No One Telling Who Took $586B in Fed Swaps

By Scott Lanman and Bradley Keoun - Dec 12, 2011 6:01 AM GMT+0700

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Dec. 12 (Bloomberg) -- For all the transparency forced on the Federal Reserve by Congress and the courts, the U.S. government and public remain in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. As part of a currency-swap plan revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. While the transactions with other central banks are disclosed, the Fed doesn’t track where the dollars end up. Bradley Keoun reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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Ben S. Bernanke, chairman of the U.S. Federal Reserve. Photographer: Andrew Harrer/Bloomberg

For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.

As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.

The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.

“Increased transparency is warranted here,” given the size of the Fed’s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.

Whether the U.S. should make disclosure of the recipients a condition of the swap lines is “probably a discussion we need to have,” possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.

Unprecedented Transparency

The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen programs used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.

Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks, which are the Fed’s only counterparties on the swap lines and assume any credit risk.

“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”

Turmoil Overseas

Americans may have to accept nondisclosure as a condition of protecting the U.S. economy from turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.

The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.

The Fed last week released a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.

Century-Old Program

The Dodd-Frank Act overhauling U.S. financial law included legislation proposed by Senator Bernard Sanders, a Vermont independent, that required the Fed in December 2010 to disclose recipients of aid it provided during the crisis, except for banks that used the liquidity-swap lines or the discount window -- a century-old emergency-lending program. Under Dodd-Frank, new Fed borrowers from the discount window are subject to identification with a two-year delay.

Bloomberg LP and News Corp.’s Fox News Network LLC won a court case forcing the Fed last March to name the crisis discount-window borrowers. There hasn’t been any case or law requiring disclosure of banks that borrowed via the swap lines.

“That is certainly a legitimate piece of information for the American people,” and “we’re going to be vigilant in increasing transparency,” said Warren Gunnels, Sanders’ senior policy adviser.

Borrowing Dollars

Foreign central banks borrowed dollars from the Fed for terms as long as three months in return for euros, pounds and yen. The ECB accounted for 80 percent of total swap-line loans during the mortgage-induced financial crisis, according to the U.S. Government Accountability Office, the congressional auditor. The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail.

“These banks have a right to enjoy the standard confidentiality attached to banking transactions,” the spokesman wrote.

European officials may be concerned that future lending might be inhibited by a “stigma phenomenon” if past borrowers are made public, said Ralph Bryant, former director of the Fed’s international-finance division and now a senior fellow at the Brookings Institution in Washington. The concept is “usually overplayed by people, but it’s not something that’s trivial.”

‘Matter of Principle’

The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.

The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities. Confidence in banks “can best be sustained” if support is disclosed “only when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.

Fed policy makers let the program expire in February 2010 then revived it after three months to try to contain Europe’s debt crisis. Nineteen months later, European officials still struggle to contain the market turmoil, which has spread to sovereign bonds in France and Italy as investors increasingly question governments’ ability to repay debt.

Expanding Crisis

The expanding crisis spurred the Fed and other central banks in November to extend the program by six months to Feb. 1, 2013, and lower borrowing costs by half a percentage point to make them more attractive. Last week, European leaders agreed to make loans of as much as 200 billion euros ($267.7 billion) to the International Monetary Fund and tightened rules to curb future debts.

The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet.

The GAO, which released its emergency-lending report in July, wasn’t required to delve into the final destinations of the swap dollars, said Orice Williams Brown, the agency’s lead official on Fed audits. As a result of the study, the GAO learned that UBS AG (UBSN)’s October 2008 bailout from the Swiss government included an “atypical use” of swap-line dollars “generally not exceeding about $13 billion,” the report said.

Didn’t Know

Bernanke didn’t know which financial institutions got dollar loans, he said during a July 2009 House Financial Services Committee hearing.

Not having the identities would restrict the Fed’s ability to understand the “overall risk exposure of the institutions it’s supervising,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.

The Fed may not need all the details, said Al Broaddus, former president of the Federal Reserve Bank of Richmond. The ECB and other central banks “are obliged to pay the Fed back. They’re the ones that are taking the credit risk with the institutions that are actually being lent to.”

In 2008, the dollar-based money markets that many foreign banks used to finance their holdings of U.S. mortgage-backed securities froze, forcing them to turn to the Fed to fill the funding gap. Much of the borrowing was done through U.S. branches that are legally eligible to draw emergency loans from the Fed’s lender-of-last-resort programs, according to the Bloomberg examination.

Biggest Foreign Borrower

The U.K.’s Royal Bank of Scotland Group Plc (RBS) was the biggest foreign borrower, drawing $84.5 billion in October 2008. UBS, based in Zurich, got $77.2 billion, while Frankfurt-based Deutsche Bank AG (DBK) took $66 billion and London-based Barclays Plc (BARC) borrowed $64.9 billion, according to the Bloomberg data.

One of the borrowers, Dexia SA (DEXB), is being broken up after running out of short-term funding. The French-Belgian lender had 120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed.

Fed officials, including Governor Daniel Tarullo, have emphasized the need for improved monitoring and control of risks throughout the banking system, as well as global coordination among financial-policy makers. Regulators “must not lose sight of the importance of supervisory cooperation in pursuit of the shared goal of a stable international financial system,” he said in a Nov. 4 speech.

Full Disclosure

Ohio Senator Sherrod Brown, a Democrat who heads the Banking Subcommittee on Financial Institutions and Consumer Protection, said he isn’t sure swap-line borrowers should be made public. Still, the Fed “should follow the money in terms of disclosure, period,” he said. “Full disclosure from start to finish is the goal.”

Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee, said he saw no need for the disclosure because the Fed has no role in approving the ultimate borrowers.

“What the Fed is doing with regard to the ECB is very important for the American economy,” Frank said. “Our interest is to make sure we get paid back. I think the ECB is a pretty good debtor and a pretty reliable one.”

‘Fundamental Problem’

Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton’s Council of Economic Advisers, said the “fundamental problem” is that capital markets need information to work properly, yet the Fed is saying, “we believe in capital-market discipline without information.”

“It would be very useful to see” those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, “what we have now is a very partial picture.”

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scheer at dscheer@bloomberg.net

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Euro Undermined as Draghi Undoes Trichet Rates

By Lukanyo Mnyanda and Catarina Saraiva - Dec 12, 2011 5:30 PM GMT+0700

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Dec. 12 (Bloomberg) -- Russell Jones, global head of fixed-income strategy at Westpac Banking Corp., talks about Europe's sovereign debt crisis. Germany’s top central banker cooled speculation that the European Central Bank will extend its role as European leaders pressed their case that a new fiscal accord will deliver the region from its two-year-old debt crisis. Jones speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Dec. 12 (Bloomberg) -- Don Hanna, managing director at New York-based hedge fund Fortress Investment Group LLC, talks about European Central Bank monetary policy, the region's debt crisis and its implications for Asian markets. Investors are fleeing assets denominated in the 17-nation currency as European Union leaders fail to end concern that Italy and Spain would succumb to a sovereign debt crisis that forced Greece, Ireland and Portugal to seek bailouts. Hanna speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)

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Dec. 12 (Bloomberg) -- Peter Garnry, an equity strategist at Saxo Bank A/S, discusses the outlook for a fiscal union in Europe and his recommendation of Hennes & Mauritz AB. He speaks from Hellerup, Denmark, with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

Foreign-exchange strategists are reducing their forecasts for the euro at the fastest pace this year as European Central Bank President Mario Draghi’s interest- rate cuts remove one of the currency’s pillars of support.

Since Nov. 3, when Draghi began to undo the rate increases implemented earlier this year by his predecessor, Jean-Claude Trichet, analysts have cut end-of-2012 estimates for the euro to $1.32 from $1.40, based on the median of 40 forecasts in a Bloomberg survey as of last week. It has weakened versus every major currency except the Swiss franc since then, after gaining against 12 of the 16 this year prior to that.

