Economic Calendar

Thursday, May 31, 2012

EU Weighs Direct Aid to Banks as Antidote to Crisis

By James G. Neuger - May 31, 2012 5:00 AM GMT+0700

The European Commission challenged Germany’s remedies for the financial crisis, calling for direct euro-area aid for troubled banks and demanding a path to common bond issuance.

The commission, the European Union’s central regulator, sided with Spain in proposing that the planned permanent rescue fund, the European Stability Mechanism, inject cash to banks instead of channeling the money via national governments.

Spain, the 17-nation euro area’s fourth-largest economy, is trying to simultaneously plug holes in regional budgets and detoxify its banks, all while struggling to lift the economy out of a recession. Photographer: Angel Navarrete/Bloomberg

May 30 (Bloomberg) -- European Commission President Jose Barroso speaks about the need for closer financial integration among member states. Economic and Monetary Affairs Commissioner Olli Rehn discusses Spain's deficit-cutting timetable. They speak at a news conference in Brussels. (Excerpts. Source: Europe by Satellite)

May 30 (Bloomberg) -- Bloomberg's Erik Schatzker reports that the European Commission called for direct euro-area aid for troubled banks and touted common bond issuance as an antidote to the debt crisis now threatening to overwhelm Spain. He speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

May 30 (Bloomberg) -- Bryan Marsal, co-founder of Alvarez & Marsal Inc., talks about the outlook for the U.S. banking industry and implementation of the Dodd-Frank Act. Marsal, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "InsideTrack," also discusses his tenure as Chief Executive Officer of Lehman Brothers Holdings Inc. and the European debt crisis. (Source: Bloomberg)

May 30 (Bloomberg) -- Luke Spajic, head of European credit portfolio management at Pacific Investment Management Co., talks about the role of the European Central Bank in stemming the sovereign debt crisis, Greece's euro prospects and his investment strategy. He speaks with Caroline Hyde on Bloomberg Television's "The Pulse." (Source: Bloomberg)

May 30 (Bloomberg) -- Simon Derrick, chief currency strategist at Bank of New York Mellon Corp., discusses the euro, yen and dollar. He speaks with Owen Thomas on Bloomberg Television's "First Look." (Source: Bloomberg)

“Flexibility and speed of action will be of the essence,” Jose Barroso, the commission’s president, said in Brussels yesterday. He sought “not only flexibility in terms of instruments, but also in terms of speed of reaction of the so- called firewalls, in this case of the ESM.”

Proposals for more liberal use of European bailout money face resistance in creditor countries such as Germany, Finland and the Netherlands, the scenes of growing taxpayer opposition to adding to the 386 billion euros ($479 billion) already pledged to fight the crisis.

Germany showed no signs of easing its stance, as Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, told reporters in Berlin that “the German position on the direct recapitalization of banks out of the European rescue funds is known.”

Signs of stress multiplied in financial markets. Investors relinquished returns for security, sending the yield on German two-year notes to zero. Italy’s 10-year yield rose above 6 percent for the first time since January and Spain’s 10-year yields approached 7 percent.

The euro tumbled to as low as $1.2386, the lowest in almost two years.

Bank Aid

The commission packaged the bank-aid ideas along with a call for a European deposit-insurance program, designed to break the spiral of faltering governments and failing banks. It said it will make concrete proposals for common bond issuance -- also opposed by northern European donor countries -- and singled Spain out as the only country entitled to more time to cut its budget deficit.

Spain, the 17-nation euro area’s fourth-largest economy, is trying to simultaneously plug holes in regional budgets and detoxify its banks, all while struggling to lift the economy out of a recession.

‘Sever the Link’

Current EU plans call for the 500 billion-euro ESM to funnel bank-aid money through national governments and, ultimately, require those governments to pay it back. Direct recapitalizations by the fund “might be envisaged” and would “sever the link between banks and the sovereigns,” the commission said in a staff working paper.

Any discussion of creating that power would come once the permanent fund gets going in July, the commission said. A makeover of the fund’s aid tools requires a unanimous vote of the euro area’s 17 finance ministers, though ratification by national parliaments wouldn’t be needed.

Germany is spearheading resistance to direct European financing for banks because that would let governments bypass the conditions set for full aid programs, such as deeper budget cuts and more European intrusion into economic management. Finland is in Germany’s camp, Martti Salmi, a Finance Ministry official, said in a telephone interview.

Banking Union

The commission appealed for a “banking union” that would more tightly integrate supervision and create a pool of European funds to clean up banks with cross-border exposure and segregate their underperforming assets.

“It’s hard enough to bail out local banks let alone non- domestic banks,” said Harvinder Sian, a London-based fixed- income strategist at Royal Bank of Scotland Group Plc. (RBS) “A crisis lesson so far is that big ideas coming from Brussels or the guys taking the money are noise up until the point that the Germans get on the same page.”

Part of the solution lies in “correct and transparent risk recognition” instead of putting off the reckoning, the commission said. In the wake of the European Central Bank’s unprecedented 1 trillion euros in long-term loans, some banks are still using the funds to buy sovereign bonds, binding them more closely to financially shaky governments, the commission said.

Watchful ECB

The central bank’s “accommodative” monetary policy with interest rates at 1 percent limits its scope for spurring the economy, the commission said. It estimated on May 11 that the euro economy will contract 0.3 percent in 2012.

In an assessment by staff economists, the commission said there is little room for deficit-plagued countries to push back planned savings to a later date. Such an easing-up would be punished by markets, it said.

“Member states which face high and potentially rising risk premia do not have much room for maneuver to deviate from their nominal fiscal targets, even if macroeconomic conditions turn out worse than expected,” according to the document.

Still, Economic and Monetary Commissioner Olli Rehn said Spain might be granted an extra year, until 2014, to bring its deficit down to the limit of 3 percent of gross domestic product.

Spain deserves that mercy -- denied to France and the Netherlands -- because it is the only euro-area country likely to still be in recession in 2013, Rehn said. The concession will only come if Spanish Prime Minister Mariano Rajoy’s government delivers a “solid, two-year budget plan for 2013 and 2014,” he said.

The commission, which gained new powers to police national budgets in response to the crisis, is trying to crack down on deficits without imposing policies that crimp the economy.

“Credibility of consolidation is one of the key factors,” the staff paper said.

Euro Bonds

The commission kept alive the debate over common borrowing by euro-area governments, already rejected by Merkel as at best a goal for the long term and not a way out of the current turmoil.

Debate over euro bonds flared at last week’s summit of European leaders, the first for French President Francois Hollande after he took office vowing to challenge the German- dominated budget-cutting creed that has marked the crisis response.

Ideas include a debt-redemption fund proposed by Germany’s council of economic advisers and different types of “stability bonds” sketched out by the commission last year. The commission is now working on more concrete proposals.

