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Former Top Banker Testifies in Spain

December 20, 2012 by Leave a Comment

MADRID — Rodrigo Rato, a former top banking official in Spain and former managing director of the International Monetary Fund, on Thursday became the most prominent banker to appear in a Spanish court since the start of the country’s financial crisis.

Mr. Rato was called to answer claims that he and fellow directors at Bankia presented misleading accounts for the lender. He testified behind closed doors for nearly three hours and did not make a public statement afterward.

Mr. Rato, the former executive chairman of Bankia, and 32 other former executives and board members were named in a criminal investigation that was ordered this year by a judge from the National Court.

Neither Mr. Rato nor the other executives have been formally charged with any crime. But prosecutors have accused Mr. Rato and the others of presenting inaccurate accounts when Bankia was listed as a public company in July 2011.

In his court appearance, Mr. Rato denied any wrongdoing and instead argued that Bankia was put under pressure to proceed with the stock listing by both the government and the central bank, according to a person familiar with the testimony who requested anonymity because of the confidential nature of the proceedings.

Mr. Rato, who is also a former finance minister, appeared before Parliament in July of this year to answer similar accusations. At the time, he rejected any suggestion that he or other directors had ignored or hidden Bankia’s pile of bad loans.

The government of Prime Minister Mariano Rajoy nationalized Bankia in early May, two days after Mr. Rato resigned from the bank. A month later, after Bankia’s new management announced that the lender needed €19 billion, or $25 billion, in additional capital, Madrid negotiated a €100 billion E.U. rescue package for the country’s troubled banking sector.

That rescue operation is still under way. On Thursday, the European Commission cleared the restructuring plans of four smaller lenders — Banco Mare Nostrum, Caja España-Caja Duero, Caja3 and Liberbank — that were also left with an unsustainable burden of bad property loans after Spain’s construction bubble burst.

The commission has been reviewing the bailouts of the ailing banks to ensure the government aid does not distort competition in the financial sector. As part of the process, the commission has demanded that the banks make significant cuts.

Spanish banks are set to receive €39 billion of the €100 billion authorized. The banks have already received a total of €13 billion of Spanish government aid since 2010 to help them stay afloat.

Shareholders have watched Bankia’s stock price sink since the initial public offering. Many other investors have also incurred losses on preference shares, a type of convertible debt that Bankia and other banks sold mainly to their retail clients. Mr. Rato was confronted by a large group of protesters Thursday, some of whom screamed insults at him as he made his way into the courthouse.

Bankia’s collapse has had political repercussions because the lender has longstanding ties to Mr. Rajoy’s governing Popular Party. Mr. Rato was finance minister in a previous conservative administration, alongside Mr. Rajoy, who was then the interior minister.

Bankia was the product of a merger of seven cajas, or savings banks, that was engineered as part of a government-directed consolidation of the sector.

Bankia’s initial offering had been hailed in Spain as proof that the financial sector could overcome the consequences of a decade of reckless property lending. Instead, Bankia ended up reporting a loss of almost €4.5 billion in the first half of this year, a record for a Spanish bank.

Article source: http://www.nytimes.com/2012/12/21/business/global/former-top-banker-testifies-in-spain.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: S.E.C. Chief Who Overhauled Agency to Step Down

November 26, 2012 by Leave a Comment

Mary L. Schapiro, right, and Elisse B. Walter at a meeting of the Securities and Exchange Commission last year.Alex Wong/Getty ImagesMary L. Schapiro, right, and Elisse B. Walter at a meeting of the Securities and Exchange Commission last year.

11:42 a.m. | Updated

Mary L. Schapiro, who overhauled the Securities and Exchange Commission after the financial crisis, announced Monday that she was stepping down as chairwoman of the agency.

In recent days, the S.E.C. informed the White House and Treasury Department that Ms. Schapiro planned to leave Dec. 14, becoming the first major departure from the Obama administration’s team of financial regulators. Ms. Schapiro will also relinquish her position as one of the five members of the agency’s commission, the group that oversees Wall Street and the broader financial markets.

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The White House announced on Monday that President Obama was naming Elisse B. Walter, a commissioner at the S.E.C., as the new chairwoman. In a somewhat surprising move, Ms. Walter will not step into an interim post, but will take over the top spot for the foreseeable future.

Ms. Walter’s appointment does not require Congressional approval because the Senate previously confirmed her as a commissioner. Eventually, the White House is expected to nominate another agency chief, according to a person briefed on the matter.

Ms. Schapiro’s departure, which follows a bruising four-year tenure, was widely telegraphed. Ms. Schapiro, 57, has confided in staff members for more than a year that she was exhausted and hoped to leave after the November elections.

“It has been an incredibly rewarding experience to work with so many dedicated S.E.C. staff who strive every day to protect investors and ensure our markets operate with integrity,” Ms. Schapiro said in a statement. “Over the past four years we have brought a record number of enforcement actions, engaged in one of the busiest rule-making periods, and gained greater authority from Congress to better fulfill our mission.”

In 2008, Mr. Obama nominated Ms. Schapiro, a political independent, to head the S.E.C. at a time when extreme economic turmoil had shaken investor confidence in the country’s securities regulators.

The agency was faulted for its lax oversight of brokerage firms like Lehman Brothers, which failed in 2008 and contributed to the worst economic downturn since the Great Depression. Just weeks before Ms. Schapiro started as chairwoman, the Wall Street investor Bernard L. Madoff was accused of running a large Ponzi scheme, further damaging the credibility of regulators like the S.E.C., which missed crucial warning signs about the fraud.

