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DealBook: MF Global’s Risk Officer Said to Lack Authority

December 15, 2011 by Leave a Comment

Jon S. Corzine, MF Global's former chief executive, being sworn in at a Senate hearing on the firm's demise. He will face more questions from a House committee on Thursday.Chip Somodevilla/Getty ImagesJon S. Corzine, MF Global’s former chief executive, being sworn in at a Senate hearing on the firm’s demise. He will face more questions during a House hearing on Thursday.

Congressional investigators are exploring whether regulators and feeble risk controls allowed MF Global to topple.

A House committee is expected to disclose on Thursday that MF Global, under Jon S. Corzine, stripped critical powers from its top executive in charge of controlling risk, according to a person briefed on the matter.

The move left the firm short-handed as it was grappling with the implications of its $6.3 billion position on European sovereign debt, a trade large enough to wipe out the firm if it soured.

Earlier this year, MF Global replaced its chief risk officer, Michael Roseman, after he repeatedly clashed with Mr. Corzine over the firm’s purchase of European sovereign debt. The new risk officer, Michael Stockman, took over the position in early 2011 with one major difference: unlike his predecessor, he was not allowed to weigh in on the broader implications the trades might have on the firm, including whether they might undermine investor confidence.

In the last week of October, as ratings agencies downgraded the firm and investors fled, MF Global’s liquidity dried up. The firm filed for bankruptcy on Oct. 31 after it was discovered that about $1 billion in customers’ money was missing.

The House Financial Services subcommittee will also focus its attention on the patchwork of 20 regulators and federal agencies charged with oversight of MF Global, according to a Congressional memo. It will afford the Republican-controlled committee an opportunity to take a swipe at Wall Street’s largely Democratic watchdogs.

In particular, the committee will examine the role of the Federal Reserve Bank of New York, which did not have direct regulatory oversight over MF Global.

The New York Fed this year designated MF Global a primary dealer, allowing it to trade directly with the bank in the buying and selling of United States government debt.

The chief legal counsel for the New York Fed is expected to say Thursday that as worries mounted over MF Global’s ability to stay afloat, the governmental institution issued the firm a margin call on Oct. 28 — demanding more money from the firm to continue trading with it.

The margin call raises the possibility that MF Global improperly transferred customer cash to meet the New York Fed’s demands. While the size of the margin call on the $950 million position was not specified in the counsel’s prepared testimony, the New York Fed used the cash to pay off $3 million in trading fees. The remainder of the money was turned over to the trustee overseeing the liquidation of MF Global’s brokerage unit.

Investigators on Wednesday would not say whether the money used to meet the margin call belonged to customers.

Lawmakers plan to question whether the firm deserved its primary dealer status to begin with. Such a distinction is not easily earned — just 21 financial firms worldwide have it. House panel members plan to point to MF Global’s weak earnings, low credit rating and lackluster business model as potential shortcomings that should have led the regulator to reject the firm’s bid.

In 2010, the New York Fed delayed the application because the firm faced federal enforcement actions over weak internal controls. It approved the application in February 2011.

Mr. Corzine has previously told lawmakers that the firm was better than some other primary dealers.

“We had adequate capital, and while, as I indicated in my written testimony, our historical earnings hadn’t been so good, they had gotten slightly better,” he told the House Agriculture Committee last week.

Pressed about his own personal involvement in securing the firm’s primary dealer title, Mr. Corzine, who commanded respect in Washington and Wall Street as a former Democratic senator from New Jersey and a former head of Goldman Sachs, noted that MF Global’s application began before he took over.

“I visited with people at the Federal Reserve, as I reported,” he said. But “never with either the president or chairman or any of the board of governors.”

William Dudley, chief of the New York Fed, had frequent contact with Jon Corzine in the last days of MF Global.Jonathan Ernst/ReutersWilliam Dudley, chief of the New York Fed, had frequent contact with Jon Corzine in the last days of MF Global.

He spoke briefly of his interaction with the New York institution, whose president, William Dudley, like Mr. Corzine, was also a former Goldman executive. While he did not engage with Mr. Dudley about the primary dealer designation, Mr. Corzine had repeated contact with him during the last days of MF Global, before it filed for bankruptcy. The contact included phone calls and e-mails, and were most likely about MF Global’s endangered status as a primary dealer, according to the person briefed on the matter.

