Business News: Ron Paul's Moment Arrives

Business News: Ron Paul's Moment Arrives

Ron Paul's Moment Arrives

Posted: 02 Dec 2010 02:00 PM PST

Paul: Fed 'Out of Control'

Posted: 02 Dec 2010 06:19 AM PST

Fed Created Conflicts Improvising Rescue

Posted: 02 Dec 2010 09:17 PM PST

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By Bob Ivry, Christine Richard and Christopher Condon

(For more on the Fed’s emergency programs, {EXT5 <GO>}.)

Dec. 3 (Bloomberg) -- Deborah A. Cunningham, the manager of $261 billion at Federated Investors Inc., was squeezed into the bathroom of her family’s recreational vehicle, trying to help save the $3.6 trillion money market industry.

Cunningham was on the phone with Federal Reserve officials in Boston, New York and Washington. Outside, in the Pennsylvania State University stadium parking lot in State College, football fans were preparing for a game against Temple University.

“It was the only place I could hear,” Cunningham said. “People were drinking beer. They kept knocking on the door, saying, ‘I have to go.’”

The solution Cunningham helped craft on Sept. 20, 2008, was a bailout for money market funds, which were created as safe investments that could be easily cashed out. The Fed put the facility into effect two days later. At its peak in October 2008, it provided $152 billion to stem a customer run sparked by the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

This week’s disclosures of data from the Fed’s rescue efforts during the 2007-2008 financial crisis show how the central bank employed companies to help design or run programs they could use to their benefit. Federated tapped the money- market rescue for $8.89 billion, according to Fed data. Pacific Investment Management Co. and BlackRock Inc. weren’t only advisers to the Fed, they were also trading securities they helped value, the Fed data show.

No Choice

“That’s the way the system works,” said David Castillo, senior managing director at Further Lane Securities in San Francisco. “It’s problematic that they’re customers, but that shouldn’t limit their ability to participate in this process. Quite frankly, we don’t have a choice. They have the expertise.”

In compliance with the Dodd-Frank financial overhaul law, the Fed on Dec. 1 identified the institutions that used $3.3 trillion of improvised rescue programs. The 21,000 transactions in 11 initiatives included the money-market plan Cunningham helped devise, known as the AMLF, short for its 10-word formal name, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility.

In its scramble to keep the economy from collapsing, the Fed also created the Commercial Paper Funding Facility, or CPFF, which tried to ensure that banks and industrial companies had the short-term loans they needed to fund everyday operations. General Electric Co., the biggest issuer of commercial paper, met with Treasury and Fed officials in the days before they created the CPFF.

‘Unintended Consequences’

Later, the Fed set up the Term Asset-Backed Securities Loan Facility, or TALF, to keep consumer credit flowing. It hired Pimco, manager of the world’s largest bond fund, and BlackRock, the world’s biggest money manager, to provide analytical help, according to a November 2010 report by the Fed’s Office of Inspector General.

“Any situation where the potential exists for a conflict of interest is concerning,” said Kurt Bardella, spokesman for Representative Darrell Issa, the California Republican who will become chairman of the House Oversight and Government Reform Committee next month. “This really brings into focus one of the unintended consequences of institutionalizing the federal government picking winners and losers while those entities are partaking directly and indirectly in what should be exclusive government functions.”

Breaking the Buck

Cunningham was making calls from her camper’s restroom after the Lehman Brothers bankruptcy filing panicked investors, who pulled $230 billion from money-market accounts. The $62.5 billion Reserve Primary Fund, which held $785 million of loans to Lehman Brothers, became the biggest money-market fund and the first in 14 years to “break the buck,” meaning the value of a share fell below $1 and investors faced losses.

Money funds were the main buyers of commercial paper. During the panic, they had to sell off assets to pay investors who demanded their money back. That meant they couldn’t buy the commercial paper that corporations needed to pay for things such as payroll and utility bills. In less than a day, the credit crunch had spread to industrial companies.

By Wednesday, Sept. 17, officials at the Fed and the Treasury Department were focused on finding a solution for money funds, says Phill Swagel, who was assistant Treasury secretary for economic policy.

Swagel testified to Congress that morning on the deteriorating housing market and returned to the Treasury building around midday, he said. After eating a tuna sandwich, he was on conference calls with Fed officials the rest of the afternoon and late into the night.

‘Not Normal Policy’

Two days later, on Sept. 19, the Treasury announced that for a fee it would insure money market funds against investor losses.

“It’s not normal policy to say this asset class is now guaranteed,” said Swagel, a professor at Georgetown University’s McDonough School of Business in Washington, in an interview. “When there’s a run on money market mutual funds, there’s no time to do anything else but say they’re all guaranteed, we’re done.”

While the Treasury measure slowed the pace of withdrawals, it didn’t help money-market funds turn assets into cash fast enough to pay investors who wanted out. Putnam Investments LLC closed its $12.3 billion Putnam Prime Money Market Fund on Sept. 17 after investors asked for about a third of the fund’s money. Managers of the Boston-based firm faced the prospect of selling assets in a distressed market, which would cause the fund to break the buck.

Federated’s Fund Takeover

Cunningham’s Federated, based in Pittsburgh, was prepared to take over the assets of the Putnam fund, issuing investors shares in its $22.1 billion Prime Obligations Fund, she said. To make the takeover work, Federated needed to pay off all the Putnam investors who’d demanded their money, she said. For that, she turned to the Fed.

“We had been working with them trying to figure out what might work to add liquidity to the marketplace,” Cunningham said in an interview.

The AMLF, the bailout that Cunningham helped design, provided cash for banks to buy asset-backed commercial paper from money market funds. This made it possible for the funds to avoid selling at a discount, and the Fed agreed to take the risk of defaults, guaranteeing a profit for the banks when the loans were repaid.

