China’s Manufacturing May Contract for a Third Month, HSBC Survey Shows

By Bloomberg News - Sep 22, 2011 11:19 AM GMT+0700

China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined.

The reading of 49.4 for the index released by HSBC Holdings Plc and Markit Economics compares with a final 49.9 for August and 49.3 for July. The gauge was below 50, the level that separates expansion from contraction, for eight months through March 2009, according to previously released figures.

Today’s data adds to evidence the world’s second-biggest economy is slowing after the central bank raised borrowing costs and curbed lending to cool inflation. China has joined policy makers in Asian economies from South Korea to Malaysia in limiting monetary tightening as Europe's debt crisis deepens and the risk of a renewed U.S. recession increases.

“The index points to continued moderation in manufacturing growth,” said Chang Jian, an economist at Barclays Capital in Hong Kong who formerly worked for the World Bank. “But the fact that the number is hovering around 50 should reduce concerns over a sharp slowdown and which would support the authorities in keeping their current policy stance largely in place.”

Slowdown Concern

Stocks in China extended their decline after the data were released. The benchmark Shanghai Composite Index was 1.7 percent lower at 2469.36 at the 11:30 a.m. local-time break. The gauge has slumped 12 percent this year as the government tightened policies to cool inflation and concern deepened that faltering growth in developed economies will sap export demand.

HSBC’s preliminary index, known as the Flash PMI, is based on 85 percent to 90 percent of responses to a survey of executives in more than 400 companies. The final reading will be released on Sept. 30.

A gauge of output dropped below 50 in September after expanding the previous month, orders contracted at the same rate and a measure of new export orders contracted at a faster pace, today’s statement showed. Sub-indexes for output prices and input costs rose at a faster pace compared with August, today’s report showed, indicating inflationary pressure hasn’t abated.

The preliminary index has matched the final reading twice since HSBC began publishing the series in February. The index fell below 50 in July for the first time in a year. The official manufacturing index released by the statistics bureau and the China Federation of Logistics and Purchasing had a reading of 50.9 in August.

Hard-Landing Fears

A final reading below 50 for the third month “implies that China’s manufacturing sector will see weakening sequential growth in the coming months,” Qu Hongbin, a Hong Kong-based economist at HSBC, said. “Fears of a hard landing are unwarranted” as the nation is less dependent on overseas sales than during the last crisis and domestic investment and consumer spending are “resilient,” he said.

In contrast, Kevin Lai, a Hong Kong-based economist at Daiwa Capital Markets Ltd. said he’s “extremely concerned” about the outlook for the economy. Concerns the economy will experience a hard landing “are not unwarranted,” he said.

Downside Risks

Economists including Shen Jianguang at Mizuho Securities Asia Ltd. and Lu Ting at Bank of America Merrill Lynch have said the HSBC PMI focuses on small and medium-sized companies that have been affected more than state-owned enterprises in the government’s tightening campaign.

The official PMI, which surveys more than 800 companies in 20 industries, hasn’t dropped below the 50 line that divides expansion from contraction since February 2009.

The International Monetary Fund this week cut its forecast for global growth to 4 percent for 2011 from a June estimate of 4.3 percent, and said “downside risks are growing” as Europe’s debt crisis widens. The Washington-based lender also lowered its estimate for China’s expansion because of monetary tightening and a weaker outlook for exports.

The IMF now projects the Chinese economy will grow 9.5 percent this year, down from a forecast of 9.6 percent in June, and 9 percent in 2012.

Premier Wen Jiabao said this month the slowdown is within the government’s expectations and that stabilizing prices remains the top economic priority.

Mixed Outlook

A central bank survey last week showed inflation expectations among households rebounded in the third quarter even as August consumer-price gains eased to 6.2 percent from a three-year high in July.

Signs are mixed on the outlook for the economy. While industrial output growth moderated in August for the second straight month, exports grew more than expected and imports climbed to a record, indicating demand is holding up.

Rio Tinto Plc (RIO), the world’s second-largest mining group, said this week that “a policy-induced hard landing remains unlikely” and that the long-term outlook for demand from China is “positive.”

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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Asia’s Millionaires Form Family Offices

By Netty Ismail - Sep 22, 2011 1:03 PM GMT+0700

Stephen Diggle, who co-founded a hedge fund that made $2.7 billion for investors in 2007 and 2008, set up a family office to manage the millions in fees he earned instead of entrusting his wealth to private bankers.

“It was fairly demonstrably clear that there was a very significant problem of alignment of interests by private banks and their customers,” said the 47-year-old founder of Vulpes Investment Management, whose Singapore-based family office has invested in hotels in Japan and farms in Uruguay. “They ceased to be custodians of people’s money and they became salesmen.”

Asia’s wealthiest investors, whose ranks are swelling as the region’s economic growth outperforms the rest of the world, are turning to family offices to maintain control of their money after the collapse of Lehman Brothers Holdings Inc. in 2008 made them more risk averse.

“Private banks try to sell you everything and not necessarily what’s best for your family office or for yourself,” said Clinton Ang, managing director of Singapore- based wine and spirits distributor Hock Tong Bee Pte, who is among those preferring to manage his family’s wealth himself. “If sophisticated investors haven’t already learnt the lessons of the past crisis, with the impending crisis that is on the horizon they’d better.”

The MSCI World (MXWO) Index has tumbled 17 percent from this year’s high in May and is trading close to a one-year low after Standard & Poor’s stripped the U.S. of its AAA credit rating in August and Europe’s debt crisis deepened.

U.S. Downgrade

“Markets go up and markets go down,” said Tan Su Shan, head of wealth management of Singapore-based DBS Group Holdings Ltd., Southeast Asia’s biggest bank. “It’s easy enough for clients to point the finger at the banker when things go wrong. What about when things go up? There are always two sides to the story.”

DBS attracted more than S$2 billion ($1.6 billion) in net new money in August, Tan said. The bank’s wealth-management unit turned bearish two months ago and “took money off the table for clients” invested in equities, Tan said.

About 90 percent of Ang’s family’s investable assets of almost S$100 million are in cash after he sold from October through March its investments in stocks, bonds and most property assets, said the 38-year-old, who describes himself a follower of Templeton Asset Management’s Mark Mobius.

Family offices are typically tailored to the families’ investment and personal needs, and often include estate planning, philanthropy and lifestyle management such as maintaining homes and yachts. Private wealth managers, who generally work for global investment banks, rely on fees and commissions from managing their clients’ money.

More Defensive

Most family offices in Asia are more defensive in their investment strategy and tend to hire a “generalist” to manage their wealth, rather than specialists such as former hedge fund managers, said William Chan, chief executive officer of Singapore-based Stamford Privee, which manages his family’s wealth and that of two others. Such managers may cost a family office between $300,000 and $400,000 a year, while specialists would be more expensive, Chan said, citing U.S. surveys.

Wealthy families tend to choose investment professionals they had previous dealings with, such as a private banker, as their office manager, said Chan. Others may select an ex- investment banker who advised them on transactions such as an initial public offering of their company, he said.

“Being the trusted adviser is key,” Chan said. “Failure to retain talent in a buoyant market will usually be the cause of the office’s failure. Right hires are managers who have a strong streak of loyalty to the family and who will not be easily swayed by other offers.”

Asian Wealth

Wealth in Asia, excluding Japan, is expected to rise at about double the global rate of almost 6 percent through the next five years, the Boston Consulting Group said in a May 31 report. Singapore will become the world’s top wealth management center by 2013, overtaking Switzerland and London, according to a PricewaterhouseCoopers LLP study published in June.

The region also is attracting overseas family offices. Tano Capital, the financial adviser of the founders of Franklin Templeton Investments, and London-based Alta Advisers Ltd., the family office of Swedish billionaire Hans Rausing, have opened units in Singapore.

“Anecdotally, we are seeing more European family offices making enquiries about setting up their Asian headquarters to participate in the Asian growth story,” said Amy Lo, head of ultra-high net worth in Asia-Pacific at UBS AG’s wealth management business.

Singapore Rules

About 62 percent of U.S.-based family offices surveyed this year said they were considering increasing allocations to Asian markets outside Japan, according to Family Office Exchange. The median family office reported 12 percent annual pretax portfolio return in 2010 and families are expecting a median return of 8 percent this year, according to the Chicago-based organization, which represents 350 families worldwide.

Singapore’s central bank will require banks from Jan. 1 to advise inexperienced investors on the suitability of products they wish to buy.

“The Lehman crisis was a learning experience for most private banks and private bankers,” said DBS’s Tan. “You cannot sell products that don’t fit the clients’ risk profile and investment objectives.” The Monetary Authority of Singapore’s rules serve “as a protection from hopefully mis- selling from the bankers to the clients.”

