‘Extravagant’ Spending, $16 Muffins Found at U.S. Meetings

By Seth Stern - Sep 20, 2011 9:26 PM GMT+0700

U.S. Justice Department agencies spent too much for food at conferences, in one case serving $16 muffins and in another dishing out beef Wellington appetizers that cost $7.32 per serving, an audit found.

“Some conferences featured costly meals, refreshments, and themed breaks that we believe were indicative of wasteful or extravagant spending,” the Justice Department’s inspector general wrote in a report released today.

The inspector general reviewed a sample of 10 Justice Department conferences held between October 2007 and September 2009 at a cost of $4.4 million. The Justice Department spent $73.3 million on conferences in fiscal 2009, compared with $47.8 million a year earlier, according to the report.

The muffins were served at a conference of the Executive Office for Immigration Review and the beef Wellington was offered at a meeting hosted by the Executive Office for U.S. Attorneys. A conference of the Office on Violence Against Women served Cracker Jacks, popcorn and candy bars at a single break, costing $32 per person, according to the report.

The report is a follow-up to one from 2007 that found the Justice Department had few controls to limit the costs of conference planning, food and beverages. That audit cited a reception that included Swedish meatballs costing $5 apiece.

In April 2008 the Justice Department issued policies and procedures designed to control conference spending.

The new report found that agencies were able to “circumvent meal and refreshment cost limits” when conferences were planned under cooperative agreements, a type of funding awarded by a Justice Department agency.

Justice Department agencies “did not adequately attempt to minimize conference costs as required by federal and DOJ guidelines,” the report said.

To contact the reporter on this story: Seth Stern in Washington at sstern14@bloomberg.net

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

Read more...

HP Shows Hazard of Sharing LinkedIn Profiles

By Douglas MacMillan - Sep 20, 2011 11:01 AM GMT+0700

Hewlett-Packard Co. (HPQ) Vice President Scott McClellan gave away more than his job status when he mentioned the computer maker’s new Web-storage initiative in his profile on LinkedIn Corp., a professional-networking site.

McClellan inadvertently tipped off competitors earlier this year to previously undisclosed details of Hewlett-Packard’s cloud-computing services. The information was later removed, though not before rivals got a look at the plans.

As workers put more information about their lives online through status updates, location check-ins and resume changes, employers are more at risk of competitors watching their every move. Investigators at Kroll Inc., the 40-year-old corporate sleuthing pioneer, are known for scanning deleted computer files and monitoring surveillance cameras to help large companies uncover rivals’ secrets. Now they’re trawling the social Web.

“Social media has become a much more efficient way of getting information that could only be gotten in the past by things like surveillance,” said Kroll Senior Managing Director Rich Plansky.

In a Forrester Research survey last year of more than 150 companies that monitor social media, more than 82 percent said they use this data for competitive intelligence -- the most cited reason for the monitoring. With good reason: A single insider’s Twitter Inc. post can be more valuable than a stack of analysts’ research.

“Competitors obviously watch each other in social media just as they have historically monitored each other in the media and in public presentations,” said Shel Israel, an author and consultant on online networks. “Social media is a new data- abundant source that is here to stay.”

Prowling Social Sites

Corporate investigators including Kroll, Nardello & Co. and Risk Solutions & Investigations are prowling social sites for oversharing insiders like McClellan. Michael Thacker, a spokesman for Palo Alto, California-based Hewlett-Packard, declined to comment on the matter.

At Kroll, a division of Falls Church, Virginia-based Altegrity Inc., social sites such as LinkedIn, Twitter and Facebook Inc. aid in investigations of employee misconduct, background checks and suspected cases of data breach.

“Who a person’s friends are, what bars they go to, which groups they are interested in, what they look like,” Plansky said. “All of those information sources are a potential gold mine for us in developing intelligence for our clients.”

Play-by-Play

When one client asked Kroll to find out how a potential acquisition target got leaked to a competitor, investigators found a series of social media posts in which a member of the client’s mergers-and-acquisitions team publicly discussed doing diligence on a company in a specific city.

“Twitter can give you a play-by-play about a person’s activities,” Plansky said. “‘A lot of these posts are time-and date-stamped.”

For another client, Kroll began building a case against a fired executive by seeing whom in his LinkedIn network he might be sharing trade secrets with, a violation of his termination contract. Plansky declined to name any of Kroll’s customers.

Sean Garrett, a spokesman for San Francisco-based Twitter, said in an e-mail that posts made on Twitter are publicly available. Erin O’Harra, a spokeswoman for Mountain View, California-based LinkedIn, declined to comment.

The amount of data on social networks relevant to corporate investigations may be declining as users get more sophisticated about protecting their online privacy, said Michael Walsh, managing director of London-based Nardello, which gathers intelligence for companies and governments.

‘Glass House’

“We will check” social sites, he said, “but it is increasingly becoming less a real source of information because people are becoming all too aware that this is a vulnerable spot for them.”

The people closest to a company’s sensitive information may be the most likely to leak it online, said Abhilash Sonwane, senior vice president of product management at Indian cybersecurity firm Cyberoam. Beginning in June 2010, his firm selected 20 companies and set out to track them across social media sites for several months. For each company, Cyberoam identified all the employees with a profile on LinkedIn, then subscribed to their feeds on Twitter and other sites.

“You can actually feel yourself inside that company -- what’s happening, what’s the morale of the employees, how the business is doing, where top management go on vacation, did the CEO have a fight with somebody,” Sonwane said. “It’s a glass house.”

‘Edgy’ Before Bankruptcy

At one of the companies, workers began to indicate in their postings that business was slow around October 2010.

“We could sense that they were edgy about something,” Sonwane said. A few months later, a vice president wrote in a LinkedIn status update that he was looking for a new job. When his followers asked why, he responded that the company was about to file for bankruptcy -- which it did less than six months later, Sonwane said. He declined to identify any of the companies in the study.

Preventing such leaks can be difficult, said Josh Bernoff, a social-media analyst at Forrester Research.

“Employees will post, regardless of whether the company endorses it or not,” he said. “It is far better to have a policy about what you can and can’t say than to try to stop it.”

Reputation.com Inc., a Redwood City, California-based service for helping individuals and organizations monitor what’s being said about them online, has been enlisted by one client to track activity related to the company’s top 300 executives. Michael Fertik, Reputation’s chief executive officer, wouldn’t name the client.

Managing Internet ‘Footprint’

“Everybody who is in business with you, in a personal, professional, romantic, transactional relationship with you, is looking up information about you, is finding information about you, and then, most importantly, making decisions about what they find about you on the Internet,” Fertik said. “That’s why everybody has a need and obligation to themselves, to their family members, to their shareholders, to manage their footprint on the Internet.”

More and more businesses are going on the offensive, collecting information about their own rivals. That has led companies including Bellevue, Washington-based Visible Technologies LLC to develop tools that detect competitive intelligence on the Web. For about $4,500 a month, Visible’s customers get a dashboard that identifies conversations happening about their industry in blogs, message boards and social sites including Twitter and Facebook.

Corporate Alerts

If there is a conversation with a negative sentiment, such as someone complaining about a rival company’s product, people monitoring the dashboard might intervene and offer a discount on switching to their own product or service.

LinkedIn has added tools to its networking site that send users alerts when competitors hire employees, or when its executives change roles.

“On LinkedIn, above all other social networks, people are very connected with their employer,” said Edd Dumbill, program chair for Strata Conference, a technology event hosted by O’Reilly Media Inc. focused on the use of online data.

As the generation of workers in their 20s and 30s take more senior roles in organizations, their greater exposure on social sites can make them more prone to investigations, said Steve Vale, a former Kroll managing director who is now a principal at Los Angeles-based Risk Solutions & Investigations.

During a recent background check on someone whose company was being acquired by a private equity firm -- a man in his mid- 30s -- Vale discovered numerous videos and online posts he created that raised additional questions and necessitated extra interviews with him.

“You just wouldn’t believe the amount of social networking this fellow did,” said Vale, who wouldn’t disclose the name of the client or the subject being investigated. “In the end, everybody was fine with it, but it begged a question you would never have posed just a short time ago.”

To contact the reporter on this story: Douglas MacMillan in San Francisco at Dmacmillan3@bloomberg.net;

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

Read more...

