Mayfair Eviction Fight Pits Credit Suisse Against Investor

(Bloomberg) -- Cevdet Caner, the man at the center of Germany’s biggest real estate insolvency in 15 years, is fighting eviction from his 20 million-pound ($31 million) London townhouse, complete with basement swimming pool.

His group of investment companies called Level One owes 1.5 billion euros ($2 billion) to creditors led by Credit Suisse Group AG, according to estimates by the German administrator. The two main holding companies defaulted and were placed under court administration in August, U.K. filings show, after the group bought 27,000 units of communist-era public housing in the former East Germany over three years, almost entirely with debt.

The battles with creditors are the legacy of the boom years, when banks expanded lending to real estate investors -- even those with limited experience like Caner. Lenders blame him for mismanagement and say about 50 million euros were channeled out of the Level One businesses while they failed to pay utility and tax bills, according to six people who have seen an audit of Level One’s finances. Caner, 35, said he faults the banks for a change of heart after pledging to loan him the money.

“Level One epitomizes all that went wrong in the real estate bubble,” said Christian Koehler-Ma, an administrator of more than 50 Level One companies in Germany. “On one side you have Caner -- a good salesman, charming and intelligent -- who was looking to make money.”

On the other side were the banks, which resold the loans to investors “so they didn’t think about what they were doing as thoroughly as they should have,” he said.

Hedge Fund District

Borrower defaults such as Level One’s and falling property values led banks, insurers and government-sponsored enterprises to write down the value of loans or mortgage investments by $391 billion since September 2007. That’s 27 percent of the total losses in the global financial crisis, data compiled by Bloomberg show.

Caner’s six-story townhouse in London’s Mayfair district, the location of choice for hedge funds, is one front in the war between him and banks that is being fought in courts in Luxembourg, Berlin and Jersey, the Channel Island off the coast of France. He said he spent about 5 million pounds of his own money to buy and renovate the century-old, six-bedroom house in a neighborhood where owners include the billionaire brothers David and Simon Reuben and property investor Simon Halabi.

The property has 11,500 square feet of space if the carriage house at the rear of the garden is included. Caner got planning consent in December to demolish and rebuild this separate building as a garage with a four-bedroom apartment upstairs and a sauna, gymnasium and solarium in the basement.

Mayfair Townhouse

Caner acquired the Mayfair property for 16 million pounds in July 2007, Land Registry records show. In September 2008, the U.K. administrator of Level One Residential (Jersey) Ltd. -- Zolfo Cooper LLP, a former unit of Kroll Inc. -- demanded repayment of about 1.26 million pounds used to purchase the house, according to a March 4 report to creditors from Zolfo Cooper obtained by Bloomberg News.

The company that acquired the property, registered in St. Helier, Jersey, was put in liquidation, a court filing published Jan. 28 shows. The house was valued at 20 million pounds when the real estate brokerage arm of New York-based auction house Sotheby’s tried to find buyers in December and then withdrew it pending a court repossession order, according to the receiver, Jon Gershinson, a partner at Allsop LLP in London.

Caner’s Mayfair townhouse illustrates the lifestyle he enjoyed as money flowed from Level One into Special Opportunity Holdings Ltd., a company owned by two of his private trusts, said four people with knowledge of Level One’s insolvency who declined to be identified because the information is confidential. Katharina Gebsattel, a Frankfurt-based spokeswoman for Credit Suisse, declined to comment.

‘Stupid War’

“It’s a stupid war to try and kill me business-wise and reputation-wise,” Caner said in the wood-paneled boardroom at the townhouse, which he uses as his London office. “I don’t want to lose my investment in this property.”

No company funds were misused, Caner said, citing the money and assets he injected to satisfy lenders and avert his group’s insolvency. The 50 million euros of fees charged to Level One helped pay for his 50-employee asset management team, he said, and the rest was reinvested in the business. It was a typical private-equity fee structure, according to Caner.

“There was no wrongdoing on my side,” he said.

