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BAILOUT KINGS

October 15, 2007 — A group of the biggest U.S. banks are ready today to roll out a $100 billion bailout plan to jump-start the wrecked credit mar- ket - but it could trigger new rifts in the financial fraternity.

After a weekend marathon of prodding by Treasury Secretary Henry Paulson, Citigroup, JPMorgan Chase and Bank of America plan to unveil a rescue vehicle that will cart off the unwanted junk mortgages clogging up credit markets and wiping out billions in profits at Wall Street banks and elsewhere.

Some investors believe the move - slated to be announced prior to the opening of markets - was necessary to prevent further damage to the economy here and abroad, The Times of London reported.

The rescue - almost 20 years to the day from the Street’s Black Monday of Oct. 19, 1987 - is expected to involve a commitment to set up a $100 billion pool to buy risky mortgage securities and prevent their wholesale dumping.

“Treasury and the banks are showing they’re willing to deal with this directly,” said Tony Crescenzi, chief bond-market strategist at Miller Tabak in New York. “They’re taking nothing for granted. This will help to deaden the speculative forces.”

Such unity, though, doesn’t appear to extend to investment banks, which are taking a back seat to Citi & Co. - the rescue leaders who have exclusive access to the Federal Reserve’s discount window of cheap emergency cash.

That doesn’t sit well with the likes of Goldman Sachs, Morgan Stanley and Bear Stearns. Insiders told The Post these back-seat banks are unhappy about the disadvantage because they’re being asked to take on the riskiest parts of the rescue - the so-called “mezzanine” tranches.

These firms are expected to hold out for extra compensation to take on the added risk, banking sources said.

The bailout comes amid fears that the credit crunch is getting worse and threatens to eliminate all credit possibilities for people who aren’t solidly middle class or above, dragging down the economy more than forecast, insiders said.

Banks face the danger of liquidating hundreds of billions of weak mortgage securities on the open market at steep discounts, triggering a likely and immediate collapse of that market.

The rescue amounts to the biggest bailout on Wall Street since 1998 when Alan Greenspan, ex-head of the Fed, pushed seven investment banks to prevent the hedge fund Long Term Capital Management from collapsing and taking a big part of the economy’s plumbing along with it.

The shaky mortgages have been carried in separate entities called structured investment vehicles (SIVs), which are affiliated with various banks but generally kept off the books unless they seize up.

The SIV entities were borrowing money in the short-term market at lower rates and plowing it into higher-yielding mortgage securities for a profit. The system fell apart when homeowners began defaulting on mortgages in record numbers, wrecking the SIVs’ cash flows used to repay pension funds, mutual funds and other investors.

Citigroup has most at stake, with about $100 billion in seven SIVs, or one-quarter of the world’s SIV assets.

Insiders said the new fund, dubbed Master-Liquid Enhancement Conduit (M-LEC), would give banks a temporary clean slate and a timeout from the crunch.

Questions lingered, however, about how the fund would resolve troubled mortgages, how profits will be shared, how the acquired paper would be priced and how long the rescue project would cleanse tainted paper from ledger sheets of banks.

Insiders said Paulson had reached out to other banks, including HSBC and Barclays, to have them throw in with the pool.

Merrill: Credit Crisis Good For BRIC Stocks

Spillover from the U.S. subprime meltdown battered emerging markets even though they have little if any exposure to the U.S. mortgage market.

But emerging markets stand to be benefit from the global credit crunch as long as there isn’t a recession, says an investment strategy report released by Merrill Lynch Wednesday. And its analysts do not see one on the horizon.

“Nominal GDP growth of 12% in emerging markets should be more than sufficient to deliver the consensus EPS growth target of 15% next year,” the report said.

Fundamentals are strong, yet emerging markets are undervalued, underowned, undercapitalized and underleveraged, Merrill finds.

“Equity bear markets typically occur when central banks are combating inflation with higher rates. The current (emerging market) bull market was born at a time of great deflationary concern; we still think it will end at a time of much higher inflation. Second, (emerging markets) in stark contrast to 10 years ago have a massive surplus of savings,” Merrill’s report said.

Foundation Built On BRICs

The BRIC countries (Brazil, Russia, India and China), in particular, the consumer and infrastructure sectors, will be the sweet spot next year thanks to higher global inflation and strong domestic demand. Merrill believes these are two contrarian consequences of the current credit crisis.

SPDRs S&P BRIC 40 () and Claymore/BNY BRIC () play the four fast-growing markets with different weightings of each country.

The SPDRs ETF weights stocks from China with 42.6% of assets, Brazil 25.1%, Russia 24.5% and India 6.4%. The 75-stock Claymore fund puts Brazil on top with a 45.9% weighting, followed by China at 35.8%, India 13.6% and Russia 4.5%.

The top three sectors in both funds are energy, financials and telecom. Claymore caps energy at 25% of assets, while SPDRs weights it at 39%. Claymore has heavier weightings in materials and technology.

Emerging Recovery

Chinese stocks led a rebound off the summer lows. A major holding in both funds, China Mobile () gained 16% last week and tacked on another 1% this week. China Life Insurance () flew 19% last week and another 6% so far this week. Chinese oil giant CNOOC () and China Petroleum & Chemical () cooled off this week after gains of 15% and 14%, respectively, last week.

