March 29, 2024

DealBook: U.S. Ends Mortgage Investigations Into Goldman Sachs

9:06 p.m. | Updated

Federal authorities ended two investigations into the actions of Goldman Sachs during the financial crisis, handing a quiet victory to the bank after years of public scrutiny.

In a rare statement late Thursday, the Justice Department said there was “not a viable basis to bring a criminal prosecution” against Goldman or its employees after a Congressional committee asked prosecutors to investigate several mortgage deals at the bank. Federal prosecutors are typically loath to acknowledge the closing of a case, doing so publicly in only a handful of instances over the last several years.

The Senate’s Permanent Subcommittee on Investigations had examined troubled mortgage securities that Goldman sold to investors, who later sustained steep losses during the crisis. The subcommittee also suggested prosecutors investigate whether the chief executive of the bank, Lloyd Blankfein, had misled lawmakers during public testimony.

Separately, Goldman Sachs announced early Thursday that the Securities and Exchange Commission had ended an investigation into a $1.3 billion subprime mortgage deal, taking no action. The move was an about-face for the commission, which notified the bank in February that it planned to pursue a civil action.

“We are pleased that this matter is behind us,” a bank spokesman said Thursday.

The moves closed a difficult chapter for the bank, whose missteps became emblematic of Wall Street’s excess. But for all the public criticism of the bank, the only law enforcement case to have surfaced against Goldman was a civil case that the bank settled for $550 million in 2010 over a mortgage investment that investigators said had been intended to collapse.

The announcements were also the latest indication that federal investigations into the financial crisis were petering out as the deadline to file cases approached. While the S.E.C. has brought more than 100 financial crisis-related cases, the agency was looking to take on a big case aimed at punishing Wall Street for its role in the crisis.

After President Obama announced the creation of a special task force in January to investigate the residential mortgage mess, the S.E.C. and other authorities vowed to hold the banks accountable. Wall Street packaged and sold subprime mortgages, including to the government-owned mortgage finance giants Fannie Mae and Freddie Mac, that suffered billions of dollars in losses.

The subcommittee, led by Senator Carl Levin of Michigan, focused on a group of mortgage deals that Goldman had arranged and sold. Mr. Levin further suggested that Mr. Blankfein might have misled lawmakers when testifying about the deals.

But in a statement on Thursday, the Justice Department said it “ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time.” The agency said it would pursue the case again if new evidence emerged.

The S.E.C.’s inquiry into Goldman involved a package of subprime mortgages in Fremont, Calif., that the bank sold to investors in 2006. The S.E.C. was examining whether Goldman had misled investors into believing that the mortgage securities were a safe bet.

The S.E.C. in February sent the bank a so-called Wells notice, indicating that the agency ’s enforcement team planned to recommend an action against the bank. At the time, Goldman said it would fight to convince regulators that they were mistaken.

On Monday, the bank learned that it was successful. Goldman was “notified by the S.E.C. staff that the investigation into this offering has been completed,” the bank said In a quarterly filing released on Thursday Goldman said the agency’s “staff does not intend to recommend any enforcement action.”

Goldman’s Fremont deal, known as Fremont Home Loan Trust 2006-E, was one piece of a broader investigation into the mortgage-backed securities. Wells Fargo and JPMorgan Chase have also received warnings of potential action by the S.E.C.

“Mortgage products were in many ways ground zero in the financial crisis,” Robert Khuzami, the agency’s enforcement director, said at a news conference for the task force.

The agency, along with other federal regulators and the Justice Department, is also pursuing an array of other cases stemming from the financial crisis. And Goldman is not yet off the hook for its part in the Fremont deal.

Last year, the regulator overseeing Fannie and Freddie filed suits against 17 financial firms that sold the mortgage giants nearly $200 billion in mortgage-backed securities that later soured. In its action against Goldman, the Federal Housing Finance Agency cited the Fremont investment.

Still, the announcement on Thursday is welcome news for Goldman, allowing the bank to avoid another major battle with the S.E.C. over the mortgage crisis. In 2010, Goldman paid $550 million to settle accusations that it sold a mortgage investment that was intended to collapse. The bank, the S.E.C. said, failed to disclose to investors that the hedge fund manager John Paulson had helped create — and bet against — the deal.

A version of this article appeared in print on 08/10/2012, on page B5 of the NewYork edition with the headline: Two Investigations of Goldman Sachs End.

Article source: http://dealbook.nytimes.com/2012/08/09/goldman-says-sec-has-ended-mortgage-investigation/?partner=rss&emc=rss

DealBook: Zaoui Brothers Establish New Firm

Yoel  Zaoui in 2008.Leon Neal/Agence France-Presse — Getty ImagesYoel Zaoui in 2008.

LONDON – The brothers Michael and Yoël Zaoui, two of the most prominent London-based investment bankers of the last two decades, have created a new company called Zaoui Capital, according to British regulatory documents.

The news comes after Yoël Zaoui stepped down as co-head of global mergers and acquisitions at Goldman Sachs this year. His brother, Michael, retired from his position as Morgan Stanley’s chief European deal maker in 2008.

Born in Morocco and educated in France and the United States, Yoël Zaoui had joined Goldman Sachs in 1988, and moved to London in 1989 to help build the firm’s operations in Europe, with a focus on mergers. His brother joined Morgan Stanley in 1986, and moved to London four years later.

Over the last two decades, the Zaoui brothers had been part of many of Europe’s largest deals. The two bankers, for example, were on opposing sides of Mittal’s contentious hostile bid in 2006 for the rival steelmaker Arcelor, with Michael advising Arcelor and Yoël advising Mittal.

The new company, Zaoui Capital, was established in late July, and names the two brothers as officers of the firm. Details about the company’s activities were not disclosed.

A representative for Zaoui Capital was not immediately available for comment. The news was earlier reported by Financial News.

Article source: http://dealbook.nytimes.com/2012/08/06/zaoui-brothers-establish-new-firm/?partner=rss&emc=rss

DealBook: Rajat Gupta Convicted of Insider Trading

Rajat K. Gupta leaving the federal court in Manhattan after his guilty verdict on Friday.Lucas Jackson/ReutersRajat K. Gupta leaving the federal court in Manhattan after his guilty verdict on Friday.

Rajat K. Gupta, the retired head of the consulting firm McKinsey Company and a former Goldman Sachs board member, was found guilty on Friday of conspiracy and securities fraud for leaking boardroom secrets to a billionaire hedge fund manager.

He is the most prominent corporate executive convicted in the government’s sweeping investigation into insider trading.

The case, which caps a wave of successful insider trading prosecutions over the last three years, is a significant victory for the government, which has penetrated some of Wall Street’s most vaunted hedge funds and reached into America’s most prestigious corporate boardrooms.

