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JPMorgan Settles Case With S.E.C.

June 22, 2011 by Leave a Comment

In a case simultaneously brought and settled, the S.E.C. asserted that JPMorgan’s investment bank had structured and marketed a security known as a synthetic collateralized debt obligation without informing buyers that a hedge fund that helped select the assets in the portfolio stood to gain, in most cases, if the investment lost value.

The S.E.C. also separately accused Edward S. Steffelin, an executive at the investment advisory firm responsible for putting together the mortgage security that was sold by JPMorgan. Both JPMorgan and Mr. Steffelin were accused of negligence but not intentional or reckless misconduct.

The agency accused Mr. Steffelin of misleading investors into believing that a unit of the firm he worked for, the GSC Capital Corporation, had selected the mortgage securities in the investment portfolio. Instead, the S.E.C. said, a hedge fund named Magnetar Capital chose the assets. A lawyer for Mr. Steffelin said he intended to fight the charges.

The settlement comes after a $550 million agreement the S.E.C. reached with Goldman Sachs last year to resolve similar claims.

Investors harmed in the JPMorgan transaction, known as Squared CDO 2007-I, will receive all of their money back, according to the S.E.C., a total of $125.87 million. JPMorgan also voluntarily paid $56.76 million to some investors in a separate transaction known as Tahoma CDO I, a similar deal in which investors lost money. The S.E.C. did not bring any action related to Tahoma.

“We believe this settlement resolves all outstanding S.E.C. inquiries into J.P. Morgan’s C.D.O. business,” Joseph Evangelisti, a JPMorgan Chase spokesman, said in a statement. In settling the case, the company neither admitted nor denied wrongdoing. JPMorgan said it sustained losses of $900 million related to Squared CDO.

The case is part of a raft of litigation stemming from the mortgage crisis. The S.E.C. is still investigating accusations of improper sales practices at Deutsche Bank, Morgan Stanley and several other companies. In addition, the New York State attorney general recently opened a number of cases involving several big banks as part of a broad sweep of Wall Street’s loan packaging business.

Private investors are looking to recoup some of their losses in the courts. There are still about $200 billion in private legal claims over mortgage securities against major banks, according to Institutional Risk Analytics.

In the JPMorgan case, the S.E.C. asserted that the bank undertook “an aggressive effort” in 2007 to unload the securities on investors outside its usual circle of customers for deals involving collateralized debt obligations.

In one e-mail on March 22, 2007, the JPMorgan employee in charge of the sales effort wrote, “We are soooo pregnant with this deal, we need a wheel-barrel to move around. … Let’s schedule the cesarian, please!”

The S.E.C. also cited numerous JPMorgan e-mails noting Magnetar’s involvement in the selection. But no executives, traders or salesmen from JPMorgan were accused of wrongdoing.

That contrasts with the case the S.E.C. brought against Goldman Sachs last year. That case also accused a trader at Goldman, Fabrice Tourre, who is fighting the claims.

Robert S. Khuzami, the S.E.C.’s director of enforcement, said in a conference call with reporters that the decision not to take action against any JPMorgan executive was based on the evidence in the case.

“We look hard at the conduct of individuals,” Mr. Khuzami said. “First and foremost, you have to show that an individual is aware that information is not being disclosed, that it is material and that they knew the facts.”

Those elements were present in the company’s conduct, he said. “What JPMorgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of the C.D.O. portfolio assets heavily influenced the C.D.O. portfolio selection,” he said.

The S.E.C. previously notified at least one other individual — Michael Llodra, the former head of structured C.D.O.’s at JPMorgan — that he might be sued for his role in marketing such securities. And Magnetar has been involved with multiple C.D.O.’s arranged by other brokerage firms. Mr. Khuzami declined to comment on whether any other such cases were still proceeding.

Eric Dash contributed reporting from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=e6cca9a95485dd607546294ebcf07897

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DealBook: Wall Street Braces for New Layoffs as Profits Wane

June 17, 2011 by Leave a Comment

Illustration by The New York Times

Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.

The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.

