Economic Calendar

Wednesday, March 14, 2012

Zynga Plans $400 Million Share Sale in Secondary Offering

By Hugo Miller and Jonathan Erlichman - Mar 14, 2012 7:37 PM GMT+0700

Zynga Inc. (ZNGA), the social-gaming company that held its initial public offering in December, is planning a secondary offering of $400 million, saying it will improve the distribution of its stock.

The share sale is being underwritten by Morgan Stanley (MS) and Goldman Sachs Group Inc., as well as Bank of America Merrill Lynch (MER), Barclays Capital, Allen & Co. and JPMorgan Chase & Co., the San Francisco-based company said in a regulatory filing today. Zynga won’t receive any proceeds from the offering.

March 13 (Bloomberg) -- Carter Mack, president of JMP Group Inc., talks about the potential benefits of an additional share offering for Zynga Inc. and the outlook for the social gaming company. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

The move is designed to let investors sell some stock while getting large shareholders to agree to a longer “lockup” period that keeps them from unloading shares, three people familiar with the plan have said.

Zynga, which gets most of its revenue from Facebook Inc. (FB) users, is trying to avoid the fate of LinkedIn Corp. (LNKD), which saw its stock drop following the expiration of its lockup period in November, said two of the people. Company insiders are typically forbidden from unloading shares for six months after an IPO, in part to keep sell orders from flooding the market. Zynga’s new offering will be held before its lockup ends in June, they said.

To contact the reporters on this story: Hugo Miller in Toronto at; Jonathan Erlichman in New York at

To contact the editor responsible for this story: Ville Heiskanen at


London Shops Vanish After $1.2 Billion Olympic Payout

By Chris Spillane and Katie Linsell - Mar 14, 2012 6:04 PM GMT+0700

Tony Freail closed his window- dressing business after the world’s biggest sporting event landed outside his workshop in London’s East End. Seven years later, with the Olympic Games less than five months away, he’s still looking for full-time employment.

Freail’s former workplace was demolished as part of the construction of the velodrome, the potato-chip shaped venue where Britain’s Chris Hoy will try to retain three cycling gold medals; the International Broadcast Centre, the base for 20,000 journalists; and the Copper Box, which hosts handball. The opening ceremony of the U.K.’s biggest competition since the 1966 soccer World Cup takes place July 27.

An estate agents board offers commercial property 'To Let' on units at Fish Island, close to the London 2012 Olympic Park site in London. Photographer: Jason Alden/Bloomberg

H. Forman & Son's original factory, built in 2003, was demolished to accommodate the 80,000-seat, white-steel framed Olympic Stadium. Photographer: Jason Alden/Bloomberg

Owner of H. Forman & Son Lance Forman said, “In cases like this, there’s a danger of sacrificing your business. There was no certainty that everything that they thought would be compensated was actually going to be compensated.” Photographer: Jason Alden/Bloomberg

The company name of H. Forman & Son is seen on the exterior of their new factory on Fish Island, close to the London 2012 Olympic Park site in London. Photographer: Jason Alden/Bloomberg

An employee adjusts a row of smoked salmon fillets as they hang on racks at H. Forman & Son's new factory on Fish Island, close to the London 2012 Olympic Park site in London. Photographer: Jason Alden/Bloomberg

“Once we got the Games, everyone knew it was going to be a nightmare,” Freail said by telephone. “It was a horrible feeling knowing that a year later, you were going to be offered an amount and told to leave. It meant I couldn’t carry on.”

The London Development Agency spent about 735 million pounds ($1.2 billion) to buy land and compensate businesses that owned or leased space at the site that will be used for the Olympics, according to the development agency’s latest accounts. The strategy hasn’t prevented more than 100 companies from going out of business or becoming untraceable after the owners were forced to vacate the 246-hectare (608-acre) site that will be used for the Olympics, public records show.

Fast-Food Companies

Most of these businesses, which range from auto-repair shops to fast-food manufacturers, depended on local customers. As a result, the money they received from the agency didn’t make up for the cost involved in moving to another location and building up a new client base, according to Juliet Davis, a researcher at the London School of Economics, who wrote a paper on the event’s legacy of urban regeneration.

London beat bids from Paris, Madrid, New York and Moscow in 2005 to win the Games after the organizers, led by former gold medalist Sebastian Coe, told the International Olympic Committee that the two-week event would rejuvenate the area. Since then, abandoned railways, wasteland and offices have made way for stadiums, homes and Europe’s largest urban shopping mall.

LDA documents show that about 460 companies were paid for their portion of the area, which will be renamed Queen Elizabeth Olympic Park after the Games. More than 50 of those went into liquidation or were dissolved, according to Companies House, a register of businesses in England and Wales. Another 50 cannot be traced using public records.

