Bloomberg

Yuan Unshackled May Strengthen China's Shift to Domestic Demand for Growth

By Bloomberg News

June 21 (Bloomberg) -- China’s signal of an end to the yuan’s fixed rate to the dollar may accelerate a shift toward domestic demand as the prime driver of growth as President Hu Jintao seeks to strengthen household incomes.

The People’s Bank of China two day ago indicated it’s abandoning the 6.83 yuan peg to the dollar adopted during the global crisis to shield exporters. The central bank said while there’s no basis for “large scale” moves in the currency, the exchange rate will be allowed increased “flexibility.”

A stronger yuan will boost the purchasing power of China’s households that have helped propel imports to a record level, and companies from Orient Paper Inc. to Air China Ltd. that purchase goods from overseas. The lift adds to trends already under way that are stoking wages, as workers demand higher paychecks from employers including Honda Motor Co.

“Over a longer time, today’s announcement opens the door for increased yuan appreciation that will help adjust China’s economy towards a consumption-driven economy,” said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong, who is a former researcher for China’s State Council, or Cabinet, and used to work at the International Monetary Fund.

The Chinese central bank made its announcement at 7 p.m. Beijing time on June 19 in a posting on its website, a week before leaders from the Group of 20 meet in Toronto.

Economic Restructuring

The PBOC said in a follow-up statement yesterday that a more flexible currency will “direct resources to domestic- demand driven sectors such as services” and help curb an excessive reliance on exports, signaling it anticipates the currency will rise.

Authorities will resume a managed float of the yuan, also known as the renminbi, against a basket of currencies, according to the June 19 statement. Before the exchange rate was frozen in July 2008, Premier Wen Jiabao’s government had allowed a 21 percent advance versus the dollar over three years.

While the International Monetary Fund reaffirmed its view that the currency is “substantially” undervalued, analysts at banks from Goldman Sachs Group Inc. to Royal Bank of Scotland Group Plc predicted gains in the coming year will be held to less than 6 percent. The median of 14 forecasts in a Bloomberg News survey indicates a rise to 6.7 by Dec. 31.

Goldman’s Bet

Goldman analysts said in a note to clients that the weekend statement reaffirmed their recommendation to purchase 12-month non-deliverable forwards, with a target of 6.50, compared with last week’s close of 6.7125.

The small move anticipated in coming months means there will be limited impact on the economy in the short term, said Ma. At the same time, exchange-rate strengthening will likely over time lead to greater household purchasing power, according to the Washington-based IMF, which conducts annual reviews of its member economies.

Yuan flexibility “will help increase Chinese household income and provide the incentives necessary to reorient investment toward industries that serve the Chinese consumer,” IMF Managing Director Dominique Strauss-Kahn said in a statement. It may also damp inflation, John Lipsky, the fund’s No. 2 official, said in a Bloomberg Television interview.

Consumer prices rose 3.1 percent in May from a year before, exceeding the government’s 3 percent target average for 2010.

Paper Profits

A stronger currency will benefit Chinese paper makers as the costs of pulp imports will drop. That’s particularly true as exports aren’t an important part of the business, according to Winston Yen, chief financial officer for Hebei, China-based Orient Paper, speaking in April.

It would also be a boon to China Southern Airlines Co., China Eastern Airlines Corp. and Air China by cutting dollar- denominated fuel bills and the cost of debt payments for purchases of Boeing Co. and Airbus SAS planes, according to Ally Ma, an analyst at Citigroup Inc. in Hong Kong.

The yuan decision follows a strengthening in China’s economy that saw gross domestic product expand 11.9 percent in the first quarter from the same period of 2009. Surging industrial production, exports, retail sales and property prices have sparked concern of an overheating that may end in a bust.

U.S. Treasury Secretary Timothy F. Geithner had advocated yuan flexibility as a means of addressing China’s price pressures, outside of the argument of American lawmakers that the yuan peg was an unfair subsidy for China’s exporters.

In an indication of confidence in the U.S., China increased holdings of Treasury notes and bonds by 2.6 percent to $900.2 billion in April from the previous month, after reducing its stake by 6.5 percent from November through March, according to U.S. data released June 15.

Lesson From Crisis

China’s leaders are aiming to buttress domestic incomes and reduce reliance on exports that collapsed during the crisis, culminating in a record 26 percent drop in shipments in May 2009 from a year earlier.

A more flexible yuan “is not a panacea” for global trade imbalances, Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an e-mail. Countries with large savings, such as China, “still need to take additional actions to stimulate internal private consumption,” he said.

In the past 10 years, China’s economy became more unbalanced, with consumption’s share of GDP falling to 35 percent last year from 45 percent in 2000, according to Societe Generale SA. Now, a rebalancing “seems to be occurring by default” as labor shortages in coastal provinces encourage wage gains that will boost consumer spending, Glenn Maguire, a Hong Kong-based economist for the bank, said in a report last week.

Government’s Task

“Consumer spending won’t see significant advances unless the government effectively reduces people’s precautionary savings for education, health care and old age,” said Liu Li- Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd.

The State Council earlier this month approved a program to map out development strategies for each of the nation’s regions, the official Xinhua news agency reported June 12. President Hu plans to convene a meeting to discuss how to narrow the income gap later in the year, the Hong Kong-based newspaper South China Morning Post reported over the weekend.

More than 20 provinces and cities have overseen increases in minimum wages in recent months to help support incomes, and a focus of the 4 trillion yuan ($586 billion) stimulus package on boosting inland regions has helped reduce reliance on the export-linked coast.

Internal Regions

Manufacturers including Ningbo-based Dejin Textile Co., Shanghai-based China Crown Textile Co. and Shenzhen Jufeng Handicraft Co. have said the development of internal regions, such as Chongqing, has made it harder for them to attract migrant workers to factories on the east coast.

Meantime, employees in foreign-owned plants have been demanding higher compensation. Honda, Japan’s No. 2 carmaker, raised pay by 24 percent at a parts-making factory in Foshan, Guangdong province, after a strike crippled its production in China. Labor unrest then spread to Toyota Motor Corp.

At the same time as seeking to strengthen household incomes, China’s leaders have been pulling back on monetary stimulus in an effort to stem asset-price inflation. Data on June 10 showed property prices rose at a near-record pace, with costs jumping 12.4 percent across 70 cities from a year earlier.

The move to allow a stronger yuan means authorities may not need to tighten domestic monetary policy as much as previously was the case, according to Morgan Stanley. Wang Qing, Greater China economist at Morgan Stanley in Hong Kong, wrote in a note that the PBOC likely won’t raise interest rates this year. He also said the government may raise its target for 2010 credit growth from 7.5 trillion yuan. A record 9.59 trillion yuan of new loans were signed last year.

“The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world,” Jim O’Neill, chief global economist at Goldman, said in an interview with Bloomberg Television in St. Petersburg, Russia, after the PBOC statement.

For Related News and Information: Top China stories: TOPN <GO> China’s Economic Snapshot: ESNP CH <GO> World currency rankings: WCRS <GO> Most-read China economy stories: TNI CHECO MOSTREAD BN <GO> For top economic news: TOP ECO <GO>

BP to Increase Oil Recovery Rate From Leaking Well After Collection Halted

By Katarzyna Klimasinska

June 20 (Bloomberg) -- BP Plc plans to increase the rate it recovers oil from its leaking well in the Gulf of Mexico after collection was halted yesterday.

BP has the capacity to recover between 26,000 barrels and 28,000 barrels of oil daily, Robert Wine, a company spokesman, said today. The company recovered 21,040 barrels yesterday after the Discoverer Enterprise drillship stopped capturing oil for 10 hours because of an equipment problem and lightning storm.

The temporary halt in the recovery rate came as BP Chief Executive Officer Tony Hayward was photographed at a yacht race in the U.K. White House Chief of Staff Rahm Emanuel criticized Hayward, saying today on ABC’s “This Week” that it was “part of a long line of PR gaffes and mistakes.”

About 11,050 barrels of oil were collected onto the drillship and 9,990 barrels and 43.4 million cubic feet of natural gas were burned aboard a second vessel, the London-based company said in a statement posted today on its website.

If it’s able to recover 28,000 barrels of oil a day, BP would be preventing between 46 and 80 percent of the oil from entering the Gulf, based on leak estimates from a government-led panel of 35,000 barrels to 60,000 barrels a day.

‘Worst-Case Scenario’

Representative Edward Markey, a Massachusetts Democrat, said today a BP internal document shows the well may leak as much as 100,000 barrels a day under a “worst-case scenario.” That scenario would include a damaged bore and removing the blowout preventer and wellhead, according to an e-mailed statement from Markey’s office.

The company has been recovering at least 15,000 barrels a day since June 8, with the exception of June 15, when capture was temporarily halted because of a fire that may have been caused by lightning.

The vessels are now operating at their full capacities and BP “would like to get every drop” of oil, Wine said.

BP said it has recovered 249,500 barrels in total from the well, which began leaking after an April 20 explosion aboard the Deepwater Horizon rig.

The company’s CEO returned to the U.K. this week to see his family, Wine said. Hayward is “still very much in charge” of BP, Wine said. BP Chairman Carl-Henric Svanberg said on Sky television on June 18 that Hayward was handing over control of the spill to BP Managing Director Robert Dudley.

Wine declined to comment on a Wall Street Journal report today that BP hasn’t decided whether to sue Anadarko Petroleum Corp., a minority partner in the Macondo well. BP said June 18 that both parties are responsible for the spill, while Anadarko said well operator BP should pay the claims related to the damage.

To contact the reporter on this story: Katarzyna Klimasinska in Houston at kklimasinska@bloomberg.net

Sinopec, China's Airlines May Lead Share Gains as Stronger Yuan Cuts Costs

By Bloomberg News

June 21 (Bloomberg) -- China’s airlines and commodities companies, which would benefit from yuan gains that reduce the cost of their overseas purchases, may lead stock gains after the central bank signaled an end to the currency’s peg to the dollar.

The People’s Bank of China pledged to make the yuan more flexible, while ruling out a one-time revaluation of the currency that’s been held at about 6.83 yuan per dollar since mid-2008. A stronger yuan would help airlines reduce dollar- denominated fuel bills and debt incurred from buying Boeing Co. and Airbus SAS planes. Raw materials costs for companies such as China Petroleum & Chemical Corp. would also fall.

Yuan-denominated shares in Shanghai and Shenzhen will rise today as an appreciation of the currency will also help curb inflation and bolster purchasing power in the world’s fastest- growing major economy, according to China International Capital Corp. and Societe Generale SA. China’s benchmark Shanghai Composite Index gained 2.5 percent the day after the nation ended a decade-long peg to the dollar in July 2005.

“An appreciation in the yuan will reduce inflationary pressures and benefit consumption by increasing purchasing power,” said Shi Bo, general manager of Shanghai Elegant Investment Co., which oversees about $278 million in assets. “On balance, a strong yuan is good for China’s efforts to rebalance its economy away from exports to domestic consumption.”

The central bank said June 19 that it will “increase the renminbi’s exchange-rate flexibility” after the economy grew 11.9 percent in the first quarter.

Benefits Employment

An appreciation of the yuan, also known as the renminbi, will benefit exporters and the nation’s employment situation more than it hurts them, the central bank said in a statement. A more flexible currency would also help to curb consumer-price gains, asset bubbles and dependence on exports for growth, it said.

After China’s revaluation of the yuan in July 2005, China Eastern Airlines Corp. climbed 7.1 percent in Shanghai trading and China Southern Airlines Co. rose 4.8 percent. China Petroleum & Chemical, also known as Sinopec, gained 5.8 percent.

“If it leads to appreciation for the yuan, it’s good news for the market,” Hao Hong, global equity strategist for CICC in Beijing, said in a report yesterday. “Investors will want to get into Chinese assets because they will be worth more.”

An appreciation of the yuan would benefit Chinese airlines, Luo Zhuping, China Eastern Airlines Corp.’s board secretary, said in an interview yesterday. Foreign-currency debt accounts for about 60 percent of the company’s total debt, Luo said. Yuan gains “will help reduce the burden,” he said.

Biggest Boost

China Eastern, the nation’s second-biggest airline, would get the biggest profit boost from yuan appreciation of the country’s three largest carriers, Citigroup Inc. said in April. China Southern, the biggest carrier, would gain most in absolute terms as it has the largest debt and fleet, Citigroup analyst Ally Ma said. Air China Ltd. would benefit least as it has the highest proportion of overseas sales, Ma said.

Sinopec, Asia’s biggest refiner, would also benefit as 75 percent to 80 percent of oil it processes by volume is purchased from overseas in U.S. dollars, spokesman Huang Wensheng said.

“If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one,” Huang said yesterday.

BHP, Rio Tinto

BHP Billiton Ltd., Rio Tinto Group and other raw materials suppliers to China may also benefit as a stronger yuan reduces the cost of importing commodities from overseas. The nation is the world’s largest consumer of materials including iron ore, copper and soy beans, and the second-biggest energy consumer. Australian mining companies BHP Billiton and Rio Tinto are the world’s largest iron ore suppliers.

“You’d have to nominate BHP and Rio Tinto as the two main candidates to benefit,” said Saxon Nicholls, a fund manager at Herschel Asset Management Ltd. in Melbourne who helps oversee $785 million. “We think it’s good for commodity prices themselves. We also think it’s actually good for the value of the commodity equities.”

As an appreciation of the yuan reduces the cost of importing commodities, it may also make Chinese exports of clothing, shoes and electronics less attractive, said David Cohen, an economist at Action Economics in Singapore. Companies that may be affected include Shanghai Zhenhua Heavy Industry Co. and Hon Hai Precision Industry Co., based in Taipei.

Zhenhua Heavy

Zhenhua Heavy, which makes port handling equipment, said dollar-denominated receivables were 69 percent of its total outstanding receivables at the end of 2009, according to its annual report. The company’s shares fell 1.1 percent in Shanghai trading after China revalued the yuan in July 2005. Calls to Zhenhua Heavy’s offices during the weekend weren’t answered.

Hon Hai, which makes Apple Inc. iPhones and Hewlett-Packard Co. computers in China, will see a “limited” impact on costs as a result of a stronger yuan, Edmund Ding, a spokesman for the company, said in April. About 4 percent to 8 percent of Hon Hai’s costs are in yuan, he said. Ding didn’t immediately respond to calls to his mobile phone.

--John Liu and Chua Kong Ho. With assistance from Jin Jing in Shanghai, Tim Culpan in Taipei. Editors: Mike Tighe, Linus Chua

To contact Bloomberg News staff on this story: Chua Kong Ho in Shanghai at +86-21-6104-7011 or Kchua6@bloomberg.net John Liu in Beijing at +86-6649-7465 or jliu42@bloomberg.net

China's Hu Buys Time on Yuan Valuation by Announcement Before G-20 Summit

By Bloomberg News

June 21 (Bloomberg) -- Chinese President Hu Jintao may have succeeded in removing the yuan’s valuation from debate at this week’s Group of 20 leaders’ summit, economists and political analysts say. How much time he’s bought depends on how flexible the currency will become.

Days before China’s central bank announced on June 19 that the yuan’s “flexibility” would increase, officials said the currency’s value was not a suitable item for discussion at the G-20 meeting in Toronto. Hu will meet with President Barack Obama and other world leaders at the June 26-27 summit to discuss items ranging from the global response to the European sovereign-debt crisis to increasing the influence of developing countries in the International Monetary Fund.

U.S. lawmakers threatened to thwart China’s wish to keep the yuan off the meeting’s agenda. House Ways & Means Chairman Sander Levin, a Michigan Democrat, said on June 16 that China needed to act by the end of the summit or risk U.S. legislation which could levy penalties on Chinese imports.

“I think the announcement is in a sense preemptive and will probably keep currency off the agenda at the G-20 meeting, a well advertised Chinese goal,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington. “My view is that they have at a minimum bought some time.”

Constructive Step

Obama, in a statement, called China’s decision a “constructive step.” U.S. lawmakers said China’s move was insufficient.

Senator Charles Schumer, the New York Democrat who is co- sponsor of legislation that would allow for duties on Chinese imports, said he was dissatisfied with a statement that didn’t indicate the timing or amount of adjustment.

“We hope the Chinese will get more specific in the next few days,” Schumer said on June 19. “If not, then for the sake of American jobs and wealth, which are hurt every day by China’s practices, we will have no choice but to move forward with our legislation.”

Senator Charles Grassley of Iowa, the Finance Committee’s ranking Republican, said the Obama administration and Congress “need to keep the pressure on until China takes concrete actions to appreciate its currency exchange rate in a meaningful way.”

China’s central bank yesterday reaffirmed it would maintain the yuan’s 0.5 percent daily trading band and said greater yuan flexibility would help cut the trade surplus and reduce the reliance on exports as a driver of growth.

