Bailed-out bankers to get options windfall: study

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)

Investors dump brokers to go it alone online

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.

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

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.

Stress test results lift cloud of uncertainty

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.

Treasury, Fed continue extensive bailout efforts

Monday November 24, 2:33 pm ET
By Christopher S. Rugaber, AP Business Writer

Nothing a few more billion can’t cure: Treasury, Fed take more steps to fight meltdown

WASHINGTON (AP) — The government’s latest effort to address the financial crisis is a $20 billion investment in banking giant Citigroup Inc. (C), along with an agreement to guarantee hundreds of billions of dollars in possible losses.

The step, announced late Sunday, is the latest in a long list of government moves to counter the financial meltdown:

–March 11: The Federal Reserve announces a rescue package to provide up to $200 billion in loans to banks and investment houses and let them put up risky mortgage-backed securities as collateral.

–March 16: The Fed provides a $29 billion loan to JPMorgan Chase & Co. (JPM) as part of its purchase of investment bank Bear Stearns (BSC).

–May 2: The Fed increases the size of its loans to banks and lets them put up less-secure collateral.

–July 11: Federal regulators seize Pasadena, Calif.-based IndyMac (IMB), costing the Federal Deposit Insurance Corp. billions to compensate deposit-holders.

–July 30: President Bush signs a housing bill including $300 billion in new loan authority for the government to back cheaper mortgages for troubled homeowners.

–Sept. 7: The Treasury takes over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), putting them into a conservatorship and pledging up to $200 billion to back their assets.

–Sept. 16: The Fed injects $85 billion into the failing American International Group (AIG), one of the world’s largest insurance companies.

Bailout becomes buy-in as feds move into banking

Tuesday October 14, 9:43 pm ET
By Jeannine Aversa, AP Economics Writer

Government moves into banking — to the tune of $250 billion — as the bailout becomes a buy-in

WASHINGTON (AP) — Big banks started falling in line Tuesday behind a rejiggered bailout plan that will have the government forking over as much as $250 billion in exchange for partial ownership — putting the world’s bastion of capitalism and free markets squarely in the banking business.

Some early signs were hopeful for the latest in a flurry of radical efforts to save the nation’s financial system: Credit was a bit easier to come by. And stocks were down but not alarmingly so after Monday’s stratospheric leap.

The new plan, President Bush declared, is “not intended to take over the free market but to preserve it.”

It’s all about cash and confidence and convincing banks to lend money more freely again. Those are all critical ingredients to getting financial markets to function more normally and reviving the economy.

The big question: Will it work?

There was a mix of hope and skepticism on that front. Unprecedented steps recently taken — including hefty interest rate reductions by the Federal Reserve and other major central banks in a coordinated assault just last week — have failed to break through the credit clog and the panicky mind-set gripping investors on Wall Street and around the globe.

US to invest directly in banks: Paulson

by Adam Plowright Fri Oct 10, 10:12 PM ET

WASHINGTON (AFP) – The US government plans to invest directly in US banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said Friday, expanding the focus of the government’s 700-billion-dollar rescue plan.

“We’re going to do it as soon as we can do it and do it effectively,” Paulson said when asked about an equity-buying plan.

“There’s no doubt in our mind, given the magnitude of the issue … that we can use the taxpayers’ money more effectively and efficiently … if we develop a standardized program for making, encouraging equity participation,” he added.

A 700-billion-dollar US government rescue plan approved last week had initially focused on the problem of liquidity for banks by offering to buy up their toxic assets.

Paulson’s comments demonstrate how the Treasury, after initially resisting the idea, now recognizes the need and attraction of direct investments in struggling banks which are unable to raise new capital from private investors.

Analysts and officials say there is a precedent for the US government buying equity in the Reconstruction Finance Corporation created during the Great Depression when thousands of banks failed.

The rescue plan, called the Troubled Asset Relief Program (TARP), has so far failed to calm investors or restore confidence in the financial system. The leading indices for the US stock market tumbled 18 percent over the week.

Implementation is taking time because of the complexity of the problems, but Paulson said officials were “working around the clock to deal with this.”

The secretary of state has warned that the first purchases of toxic assets could take several weeks and he gave no timetable for the equity purchase program. He also declined to comment on the amount of money that would be spent on buying toxic assets compared with equity.

