MF Global Files for Bankruptcy Protection

By Tiffany Kary, Linda Sandler and David McLaughlin - Nov 1, 2011 5:24 AM GMT+0700

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Former New Jersey Gov. Jon Corzine greets voters at the Path train station on November 2, 2009 in Hoboken, New Jersey. Photographer: Spencer Platt/Getty Images

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Oct. 31 (Bloomberg) -- Neil Barofsky, former special inspector general for the U.S. Treasury's Troubled Asset Relief Program and a Bloomberg Television contributing editor, Sean Egan, president of Egan-Jones Ratings Co., and Richard Bove, an analyst at Rochdale Securities LLC, offer their views on today's filing for bankruptcy protection by MF Global Holdings Ltd. This report also contains comments from Dean Maki, chief U.S. economist at Barclays Capital; Matthew McCormick, vice president and portfolio manager at Bahl & Gaynor Inc.; Alexander Diaz-Matos, an analyst at Covenant Review LLC; David Kotok, chief investment officer at Cumberland Advisors Inc., and William Cohan, author of "Money and Power: How Goldman Sachs Came to Rule the World" and a Bloomberg View Columnist. (Source: Bloomberg)

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Oct. 31 (Bloomberg) -- MF Global Holdings Ltd., the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy after making bets on European sovereign debt. The New York-based firm listed total debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. Erik Schatzker reports on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

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Oct. 31 (Bloomberg) -- Matthew McCormick, vice president and portfolio manager at Bahl & Gaynor Inc., talks about today's bankruptcy filing by MF Global Holdings Ltd. and the performance of Chief Executive Officer Jon Corzine. McCormick speaks on Bloomberg Television's "InBusiness with Margaret Brennan." (Source: Bloomberg)

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Oct. 31 (Bloomberg) -- Sean Egan, president of Egan-Jones Ratings Co., talks about MF Global Holdings Ltd.'s bankruptcy filing. The New York-based holding company for the broker-dealer run by former New Jersey Governor Jon Corzine listed total debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. Egan speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

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Oct. 31 (Bloomberg) -- Richard Bove, an analyst at Rochdale Securities LLC, talks about the likely impact of MF Global Holdings Ltd.'s bankruptcy on the financial industry and regulation. He speaks with Margaret Brennan and Erik Schatzker on Bloomberg Television's "InBusiness with Margaret Brennan." (Source: Bloomberg)

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Oct. 28 (Bloomberg) -- Sheila Dharmarajan profiles the career of MF Global Holdings Ltd. Chief Executive Officer Jon Corzine on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

MF Global Holdings Ltd., the holding company for the broker-dealer run by ex-Goldman Sachs Group Inc. (GS) co-chairman Jon Corzine, filed for bankruptcy protection as it seeks to reorganize after making bets on European sovereign debt. Its broker-dealer unit, MF Global Inc., faces liquidation.

The firm listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed today in U.S. Bankruptcy Court in Manhattan. New York-based MF Global’s board met through the weekend to consider options including a sale to avert failure, according to a person with direct knowledge of the situation.

“They were trying to get a deal but at the end of the day the majority of their business is built on trust,” Scott Peltz, the national leader of RSM McGladrey’s Financial Advisory Services Group in Chicago, said today in an interview. “They had a huge position in European debt, which led to a lot of the troubles. There will be questions about that.”

Corzine, 64, a former governor of New Jersey who helped run Goldman Sachs from 1994 to 1999, sought to transform MF Global into a midsize investment bank after arriving there in March 2010. He increased the firm’s risk and used its own money to trade, including investments in European sovereign debt that rattled markets.

Fifth-Largest

MF Global filed the fifth-largest financial-industry public company bankruptcy by assets, coming after Lehman Brothers Holdings Inc., Washington Mutual Inc., CIT Group Inc. and Conseco Inc., according to BankruptcyData.com. It’s the eighth- largest bankruptcy by assets of any public company, according to the research group.

MF Global owns $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt, the company said in an Oct. 25 presentation. Concerns that it might lose money on the holdings amid Europe’s debt crisis led to demands from regulators to boost capital, credit downgrades, margin calls and bankruptcy, MF Global President Bradley Abelow said.

MF Global aims to complete “a successful, rapid reorganization” of its finances in court, while maintaining a “business-as-usual atmosphere,” Abelow said in an affidavit.

Regulated Unit

The company’s regulated U.S. broker-dealer unit, MF Global Inc., which didn’t file for bankruptcy, was sued today in U.S. District Court in Manhattan by the Securities Investor Protection Corp. The SIPC seeks to liquidate the unit so as to protect customer assets.

Broker-dealers aren’t eligible to file for Chapter 11 bankruptcy, and need to either sell assets, as Bear Stearns Cos. did in 2008 to JPMorgan, or liquidate, as did Lehman Brothers’ brokerage unit and Bernard Madoff’s firm.

SIPC trustee James Giddens was approved today by a federal judge. Giddens is also liquidating Lehman Brothers’ brokerage following its parent-company’s bankruptcy in 2008, the largest in U.S. history.

SIPC Suit

The SIPC, which is overseen by the U.S. Securities and Exchange Commission, acts in brokerage insolvency cases to recover investor funds. Liquidations are overseen by SIPC so as to return or replace customer securities. SIPC, created under the Securities Investor Protection Act, insures losses of as much as $500,000 per customer in registered securities.

“The defendant has failed or is in danger of failing to meet its obligations to its customers,” the SIPC said in court papers of MF Global. “Specifically, the defendant is unable to meet its obligations as they mature.”

The firm has drawn almost all of a $1.2 billion credit line that was amended last year to give it more liquidity, Abelow said. The broker-dealer unit has borrowed about $210 million of a $300 million secured credit line, he said. JPMorgan Chase & Co. (JPM) is the agent for the two credit lines.

Listing Debt

MF Global’s finance unit, MF Global Finance USA Inc., also filed for bankruptcy, listing debt of as much as $50 million and assets of as much as $500 million. The holding company asked the bankruptcy court for permission to continue intercompany transactions between its bankrupt businesses and non-bankrupt units, allowing MF Global to maintain its deposits, investments and bank accounts.

“The boards of directors of both entities authorized the filing of the Chapter 11 petition in order to protect their assets,” the companies said today in a statement. MF Global U.K. Ltd. separately entered administration in Britain with administrators appointed from KPMG LLP, the Financial Services Authority said.

MF Global reported a $191.6 million quarterly loss on Oct. 25 and Moody’s Investors Service and Fitch Ratings cut its credit rankings to junk. Before the bankruptcy filing, MF Global was suspended today from doing new business with the New York Federal Reserve, according to a statement on the regulator’s website, and trading in the stock was halted.

Declined Last Week

MF Global declined 67 percent last week and its bonds started trading at distressed levels amid its disclosures of bets on European sovereign debt. MF Global held talks with five potential buyers for all or parts of the company, including banks, private-equity firms and brokers, said the person familiar with the situation, who asked not to be identified because the talks were private.

The firm was getting advice from Evercore Partners Inc. (EVR) as it sought buyers. Skadden, Arps, Slate Meagher & Flom LLP is representing the company as bankruptcy counsel. The case was assigned to U.S. Bankruptcy Judge Martin Glenn, who handled Borders Group Inc.’s bankruptcy.

MF Global, based in the U.S. with offices in at least seven other countries, has about 2,870 employees. Revenue was $2.2 billion in fiscal 2011, with a net loss for the parent of $81.2 million.

