July 6, 2022

DealBook: Morgan Stanley and Citigroup Reach Deal on Smith Barney

Gregory J. Fleming leads Morgan Stanley Smith Barney, which is owned by Citigroup and Morgan Stanley.Brendan McDermid/ReutersGregory J. Fleming leads Morgan Stanley Smith Barney, which is owned by Citigroup and Morgan Stanley.

Morgan Stanley and Citigroup agreed on Tuesday to value their brokerage joint venture, Morgan Stanley Smith Barney, at $13.5 billion, allowing Morgan Stanley to buy full control of the business at a favorable valuation.

That will set the price for which Morgan Stanley will buy an additional 14 percent stake in the business, raising its stake in the brokerage to 65 percent. It will buy a 15 percent stake from Citigroup by next June, with the goal of buying the entire operation by 2015.

The two firms agreed to the valuation of the brokerage on Monday afternoon, after the investment bank Perella Weinberg Partners submitted its own appraisal of Morgan Stanley Smith Barney’s worth, according to a person briefed on the matter.

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Perella Weinberg had been called in because of a vast difference in valuation between the two firms. Despite calling the brokerage an important part of its future, Morgan Stanley valued the enterprise at about $9 billion, well below the $23 billion that Citigroup had described.

By settling on the $13.5 billion value, the two banks have aimed at establishing a firm valuation for Morgan Stanley Smith Barney, without needing to call in a third party to reassess the brokerage’s value for every stake purchase.

The business — melded from Citigroup’s Smith Barney unit and Morgan Stanley’s counterpart — has become an increasingly important part of Morgan Stanley’s business future. The brokerage business’s stable profits, arising from the management of wealthy customer’s assets, stand in contrast to the weaker earnings at the rest of Morgan Stanley’s operations.

“This mutually beneficial agreement gives both parties certainty and transparency on price and timing, and is a significant milestone for Morgan Stanley in the implementation of our strategy,” James P. Gorman, Morgan Stanley’s chairman and chief executive, said in a statement.

But the relatively low valuation of the brokerage will mean that Citigroup will need to take a write-down in its third quarter, costing the firm a big charge against earnings and capital.

Still, selling off Smith Barney is a legacy of Citigroup’s efforts to shed noncore businesses as it rebuilds itself from the financial crisis of 2008.

Vikram S. Pandit, Citigroup’s chief executive, said: “As we have shown, the more we put the past behind us, the more we can focus on our future, which is in the core businesses in Citicorp.”

In early trading on Tuesday, shares of Morgan Stanley were up more than 1 percent, and Citigroup shares were up slightly.

The joint venture deal between the banks was forged in 2009. Mr. Gorman has emphasized the importance of the business over the last year. In July, he said, “Our wealth management business will considerably increase its value to our clients and financial advisers through superior functionality, and to our shareholders through enhanced and stable earnings.”

He has also said the brokerage business would be renamed Morgan Stanley Wealth Management, retiring a name that dates to the 1938 merger of the brokerage firms Charles D. Barney Company and Edward B. Smith.

This post has been revised to reflect the following correction:

Correction: September 11, 2012

An earlier version of this article misstated the role played by the investment bank Perella Weinberg Partners, While the bank did provide an appraisal of the Smith Barney brokerage business, it was Morgan Stanley and Citigroup that came up with the $13.5 billion valuation of the business.

Article source: http://dealbook.nytimes.com/2012/09/11/morgan-stanley-smith-barney-is-valued-at-13-5-billion/?partner=rss&emc=rss

DealBook: ING Group to Sell Stake in Capital One

ING office's in Brussels, Belgium.Jock Fistick/Bloomberg NewsING office’s in Brussels.

9:16 a.m. | Updated

LONDON — The Dutch financial services giant ING Group plans to sell its 9 percent stake in Capital One in a deal that could be worth around $3 billion.

ING acquired the stake in the American firm when Capital One bought ING Direct USA for $9 billion in February.

