http://www.csmonitor.com/USA/2010/1201/Federal-Reserve-s-astounding-report-We-loaned-banks-trillions
Federal Reserve's 'astounding' report: We loaned banks trillions
The Federal Reserve offers details on the loans it gave to banks and others at the height of the financial crisis. One program alone doled out nearly $9 trillion.
Mark Trumbull, Staff writer / December 1, 2010
The Federal Reserve has lifted its veil of secrecy regarding special lending programs during the financial crisis, responding to a mandate from Congress by revealing the specifics of transactions with firms like Goldman Sachs and Citigroup.
Critics of the Federal Reserve are poring over the data, seeking red flags regarding potential improprieties. And Congress has asked its Government Accountability Office to sift through the numbers and offer its own analysis.
At the same time, it's possible that the release of details will end up largely vindicating the Fed for the massive financial support that it gave the economy at a time of severe stress. The emergency loans, in the view of many finance experts, helped to avert a much deeper economic slump. And those loans have now been largely paid back without losses to the central bank.
The numbers are staggering, encompassing more than a dozen emergency programs set up starting in 2007 or 2008. In one program alone the Fed doled out nearly $9 trillion in funds to borrowers such as Morgan Stanley and Merrill Lynch, largely at interest rates below 1 percent. (This program involved overnight loans, so the amount of Fed credit outstanding at any single point in time was much smaller.)
Other programs, with longer-term loans also measured in the trillions of dollars.
The Fed actions were just part of a larger array of government bailouts for the financial industry, which were deeply unpopular with most Americans. Rescue programs run outside the Fed included insurance-style backstops for bank debts and the investments from the Treasury's $700 billion TARP (Troubled Asset Relief Program).
Despite the public outrage stirred by the actions to prop up firms like Citigroup and AIG, the Fed's biggest mistakes may have come before the recession rather than in response to it.
"My view is that the Fed has done an excellent job since the crisis started, but they didn't do a very good job before the crisis started," says Pete Kyle, a finance expert at the University of Maryland. He says the central bank, as a key financial regulator, should have ensured that US banks had plenty of capital on hand to weather a storm.
Some other economists echo that view, arguing that the Fed and other bank regulators should have done much more to safeguard against a surge in high-risk mortgage lending during the years leading up to the crisis, at a time when US home prices were soaring.
Once a crisis is under way, however, the standard view among economists is that a central bank should act as a "lender of last resort," providing credit as freely as possible to prevent widespread bank failures at a time when ordinary investors are in a panic.
Even if the Fed's general approach was the correct one, Wednesday's data release is sure to prompt close analysis of the money lent, and who got it.
Sen. Bernie Sanders, a Vermont independent who led the charge for Fed transparency, characterized the new details as "astounding" and called for an investigation to determine whether banks borrowed at near-zero interest and then loaned money back to the government at higher rates.
He said the bailouts may have helped to line the pockets not only of banks in general, but also of their top executives.
“How many big banks [that] repaid Treasury Department bailouts in order to avoid limits on executive compensation received no-strings attached loans from the Federal Reserve?" Mr. Sanders asked in a statement released Wednesday.
The transaction details may also call into question whether the Fed was too loose in the quality of collateral that it accepted in making loans to banks and in some cases to industrial firms. (McDonald's and Verizon got Fed help.)
Scores of banks, from large to small, came to the Fed's lending windows. But in some cases the rescue programs ended up targeting aid at a few prominent firms.
For example, at the height of the crisis, just four large securities firms were the main recipients of loans from the Fed's Primary Dealer Credit Facility, an overnight loan program for securities firms. Of $3.6 trillion doled out in the six weeks after Sept. 15, 2008 (when Lehman Brothers failed), nearly $3.1 trillion went to Morgan Stanley, Citigroup, Goldman Sachs, or Merrill Lynch.
The Fed argued against disclosing the names of firms that recieved loans from this and other programs, saying that in a crisis firms should not be worried about a possible stigma attached to getting emergency funds.
Since the loans have largely been repaid in full, the crisis response appears on one level to impose little direct cost on the public. The biggest cost of the rescues may be indirect. Propping up financial firms can encourage risky behavior, and thus sow the seeds of future crises, by making financial firms believe they are too important to be allowed to fail.
Congress recently passed financial reforms designed to address this problem, but Mr. Kyle and other finance experts say the measure has not fully resolved that problem.
Showing posts with label Morgan Stanley. Show all posts
Showing posts with label Morgan Stanley. Show all posts
Thursday, December 9, 2010
Monday, May 31, 2010
“The Market” is a Reactionary Mystification
http://tarpley.net/2010/05/23/reply-to-the-attack-on-economic-populism/
“The Market” is a Reactionary Mystification: Reply to the Attack on Economic Populism from Franco Debenedetti and other Italian Economists
Webster G. Tarpley
TARPLEY.net
May 23, 2010
A group of Italian economists led by Franco Debenedetti of the famous financier clan and the banker Paolo Savona, obviously fearful that the Berlusconi-Tremonti government of Italy will join last Tuesday’s successful German ban on the type of toxic derivative known as the naked credit default swap, have sent an alarmed warning to the Corriere della Sera of Milan1. Debenedetti has contributed an article expressing similar sentiments to the Italian business newspaper Il Sole 24 Ore in which he rails at the “Mrs. Merkel market” now in force in Germany2. These economists, obviously inspired by the doctrines of Friedrich von Hayek and the Austrian school, want Italy to remain faithful no matter what to the widely discredited ideas of laissez-faire economics, even as those doctrines are everywhere under attack for having caused the current world economic depression. For these neoliberal and monetarist thinkers, any attempt to ban derivatives or tax speculation must be condemned as “economic populism,” which for these writers is a term of opprobrium.
These anti-populist economists need to be reminded of some basic facts about derivatives. The collapse of the Central European banking system in the summer of 1931 was decisively enabled by derivatives – specifically by speculation in wool futures by a north German textile company which brought down the Danat Bank, leading to panic runs on all German banks. Thanks to the American New Deal of Franklin D. Roosevelt, most over-the-counter and exchange-traded derivatives were illegal from 1936 to 1982 under the Commodities Exchange Act, which was repealed by the free-market enthusiast Ronald Reagan. During those years, US rates of economic growth and real wages were far superior to what they have been any time since, and financial panics were much more limited than they had been before or have become since. Presumably, FDR would be dismissed as a mere populist.
In today’s crisis, we are confronted at every turn with the fatal combination of deregulated hedge funds plus these now-rehabilitated derivatives, which in the meantime amount to a world speculative bubble of some $1.5 quadrillion of notional value. Lehman Brothers, Citibank, and Merrill Lynch were destroyed by derivatives in the form of a combination of their issuance of synthetic collateralized debt obligations based on mortgages and consumer debt, together with the credit default swaps used by hedge funds to attack these banks. The insurance company AIG had a hedge fund in London which issued $3 trillion worth of derivatives (more than the GDP of France), featuring a very toxic portfolio of credit default swaps. The failure of AIG caused by these toxic bets has now cost the US taxpayer $180 billion and counting. The attack on Greece, as these economists seem to recognize, was organized during a dinner party in Manhattan on February 8, 2010, leader reported in the headline story of the Wall Street Journal on February 26, 20103. European taxpayers are now on the hook for almost $1 trillion in bailouts as a result of this speculation. That Manhattan hedge fund dinner seems to fulfill the prima facie specifications of an illegal conspiracy in restraint of trade under the terms of the US Sherman Antitrust Act of 1890, a law proposed all those years ago by a very Republican senator and signed by Benjamin Harrison, a very Republican president. Were they populists too?
The May 6, 2010 1,000-point fall of the Dow Jones Industrial Average was the result of a speculative bet using options (i.e., derivatives) against the Standard & Poor’s 500 stock index placed by the Universa Investments hedge fund, advised by “Black Swan” theorist Nassim Taleb – according to the Wall Street Journal of May 11, 2010. That thousand point plunge, it is estimated, wiped out about $1 trillion worth of paper wealth in about 20 minutes. What with a trillion here and a trillion there, derivatives and the regulated hedge funds are becoming a prohibitively expensive luxury.
Debenedetti and his friends wish to save credit default swaps at all costs. In this they face serious problems. On one level, credit default swaps are bets, wagers, and therefore illegal under the gambling laws in many countries. If it is argued that credit default swaps are insurance, then they are also illegal, since most of the issuers are not insurance companies, and have no intention of meeting the legal requirements to underwrite insurance policies, such as legal registration, capital requirements, etc. Are credit default swaps such a glorious benefit to society that they should enjoy exemption from laws and regulations? Recent history indicates that derivatives do not merit such special treatment.
