After Losses, Yet Another Overhaul For Sony

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Rio Tinto Overhaul Plans Dented as Diamond Sale Abandoned

The world no.3 miner has at least half a dozen assets on the block, aiming to pare $19 billion in net debt, cut costs and boost returns to shareholders, but buyers are unwilling to pay up in face of volatile commodity prices and rising debt costs.

"In resource land it's just a little bit tough at the moment," said Paul Xiradis, chief executive of Ausbil Dexia, which owns Rio Tinto shares.

"The market would have preferred for Rio to sell (diamonds)....But if you're not going to achieve the right price, there's no point in cutting off your nose to spite your face just to achieve an end."

Rio is not alone in struggling to sell assets. Barrick Gold was unable to pin down a sale of a stake in African Barrick Gold to state-owned China National Gold in January, and Peabody Energy and Brazil's Vale have given up trying to sell some mines in Australia.

Rio Tinto's new chief executive, Sam Walsh, this month hosed down expectations for a sale of the diamonds unit, amid speculation the company was going to float the business after failing to find a buyer.

"This is not market day at the bazaar. I'd be quite happy to keep it," Walsh was quoted saying in an interview with The Telegraph in London.

Rio's Diamonds and Minerals chief executive Alan Davies said there was a positive market outlook for diamonds.

"After considering a number of alternative strategic ownership options it is clear the best path to generate maximum value for our shareholders is to retain these businesses," he said in a statement on Monday.

Rio's shares fell 2.2 percent to A$51.50, close to a nine-month low, as mining stocks were pelted on worries about slowing growth in China.

LAGS ARCH-RIVAL

Rio Tinto put the diamonds arm up for sale in March 2012, soon after rival BHP Billiton put its diamonds unit on the block. BHP won the race to find a buyer last November, selling to Harry Winston, now called Dominion Diamond Corp.

The Canadian company is co-owner of the Diavik mine with Rio Tinto and had expressed interest in buying Rio's 60 percent stake in the mine, but was not interested in the rest of its diamond business.

The diamond unit, with operations in Australia, Canada and Zimbabwe, reported a $43 million loss in 2012, down from a profit of $10 million a year earlier.

While BHP has racked up more than $4.6 billion in asset sales over the past year, over the same period Rio has only managed to sell its Eagle nickel mine for $325 million.

"Debt costs have blown out by 200 basis points in the last couple of weeks. That makes it pretty tough if you're trying to finance an acquisition," said a resources banker, who is not involved in Rio Tinto's sales.

The assets BHP has sold have mostly gone to Japanese and Chinese bidders, who are cashed up. Asian buyers are seen as most likely to be able to complete deals, which could help Rio Tinto at least on the sale of its Australian coal assets.

It has attracted interest from Indian conglomerate Aditya Birla, Coal India, China's state-owned Shenhua Group Corp and Japanese trading house Marubeni Corp for its Clermont coal mine and a 29 percent stake in Coal & Allied.

Rio is also looking to sell its Pacific Aluminium arm, on the block since 2011, a majority stake in Iron Ore Company of Canada (IOC) and its Northparkes copper mine in Australia.

The stake in IOC attracted a wide range of interest, allowing Rio to come up with a shortlist of half a dozen suitors, but there are only three bidders left in the running, according to people familiar with the situation.

Rio is seeking between $3.5 billion and $4 billion for that stake, according to one source.

The sale of its Northparkes mine, which could fetch $800 million, is seen as the easiest to seal. However people familiar with the situation have said there is only one bidder left, OZ Minerals Ltd, and it is under pressure not to overpay.

(Additional reporting by Jackie Range in SYDNEY; Editing by Edwina Gibbs and Richard Pullin)

The Trade: In Brown-Vitter Bill, a Banking Overhaul With Possible Teeth

Michael Reynolds/European Pressphoto AgencySenators David Vitter, left, and Sherrod Brown have introduced a bill that would require banks to set aside more capital to cover potential losses.

