bank of america

DealBook: ING Group to Sell Stake in Capital One

September 5, 2012 by NewsMaker Leave a Comment

Jock Fistick/Bloomberg NewsING office’s in Brussels.

9:16 a.m. | Updated

LONDON — The Dutch financial services giant ING Group plans to sell its 9 percent stake in Capital One in a deal that could be worth around $3 billion.

ING acquired the stake in the American firm when Capital One bought ING Direct USA for $9 billion in February.

The Dutch firm said that it would make a net profit of 300 million euros ($378 million) after selling the 54 million shares in Capital One for around $3 billion.

ING added that the gain would help to increase its core Tier 1 ratio, a measure of a firm’s ability to weather financial shocks, to 11.9 percent, and that it planned to complete the transaction by Monday.

The deal for ING Direct USA transformed Capital One into the country’s fifth-largest bank by deposits. The combined business has around $200 billion in deposits, making it larger than regional powerhouses like PNC and TD Bank.

Victor Blue for The New York TimesA branch of Capital One in Brooklyn.

Under the terms of the deal, Capital One issued $2.8 billion worth of new shares to ING, making the Dutch firm its largest shareholder.

The move to sell the shares comes as ING has been forced to sell assets as part of the conditions of a 10 billion euro ($12.5 billion) bailout it received from its local government in 2008.

Along with the sale of ING Direct USA to Capital One, the Dutch firm sold its online bank in Canada to a local rival, Bank of Nova Scotia, last month for $3.1 billion. ING is also planning to sell its Asian insurance businesses.

Shares in ING rose 1.8 percent in early afternoon trading in Amsterdam on Wednesday.

Bank of America Merrill Lynch, Morgan Stanley and Citigroup are the joint bookrunners for the deal.

Article source: http://dealbook.nytimes.com/2012/09/05/ing-to-sell-stake-in-capital-one/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bank of america, merrill lynch, morgan stanley

DealBook: Bank of America Posts $2.5 Billion Profit, but Mortgage Woes Remain

July 18, 2012 by NewsMaker Leave a Comment

Stan Honda/Agence France-Presse — Getty ImagesA Bank of America branch in Times Square. The bank said it had exceeded analysts’ estimates in the second quarter.

5:35 p.m. | Updated

Despite reporting better than expected profits Wednesday, the home-loan market remains a money pit for Bank of America.

On Wednesday, the second-largest bank in the United States after JPMorgan Chase, Bank of America said it earned $2.5 billion, or 19 cents a share, compared with analysts’ projections of 14 cents for the quarter, as its expenses dropped and credit conditions improved.

However, the housing woes of the last few years are still taking a toll on the bank. Investors are increasing their demands that Bank of America repurchase soured mortgages, arguing they were improperly underwritten and sold to them in the first place.

Stocks and Bonds: Shares Rise for a 3rd Day on Bank Earnings

January 22, 2012 by NewsMaker Leave a Comment

Stocks rose for the third straight day Thursday, helped by results from Bank of America and Morgan Stanley and a report showing that the latest jobless claims dropped to a near four-year low.

The Standard Poor’s 500-stock index hit a five-month high, with the industrials, consumer discretionary stocks and financials leading gains.

Tech shares advanced, with earnings from a number of bellwether companies expected after the close. But those reports were mixed. Google fell short of Wall Street’s expectations, and its shares dropped 10 percent in after-hours trading.

“Google was the big disappointment because so much of their emphasis is developing products, specifically Android, where more dollars are going out than they anticipated,” said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

In the regular session, Bank of America climbed 2.4 percent to $6.96 after it reported a fourth-quarter profit from a loss a year earlier. Morgan Stanley reported a loss that was narrower than expected, prompting a 5.4 percent jump in its stock to $18.28.

Financial stocks “have pretty much bottomed here in the U.S.,” said Paul J. Simon, chief investment officer at Tactical Allocation Group in Birmingham, Mich.

“They represent some compelling value. We think a lot of the bad news has been discounted, and you’ve seen stock prices rallying in the beginning of the year,” said Mr. Simon, whose firm has been buying financials.

Financial shares have rallied this year. The S. P. financial index is up 8.1 percent for 2012, helping to push the S. P. 500 up 4.5 percent for the year.

