U.S. bailout program increased moral hazard: watchdog

October 21, 2009

Wed Oct 21, 2009 1:30am EDT
By David Lawder

WASHINGTON (Reuters) – The U.S. government’s $700 billion financial bailout program has increased moral hazard in the markets by infusing capital into banks that caused the financial crisis, a watchdog for the program said on Wednesday.

The special inspector general for the U.S. Treasury’s Troubled Asset Relief Program (TARP) said the plan put in place a year ago was clearly influencing market behavior, and he repeated that taxpayers may never recoup all their money.

The bailout fund may have helped avert a financial system collapse but it could reinforce perceptions the government will step in to keep firms from failing, the quarterly report from inspector general Neil Barofsky said.

He said there continued to be conflicts of interest around credit rating agencies that failed to warn of risks leading up to the financial crisis. The report added that the recent rebound in big bank stocks risked removing urgency of dealing with the financial system’s problems.

“Absent meaningful regulatory reform, TARP runs the risk of merely reanimating markets that had collapsed under the weight of reckless behavior,” the report said. “The firms that were ‘too big to fail’ last October are in many cases bigger still, many as a result of government-supported and -sponsored mergers and acquisitions.”

ANGER, CYNICISM, DISTRUST

The report cites an erosion of government credibility associated with a lack of transparency, particularly in the early handling of the program’s initial investments in large financial institutions.

“Notwithstanding the TARP’s role in bringing the financial system back from the brink of collapse, it has been widely reported that the American people view TARP with anger, cynicism and distrust. These views are fueled by the lack of transparency in the program,” the report said.

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Wall Street’s Math Wizards Forgot a Few Variables

September 14, 2009

by Steve Lohr
Monday, September 14, 2009
The New York Times

In the aftermath of the great meltdown of 2008, Wall Street’s quants have been cast as the financial engineers of profit-driven innovation run amok. They, after all, invented the exotic securities that proved so troublesome.

But the real failure, according to finance experts and economists, was in the quants’ mathematical models of risk that suggested the arcane stuff was safe.

The risk models proved myopic, they say, because they were too simple-minded. They focused mainly on figures like the expected returns and the default risk of financial instruments. What they didn’t sufficiently take into account was human behavior, specifically the potential for widespread panic. When lots of investors got too scared to buy or sell, markets seized up and the models failed.

That failure suggests new frontiers for financial engineering and risk management, including trying to model the mechanics of panic and the patterns of human behavior.

“What wasn’t recognized was the importance of a different species of risk — liquidity risk,” said Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance.

Much of the early work has been done tracking online behavior. The Web provides researchers with vast data sets for tracking the spread of all manner of things — news stories, ideas, videos, music, slang and popular fads — through social networks. That research has potential applications in politics, public health, online advertising and Internet commerce. And it is being done by academics and researchers at Google, Microsoft, Yahoo and Facebook.

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Bailed-out bankers to get options windfall: study

September 2, 2009

Wed Sep 2, 2009 11:14am EDT
By Steve Eder

NEW YORK (Reuters) – As shares of bailed-out banks bottomed out earlier this year, stock options were awarded to their top executives, setting them up for millions of dollars in profit as prices rebounded, according to a report released on Wednesday.

The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.

“Not only are these executives not hurting very much from the crisis, but they might get big windfalls because of the surge in the value of some of their shares,” said Sarah Anderson, lead author of the report, “America’s Bailout Barons,” the 16th in an annual series on executive excess.

The report — which highlights executive compensation at such firms as Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Bank of America Corp. (BAC) and Citigroup Inc. (C) — comes at a time when Wall Street is facing criticism for failing to scale back outsized bonuses after borrowing billions from taxpayers amid last year’s financial crisis. Goldman, JPMorgan and Morgan Stanley have paid back the money they borrowed, but Bank of America and Citigroup are still in the U.S. Treasury’s program.

It’s also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector.

The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have “not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades.”

