December 25, 2024

Banks Revive Risky Loans and Mortgages

The banks that created risky amalgams of mortgages and loans during the boom — the kind that went so wrong during the bust — are busily reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street.

The revival partly reflects the same investor optimism that has lifted the stock market to new heights. With the real estate market and the economy improving, another financial crisis seems a distant prospect. What’s more, at a time when the Federal Reserve has pushed interest rates close to zero, the safest of these new investments offer interest rates almost double that paid by ultrasafe United States Treasury securities, according to RBS Securities, which was involved in such instruments in the past.

But the revival also underscores how these investments, known as structured financial products, have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis.

“All of this seems like a fairly quick round trip,” said Manus Clancy, a managing director at Trepp, a research firm that focuses on commercial real estate. “You are seeing a fair number of sins being forgiven.”

Banks are turning out some types of structured products as fast or faster than they did before the bottom fell out. So far this year, for instance, banks have issued $33.5 billion in bonds backed by commercial mortgages, slightly more than they did in early 2005, when the real estate market was flying high, according to data from Thomson Reuters.

Banks have won over investors by taking steps to make this generation of structured products safer than the last one. But with demand for these products on the rise, credit ratings agencies and regulators are warning that the additional protections are already dwindling, allowing some of the old excesses to creep back into the market.

“The players in the business are generally the same as they were before,” said Tad Phillips, a commercial real estate analyst at Moody’s rating agency. “Because it’s the old players, they know how to push the boundaries.”

Whatever the risks, the basic principle behind the products remains the same. A pool of loans — whether home mortgages or corporate loans — are mixed together into bonds, ranked by varying levels of risk. If the underlying loans go bad, the bonds at the bottom of the pecking order suffer losses first, followed by the next lowest, and so on up the chain. It is only after enormous losses that the top-ranked AAA bonds lose money.

Bundling many loans into one investment, a process known as securitization, provides an efficient way to channel money to borrowers who might not otherwise get funds. But securitization proved dangerous during the last real estate boom because it encouraged banks to give loans to people with weak credit and then pass on those risky loans to the buyers of the structured products. When the real estate market dropped in value, it inflicted unexpected losses on those investors and led to chaos in the financial system. Many investors complained that the complexity of the instruments obscured their risks.

The Dodd-Frank regulatory overhaul is forcing banks to take extra steps in the process of bundling loans, but it does not change the basic approach.

For a glimpse into this process, both before and after the crisis, consider the mortgage taken out by the Hard Rock Hotel in downtown Chicago. In mid-2007, just as the real estate market was coming unhinged, the hotel — like many ordinary home buyers — took out a risky mortgage on which it paid only interest. JPMorgan Chase mixed this loan and others into a commercial mortgage-backed security. Credit ratings agencies gave a large portion of the resulting bonds a AAA rating.

After the recession, the hotel struggled to keep up with its payments, edging it toward foreclosure. It was one of several bad loans that caused losses for holders of the old bonds. But late last year, with the market for structured finance coming back to life, the hotel’s owners were able to refinance the old mortgage. In February, that refinanced loan turned up in a new bond, which again received a AAA rating.

Article source: http://www.nytimes.com/2013/04/19/business/banks-revive-risky-loans-and-mortgages.html?partner=rss&emc=rss

Voters Tighten Limits on Executive Pay in Switzerland

The vote gives shareholders of companies listed in Switzerland a binding say on the overall pay packages for executives and directors. Pension funds holding shares in a company would be obligated to take part in votes on compensation packages.

In addition, companies would no longer be allowed to give bonuses to executives joining or leaving the business, or to executives when their company was taken over. Violations could result in fines equal to up to six years of salary and a prison sentence of up to three years.

The outcome of the referendum was a triumph for Thomas Minder, an entrepreneur and member of the Swiss Parliament (no relation to the reporter), who turned a personal fight against the management of Swissair, the flagship airline that collapsed in 2001, into a nationwide referendum against “rip-off merchants.”

Almost 68 percent of Swiss voters backed Mr. Minder’s proposals, according to results announced late Sunday.

“I am very proud of the Swiss people who have sent a very strong signal to the establishment,” Mr. Minder told Swiss television. Despite the fact that his referendum had been opposed by Switzerland’s main political parties, Mr. Minder, who is an independent member of the Swiss Parliament, called on all lawmakers to cooperate in swiftly enacting the law.

Nonbinding shareholder votes on executive pay have also been introduced in countries like the United States and Germany in response to Occupy Wall Street and other movements that have attacked the corporate excesses and abuses that fueled the world financial crisis. On Thursday, the European Parliament agreed to limit bonuses of bankers to two times their salaries.

In the case of Switzerland, however, Mr. Minder called for a much broader and tougher clampdown, striking a chord among citizens after the world financial crisis exposed major management failures at the financial giant UBS and other Swiss institutions.

Mr. Minder’s case was unexpectedly bolstered last month when Novartis, the pharmaceutical company, agreed to a $78 million severance payout for its departing chairman, Daniel Vasella. That set off a political storm and intense criticism from some investors, forcing Novartis to scrap the payout and prompting Mr. Vasella to tell shareholders that it had been a mistake.

