Citigroup, Wells Fargo May Post Profit Jump on Credit Costs

By Hugh Son - Oct 17, 2011 6:09 AM GMT+0700

Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC) may post better third-quarter results as loan losses at the biggest U.S. lenders subside.

Citigroup may say that profit climbed 15 percent to $2.5 billion when it reports results at 8 a.m. in New York, according to the average estimate of analysts surveyed by Bloomberg. Wells Fargo, scheduled to report at the same time, may say earnings rose 18 percent to $3.9 billion. Bank of America, which reports tomorrow, may report $2.7 billion in profit, compared with a $7.3 billion net loss a year earlier.

“We expect banks to show further credit-quality improvement, primarily in commercial and industrial unsecured loans and credit-card loans,” David Hilder, an analyst at Susquehanna Financial Group LLLP, said in a Oct. 7 note.

Traditional lending may have to carry the companies instead of investment banking, a role reversal from recent quarters, as concern that Greece would default disrupted markets. JPMorgan Chase & Co. (JPM), the second-largest U.S. bank by assets at midyear, said Oct. 13 that a slump in investment banking and trading pushed profit down 34 percent to $3.1 billion.

Commercial and residential loan growth fueled a 1.2 percent rise in total loans at the biggest 25 U.S. banks in the third quarter, Ed Najarian, analyst at International Strategy & Investment Group Inc., said in an Oct. 9 note. Deposits rose by 6.8 percent as customers sought safer assets, he wrote.

Consumer Banking

“Investors are well aware that trading, investment banking, and private-equity revenue at major U.S. banks was especially weak in the third quarter,” Najarian wrote. “Many investors may not be completely aware that core loan and deposit trends were quite good.”

Still, concerns over the European debt crisis and the possibility the U.S. economy may relapse into recession have weighed on bank shares. The 24-company KBW Bank Index has slumped 27 percent this year, and Bank of America, based in Charlotte, North Carolina and the biggest U.S. lender as of midyear, has plunged more than 50 percent.

A jump in borrowing costs at some banks, including New York-based Morgan Stanley, subsided earlier this month as investors became more optimistic that European Union policy makers would solve the sovereign debt and banking crisis.

Bank of America may perform poorly compared with peers in another U.S. recession, while New York-based JPMorgan may be best positioned, John E. McDonald, a Sanford C. Bernstein & Co. analyst, said in an Oct. 6 research note. Higher unemployment would cause more foreclosure and mortgage-related costs, he wrote.

Replacing Revenue

The third-quarter 2010 loss at Bank of America was fueled by a $10.4 billion writedown of its credit-card division after new U.S. regulations reduced its value. Last year, Chief Executive Officer Brian T. Moynihan said the bank would recoup lost revenue, without providing details.

This year, the firm added fee-based checking and said some debit-card users would be charged $5 per month. San Francisco- based Wells Fargo is testing a $3 monthly fee, and similar charges have been imposed by Regions Financial Corp. and SunTrust Banks Inc.

Bank of America’s plan sparked objections from critics including President Barack Obama. Five House Democrats asked Attorney General Eric Holder on Oct. 13 to investigate whether banks and trade groups colluded on decisions to impose new fees.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

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

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Asian Stocks Gain as Bond Risk Drops on Europe

By Shiyin Chen and Shani Raja - Oct 17, 2011 1:03 PM GMT+0700

Asian stocks advanced, extending the largest weekly rally in more than six months, while Treasuries and bond risk fell after Group of 20 officials endorsed parts of a plan to avoid a Greek default. The won rose as South Korea’s finance minister said the economy is doing better than expected.

The MSCI Asia Pacific Index jumped 1.8 percent by 3 p.m. in Tokyo. Euro Stoxx 50 Index futures added 1 percent and Standard & Poor’s 500 contracts were 0.4 percent higher after the index’s biggest weekly gain since 2009. Treasury 10-year yields reached a six-week high. The cost of insuring Asia-Pacific bonds from default headed for a four-week low. The won strengthened 1.4 percent, while the euro slipped 0.2 percent to $1.3856.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said clarity on a plan to contain the region’s debt crisis will emerge in the “coming days,” as G-20 officials held out the prospect of giving more International Monetary Fund aid to Europe. South Korean Finance Minister Bahk Jae Wan said at the meeting in Paris the Asian economy is performing better amid easing inflationary pressures, while data tomorrow may show China’s economy expanded more than 9 percent last quarter.

“An important precondition for resolving the European credit crisis is unity of vision and commitment to find a solution,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “The comments over the weekend show some elements of both. A credible and well- executed solution is the next element, and we are yet to see this.”

Stocks Rally

More than four stocks advanced for every one that fell on MSCI’s Asia Pacific Index, which rallied 3.4 percent last week, the most since the five days ended March 25. Japan’s Nikkei 225 Stock Average rose 1.5 percent, Australia’s S&P/ASX Index jumped 1.7 percent and South Korea’s Kospi Index climbed 1.6 percent.

SK Innovation Co. rallied 5.6 percent, leading South Korean refiners higher, after Samsung Securities Co. said the shares are undervalued. Olympus Corp. plunged 24 percent in Tokyo after at least five brokerages cut their ratings on the optical- equipment maker following the Oct. 14 dismissal of President Michael C. Woodford.

U.S. futures signal the S&P 500 may extend last week’s 6 percent jump, the steepest weekly increase since July 2009. El Paso Corp. (EP) may rally after Kinder Morgan Inc. agreed to buy the company for about $21.1 billion in cash and stock, creating the largest U.S. natural-gas pipeline network. The offer is valued at $26.87 per El Paso share, or 37 percent more than their Oct. 14 closing price.

Earnings, TIPS

Citigroup Inc. and Wells Fargo & Co. are among U.S. companies scheduled to release their results before the start of trading today, while International Business Machines Corp., the world’s fifth-biggest company by market value, will report earnings after the close of trading.

Treasury 10-year yields rose two basis points to 2.27 percent. The Federal Reserve is scheduled to sell $1 billion to $1.5 billion of Treasury Inflation Protected Securities due from April 2012 to July 2014 today as part of its plan to keep down borrowing costs by swapping its holdings of shorter maturities for longer ones.

The cost of protecting Asia-Pacific corporate and sovereign bonds from default dropped, with the Markit iTraxx Australia index declining 3.5 basis points to 187.5 basis points, according to Deutsche Bank AG. The index is on course for the lowest close since Sept. 19, according to data provider CMA.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell 14 basis points to 198 basis points, Royal Bank of Scotland Group Plc prices show. The gauge is set for its lowest close since Sept. 20, CMA prices show.

Europe’s Deadline

The euro retreated from near its highest in a month against the dollar, after rallying 3.8 percent last week, the most since March 2009. The 17-nation currency declined 0.3 percent to 106.85 yen. G-20 finance ministers and central banks set an Oct. 23 summit of European leaders in Brussels as the deadline to deliver a plan to halt the crisis.

“We’re now in anticipation of maybe too much from the Europeans,” said Tim Riddell, the Singapore-based head of global markets research for Asia at Australia & New Zealand Banking Group Ltd. “Look to buy into dips in the euro rather than chase it because we will get pockets of disappointment as we start to assess what the Europeans are genuinely capable of providing.”

The won appreciated to 1,140.45 per dollar, extending last week’s 1.9 percent jump. The Taiwan dollar strengthened 0.6 percent to NT$30.108, while Malaysia’s ringgit rose 0.3 percent to 3.1203 versus the U.S. currency.

Crude advanced as much as 1.1 percent to $87.71 a barrel before trading 0.4 percent higher at $87.13 on the New York Mercantile Exchange. Futures, which rose 4.6 percent last week, settled at $86.80 on Oct. 14, the highest close since Sept. 20.

Rice futures for November delivery added 0.4 percent to $16.685 per 100 pounds, adding to a four-day, 7.2 percent rally. Floods in Thailand have damaged 13 percent of the rice fields in the world’s biggest exporter of the grain, according to the farm ministry.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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U.S. Yuan Message Stronger Than Chance of Action

By James Rowley - Oct 17, 2011 6:00 AM GMT+0700

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Oct. 17 (Bloomberg) -- Bloomberg's Stephen Engle reports from the Canton Fair in Guangzhou, China, the world's largest trade fair, on the impact of a strengthening yuan on the nation's manufacturers. Treasury Secretary Timothy F. Geithner has been pushing China to allow its currency to strengthen, saying that would help support global growth, while avoiding actions that could cause friction with the world’s No. 2 economy and the second-largest U.S. trade partner. (Source: Bloomberg)

The U.S. Senate’s vote to punish China for depressing its currency to promote cheap exports is the latest legislative ritual in which the message may be as important as the proposed sanction.

