Business News: 2010 in Review: Dull, It Wasn't

Business News: 2010 in Review: Dull, It Wasn't

2010 in Review: Dull, It Wasn't

Posted: 16 Dec 2010 02:00 PM PST

Special Report: The Year in Review

Posted: 17 Dec 2010 05:16 AM PST

The Year in Six Words

Posted: 16 Dec 2010 12:37 PM PST

The Boom in Chinese B-Schools

Posted: 17 Dec 2010 05:16 AM PST

Special Report: MBAs in China

Posted: 17 Dec 2010 05:16 AM PST

Congress Passes $858 Billion Tax-Cut Plan

Posted: 17 Dec 2010 05:05 AM PST

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By Ryan J. Donmoyer and Peter Cohn

(Updates with Obama to sign bill later today in 2nd paragraph.)

Dec. 17 (Bloomberg) -- The U.S. Congress passed an $858 billion bill extending for two years all Bush-era tax cuts, sending the measure to President Barack Obama for his signature.

Obama will sign the measure into law later today, White House spokesman Robert Gibbs said in an e-mail. Gibbs didn’t cite a specific time for the bill-signing.

Before the House voted 277-148 for final passage on the tax-cut agreement, members defeated an amendment crafted by some Democrats to express their displeasure with the bill and especially with a Republican-backed estate-tax proposal.

Enough Democrats voted with House Republicans to accept the deal that Obama negotiated with congressional Republicans who gained scores of seats in last month’s election. Republicans said the bill would provide certainty about tax rates and would create jobs.

Failure to pass the bill would “cause grave economic harm and possibly send us back into a double-dip recession,” said Representative Eric Cantor, a Virginia Republican who will become majority whip in January.

The vote concluded a debate over the expiring tax cuts that dominated the 2008 and 2010 U.S. election campaigns. As the renewed tax cuts will expire at the end of 2012 they are certain to be a focus of the next presidential campaign.

Majorities of both parties supported the bill. Voting in favor were 139 Democrats and 138 Republicans, while 112 Democrats and 36 Republicans voted against it. Eight lawmakers didn’t vote.

‘Income Inequality’

“Wonderful,” said Representative David Obey, a Wisconsin Democrat who is retiring after 40 years, as he left the House floor for one of the last times in his career. “Just what we need: further exacerbate income inequality in this country.”

Treasury Secretary Timothy Geithner said in a statement that the tax plan was “good for growth, good for jobs.”

U.S. stock-index futures were little changed this morning, with the Standard & Poor’s 500 Index at its highest level since September 2008, up 46.2 percent since Obama took office and up 1.6 percent since the tax deal was struck on Dec. 7.

Many Democrats had insisted that the U.S. couldn’t afford to keep the 2001 and 2003 tax cuts for family income exceeding $250,000 a year. Republicans demanded extension of the tax cuts, which expire on Dec. 31, for all income levels.

Certainty for Business

The tax-cut plan extends through 2012 all Bush-era tax reductions on income, capital gains and dividends. It continues expanded unemployment insurance benefits through 2011, cuts payroll taxes by 2 percentage points during 2011 and lets businesses write off 100 percent of capital investments between Sept. 9, 2010, and Dec. 31, 2011. Obama agreed on the plan with Republicans on Dec. 6.

The legislation also extends dozens of expired and expiring tax breaks, including a research and development tax credit and a college tuition tax credit that was created in last year’s economic stimulus law.

Republicans said the measure would give businesses and individuals certainty that tax rates would not rise in January.

“This House -- the people’s House -- has a simple choice to make today: Raise taxes on families and small businesses or prevent a massive, job-killing tax increase from going into effect a mere 16 days from now,” said Representative Dave Camp of Michigan, who will become chairman of the tax-writing Ways and Means Committee next month.

House Democrats threatened last week to refuse to bring the Senate’s tax plan to the floor unchanged. They focused much of their ire on the estate-tax provision, saying it benefits the wealthiest Americans at the cost of a higher budget deficit.

“It is a huge giveaway to the super-rich in these tough economic times,” said Representative Jim McDermott, a Washington Democrat. “It just boggles the mind. It’s indefensible, unconscionable.”

Estate-Tax Rate

Under the plan negotiated with Obama, the estate tax next year would have a top rate of 35 percent to be applied after an exemption of $5 million per person. House Speaker Nancy Pelosi of California, who will become minority leader in January and wasn’t part of final negotiations on the measure, said she was troubled by the cost of the agreement, especially for the estate tax breaks.

“I salute President Obama for getting in the bill what is in there,” she said. “I’m sorry for the price that has to be paid by our children and our grandchildren to the Chinese government to pay for the increase in the deficit that the Republicans insisted upon.”

Many House Democrats favored a top estate tax rate of 45 percent with a $3.5 million per person tax-free allowance. The House passed such a rate in December 2009; the proposal died in the Senate.

GDP Forecasts

The tax-cut deal, along with larger-than-projected gains in U.S. retail sales, prompted economists to raise their forecasts for gross domestic product and consumer spending, which accounts for about 70 percent of the world’s largest economy.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, increased his 2011 growth forecast half a percentage point to 3.1 percent. Tom Porcelli, a senior economist at RBC Capital Markets Corp. in New York, raised his by one percentage point, also to 3.1 percent.