It also demonstrated that prosecutors could win an insider trading case largely built on circumstantial evidence like phone records and trading logs. Previous convictions, as in the trial of Raj Rajaratnam, the hedge fund manager on the receiving end of Mr. Gupta’s assumed tips, have relied more heavily on the use of incriminating wiretaps.

Mr. Gupta is one of the 66 Wall Street traders and corporate executives charged with insider trading crimes by Mr. Bharara since 2009. Of those, 60 have either pleaded guilty or been found guilty. Juries have convicted all seven defendants who have gone to trial.

After a monthlong trial in Federal District Court in Manhattan, a jury took only two days to reach a verdict. It found Mr. Gupta guilty of leaking confidential information about Goldman to his former friend and business associate, Mr. Rajaratnam, on three different occasions in 2008. He was also convicted on a conspiracy charge.

The jury found Mr. Gupta not guilty of two charges of tipping Mr. Rajaratnam, including an allegation that he divulged secret news about Procter Gamble, where he also served on the board.

“Having fallen from respected insider to convicted inside trader, Mr. Gupta has now exchanged the lofty boardroom for the prospect of a lowly jail cell,” Preet Bharara, the United States attorney in Manhattan, said in a statement.

After the verdict was read in the courtroom, Mr. Gupta, 63, remained stoic. Just behind him, his wife, Anita, buried her head in her hands. His four daughters, who had squeezed into the front row of the spectators’ gallery each day during the trial, loudly sobbed and consoled one another. Several jurors cried as they left the courtroom.

Gary P. Naftalis, a lawyer for Mr. Gupta, said that his client would appeal the verdict. “This is only Round 1,” he said.

Judge Jed S. Rakoff, who presided over the case, set Mr. Gupta free on bail until his Oct. 18 sentencing. He faces a maximum sentence of 25 years in prison, but will probably serve less time. Mr. Rajaratnam is serving an 11-year jail term.

With its crackdown on insider trading, the government wants to protect investors, sending the message that the stock market is a level playing field and not a rigged game favoring Wall Street professionals. Insider trading, in the government’s view, also victimizes the companies whose information is stolen.

The criminal charges against Mr. Gupta, brought last October, stunned the global business world. Not since last decade’s corporate crime spree, when Jeffrey K. Skilling of Enron and Bernard J. Ebbers of WorldCom received lengthy prison terms, or the Wall Street scandals of the late 1980s that led to jail time for the financiers Michael R. Milken and Ivan F. Boesky, had a corporate executive fallen from such heights.

Mr. Gupta, a native of Kolkata, India, was orphaned as a teenager. After earning an engineering degree, he moved to the United States to attend Harvard Business School on a scholarship. He joined McKinsey in the early 1970s and in 1994 was elected global head, the first non-American-born executive to hold that post.

In 2007, Mr. Gupta retired from McKinsey and became a highly sought director at public companies, joining the boards of Goldman, Procter Gamble and the parent company of American Airlines. In recent years, Mr. Gupta had also devoted his time to humanitarian causes, raising millions of dollars to combat AIDS, tuberculosis and malaria.

“Having lived a lifetime of honesty and integrity, he didn’t turn into a criminal in the seventh decade of an otherwise praiseworthy life,” said Mr. Naftalis, articulating one of Mr. Gupta’s defenses.

Yet the government, which was represented by federal prosecutors Reed Brodsky and Richard C. Tarlowe, countered with evidence that Mr. Gupta brazenly divulged confidential board discussions at both Goldman and Procter Gamble.

“Here’s a man who came to this country and was a wonderful example of the American dream,” said the jury’s foreman, Richard Lepkowski, an executive for a nonprofit organization. “We wanted to believe that the allegations weren’t true, but at the end of the day the evidence was just overwhelming.”

Prosecutors built their case around phone records, trading logs, instant messages and e-mails. Mr. Gupta would participate in Goldman board calls, and afterward quickly call Mr. Rajaratnam, the founder of the Galleon Group. Mr. Rajaratnam would then trade shares in Goldman.

The government also presented three telephone conversations between Mr. Rajaratnam and Galleon colleagues that were secretly recorded by the F.B.I. On those calls, Mr. Rajaratnam boasted that he had a source inside Goldman.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” Mr. Rajaratnam said on one call, in October 2008.

The defense repeatedly maligned Goldman, suggesting that the close ties between the bank and Galleon meant that there were numerous sources at the bank feeding Mr. Rajaratnam information.

“The wrong man is on trial,” Mr. Naftalis told the jury.

The case has been an embarrassment for the executives at McKinsey, which Mr. Gupta ran from 1994 to 2003. A trusted adviser to top companies, McKinsey counts Sheryl Sandberg, the chief operating officer of Facebook, and James P. Gorman, the chief executive of Morgan Stanley, among its alumni.

“McKinsey’s core business principle is to guard the confidential and private information of its clients,” said a former McKinsey executive, who spoke on the condition of anonymity. “It is mind-blowing that the guy who ran the firm for so many years could be going to jail for violating that principle.”

Mr. Gupta met Mr. Rajaratnam around 2007. Back then, Mr. Rajaratnam was at his peak, a billionaire hedge fund manager with a superior investment record. For Mr. Gupta, who wanted to raise his profile in the lucrative world of money management, Mr. Rajaratnam was a top-notch connection.

“Rajaratnam offered Gupta many benefits,” said the prosecutor, Mr. Tarlowe, in his summation. “What was good for Rajaratnam and Galleon was good for Gupta.”

Together, the men helped start a private equity firm focused on India. Mr. Gupta invested at least $13 million in Galleon hedge funds and took on a fund-raising role at the firm. He accepted a highly paid advisory post at the investment giant Kohlberg Kravis Roberts Company.

During a telephone conversation between Mr. Rajaratnam and Anil Kumar, a former McKinsey executive who has pleaded guilty to insider trading, the two gossiped about Mr. Gupta’s ambitions to make more money, focusing on his job at Kohlberg Kravis.

“I think he wants to be in that circle,” said Mr. Rajaratnam, in August 2008. “That’s a billionaire circle, right?”

Mr. Gupta’s friends adamantly dispute the notion that he was driven by material gain. At the trial, his private banker at JPMorgan Chase pegged his family’s net worth at $130 million, in addition to his home in Westport, Conn., a waterfront mansion once owned by the retail executive J. C. Penney.

“I don’t know who came up with this business that Rajat had billionaire envy,” said Anil Sood, a childhood friend from India who now lives in Virginia. “He has always been quite content with his wealth.”

But one of the jurors, Ronnie Sesso, a youth advocate at the Administration for Children’s Services in Manhattan, had a different view.

“What did Mr. Gupta get by giving Raj this information?” said Ms. Sesso. “A need for greed.”

