December 5, 2023

News Analysis: A Fit of Pique on Wall Street

The temptation is not to take Wall Street’s truculence too seriously and treat it as an inevitable, but passing, reaction to a world with less easy money.

But if stocks and bonds keep declining, doubts about the Fed’s withdrawal could deepen, leading to a situation in which even the real economy suffers.

In a pivotal communication, the Fed on Wednesday clearly laid out the steps it would take to reduce the extraordinary stimulus it has injected into the financial system and economy since the financial crisis of 2008. It stressed it would withdraw its support only if the economy were strong enough. The Fed’s chairman, Ben S. Bernanke, sounding not unlike a soothing parent, even said the central bank would reverse course if it mistakenly pared back too soon.

Such placating words hardly satisfied investors. The benchmark Standard Poor’s 500-stock index dropped 2.5 percent on Thursday, its steepest one-day decline since November 2011, and ended the week down 2.1 percent. The 10-year Treasury bond also plunged in price, which pushed up its yield to 2.54 percent at the end of the week, capping a sharp run-up over the last month.

Wall Street finds itself in an uncomfortable place. Perhaps more than at any time since the crisis, it knows it must prepare for a world without the Fed’s largess, one that is also facing uncertainty about tightening credit in China and continuing debt woes in Europe. Of course, stocks and bonds were always going to sell off when it became evident that the Fed was changing course.

In the past, markets have panicked initially when investors anticipated a tightening of interest rate policy by the central bank. Prices soon recovered as investors realized a stingier central bank need not spell doom. In 1994, investors sold off in the face of a toughening of Fed policy, but stocks recovered and rallied in the next years. To the optimists, the week’s instability may have merely been the market wobbling as it tried to stand on its own two feet again.

“I think it’s very fair to describe what’s going on in the markets as very normal,” said David Bianco, an equities strategist at Deutsche Bank. “Normal for when there are big changes in interest rate policies.”

Though talk about withdrawing support unnerved some investors, it may turn out to be a necessary step to build further confidence, Mr. Bianco said. After several years of Fed support, investors are not quite sure whether the searing rally in stock prices since 2009 is entirely genuine. But if stocks recover now and keep climbing, the jibes that the markets are riding on a “sugar high” could lose credibility.

Stocks are vulnerable to a tightening of Fed policy when they are overvalued. But the corporations in the S. P. 500 are reporting historically strong profits.

“The second quarter is still estimated to be an all-time record,” said Howard Silverblatt, a senior analyst at Standard Poor’s. And because of those strong earnings, stocks do not look overvalued, he said. The companies in the S. P. 500 have a stock market value that is 15 times as large as their expected combined earnings for this year. That multiple is well below the 19 times that is the average for the last 25 years, Mr. Silverblatt said.

As strong as earnings might look, the stock market reacts negatively to any hint that profits may fall below expectations.

Stocks did recover a bit on Friday, with the S. P. 500 rising 4.24 points, or 0.3 percent, to 1,592.43, and the Dow Jones industrial average climbing 41.08 points, or 0.3 percent, to 14,799.40. But it is highly unlikely that the markets have seen the last of extreme volatility. The sell-off in the bond market has caused interest rates to rise, which could depress economic activity and weigh on corporate profits. Weakness in foreign economies could also take a toll on earnings. Seeing that coming, investors might very well dump stocks.

It is these crosswinds that have convinced some people that the Fed should have waited to talk about an exit until the economic signals at home and abroad looked stronger.

James B. Bullard, president of the Federal Reserve Bank of St. Louis, who is on the Fed committee that shapes monetary policy, dissented to the Fed’s statement on Wednesday and registered his disagreement with some of the committee’s decisions. On Friday, the St. Louis Fed took the somewhat unusual step of explaining his opposition at length in a news release, saying that Mr. Bullard thought the economy was not yet strong enough to start a stimulus withdrawal. That view is widely shared on Wall Street.

“Bullard is saying it’s important to look at economic conditions now — and they are fairly weak,” said Kenneth B. Petersen, a portfolio manager at Laffer Investments.

One area of the economy that investors will be following closely is housing. The Fed’s policies led to historically low mortgage rates, and a revival in house prices. But a rapid reversal in rates has taken place. House prices still look affordable on a historical basis, so the higher cost of borrowing may not hurt too much, said Michael Cudzil, a portfolio manager at Pimco. But he added, “This will create a little more of a headwind for the economy.”

Despite the Fed’s efforts to reassure the markets, it is still essentially leaving them to comfort themselves. And as with any unsteady recovery, the risk remains of a tumble or two before footing can be fully regained.

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DealBook: R.B.S. Faces Doubts About Its Direction

Stephen Hester, chief of the Royal Bank of Scotland.Oli Scarff/Getty ImagesStephen Hester, the departing chief of Royal Bank of Scotland.

LONDON – After years of restructuring and job cuts, Royal Bank of Scotland again finds itself confronted with an uncertain future.

