Obama Invokes Cold-War Power to Unmask Chinese Spyware on Telecom Networks

By Michael Riley - Dec 1, 2011 2:45 AM GMT+0700

The U.S. is invoking Cold War-era national-security powers to force telecommunication companies including AT&T Inc. and Verizon Communications Inc. (VZ) to divulge confidential information about their networks in a hunt for Chinese cyber-spying.

In a survey distributed in April, the U.S. Commerce Department asked for a detailed accounting of foreign-made hardware and software on the companies’ networks. It also asked about security-related incidents such as the discovery of “unauthorized electronic hardware” or suspicious equipment that can duplicate or redirect data, according to a copy of the survey reviewed by Bloomberg News.

The survey represents “very high-level” concern that China and other countries may be using their growing export sectors to develop built-in spying capabilities in U.S. networks, said a senior U.S. intelligence official who asked not to be named because he wasn’t authorized to speak on the matter.

“This is beyond vague suspicions,” said Richard Falkenrath, a senior fellow in the Council on Foreign Relations Cyberconflict and Cybersecurity Initiative. “Congress is now looking at this as well, and they’re doing so based on very specific material provided them in a classified setting” by the National Security Agency, he said.

Dozens of Companies

The survey went to dozens of telecommunications companies, software makers and information-security companies, including some foreign firms, according to James Lewis, a cyber-security expert at the Center for Strategic and International Studies, or CSIS, in Washington. Lewis said AT&T and Verizon Communications were among the companies that received it.

Several of the companies were hesitant to cooperate because they had learned the Commerce Department unit handling the survey had itself been hacked by the Chinese in 2006, creating the possibility that company data provided might become known to the Chinese, according to a former government official familiar with the discussions.

The Commerce Department refused a request by the companies for specific protocols to protect the data, according to the former official, who declined to be identified because the discussions were confidential.

Security Issues

Mark Siegel, a spokesman for Dallas-based AT&T (T), declined to comment on security issues. Edward McFadden, a spokesman for New York-based Verizon, said the company had received the survey and declined to comment further. Eugene Cottilli, a Commerce Department spokesman in Washington, had no immediate comment on the survey.

So-called spyware implanted in hardware or hidden in millions of lines of code could intercept sensitive information while being almost impossible to detect, according to Joshua Pennell, president of IOActive Inc., a Seattle-based cyber security firm.

Spyware in critical U.S. networks that carry much of the country’s data would make industrial espionage or the interception of politically sensitive information almost effortless. China now targets such information via focused cyber attacks, according to a November report by the Office of the National Counterintelligence Executive.

Detailed Outline

The survey required companies to provide a detailed outline of who made equipment including optical-transmission components, transceivers and base-station controllers. The results, which according to the survey were to be shared with the Defense Department, give U.S. authorities a map of who made which parts of the nation’s networks, said Mischel Kwon, a former cyber- security official in President Barack Obama’s administration.

Companies that refused to respond could face criminal penalties under the Defense Production Act, a 1950 law allowing the government to manage the wartime economy, according to the survey. The law was invoked sporadically during the Cold War, said Lewis, the computer security expert.

The possibility that foreign companies could be seeding equipment with “backdoors” to intercept data crossing U.S. networks could have implications for a global economy in which China plays a growing role as a component supplier.

“What we don’t want to say is that we can’t have technology coded or processed in another country,” said Kwon, who has advised some of the companies sent the survey. “This is being read by some as very restrictive.”

House Committee

Citing close links between China’s military and the network equipment giant Huawei Technologies Co., the U.S. House Permanent Select Committee on Intelligence on Nov. 18 said it would investigate potential security threats posed by some foreign companies.

The committee’s chairman, Representative Mike Rogers, a Michigan Republican, said China has increased cyber espionage in the U.S. He cited connections between Huawei’s president, Ren Zhengfei, and the People’s Liberation Army. Ren once worked as a military technologist.

“That’s what we would call a clue,” said Rogers, a former agent at the Federal Bureau of Investigation.

William Plummer, a spokesman for Shenzhen-based Huawei, said this month that the company welcomed an investigation.

“Huawei conducts its businesses according to normal business practices just like everybody in this industry,” Plummer said this week in a phone interview. “Huawei is an independent company that is not directed, owned or influenced by any government, including the Chinese government.”

Classified Information

The Obama administration has said little publicly about the matter, and much of the evidence fueling lawmakers’ concerns remains classified.

The Commerce Department survey also illustrates the intelligence community’s concern that manufacturers may insert spyware after equipment is installed, through either maintenance or automatic software updates. It asks companies to detail procedures they use to test software patches or updates to insure they are safe.

“It’s the update function that is the core of the concern,” said Lewis of the CSIS. “Huawei has offered to let people examine their source code to see if it is clean,” he said. “Of course it’s clean, but that’s not the delivery vehicle, assuming there is one.”

The survey also asks about incidents in which companies “detected undocumented functionality” in network hardware and software. The survey gave as examples the duplication and manipulation of data or redirection of transmissions.

Encrypted Data

Recipients were required to send an encrypted version of their responses by June 10 to the Commerce Department’s Bureau of Industry and Security, according to the survey. That deadline was extended after companies expressed concern about how the data, much of which is proprietary, were to be handled, according to Portia Krebs, a spokeswoman for the U.S. Telecom Association, a Washington-based trade group.

U.S. Telecom and CTIA-The Wireless Association, another trade group, say the survey breaks with a tradition of voluntary cooperation between the industry and government over national security measures.

“We are deeply concerned by the lack of information regarding how this data is going to be used and shared,” the groups said in a June 8 letter to then-Secretary of Commerce Gary Locke. “Our concerns are exacerbated by the fact that the department has chosen to direct the disclosure of this data pursuant to an assertion of authority under the Defense Production Act.” Locke is now the U.S. ambassador to China.

Krebs and Amy Storey, a spokeswoman for the Washington- based CTIA, declined to comment further on the letter or their groups’ concerns.

Picture Frame

In 2008, an Insignia brand digital picture frame was shipped with malicious software embedded during the manufacturing process. Best Buy Co. (BBY), which makes Insignia products, traced the malware to a single computer at a contractor’s plant in China, according to Carolyn Aberman, a company spokeswoman. Aberman declined to comment on whether the company discovered who may have planted it or why.

An analysis by Total Defense Inc., based in Islandia, New York, concluded the malware could have been a test run for a more sophisticated attack. It was designed to upload onto computers when the picture frame was connected to a computer and was capable of stealing large amounts of data while avoiding anti-virus detectors, the company’s analysis found.

The malware came to light because the picture frame was a product that Richfield, Minnesota-based Best Buy, the world’s biggest consumer-electronics retailer, pulled from the shelves.

Homeland Security

In July, Greg Schaffer of the Department of Homeland Security testified before the House Oversight and Government Reform Committee that the department knew of instances of foreign-made components seeded with cyber-spying technology. He declined to provide further details.

The Commerce Department survey also reflected U.S. intelligence community concerns over discounting and loan packages offered by foreign manufacturers.

It asks companies to list makers of telecommunications equipment that offer the steepest discounts. Other questions ask what information or other conditions manufacturers require in exchange for sales or leasing, including knowledge of physical access procedures for entering buildings.

Lewis of the CSIS said U.S. officials suspect the Chinese government is subsidizing the discounts to give U.S. companies incentives to buy Chinese-made network equipment.

“Huawei says they’re doing this and it’s completely legitimate, and it’s just us competing in the market,” Lewis said. “The other possibility is that they are doing it because they have an intelligence motive.”

To contact the reporter on this story: Michael Riley in Washington at michaelriley@bloomberg.net.

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Record Cotton Crop Spurs Goldman to Predict Declining Prices: Commodities

By Joe Richter - Dec 1, 2011 2:03 PM GMT+0700

The combination of a record cotton crop and falling consumption will expand global stockpiles by the most since 2005, driving further declines in the price of this year’s worst-performing commodity.

