U.S. Stocks Halt Five-Day Decline After Alcoa’s Results

By Rita Nazareth - Apr 12, 2012 3:40 AM GMT+0700

U.S. stocks advanced, halting a five-day decline for the Standard & Poor’s 500 Index, after Alcoa (AA) Inc. reported an unexpected first-quarter profit.

Alcoa, the first company in the Dow Jones Industrial Average to announce quarterly results, climbed 6.2 percent. Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM) added at least 2.4 percent to pace gains in financial shares. A measure of 11 homebuilders in S&P indexes jumped 4.8 percent as Wells Fargo & Co. said a survey of sales managers showed 63 percent of the respondents reported better-than-expected orders.

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April 11 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, and Michael Gayed, chief investment strategist at Pension Partners LLC, talk about the outlook for the U.S. stock market. They speak with Stephanie Ruhle and Adam Johnson on Bloomberg Television's "Street Smart." Gary Shilling of A. Gary Shilling & Co. also speaks. (Gary Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

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April 11 (Bloomberg) -- Todd Schoenberger, managing principal at BlackBay Group, and Bloomberg's Josh Lipton talk about the impact of the Federal Reserve's Beige Book business survey on the U.S. stock market today and the outlook for equities, corporate earnings and the economy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

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April 11 (Bloomberg) -- Bloomberg’s Stephanie Ruhle, Adam Johnson and Alix Steel report on today’s ten most important stocks including Nike, Apple and Alcoa. (Source: Bloomberg)

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April 11 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, talks about the performance of the equity market and investor sentiment. Hagstrom speaks with Betty Liu, Josh Lipton and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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April 11 (Bloomberg) -- Tom Elliott, a global strategist at JPMorgan Asset Management, discusses the outlook for the U.S. economy and asset allocation. He speaks with Maryam Nemazee and Manus Cranny on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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April 11 (Bloomberg) -- Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC, talks about the outlook for the Standard & Poor's 500 Index and drivers for market volatility. She speaks with Erik Schatzker, Sara Eisen and Stephanie Ruhle on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The S&P 500 increased 0.7 percent to 1,368.71 at 4 p.m. New York time, after dropping 4.3 percent over the past five days. The Dow advanced 89.46 points, or 0.7 percent, to 12,805.39 today. The Russell 2000 Index (RTY) of small companies climbed 1.6 percent to 796.59. About 6.4 billion shares changed hands on U.S. exchanges today, 6.5 percent less than the three-month average and 23 percent below yesterday’s volume.

“Alcoa helped dampen the dark mood in the market,” said Frederic Dickson, who helps oversee $28 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. “It’s always nice to see the first company out of the box with an earnings surprise. It’s time to see how this progresses and reassess when to put some money back in.”

Almost $800 billion was erased from U.S. equity values in the five days leading up to the first-quarter earnings season. The S&P 500 yesterday capped the longest drop since November on concern about Europe’s debt crisis and the U.S. jobs market. The decline drove the gauge to about 14 times reported earnings yesterday, below the average since 1954 (SPX) of 16.4.

Earnings Season

Today’s gain extended this year’s rally in the S&P 500 to 8.8 percent as investors bought stocks amid better-than- estimated economic and corporate data. While S&P 500 per-share profit growth slowed to 0.8 percent during the first three months of the year from 4.9 percent in the fourth quarter, it will accelerate to 8.3 percent during all of 2012, according to analyst estimates compiled by Bloomberg.

Analysts’ estimates for S&P 500 earnings growth in the first quarter have declined from 4.1 percent in January, Bloomberg data showed. For Lawrence Creatura at Federated Investors Inc., earnings expectations are still low and profit surprises may drive the market higher.

“This isn’t a phantom bounce,” Creatura, who helps oversee $369.7 billion as a Rochester, New York-based fund manager at Federated, said in a telephone interview. “It seems reasonable to expect positive surprises as we move through the earnings season. Management teams have done a good job of keeping expectations contained.”

Alcoa Rallies

Alcoa climbed 6.2 percent to $9.90. The earnings were “driven by higher-than-expected profitability from every operating segment,” Brian Yu, an analyst at Citigroup Inc. (C) in San Francisco, said in a note. “Good cost control likely played a major role.” The stock dropped 48 percent in the 12 months through yesterday, the biggest decline in the Dow.

A rally in Alcoa shares following its earnings reports has been an indicator of gains for the S&P 500, according to Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati. Since 2005, the gauge has risen an average 4 percent in the three-month period that followed a positive reaction to Alcoa’s earnings, he said.

Financial shares had the biggest gain in the S&P 500 among 10 industries today, rallying 1.6 percent. Bank of America rose 3.8 percent to $8.86. JPMorgan jumped 2.4 percent to $44.01. Investors will get a first look at banks results when JPMorgan and Wells Fargo kick off earnings, about an hour apart, on April 13. Citigroup Inc. is set to announce results April 16, followed by Goldman Sachs Group Inc., Bank of America and Morgan Stanley.

Bank Earnings

The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy. The six largest U.S. lenders may post an 11 percent drop in first-quarter profit, according to a Bloomberg survey of analysts. The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first three months of the year, led by Bank of America’s 72 percent gain.

“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry.”

On top of earnings data, investors also watched the Federal Reserve’s Beige Book business survey today, published two weeks before the Federal Open Market Committee meets to set monetary policy. The Fed said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

Economic Bellwether

The Morgan Stanley Cyclical Index (CYC) of companies most-tied to the economy added 1.2 percent. FedEx Corp. (FDX), an economic bellwether as it carries everything from mobile devices to pharmaceuticals, rose 1.5 percent to $87.91. Homebuilder PulteGroup Inc. (PHM) advanced 9.1 percent to $8.39.

Apple Inc. (AAPL) reversed a gain of as much as 1.3 percent, falling 0.4 percent to $626.20. The U.S. Department of Justice sued Apple, Macmillan and Pearson Plc’s Penguin in New York today, claiming the publishers colluded to fix e-Book prices. Three other publishers, CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins, also named in the government’s antitrust lawsuit, settled their cases, according to court filings.

Owens-Illinois Inc. (OI) rose 6.9 percent to $23.52. The glass- bottle maker said first-quarter earnings will rise more than 35 percent from a year earlier on higher prices and lower costs.

‘Too Steep’

Genworth Financial Inc. (GNW) gained 3.2 percent to $7.54. The life insurer and mortgage guarantor was rated buy in new coverage by BTIG LLC, which said the stock is trading at “too steep a discount” to the company’s inherent value.

Titan Machinery Inc. (TITN) surged 17 percent to $32.05, the highest since June 2008. The owner of full-service agricultural and equipment stores forecast annual earnings of at least $2.55 a share, beating the average analyst estimate of $2.06.

U.S. shares of Nokia Oyj (NOK) tumbled 16 percent to $4.24. The Espoo, Finland-based mobile phone maker reported an operating loss for its mobile-phone division and forecast earnings won’t recover this quarter as emerging market handsets sales slumped and margins on smartphones shrank.

VMWare Inc. (VMW) slumped 2.5 percent to $107.61. The software maker announced a management shuffle including the departure of Chief Financial Officer Mark Peek. Earnings have more than doubled to $723.94 million since 2008, the first full year after Peek joined. The company is initiating a search to replace him.

Computer Sciences

Computer Sciences Corp. (CSC) fell 2.8 percent to $27.39. The technology contractor for governments and companies said earnings excluding certain costs in the quarter ended March 30 were 19 cents to 21 cents a share. Analysts predicted 97 cents, the average of estimates compiled by Bloomberg.

U.S. stocks will probably see a short-term relief rally before extending their retreat next week, according to the head of technical analysis at Credit Suisse Group AG. The S&P 500 may climb to as much as 1,382, London-based David Sneddon wrote today. The measure will then be poised to drop more than 3 percent next week to the 1,339 low from March 6, he said.

