World financial news

The U.S. Supreme Court on Tuesday cleared the way for the sale of Chrysler LLC to Italy’s Fiat, while General Motors began to revamp its widely criticized board by naming former AT&T Inc chief executive Ed Whitacre as chairman.

In a victory for the Obama administration driving the restructuring of bankrupt Chrysler, the court denied a request from Indiana pension funds to delay the sale to a group led by Fiat, a union-aligned trust and the U.S. and Canadian governments.

The White House welcomed the high court’s action.

“We are delighted that the Chrysler-Fiat alliance can now go forward, allowing Chrysler to re-emerge as a competitive and viable automaker,” said a White House official, speaking on condition of anonymity.

Indiana State Treasurer Richard Mourdock said in an emailed statement he was “disappointed” with the verdict.

“The future ramifications of the court’s decision on the capital markets remain to be seen,” Mourdock said.

A spokeswoman for Chrysler had no immediate comment.

According to a person familiar with Chrysler’s plans, the company is aiming to close the sale early Wednesday morning.

The person declined to be named because the plans are not yet public.

“Today’s decision is good news for the country,” said U florida health insurance.S. Representative Gary Peters of Michigan, whose district includes Chrysler headquarters. “Chrysler’s swift emergence from bankruptcy has put the company in position to become more globally competitive.”

Erich Merkle, independent auto analyst based in Grand Rapids, Michigan, said the choices were “approval of the sale or liquidation.”

Moreover, Merkle said the court’s decision to stand back was good news for GM, which is using a similar quick-sale strategy to facilitate its government-backed trip through bankruptcy.

“The stakes here were immense. Both GM and Chrysler need to get out of bankruptcy. They can’t stay in,” Merkle said, noting that Chrysler still had to demonstrate viability once it steps out of court protection.

John Casesa, managing partner at Casesa Shapiro Group, said at a conference at Oakland University in Rochester, Michigan, on Tuesday that both GM and Chrysler will be salvaged but it is unclear if they can be saved.

“The government can’t assure long-term viability,” he said, adding that Chrysler will shrink under Fiat ownership and GM’s future is hard to forecast. 

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Bank of America Corp’s corporate and investment banking unit has hired Ethan Harris as head of North America economics and David Bianco as head of U.S. equity strategy, two of the highest-profile appointments since the acquisition of Merrill Lynch & Co.

Harris joins Banc of America Securities-Merrill Lynch Research from Barclays Plc’s Barclays Capital unit, where along with Dean Maki he was chief U.S. economist and head of U.S. economic research. Maki will retain those roles, Barclays said in a separate statement.

Harris had since 2003 been chief U.S. economist at Lehman Brothers Holdings Inc before that company went bankrupt and Barclays bought some of its operations. Before joining Lehman in 1996, Harris worked at the Federal Reserve Bank of New York and at JPMorgan.

Bianco joins from UBS AG, where he had been chief U.S. equity portfolio strategist and head of U.S. valuation and accounting research. Before joining UBS, he worked at Deutsche Bank AG and Credit Suisse First Boston payday loan companies.

Harris will join Bank of America in September, and Bianco in July. Both will report to Adam Quinton, head of global macro research. Reuters had reported Harris’ hiring.

The hirings come as Bank of America integrates Merrill Lynch, which it acquired on January 1. Several top executives had since left, including chief North American economist David Rosenberg, who departed in March for Canadian wealth management company Gluskin Sheff & Associates Inc.

On May 11, Kenneth Lewis, Bank of America’s chief executive, said on a conference call that “we have lost some people that we did not want to lose” at Merrill. “On the other hand, business is really good.”

(Reporting by Jonathan Stempel; Editing by Lisa Von Ahn)

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Magna International is on the verge of controlling a major automaker for the first time, in what some analysts describe as a good risk.

Aurora-based Magna, the world’s third-biggest independent auto-parts maker, agreed yesterday on the framework of a deal that will eventually give the company a majority stake in General Motors’ Opel unit in Europe, according to widespread reports from European news agencies.

The blockbuster deal calls on the German government to provide 1.5 billion euros, or $2.43 billion, in temporary loans, while a Magna consortium will contribute unidentified short-term financing so it becomes the preferred negotiating partner in the sale of Opel.

Although that doesn’t clinch a deal for ownership, it would be a key step for Magna and its main partner Sberbank, a Russian bank, in assuming control. Earlier, Magna talked about taking a minority stake in Opel.

Under the deal, Magna will take a 20 per cent stake in Opel and Sberbank will take a 35 per cent stake, giving their consortium a majority. GM will retain a 35 per cent holding, while the remaining 10 per cent will go to Opel employees.

