Rio Says Accord Changes May Alarm Mongolia Investors

By Soraya Permatasari - Sep 26, 2011 7:57 AM GMT+0700

Rio Tinto Group said that potential changes by Mongolia to an investment accord that at present gives partner Ivanhoe Mines Ltd. control of one of the world’s largest copper mines will alarm investors.

“The most important thing that foreign investors require when they’re making their investment decisions is the feeling of predictability and stability in the country in which they operate,” Cameron McRae, Rio Tinto’s Mongolia country director, said in the capital, Ulan Bator, yesterday. “An unstable environment, where changes to agreements are forced, leads to investors being very apprehensive and uncertain.”

McRae, who is also chief executive officer of Oyu Tolgoi LLC, made the comment after Mongolian Finance Minister Sangajav Bayartsogt said that the government may amend the investment terms for Oyu Tolgoi to boost state ownership. A revision may delay the proposed 2013 start of the project with any increase in the state’s share curbing profits from the $10 billion mine for developers Rio and Ivanhoe.

Rio estimates world demand for refined copper will grow 40 percent to 27 million metric tons by 2020, according to a Sept. 8 presentation. Oyu Tolgoi will be one of the world’s five- biggest copper mines and may have average annual production of 450,000 tons of copper and 330,000 ounces of gold, Rio said. That’s about $4 billion a year in sales at current prices.

‘Mammoth Sum’

The existing agreement has given Rio Tinto the confidence to invest “such a mammoth sum” in the project, said McRae. “What we are demonstrating is the investment agreement is a contract. We’re going to honor it and we expect the government to honor it.”

The project, 66 percent owned by Ivanhoe and 34 percent by the Mongolian government, is half way through completion, according to Rio, which owns 48.5 percent of Vancouver-based Ivanhoe and controls the Oyu Tolgoi management.

Mongolia’s government is also seeking to change the allotment of stakes in the Talvan Tolgoi coal deposit to investors including Peabody Energy Corp. (BTU), the largest U.S. coal producer. The proposals to revise ownership of the country’s two biggest mineral developments come ahead of parliamentary elections next year.

A group of 20 Mongolian lawmakers wrote to Prime Minister Sukhbaatar Batbold on Sept. 7 demanding the investment accord for Oyu Tolgoi be revised to give the country a 50 percent holding, China’s Xinhua News Agency reported Sept. 20. Mongolia has appointed chief of the cabinet office Chimed Khurelbaatar to start talks with the miners, the news agency said on Sept. 22.

More Talks

Rio would like to have more talks with the Mongolian government as it hasn’t received any formal notification about a proposed revision, said McRae, who was appointed by Rio. The company has managed the project since December.

Oyu Tolgoi, which means “turquoise hill,” will boost the country’s gross domestic product by 30 percent by 2020, when it reaches full production, said Andrew Harding, chief executive officer of Rio Tinto’s copper unit. The project may cost $10 billion in total, Harding said.

Oyu Tolgoi’s shareholders are seeking to raise as much as $4 billion to finance the development, which would make it the biggest project financing in the mining industry, said McRae. Rio has invested more than $3 billion in the past five years.

Ivanhoe spent more than six years negotiating an investment pact with Mongolia before reaching an agreement in October 2009 to allow it to mine the site. Rio’s two biggest development projects are Oyu Tolgoi and the Simandou iron ore project in Guinea, which Rio has said will cost more than $10 billion.

Power Supplies

Rio is also seeking to resolve the issue of power supplies for Oyu Tolgoi. Production may be delayed if the source of electricity isn’t agreed in the coming months, Harding said at the briefing. Talks between the governments of China and Mongolia over power continue, with China the preferred source of initial supplies, he said.

“We believe the power issue is a key risk to the project execution at least in terms on time-line,” Citigroup Inc. analysts Heath Jansen, Clarke Wilkins and Anindya Mohinta wrote in a Sept. 20 report.

Mongolia, a landlocked country between China and Russia, is one of the richest nations in terms of natural resources, and that’s just the known deposits as four-fifths of the nation hasn’t been surveyed. Aside from coal and copper, the country also holds oil, potash, iron ore and uranium, as well as rare earths used in electronics and turbines. Agriculture and mining each account for about 20 percent of gross domestic product.

China Trade

Mongolia has grown increasingly dependent on commerce with China’s 1.3 billion people since the 1991 breakup of the Soviet Union. China accounts for 80 percent of Mongolia’s imports and buys about 85 percent of its exports, according to Mongolia’s central bank data.

President Tsakhia Elbegdorj, a former journalist who led the peaceful revolution that ended more than 65 years of communist rule in Mongolia in 1990, said in June he’s concerned about how to “manage” the surge of foreign investment and ensure the windfall spreads among the nation’s citizens.

More than 33 percent of Mongolians live below the poverty line, and per capita income in the nation of 2.7 million is $2,111, the International Monetary Fund said in 2010.

To contact the reporter on this story: Soraya Permatasari in Mongolia at soraya@bloomberg.net

To contact the editors responsible for this story: Paul Tighe at ptighe@bloomberg.net; Rebecca Keenan at rkeenan5@bloomberg.net

Read more...

London Metal Exchange Facing Takeover Bids as Trade Volumes Reach Record

By Agnieszka Troszkiewicz - Sep 26, 2011 6:01 AM GMT+0700
Enlarge image

The LME, which said Sept. 23 it had received “several expressions of interest,” handles about 80 percent of global trade in metals futures. Photographer: Chris Ratcliffe/Bloomberg

The London Metal Exchange, founded 134 years ago above a hat shop in the financial district, may be the latest major mutual exchange to be bought after record trading volumes attracted the interest of multiple bidders.

The bourse is valued at about 160 million pounds ($247 million), based on the last published price of its closely held shares, according to Niamh Alexander, an analyst at KBW Inc. in New York. The exchange’s value may be “significantly more” than its 2010 net income of 9.5 million pounds would suggest because so few exchanges of its kind are for sale, said Ruben Lee, chief executive officer of Oxford Finance Group, a London- based company specializing in financial and commodity markets.

The LME, which said Sept. 23 it had received “several expressions of interest,” handles about 80 percent of global trade in metals futures. Prices more than tripled in the past decade as demand from emerging markets led by China overwhelmed supplies from mines. The LME, which is owned by its members, handled $11.6 trillion of contracts last year, compared with $2.5 trillion in 1999, reflecting both higher prices and increasing speculative interest in raw materials.

“The LME is the last major mutual exchange,” said Christopher Gilbert, a professor at the University of Trento in Italy who has followed the bourse since 1971. “A change in ownership will shift the balance of power within the exchange from the industrial users toward the financial community.”

The LME said Sept. 23 it would “begin a formal process which may or may not lead to an acceptable offer for the company being received.” The exchange hired U.S. investment bank Moelis & Co. to advise it. Miriam Heywood, a spokeswoman for the exchange, declined to elaborate on the statement.

Singapore Exchange

Bidders may include CME Group Inc. (CME), the world’s largest futures market, IntercontinentalExchange Inc. (ICE) and Singapore Exchange Ltd. (SGX), KBW’s Alexander wrote in a report. Allan Schoenberg, a spokesman for CME in London, Kelly Loeffler, a spokeswoman for ICE in Atlanta, and Carolyn Lim, a spokeswoman for Singapore Exchange, declined to comment.

CME, based in Chicago, bought the New York Mercantile Exchange for $7.6 billion in August 2008, while ICE, based in Atlanta, bought the New York Board of Trade in 2007 for $1.79 billion, according to data compiled by Bloomberg. Singapore Exchange’s A$8.3 billion ($8.1 billion) offer to buy ASX Ltd., the owner of Australia’s main bourse, was blocked by the Australian government in April.

‘A Jewel’

“There are in fact very few successful exchanges that are actually up for sale, so the LME is in that sense a jewel,” said Lee of Oxford Finance Group. “The most likely bidders are going to be the cash-rich exchanges which already have a footprint in commodities. The LME has to be attractive to the Asian exchanges, and it could be any one of them.”

