Euro Declines Most in 2012 on Deepening Turmoil in Spain

By Allison Bennett - May 26, 2012 11:00 AM GMT+0700

The euro had its biggest weekly loss since December against the dollar as Greece’s anti-bailout party gained in the polls and amid a deepening crisis in Spain.

The shared currency fell for a fifth week versus the yen, the longest stretch since October, as German manufacturing shrank and the Bank of Japan (8301) refrained from adding stimulus to the economy. Brazil’s real was the only winner against the dollar as the central bank sold currency-swap contracts. The dollars of Australia and New Zealand declined as reports showed the Chinese economy is stalling. A report June 1 is forecast to show U.S. employers added more jobs in May than the prior month.

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May 25 (Bloomberg) -- Charles Dallara, managing director of the Institute of International Finance, talks about the potential cost of a Greek exit from the euro, its impact on the European Central Bank and the outlook for the region's economies. He speaks with Bloomberg's Andrew Davis in Rome. (Source: Bloomberg)

“Uncertainty is high, growth is poor and a Greek exit is a wild card,” said Aroop Chatterjee, a currency strategist at Barclays Plc’s Barclays Capital unit in New York. “It’s unlikely that the euro finds a bottom for a while even in a good state of the world.”

The euro declined 2.1 percent on the week to $1.2517, touching $1.2496, the weakest since July 2010. The 17-nation currency declined 1.2 percent to 99.75, falling below 100 for the first time since February. The Japanese currency fell 0.8 percent to 79.68 per dollar.

Hedge funds and other large speculators increased wagers the euro will decline versus the dollar to a record high for a second consecutive week. So-called net shorts increased for a third week, totaling 195,361 in the period ended May 22 compares to 173,869 for the week before, according to the Commodity Futures Trading Commission.

Euro Crisis

“Risk appetite itself has traced its undulation to the movements in the euro,” Ravi Bharadwaj, a market analyst in Washington at Western Union Co. (WU)’s Western Union Business Solutions unit, said May 23.

European leaders announced no new measures to stem the bloc’s crisis at a summit in Brussels this week. The gathering took place as Greece prepares to hold new elections on June 17 after an anti-bailout party surged to second place in balloting on May 6. A poll on May 24 had the Syriza party with 27.2 percent support, boosting speculation that the country may exit the currency bloc.

The euro weakened 1.2 percent against nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance along with the Swiss franc. The dollar gained 1.1 percent and the yen rose 0.2 percent.

The shared currency fell below $1.25 for the first time in 22 months after the president of Catalonia, one of 17 semi- autonomous regions in Spain, repeated his call for Spanish central government to help regions access funding, Standard & Poor’s cut the credit ratings of five Spanish banks and the Bankia group said it needed 19 billion euros ($23.8 billion) of government money.

‘Unwelcome Development’

A German index based on a survey of purchasing managers in the manufacturing industry declined to 45 this month from 46.2 in April, Markit Economics said May 24.

“It’s unwelcome development with German manufacturing, because typically that’s where you go looking for a silver lining in the euro,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said May 24. “The second quarter had delivered a shock to growth expectations globally.”

China may have a loan shortfall which would be the first in seven years, according an exclusive Bloomberg News report. Loan demand is drying up as Europe’s debt crisis curbs exports and demand for new homes wanes.

Aussie, Kiwi

Australia’s dollar fell 0.9 percent to 97.58 U.S. cents. The Aussie fell to 96.90 U.S. cents on May 23, a six-month low.

New Zealand’s dollar declined 0.3 percent to 75.40 U.S. cents and touched 74.57 U.S. cents, the weakest since November. The so-called kiwi’s losses were limited as Moody’s cited the government’s deficit and debt trajectories in affirming its AAA rating.

China is Australia’s largest trading partner and is the second-biggest destination for New Zealand exports.

American employers added 150,000 jobs in May, according to the median estimate of economists surveyed by Bloomberg News, after a 115,000 gain in April that missed forecasts. The jobless rate held steady at 8.1 percent, according to another survey.

The Dollar Index (DXY) rose 1.3 percent to 82.393, after touching 82.461, the strongest since September 2010. The gauge’s fourth consecutive weekly gain comes as cumulative net inflows in to U.S. Treasuries yesterday were more than double the daily average over the past year.

Franc Tumbles

The Swiss franc was the biggest loser against the dollar this week, falling 2.1 percent to 95.95 centimes per dollar. It was the biggest weekly loss since Nov. 4. Switzerland’s currency touched the weakest level in two months versus the euro on May 24 amid speculation the central bank may take action to discourage investment in the nation through taxing deposits.

SNB spokeswoman Silvia Oppliger declined to comment on the Swiss franc exchange rate. Finance Ministry spokesman Roland Meier wouldn’t comment on the tax speculation.

Brazil’s real rose 1.8 percent against the dollar to 1.9874 after the central bank sold currency swaps through auction for four consecutive days to stem the largest year-to-date decline against the greenback. The real is the worst performing major currency this year and has declined 6.1 percent against the dollar. It touched a three-year low on May 18.

The nation also completely removed a tax on currency derivatives for exporters on May 23, said Alexandre Andrade, an official at the tax agency.

The yen had its biggest weekly decline against the dollar since March 16 as Fitch Ratings cut the nation’s credit ranking, saying it isn’t acting quickly enough to tackle its public-debt burden.

Losses were limited as the BOJ kept its asset-purchase fund at 40 trillion yen ($502 billion) at a meeting May 23, after expanding it by 10 trillion yen last month. The central bank also left a credit-lending program at 30 trillion yen, it said in a statement in Tokyo. The policy board kept the key overnight lending rate between zero and 0.1 percent.

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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Facebook IPO Seen Deepening Investor Distrust of Stocks

By Elizabeth Ody and Margaret Collins - May 26, 2012 11:01 AM GMT+0700

Facebook Inc. (FB)’s initial public offering, plagued by trading errors and a 16 percent drop in the share price, will push more individual investors out of a stock market they already distrust after the financial crisis.

