By Simon Kennedy
Aug. 21 (Bloomberg) -- Nobel Prize-winning economists Myron Scholes and Daniel McFadden predicted the yearlong credit squeeze will inflict more pain on the world economy and financial markets.
The crisis is ``not over and I'm not exactly sure when it's going to end,'' Scholes said today at a conference in Lindau, Germany, featuring 14 Nobel laureates in economics. McFadden said in an interview ``that as the crisis continues you will see a lot of business failures.''
A year since the U.S. housing slump sparked about $500 billion in credit-market losses for banks globally, the world's largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and the euro-area and Japan contracted in the second quarter.
Economists at Goldman Sachs Group Inc. today said that countries that account for half of the world economy face recession, while those at JPMorgan Chase & Co. estimate a global expansion of 1 percent this quarter, the weakest in seven years.
Financial institutions still need to cut back lending and strengthen their balance sheets by raising additional capital and selling assets, said Scholes, chairman of Platinum Grove Asset Management LP, a hedge fund based in Rye Brook, New York. That will hurt companies that have borrowed short-term debt to finance long-term activities, said McFadden, a professor at the University of California.
Collapsing Banks
``There is still a tremendous amount of deleveraging still necessary,'' said Scholes, who was a partner in Long-Term Capital Management LP before it collapsed in 1998.
Lone Star Funds, the Dallas-based private equity firm, today agreed to buy IKB Deutsche Industriebank AG after the German bank was felled by the subprime mortgage crisis. Bear Stearns Cos., the fifth-largest U.S. securities firm has already collapsed, while the bonds of regional banks such as National City Corp. and Keycorp are under pressure on expectations of more fallout.
Speaking at the same event, Nobel laureate Joseph Stiglitz of Columbia University blamed U.S. and international regulators such as former Federal Reserve Chairman Alan Greenspan for failing to restrain an explosion in financial innovation and lending that led borrowers to rack up debt they couldn't repay. He criticized guidelines known as Basel II for encouraging too much self-regulation of banks.
'Massive Failure'
``It was a massive failure of the brains of the economy,'' said Stiglitz. ``There was a party going on and the regulator with the same mindset of those in the party didn't want to be a party pooper.''
McFadden suggested a financial equivalent of the U.S. Food and Drug Administration be established to monitor and certify new financial instruments. Scholes warned against a ``rush to regulation,'' arguing ``the cost of regulation may be far greater than its benefits.''
The economists spoke at a meeting of Nobel laureates attended by about 300 young researchers and held every two years. Scholes won the prize in 1997 for his work on derivatives, McFadden won three years later for studying how households make choices and Stiglitz won in 2001 for an analysis of how markets operate with uneven information.
To contact the reporters on this story: Simon Kennedy in Lindau, Germany, at skennedy4@bloomberg.net
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Thursday, August 21, 2008
European Services, Manufacturing Contracted in August
By Ben Sills
Aug. 21 (Bloomberg) -- Europe's manufacturing and service industries contracted for a third month in August as consumers and businesses reeled from July's record oil prices.
Royal Bank of Scotland Group Plc's composite index was at 48 after 47.8 in July, Reuters Plc reported. Economists forecast a decline to 47.7, the median of 18 estimates in a Bloomberg News survey shows. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.
While oil prices have fallen 20 percent from a record $147.27 a barrel on July 11 and the euro has dropped 7 percent from its peak, their gains over the past year have damped economic growth. The economy of the 15 nations using the euro shrank in the second quarter after faster inflation curbed spending power and the currency's strength as well as the U.S. subprime mortgage crisis hurt demand for European exports.
``There are simply too many headwinds,'' said Martin Van Vliet, an economist at ING Bank in Amsterdam. ``There remains a risk that the region's economy will contract in the third quarter.''
Gross domestic product fell 0.2 percent in the second quarter from the first, when it grew 0.7 percent, the European Union's statistics office said last week. The European Central Bank, which raised its benchmark rate by a quarter point to 4.25 percent in July, currently predicts growth will slow to about 1.8 percent this year from 2.7 percent in 2007.
Rate Cuts Approaching?
Markit's manufacturing index was at 47.5 after 47.4 in July while the services index declined to 48.2 from 48.3.
``The figures confirm that the ECB's growth projections are no longer realistic and the time for rate cuts is approaching,'' Christoph Weil, an economist at Commerzbank AG in Frankfurt, wrote in a research note to clients today. ``Disappointing economic news has still not brought down inflation expectations, though, and only when this happens will the ECB be willing to cut interest rates. We do not expect this to be the case until next year.''
Inflation is currently running at 4 percent, a 16-year high, and expectations, as measured by the breakeven rate on five-year French inflation-indexed bonds, rose to 2.22 percent today. The central bank aims to keep inflation just below 2 percent.
ECB council member Nout Wellink told Dutch newspaper Het Financieele Dagblad that the damping effect of lower oil prices on inflation is ``much reduced'' by the euro's decline.
Euro, Oil Decline
The currency's drop to $1.4780 today from a record $1.6038 on July 15 may support economic growth by easing pressure on companies' margins. German investor confidence rose more than forecast in August after touching a record low in July.
``The decline in oil prices and the euro are helping to lessen concerns about where the euro zone economy might be in six months' time,'' said Matthew Sharratt, an economist at Bank of America in London.
Even as the U.S., the world's biggest economy, skirts a recession, demand from emerging markets in Asia and Latin America has helped to support European export sales. Schneider Electric SA, the Paris-based maker of circuit breakers, reported a 17 percent advance in first-half profit this month and raised its forecast for 2008 sales on demand in China.
``No sign of change in our emerging markets but there's some slowdown in traditional construction in North America and Europe,'' Chief Executive Officer Jean-Pascal Tricoire said on Aug. 1.
`Appreciable Mark'
Bayerische Motoren Werke AG, the world's largest maker of luxury cars, on Aug. 1 abandoned its 2008 profit forecast, citing the higher cost of commodities and the decline in the value of its dollar sales. Allianz SE, Axa SA and Aegon NV, three of Europe's biggest insurers, all reported lower profit this month as the subprime contagion eroded the value of their holdings.
``The protracted difficult climate on international capital markets and movements in exchange rates did leave an appreciable mark on our results,'' Wilhelm Zeller, Chief Executive Officer of Hannover Re, Germany's second-biggest reinsurer, said Aug. 7 after announcing a 40 percent decline in second-quarter profit.
European banks have suffered $228 billion of losses since last year from investments in the U.S. mortgage market. The median house price in the U.S. fell 7.6 percent in the second quarter from a year earlier, the National Association of Realtors said this month.
To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net
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Aug. 21 (Bloomberg) -- Europe's manufacturing and service industries contracted for a third month in August as consumers and businesses reeled from July's record oil prices.
Royal Bank of Scotland Group Plc's composite index was at 48 after 47.8 in July, Reuters Plc reported. Economists forecast a decline to 47.7, the median of 18 estimates in a Bloomberg News survey shows. The index is based on a survey of purchasing managers by Markit Economics in London and a reading below 50 indicates contraction.
While oil prices have fallen 20 percent from a record $147.27 a barrel on July 11 and the euro has dropped 7 percent from its peak, their gains over the past year have damped economic growth. The economy of the 15 nations using the euro shrank in the second quarter after faster inflation curbed spending power and the currency's strength as well as the U.S. subprime mortgage crisis hurt demand for European exports.
``There are simply too many headwinds,'' said Martin Van Vliet, an economist at ING Bank in Amsterdam. ``There remains a risk that the region's economy will contract in the third quarter.''
Gross domestic product fell 0.2 percent in the second quarter from the first, when it grew 0.7 percent, the European Union's statistics office said last week. The European Central Bank, which raised its benchmark rate by a quarter point to 4.25 percent in July, currently predicts growth will slow to about 1.8 percent this year from 2.7 percent in 2007.
Rate Cuts Approaching?
Markit's manufacturing index was at 47.5 after 47.4 in July while the services index declined to 48.2 from 48.3.
``The figures confirm that the ECB's growth projections are no longer realistic and the time for rate cuts is approaching,'' Christoph Weil, an economist at Commerzbank AG in Frankfurt, wrote in a research note to clients today. ``Disappointing economic news has still not brought down inflation expectations, though, and only when this happens will the ECB be willing to cut interest rates. We do not expect this to be the case until next year.''
Inflation is currently running at 4 percent, a 16-year high, and expectations, as measured by the breakeven rate on five-year French inflation-indexed bonds, rose to 2.22 percent today. The central bank aims to keep inflation just below 2 percent.
ECB council member Nout Wellink told Dutch newspaper Het Financieele Dagblad that the damping effect of lower oil prices on inflation is ``much reduced'' by the euro's decline.
Euro, Oil Decline
The currency's drop to $1.4780 today from a record $1.6038 on July 15 may support economic growth by easing pressure on companies' margins. German investor confidence rose more than forecast in August after touching a record low in July.
``The decline in oil prices and the euro are helping to lessen concerns about where the euro zone economy might be in six months' time,'' said Matthew Sharratt, an economist at Bank of America in London.
Even as the U.S., the world's biggest economy, skirts a recession, demand from emerging markets in Asia and Latin America has helped to support European export sales. Schneider Electric SA, the Paris-based maker of circuit breakers, reported a 17 percent advance in first-half profit this month and raised its forecast for 2008 sales on demand in China.
``No sign of change in our emerging markets but there's some slowdown in traditional construction in North America and Europe,'' Chief Executive Officer Jean-Pascal Tricoire said on Aug. 1.
`Appreciable Mark'
Bayerische Motoren Werke AG, the world's largest maker of luxury cars, on Aug. 1 abandoned its 2008 profit forecast, citing the higher cost of commodities and the decline in the value of its dollar sales. Allianz SE, Axa SA and Aegon NV, three of Europe's biggest insurers, all reported lower profit this month as the subprime contagion eroded the value of their holdings.
``The protracted difficult climate on international capital markets and movements in exchange rates did leave an appreciable mark on our results,'' Wilhelm Zeller, Chief Executive Officer of Hannover Re, Germany's second-biggest reinsurer, said Aug. 7 after announcing a 40 percent decline in second-quarter profit.
European banks have suffered $228 billion of losses since last year from investments in the U.S. mortgage market. The median house price in the U.S. fell 7.6 percent in the second quarter from a year earlier, the National Association of Realtors said this month.
To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net
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Paulson Risks Goldman Standard as Fannie, Freddie Shares Erode
By Rebecca Christie and Matthew Benjamin
Enlarge Image/Details
Aug. 21 (Bloomberg) -- As soon as he became secretary of the U.S. Treasury in July 2006, Hank Paulson started preparing for a crisis.
In August 2006, at a meeting with President George W. Bush and his economic team at Camp David, Maryland, the former Goldman Sachs Group Inc. chief executive officer gave a talk about the capital markets.
Paulson held up over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy. ``My point was that we had gone eight years since the last serious problem in capital markets and that there'd been all of this innovation,'' Paulson said in an interview in late July.
Paulson also revived the President's Working Group on Financial Markets, a council of regulators consisting of the Federal Reserve, the Treasury, the Securities and Exchange Commission and the Commodities Futures Trading Commission.
Founded after the stock market crash of 1987, the group had fallen into disuse. Paulson began to build relationships among the agencies, figuring that the financial markets panel would be key to addressing the next crisis, no matter what that would be.
``No one would have predicted the Russian default in '98 or some of the things that happened in Asia,'' he says. ``But you still need to get ready to respond.''
Turbulent Times
In his two years at the Treasury, Paulson has witnessed some of the most turbulent economic times since the Great Depression.
Just in the past year, he's had to wrestle with a slumping economy and increasing home loan foreclosures, the subprime crisis, the collapse of Bear Stearns Cos. and the weakening of Fannie Mae and Freddie Mac. ``I can't remember when Treasury has been so deeply involved in the structure of securities markets,'' says James Cox, a professor at Duke University who specializes in securities law.
Paulson, 62, who was a football offensive lineman in college, hasn't just been spending his time fending off economic assaults. He brought his own list of things he wanted to accomplish in the 2 1/2 years remaining of the Bush administration.
A sampling: overhaul the Social Security system, improve economic relations with China, jump-start African financial markets and combat global warming by setting up a fund to help finance new energy-efficient technologies.
Defines Job 'Expansively'
``One of my management principles is to define your job expansively,'' Paulson says. ``I think I've defined the job here expansively.''
Not all of his initiatives have been successful. The Social Security plan and a bid to create Treasury-backed institutions to buy home mortgages were notable non-starters.
And he has drawn sharp criticism from some conservatives. Former presidential candidate Steve Forbes, a Republican, says Paulson could have avoided the Fannie-Freddie crisis altogether by cracking down on the two companies earlier.
For years, Republicans have called the firms ticking time bombs due to their private ownership and implied government guarantees. Paulson, says Forbes, should have made moves to fire their boards, recapitalize them and sever their ties to the government.
``Hank Paulson blew a supreme opportunity to make a substantial reform,'' Forbes says. ``He's caved in to the political pressure in Washington, which is, in essence, keep Fannie and Freddie largely as they are.''
Shares Tumble
During the past week, investor confidence in Fannie Mae and Freddie Mac has dwindled amid rising speculation that government intervention is inevitable. Share prices have plunged, as Wall Street watches for any sign that the two companies are no longer able to roll over their debt. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.
In a debt sale this week, Freddie Mac paid yields that had the highest spread on record over U.S. Treasuries. In Aug. 20 trading, Fannie Mae slumped 27 percent and Freddie Mac dropped 22 percent, extending its losses to 90 percent for the year. Fannie Mae declined $1.61 to $4.40, the lowest since 1989, in New York after falling as low as $3.95. Freddie dropped 92 cents to $3.25, the lowest level since 1990, and earlier in the day fell to $2.95.
Since Paulson's plan was enacted, several prominent critics have spoken out in favor of nationalizing the two companies. Former Fed Chairman Alan Greenspan said the government should create a company like the Resolution Trust Corp. to sell off the assets of any failing financial institution while limiting taxpayer losses, in a new epilogue to his memoir.
Bill Gross Prediction
Meanwhile, Bill Gross, who manages the world's biggest bond fund, said Aug. 6 the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac. Richard Syron, Freddie Mac's chief executive, that same day said he believed his company would be able to avoid Treasury intervention.
While Paulson has made deals with politicians across the spectrum, he's also expanded his authority beyond the scope of any previous Treasury secretary. That's a big change for the Bush administration, which ousted its first Treasury secretary, Paul O'Neill, for his independent views and made his successor, John Snow, a traveling salesman for Karl Rove-designed economic policies.
During Snow's tenure, the Treasury complained of being left out of efforts to revamp Fannie and Freddie, says Vincent Reinhart, former director of the Fed's Monetary Affairs Division who's now at the American Enterprise Institute in Washington.
`Back in Business'
``The Treasury's back in business,'' Reinhart says.
At the Treasury, Paulson is drawing in large part on the skills he honed during his 32 years in investment banking. Paulson's signature style is to confront issues early, hold private meetings and build a consensus before announcing a deal, so that he's sure it will get the necessary backing, according to members of Congress and government staff who've worked with him.
Goldman, which was a partnership until 1999, has a culture of collegiality, says Edward Yingling, executive director of the American Bankers Association.
The bank has produced prominent political figures such as former Treasury Secretary Robert Rubin, former Deputy Secretary of State John Whitehead and Jon Corzine, who was a senator from New Jersey before becoming governor of that state.
Evoking Hamilton
Rubin, who served at the Treasury from 1995 to '99 after 26 years at Goldman and a stint at the White House, dealt with financial crises in Mexico and Asia, pushed for free trade and promoted budget policies that led to federal budget surpluses. When he retired, former President Bill Clinton called him ``the greatest secretary of the Treasury since Alexander Hamilton.''
Yingling says he asked Robert Steel, a former vice chairman at the investment bank who was Paulson's top domestic finance aide at the Treasury for almost two years, why the firm generates so many high-profile Washington officials.
``He said the culture at Goldman Sachs was not hierarchical and that people learned to work in teams and to work with people well,'' Yingling says. (Steel left the Treasury in July to become CEO of embattled bank Wachovia Corp.)
Executives like O'Neill and Snow, both of whom had a background in industry, tended to make a decision and have people go implement it, Yingling says. ``This town doesn't work that way,'' he says.
Gillette Deal
Paulson's consensus building doesn't mean he isn't forceful enough to win people over to his point of view. As chief of Goldman Sachs, he was often called in to woo clients and persuade them to sign with his firm. In January 2005, a month after Procter & Gamble Co. abandoned efforts to acquire Gillette Co., he helped revive discussions between the two firms with a phone call to A.G. Lafley, P&G's chief executive officer. The $57 billion deal, hammered out three weeks after Paulson's call, was the biggest that year.
As Goldman's chairman and CEO, Paulson also established relationships with politicians including Angela Merkel, now Germany's chancellor, Russian leader Vladimir Putin and former Chinese President Jiang Zemin. He says he's traveled to China at least 70 times during his career.
In the past 12 months alone, he went in December and March and was on vacation in Beijing in August to attend the Olympics. He may go again for the next round of high-level U.S.-China talks.
Paulson says he treats President Bush like a client, too. ``When you're advising a principal, you need to have a role where you are candid,'' Paulson says. ``But outside, there's never daylight between you and your boss.''
Fannie, Freddie
Paulson's coalition building faced one of its toughest tests in July, when the stocks of the two mortgage companies that account for almost half of the country's $12 trillion mortgage market began to collapse. Shares of Fannie Mae and Freddie Mac had lost more than 75 percent of their value in the first half of this year, as investors worried about the impact of the housing crisis on their holdings. While the two are government-chartered institutions, there was no explicit guarantee that the government would bail them out if they were to default.
On the morning of Friday, July 11, Paulson met with the president and convinced him to make a public comment about Fannie and Freddie. At the Energy Department later that day, Bush told reporters that the firms are ``very important institutions.'' He said he had discussed market concerns with his Treasury secretary. Paulson also tried to calm the markets, issuing a statement supporting the mortgage giants ``in their current form.''
Shares Slide
Both moves failed to stanch the bleeding. Fannie Mae declined $2.95, or 22 percent, to $10.25 in New York Stock Exchange trading on July 11, after passing through a low of $6.68 during the day. Freddie Mac fell 25 cents, or 3.1 percent, to $7.75 after reaching a low of $3.89.
Paulson's efforts were just beginning. He decided to seek sweeping new authority to extend emergency credit to the two companies and also to buy equity stakes in them if needed. He made ``unspecified'' powers the heart of his plan, which didn't spell out the amounts of money or terms of any bailout.
If investors knew the Treasury had power to rescue the mortgage giants, then an actual rescue might never be needed, Paulson says. Earlier in the year, Paulson had hoped Congress would create a stronger regulator for Fannie and Freddie before the firms reached a crisis point. ``I was hopeful we'd get the reform and we wouldn't have to use the plan,'' he says.
Bernanke Support
Still, Paulson knew that putting taxpayers on the hook for a possible bailout would be a tough sell on Capitol Hill. So he turned to Fed Chairman Ben S. Bernanke, whose support would be critical to convincing skeptical Democrats to back the plan.
During one of their weekly breakfasts, Paulson and Bernanke, 54, discussed the proposal and the possibility of the Fed extending an interim line of credit to Fannie and Freddie while Congress weighed the Treasury's proposal. Bernanke noted that such a move would be outside the Fed's normal duties, but that he'd consider it if Paulson thought Congress would quickly approve the Treasury's plan.
