Apple Said to Pick AutoNavi to Offer IPhone Maps in China

By Mark Lee - Jul 6, 2012 3:27 AM GMT+0700

In most of the world, Apple Inc. (AAPL) and Google Inc. (GOOG) are in an escalating battle to rule smartphone maps. In China, they’ve found a common friend they can’t live without.

Apple has selected AutoNavi Holdings Ltd. (AMAP) as a partner for maps on future iPhones and iPads in China, said two people with knowledge of the matter, who asked not to be identified before an announcement. The Beijing-based maps company has worked with Google since 2006.

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After using Google Maps on the iPhone and iPad for years, Apple in June introduced its own mapping service for the next version of the software running its mobile devices. Photographer: Nelson Ching/Bloomberg

Apple’s decision gives AutoNavi a leg up against its chief rival, NavInfo Co. (002405), which works with Baidu Inc., Nokia Oyj, and Toyota Motor Corp. The two Chinese companies are locked in a tight competition: AutoNavi, which also works with Microsoft Corp. (MSFT) and Samsung Electronics Co. (005930), had 45 percent of China’s mobile map data market in the first-quarter, versus 43 percent for NavInfo, according to researcher Analysys International.

“When Apple comes into China, they want to choose the best map they can, and lo and behold, they choose AutoNavi,” said Jake Lynch, who rates AutoNavi a buy at Macquarie Group Ltd. in Shanghai. “By getting onto all the new iPhones and iPads, AutoNavi will be increasing their users pretty dramatically.”

Mobile e-commerce in China will generate 305 billion yuan ($48 billion) of transactions annually by 2015, 26 times the value last year, and about 20 percent of the market will rely on location-based technology, industry analyst iResearch estimates. Mobile marketing may jump 10-fold to 24.5 billion yuan a year, more than one-fifth of which will use technology that matches merchants with consumers based on their whereabouts, according to iResearch.

Google Bumped

After using Google Maps on the iPhone and iPad for years, Apple in June introduced its own mapping service for the next version of its mobile-device software. In China, owners of those devices will use AutoNavi’s map service and data instead of Apple’s. Beta, or test, versions of the software show AutoNavi’s logo on maps.

Just a dozen companies -- all of them Chinese -- have licenses for collecting map survey data. That means Apple, Google, and other foreigners need local partners such as AutoNavi or NavInfo to make their maps, according to Yan Xiaojia, an analyst at Analysys.

Advertising Revenue

Apple’s change from Google Maps will hurt mobile advertising sales at the search-engine company, said Nancy Shen, an analyst at iResearch. About a third of Google Map users in China currently access the service via Apple devices, Analysys estimates.

Helen Zhu, an investor relations manager at AutoNavi in Beijing, declined to comment on the company’s business with Apple. Carolyn Wu, a spokeswoman at Apple in Beijing, declined to comment on the company’s mobile map service in China.

Google seeks to “build the perfect map for our users in the months and years ahead,” the company said in an e-mailed statement, declining to comment on its maps service in China.

AutoNavi’s digital mapmaking business started with its car navigation products. The company, like Google, has a fleet of specially outfitted vehicles to take photos and uses satellite and infrared imaging to capture data for its maps.

Chairman Jun Hon, a former official at the Beijing Municipal Public Security Bureau, co-founded AutoNavi in 2002 with Chief Executive Officer Congwu Cheng to make car navigation systems. The company obtained a surveying and mapping license in 2004 to provide digital maps data.

Market Share

In 2010, AutoNavi set up a map venture in China with TomTom NV. (TOM2) Last month, the Amsterdam company said it signed an agreement to supply map content to Apple.

NavInfo maps data were installed on more than 37 million handsets at the end of last year, the company said in an e-mail. NavInfo said it also supplies data for devices made by Samsung, Motorola Mobility, and Sony Corp.

By comparison, AutoNavi had 52 million users for its mobile maps app at the end of March, according to its first-quarter report.

Spending to expand mobile mapping has crimped earnings at AutoNavi. The company’s first-quarter profit fell 16 percent to $8.9 million as operating expenses and research-and-development costs increased.

Shares Climb

AutoNavi fell 2.4 percent to $12.95 at the close in New York yesterday, compared with the $21.50 share price estimate by Lynch. The stock has gained 29 percent this year, compared with a 7.8 percent advance in the Amsterdam-traded shares of partner TomTom, and a 29 percent drop for Shenzhen-listed NavInfo.

AutoNavi is diversifying into technology for consumer devices more quickly than NavInfo, according to Hu Jiaming, an analyst at Capital Securities Corp. in Shanghai.

“NavInfo is still much more focused on its auto division,” Hu said. “Some of the company’s partners in mobile maps, such as Nokia, are not doing too well.”

To contact the reporter on this story: Mark Lee in Hong Kong at wlee37@bloomberg.net

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

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Sun Valley Mogul Gathering Includes Buffett, Zuckerberg

By Edmund Lee - Jul 6, 2012 3:55 AM GMT+0700

Billionaires Warren Buffett and Bill Gates as well as Facebook Inc. (FB) Chief Executive Officer Mark Zuckerberg are scheduled to join media executives gathering at Allen & Co.’s conference next week in Sun Valley, Idaho, according to a guest list obtained by Bloomberg News.

Google Inc. Chairman Eric Schmidt, Twitter Inc. CEO Dick Costolo, Amazon.com Inc. CEO Jeff Bezos and Apple Inc. CEO Tim Cook are among those invited to attend. Technology investors Marc Andreessen and Peter Thiel are also on the list.

The exclusive gathering, sponsored by investment bank Allen & Co. since 1983, offers executives the opportunity to strike new deals, or in the case of Newark, New Jersey, Mayor Cory Booker, the chance to recconnect with Zuckerberg, whom he met last year. Zuckerberg donated $100 million to Newark schools. Booker is scheduled to attend this year, as is New York City Mayor Michael Bloomberg, the founder of Bloomberg News parent Bloomberg LP.

Buffett, who attended last year, has been acquiring newspapers, betting that community-focused publications will weather an advertising slump.

News Corp. (NWSA) CEO Rupert Murdoch, who recently announced a plan to spin off his company’s publishing division, is expected to attend, along with his sons Lachlan and James. News Corp. chief operating officer Chase Carey and Joel Klein, the former Justice Department lawyer who now heads up the company’s education division, are also invited.

New Attendees

Activision Blizzard Inc. CEO Bobby Kotick is also invited to attend. Vivendi SA recently announced it’s seeking a buyer for its $8.1 billion stake in the video-game maker.

