Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Stocks edge higher on bank bounce
ByTelis Demos in London
Copyright The Financial Times Limited 2010
Published: July 27 2010 09:12 | Last updated: July 27 2010 18:14
http://www.ft.com/cms/s/0/1bd5634e-994c-11df-9834-00144feab49a.html


Tuesday 18.05 BST: A rising faith in banks is helping equity markets inch forwards, but worries about the global economic recovery are keeping a lid on risk appetite.

The FTSE All-World index is up 0.2 per cent, off its session peak but on track for its highest close since mid-May. The dollar is also rebounding soundly against the yen and investors are selling safe haven bonds, but, in a sign that growth fears persist, commodities are slipping.

Banks and financials are single-handedly holding up gains in equities, extending their rally since the release of the European stress tests. The FTSE Global Bank index is higher by 2.7 per cent following strong earnings from Deutsche Bank and UBS, as well as news overnight that new, tighter Basel III capital rules will be delayed.

Credit markets are also continuing to express confidence in banks. Spreads on financials’ debt have narrowed since Friday’s release of the stress tests. Markit’s iTraxx Senior Financials index, which measures prices of insurance against bonds’ default, is down 8 per cent, now to its lowest level in three months.

Yet even with banks potentially on better footing, investors are behaving as if the global economy still has a long way to go. US home prices advanced in May more than expected, according to the latest Case-Shiller index of prices, but remain nearly 30 per cent below 2006 peak prices. Consumer confidence also fell in July, and a regional branch of the Federal Reserve reported peaking manufacturing activity. Wall Street stocks gave up early gains after the survey came out, and the S&P 500 index is down 0.2 per cent.

True, the economic picture is looking relatively better in Europe, but it is also increasingly wobbly in China. The FT reported today that senior officials in China estimate that almost one-fifth of the $1,135bn lent to local governments is in danger of default. Meanwhile, the country’s central bank said that the economy was definitely slowing, though it did note inflation pressures would also moderate. Japanese bonds yields fell their lowest since the financial crisis began.

The task for bolstering risk appetite again falls to US companies, which have of late provided bursts of good news to power gains in late rallies. DuPont, the chemicals maker, reported a tripling of profits, helping to spark stocks’ earlier gains. But halfway through the reporting season, with the S&P attempting to press forward to price levels really only attractive to bulls, the bloom may be off the rose for corporate earnings. (See Market Eye.)

“The numbers should be taken with a grain of salt, and one must be careful when trying to draw conclusions based on the percentage of beats. Below the surface, the earnings reports continue to confirm ... that this recovery is anaemic at best,” said Tom Porcelli, US market economist at RBC Capital Markets.

The Market Eye

The earnings season has been encouraging, with 86 per cent of US companies and 60 per cent of their European counterparts beating profit forecasts. But investors are used to that, after a similar performance in previous quarters.

The real catalysts are now companies’ future projections, not how well they did in the past – and those are not looking quite as rosy as might have been expected. Upwards earnings revisions have actually slowed, with 2011 projections now below where they began in July, according to figures from Barclays. Analysts have shaved almost 50 cents off their S&P 500 earnings target in just a few weeks.

The reason is a disappointment in revenues: While companies have a beat-to-miss ratio of 7:1 for earnings, they have a ratio of just 3:1 with revenues, according to Deutsche Bank. Final sales are what impress at the moment.

• Europe. Economic news continued to support risk-taking. German consumer sentiment topped expectations, and UK retail sales in July were reported to jump by the most in six years. The FTSE 100 index was up 0.3 per cent, while the broader Eurofirst 300 index was 0.5 higher. Spain’s Ibex index was up 1.3 per cent. The Athens composite index was up 4.1 per cent, its best one-day gain since May, to a six-week high.

Banking shares surged after UBS reported a swing to a second-quarter profit on a rebound in retail operations. Deutsche Bank also reported profit growth, similarly noting a retail uptick, and released more information about its sovereign risk exposure. That cheered traders who see transparency as a confidence-building measure.

