Finance and Economic

Morgan Stanley’s riskier trading operations have stolen the thunder from its growing brokerage — at least for now.

Strong fixed income sales and trading revenue and improved investment banking underwriting results broke a three-quarter losing streak as Morgan Stanley belatedly joined rivals like Goldman Sachs Group Inc in returning to the black after the collapse of the financial sector a year ago.

The New York-based bank reported third quarter net income of $498 million, or 38 cents a share, beating analysts’ average forecast of 27 cents a share, according to Thomson Reuters I/B/E/S.

Morgan Stanley shares were up 7 percent to $34.80 in afternoon trading on the New York Stock Exchange after earlier touching a 13-month high of $35.00.

In the 2008 third quarter the bank earned $7.7 billion, or $7.38 a share, boosted by a one-time accounting gain from declines in the value of its debt.

Scarred by the collapse that claimed competitors like Lehman Brothers, Morgan Stanley has pledged to play a more conservative hand as it develops its brokerage business.

Co-president James Gorman is set to succeed Chief Executive John Mack — credited with keeping the bank alive during the darkest days of the crisis, but criticized for struggling to manage risk — early next year.

Many analysts view Gorman’s appointment as evidence that Morgan Stanley is trying to dial down the riskier trading business in favor of a steadier stream of income from the wealth management business payday loans with no fax.

MAKING UP GROUND

Morgan Stanley Chief Financial Officer Colm Kelleher said in an interview that the third-quarter results were an “affirmation” that the firm’s strategy was bearing fruit.

The third-quarter rebound came largely because of solid results in trading, a riskier area of the business.

“They made up the ground on the trading side,” said Brad Hintz, an analyst with Sanford C. Bernstein in New York and former treasurer at Morgan Stanley. “The issue that Morgan Stanley faced is they cut too deeply in fixed income and markets came back more quickly than they anticipated.”

Kelleher said during a call with analysts that the firm is about halfway through a hiring spree it initiated earlier this year to restock its trading and sales ranks. Kelleher said more than 400 were expected to be hired.

“It is good that they are starting to see some of the early benefits of that,” said Michael Hecht, an analyst with JMP Securities.

The firm’s institutional securities group, which includes the advisory, underwriting and trading units, posted pre-tax income of $1.3 billion in the quarter. 

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Northrop Grumman Corp beat rival Boeing Co to win a major $3.8 billion contract to maintain and service the U.S. Air Force’s fleet of KC-10 refueling tankers, the Pentagon said on Thursday.

Boeing holds the current contract for servicing the aircraft, which expires in January, and has provided support for the KC-10s for more than a decade.

Boeing said it was disappointed by the Pentagon’s decision.

“We presented a competitive proposal that leveraged Boeing’s tremendous experience from over 80 years of building and maintaining tankers as well as inventing boom technology,” Boeing spokesman Forrest Gossett said.

“We now need to review the Air Force’s selection decision and process before deciding on our next course of action.”

Large Pentagon contracts are often appealed to the U.S. Government Accountability Office, the audit arm of Congress.

The Air Force had planned to award the contract in June 2008, but a decision was delayed because bidders submitted insufficient cost and pricing data.

“This is a stunning upset,” said defense analyst Loren Thompson with the Virginia-based Lexington Institute. Boeing has been servicing this plane since it was first introduced, Thompson said, adding “so for Boeing to lose to Northrop is truly amazing.”

Northrop, with its European partner, Airbus-maker EADS, is also in a battle with Boeing to win a contract to supply at least 179 new tankers to the Air Force, work that could be worth up to $50 billion.

The Air Force’s oldest tankers are the KC-135s, some of which are 50 years old.

The Air Force’s refueling fleet includes nearly 60 KC-10s, which were purchased in the 1970s and are modified DC-10 aircraft made by McDonnell Douglas, which was bought by Boeing in 1997.

(Reporting by Julie Vorman and Andrea Shalal-Esa; editing by Andre Grenon and Tim Dobbyn)

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Despite its name, the Airport Currency Exchange, a bare-bones operation across Interstate 70 from Lambert International Airport, doesn’t trade in euros, pesos or British pounds.