Passage of a deficit-limitation treaty and the adoption of two laws that further enhance central oversight of national budgets will help pave the way toward common bond sales, the commission said.

The commission is only asking for “a roadmap and a timetable, but an early confirmation of the steps to be taken will underscore the irreversibility and the solidity of the euro,” Barroso said.

To contact the reporter on this story: James G. Neuger in Brussels at

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


Pending Sales of U.S. Homes Decrease by Most in a Year

By Shobhana Chandra - May 31, 2012 4:14 AM GMT+0700

The number of Americans signing contracts to buy previously owned homes fell in April by the most in a year, indicating the U.S. housing recovery remains uneven.

The index of pending home resales dropped 5.5 percent following a revised 3.8 percent gain the prior month, figures from the National Association of Realtors showed today in Washington. The median forecast of 42 economists surveyed by Bloomberg News called for no change in the measure.

Real estate agents with a prospective buyer in Miami. Photographer: Joe Raedle/Getty Images

May 29 (Bloomberg) -- Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller index of property values in 20 U.S. cities, talks about the housing market. The index fell 2.6 percent from a year earlier after a 3.5 percent drop in February, the group reported today in New York. Shiller, speaking with Tom Keene on Bloomberg Television's "Surveillance Midday," also talks about Facebook Inc. (Source: Bloomberg)

May 24 (Bloomberg) -- Douglas Yearley, chief executive officer of Toll Brothers Inc., talks about the luxury-home builder's second-quarter profit and outlook for the U.S. housing market. Net income was $16.9 million, or 10 cents a share, for the three months through April, compared with a loss of $20.8 million, or 12 cents, a year earlier, the company said. Yearley speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

A PulteGroup Inc. sign advertises homes for sale in the Lyon's Gate neighborhood of Gilbert, Arizona. Photographer: Joshua Lott/Bloomberg

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Mortgage rates at record lows failed to sustain the pace of demand as some buyers may have waited for home prices to decline further. Limited access to credit and persistent foreclosures still weigh on housing, adding to concern it will remain a source of weakness for the world’s largest economy.

“The pattern of demand is sluggish and volatile,” said Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, who projected a decline. “Until the supply issue is resolved, we could see further declines in prices and the housing market will continue to hover around the bottom. It’ll be a gradual improvement, we don’t expect anything stronger than that.”

Estimates in the Bloomberg survey ranged from a drop of 4.3 percent to a rise of 3.1 percent. The Realtors group revised March data from a previously reported gain of 4.1 percent.

Stocks fell after the figures and on concern Greece will leave the euro. The Standard & Poor’s 500 Index (SPX) declined 1.4 percent to 1,313.32 at 4 p.m. in New York. The yield on the benchmark 10-year Treasury note tumbled 12 basis points to 1.62 percent at 5 p.m. after touching 1.6085 percent, the lowest in Federal Reserve figures going back to 1953.

Three Regions Decline

Three of four regions saw a decrease, today’s report showed. That included a 12 percent slump in the West and a 6.8 percent decline in the South. Pending purchases rose in the Northeast.

Compared with a year earlier, the index climbed 14.7 percent after a 10.5 percent gain in the prior 12-month period.

Pending home sales provide insight into actual contract closings a month or two later. Purchases of existing homes, which made up about 93 percent of the housing market last year, are tabulated when the contract closes.

Other figures signal demand is improving. New-home purchases, also logged when contracts are signed, climbed 3.3 percent to a 343,000 annual rate in April, a Commerce Department report showed May 23.

April Sales

Data the previous day showed sales of existing homes increased 3.4 percent to a 4.62 million annual rate, with gains in all four regions.

The Realtors group revised this year’s forecast to 4.66 million previously owned home sales, up from 4.26 million in 2011. It projects 4.92 million purchases in 2013.

Toll Brothers Inc. (TOL) is among the builders reporting growth in orders. Second-quarter profit at the Horsham, Pennsylvania- based company exceeded analysts’ estimates as orders surged 47 percent from a year earlier.

“We are feeling better than we have at any time in the past five years,” Chairman Robert Toll said on a May 23 earnings call. “We would like to say we’re back, but we need a little more confirmation. Nonetheless, it sure feels good compared to the desert we’ve just crossed.”

Borrowing costs remain attractive. The average rate on a 30-year fixed mortgage fell to an all-time low of 3.78 percent in the week ended May 24, according to Freddie Mac data going back to 1971. The average 15-year rate held at 3.04 percent, also a record low, the McLean, Virginia-based mortgage-finance company said.

A real estate agents group’s affordability index, which is based on a combination of resale prices, household income and mortgage rates, reached a record high in the first quarter, a report showed this month.

To contact the reporter on this story: Shobhana Chandra in Washington at

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


Zuckerberg Drops Off Billionaires Index as Facebook Falls

By David de Jong - May 31, 2012 3:33 AM GMT+0700

Mark Zuckerberg, Facebook (FB) Inc.’s co- founder and chief executive officer, is no longer one of the world’s 40 richest people.

The 28-year-old’s fortune fell to $14.7 billion yesterday from $16.2 billion on May 25, as shares of the world’s largest social-networking company dropped 9.6 percent. They slipped another 2.3 percent today to $28.19. That extended the stock’s losses to 26 percent from the worst-performing large initial public offering in the past decade and cut Zuckerberg’s net worth to $14.4 billion.

Mark Zuckerberg, chief executive officer and founder of Facebook Inc. Photographer: David Paul Morris/Bloomberg

May 30 (Bloomberg) -- Mark Zuckerberg, Facebook Inc.'s co-founder and chief executive officer, is no longer one of the world's 40 richest people, according to the Bloomberg Billionaires Index. Linzie Janis and Mark Barton report on Bloomberg Television's "Countdown." (Source: Bloomberg)

May 29 (Bloomberg) -- Brian Wieser, a senior analyst at Pivotal Research Group LLC, talks about the outlook for Facebook Inc. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

May 29 (Bloomberg) -- Bobby Heller, an options trader at On Point Executions LLC, talks about options trading in Facebook Inc. shares. Facebook fell to a new low, extending losses from the worst-performing large initial public offering during the past decade to more than 23 percent. Heller speaks with Matt Miller on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

May 29 (Bloomberg) -- Tom Forte, director and senior research analyst at Telsey Advisory Group, talks about the outlook for Facebook Inc. and ways the social networking company can increase its mobile advertising revenue. Forte speaks with Adam Johnson on Bloomberg Television's "InBusiness." (Source: Bloomberg)

May 29 (Bloomberg) -- Walter Isaacson, biographer of late Apple Inc. co-founder Steve Jobs and chief executive officer of the Aspen Institute, talks about Mark Zuckerberg, chief executive officer of Facebook Inc., and the social networking company's stock performance. Isaacson speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

May 30 (Bloomberg) -- Bloomberg's Betty Liu reports that Mark Zuckerberg, Facebook Inc.’s co-founder and chief executive officer, is no longer one of the world’s 40 richest people on the Bloomberg Billionaires Index. The 28-year-old’s fortune fell to $14.7 billion yesterday from $16.2 billion on May 25, as shares of the world’s largest social-networking company dropped 9.6 percent to $28.84. She speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

“It seems to be a clear reflection that there was just too much stock issued, that the valuation was aggressive and that a lot of people who lined up to buy it really had no intention of holding it,” Jack Ablin, chief investment officer of BMO Harris Private Bank in Chicago, said yesterday in a telephone interview. The bank oversees about $60 billion of assets.

