Trichet’s Post-ECB Comments: ‘Vigilence’ Needed

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Here are highlights from ECB President Jean-Claude Trichet’s comments to the media following the ECB’s decision to keep rates steady Thursday.

‘Vigilance’ Needed

Trichet Friday said the world economy is no longer in free-fall but called for vigilance. “We’re leaving this period of free-fall, we’re still falling,” Trichet said in an interview on RTL radio. “We’re in a period which still requires a great deal of vigilance,” Trichet added.

Banks Shouldn’t Retreat From International Markets
Banks mustn’t lose their international angle and return to financial protectionism, Trichet told Dow Jones Thursday, saying such a move would pose serious risks to global finance and prosperity.

“It is a danger, and the ECB will do all it can to avoid precisely such a move,” Trichet said.

The warnings come as global banks, burdened by heavy writedowns and toxic assets, have been quick to plan international disposals to cut risks. The remarks echo warnings from the Bank for International Settlements. BIS Chief Economist Stephen Cecchetti told Dow Jones Newswires in an interview
last month that “large-scale reversals of exposure have…been pretty serious for six months now.”

A return to financial protectionism would be “a blow for international finance” and prosperity, Trichet said. “It is a concern for the international community and certainly for the ECB.”

Latest BIS data show that external claims of banks in developed countries fell by 2.3%, or a total of $720 billion, in the three months to March, after dropping $1.9 trillion in the last quarter of 2008. That happened after cross-border financial stocks and flows had grown on a quarterly basis for roughly 30 years, or since the BIS started compiling the Trichet said the ECB is content with the way the European Union’s new financial regulator, the European Systemic Risk Council, is being set up.

“I don’t call for the Risk Council to have more [powers] than envisaged, namely the capacity to deliver warnings, risk assessments, early warnings and recommendations,” Trichet said.

Defending Policy

In an interview with the BBC, Trichet denied that the ECB was providing too little support for growth and said the actions taken by the major central banks are appropriate to the situations they face, reflecting in particular the different structures of their financial systems.

“We have all had to cope with exceptional situations,” he said. “We all took decisions that were commensurate with the problems we faced. We did not do the same because the situation was not the same.” He said he didn’t see a “major difference” between the approaches of the ECB and the BOE.

Trichet said despite the severity of the recession, for policy makers “caution and prudence are of the
essence.” Indeed, he said, without those qualities, confidence would be damaged.

CF-Terra: Is There Light At the End of the Tunnel?

This post is by Michael Corkery from Deal Journal

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The Kremlinologists of the merger arbitrage world have been deconstructing one line in a news release from Terra Industries responding to CF Industries Holdings’s offer to increase its bid for the fertilizer company.

“Terra’s Board of Directors will consider CF Industries’ latest proposal at a meeting to be held prior to the end of the month,’’ Terra said in a statement on Wednesday.

Previous statements by Terra executives hadn’t specified a time frame for when they would consider CF’s hostile bid, which was launched in January. So is the protracted M&A battle for the future of the fertilizer industry finally nearing the finish line?

On Wednesday, CF, which is being advised by Morgan Stanley, boosted its bid for Terra to 0.465 a CF share for each Terra share, from its prior bid of 0.4129 to 0.4539 shares. That lifts the bid ’s value to $3.71 billion, or $37.20 a share , and represents a 38% premium to Terra’s one – year average exchange ratio prior to CF’s initial Jan. 15 offer. In 2008, the average premium on all-stock deals was about 30%.

And on Thursday, CF announced it had cleared some antitrust hurdles for the offer. CF is planning on putting up a slate of directors, who would be favorable to the deal, and CF’s bylaws require the company to schedule an annual meeting before the end of the year.

But there are still several wrinkles for CF. Terra is a Maryland corporation, where state laws are generally protective of companies fending off hostile bids and may allow Terra to postpone its annual meeting and continue to stall CF.

Another wrinkle is the third fertilizer company in the mix, Agrium, which is pursuing its own hostile bid for CF. That has helped boost CF’s share price, but if Agrium backs off then CF’s stock would likely decrease, hurting the value of CF’s offer for Terra.

That may help explain why CF further sweetened its offer this week by proposing to buy back $1 billion in stock from shareholders in the combined companies after the deal.

Agrium’s own bid for CF may be stalled, but its consolation prize may be blocking a CF-Terra deal by continuing its waiting game.

Jobs Report: Some Forecasters Brace for Big Surprise

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The countdown clock for Friday’s jobs report is running, and already one thing is clear: at least a few forecasters will have regrets on Friday morning. Most Wall Street economists expect the government’s payroll report to show a July decline somewhere in the vicinity of 300,000 jobs. RBS Securities and RDQ Economics, for instance, forecast a drop of 325,000. Barclays Capital and J.P. Morgan Chase put it at 275,000.

How much bigger will the jobs fair crowds get? (Getty Images)

Predicting an accurate count for nonfarm payrolls is always hard, but it’s even tougher at what seems like a turning point for the economy. Growth forecasts are turning higher. Jobless claims are trending lower. Neither one is happening quickly enough to make this an easy call. That’s why some forecasters are comfortable staying above the consensus — TD Securities expects a drop of 375,000 jobs — while others are now aiming lower. Goldman Sachs economists on Thursday moved their forecast to a decline of 250,000 from 300,000 previously. “The economy appears to be stabilizing after the sharp declines” in the fourth quarter and first quarter, the Goldman team says, “and employment trends should follow this with some lag.”

But there’s hope, and then there’s hope. Deutsche Bank economists now expect a decline of 150,000 jobs in July, far better than their earlier estimate of 325,000. Their reasoning is built partly on jobless claims, which are settling down from their volatility tied to the auto sector. (The four-week moving average at its lowest level since late January.) “Looking back at the employment figures in the late stages of recessions from 1967 to present (the period for which jobless claims data exist), we find that payroll employment can turn up abruptly with little forewarning from claims,” economists Joseph LaVorgna and Carl Riccadonna say in a note to clients.

They reviewed the six recessions over that period (excluding the latest recession) and found where a steady string of negative results was broken. When that happened, the drops in jobless claims were relatively small. In the latest cycle, jobless claims in July showed a larger decline than at any previous inflection point.

Despite the signal from other employment metrics, “we think the improvement in claims cannot be ignored. Jobless claims typically do not send a clear signal that labor conditions have meaningfully improved before payrolls produce significant gains—but they have come down sharply since the end of [the first quarter]. In turn, the risk of a near-term upward surprise on payrolls has risen notably.”

