Economic Calendar

Thursday, October 27, 2011

Corzine Copying Goldman at MF; Bet Backfires

By Matthew Leising - Oct 27, 2011 11:02 PM GMT+0700

Jon Corzine, who won the top job at Goldman Sachs Group Inc. by leading the firm’s fixed-income unit, now says he’s responsible for trading decisions that have almost wiped out the stock-market value of his futures brokerage.

Since Corzine became chairman and chief executive officer of New York-based MF Global Holdings Ltd. (MF) in March 2010, he’s increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that have tumbled in value. This week, the firm reported its biggest quarterly loss ever, Moody’s Investors Service cut its rating to one level above junk, shares plummeted 54 percent and 6.25 percent bonds issued in August fell into distressed levels.

“On a personal note, our positions and the judgment about risk-mediation steps are my personal responsibility and a prime focus of my attention,” the 64-year-old former New Jersey Democratic governor and U.S. senator said Oct. 25 on an earnings conference call with analysts.

MF Global, the former brokerage unit of London-based Man Group Plc (EMG) that went public in July 2007, is seeking a buyer for its futures brokerage subsidiary and is looking to strike a deal within days, two people with knowledge of the matter said.

The firm has been contacting large banks already in the futures business, said the people, who spoke on condition of anonymity because the talks are private. Under the plan being discussed, its holding company and other businesses wouldn’t be included in the sale, the people said.

Lesson From 2008

MF Global is getting advice from Evercore Partners Inc. as it seeks buyers for the brokerage unit and examines other options, the people said. Market perceptions may leave the firm in the same kind of position faced by banks during the financial crisis in 2007 and 2008, when credit dried up, said Fifth Third Asset Management’s Mitchell Stapley in Grand Rapids, Michigan.

“It’s the one lesson you take away from the 2008 experience,” said Stapley, chief fixed-income officer for Fifth Third, which manages $22 billion. “When sentiment turns on any financial firm that’s dependent on external sources of funding, as really any financial firm is, and if the markets lose confidence in them and you can begin to see sources of funding dry up, the pressures on a firm escalate so quickly, so dramatically.”

Corzine, whose holdings individually and through a trust total 441,960 shares priced at $1.70 each, declined to be interviewed, said Diana DeSocio, an MF Global spokeswoman. The company, which provides execution and clearing services for exchange-traded and over-the-counter derivatives and foreign- exchange products, doesn’t comment on stock or bond price movements, she said. Shares were unchanged as of 11:48 a.m. in New York.

‘Have to Act’

“They have to act pretty quickly,” Peter Kovalski, a money manager who owns about 25,000 MF Global shares at Alpine Woods Capital Investors LLC in Purchase, New York, said in a telephone interview. His firm manages about $6 billion. “They have to focus on the immediate problems, they shouldn’t be focusing on the long-term strategic plans at this time. They need to be focusing on short-term survivability.”

The Illinois-born son of a farmer and schoolteacher, Corzine graduated from the University of Illinois at Urbana- Champaign in 1969, served in the Marine Corps Reserve and received his master’s degree in business administration from the University of Chicago in 1973. He was recruited by Goldman Sachs in 1975 as a trainee on the government bond desk.

Russia Positions

In 1994, with Corzine as co-head of fixed-income, Goldman Sachs’s pretax income fell by more than 80 percent as the company lost money on wrong-way interest rate bets, according to William Cohan’s history of the investment bank, “Money and Power,” published this year by Doubleday. Corzine resisted then-Chairman Stephen Friedman’s calls to scale back risk- taking, according to the book. Still, Corzine rose to chairman that year when Friedman departed.

Four years later, Corzine, as co-CEO, pushed traders to keep risky positions after Russia announced a devaluation of the ruble and defaulted on some of its foreign debt, while co-CEO Henry Paulson pushed to exit the holdings, according to Cohan. The firm had almost $1 billion in trading losses in the second half of that year.

He left Goldman Sachs in 1999 with an estimated $400 million as the firm went public. Corzine was elected to the Senate the following year and became governor in 2006. He was defeated in the November 2009 election by Republican Chris Christie.

Recommended by Flowers

Corzine was recommended for the position at MF Global by former Goldman Sachs banker Christopher Flowers, the chairman and CEO of JC Flowers & Co. At the same time he took the job, Corzine became an operating partner of Flowers’s buyout firm, which in 2008 bought as much as $300 million of preferred stock in the firm at a conversion price of $12.50 a share. JC Flowers controls one of the eight board seats at MF Global.

Corzine received a $1.5 million signing bonus and is paid an annual salary in the same amount. He is set to receive a retention bonus of $1.5 million if he’s at the firm as of March 31, 2014.

Investors Cheer

His arrival on March 23, 2010, was cheered by investors who drove MF Global shares up 10 percent the next day to $8.08. The shares rose as high as $9.76 in April 2010 as Corzine said that the firm’s move toward trading directly with clients was becoming more certain.

By the quarter that ended in June, MF Global revenue from trading with the firm’s own money and from taking the other side of client trades, both Corzine initiatives, rose to 42 percent of sales, from 23 percent a year earlier, the company said at the time.

“We understand trading has attendant risks,” Corzine said on a July 28 conference call with analysts. The focus is on “reducing dependence on one line of business,” he said.

Corzine began adding sovereign debt about a year ago, according to a company presentation. The positions accounted for 16 percent and 12 percent of net revenue in the quarters ended in March and June, the firm said.

Repurchase Agreements

MF Global, which had a market value yesterday of $280.3 million, holds $6.3 billion of sovereign debt from Italy, Spain, Belgium, Portugal and Ireland that it’s using in repurchase agreement trades with customers.

In a regulatory filing last month, MF Global said the Financial Industry Regulatory Authority required the firm to boost capital in its U.S. unit because of the repurchase transactions. On Oct. 24, Moody’s cited the European exposure as a reason it cut MF Global’s credit ratings to Baa3 from Baa2.

The repurchase transactions are financed to maturity and don’t need to be re-funded on an ongoing basis, MF spokeswoman DeSocio said.

MF Global increased its repurchase agreements 12.9 percent to $16.6 billion as of June 30, the company said in a regulatory filing.

Government bonds such as those MF Global has been betting on have fallen in value this year on concern that European leaders will fail to contain a crisis of confidence that’s pushing Greece toward default. MF Global’s largest holding is $3.2 billion in Italian debt. All of the firm’s European exposure matures by December 2012.

Stake Declines

Italy’s 6.52 percent notes due in December 2012 have dropped to 101.6 cents from 108 cents on the dollar at the end of 2010, according to data compiled by Bloomberg.

“The European sovereign debt would suggest there’s been a change in the risk appetite,” said Patrick O’Shaughnessy, an analyst with Raymond James & Associates Inc. in Chicago. The Moody’s “downgrade made the threat real that Corzine wouldn’t be able to make good the transition he promised,” he said.

Since MF Global reported its worst-ever quarterly results, losing $191.6 million in the three months ended in September, its stock price reached an all-time intraday low of $1.07 yesterday.

In August, Corzine bought 52,760 shares valued at $295,949. As of yesterday, the stock had declined to $89,692.

MF Global’s $325 million of 6.25 percent bonds due August 2016 reached distressed levels on Oct. 25, according to Trace, Finra’s bond-price reporting system. The debentures, which traded as low as 44.5 cents on the dollar yesterday, rebounded to 70 cents to yield 15.3 percent, or 14.2 percentage points over Treasuries. Spreads of more than 10 percentage points are considered distressed.

“Its bonds are trading at a small fraction of face value, so I’m not really sure it can recover,” said Darrell Duffie, a finance professor at Stanford University and a member of the Federal Reserve Bank of New York’s Financial Advisory Roundtable.

To contact the reporter on this story: Matthew Leising in New York at

To contact the editor responsible for this story: Alan Goldstein at


Europe Bolsters Crisis-Fighting Tools

By James G. Neuger and Simon Kennedy - Oct 27, 2011 10:35 PM GMT+0700

European leaders bolstered their crisis-fighting toolbox with a plan that may generate only limited relief for stressed sovereigns unless it can be fleshed- out within weeks.

“It remains a deal long on intentions and short on details,” said Jens Larsen, chief European economist at RBC Capital Markets in London. “Until we know how the mechanisms will work, it will be hard to judge whether this will be sufficient to entice investors to provide support to European governments.”