“With a classic bearish momentum and on-balance volume divergence reinforcing the more bearish scenario, we expect further weakness to extend,” Sneddon wrote in a note dated yesterday. So-called on-balance volume shows a security’s momentum by looking at the relationship between price and the number of transactions taking place.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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

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Stocks Rise on Alcoa Results as Spanish Bonds, Euro Gain

By Michael P. Regan and Rita Nazareth - Apr 12, 2012 3:22 AM GMT+0700

U.S. equities halted the longest slump of the year and European stocks rebounded from a two-month low as Alcoa (AA) Inc. opened the earnings season with an unexpected profit. Spanish bonds rose as a European Central Bank official signaled the ECB may revive its bond-purchase program.

The Standard & Poor’s 500 Index added 0.7 percent to close at 1,368.71, snapping a five-day slump. The Dow Jones Industrial Average climbed 89.46 points as Alcoa rallied 6.2 percent. The Stoxx Europe 600 Index (SXXP) rose 0.7 percent. The euro ended a five- day drop against the yen, while yields on Spanish and Italian 10-year debt dropped at least 10 basis points. Oil helped lead commodities higher as U.S. stockpiles of gasoline and distillate fuels declined, while natural gas tumbled below $2 per million British thermal units for first time since January 2002.

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Prime Minister Mariano Rajoy said Spain’s future is at stake in its battle to tame surging bond yields. Photographer: Jock Fistick/Bloomberg

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April 11 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, and Michael Gayed, chief investment strategist at Pension Partners LLC, talk about the outlook for the U.S. stock market. They speak with Stephanie Ruhle and Adam Johnson on Bloomberg Television's "Street Smart." Gary Shilling of A. Gary Shilling & Co. also speaks. (Gary Shilling is a Bloomberg View columnist. The opinions expressed are his own. Source: Bloomberg)

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April 11 (Bloomberg) -- Todd Schoenberger, managing principal at BlackBay Group, and Bloomberg's Josh Lipton talk about the impact of the Federal Reserve's Beige Book business survey on the U.S. stock market today and the outlook for equities, corporate earnings and the economy. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

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April 11 (Bloomberg) -- Steven Major, global head of fixed-income research at HSBC Holdings Plc, Paul Donovan, deputy head of global economics at UBS AG, and Bill Blain, co-head of the Special Situations Group at Newedge Group Ltd., discuss the outlook for Spanish bonds. This report also contains comments from Spanish Prime Minister Mariano Rajoy and Johannes Jooste, a strategist at Bank of America Corp.'s Merrill Lynch Wealth Management. (Source: Bloomberg)

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April 11 (Bloomberg) -- Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., talks about the outlook for Asia stocks Stocks in Asia slipped, with the region’s benchmark index falling for a sixth day, as Spanish bond yields surged closer to levels that prompted Greece, Ireland and Portugal to seek European bailouts. Moe speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 11 (Bloomberg) -- Peter Garnry, an equity strategist at Saxo Bank A/S, discusses Alcoa Inc.'s unexpected first-quarter profit reported yesterday, investment strategy for European equities and recommendation of Rolls-Royce Holdings Plc. He speaks from Hellerup, Denmark, with Caroline Hyde on Bloomberg Television's "Countdown." (Source: Bloomberg)

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April 11 (Bloomberg) -- Pelham Smithers, managing director of Pelham Smithers Associates, talks about the outlook for Sony Corp. and Sharp Corp. Sony and Sharp posted losses that together equaled 900 billion-yen ($11 billion) as the first decline in global TV shipments in six years and a stronger yen hurt overseas sales for Japan’s biggest LCD TV makers. Smithers speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 11 (Bloomberg) -- Robert Hagstrom, a portfolio manager at Legg Mason Capital Management, talks about the performance of the equity market and investor sentiment. Hagstrom speaks with Betty Liu, Josh Lipton and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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April 11 (Bloomberg) -- Bloomberg’s Stephanie Ruhle, Adam Johnson and Alix Steel report on today’s ten most important stocks including Nike, Apple and Alcoa. (Source: Bloomberg)

Australian one-dollar coins sit with a collection of bank notes arranged for a photograph, in Sydney, Australia. Photographer: Sergio Dionisio/Bloomberg

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Pedestrians are reflected in an electronic stock board outside a securities firm in Tokyo, Japan. Photographer: Haruyoshi Yamaguchi/Bloomberg

The S&P 500 slid 4.3 percent in the previous five sessions as $2 trillion was erased from global equities amid concern Europe’s debt crisis was worsening and weaker-than-forecast U.S. jobs growth. Today’s rebound came as Alcoa’s results boosted optimism at the start of the first-quarter earnings-reporting season, while ECB board member Benoit Coeure spurred speculation the central bank will help reduce Spain’s borrowing costs after 10-year yields touched 6 percent for the first time this year.

“The environment is still very positive for stocks,” Robert Hagstrom, fund manager at Legg Mason Capital Management Inc., said on Bloomberg Television’s “In the Loop” program. Legg Mason manages about $638 billion. Bull markets “need corrections, need a pullback, in order to be sustainable. We think about that all the time. Until we actually go through it,” he said. Then “it’s the risk-off traders, or Chicken Little, maybe, that the world is coming to an end. But it’s not coming to an end.”

‘Modest to Moderate’

U.S. equities held onto gains after the Federal Reserve said the economy maintained its expansion in all 12 of its regions as manufacturing, hiring and retail sales showed signs of strength in the face of higher fuel prices.

“The economy continued to expand at a modest to moderate pace from mid-February through late March,” the Fed said today in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. “Hiring was steady or showed a modest increase across many districts.”

Slump Halted

The S&P 500 ended its longest losing streak since November as financial, consumer-discretionary, telephone and industrial stocks led gains in all 10 of the index’s main industries. Alcoa, Bank of America Corp., JPMorgan and Cisco Systems Inc. rose more than 2 percent to lead the Dow (INDU) higher.

Alcoa marked the unofficial start of an earnings season by reporting a profit of $94 million, or 9 cents a share, after orders rose and the largest U.S. aluminum producer closed higher-cost smelting capacity. Profit excluding restructuring costs and other items was 10 cents a share, compared with the average analyst estimate for a loss of 4 cents.

Analysts project profit growth slowed to 0.8 percent in the first quarter. Google Inc. (GOOG) is scheduled to report results tomorrow after the close of trading, while JPMorgan Chase & Co. and Wells Fargo & Co. will release earnings on April 13.

A rally in Alcoa shares following earnings has foreshadowed gains for the S&P 500 in the past, according to Ryan Detrick at Schaeffer’s Investment Research. Since 2005, the benchmark gauge has risen an average 4 percent in the three-month period that followed a positive reaction to earnings from Alcoa, which is typically the first company in the Dow to report results.

‘Positive Catalyst’

“This earnings season could be a major positive catalyst,” Detrick, senior technical strategist at Schaeffer’s, said in a telephone interview from Cincinnati. “We’ve had a strong selloff ahead of it. Should earnings come in slightly better than expected, that could turn out to be one of those buying opportunities.”

UniCredit SpA (UCG) and Intesa Sanpaolo SpA, Italy’s biggest banks, led a rebound in financial shares, advancing more than 5.4 percent. CGGVeritas SA (GA), the world’s largest seismic surveyor of oil fields, climbed 4.5 percent after saying it boosted vessel production in the first quarter. Givaudan SA, a Swiss maker of flavors and fragrances, gained 3.7 percent as sales increased.

Six countries in Europe sold debt today, with Italy meeting its target and Germany receiving bids for less than its maximum objective.

Germany’s 10-year bund fell, with the yield rising 14 basis points to 1.78 percent. The 10-year Italian bond yield fell 15 basis points to 5.53 percent, while the 10-year Spanish bond yield declined 10 basis points to 5.88 percent. The euro strengthened 0.5 percent to 106.07 yen and gained 0.2 percent to $1.3108.

