Finance and Economic

The treasurer of Massachusetts has asked the federal government about lending Massachusetts money under the same favorable terms it has given banks and firms during the financial crisis.

Treasurer Timothy Cahill’s requests to the U.S. Treasury and Federal Reserve Bank of Boston this week were prompted by the state’s inability to borrow from the short-term debt markets, The Boston Globe reported Saturday. The financial turmoil has caused credit markets to stop lending, or to charge prohibitive rates.

California has made a similar request, saying it would run out of money by the end of the month if the short-term debt markets do not ease. The state asked whether it could not obtain loans from the Fed.

Massachusetts has enough money to cover its expenses for the coming weeks, Cahill said (cash loan). But a low-rate loan would ease a cash shortfall if the credit problems persist.

"That’s all we would ask them to do: Treat us like the investment banks," Cahill said.

Federal officials have not responded to his request, Cahill said Friday.

The state’s borrowing problems come as it deals with a $223 million shortfall in projected tax collections during the first quarter of the state’s fiscal year. On Thursday, Gov. Deval Patrick announced the first of what could be a series of cuts to programs and operations to deal with the sagging collections. 

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A bankruptcy judge approved a plan early Saturday under which Lehman Brothers will sell its investment banking and trading businesses to Barclays.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s Midtown Manhattan office tower.

Lehman filed the biggest bankruptcy in U.S. history Monday, after Barclays (BCS) declined to buy the investment bank in its entirety.

The British bank will take control of Lehman units that employ about 9,000 employees in the U.S.

"Not only is the sale a good match economically, but it will save the jobs of thousands of employees," Lehman lawyer Harvey Miller of Weil, Gotshal & Manges said.

Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays’ main reason for acquiring Lehman is to get its people and presence in North America, making widespread layoffs less likely.

"It’s unimaginable to me that they can run the business without people," said Lehman’s financial adviser, Barry Ridings, of Lazard Ltd.

Barclays had little competition to land the deal.

Miller said that before it filed for bankruptcy, Lehman had negotiated with just one other bidder, Bank of America Corp. BofA (BAC, Fortune 500) instead announced Monday that it would buy Merrill Lynch & Co., (MER, Fortune 500) saving it from a fate similar to Lehman’s. That deal was originally valued at $50 billion.

Miller said that since Lehman filed for bankruptcy, Barclays had been the only buyer to express interest in acquiring even parts of the 158-year-old investment bank.

Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 p.m. ET Friday and continued well past midnight.

Lehman lawyers said the value of stock Barclays will buy and liabilities it will assume has fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.

Barclays also said it would buy three additional units - Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA pay day loans. The two South American entities are part of Lehman’s money management business. Barclays is not paying extra to get the three units.

There was no change to a $250 million goodwill payment and the purchase of two data centers in New Jersey that will go to Barclays, although Barclays may pay less for them. Lehman’s investment management business Neuberger Berman was not bought by Barclays.

The Securities Investor Protection Corporation liquidated Lehman accounts on Friday under a bankruptcy-style process to transfer assets from 639,000 Lehman customer accounts - about 130,000 of which are owned by individual investors - to Barclays accounts.

"The substance of this transaction is to continue a business for the benefit of the economy," Lehman lawyer Miller said in court.

The hearing drew more than 200 lawyers and observers, who spilled into overflow rooms on two floors of the U.S. Bankruptcy Court in lower Manhattan.

In response to the extraordinary events of the week, the Bush administration announced Friday the biggest proposed government intervention in financial markets since the Great Depression. Some are calling it an "RTC-style bailout" in reference to the government-owned Resolution Trust Corp. that wound down the assets of Savings and Loan Associations, mostly in the 1980s.

"Somehow Lehman Brothers gets left on the sidelines," said Daniel Golden of Akin Gump Strauss Hauer & Feld LLP, who represents clients holding about $9 billion in bonds. "We believe this was a flawed sales process. It benefits Barclays and the federal government but not the creditors of this estate.

"The economic landscape seems to have changed over the last two days," he said. "Yet the debtors and the Fed seem determined that nothing get in the way of this transaction."

Had Lehman filed for Chapter 11 a week later than it had, its fate may have been different.

"This is a tragedy - maybe we missed the RTC by a week," Miller said.

"That occurred to me, as well," the judge in the case, James Peck, said. "Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets." 

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Starting Monday, two classes of shares in Reinsurance Group of America Inc. will be traded on the New York Stock Exchange.

