Stocks, Commodities Slump on Fed Outlook, Bank Downgrades; Treasuries Gain

By Stephen Kirkland and Shiyin Chen - Sep 22, 2011 6:43 PM GMT+0700

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

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Sept. 22 (Bloomberg) -- Jim Millstein, former chief restructuring officer at the U.S. Treasury, talks about Moody's Investor Service's downgrade of the credit ratings of Bank of America Corp. and Wells Fargo & Co., government bailouts and the outlook for U.S. banks. He speaks with Erik Schatzker and Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Stocks and commodities tumbled, Treasury 30-year yields dropped to a record and the Dollar Index climbed to a seven-month high as the Federal Reserve signaled “significant downside risks” in the U.S. economy.

The MSCI All-Country World Index retreated 2.5 percent at 7:41 a.m. in New York, extending declines from its May peak to more than 20 percent. The U.K.’s FTSE 100 Index (UKX), France’s CAC-40 Index (CAC) and Germany’s DAX slid at least 4.3 percent and Standard & Poor’s 500 Index futures lost 2.2 percent. Thirty-year Treasury yields fell to 2.8462 percent, with German 30-year yields also dropping to an all-time low. The Dollar Index rose as much as 1.6 percent, while the euro lost 1 percent against the U.S. currency. Commodities erased their gains for the year.

The Fed said yesterday it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth as the recovery falters two years after the biggest slump since the Great Depression. China’s manufacturing may shrink for a third month in September, a preliminary index of purchasing managers from HSBC Holdings Plc and Markit Economics showed today. The biggest risk to the euro area is a run on southern European banks, said Kenneth Rogoff, a former chief economist at the International Monetary Fund, Handelsblatt reported.

“The fact that the outlook has not improved despite QE1 and QE2 tells me that monetary policy is reaching its limit and fiscal measures have to do the heavy lifting,” said Manish Singh, London-based head of investment at Crossbridge Capital, which has more than $2 billion under management. “So far, what we have got from the Congress is only disappointment and half- baked measures. If we get more of the same, the downside risk to the markets amplifies.”

Bear Market

A close at this level for the MSCI’s index of developed and emerging-market stocks will mean the gauge has entered a bear market. The Stoxx Europe 600 sank 4.3 percent today as all 19 industry groups declined at least 2.5 percent. Mining companies and automakers led the retreat. Logitech International SA dropped 13 percent after the world’s biggest maker of computer mice cut its profit forecast.

The cost of insuring European corporate debt surged to the highest in 2 1/2 years, with the Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings rising 43.5 basis points to 848.5, according to JPMorgan Chase & Co.

“We have negative headwinds that are absolutely massive,” Patrick Legland, the Paris-based head of research at Societe Generale SA, said in a Bloomberg Television interview with Francine Lacqua in London. “There’s a very powerful slowdown and maybe a recession for Europe and the U.S.”

Bank Downgrades

The decline in S&P 500 futures indicated the U.S. equities gauge will extend a three-day, 4.1 percent decline. The index slumped 2.9 percent yesterday after Moody’s Investors Service cut its long-term credit ratings on Bank of America Corp. and Wells Fargo & Co., saying U.S. support has become less likely if lenders get into financial trouble. Citigroup Inc.’s short-term rating also was downgraded by Moody’s.

The Dollar Index, which tracks the U.S. currency against those of six trading partners, advanced to 78.539, after climbing to 78.575, the highest level since Feb. 16. The 17- nation euro depreciated as much as 1.1 percent against the yen to the lowest level since June 2001, and reached the weakest level since February versus the greenback.

“The euro zone is in meltdown and investors are bailing out of risk wherever they can,” said Steven Barrow, head of research for Group of 10 currencies at Standard Bank Plc in London, referring to yesterday’s statements by the Fed and the Bank of England. “The fact that the Fed delivered mo more than the market expected was probably seen as a disappointment.”

Aussie, Kiwi

The Australian dollar slid below parity with its U.S. peer for the first time in more than six weeks, falling as much as 1 percent. New Zealand’s dollar sank 1.6 percent against the U.S. currency as a report showed the economy almost stalled in the second quarter, reinforcing the case for central bank Governor Alan Bollard to maintain record-low interest rates until 2012. Gross domestic product rose 0.1 percent in the period from the first quarter, a Statistics New Zealand report showed today in Wellington. The median estimate was for a 0.5 percent gain.

The yield on the 10-year Treasury note declined as much as six basis points to 1.7944, the lowest on record. The difference in yield between two- and 30-year debt was as little as 266 basis points, the least since March 2009. The German 30-year yield dropped as much as 15 basis points to 2.45 percent, with the 10-year bund yield sliding to 1.667 percent, the least on record.

Yield Spreads

The extra yield investors demand to hold Italian 10-year bonds instead of bunds approached a euro-era record 4.16 percentage points and was at 4.03 percentage points as the European Central Bank bought Italian government bonds today, according to four people with knowledge of the transactions. A spokesman for the Frankfurt-based central bank declined to comment. Greek two-year notes rose for the first time in four days, sending the yield down 13 basis points to 66.38 percent.