“We would have survived there,” Barry Bell, who closed his car-maintenance yard on the Olympic site, said by telephone. “We had enough business to work there and our customers around us wouldn’t have moved. We didn’t know if we were turning left or right at the time.”

Opening Ceremony

The event will be held in Newham, a borough with about 270,000 residents that had the lowest average income in London in 2010 and the eighth lowest in England that year, according to a survey by the Department of Communities and Local Government.

The migration of businesses from the Olympic Park to other parts of the surrounding boroughs of Newham, Tower Hamlets, Waltham Forest and Hackney caused commercial rents to rise in those neighborhoods, said Davis of the LSE.

“Compensation didn’t recognize market forces,” Davis said by phone. “Anyone running a tight ship because they’re a small business found it quite hard. They had to be able to commit to a new lease that was going to cost two or three times more than their site had been worth.”

Forced Sales

A government minister can force landowners to sell their property if they can’t agree on a fee with the LDA, according to the Department for Communities and Local Government.

The compensation is set by an independent organization and covers disruption caused by the Games, loss of earnings and the value of their land and property interests, according to the London agency. It doesn’t cover the cost of replacing old equipment.

“The London Development Agency went over and above its statutory obligations,” the organization said in an e-mail. “The LDA has compensated firms at the market rate.”

The agency recorded 208 businesses that relocated from the Olympic Park site, according to a Freedom of Information Act request by Bloomberg News. The agency has no record of what happened to those businesses.

Smaller businesses were hurt most because they lacked the time and resources to conduct negotiations and take part in legal proceedings with the agency, the LSE’s Davis said.

Beijing’s Water Cube

London’s Olympic organizers hope to avoid pitfalls of the 2004 summer Games in Athens and the Beijing Olympics in 2008, where facilities have been underused.

In China, the iconic Water Cube needed government sports funding to break even after falling 11 million yuan ($1.7 million) short from its commercial activities alone, deputy manager Yan Qiyong told China Daily in January. Athens has leased six of the 22 venues used in the Games, according to Public Properties Company SA and Hellinikon SA.

The idea that the Olympics can be used as an economic catalyst in the host city may be misguided, said Constantine Kontokosta, a New York University Schack Institute of Real Estate researcher who has looked at performance of the Olympic Games over the last six years.

“We found some negative results in L.A., Atlanta and Calgary,” he said of previous Olympic hosts. “The residential real-estate values in the city underperformed compared with comparable cities over the same time period.”

Some, like Lance Forman, moved nearby when his 107-year-old H. Forman & Son salmon-smoking business had to make way for the Games. His factory, built in 2003, was demolished to accommodate the 80,000-seat, white-steel-framed Olympic Stadium.

Royal Customer

Forman, whose customers include the U.K.’s royal family and London department store Fortnum & Mason, rebuilt his pink and black colored facility on Fish Island a few hundred meters away from the Olympic Stadium on the banks of the river Lea.

“The negotiations were fraught,” Forman, a Cambridge University graduate, said by telephone. “In cases like this, there’s a danger of sacrificing your business. There was no certainty that everything that they thought would be compensated was actually going to be compensated.”

Most small businesses in London attract customers from within a 5- to 10-mile area only, according to Federation of Small Businesses spokesman Matthew Jaffa.

“When they get relocated, they’re stepping out of that comfort zone and losing the customer base they built up over the years,” Jaffa said by phone. “A company that was thriving has to go back to being a startup.”

Failed Businesses

Many of the businesses in the area were industrial, something Newham Mayor Robin Wales wants to change in a regeneration that spreads from Stratford to Canning Town by London’s City Airport.

“High tech and science industries are what we want to bring to the area,” Wales said in an interview last week. “We want jobs that are sustainable. London is moving eastwards.”

London had the highest percentage of businesses failing in the whole of the U.K. in 2010 with 15 percent of companies going out of business, according to a December 2011 report by the Office for National Statistics.

Bell, a 47-year-old company director, was given 60,000 pounds for the site where his automobile garage was. He closed the operation after failing to find a new site with similar rents to what he was paying in the city’s East End.

To stay in business, Bell had to leave London and move 12 miles (19 kilometers) to Rainham, Essex, where his rent has doubled. He also had to purchase new equipment as regulations prevented him using his old equipment.

Freail was less fortunate. After closing the business in 2006, he sold his tools and equipment for a loss to avoid paying storage costs. The 62-year-old was compensated 50,000 pounds by the LDA with the caveat that he couldn’t start up the same business within 30 miles of London for at least five years.

“The East End lost out big time,” he said. “I felt gutted at the time, but that’s the way the cookie crumbles.”

