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Selasa, 13 Januari 2009

Updates, advisories and surprises

Mesa Air net loss narrows

(6:25 AM ET) LONDON (MarketWatch) -- U.S. airline Mesa Air Group Inc. (MESA:

Mesa Air Group Inc

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Last: 0.29+0.01+2.86%
3:59pm 01/12/2009

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MESA 0.29, +0.01, +2.9%) said Tuesday that its fiscal fourth-quarter net loss narrowed to $30.6 million, or $1.15 a share, from $68.2 million, or $2.37 a share, a year earlier. Revenue for the quarter fell 0.8% to $325.3 million as a fall in capacity was partially offset by an increase in fuel revenue. Losses from continuing operations for the quarter were $22.3 million, or 83 cents a share. Pro forma net income, which excludes among other things the impact of vendor settlements, equity investments and a settlement with Aloha Airlines, rose 41% to $3.1 million.

EADS CEO Gallois reiterates financial targets

(6:19 AM ET) NEWPORT, Wales (MarketWatch) -- European aerospace and defense giant and Airbus parent EADS (fr:FR:005730: news , chart , profile ) on Tuesday confirmed its financial targets for 2008. "None of our objectives are changed because of the economic crisis," EADS Chief Executive Louis Gallois said at a press conference. He stressed, however, that the top priority for the group at the moment is cash preservation and that the company doesn't plan to make a major acquisition in the current climate. Regarding Airbus, Gallois said EADS was ready to increase financing support to customers in order to protect deliveries in 2009. He also said that Airbus was ready to adjust production rates if necessary to avoid building inventories.

QLT says appeals court upholds patent ruling against firm

(3:37 AM ET) TEL AVIV (MarketWatch) -- QLT Inc., (QLTI:

QLT Inc.

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4:00pm 01/12/2009

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QLTI 2.46, -0.19, -7.2%) (ca:CA:QLT: news , chart , profile ) the Vancouver biopharmaceutical company focused on ophthalmology, said the U.S. Court of Appeals for the First Circuit affirmed a lower court's judgment against it in a patent case brought by Massachusetts Eye and Ear Infirmary. The court upheld a ruling from U.S. District Court for the District of Massachusetts in a case involving a patent and certain research results of the infirmary as they relate to QLT's Visudyne drug. QLT said it is considering whether to appeal the case further. The district court found QLT liable under Massachusetts state law for unfair trade practices and awarded the infirmary 3.01% of past, present and future sales of the drug, the company said. QLT estimates that it must pay the infirmary $113.2 million plus legal fees and interest. In addition, Massachusetts General Hospital is claiming higher payments from QLT based on the amounts QLT must pay the infirmary, a claim QLT said it disputes.

Peugeot sales decline as market share holds steady

(2:35 AM ET) LONDON (MarketWatch) -- French car maker Peugeot (fr:FR:012150: news , chart , profile ) said Tuesday that its total sales of vehicles in completed and kit form in 2008 fell 4.9% to 3.26 million units. The group said its global market shares was maintained at 5% and its market share in Western Europe was steady at 13.8%, though total registrations in the region dropped 8.6% to 2.13 million units.

Mesa Air net loss narrows

U.S. airline Mesa Air Group Inc. (MESA:

Mesa Air Group Inc

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3:59pm 01/12/2009

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Health Management Associates sees Q4 EPS of 6C

Health Management Associates (HMA:

Health Management Associates, Inc

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4:02pm 01/12/2009

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HMA 1.84, -0.24, -11.5%) said that it expects to report fourth-quarter net revenue from continuing operations of around $1.1 billion and adjusted earnings per share, also from continuing operations, of approximately 6 cents a share. Analysts had been expecting average earnings of 9 cents a share, according to data compiled by FactSet. Admissions from HMA's continuing hospital operations were flat to 1.0% lower compared to same point a year ago, which the company said marked a measurable improvement compared to the last several quarters. For 2009, the firm expects revenue in a range of $4.55 billion to $4.65 billion and earnings per share of between 37 cents to 45 cents.

EADS CEO Gallois reiterates financial targets

European aerospace and defense giant and Airbus parent EADS (FR:005730:

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12:40pm 01/13/2009

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FR:005730 13.45, +0.23, +1.7%) on Tuesday confirmed its financial targets for 2008. "None of our objectives are changed because of the economic crisis," EADS Chief Executive Louis Gallois said at a press conference. He stressed, however, that the top priority for the group at the moment is cash preservation and that the company doesn't plan to make a major acquisition in the current climate. Regarding Airbus, Gallois said EADS was ready to increase financing support to customers in order to protect deliveries in 2009. He also said that Airbus was ready to adjust production rates if necessary to avoid building inventories.