The program enabled Federated to absorb the $12.3 billion in assets of the Putnam fund on Sept. 24, 2008, according to spokeswoman Meghan McAndrew. About half the investors redeemed their shares within a week, she said. That meant the deal brought Federated, the third-biggest U.S. money market company, about $6 billion in assets at no cost.

‘Single Most Successful’

Federated’s Prime Obligations Fund now holds $47 billion of assets, more than double the amount before the transaction. In a deal announced July 16, Federated will pay as much as $38.8 million over five years to acquire $17 billion in money fund assets from SunTrust Banks Inc.

“Even if the entire Putnam fund redeemed, we were still confident with this facility behind us that there was liquidity in the marketplace and the ability to withstand that,” Cunningham said. “Putnam investors were immensely aided by this program. It didn’t really help Federated except for some positive press.”

All AMLF loans have been repaid, and the facility generated $543 million in interest, according to a Fed report.

“The AMLF was the single most successful government intervention during the financial crisis,” said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts, in an interview. “In a crisis when you have esoteric corners of the market involved, you have no choice but to go to the experts, and the experts will be self- interested players.”

Commercial Paper

While the AMLF helped stabilize money funds, they didn’t start buying commercial paper again. That left issuers without their biggest group of customers and unable to roll over short- term debt as it matured. At 5:45 p.m. on Monday, Sept. 15, GE Chief Executive Officer Jeffrey R. Immelt met for half an hour with Treasury Secretary Henry M. Paulson Jr. in the secretary’s office, according to Paulson’s schedule.

An hour and 15 minutes later, Federal Reserve Bank of New York President Timothy F. Geithner convened a staff meeting to focus on “GE issues,” according to his schedule. He and Paulson conferred by phone afterward.

On Oct. 1, Geithner’s schedule noted a tentative conference call with Immelt, who was a board member of the New York Fed, a position he still has today. GE spokesman Gary Sheffer said the company doesn’t see a conflict with Immelt’s membership on the New York Fed’s board. He declined to comment on the content of Immelt’s conversations.

Reviving Securitization

Less than a month later, the Fed created a bailout of the commercial paper market. A special entity called CPFF LLC, funded by the Fed, bought commercial paper from companies, including GE, the biggest issuer in the world. GE tapped the facility 12 times for $16.1 billion, the Fed disclosed this week.

Assistance to companies, which also included Toyota Motor Corp. ($4.6 billion), Harley-Davidson Inc. ($2.3 billion) and Verizon Communications Inc. ($1.5 billion), topped out at $348.2 billion on Jan. 21, 2009, according to the Fed. The program had no defaults and gained $6.1 billion in interest and fees, the central bank’s Inspector General said in its report.

In November 2008, the Fed set out to revive the market for bonds backed by consumer and small business loans. The market froze as an unprecedented number of defaults made assets backed by mortgages impossible to value. Wall Street had fueled lending by bundling mortgages into bonds using an innovation known as securitization.

Creation of TALF

“We were pretty confident that banks didn’t have the capacity to essentially replace the capacity that was lost in the securitization market,” said William C. Dudley, who headed the New York Fed’s Markets Group at the time and is now the bank’s president, in an interview. “We thought the best way forward would be to try and restart the securitization market, rather than just sit back and rely on the banking sector.”

On Nov. 25, 2008, the Fed created the Term Asset-Backed Securities Loan Facility, or TALF, which allowed investors to borrow from the Fed as much as 95 cents of every dollar invested in Fed-approved asset-backed securities. Investors also retained the option of turning the securities over to the Fed if they fell in value.

Pimco, BlackRock

The New York Fed hired Pimco, based in Newport Beach, California, to value collateral, monitor the credit risk of TALF participants and assess the securities market, according to the Inspector General’s report. BlackRock Solutions, a unit of New York-based BlackRock, said it was brought on to supply analytical help on the securities.

Without singling out any contractors, the Inspector General’s office said that farming out certain tasks creates the potential for conflicts of interest.

The two firms also participated in TALF as borrowers on behalf of clients, along with other financial companies. Pimco tapped TALF 96 times between April 2009 and March 2010 for a total of $7.26 billion, according to Fed data. Ten funds connected to BlackRock Financial Management Inc., another unit of BlackRock, borrowed a total of $2.8 billion for clients, the Fed disclosed.

Ford Deal

On the first day of the program, Pimco put up $22 million and borrowed $292 million from the Fed to buy $314 million of bonds backed by Ford Motor Co. auto loans. The fund borrowed from the Fed at the London interbank offered rate plus 100 basis points, or 1 percentage point, and purchased securities yielding Libor plus 250 basis points, or 2.5 percentage points. The return was about 23 percent a year for investing in securities with the highest credit ratings and a Federal Reserve backstop.

The Pimco advisory team serving as a TALF collateral monitor for the New York Fed is subject to “strict physical, ethical and technological walls” and has no involvement in any investment strategies or decisions, said Mark Porterfield, a Pimco spokesman.

BlackRock also participated in the initial Ford deal, purchasing $275 million of the same securities as Pimco, using $256 million borrowed through TALF, according to the Fed. Since February, when BlackRock Solutions was hired, BlackRock Financial Management borrowed $248 million to invest in a total of 13 commercial mortgage-backed securities deals.

There was no impropriety in BlackRock’s actions, said Bobbie Collins, a BlackRock spokeswoman. BlackRock Solutions was a collateral monitor providing analytical services for TALF, while BlackRock Financial Management tapped the program on behalf of clients, she said. The two units are separate businesses with strict information barriers in place, she said.

Further Fed Review

Firms helping to price hard-to-sell assets could overvalue them to raise the value of their own assets or those of their clients, said Michael Smallberg, an investigator with the Project on Government Oversight, an independent Washington watchdog group.

