JPMorgan Shares Rise After Earnings Beat Analysts’ Estimates

July 14, 2011, 12:55 PM EDT By Dawn Kopecki

(Updates with Dimon’s comments on Europe in 12th and 13th paragraphs.)

July 14 (Bloomberg) -- JPMorgan Chase & Co. rose the most in eight months in New York trading after earnings beat analysts’ estimates and revenue unexpectedly climbed on gains from underwriting stocks and bonds.

JPMorgan shares jumped as much as 4.1 percent after the New York-based bank reported its highest half-year profit ever, at almost $11 billion. Second-quarter net income increased 13 percent from a year earlier, to $5.43 billion, or $1.27 a share, six cents higher than the average estimate of analysts surveyed by Bloomberg.

Trading and investment-banking fees bolstered results as the retail bank labored under bad mortgages, low interest rates and litigation over loan-servicing and foreclosure practices. JPMorgan, led by Chief Executive Officer Jamie Dimon, was the first of the six-largest U.S. banks to report earnings, topping estimates for the 13th straight quarter, according to data compiled by Bloomberg.

“They’ve set a high bar for the rest of the industry in a very difficult environment,” Michael Holland, who oversees more than $4 billion in assets at New York-based Holland & Co., said in an interview with Bloomberg Radio. The firm’s $26.8 billion in revenue was “a blow-away number,” Holland said.

JPMorgan rose $1.17, or 3 percent, to $40.79 at 11:51 a.m. in New York Stock Exchange composite trading, after reaching $41.24 earlier today, the biggest gain since Nov. 4. The shares were down 6.6 percent this year through yesterday.

Fixed Income

Second-quarter revenue jumped 7 percent, beating the highest estimate among 18 analysts surveyed, as fixed-income and equity markets revenue climbed to $5.5 billion from $4.6 billion a year earlier, a 20 percent gain. Revenue was projected to be $26 billion, according to the survey.

JPMorgan’s fixed-income and equity trading results beat the estimates of $5.29 billion from Chris Kotowski, an Oppenheimer & Co. analyst, and $4.95 billion from Keith Horowitz, a Citigroup Inc. analyst.

The bank was able to boost trading results by increasing leverage and making bets on safer securities, according to Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst at FBR Capital Markets in Arlington, Virginia.

Trading gains were “pretty broad-based,” Dimon said on a call with reporters.

Fee Revenue

The investment bank posted its second-best quarter for fee revenue out of the last 14 quarters and revenue outside the U.S. climbed 11 percent from the same quarter last year, Chief Financial Officer Doug Braunstein told reporters on the conference call.

The investment bank and trading desk are “carrying the bank right now, and the bank continues to struggle,” Miller said. “This was all driven by the broker-dealer side of the business.”

The bank’s outstanding loans and contracts in Portugal, Ireland, Italy, Greece and Spain total about $15 billion, which “bounces around by several billion,” after taxes and after taking into account hedges against that risk, Dimon said. In the worst-case scenario, the bank may lose about $3 billion, he said.

“We’ve not dramatically reduced those exposures,” Dimon said. “We’re still doing a lot of business in Europe. We hope the Europeans appreciate it.”

Credit Cards

JPMorgan’s credit-card division, which lost money for all of 2009, generated $911 million in profit, or 17 percent of the bank’s net income for the quarter. The investment bank’s $2.06 billion of earnings accounted for 38 percent of the total.

Fewer consumers fell behind on their credit-card payments in the second quarter. Thirty-day delinquency rates dropped to 2.98 percent from 4.96 percent in the same quarter of 2010 and 3.57 percent in the first quarter of 2011. The rate of credit cards charged off as bad debt also fell, to 5.82 percent from 10.2 percent the prior year and 6.97 percent in the previous quarter.

“Within our wholesale credit portfolio, credit trends appear to have normalized,” Dimon said in a statement.

Provisions for credit losses dropped 46 percent to $1.81 billion from $3.36 billion as defaults and late payments declined. The bank released $1.2 billion of reserves held against future losses back into earnings.

Beating Estimates

“You continue to get reserve releases, which mean that your headline earnings-per-share numbers beat” estimates, Miller said. “Investors see that as poor quality and instead look at the underlying fundamentals, pretax pre-provision profits or your underlying revenue numbers.”

The retail bank, which includes mortgages, consumer bank accounts and small business lending, posted a $582 million profit, from a $1.04 billion gain a year before and a $208 million loss in the first quarter.

The division benefited from a $587 million reduction in provisions to $1.13 billion, JPMorgan said.

The bank added $1.27 billion to litigation reserves, mostly for mortgage-related issues, and took a $1 billion charge to clean up foreclosure matters, according to a slide show accompanying the earnings report. Repurchase losses were $223 million, JPMorgan said.

Dimon told reporters that the $1 billion charge covered some of the costs to settle charges by U.S. and state officials that the bank improperly foreclosed on borrowers.

Delaying Foreclosures

“I would do anything to get it done today, but my counsel advises us that it could take a while,” Dimon said of negotiations with 50 state attorneys general and the Justice Department. “Delaying foreclosures is not a good thing for the economy.”

The reserves don’t cover liabilities from loans made by Washington Mutual, the lender JPMorgan acquired during the financial crisis. JPMorgan said those liabilities are the responsibility of the Federal Deposit Insurance Corp., adding that the “FDIC has contested this position.”

The outstanding balance of loans related to Washington Mutual was approximately $70 billion as of March 31, with about $24 billion overdue by 60 days or more, according to the company’s first-quarter regulatory filings.

JPMorgan and other large banks, which have benefited from record low costs of funding mortgages and other assets, face a squeeze on net interest margins -- the difference between what they pay to borrow money and what they get for loans and on securities.

Interest-Earning Assets

The net yield on interest-earning assets -- what the bank collects on interest on loans and securities minus what it pays out on deposits and other borrowings -- fell to 2.72 percent in the second quarter, from 2.89 percent in the first quarter and 3.01 percent a year earlier.

Citigroup, the third-biggest U.S. lender behind JPMorgan and Bank of America Corp., may report a second-quarter profit of $2.95 billion when it releases results on July 15, the survey of analysts shows. Charlotte, North Carolina-based Bank of America may report a profit of $3.08 billion excluding mortgage-related costs on July 19. San Francisco-based Wells Fargo & Co. may say it earned $3.75 billion when it announces results the same day.

Capital One Financial Corp., this year’s best-performing major U.S. bank stock, said yesterday that net income rose 50 percent to $911 million as it set aside fewer provisions for loan losses.

--With assistance from Erik Schatzker, Michael J. Moore, Rick Green, Brooke Sutherland and Lindsey Rupp in New York. Editors: Steve Dickson, William Ahearn

To contact the reporter on this story: Dawn Kopecki in New York at dkopecki@bloomberg.com.

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

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KKR, Apax Lead Cannibals Contest for Shrinking Investor Dollars

July 13, 2011, 7:26 PM EDT By Anne-Sylvaine Chassany and Cristina Alesci

July 14 (Bloomberg) -- About a month after London-based Apax Partners LLP began raising a 9 billion-euro ($12.7 billion) leveraged buyout fund, local rival Permira Advisers LLP told investors it wanted 6.5 billion euros for a new pool, people briefed on the talks said.

Permira, which still has more than a year to finish investing its existing 9.6 billion-euro fund, is joining a rush by private-equity firms including New York’s KKR & Co. and Warburg Pincus LLC to raise cash now, just as investors warn they haven’t got the money to continue backing all firms.

“Many firms have realized they can’t count on their clients’ loyalty only to raise funds,” said Jeremie Le Febvre, a partner at Triago SA, which helps firms raise money. “They can’t afford to wait if they want a piece of the pie. It’s reality-check time for everyone, and some will be disappointed.”

Investors in private-equity funds, known as limited partners, say they’re planning to reduce pledges to the largest of the new pools and invest in fewer of them, partly because they haven’t received enough money back from previous funds to match commitments during the boom years. LPs are also shifting away from large buyout funds to firms targeting smaller deals and investments in faster-growing emerging markets, making the pie available for LBO firms in Europe and the U.S. even smaller.

“Firms at the larger end are taking one another on in fundraising, vying for scarce and selective capital,” said Mounir Guen, head of MVision Private Equity Advisers, which helps firms raise funds. “They’ll end up partially cannibalizing one another, hence take much longer to raise their funds and make it more challenging to reach their targets.”

Ramping Up

Leveraged-buyout firms are seeking more than $170 billion this year, more than what they sought in 2006 at the height of the private-equity boom, according to research firm Preqin Ltd. Nearly half of all private-equity fund managers plan to raise capital in 2011, according to a survey by Rothstein Kass, an advisory firm.

“Fund managers can influence the timing of their fundraising, and many of them delayed it last year,” said Helen Steers, head of Pantheon’s European primary funds group, a backer of private-equity firms. “Equally, they have been ramping up this year, because debt financing has come back allowing to fund deals, but also because they are more eager to come back to market now.”

In the U.S., KKR and Providence Equity Partners are seeking as much as $10 billion and $6 billion respectively. New York- based Warburg Pincus is preparing to raise a new fund after investing more than 80 percent of the $15 billion vehicle it raised in 2008, people familiar with the matter said last month.

Crowded Europe

Unlike KKR, which invests in broad range of companies, Providence specializes in media and communication deals, and Warburg’s investments range from backing early stage companies to buyouts of mature businesses.

Europe is more crowded. Five of the region’s seven largest firms are raising funds or are about to do so. BC Partners Ltd, which last year began marketing the first large European buyout fund since the financial crisis, has gathered more than 4 billion euros for its 6 billion-euro pool. Cinven Ltd., the London-based firm founded by the coal miners’ pension plan, is seeking 5 billion euros. EQT Partners AB, Scandinavia’s biggest private-equity firm, has secured 3.5 billion euros out of the 4.3 billion euros it’s seeking, people familiar with the matter said on July 5.

Officials at Warburg, KKR, and Providence declined to comment on fundraising. Officials at Permira, which outlined its fundraising plans to investors last month, Cinven, BC Partners, EQT and Apax also declined to comment.

‘Harder Than Ever’

“It’s a big issue if managers can’t get at least 50 percent from current investors,” said Richard Anthony, senior managing director at Evercore Partners Inc.’s private funds group, which helps firms raise money. “It’s hard to raise money when existing clients aren’t backing you, because sourcing new capital is harder than ever, even for more established funds.”

