What is Ailing GE ?

>Swaps are killing us softly

Investors in the U.S. conglomerate largely shook off Friday’s news that it was slashing its dividend by 68 percent, as Wall Street had widely expected some cut to the quarterly payout. A reduction in its top-tier credit rating is viewed as the next domino to fall, but that is by no means the last item on shareholders’ worry lists.

Higher losses at GE Capital, a possible writedown at NBC Universal media and even the chance that an activist investor could take advantage of a beaten-down share price to try to force a change at GE are among the possibilities investors are considering.

GE shares have lost 75 percent of their value over the past year, a steeper slide than either the blue-chip Dow Jones industrial average .DJI or the broad Standard & Poor’s 500 index .SPX have witnessed.

A 10 percent fall in GE’s share price on Monday pushed the company’s market capitalization to $81 billion. That is less than one-third of GE’s $245 billion market cap in October, but still above the combined valuations of United Technologies Corp (UTX.N), Walt Disney Co (DIS.N) and Citigroup Inc (C.N).

The toppling of a company that a year ago stood as the world’s second-largest by market capitalization opens the possibility that GE could lure an activist investor seeking to force a change in strategy or management.

“It takes a lot of money to rattle the fences, so to speak, but they definitely leave themselves open to something like that,” said Daniel Holland, an analyst at Morningstar in Chicago.

While such a campaign is possible, other investors note that several factors militate against it.

One is that respected financier Warren Buffett has shown interest in the company. His company, Berkshire Hathaway Inc (BRKa.N), last year invested $3 billion in GE, buying preferred shares with the option of acquiring another $3 billion in common stock at $22.25 per share — almost three times GE’s current stock price.

Another is that in the context of the tight credit markets and sharp drop in stock prices around the world — the S&P 500 hit on Monday its lowest point since 1996 — could make even activist investors uneasy about taking on the Fairfield, Connecticut-based company.

“That’s an awful big bite,” said Wayne Titche, co-manager of the AHA Diversified Equity Fund in Grand Rapids, Michigan, which owns GE shares. “In today’s credit environment, that’s an awful lot of money to borrow. I think that game is dead.”

PLENTY TO THINK ABOUT

Both GE stockholders and investors in its debt have a lot on their minds these days. The credit-default swaps of its GE Capital finance arm traded “upfront” for the first time on Monday, meaning that investors wanting to insure $10 million of GE Capital debt for a year had to pay $850,000 straight away plus an additional $500,000 over the course of the year.

The switch to upfront trading typically is a sign of greater perceived risk.

Even after the dividend cut, Moody’s Investors Service and S&P continue to evaluate their triple-A ratings on GE with an eye toward a possible downgrade. Continued…

“The AAA rating is unsustainable even with a dividend cut,” wrote BernsteinResearch analyst Steven Winoker in a note to clients.

Investors also worry that its hefty GE Capital unit, which makes commercial loans, invests in real estate and still has a sizable U.S. private-label credit-card business, will need to raise its estimated loss reserves.

“From our perspective, the biggest area of risk is still the private-label credit cards,” due to its exposure to harried — and increasingly unemployed — U.S. consumers, said Titche. GE last year tried to sell that business but found no takers and is instead trying to pare down what was once a $30 billion business.

Investors were also confronted with the news on Monday that European entertainment group Vivendi SA (VIV.PA) was writing down the value of its 20 percent stake in NBC Universal media, in which GE owns the remaining equity.

Some wondered if GE might need to make a similar move. It had $18.97 billion worth of NBC-related goodwill on its books at the end of 2008, according to a filing with the U.S. Securities and Exchange Commission.

“Whether or not Vivendi is doing it, how many companies are writing down goodwill because the future value of these things are in question?” said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, which owns GE shares. “Once that happens, you start to look at the earning power of those assets and say, ‘Maybe they’re not going to earn me as much, so I have to write them down.'”

GE spokesman Russell Wilkerson said there was “no need for a writedown” of the NBC assets.

Still, some investors said GE’s trimming of its dividend — a move the company said as recently as January was not under consideration — indicated GE was becoming more willing to make major changes to address a serious global recession.

“The optimism has to be replaced by sober realism,” said Klein. “It would reflect management begrudgingly giving in to the market here. They might as well just do it all and get it over with.”

Get ready Iran !

WASHINGTON: President Barack Obama sent a secret letter to Russia’s president last month suggesting that he would back off deploying a new missile defense system in Eastern Europe if Moscow would help stop Iran from developing long-range weapons, American officials said Monday.

