Economic Calendar

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


Facebook Shares Slump Below $29 as Options Trading Starts

By Inyoung Hwang - May 30, 2012 5:47 AM GMT+0700

Facebook Inc. (FB) shares fell to a new low, extending losses from the worst-performing large initial public offering during the past decade to more than 24 percent.

The stock fell 9.6 percent to $28.84 in New York, below the prior low of $30.94 on May 22. Facebook debuted on May 18 after underwriters sold shares at $38. Facebook options trading began today, with volume for puts exceeding calls by 1.2-to-1, data compiled by Bloomberg show. More than 200,000 puts giving the right to sell traded.

Facebook went public as the equity index was heading for its biggest monthly decline since September. Photographer: Brendan Smialowski/AFP/Getty Images

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 29 (Bloomberg) -- Bloomberg's Betty Liu reports that Facebook shares reached a new low, dipping past the previous low of $30.94 in early trading. She speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Audio Download: Levitt Interview on Facebook

Facebook and Morgan Stanley, its lead underwriter, faced criticism for boosting the number of shares sold in the IPO by 25 percent to 421.2 million in the days before the deal. Photographer: Shen Hong/XINHUA/Landov

The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York. Photographer: Scott Eells/Bloomberg

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About $25 billion in market value has been erased from Facebook as bearish sentiment built in stock and options markets after the social networking site went public while U.S. equities headed for the biggest monthly decline since September. The company, its underwriters and Nasdaq OMX Group Inc. (NDAQ) were sued last week by investors who say they lost money in the IPO. June $30 puts were the most-active contracts, with volume at 23,723. They were followed by June $34 calls and June $32 calls.

“People are disillusioned,” Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati, said in a telephone interview. 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.”

Facebook shares climbed as high as $45 on May 18, when the shares ended the day with a price-earnings ratio of 83.1, making the Menlo Park, California-based company more expensive than 99 percent of Standard & Poor’s 500 Index stocks.

MF Global

The IPO, which set a record for technology companies by raising more than $16 billion, produced the worst five-day return among the 10 largest U.S. deals of the past decade. The 13 percent loss through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions.

The stock plunge has also pushed the purchase price for photo-sharing site Instagram Inc. below the $1 billion that Facebook offered last month. Facebook is paying $300 million in cash plus about 23 million shares of common stock to acquire Instagram. The deal is now valued at about $963 million.

Facebook and Morgan Stanley, its lead underwriter, faced criticism for boosting the number of shares sold in the IPO by 25 percent to 421.2 million in the days before the deal. They also increased the asking price to $34 to $38 from $28 to $35.

The first day of trading was disrupted by the “poor design” of Nasdaq OMX’s software for IPO auctions, Robert Greifeld, the chief executive officer of the exchange operator, said on May 20. The malfunction also prevented Nasdaq OMX from sending messages to brokerages confirming that clients’ orders went through.

“Investors are incorporating the risks embedded in the stock,” Brian Wieser, a senior analyst at New York-based Pivotal Research Group LLC, said in a telephone interview today. He has a sell rating on the stock and a $30 share-price estimate. “A lot of people are trying to trade the stock on the basis of those expectations. Options will be a very robust marketplace with respect to Facebook.”

To contact the reporter on this story: Inyoung Hwang in New York at

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


Dollar Scarce as Top-Quality Assets Shrink 42%

By John Detrixhe - May 30, 2012 12:22 AM GMT+0700

The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.

From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.

The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks. Photographer: Scott Eells/Bloomberg

May 29 (Bloomberg) -- Simon Grose-Hodge, head of investment advisory at LGT Bank in Singapore, talks about the outlook for the U.S. and European economies and currencies. Grose-Hodge also discusses the European Central Bank monetary policy. He speaks in Hong Kong with Rishaad Salamat on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.

“The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”

Euro Depreciation

The dollar is gaining mainly at the expense of the euro, which has depreciated almost 5 percent in the past six months against a basket of nine major currencies tracked by Bloomberg as nations from Spain to Italy see their credit ratings downgraded amid the region’s sovereign crisis.

Spain, which has about $917.5 billion of debt, has been cut six levels by Moody’s Investors Service to A3 from Aaa in September 2010. Italy, with more than $2 trillion of debt, has been reduced four levels to A3 from Aa2 in October.

“We’re seeing many more periods of dollar buying during these uncertain times,” Ken Dickson, an investment director of currencies at Standard Life Investments in Edinburgh, which manages $257 billion, said May 24 in a telephone interview.

The U.S. currency appreciated 2.06 percent last week to $1.2517 per euro in New York after touching $1.2496, the strongest since July 2010. It gained 0.84 percent to 79.68 yen. The Dollar Index jumped 1.37 percent to 82.402, its fourth- straight weekly rally.

The dollar rose 0.5 percent to $1.2482 per euro as of 1:20 p.m. in New York. The greenback was little changed against the yen at 79.42.