Caner, an Austrian who is the youngest of seven children born to Turkish immigrants, said he began property investing in 2003 after reading that rental incomes easily covered the borrowing costs for buying buildings.

Ran Call Center

Previously he ran CLC AG, a call-center operator he started while at business school in his hometown of Linz, where for two years he was president of the Young Socialists. He gradually sold his CLC stake until the board ousted him in 2002 because of a disagreement over expansion plans, he said. Two years later, CLC filed for insolvency, and creditors got just 1.36 cents for each euro owed, Vienna court documents show.

From late 2004 through 2007, Level One spent 1.85 billion euros buying apartments -- mostly from former East German municipalities -- and 400 commercial properties in Germany, Caner said.

It was a strategy already pursued by larger private-equity firms, including Terra Firma Capital Partners Ltd. in London, and Blackstone Group LP and Fortress Investment Group LLC, both based in New York.

Many investors got stuck after betting mistakenly that homeownership in Germany would rise as it did in the U.K. and the Netherlands when affordable housing was sold by municipalities, said Philip Cropper, London-based managing director of Real Estate Finance at CB Richard Ellis Group Inc.

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Japanese Bonds to Rally as Bank Deposits Increase, Mizuho Says

(Bloomberg) -- Japan’s 10-year government bonds will rally in coming months as a deepening recession boosts the amount of money held at banks, said Mizuho Securities Co.

Cash will pile up as households save more and companies refrain from borrowing, leaving banks with excess cash they are likely to park in government bonds, said Yasunari Ueno, chief market economist at Mizuho in Tokyo. Japan’s yield curve is set to flatten, with the gap between two- and 10-year bonds narrowing to the least since March, according to a weighted Bloomberg survey of analysts.

“Banks will have to buy 10-year bonds, which are attractive” compared to shorter-dated notes, Ueno said. “Deposits at banks are likely to increase, while demand for business funding declines. Sooner or later, banks will invest in government bonds as opposed to holding idle funds.”

Ten-year yields jumped 25 basis points this year, compared with an increase of half a basis point for two-year securities, according to data compiled by Bloomberg. The spread between the two will narrow to 88 basis points from its current level of 104.5 points, the Bloomberg survey showed. A basis point is 0.01 percentage point.

Ten-year yields advanced 1.5 basis points to 1.42 percent yesterday at Japan Bond Trading Co., the nation’s largest interdealer debt broker. A yield curve is a chart that plots the yields of bonds with the same quality but different maturities.

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AT&T to offer cloud-based storage as a service

(Reuters) - AT&T Inc, the biggest U.S. telephone company, plans to offer Web-based data storage services for corporations using "cloud computing" technologies developed by data storage equipment maker EMC Corp.

The telecommunications giant will join International Business Machines Corp, Amazon.com Inc, Symantec Corp, Iron Mountain Inc and others in offering storage as a service product, which allow companies to use the Internet to transfer information to remote storage facilities.

AT&T said on Monday it will initially run the service from two data centers in the United states, although the company intends to expand overseas.

It is still early days for the industry.

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KGI to Buy Taishin Securities for NT$29 Billion

(Bloomberg) -- KGI Securities Co. will acquire the brokerage business of Taishin Financial Holdings Co. for NT$29 billion ($880 million) to become the second-biggest equity brokerage firm in Taiwan.

KGI will pay NT$28 billion in cash and NT$1 billion worth of stock for the acquisition of Taishin Securities, Taishin Futures Co. and its Hong Kong unit Taishin Securities (Hong Kong) Co., Taishin Financial said in an exchange filing today.

Shares of KGI surged 6.7 percent to NT$15.2, a four-day high, as of 9:46 a.m. in local trading. Taishin Financial shares rose 5.7 percent to NT$8.54.

Taishin Financial is the parent of Taishin Securities, while KGI Securities is a unit of Chinatrust Financial Holdings Co. Chinatrust shares gained 4.5 percent to NT$19.60 in Taipei, while the benchmark Taiex index rose 2.1 percent.

