Money world

The U.S. Securities and Exchange Commission is not planning to suspend the controversial mark-to-market accounting rule that has forced banks to report billions of dollars in asset write-downs, a source familiar with the matter told Reuters Tuesday.

Rumors have circulated that the U.S. government was planning a temporary suspension of the accounting rule, which requires financial firms to value assets at current market prices.

A Congressional panel is set to examine the accounting rule at a hearing on Thursday.

Separately, the SEC may act as early as next month to consider a proposal to reinstate the uptick rule, a source familiar with the matter said.

The move comes after Democratic Rep Barney Frank, the chairman of the influential House Financial Services Committee, told reporters he was hopeful that the uptick rule would soon be reimposed.

New SEC Chairman Mary Schapiro has previously said the agency would consider whether to reinstitute the uptick rule, which forces short sellers to sell at a price higher than the previous trade payday loan.

Meanwhile, Federal Reserve Chairman Ben Bernanke said on Tuesday that he did not favor suspending mark-to-market financial accounting but understood the problem of valuing assets in highly disrupted markets.

"I would not support any suspension of mark-to-market," the Fed chief told the Council on Foreign Relations after delivering a speech on financial regulation.

Bernanke, however, did say that he would like to see more done to provide guidance to banks and financial firms on how they can give indications of value for assets being traded under fire-sale market conditions. 

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GE Capital, the finance arm of U.S. conglomerate General Electric Co, plans to sell more bonds under a government guarantee program, a source involved in the deal said on Monday.

The benchmark-sized offering is expected to price early this week, said the source, declining to be identified because he was not authorized to disclose details about the sale.

Benchmark-sized offerings are typically at least $500 million.

Shares of GE slumped last week, leaving them down 59 percent for the year, on worries that GE Capital has not adequately reserved against an expected rise in delinquencies on its loans.

The bonds will be sold under the Temporary Liquidity Guarantee (TLG) program, which confers backing by the U.S. Federal Deposit Insurance Corporation on new bond issuance.

GE is rated AAA by Standard & Poor’s and Moody’s Investors Service, but both its bonds and those of its finance arm have plunged in value over financing concerns payday loan lenders.

The TLG program was created in November to fill a financing gap for banks shut out of the corporate bond market by skyrocketing yields, as the global credit crunch was making it more difficult for firms to roll over debt.

GE Capital has mandated Citigroup, Credit Suisse, Goldman Sachs, JPMorgan and Morgan Stanley as underwriters for the sale, the source added.

Deutsche Bank, HSBC and Royal Bank of Scotland will also play roles.

GE Capital on Friday said it was offering to buy back up to $1.46 billion in bonds, according to International Financing Review.

According to GE’s latest annual report, GE Capital had about $510 billion of debt at the end of 2008, making it one of the largest borrowers in the corporate debt market.

(Reporting by Rafael Nam; Editing by Kim Coghill)

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Bank of England Governor Mervyn King, criticized for his initial response to the credit crisis, is now embarking on one of the biggest risks in British economic history.

The central bank yesterday won authority to print as much as 150 billion pounds ($212 billion) and pump it into an economy facing its worst recession since World War II, after cutting interest rates close to zero. With markets clogged and economic activity shriveling, King can’t be sure the gamble will work.

“We’re groping in the dark,” said Willem Buiter, a former Bank of England policy maker and now a professor at the London School of Economics. “Ultimately, we’ll know it works if the economy turns around, and that we won’t know for a couple of years.”

The risk for King is that the strategy fails, forcing him to create yet more money, or it backfires and fuels inflation. While U.K. officials are at pains to deny similarities with the economic policies of Robert Mugabe’s Zimbabwe, where printing money has fueled hyperinflation, some economists argue that the Bank of England hasn’t much of a choice left.

“You have to ask what it would be like if they weren’t doing anything and I suspect a lot worse,” said Amit Kara, an economist at UBS AG in London. “But the whole banking system has yet to be fixed, the economy has yet to deliver and credit is not available. It’s all a shot in the dark.”

Bank Run

Bond yields fell for a second day on the bank’s announcement. The yield on the U.K. 10-year gilt fell 26 basis points to 3.09 percent as of 10 a.m. in London. Bond yields move inversely to prices.

King drew criticism from bankers and economists for waiting a month to extend an emergency funding program following the collapse of Lehman Brothers Holdings Inc. last year. Before Northern Rock Plc faced the first run on a British bank in more than a century in 2007, he told cash-strapped banks that lending them extra funds risked sowing the seeds of the next crisis.

Yesterday’s move now puts King ahead of European Central Bank President Jean-Claude Trichet in devising new tools to tackle the economic crisis. Trichet said in Frankfurt yesterday that the ECB still hasn’t decided whether to step up its response and buy securities in the market.

“We don’t know whether quantitative easing works or not, but it’s a good thing to try,” said Christopher Allsopp, a former U credit scores for free.K. policy maker. “The amount looks serious, and it needs to be to make sure it has a chance of working. They’re doing what they can.”