To contact the reporters on this story: Chris Spillane in London at; Katie Linsell in London at

To contact the editor responsible for this story: Andrew Blackman at


Goldman Sachs Employee Criticizes Firm for Ripping Off Clients

By Ambereen Choudhury and Christine Harper - Mar 14, 2012 6:35 PM GMT+0700

A departing Goldman Sachs Group Inc. (GS) employee mounted an unprecedented public attack on its “toxic and destructive” culture in a New York Times opinion piece, becoming the first serving insider to openly criticize the firm.

Greg Smith, identified by the newspaper as an executive director and head of the firm’s U.S. equity derivatives business in Europe, will leave the firm after 12 years, blaming Chief Executive Officer Lloyd Blankfein and President Gary Cohn for losing hold over the firm’s culture. Executive directors are junior to managing directors and partners, the most senior rank.

Pedestrians walk past Goldman Sachs Group Inc. headquarters in New York. Photographer: Jin Lee/Bloomberg

March 14 (Bloomberg) -- Bloomberg's Erik Schatzker, Stephanie Ruhle, Sara Eisen and Scarlet Fu report on an opinion piece in today's New York Times written by Greg Smith, a departing employee from Goldman Sachs, attacking the firm's culture. They speak on Bloomberg Television's "Inside Track." (Source: Bloomberg)

“I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients,” Smith, a Stanford University graduate, wrote in the New York Times. “It’s purely about how we can make the most possible money off of them.”

The attack adds to criticism from politicians and protesters who blame the company for triggering the financial crisis and profiting at clients’ expense. Goldman Sachs has already faced congressional hearings probing its role in the financial crisis and paid $550 million in 2010 to settle a lawsuit accusing it of misleading investors in a collateralized debt obligation.

“This will certainly be damaging for the firm,” said John Purcell, founder of London-based executive search firm Purcell & Co. “It’s obviously a very heartfelt piece. Maybe he’s made a sufficient amount of money in his life that he isn’t particularly bothered if he isn’t employed in financial services again and works in a completely different world like teaching.”

‘Makes Me Ill’

A call to Smith’s mobile phone in London wasn’t immediately answered. Goldman Sachs said it disagreed with his criticism.

“In our view, we will only be successful if our clients are successful,” the firm said in a statement. “This fundamental truth lies at the heart of how we conduct ourselves.”

“It makes me ill how callously people talk about ripping their clients off,” Smith wrote. “‘Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.”

Smith blamed the company’s management for promoting employees who persuaded customers to buy products that were either money losing or unprofitable for the firm, and traders of opaque products.

“Culture was always a vital part of Goldman Sachs’s success,” he wrote in the New York Times. “It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients,” he said. “It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm.”

Goldman Sachs’s score was among the lowest in a recent study of corporate reputations, according to a Feb. 13 statement from Harris Interactive Inc., a market research firm.

To contact the reporters on this story: Ambereen Choudhury in London at

To contact the editor responsible for this story: Edward Evans at


European Stock Futures Climb; Metals, Chinese Stocks Fall

By Stephen Kirkland and Lynn Thomasson - Mar 14, 2012 7:46 PM GMT+0700

European stocks rose, the dollar strengthened and 10-year Treasury yields climbed to a four-month high after the Federal Reserve bolstered confidence in the U.S. banking system and raised its economic assessment. Copper fell after China signaled it would keep curbs on housing sales.

The Stoxx Europe 600 Index (SXXP) jumped 0.6 percent at 8:45 a.m. in New York. Standard & Poor’s 500 Index futures were little changed after the gauge closed yesterday at the highest since June 2008. The dollar rose against all 16 major peers. The U.S. 10-year yield increased for a sixth day, its longest advance since October 2010. The cost of insuring against default on European company debt declined to the lowest in more than seven months. Gold extended its drop to 4 percent in three days.

A financial trader uses a telephone as he works at his computer screens at the Frankfurt Stock Exchange in Frankfurt. Photographer: Ralph Orlowski/Bloomberg

March 13 (Bloomberg) -- Kevin Lecocq, global chief investment officer at Deutsche Bank Private Wealth Management, discusses European and Chinese equities and the outlook for emerging markets. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

March 13 (Bloomberg) -- Charles Morris, who oversees the Absolute Return fund at HSBC Global Asset Management, discusses his recommendation for investing in Japan, U.S. technology stocks and gold. He speaks with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

March 14 (Bloomberg) -- Richard Anthony, head of derivatives and equities at BGC Partners LP, talks about investment strategy, the outlook for U.S. stocks and the euro. Anthony speaks with Erik Schatzker, Sara Eisen and Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The Fed said yesterday that strains in global financial markets have eased and the labor market is gathering strength. In a separate statement, the central bank said 15 of the nation’s largest 19 banks may keep adequate capital levels even in a recession. European industrial output rose 0.2 percent in January from the previous month. Chinese Premier Wen Jiabao said relaxing property curbs could cause “chaos” in the market.

