How JPMorgan Lost $2 Billion Without Really Trying

The $2 billion trading loss that JPMorgan Chase (JPM) announced in a hastily scheduled conference call on May 10 has its roots in credit-default swaps, the same derivatives that helped trigger the financial crisis—only this time there were no mortgages involved.

The bank has launched an internal investigation, regulators are swarming, and the Department of Justice has said it is pursuing a criminal probe. The bank has not yet released details of the money-losing trades. But based on publicly available information plus interviews with traders, former JPMorgan employees, and fund managers, it’s possible to draw the basic outlines of what may have gone wrong.

Mario Tama/Getty Images

The mistakes were made in the bank’s Chief Investment Office, run by Ina Drew, who left the company on May 14. The office is in charge of managing excess cash and some of its investments. In the past five years, Chief Executive Officer Jamie Dimon has transformed the operation, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes, Bloomberg News reported in April. The mandate was to generate profits, a shift from the office’s mission of protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency fluctuations. A spokesman for the bank declined to comment.

JPMorgan Chase/Bloomberg

Credit-default swaps are insurance-like contracts between two parties. The buyer makes regular payments to the seller, who must make the buyer whole if an insured bond defaults. In addition to buying credit-default swaps on a particular bond, investors can buy swaps on indexes of bonds, such as the ones created by Markit Group, a deriviatives firm. The indexes rise when economic conditions worsen and the likelihood of corporate bond defaults increases. Traders use them to speculate on changing credit conditions. Buying the index can be a way for someone who owns a lot of corporate bonds to hedge against a decline in their value.

In 2011, JPMorgan profited by betting that credit conditions would worsen. In December, though, the European Central Bank provided long-term loans to euro zone banks, igniting a bond rally. Suddenly, JPMorgan’s bearish bets were vulnerable. Early this year, London-based traders in JPMorgan’s Chief Investment Office made offsetting bullish bets, according to market participants. It sold credit insurance using a Markit CDX North America Investment Grade Index that reflects the price of credit-default swaps on 121 companies that had investment-grade ratings when the index was created in 2007. The bank is thought to have sold insurance on the index using contracts that expire in 2017.

To protect against short-term losses, it also bought insurance on the index using contracts that expire at the end of 2012. That could have been a profitable strategy, because the 2017 insurance was more expensive than the 2012. And as long as the spread between the prices of the two contracts remained relatively stable, any decline in the value of one would be offset by an increase in the other, reducing the bank’s risk of an overall loss on the position.

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JPMorgan bought and sold so many contracts on the Markit CDX that it may have driven price moves in the $10 trillion market for credit swaps indexes tied to corporate health, according to market participants. At one point the cost of insurance via the index fell 20 percent below the average cost of insuring the individual bonds that composed the index. “The strategy overall got too big,” says Peter Tchir, a former credit derivatives trader who now heads TF Market Advisors, a New York trading firm. “Once their activity was moving the market, they should have stopped and got out.”

Sensing an opportunity, some hedge funds bought the 2017 contracts and sold credit insurance on the underlying bonds, hoping to profit when the relationship between the prices returned to normal. But because JPMorgan continued to be a big seller of insurance, the prices got even more out of whack, giving the hedge funds a paper loss. That led some traders to complain about the situation to the press. On April 5, Bloomberg News published a story saying that Bruno Iksil, a London-based trader for JPMorgan, had amassed a position so large that he may have been driving price moves in the credit derivatives market. The information was attributed to five traders at hedge funds and rival banks who requested anonymity because they were not authorized to discuss the transactions. Iksil’s influence on the market spurred some counterparts to dub him the London Whale.

Once the news got out, things quickly went south for JPMorgan. Hedge funds increased their bets that prices would come back in line. Thanks to their trades plus deteriorating credit conditions, the prices of the 2017 index contracts rose more than the prices of the 2012 contracts. JPMorgan’s paper losses mounted.

Compounding the losses were the sheer size of the bets, which made it difficult for the bank to unwind its trades. “These had to be massive positions” to inflict the loss JPMorgan suffered, says Michael Livian, CEO of Manhattan asset manager Livian & Co. and a former credit derivatives specialist at Bear Stearns. “And when you build that kind of size in the credit derivative market, you have to know you can’t just exit the position overnight.”

On the May 10 conference call, Dimon confessed: “The portfolio has proven to be riskier, more volatile, and less effective as an economic hedge than we thought.” For JPMorgan, the nation’s largest bank, the stakes are far bigger than a $2 billion paper loss. Since the bank announced its loss, investors have driven the stock down 13 percent, knocking $20 billion off the company’s market value as of May 16.

The episode has reignited the debate over how much freedom banks should have to make bets. Dimon had been a vociferous opponent of the Volcker Rule, a section of the Dodd-Frank financial reform law that would greatly limit the kinds of risks banks can take. Now, as Dimon himself pointed out, the proponents of the rule can point to JPMorgan to buttress their case. “This is a very unfortunate and inopportune time to have had this kind of mistake, yeah,” he said in an appearance on NBC’s Meet the Press.

The loss also raises the question of why the bank was putting shareholders at risk to gamble in a market of arcane indexes, where specialized hedge funds seek to profit from pricing anomalies. “JPMorgan was definitely in the very dark gray area between insurance and speculation,” says Robert Lamb, a finance professor at New York University who has studied risk on Wall Street. “To be the one side of the market and to think you were immune from the crowd on the other side is not safe, sane, or reasonable.”

The bottom line: Big bets on arcane credit derivatives left JPMorgan vulnerable to moves by hedge funds and rival traders.

With Mary Childs and Shannon Harrington

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Fed's Rising Balance Sheet Generates $76.9 Billion

January 10, 2012, 9:47 PM EST By Craig Torres

Jan. 10 (Bloomberg) -- The Federal Reserve will pay $76.9 billion to the U.S. Treasury as part of an annual dividend it remits after covering its own expenses from interest on its ballooning bond portfolio and other gains.

Total assets on the Fed’s balance sheet stood at a near- record $2.92 trillion on Jan. 4. The central bank expanded its portfolio by purchasing $2.3 trillion in U.S. Treasury debt, mortgage-backed securities and housing agency debt to push down longer-term interest rates once its benchmark lending rate hit zero in December 2008. The Fed expanded its portfolio in two rounds of asset purchases, known as quantitative easing.

Because the Fed funds itself by emitting currency on which it pays no interest, or by paying 0.25 percent on the deposits banks keep at the Fed, the central bank enjoys positive interest income. The yield on the 10-year Treasury note was 1.97 percent at 11:27 a.m. today in New York.

The bigger the Fed’s balance sheet, the more interest income it generates. This year’s dividend to the Treasury will be the second largest after 2010’s $79.3 billion. By comparison, the Fed paid $29.1 billion to the Treasury in 2006, when total assets on its balance sheet stood at $874 billion at the end of that year. The Fed’s balance sheet rose to a record $2.928 trillion on Dec. 28.

Last year, Federal Reserve’s 12 regional banks had $83.6 billion in interest income on securities held in their portfolios. An additional $2.3 billion was earned on sales of U.S. Treasury securities; the Fed reported $152 million in gains from foreign currency and income for services of $479 million. The reserve banks paid $3.8 billion in interest expenses on deposits held at the Fed.

