Goldman Sachs Beats Options Bears as S&P 500 Rallies

By Eric Martin and Kayla Carrick

July 16 (Bloomberg) -- Rising retail sales and record profits at Goldman Sachs Group Inc. are outweighing insider selling and bearish stock-options bets as the Standard & Poor’s 500 Index stages its biggest rally in four months.

The benchmark gauge for U.S. equities climbed 3 percent yesterday to complete the steepest three-day advance since March. Retail sales rose 0.6 percent last month, topping the 0.4 percent estimate of economists surveyed by Bloomberg. Goldman Sachs reported earnings of $3.44 billion. Intel Corp. said third-quarter sales will be up to 13 percent higher than analysts predicted.

As recently as four weeks ago, money managers said the longest streak in net stock sales by corporate insiders in two years, the biggest gap between the cost of bullish and bearish stock options since August 2008 and rising unemployment would drive the S&P 500 down. The index, which fell 38 percent in 2008 and another 25 percent in the first two months of the year, is now up 3.3 percent for 2009.

“The human desire for hope springs eternal,” said Peter Sorrentino, who helps oversee $13.8 billion at Huntington Asset Management in Cincinnati. “Some of this is over-complacency by people who sat out way too long.”

Sorrentino said he hasn’t sold an options position that pays off if the S&P 500 slips to 775 in December, a 17 percent decrease from yesterday’s close. He said two weeks ago that he expected the index to fall more than 10 percent from its July 2 price of 896.42.

JPMorgan, CIT

U.S. futures fluctuated between gains and losses today as earnings from New York-based JPMorgan Chase & Co. that beat analysts’ estimates offset speculation that New York-based CIT Group Inc. is on the verge of bankruptcy. The S&P 500 contract had advanced as much as 0.3 percent and retreated as much as 0.7 percent as of 7:48 a.m. in New York.

The 14-week, 40 percent rally in the S&P 500 to its 2009 high on June 12 spurred concern among some investors that the gains came too quickly. The advance was the steepest since the 1930s, according to data compiled by Bloomberg.

The S&P 500 slid 7.1 percent from its 2009 peak to 879.13 on July 10. It has rebounded to the highest level since June 12, when insiders at S&P 500 companies were selling stock for the 14th straight week, the longest streak in two years, according to data compiled by Princeton, New Jersey-based InsiderScore.com.

Lehman’s Collapse

The gauge has gained 3.8 percent since July 6, when the price of options to protect against a 10 percent decline in the index exceeded bets on an advance by the most since August 2008. That was a month before the collapse of New York-based securities firm Lehman Brothers Holdings Inc. in the biggest U.S. bankruptcy.

Profits that are beating analyst projections helped push the index up 6 percent since companies began reporting earnings on July 8. Almost 67 percent have released results that surpassed estimates, compared with an average of 59 percent since 1993, according to data compiled by Bloomberg.

“The rally is due to second-quarter earnings coming out that are showing some signs of strength,” said Jason Cooper, who manages $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. “That’s something people are looking toward as far as an indication of where we were for the second quarter and where we might be going for the third.”

Cooper cited insider selling as a reason for investor caution after it rose in the week ended June 16.

Intel, Goldman Sachs

Intel, based in Santa Clara, California, added 7.3 percent to $18.05 yesterday, the highest price since October. The world’s biggest chipmaker said third-quarter revenue will reach as much as $8.9 billion as computer makers boost orders. Analysts projected $7.86 billion based on the average of estimates compiled by Bloomberg.

Goldman Sachs climbed 9.4 percent this week. The bank posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds, and Meredith Whitney recommended buying the shares.

Whitney, the banking analyst who became one of Wall Street’s first bears when credit markets started to freeze in 2007, spurred a 9.3 percent jump in Bank of America Corp. on July 13. She said the Charlotte, North Carolina-based lender was the “cheapest” among U.S. banks.

‘Scales Have Tipped’

“The scales have tipped to where people are looking for reasons to be bullish,” said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees about $145 billion. “There’s a sense of guarded optimism.”

Levine warned that the S&P 500 had risen “too far, too fast” in a July 1 interview.

Fund managers said at the end of June that lockstep gains in commodities and stocks created the risk of a replay of last year, when equities and raw materials posted their biggest retreats in half a century. Since then, the S&P 500 has added 1.5 percent.

Joseph Keating of RBC Bank, who warned on June 17 that insider selling would precede declines in stocks, said the size of last year’s losses is helping drive the market now. The S&P 500 has fallen 40 percent since its all-time high 21 months ago.

“We’re still down from the peak in stock prices from October 2007,” said Keating, who helps oversee $4 billion as chief investment officer of Raleigh, North Carolina-based RBC Bank. “An awful lot of bad news continues to be discounted.”

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Kayla Carrick in New York at kcarrick1@bloomberg.net.

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Treasury Bets U.S. Financial System Can Weather CIT Collapse

By Scott Lanman and Vivien Lou Chen

July 16 (Bloomberg) -- The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender.

“I hate to say this, but it was probably expendable,” said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. “It may have just missed the boat” on federal rescues, Santiago said.

Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT.

Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.

A Treasury official said the department anticipates losing the $2.3 billion of taxpayer funds that it had already injected into the company from the Troubled Asset Relief Program should it file for bankruptcy.

‘Disruption’ and ‘Anger’

There will be “a lot of disruption and anger among voters, particularly among people who rely on firms such as CIT for funding,” said Sean Egan, head of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates CIT below investment grade.

“A major provider of capital in the middle market is likely to be out of business in the near future,” and investors will be concerned, at least in the “short run” about CIT, Egan said.

CIT, whose stock trading was halted by the New York Stock Exchange before the close, said late yesterday it was told “there is no appreciable likelihood of additional government support being provided over the near term.” CIT added that it was “evaluating alternatives” with its advisers.

The Treasury then highlighted in a statement that the government has enacted “powerful” mechanisms to revive credit markets. “Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the department said.

Administration Rationale

An Obama administration official separately said CIT didn’t receive more government assistance because it hadn’t gone to private capital sources to rebuild its balance sheet, something that several of the biggest Wall Street and regional lenders did earlier this year.

The official, who requested anonymity to discuss the deliberations, said the government also determined that CIT didn’t pose systemic risk to the economy if it failed to receive more aid.