“When Mary agreed to serve nearly four years ago, she was fully aware of the difficulties facing the S.E.C. and our economy as a whole,” Mr. Obama said in a statement. “But she accepted the challenge, and today, the S.E.C. is stronger and our financial system is safer and better able to serve the American people – thanks in large part to Mary’s hard work.”

Ms. Schapiro, a lifelong regulator who previously ran the Commodity Futures Trading Commission and the Financial Industry Regulatory Authority, quickly gained a reputation as a consensus builder determined to repair the agency’s reputation. A tireless preparer and self-described pragmatist, Ms. Schapiro overhauled the agency’s management ranks, revived the enforcement unit and secured more money and technology at a time when other agencies were being asked to cut back. She also helped craft new rules for Wall Street oversight, as part of the Dodd-Frank regulatory overhaul.

“The S.E.C. came back from the brink,” said Harvey L. Pitt, a former chairman of the agency under President George W. Bush. “I give her enormous credit for that.”

Consumer advocates and other critics, however, say she failed to grab the bully pulpit at a time the country needed a vocal critic of Wall Street. Since the financial crisis, the agency brought few enforcement cases against the Wall Street executives at the center of the crisis.

The S.E.C. notes it has brought a record number of cases over the last two years. While no top banking executives have been charged, the agency has filed actions against 129 people and firms tied to the crisis.

Ms. Walter, a Democrat who became an S.E.C. commissioner in 2008 and briefly served as the agency’s acting leader a year later, is a longtime ally of Ms. Schapiro. They overlapped at the Commodity Futures Trading Commission and Finra, where Ms. Walter was a senior regulator and lawyer. At the S.E.C., Ms. Walter was often the only reliable vote for Ms. Schapiro’s rule-making efforts and is now expected to carry out a similar agenda as chairwoman.

While Ms. Walter will take over, she may not serve the whole term. Among the other people that Mr. Obama may consider naming as agency chief include Mary J. Miller, a senior Treasury Department official, a person briefed on the matter said. Sallie L. Krawcheck, a former top executive at Citigroup and Bank of America, is also in the running, according to people with knowledge of the matter. The agency’s enforcement chief, Robert Khuzami, is a long-shot contender.

As for Ms. Schapiro, few expect her to follow her predecessors and move into private legal practice, where she would defend the banks she has spent years regulating. Instead, they say she is more likely to seek out a position at a university or research group.

Article source: http://dealbook.nytimes.com/2012/11/26/schapiro-head-of-s-e-c-to-announce-departure/?partner=rss&emc=rss

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High & Low Finance: Judge in Australia Finds Flaws in an S.&P. Triple-A Rating

November 9, 2012 by Leave a Comment

— John Godfrey Saxe, American poet and lawyer, 1869

Add bond ratings to that list.

The rating agencies have long managed to turn aside litigation by asserting they have a free-speech right to their opinions, whether or not they turn out to have been correct.

That makes a lot of sense in a world of uncertainty. Imagine if, say, a gambler could sue the sports section of this newspaper because our columnist’s Super Bowl forecast turned out to be wrong.

But after the financial crisis, that legal protection may be starting to break down.

This week in Australia, a federal judge found that Standard Poor’s was liable for issuing the top investment-grade rating of AAA for a product she described as a “grotesquely complicated” piece of financial engineering. In her opinion — which at 623,000 words was about 20 percent longer than “Les Misérables” — Judge Jayne Jagot meticulously traced how S. P. came to issue a top rating, concluding that no “reasonably competent ratings agency” would have awarded it.

The ruling, if it stands on appeal, would cost the rating agency only about $14 million, a relatively insignificant amount. But the danger to the firm’s reputation — and the fact that the ruling could prompt other suits — potentially could be much greater.

The ruling concerned a structured finance product developed in 2006 by the Dutch bank ABN Amro, known as a C.P.D.O., which stands for constant proportion debt obligation. In reality, it was not a debt obligation at all. The bank took money from the investors, borrowed more, then wrote credit-default swaps against a basket of corporate bonds.

It was a gamble, and a particularly risky one in that it effectively called for increasing the amount wagered if one bet lost money, on the theory that over time everything would work out. If the losses kept rising, however, the investor could lose as much as 90 percent of the initial investment.

In the end, that is exactly what happened.

In her ruling, Judge Jagot quoted from an ABN Amro document that compared the investment with a “casino strategy” of doubling your bet every time you lose: “If you hit a losing streak your net worth can become very low, however most of the time you will be able to ‘bet yourself out of the hole.’ ”

Had those who were gambling understood what they were doing, we should have no particular sympathy for them. If you want to bet that the Washington Redskins, with a current record of three wins and six losses, will somehow get to the Super Bowl, go right ahead. You must know that your chances of winning are very low.

But the buyers of C.P.D.O.’s did not understand what they were doing. It appears that those investors, including an agency that managed investments for Australian local governments, and some of those governments themselves, did not bother to go into details. They relied on S. P., which was retained and paid by the bank to rate the security and gave it a rating of AAA. That meant the agency thought that there was less than a 1 percent chance of losing money.

There was a lot of that going on in those heady days. In rating structured finance products, the agencies developed models based on past performance during the credit boom, and assumed that the past was prologue. That has been criticized, in hindsight, as the equivalent of studying the weather patterns during a prolonged drought and concluding there will never be a severe rainstorm.

But Judge Jagot said that was not what happened in this case. In this case, she said, inconvenient aspects of the past were simply ignored. S. P. did not bother to develop its own model at all before it began giving out AAA ratings to the C.P.D.O. offerings developed by ABM Amro. Instead, it simply adopted the bank’s model. Nor did the agency bother to verify the assumptions in the model.

