Goldman Sachs Takes Biggest Share of $923 Million U.S. IPO Fees

Michael Tsang, Bloomberg, December 29, 2009

Goldman Sachs Group Inc. won the biggest share of the
$923 million in fees from U.S. initial public offerings this year, while Citigroup
Inc. fell out of the top five after its revenue plummeted more than 50 percent.

Goldman Sachs made $191.6 million helping take 16 companies
from Hyatt Hotels Corp. to Cobalt International Energy Inc. public this year,
an increase of more than 60 percent from 2008, preliminary data compiled by
Bloomberg show. Citigroup’s share of fees dropped to $68.3 million, making the
New York-based lender the only underwriter that participated in at least $1
billion worth of sales to suffer a decline in revenue.

Banks increased fees for initial share sales by 62 percent
to 5.63 percent from the lowest level on record, even as the amount that U.S.
companies raised from IPOs decreased by almost half to $16.4 billion this year,
according to Bloomberg data. While the biggest surge in stocks since
the Great Depression revived the IPO market and helped enrich bankers, almost
40 percent of offerings sold by underwriters in the second half of 2009 have
left buyers with losses, the data show.

“It was sort of like a feeding frenzy, whatever deal came
people wanted to buy it,” said Joe Castle, New York-based head of the
equities syndicate for the Americas at Barclays Plc, which climbed into the top
10 among underwriters for U.S. IPOs after doubling its share of offerings this
year. In the second half, “there were some aggressive valuations that people
have pushed back on” as the performance of IPOs suffered, he said.

Most Lucrative

IPOs are among the most lucrative advisory businesses on
Wall Street, with bankers extracting fees from companies that seek initial
offerings that are more than 10 times higher than those from mergers and
acquisitions or corporate-bond sales.

During the five-year bull market for stock prices
that ended in 2007, underwriters on average kept 5.93 percent of the money
raised from IPOs by U.S. companies, Bloomberg data show.

This year, fees averaged about 5.63 percent of proceeds, up
from a record low of 3.48 percent in 2008, when the worst financial crisis
since the 1930s sparked the collapse of New York-based Lehman Brothers Holdings
Inc. in September and forced the government to give nine of the largest U.S.
banks $125 billion in bailout money, fee data compiled by Bloomberg since 1999
show.

The higher fees helped to limit the decline in revenue from
U.S. IPOs in 2009 to about 10 percent from $1.03 billion last year. The amount
raised by U.S. companies going public slumped 45 percent from $29.6 billion, as
sales evaporated in the fourth quarter of 2008 after Lehman’s failure froze
credit markets.

IPO Revival

The drought lasted until September as an average of two U.S.
companies a month went public, the slowest pace since at least 1995, according
to data compiled by Bloomberg.

The IPO market then rebounded as companies took advantage of
a 67 percent advance in the Standard & Poor’s 500 Index from its
12-year low in March. Thirty-two companies completed offerings since the start
of September, equal to 68 percent of the 47 initial sales in 2009, Bloomberg
data show.

Goldman Sachs, which became a bank holding company last year
and took $10 billion in taxpayer bailout money, earned the most from
underwriting U.S. IPOs in 2009, after getting shut out of the top three in the
prior two years, Bloomberg data show. The firm’s fees rose 62 percent from
$118.2 million last year.

The bank’s biggest payday came from managing Hyatt’s $1.09
billion offer last month, for which New York-based Goldman Sachs received about
$56 million, data compiled by Bloomberg show.

Biggest Payday

The Pritzker family, which controls the
Chicago-based hotelier, sold 38 million Class A shares at $25 each, while its
underwriters bought an additional 5.7 million shares on behalf of their clients.
Hyatt has advanced 20 percent since its IPO, almost three times the
S&P 500’s gain over the same span.

Goldman Sachs also helped manage the sale of 63 million
shares in Cobalt, the oil explorer with no revenue or profits that is
also controlled by Washington-based Carlyle Group and three other
private-equity funds.

Cobalt sold shares at $13.50 each this month after buyers
rejected the Houston-based company’s offer of $15 to $17. The price represented
a discount of as much as 21 percent.

Goldman Sachs earned $12.2 million from the IPO, while
Cobalt’s shares have fallen 0.6 percent since the Dec. 15 sale.

