London Suicide Connects Lehman Lesson Missed by Hong Kong Woman

By Mark Pittman and Bob Ivry

Sept. 10 (Bloomberg) -- Yu Lia Chun, a retired hospital orderly in Hong Kong, never heard of Lehman Brothers Holdings Inc. before she got a call last September from her banker.

“He said, ‘Did you hear the news? Something has happened to Lehman,’” Yu, 66, recalled in an interview in June. “I didn’t get it.”

Yu, who has a sixth-grade education, said she thought her money was in a savings account. She didn’t know she had lent it to a bankrupt American securities firm. Eventually, she found out that her HK$1.2 million ($155,000) nest egg was gone. Her children lost another HK$3.8 million because Yu had persuaded them to make similar investments.

“There is no way a person like me could understand any of this,” Yu said, dabbing her eyes with a tissue in a coffee shop in Hong Kong’s financial district. “Sometimes I feel like jumping off a building.”

What hit Yu and her family was a tidal wave triggered halfway around the world by the biggest bankruptcy in U.S. history. The Sept. 15, 2008, collapse of Lehman, with $613 billion in liabilities, had unforeseen and far-flung consequences that devastated those, like Yu, who didn’t know their fates were tied to the New York-based investment bank.

‘Quicker This Time’

The chief operating officer of a private-equity firm in London jumped in front of a commuter train because he blamed himself for leaving the company’s money in a Lehman account, according to a coroner’s report. The Israeli managers of a hotel construction project on the island of West Caicos, northeast of Cuba, were taken hostage by Chinese workers when an anticipated Lehman loan didn’t materialize and wages weren’t paid. In Hong Kong, Yu and thousands of others who had invested in Lehman products camped out in the rain, thumping drums and chanting, “Give us our money back.”

The realization that a U.S. securities firm so woven into the financial system couldn’t pay its debts radiated out from New York, panicking investors around the world. It was a doomsday scenario that former International Monetary Fund chief economist Simon H. Johnson likened to Kurt Vonnegut Jr.’s 1963 novel “Cat’s Cradle,” in which a single crystal of the fictitious substance ice-nine hardens all of the planet’s water.

What differentiated Lehman from previous financial crises was how fast the panic spread, said Richard Sylla, an economic and financial historian at New York University’s Leonard N. Stern School of Business in New York.

“Communications made things happen faster,” Sylla said, describing how it took six months for the 1931 failure of Austria’s Creditanstalt bank to put stress on the British financial system. “The news of everything got spread around much quicker this time.”

Goldman Sachs Debt

The freezing of global credit markets following Lehman’s demise began with professionals who traded commercial paper in New York. They were the first to feel the chill when the Reserve Primary Fund, the oldest money market fund, was inundated with requests for redemptions and seized up hours after the bankruptcy filing. The $785 million that Reserve had lent to Lehman was deemed worthless by 4 p.m. the next day.

Fear that more banks and financial firms might fail meant most investors stopped lending to anyone other than the government. Even New York-based Goldman Sachs Group Inc., which earned $11.6 billion in 2007, more than any U.S. securities firm in history, wasn’t immune. The average annual cost of insuring $10 million of Goldman Sachs debt for five years soared to a record $545,000 from $182,557 in the three days after Lehman failed, according to data compiled by Bloomberg.

Plummeting Prices

Lehman’s demise triggered a panic. Money fund managers were forced to raise cash to pay off investors. They tried selling what securities they held and couldn’t. The market was flooded, and prices were plummeting -- if prices could be obtained at all. The Standard & Poor’s 500 Index suffered its worst decline in six years. Mistrust leaked into the corporate bond market.

The most widely traded 30-year bond of General Electric Capital Corp., the world’s biggest issuer of commercial paper, dropped by as much as 30 cents on the dollar to 62 cents by Sept. 18 because of doubts that GE would be able to persuade money funds to renew its short-term notes.

At that price, the three-day loss for owners of the issue was more than $1.9 billion, according to prices provided by Trace, the bond-trade reporting system of the Financial Industry Regulatory Authority.

The U.S. responded within a week to guarantee money markets and bank-to-bank lending. Within a month, Congress agreed to spend $700 billion to prop up banks under the Troubled Asset Relief Program, the Federal Deposit Insurance Corp. guaranteed new bank debt, and Federal Reserve lending to financial institutions ballooned by $1 trillion.

Lehman Minibonds

Those programs, which succeeded in stemming the panic, remain in place today. What they didn’t do was save Yu and thousands of other investors in Hong Kong, Singapore, Taiwan and elsewhere who had bought equity-linked notes or so-called minibonds connected to Lehman.

Equity-linked notes combine attributes of both bonds and stock by investing part of the proceeds in share options and the remainder in fixed income. Minibonds are custom-made securities linked to the creditworthiness of companies, backed by collateralized-debt obligations and sold in denominations of $5,000. They functioned like credit-default swaps in reverse, where the investor stands to lose his principal when the firm named in the note can’t pay its debts.

‘Information Asymmetry’

Yu, a mother of six who emigrated from mainland China in 1962, didn’t have a chance, according to Joseph Stiglitz, a Columbia University economics professor who won a Nobel Prize for his work on the effect of unequal access to information on buyers and sellers in financial markets.

“As securities got more complex, the opportunities for gaming, to the disadvantage of ordinary people, increased,” Stiglitz said. “Complexity opened up new venues for information asymmetry, which banks exploited.”

Asia became Lehman’s highest growth region in 2007, taking in more than $3.1 billion in revenue, or 16 percent of the firm’s business. Revenue was up more than 41 percent from 2005 in Asia, while it climbed 3 percent in the U.S. in the same period, according to Bloomberg data.

Yu said she went to an export trade show in Hong Kong two years ago and met Chow Chi Chung, a salesman for Amsterdam-based ABN Amro Holding NV. He offered her a better return on her savings if she switched banks, she said. So she did.

Two-thirds of Yu’s money, about $100,000, came from a settlement with her employer after an elevator fell half a floor, injuring her pelvis, according to Yu, who still drags her right leg when she walks.

Didn’t Read Prospectus

A month after their meeting, Yu said Chow called her to say he had a new product that could return as much as 20 percent a year because it was linked to the stock performance of three large Chinese companies -- China Communications Construction Co.,China Merchants Bank Co. and Ping An Insurance Co.

Yu said she didn’t read the fine print, trusting Chow when he told her she couldn’t lose her principal. Had she looked at the prospectus and understood it she would have discovered that she had essentially bought three call options -- contracts that would capture gains if the shares of the three companies rose by a certain amount -- coupled with the equivalent of a Lehman corporate bond. If Lehman defaulted, her money would be gone.

Cash Bonus

ABN Amro, now part of Edinburgh-based Royal Bank of Scotland Group Plc, also recruited Yu to sell the same product to her family, giving her a cash bonus of about $155 for each person who signed up, she said.

