Gates to Testify in Novell Monopoly Claim Suit

By Joel Rosenblatt and Margaret Cronin Fisk - Nov 21, 2011 12:00 PM GMT+0700

Microsoft Corp. (MSFT) Chairman Bill Gates may face cross-examination about alleged monopolistic behavior 17 years ago when he testifies in a Novell Inc. lawsuit accusing the world’s largest software maker of undermining the WordPerfect program.

The suit is a byproduct of the U.S. government’s landmark antitrust case against Microsoft that settled more than eight years ago. In that case, the Redmond, Washington-based company was declared an illegal monopolist.

Novell said in its 2004 complaint that Microsoft unfairly restricted competition by its word processing program. Gates targeted its products by name, Novell’s lawyers alleged, adding that the Microsoft chairman said his company’s software could not compete without the benefit of anticompetitive conduct.

In May, the U.S. Court of Appeals in Richmond, Virginia, revived the case, which had been dismissed by a lower court judge. The appeals court ruled Novell, which briefly owned WordPerfect in the mid-1990s, didn’t cede its rights when it transferred claims related to its personal computer operating system products to Caldera Inc. in 1996.

The appeals court ruling sent the case back to U.S. District Judge J. Frederick Motz in Baltimore, who had originally tossed it out. Motz is conducting the trial in Salt Lake City federal court, where the original lawsuit was filed. Gates is scheduled to testify today.

Market Share Fell

Novell, which was bought by Seattle-based Attachmate Corp. in April, has argued that WordPerfect’s share of the word- processing market fell to less than 10 percent in 1996 from almost 50 percent in 1990.

Its value dropped from $1.2 billion in May 1994 to $170 million in 1996 when it was sold to Ottawa-based Corel Corp., said Novell, which is seeking three times its losses in the lawsuit. The company settled separate antitrust claims against Microsoft for $536 million in 2004.

In its complaint, Novell said that WordPerfect had historically been the “most popular word processing application in the global market.”

“Microsoft engaged in a series of anticompetitive activities, including integrating other Microsoft software products, such as its browser technologies, into Microsoft’s Windows operating system in an exclusionary manner, and entering into exclusionary agreements precluding companies” from providing services to or buying products from Microsoft’s competitors, Novell said in court papers.

Motion to Dismiss

In June 2005, Motz granted Microsoft’s motion to dismiss most of the counts in Novell’s complaint, holding that Novell had standing to proceed on only two. In 2007, a federal appeals court affirmed the ruling.

Count one “asserted that Microsoft had ‘engaged in anticompetitive conduct to thwart the development of products that threatened to weaken the applications barrier to entry’ to the operating systems market,” according to the appeals court opinion. “It contended that Microsoft’s conduct had damaged Novell’s WordPerfect word processing applications and its other office productivity applications in violation of Section 2 of the Sherman Act.”

In count six, Novell alleged Microsoft made exclusionary agreements with the original equipment manufacturers, which restricted the licensing of Novell’s software applications, in unreasonable restraint of trade. According to a footnote, Novell declined to pursue this claim.

In March 2010, Motz found that Novell didn’t assign Caldera its claims under counts one and six. He then granted Microsoft’s motion for summary judgment on those counts. The appeals court reversed the grant of summary judgment on Count 1, and remanded it for further proceedings.

Gates Called

Microsoft, which is calling Gates to testify in the company’s defense, has denied Novell’s arguments that it maintained an operating system monopoly by, in part, withdrawing programming support so as to hobble Novell’s WordPerfect and Quattro Pro programs for Microsoft’s Windows 95 operating system.

In court papers, Microsoft pointed to previous testimony by former Novell Chief Executive Officer Robert Frankenberg. According to the filing, Frankenberg said if Novell had succeeded in releasing versions of WordPerfect and Quattro Pro near the same time Microsoft released Windows 95 in August 1995, the Novell products “would have made Windows 95 market share even higher than what it turned out to be.”

Evidence that Novell intended to use the programming to “make Windows a better and more popular operating system refutes Novell’s theory that Microsoft’s withdrawal” of the programming support in October 1994 “adversely affected competition in the PC operating system market,” Microsoft argued in a court filing.

Previous Gates Testimony

In Microsoft’s 1998 antitrust trial of U.S. government and state claims of anticompetitive conduct, Gates appeared by videotape. His attempts to disavow the software giant’s plans to overtake Netscape Communications Corp. in the Internet browser war prompted laughter from the judge.

U.S. District Judge Thomas Penfield Jackson in Washington laughed out loud, as did many in the courtroom, and at times shook his head as Gates questioned what antitrust enforcers meant by the words “concern,” “compete” and “we.”

In one exchange, Gates was asked if he told Microsoft Vice President Paul Maritz that the Internet browser market share “was a very, very important goal,” and that’s why he stressed efforts to outdo the competition in that area.

“I guess now we’re delving into the inner workings of Paul Maritz’s mind and how he comes to conclusions,” Gates said. Microsoft’s business practices related to the Internet were central to the case against it by the Justice Department and 20 states.

Orchestrated a Scheme

The government alleged Gates orchestrated a scheme of illegal practices to protect Microsoft’s Windows monopoly and crush possible threats, including the growing power of the Internet. Windows 95 and its successor Windows 98 were loaded into about 90 percent of new personal computers as of 1998.

Internal Microsoft e-mail and documents showed the company viewed Netscape’s Navigator browser as its biggest competitor at the time, and David Boies, the Justice Department’s lead attorney, focused on those documents in questioning Gates.

“My question is what non-Microsoft browsers were you concerned about in January of 1996?” Boies asked Gates, referring to an e-mail Gates wrote in which he expressed concern that computer makers were including non-Microsoft browsers on their PCs.

‘What’s the Question?’

“I’m sure -- what’s the question? Is it -- are you asking me about when I wrote this e-mail or what are you asking me about?” Gates said.

“I’m asking you about January of 1996,” Boies responded.

“That month?” Gates asked. “Yes, sir,” replied Boies.

“And what about it?” Gates asked.

“What non-Microsoft browsers were you concerned about in January of 1996,” Boies said again.

“I don’t know what you mean ‘concerned,’” Gates said.

“What is it about the word ‘concerned’ that you don’t understand,” Boies asked.

“I’m not sure what you mean by it,” Gates said.

When the tape ended, the judge had just one question for Boies: “How long did this deposition take?”

“Three days,” the lawyer replied.

The case is Novell Inc. (NOVL) v. Microsoft Corp., 04-01045, U.S. District Court, District of Utah (Salt Lake City).

To contact the reporters on this story: Joel Rosenblatt in Salt Lake City federal court at jrosenblatt@bloomberg.net and; Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net.

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

Read more...

Microsoft, Intel Hit by Government Tech Cuts

By Dina Bass - Nov 21, 2011 12:10 PM GMT+0700

Seattle’s chief technology officer, Bill Schrier, is bracing for a 6 percent budget cut in 2012, bigger than this year’s, a sign of tighter spending that indicates slower sales gains for Microsoft Corp. (MSFT) and Intel Corp. (INTC)

“Spending is going to be down, and in some places it’s going to be down considerably,” Schrier said of technology spending by governments generally.

Schrier is likely to be told to cut even more next year, so he’s delaying upgrades to Microsoft’s Windows 7, cutting services contracts from International Business Machines Corp. (IBM) and seeking cheaper alternatives to gear from Cisco Systems Inc. (CSCO)

Belt-tightening in the biggest city in the Pacific Northwest reflects a larger trend: Financial-services companies such as Western & Southern Financial Group and governments, including the state of California, will cut or leave spending on information technology unchanged next year as economic growth slows. That means some technology bellwethers, including Intel, Microsoft, IBM and Cisco, may suffer.

“It will be a tough environment just because there’s so much pessimism out there,” said Richard Gordon, an analyst at market research firm Gartner Inc. The industry will need to prepare for “general downward pressure everywhere.”

While Gartner now expects information technology spending among businesses to rise 3.9 percent next year, less than the 5.9 percent increase for 2011, the Stamford, Connecticut-based research firm will probably cut that forecast at the end of the quarter, Gordon said.

VMware May Benefit

Some businesses that seek to stretch technology dollars may step up spending on products that are designed to save money, such as VMware Inc. (VMW)’s so-called virtualization software, which helps clients make more efficient use of data centers. Other companies that represent “areas of strength” include Citrix Systems Inc. (CTXS) and SAP AG (SAP), according to Morgan Stanley.

Technology budgets will rise just 0.6 percent over the next year, according to a September survey of U.S. and European CIOs by UBS AG.

