Stocks, U.S. Futures Gain on EU Debt-Crisis Deal

By Shiyin Chen and Stephen Kirkland - Oct 27, 2011 6:42 PM GMT+0700

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Oct. 27 (Bloomberg) -- James Hughes, a senior market analyst at Alpari Ltd., talks about steps by European leaders to solve the debt crisis and the outlook for the euro. Hughes, speaking from London with Owen Thomas on Bloomberg Television's "Countdown," also discusses Royal Dutch Shell Plc's and Bayer AG's third-quarter profit reported today. (Source: Bloomberg)

Stocks climbed to an eight-week high and the euro strengthened, while Treasuries and bunds fell as European leaders agreed to expand a bailout fund to stem the region’s debt crisis. Metals and oil led a rally in commodities.

The MSCI All-Country World Index gained 2 percent at 7:40 a.m. in New York as benchmark gauges in France and Italy jumped more than 4 percent to the highest levels in almost three months. Standard & Poor’s 500 Index futures added 2.1 percent. While Italian and Spanish bonds rallied, yields remained near levels from two weeks ago. The euro appreciated above $1.40 for the first time since Sept. 8, and the cost of insuring European debt fell to a seven-week low. The 10-year Treasury yield rose 11 basis points. Copper gained 4.6 percent, while gold dropped.

French President Nicolas Sarkozy said the euro region’s bailout fund will be leveraged by four to five times, and investors have agreed to a voluntary writedown of 50 percent on Greek debt. Sarkozy is due to speak to Chinese leader Hu Jintao today and said he’d welcome support from the Asian nation in the bailout effort. U.S. data today may show the world’s largest economy expanded last quarter at the fastest pace this year.

“Given the extent of what needed to be achieved here and the disparate views, one cannot fail but to be impressed that the EU officials have managed to carve out this plan,” Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London, said in a research note. “The announcement is enough to buy some time and generate a moderate risk-on phase.”

Banks Rally

The Stoxx Europe 600 Index climbed 3.2 percent to a 12-week high as banks led gains. BNP Paribas SA and Deutsche Bank AG, the biggest lenders in France and Germany, advanced more than 10 percent. BASF SE rallied 4.9 percent as the world’s largest chemicals maker reported profit that beat analyst estimates. Ericsson AB rose 4.7 percent as Sony Corp. agreed to buy its 50 percent stake in their joint mobile-phone venture.

The bund yield jumped as high as 2.20 percent, rising to the most since Oct. 17, while the 10-year French yield declined five basis points, dropping for the third consecutive day. That drove the difference in yield with German debt down by 11 basis points to 92 basis points, after rising on Oct. 21 to 121 basis points, the most since 1992. The spread is still 21 basis points higher this month.

Italian 10-year yields slid 12 basis points, or 0.12 percentage point, to 5.81 percent, the lowest since Oct. 17. The yield on the Greek two-year note tumbled 109 basis points to 78.68 percent, a three-day low.

Bond Risk

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 17 basis points to 317, the lowest since Sept. 5. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 35 basis points to 685 basis points, the lowest since Sept. 1, according to JPMorgan Chase & Co.

Futures signaled the S&P 500 may extend yesterday’s 1.1 percent rally. U.S. gross domestic product probably expanded 2.5 percent in the third quarter, according to the median forecast of economists surveyed by Bloomberg before today’s Commerce Department report. Other data may show pending home sales gained in September.

The 10-year Treasury yield climbed as high as 2.27 percent, while the seven-year yield increased four basis points before the U.S. sells $29 billion of the securities, the last of three auctions this week totaling $99 billion.

Federal Reserve Bank of New York President William C. Dudley said on Oct. 24 that policy makers have the option of starting a third round of asset purchases to stimulate growth. Bank of England Markets Director Paul Fisher said yesterday expanding monetary stimulus by 75 billion pounds ($120 billion) this month was the minimum amount needed to shore up an economy that may already be shrinking.

Dollar Slips

The euro climbed as high as $1.4038, and advanced 1 percent versus the yen. The Dollar Index, which tracks the U.S. currency against those of six trading partners, slid 0.8 percent to the least since Sept. 8.

The S&P GSCI index of 24 commodities gained 1.9 percent. Nickel jumped 3.9 percent and copper rose to $8,032 a metric ton. Gold fell 0.7 percent to $1,712 an ounce, after gaining 6.4 percent the previous four days. Oil in New York advanced 2.6 percent to $92.56 a barrel.

The MSCI Emerging Markets Index jumped 2.4 percent to a seven-week high. Russia’s Micex climbed 1.9 percent, Hungary’s BUX gained 3.3 percent and the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rallied 5.1 percent. Benchmark gauges in Poland, South Africa, Turkey, Indonesia, Thailand and South Korea advanced at least 1.5 percent.

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: Justin Carrigan at jcarrigan@bloomberg.net

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European Stocks Climb on Debt-Crisis Deal

By Adria Cimino - Oct 27, 2011 5:21 PM GMT+0700

European stocks rallied to the highest in 12 weeks after the region’s leaders agreed to expand a bailout plan to halt the sovereign debt crisis. Asian shares and U.S. index futures also climbed.

BNP Paribas SA, France’s biggest bank, and Deutsche Bank AG, Germany’s largest, surged more than 14 percent as policy makers boosted the firepower of the European rescue fund to 1 trillion euros ($1.4 trillion). PPR SA, the French owner of the Gucci luxury-goods brand, jumped 5.8 percent after third-quarter sales surpassed analyst estimates. Royal Dutch Shell Plc climbed after saying third-quarter earnings doubled.

The Stoxx Europe 600 Index surged 2.8 percent to 247.43 at 11:00 a.m. in London, the highest since Aug. 4. The index has rallied 15 percent from this year’s low on Sept. 22 amid growing speculation that policy makers would agree on a solution to the region’s debt woes.

“Some of the fear, which has been the dominant factor in the market, has been removed,” said Pierre Mouton, a fund manager who helps oversee $7.5 billion at Notz Stucki & Cie. in Geneva. “Europe came to an agreement and has a plan. This allows financial stocks to rise because there is no longer the specter of nationalization. There is a sense of relief for the banking sector.”

Futures on the Standard & Poor’s 500 Index jumped 2 percent, before the release of U.S. gross domestic product data. The MSCI Asia Pacific Index surged 3.1 percent.

Crisis Summit

European leaders yesterday persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund, responding to global pressure to step up the fight against the financial crisis.

Ten hours of brinkmanship at the second crisis summit in four days delivered a plan that the euro area’s stewards said points the way out of the debt quagmire, even if key details are lacking. Last-ditch talks with bank representatives led to the debt-relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro area and wreaking global economic havoc.

Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

“A lot of details are still to come out,” Ralph J. Silva Jr., a strategist at Silva Research Network in London, said on Bloomberg Television. “The overall perception I have is that it’s positive. It’s a very good start.”

U.S. Growth

The U.S. economy probably grew in the third quarter at the fastest pace this year as gains in consumer spending and business investment helped sustain a recovery on the brink of faltering, economists said before a report today. GDP rose at a 2.5 percent annual pace after advancing 1.3 percent in the previous three months, according to a Bloomberg survey of economists.

A gauge of banks in the Stoxx 600 index rose 6.3 percent, for the biggest increase among the 19 industry groups in the measure. BNP climbed 14 percent to 34.24 euros. Deutsche Bank advanced 15 percent to 32.61 euros.

Societe Generale SA, France’s second-largest bank, jumped 13 percent to 21.20 euros. The bank said in a statement today that it will meet mid-2012 capital requirements “through its own means.”

Greek Plan

Greece’s ASE Index jumped 5.9 percent, led by banks. National Bank of Greece SA, the country’s biggest lender, surged 13 percent to 2.04 euros. Alpha Bank SA soared 15 percent to 1.20 euros. EFG Eurobank Ergasias increased 10 percent to 78 euro cents.

Greek Prime Minister George Papandreou said the government may buy shares in some Greek banks as a result of the planned writedown of the country’s debt and the European accord to recapitalize lenders. Papandreou didn’t give any details on the banks that would be targeted in any nationalization program or the size of any potential shareholdings.

The Stoxx 600 is trading at 10.6 times the estimated earnings of its companies, compared with the two-year low of 9.1 reached on Sept. 23, according to data compiled by Bloomberg. About half of the 108 companies in the Stoxx 600 that have released earnings since Oct. 11 missed analyst profit estimates.

PPR, BASF

PPR advanced 5.8 percent to 116.85 euros. The company reported third-quarter sales that beat analysts’ estimates and said it expects to report an improved full-year financial performance. Revenue from continuing operations climbed 8 percent to 3.86 billion euros. The average of four analysts’ estimates compiled by Bloomberg was 3.79 billion euros.

BASF SE, the world’s largest chemicals maker, rose 4.7 percent to 52.96 euros. The company reported third-quarter profit that beat analyst estimates as price increases and the purchase of cosmetic-ingredient maker Cognis helped limit a drop in margins.

Earnings before interest, tax and items such as costs from acquisitions and restructuring fell 11 percent to 1.96 billion euros, the company said. Analysts had predicted 1.85 billion euros, according to the average of 16 estimates in a Bloomberg survey.

Shell Gains

Shell climbed 1.4 percent to 2,284.5 pence. Europe’s biggest oil company said third-quarter earnings doubled as energy prices rose and it ramped up projects from Qatar to Canada. Net income rose to $7 billion from $3.46 billion a year earlier, the company said. Excluding one-time items and inventory changes, profit beat analyst estimates.

BHP Billiton Ltd., the world’s biggest mining company, gained 5.6 percent to 2,078 pence. Copper, lead, nickel and tin prices advanced in London.

Michelin & Cie. jumped 4.7 percent to 54.75 euros. The world’s second-largest tiremaker said third-quarter revenue rose 11 percent to 5.14 billion euros, spurred by a rebound in demand from U.S. automakers and strong sales of its winter tires in Europe.

Michelin reiterated that sales should increase 8 percent during the full year. While free cash flow will be “temporarily negative” because of higher raw-material costs, operating profit should be “substantially higher,” it added.

Daimler AG added 2.4 percent to 38.81 euros. The world’s third-largest maker of luxury vehicles advanced after predicting higher fourth-quarter profit on gains at its trucks and vans divisions.

Logitech International SA, the world’s largest maker of computer mice, rallied 15 percent to 8.88 Swiss francs. The company today confirmed its full-year guidance after three profit warnings in the past seven months.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net.

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Chinese Military Suspected in Hacker Attacks on U.S. Satellites

By Tony Capaccio and Jeff Bliss - Oct 27, 2011 11:01 AM GMT+0700

Computer hackers, possibly from the Chinese military, interfered with two U.S. government satellites four times in 2007 and 2008 through a ground station in Norway, according to a congressional commission.

The intrusions on the satellites, used for earth climate and terrain observation, underscore the potential danger posed by hackers, according to excerpts from the final draft of the annual report by the U.S.-China Economic and Security Review Commission. The report is scheduled to be released next month.

“Such interference poses numerous potential threats, particularly if achieved against satellites with more sensitive functions,” according to the draft. “Access to a satellite‘s controls could allow an attacker to damage or destroy the satellite. An attacker could also deny or degrade as well as forge or otherwise manipulate the satellite’s transmission.”

A Landsat-7 earth observation satellite system experienced 12 or more minutes of interference in October 2007 and July 2008, according to the report.

Hackers interfered with a Terra AM-1 earth observation satellite twice, for two minutes in June 2008 and nine minutes in October that year, the draft says, citing a closed-door U.S. Air Force briefing.

The draft report doesn’t elaborate on the nature of the hackers’ interference with the satellites.

Chinese Military Writings

U.S. military and intelligence agencies use satellites to communicate, collect intelligence and conduct reconnaissance. The draft doesn’t accuse the Chinese government of conducting or sponsoring the four attacks. It says the breaches are consistent with Chinese military writings that advocate disabling an enemy’s space systems, and particularly “ground-based infrastructure, such as satellite control facilities.”

U.S. authorities for years have accused the Chinese government of orchestrating cyber attacks against adversaries and hacking into foreign computer networks to steal military and commercial secrets. Assigning definitive blame is difficult, the draft says, because the perpetrators obscure their involvement.

The commission’s 2009 report said that “individuals participating in ongoing penetrations of U.S. networks have Chinese language skills and have well established ties with the Chinese underground hacker community,” although it acknowledges that “these relationships do not prove any government affiliation.”

Chinese Denials

China this year “conducted and supported a range of malicious cyber activities,” this year’s draft reports. It says that evidence emerging this year tied the Chinese military to a decade-old cyber attack on a U.S.-based website of the Falun Gong spiritual group.

Chinese officials long have denied any role in computer attacks.

The commission has “been collecting unproved stories to serve its purpose of vilifying China’s international image over the years,” said Wang Baodong, a spokesman for the Chinese Embassy in Washington, in a statement. China “never does anything that endangers other countries’ security interests.”

The Chinese government is working with other countries to clamp down on cyber crime, Wang said.

Defense Department reports of malicious cyber activity, including incidents in which the Chinese weren’t the main suspect, rose to a high of 71,661 in 2009 from 3,651 in 2001, according to the draft. This year, attacks are expected to reach 55,110, compared with 55,812 in 2010.