Yuk Min Hui, a Hong Kong-based spokeswoman for RBS, declined to comment about Yu’s case. She said in an e-mail that if the bank determined that “sales processes and guidelines were not properly followed,” it would offer “appropriate remedies.” Only a small number of investors fall in this category, she said.

Chow couldn’t be located.

There are 873 issues of such Lehman equity-linked structured notes outstanding with a combined face value of about $8.7 billion, all now in default, according to data compiled by Bloomberg. Bonds were denominated in pounds, Swiss francs and Hungarian forint, as well as Australian and Hong Kong dollars.

Banks also sold $1.8 billion of Lehman minibonds to an estimated 43,000 investors in Hong Kong, where the notes were first marketed in 2003, according to the Hong Kong Monetary Authority. The biggest seller was BOC Hong Kong (Holdings) Ltd., a unit of Beijing-based Bank of China Ltd.

Financial Dumplings

The minibonds were all issued by a Cayman Islands-based entity called Pacific International Finance Ltd., set up by Lehman with trustees from London-based HSBC Holdings Plc. The notes were financial dumplings -- derivatives contracts tied to the creditworthiness of major companies wrapped inside Lehman corporate bonds. Series 19 notes, for instance, were linked to securities dealers including Citigroup Inc. and Goldman Sachs. If any of those businesses or Lehman defaulted, the investor wouldn’t get paid.

In effect, investors in Series 19 notes bought the losing end of credit-default swaps, or insurance policies pegged to the survival of financial institutions. If any of those companies failed, the noteholders were the ones responsible for paying off the principal on the derivative.

Lehman took payments from investors in exchange for a guaranteed yield, then placed the cash in a Lehman-managed money market fund and issued commercial paper to borrow more money. Those funds were in turn used to invest in CDOs sold by Lehman off-balance-sheet entities in places such as Ireland and the Cayman Islands.

‘Blood and Sweat’

Sun Kwan, a 58-year-old retired parks worker, was among those who bought Lehman minibonds. He stood outside the I.M. Pei-designed Hong Kong headquarters of the Bank of China on June 15, along with Yu and 51 other protesters, banging a chipped red drum with a stick every two seconds. Raindrops beaded on the brim of his blue cap. A sign around his neck, hand-lettered in Chinese characters, read: “The Bank of China is a hooker. Give me back my money earned with blood and sweat.”

Sun, who has a high school education, invested about $285,000 in Lehman Minibond Series 12 notes, sold to him by BOC Hong Kong, which paid about 4 percent interest a year.

He said he thought he was putting his money into a certificate of deposit. Instead, as the prospectus explained, the notes were a bet against the default of the Chinese government and five companies, including Hutchison Whampoa Ltd., which operates ports and telecommunications services, Chinese state-owned oil producer CNOOC Ltd. and Lehman.

As an incentive, he was given $26 in supermarket coupons.

Rhinos, Whales

Sun also purchased $40,000 worth of Octave Series 10 notes, a similarly structured product created by Morgan Stanley, in which the investor would lose all of his money if Lehman or any of six other companies defaulted. He said he never heard of Lehman and thought the notes were backed by the People’s Republic of China because most of the businesses were state- owned.

Nick Footitt, a spokesman for Morgan Stanley in Hong Kong, declined to comment.

Each minibond series was custom-made, so their characteristics differed. Packagers skipped using some numbers, including 4, which is considered unlucky in Chinese culture and would make the bond difficult to market. Investors got prizes, including video cameras and flat-screen televisions, according to newspaper advertisements and fliers handed out at banks. The ads, in both Chinese and English, featured rhinoceroses, whales and other symbols of potency, luck or profit.

‘Rotten Deal’

“It’s all gone,” Sun said in an interview conducted through a Chinese translator at the demonstration. “I almost wanted to kill myself. I’ve been crying for months, even though I am a man.”

He said he hadn’t yet told his 25-year-old son, Sun Chi Yan, what had happened to his nest egg, most of which came from a settlement when the government bought his family’s land.

Sun and Yu were among investors who staged protests almost every business day for nine months, sparking a Hong Kong legislative investigation and calls for more protection for retail customers. The raucous demonstrations in the city’s financial district, including a tent encampment and bullhorns connected to an iPod that blared the looped chant “Rotten Deal -- Money Back,” became an embarrassment to the banks.

In a city of 7 million, where only 30 percent of workers had pensions before 2001, the Lehman protesters struck a chord, according to Audrey Eu, one of 60 members of Hong Kong’s Legislative Council.

Bank Offer

“A lot of them lost their life savings,” Eu said in an interview in June. “They’re all crying. They work as cleaners, and $50,000 is a lot of money to them.”

Angel Yip, a spokeswoman for BOC Hong Kong, said in an e- mail that “we understand and sympathize with customers” who lost money as a result of the Lehman collapse. She said advertisements and prospectuses distributed by the bank “contained a detailed description of the structure and risks” of the investments.

In July, 16 retail banks, including BOC Hong Kong, offered to repay minibond investors at least 60 cents on the dollar, a deal brokered by the city’s securities regulator that would amount to $813 million. About two-thirds of eligible noteholders accepted the offer, the Hong Kong Monetary Authority said in a statement on Sept. 4. Sun said he hadn’t yet made up his mind.

“The compensation offer is totally unfair and based on groundless calculations,” Sun said. “If we have to accept it eventually, it’ll be because we’ve exhausted all other means.”

‘Grotesquely Wrong’

While investors in Hong Kong have the right to sue banks, there are no class-action laws or contingency fees, making it difficult to find lawyers willing to take cases.

Patrick Daniels, a lawyer with Coughlin Stoia Geller Rudman & Robbins LLP in San Diego, has filed a class-action suit against Lehman in federal court in New York on behalf of minibond holders like Sun in Hong Kong, Taiwan and Singapore seeking $1.6 billion from Bank of New York Mellon Corp. The money, mostly shares in Lehman’s Institutional Money Market Fund, is being held by the bank as collateral to secure the minibonds, Daniels said. Other Lehman creditors are trying to get the same funds from the Bank of New York Mellon, which isn’t accused of wrongdoing. The case is pending.

“Something is grotesquely wrong here,” Daniels said in an interview in July. “These people were just flat-out lied to and stolen from.”

Neither the lawsuit nor the settlement applies to Yu or other holders of equity-linked notes from Houston to Singapore.

London Suicide

Hong Kong retirees weren’t the only victims. Even professional investors were stuck with Lehman losses.

The stocks and bonds of Lehman’s London brokerage customers, used as collateral to borrow more money, were frozen on Sept. 15. About 3,500 clients, including 700 hedge funds, couldn’t get access to an estimated $65 billion of assets. PricewaterhouseCoopers, Lehman’s U.K. bankruptcy administrator, is still sorting out who should get paid and how much. Some firms have closed, and others may have to wait as long as a decade to get their assets back, Tony Lomas, the PwC partner in charge of the U.K. administration, said in August.