Investors are fleeing assets denominated in the 17-nation currency as European Union leaders fail to end concern that Italy and Spain will succumb to a sovereign-debt crisis that forced Greece, Ireland and Portugal to seek bailouts. While euro bulls say sentiment is so negative that the currency has nowhere to go but up, bears point to surveys showing the euro zone’s economy will expand 0.5 percent next year, compared with 2.19 percent for the U.S.

“There still has to be further monetary easing by the ECB to support growth in the euro area for 2012 and beyond,” Ken Dickson, investment director of currencies at Standard Life Investments in Edinburgh, which manages about $235 billion, said in a Dec. 9 telephone interview. “There’ll be further weakness, particularly in the first half of next year,” which may push the currency to as low as $1.20 from $1.3386 last week, he said.

Relative Rates

For much of this year, relatively high interest rates gave international investors an incentive to hold European fixed- income assets even as the threat of more bailouts rose.

Trichet’s increases in April and July pushed the ECB’s main refinancing rate to 1.5 percent from 1 percent, helping drive yields on two-year German bunds to 1.31 percentage points more than U.S. Treasuries of similar maturity on May 4 from 0.2 percentage point in January. The euro appreciated as much as 16 percent in that period. Since then, the gap has shrunk to 0.09 percentage point, and the euro has depreciated about 10 percent.

The two-year Treasury-German note spread has “been the most statistically significant” driver of the euro-dollar exchange rate “over time,” strategists at New York-based Citigroup Inc. said in a Dec. 9 report to clients.

Europe’s common currency fell 0.9 percent to $1.3272 at 10:25 a.m. London time. It dropped 0.6 percent to 103.25 yen and weakened 0.2 percent against the pound to 85.25 pence.

Europe Blueprint

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency, adding 200 billion euros ($268 billion) to their bailout fund and tightening rules to curb future debts. They also will start a 500 billion-euro rescue fund next year and diluted a demand that bondholders shoulder losses in rescues.

The measures failed to spur the ECB, which has bought 207 billion euros of sovereign bonds since May 2010 to curb a rise in borrowing costs, to commit to purchasing more securities. Yields on Italian five-year securities jumped as much as 65 basis points, or 0.65 percentage point on the day of the Dec. 8 ECB meeting, rising above 7 percent the next day.

“There’s an element of disappointment in that much more could have been done,” Samarjit Shankar, a managing director for the foreign-exchange group at Bank of New York Mellon Corp. in Boston, said in a Dec. 9 telephone interview. “The tolerance of investors has been severely tested and there’s a general expectation that a lot more needs to be done.”

Euro Flows

Cumulative outflows from the euro last week were twice the average in the same period last year, according to BNY Mellon, the world’s largest custodial bank, with more than $26 trillion in assets under administration. The firm doesn’t provide specific figures.

Bets against the euro are at about a record high, suggesting that any positive news may cause traders to unwind those trades, sending the currency higher, according to Pierre Lequeux, head of currency management at Aviva Investors.

“The market is already positioned for a collapse of the euro and therefore there’s not much room for them to add to the existing position,” Lequeux, whose firm manages about $420 billion, said in an interview at his office in London on Dec. 9. The single currency may rebound to as high as $1.50 next year, which would be “driven by a credible solution,” he said.

Hedge funds and other large speculators held a net 95,814 contracts at the Chicago Mercantile Exchange as of Dec. 6 anticipating a drop in the euro, from 104,302 a week earlier, according to the Washington-based Commodity Futures Trading Commission. In May, there were 99,516 contracts wagering on a gain.

Historical Levels

The last time there were about as many contracts betting on a decline was in 2010, just before the euro began a rise from $1.1877 in June to as high as $1.4282 that November.

For all the concern that the euro may break up, the currency is about 11 percent above its average since being created in 1999. That’s a sign that traders see little chance of a collapse. The currency will end March at $1.30, the weakest quarter-end level next year, based on median quarterly estimates of strategists surveyed by Bloomberg News.

Last week’s EU summit sets Europe on the path to a “lastingly stable euro,” German Chancellor Angela Merkel told reporters. “The breakthrough to a stability union has been achieved.”

Slower Growth

Growth in the euro area’s economy next year will probably slow from a projected 1.6 percent in 2011, while U.S. expansion may accelerate in 2012 from 1.8 percent this year, according to Bloomberg surveys of economists.

Stress in Europe’s financial system, coupled with slower growth, prompted Standard & Poor’s on Dec. 5 to say Germany and France may be stripped of their AAA credit ratings as it put 15 euro nations on review for possible downgrade.

A slumping economy may prompt the Frankfurt-based ECB to cut its main refinancing rate a further 0.25 percentage point to 0.75 percent by March, shrinking the difference between the Federal Reserve’s target rate to 0.50 percentage point, separate surveys show. The gap would be the smallest since 2008.

Bets that the euro will drop against the dollar increased in the options market. Traders paid 3.6 percentage points more on Dec. 9 for the right to sell the euro against the dollar than to buy it, up from about 1.2 percentage points in January. The so-called three-month 25-delta risk reversal rate rose 0.17 percentage point on Dec. 9 after EU leaders agreed at the summit to enforce stricter debt and deficit limits.

Dollar Funding Costs

Dollar funding costs for European banks increased after the summit amid concern the measures won’t be enough to stem the crisis. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, ended last week at 122 basis points below the euro interbank offered rate, from 117 basis points the day before. The measure reached 163 basis points on Nov. 30.

Looser policy from the ECB “may accentuate the process and continue to force the euro lower in due course,” Geoffrey Yu, a currency strategist at UBS AG in London, said in a telephone interview on Dec. 8. “The market is reaching a consensus that there aren’t going to be many upside factors for the euro at this stage and if Draghi is thinking of further rate cuts, it just adds to pressure on the euro.”

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net

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Israel’s Babylon Says Arab World to Boost Sales of Translation Software

By Shoshanna Solomon - Dec 11, 2011 10:04 PM GMT+0700

Babylon Ltd. (BBYL), an Israeli developer of translation and dictionary software, says sales will continue to surge on demand for language products in the Arab world and Brazil, Chief Executive Officer Alon Carmeli said.

“We have reported a growth rate in revenue of nearly 80 percent in dollar terms since the beginning of the year and we expect a similar growth going forward,” Carmeli said in an interview at Babylon’s offices in Or Yehuda.

The software developer, named after the Tower of Babel biblical story about the creation of different languages, says it has more than 100 million users and operates in about 200 markets. The company provides translation for 75 languages, including the recently added Vietnamese and Swahili.

The shares have gained 72 percent this year, giving Babylon a market value of 386 million shekels ($103 million). The benchmark TA-25 index (TA-25) has dropped 18 percent. The Tel Aviv Stock Exchange said last week that Babylon will be added to the Mid Cap-50 equity index on Dec. 15.

Babylon is boosting marketing efforts in Brazil, where it plans to capitalize on translation needs in a country that will host the 2014 World Cup and 2016 Olympics. In Arab areas, the company has strong Web traffic and needs to sell products that garner more revenue, Carmeli said. Babylon started using a call center in the West Bank city of Ramallah to push its services.

“The Arab world is a big proportion of our website traffic but not a big proportion of our revenue,” the 46-year-old CEO said. “We need to be more local in the way we do business with them, because many users don’t have credit cards and we need to find alternative payment methods.”

Internet Power

The “Arab Spring,” a wave of protests that displaced regimes in the Middle East and North Africa this year, built thirst for Internet communications, Carmeli said. Leaders of the uprising that ended Hosni Mubarak’s control of Egypt included a blogger who founded a youth movement on Facebook.

“They are suddenly realizing the power the Internet can give you,” Carmeli said. “They open Facebook accounts, then they start to communicate and then they need Babylon.”

The Israeli company has the seventh most popular website in Libya, while it’s No. 8 in Algeria, 11th in Tunisia and 23rd in Egypt, according to Alexa Internet, a research company.

Stalled peace talks between Israel and the Palestinians shouldn’t be a problem for Babylon, said Natali Gotlieb, an equity analyst at Israel Brokerage & Investments Ltd.

“There is a great need for translation services in these countries to breach the language barrier,” she said. “Babylon is an international Internet company, with no border. So the Israeli-Arab issue is a non-issue.”

