Today's Headlines

Bloomberg:

• Fitch Says U.K. Fiscal Challenge 'Formidable;' Pound Declines. Britain is facing a fiscal challenge and needs to accelerate plans to reduce its budget deficit, Fitch Ratings said. The pound extended declines. “The scale of the U.K.’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy, including a faster pace of deficit reduction than set out in the April 2010 budget,” Fitch analysts including Brian Coulton in London wrote in a report today. Interest payments on U.K. debt, rated AAA at Fitch, may reach a “staggering” 70 billion pounds ($101 billion) in five years, from 31 billion pounds in the past fiscal year, Prime Minister David Cameron said yesterday. Standard & Poor’s, which also gives Britain the top credit grade, has a “negative” outlook amid concern about the deficit.
  
• Bank Risk Nears Record High on Spain's $60 Billion Capital Call. Bank credit-default swaps surged near to a record on concern Spanish lenders will have to raise $60 billion to shore up capital as lawmakers struggle to finance a swollen budget deficit. The Markit iTraxx Financial Index of swaps on 25 European banks and insurers climbed as much as 14 basis points to 208, approaching the all-time closing high of 210 basis points set in March 2009, JPMorgan Chase & Co. prices show. Banco Santander SA, Spain’s biggest bank, increased 23 basis points to a record 258, according to CMA DataVision. Spanish lenders need as much as 50 billion euros ($60 billion) of capital, according to Banco Bilbao Vizcaya Argentaria SA, as they face mounting writedowns triggered by a housing market collapse and losses on government bond holdings. Civil servants went on strike today to protest at Prime Minister Jose Luis Rodriguez Zapatero’s efforts to tame the euro area’s third-largest deficit. “There is illness in the Spanish banking system,” said Jeroen van den Broek, head of credit strategy at ING Groep NV in Amsterdam. “It’s very similar to 2008, when the market was hunting down the next bank failure. Now, the market’s hunting the next sovereign fiscal problem.” The spread between Spanish 10-year securities and German bunds widened 10 basis points to 213 basis points, a level not seen since before the introduction of the euro in 1999. Spanish bank capital needs may amount to about 5 percent of the nation’s gross domestic product of about 1 trillion euros through 2013, Bilbao-based BBVA said yesterday. The estimate exceeds a forecast by Standard & Poor’s that a state-backed rescue of Spain’s banking industry could cost 35 billion euros. Swaps on Bancaja, the Valencia-based lender downgraded by Fitch Ratings on June 1, rose 32.5 basis points to 668.5, CMA prices show. Contracts on BBVA increased 23 basis points to a record 292, Banco de Sabadell SA climbed 20 to 369 and Banco Pastor SA rose 35.5 to 495, CMA prices show. Investors are paying record high rates to protect bonds of banks in Europe from default relative to the rest of the market. The Markit iTraxx Financial Index is more than 60 basis points higher than the corporate Markit iTraxx Europe Index, according to JPMorgan. “There’s no doubt that this EU sovereign crisis will change the course of economic history,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “It may be up to the central banks to provide stability going forward.”
• The pace of hedge fund liquidations quickened in the first quarter after a year of declines, according to Hedge Fund Research Inc. About 240 funds shuttered in the first quarter, following 165 closures in the prior three months. Firms that invest client money in hedge funds had the most closures at 102. More than 1,000 hedge funds closed last year, making 2009 the second-highest year on record after 2008, when 1,471 hedge funds liquidated.
• 'Herculean' Europe Debt Effort May Not Save Euro Area, RBS Says. Europe’s 750 billion euro ($900 billion) aid package might fail to save the 11-year-old monetary union and usher in an “extended period” of market stress and disorder, according to Royal Bank of Scotland Group Plc. “Maybe we reach the point where this Herculean effort works and enough policy stimulus is provided so countries can fly again,” David Simmonds, global head of research and strategy at RBS, said in Singapore today. “However I do not subscribe to this view because one cannot treat a debt-fuelled over-consumption problem with a lot more debt.” Financial institutions globally have combined exposure to Portugal, Spain and Greece of more than 2 trillion euros, about half taken up by banks, Simmonds said. “About 500 billion euros or so is held by French and German banks, so the point to stress is there will be a Herculean effort to hold this thing together,” he said.
• Babson Capital to Trim Equity on U.S. Downturn Bet. Babson Capital Management LLC, which oversees more than $100 billion, is betting on weak U.S. growth by limiting its equity holdings of companies acquired in leveraged buyouts. “We believe economic growth will be pretty sluggish for the next few years so we are making a strategic decision to take a more defensive posture, meaning we prefer to get a bit more of our return from coupons of the investments rather than equity kickers,” Michael Hermsen, a managing director who co-heads Babson Capital’s Mezzanine and Private-Equity Group in Springfield, Massachusetts, said.
• The rate to exchange Australian dollars for yen is moving in lockstep with U.S. stocks by the most on record as concern Europe's debt crisis will derail growth pushes investors to the safety of the Japanese currency. The 120-day correlation between Aussie-yen and the Standard & Poor's 500 Index rose to .8277 today, the highest since at least 1991, or as far back as Bloomberg data goes.
• Senate Democrats Propose Trimming Tax Rise on Buyout Managers. Senate Democrats said they will scale back a House-approved tax increase on investment-fund managers as part of their jobs legislation. The plan would tax an increasing amount of the profit share paid to fund executives, known as carried interest, at higher ordinary income tax rates rather than at the lower capital gains rate. The measure also would reinstate a provision dropped by House Democrats that would send state governments $24 billion to help pay for Medicaid health care for the poor. It would pay for that in part by increasing to 41 cents the current 8-cent tax oil companies pay on each barrel of oil they produce.

