Anglonautes > anglais / English > vocabulaire / vocabulary > économie / economy

Les anglonautes

Jeff Parker

Florida Today Cagle

22 April 2010

Patrick Chappatte

Cartoons on World Affairs Cagle

13.10.2008

capital

American capitalism USA 2008
http://online.wsj.com/article/SB120580966534444395.html

bank
http://www.independent.co.uk/news/business/news/bloodbath-of-the-banks-part-two-1451387.html

Federal Reserve System USA
http://www.federalreserve.gov/

The Federal Reserve, through its power to raise and lower interest rates,
exercises more influence over economic growth and the level of employment
than any other government entity.
That unusual role dates from the 1970s, when the executive branch and Congress
pulled back from the use of fiscal tools — vast New Deal spending and targeted tax cuts —
as a means of regulating prosperity.
http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html

http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html

The Federal Reserve / Fed USA
http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html

http://www.nytimes.com/2010/08/30/business/economy/30fed.html
http://www.nytimes.com/2010/08/28/business/economy/28fed.html
http://www.nytimes.com/2010/08/26/business/economy/26fed.html
http://www.nytimes.com/2008/12/17/business/economy/17fed.html
http://www.reuters.com/article/ousiv/idUSTRE4AO4QY20081125
http://www.nytimes.com/2008/10/30/business/economy/30fed.html
http://www.federalreserve.gov/newsevents/press/monetary/20080318a.htm
http://www.federalreserve.gov/newsevents/press/monetary/20080316a.htm
http://www.reuters.com/article/ousiv/idUSN1651144220080317
http://www.federalreserve.gov/newsevents/speech/bernanke20080314a.htm
http://www.reuters.com/article/ousiv/idUSN1155480820080311
http://www.reuters.com/article/topNews/idUSN1155795620080311?virtualBrandChannel=10005
http://www.reuters.com/article/ousiv/idUSWAT00903420080304
http://www.federalreserve.gov/aboutthefed/default.htm
http://www.federalreserve.gov/newsevents/press/monetary/20080122b.htm
http://www.usatoday.com/money/economy/2007-11-08-bernanke-economy_N.htm
http://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm
http://www.usatoday.com/money/economy/2007-09-18-fed-half-point_N.htm
http://news.bbc.co.uk/1/hi/business/6999821.stm

http://www.reuters.com/article/domesticNews/idUSWBT00846020080227
http://www.economist.com/daily/news/displaystory.cfm?story_id=9826026&top_story=1
http://www.usatoday.com/money/economy/2007-09-18-fed-half-point_N.htm
http://www.usatoday.com/money/economy/2007-09-18-fed-half-point_N.htm
http://www.usatoday.com/money/economy/2007-09-18-fed-statement_N.htm
http://news.bbc.co.uk/1/hi/business/6999821.stm
http://www.usatoday.com/money/economy/fed/beigebook/2006-10-12-moderate-growth_x.htm

The Fed Chairman / Federal Reserve Board Chairman > Ben S. Bernanke, Federal Reserve chairman USA
http://topics.nytimes.com/top/reference/timestopics/people/b/ben_s_bernanke/index.html

http://www.nytimes.com/2010/08/30/business/economy/30fed.html
http://www.nytimes.com/2010/08/28/business/economy/28fed.html
http://www.nytimes.com/2010/08/26/business/economy/26fed.html
http://www.nytimes.com/2010/01/28/opinion/28blinder.html
http://www.nytimes.com/2009/12/04/business/economy/04fed.html
http://www.nytimes.com/2009/07/27/business/27bernanke.html
http://www.reuters.com/article/ousiv/idUSTRE49J51G20081020
http://www.reuters.com/article/ousiv/idUSTRE49J5EE20081020
http://video.on.nytimes.com/?fr_story=a9474c5bb692d2e1735e417491d3d7b9e5c6e8f9
http://www.reuters.com/article/topNews/idUSWAT00923320080402
http://www.federalreserve.gov/newsevents/speech/bernanke20080314a.htm
http://www.reuters.com/article/ousiv/idUSWAT00903420080304
http://www.reuters.com/article/domesticNews/idUSWBT00846020080227
http://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm

fed leaders
http://www.nytimes.com/2010/07/15/business/economy/15econ.html

fed nominees
http://www.nytimes.com/2010/07/16/business/economy/16fed.html

The Fed Chairman / Federal Reserve Board Chairman > Alan Greenspan 1987 to early 2006 USA
http://topics.nytimes.com/top/reference/timestopics/people/g/alan_greenspan/index.html

http://www.nytimes.com/2008/10/24/business/economy/24panel.html
http://www.cagle.com/news/GreenspanGoof/main.asp

Fed > benchmark interest rate
http://www.nytimes.com/2008/12/17/business/economy/17fed.html

Fed > Monetary Policy Releases
Statements by the Federal Open Market Committee and the Board of Governors
on the stance of monetary policy and on related procedural matters
http://www.federalreserve.gov/newsevents/press/monetary/2008monetary.htm

beige book USA
http://www.nytimes.com/2008/10/16/business/economy/16econ.html
http://www.usatoday.com/money/economy/fed/beigebook/2006-10-12-moderate-growth_x.htm

The U.S. central bank's policy-setting Federal Open Market Committee USA

Senate Banking Committee USA
http://banking.senate.gov/public/

http://www.nytimes.com/2009/09/20/business/economy/20regulate.html

Financial Crisis Inquiry Commission
http://www.nytimes.com/2009/09/20/opinion/20sun1.html

Goldman Sachs
http://topics.nytimes.com/top/news/business/companies/goldman_sachs_group_inc/index.html

http://www.nytimes.com/2010/07/16/business/16goldman.html

Last Days of Lehman USA

Lehman Brothers filed for bankruptcy Sept. 15, 2008,
setting off tremors throughout the financial system.
It also caused upheaval in the personal lives of the hundreds of employees
who worked for the once-venerable investment bank.
Three former employees write about their experiences, a year later.
http://www.nytimes.com/2009/09/15/opinion/15lehman.html

Lehman Brothers filed for bankruptcy protection,
rival Merrill Lynch agreed to be taken over USA September 2008
http://www.reuters.com/news/topics/lehmanBrothers
http://www.reuters.com/article/ousiv/idUSN0927996520080915
http://www.lehman.com/press/pdf_2008/091508_lbhi_chapter11_announce.pdf

Slowpoke

by Jen Sorensen

Cagle

16 March 2009

Northern Rock

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3644980.ece

Northern Rock nationalisation February 2008

http://www.ft.com/cms/s/ea8005ba-ddff-11dc-9de3-0000779fd2ac.html
http://www.timesonline.co.uk/tol/news/politics/article3388980.ece
http://www.timesonline.co.uk/tol/news/politics/article3390265.ece
http://www.guardian.co.uk/business/2008/feb/18/northernrock
http://www.independent.co.uk/news/uk/politics/northern-rock-owned-by-uk-ltd-783533.html

Northern Rock, Britain’s eighth-biggest bank 2007

Monte Wolverton

The Wolvertoon Cagle

18 April 2010

interest rates 2008
http://www.nytimes.com/2008/12/17/business/economy/17fed.html
http://business.timesonline.co.uk/tol/business/economics/article3325435.ece
http://www.guardian.co.uk/business/2008/jan/10/interestrates.interestrates2

interest rates and inflation
Interest rates influence spending and saving in the economy and the prices we pay for goods and services.
Low inflation helps to maintain a stable economy and the value of our money
(Bank of England site - 17 December 2008)

cut interest rates
http://www.guardian.co.uk/business/2008/apr/10/interestrates.interestrates
http://business.timesonline.co.uk/tol/business/economics/article3325435.ece

interest rates
http://money.guardian.co.uk/news_/story/0,,2075668,00.html
http://business.guardian.co.uk/story/0,,2050809,00.html
http://money.guardian.co.uk/interestrates/story/0,6453,1657893,00.html

push interest rates higher

raise a key U.S. interest rate a quarter-percentage point USA
http://www.nytimes.com/2005/08/10/business/10fed.html

lift the benchmark federal funds rate,
which can sway borrowing costs throughout the economy
http://www.federalreserve.gov/boarddocs/press/monetary/2005/20050809/default.htm

lift the rate to 3.5 percent, from 3.25 percent

benchmark short-term interest rate

increase rates
http://money.guardian.co.uk/houseprices/story/0,,1835387,00.html

raise interest rates to...
http://business.guardian.co.uk/story/0,,1836465,00.html

raise a key U.S. interest rate a quarter percentage point to 2.75 percent

raise rates to control US inflation

gradual rate rises

contain prices

interest rate hike

hiking

inflation risks

keep inflation in check

keep inflation under control

curb inflation

underlying inflation

rise / rise

financial system USA
http://www.reuters.com/article/ousiv/idUSTRE4AO4QY20081125

New York Times > Select Editorials on Financial Regulation USA
http://topics.nytimes.com/topics/opinion/editorials/select-financial-regulation/index.html

global financial services company > General Motors Acceptance Corporation GMAC USA
http://topics.nytimes.com/topics/news/business/companies/gmac-llc/index.html
http://www.nytimes.com/2009/10/29/opinion/29thu1.html

Financial Services Authority FSA
Money made clear
http://www.moneymadeclear.fsa.gov.uk/

banking sector
http://www.guardian.co.uk/business/banking

Banking Code
http://www.guardian.co.uk/business/2008/dec/03/banking-queens-speech

banking giant > Citigroup USA
http://www.nytimes.com/2008/11/18/business/18citi.html

bank / bank
http://www.reuters.com/article/newsOne/idUSN1650564120080317
http://www.reuters.com/article/newsOne/idUSL1710220420080317
http://www.usatoday.com/money/industries/banking/2006-05-07-wachovia-golden-west_x.htm

banker
http://www.independent.co.uk/news/business/comment/jeremy-warner/
jeremy-warner-bankers-make-easy-scapegoats-but-1606429.html
http://www.independent.co.uk/opinion/leading-articles/
leading-article-britains-bankers-still-have-tough-questions-to-answer-1606269.html
http://www.reuters.com/article/newsOne/idUSL1710220420080317

banker > Jamie Dimon
http://topics.nytimes.com/top/reference/timestopics/people/d/james_dimon/index.html
http://www.nytimes.com/2010/07/15/business/15chase.html

banker > Bruce Wasserstein
http://topics.nytimes.com/topics/reference/timestopics/people/w/bruce_wasserstein/index.html

Bank of America
http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html

J. P. Morgan Chase & Company USA

As it name suggests, JPMorgan Chase is the product of many combinations
involving some of the most storied names in American banking.
In a 10-year stretch beginning in 1991, four of the biggest and oldest New York financial institutions
-- Chase Manhattan Bank (founded by Aaron Burr), Chemical Bank and Manufacturer Hanover Bank
were joined with J.P. Morgan and Company, the venerable investment bank.
Then in 2004, the combined company merged with Bank One Corp.,
in a $58 billion deal that remains the largest of its kind.

That deal brought JPMorgan within a whisker of catching Citigroup
as the world's largest financial institution,
and combined Bank One's vast branch retail network
with JPMorgan's investment banking franchise.

http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html

http://www.nytimes.com/2008/03/18/business/18dimon.html
http://www.nytimes.com/2008/03/17/business/17bear.html

the demise of Bear Stearns USA March 2008
http://online.wsj.com/article/SB120580966534444395.html

fire sale of Bear Stearns Cos Inc stuns Wall Street USA March 2008
http://www.reuters.com/article/newsOne/idUSN1650564120080317

bank-to-bank lending freezes USA
http://www.reuters.com/article/newsOne/idUSL1710220420080317

investor
http://www.reuters.com/article/domesticNews/idUSN1756243320080317
http://www.guardian.co.uk/world/2008/nov/01/billionaire-manchester-city-abu-dhabi

Barclays
http://www.guardian.co.uk/business/barclay
http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article5516540.ece
http://www.guardian.co.uk/business/2008/nov/01/barclay-banking-bonuses
http://www.guardian.co.uk/business/2008/oct/31/barclay-banking1

HBOS
http://www.guardian.co.uk/business/hbos
http://www.guardian.co.uk/business/2009/feb/11/hbos-banking
http://www.timesonline.co.uk/tol/news/politics/article5705330.ece
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5701380.ece
http://www.independent.co.uk/news/uk/politics/pms-adviser-blamed-for-collapse-of-hbos-1606307.html

HBOS 2006
http://business.guardian.co.uk/story/0,,1834783,00.html

Lloyds TSB
http://www.guardian.co.uk/business/lloydstsbgroup

Royal Bank of Scotland RBS
http://www.guardian.co.uk/business/2009/feb/26/rbs-record-loss
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5546850.ece
http://www.guardian.co.uk/business/2008/nov/01/royal-bank-scotland-vincent-cable
http://www.guardian.co.uk/business/royalbankofscotlandgroup
http://www.guardian.co.uk/business/2008/oct/09/royalbankofscotlandgroup.banking
http://business.guardian.co.uk/story/0,,2040821,00.html
http://business.guardian.co.uk/story/0,,1837190,00.html

in The City
http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.marketturmoil

on Wall Street USA
http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.marketturmoil

Walll Street USA
http://www.nytimes.com/2010/04/23/opinion/23krugman.html

World Bank
http://www.guardian.co.uk/globalisation/story/0,,546796,00.html

asset
http://www.nytimes.com/2008/11/18/business/18citi.html

bad assets
http://www.usatoday.com/money/industries/banking/2009-01-19-britain-bank-rescue_N.htm

high street bank 2008
http://business.timesonline.co.uk/tol/business/economics/article3572428.ece

HSBC, Britain's biggest bank 2006
http://business.guardian.co.uk/story/0,,1834132,00.html

The Guardian p. 14

25 November 2008
http://digital.guardian.co.uk/guardian/2008/11/25/pdfs/gdn_081125_ber_14_21298350.pdf

The Guardian p. 8

27 January 2009
http://digital.guardian.co.uk/guardian/2009/01/27/pdfs/gdn_090127_ber_8_21773958.pdf

free banking

bank by telephone or on-line

branch

subsidiary

charges

cheque

standing order

debit card

outlet

direct debit

debit card payment

interest

interest rate

account / bank account

overdraft

overdraw

cash machine withdrawal

save

savings accounts 2008
http://www.guardian.co.uk/money/2008/sep/24/savings.isas

savings
http://business.timesonline.co.uk/tol/business/economics/article5985900.ece
http://business.guardian.co.uk/markets/story/0,,2171571,00.html

savings rates
http://news.bbc.co.uk/1/hi/business/6993094.stm

saver
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2451069.ece
http://money.guardian.co.uk/news_/story/0,,1863446,00.html

bank charges
http://www.guardian.co.uk/money/2008/dec/02/reclaiming-bank-charges-banks

The Guardian p. 50

13 December 2008
http://digital.guardian.co.uk/guardian/2008/12/13/pdfs/gdn_081213_ber_50_21444271.pdf

financial turmoil
http://www.nytimes.com/2009/09/20/opinion/l20finance.html

How the Giants of Finance Shrunk, Then Grew, Under the Financial Crisis USA
http://www.nytimes.com/interactive/2009/09/12/business/financial-markets-graphic.html

A Year of Financial Turmoil USA
http://www.nytimes.com/interactive/2009/09/11/business/economy/
20090911_FINANCIALCRISIS_TIMELINE.html

London interbank offered rate Libor
What is Libor?
Libor is the main setter of interest in the London wholesale money market
http://www.guardian.co.uk/business/2007/sep/01/2

Libor rates
Libor rates are set by the demand and supply of money
as banks lend to each other to balance their books on a daily basis.
http://www.guardian.co.uk/business/2007/sep/01/2

lend

lender

wholesale money market

banks / high street lenders
http://www.guardian.co.uk/business/2008/oct/12/banking-economy

loan USA
http://www.nytimes.com/2009/11/19/business/19risk.html

instant loan
http://money.guardian.co.uk/news_/story/0,1456,1241719,00.html

loan sharks

commercial paper USA
http://www.nytimes.com/aponline/business/AP-Commercial-Paper.html
http://topics.nytimes.com/top/reference/timestopics/subjects/c/commercial_paper/index.html

credit

credit firm

credit derivatives 2008
http://www.guardian.co.uk/business/2008/sep/20/wallstreet.banking?gusrc=rss&feed=business
http://www.ft.com/cms/s/0/d52898c4-89b9-11dd-8371-0000779fd18c.html

credit default swap market 2008
http://www.guardian.co.uk/business/2008/oct/21/useconomy-banking

a "once-in-a-century credit tsunami" USA 2008
http://www.usatoday.com/money/economy/2008-10-23-greenspan-congress_N.htm

credit system breakdown USA 2008
http://www.nytimes.com/reuters/business/business-us-financial-greenspan.html

credit mess 2008
http://www.reuters.com/article/reutersEdge/idUSTRE4997PN20081010

credit crisis 2008
http://www.independent.co.uk/news/business/analysis-and-features/
still-confused-by-the-credit-crisis-then-read-on-966247.html
http://www.reuters.com/news/globalcoverage/creditcrisis

Credit Crisis — The Essentials
http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.html

Credit Crisis Indicators
http://www.nytimes.com/interactive/2008/10/08/business/economy/20081008-credit-chart-graphic.html

banking crisis > timeline > September - October 2008
http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.marketturmoil

The Financial Times > Global financial crisis 2008
http://www.ft.com/indepth/globalfinancialcrisis

credit crunch 2008
http://property.timesonline.co.uk/tol/life_and_style/property/article3572386.ece

The Guardian > Cartoonists > Kipper Williams > Credit crunch in cartoons 2008
http://www.guardian.co.uk/business/gallery/2008/sep/23/creditcrunch.marketturmoil?picture=338206451

The Times > Full credit crisis coverage 2008
http://www.timesonline.co.uk/tol/system/topicRoot/Credit_crunch/

global credit crunch 2007
http://news.bbc.co.uk/1/hi/in_depth/business/2007/creditcrunch/default.stm

borrow

borrower 2008
http://www.nytimes.com/2008/10/03/opinion/03mclean.html

borrowing

soaring consumer borrowing

borrowing costs

the cost of borrowing

current account

owe

pay

check

debits

credits

withdrawal

balance

run one's accounts on-line

pension fund
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3169969.ece

Mike Lane

Baltimore, Maryland Cagle

17 July 2009

Steve Sack

Minnesota, The Minneapolis Star-Tribune Cagle

23 Janauary 2009

David Horsey

Washington, The Seattle Post-Intelligencer Cagle

29 December 2008

The Bailouts: An Accounting USA September 2009

In the last year the government has rolled out more than a dozen programs
and made commitments of about $12.5 trillion to protect the economy from crisis.
Through Sept. 11, $2 trillion has been used and more than $20 billion
has been generated from interest, dividends, warrants and fees.
Publicly available program profits and expiration dates are included below.
http://www.nytimes.com/interactive/2009/09/14/business/bailout-assessment.html

bailout 2009
http://www.independent.co.uk/news/uk/politics/new-bailout-is-not-a-blank-cheque-1419507.html

bailout / bank bail-out 2008
http://www.independent.co.uk/news/uk/politics/
northern-exposure-cameron-calls-for-darling-to-be-axed-after-bank-bailout-784021.html
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3292213.ece

Pathology of a Crisis

November 19, 2009
The New York Times
By ERIC DASH

The coroner’s report left no doubt as to the cause of death: toxic loans.