Facebook shares closed at $38.23 on May 18, the first day they began trading, giving Zuckerberg a net worth of $19.4 billion. The Menlo Park, California-based company ended the day with a price-earnings ratio of 83.1, making it more expensive than 99 percent of Standard & Poor’s 500 Index (SPX) stocks. The company went public as the equity index was heading for its biggest monthly decline since September.

Facebook options trading began yesterday, with volume for puts exceeding calls by 1.2 to 1, data compiled by Bloomberg show. More than 200,000 puts were traded yesterday, giving the holder the right to sell the shares at a specified price. June $30 calls were the most active contracts today, with volume at 22,896. They were followed by June $28 puts and June $29 puts.

To contact the reporter on this story: David De Jong in New York at

To contact the editor responsible for this story: Matthew G. Miller at


Apple CEO Says TV Is ‘Intense Focus,’ Sees Closer Facebook Ties

By Douglas MacMillan - May 30, 2012 12:32 PM GMT+0700

Apple Inc. (AAPL) Chief Executive Officer Tim Cook said that television is an area of “intense focus” for the company as it seeks to add products that can build on the success of Macs, iPhones and iPads.

“This is an area of intense focus for us,” Cook said of TV in an on-stage interview yesterday at the D10 conference in Rancho Palos Verdes, California. “We’re going to keep pulling this string and see where it takes us.”

Apple CEO Tim Cook. Photographer: Kevork Djansezian/Getty Images

May 29 (Bloomberg) -- Bloomberg’s Emily Chang reports on Tim Cook’s performance at Apple. She speaks on Bloomberg Television’s “Bloomberg West.” (Source: Bloomberg)

May 30 (Bloomberg) -- Shaw Wu, an analyst at Sterne Agee & Leach Inc., talks about Apple Inc. Chief Executive Officer Tim Cook's remarks about television yesterday at the D10 conference in Rancho Palos Verdes, California, and the outlook for the company. Wu speaks with Adam Johnson on Bloomberg Television’s “InBusiness.” (Source: Bloomberg)

May 30 (Bloomberg) -- Sandy Shen, an analyst at Gartner Inc. in Shanghai, talks about Samsung Electronics Co.'s new Galaxy S III smartphone and how it compares to Apple Inc.'s iPhone 4S. Shen speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

May 30 (Bloomberg) -- In today's "Movers & Shakers", Bloomberg's Erik Schatzker reports that during an appearance Tuesday night at the D10 Conference, Apple CEO Tim Cook hinted at `incredible' new products amid speculation that Apple TV will be available later this year. He speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

May 30 (Bloomberg) -- Bloomberg's Doug MacMillan reports that Apple CEO Tim Cook hinted at great things in the company’s future at last night's D10 Conference. Cook comments referred to television, Facebook and possible U.S. production of the iPhone. He speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

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Apple co-founder Steve Jobs, before he died last year, told his biographer that he had “finally cracked” how to build a TV with a simple user interface that would wirelessly synchronize content with Apple’s other devices. The company is working on a television that may be unveiled this year and released in 2013, according to Gene Munster, an analyst at Piper Jaffray Cos.

Apple turned to Jeff Robin, the software engineer who built the iTunes media store and helped create the iPod, to lead its development of a TV set, people with knowledge of the product said last year.

The company sells a set-top box called Apple TV that lets customers stream video from Apple products or the Internet to their TVs. Still, that device has yet to gain wide acceptance, and Apple executives have called it a “hobby.”

During the conference, put on by the AllThingsD technology blog, Cook said that Apple has “great appreciation” for Facebook Inc. (FB), the largest social-networking service.

“The relationship is very solid,” he said. “We have great respect for them. I think we can do more with them. Stay tuned on this one.”

Takeovers, Transparency

In the wide-ranging interview, Cook also said that Apple remains on the lookout for acquisitions, though it’s not currently seeking a large-sized deal. He also said that it’s possible that more manufacturing of his company’s products will happen in the U.S. The iPhone, Apple’s best-selling device, might one day be assembled in the U.S., he said.

Much of the manufacturing and assembly of Apple products takes place in factories in Asia, which have come under criticism for treatment of workers. Cook said yesterday that the company is moving toward greater transparency in areas such as supplier responsibility and environmental sustainability.

Even as the company discloses more in those areas, it will redouble efforts to keep products under wraps while they are still under development, Cook said.

Responding to criticism that Apple’s Siri voice- recognition service has functioned improperly for some users, Cook said Apple is working to improve the technology.

Siri, IAd

“There’s more that it can do, and we have a lot of people working on this, and I think you’ll be really pleased with some of the things that you’ll see over the coming months,” Cook said.

Cook also said that the company’s iAd online advertising effort wasn’t essential to Apple’s future, which would remain centered on hardware.

“When I was talking about the things at Apple that make up the four legs of the stool, I didn’t mention that one,” Cook said, referring to Macs, iPods, iPhones and iPads.

Before becoming CEO last year, Cook was Apple’s chief operating officer, leading the company’s vast supply chain. He joined the company in 1998 from Compaq Computer Corp. and was instrumental in managing the operational side of Apple’s business while long-time CEO Jobs concentrated on product development and marketing.

The company’s gross margins of 47 percent last quarter are more than double those of rivals Hewlett-Packard Co. (HPQ) and Dell Inc. (DELL)

Jobs Woos Cook

The interview comes ahead of Apple’s annual Worldwide Developers Conference. The company is slated to unveil a new line-up of Mac laptops, as well as show off new features for the latest mobile operating system that powers the iPad and iPhone, people with knowledge of the matter have said.

A new iPhone, which accounts for more than half the company’s sales, is expected to be unveiled by October, according to analysts, includingMunster.

Cook also spent part of the interview reflecting on Jobs, who recruited him from Compaq when he had no intention of leaving the rival computer maker. After ignoring numerous calls from executive recruiters working on behalf of Apple, Cook agreed to meet with Jobs on a Saturday morning, he said.

