BLOOMBERG: Goldman Sachs Raising $5 Billion to Repay U.S., Shed Pay Limits

By Christine Harper

April 14 (Bloomberg) -- Goldman Sachs Group Inc., buoyed by profit that exceeded the most optimistic Wall Street estimates and a 54 percent jump in its stock price, plans to raise $5 billion to repay federal rescue funds and shed government limits on executive pay.

Chief Executive Officer Lloyd Blankfein, eager to redeem the $10 billion his New York-based bank received in October, announced the fundraising plan yesterday as the company reported a $1.81 billion profit in the first quarter. The bank earned $3.39 a share, more than double the $1.64 average of 16 analysts surveyed by Bloomberg News.

�They�ll do better now in terms of what it costs to raise money than they can for the rest of the year,� said Christopher Whalen, a managing director at Torrance, California-based Institutional Risk Analytics. �I don�t think the rest of this year will be good.�

Goldman Sachs was the most profitable Wall Street firm before converting to a bank last year and posting its first quarterly loss since the company went public in 1999. The bank also said yesterday that it lost $780 million, or $2.15 a share, in the month of December, before the start of its new fiscal year.

The bank said it will use proceeds from the common stock offering plus �additional resources� to pay back the funds it got from the Troubled Asset Relief Program. Andrew Williams, a spokesman for the Treasury Department, declined to comment on Goldman Sachs�s announcement.

�Eye of Storm�

U.S. regulators are unlikely to object to the repayment. The government favors letting banks return money if they fare well on stress tests completed by the end of this month and can get private capital, according to people familiar with the matter.

�They can raise capital now; clearly the stock is strong,� said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors, which has about $13.3 billion under management. �This is like the eye of the storm passing.�

The firm�s business model depends on its ability to attract top traders and bankers with promises of lucrative bonuses, a Wall Street pay model that is now under attack by politicians incensed at multimillion-dollar payouts to executives in an industry blamed for causing the economic crisis. The government imposed limits on executive compensation at banks such as Goldman Sachs that accepted more than $500 million in TARP funds.

Before last year, Goldman Sachs set two consecutive Wall Street pay records. Even last year, 953 of the bank�s employees made more than $1 million, the Wall Street Journal reported, citing unidentified people familiar with the matter. Lucas van Praag, a spokesman at Goldman Sachs, declined to comment.

Compensation Costs Rise

This year, the bank set aside $4.71 billion for compensation and benefits, 18 percent more than during the first quarter a year earlier. The expense totaled 50 percent of revenue, up from 48 percent in last year�s first quarter, even as the firm�s workforce shrank 12 percent to 27,989.

If Goldman Sachs returns the TARP money, it may pressure other banks to follow suit or risk appearing dependent on the government, said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who rates Goldman Sachs �market perform.�

The better-than-expected earnings will also make it difficult for competitors that are scheduled to report their own results this week or next week, said Sorrentino.

�This makes life much more difficult for everyone else out there,� he said. �To merely beat your numbers now will be viewed as, �What�s wrong?��

Goldman Sachs Results

Book value per share rose to $98.82 at the end of March compared with $98.68 in November, and return on equity, a gauge of how effectively the firm invests earnings, was 14.3 percent in the first quarter, Goldman Sachs said.

First-quarter revenue was $9.43 billion. The highlight was Goldman�s fixed-income, currencies and commodities business, known as FICC, in which trading revenue was a record $6.56 billion, 34 percent higher than its previous high, as client- driven income outweighed an $800 million loss on commercial mortgage loans, excluding hedges.

Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.

�FICC operated in a generally favorable environment characterized by client-driven activity, particularly in more liquid products, and high levels of volatility,� the bank said in a statement. �Illiquid assets generally continued to decline in value.�

Fewer Rivals

The loss of competitors including Lehman Brothers Holdings Inc. and Bear Stearns Cos. meant Goldman Sachs attracted more trading business, said Huntington�s Sorrentino.

�A lot has to do with the fact that they really narrowed the playing field,� he said. �All that business has to be flowing through to someone.�

Because trading revenue is so hard to predict, �the market�s going to value asset management and investment banking and retail brokerage higher than it�s going to value trading,� said Bernstein�s Hintz. �As an analyst you have to ask yourself, �Is this sustainable?��

Every other business unit had lower revenue compared with the first quarter of 2008 or reported a loss.

