U.K. Shuns Aid as Europe Channels $195B to IMF

By Stephanie Bodoni and James G. Neuger - Dec 20, 2011 3:22 PM GMT+0700

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Dec. 19 (Bloomberg) -- Miles Shipside, commercial director of Rightmove Plc, discusses the U.K. property market as home sellers cut asking prices in December, according to the property website. He speaks with Owen Thomas on Bloomberg Television’s "Countdown." Kit Juckes, head of foreign-exchange research at Societe Generale SA, also comments in this report. (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- Thomas Costerg, a European economist at Standard Chartered Bank Plc, talks about shocks to the euro-zone economy in 2012. He speaks with Owen Thomas on Bloomberg Television's "On the Move." (Source: Bloomberg)

Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets.

Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a statement after a conference call yesterday.

The IMF track is “obviously a small-scale solution,” former UBS AG Chairman Peter Kurer told Maryam Nemazee on Bloomberg Television’s “The Pulse” program. “What really would be needed in the ideal world would be euro bonds or a substitute which can bring large-scale liquidity and confidence into the markets.”

Germany continued to oppose an early decision to raise the limit of 500 billion euros on overall emergency aid. European leaders plan to tackle that question by March. Still, the IMF infusion and jump in ECB bond purchases indicated that Europe is wielding more money instead of relying on budget cuts alone to persuade investors to return to markets scarred by two years of burgeoning debt and threatened defaults.

ECB Auctions

The ECB said it settled 3.36 billion euros of bond purchases in the week ending Dec. 16, up from 635 million euros the week before. The Frankfurt-based ECB’s next crisis-fighting act comes today, when it offers banks unlimited three-year loans, lubricating the credit system with a flood of cash.

“I cannot put a figure to it, but I would think that it would be significant,” ECB Vice President Vitor Constancio told Bloomberg Television in Frankfurt yesterday. “It’s an important instrument for banks.”

Bonds of Italy and Spain have rallied on expectations that the unprecedented long-term loans will lead banks to buy more government debt. Two-year yields have fallen to 5.2 percent in Italy from 6.2 percent when the plan was announced Dec. 8. In Spain, they dropped below 3.4 percent from 4.9 percent.

At the same time, ECB President Mario Draghi said the bond- buying operations won’t go on forever, indicating that countries such as his native Italy can’t count on massive interventions to reduce their borrowing costs.

The ECB will start in January to act as a market agent for the European Financial Stability Facility, the 440 billion-euro government-backed rescue fund set up in May 2010 and due to be replaced by a permanent fund next year.

Bundesbank’s Demand

Contributions to the Washington-based IMF were controversial inside and outside the 17-nation euro region. The most potent central bank among the euro users, Germany’s Bundesbank, coupled its 41.5 billion-euro input to a promise that the aid not be earmarked for Europe.

Such recycling would violate euro rules, inspired by the Bundesbank, that bar central banks from financing government deficits. As a result, the euro area will lend to the IMF’s general resources, not to a special euro crisis fund.

France, the second-largest European Union state using the euro, will supply 31.4 billion euros, the statement said. Italy will deliver 23.5 billion euros and Spain 14.9 billion euros.

The three countries drawing on emergency loans to escape default -- Greece, Ireland and Portugal -- weren’t asked to contribute, the Greek Finance Ministry said. Amounts pledged by four EU countries outside the euro -- the Czech Republic, Denmark, Poland and Sweden -- weren’t immediately disclosed.

Ten days after U.K. Prime Minister David Cameron battled euro leaders over crisis management at a Brussels summit, Britain’s wariness of the IMF program sabotaged the euro region’s goal of drumming up 50 billion euros from the rest of the EU.

U.K. Deferral

“The U.K. has always been willing to consider further resources for the IMF, but for its global role and as part of a global agreement,” the Treasury said in an e-mailed statement.

The euro added 0.1 percent to $1.3010 at 9:05 a.m. in Brussels today, down from about $1.33 at the Dec. 8-9 summit.

The success of the IMF strategy hinges on how other major powers react. While talks are under way with China, there is “no chance” that U.S. lawmakers will approve more funds, German Finance Minister Wolfgang Schaeuble said on Deutschlandradio.

G-20 Bid

“The EU would welcome G-20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources so as to fill global financing gaps,” Luxembourg Prime Minister Jean-Claude Juncker, who chaired the conference call, said in the statement.

Europe is piecing together a strategy for containing the crisis, which started with the Greek government uncovering an unexpected budget hole in October 2009 and led to 256 billion euros in bailouts for Greece, Ireland and Portugal.

After “comprehensive” fixes hammered out in July and October quickly fizzled, European leaders were careful not to oversell the latest strategy, unveiled at sunrise Dec. 9 after an all-night wrangle.

The key, demanded by German Chancellor Angela Merkel, is a new treaty cementing balanced-budget rules and making it harder for violators to wriggle free from penalties. Negotiations begin today on the text, with the goal of signing the treaty in March.

While no government has been punished for a deficit above the limit of 3 percent of gross domestic product in the euro’s 13-year history, the renewed vow of fiscal probity was designed to encourage action by the independent central bank.

The pledge marked a “breakthrough,” Draghi told a European Parliament committee in Brussels yesterday. “The new fiscal compact is an essential signal, showing a clear trajectory for the future evolution of the euro area.”

To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

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

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Asia Stocks Rise as Exporters Gain U.S. Optimism

By Jonathan Burgos - Dec 20, 2011 7:36 AM GMT+0700

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Dec. 20 (Bloomberg) -- Charles Kim, a New York-based director of Mirae Asset Securities Co., talks about the outlook for South Korean stocks following the death of North Korean dictator Kim Jong Il. He speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)

Asian stocks (MXAP) rose after Federal Reserve Bank of Richmond President Jeffrey Lacker predicted the U.S. economy will grow 2 percent to 2.5 percent next year, boosting the outlook for the region’s exporters.

James Hardie Industries SE, the supplier of building materials that counts the U.S. as its biggest market, added 1.1 percent in Sydney. Honda Motor Co. (7267), the Japanese carmaker that gets about 44 percent of sales from North America, climbed 2.8 percent in Tokyo as it resumed production in the U.K. and announced plans to double factory capacity. Inpex Corp., Japan’s largest energy explorer, rose 2 percent as crude oil futures advanced for a second day.

The MSCI Asia Pacific Index added 0.2 percent to 110.63 as of 9:34 a.m. in Tokyo, with about three shares advancing for every two that fell in the measure. The gauge fell to a three- week low yesterday after North Korean leader Kim Jong Il died and Fitch Ratings said it may cut the credit ratings of European nations.

To contact the reporters on this story:

Masaaki Iwamoto in Tokyo at miwamoto4@bloomberg.net

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

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S&P Downgrade Proves Absurd as Global Investors Make U.S. Assets Preferred

By Zeke Faux and John Detrixhe - Dec 20, 2011 12:42 AM GMT+0700

Four months after Standard & Poor’s stripped the U.S. of its AAA credit rating and said the world’s biggest economy was no longer the safest of borrowers, dollar- denominated financial assets are doing nothing but appreciating.

Government bonds have returned 4.4 percent, the dollar has gained 8.6 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the U.S. was cut to AA+ from AAA on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the U.S. was no longer risk-free, with the average monthly yield in November on 10-year notes below 2 percent for the first time since 1950.

Demand for American assets is increasing as consumer confidence, manufacturing and employment show the U.S. is strengthening as Europe struggles to save its currency union and the developed world weakens. U.S. gross domestic product will expand 2.19 percent next year, compared with 1.55 percent for the Group of 10 nations, Bloomberg surveys of economists show.

“The U.S. is our favorite market,” Hiromasa Nakamura, a bond investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of about $42 billion, said Dec. 12 in a telephone interview. “The level of debt is high but I think they will deal with it,” he said. “Financial dislocations are continuing and investor money is flowing to the reserve currency, the U.S. dollar.”

