Banks Use $1.77 Trillion to Double Treasury Purchases

By Cordell Eddings and Daniel Kruger - Aug 21, 2012 1:43 AM GMT+0700

The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with more funds to buy bonds and temper the biggest sell-off in Treasuries since 2010.

As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Federal Reserve data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010. Banks have already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.

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A statue of the Albert Gallatin, the 4th Secretary of the Treasury, from the north patio of the U.S. Treasury Building. Photographer: Pablo Martinez Monsivais/AP Photo

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A flag waves over the U.S. Treasury building in Washington. Photographer: Chip Somodevilla/Getty Images

Faced with a slowing U.S. economy, unemployment above 8 percent for more than three years and regulations forcing them to hold more and higher-quality assets, banks are lending at below pre-recession levels. The bond purchases help explain why even after rising this month, Treasury 10-year note rates are about half the 3.5 percent median forecast of 43 economists in a Bloomberg survey a year ago.

“Bank deposits continue to explode and in turn they continue to buy Treasuries as the economy loses momentum, inflation is trending down, Europe continues to hang over our heads and political uncertainty reigns” said Michael Mata, a money manager in Atlanta at ING Investment Management Americas, which oversees about $160 billion. “There is no reason for interest rates to climb in any meaningful way any time soon.”

Borrowing Rises

While the gap has narrowed to $1.75 trillion as of Aug. 8 as lending of $7.12 trillion trailed $8.87 trillion in deposits, the gap is more than 17 times the $100 billion average in the decade before credit markets seized up, Fed data show.

Commercial and industrial lending reached a peak of $1.61 trillion in October 2008, a month after the bankruptcy of Lehman Brothers Holdings Inc. As the credit crisis deepened, loans tumbled to $1.2 trillion two years later, before recovering to $1.46 trillion Aug. 1.

The recent rise isn’t keeping up with record bank deposits as savings of U.S. households have risen to 4.4 percent of incomes as of June from 1.7 percent in 2007, the data show.

“Every bank is looking for a way to increase their yield,” said Mike Pearce, president of Bank of The West in Grapevine, Texas, whose company has been purchasing government securities after deposits grew faster than loans in 2010 and 2011. Instead of earning the Federal Funds rate of zero to 0.25 percent on the deposits, its bond holdings are yielding about 3.25 percent, he said.

Seeking Safety

Bank Treasury holdings reached $500 billion, the highest since June 2011, even with interest rates minus inflation for benchmark 10-year notes of 0.38 percent, compared to the average of 1.26 percent over the past decade.

Yields on 10-year Treasury notes rose 15 basis points, or 0.15 percentage point, last week to 1.81 percent. The price of the 1.625 percent security maturing in August 2022 declined 1 12/32, or $13.75 per $1,000 face value, or 98 9/32. The yield was little changed to 1.81 percent today.

They increased from a record low 1.379 percent on July 25 as investors became more optimistic about the economy. The U.S. added 163,000 jobs last month, a government report showed Aug. 3, more than the 100,000 projected by analysts. Sales at U.S. retailers increased 0.8 percent, more than the 0.3 percent forecast and following a 0.5 percent slide in June, Commerce Department data released Aug. 14 showed.

Rate Forecast

The benchmark notes will yield 1.60 percent by the end of September, below June’s projection of 1.90 percent, median estimates in separate Bloomberg surveys show. The year-end forecast fell to 1.65 percent from 2.1 percent.

Banks may be forced into more risky assets and lending practices if yields continue to hover about record low levels, said David Hendler, an analyst at financial research firm CreditSights Inc. in New York. Their net interest margin, a measure of lending profitability, has declined to 3.52 percent, the lowest since 2009, according to FDIC data.

“It doesn’t pay to be aggressive right now if you are a bank, but continuing to buy bonds near these levels is not sustainable in the long run,” Hendler said in an Aug. 14 telephone interview.

The Federal Reserve said in its quarterly survey of senior loan officers, released Aug. 6, that “domestic banks, on balance, continued to report having eased their lending standards across most loan types over the past three months.” Lending standards for large and medium-sized firms loosened, while those for small business were little changed for the fourth consecutive period.

Recession Legacy

Wall Street’s five biggest banks are off to their worst start in four years. JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley had combined first-half revenue of $161 billion, down 4.5 percent from 2011 and the lowest since $135 billion in 2008. The firms blamed the decline on low interest rates and a drop in trading and deal-making.

Low government bond yields are a legacy of the credit crisis that caused more than $2 trillion in write downs and losses at global financial institutions, according to data compiled by Bloomberg.

After cutting its target rate for overnight loans between banks in 2008 to a range of zero to 0.25 percent, the Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to reduce market interest rates and stimulate the economy.

The central bank owned $1.66 trillion of Treasuries as of August, ahead of China’s $1.16 trillion.

Extra Deposits

Investors are more willing to accept low yields “when you have large demand from the Fed as well as natural demand from banks,” said Matthew Duch, a fixed-income money manager at Calvert Investments, which oversees more than $12 billion in assets. “Are bonds where banks want to be right now? No, but given the uncertainty over regulation, the economy and still weak loan demand in the market it’s the best of lots of bad options,” he said.

