Economic Calendar

Saturday, December 17, 2011

RIM Shares Tumble as Company Pushes Back BlackBerry Release

By Hugo Miller - Dec 17, 2011 4:27 AM GMT+0700

Dec. 16 (Bloomberg) -- Jennifer Fritzsche, an analyst at Wells Fargo Securities LLC, talks about the outlook for Research In Motion Ltd. after the company said a new generation of BlackBerry's designed to fuel a comeback won't be out until later in 2012. Fritzsche speaks with Betty Liu on Bloomberg Television's "In the Loop." Robert Hagstrom, a portfolio manager at Legg Mason Funds Management, also speaks. (Source: Bloomberg)

Dec. 15 (Bloomberg) -- Brian Modoff, an analyst at Deutsche Bank Securities Inc., talks about the outlook for Research In Motion Ltd. The maker of the BlackBerry smartphone projected lower sales and profit than analysts had estimated, dragged down by customers switching to Apple Inc.’s iPhone and devices that run Google Inc.'s Android software. Modoff speaks with Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Research In Motion Ltd. (RIM) fell to the lowest level in almost eight years after saying a new generation of BlackBerrys designed to fuel a comeback won’t be out until the “latter part” of 2012.

The smartphone maker, which originally planned to release the new devices in the first quarter of next year, also gave a sales and profit forecast that missed analysts’ estimates.

The delay adds to the challenges at RIM, which has lost market share to Apple Inc. (AAPL)’s iPhone and Android phones. The company also flubbed its entry into the tablet market, with a device that bombed with shoppers. After all that, investors may not trust the new target for the upgraded BlackBerrys, said Alkesh Shah, an analyst at Evercore Partners Inc. (EVR)

“Given the misexecution they’ve had recently, it’s hard to use that as a solid deadline,” said the New York-based analyst, who has an “equal weight” rating on RIM shares. “Let’s say it’s a year from now, my concern is that it may be too late.”

RIM shares fell 11 percent to $13.44, its lowest since January 2004. The stock has dropped 77 percent this year.

BMO Capital Markets analyst Tim Long, James Cordwell of Atlantic Equities, GMP Securities’ Michael Urlocker and Kevin Dede of Brigantine Advisors, all cut their ratings on the stock.

RIM forecast profit of 80 cents to 95 cents a share for the fiscal fourth quarter, which ends on March 3. Sales will be $4.6 billion to $4.9 billion, the Waterloo, Ontario-based company said. Analysts had projected profit of $1.08 a share and revenue of $4.85 billion, according to Bloomberg data.

BB10 Software

The PlayBook tablet computer, released in April, was the first device built on RIM’s new operating system, called BB10. The product’s weak sales, along with marketing missteps, have made investors skeptical about the broader upgrade, said Colin Gillis, an analyst at BGC Partners in New York.

“Why should we think the platform is going to get traction?” he said.

RIM drew criticism for introducing the PlayBook without e- mail, a shortcoming it said it would address over the summer. Then the company said in October that the PlayBook e-mail upgrade wouldn’t come until February.

The fourth-quarter forecast suggests consumers are already losing interest in the most recent BlackBerry 7 phones, which use the previous operating system, Shah said.

“BlackBerry 7 devices have already peaked in interest,” he said. “The concern will be: When do the BlackBerry 10 devices come out? We have no specific target date for that, and my concern is that by the time they come out, it won’t be enough.”

‘Particularly Weak’

RIM co-Chief Executive Officer Jim Balsillie said on a conference call that he’s not satisfied with the “particularly weak” performance in the U.S., which accounts for about a quarter of revenue.

“The last few quarters have been some of the most trying in the recent history of the company,” Balsillie said. The two co-CEOs will be cutting their salaries to one dollar effective immediately as they embark on a review of RIM’s product portfolio, manufacturing and research strategy, he said.

The BB10 phones were delayed because the company wanted to deliver devices with better performance and battery life, said Mike Lazaridis, the other CEO. The chipsets that will allow those capabilities won’t be available until mid-2012. “We ask for your patience and confidence,” Lazaridis said.

Jaguar Financial Corp. (JFC), a Toronto-based investment firm, reiterated its call for RIM to split into separate companies -- or seek a buyer and shake up its management. Investors holding 8 percent of RIM shares support the effort, the firm has said.

The Right Stuff?

Jaguar appealed to board members Barbara Stymiest and Roger Martin to lead efforts to split the role of chairman and CEO. Balsillie and Lazaridis also serve as co-chairmen of RIM.

Lazaridis and Balsillie didn’t discuss any plans for management or leadership changes during the conference call.

“We continue to believe that RIM has the right set of strengths and capabilities to maintain a leading role in the mobile communications industry,” they said in the earnings statement.

RIM’s U.S. market share sank to 9.2 percent in the third quarter from 24 percent a year earlier, according to research firm Canalys. HTC and Samsung (005930), which use Google Inc. (GOOG)’s Android software, both posted gains. HTC rose 24 percent from 14 percent, while Samsung climbed to 21 percent from 14 percent.

Profit Decline

RIM’s third-quarter net income plunged 71 percent to $265 million, or 51 cents a share, from $911 million, or $1.74, a year earlier. Sales fell about 6 percent to $5.17 billion.

Total BlackBerry shipments this quarter will be about 11 million to 12 million, RIM said. Analysts had projected 12.8 million units, according to Bloomberg data.

“The reason they are losing share in the U.S. is they don’t have an ecosystem,” said Sameet Kanade, a Northern Securities Inc. analyst in Toronto, who rates RIM a “speculative buy.” Apple and Google have an army of developers and hundreds of thousands of applications, helping keep users loyal. RIM, meanwhile, is focused on hardware, Kanade said.

“If their entire strategy is a hardware upgrade, where is your strategy for an ecosystem like Apple?” he said.

To contact the reporter on this story: Hugo Miller in Toronto at

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


New York Police Arrest 141 People Over Alleged Thefts of IPhones and IPads

By Adam Satariano - Dec 17, 2011 6:59 AM GMT+0700

The New York Police Department arrested 141 people for allegedly selling stolen iPhones and iPads, stepping up an effort to combat robberies of handheld electronic devices.

Officers made the arrests at convenience stores, newsstands, barber shops and other businesses, the department said today in a statement. The suspects were charged with criminal possession of stolen property after being apprehended for allegedly purchasing the gadgets from undercover police.

