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)

Advertisements

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.

Read the rest of this entry »


Private rescue of CIT marks shift in crisis

July 21, 2009

Denied federal bailout, CIT taps $3B private rescue; may be strategy for other troubled banks

By Daniel Wagner and Stevenson Jacobs, AP Business Writers
Tuesday July 21, 2009, 12:44 am EDT

WASHINGTON (AP) — With bondholders coming to the rescue of troubled commercial lender CIT Group Inc. (CIT), and not the government, a new reality is setting in for investors.

With federal bailouts drying up and the economy still in distress, many more financial firms could face bankruptcy. When they do, it will be major private lenders that will have to decide whether to rescue the companies or allow them to fail.

It signals a return to the traditional path for financially troubled firms after nearly a year of government aid.

“It wasn’t clear that Treasury wanted this to be a turning point, but that’s the way it’s worked out,” said Simon Johnson, a former chief economist with the International Monetary Fund, now a professor at the Massachusetts Institute of Technology’s Sloan School of Management.

Johnson said the markets took so kindly to CIT’s quest for private-sector cash that the government “would feel pretty comfortable about” threatening bankruptcy for firms with less than $100 billion in assets.

Bondholders’ $3 billion rescue of CIT marks the first time since the banking crisis erupted that private investors have stepped in to save a big financial firm without federal help or oversight.

The lifeline for CIT, whose clients include Dunkin’ Donuts franchises and clothing maker Eddie Bauer, aims to sustain the company long enough for it to rework its heavy debt load, which includes $7.4 billion due in the first quarter of next year. It does not guarantee CIT will avoid bankruptcy.

CIT said late Monday that the rescue includes a $3 billion secured term loan with a 2.5-year maturity, which will ensure that its small and midsized business customers continue to have access to credit. Term loan proceeds of $2 billion are committed and available immediately, with an additional $1 billion expected to be committed and available within 10 days.

The short-term financing comes at a high price — an interest rate of about 10.5 percent, said a person close to the negotiations who was not authorized to discuss the matter publicly.

Read the rest of this entry »


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.

Read the rest of this entry »


GM and C removed from the Dow Jones Industrial Average

June 1, 2009

GM replaced in the S&P 500 by DeVry Inc.

Following the bankruptcy filing, Dow Jones Indexes said GM will be removed from the Dow Jones industrial average and will be replaced by Cisco Systems Inc (CSCO). Embattled financial company Citigroup Inc (C) will also be deleted from the Dow average and Travelers Cos Inc (TRV) will take its place.

Cisco, a maker of networking equipment, provided one of the biggest boosts to the Nasdaq, rising 5.4 percent to $19.50, while Travelers gained 3.1 percent to $41.91 on the New York Stock Exchange.

GM shares ended unchanged at 75 cents, a day before their suspension by the NYSE, while Citigroup slipped 0.8 percent to $3.69.

On Tuesday, GM’s stock is expected to start trading on the Pink Sheets under a new ticker symbol.

Standard & Poor’s said GM will be removed from the S&P 500 after the close of trading on Tuesday, June 2nd. It will be replaced by education company DeVry Inc (DV), whose stock jumped 4.1 percent to $46.20 after the bell.


Stress test results lift cloud of uncertainty

May 8, 2009

Results show 10 big banks need $75 billion in new capital; hope rises for economy’s recovery

Daniel Wagner and Jeannine Aversa, AP Business Writers
Friday May 8, 2009, 1:09 am EDT

WASHINGTON (AP) — Government exams of the biggest U.S. banks have helped lift a cloud of uncertainty that has hung over the economy.

The so-called stress tests — a key Obama administration effort to boost confidence in the financial system — showed nine of the 19 biggest banks have enough capital to withstand a deeper recession. Ten must raise a total of $75 billion in new capital to withstand possible future losses.

“The publication of the stress tests simply cleared the air of uncertainty,” said Allen Sinai, chief global economist at Decision Economics. “The results were not scary at all.”

He said it will take a long time for the banks to resume normal lending. But the test results didn’t alter his prediction that economy is headed for a recovery in October or November.

A key indicator of economic health will be released Friday morning, when the government announces how many more jobs were lost in April and how high the unemployment rate rose.

The stress tests have been criticized as a confidence-building exercise whose relatively rosy outcome was inevitable. But the information, which leaked out all week, was enough to cheer investors. They pushed bank stocks higher Wednesday, and rallied again in after-hours trading late Thursday once the results had been released.

Among the 10 banks that need to raise more capital, Bank of America Corp. (BAC) needs by far the most — $33.9 billion. Wells Fargo & Co. (WFC) needs $13.7 billion, GMAC LLC $11.5 billion, Citigroup Inc. (C) $5.5 billion and Morgan Stanley (MS) $1.8 billion.

The five other firms found to need more of a capital cushion are all regional banks — Regions Financial Corp. (RF) of Birmingham, Alabama; SunTrust Banks Inc. (STI) of Atlanta; KeyCorp (KEY) of Cleveland; Fifth Third Bancorp (FITB) of Cincinnati; and PNC Financial Services Group Inc. (PNC) of Pittsburgh.

The banks will have until June 8 to develop a plan and have it approved by their regulators. If they can’t raise the money on their own, the government said it’s prepared to dip further into its bailout fund.

The stress tests are a big part of the Obama administration’s plan to fortify the financial system. As home prices fell and foreclosures increased, banks took huge hits on mortgages and mortgage-related securities they were holding.

The government hopes the stress tests will restore investors’ confidence that not all banks are weak, and that even those that are can be strengthened. They have said none of the banks will be allowed to fail.

Read the rest of this entry »


Phases of fear and elation in the VIX

March 18, 2009

Here we show a nice relationship between the VIX and the SPX.  While this is a commonly referenced pairing, many still challenge the value of using the VIX as a market indicator.  There are numerous ways too use the VIX and almost everyone has their own tweaks.  This chart shows a very clear inverse relationship with several distinct “phases” discernible in the value of the VIX.  These “phases” correlate well with the action in the SPX.  We have labled these phases “euphoria”, “fear” and “panic”.  We also included the 400 day moving average (equivalent to the 80 week) which we discussed previously in The Significance of the 400 day (80 week) moving average.  This bull/bear market reference point matches up very well with the action in the VIX, as the VIX moves into the “fear phase” just as the 400 day is coming under assault, before eventually breaking.  A final test of the 400 day from below, which we highlighted in late April 2008, was accompanied by one last dip into the “euphoria” zone for the VIX.  That was the “last chance” to get out before the drop gathered steam as the SPX then dropped over 50% in less than 12 months.

We added the notes on Bear Stearns and Citigroup for a consensus of the “expert” opinion at the time.

vixspx031809


%d bloggers like this: