HP’s Board Is Said to Weigh Ousting Apotheker After Less Than Year as CEO

By Aaron Ricadela, Carol Hymowitz and Jeffrey McCracken - Sep 22, 2011 3:05 AM GMT+0700
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Pressure on Leo Apotheker intensified last month after he announced a sweeping overhaul that included a $10.3 billion acquisition of Autonomy Corp. and a possible spinoff of Hewlett-Packard’s personal computer division. Photographer: Gaby Gerster/laif/Redux

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Sept. 21 (Bloomberg) -- Hewlett-Packard Co.’s board plans to meet to consider whether to oust Leo Apotheker as chief executive officer after less than 11 months on the job, two people familiar with the matter said. Under a scenario being considered, Hewlett-Packard’s directors may appoint former EBay Inc. CEO Meg Whitman as his successor, possibly on an interim basis, said one of the people. Jon Erlichman reports on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

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Sept. 21 (Bloomberg) -- David Garrity, principal at GVA Research LLC, talks about challenges facing Hewlett-Packard Co. and potential replacements for Chief Executive Officer Leo Apotheker. Hewlett-Packard, facing investor frustration over sales-forecast cuts and jarring strategy shifts, is considering replacing Apotheker, two people familiar with the matter said. Garrity speaks with Carol Massar and Cory Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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Sept. 21 (Bloomberg) -- Jerome Dodson, chief executive officer of Parnassus Investments, and Jayson Noland, an analyst at Robert W. Baird & Co., talk about management turmoil at Hewlett-Packard Co., the performance of Chief Executive Officer Leo Apotheker and potential candidates to run the company. Hewlett-Packard, facing investor frustration over sales-forecast cuts and jarring strategy shifts, is considering repalcing Apotheker, two people familiar with the matter said. Dodson and Noland speak with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Hewlett-Packard Co. (HPQ), facing investor frustration over sales-forecast cuts and jarring strategy shifts, is considering replacing Chief Executive Officer Leo Apotheker, two people familiar with the matter said.

The board may appoint Hewlett-Packard director and former EBay Inc. (EBAY) CEO Meg Whitman as Apotheker’s successor, possibly on an interim basis, said one of the people, who asked not to be named because the plans aren’t public. The board also is reconsidering a proposal to spin off the company’s personal- computer unit, another person said.

Hewlett-Packard has lowered its sales forecasts three times since Apotheker became CEO in November, and he’s presided over strategy swings that left shareholders doubting his credibility. Before today, the company’s stock has plunged 47 percent on his watch, and “investor exasperation” with management is at its highest in more than a decade, according to Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co.

“There’s certainly a lot of investor discontent with them,” said Amit Daryanani, an analyst at RBC Capital Markets in San Francisco, who rates the shares “sector perform” and doesn’t own them. “There’s widespread frustration with the fact that numbers have been cut three times since he’s been there.”

Hewlett-Packard rose $1.51, or 6.7 percent, to $23.98 today on the New York Stock Exchange after Bloomberg reported the possible management change.

Revisiting the Spinoff

Hewlett-Packard’s board, due to meet this week, is open to re-examining the spinoff proposal now because some directors think the idea wasn’t studied as thoroughly as other high- profile spinoffs, such as one by Kraft Foods Inc. (KFT), the person familiar with the matter said. At the same time, the turmoil raises the possibility that some or all of Hewlett-Packard may become a takeover candidate.

Mylene Mangalindan, a spokeswoman for Palo Alto, California-based Hewlett-Packard, declined to comment.

The possible spinoff would take as long as 18 months to complete, Hewlett-Packard said at the time. That elicited criticism that it should have had a buyer lined up or a more concrete plan in place before making the announcement.

Whitman, who joined Hewlett-Packard’s board in January after a failed bid to become California’s governor last year, had a mixed record at EBay. CEO for a decade, she took the company public and pioneered e-commerce for small businesses. Yet in the final years of her tenure, she couldn’t halt a slowdown in sales growth and overpaid for Skype Technologies SA after a bidding war with Google Inc. and Yahoo! Inc.

Not Long-Term?

Her lack of experience in computing for large companies may mean she doesn’t stay in the role for long, said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco.

“She’s on the board and is a logical interim CEO, but not a logical long-term CEO,” said Noland, who has a “neutral” rating on the stock. “She doesn’t have enterprise experience.”

Pressure on Apotheker intensified on Aug. 18, when he announced a sweeping overhaul that included a $10.3 billion acquisition of Autonomy Corp. and the possible PC spinoff. He also killed off the company’s WebOS tablets and smartphones, just five months after vowing to put the operating system on a full range of the company’s computers.

The shares plunged 20 percent following the announcement, fueled by concerns that Autonomy was too expensive and the plans showed a lack of deliberation. The stock slumped to the point that other breakup and takeover scenarios are possible, Hewlett- Packard investor Michael Mullaney said at the time.

‘Scoop It Up’

“For the right company, it probably would make sense for someone to come in and scoop it up,” Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston, said in August. “Someone could come and at least buy pieces of the firm.”

The server unit would boost Oracle Corp.’s share fivefold and help it become the biggest maker of the hardware. Hewlett- Packard’s printer business, which is 70 percent more profitable than the company as a whole, may also attract private-equity firms, Mullaney said.

While the PC spinoff would help Hewlett-Packard focus on higher-margin products, such as services and software, the way it was conveyed didn’t satisfy shareholders, Sacconaghi said. The Autonomy deal, meanwhile, hasn’t been popular, he said.

“Our conversations with investors continue to point to near universal opposition of the Autonomy acquisition, due to its high price,” he wrote in a Sept. 13 report.

Undoing Autonomy

By paying cash for Autonomy, Hewlett-Packard doesn’t need approval from its own shareholders to complete the deal, Sacconaghi said.

The company can’t undo the takeover unless Autonomy investors fail to approve it, according to a person with knowledge of the terms. That outcome is unlikely, given that 42 percent of Autonomy shares had already been tendered in favor of the sale as of Sept. 12, this person said.

Apotheker, the former CEO of German software maker SAP AG (SAP), has aimed to transform Hewlett-Packard into a provider of more profitable software and services for businesses that are doing more computing on remote servers, via the so-called cloud. Yet, results have been plagued by tepid demand for PCs, as consumers in growing numbers snapped up competing mobile devices and tablets, such as Apple Inc.’s iPad.

Short Stint

His tenure at Hewlett-Packard may barely outlast his 10- month stint as CEO of SAP. He resigned in February 2010 after an attempted price increase during the recession that rankled consumers and a clash with German unions on plans to cut jobs. He presided over the company’s first revenue decline since 2003 as customers delayed software purchases.

Apotheker joined Hewlett-Packard after Mark Hurd departed as CEO amid a scandal over a personal relationship with a company contractor. Hurd now is a co-president at Oracle.

Hewlett-Packard isn’t looking to completely change course, said Baird’s Noland. The company’s board and shareholders are mostly looking for a surer hand, he said.

“The board is directionally behind the plan Apotheker’s put in place,” Noland said. “It’s just the execution of that plan that has investors wound up.”

