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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