“The economy is holding up slightly better than anticipated and that has carried on into this quarter,” said Lucy MacDonald, the chief investment officer for global equities at RCM Ltd., which manages about $128 billion. “That’s quite encouraging.”

Banks Rally

The Stoxx 600 (SXXP) advanced for a second day as two shares gained for every one that declined. Barclays Plc and Credit Suisse Group AG led a rally in bank stocks, climbing more than 4 percent. The results of the Fed’s stress tests showed that almost three years of economic expansion have helped U.S. banks raise profits, rebuild capital and increase liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008.

The Markit iTraxx Europe Index of credit-default swaps on 12 companies with investment-grade ratings fell 3.75 basis points to 125.75 basis points, the lowest since Aug. 2.

EON AG (EOAN), Germany’s largest utility, jumped 6.7 percent as earnings exceeded analysts’ estimates. Legal & General Group Plc surged 4.8 percent after the fourth-biggest U.K. insurer by market value boosted its dividend as full-year profit rose.

The Fed said that it expects “moderate economic growth” and predicted the unemployment rate “will decline gradually.” In their last statement in January, policy makers said growth would be “modest” and unemployment “will decline only gradually.”

Highest Since 2007

Futures on the Dow Jones Industrial Average were little changed after the measure closed at the highest level since 2007 yesterday. Citigroup Inc. (C) slumped 3.5 percent in German trading as it failed to meet minimum requirements in the stress test.

“I was expecting all of the banks to pass, but when you look at the terms, the stress tests were so onerous that a modest miss really isn’t all that discouraging,” said William Fitzpatrick, a Milwaukee-based financial-services analyst at Manulife Asset Management, whose team oversees $800 million.

The dollar advanced 0.3 percent against the euro and 0.8 percent versus the yen.

Britain is proposing to revive “perpetual gilts,” first used in the wake of the 1720 South Sea Bubble crisis, to allow the government to borrow for as long as possible at record-low rates, according to two people familiar with budget discussions. Chancellor of the Exchequer George Osborne will use his March 21 budget to announce a consultation on introducing bonds of up to 100 years and reviving debt with no fixed maturity.

The pound climbed against 14 of its 16 major counterparts, strengthening 0.1 percent versus the euro, while the yield on the 10-year gilt jumped 10 basis points to 2.28 percent.

The yield on the 30-year U.S. Treasury climbed five basis points to 3.31 percent before the government sells $13 billion of the securities, the last of three auctions this week totaling $66 billion. The two-year Italian yield slipped four basis points to 1.99 percent as the government sold 6 billion euros ($7.8 billion) of bonds today, with borrowing costs on its three-year debt falling to the lowest since October 2010.

Emerging Markets

The MSCI Emerging Markets Index (MXEF) advanced 0.2 percent, set for the highest close since March 2. Benchmark indexes in Turkey, Poland, Hungary and South Korea gained at least 1 percent. Russia’s Micex Index added 0.9 percent. The FTSE/JSE Africa All Shares Index (JALSH) rose 0.9 percent in Johannesburg.

China’s Shanghai Composite Index (SHCOMP) sank 2.6 percent, the biggest drop since Nov. 30. A gauge tracking Chinese property stocks in Shanghai slid 3.7 percent. Anhui Conch Cement Co. (600585), the nation’s biggest maker of the building material, fell 3.3 percent, and Poly Real Estate Group Co. (600048), China’s second-largest developer by market value, slumped 3 percent.

Copper lost 1.1 percent. Gold declined 1.7 percent to $1,645.68 an ounce after falling 1.6 percent yesterday. Oil retreated 0.4 percent to $106.26 a barrel.

To contact the reporters on this story: Stephen Kirkland in London at; Lynn Thomasson in Hong Kong at

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


Apple Drives Record $1.24T of Company Cash

By Sapna Maheshwari - Mar 14, 2012 6:00 AM GMT+0700

Apple Inc. (AAPL), the world’s most valuable business, led U.S. corporations in amassing a record $1.24 trillion of cash last year as memories of the 2008 credit crisis linger, according to Moody’s Investors Service.

Excluding Apple, with $97.6 billion of cash and no outstanding debt, the figure was relatively unchanged at $1.15 trillion, even as revenue and cash flow from operations rose to a record, Moody’s analysts led by Richard Lane said in a report yesterday. Investment-grade companies graded A3 or higher by Moody’s hold $594.3 billion, or 54 percent, Moody’s said in the report, which tracked cash and liquid investments for non- financials.

The Apple Inc. logo is displayed outside of a store in San Francisco, California, U.S. Photographer: David Paul Morris/Bloomberg

Apple Inc. employees and customers gather at the opening of the Grand Central Station location in New York. Photographer: Scott Eells/Bloomberg

“Treasurers have distinct memories of capital markets closing very quickly, and I think companies in general are more focused on controlling their fate from a funding standpoint and part of that means being able to internally fund your investment needs,” Lane said in a telephone interview. Still, “there’s a large and growing use of the cash that these companies generated over the last handful of years.”