“We never found anyone maliciously trying to take advantage of taxpayers,” Smallberg said. “But we have concerns about how well those firewalls work.”

The New York Fed “has carefully managed potential conflicts of interest” in TALF, including separating workers, approving staff, restricting personal investments and conducting on-site audits of the controls, said Deborah Kilroe, a bank spokeswoman.

Conflict Review

The Inspector General’s report, five months after TALF closed to new investment, said “a third-party vendor” under contract with the New York Fed’s legal group was “performing a conflict-of-interest review and testing compliance with contract provisions.”

Neither Pimco nor BlackRock has been accused of wrongdoing. The firms didn’t establish policies or approve or reject collateral, according to the Fed.

“It seems clear that the biggest beneficiaries were the insiders,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “We have a huge pinata here. The question is whether we had insiders deciding who would get the candy or was everyone in the same boat? Think of the people who get upset about the government giving a homeowner some help. Now multiply the sums by about 100 million. We should care.”

--With assistance from Rachel Layne in Boston. Editor: Robert L. Simison.

To contact the reporters on this story: Bob Ivry in New York at bivry@bloomberg.net; Christine Richard in New York at crichard5@bloomberg.net; Christopher Condon in Boston at ccondon4@bloomberg.net.

To contact the editors responsible for this story: Gary Putka at gputka@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net.

What's a Central Banker Worth?

Posted: 02 Dec 2010 02:00 PM PST

Will Netflix Kill the Internet?

Posted: 02 Dec 2010 02:00 PM PST

Jaroslovsky: Color Nook Leaps Ahead of Kindle

Posted: 02 Dec 2010 01:15 PM PST

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By Rich Jaroslovsky

Dec. 3 (Bloomberg) -- This isn’t supposed to be the year of the color-screen e-reader. Led by Amazon.com Inc.’s Kindle, monochrome readers have just burst into the mainstream. Color? Not until at least 2011, unless you’re willing to pay a lot more for a full-fledged tablet computer like Apple’s iPad or Samsung’s Galaxy Tab.

Well, Barnes & Noble Inc. didn’t get the memo. Its new $249, Wi-Fi-enabled Nook Color reader is on sale now, and provides a satisfying reading experience for half the cost of a tablet.

That’s surprising, because I wasn’t a fan of the original Nook, an agonizingly slow and buggy Kindle knock-off when it debuted a year ago. It’s improved since then, though it still hasn’t caught up to the Kindle.

By contrast, the Nook Color, with its bright backlit screen and touch interface, has beaten Amazon to the punch. Not to mention Sony Corp., which pioneered the e-reader but remains mired with a line of handsome yet overpriced monochrome devices.

Given the tradeoffs that the Nook Color requires in terms of price -- the Kindle starts at $139 -- weight and battery life, the first question has to be: Is color really worth it? It depends on what type of books you read. If it’s mostly fiction -- just words on a page -- then either color or the E Ink monochrome display used in the Kindle, Sony Reader and original Nook will do the job.

Color, though, is far more satisfying for non-fiction, art and children’s books, whose photos and other illustrations lose their punch when rendered on monochrome screens. It’s better for magazines too, and the liquid-crystal display technology used in the Nook Color and iPad also allows video to be incorporated more easily.

Reader Pipeline

China’s Hanvon Technology Co. recently announced it will start selling a reader using a color version of E Ink next year, and Qualcomm Inc. says its Mirasol color technology is on the way too. Barnes & Noble, though, has opted to use a 7-inch LCD from Korea’s LG Display Co. At 8.1 inches tall, 5 inches wide and .48 inches thick, the Nook Color is marginally larger than the Kindle but still slips into a jacket pocket. The biggest difference is in the weight: The Nook Color is 15.8 ounces, almost twice as heavy as the Kindle.

The device the Nook most resembles in size and weight is Samsung’s Galaxy Tab iPad-competitor. Both run Google Inc.’s Android operating system, though the Nook’s version has been customized to make it feel less like an overgrown smartphone. The Nook is also thinner and sleeker than the Galaxy.

Touch Advantage

Barnes & Noble has done a good job revamping the Nook’s interface to take advantage of the color version’s touch capabilities. There are multiple ways of accessing your library, including a scrolling display of up to 50 covers on the home screen and a “Keep Reading” icon that automatically returns you to your most recently viewed book or periodical.

You turn pages either by tapping or swiping the screen. Pressing and holding the screen for two seconds opens pop-up menus that allow you to annotate a passage, look up a word or term in the built-in dictionary or connect to the Internet for more information.

Oh, and add the Internet to the list of things the Nook Color does better than monochrome e-readers. Its built-in browser makes the Web look like the Web, while the touch screen makes it much easier to navigate than on most digital-ink readers.

Android Apps

The Android operating system enables the Nook Color to run apps, and several are built in, including a music player, Pandora Internet radio, a contact manager and a few games. Barnes & Noble says more apps will follow, but will be limited to those that complement or enhance the reading experience. The company says it has no plans to open the Nook Color to the broader universe of Android apps: This is a device aimed at readers, not a stealth iPad-killer.

Besides weight and cost, the Nook’s biggest drawback compared with digital-ink readers is battery life. It claims eight hours, which is good for a color LCD tablet, but far less than the Kindle, which can go a month between charges.

There are other issues as well. In my tests, the Nook Color would occasionally jump forward a few pages on its own while I was reading. In addition, while the device is capable of reorienting itself from portrait to landscape view when you turn it, Barnes & Noble inexplicably prevents you from doing so for some books.

All backlit screens, the Nook Color’s among them, are harder to read in direct sunlight than are digital-ink devices. On the other hand, they are easier to read at night, since they don’t require an external light source. In the end, if all you want from an e-reader is words, the Kindle is still the class of the field. But if you’re looking for a richer and more book-like experience, Barnes & Noble has jumped out in front.