The biggest banks have done an excellent job of delaying and undermining the Dodd-Frank financial overhaul law and staving off criminal investigations into wrongdoing.

Maybe, just maybe, they’ve been too successful.

Senators Sherrod Brown, Democrat from Ohio, and David Vitter, Republican from Louisiana, introduced a bill last week that calls for two things: making the giant banks much safer and tying regulators’ hands to prevent them from using taxpayer money to save a failing financial institution.

If the bankers who blew up the financial world had been held accountable, the popular fury that fuels this bill would have dissipated by now. And if Dodd-Frank were fully in place today, instead of being bogged down in the courts and in the halls of Washington regulatory offices, there would be no political momentum behind such an effort.

Now, we will see whether the bill is simply a barbaric yawp of anger at the big banks or something with actual force. It probably won’t get passed, but its underlying premise cannot be dislodged from the Washington conversation.

The Brown-Vitter bill calls for the banks with more than $500 billion in assets — I’m looking at you, JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley — to have capital reserves of 15 percent. That’s a much higher standard than exists today, especially because the current requirements have weak definitions of capital and total asset size.

The banks have rounded up a bunch of critics, led by the likes of the law firm Davis Polk & Wardwell and the lobbying firm Hamilton Place Strategies, the volume of their lamentations most likely in direct proportion to the hourly rate they bill their clients. They invoke terrifying, talismanic statements: the bill is a “punishment” to big banks. It is simplistic, impossible, will render American banks “uncompetitive,” lead to financial crises and probably cause tooth decay.

This naïve bill would force the giant banks to raise too much capital and would hurt the economy as the companies were forced to shrink or break up. Standard & Poor’s is one of the observers warning of a financial crisis. And who better to know than the people who brought us the last one?

Goldman Sachs and S.& P. estimate the big banks might be forced to raise $1 trillion or more. That’s a lot, so much that the leviathans’ agents cry out that they couldn’t sell that much stock. But they don’t have to raise it all at once. And they can retain their earnings and stop paying dividends in addition to selling shares.

In putting that argument forward, they don’t realize they make Senator Brown’s and Senator Vitter’s case for them. If investors are so terrified of the big banks that they won’t buy their stock, that’s a terrific problem. Most of the big banks trade below their net worth, an indication that investors don’t trust them. Brown-Vitter might actually help banks by restoring that trust.

The Brown-Vitter bill serves as a good time to remind defenders of big banks what bank “capital” is. As Professors Anat Admati and Martin Hellwig have pointed out in their indispensable book “The Bankers’ New Clothes,” capital is not a rainy-day fund. It’s not stored away in a vault somewhere, never to be touched. Capital — the rest of us know it as “equity,” like the down payment on a house — is simply money that absorbs losses. The more money a bank raises from shareholders, the more profit it keeps on hand, the less it has to borrow and the more solid it is. The bank can still lend that money. And if JPMorgan Chase doesn’t lend to some small business, perhaps a regional or community bank will.

There might be some trade-offs to higher capital requirements, but we know there are costs to lower ones: financial crises. Some try to argue that the banks faced a liquidity crisis in 2008, what we call a run on the bank. Yes, that was true in the autumn of 2008. But the crisis didn’t start then. It started in the late summer of 2007. If the banks had been more solidly capitalized, there would have been fewer panicked investors.

Banks desire as little capital as they can get away with. It’s easier to make higher returns on equity with greater debt. Often management is paid in stock. But society as a whole doesn’t benefit from banks that are running with too much leverage. They collapse.

So, it is better to have higher equity capital. But Brown-Vitter doesn’t go far enough. The bill’s definition of equity could be tighter. It still contains bookkeeping entries called intangible assets and deferred tax assets, which don’t absorb losses.

But, gratifyingly, Brown-Vitter does tighten up the definition of assets. Capital is the numerator and assets are the denominator. Both need to be made as solid and trustworthy — and resistant to manipulation by banks or regulatory capture — as they can be. When calculating assets, Brown-Vitter tightens up rules on things like how the banks measure their exposure to derivatives.