In the latest snapshot of the economy, data showed the number of Americans filing for new jobless benefits dropped last week to the fewest since April 2008. It added to views that the economy is slowly advancing.

“The broad-brush impression from the data is that it’s a Goldilocks setup — inflation tame, but economic growth showing signs of accelerating,” said Greg Anderson, senior currency strategist at Citigroup in New York.

The Dow Jones industrial average rose 45.03 points, or 0.36 percent, to end at 12,623.98. The Standard Poor’s 500-stock index gained 6.46 points, or 0.49 percent, to 1,314.50. The Nasdaq composite index climbed 18.62 points, or 0.67 percent, to close at 2,788.33.

The Treasury’s 10-year note fell 24/32, to 100 5/32. The yield rose to 1.98 percent, from 1.90 percent late Wednesday.

American Express also posted results after the close, and its shares slid 1.9 percent in extended trading to $49.98.

In a sign of optimism about Europe, Spain and France drew strong demand at government debt auctions.

The FTSEurofirst 300 index of top European shares closed up 1.1 percent at 1,046.30, near five-and-a-half-month highs. World stocks, as measured by the MSCI All World index, rose 0.9 percent to hit two-and-a-half-month highs.

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Filed Under: Economy News Tagged With: bank of america, jobless claims, quarter profit

DealBook: New Normal on Wall Street: Smaller and Restrained

January 20, 2012 by NewsMaker Leave a Comment

Illustration by The New York Times

With firms like Goldman Sachs and Morgan Stanley reporting weak results for last year, Wall Street is having to confront doubts about itself.

Is this a temporary slump? Or will the moneymakers never get to go back to their high-rolling ways? Many on Wall Street had hoped 2011 would be a year when the investment banks showed that they could still make solid profits in the more sober financial environment that has followed the 2008 crisis.

Instead, Goldman Sachs’s earnings fell 67 percent last year; Bank of America’s investment banking operation, which includes Merrill Lynch, suffered a 53 percent decline in net income; and Morgan Stanley’s earnings were down by 42 percent.

Some of the forces that weighed on earnings last year — like Europe’s government debt crisis and a sluggish United States economy — could go away. Yet Wall Street still faces permanent pressures on profitability, particularly stricter regulations aimed at making the financial system safer. For instance, Wall Street firms cannot borrow such large amounts of money and make bets with it. With much less of this kind of leverage, the game is changed — perhaps forever.

“No matter how you cut it, the Goldman Sachs of tomorrow is not going to be the Goldman Sachs of 1999, when it did its I.P.O., or the Goldman Sachs of 2006, when it was at the high point of the cycle,” said Brad Hintz, a senior analyst with Sanford C. Bernstein Company.

Andrew Harrer/Bloomberg NewsAsked about downsizing at Goldman Sachs, David A. Viniar, chief financial officer, said that was “a very difficult” question.

As profits fall way short of internal targets, the executives who run Wall Street may have to cut back hard, to stop profits from falling even further. When asked by an analyst on Wednesday whether Goldman Sachs was thinking of downsizing to deal with the difficult business conditions, David A. Viniar, the bank’s chief financial officer, said, “That is one of the most critical questions and a very difficult one to answer.”

Wall Street employees are feeling the squeeze this bonus season, which is going on right now. In 2011, Goldman set aside $12.22 billion to pay compensation and benefits for its 33,300 employees. That comes out to around $367,000 per person. In 2006, the firm paid out $16.46 billion in compensation and benefits, or roughly $621,000 per employee. At Morgan Stanley, which lost money in the fourth quarter, cash bonuses were capped at $125,000 per person.

The retrenchment has hurt morale among lower-tier workers. Young bankers and traders fresh out of Ivy League universities can no longer count on earning more than their peers in other prestigious industries, such as management consulting and law. Rounds of layoffs, which used to be aimed mainly at senior and midlevel employees, have cut through the junior ranks this year at firms like Credit Suisse, and bonuses are down for nearly everyone.

At Goldman Sachs, some young analysts — a group that could earn year-end cash bonuses of up to $80,000 in better years — were given as little as $20,000 this year, according to one person with knowledge of this year’s numbers.