The Dutch firm said that it would make a net profit of 300 million euros ($378 million) after selling the 54 million shares in Capital One for around $3 billion.

ING added that the gain would help to increase its core Tier 1 ratio, a measure of a firm’s ability to weather financial shocks, to 11.9 percent, and that it planned to complete the transaction by Monday.

The deal for ING Direct USA transformed Capital One into the country’s fifth-largest bank by deposits. The combined business has around $200 billion in deposits, making it larger than regional powerhouses like PNC and TD Bank.

A branch of Capital One in Brooklyn.Victor Blue for The New York TimesA branch of Capital One in Brooklyn.

Under the terms of the deal, Capital One issued $2.8 billion worth of new shares to ING, making the Dutch firm its largest shareholder.

The move to sell the shares comes as ING has been forced to sell assets as part of the conditions of a 10 billion euro ($12.5 billion) bailout it received from its local government in 2008.

Along with the sale of ING Direct USA to Capital One, the Dutch firm sold its online bank in Canada to a local rival, Bank of Nova Scotia, last month for $3.1 billion. ING is also planning to sell its Asian insurance businesses.

Shares in ING rose 1.8 percent in early afternoon trading in Amsterdam on Wednesday.

Bank of America Merrill Lynch, Morgan Stanley and Citigroup are the joint bookrunners for the deal.

Article source: http://dealbook.nytimes.com/2012/09/05/ing-to-sell-stake-in-capital-one/?partner=rss&emc=rss

DealBook: Morgan Stanley Shares Slump as Earnings Miss Estimates

Morgan Stanley's headquarters in Manhattan. The bank is transforming into a smaller, safer company that takes fewer risks.Eric Thayer/ReutersMorgan Stanley’s headquarters in Manhattan. The bank is transforming into a smaller, safer company that takes fewer risks.

5:30 p.m. | Updated

As the whipsawing markets batter the trading operations of many banks, Morgan Stanley is feeling the pain more acutely.

Although the firm reported on Thursday that it had swung to a $564 million profit in the second quarter from a loss one year ago, its revenue plunged 24 percent as the firm was hurt by a decline in revenue from trading bonds, currencies and commodities.

Wall Street banks have suffered through what has been a largely inhospitable environment, wracked with economic uncertainty and the European debt crisis. But Morgan Stanley has been required to navigate that landscape while also working to transform itself, shedding riskier businesses while building its steadier wealth-management arm.

The firm was also forced to post $2.9 billion in additional money to back its trades in the quarter, following a two-notch downgrade of its credit rating by Moody’s Investors Service. The firm had faced a potential cut of up to three levels, which would have put it just two positions above junk-bond status.

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In response, Morgan Stanley has taken several steps to clamp down on expenses and headcount. James P. Gorman, Morgan Stanley’s chairman and chief executive, said that the firm expected to shrink its employee rolls by 7 percent by the end of the year.

It is seeking to cut other expenses, including by locating more staff in cheaper locations like Baltimore and Glasgow, Scotland.

“Although global economic uncertainty remains a headwind, we are proactively positioning the firm for success,” Mr. Gorman said in a statement. “We continue to be focused on taking the necessary steps to deliver strong returns for our shareholders.”

Still, the damage that market conditions have inflicted was especially notable this quarter. Morgan Stanley’s profit amounted to 29 cents a share, widely missing the 43 cents a share that analysts surveyed by Thomson Reuters had expected.

The results did not impress investors. Morgan Stanley’s stock fell as much as 7 percent on Thursday before recovering slightly to finish the day down 5.3 percent to $13.25 a share.

Morgan Stanley’s fixed-income trading revenue plummeted 60 percent from the year-ago period and 70 percent from the first quarter, a drop that far outstrips what other competitors have reported.

Excluding accounting gains tied to the value of its debt, the company reported that revenue fell to $6.6 billion from $9 billion in the period a year earlier. Including adjustments, revenue fell to $6.95 billion from $9.2 billion in the year-ago quarter.