Instead, you can pay your electric, gas and phone bills there. And if you’re short on funds, the exchange can give you a short-term, high-interest loan. Missouri’s Public Counsel wants that to end.

The state’s consumer advocate for utility issues is hoping to prevent payday loan stores from doubling as utility payment centers.

In a recent filing with utility regulators, the Public Counsel asked for sweeping changes in billing and payment practices that include eliminating various payment fees. The proposal also would require utilities to open company-run payment centers and end the relationship between utilities and payday lenders.

Deputy General Counsel Mike Dandino said customers who most often used payday loan services were poor, elderly or living paycheck to paycheck. Many of the same customers either face threats of disconnection or have fallen behind on bills, making them easy targets for high-interest loans.

"It is not in the interest of consumers to have utility companies steer customers to these predatory lenders," Dandino said in the filing.

The Public Service Commission has yet to act on the petition. If the five-member commission decides to go ahead with a formal rule-making process, it would takes months and involve taking public comments and a hearing.

The recommendations are sure to draw stiff opposition from AmerenUE, Laclede and AT&T. They say that opening and operating payment centers across the area would be too expensive and that eliminating other payment sites would mean a loss of convenience for customers who may have to travel farther to pay their bills.

Richard J. Mark, senior vice president of energy delivery at AmerenUE, said the utility tried to provide customers as many options as possible, including payment centers spread across its 25,000-square-mile service area.

Eliminating even some of those options could especially hurt customers in rural areas and those who need to pay bills immediately to avoid disconnection, he said.

"By eliminating options, you really create hardships for customers," Mark said in an interview.

Nationally and in Missouri, payday loan stores have drawn increased scrutiny from regulators and consumer groups in recent years.

In 2007, the National Consumer Law Center, a nonprofit consumer advocacy group, urged regulators to end the relationship. The group said the added convenience of having more locations to pay bills was outweighed by steering vulnerable customers into the hands of those pitching high-interest loans.

Payday loans are generally defined as short-term cash advances usually secured by a post-dated personal check. In Missouri, the maximum loan is $500 and interest charges can’t total more than 75 percent of the principal.

Still, the average interest rate on a payday loan in Missouri last year was 431 percent, or $47.95 on the average two-week loan of $231 — a reason the state has been criticized for its lax regulation of payday lenders, at least compared with neighboring states.

"Regulated monopolies and the state PSC should not be a in a position where they’re encouraging the use of these services," said John Coffman, a lawyer and former Missouri Public Counsel who has in the past worked for consumer groups including AARP and Consumer Council of Missouri car loans.

The Public Counsel’s proposal doesn’t include evidence that utility customers are taking out high-interest loans to pay their bills; it only suggests that the relationship between utilities and payday lenders makes doing so more convenient.

In fact, prohibiting utility payments at payday loan stores also doesn’t guarantee that a cash-strapped customer won’t take out a high-interest loan and use the proceeds to pay their bill at a supermarket or bank.

About half of AmerenUE and Laclede customers still pay their bills by mail, and only about 10 percent pay in person through a third-party agent. And most of those do so at grocery stores or banks, not payday loan stores, spokesmen said.

Neither utility has a direct relationships with payday lenders. Both companies contract with FirsTech Inc. to recruit and run a network of agents and transmit payments.

Transaction fees at payment centers are capped at $1, and utilities get no part of the money. In fact, AmerenUE and Laclede subsidize the fees received by businesses that serve as payment agents.

The utilities also get no part of convenience fees charged for credit and debit card payments made electronically.

AmerenUE customers who want to pay online or by phone with a credit or debit card are assessed a $3.50 "convenience fee" by Speedpay, the vendor. Laclede similarly offers customers the ability to pay with a credit or debit card through ChoicePay for a $2.95 fee.

Justin Gioia, a Laclede spokesman, said that of the 40 percent of customers who pay their bills electronically, less than 2 percent use the convenience fee option. Only 4 percent of AmerenUE customers pay by credit or debit.

Both utilities offer customers free options for paying bills electronically via check or direct debit.