On Wall Street, much depends on a financial performance metric, return on equity, which effectively measures the profits a bank was able to generate on its capital. If a bank made $1 billion in profits on $10 billion of equity, its return on equity would be 10 percent.

In the middle of last year, Goldman Sachs’s target for return on equity was 20 percent, though the firm has since retreated from setting a target, citing the uncertainty in its business. Its actual return last year was only 3.7 percent, compared with 33 percent in 2006. Morgan Stanley managed 4 percent in 2011, compared with 23.5 percent in 2006.

Analysts estimate that Goldman effectively pays 10 to 15 percent for its capital. As a result, in 2011, the firm did not even cover the cost of its capital.

Jim Lo Scalzo/European Pressphoto AgencyRuth Porat, Morgan Stanley’s chief financial officer, said return on equity would rise, but would not go back to its past heights.

Morgan Stanley encapsulates the quandary facing a big Wall Street firm: Attempts to diversify may not help profitability. Over the last few years, rather than rebuild trading desks that were taking a lot of risks, Morgan Stanley has shifted its focus to wealth management, a steadier business, but that could mute returns.

“Do I expect to see a return to a return on equity in the mid-20s like the old days? No, but is there a path to the midteens over time? Yes,” said Ruth Porat, Morgan Stanley’s chief financial officer, in an interview on Thursday.

Wall Street firms operate under a tougher regulatory environment than existed in 2008. One of regulators’ first responses to the crisis was to make banks raise extra capital, to increase their buffer against losses, and they were told to use less short-term borrowed money to finance their businesses, which made them less vulnerable to runs. At the end of its 2007 fiscal year, Morgan Stanley’s $1.05 trillion of assets was supported by only $30 billion of equity. At the end of 2011, its equity was up to $60.5 billion and its assets were down to around $750 billion.

These adjustments effectively make it impossible to get back to the returns on equity achieved in the glory days. With double the equity, Morgan Stanley would now need to double profits, from a smaller pool of assets, to get back to its mid-2000s returns.

While some of 2011’s challenges may ease this year, Wall Street has to grapple with new regulations in 2012 that could whack profits.

The new rules take aim at businesses in which Wall Street has traditionally made its fattest profit margins, like bond trading and trading in financial instruments called derivatives.

The Volcker Rule, which is aimed at stopping banks from making financial bets for their own accounts, could permanently eat away at bond trading revenue. Efforts to strengthen the derivatives market — such as making sure that trades are properly backed with collateral — could deplete the profitability of this business.

Mr. Hintz estimates that a Wall Street bank currently makes a 35 percent profit margin on its derivatives businesses, but he thinks the new rules could shrink that to 20 percent.

Despite the pessimistic outlook, the fittest Wall Street firms will no doubt make a Darwinian bid to profit as weaker firms falter.

United States banks could pick up new business in Europe, for instance. In November, the Swiss banks UBS and Credit Suisse announced big cuts in their securities businesses, and the Italian bank UniCredit recently said it was closing its equities business in Europe. And some United States banks may decide to retreat from certain activities, allowing others to pick up the business.

The first part of this year may see a rebound in business, as investors venture back into the market. This occurred in the first part of 2009, once fears lessened.

“You could see a couple of blockbuster quarters as pent-up demand comes back,” said Roger Freeman, a senior analyst with Barclays Capital. But he says revenue may taper off if new regulations bite.

Still, Jamie Dimon, the chief executive of JPMorgan Chase, struck a more optimistic note in talking to reporters in a conference call last Friday. Noting that there were always swings in the investment banking business, he said, “I think when things come back, these numbers could boom again.”

Bank of America’s chief financial officer, Bruce R. Thompson, said he thought the continued downdraft in trading revenue was temporary, rather than representing a long-term shift in the Wall Street landscape.

“There’s always this question of what’s normal versus what’s not,” he said, adding that the first few weeks of 2012 had seen a pickup in trading activity.

If his optimism proves wrong, and revenues remain depressed, though, more cuts loom. “Operating at a loss,” Mr. Thompson said, “isn’t something we will continue to want to do.”

Kevin Roose and Nelson D. Schwartz contributed reporting.