Private Banks

Noor Quek, previously the head of business development in Southeast Asia at Citigroup’s private-banking unit who now runs Singapore-based family office adviser NQ International Pte, said family offices shouldn’t be seen as a replacement to banks.

“The whole issue is about both working together,” she said. “The bank must be able to understand the client and the client is to understand what the bank can offer. This is not something that happens overnight.”

Some investment banks are now seeking to tap the growth of family offices in the region by setting up units that cater to the independent firms. Credit Suisse Group AG (CSGN) is housing five Asian and European families in Singapore that are seeking to “incubate” their own wealth management firms, said Bernard Fung, head of family office services at the private banking unit. The Zurich-based bank also works with other families in the region seeking to set up their own family offices, he said.

Role to Play

Family offices and private banks are “not mutually exclusive,” said Fung, who previously oversaw the London-based family office of David Sainsbury, the billionaire philanthropist and former chairman of the eponymous supermarket chain. Families that are serious about managing their assets should use “proper systems to measure risk and governance processes,” he said.

“If you’ve got that, then financial institutions can have a role to play within that,” Fung said. “Trust goes both ways.” Part of the wealth of the family offices that Credit Suisse is housing is still managed by the bank, he said.

Zurich-based UBS set up in January a family services unit in Asia, where much of the wealth was created after World War II, which provides non-investment advice such as philanthropy and wealth planning to its richest clients.

“Most families prefer to set up their own family offices with a combination of their own employees and external experts, with specialist skills ranging from accountants to legal and tax advisers to investment professionals,” said Hong Kong-based Lo.

DBS built up its family office advisory business this year, offering services that include advice on private-equity investments and philanthropy. There’s a “huge movement” of family offices creating their own funds and teaming up with other independent firms to co-invest, said Terry Alan Farris, who joined DBS’s private banking unit in January as its Singapore-based head of family office.

Rockefeller’s Wealth

Market gains helped boost assets managed by private banks by 11 percent last year with the top 20 in the world overseeing a combined $11.1 trillion, according to London-based Scorpio Partnership. The rate of net new money inflows fell on average by almost 19 percent from 2009 and many banks saw margins squeezed, according to the wealth-management consultancy firm.

There are about 50 established family offices in Asia outside of Japan that are managed professionally, according to Scorpio. Worldwide, there are an estimated 2,500 to 3,500 family offices, said Joseph Reilly, president of the Greenwich, Connecticut-based Family Office Association. The first family office was established in the U.S. by oil baron John D. Rockefeller in 1882 to manage his family’s assets.

GFIA Pte, which advises investors seeking to allocate money to hedge funds and began its wealth-advisory business when it started managing Diggle’s money, is in talks with other prospective clients, said Peter Douglas, the firm’s principal.

As financial institutions curb risk after the collapse of Lehman Brothers triggered the global credit crisis, wealthy families are “stepping into the holes left by the exits of the banks” in making higher-return investments, Douglas said.

Uruguay Farms

“It’s partly the realization of the conflict between private wealth and the financial services industry, and it’s partly because now there’s a lot more opportunity out there for private wealth relative to that available for the financial services industry compared with pre-crisis,” Douglas said.

Diggle’s family office bought farms in Uruguay and Illinois, a kiwi-and-avocado orchard in New Zealand, land in Italy and Bali, boutique hotels in Japan, defensive stocks, gold and “a large portfolio of very high-end wine,” he said. Diggle set up Vulpes in April after closing in March Artradis Fund Management Pte, the hedge fund he co-founded with Richard Magides.

Diggle, who has four children, said he set up the family office with GFIA to put in place the processes and structure to preserve his fortune.

Sharing Costs

Some family offices cater to more than one family to gain economies of scale. It costs at least $1.5 million a year to run a family office that includes an investment team, and a family will need a minimum of $100 million to justify the expenses, said Chan of Stamford Privee.

Blue Ocean Capital Partners, a unit of Singapore-based private-equity firm Tembusu Partners Pte, plans to set up an office with a U.K.-based family firm this year, said Director Daniel Lin.

Lin, 28, said he and his 54-year-old father, who founded Tembusu Partners, will start by managing the wealth of their family with the help of a chief executive officer. At least two other families have agreed to partner with them later, he said.

“For private banks, because they have certain targets, they need to find something that will give them a financial return pretty quickly,” Lin said. “For us, we’re not in a hurry to make money out of this; we have time to build on the intangibles such as family values and governance.”

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net.

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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European Stocks Slide as Fed Sees Risks to Economy; Rio Sinks

By Corinne Gretler - Sep 22, 2011 6:21 PM GMT+0700

European stocks tumbled the most in a month as the Federal Reserve signaled “significant downside risks” to the world’s largest economy and Moody’s Investors Service downgraded three U.S. banks. Asian shares and U.S. index futures fell.

Logitech International SA (LOGN), the world’s biggest maker of computer mice, plunged 13 percent after cutting its forecasts for the second time in two months. Rio Tinto Group, the world’s second-largest mining company, sank the most in more than two years as China’s manufacturing shrunk. LVMH Moet Hennessy Louis Vuitton SA and Burberry Group Plc led luxury stocks lower.

The benchmark Stoxx Europe 600 Index sank 4.4 percent to 215.42 at 12:19 p.m. in London, the biggest drop since Aug. 18. The gauge has declined 26 percent from this year’s high on Feb. 17 amid concern the global economic recovery is stalling and the region’s debt crisis is spreading. The MSCI Asia Pacific Index retreated 4.1 percent today and S&P 500 Index futures decreased 2.6 percent after the benchmark gauge for U.S. equities plunged 2.9 percent yesterday.

“To have a chance to resolve the European debt situation, we need world growth to remain robust,” said Jean-Paul Jeckelmann, chief investment officer at Banque Bonhote & Cie. in Neuchatel, Switzerland, who helps manage $1.4 billion in equities. “Any sign that this growth is at risk will shake markets. The word ‘significant’ used by the Fed is pretty strong and is contrasting with previous declarations that were much more constructive.”

Fed Plan

The Fed said it will replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further amid “significant downside risks to the economic outlook, including strains in global financial markets.”

The central bank will buy securities with maturities of 6 to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said late yesterday after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.

The Fed’s “downbeat outlook for the economy left traders fleeing from risky assets,” Jonathan Sudaria, a trader at London Capital Group, said in e-mailed comments.

Moody’s downgraded the long-term credit ratings of Bank of America Corp. and Wells Fargo & Co., along with Citigroup Inc.’s short-term rating, saying U.S. support has become less likely if lenders get into financial trouble.

Greek Cuts

Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default, following two rounds of talks with the European Union and the International Monetary Fund. The policies were demanded by international lenders to ensure Greece reaches deficit-reduction targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.

“A promise of accelerating budget cuts is another attempt at buying more time,” said Manish Singh, London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “More austerity will pile on that pain and be deeply unpopular. I wonder if a quick Greek default is not a better option than long, drawn-out uncertainty and then a default.”

Economic Data

China’s manufacturing may shrink for a third month in September, the longest contraction since 2009, after a preliminary index of purchasing managers showed measures of export orders and output declined. A report in Brussels showed that European services and manufacturing growth contracted for the first time in more than two years in September.

U.S. Labor Department data at 8:30 a.m. in Washington may show that initial jobless claims dropped to 420,000 from 428,000 a week ago, according to 43 economists surveyed by Bloomberg. Separately, the index of U.S. leading economic indicators probably climbed 0.1 percent in August after a 0.5 percent gain in July, according to the survey median.

Logitech fell 13 percent to 6.82 Swiss francs, the biggest decline since April. The company cut its sales and operating profit forecasts for the second time in two months after reassessing its business under Chairman Guerrino De Luca acting as chief executive officer.

Rio, BHP Billiton

Mining companies declined as copper fell to the lowest in almost a year. Rio Tinto and larger rival BHP Billiton Ltd. (BHP) sank 9.3 percent to 3,075 pence and 6.7 percent to 1,762 pence, respectively. Kenmare Resources Plc (KMR) decreased 8.9 percent to 45.90 euro cents while Kazakhmys Plc (KAZ), the biggest copper producer in Kazakhstan, dropped 9.4 percent to 875.50 pence. Antofagasta Plc (ANTO) fell 9.2 percent to 1,012 pence.

LVMH, the maker of Celine handbags and TAG Heuer watches, tumbled 6.7 percent to 7.60 euros. Burberry, the U.K.’s largest luxury-goods maker, retreated 9.5 percent to 1,366 pence, the biggest drop since April 2009.