Lawmakers’ Ire

The yuan has been held at about 6.83 to the dollar since mid-2008. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen.

The persistent surplus has been a driving force of Washington lawmakers’ ire. China is the second-biggest trading partner of the U.S. after Canada and the U.S. is China’s biggest single-country export market. Two-way trade last year amounted to $366 billion, with China recording a $226.8 billion surplus, according to U.S. Commerce Department data.

Should the yuan resume its appreciation against the U.S. dollar, which was suspended in July 2008 as world economic growth slowed, then China can “avoid becoming a target in the spotlight” at the G-20, said Li Cheng, head of research at the John L. Thornton China Center at the Brookings Institution in Washington.

China’s Agenda

That will allow China to focus on its own agenda at the meeting. Vice Foreign Minister Cui Tiankai told reporters on June 18 that China wanted to discuss new quotas for the IMF that would boost the power of developing countries, promote the overhaul of global financial regulations, speak out against trade protectionism and pay more attention to economic development in poorer countries.

Zhang Tao, head of the central bank’s international department, said at the same briefing that Europe’s sovereign debt crisis was also a high priority for discussion.

China, by moving on its currency ahead of the Toronto summit, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution and a former head of the China division at the International Monetary Fund. Vice Finance Minister Zhu Guangyao said June 18 that China’s fiscal debt was about 20 percent of gross domestic product. That compares with almost 100 percent in the U.S.

Trade Surplus

Still, Hu’s respite may be cut short if China’s trade surplus rises and the yuan only makes a small appreciation of about 2-3 percent against the dollar in the coming months, Lardy said.

Reports this month from the U.S. and China highlighted concern that trade imbalances, which reached record levels before the global financial crisis, may be reemerging. Chinese exports climbed 48.5 percent in May from a year earlier. In the first four months of the year the U.S. posted a $71.0 billion trade deficit with China, up 5.7 percent from the year-ago period.

“China could come under renewed pressure,” Lardy said.

--Michael Forsythe in Beijing, with assistance from Rebecca Christie and Ian Katz in Washington and Li Yanping in Beijing. Editors: John n Brinsley, Paul Panckhurst.

To contact the reporter on this story: Michael Forsythe in Beijing at mforsythe@bloomberg.net;

Jeep to Take Global Lead Role as Chryslers Are Rebadged Lancias in Europe

By Jeff Green

June 20 (Bloomberg) -- Chrysler Group LLC’s Jeep brand will become the subsidiary’s primary global make in the first half of next year as Fiat SpA emphasizes the Lancia nameplate in Europe, a top executive said.

Chrysler’s minivan, Sebring and 300 models will be rebadged as Lancias across most of Europe at the end of the first quarter or early in the second, Michael Manley, Chrysler Group’s international chief, said in an interview. Sharing models among the brands is part of a plan outlined by Fiat and Chrysler Chief Executive Officer Sergio Marchionne in November, Manley said.

Chrysler aims for Jeep to account for half of Chrysler Group’s international sales, up from closer to a third historically, he said. The goal will be to have two brands -- Jeep and one other -- from the Chrysler Group in every market, Manley said at an event to introduce the new version of the Jeep Grand Cherokee last week in California.

“The brand is global, it’s very well known everywhere around the world,” Manley said. “With our partnership with Fiat we can now focus on Jeep as an international brand.”

Fiat, which also owns Maserati and Ferrari, is trying to share engines and other parts among models from Fiat, Chrysler, Dodge, Jeep and Alfa Romeo brands to save $2.9 billion over five years. Fiat controls the U.S. automaker through a 20 percent stake granted as part of last year’s U.S.-backed bankruptcy.

U.K. Gets Chryslers

In Europe, some Dodge models will also be sold and the Chrysler name will be kept on the minivan in the U.K., Manley said. Most of Lancia’s approximately 125,000 sales annually are in Italy. Chrysler-badged vehicles will continue to be sold in Latin America and Asia, while the North American use of Chrysler won’t change, he said.

Marchionne said April 21 that he plans to double revenue from cars and light-commercial vehicles to 51 billion euros ($63 billion) by 2014. Turin, Italy-based Fiat aims to boost deliveries by 73 percent in the period by expanding in Europe and emerging markets, re-entering North America and relaunching the Alfa Romeo and Lancia brands.

Fiat has a worldwide sales target of 3.8 million cars and commercial vans in 2014, compared with 2.2 million last year, Marchionne said April 21 in a strategy presentation. Combined with Auburn Hills, Michigan-based Chrysler Group, deliveries would total 6 million cars.

To contact the reporter on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net.

Home Sales in U.S. Probably Waned After Tax Credit as Manufacturing Grew

By Shobhana Chandra

June 20 (Bloomberg) -- The housing market began to retrench in May after a government incentive ended, leaving manufacturing at the head of the U.S. recovery, economists said reports this week will show.

Sales of new homes fell 19 percent to a 410,000 annual pace last month, according to the median estimate of 57 economists surveyed by Bloomberg News before a Commerce Department report June 23. Orders for durable goods may show gains in business investment and overseas sales boosted demand for capital equipment like computers and machinery.

“We got the run-up in housing activity and there’ll be a pretty big payback now that the tax credit has expired,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “The strongest sector of the economy right now is manufacturing.”

Federal Reserve policy makers meeting this week are projected to commit to keeping interest rates near zero in coming months to help wean the world’s largest economy off government stimulus. The hazard posed by the European debt crisis, joblessness and a lack of inflation add to the reasons why central bankers will focus on sustaining the economic rebound.

“There are certainly a lot of risks the Fed is mindful of, and they’re very much in a wait-and-see mode,” said Stanley. Central bankers begin their two-day policy meeting on June 22.

Homebuyers needed to have signed their contracts by April 30 and must close deals by the end of June to qualify for a government credit worth as much as $8,000. Sales of new houses are tabulated at contract signings, meaning the window of opportunity for that market has shut.

Fewer Orders

Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, reported this month that orders fell 17 percent in the quarter ended April 30 from the same time last year, and contract signings slowed in May, a sign the tax credit helped pull some sales forward.

“The expiration of the federal homebuyer tax credit, the lack of job growth and a potential increase in foreclosures all pose risks to a housing industry recovery,” Ara K. Hovnanian, chairman and chief executive officer, said in the statement on June 2.

Resales, in contrast, have a couple more months to run. Purchases of existing homes, which are calculated based on closings, rose 6.5 percent in May to a six-month high 6.15 million annual pace, according to the median estimate of 57 economists surveyed by Bloomberg. The report from the National Association of Realtors is due June 22.

Aircraft Orders

Bookings for goods meant to last at least three years fell in May for the first time in six months, according to the survey median. The projected 1.3 percent drop reflects a likely retreat in demand for transportation equipment, a volatile category. Orders for civilian aircraft probably fell after jumping 228 percent in April.

Orders excluding transportation increased 1 percent, the third gain in the past four months, the Commerce Department’s June 24 report on durable goods is also projected to show.

Growing exports and business spending are helping drive the rebound in demand at American factories. Sales overseas were up 22 percent through April from the same time last year, according to figures from the Commerce Department. Investment in equipment and software climbed 13 percent in the first quarter after increasing 19 percent in the prior three months, the best six- month performance since 2000.

Growing Economy

The economy began to recover in the middle of last year following the worst recession since the 1930s. Economists surveyed by Bloomberg forecast gross domestic product rose at an annual rate of 3 percent in the first quarter, matching the government’s prior estimate published last month. The Commerce Department will issue the report on June 25.

Stocks have fallen on concern the global economic rebound may cool as European governments try to reduce budget deficits. The Standard & Poor’s 500 Index is down 8.2 percent from a 19- month high reached on April 23.

The slump in stock prices is having limited effect on Americans’ confidence, a report will show on June 25. The Thomson Reuters/University of Michigan final index of consumer sentiment rose to 75.5 this month, the highest level since January 2008, from 73.6 in May, according to the survey median. The reading would match the preliminary estimate issued earlier this month.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Dubai Stocks Gain Most in 10 Weeks as Mideast Shares Rally on Europe, Oil

By Zahra Hankir

June 20 (Bloomberg) -- Dubai’s benchmark stock index rose the most in 10 weeks and Egyptian shares gained, leading a rally in Middle East markets on growing confidence that Europe will contain its debt crisis. Oil gains boosted Gulf shares.

The DFM General Index jumped 3.1 percent, the most since April 11, to 1,547.13, led by Emaar Properties PJSC, the biggest stock in the gauge. The builder of the world’s tallest skyscraper surged 8.6 percent after selling its Hamptons International unit to Countrywide Plc. Egypt’s EGX 30 Index increased 1.6 percent to 6,519.09 as Telecom Egypt, the largest fixed-line telephone company in the region, gained 2.2 percent. The TA-25 Index of Israeli equities advanced 1.8 percent.

Sentiment improved after European Union leaders agreed on June 17 to disclose how banks perform on stress tests to show investors that the financial system can withstand shocks. The Stoxx Europe 600 Index gained for a fourth week, the longest stretch of weekly gains since April. Crude oil rose to $77.18 a barrel on the New York Mercantile Exchange on June 18 for a weekly gain of 4.6 percent. The six nations of the Gulf Cooperation Council supply about a fifth of the world’s oil.

“We’re firmer in the region as the international backdrop is decent,” said Ali Khan, head of cash-equity trading at Dubai-based Arqaam Capital Ltd. “Oil is moving toward the top of its trading range.”

Global stocks advanced for a second straight week, with the MSCI World Index of developed nations rising 3.2 percent and the MSCI Emerging Markets measure advancing 4 percent. The Standard & Poor’s 500 Index had its biggest two-week rally since November, after New York-area manufacturing expanded.

Flexible Yuan

The euro strengthened for a second straight week against the dollar, climbing 2.3 percent to $1.2388. China said yesterday it will allow more flexibility in the yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit.

Emaar soared the most since March 25 to 3.30 dirhams after declining 1.3 percent earlier in the session. Countrywide, a U.K. realtor and property services company, will own the rights to operate Hamptons’s business in the U.K., Europe and Asia, Emaar said on June 17. The Dubai company will operate Hamptons in the Middle East and North Africa.

“As soon as some significant bids were seen on large-cap names, the retail buyers saw this as a signal to re-enter the market,” said Julian Bruce, director of equity sales at EFG- Hermes Holding SAE. “Due to low volumes overall the upside move has been exaggerated.”

Constrained Volume

A total of 179 million shares traded on the Dubai exchange, compared with the six-month daily average of 200 million.

Telecom Egypt rose to 17.31 Egyptian pounds, the highest this month after the company said it will pay a dividend of 55 piasters a share on June 30.

Qatar’s QE Index gained 0.6 percent to the highest in a month. The Qatar Investment Authority, the Doha-based sovereign wealth fund, agreed to invest $2.8 billion in Agricultural Bank of China Ltd.’s initial public offering, according to two people with knowledge of the matter. The $58 billion fund signed an agreement with Agricultural Bank on June 17, the people said, declining to be identified because the deal is private.

The TA-25 gains were led by Bezeq Israeli Telecommunication Corp.’s 3.2 percent advance. Kuwait’s gauge rose 0.9 percent, the most in almost two weeks. Oman’s index advanced 0.4 percent, while Bahrain’s closed little changed at 1,392.48. Abu Dhabi’s ADX General Index rose 0.8 percent. Saudi Arabia’s Tadawul All Share Index rose 1.1 percent to the highest in more than a month.

Israeli government bonds were little changed with the benchmark Mimshal Shiklit due February 2019 rising 0.09 shekel to 112.39. The yield dropped one basis point to 4.51 percent. The shekel declined 0.2 percent to 3.8307 against the dollar on June 18.

To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net or

Santos Seeks Landslide Win in Colombia as World Cup Keeps Voters at Home

By Helen Murphy

June 20 (Bloomberg) -- Colombians may hand a landslide victory today to presidential candidate Juan Manuel Santos, won over by his pledges to build on Alvaro Uribe’s successes in boosting investment and beating back Marxist rebels.

Santos, Uribe’s former defense minister, was favored by 66.5 percent of those surveyed in a Gallup Colombia poll taken June 5 to June 7, compared with 27.4 percent for the Green Party’s Antanas Mockus. The next president will take over Aug. 7 from Uribe, who brought record growth and slashed by half the number of murders while in office since 2002.

Turnout may be low as voters expecting Santos to coast to victory stay home to watch the World Cup soccer tournament. Santos, who won 47 percent in the first round, has capitalized on Uribe’s 63 percent popularity while pledging to create jobs. Mockus, a former Bogota mayor who garnered 21 percent of the vote on May 30, is pledging to improve the education system and eliminate corruption associated with Uribe’s administration.

“This will be an historic election in terms of margin between the two candidates,” said Monica Pachon, a political analyst at Bogota’s Universidad de los Andes. “It’s going to be a huge win for Santos.”

Colombia’s peso and dollar bonds rose for a fourth straight week on speculation Santos would prevail.

The peso gained 0.8 percent in the week ending June 18 to 1,909.60 per U.S. dollar and is up 7 percent this year, the best performance among world currencies tracked by Bloomberg. The IGBC stock index has climbed 7.7 percent this year, beating a 4.8 percent decline in the MSCI EM Latin America Index.

Colombia’s security forces have been deployed at polling stations to guard against violence by the Revolutionary Armed Forces of Colombia, Latin America’s biggest and oldest insurgency. The campaign has been the safest in four decades, the government says.

Latest Poll

Turnout will be lower than in the first round because of the World Cup, said Claudia Lopez, an analyst with the Electoral Observation Mission, a Bogota-based election monitoring group. In the biggest turnout since 1998, 49 percent of 30 million eligible voters cast ballots in the first round.

“The margin between candidates in the first round was so great that people think it’s already over,” Lopez said. “There’s little enthusiasm for going out to vote, and the football will influence things.”

Italy, Brazil and Paraguay all play matches while polls are open between 8 a.m. and 4 p.m. local time.

‘Biggest Goal’

“Let’s lose a few minutes of World Cup football,” said Santos, 58, during a campaign rally in Cartagena June 12. “Let’s score the biggest goal for Colombia.”

Santos is credited with delivering some of the biggest blows against the FARC while serving as defense minister from 2006 to 2008. These include the 2008 rescue of 15 hostages including French-Colombian politician Ingrid Betancourt and three U.S. defense contractors. He also ordered the raid into Ecuador that killed the group’s second in command, Raul Reyes.

Santos has benefitted from Uribe’s support. In 2002, the year Uribe took office, Colombians suffered 1,645 terrorist attacks, 28,837 murders and 2,882 kidnappings. By 2009, those numbers had been cut to 486, 15,817 and 213 respectively.

Christopher Sabatini, policy director for the Council of the Americas in New York, said the true winner is Colombia’s democracy even though the “lopsided” result will favor Santos.

“The process -- for its peacefulness, quality of candidates and convergence toward a consensus over broad policy continuity -- should be seen as a sign of political maturity in a country that only eight years ago was in the midst of a near crisis,” he said.

Campaign Pledges

If elected, Santos says he’ll fulfill Uribe’s pledge to crush the rebels and maintain the pressure on drug-traffickers responsible for 51 percent of global cocaine production last year, according to the United Nations. As the U.S.’s caretaker in the war on drugs, the Andean nation receives more than $600 million a year in American foreign aid.

Santos promises to boost tax revenue by bringing millions of informal workers into the system, close by 2014 a budget gap equal to 3.6 percent of gross domestic product and achieve annual growth of 6 percent within two years.

Mockus, 58, has presented himself as an anti-corruption politician who will improve Colombia’s education system by raising taxes on the rich. While respectful of the government’s security gains, the former philosophy professor says he wants to prepare for a post-Uribe era of greater social justice.

“Both candidates have campaigned in favor of maintaining a hard line on security and broad economic policy orthodoxy,” said Patrick Esteruelas, an analyst at Eurasia Group in New York. “But Santos’ broader support base in congress provides a much more stable political platform.”

Pro-Uribe parties won 68 of 102 Senate seats in March congressional elections, compared with 5 for the Green Party. The Liberal Party, which had been the biggest opposition bloc to Uribe’s government, is split on whether to support Santos.

To contact the reporter on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net

Macarthur Coal Founder Talbot, Sundance Resources CEO Missing in Cameroon

By Elisabeth Behrmann

June 20 (Bloomberg) -- Sundance Resources Ltd., an Australian-based iron ore explorer, today confirmed Ken Talbot, former chief executive officer of Australian mining company Macarthur Coal Ltd., is missing in West Africa after an aircraft carrying nine mining executives was lost.

