World financial news

Stocks tumbled Wednesday, retreating from one-year highs, as investors took a sell-the-news reaction to the Fed’s decision to hold interest rates steady and keep its economic outlook relatively unchanged.

The Dow Jones industrial average (INDU) lost 81 points, or 0.8%. The Dow ended the previous session at the highest point since Oct. 6, 2008. The S&P 500 (SPX) index fell 10 points, or 1%, after ending the previous session at the highest level since Oct. 3.

The Nasdaq composite (COMP) fell 14 points, or 0.7%, after finishing the previous session at the highest mark since last Sept. 26.

The major indexes have repeatedly closed at near 1-year highs over the past two weeks. Stocks are likely to keep batting up against those levels until the start of the third-quarter financial reporting period late next month, said Jeff Kleintop, chief market strategist at LPL Financial.

"I think there will be a lot of upside surprises," Kleintop said. "In the second-quarter, we saw better-than-expected earnings mostly on cost cutting and little revenue growth. This time we’ll still see the impact of cost cutting but I think we’ll also see revenue growth."

He said that this fundamental improvement in Corporate America should give the rally another push.

Stocks initially rallied after the Fed announcement Wednesday, but failed to hold gains as investors used the latest nearly one-year milestone for the market as a reason to sell. A milder-than-expected response to a government auction of $40 billion in five-year notes also contributed to the late declines.

There wasn’t much in the statement that had market-moving potential, said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. "The outlook was consistent with the reports we’ve seen recently and with what the Fed has been saying."

Thursday brings the weekly jobless claims report from the Labor Department and the existing home sales report from the National Association of Realtors (NAR).

Also, the G-20 summit in Pittsburgh begins. The Group of 20 leading developed and emerging countries will discuss the ongoing efforts to stabilize economies after the financial market meltdown.

Fed: The Federal Reserve kept the fed funds rate, a key short-term bank lending rate, at a level near zero, as expected. The announcement was made at the end of its two-day policy meeting.

In the statement, the bankers said that "economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased."

But the bankers also noted that consumer spending has remained under pressure due to the rough jobs market and still-tight credit conditions. Last week, Federal Reserve chief Ben Bernanke said the recession was very likely over, but the labor market still has a long way to go.

In light of the continued challenges, the Fed reiterated Wednesday that it was likely to keep the fed funds rate at the historic lows for the foreseeable future.

Investors were also looking for more on how the Fed plans to eventually wind down programs that have pumped as much as $1 trillion into the economy to cushion the blow of the recession.

To that end, the Fed said it will stretch its purchases of $1.25 trillion of mortgage-backed securities from Freddie Mac and Fannie Mae through the end of the first quarter of 2010. Previously, the program was set to end through Dec. 31. The program has so far succeeded in helping to lower mortgage rates.

Shapiro said that this change was the most interesting detail in the statement. "In terms of buying mortgage-backed securities, the Fed is the only game in town and so maybe they hope that in six months, the world will have had enough time to heal so that someone else can jump in."

One-year highs: The major gauges are back near levels not seen since shortly after the collapse of Lehman Bros. last September.

Despite rampant calls for a fall selloff, investors have used any modest pullback this month as an opportunity to get back into stocks at a slightly lower level. Analysts say fears of having missed the boat on the rally have driven the latest spate of gains.

Since bottoming at a 12-year low March 9, the S&P 500 has gained 56.8% and the Dow has gained 48.9%, as of Wednesday’s close. After hitting a six-year low, the Nasdaq has gained 68%.

Stocks have risen during this period on signs that the economy is slowly starting to recover, and on extraordinary amounts of fiscal and monetary stimulus.

Company news: American Airlines and US Airways Group both slipped after announcing plans to raise cash, dragging down the whole airline sector.

American said it has priced its offering of 48.5 million shares of common stock, as well as $400 million in 5-year notes, with both offerings due to close Monday. The two sales should give American about $770.5 million after fees and expenses. American parent AMR (AMR, Fortune 500) fell 7.8%.

