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Facebook Briefly Trades Above I.P.O. Price

July 31, 2013 by

On Wednesday morning, shares of the world’s leading social network traded above $38 a share, the price at which the company first sold shares to the public more than a year ago.

The immediate catalyst for the rise was the company’s surprisingly strong second-quarter earnings report last Wednesday, which quelled many investors’ doubts about the company’s ability to make money from its legions of mobile users, and suggested that the company’s profit stream was growing.

Since last week’s report, shares have risen more than 40 percent. Early Wednesday, they touched $38.31 a share, although at midday, they were slightly below $37.

The company’s shares hit a low of $17.55 last fall, but since then investors have warmed to the company. Facebook has shown signs that it can significantly grow its advertising base and keep its 1.2 billion users engaged, despite competition from rival social networks like Twitter and other social sharing sites like Pinterest.

“Facebook was caught flat-footed by the shift to mobile,” said Mark Mahaney, an analyst with RBC Capital Markets. “It took them four or five quarters to catch up.”

Now, he said, “they appear to be set up as a sustainable high-growth business.”

Mr. Mahaney, whose firm has a $40 price target on the stock, said that across Wall Street, analysts had increased their projections of the company’s financial performance. Analysts now expect Facebook to grow its profits 30 to 35 percent a year through 2015.

Since stocks tend to trade as a multiple of a company’s future profits, those upgrades last week sent Facebook’s stock soaring.

Still, there are reasons to be concerned. Mobile messaging platforms like Snapchat and Whatsapp are grabbing the attention of many of Facebook’s younger users. Twitter is mounting a major effort to go after marketers, especially brands that typically advertise on television, as it prepares for its own likely public offering.

And Facebook risks turning off users with too many ads. Currently about 1 in 20 items in the news feed, the main flow of items that a Facebook user sees, are ads. During the company’s quarterly conference call with analysts, Mark Zuckerberg, the company’s chief executive, said that users were beginning to notice the number of ads, suggesting that the company cannot greatly increase their frequency without losing some users.

Although the company raised $16 billion from the initial public offering in May 2012, problems immediately followed.

The Nasdaq stock exchange botched the handling of buy and sell orders on the first day of trading. (A few months ago, regulators fined Nasdaq $10 million fine for the fiasco.) And in ensuing weeks, shares continued to fall. Many Wall Street investors questioned whether Facebook’s stock was truly worth $38 a share at the time of the offering.

Particularly worrisome was Facebook’s seemingly nonexistent mobile strategy at a time when Internet users were abandoning PCs for their smartphones. The company’s smartphone and iPad applications were clunky, and it was generating no revenue from mobile ads.

Facebook’s management, including Mr. Zuckerberg, recognized the problem and embarked on a crash course to revamp the company’s approach to mobile and better position the company for fast-growing emerging markets.

The company overhauled its apps, introduced ads into its users’ news feeds, and created a lucrative new category of revenue called app install ads. With the app install ads, a game maker, for example, can promote its new game in Facebook’s mobile software and give users an easy way to install the app with just a couple of clicks.

At the same time, Facebook introduced new advertising products meant to give marketers ways to more directly target specific groups of customers, which allowed the service to command higher advertising rates.

While mobile advertising continues to grow, and was about 41 percent of Facebook’s ad revenue in the second quarter, investors are also looking to new areas of potential profit growth. Those include video advertising in the news feed, which is expected to begin later this year, and the possible sale of ads in Instagram, the fast-growing photo and video sharing app that Facebook bought in 2012.

“All of those seem like relatively large low-hanging fruit, and they are starting to go after them,” Mr. Mahaney said.

Article source: http://www.nytimes.com/2013/08/01/technology/facebook-briefly-trades-above-ipo-price.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

In a Shift, Eminent Domain Saves Homes

July 29, 2013 by

Traditionally, eminent domain, or the compulsory sale of private property to governments for a public purpose, works against homeowners — as when houses are bought up to make room for a highway or a commercial development. But in this case, the use of eminent domain is meant to help people stay right where they are.

The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.

The banks have warned that such a move will bring on a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it.

