Merrill Lynch on The Huffington Post

Janet Tavakoli: Goldman Sachs Responds To The New York Times

2009-11-24T10:06:38Z

Pulitzer Prize-winner Gretchen Morgenson of the New York Times wrote a must read article ("Revisiting a Fed Waltz with AIG," November 21, 2009) on Sunday in which she recaps salient points from the November 17, 2009 report of the Office of the Special Inspector General (Neil Barofsky) for the Troubled Asset Relief Programs, "Factors Affecting Efforts to Limit Payments to AIG Counterparties," and wrote:

On the question of whether this payout was what the report describes as a "backdoor bailout" of A.I.G.'s counterparties, Mr. Barofsky concluded: "The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.'s counterparties." [T]his was money the banks might not otherwise have received had A.I.G. gone belly-up.

Timothy Geithner's interaction with the New York Times, first in his role as President of the FRBNY and later as Treasury Secretary, seems to be that of a bailout enabler and a PR spin doctor for Goldman Sachs. Based on the Sunday article's revelations, I would not characterize his behavior as that of "a good man in a storm;" he seems a mere water-boy:

According to an e-mail message that Goldman sent to the New York Fed at the time
[September of '08], Mr. Geithner talked about the article with Mr. Viniar, Goldman's chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm's hedges, he said he had not. Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman's hedges were adequate. And, notwithstanding the inspector general's findings, he said he still believes Goldman was hedged."

Prior to the article's publication, Goldman Sachs responded to Ms. Morgenson's questions about the Barofsky report via an email from its spokesman Lucas van Praag. The entire exchange can be found here "Goldman's Response to Questions About A.I.G.," November 22, 2009.

Did Goldman Sachs dissemble and equivocate in its responses to the New York Times?

Based on these responses answer is yes. Treasury Secretary Geithner may wish to keep that in mind the next time he looks to Goldman Sachs for his answers.

Mr. van Praag states "Starting in the mid-90s, we bought credit default swaps from AIG to protect our firm from the risk of a decline in the value of risk we had assumed on behalf some of our clients, (i.e. assets to which we had exposure)." Near the end of his email he again mentions "CDOs from our clients" (emphasis added).

His email never once mentions that the problematic CDOs requiring collateral calls from A.I.G. that precipitated its liquidity problems, the one's referenced in the report, seem to be chiefly 2004/5/6 vintage CDOs. Goldman underwrote the Abacus CDOs on its own list, and Goldman also underwrote CDOs that featured prominently and in large portion on the lists of French Banks SocGen and Calyon as well as Bank of Montreal and Wachovia that also hedged this risk using CDSs with AIG.

When responding about whether or not Goldman would have trouble collecting on its hedges in the event of an A.I.G. collapse as Barofsky's report indicates, Mr. van Praag wrote that Barofsky's report stated a collapse "'might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased' (emphasis added by Mr. van Praag) -- however, it might not, and it is our belief that it ultimately would not have done so."

For a firm that trumpets its risk management, Goldman seemed to present only one scenario on September 16, 2008. Lehman had just gone bankrupt, Bank of America had just agreed to takeover Merrill Lynch, and banks were starved for liquidity just like A.I.G. The banks' TARP bailout had not yet occurred. I suggest that Goldman may be self-deluding with its claim to be stellar risk managers here: "I Retract My Apology and Call for More Regulation of Goldman Sachs."

Mr. van Praag notes that Barofsky's report said had AIG not been rescued, Goldman would have had to bear the risk of further declines in the CDOs that it transferred to Maiden Lane III. He retorts "This is accurate in concept; however, Goldman Sachs has significant experience in adeptly managing this form of market risk."

I previously noted how "adeptly" Goldman Sachs manages its risk: "Goldman's Undisclosed Role in AIG's Distress". How did that work out for the global markets? Fed Chairman Ben Bernanke told Congress on March 24, 2009: "Conceivably, [AIG's] failure could have resulted in a 1930's-style global financial and economic meltdown, with catastrophic implications.

Mr. van Praag also wrote: "It is worth noting that we participated in the transfer of assets to the Maiden Lane III vehicle at the request of the New York Federal Reserve." I agree this is especially worth noting given that Stephen Friedman, a sitting board member of Goldman Sachs (and former Chairman and CEO) owned shares of Goldman Sachs and was Chairman of the FRBNY (he resigned in May 2009 after his ties were questioned), and given the degree of capture Timothy Geithner, then President of the FRBNY demonstrated in his seeming lack of curiosity about Goldman's hedges as mentioned above.

Ms. Morgenson also asked for some perspective about Goldman CEO Lloyd Blankfein's apology for Goldman's practices and its contribution to the credit crisis. She asked why Blankfein said Goldman "participated in things that were clearly wrong and have reason to regret."

Mr. van Praag responded:

Lloyd has expressed regret in various different forums, including a speech to the Council of Institutional Investors in April and one at the Handelsblatt Conference in September. He has stated that the financial services industry collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public's long-term interests. In particular, the industry let the growth and complexity in some new instruments outstrip their economic and social utility as well as the operational capacity to manage them.

Of special note is Goldman's admission that these products have outstripped "their economic and social utility and operational capacity to manage them." (emphasis added) That statement is apt for many subsequent trading activities as well. But as risk managers, Goldman is dodging its responsibility in its representation that these products merely outstripped management "operational capacity."

Goldman's risk management ability was not up to the task, and its ability is not up to the task of managing the systemic risk of its now gigantic CDS operations in the wake of the demise and hobbling of many of its competitors. Operational capacity is one part of the problem. The other problem is that in Goldman's responses to the New York Times, a bunch of operators tried to gaslight the press.

Mort Zuckerman: Federal Reserve Should Retain Its Authority And Independence

2009-11-23T12:10:04Z

In the grip of our Great Recession, with more job losses to come, we have yet to fix the broken financial system that is an underlying cause of this whole mess. How can we do it? Some of the ideas being talked about in the halls of Congress are as dangerous as the reckless congressional activity that helped to precipitate the disaster in the first place.

Wall Street Profits On Pace For Record, Industry Recovering 'Faster Than Expected': NY State Comptroller

2009-11-18T07:41:33Z

It took Wall Street just one year to make its way back to record profits.

According to a report released Tuesday by the comptroller of New York State, Thomas P. DiNapoli, Wall Street is turning around "much faster than expected" and is on pace to pull in record earnings this year.

New York City's four largest investment firms -- Goldman Sachs, JPMorgan Chase, Merrill Lynch and Morgan Stanley -- earned $22.5 billion in the first nine months of 2009. Wall Street's earnings, should they remain steady for the rest of the year, could lead some firms to eclipse 2007's record profits.

From DiNapoli's report:

"The national economy is slowly improving, but Wall Street has recovered much faster than anyone had envisioned. Profitability is on track to exceed 2006 levels, which was a banner year for the industry. Strong profits have been driven by low
interest rates, which reduce the cost of doing business.

Compensation is also increasing faster than expected, leading to expectations of higher bonuses. The federal government, which spent trillions of dollars to support the financial sector, has taken steps that may restrict cash bonuses and defer compensation to future years in an effort to reduce excessive risk-taking and reward long-term performance. While these initiatives may reduce personal income tax collections in the short term, New York State and New York City could benefit from increased stability in the financial sector. industry added 3,600 jobs in September 2009.)"

The six largest bank holding companies in the U.S. dedicated $112 billion to compensation during the first nine months of the year, the report noted. Even Merrill Lynch, which lost $41 billion in the first nine months 2008, is expected to pay out sizable bonuses this year.

Deeper in the report are some indications of the disparity between Wall Street's ability to generate cash for its employees and its ability to create jobs and stimulate the larger economy. Though each new job on Wall Street creates two additional jobs in other industries in New York City, pay for bankers and traders may still be out of whack. "The securities industry accounted for 24 percent of the wages paid in New York City in 2008, even though the industry accounted for only 5 percent of the jobs," the report stated.

The average securities industry salary in 2008 was $382,130, down from a peak of $401,500 in 2007. (Keep in mind that the median income in America was approximately $50,000 in 2007.)

The average securities industry salary in New York was more than six times greater than in other industries. And since 2003 salaries in other industries in New York have grown just 20.4 percent, while Wall Street pay has jumped 73 percent.

"Consumers are still finding difficultly accessing the credit markets," DiNapoli's report states, while commercial credit has declined by 52 percent since its peak in July 2007.