It took only 10 days for the ice-nine to get to Kirk Stephenson, chief operating officer of Olivant Ltd., a London private-equity firm run by former UBS AG Chairman Luqman Arnold. On Sept. 25, Stephenson, 47, jumped in front of a train going 125 mph at a station in Taplow, 28 miles (45 kilometers) west of London.

The coroner’s office for the county of Buckinghamshire ruled the death a suicide. Stephenson, a native of New Zealand, was despondent about the financial crisis and talked about killing himself one week after Lehman’s demise, according to a statement from his wife read at the coroner’s inquest.

U.K. Lock-Up

Lehman Brothers International (Europe) was Olivant’s prime broker. It held the firm’s 2.78 percent stake in UBS, Switzerland’s largest bank by assets, according to a statement from Olivant on Oct. 1. The shares were worth 1.6 billion francs ($1.44 billion) at the time.

The hedge fund lock-up led the U.K. to reconsider its procedures when firms fail. While Lehman’s broker-dealer in the U.S. stayed out of bankruptcy long enough to process many of its trades, the business seized up in the U.K.

“In the U.S., everything was wrapped in cotton wool for four days,” said PwC’s Lomas. In the U.K., “everything failed come 7:56 a.m. that Monday morning.”

‘Black Hole’

The U.K. had an advantage in attracting hedge fund assets before the Lehman bankruptcy. While U.S. prime brokers face limits on how much they can loan hedge funds, those rules could be circumvented with overseas units like Lehman’s in London. Some U.S. clients didn’t know they were customers of Lehman Brothers International (Europe).

“If you didn’t pay attention to what you were signing, you would have missed it,” said Michael Romanek, principal at Rise Partners Ltd., which arranges financing for funds from London. “It was called enhanced prime brokerage, where they could be more accommodating with more leverage or loans. It just took signing some extra papers in New York. Most people didn’t realize it.”

Some fund managers with frozen assets say they’ve gone from extreme anger to resignation that they’ll have to wait a long time to see any return.

“I still don’t know if I’ll ever get any money back,” said Edward Chin, whose Hong Kong-based Pride Revelation Fund used Lehman as its sole prime broker. “We’re in a black hole.”

$30 Billion Gap

The ice-nine also halted construction projects from Wall Street to the Turks and Caicos Islands.

Lehman borrowed against property investments that couldn’t easily be sold, such as construction loans. So when the property market turned sour and creditors demanded more collateral for the loans or their money back, the investment bank was stuck.

The property portfolio doomed Lehman when a rescue still seemed possible. On Saturday, Sept. 13, 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and now U.S. Treasury secretary, asked a team of the world’s top bankers to evaluate Lehman’s real estate holdings as part of an effort to facilitate a sale of the investment bank to London-based Barclays Plc.

The team, including representatives from Goldman Sachs and Credit Suisse Group AG, determined that Lehman had overvalued its real estate investments by $20 billion to $30 billion, according to people who attended meetings at the New York Fed last September.

Watergate Hotel

When Barclays pulled out of an agreement to buy the firm, Lehman was forced to file for bankruptcy. Only then did Barclays buy Lehman’s U.S. securities business, including its headquarters in Manhattan’s Times Square.

The bankruptcy deprived the international real estate market of a major source of financing. The bank was known for doing deals nobody else would touch, according to a former Lehman executive.

The Watergate Hotel, made famous by the 1972 break-in that led to the resignation of President Richard Nixon, was sold at auction in August for $25 million after its owner, Washington- based Monument Realty LLC, defaulted on its mortgage. Monument was financed by Lehman.

A condo conversion at 25 Broad St. in Manhattan, two blocks from Goldman Sachs’s headquarters, was suspended by developers. It too was financed by Lehman.

SunCal, Depfa

Irvine, California-based SunCal Cos., a closely held developer, said it had $1.6 billion in financing from Lehman. Since the bank’s failure, 19 projects, all in California, have filed for bankruptcy, SunCal said. Work has stopped on all of them, including the 248-acre Marblehead Coastal community in San Clemente, which was supposed to feature 69 single-family homes, 244 other residences, a movie theater, parks and hiking trails.

Munich-based Hypo Real Estate Holding AG received 102 billion euros ($143 billion) in debt guarantees and credit lines from the German government after its Depfa unit was stuck without short-term funding following Lehman’s bankruptcy. Like Lehman, Hypo funded long-term real estate assets with short-term loans such as commercial paper.

German Finance Minister Peer Steinbrueck defended the bailout of the lender because the global financial system was just “millimeters from the abyss.”

Molasses Reef

On West Caicos, an otherwise uninhabited island 250 miles northeast of Cuba, work stopped on the Molasses Reef Ritz- Carlton Hotel and Residences, slated to include a cluster of $6.5 million cottages. About 400 Chinese employees of Tel Aviv- based construction firm Ashtrom Properties Ltd. didn’t get paid when Lehman funding dried up, according to Jonathan Siegel, New York-based managing director of Logwood Hotel Development Co.

About 60 electrical workers rebelled, taking a dozen managers hostage and refusing to let them leave the island.

“We had 400 to 500 unhappy men, and we were concerned violence would erupt,” Siegel said. “The Turks and Caicos government was very unhappy with the situation. There was a limited supply of food and water.”

Ashtrom ended the standoff after a week by paying what it considered “a ransom,” Siegel said. The project, about 70 percent completed, is still on hold, said Verona Carter, Ritz- Carlton Hotel Co.’s director of public relations for the Caribbean area.

Financial Leadership

The vulnerability of the global financial system revealed by Lehman’s bankruptcy -- from ordinary investors like Sun and Yu to London hedge funds and German lenders -- makes it all the harder to regulate.

“The difficulty you have in getting control is that you need a global alliance,” said former World Bank President James D. Wolfensohn in an e-mail. “You need all the finance ministers to come together, because if a transaction can’t be done here, it can be done in Lichtenstein or France or the Far East.”

Lehman’s bankruptcy also poses a challenge to America’s financial leadership.

Wall Street profited by arranging financing that allowed other countries to tap global capital markets to build offices, factories, resorts and housing. What’s broken now is the trust the rest of the world had in U.S. banks, said Phillip Yin, a native of Seattle who is managing director of Asia Investors Partners Ltd., a Hong Kong-based research firm.

“All that has happened since -- the job losses, the slump, everything -- is tied to one thing and one event,” Yin said. “And that’s Lehman.”

(Lehman’s Lessons: Next, Too Big to Fail)

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.

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Apple Investors Focus on New IPods Rather Than Return of Jobs

By Connie Guglielmo and Joseph Galante

Sept. 10 (Bloomberg) -- Apple Inc. investors focused on the shortcomings of a new iPod lineup rather than on the reappearance of Chief Executive Officer Steve Jobs at a product event in San Francisco yesterday, analysts said.

Apple fell as much as 1.9 percent yesterday in Nasdaq Stock Market trading after Jobs introduced an iPod Nano with a video camera and cut prices on other models. Some investors had expected more, such as an iPod Touch with a camera, said Brian Marshall, an analyst at Broadpoint AmTech Inc.