But local officials, frustrated at the lack of large-scale relief from the Obama administration, relatively free of the influence that Wall Street wields in Washington, and faced with fraying neighborhoods and a depleted middle class, are beginning to shrug off those threats.

“We’re not willing to back down on this,” said Gayle McLaughlin, the former schoolteacher who is serving her second term as Richmond’s mayor. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”

Despite rising home prices in many parts of the country, including California, roughly half of all homeowners with mortgages in Richmond are underwater, meaning they owe more — in some cases three or four times as much more — than their home is currently worth. On Monday, the city sent a round of letters to homeowners, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at high risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.

Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to Richmond’s. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.

But the cities face an uphill battle. Some have already backed off, and those who proceed will be challenged in court. After San Bernardino County dropped the idea earlier this year, a network of housing groups and unions began to win community support and develop nonprofit alternatives to Mortgage Resolution Partners, the firm that is managing the Richmond program.

“Our local electeds can’t do this alone, they need the backup support from their constituents,” said Amy Schur, a campaign director for the national Home Defenders League. “That’s what’s been the game changer in this effort.”

Richmond is offering to buy both current and delinquent loans. To simplify matters — and to defend against the charge that irresponsible homeowners are being helped at the expense of investors — the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.

The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.

Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference is divided among the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.

Alan Blinder contributed reporting.

Article source: http://www.nytimes.com/2013/07/30/business/in-a-shift-eminent-domain-saves-homes.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

DealBook: Bank of America Reports 63% Gain in Net Income

July 17, 2013 by Leave a Comment

A Bank of America branch in New York.Richard Drew/Associated PressA Bank of America branch in New York.

8:52 p.m. | Updated
Bank of America on Wednesday became the latest large bank to report second-quarter financial results that exceeded Wall Street’s expectations.

The bank benefited from higher revenue from equities sales and trading and a reduction in expenses, but its mortgage unit continued to struggle.

“We are doing more business with our customers and clients, and gaining momentum across every customer group we serve,” Brian T. Moynihan, the bank’s chief executive, said in a statement. “We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead.”

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Net income rose 63 percent, to $4 billion, or 32 cents a share, compared with $2.5 billion, or 19 cents a share, in the period a year earlier, while revenue increased to $22.7 billion from $22 billion.

Analysts had been expecting second-quarter earnings of 25 cents a share, according to Thomson Reuters.

Despite the rise in earnings, investors might question the strength of the quarter.

While revenue rose, much of the increase came from Bank of America’s Wall Street businesses, whose performance can be uneven over longer periods. Profit also received a lift from lower expenses. The bank paid substantially less interest on its own borrowings, compared with the second quarter of 2012. It also set aside less for its bad loan reserve and spent substantially less on mortgage litigation expenses.

Some analysts said they thought the bank performed relatively well in the quarter but still needed to make further progress.

“This was a quarter in which Bank of America executed on the strategies it has laid out,” said Shannon Stemm, a banking analyst at Edward Jones. “But it’s still got work to do.”

A major challenge is to achieve strong profit growth when gains in revenue are minimal. Cost-cutting is one way to do that. “A lot of this is about expenses,” said Richard Ramsden, a banking analyst at Goldman Sachs. “People really want to see revenue stabilize and expenses drop.”

Investors have long been concerned about the expense of dealing with past-due mortgages. But on Wednesday Bank of America said it expected such costs to decline more quickly, as the number of past-due home loans falls.

Cutting costs can go only so far, so Bank of America also needs to find ways to generate some revenue growth.

Part of the problem is Bank of America’s conflicted relationship with mortgages after the financial crisis. It was inundated with bad loans it inherited after it acquired Countrywide Financial in 2008Ö, and it was late to participate in the latest mortgage refinancing boom, which was a big source of revenue for many banks. Since the crisis, Wells Fargo has become the predominant mortgage bank, making it difficult for rivals to regain their pre-crisis foothold.

Bank of America wants to increase its share of the mortgage market, and though it made some gains in the second quarter, the market challenges  were apparent.

Even though it originated more mortgages in the quarter than it did in the period a year earlier, revenue from making home loans fell. The financial gain that banks make from selling mortgages to government entities has fallen, which hurts mortgage revenue. The amount of refinancing has dropped off as interest rates have climbed. As a result, banks hope borrowers will take out more original mortgages if the housing recovery continues, but this business is still relatively quiet.