Deutsche Bank Securities economists, led by Joseph LaVorgna, said the tax agreement would increase inflation- adjusted growth by 0.7 percentage point, to a 4 percent annual rate for the fourth quarter of next year.

‘Done Deal’

“This has been a done deal for a while,” said House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat. He called the speculation over the estate-tax proposal “just a lot of gnashing of teeth.”

Democrats control the House 255-179, with one seat vacant. Republicans will take over the majority in January.

“The choice is to pay the ransom now or to watch it go up next month,” said Representative Brad Sherman, a California Democrat.

The Senate passed the tax-cut plan, 81-19, on Dec. 15 with broad support from Democrats and Republicans.

Senate Republicans had said any significant changes made by the House would be rejected in the Senate and would risk scuttling the entire agreement.

--With assistance from Richard Rubin in Washington. Editors: Laurie Asseo, Jodi Schneider.

To contact the reporters on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net; Peter Cohn in Washington at pcohn@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

Stocks Up 17% Since Bernanke Disclosed QE2

Posted: 16 Dec 2010 09:15 PM PST

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By Caroline Salas

Dec. 17 (Bloomberg) -- Republican leaders in Congress say they have “deep concerns” about Ben S. Bernanke’s second round of quantitative easing. The U.S. stock and credit markets don’t share those reservations.

The Standard & Poor’s 500 Index has climbed 17 percent since the Federal Reserve chairman first indicated on Aug. 27 that the central bank might buy more securities to boost the economy. Junk bonds rallied, with the extra yield that investors demand to own the securities instead of government debt shrinking to 5.45 percentage points yesterday from 6.81 points, according to Bank of America Merrill Lynch index data.

“It has been successful,” Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York, said of Bernanke’s policy of pumping money into the financial system, dubbed QE2. “It’s contributed to the rally in the stock market” and has “been important in reducing substantially the downside risk of deflation.”

Economic reports signal the recovery is gaining strength. A bigger-than-projected increase in retail sales in November prompted Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, to raise his outlook for fourth-quarter consumer spending. Industrial production in November also exceeded forecasts, and a gauge of consumer confidence rose to a six-month high in December.

The data, coupled with the prospect Congress will pass an $858 billion plan to extend Bush-era tax cuts, has prompted economists to boost their estimates for growth next year. The economy will expand by 2.6 percent in 2011, according to the median forecast in a Bloomberg News survey of 66 economists this month, up from a 2.5 percent prediction in November.

Confidence Grows

“As people get more confident about the economy, money is coming into the stock market,” said Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia. “The most important way quantitative easing works is the provision of liquidity.”

New York Fed President William Dudley said Oct. 1 that asset purchases would reduce borrowing costs and support the value of homes and stocks, leaving consumers with more money to spend and lowering the cost of capital for businesses.

The extra yield investors demand to own investment-grade corporate bonds instead of government debt narrowed to 1.7 percentage points yesterday from 1.91 percentage points on Aug. 27, Bank of America Merrill Lynch index data show.

“Markets in general have moved in a growth-friendly direction,” said Dean Maki, chief U.S. economist at Barclays Capital in New York.

Contrast With Summer

The latest economic data are in contrast to a drumbeat of negative economic reports last summer, including declines in home sales and payrolls, that prompted economists such as Harvard University’s Martin Feldstein to warn that the risks of a renewed recession were rising.

On Aug. 27, Bernanke said the Fed “will do all that it can” to support the recovery and signaled it was ready to start a second round of securities purchases, in addition to the $1.7 trillion it bought through last March to pull the nation out of the worst recession since the Great Depression.

The Fed’s Nov. 3 announcement that it will buy $600 billion of Treasuries through June came a day after Congressional elections gave Republicans a majority of seats in the House of Representatives.

‘Dangerous Experiment’

Sarah Palin, the 2008 vice presidential nominee who says she’s considering a run for president in 2012, wrote to the Wall Street Journal last month, saying “it’s time for us to ‘refudiate’ the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems.”

Representative John Boehner of Ohio, nominated to be House speaker, and three other Republican leaders sent Bernanke a letter Nov. 17 expressing “our deep concerns over the recent announcement that the Federal Reserve will purchase additional U.S. Treasury bonds.”

“Such a measure introduces significant uncertainty regarding the future strength of the dollar and could result both in hard-to-control, long-term inflation and potentially generate artificial asset bubbles that could cause further economic disruptions,” they wrote.

Since then, the dollar has gained about 1.2 percent against the currencies of six major trading partners as measured by IntercontinentalExchange Inc.’s Dollar Index as of 5 p.m. in New York. The dollar is down 3.5 percent since Aug. 27.

The cost of living increased 0.1 percent in November, less than forecast, indicating higher prices for commodities aren’t filtering through into other goods and services, according to a Dec. 15 Labor Department report.

Seen as Favorable

“We don’t expect a rapid move higher in inflation anytime soon,” said Maki, who was the No. 2 forecaster overall for the U.S. economy in the two-year period ended on Sept. 30, according to data compiled by Bloomberg. “What we’re expecting is a very gradual upward trend that is likely to be seen by the Fed as favorable.”

Policy makers are concerned that too-low inflation will push up borrowing costs and increase the risk of deflation, or a debilitating decline in prices that boosts debt and reduces wages and profits.

The Fed’s policies have led inflation expectations to increase. The breakeven rate for 10-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has risen to 2.31 percentage points from 1.63 percentage points on Aug. 27, according to data compiled by Bloomberg. The rate is a measure of the outlook for consumer prices over the life of the securities.