The biggest U.S. nonfinancial corporations maintained fortress balance sheets last year as the U.S. economic recovery wavered and European policy makers struggled to contain the sovereign-debt crisis. Companies increased capital expenditures, dividend payments, share buybacks and acquisition spending, even after posting record revenue of $10.4 trillion and cash flow from operations of $1.3 trillion, according to Moody’s.

Record-Low Costs

Companies, including financial borrowers, sold $1.1 trillion of U.S. dollar-denominated debt last year, enticed by record-low borrowing costs spurred by the Federal Reserve leaving interest rates in a target range of zero to 0.25 percent, according to data compiled by Bloomberg.

“Companies have availed themselves of the low interest rates this year or last year to either refinance debt or bring debt into their capital structure for the first time,” Lane said. “Taken together with the economic environment modest as it was, even with increasing levels of cash outlays for research and development, capex, dividends, buybacks and acquisitions, it still resulted in companies growing aggregate levels of cash.”

Moody’s, which tracked those figures through the third quarter of 2011, excluded Cupertino, California-based Apple, Qualcomm Inc. and EMC Corp. from the cash flow data and net debt figures to avoid skewing results, Lane said.

Dividend Payments

Capital expenditures, or funds used for activities from repairing a roof to building a new factory, rose to $714 billion, the highest since 2008, accounting for the biggest use of cash from operations, the analysts said in the report. Acquisition spending followed with $329 billion, while dividend payments rose to $284 billion and share buybacks increased to $194 billion.

Spending is likely to be about the same this year, as Moody’s anticipates growth of 2.9 percent in G-20 economies from 3.1 percent last year, according to the report.

Moody’s estimates that companies hold almost $700 billion of the cash, or 57 percent, overseas and are unlikely to pay hefty taxes to repatriate it.

The increased liquidity on company balance sheets is good for credit, because it protects corporations if capital markets are disrupted, according to the report.

To contact the reporter on this story: Sapna Maheshwari in New York at

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


Stress Tests Show How Banks Bolstered Balance Sheets

By Craig Torres, Cheyenne Hopkins and Ian Katz - Mar 14, 2012 11:00 AM GMT+0700
Robert Caplin/Bloomberg
Chase Bank in New York.

The resilience of the largest U.S. financial firms when tested against a recession more severe than the last one shows regulators have succeeded in pushing banks to build fortress-like balance sheets.

The Fed yesterday said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock. Those results were due to scrutiny by the Fed on capital payouts over the past three years, the central bank said.

The JP Morgan Chase offices in New York City. Photographer: Mario Tama/Getty Images

March 14 (Bloomberg) -- JPMorgan Chase & Co., the biggest U.S. bank, surprised investors and the Federal Reserve when the firm announced two days early that it had received regulatory approval for a 20 percent dividend increase. Dawn Kopecki reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

March 13 (Bloomberg) -- Bloomberg View columnist William Cohan talks about the results of the Federal Reserve's bank stress tests. The Fed said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario. Cohan speaks with Stephanie Ruhle, Betty Liu, Adam Johnson and Michael McKee on Bloomberg Television's "Street Smart." (Cohan is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

March 13 (Bloomberg) -- Gerard Cassidy, an analyst at RBC Capital Markets, talks about the U.S. banking industry and the results of the Federal Reserve's stress tests. The Fed said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Cassidy talks with Adam Johnson and Betty Liu on Bloomberg Television's "Street Smart." (Source: Bloomberg)

March 13 (Bloomberg) -- Paul Miller, an analyst at FBR Capital Markets, talks about the results of the Federal Reserve's bank stress tests. The Fed said 15 of 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Miller speaks with Stephanie Ruhle, Betty Liu and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

March 14 (Bloomberg) -- Michael Dueker, a former St. Louis Federal Reserve economist, now the chief economist for Russell Investments North America, talks about the U.S. economy, Fed monetary policy and stress tests of U.S. banks. He speaks from Seattle with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

March 13 (Bloomberg) -- The Federal Reserve said 15 of the 19 largest U.S. banks could maintain adequate capital levels even in a recession scenario in which they continue paying dividends and buy back stock. Citigroup Inc., SunTrust Banks Inc., MetLife Inc. and Ally Financial Inc. failed to meet the Fed's minimum requirements. Betty Liu, Julie Hyman, Michael McKee, Adam Johnson and Stephanie Ruhle, report on Bloomberg Television's "Street Smart." (Source: Bloomberg)

March 14 (Bloomberg) -- The resilience of the largest U.S. financial firms when tested against a recession more severe than the last one shows regulators have succeeded in pushing banks to build fortress-like balance sheets. Bloomberg's Mike McKee reports on Bloomberg Television's "Inside Track." (Source: Bloomberg)