Jobs discussed his vision for iMac computers and sold him on the company’s ambitious plans to sell to consumers, he said.

“Five minutes into the conversation, I wanted to join Apple,” Cook said. “He painted a story, a strategy, that he was taking Apple deep into consumer at a time when I knew that other people were doing the exact opposite. And I’ve never thought following the herd was a good strategy.”

“I went back and resigned immediately,” he said.

To contact the reporters on this story: Douglas MacMillan in San Francisco at

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


Wednesday, May 30, 2012

Dewey & LeBoeuf Files for Bankruptcy, Fails to Save Firm

By Linda Sandler, Sophia Pearson and Joe Schneider - May 30, 2012 5:06 AM GMT+0700

Dewey & LeBoeuf LLP, the law firm that advised Los Angeles Dodgers LLC on restructuring, filed for bankruptcy after its chairman was ousted and almost all partners quit as creditors began suing for unpaid bills.

Dewey, based in New York, listed debt of $245 million and assets of $193 million in a Chapter 11 filing yesterday in U.S. Bankruptcy Court in Manhattan.

The Dewey & LeBoeuf LLP offices in New York. Photographer: Scott Eells/Bloomberg

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The firm, which had more than 1,300 attorneys in 12 countries after the 2007 merger of Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & McRae LLP, now has 150 employees in the U.S. to wind it down, Jonathan A. Mitchell, the firm’s restructuring officer, said in court papers. Dewey will be liquidated, he said.

Dewey & LeBoeuf “was formed at the onset of one of the worst economic downturns in U.S. history,” wrote Mitchell, who works for the restructuring adviser Zolfo Cooper Management LLC. “These negative economic conditions, combined with the firm’s rapid growth and partnership compensation arrangements, created a situation where the cash flow was insufficient to cover capital expenses and full compensation expectations.”

Dewey hired Togut, Segal & Segal LLP as bankruptcy counsel. It is closing offices in Hong Kong, Beijing, Sao Paulo, London, Paris, Madrid, Frankfurt and Johannesburg. All U.S. offices have been closed or are closing. The firm is recovering equipment and artwork and securing client records, according to the filing.

Failed Merger

Dewey’s plan to save part of its business through a merger was dealt “a body blow” when the Manhattan District Attorney said he was probing possible wrongdoing at the firm, Dewey’s bankruptcy lawyer Al Togut told U.S. Bankruptcy Judge Martin Glenn at a court hearing today. Dewey has no reason to believe that money was stolen, Togut said.

Dewey, which has been collecting bills to pay lenders, had about $13.4 million of cash in its bank accounts on May 25, according to a U.S. budget published in a court filing. Cash could rise by June 25 to $30.3 million as more clients of the law firm pay their bills, according to the filing.

Expenses in coming weeks will include $375,000 for rent on the 10th floor of Dewey’s Manhattan headquarters including storage space; $340,000 per week of restructuring costs for lenders and $58,000 a week for a so-called dissolution committee, according to Dewey’s budget.

Dewey has accounts receivable and work in progress in the U.S. valued at $255 million, according to filings. The firm has historically collected about 95 percent of its accounts receivable and converted 84 percent of work-in-progress to accounts receivable, it said.

Collection Rates

“It is unlikely the debtor will attain historical collection rates on its accounts receivable,” according to the filing. “The Chapter 11 process will enable the debtor to maximize collections on its accounts receivable in the most effective and expeditious manner as possible.”

Dewey owes secured banks and bondholders $225 million, with an additional $50 million owed to secured property lessors and $40 million in accounts payable, pension and deferred compensation claims and claims by employees for accrued paid time off, it said.

The law firm said it consolidated its bank debt on April 16, issuing $150 million of notes. From Jan. 1 to March 30, about 20 percent of the firm’s equity partners resigned or left, it said. As of last week, at least 250 of Dewey’s 304 partners had found new jobs.

“These partner departures led to a continuing cycle of decreased potential revenues, which itself caused further partner attrition,” Mitchell said.

District Attorney Probe

On or about April 27, the office of the chairman advised the partnership it had learned that the office of Manhattan District Attorney Cyrus Vance Jr. was investigating allegations of wrongdoing by Steven Davis, Dewey’s former sole chairman, the firm said. People who approached the district attorney didn’t identify themselves or provide the firm with any evidence, it said. Davis was removed from all leadership roles on April 29.

The firm’s creditors include bank lenders owed at least $75 million and bondholders owed $150 million. Other creditors range from partners who got pay guarantees worth about $100 million to the firm’s janitors, who have sued for about $300,000 in unpaid bills.

To save money, Dewey plans to hold a series of so-called omnibus hearings where creditors and other parties can make requests to the judge, according to filings. No dates have been set for those hearings.

In a series of amendments to its agreements with banks and bondholders staring in April, Dewey pledged more and more assets and potential claims to secured lenders, according to the filings.

First Claims

Those lenders now have first claim on everything from daily cash receipts, promissory notes, expense compensation -- whether billed or not -- and insurance payments, to equipment, equity in affiliates, trademarks and legal claims from any effort to recover payments to former partners, the filings show.

Unsecured creditors might try to take back the extra collateral that went to banks and bondholders, saying they received so-called preferential payments ahead of other creditors that aren’t allowed by law, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky.

“If a secured creditor gets additional security and doesn’t give anything in return, that constitutes a preference payment,” he said. “Generally it’s 90 days before a bankruptcy.”

Banks could argue they gave Dewey valuable advantages in exchange for the collateral, including continued use of their cash and forgiveness of Dewey for defaulting on its loan covenants, he said.

What’s ‘Value’

“It comes down to an argument about what constitutes value,” he said.

Jennifer Zuccarelli, a spokeswoman for JPMorgan Chase & Co. (JPM), agent for secured bank lenders, didn’t immediately respond to an e-mail seeking comment on Bowles’s remarks about collateral.

Dewey’s U.K. affiliate is guarantor to its parent’s obligations under the bank line and bond issue, having pledged current and future assets to the lenders, filings show.

In the U.K. yesterday, BDO LLP business restructuring partners Mark Shaw and Shay Bannon were appointed administrators over the unit that operates Dewey’s London and Paris offices, BDO said in a statement.

Separately in the continuing exodus, Dewey’s South African team of lawyers joined the rival law firm Baker & Mackenzie, which today announced the opening of a new Johannesburg office.

Like Chicago Fire

“The Dewey debacle has all the orderly progression of the Great Chicago Fire,” said Ed Reeser, a former managing partner for the Los Angeles office of Sonnenschein Nath & Rosenthal LLP, who’s now a consultant. Including a bankruptcy, he said, “I wouldn’t be surprised if the wind-down took a minimum of six to seven years. It could take 10.”