“That was one potential negative to offset the potential positive surprise that we saw with Steve’s appearance,” said Marshall, who is based in San Francisco. Investors are less focused on Jobs than they used to be, he said. “The investment community is very comfortable with Apple’s existing management team in addition to Steve.”

Jobs, 54, spoke publicly about his liver transplant for the first time. He said he now has the liver of a person in their mid-20s who died in a car crash and had donated their organs.

“I wouldn’t be here without such generosity,” Jobs said. “I’m vertical. I am back at Apple and loving every minute of it.”

Jobs, who went on a 5 1/2-month medical leave in January, last appeared at a company event in October, when he introduced Macintosh notebooks.

Dressed in his trademark blue jeans and black turtleneck, Jobs appeared to a standing ovation and spoke for about a half- hour. He mingled with the crowd after his presentation.

Apple, based in Cupertino, California, fell $1.79 to $171.14 yesterday in Nasdaq Stock Market trading. The stock has more than doubled this year.

‘Very Ably’

Jobs relied on a team of executives, including product marketing chief Phil Schiller, to emcee company events while he was on leave. Chief Operating Officer Tim Cook handled Apple’s day-to-day management. The executives ran the company “very ably” in his absence, Jobs said. He returned to Apple in June, staying out of the spotlight until yesterday.

“The big news is Steve Jobs looks relatively well,” said Ryan Jacob, a fund manager at Jacob Asset Management in Los Angeles. He manages about $40 million, and Apple is one of the fund’s largest holdings. “Obviously he’s been back at work, but I think it’s encouraging that he’s well enough to make a full presentation.”

IPhone Sales

Apple’s iPhone sales have climbed to 30 million, Jobs said. There are now more than 75,000 applications available at the company’s App Store, and users have downloaded more than 1.8 billion of the programs, he said. An iPhone version of Electronic Arts Inc.’s John Madden football game went on sale yesterday, the company said.

Cook was in the audience at the event, along with Apple retail chief Ron Johnson and Google Inc. CEO Eric Schmidt.

In addition to a video camera, the new iPod Nano has an FM radio and pedometer. The 8-gigabyte device costs $149, while a 16-gigabyte model goes for $179. It will compete against products such as Cisco Systems Inc.’s Flip camera.

Cisco, the largest maker of networking equipment, said it welcomes new competition and that increased use of video will help sales of its routers and switches.

“We are flattered that Apple and others perceive video is an important market,” said Jonathan Kaplan, general manager of the consumer product unit at San Jose, California-based Cisco.

Apple cut the price of the 8-gigabyte version of the iPod Touch to $199, an effort to stoke demand in the run-up to the holiday shopping season. A 32-gigabyte model will cost $299, while a 64-gigabyte model will be $399.

Apple also unveiled a 160-gigabyte version of its iPod Classic for $249 and cut the price of the 2-gigabyte Shuffle to $59.

ITunes Store

The company introduced a new version of iTunes, improving the way the software syncs with iPhones and iPods by letting users organize applications more easily. The company will also sell ring tones for $1.29 each. A feature called iTunes LP will add videos and liner notes to music, an enticement to buy songs in album form.

Apple has sold more than 220 million iPods, Schiller said at the event. The company has about 74 percent of the market in the U.S., he said.

Jobs, who co-founded Apple with Steve Wozniak in 1976, was ousted by the board in 1985. He rejoined the company 12 years later when it purchased Next Computer Inc., the business he founded after leaving Apple.

“It is a pleasant surprise for him to be hosting the event,” said Shaw Wu, an analyst at Kaufman Bros. in San Francisco. “We believe both customers and investors are grateful.”

To contact the reporters on this story: Connie Guglielmo in San Francisco at cguglielmo1@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net

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Navistar, Photronics, Texas Instruments: U.S. Equity Preview

By Lu Wang

Sept. 10 (Bloomberg) -- Shares of the following companies may have unusual moves in U.S. trading. Stock symbols are in parentheses.

Navistar International Corp. (NAV US): The largest maker of blast-proof trucks for the U.S. military reduced its forecast, saying it expects to earn $5.25 a share at most in fiscal 2009.

Photronics Inc. (PLAB US): The maker of imaging technology said it plans to offer 6.28 million shares and $50 million of convertible senior notes, raising money to repay debt.

Smith & Wesson Holding Corp. (SWHC US): The gun maker forecast second-quarter revenue of at least $103 million, exceeding the average analyst estimate of $97.8 million.

Talbots Inc. (TLB US): The chain specializing in clothing for women 35 and older was upgraded to “buy” from “hold” at Citigroup Inc., which said sales will probably rebound in the next six months.

Texas Instruments Inc. (TXN US): The second-largest U.S. chipmaker forecast third-quarter sales and profit that beat analysts’ predictions because of improving demand for chips used in computers and consumer electronics.

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

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U.S. Stock-Index Futures Fluctuate; Lazard Drops as EBay Rises

By Adam Haigh

Sept. 9 (Bloomberg) -- U.S. stock-index futures drifted between gains and losses after a six-month rally in the Standard & Poor’s 500 Index left the measure valued near the most expensive level in five years.

Lazard Ltd. dropped 3.3 percent after the investment bank led by Bruce Wasserstein said some shareholders agreed to sell 5.22 million shares in an underwritten public offering. EBay Inc. advanced 1 percent as Sanford C. Bernstein & Co. recommended buying the stock.

Futures on the S&P 500 expiring this month fell 0.1 percent to 1,024.20 as of 7:01 a.m. in New York. Dow Jones Industrial Average futures lost 0.1 percent to 9,486. Nasdaq-100 Index futures declined 0.2 percent to 1,652.

The S&P 500 has rebounded 52 percent from a 12-year low on March 9 as reports from consumer confidence to home sales signaled the recession is easing and companies from Johnson & Johnson to Goldman Sachs Group Inc. posted earnings that beat analysts’ estimates. The Federal Reserve will publish its Beige Book business survey today at 2 p.m. in Washington.

The rally has pushed valuations in the benchmark index for U.S. equities to about 18.9 times the reported earnings of its companies, near the highest level since June 2004, according to weekly data compiled by Bloomberg.

“Investors should be prepared for some additional near- term corrective action,” Robert Doll, the global chief investment officer at BlackRock Inc., wrote in an e-mail to journalists yesterday. “Stocks are no longer as cheap as they were several months ago. Conditions may be overbought and there is still a great deal of uncertainty over the outlook.”

Lazard, EBay

Lazard declined 3.3 percent to $37.73 in early New York trading. The company said it won’t receive any proceeds from the share sale.

EBay, owner of the most visited U.S. e-commerce Web site, climbed 1 percent to $22.05 after Bernstein raised its recommendation to “outperform” from “market perform” and lifted its share-price estimate 17 percent to $28.

Vivus Inc. soared 40 percent to $9.70. The developer of treatments for sexual dysfunction and obesity said its Qnexa drug helped patients lose enough weight in studies to allow the biotechnology company to seek U.S. approval to sell the treatment this year.