Harvests will increase 7.5 percent to 123.89 million 480- pound bales (27 million metric tons) in the 12 months ending in July, as demand drops to a three-year low of 114.27 million bales, the U.S. Department of Agriculture estimates. Prices may decline 15 percent to 77 cents a pound on ICE Futures U.S. in New York by the end of next year, from 90.91 cents now, based on the median of 12 analyst estimates compiled by Bloomberg.

“It’s a double whammy,” said James Dailey, who manages $215 million of assets at TEAM Financial Management LLC in Harrisburg, Pennsylvania. “Cotton is facing the worst-case nightmare for a commodity, where you have a glut in physical production combined with weakening demand.”

Cotton fell 59 percent since reaching an all-time high of $2.197 in March as investors bet that prices would curb demand and encourage supply. Output is rising from Australia to China to India, more than compensating for a U.S. decline caused by the worst crop conditions since the dust bowl era of the 1930s. Speculators in U.S. futures are now the least bullish in 2-1/2 years, Commodity Futures Trading Commission data show.

Economic growth is forecast by the International Monetary Fund to slow next year from Europe to China to the Middle East, potentially curbing the consumption of commodities. Clothing manufacturers including Levi Strauss & Co. are already starting to cut prices to stimulate demand.

Index of Equities

This year’s 37 percent decline in prices means cotton fell the most among 24 commodities in the Standard & Poor’s GSCI gauge, which advanced 4.1 percent. The fiber rose the most in 2010, adding 92 percent. The MSCI All-Country World Index of equities dropped 9.1 percent since the end of December and Treasuries returned 9.1 percent, a Bank of America Corp. index shows.

Cotton will reach 85 cents in six months, Goldman Sachs Group Inc. said in a report Nov. 10, reducing its previous forecast of $1. The most widely held option on futures gives holders the right to sell at 90 cents by Feb. 10, according to ICE Futures U.S. data.

Hedge funds and other speculators are holding a net-long position, or bets on higher prices, of 11,985 futures and options, the least since April 2009, CFTC data show. They have been reducing their position since a peak of 81,336 contracts in September 2010.

Water Supply

China’s harvest, the biggest of any nation, is expanding for the first time in four years, the USDA estimates. Output in Australia may rise as much as 25 percent to a record as water supply improves, Adam Kay, chief executive officer of Cotton Australia, a Mascot, New South Wales-based producer’s group, said in an interview Nov. 16. Exports from India, the second- biggest shipper, may climb 14 percent, B.A. Patel, the country’s joint textiles commissioner, told reporters Nov. 15.

The USDA cut its global demand forecast five times in the past six months, on expectations that global growth is slowing. Consumption contracted more than 11 percent in 2009, the most in at least a half century, during the worst global slump since the Great Depression.

Economists don’t expect a repeat next year, with the International Monetary Fund predicting global growth of 4 percent, unchanged from 2011. China, the biggest cotton consumer, will expand 9 percent, and India, the second-largest, 7.5 percent, the Washington-based group estimates.

‘Turbo Boost’

The price slump since March may spur purchases by textile makers after signs of improving consumer demand. U.S. retail sales jumped to a record $52.4 billion during the four-day Thanksgiving weekend through Nov. 27, according to the National Retail Federation. More than 51 percent of shoppers bought clothes, the Washington-based NRF said.

“Mill demand must, at some point in time, catch up with retail demand,” said O.A. Cleveland, an agricultural economist and a professor emeritus in agricultural economics at Mississippi State University. “It would be a turbo boost for prices if we see Chinese mills spinning more cotton because it means there’s actual demand.”

China may be accelerating purchases to rebuild reserves depleted this year by state sales aimed at containing inflation. Imports reached a six-month high of 250,000 tons in September and remained there in October, customs data show.

Nine Months

The gains in Chinese imports may not last. Production of fabric in the nation fell 4.9 percent in September from a year earlier and declined in eight of the past nine months, INTL FCStone Inc. said in a report Nov. 8. Cotton-cloth exports dropped 10.1 percent in September, a sign fabric production may remain weaker into 2012, the New York-based trader and adviser wrote in the report.

China will use 1.1 percent less cotton in the season ending in July, Cotlook Ltd. said in a Nov. 17 report. The Birkenhead, England-based research company also cut its demand forecasts for the Indian subcontinent and Brazil and anticipates a “massive” 3.56 million-ton supply surplus, compared with 653,000 tons in the previous year. Expectations that declining prices would spur demand “have steadily faded,” Cotlook said.

Cheaper cotton will help clothing manufacturers, who contended this year with prices that averaged $1.365 a pound, the most since at least 1958. Levi Strauss cut prices in the third quarter to reduce inventory, Chief Financial Officer Blake Jorgensen said in October. The San Francisco-based company had raised prices in the past year in response to the surge in cotton, and shoppers balked at the higher costs, he said.

‘Cotton-Price Hangover’

“There’s a cotton-price hangover that’s going to be with us for a long time,” said Rogers Varner Jr., the president of Varner Bros., a brokerage in Cleveland, Mississippi. “The price increase earlier this year was so extreme. It was more than just turmoil. It was upheaval.”

Liz Claiborne Inc., the operator of the Juicy Couture and Kate Spade clothing lines, is still suffering from the surge in cotton, Chief Financial Officer Andrew Warren said on a conference call Nov. 9. The New York-based company’s 2012 margins will be boosted after the slump in prices, Warren said.

“Historically, cotton wants to be between 50 cents and 80 cents, and that just seems to be the fair value for it,” said Michael Smith, the president of T&K Futures & Options in Port St. Lucie, Florida. “Cotton ran up more than other commodities, and so it still has a lot more correcting to do.”

To contact the reporters on this story: Joe Richter in New York at jrichter1@bloomberg.net; Feiwen Rong in Beijing at frong2@bloomberg.net.

To contact the editors responsible for this story: Steve Stroth at sstroth@bloomberg.net; Richard Dobson at rdobson4@bloomberg.net.

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China Stocks Rally Most in 18 Months on Reserve Ratio Cut; Rate Swaps Fall

By Bloomberg News - Dec 1, 2011 1:55 PM GMT+0700

China’s stocks rose the most in eight weeks, the yuan gained and interest-rate swaps fell as lenders’ reserve-ratio requirement was cut for the first time since 2008 and six central banks took action on Europe’s debt crisis.

The Shanghai Composite Index climbed 2.4 percent to 2,390.17 at 2:33 p.m. local-time, while the Hang Seng China Enterprises Index of Chinese stocks traded in Hong Kong rallied 7.8 percent. Financial stocks and commodity producers advanced the most in Shanghai, with China Life Insurance Co. rising more than 7 percent and Jiangxi Copper Co. (600362) jumping the most in 5 months. The yuan advanced the most in seven weeks while interest-rate swaps dropped to a one-year low.

“This RRR cut is very positive for the banks,” Daphne Roth, Singapore-based head of Asian equity research at ABN Amro Private Bank, said in a telephone interview. “They timed it with the other central banks to inject liquidity into the system” in a move that will help spur a rebound for stocks.

A report today showed China’s manufacturing contracted for the first time since February 2009. The Purchasing Managers’ Index fell to 49.0 in November from 50.4 in October, the China Federation of Logistics and Purchasing said in a statement. The median estimate in a Bloomberg News survey of 18 economists was 49.8. A level above 50 indicates expansion.

Chinese banks’ reserve ratios will decline by half a percentage point effective Dec. 5, the People’s Bank of China said yesterday after local markets closed. The level for the biggest banks falls to 21 percent from a record 21.5 percent. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG.

Easing Inflation

The central bank lowered the requirement amid signs that inflation is slowing, manufacturing data will be “disappointing” and the European debt crisis has worsened, said Hao Hong, global equity strategist of China International Capital Corp., the top-ranked provider of China research in Asiamoney’s survey.

