Economic Calendar

Wednesday, November 30, 2011

FCC Allows AT&T to Withdraw Merger Application

By Todd Shields - Nov 30, 2011 7:52 PM GMT+0700

AT&T Inc. (T) failed to demonstrate the public benefits of its proposed $39 billion purchase of rival T- Mobile USA Inc. would exceed its costs, U.S. regulators said in the latest challenge to the deal.

A 109-page Federal Communications Commission report concludes the combination would cause significant jobs losses and that AT&T would probably build high-speed wireless Internet connections without the merger, an agency official said in a call yesterday outlining findings with ground rules forbidding identification by name. The conclusion undermines AT&T’s claims about the deal’s benefits, the official said.

The FCC let AT&T withdraw an application to buy T-Mobile, combining the second- and fourth-largest U.S. wireless carriers. The Justice Department sued in August to block the merger as anti- competitive, and a court hearing is set for February. The FCC moved last week to send the deal for a hearing that may take much of next year, an outcome avoided with the application withdrawal.

“The applicants have failed to meet their burden of demonstrating that the competitive harms that would result from the proposed transaction are outweighed by the claimed benefits,” according to the FCC’s report. T-Mobile offers low prices and innovation, and its potential loss as a competitive force “is a cause for serious concern,” the FCC found.

The application withdrawal leaves open the possibility AT&T may again approach the commission with a revised deal, the FCC officials said. Before the report, analysts had said that to convince regulators to approve the deal, AT&T may give up half of T-Mobile’s customers to ease concerns and gain control of assets including wireless spectrum.

‘Improper’ Procedure

The release of the report was “troubling,” Jim Cicconi, AT&T’s senior executive vice president-external and legislative affairs, said in an e-mailed statement. “We have had no opportunity to address or rebut its claims, which makes its release all the more improper.”

Sprint Nextel Corp. (S), the third-largest wireless carrier and an opponent of the deal, said in a statement it applauded the FCC’s action.

“The investigation’s findings are clear: approval of AT&T’s bid for T-Mobile would lead to higher prices for consumers, eliminate jobs, harm competition, and damp innovation across the wireless industry,” Vonya McCann, Sprint senior vice president for government affairs, said in the statement.

FCC Chairman Julius Genachowski said in an e-mailed statement that “our review of this merger has had a clear focus: fostering a competitive market that drives innovation, promotes investment, encourages job creation, and protects consumers.”

AT&T and T-Mobile parent Deutsche Telekom AG (DTE) said last week they had withdrawn their FCC merger applications. They acted after Genachowski asked fellow commissioners to send the deal to the hearing before an agency judge.

The companies plan to focus on objections from antitrust authorities and to return to the FCC at some point, AT&T said in a statement last week.

To contact the reporter on this story: Todd Shields in Washington at

To contact the editor responsible for this story: Michael Shepard at


Silver Lake Bids $16.60 a Share for Yahoo Stake

By Brian Womack, Jeffrey McCracken and Douglas MacMillan - Nov 30, 2011 7:47 PM GMT+0700
Enlarge image Silver Lake Group Said to Offer $16.60 a Share for Yahoo

Yahoo! Inc. signage is displayed in the lobby at the site of the company's annual shareholder meeting in Santa Clara, California, U.S. Silver Lake is working with Microsoft Corp. and venture-capital firm Andreessen Horowitz to buy part of Yahoo, two people said. Photographer: Tony Avelar/Bloomberg

A group of investors led by private- equity firm Silver Lake offered to buy a minority stake in Yahoo! Inc. for about $16.60 a share, according to people with knowledge of the matter.

That was lower than an offer made by private-equity firm TPG Capital, said two of the people, who asked not to be identified because the bids made this week are private. Alibaba Group Holding Ltd., aiming to buy back the stake in itself owned by Yahoo, is monitoring the situation and may still enter the bidding, another person said. Silver Lake’s offer values Sunnyvale, California-based Yahoo at $20.6 billion, about 6 percent higher than its capitalization at yesterday’s close.

Silver Lake is working with Microsoft Corp. (MSFT) and venture- capital firm Andreessen Horowitz to buy part of Yahoo, two people said. Yahoo, exploring strategic options after ousting Chief Executive Officer Carol Bartz, aims to wrap up the deal by the end of the year, people said.

“The offer is disappointing,” said Hamilton Faber, an analyst at Atlantic Equities LLP in London with a “neutral” rating on Yahoo shares. “Investors who’ve been buying Yahoo recently were hoping for a significant premium and a takeout of the full company, and this falls short on both counts.”

Yahoo directors are likely to discuss offers at a board meeting scheduled for today, one person said.

Yahoo gained 1.3 percent to $15.90 in trading before U.S. exchanges opened, after closing at $15.70 yesterday. The shares had declined 5.6 percent this year before today.

Crowded Field

While Microsoft failed in 2008 to acquire all of Yahoo, it aims to use a minority holding to safeguard its 10-year Web search agreement with the company.

Microsoft, based in Redmond, Washington, forged the partnership under Bartz to provide search technology to Yahoo sites. The deal was aimed at helping both companies vie with Google, the leader in U.S. search-related advertising.

KKR (KKR) & Co. and Blackstone Group LP (BX) are among the private- equity firms considering possible bids for Yahoo, people with knowledge of the matter said last month.

Private-equity firm Thomas H. Lee Partners is also considering a bid for Yahoo, people knowledgeable said.

Alibaba Group has said it’s interested in acquiring Yahoo, in part to buy back a stake the company owns. With a holding of about 40 percent, Yahoo is Alibaba’s biggest investor.

Alibaba is waiting to see whether Yahoo’s board will deem the partial-stake bids inadequate and invite it into negotiations to acquire the whole company, a person with knowledge of the matter said. Alibaba is open to acquiring its stake back or making a larger push for all of Yahoo, this person said.

Yahoo aims to strike a deal to sell a minority stake to a private-equity firm by year’s end, the Wall Street Journal reported earlier. Offers for a roughly 20 percent stake came from at least three bidders, the newspaper reported.

Bloomberg LP, the parent company of Bloomberg News, is an investor in Andreessen Horowitz.

To contact the reporters on this story: Brian Womack in San Francisco at; Jeffrey McCracken in New York at; Douglas Macmillan in New York at

To contact the editors responsible for this story: Tom Giles at; Jennifer Sondag at


Fed, Five Central Banks Cut Rate on Dollar Swaps

By Scott Lanman and Jeff Black - Nov 30, 2011 8:31 PM GMT+0700

The Federal Reserve cut the cost of emergency dollar funding for European banks as part of a globally coordinated central-bank response to the continent’s sovereign-debt crisis.

The new interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the program, which was also joined by the Bank of Canada, Bank of England, Bank of Japan (8301), and Swiss National Bank (SNBN) are involved in the coordinated action.

The move is aimed at easing strains in markets and boosting the central banks’ capacity to support the global financial system, the statement said. The cost for European banks to fund in dollars rose to the highest levels in three years today as concerns about a possible breakup of the euro area increased after leaders said they’d failed to boost the region’s bailout fund as much as planned.

“When there’s concerted action by central banks, it’s definitely good,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “But are liquidity injections a game changer when the heart of the problem is in European sovereign debt markets?”

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

The dollar swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5.

Stocks Climb

European stocks extended their gains, the euro advanced against the dollar and Treasuries fell after the announcement. The Stoxx Europe 600 Index increased 2.2 percent to 236.66 at 1:19 p.m. in London. The euro rose to $1.3450 from $1.3317 late yesterday. The yield on the 10-year Treasury note climbed to 2.06 percent from 1.99 percent.

