(BN) Buffett Awards Wall Street-Sized Pay, Praised by Dimon

Sure you need money to keep talent. But why do you need to say it out loud?

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Buffett Awards Wall Street-Sized Pay Praised by Dimon

March 16 (Bloomberg) -- Berkshire Hathaway Inc. Chief Executive Officer Warren Buffett, who has said banker greed helped deepen the U.S. financial crisis, attracts the workers he wants with compensation that competes with Wall Street awards.

Berkshire gave $17.4 million in 2011 compensation to Thomas P. Nerney, CEO of its United States Liability Insurance Group; $12.4 million to Geico Corp. CEO Tony Nicely and the National Indemnity Co. unit gave $9.26 million to Ajit Jain, according to filings to state regulators. Berkshire, which is set to send its annual-meeting notice to shareholders today, said in last year's proxy that Buffett's salary remains $100,000 at his request.

Buffett, whose office in Omaha, Nebraska, is more than 1,000 miles from New York's financial center, endeared himself to bank critics last year by decrying income inequality and calling for higher taxes on the wealthy. Still, his pay practices won praise from JPMorgan Chase & Co. CEO Jamie Dimon, who said last month he would bet the top 20 or 30 people at Berkshire make more than the biggest earners at his bank.

"Whether it's Warren Buffett or Jamie Dimon, they all pay a lot," said Charles Elson, director of the University of Delaware's Center for Corporate Governance. "Pay is out of control everywhere."

Berkshire Class A shares declined 4.7 percent in New York last year as JPMorgan, the biggest U.S. bank by assets, slid 22 percent. Both companies underperformed the Standard & Poor's 500 Index, which ended 2011 little changed.

Think Like Owners

Buffett, whose Berkshire stock is valued at more than $40 billion, has said he gives bonuses to encourage managers to think less like employees and more like owners. He told shareholders last year he once offered to pay David Sokol a bonus of $50 million if performance targets were met. Sokol left Berkshire in April.

"We've paid out very large bonuses at Berkshire in the past, but we've always paid them out for performance," Buffett, 81, said in a January 2010 interview. "I love getting talented people doing great things for us, and I'll pay them accordingly."

Berkshire's statements to state regulators show that more than 20 managers at insurance units earned at least $1 million last year. Gregory Abel, CEO of MidAmerican Energy Holdings Co., made $9.9 million for 2011, according to the unit's annual report. Berkshire's filings to the Securities and Exchange Commission show that no executive officer at the parent company has reached $1 million in at least a decade through 2010.

Dimon's Defense

Dimon, who got $20.8 million in 2010 compensation, has defended banker pay from criticism by lawmakers and journalists. "You don't even make money!" Dimon said to reporters at JPMorgan's Feb. 28 investor presentation. JPMorgan paid the 25,999 employees at its investment bank an average of $341,552 last year, or about 34 percent of the unit's revenue.

"Warren Buffett does an exceptional job," Dimon, 56, said at the meeting. "I'll make you a bet he pays his top 20 or 30 people more than we do. We need top talent. You cannot run these businesses with second-rate talent."

Dimon had no specific knowledge of Berkshire's compensation packages, said JPMorgan spokesman Joe Evangelisti, who declined to give details on his bank's top earners. Buffett didn't respond to a request for comment e-mailed to an assistant.

Nerney's compensation declined 11 percent from 2010, while Nicely's rose 7.7 percent and Jain's advanced 6.1 percent at National Indemnity. Underwriting profit at Geico, which Nicely has led for 18 years, fell 48 percent to $576 million last year, while revenue rose 7.6 percent to $15.4 billion. The 2011 underwriting loss at Berkshire Hathaway Reinsurance Group, which Jain runs, was $714 million.

Adding Value

Buffett uses the premium revenue collected by insurance units to help fund the stock picks and takeovers that have made Berkshire into a $200 billion provider of energy, consumer goods and luxury flights. Jain, 60, has "added a great many billions of dollars" to Berkshire's value since starting his operation in 1985, Buffett said in this year's annual letter.

Nerney's unit, with a staff of 591, is part of Berkshire Hathaway Primary Group, a collection of carriers that cover risks from medical malpractice to boating accidents. Nerney, whose unit is based in Wayne, Pennsylvania, writes so-called excess and surplus policies, which typically cover risks that aren't addressed in the traditional insurance market.

"It sounds very easy to do, but I assure you it's not," Joseph Calandro, managing director at PricewaterhouseCoopers LLP in New York, said in an interview. "A good excess and surplus lines underwriter is as rare as a good investor and generally just as profitable." Calandro previously worked at an excess and surplus subsidiary of Berkshire's General Re.

Buffett's Own Compensation

Buffett has taken a $100,000 salary for more than a quarter century, while accepting additional compensation from Berkshire in the form of security services valued at about $350,000 in 2010. His chief financial officer, Marc Hamburg, was the top earning executive officer at the parent company in 2010 with compensation of $924,750. JPMorgan CFO Douglas Braunstein was awarded $16.1 million in 2010, while the investment banking chief, Jes Staley, had $13.6 million, an SEC filing shows.

Buffett has praised Dimon's leadership and said he is a shareholder of New York-based JPMorgan. Berkshire holds more than $12 billion of stock in JPMorgan's rival Wells Fargo & Co., and Buffett's company made a $5 billion investment in Goldman Sachs Group Inc. at the depths of the 2008 crisis. Goldman Sachs reported about $14 million in 2010 compensation for both CEO Lloyd Blankfein and Gary Cohn, the chief operating officer, down from more than $40 million for each for 2008.

New Regulations

Buffett, a supporter of President Barack Obama, has called for a "policeman" to oversee banking conduct and challenged Republicans in Congress to address the widening gap between the "ultra rich" and other Americans.

"There are lot of people who would like nothing better than to take Warren down a peg or two on this particular issue," Jay Lorsch, a corporate-governance professor at Harvard Business School in Boston, said in an interview. "Here's the poster child, the guy who is arguing for parity in pay and reducing executive pay."

Obama blamed lenders in his January State of the Union address for the 2008 credit freeze, saying their wrong-way bets "left innocent, hard-working Americans holding the bag." Lobby groups representing financial firms including JPMorgan and Bank of America Corp. fought against the creation of Obama's new watchdog, the U.S. Consumer Financial Protection bureau, as an independent agency, saying it would create needless bureaucracy.

Dimon, who was once dubbed Obama's "favorite banker" by the New York Times, publicly questioned Federal Reserve Chairman Ben S. Bernanke in June on financial regulatory costs. Net income at JPMorgan rose 9.2 percent to $19 billion last year.

"Jamie's irritated understandably by some of this stuff," said James Armstrong, president of Berkshire investor Henry H. Armstrong Associates. "But I don't think Berkshire is saying one thing and doing another" with compensation, he said.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net Jeff Green in Detroit at jgreen16@bloomberg.net .

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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(BN) Russian Billionaire Rybolovlev Sued by Wife Over Penthouse Buy

Her goal is vengeance. But she knows nothing she does will ever make him come back.

