Stark Says Growth Will Hold Up, ECB Ready to Act on Inflation

(Bloomberg) -- European Central Bank Executive Board member Juergen Stark said the bank still expects the economy to expand around 2 percent this year and remains ready to raise interest rates to counter inflation.

``We're sticking to our assessment that, based on current data, growth will be around potential in 2008,'' Stark said in an interview in Viernheim, Germany, today. ``I want to repeat that we have said that we will do what is needed to avoid so-called second-round effects. We are ready to act.''

ECB President Jean-Claude Trichet threatened to raise rates on Jan. 10 if unions push through bigger wage demands to compensate for faster inflation. Since then, several ECB policy makers have expressed concern that economic growth may slow more markedly as the U.S. economy teeters on the brink of recession.

Stark said while risks to the growth outlook ``are pointing downward,'' even a more pronounced slowdown wouldn't necessarily damp inflation.

``Price and wage stickiness in Europe is considerably more pronounced than in other regions, for example the U.S., so that a possible growth slowdown does not automatically lead to a drop in the inflation rate.''

 

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ACA Customers Allow More Time to Unwind Default Swaps

(Bloomberg) -- ACA Capital Holdings Inc., the bond insurer being run by regulators after subprime-mortgage losses, won a month's grace to unwind $60 billion of credit-default swap contracts that it can't pay.

ACA, under the control of the Maryland Insurance Administration, extended an agreement that waives collateral requirements, policy claims and termination rights until Feb. 19, the New York-based company said in a statement on Business Wire late yesterday.

The insurer is working with its trading partners ``to develop a permanent solution to stabilize its capital position,'' according to the statement.

Standard & Poor's cut ACA's rating 12 levels to CCC last month, casting doubt on the company's guarantees and triggering collateral requirements. ACA, which lost 97 percent of its market value in the past 12 months, caused Merrill Lynch & Co. to write down $1.9 billion of securities last week and Canadian Imperial Bank of Commerce to sell more than C$2.75 billion ($2.7 billion) in stock to cover writedowns.

Bond insurer shares plunged last week and credit-default swaps rose to a record on concern the companies may be unable to meet their obligations as the subprime-mortgage securities and collateralized debt obligations they guarantee slump in value.

Ambac Financial Group Inc., the second-largest bond insurer, had its AAA credit ranking cut to AA by Fitch Ratings. Both Ambac and its larger rival, MBIA Inc., are under threat of losing the top grades from Moody's Investors Service and S&P, a move that would throw doubt on the ratings of $2.4 trillion of securities.

An after-hours call to ACA last night by Bloomberg News wasn't immediately returned.

Derivative Contracts

``ACA is an important case to follow because it shows how the banks' react to fast-deteriorating counterparty creditworthiness,'' said Toby Nangle, who helps oversee $37 billion as head of global aggregate business at Baring Asset Management in London.

The bond insurers, also known as monolines, guaranteed $127 billion of CDOs backed by subprime-mortgage securities as of June 30, according to S&P. CDOs are created by packaging debt or derivatives into new securities with varying ratings.

Most of those guarantees are in the form of derivatives. Unlike insurance, these contracts are required to be valued at market rates. Derivatives are contracts whose value is derived from assets including stocks, bonds, currencies and commodities, or from events such as the weather or changes in interest rates.

South Dakota Bonds

ACA was founded in 1997 by former Fitch executive H. Russell Fraser, who left the ratings company in 2001 as it shifted focus to structured finance from municipal bonds.

Fraser said his idea was to start an A rated municipal bond insurance company to guarantee a new crop of borrowers he sometimes called ``the cream of the crap.'' ACA's larger competitors such as Ambac and MBIA had enough cash to get the top AAA ratings on their insured bonds.

ACA backed $51.5 million of bonds sold to finance the construction of a jail in Pinal County, Arizona, and $4.7 million of bonds for the city of Deadwood, South Dakota.

CDOs were created by Wall Street by repackaging assets such as mortgage bonds and buyout loans into new obligations for sale to institutional investors. The insurers agreed to pay CDO holders, many of them banks that created the securities, in the event of a default.

CDO Downgrades

The tipping point came last year when the three major rating companies downgraded thousands of CDOs. Ratings on more than 2,000 CDOs were cut in November alone, according to a Dec. 13 UBS AG research report.