“For this rebound to evolve into a sustainable rally, we need to see some concrete steps to resolve the sovereign crisis and stem the possibility of a global economic relapse,’ he said.

The U.S. Federal Reserve, the European Central Bank and the monetary authorities of the U.K., Canada, Japan and Switzerland said they were cutting the cost of emergency dollar funding to ease strains in financial markets. Global markets rallied, with the Standard & Poor’s 500 Index rising 4.3 percent yesterday.

Slowing Growth

Growth in China’s economy, the world’s second largest, will slow to 8.5 percent next year, the Paris-based Organization for Economic Cooperation and Development said, down from its May forecast of 9.2 percent. The economy expanded 9.1 percent in the third quarter from a year earlier, the least in two years. UBS this week lowered its prediction for growth in 2012 to 8 percent from its previous call of 8.3 percent, and Citigroup Inc. cut its forecast to 8.4 percent from 8.7 percent.

The Shanghai Composite has fallen 15 percent this year after the central bank raised interest rates three times and lifted the reserve-requirement ratio six times to curb inflation that reached a three-year high of 6.5 percent in July. The gauge is valued (SHCOMP) at 11.3 times estimated earnings, compared with a four-year average of 17.3 times, according to weekly data compiled by Bloomberg.

China’s decision to cut the reserve-requirement ratio will benefit small banks, brokerages, material producers, property developers and insurance companies the most, CICC’s Hong wrote in a note.

Financials Rally

China Life Insurance gained 7.6 percent, the most since July 2009, while rival Ping An Insurance Group Co. added 5.5 percent. Huaxia Bank Co., partly owned by Deutsche Bank AG, gained 4.8 percent, while China Merchants rallied 3.7 percent. China Vanke Co., the biggest Chinese developer, rose 5.1 percent. Jiangxi Copper, the nation’s largest producer of the metal, jumped 6 percent.

‘‘The PBOC’s move will provide the needed liquidity for the market to ensure economic growth,” said Daniel Chan, chief economist at BWC Capital Markets in Hong Kong. “The yuan also gained on the dollar’s weakness given the co-ordinated moves among the world’s major central banks. These measures boosted the appeal of Chinese assets.”

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, declined 0.14 percentage point to 2.86 percent in Shanghai, according to data compiled by Bloomberg. The yield on the government’s benchmark three-year bond dropped 12 basis points to 2.91 percent. Both rates were the lowest since November 2010.

The yuan gained 0.3 percent to 6.3600 per dollar in Shanghai, the biggest one-day advance since Oct. 10, according to the China Foreign Exchange Trade System. The People’s Bank of China raised its daily reference rate 0.2 percent, the most in a month, to 6.3353. The currency is allowed to trade up to 0.5 percent on either side of the reference rate.

Stocks Outlook

UBS forecasts a gain of up to 30 percent for the Shanghai Composite next year as liquidity is expected to improve and the cost of capital may decrease, according to a report today.

“We expect a modest recovery in the A-share market,” Li Chen, UBS’s Shanghai-based head of China equity strategy, said in a report. While the stock market’s price-earnings ratio will increase, corporate profit growth may continue to decline for the next two-to-three quarters, Chen said. The strategist didn’t immediately respond to phone calls or an e-mail message on whether the forecasts were made before the reserve-ratio cut.

Premier Wen Jiabao aims to sustain China’s economic expansion as Europe’s debt crisis saps exports, a credit squeeze hits small businesses and a crackdown on real-estate speculation sends home sales sliding.

China’s reduction in reserve requirements for bank signals a “shift in focus” from anti-inflation to economic growth stability, Citigroup Inc. said.

Easing Inflation

The inflation rate may have fallen to 4.3 percent in November from 5.5 percent the previous month, CICC’s Hong said. The November data are due on Dec. 9. The government’s full-year inflation target is 4 percent.

“The reserve requirement ratio cut came earlier than expected and that’s definitely a short-term positive,” said Chen Liqiu, a strategist at Jianghai Securities Co. in Shanghai. “This will attract more liquidity into stocks. Still, this pre- emptive move probably means the government is seeing a weaker economy than usual.”

To contact Bloomberg News staff for this story: Weiyi Lim in Singapore at wlim26@bloomberg.net; Fion Li in Hong Kong at fli59@bloomberg.net

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

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Asia Stocks, Won Jump on Central Banks Move

By Shiyin Chen - Dec 1, 2011 2:10 PM GMT+0700

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Dec. 1 (Bloomberg) -- Kelvin Tay, the Singapore-based chief investment strategist at UBS Wealth Management, talks about central banks' monetary policies, China's decision to cut banks' reserve requirements, and the potential impact of the moves on the global economy and financial markets. Six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis. Tay speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

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Dec. 1 (Bloomberg) -- David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., talks about his investment strategy and Europe's sovereign debt crisis. U.S. stocks advanced, driving the Dow Jones Industrial Average up the most since March 2009, after six central banks took action on Europe’s crisis by making it cheaper for lenders to borrow in dollars. Joy speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Dec. 1 (Bloomberg) -- Stephen Green, Hong Kong-based head of Greater China research at Standard Chartered Plc, talks about China's economy and central bank monetary policy. The People’s Bank of China announced yesterday it will cut the reserve requirement for the nation’s lenders by 0.5 percentage points from Dec. 5. Separately, China’s manufacturing contracted for the first time since February 2009 as the property market cooled and Europe’s crisis cut export demand, a survey showed. Green speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Asian stocks (MXAP) rallied, South Korea’s won jumped the most in four weeks and the dollar held at a one- week low after central banks took steps to ease Europe’s debt crisis and support economic growth. Copper snapped the biggest gain in a month as China’s manufacturing contracted.

The MSCI Asia Pacific Index rose 3.1 percent at 4:08 p.m. in Tokyo, set for its largest increase since Oct. 27. Standard & Poor’s 500 Index futures slid 0.2 percent, following the stock gauge’s 4.3 percent surge yesterday, while Euro Stoxx 50 Index contracts added 0.4 percent. China’s interest-rate swaps sank to the lowest level in a year. The won strengthened 1.4 percent and the Dollar Index fell as much as 0.2 percent. Copper slid 0.5 percent and oil traded above $100 a barrel in New York.

Six central banks led by the Federal Reserve agreed to cut the cost of providing dollar funding via swap agreements and to make other currencies available as needed. The People’s Bank of China cut banks’ reserve requirements yesterday for the first time since 2008, while a purchasing managers’ index signaled the first Chinese manufacturing contraction since February 2009.

“The global monetary policy backdrop is turning more favorable,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in the Bloomberg Television interview. “This is all in the context of undervalued markets, so there are some good things happening but the key ingredient remains Europe and what happens there.”

About six shares gained for each one that declined on MSCI’s Asia Pacific Index, helping the gauge extend a three-day, 4.3 percent advance. Japan’s Nikkei 225 Stock Average added 1.9 percent, South Korea’s Kospi Index rallied 3.7 percent and Hong Kong’s Hang Seng Index surged 5.5 percent. China’s Shanghai Composite Index rose 2.3 percent.

Banks, Developers

Commonwealth Bank of Australia (CBA) advanced 2.5 percent in Sydney, pacing gains among lenders. Evergrande Real Estate Group Ltd. (3333), China’s second-biggest developer by sales, jumped 15 percent in Hong Kong.

The S&P 500 rounded off its steepest three-day rally since March 2009, while the VIX (VIX), as the Chicago Board Options Exchange Volatility Index is known, dropped 9.3 percent yesterday to a three-week low. The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said yesterday in a statement. The so-called dollar swap lines will be extended by six months to Feb. 1, 2013.