30 Million Visitors

Babylon, whose customers include Coca-Cola Co., SAP AG and Nokia Oyj, is attracting 30 million visitors to its site a day, said Carmeli, who has led the company for almost four years. It has 15 advertising partnerships including with Google Inc. and Russia’s Yandex LLC Internet portal.

The company had a price to earnings ratio of 21.83 times as of Dec. 8, compared with an average ratio of 14.79 times for comparable Israeli software firms, according to Bloomberg data.

The software developer plans to add advertising partners in Brazil in the coming year and will build distribution, said Liat Sade-Sternberg, Babylon marketing vice president, who will travel to the country this month. Brazil’s booming economy, as well as the World Cup and Olympics events, are a major opportunity, Carmeli said.

“The whole area of languages in this country is going to get a massive push forward,” he said. “All the service providers will have to offer services in English.’”

Babylon has had annual revenue growth of more than 30 percent since 2007 and reported sales of 118.4 million shekels for 2010, according to Bloomberg data. Sales rose to 57.5 million shekels in the third quarter.

To contact the reporter on this story: Shoshanna Solomon in Tel Aviv at ssolomon22@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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Olympus Auditor Ernst & Young Will Investiate Accounting, Judgment Call

By Naoko Fujimura and Takashi Amano - Dec 12, 2011 3:23 PM GMT+0700

An Ernst & Young ShinNihon LLC committee will determine whether there were auditing problems or lapses in judgment in its probe on the coverup of a $1.7 billion fraud at Olympus Corp.

ShinNihon said Dec. 8 that it formed a committee to investigate its audit of Olympus and verify an internal probe that found nothing wrong. “We will look into whether there were problems in the accounting process for acquisitions (7733) and also judgments made in auditing,” Toshifumi Takada, a panel member and economics professor at Tohoku University in Miyagi, northern Japan, said in Tokyo today.

Olympus is investigating about 70 executives to answer queries over losses and transactions for acquisitions, including $687 million in payments to advisers in the purchase of Gyrus Group Plc in 2008 and stake writedowns in three other takeovers. The camera maker set up a special panel in November to conduct a probe after former Chief Executive Officer Michael Woodford revealed the coverup costing 135 billion yen ($1.7 billion).

The ShinNihon committee plans to ask KPMG Azsa LLC, Tokyo- based Olympus’s former auditors, to cooperate with its probe, said Nobuo Gohara, a lawyer and committee member. The committee intends to release an interim report by Dec. 31 and a full account by the end of February, he said.

Market Value

Olympus, also the world’s biggest endoscope maker, surged 7.8 percent to 1,300 yen, the highest level since Oct. 27, at the close in Tokyo trading after the company said it plans to hold a briefing about its first-half earnings on Dec. 15. As of the Dec. 9 close on the Tokyo Stock Exchange, Olympus had lost the equivalent of $4.5 billion, or about half its market value, following Woodford’s dismissal Oct. 14.

The company is required to restate earnings and issue second-quarter results by Dec. 14 to avoid delisting. Olympus said today it’s preparing to meet the deadline.

The payments were “questionable from the accounting point of view,” Olympus’s panel said in a report last week. “We cannot conclude this was appropriate.”

Japan’s Financial Services Agency is looking into any role ShinNihon may have played in the Olympus cover-up, Minister Shozaburo Jimi told reporters in Tokyo last week.

To contact the reporters on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net; Takashi Amano in Tokyo at tamano6@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

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Zynga Says IPO Price Range Affected by Underperformance of Recent Offers

By Lee Spears - Dec 10, 2011 12:01 PM GMT+0700

Zynga Inc. said the valuation it’s seeking in an initial public offering is 50 percent less than an August fair value estimate after it took into account recent IPOs that have underperformed.

The price range of $8.50 to $10 a share is based on “a review of the offering price and recent aftermarket performance of companies that completed IPOs in 2011,” the company said in a regulatory filing yesterday.

The top end of Zynga’s offering range would value the company at $7 billion, or half the $14.1 billion it said represented its fair value as of August. Groupon Inc., the Chicago-based provider of online coupons, raised $805 million in its IPO last month including an over-allotment option. The shares surged as much as 31 percent in the first weeks of trading before plunging as much as 42 percent from their high.

Angie’s List Inc., the Indianapolis-based operator of a consumer-reviews website, raised $132 million in its IPO last month, including an over-allotment. The shares tumbled as much as 29 percent from a high in public trading.

Groupon and Angie’s List both have recovered this month. Groupon closed yesterday at $23.48, 17 percent above its offering price. Angie’s List closed at $16.03, 23 percent higher than its IPO price.

Game Development

San Francisco-based Zynga’s offering of 100 million shares, set to price on Dec. 15, would be the biggest by a U.S. Internet company since Google Inc. (GOOG) went public in 2004, Bloomberg data show. Zynga may raise about $889 million in the share sale to spend on developing new games and possibly buying companies or technologies, according to its filing.

Zynga had originally planned to seek a higher market value in its IPO, and scaled back after Internet companies including Groupon sank following their debuts, a person with knowledge of the plans said this month. Zynga said its IPO price “was not determined using the methodology used by management and the third party valuation firm to value our stock in August.”

Investors have already put in enough orders to cover all the stock being offered, people familiar with the matter said Dec. 8.

Morgan Stanley and Goldman Sachs Group Inc. are managing the IPO. Zynga’s shares will trade on the Nasdaq Stock Market under the symbol ZNGA.

To contact the reporter on this story: Lee Spears in New York at lspears3@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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Zynga IPO May Cap Biggest Week for U.S. Offerings Since March

By Lee Spears - Dec 12, 2011 12:00 PM GMT+0700

Zynga Inc. and Michael Kors Holdings Ltd. are leading the biggest week for U.S. initial public offerings in nine months, betting their surging sales will attract investors.

Zynga, the largest maker of games on Facebook, luxury- clothing designer Kors Holdings and nine other companies are seeking as much as $3.8 billion in IPOs this week, data compiled by Bloomberg show. That’s the most since the five days starting March 7, when HCA Holdings Inc. raised $4.4 billion.

Zynga’s management team, led by Chief Executive Officer Mark Pincus, has been telling investors in roadshow presentations that the company is working on its biggest-ever pipeline of online games. Zynga’s sales more than doubled in the nine months through Sept. 30, while Kors Holdings’ revenue jumped more than 60 percent in its first half, even as consumer confidence sank to the lowest level since the recession.

“These are companies that are experiencing very robust secular growth,” said Paul Bard, director of research at Greenwich, Connecticut-based IPO research and investment firm Renaissance Capital LLC. “These are the types of deals that are less impacted by what we’ve seen in the broader macro environment.”

Offerings began to dry up in August as the sovereign-debt crisis engulfed Europe and the U.S. received its first-ever credit downgrade. Even with companies from Groupon Inc. to Angie’s List Inc. completing share sales since November, more than 200 IPOs are still on file with U.S. regulators to raise a total of about $49 billion, according to Renaissance, the most in more than a decade.

Asia Deals

While deals in Asia have also rebounded, with offerings raising at least $5.7 billion in Hong Kong last week, some of the biggest IPOs priced at or near the low end of their proposed ranges. Chow Tai Fook Jewellery Group Ltd. raised HK$15.8 billion ($2 billion) on Dec. 9 selling its shares at the low end of a HK$15 to HK$21 range, people with knowledge of the matter said. New China Life Insurance Co. raised HK$10.2 billion selling shares at HK$28.50 each after offering them for HK$28.20 to HK$34.33.

Nexon Co., the Tokyo-based maker of online social games, set its IPO price of 1,300 yen ($16.74) per share on Dec. 5 and will begin trading on the Tokyo Stock Exchange on Dec. 14, according to Bloomberg data.

Hong Kong Offerings

At least four companies, including Guodian Technology & Environment Group Co. and Beijing Jingneng Clean Energy Co., are seeking to sell $1 billion of stock in IPOs scheduled to price in Hong Kong this week, Bloomberg data show. That contrasts with Europe, where the amount raised in offerings since August has slumped more than 85 percent from the same period a year earlier.

Zynga plans to offer as much as $1 billion of stock selling 100 million shares for $8.50 to $10 apiece on Dec. 15, according to a regulatory filing and Bloomberg data. The $7 billion valuation Zynga seeks at the high end of that range is 6.8 times sales in the year through Sept. 30, or more than triple game maker Electronic Arts Inc.’s (ERTS) price relative to sales in the same period, data compiled by Bloomberg show.

“They have a good revenue stream and are diversifying their revenue streams,” Akram Yosri, managing partner of Dubai- based 3i Capital Group, said after leaving Zynga’s roadshow in New York last week. His firm oversees about $1.4 billion.

Zynga’s Prospects

Zynga, which has 54 million daily active users that play games for 2 billion minutes per day, is working to keep its lead over Electronic Arts, which bolstered its own online services by purchasing PopCap Games this year. Redwood City, California- based Electronic Arts had a market value of $7.3 billion, or 1.9 times trailing 12-month sales, as of Dec. 9, according to Bloomberg data.

Zynga’s games, featured on Facebook Inc.’s social- networking site, include “Mafia Wars” and “FarmVille.” Its offering is being managed by Morgan Stanley and Goldman Sachs Group Inc. (GS) The stock will list on the Nasdaq Stock Market under the symbol ZNGA. Facebook is also weighing an IPO that may value the company at more than $100 billion, a person with knowledge of the matter said last month.

Kors Holdings, whose products include clothes, fragrances and beauty items, is seeking as much as $792 million Dec. 14, offering 41.7 million shares at $17 to $19 apiece on behalf of existing stockholders. The Hong Kong-based company, founded 30 years ago by designer Michael Kors, will receive no proceeds.

Michael Kors

The midpoint of the offering range would value Kors Holdings at $3.4 billion, or 3.4 times sales of $1 billion in the 12 months through Oct. 1, its filing shows. Coach Inc. (COH) trades at about 4.3 times sales over the same period, and Ralph Lauren Corp. is at about 2.1 times sales.

Kors Holdings plans to more than double stores over the “long term,” according to its regulatory filing. Sales amounted to $548.7 million in the six months through Oct. 1, compared with $340.9 million a year earlier.

“There is, as there should be, upside to the investor, provided the company executes on a plethora of growth opportunities with continued improvement to operating margins,” said Jeffry Aronsson, chairman of New York-based Aronsson Group LLC, which helps develop fashion brands.

Kors Holdings’ operating margin widened in the year ended April 2 to about 18 percent, according to Bloomberg data. Rivals Coach and Ralph Lauren held steady from year-ago levels at 32 percent and 15 percent, respectively.

Morgan Stanley, JPMorgan Chase & Co. (JPM) and Goldman Sachs are leading the offering for the clothing designer, whose shares will trade on the New York Stock Exchange under the ticker KORS.

Jive’s Offering

Jive Software Inc., the maker of social-networking software for businesses, aims to raise as much as $117 million in its IPO. The planned sale of 11.7 million shares for $8 to $10 apiece is scheduled for today, Bloomberg data show.

The top end of the offer range would value Jive at $573 million, or 8.3 times sales in the year through Sept. 30. That’s more than double the ratio of 3 for Microsoft Corp. (MSFT) and 2.2 for International Business Machines Corp., both named as competitors in Jive’s IPO filing.

Jive, whose software lets employees collaborate on projects, may benefit as larger technology companies snap up purchases in cloud-computing to spur growth. SuccessFactors Inc., whose programs manage employee performance, is fetching $3.4 billion, 52 percent more than its public market value, in an acquisition by SAP AG announced Dec. 3. Oracle Corp. agreed to buy RightNow Technologies Inc. for $1.5 billion in October.

‘Strategic Interest’

“It shows there is strategic interest in these types of companies,” Renaissance’s Bard said.

Morgan Stanley (MS) and Goldman Sachs are leading the offering for Jive, which will trade on the Nasdaq under the symbol JIVE.

Stocks that have made public debuts in the U.S. this year have declined an average of 8.6 percent from their IPO levels through Dec. 9, according to Bloomberg data. The monthly amount raised in U.S. initial offerings this year peaked in May at $6.3 billion before bottoming at $34 million in September. The Standard & Poor’s 500 Index has recovered 14 percent, helped by improved U.S. economic data, after falling to a one-year low Oct. 3.

“It’s been a slow second half,” said Bard. “Underwriters and bankers are incentivized and motivated to do as much deal flow as they can.”

To contact the reporter on this story: Lee Spears in New York at lspears3@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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Euro, U.S. Stock Futures Drop Before Bond Sales

By Lynn Thomasson and Jonathan Burgos - Dec 12, 2011 2:51 PM GMT+0700

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Dec. 12 (Bloomberg) -- Catherine Yeung, investment director at Fidelity Worldwide Investment, talks about her strategy for Chinese stocks. She speaks from Hong Kong with Owen Thomas and Linzie Janis on Bloomberg Television's "Countdown." (Source: Bloomberg)

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Dec. 12 (Bloomberg) -- Jing Ulrich, Hong Kong-based chairman of global markets for China at JPMorgan Chase & Co., talks about the nation's economy. Ulrich also discusses Europe's sovereign debt crisis and initial public offerings in Hong Kong. She speaks with John Dawson, Susan Li, Mia Saini and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

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Dec. 12 (Bloomberg) -- Nigel Tupper, Asia Pacific strategist and chief global quantitative strategist at Bank of America Merrill Lynch, talks about the outlook for Asian financial markets and his investment strategy. Tupper speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

The euro weakened, while U.S. and European stock futures fell before a bond sale by Italy and France. Asian stocks (MXAP) snapped two days of losses amid speculation China will loosen monetary policy.

The euro fell 0.6 percent against the dollar as of 7:49 a.m. in London, following a 0.3 percent gain on Dec. 9. Futures on the Euro Stoxx 50 Index retreated 1.1 percent and contracts on the Standard & Poor’s 500 Index lost 0.7 percent. Copper slid 1.9 percent and oil declined 0.8 percent to $98.66 a barrel. The MSCI Asia Pacific Index climbed 0.7 percent.

Italy and France are preparing to sell a combined 13.5 billion euros ($18 billion) of short-term debt today. Last week’s European Union summit offered few new measures and doesn’t diminish the risk of credit-ranking revisions, Moody’s Investors Service said. European leaders unveiled a blueprint last week for a fiscal accord to save the region’s currency, adding 200 billion euros ($267 billion) to a bailout fund and tightening rules to curb future debts.

“The European situation will continue to bother us into next year as policy initiatives seem insufficient,” said Mark Matthews, Singapore-based head of research for Asia at Bank Julius Baer & Co., which has about $180 billion globally.

Asian stocks advanced as a smaller trade surplus and the weakest export growth since 2009 may encourage Chinese policy makers to add to a Nov. 30 cut in bank reserve requirements that was the first since 2008.

Bond Auctions

The euro weakened to $1.3307. Foreign-exchange strategists are slashing their forecasts for the currency at the fastest pace this year as the European Central Bank’s interest-rate cuts remove one of the currency’s pillars of support. Analysts reduced end-of-2012 estimates for the euro to $1.32 from $1.40 since Nov. 3, based on the median of 40 forecasts in a Bloomberg survey as of last week.

Italy will sell 7 billion euros ($9.4 billion) of 365-day bills today, while France is scheduled to auction 6.5 billion euros of short-term debt.

S&P 500 futures fell to 1,244.30, signaling the U.S. equity benchmark may trim its 1.7 percent gain on Dec. 9. Benchmark 10- year note yields were little changed at 2.05 percent after rising the most in a month on Dec. 9.

To contact the reporters on this story: Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net; Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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Asian Stocks Snap Two-Day Losing Streak on U.S Confidence, Europe’s Accord

By Jonathan Burgos and Yoshiaki Nohara - Dec 12, 2011 3:08 PM GMT+0700

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Dec. 12 (Bloomberg) -- Nigel Tupper, Asia Pacific strategist and chief global quantitative strategist at Bank of America Merrill Lynch, talks about the outlook for Asian financial markets and his investment strategy. Tupper speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks (MXAP) pared gains as Italy and France prepared to sell debt and Moody’s Investors Service reiterated it plans to review the credit ratings of European nations even after an agreement to tighten fiscal controls in the region and boost a bailout fund.