The S&P GSCI index of 24 commodities fell 2.8 percent, bringing the drop this year to 1.7 percent. Copper declined 4.9 percent in London, and crude oil in New York retreated 3.4 percent to $82.97 a barrel.

The MSCI Emerging Markets Index sank 4.5 percent, the most in a month. Indonesia’s Jakarta Composite Index (JCI) slumped 8.9 percent, the biggest loss since October 2008, and benchmark indexes fell more than 3 percent in Russia, India, Poland, Hungary and Taiwan. The Shanghai Composite Index slid 2.8 percent after the manufacturing gauge declined and the government said it will broaden taxes levied on resources. South Korea’s won led currencies lower, depreciating 2.5 percent against the dollar.

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

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

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Greece Accelerates Cuts to Wages, Pensions to Ensure Next Bailout Payment

By Eleni Chrepa and Natalie Weeks - Sep 22, 2011 4:53 PM GMT+0700
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Greek public sector employees burn their tax notices outside the Finance Ministry in Athens. The latest round of cuts targeting civil servants’ wages and pensioners were demanded by international lenders. Photographer: Louisa Gouliamaki/AFP/Getty Images

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Sept. 21 (Bloomberg) -- Greek Finance Minister Evangelos Venizelos prodded lawmakers to endorse deeper budget cuts to keep emergency loans flowing and avoid default. He spoke to lawmakers in Parliament today in Athens. Andrea Catherwood reports on Bloomberg Television's "Last Word." (Source: Bloomberg)

Greece said it will accelerate budget cuts to keep emergency loans flowing, extending austerity measures that have deepened a recession and failed to ease doubts that it can avoid default.

Subway, tram, train, bus and trolley workers and state- school teachers are holding a 24-hour strike in Athens today to oppose cuts in pensions and workers’ pay. Flights to and from the Athens International Airport will be disrupted as air- traffic controllers walk out for three hours.

The latest round of cuts targeting civil servants’ wages and pensioners were demanded by international lenders to ensure Greece reach deficit-reduction targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.

The cuts will enable Prime Minister George Papandreou to address his biggest deficit, the “credibility deficit,” Jens Bastian, the Alpha Bank Fellow for Southeast Europe at St. Antony’s College at the University of Oxford, said in a Bloomberg Television interview today. Meeting international targets and reducing civil-service costs are “a matter of national urgency,” he said.

Finance Minister Evangelos Venizelos heads to Washington tomorrow to attend the annual meetings of the International Monetary Fund where he will hold talks with IMF Managing Director Christine Lagarde.

Without the infusion of emergency loans, “the risk is that the system, the financial sector and the real economy stop functioning,” Venizelos told Parliament in Athens before Papandreou convened his inner Cabinet yesterday to complete the cuts.

Latest Cuts

Measures announced following two rounds of talks with the European Union and the IMF include: a 20 percent cut in pensions of more than 1,200 euros ($1,650) a month, according to a government statement; pensions paid to those younger than 55 will be shaved by 40 percent for the amount exceeding 1,000 euros and wages will be lowered for 30,000 state employees.

With an 8 billion-euro aid payment in the balance, Greek creditors are also in the final stages of negotiating a bond exchange intended to reduce the country’s debt load of about 350 billion euros. The swap was part of a second rescue set by European leaders on July 21.

Fund Ratification

EU officials are squabbling over implementation of the agreement, which includes an upgrade of the bailout fund, as national legislatures ratify its terms, countering public opposition to channeling more money to keep Greece in the currency union.

Greek bonds rose in early trading today, sending the yield on two-year notes down 27 basis points to 66.2 percent at 12:20 p.m. in Athens.

While Greece says it has enough cash to cover its needs for October, any disbursement of new funds would likely only see it through to the end of the year.

Talks on the Greek aid payments resumed after IMF and EU monitors earlier this month suspended the review for a sixth tranche of loans following the discovery of an unexpected hole in the budget.

Cuts totaling about 28 billion euros that were outlined in June, which were made to ensure the release of the previous aid payment, will be completed by 2014 instead of 2015, as planned, the government statement said yesterday.

The austerity measures are deepening a three-year recession, making it harder for the government to meet the deficit goals laid out in its aid package. The IMF’s representative in Athens said Sept. 19 the economy will shrink 5.5 percent this year and another 2.5 percent next year.

Greek government figures showed the 2011 deficit through August widened 22 percent to 18.9 billion euros, more than the target of 18.1 billion euros for the period. Greece pledged to reduce its deficit to about 7.5 percent of gross domestic product this year from 10.5 percent in 2010.

To contact the reporters on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net; Eleni Chrepa in Athens at echrepa@bloomberg.net

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

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HP’s Woes Accelerate CEO Succession Crisis

By Ari Levy and Danielle Kucera - Sep 22, 2011 9:11 AM GMT+0700

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Hewlett-Packard Co. Chief Executive Officer Leo Apotheker. Photographer: Hannelore Foerster/Bloomberg

Hewlett-Packard Co. (HPQ), weighing the ouster of Chief Executive Officer Leo Apotheker, may struggle to find a new leader who can revive the ailing computer maker after 11 months of strategy shifts and slashed forecasts.