Regardless, the Public Counsel sees the convenience fees as unnecessary and wants regulators to require utilities to operate company payment centers.

AmerenUE’s Mark said the cost of renting and staffing offices across much of the state for the benefit of a relative few customers who would use them would be expensive and an unfair burden on the rest of the utility’s customers.

Eliminating credit and debit card convenience fees, a piece of which goes to the credit card companies such as Mastercard and Visa, would also mean higher rates for all customers, not just those who use the service, he said.

Meanwhile, AT&T is challenging the accuracy of the Public Counsel’s rule-making petition, which claims the telephone company is charging customers $2.49 if they want to receive a paper copy of their local phone bill.

"AT&T Missouri does not charge customers to receive a paper copy of their AT&T local telephone bill," company spokesman Kerry Hibbs said in an e-mail.

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WOOD RIVER — A $19.5 million hotel development is expected to be the next big project in a continuing commercial boom in the city’s east end.

The national economy may be in recession, but commercial growth continues in the area near Illinois Route 255, a controlled-access highway that links the area to Interstates 255 and 270. Construction continues northward on the highway, which eventually will connect to U.S. Route 67 in Godfrey.

Aventurs Development LLC, of St. Louis, plans to develop a 14-acre site west of Route 255 and north of Route 143. Mark Hubbs, one of the company’s principals, said it will include a 110-room Holiday Inn Express, a Country Kitchen restaurant and several gas stations and convenience stores.

"We’re excited about Wood River," Hubbs said. "It’s convenient to St. Louis. I think it’s a hidden gem. Nationally, the economy is down, but Wood River, they’re kind of creating their own economy."

Aventurs was originally a partner in the hotel project with YTB International, an Internet travel company that has its headquarters nearby. Hubbs said YTB opted out and Aventurs decided to buy the land and complete the project free credit report instantly. He said the hotel should attract significant business from YTB representatives visiting the home office and construction workers involved in the $3.6 billion expansion now under way at the nearby Wood River Refinery.

Wood River Mayor Fred Ufert said hotels in his area have been operating at 85 percent capacity.

"There’s a need for hotel rooms," he said. "It’s a great thing for us."

Ufert credits the new highway with recent retail growth that has included a new Super Wal-Mart in 2006, new Walgreens and CVS stores and two new car dealerships. (One relocated from a nearby Wood River location, and one relocated from Alton.)

The mayor said the city’s sales tax revenue has increased this year despite the recession and said city officials expect continued growth. He said it’s not only the new stores boosting those numbers but also the many workers who are employed in the refinery expansion.

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U.S. homebuilder sentiment in August rose to its highest level in over a year, a private survey showed on Monday, adding to mounting evidence that the housing market and economic recession were leveling out.

The National Association of Home Builders/Wells Fargo Housing Market Index edged up to 18 from 17 in July, in line with market expectations.

It was the highest level since June 2008 and marked the second consecutive monthly gain in the gauge, which measures builder confidence in the market for newly built, single family homes.

The NAHB attributed the rise to the government’s tax credit incentive for first-time buyers, but warned the small gains in the housing market could be wiped-out if that incentive was not extended when it expires in November.

“There is definitely a sense of hope among builders that the worst of the downturn is over and that a turning point is near at hand,” said NAHB Chief Economist David Crowe.

“Meaningful action by Congress could ensure that this upward momentum continues and that housing can help push the economy back onto solid ground payday loans.”

Recent data ranging from housing starts to sales have suggested a bottoming in the three-year slump. Housing is at the center of the worst U.S. recession since the Great Depression of the 1930s.

Restoring stability to the housing market is crucial to reviving the economy. The 20-month-old recession is showing signs of winding down.

The NAHB survey also showed two out of three subindexes of the Housing Market Index rising in August.

The current sales conditions gauge was unchanged at 16, while the sales expectations measure for the next six months climbed four points to 30 in August. The traffic of prospective buyers index rose three points to 16 in August. (Reporting by Lucia Mutikani; Editing by Andrea Ricci)

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Transatlantic exchange group NYSE Euronext on Thursday said it planned to cut 290 jobs in Europe and the U.S. as second-quarter earnings before one-off items dropped 34 percent to $132 million.