Almost 90 percent of limited partners won’t commit -- or “re-up” -- to some of their existing fund managers, partly because they don’t have enough capital available, a June investors survey by investment firm Coller Capital Ltd. showed. A fifth of firms may fail to raise new funds, investors polled by Coller predicted.

Sharing Clients

“We’ll very quickly see who the winners are,” said Rhonda Ryan, head of the European Private Funds group at Pinebridge Investments, which manages about $20 billion of private equity assets. “It will take longer before we see those who can’t reach their target, and for some funds, we’ll probably see some targets revised down over time.”

Firms are competing for the same clients. Apax and Permira in London share 26 investors across their funds, according to Preqin. California State Teachers’ Retirement System and Pennsylvania State Employees’ Retirement System are among 19 investors in both of their most recent funds. Apax and BC Partners share 23, including the Michigan Department of Treasury and Pennsylvania State. Canadian Pension Plan Investment Board, Canada’s largest pension plan, and New York State Teachers’ Retirement System are among 10 investors in both Permira and Cinven’s latest pools.

“Investors have finally woken up to the huge costs associated with having many relationships,” said Erik Hirsch, chief investment officer for Hamilton Lane Advisors, which helps clients with $89 billion select private equity funds. “They should have always chosen between A or B fund and not committed to both A and B. But there’s a lot more pressure now to choose one, which means fewer ‘yes’ votes.”

Dropping Blackstone

While still committing to large buyout funds, Pinebridge favors mid-market funds, Ryan said. Pantheon won’t commit to about 40 percent of the managers it invests with today, up from 30 percent before, Steers said.

Investors are already making choices affecting the most established firms. Pennsylvania State Employees’ Retirement System, a longtime backer of Blackstone Group LP’s buyout funds, hasn’t committed to the New York firm’s latest fund, which so far has attracted more than $16 billion.

Washington State Investment Board, one of the largest private equity investors, cut its allotment to KKR’s latest fund to $500 million from a $1.5 billion commitment to its predecessor. The Oregon Public Employees’ Retirement Fund has committed $525 million to KKR’s new pool, down from a $1.3 billion pledge in the firm’s 2006 pool.

Providence’s Niche

“Washington continues to look for balance in its investment selections,” said Liz Mendizabal, a spokeswoman for Washington State Investment Board.

Pamela Hile, a spokeswoman for Pennsylvania, and James Sinks, a spokesman for Oregon, didn’t respond to calls seeking comment.

Both pensions committed to Providence’s new fund, which has secured about $3 billion so far. Washington State raised its investment to $300 million from $250 million in the previous fund, according to the board’s minutes. Oregon allotted $150 million, half the amount committed previously.

“It’s clearly in the minds of some fund managers that you need to be differentiated to fundraise at the moment,” Ryan said.

--Editors: Edward Evans, Christian Baumgaertel

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

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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Europe’s Debt Plague Spreads to Italy

Alessandra Benedetti/Bloomberg

By Jeffrey Donovan

Italy, long considered too big to fail, now looms as the Continent’s biggest possible failure. Amid indecision in Brussels over Greece’s woes and squabbling in Prime Minister Silvio Berlusconi’s Cabinet, Italy’s bonds soared to their highest yields since the euro’s introduction, and its stock market hit a two-year low as investors bet that Europe’s biggest debtor will struggle to pay its bills.

With markets jittery over results of European bank stress tests due on July 15, UniCredit, Intesa Sanpaolo, and other Italian banks have seen their shares suffer. On July 12, Milan trading in UniCredit was suspended after the stock plunged 7 percent. UniCredit later pared its losses, and Bank of Italy Governor Mario Draghi—set to take over as president of the European Central Bank in October—said on July 13 that he was “certain” Italian lenders would pass the tests.

While Italy’s €1.8 trillion ($2.6 trillion) debt pile has long made it seem like an easy target for speculators, until this summer the country had sidestepped the worst of Europe’s sovereign debt crisis. Finance Minister Giulio Tremonti helped trim the budget deficit to 4.6 percent of output last year, less than half the gap in Greece, Spain, or Ireland. Prudent lending meant Italy never had real estate bubbles like those that devastated Ireland and Spain, and more than half its bonds are held at home. Those factors seemed enough to shield the country from market turbulence.

Then on May 21, Standard & Poor’s lowered its outlook on Italy to negative from stable, fretting that political gridlock might slow cost-cutting amid chronically weak growth. Ten days later, Berlusconi’s ruling bloc was routed in local elections across Italy, raising the chances his government may fall before its term ends in 2013, jeopardizing economic reforms. His grip on power slipped further on June 14 when voters in a referendum stymied his bid to end a ban on nuclear power and privatize water distribution. Moody’s Investors Service chimed in on June 17, warning that it, too, may cut its credit rating on Italy. “If these market pressures persist, Italy’s financing costs could soon approach unsustainable levels,” says Vladimir Pillonca, an economist at Societe Generale in London.

The defeats sparked bickering in the ruling coalition. They also raised fresh criticism of Tremonti, whose fiscal rigor has never been popular and who is blamed by many for choking the euro zone’s third-largest economy. Tensions spiked after Tremonti was captured on video calling a fellow minister “a moron” and Berlusconi told la Repubblica newspaper that Tremonti “isn’t a team player.”

The bond market rout began on July 4, three days after the government approved austerity measures to balance the budget by 2014. Confusion surrounded the plan, which originally promised €47 billion, a figure later trimmed to €40 billion. Investors, worried that most savings measures kick in after 2013, when a new government will likely be in office, sent Italian bond yields soaring. To calm markets, Tremonti on July 12 departed early from a Brussels summit on Greece and rushed to Rome to push Parliament to approve the government’s austerity plan. While deputies indicated they would pass a modified package on July 15 and yields later eased back from record levels, Europe’s debt crisis had already entered a new phase.

The bottom line: With political turmoil in Rome, yields on Italian 10-year bonds have soared on concerns the country will be unable to pay its debts.

Donovan is a reporter for Bloomberg News.

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Advanced Property Investment Strategies

China to Expand Efforts to Curb Growth in Property Prices

July 14, 2011, 12:21 PM EDT By Bloomberg News

July 15 (Bloomberg) -- China will expand its efforts to curb the growth in residential prices to smaller cities after limiting home purchases in Beijing and Shanghai, according to a summary of a State Council meeting chaired by Premier Wen Jiabao.

The government said so-called second and third-tier cities which have seen excessive price gains should restrict the number of homes each family is allowed to buy, according to the State Council or cabinet yesterday.

China is intensifying property restrictions nationwide after developers posted gains in first-half sales and housing transactions climbed 31 percent last month, even after more curbs were added earlier this year. The central bank last week raised interest rates for the fifth time since October.

“If the government doesn’t step up to say anything at the half-year point, the market will interpret it as the government is tolerant to gains in the housing market,” said Yao Wei, an economist at Societe Generale SA in Hong Kong. “China is facing a big pressure from inflation and there’s no way the government will relax property curbs now.”

China’s June housing transactions increased to 499.2 billion yuan ($77 billion), compared with 380.9 billion yuan in the previous month, based on first-half economic data provided by China’s statistics bureau on June 13. Sales in the first half climbed 22 percent to 2.1 trillion yuan from a year earlier, according to the data.

Urumqi, Dandong

The property boom is shifting from Beijing and Shanghai as government measures to curb the market haven’t kept prices from rising in secondary cities. Urumqi in the northwest and northeastern Dandong posted the biggest gains in May home prices, according to the statistics bureau. The data for June is scheduled to be released on July 18.

Standard & Poor’s on June 15 cut its outlook on Chinese developers, echoing concerns of a property bubble aired by bears such as hedge fund manager Jim Chanos.

The measure tracking property stocks on the Shanghai Composite Index rose 8.1 percent this year, the most among five industry groups on the benchmark gauge.

China Vanke Co., the country’s biggest developer, reported last week that sales in the first six months rose 79 percent to 65.7 billion yuan, while Evergrande Real Estate Group said on July 11 that sales more than doubled to 42.3 billion yuan.

‘Proper and Adequate’

Cheung Kong Holdings Ltd., the developer controlled by Hong Kong billionaire Li Ka-shing, said yesterday it’s “proper and adequate” for China to impose measures to cool down its property market. Rising home prices run the risk of becoming a social problem, Executive Director Justin Chiu said in Shanghai, where he unveiled three new projects in the city.

“We do hope prices will remain stable, otherwise the government will take more action,” Chiu told reporters. “As a property developer, we don’t want prices to rise too quickly either and want prices to be stable.”

China’s rising inflation, which hit a three-year high in June, also boosted the investment data with higher costs for materials and wages, the statistics bureau said this week.

“The property policies are at a critical moment,” the State Council said in the report. “We must strictly uphold the direction of the curbs and won’t ease the tightening measures.”

June home prices climbed 0.4 percent from May, rising for a 10th straight month, according to SouFun Holdings Ltd., the country’s biggest real estate website. The increase was driven by smaller cities, while prices in larger ones including Beijing and Shanghai either posted slower gains or declines from May, SouFun said.

China will also curb gains in housing rents, the State Council report said. The government will ensure the construction of 10 million units of social or affordable housing begins by the end of November, according to the report.

“If they don’t continue to tighten the market, it will rebound soon,” said Jinsong Du, a Hong Kong-based property analyst at Credit Suisse Group AG, citing this week’s property sales data. “The property curbs haven’t showed positive effects.”

--Bonnie Cao, Liza Lin. Editors: Linus Chua, Allen Wan

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at bcao4@bloomberg.net; Liza Lin in Shanghai at llin15@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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European Stocks Drop as Italy Auctions Bonds; Software AG Falls

July 14, 2011, 12:34 PM EDT By Adam Haigh

July 14 (Bloomberg) -- European stocks fell for the fourth day in five after Italy auctioned bonds and Moody’s Investors Service said the American government may lose the Aaa credit rating it’s held since 1917.

Petrofac Ltd., the U.K.-based oilfield services and engineering provider, decreased 3.8 percent as Barclays Plc advised selling the shares. Software AG plunged 16 percent, its largest slide in more than two years, after posting a decline in sales. SAP AG, the world’s biggest business-software maker, lost 2.8 percent.

The Stoxx Europe 600 Index sank 0.8 percent to 267.68 at the 4:30 p.m. close in London. The gauge has fallen 2.2 percent this week amid concern that the sovereign-debt crisis in Europe will spread to the larger economies of Italy and Spain.

“Moody’s action overnight was a response to the small but rising risk of a short-lived default,” wrote Jim Reid, a global strategist at Deutsche Bank AG in London, in a report today. “Moody’s is now the rating agency putting most pressure on Congress to act.”

