Recovery may take longer than usual: Greenspan

(Reuters) - Economic growth has stalled and recovery may take longer than usual, former Federal Reserve chairman Alan Greenspan said on Monday.

"As of right now, U.S. economic growth is at zero," Greenspan said at an investment conference in Jeddah, Saudi Arabia's second-largest city. "We are at stall speed."

"Recovery might take longer to emerge than it usually does," he added.

The longer growth stays at zero, the more likely the world's largest economy would start to contract, he said, adding that globalization of trade could ease some shocks.

"Growing globalization of trade and the economy would facilitate the absorption of shocks in the U.S.," he said.

In updated economic forecasts released last week, the U.S. central bank lowered its outlook for 2008 growth by a half percentage point to between 1.3 percent and 2 percent, citing the prolonged housing slump and bottlenecks in credit markets.

 

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Visa sets possible record $18.8 billion IPO

(Reuters) - Visa Inc, the world's largest credit-card network, on Monday said it may raise up to $18.8 billion in its eagerly awaited public sale of shares, which could make it the largest initial public offering ever.

The company filed with the U.S. Securities and Exchange Commission to sell 406 million Class A shares at $37 to $42 each, resulting in proceeds of $15 billion to $17.1 billion. It said it might sell another 40.6 million shares to meet demand, boosting the potential size of the IPO to $18.8 billion.

A successful IPO would surpass the $10.6 billion offering in 2000 by AT&T Wireless Group.

San Francisco-based Visa plans to list its shares on the New York Stock Exchange under the symbol "V."

The timing of Visa's offering is risky, as worries that the U.S. economy might be entering a recession have chilled investor demand for stocks and IPOs.

But shares of smaller rival MasterCard Inc (MA.N: Quote, Profile, Research) have more than quintupled since that card network went public in a $2.4 billion IPO in May 2006.

"MasterCard has been an explosive stock, and investors may hope Visa will be the same," said Steve Roukis, a managing director at Matrix Asset Advisors Inc in New York, which invests $1.7 billion.

Visa intends to set aside $3 billion of net proceeds to cover a wide variety of antitrust and other litigation.

 

Read more at Reuters

Citigroup May Post First-Quarter Loss, Whitney Says

 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, may post its second-straight quarterly loss because of writedowns on home-equity loans and junk-grade corporate loans, Oppenheimer & Co.'s Meredith Whitney said.

The bank may post a loss of $1.6 billion, or 28 cents a share, for the first quarter, compared with a profit of about $5 billion, or $1.01, a year earlier, Whitney wrote today in a note to clients. The prediction compares with the 63-cents per share average of 12 analyst estimates surveyed by Bloomberg.

The rate of loan losses is ``grossly underestimated by consensus estimates'' at Citigroup and other U.S. banks, Whitney wrote. ``Core fundamentals are rapidly deteriorating.'' She cut her per-share estimate for 2008 earnings by more than 70 percent to 75 cents. The New York-based company's shares could fall more than 36 percent to less than $16, she wrote. They've declined about 15 percent this year.

Citigroup posted a $9.8 billion loss for the fourth quarter, the widest in its 196-year history, after writing down subprime mortgage-linked collateralized debt obligations whose value plummeted last year as investors shunned securities linked to the least creditworthy borrowers. Vikram Pandit stepped in as chief executive officer in December, after Charles O. ``Chuck'' Prince was forced to resign.

Whitney was among the first analysts to gauge the depth of Citigroup's losses, writing in a note last October that the bank may have to cut dividend payments to shareholders for the first time since the 1990s. In January, the bank slashed its dividend by 41 percent, reversing a pledge made by its executive- committee chairman, former U.S. Treasury Secretary Robert Rubin, to preserve the shareholder payout.

 

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Ambac Rises on $3 Billion Rescue to Avert Downgrade

 (Bloomberg) -- Ambac Financial Group Inc. rose to the highest in two weeks on investor expectations the bond insurer may be rescued from crippling credit-rating downgrades by getting $3 billion in new capital.

Ambac, the second-biggest bond insurer after MBIA Inc., may announce an agreement this week, according to a person with knowledge of the discussions who declined to be named because the details aren't complete. The New York-based company plans to raise $2.5 billion by selling stock at a discount to existing shareholders and $500 million from issuing debt, the Wall Street Journal reported today, citing people familiar with the matter.

``Maybe we'll see light at the end of the tunnel soon,'' said Geraud Charpin, head of European credit strategy at UBS in London. ``That would be good news for banks.''

Citigroup Inc. and seven other banks are working with Ambac to prevent rating cuts that would throw doubt on the credit quality of the $553 billion of municipal and asset-backed securities it guarantees. Banks stand to lose as much as $70 billion from any downgrades to Ambac, MBIA Inc. and FGIC Corp., Oppenheimer & Co. analysts estimated. Ambac rose as much as 6 percent before the official start of trading in New York.

The stock was 69 cents higher at $11.40 at 7:35 a.m., the highest since Feb. 11. Ambac jumped 16 percent in New York Stock Exchange trading on Feb. 22 after CNBC Television said banks and Ambac were preparing a deal.

Ambac spokeswoman Vandana Sharma didn't return a voicemail and e-mail seeking comment before office hours today.

Bank Talks

Rating companies are demanding bond insurers add more capital or face downgrades because of losses on subprime- mortgage securities they guaranteed. Moody's Investors Service indicated it will decide whether to cut Ambac and Armonk, New York-based MBIA by the end of the month. A downgrade of all the firms would cast doubt on $2.4 trillion of securities they back.

New York Insurance Superintendent Eric Dinallo last month arranged a meeting with banks to help avoid a downgrade of the bond insurers. Dinallo told a congressional hearing this month that the companies may be forced to separate their municipal insurance business from their asset-backed guarantees.

``Ambac was among the neediest cases, so if they can pull it off, there's hope for the others,'' said Jim Reid, credit strategist at Deutsche Bank AG in London.

CDO Losses

Banks face losses from any rating cuts because they bought bond insurance to hedge the risks of collateralized debt obligations and other asset-backed securities that are now tumbling in value. CDOs package pools of securities then split them into pieces with different ratings.

UBS AG, Royal Bank of Scotland Group Plc, Wachovia Corp., Barclays Plc, Societe Generale SA, BNP Paribas SA and Dresdner Bank AG were also involved in the group discussing a rescue, said the person.

Dresdner, the German banking arm of Allianz SE, will contribute a ``small'' investment of ``two-digit million euros,'' Stefan Jentzsch, head of the Dresdner Kleinwort investment-banking unit, said at a press conference in Frankfurt today.

``We have long been waiting for banks to pay up,'' Philip Gisdakis, a Munich-based credit analyst at UniCredit SpA, Italy's biggest bank, wrote in a note to investors today. A ``solution without their participation would lead to large losses for them.''

Spokespeople for Citigroup, UBS, Wachovia and BNP declined to comment on the rescue plans. Spokespeople for RBS, Barclays and Societe Generale didn't immediately return e-mails or calls seeking comment.

FGIC Split

FGIC, which lost its top rating at Moody's last week, asked to be split into two separate businesses, one that insures municipal bonds and another for asset-backed securities. That would help protect municipal bonds from losses on the asset- backed debt.

Channel Reinsurance Ltd., a reinsurer for MBIA, had its top Aaa credit rating cut by Moody's on Feb. 22 because of a slump in the value of residential mortgage securities.

The rating was cut three levels to Aa3 with a negative outlook, Moody's said in a statement. Channel Re provides more than half the reinsurance bought by MBIA, according to MBIA filings. MBIA said last week all bond insurers must eventually divide their businesses.

 

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Allianz cuts jobs, structured finance at Dresdner

(Reuters) - Europe's biggest insurer, Allianz , is axing hundreds of jobs at its Dresdner Kleinwort investment bank and slashing its complex structured finance business, after suffering big fourth-quarter writedowns.

Allianz confirmed on Thursday it made a record net profit of nearly 8 billion euros ($11.79 billion) in 2007, despite the writedowns that pushed Dresdner into the red and halved the insurer's profit in the final three months of the year.

Allianz finance head Helmut Perlet said the market situation at the end of last month pointed to possible further writedowns of 300-400 million euros at Dresdner for the first quarter after about 1.5 billion euros of subprime writedowns in 2007.

Allianz unit Dresdner Bank, which in turn owns Dresdner Kleinwort, said it was shedding 450 jobs, most already axed, and cutting back on activity in structured investment vehicles (SIV) and other structured debt products, which spread the U.S. subprime loans crisis across the global banking system.

"Dresdner Bank will reduce its engagement in the SIV business, as the model of interest arbitrage faces a tough future," Allianz Chief Executive Michael Diekmann said.

Dresdner Bank said it would support its SIV, called K2, to ensure repayment of its senior debt, and had cut its size to $18.8 billion now from $31.2 billion in July.

Allianz said it was not clear whether, or to what extent, it might have to take K2 onto Dresdner's books, but it did not believe that supporting K2 would have a big impact on the group.

 

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Dresdner Rescues $19 Billion SIV, Follows Citigroup

 (Bloomberg) -- Dresdner Bank AG, Germany's third- largest bank, agreed to rescue its $18.8 billion structured investment vehicle, joining Citigroup Inc. and HSBC Holdings Plc in bailing out funds crippled by the collapse of the subprime mortgage market.

