Business Blog Posts

The deal could embolden investors holding mortgage-backed securities filled with now-toxic home loans to pursue claims against other large mortgage lenders such as Wells Fargo & Co and JPMorgan Chase & Co, analysts said.

A settlement, first reported by The Wall Street Journal, would be the largest in the banking industry to date. It would also require approval by Bank of America's board, which met on Tuesday to discuss it, according to the source.

"If you're an investor, you now know this is a potential lottery ticket, and the only way you lose is by not playing," said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Investment Counsel. "You have to think this is the first settlement we'll be seeing in a long line."

After news of a possible settlement, shares rose as much as 3.5 percent from their $10.82 close but later eased to trade around $10.95 after-hours, up about 1 percent.

The largest U.S. bank by assets has been fighting claims by a group of 22 investors over the housing-related securities it packaged and sold before the financial crisis.

This investor group includes BlackRock Inc, MetLife Inc and the Federal Reserve Bank of New York, in a dispute dating back to the fall. It had threatened to take the matter to court, but both sides delayed a trial early this year to continue settlement negotiations.

Bank of America was not immediately available for comment. BlackRock declined to comment.

Bank of America's possible settlement extends beyond the case brought by the initial group of investors, and could resolve "significant parts" of its exposure to repurchase claims from private investors, the person familiar said.

The settlement would exceed the bank's earnings for the last three years, according to the company's 2010 annual report. It could also more than triple the $2.5 billion that Bank of America paid in 2008 for Countrywide Financial Corp, once the nation's largest mortgage lender.

"HAND-TO-HAND COMBAT"

Last Fall, Bank of America Chief Executive Brian Moynihan has said the bank would contest any repurchase claims, and described the process as "hand-to-hand combat."

But as the bank entered into settlement agreements with bond insurers and the two government-backed mortgage investment companies, Moynihan softened that stance, and said the bank would settle when fighting would offer little for shareholders.

In January, Bank of America announced $2.8 billion settlements with mortgage financiers Fannie Mae and Freddie Mac covering essentially all of their outstanding mortgage repurchase claims.

Three months later, the bank announced a $1.6 billion settlement with bond insurer Assured Guaranty Ltd, which had sought to hold the bank responsible for poor underwriting by Countrywide.

(Reporting by Maria Aspan in New York and Joe Rauch in Charlotte; Editing by Carol Bishopric, Tim Dobbyn and Lisa Shumaker)

Lagarde, who starts her five-year term as managing director on July 5, will find herself immediately immersed in efforts by the IMF and European Union to head off a Greek default that could touch off an international crisis.

Minutes after her appointment, Lagarde pressed Greece to move quickly to push through unpopular austerity measures that the IMF and EU say are a prerequisite for further aid.

"If I have one message tonight about Greece, it is to call on the Greek political opposition to support the party that is currently in power in a spirit of national unity," she told TF1 television.

Lagarde, 55, the first woman to head the IMF, succeeds Dominique Strauss-Kahn, who resigned from the IMF in May to defend himself against charges of sexual assault against a New York hotel maid. He denies the charges.

Her skills as a tough negotiator with a reputation for sealing deals under pressure will carry weight as she moves from defending France's economic interests to overseeing a global institution that must be seen as a neutral player around the world.

The succession race was one of the most hotly contested in IMF history as emerging market nations expressed displeasure with the 64-year tradition of having a European head the IMF and an American lead its sister institution, the World Bank.

The IMF board moved ahead despite lingering concerns about an unresolved legal case in France looking at Lagarde's role in a 2008 arbitration payout to a French businessman.

Lagarde said on Tuesday she was "completely unconcerned" by the case. A top French court has put off a decision on the matter until July 8.

The IMF may decide not to offer Lagarde a contract until the court makes a final decision, one board source said.

In a Financial Times blog post, Mohamed El-Erian, chief executive of Pimco, the world's largest bond investor, said Lagarde would need to show the IMF's efforts to help distressed European countries were not politically motivated.

He said she would need to prepare for the possibility the IMF could face losses from the large bailout loans it made in recent years, including 30 billion euros for Greece.

