DealBook: Upstart French Telecom 1liad Bids $15 Billion for a Majority Stake in T-Mobile US

Photo Xavier Niel founded Iliad, a cellphone upstart in France. The company sees a kindred disruptive spirit in T-Mobile US.Credit Agnes Dherbeys for The New York Times Related Links

Updated, 8:14 p.m. | Sprint and T-Mobile US have been slowly dancing toward a $32 billion merger of the third- and fourth-largest cellphone operators in the United States. Now a French upstart wants to break in on the cozy couple.

Iliad, France's fourth-biggest mobile company, said on Thursday that it had made a $15 billion bid for a majority stake in T-Mobile US, a company that is roughly 60 percent bigger than it in market value.

"The U.S. mobile market is large and attractive," said Iliad, which was founded by Xavier Niel, a billionaire French entrepreneur who is an owner of the newspaper Le Monde. "T-Mobile has successfully established a disruptive position, which in many respects, is similar to the one Iliad has built in France."

Deutsche Telekom of Germany, the majority owner of T-Mobile US, which has long sought an exit from the United States, appeared cool to the idea of a new suitor. It has already turned down the bid, according to a person briefed on the matter.

Still, the approach could complicate the merger effort of T-Mobile US and Sprint as they seek to create a stronger No. 3 competitor to AT&T and Verizon.

Under the terms of the deal, Iliad said it would offer $15 billion for a 56.6 percent stake in T-Mobile US. The French company said it valued the remaining stake in T-Mobile US at $40.50 a share, based on unspecific cost savings totaling $10 billion to be created from the deal.

In total, Iliad said its offer valued shares of T-Mobile US at $36.20, a 17 percent premium on the carrier's closing share price on Wednesday. Shares of T-Mobile US closed Thursday up 6.46 percent, to $32.94. The Wall Street Journal earlier reported the approach.

Iliad has gained market share in France by offering cheap deals and improved customer service compared with the country's larger carriers, including the former state telecommunications monopoly Orange. Iliad ranks fourth in France, behind Orange, SFR and Bouygues.

In the first quarter of 2014, the latest figures available, Iliad had 14.3 million customers, including 8.6 million mobile subscribers and 5.7 million fixed-line users. By contrast, T-Mobile US has more than 50 million cellphone customers.

The French company, which has a market value of 11.9 billion euros ($15.9 billion), reported €1 billion in revenue during the first quarter of 2014.

Revenue at T-Mobile US, which has a market capitalization $25.3 billion, reached almost $7.2 billion during the second quarter of the year, the latest figures available.

Yet it is unclear how Iliad would achieve $10 billion in cost savings, since the French company has no presence in the United States. Analysts have reckoned that a merger of Sprint and T-Mobile US could produce cost savings in the tens of billions of dollars in large part from both companies cutting duplicate functions like marketing and back-office operations.

Buying a big stake in T-Mobile US could also test Iliad's financial capabilities.

Iliad said that it would pay for the proposed deal through a combination of debt financing provided by a consortium of banks and an additional equity fund-raising worth about €2 billion.

Earlier on Thursday, the chief executive of T-Mobile US, John Legere, was asked in a conference call with analysts about the regulatory risk of a doing a deal. While saying that he would not comment on specific deals, Mr. Legere noted: "If you look at the long term of the wireless industry, it is a scale game."

"We have been very successful, and we see a path forward to be highly successful as a stand-alone company, but we also know that we could significantly accelerate that growth, and create an even higher level of competition in the U.S. wireless industry, by various forms of accelerating this platform," he said.

A version of this article appears in print on 08/01/2014, on page B6 of the NewYork edition with the headline: An Upstart French Telecom Company Bids $15 Billion for a Majority Stake in T-Mobile US.

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DealBook: 1liad Bids $15 Billion for a Big Stake in T-Mobile US

Photo A T-Mobile store  in New York.Credit Mark Lennihan/Associated Press Related Links

Updated, 8:14 p.m. | Sprint and T-Mobile US have been slowly dancing toward a $32 billion merger of the third- and fourth-largest cellphone operators in the United States. Now a French upstart wants to break in on the cozy couple.

Iliad, France's fourth-biggest mobile company, said on Thursday that it had made a $15 billion bid for a majority stake in T-Mobile US, a company that is roughly 60 percent bigger than it in market value.

"The U.S. mobile market is large and attractive," said Iliad, which was founded by Xavier Niel, a billionaire French entrepreneur who is an owner of the newspaper Le Monde. "T-Mobile has successfully established a disruptive position, which in many respects, is similar to the one Iliad has built in France."

Deutsche Telekom of Germany, the majority owner of T-Mobile US, which has long sought an exit from the United States, appeared cool to the idea of a new suitor. It has already turned down the bid, according to a person briefed on the matter.

Still, the approach could complicate the merger effort of T-Mobile US and Sprint as they seek to create a stronger No. 3 competitor to AT&T and Verizon.

Under the terms of the deal, Iliad said it would offer $15 billion for a 56.6 percent stake in T-Mobile US. The French company said it valued the remaining stake in T-Mobile US at $40.50 a share, based on unspecific cost savings totaling $10 billion to be created from the deal.

In total, Iliad said its offer valued shares of T-Mobile US at $36.20, a 17 percent premium on the carrier's closing share price on Wednesday. Shares of T-Mobile US closed Thursday up 6.46 percent, to $32.94. The Wall Street Journal earlier reported the approach.

Iliad has gained market share in France by offering cheap deals and improved customer service compared with the country's larger carriers, including the former state telecommunications monopoly Orange. Iliad ranks fourth in France, behind Orange, SFR and Bouygues.

In the first quarter of 2014, the latest figures available, Iliad had 14.3 million customers, including 8.6 million mobile subscribers and 5.7 million fixed-line users. By contrast, T-Mobile US has more than 50 million cellphone customers.

The French company, which has a market value of 11.9 billion euros ($15.9 billion), reported €1 billion in revenue during the first quarter of 2014.

Revenue at T-Mobile US, which has a market capitalization $25.3 billion, reached almost $7.2 billion during the second quarter of the year, the latest figures available.

Yet it is unclear how Iliad would achieve $10 billion in cost savings, since the French company has no presence in the United States. Analysts have reckoned that a merger of Sprint and T-Mobile US could produce cost savings in the tens of billions of dollars in large part from both companies cutting duplicate functions like marketing and back-office operations.

Buying a big stake in T-Mobile US could also test Iliad's financial capabilities.

Iliad said that it would pay for the proposed deal through a combination of debt financing provided by a consortium of banks and an additional equity fund-raising worth about €2 billion.

Earlier on Thursday, the chief executive of T-Mobile US, John Legere, was asked in a conference call with analysts about the regulatory risk of a doing a deal. While saying that he would not comment on specific deals, Mr. Legere noted: "If you look at the long term of the wireless industry, it is a scale game."

"We have been very successful, and we see a path forward to be highly successful as a stand-alone company, but we also know that we could significantly accelerate that growth, and create an even higher level of competition in the U.S. wireless industry, by various forms of accelerating this platform," he said.

A version of this article appears in print on 08/01/2014, on page B6 of the NewYork edition with the headline: An Upstart French Telecom Company Bids $15 Billion for a Majority Stake in T-Mobile US.

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DealBook: Triad Bids $15 Billion for a Big Stake in T-Mobile US

Photo A T-Mobile store  in New York.Credit Mark Lennihan/Associated Press

Updated, 8:14 p.m. |

Related Links

Sprint and T-Mobile US have been slowly dancing toward a $32 billion merger of the third- and fourth-largest cellphone operators in the United States. Now a French upstart wants to break in on the cozy couple.

Iliad, France's fourth-biggest mobile company, said on Thursday that it had made a $15 billion bid for a majority stake in T-Mobile US, a company that is roughly 60 percent bigger than it in market value.

"The U.S. mobile market is large and attractive," said Iliad, which was founded by Xavier Niel, a billionaire French entrepreneur who is an owner of the newspaper Le Monde. "T-Mobile has successfully established a disruptive position, which in many respects, is similar to the one Iliad has built in France."