Separately, China two hours earlier cut the amount of cash that banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

The Frankfurt-based ECB, which says it is up to governments to stem the two-year-old debt crisis, unexpectedly cut its benchmark interest rate Nov. 3 as the turmoil threatens to drag the euro area into recession.

Refinancing Operation

Yesterday the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros. The ECB offers unlimited funding to euro- area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.

To contact the reporter on this story: Scott Lanman in Washington at

To contact the editor responsible for this story: Christopher Wellisz at


China Reduces Reserve Ratios to Spur Bank Loans

By Bloomberg News - Nov 30, 2011 6:15 PM GMT+0700

China cut the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth.

Reserve ratios will decline by 50 basis points effective Dec. 5, the People’s Bank of China said in a statement on its website today. Before the announcement, the level was a record 21.5 percent for the biggest lenders, based on previous PBOC statements.

A government clampdown on property speculation has added to the risk of a deeper slowdown in the economy that contributes the most to global growth. Exports rose by the least in almost two years in October and inflation eased to 5.5 percent, the smallest gain in five months.

“The move will help ease liquidity after previous tightening measures cooled credit growth too much and may have added to the risks of a hard landing for China,” Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd., said before today’s release.

The People’s Bank of China previously allowed reserve ratios to fall by half a percentage point for more than 20 rural credit cooperatives. Those lenders had been subject to elevated requirements for a year as a penalty for failing to meet lending targets.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate. Economic growth cooled to 9.1 percent in the third quarter from a year earlier, the slowest pace in two years.

--Li Yanping. Editors: Paul Panckhurst,

To contact Bloomberg News staff on this story: Li Yanping in Beijing at

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong at


Euro Ministers Seek Bigger IMF Role in Fund

By Gregory Viscusi and Angeline Benoit - Nov 30, 2011 5:26 PM GMT+0700

Euro-area finance ministers said they would seek a greater role for the International Monetary Fund and the European Central Bank in fighting the sovereign debt crisis after conceding the effort to expand their bailout fund missed its target.

The finance chiefs of the 17 nations using the euro agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters late yesterday in Brussels after leading the meeting.

“It’s clear that we can go further through the IMF and probably action by the European Central Bank,” Belgian Finance Minister Didier Reynders said today as ministers gathered for a second day of talks. “For the IMF, we are working to see how to reinforce its action and possibly contribute to a boost in its resources. As for the central bank, it’s for the central bank to make its decisions.”

After a series of stop-gap accords failed to protect Italy and Spain from surging bond yields, Europe is under growing pressure from U.S. leaders and international financial markets to find ways to boost the EFSF’s effectiveness. The finance chiefs agreed on a plan yesterday to guarantee up to 30 percent of bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.

Pivotal Summit

European heads of government meet on Dec. 9 in Brussels, with Germany pushing for governance changes that would tighten enforcement of budget rules. The move might make it easier for the ECB to play a bigger part in supporting euro-area nations, possibly channeling loans through the IMF, two officials familiar with the matter said yesterday.

“Should they fail to deliver a credible framework encompassing both these dimensions, we would expect that the ongoing ‘run’ on governments and banks will accelerate, and it is seriously to be feared that it can no longer be stopped,” Arnaud Mares, a Morgan Stanley analyst, wrote in a research note yesterday. “The economic, social and political consequences could be unfathomable. The next few weeks are therefore a critical moment in European history.”

While leaders previously said leveraging would expand the 440 billion-euro ($584 billion) EFSF’s reach to 1 trillion euros, Chief Executive OfficerKlaus Regling said it is “impossible to give one number” for the fund’s power.

‘Very Substantial’

Juncker said the EFSF’s capacity will be “very substantial” though less that 1 trillion euros, and will be supplemented by the IMF. The ministers “agreed to rapidly explore an increase of the resources of the IMF through bilateral loans,” Juncker said, “so that the IMF could adequately match the new firepower of the EFSF and cooperate more closely with it.”

European Union Economic and Monetary Affairs Commissioner Olli Rehn said the issue “needs to be discussed with the IMF and this work is in progress.” Neither Rehn nor Juncker named who might provide the loans.

With about $390 billion currently available for lending, the Washington-based IMF may not have enough money to meet demand if the global outlook worsens, managing director Christine Lagarde has said. The IMF is co-funding the bailouts of Greece, Ireland and Portugal and is preparing to send a team to Italy for an unprecedented audit of that country’s efforts to cut its debt.

Bilateral Loans

“It’s very important that the IMF globally will increase its resources either by raising its capital or by bilateral loans so that it can lend more money to euro-zone countries in need,” Dutch Finance Minister Jan Kees de Jager said in an interview with Bloomberg Television last night. “If we open the IMF effort, that will be sufficient together with the leverage options in the EFSF.”

Boosting the IMF’s resources may not be so simple, said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration. “It will be very difficult if not impossible for the U.S. to contribute fresh resources to the IMF,” he said in an e-mailed comment.

ECB Executive Board Member Juergen Stark, speaking to reporters in Dallas yesterday, warned that the Frankfurt-based central bank cannot lend to the IMF because it is not a member.

Lagarde, a former French finance minister, said this week in Lima, Peru, that Europe needs “a comprehensive, rapid set of proposals that would form part of a comprehensive solution, and the IMF can be a party to that.”

Government Bonds

Austrian Finance Minister Maria Fekter today expressed some flexibility on the ECB stepping up purchases of Italian and Spanish government bonds to reduce their yields.

“There is a discussion on how the ECB can be better enabled to buy bonds,” said Fekter, whose country along with Germany has been one of the main opponents of a greater role for the ECB. “The ECB has a very strong role already. Since we need an instrument that can act flexibly with regard to the refinancing of banks and states, I can imagine an evolution.”

The euro-region finance ministers last night approved a 5.8 billion-euro loan to Greece under last year’s bailout after eliciting budget-austerity pledges from Greek political leaders backing a unity government. The ministers agreed to appoint France’s Benoit Coeure to a soon-to-be empty spot on the ECB’s board and presented new Italian Prime Minister Mario Monti with a report outlining measures the country should take to reduce debt and boost economic growth.

Today’s meeting, which will include all 27 EU finance ministers, will seek agreement on how to temporarily guarantee banks’ bond issuance in order to improve funding conditions for lending. EU leaders agreed last month to provide the guarantees as part of a set of measures to restore investor confidence in banks.

To contact the reporters on this story: Gregory Viscusi in Brussels at; Angeline Benoit in Brussels at

To contact the editor responsible for this story: James Hertling at


Payroll Tax Cut Talks Shift to Squabble Over How To Cover Proposal’s Cost

By Richard Rubin and Steven Sloan - Nov 30, 2011 8:36 PM GMT+0700

Top lawmakers from both parties are proposing to offset the cost of extending a U.S. payroll tax cut, establishing markers for negotiations over how to prevent the break from expiring Dec. 31.

Senate Minority Leader Mitch McConnell of Kentucky hasn’t said how Republicans plan to cover the forgone revenue from extending the 2 percentage point reduction in employees’ portion of the Social Security tax. Arizona Senator Jon Kyl, the chamber’s second-ranking Republican, said details would be available by today.

Democrats have proposed extending and expanding the tax break. The Democrats’ $265 billion proposal would be offset by a 3.25 percent surtax on annual income exceeding $1 million, and a test vote is planned for this week on the proposal.

“We’re going to enter into a phase now of back-and-forth gamesmanship over how to pay for the payroll tax,” said Brian Gardner, the senior vice president for Washington research at KBW Inc. “Even those members who question its value come to the conclusion that voting against it is a political loser. It’s really a question of how you pay for it.”