William Alden contributed reporting

Article source: http://dealbook.nytimes.com/2012/06/15/rajat-gupta-convicted-of-insider-trading/?partner=rss&emc=rss

DealBook: Once-Reticent Investors Join Shareholder Revolts

Chesapeake Energy's chief, Aubrey McClendon, has come under fire.Associated PressChesapeake Energy‘s chief, Aubrey McClendon, has come under fire.
Carl C. Icahn helped lead a shareholder revolt against Chesapeake.Scott Eells/Bloomberg NewsCarl C. Icahn helped lead a shareholder revolt against Chesapeake.
Daniel Loeb’s hedge fund pushed for Yahoo’s chief to resign.Jacob Kepler/Bloomberg NewsDaniel Loeb’s hedge fund pushed Yahoofor changes.

Every spring, corporate chieftains and their boards squash uprisings from a familiar batch of pugnacious investors, a ritual that shields many companies from major change.

This proxy season was different. In recent weeks, chief executives and directors have gone up against a more formidable foe than the typical corporate gadfly: the mainstream investor.

It is the changing face of shareholder activism. While proxy season has long been the domain of labor unions and activist investors with large personalities and forceful demands, increasingly it is mutual funds and other more tempered institutional shareholders who are criticizing lavish pay packages and questioning corporate governance.

Emboldened by new regulations — and angered by laggard stock performance and recent scandals — this new crop of activists is voting down company policies and backing proposals to reform corporate boards. The movement has already stung a variety of companies, including Citigroup, Goldman Sachs and Wal-Mart.

At its annual shareholder meeting in Oklahoma City on Friday, Chesapeake Energy will confront an army of angry institutional investors shouting for a shake-up at the embattled company. Shareholders, already exercised about the company’s underperforming stock, have seized on revelations that Chesapeake’s chief executive took personal loans from the company’s lenders.

The effort is bearing fruit. Attempting to placate detractors, Chesapeake agreed this week to shuffle its board. The move followed a string of shareholder triumphs at Canadian Pacific Railway, Barclays and other companies.

“Chesapeake is an excellent example of the changing impact of shareholder activism and the effectiveness of that activism,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

“Years ago, it was really just the large pension funds and labor funds,” he said. “Today you’re seeing a very wide mix of people.” Mr. Elson noted that one of Chesapeake’s chief critics is Southeastern Asset Management, a large money manager known as a low-key investor.

While levying a more potent attack than the average shareholder, big money managers and mutual funds are a small segment of the activist population. Large union-affiliated pension funds and select individual investors remain the most dogged harassers of corporate boards and executives, data shows.

Even so, one of the most prominent gadflies, Evelyn Y. Davis, who calls herself the Queen of the Corporate Jungle, scaled back her activism this year. And some “socially concerned” asset managers are sitting out this proxy season. Religious investors, those with ties to Catholic nuns and other spiritual outfits, have introduced only seven shareholder proposals so far this year, down from 23 in 2011, according to Proxy Monitor, a public database sponsored by the Manhattan Institute that tracks shareholder proposals.

Others have been busy. The number of shareholder proposals, one measure of activism, grew by 3 percent this year to 595, according to Broadridge Financial Solutions, a technology company that processes proxy votes. Even a modest rise is significant because new regulations made certain votes mandatory, meaning that shareholders no longer had to put them on the ballot.

“We’re looking at a bumper crop of proxy fights,” said Patrick McGurn, special counsel at Institutional Shareholder Services, which advises shareholders on proxy voting. “It looks like we’ll see more fights during the first half of 2012 than we tracked for the entire year in 2011.”

Shareholders have taken broad aim at corporate governance. They paid particular attention to so-called classified boards, in which directors serve terms of different lengths. The number of declassification proposals shot up 41 percent this year, to 79 proposals, according to Institutional Shareholder Services. The growth stemmed in part from an initiative by Harvard Law School’s Shareholder Rights Project.

A series of recent management mishaps has given investors plenty of ammunition. At Yahoo, a firestorm erupted when it emerged that the company’s chief executive, Scott Thompson, misstated information on his résumé. The hedge fund Third Point, a major Yahoo shareholder that started pushing for change earlier this year, called for Mr. Thompson to step down in May, which he soon did. It was the hedge fund’s first real activist fight in five years.

Wal-Mart, too, has faced intense scrutiny from prominent shareholders. In the wake of a New York Times article exposing bribery in Wal-Mart’s Mexican arm, the nation’s second largest public pension fund, the California State Teachers’ Retirement System, sued the company and voted against all of its board members. The pension fund railed against “a breakdown of corporate governance.”

While the skirmish has yet to yield changes at Wal-Mart, other embattled companies are making concessions. Chesapeake this week agreed to eject four of its nine board members. The company will replace them with board members handpicked by its two largest shareholders, Southeastern Asset Management and Carl C. Icahn.

The shareholder revolt at Chesapeake, which stemmed from concerns about the company’s shaky financial position, became a broad critique of the company’s chief executive, Aubrey K. McClendon, and the board’s weak oversight of his activities. Some have questioned why Mr. McClendon borrowed more than $1 billion from financial firms that were also lending to Chesapeake, asking whether Mr. McClendon allowed the company to pay high rates so he could receive a special deal. Chesapeake has said that he used the money to pay for his share of the company’s natural gas and oil wells.

Mr. Icahn is a well-known activist, but Southeastern shies away from the spotlight. It worked behind the scenes with Chesapeake as Mr. Icahn led from the front lines of the fight.
Other unlikely partnerships formed amid a shareholder face-off against Canadian Pacific Railway. William A. Ackman, a strident activist, led a lengthy proxy fight to oust the railroad’s chief executive. But it was not until May, just days after a major Canadian pension fund jumped on board, that the railroad’s chief executive resigned.

“When traditionally quieter investors join the chorus, it resonates so much more,” said Dominic J. Auld, a lawyer at Labaton Sucharow who represents institutional investors in challenges against public companies. Mr. Auld, whose law firm represents the California pension fund in its battle against Wal-Mart, added that mainstream investors are increasingly hiring in-house experts to vet companies and pinpoint problems with board members.

The board of Goldman Sachs was among the recent targets. In April, the managers of Sequoia Fund took aim at James A. Johnson, the chairman of Goldman’s compensation committee. The shareholders issued a broad rebuke of Mr. Johnson’s corporate career, specifically his tenure as chief executive of Fannie Mae, the mortgage finance titan that collapsed at the height of the financial crisis. At the bank’s recent shareholder meeting, Mr. Johnson kept his seat on the board.

Other big banks have faced tough shareholder uprisings for doling out supersized paychecks. Under pressure from investors, Barclays, the big British bank, announced in April that its executives would forfeit portions of their bonuses if it failed to meet certain profit goals.

