Showing posts with label banks. Show all posts

Apr 17, 2010

For Goldman Sachs, a Winning Bet Carries a Price - NYTimes.com

By LOUISE STORY and GRETCHEN MORGENSON

For Goldman Sachs, it was a relatively small transaction. But for the bank — and the rest of Wall Street — the stakes couldn’t be higher.

Accusations that Goldman defrauded customers who bought investments tied to risky subprime mortgages have only just begun to reverberate through the financial world.

The civil lawsuit filed against Goldman on Friday by the Securities and Exchange Commission seemed to confirm many Americans’ worst suspicions about Wall Street: that the game is rigged, the odds stacked in the banks’ favor. It is the first big case — but probably not the last, legal experts said — to delve into a Wall Street firm’s role in the mortgage fiasco.

The move against Goldman came at a particularly sensitive time for Wall Street. Washington policy makers are hotly debating a sweeping overhaul of the nation’s financial regulations, and the news could embolden those seeking to rein in the banks. President Obama on Saturday stepped up pressure for financial reform by accusing Republicans of “cynical and deceptive” attacks on the measure.

The S.E.C.’s action could also hit Wall Street where it really hurts: the wallet. It could prompt dozens of investor claims against Goldman and other Wall Street titans that devised and sold toxic mortgage investments.

And it raises new questions about Goldman, the bank at the center of more concentric circles of economic and political power than any other on Wall Street. Goldman — whose controversial success has leapt from the financial pages to the cover of Rolling Stone — has fiercely defended its actions before, during and after the financial crisis. On Friday, it called the S.E.C.’s accusations “unfounded.”

Wall Street played a complex and, at times, seemingly conflicted role in the mortgage meltdown. Goldman and others worked behind the scenes, bundling home loans into investments for sale to investors the world over. Even now, more than 18 months after Washington rescued the teetering financial system, no one knows for sure how much money was lost on those investments.

The public outcry against the bank bailouts was driven in part by suspicions that a heads-we-win, tails-you-lose ethos pervades the financial industry. To many, that Goldman and others are once again minting money — and paying big bonuses to their employees — is evidence that Wall Street got a sweet deal at taxpayers’ expense. The accusations against Goldman may only further those suspicions.

“The S.E.C. suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian and author of “Wall Street: America’s Dream Palace.” “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

On Friday, Goldman’s stock took a beating, falling 13 percent and wiping out more than $10 billion of the company’s market value. It was a possible sign that investors fear that the S.E.C. complaint will damage Goldman’s reputation and its ability to keep its hands on so many sides of a trade — a practice that is immensely profitable for the firm.

It is unclear whether the S.E.C. can prevail against Goldman. The bank has long maintained that it puts its clients first and, in a letter in its latest annual report, reiterated that position. Goldman said that it never “bet against our clients” in its trades but rather was trying to hedge against other trading positions.

Still, Wall Street analysts said Goldman and other banks, having navigated the financial crisis, might now face a new kind of risk: angry investors. Most major Wall Street banks also created collateralized debt obligations, which are at the heart of the Goldman case. C.D.O.’s, which are essentially bundles of securities backed by mortgages or other debt securities, turned out to be among the most toxic investments ever devised.

“Any investor who bought these C.D.O.’s and lost a significant amount of money is probably looking at their investment and wanting to know: what were the details behind the sale?” said William Tanona, an analyst at Collins Stewart. “Will they contact the S.E.C. and say, ‘Here’s the transaction we participated in, and we’d love to know who is on the other side of it?’ ”

Among the investors were several European banks, the S.E.C. complaint said. The biggest victim was the Royal Bank of Scotland, which inherited a loss of $841 million after it took over the Dutch bank ABN Amro, which made the original investments in 2007. According to a person briefed on the matter, Royal Bank, now controlled by the British government, is studying the documents but is not yet ready to decide whether to take action to recoup some or all of the money from Goldman.

Goldman faces a dilemma in its response. Wall Street firms tend to settle cases like this one, but Goldman’s statement Friday indicated it intended to dig in its heels and fight, perhaps in part to discourage suits by investors. But that strategy could set it up for a drawn-out, messy and public battle.

The S.E.C. complaint named just one Goldman employee: Fabrice Tourre, a vice president in the bank’s mortgage operation who worked on the questionable transaction.

But securities lawyers say Mr. Tourre appears to be a small fish. Federal investigators may try to gain his cooperation and extend their investigation to other Goldman employees. On Friday Mr. Tourre’s lawyer did not provide a comment on the complaint.

A big question is how far up this might go. The S.E.C. said the deal in its complaint had been approved by a committee at Goldman called the Mortgage Capital Committee.

“It’s typical that they’d start with someone lower down on the chain and try to exert pressure on that person,” said Bradley D. Simon of Simon & Partners, a white-collar defense lawyer in New York. “Is it really conceivable that no one else was involved in this?”

As the housing market began to fracture in 2007, senior Goldman executives began overseeing the mortgage department closely, according to four former Goldman Sachs employees, who spoke on the condition of anonymity because of the sensitivity of the matter.

Senior executives routinely visited the unit. Among them were David A. Viniar, the chief financial officer; Gary D. Cohn, the president; and Pablo Salame, a sales and trading executive, these former employees said. Even Goldman’s chief executive, Lloyd C. Blankfein, got involved.

Top executives met routinely with Dan Sparks, the head of the mortgage trading unit, who retired in the spring of 2008. Managers instructed several traders to sell housing-related investments. Indeed, they urged Mr. Tourre and a colleague, Jonathan Egol, to place more bets against mortgage investments, the former employees said.

A Goldman spokesman did not reply to a request for comment on these executives’ roles. It is unclear if any of the top executives knew about all of Mr. Tourre’s actions.

Mr. Blankfein has already been questioned about the toxic vehicles Goldman devised and sold, even as the bank realized the housing market was in trouble.

Recent public statements made by Mr. Blankfein seem to conflict with the account laid out by the S.E.C.

In testimony before the Financial Crisis Inquiry Commission in January, for example, Mr. Blankfein described Goldman’s approach to dealing with its clients: “Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else’s money.”

But the S.E.C. complaint says Goldman misled investors who bought one of the bank’s so-called Abacus deals. The bank failed to tell them that the mortgage bonds that underpinned the investment had been selected by a prominent hedge fund manager who wanted to bet against the investment, the S.E.C. says. Those bonds were especially vulnerable, the commission says.

The deal cost investors just over $1 billion, a relatively small deal by Wall Street standards. At a conference in New York in November, Mr. Blankfein talked about the risks to the firm’s reputation that it faced as a result of the mortgage mania and ensuing credit crisis.

“Are we worried about our image and reputation, and what are we doing to fix it? The answer, of course, is we’re very concerned about this,” Mr. Blankfein said. He added: “People understand our bona fides who deal with us.”

Graham Bowley contributed reporting.

Apr 1, 2010

Banking on Chalabi

Image by HYAKUNEKO via Flickr

Banking on Chalabi

Feb 22, 2010

Kabul Bank's Sherkhan Farnood feeds crony capitalism in Afghanistan

Image via Wikipedia

By Andrew Higgins
Monday, February 22, 2010; A01

KABUL -- Afghanistan's biggest private bank -- founded by the Islamic nation's only world-class poker player -- celebrated its fifth year in business last summer with a lottery for depositors at Paris Palace, a Kabul wedding hall.

Prizes awarded by Kabul Bank included nine apartments in the Afghan capital and cash gifts totaling more than $1 million. The bank trumpeted the event as the biggest prize drawing of its kind in Central Asia.

