November 29, 2021

Weekly Jobless Claims Fall to Near Six-Year Low

The government reports on Thursday suggested an acceleration in job growth in early August and hinted at pockets of pricing power in the sluggish economy, which could ease concerns among some Fed officials that inflation was too low.

While data on manufacturing was less encouraging, economists were little fazed and said it merely suggested the improvement in factory activity was slower than had been anticipated.

“It looks like the weakness in employment last month was a fluke and the breadth of gains in CPI suggest that there will be less push back against tapering because of low inflation,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester Pennsylvania. “A September taper is still on the table.”

The U.S. central bank has said it plans to start trimming the $85 billion in bonds it is purchasing each month to keep borrowing costs low later this year.

Shares on Wall Street fell and yields on U.S. Treasuries jumped to a two-year high on the data. The dollar briefly climbed to a near two-week peak against the euro.

First-time applications for state unemployment benefits dropped 15,000 to a seasonally adjusted 320,000, the lowest level since October 2007, the Labor Department said. Economists had expected initial claims to come in at 335,000 last week.

The four-week moving average for new claims, which irons out week-to-week volatility, fell to its lowest level since November 2007, offering hope of an improvement in labor market conditions after hiring slowed a bit in July.

Carl Riccadonna, a senior economist at Deutsche Bank Securities in New York, said new claims and the four-week average at pre-recession levels were consistent with a pick-up in the pace of hiring, if not in August, then some time in the next couple of months.

“The critical component is going to be the August jobs report. If that comes in at least where it was in July, then this is going to keep the Fed on track to initiate tapering at the September (policy) meeting,” said Riccadonna.

Employers added 162,000 jobs to their payrolls last month, with the jobless rate hitting a 4-1/2 year low of 7.4 percent.


In another report, the Labor Department said its Consumer Price Index rose 0.2 percent, in line with economists’ expectations, as the cost of goods and services ranging from tobacco to apparel and food increased.

The CPI had increased 0.5 percent in June. In the 12 months through July, the CPI advanced 2.0 percent, the largest increase since February, after increasing 1.8 percent in June.

The push in inflation to the Fed’s 2 percent target suggested the downward drift in prices seen early in the year was over and could comfort some central bank officials who have warned on the potential dangers of inflation running too low.

Stripping out energy and food, consumer prices rose 0.2 percent for a third straight month. That took the increase over the past 12 months to 1.7 percent after core CPI gained 1.6 percent in June.

The uptick in prices fits in with Fed Chairman Ben Bernanke’s views that the low inflation was temporary. Last month, there were also increases in the prices of gasoline, transportation and shelter.

Medical care services recorded a second successive month of gains in July. Medical care, which makes up about 10 percent of the core CPI, had been subdued in April and May.

The lack of pressure on health care costs had been attributed to the expiration of patents on several popular prescription drugs and government spending cuts that have cut payments to doctors and hospitals for Medicare.

Furniture prices posted their largest decline in three years, while airline fairs fell for second straight month.

News on the factory sector was a bit downbeat, with the Fed reporting that manufacturing output slipped 0.1 percent last month, held down by a 1.7 percent fall in the production of motor vehicles and machinery.

That, together with a drop in utilities production, left industrial output unchanged in July.

Separately, the New York Federal Reserve said its “Empire State” general business conditions index fell to 8.24 in August from 9.46 in July. A reading above zero indicates expansion.

However, details of the report were fairly encouraging, with strong gains in labor market gauges. The inventory drawdown continued, which bodes well for future production.

The Philadelphia Federal Reserve, meanwhile, said its business activity index fell to 9.3 in August from 19.8 in July, amid a slowdown in new orders growth and factory jobs.

But economists do not view this survey as a good barometer of national factory activity and were optimistic manufacturing will regain muscle, supported by a strengthening housing market recovery and firming demand overseas which is pushing up domestic exports.

“Growth in Europe and a pop in exports in June suggests we might see production growth resume after a flat first half,” said Mei Li, an economist at FTN Financial in New York.