That question will demonstrate the size of the divide between the parties on fiscal policy that helped lead to the impasse of Congress’s deficit-reduction supercommittee this month.

“We think it ought to be paid for and not by raising taxes on the people we’re depending upon to create jobs,” Senator John Cornyn, a Texas Republican, said yesterday.

Affected by Surtax

Alan Krueger, chairman of President Barack Obama’s Council of Economic Advisers, disputed that point, and said “very few” employers would be affected by the Democrats’ proposed income surtax. Obama is scheduled to travel to Pennsylvania today to make the case for the payroll tax cut.

“The president’s proposal puts the burden on those who can most afford it,” Valerie Jarrett, a senior adviser to Obama, said today on MSNBC’s “Morning Joe” program. She suggested that the White House is open to other ways to pay for the $265 billion tax cut but wouldn’t be specific.

“The president is interested in making sure that whatever we do is fiscally responsible,” she said.

Republicans distributed an analysis from the nonpartisan Joint Committee on Taxation showing that 34 percent of business income that flows through to individual returns would be subject to the surtax. The analysis doesn’t estimate the size of those businesses or how business owners would respond to the tax increase in their personal spending or business decisions.

‘Critical Time’

“This is a critical time for the economy,” Krueger said at a White House briefing yesterday. “What’s clear is extending the payroll tax cut will strengthen the recovery.”

Letting the tax cut lapse would mean a $1,000 tax increase for a family earning $50,000 a year. Crimping consumer spending at a time when the economy faces “weak aggregate demand” would be a drag on growth, Krueger said.

The Democrats’ plan would expand the two-percentage-point reduction to 3.1 percentage points for 2012. It would cut by 3.1 percentage points the tax on employers’ first $5 million in wages and remove employers’ tax on certain wage growth. The proposal would move money from the general fund to the Social Security trust fund, which is supported by the payroll tax.

McConnell Proposal

McConnell’s proposal to offset the cost of extending the payroll tax cut runs counter to arguments by some Republicans that tax-cut extensions shouldn’t be paired with other measures to prevent them from increasing the federal budget deficit.

“With this $15 trillion debt we now have, bigger than our economy, we need to be paying for a measure like this that’s temporary, and I think in the end we will pay for it,” McConnell said.

Potential offsets could include items considered by the supercommittee, though such options would need to be considered outside a comprehensive deficit-reduction package, said Representative Dave Camp, chairman of the House Ways and Means Committee.

“We’re going to have to look at everything with a new approach because we’re not in the supercommittee now,” Camp, a Michigan Republican who served on the panel, said in an interview yesterday.

McConnell’s plan to offset the cost of a payroll tax cut likely won’t have unanimous support from his members, who are split on whether to extend the tax cut and whether to offset it. That’s a change for a party that is usually united on tax cuts.

Follow Precedent

Massachusetts Republican Senator Scott Brown said yesterday that Congress should follow its precedent in deciding not to offset the cost of the tax cut when it was enacted last year. Republican Senator Mike Enzi of Wyoming said he doesn’t think the payroll tax cut has created jobs.

Senator Olympia Snowe, a Maine Republican, said the focus on the payroll tax cut was obscuring more important issues such as overhauling the tax code.

“One-year policy isn’t going to be sufficient to do what’s necessary,” she said.

Krueger wouldn’t say whether the administration would accept an extension of the tax cut that isn’t matched with higher revenue or budget cuts elsewhere. He added that the White House is “open to economically sensible ways” to offset the proposal’s cost.

‘Continue Working’

Senate Majority Leader Harry Reid didn’t signal what Democrats will do if their first proposal, containing the high- earner surtax, fails. Democrats control 53 seats in the 100-seat Senate. Republicans can use procedural moves to require a 60- vote threshold.

“We are going to continue working until we get the payroll tax extended,” Reid, a Nevada Democrat, said yesterday.

House Republicans, who control that chamber, need to discuss their options, said Camp.

“We’re just starting to get together so I think we’re going to have a few days of really listening to our members,” he said. “There’s a lot of issues that are unresolved and this is a time to really take stock with our members and see where everybody is.”

To contact the reporters on this story: Richard Rubin in Washington at; Steven Sloan in Washington at

To contact the editor responsible for this story: Mark Silva at


Stocks Rise as China Cuts Bank Reserve Ratio

By Adria Cimino - Nov 30, 2011 7:09 PM GMT+0700

European stocks rose, reversing earlier declines, after China said it will cut the amount of cash that banks must set aside as capital for the first time since 2008. U.S. index futures rallied, while Asian shares fell.

BHP Billiton Ltd. (BHP), the world’s biggest mining company, paced gains in commodity shares. Shire (SHP) Plc led health-care shares higher after Citigroup Inc. recommended buying the stock.

The Stoxx Europe 600 Index increased 0.9 percent to 233.66 at 12:08 a.m. in London. The benchmark gauge earlier fell as much as 1.1 percent after Standard & Poor’s cut the credit ratings of some of the world’s largest banks including HSBC Holdings Plc (HSBA) and UBS AG. (UBSN) The December contract on the S&P 500 Index gained 0.8 percent. The MSCI Asia Pacific Index lost 0.2 percent.

China will cut the reserve requirement ratio for banks by 0.5 percentage points from Dec. 5, according to a statement on the central bank’s website today.

“This measure shows that authorities are controlling the evolution of the economy to avoid a collapse in China,” said Guillaume Duchesne, an equity strategist at BGL BNP Paribas SA in Luxembourg. “It’s good news. It means China will avoid the worst scenario of a hard landing.”

The Stoxx 600 has still dropped 3.9 percent in November, declining for the sixth month in seven, as Italian bond yields surged and euro-area policy makers struggled to agree on a plan to contain the region’s sovereign-debt crisis.

Brussels Meeting

Euro-area finance ministers approved enhancements to their bailout fund at their meeting in Brussels yesterday. They agreed to work on boosting the resources of the International Monetary Fund so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg Prime Minister Jean- Claude Juncker said late yesterday.

Finance ministers of the 27-nation European Union are meeting in Brussels today to seek agreement on how to temporarily guarantee banks’ bond issuance in order to improve funding conditions for lending. EU leaders agreed last month to provide the guarantees to restore investor confidence in banks.

“I’m optimistic in the short term, until year end,” said Guillaume Chaloin, a fund manager at Meeschaert Asset Management in Paris, which oversees $3.3 billion in assets. “We’re waiting for a clear decision from European policy makers. The meeting of finance ministers wasn’t too bad.”

Budget Discipline

European heads of government meet on Dec. 9 in Brussels, with Germany pushing for governance changes that would tighten enforcement of budget rules. The move might make it easier for the European Central Bank to play a bigger part in supporting euro-area nations, possibly channeling loans through the IMF, two officials familiar with the matter said yesterday.

In the U.S., a report at 8:15 a.m. New York time may show companies in the world’s largest economy added 130,000 workers in November, economists said. ADP Employer Services’ report based on payrolls showed 110,000 were hired the previous month. Reports on nonfarm productivity and pending sales of existing homes are also due today.

Mining Companies Gain

BHP advanced 1.8 percent to 1,869 pence. Rio Tinto Group, the world’s second-biggest mining company, climbed 2 percent to 3,200 pence. Xstrata Plc (XTA) jumped 3.2 percent to 985.5 pence. A gauge of mining shares rose 2 percent for the best performance in the Stoxx 600.

Shire added 2.5 percent to 2,096 pence after Citigroup rated the stock “buy” in new coverage.