Keep in mind, however, that a key measure of banking risk also rose. The 3-month Euribor lending rate added 0.4 basis points. The move had only a brief impact on shares, as it has risen now for more than 40 sessions in a row.

• Asia. Shanghai markets were lower on fears about the banking sector, with the SSE Composite index falling 0.5 per cent. Japanese stocks also tumbled after another day of rises for the yen hit exporters. The Nikkei 225 index was down by 0.1 per cent.

However, the Hang Seng index in Hong Kong was up 0.6 per cent and the broader FTSE Asia-Pacific index was 0.4 per cent higher.

Mumbai’s Sensex index reversed its recent laggard trend to rise 0.3 per cent. India opted to raise rates again and even surprised markets by also lifting its reverse repo rate.

• Forex. Contrary to typical market patterns, an upswing in the dollar is being greeted as sign of rising risk appetite. Fears that the US economy may slow, and that the Fed could further ease monetary policy, has scared away haven flows of late, chasing up the yen. So then yen’s tumble and dollar’s rise today is a positive sign.

The dollar index, which measures the buck against trade-weighted basket of currencies, broke through its 200-day moving average and is up 0.2 per cent. The yen is down by 1.1 per cent against the greenback.

Trading tightly with the dollar, the euro is also up against the yen, by 1.1 per cent, to Y114.05, its highest since May. Sterling is stronger against the dollar, supported by UK economic data. The pound is up 0.5 per cent, to $1.5565, a fresh 13-week high.

• Debt. Though equities are softening, US Treasury yields are rising as investors embrace risk in the bond market. Ten-year US Treasury bond yields are up 6 basis points, at 3.05 per cent, a two-week high. Benchmark German euro Bund yields are flat, though UK Gilts are up 1 basis points to 3.53 per cent.

Japanese 10-year bonds, however, fell to their lowest level since the financial crisis, down 1 basis point to yield 1.05 per cent, as jittery Asian investors sought a risk haven.

“Peripheral” European debt is mixed. Greek two-year bonds are higher, but benchmark Spanish debt and Portuguese bonds are in demand. Hungary enjoyed another successful auction, which pushed down yields and led to a 1.4 per cent gain for the forint.

Sovereign credit default swaps are also tightening as bondholders give a vote of confidence to banks’ ultimate barrier against collapse, their governments.

• Commodities. Oil has broken out of its tight range, falling 2.1 per cent to $77.47 on fears for energy demand in the US and China. In a reversal of Monday’s move, weather in the US Gulf is an additional bearish influence, after the looming tropical storm was downgraded by meteorologists and reached the region without incident.

The broader commodities complex is softer, fearing Chinese slowdown, with copper off a May high, down 1.1 per cent at $3.18 a pound in Nymex electronic trading.

Gold is also weaker, falling sharply late by 2.1 per cent to $1,158 an ounce, a 10-week low, raising further questions about possible liquidation of funds in that market.



India raises rates by more than expected
ByJames Lamont in Mumbai
Copyright The Financial Times Limited 2010
Published: July 27 2010 07:34 | Last updated: July 27 2010 07:34
http://www.ft.com/cms/s/0/69f31b3a-9946-11df-9834-00144feab49a.html


India’s central bank raised interest rates more aggressively than expected on Tuesday in the face of double-digit inflation and a strengthening domestic economy.

The rate rise was the second in a month as India unwinds an ultra-loose monetary policy adopted to weather the global financial crisis. In recent months India has stood alongside Australia as one of the most aggressive monetary tighteners among Group of 20 nations as its economy grows powerfully at 8.5 per cent.

The Reserve Bank of India pushed the reverse repo rate, the rate at which the central bank absorbs excess cash, higher than forecast, increasing it by 50 basis points to 4.5 per cent. In line with most forecasts, the RBI also raised the repo rate, the rate at which it lends to commercial banks, by 25 basis points to 5.75 per cent.