Operating Expenses

The Fed said the reserve banks had operating expenses of $3.4 billion last year. The Fed was also assessed $1.1 billion for the cost of new currency and the expenses of the Federal Reserve Board in Washington, which does not generate interest income because it doesn’t operate as a reserve bank. Board expenses totaled about $470 million, according to a Fed official who spoke on a conference call with reporters.

Some $242 million of the income was also used to fund the operations of the Bureau of Consumer Financial Protection and $40 million funded the Office of Financial Research, two new units created by the Dodd-Frank legislation overhauling financial regulation.

--Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

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

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Sumitomo Mitsui Eyes European Banks’ $90 Billion in Asset

December 30, 2011, 9:18 PM EST By Shigeru Sato and Takako Taniguchi

(Updates with closing share price in seventh paragraph.)

Dec. 30 (Bloomberg) -- Sumitomo Mitsui Financial Group Inc., Japan’s second-biggest bank by market value, plans to buy “several hundred billion yen” of assets being sold by European lenders building capital to weather the region’s debt crisis.

The Tokyo-based bank has received 7 trillion yen ($90 billion) in offers from European banks including infrastructure project loans, Koichi Miyata, Sumitomo Mitsui’s president, said in an interview on Dec. 21. Sellers of European banking assets currently outnumber buyers, he said.

“We’ll take time and go for it once we find what we want” Miyata said. “Loans for projects in North America and Asia are the areas we are interested in.”

The euro area’s debt crisis has increased the risk of government and bank defaults, raising credit costs and pushing the region’s biggest lenders, including Spain’s Banco Santander SA and Royal Bank of Scotland Group Plc, to sell assets and boost liquidity. Miyata aims to add 6 trillion yen worth of overseas assets to his bank in next three years to help offset sluggish Japanese loan demand.

Japan’s so-called megabanks, the three biggest lenders led by Mitsubishi UFJ Financial Group Inc., have accelerated overseas lending in the past two years, as the country’s total lending shrank by 1.2 percent in 2009 and 2.1 percent in 2010.

Sumitomo Mitsui’s banking unit increased lending abroad by 16.3 percent to 9.37 trillion yen as of Sept. 30 from a year earlier, it said last month. That compares with the bank’s overall lending balance of 57 trillion yen, a 0.6 percent decline from a year earlier.

European Sales

Shares of the bank rose 0.9 percent to close at 2,144 yen on the Tokyo Stock Exchange today, the last trading day of the year. The stock declined 26 percent in 2011.

Bank of Ireland agreed to sell part of its project finance loans to Sumitomo Mitsui for 590 million euro ($764 million), the Irish lender said in a statement on Nov. 28. The loans relate to a portfolio of infrastructure and energy assets across North America and Europe, according to the statement.

Sumitomo Mitsui’s overseas assets, mostly loans, totaled $122 billion, as of Sept. 30.

France’s BNP Paribas SA and Societe Generale SA, Belgium- based Dexia SA and KBC Groep NV, and Italy’s Intesa Sanpaolo SpA and UniCredit SpA are among lenders seeking buyers for project finance and corporate loans in the Middle East, five bankers who were approached with deals said, declining to be identified because the information is private. The offers were made over the past six months, they said.

Brokerage Expansion

Mitsubishi UFJ last month agreed to buy Royal Bank of Scotland Group Plc’s Australia-based infrastructure advisory business, following the Japanese lender’s 3.9 billion-pound ($6.1 billion) acquisition in 2010 of RBS’s project financing assets.

Sumitomo Mitsui would also consider buying an entire business unit from a European bank, said Miyata. While he didn’t elaborate on specific targets, the bank’s brokerage unit offers expansion opportunities as Japanese companies tap the strong yen to buy operations abroad, Miyata said. He predicts the yen will trade around 78 yen to the dollar next year.

The currency has risen 4.6 percent against the dollar this year to 77.6 yen today in Tokyo.

The bank’s SMBC Nikko unit started merger and acquisition advisory operations in Shanghai in January to win business from Japanese companies moving to faster-growing overseas markets, he said.

Japanese acquisitions abroad have climbed to about $88 billion this year, the most in any of the 12 years for which Bloomberg data is available, and more than double last year’s. Cross-border deals this year include Takeda Pharmaceutical Co.’s $13.7 billion acquisition of Swiss drugmaker Nycomed.

--With assistance from Arif Sharif in Dubai. Editors: James Gunsalus, Nathaniel Espino

To contact the reporters on this story: Shigeru Sato in Tokyo at ssato10@bloomberg.net; Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

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

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Asia Crisis Haunts Thailand With Clash Over $35 Billion Debt

December 30, 2011, 12:15 AM EST By Daniel Ten Kate and Suttinee Yuvejwattana

(Updates baht in fifth paragraph.)

Dec. 30 (Bloomberg) -- Thailand’s government will today press the central bank chief to take on $35 billion of legacy debt from bank bailouts as Prime Minister Yingluck Shinawatra looks for fiscal scope to finance flood defenses.

Bank of Thailand Governor Prasarn Trairatvorakul meets with cabinet members in Bangkok over the proposal to shift the debt to the BOT’s balance sheet. Deputy Prime Minister Kittiratt Na- Ranong said yesterday the step would save the government as much as 65 billion baht ($2 billion) in annual interest costs that could be used to fund anti-flood measures.

The push risks deepening concern that Yingluck’s administration is infringing on the central bank’s independence, after Kittiratt in October said the BOT should lower interest rates to help businesses cope with the country’s worst flooding since 1942. The government itself lacks unanimity on the move, with Finance Minister Thirachai Phuvanatnaranubala warning it could hurt investor confidence and stoke inflation.

“The weakening of the baht in the last few days may come from this concern about inflation,” said Somprawin Manprasert, an economist at Tisco Securities in Bangkok. “It’s not a good thing to do at all and will hurt both fiscal and monetary discipline. People will start to think that if the government can do it one time, they can do it again when debts pile up.”

The baht yesterday fell the most in two months to 31.75 per dollar, the weakest level since Aug. 16, 2010, according to data compiled by Bloomberg. It was unchanged today as of 8:46 a.m. in Bangkok, set for its biggest annual loss since 2005. The benchmark SET Index has dropped 1.8 percent over the past six days, the worst performer in Asia after Vietnam in that time.

‘Quite Strange’

Thailand’s Cabinet resolved earlier this week to study moving 1.1 trillion baht in debt incurred bailing out financial institutions 14 years ago onto the central bank’s balance sheet. Prasarn said this week it was “quite strange” that the government didn’t discuss the debt transfer officially with the central bank before bringing the issue to the Cabinet.

“Our losses on the balance sheet will be higher and that may affect confidence,” Prasarn told reporters on Dec. 28.

The Financial Institutions Development Fund racked up a 1.4 trillion baht debt during the 1997 Asian financial crisis on loans aimed at rescuing struggling lenders. The government closed more than 60 non-bank financial companies and seized half of the nation’s 14 commercial banks that received help from the fund.

Under a repayment agreement in 2002, the finance ministry makes interest payments while the central bank pays down the principal whenever it earns a yearly profit. The Bank of Thailand has reported annual net income once since 2004 and last year reported a net loss of 117 billion baht, mostly due to losses on foreign exchange.

Proud to Repay

Since 1997, the principal on the debt has fallen by 300 billion baht, or about 21 billion baht per year. During that time the government has paid as much as 65 billion baht in interest annually, according to Kittiratt, who said yesterday the central bank would report a “record high profit” for 2011.