The judge goes through a list of those assumptions, concluding that in many cases they were far more optimistic than history justified. She said that S. P. did conclude that one ABM Amro assumption, regarding market volatility of credit-default swaps, needed to be adjusted, but that it did not bother to do so. Had it made the adjustment, she says, there was no way that even the bank’s model would have justified the AAA rating.

The judge quoted from ABN Amro e-mails voicing concerns that S. P. analysts might realize they had ignored one possibly significant issue, and concluding the bank should not bring it up, at least not with any specificity. “We should avoid S. P. to overthink and perhaps open a can of worms,” wrote Juan Carlos Martorell, a senior member of ABN Amro’s Structured Credit Marketing Group and a former employee of S. P.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/09/business/judge-in-australia-finds-flaws-in-sps-triple-a-rating-strategy.html?partner=rss&emc=rss

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DealBook: Dexia Gets a New Bailout

November 8, 2012 by Leave a Comment

Workers removed the logo from the Dexia's heaquarters in Brussels in February after the Belgian part of the bank was nationalized.Julien Warnand/European Pressphoto AgencyWorkers removed the logo from the Dexia’s headquarters in Brussels in February after the Belgian part of the bank was nationalized.

9:49 a.m. | Updated

PARIS — The French and Belgian governments said on Thursday that they would inject an additional 5.5 billion euros into Dexia, a bank that has been troubled since the 2008 financial crisis, in an acknowledgment that it finances have continued to deteriorate.

The two governments will obtain preference shares in exchange for the new capital, equivalent to about $7 billion, giving them first rights to any value the group might eventually yield.

Belgium will provide 2.9 billion euros, 53 percent of the new funds. The French government will provide the rest, about 2.6 billion euros. They have also renegotiated their credit guarantees to Dexia, whose operations were concentrated largely between Belgium and France at the time of the credit crisis.

They said the new capital was necessary because “a certain number of hypotheses underlying the plan” for the bank’s orderly resolution had been revised. In particular, assumptions about the bank’s financing costs had turned out to be too optimistic. Its Dexia Municipal Agency unit will now have its value effectively wiped out in a planned sale to the French government.

Dexia S.A., the group holding company, has a negative net worth after writing down the full value of its stake in Dexia Crédit Local, it said. The holding company also reported a third-quarter loss of 1.2 billion euros, and a loss of 2.4 billion euros for the first nine months of the year.

France, Belgium and Luxembourg, where the group has an operating subsidiary, are winding down Dexia after the bank reached the verge of collapse in the September 2008. The bank foundered after the collapsing credit bubble exposed its reliance on short-term financing, and its balance sheet was scorched by failed investments that included hundreds of millions of dollars in unsecured Lehman Brothers bonds.

Paris and Brussels agreed in 2008 to shore Dexia up with more than 6 billion euros. In October 2011, they decided to nationalize the bank after worries about its exposure to Greek debt led to a run on its shares, not long after the European Banking Authority had given it a clean bill of health after a stress test.

Dexia’s government-appointed administrator, Karel De Boeck, said at a news conference in Brussels on Thursday that the recapitalization was necessary because Dexia had a deficit of 2.2 billion euros in its finances, Belgium’s RTL broadcaster reported.

Without the agreement, “we would have had a hearse waiting outside the door,” RTL cited him as saying, adding: “A total and immediate liquidation of Dexia – for which there are various obligations stretching out to 2099 – would cost a ridiculous amount of money.”

Dexia continues to hemorrhage money, even as it dumps assets. It booked a loss of 599 million euros on the sale of its Turkish unit, DenizBank. It also booked a loss of 466 million euros on the sale of Dexia Municipal Agency, which it is selling to the French government for 1 euro, rather than the 380 million euros it had assumed previously.

France and Belgium, both struggling to bring their finances into line with European Union standards at a time of economic stagnation, can ill afford an open-ended commitment to Dexia.

The governments said on Thursday that they had agreed to reduce loan guarantees made to Dexia Group in 2011, to 85 billion euros from 90 billion euros. In line with the new capital injection, Belgium’s share of the guarantee falls to 51.41 percent from 60.5 percent, while that of France rises to 45.59 percent from 36.5 percent. Luxembourg’s is unchanged at 3 percent.

They must also go back to the European Commission, which adjudicates antitrust matters, and seek approval for the latest bailout.

Article source: http://dealbook.nytimes.com/2012/11/08/dexia-gets-new-5-5-billion-bailout/?partner=rss&emc=rss

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DealBook: Facing Fresh Legal Woes, Barclays Swings to a Loss

October 31, 2012 by Leave a Comment

A branch of Barclays in London. On Wednesday, the British bank posted a net loss of £106 million ($170 million) in its latest earnings report.Facundo Arrizabalaga/European Pressphoto AgencyA branch of Barclays in London. On Wednesday, the British bank posted a net loss of £106 million ($170 million) in its latest earnings report.

LONDON – The British bank Barclays faces more legal trouble, disclosing on Wednesday two new investigations by American authorities that clouded already weak third-quarter results.

The bank said the Justice Department and the Securities and Exchange Commission were investigating whether Barclays broke anticorruption laws in its capital-raising efforts during the financial crisis. The inquiries follows similar efforts by British regulators.

The United States Federal Energy Regulatory Commission is also investigating the past energy trading activity in the bank’s American operations. American authorities have until Wednesday to charge the bank in the matter. Barclays said it would defend itself against any charges stemming from the inquiry.

