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David Fagin: Flying The Unfriendly Skies

by David Fagin on March 29, 2012

Huffington Post…

From the cheerful way United’s CEO, Jeff Smisek, virtually greets you at your seat before takeoff, you’d think everything was just peachy in the newly-merged, friendly skies. More routes are being added, new planes are being bought, the online reservation system is supposedly getting easier and cabins are being modernized with wireless Internet access. So, how come everyone you talk to now refers to it as “United F#&*n Airlines?” That’s easy. Just pull back the first-class curtain and you will see the “friendly skies” aren’t so friendly after all. First off, it’s no secret, when it comes to customer service, United is commonly regarded as one of the worst airlines in the business. They may brag about their “most admired” status in the industry, but that survey , conducted by Fortune magazine, only polled industry insiders, not consumers. A look at the recent data compiled by consumer research company the Temkin Group paints a different picture. While almost every airline in the business enjoyed a bump in customer satisfaction last year, only two dropped significantly: American and Continental. At this point, you’d expect it from American, as it’s in bankruptcy. But what even Continental employees seem to be saying about their chipper CEO, is that he’s well on his way to guiding the nose of this once-proud airline down to where United currently is, and, at the same time, betraying the legacy of former Continental chief executive Gordon Bethune. One senior flight attendant in Houston even went as far as to coin the phrase, ” It’s all Jeff’d up! ” — referring to Continental’s current day-to-day operations. When Bethune, a former Boeing executive, took the reigns of Continental back in the early ’90s, the airline was at rock bottom in almost every category. Within a few years time, he took the struggling carrier from worst to first. After his departure in 2004, Larry Kellner stepped in as the new CEO and maintained the above-average experience Continental customers had grown accustomed to. (It was Kellner who introduced DirectTV, lie-flat seats and other amenities in a post-9/11 industry.) No one can say for sure why he chose to resign as CEO, but insiders say he was against the merger with United from the start. While, on the opposite end, Smisek, then president, was eager to become CEO of the world’s largest airline. Whatever advancements Mr. Smisek has been touting for the past year-plus in his welcome message, ask most customers and they’ll agree, it sure seems like they’re heading in the wrong direction. For example, one change not welcomed by its lower-tiered elite passengers is the change to the Economy Plus seating policy. Used to be, extra leg room seats were made available to elite members when booking the flight. Since the merger, that policy has been scrapped, and United now only offers whatever seats may remain at check-in. In order to ensure an extra leg room seat for a long journey, loyal elite members must purchase the seat like everyone else. Strike one. Next, is United’s new pet policy . On one hand, the airline says it has made it “safer” for pets to travel, requiring they now be labeled as “cargo,” rather than “baggage,” which allows them to be placed in a climate-controlled space in the plane’s hull. On the other, instead of costing a few hundred dollars to ship a dog overseas, it now costs several thousand . This rule, in particular, has been financially crippling to our servicemen and women in the military who routinely need to move from base to base and are now being forced to find other means of transport. It also has everyday passengers with pets up in arms. Strike two. Last, but definitely not least, is United’s overall customer service. A glimpse of the airline’s Facebook page shows a staggering number of negative comments on a variety of issues, with dozens of additional comments supporting the criticism; i.e., one man who earned a million-mile status with Continental was put in coach and denied an upgrade because the agent said his ticket was “too cheap.” A first-class passenger had condensation from the AC dripping on him the entire way to LAX. Another woman states she recently returned from a trip to Florida with her 80-plus-year-old mother who was just out of the hospital and needed special assistance, and, she said, when they tried to board early, she was literally yelled at by the attendant at the gate and told to “Wait her turn!” It may be old hat for United travelers, but Continental customers are simply not used to being treated in that manner. Yet, all signs point to the fact that they better get used to it fast. Strike thr- wait, that was a foul ball. If you’ve flown United/Continental coast-to-coast recently, you know you’d be lucky to get a power adapter at your seat, as the planes they use for the long hauls are inexplicably much older. Why? Not even customer service reps seem to know. Rumor has it it, it’s because the older planes are apparently bigger. This obviously allows United to book more seats, but, meanwhile, the smaller planes, fitted with power adapters, DirectTV and everything else you’d expect on a cross-country flight, are used for short hops up and down the East Coast. Forget about Wi-Fi. If you’re flying from L.A. to New York, it’s a crap shoot if you’ll even have your own video monitor. And, this, supposedly, is from the “most admired” airline in the business? Strike three. Yer out. It definitely seems, instead of raising United to the level where Continental used to be, Mr. Smisek is content in lowering the expectations of Continental’s employees and customers to that of United’s employees and customers. And, that just doesn’t fly .

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David Fagin: Flying The Unfriendly Skies

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Swiss Central Bank Chief To Break Silence Over Insider Deals

by AP on January 5, 2012

Huffington Post…

ZURICH — Switzerland’s central bank chief was breaking his silence Thursday over a private currency deal that appeared to net his family big profits at a time when he was spearheading efforts to lower the value of the Swiss franc. In a bid to counter a national uproar, the Swiss National Bank said its President Philipp Hildebrand would hold a news conference in Zurich to discuss “financial transactions and events of recent days.” Swiss media say Hildebrand’s appearance could make or break the 48-year-old financial prodigy who is considered key to Switzerland’s success in riding out the worst of the European financial crisis largely unscathed. “SNB’s Hildebrand – today his head is on the line,” read the front page of Switzerland’s mass market tabloid Blick. The Neue Zuercher Zeitung, which is widely read in business and political circles, saw the pressure on Hildebrand growing. “It’s now up to the central bank president to ensure complete transparency,” the influential paper wrote in an op-ed piece Thursday. The public furor over Hildebrand’s private deals marks a fall from grace for the former champion swimmer. As recently as last week, one Swiss newspaper described him as the “rock star of the euro crisis” for keeping a cool head while Switzerland’s neighbors trembled amid the turmoil affecting the euro currency. It was Hildebrand who led the Swiss National Bank’s efforts to vent steam out of Switzerland’s overheating currency by setting the minimum value of the euro at 1.20 Swiss francs on Sept. 6. When details of Hildebrand’s account at the exclusive private bank Sarasin surfaced late last year, the Swiss central bank declared that its chief had done no wrong and that the case was considered closed. But the recent drip-drip of claims – some of them pitting Hildebrand’s word against those of a magazine hostile to his leadership of the bank – has reignited debate over the future of Switzerland’s top banker. Much of Hildebrand’s defense rest on his claim that it was his wife Kashya, a former currency trader now running an art gallery in Zurich, who bought more than half a million U.S. dollars on Aug. 15 without telling her husband. Kashya Hildebrand, a Pakistan-born U.S. citizen, told Swiss television Tuesday that she invested in the dollar “because it was at a record low and almost laughably cheap.” It is unclear whether she was aware that her husband’s central bank would two days later increase the liquidity of the franc, thereby lifting the value of the dollar. The SNB says the deal, along with two other Hildebrand transactions totaling over $1.6 million, were within the rules set for senior bank officials to prevent them profiting from insider knowledge. That take was challenged by a senior figure in the powerful conservative Swiss People’s Party. “That those close to the central bank chief are making currency deals is an absolute no-go,” Christoph Moergeli told Swiss TV. “You don’t even need to put that in writing.”

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Swiss Central Bank Chief To Break Silence Over Insider Deals

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Occupy L.A. May Branch Out To Occupy Beverly Hills, Skid Row

November 28, 2011

WASHINGTON — After a tense all-nighter with the Los Angeles Police Department, Occupy L.A. activists and their tents outside City Hall have been given a temporary reprieve. The police re-opened the streets around City Hall to traffic Monday morning and essentially left Occupy L.A. alone. Four activists had been arrested — hardly the anticipated outcome from either side. Late Friday, Mayor Antonio Villaraigosa declared 12:01 a.m. Monday as the deadline by which Occupy L.A. had to vacate City Hall Park. In a letter to the activists, he wrote: “The Occupy movement is now at a crossroads.” Villaraigosa did not give an explicit explanation as to why he wanted the park cleared of the occupation’s 500 tents, food service and library. Peter Sanders, the mayor’s senior press secretary, said in an email Monday afternoon that the mayor “respects Occupy L.A.’s right to exercise their freedom of speech but that going forward, tents will not be allowed in City Hall Park and the laws regarding city parks will be enforced.” If the mayor thought his threat Friday would send Occupy L.A. members scattering to off-site locations, he was wrong. Sunday night’s general assembly was packed . When a moderator asked how many people were attending the assembly meeting for the first time, many hands shot up. But Occupy L.A.’s continuing general assemblies might be short lived. Los Angeles Police Department Chief Charlie Beck told reporters at a Monday morning press conference that the eviction will happen. “We will enforce the law on our own time schedule,” Beck said. Rumors had already begun that the eviction could come Monday at noon. The Occupy L.A. activists have been just as adamant about holding their ground. “We’re not going away,” PJ Davenport assured The Huffington Post. “We knew that the eviction order was coming down,” Davenport said. “But you can’t help but feel cheated yet again by your local government when they tell you that your time is up and you need to move elsewhere.” Yet some within Occupy L.A. are already considering such a move, Davenport conceded. Los Angeles is a sprawling city with 9.8 million residents and a nearly endless stretch of distinct neighborhoods, enclaves and cultures. Post-eviction, activists aren’t thinking about shrinking. They’re thinking about franchising. Instead of one space, how about 50 spaces? Instead of Occupy L.A., how about Occupy Beverly Hills and an Occupy Skid Row? “You will see tents across the metro area,” Davenport suggested. “If they’re not allowed at City Hall, you will see them around City Hall.” “None of us are interested in working out of an office,” Occupy L.A. activist Joan Donovan insisted. “We want real change. We hope that we show that by occupying, we are extremely serious.” Donovan said the idea of diversifying into several spaces may grow out of necessity — and a way to empower the leaders who grew up through the City Hall space. “We don’t know if we are going to get space this big again,” she explained. “The tactic would be to let all the people who became leaders here to begin the process somewhere else … It would be awesome if there was an Occupy Beverly Hills. It would be the perfect opportunity to talk to tourists about how to better spend their money, how to be better citizens. The idea is to get people to think.” There’s serious talk, Donovan said, of an occupation starting up in Los Feliz. And others are talking about Occupying Rodeo Drive. The greater Los Angeles area already boasts an Occupy Long Beach , an Occupy Venice and an Occupy Pasadena , among other spots. “There are people talking about doing a more permanent occupation of Skid Row,” said Jeremy Rothe-Kushel, an Occupy L.A. activist. “The other possibilities are fully on the table. I think there’s going to be a negotiation about centralization vs. decentralization.”

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Ex-Olympus CEO Says He’s Willing To Return To Disgraced Company

November 25, 2011

The British ex-CEO of Japan’s Olympus Corp emerged from a frosty meeting of directors on Friday convinced its board would eventually quit over an accounting scandal engulfing the firm, but he said he wasn’t “begging” to return and clean up the mess. Michael Woodford, still an Olympus director despite being fired as CEO and blowing the whistle over the scam, described the meeting as a tense encounter with no handshakes or apologies offered from the men who had sacked him barely a month ago. Instead, he said, the board had agreed that the once-proud maker of cameras and medical equipment should strive to avoid being delisted from the Tokyo stock exchange, a sanction that would make the business more vulnerable to takeover. “I just see a lot of suffering and misery for no gain,” Woodford said of the prospect of a delisting. “But we should have the investigation, it shouldn’t be fudged,” he told a news conference after the almost-two-hour meeting at Olympus’s Tokyo headquarters, where he was mobbed by reporters and TV crews as he entered and left the building. Woodford, back in Japan for the first time since fleeing the country right after his October 14 sacking, said there had been no talk at the meeting of him returning to his former post. “I’m not begging to come back,” he said, though he added that he was willing to do so if shareholders desired it. “I didn’t volunteer for this, I’m not a hero,” he added. “There was a tension in the room, but there seemed to be an understanding that it was in no one’s interest to raise the temperature,” he said. “They didn’t shake my hand and I didn’t offer mine. We said good morning and goodbye.” Major foreign shareholders have called for Woodford to be immediately reinstated, saying he can restore faith in the 92-year-old firm. The visit by Woodford, who also met this week with police and other investigators probing the scandal, coincided with a rally in Olympus shares, which have been buoyed by speculation the firm can escape delisting. The stock rose as much as 25 percent on Friday before closing up 8.6 percent at 1,107 yen. It has rebounded a whopping 77 percent in just four trading days, though it is still down more than half since the day before Woodford’s dismissal. Woodford said Olympus could survive as an independent entity as long as banks, so far supportive, kept backing it. DUBIOUS DEALS, CRIME SUSPICION Olympus had fired Woodford, a rare foreign CEO in Japan, alleging he had failed to adapt to Japanese culture and the company’s management style. Woodford says he was axed for questioning dubious merger and acquisition payments. Suspicion has swirled about possible links between the payments and organised crime. Woodford said he had no firm proof of gangster links but urged authorities to “follow the money.” “That would be concerning if organised crime was involved … but there’s no evidence of that to date,” he said. The 51-year-old freckle-faced Briton had left Japan after his dismissal citing concerns for his safety. Olympus first denied any wrongdoing, but later admitted it had hidden investment losses from investors for two decades and used some of $1.3 billion in M&A payments to aid the cover-up. Woodford said after Friday’s board meeting that the top priority was for Olympus to meet a December 14 deadline for filing its financial statements for the six-months to September — after which, he added, current management should go. The company would be automatically delisted if it misses the deadline. Even if it meets the deadline, the Tokyo Stock Exchange can still delist it, depending on the scale of past misstatements or if a link is found to “yakuza” gangsters. A third-party panel appointed by Olympus to look into the accounting scam said this week that it had not yet found any evidence of involvement by organised crime. AUDITORS, GOVERNANCE The Olympus affair has raised questions about whether its auditors, the Japanese arms of global giants KPMG and Ernst & Young, should have done more to follow up on red flags. KPMG’S chairman, Michael Andrew, on Friday called for a global set of standards for the auditing industry but said that KPMG had done the right thing in the actions it took pertaining to the Japanese company. “What is pretty evident to me is that it is a very, very significant fraud,” Andrew said in a speech in Hong Kong. “We should wait for the Japanese authorities to disclose that.” “I think it is very hard to jump to the conclusion that it’s a corporate governance failure,” he said. The scandal has also revived criticism of corporate governance in a country that Woodford said needed people who would “challenge and scrutinize.” He also took a swipe at mainstream Japanese media for being slow to cover the scandal. “What Japan should do is look around the world for the best human resources … It would be sad if no more gaijin come,” he said, using the Japanese word for foreigners. On the eve of the board meeting, two Olympus directors and an internal auditor blamed for the scandal quit and the president announced that current management was ready to step down once the firm’s recovery was on track. Current president Shuichi Takayama should stay until December 14, but changes could start thereafter, Woodford said, adding that his fellow directors seemed to realize they would have to go but had given no explicit commitment to resign. Woodford also said Japanese authorities probing the scandal, whom he met in Tokyo on Thursday, wanted to talk to him again. Tokyo police, prosecutors and regulators have launched a rare joint probe of the scandal. The U.S. Federal Bureau of Investigation and Britain’s Serious Fraud Office are also looking into the affair. Shareholders have asked Olympus to seek more damages from former and current executives if they are found to have caused losses to company value through acquisitions at the center of a scandal, the company said in a statement on Friday. (Additional reporting by Yoko Kubota, Taiga Uranaka, Lisa Twaronite and Mayumi Negishi; Writing by Linda Sieg; Editing by Mark Bendeich) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Mike Lux: RED ALERT: Biggest Bank Sweetheart Deals of All Time?

October 21, 2011

There’s a reason a big majority of the country approves of the Occupy Wall Street folks in spite of all the media derision and right-wing attacks, and a reason that demonstrators all over the country and world are organizing in their wake. The reason is that most people know what too many politicians in Washington don’t: that the big banks on Wall Street have a corrupt business model that recklessly assumes taxpayers will bail them out if their bets don’t pan out, and that their political juice will get them out of trouble if they violate laws and slide around regulations. There are three things in the news that remind us of this sorry story once again, and the American people need to raise holy hell about all of them: another sweetheart deal for Citibank on fraud charges, a new Bank of America maneuver that could turn into the biggest taxpayer bailout of all time, and a faction in the administration trying to ram through a new deal for all the big banks to have their legal issues related to foreclosure wiped away. First case in point: the astonishing (and so far mostly unnoticed) little slight-of-hand that Bank of America pulled when it switched over its Merrill Lynch-derived toxic assets to a federally insured program. Read this and weep: Bank of America is moving $75 trillion of highly risky derivative contracts “from its Merrill Lynch unit to a subsidiary flush with insured deposits.” The FDIC, which is the government agency that insures bank deposits, is screaming bloody murder, but the Federal Reserve wants to let them do it. This is a big f’ing deal, friends. Maybe the biggest swindle ever, certainly the biggest government bailout by far if the ship goes down. It makes TARP and Federal Reserve bailouts so far look like chump change. Remember, the Fed bailed out banks to the tune of a mere $16 trillion in 2008, and TARP threw in less than $1 trillion on top of that. Seventy-five trillion dollars is almost 5 times as much. Now, we don’t know how much of the $75 trillion us taxpayers would be responsible for in the end, because we don’t have access to Bank of America’s books, and the company hasn’t failed yet. But to allow taxpayers to be on the hook for this kind of exposure to even some part of a bank’s risky bets is an obscenity beyond belief. Then there is the latest Citibank settlement. Citibank agreed to pay $285 million to settle charges it defrauded investors in a billion-dollar mortgage security deal, and Citibank didn’t have to admit any wrongdoing. This kind of settlement happens all the time , and is yet another example of a corrupted system: mega-banks pay modest fines on massively fraudulent behavior; no one goes to jail, loses their jobs, or even has to admit wrongdoing. Breaking the law — stealing from and defrauding people — and then having your company stockholders pay one of these modest fines if you do get caught is just business as usual for these huge banks. And everyone in the industry knows it. When Hank Paulson, who was generally a great friend of the big banks as the Bush Treasury Secretary, wanted to force Wall Street banks to do something he considered urgent during the 2008 financial crisis, all he needed to do was to say he was going to have the FBI look at the banks’ books and emails. They would agree to anything he asked them to do, because they knew they all had plenty to hide. Bank of America and Citi are the two most wobbly banks of the Too Big to Fail crowd. The argument from 2008-on by Tim Geithner and other pro-Wall Street government officials is that we can’t do anything tough to these banks because it would cause system-wide risk. In fact, they say, we have to keep bailing them out, letting them off the hook for their legal transgressions, not be too tough on regulating them, not break them up, etc. because otherwise we will have another financial panic. But continuing to let them drain us dry isn’t working, and as Europe has discovered, at some point the bailouts get too big to take on. A $75 trillion bailout is too big a bailout number even for the U.S. government to contemplate dealing with, but Bank of America is trying to slide such a deal under our noses. Fortunately, Dodd-Frank did actually give us clear resolution authority for the Too Big to Fail banks. Banks have recapitalized themselves; the stress tests at least in theory gave government officials more knowledge of the banks’ asset holdings. Based on what Geithner himself has said, we should be in no danger of having to bail out Too Big to Fail banks. If they get in trouble, we can take them over just like the FDIC does, sell off their assets, and wind them down. And yet, we keep doing the bailing, as well as the winking and nodding at their fraudulent behavior. The BoA $75 trillion transfer to a federally insured subsidiary is the most egregious bailout yet. The Citibank wink and nod is the latest in a long line of letting crooks off the hook. And we may be on the verge of yet another massive sweetheart deal for the big banks, a deal that if it gets rammed through will not only absolve the biggest banks of all their legal violations, but a deal that would completely undercut any administration political claims that they are willing to take on Wall Street. Check this out : U.S. state and federal officials plan to give the country’s largest mortgage servicers wider protection against legal claims in exchange for refinancing help for existing borrowers, as talks on a $25bn settlement of alleged foreclosure improprieties advance. The proposed agreement would settle allegations that Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial engaged in faulty mortgage practices, including employing so-called “robosigners” — agents who processed foreclosure filings en masse without examining the underlying paperwork — that abused homeowners’ rights and led to wrongful home seizures. The banks declined to comment. Now of course, reporters sometimes get things wrong, and I haven’t heard from the White House whether this story is accurate. What I suspect, in fact, is that there are two factions in the administration, one mostly from Treasury trying to get this done as quickly and quietly as they can, and one among the political staff at the White House who understand how insane it would be politically to give the banks yet another sweetheart deal after the President praised Occupy Wall Street and after David Plouffe told the Washington Post that they will be running against Wall Street in 2012. Understand that what’s spelled out in the Nasiripour story in terms of the legal release for the big banks sounds worse than what Tom Miller was trying to negotiate with them. Once again, big banks would get off with no legal accountability whatsoever for the crimes they committed, and the money they pocketed on fraudulent activities. And while $25 billion sounds like a lot of money, it is a mere fraction of what they made on activities that were clearly not legal, and it is an even smaller fraction of what is actually needed to help underwater homeowners maybe 5 percent of what is needed. Remember how bad HAMP was : this $25 billion program would be politically far worse, because administering a fund that inadequate to the problem would be a nightmare, and for every homeowner you helped, 19 would be ticked off because once again there was nothing to help them. This is a deal that I can absolutely guarantee to my friends in the administration will blow up in their faces badly if they go through with it. All those Occupy Wall Street demonstrators all across the country will be demonstrating against the White House. Labor unions and all the community groups doing bank actions will go crazy. Every economist and consumer group who has been working on the financial reform issue will react very badly. For Obama to run against Wall Street while handing the big banks another sweetheart deal, and getting the negative reaction it would cause, would be untenable. For all these reasons, I don’t think the President will go along with this deal. But as we know from the Suskind book , there are people in his administration who have a track record of acting on their own. Tim Geithner could well be (and from what some sources tell me, is) trying to ram this deal through while the President is dealing with getting our troops out of Iraq (thank you, Mr. President), and fighting with Republicans on taxing millionaires and billionaires. The RED ALERT in my headline is for the President as well as activists who care about this issue. We need to start reining in the big banks’ power to wreck our economy, and we can start by not giving them more sweetheart deals and bailouts.

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Lori Wallach: Obama Flip-Flops Off Trade Cliff

October 4, 2011

Apparently, Obama has a plan for winning re-election that does not involve Ohio… oh, and he is tired of talking about job CREATION. Yesterday, after months of seeming ambiguity about whether to really take ownership of the three job-killing, Bush-signed, NAFTA-style Free Trade Agreements with South Korea, Colombia and Panama, he sent them to Congress for approval. Keep in mind that even the official U.S. International Trade Commission studies show that the Korea deal, the most economically significant since NAFTA, will increase our trade deficit. It’s projected to cost 160,000 jobs — many in the jobs of the future categories like high-speed trains, solar, computers etc. At this point, that Obama did a total flip-flop on very specific, written, repeated campaign promises — in this instance to replace the old damaging trade model starting with fixing these three deals — is not news. But what is noteworthy is the flip-flopping right off a political cliff. See here for a memo on the polling on these issues — opposition to these sorts of pacts is one of the few things that unites GOP, Dems, and Independents. Now, the question is whether Congress will follow. Whether or not these job-killing deals go into effect will come down to whether 218 House members vote for them. Few Dems will support the deals. The Korea deal is an albatross of job loss . Congress should not even be considering a trade deal with Colombia, where scores of trade unionists, human rights defenders and Afro-Colombians are murdered or displaced from their lands every year and conditions have worsened since the administration signed off on an unenforceable “Labor Action Plan.” At a time when America is trying to reduce the national debt, Congress should not be considering a trade deal with Panama, a notorious tax-haven where U.S. firms and wealthy individuals go to dodge their taxes. A bloc of more senior GOP oppose the Korea deal, as it clobbers certain industries. So, it will come down to the GOP freshmen. The polling shows that Tea Partiers are among the most passionate opponents of these deals. But whether the freshmen GOP will stick with the critical position many of them campaigned on and/or heed the Ron Paul call to oppose these deals is at best unclear. Many have already flipped to yes votes, falling in line with the massive Chamber of Commerce campaign that has been aimed at getting them “educated.” If the deals are passed, you can imagine the Democratic congressional campaign committees again making hay with differentiator ads attacking these job-killing votes. Maybe the White House is hoping that Democratic base voters and Independents seeing those ads forget that it was those congressional GOP and the Democratic president who slammed their futures with more NAFTAs.