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Filed Under: Business News Tagged With: bank of america, chief financial officer, goldman sachs

U.S. Stocks Rally on Manufacturing Growth

January 3, 2012 by NewsMaker Leave a Comment

Wall Street stocks rocketed higher on Tuesday, the first day of trading in the new year, fueled by a report that showed manufacturing strength in the American economy.

But traders and others noted that volumes were thin and that many wary investors remain sidelined, awaiting further direction from the euro zone or seeking clarity on the strength of the domestic economy.

And like last year, the myriad challenges facing the euro zone remained front and center for many investors, as leaders there warned of more trouble and turbulence ahead.

The Dow Jones industrial average closed with a jump of 180 points – a 1.5 percent gain. Earlier in the session, the Dow had soared by more than 2 percent.

Likewise, the Standard Poor’s 500-stock index gained 1.5 percent, and the Nasdaq composite index closed up 1.7 percent.

In a rare turn, Bank of America’s stock, which was hammered by investors for most of last year, was one of the strongest performers of the day. Its stock climbed 6 percent to $5.86, while Citigroup was up 8 percent to $28.46.

Some analysts pointed to a new report on American manufacturing as buoying investors’ spirits. The Institute for Supply Management, a trade group of purchasing managers, said its manufacturing index rose to 53.9 points in December from 52.7 in November. Readings above 50 indicate expansion.

Despite the stronger tenor of the report, other analysts remained cautious about drawing broader conclusions.

“The investor base got badly burned this time last year when many who were pessimistic in late 2010 switched to being optimistic in early 2011,” said Cary Leahey, senior economist at Decision Economics.

Investors raised their forecasts for economic growth and “upped their expectations of corporate earnings — and equity performance peaked in the second quarter and growth turned out to be about half of what people had hoped,” Mr. Leahey said.

Joseph Saluzzi, a co-head of trading at Themis Trading, said he didn’t feel the early move up in the session signaled a new, buoyant resolve among investors and that the relatively low trading volumes didn’t indicate a flood of sidelined cash moving into the markets.

“Nothing is really going to change until you start to see some real hard economic numbers that show growth. We’ve seen these sort of inklings before and they haven’t led to much in the past,” Mr. Saluzzi said.

Later in the week, more economic data will be released that investors hope will start to bring a bit more clarity to how strong the economy was running late last year.

Major retailers will release sales data, which will provide some gauge of consumer spending during the holiday season. And on Friday, the closely watched American employment figures for December will be released.

The early consensus in the market was that the economy generated another 150,000 jobs during the month. But even if true, some analysts said the market’s reaction could be muted.

“The market is primed for a good report by recent standards, but it will be a mediocre report by historical standards,” said Mr. Leahey.

Forecasts for much of the euro zone this year appear more bleak.

Chancellor Angela Merkel of Germany warned on New Year’s Eve that “next year will no doubt be more difficult than 2011,” as austerity measures across much of Europe put economic growth at risk.

Earlier Tuesday, Asian stocks rose. Hong Kong’s Hang Seng Index, on its first trading session of 2012, jumped 2.4 percent, South Korea’s Kospi index rose 2.7 percent and Australia’s S.P. ASX 200 gained 1.1 percent. Markets in Japan and mainland China remained closed for the extended New Year’s holiday.

Oil prices followed equities higher. Benchmark crude for February delivery rose $4.25 to $103.07 a barrel on the New York Mercantile Exchange.

Article source: http://feeds.nytimes.com/click.phdo?i=9d6867a2d23baa42b10f2c07cd88c4f5

Filed Under: Business News Tagged With: bank of america, domestic economy, nasdaq composite index

DealBook: On Wall Street, Renewed Optimism for Deal-Making

January 3, 2012 by NewsMaker Leave a Comment

Jim Wilson/The New York TimesKinder Morgan’s Rockies Express pipeline runs from Colorado to Ohio. The company’s $36.2 billion deal for the El Paso Corporation was one of the largest in 2011.

Before Europe’s debt crisis flared anew last summer, rattling markets and choking off a revival in mergers and acquisitions, huge corporate cash piles and cheap debt had fostered hopes that deal-making would recover strongly last year.

In the first half of 2011, the dollar volume of announced mergers worldwide neared its highest levels since the financial crisis. But that momentum proved fragile as deal volume tumbled 19 percent, to about $1.1 trillion, in the second half of 2011, compared with the same period the year before, according to Thomson Reuters data.

