State Street's Earnings Fall 28% on Legal Fund Costs

(Bloomberg) -- State Street Corp., the world's largest money manager for institutions, said fourth-quarter earnings fell 28 percent after setting aside $618 million to settle legal claims stemming from losses on subprime mortgages.

Net income declined to $223 million, or 57 cents a share, from $309 million, or 91 cents, a year earlier, the Boston-based company said today in a statement. State Street dropped 5.5 percent in New York composite trading after the company said 2008 growth will be at the lower end of its target ranges.

State Street faces at least three class-action lawsuits from investors claiming its funds made inappropriate bets on subprime-backed securities. It disclosed the legal reserve Jan. 3 and replaced William Hunt, its chief investment officer for the past three years. State Street's 2008 forecast follows a year in which the company exceeded analysts' estimates.

``People are trying to figure out just how much of the strength State Street showed in 2007 is truly sustainable,'' Thomas McCrohan, an analyst at Janney Montgomery Scott LLC in Philadelphia, said in an interview today.

State Street fell $4.03 to $80.83 at 9:38 a.m. in New York Stock Exchange composite trading after declining to as low as $80.20. Before today, the stock had risen 19 percent in the past year, compared with the 4.9 percent gain by the Standard & Poor's Supercomposite Asset Management and Custody Banks Index.

Excluding the legal reserve of $279 million after tax, or 71 cents a share, profit was $1.38 a share, beating the $1.35 average estimate of 15 analysts surveyed by Bloomberg. State Street's earnings for 2007 were $4.57 a share, outpacing the $4.55 estimate of the 15 analysts.

 

Read more at Bloomberg

Citigroup, Merrill Lynch Get $21 Billion From Outside Investors

(Bloomberg) -- Citigroup Inc. and Merrill Lynch & Co., two of America's largest financial institutions, turned to outside investors for a second time in two months to replenish capital eroded by subprime mortgage losses.

Citigroup, the biggest U.S. bank, is getting $14.5 billion from investors, including the governments of Singapore and Kuwait, former Chairman Sanford Weill, and Saudi Prince Alwaleed bin Talal, the New York-based company said today in a statement. Merrill, the largest brokerage, said it's receiving $6.6 billion from a group led by Tokyo-based Mizuho Financial Group Inc., the Kuwait Investment Authority and the Korean Investment Corp.

Wall Street banks have now received $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets. Citigroup was propped up in November by a $7.5 billion investment from the Abu Dhabi Investment Authority. New York-based Merrill was helped by a $5.6 billion cash infusion last month from Singapore's Temasek Holdings Pte. and U.S. fund manager Davis Selected Advisors LP.

``The only reason the banks are raising capital from the Middle East and Asia is because those are the only people who have the excess capital to lend,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management, which holds shares of Citigroup and Merrill.

Citigroup declined 68 cents to $28.38 and Merrill fell $1.25 to $54.72 in early New York trading.

The writedowns have reduced Citigroup's so-called Tier 1 capital ratio, which regulators monitor to assess a bank's ability to withstand loan losses. With today's capital increase, the Tier 1 ratio would be 8.2 percent, Citigroup said, keeping it above the company's 7.5 percent target.

`Capital at a Cost'

Morgan Stanley, UBS AG, Merrill Lynch & Co. and Bear Stearns Cos. also reached out to sovereign wealth funds or state- controlled investment authorities in Asia for money after bad investments depressed profits.

``It does show that investors aren't completely ignoring the sector,'' said Peter Plaut, a senior credit analyst at Sanno Point Capital Management, a hedge fund based in New York. ``They are putting in capital but it's at a cost. Now it's up to the CEOs to be able to generate returns that exceed that cost of capital.''

The Kuwait Investment Authority, which invested in both Merrill and Citigroup, was formed by the Middle East's fourth- biggest oil producing country in the 1980s to manage the nation's wealth. Kuwait may have as much as $250 billion of assets, compared with about $875 billion for the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, according to an estimate by Morgan Stanley analyst Stephen Jen.

Singapore, Alwaleed

The Government of Singapore Investment Corp. invested almost $7 billion in Citigroup convertible preferred securities and said in a statement today that it will own about 4 percent of the bank if the securities are turned into shares. With a 4 percent stake, Alwaleed has been Citigroup's biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of capital.

Singapore and Alwaleed, along with Los Angeles-based Capital Group Cos., the biggest U.S. manager of stock and bond mutual funds, Kuwait, the New Jersey Division of Investment and Weill, will receive a 7 percent annual dividend from the investment in Citigroup.