(Rich Jaroslovsky is a Bloomberg News columnist. The opinions expressed are his own.)

--Editors: Steven Gittelson, Charles W. Stevens

Click on “Send Comment” in the sidebar display to send a letter to the editor.

To contact the writer of this column: Rich Jaroslovsky in San Francisco at rjaroslovsky@bloomberg.net.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net.

Best Buy's Boss on the Lessons of Social Media

Posted: 02 Dec 2010 02:00 PM PST

CEOs Don't Need an MBA to Get Rich

Posted: 02 Dec 2010 11:58 AM PST

25 Highest Paid CEOs with MBAs

Posted: 30 Nov 2010 09:25 AM PST

Probe Unlikely to Change Insider Trading Rules

Posted: 02 Dec 2010 09:01 PM PST

Italian Lenders&rsquo; Costs Climb on Contagion Concern

Posted: 03 Dec 2010 04:39 AM PST

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By Elisa Martinuzzi, Sonia Sirletti and Bryan Keogh

(Updates with ECB action in 13th paragraph.)

Dec. 3 (Bloomberg) -- Italian banks face higher borrowing costs as concern over the nation’s debt, the second-highest in the euro zone, erodes their perceived creditworthiness.

The cost of insuring the debt of UniCredit SpA, Italy’s biggest bank, posted the largest monthly jump in November since February 2009, according to data provider CMA. UniCredit’s credit default swaps this week implied a junk rating to the company’s bonds for the first time, data from Moody’s Investors Service’s capital markets research group show. Swaps on Intesa Sanpaolo SpA, the No. 2 bank, posted a record monthly increase.

Prime Minister Silvio Berlusconi faces a confidence vote on Dec. 14, adding to investor concern that Italy may struggle to finance its 1.76 trillion euros ($2.3 trillion) of debt should his government fall. While Italian banks skirted the real estate busts of Ireland and Spain, the crisis may drive up the cost of refinancing at least 118 billion euros of debt in 2011 and squeeze profitability that is already below the region’s average.

“Contagion fears due to the country’s high debt will affect Italian banks’ profitability because they will pay higher a cost of funding and will record losses on bonds they own,” said Stefano Girola, who helps oversee about 3 billion euros at Banca Albertini Syz & Co. Banca Popolare dell’Emilia Romagna, a regional cooperative bank based in central Italy, is the only Italian lender he holds.

Customer Loans

Italian banks survived the worst financial crisis in 70 years by lending to individual and corporate clients, and steering away from bets on markets, analysts say. About 61 percent of their assets are loans to clients, higher than Spanish, U.K., French and German banks, according to data compiled by ABI, Italy’s banking association.

The country’s lenders also weigh less on the economy than banks in other European countries. Italian banks’ senior debt represents about 20 percent of the gross domestic product, the smallest amount among 11 nations, including the U.K., analysts at Barclays Plc wrote in a note published on Nov. 26. Irish bank debt is equal to about 38 percent of GDP and the debt of Spain’s banks is 54 percent of GDP, according to Barclays.

“The banking system is a relative strength in Italy, with a low risk profile, that’s been able to weather the financial crisis,” said Henry MacNevin, senior financial analyst at Moody’s Financial Institutions group. “Banks are in good shape, but their outlook is correlated to the economy.”

Banks Shares Underperform

Italian banks underperformed in Europe this year. UniCredit dropped 26 percent in Milan trading through yesterday, Intesa fell 32 percent and Banca Monte dei Paschi Siena SpA slid 28 percent, compared with the Bloomberg Europe Banks and Financial Services Index’s 7.3 percent decline.

Italian economic growth lagged behind the euro region for the past decade as falling productivity eroded competitiveness. The bloc’s third-biggest economy is unlikely to expand more than 1 percent this year and next as the recovery falters, Confindustria, an employers’ group, said on Nov. 17.

The extra yield investors demand to hold 10-year Italian bonds instead of benchmark German bunds widened to more than 200 basis points on Nov. 30 for the first time since 1997. Ireland’s bailout, the euro region’s second in six months, prompted concern that other debt-laden countries may follow.

The additional yield investors demand to own Intesa’s senior bonds rather than the safest government debt in Europe jumped 31 basis points in November to 178 basis points, according to Bank of America Corp. index data. Spreads on subordinated bonds of UniCredit surged 121 basis points to 458 basis points.

UniCredit, Intesa

Credit-default swaps on UniCredit’s senior bonds rose to 189 basis points on Nov. 30 from 139.25 on Oct. 29, data from CMA show. Swaps tied to senior debt of Intesa rose to 173 basis points on Nov. 30 from 122.25 basis points. The cost to insure senior bonds of Monte dei Paschi, Italy’s No. 3 lender, jumped 78 basis points to a record 262.5 basis points on Nov. 30.

Italian government bonds rallied today and credit-default swaps on its banks fell for a third day after the European Central Bank increased government debt purchases to stem “acute” tensions in financial markets. Contracts on Intesa fell to an almost two-week low of 143.25 basis points, while swaps tied to UniCredit debt declined to 170 basis points. The spread on Italian 10-year bonds tightened to about 150 basis points.

Lower Earnings Growth

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

“Higher cost of funding, lower fees and lower future loan growth will lead to lower earnings growth,” Sanford C. Bernstein & Co. analyst Marcello Zanardo said in an interview. “The possible implementation of austerity measures to reduce public debt could delay the expected anemic recovery and then affect bank’s profitability.”

The average return on equity of Italy’s banks is 3.4 percent, almost half of the 6.4 percent European average, data compiled by Bloomberg show.