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Rick Perry Faced Federal Scrutiny For Insider Trading, Criticism For Land Deals

September 30, 2011

WASHINGTON — Since announcing his run for the presidency, Texas Governor Rick Perry (R) has had to fend off allegations of crony capitalism . Such critiques have revealed the governor’s easy relationships with lobbyists , and his awarding campaign donors government contracts and influential positions on state boards. But Perry has also personally profited from these same relationships. His own deal making has helped him become a millionaire, and it has not gone unnoticed. In the late ’90s, federal law enforcement authorities investigated allegations that Perry had engaged in insider trading, sources involved in the inquiry tell The Huffington Post. On Jan. 24, 1996, Perry purchased 2,800 shares of stock in a company, Kinetic Concepts, Inc. , owned by a San Antonio businessman soon to be one of Perry’s top donors, James Leininger . It was great timing. Later that day, a group of investors bought up 2.2 million shares in the company, sending the price soaring and netting Perry a nice gain. On the day of the stock purchases, Perry had given a speech before a group founded by Leininger. Both Perry and Leininger later admitted talking on the day in question but denied discussing the stock. Perry would go on to sell his Kinetic Concepts stock — a total of more than 8,000 shares — a month later for a $38,000 profit. It took at least two years for an Austin attorney to uncover the suspicious trade. The attorney, who would only discuss the matter on condition of anonymity because he continues to have dealings with the U.S. Attorney’s Office, said he spoke with two sources who corroborated that Perry and Leininger had met on the day in question and that the donor had advised the politician on the stock purchase. “Perry bought immediately,” the attorney recalled. “I mean it was immediately. It was immediately after that that the transaction was announced and the stock went up considerably. My source was telling me that Leininger told [Perry] to go buy some stock.” “I was told that such a private conversation took place and in that private conversation, Leininger told him he needed to invest a little money,” the attorney added. The attorney took his findings to federal prosecutors. They met in an Austin ice cream parlor and he related what he knew. James William Blagg, who was the U.S. Attorney for Texas’ Western District at the time, confirmed there was an investigation into the Perry stock tip and that he deemed the allegation credible enough to pass to the FBI. “I received some information and supplied it to the FBI,” he told HuffPost. “That’s exactly what happened. That’s what I recall happening.” An FBI spokesperson did not return multiple calls seeking comment. The allegations may have had merit, Blagg recalled, but he questioned their provenance. They had come to him, he said, from strongly anti-Perry sources. The Austin attorney contradicts Blagg’s memory. He told HuffPost that one of his sources was getting information directly from the Perry camp. “The circumstances were so overwhelming that it made it very believable,” the attorney explained. “I didn’t doubt it. I certainly wouldn’t be talking to the U.S. Attorney’s Office if I thought it wasn’t credible. I still believe it to this day.” The problem, Blagg recalled, was that the information he received did not contain a smoking gun — an email exchange, a recorded conversation, anything that would have made the case airtight enough to indict a powerful Texas politician. Without documentation, insider-trading prosecutions become he said-she said affairs that are difficult to sell to a jury. Still, the tip merited enough interest to pass it up the chain. “I asked them [the FBI] to look into it,” Blagg said, “but nothing came of it.” After the news broke of the stock deal in 1998, both Perry and Leininger denied any wrongdoing. Perry told the Dallas Morning News : “There was never any conversation with Dr. Jim Leininger about his stock. There was talk about family and public policy, but not about the stock.” Mark Miner, Perry’s presidential campaign spokesman, responded to the allegations via email, telling HuffPost that the Securities and Exchange Commission had “reviewed the matter and dismissed it.” He added that the U.S. Attorney’s Office’s involvement was news to him. “I am not familiar with any other federal review,” Miner wrote, “and there was never action on these false accusations.” The episode was the closest Perry has come to serious legal jeopardy in connection with his controversial financial dealings with political cronies and top-tier donors. But the stock’s $38,000 payout was peanuts compared to Perry’s real estate transactions. * * * * * Perry’s business acumen wasn’t immediately apparent. He did not excel at Texas A&M. He flew beefed-up cargo planes in the Air Force before returning to his father’s farm in Haskell County. The hard work of farming did not interest Perry . “He never really had a job,” said Jim Hightower , the former Texas agriculture commissioner who lost his job to Perry in 1990. “It’s not like he’s a businessman.” In the year that he took over as agriculture commissioner, Perry’s net farm profits totaled $802 . “You’ve got a guy whose father went broke on a regular basis,” explained Peck Young , director of Austin Community College’s Center for Public Policy and Political Studies and a former political consultant. “Dry land farming — it’s a hard business to get rich on, easy to get broke on. The family was in financial straights. Then he got into politics.” Perhaps Perry’s most lavish pre-politics purchase was half an interest in 60 acres on the outskirts of Haskell County. The investment cost him $30,000. Perry shared the acreage with another couple, Tim and Paula Everett, who knew his wife, Anita, well. “We bought land so we could build a house on half of it and they could build a house on half of it,” Paula Everett told HuffPost. “I grew up with them. I went to elementary school and high school and college with Anita. Her dad was our family doctor.” Tim Everett said of Rick Perry: “He was like the rest of us here.” When Perry started out in the state legislature as a Democratic representative in the mid-’80s, his salary came to $7,200 a year. Anita Perry worked as a nurse. In 1985, the couple bought a house in Haskell for $95,000. Two years later, the Perrys had listed their total income at $45,000 . During one legislative session in Austin, Perry shared an apartment with three representatives. One roommate, former state Rep. Tom Uher, also a Democrat, recalled that Perry slept on the floor. Uher said he considered Perry to be nice but a “greenhorn.” Perry also liked to talk. “He was just a young, verbal guy,” Uher explained. “He didn’t show any wisdom or experience that he was one to listen to. To me, he never came across as having exceptional skills.” In the legislature, Perry and other like-minded fiscally conservative Democrats became known as “the pit bulls.” The title stuck, but their impact was limited. “He was no factor,” said Young. “I can tell you he was considered a non-player. He wasn’t a power. He didn’t have any say over legislation. The things he did touch were of no consequence to anybody.” Perry was elected agriculture commissioner in 1990. In his first decade holding state-wide office, he earned more than $2 million . In 2009, Perry listed his net worth at just over $1 million. As a government official with enormous hold on appointments and business interests across Texas, Perry created a one-man, public-private partnership where a key ex-staffer, along with donors and political allies, set up sweetheart deals. Pivotal appointments, government contracts and friendly legislation were soon to follow. At the center of it all were land transactions. A Perry friend and Austin businessman explained to HuffPost that there was nothing illegal going on. “It was friends giving him tips on something to buy,” he said. “It wasn’t like, ‘Here we’re going to set you up.’ And the deals were too small to accomplish something like that.” Miner, Perry’s campaign spokesman, doesn’t see the deals as anything close to crony capitalism. “As to the real estate transactions, all were above-board, arms-length, market-based transactions and fully disclosed on the Governor’s personal finance and tax forms,” he wrote in an email. But the Houston Chronicle reported that “almost everyone who steered Perry to his money-making deals has seen rewards. … Six received key state government appointments or jobs. Two benefited from government actions that had the potential to enhance their real estate holdings.” Young, the Austin Community College center director, said this type of transactional politics is nothing new in Texas. “The ethos here in Texas is you get into office and you’re stupid if you don’t get rich,” he explained. “[Perry] seemed to make an art form out of it. He managed to make it into a family business.” A few deals stick out. In 1993, Perry bought a nondescript piece of property in Austin for $122,000. The land would become essential to Dell Computer founder Michael Dell , who was building a home nearby. Perry later told the press that he had intended to build a home on the property. Two years later, Perry sold the nine acres to Dell for $465,000 . The Texas Tribune reported that Dell needed the land to “get access to important municipal sewage infrastructure.” News accounts noted that Tim Timmerman, an Austin real estate developer and Perry friend, had persuaded Perry to buy the land in the first place. Timmerman has since given close to $70,000 to Perry’s campaigns from 2000 to 2010, the Houston Chronicle reported , noting that Perry eventually appointed him to an influential board . Timmerman did not return multiple calls seeking comment. Mike Toomey , the lobbyist who would eventually work for Perry as his chief of staff and later become central in the HPV vaccine controversy , served as Perry’s power of attorney in the deal. Toomey did not return calls seeking comment. The Perry friend recalled encouraging Perry to buy the property he would later sell to Dell. Perry, he said, wasn’t so sure. The land was on the side of a hill. “I said I think it’s practically worthless,” the Perry friend explained, adding that it wasn’t “usable.” “But when Michael Dell wakes up and he’s planning his whole estate, he’ll want to buy it. His wife is going to demand that he buys that property.” Another long-time friend directed Perry to an even more lucrative deal. Republican Sen. Troy Fraser had known Perry since they were teenagers. They’d since followed each other’s careers closely. Perry had helped Fraser out when he first ran for the state legislature. So when Fraser took an interest in a resort community known as Horseshoe Bay , he purchased two adjoining lots — one for his family and one for Perry’s. Like the Everett deal, Fraser told HuffPost that the plan was for the two families to live next to each other. “We were going to build retirement properties,” he said. “That’s where we were going to retire — next to each other.” Only this time, instead putting down $30,000, Perry would have to invest 10 times that amount. Fraser told HuffPost that Perry liked the idea but said he just didn’t have the money to buy the property. Fraser said he did Perry a favor by purchasing it for him. “He didn’t have the $300,000 to buy the property,” Fraser said. “He wanted it.” “We had an agreement on the day that I bought the property,” Fraser said. “I loaned him $300,000 to buy the property.” In 2001, six months after the purchase, Fraser sold Perry the property for $300,000 plus interest. The Dallas Morning News hired an appraiser who judged the land to be actually worth $450,000. Perry never built that retirement home. Six years later, he sold the property for $1.15 million to Alan Moffatt , a British national who is the owner of an aviation firm (and was questioned on suspicious arms sales to Rwanda during the ’90s). The Morning News ‘ appraiser claimed the sale price was $350,000 above market value. Moffatt owned a home across the street from the Perry property. “He wanted to build another home,” explained Doug Jaffe, the resort’s developer. “I think the governor sold it too cheap. He did. I know he did.” Jaffe said Moffatt went through his real estate company to purchase Perry’s land. Prior to the sale, the governor’s office had cleared a $2.5 million grant to a separate, Jaffe-founded aircraft company. The Houston Chronicle noted that the money never made it to the company because it failed to meet “job-growth commitments.” Fraser insists the original deal was legitimate: “It was nothing more than a real estate transaction — two friends wanting to building houses next to each other.” The Perry friend agrees. He characterized the Horseshoe Bay transaction as “buddy to buddy,” and a lucky “inside deal.” * * * * * Due to renovation work and an arson of the governor’s mansion, the Perry family has resided in a rental mansion since 2007 , at a cost of $10,000 a month to taxpayers. Home items covered by public funds include a set of $1,000 drapes from Neiman Marcus, a $700 clothes rack, an $8,400 maintenance bill for the heated pool and other luxuries. The Perrys’ first two years in the rental property cost taxpayers $600,000 . During this time, Perry was busted for claiming a College Station property he owned as his principle residence in an effort to get a break on property taxes. Perry’s daughter lived on the property while attending Texas A&M. But her roommates paid rent to the family. For several years, Perry had failed to disclose his rental earnings with the Texas Ethics Commission as required. Nor did he disclose the loan that paid for the property. Perry had secured financing for the loan on the College Station, Texas, property through a subsidiary of Plains Capital Bank. James Huffines , a Perry mega-donor, is an executive with the bank. Perry had also appointed Huffines to the University of Texas Board of Regents. Huffines resigned the day a complaint about the rental property was filed with the Texas Ethics Commission. Huffines’ family has contributed $300,000 to various Perry campaigns. The Dallas Morning News reported that Huffines’ bank received roughly $88 million in federal bailout money in 2008. The financing for the College Station house suggests that Perry put no money down when he got the loan for the property. The house was valued at more than $200,000. The Texas Ethics Commission fined Perry $1,500 for the disclosure failures . Huffines did not return multiple calls to his home and office seeking comment. A few months after the Kinetic Concepts stock deal, Perry put his finances in a blind trust. Bill White, Houston’s former mayor who ran unsuccessfully against Perry in the 2010 governor’s race, helped uncover the College Station property controversy. He argued for more transparency from the governor and continues to do so. “We asked for Perry to support our proposed changes in ethics laws, including prompt online reporting of contributions to committees used to pay for travel and the expenses of his residence, as well as complete reporting of all income from assets which he knew about before they were placed in a blind trust,” White wrote in email to HuffPost. “Perry has not supported [these] changes.” Whatever controversy or potential controversy surrounded Perry’s dealings over the years, they did little to alter the universe of the players involved. The same year that Perry made his stock purchase, Leininger sold Perry’s campaign a plane at below-market value. Two years later, during the extremely tight race for lieutenant governor, Leininger secured a last-minute $1.1 million loan for the Perry campaign. After Perry’s razor-thin victory, his opponent John Sharp said : “I congratulate Leininger. He wanted to buy the reins of state government. And by God, he got them.” According to the nonpartisan watchdog group Texans for Public Justice, Leininger has given $239,000 to Perry’s campaign coffers between 2001 and 2009. Leininger did not return multiple calls seeking comment. But the Perry friend who spoke with HuffPost insists there’s nothing unethical about the relationship. “They are very, very tight,” he said. “Leininger’s not a guy who can do something shady. Perry’d take advantage of something like that.”

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Rick Perry, Donald Trump Meet

September 15, 2011

Republican presidential candidate Rick Perry met with Donald Trump at Jean-Georges, an upscale restaurant in New York City, on Wednesday night, according to multiple reports . Prior to the meeting, Trump spokesman Michael Cohen told CBS News and National Journal , “It’s obviously about the presidency” and added, “Everyone wants Mr. Trump’s support.” Just weeks after the Texas governor announced his candidacy for president of the United States last month, Trump said during an appearance on “Fox & Friends” that Perry has called him and that they’ve “had great conversations.” The real estate mogul added at the time, “I’m sort of proud of him.” CBS News reports that when asked how Wednesday night’s meeting went, Trump said, “Excellent, excellent.” Perry also signaled that it went well and suggested that Trump “knows his restaurants.” Before the pair met, Trump came to Perry’s defense when it comes to where the Texas governor stands on contentious political issues during an appearance on CNN: On the executive order Perry signed requiring a vaccine for girls in Texas schools that guards against HPV, a virus that can cause cervical cancer, Trump said he’s “not sure if [Perry] would have done it again,” and the Texas chief executive “made a poignant statement, that he believes in saving lives,” when he spoke of the decision during CNN’s Tea Party Republican Debate Monday. Trump also signaled he sees no problem with Perry’s characterization of Social Security as a “Ponzi scheme.” Earlier this year, Trump opted against running for the Republican presidential nomination after sparking speculation that he could jump into the GOP primary mix. More recently, however, he’s teased that it’s still possible he could mount a campaign as an independent candidate. Below, video of what Trump had to say on CNN. WATCH:

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THEY’RE BACK: Congress Returns, Prepares To Fight Over Key Issues

September 6, 2011

WASHINGTON — Members of Congress spent August listening to constituents describe their economic struggles. This week, the lawmakers return to Washington to see whether there’s enough bipartisanship left to make things better. Republicans and Democrats agree that job creation is the first priority, but there’s little indication so far that the two sides will come together. President Barack Obama, who will address a joint session of Congress on Thursday, challenged Republicans in a Labor Day speech to put country ahead of party and work with Democrats on a jobs package. He said more than 1 million unemployed construction workers are ready to rebuild deteriorating roads and bridges. Majority Republicans in the House, however, have been unwilling to spend money on new construction projects – a strong signal that they’ll give Obama’s address a cool reception. Besides spending on public works, Obama said he wants pending trade deals passed to open new markets for U.S. goods. He also said he wants Republicans to prove they’ll fight as hard to cut taxes for the middle class as they do for profitable oil companies and the wealthiest Americans. The president is expected to call for continuing a payroll tax cut for workers and jobless benefits for the unemployed. Some Republicans oppose extending the payroll tax cut, calling it an unproven job creator that will only add to the nation’s massive debt. The tax cut extension is set to expire Jan. 1. Republicans may go along with tax break proposals but won’t be friendly to ideas to extend jobless benefits. They also cite huge federal budget deficits in expressing opposition to vast new spending on jobs programs. House Republicans have prepared an autumn jobs agenda that centers on repealing what they say are job-destroying environmental and labor regulations. The first bill, slated for the week of Sept. 12, would prevent the National Labor Relations Board from restricting where an employer can locate in the United States. It grows out of a complaint issued by the NLRB that Boeing Co. was punishing union workers with plans to transfer an assembly line from Washington state to South Carolina. The anti-regulation bills are likely to hit a dead end in the Democratic-controlled Senate. But the threat of them prompted Obama last week to scrap tougher Environmental Protection Agency regulations on ozone, a key ingredient of smog that causes asthma and other lung illnesses. While talking jobs, lawmakers will have one eye on the initial meetings of the supercommittee established under legislation enacted in early August to increase the federal debt ceiling. The bipartisan committee has until Nov. 23 to come up with at least $1.2 trillion in deficit cuts. If it fails to do so or if Congress fails to approve its recommendations by Christmas, automatic spending cuts covering both defense and domestic programs would be triggered starting in 2013. More immediately, Congress must stop itself from actually causing unemployment. Obama, in his address, is expected to urge lawmakers to act swiftly to renew aviation and surface transportation programs and avoid shutdowns that he said could put 1 million jobs at risk. The Federal Aviation Administration has been operating on short-term extensions since 2007 because the House and Senate can’t agree on a comprehensive plan for the future. Earlier this year, the FAA had to shut down for two weeks, resulting in tens of thousands of construction worker layoffs and $400 million in uncollected airline ticket taxes. The agency will shut down again on Sept. 16 unless Congress acts. Similarly, the law that authorizes federal spending for highway and mass transit programs expires Sept. 30. A stalemate there could disrupt collection of the 18.4 cent-a-gallon federal gasoline tax and have a far more devastating effect on construction jobs. Rep. John Mica, R-Fla., who is chairman of the House Transportation Committee, said at the end of August that he would agree to one more short-term extension, the eighth, as he negotiates with the Senate on a long-term bill. Mica has proposed a six-year, $230 billion bill financed entirely by gasoline and diesel taxes. The Senate is calling for a two-year, $109 billion bill that would rely on $12 billion appropriated by Congress in addition to the fuel tax revenues. Not all is negative on the congressional job front. On its first day back Tuesday, the Senate will vote to move forward on the most extensive revamping of the patent system in six decades. Senate passage of the measure, already approved by the House, would send it to Obama, who agrees with most members of Congress that the legislation will make it easier for inventors to get their products to market and thus encourage hiring. There’s also some optimism that Congress will soon sign off on free trade agreements with South Korea, Colombia and Panama that have been in limbo since the George W. Bush administration. Before the August break, Senate Majority Leader Harry Reid, D-Nev., and Republican leader Mitch McConnell of Kentucky said they had agreed on a path forward for renewing a program that helps workers affected by foreign competition and passing the trade bills, and House Speaker John Boehner also promised a vote on the worker aid bill which Obama says must be linked to the trade agreements. The administration and supporters of the trade bills say they will generate tens of thousands of jobs. Some labor unions and other skeptics of free trade dispute that conclusion. Also looming is the Sept. 30 end of the fiscal year, when Congress is supposed to have completed the 12 appropriation bills to fund federal agencies for 2012. So far the House has passed only half of those bills, and the Senate only one, and as in past years they will have to agree on temporary stopgap extensions to avoid a partial government shutdown. Things are a little easier this year because the debt and budget pact sets the overall total for the 12 bills at $1.043 trillion, a $7 billion cut from current levels. Still, there will be heated debate as Democrats seek to restore cuts planned by Republicans to education, environment, foreign aid and other programs. One such debate will be over funding the Federal Emergency Management Agency, which has less than $800 million in its disaster fund as it faces the Hurricane Irene recovery operation.

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Wall Street Banks Sued For Massive Fraud In Subprime Deals

September 3, 2011

The federal government late Friday filed lawsuits against 17 financial institutions , including some of the nation’s largest banks, alleging a pattern of fraud in their packaging and selling of roughly $200 billion worth of mortgage-linked securities. The suits amount to one of the most significant legal actions to emerge from the rubble of the financial crisis nearly three years ago. The allegations by the Federal Housing Finance Agency, which is seeking unspecified compensation, penetrate the heart of Wall Street’s role in helping lead the economy to ruin. The FHFA claims these institutions knowingly peddled shoddy deals without informing investors. When the housing market crashed, and those deals went south, the damage rippled through economies around the globe, plunging nations into recession. The legal action, which comes in addition to separate allegations of dubious mortgage and foreclosure practices at some of these banks, may roil financial markets next week, and is likely to have dramatic political consequences for the Obama administration. The banks, some of which have lately been subjected to punishing speculation about the adequacy of their capital reserves, could face massive losses. A spokeswoman for the FHFA said it was “premature” to judge what the actual penalties from Friday’s lawsuits might be. The FHFA alleges that banks repeatedly made false claims to the mortgage giants Fannie Mae and Freddie Mac about the very nature of the loans banks were selling. In many cases, the FHFA claims, banks sold the shoddy loans even after a third-party analysis company informed the banks that billions of dollars’ worth of mortgages did not meet the specifications that the banks made in legal filings and in statements to Fannie and Freddie, which are still owned by U.S. taxpayers. “Make no mistake: fraud is a business model,” said Janet Tavakoli, president of the Chicago-based consulting firm Tavakoli Structured Finance. “Unfortunately, Fannie Mae and Freddie Mac were often tagged with a lot of these loans,” she continued. “Whether they were willing victims in some cases is almost irrelevant at this point, because now it is a matter of public interest, since taxpayers had to bail out Fannie and Freddie. The whole ballgame has changed.” Representatives for the banks were either unavailable to comment, or declined to comment, on Friday evening. The institutions being sued include Ally Bank, Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, First Horizon, General Electric, Goldman Sachs, HSBC, Societe Generale, JPMorgan Chase, Morgan Stanley, Nomura and Royal Bank of Scotland. Bank of America and Deutsche Bank each released statements Friday saying that Fannie and Freddie are sophisticated investors, with the ability to assess complicated securities. The banks claimed that Fannie and Freddie have said the losses were caused by broader economic forces. “Fannie Mae and Freddie Mac were among the most sophisticated, powerful and heavily regulated financial institutions in the U.S. mortgage finance system,” Bank of America said in a statement. “They claimed to understand the risks inherent in investing in subprime securities and, in fact, continued to invest heavily in those securities even after their regulator told them they did not have the risk management capabilities to do so.” But the mortgage giants were deceived, the FHFA claims. Banks concealed crucial information about the investments they were selling, so that even the most sophisticated investor would be left in the dark, lawsuits allege. “Fannie Mae and Freddie Mac did not know, and in the exercise of reasonable diligence could not have known, of the untruths and omissions,” the lawsuit against Goldman Sachs says. If Fannie and Freddie had known, the suit continues, they would not have bought the securities. Near the center of the allegations is the relationship between the banks and an independent firm known as Clayton Holdings, which analyzed mortgages for these bank clients. Clayton, which found problems with many of these loans, got national attention last fall when a former executive gave explosive testimony to a government panel. Wall Street banks bought pools of subprime home loans to turn into securities, and submitted a percentage of those loans to Clayton for review. Clayton found that as many as 28 percent of these loans failed to meet basic standards, the company revealed in September of last year . But nearly half the time, banks went ahead and purchased the bad loans anyway, using this information to go back and buy the loans on the cheap, according to Clayton data and testimony from the former executive. Worse, the banks didn’t tell investors about Clayton’s concerns, the FHFA alleged Friday. Goldman Sachs, an FHFA lawsuit claims, also bet against the securities it was selling, and reaped profits from doing so. Such bets were the subject of a lawsuit brought by the Securities and Exchange Commission, which resulted in a $550 million settlement last year, and has contributed to an ongoing public relations nightmare for the Wall Street titan. “Goldman was like a car dealership that realized it had a whole lot full of cars with faulty brakes,” wrote journalist Matt Taibbi, in an article that the FHFA quotes in its lawsuit. “Instead of announcing a recall, it surged ahead with a two-fold plan to make a fortune: first, by dumping the dangerous products on other people, and second, by taking out life insurance against the fools who bought the deadly cars.” The lawsuits put intense pressure on the Obama administration, which has long insisted that U.S. banks are healthy, while pushing for a cheap and speedy settlement over separate allegations that banks committed widespread fraud in the foreclosure process. The suits also underscore tensions over housing policy between President Barack Obama and Edward DeMarco, acting FHFA director. DeMarco, a holdover from the Bush administration, has rebuffed a push from Obama insiders to spur mortgage refinancing for underwater borrowers. The government took over Fannie and Freddie in the summer of 2008 as the mortgage giants suffered massive losses, and DeMarco is bound by that takeover deal to limit losses for taxpayers. Some housing experts have criticized the Obama team’s push for refinancing, saying it has failed to eliminate excess bubble-era housing debt for underwater homeowners. Nevertheless, the FHFA’s move prompted applause from Rep. Brad Miller (D-N.C.), one of the top mortgage experts in Congress, and a persistent critic of big bank abuses both during and after the housing bubble. “I don’t agree with Mr. DeMarco on every issue, but I have consistently supported FHFA’s efforts to pursue legitimate claims for fraud and breach of contract to limit taxpayer losses,” Miller said. “Not pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already. The American people should expect their government not to give the biggest banks a backdoor bailout.” The administration has long sought to maintain the stability of major financial firms in the aftermath of the politically unpopular bank bailouts of 2008 and 2009. Although the bailouts were initiated under President George W. Bush, Obama continued the policies, and has repeatedly touted Wall Street’s health as evidence that the programs were successful. Further losses absorbed by banks could weaken the economy and stymie job creation. The suits include at least one explicitly political problem for Obama. The FHFA’s targets include General Electric, an international beacon of American business whose CEO, Jeffrey Immelt, currently serves as a top economic adviser to Obama . Stock market investors have hammered financial institutions in recent weeks, as worries that the economy could be entering a new recession combined with fears that these companies could be on the hook for many billions in legal liabilities — and could face losses from exposure to troubled European banks. The value of Bank of America shares at closing on Friday had sunk to a third of its so-called book value, according to its recent financial statement. The closing price of $7.25 a share was just cents higher than its price before the widely-admired investor Warren Buffett injected several billions into the company last week.