A day after Stephen Hester, the chief executive, announced he was leaving the bank, investors expressed their displeasure over the surprise move, sending R.B.S. shares down more than 6 percent in trading in London on Thursday.

For many, the departure of Mr. Hester, a former Credit Suisse banker, raised concerns about how R.B.S. would navigate the British government’s planned share sale, which could begin as soon as the second half of next year.

After leading a mistimed acquisition of the Dutch financial giant ABN Amro in 2007, R.B.S. received a multibillion-dollar bailout during the financial crisis, leaving the British government with an 81 percent holding.

The stake, which is managed by the government-owned UK Financial Investments, could take the rest of the decade to offload, and analysts warned that changing R.B.S.’s chief executive could add extra instability to the process.

“This resignation adds to the existing political and regulatory uncertainty surrounding R.B.S.,” Citigroup analysts said in a research note to investors on Thursday. “One should not underestimate the time it will take for the UK Financial Investments to exit from the 81 percent stake.”

Since the financial crisis began, R.B.S. has jettisoned around 900 billion ($1.4 trillion) worth of assets from its balance sheet, and eliminated about 40,000 jobs in a bid to bolster profitability.

The bank says it will now stop selling a number of complicated financial products, including equity derivatives, through its investment banking unit, which has been pared back significantly to reduce exposure to risky trading activity.

The latest restructuring will lead to around 2,000 job cuts, or roughly 17 percent of the unit’s staff, mostly in Asia, according to a person with direct knowledge of the matter, who spoke on the condition of anonymity because he was not authorized to speak publicly.

In a memo to employees, Mr. Hester wrote that when he joined the bank, “we were a company close to the point of collapse with no clear path back to recovery.”

“All the odds and much of the opinion was against us,” he wrote, “but your efforts and strengths proved to be the biggest asset in ensuring we could recover the business for everyone who relied on us.”

The departure of Mr. Hester, 52, by the end of the year will leave the bank without many of its current senior executives ahead of its pending privatization. The bank’s chief financial officer, Bruce Van Saun, an American, will also leave his role at R.B.S. in September to lead the firm’s United States unit, the Citizens Financial Group, ahead of its planned initial public offering in 2015.

Analysts said a number of internal candidates, including the bank’s chief risk officer, Nathan Bostock, and the head of its noncore division, Rory Cullinan, could now be tapped for the top job at R.B.S.

A spokesman for R.B.S. declined to comment, adding that the search for a new chief executive had just begun and would potentially include both internal and external candidates.

R.B.S.’s chairman, Philip Hampton, said Mr. Hester’s departure had been aimed at appointing a new leader who could oversee the privatization process from start to finish.

Whoever takes over, the person must deal with attempts by its largest shareholder, the British government, to jump-start domestic growth by calling on local financial institutions to increase their lending to consumers and companies.

While the taxpayers’ holding is controlled by a separate entity owned by the British government, questions remain about whether R.B.S. can succeed in its restructuring when faced with political pressure over how the bank is run. The bank’s share price is currently around 40 percent below the so-called break-even point where taxpayers would not lose money on the R.B.S. bailout.

“We continue to argue that the political wrangling has significantly impacted the franchise, especially in R.B.S.’s markets business,” Espirito Santo analysts said in a research note on Thursday. “Given the political interference not many will relish the opportunity to run R.B.S.”

Below is a copy of Mr. Hester’s memo to employees:

Dear colleague,

The Board is announcing today that it is starting the search for a new Group Chief Executive of RBS to lead the company through privatisation and beyond. I plan to step down by the end of this year, or earlier if a successor is in place, and to help the company as much as I can in the meantime.

Nothing about this decision was easy, but I can see that as we head towards a potential privatisation, now provides a window for the company to put in place a Chief Executive that can give fresh energy to the challenge of leading RBS through the next phase.

I joined RBS at its lowest point. We were a company close to the point of collapse with no clear path back to recovery. All the odds and much of the opinion was against us, but your efforts and strengths proved to be the biggest asset in ensuring we could recover the business for everyone who relied on us.

Five years is a long time for anyone to serve as Chief Executive. The endless scrutiny we all face carries a cost, but it has always been offset for me by the warmth and support of colleagues from across the business to carry on.

This strength of teamwork is no more evident than in the leadership team that exists in RBS today. It is the strongest such team we could wish for and is well placed to steer the business through the next phase of our journey to become a really good bank.

I’ve been conscious since first taking up this role that the success of RBS should never again be cast in the image of one person. Companies rarely succeed or fail on the actions of individuals, but on the skills and strength of character present in all those who work within them.

I have believed for some time now that the recovery process revealed strength of character in RBS that lay dormant.

In the face of significant challenge, we have proven ourselves as determined and capable people, quietly rebuilding a company that the nation depends on. But more than this, it is now clear to me that RBS is a company of decent, hardworking people who care a lot about doing the right thing for customers.