Bloomberg Businessweek:

• Hedge Funds Spent $1.4 Million Lobbying in 1Q. A trade group representing hedge funds spent nearly $1.4 million in the first quarter lobbying federal officials on proposed financial regulations, including stricter oversight of derivatives trading. The $1.37 million that the Managed Funds Association spent on lobbying was up from the $790,000 that the organization spent in the same quarter a year ago. It also tops the nearly $1.1 million spent in last year's fourth quarter by the lobbying organization for hedge funds, which cater to institutional investors and wealthy individuals.
• Gold Rises to Record on Demand for Haven From European Crisis. Gold rose to a record on demand for a haven from financial turmoil in Europe. Gold futures climbed to $1,254.50 an ounce in New York and also touched highs in sterling, euros and Swiss francs. European equities fell and Fitch Ratings said the U.K. must deepen budget cuts to protect its top credit rating.

CNBC:

• Housing's Double Dip: Numbers Tell How Bad It Is.

Fox News:

• JPMorgan(JPM) May Take Brunt of New Financial Reform. The conventional wisdom on Wall Street has been that the new financial-reform package will squeeze earnings at Goldman Sachs (GS: 135.5085, -3.2815, -2.36%) much tighter than most of its competitors because of limitations on so-called proprietary trading. But executives at Goldman Sachs have been telling clients and investors just the opposite is true; in fact, it’s the firm’s chief competitor, JPMorgan Chase (JPM: 37.11, 0.38, 1.03%), that could get hit the hardest, FOX Business Network has learned.

NY Times:

• Trade by Iran is Veiled by Web of Shell Companies.
• With Strikes, China's Workers Seem to Gain Power.
  

NY Post:

• JPMorgan(JPM) Coal Hole. JPMorgan Chase's CEO Jamie Dimon may get burned by a coal trade that is said to have rung up a loss of as much as $250 million this quarter, The Post has learned.The hit, which occurred on the bank's commodities desk, is believed to have been the result of wrong-way bets that JPMorgan placed in recent weeks on coal traded in different regions of the world.The potential losses come at an inopportune time, as Washington lawmakers review sweeping changes to Wall Street rules on proprietary trading.
• Where Are the Jobs?
  

Business Insider:

• What A Downgrade of Tencent Says About China's Online Gaming Sector.
• Taylor Energy Will Soon Put Out Comments On Saratoga Oil Leak. A spokesperson from Taylor Energy contacted us about the second oil leak everyone's talking about. Denise Fields declined to comment, saying only that the Louisiana-based company will release an emailed statement later this afternoon. Although the Ocean Saratoga is leaking less than Deepwater Horizon and has been leaking for at least five weeks, all parties are treating this with great caution. Rig operator Diamond Offshore has refused to comment.
• North Korea Shoots Three Chinese At Border, As Relations Between The Countries Deteriorate Further.
• Here Are The Countries And Banks Most Exposed to the Emerging Crisis in Hungary.
  

Zero Hedge:

• China Sovereign Wealth Fund Announces 10% Mark-to-Market Loss for May.
• 7-Day Commercial Paper Rate Hits 18 Month Highs. The crunch in funding continues. As we wrote yesterday, there is $673 billion in Commercial Paper maturing over the next month and a half. The problem is that the rolling of all this paper will come at increasingly higher costs.

Seeking Alpha:

• Top Stocks Owned by Hedge Funds.

