China’s Hong Kong Succession Plan Takes Shape as Tang Quits to Prepare Run

By Sophie Leung - Sep 28, 2011 1:30 PM GMT+0700
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Henry Tang, Hong Kong's chief secretary. Photographer: Thomas Lee/Bloomberg

Hong Kong Chief Secretary Henry Tang resigned to consider running for the city’s top government job in a long-awaited succession plan that may be muddied by public anger at a widening wealth gap.

Tang, 59, is expected to run in elections when Chief Executive Donald Tsang’s five-year term ends next June. He faces competition from Leung Chun-ying, who yesterday said he will stand down from Tsang’s advisory body to compete in polls that are skewed in favor of candidates backed by China.

Preparations to replace Tsang take place against the backdrop of an economy contracting at the same time as surging prices of have stoked anger at a government seen as favoring business. While Tang’s path from finance secretary to chief secretary followed Tsang’s and fueled speculation he was being groomed to take over, China has raised concerns over social tension in the city.

“China can wait for a bit to make the final decision, as both Tang and Leung are acceptable,” said Willy Lam, an adjunct professor of history at Chinese University of Hong Kong. “Hong Kong people see Tang as a representative of the business community, which may disadvantage him. On the other hand, civil servants clearly would favor Tang over Leung, and Beijing will no doubt take that into consideration.”

China’s Unease

In a sign of unease at Hong Kong’s leadership, Chinese Premier Wen Jiabao said in March that Tsang and Tang’s administration should resolve “deep-rooted conflicts” as social unrest is growing. Tens of thousands of demonstrators marched to protest surging home prices and inequality on July 1, the 14th anniversary of Hong Kong’s return to Chinese rule.

Hong Kong was handed back in 1997 under an agreement with the U.K. that included guarantees of civil liberties, an independent judiciary and autonomy laid out in the city’s constitution, or basic law. That status helped cement its role as Asia’s biggest international financial center, with a $2 trillion stock market that hosts China’s biggest companies by market value, including Industrial & Commercial Bank of China (601398) Ltd. and PetroChina Co.

The success also created the widest rich-poor gap in Asia, according to a report by the United Nations in 2008. Inflation, excluding distortions from government subsidies, accelerated to 6.3 percent in August, the highest since the global financial crisis. The city can’t set interest rates to damp demand because its currency is pegged to the U.S. dollar.

Shrinking Economy

Rising consumer prices coincide with a slowdown in export growth that caused the economy to contract 0.5 percent in the three month ended June 30 from the previous quarter. Gross domestic product will shrink again this quarter, according to economists at Morgan Stanley and Daiwa Capital Markets.

Tang said he was stepping down to consider "how to improve our livelihood, and ensure that all sectors, particularly the underprivileged, would be able to truly share the fruits of our economic success." In a televised resignation speech he called the prospect of running for office "a great challenge for me."

The 1,200-member committee to be formed in December that will decide the next chief executive is elected from several sectors that represent “narrow business interests” and won’t confront Beijing, said Joseph Cheng, a political science professor at City University in Hong Kong. Some of the biggest groupings in the committee include delegates to the National People’s Congress, China’s parliament, and the Communist Party’s own advisory committee.

‘Cultivated’

China hasn’t always got its way with Hong Kong’s 7 million people. Tsang’s predecessor, Tung Chee-hwa, stepped down early in 2005 citing ill health after unpopular decisions fueled demonstrations that included a march of 500,000 to protest a China-backed anti-subversion law.

“In a climate where people are suspicious of collusion between the government and business, if Tang becomes chief executive there may be a backlash,” Lew Mon Hung, a Hong Kong member of the National Committee of the Chinese People’s Political Consultative Conference, told reporters in Beijing today in comments broadcast by Cable Television. “C.Y. Leung, who comes from a poor family, can avoid such doubts,” he said, adding that he would back Tang’s rival.

Leung, 57, is Asia Pacific chairman at DTZ Holdings Plc (DTZ), a real estate advisory company. He will leave his job “within days” on the Executive Council, the top advisory body to the city government, Leung told reporters yesterday.

Home Base

Leung has been vocal about housing policy, urging the government to resume a program to build subsidized homes that was halted in 2002. Home prices surged more than 70 percent since 2009 on low mortgage rates and an influx of mainland Chinese buyers, according to an index by Centaline Property Agency, the city’s biggest closely held real estate broker.

Tang’s best-known policy success was to abolish duties on wine in 2008, helping the city overtake London and New York as the world’s biggest wine auction market. Imports of the beverage surged to $858 million last year, from $185 million in 2007.

The son of a manufacturer, Tang has faced criticism over his response to public protests, including security measures during a speech by Chinese Vice Premier Li Keqiang at Hong Kong University last month. Tang described criticism that police violated demonstrators’ civil rights as “completely rubbish.”

Tang in May said young people shouldn’t blame the rich for dominating Hong Kong and should instead focus on how to become the “next Li Ka-shing,” the South China Morning Post reported. Li is known as “Superman” in Hong Kong, after parlaying a business making plastic flowers into a multibillion-dollar ports, telecoms and property empire.

Tang’s support fell to 46.6 out of 100 in the latest survey ended this month, from 65.4 when he succeeded Tsang as chief secretary in July 2007, according to the University of Hong Kong’s Public Opinion Programme.

“Chinese officials have cultivated Henry Tang and he has been groomed for the chief executive position for 10 years,” City University’s Cheng said. “Because he appears so weak, that’s why C.Y. Leung believes that he has a chance to win.”

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Hwee Ann Tan at hatan@bloomberg.net

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Obama Jobs Plan May Prevent 2012 Recession

By Timothy R. Homan - Sep 28, 2011 11:00 AM GMT+0700
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President Barack Obama holds up the American Jobs Act as he speaks at North Carolina State University in Raleigh, N.C. Photographer: Gerry Broome/AP Photo

President Barack Obama’s $447 billion jobs plan would help avoid a return to recession by maintaining growth and pushing down the unemployment rate next year, according to economists surveyed by Bloomberg News.

The legislation, submitted to Congress this month, would increase gross domestic product by 0.6 percent next year and add or keep 275,000 workers on payrolls, the median estimates in the survey of 34 economists showed. The program would also lower the jobless rate by 0.2 percentage point in 2012, economists said.

Economists in the survey are less optimistic than Treasury Secretary Timothy F. Geithner, who has cited estimates for a 1.5 percent boost to gross domestic product. Even so, the program may bolster Obama’s re-election prospects by lowering a jobless rate that has stayed near 9 percent or more since April 2009.

The plan “prevents a contraction of the economy in the first quarter” of next year, said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who participated in the survey. “It leads to more retention of workers than net new hires.”

Some 13,000 jobs would be created in 2013, bringing the total to 288,000 over two years, according to the survey. Employers in the U.S. added 1.26 million workers in the past 12 months, Labor Department data show.

Obama’s plan, announced on Sept. 8, calls for cutting the payroll taxes paid by workers and small businesses while extending unemployment insurance. It also includes an increase in infrastructure spending and more aid for cash-strapped state governments.

‘What Happens?’

“The important thing to consider is: What happens if we don’t do anything?” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. He said the program “very well could” forestall a recession in early 2012.

“Most of all, it prevents a serious drag on the economy next year” from current programs expiring, said Brown, who estimates the Obama plan would add 0.5 percent to GDP in 2012.

A reduction in government spending, the end of the payroll- tax holiday and an expiration of extended unemployment benefits would cut GDP by 1.7 percent in 2012, according to JPMorgan Chase & Co. chief U.S. economist Michael Feroli in New York. Instead, the Obama proposal makes up for that potential loss and may add a net 0.1 percent to the economy, he estimates.

State Aid

Tax cuts account for more than half the dollar value of the Obama plan, which also includes $105 billion in spending for school modernization, transportation projects and rehabilitation of vacant properties, according to a White House fact sheet. The proposal includes $35 billion in direct aid to state and local governments to stem dismissals of educators and emergency personnel.

“Some of this is just extending support that was already in place,” said Julia Coronado, chief economist for North America at BNP Paribas in New York. “The actual jobs programs themselves, I don’t think that they’re a game-changer.”

She estimates the proposal will add 200,000 new workers, while retaining about 300,000 jobs that might otherwise be lost.

Republican lawmakers in Congress have expressed opposition to parts of the White House legislation. House leaders object to Obama’s plan to cut payroll taxes, saying it would lead to an overly large boost in taxes when the temporary break ended.

