September 22, 2023

DealBook: Britain Prepares to Sell Its Stake in Lloyds and Weighs a Breakup of R.B.S.

The chancellor of the Exchequer, George Osborne, at a Lloyds branch in London on Wednesday.Luke MacGregor/ReutersThe chancellor of the Exchequer, George Osborne, at a Lloyds branch in London on Wednesday.

LONDON — The British government is preparing to sell part of its holding in the Lloyds Banking Group and is weighing a breakup of the Royal Bank of Scotland, the chancellor of the Exchequer said on Wednesday.

The comments were the clearest sign yet of the government’s approach to the two banks, which were rescued during the financial crisis. Nearly five years later — and with a general election on the horizon — questions have been raised about when the government might be able to whittle down the taxpayers’ 39 percent stake in Lloyds and 82 percent stake in the Royal Bank of Scotland.

At the annual Mansion House dinner here attended by senior financial executives, the chancellor, George Osborne, said that the government was “actively considering options for share sales in Lloyds.”

While giving no timetable, he said that a sale of the first block of shares was likely to go to institutional investors, noting that Lloyds was in a “good position,” with investor appetite increasing.

But he said that any decision on the Royal Bank of Scotland — whose chief executive, Stephen Hester, surprised investors by announcing his departure last week — was still “some way off.”

One possibility was to split the bank’s troubled assets into a “bad bank.” In hindsight, Mr. Osborne said, “splitting R.B.S. into a good bank and a bad bank was probably what should have happened in 2008.”

Now, he said, “we will urgently investigate the case for taking the bad assets — those mistakes of the past — out of R.B.S.”

The Treasury, Mr. Osborne said, would look in particular at putting the bank’s British commercial real estate holdings and its Ulster Bank subsidiary into the “bad bank.”

But he added that “we’re not prepared to put more taxpayer capital into R.B.S. as part of this process.” He said that a decision on the bank would be made in the fall.

Some lawmakers and analysts had urged Mr. Osborne to use the Mansion House speech to dispel some of the uncertainty surrounding the two banks and present a clear timetable for when the government would start selling the stakes. Pressure on the government to do so is building ahead of the next general election, expected in 2015.

But for Mr. Osborne, the stake sales are just part of a longer list of banking issues he has to resolve before that election. He is expected to back proposals in a report by a parliamentary banking committee that was released earlier in the day to introduce criminal penalties against banking executives.

The 600-page report, which was commissioned by the Treasury, may have made for uncomfortable reading for many in the room on Wednesday evening, because one of the recommendations was to threaten banking executives with prison should they behave recklessly in their jobs.

Prime Minister David Cameron told Parliament on Wednesday that he was in favor of “penalizing, including criminal penalties against bankers who behave irresponsibly.”

Mervyn A. King, who is retiring as governor of the Bank of England at the end of this month, also spoke at Wednesday’s dinner. One of the jobs he is to pass on to his successor, Mark J. Carney, the former governor of the Canadian central bank, is to improve the stability of British banks.

“All our major banks remain highly leveraged,” Mr. King said. “And of course the two biggest lenders to the domestic economy remain largely in state ownership. It is difficult to imagine a banking sector like that making a real contribution to any economic recovery.”

Mr. King reiterated that there were clear signs of a modest economic recovery but that “growth is not yet strong enough.” Support for the recovery was still needed, he said, adding that “it will inevitably be a bumpy ride.”

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Economix Blog: For Greece, a Dubious Distinction

Is Greece an “emerging” market?

“Submerging” might be more like it. But on Tuesday, MSCI, proprietors of stock indexes around the world, officially classified Greece as “emerging.”



Notions on high and low finance.

Notwithstanding what it sounds like, MSCI was not offering a compliment to the poor Greeks.

Instead, the name reflects a trend to ever more positive names for what might be called “other than developed” economies.

Once they were “undeveloped,” which really sounded nasty. Then they became “developing,” which implied progress was being made whether or not it was. Then they became “emerging.” Each term sounded better than the last.

MSCI has another group, under emerging, known as “frontier.”

Which group a country is in can matter because institutional investors compare their performance to the various MSCI indexes. There is no frontier index, which could discourage investment in those countries. Lately, the emerging index has been underperforming the developed index.

On Tuesday, MSCI decided that Greece no longer deserves to be classified as “developed.” It was transferred to “emerging.”

