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Illustration: Chris Riddell


 HSBC: snouts in the trough – cartoon

Chris Riddell on the tax avoidance scandal

surrounding the bank and the Tory party


Sunday 15 February 2015        00.05 GMT



















Jeff Parker


Florida Today


22 April 2010


















Patrick Chappatte

Cartoons on World Affairs


13 October 2008















bank        UK










































































bank        USA




























































governments-to-buy-bank-stakes-stocks-soar-idUSTRE49A36O20081013 - October 13, 2008








public banks        USA










islamic banks        USA










blue-chip banks        USA










digital / online banks > Monzo        UK



















Citicorp, JPMorgan Chase,

Barclays and Royal Bank of Scotland > felons >

plead guilty to criminal charges

of conspiring to rig

the value of the world’s currencies        USA










bank rate-fixing scandals / banking scam        UK












banking        UK










banking reform        UK










banking titan        USA










building societies, credit unions and co-operatives        UK

















central banks        UK
















beige book        USA








The U.S. central bank's

policy-setting Federal Open Market Committee        USA





Senate Banking Committee        USA









Financial Crisis Inquiry Commission        USA








Federal Deposit Insurance Commission        USA
















NYC, USA > Wall Street Banks        USA







Wall Street investment bankers        USA






Wall Street banker        USA







Wall street giant > Goldman Sachs        USA


Goldman Sachs has arguably been

the most successful firm

on Wall Street for decades,

with some of the world’s

biggest private equity and hedge funds

and investment bankers and traders

who practically minted money.

Updated: Jan. 18, 2012




















































Lehman Brothers        FR / USA


the Lehman collapse (2008)

triggered the deepest recession

in eight decades























Last Days of Lehman        USA        2009


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.









Lehman Brothers filed for bankruptcy protection,

rival Merrill Lynch agreed to be taken over        USA        September 2008

















Morgan Stanley        USA





federal-regulators-refused-to-penalize-it - Dec. 14, 2020























by Jen Sorensen


16 March 2009















UK > HSBC        UK / USA






















Northern Rock nationalisation        February 2008        UK








Northern Rock, Britain’s eighth-biggest bank        2007































Monte Wolverton

The Wolvertoon


18 April 2010















interest rates







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






interest rate        UK









push interest rates higher





raise a key U.S. interest rate

a quarter-percentage point        USA






lift the benchmark federal funds rate,

which can sway borrowing costs

throughout the economy        USA






lift the rate to 3.5 percent, from 3.25 percent





benchmark short-term interest rate





increase rates        UK






raise interest rates to N






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




















inflation risks





keep inflation in check





keep inflation under control





curb inflation





underlying inflation





rise / rise















financial system        USA






New York Times > Select Editorials on Financial Regulation        USA






Dodd-Frank regulatory reform law        USA






global financial services company





General Motors Acceptance Corporation    GMAC        USA






banking sector        UK






Banking Code        UK






banking giant > Citigroup        USA










bank / bank


















Wells Fargo        USA



















Bank of America        USA
























USA > J. P. Morgan Chase & Company        UK / USA


America's largest bank in 2020





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.






































the demise of Bear Stearns        USA        March 2008






fire sale of Bear Stearns Cos Inc stuns Wall Street        USA        March 2008






bank-to-bank lending freezes        USA



















































Royal Bank of Scotland    RBS


















in The City






high street bank















World Bank


The World Bank was established

to bring prosperity to Europe

in the post-war era.
























by Garry Trudeau


March 02, 2014






























banker > Jamie Dimon        USA








banker > Bruce Wasserstein        USA






















bad assets


















The Guardian        p. 14        25 November 2008


















The Guardian        p. 8        27 January 2009









































free banking





bank by telephone or on-line





standing order










debit card





direct debit





debit card payment























account / bank account        USA












current account























run one's accounts on-line




















bank charges        UK






Automated Teller Machine        ATM





cash machine / ATM withdrawal










overdraft        USA






overdraft fees        USA

federal-regulators-refused-to-penalize-it - Dec. 14, 2020

























savings accounts        UK






savings        UK






savings rates        UK






saver        UK

















The Guardian        p. 50        13 December 2008
















financial turmoil        USA        2009






How the Giants of Finance Shrunk,

Then Grew, Under the Financial Crisis        USA        2009






A Year of Financial Turmoil        USA        2009
















London interbank offered rate        Libor        UK / USA


What is Libor?

Libor is the main setter of interest

in the London wholesale money market















Libor rates        UK

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.










British bank Barclays' s attempt to manipulate

the London interbank offered rate, or Libor

— one of the benchmark rates used

to determine the cost of borrowing

around the world —        USA        2012












lender        USA






Internet-based payday lender        USA






bank customers        USA






customer        USA






Consumer Abuses        USA






wholesale money market















banks / high street lenders        UK






loan        USA






payday loan        USA






instant loan        UK






loan sharks





commercial paper        USA





















credit firm





credit derivatives






credit default swap market






a "once-in-a-century credit tsunami"        USA        2008






credit system breakdown        USA        2008






credit mess        2008






credit crisis





Credit Crisis Indicators






banking crisis > timeline > September - October 2008






credit crunch        2008





The Guardian > Cartoonists

Kipper Williams > Credit crunch in cartoons        2008






global credit crunch        2007























borrower        2008












soaring consumer borrowing





borrowing costs





the cost of borrowing 















pension fund

















Mike Lane





17 July 2009


















Steve Sack


The Minneapolis Star-Tribune



23 Janauary 2009


















David Horsey



The Seattle Post-Intelligencer


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.






bailout        2009






bailout / bank bail-out        2008











How Big Banks Became Our Masters


SEPT. 27, 2017

The New York Times


Opinion | Op-Ed Contributor


Ten years on from the financial crisis, it’s hard not to have a sense of déjà vu.

Financial scandal and wrangles over financial rule-making still dominate the headlines. The cyberhacking at Equifax compromised personal records for half of the adult population of the United States. At SoFi, a one-time fintech darling that crowd sources funding for student loans and other types of credit, the chief executive was forced to resign after revelations of sexual harassment and risky lending practices (the company misled investors about its finances and put inexperienced customer service representatives in charge of credit evaluations). The White House and Republicans in Congress in the meantime are trying to roll back hard-won banking regulations in the Dodd-Frank financial oversight law.

All of it brings to mind an acronym familiar to financial writers like myself — BOB, or “bored of banking.” Even some of us that cover the markets for a living can find ourselves BOB. Over the last 10 years, there has been so much financial scandal, so many battles between regulators and financiers, and so much complexity (more liquidity and less leverage with your tier one capital, anyone?) that a large swath of the public has become numb to the debate about how to make our financial system safer.

That’s a dangerous problem, because despite all of the wrangling and rule making, there’s a core truth about our financial system that we have yet to comprehend fully: It isn’t serving us, we’re serving it.

Adam Smith, the father of modern capitalism, envisioned financial services (and I stress the word “service”) as an industry that didn’t exist as an end in itself, but rather as a helpmeet to other types of business. Yet lending to Main Street is now a minority of what the largest banks in the country do. In the 1970s, most of their financial flows, which of course come directly from our savings, would have been funneled into new business investment. Today, only about 15 percent of the money coming out of the largest financial institutions goes to that purpose. The rest exists in a closed loop of trading; institutions facilitate and engage in the buying and selling of stocks, bonds, real estate and other assets that mainly enriches the 20 percent of the population that owns 80 percent of that asset base. This doesn’t help growth, but it does fuel the wealth gap.

This fundamental shift in the business model of finance is what we should really be talking about — rather than the technocratic details of liquidity ratios or capital levels or even how to punish specific banking misdeeds. The big problem is that our banking system would no longer be recognizable to Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework. Good luck with that today.