Paulson says Bernanke asked him if he believed that, in the middle of a presidential campaign, he could persuade a Democratic Congress to grant sweeping new powers to a lame-duck Republican administration. ``I took a deep breath and said yes,'' Paulson says.
Paulson immediately began calling congressional leaders to discuss the plan, making use of relationships he had been cultivating since his arrival at Treasury.
Consulting Lawmakers
Among others, he spoke with House Speaker Nancy Pelosi, a Democrat; Senate Majority Leader Harry Reid, also a Democrat; and House Minority Leader John Boehner, a Republican. Having Bernanke's backing helped with skeptical Democrats, says Reinhart, the former Fed official. ``Bringing the Federal Reserve into it brings a measure of independence that is consoling to the Congress,'' he says.
Paulson also lobbied the president, who'd threatened to veto any bill that contained major federal funding for community grants to enable municipalities to buy defaulted mortgages and help people stay in their homes.
The measure was sponsored by Democrats led by U.S. Representative Barney Frank, chairman of the powerful House Financial Services Committee. Paulson convinced Bush to back down from the veto threat, says White House spokeswoman Dana Perino. That helped to ensure the support of Frank and other Democrats. ``I think he's been very constructive,'' says Frank, 68, a Massachusetts Democrat. ``It's important to have a secretary of the Treasury that the president would listen to and respect.''
Treasury Steps
By the afternoon of Sunday, July 13, Paulson was confident enough to go public. Speaking on the steps of the Treasury Building, just hours before nervous Asian markets would open, he asked Congress for enormous new authority to backstop and oversee the beleaguered mortgage companies.
By Wednesday of that week, Fannie Mae's stock had rebounded 31 percent and Freddie Mac's was up 18 percent. On July 23, the House voted 272-152 in favor of the bill. Of the nays, only three were Democrats. Three days later -- just 13 days after Paulson's request -- the Senate passed it 72-13. All those opposed were Republicans.
Frank's Praise
Frank, a longtime foe of the administration, praised the bill after it was passed.
``Of the problems that were created by the reckless deregulation that led to the subprime crisis and the neglect of affordable housing that has marked Republican rule in Congress, this package of measures is the best response we could make,'' he said in a statement after the House vote. ``This will begin to lay the groundwork for a turnaround in the housing market.''
The legislation gives Paulson all of the major items he asked for, including unlimited authority for 18 months to make emergency loans to Fannie Mae and Freddie Mac and possibly buy stakes in the two mortgage giants. The legislation also created a long-sought new regulator to oversee Fannie and Freddie. Bush signed it into law on July 30.
Trading the presidential objections for Democratic backing was classic Paulson, says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former Treasury official.
`He's a Dealmaker'
``He's a dealmaker,'' Truman says. ``It's one skill that Treasury secretaries need to have.''
That's especially the case when the economy is in danger, says Glenn Hubbard, Columbia Business School dean and the first chairman of Bush's Council of Economic Advisers.
``The time to judge economic policy management is in times of crisis, and I think he has brought the right skills to bear,'' Hubbard says. ``Even if I don't necessarily agree with everything he's done, I think he's been incredibly thoughtful, incredibly careful and a real leader.''
Paulson says timing played a big role in getting the program through.
``We recognized quite early on that if there was some concern or lack of confidence in their access to capital, this could create a serious problem,'' he says of the mortgage companies. ``But we certainly couldn't go to Congress and ask for these powers that would make it a self-fulfilling prophecy - - or we wouldn't have gotten the powers.''
Weekend Warrior
That the crisis in the share prices occurred on a Friday also worked for Paulson. As in the Bear Stearns bailout, Paulson cobbled together the Fannie and Freddie deal over the weekend, when markets are closed and the capital is quiet.
``He's used the fact that everyone in Washington goes out of town as his strength, because he stays in town and then works the phones and then gets a plan that he can unveil Monday morning,'' says Steven Bartlett, a former congressman who now leads the Financial Services Roundtable, a Washington-based advocacy group that represents large financial services companies.
Bartlett calls the negotiating marathons Paulson's ``famous weekenders.''
Since the plan was enacted, Paulson has reiterated that a bailout won't be necessary. ``We aren't going to comment on speculation,'' a Treasury spokeswoman, Jennifer Zuccarelli, said on Aug. 18. ``As the secretary has said, we have no plans to use these authorities.'' Yesterday, the Treasury's position was unchanged despite the plunging stock prices. ``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Gathering Staff
Paulson likes to gather his staff in a room to hear from each of them before debating the merits and dangers of various policies, says David McCormick, who as Treasury undersecretary for international affairs is Paulson's top international aide.
``He really likes to sit down, go around the room and get conflicting views,'' McCormick says. ``People feel, I think, empowered.''
McCormick's first interaction with Paulson came in his previous job at the White House, when both were new to government. A Paulson aide asked McCormick, 43, to look at a draft of a speech for the Treasury secretary that addressed some international issues. McCormick sent the aide a note saying that he liked the text but that it seemed a tad long.
Five minutes later, he says, his phone rang and the Treasury secretary was on the line, wanting to know where the speech was too long and how to fix it.
`Incredibly Blunt'
Behind closed doors, Paulson's comments can have an edge. ``He is incredibly blunt,'' McCormick says. ``There's never shading with Hank, in the sense that I think you always are getting the straight picture.''
Paulson, who doesn't drink or smoke, has little time for frivolity on the job. Colleagues and lawmakers say he likes to limit interactions to serious discussions. ``I believe in substance,'' he says. ``I don't believe that you get things done just by getting together and having a drink or laughing, or interacting personally. While that's never a negative, you need to bring value.''
Henry M. Paulson Jr. developed a taste for hard work and a love of nature while growing up in Barrington, Illinois, a semirural community of 10,000 about 35 miles from Chicago with large areas of wetlands and forest preserves. Paulson still owns a farm there with his wife, Wendy, whom he married 39 years ago in September.
His father was a wholesale jeweler who raised Paulson to be a Christian Scientist and to become an Eagle Scout.
Harvard M.B.A.
At Dartmouth College in Hanover, New Hampshire, Paulson earned a degree in English and was a member of Phi Beta Kappa. He also was an all-Ivy League football player and a member of the Green Key Society, an honorary service group.
He now has two adult children, one of whom, Henry M. Paulson III, owns the Portland Beavers baseball team, the Triple-A affiliate of the San Diego Padres. His daughter, Amanda, runs the Chicago bureau of the Christian Science Monitor.
In 1970, Paulson earned a Master of Business Administration from Harvard Business School in Boston and then entered public service. From 1970 to '72, he was a staff assistant at the Defense Department, and from '72 to '73 he was a White House staff assistant, working alongside John Ehrlichman, the Nixon aide later jailed for crimes related to the Watergate break-in.
Paulson joined Goldman Sachs's Chicago office in 1974. There, he rapidly moved through the ranks, becoming managing partner and co-head of the firm's investment banking division. He was named co-chairman and co-CEO in 1998 and gained sole possession of those posts a year later, when he and other top executives pushed out Jon Corzine and took the firm public.
Goldman Shares
Paulson sold his 3.23 million shares in Goldman, worth about $500 million at the time, when he took the Treasury job, according to regulatory filings. He was exempted from paying capital gains tax on the sale of those stakes under a rule meant to avoid penalizing wealthy people who take government jobs and are forced to sell assets.
Paulson also sold about $25 million of holdings in a Goldman fund whose sole asset was a stake in Industrial & Commercial Bank of China, the world's largest publicly traded financial institution. The bank raised $22 billion in its initial public offering in October 2006, the world's biggest IPO.
Managing the U.S. relationship with China is an increasingly important part of the Treasury secretary's job. During the Fannie and Freddie crisis in July, Paulson used his credibility with Chinese leaders to reassure them that the U.S. mortgage companies weren't in jeopardy.
Talks With Chinese
``I clearly talked with the Chinese through this,'' Paulson says. ``They've worked with me enough that they knew I wouldn't say it unless I believed it.''
Chinese institutions own more than $30 billion of Fannie and Freddie paper, according to estimates by CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA.
Two-thirds of that, or $20 billion, is owned by Bank of China Ltd., the country's third-biggest lender. China Construction Bank owns the second-largest amount, $7 billion. Spokesmen for Bank of China and China Construction Bank declined to comment.
Paulson has had some success with his attempts to get the Chinese to allow their currency, the yuan, to strengthen against the dollar. In 2005, while Snow was Treasury secretary, the People's Bank of China, the central bank, abandoned a system of fixed exchange rates and began setting a daily ``reference rate'' for the yuan versus the U.S. currency.
The Chinese central bank, which has the largest currency reserves in the world, allows the yuan to fluctuate as much as 0.5 percent on either side of the daily rate.
Weak Currency
U.S. officials argue that China -- the second-largest U.S. trading partner -- keeps its currency artificially weak, which makes Chinese exports more attractive in global markets. The U.S. trade deficit with China was $117 billion in the first six months of 2008, almost unchanged from a year earlier, according to Commerce Department data.
Paulson has cajoled the Chinese into letting the currency strengthen. Since he arrived at the Treasury, the yuan has risen about 14 percent against the dollar. That's a start, Paulson says. He'd like it to increase more.
Paulson says he's laid the groundwork for the two countries to work out future problems with the Strategic Economic Dialogue, a twice yearly U.S.-China economic summit he established in September 2006. The summit is a dialogue, not a negotiation, with both sides able to set the agenda.
Two to Talk
``You can't have a discussion if one side doesn't want to talk about it,'' says China expert Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets.
Paulson also convinced lawmakers, some of whom had been calling for measures to punish China, to be more patient with the emerging economic behemoth. Paulson has tried to focus the talks with China on the potential benefits an exchange-rate overhaul could bring to China's economy, McCormick says.
The Treasury secretary wrote an article for the September/October issue of Foreign Affairs outlining how a stronger currency could benefit China, including curbing inflation, which has been rising there.
Paulson's bid to revamp Social Security failed to change policy. Democrats balked at the Bush administration's proposal to create private investment accounts for individuals to manage their retirement money.
Pension Deficits
Republicans, meanwhile, ruled out raising payroll taxes to help bankroll the pension deficits that loom as baby boomers retire. In 2007, Paulson tried to revive the issue by establishing a set of assumptions about the pension program that both parties could live with. Despite Paulson's efforts, they couldn't agree.
Paulson says just getting the issue on the table is an accomplishment. ``My objective -- and we put out a series of reports and continue to -- has been to depoliticize the issue and do some things that make it easier for the next person sitting in the seat,'' he says.
Paulson was able to bridge the divide between the two parties with the economic stimulus program, aimed at keeping the U.S. economy from tipping into a recession.
Capitol Hill Talks
Paulson says he began to lay the groundwork in December 2007 and early 2008. He held hours of conversations on Capitol Hill with a wide swath of lawmakers.
Finally, he hammered out the details of the plan behind closed doors with House Speaker Pelosi and Minority Leader Boehner. Congress passed a $168 billion package in February, marking Paulson's first major success in Washington.
Some $92 billion in rebate checks had been mailed out to taxpayers at the end of July, with the aim of stimulating spending. So far, the economy hasn't sunk into a recession: It grew 1.9 percent in the second quarter, up from 0.9 percent in the first quarter.
Paulson's consensus-building style has its critics, too. He has been slow to respond to market crises and is overactive when he does engage, says Congressman Ron Paul, a Texas Republican who ran an unsuccessful 2008 presidential campaign.
``Behind the scenes, they're always trying to prop things up,'' Paul says. ``I think Barney Frank sort of likes him, which to anybody who may have believed in the free markets ought to raise questions.''
Covered Bonds
One of Paulson's next challenges is to try to build a U.S. market for covered bonds. The instruments allow banks to raise money while keeping mortgage loans on their books, using the actual assets as collateral, instead of packaging them into mortgage-backed securities.
First used in the 18th century by Prussia's Frederick the Great, covered bonds are a thriving $3 trillion market in Europe, where there is no equivalent of Fannie Mae or Freddie Mac. The bonds never caught on in the U.S., where just two banks, Bank of America Corp. and Washington Mutual Inc., have issued them.
Paulson sees the bonds as an opportunity to shore up the $12 trillion housing finance market. The idea has potential, observers say. ``I think it will give investors confidence,'' says Texas Tech law professor Ann Graham, who edits the Banking Law Prof Blog. ``It's another way to get liquidity into the housing market, and that's very important if we want a turnaround.''
Wall Street Connections
Paulson used his Wall Street connections as well as those he's made in Washington. In June, Treasury officials met with banks and investors behind closed doors to see what the market was lacking. Paulson also backed the Federal Deposit Insurance Corp.'s efforts to update regulations on how the bonds would be treated during a bank failure.
Then, in July, Paulson held a press conference to announce new guidelines for a U.S. covered-bond market. He was flanked by all four major U.S. bank regulators and representatives from ``future issuers'' -- the four largest U.S. banks.
The goal was to advance the covered-bond market without putting anyone out on a limb, says Neel Kashkari, a Treasury assistant secretary who followed Paulson from Goldman Sachs. ``If we get the issuers, the dealers and the investors to move at the same time, nobody has the risk of going first,'' he says.
As he navigates through economic turmoil, Paulson has still found time to work on one of his favorite causes: the environment. He's trying to start a $10 billion international fund under the auspices of the World Bank that would help emerging-market countries avoid investments in heavily polluting infrastructure. The proposed Clean Technology Fund has gotten $6 billion in informal commitments so far, McCormick says. Congress is considering the administration's request to kick in $2 billion.
Paulson's Future
Even in his globe-trotting days at Goldman, Paulson served as chairman of the Nature Conservancy and sat on the board of the Peregrine Fund, which works to protect endangered birds of prey. His office at Treasury is overrun by critters: photographs of otters, alligators and birds, as well as snapshots of him holding snakes and fish he caught.
Paulson, who's ruled out staying on at Treasury after Bush leaves office in January, says his next role may well be at an environmental group. ``A big part of my life will be devoted to conservation and the environment,'' he says. ``The only thing that isn't a certainty is whether that will be my primary or sole focus.''
Whatever the role, this will be the first plan in a long time for which Paulson doesn't have to consult anybody other than his wife.
To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.
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Aug. 21 (Bloomberg) -- As soon as he became secretary of the U.S. Treasury in July 2006, Hank Paulson started preparing for a crisis.
In August 2006, at a meeting with President George W. Bush and his economic team at Camp David, Maryland, the former Goldman Sachs Group Inc. chief executive officer gave a talk about the capital markets.
Paulson held up over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy. ``My point was that we had gone eight years since the last serious problem in capital markets and that there'd been all of this innovation,'' Paulson said in an interview in late July.
Paulson also revived the President's Working Group on Financial Markets, a council of regulators consisting of the Federal Reserve, the Treasury, the Securities and Exchange Commission and the Commodities Futures Trading Commission.
Founded after the stock market crash of 1987, the group had fallen into disuse. Paulson began to build relationships among the agencies, figuring that the financial markets panel would be key to addressing the next crisis, no matter what that would be.
``No one would have predicted the Russian default in '98 or some of the things that happened in Asia,'' he says. ``But you still need to get ready to respond.''
Turbulent Times
In his two years at the Treasury, Paulson has witnessed some of the most turbulent economic times since the Great Depression.
Just in the past year, he's had to wrestle with a slumping economy and increasing home loan foreclosures, the subprime crisis, the collapse of Bear Stearns Cos. and the weakening of Fannie Mae and Freddie Mac. ``I can't remember when Treasury has been so deeply involved in the structure of securities markets,'' says James Cox, a professor at Duke University who specializes in securities law.
Paulson, 62, who was a football offensive lineman in college, hasn't just been spending his time fending off economic assaults. He brought his own list of things he wanted to accomplish in the 2 1/2 years remaining of the Bush administration.
A sampling: overhaul the Social Security system, improve economic relations with China, jump-start African financial markets and combat global warming by setting up a fund to help finance new energy-efficient technologies.
Defines Job 'Expansively'
``One of my management principles is to define your job expansively,'' Paulson says. ``I think I've defined the job here expansively.''
Not all of his initiatives have been successful. The Social Security plan and a bid to create Treasury-backed institutions to buy home mortgages were notable non-starters.
And he has drawn sharp criticism from some conservatives. Former presidential candidate Steve Forbes, a Republican, says Paulson could have avoided the Fannie-Freddie crisis altogether by cracking down on the two companies earlier.
For years, Republicans have called the firms ticking time bombs due to their private ownership and implied government guarantees. Paulson, says Forbes, should have made moves to fire their boards, recapitalize them and sever their ties to the government.
``Hank Paulson blew a supreme opportunity to make a substantial reform,'' Forbes says. ``He's caved in to the political pressure in Washington, which is, in essence, keep Fannie and Freddie largely as they are.''
Shares Tumble
During the past week, investor confidence in Fannie Mae and Freddie Mac has dwindled amid rising speculation that government intervention is inevitable. Share prices have plunged, as Wall Street watches for any sign that the two companies are no longer able to roll over their debt. Fannie has about $120 billion of debt maturing through Sept. 30, while Freddie has $103 billion, according to figures provided by the government-chartered companies and data compiled by Bloomberg.
In a debt sale this week, Freddie Mac paid yields that had the highest spread on record over U.S. Treasuries. In Aug. 20 trading, Fannie Mae slumped 27 percent and Freddie Mac dropped 22 percent, extending its losses to 90 percent for the year. Fannie Mae declined $1.61 to $4.40, the lowest since 1989, in New York after falling as low as $3.95. Freddie dropped 92 cents to $3.25, the lowest level since 1990, and earlier in the day fell to $2.95.
Since Paulson's plan was enacted, several prominent critics have spoken out in favor of nationalizing the two companies. Former Fed Chairman Alan Greenspan said the government should create a company like the Resolution Trust Corp. to sell off the assets of any failing financial institution while limiting taxpayer losses, in a new epilogue to his memoir.
Bill Gross Prediction
Meanwhile, Bill Gross, who manages the world's biggest bond fund, said Aug. 6 the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac. Richard Syron, Freddie Mac's chief executive, that same day said he believed his company would be able to avoid Treasury intervention.
While Paulson has made deals with politicians across the spectrum, he's also expanded his authority beyond the scope of any previous Treasury secretary. That's a big change for the Bush administration, which ousted its first Treasury secretary, Paul O'Neill, for his independent views and made his successor, John Snow, a traveling salesman for Karl Rove-designed economic policies.
During Snow's tenure, the Treasury complained of being left out of efforts to revamp Fannie and Freddie, says Vincent Reinhart, former director of the Fed's Monetary Affairs Division who's now at the American Enterprise Institute in Washington.
`Back in Business'
``The Treasury's back in business,'' Reinhart says.
At the Treasury, Paulson is drawing in large part on the skills he honed during his 32 years in investment banking. Paulson's signature style is to confront issues early, hold private meetings and build a consensus before announcing a deal, so that he's sure it will get the necessary backing, according to members of Congress and government staff who've worked with him.
Goldman, which was a partnership until 1999, has a culture of collegiality, says Edward Yingling, executive director of the American Bankers Association.
The bank has produced prominent political figures such as former Treasury Secretary Robert Rubin, former Deputy Secretary of State John Whitehead and Jon Corzine, who was a senator from New Jersey before becoming governor of that state.
Evoking Hamilton
Rubin, who served at the Treasury from 1995 to '99 after 26 years at Goldman and a stint at the White House, dealt with financial crises in Mexico and Asia, pushed for free trade and promoted budget policies that led to federal budget surpluses. When he retired, former President Bill Clinton called him ``the greatest secretary of the Treasury since Alexander Hamilton.''