Italian banks point to the retail networks as a steady source of funding. Lenders rely on individual investors for about 63 percent of their borrowings, compared with a European average of 48 percent, data compiled by ABI show. Retail investors don’t have pricing power when buying bonds and tend to be more stable than institutional buyers.

Retail Network

“The retail branch network is a stable and reliable source of funding,” Intesa Chief Executive Officer Corrado Passera said Nov. 9. Officials for the three biggest lenders declined to comment for this story.

Italy’s budget shortfall in 2009 reached 5.3 percent of gross domestic product and the debt is running at 116 percent of GDP, second only to Greece. Italy’s 2011 budget plan includes cuts totaling 13 billion euros to trim the deficit.

“I don’t like the size of Italy’s existing debt,” said Peter Braendle, a fund manager at Swisscanto Asset Management AG in Zurich, which oversees about $62 billion, including UniCredit and Intesa shares. “I am a little concerned about the higher interest rates Italian banks face and potential writedowns.”

Intesa has the highest net exposure to bonds of Portugal, Italy, Ireland, Greece and Spain among the southern European banks, totaling 65.1 billion euros, according to Bernstein. The exposure represents 240 percent of its core Tier 1 capital, a measure of financial strength, and 9.6 percent of total assets, according to Bernstein.

S&P Outlook

That compares with UniCredit’s 40.3 billion-euro exposure, or 103 percent of core Tier 1 and 4.2 percent of total assets, according to the analysts. For both banks, more than 96 percent of the exposure is to Italian debt.

Of the about 50 Italian banks rated by Standard & Poor’s, 40 percent have a negative outlook and 50 percent have a stable outlook. The rest are being monitored.

Morgan Stanley analysts led by Huw van Steenis warn that some Italian banks may have too little capital to sustain potential losses. In a note to clients on Dec. 1, Morgan Stanley advised clients to avoid Monte dei Paschi di Siena and Banco Popolare SC because of rising concerns over Italy’s debt and their “weaker capitalization.”

“We expect the European sovereign crisis to cast a long shadow over the European periphery where deleveraging is still the best case,” the Morgan Stanley analysts said.

--With assistance from Lorenzo Totaro in Rome and Francesca Cinelli in Milan. Editors: Steve Bailey, Frank Connelly.

To contact the reporters on this story: Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net Sonia Sirletti in Milan at ssirletti@bloomberg.net; Bryan Keogh in London at bkeogh4@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net Frank Connelly at fconnelly@bloomberg.net;

Royal Bank of Canada Profit Falls on Lower Trading

Posted: 03 Dec 2010 04:39 AM PST

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By Doug Alexander

(Adds unit performance, costs from seventh paragraph.)

Dec. 3 (Bloomberg) -- Royal Bank of Canada, the country’s largest lender by assets, reported fourth-quarter profit that unexpectedly fell on lower trading fees and higher expenses.

Net income for the period ended Oct. 31 fell 9.4 percent to C$1.12 billion ($1.12 billion), or 74 cents a share, from C$1.24 billion, or 82 cents, a year earlier, the Toronto-based bank said today in a statement. Revenue fell 3.4 percent to C$7.2 billion.

Royal Bank is the third Canadian lender to post a decline in profit for the period, as rising costs for compensation and marketing and falling trading revenue reduced earnings. Royal Bank’s trading income fell by half in the quarter, led by fixed- income and interest rates.

Royal Bank said adjusted earnings were 84 cents a share, trailing the C$1.01 a share average estimate of 14 analysts surveyed by Bloomberg News. The bank has missed estimates for five straight quarters.

“This strikes me as a pretty big miss,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion including banks.

Royal Bank fell 52 cents to C$55.72 yesterday on the Toronto Stock Exchange. The stock has fallen 1.2 percent this year, compared with a 7.5 percent gain for the 10-company Standard & Poor’s/TSX Banks Index.

More Pressure

The shares, the worst performing this year among the country’s biggest banks, will face “significant pressure” with the results, said John Aiken, an analyst at Barclays Capital.

“The market will once again have to reset its expectations for the bank,” he said in a note today.

Royal Bank set aside C$432 million for bad loans, about half the amount from a year earlier. Non-interest expenses rose 5.9 percent to C$3.8 billion.

Earnings from the RBC Capital Markets unit fell 34 percent to C$373 million from C$561 million a year earlier on declines in sales and trading. Trading revenue across the bank fell 48 percent to C$656 million.

Canadian consumer banking earnings rose 6.7 percent to C$765 million on increased lending and lower loan-loss provisions. International banking, which includes Raleigh, North Carolina-based RBC Bank, posted a loss of C$157 million, the 10th consecutive money-losing quarter for the unit.

“Royal Bank has to demonstrate that they can actually get a bang for their buck in the U.S.,” said David Baskin, president of Baskin Financial Services in Toronto, which manages C$370 million including banks. “They really have to show that they can get their act together in the United States.”

Insurance Sale

Insurance fell 74 percent to C$27 million, after taking a C$116 million loss on the October sale of its U.S. life insurance business, Liberty Life Insurance.

Wealth management rose 8.7 percent to C$175 million from a year earlier. Royal Bank said it had net income of C$5.22 billion for the year, up 35 percent driven by record earnings in Canadian banking.

Royal Bank is the fourth Canadian lender to report fourth- quarter results. National Bank of Canada, the country’s sixth- biggest bank, posted profit that beat analysts’ estimates and raised its dividend 6.5 percent. Yesterday, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce reported lower profits as trading income declined.

Bank of Nova Scotia, the third-biggest bank, reports results today. Bank of Montreal, the fourth-largest lender, releases earnings Dec. 7.