“This was a two-prong approach to apprehend both thieves and receivers of stolen property,” Police Commissioner Raymond W. Kelly said in the statement. “Suspects at both ends of the equation are learning the hard way that ‘victims’ and ‘sellers’ may in fact be undercover police officers.”

The arrests are an attempt to cope with a rash of robberies of the iPhone and iPad, Apple Inc. (AAPL)’s best-selling products. The department also is working to capture thieves stealing the products from inattentive subway riders, according to today’s statement.

Robberies involving handheld electronic devices have caused a slight increase in grand larcenies in New York City, the police department said. The iPhone and iPad arrests were made this week, between Tuesday and today, the department said. Prices for the merchandise ranged from $50 to $200.

Of the 141 arrests, 42 were in Brooklyn, 41 in Manhattan, 31 in the Bronx, 21 in Queens and six on Staten Island, the police department said.

To contact the reporter on this story: Adam Satariano in San Francisco at

To contact the editor responsible for this story: Tom Giles at


Zynga’s Mark Pincus Aims to Keep ‘That Startup Feeling’ After Company IPO

By Douglas Macmillan - Dec 17, 2011 8:03 AM GMT+0700

As Zynga Inc. shares began trading in New York today, hundreds of the company’s employees gathered to mark the occasion in the atrium of their San Francisco headquarters.

Zynga Chief Executive Officer Mark Pincus said he arranged the ceremony -- Nasdaq’s first initial public offering bell- ringing in San Francisco -- to help staff feel invested in the IPO process. Moments later, the crowd dispersed.

“The sign of a great company meeting is that a lot of employees are so fired up that they want to go back to work,” Pincus said in a telephone interview, citing a favorite saying of Zynga board member Bing Gordon. “This event was like that -- times 10.”

Under Pincus, Zynga raised $1 billion in the largest IPO since Google Inc. debuted in 2004 -- an event that stands to make many employees rich, at least on paper. His next big challenge is keeping Zynga’s roughly 2,800 staff members focused on crafting the online games that fuel growth.

“I think we’ve kept that startup feeling for people,” said Pincus, a serial entrepreneur who founded Zynga in 2007. “Our values of being metric- and outcome-driven enables us to push down ownership and control and leadership to the team, and I think that they appreciate that.”

Stock Drop

On its first trading day, Zynga fell 5 percent to $9.50 at the close. The developer of games such as “CityVille,” “FarmVille” and “Mafia Wars” sold 100 million shares yesterday for $10 each, the top end of a proposed range.

Pincus said he wasn’t concerned about the stock-price decline. His aim, he said, is achieving long-term value for investors.

“We’re not experts on stock trading and we don’t intend to be,” he said. “This story is going to play out over the next couple of years, not the next couple of trading days.”

Pincus wouldn’t comment on specific plans for the capital raised in the IPO, citing the U.S. Securities and Exchange Commission’s “quiet period” rules around companies going public. He pointed to Zynga’s history of spending hundreds of millions of dollars on data centers.

He also cited acquisitions, including last year’s $53.3 million purchase of Newtoy Inc., maker of the popular game “Words With Friends.” Zynga made 20 acquisitions in 2010 and the first nine months of 2011.

Big Believers

“We’re bigger believers in the future of play and social gaming than any other company, and we wanted to be in a position that we had the resources to invest more in that future than any other company,” Pincus said.

Zynga gets more than 90 percent of its revenue from Facebook Inc. Investor concerns about Zynga’s dependence on the social-networking company may ease over time as it adds users on mobile devices and other platforms, Chief Operating Officer John Schappert said in an interview today.

“We’re very happy to be on Facebook because it is where all our players are playing,” said Schappert, who left Electronic Arts Inc. (ERTS) for Zynga earlier this year. “At the same time, we’re also excited about new platforms. We’ve made big investments in mobile, we’ve grown our mobile user base both on iOS and Android, and we’re also on some of the new emerging platforms like Google+.”

After ringing the bell and conducting interviews with media, Pincus said he intended to spend his Friday afternoon building games.

“I’m spending the rest of the day on our product,” he said. “I believe that that’s what serves investors the best, and I believe that that’s the way it will be rewarded by the market in the long term the best.”

To contact the reporter on this story: Douglas Macmillan in New York at

To contact the editor responsible for this story: Tom Giles at


U.S. Stocks Rise on Gains by Producers

By Whitney Kisling - Dec 17, 2011 4:27 AM GMT+0700
Enlarge image U.S. Stocks Advance

Traders work at the New York Stock Exchange in New York. Photographer: Jin Lee/Bloomberg

Dec. 16 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks rose, paring a weekly loss in the Standard & Poor’s 500 Index, as gains among commodity producers helped overcome debt-crisis concerns after Fitch Ratings said it may cut ratings of European nations. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

Dec. 16 (Bloomberg) -- The cost of living in the U.S. stagnated in November as gasoline prices dropped, supporting the Federal Reserve’s view that inflation remains in check. The unchanged reading in the consumer-price index last month followed a 0.1 percent decline the prior month, a report from the Labor Department showed today in Washington. Betty Liu reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

U.S. stocks rose, paring a weekly loss in the Standard & Poor’s 500 Index, as gains among commodity producers helped overcome debt-crisis concerns after Fitch Ratings said it may cut ratings of European nations.

Halliburton Co. (HAL) and Chevron Corp. (CVX) increased at least 1.2 percent, pacing gains among energy companies. Banking shares in the S&P 500 rose 1.2 percent as a group, trimming an earlier rally. Research In Motion Ltd. (RIM) fell 11 percent after the company delayed the release of a new generation of BlackBerry devices. Zynga Inc., the largest maker of games for Facebook, declined 5 percent in its first day of trading.

The S&P 500 rose 0.3 percent to 1,219.66 at 4 p.m. New York time, after jumping as much as 1.3 percent earlier. The benchmark index has fallen 3 percent since Dec. 31 after being up for the year on nine days since Oct. 27. The Dow Jones Industrial Average slipped 2.42 points, or less than 0.1 percent, to 11,866.39 today.

“We’re seeing a market in which there’s very little long- term investor interest,” David Kelly, who helps oversee $394 billion as chief market strategist for JPMorgan Funds in New York, said in a telephone interview. “Europe is still dodging all the major decisions it needs to make in order to fix the problem and I think that the disappointment in that is still dogging the markets right now.”