With consumer businesses lackluster, Bank of America had to rely on Wall Street for growth.

Fees from advising on mergers and acquisitions and underwriting stock and bond deals were up. Managing money for wealthy individuals was also strong. At the Merrill Lynch Wealth Management unit, revenue rose 10.5 percent, to $3.74 billion.

Wall Street businesses can be volatile, though. That was apparent in Bank of America’s trading results. Revenue from trading stocks rose about 60 percent, to $1.2 billion. But the fixed-income unit, which trades bonds, currencies, commodities and derivatives linked to those assets, did not fare as well. Its revenue fell 5 percent, to $2.3 billion.

In a news release, Bank of America said fixed-income results were affected by the sell-off in bonds that took place in the second quarter after the Federal Reserve said it was contemplating reducing its stimulus policies.

Bank of America also provided estimates of how it would fare under a proposed rule that focuses on capital, the financial buffer that banks are required to maintain to absorb losses.

Investors are fixated on this issue right now, fearing that the largest banks might have to raise large amounts of new capital to comply with the rule.

But Bank of America might already meet the requirements, according to estimates the bank provided on Wednesday. The rules require a so-called leverage ratio of 5 percent at a bank’s holding company.

Bank of America estimated on Wednesday that its leverage ratio would be 4.9 to 5 percent at its parent company. The proposed rules also require a 6 percent ratio at banking subsidiaries that are covered by federal deposit insurance. Bank of America’s chief financial officer, Bruce R. Thompson, said during a news briefing on Wednesday that he thought the two largest subsidiaries already had enough capital to comply with the 6 percent requirement.

Bank of America shares rose 2.8 percent, to $14.31, suggesting that investors were pleased with the results. Mr. Ramsden, the Goldman analyst, said the market was keen to see stable revenue, lower costs and strong indications that the bank had built up sufficient capital.

“They are doing all three,” he said. “The debate is going to be, Are they moving fast enough?”

 

Article source: http://dealbook.nytimes.com/2013/07/17/bank-of-america-profit-rises-63/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Bank of America Profit Rises 63%

July 17, 2013 by Leave a Comment

A Bank of America branch in New York.Richard Drew/Associated PressA Bank of America branch in New York.

Bank of America on Wednesday became the latest large bank to report second-quarter financial results that exceeded Wall Street’s expectations.

Net income rose 63 percent, to $4 billion, or 32 cents a share, from $2.5 billion, or 19 cents a share, in the period a year earlier, while revenue increased to $22.7 billion from $22 billion.

Analysts had been expecting second-quarter earnings per share of 25 cents, according to Thomson Reuters.

The bank benefited from higher revenue from equities sales and trading and a reduction in expenses, but its mortgage unit continued to struggle.

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“We are doing more business with our customers and clients, and gaining momentum across every customer group we serve,” Brian T. Moynihan, the bank’s chief executive, said in a statement. “We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead.”

Despite the big rise in earnings, investors may question the strength of the quarter.

While revenue rose, much of the increase came from Bank of America’s Wall Street businesses, whose performance can be uneven over longer periods. Profit also received a lift from lower expenses. The bank paid substantially less interest on its own borrowings, compared with the second quarter of 2012. It also set aside less for its bad loan reserve and spent substantially less on mortgage litigation expenses.

Bank of America also provided estimates of how it would fare under a new, proposed rule that focuses on capital, the financial buffer banks are required to maintain to absorb losses.

Investors are fixated on this issue right now, fearing that the largest banks might have to raise large amounts of new capital to comply with the rule.

But Bank of America may already meet the requirements, according to estimates the bank provided on Wednesday. The rules require a so-called leverage ratio of 5 percent at a bank’s holding company.

Bank of America estimated on Wednesday that its leverage ratio would be 4.9 to 5 percent at its parent company. The proposed rules also require a 6 percent ratio at banking subsidiaries that are covered by federal deposit insurance. Bank of America’s chief financial officer, Bruce R. Thompson, said during a news briefing on Wednesday that he thought the two largest subsidiaries already had enough capital to comply with the 6 percent requirement.