As a result, sales growth will slow next year for companies like Microsoft and IBM, which rely on government and financial- services customers, said Gordon. Sales at Armonk, New York-based IBM, the largest provider of technology services, will rise only 3 percent in 2012, less than half this year’s 7 percent pace, according to analysts surveyed by Bloomberg.

At Redmond, Washington-based Microsoft, the largest software maker, sales in fiscal 2012 will increase only 7 percent, compared with 12 percent in 2011.

‘Real Risk’

Revenue will climb 8 percent in fiscal 2012 at Oracle Corp. (ORCL), the top seller of database software, compared with 33 percent the prior year, while the rate of increase at Intel, the biggest maker of computer chips, is projected to be 6 percent, a fraction of this year’s estimated 26 percent, according to Bloomberg data.

The outlook for many executives dimmed in the second half as Europe’s credit crisis spiraled, and more recently as flooding in Thailand has threatened the supply of computer hard- disk drives. Among corporate chief financial officers surveyed by Duke University and CFO Magazine, 65 percent said they were less optimistic about the U.S. economy in the third quarter than they were in the second.

“There is a real risk, and it would be foolish to say otherwise,” said Michael Holland, chairman of Holland & Co., which oversees about $4 billion, including shares of Microsoft, Intel and IBM. “To be realistic is to expect things to be a little less than the level that they were this year.”

Zero Spending Growth

Speculation that technology stocks will decline has left options traders at their most bearish since May 2010. Three- month puts to sell the Technology Select Sector SPDR Fund (XLK) cost 10.44 points more than calls to buy, according to implied- volatility data compiled by Bloomberg. The price relationship known as skew increased 78 percent in the past four months and reached 11.67 on Nov. 9, the widest in 17 months.

Life insurer Western & Southern Financial Group is keeping its technology budget flat next year after a 2 percent increase this year, Chief Technology Officer Douglas Ross said. The Cincinnati-based company is investing in virtualization software from VMware so it can cut purchases of server computers from Dell Inc. (DELL) and Hewlett-Packard Co. (HPQ) and storage products from EMC Corp. and NetApp Inc. (NTAP), he said.

“There’s a lot of scrutiny on whether the economy is slowing,” he said. “We’re certainly concerned about it. The management team is really looking at every item to figure out what we can dispense with.”

Demand from businesses this year was a bright spot for some companies, including Microsoft and Intel, as consumers curtailed spending on personal computers and other electronics. It won’t provide as big a cushion in 2012.

Thai Flooding Impact

PC shipments will drop by as much as 13.4 percent in the first quarter because of supply constraints and rising prices related to flooding in Thailand, according to researcher IDC. That’s down from a previous forecast for an 8.2 percent gain.

Bank of New York Mellon Corp. (BK) will boost its technology spending by 3.7 percent. While that’s about the same as last year, it’s more modest than the bank’s historical increases, which range from 4 percent to 6 percent, Chief Information Officer John Fiore said. The bank is saving money by moving all but the most complicated technology services to India, instead of using vendors like IBM and Accenture Plc (ACN), he said.

While the State of California hasn’t finished its budget, Secretary of California Technology Carlos Ramos predicts another year of cuts.

Insulated at Oracle

The growth slowdown will hit some areas of technology harder than others. Spending on technology services will rise 4.4 percent in 2012, compared with 7.3 percent growth this year, according to Gartner. Spending on server computers will increase 5.8 percent, down from 11 percent this year, while software spending will climb 7.4 percent next year, below this year’s 8.7 percent.

Companies that have a high percentage of recurring revenue from maintenance contracts, such as CA Inc. (CA), or large cash piles, including Microsoft and Redwood City, California-based Oracle, have some insulation against sudden swings in customer spending, said Mark Moerdler, an analyst at Sanford C. Bernstein & Co.

Some companies are increasing spending on areas that will help them reduce expenses in the long run or reach new customers. Equifax Inc. (EFX), the provider of consumer credit information, will lift spending by 4 percent to 6 percent in 2012 after a 4 percent increase this year. The spending is aimed at helping the company deliver on a pledge to investors that 10 percent of sales will come from new products, CIO David Webb said.

‘After the Accident’

“Most companies today are totally dependent on technology for growth and even if there is contraction in the general market, to stay abreast of competition you have no choice but to invest in technology,” Webb said.

Even companies that plan higher spending may favor modest increases, said Pat Becker Jr., a fund manager at Portland, Oregon-based Becker Capital Management Inc., which oversees $2.2 billion in assets. Continued turmoil in Europe or in the broader market may spook CEOs and CFOs who are still scarred from the recession.

“This is a world of driving after the car accident,” he said. “After you get in an accident, you’re a little jumpy and you go slower.”

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

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

Read more...

Rajoy Party Wins Spanish Elections After Debt Crisis Overwhelms Socialists

By Emma Ross-Thomas and Ben Sills - Nov 21, 2011 5:04 PM GMT+0700

Play Video

Nov. 21 (Bloomberg) -- Bloomberg's David Tweed reports on the victory of Mariano Rajoy in Spain's elections, winning the biggest parliamentary majority in a Spanish election in almost 30 years. (Source: Bloomberg)

Play Video

Nov. 21 (Bloomberg) -- Antonio Garcia Pascual, chief southern European economist at Barclays Capital, talks about capital requirements at Spanish banks and the country's austerity measures following the election of Mariano Rajoy as Prime Minister. He speaks with Maryam Nemazee and David Tweed on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Mariano Rajoy won the biggest majority in a Spanish election in almost 30 years, and told Spaniards to brace for hard times as the nation fights to avoid being overwhelmed by the debt crisis. Bonds continued to drop.

Rajoy’s People’s Party swept the ruling Socialists from power after eight years, winning 186 of the 350 seats in Parliament, compared with 110 for the Socialists’ candidate Alfredo Perez Rubalcaba. That’s their worst result in more than three decades, as smaller parties including Communists increased their share of the vote. Opinion polls in the month before the vote showed the PP winning 184 to 198 seats.

“Hard times lie ahead,” Rajoy, 56, told supporters outside the PP’s headquarters in Madrid, giving no new details of his plans. “We are going to govern in the most delicate situation Spain has faced in 30 years.”

Spanish borrowing costs continued rising toward euro-era records even as the PP won a mandate to slash the budget deficit, overhaul the stagnant economy and reduce the 23 percent jobless rate. Rajoy, who hasn’t given details of his proposals, won’t take over for a month, prompting him to say on Nov. 18 he hoped Spain wouldn’t need a bailout before he’s sworn in.

Bonds Fall

Spain’s 10-year bond yield rose to 6.538 percent from 6.379 percent on Nov. 18. It rose as high as 6.78 percent on Nov. 17, back at the levels Spain was paying before it joined the euro. The gap between Spanish and German borrowing costs widened to 465 basis points and the Ibex 35 stock index fell 1.9 percent.

Miguel Arias Canete, head of the PP’s electoral committee and a former minister, said today markets need to give the party time, as ministers won’t be appointed until Dec. 21 and Spanish law doesn’t allow Parliament to resume any sooner than Dec. 13. The PP’s senior members meet at 5 p.m. today in Madrid.

“We need to be very convincing during these days and hope that they give us the breathing space to be able to put in place the necessary measures,” he said in an interview with Es Radio.

Rajoy may be hard pressed to make a big difference without bolder steps from the European Union and the European Central Bank to contain the spread of the debt crisis that started in Greece two years ago, said Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, said in an e-mailed note.

‘Last Resort’

“We consider swift implementation of structural and fiscal policies as a necessary but possibly insufficient condition for the Spanish sovereign bond market to stabilize,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, said in an e-mailed note. “We still see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort.”

Rajoy pledged after the results last night that Spain would “stop being a problem and become part of the solution again,” in Europe, as he called for a “common effort.” “There won’t be miracles, we haven’t promised any,” Rajoy said.

“Rajoy will have no option but to announce a package of extraordinarily tough reforms to convince the markets and his European partners Spain is different from Italy and Greece,” said Jose Antonio Sanahuja, a professor of international relations at Madrid’s Complutense University.

Fighting for Euro

The PP, which shepherded Spain into the single currency in 1999, campaigned on its economic record, which includes eliminating a 7 percent budget deficit in the eight years to 2004 and reducing the gap between Spanish and German borrowing costs from 300 basis points to seven. Unemployment fell to 11 percent from 18 percent as a construction boom fueled hiring.

Now seven years after the fall of the PP government that qualified Spain for the single currency, Rajoy will be fighting to remain in the euro. He inherits a deficit the European Commission says will be almost 7 percent of gross domestic product and a banking system struggling to find funding and saddled by bad loans from the real-estate boom.