Moody’s put the U.S. on review for the first time since 1996 as talks to raise the country’s $14.3 trillion debt limit stalled, adding to concern that political gridlock will lead to default. Even a temporary default will probably have “large systemic effects” on the economy and Treasury finances by disrupting money funds, the repurchase-agreement market and foreign investors’ willingness to buy the government’s debt, according to JPMorgan Chase & Co.

Italy Bond Auction

Italy sold five-year bonds at the highest yield in three years. The Treasury priced 1.25 billion euros ($1.8 billion) of 2016 bonds today at an average yield of 4.93 percent, compared with a yield of 3.9 percent at a previous auction on June 14.

Prime Minister Silvio Berlusconi won a confidence vote in the Italian Senate on an austerity package aimed at balancing the budget in 2014, paving the way for the Chamber of Deputies to pass the plan tomorrow.

Greece’s credit rating was cut three levels to Fitch Ratings’ lowest grade for any country in the world as the company followed rivals and said that a default is a “real possibility.”

European stocks had increased yesterday as Federal Reserve Chairman Ben S. Bernanke said he’s prepared to provide more stimulus if needed and as China’s economic growth beat estimates. The Stoxx 600 has rallied 87 percent including dividend income since March 2009 as governments and central banks from Washington to London enacted emergency stimulus measures to revive the economy.

U.S. Earnings Season

European stocks recouped some losses after JPMorgan Chase & Co. posted second-quarter earnings that topped estimates.

Germany’s Landesbank Hessen-Thueringen snubbed the European Union’s bank stress tests, refusing to give the European Banking Authority permission to publish all of its data. The stress test results will be published tomorrow after the close of European equity markets.

National benchmark indexes declined in all 18 western European market today. The U.K. FTSE 100 Index slid 1 percent, Germany’s DAX Index declined 0.7 percent and France’s CAC 40 Index retreated 1.1 percent.

Petrofac dropped 3.8 percent to 1,445 pence after the company was downgraded to “underweight” from “equal weight” at Barclays.

SAP, Software AG

Software AG tumbled 16 percent to 35.19 euros for the biggest decline in the Stoxx 600 as Germany’s second-largest maker of business software reported second-quarter revenue that missed analysts’ estimates due to currency moves and its failure to sell licenses. Software AG also said that demand to implement products from SAP fell from the same period a year earlier. SAP slipped 2.8 percent to 40.86 euros.

Accor SA and Intercontinental Hotels Group Plc fell 2.2 percent to 29.64 euros and 3.2 percent to 1,241 pence, respectively, after rival Marriott forecast third-quarter earnings of 25 to 29 cents per share. That fell short of analysts’ estimates for earnings per share of 30 cents.

Daily Mail & General Trust Plc slumped 4.1 percent to 421.3 pence after saying that advertising sales declined 7 percent in the 13 weeks through July 3.

Mothercare Plc decreased 1.4 percent to 405 pence as first- quarter U.K. comparative sales declined 4.3 percent.

Storebrand ASA surged 5.5 percent to 46.48 kroner for the biggest gain on the Stoxx 600. Norway’s largest publicly traded insurer posted second-quarter profit today that beat analysts’ estimates.

--Additonal reporting by Conor Sullivan in London. Editors: Will Hadfield, Andrew Rummer

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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Bernanke Signals to Lawmakers Fed Has More Tools to Spur Growth

July 14, 2011, 12:21 AM EDT By Jeannine Aversa and Joshua Zumbrun

July 14 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke signaled the central bank has more tools for monetary easing should the economy weaken and stymie efforts to generate jobs for 14.1 million unemployed Americans.

The Fed could pledge to keep the main interest rate at a record low and hold its balance sheet at $2.87 trillion for a longer period, Bernanke said yesterday in congressional testimony. It could also buy more bonds, increase the average maturity of its securities holdings or cut the interest rate it pays banks on their reserves, he said.

“We have to keep all the options on the table,” Bernanke said in semi-annual testimony to the House Financial Services Committee. The “economy still needs a good deal of support.”

After predicting the economy will strengthen during the second half of 2011, Bernanke left open the door to further stimulus by saying that sagging home prices, hard-to-get loans and 9.2 percent unemployment pose long-term obstacles to growth. Stocks rose and the dollar weakened after Bernanke’s comments.

“If we see another month or two of weak jobs data, then that will be a green light for further monetary stimulus,” said Gregory Daco, U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The Fed chief is scheduled to testify today to the Senate Banking Committee beginning at 10 a.m. in Washington.

Bernanke also told Congress yesterday that high U.S. budget deficits, if not curbed, could slow the economy and prompt an increase in interest rates. At the same time, he said Congress needs to be a “little bit cautious” about “sharp cuts” in federal spending in the near term because they could hurt the recovery.

Moody’s Action

Hours after he spoke, Moody’s Investors Service put the U.S. under review for a credit rating downgrade as talks to raise the government’s $14.3 trillion debt limit stalled, adding to concern that political gridlock will lead to a default. Bernanke, in his testimony, said a default would be a “major crisis.”

The Standard & Poor’s 500 Index rose 0.3 percent to 1,317.72 as of the 4 p.m. close of trading in New York, trimming its gain from 1.4 percent.

“The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support,” Bernanke said. The Fed “remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate.”

At the same time, Bernanke said there is also the possibility that inflation could pick up in a way that would require the Fed to begin tightening credit and exit its record monetary stimulus.

High Hurdle

The “hurdle remains very high” for a new dose of bond purchases in part because inflation expectations have moved up, said Dan Greenhaus, chief global strategist at BTIG LLC in New York.

Break-even inflation rates calculated from yield differences on 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity stood at 2.3 percent yesterday. That’s up from 1.62 percent when Bernanke signaled the possibility of a second round of bond purchases at his Aug. 27 speech last year in Jackson Hole, Wyoming.

Fed policy makers disagreed on whether additional monetary stimulus will be needed even if the outlook for economic growth remains weak, minutes of their meeting last month showed. Some members said a further slowdown in growth would signal a need for additional support, while others said the growing risk of inflation would require withdrawing stimulus sooner than currently anticipated.

Fisher Comments

Federal Reserve Bank of Dallas President Richard Fisher underscored those differences in comments to reporters after a speech yesterday.

“We’ve exhausted our ammunition,” Fisher said in Dallas. He holds a vote this year on the policy-setting Federal Open Market Committee.

Bernanke’s comments were his first since a government report on July 8 showed employers added 18,000 jobs in June, less than the most pessimistic forecast in a Bloomberg News survey of economists. Bernanke said “disappointing” job growth in May and June was partly a result of temporary effects, such as high energy prices.

He predicted that the pace of economic expansion would accelerate above 3 percent in the second half of 2011. That compares with growth “in the vicinity of 2 percent or maybe even a little bit less,” in the first half of this year, which is too slow to reduce unemployment, Bernanke said.

‘Uncertainties’ to Outlook

Bernanke acknowledged there are “uncertainties” in both directions -- about the strength of the economic recovery and the prospects for inflation -- over the medium term. He also reiterated his view that inflation won’t be a problem because gasoline and food prices, which had surged earlier this year, are now moderating.

Inflation, excluding food and energy, will be slightly higher this year, between 1.5 percent and 1.8 percent, Fed officials predicted last month. That’s up from a range of 1.3 percent to 1.6 percent under the forecast in April.

“As we go forward, we’re going to obviously want to make sure that as we support the recovery that we also keep an eye on inflation,” Bernanke said.

Unemployment by the end of the year will decline to between 8.6 percent and 8.9 percent, according to the Fed’s forecast. That’s higher than the range of 8.4 percent to 8.7 percent under the previous forecast.

--With assistance from Craig Torres in Washington and Vivien Lou Chen in Dallas. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Jeannine Aversa in Washington at javersa@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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U.S. Stocks Fall as Bernanke Damps Speculation on More Stimulus

July 14, 2011, 12:57 PM EDT By Nikolaj Gammeltoft and Victoria Stilwell

July 14 (Bloomberg) -- U.S. stocks fell, driving the Standard & Poor’s 500 Index to the lowest level of the month, as Federal Reserve Chairman Ben S. Bernanke said he’s not prepared to take immediate action to stimulate the economy.

Raw-material producers and industrial companies were the biggest drags on the market among the 10 main industries in the Standard & Poor’s 500 Index, which erased a gain of as much as 0.7 percent. JPMorgan Chase & Co. rallied 2.7 percent to lead advances in the Dow Jones Industrial Average after investment banking profit surged and more customers paid their credit-card bills on time.

The S&P 500 slipped 0.4 percent to 1,312.59 at 12:23 p.m. in New York after falling to 1,311.98, its lowest level since June 30. The Dow dropped 22.10 points, or 0.2 percent, to 12,469.51 after surging 90 points following JPMorgan’s report.

“The market is going to be volatile until we get the situation in Washington resolved,” said Don Wordell, a fund manager for Atlanta-based RidgeWorth Capital Management, which oversees about $48 billion. “Earnings have been coming in pretty good and corporate balance sheets are in great shape,” he said in a telephone interview. “The economic data reports were positive.”

Bernanke testified for a second day before lawmakers after saying yesterday he’s prepared to provide more stimulus if needed. Bernanke said today that inflation now is “higher” and “closer” to the central bank’s informal target than was the case in August and that’s one reason why the Fed won’t immediately embark on a third round of bond-buying.

“We’re not prepared at this point to take further action,” he told the Senate Banking Committee.

Fed Stimulus

The S&P 500 has rallied 95 percent since March 2009 as the Fed used large-scale asset purchases to buoy the economy and companies posted earnings that beat analysts’ estimates. The index has still fallen 3.4 percent since April 29 this year on concern the economic recovery is at risk and as Europe’s sovereign-debt crisis grows.

Stocks were also pressured today after Moody’s Investors Service said late yesterday the U.S. government may lose the Aaa credit rating it’s held since 1917 on concern the country’s debt limit will not be raised in time to prevent a missed payment of interest or principal. President Barack Obama is considering summoning congressional leaders to Camp David this weekend to work on a plan to raise the debt ceiling after yesterday’s negotiations on a deficit-cutting plan of at least $2 trillion stalled, two people familiar with the matter said.

’Game of Chicken’

“Rating agencies don’t tell us anything we don’t know, but Moody’s warning underlines the seriousness of the situation and the game of chicken at Capitol Hill,” said Philip Marey, senior U.S. economist at Rabobank in Utrecht, the Netherlands.