Now, with stock and credit markets steadier, deal makers are growing confident that 2012 will be better for business. Not only do they point to cheap financing and the large amounts of cash on corporate balance sheets, but they say that companies that have already cut costs may decide that they need to make acquisitions to drive growth in the face of a tepid economy.

“The dialogue has gotten back on track,” said Steven Baronoff, chairman of global mergers and acquisitions at Bank of America Merrill Lynch. “If Europe doesn’t go off the rails, you’ll see a return to long-term positive factors.”

According to a recent study by Ernst Young, 36 percent of companies plan to pursue an acquisition this year.

“We’re optimistic that the need and desire for growth will overcome the volatility headwinds, but that’s where the battle will be waged,” said James C. Woolery, JPMorgan Chase’s co-head of North America mergers and acquisitions.

And there is pent-up demand among buyout shops. After a long stretch of tempered activity, many private equity firms are still feeling the pressure to deploy capital or engineer exits.

Signs Point to Economy’s Rise, but Experts See a False Dawn

December 22, 2011 by NewsMaker Leave a Comment

In recent weeks, a broad range of data — like reports on new residential construction and small business confidence — have beaten analysts’ expectations. Initial claims for jobless benefits, often an early indicator of where the labor market is headed, have dropped to their lowest level since May 2008. And prominent economics groups say the economy is growing three to four times as quickly as it was early in the year, at an annual pace of about 3.7 percent.

But the good news also comes with a significant caveat. Many forecasters say the recent uptick probably does not represent the long-awaited start to a strong, sustainable recovery. Much of the current strength is caused by temporary factors. And economists expect growth to slow in the first half of 2012 to an annual pace of about 1.5 to 2 percent.

Even that estimate could be optimistic if Washington lawmakers fail to extend aid for the long-term unemployed and a payroll tax cut for the United States’ 160 million wage earners.

At stake is about $150 billion, the bulk of which would go to middle-class families and the unemployed. If Congress does not pass the measures, economists say, it would significantly weaken growth from already-damped levels anticipated early in the new year.

“Unfortunately, I think we’re going to see a slowdown over the course of next year,” Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch, told reporters last week. “Not only do we have the European crisis spilling over and hurting U.S. trade and confidence,” he said, but the United States economy also faces “homegrown shocks.”

There are two reasons for the renewed pessimism. First, economists say that temporary trends increased growth in the fourth quarter and may not continue into next year. Second, the economy faces significant headwinds in 2012: some from Europe’s long-lingering sovereign debt crisis, and some from domestic cutbacks beyond the control of President Obama, whose campaign would like to point to a brightening economic picture, not a darkening one. Even the Federal Reserve is predicting that the unemployment rate will remain around 8.6 percent by the time voters go to the polls in November.

The fourth quarter benefited, for instance, from wholesalers restocking inventories of goods like petroleum, paper and cars, giving a jolt to growth.

“We had lean inventories, so those required additional production to satisfy demand,” said Gregory Daco of IHS Global Insight. “But once inventories are restocked, there is no need to restock them anymore. That means there’s going to be less production,” he said.

Consumers also pulled back on their savings, helping to finance a recent spurt in spending. a trend that forecasters doubt will continue. Other short-lived factors include falling gasoline and commodity prices, and an increase in orders from Japanese companies returning to business after the devastating spring tsunami.

But next year, Washington is increasing some taxes and reducing spending as temporary measures enacted during the worst of the recession expire. That will damp growth by a percentage point or more next year, forecasters say. Provisions like a tax write-off to help businesses pay for equipment are winding down or ending.

Most worrying is the prospect that Congress will drop aid for the long-term jobless and allow payroll taxes to rise to 6.2 percent from the current level of 4.2 percent, amounting to a $1,000 tax increase on the average wage earner. Macroeconomic Advisers, a prominent forecaster, estimates that the expiration of the two provisions could cost the economy 400,000 jobs and cut growth by half a percentage point next year.

How and when Congress acts will also have an important, if impossible to quantify, impact on consumer and business confidence, economists say. Households and companies uncertain about their income, unclear about their tax rates and lacking confidence in their government might hold off on major financial purchases and tighten their purse strings.