Banks have “very conservative” balance sheets, JPMorgan Chief Executive Officer Jamie Dimon said in a July 13 conference call with analysts. The bank lent out $700 billion of its $1.1 trillion in deposits in the second quarter. “That would generally be considered totally conservative,” Dimon said.

JPMorgan increased the Treasury and government agencies portion of their available-for-sale credit portfolio to $11.743 billion as of June 30, from $8.351 billion at the start of the year, according to a filing with the Securities and Exchange Commission on Aug. 9.

Added Incentive

“We get a lot of deposits in,” he said. “The extra deposits of $423 billion, plus equity, plus some other net liabilities, give us $522 billion that’s not being lent out that we have to invest.”

The global supply of the highest-quality securities, as measured by ratings companies, is poised to fall by as much as $4 trillion. Reforms such as the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements require institutions to hold more top-graded debt.

Lenders have an added incentive to buy Treasuries after the Basel Committee on Banking Supervision proposed rules in 2011 that banks increase available capital to bolster the cushion against potential losses and better measure and control their risk. Treasuries’ safety and liquidity makes them suitable capital under regulations designed to prevent a repeat of the global financial crisis.

Wrong Direction

Loans are being damped by the slow recovery. Gross domestic product expanded at a 1.5 percent annual rate in the second quarter after a revised 2 percent gain in the prior three months, below the average of 2.6 percent since 1982, the Commerce Department said on July 27.

The share of U.S. households viewing the economy as heading in the wrong direction rose to 45 percent in August, the highest since November, from 36 percent in July, the Bloomberg Consumer Comfort survey showed today. The monthly expectations gauge dropped to minus 22 from minus 11. The weekly Bloomberg Consumer Comfort Index fell to minus 44.4 in the period ended Aug. 12, the lowest since January, from minus 41.9.

Household purchases, which account for about 70 percent of GDP, grew at the slowest pace in a year, according to the commerce department’s report on GDP.

Stimulus Pledge

Fed policy makers said Aug 1 they would provide more monetary stimulus “as needed.”

“There’s all sorts of good long-term developments that are occurring on household balance sheets, but you sense the Fed would like them to be not quite as thrifty and instead put a little more money to work,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “But that’s not going to happen without salary incomes rising.”

That explains the gap between deposits and lending, said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on more than $30 billion of investments.

“It’s a function of inherently weak demand for loans and that relates to inherently weak demand in the economy,” he said. “Consumers, households, businesses: they’re paying down debt, they’re saving money, they’re not borrowing. They don’t have an appetite.”

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Dealers Declining Bernanke Twist Invitation

By Susanne Walker and Cordell Eddings - Jul 10, 2012 2:10 AM GMT+0700

Wall Street banks are increasingly choosing to hoard their U.S. bonds rather than sell them to the Federal Reserve as speculation grows that a slowing economy and global financial turmoil will only make them more dear.

The world’s biggest bond dealers offered an average of $7.2 billion in Treasuries a day to the central bank in June, down 40.5 percent from a high of $12.1 billion in October, data compiled by Bloomberg show. The amount tendered has fallen even as the dealers almost doubled their holdings of the securities.

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Federal Reserve Chairman Ben Bernanke. Photographer: James Berglie/Zuma Press

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Feb. 22 (Bloomberg) -- Leon Cooperman, chief executive officer of Omega Advisors Inc., talks about investment strategy and President Barack Obama's policies. Cooperman spoke with Bloomberg's Erik Schatzker yesterday. (Source: Bloomberg)

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The Marriner S. Eccles Federal Reserve building in Washington. Photographer: Andrew Harrer/Bloomberg

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Christine Lagarde, managing director of the International Monetary Fund, said “the global growth outlook will be somewhat less than we anticipated just three months ago.” Photographer: Tomohiro Ohsumi/Bloomberg

While the amount of marketable U.S. government debt outstanding has risen to more than $10.5 trillion, Treasuries are proving scarce in a world where five nations in Europe have sought bailouts, the U.S. economy is slowing again and China is weakening. That means interest rates on everything from mortgages to corporate bonds should remain at about record lows.

“People are not willing to sell Treasuries,” said Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $89 billion in fixed-income assets, in a June 28 telephone interview. “The data in the U.S. doesn’t look as good. The labor market has lost momentum. There will be more upside left in Treasuries despite the low levels of rates.”

Concern that the economy is losing momentum came July 6, when a Labor Department report showed American employers added fewer workers to payrolls in June than forecast and the jobless rate stayed at 8.2 percent.

IMF’s Warning

The International Monetary Fund will reduce its 3.5 percent estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said.

“The global growth outlook will be somewhat less than we anticipated just three months ago,” Lagarde said earlier in a July 6 speech in Tokyo. “And even that lower projection will depend on the right policy actions being taken.”

Treasuries rose last week, pushing 10-year yields down 10 basis points, or 0.1 percentage point, to 1.55 percent, according to Bloomberg Bond Trader prices. The benchmark 1.75 percent note rose 28/32, or $8.75 per $1,000 face value, to 101 26/32 in New York.

The 10-year note yield dropped four basis points today to 1.51 percent at 2:44 p.m. New York time, the lowest in more than a month.

The yield has fallen from this year’s high of 2.4 percent on March 20, and has averaged 3.8 percent the past decade. U.S. debt has returned 2.3 percent this year, including reinvested interest, led by a 6.3 percent gain in 30-year bonds.