Societe Generale SA, France’s second-largest bank by assets, slid 8 percent to 15.57 euros ands Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, lost 7.9 percent to 33.32 pence.

Michel Barnier, the European Union’s financial-services commissioner, told Le Figaro in an interview that he can’t rule out the possibility that some European banks will need state aid. Barnier said in the interview that he doesn’t share the view of the International Monetary Fund on the capital needs of European banks. Any necessary refinancing should preferably be carried out with private money, he added.

EADS Slides

European Aeronautic Defence and Space Co. slumped 6.3 percent to 21.25 euros. BNP Paribas SA and Societe Generale (GLE) have stopped lending to aircraft purchasers because of difficulties in obtaining dollar refinancing, Les Echos reported, without citing anyone. Airbus SAS may be affected more than Boeing Co., which has easier access to credit in the U.S., according to the newspaper.

Bourbon SA (GBB), owner of the second-biggest fleet of supply and crew ships for the oil industry, slumped 7.8 percent to 17.94 euros as Bank of America Corp. said the growing liquidity concern around French banks “raises question marks” around financing for part of the European oil industry, adding that Bourboun is “heavily reliant on French banks financing for their fleet expansion program.”

Stada Arzneimittel AG (SAZ) plunged 11 percent to 16.75 euros, extending yesterday’s 19 percent plunge, after Sebastian Frericks, an analyst at Bankhaus Metzler, cut the shares to “sell” from “buy.” The company said yesterday it will have a one-time charge of about 97 million euros in the third quarter because of unpaid bills from Serbian drug wholesalers.

EasyJet Plc (EZJ), Europe’s second-biggest discount airline, rallied 7.1 percent to 334 pence as the company said it will pay a dividend of 9 pence a share for the fiscal year ending in September after raising its annual profit forecast.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

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

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Fed Sees ‘Significant’ Risks to U.S. Economy

By Joshua Zumbrun and Scott Lanman - Sep 22, 2011 4:08 PM GMT+0700

Federal Reserve policy makers indicated they are willing to do more to keep the economy from sliding into another recession as they made their second move in as many months to reduce borrowing costs.

The central bank will extend the average maturities of the Treasuries in its portfolio by purchasing $400 billion of long- term debt while selling an equal amount of shorter-term securities, the Federal Open Market Committee said in Washington after ending a two-day meeting yesterday.

“It’s a modest step,” said Dean Maki, chief U.S. economist at Barclays Capital and a former Fed economist. “This is a way to start down the path of further easing, but they would become more aggressive if they were convinced growth was not going to improve.”

Treasury 30-year bonds surged in anticipation of central bank purchases of longer-term debt. Stocks fell, pushing the Standard & Poor’s 500 Index down the most in a month, on the Fed’s assessment that market turmoil caused by Europe’s sovereign-debt crisis is taking a toll on the U.S. economy.

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the FOMC said. “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”

Global Stocks Tumble

Stocks and commodities fell, Treasury 10-year yields dropped to a record and the Dollar Index climbed to a seven- month high.

The MSCI Asia Pacific Index plunged as much as 3.8 percent in Tokyo and Europe’s benchmark Stoxx 600 Index slumped 3.4 percent at 10:03 a.m. in London. U.S. stock futures dropped, signaling the world’s largest equity market may slide for a fourth straight day. The S&P 500 Index (SPX) tumbled 2.9 percent yesterday.

The Fed’s move, known as “Operation Twist” after a similar action in 1961, drew three dissents for the second meeting in a row, as Chairman Ben S. Bernanke struggled to find consensus to help an economy beset by 9.1 percent unemployment and prices that are 3.8 percent higher than a year ago, as measured by the Consumer Price Index.

The Fed will probably increase the bond-buying program announced yesterday in coming months, said companies including ING Groep NV, Mitsubishi UFJ Asset Management Co. and Wells Fargo LLC.

Rate Pledge

The Fed maintained its pledge made in August to hold its benchmark interest rate near zero through the middle of 2013 so long as unemployment stays high and the inflation outlook is “subdued.” The target rate has been in a range of zero to 0.25 percent since December 2008.

The central bank also announced a measure “to help support conditions in the mortgage market” by reinvesting maturing housing debt into mortgage-backed securities instead of Treasuries.

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates tumbled the most in more than two years relative to Treasuries after the announcement.

“The Fed is trying to drive down mortgage rates to the lowest possible level, to get people to refinance, get more disposable income in people’s pockets,” said Michael Dueker, chief economist for Russell Investments North America in Seattle, with $161 billion in assets under management.

Inflation Outlook

The amount of Treasury debt to be sold represents about three-fourths of Fed holdings of between three months and three years. The program will extend the average maturity of the Fed’s Treasury holdings to 100 months, or 8 1/3 years, by the end of 2012, from 75 months.

Inflation “appears to have moderated since earlier in the year,” the Fed said, without citing a specific measure. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.6 percent in July from a year earlier, accelerating from a 1 percent gain in March. At the same time, retail gasoline prices have declined to an average of $3.57 a gallon from $3.99 in May.

Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the FOMC decision for a second consecutive meeting. They “did not support additional policy accommodation at this time,” the Fed statement said.

Republican Backlash

The Fed’s efforts to spur growth, including purchases of $2.3 trillion in securities from December 2008 through June in two rounds of so-called quantitative easing, have sparked a backlash from Republican lawmakers.

House Speaker John Boehner of Ohio and Senate Minority Leader Mitch McConnell of Kentucky urged Bernanke in a letter this week to refrain from additional monetary easing to avoid “further harm” to the economy.

The criticism has extended to the Republican campaign for the 2012 presidential nomination, with Texas Governor Rick Perry saying Aug. 15 that Bernanke would be treated “pretty ugly down in Texas” if he printed more money before the election.

The Fed’s System Open Market Account held $2.64 trillion in securities as of Sept. 14, which included $1.65 trillion in Treasury notes, bills and inflation-protected bonds and $995 billion of mortgage debt.

Economists surveyed by Bloomberg anticipated a Fed program to extend the duration of its Treasuries. Of 42 analysts surveyed, 71 percent forecast such a move, even as 61 percent said it would probably fail to reduce unemployment.

‘Noticeable Impact’

“We saw a noticeable impact on longer-term securities,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania, who estimates the lower borrowing costs may add 0.1 percentage point to gross domestic product in the fourth quarter. “The Fed has to take strides to restore confidence. The economy is really being held back by a crisis of confidence.”

The Operation Twist from 1961, conducted with the Treasury Department, got its name from Chubby Checker’s hit song, “The Twist,” according to a report published March 14 by Eric Swanson, an economist at the Federal Reserve Bank of San Francisco. That move lowered long-term Treasury yields by about 15 basis points, or 0.15 percentage point, according to Swanson.

Some borrowing costs were already nearing record lows before yesterday’s action.

Yields on 10-year Treasuries have been falling on concerns global growth is flagging and Europe’s sovereign-debt crisis will intensify. The rate fell to 1.86 percent yesterday from this year’s high of 3.74 percent in February. The average rate for a 30-year fixed mortgage fell to 4.09 percent last week, its lowest level on record in a Freddie Mac index dating to 1972.

Joe Carson, director of global economic research at AllianceBernstein LP in New York, said consumers are likely to see little relief in the form of lower costs to pay interest on their debts, which are already at a 15-year low after falling by $250 billion since the middle of 2007.

“It will have a very minor impact on activity because our economy is not being hurt by high interest rates,” Carson said.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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King Moves Closer to Joining Fed in Global Stimulus Push

By Jennifer Ryan - Sep 22, 2011 2:57 PM GMT+0700

Bank of England Governor Mervyn King has moved closer toward joining the Federal Reserve in a global push to add stimulus and stave off renewed recessions.

Economists at JPMorgan Chase and Co. and RBC Capital Markets see the U.K. central bank starting to buy 50 billion pounds ($77 billion) of assets by November after most of its policy makers said more so-called quantitative easing is “increasingly probable.” JPMorgan economist Malcolm Barr in London said weak survey data could prompt a move in October.

A cooling global economy and the threat from Europe’s debt crisis have refocused policy makers’ attention away from inflation risks to avoiding a slide back into recession. The Fed late yesterday said it will rebalance its Treasury holdings to cut longer-term borrowing costs, Sweden’s Riksbank said slowing growth may warrant a rate cut, while the Swiss National Bank lowered its benchmark to zero earlier this month.

“Concerns about inflation carry much less weight now that the focus has shifted to growth,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “They’ve given a clear steer that they’ll announce more asset purchases in the coming months, if not October then November is quite likely.”