Hewlett-Packard’s board plans to consider firing Apotheker, two people familiar with the matter said yesterday. It may appoint former EBay Inc. (EBAY) CEO Meg Whitman, a Hewlett-Packard director, to serve as an interim leader, said one of the people. The stock had plunged 47 percent on his watch as of Sept. 20, the worst performance in the Dow Jones Industrial Average.

“It’s not going to be easy,” said Michael Mullaney, who helps manage $9.5 billion, including Hewlett-Packard shares, at Fiduciary Trust in Boston. “They have to go back and redefine what they want to be as a company, go back to the drawing board.”

Apotheker’s ouster would leave the board looking for a leader who can do a better job helping Hewlett-Packard weather a personal-computer slump while pushing further into the market for products that deliver computing services over the Web. CEO candidates may also include Todd Bradley, who runs Hewlett- Packard’s PC unit, and David Donatelli, head of the business in charge of servers, storage and networking, said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco.

Other possible candidates that would make sense include Gary Moore, chief operating officer of Cisco Systems Inc., or Steve Mills, who runs the software unit at International Business Machines Corp., said Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco.

Board Discussions

Hewlett-Packard directors met yesterday in committees and will gather today as a full board, according to a person close to the situation. Directors are concerned about the stock price and its lack of improvement under Apotheker’s leadership, the person said. Some top Hewlett-Packard executives also opposed the acquisition of Autonomy Corp., a deal pushed by Apotheker, according to the person.

Hewlett-Packard, based in Palo Alto, California, jumped $1.51, or 6.7 percent, to $23.98 yesterday on the New York Stock Exchange after Bloomberg reported the possible management change. The stock is still down 44 percent since Apotheker, 58, became CEO on Nov. 1, compared with the 1.5 percent decline in the Standard & Poor’s 500 Index.

A new CEO would be Hewlett-Packard’s seventh leader since 1999, when Carly Fiorina took over from Lewis Platt. Fiorina departed in 2005 and was replaced on an interim basis by Robert Wayman, until the company named Mark Hurd to the top job. After Hurd resigned, Cathie Lesjak took the reins temporarily until Apotheker came aboard.

PC Options

In addition to discussing Apotheker’s future, the board is reconsidering a proposal to spin off the PC business, a person familiar with the matter said. Apotheker, the former CEO of German software maker SAP AG, said the company was exploring options for that unit on Aug. 18.

The same day, Hewlett-Packard agreed to buy software maker Autonomy for $10.3 billion. The company also said it was discontinuing products running its WebOS mobile software, including smartphones and tablets -- less than six months after saying it planned to put the operating system on every Hewlett- Packard computer. Shares slumped after the announcements on concerns that Hewlett-Packard was paying too much for the acquisition and the strategic changes showed a lack of deliberation.

Corporate Focus

With the Autonomy purchase and shift in focus, Apotheker was pursuing a plan to lessen the company’s reliance on lower- margin consumer products and concentrate on more-profitable corporate businesses such as servers, software and network services. Any successor to Apotheker will need to do a better job communicating the company’s vision to shareholders, said Tony Ursillo, an analyst at Loomis Sayles & Co. in Boston, which owns Hewlett-Packard shares.

“Leo’s tenure as CEO has been disastrous,” Ursillo said.

Under one scenario, the board may appoint Whitman until a permanent candidate emerges, according to a person with knowledge of the board’s thinking.

Whitman, 55, has been a Hewlett-Packard director since January, two months after she lost a bid to become governor of California. Before entering politics, Whitman spent 10 years at the helm of EBay, the world’s largest online marketplace, and established a career at consumer-related companies.

Whitman’s Consumer Expertise

For Hewlett-Packard, which is focusing on selling to businesses, Whitman is probably not the right person for the long-term, said Dana Stalder, a partner at venture capital firm Matrix Partners in Palo Alto, California.

“It’s not clear to me that someone who spent 30 years in the consumer space is the right person for an enterprise technology company,” said Stalder, who worked under Whitman for seven years at EBay. “HP is increasingly becoming an enterprise company, given the focus on enterprise software and services.”

Sales in Hewlett-Packard’s technology solutions group, which includes services, software and enterprise storage and servers, rose 14 percent in the fiscal third quarter to $15.9 billion. By contrast, revenue in the business that comprises notebooks and PCs fell 3.3 percent to $9.59 billion.

Donatelli, executive vice president of the enterprise business, joined Hewlett-Packard in 2009 after 22 years at EMC Corp., the world’s biggest maker of storage computers. Sterne Agee’s Wu, along with Noland from Baird, said Donatelli may be a candidate for the top job.

Challenging IBM, Oracle

The company needs a leader who can mount a challenge to the biggest providers of technology for corporations, such as IBM, Oracle Corp. and Cisco, Wu said.

“They basically need a turnaround specialist,” Wu said. “It’s not going to be an easy role, whoever it is. Autonomy and the PC business -- they’ve got to figure out what to do there because not everyone thinks those are necessarily the right moves.”

Bradley, who runs the PC business, said last month that he would like to oversee the unit if it’s spun out as a separate company. Bradley, 52, came to Hewlett-Packard in 2005 from PalmOne Inc., where he spent four years.