Talbot was on board a plane chartered by Sundance on a flight to the company’s Mbalam iron ore project in Cameroon from the capital, Yaounde, yesterday, according to an e-mailed statement from Don Nissen, chairman of Talbot Group Management.

Also missing are Sundance Chairman Geoff Wedlock, Chief Executive Officer Don Lewis, Company Secretary John Carr-Gregg and non-executive directors John Jones, Craig Oliver and Talbot, Sundance said in an e-mailed statement today.

“Between them, without exaggeration, there are two centuries of mining experience,” said Gavin Wendt, an analyst at Sydney-based Mine Life Resources, by phone.

“The families of the missing have been notified and are being supported during this deeply distressing time,” the company’s statement said.

Emergency response procedures have been activated, with efforts focused on coordinating with the government authorities in the Republic of Cameroon, Republic of Gabon and Republic of Congo as well as with the Department of Foreign Affairs and Trade and Australia’s diplomatic representatives to locate the aircraft, the Perth-based iron-ore developer’s statement said.

Well Known

Talbot owns 16.1 percent of Sundance, according to Bloomberg data. A well-known Australian mining figure, he founded Macarthur Coal and built the company into the largest producer of pulverized coal used in steelmaking, with a current market capitalization of A$3.18 billion ($2.76 billion). His current investments span iron ore, uranium, liquefied natural gas and copper.

Talbot Group spokesman Shane Edwards and Sundance spokeswoman Felicity Nuttal declined to comment further.

“The Australian High Commissioner-designate to Abuja -- currently in Cameroon -- is managing the government’s response on the ground,” said spokeswoman Ranya Alkadamanini of the Australian Department of Foreign Affairs and Trade by e-mail.

Sundance shares rose 4 percent on June 18 to 13 cents, giving it a market capitalization of A$352.3 million.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

Trading Floor TVs, Atrium Stadiums Help Firms Avoid Soccer Sick-Note Surge

By Paul Jarvis and Armorel Kenna

June 18 (Bloomberg) -- Kellogg Co. doesn’t have to worry about staff at its U.K. headquarters staying away from work or sneaking out of the office when England plays its potentially decisive World Cup game against Slovenia next week.

When the match kicks off at 3 p.m. local time on June 23, the 660 employees at Kellogg’s base in Manchester, northwest England, will be allowed into the building atrium to watch the team’s attempt to qualify for the tournament’s latter stages.

“It’s fantastic that we are being able to watch it from work,” said Louise Davies, assistant communications manager for the cereal maker. “It’s hard to imagine that with a big crowd, employees won’t want to join in to watch the match.”

With many World Cup games taking place during working hours, European companies must decide whether to make provisions for staff wanting to follow their team. Those that don’t risk absenteeism or clogged Internet networks as workers log on to live streams of the games. The cost to U.K. businesses in terms of lost working hours may reach 1 billion pounds ($1.48 billion), according to the Chartered Management Institute.

Fiat SpA, Italy’s biggest carmaker, can get as many as 500 medical notes from employees on the day of an important soccer match, according to two people familiar with the matter.

Credit Suisse Group AG’s office in London has a small auditorium available to allow its employees to watch certain games of the World Cup and has screens in the background across dealing rooms. It’s raising money for the Alzheimers Society by selling flags to employees supporting their individual teams.

Accommodating Requests

“There is huge goodwill, both in terms of employee engagement and in productivity, to be gained from accommodating flexible working requests or allowing staff to take a couple of hours out to watch the games,” said Michael Rendell, leader of human resource services at PricewaterhouseCoopers LLP.

Nomura Holdings Inc., Japan’s biggest brokerage, has made arrangements for employees throughout Europe to watch the World Cup matches either via the Internet at their desks or on large screens in separate rooms.

“Our employees work hard and manage their time effectively so the management are happy to make provisions for people to watch the games over the coming weeks,” the firm said.

According to a survey conducted in April by YouGov and Telegent Systems, 38 percent of employees in England would be prepared to skip work to watch the soccer. Of 2,463 people interviewed online, 48 percent said allowing staff to watch games at work would have the most positive impact on morale.

Flexible Shifts

J Sainsbury Plc, the U.K.’s third-largest supermarket chain, is allowing workers to book time off, swap shifts, start or finish earlier and time their breaks to coincide with kick- offs. QAS Ltd., a unit of credit-checking company Experian Plc, sent an e-mail to staff before the start of the World Cup asking them to nominate a team which they would be allowed to watch at local pubs.

“We obviously have to make sure we haven’t got an important meeting when out of the office, and need to make up the time later, so it works well for us and the company,” said Nick Moodie, who works at QAS and watched New Zealand play Slovakia this week at the Frog pub in Clapham, south London.

A study of 1,000 British workers commissioned by PricewaterhouseCoopers LLP showed that 53 percent of male employees and 21 percent of females aimed to watch World Cup matches during office hours. About 5 percent planned to watch without their employers’ permission or call in sick.

Clogging Networks

Businesses that fail to make adequate provisions for their staff to watch games may find that the performance of their Internet network slows as employees log on to live streams, said Scott Morrison, an Antibes-based vice president at Gartner Inc.

“Organizations have to maintain the threat that if network performance is affected too much they will block streaming traffic and that’s certainly the approach many organizations we are speaking to are taking,” Morrison said.

In Germany, employees of sports goods makers Adidas AG and Puma AG will get to see the matches. At Adidas’s Herzogenaurach headquarters, televisions have been installed in the stadium- like exhibition center and the “Stripes” canteen, spokeswoman Katja Schreiber said. Puma has set up projector screens in its canteens, according to spokeswoman Kerstin Neuber.

Infineon Technologies AG, Europe’s second-largest chipmaker, is arranging public viewing of today’s lunchtime game between Germany and Serbia in the staff canteen, spokesman Christian Hoenicke said. SAP AG, the world’s biggest maker of business-management software, is showing all matches on a big screen at its Walldorf, Germany, headquarters and two nearby locations, according to spokeswoman Angelika Pfahler.

Business as Usual

Not all are so sympathetic. Daimler AG, the world’s second- biggest luxury carmaker, doesn’t allow staff to watch World Cup matches at work, spokeswoman Dominique Albrecht said, citing job-safety directives. Beiersdorf AG, the German maker of the Nivea skin cream, isn’t providing public viewing facilities in its Hamburg headquarters, spokesman Ralph Esper said.

At ING Groep NV, the Netherlands’ biggest financial- services firm and a sponsor of the Dutch team, employees at some locations have to pay an entrance fee to see games that goes to ING’s and Unicef’s charity program “Chances for Children.”

“Every business around the world has to make its own arrangements,” said ING spokesman Frans Middendorff. “Several ING offices in the Netherlands facilitate watching games by the Dutch team, work permitting and after management approval.”

Royal Bank of Scotland Group Plc will convert an atrium at its London office into a soccer field with giant screens to entertain bankers and clients during the World Cup. RBS will invite as many as 3,000 investment banking clients to watch the matches, according to an e-mail to employees earlier this month.

“With a canopy covering the space, an indoor pitch and giant screens it promises to be a great venue to watch the games,” the bank said.

To contact the reporters on this story: Paul Jarvis at pjarvis@bloomberg.net; Armorel Kenna in Milan at akenna@bloomberg.net.

Weber Defies Trichet Over Europe Bond Bailout as ECB Succession Approaches

By Christian Vits, Jana Randow and Richard Tomlinson

June 18 (Bloomberg) -- On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council -- including his boss, President Jean-Claude Trichet.

“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.

His comments, in an interview with the Frankfurt-based Boersen-Zeitung that was later posted on the Bundesbank’s website, came after he had spent part of the previous night on an emergency ECB conference call, Bloomberg Markets magazine reports in its August 2010 issue.

As finance ministers in Brussels hammered out a European Union-led rescue package worth about $927 billion, Trichet persuaded almost all of his council colleagues that purchasing government bonds was essential to halt a bond market rout triggered by Greece’s yawning fiscal deficit.

One of the dissenters was Weber -- the top candidate to become the ECB’s third leader when Trichet’s eight-year term expires in October 2011. Weber’s words matter because he represents the central bank of more than one-quarter of the euro region’s economy and a German habit of fiscal discipline and price stability that most of the euro-member countries have broken.

Just as German Chancellor Angela Merkel held out on rescuing debt-stricken Greece until the last minute, Weber, 53, stands against getting the ECB too entwined with indebted nations.

‘First Among Equals’

“After Trichet, Weber is the first among equals,” says Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “He’s not an ideologue, but he does represent a lot of the hard-money values that Germany is associated with.”

Weber’s intransigence presents a dilemma for European leaders, who must decide in the next year whom to pick as Trichet’s successor. The ECB president chairs a 22-member council of the heads of all 16 central banks plus a 6-member Executive Board.

By moving Weber from the Bundesbank’s bunker-like concrete building in northern Frankfurt to the Eurotower, the ECB’s 36- story glass-and-steel headquarters downtown, the member countries would be guaranteed an inflation fighter in the German tradition that underpinned the deutsche mark for half a century. They would also be choosing a plain-spoken former monetary economics professor who’s prepared to question policies he thinks are hazardous.

Wanting Him?

“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”

Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.

“There’s a rising risk of breakup of the monetary union, and the ECB will have to play an important role to prevent that from happening,” says Roubini, who sees Weber as the “leading candidate” for the top post.

Tackling the Deficit

Germany has a 2010 estimated budget deficit of 5 percent of gross domestic product, smaller than all but 4 of the 16 euro- member countries, and is fighting to keep the euro region under fiscal control. Merkel insisted Greece’s deficit be “tackled at its roots” before agreeing to the bailout package and is touting Germany’s constitutional amendment on fiscal restraint, which will start to go into effect in 2011, as an example to all euro governments.

The euro has plunged 13.8 percent this year against the dollar, falling below $1.20 on June 4. Even after the round of rescue measures announced by the EU and the ECB, the extra yield that investors demand to hold 10-year Spanish bonds over German bunds is close to a euro-era high of 216 basis points. (A basis point is 0.01 percentage point.)

Trichet’s successor thus may be confronted with the prospect of continuing to implement unconventional policy measures to safeguard the currency, such as wading deeper into the European debt market.

“The ECB has crossed the Rubicon with the bond purchases,” says Julian Callow, chief European economist at Barclays Capital in London. By June 4, the ECB had purchased 40.5 billion euros ($50.1 billion) of bonds, according to the bank.

First in Decades

If Weber takes over from Trichet, he’ll be the first German to win a top EU post since Walter Hallstein, who led the European Commission’s predecessor institution from 1958 to 1969. To get this far, Weber -- who has a British wife, Diane, and speaks fluent English -- gave up a two-decade-long academic career specializing in applied monetary and international economics when he became Bundesbank president in 2004.

“It’s the combination of his gravitas as an academic but also as head of the Bundesbank that matters,” says James Nixon, co-chief euro-region economist at Societe Generale SA in London. “I find it really hard to see any other person in Germany who can play in the same league.”

Weber, who declined to be interviewed, grew up in Glan- Muenchweiler, a village of 1,200 people surrounded by tree- covered hills in southwestern Germany, about 45 kilometers (28 miles) from the French border. His father, Hans, taught at the local primary school and still lives in the village.

Shoulder-Length Hair

While he was a student at the University of Constance from 1976 to 1982, Weber sported shoulder-length hair and supplemented his income by working as a roofer when home during vacations, recalls Rudolph Hanss, a former co-worker. Fellow roofers nicknamed Weber “the theorizer” because of his academic background, says Hanss, who’s still employed at the same company. “But he certainly knew how to work.”

After graduating, Weber taught and did research from 1982 to 2004 at German universities in Siegen, Bonn, Frankfurt and Cologne. He ran Cologne’s marathon in 2002, registering a time of 4 hours, 7 minutes.

As an academic, Weber developed ties to the inner circle of Berlin politics. He was a member of the so-called Five Wise Men, the government’s panel of economic advisers, from 2002 to 2004. Former students include Deputy Finance Minister Joerg Asmussen and Jens Weidmann, Merkel’s chief economic adviser. Merkel has increasingly enlisted Weber to sell unpopular financial bailouts at home and abroad to skeptical politicians.

Time in Berlin

“He’s been very involved in rescuing the banks and dealing with the politicians,” says Joachim Fels, co-chief global economist at Morgan Stanley in London. “My guess would be that he’s spent more time in Berlin these past two years than Frankfurt.”

On May 19, Weber spoke in a cramped meeting room in Berlin’s rebuilt Bundestag building. His task: Selling the euro bailout program to lawmakers. He wasn’t enjoying himself. “I’m personally dismayed about the fact that following the bank rescue program and help for Greece, I am now appearing before the German parliament for the third time,” Weber said. “It creates the impression that one is being driven by markets and is not in control of markets.”

The Bundesbank president’s tone was counterproductive, says Steffen Bockhahn, a legislator for the opposition Left Party who attended the hearing.

That Human Touch

“Weber lacked sensitivity, that human touch that alleviates the job of conveying bad news,” he says. “When you’re trying to tell the keepers of the country’s public purse why they have to sign off on a huge aid package, a certain humanity can go a long way.”

Selling himself as the next ECB president may require Weber to improve his conciliation skills. “He positions himself explicitly,” says Klaus Liebscher, who headed the Austrian central bank from 1995 to 2008 and thus sat with Weber on the ECB council. “He’s always honest about his convictions but possibly not always diplomatic.”

Since becoming Bundesbank president, Weber has been a regular guest at the annual August conference of central bankers and economists hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. During the afternoon break, he hikes for hours with fellow participants in the surrounding Teton Range.

Swiss National Bank President Philipp Hildebrand says he met Weber for the first time on such a jaunt in 2003 or 2004. “We started walking and marched far into the Grand Tetons,” he says. “I was impressed by his stamina and endurance. We just made it back in time for dinner.”

Economics Department

Inside the Bundesbank, Weber holds the reins tightly. One official says he wants to be No. 1 -- and wants others to accept that. For example, when he arrived at the German central bank, he assumed leadership of its economics department.

Weber reflects the Bundesbank’s traditional role as guardian of price stability. Runaway inflation gripped Germany in the early 1920s after the government printed bank notes to finance crippling World War I reparation payments imposed by the Allies. In 1957, the West German government created the Bundesbank, whose prime responsibility was to safeguard the mark as the bedrock of the country’s post-World War II recovery.

“When you talk with German monetary policy makers, they still have the 1920s hyperinflation in their minds,” says Stephane Deo, chief European economist at UBS AG in London. “They have an aversion to inflation that is much higher than in other countries.”

Implementing the Bailout

The Bundesbank, which gave up setting Europe’s de facto benchmark interest rate after the ECB took over in 1999, retains some powers. It acts as an agent for about a quarter of the bond purchases conducted by the euro region’s network of central banks -- in essence, helping implement the bailout package. And more than 70 percent of all European banks that accessed ECB money market funds last year did so through the Bundesbank.

While Weber generally advocates a tight monetary policy stance to counter inflation risks, he can quickly adapt to a crisis. After Lehman Brothers Holdings Inc.’s 2008 bankruptcy shattered confidence in financial markets and pushed Europe into its worst recession since World War II, Weber turned pragmatic. With other ECB council members, he became an advocate of pumping unlimited liquidity into the banking system to encourage lending and a supporter of lower interest rates.

‘Further Easing’

“Owing to a remarkable decline in inflationary pressures in the medium term and rapidly deteriorating economic prospects, euro-area monetary policy in my view has enough leeway for further easing if necessary,” Weber said at a banking conference in Frankfurt on Nov. 21, 2008.

He sometimes speaks more forthrightly.

Weber landed on Trichet’s so-called black list last November by revealing that the ECB would tighten its lending to banks. The list is drawn up by the ECB’s press division and given to all policy makers when they convene. The remarks breached ECB protocol that major announcements be made by the president. They also came within a week of a council meeting, when officials are supposed to refrain from commenting on policy.

Weber will temper his style if he becomes ECB president, says Allan Meltzer, political economy professor at Pittsburgh’s Carnegie Mellon University. “Anybody in that job will have to make consensus moves,” says Meltzer, who has known Weber for more than 30 years and is the author of a two-volume history of the U.S. Federal Reserve.

Draghi’s History

The only challenger for Trichet’s 35th-floor corner office is Mario Draghi, 62, governor of the Bank of Italy. His handicap may be his previous job as vice chairman of the international division of Goldman Sachs Group Inc. from 2002 to 2005. In 2000, Goldman Sachs helped Greece shave 2.4 billion euros from its official deficit through currency swaps, the New York-based bank said in a Feb. 21 statement. The Bank of Italy said on Feb. 17 that Draghi had “nothing to do with those transactions.”