The yield on the 10-year U.K. gilt increased four basis points to 2.05 percent after its debt agency sold 4.5 billion pounds ($7.2 billion) of September 2017 securities.

Commodities Gain

Lead and aluminum climbed more than 1.6 percent to lead gains in 17 of 24 commodities tracked by the S&P GSCI. Oil increased 1.7 percent to $102.70 a barrel, rebounding from an almost two-month low. Natural gas dropped as low as $1.976 per million British thermal units for the first time in more than 10 years on speculation there won’t be enough weather-driven demand for the fuel in coming weeks to reduce an inventory surplus.

The MSCI Emerging Markets Index (MXEF) slipped 0.1 percent, falling for a sixth straight day and reaching the lowest level since Jan. 30.

The Hang Seng China Enterprises Index (HSCEI) fell 0.9 percent, its third straight decline. The Shanghai Composite Index (SHCOMP) gained 0.1 percent, while benchmark indexes in the Czech Republic and Turkey rallied more than 1 percent.

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

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

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Profit Drop at U.S. Banks Imperils Rally

By Dakin Campbell - Apr 12, 2012 3:36 AM GMT+0700

The six largest U.S. lenders, including JPMorgan Chase & Co. (JPM) and Wells Fargo & Co., may post an 11 percent drop in first-quarter profit, threatening a rally that pushed bank stocks 19 percent higher this year.

The banks will post $15.3 billion in net income when adjusted for one-time items, down from $17.3 billion in last year’s first quarter, according to a Bloomberg survey of analysts. Trading revenue at the biggest lenders is projected to fall 23 percent to $18.3 billion, according to Morgan Stanley analysts, who didn’t include their firm or Wells Fargo.

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A Chase bank branch in New York. Photographer: Mark Lennihan/AP Photo

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Pedestrians walk in front of the Wells Fargo & Co. headquarters in San Francisco. Photographer: David Paul Morris/Bloomberg

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JPMorgan Chase & Co. signage is displayed at a bank branch in New York. Photographer: Robert Caplin/Bloomberg

“You can’t expect bank stocks to go straight to the moon,” said Peter Kovalski, a money manager at Alpine Woods Capital Investors LLC in Purchase, New York, which manages about $5 billion. “You have to expect fundamentals to catch up, and there are some headwinds facing the industry. There is a little too much optimism going into this quarter.”

U.S. lenders, struggling to expand in commercial banking years after the housing collapse, haven’t matched last year’s overall results, even as bond and equity markets strengthened. Making matters worse, loan balances increased less than the economy, bucking a trend in previous recoveries, said Brian Foran, a New York-based analyst at Nomura Holdings Inc.

‘Complete Reversal’

Loans at the top 25 domestically chartered commercial banks rose 0.4 percent in the quarter through March 28, slowing from 1 percent growth in the previous three months, according to the Federal Reserve. Loans fell to $4.04 trillion from a peak of $4.24 trillion in the fourth quarter of 2008, according to the Fed. The U.S. economy expanded 2 percent in the first quarter, according to estimates from 72 economists surveyed by Bloomberg.

“There will be times in this cycle, like this quarter, when GDP growth and loan growth don’t necessarily track each other,” Foran said in an interview. “It’s a complete reversal of the fourth quarter, when capital markets were weak and loan growth was strong.”

The results may disappoint investors who piled into banking stocks on a bet the industry was inexpensive and set to benefit from a strengthening economy, he said.

The KBW Bank Index (BKX) of 24 companies climbed 26 percent in the first quarter, led by Bank of America Corp.’s 72 percent gain and Regions Financial Corp.’s 53 percent. Financial services topped all sectors in the Standard & Poor’s 500 Index. (SPX)

Over the past five trading days ending yesterday, the KBW Index fell 6.4 percent. That may mean fewer investors sell shares if first-quarter results disappoint, Kovalski said.

The gauge rose 2.1 percent today in New York trading, led by Bank of America, up 3.8 percent, and KeyCorp, with a gain of 3.4 percent. JPMorgan rose 2.4 percent.

Book Values

Still, lenders are cheaper than they were last year, as measured by the ratios of their stock prices to earnings estimates over the next 12 months and to book values. The price- to-earnings ratio for the KBW Index was 10.8 as of yesterday, down from 13.7 on April 11, 2011. The ratio of price to tangible book value, a measure of what investors are willing to pay for a company’s equity after removing intangible items such as goodwill, stood at 1.22 compared with 1.53 a year earlier.

Investors will get a first look at results when JPMorgan and Wells Fargo (WFC) kick off earnings, about an hour apart, on April 13. Citigroup Inc. (C) is set to announce results April 16, followed by Goldman Sachs Group Inc. (GS), Bank of America and Morgan Stanley.

JPMorgan, the largest and most profitable U.S. lender, may say net income fell 19 percent, adjusting for one-time items, from the same period a year earlier to $4.53 billion, according to the average estimate of 19 analysts surveyed by Bloomberg. Earnings per share will fall to $1.18, the analysts estimate. Revenue at the New York-based bank is projected to fall 4.1 percent to $24.2 billion.

Wells, BofA

Profit at San Francisco-based Wells Fargo, the most valuable U.S. bank and biggest home lender, is estimated to climb 7.8 percent to $3.85 billion, analysts estimate. Revenue probably was little changed at about $20.4 billion.

Bank of America, second by assets to JPMorgan and based in Charlotte, North Carolina, may post $1.73 billion in adjusted earnings, about 1 percent less than the year-earlier period, according to the Bloomberg survey. Citigroup may report a 7 percent gain in adjusted profit to $3.21 billion. Goldman Sachs’s net income is projected to fall 29 percent to $1.81 billion. Citigroup and Goldman Sachs are based in New York.

Joe Evangelisti, a spokesman for JPMorgan, declined to comment, as did Wells Fargo’s Mary Eshet, Bank of America’s Jerry Dubrowski, Goldman Sachs’s Michael DuVally and Citigroup’s Shannon Bell.

Trading Revenue

For those banks with the largest capital-markets operations, the bond markets provided one bright spot.

Underwriters sold more than $628 billion in U.S. corporate debt in the first quarter, increasing from less than $561 billion in the prior year’s first three months, according to data compiled by Bloomberg. JPMorgan ranked first, selling $79.7 billion, and Citigroup came in second with $62.2 billion. Wells Fargo was 10th, with $25.5 billion in sales. Wells Fargo, whose 12-month stock performance has outpaced its largest peers, depends the least on capital markets for profit.

While trading probably fell short of last year, analysts estimate it jumped from the fourth quarter. Revenue in the fixed-income, currencies and commodities-trading divisions at Bank of America, Citigroup, JPMorgan and Goldman Sachs probably totaled $14.3 billion in the first quarter, Betsy Graseck, a Morgan Stanley (MS) analyst, estimated in an April 3 report. That would be an 18 percent decline from the $17.5 billion generated a year earlier and more than double the fourth quarter, when it slumped to $6.9 billion, Graseck wrote.

‘More Defensive’

Equity-trading revenue may have fallen 34 percent to $4 billion and fees from underwriting equities may have dropped 18 percent to $1.15 billion over the prior year, according to the estimates. Revenue from mergers and acquisitions advice may have declined 30 percent.

Trading got a lift from rising asset prices with those banks bringing the largest inventories into the quarter likely doing the best, according to Charles Peabody, an analyst at Portales Partners LLC in New York. U.S. investment-grade and high-yield corporate debt rose 3 percent in the first quarter, according to Bank of America Merrill Lynch Index data.

“We’ve gotten more defensive in the last several weeks,” Peabody said in a phone interview. “Fee income will be pretty strong given fixed-income results and asset appreciation. By contrast, we think top-line and the basic banking business will be disappointing.”

Peabody said bank stocks could fall 20 percent to 30 percent from their recent highs.

