European finance ministers failed to agree on steps to shore up the banking system hours after their countries' leaders pledged to do whatever was needed to restore confidence as the continent's stocks fell the most since 1987.
There appeared to be little support for suggestions from France and Italy that Europe create a U.S.-style bank rescue fund at yesterday's monthly meeting of euro-area finance ministers in Luxembourg.
Italian Prime Minister Silvio Berlusconi and French Finance Minister Christine Lagarde both have suggested a plan modeled after the $700 billion U.S. fund approved by Congress last week. The meeting ended yesterday without consensus on anything beyond a reiteration of a promise by heads of state to protect deposits.
“We all agreed that we want to do all we can to avoid financial institutions of systemic importance failing,'' Luxembourg Finance Minister Jean-Claude Juncker said after leading the meeting. “We reinforced arrangements concerning deposit protection.''
Officials in countries across Europe, mostly acting unilaterally, are rushing to rescue banks on the brink of collapse as the global credit squeeze bears down on the continent. Europe's Dow Jones Stoxx 600 Index had its steepest decline in two decades yesterday and the euro fell below $1.35 against the dollar for the first time in more than a year.
`Going Their Own Way'
“As far as I can tell, everyone's going their own way,'' said Peter Dixon, an economist at Commerzbank AG in London. “They can give blanket guarantees. They're almost meaningless, because depositors weren't going to lose money anyway. But it does take some of the heat out of the system.''
Before yesterday's meeting, European Union leaders pledged to protect depositors from losing their savings to bolster confidence as share prices tumbled.
EU countries “will take whatever measures are necessary to maintain the stability of the financial system,'' the 27 EU member countries said in a joint statement that was released by Berlusconi's office. “We will continue to take the necessary measures to protect the system so that individual depositors in our countries' banks do not suffer any loss of money.''
That statement followed earlier pledges by German Chancellor Angela Merkel and French President Nicolas Sarkozy to guarantee savings accounts.
Bailout Fund
Berlusconi two days ago said Italy would propose that EU governments contribute 3 percent of gross domestic product to a bailout fund to guarantee deposits at European banks. He said that other leaders were warming up to the idea. Italy didn't present the proposal at yesterday's meeting.
France's Lagarde floated a similar proposal last week, telling the German newspaper Handelsblatt that a “rescue package'' was needed to help “smaller'' European states “threatened with a banking failure (cash loans).''
Germany shot down that idea, and Henri Guaino, a special adviser to Sarkozy, later distanced the president from Lagarde's proposal, saying in a telephone interview that “France has neither studied nor proposed a plan of that type.''
Differences between Germany and France were apparent again yesterday.
“Coordination between all of us is very important,'' said Lagarde said at yesterday's Luxembourg meeting. In Berlin, Merkel stressed that “each member country must tackle its own problems and we can't risk creating new dangers to the banking system.''
Limiting Fallout
The finance ministers yesterday achieved little beyond what the leaders of Europe's four biggest economies did this past weekend. At that summit, Germany, the U.K., France and Italy also failed to agree on a unified response, pledging instead to work together to limit the economic fallout, ease accounting rules and seek tougher financial regulations.
“We have discussed recapitalization, liquidity, also minimum deposits,'' Luxembourg Economy Minister Jeannot Krecke said in an interview with Bloomberg Television. “We have some kind of agreement on the deposits.''
Even that agreement was undermined by discord over a plan by Ireland to protect not only deposits in six local banks but also loans they have taken. The German government criticized the Irish measure as distorting the European market, with Deputy Finance Minister Joerg Asmussen calling it “a rescue umbrella that discriminates in the internal market.''
Discrimination
The European Central Bank said the Irish government should have “properly'' informed the EU before announcing the bank- guarantee plan. And EU Competition Commissioner Neelie Kroes asked Ireland to expand the measure to include non-Irish banks to comply with EU rules that prohibit discriminating in favor of domestic institutions.