Yesterday’s collapse in talks between regulators and CIT followed reluctance by the Federal Deposit Insurance Corp., the bank’s main regulator, to give it permission to participate in the agency’s debt-guarantee program.

The Federal Reserve had separately considered whether to let CIT put some of its parent assets into a banking unit, a move that could have increased its potential borrowing from the central bank. No such aid was forthcoming. The Fed has doubled its balance sheet to more than $2 trillion as it engaged in Wall Street rescues and emergency loans to banks across the nation.

‘Very Big Losses’

“If the government would have rescued them they would have been in there for a very long time, and they would have taken very big losses,” said Eric Hovde, who manages $1 billion at Hovde Capital Advisors LLC in Washington, which concentrates on financial and real-estate related companies.

Part of the Fed and Treasury efforts to shore up the financial markets have been directed at restarting lending to small businesses. The two agencies in March jointly started the Term Asset-Backed Securities Loan Facility, or TALF. Under the program, the Fed lets investors borrow to purchase securities backed by auto, credit-card and other loans, with the idea that should spur lenders to extend more credit.

TALF loans from the Fed totaled $24.9 billion as of last week, compared with the program’s planned capacity of $1 trillion, backed by $100 billion of funds from the $700 billion Troubled Asset Relief Program.

TALF Aid

Fed officials credit the existence of the TALF with spurring the market for new asset-backed securities and reducing the difference, or spread, between yields and benchmark rates.

“So far, the evidence indicates that the program is working as designed,” New York Fed President William Dudley said in a speech last month. Yield premiums on consumer asset- backed securities have dropped “sharply,” he said.

The three-month London Interbank offered rate for the dollar, a benchmark for liquidity stresses among banks, has fallen every week since mid-March. The rate dropped to 0.51 percent yesterday from 1.43 percentage point at the start of the year.

Other evidence of a stabilization in the financial industry emerged this week, with Goldman Sachs Group Inc. reporting record profits. The Standard & Poor’s 500 Financials Index has rallied 11 percent this week.

Fed policy makers still regarded financial markets as “fragile” and the economy as “vulnerable to further adverse shocks,” minutes of their June 23-24 meeting, released yesterday in Washington, showed.

Regulatory Overhaul

The spurning of CIT comes amid a growing debate among officials, regulators, lawmakers and the financial industry over how to address the issue of firms deemed too big to let fail.

President Barack Obama is seeking the biggest overhaul of banking rules in decades, and wants to give the Fed new powers to oversee capital and liquidity standards. FDIC Chairman Sheila Bair, along with some lawmakers and central bankers, has urged stronger efforts to address the too-big-to-fail issue.

Gary Stern, president of the Minneapolis Fed, said the Obama plan “fails to come to grips” with the challenge, partly because it doesn’t threaten creditors with the risk of loss. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, plans a hearing on the matter July 21.

CIT was created in 1908, after founder Henry Ittleson noticed wholesalers repeatedly short of cash while he was a purchaser for a St. Louis department store. He wanted to create a new company that would serve customers overlooked by larger financial institutions, according to the firm’s Web site.

“I’ve heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem” for CIT to fail, Frank said in an interview yesterday before the firm’s announcement.

Among financial firms, “especially those on the edge, there’s going to be a scramble to figure out whether you’re in or out” of bailouts, said Joseph Mason, Louisiana State University finance professor. “This classification of systemic risk really is something like pornography -- Fed and Treasury know it when they see it. You really can’t pre-commit.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

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Canada’s Dollar Falls First Time in 4 Days as Oil, Stocks Slip

By Chris Fournier

July 16 (Bloomberg) -- Canada’s dollar depreciated after outperforming all other Group of 10 currencies this week as U.S. stock-index futures and crude oil fell and before the nation’s central bank meets next week to set monetary policy.

The Canadian currency rose 4.6 percent against its U.S. counterpart from July 10 through yesterday as corporate earnings and a rebound in commodity prices sharpened investor appetite for risk. Speculation that New York-based commercial lender CIT Group Inc. is on the verge of bankruptcy may damp that enthusiasm.

“The CIT situation is helping a subtext of risk aversion make itself felt even during what has been a rather positive earnings season,” said Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank. “This is putting some pressure on” the Canadian dollar.

The currency weakened 0.5 percent to C$1.1186 per U.S. dollar at 8:08 a.m. in Toronto, from C$1.1126 yesterday, when it reached C$1.1118, the strongest since June 12. One Canadian dollar buys 89.40 U.S. cents.

Canada’s statistics agency is scheduled to report inflation data tomorrow at 7 a.m. in Ottawa.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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China $2 Trillion Reserves Keep U.S. Stimulus Afloat

By Bloomberg News

July 16 (Bloomberg) -- China’s foreign-exchange reserves are surging again, helping the Obama administration sell unprecedented amounts of debt as it seeks to drag the world’s biggest economy out of a recession.

Stockpiles of currency rose by a record $178 billion in the second quarter to top $2 trillion for the first time, the People’s Bank of China said yesterday. The amount is close to two-thirds the size of China’s economy and the equivalent of Italy’s gross domestic product in 2006.

The cash holdings are growing as the central bank sells its currency, the yuan, to prevent an appreciation that would make the country’s exports more expensive. The yuan sales mean for all the calls by China and other emerging markets for an alternative to the dollar as the world’s reserve currency, it has little choice but to keep buying U.S. government assets.

“People are talking about whether the Chinese may actually one day dump the dollar and Treasuries because of the problem in the U.S., but they are missing the point,” said Stephen Jen, head of macroeconomics and currencies in London at BlueGold Capital LLP, which manages $1.1 billion. “The reserves are so big because China needs to keep the exchange rate stable for its exports. Therefore, they have to keep buying dollar assets.”

The need to temper gains in its currency led China, the biggest overseas holder of Treasuries, to more than double its holdings of U.S. government notes and bonds in three years to $763.5 billion in April, according to U.S. Treasury data. The amount was equivalent to 38 percent of its reserves at the time.

Stimulus Spending

President Barack Obama’s administration is seeking to sell a record amount of debt to pay for measures to revive the U.S. economy. New York-based Goldman Sachs Group Inc. estimates that government borrowing may total $3.25 trillion in the year ending Sept. 30, almost four times the $892 billion in 2008, to finance the budget deficit.