Tax Burden

In a memo to House Republicans on Sept. 16, House Speaker John Boehner, Majority Leader Eric Cantor and other leaders detailed several criticisms of the payroll-tax idea. The lawmakers said an added tax burden would result when, under the president’s plan, an extension and expansion of a “holiday” on such taxes for employees and employers would expire in 2013.

Herrmann agreed. “We’re setting ourselves up for a big end to the sugar high in the first half of 2013,” he said.

A majority of Americans don’t believe Obama’s jobs proposal will help lower the unemployment rate, according to a Bloomberg National Poll conducted Sept. 9-12 by Selzer & Co. of Des Moines, Iowa.

“It’s not really going to have anything more than a marginal impact,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “It’s just maintaining the status quo: extending the payroll-tax cuts and unemployment benefits. The bulk of the money is going to go to firms that would’ve hired anyway.”

Stanley estimated the program would increase payrolls by 50,000 and add 0.25 percent to GDP next year.

Fiscal Policy

While the White House hasn’t given an estimate of how the proposal would affect GDP, Geithner cited the plan Sept. 24 in an address at the annual meeting of the International Monetary Fund. Without additional near-term support, “fiscal policy in the U.S. will be overly contractionary and the U.S. economy will likely grow below its potential in 2012,” Geithner said.

He said private economists estimate the proposal could increase real economic growth next year by around “one and a half percentage points and create more than 1 million jobs at a critical moment in the recovery.”

In the Bloomberg survey, Goldman Sachs Group Inc. estimated the plan would add 1.5 percent to the economy, while Macroeconomic Advisers LLC said 1.3 percent and UniCredit Research, up to 2 percent.

The U.S. economy faces “significant downside risks,” the Federal Reserve said in a statement on Sept. 21 as it announced a plan to shift $400 billion of its Treasury securities holdings into longer-term debt to bring down borrowing costs.

The world’s largest economy grew 3 percent last year before slowing to a 0.4 percent annual pace in the first three months of 2011, followed by 1 percent in the second quarter, according to Commerce Department figures.

The economy will expand 2.2 percent next year, according to a separate Bloomberg survey of economists conducted Sept. 2 to Sept. 7. The same survey said the unemployment rate would average 8.8 percent in 2012.

============================================================                         Table of Forecasts ============================================================                  GDP     GDP     Jobs (thous)     UR Change                 2012    2013    2012    2013    2012    2013 ============================================================ Median           0.6     0.2     275      13    -0.2    -0.1 Count             34      30      28      28      28      26 ------------------------------------------------------------ Action Eco       0.0     0.0       0       0     0.0     0.0 AIG              0.7     0.1     250     100    -0.5    -0.2 Aletti           0.4     0.0     n/a     n/a     n/a     n/a Anderson Eco     0.5     0.5     500     500    -0.5    n/a BBVA             1.3     0.9     900     900    -0.8    -0.7 BNP Paribas      0.5    -0.3     500    -300     n/a     n/a Clearview Eco    0.8     0.8     750     750    -0.5    -0.5 DB               0.0     0.0       0       0     0.0     0.0 Econoclast       0.0     0.0       0       0     0.0     0.0 Euler Hermes     0.0     0.0       0       0     0.0     0.0 Fact & Opinion   0.5     0.5     500   1,000    -0.1    -0.3 Faifield         n/a     n/a     300     200    -0.2    -0.3 Fannie Mae       0.7     0.0     500       0     0.0     0.0 Goldberg Inv     n/a     n/a     150     100     n/a     n/a Goldman Sachs    1.5     n/a     n/a     n/a     n/a     n/a Guerrilla        1.5    -1.0     200       0    -0.2     n/a H. Johnson       0.2     0.3      25      45     0.2     0.2 JP Morgan        0.1     n/a     n/a     n/a     n/a     n/a MacroEco         1.3     n/a     n/a     n/a     n/a     n/a MacroFin         1.5     1.5   1,000   1,000    -1.0    -1.0 Manulife         1.5     0.5   2,000     700    -1.0    -0.3 Mizuho           0.2     0.0     n/a     n/a     n/a     n/a Moodys           2.0     1.0   1,000       0    -1.0    -0.4 NFIB             0.0     0.0       0       0     0.0     0.0 Niagara          1.0     0.1     125       0     0.0     0.0 Nord             0.4     0.5     n/a     n/a    -0.2    -0.4 Parsanec         0.5     0.5   1,100     700    -1.0    -0.5 Pierpont         0.3     0.0      50       0    -0.2     0.0 Raymond James    0.3     0.2     350      25    -0.5    -0.1 SPSU             0.9     0.1     110       0     0.0     0.0 SocGen           1.7     0.8       1       1    -0.4    -0.2 State Street     1.2    -1.0     340    -370    -0.2     0.3 Standard Charter 1.0     0.5     600     300     0.0     0.0 Unicredit        2.0     n/a     n/a     n/a     n/a     n/a W Hummer         0.2     0.2     150     200    -0.1    -0.1 J Forest         1.0     1.0     n/a     n/a    -1.0    -0.5 ============================================================ 

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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

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U.S. Stock Futures Climb in Sign of Rally

By Sarah Jones - Sep 28, 2011 7:53 PM GMT+0700
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A trader signals an order in the Volatility Index Options pit on the floor of the Chicago Board Options Exchange in Chicago, Illinois. Photographer: Tim Boyle/Bloomberg

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Sept. 28 (Bloomberg) -- Andrew Milligan, head of global strategy at Standard Life Investments Ltd., talks about U.S. and European equities. He speaks from Edinburgh with Francine Lacqua on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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Sep. 28 (Bloomberg) -- Michael Purves, chief market strategist and head of derivatives research at BGC Financial LP, talks about the outlook for the U.S. dollar, stocks, and Treasuries. Purves speaks with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stock futures rose, indicating the Standard & Poor’s 500 Index may extend the biggest three-day advance in a month, amid mounting speculation policy makers will contain Europe’s debt crisis.

Caterpillar Inc. and Amazon.com Inc. increased at least 0.6 percent, pacing advanced among the largest U.S. companies. Bank of America Corp. climbed 0.6 percent, leading gains among financial companies.

S&P 500 futures expiring in December advanced 0.3 percent to 1,173.30 at 8:50 a.m. New York time, after earlier rising as much as 1 percent. Dow Jones Industrial Average futures gained 38 points, or 0.3 percent, to 11,158 today.

“This is classic trading range action,” Liam Dalton, president of Axiom Capital Management Inc. in New York, which oversees $1.4 billion, said in a telephone interview. “We’re shifting emotions between fear and greed until we get some resolution as to the European situation. This market is struggling to have any continuity.”

The S&P 500 rallied 4.1 over the previous three days, paring its loss this quarter to 11 percent. Stocks are having the worst quarter on record relative to Treasuries and gold, which may force investors to buy equities to rebalance their allocations, JPMorgan’s Marko Kolanovic said last week.

$1 Trillion

A four-day rout last week erased $1 trillion from U.S. equities amid concern Greek insolvency is inevitable and Europe can’t contain the damage. The decline left the S&P 500 trading at 12.4 times earnings in the past 12 months, 4.4 percent below its average valuation at the lowest point during the last nine bear markets, Bloomberg data shows.

Futures on the VIX show investors expect the Chicago Board Options Exchange Volatility Index to remain at least 50 percent above its historical average of 20.5 through May, data compiled by Bloomberg show.

Stocks rallied yesterday after Greece made progress in meeting requirements for more international aid and Germany vowed continue to support for the country. Equities trimmed gains in the final hour after the Financial Times reported that some euro-area countries are demanding that private creditors take bigger writedowns on their Greek bond holdings.

European Commission President Jose Barroso today called for faster creation of a rescue fund and said he will press ahead with common bonds for the euro area, a proposal Germany opposes. Experts from the European Commission, European Central Bank and International Monetary Fund will return to Athens tomorrow to review the Greek government’s budget-cut plans, the commission said.

Stock futures briefly extended gains after a report showed orders for U.S. capital goods climbed in August by the most in three months, a sign business investment continues to support the recovery. Bookings for goods like computers and communications gear, excluding military hardware and aircraft, climbed 1.1 percent, the most since May, the Commerce Department report showed. Demand for total durable goods dropped 0.1 percent, less than forecast.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

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

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Saudi Woman Driver Sentenced to 10 Lashes After King Grants Women the Vote

By Donna Abu-Nasr - Sep 28, 2011 3:48 PM GMT+0700
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Saudi women get into the backseat of a car in Riyadh. Photographer: Fayez Nureldine/AFP/Getty Images

Two days after Saudi King Abdullah’s decision to allow women to participate in elections, two Saudi women were punished for breaking the ban on female driving: One was sentenced to 10 lashes by a court in Jeddah and another was detained in Riyadh.