Gilt Purchases

The bank’s purchases may lower long-term gilt yields, reducing benchmark corporate borrowing costs in the process. U.K. 10-year government bond yields fell the most in at least 17 years yesterday on the bank’s announcement.

Still, Buiter said that the bank’s focus on buying government bonds with outstanding maturities of five to 25 years won’t help and may raise costs for pension funds, which depend on buying long-term securities.

“This is really quite pointless and in some ways counterproductive,” Buiter said. “They could indeed end up hurting pension funds more than helping anything.”

Policy makers may also have to come up with further measures, said Lena Komileva, an economist at Tullett Prebon in London. “I don’t think it will work,” she said.

Printing money has become linked with economic mismanagement. In the 1920s, the German government fueled inflation to fund World War I loan repayments and reparations, eroding the authority of the Weimar Republic. Mugabe’s monetary policy has left Zimbabwe with the world’s fastest inflation, last estimated at 231 million percent in July 2008.

‘Lost Decade’

Quantitative easing was also tried in Japan in the 1990s, where authorities struggled to stimulate the economy in what became known as the country’s “Lost Decade.”

King himself has noted how it’s all too easy for central bankers to let prices slip out of control once they start printing money.

“Zimbabwe has determined very clearly that if you want a higher inflation rate you could have it,” he told reporters in August 2007.

With the U.K. slipping deeper into recession, some economists nevertheless say the Bank of England’s policies are bold enough to help turns things around.

“Ultimately it has to have an effect,” said Matthew Sharratt, an economist at Bank of America Corp. in London. “It’s going to bring an extraordinary amount of stimulus into the pipeline along with all the other measures that have already been taken.”

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New York state’s top legal officer issued subpoenas on Wednesday to seven executives who received tens of millions of dollars in 2008 pay from Merrill Lynch & Co. before it was taken over by Bank of America Corp., a person familiar with the investigation said.

Attorney General Andrew Cuomo is seeking information from the executives, top earners at Merrill even as its net loss swelled last year to $27.6 billion.

Last month, Cuomo’s lawyers took testimony under oath from former Merrill head John Thain and Bank of America CEO Kenneth Lewis, part of a probe into whether the firm broke securities laws on public disclosure of executive compensation.

The pay, mostly in bonuses, has become a hot-button issue in the recession as banks and companies fail. The New York attorney general’s office began its probe last October. It is investigating $3.6 billion in bonuses paid by Merrill before it merged with Bank of America Corp. (BAC, Fortune 500)

"We want the executives to testify under oath in our office about their work, the size of the bonus pool, the timing of the payments, their individual bonus and interaction with Mr Thain," said the person familiar with the probe.

A Bank of America spokesman could not immediately be reached for comment on Wednesday night. The bank filed a motion in New York State Supreme Court on Wednesday asking a judge to "either quash, fix conditions or modify" the court-ordered subpoena of Thain free credit report and score.

The bank asked that the subpoena be changed "to include a confidentiality order such that the individual compensation information (including names and/or job titles and corresponding compensation amounts of Merrill and Bank of America employees who received bonuses in 2008) provided by Mr. Thain in response to the Thain Subpoena be kept confidential by the Attorney General’s Office and not be disseminated to the public."

Merrill’s top investment banker, Andrea Orcel; its head of global proprietary trading, David Sobotka; and co-head of commodities, David Goodman, are among those Cuomo’s office wants to testify, the person familiar with the probe said.

The others are Peter Kraus, who was head of global strategy at Merrill but has left; Thomas Montag, head of global sales and trading; David Gu, head of the global rates division; and Fares Noujaim, head of Bank of America in the Middle East and Africa.

A Wall Street Journal report Wednesday said Merrill’s 10 highest-paid employees received a total of $209 million in cash and stock in 2008 compared with $201 million paid to the top 10 in 2007. It said 11 top executives were paid more than $10 million in cash and stock last year. 

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CALGARY–WestJet Airlines Ltd. says passenger traffic and load factor improved in February over the same month of 2008 but it expects the weak economy will have an impact on its first-quarter.

WestJet's revenue passenger miles, a measure of passenger traffic, rose five per cent over February 2008. Available seat miles, a measure of fleet capacity, increased by 5.7 per cent year-over-year.

February load factor, a measure of how much of the available capacity was used, was 82.6 per cent, the Calgary-based airline said Wednesday.

"Our strong load factor is, in part, a reflection of our strong growth into Mexico and the Caribbean," Sean Durfy, WestJet president and CEO, said in a statement.

"Our international expansion and continued focus on transborder routes are key to driving the success of our strategic plan."

However, Durfy also said the "pricing environment has not improved" and WestJet expects to see a 10 to 12 per cent decline in revenue per available seat mile, or RASM, in the first quarter car loans for people with bad credit.

"This decline reflects current economic challenges, the aggressive competitive pricing we have faced and the shift of Easter to the second quarter in 2009. We are seeing cost relief, due primarily to declines in fuel costs, that is helping to partially offset the decline in RASM," Durfy said.