That was the conclusion of a financial autopsy that federal officials performed on Haven Trust Bank, a small bank in Duluth, Ga., that collapsed last December.

In what sounds like an episode of “CSI: Wall Street,” dozens of government investigators — the coroners of the financial crisis — are conducting post-mortems on failed lenders across the nation. Their findings paint a striking portrait of management missteps and regulatory lapses.

At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings — made as far back as 2002 — neither the bank’s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California.

What went wrong? In many instances, the financial overseers failed to act quickly and forcefully to rein in runaway banks, according to reports compiled by the inspectors general of the four major federal banking regulators. Together, they have completed 41 inquests and have 75 more in the works.

Current and former banking regulators acknowledge that they should have been more vigilant.

“We all could have done a better job,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.

The reports, known as material loss reviews, delve into the past, but their significance lies in how they might shape the future. As another wave of bank failures looms, policy makers are considering a variety of measures that would generally strengthen banks’ finances and limit their ability to lend money aggressively in risky areas like construction. Bankers contend that such steps would not only hurt their businesses but also the broader economy, because they would throttle the flow of credit just as growth is resuming.

But while the worst seems to be over for the banking industry as a whole, many lenders are still in danger. The havoc caused by the collapse of the housing market is now being exacerbated by the deepening problems in commercial real estate, which many analysts see as the next flashpoint for the industry.

Given the past lapses, some wonder whether examiners will spot new troubles in time. Of the nation’s 8,100 banks, about 2,200 — ranging from community lenders in the Rust Belt to midsize regional players — far exceed the risk thresholds that would ordinarily call for greater scrutiny from management and regulators, according to Foresight Analytics, a banking research firm.

About 600 small banks are in danger of collapsing because of troubled real estate loans if they do not shore up their finances soon, according to the firm. About 150 lenders have failed since the crisis erupted in mid-2007.

Many bank examiners acknowledge they were lulled into believing the good times for banks would last. They also concede that they were sometimes reluctant to act when troubles surfaced, for fear of unsettling the housing market and the economy.

Then as now, banking lobbyists vigorously opposed attempts to rein in the banks, like the 2006 guidelines that discouraged banks from holding big commercial real estate positions.

“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”

Haven Trust, founded in 2000, enjoyed a light touch from its regulators, according to its autopsy, which was completed in August.

Almost from the start, examiners with the F.D.I.C and the state of Georgia raised red flags. In 2002, F.D.I.C. officials found problems with the bank’s underwriting practices. Over the next few years, Haven’s portfolio of risky commercial real estate loans grew so quickly — by an astounding 40 percent annually — that the regulators raised questions about the dangers.

But not until August 2008 did examiners step up their scrutiny by telling Haven to raise its capital cushion. A month later, the regulators issued a memorandum of understanding, known as an M.O.U., ordering the bank to limit its concentration of risky loans.

Haven’s examiners “did not always follow up on the red flags,” says the report, which runs 29 pages. “By the time the M.O.U. was issued in September 2008, Haven’s failure was all but inevitable,” it concluded.

But the fiasco at Haven Trust was not all that unusual. At the fast-growing Ocala National Bank in Florida, for example, examiners from the Office of the Comptroller of the Currency found loose lending standards and a high concentration of construction loans.

But regulators “took no forceful action to achieve corrections,” according a review after the failure. The bank collapsed in late January.

At County Bank in California, a potential powder keg of construction and land loans warranted “early, direct and forceful” action from the Federal Reserve Bank of San Francisco, according to a review of the failed lender, which collapsed in early February.

Regulators have begun to act on some of the lessons learned. Federal officials are discussing whether to impose hard limits, not just soft guidelines, on the portion of bank balance sheets that can be made up of commercial real estate loans. That would automatically prevent the buildup of risky assets and take more discretion out of the examiners’ hands.

Other ideas include requiring all lenders to hold more capital if they report big concentrations of risky assets or rapid loan growth — an approach that is the centerpiece of the Obama administration’s policy for too-big-to-fail banks.

Daniel K. Tarullo, the Federal Reserve governor overseeing bank supervision, recently proposed to impose new rules that would require banks to raise capital in the event they breach certain financial thresholds in areas like loan delinquencies or defaults.

At the F.D.I.C., Ms. Bair has been increasing the hiring of experienced examiners in the last few years, and recently empowered its on-site supervisors to impose restrictions on dividends, brokered deposits and loan growth. Every major regulator has urged examiners to take swifter action and issue more formal enforcement orders.

Still, banking executives and some regulators worry that after the long period of lax oversight chronicled by the reports, regulators will crack down too hard. The challenge, these people say, is to strike a balance between rigorous oversight and oppressive regulation. A heavy hand might discourage banks from lending.

“Right now, bankers don’t need to be told it is a dangerous world,” said William M. Isaac, the former F.D.I.C. chairman and now a regulatory consultant. “Right now, they need to be told there will be a tomorrow.”

Pathology of a Crisis, NYT, 19.11.2009, http://www.nytimes.com/2009/11/19/business/19risk.html

RBS record losses raise prospect of 95% state ownership

• Bank makes loss of £24bn
• Taxpayer could end up owning 95%
• Row over £650,000 pension for failed boss Goodwin

Thursday 26 February 2009
08.57 GMT
Guardian.co.uk
Jill Treanor
This article was first published on guardian.co.uk at 08.57 GMT on Thursday 26 February 2009.
It was last updated at 09.14 GMT on Thursday 26 February 2009.

Royal Bank of Scotland has suffered the biggest loss in British corporate history - more than £24bn - and admitted today the taxpayer could end up owning 95% of the bank if its losses continue to mount.

The troubled bank needs to sell up to £19.5bn new B shares to the taxpayer in order to insure £300bn of its most troublesome assets. As a result, the taxpayer's voting rights over the bank would increase to 75% from almost 70% now. But Stephen Hester, the new chief executive, said the government's "economic interest" could rise to 95% "depending on how things work out".

On a conference call with reporters this morning, Hester said he "wanted to be honest and clear" on the government's stake because "we live in an uncertain world". But the voting influence of the taxpayer would be restricted to 75%, he said.

The scale of the losses suffered by the bank exacerbated the row about a £650,000 pension being drawn by former chief executive Sir Fred Goodwin, who is 50 and left last month after almost a decade at the helm.

Treasury minister Stephen Timms said the current RBS board was "extremely concerned" by the pension deal, which threatens to undermine government claims that it would not reward failure.

Hester said today the payments were part of the contractual entitlement to Goodwin and were agreed by the government at the time of the initial October bail-out.

The figures from RBS showed a statutory loss of £40bn, which falls to £24.1bn if technical issues relating to the bank's acquisition of ABN Amro are ignored. It largely comprises £7.8bn of trading losses and £16.8bn of writedowns caused by paying too much for acquisitions, notably ABN.

The City had been braced for £20bn of writedowns so the overall loss is slightly lower than expected.

But Derek Simpson, joint leader of Unite, said: "These historic and humiliating losses bring into sharp focus just how recklessly RBS's former management team have behaved.

"The whole country is paying the price through job cuts and repossessions on a massive scale. It is time to take control and fully nationalise this bank.

"You cannot have a state bail-out on one hand while allowing the spectre of thousands of job losses to loom over staff on the other," he said.

Hester today set out the detail of the radical restructuring he intends to undertake to try to set RBS back on a course to recovery. He outlined seven goals and which involve the bank shrinking by 20% and did not dispute speculation that up to 20,000 jobs from a 177,000 workforce could be axed.

• Shift £240bn of assets to a non-core division for disposal/run down over three to five years

• Deliver substantive change in all core division businesses

• Centre on UK with smaller, more focused global operations

• Radically restructure global banking and markets, taking out 45% of capital employed

• Cut more than £2.5bn out of the group's cost base

• Have access to the government asset protection scheme

• Drive major changes to management, processes and culture

Hester said: "Our aspiration is that RBS should again become one of the world's premier financial institutions, anchored in the UK but serving individual and institutional customers here and globally, and doing it well".

The bank's offices in 36 of the 54 countries in which it operates around the world will be cut back or sold. But major "global hubs" will remain.

New chairman Sir Philip Hampton made a fresh apology to shareholders. Last year their shares were trading at 400p. In early trading today they were 28.1p. Hampton said: "An inevitable but regrettable consequence of the successive capital raising exercises has been the dilution of the interests of existing shareholders. My predecessor Sir Tom McKillop apologised to shareholders for the impact on them of the erosion of their investments, a sentiment I echo. Those of us now charged with leading the group are committed to implementing measures which will allow us to restore the group to standalone financial health in the interests of all shareholders."

The bank also took a £7bn charge to cover impairment of loans that have turned sour.

Executives had spent much of the night locked in talks about the asset protect scheme to insure £300m of its most troublesome assets. In turn the bank will issue £13bn of a new class of B shares and a further £6.5bn at a later date to pay for the scheme which forces the taxpayer to take on additional risk. In return, RBS will lend a further £25bn this year and a further £25bn next year to try to kick start the economy. The fee will be spread over seven years in the bank's accounts.

Hester confirmed Nathan Bostock had been hired from Abbey National to run the assets which will be disposed of or shut down. Gordon Pell, a long-standing board member, is also delaying his retirement and being appointed deputy chief executive.

RBS record losses raise prospect of 95% state ownership, G, 26.2.2009, http://www.guardian.co.uk/business/2009/feb/26/rbs-record-loss

Bankers apologise and back calls for review of bonus culture

Former bosses of RBS and HBOS apologise to the Treasury select committee
for the events that led up to their banks being taken largely into public ownership

Tuesday 10 February 2009
15.26 GMT
Guardian.co.uk
Andrew Sparrow and agencies
This article was first published on guardian.co.uk at 15.26 GMT on Tuesday 10 February 2009.
It was last updated at 15.27 GMT on Tuesday 10 February 2009.

Senior bankers today backed calls for a review of the City bonus culture as they apologised to MPs for their role in events leading up to RBS and HBOS having to be rescued from the verge of collapse.

Sir Fred Goodwin and Sir Tom McKillop, respectively the former chief executive and chairman of RBS, and Andy Hornby and Lord Stevenson, respectively the former chief executive and chairman of HBOS, were quizzed about bonuses during a Commons Treasury select committee hearing in which they were accused of being "in denial" about their role in the banking crisis.

Although all four started their evidence by apologising, at times they faced hostile questioning and after the hearing was over the committee chairman, John McFall, accused them of displaying "a hint of arrogance".

During the session, which lasted for more than three hours, the four admitted that they did not anticipate the events that led to RBS and HBOS having to be rescued, but they insisted that others had also failed to anticipate global credit drying up in the way that it did. The hearing also featured:

• Goodwin and McKillop conceding that RBS's decision to buy the Dutch bank ABN Amro was a mistake

• All four witnesses admitting that they did not have formal banking qualifications

• Hornby admitting that he was being paid £60,000 a month to work as a consultant for his old bank

• John Mann, a Labour MP, asking Goodwin if he had a "different moral compass" from other people, and Jim Cousins, another Labour MP, asking McKillop if he had taken legal advice on the nature of criminal negligence. Goodwin said there was no reason for Mann to question his integrity and McKillop said he had not asked for such advice

• Michael Fallon, a Tory MP, accusing Goodwin of "destroying a great British bank"

• McKillop admitting he did not fully understand some of the complex financial instruments his bank was using

• McFall telling the bankers that the RBS board contained "the brightest and the best" and suggesting the complexity of modern banking, not individual incompetence, was to blame for what went wrong.

At the start of the session Goodwin, who in the past has been criticised for not showing sufficient regret for his role in what happened to RBS, said he was offering "profound and unqualified apologies for all the distress that has been caused". He said that he was repeating an apology he had already given to shareholders.

Stevenson, McKillop and Hornby also repeated apologies that they said they had made in the past.

RBS is now 68% owned by the state and has been propped up with £20bn of public money.

HBOS has been entirely swallowed by Lloyds TSB in the newly formed Lloyds Banking Group after the lender fell victim to the financial crisis.

RBS, HBOS and merger partner Lloyds were supported with £37m in taxpayers' cash last autumn as the financial system came close to collapse.

On bonuses, three of the bankers agreed that the City's bonus system needed to be reviewed.

McKillop said: "I believe that the events that have occurred and the situation we are now in should give us an opportunity to look fundamentally at the remuneration practices going forward. But I do believe that it needs to happen across the board."

Goodwin said that the bonus system was "something that should be looked at", but he said he did not accept that the bonus culture had encouraged illegitimate risk-taking at RBS.

Hornby said he thought bonuses should be tied to long-term performance, and that instead of being paid annually, they should be paid over three to five years.

"There is no doubt that the bonus system in many banks around the world has proven to be wrong in the last 24 months," Hornby told MPs, "in that, if people are rewarded [in] purely short-term cash form and are paid very substantial short-term cash bonuses without it being clear whether these decisions over the next three to five years have proven to be correct, that is not rewarding the right type of behaviour."

Goodwin and McKillop were also asked about RBS's decision to buy the Dutch bank ABN Amro, which led to RBS having to write off £20bn. Michael Fallon told McKillop: "You have destroyed a great British bank. You have cost the taxpayer £20bn."

McKillop said: "The deal was a bad mistake. At the time it did not look like that ... There was widespread support for it."

The bankers came under a particularly fierce grilling from John Mann, a Labour member of the committee.

Addressing Goodwin, Mann asked him whether he had a "different moral compass" from other people. He also asked him if his integrity and ethics were representative of the banking profession as a whole.

Goodwin replied: "Reflecting on everything that has happened, I think there is a case for questioning some of the [decisions] that I have made. I'm not aware of any basis for questioning my integrity as a result of it all."

Referring to HBOS, Mann said that he had had letters from HBOS employees saying they were "ashamed" to work for the bank. He asked Hornby to confirm that he was now working for Lloyds TSB, the bank that subsequently took over HBOS, as a consultant on a salary of £60,000 a month.

Mann said Hornby's salary would pay the wages of 36 low-paid bank staff. "Why is failure being rewarded? Why are you still getting this money?" he asked.

Hornby said he was being paid £60,000 a month, but that he had said that he only wanted the arrangement to continue for three months and that, if they still wanted him after that, he would work for free.

Hornby went on: "Can I please reiterate in terms of your impression about being rewarded for failure that I invested every single penny of my bonus in shares? I have lost considerably more money since I have been chief executive than I have earned."

George Mudie, a Labour member of the committee, told the four that, having listened to them, he had the impression that they were "all in bloody denial" about their role in what went wrong.

Stevenson denied that. "We are not in denial," he told Mudie.

"There are many things that we regret. I do think that in a number of areas it's a fact that very carefully arranged risk management systems were developed ... which regrettably did not spot scenarios coming up that have come up. Stress-testing did not stress-test adequately."

During the hearing, in a hint that the four bankers may escape severe personal criticism when the committee publishes its conclusions, McFall suggested that individual bankers were not to blame and that the problems were structural.

Addressing McKillop, McFall said the RBS board contained "the brightest and the best" and that as a result "there has to be something more fundamental there".

McFall said that experts had told the committee that they would have difficulty understanding the full scale of RBS's liabilities.

"Therefore you cannot lay the charge that it's incompetence. There has to be a system problem there. I put it to you that the expansion of new financial instruments increases the complexity to such an extent that people did not really understand them."

McKillop replied: "I agree with the thrust of your question."

