Economic Calendar

Tuesday, November 29, 2011

Moody’s Signals Possible Cut for Europe Banks

By Jacob Greber and Chitra Somayaji - Nov 29, 2011 4:20 PM GMT+0700
Enlarge image Moody’s Considers Bank Debt Downgrade in 15 European Nations

A pedestrian passes the Unicredit SpA headquarters in Milan, Italy. Photographer: Guiseppe Aresu/Bloomberg

Nov. 28 (Bloomberg) -- Peter Tchir, founder of TF Market Advisors, talks about the European debt crisis, efforts by the European Financial Stability Facility and the oulook for U.S. banks. Tchir speaks with Adam Johnson and Lisa Murphy on Bloomberg Television's "Street Smart." (Source: Bloomberg)


Banks in 15 European nations, including the largest lenders in France, Italy and Spain, may have their subordinated debt ratings cut by Moody’s Investors Service Inc. to reflect the potential removal of government support.

All subordinated, junior-subordinated and Tier 3 debt ratings of 87 banks in countries where the subordinated debt incorporates an assumption of government support were placed on review for downgrade, the ratings company said in a statement today. The subordinated debt may be cut on average by two levels, with the rest lowered by one grade, Moody’s said.

Lenders in Spain, Italy, Austria and France have the most ratings to be reviewed as governments in Europe face limited financial flexibility and consider reducing support to creditors, the rating company said. Moody’s has said that a “rapid escalation” of Europe’s sovereign debt crisis threatens the entire region. U.S. President Barack Obama renewed pressure on European leaders to prevent a dismantling of the euro.

“Systemic support for subordinated debt may no longer be sufficiently predictable or reliable to be a sound basis for incorporating uplift into Moody’s ratings,” the company said in the statement.

The Bloomberg Europe Banks and Financial Services Index fell 1.7 percent by 10:10 a.m. Central European Time, led by Dexia SA (DEXB), KBC Groep and Raiffeisen Bank International AG. (RBI) The euro was little changed after the Moody’s announcement, trading at $1.3333 as of 9:15 a.m. in London from $1.3320 late yesterday in New York.

BNP Paribas (BNP), UniCredit

Moody’s said the review will include banks such as BNP Paribas SA and Societe Generale SA (GLE), France’s biggest lenders, UniCredit SpA (UCG), Italy’s largest, and Spain’s Banco Santander SA. (SAN) Zurich-based Credit Suisse AG and UBS AG (UBSN) will also be assessed, according to a list of lenders published by Moody’s.

Agreeing on a sufficient response to Europe’s problems is of “huge importance” to the U.S., Obama told reporters after meeting yesterday with European Union President Herman Van Rompuy and European Commission President José Barroso. Finance chiefs from the 17-member euro area will gather in Brussels today to discuss how the European Financial Stability Facility will boost its muscle by insuring sovereign debt with guarantees.

Economists from banks including Morgan Stanley, UBS and Nomura Holdings Inc. (8604) said over the past week that governments and the European Central Bank must step up their response.

Nomura, Japan’s largest brokerage, said in a statement late yesterday that it reduced assets linked to Italy by 83 percent from the end of September, and cut the value of assets linked to Spain by 62 percent. Greek holdings were slashed 43 percent.

‘Stark Trade-Off’

“Policy makers are increasingly unwilling and/or constrained in their support for all classes of creditors, in particular for subordinated debt holders,” Moody’s said today.

There have also been cases where countries have “faced an increasingly stark trade-off between the need to preserve confidence in their banking systems and the need to protect their own balance sheets,” the statement said.

Banks will cut bond sales by 60 percent in Europe next year as the sovereign debt crisis drives up issuance costs, Societe Generale predicts. Lenders will sell 50 billion euros ($67 billion) of senior notes, down from a euro-era low of 121 billion euros so far this year, according to the French bank.

The extra yield that investors demand to hold European bank bonds is the highest since May 5, 2009, widening to 424 basis points on Nov. 25 from 336 on Oct. 31, Bank of America Merrill Lynch’s EUR Corporates Banking index shows.

To contact the reporter on this story: Jacob Greber in Sydney at jgreber@bloomberg.net; Chitra Somayaji in Hong Kong at csomayaji@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net



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China Halts U.S. College Freedom at Class Door

By Oliver Staley and Daniel Golden - Nov 29, 2011 5:00 AM GMT+0700

Nov. 29 (Bloomberg) -- Ronald Daniels, president of Johns Hopkins University, talks with Bloomberg's Oliver Staley and Daniel Golden about the joint campus run by Johns Hopkins University and Nanjing University in China. Last year American student Brendon Stewart broke the Hopkins-Nanjing Center's rules that confine academic freedom to the classroom when he attempted to publish an academic journal designed for a wide-reaching audience. Administrators prevented the journal from circulating outside campus, and a student was pressured to withdraw an article about Chinese protest movements. (Source: Bloomberg)

Nov. 29 (Bloomberg) -- Jason Patent, American co-director of the Hopkins-Nanjing Center, talks with Bloomberg News about the joint campus run by Johns Hopkins University and Nanjing University in China. (Source: Bloomberg)


In the 25 years Johns Hopkins University and Nanjing University have run a joint campus in China, it’s never published an academic journal. When American student Brendon Stewart tried last year, he found out why.

Intended to showcase the best work by Chinese and American students and faculty to a far-flung audience, Stewart’s journal broke the Hopkins-Nanjing Center’s rules that confine academic freedom to the classroom. Administrators prevented the journal from circulating outside campus, and a student was pressured to withdraw an article about Chinese protest movements. About 75 copies sat in a box in Stewart’s dorm room for a year.

“You think you’re going to a place that has academic freedom, and maybe in theory you do, but in reality you don’t,” said Stewart, 27, who earned a master’s degree in international studies this year from Hopkins-Nanjing and now works for an accounting firm in Beijing. “The place is run by Chinese administrators, and I don’t think the U.S. side had a lot of bargaining power to protect the interests of its students. At the end of the day, it’s a campus on Chinese soil.”

The muzzling of Stewart’s journal exposes the compromises to academic freedom that some American universities make in China. While professors and students openly discuss sensitive subjects such as the Tibetan independence movement or the 1989 Tiananmen Square protests on the Hopkins-Nanjing campus, they can’t do so in the surrounding community. Even on-campus protections only cover class discussions, not activities typical of U.S. campuses, such as showing documentary films in a student lounge.

Price for Expansion

The Hopkins-Nanjing Center is a model for a growing number of U.S. colleges, including Duke University and New York University, which are establishing footholds in China. As the newcomers take advantage of multimillion-dollar subsidies from China, they may jeopardize the intellectual give-and-take that characterizes American higher education, said June Teufel Dreyer, a University of Miami political science professor and China specialist.

“In their enthusiasm to be part of the Chinese educational picture, American universities may be ceding some measure of their independence to avoid offending the government,” Dreyer said.

The Hopkins-Nanjing Center has achieved its goal of being a “safe place” where Chinese and American students can debate controversial aspects of both societies, Johns Hopkins President Ronald Daniels said in a telephone interview.

“Is it what we would desire for every project, every center we’re involved in?” Daniels asked. “The answer is no. We would hope over time that the scope for discussion can extend beyond the center.”

Academic Freedom

Academic freedom “gives both students and faculty the right to express their views -- in speech, writing and through electronic communication, both on and off campus -- without fear of sanction,” Cary Nelson, president of the American Association of University Professors, wrote in a 2010 essay.

Limits on academic freedom are one reason Stanford University and Columbia University haven’t opened campuses in China. Columbia has a study center in Beijing, while Stanford plans to open one on the campus of Peking University next year. Such centers, which provide offices for visiting professors and host lectures and fundraisers, are easily exited, Columbia President Lee Bollinger said.

“The one thing we have to do is maintain our academic integrity, our academic independence,” Bollinger said. “There are too many examples of a strict and stern control that lead you to think that this is kind of an explosive mix.”

No Guarantee

Stanford President John Hennessy said its center has no protection of academic freedom and other schools’ agreements don’t guarantee rights taken for granted in the U.S.

“Even the ones you get are so scripted as to not be freedom as we imagine it in this country,” Hennessy said.

At least a dozen private and public U.S. colleges either have or are planning campuses in China. They are part of American colleges’ increasing and lucrative involvement with China. About 57,000 Chinese undergraduates, most paying full tuition, attended U.S. colleges in 2010-2011, six times as many as in 2005-06. A Chinese government affiliate has contributed millions of dollars to establish Confucius Institutes for Chinese language and culture on 75 American campuses.