For most shareholders, their current RGA shares will be reclassified as RGA Class A shares. Shares formerly held by MetLife Inc. will trade as Class B shares.

At the end of the day Thursday, MetLife completed an exchange offer among its shareholders for the new class of stock. The exchange allows MetLife to shed its majority stake in Reinsurance Group. MetLife still will own about 3 million Class A RGA shares after the exchange.

MetLife Inc. will accept about 23 million or 8.6 percent of the 253 million MetLife shares that were tendered paydayloans. Shareholders whose stock is accepted will receive Class B shares in Reinsurance Group.

Chesterfield-based Reinsurance Group sells reinsurance worldwide. Reinsurance allows life insurance companies to spread their risk.

jerristroud@post-dispatch.com | 314-340-8384

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Euro zone economic growth will halve in 2008 from 2007 and inflation will be much higher because of financial turmoil, soaring commodity prices and housing market shocks, the European Commission said on Wednesday.

Updating its economic forecasts, the European Union executive slashed its prediction for gross domestic product growth for the 15 nations using the euro to 1.3 percent from the 1.7 percent predicted in April, as the OECD did on September 2.

In 2007, euro zone gross domestic product (GDP) grew 2.6 percent.

The Commission cautioned that its new forecast for the euro zone could still prove too strong, and its figures showed the bloc’s biggest economy, Germany, in recession, with GDP shrinking 0.2 percent in the July-September period after contracting 0.5 percent in the previous three months.

Spain, whose housing bubble has burst, will also go into recession in the second half of the year, as will Britain, the Commission forecast.

Both France and Italy, whose economies shrank 0.3 percent in the second quarter, would only stagnate in the third.

“The main downside risks identified in the spring forecast have materialized, with the financial turmoil deepening, commodity prices soaring and the shocks to several housing markets spreading more widely,” the Commission said.

The Commission raised its inflation estimate for this year to 3.6 percent from 3.1 percent previously $500 payday loan. That is almost twice the European Central Bank’s target of keeping inflation below, but close to, 2 percent. 

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The U.S. consumer is feeling pinched - and to listen to American Express, the pain is only going to get worse.

Shareholders agreed. The financial services giant’s stock dropped 11% in after-hours trading.

American Express (AXP, Fortune 500) delivered some ugly news after the market closed Monday, posting a smaller-than-expected second-quarter profit and withdrawing its 2008 earnings guidance, saying the economic environment "has weakened significantly" since it offered up its financial projections back in January.

The deterioration was notable "particularly during the month of June," the company said. And American Express says that while loan write-offs spiked last month, it expects loan losses to rise even from those levels in the second half of 2008, as the consumer pullback feeds through to businesses and the rest of the economy.

"Over the past few months, we have seen clear signs the U.S. economy is weakening," chief executive Ken Chenault said, noting falling house prices and rising unemployment. As a result, he said, "Cardmember spending slowed sharply in the last half of the quarter," even among the company’s best customers.

Chenault said on a postclose conference call Monday that he was "disappointed" in the numbers, which fell far short of Wall Street analysts’ estimates. American Express abandoned its earlier forecast of 4%-6% earnings growth for the year, citing rising charge-offs on past-due loans. The company also said it would accelerate "re-engineering efforts" in the second half, meaning more jobs are likely on the way.

American Express made $653 million, or 56 cents per share, for the quarter, down from the year-ago $1.06 billion, or 88 cents per share. Analysts surveyed by Thomson Financial were looking for an 82-cent profit. American Express said the latest quarter reflected a $374 million addition to its credit loss reserves, as the effect of falling house prices and rising unemployment "was evident even among our longer term, superprime cardmembers."

The comments strike a much more pessimistic tone than those heard earlier from Bank of America (BAC, Fortune 500) chairman and CEO Ken Lewis, who said on a conference call earlier Monday that he views BofA’s consumer exposure as "manageable."

Michael Taiano, an analyst at Sandler O’Neill in New York who has a "Hold" rating on American Express said the company is paying the price for its rapid loan growth in recent years http://easy-quick-payday-loans.com. Now, with the effect of falling house prices and job loss rippling through the economy, American Express faces rising losses as more loans go sour - at a time when the company holds a substantial portfolio of younger loans that are by their nature more likely to go bad.