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Carol Hymowitz in New York at chymowitz@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net

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Stocks Drop as Treasuries, Dollar Gain on Fed ‘Twist’ to Sustain Recovery

By Michael P. Regan and Rita Nazareth - Sep 22, 2011 3:45 AM GMT+0700

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Sept. 21 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks slumped, giving the Standard & Poor’s 500 Index its biggest decline in a month, as the Federal Reserve announced plans to buy $400 billion of long-term debt and cited risks to the economic outlook. Bloomberg's Pimm Fox also speaks. (Source: Bloomberg)

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Sept. 21 (Bloomberg) -- Mark Burgess, chief investment officer at Threadneedle Investments, talks about the global economy, stocks, and investment strategy. Burgess speaks in Hong Kong with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Sept. 21 (Bloomberg) -- European Commission President Jose Barroso talked yesterday with Bloomberg's Sara Eisen in New York about Europe's debt crisis. Barroso said policy makers battling a European debt crisis shouldn’t rule out issuing joint euro-area bonds and must develop integration tools to make that possible, even if German opposition means it can’t be done immediately. (Excerpt. Source: Bloomberg)

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Traders work at the New York Stock Exchange (NYSE) in New York. Photographer: Scott Eells/Bloomberg

U.S. stocks slid, while Treasuries and the dollar rallied, after the Federal Reserve announced plans to buy $400 billion of long-term debt in an effort to combat “significant downside risks” to the economy.

The Standard & Poor’s 500 Index tumbled the most in a month, losing 2.9 percent to 1,166.76 at the 4 p.m. close in New York and extending a three-day drop to 4.1 percent. Ten-year Treasury yields dropped to a record low and 30-year bond rates slid to the lowest since January 2009, while two-year yields rose. The Dollar Index climbed 1 percent to a seven-month high of 77.802. Lead, nickel and sugar fell more than 3 percent to lead the S&P GSCI Index to a one-month low.

Financial shares in the S&P 500 led losses and sank to a two-year low after Moody’s Investors Service cut credit ratings on three banks and the Fed said “strains in global financial markets” were among risks to the economic outlook. The Fed will replace some shorter-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession, confirming market speculation that policy makers were planning an “Operation Twist” similar to a program in 1961.

“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “While Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.”

Fed’s Plan

The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less. The Fed’s plan to replace short-term Treasuries in its $1.65 trillion portfolio with long-term debt will probably fail to lower the 9.1 percent unemployment rate, according to 61 percent of economists surveyed by Bloomberg before the announcement. The Fed also said today it will reinvest maturing housing debt into mortgage-backed securities instead of Treasuries.

“The mortgage story is the most important part,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “This goes right to the source. This will create a wave of refinancings on the mortgage side.”

GOP Opposition

Republican lawmakers urged Chairman Ben S. Bernanke to refrain from additional monetary easing to avoid “further harm” to the U.S. economy, saying Americans have reason to be “skeptical” of his plans. Senator Charles Schumer, a Democrat from New York, in a statement yesterday said the move was “a heavy-handed attempt to meddle in the Fed’s independent stewardship of monetary policy” and should be ignored.

Ten-year Treasury yields sank as much as nine basis points to 1.8525 and 30-year rates slid 19 basis points, or 0.2 percentage point, to 3.01 percent. Two-year yields climbed four basis points to 0.20 percent.

All 10 of the main industry groups in the S&P 500 retreated at least 1.3 percent, led by a 4.9 percent plunge in financial shares. The Dow Jones Industrial Average sank 283.82 points, or 2.5 percent, to 11,124.84

“The markets apparently were hoping for a large, magic pill for an anemic economy that feels like it’s catching the flu,” Barton Biggs, managing partner and co-founder of hedge fund Traxis Partners LP in New York, said in an e-mail. The firm has $1.4 billion in assets.

Financials Plunge

The S&P 500 Financials Index (S5FINL) fell to the lowest level since July 2009. Bank of America Corp. tumbled 7.5 percent after Moody’s Investors Service downgraded the bank’s long-term debt rating. Wells Fargo & Co. also had its long-term rating cut, wiping out an earlier gain and dragging the stock down 3.9 percent. Citigroup Inc. (C) fell 5.2 percent as Moody’s cut its short-term debt rating. Goldman Sachs Group Inc. closed below $100 for the first time since March 2009.

Costs to protect debt from Bank of America, Citigroup and Wells Fargo rose after the downgrades by Moody’s, which said U.S. support is less likely in an emergency. Credit-default swaps tied to Bank of America added about 40 basis points from yesterday to 375 basis points as of 3:41 p.m. in New York, according to broker Phoenix Partners Group. Swaps on Wells Fargo jumped to the highest since July 2009, climbing 17 basis points to 143 basis points, Phoenix prices show. Contracts on Citigroup rose 19 to 250, according to data provider CMA.

Coal and Train Stocks

Commodity producers in the S&P 500 sank 4.5 percent as a group for the second-biggest slide after financial shares. Alpha Natural Resources Inc. and Walter Energy Inc., two U.S. producers of coal used in steelmaking, tumbled at least 12 percent after they cut output and sales forecasts respectively. Railroad companies slumped following the forecasts, with CSX Corp. and Norfolk Southern Corp. sliding more than 8 percent.

Technology stocks fell the least among 10 groups. Oracle Corp. (ORCL) climbed 4.2 percent after the software maker reported profit that topped analysts’ estimates following increased spending on database programs and applications that help run businesses. Hewlett-Packard Co. (HPQ) rallied 6.7 percent after two people familiar with the matter said the company’s board plans to consider ousting Leo Apotheker as chief executive officer.

U.S. equities briefly turned higher this morning after sales of existing homes increased more than forecast. Purchases of existing houses, which are tabulated when a contract closes, increased 7.7 percent to a five-month high 5.03 million annual rate, figures from the National Association of Realtors showed. The median forecast of economists surveyed by Bloomberg News called for a 4.75 million rate.

European Stocks

The Stoxx Europe 600 Index lost 1.7 percent with about three shares declining for each that gained in the regional benchmark. Automakers and basic-resource companies were the biggest drag on the index, as PSA Peugeot Citroen and Daimler AG lost more than 3.7 percent. Deutsche Lufthansa AG sank 5 percent as Europe’s second-largest airline said it expects fuel expenses to climb and Deutsche Bank AG downgraded the shares.

European banks slipped 1.6 percent as a group. The government debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for the region’s banks, the International Monetary Fund said, calling for capital injections. Banks face “funding challenges” because of investor concern about their potential losses from government bonds, with some relying heavily on the European Central Bank for liquidity, it said.

Debt Risk Increasing

The European Systemic Risk Board, Europe’s risk watchdog, said threats to the financial system have increased “considerably” as the region’s sovereign debt crisis weakens economic growth and pressures banks. Intesa Sanpaolo SpA, Mediobanca SpA and two other Italian banks had their credit ratings lowered by S&P after the company downgraded Italy’s government debt on Sept. 19 for the first time in five years.

Greek 10-year bond yields surged 31 basis points to 23.55 percent and Italian and Spanish yields also increased. International inspectors will return to Athens next week to discuss Greece’s prospects for more financial aid after Greek Finance Minister Evangelos Venizelos made “good progress” in talks about with the European Union and the IMF yesterday, according to the EU. Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default.

Pound Weakens

The pound weakened 1.5 percent to $1.5505 and the U.K.’s FTSE-100 Index of stocks lost 1.4 percent after Bank of England officials said they may need to buy more bonds to bolster to boost the U.K. economy. Most policy makers said it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the minutes of the Monetary Policy Committee’s Sept. 7-8 meeting showed.

The MSCI Emerging Markets Index fell 1.2 percent to the lowest closing level since July 2010. Russia’s Micex Index retreated 0.8 percent and the ruble declined for a ninth day against the central bank’s target dollar-euro basket, headed for its longest stretch of declines since February 2009. The Shanghai Composite Index jumped 2.7 percent after the Conference Board said its leading indicator index rose in July.