Dresdner, a unit of Munich-based Allianz SE, will provide a credit line to enable the K2 fund to repay all of its senior debt, spokesman Ulrich Porwollik in Frankfurt said in a telephone interview. Dresdner will cut the size of the fund, which has been reduced from $31.2 billion since July, according to an e-mailed statement.

The bank is the last of the world's biggest financial institutions to put capital at risk salvaging a SIV from the seven-month freeze in credit markets. Banks including Citigroup, HSBC, Bank of Montreal and WestLB AG have disclosed plans to support their SIVs with $140 billion of assets.

``This is a potential threat to Dresdner Bank,'' said Thilo Mueller, managing director of MB Fund Advisory in Frankfurt. ``There is little liquidity for some of these assets and with comparative assets continuing to fall, you need to book further writedowns.''

SIVs, which use short-term borrowing to buy higher-yielding assets, have shrunk by $100 billion from $400 billion since August, according to Moody's Investors Service.

Exit Plan

``Allianz plans to exit K2 and the SIV business in general,'' Chief Financial Officer Helmut Perlet said today in an interview. ``The SIV business has no future.''

The fund, which Allianz expects will be wound down by year- end, is unlikely to cause a ``major negative hit'' if the assets are taken on to Dresdner's books because the company has the ``financial strength to sit out parts of the valuation declines,'' Perlet said.

Allianz's banking division, which is mostly Dresdner, wrote down more than 1.3 billion euros ($1.9 billion) on structured investment products, contributing to a 52 percent decline in fourth-quarter profit announced today. Europe's biggest insurer earned 665 million euros, missing the 729 million-euro median estimate of 12 analysts surveyed by Bloomberg.

Allianz, which has fallen 19 percent this year, rose 1.91 euros, or 1.61 percent, to 120.27 euros at 4:25 p.m. in Frankfurt trading.

No Subprime

K2, named after the world's second-highest mountain in the Himalayas, was started in 1999 by Paul Clarke and Alan Harley, who previously helped manage Europe's first SIVs at Citigroup.

The fund has no ``direct exposure'' to securities backed by subprime or midprime debt, the mortgages made to U.S. homeowners with poor or limited credit histories. K2 also doesn't contain collateralized debt obligations based on asset-backed notes, the statement said. CDOs are securities packaged from mortgage bonds and other assets.

One of the SIV's three portfolios has entered a ``restricted operating period,'' a rule designed to protect senior investors that prevents it making payments to lower- ranking bondholders. The credit line from Dresdner may enable K2 to end the restriction, K2 said in a separate statement today.

``Such an outcome, however, cannot be assured,'' the statement said. K2 didn't disclose the size of the portfolio.

SIV Defaults

The SIV bailouts avert the risk of forced sales of assets by the funds. Concern that fire sales by SIVs would further roil credit markets prompted U.S. Treasury Secretary Henry Paulson to begin talks on setting up an $80 billion rescue fund last year. Citigroup and JPMorgan Chase & Co. in New York and Charlotte, North Carolina-based Bank of America Corp. abandoned the so- called SuperSIV after banks began rescuing their own funds, led by London-based HSBC.

More than $20 billion of SIVs have defaulted after being forced to start winding down since August, including funds set up by New York-based Ceres Capital Partners LLC and Cheyne Capital Management (UK) LLP in London.

Whistlejacket Capital Ltd., set up by Standard Chartered Plc, may default today after the company's receiver, Deloitte & Touche LLP, froze debts last week. The London-based bank abandoned a rescue plan for SIV yesterday, prompting Moody's to downgrade Whistlejacket's senior debt rating by three steps to B2, five levels below investment grade.

``It's a positive signal that Dresdner is willing to step in and support its SIV, but the story is far from resolved as we saw with Standard Chartered's Whistlejacket SIV,'' said Henry Tabe, an analyst at Moody's in London. Moody's rates K2's senior debt at Aaa.

 

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Microsoft to Change Technology Practices in Bid to Appease EU

 (Bloomberg) -- Microsoft Corp., the world's biggest software maker, announced a series of changes in its technology and in how much information it gives developers about its products, in a bid to satisfy European regulators.

 

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Philadelphia Fed February Factory Index Falls to -24

(Bloomberg) -- Manufacturing in the Philadelphia region unexpectedly contracted the most since February 2001, the eve of the last recession, as measures of new orders and shipments reflected weakening demand.

The Federal Reserve Bank of Philadelphia's general economic index declined to a minus 24 from minus 20.9 in January, the bank said today. Readings less than zero signal contraction. The Philadelphia Fed's general economic index averaged 5.1 in 2007.

A two-year housing slump, exacerbated by tighter credit conditions, is spilling over to other industries, pushing the economy to the brink of recession. The Fed, after cutting interest rates at the fastest pace since 1990 last month, has said it is ready to move in a ``timely'' manner to avert a downturn.

``The Philadelphia Fed survey is sending clear signals that the U.S. economy is heading for a recession,'' said Lena Komileva, chief economist at Tullett Prebon in London, who forecast a minus 25 reading. ``The speed and magnitude of the recent decline in the series signals a very sharp deterioration.''

Economists had forecast the Philadelphia manufacturing index would rise to minus 10.0, according to the median of 54 estimates in a Bloomberg News survey. Projections ranged from 0 to minus 25.0.

New Orders

The Philadelphia Fed's measure of new orders rose to minus 10.9 from minus 15.2 the prior month, and a measure of shipments fell to minus 12.2 from minus 2.3 the prior month.

A gauge of unfilled orders dropped to minus 10.9 from minus 6.2, while the index of inventories declined to minus 13 from minus 11.7 the prior month.

The employment index gained to 2.5 from minus 1.5 a month earlier, the Philadelphia Fed said. An index of prices paid dropped to 46.6 from 49.8, while a gauge of prices received weakened to 24.3 from 32.

The report provides one of the month's earliest clues to the state of manufacturing nationwide. Similar data from the New York Fed released last week showed manufacturing contracted in the New York region in February for the first time in almost three years.

The Philadelphia Fed region, which comprises eastern Pennsylvania, southern New Jersey and Delaware, is more vulnerable to the auto slump and less exposed to financial services and trade than the New York region, economists said.

Nationwide Measure

Nationwide, manufacturing grew in January after contracting in December by the most in almost five years, according to a Feb. 1 survey from the Institute for Supply Management. The ISM survey on manufacturing in February is due out March 3.

The index measuring the manufacturing outlook for six months from now fell to minus 16.9 from 5.2, today's report showed.

The Fed's January rate cuts came as rising subprime defaults led to a global tightening of credit standards and declines in equity prices. Investors are betting on a half-point rate reduction, to 2.5 percent, at the March 18 Fed meeting.

The U.S. economy will probably grow at a 0.5 percent pace in the first quarter and a 1 percent rate in the following three months, according to the median forecast in a Bloomberg survey of economists taken the first week of February. Economists surveyed said a recession this year was an even bet.

 

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Ackman Proposes Bond Insurer Split, Policyholder Veto

(Bloomberg) -- Hedge fund manager William Ackman distributed a plan to restructure bond insurers that may prevent dividends from being paid to the parent companies and minimize losses for holders of asset-backed securities.

Ackman, the managing partner of Pershing Square Capital Management LP in New York, calls for a corporate structure in which dividends would flow to the so-called structured finance unit from the municipal insurer, according to his proposal, sent yesterday to regulators, lawmakers and banks.

Ackman, who is betting against MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, stands to benefit from his plan. He has short positions that would gain in value if the holding companies were to default on their debts.

The proposal ``offers the best prospect for protecting the most policyholders and ensuring a viable ongoing municipal bond insurance market,'' New York law firm Edwards Angell Palmer & Dodge LLP, which performed an analysis for Pershing, said in a memo included with the presentation. Copies were obtained by Bloomberg News and confirmed by Ackman.

Ackman's plan has two separate boards of directors, one for the municipal insurer and the other for the structured finance unit. Each board would include policyholders. The municipal insurer would pay dividends to its structured-finance parent only when the board was satisfied the unit could remain AAA rated. The structured finance insurer would send dividends to the holding company only after its board determined the money wasn't needed to cover claims.

 

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Credit Suisse Writedowns to Cut Profit by $1 Billion

(Bloomberg) -- Credit Suisse Group discovered pricing errors on bonds that will cut first-quarter profit by about $1 billion, prompting the biggest share decline in more than five years.

Switzerland's second-largest bank took $2.85 billion of writedowns on asset-backed securities after an internal review found ``mismarkings'' by a group of traders and credit markets worsened. The Zurich-based bank said in a statement today that it's assessing whether 2007 earnings were also affected.

The announcement comes two days after Qatar said it was buying shares in Credit Suisse and a week after the company reported net writedowns of 2 billion Swiss francs ($1.8 billion) for 2007, a fraction of those disclosed by bigger Swiss competitor UBS AG. Chief Executive Officer Brady Dougan said on Feb. 12 that he was ``more optimistic than many'' about prospects for a debt market recovery.

``I'm speechless,'' said Georg Kanders, an analyst at WestLB in Dusseldorf with a ``buy'' rating on Credit Suisse. ``To announce this just a week after reporting earnings is a major blow. This will again put the whole sector under pressure.''