Maryland Insurance Administration held off filing delinquency proceedings last month while ACA sought capital. ACA was required under its credit-default swap contracts to post collateral if its rating fell below A-.

ACA gained 2 cents, or 4 percent, to 48 cents in over-the- counter trading on Jan. 18 in New York.

``The monolines are dead, their business model is dead,'' said David Roche, head of investment consultancy Independent Strategy in London. ``The government is going to have to recapitalize this industry or there will be communities in the U.S. where they can't even flush their toilets'' because they can't afford the services.

 

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U.S. energy chief pleads for more Saudi, OPEC oil

(Reuters) - U.S. Energy Secretary Sam Bodman repeated his plea on Monday for more oil from top exporter Saudi Arabia, undeterred by OPEC's cautious response to Washington's request so far.

Oil has fallen by more than 10 percent from a record high of $100.09 a barrel hit early this month, easing some of the pressure on OPEC to raise supplies, analysts said.

Bodman told reporters in Abu Dhabi there were short-term concerns about the performance of the U.S. economy and he was hopeful Riyadh would steer a decision to increase oil supplies at OPEC's meeting on February 1 in Vienna.

"I continue to believe in my earlier statement that we are hopeful they will increase supplies," he said. "I am of the view that there needs to be increased supply in order to call the markets of the world well supplied with oil."

Bodman, who met the Saudi oil minister at the weekend, said the United States expected oil inventories to drop in the first half of 2008 but the Saudis held "different views".

The United Arab Emirates Oil Minister Mohammed al-Hamli said OPEC would examine all options when its ministers meet.

"OPEC ... will look then at all the options," Hamli told reporters on the sidelines of a green energy conference. "There is a disconnect between fundamentals and the price."

 

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L.A. Times editor fired, "significant changes" ahead

(Reuters) - The editor of the Los Angeles Times, James O'Shea, has been fired over a budgetary dispute only 14 months after he took over the post, the newspaper said on Sunday.

O'Shea, a veteran of the Chicago Tribune who was hired by the Times in November 2006, was fired by publisher David Hiller after he refused to carry out some $4 million in cuts, said the newspaper on its Web site, citing an unnamed source. The news was first reported by The Wall Street Journal.

In a separate statement late on Sunday, the newspaper said that like all newspaper companies, it was "facing major challenges in charting a course that will be successful for the future".

"In that vein, we will be making several significant organizational changes to put us in the best position to succeed."

It said as a result of these changes, O'Shea would be leaving the newspaper, and did not elaborate further.

O'Shea's firing comes one month after the paper's parent, Tribune Co, completed an $8.2 billion buyout led by Chicago real estate tycoon Sam Zell.

The deal restructured Tribune as an employee-owned company funded largely by debt.

The Times has struggled along with other media companies in an adverse newspaper advertising environment, and has cut staff and editorial resources in recent years.

 

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U.S. Economy: Inflation Slows, Industrial Production Unchanged

(Bloomberg) -- Consumer prices in the U.S. rose at a slower pace in December and industrial production failed to grow, giving the Federal Reserve the room and reason to cut interest rates at their next meeting on Jan. 30.

The cost of living increased 0.3 percent after a 0.8 percent gain in November, the Labor Department said today in Washington. Output at U.S. factories was unchanged in December as exports helped make up for declines in auto and housing- related production, the Federal Reserve said separately.

Slower growth will make it more difficult for companies to pass on higher costs, suggesting inflation will cool from last year's pace, the fastest in 17 years, economists said. Investors' attention may now shift to Chairman Ben S. Bernanke's testimony on the economy tomorrow at a hearing in Congress.

``With the sluggish growth outlook and rising risk of recession, inflation concerns have receded,'' said Zach Pandl, an economist in New York at Lehman Brothers Holdings Inc., which correctly forecast the increase in prices. ``The Fed is clearly focusing on growth at this point.''

Economists had anticipated a 0.2 percent increase in consumer prices last month, according to the median forecast in a Bloomberg News survey.

Prices excluding food and energy advanced 0.2 percent, after a 0.3 percent increase, matching the median estimate.

Treasury notes were little changed after the consumer price report and later slipped. The yield on the benchmark 10-year note was 3.68 percent at 10:33 a.m. in New York, little changed from late yesterday. Stocks dropped after an Intel Corp. sales forecast spurred concern technology profits will weaken.