By the total value of U.S. IPOs, Goldman Sachs also led all
other lead underwriters. The most profitable securities firm in Wall
Street history participated in 21.2 percent of the offerings, or about $3.48
billion, Bloomberg data show. Andrea Rachman, a spokeswoman at Goldman
Sachs, declined to comment.

Citigroup’s Fall

Citigroup, which ranked among the top three fee earners from
2005 to 2008, made $68.3 million arranging initial sales, a drop of 52 percent
from a year ago and less than half the amount that each of the top three
underwriters earned in 2009.

The last of the four largest U.S. banks to raise money to
exit a taxpayer bailout, Citigroup relinquished its position as the top
underwriter for U.S. IPOs, a title it held in three of the past four years. The
lender helped arrange $1.19 billion worth of initial offers, ranking sixth
among banks. Citigroup fell out of the top five for the first time
since 2004.

“The franchise is strong,” said John Chirico,
Citigroup’s New York-based co-head of capital markets origination for the
Americas. “We’re very bullish on 2010 from an IPO perspective.”

He declined to comment on why Citigroup’s share of IPOs
shrank by more than half in 2009.

‘Voting With Their Fees’

Citigroup was a lead underwriter in the IPO of Glenview,
Illinois-based Mead Johnson Nutrition Co., the maker of Enfamil
infant formula, in February. The company raised $828 million selling shares at
the $24 maximum price that it sought in the first U.S. initial offering of
2009. The stock has since added 85 percent, beating the 36 percent gain in the
S&P 500.

Among the other IPOs that Citigroup helped arrange, three
are trading below their offer prices, while five of the nine have
underperformed the S&P 500 since their sales.

“When people look at underwriters, they look at the whole
package,” said Michael Holland, chairman of Holland & Co., a New York-based
investment firm that oversees more than $4 billion. “With Goldman, people have
no problem whatsoever with their franchise. With Citi, they’ve faced some very
challenging times, so which one do you go with? People are voting with their
fees in this case.”

Bank of America Corp., the largest U.S. lender by
assets, was second in both fees and market share, as it charged companies less
on average than any other bank in the industry.

Biggest U.S. IPO

The company that agreed to acquire New York-based Merrill
Lynch & Co. last year collected $158.2 million in fee income, data compiled
by Bloomberg show. That equals about 5.28 percent of proceeds from IPOs for
which the Charlotte, North Carolina- based lender was a lead underwriter.

Bank of America’s fees were depressed by its offering of
Jersey City, New Jersey-based Verisk Analytics Inc. in the biggest
U.S. IPO of 2009, according to Lisa Carnoy, the bank’s New York-based
global head of equity capital markets.

Bank of America and Morgan Stanley each received
$43.1 million after charging the supplier of actuarial data to insurers 4
percent to underwrite Verisk’s $2.16 billion IPO in October, the lowest
percentage of any U.S. offering this year, data compiled by Bloomberg show.

Carnoy and JD Moriarty of Bank of America’s equity
capital markets group, and William Egan, who runs corporate and investment
banking for financial companies, led the bank’s team on the Verisk IPO. The
stock has climbed 41 percent since the offering, beating the 6.9
percent gain in the S&P 500.

Private-Equity IPOs

Bank of America also helped arrange the largest number of
U.S. initial sales this year, which gave the lender an 18.3 percent share of
the value of all deals. That’s less than the combined total of 25.8 percent
last year, when Bank of America and Merrill Lynch were counted separately, data
compiled by Bloomberg show.

Among the 22 deals for which the bank served as a lead
underwriter was New York-based Blackstone Group LP’s $160 million
offering of Team Health Holdings Inc., which supplies doctors to
hospitals and emergency rooms.

The Knoxville, Tennessee-based company, which was almost 90
percent owned by Stephen Schwarzman’s Blackstone, sold 13.3 million
shares at $12 each this month after investors refused to pay the $14 to $16
originally sought, Bloomberg data show. Team Health has added 14
percent, while the S&P 500 rose 1.8 percent.

‘Loud and Clear’

“What investors told us loud and clear based on the pricing
performance of these December deals was that the valuation concession they
would need to establish a significant position in IPOs was wider than the
collective capital markets and banking community thought,” said Bank of
America’s Carnoy.

Morgan Stanley more than quadrupled the amount it made
from underwriting IPOs to $156.1 million, the biggest increase from 2008 for a
bank that took part in at least $1 billion in deals, Bloomberg data indicate.
Morgan Stanley spokeswoman Alyson Barnes declined to comment.