Credit Suisse fell as much as 10 percent, and was down 4.40 francs, or 7.7 percent, to 52.35 francs by 1:15 p.m. in Swiss trading, cutting the company's market value to 60.8 billion francs. UBS AG, the biggest Swiss bank, dropped 0.8 percent.

`Loss of Confidence'

Credit-default swaps on Credit Suisse's subordinated debt rose to a record, according to Deutsche Bank AG. Credit-default swaps, used to speculate on a company's ability to repay debt, rise as perceptions of credit quality worsen.

Credit Suisse blamed the writedowns on ``significant adverse first quarter 2008 market developments'' and pricing errors ``by a small number of traders'' in the structured credit trading business. The company estimated that it remained profitable so far in the first quarter.

The announcement may raise questions about oversight at the bank less than a month after Societe Generale SA reported the worst trading loss in banking history following unauthorized bets by trader Jerome Kerviel.

``The big question mark is about the bank's control systems,'' said Stefan Raetzer, who helps manage about $28 billion at Allianz Global Investors in Frankfurt. ``The writedown isn't as much of a problem here as the loss of confidence.''

Credit Suisse spokesman Marc Dosch said a ``small number'' of traders had been suspended, declining to provide their names or location. The internal review will be finished before the publication of the annual report, scheduled for March 18, he said. The company will hold a conference call for reporters and analysts at 3 p.m. Zurich time today.

Dougan

The loss is the biggest setback for Dougan, 48, since he took over as CEO from Oswald Gruebel in May after heading the investment bank for three years. Gruebel returned the bank to stable earnings after a decade of management turnover, bungled acquisitions and the first criminal conviction of a bank in Japan. Credit Suisse's writedowns follow about $19 billion in debt and loan markdowns at UBS.

``It unfortunately just reinforces the reputation that the large Swiss banks have generated over the last year for financial ineptitude,'' Peter Thorne, a London-based analyst at Helvea Ltd., said in a note to clients. ``Whilst we had received some assurance that the Credit Suisse balance sheet is not as laden with problem securities as UBS, this disclosure just raises the prospect that they may be simply bad at knowing what problems they do have.''

 

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Banks "quietly" borrow $50 billion from Fed: report

(Reuters) - Banks in the United States have been quietly borrowing "massive amounts" from the U.S. Federal Reserve in recent weeks, using a new measure the Fed introduced two months ago to help ease the credit crunch, according to a report on the web site of The Financial Times.

The newspaper said the use of the Fed's Term Auction Facility (TAF), which allows banks to borrow at relatively attractive rates against a wide range of their assets, saw borrowing of nearly $50 billion of one-month funds from the Fed by mid-February.

 

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Medtronic quarterly net falls

(Reuters) - Medical device maker Medtronic Inc (MDT.N: Quote, Profile, Research) on Tuesday said quarterly earnings fell on charges related to the acquisition of Kyphon.

 

Fiscal third-quarter net earnings were $77 million, or 7 cents a share, compared with $710 million, or 61 cents a share, a year earlier.

 

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Home movie DVD battle won, hard sell begins

(Reuters) - Consumers will be the winners, through better quality home movies and lower prices, when Toshiba Corp finally calls time on its DVD technology, ending a long-running battle to set the format for next-generation discs.

Viewers seeking sharper movies on high-definition DVDs will no longer have to choose between rival incompatible formats. A single format should help accelerate the shift to the new technology in the $24 billion home DVD market.

But, while they will get better audio quality and higher resolution pictures -- and they will likely wait for DVD player prices to halve -- consumers will probably have to upgrade their television sets to make the most of them.

Sony Corp's Blu-ray technology is close to winning the format war for home movie DVDs after a source at Toshiba said it was planning to exit its HD DVD business after Hollywood studios and big retailers such as Wal-Mart Stores Inc backed Blu-ray.

"This has been a long overdue end to the format war that has frustrated and confused consumers, and will allow vendors to focus resources on the Blu-ray technology," said Claudio Checchia, an analyst with research firm IDC.

"I would expect a more aggressive push towards Blu-ray in the second half, resulting in more movie content, more stand-alone DVD players, and prices for these players falling to attractive levels by Christmas."

Checchia said the cheapest Blu-ray player on the market was Sony's PlayStation 3 video game console, costing about $400.

 

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Euro zone growth may be weaker than hoped: Noyer

(Reuters) - European Central Bank (ECB) Governing Council member Christian Noyer said in an interview released on Sunday euro zone growth might be weaker than hoped as a result of market turmoil but he saw no "big setback."

In an interview with the Financial Times newspaper, Noyer said French banks' exposure to the U.S. subprime market was lower than others' and the European Union economy should resist financial turmoil better than that of the United States.

"Growth may be weaker than we hoped but I don't see a big setback," Noyer said when asked about the impact of the subprime crisis on the European economy.

ECB President Jean-Claude Trichet warned after the last rate meeting on February 7 that the euro zone economy might grow slower than potential in 2008.

In December ECB economists forecast 2008 growth of around 2 percent, but a number of ECB policymakers have suggested this might need to be revised down when fresh projections are published in March.

"If we are a little bit below potential, but still close to the average we've had for a number of years... I don't think that makes (structural) reforms impossible," Noyer said in a transcript of the interview released ahead of publication in Monday's edition.

 

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Bond Insurer Split May Trigger Lawsuits, Analysts Say

(Bloomberg) -- Regulators' plans to break up bond insurers into ``good'' businesses covering municipal debt and ``bad'' businesses liable to subprime-related losses may trigger ``years of litigation,'' Bank of America Corp. analysts said.

New York Insurance Department Superintendent Eric Dinallo and New York Governor Eliot Spitzer said last week that insurers may need to be divided if they can't raise enough capital to compensate for losses on subprime-mortgage guarantees. FGIC Corp., the fourth-largest of the so-called monoline insurers, asked to be split on Feb. 15 after Moody's Investors Service cut the Stamford, Connecticut-based company's top Aaa ranking.

``Despite the regulatory interest in separating the exposures, the essential fact remains that all policy holders, whether municipal or structured finance, entered into contracts backed by the entire entity,'' analysts led by Jeffrey Rosenberg in New York wrote in a note to investors dated Feb. 15. A breakup is ``likely to lead to significant legal challenges holding up the resolution of the monoline issues for years.''

FGIC, owned by Blackstone Group LP and PMI Group Inc., insures about $314 billion of debt, including $220 billion in municipal bonds. The company said last week it applied for a license from New York state insurance regulators to create a standalone municipal company and separate the unit that guarantees subprime-mortgage bonds and related securities that led to rating downgrades.

New York-based Ambac Financial Group Inc., the second- largest bond insurer, may also seek a split, the Wall Street Journal reported today, citing a person familiar with the situation.

 

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New York Fed Manufacturing Index Dropped to -11.7 in February

(Bloomberg) -- Manufacturing in New York unexpectedly contracted this month for the first time in almost three years as new orders and shipments declined.

The Federal Reserve Bank of New York's general economic index fell to minus 11.7, the first negative reading since May 2005, from 9.0 in January, the bank said today. Readings below zero signal contraction. The New York Fed's index averaged 17.2 in 2007.

The worst housing slump in a quarter century and cutbacks at U.S. automakers are weakening manufacturing and helping to push the broader economy toward a recession. Fed Chairman Ben S. Bernanke yesterday told lawmakers that the central bank will act in a ``timely'' manner to help growth, after already cutting the benchmark interest rate 2.25 percentage points since September.

``Prospects for manufacturing are shaky,'' Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, Pennsylvania, said before the report.``We are relying on strong exports but I'm not convinced that will hold up indefinitely. We expect to see capital spending softening.''

Economists forecast the New York manufacturing index would fall to 6.5 in February, according to the median of 49 estimates in a Bloomberg News survey. Projections ranged from minus 1.2 to 11.6.

The New York Fed's measure of new orders fell to minus 11.9 from 0.0 the prior month, and a measure of shipments dropped to minus 4.9 from 15.8 in January.

Inventory Gauge

A gauge of unfilled orders decreased to minus 1.1 from 1.2, while the index of inventories was unchanged in February after a minus 4.9 reading the month before.

The employment index fell to minus 2.1 from a positive 2.4 a month earlier, the New York Fed said. An index of prices paid rose to 47.4 from 40.2, while a gauge of prices received fell to 17.9 from 18.3.

The report provides one of the month's earliest clues to the state of manufacturing nationwide. Similar data for the Philadelphia region will be released Feb. 21. New York's economy is less vulnerable to the auto slump and more exposed to financial services and trade, economists said.

The index measuring the manufacturing outlook for six months from now rose to 22.7 from 19.4, today's report showed.

 

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U.S. December Trade Gap Narrows More Than Forecast

(Bloomberg) -- The U.S. trade deficit narrowed more than forecast in December as exports reached record levels and Americans spent less on imported autos and goods from China.

The gap between imports and exports shrank 6.9 percent, the biggest decrease in more than a year, to $58.8 billion from $63.1 billion in November, the Commerce Department said today in Washington. The deficit for all of 2007 decreased for the first time in six years.

A weaker dollar and expansion of emerging economies are feeding overseas sales for U.S.-made goods and may forestall a deeper slump at U.S. manufacturers. The narrowing deficit is one of the few remaining bright spots for the economy and will probably lead the government to increase its estimate of fourth- quarter gross domestic product later this month.

