Vulture Nests Along
~ PART I ~
Sightings from The Catbird Seat
~ o ~
“Capital is only the fruit of labor, and could never have existed
if labor had not first existed.”
– Abraham Lincoln, Dec. 3, 1861
Enter The Vulture
In ordinary market times,
Bulls and bears define the culture;
But when panic grips The Street,
There appears the hungry vulture.
Fear calls vultures from their nest,
Loss of faith keeps them aloft,
Past excess suits this beasty best,
And makes its victims fat and soft.
As sales slow, as profits droop,
As corporations bleed red ink,
The vulture sets itself to swoop
And eyes weak players on the brink.
The bankruptcies that others flee,
The companies whose reps are soiled,
Enron, WorldCom, Global Crossing,
The vulture likes its meals spoiled.
It feeds on stocks, it feeds on bonds,
It thrives on busts in real estate,
While others weep, it licks its lips,
There’s nothing that this bird ain’t ate.
But don’t malign these scavengers,
Begrudge them their gone rotten picking;
The losers that they feed upon
Left unpicked would the healthy sicken.
For ugly though a vulture be,
Even esthetes must confess,
In any sound ecology,
Something’s gotta clean the mess.
– Michael Silverstein, The Wall Street Poet
The Wall Street Poet
September 6, 2009
Back to Business
Wall Street Pursues Profit in Bundles of Life
By JENNY ANDERSON
After the mortgage business imploded last year, Wall Street investment banks began
searching for another big idea to make money. They think they may have found one.
The bankers plan to buy “life settlements,” life insurance policies that ill and elderly
people sell for cash — $400,000 for a $1 million policy, say, depending on the life
expectancy of the insured person. Then they plan to “securitize” these policies, in Wall
Street jargon, by packaging hundreds or thousands together into bonds. They will
then resell those bonds to investors, like big pension funds, who will receive the
payouts when people with the insurance die.
The earlier the policyholder dies, the bigger the return — though if people live longer
than expected, investors could get poor returns or even lose money.
Either way, Wall Street would profit by pocketing sizable fees for creating the
bonds, reselling them and subsequently trading them. But some who have studied
life settlements warn that insurers might have to raise premiums in the short term if
they end up having to pay out more death claims than they had anticipated.
The idea is still in the planning stages. But already “our phones have been ringing off
the hook with inquiries,” says Kathleen Tillwitz, a senior vice president at DBRS, which
gives risk ratings to investments and is reviewing nine proposals for life-insurance
securitizations from private investors and financial firms, including Credit Suisse.
“We’re hoping to get a herd stampeding after the first offering,” said one investment
banker not authorized to speak to the news media.
In the aftermath of the financial meltdown, exotic investments dreamed up by Wall
Street got much of the blame. It was not just subprime mortgage securities but an array
of products — credit-default swaps, structured investment vehicles, collateralized
debt obligations — that proved far riskier than anticipated.
The debacle gave financial wizardry a bad name generally, but not on Wall Street.
Even as Washington debates increased financial regulation, bankers are scurrying to
concoct new products.
In addition to securitizing life settlements, for example, some banks are repackaging
their money-losing securities into higher-rated ones, called re-remics (re-securitization
of real estate mortgage investment conduits). Morgan Stanley says at least $30 billion
in residential re-remics have been done this year.
Financial innovation can be good, of course, by lowering the cost of borrowing for
everyone, giving consumers more investment choices and, more broadly, by helping the
economy to grow. And the proponents of securitizing life settlements say it would
benefit people who want to cash out their policies while they are alive.
But some are dismayed by Wall Street’s quick return to its old ways, chasing profits
with complicated new products.
“It’s bittersweet,” said James D. Cox, a professor of corporate and securities law at
Duke University. “The sweet part is there are investors interested in exotic
products created by underwriters who make large fees and rating agencies who
then get paid to confer ratings. The bitter part is it’s a return to the good old
Indeed, what is good for Wall Street could be bad for the insurance industry, and
perhaps for customers, too. That is because policyholders often let their life
insurance lapse before they die, for a variety of reasons — their children grow up and
no longer need the financial protection, or the premiums become too expensive. When
that happens, the insurer does not have to make a payout.
But if a policy is purchased and packaged into a security, investors will keep paying the
premiums that might have been abandoned; as a result, more policies will stay in force,
ensuring more payouts over time and less money for the insurance companies.
“When they set their premiums they were basing them on assumptions that were
wrong,” said Neil A. Doherty, a professor at Wharton who has studied life settlements.
Indeed, Mr. Doherty says that in reaction to widespread securitization, insurers most
likely would have to raise the premiums on new life policies.
Critics of life settlements believe “this defeats the idea of what life insurance is
supposed to be,” said Steven Weisbart, senior vice president and chief economist for
the Insurance Information Institute, a trade group. “It’s not an investment product, a
Undeterred, Wall Street is racing ahead for a simple reason: With $26 trillion of life
insurance policies in force in the United States, the market could be huge.
Not all policyholders would be interested in selling their policies, of course. And
investors are not interested in healthy people’s policies because they would have to pay
those premiums for too long, reducing profits on the investment.
But even if a small fraction of policy holders do sell them, some in the industry predict
the market could reach $500 billion. That would help Wall Street offset the loss of
revenue from the collapse of the United States residential mortgage securities market,
to $169 billion so far this year from a peak of $941 billion in 2005, according to
Dealogic, a firm that tracks financial data.
Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is
in effect building a financial assembly line to buy large numbers of life insurance
policies, package and resell them — just as Wall Street firms did with subprime
The bank bought a company that originates life settlements, and it has set up a group
dedicated to structuring deals and one to sell the products.
Goldman Sachs has developed a tradable index of life settlements, enabling
investors to bet on whether people will live longer than expected or die sooner
than planned. The index is similar to tradable stock market indices that allow investors
to bet on the overall direction of the market without buying stocks.
Spokesmen for Credit Suisse and Goldman Sachs declined to comment.
If Wall Street succeeds in securitizing life insurance policies, it would take a
controversial business — the buying and selling of policies — that has been around on
a smaller scale for a couple of decades and potentially increase it drastically.
Defenders of life settlements argue that creating a market to allow the ill or elderly to
sell their policies for cash is a public service. Insurance companies, they note, offer only
a “cash surrender value,” typically at a small fraction of the death benefit, when a
policyholder wants to cash out, even after paying large premiums for many years.
Enter life settlement companies. Depending on various factors, they will pay 20 to 200
percent more than the surrender value an insurer would pay.
But the industry has been plagued by fraud complaints. State insurance regulators,
hamstrung by a patchwork of laws and regulations, have criticized life settlement
brokers for coercing the ill and elderly to take out policies with the sole purpose
of selling them back to the brokers, called “stranger-owned life insurance.”
In 2006, while he was New York attorney general, Eliot Spitzer sued Coventry, one of
the largest life settlement companies, accusing it of engaging in bid-rigging with rivals
to keep down prices offered to people who wanted to sell their policies. The case
“Predators in the life settlement market have the motive, means and, if left
unchecked by legislators and regulators and by their own community, the
opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book
on life settlements, testified at a Senate Special Committee on Aging last April.
In addition to fraud, there is another potential risk for investors: that some people could
live far longer than expected.
It is not just a hypothetical risk. That is what happened in the 1980s, when new
treatments prolonged the life of AIDS patients. Investors who bought their policies on
the expectation that the most victims would die within two years ended up losing
It happened again last fall when companies that calculate life expectancy determined
that people were living longer.
The challenge for Wall Street is to make securitized life insurance policies more
predictable — and, ideally, safer — investments. And for any securitized bond to
interest big investors, a seal of approval is needed from a credit rating agency that
measures the level of risk.
In many ways, banks are seeking to replicate the model of subprime mortgage
securities, which became popular after ratings agencies bestowed on them the comfort
of a top-tier, triple-A rating. An individual mortgage to a home buyer with poor credit
might have been considered risky, because of the possibility of default; but packaging
lots of mortgages together limited risk, the theory went, because it was unlikely many
would default at the same time.
While that idea was, in retrospect, badly flawed, Wall Street is convinced that it can
solve the risk riddle with securitized life settlement policies.
That is why bankers from Credit Suisse and Goldman Sachs have been visiting
DBRS, a little known rating agency in lower Manhattan.
In early 2008, the firm published criteria for ways to securitize a life settlements portfolio
so that the risks were minimized.
Interest poured in. Hedge funds that have acquired life settlements, for example, are
keen to buy and sell policies more easily, so they can cash out both on investments that
are losing money and on ones that are profitable. Wall Street banks, beaten down by
the financial crisis, are looking to get their securitization machines humming again.
Ms. Tillwitz, an executive overseeing the project for DBRS, said the firm spent nine
months getting comfortable with the myriad risks associated with rating a pool of life
Could a way be found to protect against possible fraud by agents buying insurance
policies and reselling them — to avoid problems like those in the subprime mortgage
market, where some brokers made fraudulent loans that ended up in packages of
securities sold to investors? How could investors be assured that the policies were
legitimately acquired, so that the payouts would not be disputed when the original
And how could they make sure that policies being bought were legally sellable, given
that some states prohibit the sale of policies until they have been in force two to five
Spreading the Risk
To help understand how to manage these risks, Ms. Tillwitz and her colleague Jan
Buckler — a mathematics whiz with a Ph.D. in nuclear engineering — traveled the world
visiting firms that handle life settlements. “We do not want to rate a deal that blows up,”
Ms. Tillwitz said.
The solution? A bond made up of life settlements would ideally have policies from
people with a range of diseases — leukemia, lung cancer, heart disease, breast cancer,
diabetes, Alzheimer’s. That is because if too many people with leukemia are in the
securitization portfolio, and a cure is developed, the value of the bond would plummet.
As an added precaution, DBRS would run background checks on all issuers. Also, a
range of quality of life insurers would have to be included.
To test how different mixes of policies would perform, Mr. Buckler has run computer
simulations to show what would happen to returns if people lived significantly longer
But even with a math whiz calculating every possibility, some risks may not be apparent
until after the fact. How can a computer accurately predict what would happen if health
reform passed, for example, and better care for a large number of Americans meant
that people generally started living longer? Or if a magic-bullet cure for all types of
cancer was developed?
If the computer models were wrong, investors could lose a lot of money.
As unlikely as those assumptions may seem, that is effectively what happened with
many securitized subprime loans that were given triple-A ratings.
Investment banks that sold these securities sought to lower the risks by, among other
things, packaging mortgages from different regions and with differing credit levels of the
borrowers. They thought that if house prices dropped in one region — say Florida,
causing widespread defaults in that part of the portfolio — it was highly unlikely that
they would fall at the same time in, say, California.
Indeed, economists noted that historically, housing prices had fallen regionally but
never nationwide. When they did fall nationwide, investors lost hundreds of billions of
Both Standard & Poor’s and Moody’s, which gave out many triple-A ratings and were
burned by that experience, are approaching life settlements with greater caution.
Standard & Poor’s, which rated a similar deal called Dignity Partners in the 1990s,
declined to comment on its plans. Moody’s said it has been approached by financial
firms interested in securitizing life settlements, but has not yet seen a portfolio of
policies that meets its standards.
Despite the mortgage debacle, investors like Andrew Terrell are intrigued.
Mr. Terrell was the co-head of Bear Stearns’s longevity and mortality desk — which
traded unrated portfolios of life settlements — and later worked at Goldman Sachs’s
Institutional Life Companies, a venture that was introducing a trading platform for life
settlements. He thinks securitized life policies have big potential, explaining that
investors who want to spread their risks are constantly looking for new investments that
do not move in tandem with their other investments.
“It’s an interesting asset class because it’s less correlated to the rest of the market than
other asset classes,” Mr. Terrell said.
Some academics who have studied life settlement securitization agree it is a good idea.
One difference, they concur, is that death is not correlated to the rise and fall of
“These assets do not have risks that are difficult to estimate and they are not, for the
most part, exposed to broader economic risks,” said Joshua Coval, a professor of
finance at the Harvard Business School. “By pooling and tranching, you are not
amplifying systemic risks in the underlying assets.”
The insurance industry is girding for a fight. “Just as all mortgage providers have
been tarred by subprime mortgages, so too is the concern that all life insurance
companies would be tarred with the brush of subprime life insurance
settlements,” said Michael Lovendusky, vice president and associate general counsel
of the American Council of Life Insurers, a trade group that represents life insurance
And the industry may find allies in government. Among those expressing concern about
life settlements at the Senate committee hearing in April were insurance regulators from
Florida and Illinois, who argued that regulation was inadequate.
“The securitization of life settlements adds another element of possible risk to an
industry that is already in need of enhanced regulations, more transparency and
consumer safeguards,” said Senator Herb Kohl, the Democrat from Wisconsin who
is chairman of the Special Committee on Aging.
DBRS agrees on the need to be careful. “We want this market to flourish in a safe way,”
Ms. Tillwitz said.
* * *
Exhibit in CV05-00030 - U S Dept of Justice vs Harmon
December 22, 2008
Where'd the bailout money go?
Shhhh, it's a secret
By MATT APUZZO, Associated Press Writer Matt Apuzzo
WASHINGTON – It's something any bank would demand to know before handing out a
loan: Where's the money going?
But after receiving billions in aid from U.S. taxpayers, the nation's largest banks say
they can't track exactly how they're spending the money or they simply refuse to
"We've lent some of it. We've not lent some of it. We've not given any accounting of,
'Here's how we're doing it,'" said Thomas Kelly, a spokesman for JPMorgan Chase,
which received $25 billion in emergency bailout money. "We have not disclosed that
to the public. We're declining to."
The Associated Press contacted 21 banks that received at least $1 billion in
government money and asked four questions: How much has been spent? What was it
spent on? How much is being held in savings, and what's the plan for the rest?
None of the banks provided specific answers.
"We're not providing dollar-in, dollar-out tracking," said Barry Koling, a spokesman for
Atlanta, Ga.-based SunTrust Banks Inc., which got $3.5 billion in taxpayer dollars.
Some banks said they simply didn't know where the money was going.
"We manage our capital in its aggregate," said Regions Financial Corp. spokesman Tim
Deighton, who said the Birmingham, Ala.-based company is not tracking how it is
spending the $3.5 billion it received as part of the financial bailout.
The answers highlight the secrecy surrounding the Troubled Assets Relief Program,
which earmarked $700 billion — about the size of the Netherlands' economy — to help
rescue the financial industry. The Treasury Department has been using the money to
buy stock in U.S. banks, hoping that the sudden inflow of cash will get banks to start
There has been no accounting of how banks spend that money. Lawmakers summoned
bank executives to Capitol Hill last month and implored them to lend the money — not
to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But there is
no process in place to make sure that's happening and there are no
consequences for banks who don't comply.
"It is entirely appropriate for the American people to know how their taxpayer
dollars are being spent in private industry," said Elizabeth Warren, the top
congressional watchdog overseeing the financial bailout.
But, at least for now, there's no way for taxpayers to find that out.
Pressured by the Bush administration to approve the money quickly, Congress attached
nearly no strings on the $700 billion bailout in October. And the Treasury
Department, which doles out the money, never asked banks how it would be spent.
"Those are legitimate questions that should have been asked on Day One," said Rep.
Scott Garrett, R-N.J., a House Financial Services Committee member who opposed the
bailout as it was rushed through Congress. "Where is the money going to go to? How is
it going to be spent? When are we going to get a record on it?"
Nearly every bank AP questioned — including Citibank and Bank of America, two of
the largest recipients of bailout money — responded with generic public relations
statements explaining that the money was being used to strengthen balance sheets
and continue making loans to ease the credit crisis.
A few banks described company-specific programs, such as JPMorgan Chase's plan to
lend $5 billion to nonprofit and health care companies next year. Richard Becker, senior
vice president of Wisconsin-based Marshall & Ilsley Corp., said the $1.75 billion in
bailout money allowed the bank to temporarily stop foreclosing on homes.
But no bank provided even the most basic accounting for the federal money.
"We're choosing not to disclose that," said Kevin Heine, spokesman for Bank of New
York Mellon, which received about $3 billion.
Others said the money couldn't be tracked. Bob Denham, a spokesman for North
Carolina-based BB&T Corp., said the bailout money "doesn't have its own bucket." But
he said taxpayer money wasn't used in the bank's recent purchase of a Florida
insurance company. Asked how he could be sure, since the money wasn't being
tracked, Denham said the bank would have made that deal regardless.
Others, such as Morgan Stanley spokeswoman Carissa Ramirez, offered to discuss the
matter with reporters on condition of anonymity. When AP refused, Ramirez sent an e-mail saying: "We are going to decline to comment on your story."
Most banks wouldn't say why they were keeping the details secret.
"We're not sharing any other details. We're just not at this time," said Wendy Walker, a
spokeswoman for Dallas-based Comerica Inc., which received $2.25 billion from the
Heine, the New York Mellon Corp. spokesman who said he wouldn't share spending
specifics, added: "I just would prefer if you wouldn't say that we're not going to discuss
The banks which came closest to answering the questions were those, such as U.S.
Bancorp and Huntington Bancshares Inc., that only recently received the money and
have yet to spend it. But neither provided anything more than a generic summary of
how the money would be spent.
Lawmakers say they want to tighten restrictions on the remaining, yet-to-be-released
$350 billion block of bailout money before more cash is handed out. Treasury
Secretary Henry Paulson said the department is trying to step up its monitoring of
"What we've been doing here is moving, I think, with lightning speed to put necessary
programs in place, to develop them, implement them, and then we need to monitor
them while we're doing this," Paulson said at a recent forum in New York. "So we're
building this organization as we're going."
Warren, the congressional watchdog appointed by Democrats, said her oversight panel
will try to force the banks to say where they've spent the money.
"It would take a lot of nerve not to give answers," she said.
But Warren said she's surprised she even has to ask.
"If the appropriate restrictions were put on the money to begin with, if the
appropriate transparency was in place, then we wouldn't be in a position where
you're trying to call every recipient and get the basic information that should
already be in public documents," she said.
Garrett, the New Jersey congressman, said the nation might never get a clear answer
on where hundreds of billions of dollars went.
"A year or two ago, when we talked about spending $100 million for a bridge to
nowhere, that was considered a scandal," he said.
December 21, 2008
AP study finds $1.6B went to
bailed-out bank execs
By FRANK BASS and RITA BEAMISH, Associated Press
Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6
billion in salaries, bonuses, and other benefits last year, an Associated Press analysis
The rewards came even at banks where poor results last year foretold the economic
crisis that sent them to Washington for a government rescue. Some trimmed their
executive compensation due to lagging bank performance, but still forked over
multimillion-dollar executive pay packages.
Benefits included cash bonuses, stock options, personal use of company jets and
chauffeurs, home security, country club memberships and professional money
management, the AP review of federal securities documents found.
The total amount given to nearly 600 executives would cover bailout costs for many of
the 116 banks that have so far accepted tax dollars to boost their bottom lines.
Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount
to a bribe "to get them to do the jobs for which they are well paid in the first place....
The AP compiled total compensation based on annual reports that the banks file with
the Securities and Exchange Commission. The 116 banks have so far received $188
billion in taxpayer help. Among the findings:
_The average paid to each of the banks' top executives was $2.6 million in salary,
bonuses and benefits.
_Lloyd Blankfein, president and chief executive officer of Goldman Sachs, took home
nearly $54 million in compensation last year. The company's top five executives
received a total of $242 million.
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives.
They will work for their base salaries of $600,000, the company said. Facing increasing
concern by its own shareholders on executive payments, the company described its
pay plan last spring as essential to retain and motivate executives "whose efforts and
judgments are vital to our continued success, by setting their compensation at
appropriate and competitive levels." Goldman spokesman Ed Canaday declined to
comment beyond that written report.
The New York-based company on Dec. 16 reported its first quarterly loss since it went
public in 1999. It received $10 billion in taxpayer money on Oct. 28.
_Even where banks cut back on pay, some executives were left with seven- or eight-figure compensation that most people can only dream about. Richard D. Fairbank, the
chairman of Capital One Financial Corp., took a $1 million hit in compensation after
his company had a disappointing year, but still got $17 million in stock options. The
McLean, Va.-based company received $3.56 billion in bailout money on Nov. 14.
_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank
bosses with $83 million in earnings last year. Thain, a former chief operating officer for
Goldman Sachs, took the reins of the company in December 2007, avoiding the blame
for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he
earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in
Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.
The AP review comes amid sharp questions about the banks' commitment to the goals
of the Troubled Assets Relief Program (TARP), a law designed to buy bad mortgages
and other troubled assets. Last month, the Bush administration changed the program's
goals, instructing the Treasury Department to pump tax dollars directly into banks in a
bid to prevent wholesale economic collapse.
The program set restrictions on some executive compensation for participating banks,
but did not limit salaries and bonuses unless they had the effect of encouraging
excessive risk to the institution. Banks were barred from giving golden parachutes to
departing executives and deducting some executive pay for tax purposes.
Banks that got bailout funds also paid out millions for home security systems, private
chauffeured cars, and club dues. Some banks even paid for financial advisers. Wells
Fargo of San Francisco, which took $25 billion in taxpayer bailout money, gave its top
executives up to $20,000 each to pay personal financial planners.
At Bank of New York Mellon Corp., chief executive Robert P. Kelly's stipend for
financial planning services came to $66,748, on top of his $975,000 salary and $7.5
million bonus. His car and driver cost $178,879. Kelly also received $846,000 in
relocation expenses, including help selling his home in Pittsburgh and purchasing one
in Manhattan, the company said.
Goldman Sachs' tab for leased cars and drivers ran as high as $233,000 per
executive. The firm told its shareholders this year that financial counseling and
chauffeurs are important in giving executives more time to focus on their jobs.
JPMorgan Chase chairman James Dimon ran up a $211,182 private jet travel tab last
year when his family lived in Chicago and he was commuting to New York. The
company got $25 billion in bailout funds.
Banks cite security to justify personal use of company aircraft for some executives. But
Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many
locations more vulnerable than the nation's security-conscious commercial air terminals.
Sherman, a member of the House Financial Services Committee, said pay excesses
undermine development of good bank economic policies and promote an escalating
pay spiral among competing financial institutions — something particularly hard to take
when banks then ask for rescue money.
He wants them to come before Congress, like the automakers did, and spell out their
spending plans for bailout funds.
"The tougher we are on the executives that come to Washington, the fewer will come
for a bailout," he said.
On the Net:
SEC Filings & Forms: http://www.sec.gov
Emergency Economic Stabilization Act: http://www.treas.gov/initiatives/eesa/
October 9, 2008
Dow plunges 679 to fall to
lowest level in 5 years
By TIM PARADIS, AP
Stocks plunged in the final hour of trading Thursday, sending the Dow Jones industrial
average down 679 points — more than 7 percent — to its lowest level in five years after
a major credit ratings agency said it might cut its rating on General Motors Corp.
The Standard & Poor's 500 index also fell more than 7 percent.
The declines came on the one-year anniversary of the closing highs of the Dow and the
S&P. The Dow has lost 5,585 points, or 39.4 percent, since closing at 14,198 on Oct.
9, 2007. The S&P 500, meanwhile, is off 655 points, or 41.9 percent, since recording
its high of 1,565.15.
U.S. stock market paper losses totaled $872 billion Thursday and the value of shares
overall has tumbled a stunning $8.33 trillion since last year's high. That's based on
preliminary figures measured by the Dow Jones Wilshire 5000 Composite Index, which
tracks 5,000 U.S.-based companies' stocks and represents almost all stocks traded in
Thursday's sell-off came as Standard & Poor's Ratings Services put GM and its finance
affiliate GMAC LLC under review to see if its rating should be cut. GM has been
struggling with weak car sales in North America....
