Growth in lending to Australian consumers and businesses by banks and other financial institutions slowed in February after the central bank raised borrowing costs to cool the fastest inflation in 16 years.
Total credit climbed 0.7 percent from January, when it gained a revised 1 percent, and advanced 15.5 percent from a year earlier, the Reserve Bank of Australia said in a report released in Sydney today. The median estimate of 21 economists surveyed by Bloomberg News was for a 1.1 percent gain.
Credit growth may slow further in coming months after Governor Glenn Stevens increased the benchmark rate to 7.25 percent on March 4, the highest in almost 12 years and the fourth increase since August. The bank's policy makers will probably leave borrowing costs unchanged tomorrow to gauge fallout from the global credit squeeze, according to all 24 economists surveyed by Bloomberg News late last week.
Lending to businesses rose 0.5 percent in February and 22.3 percent from a year earlier, the slowest annual pace in four months, today's report showed.
Loans to consumers to buy houses in February advanced 0.9 percent for an annual increase of 11.4 percent. Credit provided to consumers for purchases other than housing fell 0.1 percent from a month earlier and gained 10.8 percent on the year.
European Central Bank council members Axel Weber and Juergen Stark signaled they are ready to raise interest rates if needed to contain inflation even as a global credit squeeze threatens the economy.
The ECB “will act'' to contain “alarming'' price pressures if its inflation goal is threatened, Weber said in a speech in Luxembourg today. Stark said in Cape Town he “cannot be sure'' that the ECB's benchmark rate, currently at a six-year high of 4 percent, is high enough to contain inflation.
The euro climbed after their remarks, which contrast with the views of other policy makers such as Portugal's Vitor Constancio and Belgium's Guy Quaden, who say that slowing growth will damp price pressures. Inflation in the euro region accelerated to 3.3 percent in February, the fastest pace in 14 years. The ECB has refrained from following the U.S. Federal Reserve in lowering borrowing costs to bolster economic growth.
The euro, which advanced to a record $1.5903 on March 17, climbed as much as 0.4 percent to $1.5839. The ECB aims to keep inflation just below 2 percent.
Stark, who along with Weber is regarded by economists as one of the ECB's toughest inflation fighters, said today price pressures are a “matter of particular concern'' and “it is very likely that the first quarter is better than expected.''
Housing Recession
A U.S. housing recession has caused a global credit squeeze for the past seven months, clouding the economic outlook globally. The cost of borrowing in euros and pounds for three months today held at the highest levels this year as banks hoard cash before the end of the quarter. Luxembourg's Yves Mersch said today the ECB will do what's needed to ensure “well- functioning'' markets.
European retail sales fell in March and consumer confidence dropped across the region, separate reports showed today.
Some ECB policy makers are expressing greater concern than Weber and Stark about the health of the European economy. Quaden told the Wall Street Journal in an interview published yesterday that slowing economic expansion “should alleviate inflation pressures.''
Constancio said March 14 the euro's 19 percent jump against the dollar in the past year “helps to control inflation.''
Expansion in Germany, Europe's largest economy, will fall short of the Bundesbank's December forecast of 1.6 percent for 2008, Weber said today. citing the euro's appreciation, record oil prices and financial-market turmoil.
The top Republican on the Senate Finance Committee said he wants to know whether Treasury Secretary Henry Paulson pressured Federal Reserve Chairman Ben S. Bernanke into brokering the deal that allowed the sale of Bear Stearns Cos. to JPMorgan Chase & Co.
Iowa Senator Charles Grassley, who will be involved in one of two congressional inquiries into the deal, asked in an interview with Bloomberg Television yesterday whether Paulson pushed Bernanke into authorizing the $29 billion loan needed to make the sale or if the agreement was the result of an “independent Fed decision.''
“We want to know the extent to which Paulson was involved in the deal,'' Grassley said. “The extent to which this was a political decision by a political branch of government that was urged on the Fed is very important to me — that that not happen.''
