“We are monitoring banks' use of the collateral framework very closely,'' Weber, who heads Germany's Bundesbank, said in an interview in Frankfurt yesterday. “We must ensure that our framework is not abused.''

The ECB will soon announce changes to the rules governing its auctions, council member Yves Mersch said in an Aug. 23 interview. The growing concern of officials is that banks struggling to sell securities damaged by the credit-market turmoil will dump them on the ECB and become overly reliant on central-bank funds.

“The collateral that we take must also be traded in the market because only then is it priced accurately,'' Weber said. “We aim at taking final decisions in autumn which will be communicated immediately.''

The ECB's Governing Council next meets on Sept. 4.

Banks with operations in the 15 countries sharing the euro can raise funding from the ECB by pledging certain types of collateral including asset-backed securities. Bonds backed by mortgages and other assets accounted for 18 percent of the ECB's loan collateral at the end of 2007, up from 4 percent in 2004, Fitch Ratings data show.

The ECB lends to banks mostly through the main refinancing operations maturing in one week. Longer-term auctions provide financing to banks during three- and six-month periods.

Governing council member Michael Bonello said in an interview with Reuters published today that he didn't expect “major fundamental change.''

`Funding Opportunities'

Spain's banks in particular are struggling to attract investors as a decade-long property boom ends and mortgage delinquencies soar to the highest in at least six years. Investors demand higher rewards to buy bonds backed by Spanish mortgages than any other home loans in Europe. The ECB lent Spanish banks a record 49.4 billion euros ($73.1 billion) in July.

The ECB's money-market system is also attracting demand from outside the euro region. The Frankfurt-based central bank said in June it will accept asset-backed bonds sold by Macquarie Group Ltd., Australia's biggest securities firm, and backed by Australian consumer loans as collateral. U.K. mortgage lender Nationwide Building Society said Aug. 18 it's planning to expand into Ireland, a member of the euro region, to take advantage of “funding opportunities.''

`React Quickly'

Weber defended the ECB's approach to date, saying the fact it had the widest collateral framework among major central banks “helped us to react quickly when the financial crisis broke out.'' The task is now to carry out the central bank's routine two-year review of its collateral framework, he said.

Former Bank of England policy maker Willem H. Buiter says the ECB may be assigning unrealistically high prices to the debt it accepts as collateral for bank borrowing, which risks delaying the recovery of the mortgage-backed bond market.

“There is almost certainly an overpricing of the bonds,'' Buiter, now a professor at the London School of Economics, said in a telephone interview yesterday. “By artificially supporting the market the ECB may be crowding out private purchasers.''

Mersch said last week that there will be no “broad-based revolution'' and that changes to the collateral framework would be unveiled within weeks.

“At the margins there can still be cases where you see dangers of gaming the system,'' Mersch said in Jackson Hole, Wyoming. “The Governing Council has been discussing the whole issue'' and has agreed on a “certain amount'' of refinement to the existing rules, he said.

“We certainly won't tolerate the creation of collateral for central banks only without the intention of trading them,'' Weber said.

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The price of goods leaving Spain's factories, refineries and mines increased 10.2 percent from a year earlier after advancing 9 percent in June, the National Statistics Institute in Madrid said in an e-mailed statement today. Producer prices gained 1.4 percent from June, the biggest monthly increase in more than two years.

Crude oil prices have risen by 60 percent in the last year and touched a record $147.27 a barrel in New York in July. That helped push euro-zone consumer price inflation to more than a 16-year high, making it harder for European Central Bank to cut interest rates, even as the region's economy slows.

The price of intermediate goods in Spain rose 7.3 percent from a year earlier, compared with 6.3 percent in June, signaling further rises in consumer prices.

“This warns us about the performance of other prices further ahead and that is why it worries us,'' said Diego Fernandez, an economist at Fortis Bank in Madrid. He estimates that rises in the price of intermediate goods take about a year to pass through to final prices.

Still, oil has eased 22 percent from its July record and economists said Spain's producer price inflation probably peaked in July. An economic slowdown in Spain would make it difficult for companies to pass on higher production costs to consumers, they said.

Spain's consumer prices gained 5.3 percent from a year earlier in July, the fastest in more than a decade and above the average for the euro region, previous data showed.

The increase in Spanish producer prices was led by energy as the cost of products from oil refineries rose 52 percent from a year earlier. Food and drink products added 10 percent, the institute said.

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Terms of the consulting deal are currently being negotiated, according to a filing with the Securities and Exchange Commission made Friday.

Busch, a member of the St. Louis-based brewer’s founding family, will also be eligible for an additional payment of $13.3 million on various change-in-control payments and benefits, the filing said.