The Broker

The broker of commodities, derivatives, equity and foreign exchange had $7.2 billion of customer funds in segregated accounts as of Aug. 31, according to the Commodity Futures Trading Commission. It was one of 22 primary dealers authorized to trade U.S. government securities with the New York Fed and is a member of more than 70 financial exchanges, according to its website.

A list of unsecured creditors filed by MF Global includes New York-based JPMorgan, as trustee for holders of $1.2 billion in debt, and Deutsche Bank AG (DBK), as trustee for holders of more than $1 billion in notes due in 2016 and 2018.

JPMorgan itself holds less than $80 million of the debt, said Joseph Evangelisti, a spokesman for the bank. JPMorgan also has $26 million in collateral belonging to MF Global that “may be subject to liens in favor” of the bank, MF Global said.

Armin Niedermeier, a spokesman for Frankfurt-based Deutsche Bank, declined to comment on the filing.

Unsecured Creditors

Other unsecured creditors include Headstrong Services LLC, owed $3.9 million; Comcast Corp.’s CNBC, owed $845,397; New York-based law firm Sullivan & Cromwell LLP, owed $596,939; Oracle Corp., owed $302,704; and Bloomberg Finance LP, owed $276,064. Bloomberg Finance is a unit of Bloomberg LP, the parent of Bloomberg News.

MF Global asked for a Jan. 30 deadline to file its full list of debt and assets, seeking a 75-day extension of the usual two-week window given under bankruptcy law.

The company “is one of the largest brokers in markets for commodities and listed derivatives,” making it large and complex enough to require more time, MF Global said in court papers.

Bond Prices

MF Global’s $325 million of 6.25 percent notes due 2016 fell 1.25 cents to 48.75 cents on the dollar at 3:49 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Regulatory Authority. The notes, which were sold in August at face value, dropped to as low as 35 cents on the dollar after the company filed for bankruptcy.

MF Global’s largest common shareholders as of Sept. 30 were Pyramis Global Advisors LLC, with 8.4 percent, and RS Investments in San Francisco, with 7.8 percent, according to court papers. RS has sold its entire stake, Erin Burke, a spokeswoman for the firm, said in an e-mail.

Fine Capital Partners LP held 7.4 percent and Cadian Capital Management LLC had 6.2 percent, the company said. J.C. Flowers & Co. owns 1.5 million preferred shares, MF Global said.

MF Global, formerly part of Man Group Plc (EMG), has its roots in a sugar brokerage founded by James Man in England in 1793. MF Global became a public company in a 2007 spinoff. It was built up before the spinoff by acquiring the assets of bankrupt brokerage Refco Inc. in 2005.

Goldman Sachs

Corzine reached out to Goldman Sachs about selling all or part of the company, according to two people with knowledge of the firm’s deliberations. Macquarie Group Ltd. examined MF Global’s books, according to a person with knowledge of the situation. David Wells, a spokesman for Goldman, didn’t return a call seeking comment. Paula Chirhart, a spokeswoman for Macquarie in New York, declined to comment.

Barclays Plc was among banks that looked at MF Global, another person said. Kerrie Cohen, a spokeswoman for the U.K.- based bank in New York, declined to comment.

Hannah Grove, a spokeswoman for State Street Corp. (STT), which was also reported to be a potential bidder, declined to comment.

“We’re investing in the future of this business,” Corzine said in a May statement that announced new hires in MF Global’s commodities and derivatives areas. In August, the company sold $325 million in senior unsecured notes to repay part of the $1.2 billion revolving credit facility, according to company statements.

Net Capital

MF Global increased net capital at the U.S. unit after Finra raised concerns about the risks to its European debt portfolio, it said in September.

“We are confident that we have the resources, capital, liquidity and expertise to successfully manage our European exposures to their end date maturity of December 2012,” Diana DeSocio, a spokeswoman for the broker, said in an Oct. 24 statement.

Along with the creditors holding millions of dollars in bonds are vendors owed much smaller sums.

Tim Jones is the president of Cedar Knolls, New Jersey- based Ticker Consulting LLC, which advises financial companies such as MF Global on electronic-trading and risk-management systems. Jones, who has an unsecured claim of about $22,800 for services he provided to MF Global, said that in bankruptcy there’s always a chance a debt can’t be collected.

“I’ll move on,” Jones said. “My W-2 will be a little bit light, and hopefully I can find places to make that money up.”

The case is MF Global Holdings Ltd. (MF), 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Tiffany Kary in New York at tkary@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net; David McLaughlin in New York at dmclaughlin9@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.

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Stocks, Italian Bonds Retreat Amid European Bailout Concern; Yen Tumbles

By Stephen Kirkland and Rita Nazareth - Oct 31, 2011 10:55 PM GMT+0700

Stocks retreated from an almost three-month high as Italian and Spanish bonds fell amid concern European leaders will struggle to raise funds to contain the region’s debt crisis. The yen sank from a post-World War II record against the dollar after Japan intervened in the market.

The MSCI All-Country World Index lost 2 percent at 11:51 a.m. New York time, trimming its monthly rally to a record 12 percent, as Deutsche Bank AG, BNP Paribas SA and Morgan Stanley dropped more than 5.6 percent. The Standard & Poor’s 500 Index slipped 1.3 percent. Italian five-year yields rose 17 basis points to 5.92 percent. German bunds and U.S. Treasuries advanced. The yen tumbled as much as 4.6 percent against the dollar, the most since 2008. Copper fell 2.3 percent in London.

Stocks declined, led by banks, following the biggest weekly gain since 2009 after China’s official news agency Xinhua said the country can’t play the role of “savior” for Europe. Equities rallied on Oct. 26 amid speculation China might invest in the European rescue fund. The yen slumped after Japanese Finance Minister Jun Azumi said the government took steps to weaken the currency. Stocks and commodities also fell after a unit of MF Global Holdings Ltd. filed for bankruptcy.

“Some of that rally that we’ve seen were on comments that China would provide support to Europe,” Mark Bronzo, who helps manage $23 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “If you get a comment saying that they can’t be viewed as a savior, the market will react,” he said. “MF Global declaring bankruptcy is certainly not a positive for the perception about the financial sector.”

Last Week’s Surge

The MSCI All-Country World Index jumped 5.6 percent last week after European leaders increased the region’s rescue fund to 1 trillion euros ($1.4 trillion) and investors agreed to a voluntary writedown of 50 percent on Greek debt.

Equities and commodities reversed course today after a measure of banks’ reluctance to lend to one another in Europe rose to the highest in almost a month. The Euribor-OIS spread, the difference between the borrowing benchmark and overnight index swaps, climbed to 81 basis points from 78 on Oct. 28. That’s the highest since Oct. 5 and compares with 89 points on Sept. 23, when the measure was its widest since 2009.

Financial stocks helped lead losses in the MSCI index, dropping 2.7 percent as a group. Deutsche Bank slumped 8.4 percent, BNP Paribas retreated 8.1 percent and Morgan Stanley fell 5.7 percent. Citigroup lost 5.4 percent.

Energy, Yahoo

Energy, raw-material and financial companies led declines in the S&P 500, retreating more than 2 percent. Yahoo! Inc. lost 4.8 percent after five people familiar with the situation said the company is leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers.

The Stoxx Europe 600 Index retreated 1.4 percent as 16 of the 19 industries declined.