READ the entire report:

wall_street_report_2009 -

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BofA, Merrill Deal: Republicans And Democrats Square Off Over Government's Role

2009-11-17T15:02:29Z

WASHINGTON — A senior House Democrat says the government didn't force Bank of America to take over Merrill Lynch, but a bank board member said much pressure was applied and Republicans charged that a committee inquiry was covering up the role of an Obama administration official.

"The government pushed us hard to do this deal," Bank of America director Charles "Chad" Gifford said after persistent questioning by lawmakers at a hearing Tuesday.

Who Was Really Bailed Out? We'll Never Know: NYT's : Floyd Norris

2009-11-17T11:39:06Z

Who were the ultimate beneficiaries of the Treasury's decision to make good on the credit default swaps written by the American International Group?

We still don't know.

Geithner Singled Out In TARP Watchdog Neil Barofsky's Scathing Report On AIG Bailout

2009-11-16T21:36:44Z

A brutal report issued Monday by a government watchdog holds Timothy Geithner -- then the head of the Federal Reserve Bank of New York and now the nation's Treasury Secretary -- responsible for overpayments that put billions of extra tax dollars in the coffers of major Wall Street firms, most notably Goldman Sachs.

The authoritative new narrative describes how, while bailing out insurance giant AIG last fall, a team led by Geithner failed nearly every step of the way.

Instead of bargaining with AIG's numerous counterparties to resolve its billions of dollars in souring derivatives contracts, Geithner's team ended up paying top dollar for toxic assets -- "an amount far above their market value at the time," the report notes.

"There is no question that the effect of FRBNY's decisions -- indeed, the very design of the federal assistance to AIG -- was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties," the Office of the Special Inspector General for the Troubled Asset Relief Program said.

Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got full value for their derivatives contracts with AIG, and taxpayers got the bill. In total, $27.1 billion of public money was transferred to companies that did business with AIG.

Throughout the bailout of AIG, the report says, the New York Fed failed to develop appropriate contingency plans; failed to properly assess the impact of its decisions; and generally engaged in negotiation strategies that were doomed to fail.

Then, after Geithner's team paid off AIG's counterparties on Wall Street, it imposed "onerous" terms on the troubled insurer, the report says.

"[T]he decision to acquire a controlling interest in one of the world's most complex and most troubled corporations was done with almost no independent consideration of the terms of the transaction or the impact that those terms might have on the future of AIG," the report finds.

Geithner, now the nation's chief financial officer, just didn't bargain hard enough with Wall Street's biggest companies, the report concludes:

[T]he refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely "voluntary," made the possibility of obtaining concessions from those counterparties extremely remote. While there can be no doubt that a regulators' inherent leverage over a regulated entity must be used appropriately, and could in certain circumstances be abused, in other instances in this financial crisis regulators (including the Federal Reserve) have used overtly coercive language to convince financial institutions to take or forego certain actions. As SIGTARP reported in its audit of the initial Capital Purchase Program investments, for example, Treasury and the Federal Reserve were fully prepared to use their leverage as regulators to compel the nine largest financial institutions (including some of AIG's counterparties) to accept $125 billion of TARP funding and to pressure Bank of America to conclude its merger with Merrill Lynch. Similarly, it has been widely reported that the Government, while arguably acting on behalf of General Motors and Chrysler, took an active role in negotiating substantial concessions from the creditors of those companies.

Meanwhile, the Fed was attempting to keep the details of AIG's counterparties hidden from public view -- another big mistake, according to the report:

The now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve...once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG's stability, the privacy and business interests of the counterparties, and the stability of the markets.

After public and Congressional pressure, AIG disclosed the identities. Notwithstanding the Federal Reserve's warnings, the sky did not fall; there is no indication that AIG's disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties. The lesson that should be learned -- one that has been made apparent time after time in the Government's response to the financial crisis -- is that the default position, whenever Government funds are deployed in a crisis to support markets or institutions, should be that the public is entitled to know what is being done with Government funds.

While SIGTARP acknowledges that there might be circumstances in which the public's right to know what its Government is doing should be circumscribed, those instances should be very few and very far between.

READ the full report:

SIGTARP Report Nov 16 -

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Huffington Post Business Editor Ryan McCarthy also contributed to this report.

Arianna Huffington: Why It's Wrong When Wrongdoers Are Allowed to Admit No Wrongdoing

2009-11-09T10:55:53Z

"The struggle of man against power is the struggle of memory against forgetting."

So wrote Milan Kundera in The Book of Laughter and Forgetting. It is one of my favorite quotes and it popped into my head as I was reading about last week's settlement between JPMorgan and the SEC in which the banking giant agreed to pay a $25 million penalty and cancel $647 million in fees owed by Alabama's Jefferson County as the result of a complicated derivatives deal that blew up in the county's face.

As part of the settlement, JPMorgan neither admitted nor denied wrongdoing -- despite ample evidence that it had engaged in plenty of wrongdoing. Things like paying off local officials with millions to win no-bid contracts worth billions and convincing county officials to switch from fixed-rate bonds to bonds hedged with risky derivatives -- a switch that has driven Jefferson County to the brink of bankruptcy. "We have been victimized by our creditors," said a county official.

JPMorgan released a statement that it was "pleased to have reached a settlement with the SEC," and acted as if it was practically a disinterested party: "The charges relate principally to municipal transactions that occurred six and seven years ago. JPMorgan has since discontinued that business, and the employees in question are no longer employed by the firm."

So no wrongdoing admitted, and time to move on to the next lucrative money-printing scheme. How tidy. This is what passes for justice on Wall Street these days. If you commit a petty crime and hammer out a plea bargain, you'll have to admit wrongdoing as part of the agreement. But put on a suit and commit a billion dollar crime and you won't even have to admit you did anything wrong. It'll be as if it never happened. Which, of course, makes it much more likely that it will happen again.

We saw the same dynamic played out earlier this year in the legal saga surrounding the $3.6 billion in bonuses that was awarded to Merrill Lynch executives just before the failing firm was acquired by Bank of America (with a lot of help from American taxpayers, who bailed out BofA with $45 billion).

It appears that Bank of America executives failed to inform their shareholders that, as part of the acquisition, they were going to give billions to the executives who had been at the helm while Merrill lost $27 billion in 2008. Had the shareholders been told, the news would more than likely have put a crimp in the hastily arranged deal.

Many thought the matter was closed back in August when the SEC reached a settlement with Bank of America in which the banking giant would pay a $33 million fine but -- you guessed it -- admit no wrongdoing.

Of course, lots of wrong was done in that case too -- something that was implicit in the bank's willingness to pay the multimillion-dollar fine. Specific people had made very specific decisions surrounding the Merrill Lynch bonuses -- including not informing their shareholders.

But, instead of going after them, regulators went after the company, gave it a minor ding to its bottom line, and were ready to forget the whole thing.

Last year, the total of amount of fines levied by the SEC was the lowest since the corporate scandals of 2002 led to stricter enforcement regulations. So while the financial system was on a fast track to near-collapse, the SEC was taking its hand off the brake. And the perpetrators of that near-collapse are being allowed to avoid accountability. When crimes are uncovered then resolved with no acknowledgment that a crime was ever committed, that's a recipe for anarchy -- not for a healthy democracy.

It's really not that complicated: if you do the crime, you do the time. But the people who run the show like to make it seem like it is very complicated -- all the better to obscure the simple moral principle of right and wrong. Why should it matter whether you commit your crimes in a fancy boardroom or on the street? If you were reaping the (often enormous) benefits of your crime, why don't you have to admit wrongdoing when you're caught, and pay a commensurate -- not a token -- penalty?

As it happens, there are some heroes out there who have noticed that the ambiguous way our laws are being enforced has diverged from the unambiguous morality the laws are based on.

In the Bank of America case, the hero is U.S. District Court Judge Jed Rakoff. Instead of rubber-stamping the BofA/SEC settlement as everybody expected, Judge Rakoff refused to sign off on the deal, which he called a breach of "justice and morality" that "suggests a rather cynical relationship between the parties."

And Judge Rakoff demanded to know who exactly were the executives who knew about the bonuses and decided not to disclose them. Instead of a faceless company, shouldn't the culpability, Rakoff asked at a hearing, be on "the individuals who were responsible?"

