Home sales contracts in 7-month rally

NEW YORK (CNNMoney.com) -- Homebuyers signed more sales contracts in August than in any month this year, boosted by the looming expiration of a homebuyers' tax credit, according to an industry report released Thursday.

The August Pending Home Sales Index from the National Association of Realtors (NAR) surged 6.4%, the seventh straight month-over-month improvement in the indicator. The increase far exceeded economists' expectations -- a panel of analysts surveyed by Briefing.com had forecast a 1% rise.

Pending home sales rose 3.2% in July.

Pending sales are considered a forward indicator of housing market health since contract signings precede actual closings, which typically occur two to three months later. August contract signings show up in October and November NAR statistics as existing home sales.

Housing markets have gained some ground recently as a tax credit for first-time homebuyers -- which is scheduled to expire Nov. 30 -- stimulated sales of starter, and other, homes.

"No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month," said Lawrence Yun, NAR's chief economist.

One problem in extrapolating future closings from contract signings, however, is that there are continuing problems obtaining mortgages that may scuttle many deals, according to Yun.

"The rise in pending home sales shows buyers are returning to the market and signing contracts, but deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules," he said.

Those issues also could also lead to some double counting of previous pending sales as buyers whose earlier deals fell through may return to the market and sign new contracts.

Still, the oversized gain in pending sales will surely translate into some increase in closings, and the report added to several other positive recent indicators that housing markets are at least stabilizing, if not in full-blown recovery.

Not all economic and housing indicators have been pointing up. Initial jobless claims climbed this week, according to a Labor Department report, after three weeks of declines.

Foreclosure filings are still well above normal and they threaten to go far higher as the terms of many toxic mortgages, such as interest-only loans and option ARMS, reset over the next six to 12 months and send the monthly mortgage payments of homeowners soaring.

Another housing market question mark is the status of the tax credit for first-time homebuyers, with the industry fearing that home sales could drop sharply if it's allowed to expire.

There are, however, several efforts in Congress to extend the credit and even to expand it to all homebuyers, not just first-timers. That could turbo-charge home sales if it goes through.

California Pension Seeks New Terms From Hedge Funds

The California Public Employees’ Retirement System said the largest U.S. state public pension wants to renegotiate new terms from hedge funds.

Calpers, as the pension is known, said hedge fund fees should be based on long-term rather than short-range performance. Under the current system a hedge fund manager gets paid yearly, generally taking 20 percent of any gains he makes. If he posts strong performance one year followed by losses the next, he may still obtain hundreds of millions of dollars in fees at the end of two years, while investors break even or even lose money.

“We are so much more of their business now and with the way the market is, we think it’s time for us to be able to get better terms and conditions,” Calpers spokeswoman Pat Macht said.

Hedge funds tumbled 19 percent on average in 2008, the worst year on record and only the second time the industry has posted an annual loss, according to Chicago-based Hedge Fund Research Inc., which began tracking returns in 1990. Clients withdrew about $250 billion last year, a number that would have been higher if not for the record number of funds that limited withdrawals.

Most hedge funds must recoup last year’s losses before they can resume collecting fees on investment gains, usually a cut of 20 percent. Managers also typically take a fee equal to 2 percent of client assets under management.

Making Money

Against this backdrop, hedge funds are making money again, with average performance up 1 percent through March 25, according to a daily index published by Hedge Fund Research.

“Hedge fund managers are expected to exhibit the same sound approach to business management they expect from the companies in which they invest,” Kurt Silberstein, a Calpers’ senior portfolio manager said in a statement. “This restructuring effort is about building more stable, long-term relationships that also benefit hedge fund managers. It’s in our interest to get the best possible return on investment for our members, but it’s in the managers’ interest to be more closely aligned with Calpers in building stronger, more stable relationships.”

Calpers, with $173.8 billion in assets as of March 26, lost 26.6 percent after costs between July 1 and Jan. 31, according to its most recent investment activity report. Calpers, which provides pension and health benefits to 1.6 million government workers, retirees and their families, reached a record high of $260 billion in October 2007.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

Madoff’s Firm Sold to Castor Pollux, Lawyer Says

By David Glovin, Linda Sandler and Christopher Scinta

March 27 (Bloomberg) -- The trustee liquidating Bernard L. Madoff Investment Securities LLC reached a deal to sell the company’s market-making business, an attorney said.

David Sheehan, a lawyer for Irving Picard, who was appointed by the Securities Investor Protection Corp. to unwind Madoff’s businesses, said today in an interview that a press release will be issued announcing the sale to an entity called Castor Pollux.