Last month, the brewer of Bud Light and Budweiser announced it had agreed to be sold to InBev, the Belgium-based maker of Stella Artois, Beck’s and Bass. The deal is worth $52 billion.

The two companies will combine to create Anheuser-Busch-InBev NV SA. The combined company’s North American headquarters will remain in St. Louis.

Busch will advise the company on new products and business opportunities, review marketing programs, and meet with retailers, wholesalers and advertisers as part of his new duties.

He will be given an office in St. Louis, administrative support, and insurance such as medical, dental and vision, the filings said.

Busch will also be given personal security services through the end of 2011 in St. Louis, in accordance with Anheuser-Busch’s past practices, the filing said. He will also get free tickets to Anheuser-Busch sponsored events.

Busch will not be able to disparage the company, or solicit employees or customers for business, according to the agreement.

Also in the filing, InBev maintained its promises to keep Anheuser-Busch’s 12 U.S. breweries open, on the condition that, "there are no new or increased federal or state excise taxes."

St. Louis will remain the home of the Budweiser brand, the filing said. InBev said it would continue to support Anheuser-Busch’s charitable causes and other operations, such as its trademark Clydesdale horses.

Anheuser-Busch will have to pay $1.25 billion if the deal falls through for one of several reasons, such as Anheuser-Busch accepting another offer. InBev will pay Anheuser-Busch the same amount if Anheuser-Busch’s shareholders reject the deal.

Anheuser-Busch said in the filing it planned to hold a special shareholder meeting to vote on the deal and would announce that date as soon as the deal receives regulatory clearance.

On Monday, InBev said the U.S. Department of Justice was seeking additional information about the deal. InBev said in a statement it would "respond expeditiously" to the so-called "Second Request" that pertains to antitrust regulations. It said the request was normal and it expected the deal to close by the end of the year.

Shares of Anheuser-Busch (BUD, Fortune 500) fell 37 cents to close at $67.82 Monday. 

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Producer input prices gained 5.6 percent in the three months ended June 30, the most since the first quarter of 1980, Statistics New Zealand said in Wellington today. From a year earlier, input prices rose 12 percent.

Prices paid for electricity increased 51 percent from the first quarter, the statistics agency said. Low hydro lake levels increased wholesale electricity prices, prompting companies to pay more for power and increase charges for their customers. Power prices rose 86 percent from a year earlier.

Rising crude oil and jet fuel prices increased the fuel costs paid by wholesalers and airlines. The air transport index rose 13 percent. Manufacturers paid more for steel and meat processors paid more for livestock.

Producer output prices, which are paid to factories, farms and other producers, rose 3.5 percent in the second quarter, the agency said. That's the biggest gain in 23 years. From a year ago, output prices increased 8.5 percent.

Generators received more for electricity as wholesale prices rose, the agency said. Oil companies were paid more for gasoline and farmers received more for lambs and cattle.

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The $2.54 billion pricetag also renewed concerns among some analysts that capital was being siphoned off from the Caremark pharmacy benefits management (PBM) business to feed a drugstore business during a time when retailers are being hurt by a weak U.S. economy.

“We believe the 32 percent premium … is excessive,” BMO Capital Markets analyst Dave Shove said.

Though Shove said the deal gives CVS a “formidable presence” in a number of valuable regions, such as northern California, it is not positive for shareholders, given how much it will cut into 2009 earnings.

Despite expected dilution, CVS shares were down less than 1 percent on Wednesday.

CVS announced the $71.50-a-share deal after the market closed on Tuesday.

It estimated the acquisition will cut earnings per share by 1 cent to 2 cents in 2008 and 5 cents to 6 cents in 2009, before adding to earnings by 4 cents to 5 cents in 2010.

The pricetag was flagged as high by other analysts on Wednesday, and some questioned whether the deal signaled that CVS was using cash from its PBM business to grow its retail business. 

Read more

Credit scores affect everything from rates on mortgages and car loans, to credit card terms and even whether you get a job. Lenders use them as an indication of how likely you are to repay a loan. The most widely used credit score is known as FICO, which ranges from 300 to 850. Credit scores change over time, depending on your credit history, which is explained in your credit report.

In recent years consumers have had the ability to access one free credit report a year. But getting an accurate reading of your credit score remains problematic and costly.

With loan delinquencies and foreclosures more common, lenders are tightening their standards and that means that a low score can prevent you from getting access to credit, and you’ll need an even higher score to qualify for the best interest rates.