“We’re not out of the woods yet,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “Europe did get a rescue that buys them more time, but they are not anywhere near a resolution to their crisis. In addition, we’ve been on a buying stampede. The market was due for a pullback.”

Yields on Italy’s 10-year government debt added eight basis points to 6.10 percent, widening the difference over benchmark German bunds to 405 basis points.

Spain, Germany

The Spanish-German 10-year yield spread widened 18 basis points to 351 basis points. German 10-year yields dropped 13 basis points to 2.05 percent, while equivalent-maturity Treasury yields were 11 basis points lower at 2.21 percent. The cost of insuring European government debt rose, with credit-default swaps tied to Italy climbing 29 basis points to 434 and the Markit iTraxx SovX Western Europe Index of 15 governments increasing 12 basis points to 302.

The yen lost 2.8 percent versus the dollar and 1.5 percent against the euro. The euro declined 1.3 percent versus the dollar. The Dollar Index climbed 1.3 percent.

Gold dropped the most in more than a week in New York as the U.S. dollar surged following Japan’s intervention in foreign-exchange markets, reducing demand for bullion as an alternative investment. Gold for December delivery slumped 1.1 percent to $1,727.30 an ounce.

The MSCI Emerging Markets Index declined for the first time in seven days, falling 1.5 percent and paring its October rally to 13 percent. The Hang Seng China Enterprises Index dropped 1.1 percent, led by property-related companies after Premier Wen Jiabao said the government should “firmly” maintain real- estate curbs.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

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

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European Stocks Fall, Paring Best Month Since 2009; Vestas, HSBC Retreat

By Adam Haigh - Oct 31, 2011 10:25 PM GMT+0700

European stocks dropped, paring their biggest monthly gain since July 2009, as some investors remain reluctant to buy equities before the euro area’s leaders explain how they will fund their expanded bailout facility.

Vestas Wind Systems A/S tumbled 24 percent as the biggest maker of wind turbines cut its forecasts for revenue and margins based on earnings before interest and taxes this year after delays in expanding production at its new plant in Germany. HSBC Holdings Plc and Rio Tinto Group led bank and commodity-company shares lower.

The Stoxx Europe 600 Index slid 1.6 percent to 245.01 at 3:22 p.m. in London, paring its monthly gain to 8.3 percent, the largest advance in more than two years. The gauge slipped 0.2 percent on Oct. 28, having rallied 3.6 percent the previous day, after the euro area’s leaders said they will boost the European Financial Stability Facility’s capacity in a bid to stem the debt crisis. The gauge jumped 4.2 percent last week, its fifth straight weekly gain.

“There are lots of missing details and it’s still frustrating slow,” said Kevin Gardiner, the global head of investment strategy at Barclays Plc’s wealth unit, which manages about $266 billion for clients. “But it’s shown a commitment that’s needed to provide the financial backstop for the banking system. Markets will stay volatile.” He spoke in a Bloomberg Television interview in London with Maryam Nemazee.

G-20 Meeting

The G-20 leaders convene on Nov. 3-4 in Cannes, France, a week after the euro area’s authorities pledged to magnify the capacity of their rescue fund to 1 trillion euros ($1.4 trillion). The euro area has already sought financial help from China and cooperation from the International Monetary Fund.

While the G-20 summit will be a “key milestone,” any commitments “are unlikely to be crystallized” until the European Financial Stability Facility’s overhaul is completed, said Jens Larsen, chief European economist at RBC Capital Markets in London.

European leaders aren’t offering China extra incentives in return for help resolving the euro area’s debt crisis, Henri Guaino, an adviser to French President Nicolas Sarkozy, said today. Sarkozy asked his Chinese counterpart Hu Jintao last week to build support for the enlarged rescue fund.

ECB Interest Rates

Only 6 of 54 economists surveyed by Bloomberg forecast that the new ECB President Mario Draghi will cut the benchmark interest rate on Nov. 3. The ECB increased rates for a second time this year to 1.5 percent in July.

The Stoxx 600 has fallen 11 percent this year amid concern that the euro area’s sovereign debt crisis will hamper growth. The gauge trades at 10.6 times the estimated earnings of its companies, compared with the average multiple of 12.1 over the past five years, according to data compiled by Bloomberg. More than half of the 145 companies in the Stoxx 600 that have released earnings since Oct. 11 beat analysts’ profit estimates, according to data compiled by Bloomberg.

National benchmark indexes declined in all 18 western- European markets. The U.K.’s FTSE 100 Index slid 1.5 percent and France’s CAC 40 Index retreated 2.3 percent. Germany’s DAX Index sank 2.4 percent.

Vestas slumped 24 percent to 84.20 kroner for its biggest slide in 14 months. The wind-turbine maker predicted revenue of 6.4 billion euros in 2011, down from the 7 billion euros it had forecast in August. Vestas said its 2011 Ebit margin will decline to 4 percent. The company projected a margin of 7 percent in August. Vestas said further delays at the facility remain possible.

Gamesa Corp. Tecnologica SA, the Spanish wind-turbine maker, plunged 8.6 percent to 3.55 euros, while Germany’s Nordex SE retreated 3.3 percent to 4.37 euros.

HSBC, BNP Paribas

HSBC lost 3.2 percent to 547.3 pence. BNP Paribas SA declined 9.1 percent to 33.04 euros. Banks performed the worst of the 19 industry groups on the Stoxx 600.

UniCredit SpA slipped 5.7 percent to 84.8 euro cents as La Stampa reported that Italy’s largest bank plans to raise 6 billion euros to 8 billion euros. The newspaper didn’t say where it got the information. A UniCredit official declined to comment.

Rio Tinto, the world’s second-biggest mining company, lost 5.2 percent to 3,432.5 pence. BHP Billiton, the world’s largest, declined 5.2 percent to 1,992.5 pence. Copper, nickel and tin prices slumped on the London Metals Exchange.

Homeserve Plc tumbled 29 percent to 344.8 pence for the biggest slump on the Stoxx 600 after the U.K.-based emergency- repair service provider suspended all telephone sales and marketing because a review showed sales processes didn’t meet standards.

TNT Express NV rallied 4.9 percent to 6.17 euros as Europe’s second-largest express-delivery service posted an unexpected third-quarter profit after increasing prices in Europe and Asia.

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

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

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U.S. Stocks Decline Amid Europe Concerns

By Rita Nazareth - Oct 31, 2011 9:58 PM GMT+0700

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Oct. 31 (Bloomberg) -- Keith Wirtz, chief investment officer of Fifth Third Asset Management Inc., talks about the U.S. stock market and investment strategy. Wirtz speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

U.S. stocks declined, trimming the biggest monthly advance since 1987 in the Standard & Poor’s 500 Index, on concern European leaders will struggle to raise funds to contain the region’s sovereign debt crisis.

Morgan Stanley and Citigroup Inc. dropped more than 5.5 percent as European banks fell and MF Global Holdings Ltd. filed for bankruptcy. Alcoa Inc. and Ford Motor Co. slumped at least 1.2 percent to pace losses in companies most-tied to the economy. Yahoo! Inc. slid 5 percent as it is said to be leaning toward selling Asian assets and redistributing proceeds to shareholders, rather than selling itself.

The S&P 500 dropped 1.2 percent to 1,269.19 as of 10:57 a.m. New York time. The gauge rose 12 percent in October and was poised to snap a five-month drop. The Dow Jones Industrial Average lost 135.78 points, or 1.1 percent, to 12,095.33.