Then there is Europe.

“If there is some Lehman-type event in the first half of the year, it will have a big impact,” said Joel Prakken, chairman of Macroeconomic Advisers. The collapse of Lehman Brothers, a New York investment bank, in late 2008 helped set off the financial crisis.

Even without such a major event, forecasters say problems on the Continent will weigh on American growth next year. Investor flight from assets denominated in the shaky euro have made the dollar stronger and American exports less competitive abroad. The euro zone’s woes have also made a global slowdown more likely, which could mean a reduction in American exports to emerging-market countries as well.

For now, Democrats and Republicans remain at loggerheads, blaming each another for the uncertainty around the payroll tax rates and aid for the unemployed.

“A two-month extension creates uncertainty and will cause problems for people who are trying to create jobs,” John Boehner, Republican of Ohio and speaker of the House, said on Monday.

“The clock is ticking. Time is running out,” President Obama said at a White House news briefing on Tuesday. “One of the House Republicans referred to what they’re doing as ‘high-stakes poker.’ He’s right about the stakes, but this is not poker. This is not a game.”

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Filed Under: Business News Tagged With: bank of america, headwinds, wage earners

Investors Scrutinizing JPMorgan’s Mortgage Bonds

December 17, 2011 by NewsMaker Leave a Comment

Lawyers representing investors that settled billions of dollars of mortgage bond claims with Bank of America last summer announced on Friday that they had opened investigations into $95 billion worth of mortgages held in JPMorgan Chase securities.

The investors are concerned that there were mortgages put inside those securities before the housing bubble burst that were subpar from the beginning, and they are investigating whether JPMorgan should repurchase those loans.

JPMorgan is among the banks with the most mortgage-related litigation and claims, having inherited much of its exposure from its acquisitions of Bear Stearns and Washington Mutual, which both ran into trouble partly because of troubled mortgages. Of the 243 mortgage bonds at JPMorgan that the investors are targeting, at least half were created by Bear Stearns or Washington Mutual.

For the banking sector in general, mortgage bond investigations have left a looming question mark over the industry’s prospects. Banks face investigations and potential litigation from private investors as well as state attorneys general and also from the Federal Housing Finance Agency, which oversees the mortgage financing giants Fannie Mae and Freddie Mac.

The potential dollar cost of the mortgage mess has kept growing this year; many analysts estimate it may be more than $100 billion for the industry. But as a team of bank analysts at FBR, a firm in Arlington, Va., put it in a report that estimated the liabilities: “Does anyone really know?”

For banks, the continuing doubts about their old mortgage businesses also makes it difficult to move on with new mortgage origination, because the companies may be concerned about the way they describe new mortgages in filings, analysts say. The lack of lending, in turn, is seen as a drag on the economy.

“It is inhibiting people from lending,” said Tom Cronin, a managing director of the Collingwood Group, a housing consulting firm in Washington. “You’re only going to make the very best loans, if you don’t know how enforcement is going to be handled.”

Joseph M. Evangelisti, a spokesman for JPMorgan, declined to discuss the bank’s mortgage liability exposure in depth, saying only: “We stand by our obligations under the agreements in question and we will honor our obligation to repurchase any loan that should be repurchased under the terms of those agreements.”

Banks like JPMorgan have benefited in recent years from the slowness of investors to investigate the bonds they bought before the financial crisis.

Under the terms of those bonds, investors who own small slivers of mortgage bonds — as most investors do — have been stymied from obtaining much data on the mortgages within the deals. The rules vary for each bond, but typically banks have to turn over detailed information only to investors who own more than a quarter of a bond. That has meant that large investors like Pimco, BlackRock and even the Federal Reserve Bank of New York have had to combine their interests to cross that threshold.

Many of the investors are coordinating their efforts through Gibbs Bruns, a law firm in Houston. That firm announced its plans to investigate the 243 JPMorgan deals on Friday.

It was also that firm that struck an $8.5 billion settlement with Bank of America to settle similar issues with $424 billion of mortgage bonds in July, though that settlement has yet to be approved by a court.

Gibbs Bruns did not return requests for comment.

It will most likely take months for the investors to determine how much money they think they are owed, but when they do, they may try to reach a settlement with JPMorgan or they may take the bank to court.