Merkel, 56, has won French President Nicolas Sarkozy’s support for Weber’s candidacy, German magazine Spiegel reported in February, and the newspaper Handelsblatt said in May that Germany agreed to support the bailout package in return for a guarantee Weber would get the job. Government spokeswoman Sabine Heimbach denied there was a deal in a May 12 statement.

“If Merkel says she wants Weber, Sarkozy probably won’t stand in her way,” says Philippe Chalmin, an economics professor at the University of Paris-Dauphine who advises France’s government on economic policy. “Now it’s Germany’s turn.”

And it may be the turn of Weber, the former construction worker, to rebuild the ECB as a central bank that stands apart from governments. As he told Bundesbank employees in Mainz, Germany, on May 31: “The damaged foundations of the currency union need to be reinforced.”

To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net; Richard Tomlinson in London at rtomlinson1@bloomberg.net.

Greek Pension `Time Bomb' May Be Difficult to Defuse for Unwed Daughters

By Maria Petrakis

June 18 (Bloomberg) -- Sophia Constantinidou works as a teacher in a private school in Athens. She also has a more lucrative job: remaining unmarried.

The 52-year-old gets 400 euros ($496) a month from the Greek government, part of her late mother’s state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn’t tie the knot.

“It’s not that I didn’t want to get married,” Constantinidou, whose mother died 20 years ago, said in an interview. “But after I turned 40, I realized I wouldn’t be getting married and that thankfully I had this.”

As the European Union, International Monetary Fund and bond investors scrutinize debt-ridden Greece, they need look no further than the pension system for a prime example of how the country is living beyond its means. Greek pensioners on average live on 96 percent of the salary they had when they worked, more than twice the proportion of earnings as Germans, according to the Organization for Economic Cooperation and Development.

Greece “is a classic case of entitlements granted by short-sighted governments that didn’t bother to secure financing sources,” said Miranda Xafa, a former director at the IMF and now a senior investment strategist at Geneva-based IJPartners. “The political benefit of pension entitlements granted is immediate, but the cost will be incurred later.”

Arduous Jobs

The OECD as long as three years ago described Greece’s state pension system as a “fiscal time bomb.”

Led by Prime Minister George Papandreou, lawmakers will begin passing legislation this month to overhaul the system, which the EU and IMF say contributed to the country’s debt crisis. Under terms of last month’s 110 billion-euro ($123 billion) bailout agreement, Greece will increase the retirement age to 65 from as early as 58, curtail early retirement and calculate payments over a longer period of employment.

The aim is to bring uniformity to a system riddled with exemptions granted over decades by governments yielding to pressure from trade unions and other groups. The bill will be the first enacted by Papandreou’s government since the May 6 package that pledged 30 billion euros of wage and pension cuts and tax increases over the next three years.

There’s one pensioner in Greece for every 1.7 workers, compared with one for every four in 1950, according to a government study published on May 12. There are 637 occupations the Greek state deems to be arduous in nature and qualify to stop work earlier. They include hairdressers, car washers, steam-bath attendants and radio technicians.

‘Paramount Reform’

Constantinidou isn’t included because she’s paid by the hour and doesn’t have enough of a private pension to live on when she’s older. She’s reliant upon the stipend she inherited from her mother, who worked at a state hospital.

Should the country keep its generous benefits, Greek pension spending will rise to 24 percent of gross domestic product in 2060, double the proportion of 2007, the European Commission estimated last year.

Pensions are “going to be the paramount reform in terms of medium-term budgetary perspectives,” EU Monetary and Monetary Commissioner Olli Rehn said on June 11.

With unions promising a “storm” of protests, the government is trying to push through the bill before the September deadline set by the EU and IMF and ahead of Greek municipal elections, tentatively scheduled for October.

Extending Work

Dina Karahali, 47, is waiting to see the final form of the bill to know whether she will be penalized by the new system or manage to escape with the early pension she expected when she began working as a childcare worker 25 years ago.

With a 16-year-old son, Karahali said she could take early retirement now on less than a full payment. What she fears is the new law will make her work an extra 13 years.

“It’s difficult,” she said by telephone in Athens. “Do I get a pension now and not receive any money until I am 50? Or, will I have to work till I am 60?”

About 5,000 state workers, mostly women, have submitted applications for early retirement this year, said Despina Spanou, an official at the civil servants’ labor union, ADEDY. That’s almost double the number filed at the same time last year, she said.

Concerns about Greece’s long-term pension finances have long played a part in the wider spread in Greek bonds over those of Germany or Italy, the OECD said in its July 2009 report.

That was before the 58-year-old Papandreou revealed the country’s budget shortfall was more than twice the previous government’s estimate, stoking concern about Greece’s ability to avert default and prompting the bailout package.

Bonds Collapse

Greek 10-year government bond yields were about 1.4 percentage points, or 140 basis points, higher than benchmark German bunds at the beginning of October as Papandreou came to power. The so-called yield spread widened to as much as 965 points on May 7 and yesterday was at 665 points.

Generous Greek pensions played prominently in Germany, where public opinion has been largely opposed to the bailout.

Germany lifted the retirement age to 67 from 65 in 2007, affecting about half of the nation’s 82 million residents. While Greece has a statutory retirement age of 65, and 60 for women, exemptions and special rules can allow a full pension at 58.

Former European Central Bank Chief Economist Otmar Issing said in February that German taxpayers can hardly be expected to support Greek pensions. Bild Zeitung, Germany’s biggest-selling tabloid, ran a front-page headline in April asking: “Why do we have to pay Greece’s luxury pensions?”

Best Years

Greeks get a pension calculated on the last five years of their working life, which tend to be the highest-paid. German, Italian and Portuguese pensions are based on wages worked over a lifetime. Spain bases them on the best 15 years of work.

In the Greek civil service, the so-called replacement rate can be as much as 149 percent, according to a report by the European Commission in October. The rate is a measure of how effectively a pension system provides income during retirement.

The EU-IMF agreement states that Greece should move to a system basing earnings on the entire lifetime and introduce a price-based indexation system, used by most OECD countries. Such a system, according to the Paris-based OECD, would allow Greece’s biggest retirement fund to scale back spending by some 20 percent by 2050 to 2055, equal to about 1 percent of GDP.

Governments since the end of the military junta in 1974 have struggled to force through reforms the EU has long demanded to the pension system or opening up product and labor markets to make Greece more competitive.

‘Dramatic Worsening’

“The reasons for the dramatic worsening of the pension systems finances are demographic developments, the exhaustion of the abilities of the pay-as-you-go system and decisions of the political system of our country for the past 35 years,” Labor Minister Andreas Loverdos told the International Labor Organization in a June 14 speech.

Civil servants didn’t pay anything towards their pensions until 1992. Female civil servants with children under 18 can get early retirement. Unmarried daughters of state workers say the payment became a factor in staying single.

Unions argue that going after employers who don’t pay mandatory contributions to pension funds is preferable to cutting benefits and raising the retirement age.

Non-payment of contributions to state pension funds, prevalent among the self-employed, is estimated by the OECD at between 20 percent and 30 percent of revenue collected.

Constantinidou is one such worker. She never managed to secure a permanent post and doesn’t get state benefits in her job supplementing the studies of high-school students at a central Athens college.

“I work in the private sector and would need to work till I’m 65 to get a pension but it’s not going to happen,” she said. “No-one is going to hire a 60- or 65-year-old woman. Thankfully I have this.”

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net.

Ferrari Designer Jason Castriota Hired by Saab Auto to Speed Turnaround

By Ola Kinnander

June 18 (Bloomberg) -- Jason Castriota, the U.S. designer known for creating the Ferrari P4/5 and Maserati GranTurismo, will head Saab Automobile’s design team to help the Swedish carmaker take on Bayerische Motoren Werke AG and Audi AG.

The first assignment for Castriota’s design firm is to create an upscale version of Saab’s current 9-3 model, scheduled for release in 2012, the 36-year-old said in an interview. Aerodynamics will be a focus of the new design, he said.

“It’s absolutely vital we get this car right,” Castriota said from New York late yesterday. “This is Saab returning to its roots, not having to worry about being part of a much larger machine that they were before in the GM organization.”

Saab, sold by General Motors Co. to Dutch supercar maker Spyker Cars NV in February, aims to become profitable by 2012. The turnaround strategy includes releasing premium models more distinct and sporty in their design than when Saab was under GM, according to Spyker Chief Executive officer Victor Muller.

Castriota will play a major role in fashioning the new 9-3 and other models, said Eric Geers, a spokesman for the Trollhaettan, Sweden-based Saab.

“The 9-3 design as made by him is basically done, and I can tell you it is spectacular,” Muller said by telephone, adding that the design will be completed within weeks. “It is truly aircraft-inspired and Swedish-clean.”

Benchmark Cars

The 9-3 was first released in 1998. The second generation, still produced today, hit the streets in 2002. The new version intends to challenge BMW’s 3-series and Volkswagen AG’s Audi A4, Castriota said.

“Those are the benchmark cars,” he said by telephone. “They’re true premium vehicles and the 9-3 also needs to be a true premium vehicle.”

Castriota started his career in 2001 at luxury-car designer Pininfarina SpA in Turin, Italy, where he stayed until 2008. He then worked for Stile Bertone in Italy until September 2009. Last December, he started his own firm, Jason Castriota Designs. The design house has five designers and is based in New York City and Turin.

“I literally started sketching Ferraris when I was about five years old,” he said. “For whatever reason, some kids might kick around a soccer ball, I picked up a pencil and started sketching cars.”

BMW Talks

Castriota will become part of the leadership at Saab and will help “define the strategy for the new models,” he said.

Saab is also planning to introduce a smaller car with a tear-drop shape inspired by the 92 model that was in production between 1949 and 1956. Saab is in talks with BMW about using its Mini platform, as well as engines and gearboxes, for that model, two people familiar with the situation said last week.

“A small premium car from Saab is a very important vehicle and is something that could truly help the overall production volume of Saab in a great way,” Castriota said.

To contact the reporters on this story: Ola Kinnander in Stockholm at okinnander@bloomberg.net; Andreas Cremer in Berlin at acremer@bloomberg.net

L.A.-San Francisco Bullet-Train Bidding Process May Begin Late Next Year

By Alan Ohnsman and Chris Cooper

June 18 (Bloomberg) -- California, the top recipient of funds from President Barack Obama’s high-speed rail program, expects to issue a tender for a bullet-train line linking Los Angeles and San Francisco by late 2011.

The state expects bids from about 10 trainmakers and construction may start as early as the first half of 2012, Quentin Kopp, a California High Speed Rail Authority board member, said in an interview in Los Angeles yesterday. The train will whisk passengers between the two cities, 432 miles apart, in less than 2 hours 40 minutes, according to the state-backed group’s website.

California’s push for high-speed rail, backed by Governor Arnold Schwarzenegger, comes as the most populous U.S. state targets cuts in congestion and greenhouse gas emissions from cars and airplanes. The Obama administration in January awarded $8 billion for high-speed rail projects, causing companies such as Alstom SA, Siemens AG, East Japan Railway Co., China South Locomotive & Rolling Stock Corp. to boost sales efforts.

“A high-speed line between Los Angeles and San Francisco makes sense given their large populations and the distance between them,” said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc., which manages about $8.3 billion. “There might be some companies trying to sell their technologies even if they don’t make a profit, so they can make a name for themselves.”

When fully completed the state anticipates an 800-mile high-speed rail network running from San Francisco to San Diego, near the U.S.-Mexico border. The total cost for the system will be more than $40 billion.

Construction From 2012

California won a $2.3 billion federal grant to help build the high-speed link, which is due to enter service in 2020. That’s in addition to a $10 billion bond sale the state approved in 2008 to fund the rail line. The state has until September 2011 to complete an environmental review, Kopp said.

“Allow four months for the conclusion of proposals and bids, and I estimate conservatively that construction will begin by the first part of 2012,” said Kopp, who was at a U.S. High Speed Rail Association conference in Los Angeles.

Schwarzenegger has proposed running high-speed trains on existing conventional tracks between Los Angeles and San Diego as early as November to spur interest in high-speed rail. Kopp said he doubted whether that timeframe would be met.

“Will that happen in the time variant in the governor’s recent proposal?” Kopp said. “ I don’t think so,” he said without elaboration.

Amtrak Trains

Trains operated by Amtrak, the U.S. long-distance passenger railroad, currently don’t run directly between Los Angeles and San Francisco. Travel between Los Angeles and Oakland, which neighbors San Francisco, on Amtrak’s Coast Starlight line takes about 12 hours or twice as long as traveling by car.

Air travel between Los Angeles and the San Francisco Bay Area takes about an hour.

“The airlines will certainly lose some of their business,” said Fukoku Capital’s Sakurai. “If you add up the time spent traveling to airports, security checks and delays it makes sense to take the train.”

U.S. Transport Secretary Ray LaHood last month visited Japan, where he tried out a JR East bullet train and rode Central Japan Railway Co.’s magnetic-levitation railway. He also encouraged Japanese trainmakers to compete for U.S. contracts and to set up plants in the country. Japan’s Transport Minister Seiji Maehara is planning a second visit to the U.S. this year to help stoke interest in bullet trains.

320 kmh Train

JR East will introduce a bullet train next year that can reach speeds of 320 kmh (199 miles per hour). The fastest train in the U.S., Amtrak’s Acela Express, which is built by Alstom and Bombardier Inc., is capable of running at up to 150 mph.

Japanese trainmakers have previously won overseas deals. Kawasaki Heavy Industries Ltd. made the trains for Taiwan’s $15 billion high-speed line that started operating three years ago between suburban Taipei and Kaohsiung in the south. Hitachi Ltd. built high-speed trains running between London and the south- east of the U.K.

China’s Ministry of Railways has teamed up with General Electric Co. in a bid to win U.S. contracts. The two in November agreed a partnership to manufacture equipment for high-speed rail projects.

Japan, which started the world’s first bullet-train services in 1964, carried 308 million people by high-speed train in the year ended March 2009, more than triple the number of passengers on domestic airline routes. Amtrak’s Acela Express carried 3.4 million passengers in fiscal 2008.

To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; Alan Ohnsman in Los Angeles at aohnsman@bloomberg.net

Nokia Sits Out Smartphone Revolution as Customers Flock to Apple IPhone 4

By Diana ben-Aaron

June 17 (Bloomberg) -- As Apple Inc. struggles to meet demand for the latest version of the iPhone, Nokia Oyj is still waiting to ship its only model that may compete.

The Finnish company has announced just one handset, the N8, from its new high-end line based on revamped Symbian 3 software, while Apple’s recently unveiled iPhone 4 is flying off virtual shelves with 600,000 pre-orders and other vendors are rolling out models with Google Inc.’s Android software.

“The smartphone revolution has started and Nokia is not there,” said Helena Nordman-Knutson, a Stockholm-based analyst at Oehman. The N8 “will be old when it’s out because everybody has taken the next step.”

The world’s largest mobile-phone maker yesterday lowered revenue and margin forecasts, citing competition in the high-end smartphone market and showing that its fortunes in the application-rich iPhone segment may not turn before 2011. Chief Executive Officer Olli-Pekka Kallasvuo has struggled to deliver on a touchscreen model on a par with the Apple device.

Nokia said in April that the N8 will be shipped sometime in the third quarter. It is also slated to introduce a second line of high-end devices running the MeeGo operating system developed with Intel Corp. at an unspecified date this year.

Investors punished Nokia, sending its shares down 9 percent to 7.22 euros in Helsinki yesterday, the lowest level since March 9, 2009. The stock drop put the market value of Nokia at 27 billion euros ($33.3 billion), below the $34.4 billion of rival Research In Motion Ltd. and Apple’s $240 billion.

Margin Forecasts

Nokia yesterday said its second-quarter handset revenue and margins will be “at the lower end of or slightly below” its earlier forecast range of 9 to 12 percent. The Espoo, Finland- based company also cut its outlook for 2010 for the second time this year. The full-year adjusted operating margin in handsets could come in below the 11 to 13 percent range forecast earlier, mainly because of its weakness in high-end smartphones, it said.

Sales in the devices and services division may fall below 6.7 billion euros in the second quarter, Nokia said.

The lowered outlook is “an implicit statement that the Symbian user experience won’t be fixed this year and MeeGo won’t arrive in time to make a difference to 2010 either,” Gartner Inc. analyst Nick Jones said in e-mailed comments.

‘Out of Patience’

The less-than-perfect implementation of the company’s strategy might prompt calls for management changes, he said.

“It’s looking now as if 2010 won’t be the year in which Nokia’s problems get fixed and I suspect investors are running out of patience and will want to hold someone accountable,” he said. “That makes me wonder if the recent reorganization may not be the last of the executive changes we’ll see in 2010.”