Diminished Risk

“Because the Fed is acting, I would say the risk is pretty low” of deflation, Bernanke said in an interview with CBS Corp.’s “60 Minutes” program broadcast Dec. 5. “But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.”

Not every indicator is going Bernanke’s way. Payrolls in November increased by 39,000 jobs, less than the most pessimistic forecast in a Bloomberg News survey of economists, and the unemployment rate rose to 9.8 percent from 9.6 percent.

The pace of economic growth is “insufficient to bring down unemployment,” the Federal Open Market Committee said this week as it affirmed its bond-buying plan and renewed a pledge for an “extended period” of low interest rates.

An increase in Treasury bond yields has provided fodder to critics such as Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

‘Dismal Failure’

“Their effort to achieve the stated objective of pressing long-term yields lower has been a dismal failure,” Stanley said in a Dec. 14 report. The yield on the benchmark 10-year Treasury note has climbed to 3.42 percent from 2.64 percent on Aug. 27, according to data compiled by Bloomberg.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute in Washington and a former Fed economist, said the central bank can’t take sole credit for the stock rally, which he said was caused by “a slew of slightly better economic data.”

Hassett, one of 23 mainly Republican academics and former policy makers who signed a letter last month to Bernanke telling him to arrest his expansion of monetary stimulus because it will cause a surge in inflation, also questioned whether stock gains will spur consumer spending through the so-called wealth effect.

While consumers’ stock investments have gained in value, “their bonds are going down,” said Hassett, who is also a columnist for Bloomberg News.

Too Early to Judge

Former Fed Governor Lyle Gramley said it’s “too early to make any definitive judgment” on the Fed’s bond purchases.

“I don’t know how you parse out the effects of QE2 given the changes in the environment,” including the sovereign-debt crisis in Europe and prospects for an extension of tax cuts in the U.S., said Gramley, senior adviser at Potomac Research Group in Washington.

Others say the rise in bond yields is a positive signal that reflects the outlook for faster economic growth and rising inflation expectations.

Fed asset purchases are keeping yields lower than they otherwise would be, Citigroup Inc. analysts led by Robert DiClemente said in a Dec. 10 report. At 3.42 percent, the yield on the 10-year Treasury note is below its 10-year average of about 4.16 percent, Bloomberg data show.

‘Bad Mistake’

“Looking only at the long-term rate is a bad mistake on those interpreting this policy” because quantitative easing works by increasing liquidity, University of Pennsylvania’s Siegel said.

Siegel pointed to the rise in commodity prices as another sign of increased confidence in the economy. Oil futures increased 17 percent since Aug. 27 to settle at $87.70 yesterday on the New York Mercantile Exchange.

“What the Fed is trying to do is reflate the economy,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “To the extent it has prevented expectations of outright deflation and encouraged an increase in the stock market, then it’s been a success.”

--With assistance from Margot Habiby in Dallas. Editors: Christopher Wellisz, James Tyson

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Google's Bid to Take TV Hits Network Walls

Posted: 16 Dec 2010 09:17 PM PST

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By Sarah Rabil and Ian King

Dec. 17 (Bloomberg) -- Google Inc.’s drive to bring the Internet to living-room TVs and generate fresh advertising sales is being threatened by the failure to obtain popular shows such as “Glee” and “NCIS.”

CBS Corp. Chief Executive Officer Leslie Moonves and Chase Carey, the No. 2 executive at Fox parent News Corp., say after months of talks they’re in no hurry to let Google TV offer shows via the Web for free. They say there have been no lucrative offers and they aren’t sure of the search company’s intentions.

The four major networks are blocking Google TV viewers from watching shows that consumers readily see on the Web with PCs out of fear they’ll lose ads, re-run revenue and fees from pay- TV systems. The standoff complicates efforts by Mountain View, California-based Google to gain a foothold in traditional TV, where global ad sales of $180 billion this year will be triple those of the Web, according to ZenithOptimedia Group Ltd.

“The mother lode is network advertising and syndication,” Moonves said in an interview at a conference in New York. “Do I want to jeopardize that -- yet -- for a couple of bucks?”

Google aims to create the dominant search tool for TV viewers, with software providing links to TV listings, movies, online video services, music and photos, and traditional browsing with search ads. Sony Corp. began selling TVs starting at $600 and $400 Blu-ray players equipped with Google TV in October. Logitech International S.A. offers a $300 set-top box with Google TV as the main interface.

The owner of the world’s most popular search engine is trying to stake that claim without being able to offer shows available at CBS’s TV.com, the networks’ own Web pages and Hulu, the site owned by General Electric Co.’s NBC, News Corp. and ABC parent Walt Disney Co.

Bread and Butter

One sticking point is ads, which accounted for 63 percent of the $13 billion in revenue last year at New York-based CBS.

Prime-time shows seen over the Internet have about four minutes of ads per hour, compared with 16 minutes on broadcast. That suggests networks lose about 75 percent of sales per viewer when programs are seen on the Web instead of TV, said Laura Martin, a Los Angeles-based analyst for Needham & Co.

Media companies will find Google doesn’t want to undermine their business, said Rishi Chandra, who oversees the product for Google. The service uses the Internet to supplement TV, and the company is focused on making it easier to use -- following criticism by reviewers -- not advertising.