Equity trading revenue was $2.0 billion as slower activity outside the U.S. meant the firm generated fewer trading commissions than a year ago.

Investment Banking

Investment banking revenue of $823 million compared with $1.17 billion in the first quarter of 2008, reflecting a decline in leveraged finance activity and fewer mergers and share offerings.

Asset management fees slumped 28 percent to $949 million as assets under management fell 3.3 percent. Securities services, which include the firm�s prime brokerage unit, made $503 million, 30 percent less than the first quarter of 2008.

Goldman Sachs had a $1.41 billion net loss from principal investments, including a $151 million loss from the firm�s investment in Industrial and Commercial Bank of China Ltd.

Total assets on the balance sheet rose 5 percent from the end of November to $925 billion as of March 27. Of that, about $59 billion qualified as �Level 3� assets, which are the hardest to value, down from $66 billion at the end of November.

Goldman Sachs raised $5.75 billion by selling shares at $123 apiece in September in an offering that started after the company announced that Warren Buffett�s Berkshire Hathaway Inc. bought $5 billion in preferred stock.

A month later, Goldman Sachs was among nine financial institutions that shared $125 billion in the first payments from the Treasury�s $700 billion bailout program.

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BLOOMBERG: Buffett reigns now that cash is king

March 26, 2008 - 4:32PM, Bloomberg

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Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world"s richest person.

Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., has $US59 billion ($65 billion) in cost-free money from insurance premiums to invest. Schwarzman"s New York-based Blackstone Group LP, manager of the biggest private-equity fund, is being forced to bypass Wall Street banks after they stopped financing most leveraged buyouts.

Buffett and Schwarzman each takes a different approach to the same goal: finding companies they consider undervalued. Investors are betting Buffett"s model will prevail, at least for now. Berkshire climbed 5.4% since the subprime-lending crisis sent the Standard & Poor"s 500 Index tumbling as much as 19.7% from its Oct. 9 peak. Blackstone dropped 43% in the same period.

""There"s a massive, massive advantage for Buffett in this kind of market,"" said Guy Spier, chief investment officer of New York-based hedge fund Aquamarine Capital Management LLC. ""All the leveraged finance has dried up, so he"s going to have a much better time finding things to buy.""

Blackstone"s vulnerability was underscored March 10, when the company said fourth-quarter profit plummeted 89% amid what Schwarzman called a ""severe financial crisis."" Banks started pulling back from most LBO lending last June after as much as $US400 billion in debt sat unsold on their books and losses from the subprime-mortgage market increased.

Without new loans, LBO firms struggled to complete deals, while declining bond prices forced Blackstone to write down the value of some of its holdings. The company is now contacting hedge funds and mutual funds in search of new financing, which usually accounts for as much as two-thirds of the price of an LBO.

Buyout firms such as Blackstone and New York-based Kohlberg Kravis Roberts & Co. relied on free-flowing debt to announce a record $US745 billion of transactions last year, according to data compiled by Bloomberg. The pace has stalled in 2008, with $US56 billion of announced deals through yesterday, a 71% drop from a year earlier.

The retreat by investors from all but the safest government debt has driven up LBO financing costs. The amount of extra yield investors demand to hold speculative-grade bonds over US Treasuries more than tripled to 7.97 percentage points yesterday from 2.41 percentage points at the start of June, according to indexes compiled by Merrill Lynch & Co.

""When both equity and credit markets go down in concert, it"s not unfair for people to expect our near-term earnings to suffer,"" Blackstone President Tony James said in a March 20 interview.

Blackstone led some of the biggest deals last year, including the $US39 billion purchase of Chicago-based Equity Office Properties Trust, then the largest LBO, and the buyout of hotel-operator Hilton Hotels Corp. of Beverly Hills, California, for $US20 billion.

This year, its $US1.8 billion takeover of PHH Corp., a Mount Laurel, New Jersey-based mortgage and auto-leasing company, with Fairfield, Connecticut-based General Electric Co. fell apart after banks reneged on a financing agreement. The $US6.6 billion buyout of Dallas-based credit-card processor Alliance Data Systems Corp. has been stalled by a dispute with regulators.

Schwarzman, 61, raised an industry record $US21.7 billion fund last year. Yet without access to the debt markets, Blackstone and other LBO firms may not be able to produce the annual returns of 20% to 30% or more their investors demand.