Currency Advantage

When it lowered the U.S. rating, S&P, the world’s largest provider of credit analysis, said the failure up to then of Democrats and Republicans to agree on budget cuts made the U.S. less creditworthy, downplaying the country’s ability -- unlike individual European nations -- to print as much money as it needs to pay its debts. Congress cleared a $1 trillion spending bill on Dec. 17 that lawmakers called a bipartisan compromise.

“It is the ability to print one’s own currency to pay government bond investors back under any circumstances that makes a government bond a government bond, i.e. a (credit) risk- free asset for hold-to-maturity investors,” Elga Bartsch, the chief European economist at Morgan Stanley in London, said in a report this month to clients.

Investors have looked past S&P’s warning even as government borrowing surpasses $15 trillion for the first time and the budget deficit exceeds $1 trillion for a third year.

Best Bonds

Long-term Treasuries are the best performing government bonds in the world this year, returning 30 percent, according to Bloomberg/EFFAS indexes. The S&P 500 has gained since August even as the MSCI All Country World Index fell 5.7 percent.

IntercontinentalExchange Inc.’s U.S. Dollar Index, which measures the greenback against the euro, yen and four other major trading partners, rose 2 percent last week and was at 80.282 at 12:34 a.m. New York time, from 74.598 on Aug. 5.

Investors are showing no reluctance to lend to the U.S., bidding a record $3.02 for each dollar of the $1.96 trillion of Treasury notes and bonds sold this year, according to data compiled by Bloomberg. That’s up from $2.56 in 2007 when the U.S. issued $581 billion in notes and bonds, government data show.

“Treasuries are clearly the safest asset in the world, they will continue to be the safest asset in the world,” James Staley, chief executive officer of JPMorgan Chase & Co.’s investment-banking unit, said today on Bloomberg Television’s “InsideTrack” with Erik Schatzker. “A downgrade in and of itself doesn’t really change the equation.”

Yields on 10-year Treasuries rose 2 basis points today to 1.83 percent, down from 2.56 percent on Aug. 5. Yields slid 21 basis points last week, or 0.21 percentage point, in the biggest drop since the five days ended Nov. 4, Bloomberg Bond Trader prices show.

Foreign Demand

Foreigners increased holdings of Treasuries by $17.2 billion in August, September and October to $4.66 trillion, the latest government data show. Non-U.S. buyers own about 48 percent of U.S. marketable debt, up from 34 percent when the nation had a budget surplus in December 2000.

“The fact that the U.S.’s credit rating was cut from AAA is not relevant,” said Jack Kelly, a fund manager at Standard Life Investments in Edinburgh, which oversees the equivalent of about $200 billion. “Treasuries are benefiting from an enormous flight to quality.”

History shows that a rally following a sovereign downgrade isn’t unusual.

After S&P cut Japan in February 2001 to AA+ from AAA, 10- year bonds yields fell below 1.15 percent four months later from 1.46 percent. Yields were at 0.97 percent today, even though S&P ultimately reduced the nation to AA-. Moody’s Investors Service waited until May 2009 to lower Japan’s foreign currency rating from Aaa, and now has it at Aa3, the same as S&P.

Stronger Yen

The yen appreciated as much as 2 percent by the end of June 2001, and is 4.7 percent stronger in 2011, based on Bloomberg Correlation-Weighted Indexes that measure the currency against a basket of nine developed-nation peers. While the Nikkei 225 Stock Average was little changed four months later, it had surged as much as 11 percent by May 7, 2001.

As the U.S. strengthens, the outlook for other parts of the world is deteriorating. Economists raised their forecasts for growth in U.S. gross domestic product next year to an average of 2.2 percent from 2 percent in October as they trimmed their estimate of Europe by 0.5 percentage point to 1 percent according to separate surveys by Bloomberg.

Demand from international investors is good news for President Barack Obama because the Treasury was able to fund the third-straight budget deficit of more than $1 trillion at a lower cost as a percentage of GDP than when the nation posted surpluses from 1998 to 2001. Interest expense accounted for 3 percent of the economy in fiscal 2011 ended Sept. 30, down from 4 percent in 1999.

Strengthening Economy

U.S. economic indicators have improved since S&P’s downgrade, with consumer confidence, as measured by the Thomson Reuters/University of Michigan preliminary index, rising to a six-month high in December.

Inflation was little changed in November and manufacturing expanded at the fastest pace in five months, according to the Institute for Supply Management’s factory index. Private employment rose 206,000 last month, the strongest increase this year, ADP Employer Services said.

The U.S. received its highest rating from international investors in more than two years, with 41 percent saying in a Bloomberg poll conducted Dec. 5-6 that the country would be among top performers in 2012.

Downgrade Justified

Not everyone agrees the U.S. is more creditworthy. Sixty- seven percent of 1,031 global investors in a Bloomberg Global Poll in September said S&P’s move was justified.

Moody’s, the second-largest ratings company, put its top Aaa grade for the U.S. on “negative outlook” during the budget debate. Fitch Ratings said last month there was a greater than 50 percent chance it would strip the nation of its top ranking over the next two years.

The ratio of net government debt to GDP reached 72 percent in 2011 and will rise to 80 percent by 2015, John Chambers, managing director of sovereign ratings at S&P, said in a speech in Beijing last month. The government’s reliance on foreign investors contributed to the downgrade, he said.

Germany’s debt-to-GDP ratio will fall to 65.6 percent by 2014 after peaking at 72.7 percent at the end of this year, according to a Bloomberg Brief estimate.

“The U.S. needs to raise its savings level,” Chambers said, according to a transcript of the speech on S&P’s website. “Failure to do so might raise the vulnerabilities to shifting non-resident investor sentiment.”

Reserve Currency

John Piecuch, an S&P spokesman, said the company wouldn’t make its sovereign analysts available for comment.

When S&P lowered its outlook for the U.S. in April, it cited the dollar as a reason to keep the top grade, referring to it four times in a statement. In its Aug. 5 announcement of the downgrade, the company mentioned it only once, in the 15th of 20 paragraphs.

S&P justified the move by saying “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened.”

The U.S. has the world’s top reserve currency, with central banks keeping 60 percent of their foreign-exchange holdings in dollars, down from 72.7 percent in 2001, according to the International Monetary Fund in Washington. America is able to print its own currency, unlike the 17 nations in Europe using the euro, which gave that authority to the European Central Bank.

That means the U.S. has the ability to create cash to pay its debts or devalue to boost imports.

Warren Buffett

“We don’t have to worry so much about our government becoming dysfunctional as we have to worry about that damn printing press becoming dysfunctional,” billionaire Warren Buffett, Berkshire Hathaway Inc.’s chairman and chief executive officer, said on Aug. 16 in a television interview with Charlie Rose. “There are 17 countries in Europe that gave up the right to print money, and believe me they know what it means to give up the right to print money.”

Buffett, the biggest shareholder of S&P rival Moody’s Corp., said after the S&P downgrade that the U.S. should be “quadruple-A.” John Bellows, then the acting assistant Treasury secretary for economic policy, said S&P made a $2 trillion “mistake” in its math and then changed the rationale for its decision to politics. S&P denied it made an error or altered its reasoning.

Ratings Methodologies

S&P said two weeks after the reduction that it would replace Deven Sharma, its president, with Douglas Peterson, a Citigroup Inc. executive. David Beers, head of sovereign ratings, said last month he was leaving to join the Bank of Canada next year. Mark Adelson, who oversaw S&P’s methodologies, was shifted to a research position on Dec. 9.

“The rating downgrade was a political message,” David Kotok, chief investment officer at Cumberland Advisors Inc., said on Dec. 7 in an interview with Sara Eisen on Bloomberg Television’s “InsideTrack.”