His goal is evasion. But he knows she is a hunter whose sole purpose left is to destroy him.

Money can't buy everything but it can buy this.

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March 15 (Bloomberg) -- Russian billionaire Dmitry Rybolovlev's wife sued him over the $88 million purchase of a Central Park West penthouse in Manhattan from former Citigroup Inc. Chairman Sanford Weill.

Elena Rybolovleva, 45, of Geneva, who is seeking a divorce, yesterday sued her 45-year-old husband in New York State Supreme Court in Manhattan. She accused him of fraudulently transferring property acquired during his marriage in violation of a Swiss court order to buy the New York penthouse "with the specific intent of hiding and diverting his personal interest in the property."

A company associated with the billionaire's daughter, Ekaterina Rybolovleva, signed a contract to purchase the 6,744- square-foot (627-square-meter), full-floor condominium at 15 Central Park West, Alan Basiev, a spokesman for Rybolovlev, said in December. The purchase closed Feb. 15, according to the complaint.

Ekaterina Rybolovleva, who is studying at a U.S. university, plans to stay at the apartment when visiting New York, Basiev said. Her father, ranked number 100 on Forbes Magazine's 2012 list of the world's billionaires with a net worth of $9 billion, is the former owner of fertilizer maker OAO Uralkali.

Divorce Filing

Elena Rybolovleva filed for divorce in Geneva in December 2008, and the court later imposed a provisional freeze on shares and assets of Rybolovlev, including stakes in Russian potash producers OAO Uralkali and OAO Silvinit, according to the complaint. The pair married in July 1987 and lived in Geneva starting in 1995.

His wife is asking the court to establish a trust over the property so that it "cannot be alienated, conveyed, encumbered, transferred or wasted" pending the final determination of the Swiss court.

Basiev and Rybolovlev couldn't immediately be reached for comment after regular business hours yesterday in Russia.

Marc I. Salis, a New York-based lawyer who represented the penthouse's buyer, didn't immediately return a phone call seeking comment on the lawsuit.

The condo was listed for $88 million. The prior record for a Manhattan residence was the $53 million sale of a townhouse to private-equity investor J. Christopher Flowers in 2006, according to Jonathan Miller, president of New York appraiser Miller Samuel Inc.

Potash Producer

The condominium was listed for sale by brokerage Brown Harris Stevens in November. Weill and his wife, Joan, paid $43.7 million for the property in 2007, according to city records. The apartment has a wraparound terrace, two wood-burning fireplaces and a library, according to a floor plan on Brown Harris's website.

Rybolovlev sold 53 percent of OAO Uralkali in June 2010 to billionaire Suleiman Kerimov and his partners, who also took control over rival OAO Silvinit as part of a plan to create the world's largest potash producer.

Rybolovlev, who lives in Monaco, liquidated his interests in Uralkali and Silvinit and used part of the proceeds to acquire the penthouse, according to the suit.

"During the marriage, and during the pendency of the divorce proceedings and this time in violation of the Swiss court order, defendant Dmitri Rybolovlev used property acquired during the marriage to purchase a multitude of new assets, using for this purpose vehicles such as trusts and limited liability companies to place them beyond the reach of plaintiff Elena Rybolovleva," according to the lawsuit.

Student Housing

Rybolovlev and his daughter planned the purchase of the penthouse since 2008 despite his assertion that it is student housing for her, and she doesn't attend school in New York, according to the lawsuit.

Rybolovleva has also sued her husband in Florida over a house he purchased from Donald Trump in Palm Beach for $95 million, which at the time was the most expensive house in the U.S., according to that lawsuit.

The case is Rybolovleva v. Rybolovlev, 102168/2012, New York State Supreme Court (Manhattan).

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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(BN) Chinese Data Show Economy Already in ‘Hard Landing,’ JPMorgan’s Mowat Says

What is Mowat taking to be hallucinating like this?

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Chinese Economy Already in 'Hard Landing,' JPMorgan Says

March 15 (Bloomberg) -- China's economy is already in a so- called "hard landing," according to Adrian Mowat, JPMorgan Chase & Co.'s chief Asian and emerging-market strategist.

"If you look at the Chinese data, you should stop debating about a hard landing," Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. "China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It's not a debate anymore, it's a fact."

The Shanghai Composite Index fell 2.6 percent yesterday, the most since Nov. 30, after Premier Wen Jiabao said home prices are still far from reasonable levels. His comments fueled concerns the government will maintain restrictions on the property market for an extended period even as the curbs threaten to slow economic growth.

Wen announced at the beginning of a national lawmakers' congress on March 5 an economic growth target of 7.5 percent for this year, down from 8 percent over the past seven years. Data last week showed China's factory output in the first two months of the year rose the least since 2009, while retail sales increased less than economists predicted and inflation eased to the slowest pace in 20 months.

Mowat, a runner-up for Asian equity strategy in 2011 according to Institutional Investor magazine, said last May the risk of a hard landing was building in China as fixed-asset investment in real estate had increased even as property demand remained weak. That meant residential inventories will increase and lead to a contraction in construction activity, the strategist said in a May 17 interview.

"One should be concerned about what's happening in the China property market," Mowat said at yesterday's conference. "People are too complacent that the government can turn what's going on in this market."

'Vastly Overblown'

Gary Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said on Feb. 2 that China's economy is headed for a "hard landing" this year as weaker demand overseas chokes off exports. Shilling, who correctly forecast the U.S. recession that began in December 2007, defines a hard landing as a growth rate below 6 percent.

Shilling and Mowat's views are in contrast with Yale University Professor Stephen Roach, a former non-executive chairman for Morgan Stanley in Asia, who said on March 8 that concerns China will enter a hard landing are "vastly overblown."

"I don't think the banking system will collapse and the property bubble will burst," Roach said at a conference in Shanghai. "These are all exaggerations."

Home Sales Slump

China is easing restrictions on lending capacity at three of the nation's four biggest banks after new loans dropped to a four-year low, officials at the banks with knowledge of the matter said. The government's two-year effort to control the property market helped spur a 25 percent drop in home sales in the first two months of the year after surging 26 percent in January and February of 2011.

"What you can look forward to is to see a pickup in property demand that will clear up the inventory; that doesn't appear likely," Mowat said in an interview after the conference. "I don't see any evidence of a policy move that will cause the economy to reaccelerate."

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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(BN) Study Abroad, Goof Off and Fool Your Future Boss: Richard Vedder

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March 13 (Bloomberg) -- Besides climbing walls and fancy housing, any college or university wanting to compete in the academic arms race for students must offer attractive study abroad programs.

Originally a province of foreign language students or a modest number of affluent young people, study abroad is viewed as a necessity, and a number of schools require some education abroad.

For example, the business school at my midquality state university (Ohio University) pressures all its students to have some foreign exposure, although some programs are short -- a few weeks in length.

Falling transportation and communication costs have greatly expanded international economic and cultural interchanges, and it's hard to be against young Americans' exposure to non-U.S. culture. My wife and I have led student educational tours or study programs in Europe frequently over the last 44 years.