“Inflation is the number one priority for the RBI, and they are making it clear that they will do what it takes to get price pressures under control,” said Brian Jackson, senior strategist at the Royal Bank of Canada.

He said that the RBI still had more work to do in the coming months and would probably raise the repo rate by another 50 basis points before December. Another adjustment of 25 basis points in the repo and reverse repo rates is expected at the next monetary policy review in September.

The government has pledged to reduce India’s wholesale price index inflation, which has run in the double digits for five months, to less than 6 per cent by the end of the year. Some analysts are less optimistic. They forecast that inflation will remain in the double digits until November in spite of good rains easing agricultural prices.

While a number of economists warn that India has maintained a loose monetary stance for too long, local business lobby groups have argued against a rapid rise in interest rates that might hurt India’s fast-growing economic growth.

Rajan Bharti Mittal, the chairman of the Federation of Indian Chambers of Commerce and Industry, described Tuesday’s adjustment as a “huge surprise”.

“The successive and frequent hikes as observed recently run the risk of slowing down industrial growth, particularly manufacturing sector,” he said. The industry body said a survey had found that 40 per cent of its members identified the high cost of borrowing as an impediment to business performance.

However, most analysts viewed the RBI’s decision as broadly in line with its policy of normalisation and a commitment to take “baby steps” rather than make dramatic adjustments in interest rates or the cash reserve ratio – the amount of money commercial banks are obliged to hold with the central bank. While industrial production, credit growth and non-oil imports are rising, the outlook for the global economy is less certain.

Having made a number of emergency interventions over the past two years outside of policy review meetings, the RBI has decided to increase the frequency of its meetings. It will hold policy meetings every six weeks, instead of every quarter, in an effort to reduce unscheduled rate changes.

“The dominant concern that has shaped the monetary policy stance in this review is high inflation,” the central bank said in a statement. “With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations.”

Indian stocks and the rupee rose following the RBI’s announcement. The Bombay Stock Exchange’s benchmark Sensex rose 0.5 per cent, while the rupee gained 0.6 per cent to 46.77 against the dollar.

The yield on the 10-year government bond climbed to the highest level in almost three months, up 3 basis points to 7.7 per cent, as the fear of higher inflation grew.

Additional reporting by James Fontanella-Khan in Mumbai and Amy Kazmin in Delhi




US recovery elusive amid fiscal gaps
By Nicole Bullock in New York
Copyright The Financial Times Limited 2010
Published: July 27 2010 05:01 | Last updated: July 27 2010 05:01
http://www.ft.com/cms/s/0/242a6dc6-9912-11df-9418-00144feab49a.html


Most US states are expecting to see tax revenues improve after a freefall from the recession, but a recovery remains uncertain and hinged on whether economic growth withstands the end of federal stimulus funds, a report on Tuesday shows.

The fiscal troubles of US state and local governments, which raise money in the $2,800bn (£1,808bn) municipal bond market, are on the minds of investors after several years of budget deficits and worries over global public finances.

People across the US have seen massive cuts to services, ranging from library hours and public parks to public safety, education and assistance. A debate is also under way on whether the historically low defaults in the municipal bond market can begin to rise.

According to the National Conference of State Legislatures (NCSL), a bipartisan research group and advocate for state governments, states faced a collective budget shortfall of $83.9bn for the fiscal year 2011, which began for most states on July 1.

Tax collections for fiscal 2010 are “widely hoped” to represent the low point, says the NCSL. Most states expect tax revenue growth this year, according to the report, which is based on data from legislative fiscal officers in late June and July.

“There is more bad news than good news but at least there is some good news,” said Corina Eckl, fiscal programme director at NCSL. “A lot of the increases are not substantial. The question is, ‘Are we on a slow march upward or are we going to be derailed by some unknown circumstance?’”

Fiscal 2011 shortfalls are much lower than the $174bn deficit estimated at the close of 2010, but new gaps have opened in some states, and further deficits are expected in the next few years, says the NCSL.