The company never comments on speculation, said Nokia spokeswoman Arja Suominen. On May 11, Nokia said it was promoting Anssi Vanjoki, a 20-year company veteran, to head a new smartphone division.

Nokia’s outlook showed that the company’s fortunes are not likely to charge in the immediate future, analysts said.

“What this did is crystallize people’s awareness that the portfolio in the third quarter is not going to be that much better than in the second,” said Stuart Jeffrey, an analyst at Nomura Securities. “So it’s all or nothing in the fourth quarter.”

The company expects the fourth-quarter margin to rise above the average for the year, Chief Financial Officer Timo Ihamuotila said in a teleconference yesterday.

Not About Volumes

“The smartphone unit is in trouble and has been for basically two years now,” said Tero Kuittinen, an analyst at Greenwich, Conn.-based MKM Partners. “The question is whether they can stabilize the situation there and I think they have a shot at doing it in the second half of the year.

Nokia held on to its smartphone market share of 41 percent in the first quarter as it introduced cheaper models and trimmed prices. It expects its share of industry handset revenue to decline this year, after earlier saying it would increase. It still expects unit market share to be flat.

“It’s not about volumes anymore -- the competition is taking place over the money,” Nordman-Knutson said. “Of course you can take market share by redefining the smartphone segment and adding volume through massive price reductions.”

The market share of Symbian, Nokia’s main smartphone operating system, fell to 44.3 percent in the first quarter from 48.8 percent a year ago, according to market researcher Gartner. Although mostly on Nokia phones, Symbian is also used by Samsung Electronics Co. and Sony Ericsson. IPhone’s share rose to 15.4 percent from 10.5 percent, while Android soared to 9.6 percent from 1.6 percent.

Not ‘Fully Baked’

The N8 will enter the market at 370 euros ($443), about a third lower than the 550-euro price tag of the N97, last year’s flagship device. The company has unveiled low-end smartphones phones costing as little as 135 euros this year.

CFO Ihamuotila said that the company is aiming for multiple Symbian 3 products in the second half, not just the N8.

Nokia allowed some handset reviewers to demo the N8 at events in London and Singapore this week. The events were followed by a spate of blog posts on the device.

“Nokia has put together a growling multimedia powerhouse, but the OS is so far from being fully baked; we can still see the dough,” Engadget, a closely followed blog said.

SlashGear, another popular blog, said the device was “decently peppy,” adding that it “isn’t perfect yet.”

“It doesn’t mean Nokia will never come back, but it does say they will not come back in 2010 or not before the fourth quarter,” said Nordman-Knutson. “We can’t expect one single phone to change the world for them.”

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

China Signals End to Yuan&rsquos Peg to Dollar Before G-20 Summit

By Bloomberg News

June 20 (Bloomberg) -- China said it will allow a more flexible yuan, signaling an end to the currency’s two-year-old peg to the dollar a week before a Group of 20 summit.

The decision was made after the world’s third-largest economy improved, the central bank said in a statement on its website yesterday, without indicating a timeframe for the change. It ruled out a one-time revaluation, saying there is no basis for “large-scale appreciation,” and kept the yuan’s 0.5 percent daily trading band unchanged.

“The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability,” the People’s Bank of China said. “It is desirable to proceed further with reform of the renminbi exchange-rate regime and increase the renminbi exchange-rate flexibility.”

The move may help deflect criticism from President Barack Obama and other G-20 leaders, who have blamed China for relying on an undervalued currency to promote exports. It also affirms Treasury Secretary Timothy F. Geithner’s policy of encouraging China to loosen restrictions on the yuan while resisting calls in Congress for trade sanctions. Geithner in April delayed a report to lawmakers assessing whether China or any other country is unfairly manipulating its exchange rate.

‘Very Cautious’

A question-and-answer document published by the central bank on its website today said Chinese companies will have time to adapt to yuan changes and reaffirmed a government policy of “gradualism” in exchange-rate reform. Increased yuan flexibility and “two-way movements” by the currency will aid management of the economy, it said.

Liu Li-Gang, a Hong Kong-based economist at Australia and New Zealand Banking Group Ltd., said today’s statement acknowledges that the yuan will appreciate and suggests daily volatility may increase, while highlighting that the government remains “very cautious” and will control the pace of gains.

“This is another small victory for Tim Geithner,” Goldman Sachs Group Inc. Chief Global Economist Jim O’Neill told Bloomberg Television in St. Petersburg, Russia.

“It makes it a lot more difficult for Washington and Congress to do China bashing,” O’Neill said. “The Chinese are increasingly confident they can make this adjustment to a domestic-driven economy rather than the one relying on exporting low-value-added stuff to the rest of the world.”

Geithner’s Praise

Geithner, in a statement, praised China’s decision and added that “vigorous implementation would make a positive contribution to strong and balanced global growth.” The Obama administration received advance notice of the announcement, U.S. officials said.

China, by moving on its currency ahead of the G-20 meeting June 26-27 in Toronto, has shifted attention to the budget deficits of developed nations, said Eswar Prasad, a senior fellow at the Brookings Institution in Washington.

“It can now argue that the G-20 leaders should focus on the major determinants of global imbalances, especially the buildup of debt in advanced economies,” said Prasad, a former head of the China division at the International Monetary Fund.

Chinese authorities have prevented the currency from strengthening since July 2008 to help exporters cope with sliding demand triggered by the global financial crisis.

The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro and the Japanese yen. The yuan is a denomination of China’s currency, the renminbi.

‘Vote of Confidence’

“This move is a vote of confidence in the global recovery and a reaffirmation of Beijing’s longstanding commitment to a flexible currency regime,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an e-mail. “This shift, however, is not a panacea for an unbalanced global economy. Surplus savers like China still need to take additional actions to stimulate internal private consumption.”

Chinese companies focused on the domestic market, including Beijing-based computer maker Lenovo Group Ltd., said in March that they would gain from lower import costs and stronger consumer purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy,” Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said then.

Freedom to Move

A more flexible currency would give China more freedom to decide on monetary policy and reduce inflationary pressures by lowering import costs, the World Bank said last week. The central bank agreed today, saying benefits could include curbing price gains, asset bubbles and dependence on exports for growth.

China’s inflation rate jumped to a 19-month high of 3.1 percent in May. Central-bank dollar buying has left the nation with $2.4 trillion in currency reserves, the world’s largest holding.

Global stocks may rise on the potential benefits of the policy shift for trading partners including the U.S., David Cohen, an economist at Action Economics in Singapore, said today. Societe Generale SA said yuan-denominated A-shares may advance tomorrow on the likelihood of currency gains boosting Chinese companies’ purchasing power.

BHP Billiton Ltd. and Rio Tinto Group, the world’s largest and third-largest mining companies, may benefit from increased Chinese demand, fund manager Saxon Nicholls, of Herschel Asset Management Ltd. in Melbourne, said today.

‘Crisis’ Policy

“China has ended its crisis-mode exchange-rate policy as the economy recovers strongly and inflationary pressure continues to build,” Li Daokui, an adviser on the People’s Bank of China’s policy board, said in an interview yesterday. “The yuan’s future trend depends on the euro’s movement, and the trends of other major currencies.”

Yuan 12-month forwards rose the most this year two days ago, gaining 0.5 percent to 6.7125 per dollar. The contracts reflect bets the currency will appreciate 1.7 percent from the spot rate of 6.8262. They had been pricing in appreciation of 3.2 percent on April 30 before a slump in the euro and a worsening of Europe’s debt crisis eased pressure for appreciation.

Geithner postponed an April 15 deadline for a semiannual review of the currency policies of major U.S. trading partners, which might have resulted in China being labeled a currency manipulator. China owned $900 billion of U.S. Treasuries as of April, the largest foreign holdings.

Export Rebound

China’s overseas sales jumped 48.5 percent in May from a year earlier, the biggest gain in more than six years. A narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” by the yuan, the central bank said in the English version of yesterday’s statement. The Chinese version said no “large-scale volatility.”

Twelve of 19 respondents surveyed by Bloomberg in April predicted the central bank would allow the currency to float more freely this quarter, while the rest saw a move by year-end. Eleven ruled out a one-time revaluation, while 15 predicted a wider daily trading range.

“Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies,” yesterday’s statement said. That suggests a looser link to the dollar, said Ben Simpfendorfer, chief China economist at Royal Bank of Scotland Group Plc, in Hong Kong.

To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net.

Yuan Policy Move May Boost China&rsquos Stocks, CICC, SocGen Say

By Bloomberg News

June 20 (Bloomberg) -- China’s pledge to make the yuan more flexible may boost shares denominated in the currency when markets open tomorrow, China International Capital Corp. and Societe Generale SA said.

“If it leads to appreciation for the yuan, it’s good news for the market,” Hao Hong, global equity strategist for CICC in Beijing, said in a report today. “Investors will want to get into Chinese assets because they will be worth more. It will also deflect political criticism and help stem inflation.”

The People’s Bank of China said yesterday that it will “increase the renminbi’s exchange-rate flexibility” after the economy improved. Officials have kept the yuan, also known as the renminbi, at about 6.83 per dollar since July 2008, aiding the nation’s exporters and fueling tensions with trade partners.

A stronger yuan would aid Chinese companies by boosting their purchasing power, while the likelihood of the currency appreciating is an incentive for foreign investors to buy yuan- denominated stock, Glenn Maguire, a Hong Kong-based economist for the French bank, said in a phone interview today.

“It’s probably going to be a positive for the A-share market,” Maguire said. “It makes A-share valuations look more attractive,” he said, declining to estimate how much shares may gain. The local-currency A-shares rose in 2005 when China revalued its currency, he added.

The Shanghai Composite Index has tumbled 23 percent this year as the government pares stimulus measures and Europe’s sovereign-debt crisis adds to the risk of a renewed global slump. In 2005, the benchmark, which covers both A shares and foreign- currency B shares, rose 2.5 percent on July 22, the day after the government revalued the currency.

China Petroleum & Chemical Corp., Asia’s largest refiner, said today that it would benefit from yuan gains.

‘Obvious’ Result

“Almost all of our sales are on the domestic Chinese market and we purchase a great deal of raw oil for processing from overseas,” spokesman Huang Wensheng said by phone. “If the ability of domestic consumers to take on higher costs increases and the cost of our overseas purchases decreases, then the result for us is an obvious one.”

CICC’s Hao expects airlines and paper producers to benefit most from possible yuan appreciation, saying it will reduce the cost of raw materials such as fuel oil and pulp. CICC was the top-ranked brokerage for China research in the annual survey by Asiamoney magazine.

Shares of raw-material importers such as Sinopec, and companies with dollar-denominated debt, such as China Southern Airlines Co., gained in trading after the revaluation in 2005.

The situation this year isn’t entirely the same. The central bank’s announcement yesterday that it will scrap an effective peg to the dollar didn’t include a one-off gain for the currency. In 2005, the yuan immediately rose 2.1 percent as part of a policy shift.

The latest policy shift may support the currencies of Taiwan, South Korea and Australia, economies closely linked to China, over the rest of this year, Maguire said. A stronger currency because of “gradual” appreciation will boost the country’s purchasing power, he said.

--Paul Panckhurst, Allen Wan. Editors: John Liu, Allen Wan

To contact Bloomberg News staff for this story: Paul Panckhurst at +86-10-6649-7574 or ppanckhurst@bloomberg.net

Medvedev Shows Off Sample Coin of New &lsquoWorld Currency&rsquo at G-8

By Lyubov Pronina

July 10 (Bloomberg) -- Russian President Dmitry Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a “united future world currency.”

“Here it is,” Medvedev told reporters today in L’Aquila, Italy, after a summit of the Group of Eight nations. “You can see it and touch it.”

The coin, which bears the words “unity in diversity,” was minted in Belgium and presented to the heads of G-8 delegations, Medvedev said.

The question of a supranational currency “concerns everyone now, even the mints,” Medvedev said. The test coin “means they’re getting ready. I think it’s a good sign that we understand how interdependent we are.”

Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the U.S. dollar’s future as a global reserve currency. Russia’s proposals for the G-20 meeting in London in April included the creation of a supranational currency.

To contact the reporter on this story: Lyubov Pronina in L’Aquila, Italy at lpronina@bloomberg.net

Yuan Gain Limited to 1.9% This Year on Euro Drop, Survey Shows

By Bloomberg News

June 20 (Bloomberg) -- The yuan’s appreciation may be limited to 1.9 percent against the dollar this year as the euro’s slump hurts exporters, a survey of economists showed after China signaled an end to a two-year peg.

The currency will probably climb to 6.7 per dollar by Dec. 31, according to the median estimate of 14 analysts interviewed after the People’s Bank of China said yesterday it will allow greater “flexibility.” The central bank ruled out “large- scale appreciation” and said it will prevent “excessive” moves.

Gains may be limited because the yuan already strengthened 16.5 percent against the euro this year, eroding earnings for Chinese exporters in the European Union, the nation’s largest market. U.S. Senator Charles Schumer said lawmakers will push ahead with proposals for trade sanctions until they are convinced the advance is fast enough to allow fair competition.

“The yuan’s appreciation against the dollar may be limited over the next six months after the Chinese currency gained significantly against the euro,” said Ma Jun, a Hong Kong-based economist for Deutsche Bank AG, who predicts a gain of 1.9 percent. U.S. politicians can only “declare this a partial victory,” he added.

The outlook for appreciation in the survey is stronger than that indicated by forwards. The six-month non-deliverable contract jumped 0.5 percent on June 18 to 6.7596 per dollar, reflecting bets the yuan will rise 1 percent from the spot rate of 6.8262.

Day One

Chinese authorities have prevented the currency from strengthening against the dollar since July 2008 to help exporters cope during the global financial crisis. The currency appreciated 21 percent in the three years after a peg to the dollar was scrapped in July 2005 and replaced by a managed float against a basket of currencies including the euro.

The yuan may advance 0.2 percent to 6.815 tomorrow and 0.4 percent this week, according to the median estimate of six analysts who gave forecasts. The central bank sets the reference rate for yuan trading at around 9:15 a.m. every day and allows the currency to fluctuate up to 0.5 percent from the fixing.

“The PBOC will probably keep the reference rate stable on Monday,” said Lu Zhengwei, an economist at Industrial Bank Co. in Shanghai, who predicts a 0.1 percent gain this year. “It needs to watch the market’s responses to the flexibility statement. Market participants won’t make bold moves either. They are waiting for more signals from the PBOC.”

The central bank, which has accumulated $2.4 trillion in currency reserves intervening in currency markets, said it will maintain the trading band and curb inflows of short-term speculative capital.

Depreciation Possible

Authorities will “ensure the exchange rate’s fluctuation is controllable and prevent the possibility of market forces causing excessive adjustment in the rate,” the central bank said in a statement today.

“We can’t exclude the possibility of yuan depreciation,” said Shen Jianguang, Mizuho Securities Asia Ltd.’s chief economist for Greater China, who said a 2.5 percent drop is possible this year if the dollar-euro rate is unchanged. Even so, he added, China needs to show flexibility in its currency before the Group of 20 summit in Toronto on June 26-27.

Textiles makers stand to lose the most from appreciation and some would “face bankruptcy” with profit margins as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March. Europe’s debt crisis has added to pressure on their earnings. Swift Umbrella Co., based in the southern Chinese province of Fujian, was forced by European buyers to cut prices 6 percent this year, Xu Youchuan, sales manager, said in a June 2 interview.

Balance of Payments

China’s narrowing balance-of-payments gap indicates that there’s no basis for “large-scale appreciation” in the yuan, the central bank said yesterday. The current-account surplus, for trade in goods and services, narrowed 32 percent to $297.1 billion in 2009, government data show.

Exports have been rebounding, exceeding imports by $19.5 billion in May, from a $1.68 billion surplus in April and a deficit of $7.24 billion in March. Overseas sales jumped 48.5 percent in May from a year earlier, customs bureau data show.

Benefits From Gains

The World Bank said last week that a stronger currency would help China cool inflation, which accelerated to a 19-month high of 3.1 percent in May, higher than the government’s full- year target of 3 percent. Yuan gains would also give more room for Asian currencies to strengthen after the euro’s record depreciation prompted exporters from Taiwan to South Korea to call for currency controls to protect their earnings.

Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said in March that they would gain from lower import costs and stronger consumer purchasing power.

“A 3 percent gain against the dollar won’t have any major impact on exports this year,” said Chen Chao, ICBC Credit Suisse Asset Management Co.’s chief economist. “Whether the yuan will rise or fall against the dollar will depend on the dollar’s movement against other currencies.”

--Judy Chen, Belinda Cao, Bob Chen, Frances Yoon, Yanping Li. Editors: Sandy Hendry, Paul Panckhurst

To contact the reporters on this story: Judy Chen in Shanghai at Xchen45@bloomberg.net.