Grifols SA (GRF) increased 2.8 percent to 11.71 euros. The stock was rated “buy” in new coverage at Deutsche Bank AG. (DBK)

Nobel Biocare Holding AG (NOBN) climbed 2.3 percent to 10.92 Swiss francs.

Wendel (MF) SA soared 12 percent to 51.50 euros for the biggest gain in the Stoxx 600. TE Connectivity Ltd., the world’s largest electrical-connections maker, agreed to buy Deutsch Group SAS from Wendel for about $2.1 billion.

To contact the reporter on this story: Adria Cimino in Paris at

To contact the editor responsible for this story: Andrew Rummer at


Horton Named CEO as AMR Files Bankruptcy

By Phil Milford, Mary Schlangenstein and David McLaughlin - Nov 30, 2011 6:08 AM GMT+0700

Nov. 29 (Bloomberg) -- Jeff Kauffman, managing director of equity research at Sterne Agee & Leach Inc., talks about the bankruptcy filing by AMR Corp., parent of American Airlines. AMR filed for Chapter 11 protection today after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S. Kauffman speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Nov. 29 (Bloomberg) -- American Airlines parent AMR Corp. filed for bankruptcy after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S. With the filing, American became the final large U.S. full-fare airline to seek court protection from creditors. Chairman Gerard Arpey will retire and be replaced by Thomas Horton, AMR said. Shannon Pettypiece reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

American Airlines parent AMR Corp. (AMR) filed for bankruptcy after failing to secure cost-cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S.

With the filing, American became the last of the so-called U.S. legacy airlines to seek court protection from creditors. The Fort Worth, Texas-based company, which traces its roots to 1920s air-mail operations in the Midwest, listed $24.7 billion in assets and $29.6 billion in debt in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan.

“It’s painful but probably necessary,” John Strickland, an aviation analyst at JLS Consulting in London, said today in a telephone interview. “They will have to go through the whole process that their peers have gone through.”

Job and flight reductions are likely in the future as AMR seeks to trim expenses and leave bankruptcy in less than 15 months, Chairman and Chief Executive Officer Tom Horton said today. Normal flight schedules will continue on American and its American Eagle regional unit for now, along with the airline’s frequent-flier program, the company said. A spinoff of American Eagle, which already had been delayed from this year into 2012, is on hold, Horton said.

Court Hearing

American’s cost structure compared with other airlines had become “untenable,” said Harvey Miller, the company’s bankruptcy lawyer, at a court hearing today in Manhattan. The airline “fought ferociously” to avoid filing for bankruptcy, and now planned to use the court process to turn around its business to become a profitable global airline, Miller said.

At today’s hearing, U.S. Bankruptcy Judge Sean Lane approved American’s requests to pay employees, continue its customer programs, and pay what the company said are vendors that are critical to maintaining its operations.

American said in court papers that it needed permission to pay $50 million in claims from critical vendors. Miller said the company will later request approval to pay an additional $35 million in claims.

“We are talking about an emergency and the survival of this company,” Miller said about the request. “We have to operate this airline and assure customers that when they book on American, that flight is going to be there and that flight is going to depart on time.”

Arpey Retires

Horton, 50, most recently AMR’s president, replaced Gerard Arpey today as chairman and CEO. Arpey, 53, opted to retire after the board asked him to stay, Horton said. Arpey will join Emerald Creek Group LLC, a private-equity firm founded by former Continental Airlines Inc. CEO Larry Kellner, on Dec. 1, the firm said in a statement.

Arpey supported the bankruptcy filing, Horton said. Arpey decided to leave after concluding that AMR would be better served with new leadership “because it was going in a different direction,” Tom Roberts, an attorney at Weil, Gotshal & Manges LLP who represents AMR, said in a telephone interview. “It was his decision because he had been the one that had been leading the charge for so many years to avoid bankruptcy.”

The hearing on first-day motions in the bankruptcy case is set for 4 p.m. today. AMR doesn’t plan to seek so-called debtor- in-possession financing to fund operations during bankruptcy, Horton said at a news conference at Dallas/Fort Worth International Airport.

AMR’s board voted unanimously last night to file for bankruptcy after considering options for months, Horton said. AMR was determined to avoid Chapter 11 as air travel fell and losses mounted after the 2001 terrorist attacks, even as peers used bankruptcy to shed costly pension and retiree benefit plans and restructure debt. Rival carriers later combined, giving them larger route networks that were more attractive to lucrative corporate travel customers.

‘Untenable’ Gap

“It became increasingly clear that the cost gap between us and our biggest competitors was untenable,” Horton said on a conference call. “The economic climate has been most uncertain, oil prices remain high and volatile, and all of that taken together led to the conclusion that now is the right time to take this step and put the company back on the path to long-term success.”

AMR plunged 80 percent to 33 cents in New York Stock Exchange composite trading at 1:06 p.m. The shares earlier fell as much as 88 percent. Unlike secured creditors, shareholders typically get paid last in a bankruptcy and often receive nothing for their shares.

The stock had declined 79 percent this year before today on concern that a Chapter 11 filing was inevitable as AMR’s losses drained cash reserves. AMR had $4.1 billion in unrestricted cash and short-term investments as of Nov. 25, Chief Financial Officer Isabella Goren said in an affidavit.

Union Talks

AMR’s bankruptcy filing “resets” the process for union talks, Horton said. American had been engaged in negotiations with unions for all of its major work groups as far back as 2006, seeking to boost employee productivity and erase part of what it said was an $800 million labor-cost disadvantage to other carriers.

AMR has the highest operating costs among the four surviving major U.S. network airlines, Goren said in court papers. The company is set to post its fourth-straight annual loss this year and analysts had forecast a loss for next year as well.

“AMR cannot continue to progress toward a viable and stable future without further, significant remediation of its uncompetitive cost structure,” Goren said.

American fell from its perch as the biggest airline by traffic after Delta Air Lines Inc. (DAL) bought Northwest Airlines Corp. in 2008, then slid to No. 3 last year when UAL Corp.’s United Airlines and Continental Airlines Inc. merged.


All operate traditional hub-and-spoke systems, with their own regional units or partner airlines ferrying passengers to be collected at larger airports. US Airways Group Inc. (LCC) is the other major carrier with that kind of route network. It ranks No. 5 in the U.S. by traffic, behind Southwest Airlines Co. (LUV), the largest discounter.

In late 2005, Delta, Northwest and UAL were all under bankruptcy protection. US Airways left Chapter 11 in September of that year through a merger with America West Holdings Corp.

American and leaders of its pilots’ union were scheduled to meet with federal mediators on Dec. 6 to provide an update on contract talks that stalled two weeks ago. The two sides hadn’t set a date to resume negotiations since Allied Pilots Association leaders declined to send a Nov. 14 contract offer to union members for a vote, saying it “clearly” would be rejected.

‘Leaner, Stronger’

“You would expect a leaner, stronger company to emerge from bankruptcy,” Chris Logan, an analyst at Echelon Research & Advisory LLP in London, said today by telephone. “As they are in Chapter 11, it will be more easy to demand concessions from the labor force.”

American’s pilots, flight attendants, mechanics and baggage handlers wanted to use the contract talks to regain some of the $1.6 billion in annual concessions they gave in 2003 to help the company avoid bankruptcy.

“We agreed to sacrifice based on the expectation that our airline would regain its leadership position,” David Bates, president of the Allied Pilots Association, told members in an e-mail. “What has transpired since has been nothing short of a ‘perfect storm.’”

The Transport Workers Union, which represents aircraft mechanics and baggage handlers, “will fight like hell to make sure that front-line workers don’t pay an unfair price for management’s failings,” James Little, the union’s international president, said in a statement today.