AeroVironment Inc. fell 1.5 percent to $29.96 in Germany. The maker of U.S. military spyplanes reported a loss of 17 cents a share in the fiscal first quarter. Analysts had expected the company to earn 12 cents, according to the average estimate in a Bloomberg survey.

Kraft Foods

Kraft Foods Inc., the world’s second-largest foodmaker, is in talks to arrange about $8 billion of financing for its bid to buy candy maker Cadbury Plc, according to two people with knowledge of the matter.

Separately, the company said it was targeting operating- income margins in the mid-teens on a percentage basis by 2011, up from 12.3 percent in 2008. The information was sent today in a regulatory filing. The shares added 0.5 percent to $26.59 in early New York trading.

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.

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Currency Technical Report

Daily Forex Technicals | Written by FX Greece | Sep 09 09 10:08 GMT |

EUR/USD Resistance: 1,4480/ 1,4500/ 1,4520/ 1,4550-55/ 1,4580/ 1,4600 Support: 1,4440/1,4400/ 1,4380/ 1,4340/ 1,4300/ 1,1270/ 1,1240 Comment: Euro rose yesterday towards 1.4530-40, forming new highs for this year. These levels were slightly higher from our targets, regarding the triangle formation scenario. Technically, euro has tested the ranges of the triangle formation as you can see in the daily chart, but the upper part of the short term rising channel is more clear in the 4 hour chart. A downward break of the consolidation and a move towards first support levels at 1,4440 area, would be a sign of weakness. Next target will be at 1,4380-00, and if it is also breached, the end of the upward move will be confirmed. If 1,4440 area is confirmed as support during retracements, and a rise to now tops is formed, next targets will be at 1,4580 and 1,4630 area. This will be a negative sign for our false break scenario and a move towards 1,4700 or 1,4850-00, would be possible. We remain cautious regarding a new rise until we have more signs. A classic reversal candle formation would be the ideal end for the rise… STRATEGY Sell orders from yesterday's move at Η 1,4500-20 remain open, with stops above 1,4560 and targets at1,4380-00. New sell orders could be tried at a break of the base at 1,4440… The above mentioned strategy refers to orders that we may follow for personal accounts, depending on the market analysis and the potential reach of resistance and support levels. We do not encourage buy or sell orders, as its effective use is based on correct risk management and the ability of position readjustment depending on current conditions FX Greece DISCLAIMER The details and information included in the above analysis, are part of research based exclusively on currency charts and are of purely instructional and educational nature. None of the information featuring in the analysis can be considered as an invitation for opening positions in FOREX market or in the market of forward contracts or any securities listed on an organized or unorganized market. We assume no responsibility for any kind of losses ,profits or property loss resulting, in whole or in part, from acts that are based either directly or indirectly on the processing or the use of information, details and strategies, the reader may find in the analysis. The readers hold full responsibility for the use and the results of their actions. The recipients of the analysis must acknowledge and accept that investment choices of any kind, especially concerning the FOREX market, contain risks (high, low and occasionally zero) of reduction or even loss of their investment. Therefore, they should always be cautious prior to any kind of action. We reserve the right to change the terms and the characteristics of the analysis. The contents of the analysis are solely intended for personal use. They may not be retransmitted, reproduced, distributed, published, adapted, modified or assigned to third parties in any way whatsoever. Anyone having access to them is required to comply with the law provisions on the protection of third party intellectual property rights.

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German August Consumer Prices Fall for Second Month

By Cornelius Rahn

Sept. 9 (Bloomberg) -- German consumer prices declined from a year earlier for a second month in August, indicating inflation pressures remained subdued even as the economy began to recover from its deepest recession in more than 60 years.

Consumer prices, calculated using a harmonized European Union method, fell 0.1 percent from a year earlier after dropping 0.7 percent in July, the Federal Statistics Office in Wiesbaden said in a statement today. The decline compares with an initial estimate that prices were unchanged on the year. From the previous month, prices rose 0.3 percent.

Inflation may accelerate as the global economy recovers, pushing up demand for commodities such as oil. While the German economy unexpectedly returned to growth in the second quarter, the pace of consumer-price increases may be restrained as rising unemployment restricts consumer spending.

“We have certainly seen the trough of price changes in July,” said Joerg Lueschow, an analyst at West LB in Duesseldorf. “Towards the end of the year, we expect inflation to be between 0.75 percent and 1 percent.”

On a non-harmonized basis, prices were unchanged in August from a year earlier and increased 0.2 percent from July.

Excluding energy and fuel, non-harmonized consumer prices rose 1 percent in August from a year earlier, the statistics office said. While crude-oil prices have more than doubled since mid-February to around $70 a barrel, they are more than 50 percent below the July 2008 record.

Inflation Forecasts

Euro-area consumer prices fell 0.2 percent in August from a year earlier, less than economists had forecast, data published on Aug. 31 showed. The European Central Bank last week raised its inflation forecasts for the region, saying price growth will average 0.4 percent this year and 1.2 percent in 2010.

ECB council member Axel Weber said yesterday that inflation pressures will remain subdued and it will take some time before the economy is growing fast enough to push up prices. “All in all, inflation fears, understandable as they may be, are unfounded,” Weber said at a conference in Frankfurt.

Metro AG, Germany’s largest retailer, said in July that it will reduce prices on 5,000 items at its cash and carry wholesale unit to attract customers. Puma AG, Europe’s second- largest sporting-goods maker, last month reported a 16 percent drop in profit as a result of increased discounting.

“When we look at basic goods, we won’t have inflation pressure for the next one and a half years since sellers don’t have much space to raise prices,” said Jens-Oliver Niklasch, an economist at Landesbank Baden-Wuerttemberg in Stuttgart.

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

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Central Banks Must Keep Stimulus to Support Growth, Gokarn Says

By Cherian Thomas

Sept. 9 (Bloomberg) -- Central banks must maintain low interest rates until consumer and company spending is “robust” enough to support economic growth, said Subir Gokarn, the Standard & Poor’s economist in the running for the deputy governor’s post at the Reserve Bank of India.

“The key transition is going to be in terms of private spending becoming more robust so policy makers can exit without completing disrupting the growth process,” Gokarn, Asia-Pacific chief economist at S&P, said in an interview yesterday in New Delhi. “There are signs that it is happening, but clearly not to the point of complete assurance.”

Gokarn’s comments came after officials from Group of 20 nations last week said they are “cautious” on the world growth outlook and agreed the need to coordinate when unwinding the emergency measures adopted to reverse the global recession. Weak growth accompanied by the risk of inflation is causing a “complex dilemma” for India’s central bank on setting rates, Governor Duvvuri Subbarao said Aug. 27.

The Reserve Bank of India on July 28 forecast the economy would grow 6 percent “with an upward bias” in the year to March 31, the weakest pace since 2003. It also raised its inflation forecast to 5 percent from 4 percent by the end of the financial year. The key wholesale price inflation index fell 0.21 percent in the week to Aug. 22 from a year earlier.

