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U.S. commercial banks reported $6 billion of revenue from trading foreign exchange, interest-rate and other derivative instruments in the third quarter as credit spreads deteriorated and accounting rules inflated results, the Office of the Comptroller of the Currency said on Monday.

Revenue was up markedly from the second quarter, when banks reported $1.6 billion of trading revenue, as market disruptions led to a widening of credit spreads.

As credit spreads widened, the value of banks’ trading liabilities declined and trading revenue increased.

Kathryn Dick, deputy comptroller for credit and market risk, said the value of trading revenue was inflated during the third quarter because of fair value accounting rules that went into effect at the end of 2007.

The rules require banks to mark derivative contracts to current market values each quarter.

"I don’t think they had a really strong quarter; they had a good quarter," Dick said about the banking industry’s trading revenue. "(The gain) was largely due to accounting purposes, not necessarily due to client flow or customer demand."

Dick said credit spreads have significantly narrowed during the fourth quarter as investor confidence in credit quality has increased.

"Credit spreads have come in dramatically, which means those (third-quarter) gains will be reversed," she said.

The comptroller’s office, which oversees most big U.S. commercial banks, also said the notional amount of derivatives held by the industry — the amount that generally does not change hands — decreased by $6 payday cash loans.3 trillion in the third quarter to $176 trillion.

However, credit derivative contracts increased 4% to $16 trillion.

"The uncertain credit environment created demand for credit hedges, particularly for counterparty credit risks," Dick said.

The OCC said the net current credit exposure for the industry increased $30 billion, or 7%, in the third quarter to $435 billion.

The agency uses that figure as the primary means to measure credit risk in derivatives activity. It said the largest five U.S. banks hold 97% of the total notional amount of derivatives.

The OCC said national banks reported strong client demand and increased client revenues due to wider bid/offer spreads and market disruptions such as the U.S. government takeover of mortgage giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in September and the failure of Washington Mutual (WAMUQ) in the same month.

The agency also said derivative contracts remain concentrated in interest rate products, which account for about 78% of total derivative notional values.

(Reporting by Karey Wutkowski; Editing by Steve Orlofsky and John Wallace) 

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Crumbling home and auto sales pushed three Japanese insurers into merger talks and Koreans plan to cut spending on children’s education, signs the global economic slump is reshaping business and lifestyles around the world.

Economic reports this week are expected to produce more bleak reading, showing global manufacturers entrenched in recession as they cut production to avoid being stuck with huge, expensive inventories in sinking economies.

Consumers, investors, central bankers and politicians are hoping to see some signs of recovery next year from the worst downturn since the 1930s as governments pump over $1 trillion into their ailing economies.

This year will produce one of the biggest ever stock market falls. The U.S. S&P 500 benchmark is down 41 percent with only three trading days left in 2008. Its biggest yearly drop was in 1931 during the Great Depression when it fell 47.1 percent.

The Dow Jones Wilshire 5000 index, the broadest measure of U.S. equity performance, shows a record $7.3 trillion of stock market value has been wiped out this year as the fast-spreading global financial crisis crippled the ability of many companies to raise funds and pushed economies into recession.

The fallout has hit all sectors from banks to autos to commodities and resources. Unemployment has climbed as house prices plummet and cash-strapped consumers curtail spending, heaping more pressure on companies struggling to survive the downturn.

Three big Japanese insurance companies were the latest firms considering a merger to tackle a downturn that has hit demand for car and fire insurance in the world’s second-largest economy no teletrak payday loan.

Shares of Mitsui Sumitomo Insurance Group Holdings Inc, Aioi Insurance Co and Nissay Dowa General Insurance Co surged on Monday on hopes that a merger would increase profits and reduce competition.

The three aim to reach a basic agreement by March 2009, a company source said, which would produce the country’s largest non-life insurer.

A surging yen also provided another motivation for a merger, analysts said, because it has eroded the value of the insurers’ foreign-currency assets.

Yen strength has prompted official concern, underscored on Monday by Finance Minister Shoichi Nakagawa, who told the Financial Times that he was watching volatility in the foreign exchange market with alarm.