Less publicly, Kabul Bank's boss has been handing out far bigger prizes to his country's U.S.-backed ruling elite: multimillion-dollar loans for the purchase of luxury villas in Dubai by members of President Hamid Karzai's family, his government and his supporters.

The close ties between Kabul Bank and Karzai's circle reflect a defining feature of the shaky post-Taliban order in which Washington has invested more than $40 billion and the lives of more than 900 U.S. service members: a crony capitalism that enriches politically connected insiders and dismays the Afghan populace.

"What I'm doing is not proper, not exactly what I should do. But this is Afghanistan," Kabul Bank's founder and chairman, Sherkhan Farnood, said in an interview when asked about the Dubai purchases and why, according to data from the Persian Gulf emirate's Land Department, many of the villas have been registered in his name. "These people don't want to reveal their names."

Afghan laws prohibit hidden overseas lending and require strict accounting of all transactions. But those involved in the Dubai loans, including Kabul Bank's owners, said the cozy flow of cash is not unusual or illegal in a deeply traditional system underpinned more by relationships than laws.

The curious role played by the bank and its unorthodox owners has not previously been reported and was documented by land registration data; public records; and interviews in Kabul, Dubai, Abu Dhabi and Moscow.

Many of those involved appear to have gone to considerable lengths to conceal the benefits they have received from Kabul Bank or its owners. Karzai's older brother and his former vice president, for example, both have Dubai villas registered under Farnood's name. Kabul Bank's executives said their books record no loans for these or other Dubai deals financed at least in part by Farnood, including home purchases by Karzai's cousin and the brother of Mohammed Qasim Fahim, his current first vice president and a much-feared warlord who worked closely with U.S. forces to topple the Taliban in 2001.

At a time when Washington is ramping up military pressure on the Taliban, the off-balance-sheet activities of Afghan bankers raise the risk of financial instability that could offset progress on the battlefield. Fewer than 5 percent of Afghans have bank accounts, but among those who do are many soldiers and policemen whose salaries are paid through Kabul Bank.

A U.S. official who monitors Afghan finances, who spoke on the condition of anonymity because he was not authorized to comment publicly, said banks appear to have plenty of money but noted that in a crisis, Afghan depositors "won't wait in line holding cups of latte" but would be "waving AK-47s."

Kabul Bank executives, in separate interviews, gave different accounts of what the bank is up to with Dubai home buyers. "They are borrowers. They have an account at Kabul Bank," said the bank's chairman, Farnood, a boisterous 46-year-old with a gift for math and money -- and the winner of $120,000 at the 2008 World Series of Poker Europe, held in a London casino.

The bank's chief audit officer, Raja Gopalakrishnan, however, insisted that the loan money didn't come directly from Kabul Bank. He said it was from affiliated but separate entities, notably a money-transfer agency called Shaheen Exchange, which is owned by Farnood, is run by one of Kabul Bank's 16 shareholders and operates in Kabul out of the bank's headquarters.

The audit officer said Farnood "thinks it is one big pot," but the entities are "legally definitely separate."

A new economy

In some ways, Kabul Bank is a symbol of how much has changed in Afghanistan since 2001, when the country had no private banks and no economy to speak of. Kabul Bank has opened more than 60 branches and recently announced that it will open 250 more, and it claims to have more than $1 billion in deposits from more than a million Afghan customers.

Kabul Bank prospers because Afghanistan, though extremely poor, is in places awash with cash, a result of huge infusions of foreign aid, opium revenue and a legal economy that, against the odds, is growing at about 15 percent a year. The vast majority of this money flows into the hands of a tiny minority -- some of it through legitimate profits, some of it through kickbacks and insider deals that bind the country's political, security and business elites.

The result is that, while anchoring a free-market order as Washington had hoped, financial institutions here sometimes serve as piggy banks for their owners and their political friends. Kabul Bank, for example, helps bankroll a money-losing airline owned by Farnood and fellow bank shareholders that flies three times a day between Kabul and Dubai.

Kabul Bank's executives helped finance President Hamid Karzai's fraud-blighted reelection campaign last year, and the bank is partly owned by Mahmoud Karzai, the Afghan president's older brother, and by Haseen Fahim, the brother of Karzai's vice presidential running mate.

Farnood, who now spends most of his time in Dubai, said he wants to do business in a "normal way" and does not receive favors as a result of his official contacts. He said that putting properties in his name means his bank's money is safe despite a slump in the Dubai property market: He can easily repossess if borrowers run short on cash.

A review of Dubai property data and interviews with current and former executives of Kabul Bank indicate that Farnood and his bank partners have at least $150 million invested in Dubai real estate. Most of their property is on Palm Jumeirah, a man-made island in the shape of a palm tree where the cheapest house costs more than $2 million.

Mirwais Azizi, an estranged business associate of Farnood and the founder of the rival Azizi Bank in Kabul, has also poured money into Dubai real estate, with even more uncertain results. A Dubai company he heads, Azizi Investments, has invested heavily in plots of land on Palm Jebel Ali, a stalled property development. Azizi did not respond to interview requests. His son, Farhad, said Mirwais was busy.

Responsibility for bank supervision in Afghanistan lies with the Afghan central bank, whose duties include preventing foreign property speculation. The United States has spent millions of dollars trying to shore up the central bank. But Afghan and U.S. officials say the bank, though increasingly professional, lacks political clout.

The central bank's governor, Abdul Qadir Fitrat, said his staff had "vigorously investigated" what he called "rumors" of Dubai property deals, but "unfortunately, up until now they have not found anything." Fitrat, who used to live in Washington, last month sent a team of inspectors to Kabul Bank as part of a regular review of the bank's accounts. He acknowledged that Afghan loans are "very difficult to verify" because "we don't know who owns what."

Kabul Bank's dealings with Mahmoud Karzai, the president's brother, help explain why this is so. In interviews, Karzai, who has an Afghan restaurant in Baltimore, initially said he rented a $5.5 million Palm Jumeirah mansion, where he now lives with his family. But later he said he had an informal home-loan agreement with Kabul Bank and pays $7,000 a month in interest.

"It is a very peculiar situation. It is hard to comprehend because this is not the usual way of doing business," said Karzai, whose home is in Farnood's name.

Karzai also said he bought a 7.4 percent stake in the bank with $5 million he borrowed from the bank. But Gopalakrishnan, the chief audit officer, said Kabul Bank's books include no loans to the president's brother.

Also in a Palm Jumeirah villa registered in Farnood's name is the family of Ahmad Zia Massoud, Afghanistan's first vice president from 2004 until last November. The house, bought in December 2007 for $2.3 million, was first put in the name of Massoud's wife but was later re-registered to give Farnood formal ownership, property records indicate.

Massoud, brother of the legendary anti-Soviet guerrilla leader Ahmad Shah Massoud, said that Farnood had always been the owner but let his family use it rent-free for the past two years because he is "my close friend." Massoud added: "We have played football together. We have played chess together." Farnood, however, said that though the "villa is in my name," it belongs to Massoud "in reality."

Haseen Fahim, the brother of Afghanistan's current first vice president, has been another beneficiary of Kabul Bank's largesse. He got money from Farnood to help buy a $6 million villa in Dubai, which, unusually, is under his own name. He borrowed millions more from the bank, which he partly owns, to fund companies he owns in Afghanistan.

In an interview at Kabul Bank's headquarters, Khalilullah Fruzi, who as chief executive heads the bank's day-to-day operations, said he didn't know how much bank money has ended up in Dubai. If Karzai's relatives and others buy homes "in Dubai, or Germany or America . . . that is their own affair," Fruzi said, adding that the bank "doesn't give loans directly for Dubai."