The Hang Seng Index fell as much as 0.4 percent, reversing its advance of as much as 1.8 percent. Esprit Holdings Ltd. (330), the Hong Kong-based clothier that counts Europe as its biggest market, slipped 1.7 percent. Samsung Electronics Co. the world’s second-largest mobile-phone maker by sales, climbed 2.9 percent in Seoul after selling a record number handsets this year.

“The European situation will continue to bother us into next year as policy initiatives seem insufficient,” said Mark Matthews, Singapore-based head of research for Asia at Bank Julius Baer & Co., which has about $180 billion globally. “U.S. economic data is improving quite nicely and that’s one of the few bright spots in the world.”

The MSCI Asia Pacific Index gained 0.7 percent to 115.89 as of 5:05 p.m. in Tokyo, paring gains of as much as 1.4 percent. Almost two shares rose for each that fell in the measure. The gauge dropped 2.2 percent last week after Standard & Poor’s said it may cut credit ratings for Germany, France and 13 other euro- area countries amid a deepening debt crisis.

Japan’s Nikkei 225 Stock Average (NKY) increased 1.4 percent led by Olympus Corp. (7733), the endoscope maker at the center of an accounting scandal. Its shares jumped 7.8 percent after saying it will meet a Dec. 14 deadline to submit its accounts to avoid delisting.

South Korea’s Kospi Index gained 1.3 percent. Australia’s S&P/ASX 200 index added 1.2 percent. China’s Shanghai Composite Index declined 1 percent.

To contact the reporters on this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

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

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Toyota Threatened in U.S. by Camry Competition

By Alan Ohnsman - Dec 12, 2011 6:36 AM GMT+0700

Toyota Motor Corp. was already counting on the revamped Camry to spark a U.S. sales rally. The carmaker’s flagship model is now under additional pressure as a stronger currency and Thailand’s floods cut into profit.

The company reduced its earnings forecast last week by more than 50 percent for the year ending in March, blaming a slump in production after Thailand’s worst floods in almost 70 years. The 2012 Camry was released in October with a goal of boosting sales hurt by Japan’s earthquake and tsunami and retaining its title as the top-selling U.S. passenger car.

“There’s a lot of pressure on that car,” said Maryann Keller, an auto analyst and president at Maryann Keller & Associates. “It’s been reviewed as being competitive within the midsize sedan segment, but not that much better or worse than competitors. Right now, the perceived design leader is Hyundai’s Sonata, and Kia’s Optima is also doing well.”

While Toyota is set to lose its ranking as the world’s largest automaker this year to General Motors Co., the Toyota City, Japan-based company has said it’s determined to keep Camry the best-selling car in the U.S., a spot held for 13 of the past 14 years. Rebounding from parts shortages and assembly disruptions may prove easier than overcoming rivals.

“Camry bears the lion’s share of whether they succeed in recovering both market share and profitability” in the U.S., said Larry Dominique, executive vice president of TrueCar.com and former head of Nissan Motor Co.’s North American product planning. “The reality is the best way to gain market share and profitability is new product, and Camry is their biggest.”

‘Pricing Power’

The success of Hyundai Motor Co.’s Sonata and Kia Motors Corp. (000270)’s Optima as well as Ford Motor Co. (F)’s Fusion, means Toyota no longer has the ability to price Camry above segment competitors, Keller said.

“The problem isn’t so much how many units of Camry they sell, but the margin of each vehicle,” she said. “They don’t have the kind of pricing power they once enjoyed.”

U.S. drivers bought 23,440 Camrys in November, 15,668 Sonatas and 9,533 Optimas. While Camry remains the best-selling car in 2011, even after production delays helped cut sales 7.3 percent so far this year, Sonata volume is up 15 percent and Optima deliveries more than tripled from last year.

Toyota doesn’t disclose its profit for the Camry. Neither Keller nor Efraim Levy, a New York-based equity analyst for S&P Capital IQ, who rates Toyota’s American depositary receipts “hold,” had estimates for how much Toyota earns from the car.

Camry’s Importance

“The success of the Camry is very important to Toyota,” Levy said. “It’s similar to Ford’s F-150 pickup, since in each case it’s the single biggest source of sales volume.”

Toyota has set a goal of selling at least 360,000 Camrys in the U.S. in 2012. The company has sold 275,004 in the first 11 months of 2011, leading Nissan’s Altima’s 243,005, which has surpassed Honda Motor Co.’s Accord, at 217,958, for the No. 2 selling car.

The best-selling midsize sedans of U.S. automakers are Ford’s Fusion at 226,445 and GM’s Chevrolet Chevrolet Malibu at 191,774. GM’s top-selling car is the Cruze compact at 215,057.

“We have been increasing the volume of shipments to our dealers since we began production in September,” Steve Curtis, a spokesman for the company’s U.S. sales unit. “We’ll get as many to customers as possible.”

Camrys for sale in North America are built at Toyota’s plant in Georgetown, Kentucky, and under contract at affiliate Fuji Heavy Industries Ltd.’s Subaru plant in Lafayette, Indiana.

After a quake- and tsunami-related production slowdown in North America that lasted more than five months, Toyota has said it’s now working to build up inventory of Camry and other models as quickly as possible.

‘Full Production’

“We are running full production on Camry lines as we continue to replenish inventory and meet market demand,” said Mike Goss, a spokesman for the company’s manufacturing unit, without elaborating.

Toyota’s best year for Camry was 473,108 sold in 2007. Between its Kentucky plant and the Subaru factory, the company has said it can produce about 500,000 of the cars.

The automaker estimates that more than 6.8 million Camry models are on the road in the U.S., the largest owner base of any midsize sedan.

Toyota touts the latest version of Camry as more fuel- efficient than the previous version, with a better ride and handling. The car has added safety features and last week received a top score in federal crash tests.

The new Camry’s exterior has squared off corners compared with the earlier version’s rounder edges. The redesigned model has a roomier rear seat and bigger trunk.

‘Extra Scrutiny’

It’s essential for the new car to be seen by consumers as safe and high-quality, following the company’s recalls of Camry and other models for flaws linked to unintended acceleration, said Eric Noble, president of the CarLab, an industry consultant in Orange, California.

“This model will receive extra scrutiny,” Noble said. “To much of America, Toyota is the Camry. What Toyota needs is at least an acceptable launch out of this car as a signal to the North American public that ‘hey, we’re all right again.’”

Since sales began in October, most buyers of the new model are previous owners of Camrys and other Toyota models, Jim Lentz, president of Toyota’s U.S. sales unit, said in an interview last month.

Sales of Camry should rebound to about 30,000 units a month “sometime in February or March,” Lentz said. The car typically sold at that level or higher before the recalls and this year’s production slowdown.

Camry Improvements

Camry sales were shrinking prior to this year’s natural disasters as Hyundai (005380), Kia, Ford and GM raised competition with features matching or topping those of Camry. The latest Camry has an enlarged cabin and moves ahead of Accord, Sonata, Optima, Altima, Fusion and the Chevy Malibu with the highest fuel- economy rating among four-cylinder midsize sedans, at 25 miles per gallon of gasoline in city driving, 35 mpg highway.

The 2012 Camry Hybrid, whose 41 mpg average tops Hyundai’s Sonata Hybrid at 37 mpg and the Fusion Hybrid at 39, is the highest among all midsize sedans, according to U.S. Environmental Protection Agency data.

The price of a base model 4-cylinder engine 2012 Camry LE with an automatic transmission was trimmed about $200 to $22,500. That compares with $23,095 for a Sonata GLS model and $21,750 for an Optima LX.

Component shortages caused by Thailand’s floods disrupted production for Japanese automakers worldwide, compounding the challenge from the record quake and the yen’s surge. Toyota said the Thai floods will cut earnings by 120 billion yen ($1.55 billion).