The New York Stock Exchange and Euronext markets owner said a contract termination charge for NYSE Liffe Clearing and provisions for the expected cost of cutting 230 jobs in Europe and 60 in the U.S. pulled it to a net loss of $182 million.

Revenue was up 9.5 percent at $1.13 billion.

Shares of NYSE Euronext edged up 0.81 percent at 0745 GMT to 19.72 euros each.

The exchange said its ongoing cost saving initiatives continued in the second quarter, with fixed costs down 6 percent from a year ago to $398 million cheap business cards.

Excluding the impact of foreign exchange rates and investment in new business, the underlying fixed expenses were down $50 million or 12 percent from the same quarter a year earlier.

NYSE Euronext’s headcount was 3,500 as of June 30, down 9 percent from a year ago.

(Reporting by Daisy Ku, editing by Will Waterman)

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Washington — Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke staked out opposing sides Friday in a turf war over who should protect Americans from shady mortgage lending, abusive credit card fees, payday loans and other high-cost or risky financial products.

The White House wants to create a new Consumer Financial Protection Agency to oversee a vast range of financial products, stripping the Federal Reserve and other banking regulators of their current authority for policing them.

"I think it’s very hard to look at that system and say that it did anything close to an adequate job of what it was designed to do," Geithner told the House Financial Services Committee. He cited the collapse of the housing and credit markets because of subprime mortgages made to borrowers who didn’t understand and couldn’t afford them.

Bernanke, appearing before the same committee after Geithner, argued that the Fed should retain consumer protection powers regarding consumer products.

Bernanke said, Congress should be aware of "some of the benefits that would be lost through this change," including the Fed’s consolidated resources for also ensuring the safety and soundness of banks.

Geithner brushed aside the Fed chairman’s concerns as part of a typical Washington turf battle pay day loans. "With great respect to the chairman and other supervisors who are reluctant to do this, they are doing what they should, which is defend the traditional prerogatives of their agencies," Geithner said. The House committee’s chairman, Rep. Barney Frank, D-Mass., has delayed a vote on the measure until after the August recess, but maintains he has the votes to pass it.

House Republicans have offered an alternative that would strip the Fed of its regulatory role and abolish the Office of the Comptroller of the Currency and the Office of Thrift Supervision. In their place would be a single regulator for depository institutions, which would include an office focused on consumer protections.

Unlike the administration’s plan, the GOP-envisioned regulator would have no authority over nonbank institutions, such as mortgage brokers.

Both Democrats and Republicans in Congress are leery of giving the Fed additional powers, blaming what they say was its lack of regulatory oversight of banks and risky mortgages for leading to the current financial crisis.

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Steven Rattner will leave as head of the U.S. autos task force, which oversaw bankruptcies at General Motors Corp and Chrysler Group, at a time when a probe into how the private equity firm he co-founded gained New York pension business has intensified.

In announcing Rattner’s resignation on Monday, Treasury Secretary Timothy Geithner said that the investor would be returning to private life and his family in New York. A source close to Rattner said he does not plan to rejoin his former firm, Quadrangle.

Rattner, a former journalist, made his name as a media banker and co-founder of media-focused private equity fund Quadrangle, and surprised Wall Street when he took the autos role in the government in February.

Quadrangle and Rattner have in recent months been linked to a corruption probe by New York’s attorney general, Andrew Cuomo, into the pensions industry.

A source familiar with the matter said that Cuomo’s investigation of Rattner has “intensified” in recent weeks.

“The attorney general’s office has been seeking additional documents from Quadrangle concerning the New York pension fund investments,” the source said.

Rattner and Quadrangle have not been accused of wrongdoing.

The pensions scandal involved allegations that high powered political lobbyists were paid by private equity firms to pull in pension fund business from New York and other state pension funds.

The investigation has already led to the indictment of several of those involved, including Henry Morris, who was the former state comptroller’s top fund-raiser cash advance no faxing.

When the controversy broke in April, U.S. President Barack Obama stood by Rattner, saying he had not been accused of wrongdoing.