Citigroup shareholders in April rejected the bank’s $15 million pay package for its chief executive, Vikram S. Pandit. The vote, known as a nonbinding “say on pay” ballot, was mandated under the Dodd-Frank regulatory law. About 55 percent of the shareholders voting were against the Citi compensation plan, including mainstream institutional investors like pension fund and mutual fund managers. In a statement at the time, Citigroup said it “takes the shareholder vote serious” and will “carefully consider their input as we move forward.”

“We’re not trying to be activists,” said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management company that voted against the Citigroup pay package. “Shareholders are paying attention to what C.E.O.’s are getting paid. Investors can’t ignore it anymore.”

Article source: http://dealbook.nytimes.com/2012/06/07/once-reticent-investors-join-shareholder-revolts/?partner=rss&emc=rss

DealBook: Ackermann Hands Over Reins of Deutsche Bank

FRANKFURT — Josef Ackermann bowed out Thursday as the chief executive of Deutsche Bank after more than a decade in which he transformed the institution into a global contender but also became a symbol to many Germans of the excesses of capitalism.

At the bank’s annual meeting, Mr. Ackermann passed his responsibilities to two subordinates who will run the bank in tandem. Anshu Jain, a native of India who has been in charge of Deutsche Bank’s investment banking operations, will serve as co-chief executive with Jürgen Fitschen, a German whose title is head of Deutsche Bank regional management.

Mr. Ackermann’s talent for drawing both accolades and catcalls was on view during his last appearance before shareholders in an arena often used for rock concerts. Among a crowd of about 7,000 — a record for the company’s meetings — there were some boos and shouted insults as Mr. Ackermann reviewed the bank’s achievements in the last decade. But at the end of his speech shareholders gave him a standing ovation.

Under Mr. Ackermann, the stock has ridden a roller coaster, peaking above 100 euros, or $124, in 2007 but falling below 20 euros in 2009. On Thursday, the shares closed at 29.09 euros.

“I have done my duty and served the company with all my strength,” said Mr. Ackermann, who is retiring, at age 64, having stayed longer than initially planned.

Mr. Ackermann, a Swiss citizen who joined Deutsche Bank from Credit Suisse in 1996 and became chief executive in 2002, made Deutsche Bank a force in international banking while also becoming an influential figure in political circles. Since the financial crisis and subsequent sovereign debt debacle weakened other German banks, Deutsche Bank remains the country’s only institution able to compete with the likes of Goldman Sachs or JPMorgan Chase.

But there were hints Thursday of the succession struggle that marred Mr. Ackermann’s final years at the bank and helped derail plans for him to become chairman of the supervisory board, a part-time oversight role that many of his predecessors have held. During a speech to shareholders, Mr. Ackermann made only the briefest mention of his successors, Mr. Jain and Mr. Fitschen, saying they ‘‘can build on what we have achieved together.’’

The investment banking business run by Mr. Jain, 49, has often been responsible for most of Deutsche Bank’s profit, which last year was 4.3 billion euros. But some critics have questioned putting an investment banker at the head of the institution when risk-taking by traders is under fire, and when Deutsche Bank is trying to re-emphasize traditional businesses like retail banking.

Mr. Fitschen is seen as a transitional figure who will help compensate for Mr. Jain’s lack of fluency in German and maintain the bank’s close ties to political leaders in Europe. At 63, Mr. Fitschen is just a few months younger than Mr. Ackermann.

While Deutsche Bank earned most of its 32 billion euros of revenue last year outside Germany, many Germans regard the bank as de facto common property, although the government has no stake — ‘‘half a bank and half a part of Germany,’’ as the newspaper Handelsblatt wrote recently.

As usual, the annual meeting was a mass event with thousands of shareholders converging on a Frankfurt arena that in a few weeks will be used for a concert by the American rappers Jay-Z and Kanye West. The shareholders lined up for wurst and potato salad at buffet tables, and there was even a place where they could have souvenir photos taken.

Leaders including the German chancellor, Angela Merkel, or Jean-Claude Trichet, president of the European Central Bank until last year, sought Mr. Ackermann’s views, particularly after the financial crisis exploded in 2008. He was also an advocate for banking interests as president of the Institute of International Finance, an industry group whose membership also includes most large U.S. banks.

But Mr. Ackermann has drawn his share of controversy. His salary of 6.3 million euros in 2011 was not outlandish compared with those of the leaders of other big banks. But in some years he has been the highest-paid chief executive in Germany, becoming to some a symbol of corporate greed.

Deutsche Bank has also come under fire for what some critics regard as an unusually high number of lawsuits by aggrieved customers or official investigations. In early May, Deutsche Bank agreed to pay the U.S. government more than $200 million to settle accusations that it knowingly misled the Department of Housing and Urban Development about the quality of mortgages that later defaulted.

“We are concerned about the number of litigations and investigations which have mounted in the last few years,” said Hans-Christoph Hirt, global head of corporate engagement at Hermes Equity Ownership Services, a unit of Hermes Fund Managers that represents several large Deutsche Bank shareholders.

“This doesn’t look good and raises concerns about how new business opportunities and business activities are assessed before they are entered into,” Mr. Hirt said.

Mr. Ackermann acknowledged that the bank had made mistakes. “No business can be worth risking the bank’s reputation and credibility,” he said. “From today’s perspective, and I underline today’s perspective, we did not always completely live up to this principle during the years of excessive exuberance prior to the financial crisis.”

Mr. Hirt also criticized what he said was weak oversight by the bank’s supervisory board, which he blamed for an unseemly public battle over who would succeed Mr. Ackermann.

Clemens Börsig, who ceded his seat as chairman of the supervisory board Thursday, resigned amid criticism of the way he handled the selection of Mr. Ackermann’s successor. And he had warred openly with Mr. Ackermann.

But the two men shook hands warmly on stage at the annual meeting. ‘‘Contrary to press reports, we always worked together in a collegial spirit in the interests of the bank,’’ Mr. Ackermann said.

The relationship between Mr. Ackermann and Mr. Jain, his onetime protégé, also seemed to cool in recent years. During his speech to shareholders, Mr. Ackermann lavished praise on two top executives, Hugo Bänziger and Hermann-Josef Lamberti, who are leaving to make way for managers close to Mr. Jain.

Mr. Börsiis also leaving as chairman of the supervisory board and will be replaced by Paul Achleitner, former head of Goldman Sachs in Germany and until this week chief financial officer of Allianz, a Munich insurance company.

While there is a tradition among Deutsche Bank chief executives of taking over the supervisory board after they retire, some investors objected to Mr. Ackermann’s assuming that role, fearing he might impede his successor. So Mr. Ackermann chose not to seek the post, rather than face possible opposition in the annual meeting.