New attendees may include Yahoo Inc.’s interim CEO Ross Levinsohn and Akamai Technologies Inc. CEO Paul Sagan, who was recently in contention to lead the New York Times Co.

The agenda and guest list for the conference aren’t made public. While the press isn’t typically invited to attend the closed-door events, reporters stay in Sun Valley to talk with the executives.

Mandy Tavakol, executive director of the Allen & Co. conference, didn’t immediately respond to a phone call seeking comment.

To contact the reporter on this story: Edmund Lee in New York at elee310@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net

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Fewer Americans Than Forecast File Unemployment Claims

By Alex Kowalski and Lorraine Woellert - Jul 6, 2012 3:09 AM GMT+0700

Paul Sancya/AP Photo

A job fair in Detroit.

Fewer Americans filed first-time claims for unemployment insurance payments and companies added more workers than forecast, easing concern the labor market is faltering further.

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Job seekers attend the Veterans Affairs Job Fair in Detroit. Photographer: Jeff Kowalsky/Bloomberg

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July 5 (Bloomberg) -- Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week. Applications for jobless benefits decreased by 14,000 in the week ended June 30 to 374,000, the fewest since mid May, Labor Department figures showed today. Michael McKee and Betty Liu report on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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July 5 (Bloomberg) -- Timothy Bitsberger, a managing director at BNP Paribas and a former assistant secretary for financial markets at the U.S. Treasury, talks about the U.S. economy and Federal Reserve monetary policy. Bitsberger, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses the European Central Bank's rate-cut decision today and the region's debt crisis. (Source: Bloomberg)

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July 5 (Bloomberg) -- George "Gus" Sauter, chief investment officer at Vanguard Group Inc., and Scott Shellady, senior vice president at Trean Group, talk about the outlook for tomorrow's June U.S. employment report and its potential impact on Federal Reserve policy and market sentiment. They speak with Scarlet Fu and Dominic Chu on Bloomberg Television's "Lunch Money." (Source: Bloomberg)

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July 5 (Bloomberg) -- Maury Harris, chief economist at UBS Securities LLC in New York, talks about the global economic outlook and the role of central bank monetary policy, including China's latest cut in benchmark interest rates. Harris, speaking with Tom Keene, Sara Eisen and Ken Prewitt on Bloomberg Television's "Surveillance," also discusses the U.S. labor market. (Source: Bloomberg)

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Applicants wait to enter a job fair in New York, on June 11, 2012. Photographer: John Moore/Getty Images

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Applications for jobless benefits fell 14,000 in the week ended June 30 to 374,000, Labor Department figures showed today. Private employers expanded payrolls by 176,000 last month, according to figures released today by Roseland, New Jersey- based ADP Employer Services, exceeding the most optimistic estimate in a Bloomberg News survey of economists.

“Before today it was pretty clear the labor market had softened over the past few months,” said Daniel Silver, an economist at JPMorgan Chase & Co. in New York. “Today’s reports show a little bright spot. The fear of a much weaker payroll number has been reduced.”

Labor Department data tomorrow may show the pace of hiring accelerated in June while remaining at less than half the average for the first quarter of the year. The report covers both private and government employers. Other figures today showed service industries expanded at a slower pace in June, underscoring Federal Reserve concern that economic growth isn’t strong enough to reduce unemployment.

U.S. stocks fell, snapping a three-day advance for the Standard & Poor’s 500 Index, as disappointment over the European Central Bank’s efforts to tame the debt crisis overshadowed improving American employment data.

The S&P 500 declined 0.5 percent to 1,367.58 at the 4 p.m. close in New York. Treasuries gained, pushing the yield on the 10-year note down to 1.60 percent from 1.63 percent late on July 3.

Central Banks

The ECB today cut its benchmark interest rates to a record low, joining counterparts in the U.K. and China in taking action against a global economic slowdown. The ECB lowered the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively.

ECB President Mario Draghi said the cuts may have only a limited impact on the euro-area economy as it slides toward recession.

“It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference in Frankfurt.

The Bank of England began today’s stimulus push, announcing it would restart buying bonds two months after stopping. The People’s Bank of China cut its key interest rate for the second time in a month and allowed banks to offer bigger discounts on their own lending costs.

Global Growth

Slowing global growth is curbing demand for U.S. exports and rippling through the rest of the economy, limiting sales at companies from Family Dollar (FDO) Stores Inc. to FedEx Corp. and restraining hiring.

The Institute for Supply Management said its non- manufacturing index dropped to 52.1, less than projected, from 53.7 in May, according to a report from the Tempe, Arizona-based group today. The median forecast of 70 economists surveyed by Bloomberg News called for 53. Readings above 50 signal expansion.

The report follows July 2 data that showed the ISM factory index fell to 49.7 in June, the first contraction in almost three years and worse than the most-pessimistic forecast in a Bloomberg survey.

Family Dollar, the owner of more than 7,200 discount shops in the U.S., narrowed its profit forecast for fiscal 2012 after third-quarter sales trailed analysts’ average estimate.

‘Economic Headwinds’

“It is clear that consumers continue to face difficult economic headwinds,” Chief Executive Officer Howard Levine said on a June 28 conference call with analysts. Discretionary purchases like home goods and apparel continue to be “challenged,” he said.

Demand remains soft, according to FedEx, which is considered an economic bellwether because it carries everything from mobile devices to pharmaceuticals. The Memphis, Tennessee- based company, operator of the world’s largest cargo airline, pledged “significant cost reductions” as slowing economic growth pressures profits.

“We now realize we’ve got to adjust the networks that we built for higher gross domestic product growth than we’re actually seeing,” Chief Financial Officer Alan Graf said on an earnings call last month.

Fewer firings help pave the way for faster job creation when companies grow more confident about the economic outlook. Tomorrow’s Labor Department report may show employers added 100,000 jobs in June, up from 69,000 the prior month that was the least in a year. The unemployment rate is forecast to be unchanged at 8.2 percent.

Goldman Estimate

Economists at Goldman Sachs Group Inc. raised their forecast for June payrolls growth to 125,000 from 75,000, citing data including today’s ADP figures and jobless claims.

Retailers’ June same-store sales about matched analysts’ estimates, with luxury chains such as Saks Inc. and discounters like TJX Cos. topping expectations and stores targeting middle- income consumers trailing projections, according to another report today.

Same-store sales at the more than 20 companies tracked by Retail Metrics Inc. rose 0.3 percent, compared with the 1 percent average estimate of analysts surveyed by the research firm. The results follow a 7.2 percent increase last year.

