Gruebel Meets With UBS Board on Trading Loss After Scolding From Singapore

By Giles Broom and Aaron Kirchfeld - Sep 21, 2011 2:24 PM GMT+0700

Oswald Gruebel, chief executive officer of UBS AG (UBSN), may face pressure to cut risk and shrink the investment bank as the board meets in Singapore, less than a week after a $2.3 billion loss from unauthorized trading.

The CEO got a scolding yesterday from the Government of Singapore Investment Corp., the company’s biggest investor, which “expressed disappointment and concern about the lapses and urged UBS to take firm action to restore confidence in the bank,” according to a statement from the sovereign wealth fund after its senior management met with Gruebel.

The opprobrium marks a shift for the 67-year-old Gruebel, brought in 2 1/2 years ago to rebuild Zurich-based UBS after record losses on U.S. subprime mortgage securities led to a state rescue. Gruebel earned the moniker “Saint Ossie” in Switzerland for helping to restore Credit Suisse Group AG (CSGN)’s profits and reputation in his previous CEO role, and for a trading acumen that included spotting the subprime debacle early. While Gruebel’s own position may be at risk, there’s no obvious replacement.

“This is a black eye for Gruebel and the bank,” said Christian Hamann, an analyst at Hamburger Sparkasse who has a “hold” rating on UBS. “On the other hand, he’s done quite a few things well and successfully stabilized the bank, which may have earned him some credit that he hasn’t used up yet.”

Tatiana Togni, a bank spokeswoman, said she wouldn’t comment on “speculation” regarding succession at UBS. Gruebel was unavailable for comment.

‘Normal’ Meeting

Chairman Kaspar Villiger, speaking to reporters in Singapore today, said it will be a “normal” board meeting. When asked whether there has been any pressure from investors following disclosure of the trading loss, he said “thankfully, no.”

UBS rose 1 centime to 10.22 francs by 9:21 a.m. in Swiss trading. The shares declined 33 percent this year, in line with the slump in the 46-company Bloomberg Europe Banks and Financial Services Index.

Gruebel, whose career in finance spans half a century, returned UBS to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank. Still, his two-year effort to rebuild profitability at the investment bank had been undercut by market turmoil and higher capital requirements even before the trading loss.

Review of Loss

The board of Switzerland’s largest bank will review the loss and possible management changes during the two-day meeting, said a person familiar with the matter 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.

Bilan magazine reported yesterday that Gruebel was asked to leave, citing an unidentified person close to the board of directors. Discussions at the board level are underway concerning Gruebel’s successor, according to Geneva-based Bilan, which didn’t say how it obtained the information or who asked him to go.

Plans to Stay

The loss resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said in a statement.

The company said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk- management units in the industry, raised questions about the bank’s controls.

Britain’s Financial Services Authority and its Swiss counterpart said they would investigate the trading losses.

Kweku Adoboli, a 31-year-old UBS trader, was charged with fraud and false accounting by London police on Sept. 16, the day after UBS first announced the trading loss. He didn’t enter a plea and his law firm, Kingsley Napley, declined to comment.

Can’t Blame CEO

Gruebel told Swiss newspaper Der Sonntag in an interview published Sept. 18 that he doesn’t plan to resign because of the loss, adding that when “someone acts with criminal intent, you can’t do anything.” He told Swiss TV in a separate interview that he’s ultimately responsible and will have to “take the consequences.”

Lutz Roehmeyer, who helps manage about $14 billion at Landesbank Berlin Investment, including UBS shares, said it will probably be up to Gruebel whether or not to resign. If a trader knows the rules and how to evade them, it’s very difficult to prevent him from doing so, he said.

“The CEO is the last person who can do something about that,” Roehmeyer said. “If someone robs a UBS branch or steals gold from UBS’s safe, you can’t blame the CEO for that. The scandal has nothing to do with his performance.”

The events throw into relief the lack of a succession plan at UBS, analysts said. Gruebel, pulled out of retirement to take on the CEO role, turns 68 in November. Villiger, 70, is scheduled to step down in 2013, replaced by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance that Carsten Kengeter, the 44-year-old head of the investment bank, will ascend to the top job.

‘Under Pressure’

“Kengeter is probably more under pressure than the CEO because he’s responsible for the investment bank,” said Roehmeyer. “He’s closer to the trading loss.”

Sergio Ermotti, UBS’s CEO of Europe, the Middle East and Africa, may be a potential successor, analysts said. The 51- year-old joined in April, after running the investment bank at UniCredit SpA, Italy’s largest lender.

Gruebel told staff in a memo on Sept. 18 that he was “shocked and disappointed” by the unauthorized trading, describing the events as a setback to UBS’s reputation and its effort to build up capital. He said the loss won’t affect UBS’s capital base, and the risk of someone violating the bank’s controls “always exists.”

‘All It Takes’

“I and the rest of the firm’s management are fully focused on thoroughly investigating this issue, and will do all it takes to determine how this happened and what we need to do to ensure that it does not recur,” Gruebel said in the memo. “Ultimately, the buck stops with me.”

David Sidwell, the senior independent director on UBS’s board and a former chief financial officer of Morgan Stanley, will lead a three-person board committee investigating the trading loss and the bank’s controls, UBS said.

For Gruebel, the outcome of the investigations into the matter may affect his legacy as the only person to have served as CEO of both of Switzerland’s biggest banks.

Born in the eastern part of Germany during World War II, he was orphaned before his first birthday. He crossed into West Germany with his grandmother on foot at the age of 10 to live with relatives. On the advice of a grandfather, he abandoned an ambition to study engineering and joined Deutsche Bank AG in 1961 as a 17-year-old trainee straight out of school.

‘Career Risk’

He moved to Credit Suisse White Weld Ltd. as a Eurobond trader in 1970. By 1991 he had become Credit Suisse’s head of global trading. Under Gruebel’s leadership as CEO, Credit Suisse started cutting its exposure to subprime mortgage bonds in 2006, when UBS was still buying them, according to disclosures from both companies. UBS eventually booked losses and writedowns of more than $57 billion, data compiled by Bloomberg show. Gruebel joined as UBS’s third CEO in less than two years.

“It was obviously quite a career risk for Gruebel to come back in 2009 and take over the UBS helm,” said Emily Adderson, a London-based fund manager at Henderson Global Investors, which oversees $117 billion. “You can understand his motivation to continue the job he started. Of course, you want to have the vote of confidence from the board that the right plan is going to be implemented going forward.”

To contact the reporters on this story: Giles Broom in Geneva at gbroom@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net;

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Bernanke Has Few Tools to Heal Economy Amid Weak Housing

By Steve Matthews and John Gittelsohn - Sep 21, 2011 11:00 AM GMT+0700

U.S. mortgage rates are the lowest in at least four decades, with a 30-year fixed loan available at 4.09 percent. That didn’t help Alexis Wolf buy a townhome in Beaverton, Oregon.

“Unless you have family help, you’re stuck renting,” said Wolf, 26, a real estate broker who turned to relatives for a loan because she didn’t have the credit and employment history needed to qualify for a mortgage.

Wolf’s experience illustrates the predicament for Federal Reserve policy makers as they end a two-day meeting today to consider ways to boost economic growth. Low interest rates, the traditional medicine for a flagging economy, aren’t helping housing, which since 1982 has aided every recovery except the current one.

Sales of existing homes dropped in July to the lowest since November, and the median price slid 4.4 percent from a year earlier. Rising foreclosures, tighter lending standards and unemployment stuck near 9 percent for more than two years are all weighing on the market. Lower borrowing costs aren’t likely to make a difference, said housing economist Brad Hunter.

“The Fed’s actions probably won’t help housing in a meaningful way,” said Hunter, chief economist and national director of consulting at Metrostudy, a Houston-based housing research firm that provides data to 18 of the 20 largest U.S. builders. “The level of mortgage rates is not a major factor. Rates are at extremely attractive levels.”