‘Crowding Out’

Treasuries trail the Standard & Poor’s 500 index (CRY) of stocks, which has returned 9 percent with reinvested dividends, while beating the 6 percent loss posted by the Thomson Reuters/Jefferies CRB Index of raw materials.

“There is a reach for quality in the market,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The Fed and investors are elbowing each other out of the way, and that process is feeding on itself. We are seeing a crowding out effect as there remains a ton of demand for safe assets.”

The Fed under Chairman Ben S. Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. It decided in June to extend a policy known as Operation Twist where it sells short-term securities and uses the proceeds to buy longer-term debt to $667 billion from $400 billion.

Primary dealers submitted offers equaling 2.32 times the $1.0804 billion of securities bought by the Fed today, down from an average ratio of 2.93 since the central bank began the program in October.

Bond Stockpiles

At the same time the Fed is trying to obtain Treasuries, the 21 primary dealers have boosted their holdings to $109.2 billion from a net short position as recently as September, according to the central bank. Stockpiles touched a record $136.4 billion on June 6.

As a result the central bank is paying more for less. Dealers pared their offers to sell in each month since March, when they submitted 3.16 times the securities bought by the Fed. The ratio fell to 2.92 in April, 2.82 in May and 2.48 in June.

At the end of May, the Fed was paying 31 cents per $1,000 face amount above intra-day market prices, compared with about 94 cents below in March, according to primary dealer Credit Suisse Group AG. That translates into an extra $312,500 on the purchase of $1 billion of eight to 10-year notes.

Most Expensive

By some measures Treasuries are about the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.947 percent July 6, surpassing the most expensive level ever of negative 0.94 percent set on June 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

“The Fed is taking a fair amount out of the market,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said in an interview July 3. “With the amount that they are holding, as it gets closer to the end of Twist, it will be difficult to argue that that won’t distort the overall ability for those securities to trade without seeing some type of impact.”

Top-rated securities are in short supply worldwide. The U.S., Germany, Switzerland, Sweden and the U.K. are the only Group-of-10 nations with credit-default swaps trading at less than 100 basis points, the cheapest to insure against default, according to Bloomberg data.

New debt for sale is being snapped up. Bidders offered a record $3.16 for each dollar of the $1.075 trillion of notes and bonds auctioned by the Treasury Department in the first half of the year, a record high, even as yields on 10-year notes fell to all-time lows of 1.4387 percent on June 1.

Falling Yields

Average yields on investment and speculative-grade corporate bonds declined to 4.04 percent last week from about 10.5 percent in early 2009, Bank of America Merrill Lynch indexes show. The average rate for a 30-year mortgage dropped to 3.62 percent on July 5 from more than 5.5 percent in 2009, according to Freddie Mac.

Investors don’t see yields moving higher anytime soon. A measure of market expectations of interest rate changes, the Merrill Option Volatility Estimate, or MOVE, index fell to 70.2 basis points on June 28 after peaking at 264.6 basis points in October 2008. It touched 56.7 on May 7, the lowest since 2007.

‘Most Dangerous’

Demand for bonds has surprised even the most successful investors. Warren Buffett the billionaire chairman of Berkshire Hathaway Inc., in February said in his annual shareholder letter that debt securities and other holdings tied to currencies “are among the most dangerous of assets.” Leon Cooperman, founder of equity hedge fund Omega Advisors Inc., also said in February in a Bloomberg Television interview that bonds will be the worst place for investors to put their money for the next three years.

Many investors failed to anticipate the sluggish recovery. President Barack Obama said the creation of 80,000 jobs in June was “a step in the right direction” though the economy has to grow “even faster.” Republican presidential candidate Mitt Romney called it “another kick in the gut.”

Amid fears of a global slowdown, policy makers at major central banks boosted stimulus measures on July 5 to strengthen their economies.

The European Central Bank lowered its refinancing benchmark to a record low 0.75 percent, while the People’s Bank of China reduced its one-year rate for lending by 0.31 percentage point. The Bank of England raised its asset purchase program by 50 billion pounds ($78 billion), to 375 billion pounds.

Biggest Owner

After cutting its target rate for overnight loans between banks in 2008 to a range of zero to 0.25 percent, the Fed has focused on buying bonds to inject cash into the economy. This has left the central bank as the biggest owner of Treasuries, with $1.67 trillion as of June 27, ahead of China’s $1.15 trillion at the end of the first quarter.

“If the Fed is going to keep this up they will be forced to buy more expensive issues,” said Michael Cloherty, head of U.S. interest rate strategy at RBC Capital Markets in New York, a primary dealer, in a telephone interview July 3. “If you think the Fed is going to have to buy some issues very aggressively it makes it difficult to be short, so you are very reluctant to sell a large block of that to anyone.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Euro Rises From Two-Year Low as Finance Ministers Meet

By Joseph Ciolli - Jul 10, 2012 4:22 AM GMT+0700

The euro advanced from a two-year low versus the dollar as finance ministers from the 17-nation currency bloc met to discuss measures to ease its debt crisis.