“We've seen negative consequences if a country goes off on its own with unilateral action,'' EU Commissioner for Economic and Monetary Affairs Joaquin Almunia said in Luxembourg. “We need a clear, coordinated, European approach.''
The debate followed rescues of major European institutions in recent days. Amsterdam- and Brussels-based Fortis, Dexia SA, which is based in Brussels and Paris, and Hypo Real Estate Holding AG of Germany required lifelines to avoid collapse.
The Stoxx 600 sank 7.6 percent to 241.6 yesterday, the steepest retreat since October 1987. Europe's plunge helped erase about $2.5 trillion from global equities as investors disregarded the U.S. Treasury plan to revive credit markets with a $700 billion bank bailout.
The beleaguered insurance giant AIG announced plans Friday to hold onto its property and casualty insurance businesses, while selling off the rest of the company to pay its massive debt to the federal government.
American International Group (AIG, Fortune 500) said it also would retain a majority stake in its foreign life insurance operations.
Everything else is on the table, said Chief Executive Edward Liddy, who was installed by the Federal Reserve last month after it gave AIG an $85 billion loan. Other businesses include its aircraft leasing unit, asset management division, retirement services and U.S. life insurance operations.
Liddy gave an upbeat presentation to analysts, saying the company will end up strong and nimble after the asset sales.
"We fully expect to emerge from this with a capital structure that’s fit to fight," said Liddy in a conference call, noting the property and casualty businesses generated $40 billion in 2007 revenue. "Our insurance businesses…are strong and well-capitalized. Our policyholders are secure."
Liddy said the company has "already been contacted by numerous strong, stable parties, and we expect that buyers will recognize the value of these properties."
He did not provide a price estimate, but noted the $700 billion government bailout of troubled assets will help stabilize the firm.
The goal is to divest these units in larger transactions to brand-name companies, he said. If AIG gets good bids, it will sell fewer assets.
Potential bidders include Berkshire Hathaway, Allstate, State Life, MetLife and Manulife, as well as some European insurers, said CreditSights, a debt analysis firm.
First to hit the market will likely be units tied to airline leasing and consumer lending, both of which require funding from the debt markets, which is hard to come by these days.
International Lease Finance Corp. could command more than $7 billion and American General Finance Corp. will likely bring in about $2 billion, according to CreditSights.
While Liddy was very reassuring on the call, some analysts said his talk was mainly hype. As the financial turmoil continues, it’s hard to say how successful the asset sales will be.
"They don’t know what they are going to get," said David Schiff, founder of Schiff Insurance Observer, a newsletter.
Ratings agency Standard and Poor’s wasn’t impressed either. It placed AIG and its guaranteed subsidiaries in its financial-services division - such as the airline leasing company - on CreditWatch negative (best payday loan).
"The current disruption in the credit markets could make it difficult to sell businesses at attractive valuations," S&P said.
CreditSights valued the units AIG planned to sell at $32.9 billion and the divisions it will keep at $86 billion. These figures do not include the sale of a minority stake in its foreign life insurance operations, valued at $133.1 billion.
Once AIG sells its assets, it faces many hurdles in stabilizing its property and casualty insurance divisions. Customers are already fleeing and rivals are swooping in, experts said.
"The next challenge will be getting the core insurance business back on track, keeping the existing business and bringing in new customers," said Stewart Johnson, portfolio manager with Philo Smith, an investment bank. "Given the competitive nature of the industry, it will be tough without giving incentives."
AIG said it has drawn $61 billion in credit from the Federal Reserve as of Sept. 30. About $54 billion of it went to boost collateral at its troubled securities lending business, which is being wound down, Liddy said.
AIG’s stock rose more than 20% - to just under $5 - in afternoon trading Friday.
