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PostSubject: Research Analyst Discussion Topics   Wed Jun 16, 2010 4:48 am

BP, White House Escrow Deal Said to Stall on Size, Supervision

(Bloomberg) June 16-- BP Plc and the Obama administration have failed to agree on an escrow fund covering cleanup costs and claims stemming from the Gulf of Mexico oil spill, people familiar with the negotiations said. The lack of an agreement raises the stakes for a scheduled meeting of President Barack Obama with BP Chief Executive Officer Tony Hayward and Chairman Carl-Henric Svanberg at the White House today.

The two sides continue to negotiate over issues including the size of the fund, who would administer it and whether BP shareholders would have to approve the transfer of money required for the account, according to the people, who asked not to be identified describing the private talks. “Tomorrow, I will meet with the chairman of BP and inform him that he is to set aside whatever resources are required to compensate the workers and business owners who have been harmed as a result of his company’s recklessness,” Obama said in a speech from the Oval Office last night.

“And this fund will not be controlled by BP,” Obama said. “In order to ensure that all legitimate claims are paid out in a fair and timely manner, the account must and will be administered by an independent, third party,” he said. The president’s tone differed from two days ago, when he said during a visit to the Gulf that the two sides were having a “constructive conversation” and that he hoped progress would be made by today’s meeting.

Stopping the Leak

In his speech, Obama said he had directed BP to devote additional technology and equipment to stopping the leak, the worst in U.S. history. Those efforts should capture as much as 90 percent of the leaking oil “in the coming weeks and days,” he said. The Gulf well is gushing as much as 60,000 barrels of oil a day, the government said yesterday, raising for the fifth time an official estimate that began at 1,000 barrels a day in April. “We share the president’s goal of shutting off the well as quickly as possible,” BP said in a statement after the speech. “We look forward to meeting with President Obama for a constructive discussion.” How the administrator for the escrow fund would be selected is part of the negotiations with London-based BP, and the president’s aides consider today’s talks crucial to resolving differences, according to an administration official who briefed reporters yesterday on condition of anonymity.

First Meeting

The meeting will be Obama’s first with the BP executives since a company-leased rig exploded on April 20 and collapsed, killing 11 workers. White House Adviser David Axelrod called on June 13 for BP to establish an escrow account for claims tied to the spill. Lawmakers led by Senate Majority Leader Harry Reid, a Nevada Democrat, have said BP should establish a $20 billion fund. BP has spent about $1.6 billion to stop the leak, clean up the oil, and compensate local businesses and residents. Lamar McKay, president of BP America Inc., told a House committee hearing yesterday that the escrow issue remained unresolved. “I don’t think any decisions have been made on a trust account,” McKay said. “We’re going to pay all legitimate claims, so a decision on whether to do a trust fund or account hasn’t been made yet.” BP shares have dropped 48 percent since the spill. They fell 3.8 percent to 342 pence in London trading yesterday, the lowest price since April 1997.

Fitch Ratings cut BP’s credit rating six notches yesterday to two levels above junk on concern over the potential cost of cleaning up the spill and meeting future liabilities.

================

As much as the financial services community likes to believe they control things, political uncertainty can change everything
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PostSubject: Apple, AT&T Systems Overwhelmed by IPhone 4 Demand   Wed Jun 16, 2010 4:51 am

Apple Inc. and AT&T Inc., which began taking preorders for a new version of the iPhone today, are struggling to handle demand at their retail and online outlets, according to customers and store representatives. At Apple stores in San Francisco and New York, the staff recommended that customers try ordering the device from Apple’s website later today or tomorrow. Some calls to Apple’s customer- service line also aren’t getting through because of high volume.

Apple Chief Executive Officer Steve Jobs unveiled the fourth-generation iPhone earlier this month, showing off a thinner smartphone with a sharper screen that can make video calls. The iPhone has become Apple’s top-selling product, accounting for 40 percent of revenue last quarter. “We expect presale activity to be very strong for the new iPhone,” Ben Reitzes, an analyst at Barclays Capital in New York, said in a report today. He expects the company to sell 8.1 million iPhones in the quarter ending June 26.