The letter to President Dmitri A. Medvedev was hand-delivered in Moscow by top administration officials three weeks ago. It said the United States would not need to proceed with the interceptor system, which has been vehemently opposed by Russia since it was proposed by the Bush administration, if Iran halted any efforts to build nuclear warheads and ballistic missiles.

The officials who described the contents of the message requested anonymity because it has not been made public. While they said it did not offer a direct quid pro quo, the letter was intended to give Moscow incentive to join the United States in a common front against Iran. Russia’s military, diplomatic and commercial ties to Tehran give it some influence there, but it has often resisted Washington’s hard line against Iran.

“It’s almost saying to them, put up or shut up,” said a senior administration official. “It’s not that the Russians get to say, ‘We’ll try and therefore you have to suspend.’ It says the threat has to go away.”

Moscow has not responded, but a Russian official said Monday that Foreign Minister Sergey Lavrov would have something to say on missile defense to Secretary of State Hillary Rodham Clinton when they meet Saturday in Geneva. Obama and Medvedev will then meet for the first time on April 2 in London, officials said Monday.

Obama’s letter, sent in response to one he received from Medvedev shortly after Obama’s inauguration, represents part of an effort to “press the reset button” on Russian-American relations, as Vice President Joseph Biden Jr. put it last month. Among other things, the letter discussed negotiations to extend a strategic arms treaty expiring this year and cooperation in opening supply routes to Afghanistan.

The plan to build a high-tech radar facility in the Czech Republic and deploy 10 interceptor missiles in Poland — a part of the world that Russia once considered its sphere of influence — was a top priority for President George W. Bush to deter Iran in case it developed a nuclear warhead to fit atop its long-range missiles. Bush never accepted a Moscow proposal to install part of the missile defense system on its territory and jointly operate it so it could not be used against Russia.

Now the Obama administration appears to be reconsidering that idea, although it is not clear if it would want to put part of the system on Russian soil where it could be flipped on or off by Russians. Obama has been lukewarm on missile defense, saying he supports it only if it can be proved technically effective and affordable.

Bush also emphasized the linkage between the Iranian threat and missile defense, but Obama’s overture reformulates it in a way designed to appeal to the Russians, who long ago soured on the Bush administration. Officials have been hinting at the possibility of an agreement in recent weeks, and Obama’s proposal was reported on Monday by a Moscow newspaper, Kommersant.

“If through strong diplomacy with Russia and our other partners we can reduce or eliminate that threat, it obviously shapes the way at which we look at missile defense,” Under Secretary of State William Burns said about the Iranian threat in an interview with the Russian news agency Interfax while in Moscow last month delivering Obama’s letter.

During a NATO meeting in Krakow, Poland, on Feb. 19, Defense Secretary Robert Gates said: “I told the Russians a year ago that if there were no Iranian missile program, there would be no need for the missile sites.” Obama’s inauguration, he added, offered the chance for a fresh start. “My hope is that now, with the new administration, the prospects for that kind of cooperation might have improved,” Gates said.

The idea has distressed Poland and the Czech Republic, where leaders invested political capital in signing missile defense cooperation treaties with the United States despite domestic opposition. If the United States were to slow or halt deployment of missile defense systems, Warsaw and Prague might insist on other incentives.

For example, the deal with Poland included a side agreement that an American Patriot air defense battery would be moved from Germany to Poland, where it would be operated by a crew of about 100 American military personnel. The administration might have to proceed with that to reassure Warsaw.
1 | 2 Next Page

394% spike in mortgage delinquency

Northern Rock, the nationalised bank, today revealed an 394 per cent increase in the number of its customers falling behind on their mortgage repayments by more than three months.

The bank said that 17,264 mortgage accounts were now in arrears up from 3,492 at the end of 2007. This was equivalent to 2.92 per cent of its total mortgage book, which is well above the industry average of 1.88 per cent.

Northern Rock’s worse-than-average position is largely due to arrears in its Together mortgage portfolio, which was on sale before the bank’s collapse. The Together product allowed customers to take a mortgage out and get a personal loan on top and arrears for this product now stand at 4.5 per cent — nearly three times the national average.

The Council of Mortgage Lenders (CML) has estimated that 75,000 homes will be repossessed this year as unemployment rises, up from 25,900 in 2007.

Northern Rock said today that it was developing mortgage rescue solutions to limit repossessions and has pledged not to take possession of a property until at least six months after a customer has fallen into arrears.

The bank published its annual report and accounts today and confirmed that it had repaid £18 billion of the £26.9 billion loan it was given by the Government when it collapsed in September 2007.