But rather than naming those responsible, Bank of America claimed it was all the fault of its lawyers -- an excuse that, shockingly, the SEC bought, saying the fact that the bank's executives had relied on legal advice would present "substantial obstacles" to prosecution.

Judge Rakoff wasn't buying it -- he saw the slippery slope that thinking would lead to: "It would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel," he said.

Rakoff has a history of actually applying the law. Back in 2003, he rejected a settlement with WorldCom because the fine was too low.

When he first became a judge, prosecution used to focus more on individuals instead of companies. "The feeling then," he said, "was if a crime had been committed, it was important to discover who the persons were who made the wrongful decisions."

Judge Rakoff's display of spine appears to have rubbed off on the SEC, which now says it will aggressively pursue its case, taking Bank of America to trial. And there have been other ripple effects: after initially stonewalling a congressional committee looking into the Merrill acquisition, the bank agreed in September to hand over some, but not all, of the documents the committee had requested. And in October, it agreed to turn over to the SEC and the New York Attorney General's office documents revealing the legal advice it received regarding the Merrill deal -- an unusual waiving of attorney-client privilege. What's more, Brian Moynihan, the bank's onetime general counsel and a contender to succeed departing CEO Ken Lewis, will testify before the House Oversight Committee next week about his role in the Merrill takeover.

Of course, it's not just our "too big to fail" banks that have been allowed to do wrong without having to admit to any wrongdoing. The pharmaceutical industry and health insurance companies have been doing the "pay the fine but admit nothing" dance for years -- chalking up the millions (and sometimes billions) they have been fined as the cost of doing business.

But with the banking, drug, and insurance industries all finding themselves at a crossroads, now is a very good time to revoke the Get Out of Jail Free card those at the helm of these companies have been given for far too long.

We all know that there was a great deal of wrongdoing that led to the near-collapse of our financial system and to our badly broken health care system. The first step to reforming each of them is to acknowledge that wrongdoing -- and to seek the real punishment of the wrongdoers.

7 Huge Corporations That Have Seen Their Valuations Plummet (PHOTOS)

2009-11-03T11:44:04Z

A little more than a year after the financial crisis took hold, most of our 401Ks are still reeling. Since its peak in 2007, the Dow Jones Index is down about 35 percent.

But, in the last few years -- and in the last decade -- more than a handful of huge corporations have seen their valuations plunge at an even greater rate. Consider the fates of the seven household names we've compiled below, who've seen enormous drops in their reported valuations or market caps.

Among them are some very well-known former titans -- Citigroup, for one -- and media giants like The New York Times and the recently-sold BusinessWeek. Though some of these companies are now wards of the state, others like Palm are being reinvigorated around new products. Which company will make it back to the top? Check out our slideshow and vote below.

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Alice Schroeder: Warren Buffett and the Business of Life: Part 1 of 7

2009-10-29T13:24:59Z

When THE SNOWBALL: WARREN BUFFETT AND THE BUSINESS OF LIFE (BANTAM) was originally published in fall 2008, Alice Schroeder's intimate account of the man known as "The Oracle of Omaha" made national headlines. The book's publication also happened to coincide with the depression of the global economy and the collapse of America's banking system. In this seven-part series, Schroeder details Buffett's reaction to the economic crisis, the November presidential race and election of Barack Obama, as well as the decline of Berkshire Hathaway's stock from Triple-A status.
_______________

On October 23, 2006, Berkshire Hathaway became the first American stock to trade above $100,000 per share. By the end of 2007, BRK reached $149,200, which gave Berkshire a market value of more than $200 billion. Berkshire was the world's most respected company, according to a Barron's survey. Buffett's personal fortune exceeded $60 billion, and only a few months earlier, the Dow had reached its all-time high of 14,164.53.2 Businesses were posting record earnings; the market, as a discounting machine, built into stock prices the expectation that an even greater and growing stream of money could be coaxed from consumers' pockets.

Buffett dampened his own shareholders' expectations of Berkshire, yet showed no signs of giving up control or competing any less aggressively than before. Even so, a few of Berkshire's longtime shareholders began to sell stock. Some were donating appreciated shares to charity at a recently run-up price. Others cited Buffett's age; he was approaching seventy-eight. And inevitably, the $149,200 price tag for a single share of BRK drew in the sort of new investors who always buy in at the top.

As reflected in Berkshire's stock price, Buffett had been enjoying a period of almost unbroken success since the end of the Internet bubble. Only one episode of any significance marred the record of these six years. This was a legal threat to Buffett and to Berkshire that, at least initially, was as serious as Buffett's earlier encounter with the SEC over Blue Chip, and Salomon's near brush with death. It had to do with General Re, Buffett's onetime problem-child investment, which had--at least financially--undergone a remarkable recovery.

By 2007, the company had become the most successful of Berkshire's long string of insurance turnarounds. After $2.3 billion of cumulative losses related to insurance and reinsurance sold in prior years, and $412 million of charges for the runoff of Gen Re Securities, the company's derivatives unit, General Re was reporting the most profitable results in its history, with $2.2 billion of pretax operating earnings.3 It had earned back the losses and restored its balance sheet to a better condition than when Buffett bought it; it was operating with nearly one-third fewer employees and the company had been transformed.

General Re had escaped the fate of Salomon and overcome the stigma of its Scarlet Letter. Buffett was finally able to praise it and its senior managers, Joe Brandon and Tad Montross, in some depth in his 2007 shareholder letter, saying "the luster of the company has been restored" by "doing first-class business in a first-class way."

But at the beginning of 2008, four employees of General Re and one employee of AIG were put on trial in Hartford, Connecticut, on charges of federal criminal conspiracy. For those on trial, the next few months would bring to a climax the years of hell that white-collar criminal investigations impose on their subjects. For Buffett, the trial would mean the beginning of the end to this particularly golden chapter of his life.

The trial came about as a consequence of General Re's last act of ignominy before its change of management in 2001. General Re had created a Salomontype scandal of its own in which it broke Buffett's rule of not "losing reputation for the firm." This was the event that had, as it unfolded, adjusted Buffett's perception of the new legal-enforcement environment, in which showing extreme contrition and cooperation produced no advantage in how a company was treated by prosecutors. Extreme contrition and cooperation were now the expected minimum standard--in part because of Salomon. Anything short of that--for a company to defend itself or its employees, for example--could be considered grounds for indictment. Trying to exceed the minimum threshold for extreme contrition and cooperation, as Buffett was always inclined to do when confessing any sort of mistake or flaw, could even be a disadvantage now, attracting more attention to a company at a time when the fairness of certain state and federal criminal procedures was being questioned.

General Re had first become entangled in legal and regulatory problems when New York Attorney General Eliot Spitzer started investigating the insurance industry over "finite" reinsurance in 2004. "Finite" reinsurance has been defined in many ways, but, put simply, it is a type of reinsurance used by the client mainly for financial or accounting reasons--either to bolster its capital or to improve the amount or timing of its earnings. While usually legal and sometimes legitimate, finite reinsurance had been subject to such widespread abuse that accounting rulemakers have spent decades trying to rein it in.

In 2003, both General Re and Ajit Jain's Berkshire Re were condemned in a special investigation for selling finite reinsurance that allegedly contributed to the 2001 collapse of an Australian insurer, HIH. Two years later, General Re was accused by insurance regulators and policyholders of having sold fraudulent reinsurance in the 1990s in connection with the failure of a Virginia medical malpractice insurer, the Reciprocal of America. Though the Department of Justice investigated the allegations extensively, no charges were brought against Gen Re or any of its employees.8 That same year, Eliot Spitzer's investigation of the insurance industry prompted an additional investigation that concluded that six General Re employees had conspired with one AIG employee to aid and abet an accounting fraud for AIG. Before long, the New York State investigation was joined by the SEC and the Department of Justice.

In June 2005, two of the conspirators, Richard Napier and John Houlds - worth, plea-bargained and agreed to testify for the prosecution against General Re's former CEO, Ronald Ferguson; its former chief financial officer, Elizabeth Monrad; its head of finite reinsurance, Christopher Garand; and its general counsel, Robert Graham; as well as Christian Milton, head of reinsurance at AIG, all of whom were indicted on federal conspiracy and fraud charges. At the same time, the SEC and the Department of Justice began pursuing a settlement of some sort with Berkshire Hathaway.