The German government wants to move Opel into an independent legal structure so it can avoid creditors in GM’s looming bankruptcy proceedings in the U.S.

Italian automaker Fiat SpA, the only other serious contender for Opel, dropped out of talks in Germany because of "unreasonable" funding demands.

Magna wants to use Opel’s strengths so it can make a major foray into the emerging Russian market and those of other East European countries.

David Cole, chairman of the U.S.-based Centre for Automotive Research, said the risk to Magna appears small since the industry can’t deteriorate much further and the price was attractive.

"This is probably a pretty good deal for Magna, GM and Opel," Cole said in an interview. "There is always a risk but relative to where we are now, it’s a good one. The industry is at a stage where it really can’t go anywhere but up payday loans."

Industry sales have plunged in North America and around the world in the last year because of the collapse of the U.S. housing market. That has led to a credit crisis and hampered consumers’ ability to refinance debt and buy vehicles.

Cole and economist Carlos Gomes, an auto specialist at Bank of Nova Scotia, noted the deal will fit well with Magna’s drive into Russia.

"I guess there is some risk but this is very much a part of their strategy," Gomes said.

Vehicle ownership among Russia’s adult population represents only one-third of the level of other countries in the European Union.

Magna co-chief executive officer Siegfried (Ziggy) Wolf, who has led the company in its pursuit of Opel, said a few years ago Russia is trying to create a middle class and this will spur major growth in the market during the next decade.

Magna hooked up with Russian industrial oligarch Oleg Deripaska in 2007 to increase revenues in Eastern Europe. But the partnership fell apart last year when the credit crunch caused Deripaska’s company, Russian Machines, to relinquish a big stake in Magna.

Opel, GM Europe’s biggest unit, produced 1.4 million vehicles including the Vauxhall brand last year. That is down 10.5 per cent from 2007.

The company has four assembly plants in Germany that employ about 25,000 workers.

Analyst Dennis DesRosiers said Magna’s interest in Opel represents an "unprecedented opportunity" for the company, but he cautioned it could still be a "high" risk for the firm if the investment sours.

Magna’s Magna-Steyr subsidiary already builds vehicles on contract for several automakers at a plant in Graz, Austria, but Magna CEO Frank Stronach has pushed for an expansion of its vehicle-making capabilities in Europe in recent years.

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Banks will be more closely scrutinized under European Union plans unveiled on Wednesday to apply lessons from the credit crunch and better protect investors hit by the worst financial crisis in decades.

The European Commission’s plans form a core plank of the EU’s response to the market debacle. They are aimed at spotting any build-up of risk earlier and avoiding a need for governments again to fork out billions of euros to prop up banks.

Britain, Europe’s biggest banking center, has already signaled its unease with the plans, fearing a loss of regulatory sovereignty to new, centralized bodies.

The Commission said the plans were ambitious but realistic and took into account the interests of non-euro as well as euro zone countries.

“It’s now or never that we build a consensus on financial supervision. I think we will do it,” Commission President Jose Manuel Barroso told a news conference.

The Commission’s plans are based on a blueprint put forward by former Bank of France governor Jacques de Larosiere and backed in principle by European Union leaders.

They represent an attempt to play regulatory catch-up with a financial market that is already integrated and dominated by cross-border banks like HSBC, BNP Paribas and Santander, even though supervision remains national.

Banks rapidly succumbed to the credit crunch partly because no overall picture existed of how easily instability in one institution could infect others cash loans.

The Commission proposed setting up two pan-EU bodies to correct what it sees as gaping regulatory holes.

A European Systemic Risk Council comprising central bankers and national regulators would monitor any build-up of risks and issue a call for action before they become unmanageable.

The European Central Bank would host and chair the council, a step Britain and national banking regulators say gives too much power to the Frankfurt-based institution.

“Serious risks to financial stability of a systemic nature were not addressed before the present crisis started,” EU Economic and Monetary Affairs Commissioner Joaquin Almunia said.

“In doing so we will be able to ensure we can escape from the boom-bust dynamic that is at the origin of the systemic failure that characterized the functioning of our financial system recently,” Almunia said.

Though the council would have no binding power, an EU state would have to explain why it was not taking action.

The body would work with new global risk warning functions being set up by the International Monetary Fund and the Financial Stability Board. 

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Swollen loan losses, soaring writedowns and slumping profits – it’s enough to make even seasoned bank shareholders run for cover.