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Banks sue MBIA over $5 billion restructuring

(Reuters) - A group of major banks including Citigroup Inc, JPMorgan Chase & Co and Barclays Plc has sued MBIA Inc, charging that the bond insurer illegally restructured its operations by moving $5 billion of assets and leaving a key unit effectively insolvent.

The group of around 20 financial institutions and affiliates are seeking to ensure that MBIA pays valid claims on insurance it issued on defaulting bonds, but did not put a value on such claims.

MBIA, along with rival bond insurer Ambac Financial Group Inc, suffered huge losses in the recent financial turmoil as they were hit by claims on insurance policies they issued on repackaged debt, which turned out to be more risky than they assumed.

A spokesman for MBIA, which reported a profit of $697 million last quarter, declined comment on the lawsuit, which was filed on Wednesday in New York State Supreme Court.

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Private equity investors waiting to sell: survey

(Reuters) - Investors in private equity funds are prepared to wait a year or two to sell their interests because of a gulf in price, a survey said on Wednesday.

London-based private equity research firm Preqin said 11 percent of the 568 institutional investors in private equity it surveyed want to sell fund interests on the so-called "secondary market" -- which allows investors to sell stakes in funds.

But the survey said that, of those, only 10 percent are looking to sell immediately, while 43 percent want to sell in the next 12 months and 47 percent within 12 to 24 months.

Investors, such as endowment and pension funds, typically commit to invest for the life of a private equity fund. But the sharp falls in equity markets has hit overall portfolios and meant some are over-exposed to other asset classes such as private equity and are looking to sell.

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Law Firm Founder Dreier Pleads Guilty, Faces Life in Prison

(Bloomberg) -- Marc Dreier, the New York law firm founder accused of defrauding hedge funds by selling $700 million in phony promissory notes, might face life in prison after pleading guilty to fraud charges.

Dreier, who turned 59 today, pleaded guilty in federal court in New York to charges of money laundering, conspiracy, securities fraud and wire fraud. Victims of Dreier’s Ponzi scheme lost more than $400 million, according to prosecutors.

“I engineered a scheme to issue and sell fictitious promissory notes purportedly issued by companies in the United States and Canada,” Dreier told U.S. District Judge Jed Rakoff, reading from a prepared text at yesterday’s hearing.

Dreier’s lawyer, Gerald Shargel, has said he will seek leniency for Dreier at his sentencing. Dreier has cooperated with court-appointed bankruptcy trustees to identify assets that can be used to pay victims and creditors, according to Shargel. Rakoff set a sentencing date of July 13.

Shargel said his client didn’t have a plea agreement with prosecutors.

Dreier has been confined to his Manhattan luxury apartment, watched around the clock by armed guards paid for by friends and relatives, a condition of his $10 million bail. Dreier’s former firm, the 250-lawyer Dreier LLP, is being liquidated in U.S. Bankruptcy Court.

Rakoff agreed to let Dreier remain on bail, confined to his apartment, until sentencing.

Arrested in Canada

Dreier was arrested in Toronto on Dec. 2 and charged with impersonating a lawyer with the Ontario Teachers’ Pension Plan. He was released on bail and arrested again Dec. 7 when he returned to New York.

Prosecutors claimed Dreier sold more than 85 phony promissory notes to at least 13 hedge funds and three individuals from 2004 to 2008. Dreier falsely told investors many of the fake notes were issued by New York developer Sheldon Solow, a client of his firm.

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Stanford’s Cowboy Lawyer DeGuerin Shows ‘No Mercy’

(Bloomberg) -- In a newspaper photo on his law office wall in Houston, Dick DeGuerin stands with Robert Durst, a New York real estate heir who admitted shooting a man and using a paring knife and a hacksaw to cut up the body.

A jury in nearby Galveston voted for acquittal after DeGuerin followed his favorite trial strategy: “Embrace the ugly baby,” he said. “You don’t shrink from the problems in the case, but find a way to turn them to your advantage.”