Buying the LME would be a “relatively small” acquisition for either CME or ICE, KBW’s Alexander wrote in her report. A new owner could raise the exchange’s earnings by handling its clearing, bringing back fees for market data and increasing trading costs, she said. CME and ICE already have their own clearing systems.

The LME clears trades through LCH.Clearnet Group Ltd., in which it owns 3.27 million shares, and said in May it was considering setting up a new clearing system to boost profit. The exchange appointed Trevor Spanner, chief operating officer of European Central Counterparty Ltd., as managing director of post-trade services this month.

Glencore Share Sale

Interest in commodities surged in the past decade as shortages drove prices higher. Investors held about $431 billion in raw materials by July, an almost fivefold gain in six years, according to Barclays Capital. Glencore International Plc, the Baar, Switzerland-based commodities trader, sold shares in May, ending more than three decades of operating as a closely held partnership. The offering valued the company at $59.2 billion.

The LME has 92 members listed on its website, including units of Goldman Sachs Group Inc. (GS), Barclays Plc and Citigroup Inc. There are seven categories of membership, conferring different rights in the handling of contracts. There are 12 category 1 members who are allowed in the bourse’s ring, a 6- meter-wide (20-foot) trading pit in Leadenhall Street, about a 10-minute walk from the Bank of England.

It is London’s last so-called open outcry trading floor and has its origins in the Jerusalem Coffee House in the financial district where metals traders would meet in the early 19th century. Merchants would draw a circle in the sawdust around which people would make their bids.

Brokers also trade through the bourse’s Select electronic platform and by phone. Select accounted for 52 percent of volume and the ring 21 percent a year ago, LME data show.

Ordinary Shares

The exchange is owned by LME Holdings Ltd., which issues two share classes. There are 12.9 million ordinary shares, which confer ownership and traded at 4.925 pounds in July, according to data on the bourse’s website. There are also 1.34 million B shares, which exchanged hands at 70 pounds in July. Neither shares trade on an exchange.

Owners of B shares get no dividend and have no right to the profits or assets of the company, according to the articles of association. In the event of a distribution of assets, they are entitled to get the nominal value of the capital paid up on each share. They can’t attend company meetings unless changes to their rights are being considered. It is mandatory for four categories of membership to own the B shares.

“Metals trading continues to expand and new metals and products are growing the reach of the market,” said John Meyer, a mining and metals analyst at Fairfax IS in London. “The LME is proven to be one of the, if not the, most resilient markets in the world in times of crisis. In 2008, investors kept funds with LME brokers rather than banks.”

Asian Tin

The LME was founded in 1877 to feed industrial Britain’s need for metals. Its benchmark contracts are three-month futures because that’s how long it took in the days of steamships to get copper from Chile or tin from Southeast Asia.

The LME started trading steel futures in 2008 and expanded into molybdenum and cobalt in 2010, adding to eight contracts in non-ferrous metals and its LMEX index of six industrial metals. The bourse introduced so-called LMEminis in February, with each contract representing five tons rather than the 25 tons normally traded. They are available through the Singapore Exchange.

“The sale of the LME is an opportunity for the shareholders to sell out based on current volume,” said David Threlkeld, president of Resolved Inc., a commodities trading and hedging adviser in Scottsdale, Arizona. “Selling the LME at this point would be as smart as Glencore going public at the top.”

To contact the reporter on this story: Agnieszka Troszkiewicz in London at atroszkiewic@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

Read more...

Crude Trades Near 6-Week Low on Speculation European Crisis to Cut Demand

By Ben Sharples - Sep 26, 2011 10:34 AM GMT+0700

Oil traded near the lowest in more than six weeks in New York as investors speculated Europe’s sovereign debt crisis will cut fuel demand amid ample supplies.

Futures fluctuated close to $80 a barrel after finance leaders at the annual International Monetary Fund meeting in Washington urged European policy makers to step up measures to counter the crisis. The region’s woes have helped slow demand for crude, Qatar’s oil minister said yesterday. Declines may be limited as New York oil approaches technical support levels, according to data compiled by Bloomberg.

“Everyone now fully understands the implications of Greece defaulting,” said Jonathan Barratt, a managing director of Commodity Broking Services Pty in Sydney. “The big key is whether or not the measures are going to help and I think that’s what we have to wait and see.”

Crude for November delivery was at $79.90 a barrel, down 5 cents, in electronic trading on the New York Mercantile Exchange at 1:31 p.m. Sydney time. Front-month prices last week slid 9.2 percent to $79.85, the lowest settlement since Aug. 9. Oil is 4.4 percent higher the past year.

Brent futures for November settlement slid 19 cents, or 0.2 percent, to $103.78 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract was at a premium of $23.88 to U.S. futures, compared with a record $26.87 on Sept. 6, based on front-month settlement prices.

“Adequate” Supply

U.S. Treasury Secretary Timothy F. Geithner said at the IMF meeting that governments and the European Central Bank must defuse the “most serious risk now confronting the world economy.”

The European financial crisis and general fears about the global economy have weakened demand for crude, Qatari Oil Minister Mohammed Saleh al Sada said yesterday in Doha. Supplies are adequate and the nation is pleased that Libya is starting to produce and export oil, he said.

Harouge Oil Operations, a joint venture between Libya’s state-owned National Oil Corp. and PetroCanada, will begin pumping crude from the country’s Amal field in a “few weeks,” the company’s chairman said. Full output of 100,000 barrels a day is expected to be reached by year’s end, Abdulwahab Elnaami said yesterday at his office in the Libyan capital Tripoli.

Fighting in Libya since February has reduced the availability of light, sweet crude, or oil with low density and sulfur content. The country’s output fell to 45,000 barrels a day last month, according to Bloomberg estimates, compared with the 1.6 million barrels a day the nation pumped in January.

Crude in New York has long-term technical support at $76.28 a barrel on the weekly chart, according to data compiled by Bloomberg. That’s the 38.2 percent Fibonacci retracement of the drop to $32.40 in December 2008 from a record high of $147.27 in July that year. Buy orders tend to be clustered close to chart- support levels.

To contact the reporter on this story: Ben Sharples in Melbourne at bsharples@bloomberg.net

To contact the editor responsible for this story: Alexander Kwiatkowski in Singapore at akwiatkowsk2@bloomberg.net

Read more...

Ford Motor May Build Electric Cars in China With Partner, CEO Mulally Says

By Bloomberg News - Sep 25, 2011 11:00 PM GMT+0700
Enlarge image

Alan Mulally, chief executive officer of Ford Motor Co. Photographer: Ariana Lindquist/Bloomberg

Play Video

Sept. 26 (Bloomberg) -- Ford Motor Co. Chief Executive Officer Alan Mulally talks about the automaker's business strategy for China. Mulally was in Chongqing, China, to attend the groundbreaking ceremony of an engine transmission plant at its venture with Changan Automobile Group. He spoke Sept. 24 with Bloomberg Television's Stephen Engle. (Source: Bloomberg)

Ford Motor Co. (F) may make electric cars with its partner in China as the auto industry moves toward producing more fuel-efficient vehicles, Chief Executive Officer Alan Mulally said.

“Our plan is to make the vehicles people want and value, in China and around the world,” Mulally, 66, said in a Bloomberg Television interview on Sept. 24 in Chongqing, China. “As we move to more electrification you’re going to see more hybrids, plug-in hybrids and all-electric.”

Mulally, who was in China to attend the groundbreaking ceremony of an engine transmission plant at its venture with Changan Automobile Group, didn’t provide a schedule for building electric cars. Rivals Daimler AG (DAI) and General Motors Co. (GM) have announced plans to add alternative-energy vehicles in China as the country, the world’s largest polluter, seeks to reduce emissions. The government aims to have 1 million electric- powered vehicles on the road by 2015, according to the Ministry of Science.

GM on Sept. 20 signed an agreement to develop electric cars in China with its partner SAIC Motor Corp. GM, which plans to introduce the plug-in hybrid Chevrolet Volt in China in the fourth quarter, will not give SAIC or the Chinese government intellectual property for the Volt as part of the agreement, GM Vice Chairman Steve Girsky said.