Slower job growth and unemployment that’s exceeded 8 percent for 40 straight months are damping sentiment. Consumer confidence dropped last week from a two-month high as fewer Americans considered it a good time to spend and their views of the economy languished.

Consumer Confidence

The Bloomberg Consumer Comfort Index decreased to minus 37.5 in the week ended July 1 from minus 36.1 in the previous period. Even with the drop, the measure averaged minus 37.6 in the second quarter, the best showing since the first three months of 2008, helped in part by lower gasoline prices.

Jobless claims were forecast at 385,000, according to the median estimate in a Bloomberg News survey of 46 economists. Projections ranged from 371,000 to 400,000. The Labor Department revised the prior week’s figure to 388,000 from an initially reported 386,000.

“Claims offer some encouragement on the labor market front,” said Millan Mulraine, a senior U.S. strategist at TD Securities in New York, who forecast a drop in jobless applications. “I would caution by saying this series is notoriously volatile. We would hope this is sustained for the coming months.”

To contact the reporters on this story: Alexander Kowalski in Washington at akowalski13@bloomberg.net; Lorraine Woellert in Washington at lwoellert@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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JPMorgan Told to Explain Withholding Energy-Probe E-Mails

By Tom Schoenberg - Jul 6, 2012 1:21 AM GMT+0700

JPMorgan Chase & Co. (JPM) was ordered by a federal judge to explain why it shouldn’t be compelled to turn over e-mails sought by U.S. regulators in a probe of potential energy-market manipulation.

U.S. District Judge Colleen Kollar-Kotelly in Washington today gave JPMorgan until the end of the day on July 13 to respond. The U.S. Federal Energy Regulatory Commission sued JPMorgan on July 2 to release 25 e-mails in an investigation of possible manipulation of power markets in California and the Midwest by J.P. Morgan Ventures Energy Corp.

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Jamie Dimon, chief executive officer of JPMorgan Chase & Co., testifies at a House Financial Services Committee hearing in Washington, on June 19, 2012. Photographer: Andrew Harrer/Bloomberg

“JPMorgan shall address why it should not be required to produce the 25 at-issue e-mails in unredacted form or to submit them to the court for in camera review,” Kollar-Kotelly said in the three-page order. “JPMorgan must present declarations or other competent evidence to support each of the essential elements of any claimed privilege.”

FERC opened the probe in August after complaints from California and Midwest grid operators that JPMorgan’s bidding practices were abusive, according to the agency’s initial court filing.

“We believe we have complied in all respects with the law, as well as FERC rules and applicable tariffs, governing this market,” Jennifer Zuccarelli, a JPMorgan spokeswoman, said in an e-mail. “We stress that this investigation is ongoing and that no conclusions have been reached or findings adjudicated.”

‘Court’s Assistance’

She said “we welcome the court’s assistance in resolving this dispute over documents.”

FERC, which has pledged to combat manipulation of prices, said JPMorgan’s bidding techniques in California and the Midwest resulted in at least $73 million in improper payments. It accused the bank of improperly using attorney-client privilege to withhold or redact 53 e-mails subpoenaed in April.

The company has since released 28 of the e-mails.

The regulator is examining efforts by Houston-based J.P. Morgan Ventures to extract excessive payments or above-market prices from and Midwest Independent Transmission System Operator Inc. and California ISO, Thomas Olson, a lawyer in the FERC investigating division, said in a court document. The probe focuses on winning inflated “make-whole” payments, he said.

Grid Operators

The California and Midwest grid operators solicit bids from electricity suppliers each day to meet expected demand. Typically, 90 percent or more power consumed is secured in what is known as the day-ahead market. Any supply shortfalls because of weather or unexpected plant shutdowns are met through bids placed in real-time.

In today’s order, the judge said the parties should meet and file a brief on July 10 advising whether they would consent to having the case handled by a magistrate judge with any appeals taken directly to the U.S. Court of Appeals in Washington. She said such an arrangement might result in a quicker decision.

The case is Federal Energy Regulatory Commission v. J.P. Morgan Ventures Energy Corp., 12-mc-352, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net.

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

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Wall Street Bank Investors in Dark on Libor Liability

By Andrew Harris, Christine Harper and Lindsay Fortado - Jul 6, 2012 2:44 AM GMT+0700

Barclays Plc (BARC) investors, blindsided by the bank’s $451.4 million regulatory fine for trying to rig benchmark rates, saw the stock drop 16 percent a day later. Other bank shareholders may be just as surprised.

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Outside New York Stock Exchange. Photographer: Paul Taggart/Bloomberg

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July 5 (Bloomberg) -- Ralph Schlosstein, president and chief executive officer of Evercore Partners Inc., talks about the broadening investigation into alleged collusion by banks in setting interbank lending rates, public and investor confidence in the financial system, and the outlook for industry regulation. Schlosstein, speaking with Erik Schatzker and Trish Regan on Bloomberg Television's "Market Makers," also discusses the U.S. economy and Evercore's performance. Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, also speaks. (Source: Bloomberg)

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July 5 (Bloomberg) -- William Cohan, author of "Money and Power: How Goldman Sachs Came to Rule the World" and a Bloomberg View columnist, talks about Barclays Plc's Libor-rigging scandal and its implications for other banks. Cohan speaks with Tom Keene, Scarlet Fu and Sara Eisen on Bloomberg Television's "Surveillance." (Cohan is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

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Barclays shareholders were notified of the Libor probe, while getting little information on how much money was set aside for potential fines and legal costs. Photographer: Simon Dawson/Bloomberg

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Barclays, like other lenders that help set key rates for $360 trillion in securities, has given investors scant guidance on the liability they face for alleged market manipulation. More than a dozen banks are being probed by U.S., Asian and European regulators for collusion in setting interbank lending rates. The others have mirrored Barclays on minimal disclosure.

“The automatic reaction from investors is: ‘Who’s next?’” said Todd Hagerman, a New York-based analyst at Sterne Agee & Leach Inc. who recommends investors remain “cautious” on the biggest U.S. banks. “It’s fair to assume that legal and related professional fees and associated reserves are going to continue to remain elevated, if not increase.”

Bank of America Corp., Citigroup Inc. (C), Royal Bank of Scotland Group Plc and UBS AG (UBSN) are among the lenders whose participation in setting the London and Europe interbank offered rates, known as Libor and Euribor, are under investigation. None of the banks would say if they set aside reserves to cope with potential liabilities and, if so, how much.

“I believe that Barclays had previously reserved for only about one-third of their ultimate liability” in regulatory fines, Charles Peabody, a banking analyst at New York-based Portales Partners LLC, said in an e-mail. Other banks’ reserves “will probably prove inadequate.”