S&P also put Ford Motor Co. on credit watch negative. The ratings agency said that
GM and Ford have adequate liquidity now, but that could change in 2009.
GM led the Dow lower, falling $2.15, or 31 percent, to $4.76, while Ford fell 58 cents,
or 22 percent, to $2.08....
Investors across markets were mulling a plan being considered by the Bush
administration to invest in hobbled U.S. banks as a way to stabilize the financial
sector. The $700 billion rescue package signed into law last week allows the Treasury
Department to inject fresh capital into financial institutions and obtain ownership shares
Energy names were among the biggest decliners as the price of oil fell. Exxon Mobil
Corp. fell $9, or 12 percent, to $68, while Chevron Corp. fell $9.10, or 12 percent, to
Trading volume on the NYSE came to 2.04 billion shares.
In Asia, Japan's Nikkei 225 closed down 0.50 percent while the Hang Seng added 3.31
percent. In Europe, Britain's FTSE-100 fell 1.21 percent, Germany's DAX fell 2.53
percent, and France's CAC-40 declined 1.55 percent.
September 29, 2008
Dow plummets record 777
as financial rescue fails
By TIM PARADIS
The failure of the bailout package in Congress literally dropped jaws on Wall Street and
triggered a historic selloff — including a terrifying decline of nearly 500 points in mere
minutes as the vote took place, the closest thing to panic the stock market has seen in
The Dow Jones industrial average lost 777 points Monday, its biggest single-day fall
ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11,
2001, terrorist attacks.
As uncertainty gripped investors, the credit markets, which provide the day-to-day
lending that powers business in the United States, froze up even further.
At the New York Stock Exchange, traders watched with faces tense and mouths agape
as TV screens showed the House vote rejecting the Bush administration's $700 billion
plan to buy up bad debt and shore up the financial industry.
Activity on the trading floor became frenetic as the "sell" orders blew in. The selling was
so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.
The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion
across the market for the day, a first.
The Dow industrials, which were down 210 points at 1:30 p.m. EDT, nose-dived as
traders on Wall Street and investors across the country saw "no" votes piling up on live
TV feeds of the House vote.
By 1:42 p.m., the decline was 292 points. Then the bottom fell out. Within five minutes,
the index was down about 700 points as it became clear the bill was doomed.
"How could this have happened? Is there such a disconnect on Capitol Hill? This
becomes a problem because Wall Street is very uncomfortable with uncertainty," said
Gordon Charlop, managing director with Rosenblatt Securities.
"The bailout not going through sends a signal that Congress isn't willing to do their
part," he added....
Before trading even began came word that Wachovia Corp., one of the biggest banks
to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup
That followed the recent forced sale of Merrill Lynch & Co. and the failure of three
other huge banking companies — Bear Stearns Cos., Washington Mutual Inc. and
Lehman Brothers Holdings Inc., all of them felled by bad mortgage investments.
And it raised the question: Which banks are next, and how many? The Federal
Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter,
and the number has probably grown since.
Wall Street is contending with all of it against the backdrop of a credit market — where
bonds and loans are bought and sold — that is barely functioning because of fears that
anyone lending money will never be paid back.
More evidence could be found Monday in the Treasury's three-month bill, where
investors were stashing money, willing to accept the tiniest of returns simply to be sure
that their principal would survive. The yield on the three-month bill was 0.15 percent,
down from 0.87 percent and approaching zero, a level reached last week when fear
was also running high.
Analysts said the government needs to find a way to help restore confidence in the
"It's probably fair to say that we are not going to see any significant stability in the credit
markets or the stock market until we see some sort of rescue package passed," said
Fred Dickson, director of retail research for D.A. Davidson & Co.
The bailout bill failed 228-205 in the House, and Democratic leaders said the House
would reconvene Thursday in hopes of a quick vote on a revised bill.
"We need to put something back together that works," Treasury Secretary Henry
Paulson said. "We need it as soon as possible."
The Dow fell 777.68 points, just shy of 7 percent, to 10,365.45, its lowest close in nearly
three years. The decline also surpasses the record for the biggest decline during a
trading day — 721.56 at one point on Sept. 17, 2001, when the market reopened after
In percentage terms, it was only the 17th-biggest decline for the Dow, far less
severe than the 20-plus-percent drops seen on Black Monday in 1987 and before
the Great Depression.
Broader stock indicators also plummeted. The Standard & Poor's 500 index declined
106.62, or nearly 9 percent, to 1,106.39. It was the S&P's largest-ever point drop and its
biggest percentage loss since the week after the October 1987 crash.
The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or
6.7 percent, to 657.72.
A huge drop in oil prices was another sign of the economic chaos that investors fear.
Light, sweet crude fell $10.52 to settle at $96.36 on the New York Mercantile Exchange
as investors feared energy demand would continue to slide amid further economic
weakness. And gold, where investors flock when they need a relatively secure
investment, rose $23.20 to $911.70 on the Nymex....
The federal Office of Thrift Supervision, one of the government's banking regulators,
indicated that the market was overreacting to the House vote and that its fears
about the financial system are misplaced.
"There is an irrational financial panic taking place today, and we support and applaud
the continuing efforts of Secretary Paulson and congressional leadership to restore
liquidity and public confidence," John Reich, Director of the federal Office of Thrift
Supervision, said in a statement.
The plan would have placed caps on pay packages of top executives that accepted
help from the government, and included assurances the government would ultimately
be reimbursed by the companies for any losses.
The Treasury would have been permitted to spend $250 billion to buy banks' risky
assets, giving them a much-needed cash infusion. There also would be another $100
billion for use at the president's discretion and a final $350 billion if Congress signs
But Wall Street found further reason for worry overseas. Three European governments
agreed to a $16.4 billion bailout for Fortis NV, Belgium's largest retail bank, and the
British government said it was nationalizing mortgage lender Bradford & Bingley,
which has a $91 billion mortgage and loan portfolio. It was the latest sign that the credit
crisis has spread beyond the U.S.
September 26, 2008
CEO of failed WaMu
could get millions
By Marcy Gordon, AP Business Writer
CEO of failed Washington Mutual entitled
to millions after few weeks on job
WASHINGTON (AP) -- The CEO of failed Washington Mutual Inc., on the job only a
few weeks before the nation's largest thrift was seized by the government and sold to
JPMorgan Chase & Co., is entitled to more than $13 million in severance and bonus
Alan H. Fishman signed an agreement that provides around $6 million in cash
severance and retention of his signing bonus of $7.5 million if he were to leave his job,
according to a company filing with the Securities and Exchange Commission.
The board of WaMu reached out to Fishman to replace Kerry Killinger as CEO as the
Seattle-based bank was in a downward financial spiral, struggling with cascading losses
from soured mortgages. On Sept. 8, the same day WaMu announced Fishman's
appointment as chief executive, the bank signed an agreement with federal regulators
to provide an updated business plan and forecast for its financial performance.
As with most bank takeovers, WaMu senior executives could be expected to be
replaced by new owners at investment bank JPMorgan Chase & Co., which paid $1.9
billion for Washington Mutual's banking assets in a deal brokered by federal
regulators who shut down the thrift.
Fishman retains his position as CEO of Washington Mutual's holding company, a
JPMorgan Chase spokeswoman in New York said Friday.
It's too early to say whether Fishman and other top executives would be replaced, the
Spokesmen for the Office of Thrift Supervision, the federal agency that oversaw
WaMu and closed it, and the Federal Deposit Insurance Corp., which brokered the
sale to JPMorgan Chase, said Friday those agencies no longer have jurisdiction
When Fishman was appointed CEO, WaMu already had lost nearly 70 percent of its
market value since the start of the year. It had reported a $3 billion second-quarter loss
-- the biggest in its history -- as it boosted its reserves to more than $8 billion to cover
Killinger had headed WaMu since 1990 and built it into one of the country's largest
banks. But with a heavy focus on subprime and option adjustable-rate mortgages -- the
types of loans at the heart of the housing bust -- WaMu's losses began to mount and its
shares plummeted, sparking an outcry from shareholders.
"The board has great confidence in Alan's ability to lead WaMu and to return the
company to profitability as quickly as possible," Chairman Stephen E. Frank said in a
conference call with analysts on Sept. 8.
Fishman stressed his belief in the value of the thrift's franchise. "I share the board's
confidence in WaMu's underlying strength," he said during the conference call. "I know
that we can and will manage the issues we face today."
Fishman previously was president and chief operating officer of Sovereign Bank, and
president and CEO of Independence Community Bank.
~ ~ ~
Alan H. Fishman (born 16 March 1946 was the last CEO of Washington Mutual
(WaMu) before its acquisition by JPMorgan Chase for $1.836 billion.
He joined WaMu on 8 September 2008, replacing outgoing CEO Kerry Killinger as
part of that bank's restructuring in the face of the subprime mortgage crisis of 2008.
According to C-Span on 26 September 2008, Alan H. Fishman was ultimately paid
19 million dollars for three weeks of being with Washington Mutual and for
severance. The previous CEO was paid 14 million for one year on the job.
He was previously president and chief operating officer of Sovereign Bank and
president and chief executive officer of Independence Community Bank. He has
served as chairman of Meridian Capital Group (beginning in 2007), one of the nation's
largest commercial mortgage brokerage firms. He has been a private equity investor,
focusing on financial services at Neuberger & Berman, Adler & Shaykin and at his
own firm Columbia Financial Partners. In addition, he held senior executive positions
at Chemical Bank, AIG, and ContiFinancial Corporation.
Mr. Fishman has been chairman of the Brooklyn Academy of Music.
He holds a bachelors degree from Brown University and a master's degree in
economics from Columbia University.
~ ~ ~
And Congress is debating whether or not to give $700 billion more in taxpayer
money to bail out these Wall Street billionaires? What do YOU say, Citizens?
DEAL OR NO DEAL?
September 22, 2008
Last major investment
banks change status
By MARTIN CRUTSINGER
It was the end of an era on Wall Street as the Federal Reserve granted permission for
the last two major investment banks — Goldman Sachs and Morgan Stanley — to
become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will
allow Goldman and Morgan Stanley to create commercial banks that can take deposits,
bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to
cope with mounting problems that began more than a year ago with the subprime
The Fed had originally said Sunday night that the change in status from investment
banks to bank holding companies would not take place for five days, pending review on
antitrust grounds. The Fed announced Monday, however, that after discussions with
the Justice Department, the status change for both institutions could take place
After weekend meetings where the Treasury Department, Fed and congressional staff
ironed out the program's details, Sen. Christopher Dodd said Monday it's equally
important to act responsibly as it is to move quickly on the legislation needed to
stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show"
that many members of Congress believe a legislative relief package also should be
tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect
people in danger of losing their homes and measures to cap executive compensation at
firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both
parties are concerned about the adverse reaction in financial markets should the
measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous
vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of
the Fed, which oversees the nation's bank holding companies. The banking
subsidiaries of the two institutions will face the stricter regulations that commercial
banks are required to meet. Previously, the primary regulator for Goldman and Morgan
Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing
last week by investment bank Lehman Brothers and the forced sale of investment
bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage
Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received
bankruptcy court approval early Saturday morning to purchase Lehman's North
American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a
Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday.
Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell
245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be
able to survive in their current form, especially after hedge funds saw some of their
funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation
that both institutions would be acquired by commercial banks, whose ability to take
deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan
Stanley would be allowed during a transition period to get short-term loans from the
Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up
commercial bank subsidiaries to take deposits, giving them a major resource base, but
they will also have the same access as other commercial banks to the Fed's
emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March,
the Fed used powers it had been granted during the Great Depression to extend its
emergency loans to investment banks as well as commercial banks. However, that
extension was granted on a temporary basis.
September 22, 2008
Nomura snares Lehman’s entire Asian Operations
The Australian Business
NOMURA Holdings, the Japan-based securities and asset management house,
is believed to have secured Lehman Brothers' entire Asian operation, including
The Wall Street Journal last night reported that Nomura would pay $US225
million ($270 million) for the operations, including $US50 million goodwill, but
would not be taking on board any of the balance sheet liabilities.
Lehman Brothers Japan, the Asian headquarters group, has total liabilities of
Y4.69 trillion according to its protective bankruptcy filing last week.
After initial fears that Lehman's Asia-Pacific operations, which employ about 3000
people, would be left to crumble, Lehman management spent the weekend in
negotiations with Nomura and Barclays, which last week bought Lehman's US
broker-dealer operations, and reportedly also Standard Chartered...
The failed Wall Street investment bank's main Asia centres are Lehman Japan
and the Lehman Brothers Asia group in Hong Kong, which housed a growing part
of the Asian markets dealing operations....
There is also China mainland and Seoul operation, what was a fast-growing
Indian division and Lehman Brothers Australia, the former Grange Securities
bought in January last year.
It was unclear last night whether Nomura's purchase would include Seoul and the
Sources in Tokyo yesterday afternoon said a deal had been agreed in the
morning but by the evening neither Lehman Japan or Nomura had issued
It is understood the deal will require approval from the courts in each of the
jurisdictions where the Lehman companies applied for bankruptcy last week.
In Japan, the purchase is likely to be welcomed as taking some pressure off
Japan government bonds issuance and commercial property markets, both areas
where Lehman was a major player. The Lehman real estate business, however,
was already struggling.
September 20, 2008
Bush team, Congress negotiate
By JULIE HIRSCHFELD DAVIS and DEB RIECHMANN, Associated Press
The Bush administration asked Congress on Saturday for the power to buy $700 billion
in toxic assets clogging the financial system and threatening the economy as
negotiations began on the largest bailout since the Great Depression.
The rescue plan would give Washington broad authority to purchase bad mortgage-related assets from U.S. financial institutions for the next two years. It does not specify
which institutions qualify or what, if anything, the government would get in return
for the unprecedented infusion.
Democrats are pressing to require that the plan help more strapped borrowers stay in
their homes and to condition the bailout on new limits on executive compensation.
Congressional aides and administration officials are working through the weekend to fill
in the details of the proposal. The White House hoped for a deal with Congress by the
time markets opened Monday; top lawmakers say they would push to enact the plan as
early as the coming week.
"We're going to work with Congress to get a bill done quickly," President Bush said at
the White House. Without discussing specifics, he said, "This is a big package because
it was a big problem."
The proposal is a mere three pages long, but it gives sweeping powers to the
government to dispense gigantic sums of taxpayer dollars in a program that
would be sheltered from court review.
"It's a rather brief bill with a lot of money," said Sen. Chris Dodd, D-Conn., the Banking
Committee chairman. "We understand the importance of the anticipation in the
markets, but we also know that what we're doing is going to have consequences for
decades to come. There's not a second act to this — we've got to get this right."
Lawmakers digesting the eye-popping cost and searching for specifics voiced concerns
that the proposal offers no help for struggling homeowners or safeguards for
The government must bail out the financial system "because if we don't, it will have a
tremendous impact on American consumers, homeowners, taxpayers and the rest,"
House Speaker Nancy Pelosi, D-Calif., said in San Francisco.
But, she added, "We cannot deal with this unless this bailout helps families stay in their
Senate Majority Leader Harry Reid, D-Nev. said "we cannot allow ourselves to be in
denial about the threat now facing the world economy. From all indications, that threat
is real, and the consequences of inaction could be catastrophic. Every single American
has a stake in preventing a global financial meltdown."
The proposal would raise the statutory limit on the national debt from $10.6 trillion to
$11.3 trillion to make room for the massive rescue.
"The American people are furious that we're in this situation, and so am I," the House's
top Republican, Ohio Rep. John A. Boehner, said in a statement. "We need to do
everything possible to protect the taxpayers from the consequences of a broken
Signaling what could erupt into a brutal fight with Democrats over add-on spending,
Boehner said "efforts to exploit this crisis for political leverage or partisan quid pro quo
will only delay the economic stability that families, seniors, and small businesses
Bush said he worried the financial troubles "could ripple throughout" the economy and
affect average citizens. "The risk of doing nothing far outweighs the risk of the package.
... Over time, we're going to get a lot of the money back."
He added, "People are beginning to doubt our system, people were losing confidence
and I understand it's important to have confidence in our financial system."
Neither presidential candidate took a position on the proposal. GOP nominee John
McCain said he was awaiting specifics and any changes by Congress.
Democratic rival Barack Obama used the party's weekly radio address to call for help
for Main Street as well as Wall Street.
Their language reflected a tricky balance that politicians in both parties are trying to
strike, just six weeks before Election Day: Back a plan that doles out hundreds of
billions to companies that made bad bets and still identify with the plight of
Besides mortgage help and executive compensation limits, Democrats are considering
attaching middle-class assistance to the legislation despite a request from Bush to
avoid adding items that could delay action. An expansion of jobless benefits was one
Bush sidestepped questions about the chances of adding such items, saying that now
was not the time for posturing. "I think most leaders would understand we need to get
this done quickly, and you know, the cleaner the better," he said about legislation being
Treasury officials met congressional staff for about two hours on Capitol Hill on
Saturday. Discussions centered on how the plan would work, and Democrats proposed
adding the executive compensation limits and new foreclosure-prevention measures.
Details of those changes were not available Saturday. Bush and Treasury
Secretary Henry Paulson conferred by phone for about 20 minutes in the afternoon,
gauging how the negotiations were unfolding.
Among the key issues up for negotiation is which financial institutions would be eligible
for the help. The proposed legislation doesn't make it clear, leaving open the
question of whether hedge funds or pension funds could qualify.
On Saturday night, Treasury released a fact sheet stating that eligible financial
institutions "must have significant operations in the U.S." unless Paulson determines,
after consulting with Federal Reserve Chairman Ben Bernanke, that "broader
eligibility is necessary to effectively stabilize financial markets."
The proposal does not require that the government receive anything from banks
in return for unloading their bad assets. But it would allow Treasury to designate
financial institutions as "agents of the government," and mandate that they perform any
"reasonable duties" that might entail.
The government could contract with private companies to manage the assets it
purchased under the rescue.
Paulson says the government would in essence set up reverse auctions, putting up
money for a class of distressed assets — such as loans that are delinquent but not in
default — and financial institutions would compete for how little they would accept.
Yahoo News/Financial Meltdown
~ ~ ~
See also: AIG: The American Idol of Greed; Allied World Assurance; Aloha, Harken
Energy; BCCI: The Bank of Crooks & Criminals; The Bear Stearns in the Bushes; Dirty
Gold in Goldman Sachs; Marsh & McLennan’s Putnam Investments; Marsh &
McLennan: The Marsh Birds; Turning Over the Rocks at Blackstone Group; Yakuza
* * * * *
SPEAK UP, AMERICA!
CONTACT YOUR CONGRESSMAN
NOW ... BEFORE IT’S TOO LATE!
* * * * *
September 21, 2008
skeptical of bailout
By AVI ZENILMAN
Many of the same economists and opinion-makers who'd provided a bipartisan sheen
of consensus to Treasury Secretary Henry Paulson's previous moves have quickly
begun casting doubts on the wisdom of a policy that would allow Treasury to purchase
without oversight hundreds of billions of dollars of difficult-to-price assets from financial
Under the proposal, Paulson would not have to report to Congress until December, and
the only safeguard for taxpayers was a provision that the “Secretary shall take into
consideration means for — (1) providing stability or preventing disruption to the financial
markets or banking system; and (2) protecting the taxpayer.”
Skepticism toward the plan reflected more than the predictable desires of the left to
spread the wealth to Main Street or of the right to reject government bailouts, although
those sentiments were also expressed.
"We need to take a bold move. In that sense I think Paulson is right," Luigi Zingales, a
Professor at the University of Chicago School of Business who wrote a widely circulated
short essay titled "Why Paulson is Wrong,” told Politico.
Zingales fears that the Treasury bailout would effectively turn the entire financial sector
into a Government Sponsored Enterprise, complete with the same murkiness and moral
hazard that sunk Fannie Mae and Freddie Mac. “It might achieve the final outcome, but
it will do so at an enormous cost," he said. "All the troubles we’ve seen with Fannie and
Freddie would be seen again and again across the entire financial sector."
President Bush is “asking for a huge amount of power,” said Nouriel Roubini, an
economist at New York University who was among the first to predict the crisis. “He's
saying, ‘Trust me, I'm going to do it right if you give me absolute control.' This is not a
monarchy.” (Roubini told the New York Times that despite these concerns, he also
thought the plan could help stave off a recession.)
Paul Krugman, the Princeton University economist and liberal columnist for The New
York Times who had until now been cautiously supportive of Paulson's and Federal
Reserve Chairman Ben Bernanke’s efforts to prop up the system, wrote that the new
plan would be a taxpayer rip-off. “I hate to say this, but looking at the plan as leaked, I
have to say no deal,” he wrote on his blog at 4:46 p.m. Saturday. “Not unless Treasury
explains, very clearly, why this is supposed to work, other than through having
taxpayers pay premium prices for lousy assets.”
Yves Smith, a longtime banker and contributor to the influential finance blog Naked
Capitalism, published an angry post there titled, "Why You Should Hate The Treasury
"Given that continuing to buy U.S. assets will come under increasingly harsh scrutiny
overseas, the U.S. needs to bend over backwards to devise a plan that at least looks
credible in terms of directing the funds that come from taxpayers and lenders to their
highest and best uses and implementing reforms that will restore active and prudent
oversight of financial firms," she wrote. "The administration's demand for a free pass,
even if Congress unwisely goes along, is likely to backfire with our foreign creditors."
Gregory Mankiw, a professor at Harvard University and a former chairman of Bush's
Council of Economic Advisers who was the economic guru for Mitt Romney's campaign,
favorably linked to Smith's post under the headline "A Blank Check" and approvingly
quoted a correspondent who wrote, "Has more money ever been given with fewer
restrictions on how it is used? Ever?"
Sebastian Mallaby, the center-right economic columnist for The Washington Post and
scholar of the modern financial system, was equally dubious. “The plan is being
marketed under false pretenses," he wrote in his Sunday column, rejecting
comparisons of the plan to the Resolution Trust Corporation, which the government
formed in response to the savings and loan crisis to purchase and sell off the bad loans
made by bankrupted thrifts.
“The administration proposes to buy up bad loans before the lenders go bust,” Mallaby
noted, keeping the banks alive but doing little to solve the problem infecting the
markets. “Bad loans are weighing down the financial system precisely because private-sector experts can't determine their worth. The government would have no better
handle on the problem.”
Justin Fox, Time magazine's top financial writer and columnist, also worried about the
lack of an upside for the taxpayer. "What I still can't figure out is how Treasury hopes to
structure the bailout so there's at least a chance of getting a fair return on that risk-taking," he wrote on his blog.
"How on earth will these things be priced?" Portfolio's Felix Salmon asked about the
bad debt Paulson plans to purchase. He also pointed out that Treasury would need to
stock its office with bond-trading professionals. "All we know so far is that it's going to
be set up as a reverse auction, but that raises more questions than it answers."
One notable proponent of the plan was The Financial Times' unsigned Lex column,
which acknowledged the lack of oversight but mostly praised the plan:
"This bailout is necessary and the bill should be pushed through quickly. … Nor is the
package necessarily a disaster for the taxpayer or the U.S. dollar. If the Treasury buys
assets well, and confidence is restored, there is [a] chance that Mr. Paulson could win
fund manager of the year."
Zingales, though, writes in "Why Paulson Is Wrong" that "For somebody like me who
believes strongly in the free market system, the most serious risk of the current situation
is that the interest of a few financiers will undermine the fundamental workings of the
capitalist system. The time has come to save capitalism from the capitalists."
