March 25, 2023

DealBook: Amid Debt Crisis, Banks Confronted by Familiar Problems

The European Central Bank in Frankfurt, Germany.Arne Dedert/European Pressphoto AgencyThe European Central Bank in Frankfurt, Germany.

Despite efforts to strengthen the international banking industry, many of the world’s largest financial institutions still face the same pressures that confronted the sector after the collapse of Lehman Brothers in 2008, according to the Bank for International Settlements.

In its annual report, published on Sunday, the association of the world’s central banks said major international banks continued to be weighed down by investor skepticism about their future earnings and their ongoing reliance on government-backed financing.

The report said that to win back investor confidence, financial institutions should write down their underperforming assets and increase their cash reserves.

“Banks need to repair their balance sheets,” the B.I.S., based in Basel, Switzerland, said in its report. “This will entail writedowns of bad assets, thus imposing losses on banks’ stakeholders.”

Regulators worldwide have demanded that banks and other financial institutions clean up their balance sheets, but the firm still have a long way to go.

European financial institutions, for example, are currently trying to offload more than 2.5 trillion euros, or $3.1 trillion, of noncore loans, or roughly 6 percent of total European banking assets, according to the accounting firm PricewaterhouseCoopers.

The average ratio of loans to deposits for European institutions — a key measure of a firm’s exposure to bad loans — currently stands at 130 percent, sizably higher than the average of 75 percent for other banks worldwide, according to statistics from the B.I.S.

The association of central banks said that the Continent’s financial institutions remain too reliant on cheap, short-term loans provided by the European Central Bank, as many banks, particularly in Southern Europe, struggle to raise new funds from the capital markets.

“Many banks depend strongly on central bank funding and are not in a position to promote economic growth,” the B.I.S. report said.

The ongoing dependence by global financial institutions on wholesale funding will likely lead to continued high financing costs for banks for the foreseeable future, as investors demand larger amounts of collateral to protect against potential losses.

In Europe, where exposure to government debt has left financial institutions vulnerable, one-fifth of banks’ assets were set aside last year as a guarantee to obtain new financing, the B.I.S. said. Institutions in Southern Europe have been hit the hardest. The amount of assets used for collateral by Greek banks, for example, rose tenfold between 2005 and 2011, and currently stands at around 33 percent of total assets.

As banks reduce their exposure to risky assets in economies that are struggling amid the global economic slowdown, many firms have pulled back on lending to other financial institutions, particularly in overseas markets. The B.I.S. said that borrowing among banks in the euro zone fell drastically between 2008 and 2011, as local firms reduced their international lending by 43 percent over the period.

Government “debt holdings are an important drag on banks’ efforts to regain the trust of their peers and the markets at large,” the B.I.S. report said. “Exposures to sovereigns on the euro area’s periphery are perceived as carrying particularly high credit risk.”

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China Outlines Cuts in Carbon Emissions

The white paper details the country’s successes in reducing carbon emissions and lays out new goals. Although much of the information has been released before, it is the first time it has been presented comprehensively — part of China’s strategy to make its accomplishments better known ahead of the talks, which begin on Monday in Durban, South Africa.

“In the past they have had a hard time getting the word out,” said Deborah Seligsohn, a Beijing-based fellow with the World Resources Institute. “This is a significant collection of information and data.”

In an interesting nuance, the report also gives a rare nod to nongovernmental organizations, which usually are frowned upon by China’s authorities. The report mentions favorably “Earth Hour,” a project by the World Wildlife Fund, and praises the work of another private organization, the Energy Foundation. The report also indicates that China will follow its previous position of pressuring developing countries to do more.

Speaking Tuesday as the white paper was released, officials said China and other developing countries had taken serious steps while developed countries lagged. Xie Zhenhua, the head of the Chinese delegation to the Durban meeting, said poorer countries accounted for 57 percent of emission reductions.

“We hope nations of the world translate their political willingness into concrete actions,” Mr. Xie said at the news conference.

The report said that China achieved a 20 percent reduction in carbon emissions between 2005 and 2010 and planned to cut another 17 percent by 2015. The reduction is per unit of gross domestic product, the most common measurement of economic output. This means that while China’s overall carbon emissions will rise along with its economic output, its industries will become more efficient.

Mr. Xie also said that despite the financial crisis, rich countries should still try to contribute to a $100 billion fund to help poorer countries finance efficiency improvements.

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DealBook: Goldman’s Shares Tumble as Firm Hires Top Lawyer

Goldman Sachs hired Reid Weingarten, a prominent criminal defense lawyer, as it expects its executives, including Lloyd C. Blankfein, below, the firm's chief, to be interviewed by the Justice Department.Michael Stravato for The New York TimesGoldman Sachs hired Reid Weingarten, a prominent criminal defense lawyer, as it expects its executives, including Lloyd C. Blankfein, below, to be interviewed by the Justice Department.Andrew Harrer/Bloomberg News

8:57 p.m. | Updated

Goldman Sachs’s actions during the financial crisis returned to haunt it with a fury on Monday afternoon.