(Reporting by Lucia Mutikani, additional reporting by Paige Gance in Washington and Steven C Johnson in New York; Editing by Chizu Nomiyama)

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Banks’ Focus on Recovery Is Miring Europe’s Economic Growth

Quarterly reports by three of the biggest banks in Europe on Tuesday showed how, five years after the beginning of the financial crisis, they continue to pay for the sins and excesses of the boom years.

While the six largest United States banks earned a combined $23 billion in the three months through June, Deutsche Bank, Barclays and UBS could not manage profit of $1 billion among them. The fallout is measured not only in diminished earnings but also in the banks’ continued need to raise money to make themselves less vulnerable to risk and to set aside reserves to pay for any future legal scandals.

As the banks work their way through the rubble of the financial crisis and their own missteps, their focus on rehabilitation — rather than a full resumption of lending to businesses and consumers — continues to delay Europe’s economic rebound.

That stands in contrast to the big American banks, which despite their own legal and financial troubles were forced by the government to quickly resolve their problems. That has helped pace the United States recovery that is creating a widening growth gap between the two sides of the Atlantic.

American banks “pushed through the pain earlier than the European banks,” said James H. Gellert, the chief executive of Rapid Ratings, an independent analysis firm in New York. Now the European banks are trying to raise capital and revamp their businesses in the midst of a downturn.

The multiple challenges “not only have financial impact,” Mr. Gellert said, “they are seriously distracting to management.”

Banks around the world face growing momentum from regulations that would curtail their use of leverage, or borrowed money. The pressure is especially intense in Europe. Regulators were generally slower than in the United States to require banks to build up more capital after the global financial system all but froze up in the autumn of 2008 because those banks did not have the ability to withstand a sudden collapse in the market for mortgage-backed securities.

On Tuesday, Deutsche Bank, Europe’s biggest investment bank, reported a 50 percent decline in profit, worse than expected. More significant, it announced that it would shrink its financial holdings by 16 percent, or 250 billion euros, to reduce its exposure to risk.

The bank also added 630 million euros, or about $836 million, to a fund to cover the costs of defending against suits brought by investors who blame Deutsche Bank for losses they suffered, including some investments linked to the United States mortgage market.Barclays, of Britain, in reporting a loss, said it would raise £7.8 billion, or about $12 billion, in capital in part by selling new shares. Reporting a second-quarter loss of £168 million, Barclays said it would set aside an additional £2 billion to compensate investors after regulators ruled that the bank improperly sold them insurance and complex financial hedging products.

Antony P. Jenkins, the chief executive of Barclays, said the increase in capital would help stabilize the bank and allow it to increase its dividend to shareholders next year.

“It is early days, and there is a long way to go,” he said, “but I’m pleased with our progress.”

The Swiss bank UBS reported a nearly one-third increase in profit, but like Deutsche Bank and Barclays, its earnings were weighed down by legal costs and by pressure to build up capital reserves.

Investors duly punished Barclays, whose shares fell 6 percent, and Deutsche Bank, whose shares declined 4 percent. UBS shares rose more than 2 percent on what, on this day, looked almost like good news.

The three lenders symbolize problems in the broader European banking system, which is both a victim of the Continent’s economic malaise and a cause of it. American banks like Goldman Sachs and JPMorgan Chase have been able to ride an improving economy in the United States, but the European banks are still working through huge portfolios of damaged government bond holdings or sour real estate loans.

As the big European banks lick their wounds, their stinginess with credit is one of the main reasons that the euro zone is stuck in recession.

Jack Ewing reported from Frankfurt and Mark Scott from London.

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DealBook: German Authorities Are Said to Investigate Deutsche Bank

The headquarters of Deutsche Bank in Frankfurt.Michael Probst/Associated PressThe headquarters of Deutsche Bank in Frankfurt.

PARIS — The German central bank is investigating allegations that Deutsche Bank hid billions of dollars in losses to avoid a potential bailout during the financial crisis, people with direct knowledge of the matter said on Thursday.

The Bundesbank is sending a team to New York next week to look into the allegations, the people said, noting that while the bank was obligated to look into the matter, there was no certainty that the investigation would result in any enforcement measures. The people spoke on condition of anonymity because they were not authorized to speak publicly about the sensitive legal matter.