The Federal Open Market Committee may decide today to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates for mortgages, auto and consumer loans, according to 71 percent of 42 economists surveyed by Bloomberg News.

Excess Reserves

Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. say policy makers may also choose to reduce the 0.25 percent interest rate paid on the excess reserves that banks hold at the Fed. The central bank is scheduled to issue its statement at about 2:15 p.m. in Washington.

The FOMC may say that while recent data are consistent with a rebound forecast for the second half of 2011, the weak labor market and high unemployment make more easing necessary, said Dean Maki, chief U.S. economist at Barclays Capital.

“It is hard to argue that what is holding the recovery back is the level of interest rates,” Maki said. “We have been through a massive boom-bust cycle in housing,” and working off excess inventory will “be a long, drawn-out process.”

A rebound in housing is essential for restoring the net worth of U.S. households, reviving consumer spending and strengthening the recovery, Harvard University economics professor Martin Feldstein said in a Sept. 14 interview. Neither monetary policy nor President Barack Obama’s proposed $447 billion jobs program will provide a fix, he said.

‘Month After Month’

“The most important thing that would stimulate households would be to go after the housing problem,” said Feldstein, who served as chief economic adviser to President Ronald Reagan. “We still have house prices falling month after month on a seasonally adjusted basis, and something has to be done to deal with that.”

Tougher lending standards imposed after the credit crisis are impeding a recovery in housing more than the cost of borrowing, Hunter said.

Commercial banks’ real estate loans have fallen as supervisors, including the Fed, set rules aimed at preventing excessive risk-taking and predatory lending. Those loans have dropped for 29 consecutive months, according to Fed data.

Fighting Last War

“Regulators are still busy fighting the last war and demand that bankers be ultra cautious about lending,” said Charles Lieberman, chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, New Jersey and a former head of monetary analysis at the Federal Reserve Bank of New York.

The Fed has held the benchmark interest rate near zero since December 2008 and expanded the central bank’s assets in July to a record $2.88 trillion. The yield on the 10-year U.S. Treasury note has declined to 1.94 percent from 4 percent in April 2010.

Still, economic growth in the first six months of this year was the weakest since the recovery started in 2009. Gross domestic product expanded at a 1 percent annual rate in the second quarter after 0.4 percent growth in the first three months of this year.

The Fed, by announcing today the lengthening in the average duration of bonds in its portfolio, would mimic a policy in 1961 known as “Operation Twist” for its goal of bending the yield curve. Within the first month, the program may push down the yield on the 10-year Treasury security by 0.15 percentage point, said Chris Rupkey, chief financial economist of Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

Sixties Version

“Operation Twist in the ‘60s wasn’t found to be a great success either,” said Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home- price index.

“Homeowners are relatively insensitive to mortgage rates when they are lacking confidence,” he said. “The dramatic thing that is happening now is that their job isn’t secure, if they even have one.”

Consumer confidence has fallen along with U.S. home values, which have declined by a third over the past five years, according to the S&P/Case-Shiller U.S. Home Price Index. In speculative markets like south Florida, home values have tumbled by half. During just the past 12 months, the value of real estate assets has declined by $947 billion.

Consumer Confidence

Consumer confidence has ebbed to the second-lowest level of the year as the most households in three years said it is a bad time to spend. The Bloomberg Consumer Comfort Index was minus 49.3 in the period to Sept. 11, near this year’s low of minus 49.4 reached in May.

“The essence of the problem is there’s no confidence in what’s next with the economy,” Jeff Lazerson, president of Mortgage Grader Inc., a mortgage broker based in Laguna Niguel, California, said in a telephone interview. “Borrowers are unemployed or worried about losing their job. Even rich guys feel poor when the stock market goes down.”

The Standard & Poor’s 500 Index has lost 4.4 percent this year, closing yesterday at 1,202.09 in New York. Net worth for households and non-profit groups decreased by $149 billion in the second quarter, a 1 percent drop at an annual pace, to $58.5 trillion, the Federal Reserve said Sept. 16.

Wolf, the real estate broker and Oregon homebuyer, said a Fed program to push down interest rates probably wouldn’t bring her more business.

“If they were even lower, I’m not sure people jump into the market,” she said. “I don’t think they’re a function of holding people back, like unemployment or uncertainty in the economy.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

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European Stocks Fall on Greece Concern as U.S. Index Futures Pare Advance

By Stephen Kirkland and Shiyin Chen - Sep 21, 2011 7:03 PM GMT+0700

European stocks fell after officials said they plan to return to Greece next week to complete a review of the economy. U.S. index futures declined while the dollar gained before the Federal Reserve concludes a two-day meeting.

The Stoxx Europe 600 Index lost 1 percent at 8 a.m. in New York and Standard & Poor’s 500 Index futures slid 0.3 percent. The Dollar Index advanced 0.3 percent. The Swiss franc weakened against most of its 16 major peers, and the pound dropped 0.6 percent versus the dollar after the Bank of England said officials considered ways to add stimulus to the economy. The 30-year U.S. Treasury yield added two basis points, with the German two-year note yield falling three basis points.

A “full mission” will return to Athens next week after Greek Finance Minister Evangelos Venizelos made “good progress” in talks with the European Union and the International Monetary Fund yesterday, according to the EU. The Fed may say today it will replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, a move that 61 percent of economists surveyed by Bloomberg said will probably fail to lower the U.S.’s 9.1 percent unemployment rate.

“We’re seeing some big slowdowns in Europe and the U.S.,” Mark Burgess, chief investment officer at Threadneedle Investments, said in a Bloomberg Television interview in Hong Kong. “A Greek default is a certainty, but in the grand scheme of things, Greece is not that relevant. The issue is really whether they can contain it.”

Peugeot, Daimler

About three shares declined for every one that gained in the Stoxx 600, which jumped 1.8 percent yesterday. Automakers were the biggest drag on the index, as PSA Peugeot Citroen and Daimler AG lost more than 2.5 percent. Deutsche Lufthansa AG sank 4.2 percent as Europe’s second-largest airline said it expects fuel expenses to climb and Deutsche Bank AG downgraded the shares.

S&P 500 futures reversed an earlier gain of as much as 0.6 percent. Oracle Corp. rose 3.2 percent in German trading after the software maker reported profit that topped analysts’ estimates, boosted by increased spending on database programs and applications that help run businesses.

Sales of existing homes dropped in July to the lowest since November, and the median price slid 4.4 percent from a year earlier, according to a Bloomberg survey of economists. Rising foreclosures, tighter lending standards and unemployment stuck near 9 percent for more than two years are all weighing on the market. The Fed is scheduled to issue its policy statement at about 2:15 p.m. in Washington.

Dollar, Euro

The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed for the third time in the past four days, while the euro weakened 0.3 percent versus the greenback and slid 0.5 percent against the yen. The Swiss franc depreciated 0.4 percent against the euro and lost 0.7 percent versus the dollar, falling for the fourth consecutive day.

The yield on the Italian two-year note rose seven basis points to 4.36 percent, while the 10-year yield increased two basis points. That left the difference in yield with benchmark German bunds three basis points wider at 396 basis points. The Greek two-year note yield jumped 122 basis points to 65.41 percent, rising for the third consecutive day.

The MSCI Emerging Markets Index fell 0.6 percent, heading for the lowest close since July 2010. Russia’s Micex Index retreated 0.4 percent as oil declined. Indonesia’s Jakarta Composite index (JCI) slid 1.5 percent as the nation’s domestic vehicle sales slowed in August.

The Shanghai Composite Index jumped 2.7 percent after the Conference Board said its leading indicator index rose in July. The Czech PX Index rose 2 percent, led by power utility CEZ AS after newspaper Lidove Noviny reported domestic energy companies will get some carbon-dioxide permits for free until 2020.