Warburg, Cinven Said to Weigh Delaying Ziggo IPO to Next Year

By Zijing Wu and Anne-Sylvaine Chassany - Sep 20, 2011 6:09 PM GMT+0700

Warburg Pincus LLC and Cinven Ltd., co-owners of Ziggo BV, may delay the cable-television company’s initial public offering to next year as global markets slump, said two people with knowledge of the matter.

No decision has been made, said the people, who declined to be identified as the process is private. The buyout firms had planned to sell 25 percent to 50 percent of the Dutch company in an IPO this year for as much as 1.5 billion euros ($2.1 billion), people with knowledge of the matter said in April.

European companies, including Siemens AG (SIE)’s Munich-based Osram lighting unit, shelved IPOs this year at almost twice the rate as the same period in 2010 as the sovereign debt crisis diminished the appeal of new stocks. Almost two-thirds of the companies that went public in western Europe this year are trading below their IPO prices, and the Stoxx Europe 600 Index has dropped 17 percent this year.

A decision hasn’t been made about a possible IPO, said Martijn Jonker, a spokesman for Ziggo. He declined to comment further.

Cinven, based in London, and Warburg each invested in predecessors of Ziggo more than five years ago. The Utrecht- based company had more than 3 million TV customers at the end of June, a 2.3 percent decline from a year earlier, according to a statement in July. The company, led by Chief Executive Officer Bernard Dijkhuizen, was formed in February 2007 from the merger of three cable operators.

Revenue climbed 7.6 percent in the second quarter to 363.7 million euros, as more customers opted for packages of multiple services, such as Internet, phone and TV. Ziggo has about 1.6 million high-speed Internet subscribers.

To contact the reporters on this story: Zijing Wu in London at zwu17@bloomberg.net; Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net

To contact the editor responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net

Read more...

Greek Default Specter Leaves Germans With Bill

By Aaron Kirchfeld, Nicholas Comfort and Oliver Suess - Sep 20, 2011 2:04 PM GMT+0700

Enlarge image

Hypo Real Estate, state-owned since being bailed out by the German government during the financial crisis, moved about 176 billion euros in assets to FMS on Sept. 30, 2010. Photographer: Guenter Schiffmann/Bloomberg

Enlarge image

The EAA, created in December 2009 to stabilize WestLB and the financial market, is winding down WestLB’s risky assets and non-strategic businesses with a total volume of approximately 85 billion euros as of June 2009. Photographer: Hannelore Foerster/Bloomberg

Germany’s bad banks, backed by the state to prevent the collapse of Hypo Real Estate Holding AG and WestLB AG during the credit crisis, would be the hardest hit in the event of a Greek default, leaving taxpayers to shoulder the bill a second time.

Hypo’s FMS Wertmanagement, with 8.76 billion euros ($12 billion) in Greek sovereign investments and loans, and WestLB’s Erste Abwicklungsanstalt, with 1.21 billion euros, bear more than half of German banks’ Greek debt, according to data compiled from company reports and statements. By contrast, Deutsche Bank AG (DBK) and Commerzbank AG (CBK), Germany’s two biggest lenders, hold a combined 3.35 billion euros.

The specter of a Greek insolvency was raised this month by members of Chancellor Angela Merkel’s coalition, when Economy Minister Philipp Roesler said there can be no “taboos” when considering action “to stabilize the euro in the short term.” The German government is considering a “Plan B” to help shield banks and insurers from losses if Greece defaults, three coalition officials said on Sept. 9.

“A Greek haircut or default will especially hit both state-owned bad banks,” said Klaus Fleischer, a professor for banking and finance at the University of Applied Sciences in Munich. “Their bills are ultimately being paid by the German taxpayer. Private lenders have an advantage because their exposure is comparatively small.”

Greek Bonds

Under Germany’s financial stability act, bad banks were created to take over bad loans and risky assets to help shield lenders from losses that threatened their solvency. The bad bank, which is backed by the government, winds down the non-strategic assets while the lender focuses on its central operating business.

Greek 10-year bonds are trading about 60 percent below face value. By comparison, financial companies including Deutsche Bank, Commerzbank and Allianz SE (ALV) agreed in July to write down the value of their Greek securities by an average 21 percent as part of a bond exchange and debt buyback program for the debt- stricken country. Some of the companies have made additional markdowns on their holdings.

As the biggest contributor to bailouts of Greece, Ireland and Portugal, Germany is trying to shield its own financial institutions from fallout from the sovereign debt crisis.

On Sept. 14, Germany joined France in signaling support for Greece with Merkel and French President Nicolas Sarkozy saying they’re “convinced” Greece will stay in the euro area.

Default Chance

Merkel’s coalition is showing a less united front, with Roesler’s comments prompting the chancellor to warn against allowing a Greek default because of the risk of contagion for other euro-area countries and recommend that “everybody should weigh their words very carefully,” in a radio interview.

Investors see a 94 percent chance Greece will default on its debt in the next five years, according to CMA, which compiles prices quoted by dealers in the privately negotiated credit-swaps market.

Moves to protect the banks are being discussed as Germany’s lower house, the Bundestag, prepares to vote Sept. 29 on amendments to the European Financial Stability Facility as part of a revised Greece rescue program laid out on July 21.

“With the EFSF we’re trying to build a fire break,” Michael Meister, the parliamentary finance spokesman for Merkel’s Christian Democratic Union, said in Berlin on Sept. 15. “If we don’t succeed in extinguishing the fire, then we must seek to protect those neighboring states. We’re working on that building site too. We are pursuing a double strategy.”

Bailed Out

Hypo Real Estate, state-owned since being bailed out by the German government during the financial crisis, moved about 176 billion euros in assets to FMS on Sept. 30, 2010. FMS, owned by Germany’s Federal Agency for Financial Market Stabilization, has the task of winding down the assets over a period of 10 years and of minimizing losses tied to the sale of the securities.

The EAA, created in December 2009 to stabilize WestLB and the financial market, is winding down WestLB’s risky assets and non-strategic businesses with a total volume of approximately 85 billion euros as of June 2009.

“It’s right to have a Plan B, especially as the market is increasingly convinced that it will be needed,” said Michael Seufert, a banking analyst at NordLB in Hannover. “The banks will prepare themselves as well, developing cushions for absorbing writedowns if they need them because the chance of a haircut is getting bigger.”

Risks

Germany’s biggest lenders and insurers had total risks related to the Greek government of about 17.5 billion euros at the end of June, according to data compiled by Bloomberg. The individual bank figures may vary slightly because of a mixture of sovereign debt, loans, writedowns and accounting differences.

According to consolidated banking statistics from the Bank for International Settlements, German banks’ “foreign claims and other potential exposures on an ultimate risk basis” vis-a- vis Greece, including both public and private sector, totaled $23.8 billion at the end of March. That included $14.1 billion to the public sector.

French lenders top the list of Greek creditors with $56.9 billion in exposure to private and public debt, according to Basel-based BIS. This includes $13.4 billion in government claims.

Credit Agricole SA (ACA) and Societe Generale (GLE) SA had their long- term credit ratings cut one level by Moody’s Investors Service on Sept. 14. BNP Paribas (BNP) SA, the largest French bank, had its Aa2 long-term rating kept on review for a possible cut.

More to Lose

Unlike Germany, French lenders haven’t set up bad banks to hold their Greek investments. France has more to lose in a Greek default because most risks are held by its private lenders and markets are already concerned about them, Professor Fleischer said.

Commerzbank, Germany’s second-biggest bank that was bailed out by the government in 2008, has reduced its Greek holdings to 2.2 billion euros while Deutsche Bank has 1.15 billion euros, according to company reports.

Commerzbank has paid back most of the more than 18 billion euros it received in state aid, though the German government still owns a 25 percent stake.

“A Greek default on its own would be manageable for Germany’s listed banks,” said Olaf Kayser, an analyst at Landesbank Baden-Wuerttemberg, who forecasts a haircut of about 60 percent in such a scenario. “It’ll be painful for the banks if Greece’s troubles spill over in the euro area.”