The incidents highlight the continuing disparity between the rights of men and women in the kingdom. Women may be able to vote and run in the 2015 municipal elections, but they still can’t drive, argue in court before a judge, travel or get an education or a job without male approval.

“Saudi Arabia made the giant leap this week from an F- to an F+ in human rights,” David Keyes, executive director of Advancing Human Rights, said in an e-mailed response to questions on Sept. 27. “It’s unconscionable that in the 21st century a woman cannot drive herself to work, a restaurant or just for the fun of it.”

Saudi Arabia, holder of the world’s biggest oil reserves, has mostly avoided the anti-government demonstrations that have rocked the Arab world this year. The kingdom announced spending plans totaling about 500 billion riyals ($130 billion) to prevent the regional unrest from sparking dissent at home.

Some women, inspired by the Arab revolts that led to the fall of leaders in Egypt, Tunisia and Libya, have been pushing for change, using social-networking sites. One of their efforts, a campaign called Baladi, calling for female enfranchisement, partially succeeded with Abdullah’s announcement this week. Still, it failed to lift the ban on women voting in tomorrow’s municipal election.

Leading ‘Saudi Spring’

“Women in Saudi Arabia are leading the Saudi spring,” said Hatoon al-Fassi, one of the Baladi campaigners, in a telephone interview on Sept. 26. “We’re going to push for driving as a next step.”

Another effort, Women2Drive, a campaign that called on women with international drivers’ licenses to break the only ban of its kind in the world and start driving on June 17, also appeared to be making headway until this week. More than 50 women responded to the appeal that day. Several across the kingdom continued to drive and authorities initially seemed to turn a blind eye to the women behind the wheel.

Sheikh Mohammed al-Nujaimi, a Saudi cleric who is a member of the non-governmental Sharia Scholars Institute, said every country punishes infringements of rules. “I haven’t heard about the lashing sentence, but if people violate laws, there will be chaos,” he said in a telephone interview today from Riyadh.

Police Summons

Women2Drive said the woman who was sentenced to 10 lashes had appeared at the Jeddah court twice before the sentencing. Two other women have been called to court, including Najla Hariri, who was forced to sign a pledge not to drive again and is scheduled to appear before a Jeddah court for trial in one month, and another woman who is on trial in the Eastern Province, the group said.

“This is completely unacceptable and certainly breaks laws and regulations as well as international treaties that Saudi Arabia has signed,” Women2Drive said in a Sept. 27 statement. “What is happening is horrifying and must immediately be stopped.”

Madeeha Ajroush, a 58-year-old psychotherapist, said she was detained in Riyadh after driving “to express my joy at the king’s decision.”

“Someone saw me drive and complained to authorities,” Ajroush said in a telephone interview yesterday. “After I got home, the police came to summon me.” She spent 3 1/2 hours at the police station, signed a no-driving pledge and was let go.

Teaching Driving

Hariri, a 45-year-old housewife, said she received a call on Sept. 21 summoning her to appear before Jeddah’s prosecutor on Sept. 25, the day the king issued his decree.

“My need to drive should not be considered a defiance of the law, the ruler or religion,” said Hariri in a telephone interview from Jeddah on Sept. 27. “I drive out of a need, because I don’t have a driver.”

The latest government actions have led to a suspension of a new initiative that Women2Drive campaigners had hoped would boost their effort: teaching women how to drive. More than 1,500 women had ticked the “learn” box on a confidential form the campaigners sent around by e-mail.

During the summer months, a small group of women looked for neighborhoods where students can practice without getting arrested, compiled instructional material, including how-to videos, for the theoretical part of the course and looked around for female volunteers with valid international licenses.

‘No Written Law’

“There’s no written law that bans women from driving, so how can women drivers be prosecuted?” said Noura Yousef, one of the campaign organizers, in a telephone interview from Jeddah on Sept. 26.

Inrahim Al Mugaiteeb, an activist and president of the Human Rights First Society, said Saudi judges can hand down sentences based on their interpretation of Islamic Sharia law even when there’s no corresponding rule on the country’s statute books. “This is why it’s not uncommon to see sentences given on the same crime, sometimes in the same city, that are radically different,” he said.

Saudi Arabia enforces restrictions interpreted from the Wahhabi version of Sunni Islam. In addition to the restrictions on women, the government enforces strict gender segregations in public, including at restaurants, schools and lines at fast food take-outs.

The last time a group of women publicly defied the driving ban was on Nov. 6, 1990, when U.S. troops massed in Saudi Arabia to prepare for a war that would expel Iraqi forces from Kuwait.

To contact the reporter on this story: Donna Abu Nasr in Manama, Bahrain at: dabunasr@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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European Stocks Retreat as Man Group Tumbles; U.S. Index Futures Advance

By Adria Cimino - Sep 28, 2011 7:45 PM GMT+0700
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Traders speak to one another on the floor of Frankfurt stock exchange in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

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Sept. 28 (Bloomberg) -- Andrew Milligan, head of global strategy at Standard Life Investments Ltd., talks about U.S. and European equities. He speaks from Edinburgh with Francine Lacqua on Bloomberg Television's "The Pulse." (Source: Bloomberg)

European stocks fell, snapping the biggest three-day rally in 16 months, after a report that some countries are demanding private creditors take bigger writedowns on Greek bonds. Asian shares and U.S. futures rose.

Man Group Plc (EMG) sank the most in almost three years as the world’s biggest hedge fund said assets under management will decrease. Cairn Energy Plc (CNE) slid 4.5 percent after abandoning an exploration well. PSA Peugeot Citroen, Europe’s second-largest carmaker, declined 2.5 percent as Goldman Sachs Group Inc. advised selling the shares.

The Stoxx Europe 600 Index slid 0.5 percent to 228.7 at 1:44 a.m. in London, having earlier risen the same amount. The gauge had surged 7 percent over the past three days, the biggest rally since May 2010, amid speculation policy makers will increase efforts to contain the region’s debt crisis. The Financial Times reported late yesterday that some euro-area countries are demanding private creditors take bigger writedowns on their Greek bond holdings.

“We’re evaluating how much banks must take in additional provisions,” said Pierre Mouton, a fund manager at Notz Stucki & Cie. in Geneva, who helps oversee $7.5 billion. “The market would be able to forget all of this if the problem stops at Greece. What is stopping the market from rebounding is concern about Italy.”

The MSCI Asia Pacific Index gained 0.4 percent and futures on the Standard & Poor’s 500 Index advanced 0.3 percent.

Greek Aid

German Chancellor Angela Merkel said today that she’s waiting for a report from the European Union, European Central Bank and International Monetary Fund on Greece’s budget progress before deciding whether revisions are needed to the financing package agreed in July. Euro-area leaders announced 159 billion euros ($229 billion) in new aid for Greece on July 21 and cajoled bondholders into footing part of the bill.

The Stoxx 600 fell 26 percent from this year’s peak in February through Sept. 22 amid concern the European debt crisis is spreading and the global economic recovery is faltering. The decline left the measure trading at 9 times estimated earnings, the cheapest since March 2009, data compiled by Bloomberg show.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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

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Euro Crisis Makes Fed Lender of Only Resort as Banks Chase Dollar Funding

By Craig Torres and Caroline Salas Gage - Sep 28, 2011 1:24 PM GMT+0700
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Jose R. Del Toral inspects stacks of freshly made twenty dollar bills at the Bureau of Engraving and Printing in Washington, DC. Photographer: Mark Wilson/Getty Images

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Sept. 28 (Bloomberg) -- Guillermo Felices, head of European currency strategy at Barclays Capital, discusses the outlook for the euro, the sovereign debt crisis and European Central Bank monetary policy. He also comments on the dollar's haven status and the pound. Felices spoke yesterday with Bloomberg's Paul Dobson in London. (Source: Bloomberg)

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Sept. 28 (Bloomberg) -- Hans-Guenter Redeker, head of global currency strategy at Morgan Stanley, and Philippe d'Arvisenet, global chief economist at BNP Paribas SA, discuss the euro-zone debt crisis and the prospects for the euro. D'Arvisenet speaks from Paris and Redeker speaks in London. They talk with Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

The Federal Reserve, chastised by Congress for lending money to foreign institutions such as the Central Bank of Libya, is once again the lender of last resort for banks around the world it knows little about.