In the time I have spent with so many of you, I am always heartened when I see the depth of belief you have in doing the best for our customers. It may surprise our critics, but this is often matched by goodwill on the part of the many customers I meet in all parts of our business who truly want us to succeed.

Our future success starts and finishes with this focus on customers. We’ve made it our purpose to serve them well, and if we truly obsess about meeting their needs over our own, then RBS will become a really good bank. We know this to be right, not because we think it is, but because our customers tell us this is what they want.

RBS lost sight of why it was founded, and it nearly died as a result. We’ve got back to a place where we can once again focus on the customer above all else. If there is one positive legacy to take from our past mistakes it must be that we never, ever forget why we are here.

Leading RBS is an exceptional task, only made possible by the fact that I work with exceptional people. Thank you for all your commitment, support and teamwork.

Be sure to continue to serve customers well.

Yours sincerely,


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Wealth Matters: An Investment Firm, Evercore, Offers Clients Honest Returns

Sure, the 12 percent returns of Bernard L. Madoff proved ephemeral and the financial crisis lowered investors’ expectations. But 3 percent? Maybe less? That certainly seems to be a meager return, particularly given the stock market’s fast start this year.

Yet this was the pitch I heard when I met Jeff Maurer, chief executive of Evercore Wealth Management, and John Apruzzese, Evercore’s chief investment officer. They formed the firm four years ago with several former executives from U.S. Trust. I joked with them that offering such measly returns did not seem to be a good way to win new business.

“We don’t win every client we pitch,” Mr. Apruzzese said.

It turns out, though, that these low returns do not come from poorly performing investments. The firm is simply being honest. That 3 percent return includes projections on performance of many types of investments but also assumptions on tax rates, inflation and fees — both theirs and those of the outside managers they use.

“One of our key principles was transparency on fees, which has hurt us,” Mr. Maurer said. “Another was how we talked about what could happen in a downturn, which has also hurt us.”

Mr. Maurer said his firm preferred to say that there was a chance your portfolio could go down 25 percent, instead of trying to attach a probability to its happening. Saying there was a 1 percent chance, he said, was misleading because the chance of a market collapse like the one in 2008 was small. But it happened nonetheless.

Fees, of course, are a constant source of friction in investing. If you are the type of person who believes it is impossible to get better than the market rate of return, then you probably believe that the lowest-fee index fund or exchange-traded fund is the way to go. On the other hand, if you are the type of person who believes that managers can get returns higher than the market average, you may be willing to pay higher fees, calculating that the net return will be better or at least the swings in the investments’ value will be less volatile.

What piqued my interest was that Mr. Maurer and Mr. Apruzzese made a point of disclosing all the charges, even the ones investors would not see. With that knowledge, investors could understand what those fees were doing to their portfolios’ returns.

So I asked to come back and play a prospective client to see how they revealed the fees. For the record, I was not assessing the quality of their advice or their offerings but how they presented likely returns, warts and all.

Evercore manages $4.7 billion and has an average account size of $10 million, so the firm serves a rarefied niche. Most of its clients also have the bulk of their wealth in taxable accounts and not in tax-deferred retirement accounts, where the money is taxed only when it is taken out.

But regardless of their wealth, all investors would benefit from asking their advisers to subtract not just their management fees, as most already do, but the fees in the investments themselves. Investors would also benefit if their advisers factored in inflation and any probable taxes. At the very least, this would give a sense of the real return and help investors be more realistic in their planning.

For the purpose of the meeting, Mr. Maurer and Mr. Apruzzese created a fictional me who resembled a typical 40-year-old client of theirs. The fictional me began his career at a top-tier consulting firm and is now an executive at a financial firm. He earns $500,000 a year with a $500,000 bonus. He has company stock worth $1.5 million with a lot of embedded capital gains and he inherited $4 million in 2010. He has a $500,000 mortgage on a $2 million house. His goal is to retire at age 60.

Mr. Maurer said this typical client would probably arrive with over half of his $10 million portfolio in cash and municipal bonds and another 20 percent in retirement accounts. Only about 10 percent would be invested in equities other than the company stock.

Mr. Apruzzese walked me through the six baskets the firm uses for thinking about how money is invested: cash, defensive assets (municipal and taxable bonds), credit strategies (high-yield bonds, mortgage-backed securities), diversified market strategies (commodities, foreign bonds, liquid alternative investments), growth assets (stocks) and illiquid alternatives (private equity, venture capital).

This was a fairly standard approach. Advisers generally aim to divide up a portfolio in ways that investors can understand, regardless of their level of financial sophistication. Another popular way is to put money into fictional buckets for specific needs, like current expenses or charity.

For me, the firm presented three investment options — capital preservation, balanced and capital appreciation, which could be translated as conservative, moderate and aggressive portfolios. Mixing the six baskets together for each objective generated pretax, after-fee returns of 6.1 percent, 7 percent and 8.2 percent a year, with maximum losses of 15 percent, 25 percent and 35 percent, respectively. The projections were for the next decade.