Ford will also consider introducing its luxury brand Lincoln in China to tap into the growing high-end sedan market, Mulally said. The carmaker currently sells models such as its Mondeo sedan and Focus small cars in the country.

“We have a great luxury brand in Lincoln, which we have recommitted ourselves to,” he said. “There’s going to be tremendous pull from China to have access to these great vehicles.”

Additional Models

Ford is spending $1.6 billion to build four factories in China, where it plans to triple its lineup by offering 15 models by mid-decade. The U.S. carmaker, dependent on the U.S. and Europe for most sales and profits, had 2.7 percent of the passenger-vehicle market in China through June, according to J.D. Power & Associates, while GM controls 10 percent.

China’s demand for luxury cars will grow about 35 percent this year, analysts at J.D. Power forecast. This compares with a 5 percent increase for overall auto sales as predicted by the China Association of Automobile Manufacturers.

Expansion in Asia is part of Mulally’s wider plan to boost annual global sales by 50 percent to 8 million vehicles by 2015. Ford’s China sales have risen 11 percent this year to 341,746 units, the company said on Sept. 6.

Overall vehicle sales in China reached 18.06 million units last year, boosted by government tax breaks and rural subsidies.

Delivery Slowdown

Ford is encountering pricing pressure in China as the auto market there slows, Joe Hinrichs, group vice president and Asia chief, said on Aug. 10. Overall deliveries in China are forecast to slow this year from the 32 percent gain in 2010, after the government removed sales-tax breaks in January and the central bank raised interest rates five times since October.

“China has a very good plan to have sustainable growth, to manage the inflation as well as the economic activity and automobile purchases move along with that,” Mulally said. “So, even though it’s lower than the previous year, it’s a lot more sustainable for the long term.”

--Stephen Engle, Liza Lin. Editors: Chua Kong Ho, Richard Frost

To contact the reporters on this story: Liza Lin in Shanghai at llin15@bloomberg.net;

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net

Read more...

U.S. Equity Futures Advance as Leaders Seeks Ways to Halt European Crisis

By Rita Nazareth - Sep 26, 2011 10:24 AM GMT+0700

Play Video

Sept. 26 (Bloomberg) -- Eswar Prasad, a professor at Cornell University and a former head of the International Monetary Fund’s financial studies division, talks about the outlook for the global economy. Euro-area countries will do whatever is necessary to end the crisis and ensure the financial stability of the entire euro area and its members, the IMF said in a statement after its meetings in Washington on Sept. 24. Prasad speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

U.S. stock futures pared an early advance, following the biggest weekly drop since October 2008 for the Dow Jones Industrial Average, on speculation European policy makers will announce steps to contain the debt crisis as foreign counterparts lobby for action.

Standard & Poor’s 500 Index futures expiring in December advanced 0.6 percent to 1,137 at 12:17 p.m. Tokyo time after falling as much as 0.7 percent and climbing as much as 1.3 percent. Dow futures gained 62 points, or 0.6 percent, to 10,759. December contracts on London’s FTSE 100 Index rose 0.5 percent.

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the International Monetary Fund in Washington that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

“It’s not a surprise that we didn’t see anything concrete out of Europe this weekend,” Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank, said in a telephone interview. “The market is already pricing in a Greek default. If we don’t see any chips falling, investors will be pleased. This market is starting to get cheap.”

U.S. stocks fell last week as the Federal Reserve said risks to the economy have increased and concern grew that policy makers will fail to spur growth. Equities rebounded on Sept. 23, following a four-day rout that drove the S&P 500 down 7.1 percent, amid speculation European governments will act to prevent a financial crisis.

Alcoa, FedEx

For the week, Alcoa Inc. and DuPont Co. tumbled more than 14 percent to lead losses in the Dow. Materials companies in the S&P 500 slipped 12 percent for the biggest drop among 10 industries as every group declined at least 1.6 percent. Bank of America Corp. slumped 13 percent, while FedEx Corp. tumbled 12 percent after cutting its profit forecast.

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 11 percent last week as all 30 of its stocks retreated. The Dow Jones Transportation Average, also considered a proxy for the economy, slumped 9.6 percent. Both gauges fell the most since March 2009.

“When you look at Europe, the solutions are not going to be implemented any time soon,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview. “That means the market volatility is going to continue.”

‘Firewall’

Geithner said over the weekend that governments must unite with the European Central Bank to “create a firewall against further contagion” and defuse the “most serious risk now confronting the world economy.” European policy makers are under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers.

Last week’s rout erased $1 trillion from U.S. equities amid concern Greek insolvency is inevitable and Europe can’t contain the damage. The S&P 500 slumped 17 percent between April 29 and Sept. 23. The index’s gain since March 2009, when the last bear market ended, has been cut to 68 percent. The benchmark gauge for American common equity is trading at 12.4 times earnings in the past 12 months, 4.4 percent below its average valuation at the lowest point during the last nine bear markets, according to data compiled by Bloomberg.

‘Scapegoat’

Greek Finance Minister Evangelos Venizelos said his country will do “whatever it takes” to meet its budget goals and cautioned against making it a “scapegoat” for the global economy. Greece has yet to secure a second international bailout amid questions about whether it can satisfy the terms for aid. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December.

Stocks are having the worst quarter on record relative to U.S. Treasuries and gold, which may force investors to buy equities to rebalance their allocations, JPMorgan Chase & Co.’s Marko Kolanovic said. U.S. and emerging-market equities have returned 43 percentage points less, the most during a quarter since at least 2002, according to data compiled by Kolanovic, whose analysis is based on a model portfolio composed of stocks, bonds and gold.

“This underperformance may trigger significant quarterly rebalance flows into equities and out of Treasuries at the end of next week,” Kolanovic, the New York-based global head of equity derivatives strategy at JPMorgan, wrote in a note to clients last week.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Read more...

Banks Splinter on Europe Debt Crisis

By Christine Harper, Dawn Kopecki and Simon Kennedy - Sep 26, 2011 9:03 AM GMT+0700
Enlarge image

Attendees watch Christine Lagarde, managing director of the International Monetary Fund (IMF), speak during a news briefing on a television monitor at the IMF and World Bank annual fall meeting in Washington, D.C., U.S., on Saturday, Sept. 24, 2011. Photographer: Joshua Roberts/Bloomberg

Enlarge image

Timothy F. Geithner, U.S. Treasury secretary, urged governments to unite with the European Central Bank to increase the firepower of the fund, known as the European Financial Stability Facility. Photographer: Peter Foley/Bloomberg

Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it.

The chiefs of firms including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK) and Societe Generale (GLE) SA met for three hours at the National Archives on Sept. 23. They differed on which government and private solutions may restore confidence in European debt and banks, and on some elements of regulation, said two participants who spoke on condition of anonymity because the meeting wasn’t public.

“It was a big group there, they’re going to differ about stuff; there’s a lot of tension in the air because of the world we live in,” Morgan Stanley (MS) Chief Executive Officer James Gorman, 53, said as he left the event, which coincided with weekend meetings of the International Monetary Fund and Institute of International Finance. “There’s no one solution. It’s going to be 25 different things.”

Bank-stock indexes in Europe and the U.S. have dropped more than 30 percent this year and borrowing costs for European lenders have climbed amid concern that Greece and other European countries may default. The level of disagreement between bankers and government officials who gathered for the annual IMF meeting was matched only by their shared sense that the stakes have rarely been higher.

‘More Gravity’

“There’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy,” said Lawrence Summers, a former U.S. Treasury secretary and White House economic adviser, who said it was his 20th annual IMF meeting.

Asian stocks fell today amid concern the European debt crisis may weaken economic growth. The MSCI Asia Pacific Index slid 1.2 percent to 110.38 at 11 a.m. in Tokyo, set for its lowest close since June 2010.

Discussion of European governments’ options, including how to use their 440 billion-euro ($596 billion) rescue fund, dominated the policy meetings. Most European parliaments, including Germany’s, still haven’t voted on a July 21 plan to endow the fund with more powers, including the ability to buy bonds and inject money into banks.

Geithner’s Plea

U.S. Treasury Secretary Timothy F. Geithner urged governments to unite with the European Central Bank to increase the firepower of the fund, known as the European Financial Stability Facility.