“The central bank should be proud that they can take care of part of the nation’s debts,” he told reporters in Bangkok yesterday. “If we transfer the debt to the Bank of Thailand, it will help reduce the government’s concerns.”

The move would reduce the public debt-to-gross domestic product ratio by 10 percentage points from 40 percent now, providing room for more government borrowing, Kittiratt said. Thailand’s Cabinet this week approved a proposal to borrow 350 billion baht to set up a fund for long-term water-management projects following the floods.

‘Amend the Bible’

The government’s move has more to do with sidestepping restrictions on budget deficits than its ability to borrow, said Sethaput Suthiwart-Narueput, managing partner of Advisor Co., a Bangkok-based corporate advisory, and former executive vice president of Siam Commercial Bank Pcl. Yingluck’s government could spend more by passing a stimulus bill as the previous administration did in 2009, he said.

Thailand’s Budget Procedures Act passed in 1959 prevents the government from borrowing more than 20 percent of approved annual budget expenditures plus 80 percent of expenses allocated to government debt payments.

The government is “trying to get more spending out without having to issue a new law,” he said. “They certainly don’t want to amend the budget law because to do that it would be seen as ‘Oh my God, they are undermining the fiscal discipline our forefathers put in place.’ It’s like trying to amend the Bible.”

Printing Money

Thirachai, the finance minister, suggested allowing the use of interest from the country’s $167 billion in foreign reserves, amounting to 25 billion baht this year, for debt payments. His predecessor under the previous government, Korn Chatikavanij, said such a move would “retain the prudency and accountability and transparency of the current structure.”

The debt “is a burden for sure, but what would be worse is trying to push it off the government balance sheet and pretend it doesn’t exist,” Korn said in a telephone interview. “It would also be detrimental to the central bank, which would have no way to repay the debt except printing fresh money.”

--Editors: Tony Jordan, Chris Anstey

To contact the reporters on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net; Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

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

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Italy Sells EU7 Billion of Bonds as Yields Fall at Auction

December 29, 2011, 6:03 AM EST By Alessandra Migliaccio

(For more on the euro crisis, see EXT4 )

Dec. 29 (Bloomberg) -- Italy sold 7 billion euros ($9 billion) of bonds and its borrowing costs fell in the country’s final debt sale of the year.

The Treasury in Rome sold 2.5 billion euros of bonds due in 2014, less than the 3 billion euro maximum for the sale, to yield 5.62 percent, down from 7.89 percent at the previous sale on Nov. 29. The Treasury priced 2.5 billion euros of its 5 percent 2022 bond to yield 6.98 percent, compared with 7.56 percent on Nov. 29. Italy also sold about 2 billion euros of bonds due 2021 and a floating-rate security due 2018.

The sale came one day after Italy auctioned 9 billion euros in treasury bills for 3.251 percent, about half the rate from the previous auction on Nov. 25 after the European Central Bank last week offered banks unlimited funds for three years.

The ECB’s measures “have clearly helped” and yesterday’s sale augurs well for today’s “more challenging auction of longer-term paper,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mail.

Prime Minister Mario Monti will probably outline new measures aimed at boosting growth in Europe’s third biggest economy that may include moves to open up closed professions, change labor laws to spur hiring and steps to lower fuel prices. The economy contracted 0.2 percent in the third quarter and probably also shrank in the three months through December, meaning Italy may have entered its fourth recession since 2001.

Yesterday’s auction was Italy’s first since the ECB loaned 489 billion euros to European banks in a bid to keep credit flowing to the 17-nation economy while lawmakers tackle the sovereign debt crisis. Italian lenders borrowed 116 billion euros as part of the tender on Dec. 21, according to a person with direct knowledge of the loans.

--Editors: Jeffrey Donovan, Andrew Davis

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net

To contact the editor responsible for this story: Jerrold Colten at jcolten@bloomberg.net

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Italy Sells 9 Billion Euros of Bills as Borrowing Costs Plunge

December 28, 2011, 6:00 AM EST By Chiara Vasarri

Dec. 28 (Bloomberg) --Italy sold 9 billion euros ($11.8 billion) of six-month Treasury bills and borrowing costs plunged from the previous auction as the government passed measures aimed at trimming the euro region’s second-biggest debt.

The Rome-based Treasury sold the 179-day bills at a rate of 3.251 percent down from a 14-year-high of 6.504 percent at the last auction of similar maturity securities on Nov. 25. Demand was 1.7 times the amount on offer, compared with 1.47 times last month. The Italian Treasury also sold 1.7 billion euros of zero- coupon notes due 2013 at 4.853 percent

A “successful start to the week’s Italian supply schedule,” said Alessandro Mercuri, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “Italy managed to get away the whole 9 billion allocation amount. Domestics are likely to have facilitated demand, given the excess liquidity currently floating around.”

Prime Minister Mario Monti secured final approval in Parliament last week for a sweeping budget plan aimed at raising revenue and boosting anemic economic growth as he tries to persuade investors Italy can tame the country’s 1.9 trillion- euro debt and avoid a bailout. The measures, including a tax on luxury goods, a levy on primary residences and higher gasoline prices, may deepen the country’s recession and until today had donw little to bring down borrowing costs.

Bonds Gain

Italian bonds pared earlier losses and advanced with the yield on the country’s 10-year debt falling 23 basis point to 6.76 percent, narrowing the difference with Germany to 483 basis points from 508 basis points yesterday. Italy had to pay the most in 14 years to sell five-year bonds on Dec. 14.

Monti’s budget plan risks deepening the country’s economic slump and complicating efforts to cut debt. Italy’s economy contracted 0.2 percent in the third quarter and likely shrank even more in the final three months, marking the fourth recession since 2001. The country will remain in a recession until the second half of next year, employers’ lobby Confindustria said in a Dec. 15 report. The $2.3 trillion economy will contract 1.6 percent in 2012 after growing 0.5 percent this year, the lobby said.

The euro region’s third-largest economy has to repay about 53 billion euros in debt in the first quarter from the region’s total maturing debt of 157 billion euros, according to UBS AG. It owes a further 3.2 billion euros in interest payments based on the average five-year yield of the past three months.

Italy expects to raise almost 450 billion euros from bond and bill sales next year to cover 202 billion euros of maturing bonds and pay for a 23.6 billion-euro deficit, Maria Cannata, director of public debt, said in a Dec. 24 interview with newspaper Il Sole 24 Ore. The remainder of the issuances will be Treasury bills.

--Editors: Andrew Davis, Jeffrey Donovan

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net.

To contact the editors responsible for this story: Angela Cullen at acullen8@bloomberg.net.

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Blackstone May Get Up to $1.8 Billion From New Jersey Pension

December 09, 2011, 11:09 AM EST By Elise Young and Devin Banerjee

Dec. 8 (Bloomberg) -- Blackstone Group LP, the world’s largest private-equity firm, may receive as much as $1.8 billion in commitments from the New Jersey Division of Investment.

The state pension system proposes investing $1.5 billion in four separate accounts to be managed by Blackstone and $300 million in three traditional funds, according to documents prepared for a public meeting today.

--Editors: Josh Friedman, Christian Baumgaertel

To contact the reporters on this story: Elise Young in Trenton at eyoung30@bloomberg.net; Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net -0- Dec/08/2011 17:22 GMT

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CFTC Backs MF Global Trustee’s $2.1 Billion Customer Payout

December 09, 2011, 12:25 PM EST By Linda Sandler and Tiffany Kary

(Updates with Freeh filing in eighth paragraph.)