While marketable U.S. government debt has risen to $9.4 trillion from $4.34 trillion in mid-2007 as the government borrowed to bail out the nation’s banking system and lift the economy out of recession, the amount of Treasuries outstanding makes them easier to trade, according to Michael Cirami, a money manager at Boston-based Eaton Vance Corp. (EV)

“People want to hold them because they’re very liquid and because they’re among the safest assets that one can hold,” Cirami, whose firm invests $13.2 billion, said on Dec. 13 in a telephone interview. “If you downgrade the U.S. from AAA to AA+, it doesn’t change the liquidity of Treasuries.”

Average Yields

Though the U.S. went from budget surpluses averaging $139.7 billion from 1998 through 2001 to a deficit of $1.29 trillion last year, the country’s borrowing costs have fallen.

Average debt yields dropped to 1.04 percent as of Dec. 14 from 1.5 percent in July and 6.54 percent in 2000, Bloomberg data show. The average yield on all types of dollar-denominated debt fell to 2.11 percent on Dec. 8, according to the Bank of America Merrill Lynch U.S. Broad Market Index.

That compared with 2.51 percent for the firm’s Global Broad Market, Ex-U.S. Dollar index. Yields on bonds from elsewhere were lower as recently as May 12, when they averaged 2.74 percent versus 2.76 percent in the U.S.

“The U.S. is still the place to park assets,” Scott Kimball, who manages $7 billion of bonds at Taplin Canida & Habacht LLC in Miami, said Dec. 7 in New York. “It is still the strongest credit in the global financial markets.”

To contact the reporters on this story: Zeke Faux in New York at zfaux@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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RBA Sees Global Slowdown as European Risk Triggers Rate Cut, Minutes Show

By Michael Heath - Dec 20, 2011 7:35 AM GMT+0700

Australia’s central bank lowered its benchmark interest rate this month because risks to global growth from Europe’s debt crisis overshadowed evidence the nation’s mining boom is intensifying, minutes of its Dec. 6 meeting showed.

While the domestic “economy was expanding at a pace broadly in line with trend,” in Europe “there was a non- trivial possibility of a very sharp contraction,” the minutes released today by the Sydney-based Reserve Bank of Australia showed. “Members concluded that growth in the world economy was likely to weaken over the coming year.”

RBA Governor Glenn Stevens and his board reduced rates by a quarter percentage point on Nov. 1 and again this month to 4.25 percent as inflation pressures eased and risks to the world economy increased. The minutes showed board members questioned whether the second cut was needed given the strength of domestic investment in resource industries.

“There had been further evidence that a major investment boom was in progress and the overall economy was expanding,” policy makers said. “Australia’s main trading partners were also still recording solid growth. This did not suggest any strong need to cut interest rates.”

The case for lowering borrowing costs revolved around the “downside risks” posed by Europe to the global economy, they said. “The risks had, if anything, increased though the timing and magnitude of any effects that might flow from them remained very difficult to predict.”

The Australian dollar held earlier advances, trading at 99.25 U.S. cents as of 11:32 a.m. from 98.96 cents yesterday in New York.

Jobs Growth

Australia is headed for its worst annual jobs growth in 15 years and the unemployment rate advanced last month to 5.3 percent, matching the highest level this year.

“Liaison had indicated significant caution in hiring intentions, with firms waiting for evidence of growth in demand before looking to increase staff levels,” policy makers said in today’s minutes, referring to the domestic economy. Most companies “expected wage pressures to remain contained,” they said.

Traders see a 44 percent chance Stevens will cut borrowing costs by 50 basis points at the central bank’s next meeting in February, interbank cash-rate futures show.

Growth in Australia is being driven by China, the nation’s biggest trading partner, which is buying up iron ore, coal and natural gas as millions of people in the world’s most populous nation move to urban centers.

EU Turmoil

Resource projects in Australia valued at A$456 billion ($452 billion), fueled by companies such as BHP Billiton Ltd., have cushioned a slump in manufacturing and services hit by a record currency and subdued consumer spending. The Aussie reached $1.1081 on July 27, the most since it was freely floated in 1983.

Europe’s fiscal turmoil is cutting demand in China’s biggest export market, and a Chinese government campaign to rein in property prices is threatening home sales and construction. China’s economic growth cooled to 9.1 percent last quarter, the least in more than two years, and an increase in exports in November was the weakest since 2009 excluding seasonal distortions.

“The poor outcomes in Europe were weighing on Asian exports, and growth in domestic demand had moderated somewhat,” the minutes said.

Europe’s troubles have weighed on the so-called Aussie dollar in recent weeks. The world’s fifth most-traded currency has fallen about 10 percent since its July peak on concern Greece would default and trigger a repeat of the credit freeze that followed the 2008 collapse of Lehman Brothers Holdings Inc. increase economists estimated.

Money Markets

In the minutes, the RBA noted “no signs of strain in local money markets through November and banks had also been able to access short-term offshore markets with relative ease.”

Payrolls in Australia gained 44,700 through the first 11 months of this year, heading for the smallest annual growth since 1996 after a record 362,300 increase in 2010, government data showed this month. The report contrasted with figures showing the biggest six-month gain in economic growth since March 2007.

“Given the expectation that inflation would be consistent with the target over the next couple of years, members felt that there was scope for a modest reduction in the cash rate,” the minutes showed. The central bank aimed to keep domestic inflation in a range of 2 percent to 3 percent.

A day after the policy meeting, a government report showed Australia’s economy grew faster than estimated last quarter on consumer spending and mining-driven investment. Gross domestic product rose 1 percent in the three months ended Sept. 30, after growing a revised 1.4 percent the prior quarter, the fastest pace in four years, a Bureau of Statistics report released in Sydney this month said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Euro Trades Near 11-Month Low Before Spain Debt Sale; Aussie Dollar Gains

By Candice Zachariahs and Masaki Kondo - Dec 20, 2011 8:27 AM GMT+0700

The euro traded 0.5 percent from an 11-month low before Spain sells securities and the release of a German report forecast to show deteriorating business confidence in Europe’s largest economy.

The dollar maintained yesterday’s advance against most major counterparts amid signs it will be difficult for the euro region to attract outside funds to address its sovereign debt crisis. Australia’s dollar rose after the Reserve Bank said in minutes of its Dec. 6 meeting that investment in the domestic economy and “solid growth” among the nation’s main trading partners had tempered the need for lower interest rates.

“The market is still fearful of some big refunding tasks in the first quarter of next year,” said Greg Gibbs, a foreign- exchange strategist at Royal Bank of Scotland Group Plc in Sydney. “The euro has made successive new lows this year, so the technical pattern is still negative for the euro.”

The euro traded at $1.3007 as of 10:08 a.m. in Tokyo from $1.2998 in New York yesterday, after falling as low as $1.2946 on Dec. 14, the least since Jan. 11. Europe’s common currency fetched 101.50 yen from 101.45 yesterday. The dollar traded at 78.04 yen from 78.05.

Spain is due to auction three- and six-month securities today. Euro-region governments have to repay more than 1.1 trillion euros ($1.4 trillion) of long- and short-term debt in 2012, according to Bloomberg data. Italy and Spain have about 146 billion euros of bonds and bills maturing in the first quarter, the data show.

IMF Funds

Euro-area governments yesterday said they will boost their anti-crisis efforts by pledging to provide 150 billion euros to the International Monetary Fund. Four countries not using the single currency also agreed to add to the IMF war chest while Britain refused to commit funds, a sign of the difficulty of attracting outside cash to ease the euro area’s debt burdens.

The euro may drop to the weakest level in almost a year and a half after breaking through its low from October, according to Bank of America Corp.

The shared currency is poised to fall to as low as $1.2510, a level last reached in July 2010, after trading below $1.3146, the lowest reached in October, said MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America in New York. The shared currency would have to reach and break through the $1.2901-$1.2859 range before dropping to $1.2533 and then the lower level, he said.

The 17-nation European currency depreciated 2.8 percent versus the dollar this year and 6.4 percent against the yen. The dollar has dropped 3.8 percent versus the Japanese currency.