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The fresh legal woes, coming on the heels of a rate-rigging scandal that erupted this summer, complicate a difficult turnaround effort by the bank.

On Wednesday, Barclays posted a net loss of £106 million ($170 million) in the three months ended Sept. 30, a steep drop from a £1.4 billion net profit it reported in the period a year earlier. The results were hurt by a charge on its own debt and provisions connected to the inappropriate sale of insurance to clients.

Libor Explained

Antony Jenkins, chief of Barclays.Justin Thomas/VisualMedia, via Agence France-Presse — Getty ImagesAntony Jenkins, chief of Barclays.

“The last three months have been difficult for Barclays,” Antony P. Jenkins, the bank’s chief executive, said on a conference call with reporters on Wednesday.

Shares in Barclays fell 3.8 percent in morning trading on Wednesday in London.

Mr. Jenkins took over as chief executive from Robert E. Diamond Jr., who resigned in July after Barclays agreed to pay $450 million to settle charges that it attempted to manipulate a key benchmark, the London interbank offered rate, or Libor. In the aftermath, Mr. Jenkins promised to increase the focus on retail banking, shifting away from riskier activity in the firm’s investment banking unit.

The new joint investigation from the Justice Department and S.E.C. relates to the bank’s capital-raising efforts during the recent financial crisis.

Unlike the Royal Bank of Scotland Group and the Lloyds Banking Group, Barclays turned to sovereign wealth funds in Abu Dhabi and Qatar for new capital. Barclays raised a total of $7.1 billion from Qatar in July and October 2008.

The bank disclosed this year that British authorities were investigating the legality of payments to Qatari investors in connection with the bank’s capital-raising. Barclays said on Wednesday that American regulators were also pursuing similar inquiries, adding that the bank was cooperating.

Despite its net loss, Barclays is making progress as its underlying businesses show signs of improvement. Excluding the adjustments, Barclays said pretax profit rose 29 percent, to £1.7 billion, in the third quarter.

In the face of continued market volatility, Barclays said pretax profit in its investment and corporate banking division more than doubled in the quarter, to just over £1 billion, on a strong performance in fixed income and equities. The European debt crisis, however, weighed on the bank’s retail and business banking franchise, where pretax profit fell 31 percent, to £794 million.

Ian Gordon, a banking analyst at Investec Securities in London, said the decline in revenue in the investment banking division raised some questions about the unit’s performance. He added, however, that Barclays was in a position to win market share, as competitors like UBS, which announced plans on Tuesday to eliminate 10,000 jobs, moved to reduce trading activity.

“As others pull back,” Mr. Gordon said, “there’s a potential to win a greater share of the piece.”

Barclays warned, however, that continued difficulties in Europe and uncertainty in global markets could weigh on future profitability. “We continue to be cautious about the environment in which we operate,” the bank said in a statement.

Given the challenging environment, Barclays is moving to insulate its businesses. The bank, which operates throughout the European Union, said it had reduce its presence in heavily indebted countries like Spain and Greece. The bank said it had cut its exposure to the sovereign debt of Spain, Italy, Portugal, Greece and Cyprus by 15 percent, to £4.8 billion.

It is also bolstering its capital to protect against potential losses. The bank’s core Tier 1 ratio, a measure of its ability to weather financial shocks, rose to 11.2 percent at the end of September from 10.9 percent at the end of the second quarter.

This post has been revised to reflect the following correction:

Correction: October 31, 2012

An earlier version of this article misstated the pretax profit Barclays attributed to its retail and business banking franchise. It was £794 million, not £794.

Article source: http://dealbook.nytimes.com/2012/10/31/barclays-reports-third-quarter-loss-on-credit-charges/?partner=rss&emc=rss

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DealBook: A Bigger Paycheck on Wall Street

October 10, 2012 by Leave a Comment

Outside the New York Stock Exchange in the financial district, where jobs have been pared back.Spencer Platt/Getty ImagesOutside the New York Stock Exchange in the financial district, where jobs have been pared back.

It still pays to be on Wall Street.

The financial industry in New York has slashed jobs by the thousands over the last two years. For those who remain, annual compensation in total is at near-record levels, according to a report released Tuesday by the New York State comptroller.

Since the financial crisis, Wall Street firms have wrestled with two competing market forces. Faced with a heavier regulatory burden, a lethargic economic recovery and the loss of once-big moneymakers like complex derivatives tied to mortgages, the banks have instead tried to cut their biggest expense: people. Yet there persists a view on Wall Street that profits can’t come simply by holding the line on costs — big pay is still needed to lure talent from other firms.

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Toward that end, firms have sought to cut jobs and noncompensation expenses rather than compensation itself. Both Goldman Sachs and Bank of America have announced big noncompensation cost-cutting efforts over the past year, for example.

The result is that compensation over all continues to rise even as some shareholders press firms to cut costs further amid weak profit growth. (Nearly half of all revenue on Wall Street is earmarked for compensation; in 2009, Morgan Stanley, which was hit harder during the crisis than most of its rivals, found itself paying out a record 62 percent of its net revenue in compensation and benefits. That number has since come down.)

The report showed that total compensation on Wall Street last year rose 4 percent, to more than $60 billion. That was higher than any total except those in 2007 and 2008 — before the financial crisis fully took its toll on pay.

The average pay package of securities industry employees in New York State was $362,950, up 16.6 percent over the last two years.

“It’s good work if you can get it,” said Thomas P. DiNapoli, the comptroller.