“We’re not out of the woods yet,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “Europe did get a rescue that buys them more time, but they are not anywhere near a resolution to their crisis. In addition, we’ve been on a buying stampede. The market was due for a pullback.”

Stocks rose last week after European leaders agreed to expand the region’s bailout fund and American economic growth accelerated. Earlier this month, the index came within 1 percent of extending a drop from its peak in April to 20 percent, the common definition of a bear market. Since then, it has risen 15 percent.

Role of ‘Savior’

China can’t play the role of “savior,” the official Xinhua news agency said yesterday, as investors awaited the country’s response to Europe’s request for money to boost its bailout fund. Japanese Finance Minister Jun Azumi said today the government took unilateral steps to weaken the yen. Group of 20 leaders will gather Nov. 3-4 in Cannes, France, while central bankers from Australia, the U.S. and Europe will hold interest- rate policy meetings this week.

Wilbur Ross said European banks will need new capital before they can sell assets to meet requirements, the Financial Times said, citing an interview with the billionaire chairman of private-equity firm WL Ross & Co.

The KBW Bank Index dropped 2.4 percent. MF Global, the holding company for the broker-dealer run by former New Jersey governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed for bankruptcy after making bets on European sovereign debt. Morgan Stanley fell 5.5 percent to $18.25. Citigroup declined 6.3 percent to $32.02.

‘Won’t Be Evident’

“The extended kind of rally we’re looking for from stocks won’t be evident until we see at least the financial sector show improvement,” Keith Wirtz, who oversees $16.7 billion as chief investment officer at Fifth Third Asset Management in Cincinnati, said in a Bloomberg Television interview. “The financials will have to be part of the play for an extended run in stocks to occur.”

The Morgan Stanley Cyclical Index of companies most-tied to the economy decreased 1.7 percent. The Dow Jones Transportation Average, a proxy for the economy, slid 1.3 percent. Alcoa, the largest U.S. aluminum producer, dropped 4 percent to $11.11. Ford erased 1.2 percent to $11.86.

The Institute for Supply Management-Chicago Inc. said today its business barometer decreased to 58.4 in October from 60.4 the prior month. A level of 50 is the dividing line between expansion and contraction. Economists forecast the gauge would drop to 59, according to the median of 55 estimates in a Bloomberg News survey. Projections ranged from 56 to 62.5.

Yahoo Slumps

Yahoo decreased 5 percent to $15.73. The Asian asset sale is emerging as the most likely option for Yahoo and would let the Internet company eventually pay a special dividend or buy back shares, according to five people familiar with the situation, who declined to be identified because the talks are private. Dana Lengkeek, a spokeswoman for Yahoo, declined to comment.

Chevron Corp. erased 2.6 percent to $106.82 after being cut to “neutral” from “buy” at Bank of America Corp., which cited valuation concern. SanDisk Corp., the biggest maker of flash-memory cards, lost 3.2 percent to $51.67. Sterne Agee & Leach Inc. downgraded its recommendation for the shares to “neutral” from “buy.”

Barton Biggs, co-founder of Traxis Partners LP, said his hedge fund’s net long position rose to about 80 percent from 65 percent earlier this month and that the U.S. stock market rally will continue. Biggs said he favors technology stocks, as well as large cap industrial companies, such as Caterpillar Inc. and General Electric Co.

‘Pretty Bullish’

“I’m pretty bullish,” Biggs said today in an interview with Betty Liu on Bloomberg TV’s “In the Loop” program. “I think this rally is about positioning and will continue for a while.”

American companies are beating Wall Street profit estimates for the 11th straight quarter, enough to revive a bull market that analysts say will eclipse any rally in the past 12 years. Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year.

Companies from Google Inc. to Peabody Energy Corp. are delivering higher earnings at a time when Bill Gross, the co- chief investment officer of Pacific Investment Management Co., is warning that Europe’s debt crisis will spur a recession. While more than $6.3 trillion has been erased from global equities since May, analyst forecasts imply the benchmark measure will post its biggest rally since the 1990s technology bubble, when the gain since March 2009 is included.

‘Really Decent’

“This is looking like it’s going to be a really decent quarter,” Warren Koontz, head of U.S. large-cap value stocks at Loomis Sayles & Co. in Boston, which manages about $150 billion, said in an Oct. 25 interview. “Valuations are very, very low relative to history, and you don’t have to make heroic assumptions on multiples to get reasonable returns.”

The S&P 500 traded at 11.7 times reported income on Oct. 3, within 14 percent of its price-earnings ratio at the bottom of the financial crisis in March 2009, Bloomberg data show. The index gained 3.8 percent last week.

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

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

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Panasonic Forecasts Biggest Loss in Decade on Strong Yen, TV Restructuring

By Mariko Yasu - Oct 31, 2011 6:38 PM GMT+0700

Panasonic Corp., the maker of Viera televisions, forecast its biggest annual loss in 10 years because of a stronger yen, declining sales and a one-time charge for restructuring its TV and chip operations.

The full-year loss may be 420 billion yen ($5.4 billion), the Osaka-based electronics maker said in a statement today, reversing an earlier projection for profit of 30 billion yen in the 12 months ending March 31. That includes a charge of 404 billion yen for streamlining the TV and semiconductor businesses, according to the statement.

Japan’s biggest maker of appliances cut its annual TV sales target to 19 million from 25 million amid competition from South Korea’s Samsung Electronics Co. and LG Electronics Inc. The yen reaching a postwar high against the dollar and a decade high against the euro is pressuring the company to accelerate plans to eliminate 17,000 jobs and focus on solar panels and rechargeable batteries after acquiring Sanyo Electric Co.

“Panasonic is having a really hard time because the company has to work on two restructuring plans at the same time,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo. “One is Sanyo and another one is downsizing the TV department.”

Panasonic declined 7.4 percent to 7.15 euros in Frankfurt trading after the announcement. The shares in Tokyo have declined 30 percent this year, compared with a 2 percent advance for Samsung and a 43 percent drop for Sony Corp.

Yen Appreciation

For the three months ended Sept. 30, Panasonic reported a net loss of 106 billion yen, compared with the 5.6 billion yen average profit of four analysts’ estimates compiled by Bloomberg.

Japan’s currency today dropped from a post-World War II record against the dollar after the country intervened in the currency markets. A stronger yen hurts the repatriated value of sales overseas.

Separately, Panasonic announced a reform plan for its TV and chip operations. The company is suspending two Japanese plants making TV displays, scrapping plans to relocate panel facilities to China and writing off some value of plants making TV displays and semiconductors.

The company also will reduce its production capacity for plasma TV panels by 48 percent.

“We’ve sought measures to solve deficits at the TV unit since 2008 but none brought a result that we anticipated,” President Fumio Ohtsubo told reporters in Tokyo.

Buying Sanyo

The company also will shift its procurement base to Singapore from Osaka, it said.

The maker of Viera TV was affected by floods in Thailand just months after restarting domestic plants crippled by Japan’s magnitude-9 temblor on March 11.

Panasonic, which spent more than $6 billion purchasing stakes in Sanyo and Panasonic Electric Works Co. last year, wants energy-related businesses to be its next earnings driver after its TV operation recorded three consecutive annual losses.

Panasonic will speed up its plan to reduce group employment to a maximum of 350,000, the company said in a statement today. It also aims to make a profit from its TV and chips businesses next fiscal year, Ohtsubo said.