Dewey & LeBoeuf was the result of a merger between Dewey Ballantine, a firm dating from 1909 whose most famous partner was two-time Republican presidential candidate Thomas E. Dewey, and LeBoeuf Lamb Greene & MacRae. Created to enter the club of powerhouse international law firms, Dewey collapsed amid a culture characterized by a lack of disclosure and controls where an inner circle of partners reaped most of the rewards.

“The combination of outsized debt and widely spread pay guarantees divorced from performance put the firm in a situation with almost zero margin for error,” said Bruce MacEwen, a lawyer and law-firm consultant at Adam Smith Esq. LLC in New York. “Markets have a habit of punishing firms in that posture.”

Biggest to Fail

Dewey, which at the time of the merger had revenue of more than $900 million, is the biggest U.S. law firm to fail, Reeser said. Other firms that have collapsed, including Brobeck, Phleger & Harrison LLP in 2003 and Heller Ehrman LLP in 2008, are still unwinding their debts and obligations, Reeser said.

More than 50 former Dewey partners have hired lawyer Mark Zauderer of Flemming Zulack Williamson Zauderer LLP to protect their interests, he said. He’ll do such things as sue former managers or defend his clients from lawsuits to claw back pay they received, according to a person familiar with his hiring.

Dewey’s bondholders are mainly insurance companies, including London-based Aviva Plc (AV/)’s U.S. subsidiary, which owned $35 million in Dewey bonds at the end of last year, said Aviva spokesman Kevin Waetke.

Aviva’s holding bonds was the biggest on a list of insurance companies disclosing the investment in the U.S., according to SNL Financial LC, which provides data to financial companies. Hartford Financial Services Group Inc. owned about $20 million of Dewey bonds, SNL said. Hartford has since sold its bonds, said Thomas Hambrick, a spokesman for Hartford.

Bond Prices

Dewey’s privately placed bonds, which trade sparsely, were quoted at 45 cents to 55 cents on the dollar earlier this month, according to a May 3 report by CRT Capital Group LLC, which buys and sells distressed debt, including Dewey’s.

Some of Dewey’s former partners were the beneficiaries of pay guarantees that totaled about $100 million a year for about 100 partners, including as much as $6 million a year for a select few, said people familiar with Dewey’s finances. Those guarantees are now worth no more than 8 cents on the dollar, if anything.

For example, Dewey’s executive director, Stephen DiCarmine, had a deal putting his salary and bonus at $2 million a year, said a person who wasn’t authorized to comment on these matters and didn’t want to be identified.

Effect of Liquidation

In a liquidation, partners with guaranteed pay become unsecured creditors, ranking equal to, or below trade creditors, said Stephen Lubben, a bankruptcy law professor at Seton Hall University in Newark, New Jersey.

Vendor claims against Dewey, also known as trade paper, are being quoted at 5 cents to 8 cents on the dollar, said Joseph Sarachek, managing director of claims trading at CRT. That category includes a unit of ABM Industries, which provided janitorial services at Dewey’s offices at 1301 Avenue of the Americas in New York, and sued the firm for about $300,000 in unpaid bills, according to a complaint filed in New York State Supreme Court in Manhattan.

The firm laid off 533 nonunion workers at its Manhattan building on May 15, according to a notice on the New York State Department of Labor website. A lawsuit filed earlier by Vittoria Conn, a former document specialist, claims Dewey fired workers without giving them adequate notice required by federal and state laws. The Pension Benefit Guaranty Corp. sued the firm on May 14 to take over pension plans covering 1,776 lawyers and staff.

Partner Suits

In a bankruptcy, Dewey partners could be sued for pay taken when the firm was already insolvent, or for taking work begun at Dewey to other firms, lawyers said.

Defections at Dewey reached about 50 in early April, topping 120 in May. The five-man chairman’s office, announced on March 26, featured the heads of the firm’s most profitable groups, including Martin Bienenstock, Rich Shutran, Jeffrey Kessler and Charles Landgraf. All those four quit. The fifth member, Steven Davis, was ousted on April 29.

Kessler went to Winston & Strawn LLP with about 20 other Dewey litigation partners; Shutran, head of the corporate group, took four partners to O’Melveny & Myers LLP; Proskauer Rose LLP took Bienenstock, who ran the restructuring group, with five colleagues; and Landgraf, known as a Washington lobbyist, joined Arnold & Porter LLP.

Dewey was doomed as soon as partners, its main assets, started walking out of the doors this year, said Chip Bowles, a bankruptcy lawyer with Bingham Greenebaum Doll LLP in Louisville, Kentucky.

“When a law firm fails, it’s like a dam bursting,” Bowles said. “It starts with a trickle of partners leaving, and what’s coming in isn’t enough to cover expenses, and the trickle speeds up,” he said. Soon, “the leaders start leaving and it bursts and floods.”

The case is In re Dewey & LeBoeuf, 12-12321, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Linda Sandler in New York at; Sophia Pearson in Philadelphia at; Joe Schneider in Sydney at

To contact the editor responsible for this story: John Pickering at;


S&P 500 Rises on Greece as Home Data Signal Stability

By Rita Nazareth - May 30, 2012 3:35 AM GMT+0700

U.S. stocks rose, after the first weekly gain since April in the Standard & Poor’s 500 Index, as Greek opinion polls eased concern the country will leave the euro and data signaled the American housing market stabilized.

All 10 industries in the S&P 500 advanced as commodity and technology companies had the biggest gains. Builders D.R. Horton Inc. and PulteGroup Inc. (PHM) increased at least 2 percent as data showed that home values in 20 U.S. cities declined at a slower pace. Caterpillar (CAT) Inc., Bank of America Corp. (BAC), Alcoa Inc. (AA) climbed more than 2.8 percent. Facebook Inc. (FB) tumbled 9.6 percent, extending losses from the worst-performing large initial public offering during the past decade to 24 percent.

May 29 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks rose, after the first weekly gain since April in the Standard & Poor’s 500 Index, as Greek opinion polls eased concern the country will leave the euro and data signaled the American housing market stabilized. (Source: Bloomberg)

May 29 (Bloomberg) -- Bloomberg’s Trish Regan, Adam Johnson and Matt Miller report on today’s ten most important stocks including Bankia, Tata Motors and Facebook. They speak on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

The S&P 500 advanced 1.1 percent to 1,332.42 at 4 p.m. New York time. The gauge added 1.7 percent last week. The Dow Jones Industrial Average increased 125.86 points, or 1 percent, to 12,580.69 today. About 6.2 billion shares changed hands on U.S. exchanges, or 8.6 percent below the three-month average.