Treasury 10-year yields increased eight basis points to 2.07 percent yesterday. The rate was little changed today. The Fed said in its Beige Book survey yesterday the economy expanded at a “moderate” pace in 11 of 12 districts, led by gains in manufacturing and consumer spending.

U.S. Economy

The Beige Book reinforced the Fed’s view that the U.S. economy, while strong enough to skirt a recession, remains too weak to bring down an unemployment rate stuck near 9 percent or higher for more than two years. The government is scheduled to release payroll figures for November tomorrow.

The Dollar Index (DXY), which tracks the U.S. currency against those of six trading partners, was little changed after a three- day decline. The gauge has dropped 1.7 percent this week. The dollar was little changed against the euro at $1.3452 and fetched 77.66 yen, compared with 77.62 yesterday in New York.

Spain and France are scheduled to sell bonds today. The European Central Bank holds its next policy meeting on Dec. 8, and regional heads of government will meet the following day in Brussels.

Currency Gains

The won rose to 1,126.10 per dollar, strengthening for a fourth day. The Taiwan dollar rose 0.8 percent to NT$30.103 and Thailand’s baht advanced 0.6 percent to 30.96. The yuan appreciated 0.3 percent to 6.3600 and China’s one-year swap contract, the fixed rate that can be exchanged for the floating seven-day repurchase rate, fell 19 basis points to 2.84 percent.

The People’s Bank of China yesterday said reserve ratios will decline by 50 basis points effective Dec. 5. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG. The Purchasing Managers’ Index fell to 49.0 in November from the previous month’s 50.4, the China Federation of Logistics and Purchasing said today. The median estimate in a Bloomberg News economist survey was 49.8. A level above 50 indicates expansion.

“The cut in the reserve ratio requirement is significant and signals Beijing is pivoting towards supporting growth,” Stephen Green, Hong Kong-based head of Greater China research at Standard Chartered Plc, said on Bloomberg Television. “As soon as the banks can lend a bit more, that should feed into the small and medium enterprises. That’s where the economy is beginning to seize up.”

Copper, Oil

Brazil yesterday cut borrowing costs for a third-straight meeting, joining Israel and Thailand in lowering interest rates this week.

Three-month copper decreased as much as 1.3 percent to $7,781.50 a metric ton on the London Metal Exchange, after prices surged 5.3 percent yesterday, the most since Oct. 27. Zinc slumped 2.1 percent, the first retreat in five days, while aluminum declined 1.2 percent.

Oil for January delivery rose 0.4 percent to $100.72 a barrel in New York. Rubber jumped as much as 6.8 percent to 285.7 yen a kilogram ($3,684 a metric ton) in Tokyo, the biggest gain since Nov. 14.

The cost of insuring Japanese corporate bonds against non- payment declined, with the Markit iTraxx Japan index dropping 10 basis points to 195 basis points, Deutsche Bank AG prices show. That would be the biggest decline since Oct. 28, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

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

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Woodford Seeks Olympus Shareholder Backing

By Chris Cooper and David Glovin - Dec 1, 2011 11:13 AM GMT+0700

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Dec. 1 (Bloomberg) -- Michael Woodford, former chief executive officer of Olympus Corp., talks about the accounting scandal at the Japanese camera maker. Woodford resigned as a director of Olympus in the first step of a campaign to take control of the company from the board that fired him as CEO in a dispute over falsified accounts. He spoke last night with Bloomberg Television's Lisa Murphy. (Source: Bloomberg)

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Michael C. Woodford, former president and chief executive officer of Olympus Corp. Photographer: Jin Lee/Bloomberg

Michael C. Woodford resigned as a director of Olympus Corp. in the first step of a campaign to take control of the camera maker from the board that fired him as chief executive officer in a dispute over falsified accounts.

“I will come together with a new slate of directors,” Woodford said in an interview in New York yesterday. Resigning “allows me to talk to all parties at Olympus.”

Shareholders should be given a chance to vote for new management after Olympus admitted former Chairman Tsuyoshi Kikukawa and senior aides colluded to cover up losses dating back to the 1990s, Woodford said. Southeastern Asset Management Inc., Olympus’s largest overseas stockholder, has called for Woodford’s reinstatement and pressed for more executives to quit, including Akihiro Nambu, the current head of investor relations.

“It’s completely inappropriate for the current management team, who are tainted by its past mistakes, to make choices about the identity of new board members,” Woodford said in an e-mailed statement today. “I intend to liaise with all interested stakeholders with a view to formulating a proposal for the constitution of a new board.”

The former CEO was fired after questioning $1.4 billion in takeover costs now at the center of criminal investigations. Olympus confirmed it accepted his resignation as a director, according to a statement to the Tokyo Stock Exchange.

“I remain completely committed to Olympus and, if the shareholders decide, very much want to return,” Woodford said in the e-mail. “I would like nothing more than to return to Olympus and lead it towards” regaining its reputation as “a world-class organization which is the envy of its competitors,” he said in the statement.

FBI, SEC

Woodford met with the Federal Bureau of Investigation, the Department of Justice and the Securities and Exchange Commission in the U.S. this week, following meetings with Japanese police and regulators last week, to discuss payments made in the purchase of Gyrus Group Plc and stake writedowns in three other takeovers.

The stock of the 92-year-old camera and endoscope maker has slumped more than 50 percent since Woodford was fired, on concerns about the scale of the losses, the threat of delisting and continuing criminal investigations. Olympus rose as much as 9.3 percent to 1,120 yen, and traded at 1,082 yen as of 11:13 a.m. in Tokyo.

Woodford met with President Shuichi Takayama and other directors at a board meeting in Tokyo last week and pledged to work to avoid delisting. The company must report earnings by a Dec. 14 deadline set by regulators to avoid being removed from public trading.

An independent panel investigating acquisitions and accounting that the company set up on Nov. 1 may report its findings as early as this week, according to a person with direct knowledge of the matter.

Committee Findings

The committee, headed by former Supreme Court Judge Tatsuo Kainaka, has interviewed previous executives including Woodford, Kikukawa and Hisashi Mori, the executive vice president dismissed over his part in the schemes to cover up losses.

The company is also forming two teams to improve corporate governance and business structure that will be led by President Takayama, the company said two days ago.

“The promise for reform or reconstruction by Mr. Takayama and the current board carries little or no credibility and is continuing to harm Olympus and its long-term future,” Woodford said in the statement.

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; David Glovin in New York at dglovin@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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Central Banks Cut Cost of Borrowing Dollars

By Scott Lanman and Jeff Black - Dec 1, 2011 4:25 AM GMT+0700

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Nov. 30 (Bloomberg) -- Michael Holland, chairman of Holland & Co., talks about the outlook for the U.S. economy following the decision by the Federal Reserve and five other central banks to cut the cost of emergency dollar funding for European banks. Holland speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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Nov. 30 (Bloomberg) -- Cliff Noreen, president of Babson Capital Management LLC, talks about his investment strategy for fixed-income. Noreen also discusses Europe's sovereign debt crisis and six central banks' move to make it cheaper for banks to borrow dollars in an effort to ease the crisis. He speaks with Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

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Nov. 30 (Bloomberg) -- Brian Belski, chief investment strategist at Oppenheimer & Co., discusses the decision by the Federal Reserve and five other central banks to cut the cost of emergency dollar funding for European banks in response to the region's sovereign-debt crisis. Belski, speaking with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop," also discusses investment strategy and the outlook for financial markets. (Source: Bloomberg)

Six central banks led by the Federal Reserve made it cheaper for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis.

Stocks rallied, driving the Dow Jones Industrial Average up the most since March 2009, commodities surged and yields on most European debt fell on the show of force from central banks aimed at easing strains in financial markets. The cost for European banks to borrow dollars dropped from the highest in three years, tempering concerns about the euro’s worsening crisis after leaders said they’d failed to boost the region’s bailout fund as much as planned.