German Confidence

German business confidence may have weakened in December for the fifth time in six months. The Munich-based Ifo institute’s business climate index, based on a survey of 7,000 executives, probably fell to 106 from 106.6 in November, according to the median estimate of economists in a Bloomberg News survey before the data is released today.

The Australian dollar gained against most of its major peers after the nation’s central bank said it lowered rates this month because risks to global growth from Europe’s debt crisis overshadowed evidence the nation’s mining boom is intensifying, according to minutes of the meeting released today.

“It’s the offshore economy rather than the local economy which was the reason why the RBA cut rates,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia. The minutes “suggest that they’re not going to be in a hurry to cut rates in the near future,” which is supporting the currency, he said.

The Australian dollar rose 0.3 percent to 99.26 U.S. cents and gained 0.3 percent to 77.46 yen.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net. Masaki Kondo in Singapore at mkondo3@bloomberg.net;

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

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AT&T Pulls $39B T-Mobile Bid On U.S. Opposition

By Scott Moritz and Cornelius Rahn - Dec 20, 2011 9:03 AM GMT+0700

AT&T Inc. (T) abandoned a $39 billion bid to acquire T-Mobile USA after opposition from U.S. regulators, thwarting its effort to become the country’s biggest wireless carrier.

The company will take a pretax charge of $4 billion to reflect cash payments and other considerations due to T-Mobile- owner Deutsche Telekom AG (DTE), according to a statement today from the Dallas-based company.

AT&T failed to convince the Justice Department, which sued to block the transaction in August, that it could remedy the market impact of absorbing T-Mobile. AT&T would have spent months in litigation to try to win court approval for buying the nation’s No. 4 mobile-phone operator in the largest acquisition announced this year. The company also faced possible opposition from the Federal Communications Commission.

“They made an unprecedented move bidding on T-Mobile and appear to have miscalculated the risks and the regulatory opposition,” said Kevin Smithen, an analyst with Macquarie Capital USA Inc.

The move comes a week after the judge in the Justice Department lawsuit agreed on Dec. 12 to put the case on hold as the telephone company decided whether or how to revise the transaction. The delay may have made it more difficult for AT&T to close the deal by the Sept. 20 deadline.

Last Best Offer

AT&T had been trying to get regulatory approval for the deal by selling off T-Mobile assets and creating a stronger wireless competitor. The last proposal before the deal was killed was the transfer of $8 billion to $9 billion worth of T- Mobile assets to Leap Wireless International Inc. (LEAP) for a cost of about $2 billion, said two people familiar with the talks.

The Justice Department didn’t consider Leap a strong alternative because the San Diego-based company didn’t have enough money to make capital investments in its network, even if it acquired the assets, the people said.

AT&T Chief Executive Officer Randall Stephenson said in the statement today that efforts by the DOJ and FCC to block the deal may hurt customers and industry investment.

“To meet the needs of our customers, we will continue to invest,” Stephenson said, adding that regulators need to allow more airwave sales and reform rules to “meet our nation’s longer-term spectrum needs.”

Stephenson’s Confidence

Stephenson said in March, when the deal was announced, that he was confident of receiving regulatory clearance. He said the combination would help improve service, speed up investment in faster networks and drive wireless expansion in rural areas. The deal would have added T-Mobile’s 33.7 million customers to AT&T’s 100.7 million subscribers, surpassing Verizon Wireless’s 107.7 million.

Critics of the deal said it would eliminate an aggressive price competitor, driving up subscription costs. T-Mobile’s monthly wireless plans are $15 to $50 cheaper than comparable AT&T plans, according to an analysis by Consumer Reports.

“I’m relieved that we are no longer at risk of concentrating such enormous power in the hands of AT&T and Verizon,” U.S. Senator Al Franken said in a statement.

The failed deal may cost AT&T next year, said Smithen. The company may have to lower its profit forecast due to capital spending or acquisitions as it makes up for the capacity it had planned to add through T-Mobile, he said.

“The next shoe to drop could be 2012 guidance,” said Smithen. “The company will report earnings next month and we are concerned that there will be downside revisions to 2012 earnings and estimates,” said Smithen.

Ashley Zandy, a spokeswoman for AT&T, declined to comment on the financial forecast.

DT’s Plans

For Deutsche Telekom, the collapse of the deal leaves it with one more subscriber-losing business as the Bonn-based company confronts the fallout from Europe’s debt crisis. Deutsche Telekom had planned to use the proceeds to cut debt by 13 billion euros ($16.9 billion) and repurchase 5 billion euros of its shares. The company also needs funds to upgrade fiber and wireless networks in Germany and other European markets.

Deutsche Telekom says the deal’s demise won’t change its financial targets for 2011 and that it will remain within its forecast range for debt reduction. The company also said it expects to receive the breakup fee’s cash component by the end of this year, adding that it will resume reporting T-Mobile USA’s earnings as “continued operations.” The division had been reported as “discontinued operations” since the first quarter.

AT&T was little changed $28.74 in extended trading. As of the close of regular trading today, the stock had lost 2.2 percent this year. Deutsche Telekom lost 1.2 percent to 8.89 euros in Frankfurt today.

$7 Billion Breakup

AT&T and Deutsche Telekom pulled their applications to the FCC on Nov. 24, with AT&T announcing the same day that it would record $4 billion in costs this quarter to reflect the risk of the deal collapsing.

The withdrawal came after FCC Chairman Julius Genachowski asked the commission on Nov. 22 to send the proposal to an agency judge for a hearing. The same move by the FCC in 2002 helped block EchoStar Communications Corp.’s acquisition of satellite-TV rival DirecTV.

According to the terms of the offer, AT&T must pay Deutsche Telekom a $3 billion breakup fee in cash, transfer radio spectrum to T-Mobile and strike a more favorable network-sharing agreement. Deutsche Telekom has valued the breakup package at as much as $7 billion.

In an effort to sell the deal to regulators and the public, AT&T vowed to honor the T-Mobile service plan prices after the merger. The company also vowed to bring 5,000 call-center jobs currently based overseas to the U.S. in the event of approval.

“They rolled the dice and took their chances,” said Craig Moffett, a Sanford C. Bernstein & Co. analyst in New York. “In the end, it didn’t work out, but that doesn’t mean it was a mistake to try.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net; Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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Europe Channels $195 Billion to IMF

By Stephanie Bodoni and James G. Neuger - Dec 20, 2011 3:46 AM GMT+0700

Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets.

Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, in a sign of the difficulty of attracting outside cash to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a Brussels statement after a conference call.

The IMF track is “obviously a small-scale solution,” former UBS AG Chairman Peter Kurer told Maryam Nemazee on Bloomberg Television’s “The Pulse” program. “What really would be needed in the ideal world would be euro bonds or a substitute which can bring large-scale liquidity and confidence into the markets.”

Germany continued to oppose an early decision to raise the limit of 500 billion euros on overall emergency aid. European leaders plan to tackle that question by March. Still, the IMF infusion and jump in ECB bond purchases indicated that Europe is wielding more money instead of relying on budget cuts alone to persuade investors to return to markets scarred by two years of burgeoning debt and threatened defaults.

Bundesbank’s Demand

Contributions to the Washington-based IMF were controversial inside and outside the 17-nation euro region. The most potent central bank among the euro users, Germany’s Bundesbank, coupled its 41.5 billion-euro input to a promise that the aid not be earmarked for Europe.

Such recycling would violate euro rules, inspired by the Bundesbank, that bar central banks from financing government deficits. As a result, the euro area will lend to the IMF’s general resources, not to a special euro crisis fund.

France, the second-largest European Union state using the euro, will supply 31.4 billion euros, the statement said. Italy will deliver 23.5 billion euros and Spain 14.9 billion euros.

The three countries drawing on emergency loans to escape default -- Greece, Ireland and Portugal -- weren’t asked to contribute, the Greek Finance Ministry said. Amounts pledged by four EU countries outside the euro -- the Czech Republic, Denmark, Poland and Sweden -- weren’t immediately disclosed.