The pound fell as much as 0.3 percent against the dollar today, dropping to an eight-month low. It traded at $1.5465 as of 8:55 a.m. in London, from $1.55 yesterday. Government bonds rose, with the yield on the 10-year gilt falling 6 basis points to 2.36 percent.

‘Materially Weaker’

Minutes of the central bank’s Sept. 7-8 meeting published yesterday showed that officials now see second-half growth being “materially weaker” than previously projected. They will announce their next policy decision on Oct. 6.

The International Monetary Fund cut its 2011 and 2012 U.K. economic growth forecasts this week to 1.1 percent and 1.6 percent. The Washington-based IMF previously projected expansion of 1.5 percent and 2.3 percent respectively.

While most of the Monetary Policy Committee sees more QE as likely, Bank of England Chief Economist Spencer Dale indicated yesterday he may not be among that group. Dale, who ended a push for a rate increase in August, said any decision on stimulus needs to be “weighed against the backdrop of continuing high inflation.”

The bank has forecast that consumer-price growth will accelerate to 5 percent in the coming months, more than twice its target. At the same time, economic expansion slowed to 0.2 percent in the second quarter, consumer confidence is declining and manufacturing and services gauges fell in August.

Recession Risk

“With the risk of recession, everything possible has to be done,” Mario Blejer, who was an adviser to King from 2003 to 2008, said in an interview. “U.K. inflation is already too high and there are issues about the bank meeting its target. But in the current context, the damage from a second recession overwhelms all the other issues.”

The Fed said yesterday it would replace much of the short- term debt in its portfolio with longer-term Treasuries in a move dubbed “Operation Twist.” The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less.

Barclays Capital said Sept. 20 that the European Central Bank will cut its benchmark interest rate by a quarter point to 1.25 percent next month, reversing one of its increases earlier this year, in an attempt to ease tensions on money markets.

Government Pressure

Pressure on the Bank of England to aid the recovery is growing as Chancellor of the Exchequer George Osborne vows to stick to his spending-cut plan to reduce the deficit, a move that opposition politicians say is undermining the recovery. Business Secretary Vince Cable repeated a call yesterday for the central bank to expand beyond its government bond purchases.

Britain is facing the fifth-largest fiscal squeeze among advanced economies, according to IMF data analyzed by the London-based Institute for Fiscal Studies. Only Greece, Ireland, Portugal and Iceland are on course to see deeper cuts to 2015.

The MPC minutes showed officials voted 8-1 to keep the bond program unchanged and were unanimous in holding the key interest rate at a record-low 0.5 percent. Still, the decision to maintain the current stimulus was “finely balanced.”

Morgan Stanley currency strategist Tim Davis said yesterday that the pound, which has fallen 6 percent against the dollar in the last month, may weaken further as the Bank of England moves closer to policy loosening.

‘Bearish’

“The pound had been supported by safe haven flows attracted by the U.K.’s stable monetary and fiscal policy, but the increased prospect of QE may have significantly removed this pillar of support,” Davis said in a note, adding he sees the currency at $1.53 by the end of the year. “We remain fundamentally bearish.”

Adam Posen, who has been voting for a 50 billion-pound expansion of the bond program since November, stepped up his push this month, saying the bank may need to buy as much as 100 billion pounds within three months and that officials’ delay in acting has made economic prospects “worse.”

“Additional QE may not be far away,” said Jamie Dannhauser, an economist at Lombard Street Research in London. “Unless there is an improvement in financial-market conditions, the MPC may be minded to ease policy as soon as next month, at the latest in November.”

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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Stocks, Commodities Slump on Fed Outlook, Bank Downgrades; Treasuries Gain

By Stephen Kirkland and Shiyin Chen - Sep 22, 2011 6:43 PM GMT+0700

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Traders work at the New York Stock Exchange in New York. Photographer: Scott Eells/Bloomberg

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Sept. 22 (Bloomberg) -- Jim Millstein, former chief restructuring officer at the U.S. Treasury, talks about Moody's Investor Service's downgrade of the credit ratings of Bank of America Corp. and Wells Fargo & Co., government bailouts and the outlook for U.S. banks. He speaks with Erik Schatzker and Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Stocks and commodities tumbled, Treasury 30-year yields dropped to a record and the Dollar Index climbed to a seven-month high as the Federal Reserve signaled “significant downside risks” in the U.S. economy.

The MSCI All-Country World Index retreated 2.5 percent at 7:41 a.m. in New York, extending declines from its May peak to more than 20 percent. The U.K.’s FTSE 100 Index (UKX), France’s CAC-40 Index (CAC) and Germany’s DAX slid at least 4.3 percent and Standard & Poor’s 500 Index futures lost 2.2 percent. Thirty-year Treasury yields fell to 2.8462 percent, with German 30-year yields also dropping to an all-time low. The Dollar Index rose as much as 1.6 percent, while the euro lost 1 percent against the U.S. currency. Commodities erased their gains for the year.

The Fed said yesterday it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth as the recovery falters two years after the biggest slump since the Great Depression. China’s manufacturing may shrink for a third month in September, a preliminary index of purchasing managers from HSBC Holdings Plc and Markit Economics showed today. The biggest risk to the euro area is a run on southern European banks, said Kenneth Rogoff, a former chief economist at the International Monetary Fund, Handelsblatt reported.

“The fact that the outlook has not improved despite QE1 and QE2 tells me that monetary policy is reaching its limit and fiscal measures have to do the heavy lifting,” said Manish Singh, London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “So far, what we have got from the Congress is only disappointment and half- baked measures. If we get more of the same, the downside risk to the markets amplifies.”

Bear Market

A close at this level for the MSCI’s index of developed and emerging-market stocks will mean the gauge has entered a bear market. The Stoxx Europe 600 sank 4.3 percent today as all 19 industry groups declined at least 2.5 percent. Mining companies and automakers led the retreat. Logitech International SA dropped 13 percent after the world’s biggest maker of computer mice cut its profit forecast.

The cost of insuring European corporate debt surged to the highest in 2 1/2 years, with the Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings rising 43.5 basis points to 848.5, according to JPMorgan Chase & Co.

“We have negative headwinds that are absolutely massive,” Patrick Legland, the Paris-based head of research at Societe Generale SA, said in a Bloomberg Television interview with Francine Lacqua in London. “There’s a very powerful slowdown and maybe a recession for Europe and the U.S.”

Bank Downgrades

The decline in S&P 500 futures indicated the U.S. equities gauge will extend a three-day, 4.1 percent decline. The index slumped 2.9 percent yesterday after Moody’s Investors Service cut its long-term credit ratings on Bank of America Corp. and Wells Fargo & Co., saying U.S. support has become less likely if lenders get into financial trouble. Citigroup Inc.’s short-term rating also was downgraded by Moody’s.

The Dollar Index, which tracks the U.S. currency against those of six trading partners, advanced to 78.539, after climbing to 78.575, the highest level since Feb. 16. The 17- nation euro depreciated as much as 1.1 percent against the yen to the lowest level since June 2001, and reached the weakest level since February versus the greenback.

“The euro zone is in meltdown and investors are bailing out of risk wherever they can,” said Steven Barrow, head of research for Group of 10 currencies at Standard Bank Plc in London, referring to yesterday’s statements by the Fed and the Bank of England. “The fact that the Fed delivered mo more than the market expected was probably seen as a disappointment.”

Aussie, Kiwi

The Australian dollar slid below parity with its U.S. peer for the first time in more than six weeks, falling as much as 1 percent. New Zealand’s dollar sank 1.6 percent against the U.S. currency as a report showed the economy almost stalled in the second quarter, reinforcing the case for central bank Governor Alan Bollard to maintain record-low interest rates until 2012. Gross domestic product rose 0.1 percent in the period from the first quarter, a Statistics New Zealand report showed today in Wellington. The median estimate was for a 0.5 percent gain.

The yield on the 10-year Treasury note declined as much as six basis points to 1.7944, the lowest on record. The difference in yield between two- and 30-year debt was as little as 266 basis points, the least since March 2009. The German 30-year yield dropped as much as 15 basis points to 2.45 percent, with the 10-year bund yield sliding to 1.667 percent, the least on record.

Yield Spreads

The extra yield investors demand to hold Italian 10-year bonds instead of bunds approached a euro-era record 4.16 percentage points and was at 4.03 percentage points as the European Central Bank bought Italian government bonds today, according to four people with knowledge of the transactions. A spokesman for the Frankfurt-based central bank declined to comment. Greek two-year notes rose for the first time in four days, sending the yield down 13 basis points to 66.38 percent.