Yet some reasons for student foreign travel are questionable on both educational and economic grounds. Study abroad is a marketing tool and in some cases a cash cow for universities. Educationally, the programs have long had a reputation for offering little intellectual content or academic rigor, and minimal language or cultural immersion.

A Financial Racket

American schools occasionally make arrangements with an institution in a foreign country, collect the American tuition fee, and sometimes additional state government subsidies. For all the talk about promoting global awareness and cultural diversity, these programs are arguably a financial racket. They free up space in dorms and classrooms on the home campus for other "customers," and are a marketing tool to convince parents (sometimes incorrectly) that their children are getting a superior education.

Unfortunately, the pressures to study abroad are only increasing. Employers are starting to expect that experience to appear on resumes of college graduates. It's part of the same credential creep that saw employers put "college degree preferred" on postings for low-skill positions -- bartenders, janitors and the like -- to help winnow down the applicant pool to manageable size. Jobs that might have required a basic degree -- as in occupational therapy, or elementary school teaching -- prefer or may demand a master's degree, or even doctorates.

On the whole, we are raising the cost of becoming eligible for managerial, technical and professional jobs that historically have gone to college graduates. Even within the spectrum of college graduates, relatively poor or middle income graduates of state schools increasingly compete for mediocre jobs, while those attending elite private schools or who augment their education with expensive overseas programs are given an advantage that on objective grounds based on the student's inherent talents and past performance are not truly justified.

In cases where language proficiency plays a big role, and where foreign study is a serious exercise in cultural and language immersion, the study abroad experience has some justification, and a number of colleges are trying to improve their programs. Yet government data show that fewer than 6 percent of study abroad students major in foreign languages, and that slightly over 20 percent of them come from each of three areas: business, social sciences, or non-foreign-language humanities or fine arts majors.

Social Education

But I think the major reason for the boom in study abroad enrollments is simple: College today is as much a socialization experience as a learning one, and relatively affluent students, and even less affluent ones who pile up big student debts, spend six months or a year in cool foreign locales, away from prying parents or university officials, having lots of fun. If it's possible to judge from the drinking habits of many students I've seen on short overseas tours, this entertainment dimension of higher education can trump learning.

Surveys show the average college student spends less than 30 hours weekly on academic pursuits, often for 30 weeks a year. My observation is that this problem is magnified when relatively lightly worked students are put in a foreign country with limited pressures to perform academically.

Should students be able to borrow money from the U.S. government, when the government in turn borrows some of the funds from Chinese and other investors to finance these junkets overseas? Federal student debt now exceeds a trillion dollars, so the padding of these numbers by foreign study programs may have broader macroeconomic implications on already stressed federal finances.

At a time when we are straining to meet our entitlement and other obligations, we should scrutinize the efficacy of these programs. Where are the accrediting agencies -- are they certifying these programs achieve true academic goals?

If accreditation boards will not assume responsibility, how about having an organization like the Educational Testing Service or ACT give standardized country-specific examinations to returning students, measuring their knowledge of the country visited, with significant financial consequences to the school if students show little or no learning?

The time has come to analyze this use of educational resources dispassionately, using honest assessments of the costs and benefits.

(Richard Vedder directs the Center for College Affordability and Productivity and teaches economics at Ohio University. The opinions expressed are his own.)

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To contact the writer of this article: Richard Vedder at vedder@ohio.edu .

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net .

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(BN) China Has Largest Trade Deficit Since 1989 as Imports Rebound From Holiday

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China Has Largest Trade Deficit Since 1989 as Imports Gain

March 10 (Bloomberg) -- China reported its biggest trade deficit since at least 1989 in February as Europe's debt crisis crimped exports and imports rebounded after a weeklong holiday.

The shortfall was $31.5 billion, the customs bureau said on its website today. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said. Data in the first two months are distorted by the timing of the Lunar New Year holiday, which fell in January this year and February in 2011.

Today's data, along with lower-than-forecast expansion in industrial output and retail sales reported yesterday, raise the odds Premier Wen Jiabao will ease policies to support growth in the world's second-biggest economy. Commerce Minister Chen Deming's warning this week that boosting trade by 10 percent this year will require "arduous efforts" may also signal a slower pace of yuan gains as policy makers seek to aid exporters.

"Easing inflation and weakening economic activity send a strong signal for further loosening in the upcoming months," said Shen Jianguang, Hong Kong-based chief greater China economist for Mizuho Securities Asia Ltd. who previously worked for the International Monetary Fund and European Central Bank.

The government is likely to cut banks' required reserves in March, the third reduction in four months, while appreciation in the yuan will be "difficult," Shen said.

Weaker Yuan

China has allowed its currency to weaken against the dollar this year, aiding exporters, as Europe's sovereign-debt turmoil clouds the outlook for overseas sales. Chen, speaking to reporters March 7, said the yuan exchange rate is in a reasonable range.

The nation may "appropriately" widen the yuan's trading band to better reflect market supply and demand, People's Bank of China Governor Zhou Xiaochuan said, according to a March 5 report by the official Xinhua News Agency.

The deficit was the first in a year and largest in data compiled by Bloomberg going back to 1990. The previous record shortfall during that time was $7.87 billion in February 2004. It compared with the median estimate for a $5.35 billion deficit in a Bloomberg News survey of 28 economists. Analysts forecast a 31.1 percent gain in exports from a year earlier and a 31.8 percent increase in imports.

Some analysts lowered estimates for export growth after Chen said March 7 that outbound shipments rose about 7 percent over the first two months of the year, a figure confirmed in today's release. Nomura Holdings Inc. forecast a gain of 18.7 percent, while Societe Generale SA projected 18 percent.

Seasonal Adjustments

The relatively fast nominal growth in trade resulted from the timing of the Lunar New Year, the customs bureau said. Including seasonal adjustments, exports in February rose 4 percent from a year earlier while imports gained 9.4 percent, it said.

Asian stocks gained yesterday on speculation China's government will take steps to boost growth. The MSCI Asia Pacific Index rose 0.7 percent, while China's benchmark Shanghai Composite Index increased 0.8 percent. The yuan rose 0.09 percent to 6.3107 against the dollar.

February exports totaled $114.5 billion, while imports were $146 billion. China's shipments to the U.S. climbed 22.6 percent from a year earlier to $19.4 billion after a 5.4 percent gain the previous month, the data show. Imports from the U.S. jumped 43.4 percent to $11 billion.

Overseas sales to the European Union, China's biggest market last year, rose 2.2 percent to $19.4 billion, after a 3.2 percent drop in January.

Copper Imports

Imports of copper by China last month were the second- highest on record, the data showed, after the weeklong holiday slowed customs clearance in January.

Net crude oil imports increased to a record to meet rising demand as farmers prepare for the planting season and the government adds to emergency stockpiles. The average price of February's crude imports was $112.39 a barrel, up from $92.28 in the same month last year, according to Bloomberg calculations.

Wen, in his state-of-the-nation work report to lawmakers at the National People's Congress this week, said the government will "carry out timely and appropriate anticipatory adjustments and fine-tuning" of fiscal and monetary policies.