US Airways Group (LCC, Fortune 500) said it will sell 26.3 million shares of its common stock to Citigroup, the offering’s underwriter, with the sale due to close Monday. US Airways fell 13.6%.

The NYSE Arca Airline (XAL) index lost 2%.

General Mills (GIS, Fortune 500) reported higher quarterly earnings that topped forecasts and boosted its full-year outlook, due to strong sales of Cheerios, Trix and its other cereal brands. Shares rose over 4%.

Washington: Treasury Secretary Timothy Geithner told a House committee that U.S. economic growth appears to be picking up, but that reforms must be enacted to fix a broken system. He was testifying at a House Financial Services committee hearing on regulatory reform.

At least one million people could be eligible for an additional 13 weeks of unemployment benefits, following a House of Representatives bill approved Tuesday night. The Senate is expected to take up the issue soon, although it faces some questions about how it should be funded.

World markets: Global markets were mostly higher. In Europe, London’s FTSE 100, France’s CAC 40 and Germany’s DAX all ended lower, giving up gains. In Asia, the Hong Kong Hang Seng fell 0.5%, while Japan’s market was closed for a holiday.

Currency and commodities: The dollar held on to gains versus the yen and euro following the Fed announcement. The greenback had touched a fresh one-year low against a basket of currencies in the morning.

The strength in the dollar dragged on dollar-traded oil and gold prices.

U.S. light crude oil for October delivery fell $2.79 to settle at $68.97 a barrel on the New York Mercantile Exchange, dropping after a government report showed a big jump in weekly crude supplies.

COMEX gold for December delivery fell $1.10 to settle at $1,014.40 an ounce. Gold closed at a record high of $1,020.20 last week.

Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 3.41% from 3.44% late Tuesday. Treasury prices and yields move in opposite directions.

Market breadth was positive. On the New York Stock Exchange, winners narrowly topped losers three to two on volume of 1.32 billion shares. On the Nasdaq, advancers topped decliners eight to five on volume of 2.72 billion shares.  

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Top U.S. consumer electronics chain Best Buy Co. reported a lower-than-expected quarterly profit Tuesday as weakness in the entertainment software and appliance categories offset market share gains.

The retailer, which has steadily gained market share after main rival Circuit City closed its doors, said net profit fell to $158 million, or 37 cents a share, in the second quarter that ended on Aug. 29, from $202 million, or 48 cents a share, a year earlier.

Excluding a tax impact, the profit was 40 cents a share, a penny below analysts’ average forecast of 41 cents a share free credit report without a credit card.

Best Buy (BBY, Fortune 500), whose total revenue rose 12% to $11 billion in the quarter, raised its outlook for the fiscal year.

The retailer’s stock was down 3.8% at $38.86 a share in trading before the opening bell. 

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Google, the Internet search group, defended its scanning and publishing of millions of books online on Monday by saying the project was making finding information on the Web more democratic.

The Californian company struck a deal with author and publisher groups in the United States earlier this year, allowing it to copy books for the Internet.

But the agreement has been criticized and come under the gaze of the U.S. Justice Department because it does not say what Google might charge libraries, for example. Some of them fear the service will become an expensive must-have.

Dan Clancy, architect of the Google program, told a hearing at the European Commission, which is the European Union’s executive body, that the group hoped to allow Web surfers to find out-of-print books.

“We have seen a democratization of access to online information,” said Clancy, engineering director of Google Book Search.

“You can discover information which you did not know was there,” he said. “It is important that these (out-of-print) books are not left behind. Google’s interest was in helping people to find the books.”

The EU said this year it would examine the Google deal in the United States after Germany said the company had scanned books from U.S. libraries to create a database without asking the authors.

COPYRIGHT SHOWDOWN

The Commission is considering what Europe should do about scanning and printing books on the Web.

Viviane Reding and Charlie McCreevy, the EU commissioners responsible for media and the European marketplace, said they would look at shaking up copyright laws.

That could make it easier for Europe to follow the United States in scanning and printing more books online.

The EU has launched its own online register, Europeana, which includes books and images ranging from William Shakespeare to pictures of French actress Brigitte Bardot.