The S&P 500 lost 2.8 percent this week. It slumped Dec. 13 after the Federal Reserve refrained from taking new actions to bolster growth, saying the U.S. economy is maintaining its expansion even as the global economy slows. Stocks rose yesterday after data showed improvements in jobless claims and manufacturing. The U.S. economy will expand at a 3.5 percent annual rate this quarter, up from a prior estimate of 3 percent, according to estimates today by JPMorgan Chase & Co. (JPM) economists.

Rating Outlook

Stocks trimmed an early rally after Fitch Ratings lowered France’s rating outlook to negative and put the grades of Belgium, Spain, Slovenia, Italy, Ireland and Cyprus on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis. It also said all investment-grade countries in the euro region rated below AAA are subject to a “Rating Watch Negative” review, which Fitch expects to complete by the end of January.

Moody’s Investors Service said Dec. 12 it would review the ratings of all European Union countries after a summit of leaders last week did little to ease pressure on the governments in Europe. S&P placed the ratings of 15 nations, including France and Germany, on review for possible downgrade on Dec. 5.

Funding Deadline

Gains in stocks were propelled earlier by optimism the European Union will meet a Dec. 19 deadline for funding a crisis-fighting package. Luxembourg’s Jean-Claude Juncker, who leads a group of finance ministers from the region, said the EU should meet the goal for arranging loans to the International Monetary Fund. An hour after Juncker’s comments, the Bundesbank said it won’t rush to a decision on the loans, which are to be provided by EU national central banks.

“Going into a weekend, people take money off the table for fear of not knowing what’s going to happen, chiefly in Europe,” Peter Tuz, who helps manage about $800 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a telephone interview.

Energy and raw material companies advanced at least 0.7 percent among groups in the S&P 500. Chevron added 1.2 percent to $100.86. Halliburton jumped 1.6 percent to $31.76.

Banks climbed the most among 24 S&P groups. Wells Fargo & Co. (WFC) jumped 1.4 percent to $25.98. JPMorgan Chase rose 0.4 percent to $31.89, after rallying as much as 2.6 percent earlier. Bank of America Corp. (BAC) lost 1.1 percent to $5.20.

Options Expiration

Today is the expiration of futures and options contracts on indexes and individual stocks, an event known as quadruple witching, which occurs once every three months.

A measure of expected stock-market volatility declined 3.3 percent today, trading at the farthest below its 200-day average since July. The Chicago Board Options Exchange Volatility Index, or VIX (VIX), dropped to 24.29, or 5.5 percent below its 200-day average.

The S&P 500 is trading for 12.8 times reported earnings, 22 percent lower than the six-decade average of 16.4, according to data compiled by Bloomberg. American companies have topped Wall Street profit estimates for 11 straight quarters.

Adobe Rises

Adobe Systems Inc. (ADBE), the largest maker of graphic-design software, rose the most in the S&P 500 after saying first- quarter sales forecast beat some estimates, boosted by demand for tools that design Web pages and create online video. The stock advanced 6.6 percent to $28.20.

RIM dropped 11 percent to $13.44 after saying a new generation of BlackBerrys designed to fuel a comeback won’t be out until the “latter part” of 2012. The smartphone maker, which originally planned to release the new devices in the firs quarter of next year, also gave sales and profit forecasts (RIMM) that missed analysts’ estimates.

Zynga slipped 5 percent to $9.50 in its first day of trading, after raising $1 billion in an initial public offering that gave it a greater valuation than rival Electronic Arts Inc. The developer of games such as “CityVille,” “FarmVille” and “Mafia Wars” sold 100 million shares for $10 each, the top end of a proposed range.

Cablevision Systems Corp. (CVC) tumbled 8.5 percent to $12.75. Th U.S. cable-television provider’s chief operating officer, Tom Rutledge, will step down this month for undisclosed reasons, in what Craig Moffett, an analyst at Sanford C. Bernstein & Co., calls a “staggering loss” for the company.

Accenture Plc (ACN) fell 3.5 percent to $54.15. The world’s second-largest technology-consulting company lowered its full- year earnings forecast on currency fluctuations, after beating analysts’ estimates for the first quarter.

To contact the reporter on this story: Whitney Kisling in New York at

To contact the editor responsible for this story: Nick Baker at


Congress Gets Failing Marks on Economy

By Laura Litvan - Dec 17, 2011 2:38 AM GMT+0700

Congress is ending what may be its least productive year on record after government shutdown threats, the collapse of debt-reduction talks and little action to fix the worst U.S. economy since the Great Depression.

Just 62 bills were signed into law through November this year, meaning that 2011 may fall short of the 88 laws enacted in 1995, the lowest number since the Congressional Record began keeping an annual tally in 1947. In 1995, as in this year, a new House Republican majority fought a Democratic president’s agenda.

This year’s partisan battles brought the U.S. to the brink of a government shutdown four times, caused a two-week furlough of Federal Aviation Administration workers and led Standard & Poor’s to lower the nation’s credit rating after it said lawmakers didn’t do enough to reduce the federal deficit.

“It’s been one of the worst Congresses in modern history,” said Representative Jim Cooper, a Tennessee Democrat. “We have failed to meet our minimum standards of competency and endangered America’s credit rating. We have failed to pass key legislation on time. And there is very little hope for improved behavior.”

Voter approval ratings for Congress are at record lows. Republicans, ranked lower than Democrats, insist both parties are to blame.

“People have a right to be frustrated and disappointed, so next year may be a good year for challengers,” said Senator Jon Kyl of Arizona, the No. 2 Senate Republican leader.

Risks to Economy

The inaction by Congress poses risks to the economy, said Ed Yardeni, president of Yardeni Research Inc. in New York. While the unemployment rate hovered around 9 percent most of the year, he said Congress did little to stimulate job growth. Lawmakers also were unwilling to make deep budget cuts or raise taxes to rein in the deficit.

“Usually gridlock is seen as a good thing from the stock market’s perspective, but clearly the out-of-control federal deficit needs to be addressed and there is no political will to do it,” Yardeni said.

S&P, in its ratings downgrade, said the government is becoming “less stable, less effective and less predictable.” Even so, 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 was 1.84 percent at 2:35 p.m. New York time today.

Voters Critical

The public is less sanguine. Seventy-six percent of registered voters in a Nov. 28-Dec. 1 Gallup Poll said most members of Congress don’t deserve to be re-elected, the highest percentage in the 19 years Gallup has asked that question.