The defendants were tried together as conspirators in a case that began in federal court in Hartford in January 2008 and lasted for several weeks. It was noteworthy for the prosecution's use of numerous e-mails and taped telephone conversations in which several of the defendants had repeatedly discussed the matter in colorful terms. The fraud had been executed through a reinsurance transaction designed to deceive investors and Wall Street analysts by transferring $500 million in reserves to AIG to window-dress AIG's balance sheet. This made AIG appear to have more claim reserves than it actually had, which soothed analysts' worries that AIG might be overstating its earnings by failing to record sufficient expenses for claims. In fact, AIG was doing just that.Spitzer, joined by the SEC and the Department of Justice, had investigated this question, and Munger, Tolles & Olson, led by partner Ron Olson, who sat on Berkshire's board, had conducted a massive internal investigation at Berkshire Hathaway. The investigation, which subsequently expanded to include the AIG deal, focused mainly on General Re and its employees. Munger, Tolles was required to, in effect, act as an arm of the prosecution, and worked with the handicap of representing Berkshire Hathaway, General Re, and Buffett personally as its clients. The conflicts posed by this set of relationships were unusual, although not unheard of in the legal profession. Ordinarily Buffett would not tolerate, much less create, such a conflict-riddled situation, but the investigation terrified him and threatened his deeply ingrained desire for privacy.

Buffett thought of himself and Berkshire as indistinguishable. He had fought like a Rottweiler earlier in his career to escape being named in the consent decree to the Blue Chip fraud case. He was far more invested in his gargantuan reputation now, both psychologically and from a business standpoint. During the months in 2005 and 2006 that the investigation was at full boil, the threat to his reputation from the case obsessed him.

Buffett was put through an awkward investigative process by Munger, Tolles and interviewed by the government, but Spitzer was quick to clear him. In April 2005 (five months after he entered the race for governor of New York), Spitzer told George Stephanopolous on ABC This Week that Buffett was "only a witness." He called Buffett an "icon" who had "succeeded in the right way" and who stood for "transparency and accountability." One need not be a cynic to detectthat Spitzer might have been angling for an endorsement from the Buffalo News in the governors' race.

After New York handed the criminal charges over to the Justice Department for prosecution, Buffett still remained in some jeopardy. If prosecutors could find enough evidence to indict Buffett, they would certainly do so. The question was, what is "enough"?

Contrary to the way they are often portrayed on television, modern prosecutors are not simply on a moral crusade trying to bring the guilty to justice; they are pragmatists who make strategic and tactical decisions. Faced with Warren Buffett, America's icon of business ethics, the prosecutors churned through a unique calculus. There could be no greater prize for a prosecutor than to convict Warren Buffett; locking up Buffett could put a journeyman attorney on the road to the Supreme Court.

On the other hand, who would take the risk of prosecuting Warren Buffett and failing to convict him? If Buffett had been caught on videotape mugging and snatching a purse from a ninety-year-old lady, there was a pretty good chance a jury would decide that the tape was doctored, she was the mugger, and he deserved a medal--and he would walk. Not only that, prosecutors wanted Buffett as a potential witness because of the star power and credibility he would bring if he testified on their behalf.

In the end, Buffett was omitted from the government's list of unindicted coconspirators. Some believed that he received kid-glove treatment because of his status as an almost untouchable figure in business. Many in the insurance industry were infuriated because they felt Ferguson and the others were being treated unjustly, especially by comparison. Buffett was left wide open to such perceptions in part because Berkshire did not hire an outside law firm to conduct its internal investigation. Thus no matter how well MTO had performed its responsibilities, the appearance that the investigation was actually not independent was impossible to overcome.

In the trial, the defendants invoked a "Buffett defense," saying that Buffett had approved the outlines of the structured transaction and was involved in setting the fee. The question, however, was not whether Buffett knew about the transaction--he did--but whether he knew it was fraudulent.

General Re's CEO, Joseph Brandon, had been listed among the various unindicted co-conspirators in the case. He had received a "Wells Notice" (of possible civil fraud prosecution) from the SEC, although no civil charges were ever filed. He cooperated with federal prosecutors without asking for immunity. During the trial, Brandon was cited by the defendants' lawyers as having knowledge of the deal; General Re's chief operating officer, Tad Montross, was also named by the defendants as having knowledge of the transaction. In the end, none of the three men--Buffett, Brandon, or Montross--testified in the case.* After weeks in court and a short jury deliberation, in February 2008 all five defendants were convicted on all counts in the indictment and were sentenced to terms ranging from a year and a day (Robert Graham) to four years (Chris Milton of AIG). The convicted defendants said they would appeal.

In April 2008, shortly after the trial ended, Brandon resigned as CEO of General Re to help facilitate a settlement between the company and government authorities that has yet to take place. The settlement, when it comes, is likely to include fines, other penalties, and adverse publicity.

Only a month after the jury reached its verdicts, New York Governor Eliot Spitzer resigned following revelations that he patronized the prostitutes of an escort service called the Emperor's Club.

The Gen Re-AIG case he launched through his investigation was noteworthy in several respects. It is the only U.S. case in which financial reinsurance has resulted in criminal charges and prison sentences, rather than civil settlements. In recent corporate history, no other criminal aiding-and-abetting case has stuck; convictions in a Merrill Lynch case related to Enron were thrown out. For the first time, therefore, employees of one company were held responsible for a fraud committed by another company.

The Gen Re case also was one of the last corporate fraud cases prosecuted under the government policy of compelled waiver of the attorney-client privilege and the attorney work-product doctrine, which was revised after being declared unconstitutional by the U.S. District Court for the Southern District of New York. Thus, the defendants were arguably convicted using evidence that either would not have been available to prosecutors or would have been thrown out if the trial were held today.

Even though he was obsessed during this period with the investigation's potential to harm his reputation, Buffett was able to compartmentalize the way he always did. Whenever a business opportunity presented itself, he'd shift with startling speed from anxious ruminant to hungry great white shark. Buffett was never more himself than when given the chance to invest in something he wanted at a price of his choosing.

Excerpted from The Snowball:: Warren Buffett and the Business of Life by Alice Schroeder Copyright © 2009 by Alice Schroeder. Excerpted by permission of Bantam, a division of Random House, Inc. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

Robert Reich: Breaking Up the Big Banks, and Why Congress Won't Do It

2009-10-26T21:49:41Z

And now there are five -- five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.

What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.

The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Steagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the 'too big to fail' problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks' techniques. And the pending failure will already have rocked the entire financial sector.

Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all -- that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them -- Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)

Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.

Needless to say, Wall Street favors the Administration's approach -- which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the president, as well as the long-term financial stability of the system.

Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.

Cross-posted from Robert Reich's Blog.

How The US Blew The Trillion-Dollar Trade Of The Century

2009-10-26T01:50:38Z

When the government was forced to bail out the financial system, our friends in Washington also had the opportunity to make the trade of the century for the American taxpayer. While Uncle Sam succeeded in the former, he failed miserably in the latter.

Leo W. Gerard: Wiping Blood Off White Buck Shoes

2009-10-22T16:36:42Z

In New York, the oldest and snobbiest financial and advising ventures are called "white shoe" firms.

This, they say, arose from the days when their hoity-toity employees wore white bucks to work.

These days, white shoe firms bear names notorious outside New York, like Goldman Sachs and Morgan Stanley. That's because their arrogance, risky investments and confounding dealing in derivatives caused last fall's Wall Street meltdown, slaughtered white shoe firms like Lehman Brothers, froze credit nationwide, and threw the rest of us into the Great Recession.

Now unemployment is up to 9.8 percent, a 26-year high. Banks repossessed 88,000 homes in September and filed foreclosure notices on another 344,000, according to RealtyTrac. Suicide hotlines report increases in calls, and a study released in July by researchers at several universities including the University of California documented the connection between unemployment, suicide and murder. Each percent increase in unemployment raised suicide rates by .8 percent and homicide rates by .8 percent, the research team found.

There's blood on those white bucks. But the guys wearing them don't seem to notice.

When bankers' backs were up against the wall, the taxpayers of the United States bailed them out to the tune of $700 billion. Some, like Bank of America, took the welfare then repaid that generosity by doling out billions in bonuses. BofA got $45 billion from taxpayers, then gave $3.6 billion in bonuses to Merrill Lynch workers, just as BofA bought Merrill -- which lost $25 billion in 2008.