U.S. House Speaker John Boehner practically declared the measure dead on arrival in the Republican-run chamber after the Senate’s 63-35 vote last week to let U.S. manufacturers seek duties on Chinese imports if they prove they were harmed by manipulation of the renminbi. Boehner, of Ohio, voiced “grave concerns” the measure may trigger a trade war.

Supporters of the sanctions say they are sending China a message, whether the legislation becomes law or not. Their votes also might pay domestic political dividends.

“A number of members” have said “it’s good politics, but we don’t think it’s good policy” to punish China over the value of its currency, said Republican Senator Jeff Sessions of Alabama, who said he co-sponsored the measure because it “protects fair trade.”

Proponents say China subsidizes its exports, and therefore undermines U.S. industries, by undervaluing its currency by at least 20 percent.

Michigan Senator Debbie Stabenow, a Democrat, said manufacturers of steel tube in her state have “been undercut for years by China” because of currency manipulation. “They’ve been laying off people for a long time,” she told reporters a day after the Oct. 11 Senate vote.

Tool & Die Company

Automation Tool & Die Inc. in the Cleveland suburb of Brunswick, Ohio, lost a $1 million contract in 2009 to provide the seat base for long-haul trucks because the yuan’s depressed value helped a Chinese competitor underbid by 20 percent, according to co-owner Bill Bennett.

“We lost the bid due to price,” Bennett, who owns the company with his brother, Randy, said in a telephone interview. “We were told we were 20 percent higher than the next bid and we were told that bid came from China.”

The price differential can only be explained by currency manipulation because “there is no way on a metal part that anybody ought to beat somebody else’s price by 20 percent,” said Bill Gaskin, president of the Precision Metalforming Association. The trade group in Independence, Ohio, represents 850 metal fabricating and stamping companies as well as tool and die makers.

In the past, China has responded to pressure by allowing the renminbi, or yuan, to appreciate in value. Before a G-20 economic summit last year in Toronto, China’s Central Bank announced changes in the valuation of the yuan, and the currency appreciated 0.43 percent.

House Bill

Lawmakers and analysts say Chinese authorities allowed the yuan to appreciate 2.9 percent over the last half of 2010 when the House, under Democratic control, passed similar legislation 348-79.

If the Senate measure became law, China would most likely retaliate by making large purchases from European companies instead of U.S. manufacturers, said Nicholas Lardy, an economist at the Peterson Institute for International Economics in Washington. Such retaliation need not be overt, he said.

Under this scenario Chicago-based Boeing Co. (BA), one of the world’s largest airplane makers, “won’t get a contract for years” to build Chinese airliners, Lardy said. “That’s why the biggest businesses in the U.S.” with substantial investments in China “are so dead set against this legislation,” he said.

The China currency issue also has resonance in the 2012 presidential campaign. Like Barack Obama and George W. Bush when they were running for president, Republican candidate Mitt Romney has chided the White House incumbent for not being tough on China’s currency policy. Obama, as president, hasn’t stated an official position on the Senate measure.

Record Trade Deficit

The record $29 billion trade deficit with China in August is reason enough to allow a floor vote on the measure, the lead House sponsor, Michigan Democrat Sander Levin, said at an Oct. 14 news conference. “The history of this is that when there has been pressure, China has acted,” he said.

Boehner and other House Republican leaders “don’t want this bill on the floor for one reason; it would pass,” Levin said. Sixty-two Republicans are among the measure’s 225 sponsors, a majority of the 435-member House.

Boehner said Oct. 6 “the president agrees with me,” and suggested that Obama’s silence on the issue was intended to avoid offending fellow Democrats who back the bill.

“Has Representative Levin discussed this issue with President Obama, who also opposes this bill?” Boehner spokesman Michael Steel said in an e-mail.

Democratic Opposition

Some Democrats oppose the sanctions. Democratic Senator Claire McCaskill of Missouri said she voted against the measure in part because she didn’t want to undercut her state’s attempt to attract more Chinese cargo planes to use the St. Louis airport as a hub for delivering goods to the U.S.

The Chinese “just landed their first plane two weeks prior,” and “we are in competition with other states,” said McCaskill, who faces re-election next year. If she had voted for the measure, “I could see the whole thing tumbling down at my feet.”

Washington state’s two Democratic senators, Maria Cantwell and Patty Murray, a member of Senate leadership, voted no.

“One out of five jobs depends on trade from my state so we are very conscious of the impact,” Murray said.

The Chinese government “plays the fear card” with U.S. companies that do business in that country, telling them “you better call a congressman” to lobby against any sanctions, said South Carolina Senator Lindsey Graham, a Republican who voted for the bill.

‘Send a Message’

Last week’s vote marked the first time the Senate passed a measure allowing sanctions against China. Fewer senators would have backed it “if there was a realistic chance it would become law,” said Douglas Irwin, a Dartmouth College economist in Hanover, New Hampshire. “The vote was to send a message,” he said.

Economists disagree about the effect of the currency disparity on U.S. jobs and how many would be created if sanctions forced China to let the value of the yuan rise.

Ending the currency misalignment would create 500,000 new U.S. jobs, C. Fred Bergsten, director of the Peterson Institute, told Congress last year.

“You’re not talking about an immediate benefit to companies,” countered Michael Moore, a George Washington University trade economist and former member of Bush’s Council of Economic Advisers.

It would take as much as a year to investigate U.S. companies’ claims they were harmed by Chinese manipulation, and companies would have to get support from half of their U.S. competitors to show harm to the industry, Moore said.

There wouldn’t be an “immediate flood of cases,” Moore said. It would more likely produce “trade friction,” he said.

To contact the reporter on this story: James Rowley in Washington at jarowle@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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Hong Kong Starts Trading Gold in Yuan to Tap ‘Triple Demand’

By Fion Li and Glenys Sim - Oct 17, 2011 9:51 AM GMT+0700
Enlarge image

Li Keqiang, Chinese Vice Premier, pledged the nation’s support for yuan business in Hong Kong two months ago. Photographer: Jerome Favre/Bloomberg

Play Video

Oct. 17 (Bloomberg) -- Bloomberg's Stephen Engle reports from the Canton Fair in Guangzhou, China, the world's largest trade fair, on the impact of a strengthening yuan on the nation's manufacturers. Treasury Secretary Timothy F. Geithner has been pushing China to allow its currency to strengthen, saying that would help support global growth, while avoiding actions that could cause friction with the world’s No. 2 economy and the second-largest U.S. trade partner. (Source: Bloomberg)

Hong Kong’s Chinese Gold & Silver Exchange Society, a century-old bullion bourse, started trading gold quoted in yuan, boosting the city’s status as an offshore hub for the currency.

The contract may generate as much as HK$6 billion ($770 million) in trades a day, exchange President Haywood Cheung said in an Oct. 14 interview. Daily bullion trading volume at the society, which has 171 active members, has jumped to HK$136 billion this year from last year’s HK$31 billion on appetite for gold as a haven from stock declines, he said.

“There’s triple demand for this yuan product,” said Cheung on Oct. 14. “Investors can enjoy the bull market in gold, the yuan’s appreciation and hedge gold denominated in other currencies against the yuan.”

Chinese Vice Premier Li Keqiang pledged the nation’s support for yuan business in Hong Kong two months ago. The city’s richest man, Li Ka-shing, sold Hong Kong’s first renminbi shares in April and the city’s bond sales in the currency have more than tripled this year. Yuan deposits in the former British colony rose 93 percent this year to a record 609 billion yuan ($96 billion) in August.

“It’s part of a larger trend in Hong Kong to increase investments priced in renminbi,” said Zhang Qiang, an analyst in Shanghai at Haitong Futures Co., China’s largest futures brokerage by registered capital. “It’s a good proposition for investors who want exposure to both gold and renminbi, however, this would depend largely on the two moving in tandem.”