Indeed, the company’s earnings presentation indicates that the biggest deterioration in credit performance came among customers who have had American Express cards for between two and four years. Accounts 30 days past due jumped 62% from a year ago among U.S. customers holding cards for 24 to 36 months and 58% for customers of 36 to 48 months, the company said.

Taiano cut his rating on the stock to "Hold" from "Buy" earlier this year, reasoning that an economic slowdown and falling house prices would combine to slow earnings growth at American Express.

Even so, he said he was surprised by "the degree of acceleration" in credit losses in the latest quarter. "They’re in for a challenging few quarters ahead," he said.  

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Residential Capital LLC, the mortgage lending unit of GMAC LLC, said Tuesday it needs more than three times more cash to stay in business than it estimated just weeks ago.

ResCap estimates it now needs about $2 billion in cash by the end of June to meet liquidity demands, according to a regulatory filing with the Securities and Exchange Commission. It previously estimated it needed just $600 million by the end of the month.

"The change in the number is not a positive development," said Christopher Whalen, managing director at the consulting firm Institutional Risk Analytics. "ResCap may have to restructure."

But, ResCap is not the only company in this predicament, Whalen said. Financial firms across the board are continuing to revise loss estimates and will likely do so throughout the year, he said.

Whalen said ResCap’s potential losses could grew even further, requiring more than the $2 billion it now needs because he does not expect the residential and commercial lending markets to bottom out until 2009.

As the mortgage lending market deteriorated rapidly, starting in the middle of 2007, ResCap posted large losses. It continues to lose money, putting it in danger of failing to meet financial obligations. ResCap lost $859 million during the first quarter.

In an effort to meet the cash requirements, ResCap increased the size of an existing credit facility with parent GMAC (GOM) and is selling some of its assets to GMAC and its majority stakeholder, private equity firm Cerberus Capital Management.

On Monday, Cerberus denied reports that it recently sold an equity stake in GMAC. Cerberus led a group of investors that purchased the financial unit of General Motors Corp cash advance. for $7.4 billion in 2006. A spokesman for Cerberus said the private equity firm has not reduced its equity stake in GMAC since it completed the acquisition.

GMAC’s former owner, General Motors, which still holds a large minority stake, is also facing its own struggles. On Tuesday morning, GM said it will shut down four truck and SUV plants in North America.

In its effort to raise the necessary capital, ResCap on Tuesday will draw $450 million from an expanded credit facility with its parent, according to the regulatory filing. The expanded facility allows ResCap to borrow up to $1.2 billion from GMAC. The previous credit facility allowed for borrowings of up to $750 million. The advance rate on the facility was also expanded to 85% from 50%.

ResCap will sell a wide variety of assets to GMAC and Cerberus, including its resort funding division. GMAC will acquire the resort funding business for an initial price of 90% of the businesses book value, with a final sale price of fair value for the division. Fair value will be determined by a third-party appraiser.

An initial deposit of $250 million, representing about 74% of the division’s book value, will be paid Tuesday.

Cerberus will purchase ResCap model home assets with a value of about $475 million as part of the asset sale. Cerberus will also purchase an additional $300 million of mortgages and mortgage-backed securities.

ResCap will also receive servicing advances from GMAC Commercial Finance.

The mortgage lender is also in the midst of a debt exchange program that will help extend the mid. "You know yesterday it was panic here. Usually we miss important things in panic." 

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Fears that the credit crisis is back rattled financial markets on Tuesday as a newspaper report added to previous woes by suggesting that U.S. giant Lehman Brothers may need to raise nore capital.

Equities were lower, bonds got a boost from investors seeking safety and the Japanese yen strengthened in a display of investor risk aversion.

The Wall Street Journal reported that Lehman Brothers (LEH.N: Quote, Profile, Research) may raise $3-$4 billion in fresh capital and suggested the bank could post its first quarterly loss since going public.

The report followed Monday’s Standard & Poor’s debt rating downgrade of three big securities companies and the ouster of number four U.S. bank Wachovia’s (WB.N: Quote, Profile, Research) chief executive. Monday also saw UK mortgage lender Bradford & Bingley (BB.L: Quote, Profile, Research) slash its emergency fundraising price to get a private equity lifeline.

“We don’t seem to have left all the problems with the banking system, as looked likely a few weeks ago,” said Edward Menashy, economist at brokerage Charles Stanley.

Investors had been looking past the credit crisis that hit last year when U.S payday loans. subprime mortgages began to unravel, focusing instead on slowing economies and inflation fears.