New world on Wall Street

Goldman Sachs and Morgan Stanley to face more oversight from the Federal Reserve. Change provides more funding and opens door to more mergers.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: September 22, 2008: 7:19 AM EDT

NEW YORK (CNNMoney.com) — And then there were none.

Federal regulators converted Wall Street’s remaining stand-alone investment banks – Goldman Sachs (GS) and Morgan Stanley (MS) – into bank holding companies Sunday night.

The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also is aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns (BSC), Lehman Brothers (LEH) and Merrill Lynch (MER) this year.

But it also puts Goldman and Morgan under the Fed’s supervision, increasing the agency’s regulatory oversight and possibly forcing them to raise additional capital. As banks, Morgan and Goldman will be forced to take less risk, which will mean fewer profits.

And it brings to a close the era of the Wall Street investment bank, a storied institution that traded stocks and bonds, advised mergers and showered lavish bonuses on its executives.

“The separation of investment banking and commercial banking has come to an end,” said Bert Ely, an independent banking consultant.

Fed OKs Goldman, Morgan as bank holding companies

Sunday September 21, 9:53 pm ET

WASHINGTON (Reuters) – The Federal Reserve approved applications on Sunday from Goldman Sachs (GS) and Morgan Stanley (MS) to become bank holding companies, putting them directly under the regulatory supervision of the U.S. central bank, the latest step to restore calm to chaotic financial markets.

To provide increased liquidity to the companies, the Fed agreed to lend to the firms’ broker-dealer subsidiaries on the same terms as the Fed discount window for banks and the central bank’s Primary Dealer Credit Facility lending window for investment banks.

It said it was making the same collateral deals available to the broker-dealer subsidiary of Merrill Lynch (MER).

Govt trading ban could have unintended results

Friday September 19, 5:07 pm ET
By Marcy Gordon and Stevenson Jacobs, AP Business Writers

Big SEC step to ban short-selling of financial stocks could have unintended consequences

WASHINGTON (AP) — The government’s unprecedented move Friday to ban people from betting against financial stocks might be a salve for the market’s turmoil but could also carry serious unintended consequences.

In a bid to shore up investor confidence in the face of the spiraling market crisis, the Securities and Exchange Commission temporarily banned all short-selling in the shares of 799 financial companies. Short selling is a time-honored method for profiting when a stock drops.

The ban took effect immediately Friday and extends through Oct. 2. The SEC said it might extend the ban — so that it would last for as many as 30 calendar days in total — if it deems that necessary.

That window could be enough time to calm the roiling financial markets, with the Bush administration’s massive new programs to buy up Wall Street’s toxic debt possibly starting to have a salutary effect by then.

The short-selling ban is “kind of a time-out,” said John Coffee, a professor of securities law at Columbia University. “In a time of crisis, the dangers of doing too little are far greater than the dangers of doing too much.”

But on Wall Street, professional short-sellers said they were being unfairly targeted by the SEC’s prohibition. And some analysts warned of possible negative consequences, maintaining that banning short-selling could actually distort — not stabilize — edgy markets.

Indeed, hours after the new ban was announced, some of its details appeared to be a work in progress. The SEC said its staff was recommending exemptions from the ban for trades market professionals make to hedge their investments in stock options or futures.

“I don’t think it’s going to accomplish what they’re after,” said Jeff Tjornehoj, senior analyst at fund research firm Lipper Inc. Without short sellers, he said, investors will have a harder time gauging the true value of a stock.

“Most people want to be in a stock for the long run and want to see prices go up. Short sellers are useful for throwing water in their face and saying, `Oh yeah? Think about this,'” Tjornehoj said. As a result, restricting the practice could inflate the value of some stocks, opening the door for a big downward correction later.

Stocks tumble after government bailout of AIG

Wednesday September 17, 5:54 pm ET
By Tim Paradis, AP Business Writer

Wall Street sinks again after Fed bails out AIG, Barclays buys Lehman businesses; Dow down 450

NEW YORK (AP) — Wall Street plunged again Wednesday as anxieties about the financial system ran high after the government’s bailout of insurer American International Group Inc. (AIG) and left investors with little confidence in many banking stocks. The Dow Jones industrial average lost about 450 points, giving it a shortfall of more than 800 so far this week.

As investors fled stocks, they sought the safety of hard assets and government debt, sending gold, oil and short-term Treasurys soaring.