``The trade balance is going to continue to be a support for the economy,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``The drop in imports is probably consistent with the view the domestic economy is turning quite soft.''

Economists had forecast the gap would narrow to $61.5 billion, according to the median of 76 projections in a Bloomberg News survey. Estimates of the deficit ranged from $57 billion to $66.5 billion.

The dollar, which had fallen against the euro earlier today, stayed lower after the report. It traded at $1.4609 per euro at 8:37 a.m. in New York, from $1.4573 late yesterday. The U.S. currency was little changed versus the yen, at 108.30 yen per dollar.

2007 Deficit Shrinks

For all of last year, the deficit shrank 6.2 percent to $711.6 billion, the biggest decrease since 1991. Last year was the first time the trade gap narrowed since 2001.

Exports rose 1.5 percent to $144.3 billion in December, setting a record for a 10th straight month and reflecting more demand for U.S. made capital equipment and industrial supplies. For the year, exports rose 12 percent to a record $1.622 trillion.

Imports in December declined 1.1 percent to $203.1 billion, reflecting lower demand for foreign-made autos, consumer goods, food and capital equipment.

Also contributing to the drop in imports was a 14 percent decline in purchases from China, which helped shrink the month's trade gap with the Asian nation 22 percent to $18.8 billion. Petroleum imports rose 4.2 percent to a record $36 billion as the average price rose to $82.76 a barrel, also the highest monthly average ever. Prices increased in late December and early January and may push up the value of imports for the January report. They have since declined.

Fourth-Quarter Growth

Today's report may cause the Commerce Department to revise its estimate of fourth-quarter economic growth higher. The government projected last month that the trade gap narrowed to a $521 billion annual pace in the last three months of 2007. For all of last year, trade contributed 0.55 percentage point to growth, the most since 1991.

The government will release a revised estimate of the expansion for the last three months of 2007 on Feb. 28.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are scheduled to testify to the Senate Banking Committee later today on the state of the U.S. expansion. Central bank policy makers have forecast the economy will avoid a recession.

``The Fed's policy actions should help to promote a pickup in growth over time,'' Fed Bank of San Francisco President Janet Yellen said in a speech on Feb. 12. ``I consider it most probable that the U.S. economy will experience slow growth, and not outright recession, in coming quarters.''

Fed's Rate Cuts

The Fed's Open Market Committee is scheduled to next vote on interest-rate policy on March 18. Policy makers lowered the benchmark rate by three-quarters of a percentage point in an emergency decision announced Jan. 22 and followed that with a half-point cut at the scheduled Jan. 29-30 meeting.

After eliminating the influence of prices, the trade deficit decreased to $49.3 billion from $53.6 billion. This is the figure the government uses in calculating GDP.

For the year, the trade deficit with China, the second- largest U.S. trading partner after Canada, increased 10 percent to a record $256.3 billion.

The gap with China is a political sticking point for the U.S. and other countries.

Group of Seven policy makers, meeting in Tokyo last weekend, said China should do more to defuse global trade tensions by allowing the yuan to climb against the dollar and other currencies. The G-7 also forecast the U.S. economy may slow further, eroding global growth.

 

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MBIA Says It Can Weather Slump, Doesn't Need Bailout

(Bloomberg) -- MBIA Inc., the world's biggest bond insurer, said it is equipped to survive the slump in prices of mortgage securities and dismissed suggestions that the industry needs a rescue or stronger federal oversight.

``A bailout of highly credit-worthy companies who, at most, are at risk of losing the very highest ratings available, is misplaced,'' MBIA Chief Financial Officer Charles Chaplin said in prepared remarks to be delivered today at a hearing of the House Financial Services subcommittee on capital markets in Washington.

Chaplin and Ambac Financial Group Inc. Chief Executive Officer Michael Callen will make their presentations on Capitol Hill as they try to fend off credit rating downgrades and critics who say the companies may be headed for bankruptcy. One of the most vocal skeptics, hedge fund manager William Ackman, will also deliver remarks today alongside the MBIA and Ambac executives.

MBIA, based in Armonk, New York, and Ambac are among five companies struggling to maintain their top bond insurance credit ratings after a slump in the value of mortgage-linked securities the companies guaranteed. Standard & Poor's, Moody's Investors Service and Fitch Ratings are reviewing MBIA's top rating for a possible downgrade. Fitch already cut its AAA ratings on New York-based Ambac's insurance unit to AA. Ambac is also being scrutinized by Moody's and S&P.

``MBIA is more than adequately capitalized to meet obligations to policyholders,'' Chaplin, 51, said in his testimony.

Rescue Plans

Ambac said in a statement last night that Callen will tell the committee the company's main challenge is to achieve ``ratings stability.''

MBIA rose 61 cents to $12.25 at 9:38 a.m. in New York Stock Exchange composite trading. Ambac climbed 19 cents to $9.56.

MBIA and Ambac tumbled more than 80 percent in the past year in New York trading as they posted record losses of more than $5 billion and concern grew the companies may not get enough capital to sustain their ratings, casting doubt on $2.4 trillion of municipal and structured finance debt.

New York Insurance Department Superintendent Eric Dinallo last month organized banks to begin plans for a rescue of the insurers and said he may consider strengthening his oversight. Dinallo will also appear before the committee today, as will New York Governor Eliot Spitzer, U.S. Securities and Exchange Commission director Erik Sirri and Keith M. Buckley, a group managing director at Fitch.

Buffett's Offer

Dinallo will tell lawmakers he will consider splitting the bond insurers into two businesses, according to prepared testimony. ``One would have the municipal bond policies and any other healthy parts of the business,'' Dinallo said. ``The other would have the structured finance and problem parts of the business.''

Billionaire investor Warren Buffett yesterday offered to take over $800 billion of the municipal debt guaranteed by MBIA, Ambac and FGIC Corp., the fourth-largest bond insurer. Ambac yesterday said it rejected the offer. Two other insurers haven't responded, Buffett told CNBC television this week.

Spitzer told CNBC today that while Buffett's proposal would benefit municipalities, it wouldn't help the ``bad bank'' piece of the bond insurers' business. ``We don't want to create that schism yet if it can be avoided,'' Spitzer said.

 

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NY AG probes health insurers over reimbursement

(Reuters) - New York Attorney General Andrew Cuomo said on Wednesday he is conducting an industry- wide probe of health insurers into an alleged scheme to defraud consumers by manipulating reimbursement rates.

At the center of the scheme is Ingenix, the nation's provider of health care billing information, which serves as a conduit for rate data to the largest insurers in the country, Cuomo said in a statement.

Cuomo intends to sue Ingenix, its parent, UnitedHealth Group Inc, and three additional subsidiaries.

 

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Paulson sees slower economy, to rush tax rebates

(Reuters) - Treasury Secretary Henry Paulson on Wednesday stood by his view that the economy will avoid recession this year and grow at a slower pace, and that the Treasury will act quickly to distribute tax rebate payments.

"The U.S. economy is diverse and resilient, and our long-term fundamentals are healthy. I believe our economy will continue to grow, although at a slower pace than we have seen in recent years," Paulson said in prepared testimony to the U.S. House of Representatives Budget Committee.

President George W. Bush on Wednesday is expected to sign into law a $152 billion fiscal stimulus package that will provide tax rebates to some 130 million Americans, with most about $600 for an individual and $1,200 for a couple.

Paulson said the Internal Revenue Service would simultaneously manage the spring tax filing season and preparations for issuing the rebate payments starting in early May.

"Payments will be largely completed this summer, putting cash in the hands of millions of Americans at a time when our economy is experiencing slower growth," he said. "Together, the payments to individuals and the incentives for businesses will help create more than half a million jobs by the end of this year."

Paulson also called on Congress to aid the housing sector by passing legislation that will modernize the Federal Housing Administration and create a new, stronger regulator for Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises.

Under the stimulus plan, Fannie and Freddie will be temporarily allowed to invest in larger mortgages, providing more resources for refinancing troubled mortgages in costly coastal housing markets.

 

Read more more at Reuters

Cuomo to Sue UnitedHealth, Probe Reimbursement Policy

(Bloomberg) -- New York Attorney General Andrew Cuomo said he plans to sue UnitedHealth Group Inc. and will issue 16 subpoenas in an industrywide probe of how U.S. insurers compute ``reasonable and customary'' rates to limit payouts.

Cuomo said he plans to sue Minnetonka, Minnesota-based UnitedHealth, the largest U.S. health insurer, over deceptive practices in the reimbursement policy it links to such charges, which he claims seriously shortchange patients and involve a conflict of interest.

``When insurers like United create convoluted and dishonest systems for determining the rate of reimbursement, real people get stuck with excessive bills and are less likely to seek the care they need,'' Cuomo said in a statement today.

Cuomo said he will subpoena UnitedHealth, Aetna Inc., Cigna Corp. and Empire Blue Cross & Blue Shield over their reimbursement practices.

UnitedHealth's Ingenix unit provides data that sets ``reasonable and customary'' rates, which put a ceiling on reimbursement to patients, Cuomo said. When patients go out of network, health insurance companies generally cover only 80 percent of `reasonable and customary' charges.