A Look Inside Fed’s Balance Sheet – 8/06/09 Update

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The Fed’s balance sheet shrunk again in the latest week, falling to $1.974 trillion from $1.985 trillion. Direct-bank lending resumed declined, falling under $270 billion. The makeup of the balance sheet continued to shift out of emergency facilities and into debt holdings. Treasurys and agency debt continued their upward march, though holdings of mortgage-backed securities fell for the second week in a row. The Fed started a program in March to ramp up such acquisitions in order to push down long-term interest rates low. Central-bank liquidity swaps posted a steep drop, as overseas demand for dollars continues to abate. The commercial paper and money market facilities declined again, as companies decide to take their funds out and tap investors directly as sentiment in the market improved.

In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. Every Thursday afternoon, the chart will be updated with the latest data released by the Fed.

In an effort to simplify the composition of the balance sheet, some elements have been consolidated. Portfolios holding assets from the Bear Stearns and AIG rescues have been put into one category, as have facilities aimed at supporting commercial paper and money markets. The direct bank lending group includes term auction credit, as well as loans extended through the discount window and similar programs.

Central bank liquidity swaps refer to Fed programs with foreign central banks that allow the institutions to lend out foreign currency to their local banks. Repurchase agreements are short-term temporary purchases of securities from banks, which are looking for liquidity and agree to repurchase them on a specified date at a specified price.

Click and drag your mouse to zoom in on the chart. Clicking the check mark on categories can add or remove elements from the balance sheet.

Deal Journal Video: AIG’s Fee Bonanza

This post is by Stephen Grocer from Deal Journal

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Who says government work doesn’t pay?

Wall Street banks and lawyers stand to reap nearly $1 billion in fees from the Federal Reserve Bank of New York and American International Group for helping manage and break apart the insurer.

Among the biggest beneficiaries is Morgan Stanley, which has earned about $10 million assisting the Fed, but could collect as much as $250 million from various AIG-related deals, according to some banking experts and documents released by the New York Fed. Goldman Sachs Group, Bank of America and J.P. Morgan Chase all have gotten assignments in recent months to help dismantle AIG.

Below the WSJ’s Liam Pleven, who wrote today’s page one article on the fee bonanza, sits down with Kelsey Hubbard to discuss:

Deals of the Day: AIG Breakup–Good Work if You Can Get It

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at

Today in BofA-Merrill

To Disclose or Not to Disclose: Bank of America’s loss projections for Merrill Lynch swelled by nearly $2 billion two days before the takeover was approved, but bank executives concluded they weren’t severe enough to disclose to shareholders before the vote. [WSJ]

Hold On One Second: U .S. District Judge Jed S. Rakoff refused to sign off on a consent decree between the SEC and BofA. [WSJ]

Today in AIG

Fee Machine: Wall Street banks and lawyers could collect nearly $1 billion in fees from the New York Fed and American International Group to help manage and break apart the troubled insurer, according to a Wall Street Journal analysis. [WSJ]
Related: At the top of Bob Benmosche’s to-do list: Oversee the selling off of assets, hiring new talent and negotiating controversial bonuses. [CNN Money]
Related: Shares of AIG soared as much as 70% Wednesday. [WSJ]

Mergers & Acquisitions

Gone Fishing: French advertising company Publicis Groupe is in the lead to buy Microsoft’s digital ad agency, Razorfish. [WSJ]

On Standby: Qantas Airways Chief Executive Alan Joyce said he doesn’t expect Australia’s national carrier to merge with another airline for at least a decade. [WSJ]

Deutsche Bank: The German bank made a nonbinding offer to take a minority stake in Sal. Oppenheim Group, a private investment bank and wealth manager. [WSJ]

Financial Institutions

Goldman Sachs Group: Was the Wall Street firm ever in danger? [NY Times]

Morgan Stanley: Morgan Stanley agreed to buy back warrants issued to the federal government for $950 million. [MarketWatch]

Fannie & Freddie: The Obama administration is considering splitting mortgage giants Fannie Mae and Freddie Mac and putting their troubled assets in a new federally backed corporation. [Washington Post]

Investment Banking: The industry was on life support last fall. Today it is booming again. []

American Express: AmEx sees signs of improvement in credit trends among cardholders, though its most affluent customers remain reluctant to spend. [WSJ]

CIT Group: Scherr has sued to end its relationship with CIT, fearing that a potential CIT bankruptcy might devastate its business. [NY Post]

Lloyds Sees the Light at the End of the Crisis: Lloyds reported a $6.8 billion loss for the first half, but said bad-loan charges have peaked and suggested some U.K. aid isn’t needed. [WSJ]


SEC: The regulator will give its attorneys more authority to speed up investigations and new tools aimed at winning the cooperation of Wall Street insiders. [WSJ]

Capital Markets

Hyatt Registers for IPO: Hyatt Hotels registered for its current shareholders to sell up to $1.15 billion of stock in an initial public offering. [WSJ]

Bankruptcy Extra

Annie Leibovitz: The celebrity photographer may be better off declaring bankruptcy than battling a creditor suing her for breaching a contract related to a $24 million loan. [Bloomberg]

Live Blog: Blackstone 2Q Call

This post is by Private Equity Beat from Private Equity Beat

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The Blackstone Group this morning reported its second quarter results. We’re live blogging the media conference call, which starts at 9:30 a.m. There is another conference call for analysts later today which we will also monitor.

9:32 a.m.: Still listening to hold music. Looking at Blackstone’s stock. Looks like it’s down just a smidgen in very early trading after a huge run-up the past few days.

9:36: Did I mention how much I enjoy listening to hold music?

9:39: Here we go.

9:40: Tony James is speaking. The delay was due to a wrong dial-in number for the call. He’s just going through the figures in the press release.

9:43: Private equity revenue was $199 million in the quarter. The firm is pleased with the solidity of its core portfolio. It had portfolio markups of 3% this quarter, which leaves the portfolio flat this year so far. About two-thirds of portfolio companies are at or above comparable Ebitda levels last year.

9:44: The firm has $14 billion of dry powder in private equity. James sees opportunities in distressed and middle market, but says realizations will be rare.

9:45: There are further writedowns of 19% in the real estate portfolio this quarter, James says. The firm will be cautious in deploying capital but sees some attractive opportunities in real estate debt.

9:46: BAAM expects significant customer inflows this year in contrast to most other competitors. The firm thinks it is now the largest institutional fund of hedge funds in the world. GSO also had net inflows this quarter.