(Royal Bank will hold a conference call to discuss fourth- quarter results at 8 a.m. Toronto time. Dial +1-866-689-5910 passcode 1853457 or +1-416-340-2217 for the call, or go to www.rbc.com/investorrelations/ir_events_presentations.html)

King Follows Osborne Pay Policy With Two-Year Freeze

Posted: 03 Dec 2010 04:38 AM PST

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By Jennifer Ryan and Svenja O'Donnell

(Updates with union comment in sixth paragraph.)

Dec. 3 (Bloomberg) -- Bank of England Governor Mervyn King froze his employees’ salaries to match the government’s policy on public-sector pay, raising the prospect of staff defections.

The London-based central bank will follow Chancellor of the Exchequer George Osborne’s policy to halt wage increases for the next two fiscal years, according to a Bank of England official. Osborne announced June 22 that pay won’t rise for public-sector employees earning more than 21,000 pounds ($33,000).

“King would have been keen to move in lockstep with what was announced,” Colin Ellis, a former Bank of England official who is now chief economist at the British Venture Capital Association, said in an interview. Still, “the bank started to lose some really good, high-level people in recent years, and clearly this is going to make life harder for them.”

Osborne unveiled his pay policy in an emergency budget to help cut Britain’s record peacetime deficit. The bank’s announcement on salaries coincides with a week of media focus on the governor, including WikiLeaks’s publication of a confidential U.S. diplomatic cable citing his concern on Osborne’s and Prime Minister David Cameron’s inexperience.

The Bank of England official said that as part of the public sector, the bank will freeze pay and that it was right that the bank respects public policy.

Unite, a labor union representing the bank’s staff, “is against the concept and reality of pay freezes,” Marie Scott, its regional officer for the central bank, said in an e-mail. “Our members at the Bank of England do not receive the ‘fat cat’ salaries associated with the City.”

Brain Drain

Four heads of division at the Bank of England left in the past six months, according to a person familiar with the matter, who didn’t want to be identified because they aren’t authorized to speak to journalists. That’s a grade below King’s executive team. There are about two dozen of such officials, according to a graphic of the bank’s management structure on its website.

Highlighting the brain drain, Jens Larsen, a former head of the macro-financial analysis division, joined RBC Capital Markets as chief European economist in London in September after 12 years at the central bank. He had spent two years representing the U.K. on the executive board of the International Monetary Fund.

The Bank of England has in the past struggled to keep economists because of the higher pay available in the financial services industry. The bank’s directors said in the 2007 annual report that there had been “some concern” about rising resignations and vacancies in the monetary analysis and financial stability areas.

King refused a salary increase this year, according to the central bank’s annual report published in June. He took a 2.5 percent raise to 305,368 pounds including benefits on July 1, 2009. The governor already refused a revamped salary package when he was reappointed in 2008 which would have increased his basic pay to at least 375,000 pounds.

--With assistance from Scott Hamilton in London. Editors: Craig Stirling, Fergal O’Brien

To contact the reporters on this story: Jennifer Ryan in London at jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

Israel Can&rsquo;t Fight Forest Fire Alone, Netanyahu Says

Posted: 03 Dec 2010 04:32 AM PST

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By Calev Ben-David and Alisa Odenheimer

(Updates with Netanyahu comment in seventh paragraph.)

Dec. 3 (Bloomberg) -- Aircraft from Europe arrived in Israel today to help combat a forest fire near the port city of Haifa that killed at least 41 people and forced 15,000 to flee their homes.

Israel “can’t cope with a forest blaze of this type, accompanied by such strong winds,” without international help, Prime Minister Benjamin Netanyahu told a meeting of the Security Cabinet today in Tel Aviv, in comments broadcast on Israel’s Army Radio. Battling the blaze requires types of aircraft Israel doesn’t have, said the premier, who went to Haifa after the meeting to survey the firefighting operations.

The fire, described by officials as the worst in the country’s history, forced Israel to call for assistance from Europe. Eight planes and three helicopters arrived from Greece, Bulgaria, Cyprus and the U.K., an Army spokeswoman said, speaking anonymously according to military regulation. Spain, Turkey, Croatia, France, Russia, Azerbaijan, Egypt and Romania have also pledged to send aircraft, Netanyahu’s office said.

“Israel has never faced a natural disaster of this scope, where it had to call on outside help, and it might have some diplomatic implications,” said Gerald Steinberg, professor of political science at Bar Ilan University outside Tel Aviv.

Two Turkish firefighting planes were dispatched at the instructions of Prime Minister Recep Tayyip Erdogan, the Turkish Foreign Ministry said today. At the cabinet meeting, Netanyahu thanked Erdogan and other leaders who offered help.

Relations between Israel and Turkey have been strained since Israeli commandos killed nine Turks in a May 31 raid on an aid flotilla seeking to break the blockade of the Gaza Strip.

‘Better Relations’

“I hope this will be the beginning of better relations between our two countries,” Netanyahu told reporters in Haifa, in comments broadcast on Channel 2 television.

U.S. President Barack Obama, at a White House ceremony to celebrate the Hanukkah holiday, began by “offering our deepest condolences to the families and loved ones” of the victims of the fire and pledged to help combat it.

Firefighters are still trying to contain the blaze, which police spokesman Micky Rosenfeld said was the worst in Israel’s history. Most of the 41 confirmed dead were killed yesterday in a bus carrying prison guards on their way to help evacuate a prison endangered by the flames, Rosenfeld said.

The fire began around midday yesterday in the Carmel hills outside of Haifa, a city with a population of 266,000. Exceptionally dry weather created conditions that allowed the flames to spread quickly, said Salman Abu Rukun, an employee of the Israel Nature and National Parks Protection Authority. Shimon Koren, Israeli police northern district commander, said the possibility that negligence or arson started the blaze was being investigated.

More than 15,000 people have been evacuated from their homes, including some from a neighborhood on the southern outskirts of Haifa, Rosenfeld said.