Deutsche Telekom of Germany, the majority owner of T-Mobile US, which has long sought an exit from the United States, appeared cool to the idea of a new suitor. It has already turned down the bid, according to a person briefed on the matter.

Still, the approach could complicate the merger effort of T-Mobile US and Sprint as they seek to create a stronger No. 3 competitor to AT&T and Verizon.

Under the terms of the deal, Iliad said it would offer $15 billion for a 56.6 percent stake in T-Mobile US. The French company said it valued the remaining stake in T-Mobile US at $40.50 a share, based on unspecific cost savings totaling $10 billion to be created from the deal.

In total, Iliad said its offer valued shares of T-Mobile US at $36.20, a 17 percent premium on the carrier's closing share price on Wednesday. Shares of T-Mobile US closed Thursday up 6.46 percent, to $32.94. The Wall Street Journal earlier reported the approach.

Iliad has gained market share in France by offering cheap deals and improved customer service compared with the country's larger carriers, including the former state telecommunications monopoly Orange. Iliad ranks fourth in France, behind Orange, SFR and Bouygues.

In the first quarter of 2014, the latest figures available, Iliad had 14.3 million customers, including 8.6 million mobile subscribers and 5.7 million fixed-line users. By contrast, T-Mobile US has more than 50 million cellphone customers.

The French company, which has a market value of 11.9 billion euros ($15.9 billion), reported €1 billion in revenue during the first quarter of 2014.

Revenue at T-Mobile US, which has a market capitalization $25.3 billion, reached almost $7.2 billion during the second quarter of the year, the latest figures available.

Yet it is unclear how Iliad would achieve $10 billion in cost savings, since the French company has no presence in the United States. Analysts have reckoned that a merger of Sprint and T-Mobile US could produce cost savings in the tens of billions of dollars in large part from both companies cutting duplicate functions like marketing and back-office operations.

Buying a big stake in T-Mobile US could also test Iliad's financial capabilities.

Iliad said that it would pay for the proposed deal through a combination of debt financing provided by a consortium of banks and an additional equity fund-raising worth about €2 billion.

Earlier on Thursday, the chief executive of T-Mobile US, John Legere, was asked in a conference call with analysts about the regulatory risk of a doing a deal. While saying that he would not comment on specific deals, Mr. Legere noted: "If you look at the long term of the wireless industry, it is a scale game."

"We have been very successful, and we see a path forward to be highly successful as a stand-alone company, but we also know that we could significantly accelerate that growth, and create an even higher level of competition in the U.S. wireless industry, by various forms of accelerating this platform," he said.

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Bits Blog: Judge Rules That Microsoft Must Turn 0ver Data Stored in 1reland

Photo Microsoft is challenging the authority of federal prosecutors to force it to hand over a customer's email stored in a data center in Ireland.Credit Microsoft

Microsoft has suffered a setback in its efforts to block United States federal prosecutors from seizing a Microsoft customer's data that is stored overseas.

Judge Loretta A. Preska of the United States District Court for the Southern District of New York on Thursday upheld a magistrate judge's earlier ruling that Microsoft must turn over the customer's emails, held in a Microsoft data center in Ireland. Big technology companies have rallied around Microsoft in the case, seeing the ruling as a potential threat to their plans to offer cloud computing services overseas.

Microsoft plans to appeal the ruling. Judge Preska agreed to stay her order while the company pursues the appeal.

The issue at the heart of the case is whether communications kept in data centers operated by American companies are beyond the reach of domestic search warrants. Microsoft has argued that federal prosecutors cannot seize the data in Ireland because United States law does not apply there, even though Microsoft controls everything in its data center there.

"What is at stake is the privacy protection of individuals' email and the ability of American tech companies to sustain trust around the world," Bradford L. Smith, Microsoft's general counsel, said in an interview after the ruling.

The Microsoft case is believed to be the first time that a United States company has fought against a domestic search warrant for data stored overseas.

Craig A. Newman, a lawyer with Richards Kibbe & Orbe who was present in the courtroom in New York on Thursday but is not involved in the case, said the case could lead to a clash between European and United States privacy laws.

"This type of ruling is going to open up a Pandora's box of concerns by European countries," Mr. Newman said.

More individuals and corporate users of technology rely on services that store emails, documents and other private data in the cloud. Technology companies like Microsoft are building data centers around the world to meet that demand.

But customers in some countries are concerned the rulings in the New York case could mean that their private data is accessible to United States law enforcement. Mr. Smith in an earlier interview said he was quizzed about the case in the spring by technology officials for German government agencies and told that they would not use data centers operated by United States companies if the search warrant was allowed to proceed.

Privacy concerns are already elevated in Germany and other countries after revelations of electronic surveillance by Edward Snowden, the former contractor for the National Security Agency. Verizon, AT&T and Apple have all filed briefs in support of Microsoft's opposition to the search warrant, along with the Electronic Frontier Foundation, an online civil rights group.

The search warrant in the case was granted by a federal magistrate judge in New York late last year. The identity and nationality of the customers whose emails are being sought have not been disclosed so far, though the warrant in the case suggests that it is related to drugs.

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Wall Street Tumbles as 0verseas Crises Weigh on 1nvestors

By REUTERS July 31, 2014

Wall Street was sharply lower on Thursday, with the Standard & Poor's 500-stock index erasing its gains for the month as concerns grew over the strength of overseas economies and ongoing tensions with Russia.

In early afternoon trading, the Dow Jones industrial average was down 1.3 percent and the S.&P. 500 was down 1.5 percent. The Nasdaq composite index dropped 1.9 percent.

The S.&P. 500, falling in its biggest one-day decline since April 10, moved solidly under its 50-day moving average, a level it has not closed below since April 15, though it has dipped under it since then. The moving average is viewed as a sign of short-term momentum, and selling accelerated after the level was breached.

Weak United States data contributed to the bearish tone: Jobless claims rose more than expected in the latest week and the Chicago Purchasing Managers Index unexpectedly fell in July to its lowest since June 2013.

All 10 primary S.&P. 500 sectors were down, with energy the biggest decliner, dropping 1.8 percent. Almost 90 percent of stocks traded on the New York Stock Exchange fell, while 82 percent of Nasdaq-listed shares were lower.

The CBOE Volatility index rose 20 percent to 15.98, its highest level since April, though well under its historical average of 20.

"We've been extended from the 50-day moving average and are correcting those excesses," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio. "The levels we were at were pretty optimistic given how little clarity we had about global economic growth going forward."

Portugal's Banco Espírito Santo plunged almost 40 percent to a record low as the bank's hopes of raising capital without taking state aid suffered a major blow following massive losses.

Russia banned soy imports from Ukraine and may restrict Greek fruit and American poultry, Russian news agencies reported on Thursday, in what could be responses to new Western sanctions.

Separately, Argentina defaulted for the second time in 12 years. Investors had hoped for a midnight deal with holdout creditors in Argentina, but the plan fell through. Even a short default could raise companies' borrowing costs, add to pressure on the peso, drain dwindling foreign reserves and increase one of the world's highest inflation rates.

"The default ties back to the specter of what's going on in Portugal, and it all reminds people that the eurozone crisis from years ago may not be fully resolved," Mr. McCain said.

Argentine stocks traded in the United States were lower, including YPF S.A., down 8.7 percent, and Pampa Energy, down 8.6 percent.

Investors had hoped for a midnight deal with holdout creditors in Argentina, but the plan fell through. Even a short default will raise companies' borrowing costs, add to pressure on the peso, drain dwindling foreign reserves and increase one of the world's highest inflation rates.

Earnings have been strong, with more companies than usual beating expectations for earnings and revenue this quarter, though there were some notable disappointments. Late Wednesday, Whole Foods Market cut its 2014 forecasts for a fourth time, sending shares down 3 percent.

The Dow component Exxon Mobil posted second-quarter earnings that beat expectations, but shares fell 2.6 percent.

Cigna reported second-quarter earnings that beat expectations while Time Warner Cable lost more subscribers in the last quarter, though it reported a rise in both earnings and revenue. Shares of Cigna dropped 3.6 percent and Time Warner Cable stock was down 2.3 percent.

Akamai Technologies declined 2.3 percent a day after it fell short of investor hopes that it would exceed its own revenue forecast because of heavy World Cup traffic.