“It’s supportive but not necessarily a game changer,” said Michelle Girard, senior U.S. economist at RBS Securities Inc. in Stamford, Connecticut. “The impact is more psychological than anything else” as investors take heart from policy makers’ coordination, Girard said.

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement in Washington. The so- called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

Starting December

The swap lines were previously set to expire Aug. 1, 2012. The new pricing will be applied to operations starting on Dec. 5. Seven-day loans would carry an interest rate of about 0.58 percent, down from 1.08 percent, based on the current one-week overnight index swap rate of 0.08 percent. OIS is a measure of expectations for the benchmark federal funds rate.

“This was in response to increased tension in global financial markets,” Bank of Japan Governor Masaaki Shirakawa said at a press conference in Tokyo today. “Coordinated action will give markets a sense of security.”

The action wasn’t aimed at supporting any specific financial institution, Canadian Finance Minister Jim Flaherty said in a Bloomberg Television interview in New York.

The Dow jumped 490.05 points, or 4.2 percent, to 12,045.68 at 4 p.m. in New York, and the Stoxx Europe 600 Index earlier surged 3.6 percent. The euro strengthened to $1.3444 from $1.3317 late yesterday. The yield on the 10-year Treasury note climbed to 2.08 percent from 1.99 percent.

Game Changer?

“When there’s concerted action by central banks, it’s definitely good,” said Jens Sondergaard, senior European economist at Nomura International Plc in London. “But are liquidity injections a game changer when the heart of the problem is in European sovereign debt markets?”

European banks gained, with Barclays Plc (BARC) climbing as much as 9.4 percent in London trading. Deutsche Bank rose as much as 7.3 percent in Frankfurt, while BNP Paribas SA and Credit Agricole SA gained in Paris.

Today’s move echoes coordinated actions from the financial panic starting in 2007 to create and expand the currency-swap lines, whose use peaked at about $583 billion in December 2008. The central banks also jointly lowered their benchmark interest rates in October 2008.

Fed policy makers voted 9-1 for the swap action in a Nov. 28 videoconference, with Richmond Fed President Jeffrey Lacker dissenting, Michelle Smith, a Fed spokeswoman, said in an e- mail. Lacker voted in place of Philadelphia Fed President Charles Plosser, who was unavailable for the meeting, Smith said. Laura Fortunato, a spokeswoman for Lacker at the Richmond Fed, didn’t immediately respond to a request for comment.

No Current Difficulties

The Fed said U.S. financial companies “currently do not face difficulty obtaining liquidity in short-term funding markets.”

“However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses,” the central bank said in the statement.

U.S. House Financial Services Committee Chairman Spencer Bachus, an Alabama Republican, said in a statement that the move “is a recognition of the interconnected nature of the global economy” and that it’s in America’s interest to see Europe recover. At the same time, the action “should not and cannot absolve European policymakers from the need to resolve their own problems,” Bachus said.

China Move

Two hours before the Fed announcement, China cut the amount of cash that the nation’s banks must set aside as reserves for the first time since 2008. The level for the biggest lenders falls to 21 percent from a record 21.5 percent, based on past statements.

While today’s move by the six central banks is likely to ease tensions in money markets, it falls short of some calls for the ECB to step up and act as lender of last resort for the governments of the 17-member euro area and buy unlimited amounts of government bonds. Germany, Europe’s largest economy, has resisted the idea, arguing it isn’t the ECB’s job to do so and would only be a temporary fix.

The ECB unexpectedly cut its benchmark interest rate Nov. 3 by 25 basis points to 1.25 percent as the turmoil threatened to drag the euro area into recession. ECB policy makers next meet Dec. 8, while Fed officials gather Dec. 13.

Seven-Day Refinancing

Yesterday, the ECB allotted the most to banks in its regular seven-day refinancing operation in more than two years, lending 265.5 billion euros ($357.5 billion). The ECB offers unlimited funding to euro-area banks against eligible collateral.

“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the Fed statement said.

Under the dollar liquidity-swap program, the Fed lends dollars to the ECB and other central banks in exchange for currencies including euros. The central banks lend dollars to commercial banks in their jurisdictions through an auction process.

The swap arrangements were revived in May 2010 when the debt crisis in Europe worsened. The Fed three months earlier had closed all swap lines opened during the financial crisis triggered by the subprime-mortgage meltdown in 2007.

Dollar Tender

European lenders asked for a total of $395 million in the ECB’s 84-day dollar tender conducted in coordination with the Fed on Nov. 9. In the first offering on Oct. 12, the ECB lent six banks $1.35 billion for three months. The next three-month loan will be offered on Dec. 7.

The coordinated action “lowers the cost of emergency funding and increases the scope,” Mohamed El-Erian, chief executive officer, of Pacific Investment Management Co. said in a radio interview today on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene.

Central banks “are seeing something in the functioning of the banking system that worries them,” El-Erian said.

To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net; Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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Alibaba-Led Group Said to Prepare Yahoo Bid

By Cristina Alesci, Jeffrey McCracken and Serena Saitto - Dec 1, 2011 9:38 AM GMT+0700

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Nov. 30 (Bloomberg) -- Bloomberg's Jon Erlichman reports on the outlook for Yahoo! Inc. and potential bids for the company. Alibaba Group Holding Ltd. and Softbank Corp. are in advanced talks with Blackstone Group LP and Bain Capital LLC about making a bid for all of Yahoo said three people with knowledge of the matter. Emily Chang also speaks on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Alibaba Group Holding Ltd. and Softbank Corp. (9984) are in advanced talks with Blackstone Group LP (BX) and Bain Capital LLC about making a bid for all of Yahoo! Inc., said three people with knowledge of the matter.

A bid may value Yahoo at more than $20 a share because of tax savings tied to the Internet company’s stakes in Alibaba and Yahoo Japan, said two of the people, who declined to be identified because the discussions are private. Yahoo shares advanced 6.9 percent to $16.79 in extended trading.

Yahoo’s board is meeting to discuss offers it received for a minority stake in the Sunnyvale, California-based company from bidders including TPG Capital and a group led by Silver Lake, people familiar with the matter said this week. Silver Lake’s bid valued Yahoo at about $16.60 a share, these people said. TPG Capital’s offer was higher, they said.

Some Yahoo investors say they would prefer the company be sold in its entirety, at a higher price. “It definitely has to be much higher than $16.60,” said Di Zhou, a Santa Fe, New Mexico-based analyst at Thornburg Investment Management, which oversees about $80 billion in assets, including Yahoo shares.

While the Alibaba group has prepared financing for a possible offer, it hasn’t decided on a final price or whether to proceed, the people said. The group would prefer to be invited to bid rather than going hostile, one person said. Alibaba hasn’t informed Yahoo of its possible bid, this person said.

No Decision Yet?

“Alibaba Group has not made a decision to be part of a whole-company bid for Yahoo,” John Spelich, a spokesman for Hangzhou, China-based Alibaba, said in an e-mailed statement.

At $20 a share, Yahoo would be valued at 24.1 times earnings in the past 12 months, data compiled by Bloomberg show. That would compare with 20.4 times for Google Inc. (GOOG) and a ratio of 9.5 for Microsoft Corp.

Yahoo shares rose 1 cent to $15.71 yesterday at the close in New York. The stock has fallen 5.5 percent this year.

The $20 price tag would undervalue the company because its Asian assets have so much growth potential, said Thornburg’s Zhou, who puts the value at about $25 a share. Yahoo, the largest U.S. Internet portal, owns about 40 percent of Alibaba, the top e-commerce site in China, and 35 percent of Yahoo Japan.

Zhou wants to see Yahoo hold on to the Alibaba stake until the Chinese company can hold an initial public offering, providing a windfall to investors.

“Chinese Internet penetration and e-commerce is going well,” she said. “It should be more valuable by the day.”

Chinese Growth

Total Internet users in China may grow 27 percent this year, with the number of online shoppers climbing 28 percent, according to Thornburg.