There was no indication from administration officials that the state pension probe was connected with Rattner’s departure from the task force.

Cuomo, a Democrat and possible gubernatorial candidate, has spent over two years investigating whether investment firms were buying access to the state’s pension fund by using paid agents. The U.S. Securities and Exchange Commission later joined his probe; so far, Cuomo has extracted two guilty pleas.

Rattner is the person identified only as a “senior executive” of Quadrangle Group in an SEC complaint against two former New York political officials and others, a source previously told Reuters.

Rattner was not available to comment and a Treasury spokeswoman declined to comment on whether the New York pension investigation was a factor in his decision to leave.

Treasury spokeswoman Meg Reilly said: “Steve’s decision to leave is the first step in a planned scaledown of the task force and there will of course be more departures in the future. It was always part of the plan to downsize once Chrysler and GM emerged from bankruptcy.”

AUTO ROLE 

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The U.S. Justice Department may drop a legal case aimed at forcing Swiss bank UBS AG to reveal the names of 52,000 wealthy American clients suspected of offshore tax evasion, the New York Times reported on Tuesday.

Swiss Finance Minister Hans-Rudolf Merz said at the weekend that U.S. authorities could be willing to strike a deal after Switzerland agreed a new double taxation treaty with the United States last week aimed at fighting tax evasion.

The case could be dropped before July 13, when Judge Alan Gold of the United States District Court in Miami, is expected to hold a short trial on the issue, the New York Times said, citing a United States official briefed on the matter, adding that a deal could still collapse.

“We hope it’s true but we also have to look at what conditions are attached,” a Swiss finance ministry spokesman said, adding it wanted to see official confirmation.

UBS, the world’s largest wealth manager which has seen big client outflows over the U.S. case, declined to comment on the report, while the U.S. Justice Department could not be immediately reached for comment.

“After both governments agreed on a new double taxation treaty last week it now seems as if a compromise could also be found for this case. This would be highly positive news for UBS,” said Kepler Capital Markets analyst Dirk Becker.

However, he added that most of the damage had already been done to UBS’s reputation.

Swiss Economics Minister Doris Leuthard was quoted on Tuesday as saying it will take some time before UBS — one of Europe’s banks hit hardest by the financial crisis — is back to health, but its situation has improved under new Chief Executive Oswald Gruebel cash advance.

UBS shares were up 3 percent at 14.20 Swiss francs by 0745 GMT (3:45 a.m. EDT), outperforming a 0.1 percent lower DJ Stoxx European banking sector .SX7P.

BERLIN SUMMIT

The Swiss agreement last week of a new tax treaty with the United States comes ahead of a summit in Berlin on Tuesday where ministers are expected to renew pressure on nations like Switzerland to weaken bank secrecy and increase tax cooperation.

Deutsche Bank analyst Matt Spick said the U.S. tax agreement increased the chances of a deal but said the U.S. Internal Revenue Service was unlikely to settle early to keep pressure on UBS clients to declare themselves voluntarily.

“This means that a settlement is likely to take place close to the July 13 court hearing date. Furthermore, an unfavorable ruling is still possible, which presents a key risk to the UBS franchise and share price,” he wrote in a client note on Monday.

The Swiss government has warned it could have trouble getting new tax agreements ratified in possible referendums without the U.S. giving ground on the UBS case.

“UBS also has to make its contribution and the USA will move,” Merz told Swiss Sunday paper SonntagsZeitung. 

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Japan’s industrial production jumped the most in 56 years in April and India’s economy expanded more than economists forecast in the first quarter, adding to evidence that the global recession is easing.

Output in Japan surged 5.2 percent from March, the Trade Ministry said in Tokyo. India’s economy, Asia’s third-biggest, grew 5.8 percent, more than the 5 percent analysts predicted. Other releases today showed U.K. house prices unexpectedly rose in May and German retail sales climbed the most in four months. In the U.S., a report due later today may show consumer confidence is improving.

The world economy is showing signs of recovery from its worst recession since the Great Depression after central banks and governments cut interest rates close to zero and pumped more than $13 trillion into their economies. The International Monetary Fund nevertheless expects the global economy to contract 1.3 percent this year and some strategists say it’s too early to give the all-clear.