Mr. Achleitner, who at 55 is young to head the supervisory board of a large German company, is expected to be an activist chairman. That could create friction with Mr. Jain. But Mr. Hirt of Hermes said he welcomed Mr. Achleitner’s influence.

The supervisory board, Mr. Hirt said, should “think a little about the culture and think about the reasons for all the litigation and investigations. That’s really an area we would like them to focus on.”

Article source: http://dealbook.nytimes.com/2012/05/31/ackermann-hands-over-reins-of-deutsche-bank/?partner=rss&emc=rss

DealBook: Buffett’s Goldman Deal Is Topic in Gupta Insider Case

Byron Trott, a former Goldman Sachs banker, was asked about Warren E. Buffett's $5 billion investment in the bank.Louis Lanzano/Bloomberg NewsByron D. Trott, a former Goldman Sachs banker, was asked about Warren E. Buffett’s $5 billion investment in the bank.

Byron D. Trott has spent a career carefully cultivating the image of the discreet investment banker, a behind-the-scenes consigliere to some of America’s wealthiest businessmen, including his star client, Warren E. Buffett. At Goldman Sachs, Mr. Trott was so vigilant about guarding clients’ confidences that he was known to fire underlings who discussed private matters in the bank’s elevators.

But on Wednesday, Mr. Trott was forced to speak publicly about one of his biggest and most important deals — Mr. Buffett’s $5 billion investment in Goldman during the heart of the financial crisis in September 2008.

Mr. Trott took the witness stand for about an hour on Wednesday at the insider trading trial of Rajat K. Gupta, the former Goldman director charged with leaking boardroom secrets to his friend and business associate Raj Rajaratnam. Among the accusations is that Mr. Gupta gave Mr. Rajaratnam advance word of Mr. Buffett’s Goldman investment.

The government says that Mr. Rajaratnam traded on Mr. Gupta’s tips, reaping big profits for his Galleon Group hedge fund. Convicted by a jury of insider trading last year, Mr. Rajaratnam is serving an 11-year prison sentence. Mr. Gupta’s trial, in Federal District Court in Manhattan before Judge Jed S. Rakoff, began on Monday and is expected to last about three weeks.

Mr. Trott’s testimony focused on the days surrounding Mr. Buffett’s investment in Goldman, a tumultuous time in the markets. But first, a prosecutor asked Mr. Trott to tell the jury who Mr. Buffett was.

“He’s the most respected businessman and investor in America,” Mr. Trott said.

Mr. Gupta’s lawyer objected to such a superlative.

“I didn’t think that was in dispute,” said Judge Rakoff, breaking into a smile.

Judge Rakoff posed his own question to Mr. Trott for the jury’s sake, exercising more restraint in his description: “Is he a very large and well-known investor?”

“Yes,” Mr. Trott acknowledged.

Mr. Trott, 53, has established a niche advising many of the country’s richest families, including the Wrigleys and the Pritzkers. As a Goldman banker, he began advising Mr. Buffett in 2002 and has advised his company, Berkshire Hathaway, on numerous deals.

“Byron is the rare investment banker who puts himself in his client’s shoes,” wrote Mr. Buffett in his 2008 investor letter. Five years before that, Mr. Buffett wrote that Mr. Trott “understands Berkshire far better than any investment banker with whom we have talked and — it hurts me to say this — earns his fee.”

The silver-haired Mr. Trott, at ease on the witness stand and at times flashing a broad smile, gave the jury an account of how Mr. Buffett’s investment materialized. He described the dark days of September 2008, when Lehman Brothers, which Mr. Trott described as a “second-tier investment bank,” had filed for bankruptcy and there were questions about whether other banks like Goldman could survive.

His purpose in testifying, according to people briefed on the prosecutors’ strategy, was to explain how quickly the Buffett deal came together and how few people knew about it — other than Mr. Gupta — before it was announced.

“This was about as top secret as you can get,” said Mr. Trott, who left Goldman in 2009 to start his own investment firm, BDT Capital Partners.

Mr. Trott, who lives in Chicago, testified that he was at a client meeting near O’Hare Airport on Sept. 22, 2008, when he received a call on his cellphone from Goldman’s co-president, Jon Winkelried. Mr. Winkelried told him that Goldman was planning to raise $10 billion in a common stock offering to help the bank address its problems and calm the markets.

Upon hearing the news, Mr. Trott said that he pitched Mr. Winkelried on having Mr. Buffett act as a “cornerstone investor” on the transaction. He said he would fly to New York immediately so he could discuss the idea with the rest of Goldman’s top officers.

The next morning, on the 30th floor of Goldman’s former headquarters at 85 Broad Street in Lower Manhattan, Mr. Trott outlined a deal that he thought Mr. Buffett would agree to and would also make sense for the bank.

“It was hugely credentializing,” he said. “It was like getting the Good Housekeeping Seal of Approval.”

Later that morning, Mr. Trott said, he had a conversation with Mr. Buffett. Earlier in the year he had floated the idea of investing in Goldman to Mr. Buffett, who rejected the proposal. This time around, Mr. Trott said, the terms would have to be sweeter.

“I have a different proposal for you,” Mr. Trott said, according to his testimony.

Mr. Trott offered Mr. Buffett a “preferred with warrants,” a complex security that gave Mr. Buffett 10 percent annual interest on a $5 billion investment plus the option to buy additional Goldman stock at a set price.

“I know Warren very well,” testified Mr. Trott. “We had done numerous deals together and I knew the structure that he would want.”

After Mr. Buffett accepted the terms, Mr. Trott testified, he took the deal back to the bank’s senior executives. Around lunchtime, the executives agreed to take the deal to the board for a vote. But before they could do that, they needed to inform Mr. Buffett that the deal had been officially agreed upon. But Mr. Buffett was unavailable until after 2:30 p.m. A prosecutor asked Mr. Trott why.

“He promised his grandkids that he would take them to Dairy Queen” — the ice cream and fast-food chain owned by Mr. Buffett — “and he did not want to be interrupted,” said Mr. Trott, eliciting laughter from the jury.

Mr. Trott said that after firming things up with Mr. Buffett, Goldman held a board meeting by telephone at 3:15 p.m. The board approved the investment. Minutes later, the government says, Mr. Gupta called Mr. Rajaratnam and told him to buy Goldman stock. Prosecutors have said Mr. Rajaratnam reaped nearly $1 million by trading before the announcement.

Outside the jury on Wednesday, the prosecution and defense focused on another Goldman employee — David Loeb, a salesman who worked closely with Galleon.

The prosecutor, Reed Brodsky, said that Mr. Loeb had passed illicit tips about Intel, Apple and Hewlett-Packard to Mr. Rajaratnam. A lawyer for Mr. Gupta said that Mr. Loeb can be heard on a secretly recorded telephone call giving confidential information about those companies.