China’s government encourages cooperation between Chinese and foreign universities. China is seeking “more substantive, productive and enduring partnerships,” Liu Yanshen, a Ministry of Education official, said in an October speech in New York.

NYU to Shanghai

NYU plans to open a liberal arts campus in 2013 in Shanghai, where the municipal government, along with tuition and philanthropy, will cover the expense, President John Sexton said in an interview.

Students and faculty at the new campus shouldn’t assume they can criticize government leaders or policies without repercussions, Sexton said in his office in Manhattan’s Washington Square.

“I have no trouble distinguishing between rights of academic freedom and rights of political expression,” he said. “These are two different things.”

The city of Kunshan, 40 miles west of Shanghai, is spending an estimated $260 million to build a new university jointly run by Duke and Wuhan University. Duke’s share of planning and operating expenses is expected to be $43 million over six years.

Duke Conversations

Duke administrators have had “pretty good conversations with people at Hopkins” and would be comfortable drawing similar distinctions between “intra-campus discussion and what you do at large,” President Richard Brodhead said.

“We know China does not observe the same norms of First Amendment rights that we’re used to in this country,” Brodhead said in his office in Durham, North Carolina. “If you want to engage in China, you have to acknowledge that fact.”

U.S. universities also encounter challenges to academic freedom in the Middle East. The University of Connecticut scrapped plans in 2007 to expand to Dubai amid criticism of the Emirate’s Israel policies. NYU last year opened an Abu Dhabi campus, which enjoys the same academic freedom as the Washington Square campus, according to the university’s web site.

The Hopkins-Nanjing Center occupies a 10-story tower of brick and glass within a gated compound on the northwest corner of the Nanjing University campus. “They probably have the strictest security on campus,” said Man Fang, 24, a Nanjing University student.

The center, which grants one-year certificates and two-year master’s degrees, has 164 students. Half of them are Chinese, and most of the rest are American. Chinese students take courses in English and international students in Mandarin.

Understanding

U.S. administrators try to anticipate the needs of their Chinese counterparts. “If you want understanding, you don’t constantly antagonize people,” said Carolyn Townsley, director of the center’s Washington support office.

Tuition covers most of the center’s cost, President Daniels said. The center charges international students $22,000 for a certificate and $36,000 a year for a master’s, plus housing. Nanjing University paid two-thirds of a $25 million-plus physical expansion completed in August 2006, said Robert Daly, co-director from 2001-2007.

The Hopkins-Nanjing Center opened in 1986 as the first campus jointly run by U.S. and Chinese universities. Hopkins insisted the center should safeguard academic freedom in the classroom, with a library giving students access to the same materials as in the U.S., said George Packard, former dean of Hopkins’ School of Advanced International Studies in Washington, who helped negotiate the deal.

Campus as Sanctuary

The most recent written version of the agreement, from 2005, formalizes the concept of the campus as a sanctuary:

“Within the HNC, no student, faculty member, research fellow, administrator, or visitor will be restricted in formal or casual speech, writing, access to research materials, or selection of research, lecture, or presentation topics.”

This approach precluded publications circulating outside the center, Daly said. “To have a voice reflective of the center would be to push the freedoms outside,” he said.

While necessary to establish the center, the restrictions on speech outside the classroom were “unreasonable, and we don’t believe in them,” Packard said.

Jason Patent, the American co-director, tells American students at an orientation briefing that they can’t expect the same levels of freedom as in the U.S., he said in an interview.

“‘The U.S. Constitution does not follow you here,’” he reminds them.

American students at Hopkins-Nanjing said they discuss sensitive subjects in class -- and recognize the hazards of doing so outside it. “It’s been very interesting to engage with the professors on topics that are somewhat taboo in China,” said Daniel Stein, 26, from New York.

‘Protected Space’

Brendon Stewart learned how the “protected space” agreement works in practice. A native of Albuquerque, New Mexico, he enrolled at Hopkins-Nanjing after a stint in the Peace Corps in Lanzhou, China.

Stewart began his journal late in 2009 to inject some vitality into a torpid campus, he said. The bilingual journal would show off the center’s finest scholarship in Chinese history and politics and would be sent to donors and prospective students.

“If you want to start a journal at an American university, you just start it,” Stewart said. “We thought we were adding value. We were like, ‘How does this not exist?’”

Encouraged by Jan Kiely, then American co-director of the center, Stewart began soliciting articles from students and faculty, aiming for equal Chinese and U.S. representation. “I didn’t foresee the way it was to become a problem,” Kiely said.

No Center Funds

Still, he and Chinese administrators rejected Stewart’s request for 3,000 yuan ($470) to print the journal. The center rarely funds student projects, Kiely said. On Kiely’s advice, Stewart asked HNC alumni for donations, and he received an anonymous gift from an American alumnus in China.

Shortly before the journal was to be published, Mitchell Lazerus, an American student, posted a one-page essay denouncing the Communist party on a white board outside the cafeteria. The essay soured the atmosphere at the center, Stewart said. Lazerus did not respond to e-mails.

Days later, a Chinese professor withdrew an article he had submitted about the financial crisis.

Stewart then heard a rumor that all the Chinese students with articles in the journal wanted them removed because they were afraid it would reflect Lazerus’s political views. To reassure them, Stewart showed them the galleys.

Powers That Be

“The word came back that they were all very sorry because they saw how hard we worked, but the powers that be wouldn’t allow them to participate,” said Stewart.

Most of the Chinese students involved in editing and layout asked Stewart to remove their names. He complied.

Chinese authorities at Hopkins-Nanjing were worried that a student-produced journal would draw unwanted attention to the center’s special protected status, Kiely said. Huang Chengfeng, the Chinese co-director of the Hopkins-Nanjing Center, declined an interview request.

One Chinese student author said that a dean from Nanjing University unaffiliated with the Hopkins-Nanjing Center prevailed on him to withdraw his article, which argued that the Communist regime gains from grassroots protests because they root out local corruption without challenging the party’s power.

The Chinese dean suggested that removing the article would be in the student’s best interest. “I did not expect that it would turn out to be such a mess,” said the student, who asked that his name not be used because he is concerned about repercussions from Chinese officials. “I didn’t expect such a rigid monitoring over students’ behavior.”

‘A Very Difficult Position’

Kiely held a forum to clear the air. He told students academic freedom “doesn’t include being able to put Chinese students and professors in a very difficult position in their own country,” he said.

Administrators told Stewart that he could publish his journal if he submitted it for their review and limited circulation to students and center personnel, he said. They removed the word “center” from the journal’s title so that it didn’t appear to be an official publication, he said.

Many of the 300 printed copies were never distributed, Stewart said. “I learned some incredible lessons about how the system works,” he said. “I got a lot more cynical.”

The journal “wasn’t part of our academic program,” Kiely said. “It was intellectual activity and carried out in that spirit, but it was not part of the program, and that’s where we drew the line.”

Stewart’s journal was placed in the center’s library, Hopkins President Daniels said. The on-campus access “respects the boundaries that we have to operate in,” he said.

Conflicted Values

The squelching was the “most obvious incident” where the center’s stated values conflicted with reality, said Adam Webb, a professor of international politics at Hopkins-Nanjing and a contributor to the journal.

Administrators also intervened on the eve of the 20th anniversary of Tiananmen Square in 2009, when students discussed the uprisings in an online Google group. One American student, who asked not to be named, offered to screen a 1995 Chinese- language documentary about the protests, “The Gate of Heavenly Peace,” which he had saved on his laptop.

“Everyone was debating about this and I said, ‘How about we set up a time to watch the documentary and have a discussion?’” the student said.

Film Interrupted

About a dozen American and Chinese students and their Chinese guests gathered one Saturday evening in the lounge on the center’s second floor. Once the film began, an American administrator said they couldn’t watch it there. They finished their viewing in the organizer’s dorm room.

Chinese police monitoring the Internet conversation had alerted the center’s Chinese administrators, who contacted their American counterparts, Kiely said.

The Chinese reaction was “heavy handed,” he said. “Something like that of course makes them very nervous.”

It was “inappropriate” to show a video banned in China to an audience that included Chinese visitors unaffiliated with the center, said Felisa Neuringer Klubes, spokeswoman for Hopkins’ School of Advanced International Studies. The video is available to faculty, staff and students in the library, she said.