The market was more unnerved than comforted by news that the Federal Reserve is giving a two-year, $85 billion loan to AIG in exchange for a nearly 80 percent stake in the company, which lost billions in the risky business of insuring against bond defaults. Wall Street had feared that the conglomerate, which has extensive ties to various financial services industries around the world, would follow the investment bank Lehman Brothers Holdings Inc. (LEH) into bankruptcy. However, the ramifications of the world’s largest insurer going under likely would have far surpassed the demise of Lehman.

“People are scared to death,” said Bill Stone, chief investment strategist for PNC Wealth Management. “Who would have imagined that AIG would have gotten into this position?”

He said the anxiety gripping the markets reflects investors’ concerns that AIG wasn’t able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter. Over the past year, companies including Lehman and AIG have sought to reassure investors that they weren’t in trouble, but as market conditions have worsened the market appears distrustful of any assurances.

“No one’s going to be believing anybody now because AIG said they were OK along with everybody else,” Stone said.

The Shakeout After Lehman, Merrill, AIG…

As credit stays tight, power shifts to Bank of America, Barclays, hedge funds, and private equity—and regulators will keep a more watchful eye

by David Henry and Matthew Goldstein

Once-mighty Wall Street has turned into the Boulevard of Broken Dreams. From Bear Stearns (BSC) and Lehman Brothers (LEH) to Merrill Lynch (MER) and AIG (AIG), the punishment for years of bad decisions has been shockingly swift and brutal. As firms wobble, markets gyrate, and investors quiver, the question is: When will the pain end?

The signs aren’t encouraging. Sure, the Federal Reserve’s dramatic bailout of American International Group prevented the full-out global panic that might have unfolded with the collapse of the largest U.S. insurer. But AIG’s sudden lurch toward bankruptcy also showed how dangerously intertwined the financial system has become.

For years that interconnectedness masked enormous underlying risks, but now it’s amplifying them. As each new thread from the crazy web has unwound during the 13-month credit crisis, a fresh problem has emerged. How bad things will get from here depends on how cleanly the losing firms and toxic investments can be extricated from the rest. With each passing day the task seems to grow more difficult. By the end of the credit bust, the total losses, now $500 billion, could reach $2 trillion, according to hedge fund Bridgewater Associates. What’s likely to be left when the Great Unwind is finally complete? A smaller, humbler, highly regulated Wall Street barely recognizable from its heady past, where caution reigns and wild risk-taking is taboo.

Plenty of Skeletons

Merrill’s ties to AIG show just how difficult it might be to untangle the financial system. During the mortgage boom, Merrill churned out billions of dollars worth of dubious collateralized debt obligations, those troublesome bonds backed by pools of risky subprime mortgages. To cut down its own risk, Merrill bought insurance contracts from AIG called credit default swaps, which pay off if the mortgages blow up. Merrill holds $5 billion worth of guarantees from AIG alone. In all, AIG insures $441 billion of CDOs, including $58 billion with the subprime taint. It’s unclear which firms bought those guarantees, but AIG sold many to big European banks.

The perils of leverage

by Martin Hutchinson
September 15, 2008

The investment bank Lehman Brothers (LEH) spent last week teetering towards the sort of bankruptcy which like that of Bear Stearns (BSC), Fannie Mae (FNM) and Freddie Mac (FRE), may require a “bailout” by the long-suffering US taxpayer. All four of these institutions shared a common feature: they had far too much leverage, i.e. they had borrowed far too much money to be compatible with their modest capital bases. Excessive leverage is currently a characteristic of the US economy as a whole, and we are in the process of paying the price for it.

Investment banks traditionally had a leverage limit (total assets to shareholders’ equity) of about 20 to 1. That limit was fudged to a certain extent with subordinated debt, but fudging was limited by investors’ unwillingness to buy subordinated debt of such intrinsically unstable institutions. However, while investment bank assets traditionally consisted of commercial paper, bonds and shares that trade every day and can be valued properly, they have now come to include investment real estate, private equity stakes, hedge fund positions, credit default swaps and other derivatives positions that do not even appear on the balance sheet. Thus even 20 to 1 in modern market conditions is excessive. Adding in subordinated debt, and claiming that say Lehman has an “11% capital ratio” works fine in bull markets, but not when things get tough.