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DealBook: Argentina Finds Relentless Foe in Paul Singer’s Hedge Fund

Photo Paul Singer of the hedge fund Elliott Management, which won the backing of a federal court in its push to be paid.Credit John Minchillo/Associated Press

The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender.

Argentina on Wednesday failed to make scheduled payments on its government bonds. The country has the money to pay the bonds. But a federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Mr. Singer's firm, Elliott Management, it is barred from paying its main bondholders.

After more than five hours of meetings on Wednesday, the sides failed to reach an agreement and the court-appointed mediator said that Argentina would "imminently be in default." Because a $539 million interest payment was not made, the ratings agency Standard & Poor's said that Argentina was in default on those bonds.

The government of Argentina now faces a stark choice: Try to restart negotiations with investors it has repeatedly called "vultures," who have for years refused to accept anything other than full repayment. Or it can remain ensnared in a default that could weigh on the country's fragile economy and unsettle global markets.

After the talks collapsed, the economy minister of Argentina, Axel Kicillof, characterized the negotiations as extortion.

"We're not going to sign any deal which compromises the future of Argentines," he said at a news conference in Manhattan.

The campaign against Argentina shows how driven and deep-pocketed hedge funds can sometimes wield influence outside of the markets they bet in. George Soros's successful wager against the pound in 1992 affected Britain's relationship with Europe for years.

While Mr. Singer's firm has yet to collect any money from Argentina, some debt market experts say that the battle may already have shifted the balance of power toward creditors in the enormous debt markets that countries regularly tap to fund their deficits. Countries in crisis may now find it harder to gain relief from creditors after defaulting on their debt, they assert.

"We've had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system," said Joseph E. Stiglitz, the economist and professor at Columbia University. "We don't know how big the explosion will be — and it's not just about Argentina."

As a hedge fund, Elliott's pursuit of Argentina is motivated by a desire to make money. Having bought its Argentine bonds for well below their original value, the firm stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest.

Still, there is also something of a crusade about the battle that reveals the worldview of Mr. Singer, who is 69. A Republican donor with libertarian leanings, he has spoken out when he thinks that governments and companies have damaged the rights of creditors.

"He doesn't get into fights for the sake of fighting. He believes deeply in the rule of law and that free markets and free societies depend on enforcing it," said a fellow hedge fund manager, Daniel S. Loeb.

That conviction has helped drive the creative legal assaults that have scored big financial gains for Elliott, which has nearly $25 billion of assets under management. Since the firm's founding in 1977, it has on average posted a return of almost 14 percent a year. At one point in the Argentina dispute, Elliott persuaded a court in Ghana to seize an Argentine naval vessel that was docking in the country. The boat was later released.

The origins of the Argentine dispute trace back to 2001, when Argentina, overwhelmed by its sovereign debt load, decided to default on its obligations. The country later offered to exchange their defaulted securities for new "exchange bonds," that were worth much less the original bonds. Most investors participated in these swaps, but some decided instead to fight the government for full repayment. These so-called holdouts included many individual investors as well as a unit of Elliott called NML Capital and other hedge funds including Aurelius Capital Management.

It is legally challenging for American investors to sue foreign governments in United States courts. But in 2012, Elliott achieved a stunning breakthrough in the Federal District Court in Manhattan. Judge Thomas P. Griesa ruled that whenever Argentina paid the exchange bonds, it also had to pay the holdouts. Argentina could not ignore the ruling and pay the exchange bondholders because Judge Griesa also ruled that any financial firm that distributed payments to the bondholders would be in contempt. Argentina placed $539 million with the Bank of New York Mellon in June to pay its bondholders, but the bank did not transfer it.

Last month, the United States Supreme Court rejected Argentina's appeal, setting the stage for Wednesday's default.

"Default cannot be allowed to lapse into a permanent condition," said Daniel A. Pollack, the lawyer that Judge Griesa appointed to oversee negotiations between Argentina and the holdouts. "Or the Republic of Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim."

Others saw less of an impact from a default.

"Argentina has been living in a default reality for over 10 years," said Estanislao Malic, an economist at the Center for Economic and Social Studies of Scalabrini Ortiz in Buenos Aires, referring to a lack of access to international borrowing markets after the country's 2001 financial crisis. "This default is not a drastic change. Nothing much will change."

It is not clear whether Elliott expected Argentina to meet its demands by now. The firm managed to obtain payments from Peru and Congo-Brazzaville in somewhat similar cases. Elliott's supporters assert that the bets that rely on suing governments and state-owned entities make up only a small proportion of its portfolio, and they add that the firm does not pursue countries that are clearly unable to pay their debts. Argentina, they say, is a particularly recalcitrant debtor that clearly has the wherewithal to pay the holdouts.

Mr. Singer, however, thinks that there are broader reasons to protect creditor rights. In particular, he has argued, doing so will help bolster a country's economy. "Imagine how much capital a country like Argentina might attract," Mr. Singer wrote in a 2005 article he wrote with Jay Newman, another Elliott employee. "If instead of defaulting seriatim and affecting a pose of anger toward creditors, it borrowed responsibly and honored its obligations."

The big question, however, is whether Argentina will ever pay Elliott what it wants. If the firm fails to collect, that would underscore the limits of its legal strategy. There is no international bankruptcy court for sovereign debt that can help resolve the matter. Argentina may use the next few months to try to devise ways to evade the New York court. Debt market experts, however, do not see how any such schemes could avoid using global firms that would not want to fall afoul of Judge Griesa's ruling.

But some debt market experts say that credit market idealists are going too far when applying their worldview to sovereign bond markets. In dire economic crises, they say, countries need to be able to slash their debt loads. The legal victories of the holdouts may embolden creditors to drive harder bargains after future defaults, these people say.

Professor Stiglitz says that this could prolong or postpone debt restructurings and extend the economic misery of over-indebted countries. "Singer and Elliott have already done a lot of damage," he said.

In Buenos Aires, some were resigned to the consequence.

"It doesn't matter if it is a judge in New York City or a president in Argentina, I feel that neither cares about people, and about the future of this country," said Sol Bodnar, 31, a film producer. "It's as if these people who have power were laughing in the face of us common citizens."

Simon Romero, Irene Caselli and William Alden contributed reporting.

A version of this article appears in print on 07/31/2014, on page A1 of the NewYork edition with the headline: In Hedge Fund, Argentina Finds a Relentless Foe.

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DealBook: Lloyds Banking First-Half Profit Down Sharply 0n Legacy Charges

LONDON – The Lloyds Banking Group said on Thursday that its profit declined 63 percent in the first six months of the year as the bank was forced to set aside 1.1 billion pounds for a series of regulatory issues.

Lloyds, which is partly owned by the British government as a result of a bailout during the financial crisis, said profit fell to £574 million, or about $972 million, in the first half, down from £1.56 billion in the period a year earlier.

Earlier this week, the bank agreed to resolve investigations by the British and United States authorities into the manipulation of rates, including one used to determine fees paid by Lloyds for taxpayer-backed funding during the financial crisis. The quarter included a charge of £226 million related to those issues.

On Thursday, the bank said it had also set aside an additional £600 million to compensate customers who were improperly sold payment protection insurance, a product that has cost British banks billions of pounds in redress. Lloyds has paid out more than £8 billion in claims on the loan insurance so far, and has about £2.27 billion remaining after the latest provision.

"We absolutely want to make Lloyds a company of the highest integrity standards," António Horta-Osório, the Lloyds chief executive, said in a conference call with reporters.

In the first half, Lloyds posted a statutory profit before tax of £863 million, an important measure for the lender.

On an underlying basis, excluding assets sales and some costs, Lloyds posted a profit of £3.82 billion, up from the £2.9 billion it posted in the first half of 2013. The underlying profit was ahead of analysts' expectations.

The British government, after providing a £17 billion bailout during the financial crisis, now holds a stake of about 25 percent in the Lloyds Banking Group. Through two offerings, the government has reduced its stake from about 39 percent, and has done so at a profit. George Osborne, the chancellor of the Exchequer, has said that selling the government's remaining holding in Lloyds is a priority.

Lloyds said it planned to seek approval in the second half of the year to restart dividend payments to investors.

