Today's Headlines

Bloomberg:

- Former Securities and Exchange Commission Chairman Arthur Levitt warned the Obama administration and U.S. regulators against attempting to change the way executives at financial firms are compensated. “Government can jawbone, but for government to regulate I think is overkill and very mistaken because you don’t know where it’s going to end,” Levitt said in an interview with Bloomberg Television today. Efforts by the Obama administration to change Wall Street pay practices are “totally wrongheaded,” he said. The criticism from Levitt, a Democrat appointed to the SEC by former President Bill Clinton, shows that efforts to overhaul pay practices will prove contentious even after a popular outcry over Wall Street bonuses.

- Dwight Anderson, the commodities investor who liquidated his main Ospraie Fund last year after losing 39 percent, is planning a comeback with two new hedge funds set to open July 1. The Ospraie Equity Fund will buy and sell stocks of commodity and basic-materials companies in industries such as chemicals, mining, paper and natural resources, Anderson said in a May 12 letter to investors. The Ospraie Commodity Fund will invest in commodities and related derivatives, according to the letter, a copy of which was obtained by Bloomberg News. Anderson’s former fund invested in commodities and related stocks. It was the world’s largest such hedge fund at its peak, with more than $3.5 billion in assets after averaging annual gains of about 15 percent from 2000 through 2007. He decided in September to shutter the eight-year-old fund and sell assets after losses of more than 30 percent triggered a clause enabling investors to withdraw their money by the month’s end. About 1,441 funds, or 15 percent of those worldwide, closed last year, according to Chicago-based Hedge Fund Research Inc. Ospraie’s clients have gotten 82 percent of their money back. The remaining portion, invested in private companies, might take as long as three years to return, Anderson told investors at the time of the closure.

- Russia is a “weak link” in emerging markets and investors should buy credit default swaps protecting the country’s bond payments to profit from an expected increase in the cost of the contracts, according to RBC Capital Markets. Russian companies will struggle to repay $51.2 billion of debt maturing before December and the banking system needs to be restructured, which could “materially increase financial sector contingent liabilities for the government,” the note said. Credit default swaps have dropped to around 300 basis points for Russia from more than 1,000 basis points in October on optimism the worst of the financial crisis is over, Bloomberg data show. This price “does not accurately reflect the risks,” RBC said.

- The Federal Reserve considers the recent jump in Treasury yields more as a reflection of a better economic outlook than a signal it needs to step up purchases of U.S. government debt, according to central bank officials who declined to be identified.

- The premiums banks charge each other for gold coins, reflecting costs above metal content, shrank this month after investor demand eased, Commerzbank AG said. The interbank premium in Europe on a 1-ounce coin such as American Eagle, Krugerrand or Maple Leaf dropped to about 6%, from 10% at the end of April. That was the highest rate for at least a decade.

- Confidence in the global economy jumped to the highest level in 19 months as central bankers pointed to signs of a revival and stress tests on U.S. lenders reassured investors, a Bloomberg survey of users on six continents showed. The Bloomberg Professional Global Confidence Index climbed to 38.72 in May from 21.2 in April, the biggest increase since the survey began in November 2007. A measure of U.S. participants’ confidence in the world’s largest economy rose to 34 from 23.9, the survey showed.

- European Union regulators levied a record 1.06 billion-euro ($1.45 billion) fine against Intel Corp.(INTC), the world’s biggest computer-chip maker, and ordered the company to stop using illegal rebates to thwart competitors. Following an eight-year investigation, the European Commission found that Intel impeded competition by giving rebates to computer makers that buy all or almost all of their chips from Intel. The penalty is the biggest antitrust fine in the 27-nation EU’s history, more than double the 497 million- euro penalty against Microsoft Corp. in 2004.

- The U.S. Treasury will tell banks to increase transparency in the over-the-counter derivatives market by making prices available on centralized computer platforms, according to people familiar with the plan. Treasury Secretary Timothy Geithner may announce the decision as soon as today, said the people, who declined to be identified because they weren’t authorized to speak publicly.