“China’s reserves will allow the U.S. to run a higher fiscal deficit than other nations,” said Bilal Hafeez, the London-based global head of currency strategy at Deutsche Bank AG, the world’s biggest foreign-exchange trader. “Their rhetoric suggests they do want to diversify their reserves but the data suggests they are doing it in a measured way. There is no dumping dollars.”

The reluctance to let the yuan appreciate when the world is mired in the deepest recession in six decades means that China will keep accumulating U.S. debt, even if the amount of its purchases declines, according to economists at RGE Monitor, a New York-based research firm headed by economist Nouriel Roubini.

“Despite China’s concerns about the value of its large stock of U.S. assets, reserve diversification will continue to be difficult,” the RGE economists wrote in a report yesterday.

Cash Surge

China’s reserves have increased by almost 14 times this decade as exports generated a trade surplus that pumped in cash. Capital Economics Ltd., a London-based consultancy, estimates that exports will account for 30 percent of China’s gross domestic product this year.

Win Thin, a currency strategist at Brown Brothers Harriman & Co., said investors have also recently pushed cash into emerging markets such as China, amid signs that their economies will recover more quickly than those of developed nations. China’s growth rebounded to 7.9 percent in the second quarter, from 6.1 percent in the first, the government said today.

Such investment inflows mean that “policy makers bought dollars and sold local currency in order to prevent currency appreciation,” Thin said in a report yesterday. He predicted that China will continue intervening to keep the yuan trading at about 6.83 per dollar through the end of this year.

Yuan’s Stability

The yuan’s value has barely changed in the past year, following a 21 percent appreciation in the three years after China scrapped its dollar peg in July 2005. The demand for dollars conflicts with China’s calls for the world to consider drawing away from the greenback as its sole reserve currency.

“As the Chinese were becoming more vocal in regard to the need to move away from the U.S. dollar, they were in actual fact buying more dollars than ever,” said Derek Halpenny, European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd.

People’s Bank of China Governor Zhou Xiaochuan urged the International Monetary Fund in March to move toward creating a “super-sovereign reserve currency” to replace the dollar. Premier Wen Jiabao said the same month that he was “worried” the dollar would weaken.

Speaking to Al-Arabiya television yesterday, U.S. Treasury Secretary Timothy Geithner expressed confidence that the dollar “will remain the principal reserve currency.” The dollar rose 0.2 percent to $1.4083 per euro at 3:11 p.m. and has declined less than 1 percent this year.

Dollar Dominance

The dollar’s share of global reserves increased to 65 percent in the first three months of this year, the most since 2007, according to the International Monetary Fund.

China is trying to reduce its reliance on the U.S. currency in other ways. It signed 650 billion yuan ($95 billion) of currency swaps since December with nations from Argentina to Belarus and is encouraging trading partners to use the yuan to settle cross-border trade.

The government is considering purchasing $50 billion of the IMF’s bonds after the Group of 20 leaders on April 2 gave the international lender approval to boost its war chest by $500 billion.

Investment Flops

China can afford that and more because its reserves will increase by more than $200 billion annually in coming years, said Wang Tao, an economist with UBS AG in Beijing. Increasing its strategic oil reserve to 90 days of imports, the nation’s target for 2020, would take another $50 billion, Wang added.

China Investment Corp., the nation’s $200 billion sovereign wealth fund, lost money on its first investments. It bought a $3 billion stake in Blackstone Group LP stake in May 2007 at a 4.5 percent discount to the initial public offering price of $31. The stock now trades at $9.97. It agreed to purchase $5 billion of Morgan Stanley stock with the lowest possible price at $48.07 in December 2007. Those shares trade at $28.80.

The country’s top currency regulator this week relaxed curbs on overseas investment by local businesses, allowing more funds to flow abroad starting Aug. 1.

All those measures are unlikely to reduce reserves or curb China’s need to purchase U.S. debt, said Zhu Baoliang, chief economist of the State Information Center, an affiliate of the National Development and Reform Commission, China’s top economic planning agency.

“The reserves will continue to pile up,” said Zhu. “Over the short term, there isn’t much China can do but continue to buy Treasuries while hoping the U.S. economy can recover as soon as possible so that the investment won’t suffer too much loss.”

--Kevin Hamlin, Li Yanping, Anchalee Worrachate, Simon Kennedy, Sandy Hendry, Justin Carrigan. Editors: Brenda Batten, Daniel Moss

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

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Yen Rises as CIT Says Aid Unlikely, Paring High-Yield Demand

By Ye Xie and Bo Nielsen

July 16 (Bloomberg) -- The yen advanced against the euro for the first time in four days as the commercial lender CIT Group Inc. said it probably won’t receive a federal bailout, reducing demand for higher-yielding assets.

New Zealand’s dollar slid the most in two weeks versus the greenback after Fitch Ratings cut the outlook for the nation’s long-term credit rating. The yen pared its gains as profit at JPMorgan Chase & Co. rose for the first time since 2007 and a report showed U.S. first-time unemployment claims fell last week to the lowest level since January.

“The yen is still the main bellwether of risk appetite,” said Paul Robson, a London-based currency strategist at Royal Bank of Scotland Group Plc. “CIT reminded people that the global financial system still has issues, but risk appetite won’t be off for long.”

Japan’s currency appreciated 0.3 percent to 132.62 per euro at 8:54 a.m. in New York, from 132.95 yesterday, when it declined to 133.40, the weakest level since July 7. The dollar slid 0.2 percent to $1.4139 per euro from $1.4107. The yen gained 0.5 percent to 93.75 per dollar from 94.23.

New Zealand’s dollar declined 0.3 percent to 64.71 U.S. cents after falling 1.5 percent, the biggest intraday drop since July 2, and slipped 0.7 percent to 60.73 yen. Australia’s currency was little changed at 80.38 cents.

Yen Versus Euro

The yen rose from near a one-week low against the euro after New York-based CIT said in a statement yesterday “there is no appreciable likelihood of additional government support being provided over the near term.” The company faces bankruptcy if no federal aid emerges, Standard & Poor’s said this week.

“Growth bears who don’t believe in the recovery story were keen to jump onto the negative news and buy the yen and the dollar,” said Henrik Gullberg, a currency strategist in London at Deutsche Bank AG, the world’s largest currency trader. “But CIT is likely to be an exception, and we’ll see more positive surprises coming from financial institutions going forward.”

More than 1.5 million U.S. properties received a default or auction notice or were seized by banks in the six months through June, RealtyTrac Inc., an Irvine, California-based seller of default data, said today in a statement. That’s a 15 percent increase from the year earlier.