Rajoy has pledged to cut the deficit by a third to 4.4 percent of GDP next year and finish the “restructuring” of the banking system. The new government will also have to crack down on spending in Spain’s autonomous regions, where budget overruns threaten the deficit goal. The PP already controls 11 of the 17 regional governments and won control of most municipal administrations in May. That may make it easier to reorder finances in the regions, which have 133 billion euros in debt.

Protecting Pensions

Rajoy has said he will cut “superfluous spending,” without giving details, and hasn’t said how he will overhaul the financial system. He has pledged to maintain the purchasing power of pensions, which accounted for 112 billion euros ($151 billion) this year, and said everything else can be trimmed.

For Rajoy the victory over the Socialists comes after he suffered two defeats to outgoing Prime Minister Jose Luis Rodriguez Zapatero. After Aznar decided not to run again, he chose Rajoy to lead the PP in the 2004 election.

Rajoy was ahead in the polls when three days before the vote a terrorist attack on commuter trains in Madrid’s Atocha train station killed 192 people. The bombing triggered a backlash against the PP government, which tried to blame the bombing on Basque terror group ETA, even after an Al-Qaeda- linked group claimed it carried out the attack to punish the Aznar government for backing the U.S.-led war in Iraq.

Riling the Base

Zapatero, who alienated traditional voters by cutting wages and changing labor rules to favor employers, was replaced in the campaign by Rubalcaba, his former deputy. His pledges to tax banks and the rich weren’t enough to woo back voters.

The landslide was due to a collapse in support for the Socialists, rather than a surge in backing for the PP. The PP won 10.8 million votes, compared with 10.3 million four years ago. Support for the Socialists plunged to almost 7 million votes, from 11.3 million in 2008. United Left, which includes Communists, won 11 seats, up from two, while Union Progress & Democracy, a party that wants to limit the power of the regions, took five seats, compared with one in the last election.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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

Read more...

Stocks Extend Three Weeks of Losses as U.S. Budget Talks Stall; Euro Falls

By Stephen Kirkland and Shiyin Chen - Nov 21, 2011 7:09 PM GMT+0700
Enlarge image

Traders watch their screens at the stock market in Frankfurt, Germany. The benchmark Stoxx Europe 600 Index lost 1.7 percent to 228.21 at 8:36 a.m. Photographer: Michael Probst/AP Photo

Play Video

Nov. 21 (Bloomberg) -- Andy Lynch, a fund manager at Schroder Investment Management Ltd., talks about the outlook for equities. He talks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

Stocks fell, extending three weeks of losses, U.S. index futures declined and Treasuries rose as U.S. lawmakers failed to agree on budget cuts. The euro weakened as French, Spanish and Italian bonds dropped.

The MSCI All-Country World Index sank 1.2 percent at 7:05 a.m. in New York, set for its first six-day slump since August. S&P 500 futures lost 1.7 percent. The yield on the 10-year U.S. Treasury note fell five basis points to 1.96 percent, while the cost of insuring against default on European government debt approached a record high. The euro depreciated 0.6 percent to $1.3442, while the Dollar Index rose 0.5 percent. Australia’s currency declined against 14 of its 16 major peers. Copper and oil retreated for a third day.

The U.S.’s deficit-cutting congressional supercommittee is expected to announce today it has failed to reach agreement on at least $1.2 trillion in federal budget savings, a Democratic aide said. Japan’s exports fell, Singapore said growth will probably slow and Germany’s Finance Ministry said the country’s expansion is “noticeably slower” this quarter. France’s rising financing costs are increasing the nation’s fiscal challenges, according to report issued by Moody’s Investors Service today.

The U.S. “story is unlikely to fully knock Europe off the front pages but it has ramifications for the fiscal outlook over the next couple of years,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a research note. “If the automatic cuts are activated then the U.S. will be going through the same austerity that has not proved particularly successful so far in Europe with regards to growth.”

Mining Stocks

The Stoxx Europe 600 Index sank 2.5 percent, extending last week’s 3.7 percent decline, as more than 40 stocks dropped for every one that rose. All 19 industries in the benchmark measure retreated more than 1 percent, with the gauge for mining stocks falling 4.4 percent. Novartis AG fell 2.1 percent after Chief Executive Officer Joe Jimenez predicted that economic conditions will worsen further.

The decline in U.S. futures indicated the S&P 500 will extend last week’s 3.8 percent decline. A report at 10 a.m. in Washington may show that sales of previously owned homes in the U.S. dropped 2.2 percent in October, a second month of falling property values.

Treasury Auction

The yield on the two-year Treasury note was unchanged at 0.28 percent as the government prepared to sell $35 billion of the securities today, the first of three auctions this week totaling $99 billion.

France’s 10-year bond yield jumped three basis points and Spain’s yield increased 16 basis points. The Italian yield advanced five basis points, leaving the difference in yield with benchmark German bunds 13 basis points wider at 481 basis points. The French-bund spread rose 11 basis points to 161, and the spread for Spain increased 24 basis points to 465.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose six basis points to 357.5, compared with an all-time high of 362 reached on Nov. 15.

The cost for European banks to fund in the U.S. currency climbed to the highest since December 2008. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, increased to 132 basis points below the euro interbank offered rate, from 130 at the end of last week.

The euro depreciated 0.7 percent versus the yen, while the Japanese currency rose against all its major counterparts. The Dollar Index, which tracks the currency against those of six U.S. trading partners, snapped a two-day decline. The Australian dollar slumped 1.3 percent against the greenback, and slid 1.4 percent versus the yen.

Commodities Retreat

Copper sank 2.5 percent, zinc tumbled 1.9 percent and lead retreated 1.7 percent. West Texas Intermediate oil for January delivery slid 1.3 percent to $96.12 a barrel in New York.

The MSCI Emerging Markets Index sank 2.3 percent, set for its lowest close since Oct. 20. Russia’s Micex Index slid 4 percent and the Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong lost 2.3 percent. India’s Sensex fell 2.6 percent. KGHM Polska Miedz SA (KGH), Poland’s sole copper and silver producer, led stocks lower in Warsaw on a government plan to increase taxes on the extraction of the metals.

Egypt’s benchmark EGX 30 Index (EGX30) slumped 3.1 percent to the lowest intraday level since Oct. 10 after clashes between protesters and security forces in several cities.

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

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

Read more...

Stocks in Europe, U.S. Futures Retreat Amid Concern Over Budget Stalemate

By Sarah Jones - Nov 21, 2011 5:47 PM GMT+0700

European stocks dropped for a third day amid signs U.S. lawmakers may fail to reach an agreement on budget cuts, raising the prospect America faces another credit downgrade. U.S. index futures and Asian shares also fell.

KBC Groep NV (KBC) led banks lower as dollar funding costs and bond yields climbed. Mining and energy companies dropped with metal and crude oil prices on signs of slowing growth in Asia. Carrefour SA (CA) slipped 2 percent after the retailer’s largest shareholders were said to consider replacing its chairman and chief executive officer.

The benchmark Stoxx Europe 600 Index sunk 2.2 percent to 227.17 at 10:45 a.m. in London, extending last week’s selloff. Futures on the Standard & Poor’s 500 Index expiring in December declined 1.6 percent and the MSCI Asia Pacific Index retreated 1.4 percent.

“Adding more uncertainty into the markets is the admission that the U.S. bipartisan supercommittee has failed at finding $1.2 trillion of spending cuts.” said Jonathan Sudaria, a trader at London Capital Spreads. “Given that the reasoning for the last U.S. downgrade was the political inability to get anything done and the soaring debt burden, it would be highly logical to expect more U.S. downgrades.”

The deficit-cutting congressional supercommittee will probably announce that it has failed to agree on $1.2 trillion of federal budget savings, a Democratic aide said in an e-mail.

Congressional Budget Office

The aide, who wasn’t authorized to discuss internal matters publicly and requested anonymity, said that it was highly unlikely that the talks could be salvaged. Today is the deadline for the Congressional Budget Office to receive a plan that it can analyze before the committee’s Nov. 23 target date for reaching an agreement. S&P downgraded the U.S. on Aug. 5 to AA+ from AAA.

In Spain, Mariano Rajoy won the biggest parliamentary majority in an election in almost 30 years, and told Spaniards to brace for difficult times as the nation fights to avoid being overwhelmed by the sovereign-debt crisis.

Rajoy’s People’s Party swept the ruling Socialists from power after eight years, winning 186 of the 350 seats in Parliament, compared with 110 for the ruling party’s candidate Alfredo Perez Rubalcaba.