“It’s a tense environment right now,” said Glenn Schorr, an analyst with the investment bank Nomura.

Even Goldman Sachs, Wall Street’s most profitable firm, is retrenching. Senior executives at Goldman have concluded they need to cut 10 percent, or $1 billion, of noncompensation expenses over the next 12 months, according to a person close to the matter who was not authorized to speak on the record. The big pullback will cause Goldman employees, who have already been ordered to cut costs, to re-examine every aspect of their business.

The firm, this person said, had not set final targets for layoffs, but Goldman was “certain” to shrink headcount in the coming months. Decisions on bonuses are still months away, but they are sure to come down as well if business does not pick up.

Bank of America is also examining its expenses and is likely in the next few months to cut some staff members from its securities division, according to one senior executive at that firm who was not authorized to speak on the record. And Credit Suisse is in the process of identifying people to cut in its investment banking unit, according to a person briefed on that bank’s plans.

Morgan Stanley is expected to cut at least 300 low-producing brokers in its wealth management division this year, more than the firm initially expected, and has announced plans to cut $1 billion in noncompensation expenses over the next three years. Unlike many of its rivals, however, the firm so far has no plans to cut staff members from its investment banking and trading division, which has added hundreds of employees over the last two years or so as part of a rebuilding effort after the financial crisis.

In the first quarter of 2009, Goldman Sachs, above, cut staff by almost 9 percent. Since then, most firms have held steady. That will change this summer.Scott Eells/Bloomberg NewsIn the first quarter of 2009, Goldman Sachs, above, cut staff by almost 9 percent. Since then, most firms have held steady. That will change this summer.

Some firms have already wielded the ax. In January, Barclays Capital cut 600 people, or more than 2 percent of its worldwide staff, citing a business slowdown, and recently cut more employees for “performance-related reasons,” according to a person briefed on the cuts but not authorized to speak on the record. A third of the January cuts were in New York.

Regulatory overhaul has weighed on the decisions to cut back, senior bank executives say. Regulation has caused some Wall Street banks to exit some businesses, like proprietary trading. Rules that require banks to hold more capital will probably cause some firms to end certain business lines as they decide they can more effectively deploy the capital elsewhere. On products like derivatives, firms will lose revenue as instruments once traded off exchanges will move into open markets.

While many financial rules are still to be written, some firms have decided that they cannot afford to wait any longer. The last significant industrywide job cuts were in early 2009. In the first quarter of that year Goldman alone cut its work force by almost 9 percent. Since then, most firms have held steady on their head counts or have added to them slightly. That will change this summer.

The scale of the expected cuts is bad news for the New York City economy, which depends heavily on a booming financial industry to pay taxes and fill its restaurants. And they will come as the national economy is still struggling to find its footing since the financial crisis.

Not all is doom and gloom. Wall Street is benefiting from the boom in social media and technology public offerings. In recent weeks big names like Pandora Media and Linkedin have gone public, brought to market by banks. So far this year, companies have raised $29.3 billion in public offerings, up more than 200 percent from a year ago. This year is on track to be the most lucrative since the technology boom in 2000, according to Thomson Reuters data.

The profit picture is also somewhat more stable for diversified companies like JPMorgan Chase, Bank of America and Citigroup, which have large commercial retail banking operations in addition to those in trading and sales. JPMorgan has no immediate plans to cut head count in trading, according to a person briefed on the matter but not authorized to speak on the record. The bank is, however, trying to reduce noncompensation expenses.

But firms like Bank of America are still paying for mortgage sins of days gone by, which have dimmed their profit pictures. Earlier this year Bank of America put aside another $1 billion to cover claims from outside investors who lost money and want the firm to buy back billions of dollars in bad Countrywide Financial mortgages. The Durbin Amendment, a proposed restriction on debit card fees, is also expected to reduce profits when it comes into effect next month.

For those firms that depend on trading, it is clear how much the engines of Wall Street have slowed. Return on equity, the amount a firm earns on its common stock outstanding and an important measure of financial performance, has decreased significantly in the years since the credit crisis. Industrywide return on equity was 8.2 percent in 2010, down from 17.5 percent in 2005, according to Nomura.