Dec. 9 (Bloomberg) -- The Commodity Futures Trading Commission defended a planned $2.2 billion payout to U.S. commodity customers by the trustee liquidating the MF Global Inc. brokerage, saying customer claims take priority over all other claims.

The third transfer by trustee James Giddens, which a judge is considering in Manhattan bankruptcy court today, would give commodity customers about 72 percent of their assets, a lawyer for Giddens told the judge. Judge Martin Glenn received at least 18 formal objections and 43 letters questioning the move, including one from creditors of the parent company and one from the parent’s trustee, who said they also have claims on the brokerage.

“The claims of commodity customers must be satisfied in full before any portion of the MFGI estate may be used to satisfy the claims of general creditors,” the CFTC said in a court filing yesterday.

CME Group Inc., owner of the world’s largest futures exchange, will guarantee $550 million of the payment in case any customer gets more than a fair share of the brokerage’s assets, which by law must be split equally among customers, the CFTC said.

In the transfer, Giddens would pay out from 80 percent to 85 percent of all assets remaining in his control, keeping $800 million in reserve, according to court papers. Two previous payouts to commodity customers totaled about $2 billion.

CFTC Restrictions

CFTC regulators approved restrictions on how brokers can invest customer funds, after as much as $1.2 billion went missing before MF Global Holdings Ltd. filed for bankruptcy on Oct. 31. Jon Corzine, the defunct parent company’s former chief executive officer, said he “would never have intended” transfers from segregated accounts and had no knowledge of any such movements of funds until a day before the bankruptcy.

Giddens has transferred about 38,000 commodity accounts to other firms, and struck a deal to sell 330 securities accounts. Three transfers of collateral made and pending will give commodity customers about $4 billion of their assets, while the sale of securities accounts would give most smaller customers access to all their funds, according to court filings.

The trustee for the bankrupt parent faulted Giddens’s plan for the securities customers, saying they shouldn’t get the total net equity in their accounts. Because the brokerage is 100 percent-owned by the holding company, the equity in MF Global units is an asset of the bankrupt estate, wrote lawyers for the trustee, former Federal Bureau of Investigation director Louis Freeh.

‘Language Changes’

To deal with objections by commodity customers who haven’t yet received any money, Giddens said he “made some language changes” in a proposed order he will ask the judge to sign approving the transfer.

To satisfy administrators of MF Global’s U.K. and other foreign affiliates, who objected that the transfer might deplete funds available to pay them, Giddens would make future transfers based on available assets and not ask the judge to let him use his own discretion, he said in a filing this week.

“The trustee believes it would be more prudent, relieve uncertainty, and better inform the expectations of customers to make further bulk transfers, if any, only upon further motion and order of the court based on facts and circumstances and availability of property,” he said.

British Unit

MF Global UK Ltd. said Dec. 6 it has $250 million remaining in accounts at the MF Global brokerage, of which $230 million is in segregated commodity accounts for customers. The U.K. company hasn’t received any money from the trustee of the U.S. brokerage and isn’t in line to get any in the planned payout of $2.2 billion, the administrators of the bankrupt company said in a court filing.

The judge handling the MF Global brokerage liquidation in New York “must adequately protect” all former customers in any order he signs approving Giddens’s next transfer, they said.

Some customers faulted the transfer because it covered only U.S. customers. The brokerage trustee treats foreign futures customers “differently,” favoring U.S. clients, said RWA Raiffeisen Ware Austria AG, a cooperative agricultural group.

In the filing, Giddens said he excluded customers whose assets are held in foreign accounts “because virtually all of it is not under the trustee’s control, but rather under the control of MFGI’s foreign former affiliates,” which are being liquidated in their home countries.

What and When

RWA has asked Giddens what he is doing to recover the funds from administrators of the U.K. affiliate, and when he might return assets to these customers.

“We are urgently working on responses to all our objectors,” Kent Jarrell, a Giddens spokesman, said in an e- mail.

Creditors of the MF Global parent said Giddens is planning the distribution without explaining why he thinks the funds are customer property or verifying that the customers are entitled to receive the funds.

Paying the wrong people or paying out too much will hurt the bankrupt parent company’s estate, which has claims against the brokerage and owns its equity, MF Global Holdings creditors’ lawyer Martin Bienenstock said in a Dec. 5 court filing.

Segregated Funds

Including funds already distributed, Giddens controlled $4.9 billion in U.S. segregated commodity customer funds, CME said. It calculated that an additional $900 million in customer funds were traded on foreign exchanges, putting the total at about $5.8 billion. Previous estimates put the segregated accounts at about $5.4 billion.

A $1.2 billion shortfall would mean more than 20 percent of commodity customers’ segregated assets are missing.

CME said the creditors committee in the holding company’s bankruptcy doesn’t have the legal right to object to the trustee’s distributions.

The parent company’s Oct. 31 bankruptcy filing, the eighth- largest in U.S. history, listed assets of $41 billion. Corzine, the former co-chief executive officer of Goldman Sachs Group Inc., quit as MF Global’s CEO on Nov. 4.

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Tiffany Kary in New York. Editors: Stephen Farr, Andrew Dunn

To contact the reporter on this story: Linda Sandler in New York at lsandler@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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Singapore Syndicated Lending Surges 91% to Record $38 Billion

December 06, 2011, 5:05 AM EST By Katrina Nicholas

Dec. 6 (Bloomberg) -- Syndicated lending in Singapore has almost doubled to a record this year, driven by demand from property developers and a surge in commodity trading.

Loans surged 91 percent to $38.3 billion this year from the same period of 2010, beating the previous record of $30.7 billion in all of 2008, according to data compiled by Bloomberg. The total doesn’t include a S$5 billion ($3.9 billion) loan sought by Temasek Holdings Pte and Khazanah Nasional Bhd., the state-owned investment companies of Singapore and Malaysia, to fund S$11 billion of hotels, apartments, offices and shops.

“Growth for the Singapore market has been boosted by a huge increase in financings for commodity sector,” said Boey Yin Chong, managing director of syndicated finance at DBS Bank Ltd., Singapore’s biggest arranger of syndicated loans. “From a $500 million base in 2007 we’ll probably hit $9 billion plus by the end of 2011.”

The economy in Singapore, home to the world’s second- busiest container port and Asia’s largest oil-trading, refining and storage center, is forecast to expand 5 percent this year after growing 14.5 percent in 2010. While slowing, that’s still better than the 1.9 percent predicted by the Organization for Economic Cooperation and Development for its 34-member nations in 2011.

Shrinking Rate Margins

Borrowing costs fell to an average 73 basis points over benchmark rates since June 30 from 105.5 in the first half of the year, Bloomberg data on 46 loans show. Average loan margins in Asia, excluding Japan, for U.S. dollar-denominated borrowings increased to 243 from 204 in the same period.

As growth in Asia outstrips Europe and the U.S., the region is becoming a more important source of funding for energy traders and suppliers of commodities such as edible oils, grains and sugar, according to Eugene Szeto, HSBC Holdings Plc’s head of Southeast Asia loans syndicate.

Syndicated loans in Europe, the Middle East and Africa fell to $120.5 billion this quarter versus $260.4 billion in the three months to Sept. 30, Bloomberg data show. Commodities have returned 4.9 percent this year versus a loss of 8.2 percent for global equities.