March 14 (Bloomberg) -- Jeffrey Davis, chief investment officer at Lee Munder Capital Group, talks about the results of the Federal Reserve's bank stress tests. Davis, speaking with Erik Schatzker and Sara Eisen on Bloomberg Television's "InsideTrack," also discusses JPMorgan Chase & Co.'s announcement that it had received regulatory approval for a 20 percent dividend increase. (Source: Bloomberg)

March 14 (Bloomberg) -- Michael Holland, chairman of Holland & Co., talks about the results of the Federal Reserve's bank stress tests. Holland also talks about JPMorgan Chase & Co's announcement that it had received regulatory approval for a 20 percent dividend increase. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Regulators, empowered by the Dodd-Frank Act and goaded by criticism for failing to spot the subprime mortgage debacle, have redesigned their approach to bank supervision. They now place greater emphasis on systemic risk as they seek to avoid a repeat of the crisis that resulted in a $245 billion taxpayer bailout of banks through the Troubled Asset Relief Program.

“Any bank that remains adequately capitalized under these acute stress scenarios is not just strong but also darn-near impregnable,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics, a Washington research firm, whose clients have included Wells Fargo & Co. (WFC) “What’s a bank for is at the heart of this question: Is it to be Fort Knox?”

JPMorgan Chase & Co. (JPM) and Wells Fargo joined banks raising dividends and authorizing share repurchases after passing the stress tests. Citigroup Inc. (C), the lender that took the most government aid during the financial crisis, said it will resubmit its capital plan to regulators after failing to meet some minimum standards in the tests. Citigroup has repaid $45 billion in TARP money.

Falling Short

SunTrust Banks Inc., Ally Financial Inc. and MetLife Inc. (MET) also fell short by at least one measure under the central bank’s worst-case scenario. Ally also intends to resubmit its plan, the company said in a statement.

Stocks rose, sending the Dow Jones Industrial (DJIA) Average to the highest level since 2007, after the JPMorgan Chase said it will increase its quarterly dividend 20 percent and as the Fed raised its assessment of the economy.

The Standard & Poor’s 500 Index added 1.8 percent to 1,395.95 at 4 p.m. New York time yesterday, and the Dow climbed 217.97 points, or 1.7 percent, to 13,177.68. Yields on 10-year Treasuries advanced a fifth day, reaching 2.13 percent.

The KBW Bank Index (BKX), which tracks shares of 23 of the largest U.S. banks, rose 4.6 percent. The index is up 21 percent this year on expectations of stronger economic growth and improving profits. Concern that the nation’s banks may be damaged by Europe’s debt crisis helped drive down the index 25 percent in 2011, its worst annual performance since 2008.

Adequate Capital

The Fed tested the banks to ensure that they have adequate capital to continue lending in a downturn. The test assumed an unemployment rate of 13 percent -- compared with a peak of 10 percent as a result of the 18-month recession that ended in June 2009 -- a 50 percent drop in stock prices and a 21 percent decline in house prices. It showed that those circumstances would produce aggregate losses of $534 billion over nine quarters.

Even with such a blow, the 19 banks would see their Tier 1 common capital ratio -- a measure of bank strength against loss -- fall to 6.3 percent in the fourth quarter of 2013, above the 5 percent minimum the Fed required. The ratio was 10.1 percent in the third quarter of last year.

‘Very Onerous’

The fact that most of the banks came through “this very onerous stress test” demonstrates “the strength of the U.S. banking system,” Gerard Cassidy, an analyst with RBC Capital Markets, said in an interview.

European banks’ reluctance to lend to one another fell yesterday to the lowest in seven months. The Euribor-OIS spread, the difference between the euro interbank offered rate and overnight indexed swaps, declined to its lowest since Aug. 5.

Banks are “much better capitalized” than during the 2008 financial crisis and “understand their balance sheet and loan portfolio much better,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst for FBR Capital Markets in Arlington, Virginia.

Bankers criticized the criteria the Fed used in the stress tests.

Frank Keating, president and chief executive officer of the American Bankers Association, said he objects “to testing bank capital under theoretical conditions that are far more severe than even those seen during ‘the Great Recession.’”

Ally Financial said in a statement that the central bank’s “analysis dramatically overstates potential contingent mortgage risk, especially with respect to newer vintages of loans.”

Tougher Standards

The Fed started the test and review of banks’ forward- looking capital strategy in November, saying they should have “credible plans” to meet tougher standards required by new regulations.

Banks “have sufficient capital to weather a severe storm,” said Ernest Patrikis, a partner at White & Case LLP and former general counsel at the Federal Reserve Bank of New York. “One question is whether they will have too much capital.”

Bank of America CEO Brian Moynihan and other executives have complained that carrying too much capital could restrict lending.