“It’s going to take time,” Chandra said in an interview. “I don’t think there’s any magical solution that’s going to happen right away. Our job from a platform basis is to make sure that we support all the different business models that they want to support.”

Awaiting Plans

The networks say Google hasn’t presented a plan to close the ad-sales gap or fully explained its business. They are mindful of losses the music and newspaper industries sustained online. They can avoid that fate if they refuse to give products away or sell them too cheaply, according to analyst Martin.

“We need to understand better what they’re going to do,” Carey, chief operating officer at New York-based News Corp., said in an interview.

Carey wouldn’t say if News Corp. is seeking upfront payments for its programs. To get support, Google needs to explain how ad sales will be shared and what steps will be taken to block pirated content, he said.

Google rose $1.41 to $591.71 yesterday in Nasdaq Stock Market trading. The shares have declined 4.6 percent this year.

Niche Product?

The high cost of producing network TV shows makes it tough to satisfy the media companies even with highly targeted ads that may sell at higher prices, said Lance Koenders, director of marketing for digital home at Intel Corp., which makes the chips for Google TV devices.

“I don’t know that you ever get to the point where advertising can pay all of the bills,” Koenders said. “I don’t think by any stretch are we done with this product.”

Google TV may not get far without current fare from the networks, said Michael Morris, a Richmond, Virginia-based analyst with Davenport & Co.

“The difference between having high-quality content and not having it is the difference between having a mass-adopted product and having a niche product,” Morris said.

With companies like Google, Apple Inc. and Netflix Inc. vying for popular shows and movies, the networks and Hollywood studios are reaching agreements to pipe more of their products to TVs through the Internet.

Disney, based in Burbank, California, agreed last week to supply some cable and broadcast programs to Los Gatos, California-based Netflix, the online and DVD subscription service. The terms weren’t disclosed.

“Hollywood owns the content and they won’t change their business model just to accommodate one company,” said Anthony DiClemente, an analyst at Barclays Capital in New York. “At some point Google will have to decide whether it wants to be in the television business.”

Time Warner Strategy

Time Warner Inc.’s HBO premium channel, which is commercial free, and the TNT and TBS cable networks, which rely less on advertising than broadcasters, let customers who already have pay-TV subscriptions use Google TV to watch their shows.

Moonves said CBS isn’t in formal negotiations with Google, which isn’t offering to pay for shows. His executives regularly talk to companies including Google, Netflix and Hulu, and he’s content to see how Google TV evolves without CBS shows.

“The trains are not leaving the station,” Moonves said. “‘Uh-oh, if you don’t join fill in the blank -- Apple TV, Google TV, Netflix -- today, it’s not going to be there tomorrow.’ Yes, it is. They’re going to want our stuff.”

--With assistance from Brian Womack in San Francisco and Andy Fixmer in Los Angeles. Editors: Rob Golum, Anthony Palazzo

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Sarah Rabil in New York at srabil@bloomberg.net.

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net.

Facebook and Advertising

Posted: 16 Dec 2010 06:25 AM PST

Ivory Coast Unrest Slows Cocoa Trade, ICCO Head Says

Posted: 17 Dec 2010 05:05 AM PST

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By Stephen Morris

(Updates with cocoa prices in fourth paragraph.)

Dec. 17 (Bloomberg) -- Ivory Coast unrest is slowing economic activity and cocoa trade “in particular,” International Cocoa Organization Executive Director Jean-Marc Anga said.

Trucks carrying cocoa from villages to ports for exports are being subject to increased inspections by “the authorities and law and order officers,” Anga said by phone from London today. The Ivory Coast is the world’s largest cocoa grower.

The West African country is bracing for a second day of political violence after a disputed presidential election resulted in both incumbent Laurent Gbagbo and challenger Alassane Ouattara claiming victory. As many as 32 supporters of Ouattara, the United Nations-backed winner of the Nov. 28 election, were killed yesterday.

The Ivory Coast cocoa crop for the season that started Oct. 1 will be 1.3 million metric tons, Macquarie Group Ltd. said on Dec. 6. That would be up from the year-earlier harvest of 1.2 million tons, Macquarie estimated in October. Cocoa prices in London have climbed 4.9 percent since the disputed election spurred speculation that violence would curb its bean exports.

Cocoa for March delivery dropped 40 pounds, or 2 percent, to 1,966 pounds ($3,059) a ton by 12:37 p.m. on NYSE Liffe, the first drop this week.

Crop Forecast

“It is a bit early to change the crop forecast,” Anga said. “The cocoa trade is relatively resilient, even at the height of the civil unrest in 2002 cocoa was still able to leave the country.” Anga took over in October as executive director of the ICCO, representing 44 cocoa exporting and importing countries.

The Ivory Coast has been divided since 2002, when rebels in the north attempted to topple Gbagbo. Its cocoa production has dropped from 1.4 million tons in 2005-06 as tree diseases curbed output.

Anga, who was born in Ivory Coast, plans to return to the country next week based in Abidjan, the commercial capital.

--With assistance from Olivier Monnier and Pauline Bax in Abidjan. Editors: Claudia Carpenter, Alastair Reed

To contact the reporter on this story: Stephen Morris in London at smorris39@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

Irish Bonds Fall After Moody’s Cuts Rating; German Bunds Rise

Posted: 17 Dec 2010 05:04 AM PST

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By Anchalee Worrachate and Emma Charlton

Dec. 17 (Bloomberg) -- Irish government bonds declined and German bunds rose as Moody’s Investors Service cut Ireland’s credit rating, renewing concern that Europe will struggle to stem its debt crisis and boosting demand for the safest assets.