The yen typically rises during times of financial turmoil because its trade surplus means the nation doesn’t have to rely on overseas lenders.

Weaker Kiwi

New Zealand’s currency, known as the kiwi, weakened after Fitch said in a statement that the South Pacific nation’s deficit is large and a “stronger fiscal adjustment than currently planned” may be needed.

“The downward revision in New Zealand’s rating outlook may spark investor worries over whether the nation can emerge from recession,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “That could cause selling of commodity currencies, particularly the kiwi, and buying of haven currencies such as the yen and the dollar.”

Fitch affirmed New Zealand’s foreign-currency rating at AA+, its second-highest level, and affirmed the local-currency rating at AAA. New Zealand’s current-account deficit was 8.5 percent of gross domestic product in the year ended March 31.

The yen pared its gain versus the euro while the dollar erased its advance on JPMorgan’s earnings and the drop in U.S. initial jobless claims.

JPMorgan’s Profit

Quarterly profit at the second-largest U.S. bank surpassed analysts’ most optimistic estimates as investment-banking fees reached a record.

The number of Americans filing claims for unemployment benefits fell to 522,000 in the week ended July 11 from a revised 569,000, the Labor Department reported today. The median forecast of 41 economists surveyed by Bloomberg News was for a decrease to 553,000 from a previously reported 565,000.

The Dollar Index, which the ICE uses to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, was little changed at 79.261 after earlier rising as much as 0.4 percent.

The yen also pared gains after China said its economy rebounded from the weakest growth in a decade, encouraging investors to buy emerging-market assets.

China’s gross domestic product expanded 7.9 percent in the second quarter from a year earlier after a 6.1 percent gain in the previous three months, the statistics bureau said. Industrial production rose 10.7 percent in June from a year earlier after an 8.9 percent gain in May, the bureau also said.

“The recent slew of economic data and incoming indicators seem to suggest that the global situation is not as bad as the market had feared,” said Kengo Suzuki, manager of the foreign bond department in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest banking group. “This will put downward pressure” on the yen and dollar.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net;

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Cameroon to Help Cotton Farmers With Increased Fertilizer Costs

By Pius Lukong

July 16 (Bloomberg) -- Cameroon’s government will help cotton farmers with increased fertilizer costs in an effort to raise production and insulate the industry from the worst of the global recession, Finance Minister Essimi Menye said.

The government plans to invest more than 6 billion CFA francs ($13 million) into Sodecoton, the state-owned cotton company to buy fertilizer to distribute to farmers, he told reporters yesterday in the capital, Yaounde.

While the government has previously rejected the concept of providing subsidies to farmers, arguing that it stifles world competition, it will make an exception this year “to save a precarious situation,” Menye said.

A 40 percent rise in the cost of fertilizer during the past three years has led to a 35 percent fall in the number of cotton producers, Hamadou Nouhou, technical director of the Cameroon Professional Cotton Producers’ Association, said on April 11.

Production this year is as a result expected to fall to about 150,000 metric tons, half the quantity that was produced in 2007, Nouhou said. Cotton, mostly grown by about 227,500 small-scale farmers in the north of the country, is Cameroon’s fifth-largest foreign-exchange earner.

Producer subsidies in richer nations have depressed global prices, threatening the livelihood of millions of people in developing countries, the International Monetary Fund has said.

Sodecoton is 59 percent-owned by the government, while the rest is held by the Compagnie Francaise de Developement du Textile.

To contact the reporter on this story: Pius Lukong in Yaounde via Johannesburg at areed12@bloomberg.net

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India Rain Deficit to Narrow, Aiding Crop Sowing

By Thomas Kutty Abraham

July 16 (Bloomberg) -- India’s monsoon deficit will drop below 20 percent by end of this month as rains increase, easing a dry spell that’s dented sowing of crops in the world’s second- biggest producer of rice, wheat and sugar.

The shortfall for the season started June 1 narrowed to 27 percent as of yesterday from 45 percent last month, the India Meteorological Department, said. Falls were 6 percent more than the long-period average for the week ended July 15, the first weekly surplus this year, the weather office said.

Rains have intensified since July 8, helping allay fears of a drought undermining Prime Minister Manmohan Singh’s efforts to push economic growth back to a 9 percent pace. A deficit of as much as 50 percent earlier this month in the northwest region, the nation’s grain bowl, has dimmed prospects for bigger crops of rice, oilseeds and sugar cane.

“The good news is that the current active phase of the monsoon has helped alleviate drought fears,” D. Sivananda Pai, a director at the weather bureau said in a phone interview from Pune today. “Most parts will continue to receive good rains, though the northwest remains a bit of a concern.”

The formation of a low-pressure weather system over the Bay of Bengal may bring more rain starting July 20, A.B. Mazumdar, deputy director general at the weather office, said today from Pune. The current spell across paddy, oilseeds and cane growing areas will persist for at least two days, he said.

India got 220.5 millimeters (8.68 inches) of rains between June 1 and July 15, compared with the 50-year average of 300.8 millimeters, the weather bureau said. Falls were deficient in 22 of the 36 weather divisions, down from 25 in the previous week.

Rice Crop

Area planted to rice in the past week has risen 76 percent from the previous week, Farm Minister Sharad Pawar said in New Delhi today. That compares with a 20 percent drop in crop area to 7.43 million hectares on July 10.

“Rains have improved in the last one week and there seems to be no shortage in sowing of paddy,” Pawar told reporters.

The monsoon is the main source of irrigation water for the nation’s 235 million farmers as more than half the crop land isn’t irrigated. Sowing begins in June and ends mostly by July.

An El Nino that’s forming over the Pacific Ocean may not impact the June-September rains, Pai said. The weather event, which occurs about every four to seven years, causes dry weather conditions in many Asian countries.

“By the time the El Nino phenomenon peaks, a better part of the monsoon would have been over,” he said. “It may impact the last leg of the rains in September.”

India got below normal rains in 15 of the 36 El Nino years it had in the 1875-2008 period, the weather office said June 24.

Showers this season may be below normal, or 93 percent of the long-period mean of 89 centimeters (35 inches), the bureau said last month. In April, it forecast rains to be near normal.

To contact the reporter on this story: Thomas Kutty Abraham in Mumbai at tabraham4@bloomberg.net.