Of the $534 billion in total projected losses, $341 billion comes from loan-portfolio losses, the Fed said. Loans and trading portfolio and counterparty losses account for 85 percent of the total, the Fed said.

Six bank-holding companies with large trading, private equity and derivatives activities were also subjected to tests of these positions from a “global market shock.” The six were Citigroup, Bank of America Corp. (BAC), Wells Fargo, Morgan Stanley (MS), Goldman Sachs Group Inc. (GS) and JPMorgan Chase.

Better Positioned

“Some banks are better positioned than others, and you’re going to see them start to steal some market share and sort of separate themselves,” said William Fitzpatrick, a Milwaukee- based financial-services analyst at Manulife Asset Management, whose team oversees $800 million and invests in companies such as Citigroup, JPMorgan Chase and MetLife. “We’re going to see some separation between the winners and the ones that didn’t pass.”

The stress tests are now a standard feature of the Fed’s big-bank supervision and oversight of financial risk. The concept was born in late 2008 when Chairman Ben S. Bernanke was trying to discern the maximum losses facing the banking system following the collapse of Lehman Brothers Holdings Inc.

Focus on 19

The Fed’s focus on the l9 largest institutions’ capital management also reflects a wary attitude toward boards that paid out more than $43 billion in dividends as housing markets started to deteriorate in 2007, according to comments last year by Patrick Parkinson, the former director of the Fed’s Division of Banking Supervision and Regulation.

Citigroup’s proposed capital actions would leave the third- biggest bank with Tier 1 common capital of 4.9 percent, below the 5 percent minimum require by the regulators, according to yesterday’s results. Citigroup would meet the requirement only if it doesn’t change the amount of capital it returns to shareholders, the test results showed.

A senior Fed official said in a conference call with reporters that the central bank’s models showed higher estimated losses than those submitted by the banks, while declining to specify in what categories.

The results were originally due to be announced on March 15. The official said they were released early because of a possible inadvertent release of information. The official said JPMorgan Chase’s release was the result of miscommunication between the Fed and the bank, and didn’t cause the Fed’s accelerated release of the results.

To contact the reporters on this story: Craig Torres in Washington at; Cheyenne Hopkins at; Ian Katz in Washington at

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


Obama’s Wine List Corked After $100-Plus Bottle Served

By Margaret Talev - Mar 13, 2012 11:00 AM GMT+0700

When British Prime Minister David Cameron visits President Barack Obama this week, one detail may stay bottled up: the labels on the wines the White House pours at the state dinner tomorrow night.

For Obama’s first three state dinners, honoring the leaders of India, Mexico and China, the White House released the name, year and appellation of wines -- all-American -- paired with each course.

At the state dinner, on June 7, 2011, for German Chancellor Angela Merkel, the menu made public by the White House didn’t include details on the wines. Photographer: Andrew Harrer/Bloomberg

Part of a tradition observed by previous presidents, including George W. Bush, that disclosure stopped after Obama’s dinner last year for Chinese President Hu Jintao. One of the wines served on Jan. 19, 2011, was a top-rated 2005 Cabernet Sauvignon from Washington state that originally sold for $115 a bottle and went for as much as $399 by the time of the dinner. The price the White House paid per bottle was not made public.

At the next state dinner, on June 7, 2011, for German Chancellor Angela Merkel, the menu made public by the White House didn’t include details on the wines.

“An American wine will be paired with each course,” stated a note at the bottom of the menu released by the White House. So went as well the menu released for the Korean State Dinner honoring President Lee Myung-Bak on Oct. 13, 2011.

Tyler Colman, who writes the Dr. Vino wine blog and teaches at New York University, said in an interview that the shift in menu protocol may reflect political considerations given the sluggish U.S. economy.

“They’re probably sensitive to displays of wealth at a time when the economy is not firing on all cylinders,” said Colman, whose blog had noted the absence of wines on the German state dinner menu the White House released.

No ‘Picnic’

Still, keeping the wine list under wraps undercuts promotion of U.S. winemakers at a time when markets in developing nations such as China have potential to be “really hot” for U.S. labels because of the rising middle- and upper- income classes, he said.

A state dinner “isn’t a picnic or casual get-together,” and it’s justifiable from diplomatic and trade standpoints for the White House to spend money to showcase fine American wines, Colman said.

Dorothy Gaiter, wine and food editor for the quarterly France Magazine and a former wine columnist for the Wall Street Journal, said Obama was private about his wine preferences before his election.

‘Good for America’

If the Obama White House has decided to stop publicizing which American wines are served at official events, she said, “I don’t understand this. It’s good for America.”

Rick Small is co-owner of the Woodward Canyon winery in Lowden, Washington, whose 2009 Chardonnay was among the wines poured for the German dinner.