Scaling that 20 to 1 up to 30 to 1, as Lehman had at its November 2007 year-end, is asking for trouble. Even if the off-balance sheet credit default swaps and other derivatives don’t lead to problems, and there are no assets parked in “vehicles” that have to be suddenly taken back on balance sheet, an institution that is 30 to 1 levered needs to see a decline of only 3.3% in the value of its assets before its capital is wiped out. Such a decline can happen frighteningly quickly – it represents only a 10% decline in the value of a third of the assets.

Lehman’s leverage is not exceptional among Wall Street investment banks. At the last quarterly balance sheet date (May or June) while Lehman’s leverage had been brought down to 23.3 times through asset sales, Morgan Stanley’s (MS) was still 30.0 times, Goldman Sachs’s (GS) 24.3 times and Merrill Lynch’s (MER) an astounding 44.1 times (or to be fair, 31.5 times at its December 2007 year-end, before new losses appeared.)

Lehman rescue fails, BofA seen buying Merrill

Sunday September 14, 10:58 pm ET
By Joe Bel Bruno, Christopher S. Rugaber and Martin Crutsinger, AP Business Writers

As Lehman’s future dims, Fed and banks offer cash lifeline to financial system

NEW YORK (AP) — A failed plan to rescue Lehman Brothers (LEH) was followed Sunday by more seismic shocks from Wall Street, including an apparent government-brokered takeover of Merrill Lynch (MER) by the Bank of America (BAC).

A forced restructuring of the world’s largest insurance company, American International Group Inc. (AIG), also weighed heavily on global markets as the effects of the 14-month-old credit crisis intensified.

A global consortium of banks, working with government officials in New York, announced late Sunday a $70 billion pool of funds to lend to troubled financial companies. The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.

Ten banks — Bank of America, Barclays (BCS), Citibank (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), JP Morgan (JPM), Merrill Lynch, Morgan Stanley (MS) and UBS (UBS) — each agreed to provide $7 billion “to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets.”

The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed.

Federal Reserve Chairman Ben Bernanke said the discussions had been aimed at identifying “potential market vulnerabilities in the wake of an unwinding of a major financial institution and to consider appropriate official sector and private sector responses.”

Futures pegged to the Dow Jones industrial average fell more than 300 points in electronic trading Sunday evening, pointing to a sharply lower open for the blue chip index Monday morning. Asian stock markets were also falling.

Govt, Wall Street races to try to save Lehman

Saturday September 13, 4:57 pm ET
By Jeannine Aversa, AP Economics Writer

As financial world frets, government and brokerage leaders try to hash out Lehman rescue

WASHINGTON (AP) — The financial world held its collective breath Saturday as the U.S. government scrambled to help devise a rescue for Lehman Brothers (LEH) and restore confidence in Wall Street and the American banking system.

Deliberations resumed Saturday as top officials and executives from government and Wall Street tried to find a buyer or financing for the nation’s No. 4 investment bank and to stop the crisis of confidence spreading to other U.S. banks, brokerages, insurance companies and thrifts.

Failure could prompt skittish investors to unload shares of financial companies, a contagion that might affect stock markets at home and abroad when they reopen Monday.

Options include selling Lehman outright or unloading it piecemeal. A sale could be helped along if major financial firms would join forces to inject new money into Lehman. Government officials are opposed to using any taxpayer money to help Lehman.

An official from the Federal Reserve Bank of New York said Saturday’s participants included Treasury Secretary Henry Paulson, Timothy Geithner, president of the Federal Reserve Bank of New York, and Securities and Exchange Commission Chairman Christopher Cox. The New York Fed official asked not to be named due to the sensitivity of the talks.

Citigroup Inc. (C)’s Vikram Pandit, JPMorgan Chase Co. (JPM)’s Jamie Dimon, Morgan Stanley (MS)’s John Mack, Goldman Sachs Group Inc.(GS)’s Lloyd Blankfein, and Merrill Lynch Co. (MER)’s John Thain were among the chief executives at the meeting.

Representatives for Lehman Brothers were not present during the discussions.

They gathered on the heels of an emergency session convened Friday night by Geithner — the Fed’s point person on financial crises.