The S&P GSCI index of 24 commodities fell 2.8 percent, bringing the drop this year to 1.7 percent. Copper declined 4.9 percent in London, and crude oil in New York retreated 3.4 percent to $82.97 a barrel.

The MSCI Emerging Markets Index sank 4.5 percent, the most in a month. Indonesia’s Jakarta Composite Index (JCI) slumped 8.9 percent, the biggest loss since October 2008, and benchmark indexes fell more than 3 percent in Russia, India, Poland, Hungary and Taiwan. The Shanghai Composite Index slid 2.8 percent after the manufacturing gauge declined and the government said it will broaden taxes levied on resources. South Korea’s won led currencies lower, depreciating 2.5 percent against the dollar.

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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Greece Accelerates Cuts to Wages, Pensions to Ensure Next Bailout Payment

By Eleni Chrepa and Natalie Weeks - Sep 22, 2011 4:53 PM GMT+0700
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Greek public sector employees burn their tax notices outside the Finance Ministry in Athens. The latest round of cuts targeting civil servants’ wages and pensioners were demanded by international lenders. Photographer: Louisa Gouliamaki/AFP/Getty Images

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Sept. 21 (Bloomberg) -- Greek Finance Minister Evangelos Venizelos prodded lawmakers to endorse deeper budget cuts to keep emergency loans flowing and avoid default. He spoke to lawmakers in Parliament today in Athens. Andrea Catherwood reports on Bloomberg Television's "Last Word." (Source: Bloomberg)

Greece said it will accelerate budget cuts to keep emergency loans flowing, extending austerity measures that have deepened a recession and failed to ease doubts that it can avoid default.

Subway, tram, train, bus and trolley workers and state- school teachers are holding a 24-hour strike in Athens today to oppose cuts in pensions and workers’ pay. Flights to and from the Athens International Airport will be disrupted as air- traffic controllers walk out for three hours.

The latest round of cuts targeting civil servants’ wages and pensioners were demanded by international lenders to ensure Greece reach deficit-reduction targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.

The cuts will enable Prime Minister George Papandreou to address his biggest deficit, the “credibility deficit,” Jens Bastian, the Alpha Bank Fellow for Southeast Europe at St. Antony’s College at the University of Oxford, said in a Bloomberg Television interview today. Meeting international targets and reducing civil-service costs are “a matter of national urgency,” he said.

Finance Minister Evangelos Venizelos heads to Washington tomorrow to attend the annual meetings of the International Monetary Fund where he will hold talks with IMF Managing Director Christine Lagarde.

Without the infusion of emergency loans, “the risk is that the system, the financial sector and the real economy stop functioning,” Venizelos told Parliament in Athens before Papandreou convened his inner Cabinet yesterday to complete the cuts.

Latest Cuts

Measures announced following two rounds of talks with the European Union and the IMF include: a 20 percent cut in pensions of more than 1,200 euros ($1,650) a month, according to a government statement; pensions paid to those younger than 55 will be shaved by 40 percent for the amount exceeding 1,000 euros and wages will be lowered for 30,000 state employees.

With an 8 billion-euro aid payment in the balance, Greek creditors are also in the final stages of negotiating a bond exchange intended to reduce the country’s debt load of about 350 billion euros. The swap was part of a second rescue set by European leaders on July 21.

Fund Ratification

EU officials are squabbling over implementation of the agreement, which includes an upgrade of the bailout fund, as national legislatures ratify its terms, countering public opposition to channeling more money to keep Greece in the currency union.

Greek bonds rose in early trading today, sending the yield on two-year notes down 27 basis points to 66.2 percent at 12:20 p.m. in Athens.

While Greece says it has enough cash to cover its needs for October, any disbursement of new funds would likely only see it through to the end of the year.

Talks on the Greek aid payments resumed after IMF and EU monitors earlier this month suspended the review for a sixth tranche of loans following the discovery of an unexpected hole in the budget.

Cuts totaling about 28 billion euros that were outlined in June, which were made to ensure the release of the previous aid payment, will be completed by 2014 instead of 2015, as planned, the government statement said yesterday.

The austerity measures are deepening a three-year recession, making it harder for the government to meet the deficit goals laid out in its aid package. The IMF’s representative in Athens said Sept. 19 the economy will shrink 5.5 percent this year and another 2.5 percent next year.

Greek government figures showed the 2011 deficit through August widened 22 percent to 18.9 billion euros, more than the target of 18.1 billion euros for the period. Greece pledged to reduce its deficit to about 7.5 percent of gross domestic product this year from 10.5 percent in 2010.

To contact the reporters on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net; Eleni Chrepa in Athens at echrepa@bloomberg.net

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

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HP’s Woes Accelerate CEO Succession Crisis

By Ari Levy and Danielle Kucera - Sep 22, 2011 9:11 AM GMT+0700

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Hewlett-Packard Co. Chief Executive Officer Leo Apotheker. Photographer: Hannelore Foerster/Bloomberg

Hewlett-Packard Co. (HPQ), weighing the ouster of Chief Executive Officer Leo Apotheker, may struggle to find a new leader who can revive the ailing computer maker after 11 months of strategy shifts and slashed forecasts.

Hewlett-Packard’s board plans to consider firing Apotheker, two people familiar with the matter said yesterday. It may appoint former EBay Inc. (EBAY) CEO Meg Whitman, a Hewlett-Packard director, to serve as an interim leader, said one of the people. The stock had plunged 47 percent on his watch as of Sept. 20, the worst performance in the Dow Jones Industrial Average.

“It’s not going to be easy,” said Michael Mullaney, who helps manage $9.5 billion, including Hewlett-Packard shares, at Fiduciary Trust in Boston. “They have to go back and redefine what they want to be as a company, go back to the drawing board.”

Apotheker’s ouster would leave the board looking for a leader who can do a better job helping Hewlett-Packard weather a personal-computer slump while pushing further into the market for products that deliver computing services over the Web. CEO candidates may also include Todd Bradley, who runs Hewlett- Packard’s PC unit, and David Donatelli, head of the business in charge of servers, storage and networking, said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco.

Other possible candidates that would make sense include Gary Moore, chief operating officer of Cisco Systems Inc., or Steve Mills, who runs the software unit at International Business Machines Corp., said Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco.

Board Discussions

Hewlett-Packard directors met yesterday in committees and will gather today as a full board, according to a person close to the situation. Directors are concerned about the stock price and its lack of improvement under Apotheker’s leadership, the person said. Some top Hewlett-Packard executives also opposed the acquisition of Autonomy Corp., a deal pushed by Apotheker, according to the person.

Hewlett-Packard, based in Palo Alto, California, jumped $1.51, or 6.7 percent, to $23.98 yesterday on the New York Stock Exchange after Bloomberg reported the possible management change. The stock is still down 44 percent since Apotheker, 58, became CEO on Nov. 1, compared with the 1.5 percent decline in the Standard & Poor’s 500 Index.

A new CEO would be Hewlett-Packard’s seventh leader since 1999, when Carly Fiorina took over from Lewis Platt. Fiorina departed in 2005 and was replaced on an interim basis by Robert Wayman, until the company named Mark Hurd to the top job. After Hurd resigned, Cathie Lesjak took the reins temporarily until Apotheker came aboard.

PC Options

In addition to discussing Apotheker’s future, the board is reconsidering a proposal to spin off the PC business, a person familiar with the matter said. Apotheker, the former CEO of German software maker SAP AG, said the company was exploring options for that unit on Aug. 18.

The same day, Hewlett-Packard agreed to buy software maker Autonomy for $10.3 billion. The company also said it was discontinuing products running its WebOS mobile software, including smartphones and tablets -- less than six months after saying it planned to put the operating system on every Hewlett- Packard computer. Shares slumped after the announcements on concerns that Hewlett-Packard was paying too much for the acquisition and the strategic changes showed a lack of deliberation.

Corporate Focus

With the Autonomy purchase and shift in focus, Apotheker was pursuing a plan to lessen the company’s reliance on lower- margin consumer products and concentrate on more-profitable corporate businesses such as servers, software and network services. Any successor to Apotheker will need to do a better job communicating the company’s vision to shareholders, said Tony Ursillo, an analyst at Loomis Sayles & Co. in Boston, which owns Hewlett-Packard shares.

“Leo’s tenure as CEO has been disastrous,” Ursillo said.

Under one scenario, the board may appoint Whitman until a permanent candidate emerges, according to a person with knowledge of the board’s thinking.