Lagarde must also show a commitment to meritocracy by eliminating some nationality-based appointments, El-Erian added, citing the No.2 position at the fund which traditionally goes to an American.

Washington is already considering naming White House advisor David Lipton to succeed John Lipsky as IMF second in command at the end of August, according to sources close to the discussions.

FINDING CONSENSUS

Lagarde's selection over Mexico's Central Bank Governor Agustin Carstens was assured after the United States made its support clear, and emerging market economies China, Brazil, India and Russia did the same.

The United States, worried about the possibility of contagion from the Greek crisis, had cautioned that the appointment of the next IMF chief should not be delayed.

French President Nicolas Sarkozy called the news of Lagarde's appointment "a victory for France."

Carstens said he hoped Lagarde would pursue "meaningful progress in strengthening the governance of the institution, so as to assure its legitimacy, cohesiveness, and ultimately, its effectiveness."

Developing countries, resentful over a process that favored a European from the start, said they would hold Lagarde to her promise of giving them more voting power in the fund.

Emerging markets have long called for greater say in the IMF to reflect their growing weight in the global economy. They have threatened to leave the IMF's fold unless imbalances in the fund's voting power are corrected.

Strauss-Kahn pushed through changes in voting power that benefited mainly larger emerging economies like China, India and Brazil, but not as much as they had wanted.

"RIGGED SYSTEM"

Brazil's Finance Minister Guido Mantega said Brazil backed Lagarde because she vowed to continue raising the profile of emerging markets.

"Our support is for her to be a manager not of Europe's problems but of the world's. We will be watching out for this from the first day," Mantega said at a regional trade meeting in Paraguay.

In justifying why India had gone with Lagarde in the end, Indian Finance Minister Pranab Mukherjee told Reuters it was in part because it wanted to be part of the consensus that had formed around her.

Speaking while on a visit to Washington, Mukherjee said the IMF's selection process should have been more transparent but he believed Lagarde was a worthy candidate.

Arvind Subramanian, a senior fellow at the Peterson Institute in Washington, said emerging economies had missed a golden opportunity to force change at the IMF helm by failing to rally around Carstens or by putting up their own consensus candidate.

"It is a rigged system that needs to change but ... the only reason the outcome didn't match what (developing nations) wanted was because emerging market countries did not grab the opportunity," Subramanian said.

Global development group Oxfam said Lagarde's appointment was "farcical" and had damaged the credibility of the IMF.

"There were noises made about openness, but the decision was made before the candidates were interviewed," said Sarah Wynn-Williams, Oxfam's head of relations with the IMF and World Bank.

(Additional reporting by Glenn Somerville and David Lawder in Washington, Luciana Lopez in Brasilia, Alexandria Sage and Catherine Bremer in Paris and Mariel Cristaldo and Guido Nejamkis in Paraguay)

(Editing by Paul Simao, Jan Paschal and Andrew Hay)

She begins her five-year term July 5 amid an escalating debt crisis in Europe and growing fears that Greece will default.

"The executive board, after considering all relevant information on the candidacies, proceeded to select Ms. Lagarde by consensus," the IMF said in a statement.

Lagarde, 55, is the first woman to lead the IMF, succeeding Dominique Strauss-Kahn, who resigned in May to defend himself against charges of sexual assault against a hotel maid in New York.

Lagarde's victory over Mexico's Central Bank Governor Agustin Carstens was assured after the United States made its support clear and emerging market economies China, Brazil and Russia did the same.

She will have to immediately deal with an IMF-European Union effort to keep debt-stricken Greece afloat and focus on potentially thorny IMF "spillover reports" that analyze the economic and policy actions of the world's major economies.

"Minister Lagarde's exceptional talent and broad experience will provide invaluable leadership for this indispensable institution at a critical time for the global economy," Treasury Secretary Timothy Geithner said in a statement.

(Reporting by Lesley Wroughton; Editing by Paul Simao, Jan Paschal and Andrew Hay)

Even so, economists cautioned house prices will likely continue to crawl along at low levels, and could have further to fall, as the battered housing market works through an excess amount of houses for sale, ongoing foreclosures, tight credit and weak demand.