I selected the balanced portfolio, and Mr. Apruzzese showed me how taxes reduced the solid 7 percent return to 5 percent, by factoring in long- and short-term capital gains at the highest federal rates. Inflation of 2 percent knocked it down to 3 percent. (The capital preservation portfolio fell to 2.3 percent, while the capital appreciation portfolio ended up at 3.9 percent.)

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DealBook: Subscribers Fear Bloomberg Is Becoming Their Rival

The Bloomberg desktop terminals contain a vast store of financial and market information.Brendan McDermid/ReutersThe Bloomberg desktop terminals contain a vast store of financial and market information.

Long thought of as a company that serves the needs of Wall Street firms, Bloomberg L.P. is quietly becoming more like them, moving recently into businesses that have been the domain of the largest banks.

This relatively unheralded expansion by Bloomberg helps explain Wall Street’s consternation at recent disclosures that some customer data was freely available to reporters and others inside the company. The fear inside banks is that Bloomberg could use that data not only to write negative news articles but also to compete directly.

In recent years, Bloomberg has offered new ways to trade stocks, bonds and more complicated financial products, potentially taking revenue from subscribers to the ubiquitous Bloomberg desktop terminals, which contain a vast store of market data. The expansion is even leading Bloomberg to offer traditional Wall Street services like wealth management and research.

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“If you add all this stuff up together, they do look increasingly like a brokerage business,” said Larry Tabb, founder of the consulting firm Tabb Group.

He said that Bloomberg was not yet a dominant force in these activities and had been careful to placate the concerns of subscribers. But, he said, “it makes some of these brokers think, are these guys friend or foe?”

Bloomberg says its trading operations are walled off from its data operations and asserts that it has won the trust of clients over the years. The company is eager to protect both its revenue and the wealth of Michael R. Bloomberg, which are still primarily generated by the terminals business.

But the sources of revenue are changing.

Bloomberg’s expansion has been motivated in part by a slowdown in the core terminals business. Before the financial crisis of 2008, executives had created the 10B initiative, which had the aim of increasing the company’s annual revenue to $10 billion by 2014, according to company employees who spoke on the condition of anonymity out of fear of jeopardizing their careers. Last year, with revenue stuck at about $8 billion, this goal has been quietly de-emphasized, the employees said.

The expansion has taken place in many new areas, including products that provide political and sports intelligence. But the continuing efforts to capture Wall Street business are particularly tricky because they risk alienating the financial firms that pay for most of the terminals.

“They have to be very careful in how they sell themselves, and who they broker to,” said David B. Weiss, a senior analyst at the Aite Group. “You don’t want to mess with a $6 billion a year golden goose.”

Bloomberg executives have said the firm is only moving into areas that complement its core business of allowing customers to analyze data and communicate with subscribers. Lengthy contracts stipulate the ways that Bloomberg can use information it gathers about terminal users.

Still, financial companies are seeking assurances from Bloomberg that important data is not finding its way into divisions at the company that could exploit it. Bloomberg executives apologized after Goldman Sachs and other banks complained that Bloomberg’s journalists were able to look at information about when customers logged in and what functions they were using.

People close to the company said Tuesday that the same data had been accessible to employees in its trading division, known as Bloomberg Tradebook, but that the company had cut off that access recently.

Bloomberg has said from the beginning that it shields specific trading activity of customers from employees not authorized to see it.

The criticism of Bloomberg has been caused in part by Wall Street’s desire to push down the steep $20,000 yearly price tag for a Bloomberg terminal. Many bankers say they have little choice but to pay if they want to communicate with their customers, most of whom are on Bloomberg’s networks.

Thomson Reuters, Bloomberg’s primary rival in the data world, also provides trading capabilities, but it rarely vies for the trades itself and emphasizes what it calls its neutrality. The company has not moved into many of the business lines where Bloomberg is now looking to make money.

“Our strategy is to partner with our customers and not to compete with them,” said Yvonne Diaz, a spokeswoman for Thomson Reuters.

The most obvious business line that competes with Wall Street is Tradebook, a subsidiary of Bloomberg that is registered to trade on behalf of clients, collecting valuable commissions for each trade. It is fighting for those commissions with trading desks across Wall Street.

Tradebook was originally created in 1996, 14 years after Mr. Bloomberg founded the larger company. For many years, Tradebook failed to gain much traction, but in 2010 it hired an ambitious new chief executive, Ray Tierney, from Morgan Stanley.

Mr. Tierney has helped Tradebook win a greater market share in stocks and options and has developed new products. Last fall, it introduced Bloomberg Pool, which serves as a competitor to Wall Street’s dark pools, where stock trades are executed away from the public exchanges.

Beyond Tradebook, Bloomberg’s clients use the company’s software to look for and execute trades in many different markets, putting the company at the center of the information flow between buyers and sellers. Bloomberg says this data is protected even within the company.

Bloomberg will be adding to its trading operations soon, when it introduces a type of electronic exchange for financial instruments known as swaps, one of the most heavily traded products on Wall Street. Bloomberg expects to charge customers for using the service.