Senin, 12 Januari 2009

Obama weighs decision about bailout funds

WASHINGTON (Reuters) - President-elect Barack Obama vowed to restructure a financial rescue plan to save more U.S. families from home foreclosures, as he considered on Sunday whether to seek additional funds from a $700 billion bailout program.

Obama's aides have been in discussions with the White House over whether President George W. Bush should ask Congress for permission to use the remaining $350 billion of the funds, which are aimed at stabilizing the financial system.

The purpose of the request, which would be formally submitted by Bush, would be to have the funds in place soon after Obama takes office on January 20.

But it may prove difficult to get approval from Congress because the bailout program is unpopular with many lawmakers who feel too much of the money has already been given to Wall Street firms with few strings attached.

The legislators want some of the remaining money to be used instead to help struggling homeowners.

Massachusetts Sen. John Kerry, after leaving a meeting with other senators and some of Obama's top aides, said the president-elect was close to a decision on the bailout fund, known as the Troubled Asset Relief Program, or TARP.

"It's my understanding that the president-elect is going to make a judgment somewhere in the next hours," Kerry told reporters. "I think the president-elect will make known -- because he's the one who's going to be controlling that -- what he would like to see happen on that."

Top Obama aides Larry Summers and Jason Furman were holding closed-door meetings with Kerry and other senators to discuss, not only the bailout funds but also a proposed $775 billion stimulus package that Obama and the Democrats say is needed to pull the U.S. economy out of a deep slump.

A COLLABORATIVE EFFORT

Senate Democrats said the plan was undergoing changes from an original outline that called for setting aside 40 percent of the money for tax cuts. Much of the rest of the package would go toward public works projects such as road and school construction and social safety-net programs like unemployment insurance.

Some Democrats want to see more energy-related tax breaks and also questioned the structure of some of the tax cuts for families and businesses.

"There are significant changes already being put in place and being contemplated," Kerry said. "I think it's moving in the right direction and I think we're making a lot of progress."

He said he believed there would be changes to the proposed $1,000 tax cut for middle-class families and to the credits aimed at encouraging businesses to hire.

After facing some resistance from Democrats last week on some aspects of the package, Obama emphasized his staff was working closely with the Democratic-led Congress.

"We're going to have a collaborative, consultative process with Congress over the next few days," Obama said in an interview on ABC's "This Week." "We're not trying to jam anything down people's throats."

Government figures last week showed the U.S. unemployment rate surged in December to 7.2 percent, capping a year in which employers slashed 2.6 million jobs, the most since 1945.

Obama says passage of the stimulus plan by mid-February is crucial to avoiding further job losses.

The Obama team sees a reworking of the bailout program as another way to throw the economy a lifeline.

He emphasized in the ABC interview that he agreed with lawmakers' concerns about how the program had been managed.

"When you look at how we have handled the home foreclosure situation and whether we've done enough in terms of helping families ... we haven't done enough there," Obama said.

Congress must give its approval to unlock the rest of the TARP funds and lawmakers who have been skeptical about the program have said they may oppose that.

"Until there is a demonstrated need in our economy and a plan to address that need, I think it would be irresponsible for them to release that money," House Minority Leader John Boehner, an Ohio Republican, told CBS's "Face the Nation".

Sabtu, 27 September 2008

Lending freeze at all-time high

Just when it looked like relief was on its way, lending seized up again Friday.

With the Treasury's $700 billion financial industry bailout proposal in jeopardy, and with Thursday night's collapse of an agreement and subsequent JPMorgan Chase takeover of Washington Mutual - the largest bank failure in the nation's history - credit markets have again stalled.

"Things have frozen over again," said Steve Van Order, chief fixed income strategist with Calvert Funds. "Banks are nervous about lending to each other, and the commercial paper market has come to a standstill."

Market gauges of lending showed higher prices for loans between banks. When lending tightens in this way, businesses and consumers have to pay more for loans, like mortgages, or can't get them at all.

For instance, one gauge that banks use to determine lending rates rose to an all-time high. The difference between the London interbank offered rate, or Libor, and the Overnight Index Swaps rose to an unprecedented 2.08%. The Libor-OIS "spread," or difference between the two rates, measures how much cash is available for lending between banks. The higher the spread, the lower availability of cash for lending.

Another lending measure rose to a 26-year high. The "TED spread" - the difference between three-month Libor, what banks pay to borrow money for three months, and the three-month Treasury borrowing rates - rose to 2.92% after hitting 3.1% earlier in the day, the widest margin for that measure since 1982. Just a month ago, the TED spread was at 1.11%.