9:47: James is talking about how attractive Blackstone is as a place to work, citing a Fortune magazine survey. He also emphasizes that the firm has more dry powder now than at any time in its history and expects this cycle to be similar to past distressed ones in providing outsized opportunities. And he’s trying to paint the firm as more of a mid-market investor than a large buyout investor. Perhaps that’s an indication of where it’s going to be going in the future?

9:50: There’s a question about IPOs. James says it’s starting to get some pitches and there are a couple of companies that are definitely candidates. “You probably will see some IPOs from us in the next 12 months” if the markets hold up. He also says there’s some interest from strategic buyers. “I’m not promising a lot of exits however, because our job is to hold for the highest possible price,” James says. As far as IPOs, it sounds like it might be defensive companies in its portfolio.

9:52: How about bank investing, given proposed FDIC rules? James says the firm had hoped bank investing would be an active sector for the firm. He refers to SEIU head Andy Stern’s negative editorial about banks and private equity that appeared in the WSJ the other day as an example of the barriers. The firm is still actively looking, and has some three transactions that it’s looking at actively right now. But if those FDIC regulations pass, “that would basically kill it for private equity.” However, he thinks there may be some loosening in those proposed rules, and although PE will still be at a competitive disadvantage, that wouldn’t necessarily slam the door on investing since there aren’t that many strategic bidders out there.

9:55: The market for bank debt still hasn’t improved materially, although the bond market is “on a tear.” “Bonds you can get done, it’s just a question of rate,” James says. The firm looked at a deal this morning where equity was 75% of total purchase price, so available leverage remains low. That’s going to change the focus on the type of companies that the firm can buy.

9:58: How’s the refinancing market? The firm has almost no debt maturities before 2013 in its portfolio. 2013 and 2014 are the big years. But the firm is concerned that when the markets normalize credit will still be constrained, James says. “We want to be sure that we have de-levered our companies such that they can access capital in a world where leverage rates of five, six or seven times or no longer acceptable.” The firm has bought back or extended maturities on about $10 billion in private equity. “We’ve been pretty active about delevering our companies on attractive terms.” James isn’t sure about how much more of that the firm is going to do; it depends on what the market offers it. The current rally in the lower end of the credit spectrum has put a damper on those activities for now.

10:01: On the SEC’s proposed ban of placement agents, the firm thinks it’s a “huge overreaction.” (Blackstone Group owns a placement agent, Park Hill Group.) “There is no way that small firms, minority owned firms will be able to access institutional capital on their own,” James says. “You’re basically going to be denying capital to women, minority-owned and smaller firms.” He also makes a point about how this is going to hurt understaffed public pension funds. They’ll either have to increase their staffing levels or they’ll have to make lower quality decisions, he says. “I think it’s a misguided overreaction that will have some very bad unintended consequences…I think there are simpler, better solutions.”

10:09: Will the firm cap fund-raising on its current PE fund at a certain size? James says that on its last fund, it’s been able to put out about $7 billion a year, 25% of that in large buyouts. So he thinks the firm could still do $4 billion or $5 billion a year even without large buyouts. “You can justify a fund of $15 billion or $20 billion,” James says. The point is, there’s plenty of opportunity to invest a fund well into the teens, but “we probably won’t get to $21 billion.”

That’s it! A lot of stuff to digest. Just a reminder, we’ll be monitoring Blackstone’s other conference call later today, so check back for updates later.

UPDATE: Shasha Dai files this dispatch from the firm’s conference call with analysts.

Blackstone Chairman Stephen Schwarzman seemed generally more optimistic about the fund-raising environment now than earlier this year. While in general it remains tough for firms, especially first-time funds, to raise capital, Schwarzman said the worst is probably over.

“The fourth quarter (of 2008) and the first quarter (of 2009) were absolutely terrible for anyone managing capital,” thanks to liquidity concerns of large pension funds and a “pervasive pessimism about the economy,” Schwarzman said.

“But that has changed,” he said, pointing to recent stock market rallies and a stabilizing economy that have “led to a change in attitude in general. We’ve seen more thoughtful potential groups of investors starting to look at their asset allocation models…There are few that are not thinking this through. People have to get higher-yield assets to repair damage to their portfolios.”

“The world has moved from seizing up to looking outward,” Schwarzman said.

Blackstone has reined in close to $9 billion for its newest main buyout fund, though the fund-raising has dragged out longer than it expected.

Blackstone said it benefits from its global presence, as investors in different regions are being affected by the downturn differently.

“One person’s tragedy is another person’s comedy,” he said. “There is always somebody that’s doing well. We can go places where we will be well received.”

The Morning Leverage: Blackstone Results Shock No One

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morningleverage_E_20090803175649.jpgMike Lucas for Dow Jones

In this morning’s media roundup:

News: Fortress Investment Group yesterday reported a narrower second quarter loss even as management fees fell and assets under management dropped 11%. Here’s the Wall Street Journal’s analysis.

Blackstone Group also just reported. Judging from a run-up in stock price in the past week, folks were expecting it to blow away analyst estimates of 9 cents a share in earnings; looks like the relevant figure in the press release is 16 cents. As far as the bottom line, the firm reported a loss of $164.3 million, a bit wider than the loss in the year-ago quarter but narrower than the first quarter loss of $232 million. We’ll have a live blog of its 9:30 a.m. call right here. As an aside, while we appreciate that Blackstone hosts a separate conference call for the media, we really wish it would give us more than 30 minutes to digest its press release. Just a thought.

Meantime, here’s our summary of American Capital Ltd.’s conference call yesterday, and here’s a link to our live blog if you missed it.

Add Hyatt Hotels Corp. to the list of companies looking to go public, as the hotel chain filed its S-1. The Pritzker family is in the driver’s seat here, but Goldman Sachs Capital Partners and Madrone Capital Partners both have small stakes. Here’s the Wall Street Journal’s take. And Australia is getting in on the IPO action too, as TPG Capital thinks about taking Australia’s largest department store, Myers, public down under, the Financial Times reports.

VNU Media, which 3i Group PLC bought from Nielsen Co. in early 2007, has restructured its debt. New backer H.I.G. Capital joined in to provide fresh capital, LBO Wire reports. Reuters says that H.I.G. has an appetite for more such deals.

Analysis: The Wharton Business School has published a special section looking at the challenges that lie ahead for private equity. It includes articles on the “coming wall of debt refinancings” and opportunities in the secondary market. Download it here.

Just for fun: This New Yorker cartoon reminds us of various and sundry appearances by bankers and others before Congress lately.

Even Paper Producers Are Going Digital

Newspapers and magazines have been warned that they must go digital or go away. The message appears to have been heard even by the companies that make the paper.