While the largest banks can correctly claim that they have offloaded risky assets and bolstered the amount of cash on their balance sheets over the last decade, their business model has become fundamentally disconnected from the very people and entities it was designed to serve. Small community banks, which make up only 13 percent of all banking assets, do nearly half of all lending to small businesses. Big banks are about deal making. They serve mostly themselves, existing as the middle of the hourglass that is our economy, charging whatever rent they like for others to pass through. (Finance is one of the few industries in which fees have gone up as the sector as a whole has grown.) The financial industry, dominated by the biggest banks, provides only 4 percent of all jobs in the country, yet takes about a quarter of the corporate profit pie.

Perhaps that’s why companies of all stripes try to copy its model. Nonfinancial firms as a whole now get five times the revenue from purely financial activities as they did in the 1980s. Stock buybacks artificially drive up the price of corporate shares, enriching the C-suite. Airlines can make more hedging oil prices than selling coach seats. Drug companies spend as much time tax optimizing as they do worrying about which new compound to research. The largest Silicon Valley firms now use a good chunk of their spare cash to underwrite bond offerings the same way Goldman Sachs might.

The blending of technology and finance has reached an apex with the creation of firms like SoFi, which put the same old models on big data steroids. It’s an area we’ll likely hear much more about. A couple of weeks ago, at the Senate Banking Committee hearings on fintech, lawmakers once again struggled with how to think about these latest lending crises. But it’s not data or privacy or algorithms that are the fundamental issue with our financial system. It’s the fact that the system itself has lost its core purpose.

Finance has become the tail that wags the dog. Until we start talking about how to create a financial system that really serves society, rather than just trying to stay ahead of the misdeeds of one that doesn’t, we’ll struggle in vain to bridge the gap between Wall Street and Main Street.


Rana Foroohar, an associate editor and global business columnist at The Financial Times, is the author
of “Makers and Takers: How Wall Street Destroyed
Main Street.”

How Big Banks Became Our Masters,
Sep. 27, 2017,






A Better Way

to Control the Banks


FEB. 26, 2016

The New York Times

The Opinion Pages




Nearly eight years after the financial crisis, behemoth banks still dominate the global economy. They are still immensely complex, highly leveraged and politically powerful. They are still difficult, if not impossible, to manage and supervise. For those reasons, they remain a threat to the economy, and the notion of breaking them up appeals to many voters, policy makers and politicians.

In his campaign for the Democratic presidential nomination, Senator Bernie Sanders has made breaking up the banks a central plank of his economic agenda. The idea has merit. Smaller, more manageable banks would allow for better internal controls over dubious ethical behavior and better regulatory oversight of risky business practices that seem entrenched despite efforts at reform.

But it is also a distraction. It offers a distant and politically uncertain solution to the problem of too-big-to-fail banks that the incremental Dodd-Frank financial reforms of 2010 have already begun to address. In the process, it plays into the hands of Republican critics of Dodd-Frank, who want to repeal the post-crisis reforms and block any further regulation. That’s why Hillary Clinton’s plan — to defend and build on Dodd-Frank — makes more sense at this time.

What gets lost in the discussion is that Dodd-Frank, properly executed, would help to create the conditions for breaking up large and complex banks. That’s because the banks would face rising regulatory costs, which means they might well be worth more to investors if taken apart. Essentially, effective regulation and market forces would work together to make banks smaller and safer.

For example, Dodd-Frank and related regulations require big banks to hold considerably more capital now than they were required to hold before the crisis. The aim is to ensure that banks can absorb any losses they may generate, instead of relying on taxpayers to pick up the bill.

Even so, the capital requirements are not strong enough, in part because they do not require banks to fully account for potential losses from the trading of derivatives, a multitrillion-dollar activity.

Recent data provided by the banks to the Federal Reserve show that capital at big American banks recently averaged a healthy 13 percent of assets. But if derivatives and other holdings were fully included — as is required under international accounting rules but not under American ones — capital would come to a feeble 5.7 percent.

Mrs. Clinton has vowed to fight for higher capital requirements, which can be accomplished without new legislation if regulators willing to impose them are appointed. Of course, that would not be as blunt a way to shrink the banks as simply requiring them to stop their riskiest trading. Still, it would not preclude breaking up the banks at some later date. And it would make the journey from here to there a safer one.

As campaign slogans go, “more capital” does not have the same ring to it as “break up the banks.” But both are paths to the same destination. Mr. Sanders has the right goal. Mrs. Clinton has the right means.


Follow The New York Times Opinion section on Facebook and Twitter, and sign up for the Opinion Today newsletter.

A version of this editorial appears in print on February 27, 2016, on page A22 of the New York edition with the headline: A Better Way to Control the Banks.

A Better Way to Control the Banks,
FEB. 26, 2016,






The Post Office Banks on the Poor


FEB. 7, 2014

The New York Times



ATHENS, Ga. — PEOPLE like to complain about banks popping up like Starbucks on every corner these days. But in poor neighborhoods, the phenomenon is quite the opposite: Over the past couple of decades, the banks have pulled out.

Approximately 88 million people in the United States, or 28 percent of the population, have no bank account at all, or do have a bank account, but primarily rely on check-cashing storefronts, payday lenders, title lenders, or even pawnshops to meet their financial needs. And these lenders charge much more for their services than traditional banks. The average annual income for an “unbanked” family is $25,500, and about 10 percent of that income, or $2,412, goes to fees and interest for gaining access to credit or other financial services.

But a possible solution has appeared, in the unlikely guise of the United States Postal Service. The unwieldy institution, which has essentially been self-funded since 1971, and has maxed out its $15 billion line of credit from the federal government, is in financial straits itself. But what it does have is infrastructure, with a post office in most ZIP codes, and a relationship with residents in every kind of neighborhood, from richest to poorest.

Last week, the office of the U.S.P.S. inspector general released a white paper noting the “huge market” represented by the population that is underserved by traditional banks, and proposing that the post office get into the business of providing financial services to “those whose needs are not being met.” (I wrote a paper years ago suggesting just such an idea.) Postal banking has a powerful advocate in Senator Elizabeth Warren, Democrat of Massachusetts, who has publicly supported the plan.

The U.S.P.S. — which already handles money orders for customers — envisions offering reloadable prepaid debit cards, mobile transactions, domestic and international money transfers, a Bitcoin exchange, and most significantly, small loans. It could offer credit at lower rates than fringe lenders do by taking advantage of economies of scale.

The post office has branches in many low-income neighborhoods that have long been deserted by commercial banks. And people at every level of society have a certain familiarity and comfort in the post office that they do not have in more formal banking institutions — a problem that, as a 2011 study by the Federal Deposit Insurance Corporation demonstrated, can keep the poor from using even the banks that are willing to offer them services.

Many will oppose the idea of a governmental agency providing financial services. Camden R. Fine, chief executive of the Independent Community Bankers of America, has already called the post office proposal “the worst idea since the Ford Edsel.” But the federal government already provides interest-free “financial services” to the largest banks (not to mention the recent bailout funds). And this is done under an implicit social contract: The state supports and insures the banking system, and in return, banks are to provide the general population with access to credit, loans and savings. But in reality, too many are left out.

It wasn’t always this way. In 1910, President William Howard Taft established the government-backed postal savings system for recent immigrants and the poor. It lasted until 1967. The government also supported and insured credit unions and savings-and-loans specifically created to provide credit to low-income earners.

But by the 1990s, there were essentially two forms of banking: regulated and insured mainstream banks to serve the needs of the wealthy and middle class, and a Wild West of unregulated payday lenders and check-cashing joints that answer the needs of the poor — at a price.

People need credit to increase their financial prospects — that’s the theory behind government backing of student loans and mortgages. The Latin root of the word “credit” is credere — to believe. But belief is something that mainstream lenders lack when it comes to assessing the creditworthiness of the poor. And yet establishing credit not only allows individual families and communities to grow wealth, but also allows our economy to do so. Everyone benefits.

There is, of course, a certain irony in the post office, cash-strapped and maxed out on credit, looking to elbow in on the business of check-cashing and payday-loan storefronts. And while the U.S.P.S. white paper stresses that its own offerings, rates and fees would be “more affordable,” a note of alarm is raised when it highlights the potential bonanza that providing financial services to the financially underserved could yield, stating that the result could be “major new revenue for the Postal Service” estimated at $8.9 billion a year. It’s a plan that could indeed save the post office, which last year recorded a $1 billion operating loss.