The sale is subject to higher offers in a U.S. bankruptcy court-supervised auction, Sheehan said. He declined to state the sale price. About 35 remaining employees of the unit were fired today as part of the planned sale, Sheehan said.

SIPC has a member firm called Castor Pollux Securities LLC, based in Medfield, Massachusetts. Darin Oliver, the president, couldn’t be reached by phone or e-mail for comment. Sheehan said Castor Pollux no longer required the trustee to retain the existing employees, with whom Castor Pollux may enter a “separate relationship.”

Picard has tracked about $75 million in Madoff assets to Gibraltar, raising to $1 billion the amount the trustee has recovered for investors, Sheehan said this week. A federal judge gave Picard power of attorney over Madoff’s London business in a March 23 order.

The U.K. unit, Madoff International, was owned almost exclusively by Madoff himself and served as his proprietary trading unit, Picard said in a Feb. 19 filing with a London court. Still, New York-based Madoff Securities and Madoff International “may well be inextricably intermingled,” he said.

Brokerage’s Earnings

The Madoff brokerage had earnings of just $1.12 million last year from its market-making and proprietary trading businesses, according to documents drawn up by the investment bank Lazard Ltd. Barry Ridings, vice chairman of U.S. investment banking at Lazard, which was handling the sale, couldn’t be reached by phone or e-mail for comment.

“The brand has no value because no one in his right mind would want to open a brokerage named Madoff,” Larry Tabb, founder of TAB Group, a financial-market research and advisory firm, said this month.

“You’re buying trading desks, computers, back office software and routing systems -- and every day the business isn’t sold, the value goes down and down.”

Madoff pleaded guilty March 12 to defrauding investors by using money from new ones to pay off old ones in a Ponzi scheme. Before his Dec. 11 arrest, Madoff had told his thousands of clients that they had about $65 billion, prosecutors said. Prosecutors and investigators including Picard, a lawyer with Baker Hostetler LLP in New York, are now seeking to recover assets for victims.

The bankruptcy case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: David Glovin in federal court in Manhattan at dglovin@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net; Christopher Scinta in federal court in Manhattan at cscinta@bloomberg.net.

Bank of America May Raise Investment Banker Salaries

Bank of America Corp. plans to increase some investment bankers’ salaries by as much as 70 percent following the takeover earlier this year of Merrill Lynch & Co., people familiar with the proposal said.

Bank of America, which has received $45 billion of taxpayers’ money, may raise the annual base pay for some managing directors to about $300,000 from $180,000, said the people, who declined to be identified because the final numbers are still under discussion. Salaries for less-senior directors would climb to about $250,000 from $150,000, and vice presidents would get $200,000, up from about $125,000, the people said.

“The concepts we are considering would not increase total compensation,” Brian Moynihan, Bank of America’s president of investment banking and wealth management, wrote in a memo to employees today, obtained by Bloomberg News. “Rather, we believe it is responsible, and consistent with the emerging public consensus, that a greater percentage of overall compensation come from fixed base salary.”

Bonuses will become a “smaller” portion of total compensation, Moynihan wrote in the memo.

The adjustments, which may be rolled out as soon as next month, are designed in part to align the salaries of employees at Charlotte, North Carolina-based Bank of America with workers at New York-based Merrill, one person familiar with the plans said. Salaries for traders and other employees outside the investment bank may also be adjusted, the person said.

Government Pressure

At the same time, governments across the world are gearing up to curb bankers’ year-end cash bonuses after the credit crisis forced regulators and lawmakers to use taxpayer funds to rescue the industry. The U.S. House passed a bill last week that would impose a 90 percent tax rate on bonuses paid by American International Group Inc. and firms that received more than $5 billion from the government. The Senate is weighing a tax.

“In view of the public concerns about executive compensation, changes in the market, and the need to create a more sustainable compensation culture, all the major financial institutions are evaluating compensation practices,” Moynihan wrote in the memo. “We are considering proposals that reflect principles that have been outlined by regulators and elected officials, as well as the need to be competitive in the industry.”

‘Public Perception’

The worst financial crisis since the 1930s has spread across the economy, lifting the U.S. unemployment rate to 8.1 percent, the highest in more than 25 years, and causing the biggest quarterly economic contraction since 1982.

“We’re in an economic downturn, the government is pouring billions into banks, and these guys are boosting their salaries,” said Jason Kennedy, chief executive officer of London-based recruitment firm Kennedy Associates. “There’s an issue of public perception.”

The U.S. is projecting that spending to stimulate the economy and rescue the financial system will lead to a $1.75 trillion budget deficit in the current fiscal year.