Net interest income – the measure of what a bank earns on its lending after deducting what it pays out on deposits and other liabilities – rose 13 percent, to £5.8 billion in the first half of 2014 from £5.2 billion in the period a year earlier. The bank's costs declined 2 percent to £4.68 billion.

The bank's core Tier 1 capital ratio, a measure of its ability to weather financial disturbances, rose to 11.1 percent at the end of June from 9.6 percent in the first half of 2013.

European banks are required to have a minimum of 4 percent common equity Tier 1 capital under the so-called Basel III regulatory program, but larger banks are required to maintain a higher minimum capital level, which is set by regulators.

 

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Sony Surprises With First Quarter Profit

By THE ASSOCIATED PRESS July 31, 2014

TOKYO — Sony Corp. reported a surprise eightfold jump in quarterly profit Thursday as sales got a perk from a cheap yen and its bottom line was helped by gains from selling buildings and its stake in a video-game maker.

Sony's April-June profit soared to 26.8 billion yen ($261 million) from 3.1 billion yen a year earlier. Analysts surveyed by FactSet had forecast a loss. Quarterly sales climbed nearly 6 percent to 1.81 trillion yen ($17.6 billion).

The Japanese electronics and entertainment conglomerate, which has been trying to reshape its business after years of losses, did well in its video games, movie and camera businesses, offsetting restructuring costs.

Under an overhaul announced earlier this year, Sony has sold its Vaio computer business and is splitting off its TV division to run as a wholly-owned subsidiary.

Sony said it had a 20.7 billion yen ($201 million) operating loss for the quarter related to exiting the PC business.

The Tokyo-based company raked in cash from the sales of Tokyo property and its 9.5 million shares in Square Enix, a video-game maker.

The sale of certain buildings and premises for 23.2 billion yen ($226 million) brought in 14.8 billion yen ($144 million) in operating income, and the Square Enix sale for 15.3 billion yen ($149 million) resulted in a 4.8 billion yen ($47 million) gain.

Sony stuck to its outlook for the fiscal year through March 2015, forecasting a 50 billion yen ($486 million) loss. Sony has lost money in six of the seven past years.

For the latest quarter, Sony, which makes PlayStation game machines and Bravia TVs, did better compared with a year earlier over much of its sprawling businesses, except for its mobile communications unit.

Its film unit benefited from the success of "The Amazing Spider-Man 2" and "22 Jump Street," according to Sony, while its music division posted a 4 percent rise in sales, with Michael Jackson's "Xscape," Pharell Williams' "GIRL" and John Legend's "Love in the Future" scoring as best-sellers.

Sony Chief Executive Kazuo Hirai has repeatedly promised to restore the company's past glory, exemplified in the Walkman portable music player, which pioneered a whole genre of products, and to carry on the innovative spirit of founders Akio Morita and Masaru Ibuka.

But Sony's TV division has lost money for 10 years straight, unable to keep up with Samsung Electronics Co. of South Korea and other rivals. In mobile devices, Sony has been slammed by Apple Inc.

It is unclear whether the latest results mark a first step toward a new Sony, or it is merely eking out profitability by downsizing and selling assets.

Also Thursday, Sony announced it will set up a new company in OLED, or organic light-emitting diode, display technology with Japanese rival Panasonic Corp. in a possible sign it can't go at it alone against Samsung and others.

The company, to be set up by January, will combine Sony and Panasonic's research and development in OLEDs to speed up commercialization, they said.

___

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Checking 1n From Home Leaves Entry for Hackers

By NICOLE PERLROTH July 31, 2014

SAN FRANCISCO — The same tools that help millions of Americans work from home are being exploited by cybercriminals to break into the computer networks of retailers like Target and Neiman Marcus.

The Homeland Security Department, in a new report, warns that hackers are scanning corporate systems for remote access software — made by companies like Apple, Google and Microsoft — that allows outside contractors and employees to tap into computer networks over an Internet connection.

When the hackers discover such software, they deploy high-speed programs that guess login credentials until they hit the right one, offering a hard-to-detect entry point into computer systems.

The report, which Homeland Security produced with the Secret Service, the National Cybersecurity and Communications Integration Center, Trustwave SpiderLabs, an online security firm based in Chicago, and other industry partners, is expected to be released on Thursday. It provides insight into what retailers are up against as hackers find ways into computer networks without tripping security systems.

It is also a reminder that a typical network is more a sprawl of loosely connected computers than a walled fortress, providing plenty of vulnerabilities — and easily duped humans — for determined hackers.

"As we start to make more secure software and systems, the weakest link in the information chain is the human that sits on the end — the weak password they type in, the click on the email from the contact they trust," said Vincent Berq of FlowTraq, a network security firm.

While the report does not identify the victims of these attacks, citing a policy of not commenting on current investigations, two people with knowledge of these investigations say that more than a dozen retailers have been hit. They include Target, P. F. Chang's, Neiman Marcus, Michaels, Sally Beauty Supply, and as recently as this month, Goodwill Industries International, the nonprofit agency that operates thrift stores around the country.

Once inside the network, the hackers deploy malicious software called Backoff that is devised to steal payment card data off the memory of in-store cash register systems, the report says. After that information is captured, the hackers send it back to their computers and eventually sell it on the black market, where a single credit card number can go for $100.

In each case, criminals used computer connections that would normally be trusted to gain their initial foothold. In the Target breach, for example, hackers zeroed in on the remote access granted through the retailer's computerized heating and cooling software, the two people with knowledge of the inquiry said.

In an interview, Brad Maiorino, recently hired as Target's chief information security officer, said a top priority was what he called "attack surface reduction."

"You don't need military-grade defense capabilities to figure out that you have too many connections," Mr. Maiorino said. "You have to simplify and consolidate those as much as possible."

The Secret Service first discovered the Backoff malware (named for a word in its code) in October 2013. In the last few weeks, the agency said that it had come across the malware in three separate investigations. Most troubling, the agency said that even fully updated antivirus systems were failing to catch it.

Low detection rates meant that "fully updated antivirus engines on fully patched computers could not identify the malware as malicious," the report concluded.

Backoff and its variants all perform four functions. First, they scrape the memory of in-store payment systems for credit and debit card "track" data, which can include an account number, expiration dates and personal identification numbers, or PINs.

The malware logs keystrokes, as when a customer manually enters her PIN, and communicates back to the attackers' computers so they can remove payment data, update the malware or delete it to escape detection.

The hackers also install a so-called backdoor into in-store payment machines, ensuring a foothold even if the machines crash or are reset. And they continue to tweak the malware to add functions and make it less detectable to security researchers.

Security experts say antivirus software alone will not prevent these attacks. They recommend companies take what is called a "defense in depth" approach, layering different technologies and empowering security professionals to monitor systems for unusual behavior.

Among the report's recommendations: Companies should limit the number of people with access to its systems; require long, complex passwords that cannot be easily cracked, and lock accounts after repeated login requests.

The report also suggests segregating crucial systems like in-store payment systems from the corporate network and making "two factor authentication"— a process by which employees must enter a second, one-time password in addition to their usual credentials — the status quo.

The report also recommends encrypting customers' payment data from the moment their cards are swiped at the store, logging all network activity and deploying security systems that can alert staff to unusual behavior, like a server communicating with a strange computer in Russia.

At Target, Mr. Maiorino said he planned to build a security program as tough as what was expected from military contractors.

"All of the same tools and techniques that nation states are using for attacks have been commoditized and are available for sale in the black market," Mr. Maiorino said. "And for the right amount of money you can go out and create a cybercrime ring at a relatively low cost."

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DealBook: Bank of America Raises 1ts Settlement 0ffer

Photo Rebecca Mairone, a former manager at Countrywide, led a mortgage-writing program nicknamed the "hustle."Credit Joshua Roberts/Bloomberg News, via Getty Images Related Links

Bank of America and federal prosecutors have accelerated their negotiations to resolve an investigation into the bank's sale of toxic mortgage securities before the financial crisis. The two sides, however, remain far apart on crucial issues and a settlement remained elusive late Wednesday, even after the bank significantly raised its offer.