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The euro earlier slid to as low as $1.2251, the weakest since July 2010. Photographer: Chris Ratcliffe/Bloomberg

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July 9 (Bloomberg) -- Adrian Schmidt, a foreign-exchange strategist at Lloyds Bank Wholesale Banking and Markets, talks about Federal Reserve monetary policy and the outlook for the euro and pound. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

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July 8 (Bloomberg) -- Italian Prime Minister Mario Monti discusses the current level of yield spreads on European sovereign debt. He talks with Bloomberg Television's Caroline Connan in Aix-en-Provence, France. (Source: Bloomberg)

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July 8 (Bloomberg) -- French Finance Minister Pierre Moscovici talks with reporters in Aix-en-Provence, France, about the need to implement debt-crisis measures agreed by heads of government on June 29. (Source: Bloomberg)

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July 9 (Bloomberg) -- Paul de Grauwe, a professor at the London School of Economics, talks about the European Stability Mechanism, European Central Bank policy and the region’s debt crisis. He speaks with Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance.” (Source: Bloomberg)

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July 6 (Bloomberg) -- Robert Parker, senior adviser at Credit Suisse Asset Management, talks about European Central Bank longer-term refinancing operations and Barclays Plc's libor-fixing scandal. Speaking with Linzie Janis on Bloomberg Television's "On the Move," he also discusses investment strategy and the outlook for the U.S. and German economies. (Source: Bloomberg)

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July 7 (Bloomberg) -- New York University Professor Nouriel Roubini discusses "greedy" bankers, the euro-zone crisis and risks facing the global economy in 2013. He speaks in Aix-en-Provence, France, with Bloomberg Television's Caroline Connan. (Source: Bloomberg)

The shared currency rose from the weakest in more than a month against the yen as European Central Bank President Mario Draghi signaled policy makers may be open to another interest- rate cut if the economic outlook warrants it. The dollar and yen gained earlier as machinery orders in Japan plunged and inflation in China declined, adding to concern economic growth is faltering and fueling demand for refuge.

“What we’ve seen today is a bit of short covering,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, said in a telephone interview. “Euro-dollar is going to continue to slip lower with monetary policy in the euro zone so loose.” Short covering is when investors end bets an asset will decline.

The euro rose for the first time in four days, gaining 0.2 percent to $1.2313 at 5 p.m. New York time, after falling earlier to $1.2251, the weakest level since July 2010. The 17- nation currency advanced 0.1 percent to 97.95 yen after earlier touching 97.43 yen, the lowest since June 5. Japan’s currency strengthened 0.1 percent to 79.56 per dollar.

Brazil’s real was the worst performer against the greenback after South Korea’s won. The real slid 0.2 percent to 2.0324 per dollar. Norway’s krone rose versus the euro and dollar, appreciating 0.4 percent to 7.4866 to the shared currency and gaining 0.6 percent to 6.0804 per dollar.

Aussie Weakens

Australia’s dollar fell after the official Xinhua News Agency reported yesterday Chinese Premier Wen said the government will intensify fine-tuning of policies in response to downside risks to economic growth. The comments came after the South Pacific nation’s biggest trading partner announced the second interest-rate cut in a month.

The Aussie slid as much as 0.6 percent to $1.0155 before trading at $1.0208, down less than 0.1 percent. It lost 0.2 percent to 81.21 yen and fell 0.3 percent to A$1.2062 per euro.

Consumer prices in China rose 2.2 percent in June from a year earlier, according to a report released today. It was the slowest pace in 29 months and compared with the median forecast in a Bloomberg poll for a 2.3 percent inflation rate.

Machinery orders in Japan, an indicator of capital spending, slumped 14.8 percent in May from April, the nation’s Cabinet Office said in a report.

Three Months

Stocks fell, with the Standard & Poor’s 500 Index (SPX) declining 0.2 percent and the MSCI World Index (MXWO) dropping 0.4 percent.

The 17-nation currency erased losses as the European Commission said future recapitalizations of banks by the European Stability Mechanism will have “no need for a sovereign guarantee.” Details of how the system will work remain to be negotiated, commission spokesman Simon O’Connor told reporters in Brussels today.

European finance ministers met to discuss crisis measures adopted by heads of government at a summit last month.

European Union leaders pledged June 29 to enable the region’s permanent bailout fund to make capital injections directly to distressed lenders rather than funneling aid through governments, once a single bank-supervision system is created.

“In the near-term, we think the euro could come back a little bit as we get some certainty about this bank program in Europe, and also increasing prospects of QE3 here in the U.S.,” said Robert Sinche, global head of currency strategy at Royal Bank of Scotland Group Plc’s RBS Securities. He was referring to speculation the Federal Reserve may begin a third round of large-scale debt purchases.

Weaker Euro

The shared currency will probably weaken to about $1.15 by the middle of next year, Sinche, who’s based in Stamford, Connecticut, said today in an interview on Bloomberg Television.

Draghi said the ECB is “searching for actions that could attenuate the current crisis,” as long as they don’t breach the central bank’s inflation-fighting mandate. The bank cut its main refinancing rate to a record low 0.75 percent last week.

While the ECB never pre-commits, it will “do everything to maintain price stability -- from both sides -- in the euro area,” Draghi told lawmakers in Brussels today when asked if the central bank could cut rates again.

The shared currency has fallen 3.6 percent in the past three months, the worst performance among the 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was the biggest winner, rising 4.7 percent, followed by a 3.1 percent increase in the dollar.