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Gold Pares Decline as Dollar Falls Against Euro; Platinum Rises

By Claudia Carpenter

July 16 (Bloomberg) -- Gold rebounded in New York and London as the dollar’s decline may spur investor demand for precious metals as alternative investments. Platinum gained after a Goldman Sachs Group Inc. recommendation.

The U.S. currency, which tends to move inversely to bullion, fell 0.2 percent against the euro after earlier rising as much as 0.4 percent. Gold has added 6.8 percent this year in London, helped by investment demand for the metal, which exceeded usage by jewelers for the first time since at least 2004 in the first quarter, according to the World Gold Council.

“A further weakening in the dollar and/or a return to the fear-driven safe-haven buying seen at the start of 2009” is needed “for gold to move sharply higher,” John Reade, UBS AG’s head metals strategist in London, wrote in a report today. “Our own jewelry flows have been very light over the past two months.”

Bullion for August delivery was 0.1 percent lower at $938.60 an ounce by 8:23 a.m. on the New York Mercantile Exchange’s Comex unit, rebounding from a drop of as much as $5. Gold for immediate delivery fell 50 cents to $938.70 an ounce in London.

Reade plans to review his one-month gold forecast of $950 an ounce after tomorrow’s release of weekly so-called commitments of traders figures from the U.S. Commodity Futures Trading Commission, according to his report.

Goldman Forecast

ETF Securities Ltd. said gold assets in its exchange-traded commodities fell 0.3 percent yesterday to 7.57 million ounces, the lowest since June 1.

“Upside risk to gold remains limited from current levels,” Jeffrey Currie, an analyst at Goldman. in London, wrote in a report yesterday. The metal will end the year at $930 an ounce, the bank predicted.

Gold futures have gained in 2009 as the greenback has declined 2.5 percent as measured by the Dollar Index, which gauges the currency’s performance against six monies.

“In the short term, gold has re-established its relationship with the dollar,” Bradley George, head of global commodities and resources at Investec Asset Management Ltd., said yesterday. The metal probably will trade between $880 an ounce and $1,100 an ounce in the second half, he said.

Gold was unchanged at $935.25 an ounce in London’s morning “fixing,” the price used by some mining companies to sell their production, compared with yesterday’s afternoon fixing.

Platinum Supply

Goldman advised investors to buy platinum for January delivery on the New York Mercantile Exchange, saying increased automobile production “will likely expose South African supply problems again during the second half of 2009.” Carmakers account for about 60 percent of platinum and palladium use, according to metals refiner and trader Johnson Matthey Plc.

Platinum for January delivery climbed $8.50, or 0.7 percent, to $1,171.90 an ounce. The October contract, the most active futures, jumped 1.2 percent to $1,171.50.

Spot platinum rose to a record $2,301.50 an ounce in March 2008 as power shortages in South Africa, the largest producer, reduced output.

Silver futures for September delivery rose 27 cents to $13.235 an ounce. Palladium fell 0.4 percent to $247.50 an ounce. Palladium, up 31 percent this year, and platinum, ahead 24 percent, are used to make jewelry and auto catalysts that remove harmful vehicle emissions.

To contact the reporter on this story: Claudia Carpenter in London at ccarpenter2@bloomberg.net

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Wheat Futures Gain for Second Day as Dry Weather Hurts Growers

By Luzi Ann Javier

July 16 (Bloomberg) -- Wheat futures in Chicago gained for a second day after Argentina lowered its wheat planting estimate and hot weather in Ukraine and Russia, the world’s second- largest exporter, continued to stress crops.

The Buenos Aires Cereals Exchange cut its wheat planting estimate for this year, already the lowest on record, to 2.75 million hectares (6.8 million acres) as the country’s drought continued. Hot weather in parts of Ukraine, the world’s fourth- largest corn exporter, and southern Russia will stress corn crops, according to a DTN Meteorlogix LLC report yesterday.

There are “a few areas of the world where the conditions aren’t favorable,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia in Sydney, said by phone today. “That’s certainly something that’s supportive” of grain prices, he said.

Wheat for September delivery added as much as 0.4 percent to $5.37 a bushel, extending yesterday’s 0.9 percent gain. The most-active contract was 0.2 percent higher at $5.355 a bushel at 1:29 p.m. Singapore time.

Corn for December delivery gained as much as 0.5 percent to $3.3925 a bushel in after-hours trading on the Chicago Board of Trade after losing 2.3 percent yesterday. Futures were little changed at $3.3725 a bushel.

Farmers in Argentina, the fifth-largest wheat exporter in the 2007-2008 season, have planted 1.9 million hectares of the grain this crop year, 45 percent less than a year earlier, the Buenos Aires Exchange said yesterday.

Russian Weather

“Dry weather and sometimes hot temperatures through the spring wheat areas of the Urals in Russia and west Kazakh increases stress to jointing to early reproductive wheat,” Meteorlogix said in a weather forecast yesterday.

Russia last week trimmed its grain harvest estimate by 6 percent to 85 million tons because of the drought. Ukraine’s corn exports are forecast to decline to 3.5 million tons in the year beginning October, down from 5.5 million tons a year ago.

Gains in corn futures may be limited by higher yields in the U.S., Mathews said. Corn yields will increase to a record 163.7 bushels an acre, up from 153.9 bushels harvested last year, said Oscar Vergara, an agricultural consultant for AIR Worldwide, a catastrophe risk-modeling firm, yesterday.

Often, “favorable conditions in the U.S. override those isolated events over in Russia,” Mathews said. Higher harvests in the U.S. may make up for slower output in other exporting countries, he said.

Soybeans for November delivery, after the U.S. harvest, were little changed at $9.05 a bushel at 1:43 p.m. Singapore time, after gaining as much as 0.9 percent earlier.

To contact the reporter on this story: Luzi Ann Javier in Singapore at javier@bloomberg.net

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Copper May Decline on Speculation Recent Gains Were Excessive

By Anna Stablum

July 16 (Bloomberg) -- Copper, little changed in New York and London today, may fall as slumping confidence in the world economy fans concern that recent gains were excessive.

Confidence in the global economy dropped for the first time in four months in July as government stimulus efforts showed little sign of reducing job losses, a Bloomberg survey showed. That helped to pull prices lower even after China, the world’s biggest copper user, reported second-quarter economic growth that topped economists’ estimates.