AIG’s downfall was due in large part to a small financial services unit in London, which prospered for years issuing credit default swaps, which insure against corporate debt defaults. With the global titan on the brink of bankruptcy a day after being downgraded by credit rating agencies, the Fed stepped up with a $85 billion loan carrying a steep interest rate, currently 12.83%. In exchange, the government took control of nearly 80% of the company.
The purpose of the loan, according to the Fed, was to help AIG to sell off its $1.1 trillion worth of assets in an "orderly manner, with the least possible disruption to the overall economy." And with the financial industry in chaos, the company needs the time so it won’t have to divest at firesale prices.
Based on the call, Liddy clearly intends to keep the company operating. In a nod to past complaints of AIG’s radio silence during troubled times, Liddy promised the company would be more forthcoming about its plans.
"Our communications and transparency will be second to none going forward," he said.
CNNMoney.com Staff Writer Aaron Smith contributed to this report.
NEW YORK — Stocks fell Wednesday as a report showed manufacturing contracted more than forecast and analysts cut earnings estimates on industrial companies, overshadowing Warren Buffett’s $3 billion investment in General Electric Co.
Ingersoll-Rand Co. and Parker Hannifin Corp. slid more than 3.6 percent on Citigroup Inc. analysts’ prediction that credit losses will delay spending on equipment. GE dropped as much as 9.8 percent as Deutsche Bank AG said profit will be hurt by "deterioration" at its financial unit, then trimmed losses on plans to raise $15 billion from Buffett and others.
Benchmark indexes pared their declines as Bank of America and Citigroup climbed more than 8 percent on speculation Congress will approve the $700 billion financial-rescue plan.
The Standard & Poor’s 500 index retreated 5.3 points to 1,161.06, extending its biggest monthly drop in six years. The Dow Jones industrial average slipped 19.59 to 10,831.07. The Nasdaq composite index fell 22.48 to 2,069.4.
The benchmark index for U.S. equities jumped the most in six years yesterday as expectations grew that lawmakers will salvage the proposal to buy bad loans from banks. Even with Tuesday’s advance, the S&P 500 had its worst month since 2002 in September, declining 9.1 percent, and tumbled 8.9 percent for the third quarter.
Ingersoll-Rand, the maker of Thermo King and Hussmann refrigeration equipment, dropped $1.71, or 5.5 percent, to $29.46. Parker Hannifin, the world’s largest maker of hydraulic equipment, lost $1.91, or 3.6 percent, to $51.09. Citigroup cut the companies to "hold" from "buy," citing a business slowdown.
"More important than the bailout plan will be next year’s economy," said Marc Faber, managing director of Marc Faber Ltd. and publisher of the Gloom, Boom & Doom Report "I would rather sell on strength."
GE lost $1, or 3.9 percent, to $24.50, leading industrial companies in the S&P 500 to a decline of 2.6 percent, the biggest retreat among 10 groups. Deutsche Bank analysts cut their 2008 earnings estimate 9 percent to $2 a share and their 2009 profit projection to $1.95 a share. The worsening conditions at GE Capital is "driven by tighter credit markets, asset shrinkage and debt pay-down," analyst Nigel Coe wrote in a research note.
"We also eased back our industrial assumptions," Coe said.
Credit default swaps, contracts to protect against a default by GE Capital, which has a AAA rating, jumped to a record.
"We see no reason for the defaults widening," GE said in a statement. The company said its commercial-paper funding "has gone smoothly," and "we have over-funded every day."
Life insurers fell on concern declines in stocks and bonds will cause increased investment losses. MetLife Inc. dropped 14 percent to $48.15. Hartford Financial Services Group Inc. slipped 7 percent to $38.11. Principal Financial Group Inc. retreated 13 percent to $37.64 no fax payday advance cash till payday. Phoenix Cos. slumped 18 percent to $7.59.
Berkshire Hathaway Inc. climbed 4.9 percent to $137,000 after GE said Buffett’s company will buy a $3 billion stake in preferred shares that pay an annual dividend of 10 percent and can be purchased back by the company at a 10 percent premium after three years.