Europe’s currency, stocks and bonds rose after 10 hours of talks ended in Brussels with governments boosting the heft of their rescue fund to 1 trillion euros ($1.4 trillion) and persuading bondholders to take 50 percent losses on Greek debt. Measures also included a recapitalization of European banks and a potentially bigger role for the International Monetary Fund in strengthening the bailout fund.

Still to be worked out in negotiations, which may fall prey to fresh bouts of political infighting and investor revolt, is just how the firepower of the 440 billion-euro rescue facility will be leveraged and what banks will get in return for accepting the Greek haircut. As next week’s Group of 20 summit looms, nations from Greece to Italy remain under pressure to restore fiscal order and the onus is on a Mario Draghi-run European Central Bank to keep buying bonds.

Buying Time

“The announcement is enough to buy some time,” said Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London. “Officials have certainly come up with a comprehensive list of actions, but we are certainly still a long way from all the process parts being in place.”

The euro rose as much as 2 percent to $1.4181, the highest since July 1. Yields on Italian and Spanish 10-year bonds fell and the Stoxx Europe 600 Index surged 3.5 percent to the highest since Aug. 3.

There have been false dawns before in the two years since Greece first revised its budget math. Policy makers initially underestimated the threat posed by the Mediterranean nation and then repeatedly failed to muster the financial firepower to prevent it from engulfing Portugal and Ireland before tainting Italy and Spain. Leaders had already declared victory after July talks which featured a 21 percent Greek writedown.

Italian Auction

“Markets now appear to be resigned to tardiness on the part of policy makers and grudgingly prepared to accept that resolution will not be achieved in a single step,” Goldman Sachs Group Inc. strategists said in a note to clients.

An early test of Europe’s latest initiative comes tomorrow when Italy auctions as much as 8.5 billion euros of bonds. The euro-area’s third-largest economy has become a focal point as investors question whether authorities can ring fence the country’s 1.9 trillion euros of borrowing, the euro-region’s second-biggest debt burden in nominal terms after Germany.

Italian Prime Minister Silvio Berlusconi heard demands from EU allies at the summit to present a comprehensive plan to speed debt reduction by spurring economic growth that has lagged behind the EU average for more than a decade. Weeks of bickering within his ruling coalition made it impossible for Berlusconi to pass new measures and he instead offered a 14-page blueprint for reforms that pledged action on asset sales, easing of labor laws and raising the retirement age.

Recession Threat

The summit was the second in four days and the 14th in the 21 months since Europe pledged solidarity with Greece. It came amid mounting global pressure for the euro-area to quarantine Greece and prevent speculation against Italy, Spain and France from ravaging its economy and triggering the second global recession in three years.

“The world’s attention was on these talks,” German Chancellor Angela Merkel told reporters after the summit concluded at about 4:15 a.m. today. “We Europeans showed tonight that we reached the right conclusions.”

Banks bowed to pressure from leaders as their negotiator agreed to higher “voluntary losses” to smooth a second bailout for Greece, which will now include 130 billion euros of official aid, up from 109 billion euros envisioned in July. Just hours before the accord, Institute of International Finance Managing Director Charles Dallara said “there is no agreement,” before he received a rare invite to join the talks.

Greek Haircut

The banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks,” Luxembourg Prime Minister Jean-Claude Juncker said.

Still to be decided are the finer points of the write-off such as the collateral banks will be given in return and whether future bank debt is backed by a national or European guarantee. Banks and insurers will be asked to accept a writedown of half the nominal value of their Greek bonds.

That “haircut” aims to reduce the country’s debt level to 120 percent of gross domestic product in 2020, still twice the EU limit, though down from the 162 percent forecast for this year. Dallara said in Brussels today that he was confident the participation rate would “very, very high.”

The writedown will make Greece’s debt more sustainable though “this position is fragile and dependent on a set of rather optimistic macro assumptions,” said Nicola Mai, an economist at JPMorgan Chase & Co. If the country’s economy fails to rebound more debt restructuring may be needed, he said.

Leveraging EFSF

Leaders backed two ways of leveraging up the European Financial Stability Facility, which is too small to defend countries such as Italy, which has a debt of more than three times the EFSF.

Under plans to be spelled out in November, the fund will be used to partly insure bond sales and a special investment vehicle will be created that would court outside money from public and private financial institutions and investors to further boost its muscle.

French President Nicolas Sarkozy spoke today with Chinese President Hu Jintao to try to tap support from the country with the world’s largest currency reserves. Hu hopes that the measures will help to stabilize markets, state-owned China Central Television reported after the call. Japan plans to support the increase, and is waiting to hear from European officials on details for the program, according to a person familiar with the matter.

Two-Tier Market

The insurance scheme may still fail to draw investors amid concern its sponsors won’t honor their commitments and questions over the timeframe and amount of guarantees on offer, said Karen Ward, an economist at HSBC Holdings Plc. It could also create a two-tier bond market as investors shy away from the previously- issued unprotected debt, she said.

Economists at Royal Bank of Scotland Group Plc said the 1 trillion-euro goal still falls short of what’s necessary to truly defend Spain and Italy, while warning the special investment vehicle may struggle to issue enough cheap debt to lure outside investors.

The very use of leverage drew criticism from the Bundesbank with President Jens Weidmann saying the “instruments that have been tabled are similar in their design to those that helped to cause the crisis.”

Europe also struck a bank-recapitalization accord, setting a June 30, 2012, deadline for lenders to reach core capital reserves of 9 percent after first writing down their sovereign- debt holdings. Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

Bank Capital

The challenges to overcome on that front include deciding which assets banks can count as capital and how financial institutions will raise it given their reluctance to seek cash from shareholders. The European Banking Authority estimated banks’ capital needs at 106 billion euros, with Spanish banks requiring 26.2 billion euros and Italian banks 14.8 billion euros.

The figure is “at the low end of expectations,” said Philippe Bodereau, head of credit research at Pacific Investment Management Co. in a telephone interview. “It would be positive if we saw banks launching rights issues, but most will try to get there by selling businesses, retaining earnings, cutting dividends and deleveraging.”

ECB Role

Leaders tiptoed around the broader role of the politically independent ECB in keeping the euro sound, making no mention of its bond-purchase program in a 15-page statement. The Frankfurt- based central bank was said to be purchasing Italian debt today and Holger Schmieding of Joh. Berenberg Gossler & Co. said it will likely have to keep doing so as policy makers round off their plan. Incoming ECB President Draghi yesterday indicated the policy will continue.

“Without ECB support, the chances of this deal putting an end to the euro debt crisis are now probably below 50 percent,” said Schmieding, Berenberg’s chief economist.

The pact received conditional support from abroad as leaders prepare for the Nov. 3-4 G-20 summit in Cannes, France, which had been set as a deadline for a new European plan and may pave the way for more international assistance. The U.S. Treasury had no immediate comment on the European agreement.

“They need to keep up momentum and urgently to fill in the elements” of the package, said U.K. Prime Minister David Cameron. Canadian Prime Minister Stephen Harper called the agreement “grounds for cautious optimism,” which now needs to be detailed and implemented.

To contact the reporters on this story: James G. Neuger in Brussels at; Simon Kennedy in London at

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


U.S. Economy Expands at Faster Pace

By Alex Kowalski - Oct 27, 2011 11:22 PM GMT+0700

The U.S. economy grew in the third quarter at the fastest pace in a year as Americans reduced savings to boost purchases and companies stepped up investment in equipment and software.

Gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, up from 1.3 percent in the prior three months, Commerce Department figures showed today in Washington. Household purchases, the biggest part of the economy, increased at a 2.4 percent pace, more than forecast by economists.

The biggest drop in incomes in two years, along with declines in home prices and consumer confidence, cast doubt on whether the increase in spending can be sustained. Federal Reserve policy makers, who meet next week, and the Obama administration are considering additional measures to reduce an unemployment rate that has been stuck around 9 percent or higher for 30 months.

“There is some gain in momentum after a very weak first half,” said Robert Dye, chief economist at Comerica Inc. in Dallas, who correctly forecast the rise in GDP. “We need to get the jobs machine going and get the housing market moving in the right direction. The economy remains in a low-to-moderate growth mode, and that keeps us vulnerable.”

Stocks surged as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. The Standard & Poor’s 500 Index climbed 2.8 percent to 1,277.3 at 12:01 p.m. in New York, extending its October advance to 13 percent and erasing its 2011 loss. Treasuries fell, pushing the yield on the 10-year note up to 2.31 percent from 2.21 percent late yesterday.

European Agreement

An agreement by European leaders on steps that included recapitalizing the continent’s banks brought them closer to a resolution of the sovereign-debt crisis that Fed policy makers have identified as a risk to the U.S. economy.