Three years after the collapse of Lehman Brothers Holdings Inc., money-market borrowing rates for dollars are rising, leading the Fed and European Central Bank to make the currency available to Europe’s institutions for as many as three months. U.S. prime money-market funds cut their exposure to euro-zone bank deposits and commercial paper, or short-term IOUs, to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. data.

The failure of regulators worldwide to address European banks’ fragile dependence on short-term funding is “putting the Fed in a really awkward position,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a Washington regulatory research firm whose clients include the biggest U.S. banks. The swaps with Europe “are an extremely advantageous political football” for critics of the Fed, she said.

The extended funding comes as the U.S. central bank is already under fire for its unprecedented monetary stimulus. Republican leaders including Representative John Boehner of Ohio and Senator Mitch McConnell of Kentucky wrote Chairman Ben S. Bernanke and the Board of Governors on Sept. 19, asking them to “resist further extraordinary intervention in the U.S. economy.”

Lawmaker Criticism

Representative Ron Paul, a Texas Republican who wants to abolish the Fed, and Senator Bernard Sanders, a Vermont independent, have criticized its loans to foreign institutions.

“The Fed has made good on most of its investments over the years, but increasing its exposure and that of the U.S. government to foreign banks is a moral-hazard problem,” said Edward Royce of California, the third most-senior Republican on the House Financial Services Committee. “We are effectively incentivizing U.S. money-market funds to continue to finance these banks.”

U.S. regulators also are becoming less patient with what are turning out to be dollar-funding runs against foreign banks. Financial institutions are too dependent on short-term money- market investors that tend “to flee at the first signs of distress,” William C. Dudley, president of the Federal Reserve Bank of New York, said Sept. 23 in a Washington speech. Regulators also lack access to data on foreign institutions operating in the U.S. that would allow them to “make informed judgments about the adequacy of such firms’ capital and liquidity buffers,” he said.

Large Losses

Investors are fleeing because of concern that banks will take large losses if a euro-zone nation such as Greece defaults. Europe’s debt crisis has generated as much as 300 billion euros ($408 billion) in credit risk for the region’s banks, the International Monetary Fund said last week.

Against the euro, the dollar is heading for its biggest monthly advance since November last year as European policy makers fail to contain their region’s sovereign-debt crisis. It was little changed today at $1.3575 at 3:11 p.m. in Tokyo.

The London Interbank Offered Rate at which banks say they can borrow for three months in dollars rose for a 13th day on Sept. 27 to 0.36522 percent from 0.36278 percent the previous day, according to data from the British Bankers’ Association.

ECB Coordination

The ECB said Sept. 15 it will coordinate with the Fed and other central banks to provide three-month dollar loans to banks to ensure they have enough of the currency through the end of the year. The Fed bears no foreign-exchange or credit risk on the swap lines because the Frankfurt-based ECB is its counterparty.

There were $575 million in outstanding swaps with foreign central banks as of Sept. 21, Fed data show. The ECB loaned a similar amount of cash to two euro-area banks earlier this month in seven-day transactions. The first of three ECB three-month dollar-loan offers starts Oct. 12.

The Fed facility provides a critical “ceiling” on funding squeezes that allows investors to avoid panic and distinguish between healthy and troubled banks, said Jerome Schneider, head of the short-term strategies and money-markets desk at Pacific Investment Management Co. in Newport Beach, California.

“What you don’t want to have is liquidity risk become intertwined with solvency risk,” Schneider said. The swap lines are “the foundation right now to provide a backstop.”

Biggest Borrowers

After the criticism earlier this year of lending to overseas institutions, including Libya’s central bank after Lehman collapsed in 2008, New York Fed researchers said U.S. branches of foreign banks were among the biggest borrowers from the discount window because they lack deposit bases. The window is the Fed’s oldest backstop-lending tool.

In an April 13 post on the New York bank’s research blog, the researchers said these institutions have relied more heavily on so-called wholesale funding for dollars, including the money markets and foreign-exchange swaps. Supporting these banks helped maintain foreign investment in the U.S., they said.

The Fed “does need to be concerned about how a liquidity run on the European banks will impact us -- our financial markets, our financial institutions, the economy as a whole,” said Republican Representative Kevin Brady of Texas, the vice chairman of Congress’s Joint Economic Committee. The Fed needs to define its safety-net policies and use the extension of its credit as a lever to persuade European regulators to work on funding stability, he added. He will call on Bernanke to address these concerns at an Oct. 4 hearing, he said.

Policy Gap

“The Fed’s lack of a lender-of-last-resort policy really does create tremendous market uncertainty” and provides an incentive for institutions “to run to the politicians,” Brady said. “It does create moral hazard, no doubt about it.”

Euro-zone banks and other institutions were more than $350 billion in debt to the Fed’s emergency-lending facilities at one point during the 2008-2009 financial crisis, according to data compiled by Bloomberg News. The analysis was based on Fed documents released earlier this year after court orders upheld Freedom of Information Act requests by Bloomberg LP, the parent company of Bloomberg News, and News Corp.’s Fox News Network LLC. Fed lending to these entities totaled more than $100 billion on an average day.

Dexia SA (DEXB), based in Brussels and Paris, was the biggest euro-area borrower, with as much as $58.5 billion of Fed loans on Dec. 31, 2008. BNP Paribas (BNP) SA in Paris borrowed as much as $29.3 billion on April 18, 2008. The largest U.S. borrower, New York-based Morgan Stanley (MS), took $107.3 billion of loans on Sept. 29, 2008.

Unstable Funding

Banks that rely on unstable short-term funding risk having to return to official sources for money until liquidity and capital are bolstered, said Viral Acharya, a New York University Stern School of Business professor and author of books on financial stability.

“All the national regulators have to agree that their banks need to raise capital,” he said. “The regulators are not sufficiently united. No one country is taking the leadership to realize the problem is getting out of hand.”

The Basel Committee on Banking Supervision, a group of regulators and central bankers from 27 nations including the U.S., has agreed on liquidity guidelines; the first round is slated to be phased in by 2015.

While the Fed is legally required to lend to banking entities in its districts, it “does have a choice” regarding how it will extend the swap lines, said William Poole, former president of the Federal Reserve Bank of St. Louis.

“European governments have substantial dollar holdings of U.S. Treasury securities, so why not sell some of their dollar securities to support their own banks?”

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Caroline Salas Gage in New York at csalas1@bloomberg.net

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

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U.S. Coast Guard Says Deepwater Horizon Wreckage May Be Source of Sheen

By Joe Carroll - Sep 28, 2011 4:39 AM GMT+0700
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An oil slick from the sunken Deepwater Horizon drilling platform is seen off the coast of Louisiana May 10, 2010 in the Gulf of Mexico. Photograph: NASA via Getty Images

The U.S. Coast Guard said the wreckage of Transocean Ltd. (RIG)’s Deepwater Horizon drilling rig may be the source of an oily sheen on the surface of the Gulf of Mexico.

The Coast Guard notified Vernier, Switzerland-based Transocean today that it may be held responsible for the pollution. BP Plc (BP/)’s Macondo well, which erupted in April 2010 off the Louisiana coast and destroyed the rig, is not suspected as a source of the sheen, the Coast Guard said on its website.

The sheen was sighted in the same area of the Gulf that includes the Macondo well, a region known as Mississippi Canyon Block 252. The disaster killed 11 rig workers, injured 17, sank the $365 million rig and shut vast swaths of the Gulf to fishing and tourism for months.

By the time BP cut off the flow of crude from the well after 87 days, more than 4 million barrels of crude had spewed into the sea to make the catastrophe the worst U.S. maritime oil spill. In today’s announcement, the Coast Guard said video shot on the seafloor by a remotely operated vehicle indicated the sheen didn’t emanate from the Macondo wellhead.

Brian Kennedy, a Transocean spokesman, said in an e-mailed statement that any oil or other fluids that may have leaked from the crumpled pipe that connected Macondo to the rig emanated from the well. As such, BP is responsible because the London- based company was operator of the well, he said.

The pipe, known as a riser, had a capacity to hold 200 barrels of crude before it was mangled, bent and snapped as the rig sank, Kennedy said. Transocean already has agreed to accept responsibility for any diesel or other onboard fluids that may have spilled during the disaster, he said.