‘Loss of Jobs’

“It’s a loss of jobs I worry most about,” Laura Glading, president of the Association of Professional Flight Attendants, said in an interview. “That’s a horrible, horrible nightmare in this economy. We’ll do what we can to mitigate that as much as possible.”

AMR had about 80,800 employees at the end of September, including 67,100 at American, with the rest at American Eagle, cargo operations and other units, according to the company’s October earnings release. American has 8,700 active pilots, with another 950 on furlough, and 17,000 flight attendants.

Among the company’s largest unsecured creditors listed in court papers was Wilmington Trust Corp., trustee for holders of $460 million in 6.25 percent convertible senior notes due in 2014. AMR on Sept. 27 sold $725.7 million of 10-year bonds backed by aircraft to refinance maturing debt. The company paid the highest interest rates since 2009 to raise the cash.

The 8.625 percent notes due in October 2021 fell 2.5 cents to 96 cents on the dollar as of 8:20 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Sept. 11

After the Sept. 11 terrorist attacks in 2001, carriers saw “a dramatic drop in air travel” for 18 months to two years, CEO Rick Seaney said in an interview. Airlines in the U.S. lost about $9.7 billion in the year following the attacks that destroyed the World Trade Center’s twin towers in New York and damaged the Pentagon. American, which operated two of the four hijacked planes used in the attacks, posted losses for four straight years afterward.

American responded by negotiating the union concessions that helped to restore profit in 2006 and 2007. The carrier had blamed losses since then partly on its labor costs and slower- than-expected gains from business ventures with partners across the Atlantic and Pacific.

The airline also has a fleet of older, less fuel-efficient planes that put it at a disadvantage when fuel prices rise. AMR spent $1.56 billion more on fuel through the first nine months of this year than a year earlier, according to the company’s third-quarter earnings release.

Flights Shuffled

In September 2009, the carrier shuffled flight schedules to increase operations in Chicago, New York, Dallas-Fort Worth, Los Angeles and Miami to attract more high-fare business travelers.

“Airlines still face that fundamental issues of cost levels versus achievable revenues in the market place,” Strickland, the JLS analyst, said. “Higher fuel prices and the weaker U.S. economy would have given them the final push.”

AMR said in July it would buy 460 single-aisle jets -- 260 from Airbus SAS and 200 from Boeing Co. (BA) -- in the industry’s biggest-ever order. The orders remain “rock solid,” Horton said today.

“When we’re completed with this process, our company will be competitive and poised to grow and prosper and go out and capitalize on these aircraft orders,” he said.

MD-80s Replaced

American’s mainline jet fleet of 619 planes includes 247 twin-engine MD-80s made by McDonnell Douglas Corp., according to the airline’s website. Boeing acquired McDonnell Douglas in 1997. Those planes, which are no longer in production, are being replaced by Boeing 737-800s that are about one-third more fuel efficient.

Placing an order for aircraft “creates a contract,” and in bankruptcy accepting or rejecting the contract will be up to AMR, said Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Service in Chicago. Boeing and other suppliers will probably have representatives at AMR’s bankruptcy hearings who “will be looking at what their options are,” he said.

Boeing said it has “no reason to doubt” that the jet order remains pivotal to AMR. Boeing and Airbus will provide $13 billion of financing on the first 230 jets, American said in July.

‘Key Part’

“We anticipate as part of American’s reorganization that new, fuel-efficient airplanes will be a key part of their ongoing success,” Mark Hooper, a spokesman for Chicago-based Boeing, said in an e-mailed statement.

International Consolidated Airlines Group SA, a U.K.-based joint venture partner with AMR that owns British Airways and Spain’s Iberia, said it has “every confidence in the future of American Airlines” and looks forward to working with Horton.

Weil Gotshal, based in New York, is AMR’s lead bankruptcy counsel. The company’s financial adviser is Rothschild Inc.

American Airlines was formed from companies including Robertson Aircraft Corp. of Missouri, which employed Charles A. Lindbergh as a mail pilot, according to the carrier’s website. The companies began consolidating in 1929 and became American Airlines in 1934.

Company stock began trading in 1939, and during World War II, half of American’s planes flew for the Air Transport Command. American pioneered nonstop transcontinental service in 1953 and 20 years later was the first major airline to hire a woman pilot, according to its website.

The case is In re AMR Corp., 11-15463 U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Phil Milford in Wilmington, Delaware at; Mary Schlangenstein in Dallas at; David McLaughlin in New York at

To contact the editors responsible for this story: John Pickering at; Michael Hytha at


AT&T May Shed 50% of T-Mobile Users

By Scott Moritz and Sara Forden - Nov 30, 2011 4:16 AM GMT+0700

AT&T Inc. (T), under pressure from regulators over its bid for T-Mobile USA, may be willing to shed up to half of the smaller company’s customers to close the deal and gain control of assets including wireless spectrum, analysts said.

AT&T, the second-largest U.S. wireless operator, is weighing the sale of customers and spectrum to address U.S. Justice Department concerns that the acquisition of the fourth- largest operator will undercut competition. The company may propose total divestitures of as much as 40 percent of T-Mobile assets, a person familiar with the plan said last week.

AT&T could sell a higher percentage of T-Mobile’s customers and smaller share of other assets, said Roger Entner, founder of market-research firm Recon Analytics LLC. Most important for AT&T is getting T-Mobile spectrum, or licenses to airwaves that provide more capacity for wireless traffic, he said.

“It’s still a good deal even if they have to give up half the customers,” said Entner. “AT&T desperately needs spectrum in larger cities and would give it up elsewhere.”

AT&T wants to work out an agreement with the Justice Department, which sued on Aug. 31 to block the deal. If the two sides can’t reach a compromise, they’re scheduled to go to trial in February.

AT&T also needs approval from the Federal Communications Commission to proceed with the deal. The company said last week it would withdraw its application for approval to the FCC to focus first on winning clearance from the Justice Department. The FCC said it is considering whether to grant AT&T’s request.

AT&T, based in Dallas, gained 0.4 percent to $28.06 at the close in New York. The stock has dropped 4.5 percent this year.

Smartphone Surge

AT&T, the first U.S. wireless company to offer Apple Inc.’s iPhone, has seen a surge in data traffic as more customers switch to smartphones, which can stream Pandora Media Inc.’s music and Netflix Inc. (NFLX) movies. Data usage on the company’s network has soared 8,000 percent over the past four years and may accelerate over the next four years, Glenn Lurie, emerging devices president, said this month.

T-Mobile’s network could provide AT&T with additional capacity to alleviate the data crunch in short order, Entner said. Buying additional spectrum from the government and then installing network infrastructure to handle wireless calls could take five years or more.

“This deal isn’t about changing the competitive dynamics, it’s about getting spectrum in larger markets as fast as possible,” said Entner, who is based in Dedham, Massachusetts.

Price Change

Divesting 50 percent of T-Mobile’s customers probably makes sense to save the deal, though AT&T is unlikely to go beyond that point, said Colby Synesael, an analyst at Cowen & Co.

“It would be a surprise if it went further,” said Synesael, who has a neutral rating on AT&T. “We are already at the precipice where it is so much divestiture that it stops looking like it worth doing the deal.”

Whether a smaller-scaled deal makes sense for AT&T and T- Mobile parent Deutsche Telekom AG (DTE) will depend in part on how much the original purchase price is reduced. Deutsche Telekom may receive less than the original $39 billion with substantial divestitures.