Now the 68-year-old lawyer is representing fellow Texan R. Allen Stanford, accused of orchestrating an $8 billion Ponzi scheme. The case was brought by “storm troopers” at the U.S. Securities and Exchange Commission who “cremated” his client’s business, DeGuerin said in an interview.

“He’s out of the ‘ride ‘em hard and show no mercy’ school of defense,” said William P. Allison, a criminal law professor at the University of Texas School of Law in Austin. “It’s a reputation he’s worked hard to earn, and what people pay for.”

DeGuerin is a member of an elite group of U.S. criminal lawyers who take high-profile cases and can “charge whatever the market will bear,” Allison said.

Among the attorney’s peers, according to the professor, are Richard “Racehorse” Haynes, who won acquittals for Texas oilman T. Cullen Davis, accused of murdering his 12-year-old stepdaughter and his wife’s boyfriend and of hiring a hit man to kill her and a judge; and the late Johnnie Cochran Jr., who helped defend former Buffalo Bills football star O.J. Simpson when he was tried on charges he killed his wife and her friend.

‘Effective’ Defense

So far, DeGuerin hasn’t been paid for his work for Stanford, the lawyer said. U.S. District Judge David Godbey in Dallas is considering Stanford’s bid to unfreeze at least $10 million in assets, locked up when the SEC sued, to pay his legal bills, which the Stanford Group Co. chief executive officer said in a court filing may exceed $20 million.

The SEC and Stanford Group investors told Godbey on May 4 that they oppose giving the financier access to the money. Stanford responded today in a filing that said he needs it to “effectively defend himself.”

His civil lawyers, with the Houston firm of Nickens Keeton Lawless Farrell & Flack LLP, said in court papers that the financier’s insurance company agreed to pay for his criminal defense if he is charged with a crime.

‘Cheap’ Fees

“I’m not doing this for free,” DeGuerin said in the interview, as he leaned back in a cane-seated desk chair, exposing well-worn elephant hide boots. “This case is a huge undertaking that no lawyer in his right mind would take on. It’s going to be a hard job, but not an impossible one.”

Declining to reveal his typical fee, he called his services “cheap at any price.”

The SEC sued Stanford, 59, and two employees, Laura Pendergest-Holt and James M. Davis, on Feb. 17, saying their sale of certificates of deposit through Stanford International Bank in Antigua was a “massive” fraud.

Pendergest-Holt, 35, Stanford’s chief investment officer, was charged with obstruction of justice on Feb. 26 and released on $300,000 bail. She is innocent, said her lawyer, Dan Cogdell of Houston. Davis, 60, the chief financial officer, is in plea negotiations, according to his attorney, David Finn of Dallas.

Stanford denied wrongdoing in an April 21 interview. “I’m not a damn swindler,” he said.

TV News Cameras

He tried to surrender to U.S. marshals in the federal courthouse in Houston on April 30 and was turned away because he hasn’t been criminally charged. DeGuerin escorted him, saying he wanted to prove his client isn’t a flight risk.

Justice Department spokesman Ian McCaleb declined to comment.

DeGuerin said he doesn’t shy away from difficult or notorious clients. He doesn’t run from publicity either, said his friend Tommy Fibich, a Houston plaintiffs lawyer.

“I’d rather be in front of the bulls of Pamplona than between Dick and the TV news cameras,” Fibich said.

One of DeGuerin’s clients was David Koresh, whose mother hired the Houstonian when her son and his followers holed up in Branch Davidian headquarters near Waco, Texas, in 1993.

Federal agents had surrounded the compound, where they said the leader of the religious sect had illegal weapons. Refusing body armor, DeGuerin walked past snipers to talk to his client.

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GM burns $10 billion in first quarter as deadline looms

(Reuters) - General Motors Corp said it burned through $10.2 billion in the first quarter as it relied on a federal bailout to ride out a sharp decline in global sales that overwhelmed its cost-cutting efforts.

Revenue dropped by almost half to $22.4 billion as the company cut production by about 900,000 vehicles and worked to run down costly inventories in the United States and Europe.

The results showed the extreme pressure on GM with just four weeks remaining for the embattled automaker to win deals to slash debt and operating costs with its major union and bondholders to avoid bankruptcy.