Bank of America, led by CEO Kenneth Lewis, has struggled to retain Merrill Lynch executives since it bought the investment bank in January. Merrill investment banking chief Greg Fleming and wealth management head Robert McCann have quit, and Andrea Orcel, Merrill’s top investment banker, has told people he’s considering leaving, according to two people with direct knowledge of his situation.

‘Go to Work’

“Orcel has indicated to his leadership team and to Brian Moynihan that he intends to roll his sleeves up, go to work on building our combined businesses, and try to ignore the distractions caused by anonymous sources of questionable reliability or motivation,” bank spokesman Scott Silvestri said in an e-mailed statement.

Before it was acquired by Bank of America, Merrill doled out $14.8 billion in pay and benefits last year, an average of $253,000 per employee, company filings show. New York Attorney General Andrew Cuomo is investigating $3.6 billion of bonuses paid to Merrill executives in December.

The American Recovery and Reinvestment Act of 2009 will require the top five executives at banks that receive at least $500 million of bailout funds, and the 20 top-paid employees at those companies, to forgo cash bonuses.

Bankers can still get stock bonuses under the law, as long as the shares are restricted until their employers repay bailout funds.

Other banks will likely ratchet up salaries as year-end bonuses shrink, according to compensation consultant Alan Johnson. UBS AG, Switzerland’s biggest bank, promoted about 1,500 investment-banking employees and raised their fixed salaries as much as 50 percent, SonntagsZeitung reported this month.

‘Silly’ Salaries

“It’s literally long overdue,” said Johnson, the founder of New York-based compensation-consulting firm Johnson Associates Inc. “Salaries haven’t really changed in 15 years. The whole industry had silly low base salaries. It was kind of a macho thing left over from the 1980s.”

Bonuses make up about two-thirds of a banker’s total compensation. Salaries have ranged from about $80,000 to $300,000, with bonuses often climbing into the millions of dollars, Johnson said. The five biggest Wall Street firms awarded their employees a record $39 billion of bonuses in 2007.

Financial firms worldwide have taken more than $1 trillion of writedowns and credit losses since the subprime mortgage market collapsed in 2007, triggering a global credit contraction. The U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the period to prop up financial firms.

To contact the reporters on this story: Jacqueline Simmons in Paris at jackiem@bloomberg.net; Josh Fineman in New York at jfineman@bloomberg.net

U.S. Stocks Tumble, Trimming Gains at End of Three-Week Rally

By Lynn Thomasson

March 27 (Bloomberg) -- U.S. stocks retreated, trimming a third-straight weekly gain, as the heads of JPMorgan Chase & Co. and Bank of America Corp. said results deteriorated in March and lower oil and metal prices dragged down commodity producers.

JPMorgan and Bank of America lost at least 3.2 percent, reducing this month’s rally in financials triggered when the banks said they made money in January and February. Schlumberger Ltd. and Hess Corp. slid more than 4 percent following a Goldman Sachs Group Inc. report predicting lower oil prices. Accenture Ltd. tumbled 13 percent, the most since the company went public in 2001, after the technology-consulting firm cut its forecasts.

The Standard & Poor’s 500 Index lost 2 percent to 815.94. The gauge is up 11 percent in March, poised for its best month since 1991. The Dow Jones Industrial Average decreased 148.38, or 1.9 percent, to 7,776.18. The Nasdaq Composite Index retreated 2.6 percent to 1,545.2. Seven stocks fell for each that rose on the New York Stock Exchange.

“You’ve got a lot of fear going into earnings,” said John Nichol, who manages $1 billion in Pittsburgh including the Federated Equity Income Fund, which has beaten 74 percent of its peers over the past five years. “You need growth and there’s just not a lot of growth right now.”

Alcoa Inc., traditionally the first Dow average company to release results, will kick-off the first-quarter earnings season on April 7. Analysts polled by Bloomberg estimate profit during the period slumped 36 percent on average for S&P 500 companies as the recession wiped out consumer spending.

All 10 industries in the S&P 500 fell today as a measure of consumer confidence held in March near a three-decade low.

Rebound Trimmed

The slump today reduced the S&P 500’s gain from a 12-year low on March 9 to 21 percent. The stock benchmark advanced 6.2 percent this week as the Treasury unveiled a plan to revive credit markets by helping investors buy toxic assets and companies from Best Buy Co. to ConAgra Foods Inc. beat analysts’ profit estimates.

JPMorgan dropped 5.8 percent to $27.40. Chief Executive Officer Jamie Dimon said “March was a little tougher” than January and February. Bank of America lost 3.2 percent to $7.34. CEO Ken Lewis said the bank’s trading book in March was “not as good as in the previous two months. Both executives spoke in interviews with the CNBC television network.