Failure to act carries the “threat of cascading default, bank runs and catastrophic risk,” Geithner said in a Sept. 24 statement to the IMF, his strongest public lobbying yet. Bank of Canada Governor Mark Carney said 1 trillion euros may be needed and U.K. Chancellor of the Exchequer George Osborne set a Nov. 3-4 Group of 20 summit as the deadline for a solution.

European policy makers indicated they may use leverage, or borrowed money, to increase the spending strength of the EFSF. Klaus Regling, its CEO, and German Finance Minister Wolfgang Schaeuble downplayed speculation that the fund might borrow from the European Central Bank or provide insurance on loans provided by the ECB directly to the private sector.

Finance officials this week will also discuss accelerating the establishment of a permanent rescue to July 2012, a year earlier than planned, according to a document prepared for the meetings and obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene said in interviews in Washington that the bank may step up its own response next week.

Bankers Mingle

The Institute of International Finance, an organization of more than 400 financial companies worldwide, holds its annual meetings in parallel with the IMF’s. In normal times, the private-sector bankers use the weekend to mingle with one another, and with government ministers and central bankers, trying to win business and get policy insight.

In some ways, this time was no different as bankers hunkered down in hotels around Washington for meetings with government clients and executives of other banks. JPMorgan and Citigroup Inc. (C), both based in New York, held cocktail parties. Even UBS AG (UBSN) feted guests with champagne and dance music on Sept. 24, the same day CEO Oswald Gruebel, 67, resigned following the bank’s announcement that it lost $2.3 billion on what it said were “unauthorized” trades.

Compares With 1930s

Yet in private discussions, bankers said the environment was exceptional. A senior European banker said he sees policy makers’ decisions as being as momentous as those in the 1930s. A senior U.S. bank executive said he’s more worried than he was at any point during the financial crisis of 2008 and 2009.

About 1,000 people attended a Sept. 24 IIF dinner, which featured a tribute to ECB President Jean-Claude Trichet, who’s stepping down Oct. 31 and will be succeeded by Mario Draghi, the governor of Italy’s central bank.

Guests dined on beef tenderloin stuffed with red chard, dates and pine nuts, and truffled potato crepes. They heard speeches about Trichet’s career and accomplishments from IIF Chairman Josef Ackermann, who’s also CEO of Frankfurt-based Deutsche Bank, as well as former Federal Reserve Chairman Paul Volcker and Carney, the Bank of Canada governor.

The ECB’s policies in recent years, such as buying bonds issued by weaker European nations and providing cash loans in return for banks’ bond holdings, have helped provide support for both governments and lenders. The policies also have stirred discontent as two German members of the ECB’s governing council resigned this year amid signs of growing disagreement about the central bank’s efforts.

ECB Easing

IIF Chief Economist Philip Suttle told conference attendees on Sept. 24 that solving the European crisis will require the ECB to reduce interest rates to boost growth.

“You need the ECB to ease significantly, and that probably means the euro needs to come down,” Suttle said.

Schaeuble, the German finance minister, addressed the same room hours later with a contrasting message: “We won’t come to grips with economies deleveraging by having governments and central banks throwing -- literally -- even more money at the problem,” he said.

At a panel discussion yesterday titled “Systemic Stability and Global Financial Firms,” bank executives including Goldman Sachs President Gary D. Cohn and Barclays Plc (BARC) CEO Robert E. Diamond, 60, discussed risk management and regulation without addressing the European crisis directly.

Restore Confidence

After the discussion, Cohn was asked what he thinks European leaders must do to restore investor confidence.

“The market needs to hear that they understand the depth and breadth of the problem,” said Cohn, 51. “They just need to convey to them that what they’re doing is big enough and powerful enough to get the market’s attention.”

Modeling a European rescue after the U.S. Treasury Department’s Troubled Asset Relief Program, which started injecting capital into banks in 2008, “would be a good solution,” he said.

Frederic Janbon, global head of fixed income at Paris-based BNP Paribas (BNP) SA, said he hopes policy makers stick with implementing the plan agreed to on July 21.

“Before we go to what we do after, we start by doing what we promised before,” he said in an interview.

Deutsche Bank’s Ackermann urged European nations to approve the 440 billion-euro rescue fund and to implement a bailout plan for Greece that are part of an agreement reached on July 21.

‘Seal the Deal’

“Our strong advice is to move on and seal the deal which was agreed on in Brussels at the end of July,” Ackermann, 63, said during a press conference yesterday. “To re-open that debate would not be productive and definitely not stabilize the turbulent situation we’re in.

JPMorgan Chief Economist Bruce Kasman, speaking a day earlier, said the July 21 bailout plan for Greece isn’t going to be enough to contain the crisis.

“Greece is insolvent and the European Monetary Union, the European Union as a whole, needs to deal with that,” Kasman said at a Sept. 24 panel discussion hosted by the IIF. “It hasn’t yet come to terms with that.”

At the private gathering of bank CEOs on Sept. 23, which was the first joint meeting of the IIF and the Financial Services Forum, the executives spent part of the session getting Carney’s views on the regulatory outlook. JPMorgan CEO Jamie Dimon, 55, criticized regulators’ plans to require the biggest banks to hold extra capital and got into a dispute with Carney, said three people with knowledge of the encounter.

Joseph Evangelisti, a spokesman for JPMorgan, and Jeremy Harrison, a spokesman for the Bank of Canada, declined to comment on what was said at the meeting.

“More generally, we have been engaged in constructive dialogue with a range of stakeholders, both domestic and international, as we move forward through this financial-sector reform process,” Harrison said in an e-mailed statement.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net Dawn Kopecki in New York at dkopecki@bloomberg.net Simon Kennedy in Washington at skennedy4@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

Read more...

‘Barrier’ Around Greece Needed: Merkel

By Tony Czuczka - Sep 26, 2011 5:01 AM GMT+0700

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area.

Expanding the powers of the region’s rescue fund, the European Financial Stability Facility, as agreed by European leaders in July is necessary to avoid Greece’s problems from spilling over to other countries, Merkel said late yesterday on ARD television. The fund’s permanent successor, due to take effect in mid-2013, is needed “so we can in fact let a state go insolvent” if it can’t pay its bills.

“We have to be in a position to react,” Merkel said. “We have to be able to put up a barrier.” Even so, “I don’t rule out at all that at some point we will have the question whether one can do an insolvency of states just like with banks.” She made no mention of setting up the permanent fund before 2013.

Merkel, as the head of Europe’s biggest economy, is at the center of calls by the U.S. and other governments to do more to stop the European sovereign debt crisis as it pounds global financial markets. The situation is “serious” and “there are no easy solutions,” Merkel said in the hour-long interview. She also indicated that she’s being treated for high blood pressure.

‘A Bit Earlier’

Policy makers can make the EFSF more “efficient” by leveraging it without involving the European Central Bank, Finance Minister Wolfgang Schaeuble said over the weekend. He also raised the prospect of bringing in the permanent backstop before 2013. Senior finance officials are preparing to examine the cost advantages of accelerating the start of the fund by a year to 2012, according to a document prepared for meetings this week obtained by Bloomberg News.

“Maybe we can manage it a bit earlier” than 2013, Schaeuble told reporters in Washington on Sept. 24 after the annual meeting of the International Monetary Fund. The current facility is a “preliminary solution and we want a permanent solution as quickly as possible.” Its successor, known as the European Stability Mechanism, will have a “quite different lasting, stabilizing, confidence-creating function” and Germany “would not oppose” bringing it forward, he said.

With global stocks entering their first bear market in two years last week, European policy makers were met with pressure at the weekend from foreign counterparts at the IMF meeting to do more to stop the contagion seeping from Greece.

‘Can’t Force It’

Merkel rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed.

“Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.

Merkel suggested that Greece may be able to get the next tranche of bailout aid, after a team of officials from the IMF, the ECB and the European Commission assess the Greek government’s progress in meeting deficit-reduction and other targets. Merkel is due to host Greek Prime Minister George Papandreou for talks in Berlin on Sept. 27, two days before German lawmakers vote on the enhanced rescue fund.