YEN SURGE

The yen has surged more than 18 percent against the U.S. dollar this year, slamming Japanese exporters like Toyota and Sony and triggering speculation the government may intervene to halt the currency’s rally.

“Every day I am looking at the market developments with a sense of alarm and urgency,” the paper quoted Nakagawa as saying in reference to yen volatility in an interview.

Nakagawa dismissed suggestions Japan will soon need another stimulus package, saying extra spending plans finalized this month must be implemented first, the newspaper said. 

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NEW YORK — The rich are tightening their belts, too. Even if it’s still a Gucci.

Faced with the sharpest decline in net worth in nearly 50 years, wealthy Americans are re-evaluating their priorities and slashing their spending at a rate unseen in decades — a move that could have dire consequences for the economy, luxury stores and high-end brands.

In response to the increasingly subdued shopping mood that began late last year, luxury brands are cutting their inventory, changing the assortment of products they offer and tweaking their advertising message.

Sure, many of the ultra-rich aren’t exactly scrimping. Some still drop $100,000 on a fur coat or $600 for a pair of shoes — but increasing numbers who were never bargain-hunters are picking through mounds of discounted designer goods to save money in an uncertain time.

And why not? Deep discounts are making it a great time to stock up on high-end clothes and accessories, whether its a Chanel suit, a Prada bag or a $1,000 pair of Christian Louboutin shoes.

Luxury sales overall dropped 34.5 percent in the first week of December from the same period a year ago, according to SpendingPulse, a data service provided by MasterCard Advisors, and were down 23 percent in the five weeks ending Dec. 6.

Such behavior differs dramatically from even just a year ago, when luxury stores couldn’t keep up with the wealthy’s appetite for extravagance. A-listers wanted $5,000 handbags, not the $500 versions they bought in the past.

But the financial meltdown has deflated the demand that reigned for much of this decade, resulting in plummeting sales for many luxury purveyors. That has forced high-end stores like Saks Fifth Avenue and Neiman Marcus to offer discounts of up to 70 percent before the traditional start of the holiday shopping season — akin to their downscale competitors.

Aspirational luxury shoppers, those whose average annual salary is about $150,000, began cutting back a year ago, according to Milton Pedraza, chief executive of the Luxury Institute, a research firm. That spiraled up the economic scale after the economy worsened. Single-digit millionaires began pulling back starting in March, when Bear Stearns nearly collapsed and was bought by JP Morgan in a fire sale, Pedraza said.

And the ultra-wealthy with a net worth above $10 million — who make up about 60 percent of sales and 20 percent of top luxury stores’ customer base — started cutting back in September, when the financial crisis ballooned, Pedraza said.

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"This is no longer a state of mind, or what feels right," said luxury consultant Robert Burke. "This is a reality of where people’s bank accounts and investment portfolios are."

But he and others are also taking note of a fundamental change in shoppers’ psyche, which could linger for a while in what’s feared to be a deep and long recession.

The cutbacks by the wealthy are clearly different from the grocery-aisle economizing so many Americans have begun making. For one, the rich typically don’t trade down to lower-price brands and stores, luxury experts say. Instead of six pairs of Manolo Blahnik shoes at $700 each, they will buy two — not browse the shoe department at J.C. Penney or shop at Nine West.

It may be hard to sympathize with such trade-offs. But millionaires saying no to that third pair of shoes is worrisome for us all, say economists, because it deepens the trough consumer spending has fallen into. Michael P. Niemira, chief economist at the International Council of Shopping Centers, says the economy depends on spending by the wealthy because of their dominance in discretionary purchases, from boats to furs.

But such over-the-top spending isn’t prudent anymore. Americans’ wealth fell 4.7 percent to $56.5 trillion in the third quarter from the second, the biggest decline since the second quarter of 1962, according to Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

Offering deep discounts can cost high-end retailers beyond falling profits, risking the cachet of their brands. Retailers may also confront problems trying to raise prices once the economy improves as consumers accustomed to deep discounts balk at buying items at regular prices.

"It is hard for us to tell what the true mindset of the customer is at this point," said Ginger Reed, a spokeswoman at Neiman Marcus, where profit dropped 85 percent in the quarter ended Nov. 1. "We do know she is still shopping — both regular-price items and sale items — but not in the quantity she has in the past."