And this year there is another reason that is prompting Wall Street to act more swiftly on cuts. Wall Street typically pays out roughly half of its revenue in compensation, and firms often wait until late summer to cull staff when they have a better sense of revenue for the year. The newest cuts are expected to come earlier this year because of recent changes in the way employees are paid.

Traditionally, Wall Street employees get most of their annual pay in the form of a one-time year-end bonus. But after the credit crisis most firms changed the way they compensated employees in an effort to discourage excessive risk-taking, increasing base salaries while reducing performance-related payments. As a result, banks are paying out more compensation as the year goes on, forcing firms to re-evaluate staffing levels earlier in the year because more of their compensation costs are now fixed.

Firms are also trying to cut noncompensation expenses and are looking for ways to cut fat. Goldman’s goal to cut $1 billion in noncompensation expenses this year is significant, analysts say. There will be immediate and significant savings from the fall off in trading volumes.

Trading firms pay fees to trade, and lower volumes could result in an annual savings of $200 million at Goldman alone, one analyst estimated. Those savings will come naturally, but most will not, and banks will be forced to rein in everything, including travel and professional fees.

Article source: http://dealbook.nytimes.com/2011/06/16/as-profits-wane-wall-street-braces-for-new-layoffs/?partner=rss&emc=rss

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DealBook: Goldman Said to Receive Subpoena Over Financial Crisis

June 2, 2011 by Leave a Comment

Goldman Sachs has received a subpoena from the office of the Manhattan district attorney, which is investigating the investment bank’s role in the financial crisis, according to people with knowledge of the matter.

The inquiry stems from a 650-page Senate report from the Permanent Subcommittee on Investigations that indicated Goldman had misled clients and Congress about its practices related to mortgage-linked securities.

Senator Carl Levin, Democrat of Michigan, who headed up the Congressional inquiry, had sent his findings to the Justice Department to figure out whether executives broke the law. The agency said it was reviewing the report.

The subpoena come two weeks after lawyers for Goldman Sachs met with the attorney general of New York’s office for an “exploratory” meeting about the Senate report, the people said.

“We don’t comment on specific regulatory or legal issues, but subpoenas are a normal part of the information request process and, of course, when we receive them we cooperate fully,” said a Goldman representative.

The investment bank has not been accused of any wrongdoing. A subpoena is a request for information.

Bloomberg News earlier reported on the issuance of the subpoena.

The subpoena is the latest blow to Goldman, which since the financial crisis has faced criticism that it shorted the mortgage market before it collapsed, making billions of dollars at the expense of its clients.

In early April, the Senate subcommittee published a scathing report, which took specific aim at Goldman. It notably highlighted testimony by the institution’s chief executive, Lloyd C. Blankfein, who denied the firm was making large bets against residential mortgages while selling securities based on home loans.

Goldman Sachs chief executive Lloyd Blankfein.Charles Dharapak/Associated PressThe Goldman Sachs chief executive Lloyd Blankfein.

“We didn’t have a massive short against the housing market,” Mr. Blankfein testified at a Congressional hearing in 2010. It was a sentiment echoed in various public statements that year.

The Senate committee took a different view. The Congressional report noted the phrase “net short” appeared more than 3,400 times in Goldman documents related to the mortgage market.

It also quoted a letter from Goldman to the Securities and Exchange Commission, in which the firm said “we maintained a net short sub-prime position and therefore stood to benefit from declining prices in the mortgage market.”

Shares of Goldman slipped more than 2 percent on Thursday. The stock, which closed on Wednesday at $136.17, was trading above $170 in January.

Correction: Lawyers for Goldman Sachs met with the attorney general of New York’s office, not the Manhattan district attorney.