In this potential transaction between an institution and a population that are both in need, it would be wise to look back a century ago, at the last time a similar experiment was conducted. In 1913, the chief post office inspector, Carter Keene, declared that the postal savings system was not meant to yield a profit: “Its aim is infinitely higher and more important. Its mission is to encourage thrift and economy among all classes of citizens.” Any benefit to the post office’s bottom line should not come at the expense of those who can least afford it.


Mehrsa Baradaran is an assistant professor of law

at the University of Georgia, specializing in banking regulation.


A version of this op-ed appears in print on February 8, 2014,

on page A19 of the New York edition with the headline:

The Post Office Banks on the Poor.

The Post Office Banks on the Poor,






Reparations From Banks


October 25, 2013

The New York Times



The government’s attempts to hold banks accountable for their mortgage practices may finally be paying off. On Friday, JPMorgan Chase agreed to pay $5.1 billion to the regulator of Fannie Mae and Freddie Mac to resolve charges related to toxic mortgage securities sold before the financial crisis. That amount had been negotiated as part of a broader $13 billion settlement — yet to be finalized — between the bank and state and federal officials over the bank’s mortgage practices.

Earlier in the week, a federal jury found Bank of America liable for mortgage fraud before the financial crisis. The jury also found a former manager specifically responsible for some of the wrongdoing. Prosecutors have asked the judge to impose a fine of $848 million on the bank.

These developments have come late in the game, more than five years after the start of the mortgage crisis from which the economy and millions of homeowners have yet to recover. And it may be too late for the government to pursue trials against other banks for similar misconduct, because of statutes of limitations.

A broad settlement with JPMorgan, however, could well be a template for other settlements in the near future. As the final pieces of the deal are put in place, it is crucial for the government to secure adequate redress for wrongdoing and clear accountability up the chain of command. (The bank manager in the Bank of America trial was small fry, relatively speaking.)

Of the $13 billion total settlement with JPMorgan — which would be the largest ever paid to the government by a single corporation — most would go to the housing regulator and to other investors who sustained losses on securities sold by JPMorgan and by two banks it bought during the financial crisis, Bear Stearns and Washington Mutual. Another $4 billion reportedly is earmarked for mortgage relief for homeowners. The only penalty would be $2 billion to $3 billion for the dubious securities sold by JPMorgan itself.

This hardly seems punitive; indeed, even with the settlement payments, JPMorgan is likely to come out way ahead, given the income and market clout that Bear Stearns and Washington Mutual have contributed to the bank since the end of 2008.

The real losers in the deal would be homeowners, because the $4 billion in relief does not appear to add to existing aid; rather, it is almost surely relief the bank would have provided anyway. JPMorgan also will be able to deduct most of the settlement from its taxes — for a tax savings of roughly $4 billion — unless the settlement forbids the write-off. (Memo to Justice Department: Forbid the write-off.)

Another problem is that the deal appears oddly short on accountability. Negotiators reportedly have not yet decided how much wrongdoing, if any, the bank will admit. If there is no admission of fault, that would imply the claims are meritless, though it is unfathomable that the bank would pay $13 billion if it had done nothing wrong.

Banks, however, are loath to admit wrongdoing in government settlements because they fear subsequent shareholder lawsuits. If the government accepts no admission, or an admission that is broad and nonspecific, it would be shielding JPMorgan — on the theory, presumably, that private lawsuits would imperil the bank and endanger the economy. But if the settlement, in effect, precludes private litigation, then $13 billion is not enough. The government has to require either a bigger settlement, which seems unlikely, or a clear and comprehensive admission of wrongdoing.

The settlement reportedly does not include a promise by the government to give up a federal criminal investigation currently under way into the bank’s mortgage practices. That is as it should be, but it is worth recalling that past indictments for banks’ violations have focused on lower-level bank employees or distant subsidiaries, while higher-level executives have remained immune.

The Bank of America trial, over actions taken at Countrywide Financial, the mortgage company that the bank bought in early 2008, shows what might have been possible if the government had taken action in a more timely way. Done right, the JPMorgan settlement and others patterned on it may be the last hope for some justice for the fraud and other wrongdoing that fueled the financial crisis.

    Reparations From Banks, NYT, 25.10.2013,





Mortgage Crisis

Presents a New Reckoning to Banks


December 9, 2012
The New York Times


The nation’s largest banks are facing a fresh torrent of lawsuits asserting that they sold shoddy mortgage securities that imploded during the financial crisis, potentially adding significantly to the tens of billions of dollars the banks have already paid to settle other cases.

Regulators, prosecutors, investors and insurers have filed dozens of new claims against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and others, related to more than $1 trillion worth of securities backed by residential mortgages.

Estimates of potential costs from these cases vary widely, but some in the banking industry fear they could reach $300 billion if the institutions lose all of the litigation. Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.

The banks are battling on three fronts: with prosecutors who accuse them of fraud, with regulators who claim that they duped investors into buying bad mortgage securities, and with investors seeking to force them to buy back the soured loans.

“We are at an all-time high for this mortgage litigation,” said Christopher J. Willis, a lawyer with Ballard Spahr, which handles securities and consumer litigation.

Efforts by the banks to limit their losses could depend on the outcome of one of the highest-stakes lawsuits to date — the $200 billion case that the Federal Housing Finance Agency, which oversees the housing twins Fannie Mae and Freddie Mac, filed against 17 banks last year, claiming that they duped the mortgage finance giants into buying shaky securities.

Last month, lawyers for some of the nation’s largest banks descended on a federal appeals court in Manhattan to make their case that the agency had waited too long to sue. A favorable ruling could overturn a decision by Judge Denise L. Cote, who is presiding over the litigation and has so far rejected virtually every defense raised by the banks, and would be cheered in bank boardrooms. It could also allow the banks to avoid federal housing regulators’ claims.

At the same time, though, some major banks are hoping to reach a broad settlement with housing agency officials, according to several people with knowledge of the talks. Although the negotiations are at a very tentative stage, the banks are broaching a potential cease-fire.

As the housing market and the nation’s economy slowly recover from the 2008 financial crisis, Wall Street is vulnerable on several fronts, including tighter regulations assembled in the aftermath of the crisis and continuing investigations into possible rigging of a major international interest rate. But the mortgage lawsuits could be the most devastating and expensive threat, bank analysts say.

“All of Wall Street has essentially refused to deal with the real costs of the litigation that they are up against,” said Christopher Whalen, a senior managing director at Tangent Capital Partners. “The real price tag is terrifying.”

Anticipating painful costs from mortgage litigation, the five major sellers of mortgage-backed securities set aside $22.5 billion as of June 30 just to cushion themselves against demands that they repurchase soured loans from trusts, according to an analysis by Natoma Partners.

But in the most extreme situation, the litigation could empty even more well-stocked reserves and weigh down profits as the banks are forced to pay penance for the subprime housing crisis, according to several senior officials in the industry.

There is no industrywide tally of how much banks have paid since the financial crisis to put the mortgage litigation behind them, but analysts say that future settlements will dwarf the payouts so far. That is because banks, for the most part, have settled only a small fraction of the lawsuits against them.

JPMorgan Chase and Credit Suisse, for example, agreed last month to settle mortgage securities cases with the Securities and Exchange Commission for $417 million, but still face billions of dollars in outstanding claims.

Bank of America is in the most precarious position, analysts say, in part because of its acquisition of the troubled subprime lender Countrywide Financial.

Last year, Bank of America paid $2.5 billion to repurchase troubled mortgages from Fannie Mae and Freddie Mac, and $1.6 billion to Assured Guaranty, which insured the shaky mortgage bonds.