“I’m very focused on continuing to work with the team of people that have been so successful at making this the largest and most profitable PC company in the world,” Bradley said in an Aug. 23 interview on “Bloomberg West.”

As much as anything, Hewlett-Packard has to find an executive who can help the company get past a series of embarrassments that date back to a boardroom spying scandal in 2006 and continued through last year, when former CEO Hurd quit amid sexual-harassment allegations.

“It’s been really hard to watch what seems to be a company that’s lost its way,” said Leslie Berlin, project historian of Silicon Valley Archives at Stanford University. “The boardroom fights, the job cuts -- it’s almost unrecognizable from the Hewlett-Packard that was once the star attraction in the Valley.”

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Danielle Kucera in San Francisco at dkucera6@bloomberg.net

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

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AT&T Wants Trial of U.S. T-Mobile Suit

By Tom Schoenberg and Michael Riley - Sep 22, 2011 6:24 AM GMT+0700

AT&T Inc. (T) is eager for a trial of the U.S. Justice Department’s lawsuit challenging its proposed acquisition of wireless carrier T-Mobile USA Inc., a lawyer for the company said.

There was no talk of settlement today in federal court in Washington as Mark Hansen, an attorney for AT&T, told U.S. District Judge Ellen Segal Huvelle that the company wants to get to trial as quickly as possible. Huvelle, who had earlier told the parties to come prepared to discuss settlement prospects, set a trial date for Feb. 13.

“We’re seeking a prompt trial because we’re very interested in closing this transaction,” Hansen, of Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC in Washington, said during the hour-long hearing. “We need to have the cloud of uncertainty removed. We’re already a month beyond where we want to be.”

The Justice Department sued Dallas-based AT&T and Bonn- based Deutsche Telekom AG (DTE)’s T-Mobile unit on Aug. 31, saying a combination of the two companies, which would make AT&T the biggest U.S. wireless carrier, would “substantially” reduce competition. Last week, seven states joined the government’s case seeking to stop the $39 billion deal.

Huvelle pressed lawyers for both sides to limit the number of witnesses and the amount of evidence they’ll present, noting that each proposed interviewing 30 potential witnesses before trial.

‘Longer and Longer’

“This case is getting longer and longer every time I ask,” Huvelle said, scheduling six weeks for the trial.

Joseph Wayland, deputy assistant attorney general of the Justice Department’s antitrust division, said the government plans to have AT&T and T-Mobile officials testify as “adverse” witnesses.

“We’ll call them as part of our case-in-chief immediately to begin the trial,” Wayland said.

Separate suits to block the deal have been filed by Sprint Nextel Corp. (S), the third-biggest U.S. wireless operator, and Ridgeland, Mississippi-based Cellular South Inc., the ninth- largest by customers.

Sprint, which claims the merged company would weaken its ability to compete with AT&T and Verizon Communications Inc., asked Huvelle to be included in coordinated proceedings with the Justice Department, as well as in motions about handling confidential evidence and scheduling.

Similar Cases

Sprint’s lawyer, Steven Sunshine of Skadden, Arps, Slate, Meagher & Flom LLP in Washington, told Huvelle that the company’s case and the government’s are closely allied. He said if the U.S. loses, most of the issues Sprint raised in its suit will be resolved.

“If we lose that day, then we think we’ll be essentially done,” Sunshine said.

Hansen called the effort by Overland Park, Kansas-based Sprint to enter the case a tactical maneuver to slow the litigation, which he said is already damaging both AT&T and T- Mobile. Sprint’s complaint contains “exotic allegations” that the government didn’t endorse, he said, adding that AT&T will ask Huvelle to dismiss Sprint’s case.

Huvelle said that while she’s still considering Sprint’s request for coordination with the government, she probably won’t join the cases for trial. She set Oct. 24 for arguments on whether to throw out Sprint’s lawsuit, and scheduled the next hearing for AT&T and the government the same day.

Still ‘Hopeful’

AT&T is still “hopeful” it can address the Justice Department’s antitrust concerns and reach a settlement, Michael Balmoris, an AT&T spokesman, said in an e-mail after the hearing.

AT&T Chief Executive Officer Randall Stephenson in March announced the proposed purchase of Bellevue, Washington-based T- Mobile. If the transaction falls apart, AT&T may be liable to pay Deutsche Telekom $3 billion in cash, to give T-Mobile USA wireless spectrum, and to reduce charges for calls into AT&T’s network.

AT&T has taken a two-track approach to the case. It’s challenging the government’s evidence that the deal would lead to higher prices, less product variety and poorer quality in services, while exploring compromises for asset sales that might satisfy the government’s concerns. The company has reached out to MetroPCS Communications Inc. and Leap Wireless International Inc. to gauge their interest in buying assets, according to two people with direct knowledge of the situation.

A merged AT&T and T-Mobile would have about 132 million connections to mobile wireless devices and more than $72 billion in mobile wireless telecom service revenue, the U.S. said in its complaint. The T-Mobile transaction is scheduled to close by March 20, a deadline that can be extended, according to company filings.