See also: The Nature Conservancy; The Peregrine Fund; The Peregrine Gallery; Henry
Paulson’s Secret Treasury; Dirty Gold in Goldman Sachs: Vote to Impeach Bush;
Thorns in The Rose Garden
September 19, 2008
Mega-Banks Use the
Uncle Sam ATM
The banks and financial institutions to whom Americans have trusted their money now
need a bank of their own. And they’re more than happy to wait in line for the Uncle Sam
Bear Streans withdrew $29 billion. Fannie Mae and Freddie Mac teamed up to take
$200 billion of government cash. Now AIG’s getting a modest $85 billion.
One reason the government’s so willing to part with this taxpayer cash—and its
expected to dole out a trillion dollars by the end of the year—is that these same
companies have been wielded their own cash on Capitol Hill for years. Even in dire
financial straits, they’ve been hefty campaign contributors and big-time lobbyists
throwing lavish parties for our “leaders.”
So the American people get what they always get: The Best Government Money Can
September 15, 2008
Stocks tumble amid new
Wall Street landscape
By TIM PARADIS, AP
A stunning makeover of the Wall Street landscape sent stocks falling precipitously
Monday, with the Dow Jones industrials losing 500 points in their worst slide since the
September 2001 terrorist attacks. Investors recoiled after a shakeup of the financial
industry that took out two storied names: Lehman Brothers Holdings Inc. and Merrill
Lynch & Co.
The pullback, which erased about $700 billion in shareholder wealth, occurred across
much of the globe as investors absorbed Lehman's bankruptcy filing and what was
essentially a forced sale of Merrill Lynch to Bank of America for $50 billion in stock.
While those companies' situations had reached some resolution, the market remained
anxious about American International Group Inc., which is seeking funding to shore
up its balance sheet. A faltering of the world's largest insurance company likely would
have implications far beyond that of Lehman, already the largest U.S. bankruptcy in
terms of assets.
The swift developments that took place Sunday are the biggest yet in the 14-month-old
credit crisis that stems from now toxic subprime mortgage debt....
Investors are worried that trouble at AIG and the bankruptcy filing by Lehman, felled by
$60 billion in bad debt and a dearth of investor confidence, will touch off another series
of troubles for banks and financial institutions that may be forced to further write down
the value of their own debt assets. Wall Street had been hopeful six months ago that
the collapse of Bear Stearns Cos. would mark the darkest day of the credit crisis.
AIG's troubles are worrisome for some investors because of the company's enormous
balance sheet and the risks that its troubles could spill over to the companies with
which it does business. AIG, one of the 30 stocks that make up the Dow industrials, fell
$7.38, or 61 percent, to $4.76 as investors worried that it would be the subject of
downgrades from credit ratings agencies.
"We have a very, very nervous market and folks hate uncertainty," said Alfred E.
Goldman, chief market strategist at Wachovia Securities in St. Louis. "They've been
waiting for another shoe to drop and two of them dropped on Sunday."...
The Dow fell 504.48, or 4.42 percent, to 10,917.51, moving below the 11,000 mark for
the first time since mid-July. It was the worst point drop for the Dow since it lost 684.81
on Sept. 17, 2001, the first day of trading after the terror attacks....
In percentage terms, the drop was the steepest since July 19, 2002. It was also the
sixth-largest point drop in the Dow, just behind the 508.00 it suffered in the October
The Dow is now down about 23 percent from its record high of 14,198.09 last October.
Broader stock indicators also fell. The Standard & Poor's 500 index declined 59.00, or
4.71 percent, to 1,192.70 — also its biggest drop since 9/11 and the first time it closed
below 1,200 in three years.
The Nasdaq composite index fell 81.36, or 3.60 percent, to 2,179.91; that was its worst
point loss since Jan. 4.
The Dow Jones Wilshire 5000 Composite Index, an index that measures the value of
5,000 U.S.-based companies, fell 4.53 percent Monday, giving investors an overall
paper loss of about $700 billion....
Investors likely shrank from snapping up any bargains Monday after Treasury
Secretary Henry Paulson said from the White House he "never once" considered
using taxpayer money to help prop up Lehman. That punctured some hopes that the
federal government might come to the rescue of AIG.
But AIG pared some of its losses after New York Gov David Paterson said the
company will be allowed to access $20 billion of assets held by its subsidiaries to stay
in business. Paterson asked the state's insurance regulators to in essence allow
AIG to provide a bridge loan to itself. Investors are worried that the company could
need up to $40 billion to aid its balance sheet.
Other financial stocks fell as investors worried about the strength of banks' balance
sheets. Washington Mutual Inc. fell 73 cents, or 27 percent, to $2, while Wachovia
Corp. fell $3.56, or 25 percent, to $10.71.
Merrill rose 1 cent to $17.06, while Bank of America fell $7.19, or 21 percent, to
Goldman noted, however, that the market's sell-off wasn't the cathartic move the
market needed to purge its worries over bad debt and the tight credit conditions that
have hobbled the economy. At some point, he contends, stock valuations will prove too
tempting for investors sitting on the sidelines with piles of cash.
"At some point the sellers have done their dastardly deed," he said....
On the Net:
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
September 15, 2008
Obama, McCain blame economic
woes on greed, policy
By LIZ SIDOTI, Associated Press
With chaos rocking financial markets, John McCain assailed "greed and corruption" on
Wall Street and promised to clean it up, while Barack Obama blamed White House
policies and said his opponent would only deliver more of the same.
The presidential candidates struggled on Monday to seize control of the issue voters
say is most important — the economy — with Republicans and Democrats alike saying
the man who succeeds may well win the election.
However, in a dizzying day of speeches and statements, neither White House hopeful
offered any fresh ideas for turning things around. Instead each relied on the same
vague, though vastly different, pitches he has sounded over the past few months for
fixing what ails the country.
And they didn't emphasize that they are part of the Congress that has done little to
head off the crisis. McCain is a four-term Arizona senator, Obama a first-termer from
Bemoaning "the most serious financial crisis since the Great Depression," Democrat
Obama faulted Republican McCain's domestic policy agenda as the same as President
Bush's — "one that says we should just stick our heads in the sand and ignore
economic problems until they spiral into crises."
McCain declared in a new TV ad, "Our economy is in crisis. Only proven reformers
John McCain and Sarah Palin can fix it" — though he also told voters in Jacksonville,
Fla., "The fundamentals of our economy are strong."
While presidents — and candidates of the party occupying the White House — often
take credit for good economies and try to avoid blame for bad ones, financial crises
nearly always have multiple causes.
Home loans became more affordable a few years ago when the Federal Reserve kept
interest rates low. Politicians of all stripes encouraged home ownership. But lightly
regulated financial outfits began slicing and dicing the resulting mortgages into
securities and selling them to investors.
Eventually, it all began collapsing, prices dropped, people started losing their homes
and Wall Street went into a spin.
This is the backdrop with some seven weeks left in the campaign, and both Obama and
McCain are trying to find a message that resonates with anxious voters who are fretting
about their retirement nest eggs, home mortgages and job security.
As different as their policies are, they were united in their message to voters: It's not
Courting working class voters who gave him grief in the Democratic primary, Obama
sounded an I-feel-your-pain note.
Obama lamented Republican policies over eight years that he said "encouraged
outsized bonuses to CEOs while ignoring middle-class Americans" and said:
"Instead of prosperity trickling down, the pain has trickled up — from the
struggles of hardworking Americans on Main Street to the largest firms of Wall
McCain's words were sympathetic as well.
"America is in a crisis today," he said — then added: "The economic crisis is not the
fault of the American people. Our workers are the most innovative, the hardest working,
the best skilled, the most productive, the most competitive in the world. ... But they are
being threatened today ... because of greed and corruption that some engaged in
on Wall Street and we have got to fix it."
Some in the markets, he said, "have treated Wall Street like a casino."
The upheaval at Lehman Brothers Holdings Inc., Merrill Lynch & Co., and
American International Group Inc. — and the stunning reordering of the financial
market that has following — gave the candidates an opening to press their economic
In line with historical positions of Democrats and Republicans, Obama generally
supports stronger consumer protections, better regulatory oversight and more
government intervention, while McCain broadly prefers a market system of less federal
involvement and red tape.
Both advocate tax cuts, though to different degrees and different ends. Obama seeks
to cut into inequality between rich and poor by raising taxes on the wealthiest
Americans and give breaks to the middle class and lower-income people. McCain
wants to spur the economy and create jobs by keeping tax rates low for higher-income taxpayers and slashing rates for corporations.
While they focused on the topic that voters say matters most, the two campaigns also
continued to assail each other Monday on character issues. The Democratic vice
presidential nominee, Joe Biden, said McCain was "launching a low blow a day."
McCain's campaign, in turn, accused Obama of spouting "false talk about change" and
hurling insults to cover up his record.
Yet, even that increasingly personal griping took a back seat as Obama and McCain
maneuvered for an edge on the economy with stocks tumbling as investors reacted to
the latest Wall Street turmoil.
Obama has led for months on the question of who would best handle the economy, but
some polls show that his advantage has dwindled. He had a slight advantage over
McCain on the economy — 47 percent to 42 percent — in an ABC News/Washington
Post poll last week, the Democrat's edge cut in half since spring. However, CNN's latest
poll showed Obama with a larger edge, 52 percent to 44 percent, with no movement
from early this year.
McCain focused mostly on a need for regulatory reforms and applauded the federal
government's refusal to bail out the latest cash-strapped institutions. It was a posture
designed to bolster his free-market stance and strike a populist chord.
He promised: "The McCain-Palin administration will replace an outdated, patchwork
quilt of regulatory oversight and bring transparency and accountability to Wall Street.
We will have transparency and accountability and we will reform the regulatory bodies
of government." He didn't say precisely how.
At a campaign appearance in Grand Junction, Colo., Obama chastised McCain by
saying: "It's not that I think John McCain doesn't care what's going on in the lives of
most Americans. I just think he doesn't know. He doesn't get what's happening between
the mountains in Sedona where he lives and the corridors of power where he works."
As for government regulation, he said, "For years I have called for modernizing the
rules of the road."
It's been nearly a decade since Congress and President Clinton reshaped the
financial landscape. That 1999 legislation removed Depression-era barriers between
commercial banks and investment firms and allowed the creation of financial
behemoths where years later the risks of underwriting subprime mortgages were
Former Sen. Phil Gramm, R-Texas, until recently one of the McCain campaign's top
economic advisers, was a chief writer of that law.
McCain voted for a Senate version of the bill but did not vote on the final package.
Biden voted against the Senate legislation but for the final compromise that Clinton
signed. Obama was not in Congress at the time.
July 11, 2008
U.S. stocks battered again after
brief rally loses steam
By Kate Gibson
NEW YORK (MarketWatch) -- U.S. stocks on Friday lapsed back into the cellar after a
late-day rally that followed reports that Federal Reserve Chairman Ben Bernanke
offered the central bank's discount window to battered mortgage lenders Fannie Mae
and Freddie Mac.
The biggest culprits are bouncing off their lows. It amounts to throwing a deck chair off
the Titanic obviously," said Art Hogan, chief market strategist at Jefferies & Co.
Of reports that Bernanke had offered use of the discount window to the government-sponsored entities, Hogan said "that would be the logical follow-through to (Treasury
Secretary Hank) Paulson saying we're going to give them access to capital. But they
still have a trillion dollars of exposure to mortgages they guaranteed."
Off its earlier lows that had the Dow Jones Industrial Average (DJI:^DJI - News)
dropping below the 11,000 level for the first time in nearly two years, the blue-chip index
was recently off 154.37 points at 11,074.65.
All but five of the Dow's 30 components succumbed, with Chevron Corp. (NYSE:CVX -
News) fronting the declines, off 4.3%.
Investors were also leery about the ailing financial sector with second-quarter results on
tap next week from big institutions including Merrill Lynch & Co. (NYSE:MER - News)
and J.P. Morgan Chase & Co. (NYSE:JPM - News)
Shares of General Electric Co. (NYSE:GE - News) tilted slightly higher after the
conglomerate affirmed its 2008 outlook and reported results that met forecasts. The
Dow component also said that it would sell its Japanese consumer-lending unit for $5.4
"GE got us ready for what we're going to be listening to: in-line number, lackluster
guidance. Other than with financials next week, we get no guidance and have no idea
where we're going," said Hogan.
General Motors Corp. (NYSE:GM - News) led the minority gains among the blue
chips, with the shares of the automaker up 2.2%.
The S&P 500 Index dropped 14.64 points, or 1.2%, to 1,238.75 with all 10 of the index's
industry groups falling, led by financials, down 4.3%.
The Nasdaq Composite Index (COMP - News) skidded 27.46 points, or 1.2%, to
Volume on the New York Stock Exchange topped 1 billion, and decliners topped
advancers nearly 3 to 1. On the Nasdaq, 642 million shares traded, and decliners
outpaced advancers nearly 2 to 1.
In a short statement early Friday, Treasury Secretary Hank Paulson said that the
government was committed to supporting Fannie and Freddie in "their current form."
Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) , the biggest
buyers of U.S. home loans, both tumbled at the start and remained down in the wake of
Paulson's comments. The mortgage giants' shares were recently down more than 25%,
with investors holding the view that U.S. taxpayers would foot the bill for any rescue.
The spiking price of crude also weighed, with tensions between Iran and the West
and worries about supply sending futures to an all-time high above $147 a barrel
in electronic trade on Globex. On the New York Mercantile Exchange, crude closed up
$3.43, at $145.08. Read Futures Movers.
"The only friendly thing I can find to say is InBev is raising its bid for Anheuser-Busch
Cos. (NYSE:BUD - News) ," said Hogan of reports that the Budweiser brewer is in talks
to be acquired by the Belgian firm.
"Will they change the name of the stadium in St. Louis to Stella?" he quipped.
Also pressuring the equities market was Labor Department data earlier that showed the
price of goods imported into the country climbing more than expected in June, as
soaring fuel costs and a drop in the dollar combined to drive up the cost of non-U.S.-made products. See Economic Report.
In a separate report, the Commerce Department said that the nation's trade gap
narrowed, with U.S. exports increasing at a more rapid pace than imports during May.
Overseas, Asia markets traded mixed, with the Nikkei 225 Average registering a slight
loss in Tokyo but the Hang Seng benchmark advancing 1.7% in Hong Kong. Read Asia
On Thursday, U.S. stocks closed higher with concerns about the viability of Fannie and
Freddie offset by a large-scale acquisition in the chemical sector and a 10% rise in
shares of Alcoa Inc. (NYSE:AA - News)
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June 26, 2008
U.S. stocks sink;
GM shares sink nearly 11%
Brokers no longer 'attractive,' says Goldman Sachs;
oil tops $140 a barrel
By Kate Gibson, MarketWatch
NEW YORK (MarketWatch) -- U.S. stocks fell sharply Thursday with the blue-chip index
enduring its worst June so far since 1930, and plunging to its lowest finish since Sept.
11, 2006, after getting slammed hard as crude soared to new highs and Goldman
Sachs disparaged U.S. brokers and advised selling General Motors Corp.
"We're going to move in the opposite direction of oil, and General Motors is going to go
out of business, at least according to Goldman Sachs," said Art Hogan, chief market
strategist at Jefferies & Co.
The Dow Jones Industrial Average Dow Jones Industrial Average tumbled 358.41
points, or 3%, to 11,453.42, leaving it down nearly 1,200 points, or 9.4%, for the
month, with one trading day yet to go. As things stand, the month is the worst June
so far since 1930 when the index declined 17.72%.
March 14, 2008
Bush acknowledges weakness
in US economy
By JENNIFER LOVEN, Associated Press Writer
Trying to calm jitters about the economy, President Bush conceded on Friday that the
country "obviously is going through a tough time" but expressed confidence that it will
rebound. He cautioned against overreacting to fix the problems.
In a speech to The Economic Club of New York, Bush said this was not the first time
the economy has been rattled and that he is certain that it will ride out its troubles.
"These are uncertain times," he said.
The president spoke as evidence of an ailing economy piled up. The dollar fell, oil and
gold hit record highs, the economy is shedding jobs, retail sales saw a big drop
and the effects of a severe credit squeeze linger. Economic worries have
replaced the Iraq war as the No. 1 concern of voters in this presidential election
Bush acknowledged that prices are up at the gas pump and grocery stores and housing
values are down — leading to worries among everyday "hardworking Americans."
But he said low unemployment and strong productivity are proof of the economy's
fundamental strength and resilience.
"Every time, this economy has bounced back better and stronger than before," Bush
The president also praised the work of the Federal Reserve. After cutting interest rates
several times, the Fed said Friday it has voted to endorse an arrangement to bolster
troubled Bear Stearns Cos. and stands ready to provide added liquidity to combat a
serious credit crisis.
"It was strong action by the Fed and they did so because some financial
institutions that borrowed money to buy securities in the housing industry must
now repair their balance sheets before they can make further loans," the president
"Today's events are fast moving, but the chairman of the Federal Reserve and the
secretary of the treasury are on top of them and will take the appropriate steps to
promote stability in our markets," Bush assured his audience.
The president chose American's financial center as the backdrop — and the titans of
finance and commerce as the audience — for his attempts to calm nerves from Wall
Street to Main Street.
The Economic Club of New York is an exclusive, wealthy, largely homogenous
group of top executives. Speaking before the gathering had Bush somewhat literally
preaching to the choir — the 101-year-old group's new chairman is Glen Hubbard, the
first head of the White House Council of Economic Advisers for Bush.
He even drew a laugh when he opened his remarks with a not-so-veiled reference to
the economy's ills. "It seems like I showed up in an interesting moment, a very
interesting time," Bush said.
His main message, aside from optimism, stuck to Republican economic orthodoxy:
warning repeatedly against too much government intervention.
For instance, while insisting his administration has an "active plan" to deal with the
problems, Bush said he opposed several measures pending on Capitol Hill. They
included proposals to allocate $400 billion to purchase abandoned and foreclosed
homes, to change the bankruptcy code to allow judges to adjust mortgage rates,
and to artificially prop up home prices.
"It's important not to overcorrect, because when you overcorrect, you end up in a ditch,"
Bush said. "It's important to be steady."
He said his administration would address the crisis "in a way that respects the ingenuity
of the American people, that bolsters the entrepreneurial spirit and ensures that when
we make it through this rough patch, that the driving will be smooth."
Bush took a veiled shot at Democratic presidential candidates Hillary Rodham Clinton
and Barack Obama for their criticism of trade agreements that they say put
American workers at a disadvantage.
"When times are tough, it's much easier to find somebody else to blame," the president
said, without mentioning either candidate by name. "Sometimes that somebody else to
blame is somebody in a distant land. It's easy politics. It's easy to go around and
hammer on trade."
In a brief question-and-answer session, a member of the audience, noting that
consumer prices are rising and the dollar is weak around the world, asked Bush
whether the United States has an inflation problem.
"I agree that the Fed needs to be independent and make considered judgments and
balance growth versus inflation," Bush said without answering the question directly.
"We believe in a strong dollar and I recognize that economies go up and down, but it's
important for us to put policy in place that sends the signal that our economy is going to
be strong and open for business."
He said the United States should not do "something foolish" during this economic
period that will make it harder to grow, such as blocking capital from coming into
the nation or failing to extend the tax cuts.
He said he had cautioned Saudi King Abdullah that he "better be careful about
affecting markets" with high oil prices and that soaring fuel costs would prompt
more investment in alternative sources of energy.
But, Bush said, "Our energy policy hasn't been very wise up to now." He avoided
further discussion of prices, saying, "I'm going to dodge the rest of your question."
March 15, 2008
Run on Big Wall St. Bank Spurs
Rescue Backed by U.S.
By LANDON THOMAS Jr.
Just three days ago, the head of Bear Stearns, the beleaguered investment bank,
sought to assure Wall Street that his firm was safe.
But those assurances were blown away in what amounted to a bank run at Bear
Stearns, prompting JPMorgan Chase and the Federal Reserve Bank of New York to
step in on Friday with a financial rescue package intended to keep the firm afloat.
The move underscores the extreme stresses that the credit crisis has imposed on the
financial system and raises the once-unthinkable prospect that major Wall Street firms
The developments may only postpone the eventual sale of all or part of Bear Stearns,
which has had crippling losses on mortgage-linked investments. To keep the 85-year-old firm solvent, JPMorgan, backed by the New York Fed, extended a secured line of
credit that gives Bear Stearns at least 28 days to shore up its finances or, more likely, to
find a buyer.
News of the bailout ignited fears that other big banks remain vulnerable to the
continuing credit crisis, and stocks tumbled in another rocky day for the markets.
Financial shares led the way, with shares of Bear Stearns plunging 47 percent. Hours
after the rescue was announced, another Wall Street firm, Lehman Brothers, said it had
secured a three-year credit line from banks. Its stock fell 15 percent.
Policy makers are likely to spend the weekend dealing with the fallout in the financial
system, and potential buyers are already circling Bear Stearns.
As the Wall Street drama unfolded, Ben S. Bernanke, the Federal Reserve chairman,
added fresh warnings Friday about a gathering wave of home foreclosures bearing
down on American communities.
President Bush, meantime, made his most striking acknowledgment yet of the
country’s economic troubles, even as he defended his administration’s responses so far
and warned against more drastic steps by the government to intervene.
“Today’s events are fast moving,” he said, “but the chairman of the Federal Reserve
and the secretary of the Treasury are on top of them and will take the appropriate
steps to promote stability in our markets.”
The rescue effort began late Thursday evening, when Alan D. Schwartz, Bear Stearns’s
chief executive, placed an urgent call to James Dimon, his counterpart at JPMorgan
Chase. Mr. Schwartz said Bear Stearns was struggling to finance its day-to-day
operations, according to several people briefed on the negotiations, a situation that
would threaten its survival.
Because JPMorgan settles transactions for Bear Stearns as its main clearing bank, it
was in a good position to assess the collateral that Bear Stearns could provide against
a loan. But Mr. Dimon insisted on the support of Timothy F. Geithner, president of the
New York Fed. Mr. Geithner quickly agreed to the plan.
Assisted by Gary Parr, a top investment banker at Lazard specializing in financial
companies, Mr. Schwartz and Mr. Dimon spent the night negotiating the deal, which
was not sealed until the early hours of Friday.
The size and terms of the credit line were not disclosed. JPMorgan will borrow the
money from the Fed and lend it to Bear Stearns, and the Fed will ultimately bear the
risk of the loan.
Meetings between Bear Stearns and prospective suitors have already begun. Interested
parties include J. C. Flowers & Company, the private equity investor, and Royal Bank
of Scotland, according to people who were briefed on the discussions.
The Fed’s intervention highlights the problems regulators face as they contemplate the
prospect that investment banks, saddled with toxic securities tied to subprime
mortgages, are losing the trust of their lenders and clients — the kiss of death on Wall
Street, where confidence has always been the most precious asset of all.
Traditionally regulators have helped commercial banks in financial panics, but not
investment banks, which do not hold customer deposits. But the 1999 repeal of the
Glass-Steagall Act, the Depression-era law that separated investment banks and
commercial banks, led to consolidation within the financial industry that has
made such distinctions harder to make.
“I don’t remember a Fed action aimed at a noncommercial bank; this is the kind
of thing you see in this post-regulatory environment,” said Charles Geisst, a Wall
Street historian at Manhattan College.
The developments represent a devastating blow to Bear Stearns, which has carved a
niche by mastering the financial arcana of the mortgage market. But after two of its
hedge funds that specialized in the subprime mortgage market collapsed last summer,
Bear Stearns’s area of strength became a millstone.
In a conference call on Friday, Mr. Schwartz, who succeeded James E. Cayne as chief
executive early this year, sounded frustrated as he described the run on Bear Stearns
over the previous 24 hours, and raised the possibility that the firm’s days as an
independent bank were numbered.