Oil lost 1.2 percent to $85.92 a barrel, erasing earlier gains which were triggered by a U.S. Department of Energy report that crude inventories fell by 7.34 million barrels to an eight- month low of 339 million last week. Among 24 commodities tracked by the S&P GSCI Index, only lean hogs advanced.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

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

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Fed Will Shift Holdings to Longer-Term Securities

By Scott Lanman - Sep 22, 2011 6:17 AM GMT+0700

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Chairman Ben S. Bernanke expanded use of unconventional monetary tools for a second straight meeting after job gains stalled and the government lowered its estimate of second-quarter growth. Photographer: Brendan Smialowski/Bloomberg

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Sept. 21 (Bloomberg) -- Federal Reserve policy makers will replace some bonds in their portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession. The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. Megan Hughes and Michael McKee report on Bloomberg Television's "Fast Forward." (Source: Bloomberg)

The Federal Reserve will replace $400 billion of short-term debt in its portfolio with longer- term Treasuries in an effort to further reduce borrowing costs and counter rising risks of a recession.

The central bank will buy bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.

Chairman Ben S. Bernanke expanded use of unconventional monetary tools for a second straight meeting after job gains stalled and the government lowered its estimate of second- quarter growth. Yields on 30-year Treasuries fell below 3 percent for the first time since 2009 and U.S. stocks had their biggest drop in a month on the Fed’s plan, dubbed “Operation Twist” after a similar Fed action in 1961.

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said. By contrast, the August statement said only that downside risks had increased and omitted any mention of financial markets.

Today’s action may boost growth by 0.2 percentage point to 0.4 percentage point during the next year, said Keith Hembre, a former researcher at the Minneapolis Fed. Central bankers might have passed on a third round of asset purchases because inflation is higher than it was when they began the second round of so-called quantitative easing in November, he said.

‘Fairly Constrained’

“The Fed, I think, is fairly constrained right now,” said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $210 billion. “The Fed can either do nothing, or it can do something like this.”

The Fed left unchanged its pledge to keep the benchmark interest rate near zero through at least mid-2013 as long as unemployment remains high and the inflation outlook stays “subdued.” The central bank has kept the target federal funds rate for overnight interbank loans in a range of zero to 0.25 percent since December 2008.

Policy makers amended the interest-rate pledge at their Aug. 9 meeting to substitute mid-2013 for the less-specific “extended period” that had been in FOMC statements since March 2009.

The central bank said today it will also reinvest maturing housing debt into mortgage-backed securities instead of Treasuries “to help support conditions in mortgage markets.”

Fannie Mae Yields

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates tumbled the most in more than two years relative to Treasuries. The average interest rate on a typical 30-year fixed loan fell to a record low 4.09 percent last week.

The FOMC vote was 7-3. Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Charles Plosser of the Philadelphia Fed voted against the FOMC decision for a second consecutive meeting. They “did not support additional policy accommodation at this time,” the Fed statement said today.

The amount of debt to be sold represents about three- fourths of Fed holdings of between three months and three years. The central bank will release a schedule of purchases and sales of bonds for October on Sept. 30. The program will extend the average maturity of the Fed’s Treasury holdings to 100 months, or 8 1/3 years, by the end of 2012, from 75 months.

‘Likely Be Lower’

“In response to the lower Treasury yields, interest rates on a range of instruments including home mortgages, corporate bonds, and loans to households and businesses will also likely be lower,” the Fed said on its website.

The Standard & Poor’s 500 Index fell 2.9 percent to 1,166.76 in New York. The yield on the 10-year Treasury note slid eight basis points to 1.86 percent after declining to a record low of 1.85 percent. Yields on 30-year Treasuries tumbled 21 basis points to 2.99 percent.

“Bernanke would rather try and fail than never have tried at all,” said Diane Swonk, chief economist for Mesirow Financial Inc. in Chicago. “He does have a mandate to deal with, and even if this helps on the margin that makes a difference for an economy that’s growing on the margin.”

Inflation “appears to have moderated since earlier in the year,” the Fed said today without citing a specific measure. The Fed’s preferred price gauge, which excludes food and energy costs, rose 1.6 percent in July from a year earlier, accelerating from a 1 percent gain in March. At the same time, retail gasoline prices have declined to an average of $3.57 a gallon from $3.99 in May.

Mortgage Debt

The Fed’s System Open Market Account held $2.64 trillion in securities as of Sept. 14, which included $1.65 trillion in Treasury notes, bills and inflation-protected bonds and $995 billion of mortgage debt.

The central bank purchased $2.3 trillion in debt from December 2008 through June in two rounds of so-called quantitative easing aimed at lowering borrowing costs for companies and consumers with the benchmark interest rate already at zero.

Of the Fed’s $1.56 trillion in Treasury notes, 19 percent mature in less than two years; 35 percent have maturities of two to five years; 36 percent are due in five to 10 years; and 10 percent mature in 10 to 30 years, according to Bloomberg calculations based on New York Fed data.

Extend Duration

Economists surveyed by Bloomberg anticipated a Fed program today to extend the duration of its Treasuries. Of 42 surveyed analysts, 71 percent forecast such a move, even as 61 percent said it would probably fail to reduce unemployment.

“This is not likely to provide any significant stimulus,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. “The market really needed a boost of confidence. There is no confidence from this.”

The Operation Twist from 1961, conducted with the Treasury Department, got its name from Chubby Checker’s hit song, “The Twist,” according to a report published March 14 by Eric Swanson, an economist at the Federal Reserve Bank of San Francisco. That move lowered long-term Treasury yields by about 15 basis points, or 0.15 percentage point, according to Swanson.

Bernanke and his colleagues, who have a dual congressional mandate to achieve stable prices and maximum employment, are trying to reduce 9.1 percent joblessness that’s crept up 0.3 point since March. It reached a 26-year high of 10.1 percent in October 2009.

Growth Accelerating

The U.S. economy expanded at a 1 percent annual pace in the second quarter, the government said Aug. 26, reducing the initial 1.3 percent estimate. Growth may be accelerating to 1.8 percent in the third period, according to the median estimate of 66 economists surveyed by Bloomberg News from Sept. 2 to Sept. 7. The International Monetary Fund yesterday cut its U.S. growth projection for 2011 to 1.5 percent from 2.5 percent in June.

The pace isn’t fast enough to make much of a dent in joblessness, analysts say. The unemployment rate won’t budge from 9.1 percent for the rest of the year, based on the median estimate of economists in the Bloomberg survey; it will reach 8.7 percent in the fourth quarter of 2012, respondents said.

Last year’s $600 billion of bond buying brought the Fed in for the strongest political criticism in three decades as Republicans, including Ohio Representative John Boehner, now the House speaker, said the central bank’s actions risked depreciating the dollar and causing too much inflation.

More Easing

Republican lawmakers including Boehner and Senate Minority Leader Mitch McConnell urged Bernanke in a letter this week to refrain from additional monetary easing to avoid “further harm” to the economy.

The barbs have extended to the Republican campaign for the 2012 presidential nomination, with Texas Governor Rick Perry saying Aug. 15 that Bernanke would be treated “pretty ugly down in Texas” if he printed more money before the election.

Today’s move, while short of creating money, brought criticism from both sides of the political aisle.

Republican Senator David Vitter of Louisiana said the program is more likely to backfire by fueling inflation and devaluing the dollar.

Vermont Senator Bernard Sanders, an independent who caucuses with Democrats, said the action is “not bold and will not create the millions of jobs that America needs.”

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.

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

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Gruebel Meets With UBS Board on Trading Loss After Scolding From Singapore

By Giles Broom and Aaron Kirchfeld - Sep 21, 2011 2:24 PM GMT+0700

Oswald Gruebel, chief executive officer of UBS AG (UBSN), may face pressure to cut risk and shrink the investment bank as the board meets in Singapore, less than a week after a $2.3 billion loss from unauthorized trading.

The CEO got a scolding yesterday from the Government of Singapore Investment Corp., the company’s biggest investor, which “expressed disappointment and concern about the lapses and urged UBS to take firm action to restore confidence in the bank,” according to a statement from the sovereign wealth fund after its senior management met with Gruebel.