“We see these little flurries of activities in Congress, where it looked like it was going to happen,” Anderson said. “Then they would just peter out.”

The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts.

The CEOs of those 20 companies were paid, on average, 85 times more than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corp, according to the report.

(Reporting by Steve Eder; editing by John Wallace)


Apple, Dell, HP laptop owners sue Nvidia over faulty graphics

July 27, 2009

Five plaintiffs join forces to demand class-action lawsuit
By Gregg Keizer
May 11, 2009 12:00 PM ET

Computerworld – Owners of Apple (AAPL), Dell (DELL) and Hewlett-Packard (HPQ) laptops have combined their lawsuits against Nvidia (NVDA) in an attempt to force the graphics chip maker to replace allegedly flawed processors, according to court documents.

If granted class-action status, the case could involve millions of laptop computer owners, the plaintiffs said.

The five plaintiffs, including a Louisiana man who bought an Apple MacBook Pro a year ago, filed an amended complaint last week in a San Francisco federal court, accusing Nvidia of violating consumer-protection laws.

Nvidia admitted to the problem in July 2008, when it said some older chipsets that had shipped in “significant quantities” of notebooks were flawed. In a subsequent filing with the U.S. Securities and Exchange Commission (SEC), the company argued that its chip suppliers, the laptop makers and even consumers were to blame.

Nvidia later told the SEC that it would take a $196 million charge to pay for replacing the graphics processors.

Apple, Dell and HP have all told users that some of their laptops contain faulty Nvidia chipsets. Apple, in fact, essentially said that Nvidia had misled it. “Nvidia assured Apple that Mac computers with these graphics processors were not affected,” Apple said in a support document posted last October. “However, after an Apple-led investigation, Apple has determined that some MacBook Pro computers … may be affected.”

Although Apple promised it would repair any defective MacBook Pro for two years after its purchase date, whether it was in warranty or not, HP and Dell first issued BIOS updates designed by Nvidia that boosted fan speed. The increased fan speed was intended to ward off chip failure. Later, however, both companies also extended warranties for the affected laptops, and in some cases offered free repairs.

The plaintiffs in the combined lawsuit said that anything other than a replacement of the flawed chips was insufficient. “This is a grossly inadequate ‘remedy,’ as it results in additional manifest defects, including, without limitation, further degraded battery life, system performance and increased noise in the Class Computers,” the complaint read.

“Worse, this ‘remedy’ fails to solve the actual problem. Instead, this measure only ensures that the Class Computers will fail after the OEM’s express warranty period expires, potentially leaving consumers with a defective computer and no immediate recourse,” the lawsuit continued. “Finally, even after this purported ‘update,’ video and system performance is still degraded due to unacceptably high heat and part failures.”

Todd Feinstein of Louisiana was the one plaintiff who had purchased an Apple laptop. After buying a MacBook Pro in April 2008, the computer ran hot, periodically shut down without warning and displayed only gray or black at times, Feinstein said.

He sent a letter to Nvidia in September 2008 demanding that the company fix his MacBook. “Nvidia has failed to respond,” he said in the complaint.

Other plaintiffs who live in California, Illinois, New Jersey and New Mexico bought Dell or HP notebooks.

The lawsuit requests the case be granted class-action status, and if it prevails, that Nvidia replace the faulty chips and pay unspecified damages.

Last September, a New York law firm sued Nvidia, accusing the company of breaking U.S. securities laws by concealing the existence of a serious defect in its graphics chip line for several months before admitting the problem. That case has been put on hold awaiting a decision by an appellate court.


Investors dump brokers to go it alone online

July 24, 2009

Fri Jul 24, 2009 12:31pm EDT

By Rachel Chang

NEW YORK, July 24 (Reuters) – The collapse of Lehman Brothers (LEH) last September marked the start of a downward spiral for big investment banks. For a smaller fraternity of Internet brokerages, it has set off a dramatic spurt of growth.