Banksters always argue that they must pay massive bonuses to reward and retain their best and brightest. Yet the best and brightest had managed to undermine Wall Street and lose $100 billion at the nine firms that received government welfare in 2008. Realistically, finding lower-cost replacements for them shouldn't be a problem since lots of unemployed bankers are pounding New York streets. The New York City Office of Management and Budget determined that Wall Street banks cut 30,000 jobs in 2008.

Still, Wall Street continues to reward incompetence. Morgan Stanley, for example, increased the proportion of its revenues to be paid as compensation and benefits - to total a whopping $6 billion by September -- despite three straight losing quarters this year. This is how the London Telegraph characterized the decision in an Oct. 21 story:

Investment bank Morgan Stanley has more than doubled the share of revenues it will hand out in pay and bonuses to its 62,000-strong army of bankers and brokers despite a 91 pc drop in profits last quarter.

Right now, they'd each get $96,774, but Morgan Stanley has another quarter to add to that pool of pay.

Investment house Goldman Sachs has set aside $11.4 billion so far for compensation, setting a pace for an average Goldman worker to get $773,000. That would more than double last year's earnings for the average Goldie.

Contrast that with the U.S. Census report that the typical worker nationwide lost $1,860 for a reduced wage of $50,303. Or compare it to the experience of the woman in the Oct. 21 New York Times story who competed with 500 other applicants for one $13-an-hour clerk job opening at an Indiana trucking company.

When America's median income workers paid to bail out those white shoe swells, they thought something would change. "There is some failure in the finance industry to appreciate the level of public antagonism toward whatever Wall Street symbolizes," Orin Kramer, a Democratic fund-raiser who is a partner in an investment firm, told the New York Times' David D. Kirkpatrick earlier this month.

Dr. Daniel E. Fass, who was chairing a Democratic fundraising event with Kramer, told the Times' Kirpatrick, "The investment community feels very put-upon. They feel there is no reason why they shouldn't earn $1 million to $200 million a year, and they don't want to be held responsible for the global financial meltdown."

And, indeed, they're acting like it never happened. JPMorgan Chase & Co. went out this year and made billions doing exactly what caused the crash last year - trading like crazy in derivatives.

So a parent figure had to step in. The Obama Administration acted this week. The Federal Reserve announced it would crack down on pay packages at the nation's 28 largest banking companies in ways intended to discourage risky practices. And the Treasury Department announced that it will order pay cuts and perk limitations for top officials at the firms still on welfare. They are Citigroup, Bank of America, American International Group, General Motors, Chrysler and the automakers' financing agencies.

This new lifestyle will be devastating for some of those on welfare. Their perks could be limited to $25,000 - only half of a typical American worker's annual salary. And the cash portion of their salaries could be slashed by 90 percent and replaced by stock that cannot be sold for years. The point is to align their personal interests to the firm's long-term financial health. It is an attempt to discourage risky investments that seemed profitable for the purpose of immediate bonus payments but later exploded like the AIG derivatives scandal.

The white shoe crowd, failing to understand that the President was trying to help them clean up the mess at their feet, immediately started whining and complaining. It just wouldn't work, they said, because pay-pinched executives would run to firms unrestricted by the government. That's all for the good because, again, there are 30,000 Wall Streeters searching for jobs.

The pay restrictions will set a proper tone. Perhaps Wall Street will hear it before, as the New York Times described it, "populist animosity toward Wall Street and corporate America" grows too great.

If that happened, the blood on their white bucks might be their own.

Al Norman: Can Wal-Mart Think Smaller?

2009-10-22T08:38:45Z

The words "small" and "Wal-Mart" don't fit well together.

Yet the dominant retailer on the globe has been telling Wall Street analysts for several years running that small is beautiful.

Last year this time, at an analyst's meeting, Tom Shoewe, Wal-Mart's Executive Vice President, summarized his company's strategy on new store growth: "A moderation in new stores, migrating to a smaller footprint for the stores that we're adding, more efficient smaller stores."

This week, at their annual analyst's gathering, there was more talk of less. Small was still on the agenda. Wal-Mart reversed its decision from June of 2007 to slow down new store growth, and told Wall Street to expect an acceleration in the number of new stores being proposed. Wal-Mart has been aggressively remodeling hundreds of existing stores -- its so-called 'Impact Store' project -- but the retailer also sounded like the annual speaker at the E.F. Schumacher Society.

One Wall Street analyst reported that although Wal-Mart would open more stores in 2010, the stores themselves would be smaller. The Associated Press quoted this analyst as predicting that Wal-Mart will be "scaling back the size of its supercenters." In fact, the analyst said in recent sit-downs with management at Wal-Mart, the company "even expressed some confidence in developing supercenters as small at 70,000 square feet."

A store that size -- 1.6 acres just for the building -- is far larger than the typical grocery store in most small communities. Add in a parking lot that is usually at least twice the size of the building, and you're no longer talking about a 'small' project.

But this is small for Wal-Mart, and these pronouncements by the company are important to local communities -- where activists for more than a decade have packed town hall hearings, demanding smaller, less intrusive stores.

Last year, a Wal-Mart real estate planner told Women's Wear Daily that his company was concentrating heavily on smaller stores. He said that Wal-Mart was far more likely these days to consider a 90,000 s.f. store for a supercenter. "We can generate as much sales, as much profit from a smaller store," the Wal-Mart official admitted.

Talk of smaller footprints goes back at least to 2004, when Merrill Lynch Global Securities said that Wal-Mart could build 850 of its smaller supercenters over the next decade. The smaller stores could go into urban areas where land isn't available for a traditional supercenter.

The reality is: land is not available anywhere for the classic Wal-Mart supercenter, weighing in at over 200,000 square feet. These retail dinosaurs will -- in the not too distant future -- sit empty by our roadways. They are cheaply made, energy guzzling eyesores, and the sooner their Ice Age comes, the better for our communities.

Wal-Mart has learned that it can take an existing store around 120,000 s.f. and convert it into a supercenter -- without altering its size. This format is called an "in-box conversion," and its been done in Milwaukee and other U.S. cities. The advantage here is that the existing discount store doesn't get abandoned -- as the company has done to more than 1,000 of its stores since 1995 -- and the company doesn't have to go through extensive zoning hearings.

It is doubtful that Wal-Mart will ever learn to think small. But the company is clearly grasping that consumers don't want to shop in endless concrete caverns, and that shoppers are increasingly aware of the environment in which they are shopping as much as what they are shopping for. It also helps that competitors like Aldi and Tesco are focusing on smaller formats. Huge superstores are obviously land-consumptive and inefficient. They clash with Wal-Mart's claims to be a sustainable, green company.

The fact that Wal-Mart is stepping up its new store growth just means that more local citizen's groups will step-up their opposition. But smaller stores will be welcomed everywhere.

Small is not yet beautiful at Wal-Mart -- but it's still an improvement over the wasteful land use monstrosities they've built over the past 15 years.

Al Norman is the founder of Sprawl-Busters. Sixteen years ago this week he helped defeat a Wal-Mart in his hometown of Greenfield, Massachusetts. Wal-Mart is back trying for a second time to locate a 160,000 s.f. store in his community. Norman's most recent book is "The Case Against Wal-Mart."

Bank of America Emails: Executives Knew Of Merrill Losses Before Shareholder Vote

2009-10-21T09:25:36Z

NEW YORK -- Congressional investigators think that reams of internal documents turned over by Bank of America last Friday show that its executives were alarmed by mounting losses at Merrill Lynch well before shareholders voted to approve the merger, according to sources familiar with the matter.

Joseph A. Palermo: Wall Street Is More of a Threat to Obama's Domestic Agenda than Afghanistan

2009-10-20T15:02:29Z

"Deficits don't matter." When Vice President Dick Cheney uttered this famous line he was making a political judgment, not an economic one. In 2001, when the newly selected President George W. Bush and his posse rode into Washington they immediately began in earnest the chicanery, lying and recklessness that we came to expect throughout the subsequent eight years. They promised there'd be great benefits for our nation if the Republican Congress passed a massive tax cut aimed at Bush's wealthy friends, corporations, and campaign donors.