The opprobrium marks a shift for the 67-year-old Gruebel, brought in 2 1/2 years ago to rebuild Zurich-based UBS after record losses on U.S. subprime mortgage securities led to a state rescue. Gruebel earned the moniker “Saint Ossie” in Switzerland for helping to restore Credit Suisse Group AG (CSGN)’s profits and reputation in his previous CEO role, and for a trading acumen that included spotting the subprime debacle early. While Gruebel’s own position may be at risk, there’s no obvious replacement.

“This is a black eye for Gruebel and the bank,” said Christian Hamann, an analyst at Hamburger Sparkasse who has a “hold” rating on UBS. “On the other hand, he’s done quite a few things well and successfully stabilized the bank, which may have earned him some credit that he hasn’t used up yet.”

Tatiana Togni, a bank spokeswoman, said she wouldn’t comment on “speculation” regarding succession at UBS. Gruebel was unavailable for comment.

‘Normal’ Meeting

Chairman Kaspar Villiger, speaking to reporters in Singapore today, said it will be a “normal” board meeting. When asked whether there has been any pressure from investors following disclosure of the trading loss, he said “thankfully, no.”

UBS rose 1 centime to 10.22 francs by 9:21 a.m. in Swiss trading. The shares declined 33 percent this year, in line with the slump in the 46-company Bloomberg Europe Banks and Financial Services Index.

Gruebel, whose career in finance spans half a century, returned UBS to profit about six months after arriving, resolved a dispute with the U.S. over banking secrecy that threatened the firm’s existence and stemmed nine straight quarters of client defections at the private bank. Still, his two-year effort to rebuild profitability at the investment bank had been undercut by market turmoil and higher capital requirements even before the trading loss.

Review of Loss

The board of Switzerland’s largest bank will review the loss and possible management changes during the two-day meeting, said a person familiar with the matter who declined to be named because the gathering is private. The regular meeting was scheduled before the loss emerged, and coincides with the Singapore Formula One Grand Prix, where the firm will be entertaining clients.

Bilan magazine reported yesterday that Gruebel was asked to leave, citing an unidentified person close to the board of directors. Discussions at the board level are underway concerning Gruebel’s successor, according to Geneva-based Bilan, which didn’t say how it obtained the information or who asked him to go.

Plans to Stay

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

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

Britain’s Financial Services Authority and its Swiss counterpart said they would investigate the trading losses.

Kweku Adoboli, a 31-year-old UBS trader, was charged with fraud and false accounting by London police on Sept. 16, the day after UBS first announced the trading loss. He didn’t enter a plea and his law firm, Kingsley Napley, declined to comment.

Can’t Blame CEO

Gruebel told Swiss newspaper Der Sonntag in an interview published Sept. 18 that he doesn’t plan to resign because of the loss, adding that when “someone acts with criminal intent, you can’t do anything.” He told Swiss TV in a separate interview that he’s ultimately responsible and will have to “take the consequences.”

Lutz Roehmeyer, who helps manage about $14 billion at Landesbank Berlin Investment, including UBS shares, said it will probably be up to Gruebel whether or not to resign. If a trader knows the rules and how to evade them, it’s very difficult to prevent him from doing so, he said.

“The CEO is the last person who can do something about that,” Roehmeyer said. “If someone robs a UBS branch or steals gold from UBS’s safe, you can’t blame the CEO for that. The scandal has nothing to do with his performance.”

The events throw into relief the lack of a succession plan at UBS, analysts said. Gruebel, pulled out of retirement to take on the CEO role, turns 68 in November. Villiger, 70, is scheduled to step down in 2013, replaced by former Bundesbank President Axel Weber, 54, who lacks hands-on experience running a commercial bank. The trading loss also reduces the chance that Carsten Kengeter, the 44-year-old head of the investment bank, will ascend to the top job.

‘Under Pressure’

“Kengeter is probably more under pressure than the CEO because he’s responsible for the investment bank,” said Roehmeyer. “He’s closer to the trading loss.”

Sergio Ermotti, UBS’s CEO of Europe, the Middle East and Africa, may be a potential successor, analysts said. The 51- year-old joined in April, after running the investment bank at UniCredit SpA, Italy’s largest lender.

Gruebel told staff in a memo on Sept. 18 that he was “shocked and disappointed” by the unauthorized trading, describing the events as a setback to UBS’s reputation and its effort to build up capital. He said the loss won’t affect UBS’s capital base, and the risk of someone violating the bank’s controls “always exists.”

‘All It Takes’

“I and the rest of the firm’s management are fully focused on thoroughly investigating this issue, and will do all it takes to determine how this happened and what we need to do to ensure that it does not recur,” Gruebel said in the memo. “Ultimately, the buck stops with me.”

David Sidwell, the senior independent director on UBS’s board and a former chief financial officer of Morgan Stanley, will lead a three-person board committee investigating the trading loss and the bank’s controls, UBS said.

For Gruebel, the outcome of the investigations into the matter may affect his legacy as the only person to have served as CEO of both of Switzerland’s biggest banks.

Born in the eastern part of Germany during World War II, he was orphaned before his first birthday. He crossed into West Germany with his grandmother on foot at the age of 10 to live with relatives. On the advice of a grandfather, he abandoned an ambition to study engineering and joined Deutsche Bank AG in 1961 as a 17-year-old trainee straight out of school.

‘Career Risk’

He moved to Credit Suisse White Weld Ltd. as a Eurobond trader in 1970. By 1991 he had become Credit Suisse’s head of global trading. Under Gruebel’s leadership as CEO, Credit Suisse started cutting its exposure to subprime mortgage bonds in 2006, when UBS was still buying them, according to disclosures from both companies. UBS eventually booked losses and writedowns of more than $57 billion, data compiled by Bloomberg show. Gruebel joined as UBS’s third CEO in less than two years.

“It was obviously quite a career risk for Gruebel to come back in 2009 and take over the UBS helm,” said Emily Adderson, a London-based fund manager at Henderson Global Investors, which oversees $117 billion. “You can understand his motivation to continue the job he started. Of course, you want to have the vote of confidence from the board that the right plan is going to be implemented going forward.”

To contact the reporters on this story: Giles Broom in Geneva at gbroom@bloomberg.net; Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net;

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Bernanke Has Few Tools to Heal Economy Amid Weak Housing

By Steve Matthews and John Gittelsohn - Sep 21, 2011 11:00 AM GMT+0700

U.S. mortgage rates are the lowest in at least four decades, with a 30-year fixed loan available at 4.09 percent. That didn’t help Alexis Wolf buy a townhome in Beaverton, Oregon.

“Unless you have family help, you’re stuck renting,” said Wolf, 26, a real estate broker who turned to relatives for a loan because she didn’t have the credit and employment history needed to qualify for a mortgage.

Wolf’s experience illustrates the predicament for Federal Reserve policy makers as they end a two-day meeting today to consider ways to boost economic growth. Low interest rates, the traditional medicine for a flagging economy, aren’t helping housing, which since 1982 has aided every recovery except the current one.

Sales of existing homes dropped in July to the lowest since November, and the median price slid 4.4 percent from a year earlier. Rising foreclosures, tighter lending standards and unemployment stuck near 9 percent for more than two years are all weighing on the market. Lower borrowing costs aren’t likely to make a difference, said housing economist Brad Hunter.

“The Fed’s actions probably won’t help housing in a meaningful way,” said Hunter, chief economist and national director of consulting at Metrostudy, a Houston-based housing research firm that provides data to 18 of the 20 largest U.S. builders. “The level of mortgage rates is not a major factor. Rates are at extremely attractive levels.”

The Federal Open Market Committee may decide today to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates for mortgages, auto and consumer loans, according to 71 percent of 42 economists surveyed by Bloomberg News.