Suntech Power Holdings Co., the largest maker of solar panels, said increased competition and government subsidy cuts will lead to a first-quarter drop in shipments, according to a statement March 8 from the Wuxi, China-based company. Deliveries in the first quarter will decline by about 30 percent from the fourth quarter, it said.

The nation will still see a sizable trade surplus for the full year, as the deficit early in 2012 is largely seasonal, according to Song Yu, a Beijing-based economist with Goldman Sachs Group Inc.

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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CNBC.com Article: Portugal to Fall, Greece to Leave Euro Zone: Roubini

Before you make speculations of this type, Roubini, why not put your nobel prize on the line. 

CNBC.com Article: Portugal to Fall, Greece to Leave Euro Zone: Roubini

Portugal is likely to be the next to restructure its debt and exit the euro zone, economist Nouriel Roubini predicted on CNBC Friday.

Full Story:
http://www.cnbc.com/id/46685944

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(BN) Solar Storm, One More Natural Disaster We’re Not Ready For

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Solar Storm One More Natural Disaster We're Not Ready For

March 9 (Bloomberg) -- On the eve of daylight-saving time, came a solar storm that was expected to beat the daylights out of the Earth's magnetic field.

Earthlings braced for breakdowns in radio and satellite communications and possible damage to electricity grids.

Nothing bad happened, as it turned out. Depending on a solar storm's magnetic orientation, it can be large and fast yet still harmless. That's what happened this time.

Do not rest easy. More and greater magnetic activity will continue in the months ahead as we close in on the so-called solar maximum in 2013, when activity in the sun's magnetic field reaches its 11-year peak.

So what can happen? A solar storm can burn out electronic systems in satellites, cause airplanes flying over the poles to lose radio communication with the ground and skew GPS data. Worst of all, by shaking the earth's magnetic field, it can send a surge of power through electricity grids, overloading and damaging transformers.

In March 1989, a brief fit by our friend the sun caused a loss of power in the grid serving the entire Canadian province of Quebec for nine hours, and damaged transformers in the U.K. and New Jersey.

So what can we do? For starters, we can strengthen our ability to predict storms. The potential danger begins when a cloud of charged particles bursts from the sun's atmosphere. Data from special NASA satellites, including a pair that reveals the 3-D structure of coronal mass ejections from the sun, let scientists know when such clouds are headed our way. Then, critically, NASA's Advanced Composition Explorer probe, which floats between the Earth and the sun a million miles away from us, measures the speed and power of the storm as it streams past.

Data from the ACE probe on the size of the storm is crucial, because it enables scientists at the national Space Weather Prediction Center to warn satellite operators and airlines if they need to take precautions.

But ACE is now 15 years old, and no longer considered dependable when buffeted by the kind of heavy magnetic storm it's meant to measure. The National Oceanic and Atmospheric Administration, which runs the space weather service, plans to replace it with a new Deep Space Climate Observatory, which could be launched as early as 2014. Congress gave NOAA $30 million for DSCOVR this year, and President Barack Obama has requested $27 million for 2013. It is essential that this be approved.

We should also shore up our electric power grids. Fortunately, technology exists to protect grids from magnetic disturbances. Blocking devices -- in the form of capacitors or resistors -- can be installed to prevent the kind of steady currents induced by solar storms from entering the grid and interrupting the regular alternating current. Few grids have them, however.

It's easy enough to understand why power companies might not see a need. Solar storms with the strength to cause real trouble are rare, occurring perhaps once or twice in a century. But as power grids have grown ever larger, more interconnected and more efficient, they have become all the more vulnerable to big fluctuations in the magnetic field.

State public utility commissions should demand that grid operators disclose what safeguards they have in place, and require them to ensure that they can withstand the strongest solar storms. Otherwise, we'll all get burned.

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(BN) Goldman Raises Conflicts to High Art: Jonathan Weil

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March 9 (Bloomberg) -- Right after a Delaware state judge issued his ruling last week in a shareholder lawsuit contesting Kinder Morgan Inc.'s purchase of El Paso Corp., the public finger-wagging aimed at Goldman Sachs Group Inc. began.

Goldman, some pundits wrote, had emerged as the biggest loser of the bunch. The bank's conflicts of interest in advising El Paso on the deal had been castigated by an esteemed jurist as breathtakingly over the top. Once again, Goldman had sullied its precious reputation. And so on, critics said.

While it's always fun to fantasize about Goldman losing at anything, one gnawing question stands out: What exactly did the company lose? The answer is nothing, as far as I can tell. Actually, it won big.

Consider these facts: El Paso's board knew that Goldman owned a 19 percent stake in Kinder Morgan worth about $4 billion when the companies' buyout talks began last year. The directors knew Goldman controlled two seats on Kinder Morgan's board. They were aware that Goldman had every incentive to maximize its own investment and fleece El Paso's shareholders. Yet they turned to Goldman anyway for advice on responding to Kinder Morgan's takeover overtures.

El Paso probably could have gotten a better price from Kinder Morgan had its representatives, including Goldman, been more faithful and less conflicted, Delaware Chancery Court Judge Leo Strine said. The difficult question he faced was whether to do anything about it. He decided he shouldn't, concluding that any remedy he tried to fashion would do more harm than good.

Done Deal

He didn't block the proposed $21.1 billion transaction between the two Houston-based pipeline operators. The sale will go through. Goldman, the world's top-ranked takeover adviser based on deals announced last year, still gets its $20 million fee from El Paso. In all likelihood, nothing about this episode will stop anyone else from hiring Goldman in the future. Plus, Strine said it's doubtful Goldman could be held liable for any damages, based on the facts known so far.

Maybe Goldman's reputation did take a hit. Yet after so many scandals the past few years, including the company's $550 million fraud-claim settlement with the Securities and Exchange Commission in 2010, you have to wonder if this new one matters.

Nobody was fooled last year when Goldman's chairman and chief executive officer, Lloyd Blankfein, made a spectacle of unveiling a new set of fluffy business principles pledging to put clients' interests first. It's not the principle that counts in this business. It's the money. And on this occasion, Goldman got a sweet deal.

Nothing was left to chance, it seems. Steve Daniel, the lead Goldman banker advising El Paso, personally owned $340,000 of stock in Kinder Morgan. This point wasn't disclosed to El Paso, although it's hard to imagine its directors would have cared much. They already knew he was horribly conflicted, because of his employer's $4 billion stake in Kinder Morgan. What would their complaint have been? That he was really, really conflicted?

Not surprisingly, Goldman's analyses of El Paso's options pointed toward accepting Kinder Morgan's offer. Goldman supposedly set up a "Chinese wall" to keep its bankers conflict-free. And a second bank, Morgan Stanley, was brought in to advise El Paso. The judge said the wall wasn't effective, though. (As if these things ever are.) Goldman made sure the terms were set so that Morgan Stanley got paid only if Kinder Morgan bought the company, Strine wrote.