Cristina Gaggini, an official from EconomieSuisse, the Swiss business federation, said Sunday that the business lobby had made some “major errors” in its efforts to stop Mr. Minder’s decade-long crusade, adding that the Novartis payout plan had amounted to a turning point in the referendum campaign.

After that, Ms. Gaggini said on Swiss national television, “It became impossible to return to a reasonable debate.”

Ahead of the vote, EconomieSuisse and Mr. Minder’s other opponents warned of dire consequences if the referendum passed, notably in terms of keeping Switzerland attractive to foreign companies and investors.

But Mr. Minder argued that Switzerland would benefit if it gave shareholders control over the companies in which they invested. Well over half the shares in many of the country’s largest companies are already held outside the country. “Investors put their money where they have the most to say, and that will clearly then be Switzerland,” Mr. Minder said ahead of the referendum.

Robin Ferracone, chief executive of Farient Advisors, an American advisory firm that specializes in executive compensation issues, said that even though the referendum would add “more burden to corporate processes, I do not predict an exodus from Switzerland,” because the tax and other benefits of being based in the country would still outweigh “the inconvenience” of having to adjust to stricter executive compensation rules.

Mr. Minder started his campaign after his family-owned business came close to bankruptcy because it had been a supplier of toothpaste and other body care products to Swissair, the airline that was grounded in October 2001.

While Swissair had run out of money, it still managed to pay an advance earlier that year of 12 million Swiss francs (about $9.6 million at the time) to a chief executive, Mario Corti, who then left shortly after the airline’s collapse.

Mr. Minder then broadened his campaign, accusing several bankers and other prominent executives of receiving “rip-off” pay packages. His campaign gained such momentum in recent months that relatively few such executives confronted him publicly, in this neutral and compromise-seeking country.

Article source: http://www.nytimes.com/2013/03/04/business/global/swiss-voters-tighten-countrys-limits-on-executive-pay.html?partner=rss&emc=rss

Bank of America Plans Big Layoffs to Cut Costs

With its stock down more than 50 percent since January, the job cuts by Bank of America may be only the start of a broader restructuring at the company, which is the nation’s largest bank. Brian T. Moynihan, the chief executive of the bank, has said that he hopes to trim quarterly expenses by $1.5 billion. Thousands more job cuts are likely in the months ahead.

“I know it is tough to have to manage through reductions,” Mr. Moynihan wrote in a memo to the company’s senior leadership late Thursday that outlined the cuts. “But we owe it to our customers and our shareholders to remain competitive, efficient and manage our expenses carefully.”

In the memo, obtained by The New York Times, Mr. Moynihan said the company’s broader revamping effort was nearing completion of its first phase, which examines the consumer business and support functions. A third and final review is set for early September.

The company plans to announce the first results of that project next month, which could include further job cuts that would total more than 10,000.

Mr. Moynihan said in the memo that the company had already begun to tell the 3,500 employees that their jobs were to be eliminated, and that the reductions would come throughout the company. Bank of America, which has roughly 280,000 employees, cut about 2,500 jobs in the first half of the year.

Even more than its large rivals, Bank of America has been battered particularly hard by the bursting of the housing bubble and the surge in foreclosures. It has already suffered tens of billions in losses tied to its disastrous acquisition in 2008 of Countrywide Financial, the subprime lender that has come to epitomize the excesses of the housing boom of the last decade.

Investors are also pressing the bank to buy back billions of dollars in securities it assembled from mortgages that later soured. In June, it agreed to pay a group of investors including Pimco, BlackRock and the Federal Reserve Bank of New York $8.5 billion to settle a portion of these claims.

While the settlement represented the culmination of months of negotiations and was seen as an attempt by Mr. Moynihan to finally put Countrywide’s disastrous legacy behind the company, investors  remain skeptical.

Earlier this month, American International Group, the giant insurer, filed suit against the company over mortgage backed securities it assembled, and investors fear the June settlement may actually spur more litigation, rather than resolve it.

The latest job cuts, which were first reported on the Wall Street Journal’s Web site late Thursday, will also hit the company’s Merrill Lynch unit. Bank of America agreed to acquire the firm at the height of the financial crisis in 2008. While Merrill has proved profitable more recently, trading volumes and the flow of deals have slowed substantially in recent months, making it vulnerable to further job reductions.

Despite the huge settlements and other write-downs, Mr. Moynihan has said that he does not plan to issue more stock to raise new capital. Instead, the company has been engaged in the corporate version of a yard sale in recent weeks, raising billions of dollars as it offloads everything from its Canadian credit card business to several commercial real estate properties.

In the recent market downturn, Bank of America shares have been especially hard hit.  Since the beginning of the year, Bank of America shares have fallen from $15 to a closing price of $7.01 on Thursday.

“While the markets reflect many economic factors we cannot control, we must stay focused on what we can control,” Mr. Moynihan said in the memo.