Income at the main audio-visual unit likely will total 36 billion yen this fiscal year, while profit at the home-appliance unit may be 104 billion yen, the company said without providing year-earlier numbers.

The Sanyo Electric unit may record a loss of 69 billion yen, it said.

Panasonic is eliminating overlapping operations in white goods and car navigation systems, consolidating marketing and research units and cutting its number of plants by as much as 20 percent from about 350, Ohtsubo said in April.

To contact the reporter on this story: Mariko Yasu in Tokyo at myasu@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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Yahoo Declines as Company Said to Lean Toward Dividend Rather Than Sale

By Serena Saitto, Jeffrey McCracken and Brian Womack - Oct 31, 2011 7:05 PM GMT+0700

Yahoo! Inc. fell in early trading as the company is leaning toward selling its Asian assets and redistributing the proceeds to shareholders, rather than selling itself to a group of buyers.

This scenario is emerging as the most likely option for Yahoo and would let the Internet company eventually pay a special dividend or buy back shares, according to five people familiar with the situation, who declined to be identified because the talks are private.

The shares declined 3.3 percent to $16.01 at 7:49 a.m. New York York time before the opening of the markets. Before today, the stock had surged 28 percent since the company fired Chief Executive Officer Carol Bartz in early September, making it a more expensive target for private-equity buyers, the people said last week.

Yahoo has been exploring options while searching for a replacement for Bartz, who struggled to boost revenue growth or fend off competition from Google Inc. and Facebook Inc. Co- founder Jerry Yang said on Oct. 20 that the company isn’t necessarily on the block.

“The intent going in is not to put ourselves up for sale,” Yang said that day at the All Things Digital Asia conference in Hong Kong. “The intent is to look at all options. There’s plenty of options for the board, and plenty of options for our shareholders to realize value.”

No decision has been made yet and Yahoo could still sell to a group of investors, the people said. Yahoo may also sell a minority stake in the company, or seek a buyer for the entire company after finding buyers for Asian assets, said the people. A change of ownership entirely would put the tax-efficiency of the Asian asset deals at risk, one of the people said.

Dana Lengkeek, a spokeswoman for Sunnyvale, California- based Yahoo, declined to comment.

Interest in Yahoo

“Multiple parties” have expressed interest in Yahoo, according to a September memo by Yang. KKR & Co. and Blackstone Group LP (BX) are among the private-equity firms considering possible bids for Yahoo, people with knowledge of the matter have said.

In addition, Alibaba Group Holding Ltd., whose biggest shareholder is Yahoo, has discussed a plan with private equity firm Silver Lake and Russia’s Digital Sky Technologies to make a joint bid, people familiar with the matter have said. Another group that is interested includes Providence Equity Partners Inc. and former News Corp. (NWSA) executive Peter Chernin, people said.

The sheer number of parties that have mulled offers for Yahoo is contributing to the difficulty in reaching an agreement, the people said. Amassing the financing needed to acquire a $20.9 billion company is another hurdle, the people said.

Tax Implications

Alibaba Chairman Jack Ma has publicly expressed interest in buying Yahoo’s stake in his company. Alibaba has no comment on the Bloomberg story, John Spelich, a spokesman, said by phone in Hong Kong. Yahoo also co-owns Yahoo Japan with Softbank Corp. (9984) of Japan.

Softbank and Yahoo Japan have been in talks with Yahoo to buy its stake in Yahoo Japan for nine months but the talks are complicated by tax considerations, one person with direct knowledge of the situation said earlier this month.

The Wall Street Journal reported Oct. 28 that Yahoo is exploring a tax-free disposal of its Asian assets.

The plan involves creating a new subsidiary into which Alibaba would put cash and some assets from Alibaba or another party, the Wall Street Journal reported. The stock of that company would be swapped for Yahoo’s stake, leaving Yahoo with the cash and assets and giving Alibaba its shares back, the Journal reported. Under U.S. tax law, such a deal isn’t considered a sale and therefore is not taxable, the paper said.

A change of ownership of Yahoo would threaten the tax- efficiency of this arrangement, said one person with direct knowledge of the situation.

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Brian Womack in San Francisco at bwomack1@bloomberg.net

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

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BT to Accelerate $4B Fiber Plan by a Year

By Jonathan Browning - Oct 31, 2011 4:00 PM GMT+0700
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An engineer for BT Openreach part of the BT Group Plc connects customers to a high speed fibre optic network in Enfield, U.K. BT is building out high-speed fiber services to counter declining revenue from traditional fixed-line offerings. Photographer: Chris Ratcliffe/Bloomberg

BT Group Plc, the U.K.’s largest Internet service provider, will accelerate its 2.5 billion-pound ($4 billion) rollout of fiber broadband as it competes with operators including Virgin Media in high-speed Web services.

BT will advance the rollout by one year by bringing forward 300 million pounds of funding, the London-based company said today in a statement. BT now plans to reach two-thirds of British homes by the end of 2014, rather than 2015.

“Our rollout of fiber broadband is one of the fastest in the world and so it is great to be ahead of what was an already challenging schedule,” Chief Executive Officer Ian Livingston said in the statement. “We are investing when others are merely talking about it.”

BT is building out high-speed fiber services to counter declining revenue from traditional fixed-line offerings. The company, which won market share from rivals including Virgin Media and TalkTalk in its fiscal first quarter, announced plans this month to double the speed of its main fiber product to as fast as 80 megabits-per-second. Virgin Media, based in Hook, England, is already rolling out a 100 megabits-per-second service.

The company also faces potential competition from Fujitsu Ltd., Japan’s biggest computer-services provider, which said this year it wants to tap BT’s infrastructure to build a rival fiber network to 5 million homes and businesses for as much as 2 billion pounds.

BT, which reports second-quarter results on Nov. 3, rose 0.4 percent to 188.7 pence at 8:56 a.m. in London trading.

To contact the reporter on this story: Jonathan Browning in London jbrowning9@bloomberg.net.

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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European Stocks Fall, U.S. Index Futures Drop; Vestas Slumps on Forecast

By Adam Haigh - Oct 31, 2011 7:24 PM GMT+0700

European stocks dropped, paring their biggest monthly gain since July 2009, as some investors remain reluctant to buy equities before the euro area’s leaders explain how they will fund their expanded bailout facility. U.S. index futures and Asian shares fell.

Vestas Wind Systems A/S tumbled 20 percent as the biggest maker of wind turbines cut its forecasts for revenue and margins based on earnings before interest and taxes this year after delays in expanding production at its new plant in Germany. HSBC Holdings Plc and BHP Billiton Ltd. led bank and commodity- company shares lower.

The Stoxx Europe 600 Index slid 1.1 to 246.19 at 12:21 p.m. in London, paring its monthly gain to 8.8 percent, the largest advance in more than two years. The gauge slipped 0.2 percent on Oct. 28, having rallied 3.6 percent the previous day, after the euro area’s leaders said they will boost the European Financial Stability Facility’s capacity in a bid to stem the debt crisis. The gauge jumped 4.2 percent last week, its fifth straight weekly gain.

“There are lots of missing details and it’s still frustrating slow,” said Kevin Gardiner, the global head of investment strategy at Barclays Plc’s wealth unit, which manages about $266 billion for clients. “But it’s shown a commitment that’s needed to provide the financial backstop for the banking system. Markets will stay volatile.” He spoke in a Bloomberg Television interview in London with Maryam Nemazee.

Futures contracts on the Standard & Poor’s 500 Index expiring in December retreated 1 percent and the MSCI Asia Pacific Index plunged 2.5 percent.