Merrill now in shorts’ sights as Lehman crumbles

Fri Sep 12, 2008 5:51pm EDT

By Elinor Comlay

NEW YORK (Reuters) – The crisis of confidence in Lehman Brothers (LEH) has led to fallout throughout the financial sector — especially for larger rival Merrill Lynch & Co Inc (MER).

The problem for Merrill is that short-sellers regard it as the next weakest investment bank after the crumbling Lehman and the crumbled Bear Stearns, which was sold at a firesale price in March.

“People are saying, ‘Who’s next on the list?'” said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor in Cincinnati.

The result in the market was clear. Merrill Lynch shares lost about a third of their value this week, while peers Citigroup Co (C) and Morgan Stanley (MS) only lost 2 percent and 4 percent, respectively.

A Merrill Lynch spokesman declined to comment.

Like Lehman and Bear, Merrill has holdings of structured debt that are triggering write-downs and calling into question its overall capital position.

Merrill Lynch has been one of the hardest hit firms over the course of the year-old credit crisis, posting well over $40 billion in write-downs and credit losses and selling valuable assets to raise capital.

Fannie Mae, Freddie `House of Cards’ Prompts Takeover

By Dawn Kopecki

Sept. 9 (Bloomberg) — Fannie Mae and Freddie Mac used accounting rules that created a “house of cards” as the housing market descended into its worst slump since the Great Depression.

While the two largest mortgage-finance companies met regulatory requirements for their capital, reviews by the Treasury, the Federal Housing Finance Agency and the Federal Reserve found they probably wouldn’t weather the highest delinquency rates on record, lawmakers and regulators said.

“Once they got someone looking closely at Fannie and Freddie’s books, they realized there just wasn’t adequate capital there,” U.S. Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said after a briefing by Treasury officials. “They found out they had a house of cards.”

Treasury Secretary Henry Paulson and FHFA Director James Lockhart seized control of Fannie and Freddie less than a month after Lockhart, whose job is to oversee the companies, declared them “adequately capitalized” under law. The discrepancy highlights the flaws in legislation and in the regulatory oversight of Fannie and Freddie that didn’t demand they keep more assets as a cushion against losses, according to Joshua Rosner, an analyst with Graham Fisher & Co. in New York.

“Fannie and Freddie’s accounting during the housing crisis appears to have been more fantasy than reality,” said Rosner, who first highlighted problems in 2003, before the two companies were forced to restate about $11.3 billion in earnings.

Citi, Merrill returning billions to investors, paying fine in deals over auction securities

Thursday August 7, 8:05 pm ET
By Marcy Gordon, AP Business Writer

WASHINGTON (AP) — Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators, who said the bank marketed the investments as safe despite liquidity risks.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords announced Thursday with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks from nearly 40,000 individual investors, small businesses and charities are not expected to cause significant losses for Citigroup; they must be completed by November.

Similar steps to buy back auction rate securities from customers are expected to be taken by other financial institutions. Bank of America Corp. revealed that it has received subpoenas and requests for information about its sale of the investments. Merrill Lynch & Co. said it will offer to buy back an estimated $12 billion in auction rate securities, though the company has already been actively reducing that amount.

Citi, the nation’s largest financial institution, said also will pay $50 million each in civil penalties to New York state and the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency’s enforcement director Linda Thomsen, said at a news conference.

New York-based Citigroup agreed to reimburse investors who sold their auction-rate securities at a loss after the market for them collapsed in mid-February. Also under the SEC accord, Citigroup agreed to make its best efforts to liquidate by the end of next year all of the roughly $12 billion of auction-rate securities it sold to retirement plans and other institutional investors. Cuomo said his office will monitor that effort for three months and then decide on a timeframe.

Wall Street’s credit crisis heads into second year

Wednesday June 18, 3:59 pm ET
By Joe Bel Bruno, AP Business Writer

More credit losses seen costing global banks $1 trillion as credit crisis hits second year

NEW YORK (AP) — There are new signs that the worst of the global credit crisis is yet to come, and that banks and brokerages caught up in the market turmoil may lose $1 trillion by the time it has passed.

Major U.S. investment banks this week announced yet another painful quarter amid the implosion of mortgage-backed securities and risky credit investments. Regional banks have scrambled to secure fresh capital to stay in business, and by Wednesday there was new talk that embattled investment bank Lehman Brothers might be forced into a sale.

