September 26, 2020

DealBook: BlackRock Fined $15.2 Million by British Regulator

The headquarters of BlackRock in Manhattan.Scott Eells/Bloomberg NewsThe headquarters of BlackRock in Manhattan.

LONDON – British authorities have fined the giant money manager BlackRock £9.5 million for failing to protect some of its clients’ money.

The fine, the equivalent of $15.2 million, is the second-largest ever levied by the Financial Services Authority in such a case.

JPMorgan Chase was fined £33.3 million in 2010 for not separating client money from the bank’s own accounts.

The actions against BlackRock relate to failures by the firm to obtain letters from third-party banks that held money belonging to BlackRock’s clients.

Under British law, firms must receive written assurances from other financial institutions that client money is clearly identifiable and protected if banks go bankrupt.

The error occurred after BlackRock acquired BIM, which previously was named Merrill Lynch Investment Managers, in 2006. None of BlackRock’s clients lost money because of the failure, the authority said.

“This is not the first time we have seen the impact on client money overlooked as part of a reorganization,” Tracey McDermott, director of enforcement and financial crime at the Financial Services Authority, said in a statement. “The fine imposed today should remind all firms of the critical importance we place on ensuring proper protection of client money at all times.”

BlackRock, which cooperated with the Financial Services Authority, apologized for the error, adding that it had taken steps to improve protections for client money.

“We regret this instance where our U.K. procedures regarding money market deposits for a number of our clients were not consistent with applicable standards,” the company said in a statement.

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DealBook: Morgan Stanley Reports a Loss as Settlement Weighs on Results

Morgan Stanley's headquarters in Manhattan.Scott Eells/Bloomberg NewsMorgan Stanley‘s headquarters in Manhattan.

Morgan Stanley, hit hard by a big legal charge and a difficult economy, swung into the red in the fourth quarter, reporting a loss of $275 million.

The loss of 15 cents a share compares with a a profit of 42 cents a share in the quarter a year ago, but is better than a loss of 57 cents that was expected by analysts polled by Thomson Reuters. Morgan Stanley last posted a loss in the second quarter of 2011.

Despite the loss, the bank’s chief executive. James P. Gorman struck a positive note in the earnings release, saying that Morgan Stanley ended the year “in better shape” than where it started and dealt with a number of outstanding legacy and strategic issues that had been dogging it.

The firm took a one-time $1.7 billion charge related to a legal settlement with bond insurer MBIA, which weighed on the results for the quarter. The charge accounted for a loss of 59 cents a share.

Fourth-quarter revenue in institutional securities fell 42 percent to $2.07 billion. One number that stood out in the institutional securities division was its compensation ratio. It came in at $1.6 billion, 75 percent of net revenue. The number is high because it includes the MBIA settlement. If that is removed the number drops to a more normalized 41 percent.

Asset management reported a sharp drop in revenue, falling to $424 million for the period, down 50 from the year-ago period. Morgan Stanley attributed the drop to lower gains on investments it has made in its merchant banking and real estate investing businesses.

The one main bright spot in the quarter was the firm’s global wealth management division. It posted net revenue of $3.25 billion this quarter, down just 3 percent from the year-ago period. The division had $1.6 trillion assets under management in the quarter, unchanged from the previous quarter.

All told, the firm logged net revenue of $5.71 billion in the quarter, down 26 percent year the year-ago period.

Morgan Stanley also announced that it has set aside $16.4 billion in 2011 to pay its employees, 51.2 percent of its net revenue. In 2010, Morgan Stanley paid $16.05 billion to employees, which also came to roughly 51 percent of its revenue. This year, with money tight, Morgan Stanley, as previously reported, decided to cap all cash bonuses at $125,000 for the year.

Morgan Stanley, like its rivals, is trying to navigate its way through the current difficult economic environment, which is exasperated by a tighter regulatory regime that has forced firms to hold more capital against certain operations and out of other businesses altogether.

On Wednesday, Goldman Sach, said its profit in the fourth quarter was $978 million, ahead of analyst expectations but still muted compared with its historical earnings power.

Yet Morgan Stanley was hit harder by the credit crisis than Goldman Sachs and Mr. Gorman has spent the last two years rebuilding the firm. He has reduced the risk in some divisions and focused a lot of his energy building out Morgan Stanley’s wealth management division, which is a lower risk operation that has the potential to deliver steady returns

Morgan Stanley on Wednesday also declared a quarterly dividend of 5 cents a common share.