Whitman, 55, has been a Hewlett-Packard director since January, two months after she lost a bid to become governor of California. Before entering politics, Whitman spent 10 years at the helm of EBay, the world’s largest online marketplace, and established a career at consumer-related companies.

Whitman’s Consumer Expertise

For Hewlett-Packard, which is focusing on selling to businesses, Whitman is probably not the right person for the long-term, said Dana Stalder, a partner at venture capital firm Matrix Partners in Palo Alto, California.

“It’s not clear to me that someone who spent 30 years in the consumer space is the right person for an enterprise technology company,” said Stalder, who worked under Whitman for seven years at EBay. “HP is increasingly becoming an enterprise company, given the focus on enterprise software and services.”

Sales in Hewlett-Packard’s technology solutions group, which includes services, software and enterprise storage and servers, rose 14 percent in the fiscal third quarter to $15.9 billion. By contrast, revenue in the business that comprises notebooks and PCs fell 3.3 percent to $9.59 billion.

Donatelli, executive vice president of the enterprise business, joined Hewlett-Packard in 2009 after 22 years at EMC Corp., the world’s biggest maker of storage computers. Sterne Agee’s Wu, along with Noland from Baird, said Donatelli may be a candidate for the top job.

Challenging IBM, Oracle

The company needs a leader who can mount a challenge to the biggest providers of technology for corporations, such as IBM, Oracle Corp. and Cisco, Wu said.

“They basically need a turnaround specialist,” Wu said. “It’s not going to be an easy role, whoever it is. Autonomy and the PC business -- they’ve got to figure out what to do there because not everyone thinks those are necessarily the right moves.”

Bradley, who runs the PC business, said last month that he would like to oversee the unit if it’s spun out as a separate company. Bradley, 52, came to Hewlett-Packard in 2005 from PalmOne Inc., where he spent four years.

“I’m very focused on continuing to work with the team of people that have been so successful at making this the largest and most profitable PC company in the world,” Bradley said in an Aug. 23 interview on “Bloomberg West.”

As much as anything, Hewlett-Packard has to find an executive who can help the company get past a series of embarrassments that date back to a boardroom spying scandal in 2006 and continued through last year, when former CEO Hurd quit amid sexual-harassment allegations.

“It’s been really hard to watch what seems to be a company that’s lost its way,” said Leslie Berlin, project historian of Silicon Valley Archives at Stanford University. “The boardroom fights, the job cuts -- it’s almost unrecognizable from the Hewlett-Packard that was once the star attraction in the Valley.”

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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

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AT&T Wants Trial of U.S. T-Mobile Suit

By Tom Schoenberg and Michael Riley - Sep 22, 2011 6:24 AM GMT+0700

AT&T Inc. (T) is eager for a trial of the U.S. Justice Department’s lawsuit challenging its proposed acquisition of wireless carrier T-Mobile USA Inc., a lawyer for the company said.

There was no talk of settlement today in federal court in Washington as Mark Hansen, an attorney for AT&T, told U.S. District Judge Ellen Segal Huvelle that the company wants to get to trial as quickly as possible. Huvelle, who had earlier told the parties to come prepared to discuss settlement prospects, set a trial date for Feb. 13.

“We’re seeking a prompt trial because we’re very interested in closing this transaction,” Hansen, of Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC in Washington, said during the hour-long hearing. “We need to have the cloud of uncertainty removed. We’re already a month beyond where we want to be.”

The Justice Department sued Dallas-based AT&T and Bonn- based Deutsche Telekom AG (DTE)’s T-Mobile unit on Aug. 31, saying a combination of the two companies, which would make AT&T the biggest U.S. wireless carrier, would “substantially” reduce competition. Last week, seven states joined the government’s case seeking to stop the $39 billion deal.

Huvelle pressed lawyers for both sides to limit the number of witnesses and the amount of evidence they’ll present, noting that each proposed interviewing 30 potential witnesses before trial.

‘Longer and Longer’

“This case is getting longer and longer every time I ask,” Huvelle said, scheduling six weeks for the trial.

Joseph Wayland, deputy assistant attorney general of the Justice Department’s antitrust division, said the government plans to have AT&T and T-Mobile officials testify as “adverse” witnesses.

“We’ll call them as part of our case-in-chief immediately to begin the trial,” Wayland said.

Separate suits to block the deal have been filed by Sprint Nextel Corp. (S), the third-biggest U.S. wireless operator, and Ridgeland, Mississippi-based Cellular South Inc., the ninth- largest by customers.

Sprint, which claims the merged company would weaken its ability to compete with AT&T and Verizon Communications Inc., asked Huvelle to be included in coordinated proceedings with the Justice Department, as well as in motions about handling confidential evidence and scheduling.

Similar Cases

Sprint’s lawyer, Steven Sunshine of Skadden, Arps, Slate, Meagher & Flom LLP in Washington, told Huvelle that the company’s case and the government’s are closely allied. He said if the U.S. loses, most of the issues Sprint raised in its suit will be resolved.

“If we lose that day, then we think we’ll be essentially done,” Sunshine said.

Hansen called the effort by Overland Park, Kansas-based Sprint to enter the case a tactical maneuver to slow the litigation, which he said is already damaging both AT&T and T- Mobile. Sprint’s complaint contains “exotic allegations” that the government didn’t endorse, he said, adding that AT&T will ask Huvelle to dismiss Sprint’s case.

Huvelle said that while she’s still considering Sprint’s request for coordination with the government, she probably won’t join the cases for trial. She set Oct. 24 for arguments on whether to throw out Sprint’s lawsuit, and scheduled the next hearing for AT&T and the government the same day.

Still ‘Hopeful’

AT&T is still “hopeful” it can address the Justice Department’s antitrust concerns and reach a settlement, Michael Balmoris, an AT&T spokesman, said in an e-mail after the hearing.

AT&T Chief Executive Officer Randall Stephenson in March announced the proposed purchase of Bellevue, Washington-based T- Mobile. If the transaction falls apart, AT&T may be liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum, and to reduce charges for calls into AT&T’s network.

AT&T has taken a two-track approach to the case. It’s challenging the government’s evidence that the deal would lead to higher prices, less product variety and poorer quality in services, while exploring compromises for asset sales that might satisfy the government’s concerns. The company has reached out to MetroPCS Communications Inc. and Leap Wireless International Inc. to gauge their interest in buying assets, according to two people with direct knowledge of the situation.

A merged AT&T and T-Mobile would have about 132 million connections to mobile wireless devices and more than $72 billion in mobile wireless telecom service revenue, the U.S. said in its complaint. The T-Mobile transaction is scheduled to close by March 20, a deadline that can be extended, according to company filings.

The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Michael Riley in Washington at michaelriley@bloomberg.net

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

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SEC Considering Curbs After Surge in Quotes

By Nina Mehta - Sep 22, 2011 3:49 AM GMT+0700

The Securities and Exchange Commission may ask stock markets to impose fees on trading firms that submit a high number of quotations in relation to executed transactions, an executive at the regulator said.

The SEC is considering whether to urge exchanges to impose a fee for exceeding a certain order-to-execution ratio or for sending messages, which include quotes, updates, cancellations and executions, said David Shillman, associate director at the regulator’s division of trading and markets. That’s because they impose a cost on brokerages who must buy that data, said Shillman, who spoke in an interview at a Securities Industry and Financial Markets Association conference in New York.

Computers are replacing humans as market makers in U.S. equities, and one way they try to entice investors is by sending quotes to exchanges and rapidly updating them. Ashok Krishnan, head of execution services for Europe, Middle East and Africa at Bank of America Corp., said at a Bloomberg Link event in London on May 19 that some firms send more than 500 orders for every execution they receive.

“The idea is to make them bear some of the costs of the infrastructure exchanges build” to attract them, Shillman said today, referring to high-frequency traders, who often update or cancel and resubmit bids and offers at different prices. The SEC could tap rules that require exchanges to “equitably allocate fees” to address the issue of increasing data and technology costs for market participants, he said.

Higher Proportion

Firms that produce many messages should shoulder a greater proportion of the resulting costs, Matthew Lavicka, a managing director at New York-based Goldman Sachs Group Inc., said during a panel discussion at the conference. Currently, those expenses are distributed industrywide, he said.

There should be a “realigning of incentives and disincentives,” Lavicka said. He suggested limits on the number of quotations trading firms can submit to exchanges.

Any rule should apply consistently across all exchanges, Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext (NYX), said during the panel discussion. His company runs the New York Stock Exchange.

The commission recognizes the difficulty exchanges face in imposing fees on brokers and trading firms that “could divert flow elsewhere,” Shillman said during the panel. If the SEC pursues the idea of fees, it may issue a statement or guidance to exchanges suggesting they impose charges for excessive quotations, he said.