Singapore-based Wilmar International Ltd., the world’s biggest palm-oil processing company, increased a $1.3 billion loan signed in November 2010 to $1.5 billion in October, according to an Oct. 28 regulatory filing.

Geneva-based Vitol Group, the world’s largest independent oil trader, signed a $1.585 billion facility due in 2012 in June for its Asia unit. Vitol has tapped the Asian bank loan market for funds every year since 2006, Bloomberg data show.

Asian Growth

“If Asia is a company’s growth market it makes sense for them to raise funds and build bank relationships here as well,” said Szeto, who is based in Singapore. “Companies are also keen to tap pockets of liquidity in Asia because aside from being an additional funding source, Asian bank market liquidity is seen as relatively more stable and reliable than in parts of the western world.”

Loans to agriculture and mining companies jumped 320 percent in October from October 2010, according to figures from the Monetary Authority of Singapore released Nov. 30. Loans to manufacturers rose 52 percent while building and construction lending increased 23 percent.

As economies in Europe face possible recession, gross domestic product in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam will expand an average 5.6 percent from 2012 to 2016, the OECD said in a Nov. 29 report.

Singapore, ranked by the World Bank as the easiest place to do business, was among the top 20 destinations for international investment last year, according to the United Nations Conference on Trade and Development.

Bookrunner Rankings

HSBC is the third-largest arranger of loans in the city- state, with an 8.9 percent market share, behind DBS at 10.2 percent and Oversea-Chinese Banking Corp. at 9.9 percent, Bloomberg data show. United Overseas Bank Ltd., Singapore’s third largest by market value, is fourth at 8.6 percent.

London-based HSBC, which makes more money in Asia than anywhere else, ranks higher for banks involved in arranging loans and then selling the debt to other lenders. The top five so-called bookrunners for loans this year are DBS, HSBC and OCBC, Sumitomo Mitsui Financial Group Inc. and Standard Chartered Plc.

Bookrunners are responsible for issuing invitations, disseminating information to interested lenders and reporting to the borrower on progress. A bank with the title of mandated lead arranger isn’t always a bookrunner.

Olam, Temasek

“There’s a perception the market is dominated by Singapore banks but that’s not the case despite Singapore banks being active in arranging deals,” DBS Bank’s Boey said. “Having a robust market also means lenders are able to sell down more in syndication.”

Olam International Ltd., the commodities trader part-owned by Temasek, signed a $1.25 billion facility in August with about 30 banks including lenders from the Middle East and India, Bloomberg data show. The 10 banks committing funds to Temasek and Khazanah included Melbourne-based Australia & New Zealand Banking Group Ltd. and Japanese lenders Bank of Tokyo-Mitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corp., two people familiar with the matter said last month.

Of the $37.1 billion of syndicated loans this year, $31.4 billion have been to property, energy or resource companies, Bloomberg data show.

“Government incentives for commodity companies to open their regional offices here has helped Singapore to corner much of the market for commodity refinancing,” Boey said. “Last year there was about $5 billion done. This year it’s been double that as these global houses seek to diversify funding as well as increase their investment in the region.”

--With assistance from Shamim Adam and Jake Lloyd-Smith in Singapore. Editors: Ed Johnson, Shelley Smith

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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Facebook Said to Be Planning $10 Billion IPO

By Douglas MacMillan and Brian Womack

(Bloomberg) — Facebook Inc. is considering raising about $10 billion in an initial public offering that would value the social-networking site at more than $100 billion, a person with knowledge of the matter said.

Facebook may file for an IPO before the end of the year, said the person, who asked not to be identified because the deliberations are private. Exact timing for the filing hasn’t been determined, the person said.

At $10 billion, the offering would raise more money than any other technology IPO, a sign investors are eager to get a piece of the top social-networking company. The amount would dwarf that of the previous record holder, Infineon Technologies AG, which generated $5.23 billion in its 1999 debut. Agere Systems Inc. raised $4.14 billion in 2000, putting it second.

Facebook’s $100 billion valuation would be twice as high as it was in January, when the company announced a $1.5 billion investment from Goldman Sachs Group Inc. and other backers at a worth of $50 billion. Facebook is currently pegged at $66.6 billion on SharesPost Inc., which handles trading of closely held companies.

Facebook expects to be required by U.S. regulators to disclose financial results by April 30, 2012, if it doesn’t go public by then, the company said in January. The social-networking company decided to wait until 2012 for its IPO to give Chief Executive Officer Mark Zuckerberg more time to gain users and boost sales, three people said last year.

Jonathan Thaw, a spokesman for Palo Alto, California-based Facebook, declined to comment.

The Wall Street Journal reported earlier today that Facebook is discussing a $10 billion IPO with a valuation of more than $100 billion. The company aims to go public between April and June, the Journal said.

With assistance from Lee Spears in New York.

MacMillan is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco. Womack is a reporter for Bloomberg News.

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Icahn’s $2 Billion Man Starts Fund as Activists Shun Biotech

December 05, 2011, 9:07 AM EST By Meg Tirrell

Dec. 5 (Bloomberg) -- Alex Denner knows how to spot biotechnology companies with promising drugs and make sure investments pay off.

Working as Carl Icahn’s top health-care investing executive for the past five years, Denner has targeted at least six drugmakers from ImClone Systems Inc. to Biogen Idec Inc., prompting sales of three. He’s generated about $2 billion in profit for Icahn, said a person familiar with his record who declined to be identified because the matter is private.

Now the 42-year-old Denner, who has a Ph.D. in biomedical engineering, is splitting with Icahn to start his own hedge fund. As some investors avoid health care, partly because of regulatory hurdles, Denner’s knowledge of science and business gives him an advantage as one of the industry’s few activists, said Les Funtleyder, a health-care strategist and portfolio manager at Miller Tabak & Co. in New York.

“Activist investors steer away because of health-care’s special characteristics,” he said. “It requires a special knowledge, which Alex has.”

Denner’s expertise and persuasive management style have facilitated Icahn’s negotiations with biotechs. The two men first met a decade ago when both invested in ImClone, at a time when most people were writing the company off. ImClone’s founder, Sam Waksal, pleaded guilty in 2002 of insider trading on word that regulatory approval of the company’s main drug would be delayed. ImClone’s shares plummeted 92 percent from a high of $73.83 in December 2001 to $6.11 in September 2002.

Value in Erbitux

Yet the experimental cancer medicine, Erbitux, was still a good drug, according to Denner. He bought ImClone stock and later teamed with Icahn to win board seats -- Icahn eventually became chairman -- and they engineered ImClone’s 2008 sale to Indianapolis-based Eli Lilly & Co. for $70 a share, or $6.5 billion.

First, though, they turned around ImClone. In 2006, Icahn named Denner head of an executive committee that ran the company. Erbitux had won regulatory approval two years before, and the company reported total revenue of $677.8 million the year Icahn’s team moved in. Denner focused on making ImClone more efficient, pushing for faster development of IMC-1121B, which was being tested in multiple cancers and had similarities to Genentech’s Avastin, a treatment already on the market.

Faster Process

Normally, the regulatory process involves three phases of studies before a drug can be submitted for marketing approval, determining safety, dosage and efficacy. Denner supported an idea to move 1121B’s testing directly from the first phase to the third in breast cancer, arguing that since Avastin already had been approved, testing could be accelerated.

The company successfully negotiated this strategy with regulators and, when Lilly announced its acquisition of ImClone, it cited 1121B as one of the most “promising ImClone pipeline molecules.”