“This is clearly the latest in a long string of events that is eviscerating the confidence investors have in the market,” said Andrew Stoltmann, a Chicago attorney who represents retail investors. “The perception is Wall Street jiggered this IPO so the underwriters made money, Facebook executives made money and the small investor got left holding the bag.”

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Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing. Photographer: Manjunath Kiran/AFP/Getty Images

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May 25 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed blog and a Bloomberg contributing editor, talks about Facebook Inc.'s initial public offering and co-founder Eduardo Saverin's investment in Jumio Inc. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 25 (Bloomberg) -- Sheila Dharmarajan reports on facebook's IPO and how it is the biggest flop in a decade based on the first 5 days of trading. She speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

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May 25 (Bloomberg) -- Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Bloomberg's Peter Cook reports on Bloomberg Television's "Money Moves." (Source: Bloomberg)

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Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Photograph: Frank May/DPA/Landov

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The Facebook Inc. logo is displayed on a computer screen in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.

“If you have a lot of angry people out there, they’re going to express their anger in different ways,” said Steve Sosnick, equity risk manager for Timber Hill LLC, the market- making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. (IBKR) “One of them may be with their feet.”

The IPO produced the worst five-day return among the largest U.S. deals of the past decade. The 13 percent decline through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions. Visa Inc. did best among the biggest deals, rising 45 percent.

Lost Decade

Some retail investors still haven’t moved off the sidelines after pulling out of the market during the 2008-09 financial crisis. The Standard & Poor’s 500 Index (SPX) has made no progress in more than a decade, currently trading at levels first seen in 1999 following two bear markets that wiped out about 50 percent from the index. The May 6, 2010, rout known as the flash crash erased $862 billion in less than 20 minutes, undermining confidence in the structure of equity markets.

Investors have withdrawn money from mutual funds that invest in U.S. stocks for five straight years as of December, according to the Investment Company Institute, a Washington- based trade group. U.S. households held about $8.1 trillion in corporate equities at the end of 2011, about 16 percent less than the $9.6 trillion they held in 2007, according to Federal Reserve data released in March.

Increased volatility, high correlation among stocks and the flash crash are among a “whole basket-load of things” that have caused retail investors to be skeptical for several years, said Ron Sloan, who oversees about $11 billion as chief investment officer of the U.S. core equity team for Atlanta- based fund manager Invesco Ltd. (IVZ) “This is just the icing on the cake.”

Lowered Estimates

Patricia Arroyo, 53, a psychologist and executive coach in Boston who manages her own investments, said, “What shakes my investor confidence more than the glitches is to see all the institutional investors, insiders and favored clients get all the advantages in these situations.”

After Facebook said on May 9 that growth in advertising had failed to keep up with user gains, analysts at some banks underwriting the deal cut their earnings estimates, said people familiar with the process. The new estimates were relayed to institutional investors.

Arroyo had avoided Facebook and instead purchased about 50 shares of social-gaming company Zynga Inc. (ZNGA), speculating that a pop in Facebook’s price would benefit the stock of the San Francisco-based company. Trading of Zynga was halted twice because of volatility on the day Facebook started trading. Zynga’s stock has fallen 20 percent in the past week.

Federal Review

Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering. Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing. New York-based Nasdaq was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading.

Brokerages whose customers had trouble executing Facebook trades, including Boston-based Fidelity Investments and Charles Schwab Corp. (SCHW), said they are trying to resolve complaints.

“Fidelity senior management has been working with regulators, market makers and Nasdaq to represent all of our customers’ trading issues from May 18 and we will continue to do so in order to persuade Nasdaq to mitigate the impact on our customers,” Stephen Austin, a spokesman at Fidelity, said in a phone interview. Schwab also is continuing to address any concerns that remain for its customers, Michael Cianfrocca, a spokesman for the San Francisco-based brokerage, said in an e- mail.

Missed Opportunity

The Facebook fallout has eroded hopes that the debut would revive the appetite for stocks among individuals. Trading in Facebook accounted for about 20 percent to 30 percent of revenue-generating trades at online brokers on May 18, Richard Repetto, an analyst at Sandler O’Neill & Partners LP in New York, said in an e-mailed report on May 23. Retail buying and selling on the day a company debuts is usually 2 percent to 5 percent, he wrote.

The social network accounted for 22 percent of equities volume on May 18 at online brokerage TD Ameritrade Holding Corp. (AMTD), according to Steve Quirk, a senior vice president at the Omaha, Nebraska-based company. The firm had almost 60,000 orders to trade Facebook shares before the stock opened, he said.

“For now, it appears like a missed opportunity to build sustainable retail momentum,” Repetto wrote. The technical glitches and price decline in the stock have “driven retail trading back to earth.”

Knight Capital

Retail investors weren’t the only ones who lost money as Facebook shares declined this week. Knight Capital Group Inc. (KCG) estimated that it lost about $30 million to $35 million trading Facebook because of technical problems at Nasdaq, the firm said in a filing with the U.S. Securities and Exchange Commission on May 23. The brokerage and market maker is based in Jersey City, New Jersey.

Citadel Securities, the Chicago-based broker run by hedge- fund manager Ken Griffin, lost as much as $35 million, according to a person with knowledge of the firm.

Despite trading problems and losses, many investors who have already purchased the stock are continuing to hold on, said John Dominic, vice president of trading for TradeKing, an online broker based in Fort Lauderdale, Florida.

“Most are probably taking a wait-and-see approach,” Dominic said.

‘Slow Motion’ Wreck

IPOs are often risky and expensive for investors, said Zack Shepard, managing director for Mason, Ohio-based Matson Money Inc., which manages about $3.1 billion on behalf of individual investors. He said his firm generally waits about one year before it considers investing in newly public companies.

The Facebook mess and concerns about whether the rules of the game are fair will get resolved, said Invesco’s Sloan. A lasting effect may be that individuals focus more on company fundamentals and invest in equities for the long-term, he said.