Profit Forecast

Toyota’s net income will fall 56 percent to 180 billion yen in the 12 months ending March 31, the carmaker said in a statement. That’s less than half the profit projected by the average of 21 analyst estimates compiled by Bloomberg.

Disruptions from the Thai floods will probably result in 260,000 vehicles in lost production, or 3.4 percent of the previous annual target, according to Toyota.

Toyota probably lost more output than any other carmaker because of the floods, said Masatoshi Nishimoto, a Tokyo-based senior manager at research firm IHS Automotive.

Toyota also revised its outlook for the yen against the dollar to 78 from 80, and to 109 from 116 versus the euro, meaning the company expects the stronger domestic currency to reduce operating income by 160 billion yen, it said. The yen, the best-performing major currency this year, forced the company to raise prices, Toyota said.

Toyota delayed the new projections by a month because of the floods. Honda, which also pushed back its forecasts because of Thailand, plans to disclose them by the end of January, Chief Financial Officer Fumihiko Ike said last week.

To contact the reporters on this story: Alan Ohnsman in Las Vegas at aohnsman@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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Obama Winning Climate Debate on China Move

By Kim Chipman and Alex Morales - Dec 12, 2011 7:01 AM GMT+0700

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Dec. 12 (Bloomberg) -- David McCauley, Philippines-based lead climate change specialist at the Asian Development Bank, talks about the agreement reached at the United Nations climate conference in Durban, South Africa. Developing nations led by China and India pledged they’d work toward an agreement that would limit their fossil fuel emissions for the first time, the biggest advance in the fight against global warming in 14 years. McCauley speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

The U.S., long accused of blocking progress in international climate talks, is winning a two-decade old debate about how to curtail global warming.

The decision yesterday by China and India to move toward an agreement with the “legal force” to limit their fossil fuel emissions marked the first step toward treating developing nations the same as industrial ones when it comes to reducing pollution.

President Barack Obama, and George W. Bush before him, had pushed for that parity after the Senate refused to ratify the Kyoto Protocol, which limits greenhouse gases for industrial nations. Developing nations such as China and India had no commitments under Kyoto.

“The U.S. saw an opportunity to push China into accepting the same rules as everyone else and took it,” said Andrew Light, coordinator of climate policy at the Center for American Progress, a research group in Washington with White House ties.

Obama’s envoy approved the accord yesterday at United Nations climate talks in Durban, South Africa. Bringing developing countries into the system is important because Kyoto regulates only a third of greenhouse gas emissions, and China and India have become two of the world’s three biggest polluters since the pact was agreed in 1997.

“The Durban climate talks have brought us to an important moment where all nations will be covered in the same roadmap toward a long-term solution for the climate crisis -- the greatest challenge facing our planet,” House Democratic leader Nancy Pelosi said in a statement.

Rich and Poor

The division between rich and developing economies has been enshrined in the UN talks since 1992, allowing the poorest nations to escape commitments on burning coal and oil while requiring industrial nations to clean up the atmosphere. That split prompted the Senate in 1997 to pass a resolution saying it wouldn’t adopt Kyoto. No president ever made a formal proposal to bring the treaty into force in the U.S.

“You can run around and pretend that behind this firewall you are going to take 30 or 35 percent of global emissions and fix the problem. But you know what? You’re not,” Todd Stern, the U.S. envoy in Durban, said Dec. 8. “What the U.S. has been doing over the last two years has been showing the leadership necessary to try to drag this process into the 21st century.”

State Department officials initially rejected the European Union’s push to start talks for a climate treaty to replace Kyoto, whose emissions limits expire at the end of 2012. Stern said last week he was skeptical China and India would participate on the same level as industrialized nations. He moved when developing nations gave assurances they would agree to the same sort of language industrial nations adhere to.

Voluntary vs. Mandatory

The agreement in Durban is a victory for the U.S. because it strengthens Obama’s effort to steer the climate talks toward voluntary pledges on emissions instead of a top-down system of targets written into the Kyoto Protocol, said Robert Stavins, director of Harvard University’s Environmental Economics Program in Cambridge, Massachusetts.

Kyoto sets a goal meant to spur emission-reducing policies and provides an international system of mechanisms such as the global carbon market to help nations comply. U.S. has pushed a “bottom-up” approach of allowing each nation to fix its own policy and from there determining how much emissions will fall. Stern won support from India and China for voluntary pledges in Copenhagen in 2009 and last year in Cancun, Mexico.

‘International Framework’

“In the Copenhagen Accord, more than 90 countries signed up to do something domestically, so now we are working with this international framework while countries are starting to do things on the ground,” European Union Climate Commissioner Connie Hedegaard said in an interview yesterday in Durban after the negotiations ended. “It’s moving, too slow, but it’s moving.”

Stavins from Harvard said the vague legal language coming from Durban helps validate the “wisdom of giving more attention to bottom-up, decentralized approaches.”

For companies looking for guidance on how regulations will shape energy demand, the Durban framework may provide less certainty because it leaves the policy decisions to individual nations, and there’s nothing to drive policy immediately. Envoys at the talks agreed to develop a process leading to a treaty in 2015 that would come into force starting in 2020.

Renewable-energy investment rose to a record $243 billion last year as solar and wind energy subsidies increased orders at such companies as LDK Solar Co. and Vestas Wind Systems A/S., though both companies have said increasing competition will shrink margins in the coming months.

‘Legally-Binding Agreement’

“We want a legally-binding agreement that sets long-term targets,” Jeff Moe, director of global policy at Ingersoll-Rand Plc (IR), which sells heating and ventilation equipment, said in an interview in Durban. “We want to see an enabling policy that goes global.”

By signaling their willingness to take on emissions cuts later, China and India won backing to extend Kyoto’s curbs past 2012. That supports the Clean Development Mechanism, a pillar of the global carbon market established by the treaty. Prices of CDM certificates have fallen 54 percent in the past year as the weaker economy cut demand for the offsets and concern mounted about the continuation of the program.

The Durban deal “is like a Viagra shot for the flailing carbon markets” and may boost prices today, said Abyd Karmali, head of carbon markets at Bank of America in London.

Still, the Durban agreement is a fragile compromise that almost came apart just as ministers were adopting it. Just after 1 a.m. yesterday, India fought to include language calling for a “legal outcome,” a phrase rejected by the EU as too soft.

Compromise Language

A couple hours later, with help from Brazil and the U.S., the EU and India agreed on compromise language that says “agreed outcome with legal force.” The government in Delhi has indicated it’s more comfortable with the voluntary framework than a legally-binding requirement.

“We aren’t talking about lifestyle sustainability that many of the children of more fortunate countries than ours have, we are talking about livelihood sustainability,” India’s Environment Minister Jayanthi Natarajan said in a speech to at the meeting in Durban, winning thunderous applause. “How do a give a blank check and give a legally binding agreement to sign away the rights of 1.2 billion people and many other people in the developing world? Is that equity?”

China spoke in Durban about taking on mandatory targets only after 2020 and only if certain conditions are met. It has been more willing to take on voluntary measures and supported both the Cancun and Copenhagen accords.

‘New Arrangement’

“This is a new arrangement, and we all support the serious decisions made at this conference which demonstrated that a multinational mechanism is functioning to address climate change,” Chinese envoy Xie Zhenhua told reporters yesterday after the talks finished.

Among people involved in the talks, there’s a concern that neither Durban nor the Kyoto rules seem to be having much effect on global warming, said Elliot Diringer of the Center for Climate and Energy Solutions in Arlington, Virginia.

“We all believed 15 years ago that binding commitments were the answer,” he said. “They are an important piece of the answer, but it’s going to take time to get there. We keep waiting for the magic moment. There are no magic moments.”