The investigation stems from allegations that the German lender understated the value of credit derivatives positions beginning in 2007 that were worth as much as $130 billion in so-called notional terms.

The financial positions came under severe stress at the height of the financial crisis, when many complex derivatives could not be traded at all. Had the position been properly reported, according to the allegations, Deutsche Bank would have needed a bailout from the German government. One of the country’s smaller lenders, Commerzbank, received 18.2 billion euros, or $23.3 billion, in taxpayer funds in 2009.

In contrast, Deutsche Bank has avoided the stigma of a bailout during the financial crisis. The German firm is expected to argue that its accounting at the time was in line with industry standards, and that its external auditors signed off on it.

One of Deutsche Bank’s former employees, a quantitative risk analyst named Eric Ben-Artzi, had reported the alleged abuses to the U.S. Securities and Exchange Commission through the regulator’s new whistle-blower program. Mr. Ben-Artzi is also suing the bank, claiming wrongful dismissal, and stands to gain financially if the bank is fined.

News of the Bundesbank’s involvement was reported earlier by The Financial Times. Shares of Deutsche Bank were trading higher in Frankfurt on Thursday.

Ute Bremers, a spokeswoman for the German central bank, said in a statement that the central bank did not comment on individual investigations.

‘‘You may assume that supervisors always investigate allegations that have been raised in order to verify their validity,” she added. “This is the task of banking supervisors.’’

Deutsche Bank declined to comment. Ronald Weichert, a bank spokesman in Frankfurt, referred to a December statement that noted the allegations ‘‘have been the subject of a careful and thorough investigation, and they are wholly unfounded.’’

The people making the allegations, the statement said, had ‘‘no personal knowledge of key facts and information.’’

‘‘We have and will continue to cooperate fully with our regulators on this matter,’’ the Deutsche bank statement said.

Deutsche Bank already faces inquiries and lawsuits related to its conduct before or during the financial crisis. Last month, the bank allocated an additional 600 million euros ($775 million) to cover its legal costs, a move that reduced its pretax profit for 2012 by the same amount.

The additional money was primarily a response to numerous lawsuits stemming from Deutsche Bank’s sales of mortgages and mortgage-related derivatives in the United States.

The bank has also been ensnared by the global investigation into interest rate manipulation. In November, Deutsche Bank said it had set aside money for potential penalties related to rate rigging. In total, Deutsche Bank has set aside 2.4 billion euros ($3.1 billion) to cover legal costs.

Besides raising further questions about ethical standards at Germany’s largest bank, the Bundesbank inquiry could weaken Deutsche Bank’s claim to have weathered the financial crisis better than most peers. While Deutsche Bank did not take a bailout directly from the government, it benefited from measures that the German and U.S. governments as well as central banks have undertaken since 2008 to contain the financial crisis.

Jack Ewing contributed reporting.

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DealBook: British Regulators Slow to Respond to Libor Scandal, Audit Says

Adair Turner, the chairman of the Financial Services Authority.Andrew Winning/ReutersAdair Turner, the chairman of the Financial Services Authority.

LONDON – British authorities failed to spot interest-rate manipulation by big banks because they were narrowly focused on responding to the financial crisis, according to an internal review by the country’s financial watchdog released on Tuesday.

The audit followed widespread criticism from politicians and some of the banks caught up in the scandal involving benchmark interest rates. Critics said regulators did not respond quickly enough to warnings that employees at certain banks were attempting to alter rates for financial gain.

The review published by the Financial Services Authority, the country’s regulator, said there had not been a major failure of oversight by local authorities, but it added that officials had become too focused on containing the financial crisis to analyze information connected with the potential rate-rigging.

The authority also conceded that it had failed to respond quickly to allegations of so-called lowballing, in which managers altered submissions to the London interbank offered rate, or Libor, to portray their firms in a healthier financial position. The agency added that Libor had been an area of the financial markets that had not received close attention from regulators.

“The F.S.A. did not respond rapidly to clues that lowballing might be occurring,” Adair Turner, chairman of the Financial Services Authority, said in a statement on Tuesday.

Several European banks, including Barclays and UBS, have paid multimillion-dollar fines to American, British and other international regulators related to the continuing investigation into Libor manipulation. Other large firms, including Deutsche Bank and Citigroup, remain under investigation.