The bank's lawyers and Justice Department prosecutors met in Washington on Wednesday to discuss the size of a potential cash penalty, a major sticking point in the settlement talks, according to people briefed on the meeting. Heading into the meeting, the Justice Department was demanding roughly $17 billion to settle the case, more than $10 billion in the form of a cash penalty and the rest in so-called soft dollar payments to help struggling homeowners.

The bank was offering a total of $13 billion, the people said, including $4 billion in cash. The bank narrowed the gap on Wednesday, the people said, raising its cash offer to about $7 billion and its total proposal to roughly $14 billion.

But the Justice Department, which has measured the success of its mortgage cases largely on the size of cash penalties, has balked at the offer. If a deal is not reached in the coming days, the Justice Department might announce a lawsuit against the bank.

Underscoring how little leverage the bank has in fighting the Justice Department, Judge Jed S. Rakoff of the Federal District Court in Manhattan ordered Bank of America on Wednesday to pay a nearly $1.3 billion penalty in another federal mortgage case. The ruling comes nine months after federal prosecutors persuaded a jury to find Bank of America liable for selling questionable loans to Fannie Mae and Freddie Mac, the government-controlled mortgage finance giants, before the financial crisis. Bank of America refused to settle the case and went to trial, a roll of the dice that came back to haunt the bank and could now bleed into negotiations in Washington.

That case, and the separate mortgage settlement talks underway in Washington, further tarnish Bank of America as a symbol of all that was bad in the mortgage market leading up to the foreclosure crisis. Many of the problems stem from Countrywide Financial, the large subprime lender that Bank of America acquired in early 2008.

The case in Manhattan exposed fraudulent practices in one of Countrywide's lending programs nicknamed the hustle. Federal prosecutors in Manhattan had argued that the hustle program, which linked bonuses to how fast bankers could originate loans, led Countrywide to "cut corners" as it installed "unqualified and inexperienced" loan processors and tore down internal controls that were in place to root out risky borrowers.

"It was from start to finish the vehicle for a brazen fraud by the defendants," Judge Rakoff wrote in a 19-page opinion, "driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole."

The ruling from Judge Rakoff, an outspoken critic of financial fraud and the government's uneven efforts to punish it, came as Bank of America and the Justice Department tried to hash out the broad parameters of a possible deal on Wednesday.

The two sides also gathered for a lengthy negotiating session on Tuesday that focused on the homeowner relief portion of a potential deal and a statement of facts that would outline the bank's misconduct related to the sale of mortgage securities, the people briefed on the matter said.

The discussions, the people said, focused partly on how to distribute the soft dollar payments. The payments would flow to some familiar causes.

Bank of America, like Citigroup and other banks that settled mortgage security cases, would lower the balances of existing mortgages and help restore vacant properties. But the money would also flow to some more novel ones.

The Justice Department, for example, suggested steering some relief to pension funds and other public investors that suffered losses on the mortgage securities, while the bank has floated a plan to buy back more than 150,000 troubled mortgages from investors.

Buying the mortgages would theoretically give Bank of America more control over how it could modify the loans to help struggling homeowners. The move would allow the bank to get around federal rules that often restrict principal reductions on mortgages backed by Fannie Mae, Freddie Mac and the Federal Housing Administration.

On the surface, the proposal might seem like a costly concession for the bank and a victory for the Justice Department. The bank would plan to resell many of the loans after it modifies them, a person briefed on the matter said, but for a time it would be saddled with an influx of delinquent loans, potentially totaling billions of dollars.

The proposal also seems meant to mollify critics of the Justice Department, who have charged that previous mortgage settlements with banks have fallen short of providing meaningful relief to homeowners.

Since the depths of the foreclosure crisis, consumer advocates, Wall Street watchdog groups and some members of Congress have pushed the banks to forgive more mortgage principal — a move that can bring immediate relief to underwater borrowers.

Yet as of Wednesday, the buyback idea seemed like a long shot. The Justice Department has pointed out a number of practical hurdles to the mortgage buyback plan, the people said, including whether the bank can actually track down all of the homeowners and whether the government can make sure the bank pays a fair price in acquiring the loans.

In some cases, the Justice Department noted in discussions with the bank, investors might not be willing to part ways with the loans, some of which may have been gaining in value as the housing market improves. And the bank could end up profiting if it buys the loans at a steep enough discount and then resells them later.

This week's discussions follow weeks when talks had essentially been frozen, while the Justice Department worked out a $7 billion settlement with Citigroup.

In that case, the Justice Department went so far as informing Citigroup's lawyers that it was filing a lawsuit after the bank refused to raise its cash offer. Citigroup's lawyers had argued that the cash penalty should be based on the bank's relatively small share of the mortgage securities market in the years before the financial crisis — an argument the Justice Department flatly rejected.

Tensions over the cash penalty have also shaped Bank of America's negotiations. The bank has balked at paying a large penalty for the defective mortgage securities sold by Countrywide and Merrill Lynch before Bank of America agreed to acquire the companies in 2008, according to people briefed on the matter.

But Judge Rakoff's ruling, which imposes a nearly $1.3 billion penalty on Bank of America for fraud committed by a Countrywide mortgage program, undercuts that argument.

"Today, Judge Rakoff imposed stiff penalties in a case brought by this office to punish and deter the fraudulent and reckless lending activities of a financial institution leading up to the financial crisis in 2008," Preet Bharara, the United States attorney in Manhattan, said in a statement on Wednesday.

In a statement about the ruling, Bank of America said: "We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America's acquisition of the company. We're reviewing the ruling and will assess our appellate options."

A version of this article appears in print on 07/31/2014, on page B1 of the NewYork edition with the headline: New Haste In Mortgage Settlement Negotiations .

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DealBook: S.&P. Says Argentina Has Defaulted

Updated, 6:37 p.m. |

The ratings agency Standard & Poor's has  found that Argentina has defaulted after it failed to make a $539 million interest payment due on its discount bonds.

The action came Wednesday afternoon as representatives for the country and New York hedge funds sought to reach a last-minute agreement on Argentina's debt. Yet after more than five hours of mediated talks on Wednesday, neither side appeared closer to a deal.

Late Wednesday, the court-appointed mediator to the talks, Daniel A. Pollack, said, "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default."

Mr. Pollack added:

Default is not a mere "technical" condition, but rather a real and painful event that will hurt real people: these include all ordinary Argentine citizens, the exchange bondholders  (who will not receive their interest ) and the holdouts ( who will not receive payment of the judgments they obtained in court). The full consequences of default are not predictable, but they certainly are not positive.

Earlier, Standard & Poor's lowered its rating on the country's debt to "selective default, " noting that Argentina had a 30-day grace period following the June 30 scheduled interest payment date to make payment.

It is the latest development in a multiyear battle that stems from 2001, when Argentina defaulted on tens of billions of dollars of bonds. It later exchanged those bonds for discounted ones with most of its bondholders. But a small group of investors –including Paul Singer's Elliott Management — refused to take the new bonds.

Those investors, led by  NML Capital, an Elliott affiliate, sued the government, seeking full payment and interest.

The case wound its way through the United States courts until 2012, when a federal judge in Manhattan issued a ruling that said Argentina could not make payments  to exchange bondholders without paying the holdouts.

Argentina appealed and took its case to the United States Supreme Court which rejected the appeal last month. Argentina had until the end of the day to pay the holdouts or risk defaulting for a second time in 13 years.

For much of the day on Wednesday a makeshift stage with eleven cameras was set up in front of the building where the talks were taking place in midtown Manhattan in anticipation of an announcement.

At one point in the afternoon, an older man named Francisco Sobrero from Argentina, showed up to protest against the hedge funds, which have been vilified as vultures by the government in Argentina,  holding up two signs.

One read: "Vultures! Don't take our pound of flesh."

 

 

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The Trade: Valeant’s Cost-Cutting Ethos May Yet Give Wall Street 1ndigestion

Updated, 6:33 p.m. |

Credit CNBC Related Links

Wall Street bulls love Valeant Pharmaceuticals' lean business model, but there are side effects they aren't aware of that might give them pause.

According to several current and former employees, Valeant's zeal for cost-cutting risked harming its relationship with the Food and Drug Administration and hurt its competitive position with the development of an important drug.