To contact the reporters on this story: Kim Chipman in Durban, South Africa at kchipman@bloomberg.net; Alex Morales in Durban, South Africa at amorales2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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China May Add Stimulus as Exports Weaken

By Bloomberg News - Dec 12, 2011 1:52 PM GMT+0700
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Containers at the Yangshan Deep Water Port in Shanghai. Photographer: Qilai Shen/Bloomberg

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Dec. 12 (Bloomberg) -- Zhang Zhiwei, chief China economist at Nomura Holdings Inc., talks about the outlook for China's economic growth and central bank monetary policy. China’s economic expansion could decline to 7.5 percent in the three months through March from 9.1 percent in this year’s third quarter, as export growth slows and the government’s campaign to curb property prices damps investment, according to Nomura. Zhang speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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Dec. 12 (Bloomberg) -- Ronald Wan, a Hong Kong-based managing director at China Merchants Securities Co., talks about the outlook for China's monetary and currency policy, and the nation's economy. China’s shrinking trade surplus and the weakest export growth since 2009 may encourage Premier Wen Jiabao to keep cutting banks’ reserve requirements to sustain expansion in the world’s second-biggest economy. Wan speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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Dec. 12 (Bloomberg) -- Nicholas Kwan, Hong Kong-based head of East Asia research at Standard Chartered Plc, talks about China's economy and central bank monetary policy. He speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Chinese Premier Wen Jiabao and officials meeting to map out economic policies for 2012 may be encouraged to add more stimulus as a shrinking trade surplus shows Europe’s debt crisis hitting exports.

Overseas shipments rose 13.8 percent in November from a year earlier, the weakest growth since 2009, according to customs data released Dec. 10 in Beijing. The excess of exports over imports fell by 35 percent.

The decline in the surplus and signs that capital has started to flow out of the country may prompt the government to keep cutting banks’ reserve requirements to sustain growth. Sliding exports to Germany and Italy weighed on gains in shipments to emerging nations, and President Hu Jintao yesterday marked 10 years in the World Trade Organization by warning that the global economy faces “severe” challenges.

“China’s capital outflows will continue and the trade surplus may shrink further, forcing the central bank to cut reserve ratios” and use bill sales to inject liquidity and bolster growth, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “It’s very likely China will see a trade deficit in the next quarter,” said Shen, who previously worked at the International Monetary Fund and the European Central Bank.

Shares Drop

Stocks in China fell for a third day on concern a slowdown in growth is deepening and after the government said it will maintain property curbs next year. The benchmark Shanghai Composite Index (SHCOMP) dropped 0.5 percent to 2,304.80 at the 11:30 a.m. local-time break, set for the lowest close since March 2009.

The yuan was trading 0.08 percent higher at 6.3594 per dollar at 12:07 p.m. in Shanghai after the central bank set the strongest reference rate in a month. Investors have pared expectations for gains in the currency, with 12-month non- deliverable forwards dropping 0.5 percent last week.

Last month’s rise in overseas shipments compared with the 10.9 percent median estimate in a Bloomberg News survey and a 15.9 percent increase in October. Excluding distortions in January and February each year, the advance was the smallest since export growth resumed in December 2009. The expansion in imports slowed to 22.1 percent and the trade surplus narrowed more than estimated to $14.5 billion.

Europe Slows

Shipments to the European Union, China’s biggest market, rose 5 percent from a year earlier, a quarter of the pace reported in July and August. Sales to Germany, Europe’s biggest economy, fell 1.6 percent and those to Italy dropped for a third month. In contrast, exports to Malaysia rose 34.9 percent and those to Brazil gained 26.4 percent.

China Cosco Holdings Co. (601919), the nation’s largest operator of dry-bulk and container vessels, warned on Oct. 27 it will report a full-year loss as rates for carrying commodities and containers have plunged.

China’s economic expansion could decline to 7.5 percent in the three months through March from 9.1 percent in this year’s third quarter, as export growth slows and the government’s campaign to curb property prices damps investment, according to Nomura Holdings Inc. The country may post a $28.8 billion trade deficit next quarter, according to Zhang Zhiwei, the bank’s chief China economist in Hong Kong. That would be a record quarterly shortfall, according to data compiled by Bloomberg that goes back to January 1994.

Adding Liquidity

The central bank announced the first cut in lenders’ reserve requirements since 2008 on Nov. 30. Zhang estimates the ratio, now 21 percent of deposits for the biggest banks, will be lowered by 150 basis points in the first half of next year. Standard Chartered Plc last week raised its projection for the number of cuts by the end of 2012 to six from four, with the first coming by the end of this year, providing an extra 2.4 trillion yuan ($378 billion) of liquidity for banks.

Foreign-exchange reserves dropped in September for the first time in 16 months and continued to decline through early this month, Li Yang, a former central bank adviser, said Dec. 7, without specifying the source of his information.

A People’s Bank of China report last month showed financial institutions’ purchases of foreign exchange dropped in October, the first decline since December 2007, according to China International Capital Corp. Analysts watch the number for signs of so-called hot money flows.

Policy Fine Tuning

Purchases may remain low or even turn negative next year, reflecting further declines in the trade surplus, a slowdown in property investment and a worsening euro-area economy, Peng Wensheng, a Hong Kong-based economist with CICC, said in a Dec. 8 note.

Countries should strengthen monitoring of systemic risks, central bank Governor Zhou Xiaochuan said at a conference in Shanghai last week, according to a copy of his speech posted on the PBOC’s website yesterday.

The Communist Party’s Politburo, the 25-member body that oversees policy-making, said Dec. 9 it will “fine tune” economic policies next year “as conditions change,” and will make them more “targeted, flexible and forward-looking.” The nation will maintain a “prudent” monetary policy and a “proactive” fiscal policy, it said after a meeting chaired by President Hu Jintao, the official Xinhua News Agency reported.

Inflation Cools

The announcement preceded the annual economic work conference that maps out plans for development next year. It started today, the official Xinhua News Agency reported.

“The government is leaving its boilerplate language on policy unchanged,” London-based Capital Economics Ltd. said in a note. “In practice, easing has begun.”

Inflation cooled to 4.2 percent last month from a year earlier and industrial output growth weakened, according to statistics bureau data released Dec. 9, giving the government more room to loosen policies.

China’s trade surplus, a source of friction with nations including the U.S., has fallen from a peak of almost $300 billion in 2008. The commerce ministry said last month that it may be as small as $150 billion this year.

In a speech yesterday, President Hu pledged to “actively” expand imports to resolve imbalances with nations that have “substantial” deficits with China.

The excess may disappear within two years as domestic demand rises, making the yuan’s value less of an issue with trading partners, Li Daokui, an academic adviser to the central bank, said last month. The currency may even face depreciation pressure, he said in an interview.

--Li Yanping. With assistance from Victoria Ruan in Beijing. Editors: Nerys Avery, Steve Bailey

To contact Bloomberg News staff for this story: Li Yanping in Beijing at yli16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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No One Says Who Took $586B in Fed Swaps

By Scott Lanman and Bradley Keoun - Dec 12, 2011 6:01 AM GMT+0700

For all the transparency forced on the Federal Reserve by Congress and the courts, one of the central bank’s emergency-lending programs remains so secretive that names of borrowers may be hidden from the Fed itself.

As part of a currency-swap plan active from 2007 to 2010 and revived to fight the European debt crisis, the Fed lends dollars to other central banks, which auction them to local commercial banks. Lending peaked at $586 billion in December 2008. While the transactions with other central banks are all disclosed, the Fed doesn’t track where the dollars ultimately end up, and European officials don’t share borrowers’ identities outside the continent.

The lack of openness may leave the U.S. government and public in the dark on the beneficiaries and potential risks from one of the Fed’s largest crisis-loan programs. The European Central Bank’s three-month dollar lending through the swap lines surged last week to $50.7 billion from $400 million after the Nov. 30 announcement that the Fed, in concert with the ECB and four other central banks, lowered the interest rate by a half percentage point.

“Increased transparency is warranted here,” given the size of the Fed’s aid and current pressures on European banks, said Representative Randy Neugebauer, a Texas Republican who heads the House Financial Services Subcommittee on Oversight and Investigations.

Whether the U.S. should make disclosure of the recipients a condition of the swap lines is “probably a discussion we need to have,” possibly in a hearing that includes Fed Chairman Ben S. Bernanke, Neugebauer said.