JPMorgan is currently in litigation with the Federal Deposit Insurance Corporation over the terms of its deal to acquire Washington Mutual, and it is unclear if it would be the F.D.I.C. or JPMorgan that would pay out on claims related to the failed bank’s mortgage bonds.

JPMorgan has set aside billions in reserves to cover mortgage-related litigation, according to a recent company presentation.

If the bank settled with the investors using the same loss ratio that was applied in the Bank of America settlement, it would cost JPMorgan about $1.9 billion. Still the bank would have other exposure outstanding. JPMorgan faces about $31 billion in class-action cases, according to McCarthy Lawyer Links, a legal consulting firm.

Elizabeth Nowicki, a professor of securities law at Tulane University and a former lawyer at the Securities and Exchange Commission, said that the efforts by investors might turn out to be the costliest and most important way that banks are held accountable for their mortgage security creations, because the push for accountability is coming from bank clients. For instance, in the one mortgage security case the S.E.C. has brought against JPMorgan, the bank settled the allegations in June for $153.6 million.

“I think this is going to have much more of an impact in terms of fear and Wall Street sort of shaking in its boots than anything the S.E.C. or Congress can do,” Ms. Nowicki said.

“Without a confident client base, the banks can’t make any money, and now that the client base is really trying to probe into these packages to see what really went on, they are going to have to give some answers.”

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Filed Under: Business News Tagged With: bank of america, bear stearns, new mortgage

Fair Game: Secrets of the Bailout, Now Revealed

December 4, 2011 by NewsMaker Leave a Comment

It is dispiriting, of course, that we are still learning about the billions provided to various financial firms during the crisis. Another sad element to this mess is that getting the truth requires the legal firepower of an organization as rich as Bloomberg.

But that’s the way our world works. Billions are secretly showered on troubled financial institutions to stave off disaster. Individuals get little or no help.

Here are some of the new figures:

Among all the rescue programs set up by the Fed, $7.77 trillion in commitments were outstanding as of March 2009, Bloomberg said. The nation’s six largest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley — borrowed almost half a trillion dollars from the Fed at peak periods, Bloomberg calculated, using the central bank’s data.

Those six institutions accounted for 63 percent of the average daily borrowings from the Fed by all publicly traded United States banks, money management and investment firms, Bloomberg said.

Numbers for individual companies were equally astonishing. For example, the Fed provided Bear Stearns with $30 billion to see it through its 2008 shotgun marriage with JPMorgan. This was in addition to the $29.5 billion in assets purchased by the Fed from Bear to assist in the buyout by JPMorgan. Citigroup, meanwhile, tapped the Fed for almost $100 billion in January 2009 — its peak during the crisis — and Morgan Stanley received $107 billion in Fed loans in September 2008.

Some may see all this as ancient history or as ho-hum disclosures that confirm what everybody already knew — that our banks were on the precipice and that only hundreds of billions of dollars could save them. The Fed says that the money it lent in these programs was paid back without generating any losses.

But the information is revealing nonetheless. The fact is, investors didn’t know how dire the situation was at these institutions. At the same time that these banks were privately thronging the teller windows at the Fed, some of their executives were publicly espousing their firms’ financial solidity.

During the first three months of 2009, for example, when Citigroup’s Fed borrowing apparently peaked, Vikram Pandit, its chief executive, hailed the company’s performance. Calling that first quarter the best over all since 2007, Mr. Pandit said the results showed “the strength of Citi’s franchise.”

Citi’s earnings release didn’t detail its large Fed borrowings; neither did its filing for the first quarter of 2009 with the Securities and Exchange Commission. Other banks kept silent on these activities or mentioned them in passing with few specifics.

These disclosure lapses are disturbing to Lynn E. Turner, a former chief accountant at the S.E.C. Since 1989, he said, commission rules have required public companies to disclose details about material federal assistance they receive. The rules grew out of the savings and loan crisis, during which hundreds of banks failed and others received government help.

The rules are found in a section of the S.E.C.’s Codification of Financial Reporting Policies titled “Effects of Federal Financial Assistance Upon Operations.” They state that if any types of federal financial assistance have “materially affected or are reasonably likely to have a future material effect upon financial condition or results of operations, the management discussion and analysis should provide disclosure of the nature, amounts and effects of such assistance.”