--With assistance from Gwen Ackerman in Jerusalem and Jonathan Ferziger in Tel Aviv. Editors: Ben Holland, Heather Langan.

To contact the reporters on this story: Calev Ben-David in Jerusalem at cbendavid@bloomberg.net; Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

To contact the editor responsible for this story: Louis Meixler at lmeixler@bloomberg.net.

European Stocks Fluctuate Before U.S. Jobs Data; Berkeley Climbs

Posted: 03 Dec 2010 04:32 AM PST

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By Adam Haigh

Dec. 3 (Bloomberg) -- European stocks fluctuated, with the Stoxx Europe 600 Index poised to snap three weeks of losses, before a report that may show the labor market in the world’s largest economy has begun to improve. U.S. futures were little changed and Asian shares gained.

Berkeley Group Holdings Plc climbed 4.5 percent after the U.K.’s second-biggest homebuilder by market value said first- half profit increased 21 percent as it sold more houses. STMicroelectronics NV rallied 4.4 percent as Exane BNP Paribas recommended buying the shares of Europe’s largest semiconductor maker.

The Stoxx 600 slid less than 0.1 percent to 271.42 as of 12:19 p.m. in London. The gauge completed its biggest two-day rally since July yesterday as the European Central Bank extended its emergency loan and bond-buying programs and housing data added to confidence that the U.S. economy will continue to recover. The gauge is trading within 0.5 percent of its 2010 high reached on Nov. 9 as it headed for a weekly gain of 1.9 percent, paring the previous three weeks of losses.

“Traders are likely to be on the sidelines today as they eagerly await key jobs and unemployment data from the U.S.,” Jonathan Sudaria, a trader at London Capital Group Holdings Plc, said. “The major stumbling block could be the unemployment rate, expected to stay at 9.6 percent for a fourth month. Traders will question how far a consumer-led recovery can go without real job creation.”

Futures contracts on the Standard & Poor’s 500 Index expiring this month lost 0.1 percent. The MSCI Asia Pacific Index climbed 0.5 percent.

U.S. Unemployment

A Labor Department report due at 8:30 a.m. in Washington may show employers added 150,000 workers in November and the unemployment rate held at 9.6 percent. A report yesterday said fewer Americans filed claims for unemployment insurance payments in November, showing the job market has begun to improve.

Greece had its ‘BB+’ long-term sovereign credit rating placed on “CreditWatch” with negative implications by Standard & Poor’s Ratings Services. S&P will assess whether “assigning ‘preferred creditor’ status to future official lending” through the proposed European Stability Mechanism “could be detrimental” to bondholders who want to be repaid. The so- called ESM may govern European Union sovereign bonds from July 2013.

German Economic Growth

The Bundesbank raised its forecast for German economic growth this year, projecting the fastest expansion since data for the reunified country began in 1992. Gross domestic product will expand 3.6 percent in 2010, 2 percent in 2011 and 1.5 percent in 2012, the Frankfurt-based central bank said in its bi-annual economic outlook today.

The European Central Bank bought Irish government bonds today, according to three traders with knowledge of the transactions. The ECB also purchased Portuguese debt, said two of the people, who asked not to be identified because the deals are confidential. An ECB spokesman in Frankfurt declined to comment.

Berkeley climbed 4.5 percent to 878 pence after the homebuilder said net income rose to 44.5 million pounds ($69.7 million) in its fiscal first half from 36.9 million pounds a year earlier. Berkeley benefited from an increase in demand for homes in the southeast of England, which started in April 2009, because of its focus on the area. Berkeley sold 1,249 homes in the first half compared with 914 a year earlier.

Rivals Taylor Wimpey Plc and Persimmon Plc climbed 3.7 percent to 26.31 pence and 1.1 percent to 376.2 pence, respectively.

STMicroelectronics rallied 4.4 percent to 7.28 euros after Exane upgraded its recommendation on the shares to “outperform” from “neutral” and increased its price estimate 53 percent.

Arkema, Deutz

Arkema SA, the French maker of acrylics, climbed 4.2 percent to 52.60 euros after JPMorgan Chase & Co. and Morgan Stanley raised their share-price estimates, citing improved prospects for 2011. JPMorgan analysts, including Martin Evans and Neil Tyler, raised their 12-month price forecast 8 percent to 54 euros. Morgan Stanley boosted its estimate 13 percent to 62 euros.

Deutz AG slumped 6.9 percent to 5.48 euros. The company’s largest shareholder Same Deutz-Fahr Holding & Finance is selling as much as 20 percent of the existing stock, according to terms of the offer obtained by Bloomberg News. The offer range has been narrowed to 5.30 euros to 5.40 euros, according to the people, who declined to be named because the information isn’t yet public.

GN Store Nord A/S fell 4.4 percent to 47.80 kroner, among the biggest decliner on the Stoxx 600, after Telekomunikacja Polska SA filed a complaint over an arbitration procedure.

--Editors: {Will Hadfield}, {Andrew Rummer}

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net.

Porsche Plans &lsquo;Spectacular&rsquo; Detroit Show Return After 4 Years

Posted: 03 Dec 2010 04:16 AM PST

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By Andreas Cremer

Dec. 3 (Bloomberg) -- Porsche AG, the sports-car maker merging with Volkswagen AG, will return to the Detroit auto show in January for the first time in four years with a “spectacular” model meant to reinforce its commitment to the U.S. market.

“Porsche is becoming an integral part of the VW group, it’s only logical that we’re taking part,” Hans-Gerd Bode, a spokesman at the Stuttgart-based carmaker, said in a telephone interview today. “We’ll have something spectacular to show there. You’ll have to wait and be surprised.”

Porsche will join VW group presentations beginning Jan. 10 in Detroit that will also include luxury unit Audi and ultra- luxury brand Bentley Motors Ltd., Bode said.