China mandates political-study courses in such topics as the ideology of Mao Zedong and Deng Xiaoping, Daly said. While Hopkins-Nanjing was exempted from this requirement, other joint campuses may have to grapple with it, he said.

Studying Mao

During early discussions with NYU, Chinese officials mentioned a requirement for a Chinese study course, said May Lee, NYU’s associate vice chancellor for Asia. Two British schools fulfill that mandate at their China campuses with standard history courses, she said. NYU would not teach anything it objected to, Sexton said.

Neither Duke nor NYU has an agreement specifying what kinds of speech will be permitted at their campuses.

“We haven’t negotiated in advance about such things,” Duke President Brodhead said. “We’ve made it clear that we have values and principles and if it becomes untenable, we have an exit clause.”

The ministry of education assured Sexton that the university can manage its academic program as it sees fit, he said. “If it gets to a point where we feel that our core and essence is being compromised, we can leave without having jeopardized” the university’s finances or reputation.

Earlier NYU effort

Restrictions on academic freedom helped trip up a prior NYU collaboration in China. In 2006, officials at Shanghai Jiao Tong University’s law school asked NYU law professor Jerome A. Cohen to start a joint law center. Cohen has studied China since the 1960s and met leaders such as Zhou Enlai and Deng. After retiring from law practice, he began pushing to reform China’s criminal justice system.

“I may cause you nothing but trouble,” Cohen told Jiao Tong administrators.

They reassured Cohen of their support. Then the Jiao Tong administrator who had pushed for the center died, and party representatives began to criticize the program, Cohen said.

“It became clear that things would go better if I resigned as head of the NYU side,” he said. “I didn’t step down because it was a matter of principle.”

The three-year agreement between the two universities wasn’t renewed. “We just let it drop,” Cohen said.

The Jiao Tong program was “fairly small,” said NYU spokesman John Beckman. At NYU’s study-abroad site in Shanghai, professors haven’t had issues with academic freedom, he said.

Cohen again encountered China’s limits on free speech when Tsinghua University School of Law in Beijing and the American Bar Association’s China office celebrated his 80th birthday with a May 2010 conference on the role of the criminal defense lawyer in China.

Removed From Panel

At Cohen’s urging, the ABA invited Mo Shaoping, a human rights lawyer whose clients have included Nobel Peace Prize winner Liu Xiaobo and other dissidents, as a speaker.

The day before the event, Mo was dropped from the panel, presumably by Communist party officials at the upper levels of the university, Cohen said. After Cohen threatened to cancel the conference, he and an ABA representative were allowed to tell the audience about Mo’s removal and to criticize the decision.

“I didn’t want to be associated with the denial of free speech to a friend,” Cohen said.

The curbing of Brendon Stewart’s free speech rights didn’t stop him from trying again. Following the turmoil about the journal, the Hopkins-Nanjing Center clarified its rules on extracurricular activities in 2010-11. From now on, students would need the administration’s approval for events and clubs.

Even with his prior ordeal, Stewart applied through official channels to publish another journal.

His application was rejected.

To contact the reporters on this story: Oliver Staley in New York at ostaley@bloomberg.net; Dan Golden in Boston at dlgolden@bloomberg.net

To contact the editor responsible for this story: Jonathan Kaufman at jkaufman17@bloomberg.net



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Chipmakers Lose as IPad Challenges PCs

By Tim Culpan and Jun Yang - Nov 29, 2011 4:06 PM GMT+0700
Enlarge image Chipmakers Lose Billions as IPad Challenges Computers

Apple has sold about 40 million iPads since the product’s debut last year, generating $25.3 billion in revenue. Photographer: Fabrice Dimier/Bloomberg

A sales clerk shows off Elpida Memory Inc. memory chips at an electronics shop in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg News


Apple Inc. (AAPL)’s iPad is the bane of computer-memory makers, worsening the industry’s losses as consumers choose the hand-held device that uses about 75 percent fewer of the chips than a typical laptop.

Elpida Memory Inc. (6665), Hynix Semiconductor Inc. and other makers of dynamic random-access memory, the most common chip in computers, lost a combined $14 billion in the past three years, according to Bloomberg calculations. That comes after the $37 billion that researcher DRAMeXchange estimates they spent building factories in a bet on continued growth in the industry.

DRAM prices plunged to a record low this month after PC shipments missed analyst forecasts and iPad sales reached a record 11.1 million. As the faltering global economy and Thailand floods curb PC production, some DRAM manufacturers may not have enough money to mimic Samsung Electronics Co. (005930)’s profitable diversification into specialty chips for smartphones, tablet devices and servers.

“DRAM makers invested too much, and they bet heavily that growth of the computer industry would always continue,” said Chen Liway, an industry analyst at Polaris Securities Co. in Taipei. “That would have been OK if the iPad had never come along.”

Apple, Microsoft

PC shipments were hit last quarter by the popularity of tablets like the iPad, researchers Gartner Inc. and IDC said last month. PC shipments climbed 3.2 percent to 92 million units, compared with an earlier projection for 5.1 percent growth, Stamford, Connecticut-based Gartner said. IPad sales in the same period exceeded computer shipments by Dell Inc. (DELL), the world’s No. 3 seller.

Apple has sold about 40 million iPads since the product’s debut last year, generating $25.3 billion in revenue. Apple may sell a record 20 million iPads globally during the holiday quarter, according to Forrester Research Inc. (FORR) in Cambridge, Massachusetts.

Elpida and other DRAM makers bet that new versions of Microsoft Corp. (MSFT)’s Windows and a stable global economy would drive demand for their chips. Instead, Windows sales fell 8 percent in the three months ending Dec. 31, 2008, missing Microsoft’s forecast for 10 percent growth; the global financial crisis hit the following year; and Apple released the iPad in April 2010.

Lowest Prices

Manufacturers lost money on the DRAM business in three of the past four years, according to Bloomberg data. DRAM prices fell 32 percent in the third quarter, the most in almost three years, according to Bloomberg Industries data.

“Prices will keep falling,” said Alvin Lim, an associate director at Fitch Ratings in Seoul. “I don’t think there will ever be a meaningful recovery.”

DRAM is the most common chip used in computers and speeds up processing by temporarily storing data. Slowing growth in the PC industry, which buys 65 percent of all DRAM output according to Bloomberg Industries, and less memory requirements for newer versions of Windows will prompt a record slowdown in demand, Englewood, Colorado-based IHS Inc.’s iSuppli said in August.

Growth in DRAM per PC will drop to 35 percent after next year following 48 percent average growth for the past 25 years, iSuppli said.

Prices of benchmark DDR3 2-gigabit DRAM chips fell 61 percent this year to a record-low 71 cents on Nov. 21, according to Taipei-based TrendForce Corp.’s DRAMeXchange, the researcher and largest spot market for the chips.

‘Rice Ball’

Elpida, Japan’s largest memory-chip maker, will lose money this year and next, according to the average of 18 analysts’ estimates compiled by Bloomberg. Manufacturers like Elpida, which spent $3.8 billion on factories in the past four years, must keep churning out chips to generate enough cash to cover debt payments, pushing prices down even further.

“Elpida is using the state-of-the-art production technology, yet the finished products are sold for half the price of a rice ball,” Yukio Sakamoto, chief executive officer of the Tokyo-based company, told investors last month.

Elpida’s shares fell 1 percent to 390 yen at the close of trading in Tokyo today, taking losses for the year to 59 percent. The benchmark Nikkei 225 (NKY) added 2.3 percent, stemming losses to 17 percent for the year.

PC unit sales may decline 8 percent next year because of the recent floods in Thailand, where at least 40 percent of the world’s computer disk drives are made, Kevin Chang, a technology analyst with Fitch Ratings Ltd. in Taipei, said in a Nov. 23 statement. The original projection was for 5 percent growth.

“Lower DRAM orders will have a negative impact on memory- chip prices,” Chang said.

Flash Demand

Suwon, South Korea-based Samsung, the world’s biggest semiconductor maker, will post 2.3 trillion won ($1.98 billion) profit from DRAM this year, according to Shinhan Investment Corp. in Seoul. That’s because Samsung sells twice as many specialty DRAM chips, where margins are higher, as commoditized chips used in PCs, Shinhan said in an Oct. 25 report.