Germany’s banking industry is “very stable” after lenders raised capital levels, Michael Kemmer, general manager of the BdB Association of German Banks, said in an interview on Aug. 10. German banks’ capital ratios have increased to about 12.3 percent from 9.4 percent in October 2008, the Bundesbank said in May.

Following is a table showing the sovereign risk related to Greece of selected German banks and insurers. The data is based on company filings, some of which include bond holdings as well as the value of loans. Figures are in euros.

                      at June 30, 2011 FMS Wertmanagement    8.76 billion * Commerzbank           2.2 billion EAA                   1.21 billion * Deutsche Bank         1.15 billion Munich Re             811 million DZ Bank               793 million Allianz               782 million WGZ Bank              533 million KfW Group             250 million LB Berlin             230 million * NordLB                217 million LBBW                  131 million HSH Nordbank          108 million BayernLB              101 million Dekabank              100 million * Helaba                86 million * Hannover Re           Zero Hypo Real Estate      Zero  TOTAL                 17.46 billion 

* Nominal figure

To contact the reporters on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net; Oliver Suess in Munich at osuess@bloomberg.net

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

Read more...

Merkel Signals She’ll Dodge Breakup as Debt Crisis Squeezes Her Coalition

By Tony Czuczka - Sep 20, 2011 2:19 PM GMT+0700
Enlarge image

Germany's chancellor Angela Merkel. Photographer: Michele Tantussi/Bloomberg

German Chancellor Angela Merkel said she’ll hold the government together even after her coalition partner defied a call to stop talking down Greece and was flattened in a state election.

“We will continue our work as a government and I don’t think it’s become more difficult,” Merkel told reporters in Berlin yesterday. “The coalition is on the job and we have a whole lot of tasks ahead. All coalition partners know what their task is and will pursue them with great diligence.”

The task at hand was underscored as Standard & Poor’s downgraded Italy’s credit rating, sending the euro sliding. The government in Slovenia, a euro member since 2007 that Merkel visited three weeks ago, meanwhile faces a confidence vote today that it may not survive, threatening to delay approval of an overhaul of the European rescue fund that Merkel has backed.

Merkel and President Barack Obama discussed the euro-region crisis and financial-market developments in a phone call overnight, agreeing that “concerted action would be needed in the months ahead to address the current economic challenges and to assure global economic recovery,” according to a White House statement.

Domestically, Merkel is struggling with a weakened Free Democratic Party coalition partner that’s flirting with an anti- bailout stance to try and bolster its popularity. The FDP lost all its seats for the fifth time this year at a state election in Berlin two days ago after turning skepticism over euro-area rescues into a campaign theme. The main opposition Social Democrats and Greens demanded an end to Merkel’s coalition and offer to work with her on tackling the debt crisis.

Crisis Management

Open conflict in Merkel’s three-party alliance has erupted over the euro’s future and financial aid to Greece, stoking speculation that she may end the coalition midway through her second term. As 82 percent of respondents to a poll in this week’s Spiegel magazine said the government’s crisis management is “bad,” the FDP, or liberals, bore the brunt of voter anger.

Merkel is still unlikely to call elections before they are scheduled in 2013 or accept the Social Democrats’ offer to switch coalition partners, Gerd Langguth, a political scientist at Bonn University and Merkel biographer, said by phone.

‘Nervous and Incalculable’

“Merkel will want to keep the FDP on board” and avoid an early election that would be “a disaster” for her coalition parties, said Langguth. The FDP has lost so much support that it’s “very nervous and incalculable,” he said. “That’s the danger for Merkel. Still, I don’t expect the FDP to leave the government.”

Free Democratic Party backing nationally has collapsed to about 5 percent, the threshold for parliamentary seats, after a record 14.6 percent in the September 2009 election as the debt crisis forces a dilemma on the party of Hans-Dietrich Genscher, the foreign minister who helped forge German and European unity.

With a change of leadership failing to halt the decline, a group of lawmakers skeptical of bailouts is gaining traction within the party, threatening to disrupt parliamentary votes on the European rescue fund and its permanent successor from 2013, the European Stability Mechanism.

“The issue now is how long the liberals hold onto the coalition, whether they break it off ahead of time,” Nils Diederich, a politics professor at Berlin’s Free University, said in an interview. “But I don’t think they will.”

German ‘Duty’

Economy Minister Philipp Roesler, who took over the party chairmanship from Foreign Minister Guido Westerwelle in May, put an “orderly default” for Greece on the table last week, roiling financial markets and earning him rebukes from members of Merkel’s Christian Democrats.

Merkel responded by sharpening her arguments in defense of the euro, saying Germany has a “duty” to preserve the joint currency because it helps exports, makes the country richer and underpins Europe.

“Words must be weighed carefully in dealing with the euro crisis -- that applies to everyone,” Merkel said yesterday when asked about Roesler’s position. “We must have the resolve to master the debt crisis. We shouldn’t do anything with an incalculable outcome. That applies to one’s own party, the coalition partners and certainly also to the opposition.”

‘Collective Liability’

Bundesbank President Jens Weidmann, who was Merkel’s chief economic adviser until moving to the central bank in May, said the expansion of the rescue fund’s powers agreed by EU leaders in July risks increasing the burden on “financially strong countries.”

“These decisions are another big step toward a collective liability and reduce the disciplining function of capital markets without strengthening control and influence on national fiscal policies in return,” Weidmann, who also sits on the European Central Bank’s governing council, said in written testimony to the German parliament’s budget committee.

The FDP won just 1.8 percent of the vote in Berlin, the last of seven state elections this year that have seen the coalition parties punished over their handling of the debt crisis. The FDP result was its worst in the German capital since World War II, and compared with 8.9 percent for the Internet- freedom campaigning Pirate Party.

Playing on voter concern about the debt crisis backfired because voters saw it “as ‘calculated populism,’ and Germans don’t like that,” Langguth said. Even so, the Social Democrats’ offer to help Merkel out is “hot air.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Read more...

Netflix Move Sets Up Possible Sale or Spinoff

By Cliff Edwards - Sep 20, 2011 11:00 AM GMT+0700

Enlarge image

The Netflix Inc. website is displayed for a photograph in New York, U.S. Photographer: Scott Eells/Bloomberg

Netflix Inc. (NFLX)’s decision to split its DVD operation from the flagship streaming service isolates the shrinking mail-order business and paves the way for an eventual exit, analysts said.

A pure-play online business would be smaller and faster- growing, with more freedom to experiment, said George Askew, an analyst with Stifel Nicolaus & Co. in Baltimore.

“The separation of online streaming and DVDs will set the stage for spinning off or selling the DVD business in the future,” said Askew, who has a “hold” rating on the shares.

Netflix has plunged 31 percent the past three trading days as investors react to cuts in the Los Gatos, California-based company’s subscriber forecast and plans to separate the mail- order DVD business into a service called Qwikster. Netflix appears to be “actively trying to push people away” from the disc business, said Tony Wible, an analyst with Janney Montgomery Scott LLC in Philadelphia.

The DVD and streaming units have evolved differently, said Rich Greenfield, an analyst at BTIG LLC in New York.

“One business is global, one is domestic,” Greenfield said. “One is based on physical media and the other on digital. It’s about aligning the business up and down.”

Netflix said it has no plans to exit mail order and that the split reflects different growth trajectories. In a weekend blog post announcing the changes, Chief Executive Officer Reed Hastings apologized to customers over the handling of a July price change that boosted the monthly cost by 60 percent for subscribers who stream movies and rent DVDs by mail.

“It is clear from the feedback over the past two months that many members felt we lacked respect and humility in the way we announced the separation of DVD and streaming, and the price changes,” Hastings said.

Shares Fall

Netflix fell $11.44, or 7.4 percent, to $143.75 yesterday in Nasdaq Stock Market trading. The shares have declined 18 percent this year after more than tripling in 2010 and almost doubling in 2009.

Not everyone expects a sale. Wible, the Janney Montgomery analyst, puts the odds of a sale or spinoff at less than 50 percent, because of the difficulty finding a buyer or investors who would want stock in a mail-order DVD rental company.

The mail-order business is worth eight to 10 times earnings, or about $20 per Netflix share, said Wible, who has a longstanding sell recommendation on the shares.

“I think you’d find a lot of skepticism, like the Postal Service trying to do an IPO right now,” Wible said. “There are issues that are only going to get worse.”