Yingling says he asked Robert Steel, a former vice chairman at the investment bank who was Paulson's top domestic finance aide at the Treasury for almost two years, why the firm generates so many high-profile Washington officials.
``He said the culture at Goldman Sachs was not hierarchical and that people learned to work in teams and to work with people well,'' Yingling says. (Steel left the Treasury in July to become CEO of embattled bank Wachovia Corp.)
Executives like O'Neill and Snow, both of whom had a background in industry, tended to make a decision and have people go implement it, Yingling says. ``This town doesn't work that way,'' he says.
Gillette Deal
Paulson's consensus building doesn't mean he isn't forceful enough to win people over to his point of view. As chief of Goldman Sachs, he was often called in to woo clients and persuade them to sign with his firm. In January 2005, a month after Procter & Gamble Co. abandoned efforts to acquire Gillette Co., he helped revive discussions between the two firms with a phone call to A.G. Lafley, P&G's chief executive officer. The $57 billion deal, hammered out three weeks after Paulson's call, was the biggest that year.
As Goldman's chairman and CEO, Paulson also established relationships with politicians including Angela Merkel, now Germany's chancellor, Russian leader Vladimir Putin and former Chinese President Jiang Zemin. He says he's traveled to China at least 70 times during his career.
In the past 12 months alone, he went in December and March and was on vacation in Beijing in August to attend the Olympics. He may go again for the next round of high-level U.S.-China talks.
Paulson says he treats President Bush like a client, too. ``When you're advising a principal, you need to have a role where you are candid,'' Paulson says. ``But outside, there's never daylight between you and your boss.''
Fannie, Freddie
Paulson's coalition building faced one of its toughest tests in July, when the stocks of the two mortgage companies that account for almost half of the country's $12 trillion mortgage market began to collapse. Shares of Fannie Mae and Freddie Mac had lost more than 75 percent of their value in the first half of this year, as investors worried about the impact of the housing crisis on their holdings. While the two are government-chartered institutions, there was no explicit guarantee that the government would bail them out if they were to default.
On the morning of Friday, July 11, Paulson met with the president and convinced him to make a public comment about Fannie and Freddie. At the Energy Department later that day, Bush told reporters that the firms are ``very important institutions.'' He said he had discussed market concerns with his Treasury secretary. Paulson also tried to calm the markets, issuing a statement supporting the mortgage giants ``in their current form.''
Shares Slide
Both moves failed to stanch the bleeding. Fannie Mae declined $2.95, or 22 percent, to $10.25 in New York Stock Exchange trading on July 11, after passing through a low of $6.68 during the day. Freddie Mac fell 25 cents, or 3.1 percent, to $7.75 after reaching a low of $3.89.
Paulson's efforts were just beginning. He decided to seek sweeping new authority to extend emergency credit to the two companies and also to buy equity stakes in them if needed. He made ``unspecified'' powers the heart of his plan, which didn't spell out the amounts of money or terms of any bailout.
If investors knew the Treasury had power to rescue the mortgage giants, then an actual rescue might never be needed, Paulson says. Earlier in the year, Paulson had hoped Congress would create a stronger regulator for Fannie and Freddie before the firms reached a crisis point. ``I was hopeful we'd get the reform and we wouldn't have to use the plan,'' he says.
Bernanke Support
Still, Paulson knew that putting taxpayers on the hook for a possible bailout would be a tough sell on Capitol Hill. So he turned to Fed Chairman Ben S. Bernanke, whose support would be critical to convincing skeptical Democrats to back the plan.
During one of their weekly breakfasts, Paulson and Bernanke, 54, discussed the proposal and the possibility of the Fed extending an interim line of credit to Fannie and Freddie while Congress weighed the Treasury's proposal. Bernanke noted that such a move would be outside the Fed's normal duties, but that he'd consider it if Paulson thought Congress would quickly approve the Treasury's plan.
Paulson says Bernanke asked him if he believed that, in the middle of a presidential campaign, he could persuade a Democratic Congress to grant sweeping new powers to a lame-duck Republican administration. ``I took a deep breath and said yes,'' Paulson says.
Paulson immediately began calling congressional leaders to discuss the plan, making use of relationships he had been cultivating since his arrival at Treasury.
Consulting Lawmakers
Among others, he spoke with House Speaker Nancy Pelosi, a Democrat; Senate Majority Leader Harry Reid, also a Democrat; and House Minority Leader John Boehner, a Republican. Having Bernanke's backing helped with skeptical Democrats, says Reinhart, the former Fed official. ``Bringing the Federal Reserve into it brings a measure of independence that is consoling to the Congress,'' he says.
Paulson also lobbied the president, who'd threatened to veto any bill that contained major federal funding for community grants to enable municipalities to buy defaulted mortgages and help people stay in their homes.
The measure was sponsored by Democrats led by U.S. Representative Barney Frank, chairman of the powerful House Financial Services Committee. Paulson convinced Bush to back down from the veto threat, says White House spokeswoman Dana Perino. That helped to ensure the support of Frank and other Democrats. ``I think he's been very constructive,'' says Frank, 68, a Massachusetts Democrat. ``It's important to have a secretary of the Treasury that the president would listen to and respect.''
Treasury Steps
By the afternoon of Sunday, July 13, Paulson was confident enough to go public. Speaking on the steps of the Treasury Building, just hours before nervous Asian markets would open, he asked Congress for enormous new authority to backstop and oversee the beleaguered mortgage companies.
By Wednesday of that week, Fannie Mae's stock had rebounded 31 percent and Freddie Mac's was up 18 percent. On July 23, the House voted 272-152 in favor of the bill. Of the nays, only three were Democrats. Three days later -- just 13 days after Paulson's request -- the Senate passed it 72-13. All those opposed were Republicans.
Frank's Praise
Frank, a longtime foe of the administration, praised the bill after it was passed.
``Of the problems that were created by the reckless deregulation that led to the subprime crisis and the neglect of affordable housing that has marked Republican rule in Congress, this package of measures is the best response we could make,'' he said in a statement after the House vote. ``This will begin to lay the groundwork for a turnaround in the housing market.''
The legislation gives Paulson all of the major items he asked for, including unlimited authority for 18 months to make emergency loans to Fannie Mae and Freddie Mac and possibly buy stakes in the two mortgage giants. The legislation also created a long-sought new regulator to oversee Fannie and Freddie. Bush signed it into law on July 30.
Trading the presidential objections for Democratic backing was classic Paulson, says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former Treasury official.
`He's a Dealmaker'
``He's a dealmaker,'' Truman says. ``It's one skill that Treasury secretaries need to have.''
That's especially the case when the economy is in danger, says Glenn Hubbard, Columbia Business School dean and the first chairman of Bush's Council of Economic Advisers.
``The time to judge economic policy management is in times of crisis, and I think he has brought the right skills to bear,'' Hubbard says. ``Even if I don't necessarily agree with everything he's done, I think he's been incredibly thoughtful, incredibly careful and a real leader.''
Paulson says timing played a big role in getting the program through.
``We recognized quite early on that if there was some concern or lack of confidence in their access to capital, this could create a serious problem,'' he says of the mortgage companies. ``But we certainly couldn't go to Congress and ask for these powers that would make it a self-fulfilling prophecy - - or we wouldn't have gotten the powers.''
Weekend Warrior
That the crisis in the share prices occurred on a Friday also worked for Paulson. As in the Bear Stearns bailout, Paulson cobbled together the Fannie and Freddie deal over the weekend, when markets are closed and the capital is quiet.
``He's used the fact that everyone in Washington goes out of town as his strength, because he stays in town and then works the phones and then gets a plan that he can unveil Monday morning,'' says Steven Bartlett, a former congressman who now leads the Financial Services Roundtable, a Washington-based advocacy group that represents large financial services companies.
Bartlett calls the negotiating marathons Paulson's ``famous weekenders.''
Since the plan was enacted, Paulson has reiterated that a bailout won't be necessary. ``We aren't going to comment on speculation,'' a Treasury spokeswoman, Jennifer Zuccarelli, said on Aug. 18. ``As the secretary has said, we have no plans to use these authorities.'' Yesterday, the Treasury's position was unchanged despite the plunging stock prices. ``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Gathering Staff
Paulson likes to gather his staff in a room to hear from each of them before debating the merits and dangers of various policies, says David McCormick, who as Treasury undersecretary for international affairs is Paulson's top international aide.
``He really likes to sit down, go around the room and get conflicting views,'' McCormick says. ``People feel, I think, empowered.''
McCormick's first interaction with Paulson came in his previous job at the White House, when both were new to government. A Paulson aide asked McCormick, 43, to look at a draft of a speech for the Treasury secretary that addressed some international issues. McCormick sent the aide a note saying that he liked the text but that it seemed a tad long.
Five minutes later, he says, his phone rang and the Treasury secretary was on the line, wanting to know where the speech was too long and how to fix it.
`Incredibly Blunt'
Behind closed doors, Paulson's comments can have an edge. ``He is incredibly blunt,'' McCormick says. ``There's never shading with Hank, in the sense that I think you always are getting the straight picture.''
Paulson, who doesn't drink or smoke, has little time for frivolity on the job. Colleagues and lawmakers say he likes to limit interactions to serious discussions. ``I believe in substance,'' he says. ``I don't believe that you get things done just by getting together and having a drink or laughing, or interacting personally. While that's never a negative, you need to bring value.''
Henry M. Paulson Jr. developed a taste for hard work and a love of nature while growing up in Barrington, Illinois, a semirural community of 10,000 about 35 miles from Chicago with large areas of wetlands and forest preserves. Paulson still owns a farm there with his wife, Wendy, whom he married 39 years ago in September.
His father was a wholesale jeweler who raised Paulson to be a Christian Scientist and to become an Eagle Scout.
Harvard M.B.A.
At Dartmouth College in Hanover, New Hampshire, Paulson earned a degree in English and was a member of Phi Beta Kappa. He also was an all-Ivy League football player and a member of the Green Key Society, an honorary service group.
He now has two adult children, one of whom, Henry M. Paulson III, owns the Portland Beavers baseball team, the Triple-A affiliate of the San Diego Padres. His daughter, Amanda, runs the Chicago bureau of the Christian Science Monitor.
In 1970, Paulson earned a Master of Business Administration from Harvard Business School in Boston and then entered public service. From 1970 to '72, he was a staff assistant at the Defense Department, and from '72 to '73 he was a White House staff assistant, working alongside John Ehrlichman, the Nixon aide later jailed for crimes related to the Watergate break-in.
Paulson joined Goldman Sachs's Chicago office in 1974. There, he rapidly moved through the ranks, becoming managing partner and co-head of the firm's investment banking division. He was named co-chairman and co-CEO in 1998 and gained sole possession of those posts a year later, when he and other top executives pushed out Jon Corzine and took the firm public.
Goldman Shares
Paulson sold his 3.23 million shares in Goldman, worth about $500 million at the time, when he took the Treasury job, according to regulatory filings. He was exempted from paying capital gains tax on the sale of those stakes under a rule meant to avoid penalizing wealthy people who take government jobs and are forced to sell assets.
Paulson also sold about $25 million of holdings in a Goldman fund whose sole asset was a stake in Industrial & Commercial Bank of China, the world's largest publicly traded financial institution. The bank raised $22 billion in its initial public offering in October 2006, the world's biggest IPO.
Managing the U.S. relationship with China is an increasingly important part of the Treasury secretary's job. During the Fannie and Freddie crisis in July, Paulson used his credibility with Chinese leaders to reassure them that the U.S. mortgage companies weren't in jeopardy.
Talks With Chinese
``I clearly talked with the Chinese through this,'' Paulson says. ``They've worked with me enough that they knew I wouldn't say it unless I believed it.''
Chinese institutions own more than $30 billion of Fannie and Freddie paper, according to estimates by CLSA Ltd., the Hong Kong-based investment banking arm of France's Credit Agricole SA.
Two-thirds of that, or $20 billion, is owned by Bank of China Ltd., the country's third-biggest lender. China Construction Bank owns the second-largest amount, $7 billion. Spokesmen for Bank of China and China Construction Bank declined to comment.
Paulson has had some success with his attempts to get the Chinese to allow their currency, the yuan, to strengthen against the dollar. In 2005, while Snow was Treasury secretary, the People's Bank of China, the central bank, abandoned a system of fixed exchange rates and began setting a daily ``reference rate'' for the yuan versus the U.S. currency.
The Chinese central bank, which has the largest currency reserves in the world, allows the yuan to fluctuate as much as 0.5 percent on either side of the daily rate.
Weak Currency
U.S. officials argue that China -- the second-largest U.S. trading partner -- keeps its currency artificially weak, which makes Chinese exports more attractive in global markets. The U.S. trade deficit with China was $117 billion in the first six months of 2008, almost unchanged from a year earlier, according to Commerce Department data.
Paulson has cajoled the Chinese into letting the currency strengthen. Since he arrived at the Treasury, the yuan has risen about 14 percent against the dollar. That's a start, Paulson says. He'd like it to increase more.
Paulson says he's laid the groundwork for the two countries to work out future problems with the Strategic Economic Dialogue, a twice yearly U.S.-China economic summit he established in September 2006. The summit is a dialogue, not a negotiation, with both sides able to set the agenda.
Two to Talk
``You can't have a discussion if one side doesn't want to talk about it,'' says China expert Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets.
Paulson also convinced lawmakers, some of whom had been calling for measures to punish China, to be more patient with the emerging economic behemoth. Paulson has tried to focus the talks with China on the potential benefits an exchange-rate overhaul could bring to China's economy, McCormick says.
The Treasury secretary wrote an article for the September/October issue of Foreign Affairs outlining how a stronger currency could benefit China, including curbing inflation, which has been rising there.
Paulson's bid to revamp Social Security failed to change policy. Democrats balked at the Bush administration's proposal to create private investment accounts for individuals to manage their retirement money.
Pension Deficits
Republicans, meanwhile, ruled out raising payroll taxes to help bankroll the pension deficits that loom as baby boomers retire. In 2007, Paulson tried to revive the issue by establishing a set of assumptions about the pension program that both parties could live with. Despite Paulson's efforts, they couldn't agree.
Paulson says just getting the issue on the table is an accomplishment. ``My objective -- and we put out a series of reports and continue to -- has been to depoliticize the issue and do some things that make it easier for the next person sitting in the seat,'' he says.
Paulson was able to bridge the divide between the two parties with the economic stimulus program, aimed at keeping the U.S. economy from tipping into a recession.
Capitol Hill Talks
Paulson says he began to lay the groundwork in December 2007 and early 2008. He held hours of conversations on Capitol Hill with a wide swath of lawmakers.
Finally, he hammered out the details of the plan behind closed doors with House Speaker Pelosi and Minority Leader Boehner. Congress passed a $168 billion package in February, marking Paulson's first major success in Washington.
Some $92 billion in rebate checks had been mailed out to taxpayers at the end of July, with the aim of stimulating spending. So far, the economy hasn't sunk into a recession: It grew 1.9 percent in the second quarter, up from 0.9 percent in the first quarter.
Paulson's consensus-building style has its critics, too. He has been slow to respond to market crises and is overactive when he does engage, says Congressman Ron Paul, a Texas Republican who ran an unsuccessful 2008 presidential campaign.
``Behind the scenes, they're always trying to prop things up,'' Paul says. ``I think Barney Frank sort of likes him, which to anybody who may have believed in the free markets ought to raise questions.''
Covered Bonds
One of Paulson's next challenges is to try to build a U.S. market for covered bonds. The instruments allow banks to raise money while keeping mortgage loans on their books, using the actual assets as collateral, instead of packaging them into mortgage-backed securities.
First used in the 18th century by Prussia's Frederick the Great, covered bonds are a thriving $3 trillion market in Europe, where there is no equivalent of Fannie Mae or Freddie Mac. The bonds never caught on in the U.S., where just two banks, Bank of America Corp. and Washington Mutual Inc., have issued them.
Paulson sees the bonds as an opportunity to shore up the $12 trillion housing finance market. The idea has potential, observers say. ``I think it will give investors confidence,'' says Texas Tech law professor Ann Graham, who edits the Banking Law Prof Blog. ``It's another way to get liquidity into the housing market, and that's very important if we want a turnaround.''
Wall Street Connections
Paulson used his Wall Street connections as well as those he's made in Washington. In June, Treasury officials met with banks and investors behind closed doors to see what the market was lacking. Paulson also backed the Federal Deposit Insurance Corp.'s efforts to update regulations on how the bonds would be treated during a bank failure.
Then, in July, Paulson held a press conference to announce new guidelines for a U.S. covered-bond market. He was flanked by all four major U.S. bank regulators and representatives from ``future issuers'' -- the four largest U.S. banks.
The goal was to advance the covered-bond market without putting anyone out on a limb, says Neel Kashkari, a Treasury assistant secretary who followed Paulson from Goldman Sachs. ``If we get the issuers, the dealers and the investors to move at the same time, nobody has the risk of going first,'' he says.
As he navigates through economic turmoil, Paulson has still found time to work on one of his favorite causes: the environment. He's trying to start a $10 billion international fund under the auspices of the World Bank that would help emerging-market countries avoid investments in heavily polluting infrastructure. The proposed Clean Technology Fund has gotten $6 billion in informal commitments so far, McCormick says. Congress is considering the administration's request to kick in $2 billion.
Paulson's Future
Even in his globe-trotting days at Goldman, Paulson served as chairman of the Nature Conservancy and sat on the board of the Peregrine Fund, which works to protect endangered birds of prey. His office at Treasury is overrun by critters: photographs of otters, alligators and birds, as well as snapshots of him holding snakes and fish he caught.
Paulson, who's ruled out staying on at Treasury after Bush leaves office in January, says his next role may well be at an environmental group. ``A big part of my life will be devoted to conservation and the environment,'' he says. ``The only thing that isn't a certainty is whether that will be my primary or sole focus.''
Whatever the role, this will be the first plan in a long time for which Paulson doesn't have to consult anybody other than his wife.
To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; Matthew Benjamin in Washington at mbenjamin2@bloomberg.net.
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U.S. Initial Jobless Claims Fell to 432,000 Last Week
By Timothy R. Homan
Aug. 21 (Bloomberg) -- Initial jobless claims in the U.S. fell last week to a level that still indicates the labor market is softening.
The number of Americans filing-first time claims for unemployment benefits decreased by 13,000 to 432,000 in the week ended Aug. 16, fewer than forecast, from a revised 445,000 the prior week. The four-week average, a less volatile measure, rose to the highest level in almost seven years.
Companies are trimming staff as demand softens and raw- material costs remain elevated. High unemployment contributes to concerns that consumer spending will falter through the end of the year as the cost of living increases and the effect of the government's tax rebates fade.
``It's hard to say the labor market is strong right now,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said in an interview on Bloomberg Television. A job market turnaround ``is going to be a story for next year.''
Treasuries were little changed after the report, with the 10-year note yielding 3.81 percent as of 8:40 a.m. in New York. Stock futures were lower.
Economists had forecast claims would fall to 440,000 from a previously reported 450,000 for the prior week, according to the median of 40 projections in a Bloomberg News survey. Estimates ranged from 400,000 to 470,000.
Claims averaged 445,750 a week since the end of July, the highest level since December 2001. So far this year, weekly claims have averaged 374,000, compared with 321,000 for all of 2007.
Extended Benefits
Publicity surrounding the government's extension of jobless benefits under the spending bill signed by President George W. Bush in June has prompted more unemployed workers to apply for the program, contributing to the jump in claims that began in the middle of last month.