At another point Sir Peter Viggers, a Tory MP, asked the witnesses if they understood the full complexities of the financial vehicles that their "clever young men" were creating.

McKillop replied: "You said 'full complexities'. I would say no."

After the hearing McFall told the World at One that he was glad the bankers had apologised but that he thought they had not showed full contrition.

"Was there a hint of arrogance still there? Absolutely," he said.

McFall also said the hearing had shown that the business model the bankers had been using had been "flawed".

Bankers apologise and back calls for review of bonus culture, G, 10.2.2009, http://www.guardian.co.uk/business/2009/feb/10/bankers-apologise-rbs-hbos-treasury-committee

Fed Cuts Key Rate to a Record Low

December 17, 2008
The New York Times
By EDMUND L. ANDREWS and JACKIE CALMES

WASHINGTON — The Federal Reserve entered a new era on Tuesday, lowering its benchmark interest rate virtually to zero and declaring that it would now fight the recession by pumping out vast amounts of money to businesses and consumers through an expanding array of new lending programs.

Going further than expected, the central bank cut its target for the overnight federal funds rate to a range of zero to 0.25 percent and brought the United States to the zero-rate policies that Japan used for years in its own fight against deflation.

Though important as a historic milestone, the move to an interest rate of zero from 1 percent is largely symbolic. The funds rate, which affects what banks charge for lending their reserves to each other, had already fallen to nearly zero in recent days because banks have been so reluctant to do business.

Of much greater practical importance, the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation’s worst economic downturn since World War II.

In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself. “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” it said. Those tools include buying “large quantities” of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

The move came as President-elect Barack Obama summoned his economic team to a four-hour meeting in Chicago to map out plans for an enormous economic stimulus measure that could cost anywhere from $600 billion to $1 trillion over the next two years.

The two huge economic stimulus programs, one from the Fed and one from the White House and Congress, set the stage for a powerful but potentially risky partnership between Mr. Obama and the Fed’s Republican chairman, Ben S. Bernanke.

“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said at a news conference Tuesday. “It is critical that the other branches of government step up, and that’s why the economic recovery plan is so essential.”

Financial markets were electrified by the Fed action. The Dow Jones industrial average jumped 4.2 percent, or 359.61 points, to close at 8,924.14.

Investors rushed to buy long-term Treasury bonds. Yields on 10-year Treasuries, which have traditionally served as a guide for mortgage rates, plunged immediately after the announcement to 2.26 percent, their lowest level in decades, from 2.51 percent earlier in the day.

Yields on investment-grade corporate bonds edged down to 7.215 percent on Tuesday, from 7.355 on Monday. Yields on riskier high-yielding corporate bonds remained in the stratosphere at 22.493 percent, almost unchanged from 22.732 on Monday.

By contrast, the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars. Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

For the moment, Mr. Obama and Mr. Bernanke appear to be on the same page, though that could abruptly change if the economy starts to revive. Fed officials have already assumed that Congress will pass a major spending program to stimulate the economy, and they are counting on it to contribute to economic growth next year.

In more normal times, the Fed might easily start raising interest rates in reaction to a huge new spending program, out of concern about rising inflation.

But data on Tuesday provided new evidence that the biggest threat to prices right now was not inflation but deflation.

The federal government reported on Tuesday that the Consumer Price Index fell 1.7 percent in November, the steepest monthly drop since the government began tracking prices in 1947. The decline was largely driven by the recent plunge in energy prices, but even the so-called core inflation rate, which excludes the volatile food and energy sectors, was essentially zero.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

The Fed, in a statement accompanying its rate decision, acknowledged that the recession was more severe than officials had thought at their last meeting in October.

“Over all, the outlook for economic activity has weakened further,” the central bank said.

“Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

The central bank added: “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

With fewer than 10 days until Christmas, retailers from Saks Fifth Avenue to Wal-Mart have been slashing prices to draw in consumers, who have sharply reduced their spending over the last six months. On Tuesday, Banana Republic offered customers $50 off on any purchases that total $125. The clothing retailer DKNY offered customers $50 off any purchase totaling $250.

Ian Shepherdson, an analyst at High Frequency Economics, said falling energy prices were likely to bring the year-over-year rate of inflation to below zero in January.

The Fed has already announced or outlined a range of unorthodox new tools that it can use to keep stimulating the economy once the federal funds rate effectively reaches zero. On Tuesday, Fed officials said they stood ready to expand them or create new ones to relieve bottlenecks in the credit markets.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started. Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

Vikas Bajaj contributed reporting from New York.

Fed Cuts Key Rate to a Record Low, NYT, 17.12.2008, http://www.nytimes.com/2008/12/17/business/economy/17fed.html

Queen's speech: Banks face fines for breaking new lending rules

The move comes after a flood of complaints from small firms
whose banks have suddenly raised their fees or hit them with more restrictive loan arrangements

Wednesday December 3 2008
09.15 GMT
Guardian.co.uk
Graeme Wearden
This article was first published on guardian.co.uk at 09.15 GMT on Wednesday December 03 2008.
It was last updated at 09.26 GMT on Wednesday December 03 2008

Britain's banks will face potentially huge fines if they refuse to lend fairly to small businesses and individuals under legislation to be announced this afternoon.

The Queen's speech is expected to include making the current voluntary code of practice for the banking sector legally binding, as part of several major reforms to the financial sector contained in a new Banking Reform bill.

The move comes after a flood of complaints from small firms whose banks have suddenly raised their fees or hit them with more restrictive loan arrangements, even if they had been trading profitably for years.

Having bailed out the banking sector with a £500bn rescue package, the government is concerned that small businesses could be driven to the wall as the repercussions of the credit crunch continue to batter the UK economy.

The existing code of conduct sets out the minimum standards that banks must provide to their customers. This includes lending responsibly, giving help for customers who hit problems, and more transparent bank charges.

However, the most severe penalty for a breach is only to be "named and shamed". The plans that are expected to be announced today will include unlimited fines for banks that break the rules and refuse to improve their service. It will be policed by the FSA.

HBOS announced new support for businesses this morning. Small and medium-sized firms who are customers of Bank of Scotland will be offered funding worth £250m, which will be available at up to 80 basis points below standard lending rates, it said. The company added that it will guarantee pricing on Bank of Scotland small business customer overdrafts for 12 months from the date of arrangement for new loans and renewals.

HBOS is receiving a multi-billion pound injection from the government as part of its rescue merger with Lloyds TSB.

A row is already brewing between HBOS and the FSA over its tracker mortgages. Like several other lenders it operates a "collar" that stops the rate of repayment falling below a certain point. The Bank of England is expected to cut interest rates again tomorrow, and the FSA has already indicated that it expects any reduction to be passed on – even it that would take repayment levels below the collar.

The Banking Code:

The Banking Code was last updated in March this year, when these changes were added:

• A new commitment on responsible lending
• A new commitment on current account switching
• More help for customers who may be heading towards financial difficulties
• Strengthened credit assessment practices to enhance responsible lending
• Clearer information about products, including pre-sale summary boxes for unsecured loans and savings accounts
• Prohibition of account closure as a result of a customer making a valid complaint
• Information on how to find lost accounts
• Greater clarity of cheque clearance times
• Clearer information about credit cards and credit card cheques, upgrading current accounts, moving or closing branches, alternatives to Chip and PIN, and protecting accounts

Queen's speech: Banks face fines for breaking new lending rules, G, 3.12.2008, http://www.guardian.co.uk/business/2008/dec/03/banking-queens-speech

Banks Mine Data and Pitch to Troubled Borrowers

October 22, 2008
The New York Times
By BRAD STONE

Brenda Jerez hardly seems like the kind of person lenders would fight over.

Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.

For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.

“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.

“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”

Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.

Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.

They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.

These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.

These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”

This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.

The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.

“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”

Compiling Histories

To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.

Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.

The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.

“It almost seems like they are trying to get you into trouble,” he says.

The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.

During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.

The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.

Profiling Methods

Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.

In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.

One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.

The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.

The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.

An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”

Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.

In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.

At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.

“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”

“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.

The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.

What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.

“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.

Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.

“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.

Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.

Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.

“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”

Decrease in Mailings

In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.

Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.

Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.

For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.

Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.

He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.

The campaign flopped. “It was just too eerie,” Mr. Harvey said.

Banks Mine Data and Pitch to Troubled Borrowers, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/22target.html

The Guys From ‘Government Sachs’

October 19, 2008
The New York Times
By JULIE CRESWELL and BEN WHITE

THIS summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings.

In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G.

And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance.

Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.

It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere. While Goldman sees this as little more than giving back to the financial world, outside executives and analysts wonder about potential conflicts of interest presented by the firm’s unique perch.

They note that decisions that Mr. Paulson and other Goldman alumni make at Treasury directly affect the firm’s own fortunes. They also question why Goldman, which with other firms may have helped fuel the financial crisis through the use of exotic securities, has such a strong hand in trying to resolve the problem.

The very scale of the financial calamity and the historic government response to it have spawned a host of other questions about Goldman’s role.

Analysts wonder why Mr. Paulson hasn’t hired more individuals from other banks to limit the appearance that the Treasury Department has become a de facto Goldman division. Others ask whose interests Mr. Paulson and his coterie of former Goldman executives have in mind: those overseeing tottering financial services firms, or average homeowners squeezed by the crisis?

Still others question whether Goldman alumni leading the federal bailout have the breadth and depth of experience needed to tackle financial problems of such complexity — and whether Mr. Paulson has cast his net widely enough to ensure that innovative responses are pursued.

“He’s brought on people who have the same life experiences and ideologies as he does,” said William K. Black, an associate professor of law and economics at the University of Missouri and counsel to the Federal Home Loan Bank Board during the savings and loan crisis of the 1980s. “These people were trained by Paulson, evaluated by Paulson so their mind-set is not just shaped in generalized group think — it’s specific Paulson group think.”

Not so fast, say Goldman’s supporters. They vehemently dismiss suggestions that Mr. Paulson’s team would elevate Goldman’s interests above those of other banks, homeowners and taxpayers. Such chatter, they say, is a paranoid theory peddled, almost always anonymously, by less successful rivals. Just add black helicopters, they joke.

“There is no conspiracy,” said Donald C. Langevoort, a law professor at Georgetown University. “Clearly if time were not a problem, you would have a committee of independent people vetting all of the potential conflicts, responding to questions whether someone ought to be involved with a particular aspect or project or not because of relationships with a former firm — but those things do take time and can’t be imposed in an emergency situation.”

In fact, Goldman’s admirers say, the firm’s ranks should be praised, not criticized, for taking a leadership role in the crisis.

“There are people at Goldman Sachs making no money, living at hotels, trying to save the financial world,” said Jes Staley, the head of JPMorgan Chase’s asset management division. “To indict Goldman Sachs for the people helping out Washington is wrong.”

Goldman concurs. “We’re proud of our alumni, but frankly, when they work in the public sector, their presence is more of a negative than a positive for us in terms of winning business,” said Lucas Van Praag, a spokesman for Goldman. “There is no mileage for them in giving Goldman Sachs the corporate equivalent of most-favored-nation status.”

MR. PAULSON himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.

Some analysts say that given the pressures Mr. Paulson faced creating a SWAT team to address the financial crisis, it was only natural for him to turn to his former firm for a capable battery.

And if there is one thing Goldman has, it is an imposing army of top-of-their-class, up-before-dawn über-achievers. The most prominent former Goldman banker now working for Mr. Paulson at Treasury is also perhaps the most unlikely.

Neel T. Kashkari arrived in Washington in 2006 after spending two years as a low-level technology investment banker for Goldman in San Francisco, where he advised start-up computer security companies. Before joining Goldman, Mr. Kashkari, who has two engineering degrees in addition to an M.B.A. from the Wharton School of the University of Pennsylvania, worked on satellite projects for TRW, the space company that now belongs to Northrop Grumman.

He was originally appointed to oversee a $700 billion fund that Mr. Paulson orchestrated to buy toxic and complex bank assets, but the role evolved as his boss decided to invest taxpayer money directly in troubled financial institutions.

Mr. Kashkari, who met Mr. Paulson only briefly before going to the Treasury Department, is also in charge of selecting the staff to run the bailout program. One of his early picks was Reuben Jeffrey, a former Goldman executive, to serve as interim chief investment officer.

Mr. Kashkari is considered highly intelligent and talented. He has also been Mr. Paulson’s right-hand man — and constant public shadow — during the financial crisis.

He played a main role in the emergency sale of Bear Stearns to JPMorgan Chase in March, sitting in a Park Avenue conference room as details of the acquisition were hammered out. He often exited the room to funnel information to Mr. Paulson about the progress.

Despite Mr. Kashkari’s talents in deal-making, there are widespread questions about whether he has the experience or expertise to manage such a project.

“Mr. Kashkari may be the most brilliant, talented person in the United States, but the optics of putting a 35-year-old Paulson protégé in charge of what, at least at one point, was supposed to be the most important part of the recovery effort are just very damaging,” said Michael Greenberger, a University of Maryland law professor and a former senior official with the Commodity Futures Trading Commission.

“The American people are fed up with Wall Street, and there are plenty of people around who could have been brought in here to offer broader judgment on these problems,” Mr. Greenberger added. “All wisdom about financial matters does not reside on Wall Street.”

Mr. Kashkari won’t directly manage the bailout fund. More than 200 firms submitted bids to oversee pieces of the program, and Treasury has winnowed the list to fewer than 10 and could announce the results as early as this week. Goldman submitted a bid but offered to provide its services gratis.

While Mr. Kashkari is playing a prominent public role, other Goldman alumni dominate Mr. Paulson’s inner sanctum.

The A-team includes Dan Jester, a former strategic officer for Goldman who has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae and Freddie Mac. Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.

Another central player is Steve Shafran, who grew close to Mr. Paulson in the 1990s while working in Goldman’s private equity business in Asia. Initially focused on student loan problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.

Mr. Shafran, who retired from Goldman in 2000, had settled with his family in Ketchum, Idaho, where he joined the city council. Baird Gourlay, the council president, said he had spoken a couple of times with Mr. Shafran since he returned to Washington last year.

“He was initially working on the student loan part of the problem,” Mr. Gourlay said. “But as things started falling apart, he said Paulson was relying on him more and more.”

The Treasury Department said Mr. Shafran and the other former Goldman executives were unavailable for comment.

Other prominent former Goldman executives now at Treasury include Kendrick R. Wilson III, a seasoned adviser to chief executives of the nation’s biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time working his ample contact list of bank chiefs to apprise them of possible Treasury plans and gauge reaction.

Another Goldman veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson on setting up the bailout fund but has since left to return to his post as executive vice president of Harvard. Robert K. Steel, a former vice chairman at Goldman, was tapped to look at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia this summer before the government took over the entities.

Treasury officials acknowledge that former Goldman executives have played an enormous role in responding to the current crisis. But they also note that many other top Treasury Department officials with no ties to Goldman are doing significant work, often without notice. This group includes David G. Nason, a senior adviser to Mr. Paulson and a former Securities and Exchange Commission official.

Robert F. Hoyt, general counsel at Treasury, has also worked around the clock in recent weeks to make sure the department’s unprecedented moves pass legal muster. Michele Davis is a Capitol Hill veteran and Treasury policy director. None of them are Goldmanites.

“Secretary Paulson has a deep bench of seasoned financial policy experts with varied experience,” said Jennifer Zuccarelli, a spokeswoman for the Treasury. “Bringing additional expertise to bear at times like these is clearly in the taxpayers’ and the U.S. economy’s best interests.”

While many Wall Streeters have made the trek to Washington, there is no question that the axis of power at the Treasury Department tilts toward Goldman. That has led some to assume that the interests of the bank, and Wall Street more broadly, are the first priority. There is also the question of whether the department’s actions benefit the personal finances of the former Goldman executives and their friends.

“To the extent that they have a portfolio or blind trust that holds Goldman Sachs stock, they have conflicts,” said James K. Galbraith, a professor of government and business relations at the University of Texas. “To the extent that they have ties and alumni loyalty or friendships with people that are still there, they have potential conflicts.”

Mr. Paulson, Mr. Kashkari and Mr. Shafran no longer own any Goldman shares. It is unclear whether Mr. Jester or Mr. Wilson does because, according to the Treasury Department, they were hired as contractors and are not required to disclose their financial holdings.

For every naysayer, meanwhile, there is also a Goldman defender who says the bank’s alumni are doing what they have done since the days when Sidney Weinberg ran the bank in the 1930s and urged his bankers to give generously to charities and volunteer for public service.

“I give Hank credit for attracting so many talented people. None of these guys need to do this,” said Barry Volpert, a managing director at Crestview Partners and a former co-chief operating officer of Goldman’s private equity business. “They’re not getting paid. They’re killing themselves. They haven’t seen their families for months. The idea that there’s some sort of cabal or conflict here is nonsense.”

In fact, say some Goldman executives, the perception of a conflict of interest has actually cost them opportunities in the crisis. For instance, Goldman wasn’t allowed to examine the books of Bear Stearns when regulators were orchestrating an emergency sale of the faltering investment bank.

THIS summer, as he fought for the survival of Lehman Brothers, Richard S. Fuld Jr., its chief executive, made a final plea to regulators to turn his investment bank into a bank holding company, which would allow it to receive constant access to federal funding.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firm’s demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.

One week later, Goldman and Morgan Stanley were designated bank holding companies.

“That was our idea three months ago, and they wouldn’t let us do it,” said a former senior Lehman executive who requested anonymity because he was not authorized to comment publicly. “But when Goldman got in trouble, they did it right away. No one could believe it.”