Relying on the Internet

In the October 2008 incident with the Terra AM-1, which is managed by the National Aeronautics and Space Administration, “the responsible party achieved all steps required to command the satellite,” although the hackers never exercised that control, according to the draft.

The U.S. discovered the 2007 cyber attack on the Landsat-7, which is jointly managed by NASA and the U.S. Geological Survey, only after tracking the 2008 breach.

The Landsat-7 and Terra AM-1 satellites utilize the commercially operated Svalbard Satellite Station in Spitsbergen, Norway that “routinely relies on the Internet for data access and file transfers,” says the commission, quoting a NASA report.

The hackers may have used that Internet connection to get into the ground station’s information systems, according to the draft.

While the perpetrators of the satellite breaches aren’t known for sure, other evidence uncovered this year showed the Chinese government’s involvement in another cyber attack, according to the draft.

TV Report

A brief July segment on China Central Television 7, the government’s military and agricultural channel, indicated that China’s People’s Liberation Army engineered an attack on the Falun Gong website, the draft said.

The website, which was hosted on a University of Alabama at Birmingham computer network, was attacked in 2001 or earlier, the draft says.

The CCTV-7 segment said the People’s Liberation Army’s Electrical Engineering University wrote the software to carry out the attack against the Falun Gong website, according to the draft. The Falun Gong movement is banned by the Chinese government, which considers it a cult.

After initially posting the segment on its website, CCTV-7 removed the footage after media from other countries began to report the story, the congressional draft says.

Military Disruption

The Chinese military also has been focused on its U.S. counterpart, which it considers too reliant on computers. In a conflict, the Chinese would try to “compromise, disrupt, deny, degrade, deceive or destroy” U.S. space and computer systems, the draft says.

“This could critically disrupt the U.S. military’s ability to deploy and operate during a military contingency,” according to the draft.

Other cyber intrusions with possible Chinese involvement included the so-called Night Dragon attacks on energy and petrochemical companies and an effort to compromise the Gmail accounts of U.S. government officials, journalists and Chinese political activists, according to the draft.

Often the attacks are found to have come from Chinese Internet-protocol, or IP, addresses.

Businesses based in other countries and operating in China think that computer network intrusions are among the “most serious threats to their intellectual property,” the draft says.

The threat extends to companies not located in China. On March 22, U.S. Internet traffic was “improperly” redirected through a network controlled by Beijing-based China Telecom Corp. Ltd., the state-owned largest provider of broadband Internet connections in the country, the draft said.

In its draft of last year’s report, the commission highlighted China’s ability to direct Internet traffic and exploit “hijacked” data.

To contact the reporters on this story: Jeff Bliss in Washington at jbliss@bloomberg.net; Tony Capaccio in Washington at acapaccio@bloomberg.net

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

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Sarkozy to Seek China Aid as EU Expands Rescue Fund

By Jonathan Stearns and Helene Fouquet - Oct 27, 2011 5:28 PM GMT+0700
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Chinese President Hu Jintao (R) welcomes his French counterpart Nicolas Sarkozy (L). Photographer: Eric Feferberg/AFP/Getty Images

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Oct. 27 (Bloomberg) -- Guy Verhofstadt, member of the European Parliament and former prime minister of Belgium, discusses efforts to solve the debt crisis. European leaders persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros ($1.4 trillion). Verhofstadt speaks from Strasbourg with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)

French President Nicolas Sarkozy said he plans to call Chinese counterpart Hu Jintao today to discuss China contributing to Europe’s efforts to resolve the region’s debt crisis.

The European Financial Stability Facility will be worth about $1.4 trillion after European leaders agreed to leverage existing guarantees by as much as five times, Sarkozy said at a briefing in Brussels at 4 a.m. local time. The presidents will speak about noon Brussels time and Chinese support will be welcomed, he said. Jiang Yu, China’s foreign ministry spokeswoman, said Beijing is ready to work with Europe to stabilize markets.

Sarkozy’s outreach precedes a Group of 20 summit he will host next week, and coincides with European efforts to bolster the role of the International Monetary Fund in overcoming the euro-region’s woes. Australia’s finance chief said that while it’s “appropriate” to look at the IMF’s resources, Europeans must look to themselves first for bailout money.

“China will need time to evaluate this plan very carefully,” said Shen Jianguang, a Hong Kong-based economist for Mizuho Securities Asia Ltd. “What worries China is that there is so much disagreement among European policy makers. It doesn’t want to be seen spending money on a plan that even Europeans don’t want to support.”

Greek Debt

Chinese Premier Wen Jiabao has signaled willingness to aid the European Union as financial turmoil within the region threatens to crush export demand in China’s biggest market. The expansion of the rescue fund and a deal for bondholders to take 50 percent losses on Greek debt may help Sarkozy and German Chancellor Angela Merkel to convince the world that Europe is getting to grips with the crisis.

Sarkozy and Hu’s conversation comes a day before a planned visit to Beijing by Klaus Regling, chief executive officer of the EFSF, to court investors. China has the world’s largest foreign currency reserves at more than $3.2 trillion.

The EFSF, established last year to sell bonds to finance loans for distressed euro nations, has since also gained the authority to buy sovereign bonds on the secondary and primary markets, offer credit lines to governments and recapitalize banks as the Greece-triggered debt troubles have spread. The EFSF said Regling’s visit to China this week is linked to the fund’s original debt-issuance role.

‘Normal’ Discussion

“It is a normal round of discussion with important buyers of EFSF bonds,” Christof Roche, spokesman for the Luxembourg- based facility, said by e-mail yesterday. He declined to comment further when contacted by Bloomberg News by telephone. Agence France-Presse reported that Regling will travel on to Tokyo, citing a European Union official in Asia.

Jiang, the Chinese foreign ministry spokeswoman, didn’t give details of how China might work with the EU.

China “welcomes’’ the agreement reached by EU leaders, Jiang said at a regular press briefing in Beijing. “It is conducive to lifting market confidence.’’

The European Union must ensure the safety of China’s investments, the official Xinhua News Agency reported today, citing Wang Hua, an official in the Western Europe division of the International Department under the Communist Party’s Central Committee.

A press official at the People’s Bank of China said he wasn’t aware of the issue and asked for faxed questions, which weren’t answered. Calls to the press office of China Investment Corp., the nation’s $300 billion sovereign wealth fund, weren’t immediately answered.

American Angst

Europe is facing international calls to end a debt crisis that President Barack Obama has said “is scaring the world” and U.S. Treasury Secretary Timothy F. Geithner has described as a “catastrophic risk.”

With the G-20 leaders gathering in Cannes, France, Nov. 3- 4, euro-area government heads gathered in Brussels yesterday for the 14th time to tackle troubles that began in Greece two years ago, then engulfed Ireland and Portugal and now threaten Spain and Italy.

Premier Wen said last month that while China was willing to help, developed nations also needed to put “their own houses in order.”

In Canberra today, Australian Treasurer Wayne Swan echoed that sentiment. “In the first instance, any bailout fund in Europe is a responsibility of the Europeans,” he told reporters. Swan said in a statement later that global markets will demand details of the European plans. “Europe is building its war chest, but the war has not yet been won,” the statement said.

Stocks rose in Asia after the euro-region meeting, with the MSCI Asia Pacific Index advancing 3 percent, the most in more than three weeks.

Pudding Test

“This morning we saw broad positive reaction from the market -- but as they say, the proof of the pudding is in the eating,” Amando Tetangco, governor of the Philippine central bank, said in a mobile-phone text message to reporters today.

Bank of Korea Governor Kim Choong Soo said his nation hasn’t been approached and hasn’t considered joining the European financing effort. Indonesian Vice Finance Minister Mahendra Siregar said his country also hasn’t been asked to contribute. Japan’s Finance Minister Jun Azumi said the European statement today was a “big step forward,” speaking at parliament in Tokyo.

The question of leveraging the AAA rated EFSF has arisen because of the political hurdles in countries such as Germany, the biggest European economy, to increasing the national guarantees that back the fund.

Japan’s Ante

As part of its original role, the EFSF is providing 17.7 billion euros under Ireland’s aid package of 67.5 billion euros and 26 billion euros under Portugal’s rescue of 78 billion euros. So far, the EFSF has sold two five-year bonds and one 10- year security, all in the first half of this year. The Japanese government bought more than a fifth of the inaugural issue in January.

On Oct. 13, the EFSF announced changes to its bond-sale program for the two countries in the second half of 2011. Instead of selling four “benchmark” bonds in the period, as outlined in mid-May, the fund will sell one security for Ireland valued at 3 billion euros and delay issues planned for Portugal until “early 2012.”

The EFSF may have to finance more than 70 billion euros of a planned second aid package for Greece. The initial Greek rescue of 110 billion euros in May 2010 was composed of loans directly from euro-area governments and the IMF.

To contact the reporters on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net

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

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EU Sets 50% Greek Writedown, $1.4T in Rescue Fund

By James G. Neuger and Stephanie Bodoni - Oct 27, 2011 5:08 PM GMT+0700

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Oct. 27 (Bloomberg) -- Charles Dallara, managing director of the Institute of International Finance, discusses the Greek debt agreement reached by European leaders, who persuaded bondholders to take 50 percent losses. He speaks from Brussels with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area.

The 17-nation euro and stocks climbed while bond spreads narrowed after leaders emerged early today from a 10-hour summit in Brussels armed with a plan they said points the way out of the quagmire, albeit with some details still to be ironed out.

“Overall the outcome is better than we anticipated one week ago,” Laurent Bilke, global head of inflation strategy at Nomura International Plc in London, said in an interview. “There are several issues left open, but I do believe that getting a more necessary debt relief for Greece is a pretty important step.”

Last-ditch talks with bank representatives led to the debt- relief accord, in an effort to quarantine Greece and prevent speculation against Italy and France from ravaging the euro zone and wreaking global economic havoc. Greek Prime Minister George Papandreou will address the nation at 8 p.m. in Athens to outline the summit’s ramifications for the country at the eye of the two-year sovereign debt crisis.

“The world’s attention was on these talks,” German Chancellor Angela Merkel told reporters in Brussels at about 4:15 a.m. “We Europeans showed tonight that we reached the right conclusions.”

ECB Role

Measures include recapitalization of European banks, a potentially bigger role for the International Monetary Fund, a commitment from Italy to do more to reduce its debt and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.

The euro advanced to a seven-week high against the dollar, rising above $1.40 for the first time since September. It was at $1.4007 at 11:48 a.m. in Brussels. The Stoxx Europe 600 Index surged 2.6 percent.

“It’s long on words, short on detail,” said Peter Dixon, an economist at Commerzbank AG in London. “The solution that’s been put in place now gives us enough ammunition to stave off any immediate problems but we may well run into other problems down the track.”

The summit was the 14th in the 21 months since Europe pledged solidarity with Greece, and came amid mounting global pressure for the bloc to deliver a credible anti-crisis toolkit before a Group of 20 meeting Nov. 3-4 in Cannes, France.

Banks Summoned

Europe’s leaders took the unusual step of summoning the banks’ representative, Managing Director Charles Dallara of the Institute of International Finance, into the summit to break the deadlock over how to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.

Dallara squared off with a group led by Merkel and French President Nicolas Sarkozy around midnight after issuing an e- mailed statement that “there is no agreement on any element of a deal.”

Sarkozy said the bankers were escorted in “not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it.” Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.”

Insolvency Threat

The resulting “voluntary” losses by bondholders were the key plank in a second bailout for Greece, which was awarded 110 billion euros in May 2010 at the outbreak of the crisis. The new program includes 130 billion euros of official aid, up from 109 billion euros envisioned in July.

The Washington-based IMF, meanwhile, said it is ready to disburse its 2.2 billion-euro share of the next installment of Greece’s original bailout. The release of the euro zone’s 5.8 billion-euro share was approved last week.

Greek, Spanish, Italian and French bonds all rallied today, with the spreads over benchmark German bunds narrowing. The yield on German 10-year bonds jumped eight basis points, the most in more than 11 weeks, to 2.11 percent at 10:05 a.m. London

The yield on Greek bonds due in October 2022 fell 117 basis points to 24.15 percent, Spanish 10-year yields dropped 16 basis points to 5.32 percent and Italy’s 10-year bonds advanced for a second day, with yields falling 13 basis points to 5.81 percent.

ECB President Jean-Claude Trichet, who has warned against the spillover effects of bond writedowns on the banking system, didn’t take part in the confrontation with bankers on the debt relief. He later praised the leaders’ determination to get ahead of the crisis.

Trichet’s Call

The measures agreed “have to be fully implemented, as rapidly and effectively as possible,” Trichet, who leaves office Oct. 31, said afterwards.

Leaders tiptoed around the politically independent ECB’s broader role in keeping the euro sound, making no mention of its bond-purchase program in a 15-page statement. The Frankfurt- based central bank has bought 169.5 billion euros in bonds so far, starting with Greece, Ireland and Portugal last year, then extending the coverage to Italy and Spain in August.

While Trichet didn’t mention the controversial purchases either, his successor, Mario Draghi of Italy, indicated that the policy will continue. Speaking in Rome yesterday, Draghi said the ECB remains “determined to avoid a poor functioning of monetary and financial markets.”

Leaders backed two ways of leveraging up the 440 billion- euro rescue fund, which was designed last year to shield smaller countries such as Greece, Ireland and Portugal, and lacks the heft to protect Italy, the euro area’s third-largest economy.

Leverage Options

Under plans to be spelled out in November, the fund will be used to insure bond sales and to create a special investment vehicle that would court outside money, from public and private financial institutions and investors.

Canadian Prime Minister Stephen Harper, speaking at a conference in Perth, Australia, called the agreement “grounds for cautious optimism,” and urged European leaders to work out details of the plan and implement it.

Europe cast about for more international money to aid the rescue, with France’s Sarkozy set to call Chinese leader Hu Jintao tomorrow with the goal of tapping into the world’s largest foreign exchange reserves.

While the mechanics are a work in progress, European Union President Herman Van Rompuy said the leverage effect would multiply the power of the fund by a factor of four to five. He compared it to normal banking business that needn’t entail excessive risks.

‘Detail Further’

“It will be important to detail further the modalities of how this enhanced EFSF will operate and deliver the scale of support envisaged,” IMF Managing Director Christine Lagarde said.

Europe also struck a bank-recapitalization accord, setting a June 30, 2012, deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign-debt holdings. Banks below that target would face “constraints” on paying dividends and awarding bonuses, a statement said.

The European Banking Authority estimated banks’ capital needs at 106 billion euros, with Spanish banks requiring 26.2 billion euros and Italian banks 14.8 billion euros. It gave them until Dec. 25 to submit money-raising plans to national supervisors.

Banks that fail to raise enough capital on the markets will first tap national governments, falling back on the EFSF rescue fund only as a last resort.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Stephanie Bodoni in Brussels at sbodoni@bloomberg.net

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

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Akamai’s Forecast Tops Estimates; Kenny Resigns as President

By Brian Womack - Oct 27, 2011 5:18 AM GMT+0700

Akamai Technologies Inc., the operator of a server network that lets businesses speed data delivery, forecast fourth-quarter sales that topped some analysts’ estimates. The shares rose as much as 14 percent.

Revenue in the current period is projected to be $303 million to $315 million, the company said on a conference call today. That compares with the $310.9 million average estimate of analysts, according to Bloomberg data. Akamai also said David Kenny resigned as president and will leave the board.

Akamai, whose customers include Apple Inc., is benefiting from demand for new services, such as security protection. That may be helping to counter the impact of rising competition in its more traditional business, which lets customers more quickly transmit digital content on networks around the world.

“It’s a lot higher-margin business,” said Ilya Grozovsky, an analyst at Morgan Joseph TriArtisan LLC in New York, referring to the new offerings like security. “Ultimately, it’s a much better service for the customers. So they’re willing to pay more and they’re willing to stick with you.” Grozovsky rates the stock a “buy” and doesn’t own it.

Third Quarter

For the third quarter, revenue climbed 11 percent to $281.9 million, the Cambridge, Massachusetts-based company said in a statement. That surpassed the $279.2 million average analyst estimate compiled by Bloomberg.

Net income increased to $42.3 million, or 23 cents a share, from $39.7 million, or 21 cents, a year earlier. Profit excluding some costs was 34 cents, beating the 33-cent average estimate.

Akamai rose as high as $27.15 in extended trading. The stock rose 2.1 percent to $23.78 at the close in New York. The shares have declined 49 percent this year.

Kenny, who became Akamai’s president last year, will serve as a consultant to the company on business strategy. Chief Executive Officer Paul Sagan was given the additional title of president to succeed Kenny in that role.

The shift will leave the company without the executive who was responsible for much of its international expansion, said Donna Jaegers, a Denver-based analyst at D.A. Davidson & Co., who rates Akamai shares “buy.”

“It will leave a temporary void,” she said.

Kenny is leaving Akamai to pursue opportunities in consumer Internet, he said in the statement. Jaegers said that may point to an eventual landing at Yahoo! Inc., the Web portal that has been exploring strategic options after firing Chief Executive Officer Carol Bartz last month. Kenny is a member of Yahoo’s board.

Jeff Young, a spokesman at Akamai, declined to comment further about Kenny’s plans.

To contact the reporter on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net

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

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Hynix Reports Wider-Than-Estimated Third-Quarter Loss as Chip Prices Fall

By Jun Yang - Oct 27, 2011 6:53 AM GMT+0700

Hynix Semiconductor Inc. (000660), the world’s second-largest maker of computer-memory chips, posted a wider-than-estimated third-quarter loss after weak demand for personal computers led to a decline in chip prices.

The net loss was 562.6 billion won ($496 million), compared with a profit of 1.04 trillion won a year earlier, Ichon, South Korea-based Hynix said today in a statement. Analysts expected a loss of 398.5 billion won, according to the median of four estimates in a survey by Bloomberg News.

Hynix and other makers of memory chips known as DRAM have suffered from weakening demand as makers of traditional PCs cut back on purchases, with consumers flocking to mobile devices such as Apple Inc.’s iPad. The South Korean company, on sale by former creditors, is seeking to boost sales with different types of memory used in new mobile devices.

“DRAM prices have fallen so much, and there’s a limit to what they can do no matter how much they try to cut costs and improve their product mix,” Park Hyun, a Seoul-based analyst at Tong Yang Securities Inc., said before today’s announcement.

The company’s operating loss, or sales minus the cost of goods sold and administrative costs, was 276.8 billion won on sales of 2.29 trillion won.

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Amazon’s Apple War Costs Investors $13B

By Danielle Kucera - Oct 27, 2011 4:14 AM GMT+0700

Amazon.com Inc.’s escalating pursuit of Apple Inc. squeezed its profit forecast for this quarter, prompting investors to erase $13 billion from the company’s market value.

Amazon’s operations could lose $200 million in the fourth quarter as costs mount, the Seattle-based company said yesterday. The shares fell 13 percent to $198.40 at the close, the biggest decline since October 2008.

The company is taking on Apple in the market for tablet computers and sales of digital songs, books and movies. To gain an edge in tablets, Amazon is selling its new Kindle Fire device for as low as $199 -- less than half the price of Apple’s cheapest iPad. At that price, the company will lose $10 per device, research firm IHS Inc. estimates.

“Competing with Apple isn’t easy,” said Colin Sebastian, an analyst at Robert W. Baird & Co. “It comes at a cost, but the traditional media business they have would wilt on the vine without Amazon making this transition to digital.”

Last quarter’s profit also disappointed analysts, missing estimates by 42 percent -- the biggest negative surprise of any technology business in the Standard & Poor’s 500 Index

The stock had advanced 26 percent this year before today and set a record of $246.71 this month, raising pressure on Amazon to deliver stronger results.

Bezos’s Stake

Chief Executive Officer Jeff Bezos, Amazon’s founder and largest shareholder, saw his stake lose $2.5 billion in value. He reported holding 88.1 million shares as of Aug. 18.