Transocean dropped as much as 3.1 percent minutes after the Coast Guard’s announcement. The shares fell 73 cents, or 1.4 percent, to $51.74, at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 44 percent of its value since the disaster.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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Record Prices Test Australia Property Market

By Nichola Saminather - Sep 28, 2011 8:55 AM GMT+0700
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A residence stands on a street known as "Mansion Street" in the eastern suburb of Bellevue Hill in Sydney, Australia. Photographer: Jack Atley/Bloomberg

A mansion with a 4,000-bottle wine cellar in one of Sydney’s most exclusive waterfront suburbs is seeking a record A$50 million ($49 million) in a test of Australia’s luxury property market.

Prices of homes costing more than A$15 million have declined about 15 percent, said Michael Dunn, principal at property broker Richardson & Wrench Double Bay, one of the agents marketing the five-bedroom house in Darling Point in the city’s east. The number of potential buyers has dropped to one or two per property, from five or six before 2009, and homes that once sold within 90 days now take about 120, Dunn said.

Home prices in the top 20 percent of capital city suburbs when measured by the median sale price fell 5.7 percent in the six months to July, according to figures from real estate researcher RP Data. That’s more than double the 2.7 percent decline in the lowest 20 percent by sale value and a 2.6 percent drop across the middle 60 percent.

“Nobody suggested that getting a record price would be an easy exercise in this climate,” Dunn said in a telephone interview Sept. 26. “But these sorts of properties sell in good times and bad.”

The most expensive house sold in Sydney is Coolong on the waterfront in Vaucluse, which fetched A$45 million three years ago.

Sydney’s top-end homes cost 590 pounds ($922) a square foot, London-based Savills Plc (SVS) said in a report last week accompanying its billionaire property index. That places them 10th on a global list topped by Hong Kong, Tokyo, Paris and London.

Price Declines

Australian homeowners are increasingly pessimistic about the housing market as rising unemployment and constrained sales dampen growth expectations, a National Australia Bank Ltd. (NAB) survey showed today. Home prices fell 2.4 percent in the third quarter and are expected to fall 1 percent over the next year, Australia’s fourth-largest lender said in an e-mailed report.

The ability of Australian homeowners to keep up with mortgage payments declined over the past year, Moody’s Investors Service said in an e-mailed report today. The national delinquency rate rose to 1.67 percent from 1.36 percent between March 2010 and June this year, while the number of regions with mortgage performance classed by the risk assessor as “poor” or “very poor” increased fourfold to 28 out of 65.

“The trend of value declines has actually worsened at the top end of the market over the months leading up to July, so a recovery doesn’t appear to be on the cards just yet,” Tim Lawless, national research director at RP Data said in an e-mail yesterday.

Top-End Buyers

The S&P/ASX 200 share index has plunged 16 percent this year as the sovereign-debt crisis in Europe roils markets.

The uncertainty and seven interest-rate increases in Australia between October 2009 and November 2010 has kept buyers sidelined even as more houses are coming onto the market. The number of homes listed for sale across the country jumped 23.6 percent in August from a year ago, according to SQM Research Pty, and the number of sales is 18 percent below the five-year average, RP Data said.

“We aren’t likely to see a dramatic improvement in buyer numbers in the top price brackets until we see some renewed stability in equity markets and both consumer and business confidence levels,” Lawless said.

Australian business confidence plunged last month to the lowest level since April 2009, a National Australia Bank survey published Sept. 13 showed. Consumer confidence rebounded this month from a two-year low as the central bank indicated it will keep the developed world’s highest borrowing costs on hold.

Lloyd Wright-Inspired

The Darling Point mansion belonging to William Tyree, the millionaire founder of closely held transformer manufacturer Tyree Industries, is set on 1,800 square meters (19,375 square feet) of land. The Frank Lloyd Wright-inspired home opens up to tiered gardens and lawns that lead down to a boat pen.

The sale will be the highest in Sydney this year, said Ken Jacobs, managing director of Ken Jacobs Real Estate, who is also marketing the mansion.

Jacobs is also working on the sale of Amaroo, a six-bedroom waterfront home on Bayview Hill Road in Rose Bay, another eastern suburb. While he declined to comment on a price he’s aiming to sell Amaroo for, another home in the street holds the record for the most expensive in the suburb, at A$18.2 million.

“It’s always difficult at the top end, but there are certainly anti-cyclical buyers out there who see real estate as a good place to invest,” he said.

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

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

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China Warns Asia Not to Hide Behind U.S. Military

By Bloomberg News - Sep 28, 2011 12:45 PM GMT+0700

Asian countries should be on guard against the “danger” of feeling they can “do whatever they want” because of the U.S. military presence in the region, the Chinese Communist Party’s People’s Daily said in a commentary.

The opinion piece said it was understandable that some Asian countries may be uncomfortable with China’s rise and emphasized that the government in Beijing was working for “peaceful solutions” to conflicts such as territorial disputes in the South China Sea. The commentary comes as countries such as the Philippines and Vietnam are increasingly voicing concerns over China’s claims to the waters.

“Asia remains a fertile ground for a Cold War mentality,” the commentary said. “Asia is advancing, will never return to the Cold War, and China must have an important role in the future of Asian security.”

Competing claims to the South China Sea threaten to sour ties between China and the Association of Southeast Asian Nations members Vietnam, the Philippines and Malaysia as the countries compete over oil, gas and fisheries resources. China, citing historical evidence such as pottery shards, claims a tongue-shaped swath of the sea demarked by nine dashes that extends hundreds of miles south from Hainan Island to the equatorial waters off the coast of Borneo.

China’s Ire

The U.S. set off China’s ire in 2010 when Secretary of State Hillary Clinton, speaking at a regional summit in Hanoi, called resolving the competing claims to the sea “a leading diplomatic priority.” That drew a rebuke from Chinese Foreign Minister Yang Jiechi, who said internationalizing the incident with U.S. involvement “can only make matters worse and more difficult to solve.”

Huang Jing, a professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore, said the commentary may offer a hint that China is actually willing to compromise with southeast Asian nations on the South China Sea in a bid to stave off deeper U.S. involvement.

One compromise could be giving up a claim to the entire sea demarcated by the nine-dash line, Huang said. Instead, China would focus its claims on the waters surrounding the reefs and shoals, which may placate Malaysia and the Philippines, he said.

“China knows it doesn’t have any ground to claim the nine- dash line,” Huang said. “If China doesn’t clarify its position it gives America more of an excuse or more justification to intervene.”

Today’s commentary was attributed to Zhong Sheng, a play on words that sounds like “voice of China.” Commentaries on topics that take a nationalist line, including one on Sept. 23 criticizing the U.S. decision to sell arms to Taiwan, often carry the same name. Zhong Sheng likely represents a group of “hardliners,” Huang said.

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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Shanghai Closes Subway Stations After Crash

By Bloomberg News - Sep 28, 2011 11:34 AM GMT+0700
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Rescuers evacuate passengers after a subway train collision in Shanghai on September 27, 2011, where a crash between two metro trains injured more than 40 people, as more than 500 passengers have been evacuated from the trains after the collision, which was apparently caused by a signal failure. Photographer: STR/AFP/Getty Images

Shanghai, China’s financial capital, shuttered a subway line for 13 stations and slowed metro trains after two locomotives collided yesterday, injuring 271 people.

Line 10 was closed from Hailun Road to Yili Road, according to station announcements, which didn’t say when services would resume. At Yuyuan Garden station, in central Shanghai, and the stop closest to the crash site, security guards were directing people to special buses run by the city government.

“I’m scared of taking the subway for the time being,” Li Fei, a 36-year-old bank worker, said as she waited at a nearby bus stop. “I’d rather take the bus because it’s safer.”

Rail stocks also fell in Hong Kong on concern the accident may damp spending on subways following a slowdown in mainline investments prompted by a fatal high-speed crash in July. The Shanghai accident happened when a train careered into the back of another one while controllers were running operations using a manual system following an equipment failure.

“This is an alarm bell for the subway system after years of rapid growth,” said Jack Xu, an analyst at Sinopac Securities Asia Ltd. in Shanghai. “Investment in the sector may slow in the near term.”

Shanghai Construction

The subway and maglev-train network in Shanghai expanded more than sevenfold in eight years to 453 kilometers (281 miles) to keep pace with a growing population and demand during last year’s World Expo. Line 10 opened last year.

The equipment that had the fault was made by Casco Signal Ltd., Shanghai Shentong Metro Co. Chairman Yu Guangyao said at a press conference yesterday. The city is limiting train speeds to 45 kilometers an hour (28 miles per hour) and beginning an investigation, he said.