Cuomo said a six-month investigation showed Ingenix has a ``defective and manipulated'' database that most health insurance companies use to set reimbursement rates for out-of-network expenses. The probe found that two subsidiaries of United ``dramatically under-reimbursed'' patients for out-of-network expenses using information from Ingenix.

United Falls

UnitedHealth fell $2.28, or 4.7 percent, to $45.99 at 12:02 p.m. in New York Stock Exchange composite trading.

``This is obviously going to be a negative for the company,'' said Sheryl Skolnick, an analyst with CRT Capital Group in Stamford, Connecticut, in a telephone interview. ``These things typically take a long time to work their way through. It does make it more difficult for United to argue that they have fixed their challenges.''

UnitedHealth Group Inc., WellPoint Inc., Aetna Inc. and other health insurers fell in New York trading this morning in anticipation of Cuomo's announcement.

Don Nathan, a spokesman for UnitedHealth, had no comment before the announcement.

Ingenix, with $1.3 billion in revenue last year, markets services to detect health-care fraud, identify preferred doctors and hospitals for insurers and help drugmakers run trials of new medicines. The company has said it has contracts with 1,500 health insurers, including rival Aetna Inc., as well as 200,000 doctors, 3,500 hospitals, 140 drug companies and government agencies.

 

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Rand regroups, gains nearly 1%

(Fin24) - The rand currency strengthened nearly one percent against the dollar and bonds also firmed, regrouping after a sharp fall over the past two weeks, as emerging market sentiment improved and stocks recovered further.

The local currency was trading at R7.71 to the dollar at 17:44 GMT, 0.9% stronger than its previous close in New York, after see-sawing between R7.6775 and R7.82 during the session.

Government bonds tracked the rand's move in relatively light trade, pulling back some of their sizable losses sparked by investor concern over an expected easing in economic growth.

Dealers said trade was largely flow-driven with dollar buying out of London early in the day paring gains before it drifted back on higher stocks and broader emerging market gains as those flows waned.

"Emerging markets are stronger, the dollar is weaker against the euro and local stocks are up on the Dow (Jones index) and we are just picking up that on the currency," ABN AMRO trader Paul Peter said.

"The slight correction today is on the back of the euro, the
JSE."
 

 

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Platinum sets lifetime high

(Fin24) - Platinum hit a record high for the ninth straight trading day on Tuesday as concerns deepened over output losses in top producer South Africa due to a power crisis, analysts said.

Gold fell as much as 1% as the dollar gained ground versus the euro after Warren Buffett told CNBC television that he had offered to take over the liabilities of monoline bond insurers. But the metal later pared losses.

Platinum rose to a high of $1 965 an ounce before falling to $1 943/1 950 by 17:50, against $1 933/1 941 in New York late on Monday.

"You know that platinum demand is increasing on the back of emission controls and you know that supplies are going to be squeezed. So it just makes sense to be long in this market," said Johannesburg-based Walter De Wet, analyst at Standard Bank.

"There might be slight over-reaction as everybody is on the bandwagon because of the recent price rise, but there is also some realisation that things are going to get tighter. We believe that the bias is on the upside."

Platinum's rally, which has sent prices up 30% in just three weeks, gained pace after Anglo Platinum, the world's biggest producer, said on Monday the power problem alone would cut output by as much as 120 000 ounces in 2008. It had already cost 30 000 ounces in lost output this year.

Northam Platinum said on Tuesday its production fell 16.5% to 150 755 ounces the July-December period of 2007 from a year earlier and saw its output at the same level in the next six months, provided mines got 90% power.

The market nervously awaits financial results of Impala Platinum, the world's second-biggest producer of the metal, on Thursday for more cues on total production losses.

"It's a chronic problem. It has been a deficit market for many years and it looks like it has returned to a significant deficit market again," said David Holmes, director of metals sales at Dresdner Kleinwort Investment Bank.

Mines across South Africa, which accounts for four-fifths of the world's supply of the metal, ground to a halt for five days at the height of the power crisis last month. Platinum is used in jewellery and auto catalysts to clean exhaust fumes.

Negotiations were under way for South African state-owned power utility Eskom to buy surplus electricity from local producers as part of its bid to solve the nation's energy crisis, Public Enterprises Minister Alec Erwin said on Monday.

A spokesperson at Eskom said the company was in discussions with the government to ensure sufficient funding to meet its expansion programme.
 

 

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TPG Seeks More Than $15 Billion for Buyout Fund, Investors Say

(Bloomberg) -- TPG Inc., the private-equity firm that last year bought TXU Corp. in the largest U.S. leveraged buyout, is seeking more than $15 billion for a new fund, according to potential investors.

The investment committee of Washington state's pension fund, which met with TPG co-founder David Bonderman Feb. 7, will recommend a $750 million commitment, said Liz Mendizabal, a spokeswoman in Olympia. Bonderman is set to discuss the fund, called TPG VI, with the Oregon Investment Council Feb. 27.

TPG, based in Fort Worth, Texas, is putting together the fund even as deal-making is stalled after a doubling of financing costs in the second half of 2007. Endowments and pension funds, seeking returns that top stocks and bonds, are increasing their investments with private-equity firms, whose assets may reach $5 trillion by 2012, according to research firm Private Equity Intelligence Ltd. in London.

``The public markets are down or soft and there's no other game,'' said Lyons Brewer, a managing director of C.P. Eaton Partners LLC, a Rowayton, Connecticut-based firm that helps buyout firms and hedge funds raise money.

Funds raised a record $502 billion last year, according to Private Equity Intelligence, including $21.7 billion by New York-based Blackstone Group LP, the industry's biggest pool.

TPG Partners IV, the $5.3 billion fund the firm started in 2003, has since returned an average of almost 36 percent a year to investors, according to data on the Web site of the California Public Employees' Retirement System.

 

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AIG Credit-Default Swap Losses Won't Be `Material'

(Bloomberg) -- American International Group Inc., the world's largest insurer by assets, said ``over time'' it may recoup losses in assets that declined by $4.88 billion in value in October and November.

Any losses by the unit that issues so-called credit-default swaps won't be material to AIG, the firm said today in a statement. AIG rebounded in New York trading after falling the most in two decades yesterday on disclosure that writedowns from the contracts, sold to protect fixed-income investors, were four times bigger than a previous estimate.

Chief Executive Officer Martin Sullivan, who manages units that originate, insure and invest in subprime mortgages or securities, assured investors in December that writedowns tied to the U.S. housing market were ``manageable.'' The company, based in New York, has said it doesn't expect to sell mortgage- related investments at a loss when markets are weak.

While AIG ``may have illustrated questionable judgment'' in its accounting lapse, it ``does not necessarily increase the probability of real economic impairment'' on assets held to maturity, said Mark Lane, analyst at William Blair & Co. in Chicago, today in a research note. He rates the company ``outperform.''

AIG advanced $1.45, or 3.2 percent, to $46.19 at 12:48 p.m. in New York Stock Exchange composite trading. The company has lost about 33 percent in the past 12 months, trailing the 5.7 percent decline of the Standard & Poor's 500 Index.

`Solid Upside'

``For patient investors willing to ride out near-term volatility, we see solid upside in the stock,'' said Morgan Stanley analyst Nigel Dally in a note to investors today. He rates the company ``overweight.''

The insurer's financial products unit issues contracts that promise to reimburse investors for losses tied to $505.5 billion of securities as of Nov. 25, including corporate debt, European mortgages and collateralized debt obligations, which bundle together loans.

AIG's independent auditor PricewaterhouseCoopers LLP found a ``material weakness'' in the company's accounting for the contracts, AIG said yesterday, and the insurer didn't know what they were worth at the end of 2007.

 

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Platinum leaps over $1 900

(Fin24) - Platinum cleared the $1 900 an
ounce mark on Monday for the first time in its history as concerns of further supply disruptions due to power shortages continued to plague the market.

The precious white metal gained $27 to trade at $1 917.50 an ounce by 13:45 after hitting $1 890 in late after-market trade on Friday.

Additionally, Eskom's prediction that power supply problems were likely to continue for several weeks made "further gains seem inevitable with the metal potentially testing $2 000/oz in the not too distant future," said James Moore of TheBullionDesk.

South Africa's ongoing electricity concerns have already seen several precious metals producers warn that their output would drop in 2008, as Eskom restricted mines operating in the country to a power supply that equated to 90% of their average requirements.

 

Read moe at Fin24

BNP Paribas not planning SocGen bid: source

(Reuters) - French bank BNP Paribas (BNPP.PA: Quote, Profile, Research) is not preparing a hostile takeover bid for embattled rival Societe Generale (SOGN.PA: Quote, Profile, Research) but could be interested in a friendly deal, a source familiar with the bank's thinking said on Monday.

 

A French financial newsletter report on Monday that BNP was preparing a 93-euros-a-share offer for SocGen was "total rubbish", the source said.

 

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Random House to sell books by the chapter online: report

(Reuters) - Random House Publishing Group, the world's largest book publisher, is planning to test selling individual chapters of a popular book to gauge reader demand, according to a report in the Wall Street Journal.

 

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Auto Insurers Boost Premiums on Injury, Crash Costs

(Bloomberg) -- Allstate Corp. and Progressive Corp. are leading the push by U.S. auto insurers to raise premiums in at least 20 states as the $160 billion industry moves to end two years of price reductions.