Sovereign Borrowing Costs

Stocks tumbled around the world last week as borrowing costs surged to record levels in the euro area and policy makers disagreed over their response to the spreading debt crisis. The Stoxx 600 lost 3.7 percent as the yields on Italian and Spanish bonds climbed, and the cost of insuring against losses on the nations’ debt rose.

Greece’s new Prime Minister Lucas Papademos meets with European Union President Herman Van Rompuy and European Commission President Jose Barroso in Brussels today.

Antonis Samaras, leader of Greece’s New Democracy Party, told officials from the so-called troika of the EU, the International Monetary Fund and the European Central Bank that he won’t sign a document pledging his commitment to the Oct. 26 euro-area bailout package for his country, the Athens News Agency said.

Samaras, whose party is a member of the country’s unity government, said that he has already taken five actions that show New Democracy’s commitment to the agreement, the agency said.

KBC led bank shares lower, slumping 10 percent to 9.80 euros in Brussels, as the three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, widened for a sixth day and bond yields climbed in Spain, Italy, France and Belgium.

Commerzbank, BNP Paribas

Commerzbank AG (CBK) declined 4.5 percent to 1.39 euros, BNP Paribas SA slid 5.4 percent to 26.54 euros and Barclays Plc (BARC) retreated 4.8 percent to 158.5 pence.

Shares also fell as Moody’s Investors Service warned that rising French bond yields increased the fiscal challenges facing the nation with “negative credit implications.” The rating company declined to comment on a report in Le Figaro newspaper that France’s AAA credit rating is at risk.

Rio Tinto Group slid 4.7 percent to 3,121.5 pence and Total SA (FP) lost 2.3 percent to 36.27 euros, pacing gauges of mining and energy companies lower. Copper and oil fell for a third day as Japan’s exports dropped and Singapore warned its economy may grow 1 percent to 3 percent in 2012 after expanding 5 percent this year.

Carrefour slipped 2 percent to 18.06 euros after people familiar with the matter said shareholders may replace the retailer’s Chairman and CEO Lars Olofsson.

Groupe Arnault SAS and Colony Capital LLC, which hold a combined 16.15 percent of Carrefour and 22.14 percent of the voting rights, will give Olofsson until the end of the year to improve the company’s performance in its domestic and largest market, said the people, who asked not to be named as the discussions are private.

Statoil ASA (STL) slid 1.7 percent to 143 kroner after Norway’s national oil company agreed to sell stakes in fields to Centrica Plc (CNA) for $1.6 billion. Statoil will dispose of stakes in eight fields on the Norwegian continental shelf, it said. Centrica’s shares were little changed at 288 pence.

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

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

Read more...

U.S. Stock Futures Drop as Prospects Fade for Budget Agreement

By Joanna Ossinger and Julie Cruz - Nov 21, 2011 7:33 PM GMT+0700

U.S. stock-index futures retreated, indicating the Standard & Poor’s 500 Index will extend its biggest weekly decline in two months, on signs lawmakers will fail to agree on cutting the budget deficit.

Transatlantic Holdings Inc. (TRH) may be active after Alleghany Corp. agreed to buy the reinsurer for $3.4 billion in cash and stock. Chevron Corp. (CVX) and Schlumberger Ltd. dropped in early New York trading as crude oil fell for a third day to its lowest price in more than a week. Alcoa Inc. (AA) slid 2 percent, pacing declines in metal prices.

Futures on the S&P 500 expiring in December dropped 1.7 percent to 1,193.10 at 7:13 a.m. in New York. The equity benchmark lost 3.8 percent last week, the biggest retreat since Sept. 23, as Spanish, French and Italian bond yields rose and Fitch Ratings said the euro-area’s debt crisis poses a threat to American banks. Dow Jones Industrial Average futures lost 162 points, or 1.4 percent, to 11,605.

“The markets are extremely nervous everywhere,” said Jacques Porta, a fund manager at Ofi Patrimoine in Paris, who helps oversee about $400 million. “They are focusing on what the rating agencies will do if U.S. lawmakers can’t reach an agreement to cut the budget deficit. It’s a very difficult situation.”

The deficit-cutting congressional supercommittee will probably say that no agreement was reached on saving $1.2 trillion from the federal budget, a Democratic aide said on condition of anonymity because the official is not authorized to discuss internal matters publicly.

New Spanish Leader

In Spain, People’s Party leader Mariano Rajoy won the biggest parliamentary majority in a Spanish election in 29 years and called on Spaniards to work together to prevent the nation being overwhelmed by the debt crisis.

A report at 10 a.m. in Washington will probably show that sales of previously owned homes in the U.S. fell in October for a second month as declining property values failed to entice buyers, economists said.

Purchases decreased 2.2 percent last month to a 4.8 million annual rate, according to the median forecast of 65 economists surveyed by Bloomberg News.

The 5.4 percent decline in the S&P 500 since reaching a three-month high of 1,285.09 on Oct. 28 has pushed its price- earnings ratio to 12.8, or about 22 percent below its five- decade average, based on reported profits. S&P 500 income rose at a 16 percent rate in the third quarter, with about three companies beating analyst profit estimates for each that missed, according to data compiled by Bloomberg.

The index is trading 6.4 percent below the average year-end forecast of Wall Street equity strategists tracked by Bloomberg.

Hewlett-Packard Earnings

Hewlett-Packard Co. (HPQ) will report fourth-quarter adjusted profit of $1.13 a share after the market close today, compared with $1.27 in the same period last year, according to analyst estimates compiled by Bloomberg. HP fell 1.5 percent to $27.56 in early New York trading.

Tyson Foods Inc. (TSN) will report fourth-quarter profit of 32 cents a share excluding some items in its announcement today, according to analyst forecasts.

Transatlantic may move as Alleghany agreed to buy the reinsurer. Transatlantic shareholders will receive 0.145 share of Alleghany and $14.22, valued at about $59.79 per share, the companies said today.

Chevron, Alcoa

Chevron, the second-largest U.S. energy company, declined 1.2 percent to $96.74 in early New York trading. Schlumberger, the world’s largest provider of oilfield services, slid 2.9 percent to $69.25. Crude oil dropped as much as 2.1 percent to their lowest price since Nov. 10. Japan, the world’s third- biggest crude consumer, reported the first drop in exports in three months.

Alcoa, the largest U.S. aluminum producer, lost 2 percent to $9.50 in early New York trading. Freeport-McMoRan Copper & Gold Inc., the world’s biggest publicly traded copper producer, retreated 1.4 percent to $36.41. Copper, lead, tin and zinc fell on the London Metal Exchange today.

Walgreen Co., the largest U.S. drugstore chain, tumbled 2.3 percent to $31.88 in early trading after Morgan Stanley downgraded the shares to “underweight.”

To contact the reporters on this story: Joanna Ossinger in New York at jossinger@bloomberg.net; Julie Cruz in Frankfurt at jcruz6@bloomberg.net

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

Read more...

U.S. Debt Supercommittee Ready to Announce Failure

By Heidi Przybyla and Kathleen Hunter - Nov 21, 2011 3:56 PM GMT+0700

Play Video

Nov. 21 (Bloomberg) -- Matthew Dowd, Bloomberg political analyst and former chief campaign strategist for George W. Bush, talks about the consequences of failure by the deficit reduction supercommittee to reach agreement on deficit savings. Dowd speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

A debt-reduction committee with special powers that was supposed to dissolve congressional gridlock in Washington is instead on the brink of failure, setting the stage for $1.2 trillion in automatic spending cuts.

The 12-member bipartisan supercommittee likely will announce today that it can’t reach agreement on deficit savings, according to a Democratic aide. The aide, who wasn’t authorized to discuss internal matters publicly and requested not to be identified, said in an e-mail that it was highly unlikely that the committee’s talks could be salvaged.

Today is the deadline for the Congressional Budget Office to receive information for scoring a proposal in advance of the supercommittee’s Nov. 23 target date for reaching a deal. Republican Senate Minority Leader Mitch McConnell has declared over the past few months that failure is “not an option” for the panel, created in August after rancorous debate over raising the nation’s borrowing limit that plunged congressional approval ratings to lows of between 9 percent and 14 percent.

Both parties took to the airwaves yesterday to blame the other for the lack of an agreement, though they stopped short of saying the talks had failed. Democrats faulted Republicans for refusing to budge on an anti-tax pledge and Republicans accused Democrats of rejecting their latest offer to raise revenue along with spending cuts.

Finger-Pointing

U.S. Senator Jon Kyl of Arizona, the chamber’s No. 2 Republican who sits on the panel, said Democrats turned down a final offer that included $250 billion in new revenue by eliminating some tax breaks even as it lowered income tax rates. “There’s a group of folks that will not cut a dollar unless we also raise taxes,” Kyl said on NBC’s “Meet the Press.”