The S&P 500 Financials Index retreated 3.5 percent, trimming its rebound from a March 6 low to 51 percent, as Democrats in the U.S. House of Representatives recommended legislation to curb “predatory” lending and encourage the use of traditional 30-year, fixed-rate loans.

‘More to Come’

The new rules would prohibit banks from “directly or indirectly” hedging or transferring a minimum retained credit risk on most nontraditional mortgages, including some loans that have adjustable interest rates or require little documentation of a borrower’s income.

“While we have had a great deal of bad news on banks, we think there is still more to come,” said Goldman Sachs strategist Abby Joseph Cohen in a Bloomberg Radio interview from New York. “We’re certainly not yet in the clear -- whether in the U.S. or around the world.”

The banking industry had its first loss in derivatives trading last year, driven by a fourth-quarter $9 billion rout in credit markets. U.S. commercial banks lost $836 million in 2008 from trading over-the-counter cash and derivatives contracts, compared with a $5.5 billion gain in 2007, the Office for the Comptroller of the Currency said in a report today.

Energy Slump

Schlumberger, the world’s largest oilfield-services provider, dropped 4.4 percent to $43.52. Hess slumped 8.4 percent to $58.23. Crude oil declined 3.7 percent to $52.35 a barrel on the New York Mercantile Exchange, paring its sixth weekly increase.

Accenture tumbled 13 percent to $27.66. The second-biggest technology-consulting firm cut its profit and sales forecasts as the worsening economy curbed spending on computer equipment.

A measure of technology shares in the S&P 500 dropped 2.7 percent, the most in three weeks. The industry remains the S&P 500’s best performer this year with a 4.9 percent advance.

Amazon.com Inc. fell 4.3 percent to $70.52. The world’s largest Internet retailer was removed from the “conviction buy” list at Goldman Sachs because the shares are no longer cheap.

‘Headwinds’

“There are still plenty of headwinds out there to concern equity investors,” said Michael Koskuba, a New York-based fund manager at Victory Capital Management Inc., which oversees $50 billion. “Given the sharp rally we’ve seen, it makes sense for the market to sell off a bit.”

The U.K. economy contracted 1.6 percent in the fourth quarter from the third quarter, exceeding the prior measurement of 1.5 percent, which was also the median forecast of 27 economists in a Bloomberg News survey. Europe’s Dow Jones Stoxx 600 Index slipped 1.1 percent.

The MSCI Asia Pacific Index closed little changed after paring gains that drove valuations to the highest levels since December.

The Reuters/University of Michigan final index of consumer sentiment rose to 57.3 from 56.3 in February. The gauge, which has averaged 112 over the last three decades, reached a 28-year low of 55.3 in November.

Economy Watch

Growth in spending by U.S. shoppers slowed in February and incomes fell more than forecast amid the deteriorating job market, the Commerce Department reported. Bed Bath & Beyond Inc., Starbucks Corp. and Harley-Davidson Inc. fell more than 4 percent, leading the S&P 500 Consumer Discretionary Index to a 2.1 percent loss.

Rising unemployment raises the risk that recent increases in purchases will be short-lived, extending the recession though much of 2009. Still, other economic reports this week showed the economy is stabilizing as home sales and demand for longer lasting products, such as refrigerators, airplanes and computer chips, unexpectedly grew in February.

General Motors Corp. jumped 6.2 percent to $3.62 for the biggest gain in the Dow average. The largest U.S. automaker hired Commerzbank AG to find an investor for its Opel unit in Europe, two people familiar with the matter said. The sale would be part of the company’s plan to raise as much as 3.3 billion euros ($4.5 billion) in Europe, according to one of the people, who declined to be identified because details of the plan aren’t public. Spokesmen for Commerzbank and GM declined to comment.

Short Interest

The number of shares borrowed and sold short on the New York Stock Exchange jumped to 16.1 billion on March 13, the most since Lehman Brothers Holdings Inc. filed for bankruptcy, NYSE Euronext reported earlier this week.

The so-called short interest was boosted by an almost fivefold increase in bets against Citigroup Inc. between Feb. 27 and March 13 as speculators sold its common stock short and purchased its convertible securities before they are eligible to swap. Shares of the New York-based bank have rallied 75 percent since Feb. 27.

The S&P 500 is still down 9.7 percent this year after tumbling 38 percent in 2008, its worst annual return since the Great Depression. The MSCI World has dropped 10 percent in 2009 after last year’s 42 percent plunge, the biggest since the index was created in 1970.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.