Debenedetti and his friends are also opposed to a Tobin tax, otherwise known as a Wall Street sales tax, financial transaction tax, securities transfer tax, trading tax, or Robin Hood tax, which would be levied on the financial transactions of market players. Debenedetti & Co. therefore want derivatives and other financial instruments to enjoy yet another exemption. In Italy, the vast majority of goods and services must pay a hefty Value Added Tax (VAT or IVA). Parents who want to buy shoes, clothing, and school supplies for their children must pay this tax. But for some strange reason, banks and hedge funds do not pay on their flash trading, program trading, and high-frequency trading. We can guess that the total deficit of governments at all levels in Europe, the United States, and Japan is closely correlated to the total exemption of financial institutions from IVA or sales tax on their turnover. To argue that this de facto public subsidy for speculation should be continued in an era when so many other activities are being heavily taxed or subjected to austerity cuts is reminiscent of the mentality of the French aristocracy under the pre-1789 ancien régime, which claimed that it had the divine right not be taxed under any circumstances. This claim, as we know, did not hold up.
At the heart of the arguments put forward by Debenedetti and his friends is the notion that human reason is very weak indeed, and cannot attain a practical understanding or overview of how political economy works. Only the market, they claim, can do with this by totalizing so many separate facts. But they are not arguing from any empirical observation of how markets really work, but expressing the fetishism of an efficient market which was typical of von Hayek and other Austrians. They tried to portray markets as genuine epistemological tools, which provided knowledge which could not be obtained any other way. Even the Ayn Rand devotee Alan Greenspan has backed away from this extravagant claim in the wake of the catastrophic collapse of the New York banks in October 2008. When asked whether he had been led astray by his market ideology, Greenspan told a Congressional hearing: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.” (New York Times, October 23, 2008) Debenedetti does not share this distress. At the same time, the successful history of the Bank of the United States under Alexander Hamilton, the French Commissariat du Plan under DeGaulle, and the Japanese Ministry of International Trade and Industry (MITI)) makes clear to human reason is indeed capable of determining the main priorities of national economies.
Market fetishism is radically anti-historical. Everyone is aware of speculative manias, bubbles, panics, and the other recurring psychoses which make the judgment of any market totally unreliable in many critical moments. And what if there are monopolies, duopolies, oligopolies, trusts, combinations, or cartels of the February 8 type? Then the market is permanently distorted, which is what we have been seeing for decades.
Debenedetti wants “the market” to be seen as objective and impersonal, but it is not. “The market” has names and faces. If we find that half a dozen of the largest US banks control about 60% of all assets in the entire United States economy, then we can make that exorbitant control very personal and concrete. The owners of a majority share of the United States are bankers like Jamie Dimon of J.P. Morgan Chase, Vikram Pandit of Citibank, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America/Merrill Lynch, and their respective boards. We can even know how many billions each one has been given in the form of bailouts at public expense.
The Austrian school makes the market into a metaphysical abstraction, a force above the rest of history, because it needs this mystification in order to defend the very concrete privileges of some very sleazy individuals who are the speculators. Some early Protestants tried to argue that the success of the speculator had been instituted by God. When this idea lost traction, apologists for speculation tried to argue that the speculators were morally or intellectually superior to the rest of humanity. When that did not work either, the Austrian school hit upon the trick of removing the speculators from consideration altogether by hiding them from view behind the anonymous and impersonal abstraction of “the market.” As the case of Greenspan suggests, this argument has also become untenable, and the entire edifice of Austrian thought is falling to the ground.
Debenedetti and his co-thinkers suggest that “the market” is able to detect the secret financial weaknesses of nations. But surely the shoe is on the other foot. The major US banks listed above were all, without exception, bankrupt and insolvent before US government intervention in the form of the bailout of October 2008. Today, any objective appraisal would conclude that Greece is far more economically viable and solvent then Citibank. Portugal is more viable than Goldman Sachs. Italy has a brighter economic future by far than J.P. Morgan.
The situation today would therefore seem to offer the following alternative. The speculative assault of the zombie banks and hedge fund speculators may succeed in bankrupting the modern nation state at all levels, in which case we will be dealing with the collapse of civilization as we have known it since the first prototype of the modern state emerged in Milan in the late 14th century under Giangaleazzo Visconti, who offered debt relief to strapped farmers. The better alternative is that the nation state will use its inherent sovereign powers to liquidate the bankrupt zombie banks and regulate many of the predatory activities of hedge funds out of existence, while banning the most toxic forms of derivatives and forcing speculators to share in the general tax burden of society.
Those who want the second of these alternatives must get to work here and now. The most obvious way to begin is for the present Italian government of Berlusconi and Tremonti to join the measures instituted by the German government last Tuesday. Italy should also go beyond these tentative initial German measures by banning all forms of credit default swaps, which are already inherently illegal under existing laws. Then there are those extremely dangerous synthetic collateralized debt obligations, which even Blankfein of Goldman Sachs has suggested might be done away with. They should indeed be totally banned at once. Antitrust investigations could be opened against the Feb. 8 hedge fund group by the Italian magistrates, whose independence has become world-famous. The Tobin tax should also be instituted on an emergency measure for financial stability and revenue enhancement on a purely national basis, with the revenue being retained for the benefit of the national budget.
Additional countries may soon join in the German ban. Likely candidates are the nations that were closely associated with the D-Mark in the old “snake in a tunnel” currency bloc starting in the 1970s. These would include Belgium and the Netherlands. The Czech Republic is another possibility, as is Sweden. Soon we may have a pro-derivatives bloc led by the US and the UK confronting an anti-derivatives bloc led by Germany. On the eve of the Washington Economic Conference of November 2008, I wrote: “The best we can hope for … is … dividing the world between a US-UK dominated derivatives bloc and a Brazil-India-Russia-China-South Africa anti-derivatives bloc interested in real physical commodity production, not fictitious capital.” The surprise is that the leadership of the anti-derivatives forces has actually been seized by Germany.
____________________________________
[1] Franco Debenedetti, Oscar Giannin, Antonio Martino, Roberto Perotti, Nicola Rossi, Paolo Savona, Vito Tanzi, Alberto Mingardi, “In difesa del mercato e degli operatori i responsabili veri e presunti della crisi,” Corriere della Sera, May 21, 2010, http://archiviostorico.corriere.it/2010/maggio/21/difesa_del_mercato_degli_operatori_co_9_100521085.shtml
[2] Franco Debenedetti, “È il mercato signora Merkel,” Il Sole 24 Ore, May 21, 2010, http://www.ilsole24ore.com/art/SoleOnLine4/Editrice/IlSole24Ore/2010/05/21/Italia/17_A.shtml
[3] See “Financial Warfare Exposed: Soros, Goldman Sachs, Hedge Funds Attack Greece to Smash Euro,” http://tarpley.net/2010/03/04/financial-warfare-exposed-soros-goldman-sachs-hedge-funds-attack-greece-to-smash-euro/
“The Market” is a Reactionary Mystification: Reply to the Attack on Economic Populism from Franco Debenedetti and other Italian Economists
Webster G. Tarpley
TARPLEY.net
May 23, 2010
A group of Italian economists led by Franco Debenedetti of the famous financier clan and the banker Paolo Savona, obviously fearful that the Berlusconi-Tremonti government of Italy will join last Tuesday’s successful German ban on the type of toxic derivative known as the naked credit default swap, have sent an alarmed warning to the Corriere della Sera of Milan1. Debenedetti has contributed an article expressing similar sentiments to the Italian business newspaper Il Sole 24 Ore in which he rails at the “Mrs. Merkel market” now in force in Germany2. These economists, obviously inspired by the doctrines of Friedrich von Hayek and the Austrian school, want Italy to remain faithful no matter what to the widely discredited ideas of laissez-faire economics, even as those doctrines are everywhere under attack for having caused the current world economic depression. For these neoliberal and monetarist thinkers, any attempt to ban derivatives or tax speculation must be condemned as “economic populism,” which for these writers is a term of opprobrium.
These anti-populist economists need to be reminded of some basic facts about derivatives. The collapse of the Central European banking system in the summer of 1931 was decisively enabled by derivatives – specifically by speculation in wool futures by a north German textile company which brought down the Danat Bank, leading to panic runs on all German banks. Thanks to the American New Deal of Franklin D. Roosevelt, most over-the-counter and exchange-traded derivatives were illegal from 1936 to 1982 under the Commodities Exchange Act, which was repealed by the free-market enthusiast Ronald Reagan. During those years, US rates of economic growth and real wages were far superior to what they have been any time since, and financial panics were much more limited than they had been before or have become since. Presumably, FDR would be dismissed as a mere populist.