Cerberus Capital Partners LP-backed paper producer NewPage Corp. has a biweekly podcast series, titled “On Paper,” that features interviews with corporate executives about topics like sustainability and socially responsible investing. (Schedules can be found here.)

NewPage says the show, available at iTunes, is approaching 1 million downloads. In one recent podcast, Guy Gleysteen, a senior vice president of production for Time Inc., reflects on responsible forestry practices and their alignment with the publishing industry, and sheds light on how the magazine’s supply chain – from forests to mailboxes – is responsible and sustainable.

In another installment, IBM Vice President of Energy and Environment Richard Lechner boasts about several of IBM’s green initiatives, including an in-house “green army” of 35,000 employees who are working toward improvements in energy efficiency.

While the “On Paper” series may not be generating Kings Of Leon-level buzz, it is a continuation of an increasing environmental focus for private equity overall (click here and here) and for NewPage itself. The company has been studying biofuel development and recently announced the ‘Tree as a Crop’ program in conjunction with Rodale Inc. and the Rodale Institute. According to a press release, the program aims to “teach farmers and landowners to manage trees as they would any other crop, rather than just react to how they grow on their own,” in an effort to enhance bio-diversity and reduce carbon dioxide levels.

These efforts speak to a certain level of creativity by NewPage as it faces financial difficulties tied to the woes of its publishing industry customers, who have seen overall print pages shrink particularly rapidly lately as advertisers have disappeared in the recession. NewPage projects second quarter sales of about $735 million to $740 million, down from $1.06 billion in the 2008 quarter. NewPage’s publishing customers include Condé Nast Publications, McGraw-Hill Cos., Meredith Corp. and Time.

Cerberus bought NewPage in 2005 for $2.3 billion from MeadWestvaco Corp. In 2007, the company purchased Stora Enso Oyj’s Sena division for $2.5 billion. In a bid to reduce its debt, the company is pursuing a refinancing effort that includes the repurchase of notes and a new $595 million note offer.

-With Rimin Dutt

LBO Industry Passes Avago Test With Flying Colors, So Far

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avago_E_20090805221253.jpgCourtesy Avago

Why yes – yes, the public markets do have a certain appetite for heavily leveraged companies in cyclical industries.

That’s the conclusion to be drawn from the pricing of Avago Technologies Ltd.’s upsized initial public offering. The semiconductor company’s IPO priced at $15, the upper end of a $13 to $15 range, and 43.2 million shares are to be sold, up from an originally planned 36 million.

All of the additional 7.2 million shares being sold are coming from the company’s backers, mainly Kohlberg Kravis Roberts & Co. and Silver Lake, as opposed to Avago itself.

With the upsized offer, selling shareholders like KKR and Silver Lake will unload a total of 21.7 million shares, generating some $325.5 million before fees. That’s good news for these firms’ investors, many of whom desperately need liquidity.

At the $15 level, the investment group’s remaining stake would be valued at well north of $2 billion. On paper at least, it all adds up to easily more than double the equity they put into Avago’s $2.7 billion buyout in late 2005.

While there have been other IPOs by buyout firm portfolio companies since the public markets deteriorated last fall, Avago generally bears a higher level of leverage and operates in a less defensive industry. As such, the successful pricing is good news for a number of other buyout-backed companies that are queuing up to hit the public markets.

That is, if the shares do well Thursday morning.

Evening Reading: Buffett Profits From Bailout

This post is by Stephen Grocer from Deal Journal

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Buffett gets the Goldman treatment: Goldman Sachs has faced much criticism for profiting from taxpayer largesse. Now the spotlight is turning Warren Buffett’s way. Berkshire Hathaway has more than $26 billion invested in eight financial companies that have received bailout money, writes Rolfe Winkler. “The TARP at one point had nearly $100 billion invested in these companies and, according to new data released by Thomson Reuters, FDIC backs more than $130 billion of their debt. To put that in perspective, 75 percent of the debt these companies have issued since late November has come with a federal guarantee. Without FDIC’s debt guarantee program, even impregnable Goldman would have collapsed.”

Another horse in the race: BofA’s merger with Merrill has cost its shareholders billions, brought the firm to its knees, cost Ken Lewis his job as chairman and cast doubt over his job as CEO. Yet one of the oft mentioned problems with ousting Lewis is who will replace him? John Thain seemed like the obvious choice back in September, but we all know what happened there. So who then? The list got a bit of a shake up this week. Sallie Krawcheck’s name was added to the list, while Thomas Montag ’s name was removed. Dealscape runs through the potential contenders.

Why did Pepsi buy its bottlers? Pepsi and Coke spun off their bottlers a decade ago. That allowed the soft drink giants to focus on their core products and brands, while the bottlers did the grunt work. But things have changed. Fewer people are drinking soda these days. By taking back control of its bottlers, Pepsi will have greater power in dealing with stors such as Wal-Mart and can eliminate redundancies in its distribution system, writes the Big Money. But the real question is will Coca-Cola follow suit? Right now, it doesn’t seem likely, writes the Big Money.

Geithner should be angry, but at who? Tim Geithner had had enough last Friday, and unleashed a tongue lashing on the financial regulators standing in the way of Obama administrations efforts to reform the financial regulatory system. Matthew Goldstein over at Reuters says good for him. But before you think Goldstein thinks the regulators had it coming, he doesn’t. Rather Goldstein thinks the anger should have been directed at — surprise, surprise — the bankers. “It’s about time someone in the Obama administration got a little red in the face over the financial crisis. But here’s the thing: the Treasury Secretary’s temper tantrum was misdirected and he ended up taking his anger out on the wrong parties. The people Geithner really needs to be delivering a few choice words to are the nation’s bankers — especially the ones who were bailed out by U.S. taxpayers and now act as if last fall never happened.”

Citi, Andrew Hall and $100 million: Should Hall get his $100 million pay day? Should Citi offload the Phibro unit Hall runs? Felix Salmon weighs in again on the topic. “Citi isn’t and shouldn’t be in the business of running hedge funds, and the great thing about Phibro (compare and contrast Old Lane) is that the bank will have not only made billions of dollars in total profits to date but will also make a large gain on selling the business as well.”

Court Kills Chrysler Conspiracy Theories

This post is by Mike Spector from Deal Journal

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Remember the delay that holdout Indiana pension funds caused in Chrysler’s historic bankruptcy case? A federal appeals court ruled against the Hoosier pensioners in early June, and the U.S. Supreme Court declined to hear the case.