The New York Fed, which declined to comment, has become, after Treasury, the favorite target for Goldman conspiracy theorists. As the most powerful regional member of the Federal Reserve system, and based in the nation’s financial capital, it has been a driving force in efforts to shore up the flailing financial system.

Mr. Geithner, 47, played a pivotal role in the decision to let Lehman die and to bail out A.I.G. A 20-year public servant, he has never worked in the financial sector. Some analysts say that has left him reliant on Wall Street chiefs to guide his thinking and that Goldman alumni have figured prominently in his ascent.

After working at the New York consulting firm Kissinger Associates, Mr. Geithner landed at the Treasury Department in 1988, eventually catching the eye of Robert E. Rubin, Goldman’s former co-chairman. Mr. Rubin, who became Treasury secretary in 1995, kept Mr. Geithner at his side through several international meltdowns, including the Russian credit crisis in the late 1990s.

Mr. Rubin, now senior counselor at Citigroup, declined to comment.

A few years later, in 2003, Mr. Geithner was named president of the New York Fed. Leading the search committee was Pete G. Peterson, the former head of Lehman Brothers and the senior chairman of the private equity firm Blackstone. Among those on an outside advisory committee were the former Fed chairman Paul A. Volcker; the former A.I.G. chief executive Maurice R. Greenberg; and John C. Whitehead, a former co-chairman of Goldman.

The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. He is a “Class C” director, meaning that he was appointed by the board to represent the public.

Mr. Friedman, who wears many hats, including that of chairman of the President’s Foreign Intelligence Advisory Board, did not return calls for comment.

During his tenure, Mr. Geithner has turned to Goldman in filling important positions or to handle special projects. He hired a former Goldman economist, William C. Dudley, to oversee the New York Fed unit that buys and sells government securities. He also tapped E. Gerald Corrigan, a well-regarded Goldman managing director and former New York Fed president, to reconvene a group to analyze risk on Wall Street.

Some people say that all of these Goldman ties to the New York Fed are simply too close for comfort. “It’s grotesque,” said Christopher Whalen, a managing partner at Institutional Risk Analytics and a critic of the Fed. “And it’s done without apology.”

A person familiar with Mr. Geithner’s thinking who was not authorized to speak publicly said that there was “no secret handshake” between the New York Fed and Goldman, describing such speculation as a conspiracy theory.

Furthermore, others say, it makes sense that Goldman would have a presence in organizations like the New York Fed.

“This is a very small, close-knit world. The fact that all of the major financial services firms, investment banking firms are in New York City means that when work is to be done, you’re going to be dealing with one of these guys,” said Mr. Langevoort at Georgetown. “The work of selecting the head of the New York Fed or a blue-ribbon commission — any of that sort of work — is going to involve a standard cast of characters.”

Being inside may not curry special favor anyway, some people note. Even though Mr. Fuld served on the board of the New York Fed, his proximity to federal power didn’t spare Lehman from bankruptcy.

But when bankruptcy loomed for A.I.G. — a collapse regulators feared would take down the entire financial system — federal officials found themselves once again turning to someone who had a Goldman connection. Once the government decided to grant A.I.G., the largest insurance company, an $85 billion lifeline (which has since grown to about $122 billion) to prevent a collapse, regulators, including Mr. Paulson and Mr. Geithner, wanted new executive blood at the top.

They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate. Mr. Liddy had been a Goldman director since 2003 — he resigned after taking the A.I.G. job — and was chairman of the audit committee. (Another former Goldman executive, Suzanne Nora Johnson, was named to the A.I.G. board this summer.)

Like many Wall Street firms, Goldman also had financial ties to A.I.G. It was the insurer’s largest trading partner, with exposure to $20 billion in credit derivatives, and could have faced losses had A.I.G. collapsed. Goldman has said repeatedly that its exposure to A.I.G. was “immaterial” and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses.

As the financial crisis has taken on a more global cast in recent weeks, Mr. Paulson has sat across the table from former Goldman colleagues, including Robert B. Zoellick, now president of the World Bank; Mario Draghi, president of the international group of regulators called the Financial Stability Forum; and Mark J. Carney, the governor of the Bank of Canada.

BUT Mr. Paulson’s home team is still what draws the most scrutiny.

“Paulson put Goldman people into these positions at Treasury because these are the people he knows and there are no constraints on him not to do so,” Mr. Whalen says. “The appearance of conflict of interest is everywhere, and that used to be enough. However, we’ve decided to dispense with the basic principles of checks and balances and our ethical standards in times of crisis.”

Ultimately, analysts say, the actions of Mr. Paulson and his alumni club may come under more study.

“I suspect the conduct of Goldman Sachs and other bankers in the rescue will be a background theme, if not a highlighted theme, as Congress decides how much regulation, how much control and frankly, how punitive to be with respect to the financial services industry,” said Mr. Langevoort at Georgetown. “The settling up is going to come in Congress next spring.”

The Guys From ‘Government Sachs’, NYT, 19.10.2008, http://www.nytimes.com/2008/10/19/business/19gold.html

U.S. Investing $250 Billion in Banks

October 14, 2008
The New York Times
By MARK LANDLER

WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

The Dow Jones industrial average gained 936 points, or 11 percent, the largest single-day gain in the American stock market since the 1930s. The surge stretched around the globe: in Paris and Frankfurt, stocks had their biggest one-day gains ever, responding to news of similar multibillion-dollar rescue packages by the French and German governments.

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

President Bush plans to announce the measures on Tuesday morning after a harrowing week in which confidence vanished in financial markets as the crisis spread worldwide and government leaders engaged in a desperate search for remedies to the spreading contagion. They are desperately seeking to curb the severity of a recession that has come to appear all but inevitable.

Over the weekend, central banks flooded the system with billions of dollars in liquidity, throwing out the traditional financial playbook in favor of a series of moves that officials hoped would get banks lending again.

European countries — including Britain, France, Germany and Spain — announced aggressive plans to guarantee bank debt, take ownership stakes in banks or prop up ailing companies with billions in taxpayer funds.

The Treasury’s plan would help the United States catch up to Europe in what has become a footrace between countries to reassure investors that their banks will not default or that other countries will not one-up their rescue plans and, in so doing, siphon off bank deposits or investment capital.

“The Europeans not only provided a blueprint, but forced our hand,” said Kenneth S. Rogoff, a professor of economics at Harvard and an adviser to John McCain, the Republican presidential candidate. “We’re trying to prevent wholesale carnage in the financial system.”

In the process, Mr. Rogoff and other experts said, the government is remaking the financial landscape in ways that would have been unimaginable a few weeks ago — taking stakes in the industry and making Washington the ultimate guarantor for banking in the United States.

But the pace of the crisis has driven events, and fissures in places as far-flung as Iceland, which suffered a wholesale collapse of its banks, persuaded officials to act far more decisively than they had previously.

“Over the weekend, I thought it could come out very badly,” said Simon Johnson, a former chief economist of the International Monetary Fund. “But we stepped back from the cliff.”

The guarantee on bank debt is similar to one announced by several European countries earlier on Monday, and is meant to unlock the lending market between banks. Banks have curtailed such lending — considered crucial to the smooth running of the financial system and the broader economy — because they fear they will not be repaid if a bank borrower runs into trouble.

But officials said they hoped the guarantee on new senior debt would have an even broader effect than an interbank lending guarantee because it should also stimulate lending to businesses.

Another part of the government’s remedy is to extend the federal deposit insurance to cover all small-business deposits. Federal regulators recently have been noticing that small-business customers, which tend to carry balances over the federal insurance limits, had been withdrawing their money from weaker banks and moving it to bigger, more stable banks.

Congress had already raised the F.D.I.C.’s deposit insurance limit to $250,000 earlier this month, extending coverage to roughly 68 percent of small-business deposits, according to estimates by Oliver Wyman, a financial services consulting firm. The new rules would cover the remaining 32 percent.

“Imposing unlimited deposit insurance doesn’t fix the underlying problem, but it does reduce the threat of overnight failures,” said Jaret Seiberg, a financial services policy analyst at the Stanford Group in Washington.

“If you reduce the threat of overnight failures,” Mr. Seiberg said, “you start to encourage lending to each other overnight, which starts to restore the normal functioning of the credit markets.”

Recapitalizing banks is not without its risks, experts warned, pointing to the example of Britain, which announced its program last week and injected its first capital into three banks on Monday.

Shares of the newly nationalized banks — Royal Bank of Scotland, HBOS and Lloyds — slumped on Monday, despite a surge in banks elsewhere, because shareholder value was diluted by the government.

The move, analysts said, makes the government Britain’s biggest banker. And it creates a two-tier banking system in which the nationalized banks are run like utilities and others are free to pursue profit growth. As part of the plan, the chief executives of the three banks stepped down.

Still, Mr. Paulson’s strategy was backed by lawmakers, including Senator Charles E. Schumer, Democrat of New York, who said he preferred capital injections to buying distressed mortgage-related assets — a proposal that Treasury pushed aggressively before its turnabout.

In a letter to Mr. Paulson on Monday, Mr. Schumer, chairman of the Joint Economic Committee, urged the Treasury to demand that banks receiving capital eliminate their dividends, restrict executive pay and stick to “safe and sustainable, rather than exotic, financial activities.”

“I don’t think making this as easy as possible for the financial institutions is the way to go,” Mr. Schumer said in a call with reporters. “You need some carrots but you also need some sticks.”

But officials said the banks would not be required to eliminate dividends, nor would the chief executives be asked to resign. They will, however, be held to strict restrictions on compensation, including a prohibition on golden parachutes and requirements to return any improper bonuses. Those rules were also part of the $700 billion bailout law passed by Congress.

The nine chief executives met in a conference room outside Mr. Paulson’s ornate office, people briefed on the meeting said. They were seated across the table from Mr. Paulson; Ben S. Bernanke, chairman of the Federal Reserve; Timothy F. Geithner, president of the Federal Reserve Bank of New York; Federal Reserve Governor Kevin M. Warsh; the chairman of the F.D.I.C., Sheila C. Bair; and the comptroller of the currency, John C. Dugan.

Among the bankers attending were Kenneth D. Lewis of Bank of America, Jamie Dimon of JPMorgan Chase, Lloyd C. Blankfein of Goldman Sachs, John J. Mack of Morgan Stanley, Vikram S. Pandit of Citigroup, Robert Kelly of Bank of New York Mellon and John A. Thain of Merrill Lynch.

Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

As Treasury embarked on its recapitalization plan, it offered some details on the nuts-and-bolts of the broader bailout effort. The program’s interim head, Neel T. Kashkari, said Treasury had filled several senior posts and selected the Wall Street firm Simpson Thacher as a legal adviser.

It named an investment management consultant, Ennis Knupp, based in Chicago, to help it select asset management firms to buy distressed bank assets. And it plans to announce the firm that will serve as the program’s prime contractor, running auctions and holding assets, within the next day.

“We are working around the clock to make it happen,” said Mr. Kashkari, a former Goldman Sachs banker who has been entrusted with the job of building this operation within weeks.

As details of the American recapitalization plan emerged, fears grew over the impact on smaller countries. Iceland is discussing an aid package with the International Monetary Fund, a week after Reykjavik seized its three largest banks and shut down its stock market.

The fund also offered “technical and financial” aid to Hungary, which last week suffered a run on its currency. Prime Minister Ferenc Gyurcsany said the country would accept aid only as a last resort.

In a new report on capital flows, the Institute of International Finance projected that net capital in-flows to emerging markets would decline sharply, to $560 billion in 2009, from $900 billion last year.

In Asia, markets continued to rise on Tuesday, lifted further by the announcement that the Japanese government would inject 1 trillion yen ($9.7 billion) into the financial system.

U.S. Investing $250 Billion in Banks, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14treasury.html?hp

Op-Ed Contributor

An Economy You Can Bank On

October 10, 2008
The New York Times
By CASEY B. MULLIGAN

Chicago

THE Treasury Department is now thinking about using some of the $700 billion it has been given to rescue Wall Street to buy ownership stakes in American banks. The idea is that banking is so central to the American economy that the government is justified in virtually nationalizing much of the industry in order to save us from a potential depression.

There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think.

Bear with me. I know that most everyone has been saying for a couple of weeks that something has to be done; a banking crisis could quickly become a wider crisis, pulling the rest of us down. For this reason, the Wall Street bailout is supposed to be better than no plan at all.

Too bad this line of thinking is seriously flawed. The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated.

Although banks perform an essential economic function — bringing together investors and savers — they are not the only institutions that can do this. Pension funds, university endowments, venture capitalists and corporations all bring money to new investment projects without banks playing any essential role. The average corporation gets about a quarter of its investment funds from the profits it has after paying dividends — and could double or even triple that amount by cutting its dividend, if necessary.

What’s more, it’s not as if banking services are about to vanish. When a bank or a group of banks go under, the economywide demand for their services creates a strong profit motive for new banks to enter the marketplace and for existing banks to expand their operations. (Bank of America and J. P. Morgan Chase are already doing this.)

It’s important to keep in mind, too, that the financial sector has had a long history of fluctuating without any correlated fluctuations in the rest of the economy. The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits.

It turns out that John McCain, who was widely mocked for saying that “the fundamentals of our economy are strong,” was actually right. We’re in a financial crisis, not an economic crisis. We’re not entering a second Great Depression.

How do we know? Well, the economy outside the financial sector is healthier than it seems.

One important indicator is the profitability of non-financial capital, what economists call the marginal product of capital. It’s a measure of how much profit that each dollar of capital invested in the economy is producing during, say, a year. Some investments earn more than others, of course, but the marginal product of capital is a composite of all of them — a macroeconomic version of the price-to-earnings ratio followed in the financial markets.

When the profit per dollar of capital invested in the economy is higher than average, future rates of economic growth also tend to be above average. The same cannot be said about rates of return on the S.& P. 500, or any another measurement that commands attention on Wall Street.

Since World War II, the marginal product of capital, after taxes, has averaged 7 percent to 8 percent per year. (In other words, each dollar of capital invested in the economy earns, on average, 7 cents to 8 cents annually.) And what happened during 2007 and the first half of 2008, when the financial markets were already spooked by oil price spikes and housing price crashes? The marginal product was more than 10 percent per year, far above the historical average. The third-quarter earnings reports from some companies already suggest that America’s non-financial companies are still making plenty of money.

The marginal product has accurately reflected hard economic times in the past. From 1930 to 1933, for instance, the marginal product of capital averaged 0.5 percentage points per year less than the postwar average. The profit per dollar of capital was also below average in the year before the 1982 recession and the year before the 2001 recession. Sure, the financial industry has taken a hit, and so have cities like New York that depend on that industry. But the financial system is more resilient today than it has been in the past, because it’s a much easier industry for companies to enter than it was in the 1930s.

When banks failed during the Great Depression, there were not so many foreign investors that were cash-rich (or these days, oil-rich) and appreciative of how some of the bank assets, personnel and brand names in the United States could be used to earn profits in the future. And don’t worry about foreign ownership: Americans would benefit if foreigners brought money into our economy to enable banks to continue to lend.

And if it takes a while for banks and lenders to get up and running again, what’s the big deal? Saving and investment are themselves not essential to the economy in the short term. Businesses could postpone their investments for a few quarters with a fairly small effect on Americans’ living standards. How harmful would it be to wait nine more months for a new car or an addition to your house?

We can largely make up for this delay by extra investment when the banking sector reorganizes itself. Americans waited years during World War II to begin private-sector investment projects (when wartime production displaced private investment), and quickly brought the capital stock (housing and big-ticket consumer items) back to normal levels when the war ended.

So, if you are not employed by the financial industry (94 percent of you are not), don’t worry. The current unemployment rate of 6.1 percent is not alarming, and we should reconsider whether it is worth it to spend $700 billion to bring it down to 5.9 percent.

Casey B. Mulligan is a professor of economics at the University of Chicago.

An Economy You Can Bank On, NYT, 10.10.2008, http://www.nytimes.com/2008/10/10/opinion/10mulligan.html?ref=opinion

U.S. May Take Ownership Stake in Banks

October 9, 2008
The New York Times
By EDMUND L. ANDREWS and MARK LANDLER

WASHINGTON — Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

In a coordinated action, the central banks reduced their benchmark interest rates by one-half percentage point. On top of that, the Bank of England announced its plan to nationalize part of the British banking system and devote almost $500 billion to guarantee financial transactions between banks.

The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.

The gloomy market response sent policy makers and outside experts on a scramble for additional remedies to stabilize the banks and reassure investors.

There is no shortage of ideas, ranging from the partial nationalization proposal to a guarantee by the Fed of all lending between banks.

Senator John McCain, the Republican presidential candidate, on Wednesday refined his proposal — revealed in a debate with the Democratic nominee, Senator Barack Obama, the night before — to allow millions of Americans to refinance their mortgages with government assistance.

As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.

Yet behind the scramble for solutions lies a hard reality: the financial crisis has mutated into a global downturn that economists warn will be painful and protracted, and for which there is no quick cure.

“Everyone is conditioned to getting instant relief from the medicine, and that is unrealistic,” said Allen Sinai, president of Decision Economics, a forecasting firm in Lexington, Mass. “As hard as it is for investors and jobholders and politicians in an election year, this crisis will not end without a lot more pain.”