Northern Rock said two weeks ago that this had been achieved by issuing fewer mortgages so that money from redemptions could be used to repay the loan.

The policy has now been reversed and Northern Rock will invest £5 billion in new mortgages this year and a further £9 billion next year as part of the Government’s policy of restarting bank lending.

Northern Rock also confirmed that it had lost £1.3 billion last year, up from £585 million the year before.

Of the total loss, £894 million was due to borrowers defaulting on their mortgages, personal loans and credit cards. A further £164 million came from exceptional costs including fees to lawyers and City advisers and redundancy costs.

Despite the heavy loss, Northern Rock will pay 100 of its senior managers bonuses for their work in 2008 — a decision that has been criticised by politicians.

Gary Hoffman, the chief executive, said: “The Government loan has been reduced significantly, and the deposit base of the company has grown as customers have returned to Northern Rock. We can now return to what we do well — mortgage lending.”

Northern Rock nearly doubled its deposit balances to £19.6 billion last year despite competition regulations limiting the competiveness of its products. The bank cannot offer savings rates that are too competitive but still took in large quantities of new business as customers sought a safe place to store their money with other banks faltering.

Genius call

The global recession is set to be deeper than already pessimistic forecasts, according to the Organisation for Economic Cooperation and Development (OECD), which warned that protectionist measures will only intensify the financial crisis.

Klaus Schmidt-Hebbel, the chief economist at the OECD, said that the downturn will be worse than a forecast from the International Monetary Fund (IMF) over a month ago of 0.5 per cent. The IMF had previously forecast 2.2 per cent.

Mr Schmidt-Hebbel said: “The recession will deepen… there’s no doubt. I think this quarter will be the worst quarter of all.”

The OECD also cautioned against protectionism and urged its 30 member countries to avoid bailouts like subsidies to struggling carmakers and instead to support their economies with increased spending on infrastructure and by lowering income taxes for the less well-off.

In its Going for Growth report it said that member states should take heed of past mistakes such as the erection of import barriers which helped to turn the 1930s economic crisis into a depression.

Mr Schmidt-Hebbel said: “Under no circumstances should mistakes from previous crises be repeated. Keeping markets open and avoiding new protectionsim is key to strengthen prosperity throughout the world.”

Any state aid to non-financial sectors should, he advised, “be phased out quickly”.

The OECD is the latest high-profile institution to warn against protectionism in the light of the deepening financial downturn. Charlie Bean, the deputy governor of the Bank of England, recently warned that protectionist measures abroad might slow recovery in Britain.

Gordon Brown, who is on a visit to Washington to meet with President Obama, is expected to use a speech to both Houses of Congress to warn that protectionist tendencies risk making the recession worse.

Last month the European Union warned the US against plunging the world into depression by adopting a planned “buy American” policy. It threatened to retaliate if the US Congress went ahead with sweeping measures to restrict spending to American goods and services.

The OECD report says that “countries currently relying disproportionately on taxes levied on corporate and labour income could… raise GDP per capita by shifting their tax base towards goods and services as well as property.”

The study came as the European Union pledged to bail out any struggling eurozone members before they turn to the IMF and declared itself strong enough to combat the global financial crisis.

Thankfully overseas markets are not getting blown up !

March 3 (Bloomberg) — European stocks fell to the lowest level since 1996 on concern profits are deteriorating and banks will need more capital. U.S. futures fluctuated between gains and losses after the Standard & Poor’s 500 Index traded at the cheapest level relative to earnings in two decades.

Bayer AG, Germany’s biggest drugmaker, slid for the ninth straight day after lowering its forecast for 2009 as the deepening global recession erodes demand for plastics. Barclays Plc dropped 6.6 percent, leading financial shares lower a day after U.K. banks posted their biggest slump in two decades.

“We advise clients to be extremely cautious,” said Philippe Gijsels, a Brussels-based senior structured-product strategist at Fortis Global Markets. “The crisis in the financial sector is clearly not over,” he said in a Bloomberg Television interview.

The Dow Jones Stoxx 600 Index slipped 1.1 percent at 11:36 a.m. in London after earlier sliding as much as 1.4 percent to 162.02, a level not seen since November 1996. The regional gauge has lost 18 percent in 2009 and posted its biggest drop of the year yesterday after Warren Buffett said the U.S. economy is in a “shambles” and HSBC Holdings Plc announced a rights offering.

Futures on the S&P 500 added 0.2 percent to 707 after earlier climbing 1.5 percent and falling as much as 0.3 percent. The gauge closed at the lowest level since 1996 yesterday.