‘Too Much’

“There is something that can be viewed as too much messaging,” Elizabeth King, a former SEC executive who’s head of regulatory affairs at Chicago-based Getco LLC, said today at the conference.

If exchanges impose fees for quote traffic, the threshold should vary for different products and across market conditions, allowing for more flexibility, she said. Getco is an automated trading firm that makes markets in equities, bonds, currencies and commodities.

“I don’t think there has to be uniformity to address some of the extreme situations around message rates,” she said.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net

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

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Palestinians to Delay Call for Fast UN Vote

By Flavia Krause-Jackson and Bill Varner - Sep 22, 2011 2:27 AM GMT+0700

The Palestinian Authority, while determined to seek full membership in the United Nations, won’t push for an immediate vote in the Security Council, where it doesn’t yet have enough support for its statehood bid.

Allowing the UN’s administrative process to slow down a Palestinian application to the Security Council would give diplomats time to look for an alternative that restarts peace talks. The U.S. is using the time to lean on council members to abstain from voting in favor of the Palestinians, who are fighting to retain supporters.

“We will give some time to the Security Council to consider first our full membership request before heading to the General Assembly,” Palestinian negotiator Nabil Shaath told reporters today. “ If we fail, we will keep knocking on the door. We do not have a time limit.”

Once a membership application has been lodged, the Security Council can either act fast or hold things up. In the case of South Sudan it took three days to make the African country the UN’s 193rd member while in the case of Jordan it took five years. In the case of the Palestinians, an admissions committee representing all 15 Security Council members can be set up to deliberate on the matter for days, weeks, or even months.

Palestinian Authority President Mahmoud Abbas will speak at the UN General Assembly and formally submit his letter of application to UN Secretary-General Ban Ki-Moon, who will then pass it on to Lebanon, which presides this month over the Security Council. It’s the only Arab country in the 15-member body and supports the Palestinian bid.

Not a Bluff

``We do not think about it as a tactic or a bluff,’’ Shaath told reporters today. We are ‘‘not seeking to join the Mafia or al-Qaeda.’’

Another option open for the Palestinians would be to pursue an upgraded status at the General Assembly from ‘‘entity’’ to ‘‘non-member state.’’ That could enable them to sign international treaties and have cases heard in the International Criminal Court.

The Palestinians have said eight of the council’s members - - Russia, China, Gabon, Nigeria, South Africa, Brazil, Lebanon and India -- will back them. The U.S.’s veto pledge notwithstanding, that still leaves the Palestinians one vote short of the nine needed for membership.

Slow Tracking

‘‘The idea of majorly slow-tracking this is being floated by multiple officials, including Palestinian officials, American officials, and it’s being welcomed,” said Hussein Ibish, a senior fellow at the American Task Force on Palestine, a Washington-based group that advocates a peaceful resolution to the Middle East conflict.

In what U.S. Secretary of State Clinton referred to as “extremely intense” diplomacy, Israel and the U.S. may be making headway in eroding support, even among countries the Palestinians have been counting on.

Israeli Defense Minister Ehud Barak met in New York with Nigerian President Goodluck Jonathan and convinced him to stay neutral in a possible vote on Palestinian statehood, according to a statement released yesterday by his Barak’s office.

“Peace will not come through statements and resolutions at the UN,” U.S. President Barack Obama said today of Palestinian plans to seek the world body’s recognition.

A Vote Short

“At this point it does not look like the Palestinians have the nine affirmative votes they would need” to pass a resolution at the Security Council, said Jennifer Lazlos Mizrahi, founder of the Israel Project, a Washington-based pro- Israel advocacy group.

The Israel Project has met with more than 80 ambassadors in an effort to lobby against the Palestinian bid for recognition. The group brought 18 ambassadors and one other senior diplomat to Israel and Ramallah, the Palestinian capitol, Mizrahi said.

Security Council members Britain, France, Germany, Portugal, Colombia, and Bosnia and Herzegovina are among the countries that are being actively courted.

French President Nicolas Sarkozy, addressing the UN General Assembly today, said the Palestinians can’t now obtain full member-state status through the Security Council and said a U.S. veto “risks engendering a cycle of violence.”

‘Intermediate Step’

Sarkozy endorsed the “intermediate step” of observer- state status, granted through a vote by the General Assembly.

“This would be an important step forward,” he said, as he also proposed a one-year timetable for resumed Israeli- Palestinian negotiations that lead to a full peace accord. The talks should begin within a month without preconditions, he said.

Israeli Prime Minister Benjamin Netanyahu, who met today with Colombia’s President Juan Manuel Santos, thanked him for “support for the position” of Israel, according to the premier’s office.

The U.K. and France, which have been sympathetic to the Palestinian cause, have said they want to see a return to the negotiating table first. Germany is most likely to side with Israel while Portugal leans toward the Palestinians. Still, the European countries are inclined to show a united front and may be reaching a consensus to stay neutral.

Special Attention

Some countries rarely have received so much attention. Bosnia and Herzegovina is the smallest country in the Security Council and its ambassador to the UN is a 36-year-old Croat, who says he’s been contacted by Israel, the Palestinians and the U.S.

Among nations on the Security Council, Brazil, Russia, China, India, Lebanon, South Africa, Bosnia and Herzegovina, Gabon and Nigeria have already recognized a Palestinian state bilaterally, according to Shaath.

“Like most countries in this assembly we believe the time has come,” for the Palestinians to take their right to statehood to the UN, Brazil’s President Dilma Rousseff told the General Assembly.

Russian Foreign Minister Sergei Lavrov told reporters that “no one should deny the Palestinians the right to ask the Security Council to consider recognizing them as a state.”

The European Union’s foreign policy chief, Catherine Ashton, and former British Prime Minister Tony Blair, representing the so-called Quartet mediating group, are leading a last-minute bid to work out an agreement that might lure Abbas back into talks and avoid a showdown at the Security Council.

The Quartet is comprised of the U.S., UN, European Union and Russia.

Some Time

The Palestinians “are not going to be fobbed off” but ‘there is a machinery at the UN,’’ Blair said in an interview with Charlie Rose on Bloomberg Television. “That process doesn’t happen overnight. That will take some time.”

Blair said he is working on a statement that will ask Palestinians and Israelis to return to direct talks under a “very tough timeline” and commit to resolving the issues of settlements and borders first. He declined to give details.

Peace negotiations collapsed last year following Netanyahu’s decision not to extend a 10-month partial freeze of construction in the West Bank’s Jewish settlements. Abbas has said he won’t resume talks while building continues. Netanyahu, who hasn’t offered to resume the freeze in settlement building, has repeatedly said that Abbas should restart direct talks.

To contact the reporters on this story: Flavia Krause-Jackson in United Nations at fjackson@bloomberg.net; Bill Varner in United Nations at wvarner@bloomberg.net

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

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U.S. Stocks Drop as Fed Announces Bond Purchase Plan, Sees Economic Risks

By Rita Nazareth - Sep 22, 2011 4:43 AM GMT+0700

U.S. stocks slumped, giving the Standard & Poor’s 500 Index its biggest decline in a month, as the Federal Reserve announced plans to buy $400 billion of long- term debt and cited risks to the economic outlook.

Caterpillar Inc. and Dow Chemical Co. fell more than 5.1 percent, pacing losses among companies most-tied to the economy. Financial shares in the S&P 500 slid 4.9 percent as a group, to a two-year low, as Moody’s Investors Service cut its ratings on Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. The Dow Jones Transportation Average slid 5.3 percent as railroad shares tumbled after two coal companies cut their forecasts.

The S&P 500 fell 2.9 percent to 1,166.76 at 4 p.m. New York time. The benchmark gauge for American equities has dropped 4.1 percent in three days. The Dow Jones Industrial Average lost 283.82 points, or 2.5 percent, to 11,124.84 today.

“The markets apparently were hoping for a large, magic pill for an anemic economy that feels like it’s catching the flu,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said in an e-mail. The firm has $1.4 billion in assets.

The S&P 500 had tumbled as much as 18 percent from a three- year high at the end of April amid concern the economic recovery was weakening. The index has rebounded 4.2 percent after sinking to an 11-month low on Aug. 8.

Treasury 30-year bonds surged, pushing the yields below 3 percent for the first time since 2009, after the Fed said it will purchase longer-term debt and sell shorter maturities to sustain the economic recovery, confirming market speculation that the central bank was planning an “Operation Twist” similar to one of the central bank’s programs in the 1960s.

‘Significant Downside Risks’

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said.