Biggest Banks

Barclays’s fines were the first in a two-year, inter- continental investigation into manipulation of Libor and Euribor, benchmarks used globally for setting borrowing rates. Among the 18 lenders on the U.S. dollar panel are the three biggest American banks, JPMorgan Chase & Co. (JPM), Bank of America and Citigroup, as well as Barclays and Zurich-based UBS. The 16- member British pound panel includes Barclays, UBS, JPMorgan and Frankfurt-based Deutsche Bank AG. (DBK)

“The two-year investigation into banks rigging Libor, which has taken a toll on Barclays, has the potential to hurt Citigroup, JPMorgan and Bank of America,” Mike Mayo, an analyst at CLSA Ltd. in New York, wrote in a July 2 research note. The banks face risks of fines, lawsuits, negative news and new regulations, according to Mayo.

“While there is no evidence that the three U.S. money- center banks did anything wrong, there is a heightened possibility of scrutiny after recent events at Barclays,” Mayo said.

Limited Data

Barclays shareholders were notified of the Libor probe, while getting little information on how much money was set aside for potential fines and legal costs. First-quarter operating expenses for the firm’s investment bank rose 4 percent to 2.14 billion pounds ($3.3 billion), reflecting a 115 million-pound increase in provisions for legal and regulatory costs, partly offset by non-performance cost savings, the bank said in an April regulatory filing. The company didn’t specify whether any of the increase was due to Libor-related provisions.

The regulatory fine is just the beginning for London-based Barclays, which is a defendant in some of the 24 interrelated Libor lawsuits that have been aggregated before U.S. District Judge Naomi Reice Buchwald in Manhattan federal court.

“The global quantity of claims against Barclays as a result of it having manipulated Libor, it could stretch from the hundreds of millions into the billions,” said Robert Hickmott, an attorney with Los Angeles-based Quinn Emanuel Urquhart & Sullivan LLP. He said litigation in London may follow soon.

Punitive Damages

U.S. liabilities may be higher because American plaintiffs are allowed to ask for punitive damages for bad conduct, while the British are limited to compensatory awards, Hickmott said.

Criminal liability could be added to those regulatory fines and civil lawsuits. The U.K. Serious Fraud Office said July 2 that it would decide within a month whether to open a criminal investigation into Libor-fixing. The U.S. Justice Department already is conducting a criminal probe into the attempted manipulation of interbank-offered rates.

Barclays, in its accord with U.S. authorities, agreed to cooperate with the joint British-American investigation in exchange for a two-year non-prosecution agreement.

“Barclays’s cooperation has been extensive, in terms of the quality and type of information and assistance provided, and has been of substantial value in furthering the department’s ongoing criminal investigation,” the Justice Department said in a statement last week.

‘Completely Lacking’

“Specific disclosure on litigation reserves for any Libor suit settlements is completely lacking in any regulatory filings,” Portales’s Peabody said, referring to all banks. “My guess is that litigation reserves for civil suits from municipalities, class action suits, etc. are non-existent.”

Lawsuits could be filed “by anyone stuck on the wrong side of these transactions,” said Anthony Maton, an attorney at Washington-based Hausfeld LLP, which is representing claimants in the New York litigation and working on a British case to be filed later this year. “Large corporate local authorities, other banks and financial institutions on the wrong side of the trades, pension funds, a very large variety of people that have been affected by this.”

The U.S. Commodity Futures Trading Commission, one of the agencies investigating the Libor manipulation, said last week that Barclays employees tried to manipulate Libor and Euribor by making false interest-rate reports to increase derivatives- trading profits and to decrease losses from 2005 to 2009.

Proof Difficult

Proving actual damages may be difficult for investors, said Brad Hintz, a Sanford C. Bernstein & Co. analyst.

“The large fine is for attempting to move the market, not for moving the market,” Hintz said. “The civil guys are going to have to prove that the market was moved here.”

The extent of lenders’ liability may be difficult to determine, Hintz said. Banks may argue that any derivatives trading losses must be determined on a net basis, because such trades typically are hedged.

Sterne Agee’s Hagerman said he didn’t think any of the big U.S. banks had set aside reserves for Libor-related costs.

For bank stock investors “it hasn’t been top-of-mind,” he said. “I’ve only received a couple phone calls about it and the reaction has been surprise.”

David Kovel, an attorney who represents euro futures traders in the New York federal court litigation, proposes to represent a class including anyone involved in such trading between August 2007 and May 2010, a number of traders he said could be in the thousands. He declined to estimate the value of the alleged damages.

‘Large Impact’

“Even a 2- to 3-basis-point manipulation would have a large impact on the product and the investors in that product,” he said. A basis point is 0.01 of a percentage point.

Two days after the Barclays fine was announced, banks being sued in New York filed motions asking Buchwald to dismiss allegations against them. Exchange-based plaintiffs’ claims are barred by lapse of time and extra-territoriality, lawyers for lenders including Bank of America and Citigroup argued in one filing.

“It is of course a mathematical truism that the published index would have been different if higher or lower rates had been reported by a sufficient number of banks,” lawyers for those same lenders said in arguing against antitrust claims in a different filing. “That might impact financial results to those who chose to incorporate the index in their transactions, but that is not a restraint of trade,” they wrote.

Dismissal Motion

Barclays, in its own brief, joined the other bank defendants in asking Buchwald to throw out allegations against it, excepting those contending the exchange-based plaintiffs had made a case for market manipulation.

Jeffrey Shinder, an antitrust attorney with New York-based Constantine Cannon LLP who has been following that Libor litigation, said potential bank liabilities could be “massive.”

“This is potentially the mother lode in terms of potential damages,” he said.

While it’s not possible to predict a specific loss amount, damages could be in the tens or hundreds of billions of dollars if the lenders are found liable, Shinder said.

“Everyone in the industry knows if you knock down a few basis points here and there billions of dollars shift between counterparties,” Shinder said. Adjusting Libor up or down affects the interest rates on scores of financial instruments. “This is price-fixing,” he said.

Some Reserves

Bank of America has said that as of March 31, costs from litigation and regulatory matters could be as much as $4.2 billion beyond its accrued liability. The firm said that it sets aside liabilities when losses are “both probable and estimable.” The bank hasn’t said whether Libor liability fell into that category. Bill Halldin, a spokesman for the Charlotte, North Carolina-based bank, declined to say whether it had.

U.S. laws generally require companies that issue securities to disclose information that people reasonably would need to make investment decisions. Regulators typically provide guidance on their expectations without setting specific criteria on what should be disclosed.