Of course, MSCI does not really mean Greece is emerging. Going back to the old label of undeveloped would be closer to what it is trying to say, but it would not sound as good. “Undeveloping” might be appropriate, but we don’t have negative titles anymore.

The other changes made Tuesday included the demotion of Morocco from “emerging” to “frontier,” and the promotions of Qatar and the United Arab Emirates to “emerging.”

MSCI says it is thinking about dropping Egypt down to “frontier” from “emerging,” and might raise South Korea and Taiwan to “developed” from “emerging,” but won’t act until next year at the earliest. China, which remains “emerging,” might not like to see Taiwan move up.

It would be nice if we had terminology that sounded neutral. What we now have tends to make every country sound good. Call it the Lake Wobegon effect.

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Authorities Raid Olympus Offices in Tokyo

TOKYO — More than two months after Olympus’s former president blew the whistle on a huge accounting fraud, Japanese authorities raided the company’s headquarters here Wednesday, emerging several hours later with boxes of documents.

TV cameras crews, tipped off in advance, were in position outside to watch dozens of investigators in dark business suits pour into the building. But it is likely to take more than symbolic action to assure foreign investors that the company will address a scandal that has caused the company’s stock market value to drop by half since early October.

Olympus is said to be looking to raise capital from a domestic investor, a move that would dilute the influence of overseas shareholders, while making fundamental changes less likely.

In fact, some foreign shareholders say the reaction to the scandal is shaping up to confirm overseas investors’ worst fears about Japan Inc.: that entrenched executives will thwart any attempts at reform, with their business-as-usual attitudes given the tacit endorsement of friendly bankers and staid Japanese institutional investors.

The eventual Olympus salvage plan could even be a Japan-wide effort. This week, the Nikkei business daily reported that Olympus might issue about 100 billion yen (about $1.3 billion) in new preferred shares, and that Japanese technology companies like Fujifilm or Sony might be possible buyers. Those two companies, though, denied that any such investment was in the works.

Foreign institutional investors are on edge. “The incumbent board should not be allowed to sell off Olympus’s independence on the cheap to protect its own interests,” an American fund manager, Southeastern Asset Management, said in a statement this week. “Allowing it to do so would deal a severe blow to the reputation of Japan’s capital markets and corporate governance,” said Southeastern, which holds about 5 percent of Olympus shares.

Top Olympus executives acknowledged last month that the company had conducted a decades-long effort to cover up $1.7 billion in investment losses in a global scheme that sparked public investigations on three continents. Last week, Olympus acknowledged some of the losses in five years’ worth of revised statements, which showed shareholders’ equity plunging to just 42.9 billion yen and casting a shadow over the company’s long-term viability.

Three executives implicated in the scheme have left the company. But the rest of the Olympus board has been scrambling to retain control of the company. Backing them are the country’s biggest banks, which hold great sway over top Japanese corporations, serving as major lenders and as major shareholders.

The Sumitomo Mitsui Financial Group is the biggest lender to Olympus with 227.5 billion yen in outstanding loans and bonds, according to Reuters, and also holds a 3.4 percent equity stake in the company. Olympus’s other main lender-cum-shareholder, Mitsubishi UFJ Financial Group, owns a 7.6 percent stake and has also stood by the company’s management.

Together, they are likely to bring in a new domestic investor to inject more capital into the company — a bid to diminish the role of foreign investors in shaping the company’s future, according to several people briefed on the plans. That has caused dismay among foreign shareholders, who say the current management is tainted and should leave, for the sake of robust corporate governance.

It is unclear how many Olympus shares are controlled by overseas investors, but analysts say the proportion could be significant.

Officials at Sumitomo Mitsui and Mitsubishi UJF declined to comment Wednesday.

Any moves by Olympus to inject new equity into the company might also thwart efforts by the whistle-blowing former chief executive, Michael C. Woodford, to return to the company’s helm with a new slate of directors. Mr. Woodford, a British national, was fired in mid-October after he questioned the Olympus board over a series of unusually large acquisition payments that were later found to be part of the company’s cover-up.

Mr. Woodford has said he had enlisted “impressive” members of the Japanese business community to join his prospective board and had outlined his own plans to raise capital, either through private equity or a rights issue.

But working with private equity firms, especially from overseas, may not go down well with Japanese investors, who often see them as vulture funds looking to feast on weak Japanese companies and sell off their assets piecemeal.