The mixed fiscal picture that has emerged is further complicated by the extent of the revenue declines since fiscal 2008, an uncertain outlook for economic growth and the end of federal stimulus. Among the latest concerns are potential new gaps totalling more than $12bn that have opened for 29 states at the start of the new fiscal year.

At least 25 states budgeted for additional money from the federal government for Medicaid, the US health programme for the poor. Crisis-era funds were to be extended, but resistance in Congress had made delivery uncertain. The gaps range from $9m in Vermont to $1.5bn in California.

In Pennsylvania, Governor Edward Rendell worries that, without the extension, the cuts he will have to make – potentially including the jobs of 10,000 to 20,000 teachers, case, city and fire safety workers – could restrain the nascent rebound there. Other states face similar concerns.

“Many states are showing signs of recovery,” Mr Rendell told the Financial Times. In March and April, Pennsylvania gained 76,000 jobs, but it has an $850m budget hole if the Medicaid extension is not approved.

The Obama administration’s 2009 stimulus package is also ending at a time when spending pressures are mounting. For this reason, two-thirds of states already forecast a cumulative gap of $72bn for 2012 and 23 states are projecting gaps of $64.3bn for 2013.

After several years of budget-cutting, lawmakers have fewer options to close gaps, and cuts are increasingly painful.

In North Carolina, for example, the state plans to cut about $50m for in-home care under Medicaid – ending the service for about 20,000 elderly and disabled people, or more than half of those who now get help.


CASE STUDY: Wage freezes, staff cuts and expanding class sizes

In the academic year that finished last month, introductory courses in psychology at the University of Illinois at Chicago had 300 students per lecture. When the new semester begins next month, the same class will have 450 students, writes Hal Weitzman.

The congested psychology classes are a striking example of how Illinois’ budget woes are having a tangible effect on the state’s residents. Gary Raney, head of UIC’s psychology department, said the school had to offer two rather than three classes as part of efforts to bridge the lack of funding from the cash-strapped state.

As a public institution, the university depends on the state for its funding. However, not only did education account for a large share of the $1.4bn (€1bn, £900m) in cuts that the state made in its last financial year, but Illinois is also behind on paying its bills: it still owes the University of Illinois $279m of the $743m it was due to have handed over for the financial year that ended last month, on top of the $45m it owes for the current year.

Students are suffering, says Prof Raney. Salary freezes mean he is losing academic staff to other institutions, while he cannot replace those who retire. As well as expanding class sizes, he has been forced to cancel three courses for next semester.

“We have about 55 students for every member of faculty, compared to 25 in the broader college of liberal arts and sciences,” he says. “How much attention can we actually give to individual students?”

Prof Raney says UIC receives a lot of money from external grants but, as staff numbers dwindle and teaching workloads increase, the university’s research status is suffering, putting outside funding at risk. “We’re trapped in a vicious cycle,” he says.

Prof Raney has little confidence the state will get to grips with its financial situation, and he worries about how UIC will handle the pressure. “We physically can’t increase class sizes any further,” he says. “Our classes are now as big as the largest teaching space in the university.”

www.ft.com/usstates







US home prices pick up in May
By Alan Rappeport in New York
Copyright The Financial Times Limited 2010
Published: July 27 2010 14:58 | Last updated: July 27 2010 15:59
http://www.ft.com/cms/s/0/9aa6c262-9979-11df-9834-00144feab49a.html


Home prices in the US climbed higher than expected in May as the housing market benefited from the last drops of federal stimulus ahead of summer, but tumbling consumer confidence showed growing fears about the economic recovery.

The closely watched S&P/Case-Shiller index showed house prices in the biggest US cities had risen 4.6 per cent in May from the same month a year earlier. That was stronger than economists had predicted and marked the biggest year-on-year increase since 2006.