Like other Wall Street firms, Bloomberg has not been afraid to resort to legal muscle to protect its swaps business. It has hired a top Washington lawyer, Eugene Scalia, to challenge rules for the swaps exchanges that were proposed by the Commodity Futures Trading Commission.

The company contends that the commission’s rules could prompt investors to move out of the swaps market into another market that could be weaker and less transparent. But some industry officials have argued that the case is motivated by Bloomberg’s desire to bolster business for its own swaps trading operation.

Bloomberg is even showing signs that it wants a slice of that most traditional of Wall Street businesses, investment advice for individuals. Its offering in this area, BloombergBlack, is in a testing phase. It is intended to serve somewhat like a scaled-down Bloomberg terminal for investors at home. Automated money management is seen as a growth opportunity by many brokerage houses.

“The perfect customer for this is a guy who’s done a lot of investing and it’s a hobby for him,” said Joshua Brown, a financial adviser at Fusion Analytics, and author of the Reformed Broker blog. “That’s a pretty good market.”

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High & Low Finance: Foreign Banks in U.S. Face Greater Restrictions

Those days are gone. Despite a lot of talk about the need for international cooperation in regulation, it now appears that American regulators intend to assure that foreign banks operating in the United States have adequate capitalization.

It was not always such. Until the financial crisis, the Federal Reserve was happy to allow American subsidiaries of foreign banks to have no capital at all, and some did not. At the end of 2007, Deutsche Bank’s American operations reported having a negative $8.8 billion in capital.

How could any regulator allow that? The idea was that the presumably well-capitalized parent back home would stand behind the American operation if it ran into trouble. And the United States could, of course, rely on home countries to both regulate their banks and, if something went badly wrong anyway, provide bailouts.

But as the crisis approached, some funny things were happening. Until the turn of the century, American operations of foreign banks tended to receive financing from home. But as the credit party grew after 2003, those banks increasingly borrowed in America’s short-term markets and sent the money back home to the parent.

When the credit crisis appeared, that financing — a significant part of which had come from selling short-term securities to United States money market funds — dried up.

“Foreign banks that relied heavily on short-term U.S. dollar liabilities were forced to sell U.S. dollar assets and reduce lending rapidly when that funding source evaporated, thereby compounding risks to U.S. financial stability,” Daniel K. Tarullo, a Fed governor, said in a speech late last year.

The foreign banks ended up needing a disproportionate share of loans the Fed handed out to stabilize banks. And since then the ability, let alone the willingness, of some countries, particularly in Europe, to provide what the Fed delicately calls “backstops” — a term that sounds much less harsh than “bailouts” — appears to have diminished.

In December, the Fed proposed new rules that have set off loud protests from overseas and are likely to provoke a flood of complaints before the comment period ends on Tuesday.

The rules would require that American subsidiaries of each foreign bank be put together in a holding company that would have to maintain capital, and liquidity, in the United States. In some cases the requirements would be greater than home countries require of the parent institutions.

In a letter to the Fed, Michel Barnier, the European commissioner in charge of internal markets, complained that the proposal was “a radical departure” from internationally accepted policies. He darkly warned that if the Fed did not back down and accept that Europe will do a perfectly good job of regulating its own banks, the new rules “could spark a protectionist reaction” from other countries and bring on “a fragmentation of global banking markets and regulatory frameworks.”

The proposed rules seem to be particularly objectionable to some European banks in two ways. The first is the introduction of an effective 5 percent leverage ratio — calculated as the equity capital of the operation divided by the total amount of assets.

To banks with a lot of securities market activities, that sounds like a harsh rule. Deutsche Bank is particularly upset.

Some other European banks seem to be worried by the application of rules requiring an adequate level of very liquid assets relative to the bank’s short-term financing. The idea there is that if the short-term financing dries up again, the bank will be able to cope for at least a brief period without having to either conduct a fire sale of assets or turn to the Fed for help.

These rules might not actually require the banks to raise a lot of cash, or invest a lot of money in low-returning assets. To meet the liquidity rules, a bank could add more superliquid securities, like United States Treasury or agency securities. Or it could change its financing. Rather than borrowing huge sums overnight, it could borrow at longer maturities, perhaps 45 days. Then it would not need as many liquid assets.

Floyd Norris comments on finance and the economy at

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DealBook: Bank of America Profit Misses Expectations

The bank's shares rose nearly 35 percent in the last year but fell almost 5 percent on Wednesday.Richard Drew/Associated PressThe bank’s shares rose nearly 35 percent in the last year but fell almost 5 percent on Wednesday.

8:06 p.m. | Updated

Bank of America reported first-quarter earnings on Wednesday that fell well short of Wall Street’s expectations but that were substantially higher than in the period a year earlier.

The bank made 20 cents a share in the first quarter, compared with 3 cents in the year-earlier period. Analysts expected a profit of 23 cents a share. Bank of America, the nation’s second-largest lender by assets, had revenue of $23.5 billion in the first quarter.