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DealBook: Despite Losses, Investors Stick With Paulson

One of John Paulson’s funds returned 600 percent in a bet against subprime mortgages in 2007.Rick Maiman/Bloomberg NewsOne of John Paulson’s funds returned 600 percent in a bet against subprime mortgages in 2007.

John A. Paulson, the billionaire hedge fund manager who made his fortune betting against subprime mortgages, has been fodder for Wall Street gossip as rivals wondered whether investors would bolt after suffering staggering losses this year.

At least for now, pensions, endowments and wealthy individuals are standing by their money manager. Redemption requests, which were due by Oct. 31, totaled less than 8 percent of assets, or roughly $2.4 billion, according to a letter that Mr. Paulson sent to investors on Tuesday.

It’s a rare feat for a hedge fund. When returns sink by as much as 50 percent — as one portfolio did at Paulson Company — investors typically flee at the first opportunity.

But Mr. Paulson has built a reservoir of credibility, largely through past performance and marketing efforts.

Longtime clients are still giddy from 2007, when one credit-focused fund gained 600 percent amid the broader market downturn. Newer institutional investors that have lost millions, like public pensions in New Mexico and Missouri, figure returns will bounce back. Some are even pouring additional money into its funds in anticipation of a turnaround, money that will help offset some of the withdrawals.

“We still have a very high conviction that long-term Paulson is a very good investor,” said Jon Sundt, the chief executive of Altegris in La Jolla, Calif., an investment manager that oversees $3 billion. “We have had some investors who have been adding to their investments in Paulson.”

Still, Mr. Paulson, who is set to report positive monthly returns in a few days, is in a precarious spot. Since employees account for half of the fund’s overall assets, the recent withdrawals amount to nearly 16 percent of the outside capital. And the firm is also attracting new money mainly by offering a break on fees to existing investors, rather than by cultivating new clients.

Should returns remain in the doldrums, some big clients have indicated they will withdraw their money. The next deadline to withdraw from most funds will be next year.

Mr. Paulson’s spectacular fall has been watched as closely as his impressive rise.

The soft-spoken son of a corporate finance executive, Mr. Paulson, a former investment banker, ventured out on his own in 1994. Over the years, he produced steady gains, returning an average 16 percent a year in his oldest fund through 2006. He entered the big leagues in 2007, earnings billions of dollars betting against subprime mortgages.

Since then, investors have plowed money into his firm, encouraged by consultants like Cliffwater Associates and banks like Morgan Stanley and Bank of America Merrill Lynch. At the start of the year, Paulson Company oversaw $38 billion compared to just $4 billion in 2007.

Some industry players have complained that Mr. Paulson has shown little restraint in his fund-raising efforts, amassing assets at the expense of performance. His marketing team boasts a staff of more than two dozen professionals, higher than many large hedge funds. And he also has separate teams devoted to different types of investors, including endowments, foundations and pension funds.

The firm started to show cracks this year. Mr. Paulson lost $500 million on Sino-Forest, a Chinese timber company accused by an analyst of running a vast Ponzi scheme. His stakes in Bank of America, Citigroup and Hewlett Packard — part of a bullish call on the economy — have also withered.

He conceded to investors in October that he “made a mistake.” The Advantage Plus fund is off 47 percent through September. To climb out of that hole and start charging lucrative performance fees, the fund will need to post least 100 percent. Other funds like Advantage and Recovery will have to notch returns of at least 60 percent to get above water. The losses are so significant that some competitors joke Mr. Paulson would need to pull off a Hail Mary, with returns on par with the subprime play.

Investors who have recently met with the money manager say his usual swagger has diminished, and he appears worn. Last month, protesters at Occupy Wall Street focused on his Upper East Side townhouse. He responded in a statement, that “instead of vilifying our most successful businesses, we should be supporting them.”

Despite the reversal, investors are largely remaining patient. Some are loath to sell their positions in Mr. Paulson’s funds at their low point. Other big institutions are willing to stick by the money manager given the proven team and strong record.

“With a fund of our size, we are going to constantly have investments that do very well and those that don’t,” said M. Steve Yoakum, executive director of the $30 billion Public School Education Employee Retirement System of Missouri, which has $118 million with Mr. Paulson. “One of the biggest differences between institutions and private investors is the tendency to sell when things are bad.”