One concern about the Treasury’s bailout plan is that it calls for limits on executive pay when capital is directly injected into a bank. The law directs Treasury officials to write compensation standards that would discourage executives from taking “unnecessary and excessive risks” and that would allow the government to recover any bonus pay that is based on stated earnings that turn out to be inaccurate. In addition, any bank in which the Treasury holds a stake would be barred from paying its chief executive a “golden parachute” package.

Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.

At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.

“We will use all the tools we’ve been given to maximum effectiveness,” Mr. Paulson said, “including strengthening the capitalization of financial institutions of every size.”

The idea is gaining support even among longtime Republican policy makers who have spent most of their careers defending laissez-faire economic policies.

“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,” said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”

Mr. Paulson acknowledged that the flurry of emergency steps had done little to break the cycle of fear and mistrust, and he pleaded for patience.

“The turmoil will not end quickly,” Mr. Paulson told reporters on Wednesday. “Neither the passage of this law nor the implementation of these initiatives will bring an immediate end to the current difficulties.”

Mr. Paulson will play host to finance ministers and central bankers from the Group of 7 countries this Friday. But he cautioned against expecting a grand plan to emerge from the gathering.

More likely, the participants will compare notes about the measures they are adopting in their own countries. David H. McCormick, Treasury’s under secretary for international affairs, said there was no “one size fits all” remedy for the crisis, though countries were cooperating through the coordinated cuts in interest rates, with guarantees on bank deposits and in regulations.

At the Federal Reserve in Washington, officials insisted they had not run out of options and made it clear they were willing to do whatever it took to shore up the economy.

Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”

This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.

In the last month, both the Treasury and the Fed took extraordinary steps toward nationalizing three of the biggest financial companies in the country. Last month, the Treasury took over Fannie Mae and Freddie Mac, the giant government-sponsored mortgage-finance companies that were on the brink of collapse. A week later, the Fed took control of the American International Group, the failing insurance conglomerate, in exchange for agreeing to lend it $85 billion.

On Wednesday, the Federal Reserve announced that it would lend A.I.G. an additional $37.8 billion.

But neither the individual corporate bailouts nor the Fed’s enormous emergency lending programs — including up to $900 billion through its Term Auction Facility for banks — have succeeded in jump-starting the credit markets.

“The core problem is that the smart people are realizing that the banking system is broken,” said Carl B. Weinberg, chief economist at High Frequency Economics. “Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.”

U.S. May Take Ownership Stake in Banks, NYT, 9.10.2008, http://www.nytimes.com/2008/10/09/business/economy/09econ.html?hp

Op-Ed Contributor

The Borrowers

October 3, 2008
The New York Times
By BETHANY McLEAN

Chicago

ON Monday, in a vote that will go down in history, the House of Representatives said no to a $700 billion plan to bail out the teetering financial system. Members of Congress chalked the rejection up to populist rage over the idea of rescuing Wall Street while helpless homeowners flail, and some representatives who voted no say they’ll vote no again when the version of the bailout passed by the Senate on Wednesday comes up in the House.

I’ll say this upfront: I hope the titans of finance who expect us little people to save them are ashamed of themselves. But at the same time, in painting Main Street solely as a victim of a rapacious Wall Street, we are being hypocritical.

We are all to blame.

Step back. The securities that are poisoning the financial system are made up of mortgages and home equity lines that are going sour. They may soon consist of sick credit card and automobile debt as well. “Innovation” on Wall Street meant that the institution that made the loans could sell them off, and bankers could carve up those loans into new instruments, which they in turn sold to investors around the globe, with the result being that no one felt responsible for ensuring that the person who got the mortgage or the credit card or the home equity loan could actually pay for it.

But who made the decision to take on that mortgage she couldn’t really afford? Who lied about her income or assets in order to qualify for a mortgage? Who used the proceeds of a home equity line to pay for an elaborate vacation? Who used credit cards to live a lifestyle that was well beyond her means? Well, you and I did. (Or at least, our neighbors did.)

In other words, without the complicity of Main Street, Wall Street’s scheme never would have flowered. Some would argue that the modern sales machinery — remember those ads telling you to let your home take you on vacation? — is to blame. And it is.

But we’re supposed to be adults, not children who can’t keep our hands out of the cookie jar. (Those who were lied to by brokers about the reset rates on adjustable-rate mortgages and other elements of their loans are in a different category.)

Just as many of us deserve a share of the blame, many of us also got a share of the profits. No, not the kind of profits that Wall Streeters got, at least individually. But if you sold your house over, say, the last five years, you got an inflated price because of the proliferation of credit made possible by the Street’s practices.

If you bought a house, then you got a lower mortgage rate than you would have if it weren’t for Wall Street.

If you made money on the shares of Merrill Lynch or Lehman Brothers or another participant in this mess, then you shared in the profits. One could even argue that the overall stock market wouldn’t have achieved the heights it did were it not for our housing and debt-fueled economy. So if you cashed out at all, then you got some of the profits.

This isn’t an argument in favor of the bailout plan. There are big questions that need to be answered. When Treasury Secretary Henry Paulson argues that the plan can’t impose onerous requirements on financial institutions because otherwise they won’t participate, I think, “Well, if they are in good enough shape that they actually have a choice, then why are we offering them a costly lifeline?”

This also isn’t an argument that a bailout would be fair to ordinary Americans. We are to blame, but we don’t deserve all the blame. We profited, but we didn’t get anywhere near the lion’s share of the profits — and from the sound of things, a bailout would stick us with a disproportionate amount of the bill.

But it’s also true that if the experts are right, a failure to act will stick us with most of the pain as the economy seizes up. The Wall Streeters who pocketed million-dollar bonuses can handle a layoff. Most Americans can’t.

Didn’t your parents teach you that life isn’t fair?

Bethany McLean, a contributing editor for Vanity Fair, is the co-author of “The Smartest Guys in the Room: The Amazing Rise and the Scandalous Fall of Enron.”

The Borrowers, NYT, 3.10.2008, http://www.nytimes.com/2008/10/03/opinion/03mclean.html

Wall Street, R.I.P.: The End of an Era, Even at Goldman

September 28, 2008
The New York Times
By JULIE CRESWELL and BEN WHITE

WALL STREET. Two simple words that — like Hollywood and Washington — conjure a world.

A world of big egos. A world where people love to roll the dice with borrowed money. A world of tightwire trading, propelled by computers.

In search of ever-higher returns — and larger yachts, faster cars and pricier art collections for their top executives — Wall Street firms bulked up their trading desks and hired pointy-headed quantum physicists to develop foolproof programs.

Hedge funds placed markers on red (the Danish krone goes up) or black (the G.D.P. of Thailand falls). And private equity firms amassed giant funds and went on a shopping spree, snapping up companies as if they were second wives buying Jimmy Choo shoes on sale.

That world is largely coming to an end.

The huge bailout package being debated in Congress may succeed in stabilizing the financial markets. But it is too late to help firms like Bear Stearns and Lehman Brothers, which have already disappeared. Merrill Lynch, whose trademark bull symbolized Wall Street to many Americans, is being folded into Bank of America, located hundreds of miles from New York, in Charlotte, N.C.

For most of the financiers who remain, with the exception of a few superstars, the days of easy money and supersized bonuses are behind them. The credit boom that drove Wall Street’s explosive growth has dried up. Regulators who sat on the sidelines for too long are now eager to rein in Wall Street’s bad boys and the practices that proliferated in recent years.

“The swashbuckling days of Wall Street firms’ trading, essentially turning themselves into giant hedge funds, are over. Turns out they weren’t that good,” said Andrew Kessler, a former hedge fund manager. “You’re no longer going to see middle-level folks pulling in seven- and multiple-seven-dollar figures that no one can figure out exactly what they did for that.”

The beginning of the end is felt even in the halls of the white-shoe firm Goldman Sachs, which, among its Wall Street peers, epitomized and defined a high-risk, high-return culture.

Goldman is the firm that other Wall Street firms love to hate. It houses some of the world’s biggest private equity and hedge funds. Its investment bankers are the smartest. Its traders, the best. They make the most money on Wall Street, earning the firm the nickname Goldmine Sachs. (Its 30,522 employees earned an average of $600,000 last year — an average that considers secretaries as well as traders.)

Although executives at other firms secretly hoped that Goldman would once — just once — make a big mistake, at the same time, they tried their darnedest to emulate it.

While Goldman remains top-notch in providing merger advice and underwriting public offerings, what it does better than any other firm on Wall Street is proprietary trading. That involves using its own funds, as well as a heap of borrowed money, to make big, smart global bets.

Other firms tried to follow its lead, heaping risk on top of risk, all trying to capture just a touch of Goldman’s magic dust and its stellar quarter-after-quarter returns.

Not one ever came close.

While the credit crisis swamped Wall Street over the last year, causing Merrill, Citigroup and Lehman Brothers to sustain heavy losses on big bets in mortgage-related securities, Goldman sailed through with relatively minor bumps.

In 2007, the same year that Citigroup and Merrill cast out their chief executives, Goldman booked record revenue and earnings and paid its chief, Lloyd C. Blankfein, $68.7 million — the most ever for a Wall Street C.E.O.

Even Wall Street’s golden child, Goldman, however, could not withstand the turmoil that rocked the financial system in recent weeks. After Lehman and the American International Group were upended, and Merrill jumped into its hastily arranged engagement with Bank of America two weeks ago, Goldman’s stock hit a wall.

The A.I.G. debacle was particularly troubling. Goldman was A.I.G.’s largest trading partner, according to several people close to A.I.G. who requested anonymity because of confidentiality agreements. Goldman assured investors that its exposure to A.I.G. was immaterial, but jittery investors and clients pulled out of the firm, nervous that stand-alone investment banks — even one as esteemed as Goldman — might not survive.

“What happened confirmed my feeling that Goldman Sachs, no matter how good it was, was not impervious to the fortunes of fate,” said John H. Gutfreund, the former chief executive of Salomon Brothers.

So, last weekend, with few choices left, Goldman Sachs swallowed a bitter pill and turned itself into, of all things, something rather plain and pedestrian: a deposit-taking bank.

The move doesn’t mean that Goldman is going to give away free toasters for opening a checking account at a branch in Wichita anytime soon. But the shift is an assault on Goldman’s culture and the core of its astounding returns of recent years.

Not everyone thinks that the Goldman money machine is going to be entirely constrained. Last week, the Oracle of Omaha, Warren E. Buffett, made a $5 billion investment in the firm, and Goldman raised another $5 billion in a separate stock offering.

Still, many people say, with such sweeping changes before it, Goldman Sachs could well be losing what made it so special. But, then again, few things on Wall Street will be the same.

GOLDMAN’S latest golden era can be traced to the rise of Mr. Blankfein, the Brooklyn-born trading genius who took the helm in June 2006, when Henry M. Paulson Jr., a veteran investment banker and adviser to many of the world’s biggest companies, left the bank to become the nation’s Treasury secretary.

Mr. Blankfein’s ascent was a significant changing of the guard at Goldman, with the vaunted investment banking division giving way to traders who had become increasingly responsible for driving a run of eye-popping profits.

Before taking over as chief executive, Mr. Blankfein led Goldman’s securities division, pushing a strategy that increasingly put the bank’s own capital on the line to make big trading bets and investments in businesses as varied as power plants and Japanese banks.

The shift in Goldman’s revenue shows the transformation of the bank.

From 1996 to 1998, investment banking generated up to 40 percent of the money Goldman brought in the door. In 2007, Goldman’s best year, that figure was less than 16 percent, while revenue from trading and principal investing was 68 percent.

Goldman’s ability to sidestep the worst of the credit crisis came mainly because of its roots as a private partnership in which senior executives stood to lose their shirts if the bank faltered. Founded in 1869, Goldman officially went public in 1999 but never lost the flat structure that kept lines of communication open among different divisions.

In late 2006, when losses began showing in one of Goldman’s mortgage trading accounts, the bank held a top-level meeting where executives including David Viniar, the chief financial officer, concluded that the housing market was headed for a significant downturn.

Hedging strategies were put in place that essentially amounted to a bet that housing prices would fall. When they did, Goldman limited its losses while rivals posted ever-bigger write-downs on mortgages and complex securities tied to them.

In 2007, Goldman generated $11.6 billion in profit, the most money an investment bank has ever made in a year, and avoided most of the big mortgage-related losses that began slamming other banks late in that year. Goldman’s share price soared to a record of $247.92 on Oct. 31.

Goldman continued to outpace its rivals into this year, though profits declined significantly as the credit crisis worsened and trading conditions became treacherous. Still, even as Bear Stearns collapsed in March over bad mortgage bets and Lehman was battered, few thought that the untouchable Goldman could ever falter.

Mr. Blankfein, an inveterate worrier, beefed up his books in part by stashing more than $100 billion in cash and short-term, highly liquid securities in an account at the Bank of New York. The Bony Box, as Mr. Blankfein calls it, was created to make sure that Goldman could keep doing business even in the face of market eruptions.

That strong balance sheet, and Goldman’s ability to avoid losses during the crisis, appeared to leave the bank in a strong position to move through the industry upheaval with its trading-heavy business model intact, if temporarily dormant.

Even as some analysts suggested that Goldman should consider buying a commercial bank to diversify, executives including Mr. Blankfein remained cool to the notion. Becoming a deposit-taking bank would just invite more regulation and lessen its ability to shift capital quickly in volatile markets, the thinking went.

All of that changed two weeks ago when shares of Goldman and its chief rival, Morgan Stanley, went into free fall. A national panic over the mortgage crisis deepened and investors became increasingly convinced that no stand-alone investment bank would survive, even with the government’s plan to buy up toxic assets.

Nervous hedge funds, some burned by losing big money when Lehman went bust, began moving some of their balances away from Goldman to bigger banks, like JPMorgan Chase and Deutsche Bank.

By the weekend, it was clear that Goldman’s options were to either merge with another company or transform itself into a deposit-taking bank holding company. So Goldman did what it has always done in the face of rapidly changing events: it turned on a dime.

“They change to fit their environment. When it was good to go public, they went public,” said Michael Mayo, banking analyst at Deutsche Bank. “When it was good to get big in fixed income, they got big in fixed income. When it was good to get into emerging markets, they got into emerging markets. Now that it’s good to be a bank, they became a bank.”

The moment it changed its status, Goldman became the fourth-largest bank holding company in the United States, with $20 billion in customer deposits spread between a bank subsidiary it already owned in Utah and its European bank. Goldman said it would quickly move more assets, including its existing loan business, to give the bank $150 billion in deposits.

Even as Goldman was preparing to radically alter its structure, it was also negotiating with Mr. Buffett, a longtime client, on the terms of his $5 billion cash infusion.

Mr. Buffett, as he always does, drove a relentless bargain, securing a guaranteed annual dividend of $500 million and the right to buy $5 billion more in Goldman shares at a below-market price.

While the price tag for his blessing was steep, the impact was priceless.

“Buffett got a very good deal, which means the guy on the other side did not get as good a deal,” said Jonathan Vyorst, a portfolio manager at the Paradigm Value Fund. “But from Goldman’s perspective, it is reputational capital that is unparalleled.”

EVEN if the bailout stabilizes the markets, Wall Street won’t go back to its freewheeling, profit-spinning ways of old. After years of lax regulation, Wall Street firms will face much stronger oversight by regulators who are looking to tighten the reins on many practices that allowed the Street to flourish.

For Goldman and Morgan Stanley, which are converting themselves into bank holding companies, that means their primary regulators become the Federal Reserve and the Office of the Comptroller of the Currency, which oversee banking institutions.

Rather than periodic audits by the Securities and Exchange Commission, Goldman will have regulators on site and looking over their shoulders all the time.

The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller’s agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. (That’s not to say stronger regulators would prevent losses. Citigroup, which on paper is highly regulated, suffered huge write-downs on risky mortgage securities bets.)

As a bank, Goldman will also face tougher requirements about the size of the financial cushion it maintains. While Goldman and Morgan Stanley both meet current guidelines, many analysts argue that regulators, as part of the fallout from the credit crisis, may increase the amount of capital banks must have on hand.

More important, a stiffer regulatory regime across Wall Street is likely to reduce the use and abuse of its favorite addictive drug: leverage.

The low-interest-rate environment of the last decade offered buckets of cheap credit. Just as consumers maxed out their credit cards to live beyond their means, Wall Street firms bolstered their returns by pumping that cheap credit into their own trading operations and lending money to hedge funds and private equity firms so they could do the same.

By using leverage, or borrowed funds, firms like Goldman Sachs easily increased the size of the bets they were making in their own trading portfolios. If they were right — and Goldman typically was — the returns were huge.

When things went wrong, however, all of that debt turned into a nightmare. When Bear Stearns was on the verge of collapse, it had borrowed $33 for every $1 of equity it held. When trading partners that had lent Bear the money began demanding it back, the firm’s coffers ran dangerously low.

Earlier this year, Goldman had borrowed about $28 for every $1 in equity. In the ensuing credit crisis, Wall Street firms have reined in their borrowing significantly and have lent less money to hedge funds and private equity firms.

Today, Goldman’s borrowings stand at about $20 to $1, but even that is likely to come down. Banks like JPMorgan and Citigroup typically borrow about $10 to $1, analysts say.

As leverage dries up across Wall Street, so will the outsize returns at many private equity firms and hedge funds.

Returns at many hedge funds are expected to be awful this year because of a combination of bad bets and an inability to borrow. One result could be a landslide of hedge funds’ closing shop.