“This is a bridge to a more permanent solution and it will allow us to look at strategic
alternatives that can run the gamut,” he said. “Investors will be able to see the facts
instead of the fiction. We will look for any alternative that serves our customers as well
as maximizes shareholder value.”
Only days earlier, Mr. Schwartz, a well-connected investment banker who has been at
Bear Stearns since the early 1970s, appeared on television to try to calm market fears
that the bank was in trouble. Skittish lenders were already calling in loans made to
Carlyle Capital, a bond fund sponsored by the Carlyle private equity group, as well as
Thornburg Mortgage, a major mortgage firm. Soon the attention spread to Bear Stearns
as market players began to question the firm’s ability to finance itself, sending its stock
into a tailspin.
By late Thursday, Bear Stearns’s top lenders and its hedge fund clients were calling the
firm and demanding their cash back, perhaps encouraged by Mr. Schwartz’s comments
that the firm’s capital and liquidity were strong.
Mr. Schwartz said on Friday that he hoped to find a long-term solution as soon as
possible. At its closing price of $30 a share on Friday, Bear Stearns was trading at a
gaping discount to its reported book value of $80 a share. Mr. Schwartz said that Bear
Stearns, which moved up the reporting of its first-quarter results to this Monday, is still
likely to have a result in the range of analyst estimates, suggesting a profit and a slight
expansion of its book value, the truest measure of its financial condition.
Questions persist, however, concerning the real value of its remaining assets.
While Bear Stearns has valuable businesses like its hedge fund servicing and back
office unit, as well as aspects of its real estate operations, they are unlikely to command
a high price given the current market. But Mr. Dimon, despite having expressed
reservations on buying another investment bank, could bid for all or part of Bear
Stearns at a discounted price. Bear Stearns might accept his offer if it cannot solicit a
The troubles at Bear Stearns have come quickly and savagely and hurt some of the
putatively smartest money in finance. From Joseph Lewis, the Bermuda-based
billionaire who bought $1 billion of Bear Stearns shares last summer, when the stock
was trading at $100 and above, to William Miller, the vaunted value investor at Legg
Mason, those who have wagered on a turnaround at Bear Stearns are many.
As the smallest of the major Wall Street banks, Bear Stearns disdained the big bets
that its larger competitors made and shied away from trendy markets like Internet
stocks in the 1990s.
But as its core mortgage business flourished during the housing boom from 2003 to
2006, Bear Stearns, under the guidance of Mr. Cayne, succumbed to the fervor of the
time. Bear Stearns’s stock price soared and hit a high of $171, making Mr. Cayne, who
owns 5 percent of Bear Stearns, a billionaire for a brief moment.
The demise of the hedge funds began a slow but persistent loss of market confidence
in the bank. Such an erosion can be devastating for any investment bank, especially
one like Bear Stearns, which has a leverage ratio of over 30 to 1, meaning it borrows
more than 30 times the value of its $11 billion equity base.
“The public has never fully understood how leveraged these institutions are,”
said Samuel L. Hayes, a professor of investment banking at Harvard Business School.
“But the market makers understand this inherent risk. This is a run on the bank,
just like Long-Term Capital Management, Kidder and Drexel Burnham.”
Mar 14, 2008
"SPITZER WAS SILENCED."
THE $200 BILLION BAIL-OUT FOR PREDATOR BANKS
AND SPITZER CHARGES ARE INTIMATELY LINKED
By Greg Palast
Reporting for Air America Radio's Clout*
While New York Governor Eliot Spitzer was paying an 'escort' $4,300 in a hotel room
in Washington, just down the road, George Bush's new Federal Reserve Board
Chairman, Ben Bernanke, was secretly handing over $200 billion in a tryst with
mortgage bank industry speculators.
Both acts were wanton, wicked and lewd. But there's a BIG difference. The Governor
was using his own checkbook. Bush's man Bernanke was using ours.
This week, Bernanke's Fed, for the first time in its history, loaned a selected coterie
of banks one-fifth of a trillion dollars to guarantee these banks' mortgage-backed
junk bonds. The deluge of public loot was an eye-popping windfall to the very banking
predators who have brought two million families to the brink of foreclosure.
Up until Wednesday, there was one single, lonely politician who stood in the way of this
creepy little assignation at the bankers' bordello: Eliot Spitzer.
Who are they kidding? Spitzer's lynching and the bankers' enriching are intimately tied.
HOW? FOLLOW THE MONEY.
The press has swallowed Wall Street's line that millions of US families are about to lose
their homes because they bought homes they couldn't afford or took loans too big for
their wallets. Ba-LON-ey. That's blaming the victim.
Here's what happened. Since the Bush regime came to power, a new species of loan
became the norm, the 'sub-prime' mortgage and it's variants including loans with teeny
'introductory' interest rates. From out of nowhere, a company called 'Countrywide'
became America's top mortgage lender, accounting for one in five home loans, a large
chuck of these 'sub-prime's.
Here's how it worked: The Grinning Family, with US average household income, gets a
$200,000 mortgage at 4% for two years. Their $955 a month payment is 25% of their
income. No problem. Their banker promises them a new mortgage, again at the cheap
rate, in two years. But in two years, the promise ain't worth a can of spam and the
Grinnings are told to scram - because their house is now worth less than the mortgage.
Now, the mortgage hits 9% or $1,609 plus fees to recover the 'discount' they had for
two years. Suddenly, payments equal 42% to 50% of pre-tax income. Grinnings move
into their Toyota.
Now, what kind of American is 'sub-prime'. Guess. No peeking. Here's a hint: 73% of
HIGH INCOME Black and Hispanic borrowers were given sub-prime loans versus 17%
of similar-income Whites. Dark-skinned borrowers aren't 'stupid', they had no choice.
They were 'steered' as it's called in the mortgage sharking business.
"Steering," sub-prime loans with usurious kickers, fake inducements to over-borrow,
called 'fraudulent conveyance' or 'predatory lending' under US law, were almost
completely forbidden in the olden days (Clinton Administration and earlier) by federal
regulators and state laws as nothing more than fancy loan-sharking.
But when the Bush regime took over, Countrywide and its banking brethren were told to
party hardy "it was OK now to steer'm, fake'm, charge'm and take'm."
BUT THERE WAS THIS ANNOYING PARTY-POOPER.
The Attorney General of New York, Eliot Spitzer, who sued these guys to a fare-thee-well. Or tried to.
Instead of regulating the banks that had run amok, Bush's regulators went on the
warpath against Spitzer and states attempting to stop predatory practices. Making an
unprecedented use of the legal power of 'federal pre-emption', Bush-bots ordered the
states to NOT enforce their consumer protection laws.
Indeed, the feds actually filed a lawsuit to block Spitzer's investigation of ugly
racial mortgage steering. Bush's banking buddies were especially steamed that
Spitzer hammered bank practices across the nation using New York State laws.
Spitzer not only took on Countrywide, he took on their predatory enablers in the
investment banking community. Behind Countrywide was the Mother Shark, its funder
and now owner, Bank of America. Others joined the sharkfest: Goldman Sachs,
Merrill Lynch and Citigroup's Citibank made mortgage usury their major profit
centers. They did this through a bit of financial legerdemain called 'securitization.'
What that means is that they took a bunch of junk mortgages, like the Grinnings, loans
about to go down the toilet and re-packaged them into 'tranches' of bonds which were
stamped 'AAA' - top grade - by bond rating agencies. These gold-painted turds were
sold as sparkling safe investments to US school district pension funds and town
governments in Finland (really).
When the housing bubble burst and the paint flaked off, investors were left with the
poop and the bankers were left with bonuses. Countrywide's top man, Angelo Mozilo,
will 'earn' a $77 million buy-out bonus this year on top of the $656 million - over half a
billion dollars he pulled in from 1998 through 2007.
BUT THERE WERE RUMBLINGS THAT THE PARTY WOULD SOON BE OVER.
Angry regulators, burned investors and the weight of millions of homes about to be
boarded up were causing the sharks to sink. Countrywide's stock was down 50%, and
Citigroup was off 38%, not pleasing to the Gulf sheiks who now control its biggest
Then, on Wednesday of this week, the unthinkable happened. Carlyle Capital went
bankrupt. Who? That's Carlyle as in Carlyle Group. James Baker, Senior Counsel.
Notable partners, former and past: George Bush, the Bin Laden family and more
dictators, potentates, pirates and presidents than you can count.
The Fed had to act. Bernanke opened the vault and dumped $200 billion on the poor
little suffering bankers. They got the 'public treasure' and got to keep the Grinning's
house. There was no 'quid' of a foreclosure moratorium for the 'pro quo' of public bail-out. Not one family was 'saved,' but not one banker was left behind.
Every mortgage sharking operation shot up in value. Mozilo's Countrywide stock rose
17% in one day. The Citi sheiks saw their company's stock rise $10 billion in an
And that very same day the bail-out was decided - what a coinkydink! - the man
called "The Sheriff of Wall Street" was cuffed.
SPITZER WAS SILENCED.
Do I believe the banks called Justice and said "Take him down today!" Naw, that's not
how the system works. But the big players knew that unless Spitzer was taken out, he
would create enough ruckus to spoil the party. Headlines in the financial press, one was
'Wall Street Declares War on Spitzer' - made clear to Bush's enforcers at Justice who
their number one target should be. And it wasn't Bin Laden.
It was the night of February 13 when Spitzer made the bone-headed choice to order
take-out in his Washington Hotel room. He had just finished signing these words for the
Washington Post about predatory loans:
'Not only did the Bush administration do nothing to protect consumers, it embarked on
an aggressive and unprecedented campaign to prevent states from protecting their
residents from the very problems to which he federal government was turning a blind
Bush, said Spitzer right in the headline: 'was the 'Predator Lenders' Partner in Crime.'
The President, said Spitzer, was a fugitive from justice. And Spitzer was in Washington
to launch a campaign to take on the Bush regime and the biggest financial powers on
Spitzer wrote: When history tells the story of the subprime lending crisis and recounts
its devastating effects on the lives of so many innocent homeowners the Bush
administration will not be judged favorably."
FALLEN ON HIS OWN GUN
But now, the Administration can rest assured that this love story - of Bush and his
bankers - will not be told by history at all ''now that the Sheriff of Wall Street has fallen
on his own gun.''
A note on 'Prosecutorial Indiscretion.'
Back in the day when I was an investigator of racketeers for government, the federal
prosecutor I was assisting was deciding whether to launch a case based on his
negotiations for air-time with 60 Minutes. I'm not allowed to tell you the prosecutor's
name, but I want to mention he was recently seen shouting: "Florida is Rudi country!
Florida is Rudi country!"
Not all crimes lead to federal bust or even public exposure. It's up to something called
Funny thing, this "discretion." For example, Senator David Vitter, Republican of
Louisiana, paid Washington DC prostitutes to put him in diapers (ewww!), yet the
Senator was not exposed by the US prosecutors busting the pimp-ring that pampered
Naming and shaming and ruining Spitzer - rarely done in these cases - was made at the
'discretion' of Bush's Justice Department.
Or maybe we should say, 'indiscretion.'
* Listen to Palast on Clout at http://www.GregPalast.com
Greg Palast, former investigator of financial fraud, is the author of the New York Times
bestsellers Armed Madhouse and The Best Democracy Money Can Buy.
Fwd. by the Foreign Press Foundation - Related links:
* But where does all the loot go, also via the 'Central Banks' many people are
wondering? Well, for instance via the privately owned Bank of England, and all other
so called 'central banks' of this cartel, it is 'recycled' through the rather secret 'head
office' of this London group in Basle, Switzerland. The likewise privately owned 'Bank
of International Settlements', the BIS, which is functioning as one of the main 'central
banks' to central banks. And it is difficult to believe, but their BIS bank has greater
immunity than a sovereign nation, is accountable to no one, runs global monetary
affairs and is privately owned. - BIS Url.:
And it may be difficult for many of us to grasp, but it is true: none of the humanoids
involved in 'The City', at the by them owned 'Bank of England' or at the Swiss based
BIS is ever anywhere on earth accountable for what is done to you, your family or
friends, or anybody else, including countries and continents. The 'Board' has all the
same names, the known vultures are there, like Wolfowitz, Greenspan, Bernanke
etc. - as their money-printing business in the US - the Federal Reserve which also has
the cartel as private banking owners. The bookkeepers and usurers are absolutely
immune and there is NO law nor any kind of court on this earth which ever can stop
them. They think...
Many of them operate from 'The City' their own 'state within a state' in London, England,
where the 'evil empire' can be found and the 'Board of Directors' of the so called 'Evil
empire' - their Animal Farm - which is built on the corpses of millions of human
beings. For those who don't know it yet. - Url.: http://tinyurl.com/2zj7wl
* The "visible and audible leaders" are mere puppets who dance on command. They
have no power. They have no authority. In spite of all the outward show they are mere
pawns in the game being played by the financial elite. - Url.: http://tinyurl.com/2zj7wl
* HITLER: AN OFFICER AND A GENTLEMAN? - History's warning regarding a
compliant media. - Url.: http://tinyurl.com/2xcbce
*NEWSPAPERS (AND OTHER MEDIA) MAINTAIN THAT THEY ARE ENTITLED BY A
“PRIVILEGE” TO LIE, etc., by proxy – that is, by printing the lies, etc. of others without
verification and/or qualification. Yet, that is not the whole of it. - Url.:
* WHY U.S. AMERICANS (AND MANY IN OTHER COUNTRIES) WILL BELIEVE
ALMOST ANYTHING THEIR 'GOVERNMENT' AND PROPAGANDA MEDIA TELL
THEM - Url.: http://www.rense.com/general78/believe.htm
* THE US IS A 'CRIMOCRACY' - Christopher Bollyn: "This is how the U.S. government,
which I call a "crimocracy" works. -
* FPF-COPYRIGHT NOTICE - In accordance with Title 17 U. S. C. Section 107 - any
copyrighted work in this message is distributed by the Foreign Press Foundation under
fair use, without profit or payment, to those who have expressed a prior interest in
receiving the information. Url.: http://tinyurl.com/3z3r6
FOREIGN PRESS FOUNDATION
Editor: Henk Ruyssenaars
November 27, 2007
Wall Street leads surge in
corporate political giving
By Kevin Drawbaugh
Big business is shoveling more money than ever into U.S. political campaigns, with Wall
Street donations way up, a watchdog group said on Tuesday.
The securities and investment industry -- which includes brokerages, hedge funds and
private equity firms -- registered the sharpest increase in giving since 2004 among all
industry sectors studied by the Center for Responsive Politics.
Record-breaking contributions from the nation's biggest political givers are the result of
a wide-open race for the White House and last year's power shift in Congress, said
Sheila Krumholz, the nonpartisan center's executive director.
"There is an intensity to the fund raising for 2008 that we've never seen before,
which means the candidates and parties will be all the more beholden" to big
donors, she said.
The nonprofit center analyzes campaign finance and lobbying records at the Federal
Election Commission (FEC), a government agency that enforces U.S. campaign
The analysis includes contributions to federal candidates and parties from individuals
working in an industry and from associated political action committees.
In both presidential and congressional contests, Democrats are benefiting more than
Republicans from the surge in business donations, with 57 percent of giving from
typical big donors going to Democrats versus 43 percent in 2006 and 2004.
More money is coming in from lawyers than from any other sector, as usual. But the
biggest increase in giving since 2004 is coming from financiers, whose donations are
up 91 percent.
Steep increases are also coming from the real estate industry, Hollywood,
healthcare professionals and insurers.
Industries with small increases, and even some decreases, tend to be past Republican
allies, said the center's analysis.
Automakers have been staunch Republican supporters since 1990, but in this
campaign cycle their giving is down 20 percent. Declines are also evident among
grocers, food processors and telephone companies, the center said.
Only small increases are being seen among Republican backers such as builders and
defense and aerospace firms. The oil and gas industry's contributions are up 15
percent, "well below the average for big industries," the center said.
"Democratic donors seem unusually mobilized for this election. But those industries
who've traditionally given to Republicans seem to be either nursing their wounds from
'06 or sitting this election out," Krumholz said.
Wall Street's favorite presidential candidate, based on the latest FEC disclosures
from October 29, was Democratic New York Sen. Hillary Clinton. Close behind her in
donations from financiers were Republican former New York Mayor Rudolph Giuliani
and Democratic Illinois Sen. Barack Obama.
Next were Republican former Massachusetts Gov. Mitt Romney, Democratic Sen.
Christopher Dodd of Connecticut, Republican Sen. John McCain from Arizona,
Democratic former North Carolina Sen. John Edwards and Democratic New Mexico
Gov. Bill Richardson.
The biggest donors in the securities and investment sector, as of October 29, were the
brokerage firms Goldman Sachs, Morgan Stanley, UBS, Merrill Lynch, Lehman
Brothers and Credit Suisse.
Also among the sector's top contributors were hedge funds and private equity firms
Bain Capital, SAC Capital Advisers, Fortress Investment Group and Blackstone
"There's no question that hedge funds and private equity firms have ramped up
their political giving in the last couple of years as Congress looks seriously at
raising their taxes," said Massie Ritsch, spokesman for the Center for Responsive
Lawmakers are considering proposals to more than double the tax rate on the
"carried interest" gains of senior partners at private equity firms that buy and sell
December 20, 2006
Goldman CEO's $53.4M
Bonus Breaks Record
By Vinnee Tong, AP Business Writer
Goldman Sachs Breaks Wall Street CEO Bonus Record,
Pays Blankfein $53.4M
NEW YORK (AP) -- John Mack's record for the biggest bonus ever paid to a Wall
Street CEO didn't last even a week. It was smashed by the $53.4 million that Goldman
Sachs gave its chief executive, Lloyd Blankfein.
The bonanza for Blankfein included a cash bonus of $27.3 million, with the rest paid in
stock and options. He took the helm of the investment bank in June [not bad for half-a-year’s work] after President Bush nominated Henry Paulson to be Treasury secretary.
The record payday, disclosed by Goldman Sachs Group Inc. in a filing with the
Securities and Exchange Commission on Tuesday, breaks the one set just last
Thursday when Morgan Stanley disclosed that it paid CEO Mack $40 million in stock
and options. Mack, who is 62, rejoined Morgan Stanley 18 months ago to turn around
the company after the ouster of Philip Purcell. Mack's short-lived record bested one set
in 2005 by Goldman's Paulson, who was given $38.3 million.
Other than Blankfein, 11 other senior Goldman executives as a group were granted
slightly more than $150 million in shares and stock options. The highest paid among
those were Gary Cohn and Jon Winkelried, who both hold the titles of president and
chief operating officer. They each received $25.6 million in shares and options in 2006.
Any cash bonuses for the other executives were not mentioned in the filings.
The bonuses come after Goldman reported last week that it had earned the highest
yearly profit in the history of Wall Street. Net profit rose 70 percent to $9.4 billion on
revenue of $37.67 billion. Goldman and other firms have benefitted from a surging
market for takeovers and a strong stock market.
Goldman said last week it had set aside a total of $16.5 billion this year for salaries,
bonuses and benefits. On average, this would translate to $622,000 per employee.
The bonuses come in a year in which Goldman shareholders have benefitted from a
rise of about 58 percent in the company's share price, the strongest returns of any Wall
Street investment house.
Lehman Brothers Holdings Inc. and Bear Stearns Cos. have said they would pay
about $12 billion in compensation each. Lehman said last week it paid its chief
executive, Richard Fuld, $10.9 million in stock this year...
For more on Goldman Sachs, AIG, Coral Re, Marsh McLennan, Henry Kissinger, the
SEC, etc. ...GO TO > > > Axis of Evil, Cooking the Insurance Books; Nests of the
Insurance Vampires; Vultures in the Nature Conservancy
December 28, 2006
Merger activity to get even hotter
in 2007, analysts predict
Hot takeover market is expected to get even hotter in 2007
By Dana Cimilluca and Julia Werdigier, Bloomberg News
NEW YORK: As hot as the mergers market is now, it is about to get hotter.
All the variables are in place for acquisitions in 2007 to surpass the record $3.6 trillion
this year. U.S. stocks are trading close to their lowest price/ earnings levels in a decade,
data compiled by Bloomberg show.
Yields on the junk bonds used to finance takeovers also are near 10-year lows,
according to Merrill Lynch. Leveraged buyout firms have $1.6 trillion to spend,
Morgan Stanley estimates.
"There hasn't been a period I've seen in my career when all of those factors that
influence M&A activity have been as strong," said Stefan Selig, the global head of
mergers and acquisitions at the securities unit of Bank of America.
The conditions have never been even close to what they are now, said Felix Rohatyn,
a longtime investment banker who spent half a century at Lazard Frères and now
works as an adviser to the chief executive of Lehman Brothers Holdings, Richard
Bank of America, Morgan Stanley, Deutsche Bank and J.P. Morgan Chase all forecast
that takeovers may climb at least 10 percent next year. An increase of that magnitude
would raise fees from advising companies and buyout groups to a record $24 billion,
according to estimates based on Bloomberg data.
Goldman Sachs Group, Morgan Stanley, Lehman and Bear Stearns may need the extra
fees to keep profits growing after they earned a record $23 billion in 2006. Merrill,
which rounds out the top five, is to report its financial results next month.
In the United States, more than $170 billion of deals were announced this month.
Vodafone Group, Barclays and Air Liquide are among the European companies
whose shares gained this year on speculation that they might be takeover targets.
Anglo American, a mining company with a market value of £36.5 billion, or $71.5
billion, also may be bought, UBS analysts wrote in a note to clients Dec. 15.
The last time the backdrop for mergers and acquisitions was anywhere near as
favorable was in the late 1980s, when the former junk bond chief at Drexel Burnham
Lambert, Michael Milken, was helping finance hostile takeovers, and U.S. stocks lost
$500 billion of market value in the crash of October 1987.
Even then, 10-year U.S. Treasury yields were about twice the current level of 4.59
percent, making it more expensive to pay for deals. Only five buyout firms had
investment funds of more than $1 billion, Morgan Stanley research shows. Now, 115
have at least that much to spend.
"The financing markets today are much more robust," said Frank Yeary, global head of
mergers and acquisitions at Citigroup, which advised on eight of the 10 biggest deals
this year, including AT&T's $83 billion takeover of BellSouth. "There are many more,
and larger and deeper pockets of money."
Private equity firms are driving the increase in deals to heights never before seen.
Blackstone Group, Carlyle Group and Kohlberg Kravis led leveraged buyout firms in
announcing $735 billion of purchases this year, almost triple the amount announced in
The companies have about $409 billion of combined equity to invest and can raise
$1.2 trillion in non-investment grade bonds and loans, according to Morgan Stanley.
David Rubenstein, co-founder of Carlyle, this month predicted a $100 billion
leveraged buyout in the next two years.
Demand for high-yield debt is making it easier for buyout firms to finance acquisitions.
About $473 billion of leveraged loans were issued this year, up 60 percent from
2005, Standard & Poor's estimates. Sales of junk bonds increased 50 percent to
$199 billion, Bloomberg data show.
"If you look at the state of the credit markets, the increase in corporate earnings and the
buying power in private equity hands, it could well be another record year," said Dennis
Hersch, chairman of mergers at J.P. Morgan.
Companies in the S&P 500-stock index have increased profits by at least 10 percent for
13 straight quarters, the longest stretch since the 1950s, according to data from
Because stock market gains have not kept up with earnings growth, the average P/E
multiple for companies in the S&P 500 fell to 16.5 in July, the lowest in 11 years.
Goldman was the No.1 mergers and acquisitions adviser for a sixth straight year in
2006, working on more than $1 trillion of deals, according to Bloomberg data.