In today’s crisis, we are confronted at every turn with the fatal combination of deregulated hedge funds plus these now-rehabilitated derivatives, which in the meantime amount to a world speculative bubble of some $1.5 quadrillion of notional value. Lehman Brothers, Citibank, and Merrill Lynch were destroyed by derivatives in the form of a combination of their issuance of synthetic collateralized debt obligations based on mortgages and consumer debt, together with the credit default swaps used by hedge funds to attack these banks. The insurance company AIG had a hedge fund in London which issued $3 trillion worth of derivatives (more than the GDP of France), featuring a very toxic portfolio of credit default swaps. The failure of AIG caused by these toxic bets has now cost the US taxpayer $180 billion and counting. The attack on Greece, as these economists seem to recognize, was organized during a dinner party in Manhattan on February 8, 2010, leader reported in the headline story of the Wall Street Journal on February 26, 20103. European taxpayers are now on the hook for almost $1 trillion in bailouts as a result of this speculation. That Manhattan hedge fund dinner seems to fulfill the prima facie specifications of an illegal conspiracy in restraint of trade under the terms of the US Sherman Antitrust Act of 1890, a law proposed all those years ago by a very Republican senator and signed by Benjamin Harrison, a very Republican president. Were they populists too?
The May 6, 2010 1,000-point fall of the Dow Jones Industrial Average was the result of a speculative bet using options (i.e., derivatives) against the Standard & Poor’s 500 stock index placed by the Universa Investments hedge fund, advised by “Black Swan” theorist Nassim Taleb – according to the Wall Street Journal of May 11, 2010. That thousand point plunge, it is estimated, wiped out about $1 trillion worth of paper wealth in about 20 minutes. What with a trillion here and a trillion there, derivatives and the regulated hedge funds are becoming a prohibitively expensive luxury.
Debenedetti and his friends wish to save credit default swaps at all costs. In this they face serious problems. On one level, credit default swaps are bets, wagers, and therefore illegal under the gambling laws in many countries. If it is argued that credit default swaps are insurance, then they are also illegal, since most of the issuers are not insurance companies, and have no intention of meeting the legal requirements to underwrite insurance policies, such as legal registration, capital requirements, etc. Are credit default swaps such a glorious benefit to society that they should enjoy exemption from laws and regulations? Recent history indicates that derivatives do not merit such special treatment.
Debenedetti and his friends are also opposed to a Tobin tax, otherwise known as a Wall Street sales tax, financial transaction tax, securities transfer tax, trading tax, or Robin Hood tax, which would be levied on the financial transactions of market players. Debenedetti & Co. therefore want derivatives and other financial instruments to enjoy yet another exemption. In Italy, the vast majority of goods and services must pay a hefty Value Added Tax (VAT or IVA). Parents who want to buy shoes, clothing, and school supplies for their children must pay this tax. But for some strange reason, banks and hedge funds do not pay on their flash trading, program trading, and high-frequency trading. We can guess that the total deficit of governments at all levels in Europe, the United States, and Japan is closely correlated to the total exemption of financial institutions from IVA or sales tax on their turnover. To argue that this de facto public subsidy for speculation should be continued in an era when so many other activities are being heavily taxed or subjected to austerity cuts is reminiscent of the mentality of the French aristocracy under the pre-1789 ancien régime, which claimed that it had the divine right not be taxed under any circumstances. This claim, as we know, did not hold up.
At the heart of the arguments put forward by Debenedetti and his friends is the notion that human reason is very weak indeed, and cannot attain a practical understanding or overview of how political economy works. Only the market, they claim, can do with this by totalizing so many separate facts. But they are not arguing from any empirical observation of how markets really work, but expressing the fetishism of an efficient market which was typical of von Hayek and other Austrians. They tried to portray markets as genuine epistemological tools, which provided knowledge which could not be obtained any other way. Even the Ayn Rand devotee Alan Greenspan has backed away from this extravagant claim in the wake of the catastrophic collapse of the New York banks in October 2008. When asked whether he had been led astray by his market ideology, Greenspan told a Congressional hearing: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.” (New York Times, October 23, 2008) Debenedetti does not share this distress. At the same time, the successful history of the Bank of the United States under Alexander Hamilton, the French Commissariat du Plan under DeGaulle, and the Japanese Ministry of International Trade and Industry (MITI)) makes clear to human reason is indeed capable of determining the main priorities of national economies.
Market fetishism is radically anti-historical. Everyone is aware of speculative manias, bubbles, panics, and the other recurring psychoses which make the judgment of any market totally unreliable in many critical moments. And what if there are monopolies, duopolies, oligopolies, trusts, combinations, or cartels of the February 8 type? Then the market is permanently distorted, which is what we have been seeing for decades.
Debenedetti wants “the market” to be seen as objective and impersonal, but it is not. “The market” has names and faces. If we find that half a dozen of the largest US banks control about 60% of all assets in the entire United States economy, then we can make that exorbitant control very personal and concrete. The owners of a majority share of the United States are bankers like Jamie Dimon of J.P. Morgan Chase, Vikram Pandit of Citibank, Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, and Brian Moynihan of Bank of America/Merrill Lynch, and their respective boards. We can even know how many billions each one has been given in the form of bailouts at public expense.
The Austrian school makes the market into a metaphysical abstraction, a force above the rest of history, because it needs this mystification in order to defend the very concrete privileges of some very sleazy individuals who are the speculators. Some early Protestants tried to argue that the success of the speculator had been instituted by God. When this idea lost traction, apologists for speculation tried to argue that the speculators were morally or intellectually superior to the rest of humanity. When that did not work either, the Austrian school hit upon the trick of removing the speculators from consideration altogether by hiding them from view behind the anonymous and impersonal abstraction of “the market.” As the case of Greenspan suggests, this argument has also become untenable, and the entire edifice of Austrian thought is falling to the ground.
Debenedetti and his co-thinkers suggest that “the market” is able to detect the secret financial weaknesses of nations. But surely the shoe is on the other foot. The major US banks listed above were all, without exception, bankrupt and insolvent before US government intervention in the form of the bailout of October 2008. Today, any objective appraisal would conclude that Greece is far more economically viable and solvent then Citibank. Portugal is more viable than Goldman Sachs. Italy has a brighter economic future by far than J.P. Morgan.
The situation today would therefore seem to offer the following alternative. The speculative assault of the zombie banks and hedge fund speculators may succeed in bankrupting the modern nation state at all levels, in which case we will be dealing with the collapse of civilization as we have known it since the first prototype of the modern state emerged in Milan in the late 14th century under Giangaleazzo Visconti, who offered debt relief to strapped farmers. The better alternative is that the nation state will use its inherent sovereign powers to liquidate the bankrupt zombie banks and regulate many of the predatory activities of hedge funds out of existence, while banning the most toxic forms of derivatives and forcing speculators to share in the general tax burden of society.
Those who want the second of these alternatives must get to work here and now. The most obvious way to begin is for the present Italian government of Berlusconi and Tremonti to join the measures instituted by the German government last Tuesday. Italy should also go beyond these tentative initial German measures by banning all forms of credit default swaps, which are already inherently illegal under existing laws. Then there are those extremely dangerous synthetic collateralized debt obligations, which even Blankfein of Goldman Sachs has suggested might be done away with. They should indeed be totally banned at once. Antitrust investigations could be opened against the Feb. 8 hedge fund group by the Italian magistrates, whose independence has become world-famous. The Tobin tax should also be instituted on an emergency measure for financial stability and revenue enhancement on a purely national basis, with the revenue being retained for the benefit of the national budget.
Additional countries may soon join in the German ban. Likely candidates are the nations that were closely associated with the D-Mark in the old “snake in a tunnel” currency bloc starting in the 1970s. These would include Belgium and the Netherlands. The Czech Republic is another possibility, as is Sweden. Soon we may have a pro-derivatives bloc led by the US and the UK confronting an anti-derivatives bloc led by Germany. On the eve of the Washington Economic Conference of November 2008, I wrote: “The best we can hope for … is … dividing the world between a US-UK dominated derivatives bloc and a Brazil-India-Russia-China-South Africa anti-derivatives bloc interested in real physical commodity production, not fictitious capital.” The surprise is that the leadership of the anti-derivatives forces has actually been seized by Germany.
