Brown said. Asked in an interview after yesterday’s European Union meeting in Brussels if Darling would remain in the job in the event of a Labour victory, the premier replied: “Yes, he would.” Darling was cheered by Labour lawmakers during his budget speech in the House of Commons March 24 after he announced an increase in the purchase tax on homes costing more than 1 million pounds ($1.5 million). His cabinet colleagues also gave him a round of applause when he set out his spending plans, including deficits that were smaller than he previously forecast. Brown, 59, must hold the election by June 3, though Labour briefing documents suggest May 6 as the likely date. Opinion polls show Labour has narrowed the opposition Conservatives’ lead and point to neither party winning a majority. A ComRes Ltd. survey yesterday found voters trusted Brown and Darling more on the economy. Brown’s endorsement of Darling, 56, will end conjecture in the British media that Brown is lining up his long-time ally, Ed Balls , for the job. Balls, 43, was Brown’s deputy when the premier was chancellor under Tony Blair and is now secretary for children, schools and families. ‘Great Job’ “I’ve actually never had a big ambition to take Alistair’s job,” Balls said in an interview March 24. “Alistair’s doing a great job and I would be hoping we’ll see Alistair Darling delivering the pre-budget report when the autumn comes.” The global financial crisis has dominated Darling’s period as chancellor. He succeeded Brown in June 2007 and less than three months later rescued mortgage lender Northern Rock Plc as customers waited outside branches to withdraw savings. Then he helped organize the biggest bank bailout in the world by deciding to take over Royal Bank of Scotland Plc in October 2008. Brown wanted to replace Darling with Balls in June last year, according to people familiar with the matter, because of Darling’s resistance to boosting spending to win votes. Darling worked as a solicitor in Edinburgh after studying law at Aberdeen University. He’s been a lawmaker representing electoral districts in Edinburgh since 1987 and previously ran the departments controlling transport, trade and work and pensions. Brown yesterday rejected criticism from investors and credit-rating firms he and Darling are doing too little to reduce Britain’s record budget deficit . ‘Substantial Reductions’ “I don’t accept that we haven’t given a detailed plan” to reduce the shortfall, Brown said in the 30-minute interview as he returned by train to London from Brussels. “We are talking about substantial reductions combining a deficit-reduction plan with protecting front-line services” such as health, education and law enforcement. Darling resisted calls to cut spending more quickly in his budget. Fitch Ratings said after the chancellor’s speech the pace of deficit reduction was too slow. Moody’s Investors Service said this month Britain has moved “substantially” closer to losing its top credit rating. Bill Gross , who runs the world’s biggest mutual fund at Pacific Investment Management Co., said in January that U.K. government bonds are “a must to avoid.” The pound has lost 8 percent against the dollar so far this year, the biggest loser among the 16 major currencies tracked by Bloomberg. ‘Due Course’ Brown refused to be drawn on whether a new Labour government — if it wins the vote — would put forward a new budget with more reductions. “We are talking about a spending review and we will announce that in due course,” he said. “I think people understand that the next few months will be clearer about what debt interest is going to cost, what unemployment is going to be and that is the basis on which we make the next decisions,” Brown said. The ComRes poll showed 33 percent back Brown and Darling to steer the economy, compared with 27 percent favoring the Conservatives. The last time ComRes asked the question, in December, Labour trailed by 33 percent to 26 percent. The poll suggests Brown may be winning the battle to persuade voters its record on taking Britain out of recession means it deserves a fourth term in office in the election. Brown says growth, which resumed in the final quarter of 2009 after the longest recession no record, is too fragile to focus on the deficit. Looming Cuts The London-based Institute for Fiscal Studies said March 25 that areas other than health, schools and overseas aid face real-terms cuts of as much as 25 percent by 2015 under plans to cut the deficit in half from the current 11.8 percent of gross domestic product. IFS Director Robert Chote said the new budget fell short of providing “a detailed picture to voters and financial market participants of the fiscal repair job in prospect beyond the election.” The Conservatives say they’ll begin cutting spending this year, saying Brown’s decision to delay cuts until 2011 until economic growth picks up threatens to push up borrowing costs and lead to a credit-rating downgrade. To contact the reporter on this story: Kitty Donaldson in London at kdonaldson1@bloomberg.net .

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