“We’re definitely seeing signs of stabilization on the housing front,” said Brad Sorensen, director of market and sector analysis at San Francisco-based Charles Schwab Corp. His firm has $1.83 trillion in client assets. “The economy is looking decent. There’s also a bit of relief that we won’t have any imminent kicking out or defaulting of Greece.”

American equities joined a global rally. Greece’s New Democracy, which supports the austerity plan negotiated with international lenders, placed first in all six polls published on May 26 as campaigning continued for June’s election. The U.S. market was closed yesterday for a holiday. Home values in 20 U.S. cities fell in the 12 months ended March at the slowest pace in more than a year.

Spain’s Downgrade

Benchmark gauges briefly pared gains as the euro weakened to the lowest level versus the dollar in almost two years on concern that Spain’s financial crisis is worsening. Egan-Jones Ratings Co. reduced its credit rating for Spain to B from Bb-. The 17-nation currency fell against most of its major counterparts as Spanish officials debated how to fund a recapitalization of the Bankia group.

Today’s rally trimmed this month’s slump in the S&P 500 to 4.7 percent. The benchmark gauge is heading for its biggest monthly retreat since September, amid concern global economic growth is slowing and Greece may leave the euro area.

The Morgan Stanley Cyclical Index of companies most-tied to the economy increased 2 percent. A gauge of homebuilders in S&P indexes added 1.9 percent. D.R. Horton gained 2.5 percent to $17.43. PulteGroup advanced 2 percent to $9.52. Caterpillar, the biggest maker of construction equipment, added 2.9 percent to $92.52. Bank of America added 4.1 percent to $7.44. Alcoa increased 3 percent to $8.89.

Coal Companies

Coal producers gained after Goldman Sachs Group Inc. raised its recommendation for the industry to attractive from neutral. Peabody Energy Corp. (BTU), the largest U.S. coal producer, jumped 5.6 percent to $25.22 as Goldman recommended buying the shares. Consol Energy Inc. added 1.8 percent to $30.13.

Facebook lost 9.6 percent to $28.84. The company’s options trading began today. Facebook debuted on May 18 after underwriters sold shares at $38.

“People are disillusioned,” said Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati. He doesn’t own shares of Facebook. “A lot of investors believed the hype,” he said. “In this type of volatile market environment, people are not going to take chances.”

Vertex Pharmaceuticals Inc. (VRTX) tumbled 11 percent, the most since 2008, to $57.80. The company revised results reported three weeks ago from a study of two cystic fibrosis drugs, saying the combination showed less of a benefit.

Western Digital

Western Digital Corp. (WDC) slumped 3 percent, the most in the S&P 500, to $33.17. The maker of disk drives was downgraded at Barclays Plc. The share price estimate is $37. Seagate Technology Plc (STX), also cut at Barclays, dropped 4.4 percent to $25.03.

Stock buybacks are falling to a three-year low just as U.S. chief executive officers boost spending on plants and equipment to a record.

Companies announced $1.1 billion of repurchases a day on average during the earnings season in April and May, the lowest level since mid-2009, according to data compiled by Bloomberg and TrimTabs Investment Research Inc. Capital spending in the U.S. has risen since 2010 and reached $63.6 billion in March. Devon Energy Corp. (DVN) eliminated buybacks and boosted exploration and production spending 18 percent. United Parcel Service Inc. cut repurchases in order to buy TNT Express NV.

After the biggest first-quarter gain for the S&P 500 since 1998, bears say the 58 percent decline in buybacks removes key support for equities amid Europe’s debt crisis and a weakening U.S. recovery.

More Optimistic

While orders for capital equipment fell last month, bulls say the two-year gain in business investment shows CEOs are growing more optimistic, spending to raise profits instead of reducing stock to boost per-share earnings.

“Investors and corporations themselves are best served when the cash is applied to improving capital investment, as opposed to buying stock back,” Bruce Bittles, chief investment strategist at Milwaukee-based Robert W. Baird & Co., which oversees $85 billion, said in a May 22 phone interview. “That would be much more bullish.”

To contact the reporter on this story: Rita Nazareth in New York at

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


Oil Trades Near Weekly Low as U.S. Supplies Seen Rising

By Ben Sharples - May 30, 2012 9:13 AM GMT+0700

Oil fell for a second day, heading for the biggest monthly drop in two years, before a report that may show stockpiles climbed to the highest level since 1990 in the U.S., the world’s biggest crude user.

Futures slid as much as 0.5 percent. U.S. inventories rose 800,000 barrels to 383.3 million last week, according to the median estimate of eight analysts in a Bloomberg News survey before the Energy Department report tomorrow. Prices dropped yesterday after Spain’s credit rating was cut and BNP Paribas SA reduced its 2012 forecast for West Texas Intermediate oil.

“Demand out of the U.S. and the euro zone has been very soft,” David Lennox, an analyst at Fat Prophets in Sydney, said in a telephone interview. “For the foreseeable future, barring any supply-side shocks, oil will stay around $90 a barrel. If there’s going to be any movement, it’s not likely to be up.”

Crude for July delivery decreased as much as 45 cents to $90.31 a barrel in electronic trading on the New York Mercantile Exchange, and was at $90.34 at 12:07 p.m. Sydney time. The contract yesterday slid 10 cents to $90.76, the lowest close since May 24. Prices are down 14 percent this month, the biggest drop since May 2010.

Brent oil for July settlement fell 43 cents, or 0.4 percent, to $106.25 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract’s premium to West Texas Intermediate was at $15.91, from $15.92 yesterday.

Fuel Supplies

Oil in New York has long-term technical support at $89.83 a barrel, according to data compiled by Bloomberg. On the weekly chart, that’s the 50 percent Fibonacci retracement of the drop to $32.40 in December 2008 from an intraday record high of $147.27 in July that year. Buy orders tend to be clustered near chart-support levels.

U.S. gasoline stockpiles probably fell 250,000 barrels last week, according to the Bloomberg survey before tomorrow’s Energy Department report. Distillate supplies, a category that includes heating oil and diesel, will likely remain unchanged at 119.5 million barrels, the survey shows.

The American Petroleum Institute will release separate inventory data today. The API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

U.S. gasoline at the pump fell below year-earlier levels for the sixth straight week, the Energy Department said in a weekly retail report yesterday. The national average price for regular gasoline dropped 4.5 cents to $3.669 a gallon from a week earlier, it said.

Oil Forecast

BNP Paribas cut its 2012 price forecast for New York crude by $7 to $100 a barrel, and its estimates for Brent by $4 to $115 a barrel, as Europe’s debt crisis worsened, according to an e-mailed report. Prices will still advance in the third quarter because of sanctions against Iran and shrinking spare production capacity in the Organization of Petroleum Exporting Countries, the bank said.