“Watching this fiasco was like watching a car wreck in slow motion,” Andrew T. Gardener, president of Tanglewood Legacy Advisors LLC, based in Houston, said in e-mailed comments. “Only a small number of investors were directly involved. The rest of us will soon get out the keys and go for a drive.”

To contact the reporters on this story: Elizabeth Ody in New York at eody@bloomberg.net; Margaret Collins in New York at mcollins45@bloomberg.net

To contact the editor responsible for this story: Rick Levinson at rlevinson2@bloomberg.net

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U.S. Stocks Erase Loss as Europe Offsets China Concern

By Rita Nazareth - May 25, 2012 3:45 AM GMT+0700

U.S. stocks erased losses as Italian Prime Minister Mario Monti said Greece is likely to stay in the euro and a majority of the region’s leaders support issuing a joint bond, offsetting earlier concern about a Chinese slowdown.

A measure of financial shares in the Standard & Poor’s 500 Index gained, while technology and industrial companies retreated. Hewlett-Packard Co. (HPQ) rose 3.3 percent after the largest personal-computer maker announced plans to slice its workforce by 27,000 and reported quarterly sales and earnings that topped estimates. Tiffany & Co. (TIF) tumbled 6.8 percent as the luxury jewelry retailer cut its profit and sales forecasts.

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Traders work at the New York Stock Exchange (NYSE) in New York on May 24, 2012. Photographer: Scott Eells/Bloomberg

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May 24 (Bloomberg) -- Bloomberg's Deborah Kostroun reports on the performance of the U.S. equity market today. U.S. stocks erased losses as Italian Prime Minister Mario Monti said Greece is likely to stay in the euro and a majority of the region’s leaders support issuing a joint bond, offsetting earlier concern about a Chinese slowdown. (Source: Bloomberg)

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May 24 (Bloomberg) -- Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, talks about Facebook Inc.'s initial public offering and the potential impact on U.S. investor sentiment. Levitt speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

The S&P 500 rose 0.1 percent to 1,320.68 at 4 p.m. New York time, reversing a loss of 0.6 percent. The index gained for a fourth day. The Dow Jones Industrial Average added 33.60 points, or 0.3 percent, to 12,529.75. The Nasdaq Composite Index (CCMP) fell 0.4 percent to 2,839.38. About 6.9 billion shares changed hands on U.S. exchanges, almost in line with the three-month average.

“The market has come down not necessarily because growth has slowed so significantly, but because of a potential disorderly unwind of the euro,” said Dan Veru, who oversees $3.7 billion as chief investment officer of Palisade Capital Management LLC in Fort Lee, New Jersey. “Greece won’t come out of the euro. There’s no mechanism in place to do that.”

Equities reversed losses as Monti said in an interview on Italian television station La7 today that “Europe can have euro bonds soon.” Italy can help push Germany to support the idea of collective debt and to embrace the “common good” of Europe, he said. Stocks dropped earlier as three officials said China’s biggest banks may fall short of loan targets for the first time in at least seven years amid an economic slowdown.

Economic Data

In the U.S., data showed companies placed fewer orders for computers, machinery and other capital equipment in April for a second month. Manufacturing in the U.S. expanded in May at the slowest pace in three months, indicating the industry that’s spurred the expansion is cooling.

Concern about a slowdown in global growth and a worsening of Europe’s debt crisis drove the S&P 500 down 5.5 percent so far this month. Financial, energy and technology shares have tumbled at least 7.7 percent in May.

Hewlett-Packard rose 3.3 percent to $21.77. The 8 percent workforce reduction, taking place through firings and early retirement offers, will generate annual savings of as much as $3.5 billion starting in 2014.

Facebook Inc. (FB) added 3.2 percent to $33.03, gaining for a second day. The social networking company is still trading below its initial public offering price of $38.

Airlines Rally

The Bloomberg U.S. Airlines Index (BUSAIRL) climbed 4.9 percent after JPMorgan Chase & Co. raised industry estimates, citing lower jet-fuel prices. Southwest Airlines Co. (LUV) jumped 4.6 percent, the biggest gain in the S&P 500, to $8.74. US Airways Group Inc. (LCC) surged 11 percent to $12.16.

Dow Chemical Co. (DOW) rallied 3.4 percent to $31.55. The chemical maker said an arbitration panel ruled that Kuwait must pay $2.16 billion in damages after it canceled a 2008 agreement to buy a stake in the company’s plastics business.

Pandora Media Inc. (P) surged 12 percent to $11.60. The Internet radio pioneer rose the most since its first day of trading in June 2011 after first-quarter results exceeded analysts’ estimates on higher mobile advertising sales.

Technology had the biggest decline among 10 groups in the S&P 500, dropping 0.9 percent. Apple Inc. (AAPL), the most valuable company, lost 0.9 percent to $565.32.

NetApp Tumbles

NetApp Inc. (NTAP) plunged 12 percent, the most in the S&P 500, to $28.82. The seller of hardware and software for storing data forecast first-quarter earnings trailing analysts’ estimates amid a weak economic outlook.

Tiffany tumbled 6.8 percent to $57.59. Chief Executive Officer Michael Kowalski said sales in the Americas region “underperformed, continuing a soft trend that began in the last quarter of 2011.” Sales in the first quarter rose 3 percent to $386 million in the Americas and declined 4 percent in the New York flagship store.

MEMC Electronic Materials Inc. (WFR) lost 6 percent to $1.58. The second-largest U.S. maker of polysilicon dropped after S&P cut its corporate credit rating two levels to B+ from BB.

The slump in the S&P 500 may be nearing an end after the measure dropped below its 150-day average, which may lure buyers into the market, said Oppenheimer & Co. The gauge slipped 8.7 percent between April 2 and May 18, falling below its average price from the prior 150 days on May 17 for the first time since Dec. 19, according to data compiled by Bloomberg.

150-Day Average

Oppenheimer’s Carter Worth wrote in a May 21 report that declines to the 150-day average may prompt pessimists to stop selling and persuade investors who missed out on the market’s rally through April to buy.