Amazon’s operating results may range from a loss of $200 million to a profit of $250 million this quarter, the company said yesterday. Analysts were projecting a gain of $512.7 million on average, according to Bloomberg data. Sales will be $16.5 billion to $18.7 billion, Amazon said.

The last time Amazon suffered an operating loss was in the third quarter of 2001, when it fell $68.9 million into the red.

Third-quarter net income fell 73 percent to $63 million, or 14 cents a share, from $231 million, or 51 cents, a year earlier. That missed the 24 cents predicted by analysts.

Technology has fared worse than most industries this quarter in meeting investors’ earnings expectations, with about a third of companies missing estimates.

Amazon added 17 new fulfillment centers this year, and that overhead has weighed on margins, Chief Financial Officer Tom Szkutak said yesterday in a conference call. It’s also building out the infrastructure for its Web services offerings.

“We’ve added a lot of capacity to support those growth rates,” Szkutak said.

Startup Competition

In addition to competing with Apple in a range of markets, including digital music and movies, Amazon is vying with startups such as Spotify Ltd., which offer streaming songs. For now, Amazon’s growth plans aren’t doing enough to spur profit, even as sales climb, Sebastian said.

“If they don’t show a corresponding increase in earnings, investors start to scratch their heads,” the San Francisco- based analyst said.

Amazon doesn’t deserve a valuation that puts it ahead of Apple by some measures, said Colin Gillis, an analyst at BGC Partners LP. With an operating margin of 30.8 last quarter, Apple squeezes more profitability from sales, even with its own investment in new products, he said. Amazon traded at 119.5 times earnings, compared with Apple’s 14.4 times before today, according to data compiled by Bloomberg.

“Ultimately, does this deserve an ultra-premium valuation? No,” said Gillis, who rates Amazon a “sell.”

Shipping Costs

The stock’s lofty value reflects investors’ belief that Amazon’s new products will pay off down the road, said Josh Stewart, a Salt Lake City-based analyst at Wasatch Advisors Inc., which oversees about $11 billion in assets, including Amazon shares. The online retailer has historically acted more like a private company, investing for the long term and ignoring quarterly earnings, he said.

“We’ve been selling some of our investment going into the quarter because it’s had a run, and it’s a really expensive stock,” Stewart said in an interview. “We own more Apple than we do Amazon.”

Still, Amazon has had unprofitable periods before, as they built up their distribution. And that paid off, he said. “They realized how important it would be to get the scale early on.”

The company’s soaring shipping expenses also are dragging on profit, Gillis said. More customers are using Amazon’s Prime program, which offers unlimited two-day shipping for $79 a year. The company’s shipping fees generated $360 million in the third quarter, dwarfed by $918 million in shipping expenses.

Sales Gains

Even as profit shrinks, revenue is benefiting from surging Kindle orders, propelled by customers ditching paper books in favor of electronic versions. Net sales climbed 44 percent last quarter to $10.9 billion, in line with estimates.

“They could invest less and add more to cash flow today, but that’s leaving room for someone else to take market share tomorrow,” Sebastian said. “As an investor, you have to share their long-term vision.”

The company upgraded its Kindle e-readers and introduced the Kindle Fire tablet to more directly challenge Apple -- something Hewlett-Packard Co. and Research In Motion Ltd. have struggled to do. The Fire tablet, due next month, has a 7-inch display, smaller than the iPad’s 9.7-inch screen. It will run on Google Inc.’s Android software and offer Wi-Fi connectivity.

Amazon is pricing its devices to spur sales, said Kerry Rice, an analyst at Needham & Co. in San Francisco.

“They don’t care that the operating margin is 1 percent or 2 percent,” he said.

To contact the reporter on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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

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Apple May Gain as VA Seeks Security for 100,000 Devices

By Kathleen Miller - Oct 27, 2011 1:43 AM GMT+0700
Enlarge image

The U.S. Department of Veterans Affairs is exploring security systems that would permit employees to use as many as 100,000 mobile devices, including Apple Inc.’s iPad. Photographer: Christof Stache/AFP/Getty Images

The U.S. Department of Veterans Affairs is exploring security systems that would permit employees to use as many as 100,000 mobile devices, including Apple Inc. (AAPL)’s iPad and phones using Google Inc. (GOOG)’s Android, without endangering the privacy of sensitive information.

VA officials are researching “mobile device management” services that will protect e-mail and control access to agency computer networks for people using smartphones and tablet computers, according to a VA request for information issued last week and updated today.

“We want to make sure that veteran information is protected while still enabling productivity enhancing applications,” Roger Baker, the agency’s chief information officer, said in an e-mailed statement.

The VA’s decision may open a new market for Apple, which has until now lagged behind competitors Dell Inc. (DELL) and Research In Motion Ltd. (RIM) in selling technology to the government. The VA is looking for technology that would allow its employees to use as many as 100,000 iPads and iPhones within 18 months, including a mix of government-owned and personal mobile devices, Jo Schuda, a VA spokeswoman, said in an e-mail today.

Enterprise Network

The request, previously reported by Nextgov.com, is a precursor to a formal bid solicitation. It specifies that the agency wants a secure connection for a range of operating systems, including Apple’s iOS, Android, and Windows phones, to its enterprise network.

The request is good news for Apple, said Dan Jacobs, chief executive officer of The Federal Market Group, a consulting company based in Warrenton, Virgina. "More people are using their iPads" as computers, he said.

Apple is seeking a security certification from the National Institute of Standards and Technology, the agency that provides technology recommendations to the federal government. The institute certified RIM’s tablet computer, known as the PlayBook, on July 21, making it the first tablet device cleared by the agency. A decision on Apple’s iPad is pending, said Randy Easter, director of the cryptographic module validation program at NIST.

Cupertino, California-based Apple reported $65.2 billion in revenue for its fiscal year that ended Sept. 25, 2010.

Government Sales

Little of that comes from U.S. government business: In the 12 months ending Sept. 30, 2010, the latest fiscal year for which complete data are available, the federal government spent $50.8 million on Apple products, either directly or through resellers and integrators, according to data compiled by Bloomberg Government.

By contrast, $1.9 billion of products made by Dell, a technology company with roughly the same revenue as Apple last year, were bought by the government that year. Dell, of Round Rock, Texas, reported revenue of $61.5 billion in the 12 months ending Jan. 28, 2011.

Research in Motion, based in Waterloo, Ontario, is the only smartphone maker whose products have received Pentagon security certification. The federal government bought $90.2 million worth of RIM products in the fiscal year ending Sept. 30, 2010, according to data compiled by Bloomberg Government.