The S&P 500 traded for 12.2 times company profits from the past 10 years as of yesterday’s close, the cheapest since 1986, according to data compiled by Yale University professor Robert Shiller. He uses a decade of earnings to smooth out short-term fluctuations.

Asian Shares

The MSCI Asia Pacific Index slipped 0.4 percent today, trimming an earlier drop of as much as 1.7 percent, as Japan’s Finance Minister Kaoru Yosano said the government can’t ignore “excessive declines” in the nation’s stock market.

The deepening global recession, a third government rescue for Citigroup and dividend cuts at companies from General Electric Co. to JPMorgan Chase & Co. have sent the MSCI World Index of 23 developed countries to a 23 percent drop this year, the worst start since the gauge was created in 1970.

The MSCI World is valued at 10.5 times the earnings of its 1,680 companies, less than half this decade’s average ratio of 21.6, data compiled by Bloomberg show.

Bayer lost 3.2 percent to 35.54 euros. The drugmaker reported fourth-quarter net income of 106 million euros ($134 million), missing the 190 million-euro estimate of analysts surveyed by Bloomberg.

Barclays, CRH

Barclays retreated 6.6 percent to 81.9 pence, extending its three-day slump to 29 percent. The U.K.’s FTSE 350 Banks Index slipped 2.6 percent after yesterday posting the biggest drop since at least 1985.

CRH Plc slid 3.6 percent to 14.84 euros. The world’s second- biggest maker and distributor of building materials plans to raise 1.24 billion euros to take advantage of cheaper asset values as a slowdown in construction spreads from the U.S. to Eastern Europe. CRH will sell 152.1 million new shares at 8.40 euros apiece, the supplier of asphalt, concrete products and crushed rock said.

Citigroup Inc. added 8.3 percent to $1.30 in pre-market New York trading following a two-day, 51 percent plunge. Bank of America Corp. rose 5.8 percent to $3.84. The shares slumped 32 percent in the past two sessions.

Distressed Assets

U.S. President Barack Obama’s administration may create investment funds to purchase loans and other distressed assets, the Wall Street Journal reported, citing people familiar with the matter. Managers of the funds would have to invest some of their own capital, along with government money, and would share in any profit or loss, the report said. No decision has been made on the final structure of this financing partnership, it said.

Look out here we go again

March 3 (Bloomberg) — Asia-Pacific bond risk jumped, with the cost to protect Australian corporate bonds against default matching a record, as financial company losses triggered concern credit writedowns will increase amid the global recession.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan climbed 23 basis points to 473 as of 9 a.m. in Hong Kong, according to ICAP Plc prices. The Markit iTraxx Japan index jumped 37.5 basis points to 527.5 at 10 a.m. in Tokyo, Barclays Plc data show.

“It was another sea of red overnight,” said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment banking unit of France’s Credit Agricole SA. “Credit writedowns are less than half way towards the IMF estimates of total writedowns, suggesting much more pain to come.”

The Dow Jones Industrial Average fell below 7,000 for the first time since 1997 yesterday after American International Group Inc. posted the worst corporate loss in U.S. history and HSBC Holdings Plc said it needs to raise capital, triggering the worst plunge in U.K. banks since at least 1985.

The world’s financial companies have posted more than $1.18 trillion in losses and writedowns and raised $1 trillion in new capital since credit markets froze in 2007, triggering the collapse of lenders including Lehman Brothers Holdings Inc. The global economy will show little or no growth this year as more than $2 trillion of bad assets help sink economies, the International Monetary Fund said Jan. 28.

Australia Fears

The Markit iTraxx Australia index was quoted 15 basis points higher at 405 as of 12:40 p.m. in Sydney, matching its December record, Westpac Banking Corp. data show. Contracts on the debt of Qantas Airways Ltd., Australia’s biggest airline, were quoted 10 basis points higher at 300.

“Aussie valuations have been suffering from mounting recession fears there as well as from Moody’s downgrade yesterday of banks’ rating outlooks,” BNP Paribas SA credit analyst Brett Williams wrote in a note to clients today.

Moody’s yesterday lowered its outlook on Australia & New Zealand Banking Group, Commonwealth Bank of Australia and Westpac Banking Corp. to negative from stable as the economy slows and bad debts rise.

Contracts on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada climbed 13.75 basis points to 239 yesterday, according to Barclays Capital in New York. In London, the Markit iTraxx Financial index of 25 European financial companies increased 7 basis points to 160, according to JPMorgan Chase & Co. prices.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. An increase in the price suggests deteriorating investor perceptions of credit quality and a decrease indicates improvement.

The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt from default.