Net Interest Margins

Central bankers aren’t helping. Fed officials affirmed their projection, first announced in January, that subdued inflation and economic slack probably will warrant low rates through late 2014, according to minutes of the March policy meeting released this month. That cuts into net interest margins, the difference between what banks earn on loans and what they pay for funds. At the four largest U.S. banks by assets, margins dropped to 2.99 percent in the fourth quarter from 3.17 percent a year earlier.

“It will be a while until the industry gets back to its optimal returns,” said Kovalski of Alpine Woods Capital Advisors. “We had a lot of underweighted portfolios quickly increasing their allocation to the sector. Now the question is will they hold it there, or will they get antsy that the group isn’t generating the quick turnaround that was expected?”

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

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

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U.S. Files Antitrust Lawsuit Against Apple, Hachette

By Bob Van Voris - Apr 11, 2012 9:27 PM GMT+0700

The U.S. sued Apple Inc. (AAPL), Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster in New York district court, claiming the publishers colluded to fix eBook prices.

CBS Corp. (CBS)’s Simon & Schuster, Lagardère SCA’s Hachette Book Group and News Corp. (NWSA)’s HarperCollins settled their suits today, two people familiar with the cases said.

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Ebook on an iPad in New York on April 11, 2012. Photographer: Scott Eells/Bloomberg

Apple and Macmillan, which have refused to engage in settlement talks with the Justice Department, deny they colluded to raise prices for digital books, according to people familiar with the matter. They will argue that pricing agreements between Apple and publishers enhanced competition in the e-book industry, which was dominated by Amazon.com Inc. (AMZN)

The Justice Department is probing how Cupertino, California-based Apple changed the way publishers charged for e- books on the iPad, a person familiar with the matter said last month. The Justice Department said it would announce an “unspecified” antitrust settlement today.

Pearson Plc (PSON)’s Penguin Group (PNGN) was also preparing to fight the U.S. Justice Department in court if necessary, two people familiar with knowledge of the matter told Bloomberg News April 5.

Gina Talamona, a spokeswoman for the Justice Department’s antitrust division, and representatives of Apple, Simon & Schuster, HarperCollins, Hachette, Penguin and Macmillan, which is a unit of Verlagsgruppe Georg von Holtzbrinck GmbH, declined to comment on prospects for lawsuits or settlements.

Agency Model

Apple, Penguin and Macmillan want to protect the so-called agency model that lets publishers -- not vendors -- set e-book prices, said the people on April 5, who declined to be identified because they weren’t authorized to speak publicly.

The government is seeking a settlement that would let Amazon and other retailers return to a wholesale model, where retailers decide what to charge customers, the people said. A settlement could also void so-called most-favored nation clauses in Apple’s contracts that require book sellers to provide the maker of the iPad with the lowest prices they offer competitors, the people said.

Consumers and competition could be hurt if several companies sign contracts that refer to prices charged to rivals even if those firms aren’t dominant, said Fiona Scott-Morton, a Justice Department economist, in an April 5 speech in Washington, signaling the antitrust division’s thinking on the issue of most-favored-nation clauses.

More Control

Upholding the agency model would give publishers more control over pricing and limit discounting, helping the industry avoid sales losses as more consumers buy books online.

Sales of e-books rose 117 percent in 2011, generating $969.9 million, Publishers Weekly reported Feb. 27, citing estimates from the Association of American Publishers. By eliminating printing and shipping costs, digital versions generate higher profit margins than physical copies.

When Apple came out with the iPad in 2010, it let publishers set their own prices for e-books as long as it got a 30 percent cut and the publishers agreed to offer their lowest prices through Apple. This agency model overtook Amazon’s practice of buying books at a discount from publishers and then setting its own price for e-reader devices.

The results of a settlement or lawsuit wouldn’t necessarily kill the agency model or prevent other publishers from continuing to set their own prices for e-books, one of the people said.

Random House Inc., based in New York, has agreements with Apple and Amazon that lets the book publisher set prices for e- books, the essence of the agency model. The company isn’t a part of the U.S. inquiry.

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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Zuckerberg Threatened to Disable Ceglia Site Amid Dispute

By Bob Van Voris - Apr 11, 2012 11:00 AM GMT+0700

Facebook Inc. (FB) cofounder Mark Zuckerberg threatened in 2004 to disable part of the website he was working on for Paul Ceglia, the New York man now suing him for part-ownership of the multibillion-dollar company, according to copies of e-mails filed by Facebook in federal court.

Zuckerberg worked for Ceglia in 2003 and 2004, while he was attending Harvard University and building the website that would become the world’s biggest social network. In an e-mail to Ceglia, Zuckerberg demanded payment for work on Ceglia's website, StreetFax.com, warning that if he didn’t get the money that was coming to him, he would take down part of the site.

Mark Zuckerberg, chief executive officer of Facebook Inc., listens to a question at the Web 2.0 Summit in San Francisco. Photographer: Tony Avelar/Bloomberg

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Facebook Inc. cofounder Mark Zuckerberg threatened in 2004 to disable part of the website he was working on for Paul Ceglia, the New York man now suing him for part-ownership of the multibillion-dollar company, according to copies of e-mails filed by Facebook in federal court. Photographer: Bob Van Voris/Bloomberg

“I must receive $5,000 by next Saturday at midnight, or the scroll search functionality will be removed from the site,” Zuckerberg wrote in a message to Ceglia on Feb. 21, 2004, about two weeks after he put “Thefacebook.com” online. Zuckerberg told Ceglia he owed him $10,500 of the $19,500 he’d been promised, according to the e-mails, filed by Facebook as part of the lawsuit in Buffalo, New York.

Facebook last month asked the judge to throw out the lawsuit. The incident supports Zuckerberg’s defense that the contract on which Ceglia bases his claim to half of the CEO’s Facebook holdings is a fake, defense attorney Orin Snyder of Gibson Dunn & Crutcher LLP said in an e-mail April 9. A different contract Facebook claims is the actual agreement between the men shows Ceglia hired Zuckerberg for the StreetFax work alone, the lawyer said. Zuckerberg never acted on the threat to disable Ceglia’s website, according to Snyder.

‘Cyber-Briber’

Zuckerberg’s 2004 e-mail to Ceglia prompted a lawyer connected to StreetFax at the time to refer to him as the “brat programmer” and “cyber-briber,” according to messages included in Facebook’s court papers. The company said it found the e-mails in Ceglia’s electronic files.

The contract Facebook claims is genuine would have permitted Zuckerberg “to offline the site Streetfax.com and remove his program” for non-payment. The contract Ceglia claims Zuckerberg signed gives him no such right. In its court papers seeking dismissal of the suit, Facebook said Ceglia never paid Zuckerberg the remaining $10,500. The two last communicated in May 2004, according to Facebook.

Facebook has disclosed in court papers 15 of about 300 e-mails the company said it recovered from Zuckerberg’s Harvard e-mail account, consisting of communications with Ceglia and others working for StreetFax at the time.

Frequently Demands Money

In the e-mails, Zuckerberg frequently demands money he claims Ceglia owes him, while Ceglia asks for more time to pay. The 15 messages span almost nine months, from Aug. 15, 2003, to May 7, 2004, shortly before Zuckerberg left Harvard for Palo Alto, California, where he ran Facebook until moving it last year.

Ceglia’s lawyer, Dean Boland, said his client’s computer experts aren’t able to determine whether the Harvard e-mails are genuine or complete because they haven’t had access to the Harvard e-mail server. Facebook, now based in Menlo Park, California, has also had exclusive access to computers Zuckerberg used in 2003 and 2004, and evidence from suits filed against the company by Facebook co-founder Eduardo Saverin, and by Tyler and Cameron Winklevoss and Divya Nirendra, Boland said.

The plaintiffs in the two cases, former Harvard students who claimed a role in founding Facebook, eventually settled.

Ceglia, 38, sued Zuckerberg, 27, and Facebook in 2010, claiming he signed a contract with Zuckerberg in April 2003 that made them partners in exchange for an investment in the project. Zuckerberg said in court papers that the contract he signed related only to his StreetFax work and had nothing to do with Facebook.