But most European countries have been slow in scanning and publishing literature for Europeana and Reding hopes companies such as Google can pick up the slack.

The decision to allow Google to build its library of more than 10 million scanned books has divided opinion worldwide.

“The settlement mostly only affects out-of-print books,” said James Gleick, one of the writers who sued Google but later agreed to let the group scan old books and print them online. 

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You might be surprised to know that Coinstar, the company that operates those coin counting machines in your local grocery store, is one of the better performing stocks this year. Shares are up more than 70%.

Sure, it makes sense that the company would thrive as more penny-pinching consumers turn coins sitting in an old coffee cans into actual dollars they can use to buy stuff.

But the real reason behind Coinstar’s success has little to do with people hoarding nickels and dimes. Coinstar has another business that is exciting investors — and making big media companies nervous.

Meet Redbox. If you haven’t heard of the $1 DVD rental service, here’s a quick description. Redbox kiosks, like the Coinstar (CSTR) machines, are found in many retailers, from McDonald’s (MCD, Fortune 500) — which was an initial investor — to Wal-Mart (WMT, Fortune 500), supermarket chain Kroger (KR, Fortune 500) and drug store chain Walgreen (WAG, Fortune 500), to name a few.

People interested in renting a movie can reserve one online at Redbox’s web site. They can then go pick up the DVD at a kiosk and use their credit card to pay for it. The cost is a $1 per night. The company says there are no late fees, but if you don’t return the DVD the day after you rent it, you are charged an extra $1 per night that you keep it.

Needless to say, this has proven to become popular with consumers, particularly in this economic downturn. Assuming you do actually return the DVD in one day, it could be cheaper to use Redbox than a DVD rental service like Netflix (NFLX) or Blockbuster (BBI, Fortune 500).

Redbox, which was founded in 2002, had kiosks at just under 18,000 locations as of June 30. (That includes locations for another kiosk service owned by Coinstar called DVDExpress.) Redbox also recently announced the rental of its 500 millionth DVD.

This has all served as a big boost to Coinstar, which estimates that Redbox had a 13.8% market share of the DVD rental market in the first six months of the year, up from 9% last year and just 2.3% in 2007.

Coinstar had previously been a minority stakeholder in the company, but it acquired the remainder of Redbox from an affiliate of McDonald’s and other investors in February.

In the first half of this year, Coinstar said that revenue from its DVD business totaled $344 million, nearly 60% of its total sales. Coinstar said its expects sales from Redbox and DVDExpress to nearly double this year.

By way of comparison, Coinstar’s traditional coin transaction business has started to slow as more banks allow people to turn coins into paper money free of charge (such as TD Bank). Coinstar charges consumers a processing fee of 8.9 cents a dollar.

In the first six months of 2009, the company’s coin business accounted for a little over 20% of total revenue; it is predicting that sales will essentially be unchanged from last year.

It makes you wonder if Coinstar won’t eventually pull a page from the retailer formerly known as Dayton Hudson, which changed its corporate name to Target (TGT, Fortune 500), and someday be known as Redbox.

But will Redbox continue to do well? All that depends on whether or not the company can make nice with media companies, which are the main suppliers of DVDs for all those kiosks.

Hollywood smackdown

Right now, battle lines are being drawn as movie companies try and figure out if Redbox is friend or foe. Already they’re concerned whether traditional rentals from the likes of Netflix and Blockbuster are hurting their profits quick payday loans.

Some movie studios, such as Sony’s (SNE) home entertainment unit and Lionsgate (LGF), have signed multi-year agreements to supply Redbox with new releases of DVDs.

Viacom’s (VIAB, Fortune 500) Paramount announced a trial program earlier this week that will last until the end of the year. Paramount has the option to extend the deal until 2014 after the trial expires.

But other studios have balked at allowing Redbox access to new releases on the first day they are released for sale due to worries that fewer people would be wiling to buy DVDs if they can easily get them for a $1 on Redbox.