The inquiries — one by the Senate Finance Committee of which Grassley is the ranking Republican and the other by the Senate Banking Committee — may herald a broader congressional backlash against the agreement, which Senate Majority Leader Harry Reid of Nevada has described as a “bailout.''
Grassley said he doubted Congress would attempt to block the deal.
“I'm going to be very reluctant to have Congress step in because you get more politics involved at that point,'' he said.
Demand Details
Still, he said, lawmakers deserve to know the details of the agreement because taxpayer dollars are involved.
“We need to know the upside and the downside for the taxpayer,'' Grassley said. “We also need to know whether or not this is a precedent.''
Jennifer Zuccarelli, a Treasury Department spokeswoman, responded to Grassley's remarks in an e-mail, saying: “We will work with the committee to respond.''
Senate Banking Committee Chairman Christopher Dodd yesterday asked Bernanke, Bear Stearns Chief Executive Officer Alan Schwartz, JPMorgan CEO Jamie Dimon, Securities and Exchange Commission Chairman Christopher Cox and Paulson to testify at an April 3 hearing on the issue.
Separately, the Senate Finance Committee asked the company chief executives, Bernanke, New York Fed President Timothy Geithner and Paulson to provide details on how the buyout was negotiated.
The Fed, in an emergency action this month, authorized a $29 billion loan against illiquid mortgage- and asset-backed securities from Bear Stearns to help the company avert bankruptcy. JPMorgan contributed $1 billion.
`Taxpayer Dollars'
“Americans are being asked to back a brand new kind of transaction, to the tune of tens of billions of dollars,'' Senate Finance Committee Chairman Max Baucus, a Montana Democrat, said yesterday in a statement. “With jurisdiction over federal debt, it's the Finance Committee's responsibility to pin down just how the government decided to front $30 billion in taxpayer dollars'' for the deal, Baucus said.
Dodd said he scheduled his hearing to explore the “policy rationale'' behind the Fed's action, the impact of the original and new sale agreements on investors and the markets, and the implications for U.S. taxpayers and regulation of U.S. financial markets.
“It's some pushback from Congress to send a warning shot to the Fed to not use taxpayer resources to bail out Wall Street,'' said Andy Laperriere, managing director at International Strategy & Investment Group in Washington. “If there is a significant negative response from Congress, it would deter the Fed from doing this in the future,'' Laperriere said.
Negotiators and Lawyers
Baucus and Grassley said in their letter that they want to know the names of all negotiators and lawyers involved in the transaction as well as all the steps taken, their specific dates and a list of steps yet to be taken. Grassley said he also wants to know how Bear Stearns's chief will “come out of this'' compared to “rank-and-file'' employees of the firm.
Baucus and Grassley want a description of the assets to be secured by the Federal Reserve, including their value and the types of mortgages underlying the assets. The senators asked for all copies of documents that will be filed with the Securities and Exchange Commission.
The senators asked for a response no later than tomorrow.
Federal Reserve spokeswoman Susan Stawick said the central bank has received the letter and will respond to it.
JPMorgan spokesman Joseph Evangelisti declined to comment on the Finance Committee request. Bear Stearns spokesman Russell Sherman didn't return a call and e-mail seeking a comment.
The Bank of Israel cut its benchmark lending rate half a percentage point to the lowest ever as it seeks to limit the impact of the slowing global economy and curb the shekel's appreciation.
The rate charged to commercial lenders was reduced to 3.25 percent, a spokeswoman for the Jerusalem-based bank said today. Seven out of 13 economists surveyed by Bloomberg had forecast a drop of half a point, while the rest were split evenly between those expecting a reduction of a quarter point, three quarters of a point and no change.
The latest economic forecasts point to a “more severe slowdown'' in the U.S. and other economies, the bank said in an e- mailed statement today, explaining its decision. It also cited the effect of the stronger shekel on curbing inflation and the need to keep the gap between domestic and U.S. rates from widening.