According to a term in the merger agreement, AT&T would be able to pay less than that value if regulators demand asset sales that surpass 20 percent of the figure, or about $7.8 billion, three people with direct knowledge of the situation said in September. AT&T could walk away from the deal and pay Deutsche Telekom a breakup fee if the concessions requested top 40 percent of that value, the people said.

‘Only Card’

Brad Burns, a spokesman for AT&T, declined to comment. Andreas Fuchs, a Deutsche Telekom spokesman, said the company is bound by the terms of the purchase agreement and declined to comment further.

An AT&T proposal for substantial asset sales may also have a tactical reason. The company could signal that it is making a significant concession to negotiate a solution before the trial date with the Justice Department, said Justin Serafini, an analyst with Height Analytics LLC.

“This is the only card left at this point,” said Serafini, who is based in Washington. “AT&T is hoping that the big asset divestiture will be enough to get an agreement before the trial. If it goes to trial it might be useful to get sympathy from the judge.”

‘Won’t Work’

Even selling off 50 percent of T-Mobile’s customers and a lower percentage of other assets such as spectrum may not be enough to win over the Justice Department, said Robert W. Doyle, an antitrust attorney in Washington. The issue is that selling off such customers won’t necessarily replace the competitive force of T-Mobile, he said.

“The key question that needs to be answered is does the proposed divestiture package replace the lost competition resulting from the elimination of a significant competitor? My answer is a no, it won’t work,” said Doyle, a former official at the Federal Trade Commission.

AT&T and Deutsche Telekom need to find companies willing to buy such a large slice of assets. AT&T has been negotiating over divestitures with regional operators MetroPCS Communications Inc. (PCS) and Leap Wireless International Inc. (LEAP), two people close to the situation said this month.

MetroPCS, the larger of the two, had 9.1 million customers at the end of September and its executives have said they don’t have ambitions for building a national network. Leap had 5.8 million customers, compared with T-Mobile’s 33.7 million.

Little Overlap

MetroPCS operates in just four of the 17 cities where the combined AT&T/T-Mobile would control more than 50 percent of the market, Michael Nelson, an analyst with Mizuho Securities USA Inc. in New York, wrote in a research note yesterday. Leap offers mobile service in six of the 17 cities.

Even with the regional carriers participating in the asset sales it’s “unlikely to be enough to satisfy regulatory concerns,” said Nelson, who put the likelihood of a deal going through at about 10 percent.

AT&T’s proposed acquisition of T-Mobile would create two industry giants in AT&T, with about 137 million subscribers, and Verizon, with about 107.7 million. Sprint had 53.4 million at the end of September.

AT&T’s spectrum shortage argument doesn’t address the Justice Department’s concern with a market that would lose a fourth national competitor, said Serafini.

“I don’t think DOJ could go for any deal that results in only three national wireless providers,” said Serafini.

To contact the reporter on this story: Scott Moritz in New York at Sara Forden in Washington at

To contact the editor responsible for this story: Peter Elstrom at; Michael Hytha at


ADP Says U.S. Companies Added 206,000 Workers

By Shobhana Chandra - Nov 30, 2011 8:37 PM GMT+0700

Companies added more workers than anticipated in November, easing concern the job market is stagnating in the third year of the U.S. recovery, according to a private report based on payrolls.

The 206,000 increase was the biggest this year and followed a revised 130,000 gain the prior month, Roseland, New Jersey- based ADP Employer Services said today. The median forecast of economists surveyed by Bloomberg News called for an advance of 130,000.

A pickup in hiring will make it easier to sustain the recent gain in consumer spending, which accounts for about 70 percent of the economy. Overall payrolls rose by 122,000, still not enough to cut the jobless rate from 9 percent, economists in a Bloomberg survey projected ahead of a Labor Department report due in two days.

“Companies are going to ramp up a bit,” Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said before the report. “We just have to let the economy build on its own momentum. Then we’ll be at a stage where demand creates employment which creates more spending.”

Last month’s initial ADP figures showed a 110,000 gain, while the Labor Department’s data two days later showed an increase of 104,000 in private payrolls for October.

Stock-index futures extended gains after the Federal Reserve and five central banks lowered interest rates on dollar swaps and China cut banks’ reserve requirements. The contract on the Standard & Poor’s 500 Index expiring next month climbed 3 percent to 1,232.6 at 8:33 a.m. in New York.

The projections for November ranged from 95,000 to 200,000, based on the estimates of 44 economists surveyed by Bloomberg.

Construction Employment

Goods-producing industries, which include manufacturers and construction companies, had an increase of 28,000 workers, today’s figures showed. Employment in construction rose by 16,000, the most since November 2006, while factories added 7,000 jobs.

Service providers took on 178,000 workers.

Companies employing more than 499 workers added 12,000 jobs. Medium-sized businesses, with 50 to 499 employees, took on 84,000 workers and small companies increased payrolls by 110,000, ADP said.

Another report today showed employers announced fewer job cuts this month, according to figures from Chicago-based Challenger, Gray & Christmas Inc. Job-cut announcements dropped 13 percent in November from the same month in 2010.

Yellen on Economy

Economic growth in the U.S. and other advanced economies “has been proceeding too slowly to provide jobs for millions of unemployed people,” Federal Reserve Vice Chairman Janet Yellen said in a speech at a San Francisco Fed conference yesterday. She called for “urgent” international action to combat a “dearth” of global demand.

Yellen said the central bank has leeway to spur the U.S. recovery and reduce unemployment by buying more assets or clarifying its plan to sustain record-low borrowing costs.

Fed officials have differed this month over whether additional stimulus may be needed to reduce unemployment more quickly. Policy makers next meet Dec. 13 in Washington.

Macy’s Inc. (M), betting consumer spending will be sustained during the November-December holiday shopping season, was among companies that added staff. The second-biggest U.S. department- store chain said it was stepping up hiring of mostly part-time employees by 4 percent for the period.

Retailer Hiring

Earnings growth is allowing some businesses to hire. Williams-Sonoma Inc. (WSM), a retailer of high-end home goods, raised its annual profit forecast and will “continue to look for a few key jobs” in online sales, Chief Executive Officer Laura Alber said in a Nov. 17 conference call with analysts.

Companies remaining cautious include DirecTV (DTV), the largest U.S. satellite-TV provider, which this month said it will cut back on spending in 2012 to prepare for any slowdown in the economy.

The Labor Department’s report, to be released on Dec. 2, may show private payrolls rose by 146,000 in November, according to the Bloomberg survey median. Overall hiring, which includes government jobs, may have climbed after rising 80,000.

The ADP report is based on data from about 337,000 businesses with more than 21 million workers on payrolls. Macroeconomic Advisers LLC in St. Louis produces the data with ADP.

To contact the reporters on this story: Shobhana Chandra in Washington at

To contact the editor responsible for this story: Christopher Wellisz at


U.S. Stock Futures Advance as Fed, Central Banks Add Liquidity to Markets

By Rita Nazareth - Nov 30, 2011 8:21 PM GMT+0700

Nov. 29 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. Stocks and commodities rose for a second day as U.S. consumer confidence increased by the most since 2003 and European finance ministers discussed efforts to tame the region’s debt crisis. Treasuries pared losses. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

U.S. stock futures rose, indicating the Standard & Poor’s 500 Index will rally a third day, after the Federal Reserve and five central banks lowered interest rates on dollar swaps and China cut banks’ reserve requirements.

The Financial Select Sector SPDR Fund (XLF) advanced 3.1 percent as Wells Fargo & Co. (WFC) and Citigroup Inc. (C) added at least 2.9 percent. Caterpillar Inc. (CAT) and Freeport-McMoRan Copper & Gold Inc. rallied more than 3.3 percent to pace gains among the biggest companies. AMR Corp. (AMR) increased 31 percent, following yesterday’s plunge spurred by its bankruptcy filing.