With loads of troubled assets on their balance sheets, banks are hesitant to take on more loans if the risk of default is high. Furthermore, when banks need to write down those assets, they have less cash on hand to issue loans. That stops the financial system's gears from turning, in turn hurting customers who need a loan to finance a home, a car or tuition.

"The interbank lending markets are clogged up, because there is a freeze-up in the pipes that normally carry funding from central banks to banks to customers," Van Order explained.

How WaMu makes it worse: The announcement that JPMorgan Chase (JPM, Fortune 500) acquired the banking assets of Washington Mutual (WM, Fortune 500) late Thursday after the beleaguered thrift was seized by federal regulators sent yet another shock to already skittish lenders.

"JPMorgan is going to have to take a writedown and ultimately raise capital," Van Order said. "The bank's lines of credit are being drawn on...and the acquisition puts another strain on lending."

As JPMorgan tries to finance its purchase, it priced $10 billion in new capital Friday morning, building on the $8 billion that was included in the deal. But other banks without the access to capital that JPMorgan has are finding loans hard to come by.

"More financial corporations are finding it tight in the commercial paper market," Van Order noted. "Some corporations are using lines of credit with banks, and as those get tapped it uses up marginal capacity to make new loans."

The bailout's impact: With the credit markets all but stopped, the Bush administration hopes that the removal of risky assets from the financial institutions will restore the flow of credit. But as partisan politics put the enactment of a bill in doubt, banks worry that the wrench in the gears may not be removed anytime soon.

"If banks don't have the market to sell off illiquid assets, we're just going to be stuck in the same situation a year from now," Van Order said. "There's just no market for whole classes of asset- backed securities, and the government is the only one that is large enough to create a market."

With the government the only potential buyer debating whether or not to make the deal, financial institutions continued to invest in less risky assets like government bonds.

Treasurys: The unprecedented events of the past two weeks have had investors moving into and out of Treasurys quickly. U.S. government bonds are considered one of the safest places to keep assets and as anxiety in the marketplace increases, so does demand for Treasurys.

"The holdup of the rescue plan and of course the failure of WaMu is once again flocking investors toward safety," said Peter Cardillo, chief market economist at Avalon Partners.

The benchmark 10-year note rose 20/32 to 101-24/32 and its yield fell to 3.79% from 3.84% late Thursday. Treasury prices and yields move in opposite directions.

The 30-year bond jumped 1-2/32 to 102-17/32 and its yield dipped to 4.35% from 4.39%.

The 2-year note rose 9/32 to 99-30/32, while its yield fell to 2.03% from 2.16%.

The yield on the 3-month note fell to 0.70% from 0.74% as prices ticked higher. Yields on 3-month Treasurys have remained at very low levels as demand for the notes has increased amid the uncertainty in the financial markets.

The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

On Thursday, bond prices were mixed as key lawmakers announced they had reached an agreement for the proposed $700 billion bailout of the financial system, which has been battered by the collapse of the housing market. Investors started tip-toeing out of the safe haven of government bonds; stocks rallied, sending the Dow Jones industrial average up 197 points.

But the bank failure and the breakdown in the bailout agreement sent investors running right back to the safe haven of Treasurys.

Looking for a lifeline: After days of negotiations in Congress, lawmakers said Thursday they were taking a revised bailout proposal to Treasury Secretary Henry Paulson.

But a meeting at the White House later on Thursday between President Bush, Congressional leaders and the presidential candidates failed to provide a conclusion, sending fresh anxiety to Wall Street that maybe the much-needed relief was not imminent.

"The financial markets are burning and the politicians are playing politics," said Cardillo. As the uncertainty mounts as to what form a bailout would eventually take, investors are returning to the perceived safety of government bonds, sending the prices of Treasurys higher.

As the situation in the financial sector continues to deteriorate, "people are trying to protect their assets and they are running into Treasurys," said Cardillo.

In order to pay for a costly rescue plan, the government would need to sell a lot more debt. On Thursday, the government auctioned $24 billion worth of 5-year notes. The Treasury received bids totaling nearly $46 billion, with a median yield of 3%.

WaMu Seized by U.S., Assets Sold to JPMorgan in Record Failure

Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

WaMu customers withdrew $16.7 billion since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said yesterday. Branches are open today and depositors have full access to their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said.

The failure of WaMu, which has $188 billion in deposits, ratchets up pressure on lawmakers trying to piece together a rescue package for the nation's financial system. The government's inability yesterday to reach agreement on a bailout and the seizure of the biggest savings and loan sparked a sell- off of bank stocks, led by a 25 percent tumble in Wachovia Corp.