A vast financial supermarket, Bank of America makes loans to consumers and companies and has a big presence on Wall Street. Since the financial crisis, the bank has struggled to reassert itself in crucial businesses. It was particularly hampered by large and lingering losses stemming from Countrywide Financial, the mortgage giant it acquired in 2008.

Some analysts thought the bank performed relatively well in the quarter but still needed to make further progress.

“This was a quarter in which Bank of America executed on the strategies it has laid out,” said Shannon Stemm, a banking analyst at Edward Jones. “But it’s still got work to do.”

One challenge is achieving revenue growth when interest rates are low and its balance sheet is not growing. Bank of America’s total assets fell slightly in the second quarter. Still, it managed to increase revenue by 3 percent. The bank also managed to cut costs, which helped drive an increase in earnings that far exceeded the growth in revenue.

“A lot of this is about expenses,” said Richard Ramsden, a banking analyst at Goldman Sachs. “People really want to see revenue stabilize and expenses drop.”

Some of the cost-cutting may be hard to sustain, though.

In the second quarter, Bank of America registered significant savings by paying less for the money it borrows. The main reason is that it is sharply reducing its long-term debt, which costs more than other types of borrowing. But the reductions may ultimately run into a new rule regulators are preparing that would require banks to hold set amounts of long-term debt.

Another big expense reduction may be hard to repeat. The costs related to the litigation of bad mortgages was $471 million in the second quarter, about half the amount a year ago. Adverse legal outcomes and new settlements could drive litigation expenses higher again, analysts said.

“The litigation expense is one that we are modeling down over time,” Ms. Stemm said. “But that doesn’t account for the one-off risk of a large settlement.”

Still, Bank of America appears to be making progress in the unit that deals with borrowers who have fallen behind on their mortgage payments. The expenses related to collecting payments and negotiating loan modifications have been high at Bank of America. But the bank said on Wednesday that it expected the number of mortgages that are more than two months past due to decline to 375,000 by the fourth quarter, compared with its previous estimate of 400,000 by the end of the year. Expenses in the unit are also expected to fall, the bank said.

Cutting costs can only go so far, so Bank of America also needs to find ways to generate some revenue growth.

Part of the problem is Bank of America’s conflicted relationship with mortgages after the financial crisis. It was inundated with Countrywide’s bad loans, and it was late to participate in the latest mortgage refinancing boom, which was a big source of revenue for many banks. And since the crisis, Wells Fargo has become the predominant mortgage bank, making it difficult for rivals to regain their precrisis foothold.

Bank of America wants to increase its share of the mortgage market, and it made some gains in the second quarter, but the challenges of the market were apparent.

Even though Bank of America originated more mortgages in the quarter than it did in the period a year earlier, its revenue from making home loans fell. The financial gain that banks make from selling mortgages to government entities has fallen, which hurts mortgage revenue.

The amount of refinancing has dropped off as interest rates have climbed. As a result, banks hope borrowers will take out more original mortgages if the housing recovery continues, but this business is still relatively quiet.

With consumer businesses lackluster, Bank of America had to rely on Wall Street for growth.

Fees from advising on mergers and acquisitions and underwriting stock and bond deals were up. Managing money for wealthy individuals was also strong. At the Merrill Lynch Wealth Management unit, revenue rose 10.5 percent, to $3.74 billion.

Wall Street businesses can be volatile, though.

That was apparent in Bank of America’s trading results. Revenue from trading stocks rose nearly 60 percent, to $1.2 billion. But the fixed-income unit that trades bonds, currencies, commodities and derivatives linked to those assets, didn’t fare as well. Its revenue fell 5 percent, to $2.3 billion.

Bank of America’s rivals have so far reported increases of more than 10 percent in fixed-income revenue growth in the quarter.

In a news release, Bank of America said fixed-income results were affected by the sell-off in bonds that took place in the second quarter after the Federal Reserve said it was contemplating reducing its stimulus policies.

Bank of America shares were up 3.6 percent in afternoon trading, suggesting investors were pleased with the results. Mr. Ramsden, the Goldman analyst, said the market was keen to see revenue stabilize, costs come down and strong indications that the bank has built up sufficient capital.