And return on equity from continuing operations, a prominent measure of profitability, was only 3.5 percent. Goldman Sachs, one of the firm’s top competitors, said this week that its own 5.4 percent return on equity was “unacceptable.”

By far the most notable problems lay in fixed-income trading, where Mr. Gorman is trying to move the firm from more complicated and capital-intensive products to simpler offerings. Morgan Stanley reported $770 million in adjusted trading revenue.

Ruth Porat, Morgan Stanley’s chief financial officer, said in a telephone interview that the results stemmed from the “challenging macro backdrop,” as well as clients pulling back while waiting for Moody’s to complete its review of bank credit ratings. That the agency took longer than expected to announce its results drew out the pain, she added.

“As the month wore on, clients took a wait-and-see attitude,” she said. “Time was not our friend.”

Other businesses suffered as well. Advisory revenue was halved from the year-ago period, to $263 million, as fewer corporations pursued mergers or sales of stocks and bonds. Mr. Gorman still highlighted the division’s performance, however, pointing to big mandates like leading Facebook‘s initial public offering.

(The firm has defended its work taking Facebook public, but the social networking company’s stock has fallen 24 percent since the I.P.O. in May.)

One business did show some bright spots: global wealth management, which now includes all of the Morgan Stanley Smith Barney venture that the firm took over from Citigroup. The unit reported a 23 percent gain in pretax income, to $393 million, although net revenue declined slightly.

This post has been revised to reflect the following correction:

Correction: July 19, 2012

An earlier version of this post misstated the drop in Morgan Stanley’s revenue as 35 percent, not 24 percent.

Article source: http://dealbook.nytimes.com/2012/07/19/morgan-stanley-swings-to-profit-but-revenue-falls/?partner=rss&emc=rss

DealBook: Former Brokers Say JPMorgan Favored Selling Bank’s Own Funds Over Others

Geoffrey Tomes, who left JPMorgan last year, said he had sold some weakly performing funds merely to enrich the company.Librado Romero/The New York TimesGeoffrey Tomes, who left JPMorgan last year, said he had sold some weakly performing funds merely to enrich the company.

Facing a slump after the financial crisis, JPMorgan Chase turned to ordinary investors to make up for the lost profit.

But as the bank became one of the nation’s largest mutual fund managers, some current and former brokers say it emphasized its sales over clients’ needs.

These financial advisers say they were encouraged, at times, to favor JPMorgan’s own products even when competitors had better-performing or cheaper options. With one crucial offering, the bank exaggerated the returns of what it was selling in marketing materials, according to JPMorgan documents reviewed by The New York Times.

The benefit to JPMorgan is clear. The more money investors plow into the bank’s funds, the more fees it collects for managing them. The aggressive sales push has allowed JPMorgan to buck an industry trend. Amid the market volatility, ordinary investors are leaving stock funds in droves.

In contrast, JPMorgan is gathering assets in its stock funds at a rapid rate, despite having only a small group of top-performing mutual funds that are run by portfolio managers. Over the last three years, roughly 42 percent of its funds failed to beat the average performance of funds that make similar investments, according to Morningstar, a fund researcher.

“I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm,” said Geoffrey Tomes, who left JPMorgan last year and is now an adviser at Urso Investment Management. “I couldn’t call myself objective.”

JPMorgan, with its army of financial advisers and nearly $160 billion in fund assets, is not the only bank to build an advisory business that caters to mom and pop investors. Morgan Stanley and UBS have redoubled their efforts, drawn by steadier returns than those on trading desks.

But JPMorgan has taken a different tack by focusing on selling funds that it creates. It is a controversial practice, and many companies have backed away from offering their own funds because of the perceived conflicts.

Morgan Stanley and Citigroup have largely exited the business. Last year, JPMorgan was the only bank among the 10 largest fund companies, according to the research firm Strategic Insights.