Other data today showed that consumer confidence declined last week as Americans’ views of the economy sank to the lowest since the recession, and the number of contracts to purchase previously owned U.S. homes unexpectedly fell in September.

The Bloomberg Consumer Comfort Index dropped to minus 51.1 in the week ended Oct. 23, the lowest in a month, from minus 48.4 the prior period. Ninety-five percent of those surveyed had a negative opinion about the economy, the worst since April 2009 and one percentage point shy of a record high.

The National Association of Realtors said its index of pending home sales fell 4.6 percent, the biggest decline since April. Economists forecast a 0.4 percent gain, according to the median of 38 estimates in a Bloomberg News survey.

Household Spending

The increase in consumer spending last quarter followed a 0.7 percent gain in the previous period and exceeded the 1.9 percent median forecast in a Bloomberg News survey. Purchases added 1.7 percentage points to growth.

Consumers lowered the pace of saving as incomes declined, the report showed. The savings rate last quarter dropped to 4.1 percent, the lowest since the last three months of 2007. After- tax incomes adjusted for inflation decreased at a 1.7 percent annual rate, the biggest drop since the third quarter of 2009.

McDonald’s Corp. (MCD), the world’s biggest restaurant chain, is among companies trying to keep prices down to attract budget- conscious customers. The Oak Brook, Illinois-based company this month said third-quarter profit gained 8.6 percent.

‘Still Fragile’

“The environment out there is still fragile,” James Skinner, McDonald’s vice-chairman and chief executive officer, said in an Oct. 21 call with analysts. “Consumers everywhere continue to be cautious and hesitant to spend.”

Gross domestic product surpassed its pre-recession peak for the first time. The 15 quarters it took to reach that milestone compares with an average of five quarters it has taken to recover from previous post-war recessions.

While the expansion is “encouraging,” faster growth is needed “to replace jobs lost in the recent downturn,” Katharine Abraham, a member of the White House Council of Economic Advisers, said in a blog posting.

The economy expanded at an average 0.9 percent rate in the first half of 2011, the worst performance since the recovery began in June 2009. Growth needs to exceed 2.5 percent to reduce the jobless rate, according to estimates by Kurt Karl, chief U.S. economist at Swiss RE in New York.

Business Investment

One bright spot is business investment. Corporate spending on equipment and software climbed at a 17.4 percent pace, the most in a year. It contributed 1.2 percentage point to growth.

“We are starting to see our customers resume their investment activity,” Richard S. Hill, chairman and chief executive officer at San Jose, California-based Novellus Systems Inc., a maker of machinery used in semiconductor production, said on a conference call with analysts yesterday.

A rush to qualify for a larger government credit may be contributing to the increase. The Obama administration’s tax compromise allows companies to depreciate 100 percent of investment in capital outlays in 2011 and 50 percent in 2012.

“A lot of the strength is being driven by tax incentives,” said Aneta Markowska, a senior U.S. economist at Societe Generale in New York.

The pickup in investment didn’t translate into more jobs. Payrolls rose by an average 96,000 workers per month last quarter, down from the 166,000 average in the first quarter.

Unemployment Benefits

A Labor Department report today showed that fewer Americans filed applications for unemployment assistance last week, signaling limited improvement in the labor market.

First-time jobless claims decreased by 2,000 to 402,000 in the week ended Oct. 22. The number of people collecting unemployment benefits fell in the prior week by 96,000 to 3.65 million, the fewest since September 2008.

President Barack Obama proposed last month a $447 billion plan to stimulate jobs, which included expanding a payroll tax break due to expire at the end of this year, increasing spending on public works and extending jobless benefits.

Obama yesterday said he is seeking ways to take action without congressional approval after the Senate blocked the measure earlier this month. The steps include altering a program to help homeowners refinance mortgages and easing the burden of student loans.

Fed policy makers are developing options for further monetary easing even as the economy picks up.

Policy Makers

Vice Chairman Janet Yellen said last week that a third round of large-scale asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.” Governor Daniel Tarullo said buying mortgage-backed securities “should move back up toward the top of the list of options.”

Policy makers pledged in August to hold the benchmark interest rate near zero at least through the middle of 2013 so long as joblessness stays high and the inflation outlook is “subdued.” On Sept. 21, they announced a plan to replace debt in the central bank’s portfolio with longer-term Treasuries to help cut borrowing costs.

Companies also kept a tight rein on stockpiles last quarter, making it less likely that production will have to be cut back. Inventories were rebuilt at a $5.4 billion annual pace, down from the second quarter’s $39.1 billion rate. The reduction subtracted 1.1 percentage points from GDP growth.

Excluding inventories, the economy grew at a 3.6 percent annual rate last quarter, up from a 1.6 percent in the April through June period.

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

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


Currency Traders in Worst Year Since 1991

By Paul Dobson - Oct 27, 2011 8:05 PM GMT+0700

Currency-trading strategies are losing the most in two decades as the volatility that’s boosted volume and profits for investment banks erodes the ability of investors to make money.

Three out of four Royal Bank of Scotland Group Plc indexes of foreign-exchange trading strategies are down this year, including a 2.7 percent drop through September for its carry trade index. Deutsche Bank AG’s dollar-denominated Currency Returns Index has fallen 3.4 percent, the biggest drop since a 4 percent slide in 1991. The Stark Currency Traders Index and the Barclay Currency Traders Index have declined by 8.6 percent and 0.4 percent.

Whipsawed by slowing global growth, central banks fighting currency gains, and swings between optimism and despair over the 17-nation euro area’s debt crisis, traders are reeling from losses in an environment that should have favored them.

“What’s really frustrating is that we’re supposed to do well in a lousy world market,” said John Taylor, the founder of New York-based FX Concepts LLC, the world’s largest currency hedge fund. Taylor said in an Oct. 19 interview in London that he has lost 12 percent this year and assets under management fell to $5 billion from as much as $8 billion. “We’re doing very badly.”

‘Walloped Every Time’

Losses started as early as the first week of January, when Chile’s central bank said it would buy $12 billion dollars to stem a rise in its peso, Taylor said. The peso tumbled 6 percent that week, erasing most of its 8.4 percent gain from last year.

“Our position was relatively large, it was 8 or 9 percent of our total assets, and there was no way to get out,” Taylor said. “What was bad about it was that a couple of days later Israel did the same thing, then a week or so after that South Africa did the same thing, then after a little bit more study Brazil did the same thing. We got walloped every time.”

The losses are a blow for specific types of currency funds that seek to lure investors with trading techniques that are designed to provide returns in economic declines as well as in periods of growth.

Other investment classes have also suffered. The MSCI All- Country World Index of equities slid 5.6 percent since December and S&P’s GSCI Total Return Index of commodities is little changed. The global bond market returned about 4.7 percent, including reinvested interest, according to Bank of America Merrill Lynch indexes.

Alpha Fund Gains

Global Capital Management NV’s GCM Alpha Fund, with 9 million euros ($12.6 million), has risen 13 percent this year, the most of 56 peers in a Bloomberg index of open-end currency funds domiciled in an offshore market.

The fund’s automated trading systems designed to follow market trends ended a bet on franc strength before the Swiss National Bank said it would prevent any appreciation beyond 1.20 per euro. The franc has weakened about 21 percent to 1.22227 per euro from its record 1.00749 on Aug. 9.

Global Capital also bought dollars before the Dollar Index rallied 6.3 percent in September amid concern Europe’s deepening debt crisis would trigger a global economic slowdown.

“We obviously didn’t know there was going to be the intervention and most people were still long Swiss francs then. That was very nice,” Jan Hillen, a managing partner at the firm, said in a phone interview from Brussels.

The fund scaled back its trading this month, he said.

Carry Trades Down

Carry trades, where investors borrow in countries with lower interest rates to invest in nations where yields are higher, often lose money in times of financial turmoil.

The RBS carry trade index lost 2.7 percent through September, after an 8.6 percent profit in 2010. Returns were hurt early in the year by bets on Chile, and in September as the U.S. Dollar Index rose the most since October 2008. That cut the value of positions funded in the greenback.

While central bank actions in Latin America had an impact, “the much bigger contributor has been the period of risk aversion we saw in the third quarter,” James Wood-Collins, the chief executive officer at Windsor, England-based currency manager Record Plc., said in a telephone interview on Oct. 20.

Funds managed by Record that focus on carry trades are down about 1 percent for the year, he said. “We continue to have confidence in the strategies,” Wood-Collins said.

