Aegon completes acquisitions

NEW YORK (AP)

Dutch insurer Aegon said Monday it completed the acquisition of Merrill Lynch & Co.'s life insurance subsidiaries for $1.25 billion in cash, including excess surplus of about $425 million. Aegon acquired Merrill Lynch Life Insurance Co. and ML Life Insurance Co. of New York from Merrill Lynch. As part of the deal, the pair formed a partnership that will allow Merrill Lynch to offer Aegon insurance products through its financial adviser network. Aegon, through its Transamerica companies will continue to offer insurance and investment services, including Merrill Lynch annuity products. Aegon anticipates the acquisition will boost earnings slightly, while Merrill Lynch will record a net gain from the sale during the fourth quarter.

MBIA, Ambac Fall as Buffett Starts Up Bond Insurer

By Christine Richard and Josh P. Hamilton (Bloomberg)

MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt. MBIA, based in Armonk, New York, fell as much as 17 percent and Ambac dropped 15 percent, the most in two months. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., told the Wall Street Journal his bond insurer opens for business today in New York. New York State Insurance Department Superintendent Eric Dinallo said the agency expedited Buffett's license request.

Berkshire, which gets half its profit from insurance, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee about $1.2 trillion of municipal bonds. The rankings of MBIA, Ambac and other guarantors are under scrutiny amid concern they don't have enough capital set aside to cover potential losses on bonds they insure that are linked to subprime mortgages. ``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. Bond insurers ``are hurting, so now is a good time for Buffett to be getting into the market.'' Buffett, 77, told the newspaper that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. David Neustadt, a spokesman for New York's insurance department, said Berkshire will get a license by Dec. 31.

Shares Drop

Buffett didn't respond to requests for comment through spokeswoman Jackie Wilson. Calls to Liz James, a spokeswoman for MBIA, and Peter Poillon, a spokesman for Ambac, also weren't returned. MBIA, down about 74 percent this year, fell $3.05 to $19.22 at 12:15 p.m. in New York. Ambac, down 72 percent, dropped $3.85 to $25.29. Buffett's decision also indicates he is unlikely to bail out any of the bond insurers. Credit-default swaps on MBIA, which rise as perceptions of credit quality drop, rose 30 basis points to 610 basis points, the highest ever, according to CMA Datavision in London. Ambac increased 10 basis points to 620, the widest in three weeks. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

`Positive Development'

The bond insurance venture is Buffett's third move in a week as he seeks investments to absorb $45 billion in cash. Buffett said Dec. 25 that he will pay $4.5 billion to gain control of Marmon Holdings Inc., the Pritzker family's closely held collection of 125 companies and Berkshire today agreed to buy a reinsurance unit of ING Groep NV for about 300 million euros ($440 million). ``Having new entrants in the market to provide municipalities with options to enhance the credit of new bonds or to potentially provide enhanced credit for outstanding downgraded bonds is a very positive development,'' Dinallo said in a statement today. Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Berkshire Hathaway is the largest investor in Moody's Corp., with a 19 percent stake as of Sept. 30.

`Vintage Warren Buffett'

``If Berkshire Hathaway Assurance knocks on the door of a municipal official, they all know who Warren Buffett is and they all know that the other major players in this business are suddenly suspect,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``It is such vintage Warren Buffett.'' MBIA, as well as Ambac and FGIC Corp. of New York, are trying to convince Moody's, Fitch and S&P that they deserve to keep their top ratings. Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees. ''MBIA and Ambac are probably going to be able to get through this and raise the capital needed to retain their AAA ratings,'' said Rob Haines, an analyst at CreditSights Inc. in New York. ``But it hurts them.''

`Mass Destruction'

Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac. The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. The insurers guarantee about $1.2 trillion of structured finance debt. Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs. ``They're not seeing deterioration in the muni book,'' Haines said. ``All the real risk is in the structured book, which Buffett won't have.''

ACA Capital Holdings

New York-based ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA's rating by 12 levels to CCC after the company posted a $1.04 billion third-quarter loss. ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends. Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance coverage for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses. ``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.''

Ice Cream, Jets

Buffett built Berkshire into a $210 billion holding company by investing premiums from insurance subsidiaries including Geico Corp., the fourth-largest U.S. car insurer, until claims need to be paid. The company's operating businesses include ice cream company International Dairy Queen Inc., business-jet fleet operator NetJets Inc. and carpet maker Shaw Industries. ''What we really hope over time is to more or less break even on underwriting of insurance,'' Buffett said at the company's annual meeting in May. Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged about 27 percent this year. The shares rose $1,900 to $139,700 today. ``Be fearful when others are greedy, and be greedy when others are fearful,'' the billionaire chairman told Berkshire shareholders in his 2006 annual report released in March. ``Appropriate prices don't guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses.''