``All eyes are now on Wachovia,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York.

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.

JPMorgan became the biggest U.S. bank by deposits with the deal, acquiring WaMu's branch network for $1.9 billion.

``This is a fabulous franchise,'' JPMorgan Chief Executive Officer Jamie Dimon, 52, said in an interview. ``We think we got this at a price that protects us, where if we were wrong, it still protects us.''

Lehman, Merrill

WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was also absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan that the savings and loan valued at $4 a share.

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 16 cents on the New York Stock Exchange.

David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''

Share Sale

New York-based JPMorgan said today it sold $10 billion of shares at $40.50 apiece. The bank rose 33 cents, or 0.8 percent, to $43.79 in composite trading at 10 a.m.

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

``This is one of the reasons I own JPMorgan: They're going to win from all this,'' Schutz said. ``They're taking on credit risk, but they're not taking on any debt obligations.''

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

JPMorgan had 75 people involved in the transaction and ``bid to win'' because it wanted WaMu's assets, Dimon said on a conference call yesterday. JPMorgan used its own investment bank to value the mortgages, he said.

Bailout Support

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal. The plan was jeopardized yesterday as congressional Republicans failed to agree on its details.

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

Earnings Forecast

The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

WaMu had about 2,300 branches at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

`Commendable Stewardship'

``It is important to acknowledge that the largest U.S. thrift just failed and did so seamlessly with the commendable stewardship of the FDIC,'' Oppenheimer & Co. analyst Meredith Whitney wrote in a research note. ``Things could have played out much worse for all the deposit-taking parties involved.''

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

``There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,'' FDIC's Bair said.

Rise of WaMu

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

``There's a lot of sadness and a lot of people are hurt,'' Lee Lannoye, 71, who was chief credit officer at WaMu from 1988 to 1998, said yesterday. ``Having worked with Kerry Killinger for 10 years, I still absolutely cannot fathom where or why he went wrong, and what caused him to lead the company into taking the kinds of risks that they did.''

Fortis Says Financial Position `Solid' as Shares Fall (Update3)

Fortis, seeking to stem a sell-off that drove its stock down 35 percent this week, said the bank's financial position is ``solid.''

Chief Executive Officer Herman Verwilst told reporters at a press briefing in Brussels today that he's ``flabbergasted'' by the share decline and said the bank's market value doesn't reflect its worth. The efforts failed to bolster the stock, which fell a record 20 percent to 5.20 euros in Brussels trading, while the cost of protecting Fortis bonds from default surged.

Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it's seeking to bolster capital, and might even need more funds as financial markets deteriorate. Verwilst repeated today that the firm may sell more assets than anticipated as it becomes harder to raise money by other means.

``Investors are concerned Fortis may have to sell assets at knock-down prices,'' said Jaap Meijer, a London-based analyst at Dresdner Kleinwort who has a ``hold'' rating on the stock.

Fortis has fallen 71 percent this year, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros. Today's decline was the biggest since the company was created in a 1990 merger.

WaMu Failure

The collapse of New York-based Lehman Brothers Holdings Inc. on Sept. 15 and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc., the largest U.S. savings and loan, was seized by regulators yesterday in the biggest U.S. bank failure in history.

Financial shares across Europe also fell as U.S. Treasury Secretary Henry Paulson's proposed $700 billion rescue of the nation's financial system stumbled in Congress. The Bloomberg European banks index dropped 1.9 percent.

Fortis, based in Brussels and Amsterdam, needs to raise capital after agreeing to buy the Dutch consumer banking and asset management units of ABN Amro Holding NV last year for 24.2 billion euros.

The firm said today it earmarked for sale banking and insurance businesses that may be worth as much as 10 billion euros. In each case, ``concrete interest of potential buyers is indicated,'' the company said, without elaborating.

Fortis said it won't sell assets at fire-sale prices, and doesn't have an urgent need for funds.

``The future need for additional capital will actually only be in 12 to 18 months as we start to fold in the largest part'' of ABN Amro's business, the company said today in a statement distributed by Hugin.

Ping An Deal

Fortis agreed in March to sell half of its asset-management unit to Ping An Insurance (Group) Co., China's second-biggest insurer, for 2.15 billion euros. Verwilst said in an interview with Bloomberg Television today he still expects the companies to get regulatory approval before the end of the year.

Fortis said on June 26 it would sell so-called non-core assets, notes and asset-backed debt to raise money. It planned to sell 2 billion euros of assets this and next year. The lender also scrapped a 1.4 billion-euro dividend and sold 1.5 billion euros of shares to investors including Ping An.