“They are doing all three,” he said. “The debate is going to be, are they moving fast enough?”

Article source: http://dealbook.nytimes.com/2013/07/17/bank-of-america-profit-rises-63/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Bausch & Lomb Said to Be Near $9 Billion Sale to Valeant

May 24, 2013 by Leave a Comment

Bausch Lomb, an eye care products maker, filed in March to go public.Paul Sakuma/Associated PressBausch Lomb, an eye care products maker, filed in March to go public.

Bausch Lomb, the eye care products maker, is near a deal to sell itself to Valeant Pharmaceuticals for about $9 billion, people briefed on the matter said on Friday.

A deal could be announced as soon as next week, these people said, cautioning that talks were continuing and could fall apart.

If completed, a transaction would be one of the biggest health care deals of the year. It would also be the largest ever for Valeant, a Canadian drug maker with a history of striking deals. The company unsuccessfully sought this year to buy Actavis, a generic pharmaceutical company, in what would have been a takeover worth more than $13 billion.

And it could reap a big gain for Bausch Lomb’s current owner, the private equity firm Warburg Pincus, which paid about $4.5 billion for it in 2007. Warburg Pincus had been pursuing a sale or an initial public offering of the health care company since late last year.

The investment firm appeared to be leaning toward an initial offering for Bausch Lomb earlier this year, after potential takeover bids fell short of a roughly $10 billion price target.

News of the talks was reported earlier by The Wall Street Journal online.

Article source: http://dealbook.nytimes.com/2013/05/24/bausch-lomb-said-to-be-near-9-billion-sale-to-valeant/?partner=rss&emc=rss

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Durable Goods Orders Up More Than Expected

May 24, 2013 by Leave a Comment

New orders for durable goods, which range from toasters to aircraft, increased 3.3 percent last month, the Commerce Department said on Friday.

The data was the latest to show the U.S. economy exhibiting surprising resilience in the face of harsh fiscal austerity measures enacted this year.

“(It’s) another sign that growth is holding up quite well,” said Paul Ashworth, an economist at Capital Economics in Toronto.

While Washington hiked taxes in January and sweeping budget cuts began in March, consumer spending has looked relatively robust and many economists think the U.S. Federal Reserve could begin tapering a monetary stimulus program by the end of the year.

Economists polled by Reuters had expected new orders for durable goods, which are meant to last three years or more, to rise 1.5 percent last month. The Commerce Department also revised prior readings for orders to show a smaller decline in March than previously estimated.

The better-than-expected news helped contain losses on Wall Street, where stocks slipped for a third straight day. Investors fear that less monetary stimulus could crimp the supply of money for investing. Yields on U.S. government debt also declined.

NOT RIP-ROARING

Data earlier this month showed U.S. factory output fell in April for the second straight month, hurt by the European debt crisis which has weighed on demand at factories from Los Angeles to Shanghai.

Friday’s report showed a measure of underlying demand in the factory sector, which strips out aircraft and military goods and is an indicator of future business spending, advanced 1.2 percent. That was a faster clip than analysts had expected.

Even if that signals a return to growth in the factory sector, economists expect government austerity will nevertheless sap strength from the economy as the year progresses.

“While (Friday’s data) was definitely better than expected, I would not mistake this for rip-roaring strength,” said Stephen Stanley, an economist at Pierpont Securities in Stamford, Connecticut.

Shipments of core capital goods, which go into calculations of equipment and software spending in the gross domestic product report, fell 1.5 percent.

That suggests that while there were signs businesses could spend more in coming months, actual transactions got off to a weak start in the second quarter, reinforcing the view that economic growth has slowed.

Economists polled by Reuters earlier this month expect GDP to grow at a 1.5 percent annual rate in the second quarter, down from a 2.5 percent pace in the January-March period.

Shipments of capital goods in the defense sector, which is shouldering a large share of Washington’s austerity drive, fell 5.6 percent in April.

And while the strength in overall new orders was broad based, it received a boost from a rise in demand for aircraft, which is often volatile. The increase in aircraft orders was expected; plane-maker Boeing received orders for 51 aircraft, up from 39 in March, according to information posted on its website.