Fruzi, a former gem trader, said Kabul Bank is in robust health, makes a profit and has about $400 million in liquid assets deposited with the Afghan central bank and other institutions. Kabul Bank is so flush, he added, that it is building a $30 million headquarters, a cluster of shimmering towers of bulletproof glass.

The bank is also spending millions to hire gunmen from a company called Khurasan Security Services, which, according to registration documents, used to be controlled by Fruzi and is now run by his brother.

The roots of Kabul Bank stretch back to the Soviet Union. Both Fruzi and Farnood got their education and their start in business there after Moscow invaded Afghanistan in 1979.

While in Moscow, Farnood set up a successful hawala money-transfer outfit to move funds between Russia and Kabul. Russian court documents show that 10 of Farnood's employees were arrested in 1998 and later convicted of illegal banking activity. Fearful of arrest in Russia and also in Taliban-ruled Afghanistan, Farnood shifted his focus to Dubai.

In 2004, three years after the fall of the Taliban regime, he got a license to open Kabul Bank. His Dubai-registered hawala, Shaheen Exchange, moved in upstairs and started moving cash for bank clients. It last year shifted $250 million to $300 million to Dubai, said the chief audit officer.

The bank began to take in new, politically connected shareholders, among them the president's brother, Mahmoud, and Fahim, brother of the vice president, who registered his stake in the name of his teenage son.

Fahim said two of his companies have borrowed $70 million from Kabul Bank. Insider borrowing, he said, is unavoidable and even desirable in Afghanistan because, in the absence of a solid legal system, business revolves around trust, not formal contracts. "Afghanistan is not America or Europe. Afghanistan is starting from zero," he said.

Fahim's business has boomed, thanks largely to subcontracting work on foreign-funded projects, including a new U.S. Embassy annex and various buildings at CIA sites across the country, among them a remote base in Khost where seven Americans were killed in a December suicide attack by a Jordanian jihadiist. "I have good opportunities to get profit," Fahim said.

'Like wild horses'

Kabul Bank also plunged into the airline business, providing loans to Pamir Airways, an Afghan carrier now owned by Farnood, Fruzi and Fahim. Pamir spent $46 million on four used Boeing 737-400s and hired Hashim Karzai, the president's cousin, formerly of Silver Spring, as a "senior adviser."

Farnood said he also provided a "little bit" of money to help Hashim Karzai buy a house on Palm Jumeirah in Dubai. Karzai, in brief telephone interviews, said that the property was an investment and that he had borrowed some money from Farnood. He said he couldn't recall details and would "have to check with my accountant."

Noor Delawari, governor of the central bank during Kabul Bank's rise, said Farnood and his lieutenants "were like wild horses" and "never paid attention to the rules and regulations." Delawari said he didn't know about any property deals by Kabul Bank in Dubai. He said that he, too, bought a home in the emirate, for about $200,000.

Fitrat, the current central bank governor, has tried to take a tougher line against Kabul Bank and its rivals, with little luck. Before last year's presidential election, the central bank sent a stern letter to bankers, complaining that they squander too much money on "security guards and bulletproof vehicles" and "expend large-scale monetary assistance to politicians." The letter ordered them to remain "politically neutral."

Kabul Bank did the opposite: Fruzi, its chief executive, joined Karzai's campaign in Kabul while Farnood, its poker-playing chairman, organized fundraising events for Karzai in Dubai. One of these was held at the Palm Jumeirah house of Karzai's brother.

The government has returned the favor. The ministries of defense, interior and education now pay many soldiers, police and teachers through Kabul Bank. This means that tens of millions of dollars' worth of public money sloshes through the bank, an unusual arrangement, as governments generally don't pump so much through a single private bank.

Soon after his November inauguration for a second term, President Karzai spoke at an anti-corruption conference in Kabul, criticizing officials who "after one or two years work for the government get rich and buy houses in Dubai." Last month, he flew to London for a conference on Afghanistan, attended by Secretary of State Hillary Rodham Clinton and other leaders, and again promised an end to the murky deals that have so tarnished his rule.

Also in London for the conference were Farnood, who now has an Afghan diplomatic passport, and Fruzi, who served as a financial adviser to Karzai's reelection campaign and also owns a house in Dubai. "If there is no Kabul Bank, there will be no Karzai, no government," Fruzi said.

Correspondent Joshua Partlow in Kabul and special correspondent Anna Masterova in Moscow contributed to this report.

Jan 31, 2010

Can Bank-Bashing Help Obama?

Thursday, Jan. 28, 2010

Can Bashing the Banks Help Obama?

By Michael Grunwald and Michael Scherer

The no-drama law professor is going populist.

First President Obama proposed new taxes on big banks, blasting the "twisted logic" of Wall Street executives who keep awarding themselves giant bonuses while resisting government efforts to recoup the cost of their industry's bailouts. "Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee, I suggest you might want to consider simply meeting your responsibilities," the President warned.

A week later, Obama proposed new restrictions on big banks, aimed at limiting their size while prohibiting them from playing the markets with their own cash. "If these folks want a fight," he thundered, "it's a fight I'm ready to have." In case anyone missed the point, Obama used the word fight or fighting 22 times in a speech the next day in Ohio. (See judgments of Obama's first year, issue by issue.)

The new proposals were in the works long before Scott Brown rode his truck to victory in Massachusetts, and they reflect fairly modest shifts in the Administration's finance policies. Even the rhetoric is familiar: Obama took periodic swipes at "outrageous" bonuses and "fat-cat bankers" throughout his first year in office. But the latest bank-bashing does indicate a new strategic approach to his second year, inspired by the same public wrath that produced Brown's upset. As the White House shifts its top legislative priority from health care reform to financial reform, it is hoping to avoid the mistakes of the health effort that have left Obama and the Democratic Party on the wrong side of a grumpy public.

That means more populism and confrontation, less deference to Congress. It's a shift from an inside game to an outside game, from passive leader of a divided party to active agitator for change. The idea is to take an uncompromising stand, make a clear case to the public and then force lawmakers to choose sides — as opposed to announcing general principles, letting Congress hash out its own details at its own pace and then desperately cutting deals to try to cobble together 60 Senators.

That was a bumpy road even before Massachusetts left Democrats with only 59; months of bipartisan Senate negotiations over health care reform attracted zero Republican votes, as did the financial-reform package that passed the House in December. And White House officials admit they underestimated how ugly Capitol Hill's sausagemaking process would look in the spotlight, turning a debate about expanding health coverage, controlling costs and reining in the abuses of profit-obsessed insurers into a brawl over "death panels," taxpayer-funded abortions and congressional giveaways to Nebraska. (See the financial crisis after one year.)

So now they want to draw bright lines: Are you with us or Wall Street, with ordinary families or greedy titans? They figure that if they can't get a legislative victory, they'll get a potent political issue.

But Republicans are already accusing Obama of sacrificing reform on the altar of politics, and it's true that the bright-line strategy could scuttle whatever chances there might have been to build bipartisan consensus in the Senate. For example, the White House recently leaked word that it considers the creation of a new Consumer Financial Protection Agency "nonnegotiable," drawing a clear contrast with Republicans and financial lobbyists on a relatively simple issue that polls extremely well — but risking a stalemate in the Senate Banking Committee, where the GOP and several Democrats have expressed doubts about a new bureaucracy. After health care, that's a price the Administration is now willing to pay. It's no coincidence that the day before Obama announced his latest push to crack down on big banks, his confidants David Axelrod and Valerie Jarrett met with Troubled Asset Relief Program (TARP) watchdog Elizabeth Warren, the intellectual mother of the consumer agency and the most prominent populist advocate for financial reform. "They made it very clear that Wall Street needs to stop acting like nothing has changed," Warren told TIME.