Merrill's convertible securities will pay a 9 percent annual dividend on the securities until they automatically turn into Merrill shares in 2 3/4 years' time. The group will get fewer shares if Merrill's stock price climbs above $61.31 and more if it drops below $52.40, according to the company's statement.

 

Read more at Bloomberg

Street Talk: How Far Will Bernanke Go?

(Businessweek) - What leading economists and market strategists are saying about the Fed's next moves

 

What will Ben Bernanke & Co. do next in the face of a weakening economy and volatile financial markets? Here's a roundup of Jan. 11 comments from Wall Street economists and market strategists on their Federal Reserve policy expectations, as compiled by Standard & Poor's and BusinessWeek editors:

Ben States His Case

David Wyss, chief economist, Standard & Poor's

[In his Jan. 10 speech] Bernanke's worries about inflation were cited with uncharacteristic clarity: "[I]nflation expectations appear to have remained reasonably well-anchored, and pressures on resource utilization have diminished a bit." However, to make sure we didn't think that the Fed was getting too complacent, he also said that, "the increase in oil prices…is also lifting overall consumer prices and probably putting upward pressure on core inflation."

But the speech stressed the risk to growth much more than inflation. "The baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become much more pronounced." The bottom line is that, "we stand ready to take substantive additional action as needed to support growth and provide adequate insurance against downside risks." Markets interpret this statement to mean that the Fed will start to cut rates more aggressively, beginning with a half-point cut in January. Another cut, perhaps another half-point, is likely at the March meeting and again in April. The federal funds rate seems likely to fall to 3% by midyear, rather than the 3.5% we had been assuming.

Read more at Businessweek

Diamond Core BRC merger okayed

(Fin24) - The proposed merger of Northern Cape diamond explorer Diamond Core Resources (DMR) and BRC Diamond
Corporation, a Canadian diamond exploration company, looks set to go ahead after Diamond Core secured shareholder approval for the transaction today.

The merger will create a company with a combined value of $200m, which will make it the fifth-largest diamond junior mining company in Africa.

Diamond Core said in a statement to the JSE that shareholders
representing 99.52% of the total number of votes voted in favour of the merger.

The proposed merger, which will be done by way of a court-sanctioned scheme of arrangement, was first announced in July last year.

 

Read more at Fin24

Canada lifts SA steel duties

(Fin24) - The Canadian International Trade Tribunal, an independent quasi-judicial body, has lifted anti-dumping duties
on hot-rolled steel plate from South Africa and Russia, saying they aren't likely to harm Canadian steel producers.

However, the tribunal ruled that anti-dumping duties would continue on hot-rolled steel plate from China.

It stated that the "dumping of hot-rolled steel plate from South Africa and Russia is unlikely to result in injury or
retardation."

"The Canada Border Services Agency will therefore no longer impose anti-dumping duties on these products," the tribunal added.

Dumping not on

Under international trade rules, dumping occurs when products are exported or sold in another country at prices below their cost in the producer's home market.

The Canadian press said the anti-dumping duties were imposed after Hamilton-based Stelco, backed by other Canadian steel producers, brought a complaint in 1997 against several countries comprising South Africa, Russia and China, Mexico and Poland.

Since then, all of Canada's major publicly traded steel producers - Stelco, Ipsco, Algoma and Dofasco - have been bought by foreign companies and taken private, although they continue to operate.

Hot-rolled carbon steel is used in making such things as rail cars, fuel storage tanks, construction machinery, agricultural equipment, bridges, industrial buildings, high-rise office towers, automobiles and truck parts and ships.

Read more at Fin24

Sarkozy slams oil prices

(Fin24) - French President Nicolas Sarkozy, on a visit to Saudi Arabia, has said that he is worried about the "brutality" of recent oil price increases which "are affecting growth and purchasing power."
 

Read more at Fin24

Regulators reviewing pre-M&A trades: report

(Reuters) - Securities regulators are reviewing whether investment banks' trades in shares of companies linked to M&A deals they were advising were based on coincidence or inside information, according to The Wall Street Journal on Monday.

Investment banks must keep their trading and merger advisory businesses separate, although one arm of a bank could buy shares in a company without knowing that another arm is advising on a deal involving that firm.

The report quoted Stephen Luparello, a top official at the Financial Industry Regulatory Authority (FINRA), as saying the issue was "definitely on our radar screen". FINRA is the largest non-governmental regulator of the U.S. securities industry.

Its interest stemmed from an academic study which found such trading happens more often than would be expected by chance, the report said.

The Wall Street Journal said it had reviewed stock ownership and deal records and found dozens of cases in which investment banks appeared to buy shares in companies that were targets of acquisitions by firms they were advising.

 

Read more at Reuters