A deal benefitting Kinder Morgan may have been what some of El Paso's bosses wanted. As Strine explained, El Paso's CEO and chairman, Douglas Foshee, didn't tell his board that he and other El Paso managers wanted to buy back El Paso's energy exploration-and-production business from Kinder Morgan for themselves, after the deal was negotiated.

Warped Incentives

Foshee's incentive was to limit the sale price that El Paso got, not maximize it. "Not forcing Kinder Morgan to pay the highest price possible for El Paso was more optimal than exhausting its wallet, because that would tend to cause Kinder Morgan to demand a higher price for the E&P assets," Strine wrote. The board had given Foshee sole responsibility for negotiating the company's sale from the outset. As for Kinder Morgan, it drove a hard bargain, as it was entitled to do.

So what did Goldman do wrong? Its bankers seem to have behaved like sharks. Guess what? Investment bankers are sharks. Goldman's reputation was reinforced, not damaged.

If El Paso's shareholders dislike the deal, they can vote against it. The vast majority won't. There is no competing bidder, because El Paso's board didn't seek one. What El Paso shareholders lost was the possibility that another company might have offered a higher premium than Kinder Morgan did. There's no way to know if anybody would have.

While the conflicts here may have been extreme, managers and buyout advisers at big companies pull similar escapades all the time, skimming corporate resources for themselves at the expense of passive shareholders. (Foshee stands to receive about $90 million once the sale is completed.) There usually isn't much outsiders can do about it, which is something everyone should understand before they buy stock in a public company.

As for the notion that Goldman lost? Come on. It was paid $20 million for advising a client in a deal where Goldman itself was on the other side. What's amazing is that El Paso let Goldman pull this off.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

To contact the writer of this article: Jonathan Weil in New York at jweil6@bloomberg.net

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net

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(BN) IBM’s Watson Gets Wall Street Job After ‘Jeopardy’ Win

What a dumb guy from CA talking through his ass who said IBM will kick ass going into asset management. Being suzy orman isn't the same as Warren Buffett.

Bloomberg News, sent from my Android phone

March 6 (Bloomberg) -- International Business Machines Corp.'s Watson computer, which beat champions of the quiz show "Jeopardy!" a year ago, will soon be advising Wall Street on risks, portfolios and clients.

Citigroup Inc., the third-largest U.S. lender, is Watson's first financial services client, IBM said yesterday. It will help analyze customer needs and process financial, economic and client data to advance and personalize digital banking.

IBM expects to generate billions in new revenue by 2015 by putting Watson to work. The technology giant has already sold Watson to health-care clients, helping WellPoint Inc. and Seton Health Family analyze data to improve care. IBM executives say Watson's skills -- understanding and processing natural language, consulting vast volumes of unstructured information, and accurately answering questions with humanlike cognition -- are also well suited for the finance industry.

Financial services is the "next big one for us," said Manoj Saxena, the man responsible for finding Watson work. IBM is confident that with a little training, the quiz-show star that can read and understand 200 million pages in three seconds can make money for IBM by helping financial firms identify risks, rewards and customer wants mere human experts may overlook.

Banks spent about $400 billion on information technology last year, said Michael Versace, head of risk research at International Data Corp.'s Financial Insights, which has done research for IBM.

Cloud-Based Service

Watson the financial assistant will be delivered as a cloud-based service and earn a percentage of the additional revenue and cost savings it is able to help financial institutions realize. Watson, including its work in the health- care and finance industries, will contribute "a portion" of IBM's target of $16 billion of analytics revenues in 2015, Saxena said, and that portion will "have a B next to it."

Watson may add $2.65 billion in revenue in 2015, adding 52 cents of earnings per share, Ed Maguire, an analyst at Credit Agricole, estimated in a November research note.

IBM, the world's biggest computer-services provider, reported revenue of $107 billion in 2011 and earnings of $13.06 a share. The company ended 2011 with $11.9 billion in cash.

Watson "can give an edge" in finance, said Stephen Baker, author of books The Numerati and Final Jeopardy, a Watson biography. "It can go through newspaper articles, documents, SEC filings, and try to make some sense out of them, put them into a context banks are interested in, like risk."

Language of Wall Street

In addition to Citigroup, Armonk, New York-based IBM has been working with financial institutions teaching Watson the language of Wall Street, and adding content including regulatory announcements, news and social media feeds. IBM won't say which other institutions Watson is already working with.

"It's not selling them software, it's selling them outcomes," Saxena said in a phone interview.

Watson offers a "more global" picture by looking beyond financial data, Saxena said. For example, Watson can comb 10-Ks, prospectuses, loan performances and earnings quality while also uncovering sentiment and news not in the usual metrics before offering securities portfolio recommendations. It can also monitor trading, news sources and Facebook to help a treasurer manage foreign exchange risk.

'Huge Marketing Edge'

Some of the biggest financial institutions have already built big data centers. IBM is competing with most other major technology companies to sell them tools to analyze and use accumulated information, Versace said.

"Apparently Citi gets it -- analytics is the new core in competitive banking," Versace said. "The ability to efficiently and effectively exploit big data, advanced modeling, text analytics, in memory and real-time decisions across channels and operations will distinguish those that thrive in uncertain and uneven markets, from those that fumble."

Watson gives IBM "a huge marketing edge" in the race among tech giants including Google Inc. and Microsoft Corp. to obtain intelligence for businesses by teaching machines to understand sentences and paragraphs rather than searching for single words or phrases, said author Baker.

Parts of Watson could already be combined with other IBM technologies to help banks with regulatory compliance by surveying internal documents and flagging those that seem amiss, Baker said. Watson was designed to be loaded with information rather than grapple with a live streaming feed, making it likely IBM will partner it with other technologies.

Applications Beyond Banking

Beyond banks and other financial institutions, and insurance companies, Watson may have applications for telecommunications companies, and perhaps even call centers, said Saxena, who joined IBM when it acquired his company Webify Solutions Inc. in 2006.

IBM plans to use Watson in financial services "mostly for portfolio risk management, they're not going to do stock picking," Maguire said in a Feb. 17 phone interview. "They think that Watson can make a difference." Still, Watson isn't perfect. It is weak in languages other than English, and its processing of social media streams from platforms including Facebook and Twitter can be sluggish. The lag is "getting shorter", Saxena said.

Precise Answers

A year ago last month, about 15 million viewers watched Watson beat former Jeopardy champions Ken Jennings and Brad Rutter -- a highly publicized victory in artificial intelligence that IBM always aimed to apply to the business world.

Watson had to learn how people speak and write, and evaluate its level of understanding, said Eric Brown, a member of the team that built him in an IBM research facility in New York. Precise answers delivered with confidence distinguish Watson from Web searches, enabling the technology to advise real-life decision makers, Brown said.

"I'm sure they use all this stuff internally to manage their own portfolio," said Credit Agricole's Maguire. "IBM's treasury is bigger than a lot of trading desks. If they went into asset management they would kick ass, but that's not what they do."

To contact the reporter on this story: Beth Jinks in New York at bjinks1@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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Is Apple the stock you need for retirement?