But things moved so fast that the 2nd Circuit Court of Appeals had to rule from the bench. Today the 2nd Circuit issued its final written opinion, striking down a series of arguments made by the funds that attempted to block the government-backed Chrysler-Fiat deal. The big takeaways: If you’re a debt holder, you need to offer solutions of your own – otherwise a company can sell its assets free and clear to a white-knight buyer. And if you’re part of a group of secured lenders, the lead agent holds sway on whether to cut deals with whomever it chooses.

For companies who want to use quick bankruptcy asset sales – known as 363 sales for the relevant section of the Bankruptcy Code – to remake themselves, New York is your venue.
“Short of the Supreme Court or Congress changing the status quo, it seems practitioners could feel very comfortable using a 363 sale in New York, because they have a strong precedent here,” said Stephen Lubben, a bankruptcy professor at Seton Hall law school who has testified before lawmakers on the Chrysler and General Motors cases.

Here’s a rundown of the Indiana pension funds’ arguments and how the court knocked them down:

1) Chrysler’s use of a 363 sale to sell its assets to Fiat constituted a “sub rosa” plan that trampled on creditors’ rights.

In bankruptcy, companies typically have to submit reorganization plans subject to creditors’ approval. But the government feared that would take too long, and risk liquidation. So instead, Chrysler used a quick 363 sale to unload its assets to Fiat, the only buyer available.

The pension funds, angry they would receive only 29 cents on the dollar, said that plan violated their rights. They deplored a deal with the government that would give the United Auto Workers union, an unsecured creditor, equity in the new Chrysler owned by Fiat while secured lenders got about $2 billion for their $6.9 billion in debt.

But the court found that legal precedent allows judges to approve these sales if there is a “good business reason” that maximizes the value of eroding assets:

To preserve resources, Chrysler factories had been shuttered, and the business was hemorrhaging cash. According to the bankruptcy court, Chrysler was losing going concern value of nearly $100 million each day … With its revenues sinking, its factories dark, and its massive debts growing, Chrysler fit the paradigm of the melting ice cube. Going concern value was being reduced each passing day that it produced no cars, yet was obliged to pay rents, overhead, and salaries. Consistent with an underlying purpose of the Bankruptcy Code – maximizing the value of the bankrupt estate – it was no abuse of discretion to determine the sale prevented further unnecessary losses.

2) The sale cheats pension funds by releasing their liens against their will.

The court beat back the funds’ arguments that its liens couldn’t be released by other secured lenders, which cleared the way for the sale. In its opinion, the court said the lenders’ lead agent has broad discretion to act on behalf of other debtholders.

The bottom line: agents rule the day. “This is one of the first circuit court opinions to address the structure of senior debt agreements and the control that an agent has in a bankruptcy case,” said Lubben. “The relationship between the agent bank and all the other banks in line is going to be a very important issue in the next 18 months as we work our way through a number of Chapter 11 cases.”

3) The Treasury Department illegally used TARP funds to aid Chrysler, because the auto maker isn’t a “financial institution.”

The court said the pension funds “lack standing” to bring an argument that the Treasury illegally used TARP funds. The funds “raise interesting and unresolved constitutional issues,” the court wrote, but the judges didn’t have jurisdiction to consider it. See Deal Journal’s previous interview with Chrysler’s lawyer, Jones Day partner Corinne Ball.

Why Is AIG Stock Up 63% Today?

AIG rose 63% today.

No, that isn’t a typo. Shares of American International Group, which is 80% owned by the U.S. government, surged two days before the beleagured insurer is scheduled earning’s release on Friday. It was the biggest gain since. The company is now worth — yes — $3 billion, one seventh of the value of its all-time high.

What’s behind the surge?

1) One likely reason was the financial results of a little-known Philadelphia mortgage insurer called Radian Group. The company blew away analysts profit expectation today and cut its claims payments outlook for the rest of the year. The company says mortgage losses are declining as the housing market recovers. While everyone from home builders to banks have been saying there are signs of a turnaround, Radian has some numbers to prove it. Radian’s loan – loss provisions fell 78% to $132.8 million. While first- and second-lien claims were $167.7 million, far below expectations of about $300 million.

That bodes well for AIG, which holds or insured hundreds of millions of dollars of mortgage-related securities and derivatives. Like Radian, AIG could surprise investors with fewer mortgage losses. It could also see big gains, as it marks to market its mortgage and other assets, amid tighter credit spreads, says S&P analyst Cathy A. Seifer.

2) There’s speculation that the recent hiring of MetLife veteran Robert H. Benmosche as AIG’s new chief might have lifted the stock. But it seems doubtful that investors would put that much faith in the ability of AIG’s fourth CEO in 14 months to resurrect the company. And besides, if that were the case, the stock would have reacted days ago. “I hope for his sake that he’s not the reason,’’ for the stock surge, says Seifer. “Those would be big expectations for one person to meet.”

3) Is AIG about to be sold in its entirety? The company has been trying to selling off its assets piecemeal, from New York office buildings to its insurance operations in Japan, with mixed success. Most recently, private-equity firms are in talks to buy AIG’s aircraft leasing business and there’s a possibility that the U.S. government will increase its $5 billion guarantee of the aircraft leasing debt to attract more investors. But it’s doubtful that AIG would have more success selling its whole shop than it has shopping it pieces. In addition, a sale of the company probably isn’t imminent if AIG just signed a contract, totaling as much as $10 million, to hire Benmosche.

4) A potential debt-for-equity swap? As our friends at Marketbeat point out, there’s also been some chatter about a debt-for-equity swap between AIG and the U.S. government. The swap would reduce the debtload AIG has to pay back to the government. It’s seems one of the most positive reasons for the stock movement, though at the moment it’s unconfirmed.

UPDATE: Deal Journal just spoke to two people, both of them highly knowledgeable about goings on inside AIG. They said that the company has no apparent plans for a debt-to-equity swap, big M&A transaction, or other big shakeup. Most people in the company are focused on the new CEO and Friday’s earnings, they said. If anything is driving the stock runup it is market optimism about those results, they speculated. But like many others, they remained stumped by the big move.

Even Goldman Now Sees a Rosier Third Quarter

This post is by Real Time Economics from Real Time Economics

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Economists at Goldman, Sachs & Co., among the most bearish on the outlook for the U.S. economy, are now joining the ranks of those who see a rosier outlook for the U.S. this year than previously thought. 

The bank now sees the U.S. economy expanding by a 3% annual rate in the third quarter, more than double their previous estimate of 1%. In a research note to clients today, they point to last week’s second-quarter GDP report, which showed so much inventory liquidation that factory output is now likely to expand in the July through September months, providing a lift to overall growth.

The economists also see a bigger assist coming from fiscal stimulus efforts than they had previously thought, coupled with surprising strength in residential investment rates, most notably home sales. 