Japan Surplus

The yen tends to appreciate in periods of financial and economic turmoil because Japan’s current-account surplus makes it less reliant on foreign capital. Government data showed the surplus was 215.1 billion yen ($2.7 billion) in May, compared with the median estimate for an excess of 493.1 billion yen in a Bloomberg News survey of economists.

Bank of Japan (8301) policy makers are set to meet on July 11-12. Governor Masaaki Shirakawa has said it is fully committed to pursuing “powerful monetary easing” until a 1 percent inflation target set in February is in sight. The central bank has expanded its asset-purchase fund, its main policy tool, by 20 trillion yen this year in a bid to stimulate growth.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Franco-German Amity Needed for Strengthened Euro, Leaders Say

By Gregory Viscusi and Tony Czuczka - Jul 9, 2012 5:01 AM GMT+0700

French President Francois Hollande and German Chancellor Angela Merkel said friendship between their nations is critical to saving the common currency, putting aside until today their differences on solving the euro debt crisis.

The leaders of the European Union’s two biggest economies met yesterday in the eastern French city of Reims to celebrate the moment 50 years ago when their predecessors, Charles de Gaulle and Konrad Adenauer, signed a reconciliation treaty and buried the enmity that had sparked three wars in 90 years.

Resolving divisions between the two countries will be at the heart of euro-area finance ministers’ talks in Brussels today and during a subsequent gathering on July 20. The two meetings follow clashes between Hollande and Merkel at the June 28-29 European summit, where the German chancellor faced pressure from France, Italy and Spain to agree greater burden sharing for the currency zone’s debt burden.

“At each step of European construction, the German-French friendship was the base,” Hollande said outside Reims cathedral yesterday as he stood alongside Merkel under rainy skies. “I propose to you that we open a new door to even tighter friendship.”

European Union leaders agreed at the June summit to ease the way to direct financing for troubled banks, to start work on Europe-wide bank supervision, and to ease access to the EU’s bailout mechanisms. Finance ministers have been asked to hammer out the details.

Spanish Yields Rise

Yields on Spanish 10-year bonds fell to a three-week low of 6.17 percent after the summit, before rising three consecutive days to end last week at 6.87 percent. The dollar rallied to $1.2291 per euro in New York on July 6, its biggest jump against the common currency since the five days ending Sept. 9.

“The European economic and currency union, as founded 20 years ago, has proved itself not strong enough yet,” Merkel said yesterday at the ceremony. “Our generation has to draw the right lessons from that.”

European sovereign debt yields are a concern and euro area finance ministers should act to counter them, Italy’s Prime Minister Mario Monti said yesterday. Wide spreads were also “a concern for the financial stability of the euro zone” and “for the efficient transmission of monetary policy,” he said during a meeting in Aix-en-Provence, France.

Spanish Prime Minister Mariano Rajoy July 7 pleaded with other euro-area countries to make good on the June summit pledges, which include the option of government bond purchases by Europe’s rescue funds for countries meeting the euro’s existing debt and deficit rules.

‘Words to Deeds’

“It’s time to go from words to deeds,” he said during a speech in Navacerrada near Madrid. “Europe must comply as quickly as possible with the agreements its leaders reached in Brussels. The European project is at stake,” he said.

“Last week’s EU summit delivered measures to manage the euro-area crisis while signaling limited but important progress toward regional integration and burden sharing,” Bruce Kasman, chief economist at JPMorgan Chase & Co., wrote in a note to clients on July 7. “However, this week showed participants interpreting the agreement in widely different ways. These tensions will be evident at the eurogroup meeting.”

Troubled Banks

Among the issues finance ministers will have to tackle today is how to start funneling as much as 100 billion euros ($123 billion) in aid to troubled Spanish banks without boosting the government’s debt load. Ministers are likely to initially channel the money via a Spanish state agency because the 500 billion-euro European Stability Mechanism won’t be operational until a still-unspecified date in the summer, an EU official told reporters in Brussels on July 6 on condition of anonymity.

Direct capital injections by the ESM into banks are unlikely to be authorized before two waves of Spanish recapitalizations are completed by the middle of next year, by when the ECB should have created a Europe-wide bank supervisor, the official said.

French Finance Minister Pierre Moscovici said in an interview with Figaro on July 1 that the French government sees jointly issued bonds as a solution to the crisis, while adding, “I understand that for the moment it’s a red line that our German friends can’t cross.”

Those differences were hidden yesterday in Reims, whose cathedral was badly damaged by German shelling in World War I and where Supreme Allied Commander Dwight D. Eisenhower received the German surrender in World War II.

Flag Waving

Merkel and Hollande greeted crowds waving French and German flags before attending a ceremony at the cathedral where Catholic Archbishop Thierry Jordan read a message in both languages. The leaders opened a museum and then lunched at the town hall after their public addresses.

Hollande and Merkel now face a challenge that concerns not just their countries but Europe and its place in the world, Jordan said at the ceremony.

Hollande mentioned the euro crisis in his speech, saying that the proposed banking union agreed at the EU summit was the “first step to a budgetary union, which will open the way to stability, growth, and tighter ties.”

He said France and Germany must defend the euro with “strict rules, powerful instruments and common policies.”