NEWS FROM USA TODAY

This is a crazy, and utterly irresponsible reporting by a moron who knows NOTHING about investing. 

Is Apple the stock you need for retirement?

by Matt Krantz on Mar. 05, 2012, under USA Today News

Q: Shouldn’t a person saving for retirement just put all their money on Apple stock?

A: If you were to pick a basket to put all your apples in, Apple (AAPL) stock would have been an appealing choice.

Investors like to think a stock that made other people rich before, will make them rich, too, in the future. And given the tremendous run in shares of Apple, it may seem like a no-brainer to place a big bet on Apple. And given the past, it’s hard to argue otherwise.

Just consider an investor who bought $10,000 of stock at the beginning of 1999. Perhaps this would have been a young investor’s early retirement savings. The shares closed at $10.31 on Jan. 4, 1999, meaning the investor could have bought 969.932 shares that day. You can look up historical prices of stocks, like Apple, using USA TODAY.com’s free historical price lookup.

Now that Apple shares are trading for roughly $500, those 969.932 shares would be worth $484,966. That’s a remarkable 35% average annual compound gain, which blows away just about any mainstream investment you could have made during that time. For most investors, $484,966 would be a stellar amount to have saved for retirement after just putting away $10,000.

So, there’s no question, if you could teleport back to 1999 and bet all on your money on Apple, it certainly would have paid off big. Even a retirement plan that was way off schedule could be righted in just 10 years with Apple stock, had you started in 1999.

The trouble is, it’s not 1999, it’s 2012. Back in 1999, Apple was a tired has-been technology company clawing its way to survival. All the interest was centered around dot-coms, which investors thought had huge growth ahead of them for years. Who would have wanted to invest in a retro maker of high-priced proprietary PCs? Clearly, though, the stock did incredibly well, despite the reasonable reasons to think it wouldn’t.

Things have since changed dramatically. Apple is hardly an undiscovered gem. It’s the largest company in the world by market value. Any mutual fund manager that hopes to keep pace with the stock market most likely must own the stock. The company’s profits are so massive that they have an oversized influence on the bottom line of the entire Standard & Poor’s 500. And of the 40 Wall Street analysts who cover the stock, 38 give it either a buy or a strong buy.

Academic research has shown, that over time, value-priced and beaten down stocks do best in the future, on average. Some investors make a case that Apple is a cheap stock. But it’s hard to argue that a stock that’s up 4,749% since 1999 is beaten down.

Could Apple continue to be that only stock that matters? It’s certainly possible. Consumers of Apple products continue to demonstrate that even amid a recession, they have no problem paying the premium the company charges for its products. The company also continues to dominate just about any industry it goes into, ranging from digital music to tablet computers and increasingly smartphones. If consumers continue to ignore competition, it’s hard to see anything stopping the power and influence of Apple.

At the same time, just about all hot stocks eventually get challenged. Laws of economics dictate that eventually companies enjoying extremely large profit margins are challenged by competition and replacement products. Perhaps it’s truly different this time with Apple. Perhaps Apple’s popularity and keen advertising will continue to defy the laws of economics. Just not sure you’d want to bet your retirement on that happening.

Copyright © 2010 USA TODAY, a division of Gannett Co. Inc.

(BN) Buffett’s Immunity to Gold Bug Baffles State Street’s Gold Guy Goolgasian

Theres no stopping people from finding excuses to support their view, especially if their job requires them to.

Bloomberg News, sent from my iPad.

Buffett's Immunity to Gold Bug Baffles State Street's Goolgasian

March 5 (Bloomberg) -- Warren Buffett is a great investor, says Christopher Goolgasian, a portfolio manager at State Street Global Advisors Inc. who helps oversee a $74 billion gold fund. The Oracle of Omaha just has it wrong when it comes to the metal.

"While he won't own gold, he also never owned Apple (up around 1,500% since January of 2000) or Google (up 530% since August of 2004)," Goolgasian said of Buffett in a March 2 regulatory filing for SPDR Gold Trust, an exchange-traded fund managed by Boston-based State Street Corp.

In the filing, Goolgasian wrote that while Buffett's Berkshire Hathaway Inc. has risen 105 percent since January of 2000, gold has climbed nearly fivefold during the same period.

Buffett, in his annual letter to shareholders last month, said investors should avoid gold because its uses are limited and it doesn't have the potential of farmland or companies to produce new wealth. Achieving a long-term gain on the metal requires an "expanding pool of buyers" who believe the group will increase further, he said.

"What motivates most gold purchasers is their belief that the ranks of the fearful will grow," Buffett wrote in the letter, posted Feb. 25 on the company's website. "During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As bandwagon investors join any party, they create their own truth -- for a while."

In his letter, Buffett estimated the world's stock of gold if melded together would form a cube of about 68 feet per side and, when valued at $1,750 an ounce, amount to about $9.6 trillion.

'Fondle the Cube'

For the same amount of money, an investor could acquire all the cropland in the U.S. and buy Exxon Mobil Corp. 16 times, while still having $1 trillion left over, Buffett wrote.

"You can fondle the cube, but it will not respond," he said.

Gold futures for April delivery settled at $1,709.80 an ounce March 2 on the Comex in New York.

Buffett, 81, built Omaha, Nebraska-based Berkshire from a failing textile maker into a firm selling insurance, energy, and jewelry through acquisitions and stock picks. The company has a market value of $194 billion, according to data compiled by Bloomberg.

In his note, Goolgasian, called Buffett "the greatest investor of our time." Still, that didn't stop him from questioning Buffett's take on gold.

"It strikes us that Buffett believes that only asset classes and investments that fit his specific investment beliefs can be sensible investments," Goolgasian wrote. "We, however, are agnostic about how to beat the market. We just want to do it."

Buffett didn't immediately return an e-mail sent to his assistant, Carrie Kizer, requesting a comment on State Street's filing.

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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(BN) Yale Professors Want Singapore Campus to Protect Human Rights

Singapore doesnt need Yale, for heavens sake, kick Yale back to where it came from!

Bloomberg News, sent from my iPad.

Yale Professors Want Singapore Campus to Protect Human Rights

March 2 (Bloomberg) -- Yale University professors are pushing the school to protect civil and political rights at the branch campus in Singapore scheduled to open next year.

At a meeting yesterday, faculty members proposed a resolution that demands the campus "respect, protect and further the ideals of civil liberties," Victor Bers, a classics professor at the New Haven, Connecticut-based school, said in an e-mail. The resolution may be voted on at the April 5 faculty meeting, Bers said.

The campus, which Yale will run with the National University of Singapore, will be the first overseas branch in Yale's 300-year history. It is one of a number of campuses in East Asia being developed by U.S. colleges including New York University and Duke University. Those campuses face restrictions on academic and political freedoms, and Yale professors said they are concerned about human rights in Singapore and the faculty's exclusion from the planning.

"Colleagues, our honor and judgment are being tested by the Yale-NUS enterprise," Bers said at the meeting, according to an e-mailed copy of his remarks.