Fed Chairman Ben Bernanke said in an Aug. 26 speech that the central bank still has tools to stimulate the economy without signaling he will use them. He echoed comments of dissenting members of the Federal Open Market Committee who said then that U.S. economic data aren’t pointing to a recession.

“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A. El-Erian, the chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “They recognize that while Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.”

Caterpillar, Dow Chemical

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 4.2 percent. Caterpillar declined 5.1 percent to $79.36. Dow Chemical lost 6.3 percent to $25.54.

The KBW Bank Index (BKX) declined 5.5 percent. Bank of America fell 7.5 percent to $6.38. Wells Fargo lost 3.9 percent to $23.71, and Citigroup slipped 5.2 percent to $25.52.

Bank of America and Wells Fargo had their long-term credit ratings downgraded by Moody’s, which cited a decreasing probability that the U.S. would support the lenders in an emergency. Citigroup’s short-term credit rating was cut.

Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, closed below $100 for the first time since March 2009. The shares dropped 4.6 percent to $97.86. Morgan Stanley, the sixth-biggest U.S. bank by assets, sustained the biggest decline in the S&P 500 Financials Index as the stock fell 8.6 percent to $13.82.

European Banks

Banks also fell following declines in European lenders. The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

Coal companies tumbled, pacing losses in railroad shares. Walter Energy Inc. (WLT) reduced its second-half sales forecast, citing delays at mines in British Columbia and Alberta. Alpha Natural Resources Inc. (ANR) pared its outlook for full-year production because of a drop in Asia demand and lower-than- expected output at some mines.

“That’s a point of evidence that the global economy is slowing down,” Peter Tuz, who helps manage $1 billion as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a telephone interview. “One of the real strengths of the market of the last few years has been the upward push of commodities driven by global demand.”

Walter Energy slumped 12 percent to $66.25. Alpha decreased 17 percent to $22.30. CSX Corp. (CSX), the biggest eastern U.S. railroad, slumped 8.1 percent to $18.59.

Hewlett-Packard Rallies

Hewlett-Packard Co. (HPQ) rallied 6.7 percent, the only gain in the Dow, to $23.98. The company’s board plans to meet to consider whether to oust Leo Apotheker as chief executive officer after less than 11 months on the job, two people familiar with the matter said.

Under a scenario being considered, Hewlett-Packard’s directors may appoint former EBay Inc. CEO Meg Whitman as his successor, possibly on an interim basis, said one of the people, who asked not to be named because the plans aren’t public.

Oracle Corp. (ORCL) rose 4.2 percent to $29.54. The software maker reported profit that topped analysts’ estimates, boosted by increased spending on database programs and applications that help run businesses.

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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BofA, Wells Fargo Downgraded by Moody’s

By Hugh Son, Dakin Campbell and Donal Griffin - Sep 22, 2011 4:46 AM GMT+0700

Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) had long-term credit ratings downgraded by Moody’s Investors Service, which said U.S. support has become less likely if lenders get into financial trouble.

Citigroup Inc. (C)’s short-term rating also was cut by Moody’s, which said today “there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited.” Citigroup’s stand-alone credit has improved, Moody’s said in a statement, leading the service to confirm the bank’s long-term rating.

The downgrade questions whether the largest banks will always be “too big to fail,” a status conferred in 2008 when they received government rescues to keep the financial system from collapsing. Lawmakers have since overhauled regulations to head off a repeat of the bailouts and ordered regulators to set up a system for seizing and dismantling banks that founder.

Bank of America, the biggest U.S. lender by assets, had its ratings cut two levels to Baa1 from A2 for long-term senior debt, and to Prime-2 from Prime-1 for short-term debt, Moody’s said. The outlook for long-term senior ratings at the Charlotte, North Carolina-based company remains negative, indicating another cut may be ahead.

Litigation Costs

“It makes sense they would get hit the hardest; there are real questions about Bank of America’s assets and the extent of their litigation liabilities,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York-based firm with $1.4 billion in assets that invests in credit markets.

Bank of America was the day’s worst performer in the Dow Jones Industrial Average, falling 7.5 percent to $6.38 at 4 p.m. in New York Stock Exchange composite trading. New York-based Citigroup slipped 5.2 percent to $25.52, while San Francisco- based Wells Fargo dropped 3.9 percent to $23.71.

Wells Fargo’s senior debt was downgraded one level to A2 from A1, according to a Moody’s statement. The outlook remains negative on the senior long-term ratings.

Citigroup had its short-term credit ratings cut to Prime 2 from Prime 1. Moody’s confirmed the lender’s A3 long-term rating, and the A1 long-term and Prime-1 short-term ratings of Citibank N.A., saying the bank’s stand-alone credit profile had improved. Liquidity has “strengthened significantly in the past two years and is robust,” Moody’s said.

U.S. Support

The three firms benefited more than others from underlying government support, according to Moody’s. Five other banks have ratings that include the assumption of some support from the U.S., according to Moody’s: JPMorgan Chase & Co., the second- biggest U.S. bank, Morgan Stanley, Goldman Sachs Group Inc., State Street Corp. and Bank of New York Mellon Corp. These firms aren’t under review, said Abbas Qasim, a Moody’s spokesman.

Moody’s isn’t abandoning the idea of government help, saying in its Citigroup statement that the rating’s new assumptions represent a pre-crisis level of support. The rating for Bank of America now incorporates two levels of “uplift due to systemic support, down from four notches previously,” Moody’s wrote.

Bank of America was unprofitable in three of the four quarters ended June 30 as Chief Executive Officer Brian T. Moynihan, 51, booked more than $30 billion in charges tied to soured mortgages.

Mortgage Disputes

The lender dropped by about half this year in New York trading as Moynihan settled disputes over defective loans. Under so-called representation and warranty clauses, mortgage bond investors can demand that the bank buy back any loans based on faulty information about borrowers and properties.

“The risk to Bank of America, which has clearly generated a lot of litigation and reps and warranties, is particularly significant,” David Fanger, a senior vice president with Moody’s, said in an interview. “We don’t see those adverse outcomes as significant for a Wells Fargo or a Citigroup, given the different mixes” of loan holdings.

Bank of America disputed Moody’s decision.

“Our ratings should be higher,” the company said in a statement. Still, “to minimize any potential impact of this decision on our business, we have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year.”

Impact of Downgrade

While Moody’s said Bank of America has made “significant progress” in improving its capital levels, it didn’t upgrade the firm’s stand-alone ratings because of continuing risks from mortgage operations.

Lower ratings could weaken liquidity, limit access to credit markets and pressure businesses that rely on trading revenue, the bank said in an Aug. 4 regulatory filing. A downgrade by one level at all rating firms could trigger demands for $1.5 billion in collateral and termination payments tied to derivatives and trading agreements as of June 30, the bank said.

The impact of Moody’s decision by itself “at this point is unknown,” said Jerry Dubrowski, a spokesman for the bank. The bank had about $400 billion in liquidity at midyear, enough for two years without going to the markets, he said.

The downgrades may not have a significant impact on banks’ day-to-day funding, said Nancy Bush, an analyst and contributing editor at SNL Financial, the bank-research firm in Charlottesville, Virginia.

Slack Demand

“The irony is that no one needs funding right now, they have all the funding they need,” Bush said. “Moody’s downgraded in an environment in which the banks are so much stronger than in 2008.”

The cost to protect Bank of America’s debt from default for five years jumped to 380 basis points at 12:38 p.m. from 340 before the downgrade, according to broker Phoenix Partners Group. Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bank of America’s $2 billion of 5 percent notes due in May 2021 tumbled 1.65 cents on the dollar to 93.10 cents with a yield of 5.95 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Wells Fargo, led by CEO John Stumpf, 58, has repaid $25 billion in U.S. funds and built capital to meet regulatory thresholds and guard against further declines in housing prices. In March, regulators gave the bank permission to increase its dividend to 12 cents a share and buy back 200 million shares. Bank of America has also repaid $45 billion in bailout funds.

Systemic Support

Moody’s decision “solely reflects a change in their assumption regarding systemic support,” Wells Fargo said in a statement.

Citigroup, the third-biggest U.S. bank, posted $29.3 billion in losses tied to subprime mortgages for 2008 and 2009 combined and took a $45 billion bailout from taxpayers, which has since been repaid. Under CEO Vikram Pandit, the bank has since sold troubled assets and returned to profitability.

“We completely disagree with Moody’s change to Citigroup’s short-term rating,” Citigroup said in a statement. “It does not accurately reflect the significant progress Citi has made since Moody’s last rated Citi more than two and a half years ago.”

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; 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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