Oh, the critics shout, this is just a backdoor way of making banks smaller. The bill’s authors fail to understand that diversity of exposure saves gargantuan banks, they say. This requires a slap to the side of the head and a one-word rebuttal: Citigroup. Citi blew up because of its exposure to collateralized debt obligations. That exposure was dismissed and misunderstood by the top ranks because it was seemingly small as a portion of the bank’s balance sheet. It was wonderfully diversified into all kinds of investments, which didn’t help at all. Sure, small banks are less diverse. But when they collapse, the problem is more manageable.

Brown-Vitter inhibits regulators from using risk-weighting of assets, where banks and regulators determine which kinds of investments are safe and require little capital behind them. Davis Polk declared that getting rid of risk-weighting is “too blunt,” somehow immune to the absurd spectacle of lawyers opining on proper risk management.

In fact, risk-weighting has a storied history of blunder. Residential mortgages and sovereign debt, like that of, say, Greece, were once viewed as carrying little risk. Risk-weighting encourages banks to crowd into assets thought to be safe, in that way making them unsafe. It lulls them, and regulators, into a false sense of confidence. Perhaps throwing out risk-weighting might lead lots of banks to buy stuff that is known to carry risk. It’s far better to have them piling into investments that are known to be risky and count those purchases with a clearer, less manipulated number. Then, regulators need to pay attention, which, call me crazy, is their job.

Brown-Vitter also ties regulators’ hands on whether they can pour taxpayer money into failing banks. Here, it’s less plausible. Dodd-Frank has given regulators resolution authority, which gives them the power to unwind failing institutions and impose losses on the shareholders and creditors. Brown-Vitter tries to eliminate what Dodd-Frank skeptics see as too much regulatory flexibility.

It’s a noble idea. But the problem, as Paul A. Volcker has pointed out, is that if JPMorgan Chase is truly failing, it’s almost a certainty that Citi and Bank of America are going down, too. And taxpayers would then have to step in in some fashion.

So, taxpayers are implicitly on the hook for the financial sector, even with Brown-Vitter.

That’s why we need the biggest banks to have truly clear and understandable balance sheet fortresses.

Obama Promotes Ambitious Plan to Overhaul Nation’s Infrastructure

At the end of a week absorbed by social issues like gun control and gay rights, the president returned to the economic challenges he has called his top priorities with a set of proposals to generate money for construction projects.

“What are we waiting for?” Mr. Obama asked, surrounded by massive cranes and cargo containers. “There’s work to be done. There are workers who are ready to do it. Let’s prove to the world that there’s no better place to do business than right here in the United States of America, and let’s get started rebuilding America.”

Expanding on ideas from his first term and this year’s State of the Union address, Mr. Obama proposed a series of tax breaks and loans to stimulate private investment. Among other things, new “America Fast Forward Bonds” would help state and local governments borrow money for projects, while foreign pension and retirement funds would have a tax penalty eliminated so they could invest in infrastructure in the United States on a similar basis as American funds. Grant programs that were part of the president’s stimulus program would be expanded by $4 billion.

Mr. Obama also promoted an infrastructure bank that would use $10 billion in public money to leverage private investment, a concept he has been pushing without success since 2011.

Republicans responded by saying they also wanted to upgrade American roads, bridges and other infrastructure, but only if it could be paid for. SpeakerJohn A. Boehner’s office distributed comments he made last month after Mr. Obama’s State of the Union address.

“It’s easy to go out there and be Santa Claus and talk about all the things you want to give away,” Mr. Boehner said. “But at some point, somebody has to pay the bill.”

Infrastructure has been one of Mr. Obama’s favorite talking points because its appeal often crosses party lines. Both labor unions and corporations favor more spending on airports, highways and the like, and both Republican and Democratic lawmakers are eager for projects in their districts.