It’s the “troika’s” job to make the ruling on progress made by Greece, she said. “Were they to come back one day and say Greece can’t make it, then we would have to rethink,” Merkel said. “But they aren’t doing that so far.”

EFSF Vote

Merkel said she’ll win legislative approval of the expanded EFSF powers on Sept. 29 on the strength of her governing majority without depending on opposition support. “I want a majority of my own and I’m confident I will get it,” she said. “I’m also going to lobby for it one more time this week.”

For all the turmoil, Germans can have confidence in the euro. “We need the euro,” she said. “The euro is good for us. That is why we need to improve on what has gone wrong in the past.” Changing European treaties to make it easier to enforce budget discipline is one solution, she said. “We have to work toward treaty change.”

To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net

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

Read more...

AutoZone Billionaire Pumps Fortune Into Cancer Fight

By David Beasley - Sep 20, 2011 11:01 AM GMT+0700

In the 15 years since J.R. “Pitt” Hyde was diagnosed with prostate cancer, the founder of AutoZone Inc. (AZO) has devoted the largest single portion of his billion-dollar fortune to searching for a cure.

Hyde, now 68 and cancer free, teamed up with Mitch Steiner, the surgeon who removed his prostate, to form GTx Inc. (GTXI), a biomedical company based in Memphis, Tennessee. GTx has yet to put a new drug on the market since its 1997 launch and the stock, which closed yesterday at $3.49, has been volatile. It hit its 52-week low of $2.31 in March and its 52-week high of $6.57 in June.

“Biotech is a vast departure from retailing for sure,” Hyde said in a telephone interview. “It’s a business not for the faint of heart.”

This month GTx began the process to enroll patients in the third and final phase of study for its most advanced experimental medicine Ostarine, designed to increase muscle mass and fitness in cancer patients. The company began a mid-stage study this summer for its other drug candidate Capesaris, a hormone therapy for prostate tumors without the side effects of existing treatments.

Ostarine showed promise among select patients in earlier studies, said David Nierengarten, an analyst with Wedbush Securities Inc. in Los Angeles. Lung cancer patients getting it did better on a stair climbing test than those on a placebo, while the higher risk of death among those who lost significant amounts of weight seemed to lessen in those getting Ostarine. The final studies are needed to confirm the benefits.

‘Actually Worked’

“We think it has a better chance than maybe some other drugs in phase 3 clinical trials because it has actually worked in phase 2 so far,” said Nierengarten, who has an “outperform” rating on GTx with a 12-month target price of $13.

Capesaris “is the first new hormone treatment for prostate cancer in quite some time,” Nierengarten said. “The current treatment options have a lot of side effects associated with them hopefully the GTx compound won’t have.”

Even if the trials go well, Food and Drug Administration approval likely wouldn’t come for Ostarine until 2014 at the earliest and 2015 at the soonest for Capesaris, said Steiner, 50, who is GTx’s CEO.

“All your risk and all your capital is front-end loaded unlike the retail business I grew up in where if you didn’t make money every quarter you were toast,” Hyde said. “You’ve got to take a long view in this business.”

At yesterday’s close, Hyde’s stake in GTx was worth about $65 million.

‘Imbedded Gain’

John Pontius, Hyde’s money manager who is president of Pittco Management LLC, said Hyde’s investment in GTx is “by a wide measure, the largest single investment he has made since he was diagnosed with prostate cancer.

“His AutoZone stock is probably worth a little more than his GTx stock today,” Pontius said, but those shares were purchased years ago and there is a large imbedded gain in that stock. Hyde’s stake in AutoZone was worth about $83 million at yesterday’s close.

Hyde turned what was an estimated $485 million net worth in 1996 into a billion-dollar fortune through investments in managed funds, venture capital and real estate, he said.

‘Learned From Sam’

After graduating from the University of North Carolina at Chapel Hill with a bachelor’s degree in economics in 1965, Hyde joined his family’s wholesale grocery business, Malone and Hyde Inc., in Memphis, building it from a regional company to the third largest of its kind in the U.S. He was invited to join the board of Wal-Mart Stores Inc. (WMT), where he soaked up business lessons from the chain’s founder, Sam Walton.

“I got to be tutored by the master,” Hyde said. “A lot of the things we incorporated into AutoZone, I learned from Sam.” He served on the board from 1978 to 1983, according Greg Rossiter, a Wal-Mart spokesman.

He also learned from Wal-Mart that it might be time to think about exiting the wholesale grocery business.

“The highest percentage of our business was in small towns,” Hyde said. “In some small towns, we might be supplying every grocer in town. Obviously seeing the potential of Wal-Mart opening these huge stores in small towns, they were certainly going to take a huge bite out of the apple.” He sold Malone and Hyde in 1988 to Fleming Cos.

Hyde saw an opening in providing auto parts for the do-it-yourself market and opened the first AutoZone, then called Auto Shack in July 1979 in Forrest City, Arkansas, with four stores in Memphis following a few days later. The chain now has 4,500 stores, with $7.4 billion in fiscal- year 2010 revenue.

FedEx Director

Hyde still serves on the AutoZone board but stepped down as CEO in 1996, the year he had surgery for prostate cancer. He also serves on the board of Memphis-based FedEx Corp. (FDX), devoting half his workday to business and the other half to philanthropy. Off hours, he goes fly-fishing and skiing in Aspen, Colorado, where he owns a home. In 2001, Hyde and five other Memphis investors purchased a 30- percent stake in the National Basketball Association franchise, the Memphis Grizzlies, an investment Hyde said was prompted more by a desire to help Memphis than by a passion for sports.

GTx, the biotech company “is the one area where I am directly involved in operations,” said Hyde, who serves as non-executive chairman.

‘Dream Come True’

After his own successful surgery for prostate cancer, Hyde began donating money for Steiner’s research at the University of Tennessee before they launched GTx. Hyde has been cancer-free since his surgery, Steiner said.

Steiner called Hyde’s investment in GTx “a dream come true” because it rescued his research from the cash-starved academic field.

“In academics, you have to get a grant and you’re lucky to get an $80,000 or $100,000 grant which is only going to cover a fraction of what you need,” said Steiner. “You need to put in 20 years or 30 years of your life to see something move very little. In industry, you can really move it because you have the resources and the people and you pay them well.”

Over the years, Steiner taught Hyde about science and Hyde taught him about business.

“With Pitt having had prostate cancer, he gets it, he understands it,” said Steiner. “Having a combination of the surgeon and the grateful patient, it’s just a very unusual mix.

“It’s high risk but it’s high reward,” Steiner added. “All you need is one. Once you get one, boom, you are instantly a player.”

To contact the reporter on this story: David Beasley at dbeasley@bloomberg.net

To contact the editor responsible for this story: Anita Sharpe at asharpe6@bloomberg.net

Read more...

Boeing to End Dreamliner Delays With All Nippon

By Susanna Ray - Sep 26, 2011 9:34 AM GMT+0700

Boeing Co. (BA) hands over the first 787 Dreamliner today to end more than three years of delays for a plane that the company says will become a benchmark for decades for technology and passenger amenities.

All Nippon Airways Co. will take delivery at a ceremony in Everett, Washington, of the first jetliner with a fuselage made of carbon-fiber reinforced plastic materials. Struggles with those composites and manufacturing process pushed back the jet’s entry into service seven times since 2007.

Boeing is counting on the Dreamliner to help it reclaim the top spot in industry sales lost to Airbus SAS in 2003. The composite body is lighter than traditional aluminum, cutting fuel use, and upgrades such as LED lighting and larger windows are designed to improve passengers’ in-flight experience.

“We’ve developed a set of technologies that will serve as the backbone of our airplanes for the next 30 years,” Scott Fancher, the 787 program chief, told reporters yesterday at a briefing in Everett.

The twin-engine 787 is Chicago-based Boeing’s best-selling new jet ever, with 821 orders from 56 customers. Boeing is working to boost production to 10 a month, a record for wide- body aircraft, after the setbacks increased costs, sent 787 inventory ballooning to $16.2 billion through June and upset airlines’ timetables for adding new routes.

Carriers have penalty clauses written into contracts for late deliveries. All Nippon has worked with Boeing to receive 767s and 777s to blunt the effect of not getting the 787 in May 2008 as planned. Satoru Fujiki, All Nippon’s senior vice president for the Americas, declined to give financial details.

‘Quite Confident’

“We have waited three years, and finally we have reached first delivery,” Fujiki told reporters yesterday in Everett. “We are quite confident in Boeing’s ability” to meet delivery targets as production ratchets up.

The 55 787s on order at All Nippon would make the Tokyo- based airline the biggest operator of the plane. It plans to offer the first passenger flight on Oct. 26 as a special trip between Tokyo and Hong Kong.

The jets will start on shorter routes within Japan, because the first ones are overweight and not as fuel-efficient, Fujiki said. Regular domestic service will start Nov. 1 between Haneda and Okayama and Hiroshima, followed by intercontinental service between Haneda and Frankfurt in January after the carrier receives several more of the planes.

Share Performance

Boeing rose 79 cents, or 1.3 percent, to $59.51 in New York Stock Exchange composite trading on Sept. 23, snapping a streak of four declines. The shares have fallen 41 percent since the initial 787 delay was announced almost four years ago.

“I’m sleeping better than I have been for awhile,” said Dan Mooney, Boeing’s vice president of development for the 787- 8, the initial Dreamliner variant being built. “But our next challenge is getting that production system stable.”

The Dreamliner is Boeing’s first new jet in 16 years, after the 777, the planemaker’s biggest twin-engine aircraft. The company doesn’t expect to develop another new plane until next decade, after deciding in July to upgrade the engines on the 737 instead of building a replacement jet.

The 787 promises to be 20 percent cheaper to operate than comparably sized jets, due to the lightweight materials and a new all-electric system that doesn’t divert air from the engines for power. Boeing is marketing the plane, which seats 210 to 290 people, for long-haul routes such as Tokyo-New York that have been the domain of larger aircraft.

‘Biggest Challenges’

“This airplane is positioned to capitalize on one of the biggest challenges in aviation -- the operating cost of fuel and maintenance,” Fancher said. “This is positioned to challenge those head-on.”

The 787’s new Rolls-Royce Holdings Plc engine, an option along with a General Electric Co. (GE) model, collects data every few seconds and transmits it so parts can be waiting for any repairs at the plane’s next stop, according to the London-based manufacturer.

Boeing drew from a decade of research by psychologists and architects to make air travel more comfortable for passengers with the 787.

The bigger windows feature dimming glass that replaces window shades; bigger luggage bins that still allow for more headroom; and LED lighting that highlights new archways. Because plastics don’t corrode like metals, cabin air can have more humidity and be kept at a higher pressure, so travelers feel they’re at a lower altitude than on other planes.

Boeing will continue to refine the 787’s interior, said Kent Craver, regional director of passenger satisfaction and revenue for Boeing.

“This is going to be the new baseline for all future airplanes,” Craver said.

To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

Read more...

Europe Pressured by Geithner, Soros to Come to Grips With Sovereign Crisis

By Rainer Buergin and Belinda Cao - Sep 26, 2011 1:45 AM GMT+0700

European policy makers faced mounting pressure from foreign counterparts and investors to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy.

U.S. Treasury Secretary Timothy F. Geithner set the tone at the annual meeting of the International Monetary Fund in Washington by warning that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

Such calls leave European policy makers under pressure to further boost the ammunition of their regional rescue fund even as parliaments focus on ratifying a July plan to broaden its powers. Trading resumes tomorrow after global stocks entered their first bear market in two years last week on concern Greek insolvency is inevitable and Europe can’t contain the damage.

“The sovereign debt crisis in the euro area needs to be resolved promptly to stabilize market confidence,” People’s Bank of China Governor Zhou Xiaochuan said at the IMF talks, which conclude today.

‘Firewall Against Contagion’

In his strongest public push yet for action, Geithner pressed governments to unite with the European Central Bank to “create a firewall against further contagion” and defuse the “most serious risk now confronting the world economy.” Antonio Borges, the head of the IMF’s European department, said today the ECB is the only agent that can “scare” the markets.

Geithner wants authorities to use leverage to increase the spending strength of the 440 billion-euro ($594 billion) European Financial Stability Facility. Bank of Canada Governor Mark Carney said 1 trillion euros should be deployed.

There are indications European governments are heeding the advice although they signaled a preference to first pass into law a revamp of the EFSF that will allow it to buy bonds and aid banks. European members of the Group of 20 agreed Sept. 22 to “maximize” the fund’s impact, while there are also discussions under way on speeding the start of a permanent rescue program.

They may be working against the clock. Greece has yet to secure a second bailout amid questions about whether it can satisfy the aid terms. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. predict the euro area will start contracting in the fourth quarter and that the ECB will cut interest rates next month.

‘Fundamental Issues’

“Policy makers need to move beyond ad hoc financial responses to address fundamental issues about the nature of European monetary and economic integration,” Deutsche Bank AG Chief Executive Officer Josef Ackermann told a banking conference in Washington.

Germany’s government has already begun debating how to shore up its banks if Greece defaults. One official from a G-20 country said yesterday that an eventual insolvency in the Mediterranean nation is likely.

Speaking to a banking conference in Washington today, Greek Finance Minister Evangelos Venizelos said his country “wants to make it and will make it,” and will never leave the euro.

Proposals to beef up the facility’s spending power include using the bonds it buys from stressed states as collateral for fresh loans from the ECB or offering the central bank credit protection for helping investors buy debt.

Increasing Heft

German Finance Minister Wolfgang Schaeuble said the ECB wasn’t necessarily needed to increase the facility’s heft, while Bundesbank President Jens Weidmann said involving the central bank would violate EU treaties. Schaeuble again rejected euro- area countries issuing joint bonds. Klaus Regling, the head of the EFSF, said today he doubts accessing the ECB “will fly” and that other ways of bolstering the fund may be detailed soon.

European finance officials will also examine this week the cost advantages of setting up the permanent fund, known as the European Stability Mechanism, a year earlier than its currently planned July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News. Spanish Economy Minister Elena Salgado said yesterday she would back early adoption of the fund and Schaeuble said that may be possible.

In a sign some in Europe resent Geithner’s campaign, outgoing ECB Executive Board member Juergen Stark said governments should do their “own homework before they give advice.” ECB President Jean-Claude Trichet noted Sept. 23 that the U.S. budget gap dwarfs that of the euro-area.

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde said its $384 billion lending chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net.

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

Read more...

El-Erian Sees Global Economy Slowing Next Year

By Simon Kennedy, Rich Miller and Gabi Thesing - Sep 26, 2011 9:09 AM GMT+0700

Enlarge image

The International Monetary Fund's Managing Director, Christine Lagarde, speaks on Sept. 24 at a committee meeting during the IMF's annual meeting in Washington, D.C. Photographer: Stephen Jaffe/AFP/Getty Images/Newscom

Enlarge image

Pacific Investment Management Co.'s CEO Mohamed El-Erian. Photographer: Jonathan Alcorn/Bloomberg

Enlarge image

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. (PIMCO). Photographer: T.J. Kirkpatrick/Bloomberg

Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting that advanced economies will stall over the next year as Europe slides into a recession, underscoring mounting investor concern about the global economic outlook.

There will be little-to-no economic growth in industrial nations in the coming 12 months as Europe’s economy shrinks by 1 percent to 2 percent and the U.S. stagnates, said Mohamed El- Erian, chief executive officer of Newport Beach, California- based Pimco. That will leave worldwide expansion at about 2.5 percent, less than the 4 percent forecast by the International Monetary Fund this year and next.

Such gloomy sentiment dominated weekend talks of policy makers, investors and bankers in Washington, where the IMF and World Bank held their annual meetings. The Dow Jones Industrial Average suffered its biggest loss since 2008 last week as the Federal Reserve said risks to the U.S. economy had increased and Europe’s debt crisis went unresolved.

“For the next 12 months, the global economy will slow materially with advanced economies struggling to grow much above zero,” El-Erian said in a Sept. 24 interview in Washington. “Emerging economies will maintain faster growth, albeit not as high as the last 12 months.”

Worst Experience

Former U.S. Treasury Secretary Lawrence Summers said he has been to 20 years of IMF gatherings, and “there’s not been a prior meeting at which matters have had more gravity and at which I’ve been more concerned about the future of the global economy.”

The euro dropped as trading began in Asia, stocks retreated and Treasuries advanced. The European currency fell 0.5 percent to $1.3435 as of 11:03 a.m. in Tokyo, the MSCI Asia Pacific index of equities was down 1.2 percent and yields on benchmark 10-year U.S. notes declined 1 basis point to 1.82 percent.

Finance ministers and central bankers urged European officials to intensify efforts to contain their 18-month debt crisis as Greece teetered on the edge of default. U.S. Treasury Secretary Timothy F. Geithner called on governments to unite with the European Central Bank to beef-up the capacity of their 440 billion-euro ($594 billion) bailout fund, warning that failure to act threatened “cascading default, bank runs and catastrophic risk.”

Trillion Euros

Bank of Canada Governor Mark Carney estimated 1 trillion euros may have to be deployed. U.K. Chancellor of the Exchequer George Osborne said a solution is needed by the time that Group of 20 leaders meet in Cannes, France, on Nov. 3-4.

“Patience is running out in the international community,” Osborne said. “The euro zone has six weeks to resolve this political crisis.”

Whether “the markets will accept the luxury of six weeks grace remains to be seen,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “In the interim, policy makers will have to feed markets with hope as to what might arrive in November and then not disappoint.”

Reports this week may reinforce the sense of weakness, with economists predicting that U.S. consumer spending slowed in August and business confidence in Germany, Europe’s largest economy, fell to a 15-month low this month.

Memphis, Tennessee-based FedEx Corp. (FDX), operator of the world’s biggest cargo airline, cut its full-year profit forecast last week amid declining demand in the U.S. and Asia. CEO Fred Smith nevertheless said he expects sluggish economic growth rather than a recession.

Soros’s Call

Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default. The IMF said last week that the turmoil has generated as much as 300 billion euros in credit risk for the region’s banks and advocated capital injections.

German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to avert a cascade of market attacks on other European states that would risk breaking up the currency area. “We have to be in a position to react,” Merkel said late yesterday on ARD television. “We have to be able to put up a barrier.”

European policy makers hinted they may soon heed Geithner’s advice and use leverage to increase the firepower of their rescue fund, while saying parliaments must first ratify a July plan to broaden its remit to include bond-buying and aiding banks. German Finance Minister Wolfgang Schaeuble and European Financial Stability Fund CEO Klaus Regling played down speculation the ECB would be needed to increase the fund’s heft.

World Waits

“Wait a few more days,” said Regling, when asked for details.

Finance officials will also discuss this week speeding implementation of a permanent rescue plan by a year to next July, according to a working paper obtained by Bloomberg News. ECB Governing Council members Ewald Nowotny and Luc Coene signaled in interviews in Washington that the central bank may say next week it will begin offering banks unlimited liquidity for as long as a year.

Greek Finance Minister Evangelos Venizelos said his country “wants to make it and will make it” and that it will always be a member of the euro area. Prime Minister George Papandreou said yesterday that the EU must take “strategic decisions” and that the end of the global economic crisis “appears even more distant.”

IMF Insufficient

While the IMF vowed to “strongly support” Europe, Managing Director Christine Lagarde warned its $384 billion war chest may not be enough to meet all aid requests if the world economy worsens. The current lending capacity “looks comfortable today but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders,” she said.

The world economy will find some support from emerging markets, which will grow 4.5 percent to 5 percent over the next 12 months, and Japan’s 1.5 percent expansion, El-Erian said.

El-Erian popularized the “new normal” term to describe how growth patterns in the world economy changed after the worst recession since the Great Depression. The firm under-performed most of its bond mutual fund peers this year after a February decision to eliminate U.S. Treasuries from its Total Return Fund backfired as the securities rallied.

JPMorgan Chase & Co. Chief Economist Bruce Kasman said in Washington that Greece is already insolvent and headed toward a depression that will roil the euro area. His team revised their forecasts last week to show the region entering a recession in the next quarter and the ECB cutting its key interest rate on Oct. 6 to 1 percent from 1.5 percent.

“I fear very much that the situation will deteriorate further before it improves,” said Axel Weber, the former president of the Bundesbank, in Washington yesterday. “We will see much more drastic action” by policy makers if the situation in financial markets gets worse.

To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net. Gabi Thesing in Washington at gthesing@bloomberg.net Rich Miller in Washington at rmiller28@bloomberg.net

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

Read more...

UBS in ‘Disarray,’ Ermotti Named Interim CEO

By Giles Broom - Sep 26, 2011 6:13 AM GMT+0700
Enlarge image

A tram passes the headquarters of UBS AG bank in Zurich, Switzerland. Photographer: Chris Ratcliffe/Bloomberg

The exit of Chief Executive Officer Oswald Gruebel heightened the turmoil roiling UBS AG (UBSN) since it announced a $2.3 billion loss from unauthorized trading less than two weeks ago.

Gruebel, the head of Switzerland’s largest bank since February 2009, was replaced on an interim basis by Sergio Ermotti, who joined less than six months ago as CEO for Europe, the Middle East and Africa, UBS said on Sept. 24. The resignation of Gruebel, 67, who restored the Zurich-based bank to profit after record losses, marks the third CEO departure since 2007.

“This is a bank now in disarray,” said Christopher Wheeler, an analyst at Mediobanca Securities SpA in London who has an “outperform” rating on the stock. “The board made a terrible blunder” by not persuading Gruebel to stay, he said.

Morale within the investment-banking division, already depressed following the trading scandal, dropped even further in the wake of Gruebel’s departure, according to an executive at the unit who requested anonymity because he wasn’t authorized to speak publicly.

As the fallout from the trading scandal widens, a senior executive at UBS speculated that Gruebel quit to prevent the greater disruption that might have resulted from the departure of investment-banking chief Carsten Kengeter, who’s in the midst of shrinking the division. Kengeter, 44, is viewed by some at UBS as a favorite of Chairman Kaspar Villiger. Villiger told reporters after Gruebel’s departure that Kengeter had done an “excellent job” in covering positions after the loss and that there was no doubt about his future.

Gruebel ‘Shocked’

Gruebel, in a memo to staff, said he was convinced a change of leadership at the top was in the best interests of UBS. He resigned as the board grappled with the aftermath of the trading loss in Singapore, where members and executives convened for a meeting scheduled to coincide with the bank’s sponsorship of the Singapore Formula One Grand Prix.

“That it was possible for one of our traders in London to inflict a multibillion loss on our bank through unauthorized trading shocked me,” said Gruebel, a former trader whose career in finance spanned half a century. The scandal dealt a “significant setback” to UBS’s efforts to rebuild trust, he said in the memo.

Gruebel, who joined UBS after about 37 years at rival Credit Suisse Group AG, is the only person to have served as CEO of both of the biggest Swiss banks. Brought out of retirement to rebuild UBS after record losses, he returned the bank to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank.

More Departures?

Two senior UBS executives speculated on whether other departures might follow, such as Kengeter, Maureen Miskovic, 54, who took over as chief risk officer in January, and Thomas Daula, the chief operating officer at the investment bank. Miskovic previously served as chief risk officer at State Street Corp. and held the same role at Lehman Brothers Holdings Inc. for six years until 2002.

Daula, hired in June 2008 to run risk management at the investment bank, had been chief risk officer at Morgan Stanley in 2007 when that bank wrote down $9.4 billion on wrong-way proprietary trading bets on mortgage-related securities. He became COO at UBS’s investment bank in January.

Less Complex

Gruebel and Kengeter, 44, tried for the last two years to rebuild UBS into a top-tier investment bank, hiring more than 1,700 people and bringing in new business heads to replace those that left or were fired. They also increased risk-taking. Market turmoil and rising capital requirements led them to begin reversing that strategy even before the trading loss. The retrenchment is likely to accelerate now.

“In the future, the investment bank will be less complex, carry less risk and use less capital to produce reliable returns and contribute more optimally to UBS’s overall objectives.” Villiger, 70, told reporters two days ago.