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President Bush’s bailout plan contains some "targets" the government wants the automakers and the United Auto Workers union to achieve before agreeing to a bailout loan.

All of the terms are still negotiable as long the automakers can produce a plan to become viable without them.

The terms, as laid out by the White House, appear simple on the surface, but the issues they cover are a lot more complicated. Here’s a rundown:

The way it is now: Domestic automakers’ labor costs are considerably higher than those of foreign competitors operating here in the United States.

What’s in the bailout: By 2010, domestic automakers must pay hourly wages that are on par with those offered by their foreign competitors.

Reality check: Hourly wages for comparable work at General Motors (GM, Fortune 500) and Toyota are nearly identical. According to various reports, each company pays experienced auto workers about $30 an hour.

It’s when benefits are factored in that cost differences begin to rise, opening up differences of several dollars per hour.

But the real issue for U.S. automakers - the factor that gives rise to stories of autoworkers bringing home more than $70 an hour - is retiree benefits. Those hourly figures, which were calculated by the automakers before the latest round of contract negotiations in 2007, include money paid into retiree healthcare and pension funds - not just the pay and benefits of active workers.

Those retiree costs are the reason that the UAW created trusts to cover them so that automakers wouldn’t have to continue paying for retiree benefits out of their own funds indefinitely.

The way it is now: Various work rules built into union contracts cover things like paid holidays and dictate specific job descriptions laying out exactly what each worker can and cannot be required to do as part of his job.

What’s in the bailout: Domestic automakers’ work rules must be competitive with those at foreign auto plants in the United States, like those run by Toyota, Honda and Nissan.

Reality check: It’s commonly thought that the domestic automakers’ plants are far less efficient than plants run by foreign automakers. The blame usually goes to strict work rules that rigidly define each union worker’s job function.

Here’s an extreme, but common, perception: If an assembly worker sees a piece of trash on the floor, he can’t just bend over and pick it up because that would infringe on another worker’s job.

"That was true 10, 20, 30 years ago," said Ron Harbour, an auto manufacturing consultant and analyst. Those sorts of efficiency-strangling rules have been negotiated out of contracts over the years.

The rules that do remain mostly involve legitimate safety concerns, he said, and don’t hurt efficiency. For example, fixing an electrical problem still requires a union electrician. "If you are not a trained electrician, you can kill yourself," he said. "That makes sense."

His annual Harbour Report ranks auto factories by their efficiency, or the number of worker-hours required to produce a car. In his most recent report, he found nine of the 10 most efficient auto plants in North America are unionized plants run by domestic automakers. The 10th is a unionized auto plant run jointly by GM and Toyota.

The way it is now: Under labor agreements, laid-off union workers are furloughed while receiving almost their entire pay.

What’s in the bailout: The plan calls on automakers and unions to eliminate these so-called jobs banks.

Reality check: After the automakers went to Congress asking for bailout loans, the UAW offered to eliminate the jobs bank. That wouldn’t eliminate something called supplemental pay, though. Workers go into sub-pay, as it’s called, immediately after being laid off and go into the jobs bank only after their unemployment benefits run out health insurance quotes.

While on unemployment, state benefits are supplemented by money from the automaker. In the case of General Motors, the total compensation adds up to 72% of a worker’s original pay, according to a GM spokesman.

After that, the employee goes into the jobs bank and receives either 85% of his pay or 100% if he’s asked to come in for training or other work.

If a job becomes available at any time within 50 miles of a GM worker’s old job, he or she must accept it. If jobs become available elsewhere, the worker is allowed to turn down up to two more distant reassignment offers.

Years ago, the jobs banks were much more expensive for automakers than they are today, according to a General Motors spokesman, because many workers have left the company through employee buyout programs and early retirement. Recent rounds of plant closings and layoffs are expected to push these costs back up, though.

What Toyota does for its workers is actually very similar to the jobs bank, but without the sub-pay period. Toyota has a strong "no layoff" policy, so workers stay on the company payroll at full wages while they are assigned to either training programs or other jobs within the company.

Up to a point, jobs banks do offer some benefit to the automakers themselves. Automobile sales are highly cyclical and even in good times, workers sometimes have to be idled for weeks as factories are retooled or inventory is sold off.