But in October, federal prosecutors in New York accused the bank of perpetrating a fraud through Countrywide by churning out loans at such a fast pace that controls were largely ignored. A settlement in that case could reach well beyond $1 billion because the Justice Department sued the bank under a law that could allow roughly triple the damages incurred by taxpayers.

Bank of America’s attempts to resolve some mortgage litigation with an umbrella settlement have stalled. In June 2011, the bank agreed to pay $8.5 billion to appease investors, including the Federal Reserve Bank of New York and Pimco, that lost billions of dollars when the mortgage securities assembled by the bank went bad. But the settlement is in limbo after being challenged by investors. Kathy D. Patrick, the lawyer representing investors, has said she will set her sights on Morgan Stanley and Wells Fargo next.

Of the more than $1 trillion in troubled mortgage-backed securities remaining, Bank of America has more than $417 billion from Countrywide alone, according to an analysis of lawsuits and company filings. The bank does not disclose the volume of its mortgage litigation reserves.

“We have resolved many Countrywide mortgage-related matters, established large reserves to address these issues and identified a range of possible losses beyond those reserves, which we believe adequately addresses our exposures,” said Lawrence Grayson, a spokesman for Bank of America.

Adding to the legal fracas, New York’s attorney general, Eric T. Schneiderman, accused Credit Suisse last month of perpetrating an $11.2 billion fraud by deceiving investors into buying shoddy mortgage-backed securities. According to the complaint, the bank dismissed flaws in the loans packaged into securities even while assuring investors that the quality was sound. The bank disputes the claims.

“We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors,” Mr. Schneiderman said.

It is the second time that Mr. Schneiderman — who is also co-chairman of the Residential Mortgage-Backed Securities Working Group, created by President Obama in January — has taken aim at Wall Street for problems related to the subprime mortgage morass. In October, he filed a civil suit in New York State Supreme Court against Bear Stearns & Company, which JPMorgan Chase bought in 2008. The complaint claims that Bear Stearns and its lending unit harmed investors who bought mortgage securities put together from 2005 through 2007. JPMorgan denies the allegations. Another potentially costly prospect for the banks are the demands from a number of private investors who want the banks to buy back securities that violated representations and warranties vouching for the loans.

JPMorgan Chase told investors that as of the second quarter of this year, it was contending with more than $3.5 billion in repurchase demands. In the same quarter, it received more than $1.5 billion in fresh demands. Bank of America reported that as of the second quarter, it was dealing with more than $22 billion in unresolved demands, more than $8 billion of which were received during that quarter.

    Mortgage Crisis Presents a New Reckoning to Banks,
    NYT, 9.12.2012,






Why People Hate the Banks


April 2, 2012
The New York Times


A few months ago, I was standing in a crowded elevator when Jamie Dimon, the chief executive of JPMorgan Chase, stepped in. When he saw me, he said in a voice loud enough for everyone to hear: “Why does The New York Times hate the banks?”

It’s not The New York Times, Mr. Dimon. It really isn’t. It’s the country that hates the banks these days. If you want to understand why, I would direct your attention to the bible of your industry, The American Banker. On Monday, it published the third part in its depressing — and infuriating — series on credit card debt collection practices.

You can’t read the series without wondering whether banks have learned anything from the foreclosure crisis, which resulted in a $25 billion settlement with the federal government and the states. That crisis was the direct result of shoddy, often illegal practices on the part of the banks, which caused untold misery for millions of Americans. Part of the goal of the settlement was simply to force the banks to treat homeowners with some decency. You wouldn’t think that that would be too much to ask. But it was never going to happen without the threat of litigation.

As it turns out, this same kind of awful behavior has been taking place inside the credit card collections departments of the big banks. Records are a mess. Robo-signing has been commonplace. Collections practices hurt primarily the poor and the unsophisticated, just like foreclosure practices. (I sometimes wonder if banks would make any profits at all if they couldn’t take advantage of the poor and unsophisticated.)

At Dimon’s bank, JPMorgan Chase, according to Jeff Horwitz, the author of the American Banker series, the records used by outside law firms to sue people who had defaulted on credit card debt “sometimes differed from Chase’s own files at an alarming rate, according to a routine Chase presentation.” It sold debt to so-called “debt buyers” — who then went to court to try to collect — from one Chase portfolio, in particular, “that had long been considered unreliable and lacked documentation.”

At Bank of America, according to Horwitz, executives sold off its worst credit card receivables for pennies on the dollar. Its contracts with the debt buyers included disclaimers about the accuracy of the balances. Thus, if there were mistakes, it was up to the borrowers to point them out — after the debt buyer had sued for recovery. Most such contracts don’t even require a bank to provide documentation if it is requested of them. (Bank of America says that it will provide documentation.) Horwitz found a woman who had paid off her balance in full — and then spent three years trying to fend off a debt collector. Sounds just like some of the foreclosure horror stories, doesn’t it?

The practices exposed by The American Banker all took place in 2009 and 2010. In response to the problems, JPMorgan shut down its credit card collections, at least for now, and informed its regulator. (It also settled a whistle-blower lawsuit.) Bank of America says that its debt collection practices are not unique to it. Which is true enough.

But lawyers on the front lines say that credit card debt collection remains a horrific problem. “Most of the time, the borrower has no lawyer,” says Carolyn Coffey, of MFY Legal Services, who defends consumers being sued by debt collectors. “There are terrible problems with people not being served properly, so they don’t even know they have been sued. But if you do get to court and ask for documentation, the debt buyers drop the case. It is not worth it for them if they have to provide actual proof.”

Karen Petrou, the managing partner of Federal Financial Analytics, pointed out another reason these practices are so unseemly. In effect, the banks are outsourcing their dirty work — and then washing their hands as the debt collectors harass and sue and make people miserable, often without proof that the debt is owed. Banks, she said, should not be allowed to “avert their gaze” so easily.

“In my church, we pray for forgiveness for the ‘evil done on our behalf,’ ” she wrote in an e-mail. “Banks should do more than pray. They should be held responsible.”

When I was at the Consumer Financial Protection Bureau a few weeks ago, I heard a lot of emphasis placed on debt collection practices, which, up until now, have been unregulated. So I called the agency to ask if people there had read The American Banker series. The answer was yes. “We take seriously any reports that debt is being bought or sold for collection without adequate documentation that money is owed at all or in what amount,” the agency said in a short statement. “The C.F.P.B. is taking a close look at debt collection practices.”

Not a moment too soon.

    Why People Hate the Banks, NYT, 2.4.2012,






The Banks Win, Again


March 17, 2012
The New York Times


Last week was a big one for the banks. On Monday, the foreclosure settlement between the big banks and federal and state officials was filed in federal court, and it is now awaiting a judge’s all-but-certain approval. On Tuesday, the Federal Reserve announced the much-anticipated results of the latest round of bank stress tests.

How did the banks do on both? Pretty well, thank you — and better than homeowners and American taxpayers.

That is not only unfair, given banks’ huge culpability in the mortgage bubble and financial meltdown. It also means that homeowners and the economy still need more relief, and that the banks, without more meaningful punishment, will not be deterred from the next round of misbehavior.

Under the terms of the settlement, the banks will provide $26 billion worth of relief to borrowers and aid to states for antiforeclosure efforts. In exchange, they will get immunity from government civil lawsuits for a litany of alleged abuses, including wrongful denial of loan modifications and wrongful foreclosures. That $26 billion is paltry compared with the scale of wrongdoing and ensuing damage, including 4 million homeowners who have lost their homes, 3.3 million others who are in or near foreclosure, and more than 11 million borrowers who are underwater by $700 billion.

The settlement could also end up doing more to clean up the banks’ books than to help homeowners. Banks will be required to provide at least $17 billion worth of principal-reduction loan modifications and other relief, like forbearance for unemployed homeowners. Compelling the banks to do principal write-downs is an undeniable accomplishment of the settlement. But the amount of relief is still tiny compared with the problem. And the banks also get credit toward their share of the settlement for other actions that should be required, not rewarded.