The defense, which complained to Judge Rakoff that prosecutors had not disclosed evidence about Mr. Loeb, is using the government’s investigation of three other Goldman executives to suggest to the jury that there were other sources of inside information within the bank.

Prosecutors have countered that these executives, including Mr. Loeb, had no access to confidential information about Goldman. A Goldman executive declined to comment.


This post has been revised to reflect the following correction:

Correction: May 24, 2012

An earlier version of this article misspelled the surname of Jon Winkelried as Winkelreid.

Article source: http://dealbook.nytimes.com/2012/05/23/buffetts-goldman-deal-is-topic-in-an-insider-case/?partner=rss&emc=rss

DealBook: Goldman Makes Money for the Romneys

Mitt Romney's campaign stopped in Conway, S.C., earlier this month.David Goldman/Associated PressMitt Romney’s campaign stopped in Conway, S.C., earlier this month.

After a long, controversial wait, Mitt Romney released details of his federal tax returns on Tuesday, inciting a flurry of wide-eyed analysis from those curious to see exactly how Mr. Romney’s personal finances stack up.

DealBook perked up when it saw that many of the assets described in Mr. Romney’s returns were held in blind trusts managed by Goldman Sachs.

As beneficiaries of a blind trust, Mr. Romney and his wife, Ann, would not have picked the individual stocks contained in their trusts’ portfolios. But by examining the trusts’ 2010 returns, a picture emerges of how the Romneys have benefited from – and been hurt by – Goldman’s investment decisions.

In that year, two Romney trusts – the Ann and Mitt Romney 1995 Family Trust and the W. Mitt Romney Blind Trust – made nearly $2.8 million in combined capital gains from their Goldman investments, according to the trusts’ filings. Almost all of those gains, nearly $2.7 million, were long-term gains made by selling securities that the trusts had owned for more than a year.

The trusts sold a combined 7,000 shares of Goldman’s own stock, which was purchased in May 1999 when the firm went public. The shares, offered at the time of the I.P.O. to Goldman’s most important clients, including Mr. Romney, were issued at $53 a share. But they had zoomed up to $161.45 apiece by the time the trusts sold them in December 2010.

Aside from the Goldman I.P.O. shares, the Romneys’ trusts sold several financial stocks in 2010. A January 2010 sale of Bank of America and JPMorgan Chase stock produced a small loss and a small gain, respectively. More common were sales of retail companies like Target, Unilever and Apple.

Mr. Romney’s trusts made money on Research in Motion. His brokers bought shares in the BlackBerry maker in 2006 and 2008, long before the company’s stock began its precipitous slide. Before the worst hit last year, the trusts sold 1,027 shares in RIM, notching gains of more than $30,000.

Other investments didn’t work out so well. The trusts sold shares of Comcast class A stock in January 2010, near the stock’s multi-year low, for thousands of dollars in losses.

But the majority of the trusts’ sales in 2010 posted a profit. (This is not surprising – wealth managers often hold on to underperforming stocks in the hopes that they will recover in value.)

The Romneys’ trusts even owned shares of LVMH Moët Hennessy Louis Vuitton, which controls beverage brands like Dom Pérignon and Veuve Clicquot as well as fashion brands like Marc Jacobs and Fendi.

As a Mormon, Mr. Romney is prohibited from consuming the alcohol in Dom Pérignon. Luckily, his trusts were allowed to own its stock. A January 2010 sale of LVMH shares from the family trust produced a profit of around $20,000.

Article source: http://feeds.nytimes.com/click.phdo?i=df023b12d039e679373f90ff7faec4e6

Common Sense: A New Era of Lower Pay on Wall Street

This week, the venerable investment bank Morgan Stanley stunned a generation of Wall Street bankers and traders by announcing that it was capping cash bonuses for 2011 at $125,000. Its top executives, including the chief executive, James P. Gorman, and his management team, will receive zero cash. And the Republican presidential front-runner, Mitt Romney, reignited a national debate over taxing the rich and Wall Street pay by revealing that his tax rate was in the 15 percent range, joining the billionaire investor Warren E. Buffett among the ranks of the favored few who pay lower rates than people earning just a small fraction of their millions. Mr. Romney hasn’t revealed his tax returns or total income, but disclosure forms indicate he received $9.6 million in 2010 and part of 2011 and had a net worth in excess of $250 million, much of it derived from his days as head of the private equity firm Bain Capital.

For most people, $125,000 is a lot of money, and for people on Wall Street, the cash bonus comes on top of base pay that has increased in recent years. The average base pay for managing directors at Morgan Stanley has risen to $400,000 and to $600,000 at Goldman Sachs. Employees also earn large parts of their bonuses in deferred cash and stock.

But $125,000 is a pittance by Wall Street standards. Citigroup paid Andrew Hall, a star commodities trader, a bonus of $98 million in 2008, the year of the financial crisis. As recently as 2010, many traders and investment bankers were arguing over whether their yearly bonuses should be eight figures rather than seven. Compensation at the 25 largest firms hit a record $135 billion that year, according to an analysis by The Wall Street Journal.

This week, Wall Street veterans were marveling that after paying federal and New York’s high state and city income taxes, Morgan Stanley employees who get the maximum cash bonus would take home just $65,000 to $75,000 on top of their base pay. “That’s an eye-opener,” said Michael Driscoll, a former top trader at Bear Stearns and Geosphere Capital, a hedge fund, who is now a visiting professor at Adelphi University. Many people on Wall Street, he said, have “multiple homes at high cost and with big mortgages, private school payments, college tuitions, car leases and payments. They were out over their skis with leverage and assumed the good days would last forever.”

Last year, Morgan Stanley increased the deferred portion of cash compensation to 60 percent from 40 percent, a move that was greeted with howls from employees who said they didn’t have enough advance notice and needed the money to meet mortgage payments, school costs and other fixed expenses. “The cost of living is so high in the New York area that we found it was a genuine hardship,” a Morgan Stanley spokeswoman told me this week. This year, cash bonuses for employees making $250,000 or less will be paid in full, with none of it deferred, although the bonuses are being capped at $125,000.

Even for those making seven figures or more, the cuts “are a blow,” Mr. Driscoll said. “The effect is psychological. To a large extent, Wall Street keeps score by what you’re paid. If you’re making $750,000 or $1 million, you’re doing O.K. by any reasonable standard. A lot of people make that kind of money. But it affects people’s psyches. It’s a hard thing for the other 99 percent to grasp, but for better or worse, that’s how they measure their value and self-worth: what their paycheck is. I’m not trying to defend that, but that’s how it is. Now they’re being paid less and less. They’re being pilloried in the press and by the 99 percent. Even Republican candidates are attacking you. People in the industry are being treated like pariahs.”