Hastings wants to speed up consumers’ migration from physical rentals of discs to streaming of movies and TV shows. About 12 million of Netflix’s 25 million-plus customers use both the mail-order and streaming service.

Like Music, Like DVDs?

The Netflix CEO also suggested the mail-order business, while shrinking, has a long run ahead of it. On a July conference call, he estimated the DVD business may decline by 10 percent a year.

“What we do know is that we are going to maximize whatever opportunity is there,” Hastings said on July 25.

Netflix cut its third-quarter subscriber forecast on Sept. 15, two weeks after the price change took effect. The company trimmed its estimate of domestic DVD-only subscribers to 2.2 million from 3 million and said U.S. streaming-only users would total 9.8 million, down from the 10 million seen earlier.

With the split, subscribers who want to remain customers of both businesses will have to use different websites to order from each. Qwikster, which plans to offer video-game rentals, will also bill separately.

More Churn

The division could alienate users attracted to the convenience of a single site for finding DVDs and streaming, said Michael Olson, an analyst with Piper Jaffray Cos. in Minneapolis. He has an “overweight” rating on the shares.

Separating the two businesses may also signal Hollywood is gaining the upper hand in negotiating streaming rights, according to Bill Gurley, a partner with Benchmark Capital who blogs at abovethecrowd.com.

Given studios’ demands to be paid per user, Netflix probably separated the businesses so it wouldn’t have to pay for subscribers who don’t stream, Gurley said in a blog post.

The danger is that Netflix may weaken both businesses, especially after the company lost access to Sony Corp. (6758) movies from Starz, part of John Malone’s Liberty Media Corp. empire.

“If anything, the streaming service is probably weaker today than it was three months ago,” said Youssef Squali, an analyst at Jefferies & Co. with a “hold” rating on the stock.

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

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

Read more...

Ireland Recovers as Greece Sinks in Debt Market

By Dara Doyle - Sep 20, 2011 6:01 AM GMT+0700

Enlarge image

Enda Kenny, Ireland's prime minister. Photographer: Chris Ratcliffe/Bloomberg

Labros Chatzis, a plastic surgeon from Athens, settled in Dublin 11 years ago because he found the Irish similar to the Greeks. Now it’s their differences that are keeping him there as his homeland sinks deeper into crisis.

The 55-year-old says he’s more confident about the future of his adopted nation because Irish Prime Minister Enda Kenny is meeting the demands of an international bailout, while Greek premier George Papandreou is scrambling to raise money as the economy slumps more than forecast.

“Ireland is on the right track, but I’m very pessimistic about Greece,” said Chatzis, who is also president of the Hellenic Community of Ireland. “Kenny has a strong mandate and the power to do what needs to be done. Papandreou is very weak, nobody listens to him, even his own party oppose him.”

Six months after Kenny, 60, came to power by winning the most seats in his party’s history, investors as well as voters are supporting that view. While concern that Greece may default reignites speculation about the fate of the euro, Irish bonds delivered the best returns in the world the past three months.

The International Monetary Fund, which contributed to Ireland’s 85 billion-euro ($116 billion) rescue package last November, said Sept. 7 that it’s “very impressed” with Kenny’s government efforts to implement its austerity program.

“Somehow, through luck or brilliant strategy, or some combination of both, Ireland has put clear blue water between it and Greece, primarily by being seen to deliver,” Eoin Fahy, chief economist at Kleinwort Benson Investors in Dublin, said in a telephone interview. “I would give the government a minimum of a B-plus grade.”

Market Reward

Irish bonds with a duration of more than a year returned 17.4 percent in dollar terms since June 17, the most of the 26 government debt markets tracked in indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The yield on Irish two-year government bonds was 9.38 percent yesterday, down from an all-time high of 23.2 percent on July 18. Greek bonds plummeted, with the two-year yield more than doubling to a record 76.73 percent in the same period. It was down to 61.4 percent yesterday.

While the difference in yield between the two widened to a record 67.3 percentage points on Sept. 13, the unraveling of Greece threatens Ireland’s ambition of restoring the nation’s economic sovereignty by 2016, the 100th anniversary of the Irish uprising against Britain.

Kenny plans to narrow the budget deficit to 3 percent of gross domestic product by 2015 and start persuading investors to buy bonds again in the public markets as early as next year.

‘Dangerous Precedent’

“A Greek default could set a dangerous precedent and revive fears that Irish bonds are a similar risk,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

European Union and IMF inspectors spoke with Greek Finance Minister Evangelos Venizelos yesterday and will do so again today to judge whether the country was eligible for an aid payment due next month. Kevin Cardiff, the Irish Finance Ministry’s secretary general, told a parliamentary hearing on Sept. 15 that “a Greek cough is also an Irish cough.”

Kenny inherited an economy that had shrunk three years in a row after a real-estate boom collapsed in 2008. Unemployment stood at fifteen-year high of 14.8 percent in November 2010 when Europe’s worst banking crisis forced the state to seek an international rescue from the EU and IMF. Joblessness was 4.8 percent three years earlier.

Winning more favorable terms on the loans in that bailout has been Kenny’s biggest success.

Gallic Spat

In July, after what he earlier termed a Gallic spat with French President Nicolas Sarkozy over tax rates, Ireland was given more time to repay the debt and a 2 percentage-point cut in its interest rate. The reductions are worth about 1.1 billion euros a year to Ireland, the Finance Ministry said.

What’s more, a line has been drawn under the banking crisis, after the government pumped another 17 billion euros into the financial industry.

Billionaire investor Wilbur Ross, chairman of WL Ross & Co., was part of a group that in July agreed to take a 34.9 percent stake in Bank of Ireland Plc, the biggest lender.

“Ireland will be the first of the euro countries to recover because they really bit the bullet,” Ross, said in an Aug. 30 radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “Once they get through all that, the fundamental advantages of Ireland are intact.”

Larger Majority

The country is meeting targets set for it by the EU, IMF and European Central Bank as Kenny’s government pushes austerity measures through parliament by controlling 113 seats in the 166- seat legislature. By contrast, Papandreou’s four-seat majority imperils the implementation of Greece’s bailout package.

Chatzis, the plastic surgeon, said he moved to Ireland in 2000 in part because the Irish were similar to Greeks in that “they both like to talk and have fun.”

The difference is “in Greece, the black economy thrives, many people avoid taxes, and you can get one price with a receipt and once price without,” he said. “Here, there is respect for the system. People will do what it takes.”

In six separate packages, the Irish have achieved 21 billion euros worth of savings since July 2008 by reducing pay for public servants, lowering welfare payments and introducing taxes. About 15 billion euros of the cuts came from initiatives announced by the previous government, led by Brian Cowen, before it lost the election in February.

Following Cowen

There’s at least another 3.6 billion euros of cost savings to come this year, testing Kenny’s popularity, which has soared even as his Fine Gael-led government has largely followed the fiscal policies of Cowen’s Fianna Fail administration.

“Kenny is doing a better job than Cowen, but that wouldn’t be hard,” said Brian Doolan, 66, retired law lecturer. “Look around, empty shops and shops closed. I remember the 1950s when it was hopelessness and emigration. I wonder if it hasn’t gone back to that.”

Kenny has simply stuck with Cowen’s policies, said Micheal Martin, the former foreign minister and now leader of Fianna Fail, in a Sept. 12 speech to his parliamentary party.

“The budgetary, banking and public service policies it has been implementing are overwhelmingly those which its members condemned and voted against as recently as January,” he said.

Even with the skepticism, Kenny’s satisfaction rating has climbed 16 percentage points to 53 percent since February, according to a poll published by the Irish Times on July 20.

Goodwill Boost

It’s the best support Kenny has drawn since taking over the leadership of Fine Gael nine years ago and makes him the nation’s most popular political leader. Before the election, his public support consistently ranked behind his party, prompting his deputy to unsuccessfully challenge Kenny in June 2010.

The government “is benefiting from the goodwill which attaches to any new government,” said Martin, 51. “This is natural, but it will only last for so long.”

Kenny’s instinct for symbolic gestures play well with voters. In his first days in office, he took a pay cut and walked to his office, having scrapped most ministerial cars. He’s been pictured walking the hills of his native Mayo in the west of Ireland, and taking part in a 112-mile charity cycle around the Ring of Kerry.