Home Sales Probably Waned After Credit U.S. Economy Preview

By Shobhana Chandra

“There are certainly a lot of risks the Fed is mindful of, and they’re very much in a wait-and-see mode,” said Stanley. Central bankers begin their two-day policy meeting on June 22.

Fewer Orders

Aircraft Orders

Orders excluding transportation increased 1 percent, the third gain in the past four months, the Commerce Department’s June 24 report on durable goods is also projected to show.

Growing Economy

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

From Fluor to Booms to Costner, BP Cleanup Means Some Clean Up

By Mark Drajem and Katarzyna Klimasinska

June 18 (Bloomberg) -- Michigan’s depressed economy nearly toppled Grand Rapids-based awning maker Prestige Products. In April, the company’s fortunes changed when executive Brian Rickel got a phone call from an old contact at BP Plc.

It was 10 days after the BP-leased Deepwater Horizon rig had exploded, and the company needed help containing the gush of oil. Six weeks later, Prestige has rented a factory, filled it with millions of dollars of new equipment, and hired 74 workers, up from six in April. Using material similar to the vinyl in awnings, Prestige is churning out 12,000 feet a day of booms, the floating barriers that help contain oil slicks. Prestige hopes to double its output, if it can hire 50 additional workers.

“We’re in Michigan,” Rickel said in an interview. “The economy has been horrible for everybody here. But the expertise is here and we cashed in on it.”

The spill in the Gulf of Mexico will inflict billions of dollars’ worth of damage on the economies of Louisiana, Alabama, Mississippi and Florida by destroying fisheries, halting oil drilling, and scaring off tourists. But for scores of businesses -- from small fry like Prestige to construction giant Fluor Corp. -- there’s money to be made in the aftermath of the worst oil spill in U.S. history, Bloomberg Businessweek reports in its June 21 issue.

Help Wanted Signs

It’s a dichotomy present across the Gulf region. A sign on a shuttered seafood shop in Grand Isle, Louisiana, blames BP and President Barack Obama for its woes. Nearby motels and repair shops display Help Wanted signs for maids and mechanics to help with the crush of cleanup activity. Local caterers are aggressively advertising, trying to persuade BP to hire them to feed spill-response workers gathering on the coast.

Rene Vegas, owner of Bridge Side Cabins & Marina, also in Grand Isle, says his summer sport fishing season is lost due to the fast-expanding oil slick. So, like many area businesses, he’s shifting his focus. Vegas has begun stocking rubber boots, hard hats and ropes to sell to cleanup crews.

Troy Petrovich, co-owner of T+T Boat Rentals in Buras, Louisiana, has seen demand for his marine-related services spike. Before the spill, “I kept calling, putting out more phone calls” in search of oil-company customers, Petrovich said. “Now my phone is ringing pretty steady; everybody is looking for boats.” T+T has rented out all 10 of its boats to oil companies and raised the daily rate to $450 from $325.

‘Mop Up Oil’

Plenty of other companies aren’t waiting for business to come to them. Shortly after the spill began, MOP Environmental Solutions Inc., a Bath, New Hampshire-based maker of a substance it claims absorbs up to 30 times its weight in oil, sent four employees to the Gulf to conduct demonstrations for cleanup officials.

The MOP workers came armed with fish tanks, oil and the absorbing material in the trunks of their cars. Some of the company’s shareholders hired a local pilot to fly around the region with a banner reading, “We mop up oil.” After weeks of being pestered, BP purchased its first three truckloads of the oil-absorbent material for $155,000, MOP President Charles Diamond said.

The company didn’t have to wait as long to get a full hearing as actor Kevin Costner. Costner’s company, Ocean Therapy Solutions Inc., uses barge-based turbines to separate water from oil. He first demonstrated the centrifuges to BP officials at a technology conference 10 years ago, but wasn’t given the go- ahead to test the gear in open water until earlier this month. Now Ocean Therapy says it has sold 32 of the centrifuges to BP.

Corexit, Skimmers

Another beneficiary of the cleanup is Nalco Holding Co. More than one million gallons of Nalco’s chemical dispersant Corexit, which breaks up oil slicks, have been used in the Gulf. The company sold $40 million of Corexit to BP through the week of May 15, according to spokesman Charlie Pajor.

Some faraway businesses are profiting from producing or deploying equipment to get rid of the oil residue. The Slickbar Products division of Finland’s Lamor Corp. sent employees to Mississippi to help install its skimmers, which collect oil from the water, onto shrimp boats. Its oil-boom plant in Seymour, Connecticut, is operating at a pace not seen since the Exxon Valdez spill in 1989. Slickbar has made more booms in the past month than it had in the previous 12 months, Chief Executive Officer Stephen Reilly said.

There’s activity on land as well. Irving, Texas-based Fluor has a contract to supply BP with workers to clean up tar on Alabama and Florida beaches. So far it has hired 1,200 workers in Alabama and 2,400 in Florida, all of them off unemployment rolls in those states, said spokesman Brian Mershon. Fluor plans to increase its Florida workforce to 4,100.

Birds, Shipwrecks

The Shaw Group Inc., a Baton Rouge-based power-plant builder that has a $360 million contract to construct barrier islands along the Gulf Coast, is hiring staffers to count birds on nearby islands and map shipwrecks.

The cleanup rush isn’t generating just blue-collar work. The Pensacola, Florida, law firm of Levin Papantonio Thomas Mitchell Echsner Rafferty & Proctor has hired an airplane to fly a banner over beaches reading “Prosecute BP” and is offering free claims evaluations.

“There are probably hundreds of lawyers who are working to generate claims on the BP spill,” said Fredric Levin, a partner in the firm.

Washington’s K Street lobbying crowd also stands to benefit as federal regulators crack down on drillers. Transocean Ltd., owner of the Deepwater Horizon rig, has hired former Oklahoma congressman Bill Brewster’s firm, Capitol Hill Consulting Group, to represent its interests, according to a regulatory filing on May 10.

BP Employees

Litigation or legislative changes may generate years of billings. For now, businesses in the affected area are taking advantage of the spill work while they can. Marina owner Vegas says he has as many as 60 BP employees and contractors staying at his marina, which normally caters to sport fishermen and beachgoing families.

“The motel is booked, the motel is doing fine,” he said. “But when they leave in January or December, we’re in trouble.”

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net Katarzyna Klimasinska in Houston at kklimasinska@bloomberg.net

Macarthur Coal Founder Talbot, Sundance Resources CEO Missing in Cameroon

By Elisabeth Behrmann

“Between them, without exaggeration, there are two centuries of mining experience,” said Gavin Wendt, an analyst at Sydney-based Mine Life Resources, by phone.

“The families of the missing have been notified and are being supported during this deeply distressing time,” the company’s statement said.

Well Known

Talbot Group spokesman Shane Edwards and Sundance spokeswoman Felicity Nuttal declined to comment further.

Sundance shares rose 4 percent on June 18 to 13 cents, giving it a market capitalization of A$352.3 million.

To contact the reporter on this story: Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

Santos Seeks Landslide Win in Colombia as World Cup Keeps Voters at Home

By Helen Murphy

Colombia’s peso and dollar bonds rose for a fourth straight week on speculation Santos would prevail.

Latest Poll

Italy, Brazil and Paraguay all play matches while polls are open between 8 a.m. and 4 p.m. local time.

‘Biggest Goal’

“Let’s lose a few minutes of World Cup football,” said Santos, 58, during a campaign rally in Cartagena June 12. “Let’s score the biggest goal for Colombia.”

Christopher Sabatini, policy director for the Council of the Americas in New York, said the true winner is Colombia’s democracy even though the “lopsided” result will favor Santos.

Campaign Pledges

To contact the reporter on this story: Helen Murphy in Bogota at hmurphy1@bloomberg.net

Celebrity Adviser Ken Starr Name-Dropped Peterson, Mellons in Alleged Scam

By John Helyar and David Glovin

June 18 (Bloomberg) -- Kenneth I. Starr knew how to cultivate relationships with powerful people, and he did it in the most transparent way -- by serial name-dropping.

Dining with Starr in the Grill Room at the Four Seasons in New York meant listening to him reel off bold-face names as fast as he guzzled Diet Cokes, according to one occasional lunch companion who asked not to be identified.

Certain people would come up again and again in his boasts, according to a story in the June 21 issue of Bloomberg Businessweek. Starr would say he had lunch with Peter Peterson, co-founder of the private-equity firm Blackstone Group LP, or that he and “Pete” were talking at the Council on Foreign Relations, long chaired by Peterson, or that he had done something with “Pete,” according to the companion.

Starr managed money for a living, and his relationship with Peterson was one of his key assets. Rachel “Bunny” Mellon, the 99-year-old widow of the bank heir and philanthropist Paul Mellon was a longstanding client, according to Alex Forger, Mellon’s lawyer. It was his connection to the Mellons that started Starr on his path to wooing the rich, according to people who knew Starr and who asked not to be identified.

Starr’s career famously came to an end last month when government agents arrived at his home on Manhattan’s Upper East Side and found him hiding in a closet, prosecutors in Manhattan said on the night of his arrest. His $7.5 million condominium, which he shared with his fourth wife, Diane Passage, a pole dancer, featured floor-to-ceiling windows, a granite lap pool, and a 1,500-square-foot garden, financed with what prosecutors said was plundered cash, according to a criminal complaint.

‘Secret’ Interest

Days after his arrest, a grand jury indicted Starr for cheating 11 clients -- Jim Wiatt, the former head of the William Morris Agency, and actress Uma Thurman among them -- out of $59 million.

Starr pocketed half that amount, while the other half was placed in investments in which he or his friends had a secret interest, prosecutors said. Starr has denied wrongdoing and is being held at the Metropolitan Correctional Center in lower Manhattan. The Securities and Exchange Commission brought its own civil fraud lawsuit against Starr and Passage, seeking the return of tens of millions of dollars.

The two haven’t yet responded to the SEC suit. A judge last week extended the freeze on the couple’s assets at a hearing attended by Passage, who looked uncharacteristically demure in a pink cardigan and a black skirt. She declined all reporters’ questions except for one from Bloomberg Businessweek, about her age.

“Thirty-four,” she said. “You can take a couple of years off that if you want to.”

Elite Crowd

The disintegration of Starr & Co., which once managed more than $700 million for about 175 wealthy individuals, exposes an uncomfortable truth about the elite crowd he preyed on -- that wealthy, sophisticated people could be such easy marks for fraud. While the numbers involved aren’t on the scale of Bernie Madoff’s Ponzi scheme, Starr shared Madoff’s ability to create an aura of exclusivity around himself that appealed to the elite.

His allure was augmented by Starr’s attendance at invitation-only business gatherings, such as Allen & Co. President Herbert Allen’s annual media conference in Sun Valley, Idaho.

Still, there is no special trick to Starr’s alleged con game that one can glean from his indictment or the SEC complaint. So how is it so many people so willingly allowed their pockets to be picked?

The Herd

“Everyone follows the herd,” said Ken Springer, a former Federal Bureau of Investigation agent and founder of New York- based investigative firm Corporate Resolutions. “Everyone says this guy is the best, and no one vets the people.”

Starr & Co. rose by buzz and fell by buzz. A court- appointed receiver has reported that only 30 to 40 clients remained with the firm, after scores of others left amid repeated incidents of unauthorized client wire transfers and money-losing investments.

Individuals once affiliated with Starr have typically gone mum -- Peterson declined to comment on either his relationship with Starr or the accusations against him -- or distanced themselves from him. Millennium Technology Ventures, a venture- capital firm that grew out of one co-founded by Starr and Peterson, addressed the issue in a June 4 letter to investors.

‘Not Involved’

“He has not been involved in investment decisions for the fund and has not been actively involved in any operational or strategic decision-making capacity with the fund for many years now,” wrote Daniel Burstein, one of Millennium’s two managing partners who were once with Blackstone. In addition, he wrote, “Mr. Starr has been removed from his role as a member of the Special Advisory Board.”

Peterson remains a special advisory partner with Millennium, according to the firm’s website. Burstein declined to comment for this story.

Starr’s connections to Blackstone go back to the early 1990s, when the firm was considerably smaller than it is now. Blackstone received $90 million from clients of Starr & Co., according to a lawsuit filed in 2009 by the estate of former Starr client Joan Stanton.

Actor Wesley Snipes, for instance, put $1 million into Blackstone, according to testimony in the actor’s 2008 tax- evasion trial. Injecting himself as a middleman, Starr charged clients for placing their money with the firm and pooled their investments in partnerships he controlled, prosecutors said. The Stanton complaint doesn’t claim that Blackstone was aware of Starr’s motives.

‘Excessive’ Fees

The Stanton estate’s suit decried “excessive fees,” which came on top of Starr’s regular ones. His annual charges rose from $120,000 in the years after he began working with Stanton in 1987 to $240,000 in 2004. The suit also accused Starr of using the partnerships to prevent Stanton from having direct communication with Blackstone.

Stanton committed $5.1 million to a fund called Blackstone Domestic Capital Partners II, a Blackstone entity, her estate alleged. Her money didn’t go straight to Blackstone Domestic, according to the lawsuit. Stanton’s money was instead put with that of other Starr clients in a $12.4 million pool he formed called Blackstone Investors Partnership, which wasn’t affiliated with the Peterson Blackstone, according to the complaint.

Stanton’s Blackstone Domestic returns were supposed to go to a trust whose assets would be distributed tax-free to heirs. Those Blackstone returns went to purposes unknown, according to the Stanton estate’s complaint.

Venture Firm

By 1997, Starr and Peterson had grown close enough to create and co-invest in a tech venture firm called P.S. Capital, according to filings and a person familiar with the enterprise. The vehicle’s chief financial officer and general counsel was Ronald Starr, a son from Ken Starr’s first marriage, and it created two investment funds totaling $13 million, according to this person.

As Internet fever spiked around the year 2000, P.S. Capital morphed into the more ambitious Millennium Technology Venture Fund, which, according to press releases, raised $160 million of investor capital, yielded more than two dozen technology startups, and included “special limited advisory partners” Peterson and Starr.

Dan Burstein, who previously had been a senior adviser to Blackstone and chief investment officer of P.S. Capital, became a managing partner of Millennium, as did Richard Kimball, then Peterson’s son-in-law.

Settled Suit

The firm’s location in the same office building as Starr & Co. enabled Starr to be active in the firm. He was “actively involved in managing personnel matters,” according to a former Millennium secretary named Mystery Masiello, who filed a discrimination lawsuit against the company in 2003. She alleged that when she told the firm’s leaders she was pregnant in July 2001, Starr said, “Oh great, now Dan is going to have to get a new assistant,” referring to Burstein. The case was settled on undisclosed terms in 2003.

The Millennium fund, launched just before the Internet bubble burst, proved to be a dud. Its few successes -- such as the Internet security company Phobos, which was sold to SonicWALL in 2000 -- were overshadowed by big losses. About half of the original $160 million has been returned to investors, according to a person familiar with its finances who asked not to be identified. Millennium is in the process of being wound down, according to the June 4 letter to investors.

‘Land Rush’

“They were caught up in the Oklahoma land rush” along with many other Internet investors, says Neil Livingstone, former chief executive officer of GlobalOptions Group Inc., a security company. GlobalOptions, which he said was the Millennium Fund’s only non-tech investment and its top- performing portfolio company after the bubble burst, went public in 2005. It owed much of its success to business it received directly from Millennium during the post-bubble malaise.

“We shut down a lot of their Silicon Valley companies,” said Livingstone, who is now CEO of Washington security firm ExecutiveAction. The firm was an early example of Starr’s growing propensity to invest client funds “in questionable and suspicious investments, often with a direct benefit to himself, his wife,” or friends, prosecutors said last month in Starr’s criminal complaint.

Starr also put his clients’ money straight into GlobalOptions stock. In a February 2008 SEC filing by GlobalOptions, Thurman and playwright Neil Simon together were listed as owning almost as many shares as the company’s CEO, Harvey Schiller.

New Incarnation

In 2004, Millennium was reinvented by Burstein as Millennium Technology Value Partners, a provider of liquidity for distressed tech companies in exchange for equity stakes. In its new incarnation it has had some success, investing in companies that were later bought by Amazon.com Inc., Microsoft Corp. and AT&T Inc., and in April it closed a new $280 million fund to new investors, according to Millennium’s press releases.

Starr was listed on the Millennium website as a “special limited advisory partner” until February 2008. He effectively ceased involvement when Burstein changed the concept, according to people familiar with the firm.

Starr met Bunny Mellon when he was a young certified public accountant with Manhattan-based Oppenheim, Appel, Dixon & Co. The Bronx-born graduate of Queens College and Brooklyn Law School loved the idea of handling taxes for one of America’s richest families, according to a person familiar with the situation.