The S&P/Case-Shiller composite index of single-family homes in 20 metropolitan areas dipped 0.1 percent on a seasonally adjusted basis. A Reuters poll of economists had forecast a decline of 0.2 percent.

On a non-seasonally adjusted basis, however, the index rose 0.7 percent, its first advance in eight months, the report said.

"The seasonally adjusted numbers show that much of the improvement reflects the beginning of the spring-summer home buying season," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement.

"It is much too early to tell if this is a turning point or simply due to some warmer weather."

There was little reaction in financial markets to the data.

"It suggests that the housing market is stabilizing. It suggests that things are bottoming out, and it is only a matter of months before you hit the bottom," said Rudy Narvas, senior economist at Societe Generale in New York.

"Things aren't great but at least they are not completely falling apart."

The 20-city composite index edged up at 138.84 from 138.16 in March, which had marked a new crisis-era low.

Prices in the 20-city index fell 4 percent year over year, slightly worse than expectations for a drop of 3.9 percent.

U.S. home prices were supported last spring by a tax credit, but the housing market has struggled since the credit expired. While housing makes up a fraction of gross domestic product, most economists say the economy will be hard pressed to make a sustainable recovery without an improvement in housing.

(Reporting by Leah Schnurr, additional reporting by Chris Reese; Editing by Padraic Cassidy)

* Greece still needed a vote of approval by lawmakers on Wednesday and Thursday for the austerity measures being debated through parliament in order to receive the next tranche of the bailout program.

If it does not get the next tranche, analysts said Greece could default, sparking a Europe-wide crisis and potential credit market freeze similar to the Lehman collapse.

* Nike Inc (NKE.N) quarterly earnings beat expectations on Monday, helping its shares gain 4.3 percent in after-hours trading.

* Swiss drugmaker Roche (ROG.VX) will try and persuade a U.S. health panel that it should retain approval for Avastin, the world's best-selling cancer medicine.

* Google (GOOG.O) said French search engine company 1plusV had been notified the company of its intention to file a 295-million-euro damage claim but declined to comment further on the matter.

* Steve Balmer, chief executive of Microsoft (MSFT.O) is set to launch its Office 365 software on Tuesday - a revamped online version of its hugely profitable Office software suite.

* French Finance Minister Christine Lagarde looked set to get the majority support of the International Monetary Fund board to become the new chief.

* Investors will watch the U.S. S&P/Case-Shiller April Home Price index at 1300 GMT and both the U.S. Richmond Fed Manufacturing Services index for June and the U.S. Consumer Confidence for June at 14 GMT, for signs that the economic recovery is back on track.

* Wall Street rose on Monday after three days of losses on optimism over Greece's austerity plan and France's proposal that French banks would roll over Greek debt.

The Dow Jones industrial average .DJI gained 0.9 percent, the Standard & Poor's 500 Index .SPX rose 0.9 percent and Nasdaq Composite Index .IXIC added 1.3 percent.

* European shares were flat on Tuesday ahead of a Greek parliamentary vote on austerity measures.

With depositors fleeing Greek banks in growing numbers and financial markets watching anxiously, President Nicolas Sarkozy told a news conference in Paris that French banks had reached a draft agreement with the authorities on a voluntary rollover of maturing bonds.

"We concluded that by stretching out the loans over 30 years, putting (interest rates) at the level of European loans, plus a premium indexed to future Greek growth, that would be a system that each country could find attractive," he said.

The plan was put to a meeting of international bankers and European Union officials with the International Institute of Finance (IIF) in Rome Monday but no decision was taken, an Italian Treasury official said.

In a sign of ebbing confidence that Greece can avoid default on its 340 billion euro ($486 billion) debt mountain, Moody's said Greek banks had lost about 8 percent of private sector deposits so far this year as customers burned their savings due to unemployment, transferred funds abroad or bought gold.

French government sources said under an outline deal, banks would reinvest 70 percent of the proceeds when Greek bonds fall due in 2011-14 and cash out the rest. Of the amount reinvested, 50 percent would go into the new 30-year bonds and 20 percent would go into zero-coupon AAA bonds with deferred interest.