The government hasn't been able to quantify the program's impact on initial claims. The number of people applying for extended benefits, which aren't included in the figures for initial claims, jumped to 1.284 million in the week ended Aug. 2 from 714,000 the previous week.
Continuing claims, or the total number of people receiving benefits, dropped by 17,000 to 3.362 million in the week ended Aug. 9.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, was unchanged at 2.5 percent. Thirty-three states and territories reported an increase in claims, while 20 had a decrease. Georgia and New York reported the biggest increases in applications. These data are reported with a one-week lag.
Today's report covers the week the Labor Department surveys businesses to calculate the monthly payroll figures. The next jobs report is due Sept. 5.
Spending Outlook
Rising prices and dimming job and wage prospects may hurt consumer spending the rest of this year. Sales at U.S. retailers dropped 0.1 percent in July, the first decrease in five months, according to figures from the Commerce Department.
Inflation concerns are high following three reports from the Labor Department this month. Consumer, producer and import prices were all higher than forecast.
Companies are trimming staff to offset declining demand. Delphi Corp., the bankrupt former parts unit of General Motors Corp., said this week it will cut 600 salaried jobs in the U.S., part of an effort to reduce costs by 25 percent amid a drop in sales to automakers.
``Consumer trends and market conditions have caused fundamental shifts in consumer preferences, impacting both the volume and mix of vehicles produced by our North American customers,'' Jeff Owens, president of the company's electronics and safety division, said in a statement.
To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net
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Aug. 21 (Bloomberg) -- Initial jobless claims in the U.S. fell last week to a level that still indicates the labor market is softening.
The number of Americans filing-first time claims for unemployment benefits decreased by 13,000 to 432,000 in the week ended Aug. 16, fewer than forecast, from a revised 445,000 the prior week. The four-week average, a less volatile measure, rose to the highest level in almost seven years.
Companies are trimming staff as demand softens and raw- material costs remain elevated. High unemployment contributes to concerns that consumer spending will falter through the end of the year as the cost of living increases and the effect of the government's tax rebates fade.
``It's hard to say the labor market is strong right now,'' Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said in an interview on Bloomberg Television. A job market turnaround ``is going to be a story for next year.''
Treasuries were little changed after the report, with the 10-year note yielding 3.81 percent as of 8:40 a.m. in New York. Stock futures were lower.
Economists had forecast claims would fall to 440,000 from a previously reported 450,000 for the prior week, according to the median of 40 projections in a Bloomberg News survey. Estimates ranged from 400,000 to 470,000.
Claims averaged 445,750 a week since the end of July, the highest level since December 2001. So far this year, weekly claims have averaged 374,000, compared with 321,000 for all of 2007.
Extended Benefits
Publicity surrounding the government's extension of jobless benefits under the spending bill signed by President George W. Bush in June has prompted more unemployed workers to apply for the program, contributing to the jump in claims that began in the middle of last month.
The government hasn't been able to quantify the program's impact on initial claims. The number of people applying for extended benefits, which aren't included in the figures for initial claims, jumped to 1.284 million in the week ended Aug. 2 from 714,000 the previous week.
Continuing claims, or the total number of people receiving benefits, dropped by 17,000 to 3.362 million in the week ended Aug. 9.
The unemployment rate among people eligible for benefits, which tends to track the jobless rate, was unchanged at 2.5 percent. Thirty-three states and territories reported an increase in claims, while 20 had a decrease. Georgia and New York reported the biggest increases in applications. These data are reported with a one-week lag.
Today's report covers the week the Labor Department surveys businesses to calculate the monthly payroll figures. The next jobs report is due Sept. 5.
Spending Outlook
Rising prices and dimming job and wage prospects may hurt consumer spending the rest of this year. Sales at U.S. retailers dropped 0.1 percent in July, the first decrease in five months, according to figures from the Commerce Department.
Inflation concerns are high following three reports from the Labor Department this month. Consumer, producer and import prices were all higher than forecast.
Companies are trimming staff to offset declining demand. Delphi Corp., the bankrupt former parts unit of General Motors Corp., said this week it will cut 600 salaried jobs in the U.S., part of an effort to reduce costs by 25 percent amid a drop in sales to automakers.
``Consumer trends and market conditions have caused fundamental shifts in consumer preferences, impacting both the volume and mix of vehicles produced by our North American customers,'' Jeff Owens, president of the company's electronics and safety division, said in a statement.
To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net
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U.K. Retail Sales Increased Unexpectedly in July
By Svenja O'Donnell
Aug. 21 (Bloomberg) -- U.K. retail sales unexpectedly rose in July as consumers shunned department stores in favor of discounted goods and snapped up mobile phones including Apple Inc.'s new model iPhone.
Sales gained 0.8 percent after falling 4.3 percent the month before, which was the biggest decline since at least 1986, the Office for National Statistics said today in London. Economists had expected a 0.2 percent drop for July, the median of 32 forecasts in a Bloomberg News survey showed.
Bank of England Governor Mervyn King said last week the economy faces a ``difficult and painful adjustment'' as falling house prices and rising inflation hurt consumer spending. On the year, shop sales rose 2.1 percent, the least since February 2006. Separate figures showed business investment fell.
``The weakness in the housing market and high inflation take a while to feed through,'' said Vicky Redwood, an economist at Capital Economics Ltd. in London. ``Retail sales figures will get worse later in the year.''
The pound briefly gained as much as 0.4 percent against the dollar after the report, trading as high as $1.8707 compared with $1.8585 yesterday before surrendering most of those gains. It was trading at $1.8624 at 12:25 a.m. in London.
Volatile Data
The central bank said last week that policy makers placed ``a rather greater weight than usual'' on survey data for retail sales because of the volatility of official figures.
``Few retailers will recognize this positive picture,'' Stephen Robertson, director general of the British Retail Consortium, the industry's lobby group. ``It's hard to see what could produce the sales-growth'' recorded in official figures.
Business investment fell 1.9 percent in the second quarter compared with the first, sharper than the 0.7 percent drop estimated by economists surveyed before the report. That report solidified expectations that the statistics office will revise down its estimate for gross domestic product for the second quarter when it releases those figures at 9:30 a.m. tomorrow.
``Businesses are absorbing a large proportion of the high input costs they have been facing, which indicates that profitability is likely to be severely dented, making it even harder for firms to find the finances for investing,'' said Hetal Mehta, senior economic adviser to Ernst & Young.
Survey Evidence
Other reports suggest consumers are starting to curb their spending. Sales in U.K. shops open at least a year fell an annual 0.9 percent in July, the British Retail Consortium, which represents 80 percent of stores, said in an Aug. 12 report.
Today's retail sales figures also showed revisions for previous months, which strengthened gains recorded in May and further depressed the drop in June. May's gain was revised to 3.9 percent from 3.6 percent. The drop in June now is estimated to be 4.3 percent instead of 3.9 percent.
``Consumer spending may well fall in the third quarter, which makes it quite likely we will see the first quarter of negative GDP growth since 1992,'' said David Tinsley, an economist at National Australia Bank in London, in an e-mailed note. ``There is still evidence that the pace of retail sales is slowing, though not as fast as some were expecting.''
The statistics office said ``other stores'' including jewelers and those that sell mobile phones, games, clocks and were the strongest of the five categories into which overall sales fall, gaining 2.8 percent. Non-specialized stores, or department stores, suffered a decline of 2.6 percent in July.
Phones and Markets
Apple Inc. sold 1 million iPhones in the three days after the debut of a faster model in July. A government statistician said he had no way of telling how much, if at all, that flattered this month's U.K. retail sales figures.
Carphone Warehouse Group Plc, Europe's largest handset retailer, said on July 31 fiscal first-quarter sales rose 2 percent as the company opened new stores. Discount retailers Aldi Group and Lidl won more of the U.K. grocery market in the last three months, according to Taylor Nelson Sofres Plc.
``The mix is as before, with bigger ticket, housing related sales doing badly and smaller ticket items doing well, supported by tourist sales in central London,'' said Geoffrey Dicks, an economist at Royal Bank of Scotland Plc. ``The U.K. consumer is down but by no means out.''
The figures complicate the picture for Bank of England policy makers, who have kept the benchmark rate at 5 percent since April as they weigh inflation pressures against the threat of slower growth. The retail sales deflator, a measure of cost changes in stores, rose 1.6 percent in July, the most since May 1998, the statistics office said.
GDP Report Due
Tomorrow, the statistics office probably will cut its estimate for second quarter economic growth to 0.1 percent from the 0.2 percent previously estimated, the median forecast of 34 economists surveyed by Bloomberg News shows. That would be the slowest pace since the aftermath of the last recession in 1992.
``With inflation at its upper limit and a calmer picture for retail sales, interest rates are likely to remain on hold until the end of the year,'' said Benjamin Williamson, an economist at the Centre for Economics and Business Research Ltd. ``Further storms down the line, however, could see interest rate expectations revised downwards.''
To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.
Read more...
Aug. 21 (Bloomberg) -- U.K. retail sales unexpectedly rose in July as consumers shunned department stores in favor of discounted goods and snapped up mobile phones including Apple Inc.'s new model iPhone.
Sales gained 0.8 percent after falling 4.3 percent the month before, which was the biggest decline since at least 1986, the Office for National Statistics said today in London. Economists had expected a 0.2 percent drop for July, the median of 32 forecasts in a Bloomberg News survey showed.
Bank of England Governor Mervyn King said last week the economy faces a ``difficult and painful adjustment'' as falling house prices and rising inflation hurt consumer spending. On the year, shop sales rose 2.1 percent, the least since February 2006. Separate figures showed business investment fell.
``The weakness in the housing market and high inflation take a while to feed through,'' said Vicky Redwood, an economist at Capital Economics Ltd. in London. ``Retail sales figures will get worse later in the year.''
The pound briefly gained as much as 0.4 percent against the dollar after the report, trading as high as $1.8707 compared with $1.8585 yesterday before surrendering most of those gains. It was trading at $1.8624 at 12:25 a.m. in London.
Volatile Data
The central bank said last week that policy makers placed ``a rather greater weight than usual'' on survey data for retail sales because of the volatility of official figures.
``Few retailers will recognize this positive picture,'' Stephen Robertson, director general of the British Retail Consortium, the industry's lobby group. ``It's hard to see what could produce the sales-growth'' recorded in official figures.
Business investment fell 1.9 percent in the second quarter compared with the first, sharper than the 0.7 percent drop estimated by economists surveyed before the report. That report solidified expectations that the statistics office will revise down its estimate for gross domestic product for the second quarter when it releases those figures at 9:30 a.m. tomorrow.
``Businesses are absorbing a large proportion of the high input costs they have been facing, which indicates that profitability is likely to be severely dented, making it even harder for firms to find the finances for investing,'' said Hetal Mehta, senior economic adviser to Ernst & Young.
Survey Evidence
Other reports suggest consumers are starting to curb their spending. Sales in U.K. shops open at least a year fell an annual 0.9 percent in July, the British Retail Consortium, which represents 80 percent of stores, said in an Aug. 12 report.
Today's retail sales figures also showed revisions for previous months, which strengthened gains recorded in May and further depressed the drop in June. May's gain was revised to 3.9 percent from 3.6 percent. The drop in June now is estimated to be 4.3 percent instead of 3.9 percent.
``Consumer spending may well fall in the third quarter, which makes it quite likely we will see the first quarter of negative GDP growth since 1992,'' said David Tinsley, an economist at National Australia Bank in London, in an e-mailed note. ``There is still evidence that the pace of retail sales is slowing, though not as fast as some were expecting.''
The statistics office said ``other stores'' including jewelers and those that sell mobile phones, games, clocks and were the strongest of the five categories into which overall sales fall, gaining 2.8 percent. Non-specialized stores, or department stores, suffered a decline of 2.6 percent in July.
Phones and Markets
Apple Inc. sold 1 million iPhones in the three days after the debut of a faster model in July. A government statistician said he had no way of telling how much, if at all, that flattered this month's U.K. retail sales figures.
Carphone Warehouse Group Plc, Europe's largest handset retailer, said on July 31 fiscal first-quarter sales rose 2 percent as the company opened new stores. Discount retailers Aldi Group and Lidl won more of the U.K. grocery market in the last three months, according to Taylor Nelson Sofres Plc.
``The mix is as before, with bigger ticket, housing related sales doing badly and smaller ticket items doing well, supported by tourist sales in central London,'' said Geoffrey Dicks, an economist at Royal Bank of Scotland Plc. ``The U.K. consumer is down but by no means out.''
The figures complicate the picture for Bank of England policy makers, who have kept the benchmark rate at 5 percent since April as they weigh inflation pressures against the threat of slower growth. The retail sales deflator, a measure of cost changes in stores, rose 1.6 percent in July, the most since May 1998, the statistics office said.
GDP Report Due
Tomorrow, the statistics office probably will cut its estimate for second quarter economic growth to 0.1 percent from the 0.2 percent previously estimated, the median forecast of 34 economists surveyed by Bloomberg News shows. That would be the slowest pace since the aftermath of the last recession in 1992.
``With inflation at its upper limit and a calmer picture for retail sales, interest rates are likely to remain on hold until the end of the year,'' said Benjamin Williamson, an economist at the Centre for Economics and Business Research Ltd. ``Further storms down the line, however, could see interest rate expectations revised downwards.''
To contact the reporter on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net.
Read more...
Paulson's Fannie-Freddie `Bazooka' Shakes Investors
By Brendan Murray
Enlarge Image/Details
Aug. 21 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's ``bazooka'' may be intimidating the same investors he intended to reassure.
The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
They say the threat of government action is creating uncertainty that is raising the companies' borrowing costs and increasing the odds Fannie and Freddie will need taxpayer funding.
``It is the lack of clarity of what exactly the government is going to do, and what Congress is going to do, that is sending shivers'' through investors, said Axel Merk, president and portfolio manager of Merk Investments LLC in Palo Alto, California.
``To make this politically viable, why would the government even think about coming in junior to somebody else?'' he said.
Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.
Paulson's Lobbying
In lobbying for the rescue plan, Paulson told lawmakers that giving him authority to bail out the beleaguered lenders would reassure their private sources of capital.
``If you have a bazooka in your pocket and people know it, you probably won't have to use it,'' he told U.S. senators at a July 15 hearing in Washington.
Instead, investors are betting Fannie and Freddie will have little option but to tap the Treasury.
Washington-based Fannie Mae stock has fallen 74 percent and McLean, Virginia-based Freddie Mac is down 63 percent since the law was signed. Fannie shares traded at $3.93 at 9:01 a.m. in early New York Stock Exchange trading, with Freddie at $2.88, bringing their combined market capitalization to about $6.8 billion from $92.6 billion two years ago.
Fannie Mae's 5.5 percent perpetual preferred shares have dropped 28 percent this week to $15.18. Freddie Mac's 5.57 percent preferred stock has fallen 38 percent this week to $7.15.
The companies' preferred securities are typically held by insurance companies, mutual funds and banks, analysts said. That may cause Paulson to stop short of eliminating their holdings in any government intervention.
`Wiped Out'
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''
Fannie Mae and Freddie Mac's securities probably would have performed even worse without the rescue plan Paulson pushed through Congress last month, said former Federal Reserve Bank of St. Louis President William Poole.
There ``might have been a total failure'' at Freddie Mac's sale of bonds this week ``if there had not been this legislation,'' said Poole, a Bloomberg contributor. Paulson's plan ``was necessary under the circumstances,'' he said.
``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Maturing Debt
Paulson's intention to not use the authority hinges on the ability of the companies to sell debt to finance their portfolios of mortgages and asset-backed bonds. The companies have $223 billion of bonds due by the end of the quarter, according to data compiled by Bloomberg.
``They need support from the U.S. Treasury'' to finance maturing debt, said Sean Egan, president of Egan-Jones Ratings Co., a Haverford, Pennsylvania-based credit-rating company that has met with lawmakers and officials about the Treasury's options.
Freddie on Aug. 19 sold $3 billion of five-year notes at the highest yields over benchmarks in at least 10 years. Asians bought 30 percent of the debt, down from 41 percent in a May sale, company data showed. Fannie paid a record-high yield in a $3.5 billion sale of three-year notes last week, with Asian investors buying just 22 percent, almost half the demand in May.
The jump in borrowing costs belies Paulson's testimony to Senate lawmakers last month that ``the credit spreads are very strong and holding in there. I think there's confidence in the market.''
``Explicit government support leaves the GSEs in an unpredictable situation,'' said Alec Phillips, who heads Goldman Sachs Group Inc.'s Washington office and is a former staffer on the Senate Finance Committee. Fannie and Freddie ``do not yet have additional public sector capital, but this possibility may hinder attempts to raise private capital,'' he said.
To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net
Read more...
Enlarge Image/Details
Aug. 21 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's ``bazooka'' may be intimidating the same investors he intended to reassure.
The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
They say the threat of government action is creating uncertainty that is raising the companies' borrowing costs and increasing the odds Fannie and Freddie will need taxpayer funding.
``It is the lack of clarity of what exactly the government is going to do, and what Congress is going to do, that is sending shivers'' through investors, said Axel Merk, president and portfolio manager of Merk Investments LLC in Palo Alto, California.
``To make this politically viable, why would the government even think about coming in junior to somebody else?'' he said.
Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.
Paulson's Lobbying
In lobbying for the rescue plan, Paulson told lawmakers that giving him authority to bail out the beleaguered lenders would reassure their private sources of capital.
``If you have a bazooka in your pocket and people know it, you probably won't have to use it,'' he told U.S. senators at a July 15 hearing in Washington.
Instead, investors are betting Fannie and Freddie will have little option but to tap the Treasury.
Washington-based Fannie Mae stock has fallen 74 percent and McLean, Virginia-based Freddie Mac is down 63 percent since the law was signed. Fannie shares traded at $3.93 at 9:01 a.m. in early New York Stock Exchange trading, with Freddie at $2.88, bringing their combined market capitalization to about $6.8 billion from $92.6 billion two years ago.
Fannie Mae's 5.5 percent perpetual preferred shares have dropped 28 percent this week to $15.18. Freddie Mac's 5.57 percent preferred stock has fallen 38 percent this week to $7.15.
The companies' preferred securities are typically held by insurance companies, mutual funds and banks, analysts said. That may cause Paulson to stop short of eliminating their holdings in any government intervention.
`Wiped Out'
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''
Fannie Mae and Freddie Mac's securities probably would have performed even worse without the rescue plan Paulson pushed through Congress last month, said former Federal Reserve Bank of St. Louis President William Poole.
There ``might have been a total failure'' at Freddie Mac's sale of bonds this week ``if there had not been this legislation,'' said Poole, a Bloomberg contributor. Paulson's plan ``was necessary under the circumstances,'' he said.
``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Maturing Debt
Paulson's intention to not use the authority hinges on the ability of the companies to sell debt to finance their portfolios of mortgages and asset-backed bonds. The companies have $223 billion of bonds due by the end of the quarter, according to data compiled by Bloomberg.
``They need support from the U.S. Treasury'' to finance maturing debt, said Sean Egan, president of Egan-Jones Ratings Co., a Haverford, Pennsylvania-based credit-rating company that has met with lawmakers and officials about the Treasury's options.
Freddie on Aug. 19 sold $3 billion of five-year notes at the highest yields over benchmarks in at least 10 years. Asians bought 30 percent of the debt, down from 41 percent in a May sale, company data showed. Fannie paid a record-high yield in a $3.5 billion sale of three-year notes last week, with Asian investors buying just 22 percent, almost half the demand in May.