This call for fiscal abandon came after years where we heard squawking about the danger of budget deficits from Newt Gingrich and other Republicans, as well as from conservative pundits and Blue Dog Democrats. And one of the loudest voices decrying budget deficits in the pre-Bush years was the Chair of the Federal Reserve Alan Greenspan. The proposal coming from the Republican president and the Republican Congress was a tax giveaway to the wealthiest Americans and corporations that was certain to blow a hole in the federal budget and add $1.7 trillion to the national debt.

As head of the Federal Reserve it was Alan Greenspan's job to tell the Bush gang that after the sacrifices made to pay down the debt a new round of Reagan-style tax giveaways to the rich and corporations would be a bad idea. That line would have been the "conservative" position to take. Instead, as the high priest of all things economic, Greenspan testified to Congress giving his imprimatur to the Bush administration's kleptomania.

Greenspan's easy money policies aided and abetted Wall Street's pumping up "the mother of all bubbles." And along with the federal budget deficit he encouraged (and the Republicans' drunken spending spree that followed) the money ordinary Americans circulate was buried under a mountain of new debt and new claims on the money supply from Wall Street. By 2006, Wall Street was throwing around 7.5 times as much money ($10.299 trillion) than was being spent by Main Street ($1.367 trillion). Greenspan also sat back and watched when an exemption to the "net capital rule" was passed in 2004 that allowed investment banks to exceed the maximum debt to equity ratio of 12 to 1. Soon Bear Stearns' debt to equity ratio jumped to 33 to 1 and Merrill Lynch's ballooned to 40 to 1. And a lot of this leveraged debt was wrapped up in collateralized debt obligations (CDOs) and other toxic derivative sludge.

We all know how the story plays out: In October 2008 the Congress, with a gun to its head from Wall Street titans and in the middle of an election season, forked over $810 billion of the taxpayers' money to bailout some of the greediest and most short-sighted market players ever to exist in the history of capitalism.

Today, just over a year later, with Goldman Sachs and other bailed out financial institutions turning big profits and paying out bonuses to their luckiest gamblers we continue to see the "real economy" in free fall. There are about $70 billion in crappy mortgages due to be "reset" in the next eighteen months, so there's no end in sight to Americans being thrown out of their homes. Unemployment continues to climb (albeit at a slower rate) but the deep hole that needs to be filled to replace the jobs lost will take many years of robust economic growth. The Congress, always in hawk to Wall Street, is dragging its feet in passing anything near the sweeping regulatory restructuring that is needed if we are to prevent Goldman Sachs and the rest of the gang from exploiting their "moral hazard" by using the federal treasury as the mother of all "credit default swaps." We can't even get the Democratic Congress to create a Pecora Commission with subpoena power to explore the extent of the criminality that led to the current crisis with the aim of modernizing the Securities and Exchange Commission to challenge the kleptocracy.

At some point, as the journalist Matt Taibbi and others have pointed out, our nation's Treasury seems to have been usurped by the former Goldman Sachs CEOs and other executives who both Bill Clinton and George W. Bush thought would make great Treasury Secretaries.

President Barack Obama's economic team headed by Treasury Secretary Tim Geithner and presidential adviser Larry Summers, like Alan Greenspan, are the wrong people doing the wrong job at the wrong time. They are catering to the whims of Wall Street when they should be mad as hell and representing the interests of Main Street. When FDR tapped Joseph P. Kennedy to be the first chair of the SEC he did so because Kennedy understood the swindles that needed to be policed because he had practiced them himself. Geithner and Summers understand the problems but so far they have not shown the will or desire to do anything about them.

There is currently a lot of hand wringing about the possibility of the war in Afghanistan, as costs rise and public support wanes, destroying President Obama's domestic agenda just as the Vietnam War brought down Lyndon Johnson. But whatever Obama decides to do in Afghanistan is of little consequence compared to Wall Street's ongoing "plutonomy." Either President Obama and the Congress tame and bring under control the white collar criminals who run Goldman Sachs and other "too big to fail" institutions or else there isn't going to be a "domestic agenda."

Wall Street Donating Little To Obama

2009-10-20T03:37:35Z

The Wall Street giants that received a financial lifeline from Washington may have no compunction about paying big bonuses to their dealmakers and traders. But their willingness to deliver "thank you" gifts to President Obama and the Democrats is another question altogether.

Stanley O'Neal, Former Merrill Lynch Chief, Flies COACH?

2009-10-16T11:44:38Z

It's been a steep drop for former Merrill Lynch chairman and CEO Stanley O'Neal, who was ousted in 2007 after his company had amassed a big portfolio of troubled mortgages.

Andy Borowitz: Big Bank Profits Spark Rally in Cocaine, Hooker Sectors

2009-10-15T09:25:11Z

NEW YORK (The Borowitz Report) - The historic profits notched by the nation's biggest banks are starting to have a positive impact on the broader economy, with the cocaine and hooker sectors showing striking gains.

Almost as impressive are the price advances in limousines, hotel rooms, and expensive jewelry for mistresses.

"We've never seen a rally in prices like this," said Tracy Klugian, an equities analyst who tracks the coke and hooker industries for Merrill Lynch. "Before the bank bailouts, the cost of a coke-fueled three-way with a couple of Russian prostitutes had hit rock bottom, but now it's through the roof."

While the surge in bank profits has so far done little to create new jobs, Mr. Klugian noted, "it's meant a huge increase in blow jobs." More here.

Bank Of America Email: Merrill Deal Would "Screw Shareholders"

2009-10-14T08:02:13Z

A Bank of America Corp. director wrote to another director in a January email that pressure from the federal government to slash the bank's dividend meant "unfortunately it's screw the shareholders," according to people familiar with the exchange.

Georges Ugeux: Time to Stop the Regulatory Circus and to Steer the Ship to Safe Ground

2009-10-08T10:50:46Z

Writing from Istanbul October 6, 2009

After the G 20, the annual assembly of the International Monetary Fund and the World Bank in Istanbul has been a theater (in the true sense of the word) of the most confusing and disparate cacophony of opinions on the issues of the day. The world's financial regulators and Ministers of Finance need to stop their internal competitions and find a different way to reform financial regulation, make the economy grow, ensure that the systemic risk is eliminated and define an exit strategy.

Last year, this same assembly was starting to realize the magnitude of the disaster created by the bankruptcy of Lehman Brothers, the rescue of Bear Stearns and Merrill Lynch, the transformation of Goldman Sachs and Morgan Stanley into a bank, and of course the bloodbath of AIG. This week's meeting in Istanbul is the first assembly after three G 20 meetings, loads of summits and meetings around the world.

Foreign delegations were not amazed to hear, read or see the cacophony of opinions emanating from the U.S. administration and its focus on short term measures, completely missing the global and long-term perspectives. Emerging markets in particular had a field-day explaining that they coped very well with the crisis, did not suffer from a collapse of their financial institutions and were not plagued by greed as the Western Hemisphere has been.

However, this is not an excuse to continue business as usual. Somebody has to rein in the various parties and call them to focus on the work at hand. Yes, they can congratulate each other for the way they managed to stop what could have been a true financial earthquake, but the current landscape is not exactly pretty and it is urgent to make some sense of the current disorder of financial markets. On top of that, they should not ignore their own responsibilities in the crisis.

While all of this is happening, the derivative market's gross exposure is approaching its pre-crisis levels or in the words of NYU Professor, Nouriel Rubini, it is nearly ten times the world's Gross Domestic Product. With $ 1.5 trillion, the fixed income markets (and related bonuses) are at record levels.

The real issue for regulators around the globe is a serious definition of the financial world we want to live in. The current focus nearly exclusively on the banking sector, could cause authorities to miss the broader picture: the non-banking financial sector and global capital markets. By adding charges and equity requirements to the banks' balance sheet and cash flows, we are substantially shrinking the ability of banks to keep loans on their balance sheets and setting up the potential for days of scarce and expensive credit that could threaten the fragile economic growth we currently enjoy.

The United States has demonstrated that unless it reorganizes its regulatory apparatus to make it coherent and to give the Federal Reserve a coordinating role at the Federal and State levels, it will have no credibility. Only president Obama can empower the Federal Reserve Bank to play an essential leadership role, since it has the financial means to act and oversee the systemic financial risks.

Creating a special regime for financial institutions representing a systemic risk could effectively giving them control of banks to the public sector and creating a scenario where institutions that are "too big to fail" will enjoy quasi-Government guaranteed funding.