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DealBook: Lending Helps JPMorgan, but 4th Quarter Was Soft

“I believe that you are seeing real loan growth,” said Jamie Dimon, chief executive of JPMorgan Chase.Scott Eells/Bloomberg News“I believe that you are seeing real loan growth,” said Jamie Dimon, chief executive of JPMorgan Chase.

Wall Street, more than three years after the financial crisis, has loosened its lending tap. Consumers, however, have yet to reap the benefits.

Results announced on Friday by the nation’s strongest and biggest bank by assets, JPMorgan Chase, point to a divided economy where big businesses are gaining ground while consumers still cannot find their footing.

JPMorgan reported a weak fourth quarter, with earnings down 23 percent compared with the period a year earlier. The bank was hurt by a fourth-quarter slump in investment banking and other Wall Street businesses, which suffered amid the sluggish economic recovery and worries that the European debt crisis will spread.

One significant bright spot was the bank’s growth in corporate loans. The commercial banking unit’s profits rose to $643 million, a 21 percent increase from the previous year, as lending to corporations grew for the sixth consecutive quarter.

The strong results helped JPMorgan turn a $19 billion profit for 2011, up 9 percent from a year earlier.

The bank’s chairman and chief executive, Jamie Dimon, emphasized the uptick in lending. “I believe that you are seeing real loan growth,” Mr. Dimon said on a conference call with journalists. “And I think that will continue.”

The credit surge rippled through corporate America and the nonprofit world, too, as the bank lent to entities as varied as major corporations, hospitals, universities and local governments. Last year, JPMorgan lent $58 million to a cancer research center in Washington State. The bank also lent $17 billion to small businesses in the United States, a 52 percent leap.

“All types of corporations” are taking out loans, Mr. Dimon said, “large, small, medium, all types.”

But the figures highlight the differences between the corporate and consumer economies.

The bank’s student loans dipped more than 7 percent last year. Auto loans dropped nearly 2 percent. JPMorgan’s credit card lending fell 2.5 percent, to $132.2 billion at the end of 2011, though such loans rose 5 percent in the second half of the year.

“The consumer is still deleveraging,” said Jason Goldberg, a senior analyst with Barclays. “It’s not a lack of supply; it’s a lack of demand.”

While consumers are reluctant to take on extra debt when the economic outlook is uncertain, banks like JPMorgan also remain wary of increasing their exposure to individual borrowers, particularly potential homeowners.

JPMorgan made 765,000 mortgages in 2011, but, like other banks, it sells most of them to Fannie Mae and Freddie Mac, the government-controlled housing finance companies. Banks must hold layers of capital against mortgages they keep on their balance sheets, so selling to Fannie and Freddie can be an attractive alternative to holding them.

Nearly 90 percent of all mortgages made in the first nine months of 2011 wound up at a government agency, according to Inside Mortgage Finance, an industry trade magazine.

The reluctance of banks to keep control of mortgages underscores how distant a recovery is in the home loan market. JPMorgan’s holdings of mortgages to people with stronger credit rose by just 2 percent in 2011, to $76.2 billion, while its home equity loans fell 12 percent.

“We’re getting killed in mortgages, in case you hadn’t noticed,” Mr. Dimon said on Friday.

Banks also face a reckoning for their lax lending standards during the mortgage bubble. A wave of lawsuits, filed by Fannie, Freddie and private mortgage investors alike, has loomed large on the business since the dark days of the financial crisis. JPMorgan last quarter recorded a $528 million expense for restocking its mortgage litigation reserves.

“There’s going to be a long tail to this real estate cycle,” Mr. Goldberg said. “This could go on for years.”

Still, JPMorgan on Friday highlighted some encouraging signs for its consumer divisions. The bank set aside $730 million in fewer reserves for loan losses, as its credit card portfolio showed signs of life. That decision also increased earnings for Chase retail financial services, the bank’s consumer banking arm that offers services like mortgages and checking accounts. The unit earned $533 million in the fourth quarter, up from $459 million a year earlier.

JPMorgan, for all its lingering mortgage issues, has emerged from the financial crisis as one of Wall Street’s most dominant banks. In 2011, JPMorgan stripped Bank of America of its title as the nation’s biggest bank by assets.

Bank of America is struggling more than any other big bank to shed the legacy of the subprime mortgage mess.

“JPMorgan is in the best position for no other reason than they don’t have the troubles that Bank of America has,” said Jim Sinegal, an analyst with the research firm Morningstar.

But the JPMorgan profit engine stalled in the fourth quarter amid the weak economic conditions and as new federal rules reined in fees tied to overdrafts and debit cards, onetime revenue drivers. Revenue last year fell about 5 percent, to $99.77 billion, from $104.84 billion a year earlier.