G-20 Meeting

The G-20 leaders convene on Nov. 3-4 in Cannes, France, a week after the euro area’s authorities pledged to magnify the capacity of their rescue fund to 1 trillion euros ($1.4 trillion). The euro area has already sought financial help from China and cooperation from the International Monetary Fund.

While the G-20 summit will be a “key milestone,” any commitments “are unlikely to be crystallized” until the European Financial Stability Facility’s overhaul is completed, said Jens Larsen, chief European economist at RBC Capital Markets in London.

European leaders aren’t offering China extra incentives in return for help resolving the euro area’s debt crisis, Henri Guaino, an adviser to French President Nicolas Sarkozy, said today. Sarkozy asked his Chinese counterpart Hu Jintao last week to build support for the enlarged rescue fund.

ECB Interest Rates

Only 6 of 54 economists surveyed by Bloomberg forecast that the new ECB President Mario Draghi will cut the benchmark interest rate on Nov. 3. The ECB increased rates for a second time this year to 1.5 percent in July.

The Stoxx 600 has fallen 11 percent this year amid concern that the euro area’s sovereign debt crisis will hamper growth. The gauge trades at 10.7 times the estimated earnings of its companies, compared with the average multiple of 12.1 over the past five years, according to data compiled by Bloomberg. More than half of the 145 companies in the Stoxx 600 that have released earnings since Oct. 11 beat analysts’ profit estimates, according to data compiled by Bloomberg.

Vestas slumped 20 percent to 89.20 kroner for its biggest slide in 14 months. The wind-turbine maker predicted revenue of 6.4 billion euros in 2011, down from the 7 billion euros it had forecast in August. Vestas said its 2011 Ebit margin will decline to 4 percent. The company projected a margin of 7 percent in August. Vestas said further delays at the facility remain possible.

HSBC, BNP Paribas

HSBC lost 2.4 percent to 551.7 pence. BNP Paribas SA declined 6.1 percent to 34.15 euros. Banks were among the worst performing of the 19 industry groups on the Stoxx 600.

UniCredit SpA slipped 3.3 percent to 86.9 euro cents as La Stampa reported that Italy’s largest bank plans to raise 6 billion euros to 8 billion euros. The newspaper didn’t say where it got the information. A UniCredit official declined to comment.

BHP Billiton declined 4.1 percent to 2,016.5 pence. Rio Tinto Group lost 4.2 percent to 3,467 pence. Copper, nickel and tin prices slumped on the London Metals Exchange.

Homeserve Plc tumbled 29 percent to 346.5 pence for the biggest slump on the Stoxx 600 after the U.K.-based emergency- repair service provider suspended all telephone sales and marketing because a review showed sales processes didn’t meet standards.

Clariant AG climbed 1 percent to 9.82 Swiss francs after reporting earnings before interest, taxes, depreciation, amortization and one-off items for the third quarter that beat some analyst estimates.

TNT Express NV rallied 6.6 percent to 6.27 euros, its biggest jump in three weeks, as Europe’s second-largest express- delivery service posted an unexpected third-quarter profit after increasing prices in Europe and Asia.

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

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

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Italian, Spanish Bonds Fall on Bailout Concern

By Stephen Kirkland - Oct 31, 2011 7:24 PM GMT+0700
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Italian five-year yields rose 12 basis points to 5.87 percent at 10:31 a.m. in London. Photographer: Victor Sokolowicz/Bloomberg

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Oct. 31 (Bloomberg) -- Naomi Fink, head of Japan strategy at Jefferies Japan Ltd., discusses Japan's intervention in markets to weaken its currency and the impact of the yen's appreciation on Japanese corporations and trade. Fink speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Italian and Spanish bonds fell, while stocks retreated from a three-month high on concern European leaders will struggle to raise funds to contain the region’s debt crisis. The yen sank from a post-World War II record against the dollar after Japan intervened in the market.

Italian five-year yields rose 24 basis points to 5.99 percent, the highest since 1997, at 8:22 a.m. in New York. German bunds and U.S. Treasuries advanced. The yen tumbled as much as 4.9 percent against the dollar, the biggest drop in three years. The MSCI All-Country World Index lost 1.1 percent, trimming its record monthly rally to 12 percent, and Standard & Poor’s 500 Index futures slipped 1 percent. Copper and silver slid 2.6 percent.

China can’t play the role of “savior,” the official Xinhua news agency said yesterday after European leaders agreed last week to boost their bailout fund. Japanese Finance Minister Jun Azumi said today the government took unilateral steps to weaken the yen. Group of 20 leaders will gather Nov. 3-4 in Cannes, France, while central bankers from Australia, the U.S. and Europe will hold interest-rate policy meetings this week.

“Italian yield spreads suggest bond markets seem to be quite cynical about the latest deal,” said John Stopford, the head of fixed income at Investec Asset Management in London. “Although the package may be seen as a step forward, the lack of details at this point worried investors. The market is obviously concerned about the amount of borrowing that Italy has to do, and the limited firepower that exists to help it.”

Italian five-year yields earlier climbed even after three people said the European Central Bank bought the nation’s debt. Italian 10-year yields added 15 basis points to 6.18 percent, widening the yield difference over benchmark German bunds to 408 basis points. It reached a record 4.16 percent on Aug. 5.

Bond Risk

The Spanish-German 10-year yield spread widened 20 basis points to 353 basis points. German 10-year yields dropped eight basis points to 2.10 percent, while equivalent-maturity Treasury yields were nine basis points lower at 2.23 percent. The cost of insuring European government debt rose, with credit-default swaps tied to Italy climbing 29 basis points to 434 and the Markit iTraxx SovX Western Europe Index of 15 governments increasing 12 basis points to 302.

The Stoxx Europe 600 Index retreated 1.1 percent as 16 of the 19 industry groups declined. Banks led losses with BNP Paribas SA, Societe Generale SA and Deutsche Bank AG dropping more than 5 percent. Vestas Wind Systems A/S tumbled 21 percent, the wind-turbine maker’s biggest drop in 14 months, after cutting its 2011 forecasts for revenue and margins. More than half of the 145 companies in the Stoxx 600 that have released earnings since Oct. 11 beat analysts’ profit estimates, according to data compiled by Bloomberg.

Biggest Gain

The decline in S&P 500 futures indicated the benchmark measure will pare its biggest monthly gain since 1974. Seven companies on the S&P 500, including Loews Corp. and Anadarko Petroleum Corp. report their earnings today. Almost three- quarters of the 220 companies that have posted results since Oct. 11 have exceeded analysts’ forecasts.

The yen declined versus all of the more than 150 currencies tracked by Bloomberg. It was 2.7 percent weaker at 77.89 per dollar and 1.7 percent lower against the euro at 109.10. The euro declined 1 percent to $1.4007. The Dollar Index climbed 1.2 percent.

Silver fell for the first time in seven sessions, and gold dropped 1.2 percent to $1,723.48 an ounce. Natural gas climbed 0.9 percent on speculation cold weather in the U.S. will boost demand for the fuel. Lead declined 3.7 percent. Oil lost 0.6 percent to $92.79 a barrel.

The MSCI Emerging Markets Index declined for the first time in seven days, falling 0.8 percent and paring its October rally to 14 percent. The Hang Seng China Enterprises Index dropped 1.1 percent, led by property-related companies after Premier Wen Jiabao said the government should “firmly” maintain real- estate curbs. Benchmark equity indexes in Poland, the Czech Republic and South Africa retreated more than 1 percent, while the Russian ruble weakened 1.4 percent versus the dollar.