Last week, the House Subcommittee on Oversight and Investigations took up the discussion in a hearing to examine credit scoring and whether consumers are granted fair access to their own three-digit numbers.

Thanks to the Fair and Accurate Credit Transactions Act, or FACT Act, enacted by Congress in 2003, consumers can get one free credit report a year from the three major agencies - Equifax, Experian and TransUnion. But that doesn’t include scores, which come at an added cost of around $6 to $16. That’s the "fair and reasonable" fee credit rating agencies can charge consumers under the legislation.

Some consumer advocates argue that scores should be free too, and included in the free annual credit report consumers are entitled to.

But the credit rating agencies argue that it costs them money to compile and maintain those scores, and lawmakers should not interfere with their ability to sell credit reports and credit scores at a profit.

If legislation were proposed that mandated giving consumers a score along with their annual free credit report, that would be "legislating revenue right out of my pocket," said Steve Ely, president of Equifax.

According to Ely, Equifax makes $154 million a year from selling credit reports, credit scores and credit monitoring products to consumers.

Evan Hendricks, editor of Privacy Times and author of "Credit Scores and Credit Reports: How the System Really Works, What You Can Do," argues the credit rating agencies could still maintain a profitable business, just as they did after the FACT Act mandated that they give annual reports away for free.

Originally, Hendricks said, the credit rating agencies fought the free credit report legislation but now "they’re selling more reports than they are giving away for free." The credit rating agencies argue that is not the case.

"I would dispute that considerably," said Ely.

"We do give away significantly more free credit report disclosures than the reports that we charge for," confirmed Steven Katz, a spokesman for TransUnion.

Hendricks also argues that consumers pay $5.95 to $15.95 to see their credit score while lenders buy those scores from the credit bureaus for less than a dollar. Ely counters that business-to-business customers buy in large volumes, and therefore get a discount.

Another issue up for debate is the number of different kind of credit scores out there, often confusing or misleading consumers. FICO, the scoring system devised by Fair Isaac Corp., is the one most commonly used by lenders in determining consumer credit worthiness.

But some credit rating agencies sell "educational scores," sometimes referred to as "FAKOs," (as in a fake FICO score) that are similar to FICO scores, but can differ by up to 20 points or more.

So consumers who purchase scores directly from one of the three credit agencies might not be seeing the same score that lenders are using.

While Equifax sells FICO scores, Experian offers their own proprietary PLUS Score and TransUnion sells a "Vantage Score," another variation on the FICO scoring system created by the three credit bureaus. Vantage Scores range between 501 and 990 and includes a letter grade, which can help consumers gauge how they rank compared to others.

"Accordingly, Congress needs to act to bring the appropriate level of transparency and fairness to credit scoring," Hendricks said in his testimony before the subcommittee.

"People don’t realize that the credit score they are buying isn’t the score used by lenders," Hendricks said. "At a minimum, fundamental fairness dictates that sellers of knock-off scores clearly and conspicuously disclose that their scores are not used by lenders and may differ significantly from the ones that are."

Stuart Pratt, president and CEO of the Consumer Data Industry Association, the credit reporting agencies’ trade association, said that consumers can’t get a free credit score with their annual report precisely because there is no single universal score.

Further complicating matters, some lenders devise their own scoring systems in addition to using the ones provided by the credit agencies.

In written testimony before the subcommittee, Jack Forestell, vice president of marketing and analytics at Capital One Financial Corp. said "Capital One uses a blend of internally derived and externally available consumer data to develop its own credit scoring models."

Steven Katz, a spokesman for TransUnion warns consumers not to key in on the specific number and instead look at all the information that is provided in the report.

So what should consumers seeking credit be doing? Ultimately, focusing on a single score, whether it will one day be free with your credit report or remain available for a price, is only one aspect of your credit worthiness. The credit report shows what you can do to improve and protect your overall financial health. So viewing both the score and the report is the best way to determine your level of risk as a borrower.

For a free copy of your credit report, visit http://www.annualcreditreport.com/ or call 877-322-8228. 

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The Institute for Supply Management’s (ISM) non-manufacturing index rose to 49.5 from 48.2 in June. Economists were expecting a reading of 48.7, according to a consensus compiled by Briefing.com.

A reading above 50 indicates growth in the sector, and a reading below 50 means that the sector is contracting.

Still in contraction. Despite the rise, one analyst cautioned that the reading is still an indication of contraction in services.

"It is higher, no doubt about that, but the problem is that it is still below 50 and any measure below 50 is still in contraction," said Christian Menegatti, lead analyst with of RGE Monitor, an online economic research company.