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Since the financial crisis, Bank of America’s performance has been hurt by large mortgage-related losses, but in recent months investors have been betting that the bank would regain its footing. Its shares have risen nearly 35 percent in the last 12 months. Earlier this year, regulators approved the bank’s plan to buy back stock, a clear sign they felt that the lender was on firmer ground.

In a statement, Brian T. Moynihan, Bank of America’s chief executive, said, “Our strategy of connecting our customers to all we can do for them is working.”

The question now is how the latest earnings will affect the recent optimism surrounding the bank, which lends to individuals and companies and has a large Wall Street presence through its Merrill Lynch unit.

Other large banks have reported earnings that exceeded analysts’ estimates this quarter, so Bank of America’s failure to do so may unnerve some investors. The debate will be over whether the bank fell short because of deeper issues that will be hard to resolve or because of items that will have less of a negative effect as time passes. On Wednesday, the bank’s stock fell nearly 5 percent to close at $11.70.

Much uncertainty surrounds the cost of litigation over bad mortgages. Most of these troubled loans were made by Countrywide Financial, which Bank of America acquired in 2008. Bank of America has settled several big mortgage lawsuits, including one on Wednesday for $500 million, which was led by the Iowa Public Employees’ Retirement System. In the first quarter, Bank of America had litigation expenses of $881 million.

Some analysts wonder why the bank is still setting aside large amounts of money to cover mortgage lawsuits after reaching several settlements. “Maybe they haven’t been accruing enough for the outstanding litigation,” said Todd L. Hagerman, an analyst with Sterne Agee Leech.

In particular, analysts are focusing on a pending settlement with Bank of New York Mellon. The cost of this litigation, they say, could soar if the settlement does not gain court approval. A research note this year from Mike Mayo, an analyst with CLSA, suggested that the actual cost of the Bank of New York Mellon litigation could be as high as $30 billion, compared with the bank’s estimated cost of $8.5 billion.

The bank defended its litigation reserves.

“We believe we are appropriately reserved for the exposures we face, and we have provided investors with a range of possible loss estimates that could go beyond those reserves,” said Jerome F. Dubrowski, a spokesman for Bank of America.

Responding to the skepticism about the reserves against the Bank of New York litigation, he added, “We believe extrapolating selective rulings from other venues involving other litigants and facts and drawing conclusions about our settlements and other litigation matters does not portray a fair and accurate presentation of our litigation matters.”

The first-quarter results also revealed a mixed performance in Bank of America’s current mortgage business. Initially, the bank did not participate in the mortgage refinancing boom as strongly as rivals like Wells Fargo. But in recent months it has jumped back in.

In the first quarter, Bank of America originated $23.9 billion of mortgages, well up from $15.2 billion a year earlier. But revenue from writing new mortgages actually fell to $815 million from $928 million in the period a year earlier. This shows that profit margins in the new mortgage business have fallen as Bank of America has increased its activity.

The quarter contained bright spots for shareholders. The bank said it made headway in cutting expenses, something investors are watching closely.

In addition, Bank of America set aside significantly less money for its reserve against bad loans, which helped earnings.

Its wealth management unit, which includes the Merrill Lynch brokerage house, had a strong quarter. Revenue in the unit rose to $4.4 billion a year earlier.

While Bank of America’s earnings per share increased a lot when measured using generally accepted accounting principles, it declined on another measure that investors often look at. This nonstandard metric excludes arcane accounting charges. Without those charges in the first quarter of 2012, the bank made 31 cents a share.

This year’s first quarter contained little effect from such charges, so the 20 cents a share the bank reported on Wednesday should be compared with the 31 cents a share from the period a year earlier. In effect, under this approach, Bank of America’s earnings fell more than a third.

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Despite Setbacks at Big Banks, Pay Rises for Board Members

Since the financial crisis, compensation for the directors of the nation’s biggest banks has continued to rise even as the banks themselves, facing difficult markets and regulatory pressures, are reining in bonuses and pay.

Take Goldman Sachs, where the average annual compensation for a director — essentially a part-time job — was $488,709 in 2011, the last year for which data is available, up more than 50 percent from 2008, according to Equilar, a compensation data firm. Some of the firm’s 13 directors make more than $500,000 because they have extra responsibilities.

And those numbers are likely to skyrocket for 2012 because the firm’s shares rose more than 35 percent last year and its directors are paid in stock. Goldman Sachs is expected to release fresh pay data in the coming weeks.

Goldman’s board is the best compensated of any big American bank and the fifth-highest paid of any company in the country, according to Equilar. Some of its rivals are not that far behind. The nation’s biggest banks paid their directors over $95,000 a year more on average in 2011 than what other large corporations paid.

Goldman defends the board’s pay, saying that the bulk of the compensation is in stock that directors cannot touch until after they have left the board.

That arrangement, the firm says, aligns directors’ interests with those of shareholders.