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Goldman Ordered To Hire Consultant To Review Mortgage Loans

September 1, 2011

NEW YORK (Lauren Tara LaCapra) – The U.S. Federal Reserve ordered Goldman Sachs Group Inc to hire a consultant to review practices of a former mortgage subsidiary on Thursday and said it plans to assess a monetary penalty for wrongful foreclosures. The Fed’s crackdown sent Goldman shares down 3.5 percent on Thursday, even as the bank announced that it had completed the sale of Litton Loan Servicing LP, the mortgage-servicing business at the heart of its foreclosure problems. Litton’s regulatory troubles stem largely from the practice of “robosigning,” in which bank employees signed foreclosure documents without reviewing case files as required by law. Many large banks, including Bank of America Corp, JPMorgan Chase & Co, Wells Fargo & Co and Citigroup Inc , have been targets of probes by state and federal regulators over the same issue, in the clean-up after a world financial crisis triggered in large part by bad mortgages in the United States and bonds backed by those loans. The Fed cited “a pattern of misconduct and negligence” at Litton in announcing its enforcement action against Goldman. An outside consultant will have to review all of Litton’s foreclosure activity in 2009 and 2010, to identify borrowers who suffered financial losses due to improper practices. Goldman will have to reimburse those customers and is also responsible for any fines that the Fed assesses after the review is complete. Separately, Goldman also reached a foreclosure-practices pact on Thursday with New York Financial Services Superintendent Benjamin Lawsky, helping clear the way for the bank to sell the business to Ocwen Financial Corp for $264 million. The bank agreed to forgive 25 percent of principal balances for struggling homeowners who are 60 days past due on mortgage payments, at a cost of $53 million. Goldman will also compensate some Litton home loan borrowers for wrongful foreclosures at an indeterminate cost. As part of the deal, Goldman, Litton and Ocwen all pledged to stop the robosigning practice, institute new staffing and training requirements for employees handling foreclosures and withdraw pending foreclosure actions that are based on faulty paperwork. They also agreed to compensate borrowers for wrongful foreclosures and strengthen protections for homeowners in relation to late payment fees and insurance costs. In return, Lawsky agreed to issue a “no objection” letter to the planned Litton-Ocwen transaction. [ID:nN06259001] But the agreement “does not preclude any future investigations of past practices or release any future claims or actions whatsoever,” the state agency said in a statement. Goldman shares closed down $4.06, or 3.5 percent, at $112.16 on the New York Stock Exchange. Ocwen Financial shares closed down 52 cents, or 3.8 percent, at $13.28. Goldman bought Litton in 2007 for $430 million, hoping to glean more information about the subprime mortgage market to help its trading business. But more recently, it has become a money-losing thorn in Goldman’s side. The bank began considering a sale of Litton late last year, as the mortgage market continued to suffer losses and state and federal regulators began investigating industry-wide foreclosure problems. Goldman wrote down the value of the business by $220 million in the first quarter. In a quarterly filing on Aug. 9, Goldman said Litton was facing probes by state attorneys general and banking regulators. A group of the nation’s largest banks are said to be working toward a settlement that could resolve some of those investigations and cost the industry billions of dollars. Ocwen is now the 12th largest mortgage-servicer in the United States after having acquired Litton, a relatively small player that ranked 23rd in the industry. (Additional reporting by Sakthi Prasad in Bangalore; Editing by Robert MacMillan, Steve Orlofsky, Gary Hill) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Beantown Scores Trifecta of Deals

August 30, 2011

From WSJ.com… A land swap at Harvard University, Boston’s Mandarin Oriental hotel and Renaissance Boston Waterfront Hotel are in the news. Follow this link: Beantown Scores Trifecta of Deals Find our Weekly Commercial Real Estate, Private Equity and Fund Newsletters at www.WeeklyBrief.net

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Grant Cardone: Social Media Reputation Management Tips

July 15, 2011

With increasing numbers of people heading online as their first step to research your company, product and even for your personal information, it only takes a few bad reviews or complaints to result in lost opportunities and a damaged perception or brand. Your customers are online and it is vital to manage your online reputation in order to protect your brand as it may be the first impression the public gets about you. Social tools, like Yelp, Facebook, Twitter, Youtube and blogging sites with endless agendas have magnified the voices of your clients and potential prospects for your business. Let’s face it, almost anything can get posted about you or your company regardless of the facts. No matter who you are or what business is, when you start getting attention, it is only a matter of time before someone will post something negative about you online. With the influence of social media, those that are critical of you, your product or your company can easily show up online bashing you. Criticism, dissatisfied customers, varying opinions, opposition, even intentional and malicious brand-bashing are not new challenges in business. These issues has been around since the creation of gossip and opposition, it is the power, accessibility and reach of the web that makes your social media reputation a new issue. Here are some ideas about how to manage negative social media: 1) Treat Your Social Media Reputation Like Your Personal Reputation. Handle social media attacks the same way you would a personal attack. Handle it, don’t delegate this or take it lightly. Nothing is more important than your name and reputation. 2) Handle ALL negative post as opportunities. All complaints, bashing, and customer dissatisfactions should be treated as opportunities not problems (until proven to be something else). A dissatisfied customer or post can be turned into a fan when handled correctly. I have a policy in my company where I personally contact every customer that expresses a complaint with the goal of making turning a problem into a win for everyone. 3) Handle Immediately — The sooner you handle the complaint the easier they handle. Respond immediately and reasonable people will appreciate you making them a priority. Don’t respond with the intent for them to remove a post or criticism but to handle it. “Wow, I saw what you posted online and I wanted to call you right away and see what I could do to handle it. I had no idea. Tell me about what happened. What can I do to resolve it?” Most people, when handled correctly, will then retract the post or post how great you are. 4) Contact directly. Do not respond publicly online to something negative as you only bring more attention to it. Like an communication it is best done when handled directly either by phone, a direct message or even in person if possible. Be careful not to suggest wrong doing in your message but that you want to see what you can do to handle the upset. 5) Be pro-active — The best solution to reputation management is to be on offense not defense. Create initiatives to simply collecting positive post and testimonials, even video, about you and your company. Encourage and make it easy for the people that love and do business with you to spread the good word about you. Aggressively build a positive public relations campaign about your good works, endeavors and contributions that will outweigh any negative post. 6) Know Your Limitations — While I believe that every complaint is an opportunity you have to know which battles to fight and which one’s to walk away from. Don’t invest time in those that have as their real goal to consume you, your focus or your energy. There are a some people that are only interested in making noise, negativity and spewing hate. Disregard and don’t engage them once they prove they are only interested in the negative. The most important consideration is you should treat your social media reputation in the same manner you would your personal and public reputation. It is only a matter of time before someone post negative comments about you, which may include exaggerations of dissatisfaction issues with some going as far as fabricating complete falsehoods. It is a fact of life that to the degree you get attention, you will at some point get criticism. Protecting your online reputation requires that you know what you can do so that the public searching you out gets the right story about you. Make it a priority and be proactive!

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Food Critic Exposes The Bad Dining Deals From Groupon, Gilt & More

July 8, 2011

There has been a ton of chatter recently about the plethora of deal sites around, and their viability in the marketplace. Bloomberg food critic Ryan Sutton and founder of The Price Hike has had enough of them. He recently founded The Bad Deal to highlight some particularly egregious “deals.” The Bad Deal is a smart and necessary site; HuffPost Food recently chatted with Sutton to learn more about what makes a bad deal, and how to avoid them. What inspired you to start The Bad Deal? I started The Bad Deal after I watched one of New York’s worst restaurants sell an obscene amount of deals on Groupon. The offer was for At Vermilion, a Latin-Indian fusion joint I was certain would shutter after critics like me drop-kicked it in 2008. But when I started hitting refresh on the Groupon deal last month, I noticed that purchases for the At Vermilion vouchers were going through the roof. It was like watching Wile E. Coyote on a shoddy Acme Rocket; you know he’s about to hit a brick wall but there’s nothing you can do to stop the impending disaster. Vermilion sold over $17,000 worth of those deals in June, and nearly $50,000 back in November. So that was the wakeup call to me as a critic, that I couldn’t ignore these deal sites anymore. Right now, I believe a growing amount of people are getting more and more of their restaurant information from deal sites, which is the equivalent of canceling your subscription to The Washington Post and watching infomercials all day — in other words; you’re taking advice from paid salespeople instead of good journalists. There aren’t enough checks and balances for deals; there isn’t enough criticism. When a restaurant opens, it gets free publicity, then it receives proper reviews from the critics a month or two later. But for deals, they appear and disappear within the span of days, and sometimes hundreds of thousands of dollars have exchanged hands before a trustworthy source can say, hey, wait a minute, should you really be ordering a tasting menu for six at The Dog Food Emporium? There has recently been a ton of backlash about the whole Groupon phenomenon — what do you see happening with similar companies in the next few years? Is the market saturated? Or will people keep finding new ways to “save?” For deal sites, I believe it’s still the Friendster and Myspace era, so to speak; we haven’t yet discovered the next Facebook — Groupon’s [impending] enormous IPO notwithstanding. I’m quite curious to see what Google Offers and Priceless Cities by MasterCard have up their sleeves. I’ve often said deal sites have the potential to do good. As we emerge from the Great Recession, there are still great restaurants with empty seats, and there are still consumers who want a taste of luxury without blowing an entire month’s worth of disposable income on a single meal, and if deal sites can help them in a way that’s informed, fair and transparent, I’m all for that. Unfortunately, many deal sites are flip, biased and opaque. Do you think any deal sites are worse than others? Or are they all equal opportunity bad deals? Deal sites often restrict your choice based on their own financial considerations rather than on sound editorial judgment; if that wasn’t the case, deal sites would highlight great restaurants that don’t offer deals. But deal sites aren’t in business to educate you about great fine dining establishments any more than the George Foreman cookbook is in business to help you learn the intricacies of making good chicken stock. I do have a pretty good feeling about Savored , which is like OpenTable.com , except you get 30% off for dining at mostly good restaurants (Le Cirque, SHO, etc). The service helps restaurants fill their books in the off-hours or on slow nights by giving consumers a deal. There are usually no menu restrictions and you don’t have to pay in advance or worry about unused, $1,000 vouchers, because you make the reservations through Savored and those resies are just $10 a pop. I’m also cautiously optimistic about Yipit.com , a deal aggregator whose founders, I hope, will soon realize that they’ll make more money by not just linking to offers by Gilt and Thrillist, but by criticizing the bad offers that they link to. That’s my public suggestion. Anyone can aggregate, but if Yipit.com takes my advice and includes serious, professional criticism of, say, Living Social and Daily Candy deals on their site, I think they could pull away from the pack. What has reception been like — have you gotten any pushback? Have any deal sites contacted you? I’ve been overwhelmed by the positive reception. Sure there’ve been criticisms too, but I’m a big guy; I can take them and learn from them. Only one (big) deal site has contacted me since I started The Bad Deal. They asked for my resume to consider me for a job. I was like, really? But still, kinda flattering. It also gives me hope that deal sites themselves are interested in adding criticism. Well, either that or they’re trying to co-opt me. What I’m doing, and I mean this humbly and introspectively, is trying to push the envelope in terms of criticism, as I’m saying pretty tough things about restaurants I sometimes haven’t visited, which is generally taboo in my profession. But if we critics want to influence the sales of lousy deals that sell out in days or sometimes hours, we’re going to have to rely less on arguments that concern whether a dish was overcooked or undercooked, and more on the language of economics, statistics, marketing, psychology and transparency. We critics are fighting a difficult uphill battle here; when a deal site says: 70 percent off, that’s a powerful thing. It sometimes takes me 300 words to dissect the deal and describe why those three words — 70 percent off — are a fallacy. The consumer prefers three simple words to 300 complicated ones. That’s a big problem for the critic. How do you evaluate value — what makes a $400 meal worth it? Or, a $5 meal? That’s the $64,000 question. How do food reviewers and consumers assess value? I have a little analogy that helps. Say you’re at a nightclub. The music is pretty loud (perhaps some early Jurassic Five), but it’s great music, so you don’t mind so much, right? Now let’s pretend the music is awful — Britney Spears’ latest garbage. And the songs are just as loud, which makes the bad music even worse. So you ask the DJ to turn it down, which he does, and it’s more tolerable, but it’s still bad music. Same goes for restaurants — good food takes the sting off high prices, resulting in a good value. That’s why it’s so hard to criticize the price of Per Se; the food is so lovely it’s easier (if not quite easy) to forgive the cost. But the reverse is also true, lower food prices don’t make bad food taste better, it simply makes the meal more tolerable. So the moral of the story is that lower prices and “good deals” won’t solves the problems of a bad restaurant. Rather, a good restaurant is usually a good deal already. Pick a restaurant, not a deal, for the best value. When should a customer be suspicious of a supposed deal? What are some red flags you’ve picked up on? If there’s fine print, there’s a catch. And if the fine print is longer than the deal description itself, which it sometimes is (I’ve done comparative word counts), then there’s something fundamentally wrong about the whole transaction. There are no catches or fine print on most restaurant menus, rather, the menus only list the dishes to be ordered and prices you’ll pay for them. It’s that simple. Here’s a trick: watch out for “false savings.” Find a restaurant that has a 40% discount on its tasting menu through, say, Gilt City. Then call up the restaurant and ask the receptionist how much the tasting menu is, and if he answers that you can only get that menu through Gilt, then guess what, you’re not really saving anything because the menu is probably never sold at full price, just like that LCD television is never sold at the MSRP. Want more? Check out The Bad Deal , The Price Hike or follow Ryan @qualityrye .

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U.S. Probing Tech Giants’ Patent Deals

June 5, 2011

The Justice Department is scrutinizing likely bidders for a trove of patents being sold by the bankrupt Canadian telecom-equipment maker Nortel Networks Corp. amid concerns the patents could be used to unfairly hobble competition, according to people familiar with the matter.

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In AT&T Deal, Bankers Guaranteed To Benefit As Consumers And Shareholders Hope For Best

March 23, 2011

Eleven years ago, at the height of the telecom bubble, Deutsche Telekom paid about $51 billion for one of America’s smallest national cell phone companies, hoping to gain entry into the burgeoning U.S. market. On Monday, the German giant announced it’s selling the offspring of that deal — T-Mobile USA — to AT&T for $39 billion. That 2000 investment — now worth about 40 percent less after adjusting for inflation — has cost Deutsche Telekom and its shareholders dearly. The benefits for the American public, which were widely touted at the time as the German company fought for regulatory approval, are debatable. But the bankers on those deals sure made a killing. And while it remains to be seen whether the same purported “synergies” and “cost savings” that were peddled in 2000 will ultimately benefit AT&T’s shareholders who are being promised the same thing, bankers once again are poised to strike it rich. Bankers’ fees will roll in regardless of whether their advice will ultimately benefit their clients. “When you look at investment bankers, their job is to put buyer and seller together,” said Matt McCormick, a portfolio manager at Bahl & Gaynor, which oversees about $3.2 billion. “Much like a real estate broker, if you’re trying to buy a house, does the broker really care if you’re in a ranch, or a two-story home, or with a pool or not? They are only paid if a deal gets done.” AT&T’s shareholders are cool to the idea. McCormick, who oversees about 500,000 shares of AT&T for clients, said the benefits of the deal are “yet to be seen.” Shares in AT&T are up 0.6 percent since Friday. Bankers will probably pocket about $120-140 million off the AT&T and T-Mobile deal, according to Teck-Tjuan Yap, managing director at Freeman Consulting Services. For JPMorgan Chase, which advised AT&T and provided a $20 billion loan, it’ll likely be much, much more after a few years, one prominent bank analyst said. Richard Bove, an analyst at Rochdale Securities, told clients that the purchase could be worth upwards of half a billion dollars for JPMorgan after fees and other sorts of income over the coming years are considered. Bankers, unlike shareholders, are always among the biggest beneficiaries when companies merge. Back in 2000, when Goldman Sachs was advising VoiceStream Wireless, the firm that eventually became T-Mobile, it made at least $80 million off its sale to Deutsche, securities filings show. That $80 million is worth $103 million in today’s dollars. Investors fared worse. Shares of Deutsche Telekom closed at 10.8 Euros on Tuesday, down about 60 percent from when the firm announced it was buying VoiceStream. In July 2000, Deutsche’s shares were trading in the 25-Euros range. Even investors who bought houses in Miami at the height of the housing bubble in 2006 have fared better. Their investment is down only about 49 percent, according to the S&P/Case-Shiller Home Price Index. The initial investment in T-Mobile was apparently so bad for Deutsche’s investors that they celebrated the sale to AT&T. Deutsche’s shares are up 12.6 percent since Friday’s close. But the wisdom of Deutsche’s bankers’ advice at the time isn’t what generated their fees. Donaldson, Lufkin & Jenrette, a firm that was eventually bought by Credit Suisse, got paid to get the deal done. That’s generally how it works, according to Alex Edmans, a finance professor at the University of Pennsylvania’s Wharton School and a former investment banker at Morgan Stanley. “Bankers’ fees are not contingent on the success of the deal,” Edmans said. “How much a banker gets paid for advising on a deal doesn’t depend on whether it creates shareholder value or whether they could sell it for more later. They get a fee for the announcement and the completion of the deal.” Edmans reckons that this may skew incentives towards completing a deal “at any cost, even if it’s not in the client’s interest.” There are three benefits from getting a deal done — regardless of its merits, he said. First, the bank immediately receives fees. Last year, mergers and acquisitions generated $17.9 billion in fees for investment banks, a 23 percent increase from 2009, according to data compiled by Bloomberg. Second, the banks on the deal improve their rankings among peers. Wall Street compiles lists ranking firms based on the income banks generate off M&A and the value of their deals. These lists are incredibly important — both for bragging rights and for landing future clients. Edmans said the potential of moving up these lists creates a “huge incentive” to get deals done as potential clients largely decide which bank they’ll pick for future deals based off their rankings. Third, deal activity improves a bank’s market share, particularly if the deal is huge. Predictably, there’s an emphasis on doing lots of deals, rather than being selective about which truly are the best for clients. The AT&T deal is the largest telecom acquisition since AT&T purchased BellSouth in 2006 for about $102 billion, according to Dealogic, a data provider. Thanks to the proposed purchase, JPMorgan moved one spot up in the rankings, according to data compiled by Thomson Reuters. “Even if you do a lot of value-destructive deals, this doesn’t seem to reduce your market share going forward,” Edmans said. “That sort of discouragement doesn’t really seem to exist.” “This isn’t optimal for the industry,” he added. There’s a way to ease the distortion caused by such incentives, Edmans argues. He said clients should judge banks based on the quality of their advice, rather than on the number of times they’re asked to provide that advice. In a paper with Jack Bao of Ohio State, Edmans and his colleague ranked banks based on whether investors cheered a proposed deal. By looking at the stock price of the affected companies over a three-day period immediately preceding and following a deal’s announcement, they found that the biggest banks were among the worst when it came to advising successful mergers. Goldman Sachs was about 10 times worse than the average firm, Edmans and Bao found. Morgan Stanley was just a tad better than Goldman. JPMorgan was also significantly worse than average. Their paper will be published in the Review of Financial Studies. Edmans and Bao found that middle-tier investment banks advised the best deals, likely providing the best advice, according to their metric. The big banks like Goldman and Morgan, Edmans said, probably advised bad deals because they had other interests in getting the deal done, like future opportunities underwriting the firm’s bonds or new stock issuance, as opposed to simply getting paid for providing good advice. “Given how the industry works, the banks are doing the rational thing,” Edmans said. That particularly makes sense in cases in which banks aren’t even brought in for their advice. “Being a consultant I hate to say this, but sometimes consultants are called onto a job just to validate what the CEO and CFO want,” said Yap of Freeman. “The question is: are the bankers basically called in to validate or justify,” or are they brought in to provide good counsel? Yap asked. He said that for AT&T, the question may not be about the benefit of purchasing T-Mobile, but rather the detriment that could arise from a competitor buying the nation’s fourth-largest wireless provider. If AT&T didn’t attempt to merge with T-Mobile, for example, the firm could face the prospect of declining market share if a competitor joined forces with Deutsche’s American subsidiary. AT&T and T-Mobile said the value of the “synergies” from their merger — corporate lingo for the savings derived from eliminating duplicative employees and activities — are “expected to exceed the purchase price of $39 billion,” according to a joint statement. That’s nothing new to McCormick, the money manager. “The usual things I look for in every press release are always statements like, ‘This will mean more synergies’ or ‘This will lead to more cost savings,’” he said. Firms are “always touting those key points again and again and again.” “But the truth is, they rarely work out.” ************************* Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

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Les Leopold: Is Corruption on Wall Street All in the Eyes of the Beholder?

March 18, 2011

Japan’s Nikkei share average plunged 10.6 percent on Tuesday, posting the worst two-day rout since 1987, as hedge funds bailed out after reports of rising radiation near Tokyo. ~ Reuters, March 15, 2011 While it’s far too early to assess the full impact of the Japanese disaster on markets around the globe — let alone on the Japanese people — we do know that hedge funds are already busy trying to profit from the misery. They make no apologies for operating in an ethics-free zone. Their business is to rapidly move money in and out of distressed markets. That’s just what they do. But as we’re learning from the trial of billionaire Raj Rajaratnam , head of the Galleon hedge fund, an ethics-free zone can easily become a crime scene. The Raj is charged with enough counts of insider trading to spend 20 years in the hoosegow. And he’s not the only one on trial. As the case unfolds, Wall Street as a whole may find itself in the dock, facing the question it dreads most: Just how much of Wall Street’s wealth is built upon criminal activity? Of all the rich and worried people on Wall Street right now, the hedge fund managers are the richest and maybe the most worried. After all, they’ve got a lot to lose. A LOT. Just to name one example, in 2010, the top hedge fund manager, John Paulson, netted — for himself personally — $2.4 million an HOUR. Forbes reports that in 2009, Rajaratnam was the 236th richest American, with an estimated net worth of $1.8 billion. That’s more than 12,000 times the median US family’s net worth (which was $98,997 in 2009). Sebastian Mallaby, the financial author, offers a spirited defense of the hedge fund industry, arguing that, yes, there may be a few truly rotten apples, but insider trading is really no big deal. (See ” Hands Off Hedge Funds ” May 2007) An industry of around 9,000 hedge funds is indeed bound to harbor some criminals….Moreover, some of what politicians and journalists label ‘hedge-fund abuses’ involve leaks of inside information from investment banks rather than from hedge funds, making the hedge-fund managers who receive the leaks accomplices rather than the chief offenders. But federal prosecutors beg to differ: They say the Raj’s hedge fund is the prime mover of the insider conspiracy , not a lowly accomplice to the crime. “Greed and corruption — that’s what this case is all about,” said the the lead prosecutor in his opening statement. Rajaratnam “knew tomorrow’s business news today and traded on it. ….One crucial thing he didn’t know. He didn’t know the FBI was listening.” What goes on when the F.B.I. isn’t listening? The defense team, led by John Dowd, argues that the Raj is just a smart guy who made his fortune through “shoe-leather research, diligence and hard work” and who “conducted the best research in the business.” You see, says Dowd, the Raj used the “mosaic” method of investing: He collected from many sources a compendium of unconnected facts about a company to form a mosaic of its true worth. And that mosaic told him whether to go long, short, both, or stay away. Constructing these gorgeous mosaics turned the Raj into the billionaire he is today. Mosaic method? Okay, let’s give it a try. How about constructing a mosaic of hedge fund illegalities over the past decade or so? There are so many colorful tiles to choose from. Here are a few. Insider Trading : Hedge funds of all kinds rely on ” expert networks ” who link together consultants who gather information about companies. In the process, bits of illegal information find their way into and around the network and then into the bottom lines. The Raj investigation already has upended several hedge funds that benefited from this common phenomenon. Tax Evasion : Swiss banker Rudolf M. Elmer has blown the whistle on an international web of rich investors, banks and hedge funds that evade taxes by illegally shifting money to low-tax jurisdictions. There’s something extra-slimy about tax dodging by hedge funds, given that they already pay less taxes than anyone else. Due to an egregious IRS loophole , hedge fund managers pay a top tax rate of 15 percent instead of the 35 percent normal wealthy people are supposed to pay. That these under-taxed fat cats feel entitled to top it off by engaging in this blatantly illegal form of tax evasion is galling. These guys seem unable to resist piling up more money, even if it means taking the law into their own hands. Ponzi Schemes: When we think Ponzi, we think Bernie. Hedge funds like Madoff’s are ideally suited for this kind of scam since they are designed to evade so many disclosure regulations. But Bernie’s isn’t the only game in town. There’s a whole other kind of Ponzi scheme that has largely escaped media attention. You can find a description of this seriously twisted strategem buried deep in the bowels of the Financial Crisis Inquiry Commission Report . To construct and market exotic and highly profitable CDOs based on toxic subprime assets, investment banks had to be able sell the lower tranches (where a good deal of the junk assets lived). But that got harder towards the end of the housing boom. So to keep the production line going, the banks sold the junk to each other: Entity A sold to Entity B who then sold back to Entity A. This game of hot potato was even played by different departments within one large investment bank. Hedge funds were always there to suck up the lowest level, highest yield “equity” tranches — while often shorting other pieces. The potato toss had to continue or the entire game was lost. According to the Financial Crisis Inquiry Report , “heading into 2007 there was a Streetwide gentleman’s agreement: you buy my BBB tranch and I’ll buy yours.” (p. 278) This scheme would have gone nowhere without hundreds of hedge fund players lapping up the equity tranches and buying the credit default swaps that allowed the deals to be constructed in the first place. How many financial billionaires were minted in this process, I wonder? Front-running trades: With their high-speed trading computers and algorithms that sense market moves, the biggest hedge funds and banks are able to trade just a fraction of a second before the rest of us do. The SEC has been investigating this practice , known as front-running, for several years. The agency is worried that brokers leaked information about large trades by institutional investors to hedge funds so they could pull off the trade just a split second before the large trade took place thereby earning a quick, easy and illegal profit. Timing and Late Trading: When Eliot Spitzer was New York Attorney General (and earned the handle Sheriff of Wall Street), he uncovered how hedge funds were maneuvering around trading rules like a Ferrari speeding around the hapless shmoes stuck in midtown traffic. Hedge funds were allowed to jump in and out of mutual funds many more times than normal investors, enabling them to score high returns at the expense of regular mutual fund customers. They even got away with booking trades hours after the market closed for the day — a real perk, since market-moving announcements often are made right after closing. You don’t need to go to Wharton to make big bucks on this one: All you do is wait a few hours to judge the impact of the after-closing news, then book your trades at the 4 pm price. Spitzer forced the guilty parties to pay several billion dollars in fines. Accounting Irregularities: This is the catch-all biggie: Hedge funds and banks cook the books to avoid showing losses and to artificially inflate profits. Hedge funds are also deeply involved in helping other companies — like Enron and WorldCom — cook their books. According to a study by Bing Liang at the University of Massachusetts, as of 2004, 35 percent of all hedge funds cited no dates for their last audit. Hmmm. Setting up bets that can’t fail: Goldman Sachs had to pay $550 million for not telling its investors about its questionable deal with a hedge fund: The bank allowed the hedge fund to pick the most shaky underlying mortgage securities to be used in creating a synthetic CDO — so that the hedge fund could then turn around and bet against it. It was a winning bet for the hedge fund — it bagged a billion. Unfortunately, the investors lost a billion. Goldman Sachs did pretty well with its deal to pay only the $550 million SEC fine. After all, the company was bailed out by taxpayers to the tune of $12 billion: We paid them 100 cents on the dollar for credit default swap insurance that AIG could not pay. Incredibly, the hedge fund was in the clear. It couldn’t even be charged, since it neither bought nor sold the securities in question. At the moment, there’s no law against encouraging someone else to rig a bet for you — except at the racetrack. These are just a few of the many tiles for our hedge fund mosaic of cheating. As Neil Weinberg and Bernard Condon wrote in Forbes back in 2004 (” The Sleaziest Show On Earth “): Hedge funds exist in a lawless and risky realm, exempt from the rules governing mutual funds, equities and most other investments. Hedge funds aren’t even required to keep audited books — and many don’t. These risky funds often are guilty of inadequate disclosure of costs, overvaluation of holdings to goose reported performance and manager pay, and cozy ties between funds and brokers that often shortchange investors. Of course, none of this proves that any given hedge fund billionaire is a cheat or even ethically challenged. But it does offer an unflattering picture of an industry that is at this very moment trying to milk money from Japan’s roiling markets, once again profiting from the misery of others. There’s got to be a better way. Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn a Million an HOUR: The Dubious Contribution of Wall Street Billionaires to the American Economy (hopefully to be published in 2011).