Excess Reserves

Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. say policy makers may also choose to reduce the 0.25 percent interest rate paid on the excess reserves that banks hold at the Fed. The central bank is scheduled to issue its statement at about 2:15 p.m. in Washington.

The FOMC may say that while recent data are consistent with a rebound forecast for the second half of 2011, the weak labor market and high unemployment make more easing necessary, said Dean Maki, chief U.S. economist at Barclays Capital.

“It is hard to argue that what is holding the recovery back is the level of interest rates,” Maki said. “We have been through a massive boom-bust cycle in housing,” and working off excess inventory will “be a long, drawn-out process.”

A rebound in housing is essential for restoring the net worth of U.S. households, reviving consumer spending and strengthening the recovery, Harvard University economics professor Martin Feldstein said in a Sept. 14 interview. Neither monetary policy nor President Barack Obama’s proposed $447 billion jobs program will provide a fix, he said.

‘Month After Month’

“The most important thing that would stimulate households would be to go after the housing problem,” said Feldstein, who served as chief economic adviser to President Ronald Reagan. “We still have house prices falling month after month on a seasonally adjusted basis, and something has to be done to deal with that.”

Tougher lending standards imposed after the credit crisis are impeding a recovery in housing more than the cost of borrowing, Hunter said.

Commercial banks’ real estate loans have fallen as supervisors, including the Fed, set rules aimed at preventing excessive risk-taking and predatory lending. Those loans have dropped for 29 consecutive months, according to Fed data.

Fighting Last War

“Regulators are still busy fighting the last war and demand that bankers be ultra cautious about lending,” said Charles Lieberman, chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, New Jersey and a former head of monetary analysis at the Federal Reserve Bank of New York.

The Fed has held the benchmark interest rate near zero since December 2008 and expanded the central bank’s assets in July to a record $2.88 trillion. The yield on the 10-year U.S. Treasury note has declined to 1.94 percent from 4 percent in April 2010.

Still, economic growth in the first six months of this year was the weakest since the recovery started in 2009. Gross domestic product expanded at a 1 percent annual rate in the second quarter after 0.4 percent growth in the first three months of this year.

The Fed, by announcing today the lengthening in the average duration of bonds in its portfolio, would mimic a policy in 1961 known as “Operation Twist” for its goal of bending the yield curve. Within the first month, the program may push down the yield on the 10-year Treasury security by 0.15 percentage point, said Chris Rupkey, chief financial economist of Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

Sixties Version

“Operation Twist in the ‘60s wasn’t found to be a great success either,” said Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller home- price index.

“Homeowners are relatively insensitive to mortgage rates when they are lacking confidence,” he said. “The dramatic thing that is happening now is that their job isn’t secure, if they even have one.”

Consumer confidence has fallen along with U.S. home values, which have declined by a third over the past five years, according to the S&P/Case-Shiller U.S. Home Price Index. In speculative markets like south Florida, home values have tumbled by half. During just the past 12 months, the value of real estate assets has declined by $947 billion.

Consumer Confidence

Consumer confidence has ebbed to the second-lowest level of the year as the most households in three years said it is a bad time to spend. The Bloomberg Consumer Comfort Index was minus 49.3 in the period to Sept. 11, near this year’s low of minus 49.4 reached in May.

“The essence of the problem is there’s no confidence in what’s next with the economy,” Jeff Lazerson, president of Mortgage Grader Inc., a mortgage broker based in Laguna Niguel, California, said in a telephone interview. “Borrowers are unemployed or worried about losing their job. Even rich guys feel poor when the stock market goes down.”

The Standard & Poor’s 500 Index has lost 4.4 percent this year, closing yesterday at 1,202.09 in New York. Net worth for households and non-profit groups decreased by $149 billion in the second quarter, a 1 percent drop at an annual pace, to $58.5 trillion, the Federal Reserve said Sept. 16.

Wolf, the real estate broker and Oregon homebuyer, said a Fed program to push down interest rates probably wouldn’t bring her more business.

“If they were even lower, I’m not sure people jump into the market,” she said. “I don’t think they’re a function of holding people back, like unemployment or uncertainty in the economy.”

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

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European Stocks Fall on Greece Concern as U.S. Index Futures Pare Advance

By Stephen Kirkland and Shiyin Chen - Sep 21, 2011 7:03 PM GMT+0700

European stocks fell after officials said they plan to return to Greece next week to complete a review of the economy. U.S. index futures declined while the dollar gained before the Federal Reserve concludes a two-day meeting.

The Stoxx Europe 600 Index lost 1 percent at 8 a.m. in New York and Standard & Poor’s 500 Index futures slid 0.3 percent. The Dollar Index advanced 0.3 percent. The Swiss franc weakened against most of its 16 major peers, and the pound dropped 0.6 percent versus the dollar after the Bank of England said officials considered ways to add stimulus to the economy. The 30-year U.S. Treasury yield added two basis points, with the German two-year note yield falling three basis points.

A “full mission” will return to Athens next week after Greek Finance Minister Evangelos Venizelos made “good progress” in talks with the European Union and the International Monetary Fund yesterday, according to the EU. The Fed may say today it will replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, a move that 61 percent of economists surveyed by Bloomberg said will probably fail to lower the U.S.’s 9.1 percent unemployment rate.

“We’re seeing some big slowdowns in Europe and the U.S.,” Mark Burgess, chief investment officer at Threadneedle Investments, said in a Bloomberg Television interview in Hong Kong. “A Greek default is a certainty, but in the grand scheme of things, Greece is not that relevant. The issue is really whether they can contain it.”

Peugeot, Daimler

About three shares declined for every one that gained in the Stoxx 600, which jumped 1.8 percent yesterday. Automakers were the biggest drag on the index, as PSA Peugeot Citroen and Daimler AG lost more than 2.5 percent. Deutsche Lufthansa AG sank 4.2 percent as Europe’s second-largest airline said it expects fuel expenses to climb and Deutsche Bank AG downgraded the shares.

S&P 500 futures reversed an earlier gain of as much as 0.6 percent. Oracle Corp. rose 3.2 percent in German trading after the software maker reported profit that topped analysts’ estimates, boosted by increased spending on database programs and applications that help run businesses.

Sales of existing homes dropped in July to the lowest since November, and the median price slid 4.4 percent from a year earlier, according to a Bloomberg survey of economists. Rising foreclosures, tighter lending standards and unemployment stuck near 9 percent for more than two years are all weighing on the market. The Fed is scheduled to issue its policy statement at about 2:15 p.m. in Washington.

Dollar, Euro

The Dollar Index, which tracks the U.S. currency against those of six trading partners, climbed for the third time in the past four days, while the euro weakened 0.3 percent versus the greenback and slid 0.5 percent against the yen. The Swiss franc depreciated 0.4 percent against the euro and lost 0.7 percent versus the dollar, falling for the fourth consecutive day.

The yield on the Italian two-year note rose seven basis points to 4.36 percent, while the 10-year yield increased two basis points. That left the difference in yield with benchmark German bunds three basis points wider at 396 basis points. The Greek two-year note yield jumped 122 basis points to 65.41 percent, rising for the third consecutive day.

The MSCI Emerging Markets Index fell 0.6 percent, heading for the lowest close since July 2010. Russia’s Micex Index retreated 0.4 percent as oil declined. Indonesia’s Jakarta Composite index (JCI) slid 1.5 percent as the nation’s domestic vehicle sales slowed in August.

The Shanghai Composite Index jumped 2.7 percent after the Conference Board said its leading indicator index rose in July. The Czech PX Index rose 2 percent, led by power utility CEZ AS after newspaper Lidove Noviny reported domestic energy companies will get some carbon-dioxide permits for free until 2020.

Oil slid 0.7 percent to $86.30 a barrel in New York. Copper dropped 0.8 percent in London.