Buffett, meanwhile, is swimming in capital. Berkshire"s float, or insurance premiums collected by General Re, Geico and other Berkshire divisions, reached $US59 billion at the end of 2007, according to company"s annual report.

""This float is "free" as long as insurance underwriting breaks even, meaning that the premiums we receive equal the losses and expenses we incur,"" Buffett, 77, wrote in the February report. ""If we do that, our investments can be viewed as an unencumbered source of value for Berkshire shareholders.""

Berkshire has invested in shares of Atlanta-based Coca-Cola Co. and Procter & Gamble Co. of Cincinnati, and in the Brazilian real. It owns more than 75 companies, including paint supplier Benjamin Moore & Co. based in Montvale, New Jersey; Fruit of the Loom Ltd., the Bowling Green, Kentucky-based underwear maker; and NetJets Inc. of Woodbridge, New Jersey, which leases private airplanes.

Buffett, whose personal fortune was estimated at $US62 billion by Forbes magazine, agreed Dec. 25 to buy 60% of Marmon Holdings Inc., the Pritzker family"s collection of 125 companies, for $US4.5 billion. He"ll buy the rest of the Chicago- based company by 2014, and depending on the final price, it may be his largest purchase outside the insurance industry.

In all, the companies Berkshire owns employed 233,000 people at the end of last year. Berkshire"s market value has climbed to $US202 billion, making it the 14th-biggest company in the world.

Blackstone, formed in 1985 by Schwarzman and Peter G. Peterson, went public in June, raising $US7.1 billion through an initial public offering and sale of a 9.4% stake to China Investment Corp., a sovereign wealth fund. It was the peak of the LBO boom.

In addition to Equity Office and Hilton, the company"s biggest acquisitions include Freescale Semiconductor Inc., the Austin, Texas-based maker of chips for mobile phone, cars and consumer electronics; New York-based market researcher Nielson Co.; and Michaels Stores Inc. of Irving, Texas, the biggest arts-and-crafts retailer in the US.

Blackstone"s corporate buyout funds own 48 companies that employ about 560,000. Now, it is increasingly looking outside private equity for profits as large buyouts wane.

Assets at Blackstone"s hedge-fund division reached $US44.5 billion in the fourth quarter. The unit"s operating profit rose 58% to $US110.3 million in the final three months of 2007, while the private-equity unit had an operating loss of $US37.2 million.

""As time goes on, we get a more balanced revenue stream,"" Blackstone"s James, 57, said in last week"s interview.

The firm is also pursuing smaller deals, such as the $US1.2 billion purchase of Richmond, Virginia-based Performance Food Group Co. announced in January, and companies in regions including Asia, where credit still is available, James said.

Schwarzman thrives when he can use cheap financing to buy struggling companies. Blackstone then revamps their operations and resells them for relatively high returns because the acquisitions were funded with borrowed money.

Today, with more bargains in equity markets, Blackstone is unable to sell the bonds and loans needed to buy big companies like Hilton that can boost returns at a firm with almost $US100 billion in assets under management.

Schwarzman ""just won"t do any of these deals for a few years,"" said Whitney Tilson, founder of New York-based T2 Partners LLC, which holds Berkshire shares.

""Blackstone still has a great business model. Buffett just has a much better one.""

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BLOOMBERG: General Electric Rises as S&P�s Ratings Cut Eases Concern

By Rachel Layne

March 12 (Bloomberg) -- General Electric Co. shares and bonds rallied after Standard & Poor�s lowered its debt ratings one level and raised the outlook to �stable,� comforting investors who feared a sharper cut as profit falls at GE�s finance arm in a global recession.

The switch to AA+, from AAA and with a �negative� outlook, affects long-term debt, S&P analysts said in a statement today.

GE, which held the top rating since 1956, said in a statement doesn�t foresee �any significant operational or funding impacts.� The Fairfield, Connecticut-based company�s shares rose 87 cents to $9.36 at 11:55 a.m. in New York Stock Exchange composite trading.