Oil slid 0.7 percent to $86.30 a barrel in New York. Copper dropped 0.8 percent in London.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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GM Aims to Lower U.S. Labor Costs With Buyouts, Cheaper Hires Over 4 Years

By Craig Trudell, David Welch and Keith Naughton - Sep 21, 2011 11:01 AM GMT+0700
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General Motors Co. (GM) employees inspect a Chevrolet Silverado truck as it moves down the production line in Flint, Michigan. Photographer: Jeffrey Sauger/Bloomberg

General Motors Co. (GM) will move to entice electricians and its other highest-paid U.S. hourly workers to retire so it can hire lower-wage replacements through a four-year labor agreement with the United Auto Workers.

GM, the biggest U.S. automaker, will offer buyout packages worth as much as $75,000 to its roughly 10,000 skilled-trades workers, the Detroit-based UAW said yesterday in a briefing with reporters. Other employees eligible to retire can take $10,000 to stop working within two years so that GM can replace them with new hires starting with wages of less than $16 an hour.

UAW President Bob King said the agreement achieves some of the union’s major goals in talks with the Detroit-based automaker, which emerged from U.S.-backed bankruptcy in 2009. The accord up for a ratification vote by 48,500 members calls for GM to invest $2.5 billion through four years, reopen a plant in Tennessee and add or retain jobs at six other factories.

“It’s all about demographics and attrition for GM now,” said Brian Johnson, a Chicago-based analyst for Barclays Capital, who has an “overweight” rating on GM. The agreement allows GM to replace more expensive workers with an unlimited number of employees at the entry-level wages, which is “a plus that people weren’t expecting,” he said.

GM will save $30 an hour for every skilled-trade employee who leaves and is replaced by a lower-paid worker, said Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research in Ann Arbor, Michigan. That adds up to $57,000 a year per worker who is replaced, she said.

Buyout Eligibility

About 4,000 skilled-trades employees and 11,550 production workers are eligible to retire, according to GM.

Attrition of those employees would make room for entry- level workers whose starting pay will increase to at least $14.78 an hour from $14 as part of the UAW’s agreement with GM. The wage rises to as much $19.28 an hour by 2015 from a previous maximum of $16.23.

There’s no limit to the number of workers who can be hired at those wages, said Joe Ashton, the union’s vice president for GM relations. In 2015, the second tier would be capped at 25 percent, according to King.

“We would love to see it at 40 percent because that would mean our workforce would have grown,” Ashton said of GM’s portion of workers earning lower wages. About 4 percent of GM- UAW workers are receiving that pay now, he said.

GM is offering $10,000 buyouts to all employees who retire within two years, the UAW said yesterday, and the automaker will offer additional $65,000 bonuses to skilled-trades workers who leave between Nov. 1 and March 31.

Signing Bonuses

GM’s accord also calls for the company to provide a record $5,000 lump-sum signing bonuses. The largest U.S. automaker will invest $419 million to reopen the assembly plant in Spring Hill, Tennessee, which will make two midsize cars and hire 1,710 people. The agreement adds or retains 6,400 jobs, the UAW said.

GM will add a shift at a full-size van factory in Wentzville, Missouri, to make midsize pickups, such as the Chevrolet Colorado and GMC Canyon and boost output in Michigan at two powertrain plants and a casting factory, the union said. GM also committed $230 million to continue assembling trucks in Fort Wayne, Indiana, where workers make Chevrolet Silverado and GMC Sierra pickups.

A midsize truck plant in Shreveport, Louisiana, will close. The union is still pushing GM to extend the use of the factory and consider adding stamping work there, Ashton said. A plant in Janesville, Wisconsin, will remain on standby, the UAW said.

Employees who were moved from a shuttered factory get return-home rights and will receive $30,000 relocation payments, the UAW said.

Akerson’s Goals

Chief Executive Officer Dan Akerson said when talks began in July that the automaker wanted to manage costs while giving UAW-represented workers the “opportunity to share in the success of the company going forward.” GM reported $6.36 billion of profit in the first half and $6.17 billion last year.

“This is, of course, a less risky contract,” Sean McAlinden, chief economist at the Center for Automotive Research, said yesterday in an e-mail. “If the market heads south, so does labor compensation.”

GM pledged to base its profit-sharing arrangement on a greater portion of the automaker’s income, the UAW said. Annual profit-sharing checks will be determined by GM earnings in North America instead of just the U.S. The plan equates to bonuses of about $1,000 per $1 billion in North American profit.

The agreement requires a minimum profit in North America of $1.25 billion to produce a payout and caps distributions to workers at $12,000, the UAW said.

Industry ‘Is Back’

“This contract really shows the auto industry is back,” King said yesterday.

GM expects the union to hold ratification votes within 10 days, according to a Sept. 17 statement.

Union workers will also get $1,000 “inflation protection” payments for the next three years. If they meet quality targets, they will be paid an additional $250 a year.

The UAW continues to negotiate with GM over a plan to divert 10 percent of workers’ profit-sharing payments to the union’s retiree health-care fund, Ashton said. The additional funds are intended to improve coverage for retirees. GM has questioned the legality of the diversion, Ashton said.

“There are some legal questions about that,” Ashton said. “We’re still negotiating with GM on that.”

GM fell 62 cents, or 2.7 percent, to $22.43 at 4:15 p.m. yesterday in New York Stock Exchange composite trading. The shares have lost 32 percent since GM’s initial public offering in November.

Ratification Likely

The tentative agreement will be put to a vote by UAW members who King has estimated each gave $7,000 to $30,000 in concessions since 2005. Analysts Himanshu Patel of JPMorgan Chase & Co. and Johnson of Barclays said ratification was likely in separate research notes published Sept. 19.

“The economic gains for the membership are good,” Art Reyes, president of UAW Local 651 in Flint, Michigan, said in an interview. “I’ll recommend it to the membership.”

Contracts covering 113,000 workers at GM, Ford Motor Co. (F) and Chrysler Group LLC were set to expire Sept. 14 before being extended. Fiat SpA-controlled Chrysler is pushing for a smaller signing bonus than GM accepted, about $3,500, two people familiar with the talks said Sept. 19.

The UAW typically uses its first accord to set a pattern for pay and benefits at the other two organized U.S. automakers. Union negotiators will seek a deal with Auburn Hills, Michigan- based Chrysler next and then go to Dearborn, Michigan-based Ford, three people familiar with the talks have said.

Contract Pattern

“There is a general framework pattern we’ll go to Ford and Chrysler with,” King said yesterday. “I’m confident we can put an agreement together for both.”

UAW members agreed to a no-strike pledge at GM and Chrysler as part of their 2009 bankruptcies. Unsettled disputes are to be decided through binding arbitration.

Ford didn’t receive a U.S. bailout and UAW members there, going against the wishes of union leaders, rejected a strike ban and arbitration.

King, 65, has pledged to organize a foreign automaker this year to expand the UAW’s bargaining power beyond GM, Ford and Chrysler. The agreement with GM will help that effort, he said.

“Winning always helps you get momentum,” King said. “When workers see how we play such a key role in the success of the companies, that will have a big impact.”

To contact the reporters on this story: Craig Trudell in Southfield, Michigan, at ctrudell1@bloomberg.net; David Welch in Southfield, Michigan, at dwelch12@bloomberg.net; Keith Naughton in Southfield, Michigan, at knaughton3@bloomberg.net.

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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RIM U.S. Sales Cut in Half Last Quarter as Consumers Defect to Iphones

By Hugo Miller - Sep 21, 2011 3:09 AM GMT+0700
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The new Blackberry Torch 9800 smartphone is seen after being unveiled at a news conference August 3, 2010 in New York City. Photographer: Mario Tama/Getty Images

Research In Motion Ltd. (RIMM)’s sales in the U.S. fell by 50 percent last quarter, dragging total revenue lower, as American consumers abandoned older BlackBerry phone models for Apple Inc. (AAPL)’s iPhones.