It's also no coincidence that the President made his announcement while standing next to the unlikeliest populist advocate for financial reform, 82-year-old former Federal Reserve chairman Paul Volcker, a previously marginalized Obama adviser who had chastised the Administration for making insufficient efforts to limit the size and risk profiles of big banks. The White House is tired of complaints that its economic team — especially Treasury Secretary Timothy Geithner, the former New York Fed president who helped bail out AIG and other failing firms — is too close to Wall Street. Bringing the legendary gray eminence in from the cold — Obama called his plan to ban proprietary trading by commercial banks "the Volcker rule" — not only lent capitalist gravitas to populist bank-bashing but also reinforced the message that the Administration will not be outflanked in its assaults on Big Finance. That hasn't always been the case.

Allergic to Populism
Shortly after Obama unveiled a $117 billion plan to tax the riskier liabilities of larger financial firms, Geithner hosted a dinner for bankers. A few of them grumbled about Big Government, class warfare and the unfairness of scapegoating financial institutions that already repaid their bailout money while GM and Chrysler keep hemorrhaging taxpayer cash. But one midsize-bank CEO suggested the tax was a reasonable surcharge on too-big-to-fail conglomerates that benefit from an implicit guarantee of federal help in a crisis. "If I fail, the FDIC shuts me down," he said. Then he gestured at a big-bank CEO. "If he fails, the Fed asks how it can help."

Read "Bank CEOs Continue to Fight Financial Reform."

See pictures of TIME's Wall Street covers.

It's a telling story. For one thing, it's a reminder that Geithner is the kind of guy who hosts dinners for bankers. He's not a populist; he's allergic to populists, and so are his aides. Behind closed doors, Treasury officials can sound like their MoveOn.org caricatures, griping about "wacko populists" who use "anticapitalist rhetoric" to "extract their pound of flesh from the Street" — even making excuses for the megabankers who no-showed a recent White House meeting with Obama. ("I wouldn't say they blew him off," said one Treasury aide.) Geithner has opposed proposals to tax Wall Street bonuses as well as financial transactions, infuriating the left. And he made quite a few of those how-can-we-help calls to floundering bankers when he was at the Fed, providing a juicy target for the right.

And yet Obama's bank tax — designed not only to make taxpayers whole but also to discourage excessive risk-taking — came from Geithner. And so did most of the Administration's plans to address the too-big-to-fail problem, create an independent consumer agency for financial products and otherwise overhaul the regulatory system that failed so dramatically in 2008. Geithner sees big banks not as evil empires to be toppled but as moneymaking machines to be restrained, so that the panic and bailouts of two years ago are never repeated. Just because it's populist, he likes to say, doesn't mean it's wrong. (See award-winning pictures of the fallout from the financial meltdown.)

And as was conspicuously not the case with health care reform, the Administration has laid out specific changes it wants to see in financial oversight. In June, Geithner released an 88-page paper with proposals to address just about everything that went wrong before the meltdown, from unregulated brokers who peddled toxic subprime mortgages with brutal fine print to in-the-tank ratings agencies that vouched for house-of-cards financial instruments they didn't even understand. He proposed much tougher oversight of derivatives, hedge funds and nonbank financial firms like AIG, as well as so-called resolution authority to help public officials wind down failed behemoths like Lehman Brothers during a crisis without triggering a panic. Geithner then shipped hundreds of pages of legislative language to the Hill.

The bill the House passed in December closely tracks the Treasury proposals; Geithner's aides say they got at least 80% of what they wanted, including the stand-alone consumer agency, an easy-to-understand innovation for Americans who think mortgages and credit cards should be as safe as toasters. Many of the differences were technical or turf-based: how to structure the resolution authority and regulate systemic risks, a loophole exempting "industrial loan companies" from various regulations, more loopholes shielding community banks and auto dealers (known for their pull with local Congressmen) from the new consumer agency's direct oversight. House Financial Services Committee chairman Barney Frank points out that the Republican alternative to the bill consisted of ending TARP and otherwise maintaining the status quo; he's surprised the GOP hasn't paid a political price. "I'm disappointed with the zeitgeist," Frank says. "The Republicans are so extreme they couldn't help themselves; they actually proposed doing nothing. I would've thought refusing to fix a dysfunctional system would be unpopular." (See how Americans are spending now.)

Republicans say they haven't seen any downside yet to opposing reform. Brown actually stepped into Obama's populist trap by opposing the bank tax, and it didn't seem to help his opponent, Martha Coakley, even though internal polling gave her a 21-point advantage when it came to "taking on Wall Street." Why? "People thought Democrats in Washington would not deliver on these issues," says her pollster, Celinda Lake.

In fact, Democrats in Washington and even within the Administration were at odds over dozens of provisions. As with health care, there are serious differences on financial reform between the House and the Senate, and the Democratic caucus within the Senate is again divided. And as the House bill got watered down a bit, some reformers saw Treasury's fingerprints. For example, Michael Greenberger, a policy adviser to Americans for Financial Reform, a coalition of union, consumer and environmental groups, says Treasury lobbied "vigorously" for loopholes exempting certain over-the-counter derivatives from new regulations, a key objective of centrist New Democrats who took their concerns to Geithner — and one shared by the Chamber of Commerce, the National Association of Manufacturers and big banks.

But for critics who believed the Administration was reluctant to crack down on Wall Street, Volcker became the proof that wasn't in the pudding — the monetary version of the "most trusted name in news" who suddenly sounded like a Daily Kos blogger. If Obama really wanted to stop banks from getting too big to fail, why didn't he take Volcker's advice about how to stop them from getting too big? If Obama really wanted to stop Wall Street's excessive risk-taking, why didn't he take Volcker's advice to stop federally insured banks from gambling on their own accounts? And where was Volcker anyway?

Back in Vogue
Volcker was living in New York City, getting engaged to his longtime assistant, giving speeches around the world, making wry comments about the uselessness of financial innovation and the remorselessness of Wall Street. He was also making cagey references to his lack of influence with Obama, for whom he was chairing an obscure economic-recovery board. Congressman Paul Kanjorski says that last March, when he pitched Volcker on a plan to let regulators break up big banks that threatened the financial system, the former Fed chair said, "I'm out of vogue right now in the White House ... but I agree." Volcker secured his walk-on-water reputation by taming runaway inflation in the late 1970s, jacking up interest rates and ignoring intense public pressure to reverse course. His grandpa-in-the-attic status in Obamaworld seemed to suggest an Administration too cozy with the Street.

Read "Can Obama Profit from a Wall Street Crackdown?"

Read "Bank Earnings: Economic Woes Persist."

In fact, while Volcker did have some policy disagreements with Geithner and National Economic Council chairman Larry Summers — who were not eager to dismantle large banks and did not see how proprietary trading contributed to the crisis — those ideas had support from White House economists like Christina Romer and Austan Goolsbee of the Council of Economic Advisers and Jared Bernstein in Vice President Joe Biden's office. Volcker was never really persona non grata; he's friendly with Biden, and Goolsbee says Volcker spoke "extensively and repeatedly" with all the key players — including Obama. Still, White House officials were increasingly frustrated that they weren't getting credit for going after Wall Street. "It came up in every meeting: This bank stuff is killing us and killing us," a Treasury official told TIME.

The political aides were eager to adopt a more populist tone, urging Treasury to give them something they could use. The bank tax was already in the works, but after Volcker made his case at a White House meeting in October, the rest of the Administration started shifting his way. Giant firms like Goldman Sachs were raking in record profits, and financiers ranging from British central banker Mervyn King to former Citigroup chairman John Reed were endorsing the Volcker rule. (See the worst business deals of 2009.)