Without some way to support themselves during that time, workers may look for other jobs, requiring automakers to go through a massive hiring and training process for new workers when the lines start back up.

The way it is now: In last year’s round of contract negotiations, domestic automakers agreed to put money into a union-controlled investment fund that would pay for future retiree benefits. It was called the Voluntary Employees’ Beneficiary Association (VEBA). The biggest benefit for automakers was that it removed these costs from their books.

What’s in the bailout: Half of VEBA payments must be paid in company stock.

Reality check: Under the original VEBA rules, automakers are already allowed to make some payments in company stock. With GM stock at extremely depressed levels already, this might not be a bad move.

If GM can become a financially viable company again, its stock price is bound to go up, adding more value to the fund.

How much auto workers will have to concede ultimately depend on how much money is available for the final bailout loans, said Brad Coulter, a director with O’Keefe and Assoc., a Detroit-based bankruptcy and turnaround consulting firm.

Coulter expects the automakers to borrow even more money later beyond the $17.4 billion on the table to keep the automakers alive while they plan their restructurings, but the question is just how much. "As they run their numbers, what kind of cash burn is the lender willing to fund?" he asked.

If there isn’t enough money available to continue programs like 48 weeks of sub-pay for workers, the UAW may be forced to accept major cuts or watch the Chrysler and GM file for bankruptcy.

The UAW will want to hold off on offering any concessions until the more labor-friendly Obama administration comes to office, according to John Rivette, a professor of labor relations at Michigan State University.

"Behind the scenes, they’re going to pressure the Obama administration and congressional Democrats," he said.

The changes being asked of workers represent relatively small dollar amounts in light of the larger problems facing the automakers. "The much bigger thing," he said, "is what can be done with the suppliers and the dealers." 

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OTTAWA–Canada’s annual inflation rate continued to fall in November as the steep drop in the cost of filling up at the gas station more than compensated for higher prices charged at the grocery store.

Statistics Canada said yesterday the annual inflation rate dropped to 2 per cent last month from 2.6 per cent in October.

Bank of Montreal economist Doug Porter described the change as "a much milder decline than expected."

November data proves talk of deflation is unfounded, CIBC economist Avery Shenfeld noted. "There’s no serious threat of deflation in Canada, with wages still climbing, unemployment even at the height of this recession likely to be far lower than in past recessions, and labour playing a big role in services costs," Shenfeld stated.

November’s was the second consecutive monthly decline. But core inflation, which excludes volatile items, rose to 2.4 per cent from 1.7 per cent in October.

The agency said gas prices were again the chief reason for the fall in overall inflation as pump prices fell 14.4 per cent from a year ago – the largest decline in more than two years – but that was offset by the falling loonie and higher food prices.

"Fuelling your car got a lot cheaper in Canada in November, but fuelling your body got a lot more expensive," Shenfeld said no fax pay day loans.

On a month-to-month basis, gas prices plunged 21.4 per cent from October, reflecting the tumbling price of crude on global markets.

After rising to record levels last fall, Statistics Canada said the loonie bought 20.6 per cent less in world markets in November, contributing to increases in five of eight inflationary components measured by the agency.

Shenfeld said the recent recovery in the Canadian dollar’s value should help lower food prices in December.

The rise in food prices accelerated in November, up 7.4 per cent from a year ago, including a 28.9 per cent spike in the cost of fresh vegetables. Excluding food, Canada’s annual inflation rate would have risen a mere 0.9 per cent last month.

Given the milder-than-expected decrease, it’s unlikely Canada will see interest rates as low as the zero per cent of the U.S. Shenfeld predicted Bank of Canada will cut rates to 1 per cent or 0.75 per cent in early 2009.

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SASKATOON–Federal Finance Minister Jim Flaherty has announced he’s establishing an 11-member economic advisory council to give advice on next month’s federal budget and ongoing advice on the deteriorating economy.

He says the council is made up of eminent Canadians who will work for one dollar a year.

They include former B.C. finance minister Carole Taylor, businessmen James D. Irving and James A. Pattison and University of Calgary professor Jack Mintz who is the former president and CEO of the C.D cheap pay day loans. Howe Institute.