Given these rules, Mr. Turner said: “I would have expected some discussion in the management discussion and analysis of how this has had a positive impact on these banks’ operating results. The borrowings had to have an impact on their liquidity and earnings, but I don’t ever recall anybody saying ‘we borrowed a bunch of money from the Fed at zero percent interest.’ ”

I asked officials at Citigroup and Morgan Stanley about these disclosures. Jon Diat, a spokesman for Citigroup, said the bank’s disclosures in its quarterly filings with the S.E.C. “were entirely appropriate.” He added that Citi and other financial services firms “utilized numerous government programs that provided significant funding capacity and liquidity support which helped increase the flow of credit into the economy.”

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Filed Under: Business News Tagged With: bank of america, morgan stanley, shotgun marriage

Judge Blocks S.E.C. Settlement With Citigroup

November 29, 2011 by NewsMaker Leave a Comment

The judge, Jed S. Rakoff of United States District Court in Manhattan, said that he could not determine whether the agency’s settlement with Citigroup was “fair, reasonable, adequate and in the public interest,” as required by law, because the agency had claimed, but had not proved, that Citigroup committed fraud.

As it has in recent cases involving Bank of America, JPMorgan Chase, UBS and others, the agency proposed to settle the case by levying a fine on Citigroup and allowing it to neither admit nor deny the agency’s findings. Such settlements require approval by a federal judge.

While other judges are not obligated to follow Judge Rakoff’s opinion, the 15-page ruling could severely undermine the agency’s enforcement efforts if it eventually blocks the agency from settling cases in which the defendant does not admit the charges.

The agency contends that it must settle most of the cases it brings because it does not have the money or the staff to battle deep-pocketed Wall Street firms in court. Wall Street firms will rarely admit wrongdoing, the agency says, because that can be used against them in investor lawsuits.

The agency in particular, Judge Rakoff argued, “has a duty, inherent in its statutory mission, to see that the truth emerges.” But it is difficult to tell what the agency is getting from this settlement “other than a quick headline.” Even a $285 million settlement, he said, “is pocket change to any entity as large as Citigroup,” and often viewed by Wall Street firms “as a cost of doing business.”

According to the Securities and Exchange Commission, Citigroup stuffed a $1 billion mortgage fund that it sold to investors in 2007 with securities that it believed would fail so that it could bet against its customers and profit when values declined. The fraud, the agency said, was in Citigroup’s falsely telling investors that an independent party was choosing the portfolio’s investments. Citigroup made $160 million from the deal and investors lost $700 million.

Judge Rakoff said the agency settlement policy — “hallowed by history, but not by reason”— creates substantial potential for abuse because “it asks the court to employ its power and assert its authority when it does not know the facts.” That undermines the constitutional separation of powers, he said, by asking the judiciary to rubber-stamp the executive branch’s interpretation of the law.

The agency said that it disagreed with the judge’s ruling but did not say whether it would appeal, or try to refashion the settlement or prepare to begin a trial, as the judge directed, on July 16.

Robert Khuzami, the agency’s director of enforcement, said in a statement that the Citigroup settlement “reasonably reflects the scope of relief that would be obtained after a successful trial,” and that the decision “ignores decades of established practice throughout federal agencies and decisions of the federal courts.”

Citigroup said it also disagreed with Judge Rakoff’s decision, adding that it would fight the charges if the case indeed went to trial.

“We believe the proposed settlement is a fair and reasonable resolution to the S.E.C.’s allegation of negligence, which relates to a five-year-old transaction,” Edward Skyler, a Citigroup spokesman, said in a statement. “We also believe the settlement fully complies with long-established legal standards. In the event the case is tried, we would present substantial factual and legal defenses to the charges.”

In his decision, Judge Rakoff called Citigroup “a recidivist,” or repeat offender, for having previously settled other fraud cases with the agency where it neither admitted nor denied the allegations but agreed never to violate the law in the future.

Citigroup and other repeat offenders can agree to those terms, the judge said, because they know that the commission has not monitored compliance, failing to bring contempt charges for repeat violations in at least 10 years.

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Filed Under: Business News Tagged With: bank of america, mortgage fund, statutory mission