The Chinese insurer said today it may make further provisions in the third quarter for losses arising from its 4.99 percent stake in Fortis. Ping An booked a 10.5 billion yuan ($1.5 billion) loss in the first half from its holding. Its shares tumbled 9.7 percent in Hong Kong trading.

`Confidence' in Fortis

Fortis repeated today that a share sale isn't being considered. Filip Dierckx, head of the company's banking unit, told reporters in Brussels that Fortis has no shortage of liquidity. Customer moves at its Benelux banking business have remained limited to less than 3 percent of assets since the start of the year, Fortis said.

Fortis started offering Belgian customers opening online savings accounts 4 percent interest on deposits of as much as 250,000 euros in July, in a bid to hang onto customers after ING Groep NV, Dexia SA and KBC Group NV raised interest rates on savings accounts.

``I still have confidence in Fortis,'' said Dominique Achourt, a client for more than 35 years, when leaving the Fortis Bank branch at the head office in Brussels. ``Clients should see that Fortis is just being caught up in the global financial crisis and that its banking activities are not affected by the share price falling.''

Deposit Guarantees

Belgian Prime Minister Yves Leterme and Finance Minister Didier Reynders reiterated that the government guarantees deposits, in a bid to calm Fortis clients, local newswire Belga reported today. They also said that the Belgian financial regulator will probe any false information or rumor about Fortis, according to Belga.

Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.

As of Sept. 24, short interest in Fortis amounted to 2.45 percent of its market value, according to London-based Data Explorers Ltd.

Credit-default swaps on Fortis by assets jumped 311 basis points to 583, according to CMA Datavision prices at 4:45 p.m. in London. Credit-default swaps on the lender's subordinated debt rose 416 basis points to 854, CMA prices show.

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

U.S. Economic Growth Slower Than Initially Estimated (Update2)

The U.S. economy expanded more slowly than previously estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified.

The annual rate of 2.8 percent was down from a preliminary estimate of 3.3 percent issued last month, the Commerce Department said today in Washington. Measures of inflation were higher than previously projected. Personal consumption, trade and business investment contributed less to gross domestic product than the prior estimate, the report showed.

Americans have since cut back on purchases, businesses have put investment plans on hold, builders have scaled back and credit markets have seized up. Economists at JPMorgan Chase & Co. and Morgan Stanley this week cut third-quarter GDP forecasts and Federal Reserve Chairman Ben S. Bernanke warned the economy may falter without a $700 billion bank rescue.

``Consumer spending doesn't bode well for overall growth over the next few quarters,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``It's pretty clear now that we are in a recession, and it's a recession that still has some room to run.''

Treasury Yields

Treasuries were higher, pushing yields down. The benchmark 10-year note yielded 3.8 percent as of 8:55 a.m. in New York, down 6 basis points from yesterday. Stock futures were lower after negotiations on the bank bailout plan stalled on Capitol Hill.

Economists had projected growth would remain unchanged at 3.3 percent, according to the median of 76 estimate in a Bloomberg News survey. Forecasts ranged from 3 percent to 3.7 percent. Today's report is the final of three estimates.

The world's largest economy grew at a 0.9 percent pace in the first quarter.

Today's gross domestic product report showed that the Fed's preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, higher than forecast and faster than the 2.1 percent previously estimated. Prices overall came in less than anticipated.

The biggest part of the economy, consumer spending, rose at a 1.2 percent annual rate from April through June, weaker than the 1.7 percent estimated last month. Spending received a lift during the second quarter from the government's stimulus plan.

Bernanke, who was on Capitol Hill this week urging quick passage of the administration's plan to rescue weakened Wall Street firms, said the U.S. faces ``grave threats'' to financial stability and warned the credit crisis is hurting business spending. He added that the outlook for consumer spending is ``sluggish at best.''

Labor Market

A deteriorating labor market is one reason consumer spending is likely to stagnate this quarter, the worst performance since 1991, according to economists surveyed by Bloomberg earlier this month.

The U.S. has lost jobs every month this year, and the unemployment rate in August jumped to a five-year high of 6.1 percent, according to Labor Department data.

Retail sales fell in August for a second consecutive month, the Commerce Department said previously. Holiday sales during November and December may be the weakest in six years as high food prices pare spending on non-essential items, the National Retail Federation said in a statement Sept. 23.

The trade gap widened to a $381.3 billion annual pace and added 2.9 percentage points to growth, the biggest contribution since 1980 and down from the previous estimate of 3.1 percent. Excluding trade, the economy would have contracted at a 0.1 percent pace after growing at a 0.1 percent rate in the first three months of the year.

