FST US

Is credit card debt a hindrance?

Wed, 17 Mar 2010 09:12:00 +0000

With the recession forcing more and more Americans to burden their credit cards with debt, it's time to ask whether the increasing accrued costs are manageable, or are detrimentally impacting lives.

Unless you've had your head in the sand for a few years, you know times are hard. For those old enough to remember they aren't Great Depression hard, but for most of us, poor economy, lack of opportunities and a loss of jobs equal a rolling snowball which carries with it exceeding pressure to find money we don't have, and in turn means we turn to the plastic more than we would like.

And the numbers don't lie. In the last decade, 22 million more Americans have got their hands on a credit card, bringing the figure to 181 million, up from 159 million in 2000. This doesn't tell the whole story, as around half of the cardholders have more than one credit card, with 14 percent having up to ten credit cards, (yes you read that correctly, ten!) meaning the total number of credit cards in circulation in the U.S is estimated at around 1.5 billion. That means the potential for spending is gargantuan ($2.1 trillion in 2008 to be precise, up from 1.4 trillion in 2003) and in turn, the potential for crippling debt ($972 billion in 2008, up from less then $8 million in 1968).

Alarmingly, almost 15 percent of families have debt exceeding 40 percent of their income.

The average outstanding credit card debt for households that have a credit card was $10,679 at the end of 2008.

Debt by the numbers

In 2006, fee's alone cost consumers $17.1 billion. Over the past 10 years, household debt has grown by 147 percent, with credit card debt growing by 69 percent. Credit card debt slowed to less than half of household debt primarily because consumers borrowed against equity in their homes to pay down credit card account balances, says lowcards.

One look at the top ten some top credit card issuers in 2008 shows that credit card issuing is a profitable business. Topping the list is US Bank, recording profits of £1.07 billion, with Capital One also recording profit over £1 billion. Other top profits belong to Wells Fargo at $990 million, and American Express with $850 million. Only Citi Bank recorded a loss, at $530 million. This in part is because the average credit card APR is 14.9%, the average penalty/default rate is 23.9%, going as high as 32.24% (Chase), and the average late-payment fee is $25. Cardholders also pay $25 on average for encroaching over their limit fee.

The debt, it appears, is spread evenly geographically and demographically.

Undergraduate spending

Undergraduates have long been a target of cardholders, and with rising college fees, undergraduate credit card debt is averaged at £3,173 per student. One investigation highlighted nearly 30 percent of undergraduates put tuition on their credit card, an increase from 24 percent in 2004. In total, 92 percent of undergraduate credit cardholders charged textbooks, school supplies, or other direct education expenses, up seven percent from the previous study.

Thankfully this could become a thing of the past, as new laws are coming in to protect those students buying stuff on the plastic. The Credit Card Accountability, Responsibility and Disclosure Act (CARD) is an attempt for consumer protection and should hold credit card companies more responsible, the CARD Act ends certain fees and the increase of high interest rates.

"This marks a turning point in helping to protect consumers from practices that have gotten us in the hole we’re in now,” said Jared Bernstein, chief economic advisor to Vice President Joseph Biden. “It’s unfortunate when young people get in over [their] head with credit cards."

In the UK, Prime Minister Gordon Brown has taken measures to protect those cardholders most vulnerable to rising debt, namely by forcing credit card lenders to change the way they make consumers pay off their debt.

Eighty-four percent of undergraduates indicated that they felt they needed more education on financial management topics. And with no light at the end of the recession tunnel, it seems its not only undergraduates who could do with help with regard to spiralling debt.

Credit Card debt accounts for just over 2 percent of America's total debt.

Lehman bankruptcy report

Mon, 15 Mar 2010 16:04:00 +0000

Jenner & Block, the New York law firm appointed to examine the cause of Lehman's monumental demise have found that failings by executives, bad calls by management and its auditor are to blame for the bank's 2009 bankruptcy.

Jenner & Blocks' Anton Valukas' 2200-page report became public on Thursday, after he had initially submitted it to court earlier in the year. The findings paint a grim picture of Lehman's incompetency with few heroes and numerous alleged culprits, according to ft.com.

Pointing the finger

Valukas accused top Lehman executives of painting a misleading picture of its financial condition during the third quarter of 2008, which ultimately kept creditors and shareholders in the dark about Lehman's financial woes. "Lehman did not disclose [...] that it had been using an accounting device (known within Lehman as "Repo 105") to manage its balance sheet – by temporarily removing approximately $50 billion of assets from the balance sheet at the end of the first and second quarters of 2008," Valukas wrote in the report.

The report laid blame across several of Lehman's top earners, including long-time Chief Executive Dick Fuld, former finance chiefs Chris O'Meara, Erin Callan and Ian Lowitt. "There are many reasons Lehman failed, and the responsibility is shared," Mr. Valukas wrote. He added that Lehman's financial plight "was exacerbated by Lehman executives, whose conduct ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by government agencies, who by their own admission might better have anticipated or mitigated the outcome."

Valukas also highlighted that a "limited amount of assets" were "improperly transferred" to Barclays, the UK bank that acquired Lehman’s US brokerage business following the collapse.

Remembering the numbers

Lehman had bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion. The bankruptcy capped a 95 percent slide in its stock price and launched a crisis of confidence that sent ripples through financial markets worldwide, sparking the worst crisis since the Great Depression with the Dow experiencing its largest one day point loss.

Ross Densley

Ross Densley is a graduate from Bath Spa University, and has freelanced for several magazines ranging across a section of topics such as animation, business, film and lifestyle. When Ross is not working he writes and edits his own satirical website.

New York agrees 9/11 payout

Fri, 12 Mar 2010 16:10:00 +0000

Almost ten years after the Twin Towers and Building 7 collapsed from the Manhattan skyline, the City of New York will compensate rescue and recovery workers affected by the dust and debris to the tune of up to $657.5 million.

The World Trade Centre Captive Insurance Company - established to indemnify the city and its contractors against possible legal action - announced the news on Thursday night, said the UK Press Association.

"[It's] a fair and reasonable resolution to a complex set of circumstances," said New York Mayor Michael Bloomberg. "The resolution of the World Trade Centre litigation will allow the first responders and workers to be compensated for injuries suffered following their work at Ground Zero."

"We are gratified that these heroic men and women who performed their duties without consideration of the health implications will finally receive just compensation for their pain and suffering, lost wages, medical and other expenses, as the US Congress intended when it appropriated this money," said Marc Bern, a senior partner with the law firm Worby, Groner, Edelman & Napoli, Bern LLP, which negotiated the deal.

Wishing to be compensated

To detract false and fraudulent claims, workers who wish to be compensated will need to prove that they had been at the World Trade Centre site, had handled debris or need to produce medical records or other relevant information from a medical professional.

The enormity of the payout will aim to compensate the thousands of inadequately insured workers exposed to the dust fumes and smouldering wreckage in the months following the initial terror attacks, with symptoms as serious as cell-cancer, to less severe, but oft-recurrent symptoms like nasal drip or sinus congestion and headaches.

The majority of the money would come out of a $1 billion grant from the Federal Emergency Management Agency.

Ross Densley

Where next for IPOs?

Tue, 09 Mar 2010 15:56:00 +0000

There are a few reasons why a company may issue an initial public offering (IPO), but primarily a company will do it to provide itself with capital expansion without incurring debt. An IPO enables a company to gain access to a pool of stock market investors through listing its shares on the public stock, thus increasing its chances of raising revenue to drive future growth.

The investors are happy because they have a right to future profits distributed by the company and the right to a capital distribution in case of a dissolution. The company is happy because it gets the chance to increase income without being required to repay the capital outlays.

Traditionally, the issuing of an IPO has been reserved for well established firms with a loyal client or customer base that is considered a safe bet on the stock market. British Gas PLC's $7.6 billion IPO and Japan's Nippon Telegraph & Telephone's $13.7 billion are cases in point.