Authorities including the Securities and Exchange Commission and the Financial Accounting Standards Board have taken steps in the past two years to pressure banks to disclose more information about potential costs from litigation as claims mounted in the wake of the subprime-mortgage crisis. FASB, based in Norwalk, Connecticut, sets accounting rules for public companies under authority delegated by the SEC.

International Probe

Royal Bank of Scotland, which is majority owned by the U.K. government, acknowledged the ongoing international probe in a February report and said it’s cooperating with authorities including the CFTC and Justice Department, the Financial Services Authority and Japanese regulators.

“It is not possible to estimate with any certainty what effect these investigations and any related developments may have on the group,” Edinburgh-based Royal Bank of Scotland said in a statement at the time.

UBS and Credit Suisse Group AG, Switzerland’s biggest banks, declined to say what, if any, reserves they had set aside for possible Libor-related liabilities. Deutsche Bank, Germany’s biggest lender, also declined to comment on whether it has set aside reserves.

Plaintiffs seeking to prove their cases against the banks may be aided by studies whose “results imply that the Barclays manipulation was probably successful and further imply that more than just one bank was involved in the scheme,” Bernstein analysts led by Hintz said in a June 29 report. Barclays and regulators haven’t said the attempted manipulation succeeded.

“This is a major regulatory issue for the Libor banks that will likely generate significant civil claims over the next four to five years,” the analysts wrote. “Investors should not minimize the importance of this matter.”

Barclays rose 1.3 percent to 168.20 pence in London trading.

The multidistrict case is In Re Libor-based Financial Instruments Antitrust Litigation, 11md2262, U.S. District Court for the Southern District of New York (Manhattan).

To contact the reporters on this story: Andrew Harris in Chicago at aharris16@bloomberg.net; Christine Harper in New York at charper@bloomberg.net; Lindsay Fortado in London at lfortado@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; David Scheer at dscheer@bloomberg.net; Anthony Aarons at aaarons@bloomberg.net.

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Euro, Stocks Retreat With Italy, Spain Bonds on ECB

By Michael P. Regan - Jul 6, 2012 3:17 AM GMT+0700

The euro sank to a one-month low as Spanish and Italian bonds plunged, while stocks retreated, after the European Central Bank disappointed investors anticipating a more aggressive effort to fight the debt crisis.

The euro tumbled 1.1 percent to $1.2390 at 4 p.m. in New York and the Dollar Index surged the most this year. Ten-year Spanish and Italian bond yields increased at least 21 basis points. The Standard & Poor’s 500 Index lost 0.5 percent after slumping 0.8 percent earlier. The S&P GSCI Index of commodities rose 0.4 percent as crops rallied. Ten-year Treasury note rates slipped three basis points to 1.60 percent as trading resumed following the Independence Day holiday.

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A two euro coin sits next to the European Union (EU) flag on a euro note in this arranged photograph in London. Photographer: Simon Dawson/Bloomberg

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July 5 (Bloomberg) -- European Central Bank President Mario Draghi talks about the ECB's decision to cut its benchmark interest rate by 25 basis points to 0.75 percent and inflation expectations. Draghi, speaking in Frankfurt at his monthly news conference, also discusses the outlook for the euro-area economy and bank supervision. (Excerpts. Source: Bloomberg)

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July 5 (Bloomberg) -- European Central Bank President Mario Draghi speaks at his monthly news conference in Frankfurt about the bank's decision to cut its main refinancing rate to 0.75 percent from 1 percent and its deposit rate to zero from 0.25 percent. (This is Draghi's statement only. Source: European Central Bank)

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July 5 (Bloomberg) -- George "Gus" Sauter, chief investment officer at Vanguard Group Inc., and Scott Shellady, senior vice president at Trean Group, talk about the outlook for tomorrow's June U.S. employment report and its potential impact on Federal Reserve policy and market sentiment. They speak with Scarlet Fu and Dominic Chu on Bloomberg Television's "Lunch Money." (Source: Bloomberg)

ECB policy makers refrained from announcing more measures to cap borrowing costs in Italy and Spain. Some “downside risks to the euro-area economic outlook have materialized,” the central bank’s president, Mario Draghi, said after policy makers lowered the main refinancing rate and the deposit rate by 25 basis points to 0.75 percent and zero respectively. In the U.S., a gauge of service-industry growth trailed forecasts, while data on employment showed improvement.

“There’s still a lot of uncertainty for peripheral bonds and Draghi made that clear today,” said Ciaran O’Hagan, head of European rate strategy at Societe Generale SA in Paris. “Draghi’s comments illustrate that the economic outlook has worsened and that details of last week’s summit accord still need to be worked out between sovereigns.”

Euro Weakens

The euro weakened against 14 of 16 major peers, with eight counterparts gaining more than 1 percent, including the Brazilian real, Australian and Singapore dollars. The U.S. dollar strengthened against 10 of 16 peers. The Dollar Index, a gauge of the currency against six major counterparts, jumped almost 1.3 percent for its biggest advance of 2012.

European stocks, S&P 500 futures and commodities rallied earlier after China cut its benchmark deposit rate by 25 basis points and lending rate 31 basis points, and the Bank of England restarted bond purchases. Equities also climbed earlier as companies in the U.S. added 176,000 workers in June, according to figures from ADP Employer Services, topping economists’ estimates for 100,000 jobs. American unemployment claims fell more than forecast to 374,000 last week, a government report showed.

U.S. Labor Department data tomorrow is forecast to show that 100,000 jobs were added to American payrolls in June, according to the median forecast of economists. The 69,000 increase in jobs in May, reported on June 1, was the weakest growth in a year. The S&P 500 tumbled 2.5 percent to a five- month low that day and 10-year Treasury yields set a record low of 1.4387 percent. The S&P 500 has rebounded 7 percent since.

Two-Month High

The S&P 500 retreated today after closing at a two-month high on July 3. Financial and energy shares led losses among the 10 main industry groups in the index, with JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Chevron Corp. (CVX) falling more than 1.2 percent to lead declines in the Dow Jones Industrial Average. Limited Brands Inc. and Ross Stores Inc. (ROST) rose more than 4.4 percent to lead a rally in retailers after reporting June sales that topped estimates.

The Institute for Supply Management’s index of U.S. non- manufacturing businesses, which covers about 90 percent of the economy, fell to 52.1 in June from the prior month’s 53.7.

Among commodities tracked by the S&P GSCI Index, wheat, corn and soybeans surged more than 3.5 percent to lead gains as hot dry weather continued to threaten production in the U.S. Zinc, cotton and silver lost at least 2.1 percent for the biggest declines.