"If you’re an entity with cash available, and not cash you have to borrow, there are some real opportunities in this market," said Mark Freeman, a money manager at Westwood Management Corp. in Dallas, which oversees $8 billion. "However, the number of participants that have that ability is fairly limited. There’s no shortage of sellers and very few buyers."
SLM Corp., the biggest U.S. student lender, fell the most in the S&P 500, losing $3.99 to $8.35. The cost to protect against the company’s default reached a record Tuesday as short-term corporate borrowing rates soared amid the worst financial crisis since the Great Depression.
IBM Corp. fell $6.83, or 5.8 percent, to $110.13, the steepest decline in the Dow average. Sanford C. Bernstein analysts said the increased risk of customers failing to pay their bills could hurt profit at the world’s second-largest software maker.
Ford Motor Co. dropped 65 cents, or 13 percent, to $4.55. The second-largest U.S. automaker said second-half profit at its European unit will decline on sagging demand for new vehicles and rising raw-material costs.
Peabody Energy Corp. tumbled 8.8 percent to $41.05. Cabot Oil & Gas slid $2.31 to $33.83 as the S&P 500 energy index tumbled 1.7 percent. Crude for November delivery fell $2.11, or 2.1 percent, to $98.53 a barrel. Prices are down 33 percent from the record $147.27 a barrel reached on July 11.
Citigroup climbed $2.49, or 12 percent, to $23 and Bank of America added $3.13, or 8.9 percent, to $38.13.
The paralysis in credit markets is changing how U.S. companies do business as banks pull back on loans or make them prohibitively expensive. Some companies are closing plants and stores, postponing takeovers and grabbing any available credit in a fight for survival.
Carmike Cinemas Inc., the third-largest U.S. theater chain by screens, suspended its dividend, while Duke Energy Corp., owner of utilities in five U.S. states, tapped $1 billion from a credit agreement and RC2 Corp., the maker of infant and preschool products, canceled an acquisition.
National City Corp. gained the most in the S&P 500, rising $1.14, or 65 percent, to $2.89 on speculation Ohio’s biggest bank may be acquired. Huntington Bancshares Inc. rose $1.81, or 23 percent, to $9.80. Sovereign Bancorp Inc., the second-largest U.S. savings and loan, increased 22 percent to $4.82. First Horizon National Corp., Tennessee’s biggest bank, rose 20 percent to $11.24.
The U.S. Senate passed a $700 billion financial-market rescue package loaded with inducements for the House of Representatives to approve the measure following its rejection of an earlier version.
The legislation, approved last night on a 74-25 vote, authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. It contains two provisions favored by House Republicans: One raises the limit on federal bank-deposit insurance; the other reiterates the authority of securities regulators to suspend asset-valuing rules that corporate executives blame for fueling the crisis.
The bill's proponents cited the record 778-point drop in the Dow Jones Industrial Average after the House's 228-205 defeat of the legislation Sept. 29 as evidence of the urgency to stabilize the banking system. They suggested that the market reaction may spur some House Republicans to change their minds when the bill comes to a vote, likely tomorrow afternoon.
“The big drop'' in the Dow Index “really had a chilling effect on a lot of our members and a lot of their constituents,'' House Republican Leader John Boehner said on Fox News. With changes made by the Senate, the legislation “has a much better chance'' of passage this time, he said.
`Signal to Markets'
Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he hoped the vote “will send a very strong signal even to the Asian markets and others.''
The dollar rose against the euro, approaching a one-year high, after the Senate approval, bolstering expectations the U.S. will act faster than Europe to address the seizure in credit markets. The dollar advanced to $1.3883 per euro at 12:46 p.m. in London, from $1.4009 late yesterday in New York.
Asian stocks and U.S. futures fell on concern the package won't be enough to avert a recession, with futures on the Standard & Poor's 500 Index falling 1.1 percent and the MSCI Asia Pacific Index lost 1.3 percent. Europe's Dow Jones Stoxx 600 Index added 1.2 percent to 260.75 as of 12:46 p.m. in London.