S&P 500 futures expiring in December gained 2.6 percent to 1,227.40 at 8:18 a.m. New York time. The benchmark gauge rallied 3.2 percent over the previous two days. Dow Jones Industrial Average futures rose 262 points, or 2.3 percent, to 11,827.

"Central banks around the world are going back to easing or supporting the marketplace," Mark Bronzo, who helps manage $24 billion at Security Global Investors in Irvington, New York, said in a telephone interview. "It’s a step in the right direction especially because it’s coordinated on a global basis. These actions may help global growth not to follow Europe into a recession."

The Federal Reserve and five other central banks agreed to reduce the interest rate on dollar liquidity swap lines by 50 basis points and extend their authorization through Feb. 1, 2013. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank are involved in the coordinated action, the Fed said in a statement in Washington.

‘Ease Strains’

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.

Benchmark gauges rose for a second day yesterday as consumer confidence increased and European finance ministers discussed efforts to tame the debt crisis. Stock-futures slumped after the close of regular trading after S&P cut credit ratings for lenders including Bank of America Corp. (BAC) and Citigroup.

Equity futures rebounded as China reduced the amount of cash that banks must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth. Easing in the nation that contributes most to global growth may boost confidence as Europe’s crisis worsens.

“China is reversing its policy from the past 18 months and releasing capital that may be used for internal expansion,” said Francisco Salvador, strategist at FGA/MG Valores in Madrid. “While they may be seeing some signs of weakening growth, this is also a relaxation of their policy tightening.”

In the U.S., companies added 206,000 workers to payrolls in November, according to data today from Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for an advance of 130,000. Projections ranged from gains of 95,000 to 200,000.

To contact the reporters on this story: Rita Nazareth in Sao Paulo at;

To contact the editor responsible for this story: Nick Baker at


U.S. Third-Quarter Productivity Increases 2.3%, Less Than First Estimated

By Alex Kowalski - - Nov 30, 2011 8:30 PM GMT+0700

The productivity of U.S. workers advanced in the third quarter more slowly than previously estimated, a signal that efficiency gains are contributing less to growing corporate profits.

The measure of employee output per hour increased at a 2.3 percent annual rate after declining for two quarters, revised data from the Labor Department showed today in Washington. The previous figures indicated productivity rose 3.1 percent in the July-September period. Expenses per employee fell at a 2.5 percent rate, more than initially estimated.

Companies may find it harder to maintain earnings growth with productivity cooling relative to the recovery, when employment fell faster than output. Meanwhile, slower efficiency gains mean short term increases in demand could lead to larger payrolls at the same businesses.

“Going forward, productivity depends on how much longer corporate America can make more with less labor input,” Ellen Zentner, senior U.S. economist at Nomura Securities in New York, said before the report. “At some point, the cost of additional capital is going to outweigh the cost of additional labor, and businesses will have to accelerate hiring.”

Bloomberg Survey

Third-quarter productivity was projected to pick up by 2.5 percent, according to the median forecast of 55 economists surveyed by Bloomberg News. Estimates ranged from gains of 1.4 percent to a high of 3.2 percent.

Compared with the July-September period in 2010, worker output per hour increased 0.9 percent. It fell in the first two quarters of this year, marking the first back-to-back declines since the second half of 2008.

Among manufacturers, business efficiency increased at a 5.0 percent rate in the third quarter.

Unit labor costs, which are adjusted for productivity gains, were revised from a 2.4 percent drop first estimated. They were forecast to slide 2.1 percent in the survey median.

The measure of expenses per employee increased 0.4 percent from the year-earlier period.

Hourly compensation adjusted for inflation declined 2.3 percent year over year, which was the largest drop since the data series began in 1948, the Labor Department said.

Improvements in output per hour have helped U.S. companies manage rising input costs and any upticks in demand without losing earnings or rapidly expanding payrolls.

‘Key Driver’

“We continued to grow sales productivity, the key driver of profitability,” Michael MacDonald, president and chief executive officer of DSW Inc. (DSW), said during a Nov. 22 call with analysts. Adjusted profit rose to $39.8 million in the third quarter from $35.5 million a year earlier, according to the Columbus, Ohio-based shoe retailer. Efficiency at DSW has increased 22 percent since 2008, MacDonald said.

Even so, overall efficiency gains in the U.S. have slowed compared with 2009 and 2010, when productivity advanced 2.3 percent and 4.1 percent. That means additional expenses will increasingly eat into businesses’ profits.

“Corporate cost structures are extremely lean, and it’s going to be tough to cut anything any further,” said Aneta Markowska, a senior U.S. economist at Societe Generale in New York. “Profits will slow down sharply. The idea of 40 percent year-on-year profit growth, we won’t see that for a while.”

Earnings at U.S. companies climbed 2.1 percent last quarter to $1.98 trillion at an annual rate, down from 3.3 percent in the prior three months, according to Commerce Department data.

To maintain profitability, businesses may have to take a greater share of income away from employees. At $8.25 trillion, worker compensation, including wages and supplements, in the third quarter accounted for a 56-year low of 55 percent of the nation’s gross domestic income, a measure of the money earned by the people, businesses and government agencies whose purchases go into calculating economic growth.

To contact the reporter on this story: Alex Kowalski in Washington at

To contact the editor responsible for this story: Christopher Wellisz at


U.S. Futures Extend Gain on Central Bank Action

By Stephen Kirkland - Nov 30, 2011 8:19 PM GMT+0700

Nov. 30 (Bloomberg) -- Anthony Crescenzi, executive vice president at Pacific Investment Management Co., talks about the global economy and financial markets. Crescenzi also discusses the U.S. and China's banking industries and real estate markets. He speaks from Newport Beach, California, with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Nov. 30 (Bloomberg) -- Ritesh Maheshwari, an analyst at Standard & Poor's in Singapore, talks about Asian banks' credit ratings. S&P upgraded ratings of Bank of China Ltd. and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd., giving all three lenders higher grades than most big U.S. banks. Maheshwari speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

European stocks rose for a fourth day and U.S. index futures rallied after central banks acted together to make additional funds available to banks. Italian bonds dropped while the German one-year yield sank below zero for the first time.

The Stoxx Europe 600 Index added 3 percent at 8:17 a.m. in New York. Standard & Poor’s 500 Index futures gained 2.6 percent. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, dropped to 157 basis points below the euro interbank offered rate, from as high as 163 this morning, a three-year high. The yield on the 10-year Treasury note rose four basis points to 2.03 percent. Oil jumped 1.4 percent, and copper rallied 2.3 percent.

The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said in a press release. They also agreed to make other currencies available as needed, it said.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Fed said.

China said earlier it will cut reserve requirement ratio for banks by 0.5 percentage points from Dec. 5, according to the central bank website. Finance ministers yesterday agreed to guarantee as much as 30 percent of new bond sales from troubled governments to enhance the region’s bailout fund, and to improve its ability to cap yields by buying bonds.

China’s Concern

“The Chinese move reflects how concerned they are about the European Union debt threat and that’s how investors also see it,” Chris Weafer, chief strategist at Troika Dialog in Moscow, said by e-mail. “That is still the dominant issue affecting all markets and will remain so well into 2012.”

The next 10 days will be a “critical period” to complete the crisis response, European Union Economic and Monetary Affairs Commissioner Olli Rehn said today in Brussels.