By late December, Obama's entire economic team agreed to support the rule, along with limits on the size and scope of banks that go beyond the amendment Kanjorski drew up. Geithner would have preferred to limit risk-taking through tougher rules on leverage and capital — and he's still planning a push on that front — but in an election year, it was easy to see the value of having Volcker inside the tent. "The narrative is changing," Warren says. "In 2010, Congress will have a basic choice between taking the side of banks and taking the side of families."

The question is: Does the new populism make reform more or less likely?

Fight or Fix?
"Your bosses are sociopaths! A bunch of Ted Bundys in $10,000 suits!" The words were hurled by an unnamed Democratic Congressman at a bank lobbyist who must also remain anonymous. Suffice it to say the lobbyist is getting used to hostile greetings. "We get it: we're al-Qaeda, and nobody wants to be seen with us," he says. "Obviously, we're going to take some abuse in 2010." Like most bank lobbyists, he says he supports financial reform — as long as it doesn't include a consumer agency or a bunch of other provisions that Obama supports — but that hasn't stopped his industry from spending millions of dollars to kill it. What's interesting is that now, for the first time, the lobbyist thinks reform is going to stall. "I'm not sure I see the path anymore," he says. (See 10 things that have and haven't changed during Obama's first year.)

The problem, as usual, is the Senate — and, in an election year, the calendar. Republicans are already suggesting that Obama's belated push for the Volcker rule and other add-ons will require new hearings and more delay, and that its line-in-the-sand approach to the consumer agency is a formula for gridlock. Meanwhile, in the post-Massachusetts political climate — and with so much industry cash sloshing around in Washington — centrist Democrats seem to fear getting tagged as Obama liberals more than they fear getting tagged as Wall Street water carriers. And the White House would rather see reform blocked by Republican recalcitrance it can exploit at the polls than watch another round of interminable horse-trading that will ultimately be blamed on Obama.

This is not to say the White House wants an issue rather than a bill. It wants both, especially if health care dies and leaves Democrats short on achievements to brag about in 2010. It's simply decided that the most plausible path to a bill is to warn the public that the financial system is still a ticking bomb, and to try to make opposition to strong reform tantamount to support for the terrorists in fancy suits. The problem is that on an issue this complex, with so many contentious provisions and alternative proposals floating around, naysayers are always going to be able to find a populist excuse to say nay. For example, some in both parties have turned to Fed-bashing, trying to strip the agency's regulatory powers and opposing Chairman Ben Bernanke's nomination for a second term. Who knows? In 2010, "Bailout Ben" could be just as potent a populist issue as "financial reform."

Financial reform, like health care reform, is truly complex. It's hard to explain controversies over pre-emption or end users or proprietary trading; as another Wall Street lobbyist puts it, "Americans don't care whether Morgan Stanley keeps its prop desk." Obama knows he has little chance to transform the system if regulatory reform gets bogged down over health-care-style intricacies. The good news for Obama is that nobody claims our financial oversight is the best in the world. He may have a chance for reform if he can boil it down to one simple question: yes or no.

Read "Is Obama's Financial-Reform Plan Bold Enough?"

See the best pictures of 2009.

Oct 30, 2009

BBC - Fugitive Thai banker faces trial

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A fugitive Thai banker has lost a 13-year extradition battle and has been put on a plane back to Thailand from Vancouver, Canada.

The Thai authorities accuse Rakesh Saxena of defrauding more than $80m (£48m) from the Bangkok Bank of Commerce - something he denies.

The bank's collapse in 1996, under the weight of bad loans, exposed regulatory failures in the Thai banking system.

Thai officials say the collapse helped spark the 1997 Asian financial crisis.

Mr Saxena has argued that he would be harmed if he returned to Thailand and that he would not receive a fair trial.

But when his lawyer, Amandeep Singh, and his mother, Amrit Sarup, left Vancouver Airport where Mr Saxena was put on a plane, Mr Singh described his client as confident.

Many charges?

"He has chosen not to pursue any more legal challenges here, and ... he'll pursue his legal case in Thailand. He's very confident," Mr Singh told AP Television News.

"He's in good spirits when I spoke to him last, and we will keep abreast of his case in Thailand."

The fugitive is expected to land in Bangkok late on Friday after taking a Thursday afternoon flight from Vancouver to China, and then from Beijing to Thailand, Bangkok.

Thai authorities are reportedly dusting off dozens of case files relating to Mr Saxena's activities - a spokesman for the Office of Thailand's Attorney General told reporters that Mr Saxena has over 20 cases pending against him.

But Mr Singh argued that extradition law provided for trial on one charge only and said he had been assured by the Thai justice department that this would be the case.

Loss of confidence

Mr Saxena, who suffered a stroke last March and uses a wheelchair, was an adviser for the Bangkok Bank of Commerce when Thai authorities charged him in 1996 with setting up a series of phoney loans to siphon millions from the bank.

He fled Thailand and was arrested later that year in the British Columbia ski resort town of Whistler.

The collapse of the bank under $3bn in debts - partly accumulated by unsecured loans made to Thai politicians - created a loss of confidence in the Thai banking system that is blamed for helping to trigger Asia's economic crisis a year later.

Mr Saxena has maintained he is being made a scapegoat by well-connected executives of the bank and by financial regulators embarrassed by the scandal.

Oct 11, 2009

Small Banks Fail at Growing Rate, Straining F.D.I.C. - NYTimes.com

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By ERIC DASH

A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009.

In what has become a ritual, the Federal Deposit Insurance Corporation has swooped down on a handful of troubled lenders almost every Friday, seizing 98 since January alone and putting their assets into the hands of another bank.

While the parade of failures still represents a mere fraction of America’s small banks, it underscores a growing divide between them and large institutions like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are slowly growing stronger as the economy improves.

Burdened by worsening commercial real estate loans, many small banks’ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy.

Already, the bank failures are placing enormous strain on the F.D.I.C. and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red.

The prospect of more failures has led the F.D.I.C. to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses.

The initial wave of failures has also unsettled some communities, even though most of the troubled institutions have been bought by other banks rather than shuttered. While deposits are safe thanks to federal insurance, the new buyers often do not have the same ties to local businesses as the former owners.

In some cases, they tighten lending and make it harder for longtime customers to obtain loans or favorable terms. In other cases, managers of the new bank make other changes, like ending offers for high-interest certificates of deposit and calling in certain lines of credit. In the longer term, some new owners are likely to close branches of the bank they have acquired in order to cut costs.

“In the near term, bank failures can be painful,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation. But a bank that is teetering on collapse is not going to lend, she said, and “that’s not good for the economy.”

Regulators expect closures to ripple through hundreds of small banks over the next couple of years, especially in the Midwest and Southeast, where lenders have been hard hit by the recession.

These banks loaded their balance sheets with loans to home builders and other property developers to make up for lost business in credit card and mortgage lending that bigger competitors wrested away. They eased their lending standards during the boom years and made big bets on new housing developments, strip malls and office projects. Now, many of those deals are falling apart, and the lenders are scrambling to raise capital to cushion the losses.

“These banks were big enough that they could do loans that were fairly sizable,” said John R. Chrin, a former investment banker who is now an executive in residence at Lehigh University. “If they go bad, they are toast.”

The pace of bank failures is expected to accelerate in the coming months. There were just 25 bank failures in 2008 and just 10 in the five previous years. But in September alone, regulators took over 11 banks in nine states that were saddled with soured commercial real estate loans, from Corus Bank, a $7 billion construction lender based in Chicago that financed projects across the country, to Brickwell Community Bank in Woodbury, Minn., which had just a single branch and $72.6 million in assets.

Three others were taken over this month, including Warren Bank, a small lender just outside Detroit. Regulators swept into the offices on a recent Friday night after brokering a sale to Huntington Bancshares of Ohio, a regional bank with a big presence in Michigan.