The cut was the second half-point reduction in as many months. Governor Stanley Fischer said in an interview last week that economic growth will probably ease to between 3.5 percent and 3.6 percent this year, down from 5.3 percent in 2007, to its slowest pace in five years.
Government Target
While the consumer price index has exceeded the government's target of 1 percent to 3 percent during the last three months, the bank's monthly survey of economists released last week forecasts inflation to slow to 2.4 percent in the next 12 months, helped by the appreciation of the shekel.
Fischer “is giving more emphasis to economic growth and less to inflation,'' said Ptachia Bar-Shavit, economist at Rehovot, Israel-based Financial Immunities Ltd. He forecast inflation at 2.5 percent to 2.6 percent this year.
The 12 percent appreciation of the shekel during the past 14 weeks will help cool inflation because home prices are linked to the dollar. The Israeli currency, which reached 3.3531 on March 13, its strongest against the dollar in 11 years, traded at 3.5200 at 6:55 p.m.
The shekel has shed about 5 percent after the central bank bought dollars March 13 and 14 — the first time since 1997 that it entered the forex market to influence the exchange rate. The Bank of Israel said March 20 that it would start buying dollars at a rate of $25 million a day to help increase reserves by as much as $12 billion over the next two years to $40 billion.
Fischer “was right not to relate too much to the shekel depreciation the last few days,'' Bar-Shavit said by telephone.
Fischer was probably concerned about further rate cuts by the U.S. Federal Reserve, which on March 18 lowered its target rate by three-quarters of a point to 2.25 percent, Bar-Shavit said. The Fed may cut rates again, which Fischer will try to match to keep the differential at 1 percentage point, Bar-Shavit said.
The yield on the government's Shahar bond due in 2016 traded at 5.57 percent today before the decision. It fell as low as 5.32 percent March 20, it lowest since last July.
The bank increased rates three times in the second half of last year, raising it by a total of three-quarters of a percentage point after a depreciation of the shekel and higher world commodities prices creating a surge of inflation.
Oil fell nearly $2 to around $100 a barrel on Monday, extending last week’s deep losses as funds sought to lock in first-quarter profits and Saudi Arabia reassured consumers of its plans to boost supply.
U.S. light crude for May delivery fell $1.70 to $100.14 a barrel in Globex electronic trading by 12:18 a.m. EDT. Prices dropped by almost $9, about 8 percent, last week as investors fled the commodities complex on fears that gains had been overdone, giving a lift to the beleaguered dollar in the process.
London Brent crude fell $1.46 cents to $98.92.
“I think there’s still a lot of profit taking in the market and that is pushing down oil prices. The U.S. dollar is also bouncing back from major currencies, so that’s adding to the downward pressure,” said Tetsu Emori, a Tokyo-based fund manager at Astmax Co Ltd.
“The market could also be reacting to comments from Saudi Arabia.”
Saudi Arabia said on Sunday it was working to expand its oil production and refinery capacity in order to maintain world economic growth, reaffirming its vow to invest tens of billions of dollars in new wells and infrastructure.
“The kingdom will work with OPEC countries, other producers and consuming countries towards oil market stability and to avoid the effects of harmful speculation,” the Supreme Council of Petroleum and Mineral Affairs said in a statement following a visit by U.S. Vice President Dick Cheney.
Washington has said it wants Saudi Arabia to help raise OPEC production to ease prices, but the producers’ cartel has resisted pumping more crude due to fears of weakening demand.
The Federal Reserve, in its first extension of credit to non-banks since the Great Depression, lent $28.8 billion as of yesterday to the biggest securities firms to try to stabilize capital markets.
In a separate announcement, the Fed expanded collateral eligible for its first auction of Treasuries March 27 to include bundled mortgage debt and securities linked to commercial real- estate loans. The value of the sale was set at $75 billion, part of a $200 billion facility unveiled last week.