The jump in borrowing costs belies Paulson's testimony to Senate lawmakers last month that ``the credit spreads are very strong and holding in there. I think there's confidence in the market.''
``Explicit government support leaves the GSEs in an unpredictable situation,'' said Alec Phillips, who heads Goldman Sachs Group Inc.'s Washington office and is a former staffer on the Senate Finance Committee. Fannie and Freddie ``do not yet have additional public sector capital, but this possibility may hinder attempts to raise private capital,'' he said.
To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net
Read more...
BTC Pipeline Will Be Operational Within `A Few Days'
By Mark Bentley and Ali Berat Meric
Aug. 21 (Bloomberg) -- The Baku-Tbilisi-Ceyhan pipeline, which transports oil from Azerbaijan through Georgia to Turkey's Mediterranean coast, will be fully operational within ``a few days,'' the Turkish energy ministry said.
BP Plc and partners have started testing the 1,768- kilometer (1,100-mile) link following repairs to damage caused by a fire on Aug. 5, Akif Sam, a spokesman for the Turkish energy ministry in Ankara, said by telephone today.
``We expect petrol flows through the pipeline to return to a completely normal level,'' he said.
BP, StatoilHydro ASA and partners had to reduce production at oil and natural gas fields in the Azeri part of the Caspian Sea after pumping halted through the pipeline, which has a capacity of 1 million barrels a day, or about 1 percent of the world's supply.
Tanker loadings at Ceyhan will resume next week, BTC Co., which operates the link, said yesterday.
``The plan is to issue shipping schedules by the end of the week,'' Toby Odone, a London-based spokesman at BP, said today by phone. ``It will depend on how the pipeline testing goes.''
The Baku-Supsa pipeline, which pumps more than 100,000 barrels of crude a day from the Azeri capital of Baku to the Georgian port of Supsa on the Black Sea coast, is still shut on security concerns following the conflict between Georgia and Russia, Odone said.
Railway transportation to Georgia's Black Sea ports has been also suspended because of a damaged bridge, he said.
Shippers declared force majeure on exports from the Supsa and Ceyhan ports, a legal clause that exempts them from meeting contracts because of circumstances beyond their control.
To contact the reporters on this story: Mark Bentley in Ankara at mbentley3@bloomberg.net; Ali Berat Meric in Ankara at
Read more...
Aug. 21 (Bloomberg) -- The Baku-Tbilisi-Ceyhan pipeline, which transports oil from Azerbaijan through Georgia to Turkey's Mediterranean coast, will be fully operational within ``a few days,'' the Turkish energy ministry said.
BP Plc and partners have started testing the 1,768- kilometer (1,100-mile) link following repairs to damage caused by a fire on Aug. 5, Akif Sam, a spokesman for the Turkish energy ministry in Ankara, said by telephone today.
``We expect petrol flows through the pipeline to return to a completely normal level,'' he said.
BP, StatoilHydro ASA and partners had to reduce production at oil and natural gas fields in the Azeri part of the Caspian Sea after pumping halted through the pipeline, which has a capacity of 1 million barrels a day, or about 1 percent of the world's supply.
Tanker loadings at Ceyhan will resume next week, BTC Co., which operates the link, said yesterday.
``The plan is to issue shipping schedules by the end of the week,'' Toby Odone, a London-based spokesman at BP, said today by phone. ``It will depend on how the pipeline testing goes.''
The Baku-Supsa pipeline, which pumps more than 100,000 barrels of crude a day from the Azeri capital of Baku to the Georgian port of Supsa on the Black Sea coast, is still shut on security concerns following the conflict between Georgia and Russia, Odone said.
Railway transportation to Georgia's Black Sea ports has been also suspended because of a damaged bridge, he said.
Shippers declared force majeure on exports from the Supsa and Ceyhan ports, a legal clause that exempts them from meeting contracts because of circumstances beyond their control.
To contact the reporters on this story: Mark Bentley in Ankara at mbentley3@bloomberg.net; Ali Berat Meric in Ankara at
Read more...
E.ON U.K. Raises Gas, Power Prices After Costs Surge
By Paul Dobson
Aug. 21 (Bloomberg) -- E.ON AG, Germany's biggest utility, will raise U.K. household prices for natural gas and electricity tomorrow after wholesale costs advanced to a record, boosted by a Norwegian pipeline leak.
E.ON will charge 26 percent more for gas and 16 percent extra for electricity supplies, the company said today in a statement. That will cost the average customer buying both gas and power from the Dusseldorf-based utility an additional 226 pounds ($422) a year.
The move comes after Centrica Plc's British Gas unit, the country's biggest supplier, raised charges on July 30 and Electricite de France SA's U.K. division put up prices five days earlier. The increases may stoke inflation across the U.K. economy, adding to the Bank of England's problems as it seeks to stave off a recession.
``The gas pipeline leak is probably the straw that broke the camel's back and a good excuse to put prices up today, though the hikes were inevitable irrespective of the overnight news,'' BNP Paribas SA economist Alan Clarke said today in a note. The price increase was in line with estimates, he said.
U.K. gas and electricity for the coming winter traded at records today after StatoilHydro ASA said yesterday that the North Sea Kvitebjoern field may not export gas this winter because of a pipe leak. Gas-fired power plants produce more than 40 percent of Britain's electricity, so the gas price influences the power market.
Antitrust Probe
Britain's six biggest energy suppliers are under increasing scrutiny after a panel of lawmakers said the government should consider pursuing an antitrust probe into gas and power markets because of climbing retail prices. All six raised prices in the first half of the year. The industry regulator is conducting its own investigation and will report later this year.
RWE AG's U.K. unit isn't ruling out a price increase, spokeswoman Sunita Patel said today by telephone, adding that the company has ``no immediate plans'' to raise rates. ``We face the same pressures as any other utility company,'' she said.
Scottish Power Ltd., the British division of Iberdrola SA, ``continues to review'' pricing ``against the market we operate in,'' spokesman Paul Ferguson said by telephone.
Laura Young, a spokeswoman for Scottish & Southern Energy Plc, declined to comment. The company's chief executive officer said in July that it's becoming more difficult to resist increasing consumer prices.
`Steady Climb Upwards'
``Today's news of a key gas pipeline being shut and wholesale gas prices increasing as a result does not augur well for consumers,'' said Ann Robinson, director of consumer policy at E.W. Scripps Co.'s Uswitch, a Web site that makes money when consumers use it to change energy supplier. ``All the evidence points towards a slow process and a steady climb upwards for energy bills.''
Good Energy Group Plc, a supplier of renewable electricity in the U.K., said today a price increase is ``imminent'' after first-half net income declined 19 percent.
``We are putting our prices up because the wholesale costs have risen significantly,'' Finance Director Jon Fairchild said in a telephone interview.
E.ON said it will stop charging a premium for U.K. customers on so-called prepayment meters to help shelter poorer consumers from the impact of the price increases. The utility has about 5.5 million customers in the U.K.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
Read more...
Aug. 21 (Bloomberg) -- E.ON AG, Germany's biggest utility, will raise U.K. household prices for natural gas and electricity tomorrow after wholesale costs advanced to a record, boosted by a Norwegian pipeline leak.
E.ON will charge 26 percent more for gas and 16 percent extra for electricity supplies, the company said today in a statement. That will cost the average customer buying both gas and power from the Dusseldorf-based utility an additional 226 pounds ($422) a year.
The move comes after Centrica Plc's British Gas unit, the country's biggest supplier, raised charges on July 30 and Electricite de France SA's U.K. division put up prices five days earlier. The increases may stoke inflation across the U.K. economy, adding to the Bank of England's problems as it seeks to stave off a recession.
``The gas pipeline leak is probably the straw that broke the camel's back and a good excuse to put prices up today, though the hikes were inevitable irrespective of the overnight news,'' BNP Paribas SA economist Alan Clarke said today in a note. The price increase was in line with estimates, he said.
U.K. gas and electricity for the coming winter traded at records today after StatoilHydro ASA said yesterday that the North Sea Kvitebjoern field may not export gas this winter because of a pipe leak. Gas-fired power plants produce more than 40 percent of Britain's electricity, so the gas price influences the power market.
Antitrust Probe
Britain's six biggest energy suppliers are under increasing scrutiny after a panel of lawmakers said the government should consider pursuing an antitrust probe into gas and power markets because of climbing retail prices. All six raised prices in the first half of the year. The industry regulator is conducting its own investigation and will report later this year.
RWE AG's U.K. unit isn't ruling out a price increase, spokeswoman Sunita Patel said today by telephone, adding that the company has ``no immediate plans'' to raise rates. ``We face the same pressures as any other utility company,'' she said.
Scottish Power Ltd., the British division of Iberdrola SA, ``continues to review'' pricing ``against the market we operate in,'' spokesman Paul Ferguson said by telephone.
Laura Young, a spokeswoman for Scottish & Southern Energy Plc, declined to comment. The company's chief executive officer said in July that it's becoming more difficult to resist increasing consumer prices.
`Steady Climb Upwards'
``Today's news of a key gas pipeline being shut and wholesale gas prices increasing as a result does not augur well for consumers,'' said Ann Robinson, director of consumer policy at E.W. Scripps Co.'s Uswitch, a Web site that makes money when consumers use it to change energy supplier. ``All the evidence points towards a slow process and a steady climb upwards for energy bills.''
Good Energy Group Plc, a supplier of renewable electricity in the U.K., said today a price increase is ``imminent'' after first-half net income declined 19 percent.
``We are putting our prices up because the wholesale costs have risen significantly,'' Finance Director Jon Fairchild said in a telephone interview.
E.ON said it will stop charging a premium for U.K. customers on so-called prepayment meters to help shelter poorer consumers from the impact of the price increases. The utility has about 5.5 million customers in the U.K.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
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Goldman Sachs Says Half of the World Economy Faces Recession
By Simon Kennedy
Aug. 21 (Bloomberg) -- Goldman Sachs Group Inc. said countries that account for half of the world's economy face a recession a year after the credit crisis began.
The U.S., Japan, the 15-nation euro area and the U.K. are ``either in recession or face significant recession risks in the months ahead,'' Goldman's London-based international economist Binit Patel said in a report to clients today.
A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world's largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and France, Germany and Japan all contracted in the second quarter.
Economists at UBS AG led by Larry Hatheway this week cut their forecast for global growth next year to 2.9 percent from 3.1 percent, close to the 2.5 percent deemed a world recession, while those at JPMorgan Chase & Co. say this quarter's estimated 1 percent expansion will be the slowest since mid-2001.
Patel estimates the chances of a global recession at no more than 20 percent given his expectation that China's economy will continue to grow about 10 percent this year and next.
``Continued robust, albeit slowing, growth in China and the rest of the emerging markets'' will deliver world growth of 3.6 percent next year after 3.9 percent in 2008, said Patel, who estimates emerging markets account for the other 50 percent of the world economy.
To contact the reporters on this story: Simon Kennedy in Lindau, Germany, at skennedy4@bloomberg.net
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Aug. 21 (Bloomberg) -- Goldman Sachs Group Inc. said countries that account for half of the world's economy face a recession a year after the credit crisis began.
The U.S., Japan, the 15-nation euro area and the U.K. are ``either in recession or face significant recession risks in the months ahead,'' Goldman's London-based international economist Binit Patel said in a report to clients today.
A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world's largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and France, Germany and Japan all contracted in the second quarter.
Economists at UBS AG led by Larry Hatheway this week cut their forecast for global growth next year to 2.9 percent from 3.1 percent, close to the 2.5 percent deemed a world recession, while those at JPMorgan Chase & Co. say this quarter's estimated 1 percent expansion will be the slowest since mid-2001.
Patel estimates the chances of a global recession at no more than 20 percent given his expectation that China's economy will continue to grow about 10 percent this year and next.
``Continued robust, albeit slowing, growth in China and the rest of the emerging markets'' will deliver world growth of 3.6 percent next year after 3.9 percent in 2008, said Patel, who estimates emerging markets account for the other 50 percent of the world economy.
To contact the reporters on this story: Simon Kennedy in Lindau, Germany, at skennedy4@bloomberg.net
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Frontline Falls in Oslo After Profits Misses Analyst Estimates
By Alaric Nightingale
Aug. 21 (Bloomberg) -- Frontline Ltd., the world's largest owner of supertankers, fell the most in six weeks in Oslo trading after second-quarter profit missed analyst estimates and it didn't say when a slump in freight costs will end.
Frontline dropped as much as 6.2 percent after saying net income rose 69 percent to $318.4 million. The company was expected to make $339 million, according to the median estimate of nine analysts surveyed by Bloomberg News.
A decline in rental rates since July is a ``temporary negative development'' caused by China slowing crude imports before the Olympic Games, reduced oil demand in the U.S. and fewer West African cargoes, Frontline said. The market may strengthen as owners sail more slowly, world crude production increases and refineries produce more fuel, it said.
``Some people were hoping they would have very specific news on when the market is turning,'' Ole Stenhagen, an Oslo- based analyst at SEB Enskilda who has a ``sell'' recommendation on the shares, said by telephone. ``I don't feel they gave the place, time or numbers.''
Frontline declined 19 Norwegian kroner, or 6.1 percent, to 294.5 kroner as of 11:27 a.m. in Oslo. Earlier it traded as low as 294 kroner, and a close at that price would be the biggest one0-day drop since Feb. 22. The stock has risen 14 percent in 2008, giving Frontline a market value of 22 billion kroner ($4.1 billion).
Profit was buoyed by record oil production from the Organization of Petroleum Exporting Countries. Fleet supply was curtailed by Iran using its fleet as floating oil storage rather than for deliveries, Frontline said.
$84,300 a Day
Daily rental income after fuel and port costs from company's very large crude carriers, or VLCCs, gained 68 percent to $84,300 a day. Suezmax tankers that have about half the shipping capacity of a VLCC, saw profits advance 87 percent to $61,100 a day.
By contrast, Euronav NV, Belgium's only publicly traded oil-tanker owner, made $97,950 a day on its VLCCs and $44,800 a day from its suezmaxes in the second quarter.
Since climbing to $148,122 a day on July 1, rental returns from leasing VLCCs have plunged to $13,547 a day, according to data from the London-based Baltic Exchange, whose daily price assessments are used to settle shipping contracts and derivatives contracts.
That's less than the $31,400 a day that Frontline said today its VLCCs need to break even. Suezmaxes returns have slipped to $32,022 a day compared with $24,800 a day that Frontline requires for profit.
OPEC pumped a record average of 32.3 million barrels of crude a day in April, May and June. Iran deployed its fleet as floating storage, after demand for some of its crude fell.
Deducting gains of $126.7 million from the sale of assets would imply Frontline made a profit of $191.6 million. That would beat the $188.25 median estimate of 10 analysts surveyed by Bloomberg.
To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net
Read more...
Aug. 21 (Bloomberg) -- Frontline Ltd., the world's largest owner of supertankers, fell the most in six weeks in Oslo trading after second-quarter profit missed analyst estimates and it didn't say when a slump in freight costs will end.
Frontline dropped as much as 6.2 percent after saying net income rose 69 percent to $318.4 million. The company was expected to make $339 million, according to the median estimate of nine analysts surveyed by Bloomberg News.
A decline in rental rates since July is a ``temporary negative development'' caused by China slowing crude imports before the Olympic Games, reduced oil demand in the U.S. and fewer West African cargoes, Frontline said. The market may strengthen as owners sail more slowly, world crude production increases and refineries produce more fuel, it said.
``Some people were hoping they would have very specific news on when the market is turning,'' Ole Stenhagen, an Oslo- based analyst at SEB Enskilda who has a ``sell'' recommendation on the shares, said by telephone. ``I don't feel they gave the place, time or numbers.''
Frontline declined 19 Norwegian kroner, or 6.1 percent, to 294.5 kroner as of 11:27 a.m. in Oslo. Earlier it traded as low as 294 kroner, and a close at that price would be the biggest one0-day drop since Feb. 22. The stock has risen 14 percent in 2008, giving Frontline a market value of 22 billion kroner ($4.1 billion).
Profit was buoyed by record oil production from the Organization of Petroleum Exporting Countries. Fleet supply was curtailed by Iran using its fleet as floating oil storage rather than for deliveries, Frontline said.
$84,300 a Day
Daily rental income after fuel and port costs from company's very large crude carriers, or VLCCs, gained 68 percent to $84,300 a day. Suezmax tankers that have about half the shipping capacity of a VLCC, saw profits advance 87 percent to $61,100 a day.
By contrast, Euronav NV, Belgium's only publicly traded oil-tanker owner, made $97,950 a day on its VLCCs and $44,800 a day from its suezmaxes in the second quarter.
Since climbing to $148,122 a day on July 1, rental returns from leasing VLCCs have plunged to $13,547 a day, according to data from the London-based Baltic Exchange, whose daily price assessments are used to settle shipping contracts and derivatives contracts.
That's less than the $31,400 a day that Frontline said today its VLCCs need to break even. Suezmaxes returns have slipped to $32,022 a day compared with $24,800 a day that Frontline requires for profit.
OPEC pumped a record average of 32.3 million barrels of crude a day in April, May and June. Iran deployed its fleet as floating storage, after demand for some of its crude fell.
Deducting gains of $126.7 million from the sale of assets would imply Frontline made a profit of $191.6 million. That would beat the $188.25 median estimate of 10 analysts surveyed by Bloomberg.
To contact the reporter on this story: Alaric Nightingale in London at Anightingal1@bloomberg.net
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Imperial Energy Climbs on Report of ONGC Videsh Offer
By Archana Chaudhary and Stephen Bierman
Aug. 21 (Bloomberg) -- Imperial Energy Plc, a U.K. oil and natural-gas explorer developing deposits in Siberia, climbed to a seven-month high in London trading following a report that ONGC Videsh Ltd. bid for the company.
Imperial Energy rose as much as 88 pence, or 7.7 percent, to 1,234 pence, which would be the highest close since Jan. 15. The stock traded at 1,201 pence as of 11:45 a.m. local time, valuing the London-based company at 1.23 billion pounds ($2.3 billion).
ONGC Videsh, the overseas unit of India's state-run Oil & Natural Gas Corp., made a $2.5 billion ``non-binding offer'' for a controlling stake in Imperial Energy on June 24, the Hindustan Times reported, citing unidentified people familiar with the bid. Oil & Natural Gas Chairman R.S. Sharma declined to comment on the report when contacted by telephone in New Delhi today.
ONGC Videsh offered to pay 1,290 pence a share for Imperial Energy and may increase the bid to 1,500 pence if China Petroleum & Chemical Corp. makes a counter offer, Business Standard reported today, citing an investment banker it didn't name. The approach was approved by a committee of senior government officials, according to the Standard.
``This is speculation,'' said R.S. Pandey, the top bureaucrat in India's Oil Ministry. ``We cannot comment.''
Possible Bidders
Oil & Natural Gas, China Petroleum and Korea National Oil Corp. are interested in acquiring Imperial Energy, Reuters reported Aug. 13. Zhang Zheng, a Beijing-based spokesman for the overseas projects of Sinopec, as China Petroleum is known, didn't pick up calls to his office today. Bae Ho Jun, a spokesman for Korean National Oil Corp., declined to comment.
``A bid of 1,500 is around the upper range of our valuation,'' Artem Konchin, an oil and gas analyst at UniCredit Aton in Moscow, said by phone today.
JPMorgan Chase & Co. analysts Andrey Gromadin and Nadia Kazakova said in a research note that the risk of a deal failing ``has dropped considerably in our view.''