Compared with the first quarter of 2008, crude oil prices – which affects the cost of jet fuel – have fallen to about US$44 a barrel currently from about US$102 a year ago.

WestJet said its available seat miles in February increased to 1.35 billion from just under 1.27 billion, while revenue per passenger mile increased to 1.116 billion from 1.058 billion.

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China will send a delegation to Europe this week to investigate investment opportunities, including mergers and acquisitions, Commerce Minister Chen Deming said in Beijing today.

The group will go to Switzerland, Spain, the U.K. and Germany, Chen told reporters before a meeting of the advisory body to the nation’s legislature. Those are the same countries visited by a purchasing mission last month.

Chinese companies spent almost $15 billion in the previous four-country purchasing tour, Chen said. German businesses signed $10 billion of trade agreements with the mission, which China said was intended to bolster global trade and counter the deepening economic slump best auto loan rates. Chen said today that China needs to increase outbound investment to help balance its international payments.

China’s exports and imports in February will both lag behind figures from a month earlier, Chen added. The nation had a $39.1 billion trade surplus in January, the second biggest on record, as imports fell 43.1 percent from a year earlier.

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Kohlberg Kravis Roberts & Co’s KKR.UL Amsterdam-listed fund KPE said on Monday that KKR was re-evaluating a previously-announced deal to buy out the fund, throwing doubt on KKR’s plans for a U.S. stock listing.

KKR’s plans to become a publicly-traded company hinge on the deal to buy the fund, and if that transaction is scrapped, the listing would be thrown into question.

KKR made no comment on its proposed listing in the KPE news release, which also reported a 50 percent drop in the value of KPE’s portfolio.

KKR in July announced the complicated transaction to buy KKR Private Equity Investors (KPE), delist it from Euronext, and debut the new company on the New York Stock Exchange under the ticker “KKR.” KKR had previously considered a more conventional initial public offering.

But since the July announcement, the S&P 500 Index .SPX has slumped 40 percent and the private equity industry has been hit by the financial meltdown, which shut off the supply of leverage for new deals and made nearly impossible the sale of companies they already owned.

“The financial world and markets have changed dramatically since July 2008,” KPE said in the statement on Monday.

“KKR and the independent directors of KPE’s general partner are in the process of evaluating the impact of these changes on the continued advisability of the transaction and hope to complete their analysis over the next several weeks,” it said.

KKR took KPE public in May 2006 in a $5 billion, or $25 per share, offering but shares have slumped since the credit turmoil hit payday loans guaranteed no fax. They closed on Friday at $2.25 a share.

KKR announced plans to buy KPE in July for an implied value at the time of $16 to $19.20 a share, partly to address concerns that KPE’s shares traded with little liquidity.

Under that deal, KPE holders would own 21 percent of the combined company, with KKR holding the remaining 79 percent.

KKR initially signaled its plan to list in July 2007, when it filed a registration statement for an IPO. But the credit crunch hit, and the prospects of going public for any company became tough.

Rival Blackstone LP, the only other major U.S. private equity firm to go public, is trading at a fraction of its June 2007 IPO value of $31 a share. Blackstone’s shares closed at $4.87 Friday on the New York Stock Exchange.

PORTFOLIO VALUE

KPE, which has investments in a number of KKR’s funds, also announced fourth quarter results which showed a sharp fall in the reported value of its investments.

Its net asset value, which tracks the worth of its investment portfolio, nearly halved to $12.78 per unit at the end of December from $24.36 the year before. Its NAV dropped 32 percent from the third quarter. 

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NEW YORK – The renowned investor Warren E. Buffett was uncharacteristically critical of himself and the business world at large in his annual letter to the shareholders of his holding company yesterday, as he sifted through the wreckage of his worst year in four decades.

Buffett’s company, Berkshire Hathaway, reported a 62 per cent drop in net income for 2008 and posted negative results for only the second time since he took control in 1965.

Buffett wrote he’s certain "the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall."

In between the news of Berkshire’s sharply lower profit and its nearly $7.5 billion in losses, Buffett offered a hopeful view of the future.

He said the United States has faced bigger economic challenges in the past, including two World Wars and the Great Depression.

"Though the path has not been smooth, our economic system has worked extraordinarily well over time," Buffett wrote. "It has unleashed human potential as no other system has, and it will continue to do so personal loan for poor credit. America’s best days lie ahead."

Within Berkshire, Buffett said the company’s retail businesses, including furniture and jewellery stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.

Berkshire’s 2008 net income of $4.99 billion was down from last year’s $13.21 billion.

Buffett said "stupefying losses in mortgage-related securities came in large part because of flawed … models used by salesmen, rating agencies and investors."

Buffett admitted to some mistakes. For example, he bought a block of ConocoPhillips shares just as oil and gas prices were reaching their highest levels. He also bought shares of two Irish banks, which subsequently have decreased more than 89 per cent. "The tennis crowd," he wrote, "would call my mistakes ‘unforced errors.’ "

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