“The board’s pay is set at a level that reflects the firm’s long-term performance as well as directors’ substantial time commitment and the increased demands placed on them in recent years by new laws and regulations,” said David Wells, a Goldman spokesman.

More broadly, banks and compensation experts say, financial firms must now pay a premium to entice and keep qualified directors.

After the financial crisis, some financial firms’ boards were criticized for being asleep at the wheel and not understanding the risks being taken. Recruiters say banks are redoubling efforts to recruit directors with more financial expertise who can exercise better oversight.

Yet it is also a balancing act, because too much pay may end up giving boards an incentive to not rock the boat.

Some Wall Street insiders also question the need to pay bank directors more than their counterparts at other big corporations, arguing that the increased regulation has actually limited bank boards’ ability to perform important tasks, like raising capital and issuing dividends. Even when it comes to paying senior executives, boards have less leeway because regulators have pressured boards to bring down executive pay.

“About the only thing bank directors have more of these days is meetings,” joked one senior Wall Street executive who has frequent interaction with his board but spoke on the condition he not be named because he was not authorized to speak on the record.

“Regulators have all but stripped boards of the main powers they had before the crisis.”

After Goldman, Morgan Stanley’s director pay is the second highest on Wall Street, with an average of $351,080, roughly the same as it was in 2008 but much higher than the pay at bigger and more complicated rivals like JPMorgan Chase and Citigroup.

Board pay at Morgan Stanley has drawn criticism from Daniel S. Loeb’s hedge fund, Third Point, which recently bought 7.8 million shares, or a 0.4 percent stake, in the firm. While praising Morgan Stanley and its management, Mr. Loeb said in a letter to investors how “surprised” he was about how much its directors received.

“We hope Morgan Stanley will show that its reinvention begins at the top and set an example for the company by quickly revising its board practices,” he wrote.

At Citigroup, directors make an average of $315,000 a year, according to Equilar, up 64 percent from 2008. The value of the annual cash retainer and deferred stock award Citigroup directors receive has not changed since 2005, but the pay for additional work, like leading a committee, has risen.

Of the five financial institutions to have reported director pay for 2012, JPMorgan is the biggest, but it gives its directors compensation, on average, worth $278,194 each. Only Bank of America, where directors are paid $275,000 each, pays less.

All told, the average compensation for a director at one of the six biggest banks in 2011 was $328,655, according to Equilar. This compares with $232,142 at almost 500 publicly traded companies analyzed in a study by the executive search firm Spencer Stuart. In 2012, that number rose to $242,385.

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Facing Bailout Tax, Cypriots Rush to Get Their Money Out of Banks

The decision — a first in the three-year-old European financial crisis — raised questions about whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, declined Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.

A scheduled parliamentary vote on the plan at an emergency meeting Sunday was postponed until Monday. The delay was to give a chance for the newly elected Cypriot president, Nicos Anastasiades, to brief lawmakers, according to the president’s office.

Although banks placed withdrawal limits of €400, or about $520, on A.T.M.’s, most had run out of cash by early evening. People around the country reacted with disbelief and anger.

“This is a clear-cut robbery,” said Andreas Moyseos, a former electrician who is now a retiree in Nicosia, the capital. Iliana Andreadakis, a book critic, added: “This issue doesn’t only affect the people’s deposits, but also the prospect of the Cyprus economy. The E.U. has diminished its credibility.”

In Nicosia, a crowd of about 150 demonstrators gathered in front of the presidential palace late in the afternoon after calls went out on the social media to protest the abrupt decision, which came with almost no warning at the beginning of a three-day religious holiday on the island.

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than €100,000 effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits of less than that amount are to be taxed at 6.75 percent, meaning that Cypriot creditors will be confiscating money directly from retirees, workers and regular depositors to pay off the bailout tab.

Mr. Anastasiades said taxing depositors would allow Cyprus to avoid implementing harsher austerity measures, including pension cuts and tax increases, of the type that have wreaked havoc in neighboring Greece. That thinking appealed to some Cypriots, including Stala Georgoudi, 56. “A one-time thing would be better than worse measures,” she said. “Procrastinating and beating around the bush would be worse.”

But Sharon Bowles, a British member of the European Parliament who is the head of the body’s influential Economic and Monetary Affairs Committee, said the accord amounted to a “grabbing of ordinary depositors’ money” in the guise of a tax.

“What the deal reflects is that being an unsecured or even secured depositor in euro-area banks is not as safe as it used to be,” said Jacob F. Kirkegaard, an economist and European specialist at the Peterson Institute for International Economics in Washington. “We are in a new world.”

Cyprus had been a blip on the radar screen of Europe’s long-running debt crisis — until now.

Hobbled by a devastating banking crisis linked to a slump in Greece’s economy, where Cypriot banks made piles of loans that are now virtually worthless, Cyprus on Saturday became the fifth country in the euro union to receive a financial lifeline since Europe’s debt crisis broke out. As the euro zone’s smallest economy, Cyprus had hardly been considered the risk for the euro group that Greece, Ireland, Portugal or Spain were.