Brazilian mining giant Companhia Vale do Rio Doce () surged 19% and oil producer Petroleo Brasileiro () spiked 10% last week to lead Brazil’s markets higher.

Russian stocks joined the bandwagon Thursday with a 11% jump in VimpelCom () and a 5% climb in Mobile TeleSystems. () The two telecom firms sprang 11% and 8%, respectively, last week.

Stocks On Track For Higher Open

Stock futures pointed to a higher open Thursday, following a surprising drop in jobless claims and sprightly retail data.

The Nasdaq rose 9 points vs. fair value, the S&P 500 4 points and the Dow 47 points.

In economic news, new jobless claims unexpectedly fell by 19,000 last week to 318,000, the lowest since the week ended Aug 4, after trending higher in recent weeks. Economists expected 330,000.

And productivity in the second quarter was revised up to a 2.6% annual rate from an initial estimate of 1.8%. Unit labor costs were revised lower to a 1.4% pace from 2.1%, easing inflation pressures.

At 10:00 a.m. ET, the ISM services index for August will be released. Economists expect a dip to 54.5 from July’s 55.8.

The European Central Bank left interest rates unchanged at 4% and injected $57.7 billion into the banking system.

Retailers reported stronger-than-expected same-store sales in August. That’s good news, but only with the day’s economic data, lessens the need for a Fed rate cut.

Wal-Mart () climbed about 3% in pre-market trading. The world’s largest retailer reported a 3.1% rise in August same-store sales, boosted by back-to-school shopping. Analysts expected a 1.5% rise.

Board shop Zumiez () said same-store sales surged 17.4%, also double estimates. But the stock edged lower in pre-open trade.

American Eagle Outfitters () rose about 1% before the open. The teen apparel retailer reported a 9% jump in August same-store sales, beating views.

Group mate Abercrombie & Fitch () also topped estimates.

Meanwhile, Aeropostale () delivered a 1.7% rise in same-store sales, but that was below analyst estimates.

Elsewhere, J. Crew () dropped 7% in the premarket. Late Wednesday, the clothing retailer reported Q2 earnings above views, but its sales were a little shy. The guided full-year profit of $1.42-$1.46 a share vs. views of $1.45.

Spanish GDP growth seen slowing to around 3 pct over next 2 yrs - Ordonez

MADRID (Thomson Financial) - Bank of Spain Governor Miguel Angel Fernandez Ordonez said that Spain’s GDP growth will slow to just over 3 pct over the next two years, from 3.9 pct in 2006, and that he predicts GDP growth in the first quarter at around 4 pct.

Last week, the government also said that it forecasts first quarter GDP at around 4 pct, and it raised its GDP growth forecast for 2007 to over 3.5 pct year-on-year from the previous forecast of 3.4 pct.

Speaking to reporters after addressing Parliament, Ordonez said the European Central Bank considers the current 3.75 pct benchmark interest rate as “still on the accommodative side.”

Addressing questions on today’s stock market fall amid reports that the housing market bubble is about to burst, Ordonez said mortgage loan growth, while slowing, is still at important growth levels.

“I think what we are seeing is a gradual slowdown,” he noted.

tfn.europemadrid@thomson.com

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Fishy pair in door-to-door seafood scam

ROGUE fishmongers are targeting Edinburgh with a scam which has already cost one man hundreds of pounds.

The pair have been going door-to-door in recent days, reportedly using “high pressure” sales techniques. The fish they sell are overpriced and thought to be out of date, sparking health concerns.

Trading Standards officers also believe the fish may not be all they seem, as a similar scam last year saw people duped into buying what they thought were monkfish fillets but which turned out to be Vietnamese catfish.

The men involved have called on homes in Inverleith, charging 8 to 12 for 400g of fish - around double the high street price.

One man was said to have bought almost 300 worth after being pressured by the salesmen.

The city’s environment leader, Councillor Robert Aldridge, said: “Regrettably there will always be unscrupulous individuals willing to take advantage of vulnerable residents.”

The men involved had north-east English accents and were wearing jumpers with “North Eastern Fisheries” embroidered on them. They are believed to be trading from a white van with “Sarrillion” on the side.

This description has convinced trading standards officers that they are the same men who carried out a similar operation in Portobello last year.

At that time, one woman spent more than 300 on salmon, sea bass, haddock and cod from the unnamed company, but when the produce arrived at her home, not one of the varieties was included.

Jonathan Croan, manager of J Brown Fishmongers on Montague Terrace, said: “The concern for people would be that these men probably don’t have a licence, and so there is no telling what state the fish is in, or where it came from.

“The prices they are charging sound extortionate.”

Eddie Kwok, who owns Eddie’s Seafood Market in Marchmont, said the difference between Vietnamese catfish and monkfish would be difficult to spot if the fish had been filleted, but said the taste would be very different.

“The monkfish here is a seawater fish, whereas the Vietnamese catfish is a freshwater fish, and so the difference in taste would be quite obvious,” he said.