Traffic Intersections

StreetFax, which Ceglia started to sell pictures of traffic intersections to insurance companies, is no longer in business. Facebook, which in February filed for an initial public offering to raise $5 billion, is worth an estimated $95.8 billion, according to SharesPost.com, which tracks nonpublic companies.

Facebook said in its request to dismiss Ceglia’s suit that the complaint is a fraud on the court. Facebook claimed Ceglia hopes to use the litigation to “leverage his fraud by disrupting Facebook’s highly publicized initial public offering.”

After Zuckerberg sent the 2004 message threatening to disable the StreetFax site, Ceglia contacted Jim Kole, a lawyer Facebook described in court papers as “an initial member of StreetFax,” for advice on what to do, according to a separate e-mail exchange made public by Facebook in the case.

Written Assurance

In messages dated March 4 and 5, Kole called Zuckerberg “the brat programmer,” suggesting that Ceglia offer to pay him some money, to be held in escrow until Zuckerberg “provides his written assurance that he will not access or disable any portion of the site.” Kole, formerly with Sidley Austin LLP, didn’t return a call and e-mail seeking comment on the case.

“Mabe I am a littel to emotionally charged about this but I think that after him illegally removing functionality from the site that I dont want to pay this kid another dime,” Ceglia wrote in an e-mailed response filed in court papers.

“I think I’ll just make a veiled reference to payments that could be made if he settles the matter as a businessman rather than a cyber-briber,” Kole answered in a handwritten note, according to the Facebook court filings. “PLEASE, PLEASE fax me the contract.”

Facebook’s forensic computer experts, from the firm Stroz Friedberg LLC, said they discovered an image of the Ceglia e-mails, with the handwritten note, in one of Ceglia's e-mail accounts, which they were permitted to access by order of the judge. The e-mail exchange was included in a report by Stroz Friedberg filed by Facebook with the court.

‘Smoking Gun’

Facebook said Ceglia responded to Kole’s fax request by sending him a copy of what the company says is the real StreetFax contract, with no mention of a stake in the social network. The company claims those e-mails and the attached contract provide “smoking gun” proof in its defense.

In a March 8, 2004, e-mail, about two weeks after the threat to disable StreetFax, Zuckerberg told Ceglia “The need for my immediate payment has been resolved for now, and so I guess it is to my advantage to allow you to continue to use the site, as long as you can make monthly payments.”

“I really appreciate you not doing anything rash,” Ceglia answered, according to the e-mails.

Later that month, Ceglia proposed giving Zuckerberg 1 percent of StreetFax as security for the money he owed him.

‘Giving Myself Ulcers’

“I am giving myself ulcers trying to get your money to you before you take aggressive action against the site again,” Ceglia said, according to the e-mail provided by Facebook.

In a hearing last week, U.S. Magistrate Judge Leslie Foschio ruled that Ceglia’s lawyers may question Facebook’s expert-witnesses in computer forensics, documents, paper and ink, who have said Ceglia’s contract and the e-mails he produced in the case are fake.

Foschio barred Ceglia from seeking more evidence from Facebook, including Zuckerberg’s Harvard computers. The judge has yet to rule on Facebook’s motion to dismiss the case.

The case is Ceglia v. Zuckerberg, 1:10-cv-00569, U.S. District Court, Western District of New York (Buffalo).

To contact the reporter on this story: Bob Van Voris in U.S. District Court for the Western District of New York in Buffalo at rvanvoris@bloomberg.net.

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

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Stocks Rebound With U.S. Futures; Spanish Yields Drop

By Paul Armstrong and Lynn Thomasson - Apr 11, 2012 6:00 PM GMT+0700

European stocks rebounded from a two-month low and U.S. equity futures gained after Alcoa Inc. opened the earnings season with an unexpected profit. Spanish and Italian bonds climbed as governments sell about $50 billion of debt and the euro strengthened.

The Stoxx Europe 600 Index (SXXP) rose 0.9 percent as of 11:57 a.m. in London, while Standard & Poor’s 500 Index futures advanced 0.8 percent, signaling that stocks may gain for the first time in six days. Alcoa rose 6.3 percent in pre-market New York trading as aluminum climbed 0.9 percent from a three-month low. The euro snapped a five-day drop against the yen to strengthen 0.7 percent and Spanish debt risk neared a record.

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Prime Minister Mariano Rajoy said Spain’s future is at stake in its battle to tame surging bond yields. Photographer: Jock Fistick/Bloomberg

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April 11 (Bloomberg) -- Timothy Moe, a Hong Kong-based strategist at Goldman Sachs Group Inc., talks about the outlook for Asia stocks Stocks in Asia slipped, with the region’s benchmark index falling for a sixth day, as Spanish bond yields surged closer to levels that prompted Greece, Ireland and Portugal to seek European bailouts. Moe speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 11 (Bloomberg) -- Peter Garnry, an equity strategist at Saxo Bank A/S, discusses Alcoa Inc.'s unexpected first-quarter profit reported yesterday, investment strategy for European equities and recommendation of Rolls-Royce Holdings Plc. He speaks from Hellerup, Denmark, with Caroline Hyde on Bloomberg Television's "Countdown." (Source: Bloomberg)

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April 11 (Bloomberg) -- Pelham Smithers, managing director of Pelham Smithers Associates, talks about the outlook for Sony Corp. and Sharp Corp. Sony and Sharp posted losses that together equaled 900 billion-yen ($11 billion) as the first decline in global TV shipments in six years and a stronger yen hurt overseas sales for Japan’s biggest LCD TV makers. Smithers speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

Australian one-dollar coins sit with a collection of bank notes arranged for a photograph, in Sydney, Australia. Photographer: Sergio Dionisio/Bloomberg

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Pedestrians are reflected in an electronic stock board outside a securities firm in Tokyo, Japan. Photographer: Haruyoshi Yamaguchi/Bloomberg

European Central Bank Executive Board member Benoit Coeure suggested the lender could revive its debt-purchase program to reduce Spain’s borrowing costs after 10-year yields approached 6 percent. Italy and Germany were among six countries in Europe that sold debt today, while in the U.S., the Federal Reserve will release its Beige Book business survey. Alcoa (AA), the country’s largest aluminum producer, reported an unexpected first-quarter profit after orders rose.

“Fundamentally, the equity market offers extreme value and I am very happy to be buying on the dips,” said George Godber, who helps oversee $22 billion as a fund manager at Charles Stanley’s Matterley division in London. His Matterley Undervalued Assets Fund gained 12 percent in 2012. “Equities are the only place to be.”

UniCredit, Sanpaolo

UniCredit SpA (UCG) and Intesa Sanpaolo SpA, Italy’s biggest banks, led a rebound in financial shares, advancing 5.7 percent and 5.6 percent. CGGVeritas SA (GA), the world’s largest seismic surveyor of oil fields, climbed 5.5 percent after saying it boosted vessel production in the first quarter. Givaudan SA, a Swiss maker of flavors and fragrances, gained 3 percent as sales increased.

Germany’s 10-year bund fell, with the yield rising six basis points to 1.79 percent, after an auction of 10-year benchmark notes failed to attract bids for the maximum amount that the nation planned to sell.

The 10-year Italian bond yield fell 15 basis points to 5.54 percent after the government sold debt, while the 10-year Spanish bond yield declined nine basis points to 5.89 percent. The euro strengthened to 106.31 yen and gained 0.5 percent to $1.3150.

The yield on the 10-year U.K. gilt increased five basis points to 2.05 percent after its debt agency sold 4.5 billion pounds ($7.2 billion) of September 2017 securities. The yield on the 10-year U.S. Treasury advanced four basis points to 2.02 percent, snapping five days of declines, before the government auctions $21 billion of the debt.

Spanish Risk

The cost of insuring against a default on Spanish government bonds approached the highest ever, with credit- default swaps on the nation climbing 10.5 basis points to 490.5, compared with a record 493 set on Nov. 23.

European corporate bond risk fell from a 2 1/2-month high, with the Markit iTraxx Crossover Index of default swaps on 50 mostly junk-rated European companies declining 17.5 basis points to 682.5. That’s the index’s first decline since April 2 and signals an improvement in perceptions of creditworthiness.

“Markets do feel primed for a mini-correction,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “There could be an overly great focus on the Italian auction as we search for direction.”

Aluminum Gains

Aluminum gained to $2,082 a metric ton. Brent crude oil added 0.1 percent to $120.04 a barrel after two days of declines. Copper for delivery in three months increased 0.6 percent to $8,078 a ton on the London Metal Exchange and gold dropped 0.3 percent to $1,655.40 an ounce, the first decline in five days.

The MSCI Emerging Markets Index (MXEF) dropped 0.2 percent, heading for its sixth day of declines and its lowest level since Jan. 30.

The Hang Seng China Enterprises Index (HSCEI) fell 1 percent, its third straight decline. The Shanghai Composite Index (SHCOMP) gained 0.1 percent. Chongqing Brewery Co. and Chongqing Road & Bridge Co. (600106) dropped at least 0.4 percent after the official Xinhua News Agency said Bo Xilai was removed from the Politburo.

The ISE National 100 Index (XU100) slid 0.7 percent in Turkey and the FTSE/JSE Africa All Shares Index (JALSH) slipped 0.2 percent in Johannesburg. The Micex Index (MICEX) gained 0.5 percent in Moscow.

To contact the reporters on this story: Paul Armstrong in London at parmstrong10@bloomberg.net; Lynn Thomasson in Hong Kong at lthomasson@bloomberg.net

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

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Bo Suspended After Wife Suspected in British Man’s Murder

By Bloomberg News - Apr 11, 2012 2:19 PM GMT+0700

China’s Communist Party moved to show unity after suspending Bo Xilai from the ruling Politburo and declaring his wife a murder suspect, ordering the nation’s more than 80 million party members to back the decision.

China’s central television station read the charges against Gu Kailai, Bo’s wife, every hour on the hour, detailing how she had been arrested on suspicion of murdering British businessman Neil Heywood in Chongqing. A commentary on the front page of today’s People’s Daily (PEODOZ), the party’s mouthpiece, urged cadres to “firmly support the correct decision” to investigate Bo.

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Bo Xilai attends the opening ceremony of the National People's Congress (NPC) at the Great Hall of the People on March 5, 2012 in Beijing, China. Photographer: Feng Li/Getty Images

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April 11 (Bloomberg) -- Robert Kuhn, chairman of The Kuhn Foundation and author of "How China's Leaders Think," talks about the suspension of Bo Xilai, the former top official in the Chinese municipality of Chongqing, and its implications for Chinese politics. Bo was suspended from his Communist Party posts after an investigation led to his wife being arrested on suspicion of murdering a U.K. citizen. Kuhn speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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April 11 (Bloomberg) -- Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management, discusses Bo Xilai's suspension from his Chinese Communist Party posts after an investigation led to his wife being arrested on suspicion of murdering a U.K. citizen. He speaks from Beijing with Caroline Hyde on Bloomberg Television's "First Look." (Source: Bloomberg)

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Bo Xilai, Chinese Communist Party secretary of Chongqing, attends a plenary session on the work report of the National People's Congress (NPC) as China's NPC takes place in Beijing on March 9, 2012. Photographer: Nelson Ching/Bloomberg

“The death of Neil Heywood is a serious criminal case involving the family and close staff of a Party and state leader,” the commentary said. “Bo has seriously violated the Party discipline, causing damage to the cause and the image of the Party and state.”

Bo’s downfall, which comes as China prepares for a once-in- a-decade leadership change this year, is the biggest political upheaval in the country’s top ranks since Communist Party General Secretary Zhao Ziyang was purged in the wake of the 1989 Tiananmen protests. Removal from the Politburo and Central Committee, which would come at a formal party meeting, is often a precursor to prison or detention. Among four other men removed from the Politburo outside regular Communist Party congresses since 1989, two were imprisoned and a third, Zhao, lived out most of the rest of his life confined to his home.

‘Greatest Fear’

“They’ve struggled with how to portray this,” said Christopher K. Johnson, a senior adviser at the Washington-based Center for Strategic and International Studies and a former China analyst at the Central Intelligence Agency. “Their greatest fear is to show any inkling that the leadership is anything but totally unified.”

The People’s Daily commentary said the decision to suspend Bo “highlights the Party and the government’s apparent attitude of firmly maintaining discipline and laws” that will “certainly get the wholehearted support from the whole party and all of the nation’s people.”

Party newspapers across the country, including Chongqing, where Bo served as the top official until last month, reprinted the commentary.

Contracts to insure China’s sovereign debt against non- payment for five years rose 1.5 basis points to 118.5 as of 2:49 p.m. in Beijing, erasing an earlier increase of as much as 3 basis points on the day, according to Royal Bank of Scotland Group Plc prices.

Political Downfall

Gu and a personal attendant are “highly suspected” of killing British businessman Neil Heywood, who died in Chongqing in November, the official Xinhua News Agency reported late yesterday. The U.K. was originally told that Heywood died of alcohol poisoning.

Bo’s wife and the attendant, Zhang Xiaojun, “have been transferred to judicial authorities on suspected crime of intentional homicide,” Xinhua said yesterday. Bo has been suspended from his party posts and is “suspected of being involved in serious discipline violations,” Xinhua said in a separate report.

Bo’s political downfall comes ahead of a party congress scheduled for later this year that will pick a new generation of Chinese leaders. Before his lieutenant Wang Lijun, who Xinhua said made the murder allegations, spent a night in February at the U.S. consulate in Chengdu, Bo, 62, was seen by many analysts of Chinese politics as being a top contender for membership in the elite Politburo Standing Committee. That panel, now with nine men, exercises supreme authority in China.

Orderly Transition

“It’s another step toward putting him in jail on a very serious charge,” said Li Cheng, an analyst of Chinese politics at Washington’s Brookings Institution. “It reflects the unity of the party leadership and their plan to resolve this problem in a relatively short period of time, and move on to make sure the party congress will be held in an orderly and institutional way.”

The U.K. embassy in Beijing had asked earlier this year for an investigation into Heywood’s death based on increasing rumors and suspicions, spokesman John Gallagher said on March 26. Gu Kailai and her son were on “good terms with Heywood” and then had “a conflict over economic interests, which had been intensified,” Xinhua reported.

U.K. Foreign Secretary William Hague said he welcomed the inquiry into Heywood’s death.

U.K. Response

“We look forward to seeing those investigations take place and in due course hearing the outcome of those investigations,” Hague told Sky News television yesterday. “I don’t really want to say anything more than that because, having asked for the investigations, I don’t want to prejudice their conduct in any way.”

Heywood and the son of Bo and Gu, Bo Guagua, both attended Harrow school in the U.K., with Heywood attending in the 1980s and Bo from 2001 to 2006, Luke Meadows, information officer for the Harrow Association, said in a March 27 e-mail. Heywood, 41, lived in Beijing with his wife and had two children, according to U.K. birth records. Bo Guagua is a student at Harvard University’s John F. Kennedy School of Government in Cambridge, Massachusetts.

Bo’s troubles became public in early February, after his former police chief Wang Lijun spent the night of Feb. 6 at the U.S. Consulate in Chengdu, an event confirmed by both the U.S. and Chinese governments. On Feb. 8, Wang was booked with a first-class seat on an Air China (753) flight from Chengdu to Beijing accompanied by a vice minister for state security, Bloomberg reported on Feb. 10.

Crime Crackdown

Bo won national attention for his success in cracking down on organized crime with Wang as police chief and for his “Chongqing Model” of emphasizing state-led investment to ease wealth gaps between urban and rural residents. Bo also reintroduced songs and slogans from the era of Chairman Mao Zedong to re-instill a socialist spirit.