JPMorgan Chase & Co., the second-largest U.S. bank,
made $105.4 million charging the industry’s highest fees. The New York-based
lender received 5.8 percent in fees from the $1.82 billion in IPOs that it
helped underwrite, the highest percentage of those credited with $1 billion or
more in IPOs.

The 17 companies that JPMorgan helped take public
through IPOs have also posted the biggest stock-market gains. Their shares have
advanced 26 percent since going public, the highest average among the top eight
underwriters, Bloomberg data show.

IPO Performance

Three IPOs that JPMorgan helped underwrite are
trading below the offer price. Joe Evangelisti, JPMorgan’s spokesman,
didn’t immediately respond to e-mails seeking comment.

U.S. companies that paid Frankfurt-based Deutsche Bank
AG $53.7 million in IPO fees this year have fared the worst. Six of eight
are trading below their offer price, with the average company falling 4.1
percent since its IPO.

Omeros Corp., the Seattle-based biopharmaceutical
company, has lost 28 percent of its stock-market value, the biggest decline
among 47 U.S. IPOs this year. Deutsche Bank, Germany’s biggest bank, was the
sole lead underwriter of the offering.

“It’s been a tougher market than we’ve seen in some time,”
said Mark Hantho, Deutsche Bank’s New York-based global co-head of equity
capital markets. “Finding a balance between the value at which a company goes
public and also have it trade well in the after-market, that’s a tough
balance.”

Based on the number of companies that have filed to raise
money through IPOs and have yet to do so, Deutsche Bank ranks fifth with a 7.5
percent share, the bank’s own data showed.

“We’re poised to do better,” Hantho said. “We have a real
shot” of rising in the rankings next year, he said.

JPMorgan’s Dimon Called Darling to Reject Bonus Tax

Elizabeth Hester, Bloomberg, December 29, 2009

JPMorgan Chase & Co. Chief Executive Officer Jamie
Dimon told U.K. Chancellor of the Exchequer Alistair Darling that
his 50 percent tax on banker bonuses would unfairly penalize the U.S. bank, a
person close to the firm said.

Dimon, 53, mentioned plans to build European headquarters in
London’s Canary Wharf for 1.5 billion pounds ($2.4 billion) as an example of
the New York-based company’s commitment to the city, the person said. JPMorgan
is considering dropping the Canary Wharf plans because of the bonus tax, the
Financial Times reported today, citing an unidentified bank executive.

In the call to Darling, Dimon reiterated that the bank, the
second-biggest U.S. lender by assets and deposits, paid British taxes and
didn’t take a U.K. taxpayer bailout, the person said, declining to be
identified because the conversation was private.

The telephone call was made after Darling on Dec. 9 imposed
a 50 percent tax on discretionary bonuses greater than 25,000 pounds at all
banks operating in the U.K. The tax, which the Treasury says will raise more
than 550 million pounds, covers about 20,000 people in the U.K.

The Dimon phone conversation with Darling was reported
yesterday by the London Telegraph. JPMorgan spokesman David Wells declined
to comment. A U.K. Treasury spokesman yesterday defended the tax as fair
because it would apply to all banks and said he couldn’t confirm the telephone
conversation.

Tullett Prebon

Financial firms are threatening to leave the U.K. as
increased taxes and regulation make London a less attractive location. Tullett
Prebon Plc, the inter-dealer broker, said it will help employees depart
following the government’s decision to put a 50 percent tax on bankers’
bonuses.

BlueCrest Capital Management Ltd., a London-based hedge fund
firm that oversees about $15.4 billion, plans to open a Geneva office, a person
familiar with the situation said last month. As many as 50 of BlueCrest’s 300
employees in London may move, the person said.

Deutsche Bank AG Chief Executive Officer Josef Ackermann
said on Dec. 12 that Germany has a “comparative advantage” over other financial
hubs because it doesn’t plan to tax bonuses. The bank said it plans to spread
the costs of the U.K. bonus tax to all employees worldwide.

Canary Wharf

The U.K. Treasury is working with banks to identify
employees who are excluded from the tax, and Darling said Dec. 16 he will
resist calls to change the policy. He suggested banks’ complex operations won’t
allow them to escape the levy by arguing that some activities aren’t defined as
banking.