Capacity Use

Capacity utilization, which measures the proportion of plants in use, fell to 81.4 percent from 81.6 percent in November, indicating greater slack in the economy, the Fed's report showed. Economists had predicted a 0.2 percent drop in output and a capacity-in-use rate of 81.2 percent.

``There is nothing that would keep the Fed from cutting 50 to 75 basis points later this month,'' based on today's data, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp. in New York.

Traders anticipate the Fed will cut its benchmark rate to 3.75 percent, from 4.25 percent, this month, futures prices show. The chance of a 75 basis-point cut was 42 percent. Policy makers are next scheduled to gather Jan. 29-30. A basis point is 0.01 percentage point.

For all of last year, consumer prices rose 4.1 percent, the most since 1990. The core rate climbed 2.4 percent after a 2.6 percent increase in 2006.

Energy Costs

Energy prices last month rose 0.9 percent, after gaining 5.7 percent the previous month. Fuel costs were up 18 percent in 2007, also the most in 17 years.

Food prices, which account for about one-fifth of the CPI, increased 0.1 percent, the smallest gain of any month in 2007.

The consumer price index is the government's broadest gauge of costs for goods and services. Almost 60 percent of the CPI covers prices that consumers pay for services ranging from medical visits to airline fares and movie tickets.

The government yesterday said producer prices unexpectedly eased 0.1 percent at the end of a year that saw the biggest annual jump in more than a quarter century. The cost of imported goods was unchanged in December, a report last week showed.

PPI and CPI have some differences in timing that may cause discrepancies. In calculating wholesale prices, the government asks survey participants to report costs as of the Tuesday of the week that includes the 13th. Consumer prices are based on average costs over the entire month.

Rents, which make up almost 40 percent of the core CPI, rose 0.3 percent.

 

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Wells Fargo profit falls

(Reuters) - Wells Fargo & Co (WFC.N: Quote, Profile, Research) on Wednesday said its fourth-quarter profit fell 38 percent, the first decline in more than six years, hurt by rising losses from home equity loans.

However, the decline was smaller than expected, and shares of the financial company were up 41 cents, or 1.5 percent, to $26.90 in early trading on the New York Stock Exchange after climbing to a session high of $28.11.

The weaker results reflect how the housing slump and tight credit markets have affected even mortgage providers such as Wells Fargo, whose lending practices are considered conservative.

"Except for the admitted slip of getting involved in third-party home equity loans, they've done a fine job in a challenging market in avoiding credit missteps," said Thomas Russo, who helps invest more than $3 billion at Gardner, Russo & Gardner in Lancaster, Pennsylvania, including 4 percent in Wells Fargo. "They're not immune, but have less exposure."

Net income for the San Francisco-based bank, which is the nation's fifth-largest bank and second-largest mortgage lender, fell to $1.36 billion, or 41 cents per share, from $2.18 billion, or 64 cents, a year earlier. Revenue increased 8 percent to $10.21 billion.

Analysts on average expected a profit of 39 cents per share on revenue of $10 billion, according to Reuters Estimates.

Wells Fargo said it tripled the amount set aside for loan losses to $2.6 billion, including $1.4 billion tied to home equity loans. The latter reduced after-tax profit by 27 cents per share. In November, the bank significantly scaled back offering home equity loans through brokers.

 

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Load shedding inquiry looms

(Fin24) - The public protector is considering whether or not to mount an investigation into the load shedding currently being experienced by South Africans, which, he says "is having a devastating effect ... on service delivery by government, is causing serious prejudice to the private sector and negatively affects the lives of many of the people."

In a letter to the chief executive of Eskom, Jacob Maroga, the public protector, Lawrence Mushwana, on Wednesday said that he is mandated to investigate on his own initiative or on receipt of a complaint, conduct by public entities that causes unlawful or improper prejudice to any person.

He poses a series of questions to the Eskom chief to help him decide whether to proceed.

He asks Maroga to explain the reasons for the load shedding, the measures that were put in place by Eskom to prevent what is causing the load shedding and the expected duration of the load shedding practice.

He also asks for detailed information "as a matter of urgency" on steps that have been taken by Eskom to address the reasons for the load shedding and the time frames within which the problems will be resolved.

 

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