An investment banker I know lamented, “Contrary to popular opinion, bankers are people, enduring the human condition like other people. The industry is experiencing massive retrenchment, waves of redundancies, endless public criticism and repeated cutbacks in compensation levels.”

Overall compensation on Wall Street this year is expected to drop at least 30 percent, reflecting the dismal financial results reported this week by the industry standard-bearers Goldman Sachs, JPMorgan Chase, Bank of America and Morgan Stanley. The compensation ratios are hard to evaluate because this year’s payouts include the deferred portions of previous years’ awards, and include only the current components of this year’s.

Still, a trend seems clear. At Goldman Sachs, compensation was just over 42 percent of revenue, and at JPMorgan Chase it was 34 percent for the investment bank — low by historical standards. Even with the new caps on cash bonuses, Morgan Stanley’s compensation was something of an outlier, representing 51 percent of revenue, which reflects high costs at its global wealth management division, where brokers are paid on commission. Still, Morgan Stanley’s ratio was sharply lower than 2009’s 62 percent, which Mr. Gorman at the time vowed “no one will ever see again.”

Article source: http://feeds.nytimes.com/click.phdo?i=90eb706ea5f037ee57fe556451a0c1b1

DealBook: New Normal on Wall Street: Smaller and Restrained

Illustration by The New York Times

With firms like Goldman Sachs and Morgan Stanley reporting weak results for last year, Wall Street is having to confront doubts about itself.

Is this a temporary slump? Or will the moneymakers never get to go back to their high-rolling ways? Many on Wall Street had hoped 2011 would be a year when the investment banks showed that they could still make solid profits in the more sober financial environment that has followed the 2008 crisis.

Instead, Goldman Sachs’s earnings fell 67 percent last year; Bank of America’s investment banking operation, which includes Merrill Lynch, suffered a 53 percent decline in net income; and Morgan Stanley’s earnings were down by 42 percent.

Some of the forces that weighed on earnings last year — like Europe’s government debt crisis and a sluggish United States economy — could go away. Yet Wall Street still faces permanent pressures on profitability, particularly stricter regulations aimed at making the financial system safer. For instance, Wall Street firms cannot borrow such large amounts of money and make bets with it. With much less of this kind of leverage, the game is changed — perhaps forever.

“No matter how you cut it, the Goldman Sachs of tomorrow is not going to be the Goldman Sachs of 1999, when it did its I.P.O., or the Goldman Sachs of 2006, when it was at the high point of the cycle,” said Brad Hintz, a senior analyst with Sanford C. Bernstein Company.

Asked about downsizing at Goldman Sachs, David A. Viniar, chief financial officer, said that was “a very difficult” question.Andrew Harrer/Bloomberg NewsAsked about downsizing at Goldman Sachs, David A. Viniar, chief financial officer, said that was “a very difficult” question.

As profits fall way short of internal targets, the executives who run Wall Street may have to cut back hard, to stop profits from falling even further. When asked by an analyst on Wednesday whether Goldman Sachs was thinking of downsizing to deal with the difficult business conditions, David A. Viniar, the bank’s chief financial officer, said, “That is one of the most critical questions and a very difficult one to answer.”

Wall Street employees are feeling the squeeze this bonus season, which is going on right now. In 2011, Goldman set aside $12.22 billion to pay compensation and benefits for its 33,300 employees. That comes out to around $367,000 per person. In 2006, the firm paid out $16.46 billion in compensation and benefits, or roughly $621,000 per employee. At Morgan Stanley, which lost money in the fourth quarter, cash bonuses were capped at $125,000 per person.

The retrenchment has hurt morale among lower-tier workers. Young bankers and traders fresh out of Ivy League universities can no longer count on earning more than their peers in other prestigious industries, such as management consulting and law. Rounds of layoffs, which used to be aimed mainly at senior and midlevel employees, have cut through the junior ranks this year at firms like Credit Suisse, and bonuses are down for nearly everyone.

At Goldman Sachs, some young analysts — a group that could earn year-end cash bonuses of up to $80,000 in better years — were given as little as $20,000 this year, according to one person with knowledge of this year’s numbers.

On Wall Street, much depends on a financial performance metric, return on equity, which effectively measures the profits a bank was able to generate on its capital. If a bank made $1 billion in profits on $10 billion of equity, its return on equity would be 10 percent.

In the middle of last year, Goldman Sachs’s target for return on equity was 20 percent, though the firm has since retreated from setting a target, citing the uncertainty in its business. Its actual return last year was only 3.7 percent, compared with 33 percent in 2006. Morgan Stanley managed 4 percent in 2011, compared with 23.5 percent in 2006.

Analysts estimate that Goldman effectively pays 10 to 15 percent for its capital. As a result, in 2011, the firm did not even cover the cost of its capital.

Ruth Porat, Morgan Stanley's chief financial officer, said return on equity would rise, but would not go back to its past heights.Jim Lo Scalzo/European Pressphoto AgencyRuth Porat, Morgan Stanley’s chief financial officer, said return on equity would rise, but would not go back to its past heights.

Morgan Stanley encapsulates the quandary facing a big Wall Street firm: Attempts to diversify may not help profitability. Over the last few years, rather than rebuild trading desks that were taking a lot of risks, Morgan Stanley has shifted its focus to wealth management, a steadier business, but that could mute returns.

“Do I expect to see a return to a return on equity in the mid-20s like the old days? No, but is there a path to the midteens over time? Yes,” said Ruth Porat, Morgan Stanley’s chief financial officer, in an interview on Thursday.

Wall Street firms operate under a tougher regulatory environment than existed in 2008. One of regulators’ first responses to the crisis was to make banks raise extra capital, to increase their buffer against losses, and they were told to use less short-term borrowed money to finance their businesses, which made them less vulnerable to runs. At the end of its 2007 fiscal year, Morgan Stanley’s $1.05 trillion of assets was supported by only $30 billion of equity. At the end of 2011, its equity was up to $60.5 billion and its assets were down to around $750 billion.

These adjustments effectively make it impossible to get back to the returns on equity achieved in the glory days. With double the equity, Morgan Stanley would now need to double profits, from a smaller pool of assets, to get back to its mid-2000s returns.

While some of 2011’s challenges may ease this year, Wall Street has to grapple with new regulations in 2012 that could whack profits.

The new rules take aim at businesses in which Wall Street has traditionally made its fattest profit margins, like bond trading and trading in financial instruments called derivatives.

The Volcker Rule, which is aimed at stopping banks from making financial bets for their own accounts, could permanently eat away at bond trading revenue. Efforts to strengthen the derivatives market — such as making sure that trades are properly backed with collateral — could deplete the profitability of this business.