He’s also drawn plaudits in newspaper editorials for his attack on the Vatican’s handling of sex abuse allegations. In the sharpest language an Irish leader has used against the church, Kenny said in July that the Vatican’s handling of the scandals has been dominated by “elitism and narcissism.”

‘Breathtaking’

The speech “was one for which he will always be remembered,” the Irish Independent said on July 21. New York Times columnist Maureen Dowd two days later called Kenny’s actions “breathtaking.”

On the economic front, Ireland’s GDP will increase this year for the first time since 2007, the IMF said on Sept. 7. In Greece, Finance Minister Venizelos expects the country’s economy to shrink by about 5 percent this year, worse than the June estimate of 3.8 percent from the EU and IMF, and a deeper contraction than in the past two years.

Chatzis said a friend in Athens who runs his own publishing company is owed money by a university client and frets that he may never get paid.

“Greece could be bankrupt by Christmas,” said Chatzis, adding that his own business is up this year as more people seek cosmetic surgery. “You don’t spend 5,000 euros on a nose job unless you’re confident in the future.”

To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

To contact the editor responsible for this story: Tim Quinson at tquinson@bloomberg.net

Read more...

European Stocks Advance on Greece Debt Talks

By Peter Levring - Sep 20, 2011 6:51 PM GMT+0700

Enlarge image

A stockbroker monitors stock prices on his computer screens at Shore Capital Group Ltd. in London. Photographer: Simon Dawson/Bloomberg

Play Video

Sept. 20 (Bloomberg) -- Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, talks about Standard & Poor’s downgrade of Italy’s credit rating, and gold and stocks. Cameron Watt speaks with Susan Li on Bloomberg Television's "First Up. (Source: Bloomberg)

European stocks climbed as Greece described its debt talks with the European Union and the International Monetary Fund as “productive” and investors speculated the Federal Reserve will provide more stimulus. U.S. futures rose, while Asian shares dropped.

SAP AG (SAP) gained 2.1 percent after a U.S. judge asked Oracle Corp. to consider revising its request for a review of a court order overturning a damage award against the German software maker. A gauge of technology companies gained 1.2 percent. EON AG and RWE AG (RWE) both climbed more than 3 percent after a court suspended a nuclear fuel tax.

The Stoxx Europe 600 Index rose 1.3 percent to 227.8 at 12:49 p.m. in London. The gauge slid as much as 0.6 percent in the first half hour of trading after Italy had its credit rating cut by Standard & Poor’s, fueling concern that Europe’s debt crisis was worsening. S&P 500 Index futures expiring in December rose 0.8 percent, while the MSCI Asia Pacific Index slipped 0.6 percent.

“The S&P move on Italy was expected and European shares have been underpriced versus U.S. stocks,” said Henrik Henriksen, chief investment strategist at PFA Pension A/S, which manages $45 billion, in Copenhagen. “Investors may be beginning to pick up equities ahead of a possible catch up with the S&P 500.”

The benchmark Stoxx 600 traded at 9.5 times the estimated earnings of its constituent companies, while the S&P 500 closed yesterday with a price-earnings ratio of 12.1 times projected earnings. The Stoxx 600 has fallen 22 percent from this year’s peak on Feb. 17 as the region’s mounting sovereign-debt crisis added to concern that the economic recovery is at risk.

‘Impressive Fiscal Consolidation’

Greece said Finance Minister Evangelos Venizelos held “productive” discussions with European officials yesterday about the country’s bailout. Prime Minister George Papandreou’s government will hold another call today as European leaders squabble over the terms of a July agreement and the prospect that they will be forced to channel more money to keep Greece in the currency union.

The IMF said that the program carried out by the government had produced “impressive fiscal consolidation,” while EU economics spokesman Amadeu Altafaj told reporters in Brussels yesterday that the European Commission has not demanded more of Greece than was agreed to in the international aid program for the country.

“The only thing that is on the table is full compliance with the agreed targets. No more, no less.”

Greek Lenders Gain

Italy had its credit rating cut to A from A+ by S&P on concern that weakening economic growth and a “fragile” government mean the nation won’t be able to reduce the euro area’s second-largest debt burden.

S&P said Italy’s net general government debt is the highest among A-rated sovereigns, and the company expects it to peak later and at a higher level than it had estimated.

Societe Generale (GLE) SA, which was downgraded by Moody’s on Sept. 14, sank 3.7 percent to 17.04 euros and BNP Paribas (BNP) SA declined 3.3 percent to 25.76 euros.

Federal Reserve officials tomorrow will probably announce a program for monetary easing that will do little to help 14 million unemployed Americans find work, according to economists in a Bloomberg News survey.

Federal Reserve Meeting

The Federal Open Market Committee will decide to replace short-term Treasuries in its $1.65 trillion portfolio with long- term bonds, according to 71 percent of 42 surveyed economists. The move, known as “Operation Twist” for its goal to bend the yield curve, will probably fail to reduce the 9.1 percent unemployment rate, 61 percent of the economists said.

German investor confidence fell less in September than analysts had estimated. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to minus 43.3 from minus 37.6 in August. Economists had projected a drop to minus 45, according to the median of 37 estimates in a Bloomberg News survey.

SAP, the world’s biggest maker of business software, rose 2.1 percent to 37.27 euros. A U.S. federal judge asked Oracle Corp. to consider revising its request to seek a review of a court order overturning a $1.3 billion damage award against SAP.

SAP Shares Gain

U.S. District Judge Phyllis Hamilton in Oakland, California, on Sept. 1 granted SAP’s motion to throw out the copyright-infringement verdict against it. She ruled that SAP should get a new trial for damages if Oracle rejects her decision to reduce the amount to $272 million, which she said should be the maximum in damages based on the evidence at trial.

Alcatel-Lucent climbed 3.7 percent to 2.41 euros after UBS AG analysts, headed by Gareth Jenkins, said the French telecommunications equipment maker’s forecasts appeared “reasonable” and its details on cost savings “encouraging.”

Germany’s biggest utilities RWE and EON jumped 3.2 percent to 25.79 euros and 3.8 percent to 15.75 euros, respectively, as a Hamburg court suspended a federal tax on companies that use nuclear fuel. The court said that the government should reimburse an unnamed power plant operator, which asked that the tax be suspended, the 96 million euros ($131 million) it had paid on the levy.

NKT Holding A/S, the Danish maker of industrial vacuum cleaners and power cables, surged 9 percent to 208.40 kroner after saying it may sell its flexible pipeline joint venture with Norwegian offshore engineering group Subsea 7 SA. Subsea 7 rose 2.6 percent to 120 kroner.

Zodiac Aerospace (ZC) Soars

Zodiac Aerospace rallied 5.5 percent to 57.94 euros, the biggest gain on the Stoxx 600, after announcing that annual sales climbed 38 percent to 2.75 billion euros in the year ended August. The company confirmed its full-year current operating margin target of more than 13 percent. The company, which sells airplane equipment, said that 11 percent of the full-year sales growth came from recent acquisitions.

Deutsche Lufthansa AG (LHA), Europe’ second-biggest airline, declined 5.7 percent to 10.19 euros after saying operating profit in 2011 will fall short of last year’s 876 million euros. International Consolidated Airlines Group SA, the owner of British Airways and Spain’s Iberia, declined 2.1 percent to 150.9 pence, while Air France-KLM (AF) fell 3.3 percent to 5.76 euros.

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

Read more...

U.S. Index Futures Climb on Fed Speculation

By Adam Haigh - Sep 20, 2011 6:42 PM GMT+0700

Play Video

Sept. 20 (Bloomberg) -- Nick Nelson, a strategist at UBS AG, discusses factors influencing equity valuations, including the risk of recession. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

Play Video

Sept. 20 (Bloomberg) -- Komal Sri-Kumar, chief global strategist at TCW Group Inc., talks about Standard & Poor’s downgrade of Italy’s credit rating, the outlook for the European economy and stocks. Sri-Kumar speaks from Los Angeles with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

U.S. stock futures rose, signaling the market may recoup some of yesterday’s drop, as speculation the Federal Reserve will provide more stimulus for the ailing economy outweighed a downgrade of Italy’s credit rating.