The meeting was attended by more than 140 professors as well as Yale President Richard Levin, Bers said.

Bers noted that Levin spoke out in opposition to the New York Police Department's monitoring of Muslim students at Yale and wondered what his response would be to a similar government intrusion in Singapore.

"President Levin did us proud by issuing a public protest," Bers said at the meeting. "Does he plan, as a member of the Yale-NUS board of trustees to stifle himself in comparable circumstances?"

Human Rights

Singapore's government censors the media and uses the courts to silence criticism of the regime, according to Human Rights Watch, a New York-based group. Last year, Levin said he was confident that Yale's faculty in Singapore could teach and publish without restrictions.

Yale-NUS College is scheduled to open in August of 2013 with 150 undergraduate students and will grow to about 1,000, according to Yale. Its board includes Levin and members appointed by both Yale and NUS.

Christopher Miller, a Yale French and African-American studies professor, raised the issue of homosexuality, which is illegal for men in Singapore, he said. Because it is seldom enforced, Yale has been lured to believe it won't be a issue for faculty and students, he said.

"There is no confusion about the law on the books: male homosexuality is illegal," Miller said in remarks he made at the meeting and e-mailed. "But the Singaporean government has managed to create a 'twilight zone' around the question of enforcement. And Yale has fallen into their trap."

Yale, a member of the Ivy League of eight private U.S. universities, was founded in 1701.

To contact the reporter on this story: Oliver Staley in London at ostaley@bloomberg.net

To contact the editor responsible for this story: Lisa Wolfson at lwolfson@bloomberg.net

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(BN) EU Leaders Declare Crisis Turning Point as Focus Starts Shifting to Growth

Bite the bullet. Lets Move on! 

Bloomberg News, sent from my iPad.

EU Leaders Will Speed Up Payments to Permanent Aid Fund

March 2 (Bloomberg) -- European leaders declared a turning point in the Greece-fueled debt crisis, shifting their focus away from the budget-cutting spree that has dominated two years of rescue operations.

With a second Greek aid package wrapped up and the euro region slipping into recession, the leaders committed to a pro- growth agenda that sits uneasily with a deficit-control treaty that was signed today at the 17th summit since the outbreak of the crisis.

"We're not out of the economic crisis yet but we are turning the page of the financial crisis," French President Nicolas Sarkozy told reporters after the Brussels summit.

European leaders are on guard against a repeat of the false dawn of mid-2010 after Greece's first bailout and the setup of a rescue fund. A phase of market calm was jolted by German demands for bond writeoffs that rattled investors, forcing Ireland and Portugal to fall back on emergency aid.

The next tests include Spain's defiance of deficit- reduction targets, a wrangle over the size of the rescue fund and pleas for more International Monetary Fund backup, all flanked by the multi-year effort of stepping up Greece's aid and then making sure it gets paid back.

Greece's 130 billion-euro ($172 billion) second package, confirmed on the eve of the summit, brought to at least 386 billion euros the sums committed or disbursed by European governments and the IMF to keep the euro -- a currency designed to last forever -- intact.

ECB Cash

Added to that are 219.5 billion euros spent by the European Central Bank to buy the bonds of struggling countries, and another 1 trillion euros in unprecedented ECB loans to tide the banking system through the crisis.

"It's a reassuring picture which is still very fragile because we have a lot of uncertainty and the countries of Europe have to persevere," ECB President Mario Draghi said at the summit. "It's a much much better picture than we had until November."

The Euro Stoxx 50 Index has advanced to a seven-month high and yields on Spanish and Italian government bonds have plunged as investor concerns that the single currency was at risk eased.

"For the short term the risk of contagion has been eliminated, but the deeper problems are still there," Zsolt Darvas, an economist at the Bruegel research institute in Brussels, told Bloomberg Television today.

Debt Swap

The next hurdle is to line up private investors to take losses of more than 70 percent on Greek bonds in a bond exchange, the key plank in a strategy to reduce Greece's debt to about 120 percent of gross domestic product by 2020, a figure still double the euro-area limit.

Finance ministers will hold a March 9 teleconference to review the outcome of the swap offer. The incentive for bondholders is that a refusal to take part might lead to even bigger losses.

Whether there is a fallback position was left open. Luxembourg Prime Minister Jean-Claude Juncker said there is a back-up plan for Greece, Finnish Prime Minister Jyrki Katainen said there isn't, and Sarkozy called talk of yet more aid an "odd declaration."

Prime Minister Helle Thorning-Schmidt of Denmark, one of 10 EU countries outside the euro, concluded: "Everyone knows that we are not completely finished in terms of the Greek situation, but everyone understands that we take substantial steps in a positive direction. For the first time in many, many months this is not a crisis summit."

'Unique' Case

Leaders labeled Greece a "unique" case, promising that bond writedowns are a thing of the past, in a reversal of the strategy demanded in late 2010 by Chancellor Angela Merkel of Germany, Europe's dominant country.

Merkel executed another reversal at the summit, agreeing to speed the payments into the planned 500 billion-euro permanent rescue fund barely a year after she won a deal to slow them down.

"We are still in a fragile situation," Merkel said. 'This situation has calmed down a bit, but the crisis is hardly over and further steps will be required to get there.''

Under pressure from world leaders and the IMF to reinforce the European firewall, the euro's stewards pledged to pay the first two annual installments into the fund this year. Known as the European Stability Mechanism, the permanent fund will go into operation in July.

Fund Installments

The timing of the remaining three installments to bring it up to its 500 billion-euro capacity will be set later in March, along with a decision whether to add on the 250 billion euros left in the temporary rescue fund, the European Financial Stability Facility.

The month will also bring an austerity-versus-growth confrontation, as the signers of the freshly minted deficit- reduction treaty weigh whether to push back Spain's deficit- reduction timetable as it struggles through its second recession since 2009.

"For the credibility of the whole operation, I think it is necessary that we maintain these budgetary targets," said EU President Herman Van Rompuy, who was named to a second 2 1/2- year term at the summit. "If we don't do that in a consistent fashion, then we will be punished by the markets."

The tension is between abiding by the EU's fiscal corset and the economic logic of forcing more cuts on a country suffering unemployment over 20 percent. After most leaders left the EU building, Spanish Prime Minister Mariano Rajoy scuttled his target of a 4.4 percent deficit in 2012, aiming for 5.8 percent instead.

"I didn't communicate the deficit target to the heads of state, nor do I have to," Rajoy said. "This is a sovereign decision taken by Spain."

The next move lies with the European Commission, which will decide whether to grant Spain leniency or pursue sanctions under enhanced powers it acquired last year.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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(BN) Life as Libor Traders Knew It Seen as Abusive by Collusion Investigators

The President of the United States of America decides which countries to go to war with. That cant' continue either then.

These people are morons ranked at the bottom of their class.

Bloomberg News, sent from my iPad.

Life as Libor Traders Knew It Seen as Abusive by Investigators

March 2 (Bloomberg) -- Regulators probing the alleged manipulation of global interest rates are focusing on what traders involved in setting the benchmark say were routine discussions condoned by their superiors.