UBS will probably scale back credit businesses that haven’t been very profitable and that will be affected most by the higher capital requirements under Basel III, said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London who has a “hold” rating on UBS stock. The equities business, by contrast, “has a relatively high return so you’d expect them not to close that down,” Leech said.

UBS will announce further changes to the investment bank in a presentation to investors scheduled for Nov. 17, Ermotti said on a conference call with reporters two days ago.

Changing Aspirations

“They’ve got to change the aspirations of the investment bank and they’ve got to shrink it,” said Peter Thorne, a London-based analyst at Helvea SA.

UBS said it may be unprofitable in the third quarter after the unauthorized trading. The loss, less than two months after Gruebel said the firm had “one of the best” risk-management units in the industry, raised questions about the bank’s controls.

It resulted from trading in Standard & Poor’s 500, DAX and EuroStoxx index futures over the past three months, UBS said on Sept. 18. While the positions were taken within the “normal business flow of a large global equity trading house,” the size of the risk was hidden by phony trades, UBS said at the time.

Kweku Adoboli, 31, the UBS trader charged with fraud and false accounting that may have resulted in the loss, remained in custody after a hearing in London on Sept. 22. He has yet to enter a plea.

‘In a Vacuum’

The bank’s shares have declined by 7.4 percent in Swiss trading since the trading loss was announced and 34 percent this year. That compares with a 37 percent tumble in the Bloomberg Europe Banks and Financial Services Index, which tracks 46 companies.

Gruebel’s decision to leave throws into relief the lack of a succession plan at UBS, analysts said. Villiger is scheduled to step down in 2013 and be replaced as chairman by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance Kengeter will ascend to the top job.

Villiger, on the conference call with reporters on Sept. 24, said the board tried unsuccessfully to persuade Gruebel to remain until the annual shareholders meeting. He will be paid for a six-month notice period and have no further role at the bank. His sudden departure suggests a worrying level of disorder, especially as Chief Financial Officer Tom Naratil took up his post only three months ago, said Mediobanca’s Wheeler.

“They’ve left themselves in a vacuum,” Wheeler said. “It’s got a brand new CFO and now they’ve let the CEO walk away.”

Ermotti in Charge

Ermotti, a 51-year-old Swiss national who joined UBS in April after working at Merrill Lynch & Co. and UniCredit SpA (UCG), will be interim CEO while the board seeks a permanent successor to Gruebel, the bank said. In his 18 years at Merrill Lynch, Ermotti oversaw businesses including the global equities division before leaving in 2003 to join UniCredit, Italy’s biggest bank.

As UniCredit’s investment-banking chief, Ermotti also supervised global transaction and private banking. Ermotti had aimed to compete with the world’s top securities firms as mergers soared and business flourished before the subprime crisis spread and credit became scarce. He later scaled back the plan to focus on corporate and investment-banking business in UniCredit’s home markets.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

To contact the editor responsible for this story: Frank Connelly in Paris at fconnelly@bloomberg.net

Read more...

Asian Stocks Decline, Led by Japanese Shares

By Lynn Thomasson - Sep 26, 2011 8:43 AM GMT+0700

Play Video

Sept. 26 (Bloomberg) -- Nicholas Smith, a Japan strategist at CLSA Asia-Pacific Markets Ltd., talks about the nation's financial markets and economy. Smith speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks fell, sending the MSCI Asia Pacific Index to the lowest since June 2010, as Europe’s failure to tame the region’s sovereign-debt crisis threatens global economic growth.

Fanuc Corp., a producer of industrial robots, dropped 2.8 percent and trading company Mitsubishi Corp. lost more than 6.5 percent, dragging MSCI’s Asia equity benchmark to a third day of losses. Hanjin Shipping Co., South Korea’s largest shipping line, fell by the daily limit of 15 percent after saying it will sell new shares. Nippon Electric Glass Co., a maker of glass for electronic displays, sank 11 percent after cutting its profit forecast.

The MSCI Asia Pacific Index dropped 1.3 percent to 110.23 at 10:29 a.m. in Tokyo, with more than two stocks retreating for each that rose. The measure entered a so-called bear market last week after falling more than 20 percent from a May 2 high.

“There’s concern that the European debt crisis will spread,” said Takashi Hiroki, chief strategist at Monex Securities in Tokyo. “Stocks are falling as we get more concerned about a deceleration of the global economy. A sell-off in shares sensitive to the economy, such as commodity-related stocks, are a reflection of investors’ fears.”

Japan’s Nikkei 225 Stock Average tumbled 1.8 percent after being closed on Friday, when the MSCI Asia Pacific excluding Japan Index dropped 2 percent. The Nikkei is set for the lowest close since April 2009. South Korea’s Kospi Index (KOSPI) retreated 3.1 percent and Hong Kong’s Hang Seng Index swing between gains and losses after falling 9.2 percent last week.

Pimco Stagnation Forecast

European policy makers are facing mounting pressure to step up efforts to prevent their sovereign debt crisis from further roiling the world’s financial markets and economy. Pacific Investment Management Co., which runs the world’s biggest bond fund, is forecasting advanced economies to stall over the next year with Europe sliding into recession.

U.S. Treasury Secretary Timothy F. Geithner warned at the annual meeting of the International Monetary Fund in Washington that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

The MSCI Asia Pacific Index lost 7.1 percent last week, the most in almost three years. The MSCI All-Country World Index of shares in emerging and developed economies dropped 7.8 percent through the week, entering a bear market for the first time in two years.

Fanuc fell 2.8 percent to 10,530 yen. Mitsubishi Corp. retreated 6.8 percent to 1,584 yen. Hanjin Shipping dropped 15 percent to 11,650 won. Nippon Electric Glass declined 11 percent to 669 yen.

To contact the reporter on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net

Read more...

Greece Minister: ‘Whatever It Takes’ to Solve Crisis

By Meera Louis and Alaa Shahine - Sep 26, 2011 1:56 AM GMT+0700
Enlarge image

Greek Finance Minister Evangelos Venizelos. Photographer: Joshua Roberts/Bloomberg

Greek Finance Minister Evangelos Venizelos said his country will do “whatever it takes” to meet its budget goals and cautioned against making it a “scapegoat” for global economic woes.

Venizelos, who is also Greece’s deputy prime minister, pledged that the country will always remain a member of the euro zone, in an effort to dismiss investors’ concern that its debt crisis may cause it to break away from the currency union.

“Greece wants to make it and will make it,” he said in a speech today in Washington after attending the annual meetings of the International Monetary Fund and the World Bank. “We are ready to take the necessary initiatives at any political cost” to improve the economy, he said.

Greece has yet to secure a second international bailout amid questions about whether it can satisfy the terms for aid. Economists at Citigroup Inc. say they expect the country to begin restructuring its debt as soon as December. Analysts at JPMorgan Chase & Co. (JPM) predict the euro area will start contracting in the fourth quarter and that the European Central Bank will cut interest rates next month.

“It’s Greece’s final and irrevocable decision to do whatever it takes to fulfill its obligations towards its partners, towards the euro area, towards the IMF,” he said.

No ‘Domino Effect’

The size of Greece’s economy and its debt make it unlikely to be at the “heart” of Europe’s problems and incapable of “causing a domino effect of pan-European dimensions,” Venizelos said.

“Greece is not the euro area’s central problem, nor can it be the catalyst” for a financial crisis, he said, noting that Greece’s debt accounts for 3 percent of the euro area’s public debt.

Venizelos said that the biggest problem for his country is the public sector.

“The main problem for my country is the public sector and the capability of the public administration to offer the necessary services to our people, to our society with a cheaper, more clever way,” Venizelos said.

Greece’s top priority is “to organize a smaller, clever and cheaper state,” he said. “This is our basic need, not because this is an external obligation but because this is an internal, existential need.”

To contact the reporters on this story: Meera Louis in Washington at mlouis1@bloomberg.net; Alaa Shahine in Washington at asalha@bloomberg.net

To contact the editor responsible for this story: Kevin Costelloe at kcostelloe@bloomberg.net

Read more...