Porsche, maker of the 911 sports car, last year delivered a quarter of its 85,903 vehicles to the U.S., its biggest single market. The manufacturer pulled out of Detroit after 2007 to focus U.S. activities on the show in Los Angeles. California is a main U.S. market for Porsche.

“Porsche’s return demonstrates the relevancy of the Detroit show for luxury manufacturers,” said Rebecca Lindland, an analyst at IHS Automotive in Lexington, Massachusetts. “They target a very specific audience with their cars and the U.S. market is incredibly important for Porsche.”

Porsche’s Cayman R mid-engine sports car, which sells in Europe for 69,830 euros ($91,935), premiered last month in Los Angeles. The model, which surges to 100 kilometers (62 miles) per hour in 5 seconds and has a top speed of 282 kilometers per hour, will hit showrooms next spring, Bode said.

Porsche took another step this week toward its planned merger with Volkswagen after the company’s shareholders backed a 5 billion-euro stock sale to lower debt. The sports-car maker agreed to combine with VW in August 2009 after a failed attempt by Porsche to gain control of VW.

--Editors: Chad Thomas, Heather Harris

To contact the reporter on this story: Andreas Cremer in Berlin at acremer@bloomberg.net.

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net.

Dollar Weakens, Stocks, U.S. Futures Fluctuate Before Jobs Data

Posted: 03 Dec 2010 04:12 AM PST

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By Stephen Kirkland

Dec. 3 (Bloomberg) -- The dollar weakened for a third day while stocks and U.S. index futures fluctuated before a report that may show America’s unemployment rate held at 9.6 percent. Irish and Portuguese bonds gained and the ruble jumped.

The Dollar Index fell 0.3 percent at 7:10 a.m. in London. The yield on the Irish 10-year bond slid 40 basis points, while the Portuguese yield dropped 29 basis points. Greek 10-year bonds rose, with the yield declining six basis points, even as Standard & Poor’s said it may cut the nation’s credit ranking. The Stoxx Europe 600 Index fell less than 0.1 percent, while Standard & Poor’s 500 Index futures were little changed. The ruble strengthened the most in two weeks versus the dollar after Russia won the right to host soccer’s 2018 World Cup.

An increase in November payrolls may not be large enough to bring down unemployment, which remained unchanged for a fourth month in November, economists said in a Bloomberg survey before today’s Labor Department report. The European Central Bank probably bought Portuguese and Irish debt yesterday as ECB President Jean-Claude Trichet pledged to maintain emergency liquidity measures.

The ECB’s delayed exit strategy “has pushed the sovereign debt crisis off the front seat for market momentum drivers, leaving focus on today’s U.S. non-farm payrolls report and its implications for the Federal Reserve’s quantitative easing,” Lena Komileva, an economist in London at the brokerage firm Tullett Prebon, wrote in a research note to clients.

Jobs, Services

The dollar weakened 0.3 percent to 83.61 yen. The euro climbed 0.3 percent to $1.3253, erasing a weekly decline. South Korea’s won strengthened against all 16 major peers as overseas investors raised their holdings of the nation’s shares.

The yield on the U.S. 10-year Treasury note held steady at 2.99 percent. U.S. futures were little changed after the S&P 500 yesterday rallied to its highest level in almost a month. Employment increased by 150,000 in November, according to the median forecast of 87 economists surveyed, bringing the gain this year to 1.02 million. The Labor Department’s report is scheduled for 8:30 a.m. in Washington. A separate report may show service industries, which account for almost 90 percent of the economy, grew last month at the fastest pace since May.

The extra yield, or spread, that investors demand to hold 10-year Irish securities instead of benchmark German bunds fell 33 basis points to 536 basis points, while the Portuguese-German spread narrowed 30 basis points to 304 basis points. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments fell two basis points to 178, compared with a record-high 200.75 basis points on Nov. 30, according to CMA.

Berkeley, Hochtief

European stocks fluctuated after the biggest two-day rally for the Stoxx 600 since July, while the MSCI Asia Pacific Index gained 0.5 percent. Berkeley Group Holdings Plc climbed 4.1 percent after the U.K.’s third-biggest homebuilder said profit rose. GN Store Nord A/S fell 4.4 percent after Telekomunikacja Polska SA filed a complaint over an arbitration procedure. Construction shares such as Hochtief AG advanced, extending yesterday’s rally, after Russia and Qatar won the rights to host the 2018 and 2022 World Cup soccer tournaments.

The ruble appreciated 0.6 percent against the dollar. Russia’s Micex Index advanced 1 percent to the highest level since July 2008 as OAO Novolipetsk Steel and OAO Severstal surged more than 3.5 percent. The MSCI Emerging Markets Index climbed 0.5 percent, poised for its biggest three-day rally since May.

Brent crude for January delivery on the ICE Futures Europe exchange rose to $91.07 a barrel, its highest since Oct. 3, 2008. Oil will advance to $120 a barrel in 2012 as consumption in emerging economies increases, JPMorgan Chase & Co. said in a report today.

Gold for immediate delivery rose 0.4 percent to $1,390.80 an ounce. Wheat for March delivery climbed as much as 3.4 percent to the highest level since Aug. 6 on concern wet weather in Australia may curb supply. The S&P GSCI Index of 24 commodities added 0.5 percent.

--With assistance from David Merritt, Abigail Moses, Michael Patterson, Raj Rajendran and Dan Tilles in London. Editors: Stephen Kirkland, Justin Carrigan

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

To contact the editor responsible for this story: Paul Sillitoe in London at psillitoe@bloomberg.net

Oracle Says Sun Servers Set Database Record

Posted: 02 Dec 2010 07:16 PM PST

Media Dinosaurs Adapt to the iPad Age

Posted: 02 Dec 2010 06:00 AM PST