But with Canadian bank stocks on a rebound since March, wary investors are wondering whether it would be wise to hang on for the long-term or head for the exits while the getting is still good. Analysts appear divided on the hold `em or fold `em debate, but surmise that next week’s round of second-quarter earnings should provide some sense of direction.

Banks, meanwhile, are facing a delicate balancing act for the remainder of fiscal 2009. In order to stay profitable, they have to keep loans flowing, while boosting some rates because the recession is rife with risk. At the same time, they must sop up climbing credit losses and maintain plump capital cushions – all without jeopardizing the sanctity of their dividends.

While acknowledging that the economic outlook remains murky, bank bulls argue this earnings season marks a turning point for the industry. For the first time in about 18 months, those much-maligned capital markets-related writedowns are not expected to eclipse the earnings parade.

The running tally of those charges hit $20.24 billion for the "Big Six" at the end of January. While more writedowns are anticipated for the February-to-April quarter, some analysts suggest this batch of reports could signal those charges are on the wane. With capital markets on the mend, many are also betting that results from the banks’ trading businesses could even surpass expectations.

Another plus, rebounding stock prices have taken the banks’ dividend yields out of the danger zone, which has dampened speculation of cuts to those sacred payouts. In fact, Michael Goldberg of Desjardins Securities is actually expecting "minimal dividend growth" for the second half of fiscal ‘09.

Those in the bear camp, however, are advising investors to be extremely cautious because bank stocks remain fraught with risks. In short, "the economy still sucks," observed John Aiken of Dundee Capital Markets in a research note to clients. He has a majority of "sell" ratings on Canadian banks, most because they are bracing for more bad loans as the economy sheds jobs and consumer bankruptcies soar.

Provisions for credit losses, the money banks set aside to cover bad loans, have been rising in recent quarters. Craig Fehr, an analyst with Edward Jones, predicts credit conditions will worsen for the rest of this year.

"We are seeing some of the pressures that have existed for the last year or so, largely on the capital markets side, are starting to subside. And we’re exchanging that a bit for the pressures that are coming from good old-fashioned credit deterioration – higher loan losses," Fehr said in an interview.

"I think that we are going to see pretty substantial year-over-year increases in provisions across the board – for all the banks. We’re talking about 50 to 100 per cent increases in provisions year over year."

The key trouble spots are likely defaults in credit-card lending, while commercial mortgages are also expected to show increasing signs of stress. The Canadian Imperial Bank of Commerce administers Canada’s largest credit-card portfolio. It began curbing lending during the second half of fiscal 2008 but remains at risk of more losses, Fehr said cash advance loan no fax.

Toronto-Dominion Bank, meanwhile, has large exposures to the hard-hit U.S. commercial real-estate sector and the sputtering Ontario economy, suggesting its "results might disappoint," said André-Philippe Hardy of RBC Capital Markets. His research also proposes that results from the Bank of Nova Scotia could miss expectations because it "is also exposed to rising credit losses in Latin America and the Caribbean."

While all banks are expected to pad their provisions, it appears to be "less of a negative" for Bank of Montreal, while National Bank of Canada is "least exposed to deteriorating credit quality near term" because of its regional concentration in Quebec, Hardy said.

Royal Bank of Canada, meanwhile, is facing its own challenges south of the border. Last month, RBC pre-announced an $850 million (U.S.) goodwill impairment charge for its international banking business. "The impairment charge is the result of the prolonged economic difficulties in the U.S., in particular the deterioration of the U.S. housing market, and the decline in market value of U.S. banks," noted Scotia Capital’s Kevin Choquette.

Despite those economic hurdles, some analysts contend the Canadian banks’ penchant for being "boring" retail lenders is standing them in good stead for longer-term profit growth.

While the banks’ net interest margins – the difference between the money they make on interest and their own interest expenses – are being squeezed because of historically low interest rates, that pressure is expected to ease going forward for a number of reasons.

First, banks have taken action to hike their rates on popular consumer loans such as personal lines of credit and float-rate mortgages. "Banks have repriced some of their mortgages and we believe banks are now charging a premium of about 75 to 100 basis points over prime on a five-year variable mortgage versus a discount of 75 to 100 basis points before the crisis," Hardy said.

Moreover, the banks’ key short-term funding costs have fallen in recent months. Medium-term funding is also down from crisis levels, while longer-term funding remains elevated. Banks are also benefiting from a surge of new deposits as their customers hoard cash.

Fehr said those various factors have created a wider spread between short-term and longer-term interest rates, which suggests that banks are poised to reap profits from interest income in the not-too-distant future. That’s because banks tend to borrow "cheap" short-term funds to make longer-term loans that feature higher interest rates, he said.