‘Tough Year’

The style of trading that involves betting on established currency-market trends has lost 3.2 percent, RBS indexes show.

“It has been quite a tough year for trend-following systems,” said Maria Heiden, who oversees Hamburg-based Berenberg Bank’s 142 million-euro Currency Alpha fund, Germany’s biggest. “From May to August there has been no possibility to generate any returns” as the euro traded in a range, said Heiden, who said 30 percent of her fund’s “exposure” is to euro-dollar.

Between May 1 and Aug. 31, the euro traded between $1.3837 and $1.4940. That compares with a range of $1.1877 and $1.6038 since the start of 2008. It rose 1.2 percent to $1.4074 at 2:04 p.m. London time.

While September’s rally in the dollar boosted the fund’s returns, “what we’re seeing in October is a total trend reversal,” said Heiden, whose fund is down 4.3 percent year-to- date. The euro has strengthened about 4.8 percent against the dollar this year.

Worse still for currency traders are policy makers’ steps to stem the appreciation of the two best-performing Group-of-10 currencies, the franc and the yen.

Japan Intervention

The Bank of Japan has sold yen twice this year to weaken the currency, including a coordinated move by the Group of Seven to counter a jump in the currency after the March 11 earthquake and tsunami crippled the nation. Japanese Finance Minister Jun Azumi said yesterday that his ministry will take “decisive” measures to stem the yen’s rise after it surged to a post-World War II record of 75.72 against the dollar.

“I’ve ordered my staff to be prepared to take action at any time,” Azumi told reporters in Tokyo. “Speculative movements have become very prominent.”

Berenberg stopped trading dollar-yen “because the risk of intervention is too high right now,” Heiden said.

Results will improve as the euro-region debt crisis moves toward a resolution, Heiden said. “We know that after these political situations we will come back to a better environment, so we look forward to when markets trend properly again.”

Trading Revenue

Of the other strategies monitored by the RBS indexes, trading in currency volatility lost 8.3 percent this year, including a more than 17 percent plunge last month.

Implied volatility among currencies has increased 6.8 percent this year, according to a JPMorgan Chase & Co. measure. The JPMorgan Global FX Volatility Index was at 13.38 yesterday, up from this year’s low of 9.99 in March.

The RBS valuation strategy that bets currencies will return to so-called fair value levels over time is the only one of the four trading styles to have handed investors a profit, with a 2.2 percent return, including an 8.8 percent gain in September.

Losses haven’t kept revenue for brokers from rising. CLS Bank, the New York-based operator of the biggest currency- trading settlement system, said it handled a record $5.21 trillion a day in September. That was a 23 percent increase from the same month in 2010. Deutsche Bank, the world’s biggest currency trader, said Oct. 25 that it had record revenue from foreign-exchange trading in the third quarter.

“There was a huge amount of market uncertainty, the consequence of that was that clients had to do more and more business,” Zar Amrolia, the London-based global head of foreign-exchange at Deutsche Bank, said in a telephone interview. “Volatility will remain elevated for some time to come.”

Taylor discarded his holdings of Argentina’s peso on concern it’s poised to keep falling after a 6.1 drop this year. He said he adjusted his models to anticipate action such as Chile’s elsewhere.

“You have to have measures that explain as to whether the country is swamped with capital,” Taylor said. “Are we smarter about that? Yes, a little bit.”

To contact the reporter on this story: Paul Dobson in London at

To contact the editor responsible for this story: Daniel Tilles at


S&P 500 Extends Best Month Since ’87, Euro Rises on Debt Accord

By Stephen Kirkland and Rita Nazareth - Oct 27, 2011 8:42 PM GMT+0700

Stocks surged, extending the biggest monthly rally in U.S. equities since 1987, and the euro strengthened as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. Treasuries and bunds fell, while metals and oil led a rally in commodities.

The Standard & Poor’s 500 Index climbed 2.5 percent to 1,272.6 at 9:38 a.m. in New York, extending its October advance to more than 12 percent and erasing its 2011 loss. The MSCI All-Country World Index gained 3.7 percent as benchmark gauges in France, Germany and Italy jumped more than 5 percent. While Italian and Spanish bonds rallied, yields remained near levels of two weeks ago. The euro appreciated above $1.40 for the first time since Sept. 8. Ten-year Treasury yields gained nine basis points. Copper rose almost 5 percent.

French President Nicolas Sarkozy said the euro region’s bailout fund will be leveraged by four to five times, and investors have agreed to a voluntary writedown of 50 percent on Greek debt. Sarkozy is due to speak to Chinese leader Hu Jintao today and said he’d welcome support from the Asian nation in the bailout effort. U.S. data today showed the world’s largest economy expanded last quarter at the fastest pace in a year.

“Europe has done enough for the time being,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.3 trillion as the world’s largest asset manager. “It will remove near-term pressure,” he said. “In the U.S., the GDP report was decent and it was encouraging to see the consumer hold. The fear of a recession is fading.”

The U.S. economy grew at a 2.5 percent annual rate in the third quarter, matching the median forecast of economists surveyed by Bloomberg, according to figures from the Commerce Department. Other data may show pending home sales gained in September.

Banks Rally

The Stoxx Europe 600 Index climbed 3.8 percent to a 12-week high as banks led gains. BNP Paribas SA and Deutsche Bank AG, the biggest lenders in France and Germany, advanced more than 15 percent. BASF SE rallied 6.9 percent as the world’s largest chemicals maker reported profit that beat analyst estimates. Ericsson AB rose 5.3 percent as Sony Corp. agreed to buy its 50 percent stake in their joint mobile-phone venture.

The bund yield jumped as high as 2.20 percent, rising to the most since Oct. 17, while the 10-year Spanish yield fell 18 basis points. That drove the difference in yield with German debt down by 30 basis points to 3.13 percent, the lowest since Oct. 14 on a closing basis.

‘Red Flag’

Even after today’s gains, the bonds of some of Europe’s most-indebted countries are still trading near their historical lows. Greece’s two-year yield slid 69 basis points to 79.08 percent today, compared with an average of 27.62 percent in the past year. Italy’s 10-year yield, which averaged 4.94 percent in the past 12 months, fell 12 basis points to 5.80 percent.

“If we’re not seeing the sovereign debt markets turn around, that is a red flag,” Michael Darda, the Stamford, Connecticut-based chief economist and chief market strategist at MKM Partners LP, told Bloomberg Television. “Equity markets have gotten optimistic here. One of the things that bothers me is the euro-zone debt markets have not registered the same degree of optimism, and that’s really the core of the problem.”

Default Swaps

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 32 basis points to 302, the lowest since Sept. 1. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 56 basis points to 664 basis points, the lowest since Sept. 1, according to JPMorgan Chase & Co.

The EU agreement with investors for a voluntary 50 percent writedown on their Greek bond holdings means $3.7 billion of debt-insurance contracts won’t be triggered, according to the International Swaps & Derivatives Association’s rules. ISDA will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory. European leaders said in the agreement they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new debt.

The 10-year Treasury yield climbed as high as 2.3084 percent, while the seven-year yield increased seven basis points before the U.S. sells $29 billion of the securities, the last of three auctions this week totaling $99 billion.

Federal Reserve Bank of New York President William C. Dudley said on Oct. 24 that policy makers have the option of starting a third round of asset purchases to stimulate growth. Bank of England Markets Director Paul Fisher said yesterday expanding monetary stimulus by 75 billion pounds ($120 billion) this month was the minimum amount needed to shore up an economy that may already be shrinking.

Dollar Slips

The euro climbed as high as $1.4070, and advanced 1.2 percent versus the yen. The Dollar Index, which tracks the U.S. currency against those of six trading partners, slid 1.1 percent to the least since Sept. 8.

The S&P GSCI index of 24 commodities gained 2.1 percent. Nickel jumped 3.9 percent and copper rose to $8,059 a metric ton. Gold fell 0.7 percent to $1,712 an ounce, after gaining 6.4 percent the previous four days. Oil in New York advanced 3.8 percent to $93.60 a barrel.

The MSCI Emerging Markets Index jumped 2.9 percent to a seven-week high. Russia’s Micex climbed 2.8 percent, Hungary’s BUX gained 3.6 percent and the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rallied 5.1 percent. Benchmark gauges in Poland, South Africa, Turkey and Thailand advanced more than 2 percent.