The drug, also called ramucirumab, is now in Phase 3 testing in breast, colorectal, lung, liver and gastric cancers, according to Lilly.

Denner identifies companies whose research efforts lack focus or whose senior executives aren’t effectively growing the business. After buying a small stake, he typically urges management to consider his suggestions. If they resist, he seeks board seats to push for change and sometimes a sale of the company.

Reliable Advice

“My impression was that Carl Icahn very much depended on Alex and Alex’s views,” said Genzyme’s former CEO, Henri Termeer, in a telephone interview. Termeer’s company, which makes medicines for rare diseases, was acquired by Paris-based Sanofi for $20.1 billion in February, eight months after it added Icahn representatives.

If Icahn is the iron fist who expects corporate boards to yield to him, Denner has been the velvet glove who smooths the way for investments to pay off over time, according to board members and executives who’ve dealt with both men. Denner’s willingness to listen to others has helped him win over directors after he gains entree to a board following a hostile proxy battle.

“My biggest surprise was how personable Alex is, and funny,” said Lynn Schenk, a board member at Biogen, where the Icahn team secured three board seats after two separate proxy fights. “He really listens to his board colleagues and treats opinions other than his own with respect.”

Biogen Battle

Not that Denner isn’t aggressive. At Biogen’s June 2009 annual shareholder meeting, the company wouldn’t give him the floor, and called a recess before announcing the results of Denner’s proxy fight.

“This is not North Korea!” Denner shouted as people filed out of the room. He and another Icahn-backed nominee, Harvard University geneticist Richard Mulligan, won seats.

Once on the board, they began to spur change. The company has since replaced its chief executive officer and refocused the business on multiple sclerosis and other neurological diseases. It is shedding assets in other research areas, such as cancer and cardiovascular disorders, and reducing 13 percent of its workforce. The stock has more than doubled to $113.24 since June 2009.

Denner hasn’t always been successful. A team he led failed in August to gain representation on the board of New York-based Forest Laboratories, maker of the antidepressant Lexapro and Alzheimer’s disease medicine Namenda.

Critic Fires Back

Frank Perier, the finance chief at Forest Labs, said during the proxy fight that Denner “has no true hands-on business experience,” and shouldn’t be telling his company to change its practices. Denner called Perier’s assertion “factually incorrect.”

“Does running a major biotech company not count as business experience?” he said, citing his time at ImClone.

Denner, who grew up near Boston, was a “geeky kid” who always wanted to be an investor, he said in an interview. His mother opened a brokerage account for him when he was 11, and he traded equities, including Coca-Cola Co. and other names he recognized -- and got a positive return.

“It was a very small amount of money,” he recalled.

In school, he loved science and math. His father was a mechanical engineer, the same major Denner chose when he was an undergraduate at the Massachusetts Institute of Technology in Cambridge. In graduate school at Yale University in New Haven, Connecticut, he initially intended to study the math involved with the fluid flow of turbulence.

New Challenge

After auditing a few biology classes, he decided to change directions and analyze the biological signals that provide clues about cardiac health. It was the early 1990s, a time when the Human Genome Project -- and its hope of unlocking the secrets of a healthy life -- had just begun.

There was a lot happening in biology then, and “there still is now,” Denner said. “The basic fundamentals of how cells work and how DNA works are still being elucidated.”

After getting his Ph.D., Denner became a portfolio manager at Morgan Stanley and then at hedge fund Viking Global Investors LP in New York. He joined Icahn’s firm in 2006, when they were working together at ImClone.

Paying Off

Prior to that, some of Denner’s health-care investments were in then-tiny companies that were developing drugs few thought would work. They were Summit, New Jersey-based Celgene Corp. and Gilead Sciences Inc., based in Foster City, California -- now two of the world’s biggest biotechs.

Denner lives in Greenwich, Connecticut, with his wife, Jasmina, and their sons, Max, 6, and Lex, 7. Lex is short for Lysander, the name of the Spartan general who won the final battle that ended the Peloponnesian War, Denner said. “We chose it because it’s a cool name,” he explained.

While working with Icahn, Denner would drive into Manhattan to the investor’s offices in the General Motors building across from the Plaza Hotel. He found a garage a few avenues across town that allowed him to park his own car, which he said he preferred to handing the keys over to valet attendants.

That fastidiousness is reflected in everything he does, from picking stocks to his dining choices. He eats at Nobu, one of Manhattan’s most upscale sushi restaurants, as many as three times a week. He likes it because it’s clean, he said. He’s toured the kitchen, and even checked to make sure the stones for resting chopsticks are cleaned between patrons. “You could get hepatitis!” he joked.

For all his success, “Alex is very self-effacing,” said Waksal, who spent five years in prison after being convicted of securities fraud. Waksal said he’s glad Denner recognized ImClone’s value.

“Alex actually understands the science -- and how to build that into a business,” Waksal said. “When a company is broken, he knows what should be done to fix it.”

--Editors: Carol Hymowitz, Andrew Pollack

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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Lloyds Said to Seek About 2.5 Billion Pounds From Branch Sales

July 05, 2011, 11:01 AM EDT By Ambereen Choudhury and Gavin Finch

July 5 (Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggest mortgage lender, is seeking about 2.5 billion pounds ($4 billion) for the 632 branches it’s selling to comply with a European Union ruling on taxpayer aid, two people familiar with the sales process said.

The deadline for the first round of bids is next week, said the people, who declined to be identified because the matter is private. A Lloyds spokeswoman declined to comment.

--Editors: Francis Harris, Edward Evans

To contact the reporter on this story: Gavin Finch at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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Western Union Said Near $1 Billion Travelex Unit Purchase

July 02, 2011, 1:49 PM EDT By Anne-Sylvaine Chassany, Cristina Alesci and Donal Griffin

(Updates with Susquehanna disclosure and closing share price starting in the fifth paragraph.)

July 1 (Bloomberg) -- Western Union Co., the world’s largest money-transfer firm, is in talks to buy a division of Apax Partners LLP’s Travelex foreign-exchange business for about $1 billion, according to people with knowledge of the matter.

Western Union, based in Englewood, Colorado, may announce an agreement to acquire Travelex’s global business-payments unit as early as next week, said the people, who didn’t wish to be named because the talks are private.

A deal would help Western Union Chief Executive Officer Hikmet Ersek, 50, add revenue from corporate transactions overseas. Consumer-to-consumer services provided 84 percent of the firm’s $1.28 billion revenue in the first quarter, according to the company’s financial report. Travelex describes its business-payments unit as the world’s largest non-bank provider of foreign exchange and risk solutions.

“This business does have good margin characteristics,” said James Friedman, an analyst at Susquehanna Financial Group in New York who has a “positive” rating on Western Union shares. “It certainly has the potential to be more lucrative than the consumer. The fee per transaction is really huge.”

Susquehanna facilitates trading in Western Union shares, which gained 21 cents, or 1.1 percent, to $20.24 at 4:15 p.m. in New York Stock Exchange composite trading.

Ben Harding, a spokesman for London-based private-equity firm Apax, and Tom Fitzgerald at Western Union declined to comment. Dani Filer at Travelex didn’t immediately respond to a message seeking comment.

European Acquisitions

Ersek, who played professional basketball in Austria, is expanding Western Union’s operations in Europe. The company said last month that it would buy the rest of Finint Srl, an Italian money-transfer firm. This year, it also spent $136 million to complete a takeover of Angelo Costa Srl, another Italian company, according to a regulatory filing.