Revenue from the U.S. dropped to $1.11 billion from $2.22 billion a year earlier, overshadowing gains in Canada and other markets, according to a filing released yesterday after the company reported earnings last week.

RIM plunged 19 percent on Sept. 16 after reporting fiscal second-quarter profit and sales that missed analysts’ estimates. Stung by customer defections to the iPhone and handsets that run on Google Inc. (GOOG)’s Android platform, RIM’s share of the global smartphone market dropped to 12 percent in last quarter from 19 percent a year earlier, according to Gartner Inc.

U.K. sales fell 2.3 percent to $419 million, according to the filing. Sales in Canada climbed 7.7 percent to $308 million and sales outside the U.S., Canada and the U.K. jumped 38 percent to $2.33 billion.

RIM, based in Waterloo, Ontario, fell 99 cents, or 4.2 percent, to $22.73 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has dropped 61 percent this year.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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U.S. Stocks Drop as Concern Over Greece Crisis Offsets Fed Stimulus Bets

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Traders work on the floor of the New York Stock Exchange on September 19, 2011. Photographer: Spencer Platt/Getty Images

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Sept. 20 (Bloomberg) -- Joseph Duran, chief executive officer of United Capital Financial, talks about investment strategy and the outlook for the economy and financial markets. Duran speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

U.S. stocks fell, erasing a 1.4 percent rally by the Standard & Poor’s 500 Index, amid concern international officials won’t make a decision on Greece’s next aid payment until October. The yield gap between two- and 30- year Treasuries narrowed to the smallest level in a year.

The S&P 500 lost 0.2 percent to 1,202.09 at 4 p.m. New York time. The difference between two- and 30-year Treasury yields fell to 304 basis points amid speculation the Federal Reserve will increase holdings of longer maturities. Credit-default swaps on Italy jumped 25 basis points to a record 514 basis points after S&P cut the nation’s rating. Oil added 1.4 percent.

Officials from the so-called troika, comprising the European Union, European Central Bank and International Monetary Fund, plan to return to Athens in early October to complete their review of the Greek economy, the state-run Athens News Agency reported, without citing sources. Equities rose in Europe and the U.S. earlier as investors speculated the Fed will announce steps tomorrow to shore up the economy and optimism grew that Greece will satisfy requirements for aid.

“This is all about Europe, all about Greece,” Kevin Caron, market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., said in a telephone interview. His firm has more than $115 billion in client assets. “There’s concern the next injection would be delayed. It will take years to get a proper resolution to it.”

Operation Twist

The Fed may decide to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, according to 71 percent of 42 surveyed economists. Such a policy is known as Operation Twist because of the goal of bending the yield curve. Pacific Investment Management Co.’s Bill Gross, who oversees the world’s biggest bond fund manager, said in Twitter post that a further rally in Treasuries is “dependent on QE3 expansion of balance sheet or new ‘language.’”

Raw-material, industrial and energy companies posted the biggest losses among 10 S&P 500 groups, falling at least 0.6 percent. All 10 industries advanced earlier. Alcoa Inc. posted the biggest drop in the Dow Jones Industrial Average, retreating 2.9 percent. The Stoxx Europe 600 Index rallied 1.8 percent.

Italy’s 10-year bond yield rose 13 basis points to 5.72 percent. Italy was lowered to A from A+ by S&P on concern that weaker growth and a “fragile” government mean the country won’t be able to cut the euro-region’s second-largest debt load, S&P said. The FTSE MIB Index of Italian stocks climbed 1.9 percent.

The franc fell versus 14 of 16 major peers amid speculation policy makers will weaken the currency further. Turkey’s stocks and currency climbed as S&P raised its local debt rating for the nation to investment grade.

Gold, Copper

Gold rose 1.7 percent to $1,809.10 an ounce. The metal may climb to a record $2,019 an ounce by November 2012, according to the average response in a survey of attendees at the London Bullion Market Association’s annual conference in Montreal.

Copper fell, extending a slump to the lowest since November, as the International Monetary Fund lowered its forecast for the economy in the U.S., the second-biggest consumer of the metal used in wires and pipes.

The IMF said today that the U.S. economy will expand 1.5 percent this year, down from 2.5 percent projected in June. Housing starts slid 5 percent to a three-month low, Commerce Department data showed. Copper in New York has tumbled 20 percent from a record in February, entering a bear market, amid concern that European fiscal woes will damp commodity demand.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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Full Tilt Poker Website Used Players’ Money to Pay Directors, U.S. Claims

By Andrew Harris - Sep 21, 2011 4:34 AM GMT+0700
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Four of its directors, Raymond Bitar, Howard Lederer, Christopher Ferguson, shown, and Rafael Furst, were paid from player funds since 2007. Photographer: Kane Hibberd/Getty Images

Full Tilt Poker paid board members more than $440 million using funds that it had told its online poker players would be available to them for withdrawal at any time, U.S. prosecutors said.

Manhattan U.S. Attorney Preet Bharara’s office today asked U.S. District Judge Leonard B. Sand for permission to add the new allegations to an April civil forfeiture case against Full Tilt, PokerStars, Absolute Poker and other businesses.

“Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and public alike about the safety and security of the money deposited with the company,” Bharara said in a statement. He called it “a global Ponzi scheme.”

The forfeiture action parallels criminal charges by Bharara against the poker companies and 11 people, alleging bank fraud, money laundering and illegal gambling. Two white-collar criminal-defense lawyers who have no stake in the case questioned whether the proposed new allegations could withstand a legal challenge.

“This is gambling,” said ex-federal prosecutor James Montana, now a partner in Chicago’s Vedder Price LLC. “People are constantly putting money on deposit. It’s almost a guaranteed cash flow. It’s a little different than your normal Ponzi scheme.”

No Loss

The government hasn’t alleged that any player lost money, said Montana, a former general counsel at the casino operator Bally Entertainment Corp.

According to prosecutors, after a 2006 U.S. law barred banks from processing payments to offshore gambling websites, Full Tilt, PokerStars and Absolute Poker worked around the ban to continue operating in the U.S.

Ireland-based Full Tilt, Absolute Poker of Costa Rica and PokerStars, based on the Isle of Man, were the leading online poker sites doing business with U.S. customers, Bharara said in April.

Bharara’s office said in today’s filing that Full Tilt management’s payment processing had so degraded by last year that it was crediting website players with money never collected from their accounts.

“Full Tilt Poker allowed players to gamble with -- and lose to other players -- this phantom money that Full Tilt Poker never actually collected or possessed,” according to a government court filing.

Bank Account

By the end of March, the company owed players worldwide about $390 million, $150 million of which was owed to gamblers in the U.S., Bharara said in today’s statement. Full Tilt had only $60 million in its bank accounts at the time, he said.

Four of its directors, Raymond Bitar, Howard Lederer, Christopher Ferguson and Rafael Furst, were paid from player funds since 2007, Bharara said.

One of the 11 criminal defendants, Bitar, is charged with bank fraud, illegal gambling and money laundering.

L. Barrett Boss, an attorney for Full Tilt, didn’t immediately return phone and e-mail messages seeking comment.

No lawyer has appeared for Bitar in the criminal case, according to the court’s electronic docket.

Jeff Ifrah, an attorney in Washington, has represented Lederer and Ferguson in other proceedings in federal court in Manhattan. Ifrah said he couldn’t immediately comment on the proposed amended complaint.

A Full Tilt web page for Furst identifies him as “Rafe” and links to his own site, www.rafefurst.com. Furst didn’t immediately reply to an e-mailed request for comment.