____________________________________
[1] Franco Debenedetti, Oscar Giannin, Antonio Martino, Roberto Perotti, Nicola Rossi, Paolo Savona, Vito Tanzi, Alberto Mingardi, “In difesa del mercato e degli operatori i responsabili veri e presunti della crisi,” Corriere della Sera, May 21, 2010, http://archiviostorico.corriere.it/2010/maggio/21/difesa_del_mercato_degli_operatori_co_9_100521085.shtml
[2] Franco Debenedetti, “È il mercato signora Merkel,” Il Sole 24 Ore, May 21, 2010, http://www.ilsole24ore.com/art/SoleOnLine4/Editrice/IlSole24Ore/2010/05/21/Italia/17_A.shtml
[3] See “Financial Warfare Exposed: Soros, Goldman Sachs, Hedge Funds Attack Greece to Smash Euro,” http://tarpley.net/2010/03/04/financial-warfare-exposed-soros-goldman-sachs-hedge-funds-attack-greece-to-smash-euro/
Saturday, April 24, 2010
Big Banks Mask Risk Levels
http://online.wsj.com/article/SB10001424052702304830104575172280848939898.html
APRIL 9, 2010
Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Citi Execs Deny Responsibility Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank. Kate Kelly and Evan Newmark discuss.
"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.
Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.
"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.
Masking Risk
An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.
According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.
The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.
Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.
Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.
For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.
Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.
A bank spokeswoman said "the team was aware of and worked within its risk limits."
Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
APRIL 9, 2010
Big Banks Mask Risk Levels
Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review
By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.
A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.
Citi Execs Deny Responsibility Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.
That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.
Major banks masked their risk levels during the most recent five quarters by lowering debt levels just before announcing quarterly earnings, according to data from the New York Federal Reserve Bank. Kate Kelly and Evan Newmark discuss.
"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.
Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.
"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.
Masking Risk
An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.
The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.
According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.
The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.
The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.
The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.
Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.
Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.
For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.
Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.
A bank spokeswoman said "the team was aware of and worked within its risk limits."
Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com
Wednesday, August 5, 2009
Citigroup’s $100 million banker
http://wsws.org/articles/2009/jul2009/pers-j29.shtml
Citigroup’s $100 million banker
29 July 2009
The Wall Street Journal reported Saturday that a top Citigroup trader is demanding that the bank follow through on a 2009 pay package estimated at $100 million. Andrew J. Hall, who runs Citigroup’s energy trading division, has threatened to quit should the bank fail to honor his pay deal in full.
According to the Journal, Hall, an energy speculator and top money-maker for the bank, received more than $100 million last year. Such nine-digit salaries exemplify the plundering of social resources that has become a hallmark of American capitalism and the American financial elite.
The crash of 2008 and Great Recession of 2009 have had no impact on the obscene levels of wealth that flow to a parasitic elite at the top of the economic ladder. On the contrary, the power of the aristocracy has, if anything, been enhanced as a result of the policies of the Obama administration, which has made the bailout of Wall Street at public expense its number one priority.
It would take a minimum wage worker, working full-time without vacations, 6,269 years to earn $100 million. Hall’s yearly pay is roughly equivalent to the annual wage of 2,000 workers in the US. He makes in an hour about the same amount most American workers earn in a year.
Hall’s two-year take of $200 million will be greater than the budget deficits confronting a large number of US cities and their public school systems.
Hall heads Citigroup’s energy-trading unit, Phibro LLC, which the Journal describes as “a secretive operation, run from the site of a former Connecticut dairy farm [that] occasionally accounts for a disproportionate chunk of Citigroup’s income.”
The federal government has plowed $45 billion in cash into Citigroup and guaranteed over $300 billion of the bank’s assets. It will soon own 34 percent of the bank’s common stock, making it Citigroup’s largest shareholder.
Yet the Obama administration is tied up in knots over the demands of a single Citigroup energy speculator. Nothing could more clearly demonstrate the complete subordination of the government and the entire political system to the financial mafia.
The Journal writes that the payout would set “the stage for a potential showdown between Citigroup and the government’s new pay czar,” Kenneth Feinberg. President Obama recently appointed Feinberg to the Treasury Department to oversee executive compensation at seven corporations holding outstanding TARP (Trouble Asset Relief Program) funds—Citigroup, Bank of America, American International Group, General Motors, Chrysler, and the two automakers’ finance arms.
Far from a “showdown,” a chummy discussion among Wall Street insiders is underway over how to pay Hall. The Journal reports that Citigroup officials have been lobbying Feinberg to approve Hall’s pay package, especially Citigroup Vice Chairman Lewis Kaden, “who has been handling most of the discussions with the pay czar, trying to capitalize on the two men’s longtime friendship.” The newspaper indicates that Citigroup might finesse the TARP pay limits by formally spinning off Phibro.
In a statement on the controversy over Hall’s pay, Citigroup declared, “Retaining and attracting the best talent is very important to the success of Citigroup and all its stakeholders.”
The type of talent so prized on Wall Street is indicated in a separate Journal article, “Traders Blamed for Oil Spike,” published on Tuesday. The article points to the socially destructive nature of Hall’s line of work. It states that the Commodity Futures Trading Commission will issue a report next month attributing the wild swings in oil prices from 2007 to the present largely to the role of energy traders.
Hall’s enormous personal income is bound up with the manipulation of energy markets, which has contributed to the broken finances of millions of American households through higher gas and home heating bills and a run-up in food prices that has dramatically increased hunger in many parts of the world. The volatility on energy markets has played a significant role in the global economic crisis, driving up unemployment to levels not seen since the Great Depression.
Hall’s case only highlights Wall Street’s resumption of multimillion-dollar salaries and bonuses for executives and traders. In recent weeks, other major bailed-out banks, including Goldman Sachs, JPMorgan Chase and Morgan Stanley, have set aside sharply higher—in the case of Goldman Sachs, record—sums for bonuses and salaries. Last week, Morgan Stanley issued its second quarter financial results, revealing that it set aside 72 percent of revenues for salaries and bonuses, even though it reported a loss for the period.
The Obama administration has worked to block any real restrictions on Wall Street pay. Treasury Secretary Timothy Geithner and top economic adviser Lawrence Summers publicly opposed modest limits on executive pay at firms receiving TARP funds that were included in the $787 billion economic stimulus bill passed last February.
The following month, Obama intervened to block executive pay limits passed by the House of Representatives and set for a vote in the Senate following public outrage over reports that the bailed-out insurance giant American International Group (AIG) was about to dispense hundreds of millions of dollars in bonuses.
Obama’s July 22 prime time press conference provided a graphic demonstration of the utter servility of the president and the entire government to the barons of Wall Street. Asked by a reporter if new revelations about bank profits did not indicate that the White House should take “a harder line with Wall Street,” Obama acknowledged that the banks’ reckless speculation and profiteering had precipitated the global economic crisis.
“Wall Street,” he said, “took extraordinary risks with other people’s money, they were peddling loans that they knew could never be paid back, they were flipping those loans and leveraging those loans and higher and higher mountains of debt were being built on loans that were fundamentally unsound. And all of us now are paying the price.”
Far from suggesting that there should be any consequences for such crimes against society, Obama hastened to declare that “it’s a good thing that they’re profitable again, because if they’re profitable that means that they have reserves in place and they can lend.” (In fact, the banks have refused to significantly expand their lending to businesses and consumers). Obama added, “And this is America, so if you’re profitable in the free market system, then you benefit.”
As for the bankers’ use of taxpayer money to reward themselves with colossal salaries and bonuses, the president could do no more than make a lame appeal for greater restraint. “With respect to compensation, I’d like to think that people would feel a little remorse and feel embarrassed and would not get million-dollar or multimillion-dollar bonuses,” Obama said.
The same White House that dictates wage cuts, layoffs and poverty for auto workers dares not infringe on the wealth or prerogatives of the financial aristocracy. Such are the class realities of America and the dictatorial power exerted by the financial elite behind the trappings of American democracy.
Tom Eley and Barry Grey
Citigroup’s $100 million banker
29 July 2009
The Wall Street Journal reported Saturday that a top Citigroup trader is demanding that the bank follow through on a 2009 pay package estimated at $100 million. Andrew J. Hall, who runs Citigroup’s energy trading division, has threatened to quit should the bank fail to honor his pay deal in full.
According to the Journal, Hall, an energy speculator and top money-maker for the bank, received more than $100 million last year. Such nine-digit salaries exemplify the plundering of social resources that has become a hallmark of American capitalism and the American financial elite.