Yuan Appreciation

The contract traded at 346.47 yuan per gram, or the equivalent of $1,690.80 an ounce, according to data on the society’s website at 10:20 a.m. in Hong Kong. That compares with 347.55 on the Shanghai Gold Exchange and $1,681.60 in London. In Hong Kong’s offshore market, the yuan advanced 0.3 percent to 6.4213 per dollar, a 0.8 percent discount to the onshore spot rate. The currency rose 0.1 percent in Shanghai to 6.3726.

Twenty-five members will participate at the initial stage, Cheung said, adding that banks and jewelers had pushed him to start the contract. The society’s members include Chow Sang Sang Holdings International Ltd. (116), the biggest Hong Kong-listed jewelry maker and retailer, as well as HSBC Holdings Plc., the city’s biggest lender, he said. BOC Hong Kong Holdings Ltd. (2388) and Wing Hang Bank are the clearing banks.

The yuan in Shanghai will advance 5.1 percent to 6.06 by the end of 2012, according to the median estimate in a Bloomberg survey of 18 analysts. Europe’s debt crisis triggered a 2.1 percent slide in the offshore yuan rate in Hong Kong last month. The yuan is a denomination of China’s currency, the renminbi.

‘Right Timing’

“It’s still the right timing,” Cheung said. “With the depreciation of the dollar and problems in the Eurozone, investors realize they want some other currencies that are safer like the renminbi. Gold can be a way for people to bet on the yuan, even it’s not yet fully convertible.”

The Hong Kong Mercantile Exchange, backed by the world’s largest lender, started trading dollar-denominated gold futures on May 18, tapping demand for the metal from Asian investors. It plans to offer products in yuan this year, Albert Helmig, president of the exchange, said in a May 9 interview.

Bullion prices have jumped 17 percent this year, reaching a record $1,921.15 an ounce on Sept. 6. Gold prices fell from their peak as investors sold the metal to cover losses in other markets. The precious metal will likely trade between $1,500 and $1,700 an ounce in the short term, Cheung said.

The society, started in 1910, will consider trading silver in the Chinese currency later, Cheung said, declining to identify the timeframe. The society has imposed a daily ceiling of 300 kilos for physical delivery of gold denominated in yuan to avoid depleting the currency pool in Hong Kong, he said.

“The sudden influx into gold bars may take away half of the yuan liquidity in Hong Kong,” Cheung said. “The uncertainties in the global economy are supporting gold.”

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net Glenys Sim in Singapore at gsim4@bloomberg.net

To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

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Bankers Balk at EU Push for Bigger Greek Losses

By Aaron Kirchfeld - Oct 17, 2011 5:15 AM GMT+0700

Josef Ackermann, the head of Deutsche Bank AG (DBK) and chief lobbyist for the world’s largest financial firms, has pressed European leaders for months to devise a strategy to stamp out the sovereign debt crisis.

Now that European Union officials are moving toward an agreement that may include bigger losses on Greek debt holdings and the forced recapitalization of lenders, the Deutsche Bank chief executive officer and Washington-based Institute of International Finance he chairs are pushing back. He travels to Brussels this week for talks with policy makers.

Forcing lenders to boost capital would be counterproductive, and getting investors to accept larger losses on Greek holdings difficult, Ackermann said on Oct. 13. Opposition from banks may hamper efforts by German Chancellor Angela Merkel and French President Nicolas Sarkozy to present a breakthrough at an Oct. 23 summit of euro leaders in combating the crisis, which has driven Greece toward default, roiled global markets and dented confidence in the survival of the 17- nation currency.

“What’s most depressing about this whole thing is the squabbling between politicians, regulators and banks,” said Christopher Wheeler, a London-based analyst with Mediobanca SpA. “Banks have to take positive action alongside the EU to find a solution, which is a combination of dealing with sovereigns as well as capital concerns.”

Revamped Strategy

Reaching a compromise is in the interest of banks, whose earnings have been battered by financial-market turbulence, Wheeler said. Frankfurt-based Deutsche Bank scrapped its profit forecast on Oct. 4 and announced 500 job cuts and further writedowns of Greek bond holdings amid what the company described as a “significant and unabated slowdown in client activity” brought on by the debt crisis.

Europe’s revamped strategy to beat its two-year sovereign debt crisis won the backing of global finance chiefs in Paris this past weekend. In the works is a five-point plan foreseeing a solution for Greece, bolstering of the firepower of the 440 billion-euro ($611 billion) European Financial Stability Facility bailout fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.

The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, people familiar with the discussion said on Oct. 14.

Bigger Losses

Options include altering a July accord struck with investors and spearheaded by Ackermann for a 21 percent net- present-value reduction in Greek debt holdings. One variant would take that loss up to 50 percent, the people said.

German Finance Minister Wolfgang Schaeuble said yesterday the reduction of Greece’s debt by means of private-investor participation must be bigger than agreed to in July by euro- region leaders to achieve a “sustainable solution” for the country. There will be negotiations with banks about a debt cut for Greece, Schaeuble said on ARD public television, according to a transcript of the interview.

Policy makers’ priority needs to be convincing investors that Italy, the third-largest issuer of debt after the U.S. and Japan, is a risk-free investment, said Holger Schmieding, a London-based chief economist for Berenberg Bank. Still, increasing private contributions to a Greek rescue would help mollify German voters and injecting capital into banks may ease investors’ concerns about the stability of the financial system, he said.

‘Political Reality’

“Being a realist, I don’t see the chance of avoiding larger private-sector involvement, especially given the German political reality,” said Schmieding. “We also probably need some type of recap after raising market expectations over the last few weeks. But the ultimate thing is impressing on the market that Italy is safe.”

The Institute of International Finance on Oct. 10 rejected pressure for banks to accept larger losses on their holdings of Greek government debt. There are no plans to change the deal, Hung Tran, deputy managing director of the IIF, said in a telephone interview.

“The potential risk and potential costs of revisiting the deal far outweigh any potential benefits,” Tran said. “July 21 represented a balanced approach with significant concessions from private investors. We should remind the public sector that we need to preserve the voluntary nature of the Private Sector Agreement, and therefore honor and implement the deal.”

No ‘Compelling Case’

Charles Dallara, managing director of the IIF, which represents more than 450 financial institutions globally, told the Financial Times on Oct. 14 that he didn’t see a “compelling case” to reopen negotiations.

One risk to changing the agreement is that forcing bigger writedowns could be viewed as a default, triggering insurance bought against such an event, known as credit default swaps, and risking contagion to larger countries such as Italy and Spain, according to analysts.

Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS, have about 2.9 trillion euros of government bonds outstanding, according to data compiled by Bloomberg. Italy accounts for more than half, or 1.59 trillion euros, the data show.

About 413 billion euros of GIIPS debt is held by 38 of Europe’s largest lenders, according to an analysis of European stress-test results by Alberto Gallo, a strategist at Royal Bank of Scotland Group Plc (RBS) in London. Those holdings equal almost 40 percent of the banks’ 1.1 trillion euros of equity, according to Gallo.

Rescue Fund

To combat concern about contagion, officials are considering ways of multiplying the strength of Europe’s temporary rescue fund. The likeliest option is using it to partly insure new bonds issued by distressed governments. EFSF guarantees of new bonds might range from 20 percent to 30 percent, a person familiar with those deliberations said.

There are risks to this plan, Joachim Fels and Sung Woen Kang, analysts at Morgan Stanley, said yesterday in a research note.

“Guaranteeing first losses may well turn out less appealing to investors than many hope and a larger private sector involvement could spark another wave of contagion,” the analysts wrote. “Banks would probably choose to shed assets and de-lever rather than raise capital in the market if they are given a longish grace period before having to accept recapitalization through their sovereign and the EFSF.”

More Capital

All lenders judged by the region’s top banking regulator to be systemically important should be required to hold “temporarily higher” amounts of capital, European Commission President Jose Barroso said on Oct. 12. The European Banking Authority discussed making the banks hold core capital equal to at least 9 percent of their assets, up from a 5 percent core Tier 1 capital requirement imposed in the stress tests carried out by the regulator earlier this year, according to a person familiar with the proposals.

Those new criteria would lead to a 220 billion-euro capital shortfall at 66 of the participating banks, with the biggest gaps at Edinburgh-based RBS, Deutsche Bank and Paris-based BNP Paribas (BNP) SA, according to a note published by Credit Suisse Group AG analysts on Oct. 13.

The European Banking Federation, in a statement on Oct. 13 titled “High time for coordinated European solution on sovereign debt,” said recapitalization is not “central to the solution” and the region’s lenders have continued to place trust in sovereign debt and made credit available to national governments throughout the crisis.

‘Held Hostage’

“European banks feel they are being held hostage by the sovereign debt crisis,” said Guido Ravoet, secretary general of Brussels-based EBF, which represents more than 5,000 banks. The region’s lenders have already “substantially increased” their capital and among about 90 lenders that took part in July’s stress tests, the average core tier 1 capital ratio, a measure of financial strength, was 8.9 percent at the end of 2010, the EBF said.

Bankers including Ackermann have also said that tougher regulation, higher capital requirements and bigger sovereign debt writedowns may force them to restrict lending, which could hurt economic growth.

Deutsche Bank, which navigated the financial crisis in 2008 without a government capital injection, will “do everything” not to take money from the state as part of assistance efforts for European banks, Ackermann said in a speech last week, when he criticized the EU’s plans.

His remarks created a stir in Germany. Newsmagazine Spiegel carried the headline “Everyone against Ackermann,” while the country’s biggest tabloid, Bild-Zeitung, wrote: “New Ice Age between Merkel and Ackermann.”

Even if Deutsche Bank didn’t need direct state support in the last financial crisis, “it profited from the fact that the government staved off a collapse of the financial market,” Social Democrat Carsten Schneider told Der Spiegel. “A little bit of humility wouldn’t hurt.”

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Kinder Morgan to Buy El Paso for $21B

By Mike Lee and Zachary R. Mider - Oct 17, 2011 12:43 PM GMT+0700

Kinder Morgan Inc.’s agreement to buy El Paso Corp. (EP) for $21.1 billion, the energy industry’s biggest transaction in more than a year, would create the largest natural-gas pipeline network in the U.S.

The cash and stock offer is valued at $26.87 per El Paso share, or 37 percent more than the Oct. 14 closing price, Houston-based Kinder Morgan said in a statement yesterday. The combined company would have 67,000 miles (107,000 kilometers) of gas lines and eclipse Enterprise Products Partners LP (EPD) as the biggest U.S. pipeline operator.

The transaction strengthens Kinder Morgan’s position as a major player in the U.S. gas industry, providing the infrastructure to transport growing production from new fields to new markets. Chief Executive Officer Richard Kinder is making a bet that the need for pipelines will continue to grow, said Bill Herbert, an analyst at Simmons & Co. International in Houston.

“Rich Kinder continues to make history by shaping and redefining the North American energy landscape,” Herbert said. “And he is, once again, likely making the wise bet.”

Kinder, 66, will be chairman and CEO of the combined company. The acquisition, once closed, would create immediate shareholder value because of its cash flow, he said in a statement yesterday.

Barclays Plc agreed to lend Kinder Morgan the entire $11.5 billion cash portion of the bid, the statement said. Kinder Morgan’s current debt is held by its Kinder Morgan Kansas subsidiary and is currently rated “BB” by Standard & Poor’s, two notches below investment grade.

Selling E&P

The total value of the acquisition, including debt assumed from Houston-based El Paso, is $37.8 billion, Kinder Morgan said in a document prepared for investors.

The acquisition is the largest ever proposed of a pipeline company, surpassing the 2007 leveraged buyout of Kinder Morgan itself by a group including Kinder and Goldman Sachs Group Inc. If completed, it will be the ninth-largest takeover in the global energy industry and the biggest in more than a year, according to data compiled by Bloomberg.

Kinder Morgan said it will try to sell El Paso’s exploration and production business. Evercore Partners Inc. (EVR) and Barclays are advising Kinder Morgan on the effort, which may reap $6 billion or more, said a person with knowledge of the matter.

El Paso had announced in May that it would spin off the unit to its shareholders. As a stand-alone company, the business, known as EP Energy Corp., had $374 million of net income in 2010, El Paso said in an August regulatory filing.

Offer Details

For each El Paso share, Kinder Morgan is offering $14.65 in cash, 0.4187 share of Kinder Morgan, and 0.64 Kinder Morgan warrant, which allows the holder to buy a Kinder Morgan share at $40 within the next five years, the statement said.

The takeover values El Paso at about 13 times the last 12 months’ earnings before interest, taxes, depreciation and amortization of $2.67 billion, according to Bloomberg data. That compares with the 14 times Ebitda that Dallas-based Energy Transfer Equity LP (ETE) agreed in July to pay for Southern Union Co. (SUG), based in Houston, and the 27 times Ebitda that Richard Kinder and his co-investors paid to take his company private in 2007, the data show.

Growing Networks

Pipeline companies have been expanding their networks over the last few years to move growing U.S. production of natural gas, said Dan Spears, a fund manager at Swank Capital LLC in Dallas. More pipelines are needed to move gas to new markets, particularly for power generation, and to accommodate supplies from new gas fields such as the Marcellus Shale, Spears said.

Energy Transfer’s $5.1 billion bid for Southern Union is one such effort to gain access to new markets in Florida and the U.S. Midwest.

The El Paso acquisition will establish Kinder Morgan “as the pre-eminent pipeline company in the United States,” and will provide operational savings and increased cash flows, Gianna Bern, president of Brookshire Advisory & Research Inc. in Chicago, said in a telephone interview yesterday. Bern said she owns units in Kinder Morgan Energy Partners LP (KMP), an associated master limited partnership.

Kinder approached El Paso CEO Douglas Foshee at the end of August with a takeover proposal, Joe Hollier, a spokesman for Kinder Morgan, said in an e-mail. That was about three months after Foshee announced the plan to spin off El Paso’s exploration and production assets.

Billionaire Investor

Two prominent shareholder activists may have profited from the El Paso transaction. Billionaire investor Carl Icahn held about 58.3 million shares as of Aug. 5, or about 7.6 percent of the company’s stock, according to a regulatory filing. That made him the company’s largest shareholder, according to data compiled by Bloomberg.

Barry Rosenstein’s Jana Partners LLC held 24.2 million shares as of June 30, the data show.

El Paso didn’t seek competing bids for the company because it wanted to preserve its spinoff option in case the merger talks collapsed, a person with knowledge of the talks said. Under U.S. tax rules, holding discussions with potential buyers prior to a spinoff might imperil the tax benefits of the transaction if the division is later acquired.

Enron Corp.

Richard Kinder formed Kinder Morgan after leaving Enron Corp. before the company went bankrupt in 2001.

In 2007, Kinder Morgan Inc. went private in a transaction valued at $22 billion. Kinder Morgan Energy Partners LP remained publicly traded. Kinder took the parent company public again with an IPO in February for 13 percent of its shares, which raised $2.9 billion.

Kinder Morgan fell 3 cents to $26.89 in New York on Oct. 14, a 10 percent decline from its IPO debut. El Paso shares rose 2.3 percent to $19.59 in New York on Oct. 14 and had increased 42 percent so far this year.

Kinder Morgan and El Paso said they expect their deal to close in the second quarter of 2012, creating the fourth-largest energy company in North America.

“This once in a lifetime transaction is a win-win opportunity for both companies,” Kinder said.

Evercore and Barclays served as financial advisers for Kinder Morgan; Weil Gotshal & Manges LLP and Bracewell & Giuliani LLP acted as legal advisers.

Morgan Stanley acted as financial adviser for El Paso; Goldman Sachs Group Inc. (GS) was advising El Paso on its previous spinoff. Wachtell, Lipton, Rosen & Katz was El Paso’s legal adviser.

Enterprise Products, which will become the second-largest U.S. pipeline operator after the transaction closes, has about 50,000 miles of pipeline.

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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BGC Partners, El Paso, Itron, Morgan Stanley, NextEra: U.S. Equity Preview

By Whitney Kisling and Alexis Leondis - Oct 17, 2011 7:08 AM GMT+0700

Shares of the following companies may have unusual moves in U.S. trading tomorrow. Stock symbols are in parentheses.