Redbox has sued three of the companies that are holding back on DVDs — GE (GE, Fortune 500)-owned Universal, News Corp.’s (NWS, Fortune 500) Fox and Warner Bros., which like CNNMoney.com is owned by Time Warner (TWX, Fortune 500). Redbox alleges that the studios’ actions violate antitrust laws.

Redbox has maintained that it will continue to offer customers new releases from those studios, even if the company has to go buy the DVDs themselves at retail prices.

That would be good news for Redbox customers since they won’t suffer from a lack of choice. But it could decimate Redbox’s profits in the process and make the company’s business model far less viable.

Redbox generated $54 million in operating income in the first half this year. That gives the unit a decent 17% operating margin. But that pales in comparison to the nearly 37% profit margins that Coinstar’s coin business put up.

So it may not be good news for Coinstar if there is more pressure on its slow-growth, albeit extremely profitable, coin business to subsidize any potential profit hits from Redbox.

Robert Evans, an analyst with Craig-Hallum Capital, said Coinstar investors are already discounting the delay by studios and the potential impact from the lawsuits into the stock price. He adds there is a good chance Redbox could settle with those studios and eventually become partners with them.

Some big shareholders in Coinstar are sticking by the company as well.

Bradley Hinton, a portfolio manager with mutual fund firm Wallace R. Weitz & Co., wrote in a second quarter letter to shareholders of the Weitz Balanced fund that Coinstar is one of the fund’s "more predictable businesses and cheaper holdings." The fund owned about 50,000 shares as of June 30 while Weitz overall owned approximately 894,000 shares.

Coinstar trades at about 22 times 2010 earnings estimates and profits are expected to grow 28.5% a year on average for the next five years, according to analysts’ estimates.

And Jamie Cuellar, a portfolio manager with Brazos Mutual Funds, wrote in a second quarter report to shareholders that "Coinstar has the upper hand with the studios on DVD rental given legal precedent." Brazos owned more than 128,000 shares of Coinstar according to FactSet.

Cuellar added that "the company is dramatically ahead of competition on building a DVD kiosk brand, and the placement numbers and location agreements bear this out."

Talkback: Have you tried Redbox? If so, are you a fan? Or do you use other services to rent or watch movies at home? Share your comments below. 

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The buzzing saws and pounding hammers from the new project inside the Casino Queen can’t be heard on the gaming floor. But the casino hopes it will draw much-needed attention when the temporary wall comes down and reveals the new sports bar and entertainment venue.

The Casino Queen announced this week it is spending $2.15 million to develop Sevens — a 6,250-square-foot club slated to open around the third quarter of this year. The venue is a reincarnation of Club Sevens, a popular nightspot at the Casino Queen before the casino moved in August 2007 from its riverboat to a new building across the parking lot.

The original club wasn’t relocated to the new building. But with gaming revenue falling, the casino’s marketing director said the new club could prove more important than its predecessor.

The Casino Queen reported $8.1 million in revenue in the first half on 2009, down about 25 percent versus the same period last year, according to figures from the Illinois Gaming Board. Aside from the poor economy, several other factors have affected the casino since moving to the new building, said Todd Ribick, its marketing director.

"I think a lot of the legislative changes have brought some of that about, as far as the nonsmoking bill and Amendment A," Ribick said, referring to the Illinois’ 2008 ban of smoking in casinos and the fall vote that removed Missouri’s $500 loss limit, respectively.

"Those are some things that have made Missouri (casino) properties more attractive," he said

As a result, revenue at the four Missouri casinos in the St business card templates. Louis area has risen about 9 percent in the first half of 2009 compared with the same time last year, according to the Missouri Gaming Commission.

These impacts were fairly predictable, said Richard Thalheimer, head of Thalheimer Research Associates Inc., an economic research and consulting firm specializing in the racing and gaming industries based in Lexington, Ky.

Thalheimer said he has long studied the impact of loss limits and smoking in other states, and the results in Illinois and Missouri hold true to what he would expect.

What’s harder to predict are ways to win back customers. Sevens will take the place of a coffee cafe and a gift shop stationed just inside the casino’s main entrance. A new gift shop also will be constructed.