Equities gained after government data showed retail sales unexpectedly increased and jobless claims fell more than economists estimated, bolstering confidence in the economy.

The 0.1 percent increase in retail sales reported by the Commerce Department compared with the median forecast of a 0.1 percent drop in the Bloomberg News survey of 80 economists. Excluding auto sales, purchases were little changed, the weakest performance since July 2010. Separate data showed initial jobless claims fell by 22,000 to 405,000 last week.

Earnings are gaining attention as more companies post second-quarter results. S&P 500 profits are forecast to have grown 13 percent in the quarter, the smallest increase in two years, according to data compiled by Bloomberg.

“The market is being driven by macro events such as the U.S. and European debt crises,” Giri Cherukuri, who helps manage $2.6 billion as money manager and head trader at Oakbrook Investments in Lisle, Illinois, said in a telephone interview. “But we’re heading into the heart of earnings season, and people are getting ready for a change towards a market that’ll be focused on the earnings reports of major companies.”

JPMorgan Earnings

JPMorgan, the second-largest U.S. bank, advanced 2.7 percent to $40.70 after the New York-based bank reported its highest half-year profit ever, at almost $11 billion. Second- quarter net income climbed 13 percent from a year earlier, to $5.43 billion, or $1.27 a share, six cents higher than the average estimate of analysts surveyed by Bloomberg.

ConocoPhillips jumped 4.2 percent to $77.49. The Houston, Texas-based oil company said it will separate its refining and marketing and exploration and production businesses.

Yum! Brands Inc. climbed 0.9 percent to $56.07 as the owner of the KFC and Pizza Hut restaurant chains boosted its earnings forecast for the year on increasing customer traffic at restaurants in China.

Hartford Financial Services Group Inc. declined 2.3 percent to $25.02. The seller of life insurance and property-casualty coverage said second-quarter net income plunged on catastrophe claims and the cost of asbestos liabilities.

Marriott International Inc. declined 8.4 percent to $34.02 after forecasting earnings that fell short of estimates. The largest publicly traded U.S. hotel chain said third-quarter earnings won’t be higher than 29 cents a share, missing the 30- cent average analyst projection.

--Editors: Jeff Sutherland, Michael Regan

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Victoria Stilwell in New York at vstilwell@bloomberg.net

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

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U.S. Stock Futures Tumble After Jobs Growth Trails Forecasts

July 08, 2011, 8:56 AM EDT By Michael P. Regan

July 8 (Bloomberg) -- U.S. stock-index futures retreated after the nation added fewer jobs than forecast in June, damping optimism about the economy.

Futures on the Standard & Poor’s 500 Index expiring in September lost 1 percent to 1,338.5 at 8:30 a.m. in New York. Dow Jones Industrial Average futures tumbled 95 points, or 0.8 percent, to 12,586.

Labor Department figures showed U.S. employers added 18,000 workers in June, less than the median economist forecast of 105,000 and the fewest in nine months, while the unemployment rate unexpectedly climbed to 9.2 percent, indicating a struggling labor market.

The S&P 500 has climbed 6.7 percent since the start of last week as Greek lawmakers passed a five-year austerity package, qualifying the country for further aid, and yesterday’s report from ADP Employer Services showed U.S. companies added twice as many jobs as forecast in June. The index is about 10 points shy, or less than 0.8 percent, of a three-year high reached on April 29.

Investors are also turning their attention to the second- quarter earnings season, which unofficially starts on July 11 with Alcoa Inc., the first Dow company to release results. S&P 500 profits are forecast to have grown by 13 percent in the period, according to analyst estimates compiled by Bloomberg.

To contact the editor responsible for this story: Michael Regan at mregan12@bloomberg.net

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Housing Horror Show: Worse Than You Think

Unfinished homes and empty lots in a subdivision near Homestead, Fla. Joe Raedle/Getty Images

By Roben Farzad

You might be tempted to believe that after four years of brutal declines in home prices, the worst of the crisis is over. The Standard & Poor’s/Case-Shiller 20-city index of prices has fallen back to where it was in 2003. Housing prices in Phoenix are at 2000 levels, and Las Vegas is revisiting 1999. Lower prices have made homes more affordable than they’ve been in a generation, and sales have gone up in six of the past nine months. “It’s very unlikely that we will see a significant further decline” in prices, Housing and Urban Development Secretary Shaun Donovan said in a July 3 appearance on CNN. “The real question is, when will we start to see sustainable increases? Some think it will be as early as the end of this summer or this fall.”

Doug Ramsey of Minneapolis investment firm Leuthold Group is a student of asset bubbles, from tech stocks in the late ’90s to commodities in the late ’70s and railroads in the 19th century. His outlook is very different from the HUD Secretary’s. Ramsey calculates that single-family housing starts would have to soar an unprecedented 60 percent to 70 percent from their current half-century low of a 419,000 annual rate just to hit the average low of the past six housing busts since 1960 (650,000 to 700,000).

Ramsey says every housing statistic he tracks, including new and existing home prices and the performance of homebuilding stocks, has so far matched the pattern of prices after the bursting of other bubbles, including the Dow Jones industrial average following the crash of 1929 and Japan’s Nikkei after its 1989 peak. It starts with a steep decline lasting three or four years, followed by a brief rally that ends in years of stagnation. The Dow took 35 years to return to pre-crash levels. The Nikkei trades at less than a third of where it peaked 22 years ago. “The housing decline,” he says, “will be a long, multiyear process, and the multiplier effect across the economy will be enormous.”

Others are equally gloomy. “It’s still a vicious cycle of foreclosures, prices falling, and buyers remaining on the sidelines,” says Jonathan Smoke, head of research for Hanley Wood, a housing data company. With the homeownership rate possibly headed to its pre-bubble level of 64 percent from 69 percent at the peak, Smoke calculates that the nation needs 1.6 million fewer homes that it now has. “We’ve gone through a period when we should have been tearing down houses,” he says. “The supply of total housing stock is beyond what is necessary.”

Scott Simon, a portfolio manager who heads real estate analysis for bond giant Pimco, says because this housing bust is so much worse than previous ones, it’s hard to tell when it will end. “There are all these things going on that we have never seen before,” he says. “No one knows how or what to model.”

Simon has been traveling the country with a 28-page PowerPoint presentation for clients that illustrates the dire state of today’s housing market. Three of 10 homes, he notes, are now sold for a loss. American homeowners have equity (market value minus mortgage debt) equal to 38 percent of their homes’ worth, down a third since 2005 and half what it was in 1950. A lot of the decline is attributable to people who have negative equity—they owe more on their mortgages than their homes are worth.

Simon also points to the affordability index, which measures the ability of a family with the median national income to buy a median-price home at current mortgage rates. The index is near an all-time high and double its level in 2006 at the peak of the bubble—meaning buyers should find many more homes within their budgets. “I would never have believed this index could get so high,” he says. A rise in affordability should have spurred purchases, boosting prices and keeping a lid on the index. “What this instead means to me is that the credit is not available to most people,” he says. “Houses aren’t cheap if you can’t get the loan.” Simon worries that the problem will get worse in October, when Fannie Mae, Freddie Mac, and the Federal Housing Administration drop the maximum mortgage they will buy to $625,000 from $729,750 as a temporary increase expires.

The crux of Simon’s analysis is that the loose lending practices seen during the housing bubble allowed 5 million renters to become homeowners, and that the market is in the protracted process of evicting this group. He believes housing prices will decline 6 percent to 8 percent nationally, with 6 million to 7 million more foreclosures yet to come.

If these predictions are right, the economy will be missing a key driving force for years—and the nation will keep paying the price for what Ramsey calls the “illusory prosperity” of the housing boom. “Think about local tax revenues—what the housing bubble contributed to coffers across the country,” he says. “The ripple effect for the economy was enormous: washers, dryers, carpeting, construction jobs.” The housing wealth that has now evaporated gave Americans false expectations about economic growth and rising standards of living. Asks Ramsey: “What was real and what was never meant to be?”

The bottom line: Despite intermittent signs of recovery, the housing market may be in the midst of a slump that could last a generation.

Bloomberg Businessweek Senior Writer Farzad covers Wall Street and international finance.

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Bankers Losing Battle Against Regulation

July 07, 2011, 1:41 PM EDT By David J. Lynch

July 7 (Bloomberg) -- When a top banker chooses to tangle publicly with the chairman of the Federal Reserve Board, it can only mean one of two things: strength or desperation.

“We’ve been through two stress tests, one at the Treasury, one at the Fed. I believe most of the banks passed the recent ones with flying colors,” Jamie Dimon, JP Morgan Chase & Co.’s chief executive officer, told Fed Chairman Ben S. Bernanke June 7. “Now we’re told there are going to be even higher capital requirements,” and “we know there are 300 rules coming. Has anyone bothered to study the cumulative effect of all these things?”

One month later, Dimon’s boldness has proven to be less an emblem of power than a cry of frustration. Global banking supervisors are poised to impose higher capital requirements that Wall Street complains will crimp profits, hamstring its fight against foreign rivals and damage the U.S. economy. And Dimon, 55, who kept JPMorgan largely clear of the subprime mortgage fiasco and helped stabilize the financial system in 2008 by acquiring Bear Stearns Cos. and Washington Mutual Inc., will face the same new strictures as the industry’s rogues.

Another indication of the changing regulatory environment took place almost a month earlier and an ocean away. During a May 17 confirmation hearing on his appointment to a new British financial watchdog, Donald Kohn, a former Fed vice chairman, told British lawmakers he had abandoned his belief that bankers’ self-interest would keep markets safe.

“I placed too much confidence in the ability of the private market participants to police themselves,” he testified.

Rival Poles

Banker and regulator, Dimon and Kohn represent rival poles in the struggle to reconcile economic growth and financial stability. Their remarks, ostensibly about the details of banking regulations, really concerned the lessons of the worst financial crisis since the Great Depression -- and the danger, say some, that those lessons already are being forgotten. “I see a lot of amnesia setting in now,” Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said last month.

“Unquestionably, there’s a need for higher capital,” said Richard Spillenkothen, the Fed’s director of banking supervision and regulation from 1991 to 2006, now retired. “The industry will never be terribly enthusiastic about that prospect.”

Once known as “Obama’s favorite banker,” Dimon and his Wall Street colleagues long ago lost the battle for public opinion. Taxpayers soured on the banks in late 2008 when called upon to save them from collapse and have stayed sour ever since. In a March 2011 Bloomberg national poll, 19 percent of respondents said banking regulation was too strict; 76 percent said current rules were needed or should be toughened. Kohn and Dimon both declined to comment.