The case is U.S. v. AT&T Inc., 11-cv-01560, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net; Michael Riley in Washington at michaelriley@bloomberg.net

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

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SEC Considering Curbs After Surge in Quotes

By Nina Mehta - Sep 22, 2011 3:49 AM GMT+0700

The Securities and Exchange Commission may ask stock markets to impose fees on trading firms that submit a high number of quotations in relation to executed transactions, an executive at the regulator said.

The SEC is considering whether to urge exchanges to impose a fee for exceeding a certain order-to-execution ratio or for sending messages, which include quotes, updates, cancellations and executions, said David Shillman, associate director at the regulator’s division of trading and markets. That’s because they impose a cost on brokerages who must buy that data, said Shillman, who spoke in an interview at a Securities Industry and Financial Markets Association conference in New York.

Computers are replacing humans as market makers in U.S. equities, and one way they try to entice investors is by sending quotes to exchanges and rapidly updating them. Ashok Krishnan, head of execution services for Europe, Middle East and Africa at Bank of America Corp., said at a Bloomberg Link event in London on May 19 that some firms send more than 500 orders for every execution they receive.

“The idea is to make them bear some of the costs of the infrastructure exchanges build” to attract them, Shillman said today, referring to high-frequency traders, who often update or cancel and resubmit bids and offers at different prices. The SEC could tap rules that require exchanges to “equitably allocate fees” to address the issue of increasing data and technology costs for market participants, he said.

Higher Proportion

Firms that produce many messages should shoulder a greater proportion of the resulting costs, Matthew Lavicka, a managing director at New York-based Goldman Sachs Group Inc., said during a panel discussion at the conference. Currently, those expenses are distributed industrywide, he said.

There should be a “realigning of incentives and disincentives,” Lavicka said. He suggested limits on the number of quotations trading firms can submit to exchanges.

Any rule should apply consistently across all exchanges, Joseph Mecane, executive vice president and chief administrative officer for U.S. markets at NYSE Euronext (NYX), said during the panel discussion. His company runs the New York Stock Exchange.

The commission recognizes the difficulty exchanges face in imposing fees on brokers and trading firms that “could divert flow elsewhere,” Shillman said during the panel. If the SEC pursues the idea of fees, it may issue a statement or guidance to exchanges suggesting they impose charges for excessive quotations, he said.

‘Too Much’

“There is something that can be viewed as too much messaging,” Elizabeth King, a former SEC executive who’s head of regulatory affairs at Chicago-based Getco LLC, said today at the conference.

If exchanges impose fees for quote traffic, the threshold should vary for different products and across market conditions, allowing for more flexibility, she said. Getco is an automated trading firm that makes markets in equities, bonds, currencies and commodities.

“I don’t think there has to be uniformity to address some of the extreme situations around message rates,” she said.

To contact the reporter on this story: Nina Mehta in New York at nmehta24@bloomberg.net

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

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Palestinians to Delay Call for Fast UN Vote

By Flavia Krause-Jackson and Bill Varner - Sep 22, 2011 2:27 AM GMT+0700

The Palestinian Authority, while determined to seek full membership in the United Nations, won’t push for an immediate vote in the Security Council, where it doesn’t yet have enough support for its statehood bid.

Allowing the UN’s administrative process to slow down a Palestinian application to the Security Council would give diplomats time to look for an alternative that restarts peace talks. The U.S. is using the time to lean on council members to abstain from voting in favor of the Palestinians, who are fighting to retain supporters.

“We will give some time to the Security Council to consider first our full membership request before heading to the General Assembly,” Palestinian negotiator Nabil Shaath told reporters today. “ If we fail, we will keep knocking on the door. We do not have a time limit.”

Once a membership application has been lodged, the Security Council can either act fast or hold things up. In the case of South Sudan it took three days to make the African country the UN’s 193rd member while in the case of Jordan it took five years. In the case of the Palestinians, an admissions committee representing all 15 Security Council members can be set up to deliberate on the matter for days, weeks, or even months.

Palestinian Authority President Mahmoud Abbas will speak at the UN General Assembly and formally submit his letter of application to UN Secretary-General Ban Ki-Moon, who will then pass it on to Lebanon, which presides this month over the Security Council. It’s the only Arab country in the 15-member body and supports the Palestinian bid.

Not a Bluff

``We do not think about it as a tactic or a bluff,’’ Shaath told reporters today. We are ‘‘not seeking to join the Mafia or al-Qaeda.’’

Another option open for the Palestinians would be to pursue an upgraded status at the General Assembly from ‘‘entity’’ to ‘‘non-member state.’’ That could enable them to sign international treaties and have cases heard in the International Criminal Court.

The Palestinians have said eight of the council’s members - - Russia, China, Gabon, Nigeria, South Africa, Brazil, Lebanon and India -- will back them. The U.S.’s veto pledge notwithstanding, that still leaves the Palestinians one vote short of the nine needed for membership.

Slow Tracking

‘‘The idea of majorly slow-tracking this is being floated by multiple officials, including Palestinian officials, American officials, and it’s being welcomed,” said Hussein Ibish, a senior fellow at the American Task Force on Palestine, a Washington-based group that advocates a peaceful resolution to the Middle East conflict.