The Financial Services Authority’s audit was conducted in response to claims made by politicians and the British bank Barclays that regulators had been informed several times about the potential rate-rigging, but had failed to act.

As part of a major overhaul of the Libor rate, the rate-setting process will come under the oversight of British regulators in April, just as the Financial Services Authority is divided into two separate units as part of a major overhaul of the country’s regulatory regime.

This is not the first time Financial Services Authority has come under fire since the financial crisis began. The agency has also acknowledged partial blame for its role in the bailout of the local lenders Royal Bank of Scotland and Northern Rock.

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Italian Lender Sues Deutsche Bank and Nomura

The Italian bank filed two separate lawsuits at the civil court in Florence a day after receiving €4.1 billion, or $5.3 billion, in government funds as part of a bailout. Monte dei Paschi said it was also suing Antonio Vigni, the bank’s former chief executive, and Giuseppe Mussari, its former chairman, because of their involvement in the deals.

The bank is seeking compensation for “damages sustained and to be sustained by the bank as a result of the challenged transactions,” Monte dei Paschi said in a statement on its Web site.

Rob Davies, a spokesman for Nomura in London, and Kathryn Hanes, a spokeswoman for Deutsche Bank, declined to comment on the lawsuits.

Monte dei Paschi revealed last month that it had lost €730 million on three transactions that were used to conceal the size of the bank’s difficulties. The bank said Friday that the lawsuits concerned two of the three transactions that were responsible for most of the losses.

Monte dei Paschi said one lawsuit related to Mr. Mussari, Nomura and a financial transaction in 2009 called Alexandria. The other lawsuit refers to Mr. Vigni, Deutsche Bank and a trade called Santorini, which took place in December 2008.

Lawyers for Mr. Mussari and Mr. Vigni could not be reached for comment.

The two transactions have been in the spotlight since January, when news spread that Fabrizio Viola, the bank’s new chief executive, had found an exchange of letters from Nomura to M.P.S. hidden in a safe. The bank consequently started a review of its financial portfolio in October, which led to a revision of its 2012 final results.

The Alexandria transaction caused a €273.5 million loss, Santorini resulted in a loss of €305.2 million, and the third transaction, called Nota Italia, lost €151.7 million, M.P.S. said.

Italian prosecutors have started an investigation into why this 541-year old bank ran into trouble. The local authorities have long asked for those responsible for the bank’s demise to be held accountable.

The bank’s problems began in 2008, when it acquired the regional lender Antonveneta for €9 billion, a sum regarded by analysts as far too large. Short of cash, Monte dei Paschi then tried to raise money without compromising its capital base and concealed certain features of the transaction, according to the Bank of Italy, the country’s central bank. The Siena magistrates are now looking into allegations of bribery related to the Antonveneta deal.

Alessandro Profumo, Monte dei Paschi’s chairman, and Mr. Viola, who took over as chief executive last year, are now working to repair the bank’s finances and reputation. They replaced executives, closed branches and announced the elimination of thousands of jobs.

The bank had to ask for a government bailout because its troubles had left it short of the minimum capital requirement set by regulators.

Gaia Pianigiani reported from Rome. Jack Ewing contributed reporting from Frankfurt.

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Today’s Economist: Simon Johnson: The S.E.C. at a Turning Point


Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The job of head of enforcement at the Securities and Exchange Commission is now open. The Obama administration should press for the appointment of Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, to this position. Unfortunately, the administration has given no indication it will do so, leaving the impression that it is likely to be business as usual for the next four years, with regulators who are less than tough on the industry.

Today’s Economist

Perspectives from expert contributors.

(I have also endorsed Mr. Barofsky as a chairman of the S.E.C.; clearly, I want him at the commission one way or another.)

The departing director of the division of enforcement at the S.E.C. is Robert Khuzami, a former general counsel for the Americas at Deutsche Bank, a job he held from 2004 through early 2009. Although Mr. Khuzami was once a distinguished prosecutor, his appointment to the S.E.C. turned out to be a mistake because Deutsche Bank was so deeply involved in the securitization morass that led to the financial crisis of 2008.