"Saying things are better because the non-manufacturing index is at 49.5 rather than 48.2 is a little big far-fetched - it is a wrong interpretation of this economy right now," he said.

The service sector includes real estate, construction, mining, fishing, agriculture, health care, finance, insurance and administration.

"Members’ comments in July indicate concern about inflationary pressures and the effect on the economy," said Anthony Nieves, chair of the ISM Non-Manufacturing survey committee in a written report.

The employment component increased to 47.1 from 43.8 in June, indicating contraction in the sector, but at a slower rate.

Menegatti said that even though the reading ticked up, it was still not a strong labor market reading.

The employment index "is improved but it is far from 50," he said. "I would be careful in seeing this as a significant improvement."

The reading on business activity for July decreased to 49.6 from 49.9 in June, a signal of slightly faster contraction.

The survey showed that demand for new orders also contracted faster in July, with the component slipping to 47.9 from 48.6 in June.

Prices increases for 62nd month in a row. Of particular concern for business owners, prices paid for materials and services by businesses increased in July for the 62nd consecutive month.

But the measure slipped to 80.8 from 84.5 in June.

The percentage of survey respondents reporting higher prices was 66%, while 30% indicated no change in prices. Only 4% of respondents reported lower prices.

Higher energy and commodity prices are hitting the service sector, but business owners are having a hard time passing on the higher costs to consumers, according to Menegatti.

"There is no way that businesses are not feeling the heat from high energy prices, especially since they are having a very hard time passing on these high costs to the consumer," he said. The consumer "is completely shopped out."  

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Deutsche Lufthansa AG said it canceled four flights to the U.S., India and Canada. The rest of the 78 flights canceled Wednesday were for destinations in Germany and Europe.

Spokeswoman Amelie Lorenz said the canceled flights accounted for about 4% of the airline’s total flight capacity. She said that affected passengers were being put on flights operated by other airlines.

The ver.di union, which represents about 50,000 ground service personnel and a small number of cabin staff, started an open-ended strike for more pay Monday.

The union is seeking a 9.8% pay rise for a year, while the airline has offered 7.7% for 21 months including a one-time bonus payment.

The first day of strikes had little effect on the Cologne-based airline’s flights, but approximately 70 flights were canceled Tuesday. 

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The Japanese electronics and entertainment company, which makes the Walkman player and the PlayStation 3 game machine, had recorded about $620 million in profit for the fiscal first quarter the previous year.

Price competition in its core electronics sector also led to Sony’s worse-than-expected quarterly performance. Analysts surveyed by Thomson Financial had forecast a $486 million profit.

Sony also lowered its full year profit forecast Tuesday to $2.24 billion from an earlier $2.71 billion, blaming expected poor results at its Sony Ericsson mobile joint venture and a pessimistic outlook in electronics.

The results for the latest quarter were also hurt by the absence of a blockbuster like "Spider-Man 3," which lifted the performance of Sony’s movie division in the same period a year earlier, according to the company.

In a bit of bright news, the Tokyo-based manufacturer marked a continued recovery in its long struggling video game section, which was profitable in the latest quarter in contrast to losses the previous year.

Sony sold 1.56 million PlayStation 3 machines in April-June, more than double the 700,000 machines sold the same period a year ago. It kept unchanged its forecast for selling 10 million PS3 consoles the fiscal year through March 2009.

The PS3 has been struggling against the hit Wii from rival Nintendo Co. Sony said it has now sold a cumulative 14.4 million PS3 machines worldwide since it went on sale late 2006. Nintendo reports earnings Wednesday.

Sony’s quarterly sales were just about unchanged at $18.5 billion compared with $18.37 billion a year ago.

If currency rates had remained the same, sales would have jumped 8% on year, but the yen rose against the dollar by nearly 16% from the previous year, Sony said.

In its electronics business, the unfavorable exchange rate erased $133.6 million from Sony’s operating profit for the fiscal first quarter.

Sony raised its sales forecast for the year ending March 2009, to $85.98 billion, up from an earlier $84.1 billion, citing in part a more favorable exchange rate. Sony had assumed the dollar would trade at 93 cents but now expects it to hold at 98 cents.

Price competition, unpopular products and higher research investments hammered results at Sony Ericsson, Sony’s joint venture with Ericsson (ERIC) of Sweden, for the quarter ended June 30.

In other equity-related income, Sony’s music business Sony BMG deteriorated into losses from a year earlier, reflecting an overall decline in the worldwide market and restructuring costs.

Best-sellers during the quarter included Usher’s "Here I Stand" and Neil Diamond’s "Home Before Dark," Sony said.