In what U.S. Secretary of State Clinton referred to as “extremely intense” diplomacy, Israel and the U.S. may be making headway in eroding support, even among countries the Palestinians have been counting on.

Israeli Defense Minister Ehud Barak met in New York with Nigerian President Goodluck Jonathan and convinced him to stay neutral in a possible vote on Palestinian statehood, according to a statement released yesterday by his Barak’s office.

“Peace will not come through statements and resolutions at the UN,” U.S. President Barack Obama said today of Palestinian plans to seek the world body’s recognition.

A Vote Short

“At this point it does not look like the Palestinians have the nine affirmative votes they would need” to pass a resolution at the Security Council, said Jennifer Lazlos Mizrahi, founder of the Israel Project, a Washington-based pro- Israel advocacy group.

The Israel Project has met with more than 80 ambassadors in an effort to lobby against the Palestinian bid for recognition. The group brought 18 ambassadors and one other senior diplomat to Israel and Ramallah, the Palestinian capitol, Mizrahi said.

Security Council members Britain, France, Germany, Portugal, Colombia, and Bosnia and Herzegovina are among the countries that are being actively courted.

French President Nicolas Sarkozy, addressing the UN General Assembly today, said the Palestinians can’t now obtain full member-state status through the Security Council and said a U.S. veto “risks engendering a cycle of violence.”

‘Intermediate Step’

Sarkozy endorsed the “intermediate step” of observer- state status, granted through a vote by the General Assembly.

“This would be an important step forward,” he said, as he also proposed a one-year timetable for resumed Israeli- Palestinian negotiations that lead to a full peace accord. The talks should begin within a month without preconditions, he said.

Israeli Prime Minister Benjamin Netanyahu, who met today with Colombia’s President Juan Manuel Santos, thanked him for “support for the position” of Israel, according to the premier’s office.

The U.K. and France, which have been sympathetic to the Palestinian cause, have said they want to see a return to the negotiating table first. Germany is most likely to side with Israel while Portugal leans toward the Palestinians. Still, the European countries are inclined to show a united front and may be reaching a consensus to stay neutral.

Special Attention

Some countries rarely have received so much attention. Bosnia and Herzegovina is the smallest country in the Security Council and its ambassador to the UN is a 36-year-old Croat, who says he’s been contacted by Israel, the Palestinians and the U.S.

Among nations on the Security Council, Brazil, Russia, China, India, Lebanon, South Africa, Bosnia and Herzegovina, Gabon and Nigeria have already recognized a Palestinian state bilaterally, according to Shaath.

“Like most countries in this assembly we believe the time has come,” for the Palestinians to take their right to statehood to the UN, Brazil’s President Dilma Rousseff told the General Assembly.

Russian Foreign Minister Sergei Lavrov told reporters that “no one should deny the Palestinians the right to ask the Security Council to consider recognizing them as a state.”

The European Union’s foreign policy chief, Catherine Ashton, and former British Prime Minister Tony Blair, representing the so-called Quartet mediating group, are leading a last-minute bid to work out an agreement that might lure Abbas back into talks and avoid a showdown at the Security Council.

The Quartet is comprised of the U.S., UN, European Union and Russia.

Some Time

The Palestinians “are not going to be fobbed off” but ‘there is a machinery at the UN,’’ Blair said in an interview with Charlie Rose on Bloomberg Television. “That process doesn’t happen overnight. That will take some time.”

Blair said he is working on a statement that will ask Palestinians and Israelis to return to direct talks under a “very tough timeline” and commit to resolving the issues of settlements and borders first. He declined to give details.

Peace negotiations collapsed last year following Netanyahu’s decision not to extend a 10-month partial freeze of construction in the West Bank’s Jewish settlements. Abbas has said he won’t resume talks while building continues. Netanyahu, who hasn’t offered to resume the freeze in settlement building, has repeatedly said that Abbas should restart direct talks.

To contact the reporters on this story: Flavia Krause-Jackson in United Nations at fjackson@bloomberg.net; Bill Varner in United Nations at wvarner@bloomberg.net

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

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U.S. Stocks Drop as Fed Announces Bond Purchase Plan, Sees Economic Risks

By Rita Nazareth - Sep 22, 2011 4:43 AM GMT+0700

U.S. stocks slumped, giving the Standard & Poor’s 500 Index its biggest decline in a month, as the Federal Reserve announced plans to buy $400 billion of long- term debt and cited risks to the economic outlook.

Caterpillar Inc. and Dow Chemical Co. fell more than 5.1 percent, pacing losses among companies most-tied to the economy. Financial shares in the S&P 500 slid 4.9 percent as a group, to a two-year low, as Moody’s Investors Service cut its ratings on Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. The Dow Jones Transportation Average slid 5.3 percent as railroad shares tumbled after two coal companies cut their forecasts.

The S&P 500 fell 2.9 percent to 1,166.76 at 4 p.m. New York time. The benchmark gauge for American equities has dropped 4.1 percent in three days. The Dow Jones Industrial Average lost 283.82 points, or 2.5 percent, to 11,124.84 today.