Bank Credit

There is scant evidence to support Dimon’s complaint that the prospect of more stringent regulation, aimed at preventing another crisis, is instead slowing a recovery from the last one. Total U.S. bank credit for the week ending June 22 was a seasonally adjusted $9.16 trillion, little changed from a year ago, according to the Fed.

With industry using less than 77 percent of available capacity and almost 14 million workers unemployed, there is little indication that the welter of pending regulations is what is depressing lending.

“I think demand is still more important than supply,” said Mark Zandi, chief economist for Moodys Analytics in West Chester, Pennsylvania.

Greenspan’s Mentor

Kohn’s May 17 testimony, from the man Alan Greenspan once dubbed “my first mentor at the Fed,” was striking for its defense of regulation and its public apology for Fed errors that enabled the 2008 crisis.

In the eyes of its critics, the Fed has much to apologize for, such as trusting the banks to largely police themselves and keeping interest rates too low for too long. In 2000, Edward Gramlich, a Fed governor who worried that mortgages were being extended to so-called “subprime” borrowers who couldn’t afford them, urged Greenspan to investigate the home-loan units of major banks. The Fed chairman refused, and the fuse on the subprime bomb continued to burn.

Greenspan also welcomed financial innovations such as derivatives, which he said in 2002 “appear to have effectively spread losses” from corporate defaults rather than concentrate them. The Fed further fueled the housing and credit bubbles by keeping interest rates low for years before the 2008 panic, say economists such as Stanford University’s John Taylor. In 2001, the Fed cut borrowing costs 11 times, bringing the benchmark interest rate to 1.75 percent, the lowest in 40 years. Greenspan repeatedly dismissed warnings that housing prices were headed for a crash.

Benefits of Stability

At his London confirmation hearing, Kohn, 68, acknowledged that additional regulation means additional costs. “But the benefits of keeping a stable system are huge,” he said. “We have seen the cost of not keeping a stable system.”

The financial and human toll has been immense. More than 8.7 million people lost their jobs in the recession that followed the bursting of the housing bubble, while the recovery so far has created only 1.8 million new ones. In excess of $6 trillion was erased from household balance sheets. And the national debt has ballooned by $4.7 trillion, or almost 50 percent, in the 33 months since the Sept. 15, 2008 collapse of Lehman Brothers Holdings Inc.

Amid a global credit panic, the nation’s largest banks were saved only with capital infusions from the federal government and extraordinary aid from the central bank.

Markets Heal

As financial markets have healed -- the Dow Jones Industrial Average is up 93 percent from its March 2009 low -- memories of the post-Lehman Brothers trauma have faded. The banking industry has been able to capitalize on that shift. Regulators’ efforts to implement the Dodd-Frank financial regulation bill Congress passed one year ago are bogged down amid disputes over agency funding and lobbying efforts to weaken constraints on the industry.

“As markets began to get better, the fervor for regulatory reform has diminished,” said Arthur Levitt, the longest serving head of the Securities and Exchange Commission. Levitt, a Bloomberg LP board member and policy adviser to Goldman Sachs Group Inc., criticizes President Barack Obama and members of Congress for buckling to lobbyists and punting the toughest choices to regulators.

On July 21, 2010, Obama signed Dodd-Frank into law, saying “Unless your business model depends on cutting corners or bilking your customers, you’ve got nothing to fear from reform.”

It seemed like the battle over remaking Wall Street was over. In fact, it was just beginning.

Lobbying Costs

In 2010, the securities and investment industry spent $101 million on lobbying, compared with $60.5 million in 2005, according to the non-partisan Center for Responsive Politics in Washington.

The backstage maneuvering burst into public view on June 7, when Dimon rose from the audience at a bankers’ conference in Atlanta. His confrontation with Bernanke was a rare example of a banker publicly challenging his principal regulator.

The CEO’s concerns had been brewing for some time. In an April 4 letter to shareholders, Dimon previewed his argument. Much already had been done to make finance safer: off-balance- sheet vehicles “essentially are gone;” mortgages are written to tougher standards; and bank boards and managements “are more attentive to risk,” Dimon wrote.

Industry Ire

Under Dodd-Frank, banks face hundreds of new regulations by federal agencies such as the Fed, the SEC and the Commodity Futures Trading Commission. The greatest industry ire is reserved for a proposal by global regulators for the largest “systemically-important” institutions -- known as SIFIs -- to hold an extra capital reserve of up to 3.5 percentage points beyond the 7 percent Tier 1 capital required by the Basel Committee on Banking Supervision’s so-called Basel III rules.

The aim is to make sure that in any future crisis, losses are absorbed by bank shareholders, not taxpayers.

In the years before the 2008 crisis, the largest U.S. banks grew reliant upon borrowed money to increase their returns. By 2007, Lehman Brothers and Morgan Stanley had borrowed $40 for every $1 of equity; Goldman Sachs and Citigroup Inc. had leverage ratios of 32-to-1, according to the report of the Financial Crisis Inquiry Commission.

Absorbing Losses

Dimon told Bernanke that capital and liquidity now are “more than double what they were before.” Starting with a 7 percent level, the nine U.S. banks likely to be deemed systemically important could “absorb an instantaneous loss equal to two years of their average losses during the financial crisis -- $203 billion -- and still maintain a 5 percent Tier 1 common capital ratio,” Barry Zubrow, JPMorgan’s chief risk officer, told the House Financial Services Committee June 16.

Requiring banks to hold even more capital is unnecessary and would hamstring U.S. financial institutions in global markets, Dimon said in his shareholder letter.

Those complaints are proving unpersuasive. Bernanke and Bair both say requiring banks to use more capital and less debt to fund their lending won’t hurt economic growth. “I say full speed ahead and the higher the better,” Bair said last month.

Likewise, a December 2010 report by the Basel panel’s Macroeconomic Assessment Group found that each additional percentage point increase in banks’ required capital ratio would lower the level of long-term gross domestic product by 0.22 percent. If applied to the current size of the U.S. economy, that suggests a GDP of $14.978 trillion instead of the actual $15.01 trillion.

‘Ultimately Therapeutic’

“If we settle around 10 percent, that would be digestible and ultimately therapeutic,” said Zandi.

Compared to Dimon’s reassuring assessment, the financial world looks quite different through Kohn’s eyes. A veteran of 40 years in the Federal Reserve system, Kohn was at Bernanke’s side during the crisis, which he described in a 2010 speech as “a difficult learning experience.”

In February, Kohn was named to an interim U.K. Financial Policy Committee, the forerunner of a new Bank of England body designed to curb systemic financial risks. His May 17 testimony before Parliament’s Treasury Committee showed a central banker scarred by crisis.

“I have learned quite a few lessons, unfortunately for the economy I guess, in the past few years,” Kohn testified, later adding: “I deeply regret the pain that was caused to millions of people in the United States and around the world by the financial crisis and its aftermath.”

Bad Actors

Where Dimon sees a rebuilt financial industry in which “most of the bad actors are gone” and the survivors are more attuned to risk, Kohn, who declined to be interviewed, says the crisis taught him “people in the markets can become excessively complacent and relaxed about risk.”

Asked how to handle the issue of banks considered “too big to fail,” Kohn embraced the tool that so irks Dimon. “Step number one is to make them much less likely to fail: much higher capital,” Kohn said. “I would include a so-called SIFI surcharge in that, on top of the Basel III capital requirements and I hope that it is a substantial surcharge, on the order of the 3 percent people are talking about.”

The new U.K. panel issued its first recommendations on June 24, including a call for British regulators and banks to build thicker capital buffers. The extra buffers may come in handy some day, as Kohn has learned.

“Everybody relaxed -- in the financial sector, in the regulatory sector -- and it turned out to be a big mistake,” said Kohn. “We need to guard against that.”

--Editors: Christopher Wellisz, Ken McCallum

-0- Jul/07/2011 17:40 GMT

To contact the reporter on this story: David L. Lynch at dlynch27@bloomberg.net

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

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U.S. Payrolls Probably Picked Up in Sign Economy Rebounding

July 08, 2011, 8:41 AM EDT By Shobhana Chandra

(Adds Obama to make statement in fifth paragraph.)

July 8 (Bloomberg) -- Employers in the U.S. probably added more workers in June than the prior month, indicating the labor market may be poised to pick up in the second half, economists said before a report today.

Payrolls rose by 105,000 workers after a 54,000 increase in May that was the smallest in eight months, according to the median of 85 estimates in a Bloomberg News survey. The projected gain probably failed to reduce the jobless rate, which economists forecast held at 9.1 percent.

Cheaper fuel that helps companies hold down costs may make it easier for them to step up hiring, setting the stage for a pickup in the consumer spending that accounts for about 70 percent of the economy. While the improvement reinforces the Federal Reserve’s view that the first-half slowdown was temporary, bigger payroll gains are needed for a sustained decline in the unemployment rate.

“Payrolls will start to look better in the second half as the economy shifts into higher gear,” said Christopher Low, chief economist at FTN Financial in New York. “We do have job growth, but it’s not enough. It’ll take a long time for the unemployment rate to come down significantly.”

The Labor Department’s payroll numbers are due at 8:30 a.m. in Washington. Bloomberg survey estimates ranged from increases of 40,000 to 175,000. President Barack Obama is due to make statement on the report at 10:35 a.m., the White House said.

Company Payrolls

The projected gain would be less than the 166,000 monthly average in the first quarter. Payroll increases of at least 200,000 a month are needed for a sustained decline in the unemployment rate, Low said.

Private payrolls, which exclude government agencies, increased by 132,000 after rising 83,000 in May, according to the survey median. Manufacturing employment probably rose by 5,000 in June, the figures may show.

Recent figures have shown the economy has started to perk up. Companies added twice as many workers as forecast last month, data from ADP Employer Services showed yesterday. An Institute for Supply Management report last week showed manufacturing unexpectedly accelerated in June.

The figures helped drive stocks higher. The Standard & Poor’s 500 Index jumped 1.1 percent to an almost two-month high yesterday. In Europe today, stocks were little changed amid renewed concern about the region’s debt crisis, with the Stoxx Europe 600 Index slipping 0.1 percent.

U.S. stock-index futures fell, with futures on the S&P down 0.2 percent to 1,349.7 at 11:48 a.m. in London.

Estimates in the Bloomberg survey for the unemployment rate ranged from 8.9 percent to 9.2 percent.