To contact the reporters on this story: Stephen Kirkland in London at skirkland@bloomberg.net; Shiyin Chen in Singapore at schen37@bloomberg.net

To contact the editor responsible for this story: Stuart Wallace at swallace6@bloomberg.net

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GM Aims to Lower U.S. Labor Costs With Buyouts, Cheaper Hires Over 4 Years

By Craig Trudell, David Welch and Keith Naughton - Sep 21, 2011 11:01 AM GMT+0700
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General Motors Co. (GM) employees inspect a Chevrolet Silverado truck as it moves down the production line in Flint, Michigan. Photographer: Jeffrey Sauger/Bloomberg

General Motors Co. (GM) will move to entice electricians and its other highest-paid U.S. hourly workers to retire so it can hire lower-wage replacements through a four-year labor agreement with the United Auto Workers.

GM, the biggest U.S. automaker, will offer buyout packages worth as much as $75,000 to its roughly 10,000 skilled-trades workers, the Detroit-based UAW said yesterday in a briefing with reporters. Other employees eligible to retire can take $10,000 to stop working within two years so that GM can replace them with new hires starting with wages of less than $16 an hour.

UAW President Bob King said the agreement achieves some of the union’s major goals in talks with the Detroit-based automaker, which emerged from U.S.-backed bankruptcy in 2009. The accord up for a ratification vote by 48,500 members calls for GM to invest $2.5 billion through four years, reopen a plant in Tennessee and add or retain jobs at six other factories.

“It’s all about demographics and attrition for GM now,” said Brian Johnson, a Chicago-based analyst for Barclays Capital, who has an “overweight” rating on GM. The agreement allows GM to replace more expensive workers with an unlimited number of employees at the entry-level wages, which is “a plus that people weren’t expecting,” he said.

GM will save $30 an hour for every skilled-trade employee who leaves and is replaced by a lower-paid worker, said Kristin Dziczek, director of the labor and industry group at the Center for Automotive Research in Ann Arbor, Michigan. That adds up to $57,000 a year per worker who is replaced, she said.

Buyout Eligibility

About 4,000 skilled-trades employees and 11,550 production workers are eligible to retire, according to GM.

Attrition of those employees would make room for entry- level workers whose starting pay will increase to at least $14.78 an hour from $14 as part of the UAW’s agreement with GM. The wage rises to as much $19.28 an hour by 2015 from a previous maximum of $16.23.

There’s no limit to the number of workers who can be hired at those wages, said Joe Ashton, the union’s vice president for GM relations. In 2015, the second tier would be capped at 25 percent, according to King.

“We would love to see it at 40 percent because that would mean our workforce would have grown,” Ashton said of GM’s portion of workers earning lower wages. About 4 percent of GM- UAW workers are receiving that pay now, he said.

GM is offering $10,000 buyouts to all employees who retire within two years, the UAW said yesterday, and the automaker will offer additional $65,000 bonuses to skilled-trades workers who leave between Nov. 1 and March 31.

Signing Bonuses

GM’s accord also calls for the company to provide a record $5,000 lump-sum signing bonuses. The largest U.S. automaker will invest $419 million to reopen the assembly plant in Spring Hill, Tennessee, which will make two midsize cars and hire 1,710 people. The agreement adds or retains 6,400 jobs, the UAW said.

GM will add a shift at a full-size van factory in Wentzville, Missouri, to make midsize pickups, such as the Chevrolet Colorado and GMC Canyon and boost output in Michigan at two powertrain plants and a casting factory, the union said. GM also committed $230 million to continue assembling trucks in Fort Wayne, Indiana, where workers make Chevrolet Silverado and GMC Sierra pickups.

A midsize truck plant in Shreveport, Louisiana, will close. The union is still pushing GM to extend the use of the factory and consider adding stamping work there, Ashton said. A plant in Janesville, Wisconsin, will remain on standby, the UAW said.

Employees who were moved from a shuttered factory get return-home rights and will receive $30,000 relocation payments, the UAW said.

Akerson’s Goals

Chief Executive Officer Dan Akerson said when talks began in July that the automaker wanted to manage costs while giving UAW-represented workers the “opportunity to share in the success of the company going forward.” GM reported $6.36 billion of profit in the first half and $6.17 billion last year.

“This is, of course, a less risky contract,” Sean McAlinden, chief economist at the Center for Automotive Research, said yesterday in an e-mail. “If the market heads south, so does labor compensation.”

GM pledged to base its profit-sharing arrangement on a greater portion of the automaker’s income, the UAW said. Annual profit-sharing checks will be determined by GM earnings in North America instead of just the U.S. The plan equates to bonuses of about $1,000 per $1 billion in North American profit.

The agreement requires a minimum profit in North America of $1.25 billion to produce a payout and caps distributions to workers at $12,000, the UAW said.

Industry ‘Is Back’

“This contract really shows the auto industry is back,” King said yesterday.

GM expects the union to hold ratification votes within 10 days, according to a Sept. 17 statement.

Union workers will also get $1,000 “inflation protection” payments for the next three years. If they meet quality targets, they will be paid an additional $250 a year.

The UAW continues to negotiate with GM over a plan to divert 10 percent of workers’ profit-sharing payments to the union’s retiree health-care fund, Ashton said. The additional funds are intended to improve coverage for retirees. GM has questioned the legality of the diversion, Ashton said.

“There are some legal questions about that,” Ashton said. “We’re still negotiating with GM on that.”

GM fell 62 cents, or 2.7 percent, to $22.43 at 4:15 p.m. yesterday in New York Stock Exchange composite trading. The shares have lost 32 percent since GM’s initial public offering in November.

Ratification Likely

The tentative agreement will be put to a vote by UAW members who King has estimated each gave $7,000 to $30,000 in concessions since 2005. Analysts Himanshu Patel of JPMorgan Chase & Co. and Johnson of Barclays said ratification was likely in separate research notes published Sept. 19.

“The economic gains for the membership are good,” Art Reyes, president of UAW Local 651 in Flint, Michigan, said in an interview. “I’ll recommend it to the membership.”

Contracts covering 113,000 workers at GM, Ford Motor Co. (F) and Chrysler Group LLC were set to expire Sept. 14 before being extended. Fiat SpA-controlled Chrysler is pushing for a smaller signing bonus than GM accepted, about $3,500, two people familiar with the talks said Sept. 19.

The UAW typically uses its first accord to set a pattern for pay and benefits at the other two organized U.S. automakers. Union negotiators will seek a deal with Auburn Hills, Michigan- based Chrysler next and then go to Dearborn, Michigan-based Ford, three people familiar with the talks have said.

Contract Pattern

“There is a general framework pattern we’ll go to Ford and Chrysler with,” King said yesterday. “I’m confident we can put an agreement together for both.”

UAW members agreed to a no-strike pledge at GM and Chrysler as part of their 2009 bankruptcies. Unsettled disputes are to be decided through binding arbitration.

Ford didn’t receive a U.S. bailout and UAW members there, going against the wishes of union leaders, rejected a strike ban and arbitration.

King, 65, has pledged to organize a foreign automaker this year to expand the UAW’s bargaining power beyond GM, Ford and Chrysler. The agreement with GM will help that effort, he said.

“Winning always helps you get momentum,” King said. “When workers see how we play such a key role in the success of the companies, that will have a big impact.”

To contact the reporters on this story: Craig Trudell in Southfield, Michigan, at ctrudell1@bloomberg.net; David Welch in Southfield, Michigan, at dwelch12@bloomberg.net; Keith Naughton in Southfield, Michigan, at knaughton3@bloomberg.net.