JPMorgan paid 237 million pounds in November 2008 to acquire
land in London’s Canary Wharf financial district to build a 1.9 million square
foot (176,500 square meter) tower.

Under the agreement with Canary Wharf’s owners, who will build
the offices, JPMorgan can scale back the size of the project. The planned
headquarters will house JPMorgan employees from seven other buildings after the
bank scrapped plans to build a new office in London’s main financial district.

JPMorgan Sues Former Executive Accused of $2.8 Million Theft

The New York Times, December 28, 2009

(Reuters) JPMorgan Chase & Company said Monday that
it had sued a former banking executive arrested last year in Argentina,
accusing him of stealing $2.8 million from a customer’s account.

In a civil lawsuit filed Monday in Federal District Court in
Manhattan, JPMorgan said that the executive, Hernan Arbizu, had
arranged for the money to be wired to a customer account at his previous
employer, UBS, an account from which it said he had also stolen funds.
“Arbizu committed this theft by lying to JPMorgan employees, falsifying
documents, and forging the JPMorgan customer’s signature in order to mislead
JPMorgan to believe that the JPMorgan customer had directed these transfers,”
the complaint said.

JPMorgan said it reimbursed its customer.

Mr. Arbizu did not respond to a request for comment. His
lawyer could not be located. A spokesman for UBS said only that the bank had
not reviewed the lawsuit.

Mr. Arbizu was arrested in July 2008, and charged by federal
prosecutors in a 15-count indictment with embezzling about $5.4 million from
bank customers.

He remains in Argentina, pending extradition, JPMorgan said.

Markets Push Ahead as Year Nears a Close

The New York Times,  December
29, 2009

 (AP) Riding a six-day
winning streak, shares on Wall Street edged higher on Tuesday after a report
showing a slight rise in home prices.

The Standard & Poor’s/Case-Shiller home price index rose
for a fifth consecutive month in October, edging up 0.4 percent. However, the
index was off 7.3 percent from October a year ago. That was roughly in line
with what analysts expected.

The index is now up 3.4 percent from its bottom in May, but
still almost 30 percent below its peak in April 2006. Only 11 of the 20 cities
tracked showed gains.

Trading has been quiet in recent days, as many investors
take vacation between the Christmas and New Year’s holidays. The Dow Jones
industrial average rose 26.37 points, or 0.24 percent, shortly after the open.
The Standard & Poor’s 500-stock index rose 2.44 points, while the Nasdaq
rose 3.26 points, or 0.15 percent,.

Markets in Europe and Asia were also higher, amid light
trading. Many, including Wall Street, are at their highs for the year. The
S.&P. has gained 2.3 percent in the last six days.

“If you look at the day-to-day news coming out, it’s been
very positive,” said Tim Speiss, chairman of Personal Wealth Advisors practice
at Eisner in New York.

Government bonds were little changed Tuesday. The yield on
the benchmark 10-yearTreasury note held steady at 3.85 percent. The
Treasury Department will issue $42 billion of five-year notes later Tuesday as
part of its latest round of auctions.

The dollar slipped against other major currencies. Oil
prices rose 56 cents to $79.33 a barrel in electronic trading in New York. Gold
prices dipped.

European markets rose as investors continued to book modest
gains on the back of better-than-expected holiday sales in the United States.
The FTSE-100 rose 41.90 points or 0.78 percent on Tuesday, after being closed
Monday. The CAC 40 in Paris was up 23.42 points or 0.6 percent, and the DAX in
Frankfurt rose 19.49 points or 0.59 percent.

Bloomberg News reported that the FTSE-100 in London was set
to become the first equity market among the biggest developed economies to
recover its losses since the collapse of Lehman Brothers. The FTSE 100 was
headed Tuesday for the highest closing since Sept. 8, 2008, according to
Bloomberg. The last trading session before Lehman filed bankruptcy was on Sept.
12 of last year.

Earlier Asian stocks markets moved mostly higher Tuesday in
dwindling holiday trade after Wall Street posted muted gains.

Trade was sluggish and thin across the region with many
investors out for the holidays and unwilling to place bets toward the end of a
year marked by tremendous gains in stocks around the world.

In Japan, the benchmark Nikkei 225 stock average edged up
3.83 points, or 0.04 percent, to 10,638.06 in an erratic session. Hong Kong’s
Hang Seng, also down earlier in the day, added 19.22 points, or 0.1 percent, to
21,499.44.