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DealBook: Pension Investor to Vote Against Murdochs on News Corp. Board

LONDON – Hermes Equity Ownership Services, which represents British Telecom and other large pension funds, said Friday it planned to vote against the re-election of Rupert Murdoch and his sons to News Corporation’s board at next week’s shareholder meeting.

Hermes EOS, indirectly owned by the BT pension scheme, Britain’s largest, said News Corporation’s directors failed to react to concerns about the composition of the board. The institutional investors also raised concerns that calls for an independent investigation into corporate governance and the culture at the media conglomerate went ignored, following the phone hacking scandal at one of its publications were also ignored.

Jennifer Walmsley, director of Hermes EOS, said she had a number of meetings with the independent directors of the board to discuss the demands but that they have “not reacted with sufficient urgency.” Hermes EOS, which represents about 0.5 percent of News Corp., plans to withhold support for Rupert Murdoch, his sons, James and Lachlan Murdoch, as well as Arthur Siskind and Andrew Knight.

“They’ve made some very minor changes to the board so far, which is rather a tinkering around the edges,” Mrs. Walmsley said. “To know why the change isn’t happening, you only have to look at the composition of the board.”

“Members are either family members, owe their position to a relationship with the family or are somehow linked to the family,” she said. “We want to see family members and affiliated directors to be replaced.”

It’s a sign of the mounting pressure on the board. On Monday, Institutional Shareholder Services, a major investor advisory firm, recommended Monday that investors vote against the vast majority of the company’s board at the shareholder meeting on Oct. 21.

Still, such efforts may not have much sway. Mr. Murdoch, who is the company’s chairman and chief executive, controls about 40 percent of the voting shares.

Concerns about the management grew after the phone-hacking scandal in Britain that has led to the arrests of several News Corporation executives earlier this year. Institutional Shareholder Services criticized ”a striking lack of stewardship and failure of independence by a board whose inability to set a strong tone-at-the-top about unethical business practices has now resulted in enormous costs — financial, legal, regulatory, reputational and opportunity – for the shareholders the board ostensibly serves.”

Additional revelations this week of a controversial circulation deal at the media company’s Wall Street Journal Europe that lead to the resignation of the newspaper’s publisher were just the latest proof that an independent investigation into all of News Corporation was needed, Mrs. Walmsley of Hermes EOS said.

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DealBook: Oaktree Capital Plans Initial Public Offering

Oaktree Capital Management is planning to list its shares on the New York Stock Exchange, the latest private investment firm to tap the public markets.

Oaktree, which manages about $82 billion, mostly in fixed-income strategies, is expected to transfer its shares from a private exchange to the Exchange, according to a person familiar with the planned move who requested anonymity because he was not authorized to discuss it.

The listing will provide Oaktree with a more active trading market in its stock, broaden the ownership of the firm to retail investors, and ultimately give its founders a means to cash out their stakes.

In May 2007, at the market peak, Oaktree’s owners sold a minority stake in the company to institutional investors in a private placement. Those shares have since traded on a private exchange run by Goldman Sachs.

Its shift to the Big Board would follow a similar maneuver by Apollo Global Management, which moved its shares from the Goldman marketplace to the Exchange in March and, at the same time, raised about $400 million in an initial public offering.

Oaktree would join the growing ranks of so-called alternative asset managers that are now publicly traded, a list that includes Apollo, Blackstone Group, Kohlberg Kravis Roberts Company and Fortress Investment Group. Five years ago, all those companies were closely held.

An Oaktree representative declined to comment. News of the firm’s plans was earlier reported by The Financial Times.

Based in Los Angeles, Oaktree was started in 1995 by Howard Marks and Bruce Karsh, who left the asset manager TCW to form their own firm. Mr. Marks has become well known for his investment memos to Oaktree clients. Those memos form the basis of “The Most Important Thing,” a new book by Mr. Marks released this month.

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DealBook: LinkedIn Raises I.P.O. Goal to More Than $405 Million

LinkedIn, which is set for an initial public offering on Thursday, could raise more than $405 million, up from an estimate of $315 million earlier this month, according to a regulatory filing on Tuesday.

As investor demand for social media companies has surged, LinkedIn, whose networking site for professionals has more than 100 million members in over 200 counties, said it planned to sell more than 7.84 million shares at $42 to $45 apiece. The underwriters have the option to sell additional 1,176,000 shares, depending on the appetite for the offering.