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Roger Ehrenberg: What Keeps Venture Investors Up At Night

March 15, 2011

As a venture investor, one thought routinely keeps me up at night: Are we making the right investments? After the beads of sweat form on my brow, they really get going when I think of the complexity and multi-dimensional nature of the question. Some related issues that keep me awake include: Are we seeing the right deals? Is our evaluation process effective? Does our method of decision-making promote successful outcomes? Are we capturing the data necessary to make a reasoned assessment of the above? Gulp. Each one of these represents a key strategic initiative, core questions whose answers are necessary for building the best firm possible for the long term. Needless to say, these issues can’t be assessed in a vacuum, as the vectors of time, competitive pressures and market conditions are at play and invariably impact the answers. In short, running a venture firm is very difficult, and it’s successful operation involves navigating a multi-variate thicket of obstacles while optimizing the combination of long-term franchise value and LP returns. Are we seeing the right deals? One of the eternal questions in venture capital relates to the “deal funnel”: Should we work to maximize throughput or optimize for quality. There are massive trade-offs between these two approaches, and different strategies subject themselves better to one or the other. For example, a general fund that is seeking to make a very large number of small investments is likely to solve for maximum throughput. They will apply a very basic but robust screen to quickly weed out the definite “nos,” likely do those that arrive with a high degree of “social proof” and spend some time thinking about the rest. Conversely, a more specialized fund (like IA Ventures) works to be crystal clear in its messaging in order to only attract deals that fundamentally fit with its investment thesis. This will yield a smaller amount of more highly-curated throughput, providing a more manageable pool of deals that require more in-depth screening before a go/no-go decision is arrived at. Seems pretty rational, right? Well, if you consider being almost 100 percent reactive rational. The problem is, I don’t. While having a giant catcher’s mitt is a fine way to gain a sense of what’s trending, it is very hard to identify true gems sitting on your ass and letting the market define your opportunity set. So that means thinking deeply about what the future holds, considering mega-trends, and actively seeking opportunities that others think suck or simply don’t understand but really represent a window into the future. It is quite difficult to have this level of conviction and risk tolerance and to subject yourself to ridicule by shunning conventional wisdom. But who said the road to innovation — and riches — was going to be easy? It’s not. Being contrarian and pursuing true innovation requires a lot of hard work, and sitting in your office and simply being a filter is not the way to achieve extraordinary returns IMHO. So bottom line: our approach is to combine a clear domain focus (which generates curated, but reactive, deal flow) with a willingness to try, test and incubate. Is our evaluation process effective? The Big Screen. Not easy, when you consider the massive inbound volume of most venture firms (and IA Ventures is no exception.) Do we have a clear sense of what we’re looking for (like a checklist), or is the spark of a crazy idea what really gets us going? More importantly, what should get us going? And are we able to glean enough from basic written materials to make an educated judgment as to whether or not an idea is worth digging into? Due to sheer volume, it is impossible for us to engage with more than a small percentage of the companies that reach out to us. Since we’re almost exclusively focused on pre-revenue opportunities, it really is about the entrepreneur, the idea and the vision, not actual performance. And most challenging of all, we are too young to have much data on the efficacy of our evaluation process. We do not yet have an “anti-portfolio,” a series of misses that might be instructive of our fears, biases and blind spots. So we are using our experience and best efforts to choose well, but with precious little data on which to base our decisions. As a firm, we have a series of well-understood “hot buttons”: a set of attributes we are looking for in an opportunity. These attributes are applied to the top of our deal funnel, sharply reducing the number of potential opportunities that warrant a follow-up phone call, meeting, etc. We definitely try to apply the lens of “Is this really differentiated/transformational/addressing a sharp pain point in a large market?” when gauging our interest. We are also predisposed towards opportunities that reach us early in the financing process, where we can both play a significant role in the deal and work with the entrepreneur on the plan, milestones and syndicate. The nature of our interaction with the entrepreneur is also instructive of whether we make a good team, and a positive working relationship can help de-risk execution of the plan. While I feel like we’re doing the right things, the jury is still out until we are able to collect the data necessary to validate our process. Does our method of decision-making promote successful outcomes? Now this is where it gets very tricky. Different partnerships have starkly different views on how a deal gets approved. They also have different cultures with respect to individual “check writers” versus a firm approach. Some firms want consensus. Others will not do a deal if there is consensus. Some firms have very rigid time frames around which funding decisions can get made. Others are more free-form. How a firm makes decisions can define a culture and a partnership, and is not a matter to be taken lightly. At IA Ventures, we take a team-managed approach to investing. There are no individual check-writers. We invest as a group. We do not strive for consensus or have hard and fast “thumbs up/thumbs down” rules. Deal deliberations are active and ongoing at each stage of the evaluation process, and by the time we are considering issuing a term sheet, we’ve all hashed it out pretty well. It is rare that all four of us are equally pumped about a deal, which is good. Because if we’re all psyched, it probably means the idea isn’t sufficiently differentiated to disrupt a market. In fact, we revel in conflict and dissent because it forces us to look at all sides of an opportunity, and to guard against the group-think/rose-colored glasses associated with a “hot” (read: popular) idea. I think we do a pretty good job on this front. One thing we don’t do — an idea that my smart friend Phin Barnes and I were kicking around last week — is empower an individual to meet an entrepreneur, fall in love, have a strong gut feel and make a commitment on the spot. The benefits: a willingness to fund orthogonal ideas without over-thinking and detailed analysis; a forced focus on the entrepreneur and their power to make an idea come to life; a special bond with the entrepreneur by showing deep confidence and conviction in their idea by offering an immediate commitment; and the signaling effects of having a firm and culture that supports such instinctive and passionate decisions in favor of the entrepreneur. If one truly believes that success in stage investing is heavily dependent upon the quality and passion of the entrepreneur and a contrarian take on the market, then having this as part of an investment program might be both rational and effective. I’m not there yet, but it is certainly a provocative and interesting approach to deploying an amount of high risk, high return capital. Are we capturing the data necessary to make a reasoned assessment of the above? It is early days, but we have built instrumentation and processes to help us collect data on the dimensions discussed above. While there is little doubt in my mind that smart venture investing — specifically seed stage investing — is impacted by a heavy dose of art, with a modicum of science, we want to collect as much data as possible about how we do what we do to ensure that we’re using all the information at our disposal. Are we seeing the deals we want to see, and what portion of the deals are because we went out and got them as opposed to them coming to us? Are we doing a good job investing in companies consistent with our mission, some of which are off the beaten path? Are we taking enough risk, and do members of our firm have the opportunity to be hard-core champions of a deal and to get it done in the face of dissent? Do our dashboards give us useful and actionable information about how we should be running our business? All of these metrics are important for doing the best job possible and building the best long-term business at IA Ventures, for the benefit of our entrepreneurs, our LPs and our firm colleagues. Being a startup investing in startups is no easy task. But we’re trying to be thoughtful about it, try new things and iterate rapidly with the benefit of data. Sounds a lot like what we expect from the startups we invest in. Makes sense. This post originally appeared on Information Arbitrage .

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Obama Executes Above-The-Fray Strategy On High-Profile Issues

March 12, 2011

WASHINGTON — Call it an above-the-fray strategy. On hot issues that Democrats and Republicans have found cause to fret about – from spending reductions to state labor disputes – President Barack Obama is keeping a low profile. Democrats such as Sen. Joe Manchin of West Virginia want him more publicly engaged in budget negotiations in Congress; some lawmakers want him to denounce Republican proposed program cuts. Rep. Keith Ellison, D-Wis., and others in the party want him to go to Wisconsin to stand in solidarity with public unions fighting to retain their bargaining rights. Some lawmakers in both parties want him to take a greater lead against Libya’s Moammar Gadhafi. But the White House sees no upside in outspokenness. “There is a very strong gravitational pull in this town to try to drag the president to every single political skirmish and news story,” said White House communications director Dan Pfeiffer. Pfeiffer said Obama has enough issues on his agenda and said the White House doesn’t believe the public wants the president weighing in on an array of subjects. “They want him leading the country; they don’t want him serving as a cable commentator for the issue of the day,” he said. At a news conference Friday, Obama defended the role he has played in seeking a compromise on spending cuts in the current federal budget to avoid a government shutdown. But he made it clear that resolving the impasse rests mainly with congressional leaders. “This is an appropriations task,” he said, putting the issue firmly in Congress’ domain. Manchin said an agreement could only be reached if Obama led the negotiations. “And, right now – that is not happening,” he said. But Obama noted that he has spoken to congressional leaders “about how they should approach this budget problem.” That doesn’t preclude a White House role. White House officials point to the negotiations in December that produced a deal with Senate GOP leader Mitch McConnell of Kentucky on extending Bush-era tax rates as a template for other deals. But unlike the tax deal, when both sides got something they wanted, the debate over spending would require both to give something up while gaining little. While Democrats have attacked the Republican spending cuts as cruel or heartless, Obama has avoided such loaded language. He has drawn a line at education spending, saying he would not support cuts that reduce money for schools or college tuition. “What I’ve done is, every day I talk to my team,” the president said, responding directly to criticism that he has been absent from the debate. “I give them instructions in terms of how they can participate in the negotiations, indicate what’s acceptable, indicate what’s not acceptable.” On the Wisconsin labor dispute, Obama initially appeared to be stepping into that fight when he told a Milwaukee television station that GOP Gov. Scott Walker’s effort to make it harder for public employees to engage in collective bargaining “seems like more of an assault on unions.” Around the same time, his political arm at the Democratic National Committee, Organizing for America, coordinated with unions that were mobilizing demonstrators. But the DNC has played down its role, and Obama has left most of the criticism to his spokesman, Jay Carney. The Wisconsin Legislature this past week passed the collective bargaining restrictions and Walker signed the measure into law Friday. Ellison, together with liberal commentators and some union leaders, demanded that Obama go to the state in support of the teachers and other public sector workers. But White House officials believe the demonstrators have made the best case on their own and point to public opinion surveys that indicated support for bargaining rights. Republicans already were portraying Obama as a tool of labor for his remarks to the Wisconsin television station and for the logistical assistance that his political arm had supplied. White House officials say a higher profile on the issue by the president would have been counterproductive and could have interfered with a naturally occurring protest. “In Wisconsin, it’s been a much more organic movement there,” said David DiMartino, a Democratic political consultant and former Senate staffer. “The White House doesn’t need to get involved.” The bipartisan criticism of Obama on Libya has less to do with low profile rhetoric – the president has been vocal in his demand that Gadhafi step down – than with the direction of the president’s policy. Sens. John Kerry, D-Mass., John McCain, R-Ariz., and Joe Lieberman, a Connecticut independent, have called for the United States to impose a no-fly zone over Libyan airspace. Administration officials have shown little enthusiasm for such a step. They don’t want to act unilaterally and would only consider it if it had widespread international support. As important, they point out enforcing a no-fly zone would require military action, including attacks on Libyan anti-aircraft defenses. Asked at his news conference if he would use any means necessary to force Gadhafi’s removal, Obama recited the steps already taken, including what he called “the largest financial seizure of assets in our history.” As for military action, he said: “Anytime I send United States forces into a potentially hostile situation, there are risks involved and there are consequences. And it is my job as president to make sure that we have considered all those risks. “It’s also important from a political perspective to, as much as possible, maintain the strong international coalition that we have right now.”

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The Groupon Deal That Wasn’t Such A Deal

March 9, 2011

NEW YORK — Did Groupon serve up a raw deal? According to users, a recent offer for an online printing service wasn’t the money-saver it first seemed. Some of the 1,435 Groupon users trying to redeem a March 2 deal that offered $50 worth of “Personalized Printing Online” from Vistaprint for $10 to customers in Baton Rouge, La., found that the Vistaprint site initially lacked the field for entering the coupon code at checkout. A Vistaprint rep responded to confused users on the offer’s comment board . “My understanding is that you all received a link to the Vistaprint website – unfortunately you cannot redeem through this main link (coupon code box is not enabled),” she wrote. “Groupon will be sending out the correct link shortly. Sorry for the delay, but thank you for your patience!” The follow-up email from Groupon gave the following instructions: We’re writing to inform you of an important change to the redemption instructions for this Groupon. The redemption instructions originally stated that you have to visit www.vistaprint.com to redeem your Groupon. The business has changed the website where you redeem your Groupon to www.vistaprint.com/groupon50, so please make sure to follow that step when using your Groupon. The new website led to a mirror version of the site — seemingly identical, but with a few important differences. The new site included the missing entry field for the Groupon code. It also readjusted sales rates so that a flat-rate 30 percent — or, in some cases, 31 percent — discount applied to all items on the site, a Vistaprint discount unmentioned in the Groupon offer. The non-Groupon Vistaprint site featured a wider range of discounts. For some items, only a 10 percent discount applied. For others, that number jumped to 40 percent. A cached version of the “specials” page shows discounts for business cards that are 80 percent off. Accessing Vistaprint through different sites acting as affiliates also led to different discounts. “Discounts on the homepage can always be different,” Vistaprint spokesman Jason Keith told The Huffington Post. “There could be a deal running on the homepage that’s completely different, and it’s possible, depending on the channel you come in with, you could see a different deal on a different day.” In short, the prices for an item can depend on the day it’s purchased or the site through which users access Vistaprint. This elaborate pricing structure leaves room for deal-seekers to carve out the most affordable option. For some items, the Groupon venue may end up to be a better buy, but for others, the same items could cost about the same or even slightly more. The original offer only told users that they’d receive $50 worth of inventory for $10, without any mention of other discounts. The Vistaprint mirror for Groupon says, “Groupon members, Enjoy $50 of products + 30% off all products site-wide!” But that 30 percent figure was added for the mirror — it was not a part of the initial deal, nor is it always materially cheaper than other deals on Vistaprint’s main site. Customers who believed that the Groupon deal would apply to the discount rates they found on the original site might end up paying a different amount than they’d anticipated on purchase. After all, for the first day or so, the original offer had a link that went to Vistaprint’s original site, not the dedicated Groupon site with its own prices and also stated that “This Groupon is valid for any item on the website, including sale items.” Though it’s unclear who was responsible for the change in discount amounts between Vistaprint and Groupon, some experts suggest that Groupon is responsible for ensuring that merchants’ practices regarding pricing stay consistent with customer expectations. “The burden has to fall on Groupon. If they want to maintain integrity, they have to make sure the merchant doesn’t bamboozle them or their customers,” said Sucharita Mulpuru, a retail analyst at the market research firm Forrester. Mulpuru said such incidents may lead to customer service complaints and wider trust issues. “Customers can become skeptical of repeat purchases,” she said. Some irritated users have already obtained refunds from Groupon for the initial $10 cost of the deal. Others have contacted Vistaprint to receive refunds on a faulty free-shipping promotion. The entire snafu recalls Groupon’s headache over a Valentine’s Day deal with the florist company FTD, which infuriated some Groupon customers who had to pay non-sale prices on sale items for their deal. In this case, sale prices are eligible for the offer — but they’re different sale prices. “Either consumers are just not going to care or not notice — if that happens, you’ll see more of this in the future,” said Mulpuru, “or it’ll raise a huge stink, and force a lot stricter restrictions around how offers are offered and the parameters around what’s allowed or not allowed.” A Groupon representative declined to comment for this story.

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Lehman Brothers Battles With Investors

March 4, 2011

LONDON (By Sarah White) – A legal tussle between defunct Lehman Brothers (LEHMQ.PK) and investors in highly complex debt vehicles has drawn attention from financial professionals and British football clubs alike. The dispute reaches beyond the obscure clauses in the instruments caught up in the row, with consequences for the order in which creditors get paid out in a bankruptcy — a source of contention in football insolvencies too. Billions of dollars of derivatives are at stake, and risk losing their worth if the case goes against investors. A similar, widely-trailed case settled in the United States last year had already sparked alarm among lawyers, noteholders, and academics watching the securitization industry. One Manhattan federal court judge, calling for a review of a decision on the case last September before a settlement with Lehman was reached, cited its “potentially game-changing effect on the structured finance business.” She added that it had “potentially far-reaching ramifications for the international securities markets and has triggered significant uncertainty in the financial community.” The dispute centers on a series of credit-linked notes, part of only one of Lehman’s synthetic collateralized debt obligation (CDO) programs — known as Dante — valued at $12.5 billion at the time of the firm’s collapse in September 2008. The stakes are high for those owed money by Lehman, for whom derivative deals are a big chunk of what they are hoping to claw back. The creditors are pitted against a group of Australian investors known as Belmont in a UK appeal to the Supreme Court, where three days of hearings ended this week. A verdict is expected to emerge after several weeks, lawyers close to the case said. Both Lehman and the investors are hoping to seize the assets backing the deals, and any final ruling would set a precedent for how the priority of payments in billions of dollars worth of similar deals are worked out. LOOMING DOWNGRADES Investors need a validation of so-called flip clauses in the notes they hold, designed to reorder payment priorities in bankruptcies and allowing them to jump in ahead of Lehman. Trouble looms if they lose, as noteholders in deals with similar structures would find they had no guarantee of being paid out when other parties default. “Certainly for anything that is rated, the rating agencies may seek to downgrade in some cases. They are watching very carefully what happens with the litigation,” said Jennifer Marshall, a partner at Allen & Overy specializing in insolvency, whose clients have followed the case. “For non-rated transactions, I’m sure you’d find parties coming back to the table wanting to renegotiate.” The synthetic CDOs, which expose investors to a pool of insurance contracts on debt known as credit-default swaps, were in the main rated triple-A. Some of the legal arguments at stake in the exotic-sounding financial deals could also have a bearing for football clubs. The British taxman and the Premier League, the top league in the country, are intervening in proceedings, hoping for clarity on the priority of payments when clubs go bust. Footballers are usually paid out first, to the detriment of the taxman — a situation the UK Revenues and Customs department may be able to reverse if it can cite legal precedents. But a conclusion may yet take time to emerge. Lehman managed to settle with another group of Australian investors caught up in the Dante CDO row last November, after U.S. bankruptcy judge James Peck ruled in Lehman Brothers Holdings Inc.’s favor, but UK courts found against it. Should Lehman lose its appeal at the Supreme Court, a transatlantic battle between the U.S. and British courts could be revived, if litigation heads back to the United States. Lawyers would have to work out which rulings to abide by, adding an extra lawyer of complexity to Lehman’s sprawling bankruptcy workout, the biggest and costliest in U.S. history. (Editing by David Cowell) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Google Replaces CEO

January 20, 2011

See additional updates in the live blog below In a move that has shocked the tech world, Google has announced that it will be replacing its CEO. Effective April 4 of this year, Google co-founder Larry Page will become CEO, taking over for Eric Schmidt, who has been the company’s chief executive since 2001. Schmidt will stay on as the company’s executive chairman. Schmidt, who was initially hired as CEO to provide more ” mature ” leadership, joked about the management shake-up on Twitter , tweeting, “Day-to-day adult supervision no longer needed!” In a blog post announcing the management changes, Schmidt wrote that in his new role, he will “focus wherever I can add the greatest value: externally, on the deals, partnerships, customers and broader business relationships, government outreach and technology thought leadership that are increasingly important given Google’s global reach; and internally as an advisor to Larry and Sergey.” Noting that “the business has become more complicated” as Google has grown, Schmidt wrote in his statement that he and Google’s co-founders, Page and Sergey Brin, have been “talking for a long time about how best to simplify our management structure,” and looking for ways to “speed up decision making.” “I am enormously proud of my last decade as CEO, and I am certain that the next 10 years under Larry will be even better!” Schmidt wrote. “Larry, in my clear opinion, is ready to lead.” The changes mark Page’s return to the helm of the company he and Brin co-founded in 1998. Page and Brin were co-presidents of Google until Schmidt took over as CEO in 2001. Schmidt has made headlines in the past year with a number of controversial statements about privacy. “Google policy is to get right up to the creepy line and not cross it,” Schmidt said at a conference in October.

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Watch List (Dec: 16) Investors Work Up More Appetite for Risk

December 15, 2010

IN THIS WEEK’S ISSUE: More Sales Expected in More Markets In 2011 As Investors Work Up Appetite for Risk GGP Reorganization Leads to a Surge in CRE Fundraising in November A&P Files Chapter 11; Seeks To Cancel 73 Store Leases Lease Cancellations: A&P Stores T.J. Maxx To Close 71 A.J. Wright Stores, Layoff 4,400 $5.8 Billion in TALF CMBS Loans Still Outstanding Two New CMBS Deals Come to Market U.S. CMBS Delinquencies Resume Climb, Approach…

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TV Sales: Sharp Holiday Price Drops Seen For Flat-Panel TVs

November 26, 2010

SEATTLE — If you’re in the market for a new flat-panel TV, it’s a good time to buy. TV prices usually drop from year to year, and the decline will be sharp this season thanks to a supply glut. Consumers have been holding out all year for better deals, leaving lots of unsold televisions on the shelves. Prices for high-definition LCD TVs will fall more than twice as fast as they have so far this year as manufacturers and retailers clear out inventory, analysts predict. New sets will also be cheaper because TV makers have been getting great deals on the most expensive parts, the glass LCD panels. However, DisplaySearch analyst Paul Gagnon expects prices for those components to level off early next year, so discounts won’t be this steep again until the holidays next year, or even later. For the consumer, that means that if you pull the trigger on a new set in the next few months, you probably won’t be kicking yourself next year for not waiting a little longer. The law of supply and demand is at work here: _ A TV-buying spree in late 2009 led to component shortages, which kept prices high in early 2010. That discouraged consumers. _ Makers of LCD panels invested profits from last year’s buying spree in more manufacturing capacity. Thinking 2010 would be as strong as 2009, they flooded the market. But the economy didn’t improve as expected. _ As a result, there’s an oversupply of panels, and prices started dropping over the summer. That means cheaper sets should be making their way to stores now. Already, Wal-Mart Stores Inc. has slashed prices for some older models. Among the deals: a 32-inch Vizio set that went to $298 from $348. Amazon.com Inc. and Best Buy Co. are starting to advertise deals, too. Some of the best deals this season will be on 32-inch LCD TVs, the most popular size. They will sell for rock-bottom rates of $300 or less, compared with about $400 last year. That’s because manufacturers are selling raw panels of that size for only slightly more than the cost of making them – $160 to $170 each, far less than the $210 to $220 they fetched earlier this year. Prices for 40-inch and 42-inch sets will drop about 20 percent, approaching $500, said Gagnon, the DisplaySearch analyst. Deep price cuts also are coming for higher-end models, including LCD TVs with LED backlights, which use less energy than regular sets and can be thinner or provide improved picture quality. Manufacturers have increased production capacity for parts specific to LED sets; that will drive down prices for components and, ultimately, the TVs themselves. Overall, good deals will be 15 percent to 20 percent lower than holiday 2009 prices for regular LCD TVs. The price drop had been slimmer at 7 percent earlier this year, Gagnon says, and the decline should return to the single digits by spring. Of course, the longer a buyer waits, the lower the prices go. But that has to be weighed against the value of having a new TV. If a 32-inch set turns out to be $20 cheaper next summer, the buyer could have gotten six months of better TV for $20. “In this industry you always know that in the future, you will buy new technology at a lower price. That’s not the point,” said Sweta Dash, an analyst at iSuppli Corp. “Especially this holiday, the price you will see is very good.” ___ AP Retail Writer Mae Anderson in New York contributed to this report.

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Car Buyers Likelier To Find Deals Later This Year

November 2, 2010

DETROIT — If you’re holding out for a bargain on a car, you could be rewarded this month or next. Automakers are more likely to offer promotions on certain makes and models – particularly luxury cars, SUVs and trucks – to clear out their older models and improve their year-end numbers. Overall, the auto industry remains cautious about generous rebates and low-cost loans to lure customers. Newly lean and profitable carmakers don’t want to erode the bottom line by offering too many sweet deals that cut into profit margins. But as the end of the year approaches, some shoppers, including many Toyota buyers, could find bargains. Even a disciplined industry can’t resist end-of-the-year sales. So far this year, auto sales have held fairly steady, at a level well below what was considered normal before the recession. The automakers held back on rebates in July and August, which are typically big months for promotions, and results were mixed. July sales were slightly better than a year earlier. August sales were the worst since 1983. Americans are still unsure about the economy, and hesitant to make a large purchase like buying a new car unless they absolutely need to or the deal is too good to pass up, says Jessica Caldwell, senior analyst at consumer web site Edmunds.com. “People are on the sidelines waiting for that deal message to come,” she says. “When they hear it, generally during the holiday season, they might start buying again.” In general, automakers offered more incentives this October than last – about $2,800 per car, a 6 percent increase, according to the car price information service TrueCar. Final estimates won’t be available until Wednesday, when carmakers report U.S. auto sales for last month. Many automakers kept incentives flat, while others, such as Honda and Toyota, piled on the rebates. Honda’s incentives were double last year’s, and Toyota’s were up 50 percent. October sales are expected to come in slightly below 1 million vehicles, hitting around 12 million on a seasonally adjusted annual sales rate. Sales in October were uneven, coming in strong some days and really weak on others. The last eight days were particularly weak. So far this year, sales have ranged from a low annual rate of 10.53 million in February to a high of 11.76 in September. “There’s been so much focus on the elections, people are not as confident,” says Bert Boeckmann, owner of Galpin Ford in suburban Los Angeles. “My hope is that after the election, they’ll come back in.” Customers may come back when they see holiday deals on luxury cars. Those Christmas-themed commercials with the big red bows may start airing well before the holidays – a not-so-subtle attempt by automakers to remind customers that buying cars can be fun. “This whole idea about giving a car as a gift, it’s one of the long-standing holiday commercial campaigns that has really resonated with the luxury consumer,” says Steve Jett, national marketing communications manager for Lexus. Lexus and Mercedes-Benz are battling this year for the title of No. 1 luxury carmaker. It’s a title Lexus has held for years, but the carmaker is lagging behind Mercedes by about 3,000 vehicles in 2010. And with newer models rolling out, the carmakers will try to push out the older models. “It’s such a sensitive segment to old-versus-new,” said Caldwell. And when it comes to holiday marketing, retailers believe it’s never too soon to haul out the holly. Expect the Mercedes and Lexus Christmas commercials to start soon. “We’ll start to see those commercials by Thanksgiving, if not earlier,” says Jesse Toprak, vice president of industry trends at TrueCar. “I don’t know anyone who actually gives someone a car for Christmas, but those commercials are incentive to some customers to go out and buy a car.” Toyota will probably maintain big rebates for the rest of the year, trying to win back customers scared off by the company’s recalls from earlier this year for problems with acceleration and braking. And Ford, which is offering the biggest rebates on 2010 models in an attempt to grab market share from rivals, will probably keep up the promotions. The company is offering up to 15 percent off the sticker price on some of its 2010 models, such as the Ford Focus. Truck and SUV buyers will also find deals in the upcoming months, Toprak predicts. Typically, as the weather starts getting colder, it’s easier to convince people they need four-wheel drive and all-wheel-drive vehicles. George Fowler, general manager of Superior Buick-GMC in Dearborn, Mich., says leasing is loosening up, making it possible to offer some smaller SUVs for around $300 a month. Banks have eased back into the leasing market after abandoning it because of the financial crisis in 2009. Today’s $300 monthly leases are a good deal these days, Fowler says, but that’s nothing compared with the deals he was able to push just three or four years ago. “I don’t think we’ll ever get back to the days of $200-a-month leases,” he says. “Those days are gone forever.”