A Dec. 7-11 Pew Research Center poll found 40 percent of adults blame Republican leaders for a “do-nothing” Congress, while 23 percent blame Democrats.

“It’s more likely that Republicans will be hit harder than Democrats,” said David Rohde, a political scientist at Duke University in Durham, North Carolina.

In a year dominated by budget clashes, Congress passed a few significant measures.

Congress approved free-trade agreements with South Korea, Colombia and Panama. The South Korea deal was the biggest since 1993’s North American Free-Trade Agreement.

Patent Overhaul

Congress overhauled the patent system, long sought by companies such as International Business Machines Corp. (IBM) and Microsoft Corp (MSFT), and extended the USA Patriot Act until 2015, providing law enforcement continued power to track suspected terrorists.

Such output pales compared with 2010, when Congress approved a health-care overhaul, the biggest rewrite of Wall Street rules since the Great Depression, a nuclear arms reduction treaty with Russia and ended a ban against openly gay men and women serving in the military.

This year’s trade and patent bills, while important, are sideshows in the broader economic context, said Ross Baker, a professor of political science at Rutgers University in New Brunswick, New Jersey.

“Those are not insignificant things, but none of them get to the meat of the economic crisis,” Baker said.

Most of President Barack Obama’s $447 billion job-creation agenda was opposed by Republicans and some Democrats who rejected his proposed new spending and tax increases on the wealthy to help pay for it.

Tax Credits

Congress approved tax credits for companies that hire unemployed veterans and canceled a requirement that federal, state and local governments begin withholding 3 percent of payments to contractors in 2013. This week, lawmakers are working to extend a payroll-tax cut for workers through 2012.

House Majority Leader Eric Cantor, a Virginia Republican, said a “fundamental divide” with Obama and a Democrat- controlled Senate stymied House Republicans, who sought to repeal the president’s health-care overhaul and create a Medicare voucher system.

House Speaker John Boehner of Ohio heralded a shift toward cutting the size of government after Republicans forced $38.5 billion in budget cuts this year and Congress agreed in August to reduce deficits by $2.4 trillion over a decade.

Social Security ‘Conversation’

“For the first time in my 21 years here there has been a serious conversation about dealing with the entitlement programs” such as Social Security and Medicare, Boehner said at a Dec. 14 breakfast sponsored by, a political news web site. “We are talking about real change,” he said, adding that he wasn’t surprised the public has a low opinion of Congress.

Democratic leaders see it differently. House Minority Leader Nancy Pelosi, a California Democrat, told reporters today it was a “year of missed opportunities and made-up crises.”

The nation has “been engrossed in a year of manufactured crises, with multiple threats of a government shutdown and an increase of uncertainty for business and in our markets as a result of the debt ceiling being held hostage,” said Democratic Whip Steny Hoyer of Maryland.

Independent analysts say that on the matter that dominated -- deficit reduction -- the results are murky.

The nonpartisan Congressional Budget Office said the $38.5 billion in spending cuts in this year’s budget, agreed in April to avert a government shutdown, cuts the deficit by just $352 million this year, with most savings coming later. Some money cut from programs wouldn’t have been spent anyway, so it wouldn’t do as much to curb a $1.3 trillion deficit, the CBO said.

Automatic Spending Cuts

The debt-reduction measure adopted in August relies on automatic spending cuts for about half of its $2.4 trillion in savings over a decade. A congressional supercommittee’s inability to agree on at least $1.2 trillion in cuts kicks the debate over specifics into next year. To achieve the rest of the deficit reduction, lawmakers must stick with annual caps on spending for a decade.

Based on experience, Congress won’t stick with the deficit- reduction deal for more than a few years, said Stan Collender, managing director of Qorvis Communications in Washington and a former House and Senate budget committee aide.

“Budget deals are always modified, seemingly in seconds after they’re enacted,” he said.

To contact the reporter on this story: Laura Litvan in Washington at

To contact the editor responsible for this story: Mark Silva at


Buffett Buys 49% Stake in NRG Solar Plant

By Christopher Martin - Dec 17, 2011 4:16 AM GMT+0700

Warren Buffett’s MidAmerican Energy Holdings agreed to buy a 49 percent stake in NRG Energy Inc. (NRG)’s $1.8 billion Agua Caliente solar project, the billionaire’s second investment in solar this month.

The 290-megawatt power plant is being built in Arizona by First Solar Inc. (FSLR), which expects to complete the installation of its panels by 2014, Princeton, New Jersey-based NRG said today in a statement. Terms of MidAmerican’s purchase weren’t disclosed.

Buffett’s foray into solar shows that utility-scale power plants offer good returns with little downside risk, said Paul Clegg, an analyst at Mizuho Securities USA in New York. Power from the plant, which won a $967 million loan guarantee from the U.S. Energy Department this year, will be sold to a PG&E Corp. utility under a 25-year contract at undisclosed prices.

“The utility contracts are favorable and solid,” Clegg said today in an interview. “Plus, they offer tax credits that may be useful to large, profitable companies.”

Increasing competition from China’s solar industry has cut panel prices by as much as 50 percent this year, leading First Solar to shift its focus to building larger scale power plants from selling panels to rooftop developers.

MidAmerican on Dec. 7 agreed to buy the entire $2 billion Topaz power plant in California from Tempe, Arizona-based First Solar. MidAmerican is a subsidiary of Omaha, Nebraska-based Berkshire Hathaway Inc. (BRK/A)

NRG rose 0.6 percent to $18.31 and First Solar rose 1.5 percent to $31.91 at the close of trading in New York. Berkshire fell $75 to $112,325.

To contact the reporter on this story: Christopher Martin in New York at

To contact the editor responsible for this story: Todd White at


Texas Gov. Perry Gets Pension in Addition to Salary

By Jonathan D. Salant and David Mildenberg - Dec 17, 2011 5:35 AM GMT+0700

Republican presidential candidate Rick Perry is receiving a Texas pension of more than $92,000 a year in addition to his almost $133,000 salary as governor, according to a financial disclosure statement released today.

Perry, 61, was first elected to the state Legislature in 1984 and served as agriculture commissioner and lieutenant governor before succeeding George W. Bush in the top job when the latter was elected president in 2000. Perry began receiving the pension of $7,698 a month, before taxes, beginning Jan. 31, said Ray Sullivan, a campaign spokesman.

