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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Water worries threaten U.S. push for natural gas

October 1, 2009

Thu Oct 1, 2009 8:26am EDT

By Jon Hurdle

PAVILLION, Wyoming (Reuters) – Louis Meeks, a burly 59-year-old alfalfa farmer, fills a metal trough with water from his well and watches an oily sheen form on the surface which gives off a faint odor of paint.

He points to small bubbles that appear in the water, and a thin ring of foam around the edge.

Meeks is convinced that energy companies drilling for natural gas in this central Wyoming farming community have poisoned his water and ruined his health.

A recent report by the Environmental Protection Agency suggests he just might have a case — and that the multi-billion dollar industry may have a problem on its hands. EPA tests found his well contained what it termed 14 “contaminants of concern.”

It tested 39 wells in the Pavillion area this year, and said in August that 11 were contaminated. The agency did not identify the cause but said gas drilling was a possibility.

What’s happened to the water supply in Pavillion could have repercussions for the nation’s energy policies. As a clean-burning fuel with giant reserves in the United States, natural gas is central to plans for reducing U.S. dependence on foreign oil.

But aggressive development is drawing new scrutiny from residents who live near gas fields, even in energy-intensive states such as Wyoming, where one in five jobs are linked to the oil and gas industry which contributed more than $15 billion the state economy in 2007.

People living near gas drilling facilities in states including Pennsylvania, Colorado, New Mexico and Wyoming have complained that their water has turned cloudy, foul-smelling, or even black as a result of chemicals used in a drilling technique called hydraulic fracturing, or “fracking.”

The industry contends drilling chemicals are heavily diluted and injected safely into gas reservoirs thousands of feet beneath aquifers, so they will never seep into drinking water supplies.

“There has never been a documented case of fracking that’s contaminated wells or groundwater,” said Randy Teeuwen, a spokesman for EnCana Corp (ECA), Canada’s second-largest energy company, which operates 248 wells in the Pavillion and nearby Muddy Ridge fields.

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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.


SEC makes emergency rule targeting ‘naked’ short-selling permanent

July 27, 2009

By Marcy Gordon, AP Business Writer
Monday July 27, 2009, 8:03 pm EDT

WASHINGTON (AP) — Federal regulators on Monday made permanent an emergency rule put in at the height of last fall’s market turmoil that aims to reduce abusive short-selling.

The Securities and Exchange Commission announced that it took the action on the rule targeting so-called “naked” short-selling, which was due to expire Friday.

Short-sellers bet against a stock. They generally borrow a company’s shares, sell them, and then buy them when the stock falls and return them to the lender — pocketing the difference in price.

“Naked” short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions sometime after the sale.

The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

Brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren’t delivered within that time, there is deemed to be a “failure to deliver.” Brokers can be subject to penalties if the failure to deliver isn’t resolved by the start of trading on the following day.

At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices.

Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market’s downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.

Some securities industry officials, however, have maintained that the SEC’s emergency order on “naked” short-selling brought unintended negative consequences, such as wilder price swings and turbulence in the market.

The five SEC commissioners voted in April to put forward for public comment five alternative short-selling plans. One option is restoring a Depression-era rule that prohibits short sellers from making their trades until a stock ticks at least one penny above its previous trading price. The goal of the so-called uptick rule is to prevent selling sprees that feed upon themselves — actions that battered the stocks of banks and other companies over the last year.

Another approach would ban short-selling for the rest of the trading session in a stock that declines by 10 percent or more.

Schapiro said last week the SEC could decide on a final course of action in “the next several weeks or several months.”

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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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Countrywide’s Mozilo charged with fraud

June 4, 2009

Thu Jun 4, 2009 7:41pm EDT

By Gina Keating and Rachelle Younglai

LOS ANGELES/WASHINGTON (Reuters) – Angelo Mozilo, who built the largest U.S. mortgage lender, was charged with securities fraud and insider trading on Thursday, making him the most prominent defendant so far in investigations into the U.S. subprime mortgage crisis and housing bust.

Mozilo, 70, co-founder of Countrywide Financial Corp (CFC), was accused by the U.S. Securities and Exchange Commission with making more than $139 million in profits in 2006 and 2007 from exercising 5.1 million stock options and selling the underlying shares.

The sales were under four prearranged stock trading plans Mozilo prepared during the time period, the SEC said.

The accusations were made in a civil lawsuit filed by the SEC in Los Angeles on Thursday.

The SEC said that in one instance, the day before he set up a stock trading plan on September 25, 2006, Mozilo sent an email to two Countrywide executives that said: “We are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.”

Those executives, then Countrywide President David Sambol, 49, and Chief Financial Officer Eric Sieracki, 52, were charged by the SEC with knowingly writing “riskier and riskier” subprime loans that they had a limited ability to sell on the secondary mortgage market.

The SEC said that all three executives failed to tell investors how dependent Countrywide had become on its ability to sell subprime mortgages on the secondary market. All three were accused of hiding from investors the risks they took to win market share.

At one stage, Countrywide was writing almost 1 in 6 of American mortgages. The lawsuit said that by September 2006, Countrywide estimated that it had a 15.7 percent share of the market, up from 11.4 percent at the end of 2003.

“While Countrywide boasted to investors that its market share was increasing, company executives did not disclose that its market share increase came at the expense of prudent underwriting guidelines,” the lawsuit said

Bank of America Corp (BAC) bought Countrywide last July 1 for $2.5 billion, less than a tenth of what it had been worth in early 2007.

“TWO COMPANIES”, EARLY WARNING SIGNS

“This is a tale of two companies,” the SEC’s director of enforcement, Robert Khuzami, told reporters. “One that investors from the outside saw. It was allegedly characterized by prudent business practices and tightly controlled risk.”

“But the real Countrywide, which could only be seen from the inside, was one buckling under the weight of deteriorating mortgages, lax underwriting, and an increasingly suspect business model,” Khuzami said.

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