Since the start of the financial crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade Holding Corp (AMTD) and Charles Schwab Corp (SCHW), company records show.

By contrast, investors have pulled more than $100 billion from traditional full-service brokerages like Citigroup Inc’s Smith Barney (C) and Bank of America-Merrill Lynch (BAC).

Of course, Americans still keep more of their wealth with established brokerages. According to research firm Gartner, 43 percent of individual investors were with full-service brokers last year, compared with 24 percent with online outfits.

And while figures for 2009 are not yet available, the flow of investors in the past 10 months has clearly been in the direction of the online brokerages, according to analysts both at Gartner and research consultancy Celent.

Joining the exodus is Ben Mallah, who says he lost $3 million in a Smith Barney account in St. Petersburg, Florida, as the markets crashed last year.

“I will never again trust anyone who is commission-driven to manage my portfolio,” said Mallah. “If they’re not making money off you, they have no use for you.”

This trend, a product of both the financial crisis and the emergence of a new generation of tech-savvy, cost-conscious young investors, is positioning online outfits as increasingly important in the wealth management field.

The numbers reflect a loss of faith in professional money managers as small investors dress their wounds from the hammering they took over the last year, the Internet brokerages say.

“There has been an awakening,” said Don Montanaro, chief executive of TradeKing, which reported a post-Lehman spike in new accounts of 121 percent. Investors now realize they alone are responsible for their money, he said.

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6 Millionaire Traits That You Can Adopt

June 23, 2009

by Stephanie Powers
Investopedia
Tuesday, June 23, 2009

Millionaires have more in common with each other than just their bank accounts — for some millionaires, striking it rich took courage, salesmanship, vision and passion. Find out which traits are most common to the seven-figure bank account set, and what you can do to hone some of these skills in your own life.

1. Independent Thinking

Millionaires think differently. Not just about money, about everything. The time and energy everybody else spends attempting to conform, millionaires spend creating their own path. Since thoughts impact actions, people who want to be wealthy should think in a way that will get them to that goal. Independent thinking doesn’t mean doing the opposite of what the rest of the world is doing; it means having the courage to follow what is important to you. So, the lesson here is to forge your own way, and let your success drive you to financial spoils – rather than doing it the other way around and trying to chase the money.

Just look at David Geffen. A self-made millionaire with $4.5 billion to his name in 2009, this American record executive and film producer was college dropout, but made millions founding record agencies and signed some of the most prominent musicians of the 1970s and ’80s. Although he didn’t take what many assume to be the usual path to success, his tireless work ethic and sense of personal conviction about artists’ potential allowed him to rack up a sizable fortune.

2. Vision

Millionaires are creative visionaries with a positive attitude. In other words, wealthy people not only have big dreams, they also believe they will come true. As such, wealth seekers should set lofty goals and not be afraid of uncharted territories.

Bill Gates, the world’s richest person in 2009, did just that. The American chairman of Microsoft (MSFT) is one of the founding entrepreneurs who brought personal computers to the masses. Gates jumped into the personal computers business in 1975 and held on tight, creating Microsoft Windows in 1985. When consumers began to bring computers into their homes, Gates was ready to profit from this new age.

3. Skills

Writer Dennis Kimbro interviewed successful people to determine the traits they had in common for his book, “Think and Grow Rich” (1992). He found that they concentrated on their area of excellence. Millionaires also tend to partner with others to supplement their weaker skills. If you don’t know what you are good at, poll friends and family. Use training and mentors to refine your strong skills.

4. Passion

Billionaire investing guru Warren Buffett says “Money is a by-product of something I like to do very much.” Enjoying your work allows you to have the discipline to work hard at it every day. People who interact with money for a living, bankers for example, often love creating new deals and persuading others to complete a transaction. But finding your dream job may take time. The average millionaire doesn’t find it until age 45, and tends to be 54 (on average) before becoming a millionaire. Kimbro found that millionaires tried an average of 17 ventures before they were successful. So, if you want to be rich, stop doing things you don’t enjoy and do what you love. If you don’t know what you love, try a few things and keep trying until you hit on the right thing.