BGC Partners Inc. (BGCP) : The broker specializing in over-the-counter trading said it completed the acquisition of Newmark & Company Real Estate Inc. and that the transaction will add to earnings.

El Paso Corp. (EP) : Kinder Morgan Inc. (KMI US) agreed to buy El Paso for about $21.1 billion in cash and stock, creating the largest U.S. natural-gas pipeline network in the energy industry’s biggest transaction in more than a year.

Itron Inc. (ITRI) : The maker of meters and software for the utility industry may rise to as high as $45 as replacement demand for utility meters expands in the U.S. and the rest of the world, Barron’s reported.

Morgan Stanley (MS) : The owner of the world’s largest retail brokerage may be attractive for long-term investors after concern for its lending to troubled French banks drove the share price down, Barron’s reported.

NextEra Energy Inc. (NEE) : The renewable-energy power provider may rise as it expands capacity to meet growing demand, Barron’s reported.

Par Pharmaceutical Cos. (PRX US): The maker and distributor of generic drugs filed suit over Food and Drug Administration rules that would stop it from discussing off-label uses of its Megace ES drug with doctors. The drug, approved for treatment of weight loss in AIDS patients, is also prescribed to treat wasting in non-AIDS, cancer and geriatric patients, the company said.

Seaspan Corp. (SSW) : The operator of a fleet of container ships may rise to $18 a share in a year or two as the global usage of container ships expands, Barron’s reported, without citing anyone.

Sprint Nextel Co. (S US): The third-largest U.S. wireless operator said sales of Apple Inc.’s iPhone 4 and 4S smartphones exceeded expectations and set a company record for daily sales of a device family.

To contact the reporter on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Alexis Leondis in New York aleondis@bloomberg.net.

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

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G-20 Gives EU One Week to Fix Debt Crisis

By Simon Kennedy, Theophilos Argitis and James G. Neuger - Oct 17, 2011 9:58 AM GMT+0700
Enlarge image

Group of 20 (G20) finance chiefs said the world economy is strengthening even after recent shocks as they fleshed out details of a surveillance system aimed at highlighting and fixing fault lines that threaten growth. Photographer: Andrew Harrer/Bloomberg

European leaders have one week to settle differences and flesh out a strategy to terminate their sovereign debt crisis as global finance chiefs warn failure to do so would endanger the world economy.

Group of 20 finance ministers and central banks concluded weekend talks in Paris endorsing parts of the emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

“The risk of a recession would be increased dramatically were the Europeans to fail to accomplish goals that they’ve set for themselves,” Canadian Finance Minister Jim Flaherty said after the G-20 meeting, which ended Oct. 15.

Two years to the week since Greece triggered the turmoil by revising its budget math, the inability of policy makers to stamp it out has pushed the Greek government to the edge of default and the European economy close to recession. The euro weakened from near its highest in a month as traders speculated European leaders may struggle to meet the deadline.

The euro fell 0.2 percent to $1.3853 as of 11:21 a.m. in Tokyo from $1.3882 in New York on Oct. 14, when it completed a 3.8 percent weekly advance, the biggest since March 2009.

Greece’s Vote

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe’s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions. Greece’s parliament faces another tight vote on new fiscal measures as soon as this week, a showdown that Prime Minister George Papandreou needs to win to ease the way for more foreign financing.

The Brussels meeting “has the potential to turn into a positive historic moment,” Joachim Fels, London-based chief economist at Morgan Stanley, wrote in a note to clients yesterday. “But it could also easily turn into a negative catalyst.”

Europe’s plan, which has still to be made public, includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and magnifying the strength of the 440 billion-euro ($611 billion) temporary rescue fund known as the European Financial Stability Facility, people familiar with the matter said last week.

“The plan has the right elements,” U.S. Treasury Secretary Timothy F. Geithner said in Paris. “They clearly have more work to do on the strategy and the details.”

Cannes Summit

The G-20 officials -- who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France -- said in a statement that the world economy faces “heightened tensions and significant downside risks.” European authorities must “decisively address the current challenges through a comprehensive plan,” they said.

The policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender’s $390 billion war chest needs topping up.

Europe’s latest strategy hinges on putting Greece, whose government forecasts its debt to reach 172 percent of gross domestic product in 2012, on a sustainable path. Austerity has plunged the country deeper into recession and provoked civil unrest that threatens political stability.

Wage Cuts

Papandreou faces the latest test of his party’s unity as soon as this week when he asks Parliament to approve steps including bigger pension and wage cuts as well as plans that may lead to the dismissal of 30,000 state workers. One ruling party lawmaker, Thomas Robopoulos, said he may quit his seat ahead of the vote, exposing the tensions in Papandreou’s socialist party. It has 154 seats in the 300-member chamber.

Failure to limit the risk of a default to Greece led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt-strapped nations such as Italy. Investors are concerned that if the crisis keeps festering, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc. (LEHMQ) The euro area is already set to suffer a renewed recession, say economists at JPMorgan Chase & Co. and Goldman Sachs Group Inc.

“We’re aware of our responsibility,” German Finance Minister Wolfgang Schaeuble said in Paris. “We’ll solve the problems in the euro zone.”

Crisis Plan

In the works is a five-point plan foreseeing a fix for Greece, boosting of the rescue fund, fresh capital for banks, a new push to increase competitiveness and consideration of European treaty amendments to tighten economic management.

Proposals include revising a voluntary July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, and a more aggressive suggestion is for investors to exchange Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, the people said. The ultimate choice is a restructuring involving writedowns without collateral.

Highlighting potential opposition from bankers this week, Charles Dallara, managing director of the Institute of International Finance, told the Financial Times in an article published Oct. 15 that he doesn’t “see a compelling case” to reopen the July deal. The imposition of greater losses on investors may prompt them to sell other European bonds, he said. The European Central Bank has also signaled it doesn’t favor a rewrite of the three-month old accord.

Bank Liabilities

The bank-aid model under discussion is to set up a European-level backstop capitalized by the EFSF, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities. Such ideas are controversial in Germany, which has called for recapitalization on a country-by-country basis.

European Union Economic and Monetary Affairs Commissioner Olli Rehn told Bloomberg Television on Oct. 15 that euro-area authorities are “close” to a pact. Banks may be required to maintain a 9 percent capital buffer to absorb sovereign risks, up from the 5 percent core capital level used in July’s stress tests, a person with knowledge of discussions said last week.

How to magnify the strength of the EFSF may also sow discord this week. Options include enabling it to borrow from the ECB or using it to partly insure new bonds issued by distressed governments. The ECB has all but ruled out the first method, making bond guarantees more likely, the people said.

Bond Guarantees

The guarantees of new bonds sold by distressed euro-area governments might range from 20 percent to 30 percent, a person familiar with those deliberations said.

Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, the people said. ECB President Jean-Claude Trichet, who attended his last G-20 meeting before he retires Oct. 31, reiterated the central bank hopes to stop purchasing government bonds once the EFSF is able to take over.

A consensus is nevertheless emerging to accelerate the birth of a permanent aid fund by a year to July 2012. This week’s discussions will also look at easing unanimity rules that permit solitary countries to block bailouts.

Morgan Stanley’s Fels said the steps could backfire because investors may fail to be lured by the guarantees, harsher writedowns could spark contagion and banks would likely prefer to sell assets and reduce leverage than raise capital. What’s really required is leaders to take a “big step” toward fiscal integration, he said.

The coming weekend “is the moment people are expecting something quite impressive,” U.K. Chancellor of the Exchequer George Osborne said in Paris.

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; James Hertling at jhertling@bloomberg.net

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Wall Street Protests Spread to Four Continents

By Michael Heath, Karen Eeuwens and Esmé E. Deprez - Oct 17, 2011 10:40 AM GMT+0700

Protestors spent a third day in front of the Reserve Bank of Australia after weekend rallies against economic inequality on four continents that included riots in Rome and arrests in New York and Chicago.

About 30 people gathered in front of Australia’s central bank in Sydney. Signs on a nearby fence included: “When I do it, it’s counterfeiting. When the Reserve Bank does it, it’s called Quantitative Easing.” Another 70 protesters occupied Melbourne’s city square in front of the Westin Hotel.

The Occupy Wall Street demonstrations that began last month in Lower Manhattan migrated uptown on Oct. 15, as about 6,000 people gathered in Times Square during what organizers called a “global day of action against Wall Street greed.” There were 92 arrests, according to the New York City Police Department. More than 100 people were injured in Rome, where as many as 200,000 amassed, the Corriere della Sera newspaper reported.

“Around the world, we’re seeing people coming out in record numbers -- not just to protest and then go home,” said Tim David Frank, 27, a teacher involved with the Occupy Sydney movement. “These are people who’ve decided to live and stay overnight, on the streets, outside of the financial institutions to remind them that we exist and that our world should be based on our interests, not just theirs.”

Chicago, London Arrests

Chicago police arrested about 175 protesters in Grant Park around 1 a.m. local time yesterday after they refused to disperse, the Chicago Tribune reported. Eight were arrested in London a day earlier after demonstrators were barred from entering Paternoster Square, home to the London Stock Exchange. Six were charged, the Metropolitan Police said in a statement.

London protestors were camped out for a third day in front of St. Paul’s Cathedral near the financial district. Banners attached to the tents included signs reading “People Before Profit” and “The People are Too Big to Fail,” while protesters made speeches from the steps of the cathedral using megaphones.

Demonstrators plan to stay “as long as it takes,” Spyro van Leemnen, a supporter of Occupy London Stock Exchange, said in a telephone interview.

Tokyo, Toronto and other cities also saw protests in support of the month-old movement, which organizers say represents “the 99 percent,” a nod to Nobel Prize-winning economist Joseph Stiglitz’s study showing the top 1 percent of Americans control 40 percent of U.S. wealth.

Hong Kong Protests

In Hong Kong, protests extended for a second day yesterday after about 40 demonstrators slept overnight in a foyer beneath the Asian headquarters of HSBC Holdings Plc (HSBA) in the central financial district.

Armed with tents, bullhorns and a gas-powered generator used to help them recharge their laptops, the protesters occupied the public thoroughfare under the building as about a dozen police stood by. Demonstrations were also held in Seoul and Taipei.

“Wall Street has a campaign to start asking questions about capitalism but this is not enough,” said art student Derrick Benig, 22, who slept in a tent overnight in Hong Kong. “I want to tear down capitalism.”

In Rome on Oct. 15, firecrackers were thrown at the Ministry of Defense and windows of Cassa di Risparmio di Rimini and Poste Italiane SpA shattered, Sky TG24 reported. Italian Prime Minister Silvio Berlusconi called “the unbelievable violence” in Rome “a worrying signal for civil coexistence.”

‘Violent Extremists’

“Violent extremists have to be identified and punished,” Berlusconi said in a statement.

More than 800 people have been arrested in New York since the protests began Sept. 17, mostly for disorderly conduct, as demonstrators solidified their hold on Zuccotti Park, which has become the de facto epicenter of Occupy Wall Street.

A wider confrontation was avoided after the park’s owner, Brookfield Office Properties Inc., postponed a cleanup that would have removed and banned protesters’ sleeping bags, tents and other gear that provided overnight accommodations.

Protesters and local politicians had gathered 300,000 signatures, flooded the city’s 311 information line and drew more than 3,000 people to the park to oppose the cleanup, according to Patrick Bruner, an Occupy Wall Street spokesman.

“The world will rise up as one and say, ‘We have had enough,’” Bruner said in an e-mail. A news release from the organization said there were demonstrations in 1,500 cities worldwide, including 100 in the U.S.

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net Karen Eeuwens in London at keeuwens@bloomberg.net; Esmé E. Deprez in New York at edeprez@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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Olympus Plunges in Tokyo as Brokerages Cut Ratings on President’s Ouster

By Gearoid Reidy and Kazuyo Sawa - Oct 17, 2011 7:56 AM GMT+0700

Olympus Corp. (7733), the Japanese camera and medical-equipment maker, fell by a record for a second straight day after at least six brokerages cut their ratings following the dismissal of President Michael C. Woodford.

The shares tumbled as much as 24 percent, the most since Sept. 11, 1974, to 1,561 yen and traded down 17 percent at 9:28 a.m. in Tokyo. The stock plunged 18 percent on Oct. 14, the day the company announced the ouster of Woodford following disagreements about his management methods.

JPMorgan Chase & Co., Nomura Holdings Inc. and at least four other brokerages slashed their ratings on the Tokyo-based company’s stock. Woodford commissioned an external auditor’s report, which found that Olympus should investigate payments made to advisers in connection with an acquisition, according to a copy of the report obtained by Bloomberg News.

“The board’s explained rationale completely contradicts its praise for Woodford less than two weeks ago,” Goldman Sachs Group Inc. analysts Toshiya Hari and Kenya Moriuchi wrote in a report dated Oct. 14. The bank downgraded the stock to “neutral” from “buy.”

To contact the reporters on this story: Gearoid Reidy in Tokyo at greidy1@bloomberg.net; Kazuyo Sawa in Tokyo at ksawa3@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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Oil Rises a Second Day on Speculation U.S., Europe May Bolster Fuel Demand

By Ben Sharples - Oct 17, 2011 7:50 AM GMT+0700

Oil extended gains from the highest close in almost a month in New York after European leaders promised to agree on a strategy for resolving their debt crisis and U.S. economic data eased concerns about a recession.

Futures advanced as much as 1.1 percent, adding to last week’s 4.6 percent rise, after Group of 20 finance ministers and central banks concluded weekend talks in Paris and set Oct. 23 as a deadline for a plan to avoid a Greek default, bolster banks and curb contagion. U.S. retail sales rose more than forecast in September, the Commerce Department said Oct. 14. China may say tomorrow its economy grew more than 9 percent last quarter.

“It does look as if that extremely pessimistic view that the world was heading into recession, if not depression, is now changing and the overall investment view is what we’re looking at is a low-growth environment,” said Michael McCarthy, a chief market strategist at CMC Markets Asia Pacific Pty Ltd. in Sydney. “Confirmation of the growth story in China will be important.”

Crude for November delivery gained as much as 91 cents to $87.71 a barrel in electronic trading on the New York Mercantile Exchange and was at $87.33 at 11:40 a.m. Sydney time. The contract settled at $86.80 on Oct. 14, the highest close since Sept. 20. Prices are down 4.3 percent this year.

Brent oil for December settlement climbed 45 cents, or 0.4 percent, to $112.68 a barrel on the London-based ICE Futures Europe exchange. Front-month futures rose 7.8 percent last week.

Libyan Output

Libya’s Arabian Gulf Oil Co. will pump crude at its full capacity of about 425,000 barrels a day by February after it resumes production at some fields and boosts output at others, Yousef Gherryo, a marketing manager at the company, said yesterday in Benghazi.

Fighting in Libya 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 in August, according to Bloomberg estimates. The North African nation pumped 100,000 barrels a day last month.

China’s gross domestic product increased 9.3 percent in the third quarter from a year earlier, according to the median estimate of 22 economists in a Bloomberg News survey. That would be the ninth straight quarter of expansion above 9 percent and follow a 9.5 percent gain in the previous three months in China, the second biggest crude-consuming nation behind the U.S.

Hedge Fund Bets

Retail sales in the U.S. advanced 1.1 percent in September, the most since February, according to the Commerce Department in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 0.7 percent rise in purchases last month.

Hedge funds raised bullish oil bets for the first time in a month, boosting them 7.8 percent in the week ended Oct. 11, according to the Commodity Futures Trading Commission’s Commitments of Traders report on Oct. 14. Net-long positions betting on rising prices in West Texas Intermediate oil held by hedge funds, commodity pools and commodity-trading advisers, in futures and options combined increased 11,389 to 157,693.

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

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Obama Team’s Al-Awlaki Memo Furthered Bush Legacy: Noah Feldman

Illustration by Ben Wiseman

By Noah Feldman Oct 17, 2011 7:01 AM GMT+0700

Killing terrorists with drones is great politics. To the question, “Is it legal?” a natural answer might well be, “Who cares?”

But the legal justifications in the war on terrorism do matter -- and not just to people who care about civil liberties. They end up structuring policy. As it turns out, targeted killing, now the hallmark of the Barack Obama administration’s war on terrorism, has its roots in rejection of the legal justifications once offered for waterboarding prisoners.

The leaking of the basic content (but not the text) of an Obama administration memo authorizing the drone strike that killed U.S. citizen Anwar Al-Awlaki therefore calls for serious reflection about where the war on terrorists has been -- and where it is headed next.

The George W. Bush administration’s signature anti-terror policy after the Sept. 11 attacks (apart from invading countries) was to capture suspected terrorists, detain them, and question them aggressively in the hopes of gaining actionable intelligence to prevent more attacks.

In the Bush years, after the CIA and other agencies balked at the interrogation techniques being urged by Vice President Dick Cheney, the White House asked the Department of Justice to explain why the most aggressive questioning tactics were legal. Lawyers at the Office of Legal Counsel -- especially John Yoo, now a professor at the University of California at Berkeley -- produced secret memos arguing that waterboarding wasn’t torture.

The Torture Memos

What was more, the memos maintained, it didn’t matter if it was torture or not, because the president had the inherent constitutional authority to do whatever was needed to protect the country.

Some of the documents were leaked and quickly dubbed “the torture memos.” A firestorm of legal criticism followed. One of the most astute and outraged critics was Marty Lederman, who had served in the Office of Legal Counsel under President Bill Clinton. With David Barron, a colleague of mine at Harvard, Lederman went on to write two academic articles attacking the Bush administration’s theories of expansive presidential power. Eventually, Jack Goldsmith, who led the Office of Legal Council in 2003-04 (and is now also at Harvard), retracted the most extreme of Yoo’s arguments about the president’s inherent power.

In the years leading to the 2008 election, all this technical criticism of the Bush team’s legal strategy merged with domestic and global condemnation of the administration’s detention policies. The Supreme Court weighed in, finding that detainees were entitled to hearings and better tribunals than were being offered. As a candidate, Obama joined the bandwagon, promising to close the prison at Guantanamo Bay, Cuba, within a year of taking office.

Guantanamo is still open, in part because Congress put obstacles in the way. Instead of detaining new terror suspects there, however, Obama vastly expanded the tactic of targeting them, with eight times more drone strikes in his first year than in all of Bush’s time in office. Barron and Lederman, the erstwhile Bush critics, were appointed to senior positions in the Office of Legal Counsel -- where they wrote the recent memo authorizing the Al-Awlaki killing.

What explains these startling developments? If it’s illegal and wrong to capture suspected terrorists and detain them indefinitely without a hearing, how exactly did the Obama administration decide it was desirable and lawful to target and kill them?

The politics were straightforward. Obama’s team observed that holding terror suspects exposed the Bush administration to harsh criticism (including their own). They wanted to avoid adding detainees at Guantanamo or elsewhere.

A Father’s Appeal

Dead terrorists tell no tales -- and they also have no lawyers shouting about their human rights. Before Al-Awlaki was killed, his father sued the government for putting the son on its target list. The Obama Justice Department asked the court to dismiss the claim as being too closely related to government secrets. The court agreed -- a result never reached in all the Guantanamo litigation. Anwar Al-Awlaki now has no posthumous recourse.

In the bigger picture, Obama also wanted to show measurable success in the war on terrorism while withdrawing troops from Iraq and Afghanistan. But even here the means were influenced by legal concerns.

Osama bin Laden is the best example. One suspects that the U.S. forces who led the fatal raid in Abbottabad almost certainly could have taken him alive. But detaining and trying him would probably have been a political disaster. So they shot him on sight, as the international law of war allows for enemies unless they surrender.

The authority for targeted killing -- as expressed in the Lederman-Barron memo -- offers the legal counterpart to the political advantages of the Obama targeting policy. According to the leaks, the memo holds that the U.S. can kill suspected terrorists from the air not because the president has inherent power, but because Congress declared war on Al-Qaeda the week after the Sept. 11 attacks.

The logic is that once Congress declares war, the president can determine whom we are fighting. The president found that Yemen-based Al-Qaeda in the Arabian Peninsula, which didn’t exist on Sept. 11, had joined the war in progress. He determined that Al-Awlaki was an active member of the Yemeni groups with some role in planning attacks. And, the memo says, it’s not unlawful assassination or murder if the targets are wartime enemies.

From a formal legal standpoint, Lederman and Barron can claim consistency with their attacks on the Bush administration. They relied on Congress and international law; Yoo’s “torture memos” didn’t.

But this argument misses the more basic point: Most critics rejected Bush’s policies not on technical grounds based on the Constitution, but because they thought there was something wrong with the president acting as judge and jury in the war on terrorism.

No Defense Allowed

Anwar al-Awlaki was killed because the president decided he was an enemy. Like the Bush-era Guantanamo detainees, he had no chance to deny this -- even when his father tried to go to court while he was still alive.

Naturally, a uniformed soldier in a regular war also wouldn’t get a hearing. But like the Guantanamo detainees, Al- Awlaki wore no uniform. Nor was he on a battlefield, except according to the view that anywhere in the world can be the battlefield in the war on terrorism.

Al-Awlaki might have maintained that he was merely a jihadi propagandist exercising his free speech rights as a U.S. citizen. Which might well have been a lie. Yet we have only the president’s word that he was an active terrorist -- and that is all we will ever have. The future direction of the policy is therefore clear: Killing is safer, easier and legally superior to catching and detaining.

Sitting beside Al-Awlaki when he was killed was another U.S. citizen, Samir Khan, who was apparently a full-time propagandist, not an operational terrorist. Khan was, we are told, not the target, but collateral damage -- a good kill under the laws of war.

Legal memos are weapons of combat -- no matter who is writing them.

(Noah Feldman, a law professor at Harvard University and the author of “Scorpions: The Battles and Triumphs of FDR’s Great Supreme Court Justices,” is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: Noah Feldman in Cambridge, Massachusetts, at noah_feldman@harvard.edu.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

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Kodak Licenses Projection Patents to Imax

By Dan Hart - Oct 17, 2011 4:52 AM GMT+0700

Eastman Kodak Co. (EK) agreed to provide laser-projection technology to Imax Corp. (IMAX), bolstering revenue as the unprofitable 131-year-old camera company seeks to stave off bankruptcy.

Kodak, based in Rochester, New York, will receive an upfront payment of more than $10 million, a milestone payment and ongoing royalties, said a person with knowledge of the matter. Imax gains technology allowing it to expand the use of digital projection on its giant-screen theaters, the Mississauga, Ontario-based company said today in a statement.

The 10-year deal helps Kodak narrow a cash shortfall and advances a goal of generating $250 million to $350 million in revenue this year from licensing intellectual property. The company said on Sept. 30 that it has “no intention” of filing for bankruptcy.

“This is the ordinary course of business and I think, if anything, it demonstrates that they have intellectual property other than the image capture and printing side,” said Mark Kaufman, an analyst at Rafferty Capital Markets in New York.

The cash will be used for general corporate purposes, said Gerard Meuchner, a spokesman for Eastman Kodak. He declined to disclose terms.

Bright Image

Kodak put a separate set of digital-imaging patents valued at an estimated $3 billion up for sale in July. The company is facing pressure from its bondholders to use cash from asset sales to pay down debt, people familiar with the situation said last week. Some bondholders have met with bankruptcy lawyers and restructuring advisers to help ensure they are paid, the people said.

The Kodak technology will enhance the brightness of digital projection, Imax Chief Executive Officer Rich Gelfond said. This will enable Imax to display pictures using digital images on its screens larger than 80 feet (24 meters) instead of being dependent on 70mm film, as well as in dome theaters, Imax said. The technology is expected to debut by the second half of 2013, the company said.

“The Eastman Kodak technology helps present a really bright image,” Gelfond said in a telephone interview. “The cost comes down and enables this to happen.”

Kodak engineers will work with Imax employees during the next 18 months to bring the technology to Imax theaters, the company said. Kodak’s technology is expected to illuminate screens as large as 100 feet and dome theaters with a brightness and clarity not currently available, Imax said.

Kodak’s operations used $847 million in cash during the first half of this year, company filings show. At the end of the second quarter, Kodak had $957 million in cash and near-cash items.

Eastman Kodak shares fell 4 cents on Oct. 14 to $1.24. The stock has declined 77 percent this year. Imax slid 2 cents to $17.38, and the shares have fallen 38 percent this year.