No Ponzi Scheme

“It’s fundamentally unfair to call this a Ponzi scheme,” said Melinda Sarafa, a New York criminal-defense lawyer who has previously worked on Internet gambling cases.

“This was a poker business that had a legitimate business model but ran into processing disruptions,” she said. “It’s not clear to me that this was an intentional plan to defraud customers and line pockets.”

A careful review of the facts is needed, said Sarafa.

“We only have half the story at this point,” she said.

Vedder Price’s Montana said prosecutors may have the better argument solely because the Full Tilt operators are alleged to have promised bettors their money was secure when it was not and, had everyone demanded their money at once, there would not have been enough to go around.

“If this thing had just continued on, given the constant interest, they probably would have continued to go on and no one would have known the difference,” he said.

The civil forfeiture case is U.S. v. PokerStars, 11-cv- 02564, and the criminal case is U.S. v. Tzvetkoff, 10-cr-00336, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Andrew Harris in Chicago at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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Microsoft Raises Quarterly Dividend 25%

Microsoft Corp. (MSFT), the world’s biggest software maker, raised its quarterly dividend 25 percent to 20 cents, providing investors with a payout at the upper end of forecasts.

The new dividend is a penny more the 19 cents a share projected by Bloomberg data and compares with the 18 cents to 20 cents estimated by Heather Bellini, an analyst at Goldman Sachs Group Inc. in New York. The change, announced in a statement today, boosts the yield to 2.97 percent from 2.37 percent.

Microsoft generally has a policy of boosting the dividend in line with operating income. While the increase exceeded the 13 percent growth in operating income in the past fiscal year, investors were seeking more, Bellini said. The company’s cash and short-term investments surged 43 percent last year, and shareholders wanted a bigger piece of that hoard.

Microsoft’s ability to return cash to shareholders is hampered by the fact that much of that money is held internationally and would require the company to pay taxes to bring it back into the country for the purpose of paying a larger dividend.

About $45 billion, or 85 percent of the company’s cash and short-term investments, is held outside the U.S., the company said in a July 28 regulatory filing. Around half of annual cash flow from operations is generated abroad, Bellini estimated, which gives the company about $15 billion to $17 billion to spend on dividends and share repurchases this year.

Double It

Even so, Neil Herman, an analyst at Ticonderoga Securities LLC, suggested in an August report that the company should double its dividend in order to boost its share price. The shares, which have declined 3.3 percent this year, might surge past $35 with an increase of that magnitude, he wrote.

Shares of Microsoft, based in Redmond, Washington, fell 23 cents to $26.98 today on the Nasdaq Stock Market. They rose to $27.10 in late trading after the increase was announced.

Before today, Microsoft has paid out about 25 percent of earnings as dividends since starting the payments in 2003, according to Bloomberg data. Dividend-paying companies with similar market valuations to Microsoft are paying closer to 40 percent to 50 percent, the data show.

The company also said today it will continue its $40 billion stock buyback plan begun in 2008. The program, which expires in 2013, had about $12.2 billion remaining as of June 30, Microsoft said.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

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

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Google, Oracle CEOs Are Said to Make Little Headway in Patent Negotiations

By Brian Womack and Aaron Ricadela - Sep 21, 2011 7:00 AM GMT+0700

Google Inc. and Oracle Corp. (ORCL) chief executive officers made little headway yesterday in negotiations aimed at resolving a lawsuit accusing the Web-search company of patent infringement, a person briefed on the talks said.

The two sides, scheduled to meet again tomorrow in federal court in San Jose, California, remained at loggerheads after the daylong session and were unlikely to reach a settlement soon, said the person, who asked not to be identified because the discussions are private.

Oracle, the largest maker of database software, sued last year, saying Mountain View, California-based Google didn’t obtain a license to use Java technology patents that it says are infringed by the Android mobile-device operating system. Besides seeking billions of dollars in damages, Redwood City, California-based Oracle wants the court to order destruction of all products that violate its copyrights.

Google’s Larry Page and Oracle’s Larry Ellison appeared before a federal court magistrate during talks that lasted more than 10 hours.

Deborah Hellinger, a spokeswoman for Oracle, and Katelin Todhunter-Gerberg, a spokeswoman for Google, declined to comment today.

Oracle’s suit may represent a bigger menace to Google’s software than challenges from Apple Inc. (AAPL), which has already won patent decisions against Android device makers. In settlement talks, Page aims to avoid having to pay Oracle licensing fees that analysts at Citigroup Inc. said could be as high as $15 per device. That sum might slow the adoption of the software.

Oracle claimed in court papers that Google could owe as much as $6 billion, while Google suggested at a hearing that a reasonable royalty would be $100 million.

The case is scheduled to go to trial in October.

The case is Oracle America Inc. v. Google Inc. (GOOG), 10-03561, U.S. District Court, Northern District of California (San Francisco).

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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Oil Drops in New York on Speculation Demand Will Falter as Supplies Rise

Oil fell in New York as investors speculated that demand will falter amid increasing U.S. crude stockpiles in the world’s biggest consumer of the commodity. Brent oil’s premium to the U.S. contract widened.

Futures slipped as much as 0.7 percent after the American Petroleum Institute said supplies rose 2.57 million barrels last week. An Energy Department report today is forecast to show they fell 1.3 million barrels. The International Monetary Fund cut its estimates for economic growth in the U.S. and China, the world’s second-biggest crude user.

“API data were mixed-to-negative in our opinion,” Tom Pawlicki, a Chicago-based analyst at MF Global Holdings Ltd., said in a note today. “Energy prices are expected to trade in a mixed-to-lower direction in the near-term.”

Crude for November delivery slipped as much as 60 cents to $86.32 a barrel in electronic trading on the New York Mercantile Exchange and was at $86.36 at 11:42 a.m. Sydney time. The contract yesterday advanced $1.11, or 1.3 percent, to $86.92. Prices are 18 percent higher the past year.

Brent oil for November settlement fell 43 cents, or 0.4 percent, to $110.11 a barrel on the London-based ICE Futures Europe Exchange. The European benchmark contract’s premium to U.S. futures widened to $23.75 after closing at $23.62 yesterday. The difference settled at a record $26.87 on Sept. 6.

U.S. Stockpiles

U.S. gasoline stockpiles climbed 62,000 barrels last week, the American Petroleum Institute data showed. The Energy Department report will probably show inventories increased 1.35 million barrels, according to the median of 16 analyst estimates in the Bloomberg News survey.

The industry-funded API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

The IMF said yesterday that the U.S. economy will expand 1.5 percent this year, down from 2.5 percent projected in June. The Washington-based lender cut its forecast for China’s growth to 9.5 percent from 9.6 percent. The nation’s 2012 outlook was lowered to 9 percent from 9.5 percent.

Brent’s premium to New York oil has widened amid disruptions to production. The first North Sea Forties crude cargo for October loading was deferred and a third September shipment was delayed to next month, according to a revised export program obtained by Bloomberg News. Forties is one of four North Sea crude grades used to price Dated Brent, the benchmark for more than half of the world’s oil.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net

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Bullion Vaults Run Out of Space on Gold Rally

By Chanyaporn Chanjaroen, Nicholas Larkin and Debarati Roy - Sep 21, 2011 8:24 AM GMT+0700

Deep in the 7.4-acre SingaporeFreePort next to Changi International Airport’s runways is the bullion vault of Swiss Precious Metals, behind seven-metric-ton steel doors built to survive a plane crash or earthquake.

The rooms are almost full after demand rose fivefold in the year since the Geneva-based company opened the facility. The firm plans an extension, and relocated Chief Executive Officer Jean-Francois Pages to Singapore last month to cope with the surge of investors willing to pay as much as 1 percent of the value of their holdings each year to keep them secure.