Unprecedented Transparency

The secrecy surrounding foreign central banks’ emergency lending contrasts with unprecedented transparency at the Fed, which was compelled by the 2010 Dodd-Frank Act and court-upheld Freedom of Information Act requests to release details on more than a dozen programs used to combat the U.S. financial crisis from 2007 through 2010. Bernanke this year began holding regular press conferences and has said he is considering ways to make the Fed’s objectives more clear to the public.

Michelle Smith, a Fed spokeswoman, said there is “no formal reporting channel” for the identities of borrowers from other central banks, which are the Fed’s only counterparties on the swap lines and assume any credit risk.

“U.S. taxpayers have never lost a penny” on the program, she said. “Decisions about disclosure by foreign central banks of their financial arrangements with financial institutions in their jurisdictions is an issue for the foreign central banks.”

Turmoil Overseas

Americans may have to accept nondisclosure as a condition of protecting the U.S. economy from turmoil overseas, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

“As much as we might like to say they should have at least as much transparency as the Fed, I don’t know if we want to say, ‘Well, if you don’t, you’re not going to get the money,’” Baker said. U.S. policy makers should encourage international standards for disclosure through talks at forums such as meetings of the Group of 20 nations, he added.

The swaps are separate from Fed emergency loans to banks and other businesses that peaked at $1.2 trillion in December 2008, including about $538 billion that European financial companies borrowed directly, according to a Bloomberg News examination of available data.

The Fed last week released a letter from Bernanke and a staff memo criticizing recent news articles for portraying its crisis-lending efforts as secret, saying that it made aggregate amounts of the loans public. Bloomberg, which published a Nov. 28 article on the topic, said in a point-by-point response that it considered the data secret because the terms of the loans and names of borrowers were withheld. The Fed had resisted disclosing them for more than two years.

Century-Old Program

The Dodd-Frank Act overhauling U.S. financial law included legislation proposed by Senator Bernard Sanders, a Vermont independent, that required the Fed in December 2010 to disclose recipients of aid it provided during the crisis, except for banks that used the liquidity-swap lines or the discount window -- a century-old emergency-lending program. Under Dodd-Frank, new Fed borrowers from the discount window are subject to identification with a two-year delay.

Bloomberg LP and News Corp.’s Fox News Network LLC won a court case forcing the Fed last March to name the crisis discount-window borrowers. There hasn’t been any case or law requiring disclosure of banks that borrowed via the swap lines.

“That is certainly a legitimate piece of information for the American people,” and “we’re going to be vigilant in increasing transparency,” said Warren Gunnels, Sanders’ senior policy adviser.

Borrowing Dollars

Foreign central banks borrowed dollars from the Fed for terms as long as three months in return for euros, pounds and yen. The ECB accounted for 80 percent of total swap-line loans during the mortgage-induced financial crisis, according to the U.S. Government Accountability Office, the congressional auditor. The ECB won’t publicly disclose names of borrowers under any circumstances and doesn’t share the identities outside the 17 euro-area central banks, a spokesman wrote in an e-mail.

“These banks have a right to enjoy the standard confidentiality attached to banking transactions,” the spokesman wrote.

European officials may be concerned that future lending might be inhibited by a “stigma phenomenon” if past borrowers are made public, said Ralph Bryant, former director of the Fed’s international-finance division and now a senior fellow at the Brookings Institution in Washington. The concept is “usually overplayed by people, but it’s not something that’s trivial.”

‘Matter of Principle’

The Bank of Japan, which tapped 3.9 percent of the aggregate swap dollars according to the GAO, has no plans to publicize borrowers’ identities and declined to comment on whether it shares the names with the Fed, a spokesman said. The Swiss National Bank, which accounted for 4.6 percent, “as a matter of principle” doesn’t publish counterparties, said Walter Meier, a spokesman.

The Bank of England doesn’t publish details of individual financial institutions’ use of its facilities. Confidence in banks “can best be sustained” if support is disclosed “only when conditions giving rise to potentially systemic disturbance have improved,” it said in its annual report.

Fed policy makers let the program expire in February 2010 then revived it after three months to try to contain Europe’s debt crisis. Nineteen months later, European officials still struggle to contain the market turmoil, which has spread to sovereign bonds in France and Italy as investors increasingly question governments’ ability to repay debt.

Expanding Crisis

The expanding crisis spurred the Fed and other central banks in November to extend the program by six months to Feb. 1, 2013, and lower borrowing costs by half a percentage point to make them more attractive. Last week, European leaders agreed to make loans of as much as 200 billion euros ($267.7 billion) to the International Monetary Fund and tightened rules to curb future debts.

The Fed swap program had a combined balance of $2.3 billion in loans outstanding as of Dec. 7 for all five participating central banks. That doesn’t account for the ECB’s latest dollar auction because the loans hadn’t settled yet.

The GAO, which released its emergency-lending report in July, wasn’t required to delve into the final destinations of the swap dollars, said Orice Williams Brown, the agency’s lead official on Fed audits. As a result of the study, the GAO learned that UBS AG (UBSN)’s October 2008 bailout from the Swiss government included an “atypical use” of swap-line dollars “generally not exceeding about $13 billion,” the report said.

Didn’t Know

Bernanke didn’t know which financial institutions got dollar loans, he said during a July 2009 House Financial Services Committee hearing.

Not having the identities would restrict the Fed’s ability to understand the “overall risk exposure of the institutions it’s supervising,” said Robert Eisenbeis, a former research director at the Federal Reserve Bank of Atlanta who’s now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.

The Fed may not need all the details, said Al Broaddus, former president of the Federal Reserve Bank of Richmond. The ECB and other central banks “are obliged to pay the Fed back. They’re the ones that are taking the credit risk with the institutions that are actually being lent to.”

In 2008, the dollar-based money markets that many foreign banks used to finance their holdings of U.S. mortgage-backed securities froze, forcing them to turn to the Fed to fill the funding gap. Much of the borrowing was done through U.S. branches that are legally eligible to draw emergency loans from the Fed’s lender-of-last-resort programs, according to the Bloomberg examination.

Biggest Foreign Borrower

The U.K.’s Royal Bank of Scotland Group Plc (RBS) was the biggest foreign borrower, drawing $84.5 billion in October 2008. UBS, based in Zurich, got $77.2 billion, while Frankfurt-based Deutsche Bank AG (DBK) took $66 billion and London-based Barclays Plc (BARC) borrowed $64.9 billion, according to the Bloomberg data.

One of the borrowers, Dexia SA (DEXB), is being broken up after running out of short-term funding. The French-Belgian lender had 120.6 billion euros of central-bank liabilities on Dec. 31, 2008, according to a company report; $58.5 billion came directly from the Fed, the Bloomberg examination showed.

Fed officials, including Governor Daniel Tarullo, have emphasized the need for improved monitoring and control of risks throughout the banking system, as well as global coordination among financial-policy makers. Regulators “must not lose sight of the importance of supervisory cooperation in pursuit of the shared goal of a stable international financial system,” he said in a Nov. 4 speech.

Full Disclosure

Ohio Senator Sherrod Brown, a Democrat who heads the Banking Subcommittee on Financial Institutions and Consumer Protection, said he isn’t sure swap-line borrowers should be made public. Still, the Fed “should follow the money in terms of disclosure, period,” he said. “Full disclosure from start to finish is the goal.”

Massachusetts Representative Barney Frank, the senior Democrat on the House Financial Services Committee, said he saw no need for the disclosure because the Fed has no role in approving the ultimate borrowers.

“What the Fed is doing with regard to the ECB is very important for the American economy,” Frank said. “Our interest is to make sure we get paid back. I think the ECB is a pretty good debtor and a pretty reliable one.”

‘Fundamental Problem’

Joseph Stiglitz, a Nobel Prize-winning economist who led President Bill Clinton’s Council of Economic Advisers, said the “fundamental problem” is that capital markets need information to work properly, yet the Fed is saying, “we believe in capital-market discipline without information.”

“It would be very useful to see” those names, said Stiglitz, a professor at Columbia University in New York. With the dollar auctions of foreign central banks shielded from disclosure, “what we have now is a very partial picture.”

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; David Scheer at dscheer@bloomberg.net

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