But the surprise policy by the International Monetary Fund, the European Central Bank and the European Commission is the first to take money directly from ordinary savers. In the bailout of Greece, holders of Greek bonds were forced to take losses, but depositors’ funds were not touched.

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DealBook: UBS Pays Investment Bank Chief $26 Million

Andrea Orcel joined UBS last year after 20 years at Bank of America Merrill Lynch.Facundo Arrizabalaga/European Pressphoto AgencyAndrea Orcel joined UBS last year.

LONDON – UBS said on Thursday that it had awarded its new investment bank chief, Andrea Orcel, 24.9 million Swiss francs ($26 million) in deferred cash and shares to compensate him for pay he forfeited when he left Bank of America Merrill Lynch.

The amount dwarfs the 8.87 million francs the bank paid its chief executive, Sergio P. Ermotti, in 2012.

“In line with market practice, he received awards as a replacement for deferred compensation and benefits forfeited by his previous employer as a result of his joining UBS,” the bank wrote in its annual report released on Thursday. Mr. Orcel’s cash and share awards will vest over the next three years, and UBS did not disclose his 2012 compensation.

Banks have come under pressure, especially in Switzerland, to curb lavish paychecks and better link pay with performance. Swiss voters two weeks ago approved changes to executive pay, including giving shareholders a vote on how much a company’s board and management can earn.

The changes, which are scheduled to become law by next year, could also keep banks from paying executives before they start their jobs and once they leave a firm, so-called golden handshakes and golden parachutes.

Mr. Ermotti, who took over as chief executive at the end of 2011, hired Mr. Orcel to return the bank’s investment banking business to profitability. To repair the investment banking business, UBS has adopted a plan to eliminate 10,000 jobs and scale back its debt-trading business while focusing on less capital-intensive activities. The unit had a pretax loss of 2.73 billion francs last year.

Mr. Orcel had worked for 20 years at Merrill Lynch, which became part of Bank of America after a merger driven by the financial crisis. The deferred payout he received included 6.36 million francs in cash and UBS shares valued at 18.5 million francs when they were awarded.

Mr. Ermotti succeeded Robert J. McCann, the head of the wealth management operation for the Americas, as the best paid board member in 2012. Mr. McCann earned 8.55 million francs last year, down from 9.18 million francs in 2011.

The bank’s total bonus pool fell 7 percent, to 2.5 billion francs, from 2.7 billion francs a year earlier. UBS said it clawed back about 60 million francs in awarded compensation from staff members linked to a rate-manipulation scandal.

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Off the Charts: Globalization, as Measured by Investment, Takes a Step Backward

Then came the financial crisis, which, the McKinsey Global Institute noted in a report issued this week, “upended many of the world’s assumptions about the inevitability of growth and globalization.”

Last year, the report estimated, world capital flows were 13 percent below the levels of the previous year. And while they were higher than during the depths of the credit crisis, they are still 61 percent below the peak levels of 2007.

“Some of the shifts under way represent a healthy correction of the excesses of the bubble years,” the report stated, but there is a risk the reversal of globalization will be overdone.

“If we move to a system where the global financial system is more balkanized, that will raise the cost of capital for more borrowers and perhaps slow economic growth,” said Susan Lund, a principal of McKinsey Global Institute and the primary author of the report.

The accompanying charts show the institute’s estimates of global capital flows, which totaled $4.6 trillion in 2012, down from $11.8 trillion in 2007. Of the 2007 total, $10.2 trillion went to developed countries, and $1.6 trillion went to developing countries. Last year, capital flows were $3.1 trillion, a decline of 69 percent, for the developed countries, and $1.5 trillion, a decline of 10 percent, for the others.

The charts break out the flows into four types. The most stable is foreign direct investment, in which a company either builds a business or acquires at least 10 percent of an existing business. By far the least stable is loans, which are often short term and can be withdrawn on short notice, creating havoc. The others are bonds and equity, meaning stock market investments.

The Asian currency crisis of the late 1990s taught developing countries the potential hazards of loans that can be here today and gone tomorrow — a lesson that some European countries ignored to their regret. The institute calculated that in 2006 and 2007, the amount of capital flowing into Ireland was more than twice as large as the country’s gross domestic product. Moreover, most of that was in loans and bonds, debt instruments that in many cases could not be repaid.

International loans and bond issuances have particularly declined in Western Europe, where the euro crisis led many to withdraw funds and caused banks to concentrate on local markets. During four years in the middle of the last decade, more than $1 trillion in Western European bonds were purchased by foreigners each year. In each of the last two years, more bonds were sold back to the issuing country than were newly sold internationally.

For a number of years, China was the largest recipient of foreign direct investment, and that continues, with as estimated $260 billion flowing in last year. But it also sent $120 billion in such investment to other countries, about the same as Japan and more than was sent by any other country except the United States, according to the estimates.

Floyd Norris comments on finance and the economy at

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