At Goldman, the reduced use of borrowed money for its own trading operations means that its earnings will also decrease, analysts warn.

Brad Hintz, an analyst at Sanford C. Bernstein & Company, predicts that Goldman’s return on equity, a common measure of how efficiently capital is invested, will fall to 13 percent this year, from 33 percent in 2007, and hover around 14 percent or 15 percent for the next few years.

Goldman says its returns are primarily driven by economic growth, its market share and pricing power, not by leverage. It adds that it does not expect changes in its business strategies and expects a 20 percent return on equity in the future.

IF Mr. Hintz is right, and Goldman’s legendary returns decline, so will its paychecks. Without those multimillion-dollar paydays, those top-notch investment bankers, elite traders and private-equity superstars may well stroll out the door and try their luck at starting small, boutique investment-banking firms or hedge funds — if they can.

“Over time, the smart people will migrate out of the firm because commercial banks don’t pay out 50 percent of their revenues as compensation,” said Christopher Whalen, a managing partner at Institutional Risk Analytics. “Banks simply aren’t that profitable.”

As the game of musical chairs continues on Wall Street, with banks like JPMorgan scooping up troubled competitors like Washington Mutual, some analysts are wondering what Goldman’s next move will be.

Goldman is unlikely to join with a commercial bank with a broad retail network, because a plain-vanilla consumer business is costly to operate and is the polar opposite of Goldman’s rarefied culture.

“If they go too far afield or get too large in terms of personnel, then they become Citigroup, with the corporate bureaucracy and slowness and the inability to make consensus-type decisions that come with that,” Mr. Hintz said.

A better fit for Goldman would be a bank that caters to corporations and other institutions, like Northern Trust or State Street Bank, he said.

“I don’t think they’re going to move too fast, no matter what the environment on Wall Street is,” Mr. Hintz said. “They’re going to take some time and consider what exactly the new Goldman Sachs is going to be.”

Wall Street, R.I.P.: The End of an Era, Even at Goldman, NYT, 28.9.2008, http://www.nytimes.com/2008/09/28/business/28lloyd.html

Economic Memo

Credit Enters a Lockdown

September 25, 2008
The New York Times
By PETER S. GOODMAN

The words coming out of Washington this week about the American financial system have been frightening. But many have raised the possibility that the Bush administration is fear-mongering to gin up support for its $700 billion bailout proposal.

In many corporate offices, in company cafeterias and around dining room tables, however, the reality of tight credit already is limiting daily economic activity.

“Loans are basically frozen due to the credit crisis,” said Vicki Sanger, who is now leaning on personal credit cards bearing double-digit interest rates to finance the building of roads and sidewalks for her residential real estate development in Fruita, Colo. “The banks just are not lending.”

With the economy already suffering the strains of plunging housing prices, growing joblessness and the new-found austerity of debt-saturated consumers, many experts fear the fraying of the financial system could pin the nation in distress for years.

Without a mechanism to shed the bad loans on their books, financial institutions may continue to hoard their dollars and starve the economy of capital. Americans would be deprived of financing to buy houses, send children to college and start businesses. That would slow economic activity further, souring more loans, and making banks tighter still. In short, a downward spiral.

Fear of this outcome has become self-fulfilling, prompting a stampede toward safer investments. Investors continued to pile into Treasury bills on Thursday despite rates of interest near zero, making less capital available for businesses and consumers. Stock markets rallied exuberantly for much of Thursday as a bailout deal appeared in hand. Then the deal stalled, leaving the markets vulnerable to a pullback.

“Without trust and confidence, business can’t go on, and we can easily fall into a deeper recession and eventually a depression,” said Andrew Lo, a finance professor at M.I.T.’s Sloan School of Management. “It would be disastrous to have no plan.”

The Bush administration has hit this message relentlessly. On Capitol Hill, Treasury Secretary Henry M. Paulson Jr. warned of a potential financial seizure without a swift bailout. Federal Reserve Chairman Ben S. Bernanke — an academic authority on the Great Depression — used words generally eschewed by people whose utterances move markets, speaking of a “grave threat.”

In a prime-time television address Wednesday night, President Bush, who has described the strains on the economy as “adjustments,” put it this way: “Our entire economy is in danger.”

The considerable pushback to the bailout reflects discomfort with the people sounding the alarm. Mr. Paulson, a creature of Wall Street, asked Congress for extraordinary powers to take bad loans off the hands of major financial institutions with a proposal that ran all of three pages. Subprime mortgages have been issued with more paperwork than Mr. Paulson filled out in asking for $700 billion.

“The situation is like that movie trailer where a guy with a deep, scary voice says, ‘In a world where credit markets are frozen, where banks refuse to lend to each other at any price, only one man, with one plan can save us,’ “ said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington.

And yet, the more he looked at the data, the more Mr. Bernstein became convinced the financial system really does require some sort of bailout. “Things are scary,” he said.

For nonfinancial firms during the first three months of the year, the outstanding balance of so-called commercial paper — short-term IOUs that businesses rely upon to finance their daily operations — was growing by more than 10 percent from a year earlier, according to an analysis of Federal Reserve data by Moody’s Economy.com. From April to June, the balance plunged by more than 9 percent compared with the previous year.

This week, the rate charged by banks for short-term loans to other banks swelled to three percentage points above the most conservative of investments, Treasury bills, with the gap nearly tripling since the beginning of this month. In other words, banks are charging more for even minimal risk, making credit tight.

Suddenly, people who have spent their careers arguing that government is in the way of progress — that its role must be pared to allow market forces to flourish — are calling for the biggest government bailout in American history.

“We are in a very serious place,” said William W. Beach, an economist at the conservative Heritage Foundation in Washington. “There is risk of contagion to the entire economy.”

Even before the stunning events of recent weeks — as the government took over the mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers disintegrated into bankruptcy, and American International Group was saved by an $85 billion government bailout — credit was tight, sowing fears that the economy would suffer.

The demise of those prominent institutions and anxiety over what could happen next has amplified worries considerably.

“The problem is so big that if somebody doesn’t step in, it will cause a panic,” said Michael Moebs, an economist and chief executive of Moebs Services, an independent research company in Lake Bluff, Ill. “Things could worsen to the point that we could see double-digit unemployment.”

This week, Mr. Moebs said he heard from two clients, one a bank and the other a credit union in a small city in the Midwest, now in serious trouble: Both are heavily invested in Lehman, Fannie Mae and Freddie Mac.

“One is going to lose about 80 percent of their capital if they can’t cash those in, and the other is going to lose about half,” Mr. Moebs said.

The credit union is located in a city in which the auto industry is a major employer — an industry now laying off workers. Yet as people try to refinance mortgages to hang on to homes and extend credit cards to pay for gas for their job searches, the local credit union is saying no.

“They have become very restrictive on who they are lending to,” Mr. Moebs said. “They can’t afford a loss. Their risk quotient is next to zero. You have a financial institution that really can’t help out the local people who are having financial difficulties.”

Along the Gulf of Mexico, in Cape Coral, Fla., Michael Pfaff, a mortgage broker, has become accustomed to constant telephone calls from local real estate agents begging for help to save deals in danger of collapsing for lack of finance.

“The underwriters are terrified and they’re dragging their feet, and making more excuses not to close loans,” Mr. Pfaff said. “Basically, they just don’t want the deals.”

Three years ago, when Cape Coral was among the fastest-appreciating real estate markets in the nation, Mr. Pfaff specialized in financing luxury homes with seven-figure price tags. “Now I’m doing a $32,000 loan on a mobile home,” he said.

Finance is still there for people with unblemished credit, he said. Mr. Pfaff recently closed a deal for a couple in Indiana that bought a second house in Cape Coral, a waterfront duplex for $300,000. Their credit score was nearly impeccable, and they had a 20 percent down payment, plus income of nearly $8,000 a month.

For people like that, conditions have actually improved since the government took over the mortgage giants. A month ago, Mr. Pfaff could secure 30-year fixed rate mortgages for about 7 percent. On Thursday, he was quoting 6 percent.

But those with less-than-ideal credit are increasingly shut out of the market, Mr. Pfaff said, and there are an awful lot of those people. So-called hard money loans, for those with problematic credit but large down payments, were easy to arrange as recently as last month.

“That money has just dried up,” Mr. Pfaff said. “I’m afraid. I’m 54 years old, and I’ve seen a lot of hyperventilating in my life, but I absolutely believe that this is a very serious issue.”

Credit Enters a Lockdown, NYT, 25.9.2008, http://www.nytimes.com/2008/09/26/business/26assess.html

WaMu is largest U.S. bank failure

Thu Sep 25, 2008
11:24pm EDT
Reuters
By Elinor Comlay and Jonathan Stempel

NEW YORK/WASHINGTON (Reuters) - Washington Mutual Inc was closed by the U.S. government in by far the largest failure of a U.S. bank, and its banking assets were sold to JPMorgan Chase & Co for $1.9 billion.

Thursday's seizure and sale is the latest historic step in U.S. government attempts to clean up a banking industry littered with toxic mortgage debt. Negotiations over a $700 billion bailout of the entire financial system stalled in Washington on Thursday.

Washington Mutual, the largest U.S. savings and loan, has been one of the lenders hardest hit by the nation's housing bust and credit crisis, and had already suffered from soaring mortgage losses.

Washington Mutual was shut by the federal Office of Thrift Supervision, and the Federal Deposit Insurance Corp was named receiver. This followed $16.7 billion of deposit outflows at the Seattle-based thrift since Sept 15, the OTS said.

"With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business," the OTS said.

Customers should expect business as usual on Friday, and all depositors are fully protected, the FDIC said.

FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.

Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The largest previous U.S. banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984.

JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.

It vaults JPMorgan past Bank of America Corp to become the nation's second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.

The bailout also fulfills JPMorgan Chief Executive Jamie Dimon's long-held goal of becoming a retail bank force in the western United States. It comes four months after JPMorgan acquired the failing investment bank Bear Stearns Cos at a fire-sale price through a government-financed transaction.

On a conference call, Dimon said the "risk here obviously is the asset values."

He added: "That's what created this opportunity."

JPMorgan expects to incur $1.5 billion of pre-tax costs, but realize an equal amount of annual savings, mostly by the end of 2010. It expects the transaction to add to earnings immediately, and increase earnings 70 cents per share by 2011.

It also plans to sell $8 billion of stock, and take a $31 billion write-down for the loans it bought, representing estimated future credit losses.

The FDIC said the acquisition does not cover claims of Washington Mutual equity, senior debt and subordinated debt holders. It also said the transaction will not affect its roughly $45.2 billion deposit insurance fund.

"Jamie Dimon is clearly feeling that he has an opportunity to grab market share, and get it at fire-sale prices," said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati. "He's becoming an acquisition machine."

BAILOUT UNCERTAINTY

The transaction came as Washington wrangles over the fate of a $700 billion bailout of the financial services industry, which has been battered by mortgage defaults and tight credit conditions, and evaporating investor confidence.

"It removes an uncertainty from the market," said Shane Oliver, head of investment strategy at AMP Capital in Sydney. "The problem is that markets are in a jittery stage. Washington Mutual provides another reminder how tenuous things are."

Washington Mutual's collapse is the latest of a series of takeovers and outright failures that have transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

These include the disappearance of Bear, government takeovers of mortgage companies Fannie Mae and Freddie Mac and the insurer American International Group Inc, the bankruptcy of Lehman Brothers Holdings Inc, and Bank of America's purchase of Merrill.

JPMorgan, based in New York, ended June with $1.78 trillion of assets, $722.9 billion of deposits and 3,157 branches. Washington Mutual then had 2,239 branches and 43,198 employees. It is unclear how many people will lose their jobs.

Shares of Washington Mutual plunged $1.24 to 45 cents in after-hours trading after news of a JPMorgan transaction surfaced. JPMorgan shares rose $1.04 to $44.50 after hours, but before the stock offering was announced.

119-YEAR HISTORY

The transaction ends exactly 119 years of independence for Washington Mutual, whose predecessor was incorporated on September 25, 1889, "to offer its stockholders a safe and profitable vehicle for investing and lending," according to the thrift's website. This helped Seattle residents rebuild after a fire torched the city's downtown.

It also follows more than a week of sale talks in which Washington Mutual attracted interest from several suitors.

These included Banco Santander SA, Citigroup Inc, HSBC Holdings Plc, Toronto-Dominion Bank and Wells Fargo & Co, as well as private equity firms Blackstone Group LP and Carlyle Group, people familiar with the situation said.

Less than three weeks ago, Washington Mutual ousted Chief Executive Kerry Killinger, who drove the thrift's growth as well as its expansion in subprime and other risky mortgages. It replaced him with Alan Fishman, the former chief executive of Brooklyn, New York's Independence Community Bank Corp.

WaMu's board was surprised at the seizure, and had been working on alternatives, people familiar with the matter said.

More than half of Washington Mutual's roughly $227 billion book of real estate loans was in home equity loans, and in adjustable-rate mortgages and subprime mortgages that are now considered risky.

The transaction wipes out a $1.35 billion investment by David Bonderman's private equity firm TPG Inc, the lead investor in a $7 billion capital raising by the thrift in April.

A TPG spokesman said the firm is "dissatisfied with the loss," but that the investment "represented a very small portion of our assets."

DIMON POUNCES

The deal is the latest ambitious move by Dimon.

Once a golden child at Citigroup before his mentor Sanford "Sandy" Weill engineered his ouster in 1998, Dimon has carved for himself something of a role as a Wall Street savior.

Dimon joined JPMorgan in 2004 after selling his Bank One Corp to the bank for $56.9 billion, and became chief executive at the end of 2005.

Some historians see parallels between him and the legendary financier John Pierpont Morgan, who ran J.P. Morgan & Co and was credited with intervening to end a banking panic in 1907.

JPMorgan has suffered less than many rivals from the credit crisis, but has been hurt. It said on Thursday it has already taken $3 billion to $3.5 billion of write-downs this quarter on mortgages and leveraged loans.

Washington Mutual has a major presence in California and Florida, two of the states hardest hit by the housing crisis. It also has a big presence in the New York City area. The thrift lost $6.3 billion in the nine months ended June 30.

"It is surprising that it has hung on for as long as it has," said Nancy Bush, an analyst at NAB Research LLC.

(Additional reporting by Paritosh Bansal, Christian Plumb and Dan Wilchins; Jessica Hall in Philadelphia; John Poirier in Washington, D.C. and Kevin Lim in Singapore; Editing by Gary Hill and Carol Bishopric)

WaMu is largest U.S. bank failure, R, 25.9.2008, http://www.reuters.com/article/newsOne/idUSTRE48P05I20080926

2 Wall St. Banks Falter; Markets Shaken

September 15, 2008
The New York Times
By ANDREW ROSS SORKIN

This article was reported by Jenny Anderson, Eric Dash and Andrew Ross Sorkin and was written by Mr. Sorkin.

In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.

The humbling moves, which reshape the landscape of American finance, mark the latest chapter in a tumultuous year in which once-proud financial institutions have been brought to their knees as a result of hundreds of billions of dollars in losses because of bad mortgage finance and real estate investments.

But even as the fates of Lehman and Merrill hung in the balance, another crisis loomed as the insurance giant American International Group appeared to teeter. Staggered by losses stemming from the credit crisis, A.I.G. sought a $40 billion lifeline from the Federal Reserve, without which the company may have only days to survive.

The stunning series of events culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral in the markets stemming from a crisis of confidence.

“My goodness. I’ve been in the business 35 years, and these are the most extraordinary events I’ve ever seen,” said Peter G. Peterson, co-founder of the private equity firm the Blackstone Group, who was head of Lehman in the 1970s and a secretary of commerce in the Nixon administration.

It remains to be seen whether the sale of Merrill, which was worth more than $100 billion during the last year, and the controlled demise of Lehman will be enough to finally turn the tide in the yearlong financial crisis that has crippled Wall Street and threatened the broader economy.

Early Monday morning, Lehman said it would file for Chapter 11 bankruptcy protection in New York for its holding company in what would be the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago, the Associated Press reported.

Questions remain about how the market will react Monday, particularly to Lehman’s plan to wind down its trading operations, and whether other companies, like A.I.G. and Washington Mutual, the nation’s largest savings and loan, might falter.

Indeed, in a move that echoed Wall Street’s rescue of a big hedge fund a decade ago this week, 10 major banks agreed to create an emergency fund of $70 billion to $100 billion that financial institutions can use to protect themselves from the fallout of Lehman’s failure.

The Fed, meantime, broadened the terms of its emergency loan program for Wall Street banks, a move that could ultimately put taxpayers’ money at risk.

Though the government took control of the troubled mortgage finance companies Fannie Mae and Freddie Mac only a week ago, investors have become increasingly nervous about whether major financial institutions can recover from their losses.

How things play out could affect the broader economy, which has been weakening steadily as the financial crisis has deepened over the last year, with unemployment increasing as the nation’s growth rate has slowed.

What will happen to Merrill’s 60,000 employees or Lehman’s 25,000 employees remains unclear. Worried about the unfolding crisis and its potential impact on New York City’s economy, Mayor Michael R. Bloomberg canceled a trip to California to meet with Gov. Arnold Schwarzenegger. Instead, aides said, Mr. Bloomberg spent much of the weekend working the phones, talking to federal officials and bank executives in an effort to gauge the severity of the crisis.

The weekend that humbled Lehman and Merrill Lynch and rewarded Bank of America, based in Charlotte, N.C., began at 6 p.m. Friday in the first of a series of emergency meetings at the Federal Reserve building in Lower Manhattan.