At international level, three institutions have the credibility to tackle these issues, provided that they closely cooperate: the International Monetary Fund for macro imbalances, the Financial Stability Board (acting effectively for the G 20) and the Bank for International Settlements where central banks coordinate their actions and clear funds between them. The time has come to stop talking and holding high level meetings. Let us see what these institutions will propose. In the mean time, the banks do not remain idle. They already are well under way in their restructuring, even at compensation level.

Now is time to identify a captain to steer this ship to safe ground by giving this person or institution the powers needed to implement a coherent new financial architecture and define the financial world in which we want to live.

John Thain, Ex-Merrill Chief COMPLAINS: It's Unfortunate The American Dream Has Been "Demonized"

2009-10-07T11:59:22Z

In a recent speech at the University Of Pennsylvania's Wharton School of Business, former Merrill Lynch CEO John Thain -- he, of the $35,000 commode -- said he thought it was unfortunate that the American dream has been "demonized" after the financial crisis.

Regardless of how you feel about him, or about his $1.2 million office renovation, Thain may truly be an example of up-by-the-bootstraps success. But Thain spent precious little time discussing how Walll Street's actions leading up to the financial crisis actually made it more difficult for ordinary citizens to achieve the American dream.

To his credit, in his speech Thain derided regulators and criticized the risks taken by Wall Street, including the risks taken by Merrill. He also made an impassioned, if a bit tone-deaf, case for the social value of banking.

Here's Thain:

"I don't want to personalize this, but I grew up in a small town in the Midwest. I had never been to the East coast. My friends in high school pump gas, sell insurance or are in jail. I went to school. I went to a good undergraduate school ...went to an okay business school. I went to Wall Street. I knew nobody. I had no contacts. I knew not one person. I had no
money. Purely based on the fact that Wall Street is a pretty good meritocracy -- you have to
have the right skill set -- basically you can start from zero there. You can become the president of Goldman Sachs. You can become the CEO of the New York Stock Exchange. You can become the CEO of Merrill Lynch. You can make a lot of money.

That's the American dream. That's a good thing. And the fact that this has been kind of
demonized now, I think, is very unfortunate. But it will change. It will come back. I think
Wall Street still is a great place for people to be successful. It's just not true that it has no
socially redeeming value. It funds business and companies and economies, and you can see
what happens when it doesn't work. It causes huge problems with the economy. That
doesn't mean that it's not a great thing to be a doctor or -- I don't know -- lawyers are in a
different category."

During the Q&A section, a Wharton student asked Thain an excellent question:

"...if you heard President Obama's speech on Monday, he said that apart from the sort of individual personal mistakes that people like you corrected, this country has lost $5 trillion in wealth. And I wonder in the privacy of your own thoughts if you have ever felt responsibility, regret or remorse at anything?"

Thain's response is rather telling. While expressing remorse, he chalks the financial crisis up to a series of failed assumptions, rather than a systemic failure of the regulatory apparatus and unchecked greed of Wall Street:

"It is -- besides being a difficult question -- it's a very good question. Yes, there have been trillions of dollars of wealth destroyed. And that is a very bad thing. Millions of people have lost their jobs. Millions of people have lost their houses. Millions of people's lives have been disrupted by all this.

So do I -- does Wall Street -- collectively bear some responsibility for that? Yes, absolutely.
Is it just Wall Street's fault? No, it's not. Has there been a failure here that we should try to
make sure doesn't happen again? Yes, there has been a failure here. There was way too
much risk. There was way too much leverage. People didn't think about the consequences of
just assuming house prices were going to go up forever.

By the way, I was going to say this at the end, but I'll say this now. One thing that you
really always have to think about: Relying on the world continuing to look like it used to
look is a really bad idea. There's something called HPA -- Home Price Appreciation. All these
mortgages -- all these securities -- all this was always based on the premise -- the belief --
that housing prices would only go up. Well, now that looks like a pretty stupid assumption.
But if you said three years ago that you thought housing prices in the United States were
going to fall 25% over the next couple of years, people would have thought you were crazy.
So not relying on these assumptions that everybody takes for granted is a really important
thing in terms of thinking out of the box.

But going back to your point. Yes, I think that we collectively -- I as a representative of Wall
Street -- bear a cost and a responsibility for the financial destruction that has been caused.
I don't think -- like some senator or Congressman suggested -- that we should kill ourselves
over that. I think what we should do is say, how do we fix it? What can we do to get the
economy started again so people have jobs? What can we do to minimize the damage of the
housing price declines and people getting kicked out of their houses? How can we make it
better? And what can we do to at least reduce the chances that it happens again to such an
extent? Because okay, yes, it's very bad. But piling up investment bankers and burning
them is not going to do any good.

Here's Thain on regulators:

"At least at the moment, it doesn't seem to me we're going to make what are the
fundamental changes in the regulatory structure in the U.S. financial system. Why do we
have the SEC and the CFTC [Commodity Futures Trading Commission]? Why do we have the
FDIC [Federal Deposit Insurance Corporation], the Fed, and the OCC [Office of the
Comptroller of the Currency]? There is no real attempt to consolidate and to eliminate the
duplication in that regulatory structure."

And, finally, here's Thain on his infamous office renovations:

"And the last thing, since you brought it up, I'll talk about my office. So you all learn lessons
from people who make mistakes. I joined Merrill Lynch in December 2007. That was before
Bear Stearns, before the world imploded, before there was any government money, and I
used my office to receive clients, to receive guests.

I used it as a meeting space. The way the office was set up, it had a big desk right in the
middle. So it didn't have seating space. You couldn't really receive clients. And also one of
the conference rooms had been converted into a private gym. If I want to work out, I don't
need to work out at the office. I can work out at my home or in a real gym. So we tore out
the private gym. We reconfigured the office so that it was like a normal office where you
could have guests and have meetings. And we decorated it in kind of the style that Merrill
Lynch offices, which were very, very nice.

Now, in hindsight that was a mistake. All right? I admit that was a mistake. I didn't know
the world was going to explode, but it did. And that was a mistake and I'm sorry that I did
that. If I had that to do over again, I'd furnish it in IKEA. "

Read the entire speech -- or catch a video of it -- at Wharton's website.

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Diane Tucker: Who Duped Rolling Stone Gonzo Reporter Matt Taibbi?

2009-10-06T12:35:37Z

It's starting to look like basketball-player-turned-political-reporter-turned-overnight-authority-on-Wall-Street Matt Taibbi may have fallen for a stock-trading ruse. Heaven knows he's an easy mark. "I can't even balance my checkbook," he told radio talk show host Don Imus.

Taibbi, Rolling Stone magazine's teen heartthrob, became a sensation last month after calling Goldman Sachs "a giant vampire squid wrapped around the face of humanity." His piece contained as many errors as facts, but few of us minded because the imaginative writer memorably captured the national zeitgeist.

Taibbi knows you're only as popular as your latest record, so in this month's issue of Rolling Stone he takes on short selling, a controversial Wall Street stock trading practice. His report offers the usual cocktail of half-truths, which you can read about at Business Insider, Economic Policy Journal, Fraud Files Blog, The Atlantic, New York Times DealBook, and Investment News.

To tell you the truth, I haven't lost any sleep worrying about Taibbi's sloppy reporting or his obscene language. He's colorful, he's cute, he admits he'd rather be writing fiction ... oh, fiddle dee dee.

But I am intrigued by the video Taibbi posted on YouTube to make his point about short selling. People who know about these things say the video is a fake ... a hoax. Taibbi claimed the video showed a Penson Financial Services trading platform transaction, but today Penson dashed off a fast letter to the U.S. Securities and Exchange Commission, alerting them that the trading platform identified in each of Taibbi's posts is not Penson's. "While we are uncertain whether Taibbi's article is the result of a hoax or something more deliberate, we are contemplating sharing our concerns with YouTube and the blogger directly," wrote Penson's associate general counsel, in a two-page letter to the SEC that was made available to the Huffington Post.

If all these folks are right, it begs a few questions:

-- How did "short selling" happen to catch Taibbi's attention?
-- Who slipped Taibbi the fake video?
-- For what purpose?

Well, Matt? Who's screwin' with ya? We're waiting ...

* * *

For more details on this story I recommend business writers John Carney, Dan Jamieson, Megan McArdle, Gary Weiss, and Robert Wenzel. You can also read fraud examiner Tracy Coenen. If you think this is all a bunch of silly nonsense, you might enjoy satirist William K. Wolfrum's hilarious Taibbi video.