The company also supplies up to 64 gigabytes of NAND flash memory for every iPad, compared with about half a gigabyte of DRAM. Demand for NAND flash -- which saves photos, videos and software permanently -- will climb 49 percent in the five years to 2015 while the DRAM market will be little changed, according to iSuppli.

“The specialty chip market may look like sacred ground to smaller companies because Samsung is so dominant,” said Park Hyun, a Seoul-based analyst at Tong Yang Securities Inc. “Over time, they will increasingly try to switch to specialty products.”

Jason Kim, a Seoul-based spokesman for Samsung, declined to comment when contacted by phone on the company’s plans for its chip business.

Hynix (000660), Winbond

Icheon, South Korea-based Hynix, the second-largest DRAM supplier, and Boise, Idaho-based Micron Technology Inc. (MU), the fourth-largest, also are increasing supply of NAND flash, helping both companies return to profitability last year after losses the two previous years.

“We’re quite positive about flash,” Fitch’s Lim said. “If smaller companies had both DRAM and flash, they could have offset the weakness in one market.”

Winbond Electronics Corp., (2344) a Taiwanese memory maker that posted losses in seven of 10 years through 2009, exited the computer DRAM business last year in favor of specialty DRAM for TVs and mobile phones. That helped the company post its largest annual profit since 2000.

Elpida is following a similar path, spending the last two years developing versions of DRAM used in smartphones that it expects to ship to clients next quarter, Sakamoto told investors last month.

“Some are making profits moving into specialty DRAM,” Chen said. “For others, it may be too late as they don’t have the money or the technology to make the switch.”

To contact the reporters on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net; Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net.


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IPad-Crazed Toddlers to Spur Holiday Rush

By Adam Satariano and Katie Linsell - Nov 29, 2011 3:16 AM GMT+0700

One iPad isn’t enough for Patrick Smith’s family.

Smith, an American Web designer living in Germany, has two kids vying for their tablet computer. The youngest started tapping and finger-swiping the screen by age 1, leading to tussles over who gets to play with the Apple Inc. (AAPL) device. Now Smith is considering buying another tablet for Christmas.

“It’s usually a fight to decide whose turn it is,” said Smith, whose sons are now 2 and 5.

The family jockeying shows how big the youth market may be for Apple and its tablet competitors, including Amazon.com Inc. (AMZN) and makers of Android devices. Among kids age 6 to 12, the iPad is the most-wanted holiday gift for the second year in a row, according to Nielsen Co. Even so, the industry faces hurdles. That includes setting a price parents can live with and dealing with concerns about kids getting hooked on technology too early.

Most iPad buyers have children in their households, estimates BlueKai Inc., which compiles consumer data. The market’s growth isn’t just generating revenue for tablet makers, it’s increasing demand for kid-oriented content. Companies ranging from Walt Disney Co. (DIS) to small startups are developing games, interactive books and other software to appeal to children.

“Kids just get it -- they touch it and it moves,” said Jamie Pearson, founder of BestKidsApps.com, a review website with almost 300,000 monthly page views, 40 percent of which are for apps aimed at kids under 5. “It’s like any other natural language at that age; they just pick it up.”

Learning to Write

According to Forrester Research Inc. (FORR), 29 percent of tablet owners regularly share the device with their kids. Among mothers, it’s 65 percent. One Apple commercial shows a young child learning to write using the iPad 2.

For Apple, the youth market presents opportunities and challenges. While the iPad is the top-selling tablet, many parents may opt for lower-cost models if they know they’re putting them in the hands of children. Amazon’s Kindle Fire is less than half the price of the iPad.

When asked to choose between the $199 Kindle Fire and the $499 iPad, 51 percent of consumers opted for the Amazon product, according to a survey by Parks Associates. Smith said he is considering a Kindle Fire for his family’s second tablet.

“It’s a low enough price point that it forces that couch- potato consumer to get up off the couch and buy something like this,” said Sucharita Mulpuru, an analyst at Cambridge, Massachusetts-based Forrester. “There’s almost no reason not to.”

Amazon said today Black Friday shoppers bought four times as many Kindle devices as a year earlier.

‘Digital Pacifier’

Still, tablets have raised concerns among child advocates. As much as kids enjoy playing with an iPad, parents should limit the amount of time they spend plopped down with the device, said Gwenn O’Keeffe, a pediatrician in Boston who has studied the effects of technology on children and works with the American Academy of Pediatrics. Toddlers under 2 shouldn’t play with an iPad unless it’s only being used to display books, she said.

Victoria Nash, a researcher at the Oxford Internet Institute who also has studied the topic, said some parents use gadgets as a “digital pacifier.”

“We know already that there are dangers with watching too much television and doing too much online gaming,” she said.

‘Goodnight IPad’

A new book, “Goodnight iPad,” a parody of the popular children’s book “Goodnight Moon,” reminds parents to unplug by poking fun at how much time is spent in front of computer and television screens each day.

Apple has sold about 40 million iPads since the product’s debut last year, and it may sell a record 20 million iPads globally during the holiday quarter, Forrester estimates. Piper Jaffray Cos. analysts observed Apple’s stores selling 14.8 iPads per hour over Black Friday, up from 8.8 per hour last year. The sales increase outpaced broader Black Friday growth.

Companies are lining up to capitalize on the frenzy. Disney has released an iPad game linked to its movie “Cars” in which kids can drive a small plastic car along a road shown on the iPad. Bertelsmann AG’s Random House and Oceanhouse Media Inc. have released interactive versions of “Dr. Seuss” books as apps. Other companies such as Callaway Digital Arts and TouchyBooks also are introducing titles tailored to youngsters.

Steve Jobs, Apple’s late co-founder, saw potential for applications aimed at children. Jobs introduced Callaway Digital Arts founder Nicholas Callaway to Kleiner Perkins Caufield & Byers, a venture firm that then led an investment round of almost $7 million in the startup. Callaway Digital Arts makes titles based on “Sesame Street” and “Thomas & Friends.”

Tapping the TV

Rex Ishibashi, chief executive officer of the company, puts the U.S. market for kids’ iPads apps at more than $500 million.

“The kids are gravitating towards these devices because they make sense,” he said. “They are intuitive.”

Ilan Abehassera, an Internet entrepreneur in New York, has his own tales of iPad-infatuated kids. His 2-year-old son constantly reaches for his iPad to see YouTube clips and interactive books. That’s forced Abehassera to limit how much time the boy spends with the tablet.

“When we don’t give it to him, he goes crazy,” Abehassera said.

The iPad will be many children’s first experience with a computer, a phenomenon that will affect the design of future consumer electronics, said Tom Mainelli, an analyst with Framingham, Massachusetts-based IDC.

A popular YouTube video shows a toddler frustrated with a magazine because she can’t zoom in on the pictures. In Abehassera’s case, his son taps the television screen to try to get it to play videos.

“The generation that is growing up with touch is going to demand it on all their devices going forward,” Mainelli said.

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net; Katie Linsell in London at klinsell@bloomberg.net

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




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Seagate Beats Sales Estimates as Disk-Drive Maker Copes With Thai Flooding

By Nick Turner - Nov 29, 2011 6:22 AM GMT+0700

Seagate Technology Plc (STX), the world’s largest maker of computer disk drives, forecast higher sales than analysts estimated, after the company withstood devastating flooding in Thailand better than rivals.

Seagate will ship 43 million units in the December quarter, generating about $2.8 billion in revenue, according to a statement today. Analysts had projected sales of $2.64 billion, based on data compiled by Bloomberg.

While the Thai floods will crimp supplies of disk-drive components, Seagate’s own factories in the country haven’t been affected by the disaster, the company said. Seagate’s two biggest competitors, Western Digital Corp. (WDC) and Toshiba Corp. (6502), both have major plants in the flood zone.

Seagate, based in Cupertino, California, rose as much as 10 percent to $17.60 in late trading after the report. It had climbed 5.5 percent to $15.99 at the close in New York.

Seagate expects the disk-drive industry to recover gradually from the flood over the course of 2012. In the March quarter, the company’s revenue will be about $3.75 billion, Seagate said. Analysts had projected $3.21 billion, according to Bloomberg.

To contact the reporter on this story: Nick Turner in San Francisco at nturner7@bloomberg.net

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




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Asia Stocks Rise Amid Europe Optimism

By Kana Nishizawa - Nov 29, 2011 7:09 AM GMT+0700

Asian stocks (MXAP) rose, sending the MSCI Asia Pacific Index toward its biggest two-day gain in a month, amid speculation European leaders are closer to stemming the region’s debt crisis.

The MSCI Asia Pacific Index gained 0.5 percent to 111.58 as of 9:05 a.m. in Tokyo, headed for its biggest two-day increase since Oct. 28. All but two of 10 industries on the measure rose. Almost four stocks advanced for each that fell on the index.

To contact the reporters on this story: Kana Nishizawa in Hong Kong at knishizawa5@bloomberg.net;

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net




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Mounting Euro Breakup Risk Seen as Moody’s Warns on Ratings

By Simon Kennedy - Nov 29, 2011 4:37 AM GMT+0700

Nov. 28 (Bloomberg) -- Carl Weinberg, founder and chief economist at High Frequency Economics, talks about the European debt crisis. Weinberg talks with Betty Liu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

Nov. 28 (Bloomberg) -- Gabriel Stein, a director at Lombard Street Research Ltd., talks about the European sovereign-debt crisis. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)


Banks and ratings companies are sounding their loudest warnings yet that the euro area risks unraveling unless its guardians intensify efforts to beat the two-year-old sovereign debt crisis.

As European finance chiefs prepare to meet this week, and Italy seeks to raise as much as 8.8 billion euros ($11.7 billion) in bond sales, economists from Morgan Stanley, UBS AG, and Nomura International Plc say governments and the European Central Bank must step up their crisis response. Moody’s Investors Service said today the “rapid escalation” of the crisis threatens all of the region’s sovereign ratings.

“Skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face,” Pier Carlo Padoan, the chief economist at the Paris-based Organization for Economic Cooperation and Development, said today as he cut forecasts for European and global growth. Serious downside risks remain, linked to “loss of confidence in sovereign-debt markets and the monetary union itself.”

What Deutsche Bank AG calls “a new stage of the crisis” and Nomura labels a “far more dangerous phase” is dawning as signs mount that investors are even concerned about top-rated Germany, the euro’s linchpin economy. Chancellor Angela Merkel’s government failed to draw bids for 35 percent of 10-year bunds sold last week and the yield on its 30-year securities had the biggest weekly gain in 14 months.

Obama, EU

President Barack Obama said resolving the European debt crisis is of “huge importance” to the U.S. and his administration is “ready to do our part” in stabilizing the global economy.

Obama said a “large part” of today’s annual U.S.-European Union summit was spent on the impact of the crisis in the euro- zone. He spoke at the White House after meeting with European Union President Herman Van Rompuy and European Commission President José Barroso.

“Markets continue to move faster than politicians,” Mansoor Mohi-uddin, Singapore-based head of foreign exchange strategy at UBS, said in a Nov. 26 note. Investors are starting to “price in the endgame” for the euro, he said.

Credit Risks

Moody’s (MCO) said today that credit risks will keep rising without steps to stabilize markets in the short-term and questioned whether policy makers can move quickly enough. The OECD said its 34-nation economy will expand 1.6 percent next year, down from 2.8 percent predicted in May.

Speculation officials will take action buoyed the euro against the dollar today after it suffered its longest losing streak in 18 months. The Stoxx Europe 600 Index rose by the most in two months and the Standard & Poor’s 500 snapped a seven-day decline. Italian bonds rose and German bunds fell.

Governments may be rethinking their crisis fight before two days of talks starting in Brussels tomorrow and a Dec. 9 summit of leaders.

Remedies previously rejected by policy makers as unpalatable and now increasingly called necessary by economists include the ECB ramping up bond buying and governments issuing common securities in a deeper fiscal union. The debate is prompting banks including UBS and Bank of America Merrill Lynch to begin outlining the likely fallout of a euro-area collapse.

Comprehensive Solution

“Failure to come up with a comprehensive solution on Dec. 9 is certainly possible, and we believe that it would open up a much darker scenario that, eventually, could entail a breakup of the euro,” said Joachim Fels, Morgan Stanley’s chief economist.

Euro-zone countries are considering creating new powers to enforce fiscal discipline, the Wall Street Journal reported Nov. 26. The proposal, which is still being crafted, would let governments reach bilateral agreements on budgets that wouldn’t take as long to complete as changes to European Union treaties, the Journal said on its website, citing unidentified people familiar with the matter. Treaty changes would follow later.

Stricter budget rules are needed if the ECB is to play its “full role” and help troubled countries, French Budget Minister Valerie Pecresse said yesterday. Germany today spurned calls to maximise financial firepower, saying its fast track proposals for EU treaty change are key to stopping the rot.

Officials may also ease market-rattling provisions that require bondholders to share losses in bailouts, German Finance Minister Wolfgang Schaeuble suggested last week.

To increase its potency, the 440-billion euro European Financial Stability Facility may begin insuring bonds of troubled countries with guarantees of between 20 percent and 30 percent of each issue in light of market circumstances, according to guidelines for the finance ministers’ meeting.

‘Separate Path’

Schaeuble told reporters that leaders will seek a “separate path” of aid from the International Monetary Fund to boost the EFSF. The IMF said today it isn’t discussing a rescue package with Italy after La Stampa newspaper reported it may be preparing a loan of as much as 600 billion euros.

The ECB must use the unlimited resources of its balance sheet to prevent a disintegration of the euro which “now appears probable rather than possible,” Nomura economists Desmond Supple and Jens Sondergaard said in a Nov. 25 report.

The Frankfurt-based central bank should be able to “avert a full-force financial crisis” for the rest of this year by next week cutting its benchmark rate back to a record low of 1 percent and granting longer emergency loans to banks, they said. Into 2012, they predict the ECB will follow the U.S. Federal Reserve in pursuing quantitative easing through largescale bond buying to reduce regional borrowing costs.

“This could preserve the integrity of the euro, although the risks are sizable and over the coming weeks and months the outlook for financial markets appears bleak,” said Supple and Sondergaard. “Downside economic risks are likely to build.”

Draghi’s View

Having bought more than 200 billion euros in bonds to calm markets since May 2010, ECB officials have refused to accelerate the effort or stop sterilizing purchases. They argue that would risk damaging their credibility by encouraging inflation, muddy the legally-mandated divide between monetary and fiscal policies and lessen pressure on governments to restore fiscal order.

President Mario Draghi, less than a month into the job, said Nov. 18 the onus must be on governments to bolster their regional fund and that “we should not be waiting any longer.”

With only “one shot” to get it right, the ECB will await signs its price stability goal is under greater threat from economic weakness and concrete proof governments will ax their debts before it moves to cap yields with “big time” bond- buying, said Deutsche Bank chief economist Thomas Mayer.

“It’s too early to expect the ECB to jump in, but we are moving to a new climax,” Mayer said in an interview.

‘Not Appropriate’

David Mackie, chief European economist at JPMorgan Chase & Co., said the central bank cannot provide a long-term solution, meaning governments will have to at some point start selling so- called euro bonds, he said.

Merkel last week rejected such securities as “not needed and not appropriate” because they would “level the difference” in euro-region interest rates, reducing pressure on profligate nations to cut budgets and forcing Germany to pay more to borrow. The European Commission nevertheless last week outlined how cross-border bond sales could work together with tougher budget controls.

“The German position on euro bonds should not be viewed as a fixed point,” said Mackie.

The failure of policy makers to end the crisis is prompting economists and investors to plot what might happen if the euro- area does splinter.

The recent increase in bond yields suggests investors worry a breakup of the euro would cause the banks of Germany and other creditor countries to incur losses on their bond holdings, raising the possibility of bank recapitalizations, UBS’s Mohi- uddin said.

At Bank of America Merrill Lynch, strategists Richard Cochinos and David Grad said in a Nov. 25 report that if Germany left the bloc, the euro’s fair value against the dollar would fall 2 percent. If Italy exited, the euro’s fair value would rise 3 percent, they said.

Their report was titled: “Euro zone: Thinking the unthinkable?”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net



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Fewer New Homes Sales in U.S. Than Forecast

By Bob Willis - Nov 29, 2011 4:09 AM GMT+0700
Enlarge image Fewer New Homes Purchased Than Forecast

New townhouses in the Four Seasons at Great Notch development in Woodland Park, New Jersey. Photographer: Emile Wamsteker/Bloomberg

Nov. 28 (Bloomberg) -- Steven Blitz, senior economist at ITG Investment Research, talks about the outlook for the U.S. housing market. Blitz also discusses U.S. holiday retail sales and the labor market. He speaks with Deirdre Bolton on Bloomberg Television's "Taking Stock." (Source: Bloomberg)


Builders sold fewer new houses in the U.S. than forecast in October, delaying a recovery as the industry heads for the weakest year on record.