Home Prices See Record Drops in October

By NOELLE KNOX (USA TODAY)

Home prices in 11 large metro areas posted record declines in October, according to data released Wednesday, more evidence that 2007 was one of the worst real estate markets since the year the United States entered World War II. Reflecting tighter lending standards and a huge number of homes for sale, the S&P/Case-Shiller composite index of home prices in 20 cities slid 6.1% compared with October of last year, led by Miami, Tampa, Detroit and San Diego. Prices in Atlanta and Dallas dipped for the first time during the current downturn. This was the 10th month in a row that the index has shown negative annual price comparisons, and the results are getting worse. The index was down 1.4% from September to October.

"When was the last time we had a bigger drop than this? It looks like 1941," Robert Shiller, economics professor at Yale University and co-developer of the index, said in an interview. Before Pearl Harbor was bombed on Dec. 7, "The U.S. wasn't in the war yet, but it sure looked bad. Hitler was raging in Europe. & You didn't want to be buying a house then." 2Today, the primary force behind the real estate recession is the almost year's supply of homes for sale. Many are being heavily discounted by builders, speculators and lenders who have become owners through foreclosure. Shiller said he expects prices to fall another 5% to 7% next year.

While it's clearly a buyers' market, demand is being constrained by mortgage lenders, who got burned by their own reckless lending of recent years. Now, home shoppers with a poor record for paying bills on time and little saved for a down payment are having serious difficulty getting a loan. "A lot of (buyers) haven't come to the realization that the subprime market no longer exists," said Ritch Workman of Workman Mortgage in Melbourne, Fla. "Mortgage brokers are turning away more and more borrowers." Anyone with a credit score below 620, which is subprime territory, he said, "will pay through the nose" to get a mortgage. In areas where home prices are falling, it's impossible to get a loan for 100% of the purchase price, unless the buyer can qualify for a loan from the Department of Veterans Affairs. Most lenders now require at least a 5% down payment, Workman said.

Home prices rose in just three of the 20 cities in the Case-Shiller index in October: Charlotte; Portland, Ore.; and Seattle. But Patrick Newport, U.S. economist for Global Insight, said he expects prices in Seattle and Portland will turn down by the end of the year. In Miami, where prices fell 12.4%, Ron Shuffield advises sellers to wait if they don't have to sell now. There are a lot of buyers in the market, said Shuffield, president of Esslinger-Wooten-Maxwell Realtors, and with "a little extra research and effort, there are certainly some very, very good deals out there to be had today. You can find deals you could not have found a year ago, or even three months ago."

Harrah's close to largest casino buyout

By KEN RITTER (AP)

Harrah's Entertainment Inc. has tentatively cleared the last remaining regulatory hurdle to the largest casino buyout ever. Harrah's said Monday that the National Indian Gaming Commission has approved the company's $17.7 billion purchase by private equity buyers Apollo Management and Texas Pacific Group, pending final commission review. That conditional approval means Harrah's can go forward with the deal, which is expected to close in early 2008. No further regulatory approval is required. Officials with Harrah's in Las Vegas and the Indian gambling commission in Washington did not immediately respond Monday to messages seeking further comment. Harrah's and the buyers received the go-ahead for the deal last week from the Nevada Gaming Commission, capping a 10-week campaign to obtain approvals from state gambling regulators in New Jersey, Pennsylvania, Louisiana, Iowa, Missouri, Illinois, Indiana and Mississippi. Harrah's, which had nearly $10 billion in revenue last year, operates more than 50 casinos including Caesars and the Imperial Palace in Las Vegas and Bally's in Atlantic City. Indian Gaming Commission approval is needed because Harrah's operates several tribal casinos as well. The company's stock was up 51 cents to $88.84 in Monday trading. The buyout deal calls for Apollo and Texas Pacific to pay $90 per share.