To contact the reporters on this story: Stephen Kirkland in London at; Rita Nazareth in New York at

To contact the editor responsible for this story: Justin Carrigan at


Olympus Stock Surges as Kikukawa Quits, Axed Woodford Takes Case to FBI

By Mariko Yasu - Oct 27, 2011 5:16 PM GMT+0700

Olympus Corp. shares surged the most in at least three decades after Chairman and President Tsuyoshi Kikukawa resigned amid allegations over acquisitions that caused $1.2 billion in losses.

Kikukawa quit yesterday following his Oct. 14 axing of Chief Executive Officer Michael C. Woodford, whose subsequent questioning of advisory fees and writedowns in four takeovers over the past three years led investors to dump the Tokyo-based company’s stock. Olympus rose 23 percent, paring losses that had wiped out more than half the camera and medical-equipment maker’s value in the past two weeks.

There was nothing illegal about the takeover of Gyrus Group Plc, a U.K. medical-equipment manufacturer, and the purchases of three Japanese companies unrelated to its main businesses were part of an expansion into new areas, the Tokyo-based company said in a statement to the city’s exchange today. A review of all the takeovers was under way, it said.

“Olympus had sought M&A as part of its efforts to accelerate growth in medical equipment as well as to reduce dependency on endoscopes,” new President Shuichi Takayama told reporters in Tokyo today. “The acquisition of Gyrus and the three Japanese companies were part of such a plan.”

In axing its first foreign CEO and president, Olympus cited differences over management style. Woodford says he was fired for challenging $687 million of fees paid in the $2 billion takeover of Gyrus in 2008.

PwC Report

After he was dismissed six months into the post of president, Woodford made public a PricewaterhouseCoopers report he commissioned that said the company may face regulatory and legal scrutiny because of the payments made in the acquisition of U.K.-based Gyrus.

Olympus stock dropped so much because of Woodford’s disclosure of company secrets, Takayama said, adding that there was also a “governance problem” at the company. Regaining trust will be the top priority, he told reporters yesterday.

“The company’s shares have fallen so much since October 14, so yesterday’s announcement was a good trigger for a rebound,” said Masaru Hamasaki, chief strategist at Toyota Asset Management Co. in Tokyo.

Olympus rose 23 percent to close at 1,355 yen, its biggest one-day gain since at least Sept. 11, 1974. The stock has lost 45 percent of its value since Woodford’s dismissal.

Kikukawa’s resignation failed to address the core issue of the payment of fees and 55 billion yen ($721 million) of writedowns within 12 months of making three other acquisitions, Toshiya Hari and Kenya Moriuchi, Tokyo-based analysts at Goldman Sachs Group Inc., wrote in a note published before Olympus’ statement and briefing today.

‘Not Unreasonably High’

The fee was “not unreasonably high,” according to Olympus. The company chose Axes America LLC as a takeover adviser for the deal because of its ability to negotiate and select targets, it said. Olympus said it adopted a system that decides the size of advisers’ fees based on the size of the deals.

Olympus issued a statement last week disclosing that the $687 million fees to the advisers included a $443 million buyback of preferred shares. The statement was made in response to media reports on the PwC investigation, Olympus said Oct. 19. The accounting firm said the structuring of the fee payment, including the use of share options, and the eventual cost to the company of more than a third of the transaction value was unusual.


Olympus booked 168 billion yen of goodwill at the time of the Gyrus purchase. The company added 41 billion yen of goodwill when it bought back the preferred shares from Axam, Axes’ Cayman Islands-based fund, the company said today.

The Gyrus-related goodwill value totaled 135 billion yen as of June 30.

“We were unable to confirm that there has been improper conduct,” said the report, a copy of which was given to Bloomberg News. “However, given the sums of money involved and some of the unusual decisions that have been made, it cannot be ruled out at this stage.”

Advisory fees in takeovers usually range from 1 percent to 5 percent of the transaction cost, two people with knowledge of such deals said, declining to be identified as they weren’t authorized to talk to the media.

Woodford will meet with the U.S. Federal Bureau of Investigation and submit documents related to the fees, he said from New York. Woodford earlier said he asked the U.K.’s Serious Fraud Office to investigate.

The FBI is investigating payments by Olympus to advisers related to the 2008 acquisition, said a person familiar with the inquiry who declined to be identified because they weren’t authorized to speak publicly about it.

Japan Regulators

In Japan, it will be up to the financial services minister to decide whether an investigation is warranted, ruling Democratic Party lawmaker Tsutomu Okubo said in an interview yesterday.

The Securities and Exchange Surveillance Commission will monitor the findings of the independent committee created by Olympus to probe acquisitions, Mario Takeno, a commission official, told lawmakers in Japan’s upper house of parliament today. The Financial Services Agency is keeping a close watch on reports about Olympus, Manabu Morimoto, head of the agency’s planning and coordination bureau, said at the same session.

Failure to act on investor concerns over the Olympus allegations risks increasing doubts about Japan’s corporate governance and the nation’s stock markets, Tokyo Stock Exchange Senior Executive Officer Masaki Shizuka told the lawmakers.

M&A Criticism

Kikukawa, 70, joined Olympus in 1964, becoming president in 2001. He was “instrumental in the company’s early move into the digital still camera market” while his “aggressive M&A strategy has met with criticism from some investors,” Goldman Sachs Group Inc. wrote in a report Oct. 12, upgrading its rating on the stock to “buy.” Goldman suspended its coverage after Woodford’s dismissal.

During Kikukawa’s tenure, Olympus’s sales grew 82 percent to 847 billion yen while operating profit remained almost unchanged at around 35 billion yen. Kikukawa oversaw about $4.3 billion in 31 acquisitions of companies including Gyrus and ITX Corp., according to data compiled by Bloomberg.

Takayama, a 61-year-old electrical engineer, joined Olympus in 1970. He held various positions, including head of the technology development planning unit and personnel chief, before taking the helm at the camera business in April.

The imaging systems unit turned to a loss of 15 billion yen in the year ended March 31. The unit’s profit fell to 3 billion yen in the previous year, a 10th of the 33 billion yen it earned in the year ended March 2008, Bloomberg data show.

Cayman Islands-incorporated Axam Investments Ltd., which received $670 million of the advisory payments, was removed from the local company registry in June 2010 for non-payment of license fees, three months after receiving its final fees from Olympus, according to the PwC report.

To contact the reporter on this story: Mariko Yasu in Tokyo at

To contact the editor responsible for this story: Peter Langan at


Nintendo Predicts First Full-Year Loss in Three Decades on Strong Yen, 3DS

By Naoko Fujimura and Masatsugu Horie - Oct 27, 2011 5:48 PM GMT+0700

Nintendo Co., the world’s largest maker of video-game machines, forecast its first annual loss in at least 30 years after the yen reached a postwar high and the new 3DS console had weaker-than-expected sales.

The net loss may be 20 billion yen ($264 million) for the year ending in March, compared with a previous projection for a 20 billion-yen profit, Kyoto, Japan-based Nintendo said in a statement today. That compared with the 12.2 billion-yen average profit of 22 analysts’ estimates compiled by Bloomberg.

Nintendo, which gets about 80 percent of its revenue from Americas and Europe, is predicting lower profit after the yen gained against the dollar and surged to a decade high against the euro, trimming the repatriated value of overseas sales. President Satoru Iwata cut the price of the 3DS by 40 percent in August as gamers flock to Apple Inc.’s iPhone and iPad, and Facebook Inc.’s website.

“Nintendo faces a very harsh time now,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd., which manages $28 billion of assets from Tokyo. “Competition in the video-game industry is getting severe, and Nintendo must fight for customers who are using smartphones and tablets.”

The full-year sales forecast was cut to 790 billion yen, compared with an earlier forecast for 900 billion yen, according to today’s statement. Operating profit in the 12 months ending March 31 may be 1 billion yen, lower than the 35 billion yen predicted earlier.

Weaker Demand

“We are cutting costs steadily and plan to release major titles seamlessly” to recover earnings, Iwata said at a press conference in Osaka, Japan.

The console maker hasn’t reported a full-year net loss since 1981 when it began releasing consolidated earnings, according to data on the company’s website.

Nintendo fell 0.6 percent to 11,110 yen at the close of trading in Osaka today, taking the year-to-date decline to 53 percent. Sixteen of the 23 analysts with a rating on the company in the past year recommend investors “hold” the stock, while two have “sell” and five have “buy.”

“Sales of Nintendo DS hardware and Nintendo 3DS software were weaker than expected,” the company said in the statement. “In addition, the yen appreciation was beyond expectation.”