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Mike Stark: Confidence Game Kills a Zombie Lie (Well, Sorta…)

October 28, 2010

Wall Street’s last decade is full of assorted criminals and villains that will never be held to account. It’s simply not plausible that so many well-meaning, law-abiding people made so many innocent mistakes that, purely by coincidence, just happened to fatten their bonus pools. Of course, apologists remain. Over and over again, the propagandists responsible for propping up the hollow façade that remains of Wall Street tell us that “nobody saw this coming.” It doesn’t matter that that lie has been deconstructed and exposed over and over and over again. The zombie lie lives on, because Wall Street needs it to. Which is why I’m not the least bit confident that Christine Richard’s Confidence Game (Wiley, 2008) will change things very much, notwithstanding its compelling narrative, meticulous reporting and unassailable documentation. Did I mention its compelling narrative? Because this book hooks you right from the start. Confidence Game tells the story of a bright hedge fund manager that saw his spot, went all in, faced down the best sharks on Wall Street and emerged with a billion-dollar payout. Typically, this would be the story of a villain, right? Not in this case. Bill Ackman looked at the emperor and saw that he was naked back in 2002. He loudly proclaimed as much. And all the emperor’s horses, and all the emperor’s men on Wall Street ran interference. For the next six years. Before all was said and done, Ackman was investigated by Eliot Spitzer, the New York State Insurance Commissioner’s Office and the SEC. Ackman stood firm in the face of the onslaught, and for his travails, walked away with $1.1 billion dollars. How did it happen? Well, a whole book was written on the subject, but in a nutshell, Ackman realized that a pillar of the bond-insurance racket (it was a racket), MBIA, had shuffled some paperwork to conceal their potential liability. They had severely underpriced their insurance contracts and could only sustain themselves so long as the economy continued to grow. Ackman’s evidence was ironclad, and he was generous in terms of sharing his information. After all, he had a reason to be — he had bet against MBIA and fully expected their share price to fall when the information he uncovered penetrated the market. That’s where things began to go wrong. The market didn’t want to accept the information Ackman was providing. Instead, they were downright hostile to it. Market participants (investment banks that built the bond deals MBIA insured) knew that if MBIA suffered, they’d suffer as well. That’s the abstract argument. In the real world, these bankers saw that if Ackman got any traction, their bonus pools would dry up overnight as their industry crashed. So they ignored Ackmen. For six years. For six years the deals continued, getting bigger and bigger. Ackman looked on with unruffled confidence. He kept whaling away at the borg, until one day, the system fell apart. And Ackman was left standing on a pile of money. If Wall Street or its regulators had listened to Ackman when he first chirped, the canary in the coal mine may have prevented what may go down in history as the world’s most devastating financial crisis. Ackman would have earned less than 1% of what he ultimately gained, but mainstreet would almost definitely be better off today. Of course, the shame of all of this is that none of it has changed Wall Street. The bankers got their bonuses, even after being bailed out. They learned that trickery, lies, deceit, intentionally feigned ignorance and any other unethical behavior required to protect their bonus pools is what pays in the end. Bill Ackmans and Bethany McLeans will come and go, but the titans of finance will always be with us. (disclaimer: I sometimes get free books. If I read them and like them, I sometimes review them. Because I like getting free books. Confidence Game was one of the books that I got for free, enjoyed reading and decided was worth reviewing, because I think you should read it, too.)

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Vivian Norris de Montaigu: Green Energy Boys Not So Different Than the Good Ole Oil Boys

October 8, 2010

I just saw the film, Wall Street: Money Never Sleeps last night, sitting next to one of the heads of technology for a major bank, and we both had the same feeling at the end of the film. Basically all of the good ole banking boys (there was one woman in those Fed meetings… that is the real problem in the financial world, not enough women!) in cahoots with the black gold kingpins were focusing on oil shale and African oil field investments. But the young “hero” of the film was just as greedy in wanting to focus on green energy. Someone explain to me how, if they were going to altruistically donate their $100 million investment in fusion, they were going to afford that Manhattan penthouse apartment, no matter how bohemian it was!? Or perhaps they were living off the Soros/Papa gone to London hedge fund money Gordon Gekko had made for them. Either way, Greed is Still Good was still the message twenty years later and that is the problem! Perhaps the best part of the film was the founder of the financial firm based on Lehman’s Fuld mixed in with a little bit of old school Wall Street throwing himself in front of the subway train. I had just said to my French banker friend that somehow the French still actually felt real remorse, and “moral hazard” still had real meaning. I mean the head of the will-not-be-mentioned French bank which just helped send a trader to jail had a nervous breakdown and left his post. And the Connecticut-based French financial advisor who lost his clients huge amounts of money with Madoff offed himself. I’m not saying suicide is the answer, I’m just saying these guys actually took a hit and “admitted” they screwed up royally. There is some kind of honor in actually paying personally, emotionally for hurting people and having not done one’s due diligence. Most of the financial greed seekers just hit the ground running greedily again after losing money on their empty bubble-based swaps, flips and derivatives. There is no moral hazard of any kind! Of course they think they can get away with it because they can. And once they have gutted our country they will just move on to London if they have not already or Paris (where I see and hear more and more New Yorkers and bankers every day!) or Asia or bunker down in their 100,000 acre estancia in Paraguay. What worries me about the new Green Good Ole Boys is the Self-Righteous holier than Thou trope that they are doing so much good for the planet that it does not matter if they are indeed moral humans (or not). Those who made millions and billions in the dirty Wall Street old energy way are just green-wahsing themselves and, in some cases just making more money creating what could be the green energy bubble. I will not name names but there are quite a few now living in multimillion dollar West Coast homes pretending to be so wonderful and evolved and green when in reality it’s just a bunch of male egos, including former politicos who are running things in the new green world. And as a woman from Texas who grew up with a close look at how the Oil Good Ole Boys operated all my life, I am frankly even more scared of the Green Tech Good Ole Boys. At least with the oilmen, I knew what I was dealing with and they did not even try to hide that they were focused on power, control, profits and sexist, macho gun-toting racist everything. The Green Boys actually pretend to be about Equality and Sustainability and Democracy, but they are just as obsessed as the oil and Wall Street guys with accumulating more, having more power and “buying” arm candy, all with a do-gooder smile on their faces. This hypocrisy is going to ruin us sooner or later. The Green Boys could make some real changes, firstly by being more inclusive of women executives leading the way, whether in finance or running the green energy companies. They could also start building green energy companies in places where the good ole boy system needs to be challenged and though there are some green biotech companies in places like Houston, I would invite the green boys to help rebuild the poverty stricken Gulf Coast area with electric car factories and green energy plants. But will old fashioned attitudes still limit the presence of women in the new energy sector? When there are too many official real working women around on the private (green?) jets, that kind of ruins the deal. I mean the wedding rings have to stay on and all that. In Houston, there used to be (still is?) a private men’s club called the Normandy Club, which I believe was in the basement of the Texas Commerce Tower or some old bank or oil company building downtown, where the deals would be signed over lunches with scotch and mistresses and sexy waitresses and lawyers coming down with papers from the offices above all to be signed in the atmosphere of a boys’ club. Be it the golf playing or the hunting or the boys’ weekends in Cabo, nothing has really changed as the new Green boys have their own hierarchy of politicos and start-up dudes to fawn over. And that money racing to finance them also comes from the male-dominated banking sphere. Not a lot of women present however. And this is a real problem, because we need real women in positions of power with the real ability to change things. Not the Meg Whitman types, but those who did not have to play the man’s game to succeed, but who actually are just plain smart, and not scared of confronting the status quo. We don’t need Tea Party reactionaries and Sarah Palinites but serious, thoughtful women we can all respect. If a woman had bought the Chicago Tribune and the LA Times instead of Sam Zell, I hope and imagine she would not have placed a bunch of macho sexist idiots in control, who aided women who literally kissed and slept their way up the ladder, to run what should be considered a respectable business which has a huge responsibility to actually keep Americans informed! Who raised these people? And what kind of corporate culture keeps this kind of insanity going? This is going to be the ruin of our country, putting egos like these and unevolved, sexist men in charge of the backbone of our financial, energy and media sectors!?! Then they go and fire the security folks who reported the misdoings instead of the abusive executives! What is the world coming to?! If these guys keep getting away with it they will keep doing it. It has to be stopped Countries in Scandinavia demonstrate that you can have an extremely successful and sustainable business and energy sector and still promote women to positions of real authority and even grow when the rest of the world is falling apart. Interestingly enough there is more private-public cooperation. In our purely private capitalistic system, part of the problem is that men tend to run things. I studied this when writing a dissertation on Globalization and Media. I want to see successful brilliant women alongside our President helping make serious decisions about the future of our country, and I want to see them in the boardrooms and running this new green energy sector! Get some modern humans in there, and some real women. Or we are headed for more of the same old same old and the United States will be going nowhere fast.

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Bill Singer: Insider Trading: Frequent Flyers, Potatoes and Macy’s

September 29, 2010

On March 25, 2010, BrokeAndBroker.com published a detailed analysis of Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval and Alexander Vorobiev (SDNY March 24, 2010), available here , which alleged that Defendant Igor Poteroba, a high-ranking investment banker in UBS Securities LLC’s Global Healthcare Group in New York City, tipped his friend Defendant Aleksey Koval with highly confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Defendant Alexander Vorobiev, who traded ahead of four of the deals. On September 21, 2010, a judgment was entered by consent against Poteroba, permanently enjoining him from future violations of Sections 10(b) and 14(e) of the Exchange Act and Rules 10b-5 and 14e-3 thereunder, in a civil action entitled Securities and Exchange Commission v. Igor Poteroba, et al., Civil Action Number 1:10-CV-2667, in the United States District Court for the Southern District of New York. On September 28, 2010, the SEC announced that Defendant Poteroba settled its charges against him, without admitting or denying the findings. In the Matter of Igor Poteroba, Respondent .(Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Section 203(f) of the Investment Advisers Acto of 1940, Making Findings and Imposing Remedial Sanctions,Exchange Act Rel. No. 62999 / Investment Advisers Act Release No. 3089 / Administrative Proceeding File 3-14071, September 28, 2010). Pursuant to that settlement, Poteroba is barred from association with any broker, dealer, or investment adviser. Click here for more information. See my March 2010 article immediately below for background: Insider Trading: Frequent Flyers, Potatoes and Macy’s Written: March 25, 2010 http://www.brokeandbroker.com/index.php?a=blog&id=346 THE SEC CASE On March 24, 2010, the Securities and Exchange Commission (SEC) alleged in a Complaint filed in the United States District Court for the Southern District of New York that Defendant Igor Poteroba, a high-ranking investment banker in UBS Securities LLC’s Global Healthcare Group in New York City, tipped his friend Defendant Aleksey Koval with highly confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Defendant Alexander Vorobiev, who traded ahead of four of the deals. The SEC further alleges that some of the insider trading was conducted through brokerage accounts held in the names of Tatiana Vorobieva (Vorobiev’s wife) and Anjali Walter (Koval’s wife) and that portions of the proceeds from the illicit trading were received by Vorobieva and Walter. Accordingly, Vorobieva and Walter are named as Relief Defendants to recover investor assets now in their possession. Securities and Exchange Commission v. Igor Poteroba, Aleksey Koval and Alexander Vorobiev (SDNY March 24, 2010) http://sec.gov/litigation/complaints/2010/comp-pr2010-44.pdf The Defendants Igor Poteroba , age 36, is a resident of Darien, Connecticut. He was born in Moscow, Russia, is a Russian citizen, and has green card immigration status. During the relevant period, Poteroba has been an investment banker in the Healthcare Group of UBS, where he has been employed since 1999. Since 2006 he was an Executive Director of the Healthcare Group. Aleksey Koval (a/k/a Alexei Koval), age 36, was a resident of Pasadena, California from mid-2006 through mid-2009. He was born in Kemerovo, Russia, is a Russian citizen, and has green card immigration status. From June 2000 until January 2006, he was employed by Citigroup Asset Management, a registered broker-dealer and investment adviser. From January 2006 until his termination in March 2009, Koval was employed by Western Asset Management, a registered investment adviser and a wholly-owned subsidiary of Legg Mason, Inc. Koval is currently employed with Northern Trust Bank in Chicago, Illinois. Alexander Vorobiev , age 34, is believed currently to reside in Russia and is a Russian citizen. From April 2001 through May 2008, Vorobiev resided in Toronto, Ontario, Canada. Relief Defendants Anjali Walter , age 35, is the wife of Koval and her last known address was in Pasadena, California. Tatiana Vorobieva , age 33, is the wife of Vorobiev. Her last known address was in Toronto, Ontario, but she is believed to currently reside in Russia. She is a Russian citizen. Prior Relationships Among Defendants Poteroba, Koval, and Vorobiev have known each other for more than ten years. Poteroba, Koval, and Vorobiev were born in Russia; Koval and Vorobiev were both born in the city of Kemerovo. Between 1992 and 1997, Poteroba, Koval, and Vorobiev attended the University of New Haven, in New Haven, Connecticut as undergraduates. Poteroba graduated in 1995, Koval left in 1996, and Vorobiev graduated in 1997. Poteroba and Koval shared a common residence address during part of this time. Between 1995 and 1998, Poteroba and Koval were enrolled in the MBA program at Baruch College in New York City. Poteroba received his MBA degree in 1997, and Koval received his the following year. At various times between 1997 through 2008, Vorobiev has used as his mailing address a number of the residences in New York and New Jersey where Poteroba and Koval resided, together or separately. Trading Accounts From at least 2005 to the present, Koval traded in the tipped securities in an on-line brokerage account maintained in Vorobiev’s name. This account was initially maintained at RushTrade Securities. RushTrade acquired Terra Nova Financial, LLC in 2006, and named the combined entity Terra Nova Financial (hereinafter, both RushTrade and Terra Nova are collectively referred to as “Terra Nova”). The account records for Vorobiev’s brokerage account at Terra Nova (the “Terra Nova Account”) show that Koval has never been formally authorized to trade in Vorobiev’s Terra Nova Account. Despite this, on numerous occasions over a period of at least four years, Koval has accessed the Terra Nova Account and executed trades in the tipped securities. Since 2005, both Vorobiev and Koval have transferred funds into and out of the Terra Nova Account. Further, from January 2008 to the present, Koval has withdrawn a total of nearly $125,000 in regular monthly withdrawals from Vorobiev’s Terra Nova Account. Targeted Companies Guilford Pharmaceuticals, Inc. ID Biomedical Corp. Molecular Devices Corp. ViaCell, Inc. Radiation Therapy Services, Inc. Datascope Corp. Millennium Pharmaceuticals, Inc. Sciele Pharma, Inc. Indevus Pharmaceuticals, Inc. Advanced Medical Optics, Inc. PharmaNet Development Group, Inc. UBS’s Healthcare Group was retained by one of the parties as a financial adviser in ten of the eleven Business Combinations identified in the Complaint, and in regard to the eleventh Business Combination, UBS sought, but ultimately failed, to be retained as an adviser to one of the participating entities. The Complaint alleges that the insider trading netted approximately $1 million in illicit profits by trading ahead of at least 11 mergers, acquisitions, and other corporate deals. The Not-So Clever Code Among the means of communication allegedly used to illegally tip and trade on the inside information were coded e-mail messages that referred to securities and money as “frequent flyer miles” and “potatoes.” They coded one e-mail exchange about insider trading as a discussion about a Macy’s wedding registry. Frequent Flyer Miles : The SEC alleges that the scheme began as early as July 2005 when Poteroba illegally tipped Koval in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI Pharma. Poteroba later sent a coded e-mail to Koval about the insider trading opportunity, signaling that Poteroba had previously given money to Koval and wanted to use those funds in this transaction: Poteroba : Keep me posted as to how * * * [m]any frequent flier miles you’ve got this far and how many you plan to get by Friday[.] Will be in Boston tomorrow[.] Plans for a trip look fine so far[.] Worst case we can get a refund by Monday, hopefully we do not[.] Koval : As I mentioned, I just got into this frequent flyer program. I got five thousand of sign-in bonus miles but thinking maybe if I fly often, I will get additional three to five K miles. Poteroba : On the frequent flyer program topic you mentioned, I think you should sign up for another flight, if you can, since they are providing bonus mileage soon[.] According to the SEC’s Complaint, Koval wired $5,000 into a brokerage account of Vorobiev that had been inactive for nearly six months. Koval then bought 2,100 shares of Guilford stock in the account at a total cost of $4,983. Both monetary amounts are consistent with the amount of 5,000 “sign-in bonus miles” referred to in the coded e-mails. A few days later, Koval wired an additional $4,800 into Vorobiev’s account and purchased an additional 2,030 shares of Guilford stock at a cost of $4,780. The money transfer and subsequent stock purchases are consistent with Koval’s coded statement that he “will get additional three to five K miles.” On July 21, 2005, Guilford publicly announced that it would be acquired by MGI Pharma, and Guilford’s stock closed 41 percent higher than the increase over the prior day’s closing price. That same day, Koval and Vorobiev sold most or all of the Guilford stock in their accounts as well as Guilford shares in a brokerage account in the name of Vorobiev’s wife. Potatoes : Allegedly, after Poteroba illegally tipped Koval with material, nonpublic information concerning ID Biomedical Corporation’s plans to be acquired, they exchanged instructions by referring to money as potatoes: Subject Line : Potatoes Poteroba : Let me know if you finished your recent harvest arrangements and how many kilos are available for my parents. They are in Turkey now and could use some once they are back. Koval : This year the potato yield was not as high as the last one. Whatever is collected is now being transported in the warehouse, with special climate conditions, from where it is going to be available for delivery. My estimates are about 6.8 kilo per square yard. …Of course, some potato [sic] need to be left for the next year [sic] seeds [sic] but it should not be a concern since I have a vendor who will provide enough once the spring comes. According to the SEC’s Complaint, the “6.8 kilo” figure is an approximate reference to $7,000 that had been wired out of a brokerage account two weeks earlier and subsequently returned. Macy’s : While allegedly conducting insider trading based on material, nonpublic information about an acquisition involving Molecular Devices Corporation, the following emails referencing a Macy’s wedding registry were exchanged: Subject Line : Let me know if you’ve started your wedding registry at Macy’s Poteroba : Happy to talk about sales items and etc. … sale ends soon …so hurry up. Koval : Yep, I have set it up. Better do it now when they have [a] sale. I could not believe how many things one needs once engaged. Single life was much easier if you ask me. It is always [a] good idea to know about coupons available. I try to follow up on the rebates programs currently in place but often miss many due to lack of time. Thanks for pointing it out to me. … Although wedding day is not yet announced, I hope to get all the important items ahead of time: I even started buying small things that [are] usually not important until you need them. Poteroba : Good points…sale ends on Friday…see if you can get registered for as many items as possible…more you get now…more you save…We should start tracking these events more actively. According to the SEC’s Complaint, Poteroba and Koval exchanged the coded messages to signal that Koval should purchase Molecular securities (“get registered for as many items as possible”) and that the opportunity to buy Molecular securities prior to the public announcement would last until Friday, Jan. 26, 2007 (“sale ends on Friday”). Charges The SEC’s Complaint charges Poteroba, Koval, and Vorobiev with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10-b5 thereunder, the general antifraud provisions of the federal securities laws, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder, the tender offer fraud provisions. The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of financial penalties against the defendants, and disgorgement of illicit profits with prejudgment interest from the relief defendants. Please remember that the above allegations are merely that, and all Defendants are presumed innocent until proven guilty. THE CRIMINAL CASE On March 24, 2010, Preet Bharara, the United States Attorney for the Southern District of New York, announced the arrests of Igor Poteroba and Alexei P. Koval for their alleged participation in an insider trading scheme. As set forth in a four-count criminal Complaint, from 2005 through at least February 2009, Poteroba allegedly agreed to leak confidential information about UBS and six of itsclients to Koval. See, http://www.justice.gov/usao/nys/pressreleases/March10/poteroboigoretalcomplaintpr.pdf The information related to forthcoming announcements about mergers or acquisitions involving the following six publicly traded healthcare companies: Guilford Phar maceuticals, Inc., Molecular Devices Corporation, PharmaNetDevelopment Group, Inc., Via Cell, Inc., MillenniumPharmaceuticals, Inc., and Indevus Pharmaceuticals, Inc.(collectively, the “Healthcare Companies”). In violation of his duties of trust and confidence, Poteroba allegedly disclosed the UBS Inside Information to Koval, who in turn disclosed the UBS Inside Information to another co-conspirator(“CC-1″). Koval, CC-1, and others earned total profits of at least approximately $870,000 from the scheme. Poteroba and Koval each are charged with one count ofconspiracy to commit securities fraud and three counts of securities fraud. The conspiracy charge carries a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or gross loss fromthe offense. Each securities fraud count carries a maximum sentence of 20 years in prison and a maximum fine of $5 million. Please remember that the above allegations are merely that, and all Defendants are presumed innocent until proven guilty . Given my role as a prominent critic of ineffective Wall Street regulation, it is all the more important that I avoid being merely a shrill voice that consistently but unfairly criticizes. Without question,the SEC Staff in Poteroba has done a superb job in drafting the Complaint and setting forth in compelling detail its case. Similarly, I compliment Preet Bharara and his staff for the presentation of their criminal case, and I would note the the US Attorney’s Office for the SDNY has been consistently outstanding in its handling of Wall Street misconduct under Mr. Bharara’s tenure. There are two critical goals inherent in regulating Wall Street. One, regulation must educate the public about the con artists and con games that seek to prey upon the unsuspecting. Two, regulation must educate the industry as to what happened, how it was detected, and suggest remedial measures to prevent a recurrence. For too many years, Wall Street’s regulators have not achieved those goals. Perhaps, in the face of public outrage, the tide is turning? The signs are encouraging but it’s still too early to tell. As I have often noted in the BrokeAndBroker Blog , Wall Street’s regulation is too often a game of hide-and-seek rather than a helpful roadmap. Modern day regulation is often typified by imprecise language, poorly drafted complaints and regulations, and an over-abundance of publicity-seeking bosses who steal the limelight from their hard working staff. When I see regulators espousing the highest standards of professionalism, as evidenced in the SEC’s and the US Attorney’s respective Poteroba cases, I am encouraged that maybe, just maybe, there is hope. Please, keep up the good work.

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Christiana Wyly: Proof That Renewable Energy Is Alive, Well and Profitable!

September 21, 2010

Last week marked the beginning of a new chapter in the creation of America’s renewable energy future. In one of the nation’s most strategic clean economy deals to date, NRG Energy, Inc. announced the $350 million acquisition of Green Mountain Energy , the company founded by my father- Sam Wyly. “A permanent and fast-growing portion of the American population is seeking to live sustainably,” NRG President and Chief Executive Officer David Crane said in a statement. “Green Mountain understands that customer base and serves it better than any other retail energy provider.” At a time when doubts prevail about the ability of clean investments to deliver real returns, the sale of the nation’s leading competitive retail provider of cleaner energy and carbon offset solutions is a clear bellwether of the industry’s future. For every other green entrepreneur, it’s a hard proof point of the economic viability of renewable energy ventures. Geoffrey Orsak, dean of the Lyle School of Engineering at Southern Methodist University, was quoted in an article in the Dallas Morning News yesterday saying the acquisition shows that green companies have market worth. “This is a great sign that the green economy is not likely to be another dot-com fantasy. This is real stuff that consumers believe in.” For me, on a personal level, it’s an important step toward the realization of a childhood dream. The seeds of Green Mountain were planted one day back when I was in the fifth grade. I was taking an environmental ethics class and learning that the pink and grey skies over Los Angeles were neither pretty nor benign. I became afraid to breathe, and asked my father, despairingly, “Dad, what are you going to do about all this toxic waste being put into the air?” He was stunned by the question. My father is quoted in the Dallas Morning News saying: “Somewhere in the Bible, there’s the verse about out of the mouths of babes. The truth hit me like a hammer.” As a prolific entrepreneur with a history of busting up monopolies , my father wanted to see Americans have a choice when it came to buying electricity too. Few Americans realize that the largest producers of pollution globally are the power plants that electrify our homes. The beginning of the problem is that the average American has no idea how energy is produced, or how it flows into a grid and arrives at their outlets, or what environmental consequences they are incurring by flipping the switch. Secondly — in most of America — they have no power to choose an alternative such as wind or solar generated electricity. But if they could be educated, and then empowered with the gift of choice — the average American energy consumer could become the greatest weapon to reducing air pollution while creating a wave of demand for the clean energy infrastructure of the future, and in doing so create thousands of clean green jobs for Americans. My father figured that he would be the one to show us. And he would do it through the vehicle he knew best: entrepreneurship. So, when he learned about a small clean-energy supplier in Vermont that was for sale, he decided to pursue it. Today more than 300,000 Green Mountain Energy customers, mostly in Texas, and some in Oregon and New York, pay a premium equal to the cost of a fancy cup of Starbucks coffee every month to purchase electricity produced from pure wind, or a price-competitive mixed blend of renewables. The company, which also sells carbon offsets, is growing at 27% a year. The chairman of a competing energy company described Green Mountain as having “tremendous, tremendous customer loyalty.” All the light switches in those customers’ 300,000 households have made a real difference. Since it was founded, Green Mountain customers have kept more than 11.3 billion pounds of carbon dioxide out of the atmosphere so far. That’s equivalent to taking 52 million cars off the road for a week, or 473 million households turning off their lights for a week, or planting 478 million trees. The company has facilitated the creation of more than 40 wind and solar farms. To that end, it has helped to create wealth for many of the clean energy pioneers who built them. The NRG acquisition will enable Green Mountain to take its clean energy mission national. “We look at this green energy space, served and almost created by Green Mountain,” NRG’s Crane told the Dallas Morning News, and “it’s still a very small part of the market, so it has a long way to grow.” Crane also said he anticipates that either Congress or the Environmental Protection Agency will put a price on carbon in a matter of years. The Green Mountain acquisition is helping to prepare NRG for that day. “The fact that a price is coming on carbon is still a fundamental premise of this company,” Crane told The News. I couldn’t agree with him more and applaud him and other forward thinking executives that are working to advocate for a price on carbon — which I believe will revolutionize the world we live in — and enable us to profitably clean up our atmosphere. The company my father started has proven that there is consumer demand — and even enthusiasm — for purchasing renewable energy. There should be. And not just for the altruistic goal of saving the planet, but because clean energy is where the real money will be made in the next generation. Educate people, give them a choice, and we will create a clean economy for all of us — together. Stick around. It’s going to be good clean fun.

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Janet Tavakoli: IKB’s CEO Found Guilty of Market Manipulation, Some U.S. Bank CEO’s Should Also Face Charges

July 16, 2010

Financial news media is abuzz today with analyses of Goldman Sachs’s settlement with the SEC for $550 million in a case of alleged fraud regarding the packaging and selling of a CDO called Abacus. Goldman Sachs admitted to no wrong-doing. The settlement is less than Tiger Wood’s potential $700 million divorce settlement –and Tiger didn’t help bring the economy to its knees (he also publicly admitted his transgressions and expressed regret )–but it’s a start. The SEC might want to look into the deals that Goldman Sachs underwrote on which other banks bought protection from AIG as well as the deals upon which Goldman Sachs itself bought protection from AIG. If all of theses banks buy the securities back at full value (less interim principal payments), the tens of billions of dollars of proceeds can be used to pay back AIG’s public debt. Instead, taxpayers heavily subsidize Goldman Sachs . The bigger story is that the former CEO of IKB, Stefan Ortseifen, was found guilty of market manipulation by a German court. Yesterday, the Wall Street Journal reported the story on the second page of its markets section (C section), and it deserved more prominent coverage: At the heart of the case was a press release that IKB issued on July 20, 2007, as credit markets worsened, assuring investors that its exposure to the subprime fallout was limited and that it remained on track to meet its profit outlook. Ortseifen was fined €100,000 (around $127,000) and given a 10 month suspended sentence. That strikes me as a pretty light sentence for fluffing the truth about the fact that at the time, IKB was actually being crushed by its losses. IKB eventually needed a bailout of over €10 billion (around $12.7 billion) in government-backed loans. The court’s fine probably didn’t even make a dent in Mr. Ortseifen’s wallet, but it’s a start. In this post-Sarbanes Oxley world, U.S. CEOs and CFOs should also be held accountable for their rosy statements during this period, along with their SEC filings. While the Goldman Sachs settlement is a victory of sorts for the SEC, it shouldn’t distract us from the larger issues. Massive widespread malfeasance helped bring the global economy to its knees. Sarbanes-Oxley was meant to hold CEOs and CFOs accountable for accounting fraud and public misstatements about the health of their financial institutions. One should expect felony indictments for accounting fraud and securities fraud. As I explained to CBS’s Katie Couric on April 16, 2010 , the Goldman Sachs case doesn’t go far enough: Janet Tavakoli’s book on the causes of the global financial meltdown and how to fix it is Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street .