"As we reprice on the long end and keep the short end very cheap, that spread will increase for the banks. And it will actually be a very strong driver of profits for them going forward," Fehr said.

"There’s no doubt in my mind that (loan) volumes will slow relative to peak years. The idea here is that the profitability of each loan they make now has the potential to be higher. So, net interest margins, in my mind, will probably increase as we move throughout the year."

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The Obama administration has signaled its support for a congressional effort that aims to boost the troubled car industry by subsidizing new cars sales for consumers who scrap old ones.

Congressional Democrats, emerging from a meeting at the White House on Tuesday, said they had struck a deal on a bill to establish a one-year program to encourage the purchase of 1 million new cars and trucks that get better gas mileage.

Under the so-called cash-for-clunkers legislation, consumers with old, gas guzzlers could get $3,500 or $4,500 in government vouchers to use toward the purchase of new cars that get gas mileage that exceeds the old car’s by four miles per gallon.

"It’s going to be a dramatic boom for our economy," said Rep. Henry Waxman, D-Calif., who heads the House Energy Committee.

The bill would be a part of a larger energy bill, which House leaders hope to pass before Memorial Day, Waxman said in an impromptu press conference on the White House lawn with other Democrats on the House Energy committee.

The deal on cash-for-clunkers would put more vouchers in the hands of consumers than a competing bill in the Senate. Its broad nature is irking environmentalists who say it helps automakers more than the environment.

For example, under the deal, a consumer could turn in a clunker that gets 18 miles per gallon and get $3,500 to buy a car that just barely meets minimum emissions standards in the United States.

"It’s greenwash," said Therese Langer of the American Council for an Energy-Efficient Economy. "The notion that this would be part of an energy and climate bill seem particularly absurd."

But automakers Ford (F, Fortune 500) and General Motors (GM, Fortune 500) applauded the deal on Tuesday.

"It’s well structured, well-received by consumers, well supported by manufacturers and can have a positive effect on primary demand," said GM Chief Executive Fritz Henderson, who was on Capitol Hill talking with lawmakers credit reports. "This is something we’ve been supportive of, we’re encouraged by it and we’d like to see implementation rapidly."

The United Auto Workers union also commended the legislation, saying it would boost car sales.

"Congress should act right away on this high-priority measure, to deliver an immediate stimulus to our auto industry and to keep Americans working," President Ron Gettelfinger said.

Even after the House deal, however, the fate of the Senate version remains uncertain.

The environmentally tougher Senate bill would require that the subsidies be limited to new cars that get 25% better gas mileage than current minimum fuel standards (27.5 miles per gallon for passenger cars and 23.1 for trucks).

The House deal does not offer any vouchers for the purchase of used cars. It also has drawn the ire of auto recyclers, because the clunkers would have to be destroyed.

Bill proponents have pointed to programs in Europe, especially in Germany, where auto sales increased dramatically after the country enacted a program to subsidize purchase of new cars by scrapping clunkers that are at least 9 years old. However, emissions standards on new cars throughout Europe are tougher than American standards.

But bill sponsor Rep. Betty Sutton, D-Ohio, called the deal a "good example of what collaboration can do."

"It will spur auto sales and stimulate the economy," said Sutton who was also at the meeting at the White House. "Energy independence is going to require that kind of innovative thinking and deal with the transition that this bill requires." 

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Japan may spend about 15 trillion yen ($150 billion) in its next economic stimulus package, according to a ruling Liberal Democratic Party legislator involved in shaping the plan.

The measures would represent about 3 percent of gross domestic product, taking total spending by Prime Minister Taro Aso to spur growth to 25 trillion yen since he took office in September. Aso this week indicated he wanted to spend at least 10 trillion yen in the latest package.

Aso must call elections by September just as Japan heads for its worst recession since World War II, with companies from Toyota Motor Corp. to Sony Corp. slashing production and firing workers. The stimulus will focus on the job market, credit to companies, energy-efficient technology, support for regions and welfare, Finance Minister Kaoru Yosano said this week.

“Japan has had the worst economic deterioration among developed nations, and that’s pushed the government to come up with a package of this size,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. The measures “might actually help the economy, unlike previous ones.”

Bond yields rose today toward the highest since November after Yosano said issuing debt to fund the spending is “unavoidable.” Aso told reporters today that the government may need to sell bonds to pay for the measures, without specifying any amounts. The yield on the benchmark 10-year bond climbed 2.5 basis points to 1.45 percent at the close in Tokyo.

Debt Burden

The government’s ability to revive the economy is constrained by its debt, which is already the world’s biggest and is likely to spiral to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development.