Bigger Share

The five economies with default swaps trading at less than 100 basis points have a combined $14 trillion in debt, with the U.S. accounting for 75 percent, according to CMA data compiled by Bloomberg as of May 25. A year ago, when there were eight nations, the total was $24 trillion, with America making up 38 percent. German credit-swaps rose to 100 basis points today from 99 basis points last week.

Bank of America Merrill Lynch’s AAA Rated Global Fixed Income Index contained 3,597 securities with the highest ratings as of April 30, down from a high of 5,331 in December 2007, the fewest since November 2005. Dollar assets make up 65 percent of the index, up from 56 percent in 2008.

Hungary’s central bank is among reserve managers diversifying foreign-exchange holdings as the credit quality of European assets declines. The central bank said it will include dollars, yen and British pounds in its reserves, currently invested exclusively in euro-denominated securities.

No ‘Master Plan’

“The number of euro-denominated assets that meet our quality standards has dropped radically,” Magyar Nemzeti Bank President Andras Simor told reporters on May 14 in Budapest. “More and more securities were dropped from our portfolio as the credit grade of more and more countries fell below the single A category and as more and more securities don’t meet our market quality requirements.”

China Investment Corp. President Gao Xiqing said May 10 the nation’s sovereign wealth fund stopped buying government debt in Europe as the region’s turmoil intensifies. With an estimated $440 billion in assets, CIC is the world’s fifth-largest country fund, according to the Sovereign Wealth Fund Institute.

“Ever since the debt crisis broke out, there has never been a master plan for a resolution,” Jin Liqun, chairman of CIC’s supervisory board, said at an event hosted by the Centre for Policy Studies in London on May 22.

Such comments are bolstering the dollar’s status as the world’s primary reserve currency after a decade-long decline.

Official Holdings

The greenback’s share of global foreign-exchange reserves climbed in the last three-months of 2011 to 62.1 percent, the highest since June 2010, while holdings of euros fell to the lowest since September 2006 at 25 percent, according to the latest quarterly data from the International Monetary Fund.

Foreign official holdings of U.S. government debt increased in each of the first three months of 2012, climbing by 3.24 percent to $3.73 trillion in the best start to a year since 2009, according to data from the Treasury Department.

Demand from outside the U.S. helps the administration of President Barack Obama finance a budget deficit forecast to exceed $1 trillion for a fourth year.

A relatively strong dollar may also damp criticism of the Fed if it decides to expand its balance sheet to boost the economy. The Dollar Index tumbled 14 percent during the Fed’s two rounds of asset purchases, known as quantitative easing, or QE, between December 2008 and June 2011.

‘Way Oversold’

While the dollar is “somewhere safe to hide,” the euro is poised to rebound before Greek elections next month before resuming its decline against the U.S. currency, said John Taylor, founder of New York-based currency-hedge fund FX Concepts LLC, which oversees $3.9 billion.

“We are way oversold in the euro,” Taylor said on May 24 in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker and Sara Eisen.

The dollar’s appeal is also getting a boost as nations generally perceived as havens become less welcoming.

The Swiss National Bank introduced a 1.20 franc-per-euro limit in September after its currency rose to a record, hurting exporters and increasing the risk of deflation.

Japan spent 16.4 trillion yen ($206.6 billion) in intervention in 2010 and 2011, according to the Finance Ministry. The franc has lost 1.9 percent against the dollar this year and the yen has depreciated 3.1 percent.

“The other countries that often have some kind of a safe- haven attraction to them are slowly but surely saying that we’re not so sure we want our currencies to be stronger,” Standard Life’s Dickson said.

Bank Demand

Demand for dollars is also showing up in financial institutions needing to meet Basel III regulations set by the Bank for International Settlements. The new rules on capital reserves will “increase the price of safety” embedded in assets deemed a reliable store of value, the IMF wrote in an April 18 report.

The cost for banks to convert euro interest payments into dollars through the swaps market for three years has increased to 67.8 basis points below the euro interbank offered rate, or Euribor, from 34.8 basis points below in March 29, according to data compiled by Bloomberg. Negative spreads show a premium for dollar funding.

Dollar assets are also looking attractive on a relative basis, with yields on Treasuries due in 10 years averaging 0.37 percentage point more than German bunds of similar maturity. As recently as November, Treasuries yielded about 0.33 percentage point less than bunds.

“With the chronic problems and challenges in Europe, it’s hard to see how that’s going to overtake the dollar anytime in our lifetime, if the euro even still exists in our lifetime,” Tim Adams, a managing director at the Lindsey Group, a Fairfax, Virginia-based investment consultant and former Treasury undersecretary, said May 1 at the Bloomberg Washington Summit hosted by Bloomberg Link.

To contact the reporter on this story: John Detrixhe in New York at

To contact the editor responsible for this story: Dave Liedtka at