Subbarao said the Reserve Bank may have to reverse its easy monetary policy sooner than most other countries as inflationary pressures are mounting quickly, Dow Jones reported on the Financial Express Web site today.

Monetary Policy

Gokarn and Cornell University economist Eswar Prasad are frontrunners for the post of deputy governor at India’s central bank, the Economic Times reported Aug. 8 without saying where it got the information. The new deputy governor will be in charge of monetary policy and will fill the vacancy created when Rakesh Mohan stepped down in June. Gokarn said he hadn’t been contacted regarding his candidature.

India’s cabinet has reappointed Shyamala Gopinath as a deputy governor of the Reserve Bank of India for another two years, the Economic Times reported today without citing anyone.

“The inflation story is a little more complicated than it appears,” Gokarn said. “I don’t see we are in danger of demand-side inflation picking up. Where it is coming from is supply side -- oil, commodities and now in India’s case, food.”

He said whether central banks will respond to supply side inflation the way they did in 2008 is “still a debate.”

India’s central bank raised the key repurchase rate by 3 percentage points to 9 percent between October 2005 and July 2008 as inflation soared to 12.91 percent, a 16-year high. Subbarao, who was appointed governor in September 2008, has since slashed the central bank’s benchmark rate to 4.75 percent as the global recession deepened.

“In 2008, they did respond to supply side inflation quite aggressively because growth was also quite high at that point,” Gokarn said. “We are in a different situation. The nature of inflationary pressures is different.”

To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net.

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Dubai ‘Not Worried’ About Maturing Debt, Ruler Says

By Riad Hamade and Arif Sharif

Sept. 9 (Bloomberg) -- Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum said he is “not worried” about the emirate’s ability to repay at least $4.52 billion of debt this year, boosting property developer Nakheel’s bonds to a year-high.

“I assure you we are alright, the U.A.E. is alright, and we are not worried,” Sheikh Mohammed told reporters late yesterday at his Zabeel palace in Dubai, when asked whether the emirate would be able to repay the loans. Sheikh Mohammed is also the prime minister of the United Arab Emirates, a union of seven states of which Dubai is the second-biggest after Abu Dhabi.

The Dubai government must repay a $1 billion Islamic bond maturing in November, while state-owned real-estate developer Nakheel PJSC has a $3.52 billion Islamic bond falling due in December. The emirate borrowed $80 billion to finance its transformation into an international logistics, tourism and finance hub, and the seizure of global credit markets sparked concern about its ability to repay the loans.

Nakheel’s 3.1725 percent bond surged 9.3 percent to 102.5 cents on a dollar at 12:34 p.m. in Dubai after the comments, according to prices provided by National Bank of Abu Dhabi PJSC to Bloomberg. The bond, which slumped to 63.5 cents on a dollar in February, is headed for its highest close since Sept. 2008.

Moving markets

“This is moving markets,” Abdul Kadir Hussain, chief executive officer of Mashreq Capital DIFC Ltd., said in a phone interview from Dubai today. “It gives a boost to confidence that the market was looking for, and this is obviously coming directly from the source, so that provides a lot of comfort.”

Dubai set up a $20 billion fund earlier this year to help state-related companies struggling to raise money amid the credit crisis. Home prices in Dubai have tumbled by about 50 percent from their peak and may drop another 20 percent this year, Deutsche Bank AG said in a report in June.

Dubai established the fund after the global financial turmoil hurt its key property, finance and tourism industries and hindered companies’ access to credit. The first $10 billion for the fund was raised by selling bonds to the U.A.E.’s Abu Dhabi-based central bank in February.

The emirate, which is building the world’s tallest tower and the biggest man-made islands in the shape of palm trees, would study the viability of projects more closely in the future after the credit crunch led to an economic slump in the Persian Gulf business hub, Sheikh Mohammed said.

More careful

“We’ll be more careful now,” he said. “The crisis came for everyone, not just Dubai. People had to fight.”

The sheikhdom shelved some of its most ambitious plans including a set of dancing towers, made up of 80 stories of rotating floors, and a Formula One theme park. Emaar Properties, the U.A.E.’s biggest developer, is in talks to merge with three developers owned by state-controlled Dubai Holding LLC.

“The strategy is nearly the same,” Sheikh Mohammed said. “The U.A.E. is strong, it is like a plane facing headwinds. Now the headwinds are slowing down, so the plane will reach its destination more quickly.”

To contact the reporter on this story: Riad Hamade in Dubai at rhamade@bloomberg.netArif Sharif in Dubai at asharif2@bloomberg.net

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Trichet Says Crisis Is Not Over, Exit Important

By Matthew Newman

Sept. 9 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said while the financial crisis is not yet over, it’s important for policy makers to consider how they will withdraw economic stimulus measures.

“It’s not time yet to say that the crisis is over,” Trichet told reporters in Brussels today after meeting European Parliament President Jerzy Buzek. “At the same time, it’s very important to be convincing on the path to a normal sustainable position.”

The Frankfurt-based ECB, which has cut interest rates to a record low, is loaning banks as much money as they want for up to 12 months to get credit flowing through the economy again. Governments are also spending billions on measures to kick-start economic growth. Germany and France emerged from their recessions in the second quarter, putting the euro-area economy on course to expand in the third.

Trichet also said the reform of the financial system should remain “as strong as possible, despite some quarters that say things are back to normal.”

He also said the ECB stands ready to contribute to the establishment of a European Systemic Risk Board of central bankers and financial regulators, which would share information and monitor hazards across borders and industries.

To contact the reporter on this story: Matthew Newman in Brussels at mnewman6@bloomberg.net

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U.S. MBA Mortgage Applications Index Soared 17% Last Week

By Jennifer Ryan

Sept. 9 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the U.K. economy will be slow to rebound from the worst contraction in a generation after the collapse of world trade battered exports.

“It’s going to take a long while for you to work your way through this,” Greenspan, who serves as an informal adviser to U.K. Prime Minister Gordon Brown, told the BBC in an interview published on its Web site. “Britain is more globally oriented as an economy.”

Greenspan’s warning comes a week after the Organization for Economic Cooperation and Development projected the U.K. would be the only member of the Group of Seven nations not to have any quarter of growth this year. U.K. exports have shrunk for five quarters as the credit crisis tipped the global economy into its deepest slump since World War II following last year’s bankruptcy of Lehman Brothers Holdings Inc.

“The dramatic decline in exports globally and trade generally following the collapse of Lehman Brothers had dramatic effects in the financial system of Britain,” said Greenspan, who received an honorary knighthood from Queen Elizabeth II in 2002.

Bank of England Governor Mervyn King said on Aug. 12 that the U.K. may be heading for a “relatively slow recovery,” although Chancellor of the Exchequer Alistair Darling predicts growth will resume around the end of this year. The National Institute of Economic and Social Research, whose clients include the central bank, said today that the economy probably grew 0.2 percent in the three months through August, compared with a decline of 0.3 percent in the three months through July.