Ten days after U.K. Prime Minister David Cameron battled euro leaders over crisis management at a Brussels summit, Britain’s wariness of the IMF program sabotaged the euro region’s goal of drumming up 50 billion euros from the rest of the EU.

U.K. Deferral

“The U.K. has always been willing to consider further resources for the IMF, but for its global role and as part of a global agreement,” the Treasury said in an e-mailed statement.

The success of the IMF strategy hinges on how other major powers react. While talks are under way with China, there is “no chance” that Congress will approve more U.S. money, German Finance Minister Wolfgang Schaeuble said on Deutschlandradio.

“The EU would welcome G-20 members and other financially strong IMF members to support the efforts to safeguard global financial stability by contributing to the increase in IMF resources so as to fill global financing gaps,” Luxembourg Prime Minister Jean-Claude Juncker, who chaired the conference call, said in the statement.

Europe is piecing together a strategy for containing the crisis, which started with the Greek government uncovering an unexpected budget hole in October 2009 and led to 256 billion euros in bailouts for Greece, Ireland and Portugal.

December Summit

After “comprehensive” fixes hammered out in July and October quickly fizzled, European leaders were careful not to oversell the latest strategy, unveiled at sunrise Dec. 9 after an all-night wrangle.

The keystone, demanded by German Chancellor Angela Merkel, is a new treaty cementing balanced-budget rules and making it harder for violators to wriggle free from penalties. Negotiations begin tomorrow on the text, with the goal of signing the treaty in March.

While no government has been punished for a deficit above the limit of 3 percent of gross domestic product in the euro’s 13-year history, the renewed vow of fiscal probity was designed to encourage action by the independent central bank.

The pledge marked a “breakthrough,” the ECB’s president, Mario Draghi, told a European Parliament committee in Brussels today. “The new fiscal compact is an essential signal, showing a clear trajectory for the future evolution of the euro area.”

ECB Purchases

The ECB said it settled 3.36 billion euros of bond purchases in the week ending Dec. 16, up from 635 million euros the week before. The Frankfurt-based ECB’s next crisis-fighting act comes tomorrow, when it is expected to flood the banking system with three-year loans.

“I cannot put a figure to it, but I would think that it would be significant,” ECB Vice President Vitor Constancio told Bloomberg Television in Frankfurt. “It’s an important instrument for banks.”

Bonds of Italy and Spain rallied on expectations that the ECB’s unprecedented long-term loans will lead banks to buy more government debt. Two-year yields fell 14 basis points to 5.15 percent in Italy and 11 basis points to 3.35 percent in Spain.

At the same time, Draghi said the central bank’s bond- buying operations won’t go on forever, indicating that countries such as his native Italy can’t count on massive ECB interventions to reduce their borrowing costs.

The ECB will start in January to act as a market agent for the European Financial Stability Facility, the 440 billion-euro government-backed rescue fund set up in May 2010 and due to be replaced by a permanent fund next year.

To contact the reporters on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

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

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Apple Wins Patent Ruling Banning Some HTC Phones

By Susan Decker - Dec 20, 2011 6:46 AM GMT+0700
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A customer examines an HTC Corp. Rhyme mobile handset device at an HTC store in Taipei on Dec. 14, 2011. Photographer: Ashley Pon/Bloomberg

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Dec. 20 (Bloomberg) -- Brian Marshall, a San Francisco-based analyst at ISI Group, talks about the patent dispute between Apple Inc. and Taoyuan, Taiwan-based HTC Corp. Apple won a patent-infringement ruling that bans some HTC smartphones from the U.S. starting next year, bolstering efforts to prove that devices running Google Inc.’s Android operating system copy the iPhone. Marshall speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)

Apple Inc. (AAPL) won a patent-infringement ruling that bans some HTC Corp. (2498) smartphones from the U.S. starting next year, bolstering efforts to prove that devices running Google Inc.’s Android operating system copy the iPhone.

The U.S. International Trade Commission, in a review of a judge’s findings in July, said yesterday that HTC is violating one Apple patent related to data-detection technology and issued a limited import exclusion order that takes effect April 19.

“HTC will completely remove it from all of our phones soon,” Grace Lei, general counsel for Taoyuan, Taiwan-based HTC, said in an e-mail. The six-member commission determined that three other patents in the case weren’t infringed.

While less than what Apple sought, the ruling gives the company its first victory in patent cases designed to slow the growth of Android, which former Chief Executive Officer Steve Jobs claimed “ripped off the iPhone.” Apple has one other case against HTC, as well as complaints against Samsung Electronics Co. and Motorola Mobility Holdings Inc., and is involved in more than a dozen other cases before the trade commission.

“The battle between Apple and Android is going to continue,” said Peter Toren, a patent lawyer with Shulman Rogers in Potomac, Maryland, who has been watching the cases. “I’m not sure this decision, the way it is, is enough to push the parties to settlement. Apple doesn’t have the leverage of a total exclusionary order.”

Nexus One

The list of affected products and a full reason for the commission’s decision, which is subject to appeal and a presidential review, wasn’t immediately made public. Apple’s original complaint named HTC’s Nexus One, Touch Pro, Diamond, Tilt II, Dream, myTouch, Hero and Droid Eris.

Kristin Huguet, a spokeswoman for Cupertino, California- based Apple, declined to discuss the possibility of a settlement. She repeated the company’s position that “competition is healthy, but competitors should create their own original technology.”

Representatives from Google had no immediate comment.

The ruling is the first definitive decision in the dozens of patent cases that began to proliferate in 2010 as smartphone makers battle over a market that Strategy Analytics Inc. said increased 44 percent last quarter from a year earlier to 117 million phones worldwide. HTC, the second-largest maker of Android phones, used its partnership with Google to help transform itself from a contract manufacturer founded in 1997 to the biggest U.S. smartphone seller in the third quarter.

HTC Sales

HTC generated about $5 billion in U.S. sales last year, according to a separate patent complaint it filed at the trade agency against Apple. That’s more than half of HTC’s $9 billion (NT$275 billion) in global sales last year.

The commission’s order applies to new phone imports and doesn’t force HTC to pull existing devices off U.S. store shelves. The company can import refurbished phones to fulfill warranties or insurance contracts through Dec. 19, 2013.

“This exemption does not permit HTC to call new devices ‘refurbished’ and to import them as replacements,” the commission said.

Apple’s so-called ’647 patent covered a feature in which the phone recognizes a telephone number so it can be stored in directories or called without dialing.

“The ’647 patent is a small user interface experience,” Lei said. The company is pleased with the commission’s overall decision, and “we respect it.”

IPhone 4s, Galaxy

HTC phones accounted for 24 percent of the U.S. smartphone market in the third quarter, based on shipments, Palo Alto, California-based researcher Canalys reported Oct. 31. Samsung held 21 percent of the market, and Apple 20 percent. The market is volatile, and the Apple iPhone 4s that went on sale in October and Samsung’s newest Galaxy phone are likely to change the rankings for the fourth quarter.

Apple contended in its complaint that the HTC phones infringed four patents. Administrative Law Judge Carl Charneski in July sided with Apple for two of the patents: the data- detection one and the other covering the transmission of multiple types of data. The commission overturned the judge’s findings on that patent, and affirmed his determination that the remaining two patents weren’t infringed, which covered ways software programs are written and executed.

The commission, a quasi-judicial arbiter of trade disputes with the power to block products that infringe U.S. patents, chose in September to review Charneski’s findings.

‘Destroy Android’

Apple has a second complaint pending before the commission that claims other HTC smartphones and Flyer tablet computers infringe five patents related to software architecture and user interfaces. Apple also has cases before the trade commission and in district courts against Samsung and Motorola Mobility, which Google agreed to acquire in August.