The new Sevens was not planned as a reaction to the downturn the casino has faced, Ribick said. Casino officials simply felt the new building was missing something, such as a place for sports fans to eat and gather before and after games. The club will feature displays of St. Louis Cardinals memorabilia. But Ribick noted that Sevens won’t be branded as a traditional sports bar, as it will feature space for live musical performances and other high-end touches.

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The Obama administration is widening its mortgage refinancing program to allow more borrowers hit hard by falling home prices to take part.

Borrowers whose loans are now worth up to 125% of their home’s value are now eligible to refinance their homes under the Obama foreclosure prevention plan announced in February. Previously, the limit was 105%.

The move acknowledges that home prices in many areas have fallen so far that many people were shut out of the program.

Some 67% of homeowners in Las Vegas — one of the hardest hit areas and where Housing Secretary Shaun Donovan announced the expansion Wednesday — owe more than their homes are worth.

More than one in five borrowers are now underwater, with homes in parts of California and Florida losing more than 50% of their value, according to Zillow.com, a real estate Web site. Some 20 million people own homes worth less than their mortgages.

"The president’s Making Home Affordable plan is already helping far more than any previous foreclosure initiative and with today’s announcement we will extend its reach still further," said Donovan.

How many more people will be drawn to the program now, however, remains a question, especially since mortgage rates are on the rise. Administration officials do not have an estimate.

Refinancings slow to ramp up

Some 20,000 loans have been refinanced so far, according to the Treasury Department.

The initiative waives the requirement that homeowners have at least 20% equity in their home, allowing them to take advantage of today’s lower rates. Homeowners must still meet other criteria, including being current on their payments and having loans that are owned or backed by Fannie Mae or Freddie Mac. The administration has set up a Web site, http://www.makinghomeaffordable.gov/, with more information.

Wednesday’s expansion means those with homes worth $200,000 and mortgages as large as $250,000 can still qualify. Previously, these borrowers could not have loans exceeding $210,000.

The program, however, has been slow to ramp up. Borrowers have complained that banks are not approving their applications. The Mortgage Bankers Association last week slashed its 2009 forecast of originations because fewer refinancings were being done than they originally expected. The group said only 13,000 were done in the three months after the plan’s launch.

The administration has projected that 4 million to 5 million mortgage borrowers would be helped fast cash advance. A Treasury official Tuesday said that the figure applied to those who would be eligible, not necessarily those who would participate.

Administration officials do not have an updated figure of how many people would be eligible or participate now that the criteria has been widened.

The recent uptick in mortgage prices has blunted the plan’s benefit, as well. The Federal Reserve has been buying mortgage-backed securities and long-term Treasurys in an effort to lower rates.

It worked for a while. Rates hit a low of 4.84% on April 28, but are now at 5.45%, according to HSH Associates.

Since mortgage rates have been in the 6% range in recent years, refinancing to the mid-5% range may not be worth it, said Keith Gumbinger, vice president at HSH Associates. A homeowner with a $200,000 mortgage at 6% would see a savings of about $64 a month if he refinanced at 5.5%, and that’s before closing costs.

"Are interest rates low enough to warrant getting into the process?" he said.

The administration’s announcement comes on the same day as an industry group reported that the demand for refinancing dropped 30% last week. In addition to higher rates, rising unemployment is contributing to the decline.

Borrowers with Freddie Mac loans who refinance through their current servicer can apply right away, but those who want to go through a different lender must wait until Oct. 1. Those with Fannie Mae mortgages can’t use a different lender and they’ll have to wait until Sept. 1 to refinance if their loans are more than 105% of their home’s value.

A second part of the program lets eligible borrowers who are in default — or at risk — lower their monthly payments to no more than 31% of their pre-tax income. This can help those who are not making as much at their jobs or who have monthly payments they can’t handle. Homeowners, servicers and mortgage investors can receive incentives to entice them to participate in the program.

Banks have extended more than 200,000 trial modification offers, according to the Treasury Department. Homeowners must make three monthly payments on time before the modification is made permanent. 

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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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