First Half of 2011

Policy makers “expect the unemployment rate to continue to decline but the pace of progress remains frustrating slow,” Fed Chairman Ben S. Bernanke said at a news conference after the central bank’s June 21-22 monetary policy meeting.

Fed officials have said the slowdown in economic growth in the first and second quarters partly reflected temporary factors. Manufacturers were hurt by supply disruptions in the aftermath of the earthquake in Japan, just as the surge in gasoline expenses limited spending on non-essential items by American consumers.

Central bankers in other countries are turning to tackling inflation after seeking to boost growth. Interest rates were raised this week in Sweden, the euro-area and China. China may now limit increases for the rest of the year after five shifts since mid-October, according to JPMorgan Chase & Co. and HSBC Holdings Plc. South Korea, India, Chile, Brazil and Poland have also all tightened monetary policy in the past month.

‘Improving Slowly’

While investors anticipate a further increase from the ECB this year, after its quarter-point boost yesterday, the Fed has signaled no imminent plan to lift its key rate from near zero amid weak expansion.

“The labor market is improving slowly,” Jenny Lin, senior U.S. economist at Ford Motor Co., said on a teleconference with analysts on July 1. “The economy is facing two temporary factors, which slowed growth -- the fuel price run-up and Japan impact. Both of these are reversing now and set the stage for some improved readings in the months ahead.”

Lack of faster progress in the labor market and in the economic recovery, which started in June 2009, has taken a toll on Obama’s approval ratings. Since he took office in January 2009, unemployment has increased by about a percentage point and the economy has lost 2.5 million jobs.

By a 44 percent to 34 percent margin, Americans say they believe they are worse off than when Obama took office, according to a Bloomberg National Poll conducted June 17-20.

--With assistance from Chris Middleton in Washington and Simon Kennedy in London. Editors: Vince Golle, Chris Wellisz

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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U.S. Payrolls Rise 18,000; Unemployment Rate Climbs to 9.2%

July 08, 2011, 10:01 AM EDT By Shobhana Chandra

(Updates with economist’s comment in eighth paragraph.)

July 8 (Bloomberg) -- U.S. employers added 18,000 workers in June, the fewest in nine months, and the unemployment rate unexpectedly climbed, indicating a struggling labor market.

The increase in payrolls followed a 25,000 gain that was less than half the rise initially estimated, Labor Department data showed today in Washington. The median estimate in a Bloomberg News survey called for a June gain of 105,000. The unemployment rate rose to 9.2 percent, the highest level this year. Hiring by companies, which excludes government agencies, was the weakest since May 2010.

Stocks plunged and Treasuries rose as the absence of stronger job growth caused earnings to stagnate, posing a threat to consumer spending that accounts for 70 percent of the economy. The second-quarter slowdown in hiring underscores a recovery that Federal Reserve Chairman Ben S. Bernanke said is “frustratingly slow.”

“The recovery is still fragile,” said Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch in New York. “The economy is healing very gradually.”

Estimates of the 85 economists surveyed by Bloomberg for overall payrolls ranged from increases of 40,000 to 175,000. instant analysis.

The Standard & Poor’s 500 Index slumped 0.9 percent to 1,341.12 at 9:31 a.m. in New York. The yield on the benchmark 10-year note dropped to 3.05 percent from 3.14 percent late yesterday.

Unemployment Forecasts

The unemployment rate was forecast to hold at 9.1 percent, according to the survey median. Estimates ranged from 8.9 percent to 9.2 percent.

“Stunned,” was how Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, described his reaction. “This number will really turn your hair gray that’s for sure. The economy remains mired in its soft patch which is looking more like a deep bog.”

The jobless rate rose even as the participation rate declined to 64.1 percent, the lowest since March 1984. The Labor Department’s separate survey of households, used to calculate the unemployment rate, showed a 445,000 decrease in employment and a 173,000 increase in unemployment.

“The payroll number was lackluster and the household survey was even weaker as unemployment increased as a result of a sharp drop in employment and a decline in the number of people looking for jobs,” Meyer said.

Private hiring, which excludes government agencies, rose 57,000 last month after a 73,000 gain. It was projected to rise by 132,000, the survey showed.

Factory Employment

Factory payrolls rose by 6,000 in June after a 2,000 decline in the previous month.

Employment at service-providers increased 14,000 in June, the least since a decline in September. Construction employment fell 9,000 workers and retailers added 5,200 employees.

Government payrolls declined by 39,000 in June, the eighth straight decline. Employment at state and local governments declined by 25,000.

Average hourly earnings fell 1 cent to $22.99, today’s report showed. The average work week for all workers dropped to 34.3 hours, from 34.4 hours the prior month.

The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- increased to 16.2 percent from 15.8 percent.

The number of temporary workers decreased 12,000. Payrolls at temporary-help agencies often slows as companies seeing a steady increase in demand take on permanent staff.

Recent Figures

Recent figures had signaled the economy was starting to perk up after slowing in the first half of the year. Companies added twice as many workers as forecast last month, data from ADP Employer Services showed yesterday. An Institute for Supply Management report last week showed manufacturing unexpectedly accelerated in June.

Policy makers “expect the unemployment rate to continue to decline but the pace of progress remains frustratingly slow,” Bernanke said at a news conference after the central bank’s June 21-22 monetary policy meeting.

The economy expanded at a 1.9 percent annual rate in the first three months of the year, and economists surveyed by Bloomberg from June 28 to July 7 forecast second-quarter growth of 2 percent. In the final three months of 2010, the economy grew 3.1 percent.

Supply Disruptions

Fed officials have said the slowdown in economic growth in the first and second quarters partly reflected temporary factors. Manufacturers were hurt by supply disruptions in the aftermath of the earthquake in Japan, at the same time the surge in gasoline expenses limited spending on non-essential items by American consumers.

“The labor market is improving slowly,” Jenny Lin, senior U.S. economist at Ford Motor Co., said on a teleconference with analysts on July 1. “The economy is facing two temporary factors, which slowed growth -- the fuel price run-up and Japan impact. Both of these are reversing now and set the stage for some improved readings in the months ahead.”

Companies reducing staff include Lockheed Martin Corp., the world’s largest defense contractor. Bethesda, Maryland-based Lockheed on June 30 said it plans to cut about 1,500 employees. McLean, Virginia-based Gannett Co., the publisher of 82 newspapers including USA Today, also announced last month it is eliminating about 700 jobs.

Lack of faster progress in the labor market and in the economic recovery, which started in June 2009, has taken a toll on President Barack Obama’s approval ratings. Since he took office in January 2009, unemployment has increased by about a percentage point and the economy has lost 2.5 million jobs.

By a 44 percent to 34 percent margin, Americans say they believe they are worse off than when Obama took office, according to a Bloomberg National Poll conducted June 17-20.

--With assistance from Chris Middleton in Washington. Editor: Vince Golle, Christopher Wellisz

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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

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The Protection Of Foreign Investments In Mozambique As Strategy For Development - Part Two

Successful Investing - Helping Investors Avoid Common Investment Mistakes

Draghi Says He’s Certain Italian Banks Will Pass Stress Tests

July 08, 2011, 9:02 AM EDT By Jeffrey Donovan

July 8 (Bloomberg) -- Bank of Italy Governor Mario Draghi said he’s certain that the country’s lenders will pass European stress tests.

“I’m certain, based on our analyses, that the Italian intermediaries will pass with a signficant margin, the stress tests that are currently being undertaken in Europe, confirming their adequate level of capitalization,” he said in an e- emailed statement today.

He added that new Italian austerity measures make balancing the country’s budget in 2014 a “realistic” goal.

To contact the editor responsible for this story: Jeffrey Donovan at jdonovan26@bloomberg.net

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Corporate Earnings to Gain Least in Two Years

July 08, 2011, 12:34 AM EDT By Ashley Lutz

July 8 (Bloomberg) -- U.S. corporations are set to report the slowest earnings gain since the recession ended as companies from Ford Motor Co. to McDonald’s Corp. struggled with rising oil and commodity prices and a slowdown in consumer confidence that may continue to hamper spending this year.

Earnings per share for all Standard & Poor’s 500 Index companies rose 13 percent in the second quarter, according to analysts’ estimates compiled by Bloomberg. Profits gained 18 percent in the first quarter after jumping 37 percent in 2010.

“We aren’t going to see the dramatic increase we’ve seen in some quarters,” said John Carey, who helps manage $260 billion for Pioneer Investment Management Inc. in Boston. “Consumer spending got hammered a bit because of higher oil prices and we have also seen a drop in consumer confidence, which maybe hurt numbers.”

While rising oil prices likely boosted profit at Exxon Mobil Corp. and Chevron Corp. to their highest levels in almost three years, they led to increasing costs at retailers such as Wal-Mart Stores Inc., airlines and carmakers worldwide.

Evidence of a slowdown is also building outside of the U.S. Earnings in the Stoxx 600 Europe Index may rise 21 percent this year, after gaining 63 percent in 2010, according to Bloomberg data. A construction slump and weaker consumer spending hurt sales at Amsterdam-based Royal Philips Electronics NV, the world’s biggest maker of light bulbs, and U.K. shoppers facing government spending cuts are restraining purchases.

Oil Prices Down

Some of the factors that contributed to the slowdown last quarter have waned, including the impact of the March 11 earthquake and tsunami in Japan, which likely caused losses at Sony Corp. and Toyota Motor Corp. Gasoline prices have come down, with U.S. retail fuel costs dropping 10 percent on July 6 from $3.99 per gallon in May, the highest since July 2008, according to figures from AAA, the nation’s largest auto club.

The gain in earnings at S&P companies in the second quarter was the slowest since the third quarter of 2009, according to Bloomberg data. Profits may rise 19 percent this year and 14 percent in 2012, according to the data.

“Because this recovery is slow and steady it may last longer than some in the past,” Carey said.

Expectations may still be too high in the U.S. in an environment where the economy is slowing, said Jack Ablin, chief investment officer for Chicago-based Harris Private Bank, which oversees $60 billion.

“My biggest concern is that companies continue to expect wider margin expansion throughout the rest of the year,” Ablin said. “I see a difficult path for margins from now to the end of the year.”

Ford, GM

Ford, based in Dearborn, Michigan, is predicted to post a 19 percent decline in profit to $2.15 billion, excluding some items, as sales dropped 8.5 percent to $32.1 billion, according to analysts’ estimates compiled by Bloomberg. General Motors Co., based in Detroit, may say profit surged to $2.08 billion on revenue of $36.2 billion, a 9.2 percent gain.