Staff responsible for submissions to the London interbank offered rate regularly discussed where to set the measure with traders sitting near them, interdealer brokers and counterparts at rival banks, according to money-market traders with direct knowledge of procedures at three firms. The talks became common practice after money markets froze in 2007, making it difficult for individual bankers to gauge the cost of borrowing from other lenders, said the traders, who asked not to be identified because they weren't authorized to speak about the subject.

"A few hundred people, mostly based in one city and sitting in close proximity to each other, set an index rate for trillions of dollars of securities with little or no oversight," said Mark Sunshine, chief executive officer and chairman of Veritas Financial Partners, a Florida-based firm that provides loans to businesses and real estate companies. "That cannot continue. The mechanism itself, the oversight and the penalties if violated, are woefully inadequate."

The investigation by regulators in the U.K., U.S. Canada, Japan and the European Union, is the latest black eye for an industry smarting from criticism that it caused a global financial crisis in 2008. The probes have called into question whether firms can be trusted to set with no regulatory oversight a rate that is the basis for about $360 trillion of securities from floating-rate mortgages to commercial loans.

'Crucial Role'

"Given the number and the value of transactions in interest-rate derivatives, and the crucial role these products play in the management of risk, any confirmed manipulation of these interest rates would probably imply a very significant cost to the European economy," EU Competition Commissioner Joaquin Almunia said in a speech last week.

Traders interviewed said there were no rules stopping talks between employees, or guidelines on how the rate should be set. The British Bankers' Association, the London-based lobby group that publishes the rate, said it has never required banks to erect Chinese walls between those setting the rate and traders making bets on the future direction of the measure, leaving it up to the firms themselves and their regulators.

Spokesmen at lenders that contribute to Libor -- Credit Suisse AG, Societe Generale SA, Bank of America Corp., Royal Bank of Scotland Group Plc, JPMorgan Chase & Co., Citigroup Inc., Lloyds Banking Group Plc, HSBC Holdings Plc and UBS AG -- declined to comment on what internal controls they have for their submissions.

Employees interviewed by Bloomberg said the interbank lending market had been broken since before Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008.

Reluctance to Lend

The difference between three-month dollar Libor and the overnight indexed swap rate, an indicator of banks' reluctance to lend to each other, peaked at a record 364 basis points on Oct. 10, 2008. The spread averaged about 10 basis points in the five years up to the collapse of Lehman Brothers Holdings Inc. and has averaged 45 basis points since.

Traders say the lack of interbank activity made it impossible to calculate accurately where borrowing costs should be fixed. Instead, rate-setters resorted to talking with other market participants, checking previous submissions from competitors and scanning the news to come up with a best guess of what they might have to pay for short-term cash if a market existed, according to the traders.

During the crisis, banks routinely misstated borrowing costs in the BBA process to avoid the perception they faced difficulty raising funds, Tim Bond, then head of asset allocation at Barclays Capital, said in a Bloomberg Television interview in May 2008. In a report the same year, the Bank for International Settlements, the central bank for central bankers, questioned the accuracy of Libor quotes, saying they could be influenced by "strategic behavior." The BIS said firms would be "wary of revealing" information that could signal stress.

'Controversy'

"Libor is not a market interest rate," said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. "The spot fixings are at best bank guesses of a hypothetical interbank" borrowing rate. "For that reason, this will always be subject to controversy."

The benchmark is generated through a daily survey of firms conducted on behalf of the BBA in which lenders are asked how much it would cost them to borrow from one another for 15 different time periods, from overnight to one year, in currencies including dollars, euro, yen and Swiss francs. After a predetermined number of quotes are excluded, those left are averaged and published for each currency by the BBA before noon.

While the BBA says typically only a bank's Treasurer or other nominated individual can make a submission, a trader at one firm said a large number of employees had access to the software used to make a bank's submission and could overwrite others' figures. On any given week, several different traders might input the rate and on at least one occasion a graduate trainee was deputized to do so, according to the trader who had direct knowledge of that firm's practices.

Trader Dismissed

Tan Chi Min, a trader dismissed by RBS, said in a lawsuit filed in Singapore in December that he and at least seven of his colleagues at the Edinburgh-based lender were regularly consulted on the bank's yen Libor submissions by rate-setters and senior managers.

There was no "regulation, policy, guideline or law" in place, Tan said in the filing. A person familiar with RBS's rate setting procedures corroborated Tan's account.

RBS responded in January, saying in court filings that it fired Tan because he tried to improperly influence the bank's rate setters from 2007 to 2011 to persuade them to offer Libor submissions that would benefit his trading positions. Tan wasn't reachable for comment.

Traders at two more firms said they also discussed where Libor would be set with managers and rate-setters because that is how the industry operated.

"As all contributor banks are regulated, they are responsible to their regulators, rather than us, for maintaining appropriate Chinese walls," the BBA said in a statement.

The U.K.'s Financial Services Authority imposes no specific restrictions on banks to prevent communications between traders and rate-setters over Libor beyond a broad requirement for them to identify and prevent conflicts of interest, according to guidelines posted on its website. A spokesman for the London- based watchdog declined to comment beyond the guidelines.

Investigator Scrutiny

Investigators are now scrutinizing e-mails and instant messages between traders and rate-setters for evidence that traders not only discussed Libor, but collaborated to rig the rate to profit from wagers on future interest rates.

Canada's Competition Bureau said in court filings that one bank had confessed to participating in a conspiracy among employees at HSBC Holdings Plc, Deutsche Bank AG, ICAP Plc, JPMorgan, RBS and Citigroup Inc. to rig the price of derivatives globally by manipulating Libor.

UBS was the bank that alerted Canadian regulators to the alleged conspiracy in return for immunity from regulatory penalties for the firm, three people with knowledge of the inquiry said last month.

A UBS employee, identified only as Trader A in the Canadian court documents, began in 2007 to contact employees at other banks to discuss his market positions and a desire for a "certain movement" in yen Libor, according to the filings. Some of those contacted said they would try and facilitate his requests by influencing their own banks submissions, according to the documents, filed at the Ontario Superior Court in May.

Traders involved say the existence of such correspondence shows they weren't trying to hide their acts from superiors. They didn't know they were in breach of any rules, they said.

Individuals and firms found to have engaged in wrongdoing would likely face demands from regulators to return any illicit profits, said Jordan Thomas, a former enforcement attorney at the U.S. Securities and Exchange Commission who now advises whistle-blowers at Labaton Sucharow LLP in New York. They may also be fined and would be forced to improve their business practices to prevent a similar situation arising again, he said.

"These cases have put the spotlight on the failings of Libor and will hopefully spur demand on regulators to assess this," said Richard Werner, a professor at University of Southampton, England. "The danger is that the focus is too much on individual cases. This is a systemic problem."

To contact the reporters responsible for this story: Liam Vaughan in London at lvaughan6@bloomberg.net Jesse Westbrook in London at jwestbrook1@bloomberg.net Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for the story: Edward Evans at eevans3@bloomberg.net

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