Employers see uptick in hiring in 2010

 

By Ellen Wulfhorst for Reuters, December 29, 2009

NEW YORK (Reuters) – U.S. employers expect to hire more new workers in 2010 than they did in 2009, a sign the U.S. recession may be easing its grip, research showed on Tuesday.

One-fifth of employers plan to add full-time, permanent employees next year, up from 14 percent in 2009, according to CareerBuilder.com, an online jobs site that surveyed more than 2,700 hiring managers and human resource professionals.

Just 9 percent said they plan to cut head count in 2010, down from 16 percent in 2009, according to the nationwide survey.

"There's definitely an uptick. The number of employers who say they're going to add full-time workers is up from last year, and that is very good news," said Michael Erwin, senior career advisor at CareerBuilder.

Yet 61 percent of employers said they do not plan to change staffing levels, showing a degree of caution, he said.

"Employers are waiting to see what the economy does and what the new year brings," he said.

One-third of employers plan to add technology jobs, while 28 percent said they would add customer service jobs and 23 percent said they planned to increase their sales force.

"The employers we're talking to are really shifting from cost containment," Erwin said. "Now it's really about growth so I think you're going to see customer service jobs added, sales jobs added.

"Those are really what can grow the business and make the money come back and get the customers back," he said.

Salaries and benefits are likely to stay tight, the research found.

Fifty-seven percent of employers expect to see higher salaries for existing employees in 2010, down from 65 percent in 2009. Also, 29 percent plan to increase salaries in offers to new employees, down from 33 percent in 2009.

As to bonuses, medical coverage and matching 401k contributions, the survey found 37 percent of employers plan to cut benefits in 2010, up from 32 percent who trimmed in 2009.

Many employers — 37 percent — said they plan to take advantage of the large labor pool and replace low-performing employees in 2010.

The survey was conducted online for CareerBuilder.com by Harris Interactive from November 5 to November 23. The overall results had a margin of error of plus or minus 1.88 percentage points.

CareerBuilder is owned by Gannett Co Inc, Tribune Co, McClatchy Co and Microsoft Corp.

 

Morgan Stanley said to mull pay changes

By Hibah Yousuf for CNNMoney, December 29, 2009

Like other Wall Street firms, Morgan Stanley appears set to implement changes to its pay practices.

The investment bank may defer more of its senior executives' compensation and compare their pay against competing firms, according to a report in Tuesday's Wall Street Journal citing people familiar with the matter.

Morgan Stanley (MS, Fortune 500) top execs may receive a quarter of their 2009 compensation in cash, with the rest as deferred stock, the paper said. In recent years, employees have received a greater portion in cash.

The Journal said Morgan Stanley's compensation committee has met over recent weeks to discuss its payment overhaul plan, including a meeting that lasted seven hours.

The report added that one idea on the table is for the top 30 Morgan Stanley executives to submit 65% or more of their pay to deferrals or "clawbacks," and return their pay in the event of future losses for the firm.

The bank would also scale 20% of the total compensation in shares based on its share price compared to peers' share price, and that portion would be based on Morgan Stanley's return on equity against a fixed benchmark over a three-year period, the Journal said.

Rival Goldman Sachs announced earlier this month that its top executives would not receive cash bonuses this year.

Earlier this month, Morgan Stanley Chairman and CEO John Mack said he would forgo his bonus for the year, citing the "unprecedented environment and the extraordinary financial support provided to our industry" in a memo to employees. It would mark the third year that Mack, who is set to step down at the end of the year, won't accept a bonus.

Morgan Stanley co-president James Gorman, Mack's successor, will take the helm in January and will help make final decisions on the compensation plans, the Journal said.

Earlier this year, the bank announced plans to payout a larger portion of annual bonuses in the form of stock instead of cash, since changes in the stock price would more closely mirror the firm's overall performance.

Morgan Stanley received $10 billion in funds under the Troubled Asset Relief Program, or TARP, which it repaid in July.

Calls to Morgan Stanley for comment were not immediately returned.  

 

Wall Street counts down to a new year

By Julianne Pepitone for CNNMoney, December 27, 2009

Wall Street is gearing up for an unpredictable week amid light trading volume, with many market participants on vacation and traders focused on the upcoming new year.

The stock exchange will be shuttered Friday for the New Year's Day holiday, and many traders will take the entire week off.