Its current pricing plans represent an increase of more than 30 percent from previous expectations. In early May, the company said in a regulatory filing shares at $32 to $35.

LinkedIn is the latest Internet company rushing to go public, amid strong investor interest and improved market conditions. Social networking sites are among the most sought after offerings, and LinkedIn will be one of the first major players in the United States to go public this year. At the top end of the price range, the company is now valued at about $4.3 billion, up from more than $3 billion based on earlier pricing.

Other big names in the space are expected to follow suit, with Groupon, the social shopping site, said to be considering an initial offering later this year. Facebook, by far the largest social networking site, could make its market debut in 2012.

An initial offering allows entrepreneurs and institutional investors a chance to cash out. LinkedIn’s chairman, Reid Hoffman, who is selling a small number of shares, will net an estimated $5.2 million, assuming the shares price at $45. At that price, his entire stake is worth $852.8 million. Goldman Sachs is to be the largest seller, offering the firm’s entire stake of 871,840 shares.

But it remains to be seen how well the stock will perform in the public markets. The Chinese social networking site Renren priced its offering on the New York Stock Exchange at $14.

While its shares closed at $18 on the first day of trading on May 4, the stock is currently trading at $12.60.

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Iceland’s Big Thaw

During Iceland’s boom years, which lasted from 2003 until 2008, a customer showed up at Guffi’s dealership wanting to buy a Porsche on credit, no money down. Guffi didn’t inquire about the man’s line of work; in fact, he didn’t care if the man paid back the loan — that was the bank’s problem, not his. Guffi sold the Porsche, and the customer drove it for a month or so until the first payment was due. The man had no interest in making the payment, and so Guffi, who always aimed to please, helped the man resell the vehicle for a profit. Guffi did the same thing a month later, and again a month after that; all told, Guffi sold the same car five times in six months, amazingly charging a higher price on each successive sale.

To understand how this strategy was even possible, it helps to know a little about banking in Iceland. In 2001, the Icelandic government began relinquishing control of the banking sector to allow for privatization. One consequence, says Gylfi Zoega, a professor of economics at the University of Iceland, was that “ownership of the banks went to a few wealthy businessmen.” These businessmen, Zoega says, hired local bankers, who had very limited experience in international banking, to run things; they issued bonds on the international market, where institutional investors were only too happy to buy them. After all, this wasn’t Argentina — this was Iceland, a Scandinavian country whose national banks had no history of defaulting on their loans. “It appeared to be a sound investment,” Zoega says. Money poured into the country, and the economy boomed. With the help of the banks, investors went on spending sprees, buying large stakes in foreign and domestic businesses; the prices of everything from houses to used cars soared; Iceland’s stock market spiked, rising 900 percent between 2002 and 2008; and, of course, money flowed into the hands of all sorts of Icelanders, like Guffi.

Guffi sold a lot of cars during the boom, but he didn’t save much. When I asked him what he spent his money on, he replied that he traveled widely, skied often and entertained a number of girlfriends from abroad. “Take a look at the beautiful girls from Ukraine and Switzerland,” he told me wistfully. “You’re like a kid in a toy store. Several times, I’ve brought them home so that they can have a vacation here. Then I show them Iceland.” He added, thoughtfully: “What I was doing was good for the tourism business.”

At first, it was all going splendidly for Guffi as he Rollerbladed down Laugavegur Street with voluptuous girlfriends and sold and resold the same luxury cars. Then he became tired — exhausted, really. He was working 13-hour days. “Do you know how much time it takes to bring all those papers to the bank every time someone takes out a loan for a car?” he asked me. The girlfriends also proved enervating. “I found girls on the Internet; that’s heavy work. You’re reading all these stupid letters that they send.” By the time the crash hit, in late 2008, Guffi was relieved. Nowadays he sells fewer cars; he no longer regularly earns more money each time he sells the same car, but he still gets a commission, and his lifestyle is simpler. “I do nothing stupid, and then I have no stress,” he explained happily. “I have no more Ukrainian or Swiss girlfriends. I have an Icelandic woman now.”

Jake Halpern ( is the author of “Fame Junkies.” His last article for the magazine was about freegans in Buffalo. Editor: Sheila Glaser (

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