Flaherty says the panel’s first meeting is Tuesday in Toronto and there will be town hall meetings across the country in the new year.

He says he looks forward to receiving the council’s advice but it is not binding on the government.

Flaherty says he did not look at party ties when he went through the list of council members.

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The German government will borrow more money next year than ever before as a contracting economy hits tax revenue and inflates spending on unemployment benefits, a senior lawmaker from the ruling coalition said.

“Next year we’ll have the highest net and gross new borrowing in the history of the Federal Republic,” Steffen Kampeter, the Christian Democratic Union’s budget spokesman in parliament, said today in a Bloomberg Television interview in Berlin. Gross borrowing will be close to 340 billion euros ($479 billion) “if things go really badly,” he said.

Based on an assumption that the economy, Europe’s biggest, may shrink 3 percent next year, net new borrowing may amount to between 40 billion euros and 50 billion euros, Kampeter said. Loan commitments to Soffin, which administers Germany’s bank- rescue fund, may come on top of that, he said. That compares with the 18.5 billion euros set out in the 2009 budget.

Kampeter’s assessment is bad news for his party leader, Chancellor Angela Merkel, who made deficit reduction and a return to a balanced budget a priority. Merkel’s popularity has already slumped after international and domestic criticism over her unwillingness to spend more to mitigate what may become the worst recession since World War II in 2009, an election year.

Merkel acknowledged for the first time yesterday that the stimulus measures taken so far “are not enough,” and more steps will have to be taken in January. She indicated “a few billion” more would be spent on infrastructure such as schools.

‘Very Worrying’

“It’s very worrying, but not surprising,” David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA, said of Kampeter’s borrowing prognosis. “Every government in the universe seems to be doing the same thing. My fear is that the market might have some indigestion trying to take down the bond supply, especially if policy response to the economic slowdown starts to work next year sam day payday loan.”

The 340 billion euros in gross borrowing includes “old capital-market commitments, commitments stemming from the federal budget, commitments stemming from the automatic stabilizers and commitments we made to supply Soffin with loans if needed,” Kampeter said.

Germany’s Finance Agency, which manages government borrowing and debt, will publish the 2009 gross borrowing plan tomorrow. Kampeter said the agency’s projection will probably be below 340 billion euros. It was 220 billion euros this year and 213 billion euros in 2007.

Public Debt ‘Limits’

“All in all, there’ll be a significant tapping of the capital market,” Kampeter said. “I’m concerned that we’re approaching the limits of public indebtedness. The government is soaking up liquidity and at the same time we’re talking about a credit crunch for the private sector.”

Finance Minister Peer Steinbrueck’s budget plan for next year assumes economic growth of 0.2 percent, a projection that’s out of line with more recent predictions by the country’s leading economic institutes. The Munich-based Ifo institute and Essen-based RWI, both of which advise the government, forecast the economy will shrink 2.2 percent and 2 percent respectively.

Based on Kampeter’s assessment, new borrowing will exceed spending on investment such as road-building, violating Germany’s constitution. That would force the government to declare that the economy is “out of balance” to avoid an infringement of the law — the first time Merkel’s government will have to resort to such measures. The economy was last out of balance between 2002 and 2004, when Gerhard Schroeder was chancellor.

The Economy Ministry is scheduled to publish its annual economic report and update its economic growth forecast on Jan. 28. The Rheinische Post newspaper reported that the declaration will be made then.

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Canadian governments must intervene to prevent the loss of whole auto assembly plants to the United States, says the president of the Canadian Auto Workers.

Despite $3.4 billion in conditional emergency aid promised to Canada’s ailing auto makers Friday by the Ontario and federal governments, Ken Lewenza says excess capacity at Canadian auto plants must be protected or General Motors, Ford and Chrysler could move plants and equipment south of the border.

"If the Canadian government doesn’t do anything … you’ve got to believe that over time, our products would be moved," Lewenza said yesterday in an interview. "We don’t want GM to pick up and say, it’s been nice doing business in Oshawa but sorry we’ve got a better deal in the United States. We want to ensure that when the Americans put their legislation together, it isn’t on the backs of Canadian jobs."