The auctions and Wall Street's new loan facility are Fed Chairman Ben S. Bernanke's answer to a credit squeeze that's eroded U.S. economic growth and forced Bear Stearns Cos. to sell for $2 a share to JPMorgan Chase & Co. The recipients of the Fed's credit are getting cash and Treasury notes in exchange for securities tied to mortgages and other distressed debt.
“The Fed's pulling out all the stops here to add liquidity,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “All these things are an attempt to bring down financing costs.''
The central bank's Primary Dealer Credit Facility, announced March 16, allows Wall Street banks to borrow money overnight at a 2.5 percent interest rate, the same charged to commercial banks. The Fed bypassed its own emergency-lending policies and used broader authority in the Federal Reserve Act to give both kinds of companies the same borrowing costs.
Six Months
The central bank said the loans will be available for at least six months. The Fed's decision to be lender of last resort to the 20 primary dealers of government debt came two days after the Fed provided emergency financing to Bear Stearns through JPMorgan.
The Fed's weekly balance sheet released today showed other credit extensions, including loans to facilitate JPMorgan's purchase of Bear Stearns, averaged $5.5 billion a day for the week ended yesterday. The balance ended at zero, according to the Fed's weekly balance sheet.
The zero balance on the Bear Stearns loans signals that the Fed has yet to extend the $30 billion in financing to JPMorgan in exchange for collateral that includes “less liquid'' Bear assets. The $5.5 billion daily average of the JPMorgan-Bear Stearns loan indicates that a March 14 bridge loan, assuming it was paid off three days later, totaled about $13 billion.
`Show Some Leadership'
Morgan Stanley and Goldman Sachs Group Inc. said yesterday that they borrowed to “test'' the new lending facility. Lehman Brothers Holdings Inc. Chief Financial Officer Erin Callan said in a Bloomberg Television interview that the firm was using the lending window to “show some leadership.'' The Fed report today showed that the lending averaged $13.4 billion in the week ended yesterday.
Spokespeople for the 20 primary dealers, which also include Banc of America Securities LLC and Citigroup Global Markets Inc., either declined to comment today, didn't return phone calls or couldn't be reached.
In the Term Securities Lending Facility, the New York Fed bank today altered its plans so it will accept the expanded collateral list, which includes residential mortgage-backed securities, in the first weekly auction instead of the second.
The new eligible collateral for the TSLF includes agency collateralized-mortgage obligations and AAA/Aaa-rated commercial mortgage-backed securities, in addition to similarly rated private-label residential mortgage-backed securities and any collateral normally eligible for Fed open-market operations.
`Give Them to Us'
“What the Fed has said is give them to us, and we'll give you very liquid Treasuries,'' said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Virginia.
The Fed scheduled the second auction for April 3 and said the central bank's Open Markets Desk will announce the size and the eligible collateral the prior day.
On March 18, the Fed cut the discount rate by 0.75 percentage point to 2.5 percent, two days after reducing it by a quarter point. The more closely watched U.S. benchmark rate, the federal funds rate, was cut this week to 2.25 percent.
From the discount window, direct lending to commercial banks fell by $18 million in the past week to a daily average of $81 million. As of yesterday, the amount of loans outstanding totaled $120 million, the Fed reported in Washington.
The Fed’s resolve to defend the stressed-out U.S. financial system was put to an early test Monday when investors bet that Lehman Brothers could be the next Wall Street giant to fall.
The brokerage firm saw its shares drop as much as 39% in early trading in wake of JPMorgan Chase’s $2-a-share purchase of Bear Stearns (BSC, Fortune 500). Monday’s selloff took Lehman (LEH, Fortune 500) shares to $24.50, down from $39 Friday, before they staged a mild recovery.