Sales increased 1.3 percent to a 307,000 annual pace, data from the Commerce Department showed today in Washington. The median estimate of 70 economists surveyed by Bloomberg News projected a 315,000 rate. Demand is on pace to reach 301,000 this year, less than the 323,000 homes sold in 2010 that were the fewest since data-keeping began in 1963.

A supply of distressed properties in the foreclosure pipeline that is weighing on prices of existing houses may keep luring buyers away from new construction. A jobless rate that has been hovering around 9 percent or higher for more than two years signals demand will take time to pick up, a sign homebuilding will contribute little to economic growth in 2012.

“The housing market remains out of balance, with much more supply than demand,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. “Builders are still competing with the significant overhang of existing homes for sale. Once we get past the overhang of foreclosed properties, single-family housing will turn around fairly rapidly, but we’re a good two years away from that.”

Stocks rose, snapping a seven-day decline in the Standard & Poor’s 500 Index, after Thanksgiving retail sales climbed to a record and amid speculation euro-area leaders will boost efforts to end the debt crisis. The S&P 500 jumped 2.9 percent to 1,192.55 at the close in New York.

Growth in Europe

The Organization for Economic Cooperation and Development said today growing doubts about the survival of Europe’s monetary union has caused global growth to stall and represents the main risk to the world economy. The 34 OECD nations will grow 1.9 percent this year and 1.6 percent next, down from 2.3 percent and 2.8 percent predicted in May, the Paris-based organization said in its twice-annual global economic outlook. In a separate report, Morgan Stanley cut its forecast for 2012 global growth.

In Asia, Chinese corporate profits grew at a slower pace in October, depressed by Europe’s deepening financial crisis and waning export demand. Industrial companies’ net income rose 12.5 percent last month from a year earlier, less than half the 27 percent pace from January to September, a statistics bureau statement showed yesterday.

Economists’ estimates for U.S. new-home sales ranged from 300,000 to 375,000. The government revised September demand to a 303,000 rate from a previously reported 313,000.

Regional Breakdown

The increase in purchases was paced by a 22 percent jump in the Midwest and a 15 percent gain in the West, an area where properties tend to be more expensive. Demand in the South, where houses are cheaper, dropped 9.5 percent.

The regional breakdown, with sales rising in the West and falling in the South, probably helped push up costs. The median price of a new house purchased last month climbed 4 percent from October 2010 to $212,300.

The supply of homes at the current sales rate fell to 6.3 months’ worth from 6.4 months in the prior month. There were 162,000 new houses on the market at the end of October, matching the September level as the fewest on record.

Sales of previously owned homes, which make up about 94 percent of the market, unexpectedly rose 1.4 percent to a 4.97 million annual rate in October, figures from the National Association of Realtors showed Nov. 21. The median price dropped 4.7 percent from October 2010. Cash deals accounted for 29 percent of the transactions, while distressed properties, including foreclosures and short sales, made up 28 percent.

Market Disconnect

New home sales, which are tabulated when contracts are signed, have lost their ability to forecast the broader market as demand shifts to previously owned houses. Purchases of existing houses are calculated when a deal closes about a month or two later.

Builders have held back on starting new projects this year. Housing starts fell 0.3 percent to a 628,000 rate in October, and have averaged a rate of 592,000 so far this year, Commerce Department data show. That compares with last year’s tally of 587,000, the second-fewest on record after 2009’s record low of 554,000.

With falling home prices continuing to weigh on household wealth and consumer spending, some Federal Reserve officials have called for more accommodative policy.

Fed on Housing

Fed Bank of New York President William C. Dudley said this month that if the central bank opted to purchase more bonds to lower interest rates and stimulate the economy, “it might make sense” for much of those purchases to consist of mortgage- backed securities, which would have a “greater direct impact on the housing market.”

The lack of demand this year came as a shock to builders like Atlanta-based Beazer Homes USA Inc. (BZH), making them reluctant to forecast the outlook.

“Even though I do believe that national housing starts are likely to be higher in 2012, we have not assumed any improvement in national housing activity as part of our financial planning for the year,” Allan Merrill, Beazer’s chief executive officer said during a Nov. 15 call with analysts. “Our predictions about improving national housing starts for fiscal year 2011 proved to be substantially too optimistic, so I’m reluctant to go on the record with any more macro predictions.”

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net;

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



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Citi Settlement With SEC Rejected by Judge

By Bob Van Voris - Nov 29, 2011 5:27 AM GMT+0700

Citigroup Inc. (C)’s $285 million settlement with the U.S. Securities and Exchange Commission over a mortgage-backed securities fund was rejected by a federal judge who said he hadn’t been given enough facts to approve it.

U.S. District Judge Jed Rakoff in Manhattan rejected the settlement in an opinion released today and set a trial date. He has criticized the SEC’s practice of letting financial institutions such as New York-based Citigroup settle without admitting or denying liability.

Citigroup, the third-biggest U.S. lender, agreed last month to resolve a claim by the SEC that it misled investors in a $1 billion collateralized debt obligation linked to subprime residential mortgage securities. Investors lost about $700 million, according to the agency. A trial could establish conclusions that investors could use against Citigroup, as could a new settlement that includes admissions by the bank.

“It’s a frontal assault on the ‘neither admit nor deny’ approach,” said J. Robert Brown Jr., who teaches corporate governance at the University of Denver Sturm School of Law. “This puts the SEC in a very difficult spot.”

Danielle Romero-Apsilos, a spokeswoman for Citigroup, said the bank disagreed with Rakoff’s ruling.

‘Fair and Reasonable’

“The proposed settlement is a fair and reasonable resolution to the SEC’s allegation of negligence,” she said in an e-mailed statement. “The settlement fully complies with long- established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges.”

Rakoff today consolidated the case with another SEC suit against former Citigroup employee Brian Stoker and scheduled the combined case for trial on July 16, 2012. The parties may try to reach a revised settlement, which must be approved by Rakoff to take effect.

Stoker, a former director in Citigroup’s CDO structuring group, was responsible for structuring and marketing the investment, according to an SEC complaint filed Last month. Brook Dooley, a lawyer for Stoker, didn’t immediately return a voice-mail message seeking comment on the SEC allegations.

‘Public Interest’

“While we respect the court’s ruling, we believe that the proposed $285 million settlement was fair, adequate, reasonable, in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial,” Robert Khuzami, director of the SEC’s Division of Enforcement, said in a statement. Khuzami didn’t say what action the agency will take in response to Rakoff’s decision.

At a hearing this month, Rakoff asked whether the public interest doesn’t require determining whether Citigroup did what the SEC claims. Matthew Martens, the SEC’s chief litigation counsel, told Rakoff that the agency adopted its policy of allowing settlements without admission or denial of liability in 1972 to avoid having defendants claim publicly they hadn’t done anything wrong after agreeing to settle.

“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth,” Rakoff wrote in the opinion. The proposed settlement is “neither fair, nor reasonable, nor adequate, nor in the public interest,” he said.

BofA Settlement

In September 2009, Rakoff rejected Charlotte, North Carolina-based Bank of America’s settlement with the SEC over claims it misled investors about bonuses at Merrill Lynch & Co., which the company had taken over that year. In February 2010, he approved a revised settlement in which Bank of America agreed to pay $150 million to resolve broader allegations about misstatements to investors, including those on the Merrill Lynch bonuses.

This year, Rakoff criticized another SEC settlement, in a case involving Vitesse Semiconductor Corp. (VTSS)

“Here an agency of the U.S. is saying, in effect, ‘although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it,’” he wrote in a decision approving the settlement.

Citigroup doesn’t want to formally admit liability because of the bad publicity that would follow and because an admission would give a powerful tool to investors suing the bank, said Mark Fickes, a former senior trial counsel at the SEC and now a partner at BraunHagey & Borden LLP in San Francisco.

SEC Claims

In its complaint against Citigroup, the SEC said the bank misled investors in a $1 billion fund that included assets the bank had projected would lose money. At the same time it was selling the fund to investors, Citigroup took a short position in many of the underlying assets, according to the agency.

“If the allegations of the complaint are true, this is a very good deal for Citigroup,” Rakoff wrote in today’s opinion. “Even if they are untrue, it is a mild and modest cost of doing business.”