“People bought on anticipation of the very solid numbers in China,” Alex Heath, head of industrial-metals trading at RBC Capital Markets in London, said by phone today. “It all got a bit ahead of itself.”

Copper for September delivery slipped 0.1 percent to $2.3895 a pound on the New York Mercantile Exchange’s Comex division at 8:21 a.m. local time, rebounding from a slide of as much as 1.5 percent. Copper for three-month delivery lost 0.2 percent to $5,250 a metric ton on the London Metal Exchange after falling as much as 1.8 percent earlier.

The outlook for prices depends on “how quickly the rest of the world pulls out of the recessionary period,” Heath said.

China’s gross domestic product expanded by 7.9 percent in the second quarter, beating the 7.8 percent median forecast of 20 economists in a Bloomberg survey, as the nation became the first major economy to rebound from the global recession. At the same time, though, the Bloomberg Professional Global Confidence Index declined to 39.13 in July from 43.57 in June.

Chinese Imports

Copper has advanced 70 percent this year in London, bolstered by demand from China, where imports of the metal and related products climbed to a record 475,999 tons in June. Industrial output in the country rose 10.7 percent in June from a year earlier, the National Bureau of Statistics said today.

“Much of the increase in imports has been driven by restocking, as opposed to stockpiling, following sizable declines in inventories in 2007 and 2008,” Tim Bond, head of global asset allocation at Barclays Capital, said in a report. “With older-economy industrial production starting to recover, any commodity correction is likely to be shallow and short- lived.”

LME copper moved into so-called backwardation this week for the first time since May 1 as metal for nearby delivery traded at a premium to three-month copper, indicating scarce supplies. The spread narrowed to $11.50 yesterday from $21 on the previous day.

Aluminum Rises

Inventories of copper in warehouses monitored by the LME slipped to 260,875 tons today, the seventh decline in eight sessions. Stockpiles have shrunk 52 percent from their peak on Feb. 25.

Among other LME metals for three-month delivery, aluminum rose 1.1 percent to $1,673.75 a ton after climbing as high as $1,680, the highest since July 1. LME-monitored inventories of the lightweight metal, used in transportation, power and packaging, have almost doubled this year.

“In a market with poor fundamentals and 4.5 million tons of stock, it is difficult to see prices going very much higher in the short term,” Steve Hardcastle, an analyst at Sucden Financial Ltd. in London, said by phone.

Tin dropped 1.4 percent to $13,115 a ton after the premium for near-month delivery surged to $160 a ton yesterday, up 68 percent this week. Nickel added 0.1 percent to $15,950 a ton, lead was unchanged at $1,635 a ton, and zinc gained 0.2 percent to $1,544.25 a ton.

To contact the reporter on this story: Anna Stablum in London at astablum@bloomberg.net

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Peer-to-Peer Loans Offer Investors 12% Return to Bypass Banks

By Peter J. Brennan

July 16 (Bloomberg) -- Scott Langmack has given more than $600,000 in unsecured loans to strangers.

“I can reliably get 12 percent, worst case 9 percent,” said Langmack, 50, a former Microsoft Corp. marketing executive who began investing in so-called peer-to-peer lending last year. “I can’t find anything that gives me this kind of confidence.”

Investors loan money directly in peer-to-peer, or P2P lending, to borrowers through firms such as LendingClub.com, which package the loans and sell them as notes, bypassing banks and credit-card issuers. The industry may grow to more than $100 billion in annual loans in 2012 from about $500 million this year as borrowers seek ways to reduce their costs, said Ed Kountz, a consumer payments analyst at market research firm Forrester Research Inc. in Cambridge, Massachusetts.

P2P lending offers a way for borrowers to get access to money for home, auto and student bills as banks scale back lending during the deepest U.S. recession since World War II. The Federal Reserve’s quarterly survey of senior loan officers released May 4 showed about 65 percent of banks lowered credit limits on new or existing credit-card customers, up from 45 percent in the January survey.

“It’s a great opportunity for investors to compete with banks, which have largely been ripping off the public with their high rates,” said Alan Lysaght, a Toronto-based author of financial advice books such as “The ABCs of Making Money.”

Investors, discouraged by stock market returns, are turning to P2P sites, said Renaud Laplanche, chief executive officer and founder of Sunnyvale, California-based LendingClub.com, which started in 2007 and now has 17,000 lenders averaging $2,500 in loans.

Market Decline

The Standard & Poor’s 500 Index declined 38 percent last year, the most since 1937. Yields on 1-year certificates of deposit fell to 1.88 percent on July 10 from a five-year high of 5.62 percent in July 2006, data compiled by Bloomberg show.

LendingClub’s loans more than doubled to $12.5 million in the second quarter from $5.3 million in the fourth quarter following the firm’s registration last October with the U.S. Securities and Exchange Commission, Laplanche said. Peer-to- peer companies must register because the loans are considered securities, SEC spokesman John Nester said.

“What E*Trade did to the stock brokerage industry, we’re doing to the banking industry,” said Laplanche, referring to how E*Trade Financial Corp. led to lower trading commissions. “A lot of good borrowers found themselves paying 24 percent interest on credit balances. They use our Web site to refinance those to 13 percent to 14 percent interest rates.”

Less Regulated

While P2P lending may grow, it isn’t as regulated as banks, which provide deposit insurance, said Carol Kaplan, a spokeswoman for the American Bankers Association in Washington.

“Investors have to question whether they want to do business with a cottage industry,” Kaplan said. “Banks are trying to control their risks by not granting credit to some people who may have a credit card, but are less than desirable borrowers.”

Among the risks of P2P loans are insufficient information to determine whether borrowers will repay, said Ken Naehu, who manages more than $2 billion in fixed income at Bel Air Investment Advisors LLC in Los Angeles. He said he can purchase 10-year California state tax-free bonds that yield about 5 percent. S&P rates California the lowest U.S. state, giving their general obligation bonds an A grade, the sixth-highest of 10 investment levels.

‘Dangerous Place’

“If you use that as a barometer, you can get a very low risk investment in comparison to these type of loans,” Naehu said. “It’s a dangerous place to be for the unsophisticated.”

Langmack, who makes loans through LendingClub.com, said investors can lose their entire investment. He said he spreads the risk by lending money on about 1,400 loans. He estimated about 15 borrowers are delinquent, meaning more than 15 days late in payments and two are in default.

“If you have a great credit rating and a solid job in a solid industry, then I like that person,” said Langmack, who lives in Hillsborough, California. He said he also plans to invest in the Web site and declined to specify an amount.