Policy Makers

Bank of England policy makers meeting today and tomorrow will probably decide to continue a plan to buy 175 billion pounds ($289 billion) of bonds with newly created money in a bid to stoke growth.

The Paris-based OECD, which seeks to coordinate policy across its 30 member nations, said on Sept. 3 that it projected the U.K. economy will contract 1 percent in the current quarter before stagnating in the final three months of the year. It cut its forecast for the full year to show a slump of 4.7 percent compared with 4.3 percent estimated in June. That made it the only G-7 economy for which the OECD’s outlook deteriorated.

Once regarded by some observers as the greatest central banker, Greenspan has seen his legacy criticized since the U.S. subprime-mortgage market collapsed in 2007, triggering a global crisis that has led to $1.6 trillion of writedowns and credit losses for financial institutions.

Under-Pricing Risk

The current crisis stemmed from bankers under-pricing risk and betting they would know when the tide turned, Greenspan said. “I fear too many of them thought they would be able to spot the actual trigger point of the crisis in time to get out,” he told the BBC.

Even as the current turmoil ebbs, Greenspan repeated that the world economy would always face periods of turbulence and recommended capital requirements be increased at banks as a buffer. While the next crisis may be different, it will still originate from the “unquenchable ability” of people to believe prosperous times are endless, he said.

“The crisis will happen again, but it will be different,” Greenspan said in the interview.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

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OPEC Committee Recommends Keeping Quotas Unchanged

By Grant Smith and Maher Chmaytelli

Sept. 9 (Bloomberg) -- The Organization of Petroleum Exporting Countries should maintain existing output quotas and improve compliance when the 12-member group meets today, the group’s production-monitoring committee recommended.

“We need more compliance” with existing production targets, Kuwaiti Oil Minister Sheikh Ahmed al-Abdullah al-Sabah told reporters in Vienna. “I don’t foresee any cut,” he said, when asked at what price level the group might consider a further supply reduction.

Saudi Arabian Oil Minister Ali al-Naimi, who represents OPEC’s biggest and most influential producer, said current oil prices are “good for everybody, consumers, producers,” adding to comments from other members of the group pointing to no change in output. All 26 analysts surveyed by Bloomberg News forecast OPEC will leave production quotas unchanged for a third time at today’s meeting.

Oil rallied from a low of $32.70 in January to peak this year at $75 a barrel on Aug. 25. Crude for October delivery was trading at $71.07 on the New York Mercantile Exchange at 10:49 a.m. in Singapore. Al-Sabah said current prices are “OK” and said a supply cutback is unlikely in the near future even though the market is “oversupplied.”

OPEC’s Ministerial Monitoring Committee met for an hour yesterday evening at the group’s Vienna headquarters to review data on OPEC oil supply and demand. The MMC, comprising officials from Iran, Nigeria and Kuwait, often recommends a course of action for the full meeting of OPEC ministers, which convenes at 9:30 p.m. local time, after dark because the summit falls in the Muslim holy month of Ramadan.

Compliance Percentage

The MMC also recommended no change in quotas when it met before OPEC’s May meeting. OPEC Secretary General Abdalla El- Badri and Iran’s incoming Oil Minister Masoud Mir-Kazemi both left the meeting without commenting.

The group agreed late last year to cut production targets by 4.2 million barrels a day after prices crashed more than $100 a barrel from a record of $147.27 in July 2008.

The 11 OPEC members bound by quotas are currently complying with about 68 percent of their promised cutbacks, Al-Sabah said, adding that “75 percent would be fine.”

Those members, all except Iraq, pumped 26.055 million barrels a day in August, according to estimates in a Bloomberg survey, which indicates quota compliance of about 71 percent. Only Saudi Arabia, Kuwait and Qatar pumped less than their target. Iran, Angola and Venezuela are the biggest quota busters.

Non-OPEC Criticized

Qatari Energy Minister Abdullah bin Hamad al-Attiyah, while backing no change to OPEC’s targets, criticized the lack of support from non-member producers such as Russia.

“We heard a lot of oral support, we would like to see physical support,” from non-OPEC suppliers, Al-Attiyah said as he arrived in Vienna yesterday.

Russia’s oil exports are surpassing those of Saudi Arabia for the first time since the Soviet Union’s collapse as Prime Minister Vladimer Putin exploits OPEC cuts to gain market share.

Exports of crude and refined products from Russia rose to about 7.4 million barrels a day in the second quarter, according to Energy Ministry data. Saudi shipments fell to about 7 million barrels a day, International Energy Agency estimates of output and domestic demand showed.

Investors had expected Russian supplies to decline this year after Putin’s deputy, Igor Sechin, told the Organization of Petroleum Exporting Countries in December that his government was ready to limit production to support prices. Instead, the country is providing tax breaks for new fields in Siberia. OAO Rosneft, OAO Lukoil and BP Plc’s Russian venture TNK-BP pumped more to take advantage of a 59 percent gain in prices so far this year.

The extra barrels may undermine OPEC efforts to reduce inventories and keep members from exceeding their quotas after the group meets in Vienna tomorrow. Oil will fall 4.7 percent from the average so far this quarter to $64.50 a barrel in the third, according to the median of 34 analyst estimates compiled by Bloomberg.

To contact the reporters on this story: Maher Chmaytelli in Vienna at mchmaytelli@bloomberg.net; Grant Smith in Vienna at gsmith52@bloomberg.net

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Record Plunge in U.S. Consumer Credit Signals Weakened Spending

By Bob Willis and Vincent Del Giudice

Sept. 9 (Bloomberg) -- A record $21.6 billion drop in borrowing by Americans added to evidence that consumer spending will be slow to recover as banks and credit-card companies tighten lending standards and households pay down debt.

Consumer credit fell by 10 percent at an annual rate in July to $2.5 trillion, according to a Federal Reserve report released yesterday in Washington. The drop was more than five times larger than economists forecast. Credit fell for a sixth month, the longest series of declines since 1991.

“The consumer is hunkered down in the process of repairing his finances,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. “Consumers remain very cautious and won’t be leading us out of this recession.”

Unemployment that’s projected to reach 10 percent by early next year and a decline in household wealth are casting doubt on the strength of the recovery from the worst economic slump since the 1930s. Federal Reserve policy makers, at their last meeting in August, expressed “uncertainty” about the projected pace of gains in spending by households.

The start of the government’s “cash for clunkers” program in late July wasn’t enough to keep credit that covers car loans from plummeting by a record amount, yesterday’s Fed report showed.

Non-revolving debt, including loans for automobiles and mobile homes, plunged by $15.4 billion in July. The Fed’s report doesn’t cover borrowing secured by real estate. Revolving debt, such as credit cards, fell by $6.1 billion.

‘Short-Term Benefit’

Non-revolving credit may have picked up last month as the auto rebate program boosted vehicle sales. The program, which ended in late August, pushed auto sales for the month to a 14.1 million annualized pace, the highest since May 2008.