The crash of 2008 and Great Recession of 2009 have had no impact on the obscene levels of wealth that flow to a parasitic elite at the top of the economic ladder. On the contrary, the power of the aristocracy has, if anything, been enhanced as a result of the policies of the Obama administration, which has made the bailout of Wall Street at public expense its number one priority.
It would take a minimum wage worker, working full-time without vacations, 6,269 years to earn $100 million. Hall’s yearly pay is roughly equivalent to the annual wage of 2,000 workers in the US. He makes in an hour about the same amount most American workers earn in a year.
Hall’s two-year take of $200 million will be greater than the budget deficits confronting a large number of US cities and their public school systems.
Hall heads Citigroup’s energy-trading unit, Phibro LLC, which the Journal describes as “a secretive operation, run from the site of a former Connecticut dairy farm [that] occasionally accounts for a disproportionate chunk of Citigroup’s income.”
The federal government has plowed $45 billion in cash into Citigroup and guaranteed over $300 billion of the bank’s assets. It will soon own 34 percent of the bank’s common stock, making it Citigroup’s largest shareholder.
Yet the Obama administration is tied up in knots over the demands of a single Citigroup energy speculator. Nothing could more clearly demonstrate the complete subordination of the government and the entire political system to the financial mafia.
The Journal writes that the payout would set “the stage for a potential showdown between Citigroup and the government’s new pay czar,” Kenneth Feinberg. President Obama recently appointed Feinberg to the Treasury Department to oversee executive compensation at seven corporations holding outstanding TARP (Trouble Asset Relief Program) funds—Citigroup, Bank of America, American International Group, General Motors, Chrysler, and the two automakers’ finance arms.
Far from a “showdown,” a chummy discussion among Wall Street insiders is underway over how to pay Hall. The Journal reports that Citigroup officials have been lobbying Feinberg to approve Hall’s pay package, especially Citigroup Vice Chairman Lewis Kaden, “who has been handling most of the discussions with the pay czar, trying to capitalize on the two men’s longtime friendship.” The newspaper indicates that Citigroup might finesse the TARP pay limits by formally spinning off Phibro.
In a statement on the controversy over Hall’s pay, Citigroup declared, “Retaining and attracting the best talent is very important to the success of Citigroup and all its stakeholders.”
The type of talent so prized on Wall Street is indicated in a separate Journal article, “Traders Blamed for Oil Spike,” published on Tuesday. The article points to the socially destructive nature of Hall’s line of work. It states that the Commodity Futures Trading Commission will issue a report next month attributing the wild swings in oil prices from 2007 to the present largely to the role of energy traders.
Hall’s enormous personal income is bound up with the manipulation of energy markets, which has contributed to the broken finances of millions of American households through higher gas and home heating bills and a run-up in food prices that has dramatically increased hunger in many parts of the world. The volatility on energy markets has played a significant role in the global economic crisis, driving up unemployment to levels not seen since the Great Depression.
Hall’s case only highlights Wall Street’s resumption of multimillion-dollar salaries and bonuses for executives and traders. In recent weeks, other major bailed-out banks, including Goldman Sachs, JPMorgan Chase and Morgan Stanley, have set aside sharply higher—in the case of Goldman Sachs, record—sums for bonuses and salaries. Last week, Morgan Stanley issued its second quarter financial results, revealing that it set aside 72 percent of revenues for salaries and bonuses, even though it reported a loss for the period.
The Obama administration has worked to block any real restrictions on Wall Street pay. Treasury Secretary Timothy Geithner and top economic adviser Lawrence Summers publicly opposed modest limits on executive pay at firms receiving TARP funds that were included in the $787 billion economic stimulus bill passed last February.
The following month, Obama intervened to block executive pay limits passed by the House of Representatives and set for a vote in the Senate following public outrage over reports that the bailed-out insurance giant American International Group (AIG) was about to dispense hundreds of millions of dollars in bonuses.
Obama’s July 22 prime time press conference provided a graphic demonstration of the utter servility of the president and the entire government to the barons of Wall Street. Asked by a reporter if new revelations about bank profits did not indicate that the White House should take “a harder line with Wall Street,” Obama acknowledged that the banks’ reckless speculation and profiteering had precipitated the global economic crisis.
“Wall Street,” he said, “took extraordinary risks with other people’s money, they were peddling loans that they knew could never be paid back, they were flipping those loans and leveraging those loans and higher and higher mountains of debt were being built on loans that were fundamentally unsound. And all of us now are paying the price.”
Far from suggesting that there should be any consequences for such crimes against society, Obama hastened to declare that “it’s a good thing that they’re profitable again, because if they’re profitable that means that they have reserves in place and they can lend.” (In fact, the banks have refused to significantly expand their lending to businesses and consumers). Obama added, “And this is America, so if you’re profitable in the free market system, then you benefit.”
As for the bankers’ use of taxpayer money to reward themselves with colossal salaries and bonuses, the president could do no more than make a lame appeal for greater restraint. “With respect to compensation, I’d like to think that people would feel a little remorse and feel embarrassed and would not get million-dollar or multimillion-dollar bonuses,” Obama said.
The same White House that dictates wage cuts, layoffs and poverty for auto workers dares not infringe on the wealth or prerogatives of the financial aristocracy. Such are the class realities of America and the dictatorial power exerted by the financial elite behind the trappings of American democracy.
Tom Eley and Barry Grey
Sunday, May 17, 2009
"The Greatest Boondoggle in History":
http://finance.yahoo.com/tech-ticker/article/244222/%22The-Greatest-Boondoggle-in-History%22-Banks-Buoyed-at-Taxpayers%27-Expense
"The Greatest Boondoggle in History": Banks Buoyed at Taxpayers' Expense
Posted May 08, 2009
by Aaron Task
Bank stocks soared Friday, including Wells Fargo and Morgan Stanley, which sold shares a discounts of more than 10% below Thursday's close.
The ability of banks to raise capital is certainly positive but the idea of shares rallying amid the capital raising and dilution is "counterintuitive," Bank of America CEO Ken Lewis said on CNBC this morning.
BofA shares were also rallying even as the government said it needs to raise an industry-leading $33.9 billion. Citigroup stock was also a big winner after the government's curious declaration that it "only" needs to raise $5 billion.
While much of the focus is on the stress tests and banks' efforts to raise cash, the real story is Geithner's Public-Private Investment Program (PPIP), says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.
The PPIP is the "greatest boondoggle in the history of the world," says Black, a former bank regulator who was counsel to the Federal Home Loan Bank Board during the S&L crisis. As occurred during the S&L era, Black says the PPIP will allow banks to exchange "trash for cash" and turn "real losses into faulty gains."
If the goal of Tim Geithner and other regulators was "to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished," Black says.
"The Greatest Boondoggle in History": Banks Buoyed at Taxpayers' Expense
Posted May 08, 2009
by Aaron Task
Bank stocks soared Friday, including Wells Fargo and Morgan Stanley, which sold shares a discounts of more than 10% below Thursday's close.
The ability of banks to raise capital is certainly positive but the idea of shares rallying amid the capital raising and dilution is "counterintuitive," Bank of America CEO Ken Lewis said on CNBC this morning.
BofA shares were also rallying even as the government said it needs to raise an industry-leading $33.9 billion. Citigroup stock was also a big winner after the government's curious declaration that it "only" needs to raise $5 billion.
While much of the focus is on the stress tests and banks' efforts to raise cash, the real story is Geithner's Public-Private Investment Program (PPIP), says William Black, an Associate Professor of Economics and Law at the University of Missouri - Kansas City.
The PPIP is the "greatest boondoggle in the history of the world," says Black, a former bank regulator who was counsel to the Federal Home Loan Bank Board during the S&L crisis. As occurred during the S&L era, Black says the PPIP will allow banks to exchange "trash for cash" and turn "real losses into faulty gains."
If the goal of Tim Geithner and other regulators was "to rip off the American taxpayer for the benefit of the least-deserving wealthiest people you can imagine, well - mission accomplished," Black says.
Thursday, November 6, 2008
Wall Street’s Great Heist of 2008
http://wsws.org/articles/2008/nov2008/pers-n01.shtml
Wall Street’s Great Heist of 2008
1st November 2008
The Wall Street Journal published a front-page article Friday reporting that the nine biggest US banks, which have received a combined $125 billion in taxpayer funds as part of the $700 billion bailout authored by Treasury Secretary Henry Paulson and passed by the Democratic Congress, owed their executives more than $40 billion for recent years’ compensation and pensions as of the end of 2007.