The new bonds would be placed in a Special Purpose Vehicle, effectively removing Greek debt from the balance sheets of participating banks, the source said. Banks would hold equity in the SPV instead.

Private banking sources said the new bonds could be guaranteed by the euro zone's rescue fund (EFSF) or the European Investment Bank.

A French government source described the solution, proposed by French bankers, as "a sort of private Brady bond without a public guarantee," referring to a 1989 swap of Latin American debt for tradable securities, some of them guaranteed, proposed by then Treasury Secretary Nicholas Brady.

German banks voiced interest in the "French model" although Deutsche Bank chief Josef Ackermann said it was only one of several solutions being considered and it was unclear whether any satisfactory proposal could be found.

"Political leaders expect a solution by the end of the week but we should not rush it," Ackermann told Reuters Television in an interview. "It is important to have a good solution. The issues are complex and need to be discussed."

REBELS PRESSED

Any new financial rescue for Athens, including official lending and private sector participation, depends on the Greek parliament approving this week a five-year austerity plan and legislation to implement structural reforms and privatization. .

"Our vote is the only chance for the country to get back on its feet," Greek Prime Minister George Papandreou told legislators at the beginning of a parliamentary debate.

Greek Finance Minister Evangelos Venizelos met ruling socialist party (PASOK) rebels in Athens to push them to toe the line in parliamentary votes Wednesday and Thursday, where a defeat could plunge the country into default.

Greece's conservative opposition has rejected calls for national unity, forcing Papandreou to rely on his slim parliamentary majority to push through a painful mix of spending cuts, tax hikes and state sell-offs. .

However with Greece stuck in deep recession, at least three PASOK deputies have expressed serious reservations or outright opposition to a plan they say will crush any hope of growth for years to come and it is unclear how the numbers will play out.

Venizelos acknowledged the plan was painful but said it would win time to negotiate more favorable terms later, an attitude which risks irritating some euro zone partners.

"The strategy is to vote on the two pieces of legislation, to be able to face the euro zone and the IMF to obtain the fifth tranche, and until the end of the summer we seriously negotiate a new loan program," he said. "That's your renegotiation."

Without parliamentary approval for the measures, which have caused a wave of strikes and demonstrations, the European Union and International Monetary Fund say they will not release the fifth tranche of the 110 billion-euro bailout agreed last year.

If the loans are not forthcoming, the Greek government, which has been shut out of financial markets because of the ruined state of its public finances, will run out of money within weeks, probably triggering a Europe-wide crisis.

"If it is Greece alone, that's already big," Deutsche Bank's Ackermann said. "But if other countries are drawn in through contagion, it could be bigger than Lehman," he said, referring to the disastrous 2008 collapse of Wall Street investment bank Lehman Bros.

PLAN B

Three euro zone sources in Brussels said EU officials were working on a contingency plan for Greece if its parliament rejects an austerity program and the country cannot receive the next installment of EU/IMF emergency loans.

The fallback plan, distinct from the French rollover ideas, involves ways to ensure Greece gets the liquidity needed to avoid default if the next aid tranche cannot be paid out by mid-July, the sources said.

An initial Greek vote on the framework austerity package is due on Wednesday, and lawmakers then vote Thursday on a separate bill containing specific steps to implement it.

Defections over the past 13 months have cut Papandreou's support in the 300-member parliament to 155 seats, meaning a handful of votes could decide the issue, which may be further complicated if one bill passes and the other does not.

In an interview with Spanish daily El Mundo Sunday, Deputy Prime Minister Theodore Pangalos said he believed the first vote would pass but he was less confident about the second implementation bill.

"That's where we may have problems," he said. "I don't know whether some of our legislators will vote against it."

Progress in the rollover talks cooled demand for safe-haven bonds Monday but the premium investors demand to hold Greek debt rather than benchmark German Bunds widened by a further 20 basis points to 1,432 basis points.

(Additional reporting by Stephen Slater in London, Luke Baker and Julien Toyer in Brussels, Nick Vinocur in Paris, Harry Papachristou and Renee Maltezou in Athens, Stefano Bernabei and Gavin Jones in Rome; Writing by James Mackenzie and Paul Taylor, editing by Paul Taylor/Janet McBride)