By Saturday morning, Huntington had taken control of the bank’s computer systems, started reassuring depositors and placed vinyl signs with its name outside some of the Warren Bank branches.

Even though the process went smoothly, customers still found it unnerving.

“People expect companies to go out of business, not banks,” said James R. Fouts, the mayor of Warren, Mich., whose working class city of 140,000 has had a front row seat to the collapses of General Motors and Chrysler. “That is something that you expect to hear about in the Great Depression, and it further exacerbates the feeling that financially, the country is not yet in stable shape.”

The banking system may also be facing a long recovery. About $870 billion, or roughly half of the industry’s $1.8 trillion of commercial real estate loans, now sit on the balance sheets of small and medium-size banks like these, according to an analysis by Foresight Analytics, a research firm. For most of the banks, this represents the biggest and riskiest part of their loan portfolio, since they lack the trading streams and fee businesses of their larger rivals. And as a group, small banks have written off only a tiny percentage of the losses that analysts expect them to incur.

In fact, applying only the commercial real estate loss assumptions that federal regulators used during the stress tests for the big banks last spring, Foresight analysts estimated that as many as 581 small banks were at risk of collapse by 2011.

By contrast, commercial real estate losses put none of the nation’s 19 biggest banks, and only about 5 of the next 100 largest lenders, in jeopardy.

Even Citigroup, the biggest and most troubled of the banks, has a relatively small portion of its loans tied to commercial real estate and may begin to recover faster than other rivals.

Gerard Cassidy, a veteran banking analyst, said the problems call to mind the wave of small bank failures in Texas and New England two decades ago during the savings and loan crisis — only on a national scale.

Back then, regulators closed more than 700 lenders in those regions. Today, Mr. Cassidy projects that as many as 1,000 small banks will close over the next few years and that their losses will be more severe. “It’s a repeat on steroids,” he said.

But Ms. Bair said the savings-and-loan crisis far surpassed the current situation. “We aren’t anywhere close to that today, and based on current projections, I don’t think we will get near that pace,” she said.

Even if hundreds of banks collapsed, they would not threaten to bring the financial system to its knees.

Together, the 8,176 smallest banks control just 15 percent of the industry’s $13.3 trillion in assets. And thanks to the expansion of the government’s deposit insurance program, regulators also appear to have squelched the threat of bank runs that brought down IndyMac Bank and Washington Mutual last year.

Consumer deposits are now insured up to $250,000 per account, and the F.D.I.C. offers unlimited coverage on noninterest payroll accounts used by businesses.

“We’ve passed the panic stage,” said Frederick Cannon, the chief equity analyst at Keefe, Bruyette & Woods in New York.

What is more, community bank supporters say the bulk of their institutions will emerge from the crisis stronger. “The community banks are picking up market share,” said Camden R. Fine, the head of the Independent Community Bankers of America.

“People are angry with all the shenanigans on Wall Street,” he said. “They believe their money stays local when they put it in a community bank, rather than sent off to Never-Never land.”

Aug 5, 2009

Banks Slow to Modify Mortgages

By Renae Merle
Washington Post Staff Writer
Wednesday, August 5, 2009

Less than 10 percent of delinquent borrowers eligible for the Obama administration's foreclosure prevention program have received help so far, according to Treasury Department estimates released Tuesday, which also illustrated how unevenly the effort has been carried out.

Of the 2.7 million borrowers who have missed at least two mortgage payments, only 235,247 have received loan modifications since the $75 billion program was launched in March. Most of those modifications have been completed by just a few banks; other lenders have modified far fewer loans under the program.

"We're encouraged by the way the program is ramping up," said Michael Barr, Treasury's assistant secretary for financial institutions. But "we're disappointed in the performance of some of the servicers -- we think they could have ramped up faster . . . and we expect them to do more."

Under the program, J.P. Morgan Chase has modified 20 percent, or 79,304, of its borrowers who have missed at least two payments. Saxon Mortgage Services, which is owned by Morgan Stanley, has modified 25 percent of its eligible delinquent borrowers. Citigroup has modified 15 percent, or 27,571, of its delinquent borrowers.

But other large banks are lagging. Bank of America has modified 4 percent, or 27,985, of its delinquent borrowers. Wells Fargo has modified 6 percent, or 20,219.

This is the first progress report on the administration's Making Home Affordable program. Under the initiative, the government is offering subsidies to help lenders offset the cost of lowering mortgage payments for distressed borrowers.

Industry executives said they are reacting quickly to a complicated program. It took time, for example, to develop a protocol for judging when a borrower who has not missed any mortgage payments should qualify for the program, they said. The data also do not reflect modifications that banks have made outside of the government initiative. Wells Fargo said that it had completed more than 220,000 modifications this year besides the 20,000 counted under President Obama's program.

"It would be false or unfair to paint Wells Fargo as if [the government program] was the only thing we were doing," said Mike Heid, co-president of Wells Fargo Home Mortgage.

Bank of America has doubled the number of employees working on loan-modification efforts since last year, the company said in a statement. "Despite our aggressive efforts to find solutions for homeowners in default, we must improve our processes for reaching those in need," said Barbara J. Desoer, president of Bank of America Home Loans and Insurance.

But part of the problem is that there is a lot of confusion, even within some of the banks, about what kind of help is available to troubled borrowers. Lisa Harris of Lorton requested a loan modification from Bank of America earlier this year after her husband's work hours were cut and her family incurred medical bills. Harris said the bank offered her in June a modification outside the federal program that would lower her payments by about $250 a month.

She declined the deal and asked for a modification under the federal program that would lower her payments by about $1,000 a month. But Bank of America refused, saying her loan was not covered by the initiative. "Servicer participation in this program is voluntary," according to a June letter Harris received from the company's loan modification department. The bank "is not actively participating in this program."

Bank of America said that Harris received the letter by mistake and that she would qualify for a modification under the federal program. The company is reviewing its records to make sure no similar letters exist, a company spokesman said. "It was very frustrating," Harris said. "At all levels at Bank of America, they were wrong and not coming through. It's just unbelievable."

Banks have been facing increasing pressure to speed up implementation of the program, and the administration set a goal last week of more than doubling the number of borrowers who will receive help, to 500,000, by Nov. 1. Some Democrats in Congress are threatening to revive legislation allowing bankruptcy judges to modify the mortgages of troubled borrowers, known as cramdowns, if lenders don't do more to prevent foreclosures.

The results of the program so far are disappointing, said Senate Majority Whip Richard J. Durbin (D-Ill.), who has led two previous attempts to pass legislation to allow loan modification in bankruptcy proceedings.

"I think it's further evidence that voluntary programs have not succeeded. We need to create some deadlines" for these lenders, Durbin said. "This mortgage foreclosure crisis will not to come to an end until we have a more aggressive approach than we have seen up to this point."

Bank Regulators Resist Reform

By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Wednesday, August 5, 2009

The nation's banking regulators are defying pressure from the Obama administration to line up in support of key proposed reforms, testifying before Congress on Tuesday that elements of the plan would actually weaken oversight of the financial industry.

Treasury Secretary Timothy F. Geithner summoned the heads of half a dozen agencies for a caustic scolding Friday and told them they were interfering unacceptably in a political process, according to people familiar with the meeting.

The warning, however, had no discernible impact on testimony Tuesday, as four of the regulators who were reprimanded told the Senate Banking Committee they had particular concerns about a centerpiece of the plan, the proposed creation of a new agency to protect consumers of bank products, including mortgages and credit cards.

The resistance comes as progress has stalled on other key administration initiatives, notably climate change and health-care reform. Organized opposition has fostered growing public skepticism, undermining the administration's prospects.