- General Motors Corp.(GM) bonds tumbled to record lows on concern that it will fail to restructure in time for a government-imposed deadline on June 1, pushing the largest U.S. automaker into bankruptcy. GM’s $300 million of 9.4 percent bonds due in 2021 fell 4.3 cents to 4.4 cents on the dollar as of 11:46 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Wall Street Journal:

- Tax Increases Could Kill the Recovery. The cap-and-trade levy would hit low-income earners especially hard. Historians and economists who've studied the 1930s conclude that the tax increases passed during that decade derailed the recovery and slowed the decline in unemployment. That was true of the 1935 tax on corporate earnings and of the 1937 introduction of the payroll tax. Japan did the same destructive thing by raising its value-added tax rate in 1997. Even if the proposed tax increases are not scheduled to take effect until 2011, households will recognize the permanent reduction in their future incomes and will reduce current spending accordingly. Higher future tax rates on capital gains and dividends will depress share prices immediately and the resulting fall in wealth will cut consumer spending further. Lower share prices will also raise the cost of equity capital, depressing business investment in plant and equipment. The Obama budget calls for tax increases of more than $1.1 trillion over the next decade. Official budget calculations disguise the resulting fiscal drag by treating Mr. Obama's proposal to cancel the 2011 income tax increases for taxpayers with incomes below $250,000 as if they are real tax cuts. The plan to modify the Alternative Minimum Tax to avoid increases for some taxpayers is also treated as a tax cut. But those are false tax cuts in which no one's tax bill actually declines. In contrast, the proposed tax increases are very real. And despite the proposed tax increases, the government's new spending and transfer programs would cause the annual budget deficit in 2019 to exceed $1 trillion, or 5.7% of GDP. Mr. Obama's biggest proposed tax increase is the cap-and-trade system of requiring businesses to buy carbon dioxide emission permits. The nonpartisan Congressional Budget Office (CBO) estimates that the proposed permit auctions would raise about $80 billion a year and that these extra taxes would be passed along in higher prices to consumers. Anyone who drives a car, uses public transportation, consumes electricity or buys any product that involves creating CO2 in its production would face higher prices. CBO Director Douglas Elmendorf testified before the Senate Finance Committee on May 7 that the cap-and-trade price increases resulting from a 15% cut in CO2 emissions would cost the average household roughly $1,600 a year, ranging from $700 in the lowest-income quintile to $2,200 in the highest-income quintile. It's not too late for Mr. Obama to put these tax increases on hold. If he doesn't, Congress should protect the recovery and the longer-term health of the U.S. economy by voting down this enormous round of higher taxes.

- The Obama administration has begun serious talks about how it can change compensation practices across the financial-services industry, including at companies that did not receive federal bailout money, according to people familiar with the matter. The initiative, which is in its early stages, is part of an ambitious and likely controversial effort to broadly address the way financial companies pay employees and executives, including an attempt to more closely align pay with long-term performance. In an indication of how broad the effort may become, Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators need to examine compensation practices in the mortgage industry, suggesting new limits could stretch beyond banks.

- The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar. The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead. Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

CNBC:

- Online classified ads service Craigslist will get rid of its "erotic services" category that critics called a front for prostitution, replacing it with an adult category that will be reviewed by Web site employees, state attorneys general announced Wednesday.

- Intel(INTC) denies allegations it used illegal selling practices and will appeal the $1.45 billion dollar fine imposed by the European Commission, company CEO Paul Otellini told CNBC Wednesday.

NY Post:

- Goldman Sachs(GS) and Morgan Stanley(MS) look to reap a combined $100 million in fees from just a few days of work -- and they can thank the government's stress test for the windfall. According to estimates calculated by The Post, Morgan Stanley and Goldman are in line to pocket the combined nine-figure sum as a result of Uncle Sam forcing 10 of the country's largest financial firms to raise $75 billion in much needed cash to gird against potentially choppy markets. Morgan and Goldman have been assigned the lion's share of plum debt and equity underwriting assignments in an otherwise dead capital-raising environment.

Washington Post:

- As American International Group chief executive Edward M. Liddy returns to Washington to face Congress today, new details are emerging about how long federal officials were aware of the company's recent bonus payments to its executives and of how inflammatory the payments could be. Documents show that senior officials at the Federal Reserve Bank of New York received details about the bonuses more than five months before the firestorm erupted and were deeply engaged with AIG as well as outside lawyers, auditors and public relations firms about the potential controversy.