Citigroup ranked second, followed by Morgan Stanley, J.P. Morgan and Merrill. UBS is
sixth, Credit Suisse is seventh and Lehman is eighth.
In 2007, the biggest increase in merger volumes will probably be in Europe and
emerging markets, said Paulo Pereira, a London-based partner at Perella Weinberg
European mergers increased 49 percent this year to $1.69 trillion, outstripping
growth in the United States for the third consecutive year, Bloomberg data show. In
the United States, the biggest market with $1.7 trillion of deals, the volume of takeovers
rose by 37 percent.
"Europe still has some adjustments to do as part of the process of liberalization of the
European economy," Pereira said. "The corporate landscape is adjusting to trends that
other areas like the U.S. have already adjusted to."
In Asia, takeovers probably will be driven by leveraged buyouts and bank mergers in
Taiwan, said Angus Barker of UBS.
"The drive of strong corporate balance sheets and supportive equity market valuations
will remain intact going into 2007, so we anticipate another strong year for M&A in the
region," Barker said.
The pace of buyouts in Australia and Japan may "spill over" into other parts of Asia, he
~ ~ ~
For more, GO TO > > > Vultures in the Merger Market
November 9, 2005
Bank of New York Settles U.S.
Inquiry Into Money Laundering
By Timothy L. O’Brien, New York Times
Federal prosecutors said yesterday that the Bank of New York agreed to pay $38
million in penalties and victim compensation in a deal stemming from a six-year
investigation of fraud and money laundering involving suspect Russian and American
bank accounts and other fraudulent transactions.
Prosecutors said the bank, one of the nation’s oldest, did not adequately monitor and
report suspect accounts at the bank.
The bank agreed to make what prosecutors described as “sweeping internal reforms to
ensure compliance with its antifraud and money laundering obligations.”
Authorities sad that the bank has “accepted responsibility for its criminal conduct”
and that it will not be prosecuted as long as it complies with the terms of the deal for
Bank of New York also agreed to allow an independent examiner to monitor its
The investigation, which began in 1998 and ended last year, first became publicly
known in the summer of 1999 when Russia’s pell-mell rush to privatize formerly state-owned assets resulted in widespread criticism of insider deals and possible
corruption among Russia’s business elite and officials of the Kremlin.
The fine, which is among the largest ever assessed against an American bank for
money laundering violations, consisted of $14 million for failing to supervise suspect
Russian accounts and $24 million for a separate series of fraudulent activities involving
a branch on Long Island.
Riggs Bank, a subsidiary of the Riggs National Corporation, paid $41 million in
federal penalties this year and last to settle a high-profile investigation of money
laundering problems at that institution.
Prosecutors withe the United States attorneys’ offices in Manhattan and Brooklyn noted
that the money laundering scheme at the Bank of New York involved unlicensed
transmissions of about $u billion that originated in Russia, passed through American
accounts, and then moved into other accounts worldwide.
Authorities said that at least nine individuals, including a former Bank of New York vice
president, had been convicted for their roles in the two cases.
The Bank of New York acknowledged in the settlement that it had failed to adequately
police and intentionally failed to report suspect accounts at the bank. Moreover,
according to the settlement, the bank’s general counsel, managing counsel, and other
senior executives repeatedly ignored requirements to report illicit transactions until
authorities began arresting suspects in its investigations.
The agreement also said that the Bank of New York subsequently provided incomplete
reports about suspect activities and failed to report separate transactions that resulted
in the defrauding of other banks - even though the Bank of New York had already
reached an agreement with regulators to overhaul its troubled monitoring operations.
“We are satisfied that reaching this agreement is in the best interest of our company
and all of our constituents,” the bank’s chief executive, Thomas A. Renyl, wrote in a
statement. “We are taking the right steps in today’s environment to ensure sound
Two Russian emigres - Lucy Edwards, a former vice president at the bank, and her
husband, Peter Berlin - originally opened the suspect accounts at the bank in 1996.
The couple pleaded guilty to fraud charges in early 2000, conceding that they helped
two Moscow banks conduct illegal operations through Bank of New York accounts....
In 1999. the Bank of New York suspended Natasha Gurfinkle Kagalovsky, a senior
executive who oversaw Ms. Edwards. Federal investigators were exploring Ms.
Kagalovsky’s possible role in the money laundering scheme at the time and she
subsequently resigned from the bank and moved to London. she has never been
charged with wrongdoing in connection with the investigation....
Ms. Kagalovsky’s husband, Konstantin Kagalovsky, served in secure government and
corporate posts in Russia. He once worked for two large companies, Menatep and
Yukos, which the Russian billionaire Mikhail Khodorkovsky formerly controlled. Mr.
Khodorkovsky, once one of Russia’s most prominent and powerful figures, was
convicted in Moscow in May on fraud and tax evasion charges in a highly disputed
case pitting him against the Kremlin.
J. Michael Shepherd, who was general counsel at the Bank of New York during the
money laundering investigation, left the bank last year to become general counsel of
the BancWest Corporation.
He did not return a telephone call seeking comment.
For more, GO TO > > > Confessions of a Whistleblower; Dirty Money, Dirty Politics &
Bishop Estate; First Hawaiian Bank
June 27, 2003
300 Tech Firms To Pay $1B
In Fraud Case
Suits Against Investment Banks Ongoing
By MEG RICHARDS
New York— More than 300 companies that staged hot initial public offerings during
the tech boom agreed to pay investors $1 billion to settle allegations they were
complicit in schemes by investment banks to rig stock sales to benefit
themselves and favored customers.
Under the tentative settlement announced Thursday, the 309 companies also agreed to
cooperate in the continuing case against 55 brokerages accused of making secret
deals for coveted shares and artificially inflating the prices.
The massive case involves hundreds of lawsuits filed by investors over IPOs between
1998 and 2000, issued by such former high-flyers as theglobe.com, Global Crossing,
MP3.com, Ask Jeeves and Red Hat.
The proposed settlement guarantees that plaintiffs will receive at least $1 billion from
the tech companies' insurers, said Melvyn I. Weiss, chairman of a committee of
attorneys representing the investors. The class, which has not been formally defined,
will cover any investor who bought shares at the time of the IPOs or in the aftermarket,
up until Dec. 6, 2000, he said.
“This covers everybody who lost money. Most of our lead plaintiffs are just ordinary
people who are investors,” he said.
Settling with the companies — who plaintiffs say knew or should have known about the
alleged misconduct — will strengthen the investors' position as they negotiate with the
banks, Weiss said.
“We have always been of the mind that the primary target in this case is the
underwriting community,” Weiss said. “This gives us a huge booster shot in our case
The plaintiffs are looking to recover “many billions” of dollars from the investment
banks, Weiss said. The firms, including J.P. Morgan, Credit Suisse First Boston,
Merrill Lynch and Smith Barney, are accused of plotting to artificially inflate the value
of IPO stocks through a practice called “laddering,” which involves doling out shares
to investors based on their commitments to buy additional stock after trading begins.
In addition, some customers who invested in IPOs were compelled to give extra
compensation to the banks, sometimes through inflated commissions on other trades.
Later, after the so-called “quiet period” that follows IPOs, analysts who worked for the
banks issued favorable research to fluff up the stocks, whether they were worthy or
As part of the settlement, the tech companies have agreed that any claims they might
have against the investment banks will be assigned to the plaintiffs' class. Their
cooperation may also help speed the discovery process, Weiss said.
“They participated in road shows, they had conversations with the underwriters,” Weiss
said. “They may have been misled as to what compensation the underwriters were
receiving. ... all of this is important to us.”
Most of those involved have approved the settlement, Weiss said, which also must be
approved by the court.
No funds will be paid to investors until the case against the banks is resolved, however.
If more than $1 billion is recovered from the banks, the tech companies' will not have to
pay anything, the lawyers said. If the award is more than $5 billion dollars, the tech
companies and their insurers will be able to recover expenses.
The settlement was reached after more than a year and a half of negotiation between
lawyers for the investors, the tech companies and at least 42 primary insurers.
Attorneys involved agree it is among the most complicated cases in U.S. history.
“This is by far the most complex securities litigation that has ever been brought, and the
settlement process is equally complex,” said Jack Auspitz, a lawyer with Morrison &
Forester, who represents 30 to 40 of the internet companies.
© The Day Publishing Co., 2003
November 26, 2002
Wall St firms facing fines
up to $500 million
NEW YORK, Nov 26 (Reuters) - Regulators are telling Wall Street firms that they face
fines as high as $500 million in order to resolve analyst conflict of interest probes,
a source familiar with the matter said on Tuesday.
Regulators expect to tell Citigroup (C) that it will have to pay $500 million to end a
probe into whether its analysts misled investors with tainted research in order to please
investment banking clients, the source said.
Regulators have told Credit Suisse First Boston that it will have to pay $250 million
to settle the probes.
Bear Stearns Cos. Inc. (BSC), Goldman Sachs Group Inc. (GS), J.P. Morgan Chase
& Co. (JPM), and UBS Warburg are to be told or have been told that will have to pay
$75 million each, the source said.
Regulators will tell Thomas Weisel Partners that it must pay $60 million and Morgan
Stanley (MWD) that it must pay $50 million, the source said.
Regulators will not require Merrill Lynch & Co. Inc. (MER) to pay any amounts in
addition to the $100 million it has already agreed to pay as the result of a settlement
with regulators earlier this year, the source said.
© 2002 Reuters
$ $ $
November 18, 2002
Securities firms pay fines
for unsaved emails
Wall Street Journal
NEW YORK, Nov 18 (Reuters) - Five securities firms have tentatively agreed to pay
$8.3 million in fines for allegedly failing to keep emails and produce them in regulatory
investigations, the Wall Street Journal reported in its online edition on Monday, citing
people familiar with the matter.
Goldman Sachs Group Inc, Morgan Stanley, the Salomon Smith Barney unit of
Citigroup Inc, the U.S. Bancorp Piper Jaffray unit of US Bancorp, and the
securities unit of Deutsche Bank AG -- each plan to pay about $1.65 million to settle
the expected civil charges without admitting or denying wrongdoing, the
A regulatory group led by the Securities and Exchange Commission, the National
Association of Securities Dealers and the New York Stock Exchange had warned
the firms of the possible fines at a meeting at the SEC in late July, the Journal said.
The formal filing of the case alleging books-and-records violations could come as early
as next week, people familiar with the matter said, according to the newspaper report. .
© 2002 Reuters
$ $ $
October 20, 2002
Take the money and RUN
K-Mart is closing 284 stores and laying off 22,000 workers without
severance pay – and yet in 2001, K-Mart Chief Executive Officer Chuck
Conaway walked away with a golden parachute worth at least $9.5 million – on top
of total 2000 compensation that topped $29 million.
K-Mart is not an isolated example. While a typical company’s corporate profits declined
by 35 percent in 2001, corporate chiefs pocketed 7 percent more in median salaries
than the previous year. At the same time, CEO’s have risk-proofed their own retirement
and job security, while workers are more vulnerable than ever.
Here are some other stories of CEO’s and what they did to their
companies and their workers.
>> GE has not contributed to it’s workers’ pension plan since 1987 – and the plan
added $1.5 billion back to GE’s earnings in 2001. In addition to 2001 compensation of
$16,246,772, former CEO John Welch, Jr. stands to receive a pension benefit of
nearly $10 million every year for the rest of his life!
>> Coca-Cola cut 5,200 jobs and the value of Coke workers’ 401(k) plan has fallen
in half. CEO Douglas Daft got the earnings targets on his restricted stock grant
reduced after he failed to meet is promised performance goals. His total 2001
compensation was $105,186,644.
>> By the end of 2002, if it spins off its recently acquired cable business, AT&T is
expected to employ 75% fewer workers than it did in 1984. CEO C. Michael
Armstrong will get a new employment contract and has a $10 million floor on his
restricted stock. His 2000 compensation totaled $27,730,943.
>> Tyco International has eliminated 11,000 jobs as it closed or consolidated more
than 300 plants. CEO Dennis Kozlowski and his chief financial officer have chased
out half-a-billion dollars in shares and stock options on top of salaries and bonuses
totaling almost $22 million over the past three years.
>> Hewlett-Packard will cut 15,000 jobs as the result of its merger with Compaq. CEO
Carly Fiornia Forina took home nearly $15 million in 2001 compensation and gets a
new employment contract....
$ $ $
September 20, 2002
bank loan ‘‘tying’’
Practice forces borrowers to sign up for investment banking
By Jathon Sapsford, THE WALL STREET JOURNAL
Sept. 20 —— The National Association of Securities Dealers said it is investigating
a widespread but controversial banking practice in which loans to companies are made
only if the borrowers agree to give the lender lucrative, fee-generating investment-banking business.
WHILE LAWS formally prevent banks from initiating such an arrangement, known as
tying, many banks have found loopholes to the laws. During the soaring stock market of
the 1990s, when investment-banking was generating huge commissions for banks that
underwrote securities or advised on enormous mergers, such quid-pro-quo
arrangements were widespread....
The multipronged investigation is likely to focus on one of the most routine ways big
lenders get around existing laws against tying. The Bank Holding Company Act
Amendments of 1970 forbids a bank from tying loans to other
businesses. But banks often side-step this rule by booking loans at an affiliate, such
as a securities unit or a bank-holding company.
In the past, tying has been extremely difficult to prove, and banking regulators and
private sector regulatory lawyers say they can’t recall a single instance of a
tying case brought by bank regulators...
“We are receiving reports and hearing concerns from some of our members that the
practice of tying commercial credit to investment banking is becoming more
widespread,” said Robert Glauber, chairman of the NASD.
“As underwriting and [initial public stock offering] business remains
low, the temptation to generate business by tying increases.”
The NASD declined to identify the institutions it is looking into. But the institutions likely
to come under scrutiny include three of the nation’s largest lenders — J.P. Morgan
Chase & Co., Citigroup Inc. and Bank of America Corp. — that also have
large and aggressive investment-banking businesses....
The NASD said its investigation indicated that the tying of commercial-bank loans to
investment-banking services occurs most commonly in scenarios involving so-called
bridge loans, which are short-term loans companies rely on while they are awaiting the
proceeds of bond sales; backup credit facilities that support a company’s issuance of
commercial paper; and syndicated loans.
“Access to these types of credit at commercial rates is critical to many companies and
may provide a bank with the opportunity to require a company to purchase additional
investment-banking services, such as investment-grade debt underwriting,” the NASD
The NASD said it is also concerned that tying may occur with other services, such as
Tying is the latest point of contention for a financial-services industry under scrutiny for
a number of conflicts, including the close ties that bank and brokerage analysts
have with the companies they cover. The tying issue surfaced in recent months as
the economy slowed and credit became scarce, giving lenders leverage over the
cash-starved corporations who need loans.
Bankers, defending their lending practices, counter that it is often borrowers who ask
that bankers provide loans in exchange for the fat fees they pay when hiring their
banks to underwrite securities or provide merger advisory. There are no laws baring
banking clients for demanding that banks provide one service at the expense of
Whoever is driving the practice, banks like Citigroup and J.P. Morgan have made
strides in stealing some of the investment-banking business from their Wall Street
rivals, by many accounts because they offer loans as well as investment-banking
But that has come at a cost for some banks. J.P. Morgan said earlier this week that
its third-quarter earnings would suffer from $1.4 billion in losses related to loans
that had gone bad. Most of those loans were extended to companies in the
telecommunications and cable industries, once considered high-growth prospects
promising to yield their bankers lucrative investment-banking fees as they expanded
The fact that lending and investment banking are becoming increasingly linked has
captured the attention of legislators only three years after Congress repealed the
Glass-Steagall Act, the last vestige of Depression-era laws that formally
separated banking, brokerage activity and insurance.
Rep. John Dingell, a Michigan Democrat, questioned regulators’ grasp on potential tying
violations in a July letter to Federal Reserve Board Chairman Alan Greenspan and
Comptroller of the Currency John D. Hawke Jr. In an Aug. 13 response, Messrs.
Greenspan and Hawke said their staffs are conducting a “special targeted review of the
tying issue at several of the country’s largest banks” and will take “appropriate
supervisory action” if necessary.
– Copyright © 2002 Dow Jones & Company, Inc.
$ $ $
September 13, 2002
Charges filed against
former Tyco executives
By Samuel Maull, Associated Press
NEW YORK – Three former Tyco International executives were charged yesterday
with looting the conglomerate of hundreds of millions of dollars. The charges were
the latest move by prosecutors against alleged thievery in America’s boardrooms.
Manhattan District Attorney Robert Morgenthau said former chief executive L. Dennis
Kozlowski, and former, chief financial officer Mark H. Swartz directly stole more
than $170 million from the company and obtained $430 million through fraudulent
Kozlowski, 55, and Swartz, 42, were charged criminally with enterprise corruption and
grand larcency. Former general counsel Mark Belnick, 55, was charged with
falsifying business records to cover up $14 million in improper loans from Tyco....
For more, GO TO > > > Tracking Tyco
$ $ $
June 28, 2002
Xerox improperly booked
Copier firm reverses $1.9 billion in sales
THE WALL STREET JOURNAL
STAMFORD, Conn. — Xerox Corp. said it reversed about $1.9 billion of revenue that
it recognized over previous years, a move that will reduce revenue 2% to $91 billion for
the 1997-2001 period.
THE COMPANY said it reversed $6.4 billion of previously recorded equipment-sale
revenue, which was offset by $5.1 billion of revenue that it recognized and reported
during the same period as service, rental, document outsourcing and financing revenue.
Also, Xerox reversed $600 million in lease revenue that it received before 1997, a
company spokeswoman said.
Shares of Xerox slid 17%, or $1.39, to $6.61 in morning trading on the New York Stock
Exchange. . . .
The SEC’s April complaint had accused Xerox of having “misled and betrayed
investors” with a wide-ranging scheme to manipulate its earnings and
enrich top executives.
Most of the charges revolved around Xerox practices that improperly accelerated
revenue from long-term leases of its copiers and other office equipment.
At that time, the SEC had estimated that Xerox’s accounting tricks accounted for as
much as 37% of pretax earnings during certain quarters.
The agency said the accounting scheme helped keep Xerox’s stock
price artificially high in the late 1990s, with the result that executives
could cash in more than $5 million in performance-based
compensation and more than $30 million from stock sales....
For more, GO TO > > > The Xerox Conspiracy
$ $ $
April 24, 2002
Research probe could cost Merrill
NEW YORK, April 24 (Reuters) - Merrill Lynch & Co. Inc. (MER), under fire for
allegedly biased stock research, could wind up with a tab of $2 billion in a worst-case
scenario outcome of a regulatory investigation, a Prudential Securities analyst
said on Wednesday.
"We estimate that the (New York) State Attorney General investigation could ultimately
cost Merrill Lynch as much as $2 billion," analyst Dave Trone said in a research note.
"A caveat is that our estimates for three of the four consequences are 'worst case'."
New York State Attorney General Eliot Spitzer earlier this month accused Merrill of
tailoring its research to woo investment banking business, after he dug up e-mails
passed around by former star analyst Henry Blodget's Internet group, showing that
analysts privately disparaged stocks they publicly touted.
Merrill agreed to disclose potential conflicts of interest on its stock reports, but it is still
negotiating with Spitzer on the size of a possible settlement payment and changes it will
make in the operation of its research department.
Following New York's lead, other investigative bodies became involved in the Wall
Street research probe on Tuesday.
Securities regulators from several states said they formed a multi-state task force to
investigate Wall Street firms for possible securities law violations in issuing misleading
stock research. Spitzer is co-chair of the national task force, along with the New Jersey
and California state attorneys general.
Merrill has enlisted former New York City Mayor Rudy Giuliani, who
initially gained public attention through his investigations of
securities traders and racketeering, to help deal with Spitzer's
"Merrill Lynch has hired Giuliani Partners to advise on all aspects of a resolution," a
Merrill spokesman said. "The issues presented in this matter are complex and require a
complex understanding of the market system."
Spitzer has also subpoenaed most of Wall Street's biggest firms, including Morgan
Stanley (MWD) and reportedly Goldman Sachs Group Inc. (GS) and Credit Suisse
First Boston, which have declined to comment on the matter.
FOUR POTENTIAL CONSEQUENCES
There are four potential consequences of Spitzer's 10-month probe, Trone said. These
include a nationwide financial settlement, which, he said, could cost as much as $1
billion. The Changes to Merrill's research procedures, which Trone said could cost $30
million, and $500 million in lost profits from client defections are two other
consequences in addition to the settlement costs.
Civil lawsuits that result from the regulatory findings could cost $420 million, Trone said,
calculating there is a 1 percent chance Merrill would lose such a case and multiplying
that percentage by Merrill's total market value.
"We believe Merrill has virtually no chance of losing to plaintiff suits in court,"
Trone said. It will be too hard for plaintiffs to prove they relied solely on Merrill's
research to make the investment decisions that lost them money, he said.
A total of $2 billion is steep, but Trone noted that Merrill lost $4.4 billion in market
value in the 10 trading days after April 8, when Spitzer announced the charges.
Despite the potential costs, Trone maintains his market rating of buy on Merrill
shares. . . .
© 2002 Reuters
For more on Merrill Lynch, GO TO > > > BEWARE! This Bull is for the Birds!
For more on Prudential Securities, GO TO: A Nest on Shaky Ground
For more on Goldman Sachs, GO TO > > > Dirty Gold in Goldman Sachs?
$ $ $
April 8, 2002
Enron Shareholders' Suit to
List Banks, Brokerages
Class-Action Filing Seeks to Take Aim at Wall Street Tactics
With Potential Conflicts of Interest
By David S. Hilzenrath and Peter Behr, Washington Post
Several of Wall Street's most prominent banks and brokerages played a crucial and
deliberate role in Enron Corp.'s fraud on investors, lawyers for Enron shareholders
allege in an expanded class-action lawsuit they plan to file today.
The lawsuit seeks to put Wall Street practices on trial, including the potential conflicts
that investment banks face in recommending the stocks of companies that pay them
Enron's "house of cards" would have collapsed much earlier if it had not been propped
up by investment banks and brokerages, the suit alleges. Enron in December sought
Chapter 11 protection in the nation's largest-ever bankruptcy filing.
Financial institutions named as defendants in the lawsuit include J.P. Morgan Chase &
Co., Citigroup Inc., Credit Suisse First Boston USA Inc., Bank of America Corp.,
Merrill Lynch & Co. and Lehman Brothers Holding Inc. . . .
The lawsuit also targets two law firms that worked for Enron or a related partnership:
Vinson & Elkins LLP and Kirkland & Ellis. In statements, the law firms said they did
their jobs properly.
The suit reflects the Enron shareholders' quest for deep pockets to cover the billions of
dollars they lost when the Houston energy trader collapsed. In November, Enron
disclosed that, since 1997, it had overstated profits and understated debts.
Initial lawsuits aimed at Enron executives and directors and the company's longtime
auditor, Arthur Andersen LLP, which put its stamp of approval on the company's false
financial statements. Andersen's ability to pay damages, however, appears to have
been reduced by an exodus of clients. The accounting firm is fighting for survival and
defending itself against a federal indictment for destroying Enron-related records.
Andersen's negotiations with Enron shareholders continued over the weekend, past a
midnight Friday deadline, and sources close to the litigation said some progress was
The amended suit alleges that, with inside knowledge of Enron's vulnerable financial
condition, major financial institutions issued analyst recommendations that encouraged
investors to buy Enron stock, provided loans that propped up the company, helped
Enron hide the extent of its borrowing, and underwrote Enron securities offerings
through which the investing public paid down corporate debts.