Pershing boosts stake in Target to nearly 10 percent

WASHINGTON (Reuters) - Activist hedge fund Pershing Square Capital raised its stake in Target Corp (TGT.N: Quote, Profile, Research) to nearly 10 percent, a U.S. Securities and Exchange Commission filing said on Monday. Pershing, which recently raised a $2 billion fund to exclusively invest in Target, now holds a 9.97 percent stake in the discount retail chain, up from approximately 9.6 percent in July. Pershing said it has also invested in Target swaps and options, which combined with the stock gives the fund an economic exposure equal to a 12.6 percent stake in the retailer. According to the filing, Pershing said it has met with Target's management and may meet them again to discuss the company's strategy, business, assets, operations, capital structure or its financial condition. Pershing said it has engaged financial advisers and may contact other Target shareholders. Target rose 2.2 percent to $51.81 on the New York Stock Exchange.

Ahead of the Bell: Circuit City (AP)

Analysts said Monday that the next few years are likely to be hard for Circuit City Stores Inc., which plunged following a large third-quarter loss. On Friday, the electronics retailer reported a much larger loss than analysts expected, partly due to weak sales of accessories and warranties, and it forecast a small loss in the fourth quarter. Shares dove 28.7 percent on the day, closing at a four-year low of $4.75. Goldman Sachs analyst Matthew Fassler said Circuit City is opening new stores and taking on more debt. He did not approve of the risks involved in that strategy. "The company is betting that its new units will produce before its existing stores deteriorate to untenable levels, and, moreover, that its problems reflect poor real estate, as opposed to being endemic to the core of the organization," he said. "We view this as unwise." Fassler kept a "Neutral" rating on the stock, and cut his price target to $5.50 per share from $9. He now forecasts losses for Circuit City in 2008 and 2009. Analyst Mike Baker of Deutsche Bank differed, saying real estate is a major problem for Circuit City. He said the company suffers from bad floor plans at its 400 oldest stores, many of which are in unattractive locations. "These lead to weak sales per foot, necessitating a lower cost structure, meaning that Circuit City must sacrifice customer service," he said. "This then leads to share loss." Circuit City is moving its stores to better locations, he said, but that will happen slowly because it must wait for leases to expire. Baker cut his price target to $5 per share from $9.

Chinese fund takes $5bn Morgan Stanley stake

By Daniel Pimlott (Financial Times)

Morgan Stanley on Wednesday said it had sold a $5bn stake to China's new sovereign wealth fund and revealed that a total of $9.4bn in mortgage-related writedowns had driven it to a fourth-quarter loss, leading its chief executive John Mack to forgo his bonus for 2007. The bank said it had been forced to write off a further $5.7bn, on top of a previously announced $3.7bn charge already taken on its holdings of troubled structured credit products in the quarter. The deepening problems in the credit markets helped drive Morgan Stanley to a net loss of $3.59bn, or $3.61 a share, compared with a profit of $1.54bn a year ago. The company said it had negative revenue of $450m, down from $7.85bn a year earlier. Analysts had expected 39 cents of loss on positive revenues of $4.23bn.

The writedowns came because of "continued deterioration and lack of liquidity in the market for subprime and other mortgage related securities since August 2007", it said. Mr Mack added: "The writedown Morgan Stanley took this quarter is deeply disappointing. Ultimately, accountability for our results rests with me, so I've told our compensation committee that I will not accept a bonus for 2007." Last year Mr Mack was awarded $40m in restricted stock and options. He said the writedown stemmed from "losses by a small trading team in one part of the firm". The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. In order to "bolster" its capital position, the bank said it would issue about $5bn in new capital with mandatory conversion into stock to China Investment Corporation, a $200bn fund. In return CIC will be able to convert the investment into a stake of up to 9.9 per cent, but will remain a passive investor, with no role in managing the company. CIC's investment is the latest in a series of stake-building moves in Wall Street firms by Chinese groups. In June CIC bought a $3bn stake in Blackstone Group during the private-equity firm's initial public offering, while Bear Stearns in October agreed a deal with Citic Securities, China's largest listed brokerage, that will see the two groups invest $1bn in each other.

Among other significant foreign investments, Citigroup said last month it had taken a $7.5bn capital infusion from a fund owned by the Abu Dhabi government to shore up its capital after $11bn in writedowns on mortgage investments. Morgan Stanley said that $7.8bn of its losses came from subprime trading positions. It also had $1.2bn of writedowns related to European non-conforming loans, commercial mortgage backed securities, alt-A mortgages and other loans. The bank said that at the end of the quarter on November 30 it had $1.8bn in exposure to subprime, down from $10.4bn in August. Losses in its fixed income unit from the bets on the mortgage markets that went wrong were partially offset by stronger revenues from its equity trading segment, and higher fees in its investment banking advisory and wealth management services. Morgan Stanley shares were $1.59 or 3.3 per cent higher at $49.66 in mid-morning New York trading,