The S&P 500 is “down to a level where rebound potential is high and that the right thing to do now is to put some money to work on the long side,” Worth, the New York-based chief market technician at Oppenheimer, wrote in the May 21 report. The stock index rose 1.8 percent this week through yesterday.

Worth highlighted 90 stocks to buy that are down to levels where “selling pressure is judged likely to abate.” The list included Berkshire Hathaway Inc. (BRK/B), Intel Corp. (INTC), Microsoft Corp. (MSFT) and Starbucks Corp. (SBUX)

“If and as these names stop going down (read: stabilize) and actually start to rebound, one can make inferences about the current market correction being at an end,” Worth wrote in the report.

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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Buffett Says Free News Unsustainable, May Add More Papers

By Zachary Tracer - May 25, 2012 3:23 AM GMT+0700

Warren Buffett, whose Berkshire Hathaway Inc. (BRK/A) struck a deal this month to acquire 63 newspapers, said he may buy more publications as the industry rethinks whether to offer free content on the Internet.

“This is an unsustainable model and certain of our papers are already making progress in moving to something that makes more sense,” Buffett wrote in a letter to editors and publishers of Berkshire’s daily newspapers. “We want your best thinking as we work out the blend of digital and print that will attract both the audience and the revenue we need.”

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Warren Buffett, Chairman and CEO of Berkshire Hathaway, in Omaha, Neb., on Nov. 14, 2011. Photographer: Nati Harnik/AP Photo

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Buffett is adding to Berkshire’s newspaper holdings with the $142 million deal announced May 17 for Media General Inc. (MEG) publications including the Richmond Times-Dispatch of Virginia. The billionaire, who bought the Buffalo News in 1977 and said in 2009 that newspapers have the potential for unending losses, is now betting that papers with a community focus can profit as they change their models.

While circulation may slip, papers only fail when there are dailies competing in the same town, a publication forfeits its position as the primary source of locally important information or the market doesn’t have a sense of identity, he said.

“We don’t face those problems,” Buffett, 81, wrote in the letter dated yesterday and posted on the website of Berkshire’s Omaha World-Herald, which is in the Nebraska town where Buffett’s company is based. “Berkshire will probably purchase more papers in the next few years. We will favor towns and cities with a strong sense of community.”

Media General

Berkshire is the largest shareholder of Washington Post Co. (WPO) and purchased the World-Herald last year. Buffett said the company’s newspapers won’t “move the needle in terms of Berkshire’s economic value” in yesterday’s letter.

In the Media General deal, Berkshire also gave the Richmond-based company a $400 million term loan with an interest rate of 10.5 percent and received warrants for about 4.6 million Class A shares. Media General retained its television stations and said it’s selling the Tampa, Florida, group separately.

Media General has declined more than 90 percent since the end of 2003. The company fell 3.8 percent to $3.51 at 4:04 p.m. in New York. Berkshire slipped 0.2 percent.

The newspaper industry, suffering drops in print advertising, has recently embraced digital subscription plans. The New York Times (NYT) Media Group began charging readers to access its news stories online last year, attracting about 454,000 paying subscribers as of March. The so-called paywall is estimated to bring in $125 million next year for Times Co., according to Douglas Arthur, an analyst at Evercore Partners Inc. (EVR)

Newspaper Paywalls

Gannett Co. (GCI), owner of 82 daily newspapers, said this year it would begin charging readers to access news content online, except for flagship USA Today.

Press+, a startup that sells online subscription technology, is used by more than 300 publications, including some owned by MediaNews Group Inc., Tribune Co., GateHouse Media Inc. (GHSE), McClatchy Co. (MNI) and Lee Enterprises Inc. Press+, based in New York, was founded by former Wall Street Journal publisher L. Gordon Crovitz, along with Steven Brill and Leo Hindery in 2010.

The World-Herald and 17 of the Media General papers Berkshire is buying also use Press+, Crovitz said in an e-mail.

Buffett, a supporter of President Barack Obama and an advocate of higher taxes on the wealthy, said the newspapers would remain independent in their coverage of public policy.

‘Strong Political Views’

“I have some strong political views, but Berkshire owns the paper -- I don’t,” Buffett wrote in the letter. “And Berkshire will always be non-political.”

The billionaire investor said that editors should focus on making the papers “indispensable” to local communities.

“Our future depends on remaining the primary source of information in certain subjects of great importance to our readers,” Buffett wrote. “Technological change has caused us to lose primacy in various key areas, including national news, national sports, stock quotations and employment opportunities. So be it. Our job is to reign supreme in matters of local importance.”

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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Facebook Investor Spending Month’s Salary Exposes Hype

By Danielle Kucera and Douglas MacMillan - May 25, 2012 3:32 AM GMT+0700

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc. (FB)’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.

“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. “That’s about a 12th of my annual income -- so a month’s salary. I’m trying to do an on-my-own retirement kind of thing.”

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Pedestrians walk past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Photographer: Scott Eells/Bloomberg

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May 24 (Bloomberg) -- Mike Abramsky, a principal at Red Team Global, talks about his suggestion that Facebook Inc. purchase Research In Motion Ltd. and the potential benefits for the social networking company. Abramsky speaks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 24 (Bloomberg) -- Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission and a Bloomberg LP board member, talks about Facebook Inc.'s initial public offering and the potential impact on U.S. investor sentiment. Levitt speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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May 24 (Bloomberg) -- Facebook Inc.’s initial public offering has triggered allegations the social network and banks led by Morgan Stanley selectively disclosed crucial information to investors. Bloomberg's Jon Erlichman reports on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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May 24 (Bloomberg) -- Steven Spencer, a partner at SMB Capital, talks about the performance of Facebook Inc. stock and short-selling strategy. Spencer speaks with Stephanie Ruhle, Erik Schatzker, Scarlet Fu and Dominic Chu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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May 23 (Bloomberg) -- Robert Prongay, an attorney at Glancy Binkow & Goldberg, talks about the lawsuit the firm has filed with a California court over Facebook Inc.'s initial public offering. He speaks with Cory Johnson on Bloomberg Television's "Bloomberg West." Bloomberg's Emily Chang also speaks. (Source: Bloomberg)