Insurers say they need higher prices to counter climbing repair and medical costs. Allstate, ranked second by premiums, said collision bills rose 2.2 percent in the fourth quarter from a year earlier and payouts for injuries gained 9.3 percent. Safeco Corp., which gets almost half its total premiums from drivers, reported a $19 million loss on auto underwriting.

The rate adjustment may reverse the 20 percent drop in the market values of Allstate and Progressive during the past 12 months, said Bear Stearns Cos. analyst David Small. Earnings should improve this year because insurers have become better at predicting driving records and then setting prices, he said.

``There's a lag before rate increases show up on the income statement,'' said Small, who works in New York. ``But it's real, it's happening, and you'll see it in earnings by the end of the year.''

The largest car insurers include No. 1 State Farm Mutual Automobile Insurance Co., which isn't publicly traded, and Berkshire Hathaway Inc.'s fourth-ranked Geico Corp. Bear Stearns's Small rates Northbrook, Illinois-based Allstate ``outperform'' with a target of $69 a share, and has a ``peer perform'' rating on Mayfield Village, Ohio-based Progressive.

Allstate fell $1.10, or 2.3 percent, to $46.57 at 4 p.m. in New York Stock Exchange trading and Progressive fell 16 cents, or 0.9 percent, to $18.49.

Warren Buffett

``Auto insurance has been surprisingly good for quite awhile. That's turning now,'' said Warren Buffett, the billionaire chairman of Berkshire Hathaway, at an appearance in Toronto this week. ``Frequency of accidents just kept going down for three or four years, which was just amazing, and the severity was not particularly bad. Now both are picking up somewhat.''

Rising prices for new vehicles and expenses for labor and replacement parts contributed to a 45 percent increase in car repair costs during the past decade, according to information compiled by the Highway Loss Data Institute in Arlington, Virginia.

Collision costs rose 2.4 percent in the third quarter from a year earlier, according to data compiled by the Property Casualty Insurers Association of America in Des Plaines, Illinois. The cost of auto-body work was up 3.3 percent in 2007, the U.S. Department of Labor reported.

 

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Credit Suisse Topples UBS, Dodges `Subprime Bullet'

(Bloomberg) -- Credit Suisse Group is earning more than UBS AG for the first time in almost a decade after Chief Executive Officer Brady Dougan avoided the writedowns that forced his rival to report the biggest-ever quarterly loss by a bank.

Credit Suisse may report tomorrow that net income fell 69 percent in the fourth quarter to 1.43 billion Swiss francs ($1.29 billion), according to the median estimate of 11 analysts surveyed by Bloomberg. UBS, which marked down $14 billion on securities infected by U.S. subprime mortgages, gives details of its 12.5 billion-franc quarterly loss on Feb. 14.

Dougan, a former derivatives trader who became Credit Suisse's CEO in May after making investment banking the company's most profitable unit, scaled back debt holdings before the slump led to more than $145 billion in writedowns and loan losses at the world's biggest banks. By contrast, Marcel Rohner was named UBS's CEO in July after three quarters of declining earnings, the collapse of a hedge fund and the ouster of his predecessor.

``Credit Suisse is clearly the better positioned of the two,'' said Florian Esterer, who helps oversee $56 billion at Swisscanto Asset Management in Zurich, where both companies are based. ``There are still some tough times ahead for UBS.''

UBS, the world's biggest wealth manager, said Jan. 30 it had a net loss of 4.4 billion francs in 2007, the first time it earned less than Credit Suisse since being created in a merger in 1998. Credit Suisse, which posted losses in 2001 and 2002, had an 8.65 billion-franc profit last year, analysts estimate.

Wall Street Losses

Credit Suisse earned about 1 billion francs in the fourth quarter and 8.2 billion francs in 2007, Sonntag newspaper said Feb. 10, citing an unidentified ``reliable source.'' Credit Suisse spokesman Marc Dosch declined to comment on the report.

Like New York-based Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley, which also reported record losses in Wall Street's worst ever quarter, UBS has turned to sovereign funds to shore up its finances. The Swiss bank will seek shareholders' approval on Feb. 27 to sell 13 billion francs in bonds that will convert to shares to investors in Singapore and the Middle East.

Credit Suisse fell 0.1 percent to 57 francs at 11:04 a.m. in Zurich trading, and UBS declined 1.7 percent to 40.3 francs. UBS has dropped 50 percent in the past year, making it the fourth-worst performer in the 60-member Bloomberg Europe Banks and Financial Services Index. Credit Suisse is down 36 percent.

UBS is rated ``sell'' by 11 of 41 analysts tracked by Bloomberg, a rating awarded by six of 37 analysts covering Credit Suisse.

`Dodged the Bullet'

``I think Credit Suisse will have dodged the subprime bullet,'' said Dieter Buchholz, who helps manage $107 billion at AIG Private Bank in Zurich, including Credit Suisse shares. Chairman Walter Kielholz has signaled the bank probably won't have large charges in the quarter.

Credit Suisse's results may be more similar to those of Frankfurt-based Deutsche Bank AG than UBS, Buchholz said. Germany's biggest bank said last week it avoided writedowns from the subprime market and reported a 44 million-euro ($64 million) markdown on leveraged loans.

Managers at Credit Suisse's SPS mortgage-servicing unit alerted the executive board more than a year ago to concerns about subprime assets. By the end of 2006, the company had originated about 40 percent fewer subprime mortgages than in 2005, according to Dougan.

``The hardest thing in all of these is not just seeing the issue but taking action,'' Dougan, 48, told business leaders in Zurich on Feb. 5. ``It's always very difficult to say no.''

 

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GM Proves Demise to No. 2 Premature on Topping Toyota Overseas

(Bloomberg) -- Investors doubting General Motors Corp.'s comeback after a third straight annual loss should count the 2,500 crates of partially built Chevrolets leaving South Korea every day for plants in Poland and China.

With about six of every 10 new GM vehicles now sold overseas as U.S. production shrinks, the Detroit-based company fended off Toyota Motor Corp. last year and preserved its 77- year reign as the world's biggest automaker. Rising output abroad and a cost-saving labor contract may push profit to $12.75 a share by 2010, said Burnham Securities Inc. analyst David Healy.

 

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U.S. Stock Futures Rise; Europe Little Changed, Asia Retreats

(Bloomberg) -- U.S. stock-index futures rose as higher metal prices lifted mining companies and technology shares advanced on speculation Yahoo! Inc. will seek a higher takeover bid from Microsoft Corp.

Stocks in Europe pared earlier declines and were little changed as GlaxoSmithKline Plc climbed following UBS AG's recommendation to buy the world's second-largest drugmaker. Asian shares fell, led by Kookmin Bank and Commonwealth Bank of Australia.

Barrick Gold Corp. and Newmont Mining Corp., the world's biggest gold producers, climbed as bullion advanced. Yahoo, the most-visited U.S. Web site, increased after a person familiar with the situation said the company's board will reject Microsoft's $31-a-share offer. Merrill Lynch & Co. rallied on a Citigroup Inc. analyst report that the third-largest securities firm may double annual earnings in coming years.

Standard & Poor's 500 Index futures expiring in March added 4.1, or 0.3 percent, to 1,334.4 at 8:34 a.m. in New York. Dow Jones Industrial Average futures increased 35 to 12,212. Nasdaq- 100 futures gained 12 to 1,788.5. Europe's Dow Jones Stoxx 600 Index rose 0.01 to 315.51 after falling as much as 1.1 percent. The MSCI Asia Pacific Index fell 1.59, or 1.1 percent, to 139.24.

``The market is slowly bottoming out,'' said Claudio Meiger, a fund manager at Basel, Switzerland-based Bank Cial Schweiz, where he helps oversee about $100 million. ``Long-term investors may start building positions now. The major technology stocks are rather cheap.''

Shares in the S&P 500 Information Technology Index trade at an average 21.9 times reported earnings, according to Bloomberg data. That's near a five-year low touched on Aug. 4, 2006.

Yahoo Bid

Yahoo advanced 17 cents to $29.37. The Internet company that has failed to crack Google Inc.'s dominance of Web search plans to reject a bid from Microsoft, said a person familiar with the situation who declined to be identified because the discussions aren't public.

Yahoo wants at least $40, the Wall Street Journal reported Feb. 9. Yahoo spokeswoman Diana Wong said the company doesn't comment on rumors or speculation. Microsoft spokesman Bill Cox declined to comment.

Barrick, Newmont

Barrick Gold added 48 cents to $50.58 in Germany. Newmont gained 8 cents to $51.37. Gold rose in London as interest-rate cuts feed through to higher commodity prices, increasing demand for precious metals as a hedge against inflation. Platinum advanced to a record, silver climbed to a 27-year high and palladium reached the highest since September 2001.

Merrill Lynch gained 66 cents to $52.85. Citigroup analysts said they expect John Thain will be a ``very hands-on'' chief executive officer. Thain took over in December for Stan O'Neal, who was ousted after delivering a $2.24 billion third-quarter loss. Merrill can double annual earnings to over $10 billion in the next ``few years,'' the analysts said.

Motorola Inc. added 18 cents to $11.44 in Germany after the Wall Street Journal said the biggest U.S. mobile-phone maker and Nortel Networks Corp. may combine their wireless infrastructure units in the latest response to sluggish growth in the telecom- equipment industry. Nortel spokesman Jay Barta declined to comment when contacted by Bloomberg News. An e-mailed message to Motorola representative Kelly Harder wasn't immediately returned. Nortel rose 10 cents to $11.17.