In late trading, shares of Goldman tumbled nearly 5 percent, knocking $2.7 billion off the firm’s market value, after a report that the firm’s chief executive, Lloyd C. Blankfein, had hired a prominent criminal defense lawyer, Reid H. Weingarten.

Goldman, when confirming the hiring, portrayed it as routine, given the several government investigations faced by the firm. But the sharp reaction in the stock price showed the fragile nerves of investors, who are worried that potential legal liability could damage the firm and its earnings power.

A spokesman for Goldman said executives at the firm were expected to be interviewed by the Justice Department. The agency is conducting an inquiry that stems from a 650-page report produced earlier this year by the Senate Permanent Subcommittee on Investigations. That report said that Goldman had misled clients about its practices related to mortgage-linked securities.

“As is common in such situations, Mr. Blankfein and other individuals who were expected to be interviewed in connection with the Justice Department’s inquiry into certain matters raised in the P.S.I. report hired counsel at the outset,” Goldman Sachs said in a statement.

While investors apparently feared the worst on Monday, a person close to the matter said that Mr. Blankfein had not been subpoenaed and that no Goldman executive had received an individual subpoena. Goldman is cooperating with the Justice Department investigation.

Still, Monday’s stock fall underscored just how vulnerable Goldman’s stock would continue to be until the Justice Department and other authorities finished their investigations.

“Until Goldman resolves its legal issues, the company and the stock are vulnerable to all sorts of perceptions, real or perceived,” said Michael Mayo, an analyst with Crédit Agricole Securities.

With about 20 minutes left in the trading day, Reuters, citing an unidentified government source, reported that Mr. Blankfein had hired Mr. Weingarten. Mr. Weingarten has defended Bernard J. Ebbers, the former chief executive of WorldCom, and Mike Espy, a former agriculture secretary. Goldman’s stock price quickly tumbled, falling to its lowest level since March 2009. Its shares closed at $106.51.

The stock move also reflected the support Goldman shareholders had for Mr. Blankfein despite the problems the firm’s problems under his stewardship. At Goldman’s stakeholder meeting in May, shareholders voted 97 percent in favor of his leadership. Any suggestion that Mr. Blankfein’s legal woes were mounting, or that he might leave the firm, would be seen as a negative for the stock.

Goldman investors have been on a roller-coaster ride since April 2010, when the Securities and Exchange Commission accused Goldman of duping clients by selling mortgage securities that were secretly created by a hedge fund firm to cash in on the housing market’s collapse.

Since then, it has been dogged by investigations and speculation about investigations, all of which have taken its toll on stock. Goldman shares were trading near $180 a share before the S.E.C. filed its lawsuit. Goldman settled that suit a few months later, but its troubles were far from over.

This year came the Senate report, which led to a Justice Department inquiry. And in June, Goldman received a subpoena from the office of the Manhattan district attorney, which is also investigating Goldman’s role in the financial crisis.

Mr. Blankfein’s decision to hire his own lawyer is not unusual. Legal experts say that it is now common for a company’s chief executive to retain separate counsel from the corporation. It has become rare for a lawyer or law firm to represent both a company and its executives in a government investigation.

Mr. Weingarten, 61, is considered a skilled trial lawyer, having won acquittals for Mr. Espy, the former agriculture secretary, and Mark A. Belnick, the former general counsel at Tyco. He has also suffered his share of courtroom defeats. Mr. Ebbers, the head of WorldCom, was found guilty and was sentenced to 25 years in prison.

On Monday, Mr. Weingarten was in the Federal District Court in Manhattan with his client Anthony Cuti, the former chief executive of Duane Reade, the drugstore chain. A judge sentenced Mr. Cuti to three years in prison for a scheme to falsely inflate the income and reduce the expense that the company reported. A jury convicted Mr. Cuti in June 2010.

Mr. Weingarten did not respond to request for comment on Monday. A spokeswoman for his law firm, Steptoe Johnson, declined to comment.

Steptoe is not the firm most closely associated with Goldman. The bank’s primary outside law firm is Sullivan Cromwell, a prominent and old-line New York law firm. Sullivan represented the firm in its $550 million settlement with the S.E.C. Also, when Mr. Blankfein testified as a witness earlier this year in the insider trading trial of Raj Rajaratnam, the former hedge fund manager, lawyers from Sullivan coached him on his testimony and accompanied him to court.

A native of Newark, Mr. Weingarten is a graduate of Cornell and the Dickinson School of Law at Penn State. Before becoming a criminal defense lawyer, he spent several years as a deputy district attorney in Pennsylvania and then joined the Justice Department’s Public Integrity Section.

While at the Justice Department, he spent years bringing cases against corrupt politicians and worked with another young prosecutor, Eric H. Holder. Mr. Holder, now the attorney general of the United States, remains one of Mr. Weingarten’s closest friends.

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