"It's always an interesting week, one you can't ever really predict," said Art Hogan, chief market analyst at Jefferies & Co.

With the major indexes on track to post double-digit percentage gains for the year, money managers this week will be protecting 2009's gains. Low trading volumes tend to compound small moves, causing market volatility.

"There's an old traders' adage: 'Never trade a light market, because you can get burned,'" Hogan said.

But, he added, some traders have been holding tight since November, and they may want to start positioning for 2010.

Little economic news is on tap, similar to last week's holiday-shortened schedule. If this week's performance follows that of the previous one, the market should drift higher barring major negative news, Hogan said.

Stocks closed at fresh highs for the year last week, capping a five day wining streak. The Dow posted a 0.5% weekly gain, while the S&P rose 1.8%. The Nasdaq added 4.3% last week.

Looking to 2010. The start of a new year on Wall Street traditionally brings the "January effect," in which stock prices tend to increase during the month.

And 2010 could ring in "the strongest January effect we've seen in quite some time," Hogan said, as economic reports and corporate earnings will have easy year-over-year comparisons because 2009's data were so dismal.

"But what's really going to dominate the first quarter is massive [mergers and acquisitions] activity," Hogan said. "There's a lot of cash on corporate balance sheets that can be put to use."

Hogan also said stocks should see more cash influx in 2010, on funds coming out of the bond market.

On the docket

Monday: No economic reports on tap.

Tuesday: The Case-Shiller 20-City Composite index of home prices in major metropolitan areas for October is due shortly after the market opens. Briefing.com did not have estimates available for the week's reports.

At 10 a.m. ET, the Conference Board will release a reading on consumer confidence for December.

Wednesday: The Institute for Supply Management is scheduled to report data on Chicago-area manufacturing for December.

The weekly crude oil inventories report is due at 10:30 a.m. ET.

Thursday: The government's weekly jobless claims report is due before the market opens.

Friday: The stock exchange will be closed in observance of New Year's Day. 

 

The drama behind Wall Street’s daredevil culture

By John Gapper for Los Angeles Times, December 28, 2009

Books about Wall Street keep on coming.

Just behind Andrew Ross Sorkin's "Too Big to Fail" comes "The Sellout" by Charles Gasparino, the aggressive financial reporter for CNBC who was as close as anyone to the Street's big wayward figures before they met their downfall.

Gasparino, who figures in Ross Sorkin's account and has been sparring with him as a result, has written a shorter, more idiosyncratic and more partisan narrative of how things went wrong. It delves into history in ways that are often enlightening.

Although he is sympathetic to Wall Street chief executives such as Larry Fink of BlackRock and Jamie Dimon of JPMorgan Chase, Gasparino paints a devastating portrait of the loose, individualist, risk-hungry culture.

Impossible as this might seem, he manages to make the public's low estimation of investment bankers seem generous.

Gasparino's strength as a narrator is that he enjoys the company not only of Wall Street CEOs but also of traders and bankers lower down in the pecking order. That gives his story color from the (extremely rich) shop floor.

That strength is also his weakness. Gasparino's world has clearly defined good guys and bad guys — and when he portrays Wall Street's denizens, the better storytellers they are and the more they cooperated with him, the more favorably he tends to rate them.

Those he dislikes or does not respect tend to be painted as the villains of the piece.

At Citigroup that's Tommy Maheras, former head of fixed income, whom Gasparino portrays as "a riverboat gambler" who indulged his instincts with Citi's balance sheet.

At Merrill Lynch it's former CEO Stan O'Neal and his successor John Thain, portrayed as coldly overconfident. Gasparino's character sketches may be right, but the reader has to take his word for it.

Nevertheless, these biases do not detract from his ability to spin an engrossing tale out of Wall Street's three-decade slide into risk-taking.

The most vivid image in the book is of Wall Street as "a financial family" that gathers round to bail out U.S. hedge fund Long-Term Capital Management in 1998. Like all families, the group is riven by petty jealousies and rivalries that contributed to the eventual disaster.

The blackest sheep: former Bear Stearns CEO Jimmy Cayne, portrayed as a profane, bridge-playing, pot-smoking relative who offended the rest of the family by refusing to pony up for the Long-Term Capital rescue.

Gasparino narrates convincingly how banks such as Bear Stearns slipped into risking ever more capital, often without the full understanding of their leaders, who were engaged in a contest to see who could catch up with Goldman Sachs.