Berkshire Hathaway Inc., JPMorgan Chase & Co. and Oracle Corp. climbed at least 1.1 percent to lead gains among the largest U.S. companies in early New York trading.

Contracts on the Standard & Poor’s 500 Index expiring in December gained 0.6 percent to 1,205.3 as of 7:40 a.m. in New York, after earlier losing as much as 1 percent. Dow Jones Industrial Average futures advanced 71 points, or 0.6 percent, to 11,394.

Equities slumped yesterday, halting a five-day rally for the S&P 500, amid concern Greece will fail to qualify for more financial aid needed to avoid default. The 8.8 percent slide in the gauge since the end of June has left it trading at 12.1 times estimated earnings, near the cheapest level since the bull market began in 2009, according to data compiled by Bloomberg.

“Valuations are pricing in a recession that we don’t think will happen,” Nick Nelson, a London-based equity strategist at UBS AG, said in a Bloomberg Television interview. “Equities do look quite attractive, but it’s hard to see how they rally until you have some relief on the politics and the macro side.”

Fed officials will probably announce a new program for monetary easing tomorrow, according to economists in a Bloomberg News survey.

‘Operation Twist’

The Federal Open Market Committee will decide to replace short-term Treasuries in its $1.65 trillion portfolio with long- term bonds, according to 71 percent of 42 surveyed economists. The move, known as “Operation Twist,” will probably fail to reduce the 9.1 percent unemployment rate, 61 percent of the economists said.

S&P cut Italy’s credit rating to A from A+ on concern that weakening economic growth and a “fragile” government mean the nation won’t be able to reduce the euro area’s second-largest debt burden.

Builders probably began work on fewer homes in August, highlighting an industry that’s languishing more than two years into the U.S. economic recovery, economists forecast before a Commerce Department report due at 8:30 a.m. in Washington today.

Housing starts fell 2.3 percent to a three-month low 590,000 annual rate, according to the median estimate of 78 economists surveyed by Bloomberg News. Building permits, a proxy for future construction, may have also dropped for a second month.

Carbonite Inc. may move after JPMorgan Chase & Co., which helped run its initial public offering in August, advised buying shares of the computer-services company. Bank of America Corp., William Blair and Oppenheimer & Co. analysts also recommended the shares.

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

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

Read more...

UBS Board to Meet in Singapore to Review Loss

UBS AG (UBSN)’s directors will meet in Singapore, home to the Swiss bank’s biggest shareholder, this week following the disclosure of a $2.3 billion loss from unauthorized trading, according to two people with knowledge of the situation.

The board of Switzerland’s largest bank will review the loss and possible management changes, said one of the people, who declined to be named because the gathering is private. The regular meeting was scheduled before the loss emerged, and coincides with the Singapore Formula One Grand Prix, where the firm will be entertaining clients.

The Government of Singapore Investment Corp., a sovereign wealth fund known as GIC, is the company’s largest investor. The fund, which invested in UBS before the 2008 financial crisis, said it offset losses on that stake with other investments.

Carsten Kengeter, UBS’s head of investment banking, told employees the Zurich-based lender is “doing everything” to address shortcomings in its risk controls.

“We all share a sense of anger and frustration,” he wrote in a memo to employees as the bank said the size of the loss rose by $300 million. “We are doing everything in our power to address the frameworks, practices and procedures that should have worked better and strengthen their enforcement.”

Executive Pressure

Kengeter, who joined UBS in 2008 to rebuild its fixed income unit after it racked up record losses during the credit crisis, is among top executives that may face pressure to step down after the loss exposed flaws in the bank’s risk controls.

Chief Executive Officer Oswald Gruebel, 67, who was recruited out of retirement in 2009 to help turn around UBS after record losses and a U.S. tax scandal, has said he will stay. Earlier in his career, he earned the moniker “Saint Ossie” in Switzerland for helping to restore Credit Suisse Group AG’s profit and reputation, and for trading acumen that included spotting the subprime debacle early.

“It is very difficult to build and maintain a system which protects us effectively against every possible likelihood of attack, but we will not rest until we have controls that are as watertight as possible,” Kengeter, 44, said in the memo, which was obtained by Bloomberg News. “Continued vigilance will be key to ensuring we avoid future failures.”

Shares Fall

A spokesman for UBS in London confirmed the contents of the memo. The stock fell 1.8 percent to 10.07 francs in Swiss trading. The shares dropped 11 percent to 9.75 francs on the day the bank announced the loss, the biggest decline since March 2009, before rebounding by 5.2 percent on Sept. 16.

The loss, first estimated on Sept. 15 at $2 billion, came from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, the Zurich-based bank said in a statement on Sept. 18.

“The positions taken were within the normal business flow of a large global equity trading house as part of a properly hedged portfolio,” UBS said in the statement. The magnitude of the risk was masked by “fictitious positions,” it said.

UBS made the disclosures two days after London police 2charged a 31-year-old trader with fraud and false accounting.

GIC, which manages more than $100 billion of Singapore’s reserves, said it has fully recovered the total value of its portfolio since the financial crisis. UBS shares have lost about half their value since Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008.

Bad Timing

“In retrospect, as we had said in late 2008, the timing for the investment could have been better,” GIC said in a statement late yesterday in response to a letter to Today newspaper by a reader. “On the other hand, GIC also made good investment decisions during the same period.”

GIC will keep its investment in the Swiss bank “for many years to come” and will only consider selling if there are attractive offers Tony Tan, then deputy chairman of the Singapore sovereign wealth fund, said in a Jan. 29 interview. Tan has left GIC and was sworn in as Singapore's seventh president on Sept. 1.

The trading incident at UBS “is a reminder that things can still happen though they’re in it for the long term,” said Song Seng Wun, a Singapore-based economist at CIMB Research Pte. “Investing in a key financial institution like UBS will pay off, but it will be bumpy for a few years.”

To contact the reporters on this story: Ambereen Choudhury in London at achoudhury@bloomberg.net; Giles Broom in Geneva at gbroom@bloomberg.net

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

Read more...

‘Buffett Rule’ for Millionaire Tax Seen as Easier Said Than Done

By Richard Rubin - Sep 20, 2011 11:00 AM GMT+0700

Enlarge image

President Obama called for $1.5 trillion in tax increases over the next decade to help trim the deficit, saying U.S. prosperity depends on paying down the federal debt. Photographer: Joshua Roberts/Bloomberg

Turning the “Buffett rule” proposed yesterday by President Barack Obama from a political concept into real-world tax policy aimed at the highest-earning U.S. households will prove logistically and mathematically difficult.

The concept, named for billionaire investor Warren Buffett, would require Americans earning more than $1 million a year to pay at least the same tax rate as middle-class households. Constructing such a rule would be tricky because high earners aren’t the only taxpayers benefiting from breaks; many middle- income families use deductions, credits and exemptions to drive their rates below the 17.4 percent that Buffett says he pays.

For now, the Buffett rule is less of a concrete legislative proposal and more of a political talking point that has elicited Republican cries of “class warfare.” Democrats defended the idea and urged Congress to adopt it in designing a new tax system.

“We’re not going to give the Congress a detailed proposal for how to meet that principle because we think there are a bunch of different ways to do that,” said Treasury Secretary Timothy Geithner, adding that the details of the rule would depend on the rest of the structure of a revamped tax code.

Charles Schumer of New York, the third-ranking Democrat in the Senate, said on a conference call with reporters yesterday that the proposal would have broad support in his party and would be a “game-changer” in the tax debate.

‘Defining Principle’

“It really works well as a defining principle, but I think it works even better as an actual piece of legislation,” said Schumer, a member of the tax-writing Finance Committee. “Let’s draft the language and get it scored. Let’s put it on the floor and let’s have a vote.”

It’s undetermined how much money the proposal would raise if applied to the current tax code or how many people would be affected. Senate Majority Leader Harry Reid, a Nevada Democrat, said in a floor speech yesterday that 22,000 Americans have incomes exceeding $1 million and pay less than 15 percent of their income in taxes.

“Middle-class families shouldn’t pay higher taxes than millionaires and billionaires,” Obama said at the White House yesterday. “Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it.”