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The Facebook Inc. logo is displayed at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Scott Eells/Bloomberg

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Members of the media stand under Facebook Inc. signage projected on a screen at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Peter Foley/Bloomberg

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A television technician checks monitors displaying Mark Zuckerberg, chief executive officer of Facebook Inc., inside a satellite truck in the parking lot at the company's headquarters in Menlo Park, California on May 18, 2012. Photographer: David Paul Morris/Bloomberg

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Onlookers peer through the window during the Facebook Inc. initial public offering (IPO) at the Nasdaq MarketSite in New York on May 18, 2012. Photographer: Scott Eells/Bloomberg

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Members of the media broadcast live from Facebook Inc. headquarters in Menlo Park, California on May 18, 2012. Photographer: David Paul Morris/Bloomberg

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News of the Facebook Inc. initial public offer is displayed on a news ticker in New York on May 17, 2012. Photographer: Michael Nagle/Bloomberg

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The Facebook Inc. logo is displayed on a computer screen in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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The Facebook Inc. logo is reflected in water droplets in this arranged photograph in San Francisco on May 17, 2012. Photographer: David Paul Morris/Bloomberg

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A pedestrian walks past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Photographer: Scott Eells/Bloomberg

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Facebook, a site used by 901 million people, allocated more than 25 percent of shares to retail investors, said two people familiar with the offering who asked not to be identified because the process was confidential. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held the stock.

While asset managers and hedge funds got to buy the stock in private trading years before the IPO and investment banks made money in the offering, smaller investors had to wait until last week’s IPO for a piece of the action. The outcome: After Facebook and its underwriters misjudged demand in pricing the IPO and glitches on the Nasdaq hampered trading on the first day, the world’s largest social-network website lost 18 percent in three days. The shares are still about 13 percent under their $38 IPO price after paring some losses.

The stock rose 3.2 percent to $33.03 at 4 p.m. in New York today.

‘Should I Bail?’

Facebook, the biggest technology IPO in history, turned into a quagmire of blame. Buyers of the stock sued the company, Nasdaq OMX Group Inc. and the underwriters, claiming they were misled. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and the scrutiny prompted Morgan Stanley (MS), the lead underwriter, to defend its handling of the IPO in a statement.

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh god, should I bail or is it going to come back?’”

For Cefalu, whose children are age 12 and 1, the first-day glitches meant more than a bad day of trading: they made him buy twice as many shares as he intended after an order he canceled went through hours later, he said. With shares of Zynga Inc. (ZNGA) slumping along with Facebook, he estimates he lost a combined $2,250 as a result of the Facebook debut debacle.

Technical Problems

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.

“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”

The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

“I didn’t know what happened,” he said. “Then I was like, ‘they should be able to do something about it.’ They messed up pretty big from what I see, and it hurt more people than just me.”

Retail Investors

On its debut, the Menlo Park, California-based website jumped to $45 at the start of trading, which was delayed 30 minutes, before ending the day up 0.6 percent at $38.23. It paled in contrast with Google Inc.’s 18 percent jump in its 2004 initial public offering, Visa Inc.’s 28 percent gain in 2008 and LinkedIn Corp.’s 109 percent surge last May.

“The reaction of the retail investor is ‘Wow, what a flop,’” Jay Pestrichelli, co-founder of the Omaha, Nebraska- based investment adviser Zega Financial, said in an interview.

Frustrations of individual investors were exacerbated by a snafu at the Nasdaq, where trade confirmations were delayed and some orders may have been mishandled. Nasdaq’s woes were felt across the brokerage industry, according to Fidelity Investments, the second-largest mutual fund company.

Some customers who purchased Facebook stock “may have experienced delays in status updates,” Fidelity said in a statement. “This is an industry-wide issue that affected many different broker-dealers and other market participants.”

Fidelity Customer ‘Concerns’

Boston-based Fidelity said it’s working with other brokerage firms to “get Nasdaq to come to a resolution that addresses the concerns of our customers.”

Joseph Christinat, a spokesman for Nasdaq, declined to comment. Larry Yu, a spokesman for Facebook, declined to comment.

Facebook increased the number of shares sold and the price range days before the IPO, raising $16 billion and valuing the company at $104.2 billion.

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade Financial Corp. (ETFC) and Fidelity Brokerage in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

“They flooded the market with so many shares,” Brogan said. “I’m actually going to dump them if they get back to $38.”

Demand from retail buyers was higher than normal for Facebook, with personal investment website Sigfig.com seeing 10 times more orders than it had for other recent technology IPOs, said Terry Banet, chief investment officer for the site.

“Facebook wanted to get more retail involvement and they succeeded,” Banet said.

‘Obvious Gamble’

Some investors managed to take advantage of the initial gain. James DiMaggio, a 29-year-old product line sales manager at Ametek Inc. in Morton, Pennsylvania, said he bought 200 shares at $38, sold half for $40.98 and made about $280.

“The other half is now tanking,” said DiMaggio, who estimates his losses so far at $320. “It was really exciting in the beginning. I don’t gamble, and this is obviously a gamble.”

In the wake of the stock’s losses this week, small-time investors took to the Web to express their agitation on sites including Twitter Inc. and online investing community StockTwits Inc.

“There’s a lot of questioning about the IPO process in general and a sentiment that the real investor is getting taken by the larger Wall Street,” said Phil Pearlman, executive editor of StockTwits.

Some investors still see potential in the long term. At Sigfig, 7 percent of users who bought Facebook on May 18 sold it the same day, below the 15 percent to 31 percent first-day flipping of stock that has been more typical of recent technology IPOs, according to Banet.