The meeting was called by Fed officials, with Treasury Secretary Henry M. Paulson Jr. in attendance, and it included top bankers. The Treasury and Federal Reserve had already stepped in on several occasions to rescue the financial system, forcing a shotgun marriage between Bear Stearns and JPMorgan Chase this year and backstopping $29 billion worth of troubled assets — and then agreeing to bail out Fannie Mae and Freddie Mac.

The bankers were told that the government would not bail out Lehman and that it was up to Wall Street to solve its problems. Lehman’s stock tumbled sharply last week as concerns about its financial condition grew and other firms started to pull back from doing business with it, threatening its viability.

Without government backing, Lehman began trying to find a buyer, focusing on Barclays, the big British bank, and Bank of America. At the same time, other Wall Street executives grew more concerned about their own precarious situation.

The fates of Merrill Lynch and Lehman Brothers would not seem to be linked; Merrill has the nation’s largest brokerage force and its name is known in towns across America, while Lehman’s main customers are big institutions. But during the credit boom both firms piled into risky real estate and ended up severely weakened, with inadequate capital and toxic assets.

Knowing that investors were worried about Merrill, John A. Thain, its chief executive and an alumnus of Goldman Sachs and the New York Stock Exchange, and Kenneth D. Lewis, Bank of America’s chief executive, began negotiations. One person briefed on the negotiations said Bank of America had approached Merrill earlier in the summer but Mr. Thain had rebuffed the offer. Now, prompted by the reality that a Lehman bankruptcy would ripple through Wall Street and further cripple Merrill Lynch, the two parties proceeded with discussions.

On Sunday morning, Mr. Thain and Mr. Lewis cemented the deal. It could not be determined if Mr. Thain would play a role in the new company, but two people briefed on the negotiations said they did not expect him to stay. Merrill’s “thundering herd” of 17,000 brokers will be combined with Bank of America’s smaller group of wealth advisers and called Merrill Lynch Wealth Management.

For Bank of America, which this year bought Countrywide Financial, the troubled mortgage lender, the purchase of Merrill puts it at the pinnacle of American finance, making it the biggest brokerage house and consumer banking franchise.

Bank of America eventually pulled out of its talks with Lehman after the government refused to take responsibility for losses on some of Lehman’s most troubled real-estate assets, something it agreed to do when JP Morgan Chase bought Bear Stearns to save it from a bankruptcy filing in March.

A leading proposal to rescue Lehman would have divided the bank into two entities, a “good bank” and a “bad bank.” Under that scenario, Barclays would have bought the parts of Lehman that have been performing well, while a group of 10 to 15 Wall Street companies would have agreed to absorb losses from the bank’s troubled assets, to two people briefed on the proposal said. Taxpayer money would not have been included in such a deal, they said.

Other Wall Street banks also balked at the deal, unhappy at facing potential losses while Bank of America or Barclays walked away with the potentially profitable part of Lehman at a cheap price.

For Lehman, the end essentially came Sunday morning when its last potential suitor, Barclays, pulled out from a deal, saying it could not obtain a shareholder vote to approve a transaction before Monday morning, something required under London Stock Exchange listing rules, one person close to the matter said. Other people involved in the talks said the Financial Services Authority, the British securities regulator, had discouraged Barclays from pursuing a deal. Peter Truell, a spokesman for Barclays, declined to comment. Lehman’s subsidiaries were expected to remain solvent while the firm liquidates its holdings, these people said. Herbert H. McDade III, Lehman’s president, was at the Federal Reserve Bank in New York late Sunday, discussing terms of Lehman’s fate with government officials.

Lehman’s filing is unlikely to resemble those of other companies that seek bankruptcy protection. Because of the harsher treatment that federal bankruptcy law applies to financial-services firms, Lehman cannot hope to reorganize and survive. It was not clear whether the government would appoint a trustee to supervise Lehman’s liquidation or how big the financial backstop would be.

Lehman has retained the law firm Weil, Gotshal & Manges as its bankruptcy counsel.

The collapse of Lehman is a devastating end for Richard S. Fuld Jr., the chief executive, who has led the bank since it emerged from American Express as a public company in 1994. Mr. Fuld, who steered Lehman through near-death experiences in the past, spent the last several days in his 31st floor office in Lehman’s midtown headquarters on the phone from 6 a.m. until well past midnight trying to find save the firm, a person close to the matter said.

A.I.G. will be the next test. Ratings agencies threatened to downgrade A.I.G.’s credit rating if it does not raise $40 billion by Monday morning, a step that would crippled the company. A.I.G. had hoped to shore itself up, in party by selling certain businesses, but potential bidders, including the private investment firms Kohlberg Kravis Roberts and TPG, withdrew at the last minute because the government refused to provide a financial guarantee for the purchase. A.I.G. rejected an offer by another investor, J. C. Flowers & Company.

The weekend’s events indicate that top officials at the Federal Reserve and the Treasury are taking a harder line on providing government support of troubled financial institutions.

While offering to help Wall Street organize a shotgun marriage for Lehman, both the Fed chairman, Ben S. Bernanke, and Mr. Paulson had warned that they would not put taxpayer money at risk simply to prevent a Lehman collapse.

The message marked a major change in strategy but it remained unclear until at least Friday what would happen. “They were faced after Bear Stearns with the problem of where to draw the line,” said Laurence H. Meyer, a former Fed governor who is now vice chairman of Macroeconomic Advisors, a forecasting firm. “It became clear that this piecemeal, patchwork, case-by-case approach might not get the job done.”

Both Mr. Paulson and Mr. Bernanke worried that they had already gone much further than they had ever wanted, first by underwriting the takeover of Bear Stearns in March and by the far bigger bailout of Fannie Mae and Freddie Mac.

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.

Reporting was contributed by Edmund L. Andrews, Eric Dash, Michael Barbaro, Michael J. de la Merced, Louise Story and Ben White.

2 Wall St. Banks Falter; Markets Shaken, NYT, 15.9.2008, http://www.nytimes.com/2008/09/15/business/15lehman.html?hp

Editorial

The Banks and Private Equity

August 3, 2008
The New York Times

Many banks are ailing, lamed by hundreds of billions of dollars in bad loans and poor investments and hamstrung by the prospect of continued multibillion- dollar losses.

There is no painless solution. If banks retrench by making fewer loans, families and businesses are hurt and with them, the broader economy. If banks cope by building bigger cushions against losses, shareholders take the hit in the form of lower dividends, lower earnings per share, lower stock prices or some combination.

Yet, for the past month, some private equity firms have been promoting what they claim would be a relatively pain-free fix of the nation’s banks. And the Federal Reserve — which must know that if it sounds too good to be true, it probably is — has yet to say no, as it should.

Private equity firms say they are ready to invest huge amounts in ailing banks — provided the Fed eases up on the regulations that would otherwise apply to such large investments. The firms’ desire to jump in makes perfect sense. Bank shares are cheap now, but for the most part, are likely to rebound when the economy improves. The firms’ push for easier rules, however, is a dangerous power grab, and should be rejected.

Under current rules, if an investment firm owns 25 percent or more of a bank, it is considered, properly, a bank holding company, subject to the same federal requirements and responsibilities as a fully regulated bank. If a firm owns between 10 percent and 25 percent of a bank, it is typically barred from controlling the bank’s management. To place a director on a bank’s board, an investor’s ownership stake must be less than 10 percent. The rules exist to prevent conflicts of interest and concentration of economic power. They protect consumers and businesses who rely on well-regulated banks, as well as taxpayers, who stand behind the government’s various subsidies and guarantees to banks.

To maximize their profits, private equity firms want to own more than 9.9 percent of the banks they have their eye on and they want more managerial control — and they want it all without regulation. They argue that because they tend to be shorter-term investors, problems that the rules address are unlikely to occur on their watch. That is a weak argument. It does not necessarily take a great deal of time to do damage. And as the financial crisis demonstrates daily, decisions and actions taken by unregulated and poorly supervised firms can prove disastrous years later.

Worse, the private equity firms are exploiting the desperation of banks and regulators. They know that banks are desperate to raise capital and that doing so is a painful process bankers would rather avoid. They also know that regulators and other government officials, many of whom where asleep on the job as the financial crisis developed, want to avoid the political fallout and economic pain of bank weakness and failure.

Federal regulators would be wrong to cave. Now, when there is great uncertainty about which institutions are too big or too interconnected to fail, is exactly the wrong time to allow less transparency and less regulation. And with confidence in the financial system badly shaken, it would be a mistake to signal to global markets and American citizens that the government is willing to put expediency above long-term stability.

Held to the same rules as other investors, private equity firms may choose to invest less. Some banks may have a tougher time repairing the damage to their institutions. Some banks will fail. That, unfortunately, is what happens in a financial crisis.

The Banks and Private Equity, NYT, 3.8.2008, http://www.nytimes.com/2008/08/03/opinion/03sun1.html

Bank-to-bank lending freezes; bankers ask "who's next?"

Mon Mar 17, 2008
12:22pm EDT
Reuters
By Mike Dolan and Kirsten Donovan

LONDON (Reuters) - Financial trading and interbank lending almost ground to a halt on Monday as banks grew fearful of dealing with each other following Friday's near collapse of U.S. investment firm Bear Stearns, prompting talk of another round of coordinated central bank aid.

As banking stock prices and the U.S. dollar plummeted, banks' access to unsecured borrowing from other banks fell to a relative trickle and dealers said the over-the-counter market had become highly discriminatory, depending on the bank name.

The seizure in money markets was reflected in a dramatic 80 basis point surge in overnight dollar London interbank offered rates (Libor), the biggest daily increase since the attacks of September 11, 2001.

"Banks and institutions are just scrambling for cash, any cash they can get their hands on," said a money market trader at a European bank.

"And it's seen as a U.S. market problem for the moment, or a dollar problem anyway," he said, noting the relatively modest increase in overnight euro and sterling Libor.

Published dealing rates were unreliable and analysts said any bank that had not already secured funding further than a week or so would struggle to raise cash at all.

"Bear's near-collapse and takeover accelerates the liquidity crunch and the money market crisis," Dresdner Kleinwort analyst Willem Sels told clients in a note.

"Banks' risk aversion and sensitivity to counterparty risk should rise even further, leading to more pressure on hedge funds. Money markets are having a brutal wake-up call."

COMING TO TERMS

Bankers said they were struggling to assess developments since the New York Federal Reserve said on Friday it was propping up the stricken firm via Wall St bank JP Morgan, and intense concerns about the stability and solvency of financial counterparties had dealing volumes in lending markets seize up.

In an effort to minimize the fallout and in conjunction with the fire sale of Bear Stearns to JP Morgan, the Fed on Sunday cut its discount lending rate by a quarter percentage point to 3.25 percent and announced another series of liquidity measures.

But with concerns about whether other firms may meet a similar fate to Bear Stearns, nerves on every trade were jangled.

"It's quite illiquid this morning. If you want unsecured cash you're really going to have to pay up for it. It's really quite an intense situation," said Calyon analyst David Keeble.

Banks led the losers as stock markets lost more than 3 percent. UBS, Royal Bank of Scotland and Barclays all fell more than 8 percent. HBOS and Alliance & Leicester slid more than 11 percent.

Shares in Lehman Brothers dropped 34 percent before the opening bell on Wall St.

"There's turmoil in all markets after Bear Stearns," said BNP Paribas strategist Edmund Shing. "Everyone's asking: Who's next? Is there a Bear Stearns in Europe? Could investment banks start to fail?"

The problem was said to be particularly acute in sterling markets, with the gap between indicative three-month interbank borrowing rates and the Bank of England loans more than 70 basis points -- the highest for the year.

Some analysts said major players on the interbank market had been doing as little as 700 million pounds a day of business over the past week, a fraction of the several billions that would have been executed a year ago, and far less on Monday.

"Counterparty risk is back in play, every trade is being scrutinized ahead of time," one interest rate trader said. "

The stress in the market forced the UK central bank to make an emergency offer of five billion pounds of three-day funds.

"This action is being taken in response to conditions in the short-term money markets this morning," the Bank said in a statement. "Along with other central banks, the Bank of England is closely monitoring market conditions."

PROBLEMS EVERYWHERE

Three-month euro interbank rates were also some 65 basis points above ECB rates, compared with around 40 basis points at the start of the month. The spread reached a peak of around 90 at the end of last year.

Dollar spreads were also wider than on Friday but heavy discounting of further Fed rate cuts have meant the spread has actually narrowed this month to around 65 versus 80 basis points at the start of March.

The European Central Bank declined to comment, even though speculation of coordinated central bank statements, liquidity injections and even synchronized rate cuts circulated around markets.

A German finance ministry spokesman said no extraordinary meetings of the Group of Seven economic powers was planned. "We're watching developments very closely in the United States."

But International Monetary Fund chief Dominique Strauss-Kahn said the global financial markets crisis was worsening and risk of contagion was increasing.

With the dollar sliding to record lows, traders said currency options markets were seizing up too, another reflection of the state of panic and fear that appears to be dominating all financial markets.

Implied volatilities on FX options, a measure of expected volatility in the underlying asset price and investors' demand to protect themselves against these moves, soared on Monday.

As the dollar sank to 13-year lows against the yen further below 100 yen, one-week dollar/yen implied "vols" jumped to 25 percent, a level not seen since 1999.

"This is a market where you should be on your guard. Shorting options is quite a difficult position to manage," said the senior FX trader in Tokyo.

(Reporting by Jamie McGeever and Sitaraman Shankar; editing by Stephen Nisbet)

Bank-to-bank lending freezes; bankers ask "who's next?", R, 17.3.2008, http://www.reuters.com/article/newsOne/idUSL1710220420080317

Bear fire sale sparks rout

Mon Mar 17, 2008
12:22pm EDT
Reuters
By Jack Reerink

NEW YORK (Reuters)- A fire sale of Bear Stearns Cos Inc stunned Wall Street and pummeled global financial stocks on Monday on fears that few banks are safe from deepening market turmoil.

Trying to assuage worries that the credit crisis is spinning out of control, President George W. Bush said the United States was "on top of the situation."

And the Federal Reserve geared up for a deep cut in interest rates on Tuesday to blow money into the fragile financial system -- the latest in a series of rate cuts that has brought down borrowing costs by 2-1/4 percentage points and hammered the U.S. dollar to record lows.

Staff at Bear Stearns' Manhattan headquarters were welcomed to work on Monday by a two-dollar bill stuck to the revolving doors -- a spoof on the bargain-basement price of $2 per share that JPMorgan Chase is offering for the firm. A hopeful Coldwell Banker real estate agent was hawking cheap apartments to employees who saw the value of their stock options go up in smoke.

The combination of Bear Stearns' bailout and the Fed's offer on Sunday to extend direct lending to securities firms for the first time since the Great Depression highlighted just how hard the credit crisis has hit Wall Street.

And it scared market players worldwide.

"If you get a crisis of confidence in the wholesale banking space and something the size of Bear Stearns could go under, then people start to panic. You get a real fear factor," said Simon Maughan, analyst at MF Global in London.

The grim mood spread beyond Bear, Wall Street's fifth-biggest bank, as investors bailed from rival Lehman Bros for fear it would be next to face a cash crunch. Lehman shares briefly touched a 6-1/2 year low and later traded down 20 percent.

JPMorgan shares, by contrast, jumped 10 percent after the bank worked out a deal to buy Bear for $236 million -- just 1.2 percent of what it was worth a little over a year ago. JPMorgan's chief, Jamie Dimon, a details-oriented Wall Street luminary with a track record of fixing up banks, also got the Fed to agree to finance up to $30 billion of Bear's assets.

CONNECTIVITY - NOT ALWAYS A GOOD THING

The financial world is more interconnected than ever and the merest whiff of trouble can result in an old-fashioned run on a bank: trading partners and funds pulling out money and calling in loans. Indeed, Bear's fall shows how fast things can change on Wall Street.

Bankers around the world were already fretting about job losses because of the endless series of credit losses and paralyzed markets. The mayhem could spill over to Main Street because the financial industry is at the heart of a U.S. economy where services make up 80 percent of the pie.

That's why policymakers worldwide have pulled out all the stops, from cutting interest rates to flooding the financial system with cash to prevent it from seizing up.

Government funds from the booming Gulf and Asia-Pacific countries have pitched in by buying stakes in big-name banks such as Citi and brokerages such as Merrill Lynch worldwide.

This time around, though, the funds were conspicuously absent from Bear's bailout -- spelling trouble ahead.

"There's no way anybody's going to catch a falling knife. Why come in now?" said Craig Russell, Beijing-based chief market strategist at Saxo Bank.

The problem is that banks need the cash from these so-called sovereign wealth funds to shore up their balance sheets. So shares of European banks -- including UBS in Switzerland, HBOS in Britain and SocGen in France -- fell more than 10 percent Monday on concerns they have to take bigger hits -- haircuts, in Wall Street speak -- on their holdings of risky credit assets.

IN MOURNING

The sale of Bear came as a shock to the firm's 14,000 staff, who own roughly 30 percent of the company.

"The valuation is virtually nothing," said a Singapore-based Bear Stearns employee. "It is indeed rock bottom. We have tanked. It's very, very sad. Everyone is in mourning."

The mood among U.S. staff was similarly solemn. "My job's been eliminated," said one male employee arriving for work in New York. He'd been given 90 days' notice.