“It said financial adviser on my business card, but that’s not what JPMorgan actually let me be,” said Mathew Goldberg, a former broker who now works at the Manhattan Wealth Management Group. “I had to be a salesman even if what I was selling wasn’t that great.”

JPMorgan has previously run into trouble for pushing its own funds. In a 2011 arbitration case, it was ordered to pay $373 million for favoring its products, despite an agreement to sell alternatives from American Century.

JPMorgan defends its strategy, saying it has “in-house expertise,” and customers want access to proprietary funds. “We always place our clients first in every decision,” said Melissa Shuffield, a bank spokeswoman. She said advisers from other companies accounted for a large percentage of the sales of JPMorgan funds.

At first, JPMorgan’s chief, Jamie Dimon, balked at the idea of pushing the bank’s investments, according to two company executives who spoke on the condition of anonymity because the discussions were not public. Several years ago, Mr. Dimon wanted to allow brokers to sell a range of products and move away from its own funds. Jes Staley, then the head of asset management, argued that the company should emphasize proprietary funds. They compromised, building out the fund group while allowing brokers to sell outside products.

Now, JPMorgan is devoting more resources to the business, even as other parts of the bank are shrinking. Since 2008, JPMorgan has added hundreds of brokers in its branches, bringing its total to roughly 3,100. At the core of JPMorgan’s push are products like the Chase Strategic Portfolio. The investment combines roughly 15 mutual funds, some developed by JPMorgan and some not. It is intended to offer ordinary investors holdings in stocks and bonds, with six main models that vary the level of risk.

The product has been a boon for JPMorgan. Begun four years ago, the Chase Strategic Portfolio has roughly $20 billion in assets, according to internal documents reviewed by The Times.

Off the top, the bank levies an annual fee as high as 1.6 percent of assets in the Chase Strategic Portfolio. An independent financial planner who caters to ordinary investors generally charges 1 percent to manage assets.

The bank also earns a fee on the underlying JPMorgan funds. When Neuberger Berman bundles funds, it typically waives expenses on its own funds.

Given the level of fees, one worry is that JPMorgan may recommend internal funds for profit reasons rather than client needs. “There is a real concern about conflicts of interest,” said Andrew Metrick, a professor at the Yale School of Management.

There is also concern that investors may not have a clear sense of what they are buying. While traditional mutual funds update their returns daily, marketing documents for the Chase Strategic Portfolio highlight theoretical returns. The real performance, provided to The Times by JPMorgan, is much weaker.

Marketing materials for the balanced portfolio show a hypothetical annual return of 15.39 percent after fees for three years through March 31. Those returns beat a JPMorgan-created benchmark, or standard of comparison, by 0.73 percentage point a year.

The actual return was 13.87 percent a year, trailing the hypothetical performance and the benchmark. All four models with three-year records were lower than the hypothetical performance and the benchmarks.

JPMorgan says the models in the Chase Strategic Portfolio, after fees, gained 11 to 19 percent a year on average since 2009. “Objectively this is a competitive return,” said Ms. Shuffield.

The bank said it did not provide actual results for the investment models in the Chase Strategic Portfolio because it was standard practice in the industry to wait until all the parts of the portfolio had a three-year return before citing performance in marketing materials. She said the bank was preparing to put actual returns in the materials.

Regulators tend to discourage the use of hypothetical returns. “Regulators frown on using hypothetical returns because they are typically very sunny,” said Michael S. Caccese, a lawyer for KL Gates.

While brokers do not receive extra bonuses or commissions on the Chase Strategic Portfolio, some advisers said they had felt pressure to recommend such internal products as part of the intense sales culture. A supervisor in a New Jersey branch recently sent a congratulatory note with the header “KABOOM” to an adviser who had persuaded a client to put $75,000 into the Chase Strategic Portfolio. “Nice to know someone is taking advantage of the best selling day of the week!” he wrote.