The Federal Reserve, for its part, has said it was not responsible for the oversight of MF Global, and argued that the primary dealer designation of the firm was not meant to indicate the firm was infallible.

“We are not the regulators of MF Global — that’s done by the S.E.C, and C.F.T.C., so we do not have ongoing insight into developments within the company,” Ben S. Bernanke, the chairman of the Fed, said shortly after MF Global’s bankruptcy.

Thursday’s hearing will be Mr. Corzine’s third appearance before a Congressional panel examining the collapse of MF Global. Mr. Corzine, who was governor of New Jersey before joining the firm in 2010, has previously apologized for the firm’s collapse, but said he was “stunned” to learn that client money was missing.

A CME Group executive will also testify before the House Financial Services subcommittee, two days after suggesting that Mr. Corzine knew about the misuse of customer funds. The executive, Terrence Duffy, has not offered any clarity on the accusation since testifying before the Senate Agriculture Committee on Tuesday.

Whatever findings the panel uncovers in its hours of testimony Thursday, it is unlikely to determine the whereabouts of the missing customer cash. Two previous panels have yielded little insight on that front.

The money went missing, investigators say they believe, during the firm’s dying days in October. Some people close to the investigation have homed in on the firm’s primary bank, JPMorgan Chase, as a likely location for at least some of the funds.

After two Congressional hearings, frustration has bubbled over among customers, like farmers who remain in the dark about their missing money. “Making customers whole needs to remain the top priority,” said Debbie Stabenow, Democrat of Michigan, who leads the Senate agriculture committee.

The trustee liquidating the firm’s trading operations, James W. Giddens, has estimated that at least $1.2 billion in MF Global customer funds are missing.

On Wednesday, a federal bankruptcy judge in Manhattan approved a request by MF Global to continue using about $21.3 million of its cash on hand, allowing the firm to continue operating under Chapter 11.

The judge, Martin Glenn of the federal bankruptcy court in Manhattan, also ordered the trustee overseeing MF Global’s bankruptcy case, to begin a limited investigation into whether that cash included customer funds.

Judge Glenn’s decision to let MF Global continue using its cash on hand followed days of negotiations between Mr. Freeh and various objectors to the motion. In an opinion filed on Wednesday afternoon, the judge wrote that the need for use of the so-called cash collateral was “obvious”: It would pay for Mr. Freeh and the cadre of lawyers seeking to recover money for creditors.

Michael J. de la Merced and Susanne Craig contributed reporting.

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Economix Blog: How Much Do You Owe? Guess Again

October 20, 2011 by Leave a Comment

It would appear that Americans don’t even know how much they owe.

Households underreport the magnitude of their credit card debts by at least one-third, according to a new study from the Federal Reserve Bank of New York. The difference for the average household is more than $2,000.

Only 50 percent of households reported any credit card debt, while credit card companies reported that 76 percent of households owed them money.

The paper has the discomfiting consequence of raising questions about the accuracy of the Fed’s Survey of Consumer Finances, widely treated as an authoritative source. The authors compared the debt levels reported by participants in that survey with data that lenders reported to the Equifax credit bureau. They found that consumers gave accurate testimony about most kinds of debt, including mortgages and student loans, but not when asked about credit card debt.

In fact, borrowers reported owing only about 50 cents for each dollar claimed by credit card lenders.

There are plausible explanations for part of the difference. In particular, people who pay the full balance on their cards each month – lenders call such customers “convenience users” or, more colorfully, “deadbeats,” because they do not pay interest and therefore are less profitable — may not regard that balance as “true” debt, and therefore choose not to report it. The industry, however, simply reports the total volume of outstanding loans. (Lenders, after all, have no way to know which loans will be repaid at the end of the month and which loans will stay on the books.)

The authors overcorrect for this possibility by subtracting all transactions made in the last year, as if everyone paid their bills each month. They also make some other adjustments, including subtracting an estimate of the debt that consumers put on their credit cards for business purposes, on the theory that some people may also place this debt in a separate category.