"Results were awful, as expected, however, GM's cash burn was even worse than we were expecting," Kip Penniman of KDP Investment Advisors said in a note for clients.

Chief Financial Officer Ray Young said there was evidence consumers were scared away from GM cars and trucks because of concern the automaker was headed for bankruptcy.

GM cut $3.1 billion in operating costs in the first quarter, including just over $1 billion in North America, but the latest push in a four-year campaign to cut costs failed to keep pace with the plunge in sales.

"You could not offset the revenue implosion that we experienced here," Young told reporters following release of the quarterly results on Thursday.

GM's North American operations, where it plans to cut 21,000 factory jobs and close and close more than 2,600 dealerships, posted a loss before interest cost and taxes of $2.5 billion.

European operations, which Italy's Fiat SpA has proposed taking over, posted a loss on the same basis of $1.2 billion as vehicle sales in the region dropped 29 percent.

GM still hopes to complete a debt restructuring out of court but is readying plans for what it expects would be a quick bankruptcy if that proves necessary, Young said.

He said GM expects to draw on the experience of Chrysler LLC, which filed for bankruptcy last week under the supervision of the Obama administration.

"We are very, very cognizant of this issue of revenue perishability and how consumers react to the threat of bankruptcy," Young said.

Young said GM would make a decision at the end of this month on whether an offer to extinguish $24 billion in bond debt in exchange for new shares had garnered enough support for the company to avoid a bankruptcy filing.

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Cisco sees signs of a turnaround

(CNNMoney.com) -- Cisco Systems Inc. on Wednesday reported a drop in quarterly profit and sales from a year ago, but the network equipment maker said parts of its business are beginning to turn around.

"For the first time in many quarters, many of our global customers are describing business momentum and seeing stabilization," said Cisco Chief Executive John Chambers on a conference call with analysts. "We are going to be very aggressive this year to position ourselves for the eventual upturn."

Chambers cautioned that economic headwinds would continue to pressure the company, but he said he is encouraged by customers' renewed optimism. He said the company has "a very bright future" ahead.

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SEC charges money market fund with fraud

(CNNMoney.com) -- The Securities and Exchange Commission has filed fraud charges against the operators of the Reserve Primary Fund for failing to provide important information to investors and trustees about the fund's exposure to Lehman Brothers.

By bringing the case, the agency is trying to get the company to release the $3.5 billion it is withholding from shareholders until all lawsuits against the company are resolved.

The money market fund "broke the buck" on Sept. 16, the day after Lehman Brothers filed for bankruptcy, meaning its net asset value fell below $1 a share. Investors seek out money market funds as conservative investments because they are designed to maintain their $1 per share value. Companies also rely on them to purchase short-term corporate debt.

The Primary Fund, however, held $785 million in Lehman-issued securities, which lost most of their worth in the bankruptcy, the SEC said. This dragged down the fund's net asset value.

The agency says that the Reserve Management Company Inc., its chairman Bruce Bent Sr., vice chairman and president Bruce Bent II and Resrv Partners Inc. misled investors and "significantly understated" the volume of redemption requests. They also failed to provide trustees with accurate information about the value of the Lehman securities.

Reserve also said it would provide the money needed to maintain the fund's share value when it "had no such intention," according to regulators.

"Fund managers have serious obligations to keep their trustees and investors informed in both good times and bad, and cannot choose to reveal only favorable facts," said James Clarkson, acting director of the SEC's New York regional office.

The company said in a statement that it intends to defend itself vigorously.

"Since we created the money fund in 1970 we have operated and grown our business by putting our shareholders' interests first," said Bruce Bent Sr. "The Lehman Brothers Bankruptcy filing created an unforeseeable and out-of-control condition for many parties and the results were serious...We remain confident that we acted in the best interest of our shareholders."

There are at least 29 different lawsuits pending against the company, according to the SEC. The agency hopes to bring all claimants together in this case and have it settled together.