Alibaba is seeking to buy back the stake in its company that Yahoo owns. Softbank, meanwhile, wants to acquire the stake in Yahoo Japan, one of the people familiar with the matter said. In the proposed deal, Blackstone and Bain would take control of the U.S. operations, the person said.

Spokeswomen for Blackstone, Softbank and Yahoo declined to comment.

Alibaba Chief Executive Officer Jack Ma said in October that his company is interested in purchasing Yahoo. Earlier attempts by the Chinese e-commerce leader to buy out Yahoo’s stake faltered amid disagreements with former CEO Carol Bartz. Yahoo acquired the Alibaba stake for about $1 billion in 2005.

While Alibaba is in advanced talks with Blackstone and Bain, the company is also in discussions with other private- equity firms, including Providence Equity Partners Inc., about an offer, one person said.

Ken Sena, an analyst at Evercore Partners Inc. in New York, puts Yahoo’s total value at about $18 a share, with $5 coming from the U.S. Internet business. The so-called off-balance-sheet assets -- including the Asian investments -- are worth $11 a share, plus $2 in cash, he said. By buying the whole company, Alibaba would avoid having to negotiate over how much Yahoo’s main business is worth, Sena said.

“Almost two-thirds of the enterprise value is really these off-balance-sheet assets,” he said.

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Serena Saitto in New York at ssaitto@bloomberg.net

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

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Dow Average Jumps Most Since 2009 as Central Banks Take Action on Crisis

By Michael P. Regan and Rita Nazareth - Dec 1, 2011 4:30 AM GMT+0700

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Nov. 30 (Bloomberg) -- Anthony Crescenzi, executive vice president at Pacific Investment Management Co., talks about the global economy and financial markets. Crescenzi also discusses the U.S. and China's banking industries and real estate markets. He speaks from Newport Beach, California, with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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Nov. 30 (Bloomberg) -- Ritesh Maheshwari, an analyst at Standard & Poor's in Singapore, talks about Asian banks' credit ratings. S&P upgraded ratings of Bank of China Ltd. and China Construction Bank Corp. to A from A- and maintained the A rating on Industrial & Commercial Bank of China Ltd., giving all three lenders higher grades than most big U.S. banks. Maheshwari speaks with John Dawson on Bloomberg Television's "On the Move Asia." (Source: Bloomberg)

Stocks surged, giving the Dow Jones Industrial Average its biggest rally since March 2009, and the euro strengthened as six central banks made additional funds available to ease strains from Europe’s debt crisis. Treasuries fell while commodities jumped.

The MSCI All-Country World Index climbed 3.7 percent at 4 p.m. New York time and is up 7.6 percent in three sessions. The Dow gained 4.2 percent to 12,045.68, while the Stoxx Europe 600 Index capped its best four-day gain in three years. The dollar weakened against all 16 major peers, with the euro up 0.9 percent to $1.3441. The cost for European banks to fund in dollars retreated from the highest since 2008. Oil jumped to almost $101 a barrel and copper rose 5.5 percent.

The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said, and agreed to make other currencies available as needed. China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage points, while data on U.S. business activity and the employment and housing markets topped economists’ estimates.

“I’m in a better mood today than I’ve been in a while,” Burt White, who helps oversee about $315 billion as chief investment officer at LPL Financial Corp. in Boston, said in a telephone interview. “This coordinated effort is a huge one. It is not a European problem, it’s a global problem. If we don’t get Europe solved, it’s going to send pretty big ripples across the globe. We really could see some upside for the market, if this momentum continues.”

Rescue Fund

Euro-area finance ministers said they would seek a greater role for the International Monetary Fund and the European Central Bank in fighting the sovereign debt crisis after conceding an effort to expand their bailout fund missed its target. The ministers yesterday agreed to guarantee as much as 30 percent of new bond sales from troubled governments, and to improve its ability to cap yields by buying bonds. European heads of government will meet in Brussels on Dec. 9 to discuss the crisis.

The new interest rate central banks are offering for dollar funding is the dollar overnight index swap rate plus 50 basis points, a half percentage-point cut, and the program was extended by six months to Feb. 1, 2013, the Fed said today. The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies if needed.

Borrowing Costs

The actions helped ease a surge in borrowing rates fueled by concern about a possible breakup of the euro area.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 131 basis points below the euro interbank offered rate after earlier reaching a three-year high of 163. The U.S. two-year interest-rate swap spread fell the most in nine months. Predictions in the forward markets of how reluctant banks will be to lend in the first quarter dropped from an 18-month high.

“You really needed the central banks to come in and force, if you want to call it, the liquidity into the system,” Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist, told Bloomberg Television. “And they recognize the pressure that was building.”

The moves by the central banks fueled speculation that the Fed will cut the discount rate it charges U.S. banks, which has been at 0.75 percent since February 2010, as the changes result in lower borrowing costs for foreign firms.

‘Level the Playing Field’

“Be on the lookout for headlines on this front,"Dan Greenhaus, chief global strategist at BTIG LLC in New York, wrote in a note to clients. Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets in New York, said in a note that a discount-rate cut would ‘‘level the playing field,’’ while Jefferies Group Inc. Chief Financial Economist Ward McCarthy was skeptical the Fed will cut the rate since there is no dollar- funding problem in the U.S.

The Standard & Poor’s 500 Index jumped 4.3 percent, the most since Aug. 11. Today’s rally trimmed the sixth monthly decline in seven for the index, leaving it down 0.5 percent in November. U.S. equities also advanced after companies added 206,000 workers in November, according to data from ADP Employer Services that bolstered optimism in the labor market before a government jobs report in two days. The median forecast of economists surveyed by Bloomberg News called for an increase of 130,000.

Economic Data

Other data showed business activity in the U.S. expanded in November at the fastest pace in seven months, according to the Institute for Supply Management-Chicago Inc. The index of pending home sales increased 10.4 percent in October, the National Association of Realtors said, the biggest gain since November 2010 and five times the median forecast of economists.

The Fed said the economy expanded at a ‘‘moderate” pace in 11 of 12 districts, led by gains in manufacturing and consumer spending. The Fed’s Beige Book survey reinforced the central bank’s view that the economy, while strong enough to skirt a recession, remains too weak to bring down an unemployment rate stuck near 9 percent or higher for more than two years.

Indexes of commodity producers, industrial companies and financial firms jumped at least 5.1 percent to lead gains in all 10 of the main industry groups in the S&P 500. Trading volume of stocks in the index was 45 percent greater than the average over the past 10 sessions, according to data compiled by Bloomberg.

Caterpillar Inc., JPMorgan Chase & Co. and General Electric Co. surged at least 6.6 percent as all 30 stocks in the Dow climbed, sending the gauge up as much as 490 points.

Dollar, Commodities

The dollar weakened against all 16 major peers, with the Australian, South African and New Zealand currencies surging at least 2.5 percent.

The S&P GSCI Index of commodities climbed 0.7 percent and is up 3.4 percent in three days. Zinc, copper and aluminum rose more than 5.2 percent to lead gains today. Among 24 commodities tracked by the index, only seven declined.

Commodities are set for a “difficult environment” in 2012, UBS AG said, citing Europe’s debt crisis and a “hard landing” in China, the biggest raw-materials consumer. The People’s Bank of China cut the amount of cash that lenders must set aside as reserves for the first time since 2008 as Europe’s debt crisis dims the outlook for exports and growth.

European Stocks

More than 27 stocks advanced for every one that declined in the Stoxx 600, sending the benchmark gauge up 3.6 percent and extending its four-day rally to 9.1 percent. Barclays Plc surged and Deutsche Bank AG rallied more than 6 percent. BP Plc, Europe’s second-biggest oil producer, climbed 5 percent and BHP Billiton Plc, the world’s largest mining company, jumped 6.2 percent.