The iPhone 4, which starts at $199, goes on sale in the U.S. on June 24. That price requires a two-year service contract with AT&T, the device’s exclusive carrier in the U.S. Apple, which will offer both black and white models of the new handset, said today that customers can’t preorder the white version. It also won’t be available in stores on June 24.

Black Only

“At launch, we have the black models available for purchase and we will be adding the white models as quickly as we can,” said Natalie Harrison, a spokeswoman for the Cupertino, California-based company. “There is tremendous excitement for the new iPhone 4, and we are working to get as many of them into the hands of customers as possible.” Mark Siegel, a spokesman for Dallas-based AT&T, declined to comment. Shoppers trying to preorder the phone are having trouble completing transactions online and are experiencing long waits at some stores, according to customer reports on AppleInsider.com, Engadget.com and Gizmodo.com
The iPhone 4 comes to market as Apple faces mounting competition from Google Inc., whose Android mobile-operating software runs handsets from HTC Corp. and Motorola Inc. Apple rose $5.41 to $259.69 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have advanced 23 percent this year.Apple, AT&T Systems Overwhelmed by IPhone 4 Demand
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PostSubject: Japan Kan Plans May Require $76 Billion Japan Tax Rise   Wed Jun 16, 2010 4:53 am

Bloomberg.com:

Japanese Prime Minister Naoto Kan may have to raise taxes by as much as 7 trillion yen ($76 billion) to fulfill his pledge to cap bond sales in coming years, according to an independent adviser to the government. Kan has committed to holding new bond sales to 44.3 trillion yen through the year to March 2012. At the same time, his administration is considering an annual public-spending limit of 71 trillion yen over the coming three years, according to two government officials familiar with the deliberations. “The two targets are inconsistent,” Toshiki Tomita, who has advised the government on a midterm fiscal plan that is scheduled for release this month, said in an interview today in Tokyo. “There would be a gap between revenue and spending of 6 or 7 trillion yen.” The shortfall underscores the challenge for Kan as he seeks to contain the world’s largest public debt and end what he calls Japan’s “unsustainable” dependency on borrowing. Standard & Poor’s and Moody’s Investors Service have said they will closely watch the budget strategy as Europe’s fiscal woes increase global scrutiny of sovereign debt.

“It seems the government is going to make a tough target,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo. “We need to keep an eye on their level of commitment to this and how successful they will be.” Media including the Mainichi and Nikkei newspapers had previously reported the proposed spending ceiling. Kan, as finance minister under predecessor Yukio Hatoyama, urged the government to contemplate an increase in the country’s sales tax as part of efforts to restore fiscal health. He replaced Hatoyama as premier this month.

Tax Increase ‘Challenging’

Tomita, who is a member of the government’s Fiscal Policy Committee, said Japan could raise taxes to fill the gap, though any increase in the next fiscal year would be “challenging.” Further spending cuts may also be tough as the country faces increasing costs such as for social welfare, he said. “The more seriously I think about it, the more difficult I think it will be,” said Tomita, 62, an economics professor at Chuo University in Tokyo. Unless taxes increase, “bond sales could end up at around 50 trillion yen,” he said. A key government tax panel may underscore the need to raise taxes in recommendations this month, the Asahi newspaper reported today, without saying where it got the information. The proposal doesn’t say when or by how much the sales levy should increase, the report said. The group will also propose increasing the maximum income tax rate, the newspaper said.

20 Percent

Should policy makers delay increasing the consumption tax from the current 5 percent, an increase to as high as even 20 percent in the longer run will be insufficient to restore fiscal health, the Asahi reported, citing an unidentified Finance Ministry official. The International Monetary Fund said last month that the nation may need to raise the tax to 22 percent if the government doesn’t rein in spending. Voters have become open to the possibility of a higher sales tax as Japan’s coffers become more strained. A Nikkei newspaper survey taken in May showed that 49 percent of respondents opposed Hatoyama’s plan to delay raising the levy. Any multiyear pledge to cap spending, including grants to regional governments, would be the first since 2006, when then- Prime Minister Junichiro Koizumi announced a target of balancing the budget in five years. This month’s fiscal plan will include a goal of eliminating the primary budget deficit by 2020, according to the two officials. The primary shortfall, which excludes interest payments on bonds, is 7.1 percent of gross domestic product, or 33.5 trillion yen, for the year ending March 31, the Cabinet Office estimates.