``We believe intensifying media coverage, reports of state- level negotiations and ONGC's readiness to face competition suggest a strong possibility of a positive outcome,'' they wrote.
Oil Reserves
Imperial Energy has 450 million barrels of Russian registered reserves, according to a July company statement. Imperial is seeking parity between its Russian-approved reserves figures and its estimates based on Society of Petroleum Engineers standards after the country's government raised questions about differences between the two.
The company, which operates primarily in the Siberian region of Tomsk, has 920 million barrels of oil equivalent of proven and probable reserves as of December 2007, according to an audit by DeGolyer and McNaughton cited on Imperial's Web site.
Drilling successes at the Kiev Eganskoye field on the east side of the Ob River came after the yearly Degolyer and MacNaughton audit and will likely increase valuations when they are included in the next report, Konchin said.
Imperial said in April it pumped 7,000 barrels a day in the first quarter. The company plans to produce 25,000 barrels of oil a day by the end of the year and expects to start output at the Kiev Eganskoye field in September.
To contact the reporters on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg. Stephen Bierman in Moscow at Sbierman1@bloomberg.net
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Aug. 21 (Bloomberg) -- Imperial Energy Plc, a U.K. oil and natural-gas explorer developing deposits in Siberia, climbed to a seven-month high in London trading following a report that ONGC Videsh Ltd. bid for the company.
Imperial Energy rose as much as 88 pence, or 7.7 percent, to 1,234 pence, which would be the highest close since Jan. 15. The stock traded at 1,201 pence as of 11:45 a.m. local time, valuing the London-based company at 1.23 billion pounds ($2.3 billion).
ONGC Videsh, the overseas unit of India's state-run Oil & Natural Gas Corp., made a $2.5 billion ``non-binding offer'' for a controlling stake in Imperial Energy on June 24, the Hindustan Times reported, citing unidentified people familiar with the bid. Oil & Natural Gas Chairman R.S. Sharma declined to comment on the report when contacted by telephone in New Delhi today.
ONGC Videsh offered to pay 1,290 pence a share for Imperial Energy and may increase the bid to 1,500 pence if China Petroleum & Chemical Corp. makes a counter offer, Business Standard reported today, citing an investment banker it didn't name. The approach was approved by a committee of senior government officials, according to the Standard.
``This is speculation,'' said R.S. Pandey, the top bureaucrat in India's Oil Ministry. ``We cannot comment.''
Possible Bidders
Oil & Natural Gas, China Petroleum and Korea National Oil Corp. are interested in acquiring Imperial Energy, Reuters reported Aug. 13. Zhang Zheng, a Beijing-based spokesman for the overseas projects of Sinopec, as China Petroleum is known, didn't pick up calls to his office today. Bae Ho Jun, a spokesman for Korean National Oil Corp., declined to comment.
``A bid of 1,500 is around the upper range of our valuation,'' Artem Konchin, an oil and gas analyst at UniCredit Aton in Moscow, said by phone today.
JPMorgan Chase & Co. analysts Andrey Gromadin and Nadia Kazakova said in a research note that the risk of a deal failing ``has dropped considerably in our view.''
``We believe intensifying media coverage, reports of state- level negotiations and ONGC's readiness to face competition suggest a strong possibility of a positive outcome,'' they wrote.
Oil Reserves
Imperial Energy has 450 million barrels of Russian registered reserves, according to a July company statement. Imperial is seeking parity between its Russian-approved reserves figures and its estimates based on Society of Petroleum Engineers standards after the country's government raised questions about differences between the two.
The company, which operates primarily in the Siberian region of Tomsk, has 920 million barrels of oil equivalent of proven and probable reserves as of December 2007, according to an audit by DeGolyer and McNaughton cited on Imperial's Web site.
Drilling successes at the Kiev Eganskoye field on the east side of the Ob River came after the yearly Degolyer and MacNaughton audit and will likely increase valuations when they are included in the next report, Konchin said.
Imperial said in April it pumped 7,000 barrels a day in the first quarter. The company plans to produce 25,000 barrels of oil a day by the end of the year and expects to start output at the Kiev Eganskoye field in September.
To contact the reporters on this story: Archana Chaudhary in Mumbai at achaudhary2@bloomberg. Stephen Bierman in Moscow at Sbierman1@bloomberg.net
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Cnooc Profit Growth to Surpass Exxon, Shell on Output
By Wang Ying and Winnie Zhu
Enlarge Image/Details
Aug. 21 (Bloomberg) -- Cnooc Ltd.'s first-half profit growth may be double that of Exxon Mobil Corp. and Royal Dutch Shell Plc after China's third-largest oil company increased its crude reserves and output amid record prices.
Net income probably climbed 52 percent to 22.1 billion yuan ($3.2 billion), according to the median estimate of five analysts surveyed by Bloomberg News. Cnooc avoided the likely slump in profits at PetroChina Co. and China Petroleum & Chemical Corp. caused by government caps on fuel prices because it doesn't run refineries, Gordon Kwan, an analyst at CLSA Ltd., said.
Cnooc relied on discoveries and production at home to benefit from a 46 percent increase in crude oil prices in the first six months, while its overseas competitors struggled to boost output as countries from Kazakhstan to Venezuela cut access to oil. PetroChina and Sinopec, as China Petroleum is known, have been prevented from passing on crude oil costs to consumers.
Cnooc has benefited ``thanks to surging crude oil prices and the lack of exposure to China's depressed downstream fuel market,'' said Kwan, CLSA's Hong Kong-based head of China energy research. ``The second half should improve further on the back of still high oil prices and the start-ups of numerous oil and gas fields in Bohai Bay.''
The Beijing-based exploration company plans to increase crude oil and natural gas output by as much as 18 percent this year as economic growth spurs energy demand, Cnooc said on Jan. 29. Cnooc announced the start-up of two oil fields and two discoveries in the first half.
Exxon, PetroChina
Exxon's net income climbed 16 percent in the first six months while Shell's profit climbed 29 percent, according to data compiled by Bloomberg.
PetroChina, Asia's biggest oil company, may post a 34 percent drop in profit to 54 billion yuan and earnings at Sinopec probably fell 81 percent to 7 billion yuan, according to the median estimates of seven analysts.
Sinopec is due to release earnings between Aug. 22 and Aug. 25 while Cnooc and PetroChina are scheduled to report on Aug. 27.
Cnooc's earnings have outperformed those of its Chinese rivals because the offshore oil producer derives about 90 percent of its revenue from exploration compared with almost 11 percent at PetroChina and less than 2 percent at Sinopec.
China's refineries are still losing money even though the government raised gasoline and diesel prices by at least 17 percent in June, China National Petroleum Corp., the parent company of PetroChina, said on June 28.
Fuel Prices
Sinopec supplies about two-thirds of China's refined oil products while PetroChina provides most of the rest. First-half profit at Sinopec may have fallen by more than 50 percent because of rising crude costs, China's biggest refiner said on July 17.
``We believe there is room for the government to raise domestic refined product prices further,'' Goldman Sachs Group Inc. analysts including Kelvin Koh and Chris Shiu said in an Aug. 13 research note.
Cnooc spokesman Xiao Zongwei, Sinopec's Huang Wensheng and PetroChina's Mao Zefeng, declined to comment on the earnings estimates.
PetroChina is still in talks with the government on possible adjustments to the windfall tax levied on crude-oil sales, Chairman Jiang Jiemin said July 31.
Reconsidering Levy
Chinese oil producers pay a tax on revenue from crude sold for more than $40 a barrel under a levy introduced in March 2006, based on a global crude price of about $60. The government said the levy would be reconsidered when oil is above $80 a barrel, Jiang said in May.
``Removal of such taxes could boost our full-year 2009 profit forecast for Cnooc by 52 percent, restoring enough cash flow to reinvest in oil and gas exploration,'' CLSA's Kwan said in an Aug. 14 report.
Cnooc's shares have climbed 30 percent in the past year compared with a 0.9 percent increase in Sinopec's Hong Kong stock. PetroChina has fallen 9.7 percent while the benchmark Hang Seng Index has declined 6.2 percent in the same period.
Crude oil futures in New York reached a record $147.27 a barrel on July 11. Prices have dropped 21 percent since then and are still 68 higher than a year ago.
To contact the reporters on this story: Wang Ying in Beijing at wang30@bloomberg.net; Winnie Zhu in Shanghai at wzhu4@bloomberg.net.
Read more...
Enlarge Image/Details
Aug. 21 (Bloomberg) -- Cnooc Ltd.'s first-half profit growth may be double that of Exxon Mobil Corp. and Royal Dutch Shell Plc after China's third-largest oil company increased its crude reserves and output amid record prices.
Net income probably climbed 52 percent to 22.1 billion yuan ($3.2 billion), according to the median estimate of five analysts surveyed by Bloomberg News. Cnooc avoided the likely slump in profits at PetroChina Co. and China Petroleum & Chemical Corp. caused by government caps on fuel prices because it doesn't run refineries, Gordon Kwan, an analyst at CLSA Ltd., said.
Cnooc relied on discoveries and production at home to benefit from a 46 percent increase in crude oil prices in the first six months, while its overseas competitors struggled to boost output as countries from Kazakhstan to Venezuela cut access to oil. PetroChina and Sinopec, as China Petroleum is known, have been prevented from passing on crude oil costs to consumers.
Cnooc has benefited ``thanks to surging crude oil prices and the lack of exposure to China's depressed downstream fuel market,'' said Kwan, CLSA's Hong Kong-based head of China energy research. ``The second half should improve further on the back of still high oil prices and the start-ups of numerous oil and gas fields in Bohai Bay.''
The Beijing-based exploration company plans to increase crude oil and natural gas output by as much as 18 percent this year as economic growth spurs energy demand, Cnooc said on Jan. 29. Cnooc announced the start-up of two oil fields and two discoveries in the first half.
Exxon, PetroChina
Exxon's net income climbed 16 percent in the first six months while Shell's profit climbed 29 percent, according to data compiled by Bloomberg.
PetroChina, Asia's biggest oil company, may post a 34 percent drop in profit to 54 billion yuan and earnings at Sinopec probably fell 81 percent to 7 billion yuan, according to the median estimates of seven analysts.
Sinopec is due to release earnings between Aug. 22 and Aug. 25 while Cnooc and PetroChina are scheduled to report on Aug. 27.
Cnooc's earnings have outperformed those of its Chinese rivals because the offshore oil producer derives about 90 percent of its revenue from exploration compared with almost 11 percent at PetroChina and less than 2 percent at Sinopec.
China's refineries are still losing money even though the government raised gasoline and diesel prices by at least 17 percent in June, China National Petroleum Corp., the parent company of PetroChina, said on June 28.
Fuel Prices
Sinopec supplies about two-thirds of China's refined oil products while PetroChina provides most of the rest. First-half profit at Sinopec may have fallen by more than 50 percent because of rising crude costs, China's biggest refiner said on July 17.
``We believe there is room for the government to raise domestic refined product prices further,'' Goldman Sachs Group Inc. analysts including Kelvin Koh and Chris Shiu said in an Aug. 13 research note.
Cnooc spokesman Xiao Zongwei, Sinopec's Huang Wensheng and PetroChina's Mao Zefeng, declined to comment on the earnings estimates.
PetroChina is still in talks with the government on possible adjustments to the windfall tax levied on crude-oil sales, Chairman Jiang Jiemin said July 31.
Reconsidering Levy
Chinese oil producers pay a tax on revenue from crude sold for more than $40 a barrel under a levy introduced in March 2006, based on a global crude price of about $60. The government said the levy would be reconsidered when oil is above $80 a barrel, Jiang said in May.
``Removal of such taxes could boost our full-year 2009 profit forecast for Cnooc by 52 percent, restoring enough cash flow to reinvest in oil and gas exploration,'' CLSA's Kwan said in an Aug. 14 report.
Cnooc's shares have climbed 30 percent in the past year compared with a 0.9 percent increase in Sinopec's Hong Kong stock. PetroChina has fallen 9.7 percent while the benchmark Hang Seng Index has declined 6.2 percent in the same period.
Crude oil futures in New York reached a record $147.27 a barrel on July 11. Prices have dropped 21 percent since then and are still 68 higher than a year ago.
To contact the reporters on this story: Wang Ying in Beijing at wang30@bloomberg.net; Winnie Zhu in Shanghai at wzhu4@bloomberg.net.
Read more...
U.K. Winter Gas Slips From a Record as BP Returns Bruce Field
By Ben Farey
Aug. 21 (Bloomberg) -- U.K. wholesale natural gas for the coming winter fell from a record after BP Plc started its North Sea Bruce field, boosting supplies of the fuel and easing cost pressure for utilities.
Gas for delivery in the six months through March 2009 slid 0.3 percent to 100.25 pence a therm at 1:03 p.m. local time. That's equal to $18.70 a million British thermal units. A therm is 100,000 Btus. The contract earlier climbed to a record 109 pence after StatoilHydro ASA said it may halt gas exports from a North Sea field until spring. The U.K. price remains more than double the cost of U.S. gas.
``We plan to ramp up to normal production levels at Bruce over the next few days,'' Joanne McDonald, BP's spokeswoman in Aberdeen, Scotland, said today in a telephone interview. The resumption of output at the field, which was shut for maintenance June 21, had been delayed after a remote-controlled hydraulic device became stuck in a pipeline.
StatoilHydro said yesterday Norway's Kvitebjoern deposit may not produce gas this winter while repairs to a leaking pipeline are carried out. The field, which holds Norway's eighth-largest gas reserves, sends the fuel to the Kollsnes processing plant on the country's west coast, from where it's sent to the U.K., Germany, France and Belgium.
Gas prices doubled in the past year after U.K. North Sea production fell 9.5 percent, leading Britain's six biggest energy suppliers to raise customer prices.
E.ON Raises Rates
E.ON AG said today that climbing wholesale costs had forced it to increase U.K. household prices for gas and power by 26 percent and 16 percent respectively. The change, effective tomorrow, will cost the average customer buying both gas and electricity an additional 226 pounds ($422) a year.
Soaring energy bills have curbed consumer spending in the U.K., raising concern that the economy will fall into a recession. The British Chamber of Commerce said this week Britain's gross domestic product will either stagnate or contract in the next two or three quarters.
Gassco AS, operator of Norway's offshore pipeline system, said the Vesterled link into the U.K. opened following three weeks of maintenance. The Kollsnes plant in Norway has also returned from planned maintenance.
``All the work is done,'' Kjell Varlo Larsen, Gassco's spokesman in Norway, said by telephone today. Kollsnes normally processes gas from Kvitebjoern.
The 340-kilometer (211-mile) Vesterled pipeline can transport as much as 36 million cubic meters of gas a day from Norwegian North Sea deposits, including StatoilHydro's Heimdal and Oseberg fields.
St. Fergus Flows
The link arrives in the U.K. at Total SA's St. Fergus terminal in northeast Scotland. Gas was flowing into the terminal at a rate of about 18.6 million cubic meters a day at 12:55 p.m., National Grid Plc data show, about 190,000 cubic meters more than yesterday.
About 317 million cubic meters of the fuel will remain in the U.K.'s pipeline network at 6 a.m. tomorrow, 4 million cubic meters fewer than at the start of today, National Grid data show.
Same-day gas fell 1.8 percent to 56.25 pence a therm at 1:02 p.m., according to ICAP Plc.
U.K. baseload electricity for delivery in October dropped 1.5 percent to 86.20 pounds a megawatt-hour, ICAP data showed.
To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net
Read more...
Aug. 21 (Bloomberg) -- U.K. wholesale natural gas for the coming winter fell from a record after BP Plc started its North Sea Bruce field, boosting supplies of the fuel and easing cost pressure for utilities.
Gas for delivery in the six months through March 2009 slid 0.3 percent to 100.25 pence a therm at 1:03 p.m. local time. That's equal to $18.70 a million British thermal units. A therm is 100,000 Btus. The contract earlier climbed to a record 109 pence after StatoilHydro ASA said it may halt gas exports from a North Sea field until spring. The U.K. price remains more than double the cost of U.S. gas.
``We plan to ramp up to normal production levels at Bruce over the next few days,'' Joanne McDonald, BP's spokeswoman in Aberdeen, Scotland, said today in a telephone interview. The resumption of output at the field, which was shut for maintenance June 21, had been delayed after a remote-controlled hydraulic device became stuck in a pipeline.
StatoilHydro said yesterday Norway's Kvitebjoern deposit may not produce gas this winter while repairs to a leaking pipeline are carried out. The field, which holds Norway's eighth-largest gas reserves, sends the fuel to the Kollsnes processing plant on the country's west coast, from where it's sent to the U.K., Germany, France and Belgium.
Gas prices doubled in the past year after U.K. North Sea production fell 9.5 percent, leading Britain's six biggest energy suppliers to raise customer prices.
E.ON Raises Rates
E.ON AG said today that climbing wholesale costs had forced it to increase U.K. household prices for gas and power by 26 percent and 16 percent respectively. The change, effective tomorrow, will cost the average customer buying both gas and electricity an additional 226 pounds ($422) a year.
Soaring energy bills have curbed consumer spending in the U.K., raising concern that the economy will fall into a recession. The British Chamber of Commerce said this week Britain's gross domestic product will either stagnate or contract in the next two or three quarters.
Gassco AS, operator of Norway's offshore pipeline system, said the Vesterled link into the U.K. opened following three weeks of maintenance. The Kollsnes plant in Norway has also returned from planned maintenance.
``All the work is done,'' Kjell Varlo Larsen, Gassco's spokesman in Norway, said by telephone today. Kollsnes normally processes gas from Kvitebjoern.
The 340-kilometer (211-mile) Vesterled pipeline can transport as much as 36 million cubic meters of gas a day from Norwegian North Sea deposits, including StatoilHydro's Heimdal and Oseberg fields.
St. Fergus Flows
The link arrives in the U.K. at Total SA's St. Fergus terminal in northeast Scotland. Gas was flowing into the terminal at a rate of about 18.6 million cubic meters a day at 12:55 p.m., National Grid Plc data show, about 190,000 cubic meters more than yesterday.
About 317 million cubic meters of the fuel will remain in the U.K.'s pipeline network at 6 a.m. tomorrow, 4 million cubic meters fewer than at the start of today, National Grid data show.
Same-day gas fell 1.8 percent to 56.25 pence a therm at 1:02 p.m., according to ICAP Plc.
U.K. baseload electricity for delivery in October dropped 1.5 percent to 86.20 pounds a megawatt-hour, ICAP data showed.
To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net
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U.K. Pound Declines Against Euro as Retail Sales Growth Slows
By Lukanyo Mnyanda and Andrew MacAskill
Aug. 21 (Bloomberg) -- The U.K. pound fell against the euro after a government report showed retail sales rose by the weakest annual rate in 17 months in July, strengthening the case for lower interest rates.
The U.K. currency briefly rallied after the Office for National Statistics said sales unexpectedly rose in the month. The gain on the year was the smallest since February 2006 and added to evidence the economy is headed for a recession. The pound fell yesterday after the minutes of the Bank of England's August rates meeting yesterday showed policy makers judged inflation risks ``have probably eased a little.''
``There are still a lot of worries ahead,'' said Paul Bednarczyk, a currency strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. ``I don't think there is much upside for sterling until all the data is out the way.''
Against the single European currency, the pound dropped 0.1 percent to 79.37 pence by 12:25 p.m., from 79.21 yesterday and 79.07 pence earlier. It traded at $1.8628, after earlier posting its biggest gain since Aug. 14, to $1.8702. It slipped to $1.8512 on Aug. 15, the lowest level since July 2006. The pound will probably fall to $1.83 by year-end, Bednarczyk said.