Mr. Dimon, perhaps Wall Street’s most vocal opponent of the recent regulatory crackdown, called the debit card restrictions “a gross miscarriage of justice.”

JPMorgan also disclosed that a $567 million accounting loss weighed down revenue. The investment bank booked the loss in the fourth quarter tied to the perceived riskiness of JPMorgan’s own debt, reversing a one-time gain from last quarter that propped up earnings across Wall Street. In all, the investment bank’s revenue sank 30 percent in the fourth quarter.

Shares of JPMorgan closed down 2.5 percent, or 93 cents, at $35.92.

The revenue struggles are not unique to JPMorgan, a diversified bank seen as a gauge for the performance of Wall Street. When the nation’s other big banks — Goldman Sachs, Morgan Stanley, Citigroup and Bank of America — report earnings next week, most are expected to detail similar slowdowns in revenue.

“It’s hard to think of a bright spot on the revenue side,” Mr. Sinegal said. “That issue is going to linger.”

But Mr. Dimon on Friday offered hints of optimism for his bank — and the broader state of Wall Street and the economy.

“We have a mild recovery that might actually be strengthening,” he said. And the comeback appears to be “broad.”

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DealBook: Microsoft Signs Nondisclosure Agreement With Yahoo

Potential bidders for Yahoo include, from left, Steve Ballmer of Microsoft, Glenn Hutchins of Silver Lake, David Bonderman of TPG Capital and Jack Ma of Alibaba.From left, Ted S. Warren/Associated Press; Scott Eells/Bloomberg News; Fred Prouser/Reuters; Asa Mathat/Agence France-Presse — Getty ImagesPotential bidders for Yahoo include, from left, Steve Ballmer of Microsoft, Glenn Hutchins of Silver Lake, David Bonderman of TPG Capital and Jack Ma of Alibaba.

12:53 p.m. | Updated

Microsoft has signed a nondisclosure agreement with Yahoo, according to a person briefed on the matter, formally lining itself up as another potential bidder for the struggling Internet company.

By signing the agreement, Microsoft will join the private equity firms Silver Lake, TPG Capital and others in being allowed to take a closer look at Yahoo’s books.

A month ago, many potential bidders for Yahoo had balked at signing the nondisclosure agreement, citing a “no crosstalk” provision that forbade them from talking to other interested parties.

But Microsoft had held talks with potential partners last month about a possible bid, people briefed on the matter said previously. Under one such combination, Microsoft would chip in billions of dollars in financing as part of a consortium led by Silver Lake and the Canadian Pension Plan Investment Board. That group would be backstopped by billions of dollars in bank financing as well.

Microsoft’s primary interest in Yahoo appears to be in preserving the company’s lucrative partnership with the Web pioneer. Microsoft’s Bing search engine fetches answers to user queries, while Yahoo’s sales force sells ads against those results.

The company may also push to integrate its newest acquisition, the Internet communications provider Skype, into Yahoo.

Others who have signed the nondisclosure agreement, like TPG, had been considering making only a minority investment in Yahoo rather than buying the company outright. Such a move would involve Yahoo borrowing money to finance a stock buyback, giving that investor effective control of the company.

Some other firms have not yet signed the nondisclosure agreement. The Alibaba Group, in which Yahoo owns a 40 percent stake, has been in talks with potential partners about mounting its own bid for Yahoo, people briefed on the talks said previously.

Representatives for Microsoft and Yahoo declined to comment or were not immediately available. News of Microsoft’s signing a nondisclosure agreement was reported earlier by DealReporter.

Yahoo shares were up more than 1 percent, at $15.09, in early morning trading on Wednesday. That gives the company a market value of $18.7 billion.

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DealBook: Moody’s Downgrades 12 British Banks

Scott Eells/Bloomberg NewsMoody’s Investors Service headquarters in Manhattan.

PARIS — Moody’s Investors Service on Friday downgraded its ratings on 12 British financial institutions, including Lloyds TSB Bank and Royal Bank of Scotland, saying it believed Prime Minister David Cameron’s government was less likely to provide support for the institutions in the event of failure.

It cut the senior debt and deposit ratings on the 12 lenders, citing its “reassessment of the support environment in the U.K., which has resulted in the removal of systemic support for 7 smaller institutions and the reduction of systemic support by one to three notches for 5 larger, more systemically important financial institutions.”

Both Lloyds TSB Bank and Royal Bank of Scotland fell into the arms of the state during the 2008 crisis and likely would have collapsed without that support.

Mr. Cameron’s chancellor of the Exchequer, George Osborne, said the downgrades were expected because the government was pursuing the right policy.