Meeting with reporters on March 9 in Beijing, Bo revealed China’s wealth gap as measured by the Gini coefficient was at a level that social scientists say sparks unrest. He evoked Mao in vowing to reverse it.

“As Chairman Mao said as he was building the nation, the goal of our building a socialist society is to make sure everyone has a job to do and food to eat, that everybody is wealthy together,” Bo said. “If only a few people are rich, then we’ll slide into capitalism. We’ve failed. If a new capitalist class is created then we’ll really have turned onto a wrong road.”

Cultural Revolution

Chongqing led the other three municipalities directly under the central government -- Beijing, Shanghai and Tianjin -- in growth in per capita economic output after Bo took the helm in 2007.

Bo is the son of Bo Yibo, one of the founders of the People’s Republic of China and one of the eight “immortals” who helped shape Chinese politics after Mao’s death in 1976.

The younger Bo rose from being the mayor of Dalian to become governor of northeastern Liaoning province before becoming commerce minister, where he oversaw trade ties with the U.S. from 2004 through 2007. In 2007, Bo secured a spot on the Politburo and became the top official in Chongqing, according to his official biography.

On March 14, the day before Bo’s firing was announced, Chinese Premier Wen Jiabao told reporters in Beijing’s Great Hall of the People that China in the late 1970s had taken a decisive turn away from the politics of the Cultural Revolution. Wen said China risked a return of the Cultural Revolution -- where millions of people were persecuted by Chairman Mao’s Red Guards -- unless the country continued to pursue political change.

Murder Allegations

Allegations of murder and treason among top officials is reminiscent of Cultural Revolution politics, said Nicholas Howson, a law professor at the University of Michigan in Ann Arbor and a former managing partner at Paul Weiss Rifkind Wharton & Garrison LLP (1178L) in Beijing. Mao’s top lieutenant Lin Biao was killed when his British-made jet crashed in Mongolia in 1971 as he was apparently trying to flee the country after a failed coup attempt against Mao.

Bo’s case goes beyond those of two other Politburo members jailed in the past two decades -- former Beijing party boss Chen Xitong and former Shanghai party boss Chen Liangyu -- whose cases centered around corruption, not murder, Howson said.

“Ironically, given the fact that Bo Xilai is accused of fanning Cultural Revolution-type flames, the case now apparently being made against Bo’s wife is reminiscent of the one made against Chairman Mao’s appointed revolutionary successor Lin Biao and his family after Lin Biao’s political demise and at the height of the same Cultural Revolution,” Howson said in an e- mail. “Complete with tales of moral turpitude, sexual impropriety and murder.”

To contact Bloomberg News staff for this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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Shadow Banks on Trial as China’s Rich Sister Faces Death

By Bloomberg News - Apr 11, 2012 2:24 PM GMT+0700

When a Chinese court sentenced 28- year-old Wu Ying, known as “Rich Sister,” to death for taking $55.7 million from investors without paying them back, it sparked an unexpected firestorm that has drawn in China’s top leadership.

Her crime involved a common, illegal practice in China: raising money from the public with promises to pay back high interest rates. Known as shadow banking, these underground lending and investing networks are estimated to total $1.3 trillion, according to Ren Xianfang, an economist with IHS Global Insight Ltd. (IHS) in Beijing. That’s the size of the 2011 U.S. government deficit.

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Chinese businesswoman Wu Ying who was accused of illegally raising funds and defrauding investors during a trial at the Intermediate Peoples Court of Jinhua in Jinhua city, east Chinas Zhejiang province, 16 April 2009. Photograph: Imaginechina via AP Images

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April 4 (Bloomberg) -- China needs to break a banking "monopoly" of a few big lenders that make easy profits because it’s hard to borrow money elsewhere, Premier Wen Jiabao said. The country can extend nationwide the successful parts of a pilot program in Wenzhou in Zhejiang province that allows private financing, including non-bank lending, Wen said yesterday, as cited by China National Radio. Caroline Hyde reports on Bloomberg Television's "First Look." (Source: Bloomberg)

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Chinese businesswoman Wu Ying who was accused of illegally raising funds and defrauding investors weeps during a trial at the Intermediate Peoples Court of Jinhua in Jinhua city, east Chinas Zhejiang province, 16 April 2009. Photograph: Imaginechina via AP Images

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Wu Ying stands trial in 2009 at the Intermediate People's Court of Jinhua in Zhejiang province. Photograph: Imaginechina via AP Images

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Wen Jiabao, China's premier. Photographer: Nelson Ching/Bloomberg

Operating outside the banking system or government regulation, the informal networks provide an important source of economic growth, capital for private companies and return for investors seeking to beat inflation. Premier Wen Jiabao, in an unusual move, weighed in on the Wu case at a March 14 news conference. His comments highlighted a public debate over the importance of shadow banking to the Chinese economy, government efforts to bring it under control -- and whether capital punishment is an effective means to do so.

“Chinese companies, especially small ones, need access to funds,” Wen said when asked about Wu’s case. “Banks have yet to be able to meet those companies’ needs, and there is a massive amount of idle private capital. We need to bring private finance out into the open.”

Unfairly Singled Out

Wu’s lawyer says his client, now 30, was unfairly singled out and is no different from the estimated 42 million Chinese business owners who rely on the shadow-banking system for financing when they cannot get loans from state-owned banks. The Supreme People’s Court is reviewing the 2009 verdict and will decide as early as this month whether Wu Ying lives or dies.

“Entrepreneurs are paying attention to it because today’s Wu Ying could be any of them tomorrow,” the lawyer, Yang Zhaodong, said in an interview in Beijing last month. “There are so many of them doing the same thing Wu Ying did. This case not only relates to Wu’s life, but to whether China’s legal and judicial system is fair.”

Shadow banking has been fueled by a two-year credit squeeze in China and by large, state-owned banks’ preference for lending to government-run companies rather than small businesses. Private entrepreneurs account for 60 percent of China’s total economic activity and provide jobs for 80 percent of its urban population, according to China’s National Development and Reform Commission.

Meteoric Rise

“Underground banking filled the hole left by China’s state-owned banks, which have this long-term bias toward big enterprises,” said IHS’s Ren. “Even though it is an extremely opaque market and has a lot of hidden problems, the government needs it to meet the basic financing needs of small businesses.”

Wu’s rise and fall have been meteoric. The daughter of a farmer in Zhejiang province, south of Shanghai, Wu dropped out of technical school as a teenager to work at her aunt’s beauty salon and later opened two of her own, according to the state- run Global Times newspaper. She branched out into a foot-massage parlor and bought 10 cars which she rented out. An entertainment center and a boutique featuring Korean clothes followed, as did investments in real estate and copper, the report said.

Wu collected 770 million yuan ($122 million) from private investors between May 2005 and February 2007, according to government prosecutors. She also accumulated more than 100 properties and 40 cars, including a $500,000 Ferrari, the Global Times said.

Knowing the Risks

Wu borrowed money to fund her businesses and didn’t lie to anyone, her lawyer said. She never committed fraud, Yang said, adding that her investors, like anyone who took part in the private-banking business, knew the risks involved.

“Even her biggest creditor who she owed 320 million yuan doesn’t think Wu was lying to her,” said Yang. “These were real projects.”

The court in Wu’s home province of Zhejiang said she “brought huge losses to the nation and people with her severe crimes and should therefore be severely punished” when it upheld her death sentence in January, according to the Xinhua News Agency.

Nicknamed “Fu Jie,” or “Rich Sister,” in the media, Wu and her case were discussed at the annual legislative session in Beijing in March, where delegates debated the larger issues of shadow banking.

“You cannot try to stop this just by killing people,” Wang Yongzheng, a delegate to China’s People’s Political Consultative Conference and owner of a textile company, told a small group session at the meetings.