“The European debt crisis and its impact on the solvency of European financial players are driving European customers to find refuge in tangible values like physical gold and other precious metals,” Pages said. Demand “is totally compatible with the current financial and political global turmoil.”

Barclays Capital is building a new vault, The Brink’s Co. (BCO) and Deutsche Bank AG (DBK) may add more space, and the Perth Mint may expand for the first time since 2003, a sign they expect demand to keep increasing after the 11-year rally during which prices increased sevenfold. Investors in exchange-traded products backed by gold bought 2,198 tons of bullion since 2003, exceeding all except four countries’ official stockpiles.

Gold climbed to a record $1,921.15 an ounce on Sept. 6. Prices more than doubled since the end of 2007 as stock markets slumped, economies contracted and central banks and governments pumped more than $2 trillion into the global financial system.

Dollar Index

The metal rose 27 percent to $1,800.10 this year as the MSCI All-Country World Index of equities retreated 10 percent, led by financial stocks. Treasuries returned 8.5 percent, a Bank of America Corp. index shows. The U.S. Dollar Index, a gauge of the world’s reserve currency against six major trading partners, slumped 13 percent in the past 15 months.

Gold will exceed $2,000 this year, according to the average estimate of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s conference in Montreal. The metal will peak at $2,268 next year, the survey showed.

Storage companies are responding. The 112-year-old Perth Mint, which refines more than 8 percent of all supply and is owned by the Western Australian state government, may add a new vault within the next year, according to Treasurer Nigel Moffatt. The mint sells everything from gold coins to 400-ounce (12.4- kilogram) bars.

Bullion Carrier

Brink’s, the largest bullion carrier in the U.K., is considering adding more storage after opening a new London vault earlier this year. Barclays, based in London, is building a vault in the city that will open next year, the bank said in a statement last week.

Deutsche Bank, based in Frankfurt, is considering expanding existing facilities and developing new ones to meet demand, Matthew Keen, a director at the bank, said earlier this month. JPMorgan Chase & Co. (JPM) started a vault at the Singapore FreePort location last year and opened another in the financial district of New York.

“With gold prices where they are, we encourage people to keep it in safety-deposit boxes at banks or vaults, which gives that sense of security,” said Scott Carter, chief executive officer of Goldline International Inc., a Santa Monica, California-based precious-metals retailer established a half- century ago.

ETF Trust

Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates. Holdings in gold- backed ETPs are equal to more than nine years of U.S. mine production. The SPDR Gold Trust, the biggest bullion ETP, exceeded the market capitalization of the SPDR S&P 500 ETF Trust in August, beating what had been the industry’s largest exchange-traded fund since 1993.

The Brink’s vault business is part of the Richmond, Virginia-based company’s value-added global services unit, which accounts for about 35 percent of total revenue, according to Bradley Safalow, chief executive officer of New York-based PAA Research. The shares will rise about 55 percent to $40 in the next 12 months, he estimates.

The company operates its storage business on long-term contracts that guarantee revenue, Chairman and Chief Executive Officer Michael T. Dan said in a conference call with investors in July. Brink’s benefits when prices appreciate, he said.

‘Ultimate Asset Bubble’

The surge in demand for bullion is a warning to some investors. George Soros called gold “the ultimate asset bubble” in 2010. Soros Fund Management LLC, founded by the 81- year-old billionaire, sold 99 percent of its stake in the SPDR Gold Trust and all shares in the iShares Gold Trust in the first quarter, a U.S. Securities and Exchange Commission filing in May showed.

“We are now in the final, overheated phase of gold’s protracted bull market,” Chris Eibl, a partner at Zug, Switzerland-based Tiberius Asset Management AG, which has $2.8 billion in assets, wrote in a report distributed Sept. 15. Gold “is already so overbought in the wake of panic selling of bank stocks that a calming of the European financial markets could well trigger a tactical pullback by about $200 to $300.”

Warren Buffett, the world’s most successful investor, says the metal has no utility.

“They take it out of the ground in South Africa, ship it to the Federal Reserve, where they put it back in the ground,” Buffett said on April 30 at Berkshire Hathaway Inc.’s annual meeting in Omaha, Nebraska. “If you were watching from Mars, you might think it’s a little peculiar.”

Private Investment

All gold ever mined totaled about 168,300 tons by 2010 and would fit inside a cube measuring about 21 meters (69 feet) in length, according to the World Gold Council. Private investment in the metal reached about 31,100 tons by the end of last year, according to the council.

The gold stored in vaults typically meets the LBMA’s so- called good delivery standard, where bars are of at least 99.5 percent purity and include a serial number, the year of manufacture and the refiner’s assay mark.

“The days where a secure vault in a basement was sufficient are long gone and in today’s operating environment, the expertise required in order to manage the substantial, and expensive, quantities of bullion are far reaching,” said Orit Eyal-Fibeesh, managing director for Brink’s in the U.K.

Brink’s, the third-biggest provider of vaults in the U.K. behind New York-based JPMorgan and HSBC Holdings Plc (HSBA), is considering building another facility in London, said Eyal- Fibeesh. The company’s clients include banks, trading houses, institutions, individuals, governments and sponsors of ETPs.

Silver Surges

As gold surged 27 percent and silver 29 percent this year, so did the cost of insurance. Fees charged by Lloyd’s of London members are pegged to the value, not volume, of the metals. Individuals preferring to hoard bullion under their own names in private vaults pay about 1 percent or more of the total value a year, compared with about 0.4 percent for investors in metal held through some ETPs.

Insurers typically set maximum values for the metals they are willing to insure.

“Many vaults are hitting the insurance limit as prices of gold have surged and even if space is available, the full replacement insurance may not be available,” said Savneet Singh, the CEO of New-York based Gold Bullion International, which offers precious-metals storage to wealthy individuals, hedge funds and financial institutions. “The smaller customers are already getting squeezed.”

Singapore Vaults

Swiss Precious Metals, whose Singapore vault will be 80 percent full by December, charges as much as 1 percent of the market value of gold and silver stored, depending on the quantity, Pages said. The charge covers storage, insurance and related documentation, he said. The company has already arranged for more space for expansion.

If insurance costs rise by more than 50 percent, then the firm may ask for higher fees, according to Pages, who predicts gold may reach $2,500 by the end of the year. Swiss Precious Metals is owned by Geneva-based Palaedino Group SA and Euroasia Investment SA. Euroasia Investment is an investor in the Singapore FreePort through affiliates, according to Pages.

Lloyd’s of London, which offers so-called specie insurance, declined to provide information on rates or demand. Brink’s declined to elaborate on storage and insurance costs. JPMorgan, which also rents space at the Singapore FreePort for its gold vault, declined to comment.

Bullion Depository

Sometimes the secrecy needed at vaults backfires. Ron Paul, a Republican congressman for Texas and three-time presidential candidate who has called for a return to linking the dollar to gold, isn’t sure there’s any metal at the U.S. Bullion Depository at Fort Knox in Kentucky.

Paul told Bloomberg Businessweek’s June 20 edition that the government “is asking the American people to trust that all the gold is there, while not allowing site visits and not publishing all the data.” Eric M. Thorson, the inspector general of the Treasury, said he has seen and accounted for it all.

The U.S. has the world’s largest gold reserves, 8,133.5 tons, according to World Gold Council data. The Kentucky vault, opened in 1937, stores more than 4,500 tons at a book value of $42.22 an ounce, according to the U.S. Mint’s website. The facility admits no visitors.

“Gold is simply a mirror of economic and political failure, of all the uncertainties that make people worry,” said Gerry Schubert, the head of precious metals at Emirates NBD in Dubai, who has traded the metal since 1979. “If you have $50 million, what would you do with that money? You buy gold. Hedge funds, central banks, sovereign funds: all are buying gold.”

To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net; Debarati Roy in New York at droy5@bloomberg.net.