The informal but effective risk-management method of a bank's partners sitting in a room, grilling one another on trading risk, gave way to computer models that, he says, only a few traders claimed to understand and no one actually did.

Meanwhile, the 1999 end of the Glass-Steagall financial regulations that had divided banks and investment banks gave small groups of traders at big institutions such as Citigroup a lot more capital to play with. Smaller banks had to borrow more in order to compete, or so they thought.

The result was an arms race of leverage and complex risk-taking commanded by the family's out-of-touch senior figures who spent as much energy on internecine disputes as on taking care of the shareholders' money.

In spite of occasional biases and eccentricities, this historical tale offers unique insight into a period of Wall Street that some would like to forget.

If you give people like these a lot of money to play with, Gasparino suggests, what do you expect?

John Gapper is associate editor and chief business commentator of the Financial Times of London, in which this review first appeared.

The Sellout:

How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System

Charles Gasparino

Harper Business, $27.99, 553 pages

 

Christmas presents for bankers

By Dean Baker for The Guardian, December 28, 2009

On Christmas night in 1776, George Washington led a surprise attack on a group of Hessian mercenaries employed by the British to suppress the American revolution. This was one of the biggest military victories of the Revolutionary War.

In the same spirit of surprise, the Obama administration announced on Christmas eve that it was removing the $400bn cap on Fannie Mae and Freddie Mac's access to the US Treasury. The new draw is limitless. It also announced that the chief executives of the two government-controlled mortgage giants would be getting compensation packages worth $6m a year. This was another big blow for the financial sector in its effort to sap every last cent from the productive economy.

After throwing the economy into the worst downturn since the Great Depression and bringing the whole sector to the edge of collapse, the financial industry has used its political power to succor itself back to life. It is now stronger than ever.

In the last quarter, the financial sector accounted for 34% of all corporate profits, dwarfing the share reached in the mad days at the peak of the housing bubble. The economy might look bleak on Main Street, with double-digit unemployment rates and nearly 200,000 foreclosures a month, but they were dividing up $13bn in bonuses at Goldman Sachs this Christmas.

Most people already knows the various public pots that Goldman and the rest tapped to make themselves healthy and rich again. There was the $700bn troubled asset relief programme (Tarp) loan fund, the hundreds of billions of dollars worth of guarantees that the FDIC provided to cover their borrowing at the peak of the crisis, and the trillions of dollars lent out by the Fed. However, the bottomless line of credit for Fannie and Freddie could prove to be the biggest pot of gold of all.

Fannie and Freddie both collapsed in September of 2008 when the bad mortgage debt they purchased at the peak of the bubble overwhelmed their reserves. The Treasury Department put them into conservatorship and gave each of the mortgage giants a $100bn line of credit to cover future losses. This level was raised to $200bn each earlier this year as losses ran higher than expected.

However, this increase was supposed to be just a safeguard. We were assured that actual losses would never approach these levels. That seems reasonable since the bulk of Fannie and Freddie's loans were prime, meaning that they came with either a 20% down payment or mortgage insurance. Even with a collapsing housing bubble it is difficult to lose too much on prime mortgages.

If 10% of Fannie and Freddie's mortgages (held or insured) defaulted, this would amount to $550bn in bad mortgages. If they lost an average of 25% on these mortgages, this still only leads to losses of $163 billion, less than half of their $400 billion line of credit. And, this is before taking into account their prior reserves and profits on ongoing operations. As it stands, Fannie and Freddie had drawn just over $100bn of their line of credit, so it is difficult to understand the need for raising their borrowing limit from an amount almost four times this level.

There is one possible reason that Fannie and Freddie could see much higher losses. Suppose that they deliberately buy up mortgages from banks at inflated prices. This was the initial purpose of the Tarp, but it quickly got sidetracked into lending capital to banks. This was the better policy, but it still left the banks with huge amounts of bad loans.

Perhaps Fannie and Freddie are now acting as a "backdoor Tarp". This could easily lead to losses in excess of $400bn. It also is the type of policy that you might want to announce on Christmas eve when no one is paying much attention.

This goes along with the $6m pay package for the people who now run these government controlled entities. Is this really what we have to pay for good help? The Treasury secretary gets paid $191,300 a year. Should we infer, based on this fact, that he must be incompetent?

The folks running Fannie and Freddie prior to their collapse pocketed tens of millions of dollars in compensation. The Treasury now tells us that their incompetence could end up costing taxpayers more than $400bn.