Reuters:
- World oil demand is still shrinking as the global economy contracts, OPEC said on Wednesday, adding that a rise in oil prices reflected sentiment rather than fundamentals, which were far from balanced. Despite falling demand for oil and promises by the Organization of the Petroleum Exporting Countries to cut output, the producer group said its own production actually increased last month, suggesting rising prices may have encouraged its members to pump more. OPEC said in its Monthly Oil Market Report that its oil output, excluding Iraq, rose to 25.81 million barrels per day (bpd) in April, up from 25.59 million bpd in March. It was the first rise in OPEC output since July last year. The group said global oil demand would drop 1.57 million bpd in 2009 to average 84.03 million bpd. Its previous forecast was for demand to fall by 1.37 million bpd. OPEC still expects higher global oil demand this year than the International Energy Agency, adviser to 28 industrialized countries, which last month forecast consumption this year at 83.4 million bpd. Demand is falling fast in the developed nations of the Organization for Economic Co-operation and Development (OECD), but the global downturn has also curbed previously rapid demand growth in developing countries such as China and India. World oil demand contracted year-on-year by a record 2.4 million bpd in the first quarter of this year with about 95 percent of the total decline attributed to the OECD, OPEC said. The OPEC report cautioned that the recent improvement in market sentiment as prices have risen did not necessarily reflect the realities of demand and supply.

- OpenTable Inc, an online reservation system used in about 10,000 restaurants in the United States, will price its planned initial public offering on May 20, and begin trading the following day, a source close to the deal said Wednesday. OpenTable, which is based in San Francisco, plans to sell 3 million shares in an estimated range of $12 to $14 per share in the deal, which is being underwritten by Bank of America Merrill Lynch (BAC).

- IBM (IBM) Chief Executive Sam Palmisano reiterated his outlook for 2010 earnings, saying the company's focus on high-margin software and its geographic diversity would help buffer the impact of a slower economy. Palmisano said International Business Machines Corp is still targeting earnings of $10 to $11 per share in 2010. The company has also forecast earnings of "at least $9.20" per share in 2009.

- U.S. Bancorp (USB) Chief Executive Richard Davis said the bank expects in a few weeks to be eligible to repay a $6.6 billion taxpayer-funded infusion, becoming one of the first big lenders to exit the much-maligned Troubled Asset Relief Program.

- Verizon Communications Inc(VZ) will sell 4.8 million rural phone lines to Frontier Communications Inc for $5.25 billion in stock, getting rid of the declining business to focus on wireless and broadband services. The deal will triple the size of Frontier, making it the largest rural-only service provider in the United States.

- The U.S. financial system has completed a big part of the painful adjustment away from its excessively leveraged state, and lending is starting to improve, U.S. Treasury Secretary Timothy Geithner said on Wednesday. Speaking to a group of community bankers, Geithner also said the government planned to reopen a $700 billion bailout fund to small banks once the larger ones repay some of the government money they received.

- The U.S. economy showed some shy signs of improvement in April, although the outlook for European countries still looks mixed, credit card network MasterCard (MA) said on Wednesday.

Financial Times:
- Credit risk – measured by key money market spreads – has for the first time fallen below levels last seen before the collapse of Lehman Brothers as banks increasingly lend to each other amid growing confidence that the worst of the financial crisis is over.The gap between London interbank offered rates and overnight market rates – a pure measure of credit risk – on Wednesday dropped below levels on Friday September 12, the last price before the US investment bank collapsed on the following Monday. This spread is the most important gauge of risk in the money markets because it measures the difference between risk-free overnight market rates and three-month Libor, the key benchmark interest rate banks charge each other for lending. The narrowing of this spread suggests fears of a financial meltdown – prevalent after the US investment bank went bankrupt – have sharply receded.

CBC:

- A researcher at the National Microbiology Lab in Winnipeg is facing charges in the United States after allegedly trying to smuggle unidentified biological material across the Manitoba-North Dakota border. U.S. authorities allege Konan Michel Yao had 22 vials of an unidentified substance in the trunk of his car when he tried to cross the border on May 5. He is charged with smuggling merchandise. U.S. customs officers allegedly found the vials wrapped in aluminum foil inside a glove and packaged in a plastic bag, along with electrical wires.

Vedomosti:

- Russian mortgage loans fell 80% in the first quarter from a year earlier.