However a modest monthly gain of 1.3 per cent following April’s meagre rise revealed how flat the market has become since rebounding earlier in the year.

“While May’s report on its own looks somewhat positive, a broader look at home price levels over the past year still does not indicate that the housing market is in any form of sustained recovery,” said David Blitzer, chairman of S&P’s index committee. “Since reaching its recent trough in April 2009, the housing market has really only stabilised at this lower level.”

From April to May, prices rose consistently across the 20 key markets that Case-Shiller tracks. May is traditionally one of the busiest months for buying homes, and only Las Vegas, where prices have fallen by 6.5 per cent in the past year, registered a monthly decline.

Mr Blitzer cautioned that home prices could “bounce along the bottom for the foreseeable future” and that the expiration of stimuli such as the first-time homebuyer tax credit, which affected house purchases that closed before the start of July, could weigh on the sector.

Home sales and housing starts have both been weak in recent months and high rates of foreclosure and distressed sales are depressing prices.

Analysts at High Frequency Economics said home prices would probably fall again this summer as many would-be buyers made their purchases early to take advantage of the $8,000 tax credit. But they note that because price-to-income ratios are at their lowest levels in 35 years, houses are “sensibly priced” and could stage a sluggish recovery in the autumn.

The strongest housing markets in May were Minneapolis, Atlanta, Los Angeles, San Francisco and Boston. Meanwhile, Charlotte, Denver, Detroit and Las Vegas – where prices fell – continued to sputter.

S&P said that Las Vegas had fallen to a new low point for the current cycle, with prices having plunged by 56.4 per cent since peaking in 2006. That erased any gains it had achieved since 2000.

Steve Hawks, a realtor at Platinum Real Estate in Nevada, told the Financial Times that buyers who were shopping for houses now were asking for additional discounts to make up for missing the tax credit. He said the tax credit had created its own housing market bubble that had failed to stimulate real demand.

“Everybody wants that coupon,” Mr Hawks said. “People either want everything $8,000 cheaper or they’re going to wait for the next tax rebate.”

Meanwhile, consumers remain most anxious about the state of the labour market. The Conference Board said on Tuesday that consumer confidence fell from 54.3 in June to 50.4 in July, its lowest level in five months.

Stubbornly high unemployment, which continues to linger around 10 per cent, is casting a “dark cloud” over consumers, according to Lynn Franco, who directs the Conference Board’s consumer research centre. This bodes poorly for retailers and for consumer spending, which accounts for 70 per cent of economic activity in the US.

“Given consumers’ heightened level of anxiety, along with their pessimistic income outlook and lacklustre job growth, retailers are very likely to face a challenging back-to-school season,” Ms Franco said.

More consumers said in July that business conditions were bad and jobs were harder to get while fewer people thought the economy would improve in the next six months.





Deutsche Bank confident on continued recovery
ByJames Wilson in Frankfurt
Copyright The Financial Times Limited 2010
Published: July 27 2010 08:02 | Last updated: July 27 2010 11:28
http://www.ft.com/cms/s/0/281d7da4-994b-11df-9834-00144feab49a.html


Deutsche Bank on Tuesday reported net income of €1.2bn for the second quarter, slightly beating expectations after a tough period for the trading that it and other investment banks depend upon.

“In a quarter which was characterised by increased investor uncertainty and higher market volatility, Deutsche Bank’s investment banking business followed the industry-wide trend of weaker profitability,” said Josef Ackermann, chief executive.

But Mr Ackermann sounded more confident than he had previously of a continuous economic recovery, saying in a statement: “Global economic activity is likely to strengthen.”

The bank cut loss provisions to €243m from €1bn a year ago.

Deutsche Bank was criticised for being one of the few banks not to reveal its European sovereign debt exposure as part of the stress test results on Friday. On Tuesday, however, the bank unveiled a combined €14.8bn of gross exposure to the “peripheral” EU states of Greece, Spain, Portugal, Ireland and Italy, of which €10.4bn was to Italy. The figures are to the end of March.