The collapse of Bear Stearns has fueled fears of a widespread breakdown in the U.S. financial system. Lehman, like Bear Stearns, has been a big player in the mortgage market in recent years and investors worry that its exposure to now-toxic mortgage-based securities, combined with its relatively small size, might be fatal. Lehman is the fourth-largest U.S. player on Wall Street, behind Goldman Sachs, Merrill Lynch and Morgan Stanley.
On Monday, Lehman executives sought to calm investors. In a statement, they said the firm’s solid cash position will be bolstered by the Federal Reserve’s decision Sunday to let securities firms use the Fed’s discount window for emergency borrowing. Until now, direct Fed lending was restricted to banks, which the Fed regulates. The Fed does not oversee securities firms like Lehman.
The Fed said the decision would "improve the ability of primary dealers to provide financing to participants in securitization markets." Lehman chief Richard S. Fuld Jr. agreed, saying that the Fed move "improves the liquidity picture and, from my perspective, takes the liquidity issue for the entire industry off the table."
The Fed’s expansion of access to the discount window aims to prevent a repeat of last week’s run on Bear Stearns. Bear was forced to sell itself at a 93% discount to Friday’s market closing price after its core customers - the hedge funds that used Bear Stearns to borrow money and make trades - fled en masse, betting they wouldn’t be able to get their money out in the event of a bankruptcy filing.
The Fed’s decision to expand access to the discount window is crucial because big banks and brokerages are trying to conserve cash to deal with their own problems, rather than stepping up to buy distressed properties. Investors remain fearful in part because the prices of all sorts of assets, ranging from houses to bonds, are in free-fall - so it’s not easy to determine the true value of bank and brokerage firm balance sheets.
JPMorgan execs admitted as much on a conference call Sunday evening, when they characterized the $2-a-share price they’re paying to take over Bear Stearns’ assets and liabilities as a "cushion" for JPMorgan (JPM, Fortune 500) shareholders against future problems at the brokerage firm. An additional cushion comes from the Fed, which has agreed to provide a $30 billion loan to JPMorgan.
According to JPMorgan, Bear Stearns has $33 billion in so-called risk positions: $16 billion worth of commercial mortgage-backed securities, $15 billion in nonsubprime residential mortgages, and $2 billion in subprime assets. JPMorgan said it plans to use two-thirds of the Fed’s loan to defray JPMorgan’s exposure to those positions. Presumably it is holding the other $10 billion in reserve for problems that aren’t yet on the horizon.
The uncertainty about financial firms’ exposure to bad loans means that the next bank or brokerage to run into trouble will likely face a near wipe-out of its equity investors, just as Bear Stearns did. Roger Ehrenberg, a former Wall Street executive who writes the Information Arbitrage blog, says he is in general "not a big fan of the bailout game." But with Bear shareholders getting $2 a share on a stock that traded at $170 a year ago, no one can claim equity investors are being made whole by U.S. taxpayers.
The issue of so-called moral hazard aside, it’s clear the market tumult is adding new wrinkles to the government’s bailout game plan. With JPMorgan having taken on Bear Stearns’ bloated balance sheet and Bank of America (BAC, Fortune 500) under contract to do the same with struggling Countrywide (CFC, Fortune 500), there aren’t many domestic financial firms left to step up for the next bailout. Ehrenberg said Friday that he believes the only U.S. firms with big enough balance sheets to help out a top tier player are JPMorgan, Bank of America and perhaps AIG (AIG, Fortune 500), the big insurer that has had its own troubles in recent weeks with mounting derivatives writedowns.
The inability of big domestic players to come to the rescue of their struggling peers could presage a second wave of sovereign wealth fund investments. Big U.S. trade partners such as Dubai, China and Abu Dhabi have funneled billions of dollars into money-losing bets on U.S. companies such as Citi (C, Fortune 500), Morgan Stanley (MS, Fortune 500) and Blackstone (BX). But Ehrenberg believes they will be back for more, though - only at much better terms.