The results are sure to raise eyebrows on Main Street and in Washington, where lavish pay packages have come under attack since the crisis.

Still, the report provides only a snapshot of Wall Street’s finances. The wage data largely covers 2011. With the third quarter in the books, Wall Street firms will soon begin figuring out their bonus pool and how to distribute it. For some Wall Street professionals, the year-end bonus can easily account for more than half their total compensation.

Yet expectations for this year appear to be high, according to another study out on Tuesday. Some 48 percent of 911 Wall Street employees surveyed by eFinancialCareers.com said they felt their bonuses this year would higher than in 2011. That was an increase from 2011, when 41 percent of survey respondents said they believed their annual bonus would increase.

There, the comptroller’s report was not encouraging, saying that a survey it took earlier in the year suggested that Wall Street’s total cash bonus pool for 2012 was likely to decline for the second consecutive year.

The comptroller’s report attested to the importance of financial services to New York City. Financial jobs accounted for nearly a quarter of all private sector wages paid in the city last year, even though they accounted for just a fraction, 5.3 percent, of the city’s private sector jobs.

Over all, the annual report depicted a cloudy outlook for the financial industry and its thousands of employees.

“The securities industry remains in transition and volatility in profits and employment show that we have not yet reached the new normal,” Mr. DiNapoli said.

After posting a “disappointing” $7.7 billion in earnings last year, Wall Street in the first half of 2012 earned $10.5 billion, he said. The industry “is on pace” to earn more than $15 billion by the end of the year.

But even with some signs of improvement, Wall Street is rapidly shedding jobs. The austerity efforts have claimed 1,200 positions so far this year, according to the report. Mr. DiNapoli estimated that the industry lost more than 20,000 jobs since late 2007.

“In the short run, as a way to keep profits up, the firms will drive down costs and that will mean contraction in the work force,” Mr. DiNapoli said.

Goldman Sachs had 32,300 on the payroll at the end of its second quarter in June, down 3,200 people from the year-ago period. Bank of America has cut 12,624 employees over the past year, leaving it with 275,460 people.

Banks have also taken aim at lavish cash bonuses. The comptroller in February estimated that cash bonuses declined 13.5 percent, to $19.7 billion.

As Wall Street reins in cash payouts to top executives, the banks have been encouraged to reward employees with more stock and other long-term compensation. Some people argue that such a move discourages outsize risk-taking and ties an employee’s interest to the long-term health of the bank.

While pay remains high across the board, senior executive pay has fallen since the financial crisis. In 2007, the year before the financial crisis, Goldman’s chief executive, Lloyd C. Blankfein, made $68.5 million. In 2011 he took home $12 million.

For an executive like Mr. Blankfein, $12 million may be a pay cut, but it is still a princely sum compared with other industries. Between 2009 and 2011, compensation in the securities industry grew at an average annual rate of 8.7 percent, outpacing 5.3 percent for the rest of the private sector.

“Whether you love or hate people on Wall Street, they are spending money that is driving our economy,” Mr. DiNapoli said.

New York State Comptroller’s Report on Securities Industry (PDF)

New York State Comptroller’s Report on Securities Industry (Text)

A version of this article appeared in print on 10/10/2012, on page B1 of the NewYork edition with the headline: A Bigger Paycheck On Wall St..

Article source: http://dealbook.nytimes.com/2012/10/09/wall-street-pay-remains-high-even-as-jobs-shrink/?partner=rss&emc=rss

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DealBook: In Market Rebound, a Windfall for Wall Street Executives

October 3, 2012 by Leave a Comment

Harry Campbell

Some four years after the financial crisis, many are still feeling the ill effects. But big bank executives are not among this unfortunate group, compensation data shows.

The executives who headed financial institutions in those uncertain times of early 2009, when markets and banks were being supported by the federal government, are now in line to receive windfall compensation in the hundreds of millions of dollars.

What did they do to deserve such a reward? It’s hard to justify and it goes a long way toward explaining the persistent anger toward Wall Street. And we have the government partly to blame for it.

Deal Professor
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A large part of the reason is simply lucky timing.

In the depths of the financial crisis in 2008 and 20009, when the Standard Poor’s 500-stock index was touching below 700, bank executives were granted millions in options and stock incentives valued at incredibly low stock prices. The banks were encouraged to offer this compensation because of the restrictions in the Troubled Asset Relief Program, which in many circumstances prohibited the payment of bonuses other than in long-term restricted stock. As a result, companies awarded more equity than they otherwise would have at the time.

Since then, the stock market has returned to near the level it was before the financial crisis, making those options and stock very valuable.

To determine how large the windfall is, I asked Equilar, an executive compensation data firm, to compile the value of stock and options granted to the top five executives at each of the 18 largest American financial institutions — those that underwent stress tests in those years. (Ally Bank also received a stress test but was excluded because it was not public at the time). I also asked Equilar to determine what the packages were worth now, assuming the executives had held on to the stock and options.

It’s a stupendous amount.

The top executives at those 18 financial institutions received an aggregate of $142 million in stock and options from July 1, 2008, to June 30, 2009. It was a lot then, but these stock and options are now worth $457 million, an increase of $330 million, or 221 percent. On average, that is roughly $4 million per executive who received such compensation.

Individually, some of the gains are even more breathtaking. Take American Express and its chief executive, Kenneth I. Chenault. In 2007, before the financial crisis, American Express was trading for years at $50 to $60. Then the crisis hit, and in six months the stock fell below $10 a share.

In January 2009, American Express granted its top five executives stock options with a strike price of $16.71, which Equilar values at $7.63 million. According to American Express’s public disclosure, Mr. Chenault received the largest grant of 1,196,888 options.