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Lease Up (June 27 – July 3): GSA, Neal Gerber Eisenberg Ink Major Lease Deals

June 29, 2010

Lease Up (June 27 – July 3): GSA, Neal Gerber Eisenberg Ink Major Lease Deals A Weekly Column of Major Corporate Expansions, Relocations and Lease Extensions CoStar compiles news of corporate expansions, relocations and lease extensions in the…

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Lee&rsquos Henderson Says 20 Apartment Sales Scrapped

June 16, 2010

By Kelvin Wong June 16 (Bloomberg) — Hong Kong billionaire Lee Shau-kee ’s Henderson Land Development Co. said the sale of 20 luxury apartments collapsed, ending HK$2.67 billion ($342 million) in deals that sparked a government inquiry and fueled efforts to rein in home prices. Most buyers pulled out of the 39 Conduit Road project in Hong Kong’s Mid-Levels district, Henderson said in a filing to the stock exchange yesterday, responding to government demands for more information on the sales of 24 units. Henderson said it has sold four of the units and will record a charge of HK$734 million in its half-year results. The failure of the sales, including a unit that would have set a world record price of HK$88,000 ($11,300) per square foot, marks a setback for Hong Kong’s second-richest man as regulators try to cool the city’s surging property market. Lee had said in March buyers could have more time to complete the deals. The cancellations are “quite a negative surprise,” said Raymond Ngai , Hong Kong-based analyst at JPMorgan Chase & Co. “Those record prices they reported earlier, I doubt they’ll be able to sell them at those prices again,” Ngai said by telephone. “To sell them for around HK$30,000 per square foot is still quite possible. But selling an apartment at HK$70,000 a square foot is just too out of line with the market.” No Price Cuts “We won’t be cutting prices,” Lee, Hong Kong’s second- richest man, told reporters yesterday. “Maybe we’ll make more money when we sell these apartments again.” Henderson announced the sale cancellations after the stock market in Hong Kong closed yesterday and the market is shut for a public holiday today. Henderson Land shares closed at HK$47.80 yesterday and have slumped 18 percent this year, the biggest drop among the seven-member Hang Seng Property Index . Responding to an outcry over rising property prices last year, Hong Kong raised down-payments on luxury homes to 40 percent from 30 percent and clamped down on marketing techniques. The HK$439 million apartment Henderson had said was sold for a record — based on usable space excluding common areas — was listed on the 68th floor while it was actually on the 45th. Floor numbers are often skipped in Hong Kong to avoid those considered unlucky. Henderson included sales of the 24 apartments plus one that was sold in a completed transaction as part of its revenue of HK$15.2 billion for the 18 months ended December 2009, the company reported March 30. Prices Climb The total price of the 20 apartments whose sales collapsed came to HK$2.67 billion, Henderson spokeswoman Bonnie Ngan said by telephone today. Henderson said yesterday it was confident in selling the apartments because of the “prestigious” location, and will be “sparing” with sales. Hong Kong’s government responded to Henderson’s filing, saying “clear market information” is important to the city. “The government is determined to create a fairer and a more transparent environment for flat purchasers,” the government said in a press release on its website. Home prices in Hong Kong have risen 5.7 percent this year, adding to 2009’s 29 percent advance and raising concerns the market is overheating. Hong Kong builders often sell apartments before they are completed, drawing in customers by showing models of the homes. The government this month tightened rules on new home sales, including the use of show apartments and asking developers to disclose properties sold to their own executives. Financial Secretary John Tsang in February announced higher stamp duty on luxury properties and pledged to raise the supply of land as it wants to reduce the risk of “a property bubble” and keep housing affordable. To contact the reporters on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

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Goldman Sachs Sets Up $450 Million Loan Fund as CLO Primary Market Revives

June 4, 2010

By Richard Bravo June 4 (Bloomberg) — Goldman Sachs Group Inc. arranged a $450 million collateralized loan obligation, according to people familiar with the transaction, making it the third widely syndicated transaction of the year. Last week’s deal marks a reversal for CLO issuance, which according to Moody’s Investors Service, fell to $26.5 billion in 2009, its lowest level in more than a decade as the credit crisis and subsequent drop in loan prices made it economically difficult to arrange new funds. Loan prices on the S&P/LSTA US Leveraged Loan 100 Index ended at 89.07 cents on the dollar yesterday, gaining 50 percent since Dec. 17, 2008, and helping lure investors back to these types of investments. “There are still a lot of challenges for the new-issue market to emerge in a robust form, but it’s certainly the case that it has begun to thaw a bit,” said Vishwanath Tirupattur , an analyst at Morgan Stanley in New York. “The signs are positive.” Citigroup Inc. priced a $525 million CLO overseen by WCAS Fraser Sullivan Investment Management LLC in March, the first new issue backed by widely syndicated loans in a year. The bank also arranged a $325 million loan package last month for Apollo Management LP, the first deal of the year backed by new-issue debt. Both deals were increased from initial plans, bringing total issuance this year to $1.3 billion. CLOs pool high-yield, high-risk loans and slice them into securities of varying risk intended to provide higher returns than similarly rated investments. Morgan Stanley analysts expect around $5 billion in new CLOs to be priced this year, according to Tirupattur. ‘Not Economically Viable’ “The main issue facing the CLO market is that it’s not economically viable at this point to create a standard cash-flow CLO,” Chris Taggert , a New York-based loan strategist at CreditSights Inc., said in a telephone interview yesterday. “Year-to-date, we’ve seen less than a handful of CLOs, and each one has had unique nuances to it that aren’t highly replicable by the market broadly.” Goldman Sachs arranged the CLO on May 28 for collateral manager Doral Money Inc., with Babson Capital Management LLC as the collateral adviser, according to people familiar with the transaction, who declined to be identified because the terms are private. The CLO was split into a $250 million piece rated AAA by Standard & Poor’s and a $200 million equity portion, according to the people. Michael DuVally , a Goldman Sachs spokesman, wasn’t available to comment. Refinancing Debt CLOs contributed to about one-quarter of leveraged buyouts recently, according to Moody’s, which means a diminished CLO presence might affect companies looking to refinance maturing loans. Over the next five years, speculative-grade companies will have more than $550 billion in bank credit facilities coming due, as well as $250 billion in bonds maturing, according to Moody’s. In 2010, about $25 billion of CLOs will reach the end of their reinvestment period, CreditSight’s Taggert wrote in a report last month, with proceeds being used to repay the fund’s liabilities rather than being reinvested. When CLOs are in their reinvestment period, they can reinvest principal proceeds back into the loan market, Taggert wrote in another report. Once they get to the end of their reinvestment periods, those proceeds will be directed towards repaying the fund’s liabilities. “The wall of maturities is a consternation for the loan market,” said Morgan Stanley’s Tirupattur, “but we have to keep in mind that loan obligors have been using a range of refinancings at the moment, and we’ve seen a fair amount of organic deleveraging.” New Leveraged Loans Year-to-date, about $125 billion of new U.S. leveraged loans has been arranged, up from last year when $40.5 billion was assembled in the same time period, according to Bloomberg data. More than $880 billion was arranged in 2007, a record year for issuance. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P. The loan market has relied on issuance from the high-yield bond market to deal with maturity obligations, according to analysts at JPMorgan Chase & Co. A record $163 billion of debt was sold in the high-yield bond market last year, Bloomberg data show. In more than 100 of those transactions, proceeds totaling $48.6 billion paid down loans, JPMorgan analysts led by Peter Acciavatti in New York wrote in a May 7 report. Declining Deals New high-yield deals have declined this year, with $6.8 billion of U.S. junk bonds priced last month, down from $33.4 billion in April, according to Bloomberg data. Year-to-date, around $111 billion of junk bonds have been priced. “Refinancings, while an option for some, are certainly not universally available,” Stephen G. Moyer , a distressed-debt portfolio manager at Pacific Investment Management Co. in Newport Beach, California, wrote in a research note . “Much has been written about the substantial ‘wall of maturities’ confronting the below-investment grade segment at a time when CLOs have all but disappeared and banks have actually contracted lending,” Moyer wrote. To contact the reporter on this story: Richard Bravo in New York at rbravo5@bloomberg.net .

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Citigroup Didn’t Say Morgan Stanley Was Short When Selling `Jackson’ CDO

May 21, 2010

By Bradley Keoun May 21 (Bloomberg) — Citigroup Inc. sold a series of mortgage-linked securities without disclosing that Morgan Stanley helped shape them while betting they would fail, two people with knowledge of the matter said. Marketing documents for the $205 million Jackson Segregated Portfolio, underwritten by Citigroup in 2006, don’t say who picked the underlying mortgage bonds. A Morgan Stanley unit helped select the bonds, the people said, speaking anonymously because the deal was private. Six of the seven series of Jackson bonds later defaulted, costing investors more than $150 million of losses, data compiled by Bloomberg show. “Failure to identify that there was a third party participating who would take a short position would have been extremely relevant to the purchaser of this product,” Duke University law professor James Cox said. Regulators have been scrutinizing Wall Street firms’ sales of subprime mortgage securities that later defaulted and contributed to the worst credit crisis since the Great Depression. They include some of the more than $500 billion of collateralized debt obligations, created by pooling mortgage bonds and other debt and packaging them into new securities, sold by Wall Street from 2005 through 2007. Citigroup did say in the Jackson marketing documents that its interests in the deal “may be adverse” to those of investors in the CDO’s bonds. SEC Vs. Goldman “We expressly disclosed in marketing the Jackson CDOs that the collateral selection may have included factors adverse to investors,” said Citigroup spokeswoman Danielle Romero-Apsilos . “Having said that, we remain committed to enhancing the transparency of all financial transactions in which we are involved.” Morgan Stanley spokesman Mark Lake said he couldn’t comment. Both banks are based in New York. The Securities and Exchange Commission last month accused Goldman Sachs Group Inc. of misleading investors by failing to disclose hedge fund Paulson & Co.’s role in picking collateral it bet against. Goldman Sachs calls the claims unfounded. Citigroup hasn’t been publicly accused of any violations tied to the Jackson deals. In a quarterly filing this month, Citigroup said it’s cooperating with “various formal and informal inquiries” into subprime-mortgage-related activities and is in talks to resolve some of them. $60 Billion of CDOs Citigroup sold $59.3 billion of CDOs from 2005 to 2007, according to a November 2008 report by Sanford C. Bernstein analyst Brad Hintz . In late 2008, the bank had to get a $45 billion bailout, partly because of losses on mortgage-backed securities that it kept for itself. Citigroup lost almost $30 billion in 2008 and 2009 before reporting a $4.43 billion profit in the first quarter. Citigroup sold the Jackson CDOs in August and September of 2006, data compiled by Bloomberg show, just as delinquency rates on U.S. subprime mortgages began to climb . The Jackson deal was a synthetic CDO, in which derivatives linked to mortgage bonds were pooled together and packaged into new bonds that could be sold to investors. On the other end of the derivatives was a “short” investor who would get paid if the underlying bonds soured. To get the deals done, most underwriters of synthetic CDOs initially took the short positions, sometimes with a plan to sell them off later. When Citigroup set up Jackson, it arranged with Morgan Stanley to take over the short positions once the deal closed, the people said. Citigroup allowed the firm to help select the bonds linked to the derivatives because Morgan Stanley would have a stake in the performance of the securities, they said. 80 Bonds There were 80 mortgage-backed bonds that in turn were underwritten by firms including Citigroup, Morgan Stanley, Lehman Brothers Holdings Inc., Bank of America Corp., JPMorgan Chase & Co. and Wachovia Corp., according to the marketing documents. Citigroup’s Citibank NA banking subsidiary was the initial short counterparty to the Jackson derivatives, according to the documents. The Jackson marketing documents said Citigroup might have information about the bonds or business relationships “that may or may not be publicly available or known to the other parties to the transaction,” and that the lender had no obligation to disclose “any such relationship or information.” The documents go on to say, “In no event will Citibank or any of its affiliates be deemed to have any fiduciary obligations to the holders of the notes.” Slashed to Junk Morgan Stanley was named in the Jackson marketing documents only as a currency-hedge provider for $35 million of euro- denominated securities. In April 2007, all seven series of the Jackson bonds were cut to junk grade by Moody’s Investors Service. Six of the seven later defaulted, wiping out 76 percent of investors’ principal, according to Bloomberg data. There’s no public data on the buyers of the securities, or on the performance of the Morgan Stanley unit that shorted the Jackson deals. In its suit against Goldman Sachs, the SEC said the bank’s disclosures for the Abacus 2007-AC1 CDO were misleading because they omitted Paulson’s role in selecting the underlying bonds. Goldman Sachs told investors that an independent manager, ACA Management LLC, picked the bonds. Goldman Sachs “misled investors by representing that ACA selected the portfolio without disclosing Paulson’s significant role in determining the portfolio and its adverse economic interests,” according to the SEC suit. Paulson wasn’t accused of wrongdoing. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

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Astellas Agrees to Buy OSI Pharma for $4 Billion to Gain First Cancer Drug

May 17, 2010

By Kanoko Matsuyama and Elizabeth Lopatto May 17 (Bloomberg) — Astellas Pharma Inc. agreed to buy OSI Pharmaceuticals Inc. for $4 billion in cash, raising its bid by 11 percent to gain the world’s fourth best-selling lung cancer medicine and a U.S. sales force for oncology drugs. The revised offer of $57.50 a share is 55 percent more than OSI’s price on Feb. 26, before Tokyo-based Astellas announced its hostile takeover, the companies said in a statement today. Both boards approved the new bid, which is 3.8 percent less than Melville, New York-based OSI’s last-traded price. The proposal, the second largest U.S. acquisition by a Japanese drugmaker, will add to earnings from the first year, Astellas said. It will help buffer the impact of competition from cheaper generic medicines that the company said last week will cause profit to slide for a third straight year. “Of course I would have loved to see more, but we’re happy investors in OSI,” said Sam Isaly , the managing director of Orbimed Advisors, OSI’s sixth-largest shareholder with 1.7 million shares as of Dec. 31. “Shareholders will sell their shares.” Astellas slid 0.3 percent to close at a five-month low of 3,135 yen on the Tokyo Stock Exchange. Japan’s benchmark Topix index lost 1.7 percent. OSI advanced 4.4 percent to $59.80 in Nasdaq Stock Market composite trading on May 14 and has surged 62 percent since Feb. 26. Multibillion-Dollar Deals Astellas joins Japanese rivals Takeda Pharmaceutical Co. and Eisai Co. in multibillion-dollar acquisitions in the past three years to expand in the U.S., the world’s largest drug market. Takeda, based in Osaka, bought Millennium Pharmaceuticals Inc. for $8.9 billion and Tokyo-based Eisai purchased MGI Pharma Inc. for $3.9 billion in 2008. Astellas said it aims to acquire more than 90 percent of OSI’s shares and the offer will succeed once it has at least half the stock. It received acceptances for 299,214 OSI shares, or about 0.5 percent, as of 4 p.m. New York time on May 14. OSI’s board had rejected the $52-a-share price as being too low, and Astellas extended the deadline of its tender offer twice. “I’m not surprised to see the deal get done but I am a little surprised by the price,” said Jason Kantor , an analyst with RBC Capital Markets Corp. in San Francisco, over the phone. “A lot of people are going to be unhappy with the price, but it’s a fair price. Clearly, the market was thinking higher.” Astellas said it expects to file amended takeover documents no later than May 21 and will keep the offer open for 10 business days. U.S. Sales Force OSI, founded in 1983, would give Astellas the Tarceva drug for cancer, a disease area the company has identified for growth. In addition, OSI will give Astellas three cancer medicines undergoing patient studies, including one in the final of three stages of clinical tests. Astellas will also gain a 90-person sales and marketing team in the U.S., and facilities in three U.S. states and the U.K. “With Astellas, you have to look at the longer term,” said Jason Zhang , an analyst for BMO Capital Markets in New York, in a telephone interview. “This is a step into the U.S., and into oncology. I think this is good for them.” Astellas projected on May 12 that net income will fall 13 percent to 107 billion yen ($1.2 billion) in the 12 months ending March 31, as sales slip 3.6 percent to 940 billion yen. Patent Expiry Patent protection for Prograf, used to prevent organ rejection in transplant patients, expired last August. Harnal for urinary disorders, has faced competition from cheaper copies since March this year. Astellas has committed to spending more than $1 billion since October last year to gain rights to experimental treatments for cancer. OSI earned operating income of $153 million and revenue of $428 million last year. Astellas’s revised bid amounts to about eight times OSI’s estimated 2010 revenue, according to data compiled by Bloomberg. Takeda paid 13.5 times revenue for Millennium, OSI Chairman Robert Ingram and Chief Executive Officer Colin Goddard said in a March 15 letter to shareholders. Eli Lilly & Co. of Indianapolis paid 7.8 times revenue for ImClone Systems Inc. in 2008, they said. Tarceva, OSI’s biggest drug, is a treatment for advanced non-small-cell lung cancer and pancreatic tumors. The company projected this year that Tarceva will have $7 billion in revenue through 2020. The drug generated $1.6 billion for OSI and its Basel, Switzerland-based partner Roche Holding AG last year. Roche’s Avastin, Sanofi-Aventis SA ’s Taxotere and Eli Lilly’s Alimta were the only branded lung-cancer medications to generate higher sales than Tarceva in 2009. U.S. regulators approved the drug on April 16 for use in non-small-cell lung cancer as an initial maintenance therapy, to control symptoms or progression of a disease, spurring analyst expectations that Astellas would increase its offer. Citigroup Inc. is financial adviser for Astellas, and Centerview Partners LLC and Lazard Ltd. are advising OSI. Morrison & Foerster LLP is Astellas’ legal counsel, and Skadden, Arps, Slate, Meagher & Flom LLP & Affiliates is acting for the U.S. drugmaker. To contact the reporters on this story: Kanoko Matsuyama in Tokyo at kmatsuyama2@bloomberg.net ; Elizabeth Lopatto in New York at elopatto@bloomberg.net .

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CEO Pay Breaks Glass Ceiling as Bartz Gets $47.2 Million With ’09 Bonanza

May 13, 2010

By Alexis Leondis May 13 (Bloomberg) — Chief executive officers’ pay is shattering the glass ceiling. Boosted by a $47.2 million package for Carol Bartz of Yahoo! Inc. and $26.3 million for Irene Rosenfeld of Kraft Foods Inc., compensation for woman CEOs at the biggest U.S. companies is booming. Sixteen women heading companies in the Standard & Poor’s 500 Index averaged earnings of $14.2 million in their latest fiscal years, 43 percent more than the male average, according to data compiled by Bloomberg News from proxy filings. The women who were also CEOs in 2008 got a 19 percent raise in 2009 — while the men took a 5 percent cut. “When you see numbers like this, one can truly say that the glass ceiling in corporate America has been shattered,” said Frank Glassner , CEO of San Francisco-based Veritas Executive Compensation Consultants LLC. “I don’t remember seeing women ever getting paid more than men.” Graef Crystal , a pay expert who analyzed the data for Bloomberg News, said that “compensation committees are saying we don’t want to have any trouble” over underpaying women, “so if we err, let’s err on the side of giving them too much.” Darwinian competition is also playing a role, said Sheila Wellington, a professor of management and organizations at New York University who studies women business leaders. “These are the strongest, fittest and toughest who survive,” according to Wellington, who said she was offered half the salary of male peers for her first job at a mental health facility in 1968. “They’ve had to negotiate all the way up the ladder.” An Unusual Option Compensation consultant Todd Gershkowitz , senior vice president of Los Angeles-based Farient Advisors, said he couldn’t recall a female CEO ever receiving as much as the 61- year-old Bartz. Her package was bolstered when she joined in January 2009 by a five-million share options grant from Yahoo , valued at $27.2 million, and a $7.5 million share grant. The option is unusual in that it begins to vest, or become cashable, if Yahoo stock hits and stays above $17.60, or 50 percent above its $11.73 price on the date it was granted, for 20 straight trading days before 2013, Crystal said. Most options vest on a fixed timetable, irrespective of price. Yahoo, based in Sunnyvale, California, rose above the $17.60 level last month, falling before the option could vest. Resting Pythons “Welcome aboard” packages are standard fare for new CEOs. Yahoo went overboard when it added $7.4 million in additional stock and options to Bartz’s pay just 25 days after the initial award, Crystal said. “Why does she need to eat again 25 days after she swallowed an entire pig?” he said. “Some pythons need to rest before another meal.” The $42 million value attributed to the option and stock grants in Yahoo’s compensation disclosure wasn’t realized in 2009 and is linked to “increases in long-term shareholder value” and individual and company financial performance , said Dana Lengkeek , a Yahoo spokeswoman. In the broader workforce , women working at least 35 hours a week in the first quarter of 2010 received 79 percent of the wages earned by men, according to the U.S. Labor Department. Female heads of companies of all sizes made about 75 percent of what men did in a 2009 department survey of 1.1 million CEOs. About 24 percent were women. Pay riches for women CEOs at big companies may be “an important indicator, but not a milestone because of what happens down the line” among average workers, said Robin Ferracone, founder of Farient. Rosenfeld’s 41 Percent “Even at the CEO level, with equal pay comes equal scrutiny and a narrower band of acceptable behavior,” said Ferracone, whose clients have included Margaret Whitman , the former EBay Inc. CEO, and Carleton Fiorina , the former head of Hewlett-Packard Co. At Kraft , Rosenfeld received a 41 percent raise last year as the shares fell behind the S&P 500’s performance by 21 percentage points. In a Crystal model that adjusted pay for shareholder return, she would have taken an $18 million pay cut, and was rated as the 16th most overpaid CEO among 271 studied. Crystal looked at S&P 500 companies that had filed 2009 fiscal year proxies by April 16. (Click here to see a sortable table and other interactive graphics on CEO pay.) Rosenfeld, 57, was awarded $10.6 million in a performance- based bonus, which Kraft’s proxy attributed in part to her pursuit and acquisition of Cadbury Plc, which made Kraft into the world’s largest confectioner. ‘Dumb Deals’ To win Cadbury, Rosenfeld had to stand up to Warren Buffett , CEO of Berkshire Hathaway Inc., which has an 8 percent stake in Kraft. Buffett said Kraft made “dumb deals” by overpaying for Cadbury and selling its pizza brands. When asked about Rosenfeld’s pay at Berkshire’s annual meeting, Buffett said, “We’ve got a compensation system at Berkshire which I regard as quite rational and there’s a lot of companies in the U.S. that have different compensation systems,” according to the Daily Telegraph of London. Michael Mitchell, a spokesman for Northfield, Illinois- based Kraft, said company officials “strongly believe” the Cadbury acquisition was “absolutely the right decision” and will boost earnings. The pay package for Rosenfeld, who led Kraft to “strong operating results in 2009” in an “extremely volatile and challenging operating environment,” was driven by a payout from a 2007-2009 long-term incentive plan, he said. Extended Holding Requirements Other female CEOs in the S&P 500 considered overpaid in 2009 in the Crystal model were Susan Ivey of Reynolds American Inc. , Mary Agnes Wilderotter of Frontier Communications Corp. and Indra Nooyi of PepsiCo Inc. Shareholders at Reynolds last week defeated a resolution that would have required an extended holding requirement for stock awards. Ivey received $6.24 million in stock last year. A similar resolution is pending a vote at Frontier, where Wilderotter got $3 million in stock. “We’re concerned their high levels of stock compensation and lack of holding requirements could mean pay isn’t sufficiently tied to performance,” said Brandon Rees , deputy director of the office of investment for the AFL-CIO, a supporter of the resolutions. Debra Cafaro , CEO of real estate investment trust Ventas Inc. for the past decade, received $6.25 million last year, and was rated as underpaid in the Crystal model. She took an 18 percent pay cut in 2009. Ventas has been the best performing stock in the S&P 500 financial sector under her tenure, with a 35 percent compound annual return for shareholders. Twice as Likely “Once you’re in the CEO seat, I believe directors use a very even-handed approach to compensation,” Cafaro, 52, said. “But getting there can be a different story and women executives may be judged more critically.” Ventas returned 12 percentage points above the S&P 500 last year for shareholders. Cafaro’s base salary and non-equity incentive compensation were increased by 3.5 percent and 33 percent, respectively, while her equity awards decreased 34 percent. “The compensation committee believes the CEO should have the greatest alignment with our shareholders, and, therefore, her compensation structure was designed to reflect a higher sensitivity to our performance than the compensation structure of other named executive officers,” a company filing said. Women CEOs are almost twice as likely to have been named to the job from outside, as Cafaro was, than from within, according to a Harvard Business Review study by Herminia Ibarra, a professor of organizational behavior, and Morten T. Hansen, a professor of entrepreneurship. ‘Outside-the-Mold’ There is a strong market for “outside-the-mold” candidates today and not a huge supply, so there’s no surprise it’s reflected in their salaries, Ibarra said. Being brought in means they’ll be paid a premium, Farient’s Ferracone said. Companies are emphasizing diversity and having a woman at the helm fulfills that agenda, which can lead to an advantage when negotiating pay, Ferracone said. “Having a female CEO is an opportunity to blaze a trail, so some companies will say, ‘What do we have to do to get her?’” said Andrew Oringer, a compensation and benefits lawyer at law firm Ropes & Gray in New York. To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net .