(For more details, I recommend this Web page, with information collated by UniteHere, a trade union. You should also read this assessment by Yves Smith on her nakedcapitalism blog.)

Mr. Khuzami has vigorously defended his record and insisted it would have been “unwise” to press Wall Street firms and their executives for admissions of guilt. Whether the S.E.C. failed to prosecute the executives who made the key decisions because it had no case or because of Mr. Khuzami’s views, we may never know.

In addition, concerns continue to grow regarding the extent of mismanagement and illegal activity at Deutsche Bank during Mr. Khuzami’s time there; Mr. Khuzami has recused himself from the latest S.E.C. investigations.

According to Jordan Thomas, a lawyer representing one of the whistleblowers from Deutsche Bank, as quoted in the Financial Times,

During the financial crisis, many financial institutions faced an existential threat and the evidence suggests that Deutsche Bank crossed the line by substantially inflating the value of its credit derivatives portfolio – the largest risk area in its trading book.

This is precisely the kind of complex case that requires a skilled prosecutor with detailed knowledge of how the industry works. At the same time, it cannot be someone who has worked for a major financial institution either directly or as its outside counsel. The potential for a perceived conflict of interest is too great.

In the past, we would have looked to the United States Attorney’s Office for the Southern District of New York for the right kind of talent. But in the last few years this office has focused much more on insider-trading cases, with much of its evidence collected through wiretaps. The human capital that is capable of directly prosecuting and winning complicated securities fraud cases is much depleted.

Fortunately, Mr. Barofsky is at hand and is an excellent choice for head of enforcement at the S.E.C. (though surely not the only one so qualified). A career prosecutor who worked for the United States Attorney’s Office in a previous era (through 2008), Mr. Barofsky successfully pursued mortgage fraud cases and complex securities fraud and accounting fraud cases, including against the most senior executives of the former commodities giant Refco. He also worked on drug-trafficking cases, going up against some of the most dangerous criminals in the world.

In the fall of 2008, Mr. Barofsky, a Democrat, was nominated by the Bush administration to become the independent lawyer inside the Treasury Department (special inspector general, in Washington parlance) responsible for supervising the implementation of the divisive Troubled Asset Relief Program, or TARP. He was confirmed with bipartisan support and continued to enjoy such support until he stepped down in early 2011.

At TARP, Mr. Barofsky investigated and studied carefully almost every corner of the financial system, with the goal of preventing fraud and abuse in the use of taxpayer money. He prosecuted people who broke the rules and who were trying to steal from the government (and from you).

Remarkably, Mr. Barofsky had to contend with initial resistance from the Treasury team led by the secretary, Henry M. Paulson Jr. The extent and sophistication of resistance to Mr. Barofsky’s sensible compliance recommendations increased dramatically once Timothy F. Geithner was confirmed as Treasury secretary.

The Treasury philosophy was that all of its financial stability policies were intended to “foam the runway” for banks – making it easier for them to earn their way out of the crisis. The Obama administration’s much-hyped mortgage-modification program, for example, was designed and implemented in ways that were always going to be harmful to many homeowners, a point that Mr. Barofsky and his team made before, during and after this became painfully evident to the rest of us.

Mr. Barofsky understands the details and knows how to build an office that combines effectiveness and integrity with its own investigative capability. His reports will long stand out as beacons of clarity. (The TARP special inspector general reports are on the Web; the Barofsky reports are from February 2009 through January 2011.)

Another advantage to Mr. Barofsky’s appointment is that we would not have to fear that he would later rotate into a senior position on Wall Street. As he made abundantly clear in “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street,” Mr. Barofsky has burned all those bridges already.

We need an honest and experienced prosecutor to oversee enforcement at the S.E.C. This person must be beyond reproach and able to tackle wrongdoers, no matter how powerful their political connections or how complicated their cover story.

Fortunately, we have Mr. Barofsky. It is no time for business as usual at the S.E.C.; it sorely needs an effective head of enforcement.

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DealBook: A Dose of Realism for the Chief of J.C. Penney

J.C. Penney reported a $123 million in the latest quarter.LM Otero/Associated PressJ.C. Penney reported a $123 million loss in the latest quarter.