Even with those changes, however, the average household reports credit card debts of $4,700, while lenders report an average balance per household of $7,134.

Why do people underreport the magnitude of their debts?

Embarrassment is an obvious candidate, but there are a couple of problems with that explanation. First, people accurately report other categories of debt, like  mortgages and student loans. Of course, those are the kinds of debts people are encouraged to carry. But people also accurately report personal bankruptcies, which would seem more embarrassing. Still, it is possible that embarrassment plays a role; the authors note evidence that people tell small lies more readily than large ones, perhaps explaining why people are less willing to lie about filing for bankruptcy.

Another partial explanation: Individuals report their credit card debts more accurately than households, suggesting that people may be ignorant of debts run up by their partners. This difference, however, does not come close to explaining the magnitude of the discrepancy.

And that leaves ignorance: The possibility that Americans simply don’t know how much they owe.

“Uninformedness,” the paper notes (bringing a new word into existence), “could result from willful ignorance, as large credit card balances are not welcome information, from difficulty understanding the growth of credit card balances,” or from other barriers to knowledge.

Interestingly, there is some evidence that underreporting has declined in recent years, perhaps as a consequence of a crisis that has forced households to pay more attention to their debts.

Article source: http://feeds.nytimes.com/click.phdo?i=d3eac3a5565039b2c8df46202b6b42b8

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Factory Activity Plummets And Home Resales Slump

August 18, 2011 by Leave a Comment

Other data released on Thursday also showed that consumer inflation rose at its fastest rate in four months in July and that more Americans than expected filed claims for jobless benefits last week.

Stock markets worldwide tumbled on the weak economic data, which stoked concerns that the recovery was on the rocks.

Still, economists said they did not believe that the sharp drop in manufacturing activity signaled that the nation’s economy was sliding back into recession.

“Without a strong rebound in the coming months, this will be taken as a very worrying development for policy makers charting the outlook for the second half of the year,” said Peter Newland, a senior economist at Barclays Capital in New York.

“That said, ‘hard’ data so far available for the third quarter have taken a clearly stronger tone and timely jobless claims data are not indicative of a dramatic weakening in the economy,” he added.

Data including retail sales and industrial production suggested the economy found some momentum early in the third quarter after barely growing in the first half of the year.

The president of the Federal Reserve Bank of New York, William C. Dudley, said on Thursday that the risk of a double-dip recession was “quite low.”

“The risks have risen a little bit, but I think we very much still expect the economy to recover.” The agency expects growth to be significantly firmer than it was during the first half of the year, he told New Jersey business leaders.

In one positive report, the Conference Board said its index of leading economic indicators rose 0.5 percent in July. The increase, which followed a gain of 0.3 percent in June, was lifted by the money supply and interest rate components, the board said.

Ken Goldstein, an economist at the board, said that growth was modest, especially in nonfinancial indicators.

Despite the risks, he said, “the economy should continue to expand at a modest pace through the fall.”

The Philadelphia Federal Reserve Bank’s business activity index fell to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July.

That was much worse than economists’ expectations for a reading of plus 3.7. Any reading below zero indicates a contraction in the region’s manufacturing.

“This report clearly reflects the fact that businesses cut their outlook as a result of the debt limit crises and the resulting downgrade of the U.S. credit rating,” said Steven Ricchiuto, chief economist at Mizuho Securities in New York.

“I would not read too much into this in terms of the outlook on the economy since manufacturing had been on the rebound in autos and exports and the economy was stuck in first gear for two years.”

A second report showed sales of previously owned homes fell 3.5 percent in July, to an annual rate of 4.67 million units, the lowest in eight months. Economists had expected home resales to rise to a 4.9 million-unit pace.

Separate data from the Labor Department showed initial claims for state unemployment benefits increased 9,000, to 408,000. Another report from the department showed the Consumer Price Index increased 0.5 percent in July, the largest gain since March, after falling 0.2 percent in June.

Gasoline, which rose 4.7 percent after falling 6.8 percent the previous month, accounted for about half of the rise in C.P.I. last month.

But core C.P.I. — excluding food and energy — rose 0.2 percent after rising 0.3 percent in June.