The boost from trade may wane this quarter as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter.

`Very Weak August'

Dell Inc., the world's second-largest personal-computer maker, said that a U.S. slowdown in technology spending that started last quarter has spread to Western Europe and some Asian countries.

``We saw a very weak August,'' Chief Financial Officer Brian Gladden said Sept. 16 at a Bank of America Corp. investment conference in San Francisco, reiterating comments made last month. ``It is not coming back the way we thought it would.''

Estimates for inventories were revised downward. Companies drew down stockpiles at a $50.6 billion annual rate from April through June, compared with a previous estimate of $49.4 billion. The decrease subtracted 1.5 percentage points from growth.

Revisions in today's report also showed a smaller decline in housing. Residential construction fell at an annual rate of 13.3 percent, higher than the 15.7 percent decrease previously estimated. The housing recession subtracted 0.5 percentage points from growth.

Corporate profits were revised lower. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, were down 3.8 percent to an annual rate of $1.53 trillion. The prior estimate was a drop of 2.4 percent.

Government Bonds Rise as Bailout Plan Stalls, WaMu Collapses

Government bonds around the world rose after talks on a $700 billion rescue package for the U.S. financial system stalled and Washington Mutual Inc. was taken over in the biggest U.S. bank failure in history.

U.S. two-year Treasuries headed for a fifth week of gains and German notes of the same maturity posted their biggest weekly advance since the September 2001 terrorist attacks. Japanese 10-year bonds rallied for a second day.

``Clearly the focus is on the vacillations of U.S. Congress,'' said John Stopford, who oversees about $12 billion in assets as the London-based head of fixed-income at Investec Asset Management. ``We've taken a defensive position in the short term. We and others are increasingly accumulating a large pool of overnight deposits.''

Investors are piling in to the safest assets on concern delays to the bailout plan will cause more banks to fail. At the same time, the short-term debt markets that provide financing for the global economy are seizing up. The Libor-OIS spread, a measure of the availability of cash among banks, widened for a fifth day to near a record today.

U.S. lawmakers were meeting again today in Washington after some House Republicans, led by Virginia's Eric Cantor, said they wouldn't back a plan based on Treasury Secretary Henry Paulson's approach. The stalemate came after an unprecedented meeting of the two presidential candidates, President George W. Bush, congressional leaders and Cabinet officers.

`Changed Perception'

``What has changed is the market's perception of the bail- out package and whether or not it proceeds in its original form,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country's largest bank. ``The market has come to focus on the underlying problems, rather than the short-term solution.''

The yield on the two-year U.S. Treasury note fell 15 basis points to 2.02 percent as of 12:30 p.m. in New York, taking its decline in the past five weeks to 38 basis points. Two-year German yields dropped 18 basis points to 3.66 percent and Japanese 10-year yields lost 2 basis points.

``It's gloomy because the bailout package was seen as the cavalry coming over the hill,'' said Richard McGuire, a senior fixed-income strategist at RBC Capital Markets in London. ``The safe-haven bid for fixed income has returned.''

Central banks have so far failed to unlock the credit markets and get banks to lend to each other again. The European Central Bank lent banks $35 billion for seven days today. The Bank of England loaned $30 billion of one-week cash as well as $10 billion overnight.

Balking at Lending

Financial institutions are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. The yield on bonds sold by Morgan Stanley maturing in three months' time was almost 37 percent today, up from 4.07 percent two weeks ago.

Few strategists and analysts predicted the gains in government bonds of the past two weeks. The two-year U.S. note today yielded 14 basis points less than 2.16 percent median forecast of 31 analysts in a Bloomberg survey for the end of the third quarter. The forecast was 2.60 percent in August.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans stayed near the highest level since January today, the British Bankers' Association said. The euro rate, or Euribor, for such loans rose to the highest level since the single currency was introduced in 1999, according to the European Banking Federation.

China Curbs

The Libor-OIS spread, which compares the cost of borrowing in dollars over three months with the overnight indexed swap rate, widened 13 basis points to 208 basis points, after exceeding 200 basis points for the first time yesterday.

Concern about more failures among financial institutions prompted domestic Chinese banks to cut trading with foreign firms in the interbank market, according to Zhuang Zhiqiang, a trader at Xiamen International Bank Co., which is partly owned by the Asian Development Bank. The move aims to control risks after the bankruptcy of Lehman Brothers Holdings Inc., said Zhao Qingming, an analyst in Beijing at China Construction Bank Corp., the nation's second-largest lender.