The extra measures may help sway some Republicans.
“They only need 12 votes,'' Kansas Representative Todd Tiahrt, who voted against the bailout, said in an interview with Bloomberg Television. “If they put these few fundamental reforms in there,'' congressional leaders “would easily get enough votes to pass the legislation'' he said before the Senate included those provisions in the package.
Targeting Lawmakers
Democratic supporters of the bill are targeting lawmakers such as Illinois Representative Bobby Rush, who twice changed his vote in the House roll call. Rush ended up being among the 21 members of the Congressional Black Caucus to oppose the legislation. The caucus scheduled a meeting today to discuss the changes made by the Senate. Rush wasn't available to comment on his vote.
Still, House passage is far from certain.
House Majority Leader Steny Hoyer told MSNBC News yesterday that no Democrats who opposed the measure earlier this week have pledged to back it. “We don't have any more Democrats at this hour,'' he said.
Some Republicans said they also weren't budging.
“The bill that they are going to send back is the same bill that I voted against two days ago,'' Representative Joe Barton of Texas told Bloomberg Television. “Why would I turn around and vote for it tomorrow evening or Friday?''
Bush Presses for Passage
President George W no fax payday loans paydayloans.com. Bush said in a written statement after the vote that “the bill the Senate passed is essential to the financial security of every American.'' He said the House should follow suit in approving the proposal.
Bush is slated to meet with U.S. business representatives this morning, including members of the Chamber of Commerce and the National Association of Manufacturers, to urge their support in pushing for House passage, the White House press office said.
The bill was a bipartisan effort, with 40 Democrats, 33 Republicans and independent Joe Lieberman of Connecticut voting for it. The two presidential nominees, Democrat Barack Obama and Republican John McCain, returned from the campaign trail to vote for the plan.
The Senate also sweetened the measure for Republicans by authorizing the government's purchase of troubled assets with a $149 billion package of tax breaks. They would spare 24 million households from a $62 billion alternative minimum tax and extend $17 billion in benefits to companies that produce alternative energy.
Yet Hoyer warned there was a possibility that some additional Democrats may oppose the legislation because of the tax breaks, which aren't offset with spending cuts.
“There are people who are upset that we are making the deficit worse as we try to stabilize the economy,'' he told reporters. Hoyer said he was “personally disappointed' by the Senate's decision to include the tax legislation in the package.
Blue Dogs
Twenty-four of the 44-member Blue Dog Coalition of fiscally conservative Democrats voted for the rescue package on Sept. 29. Four of them said yesterday they'll continue to back the bill, even though their caucus derided the Senate's tax measures as irresponsible as recently as Monday.
“I will vote for the package coming from the Senate,'' said Oklahoma Representative Dan Boren. Other members of the coalition who voiced support included Representative Jane Harman of California, Representative Jim Marshall of Georgia and Representative Jim Cooper of Tennessee.
Added to the rescue plan this week is a temporary increase in the limit on federal deposit insurance to $250,000 from $100,000 aimed at discouraging people from pulling their money out of banks.
The Senate bill also reiterates the U.S. Securities and Exchange Commission's authority to suspend an accounting rule that bankers and other corporate executives say exacerbates their troubles.
Ease the Rule
The so-called fair-value standard requires companies to review assets and report losses if their values decline. Lawmakers, the American Bankers Association and companies including American International Group Inc. have urged the SEC to suspend or ease the rule, saying it forces firms to report deeper losses than needed on assets such as subprime mortgages.
Representative Rahm Emanuel of Illinois, the No. 4 House Democrat, said it was likely the Democratic vote total in the House will change.
“At the end of the day, I doubt we lose Democratic votes in total,'' Emanuel said. “We lose some and will pick up others. The question now will be how many Republicans come to the table to help solve this crisis.''