This means that nearly a third of the public funds given to these banks will ultimately be used to increase the private fortunes of a handful of multimillionaire Wall Street executives.
This revelation, the result of an analysis of the banks’ corporate reports by the American financial elite’s own chief organ, provides a stark exposure of the social interests that are being served by the government bailout. More generally, it provides an instructive insight into class relations in America.
It has already been widely reported that the banks are refusing to use their government windfalls to resume lending to other banks, businesses and consumers—the ostensible purpose of the cash injections—and are, instead, hoarding the money for the purpose of acquiring smaller and weaker banks. The so-called economic rescue plan is, in fact, a plan to effect a rapid consolidation of the US banking system, resulting in the domination of the economy by a few mega-banks, which will be free to set interest rates and lending standards as they see fit.
Far from opposing this development, Treasury Secretary Paulson and the Federal Reserve Board are encouraging it. They deliberately designed the bailout to place no restrictions on how the banks use their taxpayer money and then enacted changes in the tax code to give banks acquiring other banks a huge tax break. (See: “The ‘dirty little secret’ of the US bank bailout”)
As the Journal explains, the minimal restrictions on future executive compensation stipulated in the bailout bill do not affect deferred payments to executives accumulated over previous years. Since such deferred payment accounts are commonplace in the banking industry and are the preferred means by which top executives build up nest eggs in the hundreds of millions of dollars, those who are primarily responsible for the financial disaster and, in many cases, the ruin of their own companies, will emerge from the crisis richer than ever.
As the Journal puts it: “The deferred-compensation programs for executives are like 401(k) plans on steroids.” At some of the banks that have received government handouts, the newspaper notes, the total amounts previously incurred and owed to their executives exceed what they owe in pensions to their entire work forces.
The newspaper notes that at Goldman Sachs, formerly headed by Paulson, “the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million.”
Goldman received $10 billion of the $125 billion doled out to the biggest banks. JPMorgan Chase, which was granted $25 billion, owes its top officers $8.5 billion. Citigroup, another $25 billion recipient, owes $5 billion, and Morgan Stanley, which got $10 billion in taxpayer money, is in debt to its top executives to the tune of $10 to $12 billion.
A separate article in the same issue of the Journal amplifies this picture of parasitism and criminality. Headlined “Securities Firms Tackle Pay Issue,” it deals with discussions among the top executives of Wall Street firms such as Goldman Sachs, Morgan Stanley and Merrill Lynch over the advisability of paring down their traditional multimillion-dollar year-end bonuses in the face of growing public outrage.
The article notes that since the start of 2002, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have paid a total of $312 billion in compensation and benefits. It estimates that these firms have also paid out $187 billion in bonuses, for a grand total of $499 billion. Much of this staggering sum—more than five-and-a-half times the total income of the firms—has gone to the top echelon of executives.
The latter three firms have either disappeared or are in the process of being taken over. Bear Stearns was bought out by JPMorgan Chase last March in a deal subsidized by the government in the amount of $29 billion; Lehman Brothers filed for bankruptcy in September, and Merrill Lynch has agreed to sell itself to Bank of America in a government-brokered agreement.
While the bank executives were awarding themselves tens of millions in salaries and bonuses, their companies were being run into the ground. Since the start of 2007, for example, Merrill Lynch has had net losses of nearly $20 billion, or virtually all of the profits it made from 2003 to 2006. CEO John Thain took in $83 million in 2007. Now, thousands of Merrill employees are being laid off to cut $7 billion in costs as part of the takeover by Bank of America.
The events of the past two months have brought into sharper focus the naked power exercised by the American financial aristocracy over society and the state. All of the various schemes devised in response to the near-collapse of the financial system have had one thing in common: they proceed from the need to uphold the interests of the most powerful banks and the richest of the rich.
The combination of impotence, servility and duplicity of Congress and its Democratic leadership is being mercilessly exposed. Charles Schumer, the Democratic chairman of the Joint Economic Committee, said this week in regard to the banks’ refusal to use the government money to extend new loans, “There’s not much we can do other than jawbone.”
Christopher Dodd, the Democratic chairman of the Senate Banking Committee, blustered, “The intent here certainly wasn’t for healthy banks to buy healthy banks—it’s infuriating.”
Dodd, it would seem, is shocked to learn that the bailout plan he adamantly supported is being used to serve the narrow self-interest of the bankers. Even if one makes the implausible assumption that this veteran of Washington politics and favorite of Wall Street is not being disingenuous, that does not alter the fact of his utter prostration before the real power brokers in America.
Nothing is permissible that impinges on the basic prerogatives of the financial oligarchy, no matter the cost to the American people. On critical matters regarding the class interests of the ruling elite, the people have no say.
There is a ruling class in America. The administration, Congress, the courts—all of the agencies of the state—are, behind the trappings of democracy, instruments of its domination.
Barry Grey
Wall Street’s Great Heist of 2008
1st November 2008
The Wall Street Journal published a front-page article Friday reporting that the nine biggest US banks, which have received a combined $125 billion in taxpayer funds as part of the $700 billion bailout authored by Treasury Secretary Henry Paulson and passed by the Democratic Congress, owed their executives more than $40 billion for recent years’ compensation and pensions as of the end of 2007.
This means that nearly a third of the public funds given to these banks will ultimately be used to increase the private fortunes of a handful of multimillionaire Wall Street executives.
This revelation, the result of an analysis of the banks’ corporate reports by the American financial elite’s own chief organ, provides a stark exposure of the social interests that are being served by the government bailout. More generally, it provides an instructive insight into class relations in America.
It has already been widely reported that the banks are refusing to use their government windfalls to resume lending to other banks, businesses and consumers—the ostensible purpose of the cash injections—and are, instead, hoarding the money for the purpose of acquiring smaller and weaker banks. The so-called economic rescue plan is, in fact, a plan to effect a rapid consolidation of the US banking system, resulting in the domination of the economy by a few mega-banks, which will be free to set interest rates and lending standards as they see fit.
Far from opposing this development, Treasury Secretary Paulson and the Federal Reserve Board are encouraging it. They deliberately designed the bailout to place no restrictions on how the banks use their taxpayer money and then enacted changes in the tax code to give banks acquiring other banks a huge tax break. (See: “The ‘dirty little secret’ of the US bank bailout”)
As the Journal explains, the minimal restrictions on future executive compensation stipulated in the bailout bill do not affect deferred payments to executives accumulated over previous years. Since such deferred payment accounts are commonplace in the banking industry and are the preferred means by which top executives build up nest eggs in the hundreds of millions of dollars, those who are primarily responsible for the financial disaster and, in many cases, the ruin of their own companies, will emerge from the crisis richer than ever.
As the Journal puts it: “The deferred-compensation programs for executives are like 401(k) plans on steroids.” At some of the banks that have received government handouts, the newspaper notes, the total amounts previously incurred and owed to their executives exceed what they owe in pensions to their entire work forces.
The newspaper notes that at Goldman Sachs, formerly headed by Paulson, “the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million.”
Goldman received $10 billion of the $125 billion doled out to the biggest banks. JPMorgan Chase, which was granted $25 billion, owes its top officers $8.5 billion. Citigroup, another $25 billion recipient, owes $5 billion, and Morgan Stanley, which got $10 billion in taxpayer money, is in debt to its top executives to the tune of $10 to $12 billion.
A separate article in the same issue of the Journal amplifies this picture of parasitism and criminality. Headlined “Securities Firms Tackle Pay Issue,” it deals with discussions among the top executives of Wall Street firms such as Goldman Sachs, Morgan Stanley and Merrill Lynch over the advisability of paring down their traditional multimillion-dollar year-end bonuses in the face of growing public outrage.
The article notes that since the start of 2002, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have paid a total of $312 billion in compensation and benefits. It estimates that these firms have also paid out $187 billion in bonuses, for a grand total of $499 billion. Much of this staggering sum—more than five-and-a-half times the total income of the firms—has gone to the top echelon of executives.
The latter three firms have either disappeared or are in the process of being taken over. Bear Stearns was bought out by JPMorgan Chase last March in a deal subsidized by the government in the amount of $29 billion; Lehman Brothers filed for bankruptcy in September, and Merrill Lynch has agreed to sell itself to Bank of America in a government-brokered agreement.