Article source: http://feeds.nytimes.com/click.phdo?i=744f2e6110fead87d37daf1560d26e25

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How Goldman Sachs Beat the Bubble

May 1, 2011 by Leave a Comment

Readers who enjoyed the Rolling Stone writer Matt Taibbi’s famous 2009 hit job — in which he portrayed Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” — may find Cohan’s account dry by comparison. In the wake of the financial crisis of 2008, some may question whether he shows too much deference to Wall Street. Cohan, a former investment banker and a regular contributor to the Opinionator blog on NYTimes.com, implicitly accepts a social order in which a tiny elite pays itself fabulously for esoteric pursuits far removed from the provision of ordinary products and services. But his lack of populist resentment heightens Cohan’s credibility as a Goldman critic. What can seem at times like excessive solicitousness turns out to be a wise strategy of allowing the firm’s deeds to speak for themselves.

In an earlier work, “House of Cards,” Cohan told the tale of Bear Stearns, the investment bank that collapsed during the crisis as a result of sheer recklessness. Goldman fared very differently. Demonstrating extraordinary discipline, it hedged risks and made piles of money even as the real estate bubble burst and credit froze worldwide. How did this happen? Are Goldman’s people smarter than everyone else? These are the issues at the core of “Money and Power.”

Marcus Goldman, a former clothing merchant from Burgpreppach, Germany, opened his doors at 30 Pine Street in Lower Manhattan in 1869. Working from a cellar office next to a coal chute, he bought accounts receivable from local businessmen at a discount. His clients got quick cash and were saved what at the time was an “arduous trip uptown” to a commercial bank. The maturation of what became Goldman Sachs offers a fascinating narrative of turn-of-the-century New York and its German Jewish establishment. The Goldman firm branched out to help arrange the public sale of shares on behalf of Sears, Underwood and Studebaker; Woolworth, Goodrich and Continental Can. Cohan recounts these events capably, drawing on the work of historians like Stephen Birmingham. Where “Money and Power” begins to make a more original contribution is in explaining Goldman’s cultivation of a reputation for brilliance unique even in the rarefied precincts of Wall Street.

Part of the mystique derived from truly exceptional leaders, men like the senior partner Sidney Weinberg, who at dicey moments in the 1930s could consult privately with his friend the president, Franklin D. Roosevelt. Another ingredient was the esprit de corps that Weinberg and his successors nurtured among their subordinates. By demanding utter loyalty and rewarding it richly, Goldman invariably stayed on message and exuded a singular confidence. A private-equity executive who competes as well as invests with Goldman tells Cohan that “you’ll never get a Goldman banker after three beers” saying that his colleagues are a bunch of duplicitous and unpleasant people.

Image control and self-correction have been central to Goldman’s ability to weather catastrophe. During the Great Depression, the firm lost much of its capital in a swindle of its own invention. In the late 1940s, it was one of 17 Wall Street banks accused of illegal collusion by the federal government. More recently, Cohan notes, it has survived “rogue traders, suicidal clients and charges of insider trading.” Goldman, he adds, “has come far closer — repeatedly — to financial collapse than its reputation would attest.”

In the run-up to the crisis of 2008, Goldman underwrote billions of dollars of toxic mortgage securities — the sort of irresponsible financial engineering that helped destroy Bear Stearns and Lehman Brothers. But a small group of Goldman traders realized sooner than most others on Wall Street that the industry had gone overboard wagering that real estate ­prices would rise indefinitely. In December 2006, this trading team began betting that the market would crater. Their billions in winnings allowed Goldman to more than offset its mortgage losses and emerge in 2009 stronger than ever.

Goldman’s willingness in 2007 to mark down the value of its mortgage-related inventory gave it a sober sense of its financial position while rivals were clinging to delusions. As word spread that Goldman was taking write-offs, investors lost faith in the accounting of other financial institutions, hastening the demise of several of Goldman’s key competitors.

Paul M. Barrett is an assistant managing editor of Bloomberg Businessweek.

Article source: http://feeds.nytimes.com/click.phdo?i=6d9bdf00054af8ae7ca08d3366c9bd0d

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DealBook: Goldman Sachs Trumps Expectations as Revenues Fall

April 20, 2011 by Leave a Comment

Goldman Sachs on Tuesday reported first-quarter net income of $2.74 billion, down 21 percent from the period a year earlier, as the investment bank took a big one-time hit to pay back the billionaire investor Warren E. Buffett.