Attorney William S. Lerach of the firm Milberg Weiss Bershad Hynes & Lerach LLP,
lead counsel for the shareholders, briefed reporters yesterday on the suit after providing
draft copies of the document.
Banks "structured and/or financed" Enron's off-the-books
partnerships, at times helping them carry out bogus transactions, the
Banks also "played an indispensable role in helping to inflate and
support Enron's stock price," the suit says.
As a reward, "banks and/or their top executives" were allowed to
invest in one of Enron's key partnerships, where they stood to profit
from self-dealing transactions with Enron, the suit says.
"Secret or disguised transactions by J.P. Morgan, Citigroup and CS
First Boston also concealed billions of dollars of loans to Enron," the
For example, the suit alleges that J.P. Morgan used an entity it controlled in the
Channel Islands, Mahonia Ltd., to issue loans to Enron that were disguised as trades
of natural gas futures contracts. The transactions concealed more than $3.9 billion
of debt that should have been reported on Enron's balance sheet, the suit says.
Recognizing the risk that Enron would default, the suit says, J.P. Morgan took out
insurance on the contracts. Since Enron's bankruptcy, the insurance carriers
have refused to pay, arguing that the trades were fraudulent.
A federal judge last month refused to compel the insurers to pay, ruling that "these
arrangements now appear to be nothing but a disguised loan.". . .
© 2002 The Washington Post Company
$ $ $
February 28, 2002
Wall Street Analysts Deny
Role in Enron Fall
Senate committee points to possible
conflict of interest
by Marcy Gordon, Associated Press
WASHINGTON – Wall Street analysts who recommended Enron stock as the company
slid toward bankruptcy testified yesterday they were not influenced by their own firms’
investments and had seen no signs of serious trouble.
It was the first time financial analysts, whose advice is heeded by investors nationwide
and whose firms give millions in campaign donations to lawmakers, were called to
account for their role in the Enron debacle.
“It now seems clear that too many analysts failed to ask ‘why?’ before they said ‘buy.’”
Sen. Joseph Lieberman, D-Conn., chairman of the Senate Governmental Affairs
Committee, said at a hearing at which four analysts from big investment firms
Ten of 15 analysts who followed Enron were still rating it as a “buy” or “strong buy” as
late as Nov. 8, two weeks after the Securities and Exchange Commission announced it
had opened an inquiry into the energy-trading company’s accounting.
“It appears we were misled” about Enron’s financial condition, testified Anatol Feygin, a
senior analyst at J.P. Morgan Securities Inc.
After Enron chief executive Jeffrey Skilling resigned abruptly last August, analysts were
told in a conference call that nothing negative was happening or was anticipated, said
Curt Launer, managing director of stock research at Credit Suisse First Boston.
And independent analyst, Howard Schilit, told the senators his review of Enron’s
financial statements found numerous problems that should have been noted by
analysts covering the company.
Federal Reserve Chairman Alan Greenspan said yesterday that when investigators
collect all the evidence they will find that Enron’s collapse was triggered by
financial markets’ sudden loss of confidence in the company.
“Enron is a classic case of a company whose market value is very significantly
dependent on the reputation of the firm,” he told the House Financial Services
Committee in response to questions . . .
Although analysts’ compensation may not have been linked to their stock
recommendations, several senators said a potential conflict of interest exists because
of the investment firms’ profitable business ties with companies their analysts follow.
Analysts, who earn an average of about $200,000 yearly, often receive bonuses based
on overall profits of their firms, which depend in turn on the ties with the companies the
analysts follow. The four appearing at yesterday’s hearing said they get bonuses on
Some of the analysts also went briefly “over the wall” from the research to the
investment-business side of their firms to work on projects.
“You have an appearance problem,” Sen. George Voinovich, R-Ohio, told the analysts
from Wall Street powerhouses J.P. Morgan, Lehman Brothers, Credit Suisse First
Boston and Citigroup Salomon Smith Barney.
Several big investment firms lent money to Enron, invested in its
partnerships, bought Enron stock and recommended it to investors.
Now they face hundreds of millions of dollars in losses on the loans. .
For more, GO TO > > > The Story of Enron
$ $ $
Wall Street Greed
Fight back against anti-competitive corporate mergers,
unfettered free trade, downsizing, declining wages and
Downsizing & Corporate Relocations
According to outplacement firm Challenger Gray & Christmas, companies cut more jobs
in July 2001 than in any month since they started keeping track of layoffs in 1993.
Corporations announced a record 205,975 job cuts for July 2001 alone, bringing the
total number of lost jobs for the first seven months of the year to just under 1 million.
What newspaper articles are not saying is that it is unregulated corporate actions that
has caused the economy to go into the dumpster. But maybe even the media titans are
starting to worry. The New York Post ran a photograph of "unemployed men on a soup
line during the depression of 1934", with the bold type asking "Is this the future?" [New
York Post, 8/7/01, page 30]
* * *
Tyco International Ltd., a diversified conglomerate employing 220,000 people,
purchased 7 firms for a total of $17 billion during the 9 month period ending June 30th.
As a result of these acquisitions, they closed 58 facilities and cut 6,400 jobs ---
presumably because they were "redundant" workers. Tyco plans to eliminate an
additional 2,000 workers. Although the company is managed from Exeter, New
Hampshire, their "official" headquarters is in Bermuda. [Wall Street Journal, 8/14/01,
* * *
Companies are closing customer service centers in the United States and moving the
jobs to India, where the workers are paid about $2,400 US per year. The customer
service reps don't tell their American callers that they are really located in India.
"Companies that outsource to India would prefer to keep that under wraps", reports S.
Mitra Kalita in Newsday [7/15/01, pages F1, F6-F7].
* * *
It isn't just customer service jobs being moved to India, either. Computer programmers
are being laid off by the thousands in the United States with the work being moved to
India. Programmers in India are paid about $5,000 US per year, and receive almost no
benefits. Comparable programmers in the United States earn at least $50,000 US per
year. According to Clive Thompson in Newsday, "database giant Oracle has
announced that it would be investing $50 million to expand its Indian offices." He also
reported that Hewlett Packard is boosting its staff in India from 1,500 to 5,000.
As Mr. Thompson so eloquently stated, "Eventually the United States won't make
any hard goods, won't do the cerebral stuff and won't fulfill the orders. Then,
what's left? Brand building? Business development? Shopping? Would you like
fries with that, sir?" [Newsday, 7/15/01, page B15]
* * *
The American flag flies high outside the corporate headquarters of Symbol
Technologies, Inc. in Holtsville, NY. But even though the sales of their products are
booming, as many as 700 jobs are being eliminated in the United States. An increasing
amount of production is going to be handled at the company's plant in Reynosa,
Mexico. [Newsday, 5/4/01]
Then, less than 3 months later, Symbol Technologies announced that it was laying off
an additional 1,000 workers and closing 9 distribution facilities to consolidate them all in
the cultural wasteland of McAllen, Texas. It also reiterated its decision to move all high-volume manufacturing to Mexico and the Far East. [Newsday, 7/27/01, page A51]
* * *
The USX-U.S. Steel Group is closing the Fairless Works steel mill near Philadelphia,
with 600 people losing their jobs as a result of "an increase in foreign imports",
according to the Wall Street Journal. These job loses were "permanent", said a USX
spokesman. [Wall Street Journal, 8/15/01, page A2]
* * *
United Services Automobile Association (USAA), an insurance and financial
services firm, just announced that it would be cutting 1,370 jobs (almost 6% of its
workforce). Most of the jobs cut will be at USAA's San Antonio, Texas headquarters.
[New York Times, 8/9/01, page C4]
$ $ $
June 24, 2003
West Virginia sues Wall St. firms, seeks $300 mln
By Kristin Roberts
MIAMI, June 24 (Reuters) - West Virginia's attorney general said on Tuesday he filed
suit against 10 Wall Street firms, claiming relationships between banking and research
departments represented an illegal conflict of interest under state law.
The complaint filed by Attorney General Darrell McGraw comes two months after a
record $1.4 billion global settlement with those same firms following New York Attorney
General Eliot Spitzer's probes of stock research by Wall Street analysts.
West Virginia seeks more than $300 million in damages based on its Consumer
Credit and Protection Act. The state is suing on behalf of residents who may have
made investment decisions based on what it said could be biased research issued by
the firms' analysts.
The firms are Bear Stearns Cos. Inc. (BSC), Credit Suisse unit Credit
Suisse First Boston, Goldman Sachs Group Inc. (GS), Lehman Bros.
Holdings Inc. (LEH), Citigroup's (C) Citigroup Global Markets, J.P.
Morgan Chase & Co. (JPM), Morgan Stanley (MWD), Merrill Lynch
Cos. Inc. (MER), UBS unit UBS Warburg, and the Piper Jaffray unit of
U.S. Bancorp (USB).
Seven of the firms reached on Tuesday said they had no comment on the case. The
others were not available.
Fran Hughes, deputy attorney general, said West Virginia was not asking the court in
this case to force the firms to eliminate or alter any of their practices. Rather, West
Virginia was seeking only monetary penalties.
"We just want them to pay for all the losses that they've intentionally caused," Hughes
The state also claims two of the 10 Wall Street firms engaged in "spinning," the practice
of giving top corporate clients access to hot initial public offerings of stocks.
Under the West Virginia law, any unfair, deceptive or dishonest act directed at or
affecting a state resident is punishable by a fine of up to $5,000 per offense. The
attorney general said there could be "hundreds of thousands" of violations in this
May 31, 2002
Why Is Washington Ignoring
The Warning Signs Of Economic Devastation?
By Arianna Huffington, AlterNet
Hindsight -- it's all the rage in Washington. But though the story of the missed terror
warning signals is eating up all the headlines, there is another story of warning signs
being ignored by our elected officials that's getting hardly any ink at all, even though
these signs are multiplying at an alarming rate.
Here are a few of them:
In the last two years, 433 public companies -- including Enron, Global Crossing,
and Kmart -- have declared bankruptcy.
Two million Americans have lost their jobs.
Four trillion dollars in market value has been lost on Wall Street.
And each day brings a fresh, stomach-turning revelation of the rampant corruption
infecting corporate America. Despite these ominous flashing red lights, it now appears
almost certain that no real reform legislation will come out of Congress before the
Think of that. After the outrage generated by Enron, Arthur Andersen, Merrill Lynch,
and all the other corporate scumbags undermining the modern private enterprise
system, the end result will be a continuation of the rotten status quo. And that means
fresh disasters down the road. Yet we have the information to, as the phrase of the
moment goes, "to connect the dots" right now.
It's a textbook case of special interests triumphing over the public interest. In other
words, unless you're reading this in your executive boardroom, you've lost again. In this
case, the biggest winners are those veteran Washington arm-twisters, the powerful --
and very well-funded -- accounting and financial services lobbies.
That's right, the same folks who helped bring us this mess by relentlessly chipping away
at the rules and regulations governing their industries are now ensuring that any efforts
to clean things up will be thwarted. And lest we forget, the problem is that much of what
is being done isn't illegal but should be. Otherwise, the manic appetite for profits will
continue to inspire Wall Street's rats to squeeze through every loophole.
The latest example of their sinister handiwork is the sudden shelving of Sen. Paul
Sarbanes' accounting reform bill, a muscular measure that would strengthen the SEC,
restrict accounting firms' ability to double-dip as consultants and auditors for the same
client, and impose stringent conflict of interest rules on the investment banking world.
Instead, the bill is in a deep coma and not expected to survive, having been pummeled
within an inch of its legislative life by a goon squad made up of finance lobbyists and
their No. 1 Senate enforcer, Phil Gramm.
First, the lobbyists brought out the rhetorical brass knuckles, issuing an "Action Alert"
that Sarbanes' bill would result in a "de facto government takeover" of the accounting
profession and "serious, harmful consequences for capital markets and American
The warning on a pack of cigarettes is less alarmist. Then Gramm pulled out his copy of
Robert's Rules of Parliamentary Obstruction and went to work, pressing Chairman
Sarbanes to hold more hearings on the bill -- even though the Banking Committee had
already held 10 hearings on the matter since Feb. 12 -- and offering 41 last minute
amendments. Fellow Republican committee members added another 82 amendments
for good measure -- a few extra kicks in the gut of the lifeless bill.
It was democracy at its worst. The full court pressure worked. Sarbanes put the bill
on ice and retreated to lick his wounds. When I called for his reaction, I was told he
wasn't talking to the press. Why not? He should be speaking out to anyone who will
listen and hitting the talk shows with his condemnation of those knee-capping his
efforts. Where is his indignation over Gramm's bullyboy tactics?
It should come as no surprise that, according to the Center for Responsive Politics,
the accounting industry has already doled out $5.2 million in 2002 campaign
contributions -- with $293,196 of that going to 16 of the 21 members of the Senate
Banking Committee, including $37,500 to Gramm, and another $52,497 to Mike Enzi,
who have cosponsored a highly diluted, industry-approved, next-to-useless alternative
to the Sarbanes bill.
It was this generous spreading of financial manure that doomed an earlier effort, led by
then SEC Chairman Arthur Levitt, to bar accounting firms from serving as both
incorruptible auditor and smarmy sales help for the same company. Had Levitt's
measure passed, it very well could have removed the tempting apple that Enron used
to corrupt Arthur Andersen.
And by the way, it's not just Republicans dancing to the accountants' tune. Sen. Chuck
Schumer, the senior Democratic senator from New York, and among those who
spearheaded the opposition to Levitt's proposal, has received $438,431 from
accounting firms since 1989.
It was this financial industry lobbying muscle that over the last decade pushed through
legislation gutting so many of the regulations designed to bring accountability to our
complex free market system: the Private Securities Litigation Reform Act, which
made it much harder for investors to win lawsuits against corporations; the
Financial Modernization Act, which demolished the barriers that had kept
investment banks out of commercial banking since the Great Depression; and the
Commodity Futures Modernization Act, which gave us unregulated trading of
derivatives and made the Enron debacle possible.
Meanwhile the White House seems less than eager to put a reform bill on the
president's desk. Apparently, the post-Enron panic that inspired the president to
propose a 10-point plan that included a reform of accounting standards has subsided.
Or maybe the administration's current do-nothing posture has something to do with the
embarrassing revelation this week that the SEC has begun an investigation into
whether Halliburton, under Dick Cheney, used questionable accounting practices
to pump up its bottom line.
"Once the excitement and the glares fade," accounting industry lobbyist John Hunnicutt
said of reform efforts on the Hill, "people really start to think about it." Translation: he
and his friends are keeping all their fingers and toes crossed that, "once the excitement
and the glares fade," people will forget about the lies, the fraud, the cooked books, the
document shredding and just lose interest. . . .
It looks like they just might get their wish. "It is unlikely," Sen. Jon Corzine, a Banking
Committee member championing reform, said this week, "that we will get strong reform
unless there is a new event that captures the public imagination." You mean the largest
corporate bankruptcy in history and the parade of corruption that has followed weren't
That's like saying that Sept. 11 wasn't enough -- that we have to wait for the next
horrific attack before we get serious about taking on terrorism (which, unfortunately,
seems also to be the case).
Do we have to wait for another 433 companies to go belly up, and two million more
Americans to lose their jobs, before our leaders heed the warning signals and make
passing the post-Enron reforms a top priority?
How about a little foresight to go along with the heaping helping of hindsight
Washington is serving up?
© 2001 Independent Media Institute. All rights reserved.
$ $ $
June 10, 2002
In Search Of ‘Clean’ Stock
by Jane Bryant Quinn, Newsweek
Alas, the guidelines for ‘social investing’ ignore a thing or
two. Last year they’d have led you to Enron,
as a ‘good energy’ company. Oops.Socially responsible investors — both you and your mutual fund — have a new issue
to confront. How do you handle the ethical swamp that’s turning up at the heart of some
of America’s “cleanest” stocks? As a matter of principle, social investors buy only
progressive companies that respect the community, treat workers fairly and conserve
ALAS, THESE GUIDELINES ignore a thing or two. Last year they’d have led you to
Enron, as a “good energy” company. Oops.
Anyone can be taken in by fraud, but the problem for white-hat investors turned out to
be larger than that. A stock may pass the traditional social-responsibility tests and still
outrage one’s moral sense. You don’t want to own a company willing to cook its books
or manipulate energy prices, no matter how nice it is to its employees. . . .
Social investing emerged from the stew of civil-rights marches and protests against the
Vietnam War. The movement’s first mutual fund, Pax World, debuted in
1970—promising no defense, nuclear power or “sin” stocks (gambling, alcohol,
tobacco). It sought environmentally savvy firms that hired women and minorities.
Next came the fight against South African apartheid and social investing caught on.
Today, Morningstar counts 119 social funds, managing more than $13 billion (see
socialinvest.org, for some names). If you add institutional and private money, social
investors may control more than 12 percent of the managed assets in the United
States. . . .
When I spoke with fund managers last week, I found them thinking about this problem
but not sure how to quantify it. ... How do you recognize the risk of duplicity in a
company whose social report card shows gold stars?
One hard fact some funds are considering is CEO pay and perks. Over-the-moon
compensation seems linked with companies that inflate their earnings. . . .
Funds are also looking what the company pays its auditing firm... That raises a
question about how independent the auditors are, when their firms have that much
money at risk....
The big question about social funds has always been how they perform. As usual,
some shine while others don’t.
The former Citizens Index Fund leaned heavily toward tech stocks and got killed when
the bubble burst. It remade itself as a big-cap growth fund and is trying again. Ariel, on
the other hand, has been doing fine.
The entire social-investing group does as well as the market. Now they have to get
better at finding truly white-hat stocks.
Reporter Associate: Temma Ehrenfeld, © 2002 Newsweek, Inc.
$ $ $
June 17, 2002
Goldman unit insists it met
Japan tax obligations
TOKYO, June 17 (Reuters) - The Japanese unit of Goldman Sachs Group Inc
(GS) said on Monday it had met all tax obligations in Japan and declined to comment
on media reports that said it had failed to report some income by transferring funds
Japanese media reports said on Sunday that seven Japanese affiliates of the
U.S. securities giant failed to report a total of five billion yen ($40.24
million) in income in Japan....
Jiji news agency and the Mainichi Shimbun newspaper on Sunday quoted unidentified
sources as saying that the tax authority imposed an additional tax of some 1.5 billion
yen, including penalty taxes, on the Goldman Sachs group firms after searching their
premises for evidence.
The seven firms purchased bad loans, along with real estate assets put up as collateral,
from Japanese banks at low prices, and transferred some of those assets to a dummy
company in the Cayman Islands, a tax haven, Jiji said.
The Japanese affiliates also transferred the proceeds from related transactions to a
Goldman Sachs group company in the Netherlands, effectively evading tax payments
in Japan, Jiji quoted sources as saying.
"There are structures that have money going outside of Japan. But there was no
wrongdoing and we complied with Japan's tax regulations," Camargo said.
There were similar reports last month about top investment bank Morgan Stanley
Japanese media reports said the U.S.-based property fund run by Morgan avoided
paying tax in Japan on 18 billion yen in income by funnelling money through Dutch
Morgan said it believed it had met all tax obligations in Japan and that it had no current
dispute with Japanese tax authorities.
The reports said the Tokyo Regional Taxation Bureau had concluded that the Morgan's
fund had used a loophole to reduce its profits on transactions involving Japanese real
estate by using "dummy" companies in the Netherlands.
© 2002 Reuters
$ $ $
December 12, 2001
Asbestos on the Brain
Strike three for Halliburton came this week when a third asbestos case in
as many months went against the oil giant. Funny thing is, Halliburton does
not, nor did it ever produce asbestos. Those who did have largely gone
bankrupt, leaving the plaintiff's bar to look for deep pockets that have even
tangential connection to the cancer-causing agent. Investors are going to
continue to have difficulties accurately pricing in this risk for companies like
Halliburton and Sealed Air.
By Bill Mann (TMF Otter)
It's been a tough couple of months for Texas.
First, Houston's economy gets shelled due to the collapse of Enron (NYSE: ENE),
replete with layoffs by the thousands, suddenly unneeded "in-process" real estate, and
a loss of paper wealth among its citizens in the billions of dollars. Then Dallas-based oil
services giant Halliburton (NYSE: HAL) suffered a 40% drop in share price after it
disclosed that its asbestos litigation liability may be "materially more than previously
expected." That 40% represented about $5 billion in market value.
Plus, the Houston Astros flailed in the baseball playoffs, the Dallas Cowboys can't beat
anyone whose name doesn't rhyme with "Mashington Wedskins," and the University of
Texas biffed a chance to play for the national championship in college football. When
the fortunes in oil and football are going the wrong way in Texas, you know a lot of
people there are not at all pleased.
Halliburton's woes are not, however, related to either oil or football. They are from
litigation from asbestos, a flame retardant material that, as it turns out, causes amongst
other things, mesothlioma, a deadly form of cancer. Asbestos use peaked in the U.S.
in the 1970s, though some experts say deaths from asbestos-related illnesses are not
expected to crest until 2010. Therein lies the beginning of the problem for Halliburton
and other companies with asbestos litigation risk: With diseases that can take more
than 20 years to develop after exposure, no one has any idea how much the eventual
claims will be, or when they will stop.
Here's where it gets strange. As it turns out, Halliburton, which has in the last three
months lost three court verdicts with liabilities at about $125 million, isn't and has never
been involved in asbestos. Instead, Halliburton merged with a company, Dresser
Industries, in 1998, more than a dozen years after Dresser had been involved with
asbestos. However, Halliburton's merger with Dresser came with the assurance that
Dresser's liability for claims was insured. But since the insurer has no means to cover
claims, the responsibility to pay goes right back to Halliburton, which has money and
assets to spare.
That's right. Halliburton is on the hook for potential asbestos litigation for being in the
wrong place, and having a whole lot of money. It doesn't really seem fair, but then
again, neither is it fair to the victims of nasty diseases brought upon by exposure to
asbestos fibers. Aristotle called the law "reason free from passion," so really whether or
not treatment of Halliburton is deemed fair by the general public matters not at all.
Why not sue the companies who produced the asbestos in the first place, you say?
Well, for one thing, more than 25 companies, including USG (NYSE: USG), W.R.
Grace, (NYSE: GRA), and Owens Corning (NYSE: OWC) have already filed for
bankruptcy due to massive asbestos-related liabilities.
Other companies have some unknown asbestos liabilities as well. Sealed Air (NYSE:
SEE) held a conference call to comfort investors that its asbestos liability has not
changed and were inconsequential and that all cases against the company "are inactive
pending the disposition of the Grace bankruptcy."
Sealed Air, like Halliburton, has never had any asbestos operations. In Sealed Air's
case, it purchased a division of W. R. Grace. When Grace filed for Chapter 11, two
committees representing asbestos-related claimants filed motions with courts to pursue
Sealed Air as being successively liable. The company believes that the chances of this
happening are slim, but admits that quantification of claims against it should its defense
fail is impossible.
There are a couple of lessons here. First of which is that no one is safe from the
plaintiff's bar, but that is not so much an investment issue as it is a reality of living in
these United States.
The second issue is that uncertainty can murder stocks. Do you think that
Halliburton's 42% drop had to do with the potential payout of $30 million? The company
might have $30 million in its petty cash drawer. Halliburton has had done to it what
Philip Morris (NYSE: MO) was feeling in 1999 (and may still be today): when
investors cannot quantify a known and realized threat, they will assume the
worst. . . .
For more on Halliburton, GO TO > > > Nests in the Pentagon; The Sinking of the
$ $ $
July 25, 2001
When the fix was in
How Wall Street's storied
Chinese wall failed investors
By Richard J. Newman and Peter Basso, U.S. News & World Report
On Wall Street, there are bulls and bears. And now––well, now there are bloodhounds.