Their forecast tweak has no meaningful implications for existing views on inflation (it will stay low); or hiring, (Goldman expects unemployment levels will increase); or any changes in Federal Reserve policy. 

Goldman’s adjustment comes amid a key week for the economy that is likely to see further revisions to second-half U.S. growth after the government’s July nonfarm payrolls report arrives on Friday. Already, market participants have seen the Institute for Supply Management’s surveys of the factory and nonmanufacturing sectors. While the latter, which was released Wednesday, was unexpectedly weak, it was the former’s surprising strength that offered the most important clue about what lies ahead.

The ISM’s Anthony Nieves, who directs the nonmanufacturing survey, said Wednesday that, “manufacturing led us into this recession and manufacturing will lead – as it does historically – out.”

Bulk of TALF Eligible Deals Sold Ahead of Loan Deadline

This post is by Real Time Economics from Real Time Economics

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The bulk of the deals that emerged ahead of a loan application deadline for TALF have sold, according to people familiar with the matter.

Issuers including General Electric Co., SLM Corp., Wheels Inc. and First National Bank of Omaha sold newly created bonds backed by loans for education, credit card debt and fleet leases.

The Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, launched in March, offers investors with loans at attractive rates to buy newly created asset-backed securities. Over $8 billion in deals surfaced ahead of the sixth loan deadline on Thursday. Last month, that figure was a little over $12 billion and in June, it was $16.4 billion.

Most of the consumer loan-backed deals sold this year were eligible for TALF, which helped revitalize the securitization market and improved the availability of credit for consumers.

Initially, the program was viewed as being user-unfriendly but the Fed’s cheap loans drew investors who overcame lengthy documentation and other implementation issues to participate. Now, many hope it is extended past its scheduled expiration at the end of this year.

The Fed has recently also begun to offer attractive financing for new and existing commercial mortgage-backed loans in an effort to revive that sector. The next loan application deadline for the commercial-property portion is Aug. 20.

On Wednesday, General Electric sold two deals eligible for TALF financing: a $500 million deal, backed by dealer floorplans and dubbed GE Dealer Floorplan Master Note Trust 2009-1, has a duration of 2.94 years. The single-tranche deal sold at 168 basis points over one-month London Interbank Offered Rate, or Libor.

The other deal, a $1.75 billion credit card loan-backed deal dubbed GEMNT 2009-2, was originally $1.25 billion. The single-tranche deal, with a duration of 2.93 years, sold at 155 basis points over a short-term benchmark. Joint leads on the bond are RBS and Credit Suisse.

SLM Corp., better known as Sallie Mae, sold its $1.68 billion deal Wednesday. The student loan-backed deal sold at 25 basis points over prime rate, a benchmark. The single-tranche deal has a duration of 3.86 years. Joint leads are Barclays, Bank of America and JP Morgan.

CNH Capital America LLC sold a dealer floorplan-backed deal on Wednesday, according to a person familiar with the matter.

The $583.25 million deal sold at 170 basis points over one-month Libor. The bond, led by RBS and Banc of America Securities, is eligible for funding under the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF.

World Financial Network sold three deals on Wednesday. The first, a $500 million deal of which the top-rated tranche is worth $395 million, sold at 165 basis points over a short-term benchmark. This portion is eligible for TALF loans.

The second is a $310 million deal in which the top-rated portion is worth $245 million. It sold at 205 basis points over the same benchmark.

The third, a $139 million deal, had the $110 million portion eligible for TALF. It sold at 160 basis points over a short-term futures benchmark.

Wheels Inc. sold a $703.3 million fleet lease-backed deal. The triple-A-rated portion of $673.9 million sold at 155 basis points over one-month Libor.

First National Bank of Omaha’s $500 million credit card loan-backed deal sold at 135 basis points over one-month Libor.

Year-to-date issuance of deals eligible for TALF funds stands at over $60 billion.

Goldman Sachs’s Barry Bonds Complex

This post is by Michael Corkery from Deal Journal

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Goldman Sachs Group has been raising eyebrows for both its record trading profits and the risk it took on to earn that money.

barrybonds_CV_20090805105914.jpgBloomberg News

Barry Bonds hits his record-breaking 756th home run in August 2007.

But a look at Goldman’s daily trading record for the months of April, May and June, show that the Wall Street bank may not have been acting very risky at all. Not when Goldman was able to hit a home run nearly three out of every four days that it traded.

Bloomberg is reporting that Goldman recorded at least $100 million in trading revenue on 46 separate trading days in the second quarter, or 71% of the time. That is a record for Goldman, up from a previous high of 34 days in the first quarter.

With that kind of track record, Goldman would have been crazy not to swing for the fences. It also helps to explain why the firm was willing to trade with a record amount of its capital at risk. Goldman’s so-called value-at-risk, an estimate of how much it could lose in any given day, rose to an average of $245 million in the second quarter from $184 million a year earlier.

Consider that Barry Bonds, the home run king of the San Francisco Giants, was hitting homers 16% of his times at bat, or a homer every six at bats, during his best year in 2001. In his career, Bonds averaged a homer roughly every 12 at bats.

Goldman also was able to rap out the doubles. The company earned at least $50 million a day 89% of the time in the second quarter, according to the Bloomberg report, which was based on Goldman’s recent Securities & Exchange Commission filing.

But like Bonds, who was accused of using illegal steroids to juice his hitting, does Goldman’s second-quarter trading profit also need an asterisk next to them in the record books?

Goldman has become a big player in the controversial world of high-frequency trading, in which computers use complex formulas to conduct rapid-fire trades in markets around the world. Certain types of this lightening quick trading is drawing criticism for giving firms unfair advantage by allow them sneak peaks at market activity.

But in a letter sent to clients this week, Goldman said it doesn’t use such “flash” trading, which allows for the sneak peaks. The SEC is considering banning flash trades. Goldman added that high-frequency trading accounted for less than 1% of its total revenue in the first half of the year.

Still, just as steroid suspicions continue to dog many of baseball’s biggest hitters, Goldman probably will have to keep fielding questions about how it could pull off record profits amid a financial crisis and deep recession. That is the price you pay when you are the only team hitting, while the rest of the league is still in a slump.

Live Blog: American Capital 2Q Call

This post is by Private Equity Beat from Private Equity Beat

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American Capital Ltd. last night reported a big second quarter loss and said it remains in default on some $2.3 billion of debt. It also said it’s cut some 44% of its work force since March 31, 2008.

The business development company didn’t provide too many details on talks with its lenders in its statement. We’re live blogging the conference call, which starts at 11 a.m., to see what else we can learn.