JPMorgan also circulates a list of brokers whose clients collectively have with the largest amounts in the Chase Strategic Portfolio. Top advisers have nearly $200 million of assets in the program.

“It was all about the money, not the client,” said Warren Rockmacher, a broker who recently left the company. He said that if he did not persuade a customer to invest in the Chase Strategic Portfolio, a manager would ask him why he had selected something else.

Cheryl Gold said she got the hard sell when she stopped by her local Chase branch in New York last year and an adviser approached her about the Chase Strategic Portfolio.

“They pitched this product to me, and I just laughed,” said Ms. Gold. “I saw it as a way for them to make money at my expense.”

Article source: http://dealbook.nytimes.com/2012/07/02/ex-brokers-say-jpmorgan-favored-selling-banks-own-funds-over-others/?partner=rss&emc=rss

DealBook: Banks’ Fire Drill for Greece Election

Banks are prepping for the potential outcomes of the Greek election.Yannis Behrakis/ReutersBanks are prepping for the potential outcomes of the Greek election.

The banks are on high alert.

Hundreds of employees at big firms, some part of special teams, will be on standby this Sunday, awaiting the results of Greece’s pivotal election. They are preparing for the worst case. The fear is that the vote will heighten the chances of Greece exiting the euro and the global financial system will be shaken when the markets open on Monday.

After being largely unprepared for the extreme stress of the 2008 crisis, large banks in the United States are determined to be ready this time. They have been taking measures to deal with instability in Europe for over a year. In recent months, they have stepped up their contingency planning, especially after it became clear that Greece was struggling to comply with the terms of a March bailout that was intended to keep the country in the euro.

In New York and London, banks have set up dedicated crisis teams, and rehearsed elaborate responses. As clients get nervous, banks have been guiding clients on how to react to a range of situations, from just one country leaving the euro zone to the dissolution of the euro itself.

Ordinary investors, for example, are demanding more information on Europe from their brokers. David Darst, chief investment strategist at Morgan Stanley Smith Barney, said the crisis had consumed his regular Monday morning call with the firm’s financial advisers, and has been the focus of the monthly video he does for clients and brokers. Mr. Darst says he hears two main questions: “What is your thought on Greece pulling out of the euro and it leading to contagion?” and “What impact will this have on my portfolio?”

Large banks that have substantial exposure to Europe have been doing tests to see if important functions like moving money for clients between nations could handle a country leaving the euro. This quarter, a substantial number of Citigroup employees carried out an extensive dry run that assumed a country left the euro and caused wider stress, according to a person familiar with the bank’s activities who was not authorized to discuss the tests publicly. One aspect of the drill looked at how different parts of the bank’s international payment systems performed.

Citigroup also has a London-based team that is focusing on crisis responses. The group reports to the bank’s risk officers who give a regular download to the firm’s chief executive, Vikram S. Pandit. And the bank’s board is being regularly briefed on measures that Citigroup is taking to deal with European turbulence.

Citigroup has $84 billion in loans, bonds and other types of exposure to troubled European countries, plus France. The bank’s filings indicate that all but $8 billion of that exposure is offset with collateral it has collected and hedges on the portfolio.

“We are managing the current issues in the euro zone in line with the bank’s ongoing prudent approach to managing all forms of market, credit and operational risk,” said Jon Diat, a Citigroup spokesman.

Some banks are testing their systems to deal with the possibility of new currencies and preparing guidance for clients on how to operate in such an environment. BNY Mellon, a bank that handles huge amounts of international payments, has been sketching out the potential fallout for several disruptive outcomes in Europe.

“Over the past several months, BNY Mellon has been working to prepare our services, systems and operations to respond to potential euro-zone-related scenarios,” said Ron Gruendl, a spokesman. “Our contingency plans are designed to implement responsive measures efficiently and accurately with as little impact to our clients as possible.”

Banks like Goldman Sachs and Morgan Stanley are also looking into the severe legal challenges that would arise if a country exited the euro. Contracts that govern loans, bonds and derivatives in Europe rarely take into account such a situation.