“The combination of Governor Perry’s U.S. military service, state service and age exceeded the state-required 80 years and qualified him for the annuity,” Sullivan said. He said Perry continues to pay 6.5 percent of his salary into the state retirement system.

With U.S. unemployment topping 8 percent for 34 straight months, so-called double-dipping by tens of thousands of government workers nationwide has drawn greater scrutiny. Arkansas banned the practice this year and at least 10 states changed laws in 2010 dealing with government retirees who go back to work on public payrolls while collecting pension checks, according to the National Conference of State Legislatures.

Taking Advantage

“This makes Governor Perry look like a guy who will take advantage of the system and not stand on principle when it is to his own benefit,” said Adrian Moore, vice president of policy at the Reason Foundation, a Los Angeles-based nonprofit research organization that promotes free markets and limited government. “This is a benefit that was deliberately created for government and designed to allow double-dipping.”

A bill to block the practice in Texas, authored by Representative Kenneth Sheets, a Dallas Republican, failed to get out of a pensions committee before the legislative session ended in June. Sheets didn’t immediately respond to a message seeking comment on Perry’s pension.

In addition to his government roles in Texas, Perry served about five years in the U.S. Air Force.

Perry reported assets between $1.2 million and $2.4 million, primarily from a money market fund and a trust, both valued at between $500,000 and $1 million. Candidates need only to disclose their holdings in broad ranges.

In August, Perry ended his blind trust. His filings showed that his trust holdings included General Electric Co. (GE), ConocoPhillips (COP), Microsoft Corp. (MSFT) and Johnson & Johnson. (JNJ)

To contact the reporters on this story: Jonathan D. Salant in Washington at; David Mildenberg in Austin, Texas, at

To contact the editor responsible for this story: Mark Silva at


Zynga Declines in Trading Debut After $1B IPO

By Lee Spears and Douglas MacMillan - Dec 17, 2011 4:56 AM GMT+0700

Dec. 16 (Bloomberg) -- Max Wolff, an analyst at Greencrest Capital Management, talks about the outlook for Zynga Inc. and the company's relationship with Facebook Inc. The largest maker of games for Facebook declined in its first day of trading after raising $1 billion in an initial public offering that gave it greater valuation than rival Electronic Arts Inc. Wolff speaks with Lisa Murphy on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Dec. 16 (Bloomberg) -- Douglas Creutz, analyst at Cowen & Co., talks about Zynga Inc.'s initial public offering and the outlook for the company. Creutz talks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

Dec. 15 (Bloomberg) -- Bloomberg's Jon Erlichman reports on Zynga Inc.'s high-value customers, the amount of money players spend and the company's strategy. Zynga is the largest maker of games for Facebook Inc.’s website. Erlichman speaks on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Zynga Inc., the largest maker of games for Facebook, declined in its first day of trading after raising $1 billion in an initial public offering that gave it a greater valuation than rival Electronic Arts Inc. (ERTS)

The shares, listed on the Nasdaq Stock Market under the symbol ZNGA, fell 5 percent to $9.50. The developer of games such as “CityVille,” “FarmVille” and “Mafia Wars” sold 100 million shares for $10 each, the top end of a proposed range.

Zynga gets more than 90 percent of its revenue from Palo Alto, California-based Facebook Inc., and faces increasing competition from Electronic Arts, which bolstered its own online services by purchasing PopCap Games this year. Nexon Co., a Tokyo-based maker of games for Facebook including “Zombie Misfits,” slumped 15 percent this week after raising $1.2 billion in an IPO, Japan’s biggest this year.

“Zynga was offered at a pretty aggressive price relative to other game makers in the marketplace,” said Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank. “Anyone that has any affiliation with social media is getting bought up by an investing public that wants to be involved. And then reality hits.”

The offering is the biggest by a U.S. Internet company since Google Inc. (GOOG) raised $1.9 billion in its 2004 IPO, data compiled by Bloomberg show.

‘Growth Potential’

Zynga’s increasing ubiquity and expansion prospects appeal to investors, according to Colin Sebastian, an analyst at Robert W. Baird & Co. in San Francisco.

“Zynga and its games are becoming consumer brands, and there is a lot of recognition for growth potential,” he said.

Founded by Chief Executive Officer Mark Pincus in 2007, Zynga doubled sales to $829 million in the first nine months of 2011. The IPO valued Zynga at as much as $7 billion, or 6.8 times revenue in the year through Sept. 30. That’s more than three times rival Electronic Arts’ price relative to sales over the same period.

“We’re bigger believers in the future of play and social gaming than any other company and we wanted to be in a position that we had the resources to invest more in that future than any other company,” Pincus said in an interview today.

Electronic Arts, the Redwood City, California-based maker of “The Sims” and “Scrabble” for mobile devices, had a market value of $6.9 billion as of yesterday’s close, or about 1.8 times trailing 12-month sales.

Bigger Float

Zynga planned to offer about 14 percent of its common stock, according to a regulatory filing. That compares with less than 10 percent for companies including Groupon Inc., LinkedIn Corp., and Pandora Media Inc., which made their public debuts this year. Internet companies have used smaller free floats to boost initial demand for their stock, pushing the price higher.

Zynga sold all of the shares in the IPO, and plans to use net proceeds for game development, marketing and general corporate purposes, according to its filing.

Underwriters have an option to buy an additional 15 million shares to cover over-allotments, Zynga said in its statement. That may allow backers including Avalon Ventures, Foundry Group and Google to trim their stakes, according to the original terms of the offering. Venture firm Kleiner Perkins Caufield & Byers, Zynga’s biggest shareholder after Pincus, didn’t plan to sell shares in the IPO.

Groupon, Angie’s List

The market value Zynga sought in its IPO was less than a $14.1 billion fair-value estimate of the company’s worth as of August, according to the prospectus. The company settled on a price range after taking into account recent IPOs that underperformed, according to a Dec. 10 filing. Morgan Stanley and Goldman Sachs Group Inc. led Zynga’s offering.

Groupon, the Chicago-based provider of online coupons, raised $805 million in its IPO last month, including the over- allotment option. The shares, which surged as much as 31 percent in the first weeks of trading, have since fallen 12 percent from their high, based on yesterday’s close.

Angie’s List Inc., the Indianapolis-based operator of a consumer-reviews website, raised $132 million in its IPO last month, including an over-allotment. The stock surged in its first day of trading before falling as much as 11 percent below its offer price.