Japanese and Australian money market rates fell as U.S. lawmakers worked to salvage a financial- rescue plan and central banks pumped $15 billion into the system.
The Bank of Japan added 1.2 trillion yen ($11.3 billion), helping lower the overnight call rate to 0.4 percent from 0.7 percent, the highest level since April 1, according to Tokyo Tanshi Co. Overnight U.S. interbank loan rates fell to 3.85 percent from as high as 7.3 percent earlier today in Tokyo.
“With news from Congress they will come up with a solution, the high anxiety of yesterday's open has been stripped out to an extent,'' said Peter Pontikis, a treasury strategist at Suncorp- Metway Ltd. in Brisbane. “A fear premium got locked.''
Central banks including the U.S. Federal Reserve and the European Central Bank are pumping billions into money markets to keep them functioning. The cost of borrowing in dollars overnight in London rose the most on record yesterday after Congress's rejection of Treasury Secretary Henry Paulson's plan caused an unprecedented squeeze in credit markets.
Senate Democrats and Republicans agreed to vote today on legislation that would give Paulson broad authority to buy troubled assets from financial companies.
Asian financial markets including China, Hong Kong and Singapore are closed today for holidays.
`Better Quality Assets'
The Reserve Bank of Australia injected A$4.67 billion ($3.7 billion) as one-month bank rates fell 0.285 percentage point to 7.1 percent at 3 p.m. in Sydney, the lowest since January.
The BOJ and RBA “will continue to intervene as much as is needed to maintain liquidity in inter-bank markets,'' said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors, which manages $244.9 billion in assets globally. “Banks are definitely more resilient in Japan and also in Australia because of better quality assets.''
Australian banks' borrowing costs fell from near the highest since Bear Stearns Cos. failed six months ago, according to a gauge that measures the availability of funds in the market. The difference between the rate banks charge each other for three-month loans and the overnight indexed swap rate stood at 62.5 basis points, from 97.67 points yesterday.
The rate that Japanese banks charge overseas lenders for overnight loans fell to 0.75 percent, from 1 percent yesterday, the highest since at least December payday loans cash advance.
Financial shares in Asia gained. Westpac Banking Corp., Australia's third-largest bank, rose 5.3 percent and Nomura Holdings Inc., Japan's largest brokerage, jumped 4.8 percent.
Credit Risk Drops
The cost of protecting investors in Japanese and Australian corporate bonds from default also declined. The Markit iTraxx Australia index fell 15 basis points to 185.5, Citigroup Inc. prices show. The benchmark is tied to the debt of 25 companies and drops as perceptions of credit quality improve. The Markit iTraxx Japan fell 6 to 158, according to Morgan Stanley.
The BOJ yesterday said Japan's banking industry has been resilient during the U.S. financial crisis, though slower economic growth at home is stalling profit growth.
“Japan's financial system, on the whole, has remained stable despite continued turmoil,'' the central bank said in its semi-annual Financial System Report released yesterday. “Credit risk has started to increase amid the sluggish economic growth, and future developments require vigilance.''
India, Korea
India's benchmark overnight borrowing rate climbed to an 18-month high of 17.5 percent, the most since March 2007, according to data compiled by Bloomberg.
The central bank should make more cash available to lenders to ease a credit shortage and restore investor confidence, executives at Alok Industries Ltd., Jaiprakash Associates Ltd. and Balrampur Chini Mills Ltd. have said.
South Korea's three-month interbank offered rate held at 7.15 percent yesterday, the highest since May 2002.
The nation plans to provide at least 4.3 trillion won ($3.6 billion) in extra loans to small and medium-sized companies struggling from higher costs.
The extra loans will be provided through state-controlled banks including Korea Development Bank and Industrial Bank of Korea, the Financial Services Commission said today in a statement. The government will ask the central bank to raise the limit on total loans to commercial banks, the regulator said.
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