(Editing by Andrea Ricci)

Article source: http://www.nytimes.com/reuters/2013/05/24/business/24reuters-durable-goods.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

DealBook: Seeking Relief, Banks Shift Risk to Murkier Corners

April 10, 2013 by Leave a Comment

Banks have been shedding risky assets to show regulators that they are not as vulnerable as they were during the financial crisis. In some cases, however, the assets don’t actually move — the bank just shifts the risk to another institution.

This trading sleight of hand has been around Wall Street for a while. But as regulators press for banks to be safer, demand for these maneuvers — known as capital relief trades or regulatory capital trades — has been growing, especially in Europe.

Citigroup, Credit Suisse and UBS have recently completed such trades. Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers. The buyers agree to cover a percentage of losses on these assets for a fee, sometimes 15 percent a year or more.

The loans then look less worrisome — at least to the bank and its regulator. As a result, the bank does not need to hold as much capital, potentially improving profitability.

“I think we are going to see more of these type of trades in the U.S. given the demands by regulators to hold more capital,” said Kevin White, a former executive at Lehman Brothers who founded Spring Hill Capital Partners, which is working with banks to structure regulatory capital trades.

Citigroup, Credit Suisse and UBS declined to comment on their trades. Privately, however, bankers acknowledge that while these trades may be pushing risk into a less regulated corner of Wall Street, they also point out that the risk is being moved into a less systemic part of the financial industry than the big banks.

The rule-writing going on as part of the Dodd-Frank financial regulatory overhaul may prevent some of these trades, but bankers say this will simply force them to structure the trades differently.

Some regulators say they are concerned that in some instances these transactions are not actually taking risk off bank balance sheets. For instance, a financial institution may end up lending money to clients so they can invest in one of these trades, a move that could leave a bank with even more risk on its books.

Critics point to other reasons to worry. Most of these trades are structured as credit-default swaps, a derivative that resembles insurance. These kinds of swaps pushed the insurance giant American International Group to the brink of collapse in September 2008. Another red flag is that banks often use special-purpose vehicles located abroad, frequently in the Cayman Islands, to structure these trades.

“These trades allow the banks to go to regulators and say the risk is gone,” said Anat R. Admati, a professor of finance at Stanford University. “But it’s not gone at all; it’s just been pushed into a murky corner of the market.”

The trades can take many forms, but typically a bank will buy a credit-default swap on some of its loans from a special-purpose vehicle, which is financed by outside investors. If all goes well, the investors receive an annual fee for taking on this risk. But in the worst case, where the loans in the portfolio default, the insurance that the bank has bought kicks in and covers its losses. The investors on the other side are wiped out.

A number of American investment firms like Spring Hill Capital Partners have been trying to find investors for these deals. Glenn Blasius, another Lehman alumni, said he was raising money for the Ovid Regulatory Capital Relief Fund, which will invest in these trades.

The Orchard Global Capital Group has raised a fund to invest in regulatory capital trades, and the New Mexico Educational Retirement Board is among its investors.

In December 2011, Allan Martin, a representative with an investment consultant firm that advises pension funds, met with the New Mexican pension fund over investing through Orchard in a regulatory capital trade, according to the minutes of a board meeting.

Mr. Martin explained to the retirement board that these transactions had been created to allow the banks “to continue to hold the assets on their balance sheet” while selling some of the risk.

At the meeting, Jan Goodwin, executive director of the New Mexico Educational Retirement Board, asked about the use of credit-default swaps, which got A.I.G. into trouble. Mr. Martin admitted that the Orchard deal “has a little flavor of that” but said Orchard had done “a great deal” of due diligence on the underlying collateral, something he said A.I.G. often didn’t do.

In an interview, Mr. Martin said that “a lot of clients ask how this is different than A.I.G.,” and he said it was because Orchard had a better understanding of the risks involved in the assets it was dealing with.

An executive with Orchard did not respond to requests for comment.

Many major banks have structured these trades. In March, Credit Suisse completed a transaction named Lucerne, after the Swiss lake, in which it bought insurance on a 5 billion Swiss franc portfolio of small and medium-size Swiss business loans, according to people who were briefed on the matter but not authorized to speak on the record because they had signed confidentiality agreements.