Morgan Stanley cut its global growth forecast and said that the United States and its major export partner the euro zone were “dangerously close to recession.” In a research note that spooked investors, it lowered its United States estimate to 1.8 percent growth in gross domestic product for 2011 from 2.6 percent and for next year to 2.1 percent from 3.0 percent.

The jobless claims data covers the survey week for August nonfarm payrolls. Claims dropped by 14,000 between the July and August survey periods, but there are fears that turbulence in the financial markets could have slowed hiring this month.

“Initial claims were a bit higher than expected, indicating a generally sluggish trend for hiring although still better than where we stood during the second quarter,” said Avery Shenfeld, an economist at CIBC World Markets in Toronto.

Despite the spike in consumer inflation last month, which also reflected a 0.4 percent rise in food prices, inflation generally remains contained.

New motor vehicle costs were unchanged after five consecutive months of hefty gains. This probably reflects an improvement in supplies as disruptions caused by the March earthquake in Japan fade. Motor vehicle production rebounded sharply in July.

In the 12 months to July, core C.P.I. increased 1.8 percent — the largest increase since December 2009. This measure has rebounded from a record low of 0.6 percent in October, and the Fed would like to see that closer to 2 percent.

Overall consumer prices rose 3.6 percent year-on-year, rising by the same amount for a third consecutive month.

Within the core C.P.I. basket, shelter costs rose 0.3 percent, the largest gain since June 2008, after advancing 0.2 percent in June. Shelter has increased since October as a persistently weak housing market drives Americans into renting.

The increase in apparel prices slowed to 1.2 percent from June’s 1.4 percent increase.

Article source: http://feeds.nytimes.com/click.phdo?i=cbc8b5b3eda972ab4e3d4b0a8e58f890

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Bank of America to Set Aside $14 Billion in Mortgage Deal

June 29, 2011 by Leave a Comment

The whopping charge represents the banking industry’s biggest single settlement tied to the subprime mortgage boom and the subsequent financial crisis of 2008.

Of the $14 billion, $8.5 billion will go to help settle claims by heavyweight holders of the securities, including Pimco, BlackRock and the Federal Reserve Bank of New York, that have been pressing for a settlement since last fall.

The losses stem largely from mortgages underwritten by Countrywide Financial, the subprime mortgage lender that Bank of America bought in 2008.

“This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us,” Brian T. Moynihan, the bank’s chief executive, said in a statement. “We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide.”

In early trading, Bank of America shares rose roughly 3 percent, a sign that investors hope this deal will lift a cloud that has been hanging over the stock since last year. The bank’s mortgage woes have been considered a main reason why it has underperformed giant peers like JPMorgan Chase and Citigroup.

In addition to the $14 billion hit, the bank is taking additional charges totaling $6.4 billion in the second quarter to clean up other areas of its troubled mortgage business. That includes the $2.6 billion noncash write-off of the value of its home lending business, a move that tacitly acknowledges that it overpaid for Countrywide.

The deal will also require Bank of America, based in Charlotte, N.C., to improve its payment collection process by hiring specialists to focus on high-risk loans and to do a better job of tracking whether the bank is adhering to its own internal loan-servicing standards. 

The negotiations toward a settlement began last fall but picked up speed in recent weeks as the end of the second quarter approached. For the investors, settling avoids a costly, multiyear legal fight, while Bank of America can pile a load of its troubles into the second-quarter results and clear away one of the biggest uncertainties hanging over the company.

Last fall, Mr. Moynihan promised “hand-to-hand” combat to fight these and other legal efforts by investors to force Bank of America to make payouts for soured mortgage securities.

But he told analysts on a conference call Wednesday morning that the settlement did not mark a forced surrender. “We did fight for the last several months,” he said. “But when you look at this over all, it’s a better decision for the company. It was much more adverse to the company if we kept fighting. We’ve been battling it out.”

“It is our job, management’s job, to eliminate risk,” he added. “There is still work ahead of us on the mortgage issues but this is a major step forward for the company.”

Despite the staggering size of the settlement with the investors and other charges announced Wednesday, additional liability remains from mortgage securities that were assembled and sold by Bank of America.