Modest Dress

He absorbed his clients’ methods and desires, though he dressed inexpensively himself. He was following the advice of Paul Mellon, according to Livingstone, who recalls Starr invoking this line from the philanthropist: “If you have a bigger yacht than your clients, they won’t trust you.” The Mellons led Starr to another big-fish Oppenheim client, Arthur Stanton, who made his fortune as the first U.S. distributor of Volkswagen Beetles.

Stanton and his wife, Joan, lived at one of Manhattan’s finest addresses, 10 Gracie Square, according to a published report of her apartment’s sale in February. The Stantons’ apartment served as a salon to many of the city’s elite. Joan Stanton was an actress who had played Lois Lane in The Adventures of Superman radio show, and their home was often filled with performing artists, according to a person familiar with the matter.

When their daughter turned 21, Leonard Bernstein led the singing of Happy Birthday, the daughter, Jane Stanton Hitchcock, once recounted in an interview. Arthur Stanton introduced Starr to his social circle and endorsed his accounting. Film director Mike Nichols and stage director Hal Prince became Starr clients. Arthur Stanton died in 1987, leaving $60 million to his widow, and Starr pitched himself to manage it for her, according to a person familiar with the matter.

‘Predator’

The lawsuit brought against Starr by Joan Stanton’s estate 22 years later, soon after her own passing at age 94 in May 2009, portrayed him as a predator who defrauded her of “tens of millions of dollars.” “Mrs. Stanton’s lack of financial acumen was known to Mr. Starr,” according to the complaint. “Mr. Starr began to cultivate Mrs. Stanton as a client who would come to rely on his services exclusively.”

Starr left Oppenheim in 1987 to start his own firm, he said in testimony at the 2008 tax-evasion trial of client Wesley Snipes. Skills honed on the Mellons and Stantons served him well in building a larger clientele, according to a person who has known him professionally for years. The person describes Starr as a master of ingratiating himself with people. He wasn’t suave; he wasn’t a Madoff in appearance and charm; he was rather abrupt.

Detailed Investments

So what was the appeal? This person describes Starr as very bright and says he came across as sincere. He could sit down with a piece of paper and map out detailed investments.

Starr’s reputation took its first public beating in 2002 when his client Sylvester Stallone sued him for keeping him invested in Planet Hollywood from 1997 to 2001, as the restaurant chain spiraled toward bankruptcy and the value of his 4 million shares withered. The actor accused Starr of putting his friendship with Keith Barish, a founder of Planet Hollywood, ahead of his fiduciary duty to clients, and sought at least $10 million in damages.

The litigation, settled on undisclosed terms in 2003, was an example of what prosecutors later said was Starr’s habit of making decisions without his clients’ approval. In 2006, Starr formed Starr Investment Advisors; regulatory filings indicate he had 26 to 100 clients and 11 to 50 employees.

Two Funds

Starr placed $6.5 million of Bunny Mellon’s fortune into two investment funds from 2005 to 2007 without informing his longtime client that they were “highly speculative and risky,” according to prosecutors. He also failed to “disclose certain conflicts of interest,” according to indictment against Starr. Barish didn’t return a call seeking comment.

Only in August 2009, when investigators asked Mellon’s attorney about these illiquid investments, did her representative become aware of the funds. Starr returned $4.3 million to Mellon that month, according to the indictment.

Starr’s behavior outside the office also turned erratic after taking up with Passage in 2005. He began to forsake his own counsel about modest appearances, spending more than $400,000 on jewelry from Jacob & Co., aka Jacob the Jeweler, during the span of several months in 2006, according to the criminal complaint.

Pole Dancer

In May 2007, he divorced Marisa Starr. He did so by filing court documents without her knowledge that claimed she agreed to end 16 years of marriage, according to her 2009 lawsuit. Starr’s fourth wife was a flashy, jarring presence in Manhattan society -- tattooed, provocatively dressed and a pole dancer. She put on a Poledance Superstar competition in New York in October 2009 to raise money for a charity she started called S.P.I.N. (Single Parents In Need), according to a website promoting the event.

Starr was proud of her, too, showing iPhone pictures of her gyrating on a pole to fellow attendees at a Tribeca Film Festival function in 2008, according to people who were there.

In early 2008, Starr recruited Jacob the Jeweler, whose real name is Jacob Arabo, as an investment client. His money was invested in “sure deals” that included Glassnote Entertainment Group, which gave Passage a $150,000-a-year job, and Martin Bregman Productions, a movie venture involving Marty Bregman, a Starr client and a veteran producer of films such as Scarface, according to the criminal complaint.

Prosecutors said Passage wanted to make the film version of “The Desert Rose,” Larry McMurtry’s novel about an aging Las Vegas showgirl. The two doomed ventures represented $2.7 million of the $13 million of which Arabo was defrauded by Starr, according to the complaint.

Strange Behavior

The same network that made Starr rich quickly undid him, as stories of losses and strange behavior spread. Clients left the firm, including Mike Nichols and his broadcaster wife, Diane Sawyer, according to a person familiar with the matter.

Four months after Stanton’s death, her estate sued Starr for “gross abuse of trust and confidence” over 20 years. The Stanton complaint, combined with some individual complaints, spurred the Manhattan District Attorney’s office and the SEC to start asking questions.

Starr settled with the Stanton estate for an undisclosed sum in January, according to a person familiar with the situation. He also reached a $4 million settlement that month with an unidentified playwright and screenwriter who complained of being fraudulently induced to invest in a failed restaurant chain, according to the indictment.

Top Clients

Starr raided other clients’ accounts to make the payment, prosecutors said. In another winter development, a veteran account manager for Starr named Arnold Herrmann left for rival firm Citrin Cooperman & Co. and took some of his top clients, according to a Feb. 11 Citrin Cooperman press release. One of the clients was Barbara Walters, according to a person familiar with the matter.

As his firm disintegrated, Starr tried to maintain appearances. In February he borrowed $2.6 million from Los- Angeles-based City National Bank, according to a lawsuit filed by the bank on June 16, two weeks after Starr missed a $9,385 interest payment. At a March 10 meeting with federal investigators, he said his firm had 200 clients. While that would have almost been true at its peak, the list had dwindled to less than a quarter of that by the time of his arrest, according to the criminal complaints and a document filed in court by the Starr & Co. receiver, Aurora Cassirer.

Final Straw

In April, prosecutors said, Starr bought the $7.5 million condominium. This proved to be the final straw. On May 25, the lawyer for Bunny Mellon, Starr’s first big client and one of his last, was looking through her financial statements. He saw a series of mid-April wire-transfers out of her Starr & Co. account, totaling $5.75 million, according to prosecutors. Starr had allegedly raided the account to close on his condominium. The lawyer called the authorities. Two days later, federal agents were removing him from the closet.

The civil case is SEC v. Starr, 1:10-cv-04270, and the criminal case is U.S. v. Starr, 1:10-mj-01135, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: John Helyar in Atlanta at jhelyar@bloomberg.net; David Glovin in New York federal court at dglovin@bloomberg.net.

Yuan Unshackled May Strengthen China's Shift to Domestic Demand for Growth

By Bloomberg News

The Chinese central bank made its announcement at 7 p.m. Beijing time on June 19 in a posting on its website, a week before leaders from the Group of 20 meet in Toronto.

Economic Restructuring

Goldman’s Bet

Consumer prices rose 3.1 percent in May from a year before, exceeding the government’s 3 percent target average for 2010.

Paper Profits

Lesson From Crisis

Government’s Task

Internal Regions

Chinese Central Bank's Question-And-Answer Statement on Yuan Translation

By Bloomberg News

June 20 (Bloomberg) -- The following is a translation of portions of the question-and-answer-style statement on yuan exchange rate reform issued by the People’s Bank of China today.

Is further yuan reform in China’s interests?

The decision to proceed further with yuan reform and an improved managed-float exchange rate regime is based on China’s conditions and development strategy. It is in line with reform in the direction of a market-economy system, and with “scientific” development. It is in China’s long-term and core interest, as it can further integrate the country into the global market.

First, it will aid China’s efforts on structural adjustment and sustainable development. A floating exchange rate enables flexible adjustments of relative price levels at home and abroad. This will help direct investment toward domestic-demand sectors including services, promote industry upgrades, adjust the economic development model and reduce trade imbalances and the economy’s overreliance on exports.

Second, it will also help curb inflation and asset bubbles and strengthen the effectiveness of macroeconomic controls.

Third, it will help maintain strategic opportunities for China. China is a beneficiary of globalization, so proceeding with yuan reform will aid the government’s goals of pursuing mutual benefit, long-term cooperation and common development with other countries. It will also help maintain strategic opportunities and an international trade environment favorable to China.

How to minimize the negative impact of exchange-rate reform?

To further reform the renminbi exchange-rate regime, we need to minimize the possible negative impact.

First, we need to ensure yuan fluctuations are controllable and prevent the possibility of market forces causing excessive adjustment of the renminbi exchange rate. The balance of payments account is moving closer to equilibrium and increases in the costs of domestic labor, resources and land are adding to the price of our nation’s exports. The current yuan rate is not too far from equilibrium, so there is no basis for substantial fluctuation.

Second, we have to ensure orderly yuan-rate movements reflecting China’s economic fundamentals and macroeconomic policy needs. A floating exchange rate will help improve the balance of payments, but isn’t targeting bilateral trade imbalances with particular countries.

Third, adjustments to yuan policy need to reflect the principle of gradualism. There will be time for companies to restructure and digest the effects of a floating exchange rate and for industries to relocate and upgrade, keeping Chinese companies generally competitive in the global market and guiding employment toward the service sector.

Fourth, we will strengthen monitoring and management of short-term speculative capital, preventing large-scale hot-money flows from shocking China’s financial system.

Is this good time for further yuan reform?

It is a good time for further yuan reform.

First, the recovery and upturn of the Chinese economy has become more solid with enhanced economic stability, making this a good moment for yuan reform.

Second, China is accelerating efforts to adjust its economic structure and growth model, and the global financial crisis has made this task even more important and pressing. The reform of the exchange rate mechanism will help promote economic restructuring and improve the quality and efficiency of growth.

Third, strengthening yuan flexibility and allowing two-way movement of the currency are also needed to improve the pro- activeness and effectiveness of China’s macroeconomic policies dealing with different external shocks.

Why does the yuan rate have to refer to a basket of currencies rather than a single currency -- the dollar?

As China becomes more open to the rest of the world, its trading partners are becoming more diversified. The trading volume with the top five trading partners -- the EU, U.S., ASEAN, Japan and Hong Kong -- account for 16.3%, 12.9%, 10.1%, 9.4% and 7.5% of China’s total imports and exports respectively for the first five months this year.

A yuan peg to a single currency can’t meet the need to diversify currencies used for trade and investment, and also can’t reflect the real exchange-rate level. A currency basket can reflect the real exchange-rate level more accurately. Therefore we must adjust the exchange rate based on market supply and demand, and move the yuan with reference to a basket of currencies.

For companies and households in such a diversified trading and investment environment, it isn’t proper to value the yuan just based on the U.S. dollar. More attention should be paid to multilateral exchange rates, rather the bilateral rates, and to the yuan exchange rate change against the currency basket.

Will any substantial fluctuation occur to yuan?

Large fluctuation in the value of the yuan isn’t in China’s interest, because it will have a relatively big effect on the nation’s economic and financial stability. Keeping the yuan basically stable at a reasonable level is an important part of further reforming the currency’s exchange rate.

There is no basis at present for large changes in the yuan’s exchange rate. China’s external trade is steadily becoming more balanced. The ratio of current-account surplus to GDP has been declining continuously since 2009, and the balance- of-payment account is moving closer to equilibrium.

The People’s Bank of China will keep the exchange rate floating bands the same as previously announced in the interbank foreign-exchange market and manage and adjust exchange rates dynamically.

China will steadily push forward other reforms to create a sound policy environment for the stability of the renminbi exchange rate.

What are the effects on companies and employment of yuan movement?

Under the modern international currency system, most major currencies have adopted floating exchange-rate regimes, so exporters can’t avoid exchange rate fluctuations.

Since the start of China’s economic reform and opening-up policies, the market economy has developed to a relatively high level, and many companies have had the capability and flexibility to adapt and cope with market changes.

Based on the actual situation between 2005 and 2008 before the global financial crisis worsened, China’s exports grew 23.4 percent annually. Industries sensitive to exchange rates, such as textiles and light industry, maintained growth and hadn’t seen significant losses or business closures. Generally speaking, exchange rate movements have provided motivation and pressure for industries to upgrade and for the market to open wider.

The global economy is gradually recovering and the upturn in the Chinese economy has become more solid, creating a favorable environment for smooth yuan reform and minimizing the negative effects. In future, the government will create further favorable conditions to help companies restructure and the banking industry will improve financial services to provide powerful support to businesses and help companies manage exchange-rate risks.

Further exchange-rate reform will also help create more jobs, especially jobs in the service sector. Exchange rate movement will prompt exporters to move from simple processing to more detailed and refined processing, and by so extending the production chain, create more jobs.

The exchange-rate will particularly help optimize resource allocation between tradable sectors and non-tradable sectors, thus helping reorient employment to move to service industries. In general, pushing ahead exchange-rate reform has more pros than cons in terms of the impact on exports and employment.

How to make exchange rate policy work with other policies to promote economy restructure?

Exchange rates can play an active role in improving the international balance of payments, boosting domestic demand and adjusting economic structure.

However, the structural problems that China’s economy faces can’t be solved simply by the exchange rate, and other policies are needed to coordinate efforts. China will further adjust income distribution, boost household income, spur consumer spending, improve the social safety net and encourage private investment, especially in the service sector.

China will further improve the resource-pricing mechanism, promote imports and facilitate overseas investment and households foreign-exchange use. During the yuan reform process, China will also strengthen the monitoring and regulation of capital flows and crack down on illegal foreign-exchange flows.

--Li Yanping and Jessica Zhou in Beijing. Editors: Joshua Fellman, John Liu

To contact Bloomberg News staff on this story: Yanping Li in Beijing at +86-10-6649-7568 or yli16@bloomberg.net

Texas Congressman's Apology to BP is Denounced by His Fellow Republicans

By Lisa Lerer and Patrick O’Connor

June 18 (Bloomberg) -- U.S. Representative Joe Barton may be the only person who had a worse day on Capitol Hill yesterday than BP Plc Chief Executive Officer Tony Hayward.

The Texas Republican sparked a political backlash from both parties when he apologized to Hayward -- at a hearing where other lawmakers lined up to berate BP -- and accused the White House of a “shakedown” by pressuring BP to set aside $20 billion for damage claims from the Gulf of Mexico oil spill.

Barton retracted his comments hours later after a meeting with House Minority Leader John Boehner, an Ohio Republican, and House Minority Whip Eric Cantor, a Virginia Republican. The party leaders told Barton to apologize immediately or lose his position as ranking Republican on the Energy and Commerce Committee, said a party leadership aide who spoke on condition of anonymity.

The outcry illustrates Republicans’ difficulty in gaining political ground, even during a low period for President Barack Obama, as the party struggles to conquer internal divisions, said Julian Zelizer, a political science professor at Princeton University in New Jersey.

Message Discord

“The Republican Party is not totally united on what its message should be,” Zelizer said in an interview yesterday. “It’s the Tea Party-versus-leadership tension that we’ve seen on other issues.”

The flap began at a hearing by the Energy and Commerce panel on the Gulf of Mexico spill. Lawmakers denounced Hayward for hours, accusing him of stonewalling and failing to provide answers about the causes of the explosion.

Barton, though, at the hearing’s beginning apologized to Hayward. The congressman described the claims fund BP agreed to establish after its top officials met with Obama on June 16 as “a $20 billion shakedown.”

“I’m ashamed of what happened in the White House,” Barton, 60, told Hayward at the hearing, and later said, “I apologize” for it.

Less than six hours later, Boehner’s office released a statement by Barton in which he retracted his apology to BP and apologized “for using the term ‘shakedown.’”

‘Wrong’

Boehner’s office also issued a separate statement from the Republican leader, Cantor and Representative Mike Pence, an Indiana Republican, calling Barton’s statements at the hearing “wrong.”

Barton’s statement said he regretted “the impact that my statement this morning implied that BP should not pay for the consequences of their decisions and actions in this incident.”

The comments by Barton, who was first elected to his Dallas-area House seat in 1984, inflamed Gulf Coast Republicans, who are outraged at BP for failing to plug the leaking well.

“I don’t think we need to be apologizing to British Petroleum,” said Florida Republican Senator George LeMieux.

Representative Jeff Miller, a Florida Republican, said in a statement that Barton’s comments “call into question his judgment and ability to serve” in a leadership position on the Energy and Commerce Committee.