Casco, a venture of China Railway Signal & Communication Corp. and Alstom SA (ALO), also made the centralized traffic control system for the railway line involved in the July high-speed crash, the official Xinhua News Agency reported. A person who answered the phone at Casco’s Shanghai headquarters said the company wouldn’t take any media interviews. She declined to give her name. When a Bloomberg reporter visited the office, no one answered the door. Calls to Alstom’s media-relations office in Beijing and to China Railway Signal’s headquarters in the city also went unanswered.

CSR, China Railway

CSR Corp., which has made subway trains for lines in Shanghai, Nanjing and Guangzhou, fell as much as 9.6 percent in Hong Kong trading. It was down 6.5 percent at HK$3.03 as of 11:40 a.m. Railway-builder China Railway Group Ltd. (601390) tumbled as much as 6.6 percent. Shanghai Metro dropped 1.3 percent to 8.64 yuan in Shanghai.

More than 500 people were evacuated from the two metro trains yesterday, with 62 ambulances sent to the scene, Shanghai Metro said. Of the injured, 180 are out of hospital, 30 are under observation and 61 were admitted, none with life- threatening injuries, Xu Jianguang, director-general of the Shanghai Health Bureau, said at a press conference yesterday.

A train on the No. 10 line ran in the wrong direction on July 28 because of a signaling fault during an upgrade, according to a statement on Shanghai Metro’s website. No one was injured.

Shanghai Network

Shanghai had 11 metro lines and one magnetic-levitation track at the end of last year, which together handled an average of 5.16 million passengers a day, according to a government booklet. Two more metro lines are due to open by 2012, stretching the network to 500 kilometers and likely boosting the average number of passengers to more than 8 million a day, the booklet said.

By comparison, London Underground is 402 kilometers long and carries about 3 million passengers daily, based on data on Transport for London’s website.

China slashed nationwide spending on railway construction by 50 percent last month to 33 billion yuan ($5.2 billion) as it slowed work after the high-speed crash near Wenzhou city that killed 40 people. The government also halted approval for new lines and fired at least three officials.

The nation’s mainline rail network is set to reach 120,000 kilometers under a 2.8 trillion yuan, five-year investment plan running through 2015. That includes boosting the high-speed network, which opened in 2007, to 16,000 kilometers.

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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Christie Says U.S. Hasn’t Kept ‘Tradition of Exceptionalism’

By Terrence Dopp - Sep 28, 2011 3:40 AM GMT+0700

New Jersey Governor Chris Christie will say the U.S. has “failed to live up to our own tradition of exceptionalism,” according to excerpts of a speech to be delivered tonight.

Christie, 49, will speak at the Ronald Reagan Presidential Library in Simi Valley, California, as part of a national round of speeches and fundraising for his party’s candidates in New Jersey and other states.

The first-term Republican has denied interest in a 2012 White House run even as party leaders have intensified calls for him to join the race, according to a Republican close to the governor who declined to be identified because he isn’t authorized to speak for him.

“Through our own domestic political conduct of late, we have failed to live up to our own tradition of exceptionalism,” Christie plans to say, according to excerpts released by his office. “Our role and ability to affect change has been diminished because of our own problems and our inability to effectively deal with them.”

The speech gives Christie, who has urged Republican presidential candidates to take a harder line on entitlement spending and debt, an opportunity to expand his influence in national politics and shape the race.

Christie defeated incumbent Democrat Jon Corzine in 2009 amid voter dissatisfaction over the state economy and the highest property taxes in the nation. He rose to prominence in national Republican circles after cutting $10 billion in spending in his first budget and requiring public workers to pay more for pensions and health insurance.

To contact the reporter on this story: Terrence Dopp in Trenton at tdopp@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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Apple to Introduce New IPhone on Oct. 4

By Adam Satariano - Sep 28, 2011 3:06 AM GMT+0700
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A man lines up near the new Apple Inc. store on the eve of the store's opening in Hong Kong, on Sept. 23, 2011. Photographer: Jerome Favre/Bloomberg

Apple Inc. (AAPL) will introduce a new version of the iPhone at an Oct. 4 event, the first upgrade of its best-selling product since Steve Jobs resigned as chief executive officer.

“Let’s talk iPhone,” Apple said in an invitation to the gathering at its headquarters in Cupertino, California.

The new iPhone will include a better camera and faster processor, people familiar with the matter said earlier this year. Introduced in 2007, the iPhone accounts for about half of Apple’s revenue. Demand for the touch-screen gadget has helped catapult Apple ahead of Exxon Mobil Corp. as the world’s most valuable company.

Jobs, who resigned as CEO and turned leadership of the company over to Tim Cook on Aug. 24., is now Apple’s chairman.

“The iPhone is the most important product line in the company,” said Shaw Wu, an analyst at Sterne Agee & Leach Inc. “Cook will be heavily watched,” because he didn’t typically participate in major product introductions in his former role, Wu said.

Apple showed off new features of the iPhone’s revamped operating system during Jobs’s last major Apple event, a developers conference in June. The new software, called iOS 5, includes new notification and text messaging systems. The company also said in June that it will debut iCloud, which lets users to wirelessly access music, pictures and other files across different Apple devices.

Biggest Product

The new iPhone could be Apple’s best-selling product yet. Apple may sell 110 million iPhones in 2012, a faster pace than this year, when nearly 40 million were sold during the first half of the calendar year, according to Mike Abramsky, an analyst at RBC Capital Markets in Toronto.

Pent-up demand may help sales, said Maynard Um, an analyst at UBS Securities LLC. Apple is unveiling a new model 16 months after the iPhone 4 debuted, compared with the 12 months between previous model updates. In addition to the stronger processor and improved camera, the new iPhone may have faster networking technology, improved graphics performance and potentially be thinner and lighter, Um said.

This may be the last time Apple can wait so long between new iPhones as rivals including Samsung Electronics Co. and HTC Corp. introduce competing smartphones using Google Inc.’s Android operating system.

“A year and a half, especially in the smartphone product cycle, is many lifetimes,” said Ashok Kumar, an analyst at Rodman & Renshaw LLC in New York.

IPhone Carriers

Apple is set to expand the number of wireless providers for the iPhone. Sprint Nextel Corp. (S), the third-largest carrier, will begin offering Apple’s phone in the U.S. with unlimited data services plan next month, people familiar with the matter said. AT&T Corp. and Verizon Wireless now are the only two U.S. carriers of the iPhone.

The new iPhone probably won’t be less expensive than the current model, which is sold to wireless carriers for $600, said Gene Munster, an analyst at Piper Jaffray Cos., in a research report. Service providers generally subsidize the price for customers. Instead of making the phone cheaper, Apple is likely to drop the price of the current model iPhone to give consumers a more affordable alternative, Munster said.

Voice-Recognition

The new model may include voice-recognition software, Munster said. He speculated that the “Let’s Talk iPhone” wording of the invite may refer to such speech-based features. Apple purchased a speech-recognition software company called Siri last year.

In the first full quarter on the market, Apple may sell 25 million iPhones, Munster said, adding that this estimate for the period ending in December may be “conservative.”

Natalie Harrison, a spokeswoman for Apple, didn’t immediately return a call seeking comment.

Apple’s shares fell $3.91 to $399.26 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has climbed 24 percent this year.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

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

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RIM Gains on Speculation Icahn May Buy Stake

Enlarge image Research In Motion Gains on Speculation Icahn May Buy Stake

A man uses a Research in Motion Ltd. Blackberry device while waiting in line for a new Apple Inc. store to open in the Conestoga Mall in Waterloo, Ontario, Canada, on Aug. 13, 2011. Photographer: Norm Betts/Bloomberg

Research In Motion Ltd. (RIMM), the maker of the BlackBerry smartphone struggling to revive falling sales, rose 4.5 percent on speculation that activist investor Carl Icahn is buying a stake in the company.

“This is a typical Carl Icahn scenario to come in and change,” said Sameet Kanade, an analyst at Northern Securities Inc. in Toronto who recommends investors sell the stock. “If he did this though, it would have to be on a hostile basis, given that the two co-CEOs own 11 percent of the stock.”

RIM has plunged 61 percent on the Nasdaq this year after earnings missed analysts’ estimates on slumping demand. Stung by customer defections to Apple Inc. (AAPL)’s iPhone and handsets that run on Google Inc. (GOOG)’s Android platform, RIM’s share of the global smartphone market fell to 12 percent last quarter from 19 percent a year earlier, according to Gartner Inc.