Rising Yen

Nintendo had a 52.4 billion-yen foreign exchange loss in the first six months of the fiscal year that began April 1, according to the statement.

The company based its second-half forecast on exchange rates of 77 yen per dollar and 106 yen per euro, changing them from 80 yen and 115 yen, respectively. The yen gained 13 percent against the euro last quarter, while extending its value against the dollar by 4.5 percent, according to data compiled by Bloomberg.

Nintendo also reported a first-half loss of 70.2 billion yen, wider than the 2 billion yen loss a year earlier.

The company kept the sales forecast of the 3DS model at 16 million units, it said. Nintendo sold 3.07 million units of the 3DS, released in February, in the first half.

Rival Sony Corp. will outline sales of its handheld PSP console next week. In July, it forecast sales of 6 million for the year ending March 31.

“We expect 3DS sales will surge at a stretch toward the end of this year,” based on the recent sales trend, Iwata said.

Sony, Microsoft

Sales of software titles for the 3DS may total 50 million units this fiscal year, down 29 percent from the company’s previous estimate of 70 million, Nintendo said.

Nintendo cut the price of the 3DS to 15,000 yen from 25,000 yen in Japan and to $170 from $250 in the U.S. to help regain “sales momentum,” Iwata said in July. The 3DS allows users to see 3-D images without wearing special glasses.

Sony, based in Tokyo, plans to introduce the PlayStation Vita portable player this year.

In June, Sony said the PSP Vita will sell from $249 in the U.S., 249 euros ($359) in Europe and 24,980 yen in Japan. The handheld game player will feature a 5-inch display and a rear touch pad.

Sony, Nintendo and Microsoft Corp., the Redmond, Washington-based maker of the Xbox 360 and Kinect devices, are confronting new competitors in the gaming industry who are reshaping the field.

They include Cupertino, California-based Apple, which estimates it’s sold more than 200 million mobile devices capable of downloading and playing games. Its App Store offers more than 100,000 game and entertainment applications for the iPad, iPhone and iPod Touch.

Nintendo plans to introduce the Wii U console as a successor to its bestselling Wii model after June 2012, Iwata told reporters. The Wii U controller has a front-facing camera, a 6.2-inch touch screen, shoulder firing pads, an expansion slot and game controls on a flat pad.

Users will be able to wirelessly connect to the console and shift content between a large screen in the living room and the smaller screen.

To contact the reporter on this story: Naoko Fujimura in Tokyo at

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


Warner Music Is Said to Be Favorite to Win EMI’s Catalog of Recorded Music

By Andy Fixmer, Jeffrey McCracken and Amy Thomson - Oct 27, 2011 6:01 PM GMT+0700

Warner Music Group is the favorite to win EMI Group’s catalog of recorded music after bidding $1.5 billion to $1.6 billion, two people with knowledge of the talks said.

Warner Music and Citigroup Inc., which controls EMI, are negotiating expenses related to the London-based record company’s pension liabilities, said the people, who declined to be named because the talks are private.

BMG Rights Management GmbH, the music company controlled by KKR & Co., is the front runner for EMI’s publishing business with a bid of $1.8 billion to $2 billion, one person said. Sony Corp. asked Citigroup for more time to raise money and recruit investors for a bid for the unit, which markets and licenses the rights of work by songwriters including Beyonce Knowles for use in films, ads and other performances, they said.

“Do we lose any value by breaking these assets up? The answer is no,” said Alex DeGroote, an analyst at Panmure Gordon in London. “Publishing is reasonably stable, reasonably high margin. Recorded music is a very different kettle of fish and historically has been a very volatile industry.”

Citigroup may be able to get more for the 114-year-old record company by selling it in pieces, something EMI Chief Executive Officer Roger Faxon initially resisted. Faxon said in a memo obtained by Bloomberg News last year that “the best way to build value is for EMI to remain as one company” and that selling off catalog assets would be “utterly idiotic.”

Preferred Bids

Citigroup may pick preferred bids and enter into exclusive talks as soon as this week if the pension issues are solved, the people said. EMI acts include The Beatles, Coldplay and Katy Perry.

Mark Costiglio, a spokesman for Citigroup in New York, declined to comment, as did Dylan Jones, a spokesman for EMI in New York.

The bank seized EMI in February after investor Guy Hands and his firm Terra Firma failed to meet loan covenants. At the time, Citigroup wrote down EMI’s debt 65 percent to 1.2 billion pounds ($1.9 billion). The bank has a target price of $4 billion for the sale of the entire company and $1.7 billion for recorded music, one person said.

Sony wants to add EMI publishing to its Sony/ATV Music Publishing venture with the estate of Michael Jackson. Sony has recruited Ari Emanuel, the William Morris Endeavor talent agency’s CEO, and Raine Group LLC, the media investment bank founded by Joe Ravitch, to join its bid, the people said. Mubadala Development Co., a sovereign fund of Abu Dhabi, is also an investor with Sony, the New York Post reported Oct. 21.

Vivendi Withdraws

Billionaire Ron Perelman’s MacAndrews & Forbes Holdings Inc. asked Citigroup to consider its offer for all of EMI, a person said. Vivendi SA’s Universal Music Group, the biggest record company, has withdrawn its bid for EMI’s recorded music division, another person said.

Warner Music was acquired by billionaire Len Blavatnik in May for about $3.3 billion, including $1.99 billion in debt after a three-month auction. Warner had worked on a possible offer for EMI before it was seized by Citigroup, a person familiar with the plan said at the time.

Blavatnik, 54, has been active in bidding for media assets through his Access Industries investment arm. Last year, he unsuccessfully bid for Metro-Goldwyn-Mayer Inc., a U.S. entertainment firm, a person with knowledge of the offer said at the time. In 2009, he bought the U.K. distribution arm of Mel Gibson’s Icon Group, gaining international rights to the actor’s work and films including “Driving Miss Daisy” and “Dances With Wolves.”

To contact the reporters on this story: Andy Fixmer in Los Angeles at; Jeffrey McCracken in New York at; Amy Thomson in London at

To contact the editors responsible for this story: Anthony Palazzo at; Jennifer Sondag at; Kenneth Wong at


Sony to Acquire Ericsson’s Share of Mobile-Phone Venture for $1.5 Billion

By Jonathan Browning and Mariko Yasu - Oct 27, 2011 6:46 PM GMT+0700

Sony Corp. agreed to buy Ericsson AB’s 50 percent stake in their 10-year-old mobile-phone venture to integrate the smartphone business with its gaming and tablet offerings.

Ericsson will get 1.05 billion euros ($1.5 billion) in cash for its shares in Sony Ericsson Mobile Communications AB, the Stockholm-based company said today. Ericsson shares rose 5.2 percent to 70.15 kronor as of 1:32 p.m. in Stockholm as the company gets more for its stake than estimated by some analysts. Sony climbed 5.4 percent to 1,650 yen in Tokyo trading today.

The deal will help Sony tap demand for smartphones as Japan’s largest exporter of consumer electronics is seeking a new earnings driver after losing a total of 476.3 billion yen ($6.3 billion) from its main television operation in the past seven fiscal years. Full control of the venture will add smartphones using Google Inc.’s Android system to Sony’s device business, while freeing Ericsson to concentrate on sales of wireless transmission equipment and services.

“The deal will increase management freedom at the mobile phone unit to speed up development of new products,” said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments Ltd. in Tokyo, which manages about $28 billion in assets. “It’s up to products whether Sony can survive in the wireless industry.”

Android Focus

Sony Chairman Howard Stringer said he will change the mobile venture’s brand following the deal. Sony Ericsson has turned to smartphones based on Android to lessen market share losses amid competition from Apple Inc.’s iPhone. The company aims to distinguish itself from rivals through its integration with Sony’s entertainment range and distinctive hardware designs such as the Xperia Play, an Android phone with Playstation console controls and games.

Ericsson and Sony set up the venture on Oct. 1, 2001, giving themselves five years to dethrone Nokia Oyj as the world’s biggest mobile-phone maker. Sony Ericsson’s market share slid to 1.7 percent in the second quarter from 3 percent a year earlier, according to researcher Gartner Inc.

The 1.05 billion euros for Ericsson’s stake are less than predicted by RBS analyst Didier Scemama, who this month said that a valuation of about 1.3 billion euros would be “fair.”

‘Past Its Time’

The venture “was pretty much past its prime” because Ericsson is focusing more on infrastructure and managed services and less on devices, said Duncan Clark, Beijing-based chairman of BDA China, which advises technology companies. Sony views smartphones, which can control TVs and play games, as a way to strengthen its position against competitors including Samsung Electronics Co., he said.