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Claudia Carpenter at ccarpenter2@bloomberg.net; Steve Stroth at +1-312-443-5931 or sstroth@bloomberg.net

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Apple’s Stock Price Is Too High for Inclusion in Dow Average, Bespoke Says

Putting Apple Inc. (AAPL) in the Dow Jones Industrial Average would mean the benchmark gauge would get 22 percent of its value from the iPhone maker, too much influence even for the world’s largest company, according to Bespoke Investment Group LLC.

Apple, trading at about $420, would have the largest weighting in the 30-company measure because Dow companies are ranked by stock price, not market value. Replacing Kraft Foods Inc. with the Cupertino, California-based company would drive International Business Machines Corp. (IBM) down to 9.2 percent from 11.6 percent of the Dow, Bespoke said in a report today. IBM closed at $173.13 yesterday.

“Don’t hold your breath,” Bespoke, based in Harrison, New York, wrote in a note to clients, citing speculation today that Apple may enter the Dow. “If the stock were added to the index without a split in the shares, it would have a disproportionate weight in the index, making it more like the Dow Jones Industrial Apple.”

Richard Silverman, a spokesman for Dow Jones Indexes, declined to comment.

Apple had its weighting in another benchmark measure, the Nasdaq-100 Index, reduced this year. Nasdaq OMX Group Inc. cut the company’s share of the Nasdaq-100 Index to about 12.33 percent from 20.49 percent. While the exchange imposed rules in 1998 preventing the biggest corporations in the index from having too much sway, Apple’s market capitalization was too small to qualify for a curb at the time.

Shares of Apple jumped 91-fold between 1997, when the San Francisco Chronicle said Steve Jobs would be appointed interim chief executive officer, and his resignation in August. The company’s market value has surged to about $384 billion.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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

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U.S. Stocks Rise Amid Speculation Fed Will Provide More Stimulus

By Rita Nazareth - Sep 21, 2011 4:14 AM GMT+0700
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Traders work on the floor of the New York Stock Exchange on September 19, 2011. Photographer: Spencer Platt/Getty Images

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Sept. 20 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks fell, sending the Standard & Poor’s 500 Index lower for a second day, as concern that Greece wasn’t closer to receiving more financial aid offset speculation the Federal Reserve will act to stimulate growth. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

U.S. stocks fell, sending the Standard & Poor’s 500 Index lower for a second day, as concern that Greece wasn’t closer to receiving more financial aid offset speculation the Federal Reserve will act to stimulate growth.

Alcoa Inc. (AA), Hewlett-Packard Co. (HPQ) and Caterpillar Inc. (CAT) slid at least 1.1 percent, pacing losses among companies most-tied to economic growth. ConAgra Foods Inc. (CAG) slumped 1.7 percent after posting profit that trailed analysts’ estimates as costs for raw ingredients soared. Apple Inc. (AAPL), the world’s largest company, advanced 0.4 percent, rising for a seventh day to a record.

The S&P 500 fell 0.2 percent to 1,202.09 at 4 p.m. in New York, dropping 1.1 percent in two days. The Dow Jones Industrial Average rose 7.65 points, or 0.1 percent, to 11,408.66.

“There’s fear of a spiral downward to a really bad situation in Europe,"Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a telephone interview. ‘‘Obviously, there will be concern the economy is weakening, that fiscal problems are creating issues, that there will be less flexibility and it will be hard to find a solution.’’

Stocks fell yesterday on concern Greece will fail to qualify for more financial aid. Between April 29 and Aug. 8, the S&P 500 lost as much as 18 percent amid concern about global growth. Since then, the index has rebounded 7.4 percent.

The S&P 500 reversed gains after a report from the state- run Athens News Agency said officials from the so-called troika, comprising the European Union, European Central Bank and International Monetary Fund, plan to return to Athens in early October to complete their review of the Greek economy. The report didn’t cite any sources.

‘Good Progress’

The European Commission said in an e-mailed statement after the market close that a conference call between the Greek Minister of Finance, Evangelos Venizelos, and the international officials today made ‘‘good progress.’’

The IMF cut its forecast for global growth and predicted ‘‘severe’’ repercussions if Europe fails to contain its crisis or if U.S. policy makers reach an impasse over a fiscal plan.

Stocks rose earlier today amid speculation Federal Reserve officials might propose new measures to galvanize the economy when the Fed Open Market Committee completes a two-day meeting tomorrow. Ben S. Bernanke, the central bank’s chairman, told economists Sept. 9 in Minneapolis that policy makers have measures at hand and are ‘‘prepared to employ these tools as appropriate.’’

‘Operation Twist’

One of those untested policy tools is likely to be a move known as ‘‘Operation Twist,’’ in which the Fed would replace short-term Treasuries in its $1.65 trillion portfolio with long- term bonds, according to 71 percent of 42 surveyed economists. The move, with its goal to bend the yield curve, will probably fail to reduce the 9.1 percent unemployment rate, 61 percent of the economists said.

‘‘There’s lots of hope,’’ Jason Brady, a managing director at Thornburg Investment Management Inc., who helps oversee about $76 billion from Santa Fe, New Mexico, said in a telephone interview. ‘‘In the absence of further negative news, people are trying to be hopeful. We might get more stimulus. If the Fed doesn’t do anything, people will be disappointed.’’

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 1.6 percent. Alcoa slumped 2.9 percent to $11.25. Hewlett-Packard decreased 1.9 percent to $22.47. Caterpillar declined 1.1 percent to $83.66.

‘Severe’

ConAgra dropped 1.7 percent to $22.99. The foodmaker said its consumer foods unit, which includes Banquet frozen meals and Slim Jim snacks, is grappling with ‘‘severe’’ cost inflation. The company now projects food costs to increase as much as 10 percent this year, up from a previous estimate of a maximum of 8 percent.

Apple added 0.4 percent to $413.45, rising 9.5 percent in seven days, amid speculation that it could be added to the Dow. Richard Silverman, a spokesman for Dow Jones Indexes, declined to comment.

Putting Apple in the Dow would mean the benchmark gauge would get 22 percent of its value from the iPhone maker, too much influence even for the world’s largest company, according to Bespoke Investment Group LLC.

Apple would have the largest weighting in the 30-company measure because Dow companies are ranked by stock price, not market value. Replacing Kraft Foods Inc. with the Cupertino, California-based company would drive International Business Machines Corp. down to 9.2 percent from 11.6 percent of the Dow, Bespoke said in a report today.

‘Don’t Hold Your Breath’

‘‘Don’t hold your breath,” Bespoke, based in Harrison, New York, wrote in a note to clients, citing speculation today that Apple may enter the Dow. “If the stock were added to the index without a split in the shares, it would have a disproportionate weight in the index, making it more like the Dow Jones Industrial Apple.”

Newmont Mining Corp. (NEM) jumped 5.5 percent to $69.90, its highest price since October 1987. Gold may rise to $2,000 an ounce by the end of this year and $2,300 an ounce by the end of 2012, Chief Executive Officer Richard O’Brien said. Gold futures for December delivery settled at $1,809.10 an ounce today on the Comex in New York.

PulteGroup Inc. rose 3 percent to $4.51. The largest U.S. homebuilder was raised to “buy” from “neutral” at UBS AG, which said the stock’s valuation is “attractive.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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

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Wall Street Faces ‘Brutal’ Fixed-Income Results After Jefferies Decline

By Donal Griffin - Sep 21, 2011 2:34 AM GMT+0700
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Jefferies Group, run by CEO Richard Handler, has been adding staff since the 2008 credit crisis. Photographer: F. Carter Smith/Bloomberg

Jefferies Group Inc. (JEF) posted a 79 percent plunge in fixed-income trading revenue that may show the extent of the damage August’s market turmoil caused for its bigger Wall Street competitors.