The Primary Fund is currently being liquidated. Last month, the company said about $46.1 billion, or approximately 90% of fund assets as of Sept. 15, 2008, has been returned to investors. Approximately $4.5 billion remains in the fund, which once had a value of $60 billion.

The fund's independent trustees, who oversee its operations, said in a statement that they would work with the agency.

"The trustees will continue to fully cooperate with the Securities and Exchange Commission to expedite the distribution of the remaining assets to shareholders and to ensure that all decisions are made in the shareholders' best interest," the trustees said.

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‘Great Recession’ Will Redefine Full Employment as Jobs Vanish

(Bloomberg) -- Post-recession America may be saddled with high unemployment even after good times finally return.

Hundreds of thousands of jobs have vanished forever in industries such as auto manufacturing and financial services. Millions of people who were fired or laid off will find it harder to get hired again and for years may have to accept lower earnings than they enjoyed before the slump.

This restructuring -- in what former Federal Reserve Chairman Paul Volcker calls “the Great Recession” -- is causing some economists to reconsider what might be the “natural” rate of unemployment: a level that neither accelerates nor decelerates inflation. This state of equilibrium is often described as “full” employment.

Fallout from the recession implies a “markedly higher” natural rate of unemployment, says Edmund Phelps, a professor at Columbia University in New York and winner of the 2006 Nobel Prize in economics. “It was 5.5 percent; maybe it will be 6.5 percent, maybe 7 percent.”

That has implications for policy makers as well as workers. The Obama administration and the Federal Reserve are counting on the jobless rate to fall to a medium-term equilibrium of about 5 percent as the economy recovers. A natural rate significantly above that would drive up the annual budget deficit -- which will top $1 trillion for the first time this year -- by reducing tax revenue and pushing up spending on unemployment benefits.

A higher rate would also require the Fed to make a choice: Accept an economy with more Americans permanently out of work, or try to boost employment at the risk of heating up inflation.

Unemployment Report

The government may report May 8 that the jobless rate jumped to 8.9 percent in April, the highest since 1983, from 8.5 percent in March, according to economists surveyed by Bloomberg.

Laurence Ball, an economics professor at Johns Hopkins University in Baltimore, says unemployment may peak at 10 percent, and “it will be a long time before we see 5 percent” again.

The more time workers spend without a job, the less attractive they become to potential employers, Ball says. That in itself helps keep the unemployment rate elevated.

“If you’re unemployed” for an extended period, “you’re not keeping up with new technology,” he says. “You become discouraged and you change your lifestyle.”

A burst of productivity growth starting in the mid 1990s helped lower the natural rate of unemployment to around 5 percent from 6 percent, as profit-flush companies took on more workers. Now the fear is that will be reversed as industries downsize.

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India's recovery hopes grow

India's economy, buffeted by the global meltdown, could start recovering by mid-year amid signs of revival in business confidence, manufacturing and credit growth, economists forecast.

The upbeat outlook, boosted by expectations of a healthy harvest fuelling consumer spending, has driven India's benchmark Sensex share index to a six-month high as fund managers switch their country ratings to "overweight" from "underweight."

The "domestically driven Indian economy will begin to recover palpably from mid-year onwards," Rajeev Malik, economist at Australia's Macquarie Securities, said.

Indices measuring early changes in economic activity and business confidence and forecasts published by global financial houses in recent days suggest that India's economy is set to turn the corner.

However, the potential emergence of a politically unstable ruling coalition after general elections end on May 13 could disrupt the scenario, analysts warn.

Nevertheless, Swiss bank UBS said its "base case scenario" was for the Indian economy and corporate earnings "to bottom out by the second half of 2009/10 and for full recovery in 2010/11."

There's a "strong likelihood of an upturn in industrial activity by June," UBS economist Philip Wyatt said.

Britain's Barclays Capital has gone so far as to bullishly declare "the slump in activity in emerging Asia is over" - driven by India and China.

"Domestic leading indicators such as business sentiment are showing signs of stabilisation and the next few months of data are likely to see an upturn in most (Asian) countries," it said.

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