Credit Suisse agreed to take a small percentage of the losses, and it lined up American and European investors willing, for an annual fee of roughly 10 percent, to assume the rest of the risk, these people say.

Citigroup cut a deal at the end of last year with the private equity firm Blackstone Group, which insured the big bank against a portion of the losses on a roughly $1 billion pool of shipping loans. The bank used a special-purpose vehicle in Ireland called Cloverie to facilitate the trade, according to people briefed on the matter but not authorized to speak on the record.

For its part, Blackstone put up about $100 million, or 12 percent of the value of the shipping portfolio, to cover any possible losses. If things go well, Blackstone will receive a return of about 15 percent, these people say. If the shipping loans go sour, Citigroup gets Blackstone’s money and the private equity firm loses its cash.

Credit Suisse received capital relief on the Lucerne deal, although the exact amount is not known. Citigroup was able to reduce by roughly 90 percent the amount of capital it needed to set aside to cover losses on the shipping portfolio.

One Citigroup executive with knowledge of this trade but not authorized to speak on the record said it was structured to reduce Citigroup’s exposure to shipping loans. The fact that it reduced the amount of capital the bank had to hold was “an added bonus.”

UBS also recently completed a regulatory capital trade, selling a piece of the risk on a portfolio of roughly 100 corporate loans, according to people who reviewed the transaction but who declined to speak publicly because they had signed confidentiality agreements.

And Citigroup is marketing a second risk capital trade involving shipping loans, according to people briefed on the matter.

“These trades are a good thing,” said Richard Robb, a New York money manager whose firm, Christofferson, Robb Company, has been structuring regulatory capital trades for more than a decade. “The best way to protect the banks against this risk is to move it outside the banking system to wealthy institutions. No one will be coming to bail out our company or our investors if these trades backfire.”

Article source: http://dealbook.nytimes.com/2013/04/10/seeking-relief-banks-shift-risk-to-murkier-corners/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Geithner’s Treasury Tenure Defined by Financial Crisis

January 10, 2013 by Leave a Comment

Looking forward, Mr. Geithner has no plans. A regulator of Wall Street but not a creature of it, he will probably be the least likely former Treasury secretary to land there. “I’m going to take a long time,” he said in the second of two exit interviews, one conducted in the midst of the recent fiscal fight and one just after the news conference on Thursday at which President Obama formally nominated his successor, Jacob J. Lew.

Looking back, he is remarkably sanguine. He does not feel he would have made any decisions differently: the policy choices available to him were far from ideal, he said, but his team did the best it could within the realm of the politically possible. “It was a very bad crisis. No playbook. No road map. No clear precedent,” he said. “If we had a different set of constraints, particularly in fiscal policy, then I think that the economic outcome could have been modestly better.”

A sense of the weight of those constraints emerged in the brief speech Mr. Geithner gave at the White House news conference on Thursday, as Mr. Obama thanked him for his service. While describing the “compelling and rewarding work” of government, he mentioned the “divisive state of our political system.”

In the interviews, Mr. Geithner, 51, returned to the idea that the Treasury and the Obama administration might have done more if they had been given more latitude by Congress.

“The way our country is structured, by design, the founders left the Congress with all the meaningful authorities to determine the path of the economy and what you could do in a crisis,” he said, mentioning how hard the White House had pushed for more authority. “The scale of the fiscal response in particular was dependent” on what Congress would allow.

Mr. Geithner ran the Treasury during the tumultuous years of the financial crisis and a recession that slowly gave way to a recovery, albeit an unsteady one. As president of the Federal Reserve Bank of New York before he joined Mr. Obama’s cabinet in 2009, he was at the center of the most nerve-racking moments of the banking crisis. And his low-key but forceful insistence kept the Treasury at the center of every major economic policy decision of Mr. Obama’s first term, aside from the health care overhaul.

By a combination of historical accident and his own design, Mr. Geithner will go down as one of the most influential Treasury secretaries, alongside figures like Robert E. Rubin, who served under President Bill Clinton, and Henry Morgenthau Jr., who served under Roosevelt.