“This is a big issue — what jurisdiction are your contracts written under?” Gary Cohn, president of Goldman, said at the end of last month. “Could you end up having a contract and end up with lira or drachma or something like that?”

Consider an Italian corporation that owed a foreign bank 5 million euros, with a loan agreement struck under Italian law. If Italy left the euro, the bank might have less chance of getting euros back after the exit. In that case, the financial firm might be exposed to a new, less valuable currency.

Recognizing that threat, some banks are trying to move contracts into new jurisdictions like the United States or Britain. By transferring such loan agreements to English law, the banks may increase the chances of getting repaid in euros after an exit, according to legal experts.

“An English court would be likely to say the loan remains a euro obligation,” said Andrew McClean, a partner at Slaughter and May, a London law firm.

The banks are also trying to protect their balance sheets if they do get stuck with large amounts of assets denominated in a new, weaker currency. To help offset the potential financial hit, firms are building up their deposit base in troubled countries.

By doing so, they can better match their assets (the loans) within a specific country with their liabilities (the deposits). Then if a country left the euro zone, the value of the loan might fall in euros, but the banks wouldn’t owe as much to depositors in euros.

“We know that is a strategy that some banks are trying to do,” said Andrew Lim, a bank analyst at Espírito Santo Investment Bank in London. Mr. Lim notes, however, that some large banks, including Deutsche Bank, still have a lot more loans than deposits in countries like Italy and Spain.

If the Greek elections prompt market instability, banks are likely to have another source of support, perhaps overshadowing any of their own efforts to date. In a period of severe weakness, central banks will most likely step in and provide cheap loans to bolster the financial system.

Susanne Craig contributed reporting.

Article source: http://dealbook.nytimes.com/2012/06/15/banks-fire-drill-for-greece-election/?partner=rss&emc=rss

Bits Blog: RIM Shares Drop, and Analysts Warn of Further Trouble

Research in Motion’s already depressed shares fell sharply on Wednesday after the company unexpectedly warned that it would probably post a loss for its first quarter, and several analysts predicted worse is yet to come.

Although RIM had stopped giving investors financial forecasts, largely because it consistently failed to meet them over the last year, it took the unusual step of issuing a statement late Tuesday saying that it might lose money in the quarter, which ends Saturday.

RIM’s shares fell 88 cents, or 7.8 percent, to $10.35.

While many analysts had said they expected that RIM, which makes the BlackBerry, might start to lose money this fiscal year, none had predicted it would do so in the first quarter. RIM reported a loss for its previous quarter but it was caused by exceptional charges. Before the announcement Tuesday, the consensus of analysts was that the company would earn 42 cents a share in the first quarter, with the most pessimistic forecast at 16 cents.

Unlike many of his colleagues, Kris Thompson of National Bank Financial did not have to lower his target price for RIM’s shares after the announcement. He has predicted since last December that it would fall to $8 a share.

He shares the growing concern that RIM’s decline may reach a stage where a new line of phones and the new BlackBerry 10 operating system — which will appear this year — will not be enough to turn the company around.

In a note to investors, Mr. Thompson compared buying RIM’s shares to “going to the casino.” He added, “If you’re feeling lucky, this stock might be worth a dice-roll under $10.”

He wrote that RIM’s announcement Tuesday that it had hired J.P. Morgan Securities and RBC Capital Markets, a unit of the Royal Bank of Canada, to conduct a strategic review was a signal that RIM was for sale.

But Ehud Gelblum of Morgan Stanley offered a different analysis in his note to investors.

“We do not believe RIMM is actively looking to sell the company despite the hiring of bankers to explore alternatives,” Mr. Gelblum wrote, using the company’s stock symbol. Instead, he wrote that it was more likely that RIM would sell only a part of itself, or turn over the operation of its unique global network, which provides corporate BlackBerrys with a high level of security, to another company under contract.