While the bank executives were awarding themselves tens of millions in salaries and bonuses, their companies were being run into the ground. Since the start of 2007, for example, Merrill Lynch has had net losses of nearly $20 billion, or virtually all of the profits it made from 2003 to 2006. CEO John Thain took in $83 million in 2007. Now, thousands of Merrill employees are being laid off to cut $7 billion in costs as part of the takeover by Bank of America.
The events of the past two months have brought into sharper focus the naked power exercised by the American financial aristocracy over society and the state. All of the various schemes devised in response to the near-collapse of the financial system have had one thing in common: they proceed from the need to uphold the interests of the most powerful banks and the richest of the rich.
The combination of impotence, servility and duplicity of Congress and its Democratic leadership is being mercilessly exposed. Charles Schumer, the Democratic chairman of the Joint Economic Committee, said this week in regard to the banks’ refusal to use the government money to extend new loans, “There’s not much we can do other than jawbone.”
Christopher Dodd, the Democratic chairman of the Senate Banking Committee, blustered, “The intent here certainly wasn’t for healthy banks to buy healthy banks—it’s infuriating.”
Dodd, it would seem, is shocked to learn that the bailout plan he adamantly supported is being used to serve the narrow self-interest of the bankers. Even if one makes the implausible assumption that this veteran of Washington politics and favorite of Wall Street is not being disingenuous, that does not alter the fact of his utter prostration before the real power brokers in America.
Nothing is permissible that impinges on the basic prerogatives of the financial oligarchy, no matter the cost to the American people. On critical matters regarding the class interests of the ruling elite, the people have no say.
There is a ruling class in America. The administration, Congress, the courts—all of the agencies of the state—are, behind the trappings of democracy, instruments of its domination.
Barry Grey
Thursday, September 25, 2008
Last major investment banks change status
http://news.yahoo.com/s/ap/bank_change
Last major investment banks change status
By MARTIN CRUTSINGER
Mon Sep 22, 2008
It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
The Fed had originally said Sunday night that the change in status from investment banks to bank holding companies would not take place for five days, pending review on antitrust grounds. The Fed announced Monday, however, that after discussions with the Justice Department, the status change for both institutions could take place immediately.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday. Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell 245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
Last major investment banks change status
By MARTIN CRUTSINGER
Mon Sep 22, 2008
It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
The Fed had originally said Sunday night that the change in status from investment banks to bank holding companies would not take place for five days, pending review on antitrust grounds. The Fed announced Monday, however, that after discussions with the Justice Department, the status change for both institutions could take place immediately.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday. Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell 245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
Thursday, September 18, 2008
`Tectonic' Shift on Wall Street
http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=abVpg8xJDMWk
`Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold
By Christine Harper
Sept. 15 (Bloomberg) -- In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.
New York-based Lehman, founded 158 years ago, said early today that it filed for Chapter 11 bankruptcy protection after failing to find a buyer. Merrill Lynch, 94 years old and also based in New York, agreed to sell itself to Bank of America Corp. for $50 billion in an emergency deal hashed out yesterday.
``The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this,'' said Peter Kenny, managing director at Knight Capital Group Inc., the Jersey City, New Jersey-based brokerage that handles about $1 trillion worth of stock transactions a quarter. ``It's an ugly and painful process.''
The engines that powered record growth in the financial industry over the last decade -- cheap credit and surging property values -- have been thrust into reverse. Companies that once thrived on making real estate loans and holding assets bought with borrowed money are now under siege, giving the upper hand to those less reliant on leverage and holding the fewest assets tied to property.
The industry convulsions that started last year have already eliminated Bear Stearns Cos., forced into a cut-price sale to JPMorgan Chase & Co. with government support in March. A week ago, the U.S. Treasury placed mortgage companies Fannie Mae and Freddie Mac into conservatorship, guaranteeing their widely held debt securities while all but erasing their equity value.
American International Group Inc., once the world's largest insurer, is struggling to raise cash to avoid a credit-rating downgrade that could cripple its business.
From Five to Two
The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs Group Inc. and Morgan Stanley. While both firms are scheduled to report a drop in third-quarter earnings this year, their business has remained profitable throughout 2008 -- unlike Lehman and Merrill.
``I think highly of Morgan Stanley and Goldman Sachs, so I expect them to ride this out,'' Evercore Partners Inc. Chief Executive Officer and Former Deputy Treasury Secretary Roger Altman said in an interview on CNBC. ``But as to whether we've seen the last of this crisis, I think the answer to that is clearly no. And exactly where it goes from here and how it unfolds, I'm unsure.''
Lehman, which employed 25,935 people at the end of August in 61 offices around the world, had a balance sheet totaling $786 billion as recently as February. Merrill Lynch, with 60,000 employees, is known for its ``thundering herd'' of financial advisers that brought Wall Street financial products to Main Street investors.
`Vaporized'
``I've been on Wall Street for many years, and I've never seen a weekend like this one,'' said Michael Holland, 64, chairman and founder of New York-based Holland & Co. ``We are unwinding what has been years of silliness in the financial markets, and the silliness is being vaporized as we speak, unfortunately with the stock price of a number of companies involved in it.''
To help cushion the fallout, 10 banks created a $70 billion fund to lend to firms that are having trouble financing their assets in the markets. The Federal Reserve also said it will be willing to lend money in return for a wider array of collateral including stocks.
Still, the repercussions may be widespread.
Meredith Whitney, an analyst at Oppenheimer & Co., wrote in a note to investors that sales of Lehman's assets will push down the value of securities, forcing other firms to write down their own holdings.
`Fundamentally Flawed'
Nouriel Roubini, an economics professor at New York University, said the independent securities firm model is ``fundamentally flawed'' and that every securities firm will need to combine with a bank to gain a deposit base and greater access to loans from the Federal Reserve.
Just five months ago, Lehman Brothers Chief Executive Officer Richard Fuld, 62, was telling shareholders that ``the worst is behind us'' in the credit contraction. As concerns escalated about the value of Lehman's assets tied to residential and commercial real estate, Fuld replaced Chief Financial Officer Erin Callan and President Joseph Gregory in June.
Deteriorating markets put more pressure on the value of Lehman's assets and the firm, unable to negotiate an investment from the Korea Development Bank, instead tried to reassure investors last week by revealing third-quarter results early and unveiling a plan to sell part of its fund management unit and create a separate unit for its real estate holdings.
Fuld's Efforts Undermined
Fuld's efforts were undermined on Sept. 10, when Moody's Investors Service put Lehman's credit rating on review for downgrade, noting that the firm needed a ``strategic transaction with a stronger financial partner'' to help support its rating.
Lehman's stock fell 50 percent on Thursday, Sept. 11 and Friday, Sept. 12 and the collapse spread to Merrill, which has reported four consecutive quarters of losses and was expected to lose money again this quarter.
New York Federal Reserve President Timothy Geithner called a meeting of Wall Street's top firms starting at the Fed's downtown headquarters that began at 6 p.m. on Friday, with a goal of helping ease a sale of Lehman, according to people familiar with the situation.
Suitors Walk Away
The two banks most interested in Lehman, London-based Barclays Plc and Charlotte, North Carolina-based Bank of America, balked at a deal unless the government would protect it from any losses on some of the hardest-to-value assets. The government, already shaken by criticism of its actions to support Bear Stearns, Fannie Mae and Freddie Mac, refused to budge and tried to persuade the CEOs of the biggest Wall Street firms to pitch in instead.
The talks lasted through the weekend, with groups of executives breaking off into smaller groups to discuss options and teams of traders examining positions at every major firm. Yesterday, Barclays, the U.K.'s third-biggest bank, dropped out, deciding it couldn't agree on a deal so quickly without some type of protection from losses.
As hopes dimmed for salvaging Lehman, attention turned to the future of Merrill, Lehman's bigger rival. That business, with its 16,690 financial advisers and nearly half of fund manager BlackRock Inc., was more attractive to Bank of America than Lehman could be. Merrill CEO John Thain, persuaded by the weekend's events that a deal was necessary to avoid a loss of confidence and a fate similar to Lehman's, entered into negotiations with Bank of America's Ken Lewis.
The liquidation of Lehman, last year's top underwriter of bonds backed by mortgages, is an amplified version of investment bank Drexel Burnham Lambert Inc., which filed for bankruptcy in 1990. Drexel made its name financing corporate takeovers in the 1980s using junk bonds pushed by Michael Milken.
Keeping the Talent
Maintaining the confidence of the markets is only one of the challenges for an investment bank -- the other is retaining employees, recalled Fred Joseph, Drexel's CEO from 1985 to 1990.