Long-Term Potential

“Short term fluctuations don’t bother me,” said Charles Landry of Sacramento, California, who bought 1,000 shares on May 18. “Facebook has the potential to be, in the long term, one of the iconic companies in Silicon Valley, a la Google, a la Apple.”

Renee Morrison, who runs accounting at Empyrion Wealth Management in Roseville, California, had never bought a stock in her life before investing in Facebook last week. She too plans to wait it out, she said.

“I have been very well educated and prepared that it’s kind of like gambling, there’s no guarantee,” Morrison said.

To contact the reporters on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

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

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Morgan Stanley, Goldman Sachs Sued Over Facebook IPO

By Don Jeffrey - May 24, 2012 3:26 AM GMT+0700

Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and other underwriters along with Facebook Inc. (FB) were sued by investors who claimed they were misled in the purchase of the social network firm’s stock.

The plaintiffs, who are seeking to proceed on behalf of a class of Facebook investors, said the company and the banks didn’t disclose lower revenue estimates before the share sale. The members of the proposed class have lost more than $2.5 billion since the initial public offering last week, according to a complaint filed today in Manhattan federal court.

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A Facebook investor sued Nasdaq OMX Group Inc. yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock. Photographer: Scott Eells/Bloomberg

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May 23 (Bloomberg) -- Will Duff Gordon, a senior research analyst at Data Explorers, talks about short-selling strategy for Facebook Inc. and market outlook. He speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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May 22 (Bloomberg) -- Bloomberg's Jon Erlichman reports on a Massachusetts regulator's decision to subpoena to Morgan Stanley over talks between a research analyst and institutional investors on revenue prospects for Facebook Inc. Morgan Stanley defended its role in the initial public offering. Erlichman speaks on Bloomberg Television's "Bloomberg West." Bloomberg's Emily Chang also speaks. (Source: Bloomberg)

“The true facts at the time of the IPO were that Facebook was then experiencing a severe and pronounced reduction in revenue growth,” the plaintiffs said in the complaint.

Also sued were units of Bank of America Corp. and Barclays Plc (BARC), as well as Facebook Chief Executive Officer Mark Zuckerberg and Chief Financial Officer David Ebersman.

Facebook went public at $38 a share and plunged 19 percent over two days. Facebook rose 3.2 percent, or $1, to $32 at 4:22 p.m. New York time in Nasdaq trading.

“We believe the lawsuit is without merit,” Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mail. He said the company would fight the claims.

Pen Pendleton, Michael DuVally and Mark Lane, spokesmen for New York-based Morgan Stanley, New York-based Goldman Sachs and London-based Barclays, respectively, declined to comment on the lawsuit. Representatives of New York-based JPMorgan and Charlotte, North Carolina-based Bank of America didn’t immediately return calls for comment.

Revenue Growth

The complaint states that Facebook’s revenue growth is declining because its greatest expansion is coming from users of mobile devices rather than personal computers. The company hasn’t shown advertisements to people who log on through mobile applications, according to the complaint. Facebook booked 85 percent of its revenue from advertising in 2011, according to the complaint.

The banks named in the lawsuit reduced their estimates for Facebook for the second quarter and full year of 2012 and didn’t inform potential investors in presentations before the IPO, according to the complaint.

“The underwriters took down their earnings estimates dramatically during the road show and only told a select group of investors,” Samuel Rudman, a lawyer for the plaintiffs, said today in a phone interview.

Difficult Time

The plaintiffs may have a difficult time proving the case if it’s based on the presentation made to potential investors, according to a securities lawyer.

“It’s going to depend on who knew what when,” Jeremy Garvey of Buchanan Ingersoll & Rooney in Pittsburgh said in a phone interview. “The real question is, based on the final prospectus, were the statements complete and correct?” Garvey said. “If they have enough cautionary language in the prospectus, they do have a bit of a disclaimer.”

A Facebook investor sued Nasdaq OMX Group Inc. yesterday in the same court, saying the exchange “badly mishandled” trades in Facebook stock, which resulted in delays and a failure to complete customer orders.

That investor is also seeking class-action status for the lawsuit on behalf of investors who lost money because their buy, sell and cancellation orders weren’t properly processed.

The U.S. Securities and Exchange Commission has said it will review the first day of trading in Facebook shares.

The underwriter case is Brian Roffe Profit Sharing Plan v. Facebook, 12-04081, and the Nasdaq case is Goldberg v. Nasdaq OMX Group Inc., 12-cv-04054, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Don Jeffrey in Manhattan federal court at djeffrey1@bloomberg.net

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

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By Michael P. Regan - May 24, 2012 3:05 AM GMT+0700

U.S. Stocks Erase Loss Amid Optimism on Europe Efforts

By Michael P. Regan - May 24, 2012 3:05 AM GMT+0700

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U.S. stocks erased early losses amid optimism that European leaders will do more to halt contagion from the region’s debt crisis, helping the market reverse a plunge triggered by growing concern Greece will leave the euro.

The Standard & Poor’s 500 Index rose 0.2 percent to 1,318.85 at 4 p.m. in New York, after tumbling as much as 1.5 percent and dipping below 1,300.

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Traders work on the floor of the New York Stock Exchange (NYSE) in New York. Photographer: Michael Nagle/Bloomberg

Global stocks retreated earlier as European leaders meet to discuss the region’s crisis. Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank has the tools to curb any damage from Europe’s debt crisis.

Kocherlakota said in a speech in Rapid City, South Dakota, that the Fed probably can’t repair all the damage to U.S. employment from the credit crisis and fiscal policy could help to revive the job market. He said a fall off a “fiscal cliff” would argue for another round of quantitative easing by the Fed.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

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

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European Banks Unprepared for Greek Exit From Euro

By Elena Logutenkova, Liam Vaughan and Gavin Finch - May 23, 2012 7:50 PM GMT+0700

Europe’s banks, sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro.

While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.