“There were some car purchases and we will see some short-term benefit” from the program, said Guy LeBas, chief economist at Janney Montgomery Scott LLC in Philadelphia. “But one month is not enough to make the year.”

Economists had forecast consumer credit would drop $4 billion in July, according to the median of 31 estimates in a Bloomberg News survey. Projections ranged from declines of $12 billion to no change from the previous month.

Revolving credit may shrink by another 20 percent by the end of next year as banks pare credit lines further and more consumers turn to debit cards to pay their bills, said FBR Capital Markets Inc. analyst Scott Valentin.

U.S. banks tightened standards on all types of loans in the second quarter and said they expected to maintain strict criteria on lending until at least the second half of 2010, a Federal Reserve report showed on Aug. 17.

‘Uncertain’ Outlook

Most banks cited reduced risk tolerance and “a more uncertain economic outlook” as the main reasons for restricting credit to businesses, with 35.2 percent saying they “tightened somewhat,” the Fed said in its quarterly Senior Loan Officer survey.

The central bank lowered its main rate almost to zero in December and committed to purchasing as much as $1.75 trillion of Treasuries and housing debt to reduce borrowing costs.

Consumer spending growth will average almost 1.5 percent in the second half of this year, according to a Bloomberg News survey of economists conducted in the first week of August, after falling by an average 0.2 percent in the first half. They also forecast the jobless rate would average 10 percent in the first quarter of next year.

Economists in the survey didn’t see annual growth in consumer spending topping 2 percent until 2011, even as they forecast the economy to return to growth in the second half of this year.

Range of Views

Fed policy makers “expected the pace of recovery to pick up in 2010, but they expressed a range of views, and considerable uncertainty, about the likely strength of the upturn -- particularly about the pace of projected gains in consumer spending and the extent to which credit conditions would normalize,” according to minutes of their Aug. 11-12 meeting released last week.

Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U.S. since the middle of 2007.

A Labor Department report last week showed payrolls in August fell the least in a year. At the same time, the jobless rate rose to the highest in 26 years, a reminder that hiring will take longer to rebound, restraining consumer spending.

The economy has lost 6.9 million jobs since the recession began in December 2007, the biggest drop in any post-World War II economic downturn.

Consumer spending rose 0.2 percent in July, following a 0.6 percent increase in June, government data showed on Aug. 28. Excluding cars, purchases were little changed.

Incomes were unchanged in July after dropping 1.1 percent in the prior month. The decrease in income in June reflected the fading boost from government stimulus-related tax cuts and transfers. Wages and salaries posted the first gain of the year in July, increasing 0.1 percent after dropping 0.3 percent.

To contact the reporter on this story: Vincent Del Giudice in Washington vdelgiudice@bloomberg.netBob Willis in Washington bwillis@bloomberg.net

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BOE Opens Doors as Crisis-Hit Staff ‘Smell the Roses’

By Jennifer Ryan and Brian Swint

Sept. 9 (Bloomberg) -- The Bank of England is throwing open its doors to the public again in an annual event that was pared back a year ago following the collapse of Lehman Brothers Holdings Inc., a sign the financial crisis has now abated.

The central bank will allow visitors to see parts of its main building including the Court Room, where its governing board meets, as part of the Open House London weekend event on Sept. 19-20, according to the bank’s Web site. Last year the bank limited the tour to its museum as staff worked overtime on the Saturday and Sunday of Sept. 20-21 to save Britain’s financial system.

That was the weekend after Lehman filed for the biggest bankruptcy in history and the U.S. loaned $85 billion to bail out American International Group Inc. Bank of England staff then went to work on a plan to rescue the banking system, which Deputy Governor Paul Tucker said afterward came “preciously close” to collapse.

“People get pulled off teams and put into crisis groups where they’re often not allowed to talk to each other, and that happened when Lehman went under,” said Colin Ellis, who worked at the central bank until October and is now an economist at Daiwa Securities SMBC in London. “All those people who had been running to stand still are now able to go out and smell the roses more.”

Lehman filed for bankruptcy on Sept. 15, 2008, and the Federal Reserve rescued AIG the next day. Meanwhile, U.K. officials struggling to shore up HBOS Plc engineered the bank’s acquisition by rival Lloyds TSB Group Plc. That was announced on Sept. 18, the same day the Bank of England participated in a joint coordinated dollar swap with the Fed.

Economic Recovery

Bank of England Governor Mervyn King said Aug. 12 the U.K. may be heading for a “relatively slow recovery” as it emerges from the worst contraction in a generation, though the world financial system is in “a fragile condition.” To battle the crisis, the bank has cut the key interest rate to 0.5 percent, the lowest since it was founded in 1694, and is printing 175 billion pounds ($290 billion) of money to buy bonds. An official at the bank had no comment on this year’s tour.

Bank officials may have met and worked in rooms visitors would otherwise have seen on the tour of the historic chambers. Its headquarters take up a 3 1/2-acre block in the heart of London’s financial district, designed by Herbert Baker between 1925 and 1939 and incorporating elements of a previous building by Sir John Soane, the bank’s architect from 1788 until 1833.

Weather Vane

In the Court Room, a remnant of the original building close to where the bank’s Monetary Policy Committee meets to set interest rates each month, visitors will be able to see a dial linked to a weather vane and once used to set policy. Changes in wind speed and direction on the River Thames signaled that cargo ships may dock more quickly, and the heavier trading could boost demand for money and credit.

The Lehman collapse provoked a storm in financial markets. Bank officials started work “pretty much straight away” on a rescue plan which led to the government taking stakes in Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, former Deputy Governor John Gieve told the BBC last month.

“The pace at which things were moving in those two weeks after the Lehman’s bankruptcy is almost impossible to exaggerate,” Adair Turner, chairman of the U.K. Financial Services Authority, told lawmakers in November 2008.

Joint Action

The U.K. rescue plan was announced on Oct. 8, the same day the central bank made a surprise half-point interest rate cut in joint action coordinated with other central banks.

Alan Greenspan, former chairman of the U.S. Federal Reserve and an informal adviser to Prime Minister Gordon Brown, said today Britain will be slow to rebound from the slump after the global recession battered exports.

“It’s going to take a long while for you to work your way through this,” he told the BBC. “Britain is more globally oriented as an economy.”

“The prime minister’s view is that this is not a time for complacency,” Simon Lewis, Brown’s spokesman, told reporters today in London. “The prime minister feels strongly about the need to keep recovery going by maintaining the appropriate level of expenditure.”

The crisis created “exceptional levels of stress” in many parts of the bank, according to its annual report released in May. The Bank of England expanded its bonus pool and took on the most staff in more than two decades as events unfolded. The number of employees rose by about 6 percent and the bonus pot was widened to encompass 8.1 percent of salaries.

“It really struck me just how hard people were working,” said Daiwa’s Ellis. “The bank’s very lucky to have such a dedicated and able staff at its fingertips. Now the projects that had been put on hold can start up again.”

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Brian Swint in London at bswint@bloomberg.net.

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