Senator John Kerry, a Massachusetts Democrat who serves on the committee, called Kyl’s statement “patently not true” and said Democrats agreed to $917 billion in spending cuts with no new revenue as part of the August agreement to raise the debt ceiling. The latest Republican plan, said Kerry, “still results in the biggest tax cut since the Great Depression.”

European stocks dropped for a third day today and U.S. futures retreated in anticipation of a Congressional impasse. Treasuries advanced. The benchmark Stoxx Europe 600 Index lost 2.1 percent as of 8:49 a.m. in London, extending last week’s selloff, and the MSCI Asia Pacific Index dropped 1.3 percent.

Futures on the Standard & Poor’s 500 Index expiring in December declined 1.4 percent. The benchmark gauge for American equities lost 3.8 percent last week, the biggest loss in two months, as Spanish, French and Italian bond yields rose and Fitch Ratings said Europe’s debt crisis poses a threat to American banks.

Optimism Fades

Supercommittee members held out only a sliver of optimism that a deal is still possible. “Nobody wants to give up hope,” Representative Jeb Hensarling said on Fox News Sunday. “Reality is -- to some extent -- starting to overtake hope.”

If the committee doesn’t come up with an agreement, $1.2 trillion in across-the-board spending cuts to domestic and defense programs are set to take effect starting in January 2013. The lack of a deal would deprive President Barack Obama of a vehicle extending a payroll tax cut and insurance benefits for unemployed Americans, which expire at the end of the year.

It would also push into an election year the difficult work of reaching a bipartisan deal to head off the automatic cuts that Defense Secretary Leon Panetta has called “devastating” for the Pentagon. Many lawmakers cast doubt on whether anything will happen before the 2012 election if the committee doesn’t come up with a deal.

Waiting Until 2013

“We’re going to have to wait for the next election,” said Senator Christopher Coons, a Delaware Democrat who appeared on ABC’s “This Week” program. “I never thought the supercommittee was a good idea,” said Florida Senator Marco Rubio, a Republican who also appeared on the show.

The supercommittee was designed to be the solution to more than a year’s worth of failed bipartisan efforts to strike a “grand bargain” to drive down the debt. Obama’s fiscal commission last December didn’t agree on a $4 trillion package, pushing the work off to a group led by Vice President Joe Biden and bipartisan members of Congress.

The president and Speaker John Boehner ultimately took over those negotiations, before delegating the task of constructing a larger package to the supercommittee. With an eye to congressional approval ratings that began to sink to as low as 13 percent in a mid-August Gallup poll, Republicans insisted that the committee would deliver.

Shouldering Blame

“This joint select committee was set up to succeed,” McConnell said to reporters Nov. 1. On Nov. 14, Senator Lamar Alexander, a Tennessee Republican, reiterated that “failure is absolutely not an option.” He said “the American people expect us to get to work and do our job.”

Republicans may shoulder more blame for the panel’s failure. According to a Nov. 11-13 CNN poll, 42 percent of respondents said they would hold Republicans responsible if the supercommittee doesn’t reach agreement, with 32 percent saying they’d blame Democrats. The margin of error is 3 percentage points.

“It was Washington’s answer to kicking the can down the road,” said Senator Tom Coburn, an Oklahoma Republican who was a member of a bipartisan group of six senators working on a similar package this year. “That’s what America’s upset about,” he said in a taped interview on CSPAN’s Newsmakers.

Shrugging Off Downgrade

“There is a real threat that not only will be there a downgrade, but that the market, on Monday, will look again at Washington and say, ‘You guys can’t get the job done,’” Kerry said on “Meet the Press.”

Mark Zandi, chief economist of Moody’s Analytics, said he doesn’t think there would be much of a market reaction. “I don’t think many expected much to come out of the process,” he said on ABC’s “This Week.”

Investors have largely shrugged off Standard & Poor’s Aug. 5 downgrade of U.S. debt from AAA to AA+. After the downgrade, the government’s borrowing costs fell to record lows as Treasuries rallied. The yield on the benchmark 10-year Treasury note fell from 2.56 percent on Aug. 5 to below 1.72 percent on Sept. 22. The yield on the 10-year note fell three basis points to 1.98 percent at 1:40 p.m. in Tokyo.

Absent a last-minute breakthrough, the debate in Washington will now focus on the so-called trigger and the automatic cuts slated to start in 2013.

Undoing Cuts

Congress has a history of undoing previous attempts to require debt reduction, and lawmakers on both sides of the aisle, including Senator John McCain, an Arizona Republican, and Representative Maxine Waters, a California Democrat, are already trying to use legislative levers to stop the automatic cuts from taking effect.

House Minority Leader Nancy Pelosi, a Democrat, and Republican Speaker John Boehner have said they support the trigger. “The markets should know that the deficit reduction will occur,” Pelosi said on Nov. 3. Boehner has said he “personally” feels a moral obligation to uphold the cuts.

U.S. credit ratings agencies have made it clear that, while a failure of the supercommittee might not lead to a credit downgrade, undoing the automatic cuts probably would. Moody’s said the lack of a supercommittee agreement wouldn’t on its own cause the U.S. to lose its top credit ranking because the August debt-ceiling deal includes $1.2 trillion in automatic cuts.

Last month, John Chambers, a managing director of Standard & Poor’s, said the U.S. could face additional downgrades if Congress attempts to thwart the across-the-board cuts.

Defense Cuts

Instead of dismantling the trigger, Congress is more likely to look for ways to reconfigure the blend of defense and domestic cuts. ‘They’re done in a way that would be very harmful to our nation’s defense,’’ Toomey said yesterday. “It’s very important that we change the configuration but that we not abandon the spending cuts.”

If the current trigger remains, the consequences of failure will fall disproportionately on discretionary programs, with the Congressional Budget Office estimating that 71 percent would come from these programs such as education, the environment, transportation, housing assistance and veterans’ health care. The cuts would come in addition to the first round of cuts as part of the Budget Control Act.

If the panel fails, White House Budget Director Jack Lew has said he thinks there would be action on the deficit at the end of 2012, after the presidential election, because there would be a “perfect storm” of circumstances forcing Congress’s hand, including the expiration of the Bush-era tax cuts.

Meanwhile, with the U.S. jobless rate at 9 percent, Congress and the president must now scramble to decide whether to extend an expiring payroll tax cut, which could further roil the economy.

To contact the reporters on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net;

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

Read more...

Foreign Banks Double Dollar Deposits at Fed

By Catarina Saraiva - Nov 21, 2011 6:04 PM GMT+0700

Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

A budget deficit of more than $1 trillion, a deadlock among Congressional supercommittee members on spending cuts and 9 percent unemployment haven’t deterred investors from seeking safety in the world’s biggest economy. The euro has been undermined by the region’s sovereign debt crisis, while the Swiss franc and yen have fallen as their governments buy billions of dollars to weaken them.

“There’s not anything close to a substitute and part of it is the deepness of the market, the liquidity,” Jack McIntyre, a fund manager who oversees $23 billion in debt at Brandywine Global Investment Management, a unit of Legg Mason Inc., said Nov. 15 in a telephone interview from Philadelphia. “There’s a perception, right or wrong, that we’re going to make good on all of our assets.”

Demand Rises

The Fed’s record-low target interest rate for overnight loans among banks at between zero and 0.25 percent hasn’t discouraged dollar buying as slowing global growth and turmoil in Europe spur central banks from Australia to Brazil to cut rates, reducing their appeal to investors seeking higher returns.

Foreign demand for U.S. assets rose the most in 10 months in September. Net buying of long-term equities, notes and bonds totaled $68.6 billion, the highest since November 2010, compared with net buying of $58 billion in August, the Treasury Department said Nov. 16.

The dollar is up 6.5 percent in the past three months, recovering to about level this year with its nine peers, which include the Swedish krona and the Swiss franc. It’s trading about 4 percent below where it was in 1975, two years after President Richard Nixon ended the currency’s official ties to gold.

The U.S. currency rose 1.7 percent to $1.3525 per euro in the five days ended Nov. 18, gaining for a third week in a row. It fell 0.4 percent to 76.91 yen. The greenback traded at $1.3447 per euro and 76.90 yen as of 10:52 a.m. London time.

Banks Seek Safety

Demand for Treasury securities that mature in under a year has increased as financial institutions boost holdings of the highest-quality assets to meet new regulations set by the Bank for International Settlements in Basel, Switzerland. Bank holdings of Treasuries and government-related debt totaled a record $1.69 trillion at the end of October, up from less than $1.1 trillion in 2008.