Mr. Hintz estimates that a Wall Street bank currently makes a 35 percent profit margin on its derivatives businesses, but he thinks the new rules could shrink that to 20 percent.

Despite the pessimistic outlook, the fittest Wall Street firms will no doubt make a Darwinian bid to profit as weaker firms falter.

United States banks could pick up new business in Europe, for instance. In November, the Swiss banks UBS and Credit Suisse announced big cuts in their securities businesses, and the Italian bank UniCredit recently said it was closing its equities business in Europe. And some United States banks may decide to retreat from certain activities, allowing others to pick up the business.

The first part of this year may see a rebound in business, as investors venture back into the market. This occurred in the first part of 2009, once fears lessened.

“You could see a couple of blockbuster quarters as pent-up demand comes back,” said Roger Freeman, a senior analyst with Barclays Capital. But he says revenue may taper off if new regulations bite.

Still, Jamie Dimon, the chief executive of JPMorgan Chase, struck a more optimistic note in talking to reporters in a conference call last Friday. Noting that there were always swings in the investment banking business, he said, “I think when things come back, these numbers could boom again.”

Bank of America’s chief financial officer, Bruce R. Thompson, said he thought the continued downdraft in trading revenue was temporary, rather than representing a long-term shift in the Wall Street landscape.

“There’s always this question of what’s normal versus what’s not,” he said, adding that the first few weeks of 2012 had seen a pickup in trading activity.

If his optimism proves wrong, and revenues remain depressed, though, more cuts loom. “Operating at a loss,” Mr. Thompson said, “isn’t something we will continue to want to do.”

Kevin Roose and Nelson D. Schwartz contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=d3f9dc3b68c8038344df2f7a573cf8e7

DealBook Column: A Paradox of Smaller Wall Street Paychecks

Robert F. Greenhill, head of Greenhill  Company. The company has pledged to reduce its compensation-to-revenue ratio.Joe Tabacca for The New York TimesRobert F. Greenhill, head of Greenhill Company. The company has pledged to reduce its compensation-to-revenue ratio.

Is Wall Street cutting bonuses enough?

That is a question worth considering amid chatter that investment banking bonuses are expected to be the lowest they have been since 2008 amid lackluster profits.

Few people outside the industry are shedding tears. The average Goldman Sachs employee was paid $292,397 in the first nine months of 2011, down about 21 percent from the same period in 2010, when the average payout was $370,056. That is of course, an average, and includes the salaries of those on the lower scales, like support staff.

Each Goldman partner is still expected to take home at least $3 million; in previous years, payouts twice that amount were considered common for the top echelon.

While the total compensation reported by big banks in their 2011 results may be lower, keep an eye on another, and perhaps more important, yardstick that is likely to increase at some firms: the compensation-to-revenue ratio.

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At Goldman Sachs, for example, compensation as a percent of firm revenue is expected to rise to 44 percent in 2011, from 39.3 percent in 2010, according to Mike Mayo, a bank analyst with the brokerage firm CLSA. The firm’s revenue is expected to drop about 22 percent and its profit is expected to fall 7.2 percent. Its shares have fallen 45 percent in the last year.

At firms like Morgan Stanley, where share prices tumbled 43 percent in the last year and pretax charges worth $1.8 billion are expected to be booked for the fourth quarter, the compensation-to-revenue ratio is also expected to jump higher. In its 2010 fiscal year, its investment bank paid out 50.7 percent of revenue in compensation.

It is an odd Wall Street paradox: in down years, a higher percentage of a firm’s revenue is paid to employees.

“In the tug of war between employees and shareholders, the employees are winning,” Mr. Mayo said. He pointed out that it was still often employees in the upper ranks, including those in the C.E.O. suites, who took home the largest share of the compensation. “Wall Street has its own 99 percent and 1 percent,” he said. “The 1 percent continues to win against the 99 percent.”

He continued: “Is the incentive pay an incentive, or is it an entitlement?”

For the last several years, while recovering from the financial crisis, the biggest investment banks have tried to reduce the percentage of revenue they have paid employees, bowing to investors and regulators. Until just recently at Goldman Sachs, for example, about half of revenue was used to pay employees.

“You used to be able to set your watch by that 50 percent,” said Glenn Schorr, a banking analyst with Nomura Securities. Now, however, the compensation ratio is expected to rebound somewhat. “It’s a tough balancing act, especially as revenues are down.”

Bank executives have long said that they must pay a larger slice of a shrinking pie in bad times to retain their top people. In a bad environment for the entire industry, it remains unclear exactly where all these people would go.

Firms say that their greatest assets are not factories, equipment or intellectual property but the people who ride their elevators everyday. And in fairness, when revenue jumps at Wall Street firms, compensation has not always kept up.

The compensation-to-revenue ratio may be particularly difficult to calculate in 2011 because of an obscure accounting maneuver called debt valuation adjustment. Under it, firms have posted revenue gains in 2011 based on the deterioration of their credit quality. (The explanation for this is so convoluted that it’s best saved for another column on another day.)

Still, investors will keep their eyes peeled for that number. Nelson Peltz, the activist investor who runs Trian Partners, wrote a scathing letter to State Street’s board late last year, questioning the payout as measured against earnings per share.

He contended that State Street in 2010 “paid more in compensation than in any year other than 2008 but generated the lowest E.P.S. in its recent history. Shareholders have subsidized these increases in employee compensation.”

One firm that has been under the spotlight for its compensation ratio is Greenhill Company, a boutique advisory firm whose stock has declined 52 percent in the last year. It could be considered a case study in out-of-control compensation costs in bad times.

In the first quarter of 2011, Greenhill spent 75 percent of its revenue on compensation and benefits. In 2010, the firm spent 57 percent of its revenue on compensation, in part because the firm aggressively recruited talent after the financial crisis.

Greenhill has since pledged to reduce its compensation-to-revenue ratio. But the firm is likely to struggle to bring the number down to any semblance of a reasonable level anytime soon. The firm was expected to book about $16 million to $18 million in fees from its advisory assignment for ATT’s planned acquisition of T-Mobile USA, a merger that has since collapsed.

Lazard, under Bruce Wasserstein, paid as much as 74 percent of its revenue in compensation in 2004, the year before it went public.

At the time, the firm pledged to bring its compensation-to-revenue percentage down to 57.5 percent, but it has taken years for it to bring that number in line with its peers. For example, the firm paid out about 80 percent of revenue in 2009, in part because of a balloon payment it made to the Wasserstein estate after Bruce Wasserstein died.

Compensation as a percentage of revenue most likely won’t reach those levels again anytime soon. But in the long march toward lower payouts on Wall Street, this year may represent a detour.

Article source: http://feeds.nytimes.com/click.phdo?i=cb16cf208d088b340d3768a99be58117