Founded in 1976, Travelex processes international payments for more than 35,000 corporate clients and distribution partners, according to a May statement on its website. It also serves consumers through a network of more than 950 stores and 450 automated teller machines. It handles about 20 billion pounds ($32 billion) of foreign-exchange transactions annually.

Apax, run by CEO Martin Halusa, 56, bought a controlling stake in Travelex in 2005 for more than 1 billion pounds.

--With assistance from Zachary Mider in New York. Editors: David Scheer, Rick Green

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net; Donal Griffin in New York at dgriffin10@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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Carlyle Invested $7 Billion in Private-Equity Deals in 2010

May 23, 2011, 11:46 AM EDT By Anne-Sylvaine Chassany and Jason Kelly

(Updates with new capital raised in eighth paragraph.)

May 23 (Bloomberg) -- Carlyle Group, the world’s second- largest private-equity firm, invested $7 billion last year, a third more than in 2010, as buyouts surged.

Carlyle committed $3 billion to deals that closed in the first quarter of this year, the Washington-based firm said today in its annual report to clients. The firm invested $5.2 billion in 2009.

Private-equity transactions rose more than fourfold last year to $183 billion, according to data compiled by Bloomberg, after credit markets seized up in mid-2008 and financing for takeovers dried up. Carlyle is adding or expanding non-buyout businesses to diversify profits ahead of a potential initial public offering.

“The past year has been a period of exciting change and growth at Carlyle with new people, new geographies and new businesses,” co-founder David Rubenstein said in a statement.

The firm is considering an IPO, co-founder William Conway said in December. Blackstone Group LP, KKR & Co. and Apollo Global Management LLC, all based in New York, have gone public. Blackstone, the world’s largest private-equity company, has gained 57 percent during the past 12 months.

Carlyle agreed in January to buy AlpInvest Partners NV, a Dutch money manager that oversees about 32 billion euros ($45 billion) in private-equity funds, to expand its asset-management operations.

The firm also boosted its structured credit offerings, established an energy mezzanine team and purchased a majority stake in Claren Road Asset Management LLC, a New York-based hedge fund with $5 billion in assets under management.

New Investor Capital

Carlyle raised $4.2 billion in commitments from investors last year, according to the report. The money was spread across six funds and co-investment deals with limited partners -- the pensions, endowments and sovereign wealth funds that comprise private equity’s main investor base. Many of those funds lost value during 2008 and 2009, preventing them from making new commitments to private equity.

The firm returned a record $6.4 billion in deal profits to clients in the first quarter after distributing $7.5 billion last year.

“We are pleased that Carlyle continues to earn the confidence of its investors even during the most turbulent times,” Carlyle’s founders said in the annual report.

Fundraising has proved difficult for buyout firms even in a recovering economy. Managers raised $42.3 billion in the first quarter, the lowest amount in almost eight years, researcher Preqin Ltd. said last month.

--Editors: Larry Edelman, Christian Baumgaertel

To contact the reporter on this story: Anne-Sylvaine Chassany in Paris at achassany@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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Insurers May Owe $1 Billion in Unpaid Benefits

May 20, 2011, 4:12 PM EDT By Alexis Leondis

May 19 (Bloomberg) -- Life insurers may be keeping at least $1 billion in unclaimed benefits owed to policyholders, beneficiaries or states, according to a Florida regulator.

Florida Insurance Commissioner Kevin McCarty, who made the estimate, said it was a “conservative number,” in a conference with reporters during a break in a hearing today in Tallahassee. Officials from MetLife Inc., the largest U.S. life insurer, and Nationwide Mutual Insurance Co., the policyholder-owned insurer, were subpoenaed to appear at a hearing by the Florida Office of Insurance Regulation to explain how they determine when policyholders have died.

“We want to ensure that insurance companies use as much effort to find and pay benefits as they do to find and collect premiums,” McCarty said during the call with reporters.

The hearing, which was attended by representatives from about 15 states, was held to help determine whether life insurers use Social Security Administration death records to stop annuity payments, without using that same data to identify life insurance policyholders who have died.

Liability for life insurance begins when the company receives proof of death, which is different than what happens in the annuity business, according to testimony by Todd Katz, executive vice president of insurance products for New York- based MetLife. If annuities continue to be paid out to deceased recipients, the insurer may have to reclaim those payments, he said.

Death List Check

MetLife began using Social Security data to stop some annuity payouts starting in the late 1980s, Katz said. The insurance company started using the death list to identify some life insurance policyholders’ deaths around 2004. The insurer used the death record to conduct a sweep of most of its life insurance policies in 2007 and in 2010 decided it would check the list at least once a year. When matches are made, an investigation begins and beneficiaries are contacted, Katz said.

MetLife paid more than $11 billion to beneficiaries in 2010 and turned over $51 million to the states, according to a statement from the insurer.

Using the Social Security death list “can be valuable as an aid in preventing errors and fraud and as a safety net to identify the small fraction of deceased insureds and account holders for which the company may not receive a claim in the ordinary course,” a MetLife statement said.

MetLife officials have also been subpoenaed to appear at a hearing in California on May 23. The National Association of Insurance Commissioners, the organization of state regulators, said this week it had formed a national task force, led by Florida, to help coordinate investigations into whether companies failed to pay benefits to beneficiaries of life insurance policies.

Hancock Settlement

The group includes members from California, Illinois, Iowa, Louisiana, New Hampshire, New Jersey, North Dakota, Pennsylvania and West Virginia, according to a statement from the NAIC. Model laws may be established to provide more uniformity for unclaimed benefit practices, McCarty said.

Florida’s insurance office announced a settlement with John Hancock yesterday, in which the insurer agreed to pay money to beneficiaries with interest dating from the date of death. The settlement also includes a payment of $3 million to the state, of which $600,000 was waived, according to a statement from the insurance office.

John Hancock, a unit of Toronto-based Manulife Financial Corp., agreed to restore the full value of more than 6,400 accounts, denied any wrongdoing and also agreed to establish a $10 million fund to facilitate payments to beneficiaries that cannot be contacted, the statement said.

“This agreement is consistent with John Hancock’s longstanding commitment to keeping our promises to owners and beneficiaries of our products,” the company said in statement.

--With assistance from Margaret Collins in New York. Editors: Rick Levinson, Dan Kraut.

To contact the reporter on this story: Alexis Leondis in New York at aleondis@bloomberg.net

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

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Treasuries Drop Amid Mixed Economic Data, $72 Billion Debt Sales

May 14, 2011, 12:49 AM EDT By Susanne Walker

May 14 (Bloomberg) -- Treasuries fell for the first time in five weeks as mixed economic data and a rebound in commodities cooled demand for the safety of U.S. debt.

U.S. 10-year note yields touched the lowest since December yesterday on speculation that inflation may have peaked after the Labor Department reported the consumer price index rose 0.4 percent in April, matching economists’ forecast. The U.S. sold $72 billion in notes and bonds this week and will auction $11 billion in Treasury Inflation Protected Securities next week. The Federal Reserve will release minutes of last month’s policy meeting on May 18.

“Yields being low is because the economy is not generating enough forward momentum to suggest rising commodity prices will be passed through the underlying rate of inflation,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc. “There’s a lot of mixed data and mixed signals and it’s creating a very choppy trading environment.”