RIM, based in Waterloo, Ontario, gained 97 cents to $22.65 at 4 p.m. New York time on the Nasdaq Stock Market.

Icahn built his reputation as a corporate raider in the 1980s targeting companies such as Phillips Petroleum Co., Texaco Inc. and Trans World Airlines Inc. He more recently sparred with management at Motorola Inc. and Clorox Co. (CLX) He often spends years holding stocks as he waits for investments to pay off.

Strategy Push

“If he has taken a position, he may likely push for a board seat and compel the company to peruse value-creating strategies such as a sale of the company,” Mike Abramsky, an analyst at RBC Capital Markets in Toronto, said today in a research note.

Abramsky, who has a “sector perform” rating on the shares, said in July that the company could split into two, with one business continuing to build hardware and the other focused on supplying networks and so-called “cloud” Internet storage services to corporate customers.

Icahn had pushed for a board seat at Motorola and pressured the company into splitting into two, which it did in January. Last month, Motorola Mobility Holdings Inc. agreed to sell itself to Google for $12.5 billion.

The billionaire investor may look to keep RIM as one company to maximize its undervalued assets, said Michael Cote, whose consulting firm Cote Collaborative Inc. has advised Motorola and other U.S. handset makers and wireless carriers.

‘More Aggressively’

“They have an extensive intellectual property portfolio and they could use that more aggressively,” Cote said today in an interview.

The BlackBerry maker holds more than 2,000 patents, pertaining to everything from mobile security to e-mail, according to the U.S. Patent Office.

RIM’s data network could also have value beyond the transport of BlackBerry traffic, Cote said. In addition, cash generated from its monthly collection of BlackBerry services fees gives it “a reason why someone like an Icahn would be interested.”

Icahn and Marisa Conway, a spokeswoman for RIM, didn’t immediately return phone calls seeking comment.

RIM’s largest shareholders are co-Chief Executive Officers Jim Balsillie and Mike Lazaridis, who is also the company’s founder.

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

Scott Moritz in New York at Smoritz6@bloomberg.net

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

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Ex-Facebook Official Starts Venture Career With Yammer, SecondMarket Deals

By Ari Levy - Sep 28, 2011 3:48 AM GMT+0700

Chamath Palihapitiya, a former executive at Facebook Inc., made the first two investments for his new venture fund, buying stakes in business-software maker Yammer Inc. and private-stock exchange SecondMarket Inc.

Palihapitiya’s fund, called the Social+Capital Partnership, led a $17 million investment in Yammer, a San Francisco company that makes social-networking programs for businesses. The fund, which announced both deals today in separate statements, bought its SecondMarket stake from existing investors. SecondMarket lets investors trade shares of closely held companies before they hold an initial public offering.

After a four-year career at Facebook, where he worked on mobile products and expanded the company internationally, Palihapitiya left this year to form Social+Capital. The Palo Alto, California-based fund is raising about $300 million, with an eye to investing in Internet technology, health care, education and financial services. Prior to joining Facebook, he spent a year at venture-capital firm Mayfield Fund.

“The things I like tend to have very disruptive elements to an existing established infrastructure,” Palihapitiya, 35, said in an interview. “SecondMarket disrupts the IPO process by giving you completely different alternatives. Yammer is highly disruptive to established enterprise software companies.”

Big-Name Customers

With today’s investment, Yammer has now raised $57 million. The company, started by PayPal Inc. co-founder David Sacks, provides software to more than 100,000 businesses in 160 countries, serving clients such as Royal Dutch Shell Plc and Ford Motor Co. (F) Existing investors include Charles River Ventures, Emergence Capital and U.S. Venture Partners.

“Social networking is destined to have as significant an impact on the enterprise as it has already had in our personal lives,” Palihapitiya said in the statement.

The SecondMarket deal, meanwhile, involving buying stock from employees and early investors, Chief Executive Officer Barry Silbert said in a blog posting. Shareholders of the New York-based company sold about $13 million of stock at a valuation of about $160 million, in what the company expects to be an “annual liquidity event,” Silbert said.

SecondMarket helps investors in privately held companies buy and sell their stock. The company has handled transactions totaling almost $1 billion, Silbert said today. Shareholders of Facebook, Twitter Inc. and LinkedIn Corp. have sold stock on the exchange.

Palihapitiya was joined by Russian billionaire Yuri Milner and actor Ashton Kutcher in buying the SecondMarket shares.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

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

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Accenture Profit Beats Estimates as Companies Spend on Consulting Services

By Sarah Frier - Sep 28, 2011 3:38 AM GMT+0700

Accenture Plc (ACN), the world’s second- largest technology consulting company, reported fourth-quarter profit that exceeded analysts’ estimates on increasing spending by businesses.

Net income advanced to $611.9 million, or 91 cents a share, from $445.5 million, or 66 cents, a year earlier, the company said today in a statement. Analysts predicted 90 cents a share, the average of estimates compiled by Bloomberg. Accenture also gave 2012 forecasts exceeding projections.

Consulting revenue rose 25 percent. Accenture is benefiting as long-term clients are boosting spending on its services following the recession, said Joseph Foresi, a Janney Montgomery Scott LLC analyst in Boston. Larger rival International Business Machines Corp. (IBM) also reported earnings beating estimates for the latest quarter on demand from corporations.

“We were at a stage in the economic recovery where companies wanted to turn to consultants to help them in different aspects of their general business -- anything from cost cutting to technology,” Foresi said.

Sales in the quarter ended Aug. 31 rose 23 percent to $6.69 billion. Analysts projected $6.53 billion on average.

Accenture, incorporated in Dublin, advanced $2.07, or 3.9 percent, to $55.72 in extended trading after closing at $53.65 on the New York Stock Exchange. The shares have gained 11 percent this year.

Monitoring Economy

Bookings for consulting projects, which represent more than half of total revenue, were $4.16 billion, up from $3.7 billion in the third quarter.

“While we are closely monitoring the economic environment, we continue to see strong demand for our services,” Chief Executive Officer Pierre Nanterme, who is based in Paris, said in the statement.

The International Monetary Fund reduced its forecast for global economic growth Sept. 20 and said Europe and the U.S. risk re-entering recession if they fail to solve their financial problems.

Per-share earnings for the year ending in August 2012 will rise to $3.80 to $3.88, Accenture said. Analysts estimated $3.77 on average. Full-year revenue will increase 7 percent to 10 percent, the company said. Analysts projected 7.3 percent.

Accenture boosted its semi-annual dividend by 50 percent to 67.5 cents a share.

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

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

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Coffee Falls in Robusta Rout While Starbucks Cup Costs $1.50: Commodities

By Isis Almeida - Sep 28, 2011 6:01 AM GMT+0700
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A worker sieves coffee beans in Espirito Santo do Pinhal, Brazil. Output in Brazil, which started its 2011-12 harvest in July, will rise 14 percent to 14.5 million bags, the USDA estimates. Photographer: Paulo Fridman/Bloomberg News

Farmers from Vietnam to Brazil will supply a record robusta crop in the marketing year that begins next month, extending a slump in coffee futures that spurred Kraft Foods Inc. (KFT) and J.M. Smucker Co. to cut prices.

Production will rise 5.4 percent to 3.29 million metric tons (54.9 million 60-kilogram bags) in the 2011-12 season, the U.S. Department of Agriculture estimates. Vietnam and Brazil, the biggest producers, will reap the most beans ever. Robusta traded on the NYSE Liffe exchange in London fell 26 percent since March, and will drop another 5 percent to $1,884 a metric ton by Dec. 31, according to the mean in a Bloomberg survey of 16 brokers, traders and analysts.

Robusta, the second most-consumed coffee after arabica, is reversing a rally that more than doubled prices in the 12 months ended in March as shortages emerged. That was part of a global surge in food prices that the United Nations estimates reached a record in February. U.S. food-price inflation will be as much as 3.5 percent next year, compared with as much as 4 percent this year, the USDA estimates.

“Vietnam will have a record crop next season and supply will be readily available for roasters, which had to rely on stocks after the country ran out of beans earlier this year,” said Keith Flury, a commodities analyst at Rabobank International in London. “Increased availability will pressure prices, helping ease costs for roasters and consumers.”