He and his wife noticed the shift because they had gotten billing on the menu when their wine was served at a Clinton administration dinner. He said he didn’t know why the practice was changed and that it probably does help the industry overall to have U.S. wines publicized by name.

At the same time, Small said, it’s an honor to be chosen at all. “You’re not going to get pushy about it since they picked your wine,” he said.

The White House declined to comment for this article or to make available Daniel Shanks, the usher who has managed wine selection since the Clinton administration, or social secretary Jeremy Bernard. First Lady Michelle Obama’s office referred questions to the White House press office.

No Disclosure

White House deputy press secretary Josh Earnest declined to disclose which wines were served at the German or Korean state dinners, identify wines from non-state dinners, make menus of past meals available for inspection or answer questions about the shift in practice.

Earnest also declined to say whether the White House would release the names of wines at the Cameron dinner.

The White House has promoted its release of other documents and data. On March 8, it announced a website,, to expand access to government databases tracking White House visitor records, lobbying disclosures and Federal Election Commission reports.

“From the day he took office, the president committed his administration to work towards unprecedented openness in government,” said the official statement announcing the site.

At the state dinner for Hu, the 2005 Quilceda Creek Cabernet Sauvignon Columbia Valley from Washington state, one of the wines poured that night, was $115 a bottle at release, the winery’s general manager, John Ware said in an interview.

Turning Point

The wine earned a rare 100-point rating from wine critic Robert Parker. By the time of the White House dinner, Ware said, it sold for $300-$350. It was listed for as much as $399 per bottle, according to wine websites.

Ware said the winery was approached by the White House and asked to choose which of its wines to serve. The price the winery charged the White House was “closer to the $115” than to $399, Ware said, while declining to name the price.

Afterward, he said, the winery’s profile in Asia got a “pretty significant” boost.

The White House selection drew derision.

The day after the Hu dinner, the anti-Obama website Gateway Pundit carried a posting entitled, “Sacrifice Is For the Little People... Obama White House Serves $399 Bottles of Wine at State Dinner.”

Comedian Stephen Colbert said that, given the U.S. debt held by China, the Hu dinner “should have been a sweatpants- potluck with box wine and a sleeve of Oreos.”

Social Secretaries

Other changes were taking place at the White House at the time. Between the Chinese and German state dinners, the White House changed social secretaries, hiring Bernard that February.

Since the start of his presidency, aides also have avoided endorsing specific brands such as which golf clubs Obama favors.

Not all wines served by the administration are shielded. At Vice President Joe Biden’s dinner last month for Chinese Vice President Xi Jinping, the list included a 2010 Sauvignon Blanc and 2009 Cabernet Sauvignon from the Hall winery in California’s Napa Valley. The wines sell for $22.99 and $48.99 per bottle, respectively, on the website. Vintner Kathryn Hall was U.S. ambassador to Austria during the Clinton administration. She didn’t return calls for comment.

Wine has been regularly served at the Executive Residence since 1800, except from 1877-1881 under President Rutherford B. Hayes, Shanks wrote in 2007 for an article for the Journal of the White House Historical Association.

Kennedy and Nixon

In the 20th century, John F. Kennedy and Richard Nixon were known for their familiarity with French wine. The policy of serving American wine took hold in Lyndon Johnson’s administration, according to an article in last month’s Wine Spectator. Ronald Reagan, a former actor and California governor, raised the profile of his home state’s wines.

Ulises Valdez, 42, of the Valdez Family Winery and Tasting Room in Cloverdale, California, said he is “still celebrating” having his 2008 Silver Eagle Vineyard Chardonnay served at the White House for the Mexico state dinner on May 19, 2010.

Valdez snuck into the U.S., from Mexico, as a teenager and found work picking grapes. He got amnesty during the Reagan administration. Today he owns a vineyard management company and the winery. “This is the beauty of the U.S. --if you’re a hard worker and good and honest you can do it,” he said.

White House menus can be a point of pride and business builder for individual vintners whose wines are chosen.

China Sales ‘Quadrupled’

Kerry Murphy, proprietor of DuMOL Wines in Orinda, California, whose wines have been served at the White House since 2002, said he’s become a collector. “God knows how many menus I have -- I love ’em,” he said.

“I’ve been blessed by the association,” Murphy said. “It sets the wine to high standards,” he said, because the White House “can buy whatever they want.”

His Chardonnays sell for $50-$60 per bottle.

After his 2008 Russian River Chardonnay was served at the Hu dinner, he said, “our sales in China quadrupled.”

“I think that has a lot to do just with exposure from that one dinner,” he said. ’’It makes me feel good because we’ve got some dollars coming back’’ to the U.S. from China. “That’s a patriotic thing in itself.”

To contact the reporter on this story: Margaret Talev in Washington at

To contact the editor responsible for this story: Steven Komarow at