A revised settlement would probably have to include “an agreement as to what the actual facts were,” said Darrin Robbins, who represents investors in securities fraud suits. Robbins’s firm, San Diego-based Robbins Geller Rudman & Dowd LLP, was lead counsel in more settled securities class actions than any other firm in the past two years, according to Cornerstone Research, which tracks securities suits.

Investors could use any admissions by Citigroup against the bank in private litigation, he said.

Unproved Allegations

Rakoff said he can’t endorse the proposed settlement based only on the unproved allegations in the SEC’s complaint.

“The court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment,” he said.

He rejected the SEC argument that he should defer to the agency’s determination that the settlement is fair, particularly as it asked him to issue an order requiring Citigroup not to violate the securities laws in the future.

Calling Citigroup “a recidivist,” Rakoff said the SEC hasn’t tried to enforce such an order against a financial institution in the past 10 years.

Khuzami, the SEC’s chief of enforcement, said Rakoff’s criticism “disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial.”

‘Established Practice’

Rakoff’s position also ignores “decades of established practice” by federal agencies and threatens to drain resources that could otherwise be used to uncover other frauds, Khuzami said. The allegations against Citigroup are the “reasoned conclusions of the federal agency responsible for the enforcement of the securities laws after a thorough and careful investigation of the facts,” he said, not “mere allegations.”

Khuzami said the law generally limits the SEC to recovering twice Citigroup’s ill-gotten gains. Citigroup made $160 million to $190 million on the transaction, according to SEC estimates.

“Judge Rakoff’s opinion is a major blow to the SEC,” said Bradley J. Bondi, a Washington- and New York-based partner at Cadwalader, Wickersham & Taft LLP and former SEC lawyer. “If defendants are forced to admit to allegations in an SEC complaint in order for a federal judge to approve a settlement involving injunctive relief, then defendants may opt to battle the SEC rather than settle and adversely affect civil litigation.”

Citigroup rose $1.42, or 6 percent, to $25.05 today in New York Stock Exchange composite trading. The shares have declined 47 percent this year.

The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan).

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

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



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U.S. Outlook Cut to Negative by Fitch

By John Detrixhe - Nov 29, 2011 5:51 AM GMT+0700

The U.S. lost its last stable outlook from the three biggest credit-ranking companies after Fitch Ratings lowered the nation to negative following a congressional committee’s failure to agree on deficit cuts.

Fitch’s outlook on the U.S., which it still assigns its top AAA grade, reflects “declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming,” making the probability of a downgrade greater than 50 percent over two years, the company said yesterday in a statement. Standard & Poor’s and Moody’s Investors Service said Nov. 21 that the so-called supercommittee’s inability to reach an agreement didn’t merit downgrades because the inaction will trigger $1.2 trillion in automatic spending cuts.

U.S. government debt rallied the most since the end of 2008 after Standard & Poor’s stripped the U.S. of its AAA ranking on Aug. 5, while global equities lost $9.7 trillion in market value during that period. Even with lawmakers reluctant to embrace the automatic cutbacks that helped prevent downgrades, President Barack Obama has pledged to veto any efforts to undermine the spending reductions.

“There’s a much broader recognition out there that you can’t just cut discretionary spending, you have to actually cut into the meat and bone of the programs driving the deficit,” Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York, said yesterday in a telephone interview. Fitch is “catching up to the dysfunction that’s been widely perceived by the American electorate for the last decade.”

Debt to GDP

The 10-year yield rose one basis point, or 0.01 percentage point, to 1.98 percent yesterday in New York time, according to Bloomberg Bond Trader prices. The Standard & Poor’s 500 Index rose 2.9 percent.

The supercommittee’s failure was “a missed opportunity,” David Riley, Fitch’s head of sovereign ratings in London, said yesterday in a telephone interview. “The scale of any subsequent budget cuts are probably going to have to be larger than they otherwise would have been and certainly implemented in faster manner.”

U.S. federal debt held by the public will exceed 90 percent of gross domestic product by the end of the decade, while interest on the debt will require more than 20 percent of tax revenue, Fitch said. Gross debt, including local and state governments, will climb to 110 percent of GDP during that span, a level that “would no longer be consistent with the U.S. retaining its ‘AAA’ status,” the firm said.

Deficit Reduction

A failure by Congress to agree on a “credible deficit reduction plan” combined with a “worsening” economic and fiscal outlook would likely result in the U.S. being stripped up its AAA ranking, the rating company said.

``Fitch’s action is a reminder of the need for Congress to reduce the country’s long-term deficit in a balanced manner and to avoid efforts that would undo the $1.2 trillion in automatic cuts negotiated last summer,'' Colleen Murray, Treasury spokes- woman in Washington, said yesterday.‬

The 12-member bipartisan committee, created in August by the Budget Control Act that raised the U.S. debt ceiling, reached an impasse amid Democrats’ opposition to reductions in programs such as Medicare and Republicans’ reluctance to increases in tax revenue.

“Further deficit reduction will not be credible if it relies solely on further cuts in discretionary spending rather than reform to entitlements and taxation,” Fitch said.

The panel’s implosion is likely to delay any major deficit- reduction agreement until after the next presidential election and may pose an immediate threat to the struggling U.S. economy. The lack of a deal means several tax programs, including a payroll tax holiday, risk expiring at the beginning of next year, weighing on the household spending that accounts for about 70 percent of the world’s largest economy.

Reserve Currency

The dollar’s role as a reserve currency is among the reasons Fitch affirmed the U.S.’s AAA rating, Riley said. “That does provide a tremendous amount of financial flexibility for the U.S.,” he said.

“We’re waiting for a plan to be presented,” Riley said. “Our expectations are that we won’t get substantial fiscal reform this side of congressional and presidential elections.”

The U.S. downgrade to AA+ from AAA by S&P followed months of political gridlock about deficit cuts as the government almost reached its borrowing limit. The rating company slammed the country’s political process and criticized lawmakers.

New York-based S&P’s August decision was flawed by a $2 trillion error, according to the Treasury Department. S&P disputed the Treasury’s assertions and said using the department’s preferred spending measures in its analysis didn’t affect its credit grade. S&P was criticized by Obama and Berkshire Hathaway Inc. Chairman Warren Buffett, who said the U.S. should have been upgraded to “quadruple-A.”

Marketable Debt

The $1.3 trillion U.S. budget deficit in the fiscal year ended Sept. 30 was about 8.7 percent of gross domestic product, the third-largest percentage in the past 65 years, exceeded only by the deficits in 2009 and 2010, according to Treasury statistics. U.S. marketable debt outstanding has doubled to about $9.7 trillion since the end of 2007 as tax receipts plunged and the government boosted spending amid the worst recession since the Great Depression.

“It’s certainly a hit to market sentiment and confidence that nothing was done,” Eric Stein, a money manager in Boston at Eaton Vance Management, which oversees $203 billion, said Nov. 21 of the supercommittee’s failure. “It’s one more piece of bad news in addition to the other bad news that the market’s been digesting.”

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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




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Dollar Holds Drop Versus Euro on Prospects Stocks to Extend Rally in Asia

By Masaki Kondo and Kristine Aquino - Nov 29, 2011 6:50 AM GMT+0700

The dollar held a decline from yesterday against the euro on prospects Asian stocks will extend a global rally of shares, sapping demand for the U.S. currency as a haven.

Fitch Ratings cut the outlook for its U.S. credit ranking to negative from stable while maintaining its top AAA grade. Europe’s common currency was 0.6 percent from a two-week high versus the yen as European financial officials meet this week amid optimism leaders are closer to stemming the region’s debt crisis. Italy and Belgium are due to sell bonds today.

“In a risk-on environment, the U.S. dollar and the yen are two currencies that are going to weaken,” said Thomas Averill, a director at the currency and interest-rate risk management company Rochford Capital in Sydney. “We’re just seeing short- covering in other pairs” involving so-called risk currencies. A short position is a bet a currency will weaken.

The dollar traded at $1.3324 per euro as of 8:24 a.m. in Tokyo from $1.3320 in New York yesterday when it fell 0.6 percent. The greenback fetched 78.01 yen from 77.98. The 17- nation euro was little changed at 103.94 after touching 104.52 yesterday, the strongest level since Nov. 15.

The Standard & Poor’s 500 Index of U.S. shares rose for the first time in eight days yesterday, jumping 2.9 percent.