Oil fell yesterday as the euro slid toward an almost two- year low after Egan-Jones Rating Co. cited a deteriorating economic outlook in Spain for its decision to lower the nation’s sovereign credit rating to B from BB-. A weaker European currency increases the cost of crude priced in dollars.

To contact the reporter on this story: Ben Sharples in Melbourne at

To contact the editor responsible for this story: Alexander Kwiatkowski at


Aussie Dollar Drops Versus Peers After Retail Sales Fell

By Kristine Aquino - May 30, 2012 9:10 AM GMT+0700

Australia’s dollar slid versus all of its 16 major peers after retail sales in the nation unexpectedly dropped, boosting speculation the Reserve Bank will have more scope to lower borrowing costs.

The so-called Aussie headed for its biggest monthly decline in eight months against the greenback as bets the central bank will cut its key rate damped demand for the currency. Australia’s three-year yields tumbled to a record. New Zealand’s dollar, known as the kiwi, fell versus its U.S. and Japanese peers after building permits in the country dropped in April. Both South Pacific currencies also slid as Asian stocks retreated.

The retail data were “certainly worse than expected,” said Callum Henderson, global head of currency research at Standard Chartered Plc in Singapore. “The market is in risk-off mode and, as such, is continuing to look to sell into rallies in the higher-yielding currencies including the Aussie.”

Australia’s dollar fell 0.6 percent to 97.89 U.S. cents as of 12:08 p.m. in Sydney. It lost 0.6 percent to 77.80 yen. New Zealand’s currency declined 0.5 percent to 75.95 cents. It dropped 0.5 percent to 60.38 yen.

Bonds Rally

Australian bonds rose, pushing the 10-year yield down by four basis points, or 0.04 percentage point, to 3.1 percent. The three-year yield touched 2.313 percent, the least in data compiled by Bloomberg going back to 1990. New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, climbed 3.75 basis points to 2.53 percent.

The kiwi has dropped 7.2 percent versus the greenback since April 30, the worst performance among 16 major counterparts of the U.S. dollar, according to data compiled by Bloomberg. The Aussie has fallen 6.1 percent, poised for its biggest slide since September.

The MSCI Asia Pacific Index of shares slumped 1.3 percent, snapping a two-day advance.

Retail sales in Australia declined 0.2 percent in April from a month earlier, after a revised 1.1 percent advance in March, the Bureau of Statistics said today. The median prediction in a Bloomberg News survey was for a 0.2 percent climb.

Twenty five of 28 economists in a separate poll predict RBA Governor Glenn Stevens will hold the overnight cash rate target at 3.75 percent at the next central bank meeting on June 5. Interest-rate swaps data compiled by Bloomberg show traders are certain policy makers will reduce the benchmark next week, with a better than 30 percent chance they will lower it to 3.25 percent.

In New Zealand, home building approvals declined 7.2 percent in April from a month earlier after a revised 19.6 percent gain in March.

To contact the reporter on this story: Kristine Aquino in Singapore at

To contact the editor responsible for this story: Garfield Reynolds at


Spain Delays and Prays That Zombies Repay Debt: Mortgages

By Sharon Smyth and Neil Callanan - May 30, 2012 3:01 AM GMT+0700

Spanish banks are masking their full exposure to soured property loans while they continue to prop up zombie developers, leading to credit-rating downgrades and plummeting share prices.

Spain is working to clean up its banks, requiring lenders set aside more for possible losses on loans deemed performing to developers like Metrovacesa SA (MVC), which hasn’t completed a project in more than a year and has none under way. While that represents about 30 billion euros ($38 billion) of increased provisions, it’s not enough because many loans said to be performing aren’t being repaid, according to Mikel Echavarren, chairman of Irea, a Madrid-based finance company specializing in real estate.

Signs advertise properties for sale in Madrid. Photographer: Denis Doyle/Bloomberg

May 29 (Bloomberg) -- Filipe Correia da Silva, head of Spanish and Portuguese equities at CA Cheuvreux, talks about Spain's financial system and debt crisis. CA Cheuvreux is part of the Credit Agricole Group. He speaks Erik Schatzker and Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Unfinished homes on a stalled residential housing project in Avila, Spain, May 15, 2012. Photographer: Angel Navarrete/Bloomberg

Empty apartment blocks line a street at the Sesena residential development near Madrid. Photographer: Santi Burgos/Bloomberg News

Construction equipment lies abandoned near unfinished homes on a stalled residential housing project in Avila. Photographer: Angel Navarrete/Bloomberg

Irea Chairman Mikel Echavarren said, “Spain has engaged in a policy of delay and pray.” Photographer: Jes┼ôs de la Plaza/Un pez vivo via Bloomberg

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“Spain has engaged in a policy of delay and pray,” Echavarren said in an interview. “The problem hasn’t been quantified by anyone because there is huge pressure not to tell the truth.”

The Economy Ministry says that Spanish banks have 184 billion euros of developers’ loans and assets that are “problematic,” while the remaining 123 billion euros are performing. The need for more reserves to cover losses on the loans can’t be ruled out, Nomura International analysts Daragh Quinn and Duncan Farr said in a May 14 report. If Spain took losses on developer loans like Ireland did, Spanish banks would need 8.9 billion euros under the best case to 76.5 billion euros of additional provisions in the worst scenario, Nomura estimates.

Bank Downgrades

Bankia, which Spain nationalized this month, said on May 25 it will seek 19 billion euros of state funds after it made 5.5 billion euros of provisions for non-developer loans, mostly home mortgages and company borrowing. Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s biggest lenders, were among 16 of the country’s banks downgraded earlier this month by Moody’s Investors Service, which cited a recession and the increase in non-performing loans to real-estate companies.

Many Spanish banks are avoiding property sales so they don’t have to make mark to market valuations, which reflect current prices. Instead, they’re giving developers new loans to pay debt coming due to prevent defaults, said Ruben Manso, an economist at Mansolivar & IAX and a former Bank of Spain inspector.

“The larger banks have been selling bits and pieces and can absorb the losses,” Manso said. “Smaller savings banks are acting in bad faith in their refusal to allow transactions and saying they can’t mark to market because there isn’t one.”

A spokeswoman for CECA, the association for Spanish savings banks, said the group can’t comment on the banks’ commercial policies. She declined to be identified, citing the association’s policy.

Largest Developer

Metrovacesa, once Spain’s largest developer, is typical of the industry, according to Manso. The Madrid-based company, which once owned HSBC Holdings Plc’s London headquarters and had about a 50 billion-euro market value, was taken over by creditors in 2009 after its largest shareholder struggled to service billions of euros of debt.

Santander, BBVA, Banco Espanola de Credito SA, Banco Popular SA (POP), Banco Sabadell SA (SAB) and Bankia, canceled 2.2 billion euros of debts owed by the Sanahuja family in return for about 55 percent of Metrovacesa and purchased a further 10.8 percent of the stock in a deal that valued the company at 57 euros a share. The banks now own about 96 percent of Metrovacesa.