While Republicans on the banking committee welcomed the regulators' dissent, leading congressional Democrats said the basic elements of financial reform command a much broader consensus than the embattled initiatives. These Democrats said they remained confident they would pass a comprehensive regulatory bill by year's end.

"For someone who's involved in health care and this, this is very different," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Banking Committee, and also a leading player on health care. "We remain in very good shape" on regulatory reform.

Working Over Recess

Democrats plan to begin writing legislation during the August recess, working from hundreds of pages of polished drafts the administration has sent to guide the process.

The broad outlines of the plan remain stable after months of hearings -- Dodd said his committee has held 28 hearings on the subject -- and increasingly heated lobbying by industry and consumer groups. Democrats want to give the government new power to oversee large financial companies and important markets, and to shut down troubled firms in an orderly fashion. They want to create a consumer protection agency, removing that responsibility from banking regulators. And they want to rein in Wall Street, including by placing limits on bonuses and restricting investments made with borrowed money.

"These things are going to happen," said Steven Adamske, a spokesman for Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "It's complicated. It's not easy to do, but we are trudging through it."

The idea of a new agency to protect consumers has proved particularly popular on Capitol Hill, forcing some critics to drop their outright opposition and instead press for its powers to be circumscribed. The heads of the regulatory agencies argued Tuesday that the new agency should write rules, but that banking regulators should continue to ensure that companies comply with those rules, and punish those that do not.

Enforcement of consumer protection laws "should stay with the bank regulators, where it works well," said John Dugan, head of the Office of the Comptroller of the Currency.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., and John E. Bowman, acting head of the Office of Thrift Supervision, also argued that banking regulators should retain enforcement powers. Federal Reserve Governor Daniel K. Tarullo declined to take a position, but senior Fed officials have said they want to retain that power, too.

New Dedication

Regulators, who under the proposals would maintain responsibility for bank health, argue that protecting consumers is a vital aspect of that job. While acknowledging failures in recent years, the agency officials argue that they are newly committed to consumer protection.

Administration officials have dismissed these arguments, saying that the record of failing to protect consumers, ensure the health of banks and prevent the financial crisis speaks for itself. Some legislators were equally dismissive.

Sen. Charles E. Schumer (D-N.Y.) said the regulators' arguments were motivated by "turf, turf, turf."

Republicans, by contrast, celebrated the regulators' concerns as evidence of independent opposition to the administration's plan.

The ranking Republican, Richard Shelby of Alabama, asked each witness to affirm that their testimony "was not in any way influenced by Secretary Geithner's tirade against you the other day?"

An administration official expressed few concerns about the debate on Capitol Hill.

"In the scheme of lawmaking, we're doing quite well," said Michael S. Barr, the Treasury Department's assistant secretary for financial institutions. Barr also offered a milder account of the Friday meeting. "We were having a conversation," he said. "We told them, 'As each of you pursue your own points of view, let's not lose sight' " of the broader goal of achieving financial reform.

Another person familiar with Geithner's remarks said he warned that regulators were impeding the progress by sniping at details.

The hour-long meeting at the Treasury included the four regulators who testified as well as Fed Chairman Ben S. Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Gary Gensler, chairman of the Commodity Futures Trading Commission. Geithner's confrontation with the regulators was first reported by the Wall Street Journal.

Jul 31, 2009

Bankers' Bonuses Beat Earnings as Industry Imploded

By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, July 31, 2009

NEW YORK, July 30 -- The nation's nine largest banks handed out $32.6 billion in bonuses last year even as they ran up more than $81 billion in losses and accepted billions of dollars in emergency federal aid, New York Attorney General Andrew M. Cuomo says in a report released Thursday.

Cuomo's investigation into pay practices at Wall Street's largest firms found that nearly 4,800 executives and other employees were each awarded at least $1 million. Of those, more than 900 worked for Bank of America and Citigroup, which have been among the largest recipients of government bailout funds.

This latest report about Wall Street bonuses turned up the heat on lawmakers and regulators, who have been weighing how to rein in compensation practices that banking executives themselves admit contributed to the worst financial crisis in decades. The House is set to vote Friday on legislation that would give regulators authority to prohibit pay practices that they deem inappropriate and grant shareholders the right to cast non-binding votes on executive compensation.

Shortly after Cuomo released his findings, Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, announced a hearing to examine pay practices, particularly at companies rescued by the federal government.

"A few months ago, they were facing bankruptcy. Then, after being bailed out, they're giving huge bonuses," Towns said. "I think the American people need some answers. With the economy being the way it is, and people suffering . . . how do you still do that?"

Facing the prospect of greater government oversight, some of the biggest banks have been taking steps since late last year to restructure pay incentives as a way of keeping Washington at bay while avoiding some of the business practices that led to the financial sector's tremendous losses.

Several firms have adopted a clawback policy that allows them to reclaim bonuses if corporate or individual business decisions turn out to be costly or improper. Other firms have extended the number of years that employees have to wait before cashing in on stock awards. Still others are discussing ways to further link compensation to long-term performance.

But some prominent pay experts and investor groups question whether the measures go far enough or if any of the more ambitious proposals will ever be implemented.

"The details of design in many cases still fall short of what is necessary," said Lucian Bebchuk, a Harvard law professor who has met with Obama administration officials to discuss pay principles. "There is substantial distance we need to go before we have effective tying of pay with long-term results."

Lawmakers in Washington also are skeptical and are moving ahead with legislation that would tighten restrictions on pay.

"If I thought they were enough, why would we pass the bill?" said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, who sponsored the legislation. He said the restrictions should be uniform across companies, adding that he doubted firms would be restructuring pay practices if Congress wasn't moving ahead with legislation.

The bill embodies broad compensation principles similar to those outlined last month by Treasury Secretary Timothy F. Geithner, and its adoption would represent a victory for the Obama administration. The Senate is expected to take up the measure after the August recess.

While some in Congress and the administration have expressed cautious optimism that some banks were taking steps in the right direction, Cuomo's findings did little to boost confidence.

"It's window dressing," Towns said. "It's all basically rhetoric. They're not doing it. When it comes down to final analysis, it's not happening."

According to Cuomo's report, Citigroup and Merrill Lynch each lost more than $27 billion last year but paid out $5.3 billion and $3.6 billion in bonuses, respectively. Together, they have received government bailout funds from the Troubled Assets Relief Program totaling $55 billion.

Three other firms -- Goldman Sachs, Morgan Stanley and J.P. Morgan Chase -- were faulted for each awarding bonuses that totaled much more than their respective 2008 earnings. Goldman made $2.3 billion and paid out $4.8 billion in bonuses. Morgan Stanley earned $1.7 billion and paid $4.5 billion in bonuses. J.P. Morgan Chase made $5.6 billion and paid $8.7 billion in bonuses, the report says. Those firms recently returned their government funds, a combined $45 billion.

The report, titled "No Rhyme or Reason: The 'Heads I Win, Tails You Lose' Bank Bonus Culture," looked at bonuses and earnings at the nine large banks that were the first to receive government funds last year under TARP. Cuomo says a review going back six years shows that pay at Wall Street firms has become "unmoored" from their financial performance.

"When the banks did well, their employees were paid well," he says in the report. "When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well."

As an example, Cuomo cited pay practices at Merrill Lynch, which he accused of abandoning any effort to link pay to performance. Instead the investment bank, dragged down early in the financial crisis by bad investment decisions, set bonuses based on what it expected competitors to award. Merrill's losses in 2007 and 2008 erased all of its earnings in the preceding four boom years, evidence that pay practices were based on short-term profits on risky bets that later evaporated, Cuomo said.