Most of the bank’s sovereign debt is held for trading and therefore will have been subject to the “haircuts” – reductions in the amount of debt to be repaid to creditors – of up to 23 per cent, in the case of Greece, used in the European stress test.

The tests were criticised for not applying any haircuts to banks’ banking books – where debts will be held to maturity – that would have reflected a possibility of a sovereign default.

Deutsche’s investment banking unit, known as corporate banking and securities, continued to produce most of the bank’s profits but net revenues fell from €4.6bn a year ago to €3.6bn. Deutsche said credit and emerging market revenues had been hit by Europe’s sovereign debt crisis and investors’ limited risk-taking.

Debt sales and trading revenues fell 8 per cent while revenues from equity sales and trading were down 31 per cent compared with a year ago.

Pre-tax profits for the quarter for the unit fell from €823m a year ago to €779m.

The acquisition of some of Dutch bank ABN Amro’s commercial banking activities in the Netherlands helped push net revenues in global transaction banking from €654m a year ago to €1.1bn, while pre-tax profits rose from €187m to €478m.

Asset and wealth management revenues rose 57 per cent to €969m compared with a year ago, including €148m gained from Deutsche’s recent acquisition of Sal Oppenheim, the German private bank. The unit made a pre-tax profit of €45m, compared with a loss of €85m a year ago.

Mr Ackermann said Deutsche’s retail banking – what it calls its private and business client business – had enjoyed its best quarterly result since the peak of the financial crisis. The unit, which has 14.5m customers, reduced loss provisioning. Pre-tax profits rose from €55m a year ago to €233m.

Deutsche also booked a €64m pre-tax loss from its corporate investments compared with profits of €377m a year ago after an impairment of €124m on a resort development in Las Vegas.

In total Deutsche took charges and net markdowns of €451m, including €270m related to a commercial paper vehicle called Ocala Funding. These were partly offset by an expected gain of €208m representing negative goodwill from the ABN Amro deal.

Deutsche, which passed EU bank stress tests last week, said its tier one ratio – a key regulatory measure of the bank’s capital strength – had risen slightly to 11.3 per cent, in spite of a slight increase in risk-weighted assets and an expected impact from the Sal Oppenheim acquisition.

Shares in Deutsche were 4% higher midday trading in Frankurt at €52.42.







UBS lifted by investment banking
By Haig Simonian in Zurich
Copyright The Financial Times Limited 2010
Published: July 27 2010 07:34 | Last updated: July 27 2010 11:35
http://www.ft.com/cms/s/0/60da65fa-9944-11df-9834-00144feab49a.html


UBS pulled ahead of domestic rival Credit Suisse in the second quarter thanks to resilient earnings in investment banking and a robust private banking performance.

The Swiss group’s strength in equities meant it suffered less of a downturn in investment banking than rivals more weighted towards fixed-income markets whose revenues fell steeply in the period.

UBS also managed again to arrest the rate at which rich private customers withdrew funds, with negative net new money in the core private bank improving to SFr5.2bn ($4.9bn), compared with SFr8bn in the first quarter.

Net group profits amounted to SFr2.01bn, down only 9 per cent on the first quarter and a complete turnround compared with the SFr1.4bn loss recorded in the same period last year.

Investors welcomed the results, pushing UBS shares 9.5 per cent higher to SFr17.20 in mid-morning Zurich trading.

“This was a good result in volatile market conditions and demonstrates the progress we are making as we move towards our midterm targets. Our investment bank has improved its competitive positioning and profits in wealth management and Swiss bank are stable“, said Oswald Grübel, chief executive.

However, the bank remained cautious about the future given difficult market conditions and uncertainties. UBS warned that markets could remain volatile and directionless, leaving customers reluctant to pursue transactions, while fees on managing clients’ portfolios were likely to fall because of the lower level of invested assets at the end of June.

“We are delivering on our strategy and expect to make further progress over the coming quarters. We are confident about our future,” the bank said.