To contact the reporter on this story: Kathleen Miller in Washington at kmiller01@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net

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Netflix Said to Cut Jobs After Subscriber Loss

By Ronald Grover and Cliff Edwards - Oct 27, 2011 3:03 AM GMT+0700

Netflix Inc., the mail-order and online video service, eliminated more than 15 jobs after losing 800,000 U.S. subscribers in the third quarter, according to two people with knowledge of the decision.

The cuts, which began before earnings were announced on Oct. 24, are mostly in human resources, where Netflix had hired in anticipation of faster growth and the creation of separate companies for its mail-order and streaming businesses, said the people, who weren’t authorized to speak publicly.

Netflix, based in Los Gatos, California, has put its global expansion on hold while it tries to contain a subscriber revolt over a price increase and the aborted plan to split the two operations. The shares fell 35 percent yesterday after the company disclosed the defections and predicted losses next year.

Netflix gained 2.6 percent to $79.40 at the close in New York. The shares have retreated more than 70 percent from their all-time high set in July.

Chief Executive Officer Reed Hastings met personally with staffers who were being cut to explain the decision, according to one of the people.

Steve Swasey, a Netflix spokesman, declined to comment on the job cuts. He said last week the company had eliminated the position of chief marketing officer for the planned DVD service. Netflix finished 2010 with 2,180 employees, according to data compiled by Bloomberg.

Moody’s Investors Service today lowered its rating outlook on $200 million of Netflix debt to stable from positive, citing the subscriber loss and the company’s forecast for negative cash flow for upcoming quarters.

The company said on Oct. 24 it would hold off on further international expansion after introducing service in Great Britain and Ireland in early 2012 and in Latin America this year. On Oct. 10, the company abandoned plans to create a new DVD service called Qwikster.

To contact the reporters on this story: Ronald Grover in Los Angeles at rgrover5@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

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

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‘Incensed’ Moynihan Pushes Back at BofA’s Critics With Localized Campaign

By Hugh Son - Oct 27, 2011 12:14 AM GMT+0700

Bank of America Corp. Chief Executive Officer Brian T. Moynihan said he’s “incensed” by public criticism of his company and is pushing back by reminding local leaders of its contributions to their economies.

Moynihan, 52, told employees in a global town hall meeting last week from the firm’s Charlotte, North Carolina, headquarters that the “place to win the battle” over the bank’s battered public image is at the state and municipal level.

Bank of America’s outreach campaign is part of Moynihan’s effort to turn around the lender since he took over as CEO in January 2010 following two taxpayer bailouts. His plan to charge some debit-card users a $5 monthly fee drew reprimands from President Barack Obama and lawmakers, including U.S. Senator Richard Durbin, the Illinois Democrat who said customers should withdraw their deposits in protest.

“I, like you, get a little incensed when you think about how much good all of you do, whether it’s volunteer hours, charitable giving we do, serving clients and customers well,” Moynihan said during the Oct. 18 gathering. To the bank’s critics, he said, “You ought to think a little about that before you start yelling at us.”

Moynihan is laboring to rebuild the bank’s reputation with customers, employees and investors. Even before the debit-card fee sparked protests in Los Angeles and Boston, state attorneys general blamed the bank for using improper documents to justify foreclosures. To help reverse a stock decline this year of more than 50 percent, the lender is cutting expenses by eliminating more than 30,000 jobs.

Local Calls

The firm’s 135 market presidents have made about 1,500 phone calls and visits to local officials and community leaders across the country in two weeks, Anne Finucane, global head of strategy and marketing, said at the meeting. The effort begins with a letter explaining how much the bank lends to area businesses and the employees it has in the region, she said.

The company is trying to improve its standing with local officials and small firms because “research shows us that’s a more important indicator of reputation,” Finucane told employees. The firm has bought print advertising in 27 markets and television ads in 15 markets, she said.

Bank of America’s deposit-taking unit has the greatest concentration of locations in the most populous states, with 980 in California, 651 in Florida, 459 in Texas and 398 in New York, according to data on the Federal Deposit Insurance Corp.’s website. Minnesota, Utah and Colorado each have just one branch, the FDIC data show.

Campaign Makes Sense

“We are seeking to re-engage in a very straightforward manner on the issues people care about most, which is, ‘Are we lending and investing, and how much of it are we doing in that community?’” Finucane, 59, said in an interview. “We’re working to answer that question on a local basis.”

The campaign makes sense as part of a larger effort to improve relations with regulators and investors, said Michael Robinson, a senior vice president of Levick Strategic Communications in Washington and former head of public affairs at the Securities and Exchange Commission.

“When you feel like you’re getting assaulted on every front, you’ve got to move deliberately, you do the grass-roots plan, you work with the analysts and agencies,” said Robinson, who isn’t advising Bank of America. “They are an engine of the economy, and taking every opportunity to quantify that is a smart strategy.”

Second-Worst Company

Bank of America ranked lowest in a 24-bank survey of small business customer satisfaction from J.D. Power and Associates this month. Wells Fargo & Co., Citigroup Inc. and JPMorgan Chase & Co. also were in the bottom five. Earlier this year, Bank of America was named the country’s second-worst company by Consumerist.com after BP Plc, the firm blamed for the worst U.S. offshore oil spill. Consumers Union, the publisher of Consumer Reports that was founded in 1936, owns the website.

Bank of America had the highest customer satisfaction with its telephone service of the four largest U.S. lenders, Vocal Laboratories Inc. said yesterday. Sixty-eight percent of those surveyed were “very satisfied” with their interactions, compared with 63 percent for Wells Fargo, 56 percent for JPMorgan and 52 percent for Citigroup.

The lender’s letter-writing initiative began in early September, before the backlash from debit-card users and the Occupy Wall Street movement gained momentum, said a person with direct knowledge of the plan who asked to remain anonymous because it isn’t public.

Avoiding ‘Politics’

In media appearances, Moynihan has avoided directly addressing the complaints from Durbin and others, saying in an Oct. 5 Washington conference that he wanted to “stay away from the politics” of the debate.

Speaking to his employees last week, Moynihan was more combative, saying that critics “usually quiet down pretty quickly when they start to understand the facts and figures.”

He leavened his remarks with humor. When an employee said the CEO must be exhausted from dealing with naysayers, he drew laughter by saying “I’m not tired. Do I look that bad?”

The event followed the bank’s release of third-quarter results, a profit of $6.2 billion after one-time accounting gains. The firm was eclipsed by JPMorgan as the largest U.S. lender by assets during the quarter, and Moynihan told employees that he “could care less” that his company isn’t No. 1 anymore. Moynihan is selling assets and scaling back businesses including mortgage lending to improve capital levels.

‘Devastating’ Slowdown

Management is most focused on two areas, Chief Financial Officer Bruce Thompson said during last week’s meeting. One is cutting the $2 billion in quarterly expenses at the legacy-asset unit, the so-called bad bank managing the firm’s defaulted and delinquent loans. Most of those stem from the 2008 takeover of subprime lender Countrywide Financial Corp.