“As I understand it,” Mr. Osborne told BBC radio, “one of the reasons they’re doing this is that they think the British government is actually moving in the direction of trying to get away from guaranteeing all the largest banks in Britain, in other words trying to deal with the too-big-to-fail problem.”

Shares of Royal Bank of Scotland fell 2.8 percent in London, while Lloyds TSB Banking fell 3.8 percent.

He said the Vickers Commission report, which called in September for the separation of retail and investment banking activities, demonstrated that the government was serious about overhauling the banking industry.

“In other words,” he told the BBC, “people ask me, how are you going to avoid Britain and the British taxpayer bailing out the banks in the future? This government is taking steps to do that, and therefore credit ratings agencies and others will say, well actually, these banks have got show that they can pay their way in the world.”

Mr. Cameron added that he was “confident that British banks are well-capitalized, they’re liquid, they’re not experiencing the problems that some of the banks in the euro zone are experiencing at the moment.”

Moody’s said British banks’ ratings continued to receive “up to three notches of uplift” from expectations of support, but “it is more likely now to allow smaller institutions to fail if they become financially troubled.” It noted that the Bank of England, the Financial Services Authority and the Treasury had all made it clear that in the future the government would be more likely “to make greater use of its resolution tools to allow burden sharing with senior bondholders.”

It stressed that the ratings cuts “do not reflect a deterioration in the financial strength of the banking system or that of the government.”

Moody’s cut Lloyds TSB Bank and Santander U.K. to A1 from Aa3; Co-Operative Bank to A3 from A2, R.B.S. and Nationwide Building Society to A2 from Aa3; and cut seven smaller institutions, as well.

Shares of Royal Bank of Scotland fell 2.8 percent in London, while Lloyds TSB Banking fell 3.8 percent.

R.B.S. is now facing the need for another capital injection from the government, the Financial Times reported Friday. R.B.S. in a statement called that report “speculation.”

Moody’s said four British banks continued to benefit from “a very high likelihood of support” from the government, including Barclays and HSBC Holdings, as well as Lloyds TSB and Royal Bank of Scotland. It did not change its ratings of Barclays and HSBC.

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DealBook: McGraw-Hill to Break Into Two

McGraw-Hill headquarters in Manhattan.Scott Eells/Bloomberg NewsMcGraw-Hill headquarters in Manhattan.

McGraw-Hill announced plans on Monday to break into two companies, after calls for change from activist shareholders.

One company will be focused on the markets, with the Standard Poor’s unit, while the other will center on education, including textbook publishing. McGraw-Hill expects to spin off the education group by the end of 2012. As part of the broad makeover, the company also said it would cut costs and repurchase $1 billion worth of shares this year.

“After thorough analysis, the board determined that the creation of these two independent companies is the best and most reliable way to generate superior shareholder value,” the chairman and chief executive, Harold McGraw III, said in a statement. “Because both companies will be sharply defined, they will create two pure-play investment opportunities and present a more transparent capital markets profile, enabling investors to better assess their value, performance and potential.”

Activist investors and analysts have been pushing for McGraw-Hill to split up the company, as its stock has stagnated. Shares, once more than $70, now trade for less than $40.

Harold W. McGraw III, chief executive of McGraw-Hill.Daniel Acker/Bloomberg NewsHarold W. McGraw III, chief executive of McGraw-Hill.

Last month, Jana Partners and the Ontario Teachers Pension Plan took a stake in McGraw-Hill, disclosing they might take “steps seeking to bring about changes to increase shareholder value.” The investors met with management a few weeks later, pushing for a four-way breakup of the company.

McGraw-Hill has been conducting a comprehensive review of the businesses, a process it said was “designed to unlock superior shareholder value and accelerate global growth.” It also hired the investment bank Evercore Partners to explore the options for the education business. In June, it announced plans to sell broadcasting assets.

McGraw-Hill Markets, which will be headed by Mr. McGraw, will house the index and ratings business Standard Poor’s; Platt’s, the energy industry data provider; and J.D. Power and Associates, the research service. The group, which should have revenue of $4 billion in 2011, with some 40 percent coming from outside the United States, is expected to produce double-digit growth.

The second company, McGraw-Hill Education, should generate revenue of $2.4 billion this year, focusing on students from kindergarten through college. Robert Bahash, currently president of the education unit, will stay on in the role until the company can find a new chief.

“Our growth and value plan will transform a multifaceted corporation into two powerful companies, each with highly focused strategies, aligned customer bases and interconnected markets,” Mr. McGraw said in a statement.

McGraw-Hill is being advised by Goldman Sachs and Evercore Partners.

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