The largest U.S. automakers raised prices and lowered discounts offers to a five-year low in their home market during the quarter. That may have helped offset slower growth in U.S. sales.

“We’re more bullish on pricing than demand,” Itay Michaeli, a New York-based analyst at Citigroup Inc., said in a phone interview. “Because the industry has been more price- disciplined and the U.S. economy has been a bit stagnant, demand could be disappointing in the second half of the year and pricing could be the source of surprise.”

Alcoa, Dow Chemical

Alcoa Inc., the biggest U.S. aluminum producer, is scheduled to be the first member of the Dow Jones Industrial Average to report second-quarter earnings on July 11 after the market closes. Higher aluminum prices may have helped New York- based Alcoa increase earnings to 34 cents a share, from 13 cents a year earlier, according to the average estimate.

Dow Chemical Co., the largest U.S. chemical maker by sales, expanded second-quarter margins for plastics such as polyethylene as prices rose faster than raw-material costs, said Hassan Ahmed, a New York-based analyst at Alembic Global Advisers. Demand in China probably was better than the market expects, he said.

Net income at Midland, Michigan-based Dow advanced 52 percent to 84 cents a share, excluding some items, according to estimates compiled by Bloomberg.

Exxon Mobil, based in Irving, Texas, is predicted to report a 50 percent increase in second-quarter net income to $11.3 billion. Earnings at San Ramon, California-based Chevron may have jumped 32 percent to $7.1 billion. Such profits would be their largest since the third quarter of 2008.

Rising Fuel Demand

Worldwide demand for petroleum to make gasoline, diesel and jet fuel will continue to grow for the rest of 2011, driven by economic expansion in China and India, the International Energy Agency said in a June 16 report. The Paris-based IEA said global crude demand will rise by 1.3 million barrels a day this year, a 1.5 percent increase from 2010.

In Europe, demand for some goods was also damped by tepid consumer confidence and rising oil prices, combined with concerns about the Greek debt crisis.

U.K. retailers are anticipating little improvement in consumer spending for the remainder of the year as shoppers contend with rising fuel prices and government spending cuts.

“Consumer confidence is being affected by the state of the global economy, it’s not something particular to any market,” Tesco Plc Chief Executive Officer Philip Clarke told reporters at the annual general meeting in Nottingham, England, on July 1. “Confidence is lower than it was a year ago, consumers are feeling the pinch, it’s rising fuel prices, it’s rising taxes, it’s uncertainties about employment and that inevitably means it’s tough out there.”

German Companies

Munich-based Siemens AG, Europe’s largest engineering company, last week predicted growth will be tougher to achieve in the second half as the stimulus from an economic rebound peters out.

German carmakers, led by Volkswagen AG, are predicted to be a bright spot, and will probably show profit gains in the quarter. VW’s Audi, Daimler AG’s Mercedes and Bayerische Motoren Werke AG are all targeting record sales this year.

In Japan, the record earthquake damaged factories and a stronger yen eroded overseas earnings.

Toyota, Japan’s biggest carmaker, may report a net loss of 85 billion yen ($1.1 billion) in the three months ending June 30, according to the average estimate compiled by Bloomberg. The company reported net income of 190.5 billion yen a year earlier.

Honda Motor Co., the country’s third-biggest automaker, is predicted to post a net loss of 45.8 billion yen, compared with a 272.5 billion yen profit a year earlier.

Soaring Yen

The yen gained 15 percent in 2010 and soared to a postwar high of 76.25 per dollar on March 17. Toyota, which built 55 percent of its cars outside Japan last year, said June 10 the stronger yen may cut profit by 100 billion yen this fiscal year. A stronger yen reduces earnings repatriated from overseas.

“This year’s results won’t match last year’s, when there was a subsidy program, and the drop in sales will be immense,” said Yuuki Sakurai, president at Fukoku Capital Management Inc. in Tokyo. “The high yen is becoming the new normal.”

Tokyo-based Sony may report a loss of 2.5 billion yen, compared with a 25.7 billion yen profit a year earlier, according to the average of estimates compiled by Bloomberg. Japan’s largest consumer-electronics exporter halted operations at 10 plants and two research centers following the earthquake.

Food companies have faced rising prices of staples including sugar, meat and corn over the past year. Restaurants operators including McDonald’s have raised prices to help offset surging commodity costs.

McDonald’s, Wal-Mart

Net income at Oak Brook, Illinois-based McDonald’s may have gained 9 percent last quarter, according to the average of estimates compiled by Bloomberg, after rising 11 percent in the first quarter. In May, U.S. sales at stores open at least 13 months had their slowest monthly growth since February 2010.

Wal-Mart, the world’s largest retailer, is predicted to post a 5 percent gain in second-quarter profit. The Bentonville, Arkansas-based company is expanding abroad to counter sales at U.S. stores open at least a year that have declined for eight consecutive quarters.

United Continental Holdings Inc., Delta Air Lines Inc. and the other four largest U.S. carriers will have a combined profit of about $1.2 billion for the second quarter, according to the average estimates of analysts surveyed by Bloomberg, as higher fares and demand for summer vacation travel overcame a 47 percent jump in jet-fuel prices during the quarter.

Travel ‘Weakness’

Chicago-based United released data on June 23 that showed revenue for each seat flown a mile would rise about 4 percent in June, trailing May’s 15 percent gain. AMR Corp.’s American Airlines posted a unit revenue increase of about 5 percent for the quarter, lagging behind the 7.6 percent estimated by Hunter Keay, a Wolfe Trahan & Co. analyst.

There is a “weakness” in travel to and from Europe, Delta Chief Executive Officer Richard Anderson said in a June 30 interview. The Atlanta-based carrier plans to cut capacity by 4 percent after Labor Day in September and Anderson said he will “continue to look and tweak it and make changes” to the seat- reduction plan if demand doesn’t strengthen.

Some U.S. companies are benefiting from demand in emerging countries.

Intel Corp., the world’s largest semiconductor maker, reiterated in May that its second-quarter predictions for sales and profit margins were “right on,” as increasing orders for server chips used in Internet data centers offset slowing sales of consumer laptop computers. Intel Chief Executive Officer Paul Otellini said analysts underestimated the rising demand for computers in emerging markets such as Brazil that is compensating for weaker demand in Western Europe and the U.S.

Pharmaceutical companies

Earnings at S&P pharmaceutical and biotechnology companies may have risen 1.6 percent from the same period last year, according to estimates compiled by Bloomberg.

A dip in medical procedures that’s lasted more than a year is likely to continue to skew earnings for health companies, said John Sullivan, an analyst with Leerink Swann & Co. in Boston. For drug- and medical-device makers, it’s meant lower sales, he said.

Pharmaceutical companies have tried to offset the decline with job and cost cuts, and the benefits of a weakening U.S. dollar, which made their products less expensive in the rest of the world, Sullivan said.

Pfizer Inc., based in New York, may post an earnings decline of 6.5 percent, to 58 cents a share excluding certain items, according to the average estimate of analysts surveyed by Bloomberg.

--With assistance from Wendy Soong, Devin Banerjee, Natalie Doss, Alex Nussbaum, Matthew Boyle and Greg Bensinger in New York; Craig Trudell in Southfield, Michigan; Alex Kowalski in Washington; Mary Jane Credeur in Atlanta; Mike Lee in Dallas; Julie Johnsson and Joe Carroll in Chicago; Ian King in San Francisco; Richard Weiss in Frankfurt; Sarah Shannon in London; Anna Mukai in Tokyo; Rose Kim in Seoul; Diana ben-Aaron in Helsinki and Chris Reiter in Berlin. Editors: Cecile Daurat, Romaine Bostick

To contact the reporter on this story: Ashley Lutz at alutz8@bloomberg.net;

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net.

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Exchange-Traded Funds Said to Face U.K. Fraud Prosecutor Review

July 05, 2011, 12:04 PM EDT By Lindsay Fortado and Kevin Crowley

July 5 (Bloomberg) -- U.K. fraud prosecutors are reviewing how exchange-traded funds are marketed and whether they have the tools to prosecute any wrongdoing in the industry, a person directly involved with the probe said.

The Serious Fraud Office, which prosecutes white collar crime, hired a consultant to interview bankers and lawyers to determine whether there is a risk that sales of the products may involve criminal conduct in the future. The Financial Services Authority and the Bank of England’s Financial Policy Committee have warned of a lack of transparency in the ETF market.

ETFs are exchange-listed products that mirror indexes, commodities, bonds and currencies and allow investors to buy and sell them like stocks. They grew more popular in the aftermath of the 2008 selloff that wiped $37 trillion from global equity markets because they carry lower fees than other funds, require lower initial investment than futures, can be traded throughout the day and cover most indexes.

Terry Smith, chief executive officer at London-based inter- dealer broker Tullett Prebon Plc, has said the products often fail to track the underlying asset whose behavior they’re designed follow, are exposed to the risk of a provider going bankrupt and are vulnerable to heavy short-selling.

Question Marks

“From the investor’s point of view, I think there are question marks over whether synthetic ETFs really are appropriate for all types of the retail marketplace,” FSA Chief Executive Officer Hector Sants said June 24.

Sam Jaffa, a spokesman for the SFO in London, declined to comment. Rachel Cohen, a spokeswoman at the FSA, declined to comment other than to refer to Sants’s previous remarks. No specific companies or products have been targeted in the probe at this point, the person said.

“There are a lot of myths surrounding ETFs,” said Alan Miller, founder and chief investment officer of SCM Private, which manages ETFs. “The average ETF has higher levels of transparency, better performance and lower risk than the average mutual funds.”

All the synthetic ETFs that Miller holds are 110 percent collateralized, he said. That compares well with the transparency of the absolute return fund sector, which has “shocking” transparency, said Miller, who is the former chief investment officer of New Star Asset Management Group Plc.

At a meeting of the interim FPC in June, the group warned that FSA bank supervisors should “monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by exchange-traded funds,” according to a record of the meeting.

Mimic Performance

ETFs are typically designed to mimic the performance of gauges such as the Standard & Poor’s 500 Index. Unlike mutual funds, whose shares are priced once daily after each trading session, ETFs are listed on an exchange where shares are bought and sold throughout the day. Global ETF assets grew to $1.37 trillion as of February from $74.3 billion in 2000, according to BlackRock Inc., the world’s biggest money manager.