More than 20 stocks advanced for every one that declined in the Stoxx 600. Barclays Plc and Deutsche Bank AG rallied more than 6 percent. BP Plc, Europe’s second-biggest oil producer, climbed 4.7 percent, and BHP Billiton Plc, the world’s largest mining company, jumped 5.7 percent.

Stocks fell earlier after S&P cut debt ratings on lenders from Bank of America Corp. to Goldman Sachs Group Inc. to UBS AG. More than $3 trillion has been erased from the value of global equities this month as rising borrowing costs in Italy and Spain signaled Europe’s debt crisis was worsening.

U.S. Jobs

The gain in U.S. index futures indicated the S&P 500 will pare a 4.6 percent retreat in November, its sixth month of declines in seven.

U.S. companies added 260,000 workers in November, according to data from ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for an advance of 130,000.

The 10-year Italian bond yield rose seven basis points to 7.30 percent, with the equivalent Spanish yield climbing three basis points. Germany’s one-year yield dropped 14 basis points to minus 0.06 percent.

Italian bonds fell even as the European Central Bank bought the nation’s securities, according to three people with knowledge of the transactions, who declined to be identified because the deals are private. A spokesman for the ECB in Frankfurt declined to comment.

----With assistance from Will Hadfield, Sharon Lindores, Daniel Tilles and Jason Webb in London. Editors: Stephen Kirkland, Mark Gilbert

To contact the reporters on this story: Stephen Kirkland in London at; Shiyin Chen in Singapore at

To contact the editor responsible for this story: at


BofA, Goldman, Citi Credit Ratings Reduced by S&P

By Dakin Campbell - Nov 30, 2011 6:32 AM GMT+0700

Nov. 29 (Bloomberg) -- Bank of America Corp., Goldman Sachs Group Inc. and Citigroup Inc. had long-term credit grades downgraded to A- from A by Standard & Poor’s after the ratings firm revised its criteria for the banking industry. Bloomberg's Julie Hyman, Lisa Murphy and Adam Johnson report on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Nov. 29 (Bloomberg) -- Sean Egan, president of Egan-Jones Rating Co., talks about Standard & Poor's cut in the credit ratings of Bank of America Corp., Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. He speaks with Lisa Murphy and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Bank of America Corp. (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. had long-term credit grades reduced to A- from A by Standard & Poor’s after the ratings firm revised criteria for dozens of the world’s biggest lenders.

S&P made the same cut to Morgan Stanley and Bank of America’s Merrill Lynch unit today. JPMorgan Chase & Co. (JPM) was reduced one level to A from A+. S&P upgraded Bank of China Ltd. (3988) and China Construction Bank Corp. (939) to A from A- and maintained the A rating on Industrial and Commercial Bank of China Ltd., giving all three lenders higher grades than most big U.S. banks.

The moves may increase pressure on firms already dealing with weak economies and Europe’s mounting sovereign debt crisis. Lenders including Bank of America, Citigroup and Morgan Stanley have said they may have to post billions of dollars of additional collateral and termination payments on trades because of a one-level downgrade in their credit ratings.

“It’s evident that stress from the European banking system is taking its worldwide toll,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an e-mail.

The ratings firm also downgraded UBS AG (UBSN) and Barclays Plc (BARC) to A from A+, and HSBC Holdings Plc (HSBA) to A+ from AA-, according to the report.

Change in Technique

S&P, a unit of New York-based McGraw-Hill Cos. (MHP), has been changing the way it looks at debt after its faulty grades contributed to the credit-market seizure that brought down Lehman Brothers Holdings Inc. and Bear Stearns Cos. It started to review the methodology in December 2008, months after the collapse of those two firms.

Most bank stocks were little changed in after-hours trading. Bank of America fell 4 cents to $5.04, while Citigroup dropped 19 cents to $25.05 and Goldman Sachs declined 21 cents to $88.60 as of 6:30 p.m. in New York trading. Citigroup issued a statement disputing S&P’s downgrade. (MS)

“I don’t think moving from single A to single A- has much of an economic impact on anyone,” said David Hilder, a New York-based analyst at Susquehanna Financial Group. “Those ratings are at a high level compared to the whole spectrum of ratings and are still well into the territory of investment grade.”

For Bank of America, the bigger impact might have been with when Moody’s Investors Service reduced its grade in September to Baa1, two notches below the prior A2 rating, Hilder said. By contrast “these are relatively minor changes,” he said.

Collateral Triggers

Downgrades “could likely have a material adverse effect on our liquidity, potential loss of access to credit markets, the related cost of funds, our businesses and on certain trading revenues, particularly in those businesses where counterparty creditworthiness is critical,” Charlotte, North Carolina-based Bank of America said in its quarterly filing.

The company, which noted the risk of downgrades from S&P and Fitch Ratings in the filing, previously said it has prepared by lining up funding for a year.

Citibank NA, the deposit-taking arm of New York-based Citigroup, was downgraded to A from A+. The bank estimated in a quarterly filing that a one-level reduction to the unit’s rating could trigger $4 billion of collateral payments and other cash obligations.

Citigroup Dissents

“We completely disagree with S&P’s change to Citigroup Inc. (C)’s holding company long-term and short-term ratings,” said Jon Diat, a spokesman for the lender, in an e-mailed statement. “Less than 1 percent of Citi’s funding will be affected by the S&P revision.”

Morgan Stanley estimated over-the-counter derivatives counterparties could demand $1.29 billion of collateral or termination payments from the New York-based firm after a one- notch downgrade. In addition, the firm may have to post an additional $323 million to exchanges and clearinghouses. All the estimates were as of Sept. 30.

JPMorgan, the largest and most profitable U.S. lender (BKX), has said the New York-based company may have to post an extra $1.5 billion in collateral against its derivatives and pay additional sums for contract terminations after a one-notch cut.

Mark Lake, a Morgan Stanley spokesman, David Wells, a spokesman for New York-based Goldman Sachs, and JPMorgan’s Joe Evangelisti declined to comment.

Power Shift

S&P analysts wrote earlier this month that the new ratings would reflect “a potential shift in the power balance of global banking.” In August, S&P downgraded the U.S. sovereign credit rating from AAA, citing political failure to reduce record deficits. The ratings company downgraded the six largest U.S. banks while upgrading two Chinese lenders.

S&P analysts wrote in a Nov. 1 research note describing its criteria that developed banking markets in the U.S. and Europe were under pressure, while emerging markets in Latin America and Asia were expanding.

“Leading banks in these regions have benefited from strong economic growth which has supported household and corporate credit quality,” S&P wrote.

S&P, the world’s largest provider of bond ratings, has roiled markets this month with a pair of errors related to sovereign credit ratings. On Nov. 10, the company sent, and then corrected, an erroneous message to subscribers suggesting France’s top credit rating had been downgraded. French 10-year bond yields rose as much as 28 basis points after the mistaken announcement. A week later, it released a statement with an incorrect rating for Brazil in the headline. It later sent a corrected headline.

The following table shows firms that were downgraded by S&P, followed by a list of banks that were upgraded.

Downgraded:    Banco Bilbao Vizcaya Argentaria S.A.    Bank of America Corp.    Bank of New York Mellon Corp.    Barclays Plc    Citigroup Inc.    Rabobank Nederland    Goldman Sachs Group Inc.    HSBC Holdings Plc    JPMorgan Chase & Co.    Lloyds Banking Group Plc    Morgan Stanley    Royal Bank of Scotland Plc    UBS AG    Wells Fargo & Co.  Upgraded:    Bank of China Ltd.    China Construction Bank Corp. 

To contact the reporter on this story: Hugh Son in New York at

To contact the editor responsible for this story: David Scheer at