 

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Regulators should allow bond insurers to fail: Ackman

(Reuters) - Bill Ackman, whose hedge fund has been betting against bond insurers since at least 2002, said in a letter to U.S. regulators that rescuing the bond insurers will only prolong the credit crisis, and the companies should instead be allowed to fail.

In the letter obtained by Reuters, Ackman said bond insurers in recent years have become a means for banks to avoid reporting their full credit exposure and make their capital ratios appear stronger, but that banks should be forced to own up to their full credit risk.

"(W)e understand that the banking industry counterparties to the bond insurers would prefer to avoid taking these ... risks back on balance sheet -- particularly at a time when their balance sheets are strained by subprime and other losses that have not been hedged," Ackman wrote, adding that "there are no such free lunches available in the capital markets."

Bond insurers have in turn been critical of Ackman and other investors betting against the companies. On a recent conference call, MBIA Inc (MBI.N: Quote, Profile, Research) Chief Executive Gary Dunton railed against "the fear mongering and intentional distortions of facts about our business that have been pumped into the market by self-interested parties."

New York State Superintendent Eric Dinallo is working with banks to rescue bond insurers including Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) and FGIC Corp, which face billions of dollars of potential losses after guaranteeing bonds linked to risky subprime mortgages and other debt.

 

Read more at Reuters

Retailers struggle through dismal January

(Reuters) - Consumers held on to their cash and gift cards longer than usual and ignored widespread discounting in January, resulting in disappointing sales at many retailers, most notably industry leader Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research).

The world's largest retailer reported a 0.5 percent rise in January same-store sales, falling short of the 2 percent rise that analysts expected. Target Corp (TGT.N: Quote, Profile, Research), the No. 2 U.S. retailer posted a 1.1 percent drop in same-store sales, deeper than the 0.4 percent fall expected by Wall Street.

Wal-Mart said gift-card redemptions fell short of expectations, as consumers held on longer to their gift cards. Those who did, used gift cards for necessities like food and consumables, instead of higher margin discretionary items, the company said.

Reflecting the weakening economy and the tendency to trade down in tough times, warehouse retailers Costco Wholesale Corp (COST.O: Quote, Profile, Research) and BJ's Wholesale Club (BJ.N: Quote, Profile, Research) both reported better-than-expected January sales, boosted by the demand for gasoline. Costco also cited strength in its deli, candy, small appliance and automotive businesses.

January's sales data follow a disappointing holiday season for retailers and come amid mounting fears that the U.S. economy could be tipping into recession, as consumers faced with higher fuel and food costs and a crumbling housing markets cut back on spending.

"January has been no different," said Ken Perkins, president of research firm Retail Metrics in a note on Wednesday. "Given the difficult economic backdrop retailers/ consumers are facing, expectations have still been pared to lower levels despite starting out at very modest initial projections."

 

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Sales at U.S. Retailers Languish on Recession Concern

(Bloomberg) -- Sales at U.S. retailers languished in January as discounts failed to lure consumers concerned that a recession is coming. Macy's Inc. and Nordstrom Inc. reported declines, while sales at Wal-Mart Stores Inc. rose less than analysts estimated.

Sales at stores open at least a year gained 0.5 percent at Wal-Mart, the retailer said today, as winter storms hurt sales in the Midwest and fewer customers redeemed gift cards. Limited Brands Inc. and Target Corp. also reported declines larger than analysts predicted.

Department stores and mall-based shops slashed prices on clothing and bedding to attract customers following the slowest holiday season since 2002. Consumers refrained from spending as median home values probably fell for the first time since the Great Depression and employers cut back on hiring.

``You're seeing the continuing unfolding of the consumer spending slowdown,'' said Ken Perkins, president of Retail Metrics LLC, a Swampscott, Massachusetts-based research firm. ``Clearance sales were widespread, there were certainly enough incentives to draw the consumer in under normal economic circumstances, but consumers are hunkering down.''

Department stores have been hit hard by a decline in customer visits to malls and a lack of new products that excite consumers, Perkins said. Nordstrom's sales sank 6.6 percent. Analysts surveyed by Retail Metrics expected a 0.4 percent decline.

Macy's, the second-biggest U.S. department-store chain, said yesterday that January same-store sales dropped 7.1 percent, cut its fourth-quarter profit forecast and said it will eliminate 2,300 jobs. Kohl's, the fourth-largest U.S. department-store chain, said same-store sales fell 8.3 percent, worse than the estimate for a 7.9 percent drop.

Share Performance

Wal-Mart, the world's largest retailer, rose 7 cents to $48.90 at 9:41 a.m. in composite trading at the New York Stock Exchange. The Standard & Poor's 500 Retailing Index of 31 members rose 2.3 percent. It has slumped 5.1 percent this year before today compared with a 9.7 percent decline by the broader S&P 500.

January sales at U.S. retailers probably were unchanged, the International Council of Shopping Centers said on Feb. 5. That would be the first month without a gain since last April.

Last month will probably turn out to be the worst January performance on record, said Michael Niemira, the New York-based trade group's chief economist. The ICSC surveys almost 60 chains and will report figures later today.

Same-store sales are seen as a key gauge of a retailer's performance because they exclude locations that have recently opened or closed.

Limited Brands

Sales dropped 8 percent at Limited Brands, owner of the Victoria's Secret chain. The sales decrease exceeded the average analyst estimate for a decline of 7.1 percent. American Eagle Outfitters Inc. said yesterday that same-store sales fell 7 percent.

Wal-Mart had predicted a January same-store sales gain of 2 percent, the same as the average Retail Metrics estimate.

Target Corp., the second-largest U.S. discount chain, reported a 1.1 percent decline. It had said Jan. 21 it expected January sales to be ``near the low end'' of its forecast range of a 1 percent decrease to a 1 percent gain.

Other retailers performed better than analysts expected.

Children's Place Retail Stores Inc. reported a 6 percent same-store sales increase, ahead of the 3.6 percent estimated gain. AnnTaylor Stores Corp., a women's clothing retailer, said sales were unchanged from a year earlier, better than the estimated 3.7 percent decline. Chief Executive Officer Kay Krill said in the statement it was ``promotionally aggressive'' to clear inventory.

 

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BHP Falls After Raising Rio Offer to $147 Billion

(Bloomberg) -- BHP Billiton Ltd., the world's largest mining company, tumbled in London trading after raising its hostile bid for Rio Tinto Group to $147 billion and reporting the first drop in profit in more than five years.

BHP declined as much as 6.4 percent in London and fell the most in 20 years in Sydney after increasing its offer 13 percent to 3.4 shares for every one of Rio Tinto's. The Melbourne-based company reported today its fiscal first-half net income unexpectedly slipped 2.4 percent to $6 billion, citing higher production costs and lower prices for some metals.

Chief Executive Officer Marius Kloppers sweetened the bid five days after Aluminum Corp. of China, China's biggest aluminum company, bought a stake in Rio to block the takeover. The combination of BHP and Rio, the world's largest mining industry takeover, would cut operating costs in Western Australia and vie with Brazil's Cia. Vale do Rio Doce as the world's largest supplier of iron ore.

``BHP would not have been surprised by the emergence of the Chinese, but it has forced them to indicate they're serious about pursuing this deal,'' said Richard Dennis, a fund manager at Bournemouth, U.K.-based Wessex Asset Management, which has $490 million invested in natural-resource stocks. ``There will be another bid to come from BHP if they are to get final acceptance.''

BHP dropped as much as 102 pence to 1,495 pence, the biggest slide in more than two weeks, and was 4.6 percent lower at 1,523 pence as of 11:28 a.m. on the London Stock Exchange. Earlier it slumped 7.5 percent on the Australian Stock Exchange, the biggest decline since December 1987, amid a plunge in Asian stocks.

`Ratio Makes Sense'

Rio fell 14 pence, or 0.3 percent, to 5,420 pence in London. The shares traded at a premium of 2.7 percent over the value of the bid, based on BHP's current share price. Aluminum Corp. of China Ltd., or Chalco, Chinalco's publicly traded unit, declined as much as 12 percent in Hong Kong trading.

State-owned Chinalco and Alcoa Inc. paid 6,000 pence ($117.85) a share for a 9 percent stake in Rio last week. That equated to 4.1 BHP shares for every one of Rio's London shares compared with BHP's initial three-for-one offer.

``Rio should be having a discussion,'' Don Williams, who helps manage $1.3 billion at Platypus Asset Management, said by phone from Sydney today. He sold half of Platypus's Rio holding on Feb. 4 after the Chinalco and Alcoa transaction. ``This ratio makes sense.''

BHP's bid values Rio at 13.6 times earnings before interest and tax, compared with the 13.7 times that Rio paid for Alcan Inc. last year.

Moody's Investors Service may cut BHP's fifth-highest investment-grade ranking of A1 following the offer, the credit assessor said in a statement. Standard & Poor's today affirmed BHP's rating and said the outlook was ``negative.''

Debt Risk

The risk of BHP and Rio defaulting on their debt, as measured using credit-default swaps, increased to records. Contracts on the BHP bonds, which rise as perceptions of credit quality deteriorate, gained 17.5 basis points to a record 110 basis points at 5:18 p.m. in Sydney.