Robusta futures reached a three-year high of $2,672 in March as an unusually long rainy season in Indonesia cut output by 12 percent to 7.95 million bags. While production in the world’s third-largest grower probably dropped another 16 percent to 6.66 million bags in the harvest that began in April, the decline will be more than offset by the biggest suppliers.

Vietnam Harvest

Output in Brazil, which started its 2011-12 harvest in July, will rise 14 percent to 14.5 million bags, the USDA estimates. Vietnam’s harvest, which begins next month, will yield 9.8 percent more at 19.9 million bags, the data show. Futures traders are already anticipating the surge in supply of the beans used mostly in instant coffee, with robusta for November delivery trading at $1,932 on Sept. 26.

Prices for arabica, favored by Starbucks Corp. (SBUX), dropped 16 percent to $2.408 a pound on ICE Futures U.S. in New York since Sept. 1, also reacting to traders’ expectations of increasing supply. Brazil will harvest a record crop next year, according to Volcafe, a unit of ED&F Man Holdings Ltd. The USDA is forecasting the biggest Central American supply in a decade.

Green Coffee

The flood of beans will add to European coffee stockpiles that already rose 35 percent to 13.66 million bags this year as Vietnamese farmers accelerated exports to take advantage of a three-year high in prices, data from the European Coffee Federation show. The figure includes robusta and arabica. Stockpiles of green, or unroasted, coffee in U.S. warehouses monitored by the Green Coffee Association of New York jumped 19 percent to almost 4.74 million bags this year.

The anticipated price slump may be curbed if the Vietnam Coffee and Cocoa Association implements a plan to stockpile beans to avoid domestic shortages, said Kona Haque, an analyst at Macquarie Group Ltd. in London. Vietnam exporters agreed this month to stockpile 420,000 tons of beans for 2011-12, Luong Van Tu, chairman of the association, said yesterday.

Macquarie predicts robusta will average $1,919 in 2012, about 2 percent more than estimated in the Bloomberg survey. Robusta averaged $1,836 since NYSE Liffe started trading the 10- ton contract in 2008.

Marketing Year

Global robusta production will exceed demand by almost 4.1 million bags in the coming season, according to ABN Amro Bank NV and VM Group. Macquarie anticipates a surplus of 2.5 million bags, the most in four years, compared with a shortfall of about 700,000 bags in the current marketing year.

Robusta output in Ivory Coast, the fifth-biggest grower, will rise almost 10 percent to 2.3 million bags, according to the USDA. Production will also expand in Guinea, Madagascar, Laos, Malaysia, Tanzania and Togo, according to the Washington- based government department.

While stockpiles are rising and futures slumping, consumer prices may take longer to react because roasters and retailers need to work through inventories accumulated at higher costs.

Starbucks, the world’s largest coffee-shop operator, bought most of the coffee it needs for the year ending in September 2012, Troy Alstead, the Seattle-based company’s chief financial officer, said in a conference call in July. A 12-ounce brewed coffee from Starbucks in the U.S. ranges from $1.50 to $1.75, according to Alan Hilowitz, a spokesman for the company.

Retail Prices

Kraft, which owns the Maxwell House brand, reduced prices for some products by 6 percent last month after raising them three times in 2010, the Northfield, Illinois-based company said Aug. 23. Smucker, which owns the Folgers brand, reduced costs for the majority of its coffee products sold in U.S. by an average 6 in August, the Orrville, Ohio-based company said in a statement on Aug. 16.

U.S. retail prices for roasted coffee averaged almost $3.91 a pound last year, the most since 1997, according to data compiled by the International Coffee Organization in London.

“A fall in prices won’t feed through to us immediately because we already have stocks,” said Bryan Stockley, the managing director of Coburg Coffee Co., a London-based roasting company founded almost a half century ago. “It may take six months or more.”

To contact the reporter on this story: Isis Almeida in London at Ialmeida3@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at Ccarpenter2@bloomberg.net.

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LME Takeover Bids Mean Most at Stake for Goldman, UBS, Sucden

By Nicholas Larkin and Agnieszka Troszkiewicz - Sep 28, 2011 6:00 AM GMT+0700
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The LME, which said Sept. 23 it had received “several expressions of interest,” handles about 80 percent of global trade in metals futures. Photographer: Simon Dawson/Bloomberg

The potential sale of the London Metal Exchange, home to the city’s last open-outcry trading, means Metdist Ltd., Goldman Sachs Group Inc. (GS), MF Global (U.K.) Ltd., UBS Ltd. and Sucden Financial Ltd. have the most at stake.

The five companies are among the biggest shareholders in the 134-year-old bourse, according to a filing to the U.K.’s Companies House a year ago. The exchange told members in a notice on Sept. 23 that it had received “several expressions of interest” and would begin a process that may lead to “an acceptable offer for the company being received.”

Metals prices more than tripled in the past decade as demand from emerging markets overwhelmed supplies from mines, attracting a surge of interest from investors. The LME handled a record $11.6 trillion of contracts in copper and other industrial metals last year, compared with $2.5 trillion in 1999. It operates London’s last open-outcry transactions through a 6-meter-wide (20-foot) ring in which traders shout out orders.

“My initial preference would be to remain as an independent exchange, but if the conditions are right, then we would have to consider what would be right for us as a company,” said Michael Overlander, chief executive officer of Sucden. “There are other exchanges which perform very well, but I don’t think any of them come close to offering, or being able to provide, what the LME has.”

The exchange is owned by LME Holdings Ltd., which issues two share classes. There are 12.9 million ordinary shares, which confer ownership and traded at 4.925 pounds ($7.73) in July, according to data on the bourse’s website. There are also 1.34 million B shares, which exchanged hands at 85.425 pounds yesterday. Neither shares trade on an exchange.

Metals Trading

Metdist Ltd., a U.K. metals trading company, owns 912,000 ordinary shares, New York-based Goldman 900,000, and MF Global 600,000, according to a filing as of September 2010. UBS is registered as holding 550,000 shares and Sucden 362,000. Metdist Trading Ltd. owns 300,000 shares. Spokeswomen for Goldman, MF Global and UBS declined to comment. Officials at Metdist didn’t respond to five phone requests and an e-mail seeking comment.

Owners of B shares get no dividend and have no right to the profits or assets of the company, according to the articles of association. In the event of a distribution of assets, they are entitled to get the nominal value of the capital paid up on each share. They can’t attend company meetings unless changes to their rights are being considered. It is mandatory for four out of seven categories of membership to own the B shares.

Seven Categories

The bourse is valued at about 160 million pounds ($251 million), based on the last published price of its closely held shares, Niamh Alexander, an analyst at KBW Inc. in New York, wrote in a report Sept. 23. At the time, the B shares had last traded at 70 pounds. The exchange’s value may be “significantly more” than its 2010 net income of 9.5 million pounds would suggest, according to Ruben Lee, chief executive officer of Oxford Finance Group, a London-based company specializing in financial and commodity markets.

Bidders may include CME Group Inc. (CME), the world’s largest futures market, IntercontinentalExchange Inc. and Singapore Exchange Ltd., KBW’s Alexander wrote in her report. Officials from all three exchanges declined to comment. The LME is being advised by U.S. investment bank Moelis & Co.

Electronic trading accounted for 52 percent of LME volumes in September 2010, telephone-brokered transactions 27 percent and the remainder went through the ring. Prices used as a benchmark by metals producers, consumers and merchants are established during the second daily ring session.

Second Ring

“The second ring closing prices are used in more than 90 percent of all physical contracts worldwide in copper,” said Herwig Schmidt, head of sales in London at Triland Metals Ltd., one of the 12 companies authorized to trade in the ring. “If you want to change that you will have to work against quite a strong lobby.”

Open-outcry allows brokers to handle larger volumes at the same time, Schmidt said. The simultaneous buying and selling of contracts for different delivery dates can be done faster in the ring than through electronic trading, he said.

“Whoever takes over the LME, the open outcry will shut,” said David Threlkeld, president of Resolved Inc. in Scottsdale, Arizona, who was an LME member until 1990.

Trading floors were already shut by the International Petroleum Exchange and the London International Financial Futures & Options Exchange. ICE Futures U.S. ended floor trading of commodities including cotton in 2008 after 128 years.

“It certainly would be a shame to see something that has been there for all of its history disappear, if that’s what in fact a prospective buyer would want to do,” Sucden’s Overlander said. “There’s no guarantee that a prospective buyer would want to destroy that level of flexibility. It’s got open outcry, it’s got electronic trading, it’s got telephone trading. Any prospective would probably have to consider the value of preserving those conditions.”

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net; Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.

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