Lewenza also said that thousands of jobs could still be lost even with additional aid unless the money is contingent on manufacturers keeping workers in jobs and plants open.

Lewenza’s warning comes on the heels of Federal Industry Minister Tony Clement’s announcement late Friday of the conditional $3 easy payday loan.4 billion for Canadian operations of General Motors, Ford and Chrysler based on the $14 billion (U.S.) the White House is contemplating in rescue money for the Detroit Big Three.

The Bush administration spent yesterday weighing its options, but details were scarce as to how much interim financial aid the U.S. government would provide to stave off a collapse of the troubled industry. On Thursday, Republicans in the U.S. Senate refused to pass a $14 billion (U.S.) rescue bill, throwing the future of the Big Three into doubt. GM and Chrysler have already warned they could run out of cash in a matter of weeks without immediate government aid.

But Ontario’s assembly plants are already on the brink. Chrysler’s Windsor minivan plant will be shut down for the month of January, while GM’s car plant in Oshawa is scheduled for a six-week closure starting at the same time. Lewenza said Ford’s Oakville plant is also anticipating shutting down operations for two weeks early in the New Year. The three companies employ more than 30,000 people in Ontario.

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NEW YORK–The New York Times Co. said yesterday it is in talks with lenders about debt payments due in the next two years, as the newspaper publisher struggles to weather continued declines in advertising sales.

The company says it will borrow up to $225 million (U.S.) against the value of its Manhattan headquarters to help repay debt due in May, and is evaluating assets for potential sale as it looks to boost liquidity.

"There is no doubt that 2009 will be among the most challenging years we have faced and more steps will be needed," chief executive officer Janet Robinson said yesterday ahead of a press conference.

The newspaper industry as a whole is facing hefty debt and declining ad sales as more readers flock to the Internet. On Monday, media company Tribune Co. filed for bankruptcy to cope with a crushing $13 billion in debt.

The Times says total revenue dropped 9.4 per cent in October compared with the same month a year ago.

Yesterday, Robinson said advertising trends declined further in November, particularly in the entertainment, real estate and automotive advertising categories free car insurance quotes.

In addition to its flagship newspaper, The New York Times, the company owns The Boston Globe, the International Herald Tribune and several regional newspapers.

Last month, the company slashed its quarterly dividend by 74 per cent. The move is expected to save $98 million a year but will curtail the income of its controlling shareholders, the Sulzberger family, who together own about 19 per cent of the company.

Company shares fell 50 cents, or 6.37 per cent, to close at $7.35 yesterday. The stock has lost 64 per cent of its value since trading at a 52-week high of $21.14 in April.

Associated Press

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JLL Partners Inc. of New York has unpacked a bid for the 71 per cent of Patheon Inc. it does not already own, offering US$2 per share for the international drug manufacturer.

The price – C$2.51 per share at current exchange rates – values the company's equity at about C$227 million.

It compares with Patheon's (TSX: PTI) closing price Friday of $1.07 on the Toronto Stock Exchange, with a 52-week high and low of $4.46 and 75 cents.

The stock rose 89 cents or 83 per cent to $1.96 after Monday morning's announcement.

JLL Partners, a Manhattan private equity firm with US$3.2 billion under management, noted that its offer constitutes an insider bid under Canadian securities regulations. Patheon's board will have to form a special committee and receive an independent valuation of the proposal.

Patheon, which provides development and manufacturing services to the pharmaceutical industry, acknowledged the unsolicited offer from JLL, which it said has a 29 per cent interest in the company through convertible preferred stock and restricted voting shares fast payday loans.

Patheon's management offered no immediate recommendation to shareholders in response to the JLL move, but stated that it "remains very confident in its business plan and continues to run its business as usual."

Patheon, which will release results for its fourth quarter and full financial year on Friday, lost $14.7 million in its May-July quarter, improving on a year-earlier loss of $63.1 million. Revenue was up 18 per cent to $195 million.

The results reflected an aggressive efficiency drive by chief executive Wes Wheeler since he took over last December, including cutting staff by 850 people or 16 per cent.

The fourth quarter included "repositioning" expenses of $4.4 million in severance accruals for a planned consolidation of two Ontario operations, along with downsizing costs and a $7.7-million writedown in Puerto Rico.

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