‘Pay As You Go’

National Strategy Minister Satoshi Arai said last week that the fiscal plans “need to keep a pay-as-you-go principle,” and will be based on Kan’s pledge to limit new bond sales. This year’s budget was compiled by using 10 trillion yen of so-called hidden money -- funds from special accounts -- and it’s hard to expect Kan to secure the same amount of cash from those sources next year, said Tomita, who is a senior independent fellow at an institute that provides policy research for the Finance Ministry. “If we rely on hidden money or just manipulating figures within the account, it’s possible we will be seen as another Greece,” he said.
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PostSubject: U.K. LBO Dealmakers Resigned to Losing Carried Interest Fight   Wed Jun 16, 2010 4:55 am

Bloomberg.com:

U.K. private equity executives are lobbying against a government plan that may more than double the tax they pay on the profit from their investments. Privately, they say it’s a battle they’re resigned to losing. The coalition government plans to increase capital gains tax from 18 percent to rates closer to those applied to income. Earnings of more than 150,000 pounds ($222,000) a year are subject to a 50 percent levy. The CGT increase may raise 1.9 billion pounds, the Liberal Democrats, the coalition junior member pushing for the levy, said before the May 6 election. Carried interest, the share of profits that executives traditionally receive as the largest part of their compensation, is subject to capital gains tax. Dealmakers say they should be exempt from the rise because their work fuels economy growth. They are going to struggle to win that argument as Prime Minister David Cameron faces a near-record budget deficit.

“They are an easy political target,” said Andrew Goldstone, the partner in charge of the personal tax and estate- planning practice at law firm Mishcon de Reya in London. “Capital gains tax is going up, and one of the big targets will most probably be private equity.” Cameron says he plans to raise capital gains tax for “non- business” assets, promising “generous exemptions” for entrepreneurs. Pensioners, who face paying the levy as they sell second homes to fund their retirements, and business owners, are all pushing for exemptions in Chancellor of the Exchequer George Osborne’s first budget on June 22.

Tax ‘Injustice’

“It wouldn’t be appropriate to give private equity firms more favorable treatment than retirees,” Brendan Barber, general secretary of the Trades Union Congress, said in an interview. “Private equity is an area of the economy where injustice of the current capital gain tax regime is most evident.” It would be “bizarre” if the dealmakers’ carried interest, their share of the profit from asset sales, wasn’t considered as “business,” Simon Walker, chief executive officer of the British Venture Capital and Private Equity Association said after Cameron’s announcement on CGT last month “Raising the level of CGT to income tax levels would actually hinder endeavors to stimulate the economy and reduce the deficit, and result in a lower tax take,” he said. Even so, taxes for the industry are likely to rise, executives said. The BVCA, the industry’s lobby group, wasn’t able to provide an estimate for how much the plans will cost their members.

Rise ‘Almost Certain’

“It’s almost certain taxes are going to rise,” said Jon Moulton, who helped start the funds that grew into CVC Capital Partners Ltd. and Permira Advisers LLP, two of Europe’s biggest private equity firms. “Firms have been paying very little taxes on their carried interest in the past. They will have to learn to work in a high-tax environment.” The proposed capital gains increase would echo a draft U.S. bill that would make partners pay income tax of as much as 35 percent on carried interest, up from 15 percent. Meanwhile, the European Union is preparing legislation tightening disclosure and fundraising rules for private equity firms to limit systemic risk. Lawyers and accountants are already starting to work on ways to mitigate the increase. Some partners may relocate to Switzerland, according to Gary Heynes, head of the private clients group at London-based accounting firm Baker Tilly.