11:03 a.m.: We are still waiting for things to get under way, and in the meantime are finding the saxophone-heavy hold music oddly peaceful.

11:04 a.m.: Here we go with the disclaimers.

11:06: Malon Wilkus is going through the slide show that accompanies the conference call. So far it is a repeat of information available in the press release that we’ve linked to above. You can view the slide show here.

11:10: “I can assure you that we are focused on resolving the defaults with each of our unsecured creditor groups,” Wilkus says.

11:11: The company has 7.2% non-accruing loans at fair value.

11:12: Wilkus is going through realizations in the second quarter, of which it had $125 million. Of that, $52 million came from the sale of portfolio company equity investments. It had $308 million in realized losses, of which $196 million came from the sale of Consolidated Bedding.

11:15: Wilkus says spreads in the middle market are still widening, in contrast to most other markets.

11:16: On the topic of the forthcoming dividend, it will increase total shares outstanding by about 30%.

11:18: The firm’s European Capital affiliate has $700 million net asset value, but is currently assigned a fair value of $97 million.

11:19: We expect economic growth to start happening in the second half, but we do believe that growth will be slow. American Capital remains focused on resolving its credit defaults, providing support to its portfolio companies, and improving its operating efficiencies.

11:20: The Q&A is starting. Can you share details on a resolution to the covenant breaches? Wilkus says, “We’re unsecured on all our credit facilities that we’re in default of. We really are not able to provide any more color…I can tell you that we are working hard on our effort to resolve our credit defaults.” This is less forthcoming than he was in the first quarter conference call, for sure.

11:24: Does it feel like Ebitda has bottomed? “We do feel the economy is improving, but we aren’t going to forecast whether or not our middle-market portfolio of companies are going to be improving or not with respect to their Ebitda in the next quarter or the quarter after. We are going to be particularly cautious about trying to make any forecast.” Without a doubt there was a decline in the middle-market in the second quarter in the middle market and in American Capital’s portfolio. However, if the economy is indeed improving it will flow to the middle market.

11:27: Wilkus has received a broad-ranging question about life, the universe and everything. Even though the firm has exceeded a 1-to-1 debt to equity ratio that limits it from making new investments, it is still able to make some new investments, Wilkus says. The firm is investing in its portfolio and believes it has enough liquidity to meet the needs of its portfolio, both in difficult situations and to grow. Once it resolves the credit default situation, it believes it will be in a position to raise new capital and start deploying it.

11:30: How about current headcount? “We’ve both reduced the organization almost in half and also cut compensation for the remaining employees substantially,” Wilkus says. They’ve eliminated origination capability. What remains is the ability to manage existing portfolio companies. “If we got back into a mode of reinvesting we certainly could do a modest amount of additional investing,” Wilkus says.

11:35: There is talk about securitizations; it doesn’t seem to have much impact on the firm’s bottom line.

11:38: Wilkus is getting pushed on the difference between his comments on debt now and in the past. He says again, “We feel like we are unable to comment on our negotiations.” In fact, American Capital seems to have developed a general aversion to giving forecasts…

11:41: Somebody reading this blog post has just left a very good question in the comments: could the lenders liquidate the firm?

11:43: Forgive us. They’re discussing excise taxes. Our eyes have glazed over.

11:45 There’s some discussion of how long the firm will be able to pay its dividend in 90% stock. American Capital says it wouldn’t be surprised if that gets extended into next year.

11:47: Part of the challenge of moving quickly to resolve its loan defaults is the number of lenders involved – some 100, if I heard that right…

11:50: There is a question on what happens if the company falls below one times Ebitda to interest expense. Does it breach additional loan covenants? “There isn’t some kind of piling on that occurs if you break other covenants,” Wilkus says.

11:53: Someone asks about the mix of senior debt, sub debt, et. You can find that here.

11:56: “We’ve had $1 billion of liquidity in the last 12 months,” Wilkus says. “Those are large numbers relative to our interest payments. They’re even large numbers relative to the amount of principal we have due this year. He thinks the creditors appreciate the high degree of liquidity from the portfolio and the quality of the portfolio. The firm could get more liquidity if it wanted to take discounts to fair value, but it doesn’t want to do that, and it doesn’t think its creditors want it to do that either.

11:58: As an example of not selling at bad prices, the firm points to People Media. This company was up for sale in the 4Q of last year, but got a bad offer thanks to the environment, which American Capital declined. It reengaged the next quarter and “exited with a very fine outcome.” Here’s our story on that sale.

12:05: We’re in hour two here…on the topic of a possible reverse stock split, “That’s not something we ever want to do. We just want to have the capability of doing it if it becomes appropriate. That mostly would be driven by our stock price and the rules with respect to Nasdaq.” This seems an appropriate point to give a stock price update: looks like it’s trading at right around $3, down around 17%.

12:08: An analyst says he doesn’t understand why the market is pricing the stock at $3, given that the liquidation value as of June 30 should be at around $10. It comes down to the debt default, Wilkus says. That gives the creditors certain rights. “This is not entirely in our control. It’s in part in the hands of our creditors, because they could exercise their rights if they chose to do so. We feel that we’re working in a co-operative manner with our creditors.” So, the analyst says, once you come out of default, what is my risk? Wilkus points to a number of other companies similar to American Capital that are also trading below their net asset values. He says that’s the world we’re living in at the moment.

The Morning Leverage: Recovery Has Yet To Reach American Capital

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morningleverage_E_20090803175649.jpgMike Lucas for Dow Jones

In this morning’s media roundup:

News: American Capital’s second quarter returns were a harsh reminder that, amidst signs of recovery, some firms are still having problems. The business development company remains in default on $2.3 billion unsecured debt and reported a loss of $547 million for the second quarter, much wider than its $70 million loss a year ago. Read the LBO Wire story here, and tune in at 11 a.m. ET when we will be live blogging the firm’s conference call.

Italy’s luxury market is becoming a tougher and tougher sell, not just to cash-strapped consumers, but to investors as well. Eyeware maker Safilo is still looking for a partner after Bain Capital and PAI Partners walked out on talks for a 30% stake, and Dow Jones Newswires reported this morning that Clessidra has pulled out of a deal with Roberto Cavalli over the company’s valuation. It can be assumed that both companies are hoping to avoid the fate of their Parisian neighbor/haute couture legend Christian Lacroix.

With their deal for AIG’s aircraft leasing business still in the air, Onex Corp. and Greenbriar Equity are looking to some sovereign wealth funds to provide additional financing for the deal, according to the New York Post. PE firm/sovereign wealth fund tag-teams have long been rumored to be desired; we shall see if they can actually pull this one off.