In the meantime, Ehrenberg says, executives, legislators and regulators will have to work to restructure the U.S. financial system to remove the incentives for players to take irresponsible actions. The Bear Stearns meltdown, he says, offered "a window into the inherent conflicts and weaknesses" in current arrangements which, for instance, allowed mortgage brokers and banks to originate loans without taking any realistic view of whether the loans could be repaid. They did this in part because they stood to make big fat fees for doing deals, while other investors bore the risk that the loans would go bad - which they did in huge numbers once housing prices stopped rising.
"The cycle will come back," Ehrenberg says. But when the economy starts growing again, he adds, financial firms must have incentives "to originate good loans, not just to originate loans."
Builders in the U.S. broke ground on the fewest houses in 17 years last month as the real estate recession showed no sign of abating, economists said ahead of a government report today.
Residential starts fell 1.7 percent to an annual rate of 995,000, according to the median of 64 economists surveyed by Bloomberg News. Permits, a gauge of future building, probably fell to a 1.02 million pace from 1.061 million in January.
The Federal Reserve, which is forecast to cut its benchmark interest rate by a full percentage point today, is struggling to stem a meltdown in financial markets that is damaging the economy. Stabilization in housing may be difficult to engineer as property values fall, while lenders tighten borrowing rules and keep mortgage rates elevated.
“Housing will continue to have a drag on growth,'' said Michael Gregory, a senior economist at BMO Capital Markets in Toronto. “There is more adjustment to come in the level of housing starts that will contribute to paring inventory.''
The Commerce Department is scheduled to issue the starts report at 8:30 a.m. in Washington. Estimates in the Bloomberg News survey ranged from 950,000 to 1.08 million.
A report from the Labor Department at the same time may show that wholesale prices rose 0.4 percent in February after jumping 1 percent the prior month, according to the survey median. Excluding food and energy, prices probably rose 0.2 percent, the survey also showed.
Prices at the retail level were unexpectedly unchanged in March, the Labor Department reported last week. A cooling in inflation would make it easier for the Fed to keep cutting interest rates.
Fed Projection
Investors almost unanimously project the Fed will lower the target for overnight loans between banks to 2 percent from 3 percent following their meeting today.
On March 16, the central bank cut the rate on direct loans to banks and said it will provide up to $30 billion to JPMorgan Chase & Co. to help finance the purchase of Bear Stearns Cos. after a run on Wall Street's fifth-largest securities firm.
The Fed has been lowering its benchmark overnight rate since the middle of September, after the collapse of U.S. subprime mortgages started to infect markets around the world.
Too many home loans have been “neither responsible nor prudent,'' Fed Chairman Ben S. Bernanke said at a conference on March 14. He called for “strong oversight'' of mortgage lenders.
Foreclosures Surge
Home foreclosure filings jumped 60 percent and bank seizures more than doubled in February from the same month last year as rates on adjustable mortgages rose and property owners were unable to sell or refinance, according to RealtyTrac Inc., a seller of foreclosure data.
The yield on 10-Year Treasury notes averaged 3.59 percent in the first week of March, down almost a full percentage point from mid September as the Fed lowered rates and demand for the relative safety of government debt grew.
During the same period, the average rate on a 30-year fixed mortgage was unchanged at 6.37 percent, according to figures from the Mortgage Bankers Association.
The National Association of Homebuilders said yesterday that confidence among builders held near a record low this month.
Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, last week reached an agreement with banks on new lending terms after slowing home sales made it harder to generate cash. Hovnanian also reported its sixth straight quarterly loss.
Foreclosure filings nationwide jumped 60% in February compared with the same month last year, but they decreased slightly versus January, according to a report released Thursday.
RealtyTrac, an online marketer of foreclosure properties, said 223,651 homes got hit with foreclosure filings last month, which include default notices, auction sale notices and bank repossessions. 46,508 of those were lost to bank repossessions, which more than doubled over last year.