The Stoxx 600 is on course for a fifth week of gains, the longest winning streak since January, and has rebounded more than 9 percent from its low for the year on June 4.

Volkswagen, Porsche

Banks led declines in Europe today, with Spain’s Banco Santander SA plunging 3.9 percent and Italy’s UniCredit SpA losing 5.1 percent.

Volkswagen AG jumped 5.1 percent after reaching an agreement with Germany’s tax authorities to buy the 50.1 percent stake in Porsche SE that it doesn’t already own. GKN Plc surged 13 percent as the U.K. maker of parts for Airbus SAS jetliners agreed to buy the aircraft-engine unit of Volvo AB for 633 million pounds ($987 million).

Spain’s 10-year bond yield climbed 37 basis points to 6.78 percent, the highest since June 29. The country sold 10-year securities at an average yield of 6.43 percent today, compared with 6.044 percent at a sale in June. It also sold debt maturing in 2015 and 2016. Italy’s 10-year rate climbed 21 basis points to 5.98 percent.

The yield on the 10-year U.K. gilt fell seven basis points to 1.66 percent. The Monetary Policy Committee raised its asset- purchase target by 50 billion pounds ($78 billion) to 375 billion pounds.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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On Bus Tour in Ohio, Obama Pushes Trade, Hammers Bain

By Kate Andersen Brower - Jul 6, 2012 5:31 AM GMT+0700

Jim Watson/AFP/Getty Images

President Barack Obama with his campaign bus at Toledo Express airport in Ohio on July 5, 2012.

President Barack Obama told voters in the battleground state of Ohio today that his administration filed a claim with the World Trade Organization against China, charging it with unfair tariffs on U.S. autos, a welcome message in the U.S. rust belt.

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July 5 (Bloomberg) -- President Barack Obama speaks about a claim that his administration filed with the World Trade Organization against China, charging it with unfair tariffs on U.S. autos. Obama, speaking in Maumee, Ohio, at the start of a two-day campaign bus tour, also talks about last week’s decision by the U.S. Supreme Court to uphold the health-care law. (Source: Bloomberg)

“Americans aren’t afraid to compete. We believe in competition,” Obama said while campaigning in Maumee, Ohio. “But we’re going to make sure competition is fair.”

The WTO complaint came as Obama began a two-day bus trip in Ohio and Pennsylvania. The “Betting on America” tour, as his campaign has dubbed it, runs through areas reliant on the auto industry. The label is designed to draw a contrast with presumed Republican presidential nominee Mitt Romney, a former private- equity executive whose business made investments overseas.

Romney’s experience “has been in owning companies that were called ‘pioneers of outsourcing,’” Obama said. “My experience has been in saving the American auto industry, and as long as I’m president, that’s what I’m gonna be doing.”

The duties in the WTO claim cover more than 80 percent of US auto exports to China including cars manufactured in the Ohio cities of Toledo and Marysville, Ohio, White House press secretary Jay Carney told reporters on Air Force One.

Carney said the WTO claim, the seventh such action against China taken by the administration, was “in development for quite a long time,” and that it was not politically driven.

Health-Care Ruling

Obama also spoke about the health-care law upheld last week by the Supreme Court. The affirmation means it’s time to put the acrimony behind and focus on its protections, he said.

“In America, nobody should go bankrupt because they get sick,” he said. “The law I passed is here to stay.”

Obama’s campaign spokeswoman, Jen Psaki, told reporters that Romney was flip-flopping on whether the law’s penalty for those who don’t get insurance is a tax.

While Romney now says it’s a tax, he and his advisers previously described it as a penalty. Romney is “being impacted by the push from the right” including congressional Republicans and “the Rush Limbaughs of the world,” Psaki said, referring to the talk radio host.

Obama touched briefly on the health-care ruling later in the day at what the campaign said was an ice cream social in Sandusky, Ohio. He told a crowd of about 350 people that “we don’t need to re-argue the last two years.”

‘Worst’ Crisis

Standing inside a wooden gazebo wearing khaki slacks and a short-sleeve shirt, Obama said he favors investments in infrastructure and education and sought to distinguish that approach from his rival’s.

“We’ve got two fundamentally different visions in this election. Mr. Romney and his Republican allies in Congress” believe in “trickle-down” economics, including providing a $5 trillion tax cut for the rich, Obama said.

“Here’s the problem: we tried that,” Obama said. “Not only did it not work, it led to the worst financial crisis we’ve had in our lifetime.”

Polls show that linking Romney to the outsourcing of U.S. jobs when he was at Boston-based Bain Capital LLC, which he co- founded, is an effective approach with voters in the swing states of Ohio and Pennsylvania, where Obama will end the trip.

“If the election’s about Romney and Bain, then the president’s going to win,” said Stu Rothenberg, editor of the nonpartisan Rothenberg Political Report in Washington. “For Romney, it has to be about Obama: Obama and jobs, Obama and leadership, Obama and the economy, and Obama and health-care.”

Jobs Report

The president may be shadowed on his trip by new data showing weakness in the U.S. economic recovery. The Labor Department’s monthly jobs report, set for release tomorrow, is likely to show the U.S. unemployment rate held steady at 8.2 percent, according to the median forecast of economists surveyed by Bloomberg News. In May, the jobless rate rose to the 8.2 percent figure from 8.1 percent in April.

Ohio and Pennsylvania, both of which Obama won in 2008, have a combined 38 electoral votes in this year’s election. Since filing for re-election in April 2011, Obama has visited Ohio nine times and Pennsylvania eight times.

During his tour, Obama was stopping in small towns including Maumee and Sandusky in northern Ohio before entering Pennsylvania. He will cap off the trip at Carnegie Mellon University in Pittsburgh.

‘Close Contest’

Paul Beck, a professor of political science at Ohio State University, said the president’s decision to visit counties he won in 2008 shows that he’s not taking anything for granted.

“It’s going to be a very close contest here and when you have that kind of focus you have two battlegrounds: independent voters and you need to make sure that you squeeze every vote out of your core constituency that you can,” Beck said.

Romney’s campaign also recognizes the electoral importance of winning in Ohio and Pennsylvania. His events in the region have included a speech in Cincinnati on June 14 -- the same day Obama was speaking across the state in Cleveland. A trip in early May that officially began Obama’s re-election bid included a stop in Columbus, Ohio’s capital.

The Ohio Republican Party plans to capitalize on what it calls apathy among Democrats and an eagerness among Republicans to mobilize to defeat Obama.

Republican Response

“From his underwhelming stop in Cleveland last month, to his absolute flop of a campaign kickoff in Columbus, Ohioans are showing over and over again that they have had enough of Barack Obama’s failed economic policies and repetitive, empty rhetoric,” said Ohio Republican Party spokeswoman Izzy Santa.