“With the heightened emphasis on stronger liquidity positions for financial institutions around the world, we’ve seen an increase in the regulatory demand for liquid assets, but we’re not necessarily seeing an increase in the supply of liquid assets,” Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, a unit of ICAP, said in a Nov. 14 interview. “They’re meeting that need by holding Fed balances.”

‘Hoarding Cash’

Rates on three-month bills ended last week at zero, down from this year’s high of 0.157 percent in February and 5 percent in mid-2007, just before credit markets froze as losses on subprime mortgages accelerated.

“People are hoarding cash because they see that there’s some difficulty in the U.S. dollar funding market” as banks shed euro-denominated assets, Charles St-Arnaud, a foreign- exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview Nov. 14.

Three-month cross-currency basis swaps, the rates banks pay to convert euro payments into dollars, were as low as 132 basis points, or 1.32 percentage point, below the euro interbank offered rate Nov. 18, the most expensive since December 2008.

The cost of dollar funding is increasing as Europe’s debt crisis escalates. Last week, yields on German two-year bunds dropped below 0.3 percent for the first time, while the extra yield investors demand to hold 10-year bonds from France, Belgium, Spain and Austria instead of bunds climbed to euro-era records. The spread between German and French bonds of that maturity widened to 190 basis points on Nov. 15, the highest in the euro union’s history.

Europe Cuts Rates

European Central Bank policy makers cut the benchmark interest rate by 0.25 percent at their Nov. 3 meeting, after increasing it by 50 basis points earlier this year. Expectations for further cuts rose after Europe’s third quarter gross domestic product expanded 0.2 percent from the previous three months, a Nov. 15 report showed, signaling the region may be headed for a recession.

Slowing growth drove the Reserve Bank of Australia to cut its interest rate this month for the first time since April 2009, reducing it to 4.5 percent. Brazil’s central bank has lowered its rate twice since July to 11.5 percent, after raising it to 12.5 percent during the past 1 1/2 years.

Fed Stays Low

Cuts in central bank rates around the world have made the carry trade of selling dollars to buy the currencies of higher- yielding countries unprofitable. The trade, when borrowing dollars to buy the Australian, Swedish, Brazilian and South African currencies, has lost 30 percent since July, according to Bloomberg data.

The Fed said it will keep its rate at an all-time low through mid-2013 as the unemployment rate has remained stuck at or above 9 percent since March.

Consumer confidence rose to 64.2 this month, the highest since June, according to the Thomson Reuters/University of Michigan preliminary index of sentiment. Retail sales rose 0.5 percent in October, increasing for the fifth-straight month, according to a government report.

The economy expanded at a 2.5 percent pace in the third quarter, from 1.3 percent in second quarter, the Commerce Department said Oct. 27. Economists have increased their fourth- quarter economic forecasts to an expansion of 2.3 percent, from 2 percent estimated in October, according to two Bloomberg News surveys.

Bretton Woods

Faster growth may boost investor appetite for riskier assets, decreasing demand for the dollar’s safety, said Lane Newman, director of foreign exchange at ING Groep NV in New York. “This is perhaps a temporary respite from the dollar losing its reserve status,” he said. “I see this as a decades- long trend. Ultimately, it’s the devaluation and the end of the hegemony of the big dollar.”

The dollar has been the world’s reserve currency since World War II, when the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. After global currencies began freely floating in 1973, it has remained the most-traded legal tender, accounting for 85 percent of the $4 trillion per day foreign exchange market, according to the BIS.

Its share of foreign-exchange holdings has held steady at 61.6 percent since 2009 after peaking at 72.7 percent in 2001. The euro has stabilized at an average of 26.6 percent of reserves since 2007, up from 18 percent at its inception in 1999.

Deficit Panel

Options traders are increasingly betting that the dollar will strengthen. They paid 4.4 percentage points more for the right to sell the euro against the dollar than to buy it on Nov. 17, the most since the common currency’s inception in 1999. The so-called three-month 25-delta risk reversal rate has widened for all developed-nation currencies versus the dollar and for emerging-markets such as the real and Mexican peso.

The dollar’s rise comes as a Congressional panel of six Democrats and six Republicans, known as the supercommittee, has until Nov. 23 to find $1.2 trillion in deficit reduction, or cause that much in spending cuts to go into effect beginning in 2013.

The bipartisan group is expected to announce that it has failed to reach agreement on federal budget savings, a Democratic aide said. The aide, who wasn’t authorized to discuss internal matters publicly and requested anonymity, said in an e- mail yesterday that it was highly unlikely that the talks could be salvaged.

Budget Deficit

If Congress removes the automatic deficit cuts, Standard and Poor’s may drop the nation’s credit rating to AA, after reducing it to AA+ following the debt-cutting agreement, the ratings company said in a statement Aug. 5 when it announced the downgrade.

The U.S. budget deficit was $1.3 trillion in the fiscal year ended Sept. 30, up from $1.29 trillion in 2010 and the second-highest on record, according to Treasury Department data. It reached $1.42 trillion in 2009, the most ever.

Other traditional havens in times of market stress, the Swiss franc and yen, reached record highs against the euro and dollar, respectively, this year before their central banks acted in September and October to drive them from their peaks.

“The U.S. picks up an awful lot of the slack,” Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG, the world’s biggest currency trader according to Euromoney Institutional Investor Plc, said in a Nov. 17 telephone interview. “Particularly for large reserve portfolios, that need very liquid markets, they’re only really going to be accommodated in the U.S. market.”

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

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

Read more...

DoCoMo Plans to Increase Operating Profit While Curbing Spending, CFO Says

By Yoshinori Eki - Nov 21, 2011 12:45 PM GMT+0700

NTT DoCoMo Inc. (9437), Japan’s biggest mobile-phone carrier by subscribers, aims to keep boosting operating profit by curbing overall spending as two smaller rivals add more customers by offering Apple Inc. (AAPL)’s iPhone.

The company plans to maintain annual spending at about 700 billion yen ($9.1 billion) in the four years starting next fiscal year, Chief Financial Officer Kazuto Tsubouchi said in a Nov. 18 interview. More of that will be spent building faster networks to compete with KDDI Corp. (9433) and Softbank Corp. (9984), he said.

“Our coverage is already 100 percent in the third- generation network,” Tsubouchi said. “We plan to spend more on the long-term evolution network, as it can build on the 3G network.”

DoCoMo, which posted gains in operating profit the past four years, is trying to capitalize on the faster “Xi” data- communication service it started offering last December. The company raised its budget for expanding the service by 10 percent to 330 billion yen for the three years ending March 2013, it said Nov. 2.

KDDI and Softbank plan to offer the service next year.

Tokyo-based DoCoMo, which doesn’t offer the iPhone 4S, lagged behind adding customers in October after Softbank and KDDI began selling the latest Apple handset.

Softbank added 247,600 new customers in October, followed by KDDI’s 196,900, according to figures released by the companies Nov. 8. DoCoMo’s new users totaled 89,600 last month, the company said.

The wireless unit of Nippon Telegraph & Telephone Corp. raised its operating profit forecast 2.4 percent to 870 billion yen for the year ending March 31, the company said Nov. 2.

DoCoMo rose 1 percent to 137,400 yen in Tokyo trading as of 1:39 p.m. Shares are down 3.1 percent this year, compared with a 20 percent decrease in the Topix index.

To contact the reporter on this story: Yoshinori Eki in Tokyo at yeki@bloomberg.net

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

Read more...

Gates May Face Cross-Examination at Trial Over Novell 1994 Monopoly Claims

By Joel Rosenblatt and Margaret Cronin Fisk - Nov 21, 2011 12:00 PM GMT+0700

Microsoft Corp. (MSFT) Chairman Bill Gates may face cross-examination about alleged monopolistic behavior 17 years ago when he testifies in a Novell Inc. lawsuit accusing the world’s largest software maker of undermining the WordPerfect program.

The suit is a byproduct of the U.S. government’s landmark antitrust case against Microsoft that settled more than eight years ago, in which the Redmond, Washington-based company was declared an illegal monopolist.

Novell said in its 2004 complaint that Microsoft unfairly restricted competition by its word processing program. Gates targeted its products by name, Novell’s lawyers alleged, adding that the Microsoft chairman said his company’s software could not compete without the benefit of anticompetitive conduct.

In May, the U.S. Court of Appeals in Richmond, Virginia, revived the case, which had been dismissed by a lower court judge. The appeals court ruled Novell, which briefly owned WordPerfect in the mid-1990s, didn’t cede its rights when it transferred claims related to its personal computer operating system products to Caldera Inc. in 1996.