Deutsche Bank AG changed its U.K. interest-rate forecast today and said the Bank of England will lower borrowing costs by 1 percentage point next year. The benchmark rate will be cut to 4 percent in the first three quarters of 2009, George Buckley, the bank's chief U.K. economist, wrote in an e-mailed note.
Gilts Slip
Gilts rose, with the yield on the 10-year bond falling 1 basis point to 4.54 percent. The price of the 5 percent security due March 2018 declined 0.09, or 90 pence per 1,000-pound face amount, to 103.49. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, slipped 1 basis point to 4.53 percent. Bond yields move inversely to prices.
Sales gained 0.8 percent in July, compared with the 0.2 percent drop forecast by economists in a Bloomberg survey, a statistics office report showed today. The growth rate dropped to an annual 2.1 percent from 2.2 percent in June and 8.1 percent in May.
The spread between U.K. government bonds and their German counterparts has narrowed as traders bet the end of a decade-long rally in the nation's housing market will prompt a reduction in borrowing costs. The 10-year gilt yielded 40 basis points more than the German bund, down from 69 basis points on Feb. 25, the widest this year.
U.K. bonds have outperformed their European counterparts in the past three months as evidence the economic slowdown is deepening persuaded investors to remove wagers on rate increases. The implied yield on the March short-sterling futures contract was at 5.21 percent, from 5.44 percent at the end of July.
The nation's bonds have returned 4.4 percent since the past two months, compared with 3.2 percent from their European counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and U.K. Gilts Master indexes.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net
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Aug. 21 (Bloomberg) -- The U.K. pound fell against the euro after a government report showed retail sales rose by the weakest annual rate in 17 months in July, strengthening the case for lower interest rates.
The U.K. currency briefly rallied after the Office for National Statistics said sales unexpectedly rose in the month. The gain on the year was the smallest since February 2006 and added to evidence the economy is headed for a recession. The pound fell yesterday after the minutes of the Bank of England's August rates meeting yesterday showed policy makers judged inflation risks ``have probably eased a little.''
``There are still a lot of worries ahead,'' said Paul Bednarczyk, a currency strategist in London at 4Cast Ltd., a research company that counts central banks among its subscribers. ``I don't think there is much upside for sterling until all the data is out the way.''
Against the single European currency, the pound dropped 0.1 percent to 79.37 pence by 12:25 p.m., from 79.21 yesterday and 79.07 pence earlier. It traded at $1.8628, after earlier posting its biggest gain since Aug. 14, to $1.8702. It slipped to $1.8512 on Aug. 15, the lowest level since July 2006. The pound will probably fall to $1.83 by year-end, Bednarczyk said.
Deutsche Bank AG changed its U.K. interest-rate forecast today and said the Bank of England will lower borrowing costs by 1 percentage point next year. The benchmark rate will be cut to 4 percent in the first three quarters of 2009, George Buckley, the bank's chief U.K. economist, wrote in an e-mailed note.
Gilts Slip
Gilts rose, with the yield on the 10-year bond falling 1 basis point to 4.54 percent. The price of the 5 percent security due March 2018 declined 0.09, or 90 pence per 1,000-pound face amount, to 103.49. The yield on the two-year gilt, which is more sensitive to the outlook for interest rates, slipped 1 basis point to 4.53 percent. Bond yields move inversely to prices.
Sales gained 0.8 percent in July, compared with the 0.2 percent drop forecast by economists in a Bloomberg survey, a statistics office report showed today. The growth rate dropped to an annual 2.1 percent from 2.2 percent in June and 8.1 percent in May.
The spread between U.K. government bonds and their German counterparts has narrowed as traders bet the end of a decade-long rally in the nation's housing market will prompt a reduction in borrowing costs. The 10-year gilt yielded 40 basis points more than the German bund, down from 69 basis points on Feb. 25, the widest this year.
U.K. bonds have outperformed their European counterparts in the past three months as evidence the economic slowdown is deepening persuaded investors to remove wagers on rate increases. The implied yield on the March short-sterling futures contract was at 5.21 percent, from 5.44 percent at the end of July.
The nation's bonds have returned 4.4 percent since the past two months, compared with 3.2 percent from their European counterparts, according to Merrill Lynch & Co.'s EMU Direct Government and U.K. Gilts Master indexes.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Andrew MacAskill in London at amacaskill@bloomberg.net
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Ruble Weakens After Georgia Says Russia Expanding `Occupation'
By Emma O'Brien
Aug. 21 (Bloomberg) -- The Russian ruble weakened against the dollar-euro basket used by the central bank to limit its fluctuations after Georgia's president Mikheil Saakashvili said Russia had widened its ``occupation'' of his country.
The ruble has lost almost 1 percent against the basket since since Aug. 7, when Georgia is alleged to have attacked Russian peacekeepers and citizens in the breakaway region of South Ossetia, prompting Russia to send in troops, tanks and jets the following day.
``We're seeing a small correction on the back of general ongoing tensions,'' said Jon Harrison, an emerging markets strategist at Dresdner Kleinwort in London. ``There are concerns it could escalate again and people are uncertain.''
The managed currency fell for the first day in four against the basket, losing as much as 0.3 percent. It was at 29.6123 by 4:04 p.m. in Moscow, from 29.5994 yesterday.
Bank Rossii confines the ruble to a trading band against the basket so as to limit the impact of its fluctuations on the competitiveness of Russian exports. The basket rate is calculated by multiplying the rate to the dollar by 0.55 and the euro rate by 0.45, then adding the two together.
The ruble fell as much as 0.3 percent to 24.4619 per dollar, and by 0.4 percent to 36.0982 per euro.
Georgian officials say Russia still controls a third of their country. Saakashvili said from the capital Tbilisi today that Russia ``has actually widened its occupation'' of the country, rather than make ``any serious movement to withdraw'' as demanded by a cease-fire agreed last week. Russian troops still hold all entrances to the city of Gori, Shota Utiashvili, a spokesman for Georgia's Interior Ministry, said today.
Moscow, which yesterday decided to ``freeze'' all military cooperation with NATO, has begun pulling out missiles, tanks and troops from central Georgia, Russia's Defense Ministry said.
Wider Band
Since mid-May Russia's central bank has allowed the ruble to trade more freely and widened its trading band as it seeks to deter speculative investors and curb above-target inflation. A strengthening currency cuts prices on imported goods and each 1 percentage point appreciation of the ruble can reduce inflation by 0.3 points, according to the bank's calculations.
The ruble will probably end the year stronger as Bank Rossii allows it to rise to cool inflation, Alfa Bank analysts led by chief economist Natalia Orlova said today.
``We think the central bank will appreciate the basket again so now is a good time to open long positions in the ruble,'' the Alfa analysts wrote. A long position is a bet the currency is going to strengthen. The central bank's ``continuing talk of inflation-targeting and the need to finance investments suggest that the currency will strengthen,'' the note said.
Bonds Fall
Inflation, which slowed to 14.7 percent in June from a five- year high of 15.1 percent in May and June, must be less than 10 percent next year, Prime Minister Vladimir Putin said today.
Russia's benchmark 7.5 percent bond due in 2030 fell today, as its yield rose by 2 basis points to 5.65 percent. The two-year note yielded 5.88 percent, up 8 basis points. The difference in yield between Russian and U.S. two-year notes was 363 basis points, the widest since March.
The yield on Georgia's 7.5 percent note due in 2013 held at 10.17 percent yesterday, after the central bank of Georgia cut its key interest rate to 11 percent, from 12 percent, in a bid to lure investors and reignite the economy after the war. It has jumped 1.67 basis points since Aug. 7.
To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net
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Aug. 21 (Bloomberg) -- The Russian ruble weakened against the dollar-euro basket used by the central bank to limit its fluctuations after Georgia's president Mikheil Saakashvili said Russia had widened its ``occupation'' of his country.
The ruble has lost almost 1 percent against the basket since since Aug. 7, when Georgia is alleged to have attacked Russian peacekeepers and citizens in the breakaway region of South Ossetia, prompting Russia to send in troops, tanks and jets the following day.
``We're seeing a small correction on the back of general ongoing tensions,'' said Jon Harrison, an emerging markets strategist at Dresdner Kleinwort in London. ``There are concerns it could escalate again and people are uncertain.''
The managed currency fell for the first day in four against the basket, losing as much as 0.3 percent. It was at 29.6123 by 4:04 p.m. in Moscow, from 29.5994 yesterday.
Bank Rossii confines the ruble to a trading band against the basket so as to limit the impact of its fluctuations on the competitiveness of Russian exports. The basket rate is calculated by multiplying the rate to the dollar by 0.55 and the euro rate by 0.45, then adding the two together.
The ruble fell as much as 0.3 percent to 24.4619 per dollar, and by 0.4 percent to 36.0982 per euro.
Georgian officials say Russia still controls a third of their country. Saakashvili said from the capital Tbilisi today that Russia ``has actually widened its occupation'' of the country, rather than make ``any serious movement to withdraw'' as demanded by a cease-fire agreed last week. Russian troops still hold all entrances to the city of Gori, Shota Utiashvili, a spokesman for Georgia's Interior Ministry, said today.
Moscow, which yesterday decided to ``freeze'' all military cooperation with NATO, has begun pulling out missiles, tanks and troops from central Georgia, Russia's Defense Ministry said.
Wider Band
Since mid-May Russia's central bank has allowed the ruble to trade more freely and widened its trading band as it seeks to deter speculative investors and curb above-target inflation. A strengthening currency cuts prices on imported goods and each 1 percentage point appreciation of the ruble can reduce inflation by 0.3 points, according to the bank's calculations.
The ruble will probably end the year stronger as Bank Rossii allows it to rise to cool inflation, Alfa Bank analysts led by chief economist Natalia Orlova said today.
``We think the central bank will appreciate the basket again so now is a good time to open long positions in the ruble,'' the Alfa analysts wrote. A long position is a bet the currency is going to strengthen. The central bank's ``continuing talk of inflation-targeting and the need to finance investments suggest that the currency will strengthen,'' the note said.
Bonds Fall
Inflation, which slowed to 14.7 percent in June from a five- year high of 15.1 percent in May and June, must be less than 10 percent next year, Prime Minister Vladimir Putin said today.
Russia's benchmark 7.5 percent bond due in 2030 fell today, as its yield rose by 2 basis points to 5.65 percent. The two-year note yielded 5.88 percent, up 8 basis points. The difference in yield between Russian and U.S. two-year notes was 363 basis points, the widest since March.
The yield on Georgia's 7.5 percent note due in 2013 held at 10.17 percent yesterday, after the central bank of Georgia cut its key interest rate to 11 percent, from 12 percent, in a bid to lure investors and reignite the economy after the war. It has jumped 1.67 basis points since Aug. 7.
To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net
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BP Starts Oil and Gas Output at U.K.'s Bruce Field
By Ben Farey
Aug. 21 (Bloomberg) -- BP Plc resumed natural-gas and oil production at its Bruce field in the U.K. North Sea following a two-month shutdown, sending gas prices lower.
``We plan to ramp up to normal production levels at Bruce over the next few days,'' Joanne McDonald, BP's spokeswoman in Aberdeen, Scotland, said today in a phone interview.
Bruce and Rhum, a neighboring field, had been closed for maintenance since June 21. Bruce's start was delayed because of a pipeline fault. McDonald couldn't immediately say whether Rhum would also start today.
U.K. gas for delivery in October reversed earlier gains to fall 0.8 percent to 78.90 pence a therm as of 11:37 a.m. U.K. time, according to ICAP Plc. Baseload electricity for delivery next month dropped 0.2 percent to 83.30 pounds a megawatt hour, ICAP data showed.
Bruce produced an average of 7,620 barrels of oil a day in the 12 months to March and about 6.4 million cubic meters of gas, data from the Department for Business, Enterprise and Regulatory Reform show.
BP, Europe's second-biggest oil company, said July 24 that Bruce's return from planned summer maintenance would be delayed after a cylindrical, remotely controlled hydraulic device, designed to fit into a pipeline, was found to have moved from its original position on the Bruce platform.
``We've moved the temporary pipeline isolation tool to an area that's allowed us to restart production,'' McDonald said, adding that the device will be recovered from the pipeline during next summer's maintenance season.
Gas from the Bruce and Rhum fields flow into Total SA's Frigg pipeline and on to the St. Fergus terminal in Northern Scotland.
To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net
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Aug. 21 (Bloomberg) -- BP Plc resumed natural-gas and oil production at its Bruce field in the U.K. North Sea following a two-month shutdown, sending gas prices lower.
``We plan to ramp up to normal production levels at Bruce over the next few days,'' Joanne McDonald, BP's spokeswoman in Aberdeen, Scotland, said today in a phone interview.
Bruce and Rhum, a neighboring field, had been closed for maintenance since June 21. Bruce's start was delayed because of a pipeline fault. McDonald couldn't immediately say whether Rhum would also start today.
U.K. gas for delivery in October reversed earlier gains to fall 0.8 percent to 78.90 pence a therm as of 11:37 a.m. U.K. time, according to ICAP Plc. Baseload electricity for delivery next month dropped 0.2 percent to 83.30 pounds a megawatt hour, ICAP data showed.
Bruce produced an average of 7,620 barrels of oil a day in the 12 months to March and about 6.4 million cubic meters of gas, data from the Department for Business, Enterprise and Regulatory Reform show.
BP, Europe's second-biggest oil company, said July 24 that Bruce's return from planned summer maintenance would be delayed after a cylindrical, remotely controlled hydraulic device, designed to fit into a pipeline, was found to have moved from its original position on the Bruce platform.
``We've moved the temporary pipeline isolation tool to an area that's allowed us to restart production,'' McDonald said, adding that the device will be recovered from the pipeline during next summer's maintenance season.
Gas from the Bruce and Rhum fields flow into Total SA's Frigg pipeline and on to the St. Fergus terminal in Northern Scotland.
To contact the reporter on this story: Ben Farey in London at bfarey@bloomberg.net
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Canada's Dollar Rises for Third Straight Day as Oil Advances
By Chris Fournier
Aug. 21 (Bloomberg) -- Canada's dollar rose for a third day as the price of crude oil increased.
Crude oil for October delivery also increased for a third day, topping $118 a barrel. Oil and other commodities make up about half of Canada's exports.
Canada's dollar increased 0.6 percent to C$1.0537 per U.S. dollar at 7:51 a.m. in Toronto, from C$1.0537 yesterday. One Canadian dollar buys 94.90 U.S. cents. The currency touched C$1.0728 on Aug. 12, the weakest since August 2007.
``The market will be watching oil,'' said Steve Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto.
Canada's currency sank last week to the lowest in a year and has lost about 4.5 percent as crude oil fell from a record 147.27 a barrel set July 11. Crude oil for October delivery rose 2.7 percent to $118.13 a barrel today on bets Russian supplies may be disrupted because of rising tension with the U.S.
Consumer prices increased 3.4 percent in July from a year ago after a 3.1 percent annual gain during the previous month, Statistics Canada reported today in Ottawa.
``The data is unlikely to influence the Bank of Canada in terms of monetary policy,'' said Jack Spitz, managing director of foreign-exchange trading at National Bank of Canada in Toronto. ``Look for Canadian dollar directional bias from broad U.S. dollar flows, commodity pricing and upcoming U.S. data.''
Canada's central bank held the overnight lending rate at 3 percent for a second consecutive meeting on July 15. The bank's target for annual inflation is 2 percent.
The U.S. dollar has risen against all of the other major currencies this month on speculation the U.S. economic slowdown is spreading to other industrialized countries.
The yield on the two-year government bond fell 2 basis points, or 0.02 percentage point, to 2.77 percent. The price of the 3.75 percent security due in June 2010 increased 3 cents to C$101.68.
To contact the reporter on this story: Chris Fournier in Montreal at Cfournier3@bloomberg.net
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Aug. 21 (Bloomberg) -- Canada's dollar rose for a third day as the price of crude oil increased.
Crude oil for October delivery also increased for a third day, topping $118 a barrel. Oil and other commodities make up about half of Canada's exports.
Canada's dollar increased 0.6 percent to C$1.0537 per U.S. dollar at 7:51 a.m. in Toronto, from C$1.0537 yesterday. One Canadian dollar buys 94.90 U.S. cents. The currency touched C$1.0728 on Aug. 12, the weakest since August 2007.
``The market will be watching oil,'' said Steve Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto.
Canada's currency sank last week to the lowest in a year and has lost about 4.5 percent as crude oil fell from a record 147.27 a barrel set July 11. Crude oil for October delivery rose 2.7 percent to $118.13 a barrel today on bets Russian supplies may be disrupted because of rising tension with the U.S.
Consumer prices increased 3.4 percent in July from a year ago after a 3.1 percent annual gain during the previous month, Statistics Canada reported today in Ottawa.
``The data is unlikely to influence the Bank of Canada in terms of monetary policy,'' said Jack Spitz, managing director of foreign-exchange trading at National Bank of Canada in Toronto. ``Look for Canadian dollar directional bias from broad U.S. dollar flows, commodity pricing and upcoming U.S. data.''
Canada's central bank held the overnight lending rate at 3 percent for a second consecutive meeting on July 15. The bank's target for annual inflation is 2 percent.
The U.S. dollar has risen against all of the other major currencies this month on speculation the U.S. economic slowdown is spreading to other industrialized countries.
The yield on the two-year government bond fell 2 basis points, or 0.02 percentage point, to 2.77 percent. The price of the 3.75 percent security due in June 2010 increased 3 cents to C$101.68.
To contact the reporter on this story: Chris Fournier in Montreal at Cfournier3@bloomberg.net
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Yen Rises as Credit-Market Losses Damp Demand for Higher Yields
By Ye Xie and Gavin Finch
Aug. 21 (Bloomberg) -- The yen rose to the highest level in three months against the euro on concern credit-market losses are widening, reducing demand for higher-yielding assets funded by loans in Japan.
Japan's currency advanced versus all of the other major currencies after the Financial Times reported Lehman Brothers Holdings Inc. failed to sell a 50 percent stake to investors. The dollar traded near its lowest level in a week against the euro before a report forecast to show manufacturing in the Philadelphia region contracted.
``As long as we have uncertainty in the financial sector, the yen is most likely to benefit,'' said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets.
The yen increased 1.1 percent to 160.25 per euro at 8:42 a.m. in New York, from 162.03 yesterday. It touched 160.20, the strongest level since May 13. The yen rose 1.4 percent to 108.31 per dollar, from 109.86. The dollar fell 0.3 percent to $1.4796 per euro, from $1.4747, after touching $1.4833, the weakest level since Aug. 14.
Gains in the yen accelerated when it went through a so- called key level at 160.87 per euro. Earlier, the Japanese currency advanced after breaking above 109.50 and 109.20 against the dollar and 161.50 per euro, where traders had orders to buy the currency, said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way.
Yen vs. Aussie
Japan's currency advanced to 94.36 per Australian dollar, from 95.97 yesterday in New York. It climbed to 77.28 per New Zealand dollar from 78.33.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread. The risk is currency moves erase the profits.
Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 8 percent in New Zealand and 7.25 percent in Australia.
The Federal Reserve Bank of Philadelphia's general economic index will be minus 12.6 in August, from minus 16.3 in July, according to a Bloomberg News survey of economists. Readings less than zero signal a decline in manufacturing and that would be the longest contraction since 2001. The report is due at 10 a.m. in New York.