With each passing quarter, Wall Street’s top bankers have indicated that the worst of the market turmoil was over — only to face more pain months later. The uncertainty has caused already battered investors to lose confidence in financial companies, and expectations have increased that more layoffs, asset sales and capital raising will be needed in the weeks ahead.

“We thought this was going to be the kitchen-sink quarter, and we’re finding out that CEOs and CFOs still don’t have a handle on the credit crisis,” said William Rutherford, a former state treasurer of Oregon who now runs Rutherford Investment Management. “We haven’t disinterred all the dead bodies. What else is out there?”

The deepening credit crisis could cost the global financial system some $945 billion by the time it is over, according to a report from the International Monetary Fund. So far, banks and brokerages have written down nearly $300 billion from bad bets on mortgage-backed securities and other risky investments.

Lehman Brothers removes finance, operating chiefs

Thursday June 12, 5:03 pm ET

By Joe Bel Bruno, AP Business Writer

Lehman Brothers shakes up top management as firm takes nearly $3 billion quarterly loss

NEW YORK (AP) — The hope at Lehman Brothers is that a management shakeup Thursday will contain the damage of a stunning quarterly loss — yet some on Wall Street fear this is one more step toward a more dramatic outcome for the embattled investment bank.

The ouster of Chief Financial Officer Erin Callan and Chief Operating Officer Joseph Gregory was an attempt to quell investor anger that Lehman’s leadership has failed them. But, with a four-day stock plunge that wiped $4.5 billion from the investment bank’s market value, it was unclear if the upheaval will be enough to satisfy critics.

“These people deserve to be fired,” said Dick Bove, an analyst with Ladenburg, Thalmann & Co. “Their mistakes cost their shareholders billions of dollars in wealth.” Lehman shares fell 4.4 percent Thursday to $22.70 and are down 30 percent this week. The decline is a blow to investors who bought into a stock offering at $28 earlier this week — including BlackRock Inc. and former AIG chief Hank Greenberg.

Richard Fuld, who took the company public in 1994, has kept a low profile in recent days by refusing interviews and commenting only through a statement about the dismissals. There is growing speculation that Fuld — the Street’s longest serving CEO — might scramble to find a major outside investor or negotiate a sale to avoid his own demise by Lehman’s board.

Names from private-equity firm Blackstone Group Inc. to global bank HSBC Holdings PLC have been bandied about as possible suitors should Fuld want to arrange a buyer, though none are commenting on the possibility. Most analysts are confident that Lehman can survive on its own without a suitor, given the underlying strength of its business.

And while Lehman might have bought itself some more time by shaking up its top ranks, the question remains how much it has left.

“I think they have a few options, but they are becoming more and more limited as the stock is pressured,” said Matthew Albrecht, financials analyst for Standard & Poor’s. “It is hard to rule anything out at this point. Confidence in the firm is the paramount issue, and if your counterparties and clients don’t have confidence then you can’t do business in this market.”

Danger Ahead: Fixing Wall Street Hazardous to Earnings Growth

By Christine Harper and Yalman Onaran

April 28 (Bloomberg) — Wall Street’s money-making machine is broken, and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come.

Citigroup Inc., UBS AG and Merrill Lynch & Co. are among the banks and securities firms that have posted $310 billion of writedowns and credit losses from the collapse of the subprime mortgage market. They’ve cut 48,000 jobs and ousted four chief executive officers. The top five U.S. securities firms saw $110 billion of market value evaporate in the past 12 months.

No one is sure the model works anymore. While Wall Street executives and regulators study what went wrong, there is no consensus solution for restoring confidence. Under review are some of the motors that powered record earnings this decade — leverage, off-balance-sheet investments, the business of repackaging assets into bonds through securitization, and over- the-counter trading of credit derivatives. Without them, it will be difficult to generate growth.

“Brokerages will have a tough time for a while,” said Todd McCallister, a managing director at St. Petersburg, Florida-based Eagle Asset Management Inc., which oversees $14 billion. “The main engine of its recent growth, securitization, will be curtailed. Regulation will be cranked up. Everything is stacked against them.”

Last month’s collapse and emergency sale of Bear Stearns Cos., the fifth-largest of the New York-based securities firms, demonstrated the perils of Wall Street business practices developed after the 1999 repeal of the Glass-Steagall Act. The change allowed investment banks and depository institutions to compete with each other.