To contact the reporter on this story: Dan Hart in Washington at dahart@bloomberg.net

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

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Japanese Stocks Rise Toward One-Month High as G-20 Eases Europe Concern

By Jonathan Burgos - Oct 17, 2011 7:41 AM GMT+0700

Japanese stocks climbed, with the Nikkei 225 (NKY) Stock Average heading for its highest close in a month, after the Group of 20 finance chiefs meeting in Paris endorsed parts of a plan to contain Europe’s debt crisis.

Sumitomo Mitsui Financial Group Inc., Japan’s second- largest lender by market value, gained 1.6 percent. Nissan Motor Co., a carmaker that gets about 80 percent of its revenue overseas, advanced 2.1 percent after U.S. retail sales rose the most in seven months. Sony Corp., Japan’s biggest exporter of consumer electronics, jumped 4 percent after Sony Ericsson Mobile Communications AB beat analysts’ earnings estimates

“Investors are recovering their risk appetite,” said Kenichi Hirano, general manager and strategist at Tachibana Securities Co. in Tokyo. “We could see that G-20 countries would cooperate with European countries in tackling the debt crisis, which helped concern over the European crisis recede.”

The Nikkei 225 Stock Average increased 1.5 percent to 8,880.29 as of 9:30 a.m. in Tokyo, heading for its highest close since Sept. 2. The broader Topix gained 1.4 percent to 759.51, with about 10 times as many shares advancing as declining.

The Topix tumbled 17 percent this year through Oct. 14 amid concern the U.S. would fall into another recession while Europe’s crisis threatens to spread to the banking system. The slide has cut the price of shares on the index to 0.88 times estimated book value, near the lowest since March 2009.

G-20 Meeting

Futures on the Standard & Poor’s 500 Index added 0.4 percent today. The S&P 500 rose 1.7 percent in New York on Oct. 14, pushing the gauge to its biggest weekly gain since July 2009, after a report that showed retail sales exceeding economists estimates eased concern the world’s biggest economy will slow.

G-20 finance ministers and central banks concluded weekend talks in Paris, endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe’s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions.

To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

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

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Asia Stocks Rise on Europe Optimism

By Shani Raja - Oct 17, 2011 7:47 AM GMT+0700

Asian stocks rose, extending the biggest weekly gain since March on the region’s benchmark index, after Group of 20 finance chiefs meeting in Paris endorsed parts of a plan to contain Europe’s debt crisis.

BHP Billiton Ltd. (BHP), the world’s No. 1 mining company, advanced 2 percent in Sydney. National Australia Bank Ltd., the nation’s biggest business lender, climbed 2 percent. S-Oil Corp., South Korea’s third-largest crude refiner, surged 5.9 percent in Seoul. Sony Corp. rose 4.4 percent after profit at its Sony Ericsson Mobile Communications AB venture beat analyst estimates. Olympus Corp. tumbled 20 percent after at least five brokerages cut their ratings on the optical-equipment maker.

The MSCI Asia Pacific Index advanced 1.1 percent to 118.09 as of 9:40 a.m. in Tokyo. The gauge climbed 3.4 percent last week after German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged to deliver a plan to recapitalize Europe’s banks and address Greece’s debt crisis.

“An important precondition for resolving the European credit crisis is unity of vision and commitment to find a solution,” said Angus Gluskie, who manages more than $300 million at White Funds Management in Sydney. “The comments over the weekend show some elements of both. A credible and well- executed solution is the next element, and we are yet to see this.”

Japan’s Nikkei 225 Stock Average climbed 1.5 percent and Australia’s S&P/ASX 200 Index also gained 1.6 percent. South Korea’s Kospi Index increased 1.2 percent.

Futures on the Standard & Poor’s 500 Index added 0.4 percent today. The gauge rose 1.7 percent in New York on Oct. 14 after a report showed retail sales rose more than economists estimated. The S&P 500 had its biggest weekly gain since July 2009 amid rising confidence that European policy makers are moving toward taming the region’s sovereign-debt crisis.

Retail Sales

Retail sales in the U.S. rose more than forecast in September, easing concern that slumping confidence and scant hiring will derail the biggest part of the economy.

Separately, G-20 finance ministers and central bankers concluded weekend talks in Paris, endorsing parts of an emerging plan to avoid a Greek default, bolster banks and curb contagion. They set an Oct. 23 summit of European leaders in Brussels as the deadline for it to be delivered.

Hurdles to overcome for an accord include resistance from bankers to a deeper restructuring of Greek debt as well as disagreements between Europe’s capitals over just how to multiply the firepower of their bailout fund and recapitalize financial institutions.

‘Risk Appetite’

“We could see that G-20 countries would cooperate with European countries, which helped concern over the debt crisis recede,” said Kenichi Hirano, general manager and strategist at Tachibana Securities Co. in Tokyo. “Investors are recovering their risk appetite.”

New York-traded copper futures rose 3.1 percent on Oct. 14, while the London Metal Exchange Index of prices for six metals including copper and aluminum advanced 2.1 percent. Crude oil futures in New York gained 3.1 percent.

The MSCI Asia Pacific Index dropped 15 percent this year through Oct. 14, compared with a 2.6 percent loss by the S&P 500 and a 14 percent decline by the Stoxx Europe 600 Index. Stocks in the Asian benchmark are valued at 11.9 times estimated earnings on average, compared with 12.3 times for the S&P 500 and 10.2 times for the Stoxx 600.

To contact the reporter on this story: Shani Raja in Sydney at sraja4@bloomberg.net

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

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Kinder to Buy El Paso for $21.1B

By Mike Lee - Oct 17, 2011 3:20 AM GMT+0700
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Storage tanks at the El Paso Corp. liquified natural gas Elba Island terminal near Savannah, Georgia. Photographer: Stephen Morton/Bloomberg

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El Paso Corp. headquarters in Houston, Texas. Photographer: Brett Coomer/Bloomberg

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Kinder Morgan Chief Executive Officer Richard Kinder. Source: Kinder Morgan Inc. via Bloomberg

Kinder Morgan Inc. agreed to buy El Paso Corp. (EP) for about $21.1 billion in cash and stock, creating the largest U.S. natural-gas pipeline network in the energy industry’s biggest transaction in more than a year.

The offer is valued at $26.87 per El Paso share, or 37 percent more than their Oct. 14 closing price, Houston-based Kinder Morgan said in a statement today. The offer is comprised of $14.65 in cash, 0.4187 shares of Kinder Morgan, and 0.64 Kinder Morgan warrants, the statement said.

The takeover is the largest ever proposed of a pipeline company, surpassing the 2007 leveraged buyout of Kinder Morgan itself by a group including Richard Kinder and Goldman Sachs Group Inc. The combined company would have 67,000 miles (107,000 kilometers) of gas lines and eclipse Enterprise Products Partners LP as the biggest U.S. pipeline operator.

“This once in a lifetime transaction is a win-win opportunity for both companies,” Kinder, who will be chairman and chief executive officer of the combined company, said in the statement. He said the deal, once closed, would create immediate shareholder value because of its cash flow.

The total value including assumed debt from El Paso is $37.8 billion, Kinder Morgan said in a document prepared for investors. The acquisition is the ninth-largest ever proposed in the energy industry and the biggest in more than a year, according to data compiled by Bloomberg.

Kinder Morgan intends to sell the exploration and production assets of El Paso, the statement said. El Paso had announced in May that it would spin off the unit to its shareholders. The combination will save about $350 million a year, the statement said.

2012 Closing

Kinder Morgan and Houston-based El Paso said they expect the transaction to close in the second quarter of 2012, creating the fourth-largest energy company in North America. Enterprise Products has about 50,000 miles of pipeline.

Evercore Partners Inc. and Barclays Plc served as financial advisers for Kinder Morgan; Weil Gotshal & Manges LLP and Bracewell & Giuliani LLP acted as legal advisers.

Morgan Stanley acted as financial adviser for El Paso; Goldman Sachs Group Inc. was advising El Paso on its previous spinoff. Wachtell, Lipton, Rosen & Katz was El Paso’s legal adviser.

To contact the reporter on this story: Mike Lee in Dallas at mlee326@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

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