With the collapse of the tech sector and the nose dive in the Dow, regulators,
shareholders, and lawyers are baying for blood. Investigators from the Securities and
Exchange Commission and the Department of Justice are examining whether
questionable––and maybe criminal––behavior occurred at some of the top-tier
underwriting firms that fueled the white-hot market for initial public offerings from 1998
"I am deeply troubled by evidence of Wall Street's erosion of the bedrock of ethical
conduct," said Republican Rep. Richard Baker of Louisiana last week at congressional
hearings. "Our first goal . . . is to begin a process of rebuilding confidence in the
That's why the Securities Industry Association unveiled a new code of ethics for Wall
Street stock pickers last week. The new rules are designed to prevent analysts from
thinking of self-gain or their bosses' approval when they make "buy" or "hold" calls. But
for many investors, the push for "integrity" comes way too late. Some of the same
folks who once sued for access to IPOs are now joining class action suits, claiming
they were swindled by Wall Street analysts working both sides of the Chinese
wall that once separated brokers from their counterparts on the research side.
Through May, 105 such lawsuits had been filed, according to Stanford Law School
Scandals about hot new issues are nothing new on Wall Street, of course. For over 40
years, regulators have tried to tame the misconduct that inevitably follows speculative
surges in the market for new offerings. It's not quite like clockwork, but roughly once a
decade for the past 40 years there's been a nasty round robin of IPO bubbles, scandal,
investigation, and efforts at reform. Here we go again.
IPO markets –– the quickest way to get rich on Wall Street -– can spawn the
seediest kinds of white-collar crime:
Picture boiler rooms where fast-talking sharpies dump artificially inflated shares
on widows and orphans. Testimony in a stock-fraud case portrayed Steve
Madden, the renowned shoe designer, forking over $80,000 in a brown paper bag
at a country club in Roslyn, N.Y., to a partner in a scheme to manipulate IPOs and
share the trading profits.
But the latest kerfuffle constitutes the biggest IPO investigation yet, an ugly coda to the
most highflying new-issues market in history. At the epicenter is Credit Suisse First
Boston, the firm that underwrote more IPOs than any other over the past two years.
Under fire, CSFB has put three brokers on leave. At least six other employees are
under investigation by regulators. The firm says it's cooperating with investigators but
insists its practices are in line with others in the industry.
Other underwriters under the microscope: Goldman Sachs, Bear Stearns, Merrill
Lynch, Morgan Stanley Dean Witter, and Salomon Smith Barney. All are defendants
in shareholder lawsuits.
Writ large, the issue is basically one of conflict of interest. Did professional investors
investing on behalf of wealthy clients pay kickbacks in the form of abnormally high
commissions to get in on the hottest offerings?
The motivation would have been strong: At the height of the boom, IPOs were soaring
far above their offering prices, allowing those first in line to reap huge windfalls by
selling shares quickly after the offering. To initiates, the practice is known as "flipping."
In the Nasdaq's heyday, a good flip could yield millions of dollars––overnight.
Evidence? Total profits earned on the difference between the offering price and the first
day's closing price for IPOs in 1999 totaled some $35 billion, says finance Prof. Jay
Ritter at the University of Florida. That's more than in all prior years––combined. And
everyone, it seems, was in on the action. Last week, the Wall Street Journal reported
that six members of Congress flipped IPO stocks, claiming one-day profits as high
as 414 percent.
The line between reasonable business practices and illegal deals is murky, say experts.
Unless you've paid a bribe for the privilege, flipping is not only legal; it's also great for a
money manager's investors. "By and large, we take the allocations we get and make
money on flipping," says the general counsel of one giant mutual fund company. "I tell
my managers it's their duty to the client." Likewise, commissions are negotiated and
might be higher than usual for valid reasons. "It doesn't smell like a criminal case," says
a former criminal prosecutor. "There's a sophisticated buyer, a sophisticated seller, and
no poor victim." Says Baker, who chaired last week's congressional hearings: "It is one
thing for one shark to eat another. It is quite another thing for the shark to eat the
Meet minnow Bruce Gavin.
"I'm not in this because I'm whining and I lost a few dollars in the market," the 50-year-old computer engineer from Sacramento, Calif., says. Gavin, a plaintiff in a lawsuit filed
against PlanetRx.com and six of its IPO underwriters, says he lost $10,000 on shares of
the failed online drugstore. "I'm in this," he says, "because there's been serious trading
based on news that's only available on the inside or to preferred customers." The
minnows, in other words, didn't get a shot at flipping––and wound up buying at inflated
Dozens of class action suits have been filed by shareholders alleging violations
of both securities and antitrust laws. In a suit against MarketWatch.com and six of
its IPO underwriters, lead plaintiff Phillip Walsky of Wayne, N.J., claims the firm issued
"false and misleading" information in its prospectus to pump up the stock price. The suit
also accuses Credit Suisse and other underwriters of seeking to "surreptitiously extract
inflated commissions." When the first 2.75 million MarketWatch shares sold on Jan. 14,
1999, they rocketed from $17 to as high as $130, ending the day at $97.50. The shares
now trade near $3. Other suits make similar claims against a list of former Internet
darlings, such as Marimba, Red Hat, and VA Linux.
Sell high. The firms insist the suits are without merit. And there are legitimate questions
about whether the entrepreneurs who sought IPOs for their young companies are the
victims of IPO abuses––or the perpetrators. Entrepreneurs selling coveted shares to the
market wouldn't necessarily want underwriters to pass so much money to outsiders,
when that money might instead go to the company's coffers.
"Issuers bought into the mantra of the IPO as a marketing event," explains Ritter.
"They were choosing underwriters based on the fact that a well-known analyst
would be touting their stock." The reason? Months after the IPO –– when
restrictions on corporate sales expired –– corporate officers could then cash in their
own shares at steep profits.
Pressure on investment bank analysts to issue upbeat ratings on the stock of client
firms is often intense, recalls one analyst who used to cover natural gas firms for a
major Wall Street house. "We had seven people covering 55 companies, and we were
expected to have buys on every one of them," he says.
Resurrecting a Chinese wall between the research and investment banking
departments now tops the agenda in Washington and on Wall Street (box). The
guidelines issued by the Securities Industry Association last week call for more
safeguards against touting suspect stocks. Further reforms are likely to require
investment banking firms to disclose how they dole out IPO shares and ban kickbacks
or tie-in arrangements.
Until then, Wall Street's IPO machine is humming away quite nicely, thank you. Last
week, investors scarfed up 280 million shares in the Philip Morris spinoff of Kraft,
netting $8.68 billion for the parent company and its underwriters. CSFB managed the
offering, and together with Goldman Sachs it will lead the $3 billion-plus IPO later this
year for AT&T Wireless Services.
Business as usual.
< < < FLASHBACK < < <
June 5, 1997
Hong Kong –– Growing Economic Fears
From Pacific Rim, Managing Editor: Antonio Tambunan
Hong Kong people's fears about the future escalated as they gave the Government's
economic stimulus plan the thumbs down, sending the stock market tumbling more than
3% on Monday of this week. . . .
The bureau said the regional turmoil was making things worse: tourism numbers, down
sharply since the handover, hit the retail sector; and unemployment was at its
highest in 14 years.
''Locally, our situation was not helped by the dismissal of staff by some
established companies amidst warnings of more lay-offs and the collapse of
some businesses,'' the bureau said in its report on the survey, which was carried out
between May 11 and 15.
Financial Secretary Donald Tsang Yam-kuen said on Friday that the
Government's 1998 growth forecast of 3.5% was ''unattainable'', but gave no revised
GDP estimates, saying the situation was too uncertain to predict.
In response to the slump, the government scrapped anti-speculation
measures in the property market, acted to improve bank liquidity and
moved to boost tourist numbers. But stock brokers said the market felt the
plans were too little, too late.
... And the Merger Mania Continues ...
Travelers Group will buy a 25% stake in Nikko Securities for 220 billion yen (about
US$1.59 billion), the biggest foreign investment to date in Japan's rapidly opening
securities industry. Travelers will buy 70 billion yen worth of Nikko shares and 150
billion yen of convertible bonds, the companies said in a joint statement on Monday.
Nikko will buy an unspecified number of Travelers shares. Nikko, in a separate release,
said it would issue 154.2 million new shares at 436 yen per share to be sold to
Travelers on August 28.
Travelers will also form a joint venture in Japan with Nikko to be called Nikko Salomon
Smith Barney. Nikko will own 51% and a Nikko executive, Yuji Shirakawa, will be the
chairman. Travelers' investment banking unit, Salomon Smith Barney, will own 49%,
and its head in Tokyo, Toshiharu Kojima, will be the chief executive officer. The new
company will start with 140 billion yen in capital.
Nikko Salomon Smith Barney will open in January. It will underwrite stocks and
bonds, do large-lot securities trading, advise on mergers and acquisitions, produce
economic research and develop derivatives and other financial products. Through the
deal, Travelers will gain better access to 1,200 trillion yen of financial assets held by
Japan's avid savers. It could lure some of that from individuals, who keep 60% of their
financial assets in bank deposits yielding less than 1%.
Travelers, which agreed in April to merge with Citicorp to form the world's
biggest financial company, will become Nikko's largest shareholder and the first
major foreign investor in Japan's top three brokerages.
The purchase is the latest in a string of foreign forays into Japan's newly
deregulated financial industry. Industry leaders are encouraging the infusion to
help them overcome a seven-year economic slump and a series of scandals.
In March, Merrill Lynch & Co took over branches and hired thousands of employees
from Yamaichi Securities after the firm, Japan's fourth-largest brokerage, went
Goldman, Sachs & Co, Fidelity Investments, and HSBC Holdings also forged
alliances with Japanese banks last month.
Indonesia –– First Family Fortune Probed
Attorney-General Sujono Atmonegoro yesterday announced he was investigating the
wealth accumulated by ousted president Suharto's family. . . ..
Pressure by prominent government critics to probe the wealth accumulated by relatives
of Mr Suharto has mounted since he resigned on May 21. Mr Suharto's half-brother
Probosutejo said recently that the former first family would reveal their assets if
formally requested by the attorney-general's office. . . .
The attorney-general declined to comment on the size of the fortune believed to have
been amassed by the former first family, estimated by some media reports at about
Meanwhile, the Indonesian military has set a schedule for the court-martial of 19
soldiers suspected of opening fire on a peaceful student protest at Trisakti
University in Jakarta on May 12, killing four students. . . .
The finding followed a probe into the shooting by a military team set up by armed forces
chief General Wiranto after Mr Suharto stepped down May 21.
The shootings triggered widespread riots which left 500 dead in Jakarta. . . .
For more on Suharto, GO TO >>> The Indonesian Connection
Thailand –– Crackdown on
Hoping to free up jobs for Thai workers, police yesterday launched a crackdown on
200,000 illegal workers believed to be living in and around the capital. Immigration
authorities said they hoped workers would voluntarily leave the country, as required by
a June 1 deadline set by the Government, but threatened to arrest and deport those
The majority of the illegals come from Burma to work on construction sites. Others are
from equally poor neighbours Cambodia and Laos. A random check of four police
stations revealed only a few arrests.
The action in Bangkok comes a month after a crackdown began in the provinces,
spurred by Labor Ministry expectations that sending the illegal workers home would
create jobs for Thais.
But employers in several industries - among them fishing and construction - said
Thais would not perform dirty or poorly paid jobs. Border and fishing provinces
that depend on cheap foreign workers have successfully lobbied for exemptions
from the drive. . . .
$ $ $
When it comes to right-on, Texas-style, tell-it-like-it-is plain talk, nobody is better at it
than Jim Hightower. The following take on Wall Street is from his book, If the Gods
Had Meant Us to Vote, They Would Have Given Us Candidates:
THE FLO CHART
Flo is a waitress at the Dine & Go Diner, where she works an early breakfast shift, six to
Then she goes downtown to the law offices of Meager, Wages & Miser, where she’s a
“legal aide” ... doing grunt work ten to four for a bevy of insurance company lawyers.
Ironically, Flo doesn’t have insurance.
She does have a couple of great kids, though ... and she considers them her real job,
though she’s stretched mighty thin on time and energy and wishes she was with them
She’s also taking a couple of night courses at the community college, trying to get
ahead. To know how the nation’s economy is doing, we don’t need to consult some
trumped-up confidence index or the ethereal Dow Jones average but the Flo Chart.
How’s Flo doing?
Hers is the heartbeat of America’s majority— the 80% of folks who are paid less than
$50,000 a year, the 60% who don’t own any stocks and bonds, the 75% who don’t have
a university sheepskin hanging on the office wall . . . and the two-thirds who aren’t
voting because neither party is fighting for Flo.
The economic elites try to fool Flo by pointing to the glittering stock market; the media
elites try to fool Flo by pointing to their smiley-faced consumer reports; the political
elites try to fool Flo by pointing to the 20 million jobs created in the nineties. So why
isn’t Flo fooled? Because, to determine her economic situation, she analyzes data that
the elites ignore. . . .
Flo’s leading economic indicator is called “Income.”
When you’re alone at your kitchen table doing calculations like that, it’s hard to be
fooled by a distant chorus telling you that you’re doing great. ... With important
exceptions like [Ohio Rep. Jim] Traficant, politicians of both parties gloat about
America’s amazing “job-creating machine,” and the media cheerfully parrots industry’s
claim that so many people are now at work that they can’t find applicant’s for all kinds of
jobs, from low-tech hamburger flippers to high-tech computer code writers.
For employees and job seekers, however, the issue is not getting a job (Flo has two),
but getting a job that offers middle-class basics— decent income, health care, vacation
time, and pension....
You want statistics? . . . In real dollars, average hourly wages in 1973 were $13.61.
Today they average $12.77. Far from gaining from the “Boom,” American workers are
paid less today than when Richard Nixon was president! . . .
The 25-year decline in the Flo Chart almost exactly tracks the 25-year rise in the
Democratic Party’s fealty to Wall Street money. As the party’s congressional, White
House, and campaign officials bonded tighter and tighter with the corporate and
financial elites, they distanced themselves further and further from Flo . . .
The fact that Flo is being pounded economically is not a case of benign neglect but of
the Democrats joining the Republicans to support policies that mug her, stealing her
middle-class aspirations by aggressively holding down her income.
Let me be blunt: Low wages are the official policy of the U.S. government.
If you’re a manufacturer wanting to hold down wages here at home, the government will
book you on a trade delegation to Asia, hook you up with a contractor that provides
workers for as cheap as fifteen cents an hour, underwrite your foreign investment,
suspend tariffs and quotas so you can ship your cheap-labor products to stores back
here, and put out a press release saluting you for joining in a private-public partnership
to foster “global competitiveness.”
If you’re a minimum-wage employer, don’t worry about any rabble-rousing populism
from Democrats— they’ll give you a wink as they hold any increases to a level way
below poverty. Even at the higher wage levels, if you’re a Microsoft, IBM, or Silicon
Valley giant and want to put a drag on the salaries of your engineers, programmers,
and other high-tech workers, count on the Democrats to join Republicans in helping you
import an extra 50,000 or so of these workers each year from Pakistan, Russia, and
elsewhere, letting you pay them a third to a half less than U.S. workers, thus busting the
American salary scale.
And if wages do show any sign of creeping up, count on Uncle Alan to step in and
stomp on them.
Alan Greenspan, as chairman of the Federal Reserve Board, is the ruling authority
over our nation’s monetary policy, and he hates wage increases. You see, if wages
rise, they might possibly pinch corporate profits ever so slightly, and this might spook
your big Wall Street investors, causing the high-flying stock prices of corporations to slip
Since today’s upper-class prosperity is built almost entirely on the bloated prices of
those corporate stocks, both parties are determined that nothing should spook these
investors, even if this means keeping Flo down. . . .
Both parties have made the same choice— Greenspan, first appointed by President
Reagan and reappointed by Presidents Bush and Clinton, has been their bipartisan hit
man on Flo. There’s no relief in sight for the poor lady, either, since both Democrat
Gore and Republican Bush have signaled that they want Uncle Alan back for yet
another term. . . .
Greenspan uses the Fed’s power over interest rates to hammer Flo, much like some
clod might use a sledgehammer to swat a fly. At the slightest hint that it’s possible
sometime in the future for wages somewhere to rise ... Greenspan pounces. . . .
Last summer the cold-eyed, pursed-lipped Greenspan openly urged Congress to bring
in more immigrants, using them as wage-busters: “I have always thought ... we should
be carefully focused on [what] skilled people from abroad and unskilled people from
abroad ... can contribute to this country. . . . If we can open up our immigration rolls
significantly, that will clearly make [wage inflation] less and less of a potential problem.”
Add to Washington’s wage-busting policies, that delight that Wall Street takes in
corporate downsizing, and you have a surefire formula for holding wages (and people)
down. The politicians who talk so loud and lovingly about America’s job-creating
machine go mute on the topic of America’s job-destroying machine . . .
Challenger, Gray & Christmas is a highly regarded employment firm that tracks job cuts
daily, and it reports that companies have been eliminating some 64,000 jobs a
month, most of which are the higher-paying jobs that come with health care, pensions,
and vacation time.
It gets little media coverage, but downsizing in the late nineties has been more rampant
than it was in the 80s and early 90s, when it was a major media story and led to
Clinton’s ‘92 presidential victory.
Remember his slogan, “It’s the economy, stupid,” and his pledge to create “good jobs at
Instead, he learned that if he just laid low, like Brer Fox, while corporations punted
those jobs, Wall Street investors would cheer lustily and run up the stock price for the
companies doing this “streamlining,” then the media would focus on the lightning flash
of the Dow Jones average, and he would get credit for presiding over a thunderous,
stock-driven boom. . . .
$ $ $
INSIDERS DON’T SWEAT COLLAPSE
by Michael Perkins and Celia Nunez
“LONG BEFORE THE STOCK MARKET WENT INTO THE TOILET, THE BIG BOYS
Last March, the tech-heavy Nasdaq index reached a staggering 5048, prompting
venture capitalist John Doerr to claim that we were witnessing “the greatest-ever
legal creation of wealth in the history of the world.”
This week, the Nasdaq fell below 2000. Someone is out a lot of money, and that
someone is primarily the small retail investor. Why? Because the insiders–
entrepreneurs, venture capital firms, investment banks and large institutional investors–
pulled out their capital long before the fall, leaving mom-and-pop investors holding the
Instead of the greatest-ever legal creation of wealth, the high-tech financial
bubble represented the greatest-ever legal transfer of wealth– from retail
investors to insiders.
For example, between November 1998 and July 2000, Goldman Sachs, Morgan
Stanley Dean Witter and Credit Suisse First Boston each pocketed more than $500
million in underwriting fees from Internet companies. And over the past two years,
technology underwriting as a whole brought in close to $1 billion for each bank. . . .
Some insiders would argue they, too, have been hurt by the market’s decline. And in
fairness, it should be noted that not eery insider pulled out early. ... But the fact is, not
all stock losses are the same, because the insiders get their stock for pennies a
share, if that.
Thus, while an insider may have seen his portfolio slip from $50 million to $5 million, he
probably paid only $100,000 for his stock, so he’s still ahead in terms of real money.
But when individual investors see their stock portfolios plummet, it’s real.
The TRUTH is, little investors never stood a chance, because they simply don’t have
the same access, both to key information and to early deals, as big investors.
One reason is the “quiet period” mandated by the Securities and Exchange
Commission, which requires a startup company to shun any publicity regarding its
finances for at least three months before its initial public offering. The law was intended
to keep a company from hyping its stock, but in reality its main effect is to keep small
investors in the dark.
Big institutional investors such as Fidelity and Vanguard are never in the dark.
They’re treated to what’s known as a “road show” just days before an IPO. In this
private meeting with company executives, they are updated on the startup’s financial
Thus, the big investors know if a stock has recently become more risky and can pass
on it. Or they may decide to buy it anyway, knowing they can resell the stock on the
first day of trading before any bad news about the company is reported. This practice,
known as “flipping,” became common in an era when Internet stocks were routinely
tripling in value on their first day of trading.
Institutional investors weren’t the only ones flipping stock during the hot market.
Individual insiders did it too. During the Nasdaq bubble, investment banks would
routinely give hot new IPO stocks – FREE – to corporate executives, venture
capitalists and other decision-makers sitting on the boards of companies whose
business the banks wanted.
These privileged decision-makers would then flip their shares on the first day of
the IPO for quick profits.
While the investment banks were giving out free stock to their favored clients,
they were also giving out bad advice to their mom-and-pop customers.
In a study of high-tech stocks, Roni Michaely of Cornell University and Kent Womack of
Dartmouth College found that investment banks rarely downgrade a company’s stock to
a “sell” rating if they have a business relationship with the company.
Despite these shenanigans, the savvy retail investor could at least take comfort in Rule
144, the SEC regulation that bars a company’s owners from selling their stock for 180
days after an IPO. (This type of stock is sometimes referred to as “locked stock.”) So
if the stock did tank three months after it was issued, at least the small investor could
find solace in the fact that the entrepreneur and his venture capital backers had taken a
loss on their stock as well.
Or did they?
Actually, during the high-flying days of the tech bubble, few insiders were required to
take risks. The investment banks devised a new financial service: They would
promise to buy a venture capitalist’s or tech executive’s locked stock
as soon as the 180 days were up – but at the stock’s higher early
This special service for favored customers didn’t cost the banks a thing, since they
would then use a combination of sophisticated financial instruments to “short” the stock.
That is, the banks would make money if the stock dropped in value, which it almost
always eventually did.
The technology stock bubble is already being compared to previous financial manias”
Dutch tulips in the 1600s, U.S. railroads in the late 1800s, etc. But what sets this most
recent mania apart is its Ponzi scheme quality.
Never before has so much wealth been transferred from one group of people to another
in such a short time.
Maybe if the Securities and Exchange Commission steps in to restore fairness, it never
(Michael C. Perkins is a founding editor of Red Herring magazine and co-author of
“The Internet Bubble.” He and Celia Nunez are authors of “A Cool Billion,” a novel
about Silicon Valley.)
$ $ $
The Man Who Loves to Sue
Veteran New York attorney Mel Weiss has filed scores of
lawsuits against investment banks,
seeking billions for what he calls 'corrupt' IPO practices.
By Edward Robinson - Bloomberg Markets Magazine
Mel Weiss says he knows the reason behind the boom and bust of the initial-public-offering market during the late 1990s——and it's not irrational exuberance. Weiss, a
New York plaintiffs lawyer who specializes in stockholder lawsuits, says the IPO rise
and fall was the result of the largest case of market manipulation and fraud ever to
beset the investing public.
"This process was absolutely corrupt," Weiss says, "and it's vicious in its impact
because people were taking their life savings and putting it into this market as if it was
never going to end."
Since February, Weiss, 66, has filed more than 180 class-action lawsuits against Wall
Street investment firms on behalf of hundreds of investors. Among the firms named in
the suits are Credit Suisse First Boston; Goldman, Sachs & Co.; Merrill Lynch &
Co.; Morgan Stanley Dean Witter & Co.; Robertson Stephens Inc.; Lehman
Brothers Holdings Inc.; and Salomon Smith Barney Inc., as well as the Internet
technology companies they took public.
Weiss vows to prove that the banks used kickback schemes, secret profit-sharing agreements with selected clients and price fixing to inflate the value of
IPOs. Individual investors who bought these companies' stocks paid hidden premiums
and should, in effect, receive refunds, he says.
Many of the cases center on the activities of Frank Quattrone, head of CSFB's
technology investment banking group in Palo Alto, California, and his staff.
