How Do I Know You’re Not Bernie Madoff?

June 15, 2009

by Paul Sullivan
The New York Times
Monday, June 15, 2009

Tony Guernsey has been in the wealth management business for four decades. But clients have started asking him a question that at first caught him off guard: How do I know I own what you tell me I own?

This is the existential crisis rippling through wealth management right now, in the wake of the unraveling of Bernard L. Madoff’s long-running Ponzi scheme. Mr. Guernsey, the head of national wealth management at Wilmington Trust, says he understands why investors are asking the question, but it still unnerves him. “They got their statements from Madoff, and now they get their statement from XYZ Corporation. And they say, ‘How do I know they exist?’ ”

When he is asked this, Mr. Guernsey says he walks clients through the checks and balances that a 106-year-old firm like Wilmington has. Still, this is the ultimate reverberation from the Madoff scandal: trust, the foundation between wealth manager and client, has been called into question, if not destroyed.

“It used to be that if you owned I.B.M., you could pull the certificate out of your sock drawer,” said Dan Rauchle, president of Wells Fargo Alternative Asset Management. “Once we moved away from that, we got into this world of trusting others to know what we owned.”

The process of restoring that trust may take time. But in the meantime, investors may be putting their faith in misguided ways of ensuring trust. Mr. Madoff, after all, was not charged after an investigation by the Securities and Exchange Commission a year before his firm collapsed. Here are some considerations:

CUT THROUGH THE CLUTTER Financial disclosure rules compel money managers to send out statements. The problem is that the statements and trade confirmations arrive so frequently, they fail to help investors understand what they own.

To mitigate this, many wealth management firms have developed their own systems to track and present client assets. HSBC Private Bank has had WealthTrack for nearly five years, while Barclays Wealth is introducing Wealth Management Reporting. But there are many more, including a popular one from Advent Software.

These systems consolidate the values of securities, partnerships and, in some cases, assets like homes and jewelry. HSBC’s program takes into account the different ways firms value assets by finding a common trading date. It also breaks out the impact of currency fluctuation..

These systems have limits, though. “Our reporting is only as good as the data we receive,” said Mary Duke, head of global wealth solutions for the Americas at HSBC Private Bank. “A hedge fund’s value depends on when the hedge fund reports — if it reports a month-end value, but we get it a month late.”

In other words, no consolidation program is foolproof.

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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.

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Treasury, Fed continue extensive bailout efforts

November 24, 2008

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.

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Government unveils bold plan to rescue Citigroup

November 24, 2008

Monday November 24, 1:51 am ET
By Jeannine Aversa, AP Economics Writer

Government unveils plan to rescue Citigroup, including taking $20 billion stake in the firm

WASHINGTON (AP) — The government unveiled a bold plan Sunday to rescue troubled Citigroup (C), including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement issued late Sunday night. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.”

The move is the latest in a string of high-profile government bailout efforts. The Fed in March provided financial backing to JPMorgan Chase’s (JPM) buyout of ailing Bear Stearns (BSC). Six months later, the government was forced to take over mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) and throw a financial lifeline — which was recently rejiggered — to insurer American International Group (AIG).

Critics worry the actions could put billions of taxpayers’ dollars in jeopardy and encourage financial companies to take excessive risk on the belief that the government will bail them out of their messes.

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Preferred shares find favor

November 9, 2008

ETF portfolios offer tempting yields after sell-off, but risks abound

By John Spence, MarketWatch
Last update: 12:29 p.m. EST Nov. 9, 2008

BOSTON (MarketWatch) — Preferred stocks took a big hit in September and October as the credit crunch and bank failures sent investors for the exits, but the shares have been garnering interest as their yields approach double digits.

Preferred issues have also attracted attention because famed investor and Berkshire Hathaway chief executive Warren Buffett has been buying them. Moreover, governments around the world have taken equity stakes in troubled banks through preferred shares.

Although investors shouldn’t expect Buffett-like deals, they can invest in a basket of publicly traded preferred shares via exchange-traded funds.

Many investors like to think of preferred shares as a blend of stocks and bonds. Preferred stocks, which generally don’t carry voting rights, tend to pay higher dividends than the common shares. Preferred shareholders receive their dividends before common shareholders and also have certain advantages if a company liquidates.

There are many types of preferred shares, including cumulative, callable and convertible. The prices of preferred shares typically have had more volatility than bonds but jump around less than common stock.

Another reason investors are drawn to preferred shares is that the dividends, which are fixed, can be taxed at a lower rate than the income thrown off by bonds.

Liquidity crisis

Preferred shares tumbled hard in October; iShares S&P U.S. Preferred Stock Index Fund (PFF) , an ETF managed by Barclays Global Investors, is off about 30% year to date. It has a 30-day yield of 9.3% and charges management fees of 0.48%.

Invesco PowerShares Capital Management also oversees a pair of preferred-stock ETFs: PowerShares Preferred Portfolio (PGX) and PowerShares Financial Preferred Portfolio (PGF).

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Bailout becomes buy-in as feds move into banking

October 14, 2008

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.

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Wells Fargo agrees to buy Wachovia, Citi objects

October 3, 2008

Friday October 3, 6:19 pm ET
By Sara Lepro, AP Business Writer

Wells Fargo agrees to acquire Wachovia for $14.8 billion; Citigroup demands Wachovia nix deal

NEW YORK (AP) — A battle broke out Friday for control of Wachovia (WB), as Wells Fargo (WFC) agreed to pay $14.8 billion for the struggling bank, while Citigroup (C) and federal regulators insisted that Citi’s earlier and lower-priced takeover offer go forward.

The surprise announcement that Wachovia Corp. agreed to be acquired by San Francisco-based Wells Fargo & Co. in the all-stock deal — without government assistance — upended what had appeared to be a carefully examined arrangement and caught regulators off guard.

Wells’ original offer totaled about $15.1 billion, but since the value of its shares closed down 60 cents Friday, the deal is now valued at about $14.8 billion.

Only four days earlier, Citigroup Inc. agreed to pay $2.1 billion for Wachovia’s banking operations in a deal that would have the help of the Federal Deposit Insurance Corp.

The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks’ regulators “to pursue a resolution that serves the public interest.”

Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.

Barring legal action, the future of Wachovia will be determined by the bank’s shareholders and regulators, which both have to approve a final deal.

It was clear which they preferred Friday, as Wachovia shares climbed as high as 80 percent.

The FDIC is talking out of both sides of its mouth, said Roger Cominsky, partner in law firm Hiscock & Barclay’s financial institutions and lending practice. The agency says it stands behind the deal with Citigroup because it hasn’t been nixed yet, he said. “But at the same time, they are saying they are reviewing all proposals.”

By law, he said the FDIC is required to find the least-costly resolution for taxpayers. The Wells Fargo deal would not rely on any assistance from the government.

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