The fight can be traced back to a decision by Jobs in March 2010 to file the HTC case, the first patent complaint by a device maker targeting Google’s Android operating system. Jobs, who died Oct. 5, made it his mission “to destroy Android,” which he said “ripped off the iPhone, wholesale,” according to Walter Isaacson’s biography of the Apple founder.

HTC has retaliated with two trade commission cases against Apple, one submitted last year and one in August. HTC lost a preliminary ruling by a judge in the case filed last year, a decision that the commission is now reviewing. The other case has yet to be decided. S3 Graphics Co., a company HTC agreed to buy in July, also has two commission cases against Apple, one of which Apple won last month.

Mobile Advertising

Google, which hasn’t been named in any of the Apple cases, denies copying the iPhone and said in a filing that Apple is trying to control the U.S. smartphone market through litigation.

HTC’s Android devices “are helping prevent Apple’s iOS from becoming the sole viable mobile platform and thus ‘locking in’ consumers and software developers to that platform,” Google said in the Oct. 6 filing.

Google’s Android accounts for about 70 percent of the smartphone operating systems used in the U.S., according to Canalys. Mountain View, California-based Google licenses Android to handset makers for free as a way to further its business of selling display and search advertising on mobile devices.

Google’s share of this year’s estimated $2.1 billion U.S. mobile-ad market will expand to 24 percent from 19 percent in 2010, Framingham, Massachusetts-based researcher IDC said Dec. 13. Millennial Media Inc.’s slice may climb to 17 percent from 15 percent, and Apple’s will decline to 15 percent from 19 percent.

The case is In the Matter of Certain Personal Data and Mobile Communications Devices and Related Software, 337-710, U.S. International Trade Commission (Washington).

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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Kim Jong Il’s Death May Trigger Nuclear Crisis

By Indira A.R. Lakshmanan and Nicole Gaouette - Dec 20, 2011 3:52 AM GMT+0700

The death of North Korean dictator Kim Jong Il presents a potential crisis for President Barack Obama, complicating U.S. efforts to press the regime to abandon its nuclear arsenal and cease belligerent behavior.

The demise of the 70-year-old ruler -- who frustrated three U.S. administrations with his pursuit of nuclear weapons, threats toward American allies and economic mismanagement that resulted in mass starvation -- ushers in a period of uncertainty for the isolated communist regime and North Asia. It increases the danger of misjudgment on the Korean peninsula, where 1.7 million troops from North and South Korea and the U.S. square off. The U.S. has 75,000 troops stationed in South Korea and Japan and is bound by treaty to defend its allies.

“This is potentially a game-changing event,” Victor Cha, a former chief U.S. negotiator for North Korean nuclear talks under President George W. Bush, said in an interview. “If you asked experts what would be the most likely scenario for North Korea to collapse, the answer everyone would give you is ‘If Kim Jong Il died today.’ We’re in that scenario.”

The transition in North Korea adds to risks for South Korea, Asia’s fourth-largest economy. The Kospi index of shares closed down 3.4 percent in Seoul, and South Korea’s won sank 1.4 percent to 1,174.80 per dollar.

The prospect of a crisis in the region -- whether a hardening of confrontational behavior or a collapse of the impoverished state triggering a humanitarian emergency -- is another foreign policy challenge for the Obama administration 11 months before the U.S. presidential election.

Asia ‘Pivot’

Uncertainty over North Korea thrusts Asia to the forefront of the administration’s agenda, just weeks after Secretary of State Hillary Clinton’s statement that the U.S. plans to “pivot” its attention to Asia. Stability in Asia is essential to Obama’s aim to make the region the engine of U.S. economic recovery, largely through expanded trade.

North Korea was at the top of Clinton’s agenda today. She met with her special representative for North Korea, Glyn Davies, and later held talks with Japanese Foreign Minister Koichiro Gemba, whose visit to Washington was planned before Kim’s death.

“We both share a common interest in a peaceful and stable transition in North Korea as well as in ensuring regional peace and stability,” Clinton said at an appearance with Gemba.

‘Deeply Concerned’

“We reiterate our hope for improved relations with the people of North Korea and remain deeply concerned about their well being,” Clinton added. Gemba said he and Clinton had agreed on the need for “concrete action” by North Korea on the nuclear issue.

At the White House, press secretary Jay Carney said the U.S. has “no new concerns” about North Korea’s nuclear arsenal. The U.S. is monitoring the situation in North Korea and has consulted with allies South Korea and Japan as well as China and Russia, the other members of the six-party talks focused on North Korea shedding its nuclear weapons, Carney said at a briefing.

Strong Message

Kim’s death could scuttle what may have been the first U.S. diplomatic breakthrough with the hermetic regime in a few years. South Korea’s Yonhap News reported two days ago that the U.S. would provide food aid to North Korea with the understanding that the regime would suspend uranium enrichment. U.S. officials declined to confirm the reports, and the death of Kim may put any deal on hold.

“What needs to be done quickly is to openly offer North Korea a reasonable path forward that does not appear to be designed to undermine the regime, while in private sending a strong message that there is no other option but for North Korea to begin the process of opening up,” said Charles Pritchard, who led U.S.-North Korea talks in 1997 and now is president of the Korea Economic Institute in Washington.

Cha, now at the Center for Strategic and International Studies in Washington, likened the focus on North Korea’s tenuous situation to efforts to peer into a fishbowl.

“We’re all going to try to look in from the outside, and at same time I think everyone will be very careful about not sticking their hand in the fishbowl,” Cha said.

Worrisome Scenarios

Perhaps most probable among worrisome scenarios, according to former U.S. officials, is that Kim’s death may prompt his third-born son and anointed successor, Kim Jong Un, to accelerate nuclear weapons development and menace his neighbors in a show of force to consolidate his control.

“One question is: Will Kim Jong Un and others around him do something to prove him being in command?” said Michael Green, former National Security Council senior director for Asia under President George W. Bush. “In the next 48 hours we won’t see that, but in the next weeks and months, I suspect we may.”

The Korea peninsula has technically been in a state of war since the 1950-1953 Korean War ended in a cease-fire rather than a peace treaty.

North Korean media has reported that the country will become “a full nuclear weapons state” in 2012; April will mark the 100th anniversary of the birth of Kim Il Sung, the founder of the regime and its cult of dynastic personality. Kim Il Sung died in 1994, after grooming his son Kim Jong Il for a decade and a half to take over.

‘Communist Monarchy’

Kim Jong Il’s third son has had far less preparation or time to consolidate his authority. Believed to be 28 or 29, he was publicly tapped for the job by his father only last year, when he was appointed to the second-highest military post within the ruling Workers’ Party of Korea.

“It’s the only communist monarchy in the world, and the king is dead. And when the king dies, even when he set his succession, there can still be rivalry and civil war,” said Green, now at CSIS and Georgetown University.

While the North has twice conducted underground nuclear tests in the past five years, Green said U.S. officials are concerned that the regime may go further by showcasing progress on triggering devices and miniaturization of a nuclear payload, or by launching more advanced ballistic missiles.

Bruce Klingner, a Korea specialist at the Heritage Foundation in Washington and a former deputy chief for Korea at the Central Intelligence Agency, said Kim Jong Un is unlikely to abandon his father’s policies or his nuclear weapons as he seeks to consolidate his position. Nuclear weapons, Klingner said in an interview, “provide security against the U.S. and South Korea in case of attacks” and force the world to “pay attention to Pyongyang.”

Crippled Economy

Kim leaves behind an economy crippled by mismanagement, crop failures, sanctions and a bungled currency revaluation. North Korea’s economy is less than 3 percent the size of South Korea’s and has relied on economic handouts since the 1990s, when an estimated 2 million people died from famine. The United Nations and the U.S. last year tightened economic sanctions that were imposed on the North for its nuclear weapons activities and two attacks in 2010 that killed 50 South Koreans.

The Obama administration has said that it resumed direct talks in recent months after determining that engaging the regime might lessen the risk of violent provocations.