�A one-notch downgrade and �stable� mean you can take away the ratings as an issue for the time being,� said Stephen Tusa, a JPMorgan Chase & Co. analyst in New York. If S&P had kept the negative outlook, �it would have lingered as an issue.�

The downgrade is a setback for Chief Executive Officer Jeffrey Immelt, who until January was saying that GE generates enough earnings to justify keeping both its annual dividend and the AAA, an endorsement that a company is among a handful of the world�s safest and strongest. On Feb. 27 he reduced the shareholder payout for the first time since 1938 in a move to save about $9 billion a year.

Robert Schulz, the S&P analyst who oversees the GE parent company, said in an interview that the ratings committee balanced the �excellent risk profile� of GE�s industrial businesses against the prospects of weaker earnings or a �modest net loss� at GE Capital.

�We�re not expecting any real earnings or cash flow from GE Capital this year or next year,� Schulz said. Without the support of the parent company, GE Capital�s rating would be an A, lower than the previous A+ assessment, S&P said.

Market Reaction

S&P left GE and GE Capital�s commercial paper ratings at A- 1+ and said the rating for debt sold backed by the Federal Deposit Insurance Corp. remains AAA.

GE Capital�s $3 billion of 5.625 percent notes due in 2017 rose 1.4 cents to 82.9 cents on the dollar, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The notes yield 8.49 percent. The notes earlier rose as much as 2.1 cents to 83.7 cents, a two-week high.

The new rating �takes away that ambiguity,� said Peter Sorrentino, who helps manage $15 billion at Huntington Asset Advisors in Cincinnati. �The short-term rating was affirmed and the outlook is stable, so that�s a plus.�

The cost of protecting bonds sold by GE Capital fell 0.7 percentage point to 8.3 percent upfront today, according to CMA Datavision prices for credit-default swaps. The price means it would cost $830,000 in advance and $500,000 annually to protect $10 million of debt for five years.

GE Capital Transparency

The shares dropped 75 percent in 12 months through yesterday and traded below $6 on March 4, the lowest since December 1991, as some investors and analysts criticized the company for a lack of transparency at the GE Capital finance arm. Investors are concerned that the unit, already facing rising credit-card delinquencies and $4 billion in unrealized property losses, will require more capital than GE anticipates.

The company has scheduled what it calls a �deep-dive� meeting with analysts for March 19 to give more detail about GE Capital holdings.

Standard & Poor�s in December said GE had a 1-in-3 chance of losing its top AAA designation within two years, and S&P kept GE�s �negative� outlook after the dividend reduction. Moody�s Investors Service put GE on review in January and, after the dividend cut, said it would keep studying GE�s debt for a possible lower rating than its top-level Aaa.

Ratings Services

�The rating agencies are catching up to the reality within the finance operations at GE,� said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York, citing the global slowdown.

The global recession and credit crisis may lower odds GE Capital can make its $5 billion profit goal this year and that demand will hold up for GE�s goods as the world�s largest maker of jet engines, power turbines and medical-imaging equipment.

General Electric had held S&P�s AAA since 1956, the year Immelt was born. The company has had Moody�s Aaa top rating since 1967. Today�s downgrade squares with what investors already see: GE has traded for six years as though its bonds were less than the highest rating.

Immelt Strategy

Immelt, 53, said in a March 5 interview that a ratings drop won�t change the way he runs the company or alter his plan to shrink GE Capital to produce a lower percentage of the parent�s profit.

�I will run GE with reduced leverage, reduced commercial paper, and earning money in GE Capital, which have long been the elements of being a AAA,� Immelt said in the interview. �I�m going to continue to run the company, the same as I�ve always run the company which is with that kind of discipline.�

Under debt instrument guarantees and covenants, GE would have to post additional collateral if the ratings were cut below AA-/Aa3 or A-1 and P-1, or four levels, the company said in its annual filings with the U.S. Securities and Exchange Commission last month.

GE said in December it may generate as much as $16 billion in cash after capital expenses this year, mainly from the sale of industrial goods, more than enough for the annual dividend payout. GE�s non-finance businesses had $16.7 billion in free cash flow from operations in 2008, after capital expenditures.

Profit Prospects

GE Capital posted $8.6 billion of the parent company�s $18.1 billion in profit last year and predicts it will earn $5 billion this year. Chief Financial Officer Keith Sherin said Feb. 10 that projection exceeds most analysts� forecasts.

Immelt and GE�s board last month decided to cut the quarterly dividend by 68 percent, to 10 cents a share from 31 cents. The decision will free up about $4.4 billion in this year�s second half, the company said. GE has paid a dividend in each of the past 110 years.