You should know you have a problem when sales at your stores fall 26.1 percent in one quarter.

That was the surprising decline J. C. Penney reported last week when it disclosed that it had lost $123 million in the previous three months.

However, inside the fantasy world that is the executive suite of J. C. Penney, apparently it was just part of the plan. Ron Johnson, the former head of Apple’s retail business who was handpicked to turn around J. C. Penny a little over a year ago, was in full spin mode, brushing off the challenges and promoting the success of the company’s store renovation plan as “gaining traction with customers every day and is surpassing our own expectations in terms of sales productivity, which continues to give us confidence in our long-term business model.”

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To gain a more realistic view of J. C. Penney’s prospects, however, here’s the Deutsche Bank analyst Charles Grom: “Trends at J. C. Penney are obviously getting worse, not better, and we are becoming more and more convinced that sales in 2013 will also decline, which could lead to a going-concern problem next year.”

The company’s stock has fallen nearly 50 percent since the beginning of the year. Even its online sales, through, fell 37.3 percent last quarter from a year ago.

Yet Mr. Johnson, a well-regarded and charismatic retailer who worked at Target before his meteoric rise at Apple, appears to be trying to mimic Steve Jobs and create what Mr. Jobs’s biographer, Walter Isaacson, called a “reality distortion field.”

Mr. Johnson has spent the last several months trying to persuade investors that his transformation of J. C. Penney was the equivalent of Mr. Jobs’s efforts to turn around Apple a decade ago.

“You know, I watched this movie before. When I joined Apple in 2000, Apple was a company dwindling. Everyone said to me, ‘What are you doing there?’ ” Mr. Johnson told investors in September. “Apple wept through 2002 and I think sales were down 38 percent as we dreamed about becoming a digital device company. But Apple invested during that downturn. That’s when Apple built, started to build its chain of stores. That’s when Apple transitioned to Intel. That’s when Apple started its app division. That’s when Apple imagined and built the first iPod.”

O.K., Mr. Johnson, but that was Apple. And J. C. Penney is not Apple — and let’s be honest, it can never be Apple. The company doesn’t make its own magical, revolutionary products that bring tears of joy to its customers. It is a low-end department store that Mr. Johnson is hoping to turn into a slightly higher-end department store that sells clothing made mostly by other manufacturers.

Still, Mr. Johnson has sought to remake the company quickly, perhaps too quickly, by eliminating promotions and discounts, moving the stores more upscale, re-branding the company as JCP and putting in place a “fair and square” pricing model. (J. C. Penney is, however, putting on a special sale for the holidays.)

Yet the renovations are hardly finished — or in some cases even started. Only 11 percent of its stores’ floor space has been remodeled with his successful specialty-store-within-a-store concept in which he has opened up outposts for brands like Levi’s, Izod, Liz Claiborne and the Original Arizona Jean Company.

J. C. Penney may have been dying a slow death before Mr. Johnson’s arrival — some rivals used call it “death by coupon,” given the retailer’s penchant for discounts — but the company’s decline has only accelerated.

But the lessons, and successes, of the rollout of Apple stores are proving that they do not apply to Penney. While the customer experience at Apple is in a class by itself, and Mr. Johnson should rightly receive credit for that, the success of the stores was in large part a function of stunning products with a fan base that would stand outside stores for days in the rain to get their hands on them without any chance of a discount. Do you think there are customers who will ever stand outside J. C. Penney overnight for the next Liz Claiborne sweater? (J. C. Penney bought the Liz Claiborne brand last year.)

“Ron Johnson’s remake of JCP has assumed the consumer — the only one who matters — is the one who shops at Target or Macy’s or Nordstrom’s. Instead of pivoting on and strengthening the historic JCP brand, Johnson’s decided to recreate the Target and Apple wheel, a move akin to Toyota suddenly deciding it’s Porsche. In short, a ridiculous and condescending move,” Margaret Bogenrief, a partner at ACM Partners, a boutique crisis management and distressed investing firm, recently wrote.