The example that Obama gave during his speech illustrated the difficulty of applying the Buffett principle in practice. He said that a teacher earning $50,000 shouldn’t pay a higher tax rate than an investor making $50 million.

Deductions and Exemptions

Obama’s example isn’t as straightforward as it appears. Under current law, that teacher would have a maximum taxable income of $40,500, after subtracting the standard deduction and personal exemption. The teacher’s federal income tax would be $6,250, or 12.5 percent of the $50,000 income.

The teacher’s tax rate, though, would be higher if payroll taxes were included. This year, employees at that income level pay 6.65 percent of their wages, and employers pay 8.65 percent.

The middle-income tax rate would be lower if the teacher took advantage of the specific breaks available to middle-income taxpayers: those for retirement savings contributions and health-care flexible spending arrangements, and deductions for student loan interest and out-of-pocket expenses of educators.

The tax rate would be even lower if the teacher were married or had children, which would allow for a larger standard deduction, personal exemptions and a child tax credit. A married couple with two children can earn as much as $45,776 without paying income taxes this year, according to the Tax Policy Center, a nonpartisan Washington research group.

Complicated Arithmetic

As a result of those complexities, lawmakers trying to write a Buffett rule would have to make some choices about how to define a middle-income family’s earnings and tax rate.

They also face complicated arithmetic for higher-income taxpayers. Assuming the millionaire investor received all of his or her income from long-term capital gains and dividends, the tax rate would be 15 percent, the preferential rate for investment income.

That rate could be much lower if the investor took itemized deductions for state and local taxes, mortgage interest and charitable contributions. It would be higher if the investor also had some wage income, which would be subject to a 35 percent top rate and at least some payroll taxes.

Writing a Buffett rule into law would require defining income and setting a minimum rate for it, said Roberton Williams, a senior fellow affiliated with the Tax Policy Center.

“Every time you set up something like this, you’re opening the door for the tax lawyers to come in and get around the attempt to raise revenues,” Williams said.

Buffett’s Tax Bill

Buffett, the 81-year-old chairman and chief executive officer of Berkshire Hathaway Inc., said his federal tax bill last year, or the income tax he paid and payroll taxes paid by him and on his behalf, was $6.93 million.

“That sounds like a lot of money,” Buffett wrote in an essay calling for higher taxes on millionaires in The New York Times last month. “But what I paid was only 17.4 percent of my taxable income -- and that’s actually a lower percentage than was paid by any of the other 20 people in our office.”

Several bipartisan groups, including the fiscal commission appointed by Obama last year, have proposed eliminating the preferential tax rates for capital gains as part of a tax overhaul that also would lower rates on wage income.

That approach, rather than the calculation of a minimum tax, might be the most straightforward way to satisfy the Buffett principle, Williams said.

Preferential Rate

Alan Viard, a resident scholar at the American Enterprise Institute, a Washington group that favors smaller government, disputed the idea that most millionaires pay lower tax rates than the middle class.

“One reason you have a preferential rate today for investments is because they’re already taxed at the corporate level,” he said. “You have to consider both levels of tax.”

The Buffett rule would essentially operate as a type of alternative minimum tax.

The current AMT came into its current form in the 1986 tax- code overhaul. It requires taxpayers to compare their tax liability under the regular tax code with their liability under the AMT. Because the AMT doesn’t allow taxpayers the full benefits of the state and local tax deduction or personal exemptions, people who have large families or who live in high- tax states tend to be disproportionately affected.

Non-Payers

Congressional efforts to prevent people from legally avoiding all taxes haven’t been successful. In 2008, the most recent year for which data is available, 18,783 people filed U.S. tax returns with adjusted gross incomes of at least $200,000 and owed no taxes. That represented 0.43 percent of high-income taxpayers, the biggest non-payer percentage in an Internal Revenue Service study that dates to 1977.

Lawmakers could satisfy the Buffett rule by disallowing the lower rates under the existing AMT, with a top rate of 28 percent, said Jeff Hamond, a former Schumer tax aide who is now a vice president at Van Scoyoc Associates, a Washington lobbying firm.

“That wouldn’t be simple,” he said. “But it could be a placeholder until comprehensive tax reform passes, and the richest Americans would definitely pay a higher effective rate than the middle class.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

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

Read more...

Corporate Jets Face Flight Fee in Obama Plan

Enlarge image

The interior of a Raytheon Hawker 800, used by Blue Star Jets, is seen at Teeterboro airport in New Jersey on Aug. 10, 2011. Photographer: Scott Eells/Bloomberg

President Barack Obama’s administration proposed a $100 per-flight fee on corporate jets and other turbine-powered planes that use the U.S. air-traffic system.

The fee would raise an estimated $11 billion over 10 years, according to the president’s recommendations to the 12-member congressional committee charged with finding ways to trim the deficit. The fee is aimed at private aircraft, which currently don’t pay their fair share of costs of operating the aviation system, the administration said today.

About two-thirds of the air-traffic system is paid for by aviation excise taxes, including levies on airline tickets and on fuel. Last year these taxes raised $10.8 billion, according to the Department of Transportation.

There is a disparity between what airlines and their passengers pay into the system and what users of private aircraft pay, the plan said.

An airline flight from Los Angeles to San Francisco would generate $1,300 to $2,000 in taxes, depending on the number of passengers and what they paid for tickets. A private jet, which requires almost the same services from air-traffic controllers, would pay about $60 in fuel taxes, the plan said.

“General aviation users currently pay a fuel tax, but this revenue does not cover their fair-share use of air traffic services,” the plan said.

Opposition Mounts

A coalition of nine U.S. associations representing users and manufacturers of corporate and private aircraft issued a joint statement “expressing our unified opposition” to the proposal.

“Mr. President, many foreign countries have imposed per flight charges on general aviation and the results have been devastating,” the e-mail statement said. “Please do not go down the dangerous path and cost jobs in our community.”

General-aviation pilots pay their fair share of fuel taxes and a new fee would create “a costly new federal collection bureaucracy,” the groups said.

The groups that issued the letter include the Washington- based General Aviation Manufacturers Association, whose members include General Dynamics Corp. (GD)’s Gulfstream and Textron Inc. (TXT)’s Cessna; the Washington-based National Business Aviation Association, with members including PepsiCo Inc. and Humana Inc. (HUM), the Aircraft Owners and Pilots Association, based in Frederick, Maryland, which has more than 400,000 individual members; and the Experimental Aircraft Association in Oshkosh, Wisconsin.

NetJets Reacts

Berkshire Hathaway Inc. (BRK/A)’s NetJets, the largest U.S. firm selling fractional shares of corporate jets, issued a statement from Chairman and Chief Executive Jordan Hansell agreeing with the trade groups. NetJets, based in Columbus, Ohio, has more than 7,000 customers worldwide.

A similar proposal introduced by President George W. Bush’s administration was defeated in Congress after opposition by the same groups.

That plan, which was introduced in 2007, was supported by the airline industry, which argued that corporate aircraft owners should pay a greater share. This time, the Air Transport Association, a Washington, D.C.-based group representing airlines including Delta Air Lines Inc. (DAL), has joined the opposition.

“We oppose any new taxes on airlines or their passengers,” ATA President Nicholas Calio said in a statement.

The Obama plan is aimed at pilots who fly under the supervision of air-traffic controllers.

Nearly all small private, piston-powered planes wouldn’t have to pay the fee, the proposal said. It would also exempt aircraft operated by the military or other government agencies, air ambulances and any flight that doesn’t require air-traffic guidance.

To contact the reporter on this story: Alan Levin in Washington at alevin24@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

Read more...

Asia Stocks, U.S. Futures Drop on Italy Concern

Asian stocks and U.S. equity-index futures dropped, while the euro weakened for a third day after Italy’s credit rating was lowered at Standard & Poor’s, fueling concern Europe’s sovereign-debt crisis will worsen.

The MSCI Asia Pacific Index slipped 1.1 percent as of 9:24 a.m. in Tokyo. Standard & Poor’s 500 Index futures retreated 0.8 percent. Europe’s shared currency dropped 0.4 percent to $1.3627 and slid 0.4 percent to 104.45 yen. The Australian dollar weakened before the release of minutes from the central bank’s last policy meeting. Oil and copper retreated for a third day, while wheat climbed for the first time in four days.