Washington Post:

• Hilarious Aussie Video Explaining Europe's Impossible Debt Problem. (video)

TheStreet.com:

• Hedge Funds Struggle Amid Manager Scandals. Some of the biggest victims of the Madoff scandals were investors who relied on vehicles known as funds of hedge funds. Hundreds of millions of dollars vanished from funds of funds run by Maxam Capital Management and Tremont Group Holdings. Shaken by the losses, investors fled funds of funds. Withdrawals totaled $158 billion in 2008 and 2009, according to industry tracker Hedge Fund Research.

Washington Times:

• Lawmakers Got Fed Funds for Fancy Frontage. With a rooftop pool and 24-hour concierge service, the new luxury condominiums off Frank Sinatra Drive here seem an unlikely spot in need of a multimillion-dollar federal giveaway. Yet U.S. taxpayers doled out at least $8 million on a public walkway and park space in front of the Maxwell Place development here overlooking the New York City skyline - an amenity the development touts alongside its entertainment lounge, rooftop hot tub and theater screening room. But the decision to use tax dollars to fund the walkway project was made after private developers had already agreed in 2003 to pay for it - indeed, it was a key condition for getting the project off the ground, according to public records and interviews. Still, under the so-called earmarking process, by which Capitol Hill lawmakers slip requests for pet projects into larger spending bills, Sens. Frank R. Lautenberg and Robert Menendez, New Jersey Democrats, later pushed for millions of dollars in federal funding for the project.

The Hill:

• Ax May Fall on Tax Break for Mortgages. The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits. Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade. And now that sentiment has turned against all the federal red ink — and cost-cutting is in vogue — Democrats on President Barack Obama’s financial commission are considering the wisdom of permanent tax breaks such as the mortgage deduction and corporate deferral. Calling them “tax entitlements,” senior Democratic lawmakers have argued they should be on the table for reform just like traditional entitlement programs Medicare, Social Security and Medicaid.

Politico:

• Poll: Oil Response Worse Than Katrina. More than two-thirds of Americans rate the federal government's response to the oil spill off the Gulf Coast negatively — topping the number of those who said the same about Katrina soon after the hurricane, according to a new ABC News/Washington Post poll. Sixty-nine percent of the 1,004 adults polled nationwide held a negative view of the federal government's response to the spill; only 28 percent gave the government a positive rating.
• Spending Fears Threaten Dem Agenda. At a closed-door meeting with a small group of House Democrats late last month, House Speaker Nancy Pelosi heard gripes from members not happy about having to vote on a big spending measure at a time when many voters think government growth and deficits are out of control. Nothing new there. Pelosi’s been hearing this type of message from the noisy caucus of moderate Blue Dog Democrats for a year and a half. But this time was different: The malcontents were freshmen, many of whom have enthusiastically backed President Barack Obama’s agenda most of the way but now are choking on its cost.
  

ABC News:

• Incumbents Beware: Poll Shows Frustration Index at New Highs. Ahead of 2010 Midterm Elections, Frustration with Government Past Boiling Point.

USA Today:

• More Than 1 in 5 Kids Live in Poverty. The rate of children living in poverty this year will climb to nearly 22%, the highest rate in two decades, according to an analysis by the non-profit Foundation for Child Development. Nearly 17% of children were living in poverty in 2006, before the recession began. The foundation's Child and Youth Well-Being Index tracks 28 key statistics about children, such as health insurance coverage, parents' employment, infant mortality and preschool enrollment. The report projects that the percentage of children living in families with an "insecure" source of food has risen from about 17% in 2007 to nearly 18% in 2010, an increase of 750,000 children. Up to 500,000 children may be homeless this year, living either in shelters or places not meant for habitation.

Reuters:

• US Weekly Gasoline Demand Down 5.8% - Mastercard. Year-on-year, U.S. gasoline demand slipped 1.7 percent, the SpendingPulse report said.

Le Figaro:

• U.K. Foreign Secretary William Hague said his country can't give more financial guarantees to help nations in the euro-zone because it faces its largest-ever peacetime budget deficit, citing an interview with Hague.

The Economic Times:

• Foxconn Ends Death Payouts to Halt Suicides: Xinhua. iPhone maker Foxconn International Holdings will no longer pay compensation to families of employees who kill themselves to discourage suicides. Xinhua cited posters in Foxconn's Shenzhen complex as saying the company had "concrete evidence" that some of its employees who killed themselves in a recent spate of suicides had done so in order to win compensation money for their families. Most of the victims' families received more than 100,000 yuan ($14,640), Xinhua said.