Ken Orski, the editor of Innovation NewsBriefs, a transportation newsletter, said the president’s emphasis on private investment was important. “We need more of that kind of involvement, rather than exclusive emphasis on public financing,” he said.

In some ways, expanding private investment in such projects is a return to tradition, said Mr. Orski, a transportation official under PresidentsRichard M. NixonandGerald R. Ford. Going back to the 19th century, canals and toll roads were financed with private money, he noted. But the great flow of government spending during the New Deal and the creation of the Interstate highway system shifted assumptions.

So while some industries like freight rail, telecommunications and aviation have depended largely on private investment, other infrastructure financing has come largely from government sources. Now that sensibility is shifting again, with more private money in the past 20 years.

“Many people feel that the role of private capital in infrastructure has been de-emphasized too much and that more balance should be restored to the equation,” Mr. Orski said.

The latest national report card issued by the American Society of Civil Engineers this month on the state of bridges, roads, power grids, rail networks and other systems showed that the country’s grade had actually risen for the first time — but to a D-plus from a D. The group credited an increase of private investment and spending from Mr. Obama’s stimulus program.

PortMiami is in the midst of $2 billion in improvements, including a tunnel directly linking its facilities with the Interstate highway system. Workers are also dredging to provide access to larger vessels, reconnecting the port with the nation’s rail system, upgrading its cranes and strengthening its bulkheads. Some of the cost has been financed with federal loans.

“The Port of Miami is a tremendous example of how infrastructure investment can lead to economic prosperity,” said Gregory E. DiLoreto, president of the engineers’ society.

On Thursday, Gov. Rick Scott, a Republican, chided Mr. Obama during a conference call with reporters for following the lead of states like Florida.

“We’re certainly glad President Obama’s coming to the Port of Miami tomorrow,” Mr. Scott said, “but he’s late to the party on Florida port investments.” He said his administration had fronted part of the federal cost of the PortMiami project when Washington dawdled. “We could not wait for the federal government to come to the table with their share of the project,” he said

Peter Baker reported from Miami, and John Schwartz from New York.

DealBook: British Regulator Unveils Libor Overhaul

Carl Court/Agence France-Presse — Getty ImagesMartin Wheatley, managing director of Britain’s Financial Services Authority, said London’s reputation as a global center for financial services had been tarnished by the Libor scandal.

LONDON – A leading British regulator officially unveiled the government’s plan to overhaul the rate at the center of the manipulation scandal, but conceded that problems could still persist.

On Friday, Martin Wheatley, the managing director of the Britain’s Financial Services Authority, the British regulator, acknowledged that regulators should have stepped in sooner to fix the problems with the London interbank offered rate, or Libor. He also confirmed the broad strokes of the proposal, which came after a three-month review.
British authorities, which will provide more oversight, want to make it a criminal offense to alter the rate for financial gain. They also plan to implement new auditing systems to ensure traders cannot unfairly profit from small changes to Libor.

“There’s always a possibility for collusion,” Mr. Wheatley told an audience at Mansion House, the 260-year-old home to the lord mayor of London that is adorned with gilded statues and chandeliers. “But under the new regulatory structure, people would be taking a high risk.”

The proposed changes come amid an investigation into potential rate-rigging at big global banks like HSBC, UBS and JPMorgan Chase. In June, the British bank Barclays agreed to pay $450 million to settle allegations that some of its traders tried to manipulate Libor for financial gain. The firm was also accused of understating its rates submissions to make the bank appear healthier during the financial crisis.

Mr. Wheatley, who will lead the Financial Conduct Authority, a new British regulator that will become part of the Bank of England next year, said London’s reputation as a global center for financial services had been tarnished by the recent scandal.

In response, the country’s authorities have stripped the British Bankers’ Association, the London-based trade body that currently oversees Libor, from its powers to control the rate. A new administrator will be appointed over the next 12 months.

Organizations will be able to start pitching for the position next week. The data providers Bloomberg and Thomson Reuters, which collects the daily Libor submissions on behalf of the British Bankers’ Association, as well as NYSE Euronext have expressed interest in taking on the role. Users of Libor will still pay for the financial information, Mr. Wheatley said on Friday.