European stocks fell earlier after S&P cut debt ratings on lenders from Bank of America Corp. to Goldman Sachs Group Inc. to UBS AG. More than $3 trillion has been erased from the value of global equities this month as rising borrowing costs in Italy and Spain signaled Europe’s debt crisis was worsening.

The yield on the 10-year Treasury note rose nine basis points to 2.08 percent. Germany’s one-year yield dropped nine basis points to minus 0.01 percent, sinking below zero for the first time ever. Italy’s 10-year bond yield slid 22 basis points to 7.02 percent.

Default Swaps Drop

The cost of insuring against default on European corporate debt fell, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 33 basis points to 758.5, according to JPMorgan Chase & Co. at 3 p.m. in London. A decline signals improved perceptions of credit quality.

The MSCI Emerging Markets Index (MXEF) added 2 percent, trimming this month’s drop to 6.7 percent. Benchmark gauges in Brazil, Russia, South Africa and Turkey gained at least 2.8 percent. Poland’s WIG20 Index jumped 4.8 percent after a report showed the economy grew more than economists forecast in the third quarter. The Shanghai Composite Index (SHCOMP) earlier fell 3.3 percent after central bank adviser Xia Bin said China’s policy “fine- tuning” doesn’t mean credit controls will be loosened.

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

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

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Netflix Viewing Seen Swelling U.S. Cable Bills

By Alex Sherman - Nov 30, 2011 12:00 PM GMT+0700

Time Warner Cable Inc. (TWC) and U.S. pay- TV companies, weighing how to profit from surging Internet demand spurred by Netflix Inc. (NFLX) and Hulu, are on the verge of instituting new fees on Web-access customers who use the most.

At least one major cable operator will institute so-called usage-based billing next year, predicts Craig Moffett, an analyst with Sanford C. Bernstein & Co. in New York. He said Cox Communications Inc., Charter Communications Inc. (CHTR) or Time Warner Cable may be first to charge Web-access customers for the amount of data they consume, not just transmission speed.

“As more video shifts to the Web, the cable operators will inevitably align their pricing models,” Moffett said in an interview. “With the right usage-based pricing plan, they can embrace the transition instead of resisting it.”

U.S. providers like Time Warner Cable have weighed usage- based plans for years as a way to squeeze more profit from Web access, and to counter slowing growth and rising program costs in the TV business. While customer complaints hampered earlier attempts, pay-TV companies are testing usage caps and price structures that point to the advent of permanent fees.

“We’re basically a broadband provider,” Peter Stern, chief strategy officer for New York-based Time Warner Cable, said Nov. 17 at the Future of Television conference in New York. “As a convenience for our customers, we package and distribute television and provide service around that.”

Google (GOOG) Deterrent

Rogers Communications Inc., the largest Canadian cable company, has been billing broadband customers based on consumption since 2008. U.S. providers AT&T Inc. (T) and St. Louis- based Suddenlink Communications LLC are experimenting with usage-based plans.

Cable companies see usage-based billing as a way to limit the appeal of online services like Netflix and Hulu LLC, and reduce the threat from new entrants like Amazon.com Inc. (AMZN) and Google Inc.

“It’s the reason why Apple or Google would inevitably be reticent about committing a significant amount of capital to an online video model,” Moffett said. “You can’t simply assume just because you can buy the content more cheaply, you can offer a product that’s cheaper to the end user.”

Netflix and Hulu’s subscription services have driven up Web usage at peak hours once reserved for watching TV. Google, Amazon, Apple (AAPL) Inc. and premium channels HBO and Showtime have also put shows online and followed viewers onto mobile devices like iPads and Android tablets.

Web Demand

While demand for Web service grows, cable operators are battling to preserve profit in the mature pay-TV business and withstand competition from satellite carrier DirecTV (DTV), Verizon Communications Inc. (VZ)’s FiOS and AT&T’s U-Verse. Programmers like Walt Disney Co. (DIS)’s ESPN are also demanding higher fees.

Time Warner Cable, the second-largest U.S. cable operator behind Comcast Corp. (CMCSA), lost 126,000 pay-TV accounts in the third quarter.

The incentives to focus on Web access are compelling. Cable’s broadband gross margins are about 95 percent, versus 60 percent for video, according to Moffett. As programming costs increase nearly 10 percent a year, video margins are crimped, he said.

Time Warner Cable is testing meters to measure broadband consumption for the purpose of tiered pricing, Chief Executive Officer Glenn Britt said in June. In April, he said usage-based billing is “inevitable.” A previous attempt in 2009 was abandoned amid customer complaints.

Low-Impact Users

“Some form of usage-based billing might have some utility for customers who use the Internet very little, or only use low- bandwidth applications like e-mail,” said Alex Dudley, a Time Warner Cable spokesman.

AT&T, based in Dallas, charges digital subscriber line, or DSL, customers who exceed a monthly limit of 150 gigabytes in three consecutive months $10 extra for every additional 50 gigabytes of data they use.

Suddenlink, with about 1.4 million customers in states including Missouri, Arizona, Texas and North Carolina, began instituting usage caps in some markets in October. Users pay $10 for each 50 gigabytes they use over their monthly allowance.

Data usage is surging by almost 50 percent a year, Chief Executive Officer Jerry Kent said in an interview. Suddenlink’s broadband revenue rose 12 percent in the third quarter, versus a 1.6 percent gain from pay-TV.

“Our video business is challenged,” Kent said. “My broadband margins are double my video margins.”

Movie Quotas

Cox, the third-largest U.S. cable company, segments Web- access customers based on data speed, allowing those who purchase faster service to use more data overall.

While those who exceed the caps aren’t charged, they are told to reduce usage or choose a different plan, said Todd Smith, a spokesman for Atlanta-based Cox. He wouldn’t say whether Cox will start charging based on total data used.

Comcast, based in Philadelphia, and St. Louis-based Charter, No. 4 in the U.S., have instituted caps large enough that most customers aren’t affected. Neither charges overage fees, nor do they have near-term plans to charge subscribers based on consumption, according to Comcast spokeswoman Jennifer Khoury and Charter’s Anita Lamont.

The standard cap for Comcast, Charter, Cox and Suddenlink is 250 gigabytes per month. That’s enough for a household to send or receive 12,000 one-page e-mails and watch 60 standard- definition movies with excess capacity for other tasks, according to Suddenlink.

Netflix Protests

Netflix steers customers with enough bandwidth toward high- definition movies, which soak up about double the data. If the average U.S. household, which watches more than five hours of television a day, were to transfer all that viewing to an online, high-definition source, their usage would total almost 10 gigabytes a day and break through the current caps.

Charging by Web usage, cable companies may discourage customers from dropping traditional pay-TV service and slow the growth of Netflix, Hulu and an expanding list of online alternatives, Moffett said.

The possibility of usage-based pricing has brought protests from Los Gatos, California-based Netflix and warnings from Charlie Ergen, chairman of rival Dish Network Corp. (DISH), which operates the Blockbuster movie-rental business.

$20 Surcharge?

“That Netflix subscription of $7.99 could go to an extra $20 a month for bit streaming,” Ergen said during Dish’s conference call on Nov. 7, making a total monthly subscription “the equivalent of $27.99.”

Consumption-based pricing is anti-competitive if the goal of broadband providers is to boost revenue by diminishing the value of rivals, wrote Netflix General Counsel David Hyman in a July Wall Street Journal editorial.

The practice “is not in the consumer’s best interest as consumers deserve unfettered access to a robust Internet at reasonable rates,” said Steve Swasey, a Netflix spokesman.

Federal Communications Commission Chairman Julius Genachowski publicly supported usage-based pricing in December, a victory for cable companies concerned that usage-based billing would run afoul of net neutrality rules prohibiting Internet services from favoring one form of content for another.