``It's an awfully good business, but the assets go down in the elevator every night,'' said Joseph, 71. ``Despite the tough times, the Street's so small, everybody wants the really good guys.''
A key difference with Drexel is Lehman's central role in the over-the-counter derivatives markets, which have ballooned to $454 trillion since Drexel was in business. A default by Lehman on its obligations in that market could cause chain reactions throughout the markets that have never before seen a major financial counterparty fail to honor its obligations.
``The implications of one of the `too big to fail' institutions being allowed to fail is incredibly difficult to grasp, but suffice to say that a huge number of firms and securities are going to get affected,'' said Michael Auyeung, who manages about $500 million as chief executive officer at Pacific Mutual Fund Bhd. in Petaling Jaya, Malaysia. ``The reach of the carnage will be global and system-wide.''
Lehman's collapse wipes out a company that had a market value of $45.5 billion in February 2007. Merrill's sale to Bank of America for $29 a share, while about a 70 percent premium to Merrill's value on Friday, compares with the company's $86 billion market capitalization in January 2007.
``It's breathtaking that we've gone from five standalone firms to two very quickly,'' said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs. ``It's certainly going to cause Wall Street to rethink the strategy.''
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
`Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold
By Christine Harper
Sept. 15 (Bloomberg) -- In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., headed toward extinction.
New York-based Lehman, founded 158 years ago, said early today that it filed for Chapter 11 bankruptcy protection after failing to find a buyer. Merrill Lynch, 94 years old and also based in New York, agreed to sell itself to Bank of America Corp. for $50 billion in an emergency deal hashed out yesterday.
``The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this,'' said Peter Kenny, managing director at Knight Capital Group Inc., the Jersey City, New Jersey-based brokerage that handles about $1 trillion worth of stock transactions a quarter. ``It's an ugly and painful process.''
The engines that powered record growth in the financial industry over the last decade -- cheap credit and surging property values -- have been thrust into reverse. Companies that once thrived on making real estate loans and holding assets bought with borrowed money are now under siege, giving the upper hand to those less reliant on leverage and holding the fewest assets tied to property.
The industry convulsions that started last year have already eliminated Bear Stearns Cos., forced into a cut-price sale to JPMorgan Chase & Co. with government support in March. A week ago, the U.S. Treasury placed mortgage companies Fannie Mae and Freddie Mac into conservatorship, guaranteeing their widely held debt securities while all but erasing their equity value.
American International Group Inc., once the world's largest insurer, is struggling to raise cash to avoid a credit-rating downgrade that could cripple its business.
From Five to Two
The five New York-based securities firms that dominated Wall Street have been reduced to two: Goldman Sachs Group Inc. and Morgan Stanley. While both firms are scheduled to report a drop in third-quarter earnings this year, their business has remained profitable throughout 2008 -- unlike Lehman and Merrill.
``I think highly of Morgan Stanley and Goldman Sachs, so I expect them to ride this out,'' Evercore Partners Inc. Chief Executive Officer and Former Deputy Treasury Secretary Roger Altman said in an interview on CNBC. ``But as to whether we've seen the last of this crisis, I think the answer to that is clearly no. And exactly where it goes from here and how it unfolds, I'm unsure.''
Lehman, which employed 25,935 people at the end of August in 61 offices around the world, had a balance sheet totaling $786 billion as recently as February. Merrill Lynch, with 60,000 employees, is known for its ``thundering herd'' of financial advisers that brought Wall Street financial products to Main Street investors.
`Vaporized'
``I've been on Wall Street for many years, and I've never seen a weekend like this one,'' said Michael Holland, 64, chairman and founder of New York-based Holland & Co. ``We are unwinding what has been years of silliness in the financial markets, and the silliness is being vaporized as we speak, unfortunately with the stock price of a number of companies involved in it.''
To help cushion the fallout, 10 banks created a $70 billion fund to lend to firms that are having trouble financing their assets in the markets. The Federal Reserve also said it will be willing to lend money in return for a wider array of collateral including stocks.
Still, the repercussions may be widespread.
Meredith Whitney, an analyst at Oppenheimer & Co., wrote in a note to investors that sales of Lehman's assets will push down the value of securities, forcing other firms to write down their own holdings.
`Fundamentally Flawed'
Nouriel Roubini, an economics professor at New York University, said the independent securities firm model is ``fundamentally flawed'' and that every securities firm will need to combine with a bank to gain a deposit base and greater access to loans from the Federal Reserve.
Just five months ago, Lehman Brothers Chief Executive Officer Richard Fuld, 62, was telling shareholders that ``the worst is behind us'' in the credit contraction. As concerns escalated about the value of Lehman's assets tied to residential and commercial real estate, Fuld replaced Chief Financial Officer Erin Callan and President Joseph Gregory in June.
Deteriorating markets put more pressure on the value of Lehman's assets and the firm, unable to negotiate an investment from the Korea Development Bank, instead tried to reassure investors last week by revealing third-quarter results early and unveiling a plan to sell part of its fund management unit and create a separate unit for its real estate holdings.
Fuld's Efforts Undermined
Fuld's efforts were undermined on Sept. 10, when Moody's Investors Service put Lehman's credit rating on review for downgrade, noting that the firm needed a ``strategic transaction with a stronger financial partner'' to help support its rating.
Lehman's stock fell 50 percent on Thursday, Sept. 11 and Friday, Sept. 12 and the collapse spread to Merrill, which has reported four consecutive quarters of losses and was expected to lose money again this quarter.
New York Federal Reserve President Timothy Geithner called a meeting of Wall Street's top firms starting at the Fed's downtown headquarters that began at 6 p.m. on Friday, with a goal of helping ease a sale of Lehman, according to people familiar with the situation.
Suitors Walk Away
The two banks most interested in Lehman, London-based Barclays Plc and Charlotte, North Carolina-based Bank of America, balked at a deal unless the government would protect it from any losses on some of the hardest-to-value assets. The government, already shaken by criticism of its actions to support Bear Stearns, Fannie Mae and Freddie Mac, refused to budge and tried to persuade the CEOs of the biggest Wall Street firms to pitch in instead.
The talks lasted through the weekend, with groups of executives breaking off into smaller groups to discuss options and teams of traders examining positions at every major firm. Yesterday, Barclays, the U.K.'s third-biggest bank, dropped out, deciding it couldn't agree on a deal so quickly without some type of protection from losses.
As hopes dimmed for salvaging Lehman, attention turned to the future of Merrill, Lehman's bigger rival. That business, with its 16,690 financial advisers and nearly half of fund manager BlackRock Inc., was more attractive to Bank of America than Lehman could be. Merrill CEO John Thain, persuaded by the weekend's events that a deal was necessary to avoid a loss of confidence and a fate similar to Lehman's, entered into negotiations with Bank of America's Ken Lewis.
The liquidation of Lehman, last year's top underwriter of bonds backed by mortgages, is an amplified version of investment bank Drexel Burnham Lambert Inc., which filed for bankruptcy in 1990. Drexel made its name financing corporate takeovers in the 1980s using junk bonds pushed by Michael Milken.
Keeping the Talent
Maintaining the confidence of the markets is only one of the challenges for an investment bank -- the other is retaining employees, recalled Fred Joseph, Drexel's CEO from 1985 to 1990.
``It's an awfully good business, but the assets go down in the elevator every night,'' said Joseph, 71. ``Despite the tough times, the Street's so small, everybody wants the really good guys.''
A key difference with Drexel is Lehman's central role in the over-the-counter derivatives markets, which have ballooned to $454 trillion since Drexel was in business. A default by Lehman on its obligations in that market could cause chain reactions throughout the markets that have never before seen a major financial counterparty fail to honor its obligations.
``The implications of one of the `too big to fail' institutions being allowed to fail is incredibly difficult to grasp, but suffice to say that a huge number of firms and securities are going to get affected,'' said Michael Auyeung, who manages about $500 million as chief executive officer at Pacific Mutual Fund Bhd. in Petaling Jaya, Malaysia. ``The reach of the carnage will be global and system-wide.''
Lehman's collapse wipes out a company that had a market value of $45.5 billion in February 2007. Merrill's sale to Bank of America for $29 a share, while about a 70 percent premium to Merrill's value on Friday, compares with the company's $86 billion market capitalization in January 2007.
``It's breathtaking that we've gone from five standalone firms to two very quickly,'' said Roy Smith, a finance professor at New York University's Stern School of Business and a former partner at Goldman Sachs. ``It's certainly going to cause Wall Street to rethink the strategy.''
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
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