While Thorsten Heins, president and chief executive of RIM, has said it would review licensing BlackBerry software to other companies, Mr. Gelblum wrote that this might actually harm the company because it “would just invite others to beat RIM” using its own operating system.

He forecast that RIM’s shares could drop to as low as $6 or, if BlackBerry 10 is a success and the company’s business outside North America accelerates, rise to as high as $20. A year ago, RIM traded at more than $43.

Mark Sue, of RBC Capital Markets, cut his forecast for RIM’s share price to $11 from $13. He again warned that RIM’s market share could fall below 5 percent. That level “is the realm of subscale operations, razor-thin profits and decreasing odds of a turnaround,” he said.

He said RIM’s deteriorating finances could hamper the BlackBerry 10 phone introduction and accelerate the move by high-end BlackBerry users in the United States to iPhones and phones based on Google’s Android operating system.

Article source: http://bits.blogs.nytimes.com/2012/05/30/rim-shares-drop-and-analysts-warn-of-further-trouble/?partner=rss&emc=rss

DealBook: Facebook’s I.P.O. Raises Regulatory Concerns

 Facebook on the NASDAQ Marketsite.Brendan Mcdermid/Reuters Facebook on the NASDAQ Marketsite.

Just days before Facebook went public, some big investors got nervous about the social network.

After publicly warning about challenges in mobile advertising, Facebook executives held conference calls to update their banks’ analysts on the business. Armed with the new information, analysts at Morgan Stanley and other firms started reaching out to their clients to dial back expectations for the Internet company.

One prospective investor was told that second-quarter revenue could be 5 percent lower than the bank’s earlier estimates. Another analyst warned that revenue could be light for the next two years.

As investors tried to digest the developments, Morgan Stanley was busy setting the price and the size of the I.P.O.

While some big institutions chose not to buy the stock, others placed large orders. And retail investors, who weren’t necessarily privy to the same information, continued to clamor for shares.

William Galvin, the Massachusetts secretary of state.John Tlumacki/Boston GlobeWilliam Galvin, the Massachusetts secretary of state.

In the end, Morgan Stanley bankers decided they had enough demand and interest for Facebook to justify an offering price of $38 a share.

They didn’t.

When Facebook went public on May 18, shares of the social networking company barely budged — and they have been falling every since. On Tuesday, the stock closed at $31, more than 18 percent below its offering price.

The I.P.O. of Facebook was supposed to be Morgan Stanley’s crowning achievement. The bank had helped usher in a new era of technology companies, leading the offerings of LinkedIn, Groupon, Pandora and more than a dozen other start-ups over the past year.

Facebook was poised to be the biggest and most ambitious. When the dust settles, Morgan Stanley could make more than $100 million on the I.P.O.

But Morgan Stanley may have given the market more than it can chew. Rival bankers and big investors have complained that Morgan Stanley botched the I.P.O., setting the price too high and selling too many shares to the public.

In a statement on Tuesday evening, Morgan Stanley said that it followed the same procedures for the Facebook offering as it does for all I.P.O.’s

Facebook’s fate as a public company is hardly sealed. Many newly public companies stumble out of the gate and later become top performing stocks, including Amazon.com.

But Facebook’s troubled debut raises questions about the I.P.O. process.

Regulators are concerned, in part, that banks may have shared information with certain clients, rather than broadly with investors. On Tuesday, William Galvin, Massachusetts’ secretary of state, subpoenaed Morgan Stanley over discussions with investors about Facebook’s I.P.O. The Financial Industry Regulatory Authority, Wall Street’s self regulator, is also looking into the matter.

“If true, the allegations are a matter of regulatory concern to Finra” and the Securities and Exchange Commision, Richard G. Ketchum, the chief executive of Finra said in a statement.