The yield difference, or spread, between Irish securities and German bunds widened even as European Union leaders agreed on a mechanism to contain debt shocks and the European Central Bank said it will boost its capital to fight the sovereign-debt crisis. Moody’s lowered Ireland five levels to Baa1 from Aa2 and may cut the rating further as the nation struggles to contain bank losses. Portugal’s bonds also declined on speculation that it could be the next country forced to seek aid.

“The size of the downgrade is somewhat worrisome,” said Christopher Rieger, a fixed-income strategist at Commerzbank AG in Frankfurt. Irish debt’s “investor base looks at risk of eroding further, with market participants becoming uneasy.”

The yield on Irish 10-year bonds gained 26 basis points to 8.67 percent as of 12:45 p.m. in London. The yield on Portuguese 10-year bonds increased six basis points to 6.62 percent.

German 10-year bunds rose, pushing yields down four basis points to 3.02 percent. The 2.5 percent security due January 2021 advanced 0.31, or 3.1 euros per 1,000-euro ($1,329) face amount, to 95.57. Two-year yields were little changed at 1.06 percent.

Bunds earlier pared gains after a report showed German business confidence unexpectedly reached a record in December as domestic demand helped bolster the recovery in Europe’s largest economy.

German bonds have returned 5.3 percent this year, compared with an 11 percent loss from Irish debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

‘Acute’ Problem

“The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected or the cost of stabilizing the banking system turn out to be higher than currently forecast,” Moody’s said today.

The extra yield that investors demand for holding Ireland’s 10-year bonds rather than German equivalent, Europe’s benchmark, rose 18 basis points to 539 basis points today. That spread reached a euro-area record of 680 basis points on Nov. 30.

The Irish downgrade is “further bad news for the European sector in general,” said David Page, a fixed-income strategist at Lloyds TSB Bank Plc. “We are all aware of the problems in Ireland, but it does add to pressures for the wider euro zone. It comes against downgrade warnings on other euro-zone countries including Belgium, Greece, and Spain.”

Two-year Spanish yields rose five basis points to 3.78 percent while the yield on 10-year Belgian debt was little changed at 3.97 percent.

Credit Default Swaps

The cost of insuring against default for Irish government bonds rose 14 basis points to 574, according to data provider CMA, the highest since Nov. 30.

As European governments struggle to stop contagion from Greece and Ireland to other nations, Moody’s this week said it may lower Spain from Aa1. It also placed Greece’s Ba1 rating on review for a possible downgrade. European Union leaders agreed at a meeting in Brussels yesterday to amend the bloc’s treaties to create a permanent crisis-management mechanism in 2013.

For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or using it more flexibly.

German debt outperformed its U.S. counterparts today, with their 10-year yield spread widening two basis points to 38 basis points.

--With assistance from Abigail Moses in London. Editors: Keith Campbell, Paul Armstrong.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Cantor Said to Name Credit Suisse’s Kessler as Head of Equities

Posted: 17 Dec 2010 05:03 AM PST

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By Jeff Kearns

Dec. 17 (Bloomberg) -- Cantor Fitzgerald LP, the bond broker transforming itself into a full-service investment bank, named Jarred Kessler of Credit Suisse Group AG as global head of equities, according to three people familiar with the matter.

Kessler replaces Kenneth Savio, who will remain with the firm, according to two of the people, who declined to be identified because the company hasn’t publicly disclosed the information. Kessler will start in February, the people said. Cantor hired Savio, formerly a senior managing director at Bear Stearns Cos., in September 2009.

Kessler declined to comment. Savio didn’t respond to two telephone calls seeking comment. Sandra Lee, a spokeswoman for New York-based Cantor, and Karen Laureano-Rikardsen, a spokeswoman for Zurich-based Credit Suisse in New York, said the companies don’t comment on personnel issues.

Cantor Fitzgerald, a 65-year-old private partnership with about 1,400 employees that is 1 of 18 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York, has expanded its equity, fixed-income and investment-banking businesses as larger rivals cut staff during the financial crisis. Chief Executive Officer Howard W. Lutnick told Bloomberg Businessweek in October that he would like to take the firm public within the next two years.

“They’ve been building their market share, but equities has been a more difficult business to build,” said Richard Lipstein, a managing director at headhunter Boyden Global Executive Search in New York. “They’re one of the more recent entrants into that business.”

Savio spent more than 20 years at Bear Stearns before the firm collapsed in March 2008. He also was co-head of global equities at broker-dealer BTIG LLC and head of equity trading at Guggenheim Securities LLC in New York before joining Cantor, the firm said in a 2009 statement.

--With assistance from Krista Giovacco, Michael J. Moore and Diane Brady in New York. Editors: Nick Baker, Michael Tsang

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

Snow Disrupts Plans for European Travelers, Shoppers

Posted: 17 Dec 2010 05:01 AM PST

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By Jack Jordan and Chris Spillane

(Updates with London City Airport closure in first paragraph.)

Dec. 17 (Bloomberg) -- Flights from European airports including London, Belfast and Geneva were canceled this morning as the region braced for more snow and freezing temperatures on the last weekend before Christmas.