For instance, they will receive 50 cents in credit for every dollar they write down on second liens that are 90 to 179 days past due, and 10 cents in credit for every dollar they write down on second liens that are 180 days or more overdue. At those stages of delinquency, the write-downs bring no relief to borrowers who have long since defaulted. Rather than subsidizing the banks’ costs to write down hopelessly delinquent loans, regulators should be demanding that banks write them off and take the loss — and bring some much needed transparency to the question of whether the banks properly value their assets.

The settlement’s complex formulas for delivering relief also give the banks too much discretion to decide who gets help, what kind of help, and how much. The result could be that fewer borrowers get help, because banks will be able to structure the relief in ways that are more advantageous for them than for borrowers. The Obama administration has said the settlement will provide about one million borrowers with loan write-downs, but private analysts have put the number at 500,000 to 700,000 over the next three years.

The settlement’s go-easy-on-the-banks approach might be understandable if the banks were still hunkered down. But most of the banks — which still benefit from crisis-era support in the form of federally backed debt and near zero interest rates — passed the recent stress tests, paving the way for Fed approval to increase dividends and share buybacks, if not immediately, then as soon as possible.

When it comes to helping homeowners, banks are treated as if they still need to be protected from drains on their capital. But when it comes to rewarding executives and other bank shareholders, paying out capital is the name of the game. And at a time of economic weakness, using bank capital for investor payouts leaves the banks more exposed to shocks. So homeowners are still bearing the brunt of the mortgage debacle. Taxpayers are still supporting too-big-to-fail banks. And banks are still not being held accountable.

    The Banks Win, Again, NYT, 17.3.2012,






Unemployed Is Bad Enough;

‘Unbanked’ Can Be Worse


March 17, 2012
The New York Times


Joey Macias has lived without a bank or credit union account for more than a year. To pay his bills, Mr. Macias, a 45-year-old San Francisco resident, waits for his unemployment check to arrive in the mail and then cashes it at a Market Street branch of Money Mart, the international money-lending and check-cashing chain. He keeps any leftover cash at home or in his wallet.

Mr. Macias did not always handle his finances this way.

“I had a dispute with BofA, so now I come here,” he said outside Money Mart on a recent afternoon, referring to Bank of America.

Mr. Macias stopped banking after losing his job and incurring debt, which in turn led to bad credit. For now, fringe financial companies — businesses like check cashers, payday lenders and pawnshops that lack conventional checking or savings accounts and frequently charge huge fees and high interest for their services — are the only places Mr. Macias can cash his paychecks and borrow money.

Mr. Macias is not alone in his difficulty in maintaining or getting a bank account: 5.7 percent of San Francisco households lack conventional accounts, according to a 2009 survey by the Federal Deposit Insurance Corporation.

Over the past few years, the issue of “unbanked” people has come under increasing scrutiny. In response, Bay Area governments have created a number of programs to increase options for those without accounts.

Lacking a bank account imposes limitations on a person’s financial options, said Greg Kato, policy and legislative manager of the Office of the Treasurer-Tax Collector in San Francisco. He said that check-cashing fees at the fringe institutions could total $1,000 a year and interest rates for loans are as high as 425 percent. And there are related issues: those without a bank account cannot rent a car, buy plane tickets online, mortgage a house or make any purchase that requires a credit card.

“Without a checking or savings account, you’re basically shut out of most affordable financial services,” said Anne Stuhldreher, a senior policy fellow at New America Foundation, a nonprofit public policy organization.

According to surveys conducted by the San Francisco treasurer’s office in collaboration with nonprofit groups, there are a number of reasons people do not have bank or credit union accounts. These include an inability to afford bank fees, bad credit histories that bar people from opening accounts and being misinformed about the need for government-issued identification to open an account.

Not surprisingly, low-income people are disproportionately unbanked: the national F.D.I.C. survey from 2009 found that about 40 percent of unbanked people in the Bay Area earn below $30,000 a year, and Latino and black residents are most at risk of not having an account. This echoed research from 2008 from the Brookings Institution, a public policy think tank, finding that most of San Francisco’s estimated 36 payday loan stores and 104 check cashers are concentrated in low-income, Latino neighborhoods.

The City of San Francisco has two programs meant to help more people open traditional bank accounts. Last year, it started CurrenC SF, a program aimed at getting businesses and employees to use direct deposit. Bank On, a program developed in San Francisco in 2006 and now used nationally, gets partner banks and credit unions to offer low-risk starter accounts with no minimum balance requirements.

But efforts at curtailing the growth of fringe banking have been met with a strange paradox: national banks like Wells Fargo are also financing fringe institutions. The San Francisco-based Wells Fargo, for instance, headed a group of banks giving DFC Global Corp., the owner of Money Mart, $200 million in revolving credit, according to federal filings.

In an e-mail, a Wells Fargo spokesman defended its actions: “Wells Fargo provides credit to responsible companies in a variety of financial services industries.”

But even with the exorbitant fees and sky-high interest rates, the fringe financial shops do provide much-needed services. Outside Money Mart, Mr. Macias said that he wished banks gave him products similar to the check-cashing operation.

Ms. Stuhldreher agreed.

“There’s a lot financial institutions can learn from check cashers,” she said. “They’re convenient. Some are open 24 hours. Their fees are too high, but they are transparent.”

    Unemployed Is Bad Enough; ‘Unbanked’ Can Be Worse, NYT, 17.3.2012,






Why I Am Leaving Goldman Sachs


March 14, 2012
The New York Times


TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.

When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.

My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.


Greg Smith is resigning today

as a Goldman Sachs executive director

and head of the firm’s United States

equity derivatives business

in Europe, the Middle East and Africa.

    Why I Am Leaving Goldman Sachs, NYT, 14.3.2012,






Bring Back Boring Banks


January 3, 2012
The New York Times


Medford, Mass.

CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and the European Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks. It was a missed opportunity to fix a regulatory effort that goes back nearly 150 years.

Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.

In 1863, Congress created a uniform, government-issued currency to end panicky redemptions of the notes issued by banks. But it didn’t stop bank runs because people began to use bank accounts, instead of paper currency, to store funds and make payments. Now, during panics, depositors would scramble to turn their account balances into government-issued currency (instead of converting bank notes into gold).

The establishment of the Fed in 1913 as a lender of last resort that would temporarily replace the cash withdrawn by fleeing depositors was an important advance toward banking stability. But although the Fed could ameliorate the consequences of panics, it couldn’t prevent them. The system wasn’t stabilized until the 1930s, when the government separated commercial banking from investment banking, tightened bank regulation and created deposit insurance. This system of rules virtually eliminated bank runs and bank failures for decades, but much of it was junked in a deregulatory process that culminated in 1999 with the repeal of the 1933 Glass-Steagall Act.

The Federal Deposit Insurance Corporation now covers balances up to a $250,000 limit, but this does nothing to reassure large depositors, whose withdrawals could cause the system to collapse.

In fact, an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits. Since the 2008 financial crisis, governments and central bankers have been seriously overstretched. The next time a panic starts, markets may just not believe that the Treasury and Fed have the resources to stop it.

Deposit insurance was also a long shot in 1933 — President Franklin D. Roosevelt, the Treasury secretary, the comptroller of the currency and the American Bankers Association opposed it. Somehow advocates rallied public opinion. The public mood is no less in favor of radical reform today. What’s missing is bold, thoughtful leadership.


Amar Bhidé,

a professor at Tufts’s Fletcher School of Law

and Diplomacy, is the author of

“A Call for Judgment: Sensible Finance

for a Dynamic Economy.”

    Bring Back Boring Banks, NYT, 3.1.2012,






A Banker Speaks, With Regret


November 30, 2011
The New York Times


If you want to understand why the Occupy movement has found such traction, it helps to listen to a former banker like James Theckston. He fully acknowledges that he and other bankers are mostly responsible for the country’s housing mess.

As a regional vice president for Chase Home Finance in southern Florida, Theckston shoveled money at home borrowers. In 2007, his team wrote $2 billion in mortgages, he says. Sometimes those were “no documentation” mortgages.