Locking in Lower Rate

“Others are looking at crystallizing their gains now to secure an 18 percent rate, by transferring their co-investment or carry to a trust or a company for example,” Heynes said. The CGT rate may rise to about 40 percent, Heynes estimates. CGT generated 7.8 billion pounds in revenue from April 2008 to March 2009, before the worst of the credit crisis hit, according to the government. Before the election, the Treasury forecast it will raise 2.7 billion pounds for the year starting in April 2010. Fund managers pay the 18 percent tax rate on the share of a fund’s profit, or carried interest, they receive from investors when all the assets have been sold above a minimum annual return known as the hurdle. Partners also pay the levy on gains made on their personal money they invest alongside their firms, usually 2 percent of the fund’s total. U.K. firms generated about 2.1 billion pounds of carried interest in 2007, the peak of the buyout boom, according to estimates by London-based research firm Preqin Ltd. Senior partners and executives typically get two thirds of that money, with junior dealmakers receiving the rest, according to Preqin. That would have netted the approximately 1,000 partners and top executives who work for the 340 U.K. firms an average of 1.4 million pounds each that year, calculations by Bloomberg show.

‘Two Years Late’

An increase in the capital gains tax to 50 percent would have boosted a partner’s carry tax bill by 446,000 pounds to about 700,000 pounds that year, the calculations show. In the wake of the credit crisis, only a fifth of active private equity funds in the U.K. are making carried interest as returns dry up, according to Preqin. “The argument that it would not produce much revenue is not politically good, but economically that’s true,” Mishcon de Reya’s Goldstone said. “The government is two years late.”
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PostSubject: J&J Expands January Recall to Add Benadryl, Tylenol   Wed Jun 16, 2010 4:56 am

Bloomberg.com:

Johnson & Johnson, under congressional investigation for a recall of children’s drugs, said it is expanding a separate January withdrawal of over-the- counter medicines to include lots that were “inadvertently omitted from the initial recall.” The drugmaker’s McNeil Consumer Healthcare unit is recalling five product lots of Benadryl and Extra Strength Tylenol in addition to those announced on Jan. 15, New Brunswick, New Jersey-based J&J said today in a statement. J&J is being investigated by the U.S. House Oversight and Government Reform Committee after pulling 40 types of children’s medicines on April 30. The January recall, of 500 lots of drugs including Rolaids, Motrin and some forms of Tylenol, was an expansion of a recall of Tylenol Arthritis Pain caplets announced in November 2009.

“This latest recall is further evidence that there are wide-ranging problems at Johnson & Johnson,” Representative Edolphus Towns, a New York Democrat and chairman of the oversight committee, said today in an e-mail. “I am troubled by what we have learned so far in our investigation and this latest development adds to my concern.” Today’s recall involves four lots of Benadryl Allergy Ultratab Tablets, 100 count, sold in the U.S., and one lot of Extra Strength Tylenol Rapid Release Gels, 50 count, sold in the U.S., Trinidad and Tobago, Bermuda and Puerto Rico, J&J said in the statement. J&J shares rose 72 cents, or 1.2 percent, to $59.14 at 4:15 p.m. in New York Stock Exchange composite trading. They have dropped 8.4 percent since Jan. 15.

Consumer Complaints

The January recall was the result of consumer complaints of a musty or moldy odor that has been linked to trace amounts of a chemical called 2,4,6-tribromoanisole, or TBA, found on storage pallets. The company received reports of nausea, vomiting and diarrhea after use. The U.S. Food and Drug Administration sent a warning letter to J&J at the time, saying the drugmaker waited more than a year to notify regulators after getting complaints that tainted bottles of Tylenol sickened customers. The medicine involved in that recall was made in J&J’s Las Piedras, Puerto Rico, manufacturing facility. The children’s medicines pulled this year were made in Fort Washington, Pennsylvania. The FDA is investigating all McNeil operations, and is closely monitoring J&J’s plan to correct its manufacturing lapses, Joshua Sharfstein, the agency’s principal deputy commissioner, said in May. The company may face seizures and criminal penalties, Sharfstein said. Bonnie Jacobs, a spokeswoman for J&J, said the company had no further comment beyond its statement today.
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PostSubject: Russia Prepares to Buy Canada, Australia Dollars for First Time   Wed Jun 16, 2010 4:58 am

Bloomberg.com:

Russia may add the Australian and Canadian dollars to its international reserves for the first time after fluctuations in the U.S. dollar and euro. “Adding the Australian dollar is being discussed,” Alexei Ulyukayev, the central bank’s first deputy chairman, said in an interview at an event hosted by Bloomberg in Moscow. “There are pros and cons. We have added the Canadian dollar but haven’t yet begun operations” with the currency. Russia’s reserves are made up of 47 percent U.S. dollars, 41 percent euros, 10 percent British pounds and 2 percent Japanese yen, Ulyukyaev said in November. That’s a shift from 2006, when the central bank said it held 50 percent of its reserves in dollars, 40 percent in euros and the remaining 10 percent in yen and pounds. Russia’s international reserves, the world’s third biggest, reached $458.2 billion on May 14. President Dmitry Medvedev last year suggested Russia would reduce its use of the U.S. dollar as a reserve currency after the greenback lost 34 percent of its value against the euro in 2 ½ years. The euro fell to a four-year low of $1.1877 on June 7 and has dropped 22 percent since Nov. 25 on investor concern policy makers may fail to contain Europe’s debt crisis.

The Canadian and Australian dollars have been among the best performers in the past 12 months as investors speculated a recovering global economy would increase demand for the countries’ raw materials. The Canadian dollar has gained 10 percent against the U.S. currency and 23 percent versus the euro during that period. The Australian dollar is up 8.6 percent and 21 percent, respectively. The ruble has gained almost 11 percent against the euro and 0.2 percent versus the dollar in the past 12 months.
Central Bank Chairman Sergey Ignatiev said May 27 that Russia hadn’t changed the currency structure of its reserves after year-end figures showed Russia increased the portion held in dollars. The U.S. dollar may account for more than half of Russia’s foreign currency reserves by the end of this year, Paris-based BNP Paribas estimated last month.
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PostSubject: Spanish banks break ECB loan record   Wed Jun 16, 2010 5:00 am

FT.com:

Spanish banks are borrowing record amounts from the European Central Bank as the country’s financial institutions struggle to gain funding from the international capital markets. Spanish banks borrowed €85.6bn ($105.7bn) from the ECB last month. This was double the amount lent to them before the collapse of Lehman Brothers in September 2008 and 16.5 per cent of net eurozone loans offered by the central bank. This is the highest amount since the launch of the eurozone in 1999 and a disproportionately large share of the emergency funds provided by the euro’s monetary guardian, according to analysis by Royal Bank of Scotland and Evolution. Spanish banks account for 11 per cent of the eurozone banking system. The rise in borrowing from €74.6bn in April, or 14.4 per cent of the net liquidity pumped by the ECB into the eurozone financial system, provides further evidence of the acute tensions in the Spanish banking system.

“If the suspicion that funding markets are being closed down to Spanish banks and corporations is correct, then you can reasonably expect the share of ECB liquidity accounted for by the country to have risen further this month,” said Nick Matthews, European economist at RBS. Some investors believe the difficulties increase the chances that Spain will have to use emergency loans from the newly created €440bn stability fund. However, the euro strengthened against the dollar on Tuesday while Spanish bonds held steady as the government managed to raise €5.2bn from two short-dated debt auctions. It was forced to pay three-quarters of a point more in yields to attract demand. The big moves in the eurozone bond markets were in Greece, where 10-year yields rose 74 basis points to 9.06 per cent in reaction to Moody’s decision to lower the country’s long-term credit status to junk. Only Fitch, of the main rating agencies, gives Greece investment grade status.

Moody’s move forced investors to offload the country’s debt. Many can no longer hold these bonds in their portfolios because the rating action means the country’s bonds will be removed from indices that these investors track. Greece will be removed from Citigroup’s World Government Bond Index, the EMU Government Bond Index and the World Broad Investment-Grade Index. Greek bonds will also no longer be eligible for Barclays Capital’s Global Aggregate, Global Treasury, Euro Aggregate and Euro Treasury Indexes. Greek government bonds will also attract an extra 5 per cent penalty when banks use them as security for ECB funds because of Moody’s action. The extra haircut means commercial banks will receive less money for Greek bonds than for bonds from any other eurozone nation.
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