MSCI’s main world stock index .MIWD00000PUS was down around 0.1 percent and the emerging markets equivalent .MSCIEF shed nearly 1 percent.

European stocks FTEU3 were slightly lower. Japan’s benchmark Nikkei average .N225 had earlier closed down 1.6 percent. 

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Microsoft Corp. met with Yahoo Inc. to discuss the software maker’s unsolicited takeover bid earlier this week, a breakthrough that could be the first step toward a friendly deal between the two rivals.

The meeting occurred Monday near Yahoo’s Sunnyvale headquarters, according to a person familiar with the situation. The person spoke Friday on the condition of not being identified because the preliminary talks haven’t been formally disclosed.

No investments bankers attended Monday’s meeting, nor was there any discussion about whether Microsoft is willing to raise its offer, initially valued at $44.6 billion, or $31 per share. Yahoo’s board already has rejected that bid, arguing the company’s Internet franchise is worth more.

Although it’s unclear whether Microsoft Chief Executive Steve Ballmer and his Yahoo counterpart, Jerry Yang, attended Monday’s meeting, senior management from both companies were on hand.

The gathering, first reported by The Wall Street Journal, gave Microsoft its first chance to sell Yahoo on the rationale for the proposed marriage since the software maker unveiled its plans six weeks ago.

Since then, Yang has been exploring different ways to ward off Microsoft. The alternatives have included possible alliances with Internet search and advertising leader Google Inc. (GOOG, Fortune 500), News Corp.’s (NWS, Fortune 500) MySpace.com and Time Warner Inc.’s (TWC) AOL.

Microsoft has held firm with its bid and warned it’s prepared to pursue a hostile takeover if Yahoo continues to resist.

Most industry analysts believe neither side wants to engage in an acrimonious battle and expect Microsoft to resolve the impasse with a slightly higher bid.

Investors aren’t so sure the stakes will be raised. Yahoo (YHOO, Fortune 500) shares fell 79 cents to $26.71 Friday while Microsoft (MSFT, Fortune 500) shares shed 66 cents to $27.96. At that price, Microsoft’s offer - made partly in Microsoft stock - is worth about $40 billion.

The saga could still take several weeks to play out and may not be resolved until Yahoo releases its first-quarter earnings April 22. With Yahoo mired in a two-year slump, the first-quarter results could sway Microsoft’s next move.

The waiting game works in Google’s favor by distracting two of its biggest rivals while it strives to extend its dominance of the Internet’s lucrative search and advertising market direct payday loan cash advance. Google added another layer of muscle this week by completing its $3.1 billion acquisition of online ad service, DoubleClick Inc.

Microsoft believes a combination with Yahoo will pose a more serious threat to Google.

By finally meeting with Microsoft executives, Yahoo could be laying the groundwork for more serious negotiations. Or Yahoo’s board could just be touching base with Microsoft to show shareholders that it heard out its suitor before working out an alternative deal.

Yahoo’s other options have been considered a long shot by most analysts and now there are signs that at least two of its potential partners aren’t interested in getting together.

Rupert Murdoch, the chief executive of News Corp., downplayed his interest in a Yahoo deal at a conference this week. And AOL’s plan to buy online social network Bebo for $850 million in a deal announced Thursday may make a combination of AOL with Yahoo more complicated.

Google has offered to work with Yahoo, but analysts say antitrust regulations will make it difficult, if not impossible, for those two companies to become business partners.

Yahoo still doesn’t appear to be in any rush to resolve the saga, based on how it’s handling a key deadline for nominating candidates to supplant its current board. Microsoft has threatened an attempt to oust Yahoo’s 10 directors if it can’t broker an amicable takeover.

Last week, Yahoo postponed the deadline from Friday to 10 days after the date Yahoo announces its annual meeting.

Yahoo has no plans to disclose the meeting date before April and may not do so until its first-quarter earnings come out, according to a person close to the company. The person wasn’t authorized to be identified publicly. 

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Sigma-Aldrich Corp. said Wednesday that it is expanding a research facility in Cambridge, England, to serve drug development customers in Europe, the United States and the Asia-Pacific region.

The St. Louis-based company said it is adding 7,500 square feet of laboratory capacity to the facility, and reorganizing offices to accommodate the installation later this year of state-of-the-art spectroscopic and diffraction equipment.

It is the second phase in a multi-step development program that in total will cost $600,000.

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