Bruce Thompson, the company’s chief financial officer, said the agreement does not cover loans sold by Bank of America to other private trusts, nor does it cover mortgage securities assembled from the home loans of third parties.

He added that sales and trading in the company’s vast Wall Street business is ahead of last year but remains “below the seasonally strong first quarter.” The quarter’s results include $2.5 billion in gains from the sale of assets including the company’s Balboa insurance subsidiary and a stake that it sold in BlackRock.

Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have the greatest exposure to legal claims that they bundled troubled home loans and sold them as sound investments. Together, they are likely to absorb roughly 40 percent of the industry’s mortgage-related losses.

In a recent research note, Paul Miller of FBR Capital Markets projected that Bank of America could face a total of $25 billion of losses from the soured mortgages, the most of any of the major banks.

Other big banks face sizable risks, too. Mr. Miller predicted that Chase could expect losses reaching as much as $11.2 billion. Wells Fargo has potential losses of up to $5.2 billion, while Citigroup could see losses top $3.3 billion.

The Bank of America settlement will require court approval in New York.

Under the terms of the accord, Bank of America would deliver the money to the trustee for the securities, Bank of New York Mellon, which would distribute it to the institutional investors.

The bank does not anticipate having to raise capital or sell stock to find the money for the settlement.

Still, other huge risks loom from the fallout of the subprime mortgage crisis. All 50 state attorneys general are in the final stages of settling an investigation into abuses by the biggest mortgage servicers, and are pressing the big banks to pay up to $30 billion in fines and penalties.

What’s more, insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement, arguing that the original mortgages were underwritten with false information and did not conform to normal standards.

In an interview on Tuesday, before reports of the Bank of America settlement, Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, worried that the unresolved mortgage claims continued to hurt the broader economy.

“Unresolved legal claims could serve as a drag on the recovery of the housing market,” Ms. Bair said. “The healing of the housing market is essential to the recovery of the broader economy.”

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Stocks & Bonds: Shares Rise on Optimistic Outlook

April 16, 2011 by Leave a Comment

Merck Company and DuPont led gains in the Dow Jones industrial average. Charles Schwab, the brokerage firm, rallied 2.1 percent as earnings and sales exceeded analysts’ estimates. Google fell 8.3 percent, the most since 2008, after earnings fell short of projections. Bank of America fell 2.4 percent as executives said profitability from lending might come under pressure.

The Standard Poor’s 500-stock index rose 5.16 points, or 0.39 percent, to 1,319.68, trimming its weekly loss to 0.6 percent. The Dow Jones industrial average rose 56.68 points, or 0.46 percent, to 12,341.83. The Nasdaq composite index was up 4.43 points, or 0.16 percent, to 2,764.65.

“The economy continues to expand and the recovery is sustaining,” said Russ Koesterich, the head of investment strategy for scientific active equities at BlackRock in San Francisco. “It’s not going to be a bad earnings season. It’s just that a lot of the good news is already baked in. It’s going to be a choppy market with an upward bias.”

Stocks turned higher after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 69.6, higher than forecast, from March’s 67.5 reading, which was the lowest since November 2009. The gauge was projected to rise to 68.8, according to the median forecast of 66 economists surveyed by Bloomberg News.

Manufacturing in the New York region expanded in April at the fastest rate in a year. The Federal Reserve Bank of New York’s general economic index rose to 21.7 from 17.5 in March. Economists projected 17, based on the median forecast in a Bloomberg News survey.

A separate report showed industrial production increased more than forecast in March, led by a rebound in consumer goods manufacturing. Output rose 0.8 percent, the fifth straight gain, the Federal Reserve said.

Merck gained 1.9 percent, to $34.51. The company will split sales for the arthritis drug Remicade with Johnson Johnson, ending an arbitration dispute that helped drive Merck shares down over the last year.

Charles Schwab advanced 39 cents, to $18.61. The brokerage firm beat estimates, helped by interest revenue and higher fees for managing assets.

Google slumped $47.81, to $530.70. A first-quarter hiring binge and increased marketing led to the biggest jump in operating expenses in three years.

Bank of America fell 31 cents, to $12.82. ’The company reported first-quarter profit excluding some items of 17 cents a share, missing the average analyst estimate by 35 percent.