The report also indicated that foreclosure filings in February fell 4% compared with January, similar to a 6% decrease that occurred during the same time-span in 2007.
The monthly decrease is a "seasonal occurrence," according to Rick Sharga, a RealtyTrac spokesman. Foreclosure rates spike in January when homeowners are saddled with extra debt from the holidays, then settle in February, he said.
The report suggests that efforts from government and consumer groups to combat the rising number of foreclosures have not had a significant impact, according to Jared Bernstein, a senior economist at the Economic Policy Institute.
"I don’t see evidence that any of the interventions we’ve been implementing are having any effect," he said. The report "doesn’t show that measures have failed but it’s pretty clear that nothing we’ve undertaken is slowing foreclosures."
Sharga pointed out that the most recent action by the Federal Reserve to inject liquidity into the credit markets could help the mortgage market, though he agreed with Bernstein that "the previously announced government initiatives haven’t had any effect."
Nevada, California and Florida had the highest foreclosure filing rates in the nation. One in every 165 households in Nevada received a filing in February, up 68% from a year ago and more than three times the national average. Home prices surged in all three states during the housing boom, partly due to investment by speculative buyers, but they have fallen dramatically since last summer.
In California, foreclosure activity was up 131% year-over-year with a total of 53,629 filings. Florida reported 32,447 foreclosure filings, up 69% over the same period last year.
Metro areas in California and Florida topped the list of urban centers facing a surge in foreclosure filings.
Florida’s Cape Coral-Fort Myers metro area was the hardest hit in February with one in every 84 households receiving a foreclosure filing - 6.7 times the national average. Stockton, Calif., had the second-highest foreclosure rate, where one in every 87 households receiving a filing in February.
Outside of the sun belt, Michigan and Ohio each reported more than 10,000 properties with foreclosure filings in February.
These "Rust Belt" states with struggling economies were originally at the epicenter of the housing crisis that began last year with the collapse of the subprime mortgage market.
Now, states like California and Florida, where speculative investing helped inflate a housing bubble that has since burst, are struggling with a housing glut, record low home prices and skyrocketing foreclosure rates.
AOL, the Internet arm of Time Warner Inc., said Thursday it will pay $850 million in cash to acquire social media network Bebo, which has total global membership of more than 40 million.
Bebo is one of the largest social networks in Britain, and is ranked number one in Ireland and New Zealand and number three in the U.S, according to AOL. Bebo has about 100 employees operating in offices in the U.K., San Francisco and Austin, Texas.
As social networks such as Bebo have grown in popularity, so has their value to media companies as potential goldmines for online advertising dollars. News Corp. (NWS, Fortune 500), which also owns the Fox television and movie studios in addition to its newspaper and Internet holdings, bought MySpace for $580 million in 2005, but has estimated the network is now worth more than $15 billion.
Facebook Inc., which owns the Internet’s second-largest social network behind MySpace, now arguably has a $15 billion market value, based on Microsoft’s (MSFT, Fortune 500) purchase late last year of a 1.6% stake for $240 million.
"Bebo is the perfect complement to AOL’s personal communications network and puts us in a leading position in social media," said Randy Falco, chairman and chief executive of AOL.
AOL said current Bebo president Joanna Shields will continue to run the company, reporting to AOL President and Chief Operating Officer Ron Grant.
The acquisition is part of AOL’s shift from a subscription-driven business to becoming a public Web site that generates income from building traffic and selling advertising, similar to rivals Yahoo Inc. (YHOO, Fortune 500) and Microsoft Corp.’s MSN. AOL, which has launched 17 international Web sites over the last year and has plans to expand to 30 countries outside the U.S. by the end of 2008, said Bebo plans to launch in five countries this year, and will be "featured prominently" in AOL’s international expansion efforts after the deal is closed.
Time Warner’s (TWX, Fortune 500) AOL arm was advised by Banc of America Securities LLC and Deutsche Bank Securities Inc. Bebo was advised by Allen & Co.
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