Losses Since 2008

Santander and its Banesto unit, which now own about 35 percent of Metrovacesa, value the stake at 772 million euros, or 2.24 euros a share, according to a spokesman for Santander, who declined to be identified citing company policy. In 2009 and 2011, they made provisions of 269 million euros and 100 million euros against their holding, according to a 2011 report by Santander’s auditor.

Metrovacesa has racked up 1.8 billion euros of losses since 2008. It has debt of 5.1 billion euros and property assets valued at 3.9 billion euros.

“The banks have made writedowns in their Metrovacesa stakes, but they haven’t taken the full hit,” Manso said.

Metrovacesa trades at 39 cents a share, valuing the company at about 385 million euros. UBS AG downgraded the shares to sell on May 22 and changed its target price to 32 cents. In August, its lenders renegotiated the terms of 3.6 billion euros of its debt, extending maturities on 2.47 billion euros of obligations and granting a five-year grace period for interest payments on 1.12 billion euros of loans.

High Occupancy

“Having no controlling stake in Metrovacesa means that its creditor banks don’t have to consolidate the company’s debt or assets and contaminate their own balance sheets,” Manso said. “There are hundreds of cases like Metrovacesa out there, albeit smaller in size, and this distorts the official amount of real estate and bad developer loans that banks profess to have.”

Metrovacesa isn’t a zombie, said a company spokesman, who declined to be identified, citing company policy. Metrovacesa has projects in mind, but the market doesn’t allow homebuilding, he said. The company’s rental assets have an occupancy rate of more than 90 percent, he added.

Santander, Spain’s largest bank, fell 2.4 percent to 4.30 euros at the close of trading in Madrid, compared with a 2.3 percent decline for the nation’s IBEX 35 Index. BBVA fell 2.6 percent to 4.64 euros. Shares of Bankia (BKIA), Spain’s third-largest bank, fell 16 percent to 1.14 euros.

Credit Swaps

The cost of protecting Spanish government debt from losses with credit-default swaps rose 2 basis points to a record 561 basis points, according to data compiled by Bloomberg.

As the yield on Spain’s 10-year bond approaches levels that led to bailouts in Ireland, Portugal and Greece, the Spanish government’s latest steps may not be enough to restore confidence in the country’s banks. Spain’s economy, the euro area’s fourth-largest, has been mired in a recession with 24 percent unemployment after a decade-long, debt-fueled property boom similar to the one in Ireland that ended in 2008.

Prices in Spain “probably haven’t reached the bottom yet, so it would be prudent for them to add in another cushion against the prospect of a further property market price fall,” Irish Bank Resolution Corp. Chairman Alan Dukes said in a May 16 interview. “The situation can change for the worse very rapidly.”

Irish Bank Resolution was formed in 2011 through a merger of Anglo Irish Bank Corp., the country’s third-biggest lender prior to the economic collapse, and Irish Nationwide Building Society. The Anglo Irish side of the bank expected to need 1.5 billion euros of new capital when it was nationalized at the beginning of 2009. By the end of March, the figure had swelled to 4 billion euros, according to Dukes. The Dublin-based bank’s total losses have been estimated to be as much as 28 billion euros when it’s finally wound down.

Before the Crash

Before Ireland’s real-estate crash, banks including Anglo Irish avoided getting appraisals to avoid bringing them before audit committees, according to four people familiar with the matter, who declined to be identified because the information is private.

Anglo Irish gave developers capital to finish projects in 2008 using personal loans. That way, the bank’s primary loan would continue to appear as performing, Irish developer Simon Kelly, who together with his family owes banks 800 million euros, said in a phone interview.

“The Irish property market had to collapse like the Spanish one because the economy was collapsing,” Kelly said. “Spain is looking like a re-run.”

More than half of Spain’s 67,000 developers can be categorized as “zombies,” according R.R. de Acuna & Asociados, a real-estate consulting firm. They have combined debt of 180 billion euros that will lead to 104 billion euros of losses that hasn’t been fully provisioned for, Acuna estimates.

Assets Worth Less

“They aren’t officially bankrupt because they have been refinanced time and time again,” Fernando Rodriguez de Acuna Martinez, a partner at the company, said by telephone. “Their assets are worth much less than their liabilities, they struggle to repay loans and they haven’t revaluated them to reflect today’s prices.”

In Ireland three years ago, developer Liam Carroll’s Ronnie Rentals Ltd. was forced to value its assets to market prices. Accumulated losses at the company more than trebled to 541 million euros in the six months through March 2009 after it provisioned for all known liabilities and anticipated losses, according to accounts filed last year with Ireland’s Companies Registration Office.

The Bank of Spain allows loans that are refinanced before turning delinquent and interest-only loans to be considered “normal” or “performing” on banks’ books, according to Manso.

Masking Delinquency

“You won’t find that data anywhere,” Manso said. “There has been a lot of cheating going on where banks have lent developers new money, classed as new lending, so they can pay off their original loans.” That’s masking delinquency, he said.

Refinancing the current and future zombie developers will cost 30 billion euros over the next two years, according to Acuna. The depreciation of those developer assets from 2012 onwards will generate a further 20 billion euros of losses in that time, he said.

The Bank of Spain doesn’t publish data on the amount of restructured developer loans or interest-only paying loans that are classed as normal. The bank closely monitors refinancing to ensure that arrears aren’t being hidden, said a spokeswoman for the Bank of Spain who declined to be identified.

High Occupancy

Spanish Economy Minister Luis de Guindos said on May 23 that provisioning from the new rules stood at 84 billion euros and coverage of all assets related to developer loans is now 45 percent, far higher than the European average and the 18 percent coverage before the regulations.

“The government has taken very significant steps, but I don’t believe they have fully recognized the deterioration,” Manso said.

Echavarren’s Irea brokered the refinancing of a 200 million-euro loan two years ago for a developer. After two more rounds of refinancing, there is about 180 million euros left on the loan and it’s classified as performing, he said, without identifying the company.

“The probability that this loan will be paid when it comes due is zero,” Echavarren said. “There are dozens of similar cases.”

Spain’s government and banks need to be more like their counterparts in Ireland and be more forthcoming about loan losses, according to Echavarren. He forecasts that the larger Spanish banks with income from international operations will be able to pay for domestic real-estate losses within two years. The rest can’t take such a hit and will have to be nationalized, he said.

“We cannot continue to jeopardize the whole financial system by not telling the truth,” Echavarren said.

To contact the reporters on this story: Sharon Smyth in Madrid at; Neil Callanan in London at

To contact the editors responsible for this story: Andrew Blackman at; Rob Urban at