“On the application, you don’t put down a job; you don’t show income; you don’t show assets,” he said. “But you still got a nod.”

“If you had some old bag lady walking down the street and she had a decent credit score, she got a loan,” he added.

Theckston says that borrowers made harebrained decisions and exaggerated their resources but that bankers were far more culpable — and that all this was driven by pressure from the top.

“You’ve got somebody making $20,000 buying a $500,000 home, thinking that she’d flip it,” he said. “That was crazy, but the banks put programs together to make those kinds of loans.”

Especially when mortgages were securitized and sold off to investors, he said, senior bankers turned a blind eye to shortcuts.

“The bigwigs of the corporations knew this, but they figured we’re going to make billions out of it, so who cares? The government is going to bail us out. And the problem loans will be out of here, maybe even overseas.”

One memory particularly troubles Theckston. He says that some account executives earned a commission seven times higher from subprime loans, rather than prime mortgages. So they looked for less savvy borrowers — those with less education, without previous mortgage experience, or without fluent English — and nudged them toward subprime loans.

These less savvy borrowers were disproportionately blacks and Latinos, he said, and they ended up paying a higher rate so that they were more likely to lose their homes. Senior executives seemed aware of this racial mismatch, he recalled, and frantically tried to cover it up.

Theckston, who has a shelf full of awards that he won from Chase, such as “sales manager of the year,” showed me his 2006 performance review. It indicates that 60 percent of his evaluation depended on him increasing high-risk loans.

In late 2008, when the mortgage market collapsed, Theckston and most of his colleagues were laid off. He says he bears no animus toward Chase, but he does think it is profoundly unfair that troubled banks have been rescued while troubled homeowners have been evicted.

When I called JPMorgan Chase for its side of the story, it didn’t deny the accounts of manic mortgage-writing. Its spokesmen acknowledge that banks had made huge mistakes and noted that Chase no longer writes subprime or no-document mortgages. It also said that it has offered homeowners four times as many mortgage modifications as homes it has foreclosed on.

Still, 28 percent of all American mortgages are “underwater,” according to Zillow, a real estate Web site. That means that more is owed than the home is worth, and the figure is up from 23 percent a year ago. That overhang stifles the economy, for it’s difficult to nurture a broad recovery unless real estate and construction revive.

All this came into sharper focus this week as Bloomberg Markets magazine published a terrific exposé based on lending records it pried out of the Federal Reserve in a lawsuit. It turns out that the Fed provided an astonishing sum to keep banks afloat — $7.8 trillion, equivalent to more than $25,000 per American.

The article estimated that banks earned up to $13 billion in profits by relending that money to businesses and consumers at higher rates.

The Federal Reserve action isn’t a scandal, and arguably it’s a triumph. The Fed did everything imaginable to avert a financial catastrophe — and succeeded. The money was repaid.

Yet what is scandalous is the basic unfairness of what has transpired. The federal government rescued highly paid bankers from their reckless decisions. It protected bank shareholders and creditors. But it mostly turned a cold shoulder to some of the most vulnerable and least sophisticated people in America. Last year alone, banks seized more than one million homes.

Sure, some programs exist to help borrowers in trouble, but not nearly enough. We still haven’t taken such basic steps as allowing bankruptcy judges to modify the terms of a mortgage on a primary home. Legislation to address that has gotten nowhere.

My daughter and I are reading Steinbeck’s “Grapes of Wrath” aloud to each other, and those Depression-era injustices seem so familiar today. That’s why the Occupy movement resonates so deeply: When the federal government goes all-out to rescue errant bankers, and stiffs homeowners, that’s not just bad economics. It’s also wrong.

    A Banker Speaks, With Regret, NYT, 30.11.2011,






The Banks Falter


October 13, 2011
The New York Times


As the first of the major banks to report its earnings each quarter, JPMorgan Chase is a barometer of conditions in the financial industry. The mercury is falling.

JPMorgan reported on Thursday that its third-quarter revenue had dropped by 11 percent from the second quarter; its profit fell by 4 percent from a year earlier. And since JPMorgan is arguably one of the nation’s healthier banks, results for firms like Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are likely to be considerably worse.

These declines are worrisome in the sense that they reflect the weakness of the broader economy. Joblessness, damaged credit and falling home values have left people unable to borrow or to repay debt and businesses reluctant to hire and invest. But the results also reflect how the banks built profits abusing their customers.

Long overdue federal restrictions on hidden overdraft charges and excessive debit card fees have begun to take a bite out of bank profits, and that should be happening. But the banks and their investors tend to see any rules and regulations that slow revenue growth as undue and overly burdensome, and they are pushing back. The question is whether lawmakers and regulators will stand up for the new fee restrictions and other rules as banks resist.

Banks, habituated to gouging their customers, are already trying to recoup lost revenue with dubious new charges, like Bank of America’s $5 monthly fee for using a debit card. The move has infuriated customers and led President Obama to rightly warn against mistreatment of customers in the pursuit of profit. But Bank of America has yet to relent — a stubbornness that may be from of a belief that aggrieved customers won’t do better elsewhere. On Thursday, five Democratic congressmen led by Peter Welch of Vermont asked the Justice Department to investigate whether the big banks were engaging in “price signaling,” a form of collusion in the setting of prices.

The big banks are also resisting proposed regulations on capital levels, derivatives and investing practices. If successfully implemented, the new rules will help to curb the kind of reckless trading and irresponsible lending that caused the crash and recession. That will slow revenue growth, but it is the price of a more stable system.

The banks also have gotten themselves into a legal mess for which they have no one to blame but themselves. JPMorgan had to set aside another $1 billion last quarter to prepare for legal claims from investors who want to recoup their loss from mortgage bonds backed by bad loans.

The banks face legal challenges from federal and state governments over foreclosure abuses and other mortgage-related issues. In all, analysts say mortgage problems could cost JPMorgan up to $9 billion. Bank of America, the most exposed of the big banks to mortgage-related litigation, is potentially on the hook for far more.

Investors, meanwhile, are pricing banks’ stocks below the banks’ book value — a sign that they don’t believe the banks are worth what the banks say they are. The questions generally involve whether banks are properly valuing their loans and investments and the extent of their exposure to shaky European debt. Banks could fix this with increased and detailed disclosure. Government officials and regulators could compel that disclosure. The general failure on this front feeds the air of skepticism.

One of the lessons from the financial crash is that there is no substitute for transparency. In the new earnings season, investors are still in the dark.

    The Banks Falter, NYT, 13.10.2011,






HSBC profits double to almost £12bn

• Unnamed highest-paid banker
earned over £8.4m in 2010
• Chief executive Stuart Gulliver earned £6.1m


Monday 28 February 2011
10.49 GMT
Jill Treanor
This article was published on guardian.co.uk
at 10.49 GMT on Monday 28 February 2011.
It was last modified
at 15.40 GMT on Monday 28 February 2011.
It was first published
at 09.28 GMT on Monday 28 February 2011.


HSBC revealed that its highest-paid banker took home more than £8.4m last year as it reported that profits more than doubled to $19bn (£11.8bn) in 2010.

The UK's largest bank also admitted that more than 253 of its staff were paid more than £1m last year and that some 89 of these were based in the London.

The bank said 280 of its most senior employees had shared in bonuses of $374m. Some 186 of these were in the UK and their share of the bonuses was $172m. This means key bankers in the UK get paid an average bonus of $920,000 verses $1.3m group-wide, although this is partly because the UK numbers include lower-paid staff involved in monitoring the bank's risks.

Information provided by the bank showed that if their salaries are included, those key staff earned a total of $471m, which averages at $1.7m – just over £1m.

Stuart Gulliver, who took over as chief executive at the start of the year, is to take his £5.2m bonus in shares. His total pay was £6.1m, down on the £10m he received a year ago when he was the highest-paid employee of the bank.

While the chief executive's office is Hong Kong, Gulliver joked that he lives on Cathay Pacific and British Airways, spending a third of his time in the UK, a third in Hong Kong and a third in the air.