There is something romantic about watching Mr. Johnson try to remake a dying classic icon. At some gut level, you have to root for Mr. Johnson. He’s making a bold bet. Transitions are inherently painful. And everyone loves a great comeback story.

Here’s the good news: In the stores that have been transformed, J. C. Penney is making $269 in sales per square foot, versus $134 in sales per square foot in the older stores. So the model itself is working. And Mr. Johnson has the support of the company’s largest shareholder, Pershing Square’s Bill Ackman, who personally recruited Mr. Johnson. If Mr. Johnson were starting with a blank slate, it might be a great business.

Mr. Ackman declined to comment. J. C. Penney did not make Mr. Johnson available.

Now here’s the bad news. Mr. Johnson still has to convert nearly 90 percent of his square feet of shopping space. That will very likely take $1 billion and as long as three years. If the sales decline that occurred last quarter accelerates, the company could run out of money. It now has about a half-billion in cash and access to a credit line for as much as $1.5 billion.

Of course, it remains possible that Mr. Johnson, who people close to him say is a realist, could always decide that the transformation isn’t working and change course to return to the old model of J. C. Penney and save all that money remodeling. But that would be a huge setback.

The question Mr. Johnson may be asking himself now is: What would Steve do?

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DealBook: Deutsche Bank Blames Weak Euro for Drop in Second-Quarter Profit

Deutsche Bank named Anshu Jain, left, and Jürgen Fitschen as future co-chiefs.ReutersDeutsche Bank’s co-chief executives are Anshu Jain, left, and Jürgen Fitschen.

FRANKFURT — Deutsche Bank, Germany’s largest lender, said on Tuesday that earnings plunged more than expected in the second quarter after a weak euro led to an increase in operating costs in the United States and Britain.

Profit fell more than 40 percent to 700 million euros, or $844 million, the bank said in a preliminary release that offered little detail. The bank’s operating expenses not counting interest rose 5 percent from a year earlier, to 6.6 billion euros.

The increase in costs “is mainly a result of the bank’s U.S. dollar and pound sterling cost base being negatively affected by the weakening of the euro,” the bank said. The euro was trading at slightly more than $1.20 Tuesday, near a two-year low.

The preliminary earnings report demonstrates the challenges facing Anshu Jain and Jürgen Fitschen, who took over in May as co-chief executives of the bank, replacing Josef Ackermann, who retired. Deutsche Bank shares fell 2.1 percent Tuesday to close at $28.17 in New York.

In past quarters, Deutsche Bank had lower trading revenue as its clients stayed away from financial markets hurt by the euro zone debt crisis. The bank said that revenue in the second quarter fell to 8 billion euros from 8.5 billion euros a year earlier.

Deutsche Bank is among the institutions under scrutiny by authorities in connection with manipulation of Libor, the London interbank offered rate, a benchmark used to help determine the borrowing rates for $750 trillion worth of financial products, including student loans and mortgages.

After a rival, Barclays, agreed in June to pay $450 million to resolve accusations against it by American and British authorities, there had been speculation that Deutsche Bank would set aside money to cover a possible settlement. But the bank did not mention the Libor investigation in its one-page statement Tuesday.

Nor did it address speculation that it planned large cuts in its investment banking unit, previously run by Mr. Jain. The bank said only that it planned to reduce its level of risk to help restore profit.

Deutsche Bank said it set aside 400 million euros in the quarter to cover possible bad loans, down from 464 million euros a year earlier. Profit before taxes was about 1 billion euros, down from 1.8 billion euros, the bank said.
It said it would provide precise figures and more details about the quarter on July 31.

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DealBook: Sberbank of Russia in Talks to Buy DenizBank for $4 Billion

A Sberbank branch in Moscow.Andrey Rudakov/Bloomberg NewsA Sberbank branch in Moscow.

LONDON – Sberbank of Russia is in exclusive talks to buy DenizBank, a Turkish subsidiary of the struggling French-Belgian lender Dexia, for $4 billion, according to people with direct knowledge of the matter.

The deal would give Sberbank, controlled by Russia’s central bank, access to the fast-growing Turkish market, which has continued to grow despite the effects of the European debt crisis.