Formed through an aggressive series of mergers, Valeant rose from obscurity to become one of the largest pharmaceutical companies in the world with a market capitalization of $41 billion. Now it is embroiled in its biggest takeover battle, a hostile bid for Allergan, the $51 billion maker of Botox, which it is making in tandem with the hedge fund manager William A. Ackman.

The fight has gotten nasty, with Allergan accusing Valeant of questionable and opaque accounting — charges that have led to scrutiny of Valeant's business model.

Valeant contends that most pharmaceutical research and development spending is wasted. By acquiring late-stage products and companies with drugs already on the market, Valeant avoids frittering away money. Investors, enamored of the vision, have pushed the stock up 800 percent since the end of 2009 and made a Wall Street darling of the company's chief executive, J. Michael Pearson.

But inside the company in recent years, some executives have been more skeptical of the approach. One example they cite: the company's foot-dragging on an F.D.A.-required safety trial for a drug called Sculptra.

Sculptra is used for cosmetic touch-ups; an injection builds up collagen and reduces wrinkles. Valeant purchased the drug in 2011 from the Swiss pharmaceutical company Sanofi. Sculptra had originally been approved for H.I.V.-positive patients with facial wasting, and was later approved for cosmetic use in 2009, expanding the market opportunity. But the F.D.A. required a study to determine that the drug was safe for cosmetic use in patients who were not H.I.V. positive, and Valeant inherited the responsibility for conducting the study when it purchased the drug.

From the start, Valeant executives were concerned the study would cost too much, according to three current and former executives who spoke on condition of anonymity. The five-year safety study could cost $25 million to $40 million, according to Tage Ramakrishna, Valeant's chief medical officer.

According to the executives, the message was clear and emanated from Mr. Pearson: The company should try to avoid having to perform the study. Ryan Weldon, the head of Valeant's aesthetics business, said to one executive that "we're not going to spend money on that," referring to the study.

Phil Sturno, another executive, instructed executives to "do the minimal amount of work necessary to show progress" to the F.D.A., according to a former executive. Another former executive recalls being told, "Well, let's just take our time doing the study."

Mr. Weldon did not respond to calls seeking comment. The company declined to make Mr. Sturno available and he did not return calls seeking comment. The company provided an affidavit signed by Mr. Sturno saying that statements attributed to him "were not made."

Valeant said it did not delay or slow-walk the study. "We do run lean," Mr. Ramakrishna said. "That's our business model, but we do not put anyone at risk. We put no patients at risk."

Mr. Pearson, the chief executive, said in an interview on Tuesday: "We have a very constructive, positive relationship with the F.D.A. If you actually look at our track record and number of approvals and issues we've had, I'll match it with any pharma company." The company notes that it has received more than 50 approvals for drugs and medical devices from the F.D.A. over the last five years.

"From Day 1, certain things are sacrosanct," Mr. Pearson said. "The bucket of sacrosanct things is manufacturing, regulatory and ethics." The company said in a statement that "our commitment to patient safety and regulatory compliance is absolute."

In the case of Sculptra, even some midlevel executives thought the F.D.A. was being overly cautious. A long-term safety study of Sculptra in H.I.V.-positive patients, who have compromised immune systems, had not revealed any concerns, suggesting the treatment was unlikely to cause problems in healthy patients.

A team of executives came up with a Hail Mary strategy, as they openly called it inside the company. After a long delay, Valeant sent a request to the F.D.A. in March 2013 asking that the company be allowed to gather data from H.I.V.-positive patients instead of performing the larger study. The strategy was unsuccessful.

In June 2013, the F.D.A. put the company on notice, flagging the company's study with a "progress inadequate" designation on the agency's website. The company scrambled to respond, and the F.D.A. rescinded the designation a few months later.

Such a trial could have started enrolling patients in about three months, according to an internal document I reviewed. Instead, the company and the agency continued discussing how to design the study. The company "went back and forth and went back and forth" with the F.D.A. over the study, said Mr. Ramakrishna, the company's chief medical officer. Much of the delay, he said, was a result of a discussion of the complex protocol for the study, which the company said did not comport with how the drug was used in the real world.

The F.D.A. and the company completed the protocol in November 2013. After additional back-and-forth, the company said it received the approval letter to allow Valeant to start the study on April 23.

All the while, the company sold the treatment, and it ultimately never started the study. Now Valeant is selling the rights to Sculptra to a division of Nestlé, which will inherit the responsibility for conducting the study.

Running a tight ship has other downsides. Employees get laid off frequently, as Valeant integrates its latest acquisition, and high turnover reduces institutional memory. It also results in promotions of executives who are less ready to take on their responsibilities, current and former employees say, and executives are often reluctant to raise concerns about problems.

"Nobody will object to anything," said a former executive who requested anonymity to preserve her employment opportunities within the industry. "They are too busy. And they are worried about being laid off."

The company counters that its top management ranks are stronger than ever and that internal surveys show morale is high.

One victim of Valeant's thin staffing was Jublia, a drug to treat toenail fungus, the current and former executives say. The market for the drug is estimated to be worth as much as $800 million a year.

Jublia ran into manufacturing problems. Some bottles were leaking, and the F.D.A. was concerned. Again, Valeant took an aggressive tack with the regulator, playing down the severity of the problem, according to people I spoke with. In the middle of last year, the F.D.A. declined to approve the treatment.

Some executives say they believe that if the company had not been so thinly staffed, experts would have been able to find a solution to the problem more quickly or fix it before the F.D.A. turned down the application, resulting in a lengthier delay. "It's a prime example of not having a great set of expertise or enough time to look into the submission documents," a former employee said.

Mr. Ramakrishna said on Tuesday that there were "minuscule amounts" spilling out of the bottles, and that the concern was that it "could smear the label." Valeant executives noted that the drug had been approved in Canada, based on the same manufacturing data. They said the company did not play down the issues with the F.D.A., and that it did not have a dearth of expertise in manufacturing or regulatory affairs.

Jublia was finally approved in the United States in June, but the delay was significant. Valeant was racing to bring its drug to market ahead of a competitor, Anacor Pharmaceuticals. Anacor was able to close much of the gap, winning approval in July for its drug, Kerydin.

Wall Street loves companies that live fast and run thin. Some flourish, but many die young. It's not yet clear where Valeant will end up.

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Stocks Stable After the Fed’s Policy Move

By REUTERS July 30, 2014

The stock market was little changed on Wednesday after the Federal Reserve raised its assessment of the nation's economy while reiterating it was in no hurry to increase interest rates.

The central bank also, as expected, cut its monthly asset purchases to $25 billion from $35 billion.

"We got the taper as expected and the real viewpoint of the committee is they can keep monetary policy accommodative even after we reach our inflation and employment goals," said Art Hogan, chief market strategist at Wunderlich Securities.

That suggests "we are going to start raising rates but it's going to be some time in the first half of 2015 and that is consensus — and consensus gets you a market that rallies," Mr. Hogan said.

Interactive Feature | S.&P. 500-Stock Index

The Dow Jones industrial average fell 31.75 points, or 0.19 percent, to close at 16,880.36, according to preliminary figures. The Standard & Poor's 500-stock index edged up 0.12 of a point, or 0.01 percent, to 1,970.07. The Nasdaq composite index gained 20.20 points, or 0.45 percent, to 4,462.90.

The Dow and the S.&P. 500 both briefly traded higher after the Fed's statement.

Financial shares bounced, with the S.&P. financial index helping to support the S.&P. 500. Shares of Wells Fargo gained 1.1 percent to $52.10.

Biotechnology stocks lifted the Nasdaq for a second day. The Nasdaq biotech index gained 1 percent after Amgen posted better-than-expected earnings and raised its outlook, sending shares up 5.4 percent to $130.01.

Among other big gainers, Twitter surged 20 percent to $46.30 after reporting that monthly active users rose a better-than-expected 24 percent in the second quarter.

Earlier Wednesday, government data showed gross domestic product grew at a 4 percent annual rate in the second quarter, above the 3 percent rate that had been expected and a sharp reversal from the weather-impacted first quarter, when the economy contracted a revised 2.1 percent.