Paul Capital is bulking up its staff, though mum’s the word on its newest fund, which was slated to begin fundraising this year. The firm picked up nine to its secondaries team, in anticipation of a slew of secondary transactions. Read on in this morning’s LBO Wire.

Analysis: The New York Times takes a look at who is trying to get money from the carcass of Lehman Brothers. One hefty collector looking to jump the line? The city of New York, which claims Lehman owes $627 million in corporate and other taxes dating back to 1996.

Just for fun: With a name like “Platinum Equity,” one would expect that only the finest address would be acceptable on the firm’s letterhead. But Crain’s New York reports Platinum Equity is trading in its Park Avenue address (and Park Avenue price) for swanky digs (with roofdeck) on Vanderbilt Ave., at about a $30 per square foot discount. Not too shabby. For more details, click here.

Deals of the Day: NYC Tries to Jump Ahead in the Lehman Creditor Line

This post is by Stephen Grocer from Deal Journal

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Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at

Mergers & Acquisitions

Google: The Web search giant will issue $106.5 million in stock to acquire On2 Technologies as the Internet-search giant looks to buttress its video operations. [WSJ]

American International Group: Private-equity firms that are in talks to buy AIG’s massive aircraft leasing business are trying to raise money from sovereign wealth funds to help keep the government-funded deal on track. [NY Post]

Dow Chemical: The firm raised $2.75 billion through the public sale of debt securities, bringing in enough capital to pay off before the end of the year the $9.2 billion it borrowed to finance its Rohm & Haas acquisition. [MarketWatch]

Opel: GM and Magna have narrowed their differences in talks over the Canadian supplier’s bid for Opel. [Reuters]

Bankruptcy & Restructuring

Hey, No Cuts, Mr. Bloomberg: New York City has accused Lehman of shortchanging the city of $627 million in corporate and other taxes, beginning in 1996. Now it’s trying to convince federal bankruptcy court to let it jump closer to the front of Lehman’s long line of creditors. [NY Times]

Financial Institutions

Goldman Sachs Group: The banks earned more than $100 million in trading revenue on a record 46 separate days in the second quarter, breaking the previous high of 34 set in the prior three months. [Bloomberg]

UBS: A cleaner balance sheet and a modest profit will count for little if UBS can’t stop hemorrhaging employees. [WSJ]

How Healthy Are the Banks Really? A controversial change in accounting rules earlier this year has allowed banks to claim billions of dollars in additional earnings simply by tweaking their bookkeeping, greatly enhancing the appearance that the industry is returning to health. [Washington Post]

Standard Chartered: Banks have raised plenty of capital over the last couple of years, but most of it has been used to fill black holes or satisfy regulators. So Standard Chartered’s equity placing comes as a surprise. [WSJ]

Lloyds Steadies the Ship: If a rising tide lifts all boats, then even a badly holed tanker like Lloyds Banking Group, carelessly steered onto the rocks by its skipper, stands a chance. [WSJ]


Kohlberg Kravis Roberts: The private-equity firm inched another step closer to merging with its Euronext-listed fund after the fund received enough support from its unitholders for the deal. [Reuters]

What Spooks Wall Street These Days? The traction some private-equity firms appear to be “backward integrating” into investment banking by building up their businesses that compete with Wall Street in the lucrative underwriting of debt and equity securities, William Cohan writes. []

Fortress Investment Group: The firm second-quarter loss narrowed despite declines in assets under management and fees as revenue beat analysts’ views. [WSJ]

See, Somebody Likes You, Private Equity: Shanghai authorities are working to make it easier for foreign private-equity firms to establish themselves in the city by urging an adjustment in foreign-exchange rules. [WSJ]

People & Players

Daniel Sontag: The head of the Merrill Lynch brokerage force and a 31-year veteran of the Wall Street firm is retiring. [WSJ]

A Higher Calling: The Church of England has appointed Tom Joy, the chief investment office at RMB Asset Management, as fund manager for its $7.5 billion investment portfolio. [WSJ]

Trumping Bondholders? Donald Trump may have set a deal to retake control of his eponymous Atlantic City casino company but skeptics said it mightn’t happen. [WSJ]

Secondary Sources: Recovery?, Stimulus, Setser Signs Off

This post is by Real Time Economics from Real Time Economics

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A roundup of economic news from around the Web.

  • Economic Conditions: James Hamilton of Econbrowser looks at the latest economic data, and isn’t convinced of a turnaround. “I wish we had something else besides the auto numbers that would indicate that things have started to get better rather than simply reassuring us that things are getting worse more slowly than they used to be. I’ll be watching Thursday’s unemployment claims and Friday’s employment report with unusual interest this week. But Phil Rothman, like other forecasters, is predicting we lost another 350,000 jobs in July, or two to three times the number we’d need to add each month just to keep the unemployment rate from rising.”
  • China vs. U.S. Stimulus: The Economist’s Democracy in America blog looks at the differences between U.S. and Chinese stimulus. “America’s federal stimulus package serves partly to counteract massive cuts by state governments, many of which are required to run balanced budgets. That’s a problem China doesn’t need to cope with… It’s certainly true that China’s ability to get infrastructure spending into the pipeline rapidly has made its stimulus package more effective. Equally important is the Chinese ability to get commercial banks to lend more money and stimulate credit growth essentially through party officials jawboning bankers — something that works much better in a communist system than in a laissez-faire capitalist one, as Timothy Geithner has repeatedly discovered. Some may now yearn for America to emulate one or even both of these Chinese traits. But it should be recognized that one major reason China’s stimulus package has been more effective than America’s is that relative to the size of the economy, it’s much, much bigger.”
  • Setser Moves to NEC: Brad Setser, one of the Journal’s picks among top economics bloggers, is leaving his excellent blog to work for Larry Summers at the National Economic Council. “I always intended to write extensively about the world’s emerging markets. I never anticipated that I would end up writing most frequently about an emerging economy that I hardly knew when I first started writing this blog: China. Back in 2004, I was an expert on sovereign debt, not sovereign wealth. But some stories seize you. And China’s rise as a global creditor was just that story. I never thought China’s government would ever add close to $800 billion to its foreign assets over four quarters — accumulate close to $2,500 billion in foreign assets. China has stretched all definitions of the possible. There is — understandably — an enormous amount of interest in the consequences of a world where China is the world’s key creditor country; that, more than anything, seemed to drive this blog’s traffic.” Good luck to Brad. His contributions to the blogophere will be sorely missed.

Compiled by Phil Izzo