Euro-area finance ministers convene in Brussels this week to follow up discussions during a Group-of-20 meeting earlier this month as governments try to regain financial markets’ confidence.

Italian, Belgian Bonds

Italy will sell 8 billion euros ($10.7 billion) of bonds maturing in 2014, 2020 and 2022. Belgium is scheduled to offer 1.4 billion euros of bills today.

Fitch’s outlook reflects “declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming,” making the probability of a downgrade greater than 50 percent over two years, the company said yesterday in a statement.

S&P and Moody’s Investors Service said Nov. 21 that the inability of Congress’s so-called supercommittee to reach an agreement didn’t merit downgrades because the inaction will trigger $1.2 trillion in automatic spending cuts.

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.




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S&P 500 Surges 2.9% on Holiday Sales, Europe Optimism

By Nikolaj Gammeltoft - Nov 29, 2011 4:48 AM GMT+0700

Nov. 28 (Bloomberg) -- Jeffrey Davis, chief investment officer at Lee Munder Capital Group, talks about AT&T Inc.'s possible plan to propose bigger asset sales to save its T-Mobile USA takeover. Davis, speaking with Erik Schatzker on Bloomberg Television's "InsideTrack," also discusses the potential effects of a euro zone collapse. (Source: Bloomberg)

Nov. 28 (Bloomberg) -- Michael Nelson, analyst at Mizuho Securities USA Inc., discusses AT&T Inc.’s proposed purchase of T-Mobile USA Inc. AT&T, with its T-Mobile USA takeover facing regulatory opposition, is preparing the biggest remedy proposal yet to the Justice Department to salvage the $39 billion deal, according to a person familiar with the plan. Nelson speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)


U.S. stocks rose, snapping a seven- day decline in the Standard & Poor’s 500 Index, after Thanksgiving retail sales climbed to a record amid speculation European leaders will boost efforts to end the debt crisis.

Alcoa Inc. (AA) and Caterpillar Inc. (CAT) led gains in all 30 stocks in the Dow Jones Industrial Average. JPMorgan Chase & Co. (JPM) advanced 2.4 percent, tracking European banking shares. Energy companies in the S&P 500 soared 3.6 percent as oil rallied above $100 a barrel. AT&T Inc. (T) added 2 percent after it was said to consider larger asset sales to salvage its takeover of T-Mobile USA. Amazon.com Inc. (AMZN) jumped 6.4 percent on record Black Friday sales of its Kindle products.

The S&P 500 advanced 2.9 percent to 1,192.55 at 4 p.m. New York time as all except six stocks in the index rose. The benchmark equity gauge fell 7.9 percent from Nov. 15 through Nov. 25, including the worst Thanksgiving-week drop since 1932. The Dow rose 291.23 points, or 2.6 percent, to 11,523.01.

“The market is reflecting that the U.S. retail sales were just colossal and some movement forward in Europe,” Tom Mangan, who helps oversee about $2.8 billion at James Investment Research Inc. in Xenia, Ohio, said in a telephone interview. “There’s a sense of urgency developing among European leaders as well as a recognition that the stakes are extremely high now,” he said. “The volatility is still with us to a major extent, we’re not out of the woods.”

Stock Valuations

The S&P 500 is trading for 10.9 times analysts’ forecast for earnings in 2012, compared with its five-decade average of 16.4 times reported profits, data compiled by Bloomberg show. Companies in the benchmark gauge for American common equity are projected to increase earnings 10 percent next year, extending a streak of gains to 13 quarters, the data show.

U.S. retail sales during the Thanksgiving weekend increased 16 percent to $52.4 billion, the National Retail Federation said, citing a survey conducted by BIGresearch. The average shopper spent $398.62, up from $365.34 a year earlier. Consumer spending, which accounts for about 70 percent of the economy, grew at a 2.3 percent annual rate in the third quarter, the fastest pace in 2011, the Commerce Department said Nov. 22.

U.S. stocks maintained gains after a report showed fewer new homes were purchased in October than forecast. Sales increased 1.3 percent to a 307,000 annual pace, the Commerce Department reported today in Washington. The median estimate of economists surveyed by Bloomberg News projected a 315,000 rate.

Caterpillar Climbs

Companies most-tied to the economy rose, sending the Morgan Stanley Cyclical Index up 3.8 percent after a 6.2 percent decline last week. Caterpillar, the world’s largest construction and mining-equipment maker, increased 5.5 percent to $91.48 for the second-biggest gain in the Dow.

Energy and raw-material producers in the S&P 500 rallied at least 3.5 percent, as crude oil rose above $100 a barrel for the first time in more than a week on signs of economic recovery in the U.S., while sanctions on Syria stoked concern Middle East crude supplies may be threatened.

Alcoa gained 5.7 percent to $9.46. The largest U.S. aluminum producer rose the most in the Dow as copper, lead, nickel and zinc advanced on the London Metal Exchange. Freeport- McMoRan Copper & Gold Inc., the world’s biggest publicly traded copper producer, surged 6.3 percent to $35.94. Molycorp Inc. (MCP) climbed 14 percent to $30.65.

Energy Companies

Suncor Energy Inc. (SU) gained 3.4 percent to $27.98. Marathon Oil Corp. (MRO) increased 5.4 percent to $25.98. Halliburton Co. (HAL) advanced 3.1 percent to $32.77.

JPMorgan jumped 2.4 percent to $29.16. Goldman Sachs Group Inc. (GS) surged 2.3 percent to $90.78. A gauge of European banking shares climbed 5.7 percent, among the best performances in the benchmark Stoxx Europe 600 Index.

“It’s a sea of green and nothing is being left behind in this rally,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion, said in a telephone interview. “Equity prices are being powered higher by the quite good Black Friday sales in the U.S. and reports that European officials are rallying around some form of political cohesion to solve the debt crisis.”

In Europe, German newspaper Welt am Sonntag reported German Chancellor Angela Merkel and French President Nicolas Sarkozy are discussing an agreement under which member states will commit to tighter budget discipline without waiting for treaty changes. The newspaper did not say where it got the information.

Treaty Changes

German Finance Minister Wolfgang Schaeuble called for fast- track treaty changes to tighten budget discipline among member states of the euro area. He spoke in an interview with ARD television in Berlin yesterday. The European Financial Stability Facility may insure the bonds of debt-stricken countries with guarantees of 20 percent to 30 percent of each issue, depending on market circumstances, according to EFSF guidelines that finance ministers will discuss this week.

Euro-area finance ministers meet in Brussels tomorrow as governments bid to regain the confidence of financial markets.

The increased severity of the debt crisis is threatening the credit standing of the region’s countries, Moody’s Investors Service said in a report today. More than $1.2 trillion has been erased from U.S. stocks since Nov. 15 on mounting concern that the crisis will spread and American policy makers failed to reach agreement on reducing the federal budget.

After financial markets closed in New York, Fitch Ratings affirmed the U.S.’s AAA long-term foreign and local currency issuer default ratings. The outlook on the long-term rating was revised to negative from stable, with Fitch saying that a failure to reach a “credible deficit reduction plan” in 2013 and a worsening economy could lead to a downgrade.

Antitrust Remedy

AT&T climbed 2 percent to $27.95. The company, which faces regulatory opposition to its acquisition of Deutsche Telekom AG’s U.S. unit, is preparing its biggest antitrust remedy proposal to salvage the deal, according to a person familiar with the plan. AT&T may offer to divest a significantly larger portion of assets than it had planned. That could be as much as 40 percent of T-Mobile USA’s assets, the person said.

Amazon.com rose 6.4 percent to $194.15. The world’s largest Internet retailer said it sold four times more Kindle products on Black Friday compared with last year.

Corning Inc. (GLW) rallied 6 percent to $14.78. Demand for televisions on Black Friday was better than expected, boding well for the maker of glass for flat-panel TVs, Goldman Sachs said, citing in-store and online checks.

Genworth Financial Inc. (GNW) posted the biggest gain in the S&P 500, climbing 13 percent to $6.07. Citigroup Inc. upgraded the insurer for the second time this month on the prospect that the company can withstand mortgage-related losses.

Netflix Inc. (NFLX) surged 9.5 percent to $69.95. The video- streaming and DVD subscription service was raised to “neutral” from “negative” at Susquehanna Financial Group, which said “a significantly lower stock price largely offset the downside potential.”

To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net

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



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