American Express stock is now back to about $57 a share. And that equity package is up 1,097 percent and valued at $91.36 million. Mr. Chenault’s option package alone is now valued at almost $50 million.

That’s a nice payday. Can anyone argue that it is owed to the executive’s performance rather than to a recovery in the stock market?

American Express did not respond to requests for comment.

The biggest dollar winners are the executives of Capital One. According to Equilar, the credit card company’s top five executives received an incentive pay package granted in 2009 valued at $19.9 million. The package is now worth $114 million. The reason for the huge compensation package: Capital One’s options were granted at a price of $18.28 during the financial crisis. . Yet, Capital One’s stock price is trading at almost $60 a share, below its precrisis price of around $80.

A Capital One spokesman said that the compensation was justified because Capital One “delivered solid results in 2009.” The spokesman added that Equilar’s figures did not account for the fact that some Capital One executives had already exercised their options. According to Capital One, if these exercises were taken into account, the package’s value would be $87 million instead, still a fantastic amount.

All told, eight of these 18 firms, including Wells Fargo and SunTrust banks, gave executive pay packages during the financial crisis that are now more than 200 percent higher in value. Four of these financial institutions — BBT, U.S. Bancorp, Capital One and American Express — awarded pay packages that are up more than 400 percent. Almost all of this value is attributable simply to the stock market’s recovery.

And some of these packages reward what frankly appears to be poor performance. The top five executives of Fifth Third Bancorp received a pay package that is now 253 percent higher in value despite Fifth Third’s stock being about a third its precrisis value.

How could this happen, you may ask?

The bank executives who stood to make the most were those who were paid more in options than in stock. Options provide greater gains when the stock goes up and so are increasingly in disfavor. For example, Equilar calculates that the options granted to the Capital One executives are up 838 percent, or almost $70 million, while the stock component is up only 212 percent, or about $25 million. You won’t be surprised to hear that American Express’s total 2009 incentive compensation was paid all in options.

Another explanation is that many of the financial institutions did not adjust the dollar amount of their financial compensation paid that year to take into account the stock market drop. In other words, the banks paid the same dollar amounts but had to grant more options and stock to meet this number because of the low price.

If you are shaking your head, you should know that these numbers are only for the top five executives at these companies. Lower-ranked employees who received equity compensation, which is largely undisclosed, may have also received such a windfall.

Indeed, The New York Times reported in 2010 that the partners and employees of Goldman Sachs had received a substantial equity grant of 36 million stock options during the financial crisis. And of course, this excess compensation was awarded at many other, smaller banks.

Taken together, this is a sobering view of executive compensation. It shows how compensation can have little to do with performance and more with stock market movements and the luck of having options granted instead of less valuable stock. More tellingly, it also shows how the government most likely enriched financial executives by pushing banks to award more equity compensation through TARP than they otherwise would have.

The sad thing is that these executives were compensated not because of the work they did at their firms, but because of a lucky rise in the stock market. It is anything but pay for performance. And yes, if the financial crisis had not occurred, they were likely to have been much poorer otherwise. It’s no wonder Main Street is still seething.


Equilar Analysis of 18 TARP Bank Equity Grants JPMorgan Chase plans to disclose part of the total losses on a bungled trade.

TOTAL EQUITY
OPTIONS
STOCK
CURRENT VALUE
GRANT-DATE VALUE
% CHG.
CURRENT VALUE
GRANT-DATE VALUE
% CHG.
CURRENT VALUE
GRANT-DATE VALUE
% CHG.
Includes all grants made between July 1, 2008 and June 30, 2009.
Capital One Financial
$114,142,199
$19,937,974
472%
$77,875,140
$8,298,897
838%
$36,267,059
$11,639,077
212%
American Express
91,360,635
7,632,486
1,097
91,360,635
7,632,486
1,097
–
–
n/a
PNC Financial Services
68,817,278
20,842,433
230
54,474,868
13,861,096
293
14,342,410
6,981,337
105
Wells Fargo
32,199,370
8,972,088
259
17,468,325
3,441,590
408
14,731,045
5,530,498
166
SunTrust
29,325,385
8,465,869
246
24,264,019
6,843,223
255
5,061,366
1,622,646
212
Regions Financial Corp.
22,133,383
9,564,120
131
8,953,001
3,607,602
148
13,180,382
5,956,518
121
BBT
17,345,986
3,127,347
455
11,803,836
1,883,669
527
5,542,150
1,243,678
346
U.S. Bancorp
16,099,591
2,775,000
480
16,099,591
2,775,000
480
–
–
n/a
JPMorgan Chase
15,553,876
7,450,000
109
–
–
n/a
15,553,876
7,450,000
109
Bank of New York Mellon
13,792,147
11,885,005
16
5,915,846
5,665,420
4
7,876,300
6,219,585
27
Bank of America
12,519,196
20,000,008
-37
–
–
n/a
12,519,196
20,000,008
-37
KeyCorp
10,902,463
12,475,708
-13
5,245,500
6,373,250
-18
5,656,963
6,102,458
-7
MetLife
9,254,130
6,880,440
34
9,254,130
6,880,440
34
–
–
n/a
Fifth Third Bancorp
3,406,700
963,800
253
–
–
n/a
3,406,700
963,800
253
Citigroup
–
1,268,149
-100
–
1,268,149
-100
–
–
n/a
Goldman Sachs
–
–
n/a
–
–
n/a
–
–
n/a
State Street
–
–
n/a
–
–
n/a
–
–
n/a
Morgan Stanley
–
–
n/a
–
–
n/a
–
–
n/a
Total
$456,852,337
$142,240,427
221%
$322,714,891
$68,530,822
371%
$134,137,446
$73,709,605
82%

A version of this article appeared in print on 10/03/2012, on page B5 of the NewYork edition with the headline: In Stock Market Rebound, a Windfall for Wall St. Executives.