Merkel’s pursuit of policies opposed by the three other big euro members may be paying off with German voters, who go to the polls in the fall of 2013. Her approval rating rose to 66 percent, the highest since December 2009, in a poll taken after she fended off joint euro-area bonds at the European summit, broadcaster ARD said on July 6.

Greek Plea

France’s Moscovici said yesterday that he expects “tangible progress” at the Brussels meeting, which will also tackle Greece’s plea for a relaxation of its bailout terms and Cyprus’s call for banking aid.

Finance ministers are also expected to fill a vacancy on the European Central Bank’s Executive Board, in a contest between Yves Mersch of Luxembourg and Antonio Sainz de Vicuna of Spain, the official said.

The ECB slot, empty since June 1, has to be filled before the ministers tackle two other sensitive appointments. Luxembourg Prime Minister Jean-Claude Juncker’s term as chairman of euro finance meetings expires on July 17, and the ESM permanent bailout fund requires a head. Germany has nominated Klaus Regling, head of the temporary bailout fund, to manage the permanent one as well.

Moscovici said yesterday that France favors Juncker staying on in the euro group post.

To contact the reporters on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Euro Touches 2-Year Low Before Finance Ministers Meet

By Kristine Aquino - Jul 9, 2012 7:20 AM GMT+0700

The euro touched its lowest level in two years before regional finance ministers gather in Brussels today to discuss crisis-fighting measures adopted by heads of government at a summit last month.

The 17-nation currency weakened versus most of its 16 major counterparts before a bill sale in Italy this week. The yen advanced against all of its most-traded peers after Japan released trade data for May and as Asian stocks extended losses in global equity markets from last week, boosting demand for haven assets. Australia’s dollar fell for a second day after Chinese Premier Wen Jiabao said downward pressure on the economy is still “relatively large.”

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The euro earlier slid to as low as $1.2251, the weakest since July 2010. Photographer: Chris Ratcliffe/Bloomberg

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July 8 (Bloomberg) -- Italian Prime Minister Mario Monti discusses the current level of yield spreads on European sovereign debt. He talks with Bloomberg Television's Caroline Connan in Aix-en-Provence, France. (Source: Bloomberg)

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July 8 (Bloomberg) -- French Finance Minister Pierre Moscovici talks with reporters in Aix-en-Provence, France, about the need to implement debt-crisis measures agreed by heads of government on June 29. (Source: Bloomberg)

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July 6 (Bloomberg) -- Robert Parker, senior adviser at Credit Suisse Asset Management, talks about European Central Bank longer-term refinancing operations and Barclays Plc's libor-fixing scandal. Speaking with Linzie Janis on Bloomberg Television's "On the Move," he also discusses investment strategy and the outlook for the U.S. and German economies. (Source: Bloomberg)

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July 7 (Bloomberg) -- New York University Professor Nouriel Roubini discusses "greedy" bankers, the euro-zone crisis and risks facing the global economy in 2013. He speaks in Aix-en-Provence, France, with Bloomberg Television's Caroline Connan. (Source: Bloomberg)

“The risk around the finance ministers’ meeting is that we see more cracks appearing in European unity and perhaps a delay in implementation of the measures agreed on at the summit,” said Mike Jones, a Wellington-based currency strategist at Bank of New Zealand Ltd. “That’s taking some toll on the euro.”

The euro earlier slid to as low as $1.2251, the weakest since July 2010, before trading at $1.2281 as of 9:12 a.m. in Tokyo, 0.1 percent lower than the close on July 6. The shared currency lost 0.3 percent to 97.65 yen. The yen gained 0.2 percent to 79.52 per dollar. The so-called Aussie declined 0.1 percent to $1.0205.

The MSCI Asia Pacific Index (MXAP) of shares dropped 0.7 percent.

At a summit in June, euro-region leaders agreed to relax conditions on emergency loans for Spanish banks.

“We have to move quickly on banking supervision and we have to move quickly on the direct recapitalization of Spanish banks,” French Finance Minister Pierre Moscovici said yesterday.

Japan’s current-account surplus was 215.1 billion yen ($2.7 billion) in May, the Ministry of Finance said in Tokyo today. That compares with a median estimate for an excess of 493.1 billion yen in a Bloomberg News survey of economists.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@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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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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Diamond’s Exit Shows Libor Only What Each Bank Says It Is

By Paul Armstrong - Jul 4, 2012 6:00 AM GMT+0700

The resignation of Barclays Plc (BARC) Chief Executive Officer Robert Diamond for the firm’s role in rigging the London interbank offered rate underscores the disconnect between the market’s perception of bank borrowing costs and the benchmark for $360 trillion of global securities.

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Barclays' chief executive Robert Diamond. Photograph: eyevine/Zuma Press

Barclays has gone from saying in January it can borrow for three months at interest rates that were on average above other banks to saying it can borrow more cheaply than its peers even though the cost of insuring the London-based firm’s debt using credit-default swaps rose 33 percent, according to data compiled by Bloomberg.

The contrast between banks’ daily submissions for Libor and other measures of their creditworthiness shows why regulators from Europe to the U.S. are beginning to fine them for manipulating the market for short-term rates. While the British Bankers’ Association reveals Libor submissions from each bank, the process that the firms use to come up with their individual rates is opaque and not based on actual transactions.

“After the Barclays admission, we have proof that Libor is not a reliable benchmark,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam.

