Wednesday, December 12, 2007

Central Banks attack LIBOR!

Treasuries declined after central banks in the U.S. and Europe announced plans to stem a surge in borrowing costs after a reduction in interest rates failed to ease concern about a contraction in credit markets. The Federal Reserve, Bank of England, Bank of Canada, European Central Bank and the Swiss National Bank will set up a term auction facility and establish swap lines.

Not all borrowers are benefiting from the Fed's moves to cut interest rates. The problem: Loans that are tied to a variety of interest-rate benchmarks -- some of which aren't necessarily moving in lockstep with Fed action. A recent report from the Federal Reserve Bank of New York shows that the six-month Libor rate will determine the reset rates for an estimated 99% of subprime ARMs and 38% of Alt-A ARMs in the U.S. that have been securitized.

Wachovia Corp., the fourth-biggest U.S. bank, may allocate twice as much money for loan losses in the final quarter than it previously forecast. The bank will set aside $1 billion in excess of charge-offs, an increase from the previous estimate of $500 million to $600 million.

Bank of America Corp. Chief Executive Officer Kenneth Lewis said fourth-quarter earnings will be "quite disappointing'' and credit markets "will probably remain challenging into next year.''

Northern Rock Plc, the U.K. bank bailed out by the Bank of England, fell 7.1 percent in London trading after the Times reported Cerberus Capital Management LP has dropped out of the running to buy the bank.

When Swiss bank UBS AG wrote down its subprime-mortgage investments by an additional $10 billion this week, an obscure and sometimes maligned credit-market index played a key role.

Citigroup Inc. named Vikram Pandit, the head of its investment banking business, as its chief executive officer Tuesday.

General Electric expects its profit to rise "at least" 10 percent in 2008 to $2.42 per share, led by gains in its infrastructure business, Chairman and Chief Executive Jeff Immelt said on Tuesday. The company also hiked its dividend and authorised a $15 billion share buy back over the next three years.

The chief executive of Freddie Mac estimated Tuesday the mortgage finance company will lose an additional $5.5 billion to $7.5 billion over the next few years as the housing crisis worsens and home-loan defaults rise.

On Tuesday, McLean, Va.-based Freddie Mac announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie Mae. Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.

SAP AG, the world's largest maker of business-management software, was cut to "underperform'' from "outperform'' by Credit Suisse Group analysts, who cited slowing sales growth at the German company next year.

The amount of money managed by so-called quant funds has dropped by up to 40 per cent in the past six months, as the drawbacks of the once rapidly growing strategy have been laid bare by the credit market turmoil.

Copper is headed for the smallest gain in five years, threatening to crimp profit growth at companies including BHP Billiton Ltd., the world's biggest miner. Goldman Sachs Group Inc., the biggest securities firm by market value, cut copper and aluminum forecasts for next year by 17 percent and 9 percent respectively.

Brazil's economy expanded in the third quarter at the fastest pace in more than three years, stoking speculation that the central bank may keep borrowing costs unchanged for most of 2008 to cap inflation.

Prices companies pay for energy and raw materials climbed 2.3 percent from a year earlier, after a revised 2 percent gain in October, the Bank of Japan said in Tokyo today. The increase was faster than the 2.1 percent median estimate of 38 economists.

U.K. unemployment fell more than twice as much as forecast to the lowest since 1975 in November as the strength of the economy encouraged companies to take on more workers.

UK home affordability hits 15-year low. The Council of Mortgage Lenders on Tuesday said first-time buyers spent 20.6 per cent of their income on mortgage interest in October, up from 20.4 per cent the previous month and 17.8 per cent in January.

Industrial production in the Euro-zone was stronger than expected in October, as solid demand for goods within Europe and from emerging markets like China keeps output growth resilient.

Asian indexes fell Wednesday across the board after traders were spooked by the dropoff in U.S. markets when the Fed dropped its target rate 0.25%, disappointing those who had hoped for a more robust 0.5% cut. The Nikkei fell 0.7%. The Hang Seng plunged 2.41%. Shanghai's Composite Index fell 1.54%. European markets followed US futures higher. In afternoon trading The CAC 40 was up 29.56 points or 0.52%. The DAX was up 92.54 points or 1.16%, and the FTSE 100 was higher 27.40 points or 0.42%.

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