Article source: http://dealbook.nytimes.com/2012/10/02/in-stock-market-rebound-a-windfall-for-wall-st-executives/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Fed Returns $77 Billion in Profits to Treasury

January 11, 2012 by Leave a Comment

WASHINGTON — The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer but much more than in any other previous year.

The Fed is required by law to turn over its profits to the Treasury each year, a highly lucrative byproduct of the central bank’s continuing campaign to stimulate economic growth.

Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.

Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.

But Fed officials note that this cycle — payments flowing from Treasury to the Fed and then back to the Treasury — still saves money for taxpayers because those interest payments otherwise would be made to other investors.

“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, half-jokingly told Congress last year.

The scale of the transfers grew rapidly after the financial crisis.

The Fed made an average annual contribution to the Treasury Department of $23 billion during the five years preceding the crisis. In the years since 2007, the Fed’s average contribution has more than doubled to $54 billion.

The Fed transferred $79.3 billion in 2010. Its investment portfolio grew again in 2011, approaching $3 trillion, but profits fell modestly as the Fed reduced some more lucrative holdings, like its support for the insurance company American International Group, and expanded its holdings of low-yield government debt.

Notwithstanding its conservative investment portfolio, the central bank remains highly profitable because of its unique business model. Rather than paying for funding, it simply creates the money that it needs at no cost. The return on its investments, as a result, almost all flows directly to the bottom line.

Still, the model is not foolproof. The Fed could decide to undermine its own profitability if it concluded that the pace of inflation was increasing. Fed officials have said that they would respond to inflationary pressures through a combination of selling assets and raising short-term interest rates, which would have the effect of undercutting the value of those assets just as they were being sold. The Fed also could conclude that it needed to pay higher interest rates to banks that keep reserves on deposit with the central bank, to discourage withdrawals of that money.

In addition to the money sent to the Treasury, the Fed spent $4.5 billion on its own operations, including its expanded role as a regulator of the largest financial companies. The 2010 law overhauling financial regulations also requires the Fed to provide funding for two new agencies, the Consumer Financial Protection Bureau and the Office of Financial Research. The bill totaled $282 million last year. Other federal financial regulators are financed by the industries that they oversee. Both systems are intended to shelter regulators from political pressure.

The results reported Tuesday are preliminary. The 12 regional banks that compose the Federal Reserve system will publish final financial results in a few months. If there is a change in estimated profits, the Fed will adjust the amounts that it pays to the Treasury this year. The contributions are made weekly.

Article source: http://feeds.nytimes.com/click.phdo?i=73c09c03edfafde7c8e845a656178516

Filed Under: Economy News Tagged With: , ,

Economic View: Fed’s Moves Offer a Shield Against Europe — Economic View

December 24, 2011 by Leave a Comment

With such dangers at hand, it’s time for a spot-check on whether financial regulation in the United States has left us prepared. So far — with one notable exception — it’s not looking good.

A core problem in finance is that banks and other intermediaries can take on too much risk, not caring enough that their potential failures may throw people out of work, burden taxpayers and damage the broader economy. The solution — if it can be managed — is to ensure that banks have enough safe, liquid capital so that A) they are betting a lot of their own money, thereby inducing some caution, and that B) they have a large-enough cushion to limit the risk of failure. “Lots of capital, not too much leverage” is the basic formula for a safe financial system.

Such a general approach is needed because it’s again become clear that regulators can’t predict the specifics of the next crisis. Less than two years ago, our government enacted the Dodd-Frank law, the most complex financial regulation bill of all time, based on the work of hundreds of economic and legal experts, all hyper-aware of the issues of risk. Neither this bill nor our government, however, foresaw that we were already living in the onset of the next potential financial crisis, namely the spillover from the euro zone.

Dodd-Frank left questions of capital and leverage largely to the Basel III international banking agreements, the second piece of the new financial regulatory architecture. Basel III, like its predecessors Basel I and Basel II, encourages banks to hold sovereign debt. This has been revealed as a mistake, just as it was wrong for the earlier Basel regulations to encourage banks to hold mortgage securities.

Most fundamentally, Basel III seems obsolete even before it can formally take effect over the next few years. Its standards imply that European banks will have to raise more capital, possibly in the hundreds of billions of dollars. At this point, that’s like wishing a poor man were a millionaire. The question will sooner be one of survival. In lieu of raising new capital, many European banks will stretch the capital they already have and meet minimum capital standards by shrinking, thereby cutting back on lending and damaging economic growth.

The standards may eventually be tossed out or revised, even though they looked good on paper not that long ago. If nothing else, after recent downgrades, there are no longer enough triple-A securities to carry out the requirements.

Despite these problems, the United States may oddly enough be facing this new financial turmoil in a relatively safe position, though whether it’s safe enough remains to be seen. The Federal Reserve took the lead on future capital requirements just last week, but for the shorter run there is a more important Fed policy move. Starting in late 2008, as a response to our financial crisis, the Fed bought government and mortgage securities from banks on a very large scale.

Bank reserves at the Fed rose from virtually nothing to more than $1.6 trillion. Then the Fed paid interest on those reserves to help keep them on bank balance sheets.