“If there was a deal on food aid, whatever deal has been struck is pretty much off the table now,” Bryce Wakefield of the Woodrow Wilson International Center for Scholars, a Washington-based research institute, said in an interview. The U.S. wouldn’t be able to count on the North “to hold up its end of the deal,” he said, and it will take time for North Korea to determine its own direction.

Scott Snyder, a senior fellow for Korea studies at the Council on Foreign Relations in Washington, said “it will be more difficult to get answers or positions out of Pyongyang under current circumstances.”

To contact the reporters on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net; Nicole Gaouette in Washington at ngaouette@bloomberg.net

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

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Cornell, Technion Are Chosen by New York City to Create Engineering Campus

By Oliver Staley and Henry Goldman - Dec 20, 2011 6:04 AM GMT+0700

Cornell University and Technion- Israel Institute of Technology won a New York City contest to build an engineering campus with a grant of land on Roosevelt Island and $100 million for infrastructure improvements.

The NYCTech Campus is intended to bolster job creation in the city and may generate 600 spinoff companies and $23 billion in economic activity over the next three decades, Mayor Michael Bloomberg said at a news conference today.

Cornell, based in Ithaca, New York, and Haifa-based Technion beat out six competing bids, including one from Stanford University. Cornell announced an anonymous $350 million gift Dec. 16 to support its bid, hours after Stanford said it was withdrawing from the contest.

“Of all the applications we received, Cornell and Technion’s was the boldest and most ambitious,” Bloomberg said. “In a word, this project will be transformative.”

The city is continuing negotiations with Columbia University, New York University and Carnegie Mellon University about supporting an additional engineering project in the city, Bloomberg said.

Classes in 2012

Cornell plans to begin offering classes next year in leased space as it begins building on the campus at Roosevelt Island, in the East River. Cornell said it will move into the campus by 2017 and finish construction of 1.3 million square feet by 2027. By 2043, the campus will have 2,500 students and 280 professors, according to a statement from the mayor’s office.

The new campus will generate more than $23 billion in overall economic activity and $1.4 billion in tax revenue over the next 30 years, according to the statement. The project will create 20,000 construction jobs and 8,000 permanent jobs. The estimated 600 spinoff companies will create another 30,000 jobs.

“This is not a moment for a touchdown dance for Cornell or Technion,” Cornell President David Skorton said at the press conference. “This is a moment for a touchdown dance for New York City.”

The project will cost about $1.5 billion to build, Skorton said. The university doesn’t plan on borrowing to finance the project and instead will rely on tuition and philanthropy, technology license fees and corporate partnerships, he said.

Best Proposal

The Cornell-Technion proposal offered the most students, most faculty, biggest facility and most aggressive time frame, the mayor said.

Cornell has a medical school on the Upper East Side of Manhattan. About 20,000 graduate, undergraduate and postgraduate students attend the university, and there are about 50,000 Cornell alumni in New York City. The institution will continue to operate its engineering school in Ithaca.

“It is a tremendous boost in morale and recognition for Cornell,” said Inge Reichenbach, the vice president of development at Yale University who held the same role at Cornell for a decade. “It is an amazing opportunity.”

Technion, an 87-year-old Israeli science and engineering institution with almost 13,000 students, counts Albert Einstein as an early supporter. The scientist was president of the first Technion society, according to its website. Technion professor Dan Schechtman was awarded the Nobel Prize in chemistry on Dec. 10.

“We are not going to have an extension of the Technion or Cornell,” said Technion President Peretz Lavie. “We are going to have something new.”

An engineering campus in New York will help tie Cornell more closely to the city and provide a more viable location for companies that are spun out of the school, said Ronald Ehrenberg, an economics professor who directs the Cornell Higher Education Research Institute.

Bold Thinking

“The trustees and the president have long wanted to have a bigger presence in New York City,” Ehrenberg said. “The notion that you can be a great international university in the 21st century if you’re located in rural upstate New York doesn’t work.”

Skorton deserves credit for bold thinking, Ehrenberg said.

“I’m absolutely delighted for him,” Ehrenberg said. “To have leaders with a grand vision is incredible.”

Upon seeking requests for proposals in July, the mayor hailed the development of a “world-class” applied sciences and engineering school in the city. He said it would be “a critical driver of the further diversification of New York City’s economy” beyond its dependence on Wall Street, which provided about 7 percent of the city’s tax revenue in 2011, according to state Comptroller Thomas DiNapoli.

Cornell’s endowment was valued at $5.3 billion as of June 30, according to the university.

Cornell’s History

Cornell counts among its alumni Sanford “Sandy” Weill, former chairman of Citigroup Inc. in New York; Abby Joseph Cohen, senior investment strategist at Goldman Sachs Group Inc. in New York, and former U.S. Attorney General Janet Reno.

Founded in 1865 by Ezra Cornell and Andrew Dickson White, Cornell is the youngest university in the eight-member Ivy League. Ezra Cornell was an entrepreneur who believed in generating knowledge that could be put to practical use, Reichenbach said.

“Everything was geared to make it applicable for the benefit of mankind,” she said. “This opportunity is completely in sync with Cornell’s mission.”

Winning the contest, and receiving a $350 million donation, will catalyze fundraising for the university, Reichenbach said.

“This will be a validation of the institution and will galvanize all the alumni,” she said.

The project must get approval from City Council, the local community board, the city Planning Board and the city Department of Planning before construction may begin, as required by state law, said Julie Wood, spokeswoman for the mayor.

The mayor is founder and majority owner of Bloomberg LP, parent of Bloomberg News.

To contact the reporters on this story: Oliver Staley in New York at ostaley@bloomberg.net; Henry Goldman in New York at hgoldman@bloomberg.net

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

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AT&T Pulls $39B T-Mobile Bid, Will Take $4B Charge

By Scott Moritz - Dec 20, 2011 5:30 AM GMT+0700

AT&T Inc. (T) abandoned a $39 billion takeover bid for T-Mobile USA after underestimating opposition from regulators, thwarting its ambitions to become the biggest U.S. wireless carrier.

AT&T will take a pretax charge of $4 billion to reflect cash payments and other considerations due to T-Mobile-owner Deutsche Telekom AG (DTE), according to a statement today from the Dallas-based company.

AT&T failed to convince the Justice Department, which sued to block the transaction in August, that it could remedy the market impact of absorbing T-Mobile. AT&T would have spent months in litigation to try to win court approval for buying the nation’s No. 4 mobile-phone operator in the largest acquisition announced this year. The company also faced possible opposition from the Federal Communications Commission.

“They rolled the dice and took their chances,” said Craig Moffett, a Sanford C. Bernstein & Co. analyst in New York. “In the end, it didn’t work out, but that doesn’t mean it was a mistake to try.”

AT&T’s decision came after the judge in the Justice Department lawsuit agreed on Dec. 12 to put the case on hold as the telephone company decided whether or how to revise the transaction. The delay may have made it more difficult for AT&T to close the deal by the Sept. 20 deadline.

Stephenson’s Confidence

AT&T Chief Executive Officer Randall Stephenson said in a statement today that efforts by regulators to block the deal may hurt customers and industry investment.

“To meet the needs of our customers, we will continue to invest,” Stephenson said, adding that regulators need to allow more spectrum sales and reform rules to “meet our nation’s longer-term spectrum needs.”

Stephenson said in March, when the deal was announced, that he was confident of receiving regulatory clearance. He said the combination would help improve service, speed up investment in faster networks and drive wireless expansion in rural areas. The deal would have added T-Mobile’s 33.7 million customers to AT&T’s 100.7 million subscribers, surpassing Verizon Wireless’s 107.7 million.

“They made an unprecedented move bidding on T-Mobile and appear to have miscalculated the risks and the regulatory opposition,” said Kevin Smithen, an analyst with Macquarie Capital USA Inc.

Critics of the deal said it would eliminate an aggressive price competitor, driving up subscription costs. T-Mobile’s monthly wireless plans are $15 to $50 cheaper than comparable AT&T plans, according to an analysis by Consumer Reports.