Washington Mutual became the U.S. biggest bank failure in history yesterday after being seized by regulators and sold to JPMorgan Chase & Co. following $16.7 billion of customer withdrawals since Sept. 16. Financial institutions worldwide posted $522 billion of losses and writedowns tied to U.S. subprime mortgages since the start of 2007.

Stock Declines

Stocks and other higher-risk assets fell as investors shunned all but the safest government debt. Europe's Dow Jones Stoxx 600 Index decreased 1.9 percent, extending its drop this week to 4.4 percent, and the Standard & Poor's 500 Index slid 1.4 percent.

Waning demand for emerging-market assets widened the difference in yield, or spread, between U.S. Treasuries and the bonds of nations from Brazil to Ukraine by 10 basis points to 377 basis points, according to a JPMorgan Chase & Co. index.

Fortis, the Brussels and Amsterdam-based financial-services company, said the bank's financial position is ``solid,'' seeking to stem a sell-off that's driven the stock down 35 percent this week. Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it needs to bolster capital, and may even need more as financial markets deteriorate.

Favoring T-Bills

The U.S. commercial paper market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, the Federal Reserve said yesterday, a further sign of investor reluctance to take on higher-risk assets.

``Investors are clearly shunning financial market commercial paper in favor of T-bills,'' said Jane Caron, chief economic strategist at Dwight Asset Management Co. in Burlington, Vermont. ``Hopefully the stress level doesn't increase significantly from here.''

Three-month U.S. Treasury bill yields fell to 0.36 percent on Sept. 24 as demand for the shortest-dated government debt surged. The rate, which declined to 0.02 percent last week, the lowest since World War II, was at 0.85 percent today.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 11 basis points to 291 basis points. It was as much as 337 basis points yesterday, the most since Bloomberg began compiling the data in 1984. From 2000 to 2007, before the credit crisis began, the spread averaged 31 basis points.

Minggu, 21 September 2008

Morgan Stanley board meets to weigh options

Morgan Stanley's (MS.N: Quote, Profile, Research) board was scheduled to meet on Saturday to weigh strategic options for the investment bank, including a possible takeover by Wachovia or selling a bigger stake to China Investment Corp, sources familiar with the situation said on Saturday.

No deal was seen as imminent and no formal offers were on the table from Wachovia (WB.N: Quote, Profile, Research) or sovereign wealth fund China Investment Corp (CIC), sources said.

Morgan Stanley and Wachovia declined to comment and CIC could not be immediately reached.

Morgan Stanley feels less pressure to do a deal with Wachovia, or any other potential partner, in the wake of the U.S. government's massive rescue plan, the sources said.

The U.S. government said on Friday said it is preparing to take on hundreds of billions of dollars in bad mortgage debt from the banks' balance sheets, after curbing short selling and guaranteeing mutual funds in an effort to stabilize financial markets.

Any deal between would likely involve a stock purchase of Morgan Stanley by Wachovia, but Morgan Stanley's first preference is to remain independent, the sources said.

Although no deal is seen as imminent, all options are being weighed by the board this weekend, including a cash infusion by CIC, sources said. Still, Morgan Stanley is considering whether it needs to do a deal at all, sources said.

In the past week, Morgan Stanley's stock plunged and its debt insurance prices surged amid fear that even large broker-dealers could not weather the current crisis.

A series of moves by the U.S. government to limit short sales and to sop up toxic bank assets sparked a rally in financial shares on Friday.

Morgan Stanley has seen its market capitalization plunge to $30 billion (16.4 billion pounds) from $42 billion in the past month. Shares of Morgan Stanley closed on Friday at $27.21, up $4.66, or 21 percent. Wachovia's market capitalization is $40 billion.

The Wall Street Journal reported that CIC's interest may be contingent on Wachovia being able to offload some of its mortgage assets, the Journal said. The CIC discussion has been preliminary and has not been raised with Wachovia's board, the paper said.

CIC dampened speculation on Friday that it could be ready to increase its stake in Morgan Stanley as a senior CIC official was quoted by the Xinhua news agency as saying Morgan Stanley and Goldman Sachs were capable of tackling their problems on their own.

However, sources familiar with the plans told Reuters on Thursday that CIC, which bought 9.9 percent of Morgan Stanley last December, is in talks to raise its holdings to as much as 49 percent.

Tab for financial bailout: $700 billion

Unveiling its plan to rescue the nation's financial system from near-paralysis, the Bush administration is asking Congress for the authority to spend $700 billion and for powers to intervene in the economy so sweeping that they have virtually no precedent in U.S. history.