The appeals court ruling sent the case back to U.S. District Judge J. Frederick Motz in Baltimore, who had originally tossed it out. Motz is conducting the trial in Salt Lake City federal court, where the original lawsuit was filed. Gates is scheduled to testify today.

Market Share Fell

Novell, which was bought by Seattle-based Attachmate Corp. in April, has argued that WordPerfect’s share of the word- processing market fell to less than 10 percent in 1996 from almost 50 percent in 1990.

Its value dropped from $1.2 billion in May 1994 to $170 million in 1996 when it was sold to Ottawa-based Corel Corp., said Novell, which is seeking three times its losses in the lawsuit. The company settled separate antitrust claims against Microsoft for $536 million in 2004.

In its complaint, Novell said that WordPerfect had historically been the “most popular word processing application in the global market.”

“Microsoft engaged in a series of anticompetitive activities, including integrating other Microsoft software products, such as its browser technologies, into Microsoft’s Windows operating system in an exclusionary manner, and entering into exclusionary agreements precluding companies” from providing services to or buying products from Microsoft’s competitors, Novell said in court papers.

Motion to Dismiss

In June 2005, Motz granted Microsoft’s motion to dismiss most of the counts in Novell’s complaint, holding that Novell had standing to proceed on only two. In 2007, a federal appeals court affirmed the ruling.

Count one “asserted that Microsoft had ‘engaged in anticompetitive conduct to thwart the development of products that threatened to weaken the applications barrier to entry’ to the operating systems market,” according to the appeals court opinion. “It contended that Microsoft’s conduct had damaged Novell’s WordPerfect word processing applications and its other office productivity applications in violation of Section 2 of the Sherman Act.”

In count six, Novell alleged Microsoft made exclusionary agreements with the original equipment manufacturers, which restricted the licensing of Novell’s software applications, in unreasonable restraint of trade. According to a footnote, Novell declined to pursue this claim.

In March 2010, Motz found that Novell didn’t assign Caldera its claims under counts one and six. He then granted Microsoft’s motion for summary judgment on those counts. The appeals court reversed the grant of summary judgment on Count 1, and remanded it for further proceedings.

Gates Called

Microsoft, which is calling Gates to testify in the company’s defense, has denied Novell’s arguments that it maintained an operating system monopoly by, in part, withdrawing programming support so as to hobble Novell’s WordPerfect and Quattro Pro programs for Microsoft’s Windows 95 operating system.

In court papers, Microsoft pointed to previous testimony by former Novell Chief Executive Officer Robert Frankenberg. According to the filing, Frankenberg said if Novell had succeeded in releasing versions of WordPerfect and Quattro Pro near the same time Microsoft released Windows 95 in August 1995, the Novell products “would have made Windows 95 market share even higher than what it turned out to be.”

Evidence that Novell intended to use the programming to “make Windows a better and more popular operating system refutes Novell’s theory that Microsoft’s withdrawal” of the programming support in October 1994 “adversely affected competition in the PC operating system market,” Microsoft argued in a court filing.

Previous Gates Testimony

In Microsoft’s 1998 antitrust trial of U.S. government and state claims of anticompetitive conduct, Gates appeared by videotape. His attempts to disavow the software giant’s plans to overtake Netscape Communications Corp. in the Internet browser war prompted laughter from the judge.

U.S. District Judge Thomas Penfield Jackson in Washington laughed out loud, as did many in the courtroom, and at times shook his head as Gates questioned what antitrust enforcers meant by the words “concern,” “compete” and “we.”

In one exchange, Gates was asked if he told Microsoft Vice President Paul Maritz that the Internet browser market share “was a very, very important goal,” and that’s why he stressed efforts to outdo the competition in that area.

“I guess now we’re delving into the inner workings of Paul Maritz’s mind and how he comes to conclusions,” Gates said. Microsoft’s business practices related to the Internet were central to the case against it by the Justice Department and 20 states.

Orchestrated a Scheme

The government alleged Gates orchestrated a scheme of illegal practices to protect Microsoft’s Windows monopoly and crush possible threats, including the growing power of the Internet. Windows 95 and its successor Windows 98 were loaded into about 90 percent of new personal computers as of 1998.

Internal Microsoft e-mail and documents showed the company viewed Netscape’s Navigator browser as its biggest competitor at the time, and David Boies, the Justice Department’s lead attorney, focused on those documents in questioning Gates.

“My question is what non-Microsoft browsers were you concerned about in January of 1996?” Boies asked Gates, referring to an e-mail Gates wrote in which he expressed concern that computer makers were including non-Microsoft browsers on their PCs.

‘What’s the Question?’

“I’m sure -- what’s the question? Is it -- are you asking me about when I wrote this e-mail or what are you asking me about?” Gates said.

“I’m asking you about January of 1996,” Boies responded.

“That month?” Gates asked. “Yes, sir,” replied Boies.

“And what about it?” Gates asked.

“What non-Microsoft browsers were you concerned about in January of 1996,” Boies said again.

“I don’t know what you mean ‘concerned,’” Gates said.

“What is it about the word ‘concerned’ that you don’t understand,” Boies asked.

“I’m not sure what you mean by it,” Gates said.

When the tape ended, the judge had just one question for Boies: “How long did this deposition take?”

“Three days,” the lawyer replied.

The case is Novell Inc. (NOVL) v. Microsoft Corp., 04-01045, U.S. District Court, District of Utah (Salt Lake City).

To contact the reporters on this story: Joel Rosenblatt in Salt Lake City federal court at jrosenblatt@bloomberg.net and; Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net.

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

Read more...

U.S. Billionaires Avoid Reporting Gains to IRS

By Jesse Drucker - Nov 21, 2011 12:01 PM GMT+0700

When billionaire Billy Joe “Red” McCombs, co-founder of Clear Channel Communications Inc., reported a $9.8 million loss on his tax return, he failed to include about $259 million from a lucrative stock transaction.

After an audit, the Internal Revenue Service ordered him to pay $44.7 million in back taxes. McCombs, who is worth an estimated $1.4 billion and is a former owner of the Minnesota Vikings, Denver Nuggets and San Antonio Spurs sports franchises, sued the IRS, settling the case in March for about half the disputed amount.

McCombs’s fight with the IRS illustrates an overlooked facet in the debate over tax rates paid by the nation’s wealthiest. Billionaires -- from McCombs to Philip Anschutz to Ronald S. Lauder -- who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn’t classify as taxable income, securities filings and tax court records show.

“The 800-pound gorilla is unrealized appreciation,” said Edward J. McCaffery, a professor of law, economics and political science at the University of Southern California in Los Angeles.

While Warren Buffett has generated attention with his complaints that he and his fellow billionaires pay federal income taxes at a lower rate than his secretary -- about 17 percent -- the real figure is often smaller, said David S. Miller, former chair of the tax section of the New York State Bar Association and a partner at Cadwalader, Wickersham & Taft LLP in New York.

“The problem is not that people like Warren Buffett pay tax at a 17 percent rate, it’s that they can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all,” Miller said.

Tip of Iceberg

The rate at which the 400 U.S. taxpayers with the highest adjusted gross income actually paid federal income taxes --their so-called effective tax rate -- fell to about 18 percent in 2008 from almost 30 percent in 1995, IRS data show. That’s the tip of the iceberg, since much of their wealth never converts into income on a tax return, McCaffery said.

In the McCombs case, the billionaire entered into transactions known as variable prepaid forward contracts. He received about $259 million for lending an investment bank his Clear Channel shares with a promise to deliver the stock for good a few years later. The arrangement enabled McCombs to defer paying capital gains tax because he hadn’t sold his shares, lawyers for the billionaire said. The IRS deemed the transaction a sale since the bank paid McCombs cash and got the use of his stock almost immediately.

Taxes on Millionaires

Transactions like these may complicate plans by U.S. President Barack Obama to help close the federal deficit by increasing taxes on millionaires. Obama has said the tax code should contain a “Buffett Rule” to ensure that millionaires pay taxes at least at the same rate as middle-class Americans. Republicans have said they prefer lowering tax rates for businesses and the wealthy. Buffett declined to comment.

In the past two years, some of the wealthiest executives in the U.S. have used deals similar to McCombs’s to reap returns while deferring the taxes without running afoul of IRS rules, securities filings show.

Dole Food Co. Chairman David H. Murdock received about $228.6 million in 2009 against his Dole shares -- tax-free until he is scheduled to deliver shares in November 2012, a filing shows.