To contact the reporter on this story: Stephen Kirkland in London at skirkland@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at Swallace6@bloomberg.net

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Bonds Beat Stocks for First Time Since 1861

By Cordell Eddings - Oct 31, 2011 6:25 PM GMT+0700

The biggest bond gains in almost a decade have pushed returns on Treasuries above stocks over the past 30 years, the first time that’s happened since before the Civil War.

Fixed-income investments advanced 6.25 percent, almost triple the 2.18 percent rise in the Standard & Poor’s 500 Index through last week, according to Bank of America Merrill Lynch indexes. Debt markets are on track to return 7.63 percent this year, the most since 2002, the data show. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500, said Jim Bianco, president of Bianco Research in Chicago.

The combination of a core U.S. inflation rate that has averaged 1.5 percent this year, the Federal Reserve’s decision to keep its target interest rate for overnight loans between banks near zero through 2013, slower economic growth and the highest savings rate since the global credit crisis have made bonds the best assets to own this year. Not only have bonds knocked stocks from their perch as the dominant long-term investment, their returns proved everyone from Bill Gross to Meredith Whitney and Nassim Nicholas Taleb wrong.

“The generation-long outperformance of bonds over stocks has been the biggest investment theme that everyone has just gotten plain wrong,” Bianco said in an Oct. 26 telephone interview. “It’s such an ingrained idea in everyone’s head that such low yields should be shunned in favor of stocks, that no one wants to disrupt the idea, never mind the fact that it has been off.”

Market Returns

Stocks had risen more than bonds over every 30-year period from 1861 until now, according to Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School in Philadelphia.

U.S. government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch’s U.S Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent and mortgage bonds have risen 5.11 percent. The S&P GSCI index of 24 commodities has returned 0.25 percent.

Falling Yields

While 10-year Treasury yields rose 10 basis points, or 0.10 percentage point, last week to 2.32 percent, they are down from this year’s high of 3.77 percent on Feb. 9. The price of the benchmark 2.125 percent note due August 2021 fell 27/32, or $8.44 per $1,000 face value, in the five days ended Oct. 28 to 98 10/32, according to Bloomberg Bond Trader data.

The yield dropped six basis points today to 2.25 percent at 7:22 a.m. in New York.

The shift to debt wasn’t anticipated by Gross, who as co- chief investment officer of Newport Beach, California-based Pacific Investment Management Co. runs the world’s biggest bond fund. His $242 billion Total Return Fund, which unloaded Treasuries in February before the rally, has gained 2.55 percent this year, putting it in the bottom 18th percentile of similar funds, according to data compiled by Bloomberg.

Whitney, a banking analyst who correctly turned bearish on Citigroup Inc. in 2007, predicted in December “hundreds of billions of dollars” of municipal defaults that haven’t happened. Taleb, author of “The Black Swan” and a principal at Universa Investments LP, said at a conference in Moscow on Feb. 3 that the “first thing” investors should avoid is Treasuries.

What Went Wrong

The reluctance to purchase debt continues. Leon Cooperman, chairman of $3.5 billion hedge fund Omega Advisors Inc., said in a presentation at the Value Investing Congress in New York on Oct. 18 that he “wouldn’t be caught dead owning a U.S. government bond.”

What the bears failed to anticipate was that Americans would continue to pare debt and boost savings. Much of that money found its way into the fixed-income markets as banks and investors sought high-quality debt as unemployment held at or above 9 percent every month except for two since May 2009, Europe’s fiscal crisis threatened to push the global economy back into recession and stock markets fell.

“It’s hard to envision a scenario where we see significantly better than two percent growth, with increased fiscal austerity and headwinds from the leverage bubble and persistent unemployment,” said Rick Rieder, who oversees $620 billion as chief investment officer of fundamental fixed income at New York-based Blackrock Inc. The firm is the world’s largest money manager, investing $3.45 trillion.

Higher Savings

The U.S. savings rate has tripled to 3.6 percent since 2005 and has averaged 5.1 percent since the depth of the financial crisis in December 2008, compared with 3.1 percent for the previous 10 years, according to government data. Debt mutual funds have attracted $789.4 billion since 2008, compared with a $341 billion drop in equity funds, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.

Banks, still trying to rebuild their balance sheets after taking more than $2 trillion in writedowns and losses since the start of 2007, have boosted holdings of Treasuries and government-backed mortgage securities to $1.68 trillion from $1.62 trillion in December, according to the Fed. Foreign investors increased their stake in Treasuries to $4.57 trillion in August from $4.44 trillion at the end of 2010, according to the latest Treasury Department data.

The bond market posted its first 30-year gain over the stock market in more than a century during the period ended Sept. 30. The last time was in 1861, leading into the Civil War, when the U.S was moving from farm to factory, according to Siegel, author of the 1994 book “Stocks for the Long Run,” in a telephone interview Oct. 25.

‘Millennium Event’

“The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”

Gross eliminated Treasuries from the Total Return Fund in February and owned derivative bets against the debt in March. He moved 16 percent of its assets into U.S. government securities as of September, saying earlier this month in a note to clients that he misjudged the extent of the economic slowdown and called his performance this year “a stinker.”

Local government bonds are set for the biggest gains since 2009 as defaults fell last quarter. Cities and states are reducing expenses instead of forgoing payments on debt even as they confront fiscal strains in the wake of falling revenue.

One Miss

Whitney said on the CBS’s “60 Minutes” in December that there would be “hundreds of billions of dollars” of municipal defaults this year. Brighton, Alabama, a city of 2,945 near Birmingham, was the only U.S. municipality to miss a general- obligation debt payment in 2011. Defaults are about 25 percent of 2010’s $4.3 billion tally, according to Bank of America Corp.

Money has poured into Treasuries even as U.S. budget deficits totaled $1.4 trillion in fiscal 2009 ended Sept. 30, $1.29 trillion in 2010 and $1.3 trillion in 2011.

Rising deficits and debt led Taleb, the distinguished professor of risk engineering at New York University, to tell investors in February that the “first thing” they should do is avoid Treasuries, and the second shun the dollar. At the same conference a year earlier he said “every single human being” should bet against U.S. government debt.

Tame Inflation

Since February Treasuries have rallied 7.99 percent and the currency has gained 3.2 percent, beating 14 of its 16 most actively traded peers, according to Bank of America Merrill Lynch indexes and data compiled by Bloomberg.

Concerns about inflation have also abated. Consumer prices, excluding food and energy, rose 0.05 percent in September, the smallest gain since October 2010, the Labor Department said Oct. 19 in Washington. Yields on bonds that protect investors from rising consumer prices suggest the fixed-income market anticipates inflation will average to 2.15 percent over the next decade, down from expectations of 2.67 percent in April.

“The Fed is legally obligated to do everything in their power to keep unemployment low, and they have and will continue to do so,” said Chris Low, chief economist at FTN Financial in New York. “As long as inflation isn’t a concern the Fed is going to keep firing until something happens,” Low said in a telephone interview Oct. 21.

Low was one of three economists in a Bloomberg survey of 72 forecasters in January to predict that 10-year Treasury yields would trade below 3 percent this quarter.

Fed Signals

Fed policy makers, who meet this week, have signaled that they are considering more measures to boost the economy, after holding the target rate for overnight loans between banks at zero to 0.25 percent since December 2008 and expanding its balance sheet to a record $2.88 trillion.