Revenue from trading bonds for the three months through Aug. 31 dropped to $33.1 million from $161 million a year earlier at New York-based Jefferies, which is led by Chief Executive Officer Richard “Rich” Handler. Profit excluding an acquisition was 10 cents a share, the investment firm said today in a statement, half analysts’ estimates in a Bloomberg survey.

The biggest Wall Street firms will start reporting third- quarter results next month showing how they weathered a market grappling with fallout from Standard & Poor’s downgrade of the U.S. credit rating and concern Greece would default. August was “outright brutal,” Handler told analysts on a conference call. JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) both warned investors this month that trading revenue may suffer.

“This is a function of the environment, not something specific to Jefferies,” said Lauren Smith, an analyst with New York-based KBW Inc. who predicted the bank would post fixed- income revenue of $195 million. “June and July were fairly muted trading on the part of clients, that was across the board. But August the wheels came off the cart.”

Credit Markets

Handler, 50, said some fixed-income markets at the end of August had tumbled by as much as 15 percent from the end of May, leading to the third-worst month for U.S. credit markets after September and October in 2008. This caused “broad-based writedowns” of some trading assets held by the bank, he said.

“Our results for the quarter substantially reflect the challenging trading conditions across global markets,” Handler said on the call. The problems were “particularly pronounced in August and led to significant declines in certain inventory and hedge values during the quarter,” he said.

Handler and his fellow executives thought the bank was on course for a “satisfactory” quarter at the end of July, he said. The European sovereign debt crisis and investor concern that some banks could struggle to fund their operations ended such hopes in August, he told analysts.

Markets were roiled in August amid investor fear that Europe was struggling to contain its sovereign-debt crisis and that lenders would suffer if a country such as Greece defaulted. Shares in BNP Paribas (BNP) SA, Credit Agricole SA (ACA) and Societe Generale (GLE) SA, the three biggest French banks, fell more than 20 percent during the month. The KBW Bank Index (BKX), which tracks the performance of 24 U.S. banks, fell 13 percent.

Trading Assets

The crisis drove a period of trading volatility and caused a widening of so-called credit spreads, the extra yield that investors demand to own a corporate bond rather than U.S. Treasury notes, Handler said. This caused significant writedowns in some of the bank’s trading assets tied to high-yield bonds, distressed debt and some mortgage bonds, he said.

Trading results at Morgan Stanley, owner of the world’s biggest brokerage, could be affected for the same reason, Chief Financial Officer Ruth Porat said this month. Citigroup Inc. (C), the third-biggest U.S. bank, could post a 31 percent decline in fixed-income revenue compared with the same quarter last year tied to the rout, according to Gerard Cassidy, an analyst with Royal Bank of Canada.

Analysts have reduced their third-quarter profit estimates for firms including Morgan Stanley, Citigroup, JPMorgan and Goldman Sachs Group Inc. (GS) in the past four weeks, according to Bloomberg data. The KBW Bank Index has declined about 5.7 percent since the end of August.

“When credit spreads dislocate as they have, there is a risk that market makers got caught with adverse inventory positions that cause losses,” Chris Kotowski, a New York-based analyst with Oppenheimer & Co., wrote in a Sept. 6 note to clients. “That is clearly what the stock market is fearing.”

To contact the reporter on this story: Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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Bank of America Said to Dismiss 13 Investment Bankers in Industrials Group

By Hugh Son and Jeffrey McCracken - Sep 21, 2011 3:31 AM GMT+0700
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Bank of America has lost almost half of its market value this year amid concern that costs tied to the 2008 takeover of subprime lender Countrywide Financial Corp. will force the company to sell stock to bolster capital. Photographer: Andrew Harrer/Bloomberg

Bank of America Corp. (BAC), the biggest U.S. lender, dismissed 13 investment bankers in its industrials group, including managing directors David Iwan and Egan Antill, said two people with direct knowledge of the actions.

Iwan and Antill departed this month during a round of 3,500 reductions throughout the Charlotte, North Carolina-based company, said the people, who declined to be named because personnel matters aren’t public. The cuts amount to about 5 percent of jobs in the group, one person said.

Chief Executive Officer Brian T. Moynihan is trimming staff as costs from soured mortgages rise and revenue shrinks amid the slowing U.S. economy. The industrial group cuts weren’t part of Moynihan’s broader cost-cutting plan known as Project New BAC, announced earlier this month, which will eliminate 30,000 jobs over the next few years, said one of the people.

“In this environment, we’re finding that no one is safe, even if you are producing,” said Jeanne Branthover, a managing director at Boyden Global Executive Search Ltd. in New York. “Everyone is scrutinizing costs and revenue much more than in the past.”

Iwan worked on financing transactions for companies including Kennametal Inc., a machinery parts maker in Latrobe, Pennsylvania, according to regulatory filings. Bankers who cater to industrial firms sell services including merger advice and underwriting. Iwan and Antill were registered with Merrill Lynch & Co. since before its 2009 takeover by Bank of America, according to their broker registration data.

Industrial Fees

Bank of America is ranked second in the U.S. and globally in industrial-firm fees, according to Dealogic, an information and consulting service. Kerrie McHugh, a bank spokeswoman, declined to comment on the dismissals. Efforts to reach Iwan and Antill by e-mail and telephone weren’t immediately successful.

The industrials group provides financing and advice through two units. One is run by John Pratt and includes shipping, aerospace, defense, cars, machinery and tools. The other, run by Greg Kelly and Mitch Theiss, covers chemicals, mining and paper.

One of the year’s largest industrial mergers is being negotiated. United Technologies Corp. is in talks to acquire aerospace equipment maker Goodrich Corp., three people with knowledge of the matter said last week.

Mergers and acquisitions of industrial companies accounted for about 15 percent of all M&A activity in the last decade, according to data compiled by Bloomberg.

More Cuts Possible

Deeper job cuts may loom for the firm’s investment bankers. The 30,000 reductions announced so far affect consumer, credit- card and back-office operations. Moynihan, 51, will next tackle expenses in global corporate and commercial banking, areas overseen by co-Chief Operating Officer Thomas K. Montag, 54. That effort starts next month and ends in April, the firm said.

Bank of America has lost almost half of its market value this year amid concern that costs tied to the 2008 takeover of subprime lender Countrywide Financial Corp. will force the company to sell stock to bolster capital.

Banks are cutting jobs at the fastest pace since 2008. HSBC Holdings Plc, Europe’s largest bank, said last month it will eliminate 30,000 positions by the end of 2013 to curb the cost of rising salaries and to prepare for stricter capital rules. Lloyds Banking Group Plc said it would trim about 17,000 positions.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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$16 Muffins Found at U.S. Meetings

By Seth Stern - Sep 21, 2011 4:13 AM 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, a period that included the administrations of Republican George W. Bush and Democrat Barack Obama. 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 an August 2009 conference of the Executive Office for Immigration Review and the beef Wellington was offered at a February 2008 meeting hosted by the Executive Office for U.S. Attorneys. A March 2009 conference of the Office on Violence Against Women served Cracker Jack, popcorn and candy bars at a single break, costing $32 per person, according to the report.

$5 Swedish Meatball

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.

Gina Talamona, a Justice Department spokeswoman, said, “We agree that excessive spending of the types identified in the OIG report should not occur.”

Department agencies “have taken steps since 2009 and prior to the OIG report to ensure that these problems do not occur again,” Talamona said.

Senator Charles Grassley of Iowa, the top Republican on the Judiciary Committee, said in a statement that the Justice Department “appears to be blind to the economic realities our country is facing. People are outraged, and rightly so.”

The spending described in the report provides a “blueprint for the first cuts” that the congressional supercommittee should make, Grassley said. The panel was created in August as part of the agreement to raise the national debt limit and faces a Nov. 23 deadline to come up with recommendations for $1.5 trillion in budget savings.

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

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