Morgan Stanley said in its statement:

After Facebook released a revised S-1 filing on May 9 providing additional guidance with respect to business trends, a copy of the amendment was forwarded to all of Morgan Stanley’s institutional and retail investors and the amendment was widely publicized in the press at the time. In response to the information about business trends, a significant number of research analysts in the syndicate who were participating in investor education reduced their earnings views to reflect their estimate of the impact of the new information. These revised views were taken into account in the pricing of the I.P.O.

Article source: http://dealbook.nytimes.com/2012/05/22/facebook-i-p-o-raises-regulatory-concerns/?partner=rss&emc=rss

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.”

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DealBook: Morgan Stanley to Cut 580 Jobs in New York

Morgan Stanley headquarters in Manhattan.Richard Drew/Associated PressMorgan Stanley headquarters in Manhattan.

Morgan Stanley will slash 580 jobs in New York as part of a broader wave of layoffs underway at the bank, according to a public filing.

In a notice filed with the New York State Department of Labor, Morgan Stanley cited “economic” woes as the cause of the layoffs. The cuts began Dec. 15 on a “rolling” basis, according to the filing, known as a WARN, or Worker Adjustment and Retraining Notification.

Earlier this month, Morgan Stanley said it would cut 1,600 jobs, or 2.6 percent of its work force, by the first quarter of 2012. The bank plans to spread the round of reductions across all divisions, including investment banking and trading.

The layoffs at Morgan Stanley are the latest round of severe cutbacks on Wall Street, which has suffered a year of humbling returns and enormous cost-cutting. Citigroup recently announced it would shed 4,500 jobs. Bank of America and Goldman Sachs have also begun carrying out major staff reductions. In June, Goldman told the New York Department of Labor that it would layoff 230 New York workers through March 2012.

The job losses have taken a toll on New York City, the center of the financial industry. The securities industry in the city lost nearly $3 billion in the third quarter, according to a report released this month by the New York State comptroller. In October, the comptroller disclosed that an estimated 10,000 Wall Street workers could lose their jobs by the end of 2012.

Some of the cuts at Morgan Stanley in New York, the filing said, will impact workers at the firm’s Midtown Manhattan headquarters, 1585 Broadway. The layoffs will also affect three smaller Morgan Stanley offices in New York: 1 New York Plaza, 750 Seventh Avenue and 1221 Avenue of Americas.

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DealBook: In-Flight Internet Service Gogo Readies to Go Public

Gogo, a provider of in-flight Internet service, filed for its offering on Friday, joining a long line of technology companies hoping to go public in the new year.

The company is seeking to raise up to $100 million in its initial public offering, according to figures used to calculate the registration fee.

Gogo, formerly known as Aircell Holdings, is testing the public markets amid dampened investor enthusiasm for new tech offerings. Earlier this year, investors flocked to Internet start-ups, bidding up prices for companies like LinkedIn and Pandora.

But the I.P.O. market has chilled in recent months, owing to ongoing credit fears in Europe and renewed skepticism about tech’s newfangled business models. For instance, game-maker Zynga — a profitable company with a massive online following — went public last week, but has struggled to break above its offering price of $10. Shares of Zynga opened at $9.43 on Friday morning.

Like many of its technology peers, Gogo has been growing at a rapid clip. The company, which charges consumers fees for in-flight Internet access on major carriers like Delta and Virgin America, is now available in 1,177 commercial planes, compared with 30 planes in 2008. In addition, Gogo has signed contracts with carriers to offer its service on roughly 525 additional planes.

The company doubled revenue for the first nine months of this year to $72.9 million, swinging to a profit of $2.4 million. The company has recorded an annual loss for the last three years.

Still, the company has a long way to go to make its investors whole. Gogo, which is largely owned by the private equity firm Ripplewood Holdings and an early investor Oakleigh Thorne, has raised more than $500 million since 2006. Ripplewood is the largest investor, with a 38.1 percent stake.

The company, which plans to trade under the ticker “GOGO,” has hired Morgan Stanley, JPMorgan Chase and UBS to lead its offering, with Allen Company, Evercore Partners and William Blair Company also participating.

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