Vice Chairman Janet Yellen said Oct. 21 that a third round of large-scale securities purchases might become warranted. Last month, policy makers said they would replace $400 billion of short-term debt with longer-term Treasuries in an effort to contain borrowing costs.

“The Fed’s hope is that by pushing down Treasury rates, all other rates will follow,” Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee, said in a telephone interview Oct. 26.

“As a portfolio manager who has been in the business 30 years, it’s hard to come to terms where interest rates are, but you have to come to terms with it,” Mark MacQueen, who oversees bond investments at Austin, Texas-based Sage Advisory Services Ltd., which manages $9.5 billion, said in an Oct. 26 telephone interview. “And when you look at what stocks have done this decade it becomes much easier.”

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Europe Tries to Recapitalize Its Banks

By Liam Vaughan and Gavin Finch - Oct 31, 2011 6:50 PM GMT+0700
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A pedestrian passes a branch of Commerzbank AG in Frankfurt, Germany. Photographer: Hannelore Foerster/Bloomberg

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Oct. 31 (Bloomberg) -- Kevin Gardiner, head of global investment strategy at Barclays Wealth, talks about investment strategy and European banks. He speaks from London with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Europe’s largest banks may raise just a tenth of the total capital shortfall estimated by regulators, fueling concern policy makers’ plans to bolster the region’s lenders could fail.

European Union leaders ordered banks last week to increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($148 billion). Of Europe’s 28 largest lenders, only eight will need to raise a total of 11 billion euros from investors, Huw Van Steenis, a Morgan Stanley analyst, wrote in an Oct. 28 report.

Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk-weightings, limiting dividends, retaining earnings, reducing loans and selling assets. Banks had threatened to curb lending, risking a recession, to meet the goal rather than take government aid that would bring limits on bonuses and dividends. EU leaders already are pressing banks to restrain payments to employees and shareholders until they meet the capital target.

“The issue is how much fresh capital will be brought in,” Philippe Bodereau, head of credit research at Pacific Investment Management Co. in London, said in a telephone interview. “It would be positive if we saw banks launching rights issues, but they won’t. This is hardly shock and awe.”

Shrinking Shortfall

Lenders may sell as little as 6 billion euros of new stock to investors to plug the shortfall, according to Alastair Ryan, an analyst at UBS AG in London. That’s seven times less than the amount banks will raise from retaining earnings and adjusting risk-weightings, he said.

Before last week’s summit, analysts at JPMorgan Chase & Co. and Credit Suisse Group AG had estimated banks might need as much as 250 billion euros more capital. Now, only Banco Bilbao Vizcaya Argentaria SA of Spain, Germany’s Commerzbank AG, France’s BPCE SA, Austria’s Raiffeisen Bank International AG and four Italian banks -- UniCredit SpA, Banco Popolare SC, Banca Monte dei Paschi di Siena SpA and Unione di Banche Italiane ScpA -- need to raise money, according to Van Steenis.

The European Banking Authority, which oversees the region’s regulators, reduced the amount by changing its calculations to offset writedowns on Greek and other southern European government debt with gains on banks’ holdings of U.K. and German bonds, which are trading for more than face value.

The benchmark U.K. 10-year government bond is trading at about 111 pence on the pound and German bunds of a similar duration are trading at 101 cents on the euro. Greek bonds maturing in 2020 are trading at about 35 cents on the euro.

Shares Slide

The Bloomberg Europe Banks and Financial Services Index has fallen 26 percent this year on concern that lenders will have to write down their holdings of the government debt of Greece, Italy, Ireland, Portugal and Spain. The index’s 46 members trade at about 34 percent less than book value on average, according to data compiled by Bloomberg.

“Surely, no one thinks that by allowing banks to avoid raising capital in all these various ways it’s going to give investors more confidence,” said Peter Hahn, a professor of finance at London’s Cass Business School and a former managing director at New York-based Citigroup Inc. “Part of the issue for a long time has been the lack of credibility of bank balance sheets and their risk models. This isn’t going to help.”

Group of 20 nations are separately working on long-term plans to require the largest lenders, those deemed too-big-to- fail, to hold even more capital.

G-20 Summit

Leaders meeting in France from Nov. 3 will require the biggest banks to boost capital to levels beyond those required by the Basel III rules, a German government official said today. Leaders will discuss ways to improve supervision and ensure banks can be wound down without causing shockwaves in the financial system, the German official told reporters in Berlin today on condition of anonymity because the talks are private.

Greece’s six banks will need to raise about 30 billion euros, more than any other EU member state, the EBA said. That shortfall is covered by existing backstop arrangements with the EU and International Monetary Fund, so Greek lenders wouldn’t have to tap investors, according to the EBA.

Spanish banks have the next-biggest deficit, according to the regulator. Yet Banco Santander SA and BBVA SA, the country’s two biggest lenders, have said they won’t raise capital. They will instead rely on profit and changes to the way they calculate risk-weighted assets to meet the target.

Basel Rules

Under the Basel rules, firms use internal models to decide how much capital to assign to assets based on their own assessment of a default. The models aren’t disclosed and banks can reach different risk-weightings for the same assets, regulators and analysts say.

Lenders also are converting hybrid securities into equity. Of the 26 billion euros Spanish banks need to raise, 9.7 billion euros can be found that way, Van Steenis said. Santander has 8.5 billion euros of convertible bonds.

“The fact that the 26 billion euros could end up with less than 5 billion euros from capital-raising is a concern,” Van Steenis wrote.

Italian banks have a 15 billion-euro shortfall, according to the EBA. UniCredit, which has a 7.4 billion-euro deficit, said it may be able to reduce that to 4.4 billion euros by counting 3.3 billion euros of hybrid securities as core capital. The Milan-based lender, the country’s biggest, said it’s working to identify “capital management actions to be put in place,” without adding further details.

BNP Paribas

Monte Paschi, UBI and Popolare, which regulators estimate need about 7.4 billion euros, all have said they won’t need to raise capital through rights offerings.

France’s BNP Paribas SA and Societe Generale SA, which in September began programs to trim a combined 300 billion euros in assets, said last week they can meet the new capital targets without tapping shareholders or the government.

President Nicolas Sarkozy said on Oct. 27 he has asked the banks to shift “almost all” of their dividend payments into strengthening their balance sheets and make their bonus practices “normal.”

Deutsche Bank AG and Commerzbank AG, Germany’s biggest lenders, also are cutting assets and selling businesses to meet the threshold.

The method used to determine how much capital banks need to raise “puts the onus on peripheral banks and limits the impact on core banks,” said Pimco’s Bodereau. “The big weakness is that banks that are truly systemic are headquartered in London, Paris and Frankfurt and not in Athens.”

‘Sticking-Plaster Solution’

Southern European banks that can’t raise capital may still need to shrink their balance sheets by as much as 40 percent to meet the new requirements and run the risk of having to rely on state injections, Mediobanca analysts including Alain Tchibozo wrote in a note to clients on Oct. 28.

“They’ve cobbled together a sticking-plaster solution,” said Jonathan Newman, an analyst at London-based Brewin Dolphin Holdings Plc, which manages about 25 billion pounds ($40 billion). “While it’s desirable for them to have been tougher, the reality was they couldn’t afford to be tougher. Banks wouldn’t have been able to raise the money privately, so they would have had to go to governments, which then puts the sovereign at risk.”

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

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

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