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

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RIM U.S. Sales Cut in Half Last Quarter as Consumers Defect to Iphones

By Hugo Miller - Sep 21, 2011 3:09 AM GMT+0700
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The new Blackberry Torch 9800 smartphone is seen after being unveiled at a news conference August 3, 2010 in New York City. Photographer: Mario Tama/Getty Images

Research In Motion Ltd. (RIMM)’s sales in the U.S. fell by 50 percent last quarter, dragging total revenue lower, as American consumers abandoned older BlackBerry phone models for Apple Inc. (AAPL)’s iPhones.

Revenue from the U.S. dropped to $1.11 billion from $2.22 billion a year earlier, overshadowing gains in Canada and other markets, according to a filing released yesterday after the company reported earnings last week.

RIM plunged 19 percent on Sept. 16 after reporting fiscal second-quarter profit and sales that missed analysts’ estimates. Stung by customer defections to the iPhone and handsets that run on Google Inc. (GOOG)’s Android platform, RIM’s share of the global smartphone market dropped to 12 percent in last quarter from 19 percent a year earlier, according to Gartner Inc.

U.K. sales fell 2.3 percent to $419 million, according to the filing. Sales in Canada climbed 7.7 percent to $308 million and sales outside the U.S., Canada and the U.K. jumped 38 percent to $2.33 billion.

RIM, based in Waterloo, Ontario, fell 99 cents, or 4.2 percent, to $22.73 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has dropped 61 percent this year.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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U.S. Stocks Drop as Concern Over Greece Crisis Offsets Fed Stimulus Bets

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Traders work on the floor of the New York Stock Exchange on September 19, 2011. Photographer: Spencer Platt/Getty Images

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Sept. 20 (Bloomberg) -- Joseph Duran, chief executive officer of United Capital Financial, talks about investment strategy and the outlook for the economy and financial markets. Duran speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

U.S. stocks fell, erasing a 1.4 percent rally by the Standard & Poor’s 500 Index, amid concern international officials won’t make a decision on Greece’s next aid payment until October. The yield gap between two- and 30- year Treasuries narrowed to the smallest level in a year.

The S&P 500 lost 0.2 percent to 1,202.09 at 4 p.m. New York time. The difference between two- and 30-year Treasury yields fell to 304 basis points amid speculation the Federal Reserve will increase holdings of longer maturities. Credit-default swaps on Italy jumped 25 basis points to a record 514 basis points after S&P cut the nation’s rating. Oil added 1.4 percent.

Officials from the so-called troika, comprising the European Union, European Central Bank and International Monetary Fund, plan to return to Athens in early October to complete their review of the Greek economy, the state-run Athens News Agency reported, without citing sources. Equities rose in Europe and the U.S. earlier as investors speculated the Fed will announce steps tomorrow to shore up the economy and optimism grew that Greece will satisfy requirements for aid.

“This is all about Europe, all about Greece,” Kevin Caron, market strategist in Florham Park, New Jersey, at Stifel Nicolaus & Co., said in a telephone interview. His firm has more than $115 billion in client assets. “There’s concern the next injection would be delayed. It will take years to get a proper resolution to it.”

Operation Twist

The Fed may decide to replace short-term Treasuries in its $1.65 trillion portfolio with long-term bonds, according to 71 percent of 42 surveyed economists. Such a policy is known as Operation Twist because of the goal of bending the yield curve. Pacific Investment Management Co.’s Bill Gross, who oversees the world’s biggest bond fund manager, said in Twitter post that a further rally in Treasuries is “dependent on QE3 expansion of balance sheet or new ‘language.’”

Raw-material, industrial and energy companies posted the biggest losses among 10 S&P 500 groups, falling at least 0.6 percent. All 10 industries advanced earlier. Alcoa Inc. posted the biggest drop in the Dow Jones Industrial Average, retreating 2.9 percent. The Stoxx Europe 600 Index rallied 1.8 percent.

Italy’s 10-year bond yield rose 13 basis points to 5.72 percent. Italy was lowered to A from A+ by S&P on concern that weaker growth and a “fragile” government mean the country won’t be able to cut the euro-region’s second-largest debt load, S&P said. The FTSE MIB Index of Italian stocks climbed 1.9 percent.

The franc fell versus 14 of 16 major peers amid speculation policy makers will weaken the currency further. Turkey’s stocks and currency climbed as S&P raised its local debt rating for the nation to investment grade.

Gold, Copper

Gold rose 1.7 percent to $1,809.10 an ounce. The metal may climb to a record $2,019 an ounce by November 2012, according to the average response in a survey of attendees at the London Bullion Market Association’s annual conference in Montreal.

Copper fell, extending a slump to the lowest since November, as the International Monetary Fund lowered its forecast for the economy in the U.S., the second-biggest consumer of the metal used in wires and pipes.

The IMF said today that the U.S. economy will expand 1.5 percent this year, down from 2.5 percent projected in June. Housing starts slid 5 percent to a three-month low, Commerce Department data showed. Copper in New York has tumbled 20 percent from a record in February, entering a bear market, amid concern that European fiscal woes will damp commodity demand.

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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Full Tilt Poker Website Used Players’ Money to Pay Directors, U.S. Claims

By Andrew Harris - Sep 21, 2011 4:34 AM GMT+0700
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Four of its directors, Raymond Bitar, Howard Lederer, Christopher Ferguson, shown, and Rafael Furst, were paid from player funds since 2007. Photographer: Kane Hibberd/Getty Images

Full Tilt Poker paid board members more than $440 million using funds that it had told its online poker players would be available to them for withdrawal at any time, U.S. prosecutors said.

Manhattan U.S. Attorney Preet Bharara’s office today asked U.S. District Judge Leonard B. Sand for permission to add the new allegations to an April civil forfeiture case against Full Tilt, PokerStars, Absolute Poker and other businesses.

“Full Tilt insiders lined their own pockets with funds picked from the pockets of their most loyal customers while blithely lying to both players and public alike about the safety and security of the money deposited with the company,” Bharara said in a statement. He called it “a global Ponzi scheme.”

The forfeiture action parallels criminal charges by Bharara against the poker companies and 11 people, alleging bank fraud, money laundering and illegal gambling. Two white-collar criminal-defense lawyers who have no stake in the case questioned whether the proposed new allegations could withstand a legal challenge.

“This is gambling,” said ex-federal prosecutor James Montana, now a partner in Chicago’s Vedder Price LLC. “People are constantly putting money on deposit. It’s almost a guaranteed cash flow. It’s a little different than your normal Ponzi scheme.”

No Loss

The government hasn’t alleged that any player lost money, said Montana, a former general counsel at the casino operator Bally Entertainment Corp.

According to prosecutors, after a 2006 U.S. law barred banks from processing payments to offshore gambling websites, Full Tilt, PokerStars and Absolute Poker worked around the ban to continue operating in the U.S.

Ireland-based Full Tilt, Absolute Poker of Costa Rica and PokerStars, based on the Isle of Man, were the leading online poker sites doing business with U.S. customers, Bharara said in April.

Bharara’s office said in today’s filing that Full Tilt management’s payment processing had so degraded by last year that it was crediting website players with money never collected from their accounts.

“Full Tilt Poker allowed players to gamble with -- and lose to other players -- this phantom money that Full Tilt Poker never actually collected or possessed,” according to a government court filing.

Bank Account

By the end of March, the company owed players worldwide about $390 million, $150 million of which was owed to gamblers in the U.S., Bharara said in today’s statement. Full Tilt had only $60 million in its bank accounts at the time, he said.

Four of its directors, Raymond Bitar, Howard Lederer, Christopher Ferguson and Rafael Furst, were paid from player funds since 2007, Bharara said.

One of the 11 criminal defendants, Bitar, is charged with bank fraud, illegal gambling and money laundering.