Libor is hardwired into the world’s financial system, meaning credible alternatives have been slow to develop. ICAP Plc, which started the New York Funding Rate in 2008 amid concern about the veracity of Libor, cut the minimum number of participants in April required in its daily survey of unsecured loans because of a decline in interbank lending.

‘Archaic Process’

Libor is determined by banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies.

Princeton University economist and former Federal Reserve Vice Chairman Alan Blinder said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Scarlet Fu yesterday that a “real market” may come from the Libor investigations and that the current system is an “archaic” way to set rates. At least a dozen firms are being probed by regulators worldwide for colluding to rig the rate.

Barclays employees overseeing Libor and Euribor submissions routinely accommodated requests that benefited traders at their own and other banks, according to the U.S. Commodity Futures Trading Commission. The BBA, which has overseen Libor for 26 years, created a steering group of bankers and regulators in March to consider reforms in light of the probes.

Low-Balling

The BBA was aware that banks including Barclays were low- balling their Libor submissions during the financial crisis to avoid the perception they were struggling to borrow cash, according to CFTC documents.

“During periods of financial stress it’s not clear if Libor really represents an interbank offered rate,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Diamond, 60, quit today after the U.K.’s second-biggest lender was fined a record $451 million when investigators found traders and senior managers “systematically” tried to rig Libor and Euribor, its euro equivalent. Chief Operating Officer Jerry Del Missier also stepped down, while Marcus Agius, who said yesterday he planned to resign, will become full-time chairman and lead the search for a new CEO.

Process ‘Dead’

Diamond came under increasing pressure from politicians including British Prime Minister David Cameron before his position at the head of Barclays became untenable. Cameron’s deputy, Nick Clegg, openly called for the CEO to go this week.

“The idea that one can base the future calculation of Libor on the idea that ‘my word is my Libor’ is now dead,” Bank of England Governor Mervyn King said at a press conference to present the central bank’s Financial Stability Report in London on June 29. “It will have to be based in the future, in my judgment, on actual transactions in order to bring back credibility to the system.”

John McGuinness, a spokesman for Barclays in London, declined to comment. Brian Mairs, a spokesman for the BBA, didn’t return a phone call seeking comment.

The rate Barclays says it pays for three-month dollar loans diverged from the Libor composite on Feb. 27, after largely tracking it since 1994, BBA data show. The U.K. lender’s rate is now 12.1 basis points, or 0.121 percentage point, below the benchmark, compared with a 16.8 basis-point gap June 1, the widest since at least 2000.

Spotlight Intensifies

As the spotlight on Libor intensifies, the rates different banks give to the BBA are diverging, after being virtually identical at the start of 2007 before the worst financial crisis since the Great Depression.

The gap between the highest submission, currently from French lender Societe Generale SA (GLE), and the lowest, from HSBC Holdings Plc, has increased to 33.8 basis points. On Jan. 3, 2007, when Libor was at 5.36 percent, the gap between the highest and lowest submissions was just 1 basis point.

Barclays now puts in the second-lowest rate after HSBC, which says it can borrow at 0.26 percent. Credit-default swaps insuring HSBC’s bonds rose about 1 percent since Jan. 27 to 119 basis points, according to Bloomberg data. Contracts on Barclays jumped to 204 from 153 during the same period.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

The CFTC ordered Barclays on June 27 to keep thorough records on how it sets its Libor submissions and to erect Chinese walls between traders and rate-setters. It also said lenders should expect random checks on whether their rates reflect actual borrowing costs.

CFTC’s Recommendations

As part of its settlement, the CFTC ordered Barclays to amend how it sets Libor. Submissions should be based on actual trades if possible. Where no trades have taken place, the rate- setter can consider factors including how much competitors paid to borrow and market conditions, the CFTC said.

Rate-setters should be prohibited from “improper communications” and not work within earshot of derivatives traders, according to the commission. Barclays must keep extensive records on all its Libor submissions, including details on who the rate-setter was and how the figure was derived. The bank must also undergo annual audits and be willing to provide data to regulators on demand.

On Sept. 13, 2006, a senior Barclays trader in New York e- mailed the person who submitted the rate, “Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help,” according to a CFTC document.

‘Big Boy’

In an exchange on April 7, 2006, a submitter responded to a request for low U.S. dollar Libor submissions from a swaps trader with: “Done ... for you big boy,” the CFTC said.

“It’s the damage to confidence that corporates are concerned about,” said John Grout, the policy and technical director of the Association of Corporate Treasurers in London. The group represents borrowers in the loan market, where interest rates tend to be based on Libor or other interbank rates. “If people don’t trust these things, you can get liquidity reducing, you can get investors starting to add spreads onto corporate borrowing costs, which is not helpful.”

Three members of the new Libor steering committee interviewed by Bloomberg News last month said changes would be incremental because structural modifications in how the rate is calculated could invalidate trillions of dollars of contracts and result in litigation. They ruled out stripping the BBA’s oversight and scrapping the survey system in favor of a rate based entirely on actual trades.

The British government will emphasize to the BBA at the steering group’s next meeting that only drastic changes will suffice, according to a person with knowledge of the matter, who asked not to be identified because the talks are private. Chancellor of the Exchequer George Osborne, speaking to lawmakers in London yesterday, said the FSA is “committing significant resources” to investigate “systemic failures” over the manipulation of Libor.