Obama led Romney by nine percentage points in Ohio and six in Pennsylvania, according to a “Swing State Poll” conducted June 19-25 by Hamden, Connecticut-based Quinnipiac University. The poll of 1,237 Ohio voters and 1,252 Pennsylvania voters had a margin of error of plus or minus 2.8 percent. In 2008, Obama beat Republican John McCain in Ohio by five percentage points and in Pennsylvania by 11.

Still, Obama lost the 2008 Democratic primaries to Hillary Clinton in Ohio and Pennsylvania, and Republican George W. Bush won Ohio in 2000 and 2004.

Beck said many white middle-class voters in the region don’t feel loyal to Obama and some still have trouble voting for a black president. “While most people have gotten beyond racial prejudice, it still exists there and it’s something Obama will have to work against,” he said.

Economic Data

If the economic data “is suggesting economic problems ahead and slowdown, the harder it will be to keep the focus on Romney,” putting Ohio at risk for Obama, Rothenberg said.

Ohio’s economy has been recovering faster than most of the country. It ranks sixth in improving economic health in the Bloomberg Economic Evaluation of States from the first quarter of 2011 through the first quarter of this year, the most recent data available. The unemployment rate in Ohio was 7.3 percent in May, lower than the national rate of 8.2 percent for that month and down from a high of 10.6 percent from July 2009 through January 2010.

The Obama campaign started airing a television ad July 3 in nine states including Ohio and Pennsylvania that says Romney’s team at Bain “were pioneers in outsourcing U.S. jobs to low- wage countries.” The ad says Obama “believes in insourcing” and “fought to save the U.S. auto industry.”

Through July 2, the campaign aired two ads 504 times on stations that reach Ohio voters, blaming Romney and Bain Capital for job losses at a steel company. Another ad from the Obama campaign, citing a Washington Post article that Bain sent jobs overseas, was run 247 times on stations that reach Ohio voters beginning June 27 through July 2, according to data from Kantar Media’s CMAG, which tracks campaign advertising.

Priorities USA Action, the super-political action committee backing Obama, has produced four television ads that have run 2,357 times in Ohio; three of those ads also either ran or are running in Pennsylvania 2,591 times.

To contact the reporter on this story: Kate Andersen Brower in Washington at kandersen7@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net

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S&P 500 Snaps 3-Day Rally on ECB Ahead of Jobs Report

By Rita Nazareth and Julia Leite - Jul 6, 2012 3:47 AM GMT+0700

U.S. stocks declined, halting a three-day advance for the Standard & Poor’s 500 Index, amid disappointment over Europe’s efforts to tame the region’s debt crisis as investors awaited tomorrow’s American jobs report.

Financial (S5FINL) shares had the biggest loss among 10 groups in the S&P 500 as Spanish and Italian bonds plunged. JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) retreated at least 3 percent. Retailers in the benchmark measure rose 1 percent amid June sales data. Apple Inc. (AAPL), the world’s most valuable company, advanced 1.8 percent to pace gains in technology companies.

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July 5 (Bloomberg) -- Timothy Bitsberger, a managing director at BNP Paribas and a former assistant secretary for financial markets at the U.S. Treasury, talks about the U.S. economy and Federal Reserve monetary policy. Bitsberger, speaking with Betty Liu on Bloomberg Television's "In the Loop," also discusses the European Central Bank's rate-cut decision today and the region's debt crisis. (Source: Bloomberg)

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July 5 (Bloomberg) -- Nathan Sheets, global head of international economics at Citigroup Inc. and former head of international finance for the Federal Reserve, talks about the European Central Bank's decision to lower its main refinancing rate to 0.75 percent from 1 percent and its deposit rate to zero from 0.25 percent. Sheets, speaking with Tom Keene, Sara Eisen, Michael McKee, Scarlet Fu and Ken Prewitt on Bloomberg Television's "Surveillance," also discusses the China's interest-rate cut. (Source: Bloomberg)

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July 5 (Bloomberg) -- Fewer Americans than forecast filed first-time claims for unemployment insurance payments last week. Applications for jobless benefits decreased by 14,000 in the week ended June 30 to 374,000, the fewest since mid May, Labor Department figures showed today. Michael McKee and Betty Liu report on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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July 5 (Bloomberg) -- Maury Harris, chief economist at UBS Securities LLC in New York, talks about the global economic outlook and the role of central bank monetary policy, including China's latest cut in benchmark interest rates. Harris, speaking with Tom Keene, Sara Eisen and Ken Prewitt on Bloomberg Television's "Surveillance," also discusses the U.S. labor market. (Source: Bloomberg)

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A trader works on the floor of the New York Stock Exchange (NYSE) in New York. Photographer: Scott Eells/Bloomberg

The S&P 500 decreased 0.5 percent to 1,367.58 at 4 p.m. New York time. The Dow Jones Industrial Average fell 47.15 points, or 0.4 percent, to 12,896.67. Volume for exchange-listed stocks in the U.S. was 5.3 billion shares, 21 percent below the three- month average. The market was closed yesterday for a holiday.

“There’s a bit of disappointment with the ECB,” said Mike Ryan, the New York-based chief investment strategist at UBS Wealth Management Americas. “Meantime, people are not willing to take big bets going into the jobs report tomorrow.”

Equities fell as European Central Bank President Mario Draghi said today’s cut in interest rates to a record low may have only a limited impact on the euro-area economy. China also reduced rates in a bid to spur growth. Tomorrow’s Labor Department data may show the pace of hiring in the U.S. accelerated in June while remaining at less than half the average for the first quarter of the year, economists said.

Today’s economic reports showed that fewer Americans filed jobless claims and hiring beat estimates. Service industries expanded at a slower pace, underscoring Federal Reserve concern that growth isn’t strong enough to reduce unemployment.

Equity Rout

The last jobs report spurred a rout in stocks, erasing the 2012 gain in the Dow and putting the S&P 500 on the brink of a so-called correction, or a 10 percent decline from a recent peak. The benchmark gauge tumbled 2.5 percent on June 1 after data showed employers added the fewest workers in a year and the unemployment rate rose. Since then, the S&P 500 has risen 7 percent amid bets on global central bank action.

Eight out of 10 groups in the S&P 500 retreated today as financial and energy shares dropped at least 1.3 percent. The Morgan Stanley Cyclical Index of companies most-tied to economic growth closed almost unchanged after slumping as much as 0.9 percent and gaining 0.5 percent earlier today.