Bear Stearns was caught in a tailspin after speculation swirled last week that it faced problems and its cash reserves were drained by fleeing customers.

JPMorgan picked it up on the cheap -- although the bank estimated the total price tag at $6 billion to account for litigation and severance costs.

A lot of people lost a lot of money: Entrepreneur Joseph Lewis, a reclusive Englishman who made a fortune trading currencies, bought a stake of about 10 percent in Bear and stands to lose around $1 billion.

That has the phones ringing off the hooks at law firms that specialize in suing corporations whose stock has plummeted.

"Shareholders don't contact me when they are happy with the way things are going with their investments," said Ira Press, a lawyer at class-action firm Kirby McInerney.

(Writing by Jack Reerink; Reporting by Umesh Desai in Hong Kong; Steve Slater, Olesya Dmitracova and Mathieu Robbins in London; Herb Lash and Kristina Cooke in New York; Editing by David Holmes and John Wallace)

Bear fire sale sparks rout, R, 17.3.2008, http://www.reuters.com/article/newsOne/idUSN1650564120080317

Wall St. Banks Confront a String of Write-Downs

February 19, 2008
The New York Times
By JENNY ANDERSON

Wall Street banks are bracing for another wave of multibillion-dollar losses as the crisis that began with subprime mortgages spreads through the credit markets.

In recent weeks one part of the debt market after another has buckled. High-risk loans used to finance corporate buyouts have plummeted in value. Securities backed by commercial real estate mortgages and student loans have fallen sharply. Even auction-rate securities, arcane investments usually considered as safe as cash, have stumbled.

The breadth and scale of the declines mean more pain for major banks, which have already written off more than $120 billion of losses stemming from bad mortgage-related investments.

The deepening losses might make banks even more reluctant to make the loans needed to prod the slowing American economy. They also could force some banks to raise more capital to bolster their weakened finances.

The losses keep piling up. Leading brokerage firms are likely to write down the value of $200 billion of loans they have made to corporate clients by $10 billion to $14 billion during the first quarter of this year, Meredith Whitney, an analyst at Oppenheimer, wrote in a research report last week.

Those institutions and global banks could suffer an additional $20 billion in losses this year on commercial mortgage-backed securities and other debt instruments tied to commercial mortgages, according to Goldman Sachs, which predicts commercial property prices will decline by as much as 26 percent.

Analysts at UBS go further, predicting the world’s largest banks could ultimately take $123 billion to $203 billion of additional write-downs on subprime-related securities, structured investment vehicles, leveraged loans and commercial mortgage lending. The higher estimate assumes that the troubled bond insurance companies fail, a possibility that, for now, is relatively remote.

Such dire predictions underscore how the turmoil in the credit markets is hurting Wall Street even as the Federal Reserve reduces interest rates. Already, once-proud institutions like Merrill Lynch, Citigroup and UBS have gone hat in hand to Middle Eastern and Asian investors to raise capital. “You don’t have a recovery until you have the financial system stabilized,” Ms. Whitney said. “As the banks are trying to recover they will not lend. They are all about self-preservation at this time.”

One of the latest areas to come under pressure is the leveraged loan market. In recent weeks the market for these corporate loans plummeted, driven by fear that banks have too many loans to manage. Prices have fallen as low as 88 cents on the dollar, levels not seen since 2002, when default rates were more than 8 percent. Loans to some companies, like Univision Communications and Claire’s Stores, are trading in the high 70s, analysts say.

“Price declines of this magnitude — over 10 points — were not supposed to happen in the leveraged loan market,” Bank of America credit analysts wrote in a report on Feb. 11.

When banks make loans, they hold them until they can sell the debt to institutional investors like hedge funds and mutual funds. But lately the market for this debt has seized up and many banks have been unable to unload the loans. As the value of this debt declines, lenders must recognize as a loss the difference in the value at which they made loans and the prices of similar debt in the secondary, or resale, market.

“This correction feels a lot deeper and wider and more prolonged than what we have seen historically,” said one senior Wall Street executive who was not authorized to speak to the media.

Many analysts say the financial health of many companies has not deteriorated as much as loan prices suggest.

“People don’t know what’s out there, they haven’t sorted out what’s good and what’s bad, so they are throwing all credit assets out,” said Meredith Coffey, director of analysis at the Reuters Loan Pricing Corporation. Median loan prices were lower than those in 2002 when defaults peaked, even though very few defaults have actually occurred.

There has also been a marked deterioration in the market for commercial mortgage-backed securities, which are commercial mortgages packaged into bonds.

To some, the troubles plaguing commercial mortgage securities seem a logical extension of the turmoil in the residential real estate market. But some strategists argue that the commercial real estate market is not as vulnerable as the housing market. The pressure to package loans that was so evident in the residential market never materialized in the commercial market, these analysts say.

Also, commercial loans tend to be made at fixed, rather than adjustable, rates, and are not usually refinanced for long periods of time.

Nevertheless, the cost of insuring a basket of commercial mortgage-backed securities has soared. Last October, for example, it cost $39,000 to insure a $10 million basket of top rated 2007 commercial mortgages (super senior AAA, in Wall Street language) against default.

Today that price has increased to $214,000. For triple-B-rated commercial mortgage backed securities, those which are riskier, the cost of protection during the same time has soared from $672,000 to $1.5 million.

The deterioration of the CMBX, the benchmark index that tracks the cost of such credit protection, “started off as a fundamental repricing and then it escalated into something much more than that,” said Neil Barve, a research analyst at Lehman Brothers. “We think there is some downside in a challenging macroeconomic environment, but not nearly what has been priced in.”

Goldman Sachs seems to disagree, with analysts predicting commercial real estate loan losses to total $180 billion, with banks and brokers bearing $80 billion of that in total and about $20 billion this year.

Current index figures suggest that the banks will face significant pain. Brad Hintz, an analyst at Sanford C. Bernstein & Company, calculated that Lehman Brothers has the highest exposure to commercial real estate-backed securities, with $39.5 billion, followed by Morgan Stanley, with $31.5 billion. (These numbers do not include hedges that the banks may have but do not disclose).

To be sure, a crisis on Wall Street also spells opportunities for patient bargain hunters. After all, markets that were trading at all-time highs have been reduced to rubble, suggesting that those willing to search for value will find it.

And last week, some hedge funds began to wade into the troubled loan market. But prices do not yet reflect any widespread rallies, and Wall Street still has to absorb losses reflected in these markets.

“The fourth quarter was terrible, but you had strong investment banking revenues,” Mr. Hintz said. “Now you’ve had a bad December, a worse January and an even worse February.”

Wall St. Banks Confront a String of Write-Downs, NYT, 19.2.2008, http://www.nytimes.com/2008/02/19/business/19banks.html?hp

Buddy, Can You Spare a Billion?

January 16, 2008
The New York Times
By LANDON THOMAS Jr.

First hard-pressed Wall Street banks turned to rich foreign governments for help. Now, they are seeking aid from the likes of New Jersey and big mutual funds to bolster their weakened finances.

Citigroup and Merrill Lynch said on Tuesday that they were raising a combined $19.1 billion from parties that range from government-backed funds in Korea and Kuwait to New Jersey’s public pension fund and T. Rowe Price, the big mutual fund company. Other investors include a large bank in Japan, a hedge fund in New York and private investors in the Middle East.

While so-called sovereign wealth funds are investing the most, the emergence of new investors like New Jersey underscores the rising aversion on the part of United States banks to being seen as beholden to foreign governments. In recent months Citigroup, Merrill and several other banks have sold multibillion-dollar stakes to foreign government funds.

The latest sales came as Citigroup reported a $9.83 billion loss for the fourth quarter, the biggest loss in its history, and Merrill prepared to disclose further huge charges on Thursday. Banks worldwide have written down the value of mortgage-related investments by more than $100 billion, and some analysts warn that figure could double as the mortgage crisis grinds on.

Citigroup’s new round of capital-raising was headlined by a $6.8 billion investment by the Government of Singapore Investment Corporation, the investment arm of the Singapore government, and a smaller investment by the Kuwait Investment Authority.

Capital Research, a big United States investment firm, and Prince Walid bin Talal of Saudi Arabia — both longtime Citigroup shareholders — are also investing, along with the New Jersey Division of Investment and Sanford I. Weill, Citi’s former chairman and chief executive.

Merrill Lynch, meantime, is raising $6.6 billion, mostly from the Korean Investment Corporation, the Kuwait Investment Authority and the Mizuho Financial Group of Japan. Merrill also attracted investment from T. Rowe Price, TPG-Axon, a New York-based hedge fund, and the Olayan Group, a private company based in Saudi Arabia.

“There is still a lot of wealth out there,” said Edward Yardeni, an independent investment strategist. “The financial institutions are scrambling to shore up their capital but they also want to make sure that they get it from diversified sources. It also gives them political cover and shows that they are not just dependent on the sovereign wealth funds.”

Driving all these investments is the assumption that the beaten down stock of Merrill and Citigroup represents good value.

In the case of New Jersey, William G. Clark, the chief investment officer of the state’s $81 billion pension fund, approached both Citigroup and Merrill and agreed to invest $400 million in Citigroup and $300 million in Merrill. Even after these investments, the New Jersey fund has an underweight position in financial stocks.

“This fits the strategy of our portfolio,” said Susan Burrows Farber, the chief administrative officer of the fund, adding that New Jersey was open to making more of these types of investments.

For T. Rowe Price and Capital Research, which already own shares of Merrill and Citigroup, the decision to increase their stakes may represent less a statement of confidence than a willingness take a new slug of stock and reduce the cost of their substantial positions. TPG-Axon, a $9 billion fund run by Dinakar Singh, a former Goldman executive, is responding to a capital call from a weakened investment bank for the first time.

Another new presence is the Olayan Group, a private investment company founded by the late Suliman S. Olayan, a Saudi billionaire who made his fortune by investing in areas like food distribution and infrastructure. According to a person with knowledge of the discussions, the investment was headed by Hutham S. Olayan, leader of the group’s activities in the Americas and a board member of Morgan Stanley.

Mizuho Financial Group is the second largest financial institution in Japan. The Korea Investment Corporation is an investment fund begun by the Korean government to make more aggressive investments with the country’s rapidly accumulating foreign exchange reserves.

What remains unclear is how long overseas investment entities will remain patient with United States banks if the financial industry continues to suffer. Since Citic Securities in China invested $1 billion in Bear Stearns last fall, sovereign funds have invested over $50 billion in weakened banks. That is a small amount compared with the $2 trillion in these funds, to say nothing of additional trillions in central banks and other related entities.

But no one likes to lose money, even funds that have very long investment thresholds.

“At some point these investors will say no,” said Mr. Yardeni. “So far these investment have been value traps as opposed to good value.”

Yet with oil prices increasing, sovereign funds and other government-sponsored funds are likely to generate investment surpluses approaching $8 trillion in the next five years, according to McKinsey & Company’s research arm.

“What we find is that a lot of this liquidity is still in Treasury bills,” said Diana Farrell, an analyst at McKinsey who has studied these funds. “This is really just the beginning.”

All of which is good news for Mr. Weill, the architect of Citigroup and the conglomerate’s most passionate defender. Even with its newfound capital, Citigroup still has considerable subprime exposure and could well need another infusion from outside investors.

Mr. Weill, the second largest individual shareholder after Prince Walid, said on Tuesday that he had spoken with Vikram S. Pandit, Citigroup’s chief, last week about investing more in the company. Mr. Weill would not disclose the size of his investment, but called it substantial.

“I really believe in the future of this company,” he said.

Eric Dash contributed reporting.

Buddy, Can You Spare a Billion?, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/business/16capital.html

Citigroup Loss Raises Anxiety Over Economy

January 16, 2008
The New York Times
By JENNY ANDERSON and ERIC DASH

Citigroup, the nation’s largest bank, reported a staggering fourth-quarter loss of $9.83 billion on Tuesday and issued a sobering forecast that the housing market and the broader economy still had not bottomed out.

To shore up their financial condition, Citigroup and Merrill Lynch, which has also been rocked by the subprime mortgage debacle, both were forced again to go hat in hand for cash infusions from investors in the United States, Asia and the Middle East, for a combined total of nearly $19.1 billion.

Citigroup’s gloomy news will most likely amplify the anxiety of consumers and workers already concerned that the mortgage crisis could plunge the economy into a recession. Adding to worries, the government reported that retail sales in December declined for the first time since 2002.

Growing pessimism led to another sharp sell-off in stocks, which fell about 2 percent for the day and are now down about 6 percent since the beginning of 2008, the third worst start for a year since 1926.

More bad news is coming, with Merrill Lynch expected to report sizable losses this week and major financial institutions like Bank of America retreating from their investment banking business. These moves add to concerns that financial institutions will be forced to pull back on lending at a time the economy most needs access to credit to help cushion against a downturn.

“It looks like the financial sector as a whole will see a big decline in profits, and the only time this happened in the last 100 years — financial firms’ going from making good profits to negative profits — was the Depression in the 1930s,” said Richard Sylla, a professor of financial history at New York University. “I don’t think it will be as bad this time; the Federal Reserve is fighting the problem as hard as it can.”

Just last week, the Federal Reserve chairman, Ben S. Bernanke, said the economy was worsening, bringing widespread hope that the Fed would move swiftly to lower interest rates. Wall Street’s worsening results combined with Mr. Bernanke’s comments will certainly add fuel to the economic stimulus package being debated by the White House, Congress and the central bank.

Citigroup’s record loss was caused by write-downs from soured mortgage-related securities and reserves for current and future bad loans totaling $23.2 billion. Responding to a string of dismal quarters, the bank said it would also lay off another 4,000 workers, on top of announced reductions of 17,000 employees, and cut its dividend to conserve $4.4 billion cash annually.

Citigroup, which earlier raised $7.5 billion from the Abu Dhabi Investment Authority to improve its capital, said it had raised an additional $12.5 billion from a number of investors, including the Government of Singapore Investment Corporation and Citigroup’s former chairman and chief executive, Sanford I. Weill. Citigroup will also offer public investors about $2 billion of newly issued debt securities, a portion of which will be convertible into stock.

At the same time, Merrill Lynch announced it had issued $6.6 billion in preferred stock to the Kuwait Investment Authority, the Korean Investment Corporation, Mizhuo Financial Group, a Japanese bank and other investors, including the New Jersey pension fund and a Saudi investment fund. That is in addition to the $4.4 billion it raised in December from Temasek Holdings of Singapore.

While the banks were able to raise record amounts of cash, they had to circle the globe to get it, and they had to raise it in two separate rounds. There is “a tremendous amount of liquidity in the world,” Mr. Weill said in an interview. “That is witnessed in the amounts of money Citigroup was able to raise in a very short period of time.”

Citigroup, which has a large consumer lending business, sounded some warning bells on Tuesday that the American economy was turning. The bank reported sharp upticks in losses stemming from souring auto, home and credit card loans, with problems coming from the same areas being hit by real estate.

Two-thirds of the credit card losses, for example, occurred in just five states — California, Florida, Illinois, Arizona and Michigan — that have been among those hit hardest by the housing downturn. Gary L. Crittenden, the company’s chief financial officer, acknowledged the bank’s losses appeared to be accelerating month after month.

The banks’ need for additional financing suggests that housing-related problem will persist. Citigroup executives expect house prices around the country will fall, on average, another 6.5 percent to 7 percent.

The news sent the company’s stock tumbling 7.3 percent, to $26.94. It has now fallen about 50 percent in the past year.

The write-downs did not assuage fears in the market that more bad news was coming. “I think the financials will continue to need to raise more money,” said Barry L. Ritholtz, chief executive of Fusion IQ, a quantitative research and asset management firm.

The fear is that financial institutions will continue to take large write-downs as bad loans mount, while consumers, facing higher energy costs, falling house prices and a bleak outlook for job growth, will rein in spending even more than they already have.

Citigroup set aside $4.1 billion for future bad loans, and Mr. Crittenden said the bank is tightening lending standards as credit card defaults increase, a move that could make it harder for consumers to continue the spending that has helped fuel growth in recent years.

Bank of America said on Tuesday that it would lay off 650 people on top of the previously announced 500 and retrench in a number of significant businesses, including certain trading operations and prime brokerage, or servicing hedge funds. Kenneth D. Lewis, its chairman and chief executive, sounded a somber note about the markets.

“I am not sure there are any quick fixes,” he said in a meeting with reporters. “Only time and a little more pain will be the answer.”

Adding concern to the outlook is the significant role that financial service companies have come to play on the back of robust growth. From 1995 through 2006, financial service companies represented 17.8 percent of the Standard & Poor’s 500 index and contributed a whopping 25.1 percent of total earnings. No longer.

Including Citibank’s large fourth-quarter write-down, financial service companies constituted roughly 7 percent of total fourth-quarter earnings, according to Howard Silverblatt, senior index analyst at Standard & Poor’s.

For a sense of how steep the fall has been, Mr. Silverblatt pointed out that for the fourth quarter, earnings for all companies in the index fell 11.2 percent. But taking out financials, the index was up almost 11 percent.

Mr. Ritholtz from Fusion IQ is watching carefully to determine if weakness in consumer spending is psychological and temporary or more severe, stemming from a lack of available capital.

“Lending is a function of trust — trust that people will pay back what they borrow,” he said. “The problem with the banks is that they don’t trust their clients or each other.”

Citigroup Loss Raises Anxiety Over Economy, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/business/16bank.html

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