Typical borrowers want to consolidate balances from credit cards with higher interest rates and seek a three-year loan from a minimum $1,000 to a maximum $25,000, Laplanche said. LendingClub rates the loans based on an applicant’s credit score with a minimum requirement of 713. Interest rates range from almost 7.4 percent to 20.1 percent depending on a borrower’s credit history.

No Responses

Jim Beach, 39, a Los Angeles-based technical writer who was paying as much as 19 percent on $2,000 in credit-card debt, sought to refinance at local banks.

“I wasn’t getting responses from the banks for loans, not even at high rates,” Beach said. At LendingClub, he said he pays 12.8 percent on a $2,000 loan funded by 45 people. “The way it’s set up, it’s more like a utility bill and less like I have to become stressed and possibly miss a payment,” he said.

Investors earned an average annualized net return of 9.6 percent as of July 13, according to LendingClub’s Web site. When delinquencies occur, the company tries to work out a new payment with the borrower or sends the loan to a bill collector. LendingClub’s default rate is 3 percent, Laplanche said. Credit card write-offs, or loans that aren’t expected to be repaid, exceeded 10 percent in June, data compiled by New York-based Fitch Ratings show.

Consumers may refinance as much as $159 billion by 2012 in credit-card debt with P2P, according to a January study by Pleasanton, California-based Javelin Strategy & Research conducted for LendingClub.

Market Share

The industry can get a “a sizeable percentage” of the almost $3 trillion in U.S. unsecured debt, said Chris Larsen, co-founder and chief executive officer of Prosper.com, a San Francisco-based P2P lender that re-started lending on July 14 after a nine-month suspension while it registered with the SEC.

Growth may continue if institutional investors jump in, Larsen said. Prosper’s Web site differs from LendingClub by permitting lenders to bid on the interest rates for particular borrowers.

“This is a new asset class that is easily diversified,” Larsen said. “People are going to be able to find some great returns.”

To contact the reporter on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net.

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Goldman Beats Options Bears as S&P 500 Rallies Most Since March

By Eric Martin and Kayla Carrick

July 16 (Bloomberg) -- Rising retail sales and record profits at Goldman Sachs Group Inc. are outweighing insider selling and bearish stock-options bets as the Standard & Poor’s 500 Index stages its biggest rally in four months.

The benchmark gauge for U.S. equities climbed 3 percent yesterday to complete the steepest three-day advance since March. Retail sales rose 0.6 percent last month, topping the 0.4 percent estimate of economists surveyed by Bloomberg. Goldman Sachs reported earnings of $3.44 billion. Intel Corp. said third-quarter sales will be up to 13 percent higher than analysts predicted.

As recently as four weeks ago, money managers said the longest streak in net stock sales by corporate insiders in two years, the biggest gap between the cost of bullish and bearish stock options since August 2008 and rising unemployment would drive the S&P 500 down. The index, which fell 38 percent in 2008 and another 25 percent in the first two months of the year, is now up 3.3 percent for 2009.

“The human desire for hope springs eternal,” said Peter Sorrentino, who helps oversee $13.8 billion at Huntington Asset Management in Cincinnati. “Some of this is over-complacency by people who sat out way too long.”

Sorrentino said he hasn’t sold an options position that pays off if the S&P 500 slips to 775 in December, a 17 percent decrease from yesterday’s close. He said two weeks ago that he expected the index to fall more than 10 percent from its July 2 price of 896.42.

Overheating Index

The 14-week, 40 percent rally in the S&P 500 to its 2009 high on June 12 spurred concern among some investors that the gains came too quickly. The advance was the steepest since the 1930s, according to data compiled by Bloomberg.

The S&P 500 slid 7.1 percent from its 2009 peak to 879.13 on July 10. It has rebounded to the highest level since June 12, when insiders at S&P 500 companies were selling stock for the 14th straight week, the longest streak in two years, according to data compiled by Princeton, New Jersey-based InsiderScore.com.

The gauge has gained 3.8 percent since July 6, when the price of options to protect against a 10 percent decline in the index exceeded bets on an advance by the most since August 2008. That was a month before the collapse of New York-based securities firm Lehman Brothers Holdings Inc. in the biggest U.S. bankruptcy.

Profits that are beating analyst projections helped push the index up 6 percent since companies began reporting earnings on July 8. Almost 67 percent have released results that surpassed estimates, compared with an average of 59 percent since 1993, according to data compiled by Bloomberg.

‘Signs of Strength’

“The rally is due to second-quarter earnings coming out that are showing some signs of strength,” said Jason Cooper, who manages $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. “That’s something people are looking toward as far as an indication of where we were for the second quarter and where we might be going for the third.”

Cooper cited insider selling as a reason for investor caution after it rose in the week ended June 16.

Intel, based in Santa Clara, California, added 7.3 percent to $18.05 yesterday, the highest price since October. The world’s biggest chipmaker said third-quarter revenue will reach as much as $8.9 billion as computer makers boost orders. Analysts projected $7.86 billion based on the average of estimates compiled by Bloomberg.

Goldman Sachs Rally

Goldman Sachs climbed 9.4 percent this week. The bank posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds, and Meredith Whitney recommended buying the shares.

Whitney, the banking analyst who became one of Wall Street’s first bears when credit markets started to freeze in 2007, spurred a 9.3 percent jump in Bank of America Corp. on July 13. She said the Charlotte, North Carolina-based lender was the “cheapest” among U.S. banks.

“The scales have tipped to where people are looking for reasons to be bullish,” said Michael Levine, a money manager at New York-based OppenheimerFunds Inc., which oversees about $145 billion. “There’s a sense of guarded optimism.”

Levine warned that the S&P 500 had risen “too far, too fast” in a July 1 interview.

Lockstep Moves

Fund managers said at the end of June that lockstep gains in commodities and stocks created the risk of a replay of last year, when equities and raw materials posted their biggest retreats in half a century. Since then, the S&P 500 has added 1.5 percent.

Joseph Keating of RBC Bank, who warned on June 17 that insider selling would precede declines in stocks, said the size of last year’s losses is helping drive the market now. The S&P 500 has fallen 40 percent since its all-time high 21 months ago.

“We’re still down from the peak in stock prices from October 2007,” said Keating, who helps oversee $4 billion as chief investment officer of Raleigh, North Carolina-based RBC Bank. “An awful lot of bad news continues to be discounted.”