Twenty three out of 24 stocks in the KBW Bank Index (BKX) declined. JPMorgan Chase & Co. slumped 4.2 percent, the most in the Dow, to $34.38. The lender was ordered by a federal judge to explain why it shouldn’t be compelled to turn over e-mails sought by U.S. regulators in a probe of potential energy-market manipulation. Bank of America slid 3 percent to $7.82.

Apple Rallies

Technology shares, which comprise 20 percent of the S&P 500, reversed an earlier decline. Apple climbed 1.8 percent to $609.94, the highest since April 25.

Consumer companies in the S&P 500 rallied. U.S. retailers’ June same-store sales about matched analysts’ estimates, with luxury chains such as Saks Inc. (SKS) and discounters like TJX Cos. (TJX) topping expectations. Stores targeting middle-income consumers trailed projections.

“The high-end consumer has fared particularly well throughout this recovery,” Ken Perkins, president of Swampscott, Massachusetts-based Retail Metrics, said in an interview. “On the low end, a lot of middle-income consumers have traded down.”

TJX, which owns discount stores T.J. Maxx and Marshalls, rose 3.7 percent to $44.09. Limited Brands Inc. (LTD), the parent company of Victoria’s Secret, jumped 4.5 percent to $46.12, while Saks gained 2.5 percent to $11.19. Sales at Target Corp. (TGT) rose 2.1 percent, falling short of the average projection. The shares dropped 1.1 percent to $57.15.

Chinese Companies

Chinese stocks traded in the U.S. gained as Baidu Inc. (BIDU), the nation’s largest online search engine, rose to a two-week high after policy makers cut interest rates for a second time in a month to bolster growth.

The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese companies in the U.S. rose 0.8 percent to 92.49, the highest level since June 20. Baidu advanced 2.2 percent to $117.21. Sina Corp. (SINA), operator of the Twitter-like Weibo service, rallied 1.4 percent to $51.21.

“The Chinese authorities are trying to help stem the slowdown in global growth, and that’s a good thing,” said Audrey Kaplan, who helps manage $2 billion as head of international equities at Federated Global Investment Management in New York. “We see this as a great entry point for Chinese stocks.”

Netflix Soars

Netflix Inc. (NFLX) soared 13 percent, the most since January, to $81.72. The largest video-subscription service also had the biggest gain in the S&P 500 (SPX) after an analyst said the company’s online audience exceeds cable and TV networks.

Yelp Inc. (YELP) surged 5.8 percent to $26.16 amid speculation that a smaller model of Apple’s iPad could help the business- review service add users. Apple plans to debut a smaller, cheaper iPad by the end of the year, people familiar with the matter said earlier this week.

Patriot Coal Corp. (PCX) climbed 23 percent to $2.26 on speculation it may be near a deal to refinance its debt. The shares have jumped 85 percent in three days, the most since it was spun off from Peabody Energy Corp. in October 2007.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

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VW Finds 1 Share Saves $1.1 Billion in Tax With Loophole

By Aaron Kirchfeld and Dorothee Tschampa - Jul 6, 2012 5:01 AM GMT+0700

Jochen Eckel/Bloomberg

Volkswagens at the Autotuerme, or Car Towers, at the Autostadt car dealership in Wolfsburg.

For Volkswagen AG (VOW), what a difference a share makes.

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By paying the purchase price of 4.46 billion euros ($5.58 billion) plus 1 VW share for the 50.1 percent stake in Porsche SE (PAH3)’s automotive business it doesn’t already own, the Wolfsburg, Germany-based carmaker is avoiding an additional tax bill of more than 900 million euros. The share payment allowed VW to classify the deal as a restructuring rather than a takeover, a tax-saving plan approved by German tax authorities.

The deal structure was in large part the brain child of Michael Schaden, a press-shy tax lawyer at Ernst & Young in Stuttgart, according to people familiar with the transaction. The Heidelberg-trained lawyer, who is also an approved attorney at law in New York, has been one of Porsche’s closest advisers for years, said the people, who asked not to be identified because they were not authorized to discuss it publicly.

The restructuring idea paved the way for VW to proceed with the transaction two years earlier than planned after reaching an agreement with German tax authorities, the carmaker said late Wednesday. The transaction also ends a seven-year takeover saga that divided two of the most powerful families in Germany.

The proposal takes advantage of the so-called Umwandlungssteuergesetz, or reorganization tax act, VW said in its statement. The idea was developed in conjunction with about half a dozen Porsche and VW law firms and accountants including Freshfields Bruckhaus Deringer LLP and Flick Gocke Schaumburg, according to German legal trade publication Juve Verlag.

Transaction Taxes

VW will now pay “well over” 100 million euros in transaction taxes on this deal, Chief Financial Officer Hans Dieter Poetsch told reporters at a press conference yesterday at VW headquarters in Wolfsburg. If VW had completed a traditional takeover before August 2014, it would have resulted in at least 1 billion euros of taxes, Poetsch said in December 2010.

“This is actually great news for VW,” Credit Suisse analyst Arndt Ellinghorst wrote in a note to clients, estimating that the deal would increase the company’s earnings per share by 7 percent. VW is effectively acquiring Porsche at an enterprise value of about 11 billion euros, while the analyst estimates its enterprise value to be about twice that.

The restructuring maneuver, applauded by legal and banking advisers, has drawn the ire of some politicians.

‘They’ve Been Had’

“When global companies can save billions with such tax tricks, then every taxpayer has to feel like they’ve been had,” Rainer Bruederle, parliamentary leader of the Free Democratic Party, Chancellor Angela Merkel’s coalition partner, told German business newspaper Handelsblatt yesterday. “Many skilled workers can only dream of so much charity from the tax offices.”

Volkswagen cited the taxes it was set to pay and called Bruederle’s statement “irresponsible.”

“It’s populistic to talk of tax tricks and forbearance from the authorities,” Stephan Gruehsem, spokesman for VW, said in a statement. The idea of billions in evaded tax payments was “utterly unfounded,” he said.

Schaden didn’t immediately respond to an e-mail message and calls seeking comment.

The two companies had been working on a full-blown merger since 2009, when Porsche failed in its attempt to take over VW, which would have eliminated the holding company and given Porsche shareholders a direct interest in the larger carmaker. That goal was scrapped last September because of the lawsuits in the U.S. and Germany, claiming the carmaker secretly piled up VW shares.

VW and Porsche advisers have been working on ways to find a tax-beneficial structure to push forward with the merger since the September rejection, one of the people said.

To contact the reporters on this story: Aaron Kirchfeld in London at akirchfeld@bloomberg.net; Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net

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