“The government needs to make it clear that how they’re going to fund the package, otherwise yields will keep rising,” Nishioka said.

The Finance Ministry will sell debt to pay for most of the spending, Kyodo News reported, without saying where it got the information no fax instant cash advance. Some 3 trillion yen will come from so-called special accounts and 1 trillion yen from reserves, Kyodo said.

The package will be the largest ever for a single year, surpassing former Prime Minister Keizo Obuchi’s 8.5 trillion yen stimulus during the Asian financial crisis in 1998.

The LDP lawmaker said Aso’s plan is likely to total 50 trillion yen when including financial initiatives such as funds set aside to help companies get access to funding.

Plunging Exports

Reports today painted a mixed picture of the world’s second-largest economy.

Exports plunged a record 50.4 percent in February from a year earlier, the Finance Ministry said, and another survey showed bankruptcies rose to a six-year high in March. The Bank of Japan said the economy is deteriorating “significantly.”

Meanwhile merchant sentiment surged to the highest since July, the Cabinet Office said, indicating factory production may recover in coming months, according to Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.

“One-shot spending for a single year may not be enough to bring Japan’s economy back to a sustainable recovery,” said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. “The government may need to spend more after the election.”

Aso’s approval rating, which fell below 10 percent less than two months ago, has rebounded as he prepares sanctions against North Korea after it launched a missile over Japan earlier this week. He has also benefited from a drop in support for Ichiro Ozawa, leader of the opposition Democratic Party of Japan, whose top aide was charged with campaign-funding violations.

The prime minister’s support rating rose 9.4 percentage points from last month in a Nippon Television survey that was completed April 5, the day North Korea fired its rocket.

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Deutsche Post said it was still in talks over a possible cooperation with United Parcel Service, providing a sought-for update on its drawn-out negotiations.

But a tie-up with other providers was also a viable option, Europe’s biggest mail and express delivery company said in presentation slides on Thursday.

In 2008, Deutsche Post and UPS agreed to cooperate on air freight in the United States, but talks stalled. The exclusivity of talks between the two companies expired at the end of January.

Deutsche Post has since the start of the talks said it planned to shut down its domestic U.S. express delivery business and cut a total 14,900 jobs there. That move would cut its air capacity there to less than 100,000 shipments per day, from 1.2 million previously.

Restructuring in the U.S. was on track, Deutsche Post said, adding it still expected to post an adjusted EBIT loss of $900 million at the business in 2009 payday loan in advance.

In 2008, it booked $2.1 billion of an expected total of $3.9 billion of restructuring costs. Other DHL businesses were not affected by the changes in the United States.

Deutsche Post on Wednesday said the head of its DHL Express business, John Mullen, had resigned and would be replaced by Ken Allen, who most recently headed up the U.S. restructuring project. Mullen had suffered health problems, it said.

According to Thomson Reuters StarMine, which weights analysts’ forecasts according to their track record, the stock trades at 8.7 times its 12-month forward earnings, a discount to both UPS and FedEx as investors worry it is losing ground against its rivals.

Deutsche Post’s stock has lost more than 60 percent of its value in the past twelve months.

(Reporting by Maria Sheahan)

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No time to cruise the drive-thru or wait for a pot of drip to brew? Don't worry, Starbucks Corp. is planning to offer a new instant coffee product.

This week, the Seattle-based coffee retailer will go on the road to New York and other cities, bringing with it the company's latest product, which Starbucks said that it has been working on for 20 years.

In a memo sent to Starbucks (Nasdaq: SBUX) employees, Vivek Varma, Starbucks senior vice president of public affairs, said the product could be in stores by Feb. 18.

Varma said this won’t be your father’s instant coffee instant payday loan. She said Starbucks has developed technology to “absolutely replicate the taste of Starbucks coffee in an instant form.â€

Worldwide, there is a $17 billion market for instant coffee, according to the memo.

There are about 20 Starbucks stores within a 20-mile radius in the Albany, N.Y., area.

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Canadians spent less on auto repairs and maintenance in 2008 than the previous year for the first time in more than decade, according to DesRosiers Automotive Consultants.

Preliminary data show consumers paid $17.56 billion for auto repairs last year, or 1.5 per cent less than in 2007, the consulting firm said yesterday.

"It was a very tough year," said DesRosiers president Dennis DesRosiers.

He attributed the decline to Canadian motorists driving less because of high fuel prices which meant they did not need to visit their repair shops as much installment payday loans.

The data, which do not include revenues from collision repairs and the addition of accessories, also revealed a slight shift to "do-it-yourself" work.

Tony Van Alphen

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