“Sony should be a big player in the digital home,” Clark said. “The mobile phone is becoming much more central to electronics. If they are going to be successful and fend off Samsung, they need to do this.”

Following the deal, Sony may consider merging its handset and tablet businesses, said Janardan Menon, an analyst at Liberum Capital in London.

“They are a consumer electronics company where their mainstream is not faring well,” Menon said.

Sony, the maker of Vaio laptops, last month started offering its first tablet computer that features a 9.4-inch LCD display as well as front and rear cameras, in a pursuit of Apple whose iPad spurred a surge in demand.

Exclusive Movie Access

“TVs aren’t going to go away but consumers will watch content on smartphones, they will watch it on tablets,” Stringer said in an interview in London today. “We have the opportunity to give people something to watch and they won’t be able to get it anywhere else as far as they can get it here.”

Sony will be able to “deliver a lot of movies early” through its Sony Pictures Entertainment Inc. film studio business, he said.

Ericsson carried its share of the venture at 2.4 billion Swedish kronor ($372 million) as of the end of last year, declining from 6.7 million kronor in 2008, according to its annual report.

Stringer has previously sought to end losses by outsourcing production to contract manufacturers and eliminating thousands of jobs.

The transaction is the fourth biggest for the Japanese electronics maker, topping the company’s purchase of Sony BMG Music Entertainment from Bertelsmann AG in 2008, according to Bloomberg data.

Sue Tanaka, a Tokyo-based spokeswoman for Sony, said the company is looking at various options to finance the deal. Sony has enough cash to pay for the stake, she said.

The transaction, subject to authority approvals, will probably be completed in January 2012, the companies said.

Asian Demand

Sony Ericsson on Oct. 14 posted third-quarter sales and pretax profit that exceeded analysts’ forecasts after sales climbed in Asia while Western European revenue suffered from withering consumer confidence.

Asia sales gained 81 percent to 985 million euros while Europe, Middle East and Africa declined 43 percent to 480 million euros. Sony Ericsson has about 12 percent of the global unit market for Android handsets, it said at the time.

Sony Ericsson also has more than 4,000 of its own telecom patents and has a license to all the Nortel Networks Corp. patents that were auctioned this year, the venture said in August. Both Ericsson and Sony were part of a group, which included Apple and Microsoft Corp., that agreed in July to pay $4.5 billion for a portfolio of patents from the breakup of Nortel.

A sale of the venture would be positive for Ericsson since it would reduce the risk of additional funding obligations, Fitch Ratings said Oct. 7. Ericsson said today SEB Enskilda is acting as its sole financial adviser in the transaction.

-- With assistance from Naoko Fujimura in Tokyo. Editors: Simon Thiel, Kenneth Wong.

To contact the reporters on this story: Jonathan Browning at; Mariko Yasu in Tokyo at

To contact the editors responsible for this story: Kenneth Wong at; Michael Tighe at


Euro Crisis Fix May Threaten Lifeline for East Europe Banks

By Agnes Lovasz and Boris Groendahl - Oct 27, 2011 5:09 PM GMT+0700

Eastern Europe is at risk of its economies running out of credit as western lenders may have to focus on recapitalizing themselves, making it difficult to fund their units in the region.

With about three-quarters of the region’s banking industry owned by western lenders such as UniCredit SpA and Erste Group Bank AG, local units are likely to receive less support, “bearing on credit growth,” the European Bank for Reconstruction and Development said last week.

Lenders that bankrolled eastern Europe’s boom before the 2008 credit crunch are already squeezed by deteriorating loan quality and slowing economic growth. The region was the world’s worst-hit in the aftermath of the collapse of Lehman Brothers Holdings Inc. three years ago and faces the threat of the same fate as the euro area’s troubles spread.

“This will definitely have an impact,” Christian Keller, an emerging-markets economist at Barclays Capital in London, said in a telephone interview. “If you have a banking system that is intrinsically linked to western European banks and western European banks deleverage, you realize that growth in that region will no longer be as it was before.”

Capital Reserves

By June 30 next year, European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt, European Union leaders decided yesterday. That may require as much as 106 billion euros ($149 billion), according to the European Banking Authority.

The summit in Brussels also persuaded bondholders to take 50 percent losses on Greek debt and expanded the euro region’s rescue fund to 1 trillion euros ($1.4 trillion). Lenders have until Dec. 25 to submit money-raising plans to national supervisors.

Increased capital adequacy requirements may prompt lenders to “shrink balance sheets,” Keller said.

Lending is weakening in eastern Europe compared with the first half, when it grew 3 percent in the EBRD’s 29 countries, including a contraction in half of them, said Erik Berglof, the EBRD’s chief economist, citing inflation-adjusted figures.

Funding from western lenders added 1.5 percentage points of annual growth between 2003 and 2008 as banks feasted on new markets opening up with the European Union’s expansion waves in 2004 and 2007, according to the International Monetary Fund.

“Banks pumped all this wholesale in there, which otherwise wouldn’t have been there,” said Ronny Rehn, a banking analyst at Keefe, Bruyette & Woods in London. “This whole excess penetration is correcting.”

‘It’s an Illusion’

Loan growth is less than 10 percent everywhere in the former communist bloc, less than a third of the 2007-08 rate, the IMF said. OTP Bank Nyrt., Hungary’s largest bank, predicts that corporate lending in the country will stagnate or shrink next year because of a capital shortage at some rivals, Deputy Chief Executive Officer Laszlo Wolf said.

“It’s an illusion today that if a bank is foreign-owned it definitely has capital strength and its owner is well capitalized,” Wolf said in an Oct. 20 interview.

The amount of capital flowing into Hungary will be sufficient for “performing the necessary minimum amount of tasks” as the country is at a competitive disadvantage because of its special tax on banks, Ferenc Szabo, the deputy chief executive of Raiffeisen Bank International AG’s local unit, said in an interview yesterday.

Sales of Subsidiaries

Western banks will examine “every part of their balance sheet” and may be more willing to sell subsidiaries than before and more reluctant to roll over financing when it matures, Keller said.

While most lenders active in eastern Europe hold a limited amount of Greek bonds, UniCredit, Erste and Raiffeisen are all expected to be among those banks that will need to raise capital to meet the required ratio.

Euro-region recapitalization plans must include the eastern units, the EBRD has said. The London-based lender in 2009 orchestrated the Vienna Initiative, a pledge from the region’s biggest banks to continue financing their units.

Deleveraging Threat

“Support must be extended to the subsidiaries,” Berglof said in a telephone interview on Oct. 14. “The deleveraging process is threatening what’s been achieved.”

The Vienna Initiative must be revived as there is a danger that western banks will reduce exposure in the east, Romanian central bank Deputy Governor Cristian Popa said at a conference yesterday in Dubrovnik, Croatia.

Economic growth is slowing, tracking euro countries that buy the bulk of the region’s exports. The IMF cut its 2011 growth estimate the most for the region, along with the U.S., in its World Economic Outlook last month.

Central and eastern Europe’s economies contracted by 3.6 percent in 2009 before rebounding 4.5 percent in 2010, according to the Washington-based lender, which predicts 2.7 percent growth next year.

Western banks need to reconsider their business model in eastern Europe and cover lending increasingly from local deposits, which will slow lending growth, according to KBW’s Rehn. Erste and UniCredit have already announced they will seek to cut reliance on funding from abroad at their units.

Capital Pledge

Vienna-based Erste, the second-biggest lender in eastern Europe after UniCredit, said on Oct. 10 it expects to swing to an 800 million-euro loss this year after writedowns and provisions of 1.6 billion euros. It pledged to inject capital to its Hungarian and Romanian units.

With financial markets less developed in the east and growth outpacing the west, banks that have made the most investment will be reluctant to withdraw, said Jerome Booth, who helps manage about $47 billion of emerging-market assets as co- founder and head of research at Ashmore Investment Management in London, said.

“If you’re in these markets, you’re in there because you want to build your market share,” Booth said by telephone. “All of these banks know that the attractive future markets are the emerging markets. They are not going to be wanting to give up space.”

UniCredit’s Bank Austria AG unit, which oversees the lender’s eastern European businesses outside Poland, is “trying to focus more on local funding,” Chief Executive Officer Willibald Cernko said on Oct. 21, adding that “this is only going to be even more the case in the future.”