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CEO Pay Breaks Glass Ceiling as Bartz Gets $47.2 Million With ’09 Bonanza

May 13, 2010

By Alexis Leondis May 13 (Bloomberg) — Chief executive officers’ pay is shattering the glass ceiling. Boosted by a $47.2 million package for Carol Bartz of Yahoo! Inc. and $26.3 million for Irene Rosenfeld of Kraft Foods Inc., compensation for woman CEOs at the biggest U.S. companies is booming. Sixteen women heading companies in the Standard & Poor’s 500 Index averaged earnings of $14.2 million in their latest fiscal years, 43 percent more than the male average, according to data compiled by Bloomberg News from proxy filings. The women who were also CEOs in 2008 got a 19 percent raise in 2009 — while the men took a 5 percent cut. “When you see numbers like this, one can truly say that the glass ceiling in corporate America has been shattered,” said Frank Glassner , CEO of San Francisco-based Veritas Executive Compensation Consultants LLC. “I don’t remember seeing women ever getting paid more than men.” Graef Crystal , a pay expert who analyzed the data for Bloomberg News, said that “compensation committees are saying we don’t want to have any trouble” over underpaying women, “so if we err, let’s err on the side of giving them too much.” Darwinian competition is also playing a role, said Sheila Wellington, a professor of management and organizations at New York University who studies women business leaders. “These are the strongest, fittest and toughest who survive,” according to Wellington, who said she was offered half the salary of male peers for her first job at a mental health facility in 1968. “They’ve had to negotiate all the way up the ladder.” An Unusual Option Compensation consultant Todd Gershkowitz , senior vice president of Los Angeles-based Farient Advisors, said he couldn’t recall a female CEO ever receiving as much as the 61- year-old Bartz. Her package was bolstered when she joined in January 2009 by a five-million share options grant from Yahoo , valued at $27.2 million, and a $7.5 million share grant. The option is unusual in that it begins to vest, or become cashable, if Yahoo stock hits and stays above $17.60, or 50 percent above its $11.73 price on the date it was granted, for 20 straight trading days before 2013, Crystal said. Most options vest on a fixed timetable, irrespective of price. Yahoo, based in Sunnyvale, California, rose above the $17.60 level last month, falling before the option could vest. Resting Pythons “Welcome aboard” packages are standard fare for new CEOs. Yahoo went overboard when it added $7.4 million in additional stock and options to Bartz’s pay just 25 days after the initial award, Crystal said. “Why does she need to eat again 25 days after she swallowed an entire pig?” he said. “Some pythons need to rest before another meal.” The $42 million value attributed to the option and stock grants in Yahoo’s compensation disclosure wasn’t realized in 2009 and is linked to “increases in long-term shareholder value” and individual and company financial performance , said Dana Lengkeek , a Yahoo spokeswoman. In the broader workforce , women working at least 35 hours a week in the first quarter of 2010 received 79 percent of the wages earned by men, according to the U.S. Labor Department. Female heads of companies of all sizes made about 75 percent of what men did in a 2009 department survey of 1.1 million CEOs. About 24 percent were women. Pay riches for women CEOs at big companies may be “an important indicator, but not a milestone because of what happens down the line” among average workers, said Robin Ferracone, founder of Farient. Rosenfeld’s 41 Percent “Even at the CEO level, with equal pay comes equal scrutiny and a narrower band of acceptable behavior,” said Ferracone, whose clients have included Margaret Whitman , the former EBay Inc. CEO, and Carleton Fiorina , the former head of Hewlett-Packard Co. At Kraft , Rosenfeld received a 41 percent raise last year as the shares fell behind the S&P 500’s performance by 21 percentage points. In a Crystal model that adjusted pay for shareholder return, she would have taken an $18 million pay cut, and was rated as the 16th most overpaid CEO among 271 studied. Crystal looked at S&P 500 companies that had filed 2009 fiscal year proxies by April 16. (Click here to see a sortable table and other interactive graphics on CEO pay.) Rosenfeld, 57, was awarded $10.6 million in a performance- based bonus, which Kraft’s proxy attributed in part to her pursuit and acquisition of Cadbury Plc, which made Kraft into the world’s largest confectioner. ‘Dumb Deals’ To win Cadbury, Rosenfeld had to stand up to Warren Buffett , CEO of Berkshire Hathaway Inc., which has an 8 percent stake in Kraft. Buffett said Kraft made “dumb deals” by overpaying for Cadbury and selling its pizza brands. When asked about Rosenfeld’s pay at Berkshire’s annual meeting, Buffett said, “We’ve got a compensation system at Berkshire which I regard as quite rational and there’s a lot of companies in the U.S. that have different compensation systems,” according to the Daily Telegraph of London. Michael Mitchell, a spokesman for Northfield, Illinois- based Kraft, said company officials “strongly believe” the Cadbury acquisition was “absolutely the right decision” and will boost earnings. The pay package for Rosenfeld, who led Kraft to “strong operating results in 2009” in an “extremely volatile and challenging operating environment,” was driven by a payout from a 2007-2009 long-term incentive plan, he said. Extended Holding Requirements Other female CEOs in the S&P 500 considered overpaid in 2009 in the Crystal model were Susan Ivey of Reynolds American Inc. , Mary Agnes Wilderotter of Frontier Communications Corp. and Indra Nooyi of PepsiCo Inc. Shareholders at Reynolds last week defeated a resolution that would have required an extended holding requirement for stock awards. Ivey received $6.24 million in stock last year. A similar resolution is pending a vote at Frontier, where Wilderotter got $3 million in stock. “We’re concerned their high levels of stock compensation and lack of holding requirements could mean pay isn’t sufficiently tied to performance,” said Brandon Rees , deputy director of the office of investment for the AFL-CIO, a supporter of the resolutions. Debra Cafaro , CEO of real estate investment trust Ventas Inc. for the past decade, received $6.25 million last year, and was rated as underpaid in the Crystal model. She took an 18 percent pay cut in 2009. Ventas has been the best performing stock in the S&P 500 financial sector under her tenure, with a 35 percent compound annual return for shareholders. Twice as Likely “Once you’re in the CEO seat, I believe directors use a very even-handed approach to compensation,” Cafaro, 52, said. “But getting there can be a different story and women executives may be judged more critically.” Ventas returned 12 percentage points above the S&P 500 last year for shareholders. Cafaro’s base salary and non-equity incentive compensation were increased by 3.5 percent and 33 percent, respectively, while her equity awards decreased 34 percent. “The compensation committee believes the CEO should have the greatest alignment with our shareholders, and, therefore, her compensation structure was designed to reflect a higher sensitivity to our performance than the compensation structure of other named executive officers,” a company filing said. Women CEOs are almost twice as likely to have been named to the job from outside, as Cafaro was, than from within, according to a Harvard Business Review study by Herminia Ibarra, a professor of organizational behavior, and Morten T. Hansen, a professor of entrepreneurship. ‘Outside-the-Mold’ There is a strong market for “outside-the-mold” candidates today and not a huge supply, so there’s no surprise it’s reflected in their salaries, Ibarra said. Being brought in means they’ll be paid a premium, Farient’s Ferracone said. Companies are emphasizing diversity and having a woman at the helm fulfills that agenda, which can lead to an advantage when negotiating pay, Ferracone said. “Having a female CEO is an opportunity to blaze a trail, so some companies will say, ‘What do we have to do to get her?’” said Andrew Oringer, a compensation and benefits lawyer at law firm Ropes & Gray in New York. To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net .

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CEO Pay Breaks Glass Ceiling as Bartz Gets $47.2 Million With ’09 Bonanza

May 13, 2010

By Alexis Leondis May 13 (Bloomberg) — Chief executive officers’ pay is shattering the glass ceiling. Boosted by a $47.2 million package for Carol Bartz of Yahoo! Inc. and $26.3 million for Irene Rosenfeld of Kraft Foods Inc., compensation for woman CEOs at the biggest U.S. companies is booming. Sixteen women heading companies in the Standard & Poor’s 500 Index averaged earnings of $14.2 million in their latest fiscal years, 43 percent more than the male average, according to data compiled by Bloomberg News from proxy filings. The women who were also CEOs in 2008 got a 19 percent raise in 2009 — while the men took a 5 percent cut. “When you see numbers like this, one can truly say that the glass ceiling in corporate America has been shattered,” said Frank Glassner , CEO of San Francisco-based Veritas Executive Compensation Consultants LLC. “I don’t remember seeing women ever getting paid more than men.” Graef Crystal , a pay expert who analyzed the data for Bloomberg News, said that “compensation committees are saying we don’t want to have any trouble” over underpaying women, “so if we err, let’s err on the side of giving them too much.” Darwinian competition is also playing a role, said Sheila Wellington, a professor of management and organizations at New York University who studies women business leaders. “These are the strongest, fittest and toughest who survive,” according to Wellington, who said she was offered half the salary of male peers for her first job at a mental health facility in 1968. “They’ve had to negotiate all the way up the ladder.” An Unusual Option Compensation consultant Todd Gershkowitz , senior vice president of Los Angeles-based Farient Advisors, said he couldn’t recall a female CEO ever receiving as much as the 61- year-old Bartz. Her package was bolstered when she joined in January 2009 by a five-million share options grant from Yahoo , valued at $27.2 million, and a $7.5 million share grant. The option is unusual in that it begins to vest, or become cashable, if Yahoo stock hits and stays above $17.60, or 50 percent above its $11.73 price on the date it was granted, for 20 straight trading days before 2013, Crystal said. Most options vest on a fixed timetable, irrespective of price. Yahoo, based in Sunnyvale, California, rose above the $17.60 level last month, falling before the option could vest. Resting Pythons “Welcome aboard” packages are standard fare for new CEOs. Yahoo went overboard when it added $7.4 million in additional stock and options to Bartz’s pay just 25 days after the initial award, Crystal said. “Why does she need to eat again 25 days after she swallowed an entire pig?” he said. “Some pythons need to rest before another meal.” The $42 million value attributed to the option and stock grants in Yahoo’s compensation disclosure wasn’t realized in 2009 and is linked to “increases in long-term shareholder value” and individual and company financial performance , said Dana Lengkeek , a Yahoo spokeswoman. In the broader workforce , women working at least 35 hours a week in the first quarter of 2010 received 79 percent of the wages earned by men, according to the U.S. Labor Department. Female heads of companies of all sizes made about 75 percent of what men did in a 2009 department survey of 1.1 million CEOs. About 24 percent were women. Pay riches for women CEOs at big companies may be “an important indicator, but not a milestone because of what happens down the line” among average workers, said Robin Ferracone, founder of Farient. Rosenfeld’s 41 Percent “Even at the CEO level, with equal pay comes equal scrutiny and a narrower band of acceptable behavior,” said Ferracone, whose clients have included Margaret Whitman , the former EBay Inc. CEO, and Carleton Fiorina , the former head of Hewlett-Packard Co. At Kraft , Rosenfeld received a 41 percent raise last year as the shares fell behind the S&P 500’s performance by 21 percentage points. In a Crystal model that adjusted pay for shareholder return, she would have taken an $18 million pay cut, and was rated as the 16th most overpaid CEO among 271 studied. Crystal looked at S&P 500 companies that had filed 2009 fiscal year proxies by April 16. (Click here to see a sortable table and other interactive graphics on CEO pay.) Rosenfeld, 57, was awarded $10.6 million in a performance- based bonus, which Kraft’s proxy attributed in part to her pursuit and acquisition of Cadbury Plc, which made Kraft into the world’s largest confectioner. ‘Dumb Deals’ To win Cadbury, Rosenfeld had to stand up to Warren Buffett , CEO of Berkshire Hathaway Inc., which has an 8 percent stake in Kraft. Buffett said Kraft made “dumb deals” by overpaying for Cadbury and selling its pizza brands. When asked about Rosenfeld’s pay at Berkshire’s annual meeting, Buffett said, “We’ve got a compensation system at Berkshire which I regard as quite rational and there’s a lot of companies in the U.S. that have different compensation systems,” according to the Daily Telegraph of London. Michael Mitchell, a spokesman for Northfield, Illinois- based Kraft, said company officials “strongly believe” the Cadbury acquisition was “absolutely the right decision” and will boost earnings. The pay package for Rosenfeld, who led Kraft to “strong operating results in 2009” in an “extremely volatile and challenging operating environment,” was driven by a payout from a 2007-2009 long-term incentive plan, he said. Extended Holding Requirements Other female CEOs in the S&P 500 considered overpaid in 2009 in the Crystal model were Susan Ivey of Reynolds American Inc. , Mary Agnes Wilderotter of Frontier Communications Corp. and Indra Nooyi of PepsiCo Inc. Shareholders at Reynolds last week defeated a resolution that would have required an extended holding requirement for stock awards. Ivey received $6.24 million in stock last year. A similar resolution is pending a vote at Frontier, where Wilderotter got $3 million in stock. “We’re concerned their high levels of stock compensation and lack of holding requirements could mean pay isn’t sufficiently tied to performance,” said Brandon Rees , deputy director of the office of investment for the AFL-CIO, a supporter of the resolutions. Debra Cafaro , CEO of real estate investment trust Ventas Inc. for the past decade, received $6.25 million last year, and was rated as underpaid in the Crystal model. She took an 18 percent pay cut in 2009. Ventas has been the best performing stock in the S&P 500 financial sector under her tenure, with a 35 percent compound annual return for shareholders. Twice as Likely “Once you’re in the CEO seat, I believe directors use a very even-handed approach to compensation,” Cafaro, 52, said. “But getting there can be a different story and women executives may be judged more critically.” Ventas returned 12 percentage points above the S&P 500 last year for shareholders. Cafaro’s base salary and non-equity incentive compensation were increased by 3.5 percent and 33 percent, respectively, while her equity awards decreased 34 percent. “The compensation committee believes the CEO should have the greatest alignment with our shareholders, and, therefore, her compensation structure was designed to reflect a higher sensitivity to our performance than the compensation structure of other named executive officers,” a company filing said. Women CEOs are almost twice as likely to have been named to the job from outside, as Cafaro was, than from within, according to a Harvard Business Review study by Herminia Ibarra, a professor of organizational behavior, and Morten T. Hansen, a professor of entrepreneurship. ‘Outside-the-Mold’ There is a strong market for “outside-the-mold” candidates today and not a huge supply, so there’s no surprise it’s reflected in their salaries, Ibarra said. Being brought in means they’ll be paid a premium, Farient’s Ferracone said. Companies are emphasizing diversity and having a woman at the helm fulfills that agenda, which can lead to an advantage when negotiating pay, Ferracone said. “Having a female CEO is an opportunity to blaze a trail, so some companies will say, ‘What do we have to do to get her?’” said Andrew Oringer, a compensation and benefits lawyer at law firm Ropes & Gray in New York. To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net .

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CEO Pay Breaks Glass Ceiling as Bartz Gets $42.7 Million With ’09 Bonanza

May 12, 2010

By Alexis Leondis May 13 (Bloomberg) — Chief executive officers’ pay is shattering the glass ceiling. Boosted by a $47.2 million package for Carol Bartz of Yahoo! Inc. and $26.3 million for Irene Rosenfeld of Kraft Foods Inc., compensation for woman CEOs at the biggest U.S. companies is booming. Sixteen women heading companies in the Standard & Poor’s 500 Index averaged earnings of $14.2 million in their latest fiscal years, 43 percent more than the male average, according to data compiled by Bloomberg News from proxy filings. The women who were also CEOs in 2008 got a 19 percent raise in 2009 — while the men took a 5 percent cut. “When you see numbers like this, one can truly say that the glass ceiling in corporate America has been shattered,” said Frank Glassner , CEO of San Francisco-based Veritas Executive Compensation Consultants LLC. “I don’t remember seeing women ever getting paid more than men.” Graef Crystal , a pay expert who analyzed the data for Bloomberg News, said that “compensation committees are saying we don’t want to have any trouble” over underpaying women, “so if we err, let’s err on the side of giving them too much.” Darwinian competition is also playing a role, said Sheila Wellington, a professor of management and organizations at New York University who studies women business leaders. “These are the strongest, fittest and toughest who survive,” according to Wellington, who said she was offered half the salary of male peers for her first job at a mental health facility in 1968. ‘They’ve had to negotiate all the way up the ladder.’’ An Unusual Option Compensation consultant Todd Gershkowitz , senior vice president of Los Angeles-based Farient Advisors, said he couldn’t recall a female CEO ever receiving as much as the 61- year-old Bartz. Her package was bolstered when she joined in January 2009 by a five-million share options grant from Yahoo , valued at $27.2 million, and a $7.5 million share grant. The option is unusual in that it begins to vest, or become cashable, if Yahoo stock hits and stays above $17.60, or 50 percent above its $11.73 price on the date it was granted, for 20 straight trading days before 2013, Crystal said. Most options vest on a fixed timetable, irrespective of price. Yahoo, based in Sunnyvale, California, rose above the $17.60 level last month, falling before the option could vest. Resting Pythons “Welcome aboard” packages are standard fare for new CEOs. Yahoo went overboard when it added $7.4 million in additional stock and options to Bartz’s pay just 25 days after the initial award, Crystal said. “Why does she need to eat again 25 days after she swallowed an entire pig?” he said. “Some pythons need to rest before another meal.” The $42 million value attributed to the option and stock grants in Yahoo’s compensation disclosure wasn’t realized in 2009 and is linked to “increases in long-term shareholder value” and individual and company financial performance , said Dana Lengkeek , a Yahoo spokeswoman. In the broader workforce , women working at least 35 hours a week in the first quarter of 2010 received 79 percent of the wages earned by men, according to the U.S. Labor Department. Female heads of companies of all sizes made about 75 percent of what men did in a 2009 department survey of 1.1 million CEOs. About 24 percent were women. Pay riches for women CEOs at big companies may be “an important indicator, but not a milestone because of what happens down the line” among average workers, said Robin Ferracone, founder of Farient. Rosenfeld’s 41 Percent “Even at the CEO level, with equal pay comes equal scrutiny and a narrower band of acceptable behavior,” said Ferracone, whose clients have included Margaret Whitman , the former EBay Inc. CEO, and Carleton Fiorina , the former head of Hewlett-Packard Co. At Kraft , Rosenfeld received a 41 percent raise last year as the shares fell behind the S&P 500’s performance by 21 percentage points. In a Crystal model that adjusted pay for shareholder return, she would have taken an $18 million pay cut, and was rated as the 16th most overpaid CEO among 271 studied. Crystal looked at S&P 500 companies that had filed 2009 fiscal year proxies by April 16. (Click here to see a sortable table and other interactive graphics on CEO pay.) Rosenfeld, 57, was awarded $10.6 million in a performance- based bonus, which Kraft’s proxy attributed in part to her pursuit and acquisition of Cadbury PLC, which made Kraft into the world’s largest confectioner. ‘Dumb Deals’ To win Cadbury, Rosenfeld had to stand up to Warren Buffett , CEO of Berkshire Hathaway Inc., which has an 8 percent stake in Kraft. Buffett said Kraft made “dumb deals” by overpaying for Cadbury and selling its pizza brands. When asked about Rosenfeld’s pay at Berkshire’s annual meeting, Buffett said, “We’ve got a compensation system at Berkshire which I regard as quite rational and there’s a lot of companies in the U.S. that have different compensation systems,” according to the Daily Telegraph of London. Michael Mitchell, a spokesman for Northfield, Illinois- based Kraft, said company officials “strongly believe” the Cadbury acquisition was “absolutely the right decision” and will boost earnings. The pay package for Rosenfeld, who led Kraft to “strong operating results in 2009” in an “extremely volatile and challenging operating environment,” was driven by a payout from a 2007-2009 long-term incentive plan, he said. Extended Holding Requirements Other female CEOS in the S&P 500 considered overpaid in 2009 in the Crystal model were Susan Ivey of Reynolds American Inc. , Mary Agnes Wilderotter of Frontier Communications Corp. and Indra Nooyi of PepsiCo. Shareholders at Reynolds last week defeated a resolution that would have required an extended holding requirement for stock awards. Ivey received $6.24 million in stock last year. A similar resolution is pending a vote at Frontier, where Wilderotter got $3 million in stock. “We’re concerned their high levels of stock compensation and lack of holding requirements could mean pay isn’t sufficiently tied to performance,” said Brandon Rees , deputy director of the office of investment for the AFL-CIO, a supporter of the resolutions. Debra Cafaro , CEO of real estate investment trust Ventas Inc. for the past decade, received $6.25 million last year, and was rated as underpaid in the Crystal model. She took an 18 percent pay cut in 2009. Ventas has been the best performing stock in the S&P 500 financial sector under her tenure, with a 35 percent compound annual return for shareholders. Twice as Likely “Once you’re in the CEO seat, I believe directors use a very even-handed approach to compensation,” Cafaro, 52, said. “But getting there can be a different story and women executives may be judged more critically.” Ventas returned 12 percentage points above the S&P 500 last year for shareholders. Cafaro’s base salary and non-equity incentive compensation were increased by 3.5 percent and 33 percent, respectively, while her equity awards decreased 34 percent. “The compensation committee believes the CEO should have the greatest alignment with our shareholders, and, therefore, her compensation structure was designed to reflect a higher sensitivity to our performance than the compensation structure of other named executive officers,” a company filing said. Women CEOs are almost twice as likely to have been named to the job from outside, as Cafaro was, than from within, according to a Harvard Business Review study by Herminia Ibarra, a professor of organizational behavior, and Morten T. Hansen, a professor of entrepreneurship. There is a strong market for “outside-the-mold” candidates today and not a huge supply, so there’s no surprise it’s reflected in their salaries, Ibarra said. Being brought in means they’ll be paid a premium, Farient’s Ferracone said. Companies are emphasizing diversity and having a woman at the helm fulfills that agenda, which can lead to an advantage when negotiating pay, Ferracone said. “Having a female CEO is an opportunity to blaze a trail, so some companies will say, ‘What do we have to do to get her?’” said Andrew Oringer, a compensation and benefits lawyer at law firm Ropes & Gray in New York. To contact the reporter on this story: Alexis Leondis in New York aleondis@bloomberg.net .

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‘Dead President Deals’: Feds Interested In Morgan Stanley’s Mortgage Transactions

May 12, 2010

But this really shouldn’t come as any surprise to anyone. Every major firm on Wall Street had a hand in structuring a Goldman-like deal. In my story a few weeks ago about the SEC’s case against Goldman I said that these bogus mortgage deals became common on Wall Street. Morgan Stanley had the so-called dead-Presidents deals, named Buchanan and Jackson. Another Morgan deal, one called Libertas, defrauded investors in the U.S. Virgin Islands, according to a lawsuit. JPMorgan Chase played procurer for Magnetar, a hedge fund so artful in profiting from the meltdown that Northwestern’s Kellogg School of Management praised it last year in a case study. A firm run by Lewis Sachs, until recently a top Treasury Department adviser, and UBS, until recently a tax-cheat favorite, created junky bonds that investors who bought them now claim were going bad even before the deals were closed. Bank of America too is being sued for a deal that was set up by its Merrill Lynch subsidiary with a manager who is now under investigation by the SEC.

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Morgan Stanley Probed Over Mortgage Derivatives It Bet Against, WSJ Says

May 12, 2010

By Chris Peterson and Chitra Somayaji May 12 (Bloomberg) — Morgan Stanley is being probed by U.S. federal prosecutors over allegations it misled investors about mortgage derivatives, the Wall Street Journal reported, citing people familiar with the matter that it didn’t identify. Investments known as collateralized debt obligations, or CDOs, backed by home loans , were arranged and sold by Morgan Stanley even as its trading desk would sometimes bet that their value would fall, the newspaper said, citing traders. The investigation is reviewing whether Morgan Stanley clearly represented its roles, the WSJ said. The probe, which is at a preliminary stage, marks deepening scrutiny of Wall Street firms by U.S. regulators following the global financial crisis, the Journal said. Rival Goldman Sachs Group Inc. is contesting a fraud lawsuit from the U.S. Securities and Exchange Commission, which alleges the firm misled investors about a mortgage-linked security in 2007. “We have not been contacted by the Justice Department about the transactions being raised by the Wall Street Journal, and we have no knowledge of a Justice Department investigation into these transactions,” Morgan Stanley spokesman Nick Footitt said in an e-mail to Bloomberg News. Spokespeople for the Manhattan U.S. Attorney’s office and the SEC declined to comment, the Journal said. The probe stemmed from an ongoing civil-fraud investigation of more than a dozen Wall Street firms’ mortgage bond businesses by the SEC that began in 2009, the newspaper said. The Manhattan U.S. Attorney’s office is now conducting a criminal probe into some of those firms’ activities, it said. Criminal Investigations The government frequently begins criminal investigations without filing charges, the Journal said. In bringing criminal charges, the government would need to prove beyond a reasonable doubt that the firm or its employees misled investors, it said. Two of the transactions being probed were named after U.S. Presidents James Buchanan and Andrew Jackson, and were called the “Dead Presidents” deals by traders, the WSJ said, citing a person familiar with the matter. Morgan Stanley arranged and bet against the deals, and didn’t market them to clients, it said. The firm made money on the two transactions, though it lost $9 billion on mortgage-related investments in 2007, the newspaper said. Morgan Stanley wasn’t among the biggest firms in the CDO market, it said. To contact the reporters on this story: Chris Peterson in London at cpeterson@bloomberg.net ; Chitra Somayaji in Mumbai at csomayaji@bloomberg.net

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Jefferies Hires Former BofA, Cowen Bankers for Equity Capital Markets Team

May 11, 2010

By Michael Tsang May 11 (Bloomberg) — Jefferies Group Inc., the New York- based brokerage that specializes in mid-sized companies, hired Bank of America Corp.’s Ashley Delp to head its U.S. equity syndicate desk. The firm also named David Bohn, former co-head of private placements at Cowen & Co., to lead equity financing for closely held companies, according to Mark Connelly , Jefferies’ global head of equity capital markets. Delp, 35, and Bohn are among the managing directors that will help Connelly, who joined in August from Zurich-based UBS AG, oversee the second-ranked arranger for health care-related offerings in the U.S. this year. Connelly, 49, has added at least three senior managers since taking over as he seeks more business for the almost half century-old firm, which lags behind in overall equity underwriting. Jefferies hasn’t placed among the top 10 banks for U.S. initial public offerings, additional share sales and convertible bond issues in the past 11 years, according to data compiled by Bloomberg. “Our business is growing very, very rapidly right now,” Connelly said. “It represents a further expansion of an effort that we’ve been undertaking for the last four or five months to hire quality origination and equity capital markets product people. In terms of our capital markets team, we’d put our first team out on the field against anybody.” Delp and Bohn, 41, follow Craig McCracken , a former head of equity-linked origination at Charlotte, North Carolina-based Bank of America, who joined in December to head U.S. convertible bonds and equity-linked sales at Jefferies. ‘A Different Sell’ Connelly’s group has been a lead underwriter for two U.S. IPOs and 13 additional share sales this year, ranking 12th among banks with $867 million in sales, Bloomberg data show. New York- based JPMorgan Chase & Co. has won the biggest share of U.S. equity and equity-linked offerings in 2010, with $11.2 billion. Some of the disparity reflects Jefferies’ focus on mid- sized companies with higher than average earnings prospects, rather than private-equity backed offerings, in which leveraged buyout firms often pick banks that financed their LBOs, according to Connelly. “There’s really no competitive process to win that business and it’s a different sell,” he said. Jefferies has increased the proportion of deals in which it served as a lead underwriter to about 80 percent this year, according to Connelly. That compares with about 65 percent in 2009 and a third two years ago, he said. Health-Care Deals The brokerage is credited with helping six companies in the health-care industry raise $316 million this year, more than New York-based firms Goldman Sachs Group Inc. and Morgan Stanley , and behind JPMorgan, which was responsible for $388 million, data compiled by Bloomberg show. Jefferies helped Calix Inc. and DynaVox Inc. sell shares in initial offerings. Petaluma, California-based Calix, which sells connection equipment to telephone companies, raised $94.6 million in its IPO at the high end of its forecast range. The stock, which jumped 16 percent on the first day of trading on March 24, closed at $10.24 yesterday, 21 percent below its IPO price of $13. DynaVox of Pittsburgh, which sold $140.6 million in shares on April 21, has declined 3.3 percent since its IPO. That’s less than the 3.8 percent drop in the Standard & Poor’s 500 Index over the same period. Jesse Mark , 35, Jefferies’ global head of syndicate, said companies that have hired Jefferies for IPOs and have yet to file publicly will help bolster the firm’s standing. “We have a great opportunity in the IPO market,” said Mark. “Over time, we’re going to show very well.” To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net .