Investment banking earned SFr1.31bn before tax, up 9 per cent on the first quarter, thanks to the group’s strength in equities. Revenues in fixed income fell as at other banks this was partly offset by gains in foreign exchange, a traditional strength. Profits were also flattered by a SFr595m accounting gain on the value of its own debt. However, the UK bank bonus tax prompted an additional SFr228m charge.

In private banking and Swiss banking operations, pre-tax profits slipped only marginally quarter on quarter to SFr1.13bn. Most important, net outflows continued to ease as the bank appeared to regain the trust of customers.

As in the previous quarter, rich customers in Asia and parts of Europe remained net depositors. Overall in Europe, net new money remained negative, but net outflows decreased again compared with the previous quarter.

The bank’s capitalisation continued to strengthen. The tier one ratio – a measure of financial strength – rose from 16 per cent to 16.4 per cent at the end of March, while the core tier one ratio – a stiffer measure – rose from 12.4 per cent to 13 per cent.





GE pays $23.5m to settle with SEC
By Jeremy Lemer in New York
Copyright The Financial Times Limited 2010
Published: July 27 2010 17:55 | Last updated: July 27 2010 17:55
http://www.ft.com/cms/s/0/92f46430-999b-11df-a852-00144feab49a.html


General Electric has agreed to pay $23.5m to settle allegations from US regulators that its subsidiaries bribed Iraqi officials to win contracts under the UN Oil for Food Programme between 2000 and 2003.

The settlement with the Securities and Exchange Commission is the second in as many years for GE and its chief executive, Jeffrey Immelt. Last year, GE agreed to pay $50m to resolve charges of accounting fraud relating to hedging activities in 2002 and 2003.

In both cases GE said it had cooperated with investigators and said that in spite of the settlements it neither admitted nor denied the allegations.

According to the SEC, GE violated the Foreign Corrupt Practices Act as part of a $3.6m “kickback scheme”.

Executives at two subsidiaries, and two companies later bought by GE, allowed agents to give Iraqi health ministry officials cash, computer equipment and medical supplies, in order to win contracts for medical and water purification equipment, the SEC claimed.

“Bribes and kickbacks are bad business, period,” said Robert Khuzami, director of the SEC’s division of enforcement. “This case affirms that law enforcement is active across the globe - offshore does not mean off-limits.”

GE said: “This conduct did not meet our standards, and we believe that it is in the best interests of GE and its shareholders to resolve this matter now . . . and put the matter behind us.”

GE also said it had received assurances from the US Department of Justice that it would not be subject to any criminal enforcement proceedings.

The news comes as GE is trying to move beyond the scandal and strife of the last two years, when its financing arm was hard hit by the credit crisis and the company was forced to cut its dividend and lost its triple A credit rating.

The oil for food programme was introduced in 1996 as a way to channel vital supplies to Iraq, which was then under tight UN sanctions. In exchange for oil, the Iraqi government was able to purchase humanitarian goods through UN-controlled bank accounts.

But the programme became a byword for corruption and incompetence. According to a United Nations investigation led by Paul Volcker, former chairman of the Federal Reserve, and completed in 2005, more than 2,000 companies made improper payments to secure contracts.

In total the SEC has taken action against 15 companies, recovering more than $204m.

The SEC charges against GE involved 18 separate contracts and focused on two foreign subsidiaries of the company’s healthcare unit as well as units of two companies, Ionics Inc. and Amersham plc, which GE subsequently acquired.

“GE failed to maintain adequate internal controls to detect and prevent these illicit payments . . . and it failed to properly record the true nature of the payments in its accounting records,” Cheryl Scarboro, chief of the SEC’s FCPA unit, said.

The $23.5m settlement comprises of $18.4m for the disgorgement of profits, $4.1m for interest on the profits, plus a $1m penalty.

GE shares, which have climbed about 6 per cent over the year to date, were flat in early trading at $16.19.