Higher oil prices and supply disruptions from Japan’s March 11 earthquake prompted Thomas Lee, an equity strategist at JPMorgan Chase, to cut his 2011 profit estimate for the S. P. 500.

Alan M. Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Va., said: “The market is unforgiving. Investors have raised their expectations on what constitutes good corporate performance. Yes, the economy is growing. The question is, What is going to convince the market to break into new highs? So far earnings have not been too inspiring.”

Interest rates were lower. The Treasury’s benchmark 10-year note rose 24/32, to 101 25/32, and the yield fell to 3.41 percent from 3.50 percent late Thursday.

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Shares Rise on Report Of Jobs Growth

April 2, 2011 by Leave a Comment

The Labor Department report said 216,000 jobs were added in March, and that the unemployment rate fell to 8.8 percent.

The report beat forecasts and fueled hopes that hiring was on an upward trend. However, some noted that wages were flat.

Dan Greenhaus, chief economic strategist for Miller, Tabak and Company, said an environment of slow job creation and weak wage growth coupled with rising prices for gasoline and food was not good for consumers but “unquestionably a positive for corporate profits and margins.”

“Consumers may be getting the short end of the stick, but companies are certainly not going to complain in an environment in which prices are going up and labor costs are flat,” Mr. Greenhaus said.

Corporate profits, economic statistics and mergers have contributed to market movements in recent weeks, although global events, like the turmoil in Arab oil countries, the earthquake, tsunami and nuclear crisis in Japan, and concerns about sovereign debt in the euro zone have also had an impact.

On Friday, William C. Dudley, the president of the Federal Reserve Bank of New York, said events in Japan and the Middle East could worsen, and he emphasized that the economic recovery was “still tenuous,” even though economic conditions have improved.

Mr. Dudley singled out manufacturing in a speech that included remarks on the jobs report.

“Particularly encouraging is the growth of manufacturing jobs,” he said. “Over the past year we have added factory jobs at the fastest pace since the 1990s.”

The Institute for Supply Management said on Friday that its index for March fell slightly, to 61.2 from 61.4 in February. Any value above 50 indicates growth in manufacturing.

Daniel J. Meckstroth, the chief economist for the Manufacturers Alliance/MAPI, said the government report on jobs on Friday reflected the institute’s trend in the manufacturing sector, which added 17,000 jobs in March.

On Friday, the first day of the second quarter, the Dow Jones industrial average closed up 56.99 points, or 0.46 percent, at 12,376.72. The Standard Poor’s 500-stock index rose 6.58 points, or 0.50 percent, to 1,332.41. The Nasdaq composite index rose 8.53 points, or 0.31 percent, to 2,789.60.

The Dow was up 1.2 percent in the week, while the S. P. was up 1.4 percent and the Nasdaq rose 1.6 percent in that period.

Consumer discretionary, financial and industrial stocks ended the week with gains of less than 1 percent, while energy stocks rose slightly with oil prices.

Benchmark crude oil for May delivery rose to $107.94 a barrel on the New York Mercantile Exchange.

Caterpillar rose more than 1.5 percent to $113.12, and General Electric was up more than 1.45 percent at $20.34. The Nasdaq OMX Group and IntercontinentalExchange on Friday made a hostile bid for NYSE Euronext, offering $42.50 a share in cash and stock in a deal that is valued at $11.3 billion.

NYSE Euronext rose 12.6 percent to $39.60 and Nasdaq OMX was up 9.25 percent at $28.23; Intercontinental fell more than 3 percent to $119.75.

Information technology and telecommunications stocks declined slightly.

Economic data on construction was also released on Friday. In a sign that the housing sector remains under pressure, building slowed in February compared with January, according to the Commerce Department. Construction outlays fell 1.4 percent in February from a revised 1.8 percent in January, it said, led by a 3.7 percent drop in private residential outlays.

Severe weather could have been a factor, an economist said.

“This sector is still fantastically depressed,” Ian C. Shepherdson, the chief United States economist for High Frequency Economics, said.

Interest rates were steady. The Treasury’s benchmark 10-year note rose 5/32, to 101 16/32, and the yield slipped to 3.44 percent from 3.46 percent late Thursday.

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