On Sept. 25, GE reduced its annual profit forecast for a second time and suspended its stock buyback. A week later, GE got a $3 billion investment from investor Warren Buffett�s Berkshire Hathaway Inc. and said it would sell $12 billion in common stock.

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BLOOMBERG: GE Capital Says Funding Is Adequate, Profit Expected

By Rachel Layne

March 19 (Bloomberg) -- General Electric Co. said its GE Capital finance unit won�t need more outside funding and at worst will break even under scenarios the Federal Reserve is using to test banks during a global recession and credit crunch.

GE made the forecast at a meeting today in New York where Chief Financial Officer Keith Sherin and other executives are trying to allay investors� concerns with the most detail yet about the unit�s funding, holdings, reserves and potential writedowns and losses. The unit�s businesses include credit cards, real estate, plane leasing and corporate lending.

�We�re running GE Capital to be safe and secure in this environment,� Sherin told the audience, adding that GE is �committed� to having a finance business. �We have enough capital to be able to weather a very adverse set of cases.�

GE shares dropped about 60 percent since September through yesterday, losing $144 billion in market value as investors burned by bank failures punished even finance companies tied to profitable industrial businesses. In October, GE sold $3 billion in preferred shares to billionaire Warren Buffett and $12 billion in common shares to bolster the balance sheet.

The finance arm has been stress-tested using methods the Fed employs for banks, as well as a scenario in which U.S. unemployment peaks at 10 percent and gross domestic product declines by more than 3 percent this year, GE said. The unit�s target for net income this year remains $5 billion.

�Even in the worst case, we�re break-even to slightly profitable and we have no need for outside capital,� GE Capital Chief Executive Officer Michael Neal told investors. �We�ll try to convince you of that today. �

Economic Crisis

The deepest economic crisis since the Great Depression already cost GE its top AAA credit rating from Standard & Poor�s and prompted the Fairfield, Connecticut-based company to cut its dividend for the first time since 1938.

GE�s shares touched a 17-year low March 4, the day before Sherin went on the company-owned CNBC television network to tamp down speculation about potential losses and capital needs. After his appearance, the shares climbed 55 percent through yesterday.

The stock rose 72 cents, or 7 percent, to $11.03 at 10:50 a.m. in New York Stock Exchange composite trading.

GE Capital�s $4 billion of 5.625 percent notes due in 2018 rose 1.4 cents to 90 cents on the dollar, the highest since Feb. 23, at 9:49 a.m. in New York, according to Trace, the bond- pricing service of the Financial Industry Regulatory Authority. The notes yield 7.1 percent.

Possible Bottom

�I thought GE was bottoming� at about $6 to $7, Jack De Gan, chief investment officer at Harbor Advisory Corp. in Portsmouth, New Hampshire, said in an interview. Harbor has about $100 million under management and has roughly doubled its stake in GE to about 200,000 shares in the past month.

�This dive into GE Capital might help allay some of the concerns surrounding the asset quality there,� De Gan said.

Today�s meeting at Rockefeller Center is part of GE�s response to pressure to shed more light on what it owns and the value of those holdings, even when accounting rules may not require as much disclosure for a company that isn�t a bank.

�We�ve got to continue to give people transparency and even though we�re not a bank holding company, we have to give people bank-like detail, and we intend to do that,� Chief Executive Officer Jeffrey Immelt said in a March 5 interview.

Immelt, 53, stopped providing per-share earnings forecasts this year after twice missing his predictions in 2008.

GE Capital Profit

GE Capital, the world�s largest non-bank finance company with consolidated assets of $637 billion, accounted for $8.6 billion of the parent�s $18.1 billion profit from continuing operations last year. Immelt has said he wants the division to contribute about 30 percent of annual profit.

Today�s reaffirmed outlook for 2009 net income of $5 billion at the finance unit is based on a 1.8 percent decline in U.S. GDP. Based on the Fed �base case� scenario, GE Capital would earn $2 billion to $2.5 billion. Under what GE called the estimated Fed �adverse� case, with a 3.3 percent decline in GDP, profit at GE Capital would be zero, according to slides on the company�s Web site.

Standard & Poor�s lowered GE and GE Capital�s top-tier rating one level to AA+ last week with a �stable� outlook. GE Capital may post little or no profit or possibly a �modest net loss� this year and next, the service said in its report.