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House Transport Panel Chairman Oberstar Opposes United-Continental Merger

May 6, 2010

By John Hughes May 6 (Bloomberg) — United Airlines ’ merger with Continental Airlines Inc. should be rejected by the U.S. Justice Department because it would reduce competition, House Transportation Committee Chairman James Oberstar said. The merger would lead to higher fares, less service and more market power by “global mega-carriers,” Oberstar, a Minnesota Democrat, said on a conference call with reporters. “This transaction fundamentally alters the nature of competition in the domestic and international marketplace and should be stopped,” he said today in Washington. “I would not support any minuscule alterations, or even apparently larger ones” aimed at making the plan palatable. “This is wrong.” United parent UAL Corp. and Continental said May 3 they plan to merge in a stock swap that will create the world’s biggest airline. The plan will test President Barack Obama’s administration, which will consider its first airline merger after George W. Bush ’s administration approved three in a row. Oberstar, 75, said he expects Obama’s Justice Department “to be more serious” and to “use its authority of its antitrust powers.” He said he outlined his concerns in a letter to the Justice Department. Continental Chief Executive Officer Jeff Smisek would retain his title in the new company and United CEO Glenn Tilton would be nonexecutive chairman. United’s name and Chicago headquarters would be kept, as would Continental colors and logo. Each Continental share would be exchanged for 1.05 UAL shares. ‘Golden Parachutes’ This isn’t the first time Oberstar has used his role to criticize mergers. He opposed Delta Air Lines Inc.’s purchase of Northwest Airlines Corp. in 2008, saying it would lead to other deals and leave only three network carriers. “Hell no,” Oberstar said of mergers while Delta and Northwest were discussing a possible deal. “We did not enact deregulation in order to create golden parachute opportunities for airline executives, and that’s what results from mergers.” Oberstar said airlines were “whining” last year when they opposed his legislation, which is still pending, to place limits on carriers’ antitrust immunity for international alliances. “They don’t want to have to stand up and justify their getting a piece of the antitrust law of the nation?” Oberstar said then. “That’s nonsense. That’s un-American.” United and Houston-based Continental are the third- and fourth-largest U.S. airlines by traffic. The carriers had almost $29 billion in combined revenue last year. The airlines employ more than 88,000 workers. To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net ;

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Hands’s Terra Firma Sees 58% Return for Investors Willing to Support EMI

May 4, 2010

By Cristina Alesci May 4 (Bloomberg) — Guy Hands ’s Terra Firma Capital Partners Ltd. is telling investors they could earn a rate of return of as much as 58 percent if they pony up the cash needed to keep lenders from seizing control of EMI Group Ltd. The projection includes any recovery of the original equity, which would probably be worthless without the new investment, according to a presentation Terra Firma sent its clients April 27. The “upside case” assumes a successful exit of the fund’s investment by 2015. The firm needs to corral support from 75 percent of fund investors and inform Citigroup Inc., EMI’s lender, by May 14, according to the document. Terra Firma asked current and third-party investors for 360 million pounds ($549 million) in two parts, to restructure EMI’s 3.2 billion pounds in loans and bring the company into compliance with its debt agreements. While EMI, which owns the record label of Coldplay, Queen and Pink Floyd, produces sufficient cash flow to service its obligations, it hasn’t lowered the debt enough to keep the company from breaching an agreement with lenders, according to the presentation. “Admittedly, adopting a two-stage approach will not deliver the same positive message about the stability of EMI as the investment of 360 million pounds in one step would,” said Terra Firma in the presentation. Terra Firma has cut the fair value of its 2.6 billion-euro ($3.4 billion) EMI investment to zero, according to a February letter the firm’s 5.4 billion-euro fund, TFCP III, sent to investors. The fund, which put 59 percent of 2.8 billion euros it invested into EMI, owns 63 percent of the company. A separate fund, TFCP II, owns 23 percent. Licensing Deals Terra Firma aims to raise 105 million pounds in a first stage to help EMI meet debt covenants through March 2011. It is also seeking guidance from investors whether they would be willing to invest an additional 255 million pounds to ensure EMI stays compliant through 2015, when its loans end. Terra Firma said it would be willing to contribute 55 million pounds. EMI was unable to get money from other major music companies through a combination of licensing and outsourcing transactions, although talks are continuing, according to the presentation. “The majors indicated that no deal would be possible unless an equity cure for a longer period was achieved, given the perceived risks associated with the debt holder subsequently becoming the owner of the company,” Terra Firma said. To contact the reporter on this story: Cristina Alesci in New York at Calesci2@bloomberg.net ;

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Homestore Ex-Chief Wolff Gets 4 1/2 Year Term for `Calculated Deception’

April 19, 2010

By Edvard Pettersson April 20 (Bloomberg) — Former Homestore Inc. Chief Executive Officer Stuart Wolff was sentenced to 4 1/2 years in prison after pleading guilty in January to conspiracy to commit securities fraud. U.S. District Judge Gary Feess at a hearing yesterday in Los Angeles rejected arguments by Wolff’s lawyer for a three- year term, the low end under his plea deal with prosecutors. The judge said Wolff, 46, with a doctorate in electrical engineering from Princeton University, must have known that what he did was inappropriate and morally wrong. “This was a very calculated deception of the public,” Feess said. “He knew what was going on, and he knew it was wrong when it was happening.” Wolff’s lawyer, John Gibbons, said his client knew what he did was wrong and that it was out of character. At the time of the 2001 fraud, Wolff was part of the “go-go-go” generation of young entrepreneurs swept up in the Internet bubble, the lawyer told the judge. “He wasn’t doing what a morally bereft person would have done,” Gibbons said. Wolff didn’t address the court at the hearing. In 2006, Wolff was sentenced to 15 years in prison after a jury found him guilty of directing a $67 million fraud aimed at boosting the online home-listings company’s stock price. That conviction was thrown out in 2008 when a U.S. appeals court said the trial judge, who owned shares of America Online Inc. , a business partner of Homestore, had a conflict of interest. Round-Trip Deals Prosecutors claimed Homestore, which ran an online real estate site now known as Move.com , used intermediary vendors to pay companies including AOL to buy advertising on its site. Homestore improperly recorded revenue from the so-called round- trip deals, prosecutors claimed. Assistant U.S. Attorney Michael Wilner asked Feess to sentence Wolff to five years in prison, the longest possible term under his plea deal. Wilner said Wolff shouldn’t get additional credit for pleading guilty because he refused to come forward and answer questions for almost eight years. The case is U.S. v. Wolff, 2:05-cr-00398, U.S. District Court, Central District of California (Los Angeles). To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net .

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Magnetar Says It Didn’t Help Banks on Mortgage-Backed CDOs `Built to Fail’

April 19, 2010

By Katherine Burton and Jody Shenn April 20 (Bloomberg) — Magnetar Capital LLC, the $7 billion hedge-fund firm that profited in 2007 from wagers that subprime-housing debt would tumble, told investors it didn’t help banks create mortgage-linked investments “built to fail.”      The firm offered limited input on the selection of securities in the deals and made bets that would pay off if they soured, as part of a “market neutral” portfolio designed to profit no matter what happened, according to a letter to clients yesterday from Evanston, Illinois-based Magnetar. “There was no embedded view regarding the direction of housing prices , the rate of mortgage defaults or the subprime- mortgage market generally,” the firm said in the letter. Bank of America Corp.’s Merrill Lynch unit, Citigroup Inc. and UBS AG are among at least nine banks that underwrote more than 20 collateralized debt obligations whose riskiest slices were bought by Magnetar, according to data compiled by Bloomberg. Those CDOs, named for constellations, totaled at least $32 billion. Magnetar’s 11-page letter came in response to an April 9 article on the Web site of ProPublica, an independent, nonprofit investigative journalism project based in New York. The article suggested its CDOs were “built to fail,” according to Magnetar’s letter. “The facts in our story should allow readers to reach their own conclusions,” ProPublica said in a statement to Bloomberg News. “We see nothing in the story to correct.” Goldman Sachs Sued The SEC sued Goldman Sachs Group Inc. for fraud on April 16, saying the bank improperly failed to disclose that New York- based Paulson & Co., a hedge-fund firm betting that subprime defaults would climb, had helped choose risky mortgage-based securities to be linked to a so-called synthetic CDO. Paulson then wagered the investment would collapse. Paulson, which wasn’t accused by the SEC of any wrongdoing, said in a statement that ACA Management LLC chose the assets for Abacus 2007-AC1, as Goldman Sachs disclosed to investors. Paulson suggested some individual holdings, according to the SEC’s complaint. Goldman Sachs, based in New York, has said the SEC’s allegations are unfounded. Magnetar said in its letter that it didn’t select specific securities to be included in its CDOs. Collateral managers for the firm’s CDOs included State Street Corp., Marsh & McLennan Cos.’s Putnam Investment Management LLC, GSC Partners and Harding Advisory LLC, Bloomberg data show. John Nester , an SEC spokesman in Washington, and Steve Lipin , a spokesman for Magnetar, declined to comment. Magnetar said in the letter it bought the riskiest piece of CDOs, known as the equity, which it expected to return 20 percent annually over six to eight years if mortgage defaults remained low. It also hedged those positions with bets against its CDOs and others at a cost of less than 6 percent annually, the firm said. Use of Swaps The credit-default swaps that the company used to make those bets represented on average no more than 7 percent of the collateral of its CDO, the letter said. The banks serving as underwriters would know whether its CDOs included those bets, the firm said. The purchase of a CDO’s equity class is usually taken as “an expression of confidence in the structure,” said Thomas Adams , a partner at New York-based law firm Paykin Krieg & Adams LLP who worked in the CDO groups for two bond insurers. “It would definitively have been relevant” to other investors that Magnetar wasn’t simply making a bullish bet, Adams said in a telephone interview. Although Magnetar said its portfolio was designed to make money no matter what happened to the value of subprime mortgages, its executives have expressed views on the market. “Magnetar has been concerned about the excesses in the subprime-housing market since early 2006,” David Snyderman , Magnetar’s head of global fixed income, said in an interview with Bloomberg News in March 2007. “As a result, we have positioned our structured-credit portfolio such that we are profiting from the recent volatility.” Magnetar was started in late 2005 by Alec Litowitz , who previously worked at Ken Griffin ’s Citadel Investment Group LLC. He specialized in trading the stocks of merging companies. Snyderman also worked at Citadel before joining Magnetar. To contact the reporters on this story: Katherine Burton in New York at kburton@bloomberg.net ; Jody Shenn in New York at jshenn@bloomberg.net

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Simon Johnson On ‘Real Time’ (VIDEO): Broken System If Goldman Conspirator John Paulson Is Not Charged

April 17, 2010

Economist Simon Johnson appeared on Bill Maher’s “Real Time” panel Friday alongside GRITtv host Laura Flanders and New Yorker editor David Remnick. The panel covered the tea party movement and the Securities and Exchange Commission’s decision to charge Goldman Sachs with fraud. While explaining how Goldman made billions by selling bad securities, Johnson mentioned investor John Paulson. Johnson: “They designed something intentionally complex that’s basically a mechanism of transferring money from you to John Paulson. John Paulson, it is true, has not been charged with anything. But he was involved in designing the the security.” Paulson, who was named in the SEC’s civil fraud lawsuit against Goldman Sachs, conspired with Goldman and Deutsche bank to sell investments made up of bad loans. The New York Times reports that Paulson personally made $1 billion off of the deals. Johnson told Maher that if Paulson avoids charges similar to Goldman, it will show how broken our system is. “For all we know right now, it was probably [Paulson's] idea,” Johnson said. “If he walks away without being charged, that just tells you there’s something even more profoundly broken…” Johnson said that Goldman would fight the lawsuit “tooth and nail” because it could open the doors for customers to file a class-action lawsuit against the firm. WATCH:

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FDIC Selling Busted Bank Loans on Terms That Make It `Hard to Lose Money’

April 14, 2010

By Jonathan Keehner and Phil Mattingly April 14 (Bloomberg) — Starwood Capital Group LLC, Colony Capital LLC and TPG, whose leaders profited from the 1990s savings and loan crisis, are among firms buying assets from the Federal Deposit Insurance Corp. for as little as 22 cents cash on the dollar, according to data compiled by Bloomberg. The sales, some including no-interest financing from the agency, are part of an FDIC effort to clean out $40 billion of loans that regulators seized from failed banks. Starwood Chief Executive Officer Barry Sternlicht told potential investors in February it’s “very hard to lose money” on the deals. The government, which was faulted two decades ago for letting bank assets go at fire-sale prices, is planning to profit along with investors. Instead of selling the loans outright, the FDIC kept stakes of 50 percent or more in at least five loan portfolios sold since September. It’s also demanding as much as 70 percent of any gains. “They are doing a much better job this time around,” said John Bovenzi , the FDIC’s chief operating officer until last year, who also helped unwind the S&L crisis. “They have learned a lot, and they aren’t making the same mistakes.” Loan sales planned or completed so far this year total more than $8 billion by book value, compared with $10 billion in all of 2009. The FDIC arranged at least $860 million in interest- free financing this year to support deals, according to statements from the buyers. Failed Banks The sales involve packages of loans acquired by the FDIC from 182 banks that failed since the start of 2009. The loans typically are tied to commercial real estate and residential development, and can include debt on which borrowers stopped making payments or property seized by the bank. Terms entitle taxpayers to a share of any money that private investors squeeze from delinquent borrowers or any profit earned reselling the assets. The FDIC-backed debt has to be repaid before the private-equity firms can take any cash generated by the loans. Financing doesn’t go directly to investors. Instead, the FDIC is creating limited liability companies that hold the loans being sold and receive the financing. “It’s very hard to lose money on a transaction like that,” Sternlicht said on a Feb. 11 conference call with potential investors, according to a copy obtained by Bloomberg News. “That’s the kind of asymmetric risk profile you love in a deal.” ‘So Distressed’ Financing is made on a deal-by-deal basis and won’t necessarily continue, said agency spokesman Andrew Gray . “The financing helps pricing,” FDIC Chairman Sheila Bair said in a March 19 interview. The packages include hundreds of loans where borrowers aren’t making payments. Some “may be so distressed that a healthy bank just does not want to deal with them,” Bair said. Linus Wilson , a finance professor at the University of Louisiana at Lafayette who has written more than a dozen papers on government bailout programs , said the FDIC’s zero-percent financing artificially inflates prices by as much as 20 percent and leaves the agency’s insurance fund vulnerable to losses. The regulator may have to write down the value of its holdings if private-equity managers can’t recover as much from the loans as they expect, Wilson said. The agency could also lose money if its partners don’t make enough to repay the FDIC’s financing, he said. “A better structure would not subsidize high levels of leverage, and it would eliminate the government’s stake entirely,” he said. That would also allow the agency to collect cash more quickly while reducing risk, according to Wilson. Resolution Trust Things have changed since Sternlicht, 49, oversaw a fund that bought assets from the Resolution Trust Corp., the government agency that sold loans and property of failed lenders in the 1990s. The RTC disposed of $394 billion of assets from 747 banks between 1989 and 1995, according to an FDIC review published in 2000. Back then, a fund Sternlicht managed earned about a 94 percent return on purchases including those from the RTC, he said in the February call. This time when Starwood and its partners won a stake in a company holding $4.5 billion of unpaid loans, the FDIC added an “equity kicker.” It increases the agency’s stake to 70 percent from 60 percent once the Starwood-led group makes back twice its initial investment and earns a 25 percent internal rate of return, according to the regulator. The loans Starwood will help oversee were once held by the failed Chicago lender Corus Bankshares Inc. ‘Real Partnership’ “Structured loan sales benefit both investors and the U.S. taxpayer,” Sternlicht said in a telephone interview. “There is real partnership between the FDIC and investors in these deals, so you better be good at managing the assets.” Homebuilder Lennar Corp. also bought into two limited liability companies holding loans seized from failed banks. The Miami-based builder paid $243 million for a 40 percent stake in two LLCs with $3.05 billion of unpaid loans, according to data compiled by Bloomberg. Lennar’s cash contribution comes to about 19 cents per dollar of book value for its interest in one of the limited liability companies and about 23 cents for the other. In a February regulatory filing, Lennar valued the deals at about 40 cents on the dollar after taking into account $627 million in interest-free financing that went to the holding companies and the equity stake the FDIC is keeping. Book value refers to the unpaid balance of the loans. Lennar spokesman Marshall Ames declined to comment for this story. The Starwood-led group including TPG and developer Richard LeFrak bought a 40 percent stake in the company holding Corus’s portfolio for 31 cents cash on the dollar as measured against its share of the book value of the assets. The FDIC covered half of the deal’s $2.77 billion purchase price with an interest-free loan. Flats at Loft 5 Prospects for properties backing the FDIC assets are mixed, according to LeFrak , who visited a Corus property called the Flats at Loft 5 while in Las Vegas for his son’s wedding in October. About half of its 272 units are for rent, according to the leasing office . That’s because the condos didn’t sell, said LeFrak, whose holdings include 15,000 New York City apartments. “It was kind of like in the middle of nowhere, and the design was kind of unusual and you went: ‘Why would anyone do this?’” he asked. By contrast, LeFrak halted what he called “dirt cheap” sales at the Carlos Ott-designed Artech condominiums in Aventura, Florida, so that his group could raise prices. The Artech’s floor-to-ceiling windows overlook the Intercoastal Waterway, and buyers have access to boat slips, a beach club and a chartered yacht, according to marketing materials. The FDIC pledged up to $1 billion in working capital and to complete construction on unfinished developments, Starwood said in an October statement. ‘Enormous’ Risk “These are complex portfolios that face construction, litigation and performance issues,” said Colony Capital CEO Thomas Barrack , whose Santa Monica-based firm offered about 20 percent less than Starwood in the Corus bidding, people familiar with the sale said at the time. “They come with an enormous amount of risk, and bidders are betting to a degree on when the market corrects itself.” Colony returned to the FDIC auctions in January and won, paying 22 cents cash on the dollar for a 40 percent stake in a company holding $1.02 billion in unpaid commercial real estate loans. The FDIC retained a 60 percent interest and provided zero-coupon notes to finance the deal, Colony Financial Inc. said in a regulatory filing. Colony valued the purchase at 44 percent of the unpaid balance of the loans. Barrack, Bonderman Colony’s Barrack, Starwood’s Sternlicht and Fort Worth, Texas-based TPG co-founders David Bonderman and James Coulter all have experience buying bank assets dating back to the savings and loan crisis. Barrack, Bonderman and Coulter worked for Texas billionaire Robert Bass before starting their own private-equity firms. Bass oversaw the purchase of American Savings & Loan in a government- assisted rescue in 1988, at the time one of the biggest S&L failures . Representatives of Colony, TPG and Starwood Capital declined to comment about whether they are participating in pending auctions by the FDIC. FDIC sales scheduled this month included a $610.5 million package of real estate debts assembled from 19 seized lenders, including IndyMac Bank, Silverton Bank and New Frontier Bank. Regulators are also preparing to sell $3 billion of loans from AmTrust Bank, the Cleveland-based lender seized in December. Reluctant Banks Private buyers are taking a bigger role in FDIC disposals because banks are glutted with commercial property and reluctant to buy more, said Chip MacDonald , a partner with Jones Day in Atlanta who specializes in deals among banks. U.S. banks had $119 billion of non-performing commercial real estate loans on their books as of the fourth quarter, according to Foresight Analytics, a bank and property research firm in Oakland, California. Defaults are expected to pile up through 2011, and lenders have written off only 30 percent of the bad commercial mortgages they’ll ultimately face, according to a March report from Moody’s Investors Service. “They just don’t need more exposure to real estate,” MacDonald said. To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net ; Phil Mattingly in Washington at pmattingly@bloomberg.net .

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Citigroup Former Head Prince, Rubin Face Grilling on Role in Record Losses

April 8, 2010

By Bradley Keoun April 8 (Bloomberg) — Charles O. “Chuck” Prince and Robert Rubin , Citigroup Inc.’s former leaders, face a grilling by the Financial Crisis Inquiry Commission today on why they didn’t foresee the housing collapse and its record losses. Commission Vice Chairman Bill Thomas said in an interview yesterday he wants to hear whether Prince, ousted as chief executive officer in 2007, and Rubin, who served as interim chairman, accept any responsibility for Citigroup ’s performance. The panel is holding a second day of hearings in Washington to probe the mortgage-market collapse and ensuing bank bailouts. Given the multimillion-dollar pay packages awarded to Citigroup executives, Thomas said he wants to know why they didn’t do a better job. Bankers told the panel yesterday they relied on statistical models that failed to predict the severity of the crisis. The resulting losses crippled New York-based Citigroup and triggered a $45 billion federal bailout. “I’m struck by the fact that we can hide behind the statistical models,” said commission member John Thompson , who’s chairman of Symantec Corp. “Where was the intuitive leadership judgment that said something may not be right in this market?” One executive, former trading chief Thomas Maheras , made $97 million in the three years leading up to the credit crisis, according to Thomas. Heather Murren, another commission member, called it “disingenuous” for Citigroup executives responsible for the risks to now blame failed statistical models. ‘Defective’ Loans During yesterday’s session, the panel was told Citigroup routinely bought mortgages that violated the bank’s own standards. Richard Bowen , former chief underwriter for Citigroup’s consumer-lending group, said he determined in mid- 2006 that more than 60 percent of mortgages bought from other firms and sold to investors such as Fannie Mae and Freddie Mac were “defective.” “I started issuing warnings in June 2006 and attempted to get management to address these critical risk issues,” said Bowen, who was chief underwriter for correspondent lending in Citigroup’s consumer-lending group. “These warnings continued through 2007 and went to all levels of the consumer-lending group.” In a November 2007 e-mail headlined, “URGENT-READ IMMEDIATELY-FINANCIAL ISSUES,” Bowen said he warned top managers including Rubin, who was the board’s executive committee chairman, of “possibly unrecognized financial losses.” Bill Comes Due “I know that this will prompt an investigation of the above circumstances which will hopefully be conducted by officers of the company outside of the consumer-lending group,” Bowen wrote in the e-mail, a copy of which he included in the prepared remarks. The missive was copied to then-Chief Financial Officer Gary Crittenden and David Bushnell , Citigroup’s chief risk officer. By that time, Citigroup already was beginning to pay for its bad mortgage investments. The New York-based lender posted a then-record $9.8 billion net loss for the fourth quarter of 2007 and was forced in 2008 to get a $45 billion federal bailout. Bowen said he didn’t copy Prince, now 60 years old, on the e-mail to Rubin because there was already speculation in the media that Prince would soon be dismissed. Citigroup announced Prince’s ouster on Nov. 4, 2007, and Rubin, now 71, took over as interim chairman. “The issues raised by Mr. Bowen were promptly and carefully reviewed when he raised them and corrective actions were taken,” said Molly Meiners , a Citigroup spokeswoman. Last year, the U.S. Treasury Department converted $25 billion of the bailout funds into a 27 percent stake in the bank, and Citigroup repaid the remaining $20 billion. Packaged Debt The commission interrogated Citigroup executives who oversaw the bank’s accumulation of collateralized debt obligations, which were created by repackaging bonds that in turn were created from home loans. The so-called super-senior holdings, the highest-rated of all CDO bonds, plunged in value as subprime-mortgage defaults surged and contributed to the bank’s record $28 billion net loss in 2008. Maheras , the former trading chief, told the panel that Citigroup began its foray into CDOs on the recommendation of outside consultants and failed to see the risks. The consultants were hired by “our senior-most management” in 2005 and conducted a “careful study,” Maheras told the panel. The consultants weren’t named. ‘Alchemy’ “Even in the summer and fall of 2007, I continued to believe, based upon what I understood from the experts in the business, that the bank’s super-senior CDO holdings were safe,” Maheras said. The securities carried triple-A ratings and were deemed “super-safe,” he said. One of the commissioners, Byron Georgiou , said during the hearing that Citigroup’s CDO business was akin to medieval “alchemy,” where mortgages made to borrowers with low credit scores were packaged into bonds with triple-A ratings. Thomas asked Maheras and the other former Citigroup executives whether they lost sleep over the bank’s losses, and whether they deserved the pay they received in the years leading up to the financial crisis. “You didn’t know what you were doing,” Thomas said. “Or, yes, you knew what you were doing, until you didn’t.” Maheras, who said he was “paid handsomely” in the years leading up to the crisis, didn’t get a bonus for 2007, when he left. Risk Management The commission, led by former California Treasurer Phil Angelides , also quizzed Bushnell and Nestor Dominguez , who co- headed the bank’s CDO business. The first to testify today was former Federal Reserve Chairman Alan Greenspan , 84, who defended the central bank’s record on consumer protection in the years before the financial crisis and said regulators can reduce the chances of another meltdown by requiring banks to hold more capital. Bowen, who has 35 years of banking experience and is licensed as a certified public accountant in Texas, oversaw 220 underwriters at Citigroup and had responsibility for more than $90 billion annually of new mortgages, according to his statement. In some cases, Citigroup executives in New York overturned Bowen’s recommendations on some mortgage purchases to “approved” from “turn down,” he said. “Subprime mortgage pools, many over $300 million, were purchased even though the minimum credit-policy-required- criteria was not met,” Bowen said. “Beginning in 2006, I issued many warnings to management concerning these practices, and specifically objected to the purchase of many identified pools.” Lawyer Calls The week after Bowen sent his e-mail to Rubin, he received a “very brief” call from a lawyer in the office of Citigroup’s general counsel, he said during his live testimony today. The lawyer assured Bowen his concerns would be taken “seriously,” he said. Bowen wasn’t contacted again until January 2008, when he explained “details” to lawyers in the general counsel’s office during a series of conference calls lasting a total of five hours, he said. After that, Bowen said, he was no longer “physically” at the bank, and his employment ceased in January 2009. He said he didn’t know whether any actions had been taken as a result of the e-mail and conference calls. In a discussion with reporters during a break in the hearings, Steve Kardell, a lawyer for Bowen, declined to comment on his client’s departure from Citigroup or say whether there was any pending litigation over his employment. Bushnell, Dominguez Bushnell, who was replaced as Citigroup’s chief risk officer in November 2007, said in a statement that he communicated with Prince “almost daily” about the company’s risks and had a “regular, weekly one-on-one meeting” with the CEO. He also regularly provided reports to the board of directors , he said. Bushnell said he oversaw a team of 2,700 “highly qualified risk professionals.” The depth of the housing crisis took them by surprise, he said. “In this case, our method of analysis was not enough,” Bushnell said. “Risk models, which primarily use history as their guide, assumed that any annual decline in real-estate values would not exceed the worst-case historical precedent.” ‘Efficient Use of Capital’ Dominguez, who was co-head of Citigroup’s CDO business from 2006 to 2007, said in a prepared statement that his business produced $400 million in “total annual revenue in 2005 and 2006.” The revenue included fees from setting up the deals as well as profits from trading them, he said. The bank’s executives believed that retaining the super- senior CDO bonds was an “efficient use of capital and Citi’s balance sheet,” Dominguez said. The bank took a $14.3 billion writedown on CDOs in the fourth quarter of 2007 alone, according to Bushnell. “I believed then, and still believe now, that Citi’s CDO business was performing an important function in the capital markets” by serving investor demand for the securities, Dominguez said. To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net .

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