But he has not always been a popular one. Both Republicans and Democrats have accused him of subverting capitalism and dedicating taxpayer money to “too big to fail” institutions in perpetuity. The left has criticized him for helping “fat cat” bankers instead of regular people, especially underwater homeowners.

“Is the system safer today?” said Dennis M. Kelleher, president of Better Markets, a nonprofit that advocates stricter financial regulations. “The collapse turned an implicit public guarantee into an explicit public guarantee. It is one of the most dramatic changes of federal policy in history and puts too much at stake.”

Still, Mr. Geithner has attained something like a first-among-equals stature at the White House. He is one of the only top-level staff members to have remained throughout Mr. Obama’s first term, and his word and policy judgments have prevailed in fight after fight and negotiation after negotiation.

“He went from someone who people were unsure of in the first six months to achieving the elevated status of being the guy who made the toughest and loneliest calls at the most politically perilous moments — and turned out to be right,” said Gene B. Sperling, director of the National Economic Council.

In many ways, his colleagues said, Mr. Geithner’s job seemed at times to be that of a firefighter or, at its worst moments, a glorified janitor. His four years were filled with a series of crises: the collapse of the financial system, spiraling unemployment, the cratering housing market, the financial reform bill, the ailing auto industry, the European debt crisis, a debt ceiling standoff and two protracted budget negotiations.

“He is so serene in good times and in bad,” said Michael Froman, a deputy national security adviser who has known Mr. Geithner for two decades and helped introduce him to Mr. Obama. Given Mr. Geithner’s background fighting financial disasters abroad as a Treasury aide, Mr. Froman said, “I think he was better prepared than anyone to deal with these crises.”

The decisions Mr. Geithner made during the financial crisis remain among his most controversial. For instance, he quashed proposals to seize bonuses, impose new taxes or otherwise punish bankers, whose pay rebounded quickly after the collapse.

Mr. Geithner refers to such proposals as the “Old Testament” part of the rescue and reform effort. “We just didn’t see a more effective response,” he said. “If you’re governing, your responsibility is to do what you think is going to be best for the welfare of the country.” More punitive measures might have been emotionally satisfying, administration aides said, but they might also have put taxpayer dollars at risk by destabilizing the banks.

Housing is another area in which Mr. Geithner’s leadership has been criticized. The Obama administration estimated at first that it could reach three million to four million homeowners with its mortgage plans, but it has aided less than half that number and left billions of dollars unspent.

“Our authority on housing was very, very limited,” Mr. Geithner said. “We were able to use a significant amount of the authority in the Troubled Asset Relief Program to design a program for modifying the loans of a pretty substantial fraction of Americans facing foreclosure. But we had no legal authority to compel banks to provide mortgage relief. All we could do was find incentives.”

He added, “It’s not clear with greater authority we would have been able to achieve a significantly faster pace of improvement.”

Such technocratic responses are typical of Mr. Geithner. His aides say that empathizing with the public and communicating his anger or disappointment with the slow pace of the recovery have always been among his weak points.

He has struggled at times with the outward-facing role of the Treasury secretary. He dislikes speaking with the press and bristles at being a “potted plant” trotted out at news conferences, for instance. Aides said they prepared him for media appearances as if playing the game Taboo, banning him from using phrases like “credit-default spreads.”

But within the White House, Mr. Geithner’s technocratic skills and no-drama attitude, as well as his calls on how to deal with the crisis, made him one of Mr. Obama’s most trusted aides. Though he is mostly known for his work on the financial crisis, he was also the White House’s main emissary to Europe on its debt crisis and spent hundreds of hours working on fiscal negotiations with Congress. During his tenure, he made 61 domestic trips and 37 international ones, and testified 67 times to Congressional committees.

Looking back, he said, more authority or financing from Congress might have helped the administration promote the recovery. But he said he felt comfortable otherwise.

Asked directly how he viewed his tenure, however, Mr. Geithner shied away. “I kind of think that’s better for history to answer,” he said.

Article source: http://www.nytimes.com/2013/01/11/business/geithners-treasury-tenure-defined-by-financial-crisis.html?partner=rss&emc=rss

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