Regulators are aiming to improve the accuracy and reliability of Libor, which measures the rate at which banks lend to each other. To do so, they want banks to base the rate submission on actual market transactions whenever possible.

As part of that effort, authorities are planning to focus on fewer markets that are the most liquid. Five of the current 10 currencies, including the Swedish krona and Canadian dollar, will be removed over the next 12 months. The number of rates also will be reduced to 20, from 150.

British regulators will take a more hands-on approach with the rate. They plan to audit banks’ daily Libor submissions to avoid rate manipulation.

Even so, Libor will not be immune to manipulation. Because of limited interbank lending activity, Mr. Wheatley said, sometimes the rates would have to be based on a level of judgment from banks on what interest rates they would be able to secure from other firms.

“There’s still a risk,” he said.

DealBook: Geithner Urges an Overhaul of Rules on Money Market Funds

Andrew Harrer/Bloomberg NewsTreasury Secretary Timothy F. Geithner said changes in the rules for money market funds were “essential for financial stability.”

Treasury Secretary Timothy F. Geithner on Thursday urged the regulatory team that he leads to push ahead with new rules aimed at money market funds, which manage $2.6 trillion.

In a letter to the Financial Stability Oversight Council, a committee of senior regulators formed after the 2008 financial crisis, Mr. Geithner said the changes were “essential for financial stability.”

The Securities and Exchange Commission, which is the primary regulator for money market funds, had proposed the main changes favored by Mr. Geithner in his letter.

But the commission dropped its attempt at a money market fund overhaul last month after it became clear that a majority of its commissioners would not vote for the measures. Large mutual fund companies fiercely opposed the changes, saying they were unnecessary and could harm a type of investment fund that was popular.

“You can be sure that the firms on the receiving end won’t take this passively,” said Jay G. Baris, a lawyer at Morrison & Foerster, which represents money market funds.

During the 2008 crisis, investors fled money market funds, which worsened the credit freeze that gripped the banking system. The funds received a big bailout from the Treasury and the Federal Reserve.

Before the Dodd-Frank Act was passed, efforts to change the money market fund industry probably would have died after the commission dropped them. But the Financial Stability Oversight Council, set up by Dodd-Frank, can choose to take over from the commission.

In his letter, Mr. Geithner laid out a number of ways the council, which meets Friday, can act.

He urged it to gather public comments on a range of changes and then make a final overhaul recommendation to the S.E.C. The commission would be required to adopt those changes, or explain why it did not. Mr. Geithner said the council’s staff was already working on recommendations and said he hoped they would be considered at the council’s November meeting.

The recommendations would include two changes supported by the commission. One would require money market funds to hold loss buffers. The other would end the money market funds’ practice of valuing investors’ shares at $1 even when the funds’ assets should reflect a value slightly less than $1.

Mr. Geithner said in his letter that, while the S.E.C. is best positioned to regulate money market funds, the Financial Stability Oversight Council could proceed without waiting for the commission. The council, he wrote, could designate certain money market fund entities as systemically important and subject them to regulation by the Federal Reserve, which could then impose an overhaul.

Mr. Baris, the lawyer, said that designating a money market fund as systemically important could make it hard for it to stay in business. “Who would want to invest in a fund that has been designated by the federal government in this manner?” Mr. Baris said.

“It will drive investors away.” Mr. Baris said he believed that Mr. Geithner might face resistance on the council if any new rules were aimed at specific money market funds.

In addition, the council could designate money market fund activities as critical to the working of the financial system’s plumbing. That would allow regulators to impose heightened risk management standards on the funds.

Mr. Geithner wrote that without the changes, “our financial system will remain vulnerable to runs and instability.”

If the council acts, the mutual fund industry will almost certainly fight back. The industry’s lawyers will probably contest the council’s interpretation of Dodd-Frank and perhaps even the council’s authority to act.