The Russian bank and Dexia, which received a multibillion-dollar bailout from the French and Belgian governments last year, are expected to announce late on Thursday that they are in exclusive talks, one person said, who spoke on condition of anonymity because he was not authorized to speak publicly. The discussions are expected to last until mid-June.

Dexia’s disposal of DenizBank is part of the firm’s efforts to sell off assets, after the financial firm received a bailout from authorities last year and moved to sell off assets.

The British bank HSBC had been in the running to acquire DenizBank, but pulled out of the process, according to another person with direct knowledge of the matter.

Sberbank’s efforts to expand into Turkey follow a similar move into Eastern Europe earlier this year when the Russian bank bought Volksbank International, a subsidiary of the Austrian lender Oesterreichische Volksbanken, for 505 million euros ($636 million).

Rothschild and Deutsche Bank are advising Sberbank on the deal.

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In Europe, Juggling Image and Capital

That includes Santander, the Spanish banking giant that European regulators say has the biggest capital hole to fill: at least 15 billion euros.

So why, then, is Santander still planning to pay its shareholders 2011 dividends worth at least 2 billion euros in cash and even more in stock?

That question goes to the heart of the economic challenge that Europe faces in the year ahead. A combination of government austerity, and the imposition of bigger capital safety cushions that are leading banks to retrench, seem all but certain to plunge the Continent back into recession less than three years after emerging from the last one.

But many banks are taking actions that will only intensify the blow. To preserve their allure as global brands, while trying to compensate for their battered share prices, big European banks like Santander remain intent on maintaining rich dividend payouts to shareholders. At the same time, they are selling assets, curbing lending and taking other belt-tightening measures to satisfy regulators’ demands for more capital.

“Our dividend is a sign of our expected future profits,” said José Antonio Alvarez, the chief financial officer of Santander. “Unless our expectations change we try not to cut the dividend.”

Santander, though by many measures the most generous, is not the only bank paying dividends as it scrambles to raise capital.

Its rival, the Spanish lender BBVA, plans to pay out nearly half its profits to shareholders, despite being under regulators’ orders to raise 6.3 billion euros in capital. To a lesser but still significant extent, Deutsche Bank and BNP Paribas will also be paying out dividends as they try to take in money to build their capital cushions.

All this is a sharp contrast to the way capital-short banks in the United States slashed dividends to conserve cash during the depths of the financial crisis that followed the Lehman Brothers collapse in 2008. The American government also injected cash into the banks, as Britain did with its weaker institutions.

So far, European governments have shown no inclination to do likewise for their banks. And critics say the contrast with the American experience shows how much European regulators are out of step, or even out of touch, with the banks they supervise — with potentially disturbing ramifications for the European economy.

“I do not think Europeans understand the implications of a systemic banking crisis,” said Richard Koo, the chief economist at the Nomura Research Institute in Tokyo and an expert on the financial stagnation in Japan in the 1990s. “When all banks are forced to raise capital at the same time, the result is going to be even weaker banks and an even longer recession — if not depression.”

A paper Mr. Koo wrote on the subject has gone viral on the Web, with many picking up on his recommendation that the banking crisis will not be solved until European governments inject large amounts of money into their banks.

“Government intervention should be the first resort, not the last resort,” Mr. Koo said in an interview.

There is little doubt that European banks need shoring up right now. That fact was made clear Wednesday, when 523 banks tapped the European Central Bank for a record 489 billion euros (nearly $640 billion) in loans. Compared with their American peers, they have been much more dependent on borrowing in recent years to finance their lending binges.

On average, European banks’ loan books exceed their deposits by 1.2 times. In the United States the average loan-to-deposit ratio is 0.70. The upshot is that it will probably take much longer for Europe’s banks to unwind their bad loans and debt than it has for American banks.

The European Banking Authority, after a third round of stress tests in October, has ordered Europe’s fragile banks to raise more than 114 billion euros in fresh cash in the next six months. By June 2012, the region’s financial institutions will need to increase their so-called core Tier 1 capital ratio — the strictest measure of a bank’s ability to resist financial shocks — to 9 percent of assets.

That ratio, higher than the 5 percent preliminary target that the Federal Reserve set for American banks this week, reflects the acute capital strains that European banks are facing.

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