To contact the reporter on this story: Paul Armstrong in London at parmstrong10@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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Big Banks’ ‘Living Wills’ Aiming for Bankruptcy Not Bailouts

By Jesse Hamilton - Jul 4, 2012 4:38 AM GMT+0700

U.S. regulators, seeking to prevent a repeat of taxpayer-funded bailouts of the financial system, released summaries of plans for breaking up nine of the world’s largest banks in the event of an emergency.

The Federal Deposit Insurance Corp. and Federal Reserve posted the public portions of so-called living wills on websites today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately describing how regulators could dismantle the companies if they fail.

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Employees of Christie's auction house with the Lehman Brothers corporate logo in London. Photographer: Oli Scarff/Getty Images

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The banks required to file were JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), Morgan Stanley, Barclays PLC (BCS), Deutsche Bank AG (DB), Credit Suisse Group AG (CS) and UBS AG. (UBSN)

The aim of the living wills is to give regulators a plan for shutting down complex financial firms without taxpayer bailouts or the turmoil that followed the 2008 collapse of Lehman Brothers Holdings Inc.

Banks with more than $250 billion in nonbank assets were the first of an eventual 125 firms required to produce liquidation plans, which are expected to run into thousands of pages. Nonbank companies declared by U.S. regulators to be systemically important will also have to submit living wills.

Few Details

The public summaries of the wind-down plans reveal few details. For instance, Bank of America’s summary says that assets sold off during a resolution could go to a “range of buyers including, but not limited to, national, international and regional financial institutions; private equity and hedge funds; and other financial asset buyers such as insurance companies.”

Some banks said it would be possible to save their main businesses and avoid full liquidations. As regulators instructed, the proposals presumed markets would be functioning normally with buyers ready to make large acquisitions without government backing. That wasn’t the case when firms including Bear Stearns Cos. collapsed during 2008’s credit crisis, and the law allows the regulators to require more complicated stress scenarios in future rounds.

Morgan Stanley (MS), owner of the world’s largest brokerage, and Goldman Sachs were among firms that said it may make the most sense to sell assets or stand-alone businesses in the event of a failure. Goldman Sachs predicted that such deals could help it avoid a company-wide liquidation. Sales, which would need to be conducted “quickly,” would likely be to other financial firms, private-equity investors, insurance companies or sovereign wealth funds, it said.

‘Substantial Majority’

“If it proves impossible to sell GS Group businesses and assets then it would be possible to liquidate a substantial majority of GS Group’s assets,” the New York-based company said. Such a strategy would “likely take more time,” it said.

“We believe the plan we sent to the Federal Reserve and FDIC provides a process to enable an orderly resolution of Goldman Sachs Group,” the company said in a statement today. Its plan works in conjunction with “the firm’s well-established risk management practices, conservative liquidity management practices and rigorous approach to regularly marking assets to market values,” it said.

JPMorgan, Bank of America, Citigroup and Zurich-based Credit Suisse (CSGN) said that one option was to shunt FDIC-insured entities into a so-called bridge bank that could be preserved.

Non-bank Units

Non-banking entities, such as Bank of America’s Merrill Lynch unit, could be put through bankruptcy proceedings, the Charlotte, North Carolina-based company said. Broker-dealer units would be liquidated according to the Securities Investor Protection Act, it said.

Donald Lamson, who represents financial institutions at Shearman & Sterling LLP in Washington, said the lone failure assumption could limit the plans’ usefulness in the event of a broad financial crisis.

“The same stresses that would prompt me to put a subsidiary up for sale would make it just as difficult for another entity to make a purchase,” Lamson said.

Citigroup, the third-biggest U.S. bank with operations in more than 100 countries, said it could separate its deposit- taking banking unit, Citibank NA, from broker-dealer units that trade stocks and bonds. The New York-based parent would then go bankrupt and sell off the broker-dealers, according to the plan. Citibank would continue as a “smaller but recapitalized and viable banking institution,” it said.

‘Orderly Fashion’

Regulators could also wind down Citigroup by selling the lender’s operations “in an orderly fashion,” the firm said. Employees would be “well equipped” to help after already reducing the size of the Citi Holdings division, according to the plan. Chief Executive Officer Vikram Pandit created the unit in 2009 to hold about $600 billion of unwanted investments. Assets fell to $209 billion at the end of March.

“Our first blush review suggests few shocks,” according to a note today by Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC in Washington. “Banks basically suggest either turning themselves over to creditors or liquidating the institutions. This should hardly shock investors.”

The information in this first round of “very high-level” summaries is not much deeper than what can be found in existing securities filings, Lamson said.

‘We Hope’

“I think that in a lot of these statements, there’s the parenthetical: ‘We hope,’” Lamson said in an interview. “These are all forward-looking assessments, and it’s very hard to see the future.”

In coming months, regulators will assess whether each living will represents a “credible” path to a rapid and orderly bankruptcy. The agencies have 60 days from submission of the plans to request more information from the companies.

“These banks owe American taxpayers more information than these excerpts from their shareholder reports and the saccharine reassurance that they’re safe,” Bartlett Naylor, who works on financial policy at the Washington-based advocacy group Public Citizen, said in an interview.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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