It is estimated by Moody’s that America’s biggest banks now have liquid assets that are 3 to 11 times their short-term borrowings. In other words, it’s the cushion we’ve been seeking. Furthermore, a lot of those reserves sit in the American subsidiaries of large foreign-owned banks, protecting the European system, too.

This new safety comes not from regulatory micromanagement but rather from the creation of additional safe interest-bearing assets. While European economies have been losing safe assets through debt downgrades, the United States financial system has been gaining them.

THE Fed’s stockpiled liquid reserves have met some heavy criticism. Hard-money advocates contend that they are a prelude to hyperinflation — although market forecasts and bond yields don’t bear this out — while proponents of monetary expansion have wished that banks would more actively lend out those reserves to stimulate the economy. That second view assumes that the financial crisis is essentially over, but maybe it’s not. As the euro zone crisis continues, it seems that Ben S. Bernanke has been a smarter central banker than we had realized.

The final lessons are scary, but also powerful.

First, don’t assume that the first wave of a financial crisis is the final act. Circa 1931, many people thought that the global economy was recovering, until an additional wave of financial crises caught fire in Europe and later damaged the United States. Mr. Bernanke is a scholar of exactly this period.

Second, no matter what laws are written, good central banking is the most powerful and most influential financial regulator, if only through the broad management of liquidity and safety. The euro zone has put too much responsibility on national governments and too little on its central bank.

Third, good regulation should take account of our rather extreme ignorance. That means emphasizing the more general protections, as embodied in a ready supply of safe liquid assets, rather than obsessing over the regulatory micromanagement of particular bank activities.

On the whole, we still haven’t learned that last lesson. Nonetheless, this time around we may just squeak by, largely because of the prudence of our central bank.

Tyler Cowen is a professor of economics at George Mason University.

Article source: http://www.nytimes.com/2011/12/25/business/feds-moves-offer-a-shield-against-europe-economic-view.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

A Fight to Make Banks More Prudent

December 21, 2011 by Leave a Comment

Mr. Hildebrand, the president of the Swiss central bank, was called “arrogant” and “egotistical” by bankers quoted anonymously in the pages of Swiss newspapers. His supposed sin: Wanting banks to hold extra capital. The fact that Mr. Hildebrand was himself a former hedge fund manager in New York seemed only to heighten the sense that he had betrayed his profession.

“He’ll never find another job in Switzerland,” the Swiss newspaper Der Sonntag quoted an unnamed high-ranking banker as threatening Mr. Hildebrand in 2010.

The unusually bitter attacks on a central bank chief were a measure of what was at stake. Mr. Hildebrand, 48, had a high-visibility role in a struggle between bankers trying to preserve their most lucrative business practices and regulators trying to defuse a system that, many believe, nearly blew up the world economy.

“Many of us on the public side had to deal with industry push-back, at times amplified by public coverage,” Mr. Hildebrand said. “One lesson that emerges is that the capacity of the financial industry to lobby for its short-term interests is far reaching.”

The debate centers on an international accord that most people outside the industry have never heard of, the so-called Basel III rules. The core issue and main point of dispute is capital — the money that banks accumulate through issuing stock and holding onto profits, money that they do not have to repay. The regulators want banks to finance their operations with more capital and less borrowed money. Advocates argue that the bigger the capital buffer, the greater the stability of the financial system. But financing operations from capital, rather than borrowing money, is less profitable, and that means lower bonuses.

“In the financial crisis the banks got the upside and the public got the downside,” said Stephen G. Cecchetti, head of the monetary and economic department of the Bank for International Settlements, in Basel, Switzerland. The bank houses the Basel Committee on Banking Supervision, the secretive panel that establishes global banking standards. “We want to make sure that doesn’t happen again.”

After some fierce battles, proponents of the tighter rules have achieved some success in pushing through measures that will force banks to reduce risk. The Federal Reserve on Tuesday published draft regulations that draw heavily on the agreements reached in Basel. But there is a long phase-in period that the banking industry could use to try to water down the rules. And many economists fear that the new regulatory regime still allows banks to take outsize risks.

Flaws in earlier Basel rules, known as Basel II, allowed the financial crisis to gather in the first place, many economists say, enabling the illusion that banks were comfortably cushioned against risk. In fact, the banks had badly underestimated the malignant potential of their holdings. Faulty regulation also worsened the European sovereign debt crisis, assigning government bonds virtually zero risk. That encouraged banks to extend billions in credit to countries like Greece and Italy, setting up a dangerous correlation between the solvency of countries and the health of banks. The thinking, in effect, was “Why imprison capital to insure against losses that were unlikely ever to happen?”

The technical term was “risk weighted assets.” It was as if a homeowner only had to make a down payment on the part of a house that might catch fire. Other parts of the property, like the swimming pool and the lawn, would not count.

The flaws in this model became obvious in the days after investment bank Lehman Brothers collapsed in 2008. Banks that appeared to be well capitalized discovered that they had hugely underestimated risk. Derivatives tied to the United States real estate market, with top credit ratings, suddenly became impossible to sell and effectively worthless.

One of the most vivid examples was right around the corner from Mr. Hildebrand’s office in Zurich, the Swiss bank UBS. In the years before the crisis, UBS was, on paper, one of the best capitalized banks in the world. But in the course of 2008 UBS rapidly depleted its cushion as it absorbed losses from investments in the American real estate market.

Article source: http://feeds.nytimes.com/click.phdo?i=315a259c5d3e0adb4fd28cadaf4e81f2

Filed Under: Business News Tagged With: , ,
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