“The worst of it is probably coming to an end,” Stephen King, chief economist at HSBC Holdings Plc, said in an interview on Bloomberg Television in London today. At the same time, “the level of activity around the world is still remarkably depressed. We’ll see three to four months of pretty good news. But then all bets are off.”

Stock Markets

Reports on the U.S. economy today gave a mixed picture. While business activity contracted at a faster pace than forecast this month, consumer confidence rose to the highest since September.

Investors are anticipating a global recovery. The MSCI World Index of 23 major stock markets rose 1 percent to 946.96 points today and is poised to extend its longest winning streak since the credit-market seizure began. The dollar weakened against the Australian and New Zealand currencies as investors sought higher yields. Crude oil rose to the highest in almost seven months.

Consumer sentiment in the U.K. matched the highest level in almost a year this month. Poland today posted the only growth among the European Union’s 10 eastern members so far in the first quarter. Households in Japan are the least pessimistic they’ve been in 10 months.

“It’s safe to argue that we’ve turned the page after severe weakness in the first quarter,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore.

Made in America

Asia’s ability to lead the world economy out of recession will probably be hampered by its dependence of exports to a U.S. economy still burdened by excessive debt, said Stephen Roach, chairman of Morgan Stanley Asia.

“The region’s fate remains made in America,” he said in an e-mailed note. “That is where hopes of an Asia-led rebound are most tenuous. After a dozen years of excess, the overextended American consumer is tapped out.”

Rising unemployment and credit conditions around the world also mean any global recovery is likely to be weak.

The U.S. unemployment rate is already the highest in a quarter century. Japan’s jobless rate climbed to a five-year high in April, prompting households to pare spending for a record 14th month, separate reports today showed no fax pay day loan.

Even after April’s output gain, Japanese production is running at two-thirds of last year’s levels, saddling manufacturers such as Nikon Corp. with workers and factories they no longer need. That’s calling into question the health of a stock market rally that’s seen the Nikkei 225 Stock Average surge 35 percent since March 10, says Andrew Bell, head of research and strategy at Rensburg Sheppards Plc in London.

Heart of Dilemma

“The actual level is about where Japanese industrial production was in 1980,” said Bell. “That goes to the heart of the dilemma over the stock market. How far can you travel on things getting worse less rapidly or recovering a small amount of the ground lost?”

Federal Reserve Chairman Ben S. Bernanke is also struggling to bring down borrowing costs to revive the U.S. housing market. Mortgage rates are almost back to where they were in March, before the 30-year rate fell to a record and sparked a refinancing boom.

Bond yields are rising. U.S. Treasuries today headed for their steepest two-month loss since 2003 on concern about President Barack Obama’s record borrowing spree. In the euro region, the European Central Bank said today that loans to households and companies grew at the slowest pace on record in April.

Credit Flows

“There are still a whole lot of problems in financial markets and credit flows,” said Matthew Sharratt, economist at Bank of America in London.

For now, economies get a fillip in coming months as companies replace stockpiles ran down during the depths of the recession. U.S. industrial production contracted the least since October last month and Japanese manufacturers plan to boost output in May and June. Exports from Japan expanded last month from March as China’s $586 billion stimulus package spurs demand.

China’s prospects have also improved, analysts say. The world’s third-largest economy will expand 7.5 percent this year, according to the median estimate of 14 economists surveyed by Bloomberg News, up from a 7.1 percent forecast in February.

“What we’re seeing is a good old-fashioned kind of inventory rebuild associated with the fact that supply collapsed further than demand over the last 12 months and we’re now seeing a recovery in that supply,” said King.

India’s faster-than-expected growth makes it easier for re- elected Prime Minister Manmohan Singh to capitalize on the improving economy. The Sensitive stock index has surged 20 percent since Singh’s May 16 electoral triumph on optimism a coalition without communist parties will allow him to sell state assets and accept more foreign investments.

“There’s been an improvement and investors seem to have recovered from the near-fatal heart attack at the turn of the year,” said Sharratt. “It now has to translate into activity.”

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