The SFO began a wide probe in 2009 into whether banks sold credit-default swaps and structured-finance products, including collateralized debt obligations, with flawed valuations. The review didn’t result in a prosecution, and the agency wants to ensure that it is more prepared if there is a crisis in the ETF market, the person said.

The SFO is looking more closely at ETFs because they have similar characteristics to the CDOs that helped spark the financial meltdown in 2008, according to the person. Like CDOs, the quality of the underlying assets in synthetic ETFs can be unclear and there is the potential for firms to mis-sell assets that are being heavily short sold, the person said.

SFO director Richard Alderman is seeking legislation that would create a corporate criminal liability that would enable prosecutors to enforce fraud laws against companies or banks, the person said.

--Editors: Anthony Aarons, Steve Bailey

To contact the reporter for this story: Lindsay Fortado in London at lfortado@bloomberg.net; Kevin Crowley in London at kcrowley1@bloomberg.net.

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

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Pandit to Get $80 Million Old Lane Cash

July 01, 2011, 12:19 PM EDT By Donal Griffin

(Updates with Citigroup spokeswoman’s comment in sixth paragraph.)

July 1 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit, who took a $1 salary after his bank received the most taxpayer assistance of any U.S. lender, is poised to collect $80 million from other payments and awards that may eventually total more than $200 million.

Pandit, 54, will get the $80 million from Citigroup’s purchase of his Old Lane Partners LP hedge fund tomorrow, according to regulatory filings. The deal brought him to the lender in July 2007. JPMorgan Chase & Co., which remained profitable through the financial crisis, has disclosed about $90 million in awards for CEO Jamie Dimon since 2007.

“Pandit, his $1 pay notwithstanding, cannot be considered modestly paid,” said Graef Crystal, a compensation expert and Bloomberg News consultant based in Las Vegas. “Taxpayers saved this bank, and he’s getting a bundle while shareholders are getting shortchanged on the stock price.”

Pandit’s $80 million is the last of the $165 million New York-based Citigroup agreed to pay for his share of Old Lane four years ago. The bank has since awarded him compensation, including stock and options, worth about $63 million when he received them. This includes a $1.75 million salary he got in January, replacing the $1 he told Congress he would take in February 2009 until the bank turned a profit. In May, he entered into a company profit-sharing plan which will give him an additional $25 million if the company meets analysts’ estimates.

Citigroup Shares Fall

The Old Lane payment also caps the end of six months in which Citigroup shares have fallen 12 percent amid investor concern that bank earnings will decline, placing the lender 13th on the 24-company KBW Bank Index. The shares have fallen about 92 percent since the Old Lane deal closed and 87 percent since Dec. 11, 2007, the day Pandit was appointed CEO.

“It is apples to oranges to compare proceeds from the sale of a business to compensation,” Shannon Bell, a spokeswoman for Citigroup, said in an e-mailed statement.

His own stake has suffered on his watch. Pandit’s shares and options are currently worth about $26 million, most of which is linked to awards the bank gave him in May of this year, according to an analysis by Crystal. Share awards from 2008 have lost most of their value, Crystal said.

One period of Pandit’s tenure that Crystal studied was this year through May 17, when Citigroup’s compensation committee -- chaired by former Alcoa Inc. CEO Alain Belda -- awarded Pandit $10 million in deferred stock, entry to a company profit-sharing plan and stock options that Crystal valued at more than $10 million. Citigroup shares fell 12 percent during the period. The Standard & Poor’s 500 Index, which tracks the performance of 500 U.S. stocks, gained 5.7 percent.

JPMorgan’s Performance

“This raises the interesting question as to why the comp committee decided the war was over and it was time to stage a victory celebration,” Crystal said.

JPMorgan has awarded Dimon, 55, about $90 million since 2007 including stock and options, according to filings, which don’t outline amounts for future awards. New York-based JPMorgan’s shares have declined 17 percent since the day Pandit sold Old Lane to Citigroup, making the firm the fifth-best performer on the KBW Bank Index during the period. Citigroup was the worst-performing.

The U.S. Treasury Department provided a $25 billion bailout to JPMorgan in 2008. The bank, the second-largest in the U.S., repaid the funds in 2009 with a $1.75 billion profit for taxpayers. The lender’s profit for 2011 may be $20.8 billion, according to a Bloomberg survey of 13 analysts.

Five Profitable Quarters

Pandit replaced CEO Charles “Chuck” Prince, 61, who resigned as the bank faced billions of dollars in losses linked to subprime mortgages and related securities. Under Pandit, the bank posted $29.3 billion in losses in 2008 and 2009. The U.S. Treasury bailed out the company with a $45 billion cash injection and a guarantee of more than $300 billion of its riskiest assets.

Some analysts credit Pandit with steering the third-largest U.S. bank toward five straight profitable quarters since then as he boosted lending in emerging markets in Asia and Latin America and shrank the amount of toxic assets the company was carrying on its balance sheet.

The strategy enabled Pandit to pay back the Treasury’s bailout funds and deliver a profit to taxpayers of about $12 billion. The firm may post a $3.1 billion profit for the second quarter and is on course to make a $12.6 billion profit for the year, according to a Bloomberg survey of 12 analysts.

Dick Fuld

Shareholders may benefit. Pandit, who reinstated a 1-cent dividend in May, could introduce an 80-cent payout in 2012, about $2 billion in total, and buy back up to $4 billion of stock, according to London-based Richard Staite, an analyst with Atlantic Equities LLC, who rates the shares “overweight.”

“If Dick Fuld had been able to pull it off, how much would they have wanted to reward him?” said David Knutson, a Legal & General Investment Management credit analyst, referring to the former CEO of Lehman Brothers Holdings Inc., which collapsed in 2008. Pandit “has brought the bank back from the brink.”

Pandit, who’s from Nagpur, India, has almost doubled the firm’s Tier 1 capital ratio, a measure of financial strength, to 13.26 percent at the end of the first quarter from 7.12 percent in December 2007. Customer deposits have grown to $865.8 billion, or 49 percent of total liabilities, from $738.5 billion, or 39 percent, in March 2007, according to Bloomberg data.

Selling Troubled Assets

Citigroup has sold about $300 billion of troubled assets in Citi Holdings, the unit Pandit formed to house and offload the bank’s most distressed businesses and investments. The division still had $337 billion in assets at the end of March, much of it tied to U.S. mortgages, store-branded credit cards and securities.

If Pandit can wind down and sell the rest, regulators may consider the lender less risky than JPMorgan and Bank of America Corp., according to Charles Peabody, an analyst with New York- based Portales Partners LLC.

“$80 million is a drop in the bucket relative to what he’ll get going forward if he turns this thing around,” Peabody said in a phone interview.

Citi Holdings is still a concern for investors as they try to determine the assets’ values during a period of global uncertainty, according to Peabody, who changed his rating on Citigroup shares to “hold” from “buy” in January.

Asset Prices

“If asset prices are deteriorating, then it gets tougher to sell those asset prices at par,” said Peabody. “If they can’t unload these assets and they have to raise more common equity at dilutive prices, or if they have to take hits on these assets, then book value would go down in absolute dollar terms.”

This has dragged down Citigroup’s share price more than the 7.5 percent decline registered by the KBW Bank Index this year, Peabody said. Citigroup is among Wall Street lenders that have had their profit estimates chopped by analysts wary of declining revenue and costs tied to the Dodd-Frank regulatory act and capital rules proposed by the Basel Committee on Banking Supervision. This could pare Citigroup’s gains from emerging markets, according to David Trone, a JMP Securities analyst.

“While we concede the international side of the story is attractive, in our view, near-term risks associated with legal/regulatory issues (Basel III, mortgage woes and Dodd- Frank) outweigh any potential upside,” Trone wrote about Citigroup in a note to investors last week.

‘Bad Move’

Pandit introduced a reverse stock split in May, converting every 10 common shares into one new share to attract more institutional investors. Shares are down 7.9 percent since then and the tactic was a failure, according to Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida.

“It has been my thought from the start that no institution would buy this stock due to the split but retail investors would dump it due to the split,” said Bove, who has a “buy” rating on Citigroup shares. “It was a bad move. Managements should play less stock market and more company operations.”

Investors have also pulled back this year from emerging markets, where Pandit says the company now earns more than half its profit. The MSCI Emerging Markets Index, which tracks the shares of 824 companies in countries such as Brazil, Russia and India, has failed to gain this year after more than doubling during 2009 and 2010.

Global Banks

Citigroup hasn’t fared as well as some global banks. HSBC Holdings Plc has declined 5 percent so far this year, while shares in Standard Chartered Plc have fallen 5.1 percent. Both London-based banks rely on Asia for more than half their profit.

Standard Chartered’s price-to-book ratio, a measure of investors’ expectations, is 1.6, more than double Citigroup’s. The firm has awarded CEO Peter Alexander Sands compensation of $27.7 million since 2007, according to company filings. Standard Chartered may have a $4.77 billion profit this year, according to a Bloomberg survey of 28 analysts, which would be its eighth successive record annual profit.

Pandit isn’t the only Citigroup executive who has been waiting four years for the last round of Old Lane payouts. Chief Operating Officer John Havens will also get $80 million, while Chief Risk Officer Brian Leach will get $8.6 million, filings show.

The three left Morgan Stanley in 2005 after a dispute with then-CEO Philip Purcell. They started Old Lane in 2006 with $3.7 billion in assets, the second-largest start by a hedge fund that year. Guru Ramakrishnan, another ex-Morgan Stanley executive, was among the Old Lane founders.

Old Lane Purchase

Citigroup bought the fund in 2007 for $800 million and incorporated it into Citi Alternative Investments, the bank’s private-equity, real estate and hedge-fund investment division. Pandit was placed in charge of the unit, which had lacked a full-time CEO for about a year, while Havens, Leach and Ramakrishnan received senior positions within the firm.

Pandit received $165 million from the deal on a “pretax basis” and reinvested $100.3 million into the hedge fund, where it was supposed to remain for four years, according to filings. The bank then shut the fund shortly into Pandit’s reign as CEO, amid a spate of hedge fund failures, purchasing its assets and allowing investors to take their money out.

The bank said that $80 million of Pandit’s cash would remain locked up until July 2011 in an account at Citi Private Bank, the unit that says it caters to one-third of the world’s billionaires.

Citigroup Vice Chairman Lewis Kaden said in an October 2007 interview that the deal was really a way to recruit Pandit and his Old Lane colleagues.

“You start to see the quality of the team,” Kaden said. “If it succeeds, it was a bargain.”

--Editors: William Ahearn, Dan Reichl

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net;

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

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