‘Public Outrage’

In a country where public criticism of government policy is rarely sanctioned, state-run media outlets such as Xinhua and the People’s Daily, both Communist Party mouthpieces, have run stories, editorials and online chat sessions airing public sympathy for Wu.

On Feb. 8, the China Daily newspaper ran an article noting “public outrage” and the “wide sympathy and pleas for the fair-skinned woman with a short haircut.” It quoted a legal expert as saying the government’s seizure and sell-off of her assets was illegal.

On the Defensive

As the public outcry surrounding Wu’s case began to swell, court officials and police took the rare step of publicly defending their verdict. The presiding judge in her case, Shen Xiaoming, appeared in a Feb. 7 Internet chat to explain that Wu Ying was sentenced to death because the court found she intended to defraud investors.

“This was more than just illegal fundraising,” Shen said in the chat.

China’s entire shadow-banking system is bigger than just underground borrowing and lending, totaling about $2.4 trillion, a third the size of China’s official loan market, according to Societe Generale SA economist Yao Wei. In addition to informal lending, it includes the off-balance-sheet activities of banks, trust companies, and businesses lending to each other, Yao said. The amount is almost the size of U.S. consumer debt, which exceeded $2.5 trillion as of January, according to the U.S. Federal Reserve.

Ordinary Chinese savers also fuel the country’s shadow- banking system. They have few legal options if they want to earn a return that beats inflation, which hit 5.4 percent in 2011. The government sets China’s current ceiling for savings account interest rates at 3.5 percent, a figure that has trailed inflation for two straight years as of January. Wu offered interest rates of as much as 0.5 percent a day to attract investors, according to Xinhua.

Bankruptcies and Suicides

Zhejiang province, where Wu’s home village of Dongyang is located, has been at the heart of private lending activity. Between April and September last year, more than 80 indebted businessmen committed suicide or declared bankruptcy in its boomtown manufacturing city of Wenzhou because they couldn’t repay informal lenders, according to Xinhua.

Bankruptcies and arrests continue to be reported almost daily. Today, the China Securities Journal reported that Hangzhou Glory Real Estate Co., also located in Zhejiang, had filed for bankruptcy after borrowing 2.5 billion yuan from individuals.

Pilot Program

The government has stepped in to deal with the troubles and bring some aspects of shadow banking under government control. In October, Premier Wen traveled to Wenzhou, a city of 9.1 million people 230 miles (370 kilometers) south of Shanghai, pledging help for troubled businesses. Then, on March 28, China’s State Council approved a pilot program for Wenzhou that would ease some restrictions on private lending.

Private capital will be encouraged to participate in “innovative financial organizations” such as credit unions, and banks will be encouraged to lend money to small enterprises, the State Council said.

“The Wenzhou trial program has started us on the right track,” Zhou Dewen, president of the Wenzhou Small and Medium Sized Enterprises Development Association, said by phone the day after the announcement. “The trial program is a step forward toward making private lending a practice that’s legal.”

By the time Wu was in her mid-twenties, she had founded the Bense Holding Group -- the name means “original color” -- and established 12 companies, according to a profile in the Guangzhou-based Southern Weekly before her arrest.

Drawing Attention

Wu’s success drew the attention of the Chinese media. In its Feb. 1, 2007 profile, the Southern Weekly said she drove to the interview in a BMW and couldn’t explain where her wealth had come from.

“I don’t launder money,” Wu said, according to the newspaper. “My money is clean.”

According to the article, Wu had a tattoo of a rose on her chest and once donated 6.3 million yuan to charity. Less than two weeks after the article was published, authorities announced that Wu had been arrested on suspicion of illegal fundraising.

Prosecutors later upgraded the charges against her to financial fraud, a crime punishable by death in the most severe cases, for losing 380 million yuan of investors’ money. Two years later, she was sentenced to die.

The court found that Wu raised her money by “fabricating facts, deliberately hiding the truth, and promising high returns as an incentive,” according to Xinhua.

Photographs of Wu in court show her sobbing as she stands at the dock, clad in a yellow prison jacket, her tattoo peeking from the neckline. She has been in prison appealing her conviction since her arrest in 2007. Xinhua reported in April 2011 that Wu was writing a book called “Black Swan,” a fictional account of her life, while in prison.

Not the First

Wu wouldn’t be the first shadow banker to be put to death in China. On Aug. 5, 2009, the Supreme Court approved the execution of two female entrepreneurs in separate cases. Si Chaxian, age unreported, was charged with defrauding 300 people of 167 million yuan over five years and promising returns of as much as 108 percent annually, while Du Yimin -- who was 44 at the time her death sentence was upheld -- was charged with defrauding 709 million yuan by promising to pay as much as 10 percent per month, the official CCTV reported. Both women were from Zhejiang province.

On Death Row

At least 17 people, including Wu, now sit on death row after being sentenced for illegally raising funds from individuals, according to Chinese media reports compiled by Bloomberg since 2009. Seven of them are women.

In the latest case, on April 6, 30-year-old Wang Caiping was sentenced to death for borrowing along with her brother more than 100 million yuan from 15 victims, according to the official Xinhua News Agency. Wang and her brother, who has fled, invested the money in gold and futures speculation and incurred losses, the report said. They had paid out 5.8 million yuan in interest as of the day Wang was arrested, with 94 million yuan unpaid, Xinhua added.

In Zhejiang, sentences handed out for various shadow- banking-related crimes rose to 75 last year, up from eight in 2007, the official Legal Daily reported, citing the provincial high court.

In Shanghai, police said March 29 they had arrested Gu Chunfang, a woman in her early forties who runs a trading company, for racking up 500 million yuan in underground-lending debts, China Daily reported. Her nickname: “Most Beautiful Businesswoman.”

Striking a Chord

Wu’s case, unlike the two executions, 16 other death sentences and numerous arrests, has struck a chord and spurred a broader national debate.

“She’s not some sort of privileged person who just had everything handed to her,” said Sarah Schafer, a Hong Kong- based researcher with Amnesty International. “People see her as someone who is closer to them than they care to admit.”

Amid the demands for change to China’s shadow-banking system, Wu’s case has also been taken up as part of a parallel debate about China’s death penalty.

Groups including Amnesty International that monitor capital punishment say attitudes toward it have begun to change in China -- especially in cases of financial fraud. The government has allowed broader public debate on the death penalty, and government officials have talked more often of pushing China toward abolishing the practice, according to Schafer.

Accepting Abolition

“The argument from the Chinese government has always been that the public wouldn’t accept abolishing the death penalty,” Schafer said. “This case has shown that maybe the public isn’t ready for full abolition but we think they are ready for abolishing it for nonviolent crimes.”

The Chinese government does not release statistics on the number of executions it performs. Groups like Amnesty International, which track the cases in the media, say the reports may underestimate the total number of executions carried out, since the media tend to report only the most sensational crime and corruption cases.

Still, China has cut the number of executions it carries out every year from 8,000 in 2006 to 4,000 per year now, according to the San Francisco-based Dui Hua Foundation. Even so, it executes more people than every other government in the world put together. The next highest is Iran, with more than 360 in 2011, according to Amnesty International.

Starting in 2007, China’s Supreme Court decreed it must approve all the country’s executions. In a 2010 annual report, the court said it should “respect and protect citizens’ right to life, the most basic human right,” according to Xinhua.

Premier Wen’s remarks in March and the changes to the private banking system make Wu’s lawyer hopeful that the Supreme Court will commute her death sentence. On March 30, an editorial in the Financial News, a publication of the People’s Bank of China, said reforms in Wenzhou were a “turning point” for the development of private financing in China.

“Wu Ying’s case happened in a special time during China’s reform, where the financial system is hugely lagging behind economic development,” said Zhou, of the Wenzhou enterprise association. “Wu Ying won’t be executed now that the trial program has been announced. She can’t die before the dawn.”

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Yidi Zhao in Beijing at yzhao7@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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