Investors, comforted that the downgrade was only one step and that GE�s outlook was raised to �stable� from �negative,� have since pushed up GE shares and bonds.

Worst-Case Scenario

S&P likely already incorporated GE�s worst-case scenario in its ratings, said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York. That suggests �S&P should have a pretty stable �stable� outlook, which should give bondholders incremental comfort,� he said.

Moody�s Investors Service, which said in January it was reviewing GE for a potential downgrade, has yet to complete its assessment. That review should be done in less than the typical 90 days, Moody�s said in January.

On Sept. 25, GE reduced its annual profit forecast for a second time and suspended its stock buyback. A week later, GE got a $3 billion investment from Buffett�s Berkshire Hathaway Inc. and said it would sell $12 billion in common stock.

Capital Needs

GE Capital said it has total funding sources of about $92 billion this year and $60 billion to $80 billion for 2010 as it shrinks the portfolio. Debt issuance and reduction of commercial paper balances will leave the company with $38 billion in cash this year and $31 billion to $41 billion in cash in 2010, giving the division resources for unexpected events, GE Treasurer Kathryn Cassidy said today.

The finance unit has $58.2 billion of bank lines, putting it on track to cover commercial paper outstanding as of March 11, Cassidy said.

Credit-default swaps protecting against a default by GE Capital fell 1.5 percentage point to 7.5 percent upfront, according to broker Phoenix Partners Group. That�s in addition to 5 percent a year, meaning it would cost $750,000 initially and $500,000 annually to protect $10 million. The contracts have dropped from a record 20 percent upfront on March 4.

The company�s bonds guaranteed through a Federal Deposit Insurance Corp. program remain rated Aaa by Moody�s and AAA by S&P, their highest rankings.

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BLOOMBERG: Buffett Increases Stake in Steelmaker Posco to 5.2%

By Andrew Frye



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Feb. 28 (Bloomberg) -- Warren Buffett�s Berkshire Hathaway Inc. increased its stake in Posco, Asia�s third-largest steelmaker, to 5.2 percent as the Korean company�s stock had its worst year since 2002.

Buffett�s firm owned 3.95 million shares of the Pohang, South Korea-based company at yearend, Berkshire said today in its annual statement. That�s 13 percent more than the 3.49 million shares that Omaha, Nebraska-based Berkshire owned on Dec. 31, 2007.

Posco posted its first annual decline in Seoul trading in six years in 2008 amid slumping demand from automakers and builders as Buffett, renowned as one of the world�s best investors, added to Berkshire�s stake. The Posco investment, disclosed by Berkshire in 2007, has been profitable, according to the statement. It cost Buffett $768 million to build and had a market value of $1.19 billion at the end of the year.

�I like buying quality merchandise when it is marked down,� Buffett said in the statement. He and partner Charlie Munger �enjoy� falling stock prices when they have the funds to add to holdings of their favorite companies, he said.

Berkshire discloses its largest U.S. shareholdings, which comprise most of the firm�s portfolio, in quarterly filings with the Securities and Exchange Commission. The disclosure of the Posco stake came in a list of Berkshire�s major investments today.

Posco �was quite happy that Buffett increased his stake,� spokeswoman Ko Min Jin said in an interview. Posco has slipped 17 percent in Seoul trading this year, after declining 34 percent in 2008. The company gained 86 percent in 2007.

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BLOOMBERG: Analyst says Wells Fargo may need to raise $10 billion, cut dividend

Wells Fargo & Co., the biggest U.S. bank by stock-market value, may need to raise $10 billion and cut its dividend after the acquisition of Wachovia Corp., wrote Atlantic Equities analyst Richard Staite.

Staite, based in London, downgraded Wells Fargo to "underweight" from "neutral" Wednesday and said the bank may announce disappointing earnings this year because of the deteriorating economy. Wells Fargo reports fourth-quarter earnings on Jan. 28.

"With the accelerating decline in house prices in California and surge in unemployment we expect them to suffer significant losses in 2009," Staite wrote. "Given the weak economic outlook, there is a chance the dividend could be cut as a way to conserve capital."

Wells Fargo"s shares have outperformed those of its top competitors, including J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp., in the past year because the company avoided most of the riskiest loans during the credit bubble.