Starr International

Starr International Co., the investment vehicle run by Maurice “Hank” Greenberg -- forced from his position as chairman and chief executive officer of American International Group Inc. (AIG) in 2005 -- utilized a prepaid forward agreement last year to receive $278.2 million from an investment bank, according to a March 2010 regulatory filing. The investment vehicle isn’t slated to deliver the AIG stock until 2013.

Lauder received $72.9 million in June as part of a variable prepaid forward sale and is scheduled to deliver the Estee Lauder Cos. shares in June 2014, according to a filing with the U.S. Securities and Exchange Commission.

Spokespersons for Lauder, Murdock and Starr International declined to comment.

Realized Gains

While the tax treatment of these plans isn’t disclosed in the filings, “there’s no other reason to enter into such a convoluted arrangement,” said Robert Willens, an independent tax accounting analyst in New York. These arrangements can cost several million dollars in fees, according to tax planners.

Taxes on capital gains are triggered when assets like appreciated shares are sold -- a process called realization. What constitutes a realized, taxable sale is a frequent bone of contention between the IRS and the clients of tax planners.

Transactions intended to pull cash out of appreciated assets tax-free aren’t limited to stock. Boston real estate developer Arthur M. Winn exited his interest in a piece of real estate by converting his stake into a share of a partnership free of any capital gains tax, court filings show.

The IRS objected and claimed Winn and his partner should have reported a $12 million taxable gain. A U.S. Tax Court judge sided with Winn on one aspect of the deal; others were settled with the government. The details haven’t been disclosed.

Winn, who earlier this month pleaded guilty to making illegal campaign contributions, has retired from WinnCompanies. He did not respond to messages left with his attorney and with the company.

Mark-to-Market

Miller, the former chair of the tax section of the New York State Bar Association, has proposed a so-called mark-to-market system to tax the annual appreciation in the stock holdings of the top 1/10th of 1 percent of taxpayers. That would essentially tax gains in a given year regardless of whether the shares are sold. In a 2005 article in the journal Tax Notes he estimated this approach would raise between $490 billion and $750 billion over a decade.

Borrowing against appreciated stock and real estate is a popular tax deferral strategy particularly as interest rates plummet, said Randy Beeman, a private wealth manager at The Wise Investor Group in Reston, Virginia, a unit of Robert W. Baird & Co. The interest rate on loans to some wealthy individuals has hovered around 1 percent.

Vikings Purchase

McCombs, ranked 312 on the most recent Forbes 400 list of the richest Americans, made his fortune in automobiles, real estate, and then by building Clear Channel into a large radio station operator and outdoor advertising business. He is now the chairman of Xe Services LLC, the military security contractor formerly called Blackwater Worldwide.

In the late 1990s, McCombs borrowed about $300 million to finance the purchase of the National Football League’s Minnesota Vikings. By 2002, the Clear Channel shares pledged as collateral were falling in value and McCombs faced margin calls from lenders. He didn’t want to sell his shares, partly because of “a strong emotional attachment to his ownership in the company,” according to a filing by his lawyers in U.S. Tax Court.

Instead, he entered into a series of variable prepaid forward contracts, receiving about $259 million from JPMorgan Chase & Co. (JPM) in exchange for an agreement to deliver his Clear Channel stock in one to three years. The transaction was structured to limit his potential losses by varying how many shares he would deliver at the end of the transaction.

He loaned those shares to JPMorgan in the interim. That allowed the New York-based bank to short the stock -- selling the borrowed shares to hedge against any decline in the price of the stock it would eventually receive from McCombs.

Lawyers said the cash received up front didn’t have to be reported as income because it wasn’t a taxable sale until McCombs turned over those shares for good.

The IRS said the transaction was a cash sale of the shares, generating taxable income of as much as $213 million.

Benefits and Burdens

Over the years, the IRS has tried to crack down on such deals. In 2006, the agency declared that including a share loan meant these types of transactions were sales, triggering an immediate income tax obligation. In McCombs’s case, his lawyers contended that the share loan was separate from the first part of the transaction, and thus didn’t transfer the so-called “benefits and burdens” of owning the stock. He settled his case for $23 million in back taxes plus interest.

In 2010, a U.S. Tax Court judge found Philip Anschutz, the entertainment, oil and media investor, owed $94 million in taxes after he used transactions similar to the ones used by McCombs. Anschutz, identified by Forbes as the 39th richest man in the U.S., is appealing the decision.

‘More Hostile’

“The IRS shifted its view and threatened a legitimate business practice and that will have a dampening effect on investment,” said a spokesman for Anschutz.

The IRS has “gotten more hostile toward these transactions over the years,” through its various technical pronouncements and litigation, said Willens, the accounting analyst. Since 2006, such transactions haven’t included the interim loan of shares to the investment bank, he said.

“It’s still desirable to defer the tax and wind up with an interest free loan from the government,” he said. “Chances are you don’t get audited and if it does get challenged the odds are good you’ll have a settlement for some fraction of the amount you saved. Who wouldn’t want that?”

To contact the reporter on this story: Jesse Drucker in New York at jdrucker4@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net

Read more...

India Raids Vodafone, Airtel Offices in Probe

By Abhishek Shanker - Nov 21, 2011 12:41 PM GMT+0700

Indian investigators raided the offices of Vodafone India Ltd. and Bharti Airtel Ltd. (BHARTI), two of the country’s largest mobile-phone companies, in a widening probe into alleged irregularities in the sale of mobile-phone airwaves dating back to 2001.

The Central Bureau of Investigation registered a case against three phone companies and two government officials for alleged wrongdoing during the granting of additional second- generation spectrum, causing a loss of about 5.1 billion rupees ($100 million) during 2001-2007, it said on its website.

A deeper CBI investigation targeting the sale of phone licenses under the previous government may aid Prime Minister Manmohan Singh by blunting opposition parties’ attacks over his failure to tackle corruption. Rival parties have channeled growing public anger at scandals, including allegations of graft in the 2008 sale of phone licenses, stalling parliament and disrupting the government’s legislative agenda.

Spokesmen at Bharti Airtel, India’s biggest mobile-phone company, and Vodafone India, a unit of Vodafone Group Plc (VOD), denied any wrongdoing. The bureau also searched residences of Shyamal Ghosh, the telecom secretary in the federal government during 2001-02, and J.R. Gupta, then director at state-owned telecom company Bharat Sanchar Nigam Ltd., according to Dharini Mishra, a spokeswoman at the bureau.

In 2007, Newbury, England-based Vodafone entered the Indian market when it bought a 67 percent stake in Hutchison Essar, Hutchison Whampoa Ltd.’s local unit and India’s third-biggest mobile-phone carrier, for about $10.7 billion.

BJP Rule

Bharti shares fell 1.5 percent to 391.75 rupees as of 10.54 a.m. in Mumbai today. The benchmark BSE India Sensitive Index was down 1.1 percent.

The probe seeks information about possible malpractice in allocating spectrum during 2001-02 when Pramod Mahajan was the telecom minister under the National Democratic Alliance government led by the Bharatiya Janata Party, the main opposition to the current government, Mishra said. Mahajan has been excluded from the case since he is deceased, the bureau said.

“All our documents are in complete compliance with the governing laws and regulations,” Suresh Rangarajan, spokesman at Vodafone, said in an e-mailed statement on Nov. 19. “Vodafone India is completely co-operating with the officials and will provide them all the required details as part of their checks.”

‘Criminal Conspiracy’

Bharti Airtel’s spokesman Prem Subedi said the company secured all spectrum blocks as per the government policy.

“It has been alleged that the then-secretary in the ministry and another official entered into a criminal conspiracy with three beneficiary private companies and abused their official positions as public servants,” the agency’s statement said. “The public servants, with approval of the then minister of telecom took an alleged hurried decision on Jan. 31, 2002 to allocate additional spectrum beyond 6.2 megahertz in violation of the report of a technical committee.”

In a separate probe, India’s chief auditor said last year that former minister Andimuthu Raja in the Congress-led government and others conspired to grant licenses to unqualified companies for personal benefit, reducing state revenues by as much as $31 billion. The CBI put the loss at 220 billion rupees ($4.3 billion). Raja and others charged in the case have denied wrongdoing.

Investor Confidence

The scandal has weakened Prime Minister Manmohan Singh’s government, lowered investor confidence in the economy, paralyzed legislation in parliament and sparked nationwide street protests.

The government is cracking down on corruption as it’s under pressure from social activists and opposition parties to curb official graft and make a stronger anti-corruption law. The government may seek lawmakers’ approval for such a law in its winter session from Nov. 22 to Dec. 21.

To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editor responsible for this story: Jim McDonald at jmcdonald8@bloomberg.net

Read more...