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Kayla Carrick in New York at kcarrick1@bloomberg.net.

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Treasury Bets U.S. Financial System Can Weather CIT Collapse

By Scott Lanman and Vivien Lou Chen

July 16 (Bloomberg) -- The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender.

“I hate to say this, but it was probably expendable,” said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. “It may have just missed the boat” on federal rescues, Santiago said.

Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT.

Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.

A Treasury official said the department anticipates losing the $2.3 billion of taxpayer funds that it had already injected into the company from the Troubled Asset Relief Program should it file for bankruptcy.

‘Disruption’ and ‘Anger’

There will be “a lot of disruption and anger among voters, particularly among people who rely on firms such as CIT for funding,” said Sean Egan, head of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates CIT below investment grade.

“A major provider of capital in the middle market is likely to be out of business in the near future,” and investors will be concerned, at least in the “short run” about CIT, Egan said.

CIT, whose stock trading was halted by the New York Stock Exchange before the close, said late yesterday it was told “there is no appreciable likelihood of additional government support being provided over the near term.” CIT added that it was “evaluating alternatives” with its advisers.

The Treasury then highlighted in a statement that the government has enacted “powerful” mechanisms to revive credit markets. “Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the department said.

Administration Rationale

An Obama administration official separately said CIT didn’t receive more government assistance because it hadn’t gone to private capital sources to rebuild its balance sheet, something that several of the biggest Wall Street and regional lenders did earlier this year.

The official, who requested anonymity to discuss the deliberations, said the government also determined that CIT didn’t pose systemic risk to the economy if it failed to receive more aid.

Yesterday’s collapse in talks between regulators and CIT followed reluctance by the Federal Deposit Insurance Corp., the bank’s main regulator, to give it permission to participate in the agency’s debt-guarantee program.

The Federal Reserve had separately considered whether to let CIT put some of its parent assets into a banking unit, a move that could have increased its potential borrowing from the central bank. No such aid was forthcoming. The Fed has doubled its balance sheet to more than $2 trillion as it engaged in Wall Street rescues and emergency loans to banks across the nation.

‘Very Big Losses’

“If the government would have rescued them they would have been in there for a very long time, and they would have taken very big losses,” said Eric Hovde, who manages $1 billion at Hovde Capital Advisors LLC in Washington, which concentrates on financial and real-estate related companies.

Part of the Fed and Treasury efforts to shore up the financial markets have been directed at restarting lending to small businesses. The two agencies in March jointly started the Term Asset-Backed Securities Loan Facility, or TALF. Under the program, the Fed lets investors borrow to purchase securities backed by auto, credit-card and other loans, with the idea that should spur lenders to extend more credit.

TALF loans from the Fed totaled $24.9 billion as of last week, compared with the program’s planned capacity of $1 trillion, backed by $100 billion of funds from the $700 billion Troubled Asset Relief Program.

TALF Aid

Fed officials credit the existence of the TALF with spurring the market for new asset-backed securities and reducing the difference, or spread, between yields and benchmark rates.

“So far, the evidence indicates that the program is working as designed,” New York Fed President William Dudley said in a speech last month. Yield premiums on consumer asset- backed securities have dropped “sharply,” he said.

The three-month London Interbank offered rate for the dollar, a benchmark for liquidity stresses among banks, has fallen every week since mid-March. The rate dropped to 0.51 percent yesterday from 1.43 percentage point at the start of the year.

Other evidence of a stabilization in the financial industry emerged this week, with Goldman Sachs Group Inc. reporting record profits. The Standard & Poor’s 500 Financials Index has rallied 11 percent this week.

Fed policy makers still regarded financial markets as “fragile” and the economy as “vulnerable to further adverse shocks,” minutes of their June 23-24 meeting, released yesterday in Washington, showed.

Regulatory Overhaul

The spurning of CIT comes amid a growing debate among officials, regulators, lawmakers and the financial industry over how to address the issue of firms deemed too big to let fail.

President Barack Obama is seeking the biggest overhaul of banking rules in decades, and wants to give the Fed new powers to oversee capital and liquidity standards. FDIC Chairman Sheila Bair, along with some lawmakers and central bankers, has urged stronger efforts to address the too-big-to-fail issue.

Gary Stern, president of the Minneapolis Fed, said the Obama plan “fails to come to grips” with the challenge, partly because it doesn’t threaten creditors with the risk of loss. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, plans a hearing on the matter July 21.

CIT was created in 1908, after founder Henry Ittleson noticed wholesalers repeatedly short of cash while he was a purchaser for a St. Louis department store. He wanted to create a new company that would serve customers overlooked by larger financial institutions, according to the firm’s Web site.

“I’ve heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem” for CIT to fail, Frank said in an interview yesterday before the firm’s announcement.

Among financial firms, “especially those on the edge, there’s going to be a scramble to figure out whether you’re in or out” of bailouts, said Joseph Mason, Louisiana State University finance professor. “This classification of systemic risk really is something like pornography -- Fed and Treasury know it when they see it. You really can’t pre-commit.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

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Bank of America, Universal Forest, Xilinx: U.S. Equity

By Lu Wang

July 16 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses.

Bank of America Corp. (BAC US): The biggest U.S. bank by assets said net charge-offs on its credit-card trust rose to 13.86 percent in June from 12.5 percent a month earlier.

Legg Mason Inc. (LM US): The asset management company said it’s offering a combination of equity and cash to exchange as much as 95 percent of a $1.15 billion convertible debt offering from May 2008, to reduce debt and boost capital.

Resources Connection Inc. (RECN US): The provider of legal and accounting services posted a loss excluding some items of 1 cent a share in the fiscal fourth quarter. That compared with the average analyst estimate for profit of 3 cents a share, according to Bloomberg data.

Willis Group Holdings Ltd. (WSH US): The third-biggest insurance broker increased its stake in a Malaysian business to 49 percent as it seeks to expand in Asia.

Universal Forest Products Inc. (UFPI US): The maker of do- it-yourself lumber products reported second-quarter profit excluding some items of 81 cents a share, topping the average analyst estimate by 78 percent.

Xilinx Inc. (XLNX US): The largest maker of programmable semiconductors reported sales of $376.2 million in the fiscal first quarter. That trailed the average analyst estimate of $379.4 million in a Bloomberg survey.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

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