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UBS, the third-biggest manager of money for the wealthy, sees a 20 percent chance of Greece leaving the euro within six months, the bank’s chief investment office, led by Alexander Friedman, told client advisers in an internal note last week. Photographer: Gianluca Colla/Bloomberg

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May 23 (Bloomberg) -- Goldman Sachs Asset Management Chairman Jim O'Neill, Luxembourg Finance Minister Luc Frieden and Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, offer their views on the possible creation of a common euro-area bond. This report also contains comments from Christian Schulz, an economist at Berenberg Bank, Marchel Alexandrovich, senior European economist at Jefferies International and Yannick Naud, a portfolio manager at Glendevon King Ltd. (Source: Bloomberg)

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May 22 (Bloomberg) -- James Longsdon, a managing director in the financial institutions group at Fitch Ratings, talks about European banks. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

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May 23 (Bloomberg) -- Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics, talks about the future of Greece in the euro zone, the country's political outlook and investor sentiment. Kirkegaard speaks with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)

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May 23 (Bloomberg) -- Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong, talks about Europe's sovereign debt crisis, its implications for Asian economies and China's economic growth. He speaks with Susan Li, Rishaad Salamat, John Dawson and Zeb Eckert on Bloomberg Television's "Asia Edge." (Source: Bloomberg)

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May 23 (Bloomberg) -- Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, talks about Europe's debt crisis, global markets and investment strategy. He speaks with Sara Eisen and Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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The Deutsche Bank headquarters in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

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Deutsche Bank , Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. Photographer: Hannelore Foerster/Bloomberg

“A Greek exit would be a Pandora’s box,” said Jacques- Pascal Porta, who helps manage $570 million at Ofi Gestion Privee in Paris, including shares in Deutsche Bank AG (DBK) and BNP Paribas SA. (BNP) “It’s a disaster that would leave the door open to other disasters. The euro’s credibility will be weakened, and it would set a precedent: Why couldn’t an exit happen for Spain, for Italy, and even for France?”

The prospect of Greece leaving the 17-nation euro region increased after parties opposed to the terms of the nation’s second bailout by the European Union and the International Monetary Fund won most of the votes in May 6 elections. A fresh round of voting will be held June 17 after politicians failed to form a government. For the first time since the crisis began in November 2009, European leaders and central bankers are speaking openly of Greece abandoning the currency union.

Deposit Flight

The immediate risk for Europe’s banks, and for the euro region, would be a deposit flight from indebted nations such as Portugal, Ireland, Spain and Italy on speculation those countries also might quit the currency. Lenders in Germany, France and the U.K. had $1.19 trillion of claims on those four nations at the end of 2011, Bank for International Settlements data show.

Should Greece go, its new currency probably would suffer an immediate devaluation of as much as 75 percent against the euro, forcing individuals and companies to default on foreign loans, economists at UBS AG (UBSN) said. Unless European leaders could make a credible case that a Greek exit was an exceptional and isolated incident, depositors in other nations might decide to withdraw euros from banks or shift them to countries seen as safer.

“The highest risk facing the banks at the moment is the possibility of deposit runs,” said Andrew Stimpson, a banking analyst at Keefe, Bruyette & Woods Ltd. in London. “The more policy makers continue to openly discuss an exit, the more likely that people in Spain, Ireland and Portugal pull money out of their local banks.”

Greek Withdrawals

That already may be happening. Banks in Greece, Ireland, Italy, Portugal and Spain saw a decline of 80.6 billion euros ($103 billion), or 3.2 percent, in household and corporate deposits from the end of 2010 through the end of March, European Central Bank data show. Lenders in Germany and France saw an increase in deposits of 217.4 billion euros, or 6.3 percent, in the same period.

Greek central bank head George Provopoulos told President Karolos Papoulias last week that savers have withdrawn as much as 700 million euros and the situation may worsen, according to the transcript of the president’s meeting with party leaders published May 15. Greece had 160 billion euros of bank deposits on March 30, down almost 75 billion euros from the peak in 2009, according to the latest data from the central bank.

Greece’s pledge to inject 18 billion euros of capital in the nation’s banks may help staunch the outflow in deposits. The Hellenic Financial Stability Fund said late yesterday it approved terms of the recapitalization and the contract would be sent today to the lenders and the European Financial Stability Facility for final approval.

Rising Odds

The infusion will enable Greece’s four biggest banks to return to the ECB for funding -- after being cut off when capital ratios fell too low -- and provide an additional 18 billion euros of collateral in the form of EFSF bonds.

UBS, the third-biggest manager of money for the wealthy, sees a 20 percent chance of Greece leaving the euro within six months, the bank’s chief investment office, led by Alexander Friedman, told client advisers in an internal note last week.

To prevent contagion, countries in the euro area would have to form a full-fledged political and fiscal union immediately and implement uniform guarantees on bank deposits throughout the region, Thomas Wacker and Juerg de Spindler, economists at Zurich-based UBS, said in a separate note. They said such a response can be ruled out.

The odds of a Greek exit are seen rising over time. Citigroup Inc. analysts this month raised the likelihood of such an event to between 50 percent and 75 percent over the next 18 months after Greece’s inconclusive elections.

ECB Lifelines

“Banks’ risk-management departments have probably taken into account a Greek exit and most would likely have a plan on how to proceed,” said Robert Liljequist, a Helsinki-based fixed-income strategist at Swedbank AB. “The big problem is that nobody really knows what would happen in the markets if the country leaves the currency, so there is a significant amount of risk with that scenario.”

The ECB’s unprecedented provision of 1.02 trillion euros in three-year cash in December and February helped calm financial markets in the first quarter by removing concern that banks unwilling to lend to one another would run out of cash. Lenders in Spain and Italy also used the funds to buy sovereign debt, reducing government borrowing costs.

Euro Decline

The rebound was short-lived as doubts about the health of Spain’s banks and questions over Greece’s future returned. On May 9, the Euro Stoxx Banks (SX7E) index dropped beneath the lows of March 2009. The 30-company index of euro-region banking stocks fell 2.4 percent by 2:45 p.m. Frankfurt time today. The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers reached 308.398 on May 18, the highest since Dec. 19, two days before the ECB’s first offering of long-term funds. The euro fell today to a 21-month low against the dollar.