DT’s Plans

AT&T fell 0.7 percent to $28.55 in extended trading. As of the close of regular trading today, the stock had lost 2.2 percent this year. Deutsche Telekom lost 1.2 percent to 8.89 euros in Frankfurt today.

For Deutsche Telekom, the collapse of the deal leaves it with one more subscriber-losing business as the Bonn-based company confronts the fallout from Europe’s debt crisis. Deutsche Telekom had planned to use the proceeds to cut debt by 13 billion euros ($16.9 billion) and repurchase 5 billion euros of its shares. The company also needs funds to upgrade fiber and wireless networks in Germany and other European markets.

Deutsche Telekom said in a statement that its 2011 financial targets and shareholder remuneration policy won’t be affected by the deal’s termination. The company said it expects to receive the cash breakup fee by the end of the year.

AT&T and Deutsche Telekom pulled their applications to the FCC on Nov. 24, with AT&T announcing the same day that it would record $4 billion in costs this quarter to reflect the risk of the deal collapsing.

$7 Billion Breakup

The withdrawal came after FCC Chairman Julius Genachowski asked the commission on Nov. 22 to send the proposal to an agency judge for a hearing. The same move by the FCC in 2002 helped block EchoStar Communications Corp.’s acquisition of satellite-TV rival DirecTV.

According to the terms of the offer, AT&T must pay Deutsche Telekom a $3 billion breakup fee in cash, transfer radio spectrum to T-Mobile and strike a more favorable network-sharing agreement. Deutsche Telekom has valued the breakup package at as much as $7 billion.

In an effort to sell the deal to regulators and the public, AT&T vowed to honor the T-Mobile service plan prices after the merger. The company also vowed to bring 5,000 call-center jobs currently based overseas to the U.S. in the event of approval.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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U.S. Stocks Slump on Concern Europe Failing to Tame Sovereign Debt Crisis

By Rita Nazareth - Dec 20, 2011 4:35 AM GMT+0700

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Dec. 19 (Bloomberg) -- Rich Turnill, a portfolio manager at BlackRock Investment Management, talks about his investment criteria and strategy for the U.S., European and Asian stock markets. He speaks on Bloomberg Television's "InBusiness With Margaret Brennan." (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- James Staley, chief executive officer of JPMorgan Chase & Co.'s investment-banking unit, talks about the European sovereign debt crisis and the firm's business strategy. Staley, speaking with Erik Schatztker and Stephanie Ruhle on Bloomberg Television's "InsideTrack," also discusses the impact of financial regulation on the industry. (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC, talks about the outlook for U.S. stocks and fixed-income markets. He speaks with Lisa Murphy and Dominic Chu on Bloomberg Television's "In the Loop." (Source: Bloomberg)

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Dec. 19 (Bloomberg) -- Paul Miller, managing director and banking analyst with FBR Capital Markets Corp., talks about job cuts by Wall Street banks, investment strategy and the outlook for the industry. Miller, speaking with Lisa Murphy and Dominic Chu on Bloomberg Television's "In the Loop," also discusses the impact of the European sovereign-debt crisis on the U.S. economy and banking regulation. (Source: Bloomberg)

U.S. stocks slumped, following a two-day advance in the Standard & Poor’s 500 Index, as financial shares tumbled and concern grew that European officials were failing to make progress in taming the debt crisis.

Bank of America Corp. (BAC) fell 4.1 percent, dropping below $5 for the first time since March 2009, on a report that large financial institutions will have to hold extra capital. JPMorgan Chase & Co. (JPM) and Morgan Stanley declined more than 3.7 percent. Alcoa (AA) Inc., Hewlett-Packard Co. (HPQ) and Microsoft Corp. (MSFT) slid at least 1.8 percent to pace losses among the biggest companies.

The S&P 500 declined 1.2 percent to 1,205.35 at 4 p.m. New York time. The benchmark measure for American equities advanced 0.7 percent over the previous two days. The Dow Jones Industrial Average decreased 100.13 points, or 0.8 percent, to 11,766.26 today. About 6.3 billion shares changed hands on U.S. exchanges, or 21 percent below the three-month average.

“It’s not all roses and candy,” Malcolm Polley, who oversees $1.1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania, said in a telephone interview. “You have a stubborn debt problem in Europe. The level of distrust has been -- you guys say you have things fixed and then it turns out you don’t. Until it’s actually done, we’re not going to believe you.”

The S&P 500 has fallen 4.2 percent in 2011, poised to snap a two-year (SPX) rally, amid concern about slower global growth as European leaders struggled to solve the region’s debt crisis. Financial shares had the biggest decline among 10 groups in the benchmark measure this year, tumbling 23 percent.

Substantial Risks

Stocks fell today as European Central Bank President Mario Draghi said substantial risks to the economy remain and the law forbids him from increasing government bond purchases to fight the crisis. Equities extended losses as Dow Jones reported that European Union finance ministers failed to agree on raising the joint ceiling of their temporary and permanent rescue funds.

The first part of 2012 will be “risk off” as Europe’s sovereign-debt crisis encourages demand for safety, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co.

“This idea of austerity first, money second is a tougher road to take in Europe,” James Dunigan, who helps oversee $103 billion as chief investment officer in Philadelphia for PNC Wealth Management, said in a telephone interview. “It may end up in the right result, but it’s going to take a lot longer. The tendency is to reduce risk, not add it.”

All 10 groups in the S&P 500 (SPXL1) retreated, as gauges of financial and commodity shares had the biggest declines. The Morgan Stanley Cyclical Index slid 2.3 percent amid concern about economic growth.

Banks (SX7P) Tumble

The KBW Bank Index (BKX) slumped 2.7 percent as all of its 24 stocks fell. The Federal Reserve is expected to embrace a new global framework that requires big banks to hold extra capital, the Wall Street Journal reported, citing people familiar with the situation.

“For the large U.S. banks, it makes sense that they would be asked to hold higher levels of capital,” Stewart Capital’s Polley said. “They are a systemically bigger problem.”

Banks should be forced to reveal more data about their financial reserves so that they can’t conceal poor management decisions and excessive risk-taking, global regulators said. Lenders should “disclose the full list” of instruments that they are counting toward meeting their required minimum capital levels, the Basel Committee on Banking Supervision said in an e- mailed statement today.

BofA Below $5

Bank of America, the second-biggest U.S. lender, retreated 4.1 percent to $4.99. A sustained decline below $5 could reduce its appeal to some investors, said Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina.

“As active managers, we have screens that usually prohibit us from buying stocks under $5,” Teal said in an interview, citing the greater volatility and risk of such equities.

JPMorgan tumbled 3.7 percent to $30.70. Morgan Stanley (MS) dropped 5.5 percent to $14.16. Citigroup Inc. (C) slumped 4.7 percent to $24.82.

Some of the biggest companies fell. Alcoa, the largest U.S. aluminum producer, dropped 3.2 percent to $8.53. Hewlett-Packard declined 2.8 percent to $25.13. Microsoft slid 1.8 percent to $25.53.

A measure of raw material (S5MATR) shares in the S&P 500 lost 1.9 percent. Copper declined on concern that demand will ease after property prices dropped in China, the world’s top consumer of industrial metals. Freeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper miner, lost 3.4 percent to $35.74.

Century-Old

Schnitzer Steel Industries Inc. (SCHN) tumbled 9.2 percent to $41.54. The century-old steel recycler reported preliminary first-quarter earnings that were less than analysts projected because of slower demand and a decline in sales prices.

Cablevision Systems Corp. (CVC) rose 2 percent to $13. The cable company was added to the Top Picks Live list at Citigroup, which said the stock’s declines after earnings reports that missed analyst estimates and the departures of executives were “a touch extreme.” The company and Verizon Communications Inc. settled a lawsuit over ads that Cablevision claimed misrepresented its Internet speeds, a Verizon spokesman said.

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

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

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