For 2010, the highest-paid banker – who is not named – received between £8.4m and £8.5m; one took £6.8m and three received between £6.3m and £6.4m.

HSBC provides more information about pay than other financial institutions because it is listed in Hong Kong, which demands disclosure of the five highest-paid staff. In banking, the biggest earners are often outside the boardroom.

Under Project Merlin, the deal between major banks and the UK government, the disclosure is different and only requires the pay of the five highest-paid executives outside the boardroom – rather than all bankers and traders – to be disclosed. Under this measure the highest-paid executive received £4.2m.

The information about the bonus pool for senior staff is being provided to comply with a new Financial Services Authority rule, which requires so-called "code staff" – those deemed to be high paid and taking big risks – to have their pay published in aggregate.

Gulliver replaced Michael Geoghegan as chief executive after a very public boardroom reshuffle. For 2010 Geoghegan received £5.8m after his £2m salary and benefits were topped by a £3.8m bonus. He is also to receive £1m for 2011 and a pension contribution of £401,250 under the terms of his contract. While he stepped down at the end of December, he will receive £200,000 in consultancy fees to 1 April, which he will donate to charity.

The bank cut its long-term return on equity target to 12%-15% from a previous 15%-19% target, blaming the costs caused by regulations requiring banks to hold more capital and extra liquid instruments that can be sold quickly in a crisis. The shares fell 4% to 682p as the market digested numbers which, Gulliver admitted, showed income was flat, costs were up and that profits had been bolstered by the $12.4bn fall in impairments to $14bn – the lowest level since 2006.

The new finance director, Iain Mackay, said: "We've targeted 12% to 15% through the cycle for return on equity, principally taking into consideration what we view as a somewhat unstable and uneven economic recovery over the coming years as well as much higher capital requirements."

Commenting on the profits, which were below the $20bn estimated by analysts, Gulliver said: "Underlying financial performance continued to improve in 2010 and shareholders continued to benefit from HSBC's universal banking model.

"All regions and customer groups were profitable, as personal financial services and North America returned to profit. Commercial banking made an increased contribution to underlying earnings and global banking and markets also remained strongly profitable, albeit behind 2009's record performance, reflecting a well-balanced and diversified business."

HSBC's new chairman, Douglas Flint – who was the finance director until he replaced Stephen Green in December – said the group would not forget the financial crisis and support from governments around the world, adding the group entered 2011 "with humility". Green's departure to join the government as trade minister caused the bank to reorganise its top team last year.

But Flint hit out against George Osborne's permanent levy on bank balance sheets, saying that if the chancellor removed the levy – which will cost HSBC about $600m – the bank would increase its payouts to shareholders. The final dividend was announced at 12 cents, up from 10 cents at the same point last year.

Flint was also concerned about the new rules that force banks to hold more liquid instruments such as government bonds. "It will be a near impossibility for the industry to expand business lending at the same time as increasing the amount of deposits deployed in government bonds while, for many banks but not HSBC, reducing dependency on central bank liquidity support arrangements," he said.

"It is to be hoped that the observation period, which starts this year and precedes the formal introduction of the new requirements, will inform a recalibration of these minimum liquidity standards."

For 2009 the bank reported a 24% fall in pre-tax profit to $7bn (£4.63bn), which included a total bill for salaries and bonuses of $18.5bn, down 11%.

    HSBC profits double to almost £12bn, G, 28.2.2011, http://www.guardian.co.uk/business/2011/feb/28/hsbc-profits-double-almost-twelve-billion-pounds






Bank Closings Tilt Toward Poor Areas


February 22, 2011
The New York Times


Until it closed its doors in December, the Ohio Savings Bank branch on North Moreland Boulevard was a neighborhood anchor in Cleveland, midway between the mansions of Shaker Heights and the ramshackle bungalows of the city’s east side. Now it sits boarded up, a victim not only of Cleveland’s economic troubles but also of a broader trend of bank branch closings that is falling more heavily on low- and moderate-income neighborhoods across the country.

In 2010, for the first time in 15 years, more bank branches closed than opened across the United States. An analysis of government data shows, however, that even as banks shut branches in poorer areas, they continued to expand in wealthier ones, despite decades of government regulations requiring financial institutions to meet the credit needs of poor and middle-class neighborhoods.

The number of bank branches fell to 98,517 in 2010, from 99,550 the previous year, a loss of nearly 1,000 locations, according to data compiled by the Federal Deposit Insurance Corporation.

Banks are expected to keep closing branches in the coming years, partly because of new technology and automation and partly because of the mortgage bust and the financial crisis of 2008. New regulations will also cut deeply into revenue, including restrictions on fees for overdraft protection — a major moneymaker on accounts aimed at lower-income customers. Yet the local branch remains a crucial part of the nation’s financial infrastructure, banking analysts say, even as more customers manage their accounts via the Internet and mobile phones.

“In a competitive environment, banks are cutting costs and closing branches, but there are social costs to that decision,” said Mark T. Williams, a banking expert at Boston University and a former bank examiner for the Federal Reserve. “When a branch gets pulled out of a low- or moderate-income neighborhood, it’s not as if those needs go away.”

Mr. Williams and other observers express concern that the vacuum will be filled by so-called predatory lenders, including check-cashing centers, payday loan providers and pawnshops. The F.D.I.C. estimates that roughly 30 million American households either have no bank account or rely on these more expensive alternatives to traditional banking.

The most recent wave of closures gathered steam after the financial crisis in 2008, as banks of all sizes staggered under the weight of bad home loans. In some cases, banks with heavy exposure to risky mortgage debt simply cut branches as part of a broader restructuring. In other cases, banking companies merged and closed branches to consolidate.

Whatever the cause, there were sharp disparities in how the closures played out from 2008 to 2010, according to a detailed analysis by The New York Times of data from SNL Financial, an information provider for the banking industry. Using data culled from the Federal Deposit Insurance Corporation and ESRI, a private geographic information firm, SNL matched up the location of closed branches with census data from the surrounding neighborhood.

In low-income areas, where the median household income was below $25,000, and in moderate-income areas, where the medium household income was between $25,000 and $50,000, the number of branches declined by 396 between 2008 and 2010. In neighborhoods where household income was above $100,000, by contrast, 82 branches were added during the same period.

“You don’t have to be a statistician to see that there’s a dual financial system in America, one for essentially middle- and high-income consumers, and another one for the people that can least afford it,” said John Taylor, president of the National Community Reinvestment Coalition, a group that advocates for expanding financial services in underserved communities.

“In those neighborhoods, you won’t see bank branches,” he added. “You’ll see buildings that used to be banks, surrounded by payday lenders and check cashers that cropped up.”

Wayne A. Abernathy, an executive vice president of the American Bankers Association, disputed Mr. Taylor’s conclusion, as well as the significance of the data.

“You need to look at the context,” he said. “We’re looking at a pool of more than 95,000 branches, and we’ve had several hundred banks fail, so what would be surprising is if no branches had closed.”

The Community Reinvestment Act, signed into law more than three decades ago in an effort to combat discrimination and encourage banks to serve local communities, requires financial institutions to notify federal regulators of branch closings. But legal experts say the federal watchdogs that are supposed to enforce the law have been timid.

“The C.R.A. has been a financial Maginot Line — weakly defended and quickly overrun,” said Raymond H. Brescia, a professor at Albany Law School. What’s more, Mr. Brescia said, while closing branches violates the spirit of the law, if not the letter, he could not recall a single example in which a bank was cited by regulators under the C.R.A. for branch closures in recent years. “The C.R.A leaves banks a lot of leeway,” he said, “and regulators have not wielded their power with much force.”

Even as more customers turn to online banking, said Kathleen Engel, a law professor at Suffolk University in Boston, the presence of brick-and-mortar branches encourages “a culture of savings,” beginning with passbook accounts for children and visits to the local bank. “If we lose branch banking in low- and moderate-income neighborhoods, banks stop being central to the culture in those communities,” said Ms. Engel, author of a new book, “The Subprime Virus: Reckless Credit, Regulatory Failure and Next Steps.”