Dividend rose last year

The San Francisco-based bank bolstered its quarterly dividend by 10 percent in 2008 to 34 cents a share, while New York-based Citigroup and Charlotte, N.C.-based Bank of America slashed theirs.

By ARI LEVY, Bloomberg News

Last update: January 14, 2009 - 7:56 PM

Wells Fargo spokeswoman Julia Tunis Bernard said the company doesn"t comment on analyst reports.

The bank, whose biggest shareholder is Warren Buffett"s Berkshire Hathaway Inc., completed the $12.7 billion purchase of Charlotte, N.C.-based Wachovia on Jan. 1. In the three months since the companies agreed to the deal, economists" average for unemployment have risen to 8 percent by the third quarter from 6.2 percent, Bloomberg surveys show.

Moody"s Investors Service cut Wells Fargo"s debt rating to Aa3 from Aa1 on Jan. 6 on concern that the Wachovia deal will hurt earnings. The deal "significantly weakened" Wells Fargo"s capital position, Moody"s said.

Staite wrote Wednesday that Wells Fargo"s capital ratios have "deteriorated significantly" because of the acquisition.

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BLOOMBERG: Buffett Will Give More Information on Derivatives

By Erik Holm

Nov. 24 (Bloomberg) -- Billionaire investor Warren Buffett will provide more information to investors on how he calculates losses on his Berkshire Hathaway Inc.�s derivative bets in the firm�s annual report early next year.

The report will disclose �all aspects of valuation� and cover �deficiencies in the formula� for pricing the derivatives, �which we nevertheless use,� Buffett said in an e- mail sent by his assistant, Debbie Bosanek.

The information may calm investors concerned about losses and potential ratings downgrades tied to Berkshire�s sale of derivative contracts. Buyers of the derivatives would be entitled to billions of dollars from Omaha, Nebraska-based Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019. Berkshire shares have fallen about 18 percent since Nov. 7, when the insurer said writedowns on the contracts totaled $6.73 billion at the end of the third quarter.

Buffett�s e-mail said the four stock indexes, including the Standard & Poor�s 500, would all have to fall to zero for Berkshire to be liable for the entire $35.5 billion that�s at risk. The sum was last estimated at $37 billion in a Sept. 30 filing and shrank because of fluctuations in currency exchange rates, he said.

Berkshire gained $3,300, or 3.7 percent, to $93,300 at 9:41 a.m. in New York Stock Exchange composite trading.

Speculation about the insurer�s liability drove up prices last week on credit-default swaps tied to Berkshire debt. Fixed- income investors buy credit-default swaps to protect themselves against the possibility that a company won�t meet its obligations and prices rose last week to levels typical of a company rated one level above junk.

No Questions

�The market is so panicked that even the most respected investor in the world can see the stock in his company fall more than 30 percent on no news, other than on rumors that are clearly false based on the disclosures he�s made,� said Whitney Tilson, managing director of T2 Partners LLC, a New York-based hedge fund with about $100 million under management. �We are in a sell first, ask questions later world.�

Tilson said his firm doubled its stake in Berkshire as the shares fell, increasing its holdings to 20 percent of assets under management from 10 percent, and buying some below $75,000 a share. The stock fell as low as $74,100 on Nov. 20, before rising to $90,000 the next day.

Investors also were concerned that Berkshire might have to put up collateral, draining cash and setting off a chain of events like those that brought American International Group Inc. to the brink of failure this year.

In his e-mail, Buffett said the collateral requirements are �under any circumstances, very minor.� Berkshire had $33.4 billion in cash at the end of the third quarter.

Terms of Contract

Buffett sold the derivative contracts to undisclosed buyers for $4.85 billion. Under the agreements, Berkshire must pay out if, on specific dates starting in 2019, the market indexes are below the point where they were when he made the agreements. In the meantime, Berkshire can use the cash to buy stock or make acquisitions.

The writedowns taken on the derivatives are accounting losses that reflect the falling value of the stock indexes, not cash that Berkshire has paid out. Chief Financial Officer Marc Hamburg told the U.S. Securities and Exchange Commission in July that the firm values the derivative contracts using a model that includes equity prices, interest rates, the dollar�s performance against other currencies and market volatility.

The SEC had asked for �more robust disclosure� on how Berkshire values the contracts.

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