L. Barrett Boss, an attorney for Full Tilt, didn’t immediately return phone and e-mail messages seeking comment.

No lawyer has appeared for Bitar in the criminal case, according to the court’s electronic docket.

Jeff Ifrah, an attorney in Washington, has represented Lederer and Ferguson in other proceedings in federal court in Manhattan. Ifrah said he couldn’t immediately comment on the proposed amended complaint.

A Full Tilt web page for Furst identifies him as “Rafe” and links to his own site, www.rafefurst.com. Furst didn’t immediately reply to an e-mailed request for comment.

No Ponzi Scheme

“It’s fundamentally unfair to call this a Ponzi scheme,” said Melinda Sarafa, a New York criminal-defense lawyer who has previously worked on Internet gambling cases.

“This was a poker business that had a legitimate business model but ran into processing disruptions,” she said. “It’s not clear to me that this was an intentional plan to defraud customers and line pockets.”

A careful review of the facts is needed, said Sarafa.

“We only have half the story at this point,” she said.

Vedder Price’s Montana said prosecutors may have the better argument solely because the Full Tilt operators are alleged to have promised bettors their money was secure when it was not and, had everyone demanded their money at once, there would not have been enough to go around.

“If this thing had just continued on, given the constant interest, they probably would have continued to go on and no one would have known the difference,” he said.

The civil forfeiture case is U.S. v. PokerStars, 11-cv- 02564, and the criminal case is U.S. v. Tzvetkoff, 10-cr-00336, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Andrew Harris in Chicago at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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Microsoft Raises Quarterly Dividend 25%

Microsoft Corp. (MSFT), the world’s biggest software maker, raised its quarterly dividend 25 percent to 20 cents, providing investors with a payout at the upper end of forecasts.

The new dividend is a penny more the 19 cents a share projected by Bloomberg data and compares with the 18 cents to 20 cents estimated by Heather Bellini, an analyst at Goldman Sachs Group Inc. in New York. The change, announced in a statement today, boosts the yield to 2.97 percent from 2.37 percent.

Microsoft generally has a policy of boosting the dividend in line with operating income. While the increase exceeded the 13 percent growth in operating income in the past fiscal year, investors were seeking more, Bellini said. The company’s cash and short-term investments surged 43 percent last year, and shareholders wanted a bigger piece of that hoard.

Microsoft’s ability to return cash to shareholders is hampered by the fact that much of that money is held internationally and would require the company to pay taxes to bring it back into the country for the purpose of paying a larger dividend.

About $45 billion, or 85 percent of the company’s cash and short-term investments, is held outside the U.S., the company said in a July 28 regulatory filing. Around half of annual cash flow from operations is generated abroad, Bellini estimated, which gives the company about $15 billion to $17 billion to spend on dividends and share repurchases this year.

Double It

Even so, Neil Herman, an analyst at Ticonderoga Securities LLC, suggested in an August report that the company should double its dividend in order to boost its share price. The shares, which have declined 3.3 percent this year, might surge past $35 with an increase of that magnitude, he wrote.

Shares of Microsoft, based in Redmond, Washington, fell 23 cents to $26.98 today on the Nasdaq Stock Market. They rose to $27.10 in late trading after the increase was announced.

Before today, Microsoft has paid out about 25 percent of earnings as dividends since starting the payments in 2003, according to Bloomberg data. Dividend-paying companies with similar market valuations to Microsoft are paying closer to 40 percent to 50 percent, the data show.

The company also said today it will continue its $40 billion stock buyback plan begun in 2008. The program, which expires in 2013, had about $12.2 billion remaining as of June 30, Microsoft said.

To contact the reporter on this story: Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editors responsible for this story: Tom Giles at tgiles5@bloomberg.net

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Google, Oracle CEOs Are Said to Make Little Headway in Patent Negotiations

By Brian Womack and Aaron Ricadela - Sep 21, 2011 7:00 AM GMT+0700

Google Inc. and Oracle Corp. (ORCL) chief executive officers made little headway yesterday in negotiations aimed at resolving a lawsuit accusing the Web-search company of patent infringement, a person briefed on the talks said.

The two sides, scheduled to meet again tomorrow in federal court in San Jose, California, remained at loggerheads after the daylong session and were unlikely to reach a settlement soon, said the person, who asked not to be identified because the discussions are private.

Oracle, the largest maker of database software, sued last year, saying Mountain View, California-based Google didn’t obtain a license to use Java technology patents that it says are infringed by the Android mobile-device operating system. Besides seeking billions of dollars in damages, Redwood City, California-based Oracle wants the court to order destruction of all products that violate its copyrights.

Google’s Larry Page and Oracle’s Larry Ellison appeared before a federal court magistrate during talks that lasted more than 10 hours.

Deborah Hellinger, a spokeswoman for Oracle, and Katelin Todhunter-Gerberg, a spokeswoman for Google, declined to comment today.

Oracle’s suit may represent a bigger menace to Google’s software than challenges from Apple Inc. (AAPL), which has already won patent decisions against Android device makers. In settlement talks, Page aims to avoid having to pay Oracle licensing fees that analysts at Citigroup Inc. said could be as high as $15 per device. That sum might slow the adoption of the software.

Oracle claimed in court papers that Google could owe as much as $6 billion, while Google suggested at a hearing that a reasonable royalty would be $100 million.

The case is scheduled to go to trial in October.

The case is Oracle America Inc. v. Google Inc. (GOOG), 10-03561, U.S. District Court, Northern District of California (San Francisco).

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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Oil Drops in New York on Speculation Demand Will Falter as Supplies Rise

Oil fell in New York as investors speculated that demand will falter amid increasing U.S. crude stockpiles in the world’s biggest consumer of the commodity. Brent oil’s premium to the U.S. contract widened.

Futures slipped as much as 0.7 percent after the American Petroleum Institute said supplies rose 2.57 million barrels last week. An Energy Department report today is forecast to show they fell 1.3 million barrels. The International Monetary Fund cut its estimates for economic growth in the U.S. and China, the world’s second-biggest crude user.

“API data were mixed-to-negative in our opinion,” Tom Pawlicki, a Chicago-based analyst at MF Global Holdings Ltd., said in a note today. “Energy prices are expected to trade in a mixed-to-lower direction in the near-term.”

Crude for November delivery slipped as much as 60 cents to $86.32 a barrel in electronic trading on the New York Mercantile Exchange and was at $86.36 at 11:42 a.m. Sydney time. The contract yesterday advanced $1.11, or 1.3 percent, to $86.92. Prices are 18 percent higher the past year.

Brent oil for November settlement fell 43 cents, or 0.4 percent, to $110.11 a barrel on the London-based ICE Futures Europe Exchange. The European benchmark contract’s premium to U.S. futures widened to $23.75 after closing at $23.62 yesterday. The difference settled at a record $26.87 on Sept. 6.

U.S. Stockpiles

U.S. gasoline stockpiles climbed 62,000 barrels last week, the American Petroleum Institute data showed. The Energy Department report will probably show inventories increased 1.35 million barrels, according to the median of 16 analyst estimates in the Bloomberg News survey.

The industry-funded API collects stockpile information on a voluntary basis from operators of refineries, bulk terminals and pipelines. The government requires that reports be filed with the Energy Department for its weekly survey.

The IMF said yesterday that the U.S. economy will expand 1.5 percent this year, down from 2.5 percent projected in June. The Washington-based lender cut its forecast for China’s growth to 9.5 percent from 9.6 percent. The nation’s 2012 outlook was lowered to 9 percent from 9.5 percent.

Brent’s premium to New York oil has widened amid disruptions to production. The first North Sea Forties crude cargo for October loading was deferred and a third September shipment was delayed to next month, according to a revised export program obtained by Bloomberg News. Forties is one of four North Sea crude grades used to price Dated Brent, the benchmark for more than half of the world’s oil.

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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