The other is to improve trading revenue, which plunged more than 70 percent to $1.07 billion in the quarter as the threat of a Greek default and Standard & Poor’s U.S. credit downgrade roiled markets. There are early signs of a rebound, he said.

“Two weeks into the quarter, we’re doing a lot better so far than we were in August and September,” Thompson said.

The bank rankled some customers this month when its website was hobbled for several days, inviting speculation that the debit-fee increase had spurred an attack by hackers. While the website was never completely down, the fact that people couldn’t use it was “devastating” to employees, said Cathy Bessant, global head of technology and operations.

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

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

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Bove: Goldman May Get ‘Windfall’ If It Buys MF

By Laura Marcinek - Oct 27, 2011 2:20 AM GMT+0700

Play Video

Oct. 26 (Bloomberg) -- Sean Egan, president of Egan-Jones Ratings Co., talks about challenges facing MF Global Holdings Ltd. and the outlook for the company. Bonds of the futures brokerage tumbled to levels considered “distressed” as the firm struggles to transform itself into an investment bank. The company is exploring strategic options, including a potential sale, according to a person with knowledge of the matter. Egan speaks with Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Goldman Sachs Group Inc. is among firms that could gain by buying part or all of MF Global Holdings Ltd., said Richard Bove, an analyst at Rochdale Securities LLC.

“Goldman could benefit from MF Global’s plight,” Bove said in a note today. “One might argue that Goldman is over capitalized and that it has too much liquidity. Buying some or all of MF Global might create the opportunity to make a windfall profit.”

MF Global, run by Chairman and Chief Executive Officer Jon Corzine, is exploring strategic options, including a potential sale, after reporting its biggest quarterly loss ever and having its credit ratings cut by Moody’s Investors Service, a person with knowledge of the matter said today.

The firm needs to generate liquidity and find a partner with excess capital and a “sizable” trading operation, Bove said in a telephone interview. Goldman Sachs, which Corzine helped run from 1994 to 1999, and Citigroup Inc., both based in New York, would be “logical buyers,” he said.

David Wells, a Goldman Sachs spokesman, and Danielle Romero-Apsilos at Citigroup declined to comment.

Large deposit-taking banks may not want to buy MF Global because they would have to set aside cash to back the futures trades placed by the firm’s customers, said Allan Zavarro, the former global head of futures trading for ABN Amro Bank NV. Regulatory capital in the range of 6 percent to 10 percent of client funds on deposit must be set aside by the broker or bank, Zavarro said.

Capital Allocation

“I’m not sure the big banks would want a big futures position on their books now because they have to allocate regulatory capital to it,” he said in an Oct. 25 telephone interview. As of Aug. 31, MF Global had $7.2 billion of customer funds in segregated accounts, according to the Commodity Futures Trading Commission.

In 2008, MF Global sold $300 million in preferred shares and notes to the public and as much as $300 million in equity- linked securities to buyout firm JC Flowers & Co. to help repay a $1.05 billion bridge loan.

Evercore Partners Inc., the investment bank founded by former U.S. Deputy Treasury Secretary Roger Altman, might also show interest in a deal with MF Global, Bove said. The firm is advising MF Global on the review of its business, said a person with knowledge of the matter today. Evercore may be interested in providing advisory clients with the ability to raise funds through a fixed-income trading platform, Bove said.

“It wouldn’t surprise me at all if Evercore jumped up as a company that was going to acquire them,” he said. Such a deal might not resolve MF Global’s liquidity needs, he said.

Evercore would more likely be interested in fee-based, low- capital-intensive businesses, said Warren Gardiner, an analyst for Ticonderoga Securities LLC.

Dana Gorman, a spokesman for Evercore, declined to comment.

To contact the reporter on this story: Laura Marcinek in New York at lmarcinek3@bloomberg.net

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

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Asian Stocks Rise on European Bank Plans

By Yoshiaki Nohara - Oct 27, 2011 8:15 AM GMT+0700

Asian stocks swung between gains and losses after Europe reached an accord on plans to recapitalize banks while talks with lenders on bondholder losses as part of a second Greek bailout ran aground.

Sumitomo Mitsui Financial Group Inc., Japan’s second- biggest lender, fell 0.6 percent, reversing earlier gains. Komatsu Ltd., Japan’s largest construction machinery maker, gained 0.6 percent after orders for U.S. durable goods excluding transportation equipment increased. Hyundai Motor Co., South Korea’s No. 1 carmaker by market value that gets 58 percent of its revenue abroad, advanced 0.5 percent.

“The situation in Europe is still very fluid and we still have to see exactly what is decided,” said Diane Lin, a fund manager with Sydney-based fund Pengana Capital Ltd., which manages about $1.1 billion in global assets. “At this stage, different information and stories are coming off of different sources. Until that’s decided, we can’t really know what will happen.”

The MSCI Asia Pacific Index gained fell 0.1 percent to 119.11 as of 10:14 a.m. in Tokyo after rising as much as 0.4 percent. The measure dropped 0.2 percent yesterday. About the same number of stocks on the index gained and fell with eight of 10 groups climbing.

Debt Writedown

French President Nicolas Sarkozy and German Chancellor Angela Merkel want to meet Greek creditors in Brussels to break a deadlock of the terms of a debt writedown, said a person familiar with the matter. Sarkozy plans to call Chinese leader Hu Jintao today to discuss China contributing to a fund European leaders may set up to bolster its debt-crisis fight, according to a person familiar with the matter.

Japan’s Nikkei 225 Stock Average added 0.1 percent and South Korea’s Kospi Index gained 0.4 percent.

Trading in Australia was halted by a technical problem five minutes after the open at 10 a.m. Sydney time. Matthew Gibbs, a spokesman for bourse operator ASX Ltd., said by telephone the exchange is working on the problem, though is unsure when trading will resume.

Futures on the Standard & Poor’s 500 Index rose 0.2 percent today. In New York, the index added 1.1 percent yesterday after European Union leaders reached an agreement on a plan to recapitalize banks even as talks on bondholder losses hit an impasse. The European leaders convened for the second summit in four days -- and the 14th in 21 months -- amid mounting global exasperation over their failure to extinguish the two-year-old crisis that threatens to ravage Italy and France and brake the world economy.

Europe’s situation “is certainly clearer than we’ve had over the past few days,” said Stan Shamu, a strategist at IG Markets in Melbourne. “This does seem a little bit more positive, and we’ve also got positive economic data out of the U.S., and that did really boost sentiment.”

U.S. durable goods excluding transportation equipment rose in September by the most in six months. Another report showed purchases of new houses increased more than forecast in September as discounted prices lured buyers in some parts of the country.

To contact the reporter on this story: 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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