Representatives of Bank of America, which earlier this year acquired Merrill Lynch, declined to comment. Other banks named in the report also declined to comment on it or did not return messages.

Wall Street firms have begun taking some steps to try to ward off criticisms, which have rained in from President Obama on down. Late last year, for example, Goldman Sachs increased the holding period for restricted stock awards for all employees from three years to four. Meanwhile, Morgan Stanley introduced a clawback provision that would allow it to roll back a portion of year-end bonuses awarded to traders and other employees if they are deemed to have engaged in activities that prove detrimental to the company, such as triggering major losses or harming its reputation. The clawback can reach as far back as three years. Morgan Stanley's Swiss rivals, UBS and Credit Suisse, have adopted clawbacks.

Some experts who have studied pay practices are reserving judgment.

"They all depend upon implementation by directors," said Stephen M. Davis, a fellow at Yale University's center for corporate governance. "And do we have the right directors installed at these companies? Are they sufficiently independent to put these practices into tough practice? Or will they be more lenient as time goes on?"

Goldman Sachs said it has had a policy that allows it to claw back bonuses of employees who cause significant harm to the firm. But a company official declined to say whether the clawback has ever been triggered.

Among the more hotly debated changes in pay practices are plans to shift compensation from bonuses into higher salaries. Morgan Stanley, Citigroup and J.P. Morgan Chase, along with several foreign competitors, all have carried out or informed employees of plans to increase salaries for many of them. The banks say these raises will not increase total annual compensation. Putting less emphasis on bonuses, some banks argue, would discourage excessive risk-taking. Some executives, however, acknowledged that they are hiking salaries for competitive reasons after rivals awarded pay raises to employees.

Nell Minow, a co-founder of the Corporate Library, said these steps run counter to the efforts banks should be making to tie pay more closely to performance. "Whether you're awarding new stock options to make up for underwater options or raising cash compensation to compensate for more risk-based bonuses, all of that completely undermines the legitimacy of any of the reform efforts," she said.

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/30/AR2009073001581.html

Jul 18, 2009

Rescued Banks Post Multibillion-Dollar Profits

By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, July 18, 2009

The huge profits reported this week by some of the nation's largest banks showed that the government is succeeding in its rescue of the financial industry, but the details of those earnings reports made it clear that the broader economy is not seeing the benefits.

Bank of America and Citigroup yesterday became the latest megabanks to report multibillion-dollar profits in the second quarter, joining J.P. Morgan Chase and Goldman Sachs. The four banks together earned $13.6 billion only half a year after they lost a combined $20.8 billion.

Washington once celebrated such profits as evidence of economic strength, but the current round of earnings has instead become a political problem.

Simmering public anger over the pay practices of large financial companies has been fanned by the news that banks rescued so recently are now profiting so massively, particularly because trillions of dollars worth of federal aid has yet to revive lending, a critical step toward economic recovery.

The Obama administration moved yesterday to harness that anger in the service of its proposal to reform financial regulations.

The president's chief economic adviser, Lawrence H. Summers, said after a speech at the Petersen Institute for International Economics that the profits were made possible by "the extraordinary public support provided by the federal government." While he welcomed the performance as "a positive indicator for the economy," Summers said that the government still needs to reform financial regulations to prevent companies from engaging in the kinds of excesses that produced the crisis.

"No one should be confused about the extent to which the public sector has provided a foundation for financial recovery," Summers said. "And in that context, it is the obligation of the public sector to insist that reforms be put in place so that the mistakes of the past are not repeated."

The earnings reports also showed that the recovery is incomplete. The core business of banking -- lending money to companies and consumers -- remains deeply troubled. The number of borrowers defaulting on existing loans continued to rise rapidly, and the banks continued to respond by shrinking the total volume of their lending.

There are few signs that it is getting easier for Americans to borrow money.

Administration officials and financial experts said that the profits were a necessary step forward: The banks led the economy into recession, and now they must lead the recovery.

"It's a prerequisite for that augmented lending to have the restoration of health, which seems to be happening," said Douglas J. Elliott, a financial expert at the Brookings Institution.

But Elliott and others noted that the problem cannot be solved by the banks alone. Before the recession, about 40 percent of lending was funded by investors. Lenders went to Wall Street to raise the money they provided to borrowers. But it has been two years since investors have been willing to provide significant amounts of money, a point underscored this week by the death throes of small-business lender CIT Group, which depended on those capital markets and now faces the prospect of bankruptcy.

Experts say that lending cannot recover completely until investors start providing money again.

Bank of America posted earnings of $3.22 billion for the second quarter, or 33 cents a share. That was down from $3.41 billion (72 cents) in the period last year, but it represented a large turnaround from the bank's struggles in the fall. Citigroup reported a $4.3 billion profit, or 49 cents a share, reversing a loss during the comparable period last year of $2.5 billion (55 cents). As with reports earlier this week from Goldman Sachs and J.P. Morgan Chase, the earnings exceeded analyst predictions by a wide margin.

Despite offering emergency aid to the firms, the government gets little direct benefit from their profits, which go mostly to employees and common shareholders. The government will soon hold common shares in Citigroup, which could increase in value, and it still holds preferred shares in Bank of America, which do not fluctuate in value but do pay a regular dividend. Officials have said the investments were intentionally structured to produce modest returns because the real goal was increased lending.

The two companies reporting yesterday earned large sums from the sale of business units and other investments. Bank of America made $5.3 billion by selling part of an investment in China Construction Bank, and $3.8 billion from the sale of a merchant-processing business. Citigroup booked a $6.7 billion gain on the sale of a majority interest in its Smith Barney brokerage.

The companies also benefited from a revival in the investment-banking business. The value of investments started to rebound, and investors started to spend money again. The big banks all benefited from the absence of former rivals such as Lehman Brothers and Bear Stearns, but the strongest banks benefited the most. Goldman Sachs and J.P. Morgan Chase also were able to draw business away from Citigroup and Bank of America, according to financial analysts and executives.

The revival, however, was a product of federal intervention as much as economic recovery. The Federal Reserve provided all the banks with vast sums of cheap money, and the Federal Deposit Insurance Corp. helped banks to borrow from private investors.

"The reason we have strong capital markets is because the government is guaranteeing everyone's liquidity," said Paul Miller, a financial analyst at FBR Capital Markets.

Citigroup has required the most help. The government has invested a total of $45 billion, guaranteed to limit the company's losses on a huge portfolio of troubled loans, and allowed the company to repay the government with common stock, rather than requiring the regular dividend payments that other banks are required to make.

Bank of America is a close second. The company also got a $45 billion investment and a government guarantee to limit losses on troubled loans.

J.P. Morgan Chase last month repaid $25 billion in federal aid, and Goldman Sachs repaid $10 billion, but both companies continue to rely on the emergency borrowing programs.

The aid has allowed the banks to survive despite suffering major losses on loans made during the economic boom.

Bank of America said it had abandoned efforts during the second quarter to collect on almost 14 percent of its outstanding credit card loans, almost doubling its loss rate during the period last year. Its loss rate on mortgage loans increased more than sevenfold. Unlike in past downturns, the rate of defaults has continued to increase more rapidly than unemployment, as many Americans who still have jobs still prove unable to repay loans.

Bank of America chief executive Kenneth D. Lewis said he does not expect the numbers to improve until next year.

"We have to get through the next few quarters," Lewis told financial analysts on a conference call yesterday.

Government officials have repeatedly said that the aid programs are designed to spark new lending, but experts said that was never a realistic goal.

"This is all about survival at this point. You look at all these balance sheets, they're shrinking. Nobody's really adding liquidity to the system," Miller said. "It's going to take a while for this system to heal itself. There's a lot of damage out there, and it's going to take a while to get through it."