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

The S&P 500 had tumbled as much as 18 percent from a three- year high at the end of April amid concern the economic recovery was weakening. The index has rebounded 4.2 percent after sinking to an 11-month low on Aug. 8.

Treasury 30-year bonds surged, pushing the yields below 3 percent for the first time since 2009, after the Fed said it will purchase longer-term debt and sell shorter maturities to sustain the economic recovery, confirming market speculation that the central bank was planning an “Operation Twist” similar to one of the central bank’s programs in the 1960s.

‘Significant Downside Risks’

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the Fed statement said.

Fed Chairman Ben Bernanke said in an Aug. 26 speech that the central bank still has tools to stimulate the economy without signaling he will use them. He echoed comments of dissenting members of the Federal Open Market Committee who said then that U.S. economic data aren’t pointing to a recession.

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

Caterpillar, Dow Chemical

The Morgan Stanley Cyclical Index of companies most-tied to economic growth lost 4.2 percent. Caterpillar declined 5.1 percent to $79.36. Dow Chemical lost 6.3 percent to $25.54.

The KBW Bank Index (BKX) declined 5.5 percent. Bank of America fell 7.5 percent to $6.38. Wells Fargo lost 3.9 percent to $23.71, and Citigroup slipped 5.2 percent to $25.52.

Bank of America and Wells Fargo had their long-term credit ratings downgraded by Moody’s, which cited a decreasing probability that the U.S. would support the lenders in an emergency. Citigroup’s short-term credit rating was cut.

Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank by assets, closed below $100 for the first time since March 2009. The shares dropped 4.6 percent to $97.86. Morgan Stanley, the sixth-biggest U.S. bank by assets, sustained the biggest decline in the S&P 500 Financials Index as the stock fell 8.6 percent to $13.82.

European Banks

Banks also fell following declines in European lenders. The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending.

Coal companies tumbled, pacing losses in railroad shares. Walter Energy Inc. (WLT) reduced its second-half sales forecast, citing delays at mines in British Columbia and Alberta. Alpha Natural Resources Inc. (ANR) pared its outlook for full-year production because of a drop in Asia demand and lower-than- expected output at some mines.

“That’s a point of evidence that the global economy is slowing down,” Peter Tuz, who helps manage $1 billion as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a telephone interview. “One of the real strengths of the market of the last few years has been the upward push of commodities driven by global demand.”

Walter Energy slumped 12 percent to $66.25. Alpha decreased 17 percent to $22.30. CSX Corp. (CSX), the biggest eastern U.S. railroad, slumped 8.1 percent to $18.59.

Hewlett-Packard Rallies

Hewlett-Packard Co. (HPQ) rallied 6.7 percent, the only gain in the Dow, to $23.98. The company’s board plans to meet to consider whether to oust Leo Apotheker as chief executive officer after less than 11 months on the job, two people familiar with the matter said.

Under a scenario being considered, Hewlett-Packard’s directors may appoint former EBay Inc. CEO Meg Whitman as his successor, possibly on an interim basis, said one of the people, who asked not to be named because the plans aren’t public.

Oracle Corp. (ORCL) rose 4.2 percent to $29.54. The software maker reported profit that topped analysts’ estimates, boosted by increased spending on database programs and applications that help run businesses.

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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BofA, Wells Fargo Downgraded by Moody’s

By Hugh Son, Dakin Campbell and Donal Griffin - Sep 22, 2011 4:46 AM GMT+0700

Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) had long-term credit ratings downgraded by Moody’s Investors Service, which said U.S. support has become less likely if lenders get into financial trouble.

Citigroup Inc. (C)’s short-term rating also was cut by Moody’s, which said today “there is an increased possibility that the government might allow a large financial institution to fail, taking the view that contagion could be limited.” Citigroup’s stand-alone credit has improved, Moody’s said in a statement, leading the service to confirm the bank’s long-term rating.

The downgrade questions whether the largest banks will always be “too big to fail,” a status conferred in 2008 when they received government rescues to keep the financial system from collapsing. Lawmakers have since overhauled regulations to head off a repeat of the bailouts and ordered regulators to set up a system for seizing and dismantling banks that founder.

Bank of America, the biggest U.S. lender by assets, had its ratings cut two levels to Baa1 from A2 for long-term senior debt, and to Prime-2 from Prime-1 for short-term debt, Moody’s said. The outlook for long-term senior ratings at the Charlotte, North Carolina-based company remains negative, indicating another cut may be ahead.

Litigation Costs

“It makes sense they would get hit the hardest; there are real questions about Bank of America’s assets and the extent of their litigation liabilities,” said Michael Shemi, a director at Christofferson, Robb & Co., a New York-based firm with $1.4 billion in assets that invests in credit markets.

Bank of America was the day’s worst performer in the Dow Jones Industrial Average, falling 7.5 percent to $6.38 at 4 p.m. in New York Stock Exchange composite trading. New York-based Citigroup slipped 5.2 percent to $25.52, while San Francisco- based Wells Fargo dropped 3.9 percent to $23.71.

Wells Fargo’s senior debt was downgraded one level to A2 from A1, according to a Moody’s statement. The outlook remains negative on the senior long-term ratings.