Both Groupon and Angie’s List are trading above their offer prices.

‘Too Rich’

Facebook, operator of the world’s largest social network, is examining a $10 billion IPO that would value the company at more than $100 billion, a person with knowledge of the matter said last month.

Sixty percent of the Internet or social-media companies that completed U.S. IPOs since 2010 are trading below offer price, Kevin Pleines, an analyst at Birinyi Associates Inc. in Westport, Connecticut, said in a Dec. 13 research note. Buyers of the shares at their opening trade in the public market have lost an average of 32 percent, Pleines said.

Zynga “shouldn’t be valued at three times what other companies in that space are valued at,” said Jeffrey Sica, chief investment officer of Morristown, New Jersey-based Sica Wealth Management LLC, which oversees $1 billion. “That’s why people looked at it as having a potential downside. Investors found it too rich.”

Zynga was also held back by “overall concern in the market,” said Sica, who nevertheless advised clients to buy the Zynga IPO. “An IPO investor can’t be oblivious of the environment the IPO is coming out in.”

To contact the reporters on this story: Lee Spears in New York at; Douglas Macmillan in New York at

To contact the editors responsible for this story: Jennifer Sondag at; Tom Giles at


France’s AAA Outlook Cut; Fitch Reviews Others

By Emma Ross-Thomas - Dec 17, 2011 7:13 AM GMT+0700
Enlarge image France’s AAA Outlook Cut as Fitch Reviews Italy, Spain

Customers use automated teller machines (ATM) at a BNP Paribas SA bank in Paris. Photographer: Balint Porneczi/Bloomberg

Dec. 16 (Bloomberg) -- Guillaume Menuet, a senior economist at Citigroup Global Markets Ltd., discusses France's credit rating and the euro-zone economy. He speaks from London with Louise Beale on Bloomberg Television's "Last Word." (Source: Bloomberg)

Dec. 16 (Bloomberg) -- Christian Schulz, a senior economist at Joh. Berenberg Gossler & Co., talks about the outlook for the role of the European Central Bank in the euro zone sovereign-debt crisis. Schulz speaks with Scarlet Fu on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

France’s credit outlook was lowered by Fitch Ratings, which also put the grades of nations including Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis.

Fitch affirmed France’s AAA rating and placed Spain, Italy, Belgium, Slovenia, Ireland and Cyprus on a “Rating Watch Negative” review, which it expects to complete by the end of January, according to a statement released yesterday in London. Belgium’s credit rating was cut two levels to Aa3 yesterday by Moody’s Investors Service.

The move by Fitch increases pressure on the region’s leaders to stem a two-year debt crisis that has seen bailouts of Greece, Ireland and Portugal. European Union leaders meeting this month in Brussels agreed to forge a tighter fiscal union as the thrust of their efforts, even as the European Central Bank resisted investor calls to ramp up its bond-buying program.

“Of particular concern is the absence of a credible financial backstop,” Fitch said in an e-mailed statement. “This requires more active and explicit commitment from the ECB.”

Without a full solution, Fitch said the crisis will persist, “punctuated by episodes of severe financial-market volatility that is a particular source of risk to the sovereign governments of those countries with levels of public debt, contingent liabilities and fiscal and financial sector financing needs that are high relative to rating peers.”

S&P Action

Standard & Poor’s on Dec. 5 placed the ratings of 15 euro nations on review for possible downgrade, including the region’s six AAA rated countries. Moody’s had said Dec. 12 it will review the ratings of all EU countries in the first quarter of 2012 because the Dec. 9 EU summit didn’t produce “decisive policy measures.”

The euro gained 0.2 percent to $1.3046 at 5 p.m. in New York, after gaining as much as 0.5 percent. It fell 2.5 percent this week, the biggest such decline since the five-day period ended Sept. 9.

Fitch’s decision “has been already factored in” by investors, said Jay Bryson, global economist for Wells Fargo Securities in Charlotte, North Carolina. “I would think that if it were a surprise there would have been a larger financial market reaction.”

“It’s justified,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s. “A solution to the crisis that maintains the euro as it is, is not tenable,” he said. “The euro must be shrunk dramatically.”

Odds of Reduction

A so-called ratings watch indicates a heightened probability of a rating change. Ratings outlooks show the direction a rating is likely to move over a one- or two-year period. A negative outlook indicates a “slightly greater than 50 percent chance of a downgrade over a two-year horizon,” Fitch said in its statement on France.

Fitch said it changed France’s outlook because of the “heightened risk of contingent liabilities” that may emerge from the escalating euro-region crisis. The country has almost run out of buffers to absorb shocks “without undermining its AAA status,” it said.

“The intensification of the euro zone crisis since July constitutes a significant negative shock to the region and to France’s economy and the stability of its financial sector,” the company said.

France ‘Determined’

France’s government is “determined to follow its actions for growth” and “in the reduction of the public deficit,” Finance Minister Francois Baroin said in an e-mailed statement after the decision.

EU leaders agreed to forge a tighter fiscal union, shore up the region’s bailout funds and tighten rules to curb future debts at the summit. The same week, ECB President Mario Draghi signaled that the Frankfurt-based bank wouldn’t step up its purchases of sovereign bonds, and instead expanded its liquidity measures for banks.

“This marks the beginning of a deep paradigm shift about the euro area, especially the implied underlying assumption of intra-EMU solidarity and ECB assistance,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “They now have to show that EMU is not an emperor without clothes.”

Moody’s cut Belgium’s rating two levels to Aa3 and said rising borrowing costs, slowing growth and liabilities arising from Dexia SA’s breakup threaten to inflate the euro area’s fifth-highest debt load.