The results, $1.56 a share in the quarter ended March 31, represent a big step backward from a year earlier when Goldman earned $5.59. But the investment bank handily beat analysts’ expectations of 82 cents a share, according to Thomson Reuters.

Excluding the big payment to Mr. Buffett, the company posted a per-share profit of $4.38, with key businesses like investment banking and investment management experiencing a pickup.

Revenue from investment banking, for example, rose 5 percent, driven by a significant rise in bond and stock underwriting. But institutional client services, the largest unit, saw revenue decline 22 percent, to $6.65 billion.

“We are pleased with our first-quarter results,” Lloyd C. Blankfein, chief executive officer, said in a statement. “Generally improving market and economic conditions, coupled with our strong client franchise, produced solid results. Looking ahead, we continue to see encouraging indications for economic activity globally.”

The bulk of Goldman’s earnings decline reflected the cost of the lifeline extended to the investment bank by Mr. Buffett during the depths of the financial crisis. The government gave approval for Goldman to repay the money earlier this year as part of the second round of bank stress tests.

It was critical cash, but costly. Mr. Buffett’s Berkshire Hathaway pumped $5 billion into Goldman in 2008, and the bank paid back $5.64 billion — not including the hefty dividends it had previously coughed up.

Putting the Berkshire Hathaway deal aside, Goldman’s results were mixed, with some businesses showing signs of improvement and others continued weakness.

During a call with investors firm the firm’s chief financial officer David Viniar said Goldman saw increased client activity in quarter, despite continued economic concerns. Still he noted that business volumes were “subdued.”

Net revenue for investment banking came in at $1.27 billion, 5 percent higher than in the first quarter of 2010. Much of that growth came from stock and debt underwriting, while financial advisory was down 23 percent.

Investment management, too, was a strong point. Overall revenue rose 16 percent, to $1.3 billion.

Much of the firm’s weakness was centered on its largest division, institutional client services. Revenue for the unit dropped 22 percent, which helped drag Goldman’s total net revenue down 7 percent.

Revenue in the largest segment of institutional client services, which trades bonds, currencies and commodities, fell to $4.33 billion. That was 28 percent below results in the first quarter of 2010, a particularly strong period for Goldman. The division is a big money center for the bank, accounting for roughly 36 percent of all revenue generated in the first quarter.

In a nod to just how difficult the environment has become, Goldman’s annualized return on equity, a measure of profitability, fell to 12.2 percent in the quarter from 20.1 percent in the period a year earlier. In 2006, return on equity was 32.8 percent.

There has certainly been a lot of pain to go around. On Monday, Citigroup reported earnings of 10 cents a share, down from 15 cents a share in the period a year earlier, as it dealt with mortgage woes and sluggish economic growth. Similar factors hurt the results of Bank of America and JPMorgan Chase last week.

The lackluster economy and global uncertainty has weighed on financial stocks, too. Goldman closed on Monday at $153.78, down about 8 percent for the year. Shares of Goldman were down modestly in early trading on Tuesday.

There was some good news for shareholders in the earnings release. Goldman declared a dividend of 35 cents a common share, to be paid in June.

For the quarter, Goldman set aside $5.23 billion in compensation, down 5 percent from the period a year earlier. This represents almost 44 percent of the bank’s net revenue and is inline with how it previously compensated employees.

Goldman will not decide what it will pay out until the fourth quarter. There were also more people on the payroll — 35,400 at the end of quarter — up 7 percent from the period a year earlier.

This post has been revised to reflect the following correction:

Correction: April 19, 2011

Due to an editing error, an earlier version of the story incorrectly added the word “billion” to the company’s per shares earnings in 2010. Goldman earned $5.59 a share in the first quarter of 2010.

Article source: http://dealbook.nytimes.com/2011/04/19/goldman-sachs-trumps-expectations/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,
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