Among individual financial institutions, especially those hit hard by the mortgage mess, the differences between rich and poor communities were especially marked.

Regions Financial, based in Birmingham, Ala., had 107 fewer branches serving low- and moderate-income neighborhoods in 2010 than it did in 2008. The company, which has yet to repay $3.5 billion in federal bailout money, shuttered just one branch in a high-income neighborhood, according to SNL Financial.

At Zions Bancorporation, a Utah lender battered by losses on commercial real estate loans, branches in low- and moderate-income neighborhoods dropped by 24, compared with a decrease of just one branch in an upper-income area. It still owes the federal government $1.4 billion in bailout money. A spokesman for Zions said the branch closings reflected a strategic move to exit all supermarket locations as well as merger-related consolidation, rather than a withdrawal from particular neighborhoods.

A similar trend is evident at some larger institutions. Bank of America closed 25 branches in moderate-income areas and opened 14 in the richest areas, according to the SNL data. Citigroup, whose branch network is smaller than Bank of America’s, closed two branches in the poorest areas and opened three in the wealthiest.

The head of Citigroup’s global consumer business, Manuel Medina-Mora, made no secret of his bank’s intention to focus on the wealthy in the country, telling a Wall Street investor conference in November that “in retail banking, we will focus our growth in the emergent affluent and affluent segments in major cities — exactly in line with our global consumer banking strategy.”

Comparisons for two other giants, Wells Fargo and JPMorgan Chase, are more difficult because of the addition of thousands of branches in all categories in 2008 as they absorbed Wachovia and Washington Mutual, both of which were pushed to the brink by mortgage losses. From 2009 to 2010, however, Wells closed 57 branches in low- and moderate-income neighborhoods, and shut 20 in upper-income census tracts.

JPMorgan Chase, which emerged from the turmoil of 2008 as the healthiest of the big banks, actually opened 11 branches in low- and moderate neighborhoods, while it closed one in the $100,000-plus communities.

A spokeswoman for Bank of America, Anne Pace, defended her company’s record, noting that more than one-third of its new branch openings in 2011 would be in low- and moderate-income communities.

Citigroup, Wells Fargo and Regions Financial disputed the statistics provided by SNL, arguing that the number of branches closed in low- and moderate-income neighborhoods was overstated. The three banks insisted they are committed to serving all customers and communities, regardless of the income level.

In Cleveland, the closing of the Ohio Savings branch in December was one more bit of fallout from the financial crisis, according to Chris Warren, the city’s chief of regional development.

A year earlier, New York Community Bancorp took over the assets of AmTrust Bank, now operating as Ohio Savings Bank in Ohio, after it was shut by the federal Office of Thrift Supervision. The F.D.I.C.’s deposit insurance fund took a $2 billion loss as a result of the closing. The North Moreland branch was the only one of Ohio Savings’ 29 branches in the state to close.

“This was their introduction of their approach to community investment in this city,” Mr. Warren said. “They closed down the only branch Ohio Savings had in a low-to-moderate-income, African-American neighborhood.”

A spokeswoman for New York Community Bank said the branch was closed only because the bank was unable to reach a new agreement on a lease. She said customers could choose other branches nearby, including an Ohio Savings branch 2.4 miles way.

That is little comfort to customers like Lucretia Clay, who manages a store nearby and lives within walking distance of the now-shuttered branch. “I’ve given that bank a lot of money over the years,” she said. “So they should be here in the community. I shouldn’t have to drive forever to go find them.”

Christopher Maag contributed reporting.

    Bank Closings Tilt Toward Poor Areas, NYT, 22.2.2011,






How the Banks

Put the Economy Underwater


October 30, 2010
The New York Times


IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.

Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.

The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”

Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.

However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.

When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.

This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.

A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.

The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.

Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.

Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.

As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.

Other serious abuses are coming to light. Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.

The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.

That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?

There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.

The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.


Yves Smith is the author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism.”

How the Banks Put the Economy Underwater,






Pathology of a Crisis


November 19, 2009
The New York Times


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,
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
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,






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
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,






U.S. Investing $250 Billion in Banks


October 14, 2008
The New York Times


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,






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
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,






Banks Mine Data and Pitch

to Troubled Borrowers


October 22, 2008
The New York Times


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,






The Guys From ‘Government Sachs’


October 19, 2008
The New York Times


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,






U.S. Investing $250 Billion in Banks


October 14, 2008
The New York Times


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,






Op-Ed Contributor

An Economy You Can Bank On


October 10, 2008
The New York Times



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,






U.S. May Take

Ownership Stake in Banks


October 9, 2008
The New York Times


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,






Op-Ed Contributor

The Borrowers


October 3, 2008
The New York Times



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,






Wall Street, R.I.P.:

The End of an Era, Even at Goldman


September 28, 2008
The New York Times


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,






Economic Memo

Credit Enters a Lockdown


September 25, 2008
The New York Times


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,






WaMu is largest U.S. bank failure


Thu Sep 25, 2008
11:24pm EDT
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."



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.



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."



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,






2 Wall St. Banks Falter;

Markets Shaken

September 15, 2008
The New York Times


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,







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,






Bank-to-bank lending freezes;

bankers ask "who's next?"


Mon Mar 17, 2008
12:22pm EDT
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."



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."



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,






Bear fire sale sparks rout


Mon Mar 17, 2008
12:22pm EDT
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.



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.



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,






Wall St. Banks

Confront a String of Write-Downs


February 19, 2008
The New York Times


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,






Buddy, Can You Spare a Billion?


January 16, 2008
The New York Times


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,






Citigroup Loss

Raises Anxiety Over Economy


January 16, 2008
The New York Times


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,






February 23, 1826


Banks crash in financial panic of '26


From the Guardian archive


Thursday February 23, 1826



Meeting at Mansion House

This morning a meeting of merchants and bankers was held at the Mansion House to discuss the propriety of sending a memorial to government, praying for relief in the present depressed state of trade.

A memorial was agreed upon, praying government to issue, by way of loan, a sum not less than five millions in exchequer bills, upon goods and merchandise. A deputation was appointed to present the memorial to Lord Liverpool, at Fife House.


The Funds - City, Two o'Clock

The city continues in a state of great agitation; the rumours of the failures of country banks are unhappily confirmed; reports respecting London firms are false. The city is today comparatively free from rumours; even the report of a great marquis having been seen in the city produced no effect. Consols continued, however, in a state of agitation, fluctuating violently.

The meeting at the Mansion House had a favourable effect, as it would give greater weight to representations from Manchester and Liverpool. Money stock is still scarce, and rates high in proportion to the consols for time.

A subject of great importance is engaging the attention of the principal merchants and capitalists of the city. It is stated that the bank charter allows that establishment to lend money on goods, and it is confidently asserted that the ministers are urging the directors to put forward some measures for active operation for the relief of the public distress, in which measures the ministers would co-operate.

The following gentlemen have undertaken to act its trustees for the settlement of the affairs of messrs. B. A. Goldschmidt and Co., viz .- Mr. Rothschild, Mr. S. Samuel, Mr. D. Barclay (of the house of Barclay, Her¬ring and Co.), Mr. S. Gurney, and Mr. Richardson. Their appointment has given much satisfaction on the Exchequer. The trust deed, we believe, is not yet prepared, but as the consent of the parties has been given, no difficulty is anticipated in its completion.


Failure of the Brighton Old Bank

We have to announce the suspension of payment of the Old Bank: Messrs. Mitchell, Mills and Mitchell which succeeded the failure of the house of Sir J. Perring, Shaw, Barber, and Co of London, their correspondent, and their London brokers, Barber and Sons. The shock occasioned by this event will be felt by every individual in town. The bank crisis of 1826 was blamed on small, weak country banks issuing too many small denomination notes.

From the Guardian archive > February 23, 1826 >
Banks crash in financial panic of '26,
G, 23.2.1826, Republished 23.2.2006,










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