The proposal, set out in a spare 2 1/2 -page document sent to congressional leaders Saturday, would in effect allow the Treasury secretary to set up a government investment bank to buy up the billions of dollars of the mortgage-backed securities now clogging the arteries of the global financial system.

The dollar figure alone is remarkable, amounting to 5% of the nation's gross domestic product. But the most distinctive -- and potentially most controversial -- element of the plan is the extent to which it would allow Treasury to act unilaterally: Its decisions could not be reviewed by any court or administrative body and, once the emergency legislation was approved, the administration could raise the $700 billion through government borrowing and would not be subject to Congress' traditional power of the purse.

"Nothing quite of this scale has happened since the early years of the country when Alexander Hamilton wrote the Treasury act to give him the power to borrow and intervene in markets," said New York University financial historian Richard Sylla. And in Hamilton's case, Congress quickly clipped his wings, and no successor -- not even under President Franklin D. Roosevelt at the height of the Depression -- exercised quite such unfettered power again.

"It essentially creates an economic czar with no administrative oversight, no legal review, no legislative review. And it gives one man $700 billion to disperse as he needs fit," said Sen. Dianne Feinstein (D-Calif.), referring to Treasury Secretary Henry M. Paulson.

"He will have complete, unbridled authority subject to no law," she said.

The proposal, which contains none of the measures Democrats have sought to help homeowners facing foreclosure, set the stage for a major struggle between the administration and the Democratic Congress.

The confrontation is likely to be all the more intense because it will occur against a background of the approaching elections and fears of how shaky financial markets might react to any delay in the rescue.

Reflecting the urgency of the situation and its sensitivity, members of Congress took a cautious approach to the details Saturday but pledged to act on the crisis-fighting measure in 10 or days or fewer.

"This is a good foundation that can stabilize our markets quickly. Make no mistake about it. Nothing should slow this down," Sen. Charles E. Schumer (D-N.Y.) said.

But House Speaker Nancy Pelosi (D-San Francisco), speaking after an hourlong phone conference with fellow Democrats, made clear that they were not prepared to abandon their proposals to broaden the scope of the plan to include help for homeowners and others, as well as at least some regulatory provisions to prevent a repeat of the crisis.

"We will strengthen the proposal by ensuring that the government is accountable to the taxpayers . . . implementing strong oversight mechanisms and establishing fast-track authority for the Congress to act on responsible regulatory reform," she said, and "protect lower- and middle-income Americans, who need to be protected from the fallout of the ongoing Wall Street crisis by enacting an economic recovery package."

Such a package would add considerably to the already gargantuan costs of the plan and would come on top of the more than $100 billion in tax rebates sent this year at the administration's request.

Some conservative Republicans also expressed unhappiness. Rep. Mike Pence (R-Ind.) said, "Our financial markets are in turmoil and the administration was right to call for decisive action to prevent further harm to our economy, but nationalizing every bad mortgage in America is not the answer."

In forwarding his proposal to Congress, Paulson made good on his promise of "bold" steps to end the yearlong crisis that has sunk some of the nation's biggest financial powerhouses, created turmoil on Wall Street and pushed the struggling economy closer to recession.

And he in effect acknowledged that his previous ad hoc efforts and those of Federal Reserve Chairman Ben S. Bernanke to contain the debacle had failed.

The Paulson plan would give the Treasury secretary spectacularly wide leeway to buy, manage and sell mortgages and mortgage-related securities with the aim, in the words of the proposal, of "providing stability or preventing disruption to the financial markets or banking system" and "protecting the taxpayer."

The only limitations would be that Treasury's stock of troubled assets could not total more than $700 billion at any one time, that the buying program would end after two years, and that Paulson or his successor would regularly report to Congress. Moreover, though the proposal says Treasury's new authority would expire after two years, the history of past grants of emergency power suggests that Congress finds it hard not to renew them.

For the rest, the Treasury secretary would be free to do what he "deems necessary."

The plan would boost the public debt limit, now $10.6 trillion, to $11.3 trillion. Treasury could purchase the mortgage-backed assets of only U.S.-headquartered firms, a move that seems likely to anger foreign investors who have been among the major buyers of American financial instruments. With Bernanke's assent, Paulson could widen eligibility.
Paulson and key aides both in and out of government have reportedly been working on the plan to make the government the buyer of last resort for several weeks, having concluded that Washington's effort to fight one financial brush fire after another was failing.

But they were reluctant to share the idea with Congress until the dimensions of the crisis ballooned. In the last two weeks alone, the government has taken over mortgage finance giants Fannie Mae and Freddie Mac and insurer American International Group Inc.