Article source: http://feeds.nytimes.com/click.phdo?i=d64031c355b88d1587b392f9aa17de18

Reviled Tycoon, Assad’s Cousin, Resigns in Syria

The businessman, Rami Makhlouf, a 41-year-old tycoon who has emerged as a lightning rod in the three-month uprising against Mr. Assad’s rule, is almost synonymous with the excesses of the Syrian leadership. Offices of his mobile phone company, Syriatel, were burned in protests, and his name was chanted in denunciation in demonstrations.

Though opposition figures doubted the sincerity of the move, even a symbolic gesture may prove important, as Mr. Assad faces the gravest challenge to his 11-year rule. For the first time since the uprising began, analysts said, a figure deemed a pillar of the leadership was forced to at least publicly step aside, a startling concession for a tightknit ruling elite bound by family and clan loyalty.

“The government is now using another set of cards, one that directly addresses the protesters’ demands,” said Bassam Haddad, director of the Middle East Studies Program at George Mason University. “Makhlouf is a symbol of the corruption in the regime.” But, he added, “as a change of heart for the regime, the decision has come too late, and it’s not going to be accepted seriously by protesters.”

In a news conference carried by the Syrian state news agency, Mr. Makhlouf portrayed his move as an act of generosity, though it was unlikely that any such decision could take place without the consent and perhaps the insistence of Mr. Assad.

Mr. Makhlouf said that he would offer shares of Syriatel, Syria’s largest phone company, to the poor and that profits would go, in part, to families of people killed in the uprising. He said profits from his other endeavors would go to charitable and humanitarian work. He vowed not to enter into any new business that would bring him personal gain.

The move represented a humiliating moment for a man who is leery of the limelight, only rarely grants interviews and is described by detractors as the Assad family’s banker or Mr. Five Percent. The ascent of Mr. Makhlouf, at the intersection of power and privilege, mirrored the Assad family’s consolidation of power in Syria over the past four decades: his father Mohammed, Mr. Assad’s uncle, was a magnate in his own right, and Rami Makhlouf’s brother, Hafez, is the intelligence chief in Damascus.

Mr. Makhlouf’s supporters praise him for investment in Syria’s dilapidated infrastructure, and the sleek offices of Syriatel are a sought-after destination for the urban young and educated. But they are far outnumbered by detractors, who call him a thief, and his unpopularity rivals perhaps only that of Mr. Assad’s brother, Maher, a feared and reviled figure who commands the military’s Republican Guard and the elite Fourth Division.

Mr. Makhlouf’s influence is so great, and his connection to the leadership so deep, that opposition figures derided the move as propaganda. Others speculated that it was devised to avoid sanctions imposed on him by the European Union, which included him on a list of 13 figures subject to a freeze on assets and a ban on travel to the bloc.

The United States imposed sanctions on him in 2008, accusing him of manipulating the judicial system and using Syrian intelligence to intimidate rivals.

“There is no transparency in his declaration because we don’t know what he owns and how much money he has,” said Ammar Qurabi, head of the Syrian National Association for Human Rights. “It is a step designed for media consumption only.”

But diplomats have said that Mr. Assad himself was angered by an interview that Mr. Makhlouf gave The New York Times in May, which offered a rare insight into the thinking of an opaque government. The frank comments amounted to a public relations disaster for a government facing mounting international pressure over a ferocious crackdown that, by activists’ count, has left 1,300 dead and more than 10,000 in detention.

In the interview, he said the government would fight to the end in a struggle that could cast the Middle East into turmoil and even war, suggesting that the ruling family equated its survival with the existence of the minority sect that buttressed its power and that viewed the protests not as legitimate demands but as the seeds of civil war.

“If there is no stability here, there’s no way there will be stability in Israel,” he said in the interview. “No way, and nobody can guarantee what will happen after, God forbid, anything happens to this regime.”

Though Syrian officials quickly distanced themselves from the remarks, saying Mr. Makhlouf held no official position in the government, opposition figures and diplomats seized on the remarks as evidence of a government unwilling to change.

In some ways, the remarks were a candid take on a sentiment the government has sought to cultivate since the uprising erupted in March — us or chaos.

“They should know when we suffer, we will not suffer alone,” Mr. Makhlouf said.

Though prominent before Mr. Assad’s ascent in 2000, Mr. Makhlouf grew wealthier as he and Egyptian partners won one of two mobile phone contracts. His partners were eventually forced to sell. As Syria moved away from a state-led economy, he penetrated the economy’s most lucrative sectors: real estate, transportation, banking, insurance, construction, a five-star hotel in Damascus and duty-free shops at airports and the border.

He is the vice chairman of Cham Holding, set up in 2007 with 73 investors and $360 million in what many portrayed as an attempt to tether wealthy businessmen to the government. Syrian analysts say he is the company’s real power.

He was reported to have sold his duty-free shops to a Kuwaiti company in May, though some suggested that the move was intended to avoid sanctions.

The announcement by Mr. Makhlouf comes a day before weekly protests that have convened after Friday Prayer. Diplomats say Mr. Assad is also preparing a speech as early as Sunday that Syrian officials have described as significant, perhaps inaugurating a more serious government effort to engage the opposition in dialogue.

Nada Bakri contributed reporting.

Article source: http://www.nytimes.com/2011/06/17/world/middleeast/17syria.html?partner=rss&emc=rss