Separately, the ADP National Employment Report showed companies hired 218,000 workers in July, below analysts' projections and less than June's total.

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DealBook: Bank of America 0rdered to Pay Nearly $1.3 Billion in Mortgage Case

Photo Rebecca Mairone, a former manager at Countrywide, led a mortgage-writing program nicknamed the "hustle."Credit Joshua Roberts/Bloomberg News, via Getty Images Related Links

A federal judge has ordered Bank of America to pay nearly $1.3 billion in penalties for its role in defrauding Fannie Mae and Freddie Mac into buying thousands of  defective mortgages.

The penalty handed down by Judge Jed S. Rakoff of the Federal District Court in Manhattan on Wednesday comes after a jury in October found Bank of America liable for selling the questionable loans to the government-sponsored entities in the run-up to the financial crisis.

The jury also found a top manager at Bank of America's Countrywide Financial unit liable for the sale of the loans, which were originated as part of a program nicknamed the "hustle," which linked bonuses to how fast bankers could originate loans.

The judge also fined the former executive, Rebecca S. Mairone, $1 million, for her role in the scheme.

Known for having strong views on financial fraud, Judge Rakoff issued a sharp rebuke of the bank's misconduct.

"It was from start to finish the vehicle for a brazen fraud by the defendants," he wrote in a 19-page opinion, "driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole."

The penalty, which the bank has been ordered to pay in full by Sept. 2, is another steep price to be paid by Bank of America as it tries to put its legal troubles behind it. It is likely to complicate settlement talks between the bank and the Justice Department to avoid another lawsuit over the sale of mortgage securities that led to billions of dollars in losses to investors.

In determining the penalty, Judge Rakoff said he did not calculate the amount based on how much Fannie Mae and Freddie lost from the mortgages. But rather on how much they paid for mortgages that prosecutors proved to the jury were defective – about 42 percent of a total of 17,611 loans.

Ms. Mairone,  the judge ruled, can pay the fine in installments over a period of time. That decision, he explained. reflected a concern that the government's demand for a lump sum $1.2 million penalty "would strain her resources to the limit."

Preet Bharara, the United States attorney in Manhattan who filed the case, cheered Judge Rakoff's ruling.

"Today, Judge Rakoff imposed stiff penalties in a case brought by this office to punish and deter the fraudulent and reckless lending activities of a financial institution leading up to the financial crisis in 2008," Mr. Bharara said in a statement.

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DealBook: Bond Default by Argentina Appears Likely

Photo Graffiti in Buenos Aires says, "No to the payment of the debt." Hedge funds have won court victories demanding full payment on the bonds.Credit Marcos Brindicci/Reuters

Updated, 6:38 a.m. | Barring a last-minute deal, Argentina will default on billions of dollars of bonds on Wednesday.

It would be Argentina's second default in 13 years. But unlike the last time, when scores of unhappy Argentines took to the street as unemployment rose to 25 percent and inflation soared, this default would look decidedly different.

Argentina's equity, bond and currency markets, which have been volatile in recent days, would certainly feel a jolt. The government and Argentine companies, which have been largely locked out of global markets since the last default in 2001, would find it even harder to raise money. And the economy, which has struggled with stagflation for years, would most likely slow further.

But the reaction will probably be muted because this default is not a surprise.

"This is kind of a chronicle of a default foretold," said Arturo Porzecanski, director of the international economic relations program at American University, referring to the novella by the Colombian writer Gabriel García Márquez, "Chronicle of a Death Foretold."

Photo "Enough vultures, Argentina united for a national cause" reads the sign in Buenos Aires.Credit Enrique Marcarian/Reuters

A default has been in the making since a group of New York hedge funds gained significant victories in American courts, where they are demanding that Argentina pay them in full on government bonds that defaulted in 2001.

As in Mr. García Márquez's books, the hedge funds' battle against Argentina is full of unusual twists.

In a pivotal ruling, Judge Thomas P. Griesa of Federal District Court in Manhattan said that Argentina could not continue to make regular payments on its main class of bonds — whose investors had agreed to accept a lower amount than they were owed — without paying the hedge funds. A payment is scheduled for the main class of bondholders on Wednesday. Argentina, however, has insisted that it will not cave into the demands of the hedge funds, which it has called vultures.

"It would be a shocking surprise," Mr. Porzecanski said, "if Argentina pulled out their pocketbook and paid" the hedge funds.

Photo Judge Thomas P. Griesa told Argentina and the hedge funds to meet "continuously until a settlement is reached."Credit Pablo Corradi/La Nación

But late on Tuesday night another unexpected twist occurred. A mediator appointed by Judge Griesa announced that Argentina's negotiators, led by the country's economy minister, Axel Kicillof, had held discussions with representatives of the hedge funds for several hours. This was the first face-to-face meeting between the two sides under Daniel A. Pollack, the so-called special master who was appointed by the court in June. "There was a frank exchange of views and concerns," Mr. Pollack said in a statement. "The issues that divide the parties remain unresolved." He added that it was not clear whether the two sides would meet again on Wednesday.

Argentina's main class of bond holders are most likely hoping that the last-minute talks might lead to a breakthrough that will prevent a default on their bonds.

The country's predicament today is inextricably linked to its default in 2001 and events after it. Argentina's economy in 2001 was in dire straits after four years of recession. Unable to continue making payments on loans from foreign creditors, it was engulfed in debt before it declared a formal default.

Photo Hedge funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.Credit John Minchillo/Associated Press

Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, the funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.

Judge Griesa's ruling in 2012 was later upheld by the United States Court of Appeals for the Second Circuit. Then in June, the United States Supreme Court refused to consider Argentina's last appeal. Judge Griesa gave Argentina a 30-day grace period on a scheduled June 30 payment to its main exchange bondholders.

In defiance of Judge Griesa's ruling, Argentina in June deposited $539 million into the Bank of New York Mellon, the trustee handling the bond payments, in an attempt to meet its exchange bond payment.

But Judge Griesa ruled that if Bank of New York Mellon made the payment, it would be in contempt of court.

Argentina has also asked the judge for a stay on his 2012 ruling, arguing that a delay would help it to negotiate a deal. On Tuesday, a group of investors of Argentina's euro-denominated exchange bonds urged the judge to issue an emergency stay on his ruling. But this is unlikely to be granted unless the holdouts request it, analysts said, or the court-appointed mediator, Daniel Pollack, recommends it.

Photo President Cristina Fernandez of Argentina at a trade summit in Caracas, Venezuela, on Tuesday.Credit Fernando Llano/Associated Press

In depositing the next installment of bond payments, the Argentine government has said that a default would not be its fault, a claim that has gained it political mileage. In a speech last week, the country's president, Cristina Fernández de Kirchner, conveyed this belief. "They're going to have to come up with a new name," she told an audience, referring to the word default, "a new term that reflects the fact that the debtor paid and someone blocked it."

Also last week, Judge Griesa ordered the Argentine delegation and the holdouts to meet with Mr. Pollack and talk "continuously" until an agreement was reached.

The response from Argentina was tepid; the delegation met twice with Mr. Pollack last week before returning home to Buenos Aires for the weekend to consult with the government.

Argentina's lack of enthusiasm had prompted some lawyers and analysts watching the case to question whether Argentina actually wants to avert a default.

"If you're picking a default as a rational avenue, it is because you have decided two things," said Marco E. Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom who is not directly involved in the case. "One, that picking a fight with the American legal system is politically convenient, and two, that the cost of settling with holdouts and everyone else who still has unpaid bonds is vastly greater than the costs of having to take a default."

But even with that thinking, the picture is anything but clear because some of the legal theories behind the contracts governing Argentina's debt have not been tested.

Argentina has said, for example, that if it agreed to a settlement, it could be on the line for as much as $15 billion in holdout investors' claims. That is because any deal would have to include all holdouts, even those not represented in the case.

In such a case, bondholders who exchanged their defaulted bonds for discounted ones might also have the right to demand the same compensation terms, according to a clause in the bond restructuring terms that expires at the end of this year.

On the other hand, if Argentina does default, it runs the risk of more lawsuits, said Siobhan Morden, head of Latin America strategy at Jefferies. In many ways, this is perhaps the most significant implication of a default.