While lower caps may slow the online shift, cable companies won’t be able to stop it. According to media researcher SNL Kagan, about 12.1 million U.S. households will receive TV shows and movies from Internet services rather than a traditional pay TV provider by 2015, up from 2.5 million homes at the end of 2010, SNL Kagan estimates.

Cable’s best option is to find ways to profit from the online shift, said Moffett. If the companies were to lose all of their video customers, the revenue decline would be more than offset by a lower programming fees and set-top box spending, he said.

“In the end, it will be the best thing that ever happened to the cable industry,” Moffett said.

To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net; Peter Elstrom at pelstrom@bloomberg.net

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Silver Lake Group Said to Bid $16.60 a Share for Yahoo Stake

By Brian Womack, Jeffrey McCracken and Serena Saitto - Dec 1, 2011 5:19 AM GMT+0700

A group of investors led by private- equity firm Silver Lake offered to buy a minority stake in Yahoo! Inc. for about $16.60 a share, according to people with knowledge of the matter.

Silver Lake, working with Microsoft Corp. (MSFT), venture-capital firm Andreessen Horowitz and Canada Pension Plan Investment Board, offered to buy convertible preferred securities equal to a 10 percent to 15 percent stake for as much as $3 billion, said one of the people, who asked not to be identified because the bids made this week are private. The price was lower than an offer made by private-equity firm TPG Capital, two people said.

Silver Lake’s bid values Sunnyvale, California-based Yahoo at $20.6 billion, about 6 percent higher than its market value at yesterday’s close. Under Silver Lake’s proposal, Yahoo would be able to distribute at least $5 billion to shareholders in the form of a special dividend or a share buyback, said the person. Yahoo, exploring strategic options after ousting Chief Executive Officer Carol Bartz, aims to wrap up the deal by the end of the year, people said.

“The offer is disappointing,” said Hamilton Faber, an analyst at Atlantic Equities LLP in London with a “neutral” rating on Yahoo shares. “Investors who’ve been buying Yahoo recently were hoping for a significant premium and a takeout of the full company, and this falls short on both counts.”

Spokeswomen for Yahoo, Silver Lake and Canada Pension Plan declined to comment.

Board Meeting

Yahoo directors are likely to discuss offers at a board meeting scheduled for today, one person said. Alibaba Group Holding Ltd., aiming to buy back the stake in itself owned by Yahoo, is monitoring the situation and may still enter the bidding, one person said.

Yahoo gained 1 cent to $15.71 at the close in New York. The shares have declined 5.5 percent this year.

While Microsoft failed in 2008 to acquire all of Yahoo, it aims to use a minority holding to safeguard its 10-year Web search agreement with the company.

Microsoft, based in Redmond, Washington, forged the partnership under Bartz to provide search technology to Yahoo sites. The deal was aimed at helping both companies vie with Google, the leader in U.S. search-related advertising.

Alibaba’s Role

KKR (KKR) & Co. and Blackstone Group LP (BX) are among the private- equity firms considering possible bids for Yahoo, people with knowledge of the matter said last month.

Private-equity firm Thomas H. Lee Partners is also considering a bid for Yahoo, people knowledgeable said.

Alibaba Group has said it’s interested in acquiring Yahoo, in part to buy back a stake the company owns. With a holding of about 40 percent, Yahoo is Alibaba’s biggest investor. Alibaba is waiting to see whether Yahoo’s board will deem the partial- stake bids inadequate and invite it into negotiations to acquire the whole company, a person with knowledge of the matter said. Alibaba is open to acquiring its stake back or making a larger push for all of Yahoo, this person said.

Alibaba already submitted an offer to buy back the stake in itself held by Yahoo, said the people. That proposal was made together with Japan’s Softbank Corp., which wants to buy the rest of Yahoo Japan, and may be reviewed by Yahoo’s board today, the people said.

Alibaba and Softbank are less likely to make an offer for all of Yahoo because of difficulty financing a bid, one person said. The companies have discussed this possibility, people said earlier this month.

The Wall Street Journal reported yesterday that Yahoo aims to strike a deal by year’s end.

Bloomberg LP, the parent company of Bloomberg News, is an investor in Andreessen Horowitz.

To contact the reporters on this story: Brian Womack in San Francisco at bwomack1@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Serena Saitto in New York at ssaitto@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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Olympus Ex-CEO Woodford Resigns as Director

By Chris Cooper - Dec 1, 2011 8:00 AM GMT+0700

Michael C. Woodford, the former president and chief executive officer of Olympus Corp., resigned from the company’s board and urged a shareholder meeting to allow stock owners to choose new management.

Woodford, who was fired after questioning $1.4 billion in takeover costs now at the center of criminal investigations, said in an e-mailed statement it was “inappropriate” for current management to decide on new board members. Olympus declined to comment on his resignation, spokesman Tsuyoshi Kitada said by phone.

The 51-year-old British citizen met with the Federal Bureau of Investigation, the Department of Justice and the Securities and Exchange Commission in the U.S. this week, following meetings with Japanese officials last week, to discuss payments made in the purchase of Gyrus Group Plc and writedowns of stakes in three other takeovers. The camera maker has admitted former Chairman Tsuyoshi Kikukawa and senior aides colluded to cover up losses.

“It’s completely inappropriate for the current management team, who are tainted by its past mistakes, to make choices about the identity of new board members,” Woodford said in the statement. “I intend to liaise with all interested stakeholders with a view to formulating a proposal for the constitution of a new board.”

The stock of the 92-year-old camera and endoscope maker has slumped more than 50 percent since Woodford was fired, on concerns about the scale of the losses, the threat of delisting and continuing criminal investigations.

To contact the reporter on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net

To contact the editor responsible for this story: Ben Richardson at brichardson8@bloomberg.net

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HP Rating Cut by S&P After Autonomy Acquisition Boosts Debt

By Nick Turner and Aaron Ricadela - Dec 1, 2011 4:59 AM GMT+0700

Hewlett-Packard Co. (HPQ) had its corporate credit and senior unsecured ratings cut to BBB+ from A by Standard & Poor’s Ratings Services, which cited the increased debt load caused by the acquisition of Autonomy Corp.

The company’s “inconsistent” strategies and management turnover may also have raised risks, S&P said today in a statement. The outlook on the ratings is stable.

Hewlett-Packard is trying to rebound from sluggish sales and the ouster of two chief executive officers over the past two years. The $10 billion Autonomy acquisition, announced under ex- CEO Leo Apotheker, drew the ire of investors and contributed to his replacement by Meg Whitman in September. He also shook up the board during his tenure.

“We have concerns that HP’s inconsistent growth strategies and high levels of board of director and senior management turnover have elevated the level of operational and execution risk in the near term,” Martha Toll-Reed, an analyst at New York-based S&P, said in the report.

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

Hewlett-Packard’s first-quarter profit forecast and full- year earnings outlook both missed analysts’ estimates this month. Whitman’s plan for fixing Hewlett-Packard’s ailing businesses, such as PCs and information-technology services, includes boosting research spending and limiting the size of acquisitions.

Saving Cash

The idea is to conserve cash and spur homegrown innovation, something the company neglected over the past decade. She has said she will unveil more plans in the first half of next year.

On Nov. 17, the company appointed activist shareholder Ralph Whitworth to its board. Whitworth, whose investment firm oversees $6.5 billion, told management his appointment would burnish credibility and that he’d press for share buybacks, higher dividends or more investment in research, a person with knowledge of the situation said.

Hewlett-Packard also lost its title as the world’s biggest maker of server computers to International Business Machines Corp. (IBM) in the third quarter, Gartner Inc. said this week.

Hewlett-Packard fell 14 cents to $27.81 in extended trading after S&P posted its report. The shares, down 34 percent this year, had climbed 3.9 percent to $27.95 at the close in New York.

To contact the reporters on this story: Nick Turner in San Francisco at nturner7@bloomberg.net; Aaron Ricadela in San Francisco at aricadela@bloomberg.net

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

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