Other fiscally conservative Republicans have criticized the BP agreement with the Obama administration.

And Kentucky Republican Senate candidate Rand Paul today expressed sympathies for Barton in an interview with a radio station.

“I have never liked the tone of the president when he said things or his administration says things like he is going to put the boot on the throat of BP,” he said on Lexington, Kentucky- based WVLK-AM.

‘Shakedown Politics’

Georgia Republican Representative Tom Price, in a statement yesterday, said Obama’s insistence on creating an escrow fund was an example of his administration “exerting its brand of Chicago-style shakedown politics.”

Representative Michele Bachmann, a Minnesota Republican, criticized the idea of an escrow fund as a “redistribution-of- wealth” fund at a Heritage Foundation forum this week.

Former Representative Dick Armey of Texas, a Republican and a leading funder of the Tea Party movement, said at a meeting this week with reporters that Obama lacked the constitutional authority to set up such a fund.

‘Risky’

“They’re trying to make an anti-Obama, anti-Democratic point out of this recent announcement, but I think it’s risky to Republicans,” said Zelizer.

Employees of the oil and gas industry have been Barton’s largest source of campaign cash since 1989, giving him $1.4 million, according to the Center for Responsive Politics, a Washington-based research group. That’s more than any other House member has gotten from the industry. He has raised $100,470 from oil and gas industry employees for his 2010 re- election campaign.

Democrats immediately seized on Barton’s statements, seeing an opportunity to score political points months before the November elections.

“When people in the Gulf are suffering from actions taken by BP, Republicans in Congress are apologizing to BP,” House Speaker Nancy Pelosi told reporters, referring to the statements by Barton and Price.

Jon Vogel, executive director of the Democratic Congressional Campaign Committee, used the comments in an e-mail fundraising appeal, telling supporters that their donations would “send an overwhelming message” that Republicans “shamelessly shill for their Big Oil backers.”

Vice President Joe Biden called Barton’s remarks “incredibly insensitive, incredibly out-of-touch.”

“There’s no shakedown,” the vice president said at a White House briefing. “It’s insisting on responsible conduct and a responsible response to something they caused.”

To contact the reporters responsible for this story: Lisa Lerer at llerer@bloomberg.net; Patrick O’Connor in Washington at Poconnor14@bloomberg.net

Obama Turns to Economy in Ohio to Highlight Administration's Stimulus Jobs

By Kate Andersen Brower and Roger Runningen

June 18 (Bloomberg) -- President Barack Obama pivoted from the Gulf of Mexico oil spill back to the economy today with an emphasis on the jobs created by his administration’s $862 billion economic stimulus package.

At a groundbreaking in Columbus, Ohio, for the 10,000th road project funded by the stimulus, Obama said improving the nation’s infrastructure is one of the keys to long-term prosperity.

“If we’re going to rebuild America’s economy, then we’ve got to rebuild America, period, from the ports and the airways that ship our goods, to the roads and transit systems that move our workers and connect cities and businesses,” Obama said at the project site near the Nationwide Children’s Hospital.

The president is seeking to remind voters of his efforts to revive the economy five months ahead November’s midterm elections. Republicans have criticized the stimulus legislation as a wasteful spending program that hasn’t fulfilled the administration’s promises on job creation.

Unemployment in Ohio is 10.7 percent, one percentage point higher than the national average. While the Federal Reserve’s regional business survey showed last week that the economy expanded in all the central bank’s districts in April and May for the first time in more than two years, job growth has lagged. Initial jobless claims increased by 12,000 to 472,000 in the week ended June 12, Labor Department figures showed yesterday.

‘Summer of Recovery’

“The economy is still lousy,” Transportation Secretary Ray LaHood told reporters before today’s trip. “We want to put the message out: This is going to be the summer of recovery.”

LaHood, who traveled with the president to Ohio, said the project being highlighted today is expected to create more than 300 new jobs and is one of 462 transportation projects in Ohio funded by $1.1 billion in stimulus money.

The work being done under the stimulus will “pay dividends to our communities for generations to come,” Obama said. “While the recovery may start with projects like this it can’t end here.”

In a report to the president released yesterday, Vice President Joe Biden said the government has spent $620 billion from the stimulus and created or saved between 2.2 million and 2.8 million jobs. He predicted jobs created or retained by the end of 2010 will number “at least” 3.5 million.

Republican Critics

“We have created over 17,000 jobs in the last month” in Ohio, Republican state auditor Mary Taylor, a candidate for lieutenant governor, told reporters on a conference call today before Obama arrived. “But it’s an important fact to note that 16,800 of those jobs created were government jobs.”

The White House is kicking off a six-week focus on scores of public works projects under way across the nation and into the election season.

“This summer a lot more people are going to be working on highways, building clean water projects, weatherizing homes, and -- and they’ll be drawing paychecks that they wouldn’t have otherwise drawn,” Biden said at a briefing yesterday that was part of the administration’s focus on the stimulus.

The economy will be a top issue in the November elections that will determine which party controls the House and Senate.

The Columbus area is represented in the House by freshman Democrat Mary Jo Kilroy. She was elected in 2008, the first Democrat to represent the district since 1982, according to the Almanac of American Politics. The non-partisan Cook Political Report rates her race against Republican former state Senator Steve Stivers as a toss-up.

“There’s a feeling of disenchantment, disillusionment, discouragement -- a feeling that no politician is going to be able to do much to turn the situation around,” Paul Beck, a political science professor at Ohio State University in Columbus, said of voter sentiment in the state.

“Until the private sector really turns around you’re not going to have a big surge of jobs,” said Beck.

Still, Beck said, “the stimulus money has been very important to Ohio, it’s prevented wrenching cutbacks in Ohio.”

To contact the reporters on this story: Kate Andersen Brower in Columbus, Ohio at kandersen7@bloomberg.net; Roger Runningen in Washington at rrunningen@bloomberg.net

Bank of America Seeks `Edge' with Merrill Rivaling Schwab, Fidelity Online

By Margaret Collins and Alexis Leondis

June 18 (Bloomberg) -- Bank of America Corp., the largest U.S. bank by assets, is trying to attract investors with less to invest through a new online trading site.

Bank of America’s Merrill Lynch, the world’s largest brokerage with more than 15,000 financial advisers and about $2.2 trillion of client assets, will let customers trade stocks, mutual funds and options online starting June 21, through Merrill Edge, Dean Athanasia, head of banking and the direct investment division for Bank of America Global Wealth and Investment Management, said in an interview.

“It’s an integrated bank and brokerage offering” that will compete with companies such as Charles Schwab Corp. and closely held Fidelity Investments, said Athanasia, who is based in New York and Boston. The site will target customers who have $250,000 or less to invest, those with “emerging wealth” or self-directed investors, he said.

Customers of Merrill Edge will pay from $4.95 to as much as $8.95 a trade depending on the size of their accounts, Athanasia said. Those with at least $25,000 in total banking and brokerage accounts will get 30 free equity trades a month. Users may open investment and retirement accounts on the site and those with more than $20,000 to invest may contact advisers, who are separate from Merrill Lynch’s full-service advisers, by phone.

Schwab, based in San Francisco, charges $8.95 for all online stock trades regardless of account balances, how many shares are traded and how often shares are traded, according to the company’s website.

Trading Costs

Fidelity, based in Boston, generally charges $7.95 for online U.S. equity trades, and TD Ameritrade Holding Corp., based in Omaha, Nebraska, charges $9.99 for online stock trades. New York-based E*Trade Financial Corp. charges from $7.99 to $9.99, depending on the number of trades.

Steve Austin, a spokesman for Fidelity, the world’s largest mutual-fund manager, declined to comment on Merrill Edge. Greg Gable, a spokesman for Schwab, also declined to comment.

Schwab, TD Ameritrade and E*Trade, the largest U.S. independent online brokers, fell in stock trading yesterday after Bank of America’s plans were reported by the Wall Street Journal.

It’s “highly unlikely” that Merrill Edge will cause a significant number of existing clients to leave Schwab, TD Ameritrade or E*Trade, and the initial negative market reaction is an “overreaction,” Raymond James Financial Inc.’s Patrick O’Shaughnessy, an analyst, and Megan Repine, a research associate, wrote in a research note yesterday.

Re-Branding Effort

“We believe this is simply a re-branding of Bank of America’s existing online brokerage,” said O’Shaughnessy and Repine, who are based in Chicago. Merrill Edge may lead to more financial advisers leaving the firm because they fear the platform might cannibalize their clients, they said.

The firm’s full-service advisers target high-net-worth clients with complex needs while the online site is aimed at investors who choose to be self-directed, said Selena Morris, a spokeswoman for the Charlotte, North Carolina-based bank.

“The attrition rate for clients that have both a full- service and a self-directed account is half of those with only a full-service relationship,” Morris said.

To contact the reporters on this story: Margaret Collins in New York at mcollins45@bloomberg.net. Alexis Leondis in New York aleondis@bloomberg.net.

UBS Customers May Have `Mere Hours' to Report to IRS as Swiss Seal Accord

By Ryan J. Donmoyer

June 18 (Bloomberg) -- U.S. citizens and residents with UBS AG accounts are racing the clock to disclose their secret holdings to the Internal Revenue Service after the Swiss Parliament ratified an agreement to surrender the names of 4,450 bank clients, tax lawyers said.

Swiss lawmakers yesterday ended a standoff and approved the bank’s settlement with the U.S., allowing the names to be transmitted to tax authorities as early as this week. Lawyers said Americans who ignored an IRS offer last year to reduce penalties in exchange for voluntary disclosures are now flooding their offices with calls seeking advice on how to avoid possible sanctions, which could include prison sentences.

“For UBS account holders, they have mere hours to run to the IRS and hope they can disclose the account before the Swiss hand the data over,” said Asher Rubinstein, a partner at Rubinstein & Rubinstein LLP in New York who said he’s been “getting panicked calls all week.”

The Parliament’s vote ends Switzerland’s long tradition of bank secrecy and is a victory for the IRS and U.S. Department of Justice, which fought a two-year battle to gain access to the accounts. It also removes the threat of further civil litigation against Zurich-based UBS and additional fallout under criminal law.

‘Move Quickly’

IRS Commissioner Douglas Shulman said yesterday he expects the Swiss government to “move quickly” to transmit the information.

“We will immediately follow up on the information we receive from the Swiss and we will vigorously enforce the laws against those who have attempted to evade their tax responsibilities by hiding their assets offshore,” he said.

IRS spokesman Dean Patterson said “even though the special provisions of the voluntary disclosure program are no longer available, it’s always a good idea for taxpayers to come forward on their own and disclose tax issues before we find them.”

A UBS spokeswoman in New York, Karina Byrne, said the bank previously told the 4,450 clients their account data would be given to the Swiss Federal Tax Administration, which would then determine if it should be disclosed to the IRS.

The SFTA said yesterday in a statement that it had already reviewed 3,000 accounts to determine if they met the criteria for transfer to the U.S. under the accord. It said it had already disclosed the names of 500 consenting account-holders.

IRS Offer

About 15,000 Americans voluntarily reported secret offshore bank accounts to the IRS last year, after the tax agency offered to reduce certain penalties and not seek criminal charges. The program ran from March to October.

Robert Fink, a tax lawyer with Kostelanetz & Fink LLP in New York, said many of the 4,450 UBS account holders may already have come forward after being warned of possible disclosure by the bank and the Swiss government.

“The number of new names that the IRS will get will be far, far less than 4,450,” he said.

Americans who didn’t take the IRS’s leniency offer last year now face possible criminal charges, prison time and the loss of all the money in their Swiss accounts, plus “substantially more,” said Barbara Kaplan, a tax lawyer at the New York firm Greenberg Traurig LLP. Those who come forward before the IRS learns their identity by other means may still avoid prison, she said.

‘Worst-Case Scenario’

“I think people are starting to realize that their opportunity to avoid disclosure has run out,” she said. “The worst-case scenario, including criminal prosecution, could ensue. It’s worth taking the chance on the civil side to mitigate the chance on the criminal side.”

UBS, Switzerland’s biggest bank, avoided U.S. prosecution in February 2009 by paying $780 million, admitting it helped wealthy Americans evade U.S. taxes from 2000 to 2007, and handing over account data on more than 250 U.S. clients. The day after the settlement, the U.S. sued the bank, seeking data on 52,000 Swiss accounts.

UBS settled that case in August, agreeing to hand over as many as 4,450 names to the Swiss government to review before passing them on to the IRS.

Parliamentary approval became necessary after a Swiss court ruled in January that the agreement couldn’t be enforced as it then stood. Swiss lawmakers ratified the deal yesterday after the lower house agreed to drop demands for a public referendum that would have caused a deadline for disclosure of the information to be missed.

Undeclared Assets

Under terms of the settlement between the two countries last year, Switzerland will turn over details of UBS accounts of U.S. residents that held more than 1 million Swiss francs in undeclared assets at any time between 2001 and 2008. Other benchmarks include U.S. citizens who were beneficiaries of “offshore company accounts.”

In both cases, there has to be a suspicion of “tax fraud and the like,” according to a statement distributed last year by the Swiss Justice Ministry in Bern.

The steepest penalty allows the IRS to seize the higher of $100,000 or 50 percent of an offshore account’s value when the holder deliberately didn’t disclose it to the Treasury Department. That penalty can apply to multiple years.

Scott Michel, a lawyer at Caplin & Drysdale in Washington, said he had received two calls yesterday from clients considering a voluntary disclosure after the Parliament’s vote.

Leniency for Volunteers

Michel said he and other tax lawyers hope the IRS will continue to show leniency to people who come forward, even without explicit offers to reduce penalties such as those last year.

“If they start hammering people with 100 percent or more penalties, people are going to stop making voluntary disclosures,” Michel said.

At least 16 UBS clients have been charged with tax crimes in the case. Two UBS bankers and three other alleged enablers of tax crimes also have been charged. At least 150 other Americans are under criminal investigation, the Justice Department said last year.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Stem Cells From Own Eyes Restore Vision to Blinded Patients, Study Shows

By Rob Waters

June 18 (Bloomberg) -- Patients blinded in one or both eyes by chemical burns regained their vision after healthy stem cells were extracted from their eyes and reimplanted, according to a report by Italian researchers at a scientific meeting.

The tissue was drawn from the limbus, an area at the junction of the cornea and white part of the eye. It was grown on a fibrous tissue, then layered onto the damaged eyes. The cells grew into healthy corneal tissue, transforming disfigured, opaque eyes into functioning ones with normal appearance and color, said researchers led by Graziella Pellegrini of the University of Modena’s Center for Regenerative Medicine.

The stem-cell treatment restored sight to more than three- quarters of the 112 patients treated, Pellegrini said yesterday in a presentation at the International Society for Stem Cell Research meeting. The patients were followed for an average of three years and some for as long as a decade, Pellegrini said.

“The patients, they are happy, even the partial successes,” she said in an interview at the meeting in San Francisco. “We have a couple of patients who were blind in both eyes. Can you imagine for these patients the change in their quality of life?”

The work was praised by Ivan Schwab, an ophthalmology professor and stem cell researcher at the University of California, Davis, who has treated patients in clinical trials with a procedure based on Pellegrini’s work. While his patients improved for a time, the benefits didn’t endure, he said in a June 15 telephone interview. Pellegrini’s patients appear to have long-term improvement, he said.

‘Long-Term’ Effect

“The powerful part of her work is she has such long-term follow-up,” Schwab said.

Many of the patients she treated had been blind for years as result of tissue and blood vessels growing over damaged parts of the eye. Some had been through failed surgeries and alternative treatments. Pellegrini estimated 1,000 to 2,000 patients in Europe suffer from burns with chemicals such as bleach or industrial solvents and may benefit from the procedure.

The key to success is to be certain that when the stem cells extracted from the limbus are grown in culture they have the right mix of stem cells and the differentiated cells that form the corneal tissue, Pellegrini said. If there are too few stem cells in the transplant, the improvement won’t last because there will be no reservoir to form the new corneal cells needed with the normal recycling of cells over time, she said.

Success Rate

The procedure succeeded after a single transplant in 69 percent of cases. A second procedure was performed on some patients, boosting the success rate to 77 percent, she said. The procedure was deemed a partial success in 13 percent of cases and a failure in 10 percent, she said.

Depending on the depth of the injury, some patients regained sight in as little as two months, Pellegrini said. Others with deeper injuries needed a second procedure and waited a year before sight was restored, she said.

The applications of the work may extend to other organs, Schwab said.

“This is bigger than just the surface of the eye,” he said. “She may be making a model for how to regenerate livers or other organs.”

To contact the reporter on this story: Rob Waters in San Francisco at rwaters5@bloomberg.net.