Foreign lenders “will remain risk averse,” said Timothy Ash, the head of emerging-market research at Royal Bank of Scotland Group Plc in London. The consequences may be “less credit, which means even weaker growth and recovery.”

To contact the reporters on this story: Agnes Lovasz in London at; Boris Groendahl in Vienna at

To contact the editors responsible for this story: Balazs Penz at; Angela Cullen at


BNP, SocGen Accelerate Trading-Book Cuts

By Fabio Benedetti-Valentini - Oct 27, 2011 3:11 PM GMT+0700

BNP Paribas SA and Societe Generale SA, France’s largest banks, are accelerating cuts in their 1.1 trillion-euro ($1.5 trillion) trading books to avoid going to shareholders or the government for capital.

The banks, which last month began a program to trim about 300 billion euros in assets by 2013, have focused on cutting dollar-funded businesses such as aircraft lending after Europe’s sovereign debt woes squeezed funding. The lenders’ statements show that their trading operations have not gone unscathed.

Reluctant to lose their top spots in the risky yet lucrative trading and derivatives business, Societe Generale and BNP Paribas hadn’t shrunk the operations as much as rivals such as Deutsche Bank AG and UBS AG. The French banks may have little choice after European Union leaders pushed lenders to boost capital. BNP Paribas and Societe Generale need 5.4 billion euros in new capital, the region’s banking regulator said today.

“It’s a striking sin of pride,” said Francois Chaulet, who helps manage 250 million euros at Montsegur Finance in Paris. “They all want to keep their rankings, but French banks risk not having the necessary capitalization.”

The two banks have already made some cuts. In the first half, BNP Paribas statements show its trading book, with bonds, equities, repurchase agreements and derivatives, shrank about 8 percent to 717 billion euros, after holding steady in 2010.

Societe Generale’s trading book slipped 4 percent in the first six months to 219 billion euros, after rising 35 billion euros last year. Its derivatives trading fell 8 percent to 176 billion euros after rising by a similar percentage last year.

Shares Jump

French banks need about 8.8 billion euros in fresh capital, according to the European Banking Authority, with 2.1 billion euros for BNP Paribas and 3.3 billion euros for Societe Generale.

BNP Paribas and Societe Generale said they’ll meet the new capital requirements through their own means. BNP Paribas rose as much as 16 percent in Paris, the biggest intraday jump in a month. It traded 8.3 percent higher at 32.53 euros as of 9:28 a.m. Societe Generale gained as much as 15 percent, also the steepest gain since Sept. 27. It rose 7.7 percent to 20.20 euros.

The two banks have said they are shrinking corporate- and investment-banking, without commenting on specific cuts. Societe Generale’s corporate- and investment-banking unit, home to its trading business, accounted for 30 percent of sales and 44 percent of net income in 2010. At BNP, it was 27 percent of revenue and 41 percent of pretax profit.

‘Almost Intact’

Between 2007 and 2010, BNP Paribas cut its post-Fortis- purchase capital-markets assets including trading and derivatives by about 10 percent and Societe Generale by about 6 percent, estimates Christophe Nijdam, an analyst at AlphaValue in Paris. For Frankfurt-based Deutsche Bank the figure was 25 percent, Credit Suisse Group AG 55 percent and UBS 47 percent.

“For French banks, it was unthinkable before this summer, but the trading book is no longer immune from cuts,” he said. “They’re naturally more inclined to cut other businesses before the trading book. Some of the trading book is more profitable but also riskier. They prefer to cut the lending book.”

Societe Generale is the world’s largest equity derivatives house by sales, according to a June report by JPMorgan Cazenove. BNP Paribas is No. 3, behind Goldman Sachs Group Inc.

“To avoid weakening its results, Societe Generale has kept its corporate and investment bank almost intact,” said Pierre Flabbee, an analyst at Kepler Capital Markets in Paris. “If you want to cut the balance sheet’s size, capital-market commitments can fall at very high speeds, but results too.”

Worsening Context

Shrinking operations may result in an acceleration of job cuts at the banks. BNP Paribas Chief Executive Officer Baudouin Prot said Sept. 22 that the bank plans “significant” staff reductions at its corporate and investment-banking unit. Societe Generale said Sept. 14 that it’s seeking a 5 percent cost reduction at its unit with possible job cuts.

BNP Paribas and Societe Generale, both based in Paris, are racing to shrink balance sheets after their stocks plunged during the summer and U.S. money-market funds became reluctant to lend them dollars, making it difficult to refinance their international operations.

Before today, BNP Paribas, France’s largest bank, had tumbled 44 percent, while Societe Generale slid 54 percent since early July, more than the 26 percent drop in the 46-member Bloomberg Europe Banks and Financial Services Index.

“In many respects, the French banks have been holding on to the hope that things would be better,” said Julian Chillingworth, who helps manage 16 billion pounds ($25.5 billion) at Rathbone Brothers Plc in London.

Selling Frenzy

Markets have taken a turn for the worse. The biggest Wall Street firms are posting their worst quarter in trading and investment banking since the depths of the credit crunch. Deutsche Bank, Europe’s biggest investment bank, on Oct. 25 posted a decline in trading revenue for the third quarter.

Selling operations in the current financial context would be difficult, Chillingworth said.

“It’s all very well that you’re announcing sales of assets but you need to find a buyer,” he said.

BNP Paribas said last month it’ll cut risk-weighted assets by about 70 billion euros by the end of next year. It plans to slash total assets by 10 percent, or about 200 billion euros.

Societe Generale, France’s second-largest lender by market value, said this month it will shrink its risk-weighted assets by as much as 80 billion euros by 2013, decreasing funding needs by as much as 95 billion euros.

Tougher Rules

Their asset-cutting efforts mirror those of European rivals. UBS, Deutsche Bank, Barclays Plc and Credit Suisse have disclosed plans to shrink their combined risk-weighted assets by as much as $415 billion to prepare for stricter capital requirements under Basel III rules.

“Everybody is trying to reduce risk-weighted assets as soon as possible,” said Kian Abouhossein, a JPMorgan analyst in London. “They’ve already all started, but they’ll probably find it harder than expected because the environment is clearly getting tougher.”

Starting Dec. 31, European investment banks face higher risk-weighted assets as part of an upgrade of Basel II rules. The value-at-risk will be “stressed” for longer and capital charges on products such as credit-default swaps will increase.

Societe Generale said last year the upgraded Basel II rules will boost risk-weighted assets by 40 billion euros. BNP Paribas, which had capital markets risk-weighted assets of 71 billion euros at the end of 2010, said in March that upgraded Basel II and III will add about 60 billion euros more.

Capital Needed

The higher the risk-weighted assets, the more capital the banks need against them. Europe’s banks will need to raise 106 billion euros in fresh capital under tougher rules being introduced, the regulator said. The extra reserves aimed at meeting a temporary requirement for banks to hold 9 percent in core reserves, after sovereign debt writedowns, the EBA said.

EU leaders met yesterday to hammer out a package to bolster the region’s rescue fund, recapitalize banks and convince investors to cut Greece’s debt load to prevent contagion effects in Italy and Spain. Policy makers and bankers converged on a 50 percent writedown for Greece’s lenders.

At the end of June, French financial firms had $681 billion in public and private debt in Greece, Portugal, Ireland, Italy and Spain, according to Basel, Switzerland-based Bank for International Settlements. That’s the biggest exposure to those countries and almost a third more than German lenders.

‘Lesser Evil’

Both BNP Paribas and Societe Generale say they can meet new Basel capital requirements without capital injections. Avoiding capital increases may mean scaling back some risky trading businesses, and thus their capital needs.

“They will definitely have to reduce their trading activities,” said Valerie Cazaban, who helps manage 100 million euros at Stratege Finance in Paris. “It’s the lesser of the evils. It would shrink their balance sheets, it can be done in stages, and it is better than reaching out to shareholders.”

BNP, which reports third-quarter earnings Nov. 3, is cutting $82 billion in corporate- and investment-banking assets. In the first half, it cut liquidity needs by $22 billion, “mainly in capital markets activities,” the bank said.

Societe Generale, which is set to report results on Nov. 8, said Oct. 4 its “capital markets’ liquidity needs have already been significantly reduced during the summer.”

Deeper reductions in some of its trading operations may be in the offing.

“It’ll becoming very difficult to keep the trading and derivatives books intact,” said Montsegur’s Chaulet. “The banks must reduce risky assets, and raising capital in current conditions is impossible.”

To contact the reporter on this story: Fabio Benedetti-Valentini in Paris at

To contact the editor responsible for this story: Frank Connelly at