Belfast International will be closed until at least 2:00 p.m., according to a statement on the airport’s website, and London’s City Airport closed its runway this afternoon. Airports including Zurich, Geneva and Aberdeen have also delayed and canceled flights.

Eurostar Group Ltd. imposed a speed limit on its rail services because of the severe conditions, the company said on its website meaning journeys will take 30 minutes longer.

The U.K.’s Met Office forecast widespread snow and ice across the country today and tomorrow. Research company Planalytics predicted that the freezing conditions will “severely disrupt” business for retailers, as well as parcel deliveries. Store visits slumped by 14.5 percent at non-food outlets in Britain during wintry conditions early this month, according to researcher Synovate.

Police in northern Scotland advised against all travel and the Met Office warned of icy roads throughout Britain. There are also heavy snow warnings for Orkney and Shetland, Highlands and Outer Hebrides, Grampian, Northern Ireland, Wales and southwest England today.

Retail Spending

“People will find it difficult to get to their usual haunts if we have another bout of bad weather,” Pam Armstrong of market research company GfK NOP Ltd. said. “With out-of-town and Internet purchasing unavailable to them due to restrictions on transport and delivery times, we may see total retail spending fall this Christmas.”

More snow is forecast for later today and tomorrow with as much as 25 centimeters (10 inches) in Wales and southern and central England.

Almost a third of holiday shopping is done in the two weeks before Christmas, according to a GfK survey of 500 adults. Retailers such as Dixons Retail Plc, the owner of the PC World and Currys chains, HMV Group Plc, the music and DVD retailer, and H. Samuel owner Signet Jewelers Ltd. generate a significant proportion of their annual revenue over the holiday period.

Grocers such as J Sainsbury Plc and Wal-Mart Stores Inc.’s Asda are offering record levels of promotions to fuel spending, according to PricewaterhouseCoopers LLC. The most common offers are on confectionery and alcohol, such as 50 percent off wine cases at Tesco Plc, while discounts on fresh produce like Brussels sprouts and satsumas are increasing, PWC said.

Early Discounts

“It looks as though the grocers are leaving nothing to chance and getting those Christmas sales in while they can,” Christine Cross, chief retailer adviser to PwC, said in a statement. On average, 11 out of 20 Christmas items in a basket of goods are now on promotion, the accounting firm said.

Some major U.K. retailers are taking no new online non-food orders for delivery to Scottish addresses by Christmas Day, Sarah Cordey, a spokeswoman for the British Retail Consortium, said by telephone. Orders for food from supermarkets are still being taken, she said.

Paddy Power Plc, Ireland’s biggest bookmaker, has slashed the odds of snow falling in London on Christmas day. The odds have fallen from 5/2 a week ago to 4/7 today, meaning that a successful 1-pound ($1.56) bet would bring in 57 pence plus the original stake.

Parts of Northern Ireland and Scotland had as much as 15 centimeters of snow overnight, the Met Office said on its website. Temperatures could fall as low as minus five degrees Celsius (23 degrees Farenheit) in Central Scotland today, and as low as minus three degrees Celsius in London and southeast England.

Trains between Wales and England are being delayed and canceled this morning, according to the U.K.’s National Rail Enquiries website.

--With assistance from Christopher Spillane in London. Editors: Chris Peterson, Alan Purkiss

To contact the reporters on this story: John Jordan in London at jjordan22@bloomberg.net; Sarah Shannon in London at sshannon4@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net

BMO Agrees to Buy Marshall & Ilsley for $4.1 Billion

Posted: 17 Dec 2010 04:58 AM PST

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By Doug Alexander

(Updates with CEO comment in third paragraph.)

Dec. 17 (Bloomberg) -- Bank of Montreal, Canada’s fourth- biggest bank by assets, agreed to buy Wisconsin’s Marshall & Ilsley Corp. for $4.1 billion to expand in the U.S.

The deal values Marshall & Ilsley at $7.75 a share, compared with yesterday’s closing price of $5.79 on the New York Stock Exchange, Toronto-based BMO said today in a statement.

Canadian banks, ranked the world’s soundest for three straight years by the World Economic Forum, have been expanding in the U.S., where companies faltered as the real-estate market tumbled. Milwaukee-based Marshall & Ilsley has posted eight straight quarterly losses while Bank of Montreal has reported six consecutive quarters of profit growth, a streak unmatched by Canada’s five other large lenders.

The acquisition “transforms BMO’s competitive position in the U.S.,” said Bill Downe, chief executive officer of BMO Financial Group. “It also increases scale and provides strong entry into other attractive markets, including Minnesota, Missouri, and Kansas, and expansion in Indiana and Wisconsin.”

Bank of Montreal plans to raise about C$800 million ($794 million) in common equity prior to the completion of the deal and purchase preferred shares that the U.S. Treasury acquired when it rescued Marshall & Ilsley. The deal is expected to be completed by the end of July.

--Editors: Dan Kraut, Steve Dickson

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

Euro Gains as EU Reaches Accord, German Business Sentiment Rises

Posted: 17 Dec 2010 04:37 AM PST

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By Catarina Saraiva and Lucy Meakin

Dec. 17 (Bloomberg) -- The euro rose against most of its major counterparts after European Union leaders agreed to create a mechanism to contain future debt shocks and German business confidence unexpectedly climbed.