Moody’s lowered Belgium’s debt rating to the fourth-highest investment grade, from Aa1, with a negative outlook, the ratings company said yesterday in a statement. The action follows S&P’s one-step downgrade of Belgium to AA on Nov. 25. Fitch Ratings put Belgium’s AA+ on review for a downgrade yesterday.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at

To contact the editor responsible for this story: Craig Stirling at


House Approves $1T Budget Measure

By Brian Faler - Dec 17, 2011 7:39 AM GMT+0700

Dec. 16 (Bloomberg) -- Al Hunt, executive editor at Bloomberg News, talks about Republican presidential candidate Newt Gingrich's performance in last night's debate in Sioux City, Iowa. Hunt, speaking with Scarlet Fu on Bloomberg Television's "InBusiness With Margaret Brennan," also discusses the budget agreement reached by lawmakers to avert a U.S. government shutdown and his interview with Representative Pete Sessions of Texas, which airs this weekend on “Political Capital with Al Hunt.” (Source: Bloomberg)

House Minority Leader Nancy Pelosi, D-Calif., Assistant Democratic Leader James Clyburn, D-S.C., and House Minority Whip Steny Hoyer, D-Md., hold a news conference Dec. 16, 2011, as Congress tries to reach a deal on unemployment insurance and payroll tax cuts. Photographer: Bill Clark/CQ Roll Call/Getty Images

The House passed a $1 trillion spending bill to avert a U.S. government shutdown even as lawmakers remain at odds over what to do about an expiring payroll-tax cut.

The House voted 296-121 for the measure, sending it to the Senate for action. A stopgap plan keeping federal agencies operating expires tonight. The government should be unaffected even if the Senate doesn’t complete work on the matter until tomorrow, said Majority Leader Harry Reid. Much of the government is closed tomorrow.

Lawmakers hailed the budget plan as a rare bipartisan compromise on spending in a year otherwise dominated by partisan and inconclusive debates over the budget deficit.

“After weeks of arduous negotiations on this package with our Senate counterparts, we’ve struck a fair, bipartisan compromise,” House Appropriations Committee Chairman Hal Rogers, a Kentucky Republican, said today. “No party got everything they wanted.”

The spending panel’s top Democrat endorsed the plan, calling it the sort of compromise demanded by divided government.

“It reflects the fact that neither party can pass this bill on its own in either the House or the Senate,” said Representative Norm Dicks, a Washington Democrat.

Eighty-six Republicans voted against the bill; 149 Democrats supported it.

Funding Government Operations

At issue is a 1,200-page measure funding the day-to-day operations of hundreds of government programs across 10 Cabinet agencies. The bill had been snarled in a dispute over how to extend a payroll-tax cut into 2012 as well as expanded unemployment benefits, which also expire at year’s end.

Democratic and Republican leaders in the Senate said last night they had agreed in principle to a plan to extend the payroll tax cut through February.

“It’s an agreement I can recommend to my conference,” said Senate Minority Leader Mitch McConnell, a Kentucky Republican. He said the Senate plans to vote on the agreement, which also extends jobless benefits, tomorrow morning. Senator Debbie Stabenow, a Michigan Democrat, confirmed that a short- term agreement was reached.

Last-Minute Changes

On the separate spending bill, lawmakers made some last- minute changes, including killing provisions targeting President Barack Obama’s Cuba policies. Republicans had included language blocking his decision to loosen restrictions on travel and sending money to the Communist country.

Florida Republicans such as Senator Marco Rubio blasted the decision, saying it would only shore up the Cuban government. “It limits access to hard currency to a really tyrannical regime,” said Rubio. Representative Mario Diaz-Balart said it would “sell out the long-suffering Cuban people to appease the ruthless Castro dictatorship.”

Representative Jose Serrano, a New York Democrat, said “the U.S. government should not be in the business of restricting travel to any country, no matter what the issues we have with their government.” He said “it is surreal to think that five decades after he took power, Fidel Castro is still a driving force in our national conversation.”

1,200-Page Bill

Some House members complained Republicans gave them two days to review the 1,200-page bill and didn’t release more than 1,000 pages of additional explanatory documents until last night.

“Not one of us has read every page in this bill,” said Representative Steny Hoyer, the chamber’s second-ranking Democrat. Representative Jeff Flake, an Arizona Republican, said “we’ll be discovering for months to come what’s actually in it.”

Though lawmakers were unable this year to cut entitlement programs or raise taxes to reduce the budget deficit, they agreed to cut the roughly 40 percent of the federal budget that must be approved each year by Congress.

“Make no mistake -- there are real cuts here,” said Representative Rosa DeLauro, the ranking Democrat on the appropriations subcommittee with jurisdiction over education, health care and labor programs.

Pell Grants

The bill cuts funding for Pell grants, which help 10 million Americans from low-income families attend college. Though the legislation maintains the current $5,550 maximum grant, it tightens eligibility standards by requiring recipients to have either a high-school diploma, GED or be homeschooled.

It cuts the maximum number of semesters students may receive grants to 12 from the current 18. Those changes may affect 250,000 Americans, according to a preliminary estimate by the American Council on Education, a Washington group that advocates for colleges and universities.

The bill also eliminates the six-month grace period students receive after they leave school during which they don’t have to pay interest on their student loans.

The administration’s Race to the Top program, which awards competitive grants to schools, would be reduced by 20 percent.

Foreign aid would decline, with the U.S. Agency for International Development’s budget cut by 17 percent, according to the Republicans’ summary. The Environmental Protection Agency would be cut by 3 percent, on top of reductions approved earlier this year. The Government Accountability Office, the investigative arm of Congress, would see a 6 percent reduction. The Internal Revenue Service would be cut by 2 percent.

Environmental Regulations

Democrats fended off a number of Republican initiatives, including proposals taking aim at environmental regulations and cutting federal funding for Planned Parenthood and NPR, the syndicator of public radio stations.

Republicans prevailed with language barring public funding of abortions in Washington, D.C. They also killed a Democratic proposal to increase the security fees charged to airline passengers. Airlines are charging more for checked baggage, Democrats complained, which was prompting more travelers to bring carry-on luggage and increasing the workload for the government’s security screeners.

To contact the reporter on this story: Brian Faler in Washington at

To contact the editor responsible for this story: Mark Silva at


Syron, Mudd Sued by SEC Over Subprime Disclosures While at Freddie, Fannie

By David Glovin and Joshua Gallu - Dec 17, 2011 3:40 AM GMT+0700
Enlarge image Ex-Freddie Mac, Fannie Mae Chiefs Sued by SEC Over Loans

Daniel Mudd, left, president and CEO of Fannie Mae and Richard Syron chairman and CEO of Freddie Mac listen to questions during a House Financial Services Committee hearing on Capitol Hill. Photographer: Mark Wilson/Getty Images

Dec. 16 (Bloomberg) -- Peter Wallison, co-director of financial policy studies at the American Enterprise Institute, talks about the U.S. Securities and Exchange Commission's lawsuits against former Fannie Mae Chief Executive Officer Daniel Mudd and the ex-CEO of Freddie Mac, Richard Syron, and the outlook for the government-sponsored enterprises. Wallison talks with Lisa Murphy on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Donald Bisenius, executive vice president of Freddie Mac, speaks during a Senate Banking Committee hearing. Photographer: Andrew Harrer/Bloomberg

Daniel Mudd, the former chief executive officer of Fannie Mae, and Richard Syron, ex-CEO of Freddie Mac, were sued by the U.S. Securities and Exchange Commission for understating by hundreds of billions of dollars the subprime loans held by the firms.