`Complacency'
``The market has been showing a lot of complacency toward dollar-negative news and is now beginning to take a more balanced view of the risks,'' said Michael Klawitter, a currency strategist in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. ``Ongoing concerns about the health of some U.S. financial institutions are harming the dollar.''
The dollar may fall to $1.50 per euro this week if it weakens below $1.48, Klawitter forecast.
The U.S. currency has gained almost 8 percent versus the euro since touching an all-time low of $1.6038 on July 15 and appreciated 0.8 percent against the yen this month. The greenback has advanced as reports showed the European and Japanese economies shrank in the second quarter and crude oil fell around 20 percent from the record $147.27 a barrel reached July 11.
The 14-day relative strength index of the euro against the dollar was at 25.62, having been below 30 since Aug. 8. A reading below 30 signals Europe's single currency may strengthen.
U.S. `Fundamentals'
``The dollar has been recently heavily overbought despite deteriorating U.S. economic fundamentals,'' said Keiichi Iguchi, a currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by market value. ``Weaker economic data could spark sharp dollar-selling'' as traders unwind their positions, he said.
The dollar extended an earlier decline today after an industry report showed a composite index of manufacturing and services in the euro region rose unexpectedly in August.
Crude oil today increased 1.7 percent to $117.23 a barrel. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations based on their value changes. A reading of 1 would mean they move in lockstep.
Futures on the Chicago Board of Trade show an 20 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- point by its Dec. 16 meeting, down from 35 percent odds a week earlier. Policy makers next meet Sept. 16.
The Labor Department reported today that the number of Americans filing-first time claims for unemployment benefits decreased to 432,000 in the week ended Aug. 16, fewer than forecast, from a revised 445,000 the prior week.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
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Aug. 21 (Bloomberg) -- The yen rose to the highest level in three months against the euro on concern credit-market losses are widening, reducing demand for higher-yielding assets funded by loans in Japan.
Japan's currency advanced versus all of the other major currencies after the Financial Times reported Lehman Brothers Holdings Inc. failed to sell a 50 percent stake to investors. The dollar traded near its lowest level in a week against the euro before a report forecast to show manufacturing in the Philadelphia region contracted.
``As long as we have uncertainty in the financial sector, the yen is most likely to benefit,'' said Matthew Strauss, senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada's biggest bank by assets.
The yen increased 1.1 percent to 160.25 per euro at 8:42 a.m. in New York, from 162.03 yesterday. It touched 160.20, the strongest level since May 13. The yen rose 1.4 percent to 108.31 per dollar, from 109.86. The dollar fell 0.3 percent to $1.4796 per euro, from $1.4747, after touching $1.4833, the weakest level since Aug. 14.
Gains in the yen accelerated when it went through a so- called key level at 160.87 per euro. Earlier, the Japanese currency advanced after breaking above 109.50 and 109.20 against the dollar and 161.50 per euro, where traders had orders to buy the currency, said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. Traders sometimes place automatic instructions to limit losses in case their bets go the wrong way.
Yen vs. Aussie
Japan's currency advanced to 94.36 per Australian dollar, from 95.97 yesterday in New York. It climbed to 77.28 per New Zealand dollar from 78.33.
In carry trades, investors get funds in a country with low borrowing costs and invest in one with higher interest rates, earning the spread. The risk is currency moves erase the profits.
Japan's target lending rate of 0.5 percent is the lowest among major economies and compares with 8 percent in New Zealand and 7.25 percent in Australia.
The Federal Reserve Bank of Philadelphia's general economic index will be minus 12.6 in August, from minus 16.3 in July, according to a Bloomberg News survey of economists. Readings less than zero signal a decline in manufacturing and that would be the longest contraction since 2001. The report is due at 10 a.m. in New York.
`Complacency'
``The market has been showing a lot of complacency toward dollar-negative news and is now beginning to take a more balanced view of the risks,'' said Michael Klawitter, a currency strategist in Frankfurt at Dresdner Kleinwort, the investment bank owned by Allianz SE, Europe's biggest insurer. ``Ongoing concerns about the health of some U.S. financial institutions are harming the dollar.''
The dollar may fall to $1.50 per euro this week if it weakens below $1.48, Klawitter forecast.
The U.S. currency has gained almost 8 percent versus the euro since touching an all-time low of $1.6038 on July 15 and appreciated 0.8 percent against the yen this month. The greenback has advanced as reports showed the European and Japanese economies shrank in the second quarter and crude oil fell around 20 percent from the record $147.27 a barrel reached July 11.
The 14-day relative strength index of the euro against the dollar was at 25.62, having been below 30 since Aug. 8. A reading below 30 signals Europe's single currency may strengthen.
U.S. `Fundamentals'
``The dollar has been recently heavily overbought despite deteriorating U.S. economic fundamentals,'' said Keiichi Iguchi, a currency dealer in Tokyo at Resona Bank Ltd., a unit of Japan's fourth-largest lender by market value. ``Weaker economic data could spark sharp dollar-selling'' as traders unwind their positions, he said.
The dollar extended an earlier decline today after an industry report showed a composite index of manufacturing and services in the euro region rose unexpectedly in August.
Crude oil today increased 1.7 percent to $117.23 a barrel. The euro-dollar exchange rate and oil had a correlation of 0.9 in the past year, according to Bloomberg calculations based on their value changes. A reading of 1 would mean they move in lockstep.
Futures on the Chicago Board of Trade show an 20 percent chance the U.S. central bank will raise the 2 percent target rate for overnight lending between banks by at least a quarter- point by its Dec. 16 meeting, down from 35 percent odds a week earlier. Policy makers next meet Sept. 16.
The Labor Department reported today that the number of Americans filing-first time claims for unemployment benefits decreased to 432,000 in the week ended Aug. 16, fewer than forecast, from a revised 445,000 the prior week.
To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
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Paulson's Fannie-Freddie `Bazooka' Shakes Investors
By Brendan Murray
Aug. 21 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's ``bazooka'' may be intimidating the same investors he intended to reassure.
The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
They say the threat of government action is creating uncertainty that is raising the companies' borrowing costs and increasing the odds Fannie and Freddie will need taxpayer funding.
``It is the lack of clarity of what exactly the government is going to do, and what Congress is going to do, that is sending shivers'' through investors, said Axel Merk, president and portfolio manager of Merk Investments LLC in Palo Alto, California.
``To make this politically viable, why would the government even think about coming in junior to somebody else?'' he said.
Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.
Paulson's Lobbying
In lobbying for the rescue plan, Paulson told lawmakers that giving him authority to bail out the beleaguered lenders would reassure their private sources of capital.
``If you have a bazooka in your pocket and people know it, you probably won't have to use it,'' he told U.S. senators at a July 15 hearing in Washington.
Instead, investors are betting Fannie and Freddie will have little option but to tap the Treasury.
Washington-based Fannie Mae stock has fallen 74 percent and McLean, Virginia-based Freddie Mac is down 63 percent since the law was signed. Fannie shares traded at $3.93 at 9:01 a.m. in early New York Stock Exchange trading, with Freddie at $2.88, bringing their combined market capitalization to about $6.8 billion from $92.6 billion two years ago.
Fannie Mae's 5.5 percent perpetual preferred shares have dropped 28 percent this week to $15.18. Freddie Mac's 5.57 percent preferred stock has fallen 38 percent this week to $7.15.
The companies' preferred securities are typically held by insurance companies, mutual funds and banks, analysts said. That may cause Paulson to stop short of eliminating their holdings in any government intervention.
`Wiped Out'
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''
Fannie Mae and Freddie Mac's securities probably would have performed even worse without the rescue plan Paulson pushed through Congress last month, said former Federal Reserve Bank of St. Louis President William Poole.
There ``might have been a total failure'' at Freddie Mac's sale of bonds this week ``if there had not been this legislation,'' said Poole, a Bloomberg contributor. Paulson's plan ``was necessary under the circumstances,'' he said.
``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Maturing Debt
Paulson's intention to not use the authority hinges on the ability of the companies to sell debt to finance their portfolios of mortgages and asset-backed bonds. The companies have $223 billion of bonds due by the end of the quarter, according to data compiled by Bloomberg.
``They need support from the U.S. Treasury'' to finance maturing debt, said Sean Egan, president of Egan-Jones Ratings Co., a Haverford, Pennsylvania-based credit-rating company that has met with lawmakers and officials about the Treasury's options.
Freddie on Aug. 19 sold $3 billion of five-year notes at the highest yields over benchmarks in at least 10 years. Asians bought 30 percent of the debt, down from 41 percent in a May sale, company data showed. Fannie paid a record-high yield in a $3.5 billion sale of three-year notes last week, with Asian investors buying just 22 percent, almost half the demand in May.
The jump in borrowing costs belies Paulson's testimony to Senate lawmakers last month that ``the credit spreads are very strong and holding in there. I think there's confidence in the market.''
``Explicit government support leaves the GSEs in an unpredictable situation,'' said Alec Phillips, who heads Goldman Sachs Group Inc.'s Washington office and is a former staffer on the Senate Finance Committee. Fannie and Freddie ``do not yet have additional public sector capital, but this possibility may hinder attempts to raise private capital,'' he said.
To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net
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Aug. 21 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson's ``bazooka'' may be intimidating the same investors he intended to reassure.
The powers Paulson won from Congress last month enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired -- may end up making a bailout more likely, say analysts and investors.
They say the threat of government action is creating uncertainty that is raising the companies' borrowing costs and increasing the odds Fannie and Freddie will need taxpayer funding.
``It is the lack of clarity of what exactly the government is going to do, and what Congress is going to do, that is sending shivers'' through investors, said Axel Merk, president and portfolio manager of Merk Investments LLC in Palo Alto, California.
``To make this politically viable, why would the government even think about coming in junior to somebody else?'' he said.
Shares in Fannie and Freddie, government-chartered companies that together account for almost half the $12 trillion U.S. mortgage market, reached their lowest levels in two decades in New York Stock Exchange composite trading yesterday; their preferred shares have lost about one-third of their value this week. Central banks are also balking, paring purchases of new Fannie and Freddie debt the past two weeks by more than a quarter.
Paulson's Lobbying
In lobbying for the rescue plan, Paulson told lawmakers that giving him authority to bail out the beleaguered lenders would reassure their private sources of capital.
``If you have a bazooka in your pocket and people know it, you probably won't have to use it,'' he told U.S. senators at a July 15 hearing in Washington.
Instead, investors are betting Fannie and Freddie will have little option but to tap the Treasury.
Washington-based Fannie Mae stock has fallen 74 percent and McLean, Virginia-based Freddie Mac is down 63 percent since the law was signed. Fannie shares traded at $3.93 at 9:01 a.m. in early New York Stock Exchange trading, with Freddie at $2.88, bringing their combined market capitalization to about $6.8 billion from $92.6 billion two years ago.
Fannie Mae's 5.5 percent perpetual preferred shares have dropped 28 percent this week to $15.18. Freddie Mac's 5.57 percent preferred stock has fallen 38 percent this week to $7.15.
The companies' preferred securities are typically held by insurance companies, mutual funds and banks, analysts said. That may cause Paulson to stop short of eliminating their holdings in any government intervention.
`Wiped Out'
``The common shareholders will probably be completely wiped out,'' Paul Miller, an analyst at FBR Capital Markets, said in a Bloomberg Television interview. ``Preferred will also see a lot of pain. But that is up in the air because a lot of banks own the preferred. You put a lot of banks in trouble if you just wipe out the preferred also.''
Fannie Mae and Freddie Mac's securities probably would have performed even worse without the rescue plan Paulson pushed through Congress last month, said former Federal Reserve Bank of St. Louis President William Poole.
There ``might have been a total failure'' at Freddie Mac's sale of bonds this week ``if there had not been this legislation,'' said Poole, a Bloomberg contributor. Paulson's plan ``was necessary under the circumstances,'' he said.
``We continue to stay in touch with the companies and their regulators and are staying on top of the situation,'' Treasury spokeswoman Michele Davis said.
Maturing Debt
Paulson's intention to not use the authority hinges on the ability of the companies to sell debt to finance their portfolios of mortgages and asset-backed bonds. The companies have $223 billion of bonds due by the end of the quarter, according to data compiled by Bloomberg.
``They need support from the U.S. Treasury'' to finance maturing debt, said Sean Egan, president of Egan-Jones Ratings Co., a Haverford, Pennsylvania-based credit-rating company that has met with lawmakers and officials about the Treasury's options.
Freddie on Aug. 19 sold $3 billion of five-year notes at the highest yields over benchmarks in at least 10 years. Asians bought 30 percent of the debt, down from 41 percent in a May sale, company data showed. Fannie paid a record-high yield in a $3.5 billion sale of three-year notes last week, with Asian investors buying just 22 percent, almost half the demand in May.
The jump in borrowing costs belies Paulson's testimony to Senate lawmakers last month that ``the credit spreads are very strong and holding in there. I think there's confidence in the market.''
``Explicit government support leaves the GSEs in an unpredictable situation,'' said Alec Phillips, who heads Goldman Sachs Group Inc.'s Washington office and is a former staffer on the Senate Finance Committee. Fannie and Freddie ``do not yet have additional public sector capital, but this possibility may hinder attempts to raise private capital,'' he said.
To contact the reporter on this story: Brendan Murray in Washington at brmurray@bloomberg.net
Read more...
Cocoa Deficit to Be Wider Than Expected This Season, ICCO Says
By Marianne Stigset
Aug. 21 (Bloomberg) -- A shortfall in cocoa supply this season will be wider than previously expected, the International Cocoa Organization said.
The deficit will reach 88,000 metric tons in the season ending in October, up from a previous forecast of 44,000 tons, the London-based organization said in an e-mailed report today.
Production will be 2.5 percent lower than previously estimated, at 3.65 million tons, while grindings were lowered 1.2 percent to 3.7 million tons, the ICCO said.
To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net
Read more...
Aug. 21 (Bloomberg) -- A shortfall in cocoa supply this season will be wider than previously expected, the International Cocoa Organization said.
The deficit will reach 88,000 metric tons in the season ending in October, up from a previous forecast of 44,000 tons, the London-based organization said in an e-mailed report today.
Production will be 2.5 percent lower than previously estimated, at 3.65 million tons, while grindings were lowered 1.2 percent to 3.7 million tons, the ICCO said.
To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net
Read more...
Copper Rises in London, Boosted by Dollar, Interest From China
By Chanyaporn Chanjaroen
Aug. 21 (Bloomberg) -- Copper rose in London, buoyed by a weaker dollar and signs that China, the world's largest user of the metal, may increase purchases. Tin and lead also increased.
Copper stockpiles earmarked for delivery out of London Metal Exchange-registered warehouses in South Korea, next to China, more than tripled to 9,025 metric tons, the exchange said today. The dollar weakened against the yen and the euro, making commodities cheaper for holders of other currencies. Gold, oil also gained.
``There's a growing feeling that the Chinese are ready to enter the market,'' Daniel Hynes, an analyst at Merrill Lynch & Co., said today by phone. A jump in canceled stockpiles ``certainly is showing that demand is going to pick up.''
Copper for delivery in three months advanced $255, or 3.4 percent, to $7,770 a ton as of 1:35 p.m. local time, paring this quarter's loss to 8.7 percent.
Copper remains in a seventh consecutive annual rally that has encouraged mining companies to boost production. Metorex Ltd., a Johannesburg-based producer of the metal in Africa, will spend as much as $400 million by 2012 to expand output as much as fivefold.
Prices have also been boosted by supply disruptions from Asia to Latin America, which limited mine production growth.
``The supply picture has become worse since 2007 because of massive disruptions,'' Hynes said.
The LME index of 6 industrial metals has lost 11 percent since the end of June on concern that weakening economies in Europe and the U.S. will trim demand for metals. Price declines in nickel, zinc and tin obliged producers to limit or curb output.
Mine Life
Indonesia plans to cap production of five minerals, including tin, to extend mine life and try to control prices, a government official said.
The government will limit output of tin at 90,000 tons a year from this year, Bambang Setiawan, director general of coal and mineral resources, said in an interview in Pangkalpinang, Indonesia. He didn't provide details on output plans for copper, gold, nickel and iron ore.
The tumble in commodities from records represents a temporary reverse in a long-term rally, according to investor Jim Rogers. The UBS Constant Maturity Commodity Index, comprising 26 raw materials, has fallen 14 percent since peaking in early July.
Rising Market
``I don't see that it's the end of the bull market,'' the chairman of Rogers Holdings, said in an interview in Bangkok before speaking at an investor conference later today. ``Until either a lot of supply comes on stream or the economy collapses, the bull market will continue.''
Rogers correctly predicted in April 2006 that oil would reach $100 a barrel and gold $1,000 an ounce.
Tin jumped $750, or 3.7 percent, to $21,250 a ton. Nickel rose $275, or 1.4 percent, to $20,200 a ton.
Among other metals traded on the LME, aluminum added $32 to $2,795 a ton, lead advanced $100 to $1,870 and zinc climbed $72 to $1,822 a ton.
To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net
Read more...
Aug. 21 (Bloomberg) -- Copper rose in London, buoyed by a weaker dollar and signs that China, the world's largest user of the metal, may increase purchases. Tin and lead also increased.
Copper stockpiles earmarked for delivery out of London Metal Exchange-registered warehouses in South Korea, next to China, more than tripled to 9,025 metric tons, the exchange said today. The dollar weakened against the yen and the euro, making commodities cheaper for holders of other currencies. Gold, oil also gained.
``There's a growing feeling that the Chinese are ready to enter the market,'' Daniel Hynes, an analyst at Merrill Lynch & Co., said today by phone. A jump in canceled stockpiles ``certainly is showing that demand is going to pick up.''
Copper for delivery in three months advanced $255, or 3.4 percent, to $7,770 a ton as of 1:35 p.m. local time, paring this quarter's loss to 8.7 percent.
Copper remains in a seventh consecutive annual rally that has encouraged mining companies to boost production. Metorex Ltd., a Johannesburg-based producer of the metal in Africa, will spend as much as $400 million by 2012 to expand output as much as fivefold.
Prices have also been boosted by supply disruptions from Asia to Latin America, which limited mine production growth.
``The supply picture has become worse since 2007 because of massive disruptions,'' Hynes said.
The LME index of 6 industrial metals has lost 11 percent since the end of June on concern that weakening economies in Europe and the U.S. will trim demand for metals. Price declines in nickel, zinc and tin obliged producers to limit or curb output.
Mine Life
Indonesia plans to cap production of five minerals, including tin, to extend mine life and try to control prices, a government official said.
The government will limit output of tin at 90,000 tons a year from this year, Bambang Setiawan, director general of coal and mineral resources, said in an interview in Pangkalpinang, Indonesia. He didn't provide details on output plans for copper, gold, nickel and iron ore.
The tumble in commodities from records represents a temporary reverse in a long-term rally, according to investor Jim Rogers. The UBS Constant Maturity Commodity Index, comprising 26 raw materials, has fallen 14 percent since peaking in early July.
Rising Market
``I don't see that it's the end of the bull market,'' the chairman of Rogers Holdings, said in an interview in Bangkok before speaking at an investor conference later today. ``Until either a lot of supply comes on stream or the economy collapses, the bull market will continue.''
Rogers correctly predicted in April 2006 that oil would reach $100 a barrel and gold $1,000 an ounce.
Tin jumped $750, or 3.7 percent, to $21,250 a ton. Nickel rose $275, or 1.4 percent, to $20,200 a ton.
Among other metals traded on the LME, aluminum added $32 to $2,795 a ton, lead advanced $100 to $1,870 and zinc climbed $72 to $1,822 a ton.
To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net
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