The euro gained versus all of its 16 most-traded counterparts except for the Swiss franc after German business confidence rose in December to its highest since records for reunified nation began in 1991. Moody’s Investors Service cut Ireland’s credit rating five levels. The yen headed for a weekly loss against most of its major peers as Asian stocks advanced. The franc touched a record high versus the common currency.

The EU summit result “sets the stage for further consolidation, such as cross-border guarantees” between member states’ debt, said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. The agreement “is not negative for the euro. If they had downgraded Ireland to junk right now I don’t think it would make too much of a difference, because the country is already shut out of markets anyway.”

The euro appreciated 0.2 percent to 111.38 yen at 7:30 a.m. in New York, from 111.14 yen yesterday. It was set for a 0.3 percent increase this week. The shared currency rose 0.1 percent to $1.3255 from $1.3244. The dollar was little changed versus the yen, trading at 84.02 yen. It reached 84.51 on Dec. 15, the highest since Sept. 24.

German business confidence unexpectedly rose to a record in December as stronger domestic demand helped bolster the recovery in Europe’s largest economy, according to data published today.

Irish Downgrade

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 109.9 from 109.3 in November. That’s the highest since records for reunified Germany began in 1991. Economists predicted a drop to 109, the median of 36 forecasts in a Bloomberg survey shows.

Moody’s cut Ireland’s credit rating by five levels to Baa1 after the government was forced to ask for external aid last month, staggered by losses in the banking system.

“The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected or the cost of stabilizing the banking system turn out to be higher than currently forecast,” Moody’s said.

EU leaders will wrap up a two-day summit today in Brussels. They agreed to amend the bloc’s treaties to create a permanent crisis-management mechanism that takes effect in 2013.

The ECB said yesterday it will almost double its capital base to protect against losses as the institution buys bonds of governments from Portugal to Ireland to fight the debt crisis.

Merkel, Sarkozy

Germany, the biggest contributor to Europe’s bailouts of Greece and Ireland, pushed through a proposal that would allow financial aid “if indispensable” to underpin the euro and may force bondholders to bear some costs of future rescues.

German Chancellor Angela Merkel ruled out putting more money on the table, retooling the post-Greek rescue European Financial Stability Facility to enable it to buy troubled government bonds, or further entwining Europe’s economies through joint bond sales.

“The headlines are saying no e-bonds, no expansion of the EFSF, but that’s just for now,” Yu of UBS said by phone. “It will probably still have to happen later on.”

The euro’s survival is “non-negotiable,” requiring budget vigilance and closer economic cooperation to overcome “structural weaknesses” within the region, Merkel and French President Nicolas Sarkozy said on Dec. 10.

Weakening Yen

“Merkel and Sarkozy are not enjoying much support from their domestic constituencies, and that keeps them from making commitments to other nations,” said Manabu Tamaru, a senior investment manager at Baring Asset Management in Tokyo. “While German economy picks up, you really can’t say Europe’s economy as a whole is improving. The euro may drop below $1.30.”

The euro has slipped 9.2 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has gained 10.2 percent, while the dollar is down 1.8 percent.

The Swiss franc climbed 0.4 percent against the dollar to 0.9607 and was little changed at 1.2772 against the euro. It earlier touched a record 1.2721.

The yen headed for a weekly decline against a basket of 10 currencies as the MSCI Asia Pacific Index of regional shares rose. People’s Bank of China Governor Zhou Xiaochuan said his nation won’t increase reserve ratios and interest rates at the same time, the South China Morning Post reported, citing a speech at Peking University.

Zhou said yesterday that increases in banks’ mandatory reserves don’t rule out interest rate increases, the Hong Kong- based English-language newspaper reported today.

“Risk sentiment remains firm, supporting higher-yielding currencies against developed nations’ currencies,” said Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG. “Currencies should strengthen against the yen.”

--With assistance from Finbarr Flynn in Dublin, Jeff Black and Jana Randow in Frankfurt. Editors: Keith Campbell, Dave Liedtka

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Spain Banks Face 2011 Revenue Drain on Funding Costs

Posted: 17 Dec 2010 04:37 AM PST

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By Charles Penty

(Updates with Spanish bad loans data in sixth paragraph.)

Dec. 17 (Bloomberg) -- Spain’s banks, burdened this year by rising defaults and flagging credit demand, will face further pressure in 2011 as funding costs eat away at the returns on their stock of home loans.

The squeeze may be worst for lenders with the greatest proportion of mortgages because they have less scope to pass on the financing costs to customers, said Claire Kane, an analyst at MF Global in London. Ibercaja, a Zaragoza-based savings bank, has 53 percent of its loans in mortgages, while Bankinter SA, based in Madrid, has 46 percent, Bank of Spain data show.

“The amount of mortgages a bank has gives an indication of who is going to face the most pressure on revenues,” said Daragh Quinn, an analyst at Nomura International in Madrid. “The more retail mortgages you have, the more difficult it will be to re-price your loan book.”

Concern that Spain won’t be able to reduce the euro region’s third-highest budget deficit and avoid a European Union bailout has driven up financing costs for the banks. The nation’s Aa1 credit rating may be lowered, Moody’s Investors Service said on Dec. 15, blaming banking losses, regional public deficits and mounting borrowing costs as the government and lenders seek to refinance 260 billion euros ($345 billion) of debt.