If nothing else, the great recession should teach us that paying executives lots of money obviously does not ensure that we will get competent people in charge. But, this is not a story about doing what is best for the economy and the country. This is a story about doing what's best for the financial industry. That was the name of game in Washington DC before the collapse and that is still the name of the game – until people get pissed off enough to do something about it.

 

Tax Wall Street’s huge bonuses

By Neil H. Buchanan for CNN, December 28, 2009

France and Britain have recently enacted new taxes on bankers' bonuses, taxes that will be paid in addition to the standard income taxes that the bankers pay in those countries.

Given the historically unparalleled — and growing — concentrations of income and wealth in the United States, and given that so much of that inequity is a result of our out-of-control financial sector, our leaders should quickly adopt a similar tax on financiers' bonuses here.

Proposals for a "bonus tax" in the United States have elicited the usual denunciations of taxes of any sort, but discussion among more sophisticated analysts has been mixed. Some opponents of the tax suggest — and even some proponents seem to concede — that a tax on bonuses might drive "the best and the brightest" from the field of finance. That will not happen.

Economists have a default assumption that people will do less of whatever is being taxed. Applying that assumption to a tax on financiers' bonuses suggests that there will soon be fewer people working in finance. Make it less lucrative, and people will leave.

Of course, we know that this assumption is true in some situations, but it is certainly false in many others. Even the most basic economics textbooks describe situations in which people respond to taxes by working harder, such as a person who is trying to earn a specific amount of take-home pay and who must, therefore, work more hours to reach that target after tax rates go up.

We cannot know in advance whether any particular tax will push people to work harder or will, instead, push them out the door. We do, however, have some very good reasons to suspect that a tax on bonuses will have no impact either way on the behavior of Wall Street's players.

The tax recently imposed on London's financiers is a one-time 50 percent tax on year-end bonuses. This led, understandably, to speculation about whether the tax will be extended in the future. If it really is a one-time imposition, then surely it would be nonsensical for a banker to hang up his eyeshade. He has worked for the past year, been paid a bonus, and now he keeps less than half of the nominal amount of the bonus. Disappointing, but water under the bridge.

If there will be no future tax, then it is back to business as usual. It is more interesting, therefore, to imagine what would happen if the tax were made permanent — or if the denizens of Wall Street were to suspect that it will be imposed again in the future. In that case, they could decide to avoid the tax by leaving their jobs.

As Paul Krugman has suggested in The New York Times, that might be a good thing. Far too many talented young people have been drawn into finance in recent years; and discouraging them by lowering after-tax rewards might be just what the economy needs to improve its long-term health.

It would, indeed, be a good thing to redirect our nation's talent into more useful endeavors, but a bonus tax is unlikely to do so.

The basic question to ask is: If you received a $4 million bonus, and you ended up with $2 million after tax, in addition to your salary, would you quit your job?

Different people will, of course, answer that question differently, but economists do have a lot of evidence that full-time workers do not respond to changes in take-home pay when it comes to deciding whether to work. A bonus recipient with a few million in the bank might be more able to quit his job than someone making $50,000 a year, but that bonus baby also has a lot more to lose by quitting his job. Why walk away from half as many millions, just because you imagined that you might have had more?

The decision to leave a job or reduce one's efforts, moreover, depends on what other opportunities are out there. Sure, if I could make $3 million sitting on the bench for an NBA team, I might gladly quit a Wall Street job that unexpectedly paid "only" $2 million.

For most people on Wall Street, however, the next best way to make several million dollars legally is … what? The psychology of Wall Street makes it even less likely that a bonus tax would drive people into kindergarten teaching or car sales.

Salaries and bonuses on Wall Street are a way of keeping score, and the important thing is to win the game. If you care about having the highest bonus, because it is always better to win, then the amount that you take home does not matter. All of your competitors will keep half of their bonuses, too, so you still win.

In addition, the reason to stay on Wall Street is not just for this year's salary and bonuses but because of the possibility of a really big payday down the road. People who stay in the game are hoping for that monster year in which they receive a $20 million or $200 million bonus, putting those annual $2 million checks to shame. In order to have that chance, however, you have to stay in your job.

As they say, you have to be in it to win it. A tax on bonuses would not change that logic.

The opinions expressed in this commentary are solely those of Neil H. Buchanan.