Robert Teitelman: Sorkin On What Happened After Lehman

2009-10-05T14:03:25Z

The excerpt from Andrew Ross Sorkin's Too Big to Fail is now on the newsstands in the new issue of Vanity Fair. Because it's an excerpt, it's a little hard to tell how much it reflects the book. Like James Stewart's detailed chronology of the Lehman Brothers Holdings Inc. failure that ran in the New Yorker, Sorkin's excerpt microscopically examines the actions of some key regulatory and Wall Street players, in this case during the period immediately after Lehman failed, Bank of America Corp. (NYSE:BAC) swept in to grab Merrill Lynch & Co. and the government bailed out American International Group Inc. (NYSE:AIG). While all this is mentioned quickly, the context here is very sketchy, particularly the fact that the TARP talks with Congress were occurring offstage. This is one stripped-down, action-oriented narrative, full of stressed-out Wall Streeters that "march" and "race" and utter dramatic, occasionally vulgar, declarations: "That's a shit sandwich I can't get my big mouth around," says a Morgan Stanley (NYSE:MS) executive about Wachovia Corp.'s mortgage exposure. "Nobody gives a shit about loyalty," mutters John Mack.

There are strengths and weaknesses to this genre, which reporters, channeling Tom Wolfe and Barbarians at the Gate, seem to love: David Wessel's In Fed We Trust and Stewart's New Yorker piece both featured endless rounds of meetings and conference calls, as did Kurt Eichenwald's 700-plus-page chronology of the Enron implosion, Conspiracy of Fools, which may hold the record for the largest number of meetings in any single book. This genre does offer the possibility of real drama, what the blurbs routinely describe as a "cinematic narrative style." And, if enough of these are written, you may actually be able to deduce who said what as these decisions, or nondecisions, rushed past. On the other hand, you've got all the classic journalistic problems to cope with: How accurate is the depiction or the dialogue? Was there more going on here, outside the frame of the narrative or within the heads of the characters that we're not aware of? And, perhaps most importantly, what does it all mean? Do participants even have the ability to step back and tell us something more than that events were overwhelming, decisions were made intuitively, and passions erupted?

Sorkin's slice of history moves quickly, though an entire book like this might exhaust the doughtiest meeting freak. Sorkin has seemingly done a ton of reporting and there are some fine dramatic moments. The situation centers on the fears, post-Lehman, that Morgan Stanley and Goldman, Sachs & Co. (NYSE:GS) would fail. Regulators, notably New York Fed chief Timothy Geithner and Treasury's Henry Paulson with various staffers (Ben Bernanke makes only a brief appearance), are deeply fearful and pushing both investment banks to find big bank merger partners. Nearly any combination will work and are proposed; at one point Geithner makes index cards with all the combinations. Both firms, however, resist those acquisitions, despite continual heat from regulators, particularly Geithner, who finally pushes Morgan Stanley's John Mack to do a deal with J.P. Morgan Chase & Co. (NYSE:JPM), while desperately trying to raise capital from the Chinese and Japanese, and Goldman's Lloyd Blankfein to take on Wachovia in a shotgun marriage.

The news in all this is exactly how far these deals proceeded before they were killed. The Morgan Stanley-J.P. Morgan deal never got very far, with both CEOs resisting it. The Goldman-Wachovia deal did get to early negotiations. Wachovia's Bob Steel, a former Goldman senior executive and a Paulson deputy at Treasury, and Blankfein actually sat down, urged on by Geithner, until, of all people, Warren Buffett spoke up and pointed out the obvious: The conflicts (or "optics") in that deal with Paulson and Goldman were beyond bad, and the regulators pulled back. Meanwhile, Mack finally kept Morgan Stanley intact with an infusion from Japan's largest bank, Mitsubishi UFJ Financial Group -- a deal Geithner thought would never happen because the Japanese were traditionally so slow.

Some of this has been rumored, as fantastic as it seems. Sorkin demonstrates in an extremely graphic way what we sensed: The regulators were nearly out of their minds with panic. Geithner in particular comes across badly here. Paulson is eager to get involved and does make some calls; but he's limited by his conflicts, particularly with Goldman (and he's also busy in Washington with Congress, as is Bernanke). Paulson comes across much as he did in the press: impulsive, weary, eager to jump in, self-important. But his staff tries to restrain him, not always successfully. Geithner, on the other hand, presses these deals that would have made Paulson, Treasury and Goldman completely toxic. Give him this: In Sorkin's telling, he is inexorable in his pressure, though not exactly nuanced in either his approach or his thinking.

Now this may be unfair to Geithner. He was under extraordinary pressure, and for all of Sorkin's interviewing, there's more on the Wall Street side than the regulators. It's unclear whether Sorkin has the full picture from the regulatory side -- we have no real clue whether Geithner was just following orders -- particularly because the context there is thin (the precedent-setting decision turning Goldman and Morgan Stanley into bank holding companies gets mentioned only in passing, for instance). But he certainly looks bad.

If Geithner comes off less than Solomonic, Mack towers. Mack tries to save his firm, Mack gets his troops organized, Mack makes calls he doesn't want to make. But Mack resists. And in the end Mack triumphs: Mitsubishi comes in (it takes a number of very nervous weeks to actually nail down that deal), and Mack saves thousands of jobs. All this may well be true, although Mack's finally explosion at Geithner seems a little too polished and pat. Mack's recent decision to retire passed by without as much fanfare as the man probably deserved.

But, the genre does not allow much in the way of introspection as to how the firm and Wall Street arrived at that ugly crossroads in the first place. Two examples: Mack raging (as did Dick Fuld) had before him about short-selling. The rage is understandable; Mack was trying to save his firm. But the hypocrisy of anyone on Wall Street complaining about shorting remains awe-inspiring. At another point, Mack gets a call from hedge funder Arthur Samberg of Pequot Capital Management saying he's pulling his assets. Mack is outraged, as well he should be. He was an old pal of Samberg, as Sorkin says, but he'd also served briefly as chairman of the fund and gotten into hot water with the Securities and Exchange Commission over charges of insider trading at Pequot. All that would be nice context to know.

On the other hand, Sorkin does not unearth much evidence for a Goldman conspiracy, though many of the characters milling around on the stage insist on interpreting events as if there were one. Paulson's behavior in particular is murky; he seems more confused and panicked than anything else. And the truth is, if Goldman had gone down, we might as well have packed up and moved to the woods. As for Blankfein, as much as he hates the idea of doing a deal with Wachovia (and he's no pal of former colleague Steel either, which is interesting and an argument against a Goldman mind meld), he sucks it up and listens to Geithner -- until Geithner changes his mind.

Sorkin's excerpt provides the grist to ponder more fundamental issues. Since the Panic of 2008, regulators have argued that they need greater tools to seize banks and firms that are failing. What would have happened in this case? Neither Morgan Stanley nor Goldman was, by any measure, insolvent. They were being victimized by a run, as the panic spread, the stock price fell and clients and counterparties yanked their assets. Based on this scrap of history, it seems clear that Geithner and Paulson would have opted to seize one, or both, of these firms, perhaps halting the panic (or perhaps not) and raising all sorts of charges that the government was out of control and that Paulson and Goldman were running the world. As messy, contingent and frightening as that period was, these two firms survived and, thanks to another messy episode, the TARP, the system survived. But all that's beyond the range of this excerpt. We'll await the book.

Robert Teitelman is the editor in chief of The Deal.

Bank Of America's Merrill Acquisition Makes Up 30% Of Bank's Profits

2009-10-05T12:45:38Z

Oct. 5 (Bloomberg) -- Merrill Lynch & Co., which helped bring down Kenneth D. Lewis, may end up saving his bank.

The decision by the 62-year-old Bank of America Corp. chief executive officer to purchase Merrill in January for $29 billion already is generating more than 25 percent of the bank's profits -- along with charges by government officials that he misled investors about the extent of losses and bonuses.

TARP Watchdog's Report: Treasury Misled Public On Bailouts

2009-10-05T01:32:05Z

WASHINGTON — The credibility of the government's $700 billion financial rescue program was damaged by claims a year ago that all of the initial banks receiving support were healthy, a new report contends.

Special Inspector General Neil Barofsky generally found that the government had acted properly in October 2008 as it scrambled to implement the Troubled Asset Relief Program to avert the collapse of the U.S. financial system.