Yields on 10-year notes rose two basis points to 3.17 percent in New York, according to Bloomberg Bond Trader prices, from 3.15 percent on May 6. The yield yesterday reached 3.13 percent, the least since Dec. 8. It touched a 2011 high of 3.77 percent in February.

Yield Data

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the break- even rate, narrowed yesterday to 2.39 percentage points from 2.67 percentage points on April 11, which was the widest in three years.

“As we look back at the week and forward to the next, one begins to get the feeling that the U.S. economy is not about to run away from anyone,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote yesterday in a note to clients. “Some of the major issues like housing and jobs are slow to get better.”

The Standard & Poor’s GSCI Index of 24 raw materials moved up by 1.4 percent this week after dropping 11 percent last week. The Standard & Poor’s 500 Index trimmed weekly gains, dropping by 0.8 percent yesterday. The Index dropped 1.1 percent this month through May 12 as gauges of energy and raw-materials producers slumped with metal and oil prices.

Jobs Trend

A report on May 12 showed the number of Americans filing first-time claims for unemployment insurance payments fell less than forecast last week, indicating recovery in the labor market is taking time to accelerate. Applications for jobless benefits decreased 44,000 in the week ended May 7 to 434,000, Labor Department figures showed. Economists forecast 430,000 claims, according to the median estimate in a Bloomberg News survey.

A separate report on May 12 showed sales at U.S. retailers rose in April and the March gain was revised higher, sending Treasury yields higher that day.

“The consumer is still in the game,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It’s not telling you the consumer is retrenching or buying everything off the shelf.”

Off the Shelf

Sales at U.S. retailers April reflected gains at service stations and grocery stores as fuel and food prices climbed.

The 0.5 percent increase was the smallest since July and followed a 0.9 percent March gain that was more than double the previous estimate, Commerce Department figures showed in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.6 percent rise. Sales excluding automobiles and gasoline increased 0.2 percent.

The consumer price index increased 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News and following a 0.5 percent advance in March, figures from the Labor Department showed in Washington. Excluding volatile food and energy, the core gauge rose 0.2 percent, also as projected.

“The inflation data was not great, but not too bad,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 20 primary dealers that trade directly with the Fed. “Most people think the economy is showing signs of life, but it’s also showing signs of troubles. It’s very mixed.”

The Fed has held its target rate for overnight lending between banks at zero to 0.25 percent since December 2008. Policy makers affirmed at their April 27 meeting the plan to buy Treasuries through June in an effort to foster faster economic growth and jobs expansion.

The U.S. sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds this week.

--Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net;

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

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HSBC Targets $3.5 Billion Cost Savings With Office, Job Cuts

May 11, 2011, 5:31 AM EDT By Stephanie Tong and Gavin Finch

(Updates with analyst comment in third paragraph.)

May 11 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, will cut jobs and close offices as to reduce costs by about a tenth over the next two years to expand in faster- expanding economies and prepare for stricter capital rules.

The lender will target cost cuts of $2.5 billion to $3.5 billion by 2013, according to a statement today, compared with total operating expenses of $37.7 billion last year. HSBC will cut head office jobs and may sell its U.S. credit cards division as it seeks to exit unprofitable units among its 87 national subsidiaries, it said today. The shares fell in London trading.

The targets “are a reiteration of those announced with the full-year results,” Ian Smillie, an analyst at Royal Bank of Scotland Group Plc, said in a note to investors today. He has a “buy” rating on the stock. They “will disappoint those anticipating a revised round of more ambitious targets.”

Stuart Gulliver, 52, who became chief executive officer in January, said this week it may take as long as three years to reach the bank’s targets on reducing costs, which are the highest among its U.K. peers. He is spelling out the changes at a meeting with investors in London today. Competitors including Barclays Plc are also seeking to exit operations with low returns as regulators demand they hold more capital in the wake of the financial crisis.

‘Not About Shrinking’

“This is not about shrinking the business but about creating capacity to re-invest in growth markets and to provide a buffer against regulatory and inflationary headwinds,” Gulliver said. “We will continue to invest in markets with strategic relevance and high actual or potential returns and will either turn around or dispose of other businesses.”

The bank fell 0.9 percent to 650 pence at 9:57 a.m. in London, for a market value of 115.9 billion pounds. That marked the biggest decline in the FTSE 350 Index of Britain’s five biggest banks.

HSBC said it will focus on commercial banking globally, while scaling back in consumer banking to markets where it can “achieve profitable scale.” The lender said it will focus on retail banking in the U.K. and Hong Kong, high-growth markets such as Mexico, Singapore, Turkey and Brazil and smaller countries where it has a leading market share.

HSBC said it would cut $1.38 billion of costs by 2013 through measures including simplifying “regional structures,” consolidating data centers, shifting operations to cheaper cost locations, and reducing paperwork. The bank had 295,061 employees worldwide at the end of 2010 compared with 315,520 at the end of 2007.

‘Little Revolutionary’

“There is little revolutionary within the announcements,” Keefe, Bruyette & Woods Ltd. analysts including Mark Phin said in a note to clients today.

Costs rose to 60.9 percent of income in the first quarter from 49.6 percent, earnings figures showed on May 9. Net income rose 58 percent to $4.15 billion from $2.63 billion a year earlier. The bank has a target to increase revenue faster than costs, HSBC said today.

“We clearly have a cost problem,” Gulliver told investors today. “The team will address the issues of the firm with some energy.”

The first-quarter results, with emerging markets outperforming developed ones, showed that HSBC is “a developing-market bank trying to escape from the body of a very different type of ‘conglomerate bank,’” Mediobanca SpA analysts said in a note yesterday. HSBC is “immensely powerful” and its results showed structural flaws “that prevent it providing the kind of shareholder returns the bank should be capable of providing.”

U.S. Unit

HSBC, whose origins date back to 1865 when it operated as the Hongkong and Shanghai Banking Corp. to finance trade in opium, silk and tea, focuses on emerging markets. It has 7,500 offices.

The bank could free $25 billion of capital by selling its U.S. credit-card unit, Rohith Chandra-Rajan, an analyst at Barclays Capital, wrote in a note to investors last week.

HSBC acquired the credit-card unit in 2003 with its $15.5 billion purchase of U.S. subprime mortgage lender Household International, now known as HSBC Finance. In 2009, HSBC halted consumer-finance lending at the unit, which has contributed to about $60 billion of provisions in North America, according to data compiled by Bloomberg.

‘Lot of Inefficiency’

“HSBC has a lot of inefficiency and manages a lot of its processes on a region-by-region basis,” Cormac Leech, an analyst at Canaccord Genuity Ltd. in London, said before the statement was published.

The bank reiterated that it seeks a return on common equity of 12 percent to 15 percent. It lowered that goal in February from 15 percent to 19 percent.

HSBC could climb to about 950 pence a share if Gulliver committed to ensuring all businesses generate a return on equity exceeding 10 percent, Gareth Hunt, an analyst at Investec Securities in London, wrote in a note to investors last month. HSBC shouldn’t have “a flag in every country,” he wrote. The bank’s shares closed at 656.2 pence in London trading yesterday.

Among the bank’s peers, Barclays cut its target for return on equity in February to at least 13 percent from the 18 percent CEO Robert Diamond has said it averaged over the past three decades. Credit Suisse Group AG, Switzerland’s second-biggest bank, trimmed its goal to more than 15 percent from more than 18 percent.

--With assistance from Jon Menon in London. Editors: Francis Harris, Edward Evans.

To contact the reporters on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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