BHP's debt will increase almost seven times to about $85 billion should the takeover proceed, said Anita Yadav, head of credit and hybrid research at UBS AG in Sydney.

Credit-default swaps on Rio Tinto's debt increased 10 basis points to 110 basis points. The price means it costs $110,000 to protect $10 million of debt from default for five years.

BHP, which made an initial approach in November, had until today to formalize its offer or walk away for six months after a U.K. Takeover Panel ruling.

Possible Counter Bid

Chinalco may be preparing a counter bid, the London-based Times newspaper said, citing unidentified people. Lu Youqing, vice president of Chinalco, wouldn't comment on the newspaper report when contacted by telephone. Chinalco and Alcoa said in a statement today they will ``closely monitor further developments.''

``What BHP faces is not just a state-owned company, but a country,'' Geoffrey Cheng, a Hong Kong-based mining analyst with Daiwa Institute of Research (HK) Ltd., said by telephone. ``I don't think Chinalco will make a general offer for Rio Tinto as it may face many regulatory hurdles.''

China needs raw materials to feed an economy that grew 11.4 percent in 2007, the fastest in 13 years. The nation's biggest commodity companies, including Chalco, have said they're concerned the combination would concentrate supplies and may wield too much pricing power.

``This is our first and only offer,'' Kloppers said in the media teleconference. ``We absolutely want full control of this company,'' Kloppers, 45, said. He wouldn't say whether it would be the final offer, a declaration that would prohibit him from raising the bid.

 

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Goldman's Viniar Says `Fear Overwhelms Greed' in Credit Markets

(Bloomberg) -- U.S. credit markets are trading ``like we're in the middle of the worst recession we've seen in a very, very long time,'' Goldman Sachs Group Inc. Chief Financial Officer David Viniar said at an investor conference today.

``There is a lot of liquidity out there, but people are very hesitant to use it,'' Viniar said at the conference in Naples, Florida, sponsored by Credit Suisse Group. ``Within the credit markets, fear has overwhelmed greed.''

Goldman, the most profitable securities firm in Wall Street history, is down 12 percent in New York Stock Exchange trading this year on concern a weakening economy will damp revenue from investment banking, trading and fund management. The level of interest from investment-banking clients is ``very high,'' though the economy will determine whether deals get done, Viniar said.

Viniar, 52, also said he expects to see a plan devised that will help the monoline bond insurers, which are facing potential rating downgrades.

``It is likely that you will see some solutions to what's going on with the monolines,'' he said. ``You have a number of companies who are involved in a lot of different things, so I think it's going to be more complicated'' than the industry bailout of hedge fund Long-Term Capital Management LP in 1998.

 

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U.S. Productivity Increases 1.8%, More Than Forecast

(Bloomberg) -- Worker productivity in the U.S. grew more than forecast in the fourth quarter as companies cut employees' hours at the fastest pace in almost five years.

Productivity, a measure of employee efficiency, rose at an annual rate of 1.8 percent, after a 6 percent pace in the third quarter, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey was for a 0.5 percent gain. Labor costs rose less than forecast, the figures showed.

Businesses are trimming staff to control expenses as the economy hovers on the verge of the first recession since 2001. That may help keep consumer prices in check, giving Federal Reserve policy makers more leeway to lower interest rates, economists said.

``Productivity still looks fairly healthy and labor costs are tame,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``This gives the Fed more flexibility to respond to weakness in growth. It certainly looks like there is more easing to come.''

The median forecast for productivity was based on 71 estimates in a Bloomberg News survey. Projections ranged from a drop of 0.6 percent to a gain of 2.7 percent.

Treasury notes, which had fallen earlier in the day, stayed lower after the report. Ten-year yields advanced to 3.59 percent from 3.57 percent late yesterday.

Labor Costs

Unit labor costs, which are adjusted for gains in efficiency, rose 2.1 percent after dropping 1.9 percent in the prior three months. Economists in the Bloomberg survey had projected a 3.5 percent increase.

Hours worked dropped at a 1.5 percent pace, a second consecutive decline and the biggest since the first three months of 2003.

Compensation for each hour worked increased at an annual rate of 3.9 percent, compared with a 4 percent gain the prior quarter.

Productivity for all of 2007 rose 1.6 percent after increasing 1 percent the previous year. Labor costs rose 3.1 percent, the most since 2000.

Productivity at non-financial corporations, a measure watched by former Fed Chairman Alan Greenspan, rose at a 3.7 percent rate in the third quarter after rising 2.1 percent in the prior three months. The figures are released with a one- quarter lag.

Among manufacturers, productivity increased at a 2.5 percent pace last quarter, following a 4 percent gain.

Productivity gains may be harder to come by as the economy weakens because businesses are usually slow to reduce staff, economists said.

Slower Growth

Economic growth slowed to an annual rate of 0.6 percent in October through December, down from a 4.9 percent pace in the third quarter, according to government figures last week. A report from the Institute for Supply Management yesterday showed service industries unexpectedly contracted in January at the fastest pace since the 2001 recession.

Still, some businesses have already reacted to the demand slowdown. Companies added 1,000 workers to payrolls in January, while government agencies reduced staff. The economy lost 17,000 jobs overall, the first decline in more than four years. Hourly wages rose 0.2 percent last month, less than economists had forecast.

Labor expenses account for about two-thirds of the cost of producing a good or service.

 

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Wall St eyes bounce at open on media profits

(Reuters) - Stocks headed for a higher open on Wednesday as profits from Walt Disney Co (DIS.N: Quote, Profile, Research) and Time Warner Inc (TWX.N: Quote, Profile, Research) pointed to strength in earnings outside of the financial sector.

In economic news, U.S. productivity in the fourth quarter rose at a stronger-than-expected pace as the biggest cutback in working hours in nearly five years helped restrain growth in labor costs, the Labor Department said.

The market was poised to rise a day after recession fears sent Wall Street and markets in Europe tumbling, while overnight markets in Asia also slid.

"It's probably the natural inclination of markets to try to bounce after a bad day," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York. "There's no question that Disney helped and productivity numbers coming in better than expected didn't hurt either."

S&P 500 futures rose 4.7 points and were above fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures were up 20 points. Nasdaq 100 futures rose 6.5 points.

In deal news, global miner BHP Billiton Ltd/Plc (BHP.AX: Quote, Profile, Research) launched a hostile $147.4 billion bid for rival miner Rio Tinto Ltd/Plc (RIO.AX: Quote, Profile, Research) on Wednesday, ending months of speculation and setting the stage for the world's second-largest takeover.

 

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Wachovia accused of aiding telemarketing fraud

(Reuters) - Wachovia Corp (WB.N: Quote, Profile, Research), the fourth-largest U.S. bank, is fighting a lawsuit accusing it of letting fraudulent telemarketers use its accounts to bilk millions of dollars from consumers, court papers show.

Documents filed last month in the U.S. District Court in Philadelphia, also reported in the February 6 edition of The New York Times, detail accusations the bank and its lawyers knew about the fraud allegations for years.

The plaintiffs accused Wachovia of allowing some "payment processors" to create authorized, unsigned checks on behalf of telemarketers to withdraw funds from customer accounts between 2003 and 2006, court papers show.

They also accused Wachovia of trying to win or retain business from companies that it knew were accused of telemarketing fraud, despite being alerted by other banks about the deceptive activity, the papers show.

The original complaint was filed last April. Plaintiffs are seeking class-action status on behalf of at least 346,000 victims they say lost millions of dollars, the documents show.

Wachovia has sought to dismiss the complaint.

 

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BHP raises Rio bid; no immediate Chinese riposte

(Reuters) - BHP Billiton Ltd/Plc (BHP.AX: Quote, Profile, Research) launched a hostile $147.4 billion bid for rival miner Rio Tinto Ltd/Plc (RIO.AX: Quote, Profile, Research) on Wednesday, ending months of speculation and setting the stage for the world's second-largest takeover.

BHP hopes to sell Rio shareholders its idea of assembling a super miner, supplying the lion's share of the world's industries with millions of tonnes of minerals, but runs the risk of igniting a bidding war with Rio's largest shareholder, state-run aluminum group Aluminum Corp of China (Chinalco).

BHP (BLT.L: Quote, Profile, Research) sweetened its initial approach by 13 percent, offering 3.4 of its shares for every Rio (RIO.L: Quote, Profile, Research) share after a November proposal of three shares for one failed to persuade the Rio board to bless a friendly tie up.

"Rio Tinto shareholders will now decide," BHP Chief Executive Marius Kloppers told reporters. He added: "This is our first and only offer," though he later would not say if that meant it was the final one.

Some analysts doubted the sweetened bid would be enough to win Rio and create the world's third-richest company, ranked behind only Exxon Mobil (XOM.N: Quote, Profile, Research) and General Electric (GE.N: Quote, Profile, Research).

"It's a lot fairer than the offer we've had before, (but) it's by no means a knock-out offer," said Bertie Thomson, a fund manager at Aberdeen Asset Management (ADN.L: Quote, Profile, Research), who holds both Rio and BHP shares.

"Given our market conditions and the outlook, if you look at comparative mergers and acquisitions, it probably is not going to get there," said Ken West, a Perennial Growth Management partner.

 

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