Lenders probably would need another 800 billion-euro liquidity lifeline from the ECB to help stem contagion from a Greek exit, Citigroup analysts estimated in a May 17 note.

ECB President Mario Draghi said last week that Greece could leave the euro area and signaled policy makers won’t compromise on their key principles to prevent an exit.

Spanish Banks

The fresh doubts about Greece coincide with struggles by Spain, the euro region’s fourth-largest economy, to shore up its banks following the bursting of a property bubble. The government of Mariano Rajoy announced this month a fourth effort in less than three years to rebuild confidence in the industry as bad loans soar. The state took control of Bankia (BKIA) group, the lender with the most Spanish assets, and ordered banks to set aside an additional 30 billion euros on property loans.

With Spain’s economy in a recession and unemployment at more than 24 percent, more borrowers are defaulting. Bad loans as a proportion of total lending in Spain jumped to 8.37 percent in March, the highest since August 1994, data published last week by the Bank of Spain show. As much as 8.21 billion euros of loans soured in the first quarter, 90 percent more than in the same period of last year.

Moody’s Investors Service downgraded 16 Spanish banks last week, including the two largest, Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), citing the nation’s economy, reduced funding access for lenders and a deterioration in loan quality. The rating company also cut 26 Italian banks, including UniCredit SpA (UCG) and Intesa Sanpaolo SpA. (ISP)

Moody’s Downgrades

In all, Moody’s said in February it would review the ratings on 114 banks in Europe, as well as eight non-European firms with large capital-markets businesses, to assess the impact of the debt crisis.

Spanish, Italian, French and U.K. banks were the biggest borrowers in the ECB’s long-term refinancing operations, or LTROs, according to data compiled by analysts at Credit Suisse Group AG. While the cash injections temporarily soothed markets, they led to a retrenchment from countries on the periphery of the euro region, undermining the EU’s “solidarity incentive,” said Christine Schmid, a Zurich-based analyst with the bank.

That may explain the recent wave of comments contemplating what was once unthinkable. While German Finance Minister Wolfgang Schaeuble last week urged the Greek government to stay in the monetary union, he signaled that a departure would be manageable as European authorities “react in such a way as to ensure that the consequences are as contained as possible.” Bank of France Governor Christian Noyer told journalists in Paris last week that “whatever happens in Greece” won’t place any French financial institution in difficulty.

Different Tack

A year ago Schaeuble said a Greek exit would create an “exceptionally difficult” situation that would be “hard to control,” while Noyer called the possibility of a Greek default a “nightmare” and a “catastrophe.”

What’s changed is that banks in the so-called core EU countries of Germany, France and the U.K. used funds from the ECB in December and February to insulate their southern European units against losses should one or more country exit the euro.

“If you’re a U.K. lender and you’ve lent 10 billion euros to your Spanish subsidiary and Spain exits, you’re suddenly only going to get paid back in 50 percent devalued pesetas and you’re on the hook for 5 billion euros,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

Insulating Units

One way multinational banking groups are mitigating that risk is by replacing their own funding lines to subsidiaries in the region with ECB loans. Deutsche Bank, Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. BNP Paribas, Europe’s third-biggest bank, used the programs to help fund its Italian unit as it reduces intergroup backing.

Barclays Plc (BARC), the U.K.’s second-biggest bank by assets, took 8.2 billion euros of three-year loans from the ECB to provide “funding stability” for its units in Spain and Portugal. Lloyds Banking Group Plc (LLOY) said it’s using central bank money to “ring-fence” its Spanish operation. Credit Agricole SA (ACA), which is using 1.6 billion euros of ECB funding for Athens- based Emporiki, reduced refinancing exposure to its Greek unit by half in the nine months through March to 4.6 billion euros.

Sovereign Debt

European banks also have cut their sovereign-debt holdings and exposures to Ireland, Italy, Spain and Portugal. Lenders in Germany, France and the U.K. reduced exposure to Greece by more than half in the two years through the end of 2011 to $68.2 billion, BIS data show. Their claims on the other four countries are down 36 percent in the same period.

The average core Tier 1 capital ratio of the 10 biggest European banks by assets rose to 10.7 percent as of Sept. 30 under Basel 2 rules from 9.3 percent at the end of 2009, according to data compiled by Bloomberg. Most lenders changed at the end of last year to stricter, so-called Basel 2.5 capital rules, making comparison with prior periods meaningless.

The cash and near-cash holdings of the 10 biggest banks jumped 77 percent on average in the two years through the end of 2011, data compiled by Bloomberg show.

Christian Clausen, president of the European Banking Federation and CEO of Nordea Bank AB (NDA), the largest bank in Scandinavia, said a Greek exit from the euro zone is unlikely and won’t be disastrous for the region’s banks if it does occur.

‘Chain Reaction’

“We’ve come to a level in Europe where that can happen without any major repercussions for the rest of Europe,” Clausen said in an interview in Copenhagen on May 11. “Every bank in Europe will prepare for this, but to think it will impact the European economy and banks in general, that will not happen.”

Still, the efforts may not shield banks from contagion. The 1.1 trillion-euro liquidity buffers Europe’s eight biggest banks have to guard against deposit flight and funding-market dislocations will be insufficient if there’s a systemic loss of confidence across the region, Goldman Sachs Group Inc. analysts wrote in a note yesterday. The buffers include cash, deposits with central banks and unencumbered assets.

Loan and currency losses in the event of a euro breakup may reach $1.1 trillion across German, French, U.K., U.S., Swedish, Swiss, Dutch, Austrian and Belgian banking systems, analysts at Paris-based Societe Generale SA estimated in a note last week.

UBS economists Wacker and de Spindler see a “significant” likelihood of a Greek exit “triggering a chain reaction of bank runs and soaring risk premiums on government bonds of weaker countries, and that ultimately breaks up the entire euro zone.”

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Liam Vaughan in London at lvaughan6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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