Friday, November 30, 2007

Bail Out!

Federal Reserve Chairman Ben Bernanke said on Thursday a resurgence in financial strains in recent weeks had dimmed the outlook for the U.S. economy, signaling an openness to lowering interest rates again. Bernanke joined Vice Chairman Donald Kohn in acknowledging the threat to spending from reduced access to credit, a shift from their October assessment that growth and inflation risks were balanced.

U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday. Three months after regulators asked banks to modify loans for borrowers at risk of default, agencies have little comprehensive data on what lenders and loan servicers have done. The FDIC estimates that 1.54 million nonprime mortgages valued at $331 billion will reset by the end of next year. Credit protection costs fell sharply on housing- and mortgage-related companies on Friday after the report.

Freddie Mac said it priced a $6 billion share sale and saw strong demand for the offering. The mortgage giant is selling 240 million new shares of preferred stock to bolster its capital levels after reporting a larger-than-expected $2 billion subprime-related loss last week.

Citigroup and Wells Fargo led U.S. bank shares higher in Europe after Credit Suisse Group upgraded the industry on valuations, growth prospects and lower interest rates. Goldman removed Apple from its ``Americas conviction buy'' list. The improvement in the company's performance ``is smaller and more gradual than we had been expecting,'' analysts wrote in a note to clients.

The European Central Bank took additional steps to calm money markets after the cost of borrowing in euros for a month rose to a six-year high. The ECB will extend the maturity of its regular refinancing operation settling on Dec. 19 to two weeks from one. The cost of borrowing in euros for a month rose by a record yesterday as banks sought funds to cover their commitments through to the start of 2008. The London interbank offered rate that banks charge each other for euro loans due after the end of the year jumped 64 basis points to 4.81 percent, the highest since May 2001. "There is lots of insecurity,'' said Michael Schubert, an economist at Commerzbank AG in Frankfurt. "Banks are keeping liquidity just in case there's a shortage.''

Royal Bank of Canada, the country's biggest bank, said fourth-quarter profit rose 4.9 percent, the smallest increase in two years, as consumer-banking revenue countered writedowns on asset-backed debt. Royal Bank is one of five Canadian lenders that announced combined writedowns of about C$1.9 billion. Canadian banks may post their first average profit decline in five years this quarter because of the writedowns and higher loan-loss provisions. Royal Bank took a pretax writedown of C$357 million on U.S. subprime mortgage-backed securities and collateralized debt obligations.

Royal Bank of Scotland, the U.K.'s second-biggest bank, may write down as much as 1.9 billion pounds ($4 billion) on credit-related securities and leveraged loans, Sanford C. Bernstein & Co. estimated. "We are really in the first stages of the unwind of all the structured credit that has been built up over the last seven years'' in banks, analysts said.

Northern Rock, the U.K. bank bailed out by the Bank of England in September, declined as much as 11 percent in London trading today after Sky News said investor J.C. Flowers may withdraw its offer to buy the bank.

Morgan Stanley said that Zoe Cruz, a 25-year veteran at the firm, was ousted as co-president Thursday in a sweeping management shake-up aimed at turning around the investment bank amid turmoil in the credit markets.

Fortis, part of the group that bought ABN Amro in Europe's biggest-ever banking takeover, is raising 2.5 billion euros ($3.7 billion) by selling bonds convertible into shares to help pay for the purchase. The Fortis bonds will pay annual interest of 175 basis points to 250 basis points more than the euro interbank offered rate, or Euribor. "Given the issues Fortis has regarding disclosure of its exposure to subprime and the like, the fear was that they would have to pay even more'' to borrow, said an analyst.

Tiffany & Co., the world's second- largest luxury-jewelry retailer, said quarterly profit increased more than analysts estimated and raised its earnings forecast for the year as tourist spending boosted revenue.

Japan's economy showed its first signs of inflation this year after gasoline prices surged. Core consumer prices, which exclude fresh food, climbed 0.1 percent in October from a year earlier, the first increase since December 2006.

European inflation accelerated in November to the fastest in more than six years, adding pressure on the European Central Bank to raise interest rates even as economic expansion cools. The inflation rate in the 13-nation euro area rose to 3 percent this month from 2.6 percent in October.

The overnight Libor fixing today jumped to 5.95 pct from 5.83 pct yesterday, whereas the three-month contract rose to 6.61 pct from 6.60 pct yesterday and 6.55 pct on Monday. Both have been moving away from the Bank of England's 5.75 pct official Bank rate.

Oil prices fell Friday on expectations that OPEC will increase output next week and on fading concerns of a supply disruption from a U.S. pipeline fire. Light, sweet crude for January delivery fell $1.55 to $89.46 a barrel in electronic trading on the New York Mercantile Exchange by midday in Europe.

The yen fell broadly on Friday and high-yielders gained after comments by Federal Reserve Chairman Ben Bernanke cemented expectations of easier monetary policy, which may help the U.S. economy to avoid a recession. The euro was up 0.2 percent versus the dollar at $1.4768, The dollar index was steady at 75.556, holding above a record low hit last week. The dollar rallied on Friday morning in New York and was on track for its biggest weekly gain in more than a year as investors bet that more U.S. interest rate cuts would prevent a recession. The dollar index rose 0.5 percent to 76.019.

European stocks set two week highs on Friday and Wall Street looked set for a firmer open as equity markets basked in the glow of an expected cut in U.S. interest rates while the low yielding yen slipped back. The pan-European FTSEurofirst 300 index was up 0.9 percent at 1,522.42 points, after rising to 1,523.7, its highest in two weeks with financial stocks the top gainers. Earlier in Asia, Tokyo's Nikkei average touched a three-week high and closed 166 points or 1.08 percent higher. In Hong Kong Hang Seng closed at 28,643.61 up 161.07 points or 0.57%. On the mainland Shanghai Composite closed lower at 4,871.778 down 131.555 points or 2.63%. The B shares were bucking the trend and were up 330.79 higher by 3.70 percent. In Europe the markets were higher with the CAC40 up 1.47%, the DAX up 1.45% and the FTSE 100 up 1.36% at late afternoon trading.

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