Sony (SNE) shares fell 3.2% to $39. Trading ended in Tokyo before Sony’s earnings were announced. 

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Resales dropped 2.6 percent to a lower-than-forecast 4.86 million annual rate from a 4.99 million pace the prior month, the National Association of Realtors said today in Washington. The median home price dropped 6.1 percent from June 2007.

The housing slump may deepen further after mortgage rates climbed to the highest in a year this month and turmoil engulfed Fannie Mae and Freddie Mac, which account for more than two- thirds of new home-loan financing. A record 18.6 million houses, apartments and condominiums stood empty in the last three months as the industry's recession reverberated through communities, separate figures showed today.

The NAR report “is, unfortunately, not telling us about an end'' to the slide, said David Resler, chief economist at Nomura Securities International Inc. in New York. “Housing is going to be a non-contributor, if not a drag, on the overall economy.''

The Standard & Poor's Supercomposite Homebuilding Index dropped 7.2 percent to 273.96 at 11:49 a.m. in New York. By comparison, the Standard & Poor's 500 Stock Index lost 1.1 percent, to 1,267.74.

Economists forecast home resales would fall to a 4.94 million pace, according to the median of 77 projections in a Bloomberg News survey. Estimates ranged from a 4.79 million pace to 5.1 million rate.

Jobless Claims

The Labor Department earlier today reported that first-time claims for unemployment benefits rose last week to the highest in almost four months, a sign the slowing economy is weakening the labor market. Applications increased by 34,000 to 406,000 in the week ended July 19.

Compared with a year earlier, existing home sales were down 16 percent in June. Purchases are down by about a third from a record of 7.25 million reached in September 2005.

The number of previously owned unsold homes on the market at the end of June rose to 4.49 million from 4.482 million in May. The total represented 11.1 months' supply at the current sales pace. The agents' group has said that a five-to-six month's supply reflects a balanced market.

“The biggest problem is that we've not yet seen inventories come down,'' Paul Puryear, managing director of Raymond James & Associates Inc. in St. Petersburg, Florida, said in an interview with Bloomberg Radio yesterday. The housing market isn't likely to recover until at least 2009 or 2010, he said.

Property Types

Sales of existing single-family homes declined 3.2 percent to an annual rate of 4.27 million. Purchases of condos and co- ops increased 1.7 percent to a 590,000 pace.

The median sales price fell to $215,100 from $229,000 in June 2007. The median cost of a single-family home decreased 6.7 percent to $213,800, while that of condominiums and co-ops fell 2.2 percent to $224,200.

Purchases decreased in three of four regions, led by a 6.6 percent decline in the Northeast. Sales rose 1 percent in the West, which also showed a 17 percent drop in the median price, the biggest of any region.

The glut of homes may be even greater because not all foreclosed properties are counted by the Realtors group. The group only includes foreclosures that have been listed on the multiple listings service.

Vacant Properties

The number of vacant houses hit an all-time high in the second quarter as more properties were pushed into foreclosure. A total of 18.6 million U.S. houses, apartments and condominiums stood empty, more than at any time in history, as lenders seized a record number of properties. The figure was 6.9 percent higher than a year earlier, the U.S. Census Bureau said in a report today.

More Americans are walking away from their homes as property values slump and borrowing costs on adjustable-rate mortgages reset higher. Bank seizures increased a record 171 percent in June from a year ago and foreclosure filings rose 53 percent, RealtyTrac Inc., a seller of default data, reported this month.

Home prices nationwide have fallen 18 percent on average from their July 2006 peak, according to the S&P/Case-Shiller index of 20 metropolitan areas. The drop in values may be giving those buyers still able to get financing reason to hesitate.

Consumer sentiment dropped in June to the lowest level in 28 years, according to the Reuters/University of Michigan survey, and the economy lost jobs for a sixth straight month, adding to reasons home buyers are sidelined.

Fannie, Freddie

Concern over the ability of Fannie Mae and Freddie Mac, the largest U.S. purchasers of mortgages, to survive the meltdown in subprime lending has heightened the credit crisis and may further curtail access to loans.

There is “no sign of a recovery in housing'' this year, Caterpillar Inc., the world's largest maker of earthmoving equipment, said in a statement this week. The company said second-quarter profit climbed 34 percent, exceeding analysts' estimates, on demand for backhoes and mining tools in China and the Middle East.

Caterpillar's Chief Executive Officer Jim Owens said he expects the U.S. economy, including the housing market, to begin recovering next year.

“We will get this problem behind us,'' Owens said in a July 22 interview with Bloomberg Television. “It will probably take another six months to a year, but it will come back.''

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