Italy was lowered to A from A+ on concern that weaker growth and a “fragile” government mean the country won’t be able to reduce the euro-region’s second-largest debt load, S&P said. Greece will hold another call tonight with its main creditors after a “productive” round of talks aimed at staving off default. The U.S. Federal Reserve will start a two-day meeting today amid data forecast to show that housing starts and building permits declined.

“The Italian downgrade will just renew concerns about sovereign-debt issues spreading from Greece to Italy and Spain,” said Belinda Allen, a Sydney-based senior investment analyst at Colonial First State Global Asset Management, which oversees $150 billion. “The focus continues to be on making sure Greece has the liquidity to survive. There is no easy solution.”

About seven shares declined for every two that climbed on MSCI’s Asia Pacific Index. The Nikkei 225 Stock Average sank 1.5 percent in Japan, where financial markets were closed yesterday for a holiday. South Korea’s Kospi Index slid 1.2 percent, while Australia’s S&P/ASX 200 Index lost 0.5 percent.

Futures expiring in December indicate the S&P 500 may extend yesterday’s 1 percent drop. Equities had trimmed losses as Greece’s Finance Ministry said it had a “productive and substantive discussion” with international officials who will determine if the country gets more bailout funds.

President Barack Obama called for $1.5 trillion in tax increases over the next decade to help trim the deficit.

To contact the reporters on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

Read more...

‘Millionaire Tax’ Seen Easier Said Than Done

Enlarge image

President Obama called for $1.5 trillion in tax increases over the next decade to help trim the deficit, saying U.S. prosperity depends on paying down the federal debt. Photographer: Joshua Roberts/Bloomberg

Play Video

Sept. 19 (Bloomberg) -- U.S. President Barack Obama, House Budget Committee Chairman Paul Ryan, a Wisconsin Republican, and Martin Feldstein, a professor of economics at Harvard University, offer their views on Obama's proposal to reduce the federal budget deficit. This report also contains comments from U.S. Treasury Secretary Timothy Geithner; Jack Lew, director of the White House Office of Management and Budget; Grover Norquist, president of Americans for Tax Reform, and Stuart Eizenstat, a partner at Covington & Burling LLP. (Source: Bloomberg)

The concept, named for billionaire investor Warren Buffett, would require Americans earning more than $1 million a year to pay at least the same tax rate as middle-class households. Such a rule would be problematical to craft or ineffectual because higher earners aren’t the only taxpayers benefiting from breaks; many middle-income families take advantage of deductions and credits that drive their rates below the 17.4 percent that Buffett pays.

Buffett has said he and other Americans earning more than $1 million a year should pay more in taxes than they currently do. The administration wants to include Buffett’s concept in a broad overhaul of the U.S. tax code. Obama didn’t include specific language in the proposal he released today.

“We’re not going to give the Congress a detailed proposal for how to meet that principle because we think there are a bunch of different ways to do that,” said Treasury Secretary Timothy Geithner, adding that the details of the rule would depend on the rest of the structure of a new tax system.

‘Game-Changer’

Charles Schumer of New York, the third-ranking Democrat in the Senate, said on a conference call with reporters today that the proposal would have broad support in his party and would be a “game-changer” in the tax debate.

“It really works well as a defining principle, but I think it works even better as an actual piece of legislation,” Schumer, a member of the tax-writing Finance Committee, said. “Let’s draft the language and get it scored. Let’s put it on the floor and let’s have a vote.”

The example that Obama gave during his speech today illustrated the difficulty of applying the Buffett principle in practice. He said that a teacher earning $50,000 shouldn’t pay a higher tax rate than an investor making $50 million.

“I reject the idea that asking a hedge-fund manager to pay the same tax rate as a plumber or a teacher is class warfare,” Obama said at the White House. “It’s just the right thing to do.”

That example isn’t as straightforward as it appears. Under current law, that teacher would have a maximum taxable income of $40,500, after subtracting the standard deduction and personal exemption. The teacher’s federal income tax would be $6,250, or 12.5 percent of the $50,000 income.

Specific Breaks

The teacher’s tax rate, though, would be higher if payroll taxes were included. It would be lower if the teacher took advantage of the specific breaks available to middle-income taxpayers: those for retirement savings contributions and health-care flexible spending arrangements, and deductions for student loan interest and out-of-pocket expenses of educators.

The tax rate would be even lower if the teacher were married or had children, which would allow for a larger standard deduction, personal exemptions and a child tax credit. A married couple with two children can earn as much as $45,776 without paying income taxes this year, according to the Tax Policy Center, a nonpartisan Washington research group.

Making Choices

As a result of those complexities, lawmakers trying to write a Buffett rule would have to make some choices about how to measure a middle-income family’s earnings and tax rate. They also face complicated arithmetic for higher-income taxpayers.

Assuming the millionaire investor received all of his or her income from long-term capital gains and dividends, the tax rate would be 15 percent, the preferential rate for investment income.

That rate could be much lower if the investor took itemized deductions for state and local taxes, mortgage interest and charitable contributions. It would be higher if the investor also had some wage income.

Writing a Buffett rule into law would require defining income and setting a minimum rate for it, said Roberton Williams, a senior fellow affiliated with the Tax Policy Center. That definition might need to address sources of income, such as municipal bond interest, that aren’t included under the regular income tax.

‘Opening the Door’

“Every time you set up something like this, you’re opening the door for the tax lawyers to come in and get around the attempt to raise revenues,” Williams said.

Obama’s prime target for what he calls income-tax fairness is the 20-point gap between the top rate for capital gains and ordinary income tax rates.

In 1986, President Ronald Reagan signed an overhaul of the tax code that equalized the tax rates on capital gains and ordinary income at 28 percent. Since then, Congress has raised the top income tax rate to 35 percent and dropped the top capital gains rate to 15 percent.

During a briefing at the White House today, Geithner said the rates of high-income taxpayers vary depending on their profession.

People who earn much of their income from wages, such as corporate executives and professional athletes, have relatively high tax rates. Investors who make money from capital gains and dividends tend to have lower rates.

Buffett, the 81-year-old chairman and chief executive officer of Berkshire Hathaway Inc., said his federal tax bill last year, or the income tax he paid and payroll taxes paid by him and on his behalf, was $6.93 million.

‘Lower Percentage’

“That sounds like a lot of money,” Buffett wrote in an essay calling for higher taxes on millionaires in The New York Times last month. “But what I paid was only 17.4 percent of my taxable income -- and that’s actually a lower percentage than was paid by any of the other 20 people in our office.”

Several bipartisan groups, including the fiscal commission appointed by Obama last year, have proposed eliminating the preferential tax rates for capital gains as part of a tax overhaul that would also lower rates on wage income.

That approach, rather than the calculation of a minimum tax, might be the most straightforward way to satisfy the Buffett principle, Williams said.

“That certainly makes it a lot easier,” he said. “But a lot of people would oppose that on the argument that there are good reasons to tax capital income at lower rates.”

The arguments for lower capital gains rates include the benefits of encouraging investment, and tax economists say that lower dividend rates minimize the double taxation of income already taxed at the corporate level.

Minimum Tax

The Buffett rule would essentially operate as a type of alternative minimum tax.

Since 1969, the U.S. has imposed a minimum tax of some sort on the nation’s highest earners to prevent them from using legal deductions, credits and exemptions to avoid paying taxes. That year, in response to a report that 155 people earning more than $200,000 had paid no taxes, Congress created the forerunner to the alternative minimum tax.

The AMT came into its current form in the 1986 tax-code overhaul. It requires taxpayers to compare their tax liability under the regular tax code with their liability under the AMT. Because the AMT doesn’t allow taxpayers the full benefits of the state and local tax deduction or personal exemptions, people with large families or who live in high-tax states in the Northeast tend to be disproportionately affected.

Congressional lawmakers’ efforts to prevent people from legally avoiding all taxes haven’t been successful. In 2008, the most recent year for which data is available, 18,783 people filed U.S. tax returns with adjusted gross incomes of at least $200,000 and owed no taxes. That represented 0.43 percent of high-income taxpayers, the biggest non-payer percentage in an Internal Revenue Service study that dates to 1977.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

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

Read more...