Victoria Harmon, a spokeswoman at CSFB, denies Weiss's charges. "We refute the
allegations in these suits and will defend ourselves vigorously," she says. Harmon's
counterparts at Goldman Sachs, Morgan Stanley and the other banks decline to
comment. . . .
As in most securities cases that Weiss has tried, his ultimate aim will likely be to seek a
cash settlement for his clients. In these cases, the banks may have to spend $1 billon-$6 billion to settle the litigation, according to James Newman, executive director of
Securities Class Action Services, a research firm. Newman estimates that losses
attributable to the alleged fraud are $10 billion-$60 billion; securities class actions are
typically settled at about 10 percent of losses. . . .
Dozens of other plaintiffs' firms have filed similar claims against investment banks and
Internet companies. In total, 860 class actions, the largest collection of such cases
in financial history, have piled up in U.S. District Court in lower Manhattan in
connection with almost 200 IPOs launched from 1998 through 2000. . . .
"The last time we saw a feeding frenzy like this was the savings and
loan crisis," says Daniel Dooley, head of PricewaterhouseCoopers's securities
litigation consulting practice, referring to the failure of more than 880 S&Ls from 1988 to
In addition, the U.S. Securities and Exchange Commission and the National
Association of Securities Dealers (NASD) are each investigating Wall Street's IPO
allocation practices, and the U.S. Attorney's Office in New York has impaneled a grand
jury that is pursuing a criminal probe....
In Weiss, the investment banks face a foe who has stung them before. In 1998, Weiss's
firm, which he co-founded in 1965, roiled Wall Street when more than 30 market
makers——including Merrill Lynch, CSFB, Goldman Sachs and A. G. Edwards &
Sons——paid an unprecedented $1.02 billion to settle an antitrust suit alleging that
they had fixed the prices and spreads of stocks traded on the Nasdaq Stock Market....
Now the stakes are even higher. Resolving these cases could eclipse the largest
securities-class-action settlement so far: $2.8 billion, paid out by Cendant Corp. in an
accounting fraud case in 1999.
Securities class actions are usually settled before they go to trial, because companies
fear backbreaking jury verdicts, says Joseph Monteleone, a senior vice president at
Kemper Insurance Cos., which writes policies for corporate officers and directors.
"I don't think anyone foresees any of these cases ever making it to trial," he says....
At the heart of the cases are two sets of allegations:
First, claims Weiss, underwriters demanded that some investors pay secret,
excessive brokerage commissions to get allocations of shares in the
IPOs of hot Internet companies.
Weiss says those payments, by which investors agreed to share up to 33 percent of
the profits made in an IPO, were nothing more than kickbacks. He argues that company
officers and underwriters violated the Securities Act of 1933 by failing to disclose such
commissions in prospectuses and registration statements.
Second, Weiss alleges that underwriters entered into "tie-in" arrangements
with investors——transactions in which investors secretly agreed with underwriters
to purchase shares at preset prices in the days after the offering, known as the
"aftermarket." Also called "laddering," this practice can artificially boost share prices
and is illegal.
For example, Red Hat Inc., a Durham, North Carolina-based software maker, went
public on Aug. 11, 1999, at $14 per share. Weiss says lead underwriter Goldman
Sachs used tie-ins to jack up the price following the offering, and within 30 days, the
price had soared eightfold. Goldman; CSFB, a co-underwriter; and Red Hat all decline
Locker, the lawyer representing companies named in the suits, says Weiss's tie-in
allegations don't make sense. "Why would underwriters, given the extreme demand for
IPO allocations and expectations that such stocks would skyrocket, need commitments
from investors in the aftermarket to boost the stock?" she asks.
Weiss replies that the motive was simple: "The greed factor on Wall Street
Milberg Weiss's scorecard includes settlements in some of the biggest financial
fiascoes of the past 15 years.
In 1988, Weiss, representing a class of bondholders, helped reach a $775 million
settlement in litigation regarding the financial meltdown of the Washington Public
Power Supply System, the largest municipal bond default ever.
In 1992, Milberg Weiss—representing stockholders and bondholders in American
Continental Corp., the parent of Charles Keating Jr.'s Lincoln Savings &
Loan——helped recover $240 million in a racketeering suit connected to Drexel
Burnham Lambert and Michael Milken....
Weiss says he savors challenging powerful opponents. In February 1999, he stood
before more than a hundred German executives, ministers and other dignitaries in
Bonn as the lawyer for thousands of slave labor victims suing German industry
for human rights crimes during World War II.
Weiss cut right to the heart of the matter, asking the defendants if they were prepared
to get the aging victims some cash before they died. As part of a larger settlement
involving all victims of the Holocaust, he resolved the class actions with the German
government and several companies—including DaimlerChrysler AG, Siemens AG and
Degussa AG—in 2000 for $5.2 billion....
Weiss's lawsuit against VA Linux, a Fremont, California-based company that makes
workstations supporting the Linux operating system, and CSFB, the lead underwriter in
its IPO, is likely to be the primary test case because it was filed first, says Steven
Schulman, a Milberg Weiss partner working on the litigation.
Under Frank Quattrone's direction, CSFB became the No. 1 underwriter of IPOs in the
computer, software, Internet and semiconductor industries in 1999 and 2000, garnering
24 percent of the market, according to Bloomberg data. CSFB is named in 66 of the
class actions filed.
The suit charges that CSFB entered into secret arrangements with hedge funds to
allocate blocks of the 4 million shares VA Linux offered in its IPO on Dec. 9, 1999, in
exchange for payments made in the form of excessive commissions.
VA Linux went public at $30 per share and skyrocketed to
$239.25 that day, the largest single-day gain in history for an IPO.
On Nov. 9, 2001 it traded at $1.75.
The suit names two hedge funds—— GLG Partners LP, based in London, and
Chelsey Capital, based in New York——as having obtained "suspiciously large
Weiss says the CSFB commissions constituted a kickback scheme in which investors
agreed to share IPO profits with CSFB and other co-underwriters. The profits were
allegedly paid back to the bank in the form of extra brokerage commissions dispensed
on trading that got executed in unrelated stocks in the weeks and months following the
By adding 20 cents-$1 per share in commissions in trades of, say, General Electric Co.
or AT&T Corp. or any other stock, the investors, the suits charge, kicked back profits
from their earnings on the IPO of VA Linux, a process known as a "wash transaction."
Weiss is not accusing CSFB of violating securities laws with the transactions
themselves. He says VA Linux and CSFB broke the law by failing to disclose extra
commissions in the IPO prospectus and registration statement.
As a result, Weiss says, the prospectuses were "false and misleading" and
shareholders should be entitled to recover their investments.
Nicki Locker, VA Linux's lawyer, says her client was not obligated to disclose the
payment of excessive commissions under the Securities Act of 1933....
$ $ $
August 22, 2001
Asian Times Online
Speaking of corruption ...
There are as many opinions on what exactly caused the 1997-98 Asian crisis as there
are analysts of it. But four years after speculative attacks on and forced devaluation of
the Thai baht kicked loose the mudslide, the International Monetary Fund, the World
Bank, and most - Western, at any rate - analysts seem to be agreed that lack of
transparency in financial transactions, political loans and lending to family members
without due diligence or project evaluation, and other questionable or corrupt practices
grouped under the catch-all terms of "moral hazard" and "crony capitalism"
played a major role in making the East Asian economies vulnerable to
taking a great fall.
The drop in East Asian asset prices, of course, was dramatic. Just prior to the onset of
the crisis in July 1997, the combined stock market capitalization of the exchanges of the
principal crisis economies of Indonesia, Korea, Malaysia and Thailand was around
By January of 1998, it had dropped to about $280 billion, and - some intermediary
rallies notwithstanding - now stands at $260 billion, cut in half over the past four years.
These are ugly numbers.
Consequences of the East Asian asset price collapse, unhappily, have not been limited
to the rather small number of asset holders, but have affected hundreds of
millions of victims of collateral damage.
Ugly practices equally responsible for the financial and social disaster of the past
several years must be stamped out. . . .
For every greedy and unscrupulous East Asian borrower there were not only
greedy Asian, but as many equally greedy and "moral-hazard"-afflicted Western and
multilateral lenders. At the World Bank, there was a whole team that "analyzed" and
touted the "East Asian Miracle" only a couple of years before the crisis hit, and it was
"Asian values", not "moral hazard" the fabled report highlighted. The combination of
venom and glee to which Asia and its economic woes have been treated since 1997
represent a disgusting bit of hypocrisy.
In this context, we take note of a prescient Wall Street Journal article. In part it read:
"Last year banks boosted credit [at] ... the fastest pace in 10 years. More financial
institutions eased their lending standards than raised them, and many lowered rates for
the dicier deals.
According to a prominent banker, 'Credit standards are the weakest of any time
during [his] nearly four decades of banking.'
A leading businessman said, 'There's too much money chasing too few
deals ... As long as the economy stays hot, the impact of slipping
credit quality will remain muted. But when the downturn hits - and
someday it will hit - the recession will be exacerbated by defaults on
loans that never should have been made."
And, no, the article was not in shrewd anticipation of the Asian crisis. It was published
on April 20, 1998 and it was about the US economy. The banker quoted was John
Medlin, chairman of Wachovia Bank, and the businessman GE's Jack Welch. Two
years later, US technology stocks collapsed. Six months after that the US economy
went into steep decline. Moral hazard? Corrupt practices? We'll let US regulators,
bankers, analysts and financial journalists figure that out.
And US regulators, specifically the Securities and Exchange Commission, and New
York prosecutors at present have another little problem to cope with. It appears that
during the late 1990s Internet IPO boom a cozy little relationship between
analysts, investment bankers and preferred investors developed.
"You write a nice report on the prospects of a company about to go public and
you'll be rewarded," analysts were told. And paid they were. "We'll make sure you'll
get all the stock allotments you want, but you'll kick back some of your profits,"
investors were told.
And kick back they did.
And who were the ones doing the telling? Not some fly-by-night brokerage
outfits, but Wall Street's big boys: Credit Suisse First Boston in the lead,
followed by Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman
Brothers, Salomon Smith Barney.
CSFB's tech team boss Frank Quattrone raked in hundreds of millions,
personally; the bank billions.
Cronyism? C'mon now.
But our favorite - ah, so transparent - recent deal is a transcontinental, transcultural
A few months back, Deutsche Telekom, one of the world's largest (and most
heavily indebted - in the order of magnitude of the foreign debt of Thailand)
telecommunications companies acquired US mobile phone service provider
VoiceStream. As the result of the acquisition, Hong Kong's Hutchison
Whampoa, a VoiceStream shareholder, found itself with tens of millions of
Deutsche Telekom shares it apparently didn't want.
But there was a problem: a lock-up period terminating September 1, 2001, during which
no shares could be sold. So, on August 3, Hutchison officials met in Hong Kong with
Deutsche Bank officials and a deal was struck: Hutchison would "lend" its Deutsche
Telekom shares to Deutsche Bank for a year (some call options included), and the
bank would sell the shares in private transactions.
Quite coincidentally, also on August 3, a Deutsche Bank telecom analyst, Stuart
Birdt, issued a "Buy" recommendation for the Telekom stock. Then, on August 7,
the bank put 44 million Telekom shares on the market - and shortly thereafter
the Telekom share price in Frankfurt crashed, losing 30 percent in
value within 48 hours and imparting losses of well over US$10 billion
to shareholders caught unawares.
Not so, says Deutsche Bank which stands to collect hefty commissions. Not so, also
appears to be the verdict of the German securities watchdog (whose teeth seem to
have been pulled and eyes blinded).
Yes, Dear Reader, we know: Two wrongs don't make a right. Shady Asian deals
don't become acceptable because of shady American and European ones.
We just thought we'd inform you on the marvelous progress of globalization.
(c)2001 Asia Times Online Co, Ltd.
For more on globalization, GO TO > > > The World Trade Organization
$ $ $
From Den of Thieves, by Pulitzer Prize winner, James B. Stewart:
ABOVE THE LAW
In April 1986, a ripple of anticipation washed over the more than 2,000 participants
crammed into the main ballroom of the Beverly Hilton as curtains drew back for a
screening of one of Drexel’s “commercials,” now a popular fixture of the Predators’
Ball. As the strains of the “Dallas” theme song filled the room, Larry Hagman strode
onto the screen, flashing a “Drexel Express titanium card.” The card has “a ten-billion-dollar line of credit,” J.R. drawled. “Don’t go hunting without it.”
Then came a spoof of the popular Madonna video, “Material Girl.” A voice like
Madonna’s lip-synched “I’m a Double-B girl living in a material world,” a double
entendre referring to low-grade bond ratings and bra size. Madonna danced on the
video screen and the chorus sang, “Drexel, Drexel.” The crowd roared with delight.
When the spotlight fell on the conference’s surprise entertainer, it was Dolly Parton.
Drexel, proud of its own new star, wanted Martin Siegel front and center throughout the
affair, but Siegel demurred. He’d only been at the firm a month and a half, and he
didn’t want to upstage veteran Drexel officials. Siegel declined the opportunity to host
the M&A (Mergers & Acquisitions) department breakfast, leaving that role to Dennis
Levine, who boasted of Drexel’s growing strategic prowess. But [Frederick] Joseph did
persuade him to moderate a panel featuring takeover lawyer Joseph Flom and other
lawyers discussing legal developments in the takeover field.
“You know me as a staunch defender of targets,” Siegel began, reaching under the
table and donning a white cowboy hat, symbolizing the blue-chip Kidder, Peabody.
“Just because I’ve come to Drexel doesn’t mean I’ve changed my views,” he said with a
twinkle in his eye as he reached under the table again and substituted a black hat for
the white one.
Everyone laughed, even Siegel’s establishment clients. Several of them, including the
chairmen of Lear Siegler and Pan American, gave presentations at the conference.
The corporate lambs were lying down with the lions.
And so were the politicians. Drexel had had no Washington office or registered
lobbyists before 1985. Then, however, Congress had begun rumbling about hostile
During the Unocal raid, Representative Timothy Wirth, the powerful Colorado
Democrat who chaired the Subcomittee on Telecommunications, Consumer Protection
and Finance, introduced a bill outlawing green-mail.
Drexel, opposed to the measure, hired a former White House aide and opened an
office in Washington. It retained Robert Strauss, former Democratic National
Committee chairman, and John Evans, a former SEC commissioner, as lobbyists.
Contributions from Drexel’s political action committee rose from $20,550 in the 1984
elections to $177,800 in the 1986 elections.
At the 1986 Drexel bond conference, the once-critical Wirth was a featured speaker.
Drexel executives gave $23,900 to his successful Senate campaign, and Wirth became
a defender of junk bonds. His earlier attempt to prohibit greenmail went nowhere, and
he didn’t reintroduce it.
Drexel invited other influential politicians to speak, including Senators Bill Bradley,
Alan Cranston (the recipient of $41,750 in Drexel money that year), Edward Kennedy,
Frank Lautenberg, and Howard Metzenbaum. Most of them seemed as
dazzled by the aura of megamoney as the lowliest pension-fund
For good measure, Drexel executives contributed $56, 750 to Senator Alfonse
D’amato of New York, then chairman of the securities subcommittee. . . .
During the early and mid-1980s, Milken’s highly leveraged clients seemed to show an
amazing ability to stave off default, even when operating results were disappointing. In
those cases, Milken simply “restructured,” piling on a new and dazzling array of high-yield securities to replace the debt that was on the verge of default. The new tiers
invariably pushed payments further into the future, giving the company more time to
revive, and forestalling any rise in default rates.
That Milken could sell such restructurings – many of which, to anyone who studied the
numbers, appeared obviously doomed – was not merely a tribute to the pervasiveness
of his myth. It was a measure of the pliability of his captive clients, especially the
savings and loans and insurance companies.
By mid-1986, Milken’s friend Tom Spiegel had loaded Columbia Savings and Loan
with $3 billion of Drexel-generated junk; his crony Fred Carr’s First Executive had a
whopping $7 billion. More astoundingly, Milken himself would sit down at the end of the
day and move chunks of securities in and out of their portfolios. No one minded as long
as profits kept mounting.
Milken had other captive buyers. David Solomon ran his own money management
firm, Solomon Asset Management, with over $2 billion in assets, most of it from
employee welfare and pension plans.
He had become one of Milken’s earliest converts, and invested heavily in Milken’s high-yield products. Milken rewarded Solomon by making him a manager of a junk-bonk
mutual fund, the Finsbury Fund.
Finsbury’s purchases of Milken products generated enormous commissions for Milken’s
high-yield department, some of which were owed to the Drexel salesmen who induced
clients to buy into Finsbury. But Milken wanted all the commissions he had to pay other
Drexel salesmen. When Solomon refused, Milken threatened to have Solomon
removed from his lucrative position as Finsbury’s manager. Solomon capitulated.
Milken and Solomon, to recoup the commissions, simply inflated the price paid by
Finsbury for junk bonds, and Milken pocketed the difference. Sometimes Milken helped
generate phony tax losses for Solomon’s personal trading account. Solomon evaded
paying taxes on about $800,000 of income in 1985 alone. And Milken bestowed some
equity from the Storer buyout on Solomon. Much of this scheme was illegal;
ultimately, it was Finsbury shareholders and U.S. taxpayers who were
being cheated. . . .
~ ~ ~
Thus, in ways large and small, legal and illegal, the ordinary discipline of a free market
of arm’s-length buyers and sellers was undermined. The high-yield market’s growth
was limited only by Milken’s ability to generate product – not by market discipline or
independent decision-making on the part of buyers. In 1976, before Milken moved to
Beverly Hills, junk-bonk issues had totaled $15 billion.
Now, in 1986, it was $125 billion . . .
As for Milken’s own personal wealth, public and private estimates at the time tended to
hover around the $1 billion mark . . . Yet this was very far from the truth. Milken made
$550 million from Drexel in 1986. In addition, he (and the funds he controlled in the
names of family members) probably earned at least that much from the Beatrice
warrants alone. Milken and other partners received a distribution of $437.4 million from
Otter Creek, the Milken-created partnership that had traded so presciently in National
Beatrice was only one of dozens of transactions in which Milken and his family gained
valuable warrants and other equity interests, and Otter Creek was only one of more
than 500 Milken-created partnerships. While such assets shift in value and are difficult
to measure in any event, a closer and still conservative estimate of Milken’s and his
family’s net worth by the end of 1986 would be $3 billion.
In all likelihood, Milken had made himself one of the ten richest men in America.
No wonder Milken seemed so in command at the 1986 junk-bond conference. . . .
Drexel was now truly a rival to Goldman, Sachs and Morgan Stanley. At this rate, those
firms would inevitably be eclipsed. . . .
That year’s guest list was practically a who’s-who of self-made multimillionaires of the
80s: Merv Adelson, Norman Alexander, Henry Kravis, George Roberts, Boone
Pickens, John Kluge, Fred Carr, Marvin Davis, Barry Diller, William Farley, Harold
Geneen, Rupert Murdoch, Steve Ross, Ron Perelman, Peter Grace, Sam Heyman,
Carl Icahn, Ralph Ingersoll, Irwin Jacobs, William McGowan, David Mahoney, Martin
Davis, John Malone, Peter Ueberroth, David Murdock, Jay and Robert Pritzker,
Samuel and Mark Belzberg, Carl Lindner, Nelson Peltz, Saul Steinberg, Craig McCaw,
Frank Lorenzo, Peter May, Steve Wynn, James Wolfensohn, Oscar Wyatt, Gerald
Tsai, Roger Stone, Harold Simmons, Sir James Goldsmith, Mel Simon, Henry Gluck,
Ray Irani, Peter Magowan, Alan Bond, Ted Turner, Robert Maxwell, Kirk Kerkorian.
Mingling with them were key Drexel corporate finance and bond salesmen, such as
Siegel, Ackerman, and Dahl. . . .
Boesky arrived, accompanied by two bodyguards. Siegel hadn’t seen Boesky since
March 1985, more than a year ago. He noticed Boesky was carrying his small purse,
and then he noticed how tired and drawn Boesky seemed.
There were no women at Bungalow 8 this year. Siegel had told Joseph that he wouldn’t
participate in anything that involved procuring women, whether they were out-and-out
prostitutes or not. Joseph himself had tried to ban the women after the 1984
conference, but Milken and Engel had opposed him. Milken, despite his own professed
family values, insisted that “men like this sort of thing.” This year Joseph had put his
foot down. He assured Siegel and Schneiderman that he had ordered Engel not to
invite any women to the bungalow, and Engel had reluctantly complied. But he made
sure there would be beautiful women at the dinner afterward at Chasen’s, even if wives
also attended. . . .
Joseph looked over the crowd, and felt, for the first time, an almost palpable sense of
the power that Drexel had unleashed. He turned to Schneiderman. “We can’t let this
go hog-wild,” he said, struggling to be heard over the din of the party. “No one is going
to let every company in America get taken over.”
~ ~ ~
Boesky, his trademark black three-piece suit and watch chain concealed under cap
and gown, looked out of sorts as he waited impatiently in the wings of Berkeley’s Greek
theater, the outdoor amphitheater that serves as an open-air setting for the University of
California’s commencement ceremonies.
Rows of students filed into their seats, eagerly anticipating Boesky’s address. The
students of the university’s business school, Milken’s own alma mater, had chosen
Boesky, by popular vote, to be their 1986 commencement speaker. The famous
arbitrageur, lacking even a college degree, had flown to California that day, May 18,
1986, in a private jet. He was typically late, arriving halfway through the traditional
dean’s banquet that precedes the ceremony. . .
After welcoming remarks by the dean, Boesky stepped to the podium, greeted by
enthusiastic applause. He quickly demonstrated that he could be an excruciatingly dull
speaker. He dwelled on platitudes about America as a land of opportunity and told of
his own rise, a highly edited story of how the Detroit-raised son of immigrant parents
had conquered Wall Street. Then, when it seemed as though he would lose his
audience permanently, he galvanized the crowd with just a few sentences
“Greed is all right, by the way,” he said, raising his eyes from his text and
continuing with what seemed like genuinely extemporaneous remarks.
“I want you to know that I think greed is healthy. You can be greedy
and still feel good about yourself.”
The crowd burst into spontaneous applause as students laughed and looked at each
other knowingly. . . .
WANT TO SEE SOME MORE VULTURES’ NESTS CLOSE UP?
THEN, DRAG YOUR MOUSE HERE AND GO TO
PART II - PART III
~ ~ ~
OR, TO SEE MORE VAMPIRES HIDING IN THE CAVES OF WALL
BEWARE! THIS BULL IS FOR THE BIRDS!
BIRDS IN THE LOBBY
BIRDS THAT DRINK FROM CESSPOOLS
THE BLACKSTONE GROUP
BOEING, BOEING, BONG
A CONNECTICUT YANKEE IN KING KAMEHAMEHA’S COURT
DIRTY GOLD IN GOLDMAN SACHS
DIRTY MONEY, DIRTY POLITICS & BISHOP ESTATE
NESTS IN THE PENTAGON
PRUDENTIAL: A NEST ON SHAKY GROUND
P-S-S-T, WANNA BUY A GOOD AUDIT?
THE ACCOUNTANTS’ HOEDOWN
THE GREAT NEST EGG ROBBERIES
THE STORY OF ENRON
TRACKING THE TYCO FLOCK
VAMPIRES IN THE CITY
VULTURES IN THE MERGER MARKET
THE VULTURES WHO YAHOO!
WHAT PRICE WATERHOUSE?
THE XEROX CONSPIRACY
YAKUZA DOODLE DANDIES
~ ~ ~
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February 28, 2001: Originally posted on www.the-catbird-seat.net
March 13, 2007: Judge David Ezra signs Order to shut down website
September 6, 2009: Latest update on www.kycbs.net
~ ~ ~
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