The lawsuits filed today in Manhattan federal court were followed by an SEC statement that it had entered into “non- prosecution agreements” with each company. Fannie Mae, the government-sponsored enterprise which issues almost half of all mortgage-backed securities, and Freddie Mac, the McLean, Virginia-based mortgage-finance company, had “agreed to accept responsibility” for their conduct, the SEC said.

The agency said in the lawsuits that Syron, Mudd and other executives understated exposure to subprime mortgage loans. From 2007 to 2008, Freddie Mac executives said the company’s exposure was from $2 billion to $6 billion when it was actually as high as $244 billion, according to one SEC complaint.

From 2006 to 2008, Washington-based Fannie Mae executives said the firm’s exposure to subprime mortgage and reduced- documentation loans was about $4.8 billion when it was almost 10 times greater, according to the regulator.

‘Told the World’

“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, director of the SEC’s enforcement division, said in a statement. “These material misstatements occurred during a time of acute investor interest in financial institutions’ exposure to subprime loans, and misled the market about the amount of risk on the company’s books.”

The lawsuits, which together name six former executives at the government-sponsored entities, come amid criticism from judges and lawmakers that the SEC hasn’t done enough to hold individuals responsible for misconduct related to the housing crisis and financial-market collapse that followed.

Fannie Mae, based in Washington, and Freddie Mac were seized and placed under U.S. control in 2008 as losses on soured loans pushed them to the brink of insolvency. The two have been sustained by more than $150 billion in U.S. aid. Congress and the Obama administration are examining plans for winding down the firms and building a new system for financing housing debt.

The two non-prosecution agreements require Freddie Mac and Fannie Mae to “accept responsibility” for their conduct and to cooperate with the SEC probe of the former executives.

Legal Fees

“Under the agreement, without admitting or denying liability, Fannie Mae has offered to accept responsibility for its conduct and to not dispute, contest or contradict a set of factual statements regarding the disclosures,” Fannie Mae said today in a securities filing.

“The SEC will not initiate an enforcement action against Freddie Mac or require the company to pay a monetary penalty,” the company said in a statement. Fannie Mae said in a statement that it is “pleased to bring the SEC inquiry to a close.”

At least part of the ex-executives’ legal fees will be covered by indemnification policies, said Michael Cosgrove, a spokesman for Freddie Mac, and Andrew Wilson, a spokesman for Fannie Mae. Cosgrove declined to comment on whether Freddie Mac will be responsible for covering a damage award. Wilson said it wasn’t clear if Fannie Mae will be responsible for damages.

In the suits against the former executives, the SEC wants financial penalties and disgorgement, and an order barring them from serving as officers or directors of other companies.

Fortress Investment Group

Also named as defendants are Patricia Cook, Freddie Mac’s former executive vice president; Donald Bisenius, ex-senior vice president at Freddie Mac; Enrico Dallavecchia, who was chief risk officer for Fannie Mae; and Thomas Lund, Fannie’s Mae’s former executive vice president.

Mudd, now CEO of Fortress Investment Group LLC (FIG), was ousted when Fannie Mae and Freddie Mac were seized by regulators in September 2008. In a statement, he said the U.S. government and investors were aware of “every piece of material data about loans held by Fannie Mae.”

“The government reviewed and approved the company’s disclosures during my tenure, and through the present,” Mudd said. “Now it appears that the government has negotiated a deal to hold the government, and government-appointed executives who have signed the same disclosures since my departure, blameless - - so that it can sue individuals it fired years ago.”

‘Thorough Review’

Fortress said in a statement that the complaint against Mudd “does not relate to Fortress, and this matter has not impacted our company or our business operations. We are undertaking a thorough review of the matters.”

Michael Levy, Lund’s attorney at Bingham McCutchen LLP in Washington, said his client “did not mislead anyone. During a period of unprecedented disruption in the housing market, nobody worked more diligently or honestly to serve the best interests of both investors and homeowners.”

Tom Green, Syron’s attorney at Sidley Austin LLP in Washington, said there was “no uniform definition” of “subprime” in 2007 and that Freddie Mac included in its disclosures tables detailing credit risks. “There was no shortage of meaningful disclosures,” he said in a statement.

Dallavecchia is now chief risk officer at PNC Financial Services Group. His lawyer, Kelly Kramer, said in a statement that Dallavecchia warned in 2007 that subprime loans “could infect the entire housing market” and made clear that “Fannie Mae’s credit risks were not limited to its subprime holdings.”

Easier Loans

Steven Salky, Cook’s lawyer at Zuckerman Spaeder LLP, and Walter Ricciardi, an attorney for Bisenius at Paul, Weiss, Rifkind, Wharton & Garrison LLP, didn’t immediately return calls for comment on the lawsuits.

Fannie Mae and Freddie Mac were created by Congress to encourage homeownership by making it easier for people to get loans. The firms now own or guarantee less than half of all U.S. mortgage debt, most of which they pool and sell on the secondary market.

During Mudd’s tenure as CEO of Fannie Mae, from 2004 through its government takeover in 2008, the firm expanded its business with lower-quality mortgages. Mudd said in a 2006 interview that he planned to expand the companies’ holdings to include more higher-risk loans. Anything else would be “counterproductive,” he told investors in March of that year.

In April 2007, Mudd said in testimony before lawmakers that the firm’s exposure to subprime loans “remains minimal, less than 2.5 percent of our book.”

At the same hearing, Syron, who ran Freddie Mac from 2004 to 2008, said his firm hadn’t “been heavily involved in subprime all along.”

Within 18 months, regulators seized Fannie Mae and Freddie Mac after losses on soured loans pushed them to the brink of insolvency.

The cases are SEC v. Syron, 11-cv-09201, and SEC v. Mudd, 11-cv-09202, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in New York federal court at; Joshua Gallu in Washington at

To contact the editors responsible for this story: Michael Hytha at; Lawrence Roberts at