The cost to insure the senior debt of Bankinter for five years has almost doubled since April, to about 330 basis points, data compiled by Bloomberg show. That’s almost twice the cost of insuring the debt of Belgium’s KBC Groep NV, which has the same A1 rating from Moody’s as Bankinter. Both have a negative outlook from the rating company. The Spanish bank is the fifth- worst performer in the 53-member Bloomberg Europe Banks and Financial Services Index this year after dropping 42 percent.

‘Squeezing’ Margins

Bad loans as a proportion of total loans in Spain climbed to 5.67 percent in October, the highest level since January 1996, from 5.50 percent in September and 4.99 percent a year ago, the Bank of Spain said today.

The cost of luring deposits also rose. The average rate paid on Spanish household deposits for as long as a year reached 2.61 percent in October, compared with 1.13 percent in Germany.

Spanish banks are already contending with losses on loans to property developers and real-estate assets taken on their books during the property crash. Moody’s estimated on Dec. 13 that lenders had recognized only half of the estimated 176 billion euros of losses they will have to absorb on their loans.

The ability of Spanish banks to generate profits at the moment is “very limited,” said Juan Jose Toribio, a professor at the IESE business school and a former head of financial policy at the nation’s finance ministry. “Because they have liquidity problems, they are paying more for their liabilities and that is squeezing their margins.”

Mortgage Surge

Consolidated nine-month profit at Spain’s commercial banks and savings banks fell 18 percent from a year earlier to 14.3 billion euros, according to the banking and savings bank associations. As many as 13 mergers are underway that will reduce the number of savings bank groups to 17 from 45 in a process backed by 11 billion euros from a government bailout fund.

Spain’s housing boom led to a fivefold surge in mortgage lending to about 618 billion euros over the past decade. Banks drove down the rates on home loans to lure customers they could then sell credit cards, insurance and current accounts.

Banks that lend more to companies can turn over their loan books at a faster pace to raise the return on credit, said Nomura’s Quinn. By contrast, the average life of new mortgages taken out in Spain in the third quarter was 25 years, according to the College of Property Registrars.

‘Handicapped’

“The financial institutions that will have most problems are those that are most handicapped in re-pricing their assets,” said Albert Coll, deputy chief financial officer of Banco Sabadell SA, which makes two-thirds of its loans to companies. “They will be those that have a larger percentage of mortgages.”

Banco Pastor SA, based in La Coruna, has the lowest ratio of mortgages to overall lending at 16 percent, while Sabadell, based in the Spanish town of the same name, has 17 percent and Madrid-based Banco Popular Espanol SA 18 percent, according to the Bank of Spain.

Mortgages to individuals account for about 29 percent of the Spanish loan book of Banco Santander SA, a spokeswoman for the country’s biggest lender said in an e-mail.

Having a lower weighting of mortgages hasn’t saved the banks from taking punishment from investors. Sabadell is down 19 percent this year, while Popular and Pastor fell 23 percent.

Loan Quality

“It’s kind of the flip side of the coin,” said Kane. “Sabadell and Popular may have more flexibility to re-price their loans but people also worry about the quality of their lending to small- and medium-sized companies and developers.”

A Bankinter official, in a statement, said while mortgages provide a lower return than products such as personal loans, they are also less risky and generate better returns after provisions. A spokesman for Zaragoza, Spain-based Ibercaja didn’t immediately respond to a request for a comment.

Javier Torrero, chairman of Torrero Torinco, a Cordoba, Spain-based maker of products such as doors and windows for the construction industry, said Spanish companies are accustomed to banks charging more for loans. He expects lenders to increase the cost of credit further in 2011.

“Banks will just keep raising their rates,” said Torrero, who described the effect of higher financing costs on companies as “horrific.” His banks, which include Santander and Banco Bilbao Vizcaya Argentaria SA, have raised the rate they charge on loans to 3 percentage points over the 12-month euro-area interbank offered rate, or euribor, from less than 1 percentage point three years ago, he said.

‘Profitable Business’

At Sabadell, rates on two-year corporate loans have climbed to 233 basis points over 12-month euribor from 205 basis points last December and 190 basis points in March 2009, said Coll. Euribor, a benchmark for most Spanish mortgages, currently stands at 1.53 percent. A basis point is equivalent to one one- hundredth of a percentage point.

The quality of Spain’s mortgages has proved resilient, even with unemployment higher than 20 percent. Moody’s expects a loss ratio of 2.8 percent for home loans, compared with 12.9 percent for loans to developers and 50 percent for real estate assets.

“Mortgages can be a problem in a given year such as 2011 because of the prevailing liquidity or funding conditions,” said Arturo de Frias, an analyst at Evolution Securities Ltd. in London. Over a longer period, they remain “a very profitable business,” he said.

Mortgage ‘Millstone’

Even so, the ability to adjust lending rates will be crucial to Spanish lenders maintaining profitability, said Kane.

Bankinter’s customer spread, the difference between its yield on assets and the cost of its liabilities, shrank to 81 basis points in September from 1.93 percentage points a year earlier. Net interest income plunged 40 percent in the third quarter at the bank, whose chief executive officer, Jaime Echegoyen, resigned a day before results were announced.

“From being a goldmine for the banks, mortgages have now become a millstone,” Pablo Garcia, head of equities at Oddo Sociedad de Valores in Madrid, said by phone.

--Editor: Frank Connelly, Steve Bailey

To contact the reporter responsible for this story: Charles Penty at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net