5. Investment

Millionaires are willing to sacrifice time and money to achieve their goals. They are willing to take a risk now for the opportunity of achieving something greater in the future. Investing may include securities or starting a business – either way, it is a step toward achieving great financial rewards. Start investing now.

6. Salesmanship

Millionaires are constantly presenting their ideas and persuading others to buy into them. Good salesmen are oblivious to critics and naysayers. In other words, they don’t take “no” for an answer. Millionaires also have good social skills. In fact, when writer T. Harv Eker analyzed the results of a survey of 753 millionaires for his book, “Secrets of the Millionaire Mind” (2005), he found social skills were more important than IQ. Just look at Donald Trump. His fortune has fluctuated over the years, but his ability to sell himself – whether as a TV personality or as the force behind a line of neckties – has always brought him back among the ranks of celebrity millionaires.

The ability to communicate with people is essential to selling your idea. Contrary to the traditional view of salesmen, millionaires cite honesty as an important factor in their success. If you want to be a millionaire, be an honest salesman and polish your social skills.

***

Becoming a millionaire is not a goal that can be achieved overnight for most people. In fact, many of the world’s richest people built their wealth over many years (sometimes even generations) by making smart but often bold decisions, putting their skills to the best use possible and doggedly pursuing their vision. If you can learn anything about millionaires, it’s that for many of them, their riches are not necessarily what most sets them apart from the rest of the world – it’s what they did to earn those millions that really stands out.


U.S. clears 10 big banks to repay bailout funds

June 9, 2009

Tue Jun 9, 2009 6:09pm EDT
By Glenn Somerville

WASHINGTON (Reuters) – JPMorgan (JPM), Goldman Sachs (GS) and eight other top U.S. banks won clearance on Tuesday to repay $68 billion in taxpayer money given to them during the credit crisis, a step that may help them escape government curbs on executive pay.

Many banks had chafed at restrictions on pay that accompanied the capital injections. The U.S. Treasury Department’s announcement that some will be permitted to repay funds from the Troubled Asset Relief Program, or TARP, begins to separate the stronger banks from weaker ones as the financial sector heals.

Treasury didn’t name the banks, but all quickly stepped forward to say they were cleared to return money the government had pumped into them to try to ensure the banking system was well capitalized

Stock prices gained initially after the Treasury announcement but later shed most of the gains on concern the money could be better used for lending to boost the economy rather than paying it back to Treasury.

“If they were more concerned about the public, they would keep the cash and start loaning out money,” said Carl Birkelbach, chairman and chief executive of Birkelbach Investment Securities in Chicago.

Treasury Secretary Timothy Geithner told reporters the repayments were an encouraging sign of financial repair but said the United States and other key Group of Eight economies had to stay focused on instituting measures to boost recovery.

MUST KEEP LENDING

Earlier this year U.S. regulators put the 19 largest U.S. banks through “stress tests” to determine how much capital they might need to withstand a worsening recession. Ten of those banks were told to raise more capital, and regulators waited for their plans to do so before approving any bailout repayments.

As a condition of being allowed to repay, banks had to show they could raise money on their own from the private sector both by selling stock and by issuing debt without the help of Federal Deposit Insurance Corp guarantees. The Federal Reserve also had to agree that their capital levels were adequate to support continued lending.

American Express Co (AXP), Bank of New York Mellon Corp (BK), BB&T Corp (BBT), Capital One Financial Corp (COF), Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley (MS), Northern Trust Corp (NTRS), State Street Corp (STT) and U.S. Bancorp (USB) all said they had won approval to repay the bailout funds.

In contrast, neither Bank of America Corp (BAC) or Citigroup Inc (C), which each took $45 billion from the government, received a green light to pay back bailout money.

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