Citigroup had its short-term credit ratings cut to Prime 2 from Prime 1. Moody’s confirmed the lender’s A3 long-term rating, and the A1 long-term and Prime-1 short-term ratings of Citibank N.A., saying the bank’s stand-alone credit profile had improved. Liquidity has “strengthened significantly in the past two years and is robust,” Moody’s said.

U.S. Support

The three firms benefited more than others from underlying government support, according to Moody’s. Five other banks have ratings that include the assumption of some support from the U.S., according to Moody’s: JPMorgan Chase & Co., the second- biggest U.S. bank, Morgan Stanley, Goldman Sachs Group Inc., State Street Corp. and Bank of New York Mellon Corp. These firms aren’t under review, said Abbas Qasim, a Moody’s spokesman.

Moody’s isn’t abandoning the idea of government help, saying in its Citigroup statement that the rating’s new assumptions represent a pre-crisis level of support. The rating for Bank of America now incorporates two levels of “uplift due to systemic support, down from four notches previously,” Moody’s wrote.

Bank of America was unprofitable in three of the four quarters ended June 30 as Chief Executive Officer Brian T. Moynihan, 51, booked more than $30 billion in charges tied to soured mortgages.

Mortgage Disputes

The lender dropped by about half this year in New York trading as Moynihan settled disputes over defective loans. Under so-called representation and warranty clauses, mortgage bond investors can demand that the bank buy back any loans based on faulty information about borrowers and properties.

“The risk to Bank of America, which has clearly generated a lot of litigation and reps and warranties, is particularly significant,” David Fanger, a senior vice president with Moody’s, said in an interview. “We don’t see those adverse outcomes as significant for a Wells Fargo or a Citigroup, given the different mixes” of loan holdings.

Bank of America disputed Moody’s decision.

“Our ratings should be higher,” the company said in a statement. Still, “to minimize any potential impact of this decision on our business, we have been managing our liquidity carefully and we have prefunded our planned borrowing needs for the year.”

Impact of Downgrade

While Moody’s said Bank of America has made “significant progress” in improving its capital levels, it didn’t upgrade the firm’s stand-alone ratings because of continuing risks from mortgage operations.

Lower ratings could weaken liquidity, limit access to credit markets and pressure businesses that rely on trading revenue, the bank said in an Aug. 4 regulatory filing. A downgrade by one level at all rating firms could trigger demands for $1.5 billion in collateral and termination payments tied to derivatives and trading agreements as of June 30, the bank said.

The impact of Moody’s decision by itself “at this point is unknown,” said Jerry Dubrowski, a spokesman for the bank. The bank had about $400 billion in liquidity at midyear, enough for two years without going to the markets, he said.

The downgrades may not have a significant impact on banks’ day-to-day funding, said Nancy Bush, an analyst and contributing editor at SNL Financial, the bank-research firm in Charlottesville, Virginia.

Slack Demand

“The irony is that no one needs funding right now, they have all the funding they need,” Bush said. “Moody’s downgraded in an environment in which the banks are so much stronger than in 2008.”

The cost to protect Bank of America’s debt from default for five years jumped to 380 basis points at 12:38 p.m. from 340 before the downgrade, according to broker Phoenix Partners Group. Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bank of America’s $2 billion of 5 percent notes due in May 2021 tumbled 1.65 cents on the dollar to 93.10 cents with a yield of 5.95 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Wells Fargo, led by CEO John Stumpf, 58, has repaid $25 billion in U.S. funds and built capital to meet regulatory thresholds and guard against further declines in housing prices. In March, regulators gave the bank permission to increase its dividend to 12 cents a share and buy back 200 million shares. Bank of America has also repaid $45 billion in bailout funds.

Systemic Support

Moody’s decision “solely reflects a change in their assumption regarding systemic support,” Wells Fargo said in a statement.

Citigroup, the third-biggest U.S. bank, posted $29.3 billion in losses tied to subprime mortgages for 2008 and 2009 combined and took a $45 billion bailout from taxpayers, which has since been repaid. Under CEO Vikram Pandit, the bank has since sold troubled assets and returned to profitability.

“We completely disagree with Moody’s change to Citigroup’s short-term rating,” Citigroup said in a statement. “It does not accurately reflect the significant progress Citi has made since Moody’s last rated Citi more than two and a half years ago.”

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net.

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

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

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

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

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

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

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

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

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

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

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

Revisiting the Spinoff

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

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

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

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

Not Long-Term?

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

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

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

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

‘Scoop It Up’

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

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

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

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

Undoing Autonomy

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

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

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

Short Stint

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fed’s Plan

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

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

GOP Opposition

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

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

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

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

Financials Plunge

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

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

Coal and Train Stocks

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

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

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

European Stocks

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

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

Debt Risk Increasing

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

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

Pound Weakens

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

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

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

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

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

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Fed Will Shift Holdings to Longer-Term Securities

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

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

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

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

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

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

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

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

‘Fairly Constrained’

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

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

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

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

Fannie Mae Yields

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

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

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

‘Likely Be Lower’

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

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

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

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

Mortgage Debt

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

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

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

Extend Duration

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

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

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

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

Growth Accelerating

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

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

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

More Easing

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

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

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

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

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

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

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

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