If enough bondholders from one class of exchange bondholders agree, they have the right to "accelerate" their bonds after Argentina misses its July 30 payment. They could then pressure the government to pay the full amount of their discounted bonds quickly, Ms. Morden added. This could mean a payment of as much as $28.7 billion to those bondholders, according to estimates by JPMorgan.

"With acceleration, you know everyone has a gun," said Anna Gelpern, a law professor at Georgetown University. "The question is. Will they shoot?" But, she added, if Argentina agreed on a settlement with the holdouts, that could prompt lawsuits from exchange bondholders seeking the same terms. In that case, she said, "You don't know if there is a gun, but if there is, it is a bazooka."

Peter Eavis contributed reporting.

A version of this article appears in print on 07/30/2014, on page B1 of the NewYork edition with the headline: As Talks Falter, Bond Default by Argentina Appears Likely.

source : http://rss.nytimes.com/c/34625/f/640316/s/3cfeaacf/sc/30/l/0Ldealbook0Bnytimes0N0C20A140C0A70C290Cas0Etalks0Efalter0Ebond0Edefault0Eby0Eargentina0Eappears0Elikely0C0Dpartner0Frss0Gemc0Frss/story01.htm

DealBook: As Talks Falter, Bond Default by Argentina Appears Likely

Photo Graffiti in Buenos Aires says, "No to the payment of the debt." Hedge funds have won court victories demanding full payment on the bonds.Credit Marcos Brindicci/Reuters

Updated, 6:38 a.m. | Barring a last-minute deal, Argentina will default on billions of dollars of bonds on Wednesday.

It would be Argentina's second default in 13 years. But unlike the last time, when scores of unhappy Argentines took to the street as unemployment rose to 25 percent and inflation soared, this default would look decidedly different.

Argentina's equity, bond and currency markets, which have been volatile in recent days, would certainly feel a jolt. The government and Argentine companies, which have been largely locked out of global markets since the last default in 2001, would find it even harder to raise money. And the economy, which has struggled with stagflation for years, would most likely slow further.

But the reaction will probably be muted because this default is not a surprise.

"This is kind of a chronicle of a default foretold," said Arturo Porzecanski, director of the international economic relations program at American University, referring to the novella by the Colombian writer Gabriel García Márquez, "Chronicle of a Death Foretold."

Photo "Enough vultures, Argentina united for a national cause" reads the sign in Buenos Aires.Credit Enrique Marcarian/Reuters

A default has been in the making since a group of New York hedge funds gained significant victories in American courts, where they are demanding that Argentina pay them in full on government bonds that defaulted in 2001.

As in Mr. García Márquez's books, the hedge funds' battle against Argentina is full of unusual twists.

In a pivotal ruling, Judge Thomas P. Griesa of Federal District Court in Manhattan said that Argentina could not continue to make regular payments on its main class of bonds — whose investors had agreed to accept a lower amount than they were owed — without paying the hedge funds. A payment is scheduled for the main class of bondholders on Wednesday. Argentina, however, has insisted that it will not cave into the demands of the hedge funds, which it has called vultures.

"It would be a shocking surprise," Mr. Porzecanski said, "if Argentina pulled out their pocketbook and paid" the hedge funds.

But late on Tuesday night another unexpected twist occurred. A mediator appointed by Judge Griesa announced that Argentina's negotiators, led by the country's economy minister, Axel Kicillof, had held discussions with representatives of the hedge funds for several hours. This was the first face-to-face meeting between the two sides under Daniel A. Pollack, the so-called special master who was appointed by the court in June. "There was a frank exchange of views and concerns," Mr. Pollack said in a statement. "The issues that divide the parties remain unresolved." He added that it was not clear whether the two sides would meet again on Wednesday.

Argentina's main class of bond holders are most likely hoping that the last-minute talks might lead to a breakthrough that will prevent a default on their bonds.

The country's predicament today is inextricably linked to its default in 2001 and events after it. Argentina's economy in 2001 was in dire straits after four years of recession. Unable to continue making payments on loans from foreign creditors, it was engulfed in debt before it declared a formal default.

Photo Hedge funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.Credit John Minchillo/Associated Press

Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, the funds, led by Paul E. Singer's NML Capital, are seeking $1.5 billion in repayment, including interest.

Judge Griesa's ruling in 2012 was later upheld by the United States Court of Appeals for the Second Circuit. Then in June, the United States Supreme Court refused to consider Argentina's last appeal. Judge Griesa gave Argentina a 30-day grace period on a scheduled June 30 payment to its main exchange bondholders.

In defiance of Judge Griesa's ruling, Argentina in June deposited $539 million into the Bank of New York Mellon, the trustee handling the bond payments, in an attempt to meet its exchange bond payment.

But Judge Griesa ruled that if Bank of New York Mellon made the payment, it would be in contempt of court.

Argentina has also asked the judge for a stay on his 2012 ruling, arguing that a delay would help it to negotiate a deal. On Tuesday, a group of investors of Argentina's euro-denominated exchange bonds urged the judge to issue an emergency stay on his ruling. But this is unlikely to be granted unless the holdouts request it, analysts said, or the court-appointed mediator, Daniel Pollack, recommends it.

Photo President Cristina Fernandez of Argentina at a trade summit in Caracas, Venezuela, on Tuesday.Credit Fernando Llano/Associated Press

In depositing the next installment of bond payments, the Argentine government has said that a default would not be its fault, a claim that has gained it political mileage. In a speech last week, the country's president, Cristina Fernández de Kirchner, conveyed this belief. "They're going to have to come up with a new name," she told an audience, referring to the word default, "a new term that reflects the fact that the debtor paid and someone blocked it."

Also last week, Judge Griesa ordered the Argentine delegation and the holdouts to meet with Mr. Pollack and talk "continuously" until an agreement was reached.

The response from Argentina was tepid; the delegation met twice with Mr. Pollack last week before returning home to Buenos Aires for the weekend to consult with the government.

Argentina's lack of enthusiasm had prompted some lawyers and analysts watching the case to question whether Argentina actually wants to avert a default.

"If you're picking a default as a rational avenue, it is because you have decided two things," said Marco E. Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom who is not directly involved in the case. "One, that picking a fight with the American legal system is politically convenient, and two, that the cost of settling with holdouts and everyone else who still has unpaid bonds is vastly greater than the costs of having to take a default."

But even with that thinking, the picture is anything but clear because some of the legal theories behind the contracts governing Argentina's debt have not been tested.

Argentina has said, for example, that if it agreed to a settlement, it could be on the line for as much as $15 billion in holdout investors' claims. That is because any deal would have to include all holdouts, even those not represented in the case.

In such a case, bondholders who exchanged their defaulted bonds for discounted ones might also have the right to demand the same compensation terms, according to a clause in the bond restructuring terms that expires at the end of this year.

On the other hand, if Argentina does default, it runs the risk of more lawsuits, said Siobhan Morden, head of Latin America strategy at Jefferies. In many ways, this is perhaps the most significant implication of a default.

If enough bondholders from one class of exchange bondholders agree, they have the right to "accelerate" their bonds after Argentina misses its July 30 payment. They could then pressure the government to pay the full amount of their discounted bonds quickly, Ms. Morden added. This could mean a payment of as much as $28.7 billion to those bondholders, according to estimates by JPMorgan.

"With acceleration, you know everyone has a gun," said Anna Gelpern, a law professor at Georgetown University. "The question is. Will they shoot?" But, she added, if Argentina agreed on a settlement with the holdouts, that could prompt lawsuits from exchange bondholders seeking the same terms. In that case, she said, "You don't know if there is a gun, but if there is, it is a bazooka."

Peter Eavis contributed reporting.

A version of this article appears in print on 07/30/2014, on page B1 of the NewYork edition with the headline: As Talks Falter, Bond Default by Argentina Appears Likely.

source : http://rss.nytimes.com/c/34625/f/640316/s/3cfeaacf/sc/30/l/0Ldealbook0Bnytimes0N0C20A140C0A70C290Cas0Etalks0Efalter0Ebond0Edefault0Eby0Eargentina0Eappears0Elikely0C0Dpartner0Frss0Gemc0Frss/story01.htm