Once listed these large, well established companies benefit from the capital drawn from the general market, without having to seek and negotiate with individual investors. This helps to drive growth through attracting higher profile C-Level executives and management to the company and can expedite the development of mergers and acquisitions.

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Japanese asset price bubble

Throughout the late 1980s and early 90s Japanese firms were highly active in the IPO market as technology and communications companies took advantage of the growing demand for high-tech ways to communicate during the Japanese asset price bubble.

However as we neared the end of the 1990s internet start-ups and other companies leading the way in world wide web innovations, began to really capture the attention of investors as the dot-com bubble transformed IPOs.

This period (between around 1995 and 2003) witnessed the domination of US IPOs. A cluster of activity involving smaller deals - still in their billions but small compared to the likes of Nippon ten years earlier - was indicative of a change in business focus.

These companies were attracted by the possibility of cheap access to capital and increased exposure and prestige. Making money appeared to come easily to many during this time and investors were willing to throw money at anything that caught their eye, stock markets in industrialized nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields. They never had it so good.

However, as is so often the case when things are going so well people seemed to forget that for every boom there's a bust.

Where next for IPOs?

The market downturn at the start of the new century culminated in the global financial meltdown - the worst in about 60 years - at the end of 2007. During this tough time for global markets, IPOs have largely taken a back seat but when they have been issued that have return to the more traditional form of large, well established firms offering big sums.

But where next for IPOs?

For the time being, as investors remain more cautious over where their money is spent and start-ups and young firms remain a massive risk in the eyes of backers, IPOs will keep to the old school trend of trend of big firms looking for a quick buck.

Geographically, it's hard to look beyond China's current domination of the IPO market continuing for some time as its economy burns brighter and brighter.

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Pandit returns to testify

Thu, 04 Mar 2010 15:47:00 +0000

Vikram Pandit, CEO of Citigroup, is facing a tough week this week as he returns to Capitol Hill to testify before the congressional panel in charge of overseeing the US government's rescuing of ailing finanical services firms.

Citigroup, which still owes the US Treasury $25 billion, will face tough questions - not least because the firm remains 27 percent owned by the Treasury, a fact that is reportedly making some lawmakers tetchy about the level of taxpayer exposure to the Wall Street giant.

As such, it is anticipated that on Thursday, when Mr. Pandit takes his seat at the hearing, he will be probed into whether the financial monster is being managing in a way that assumes an implicit government backstop, as well as signs that Citigroup is "getting credit flowing," says a spokesman for the panel.

The CEO is also likely to speak about Citigroup's $160 billion in mortgage and credit card loans from last year, a fact that helped more than 800,000 families avoid foreclosure.

Reductions

However, while analysts believe Mr. Pandit is likely to "big-up" the notable actions being taken by Citigroup, regulators are likely to continue to press Mr. Pandit to speed up its balance-sheet shrinkage by selling assets marked for sale and allowing loans to mature.

According to reports in the Wall Street Journal (WSJ), for instance, Citigroup needs to "rid itself of US government meddling and influence," including "pay limits" and "lending pressures," this according to David Trone, an analyst at Macquarie Capital. It would help Citigroup "regain independence and remove a key overhang to the stock."

Meanwhile, some Citigroup shareholders contend that the government's stake could be viewed as a positive. David Ellison, manager of FBR Large Cap Financial Fund, for instance, which held 175,000 Citigroup shares as of its latest report, told the WSJ that the government shadow could help motivate management to "simplify" its balance sheet.

Matthew Buttell

Matt Buttell graduated from Bath Spa University in 2006. Since then he has written for several publications, before moving to the web. He now writes solely for the internet, continuing to cover key business issues while managing his own personal blog.

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FDIC moves toward new market | BoA warrant sale date confirmed | US Banks lending falls at record pace

FDIC moves toward new market

Wed, 03 Mar 2010 16:26:00 +0000

In an attempt to rid itself of assets from failed banks, the Federal Deposit Insurance Corp. (FDIC) is looking to tap into the securitization market with three new guaranteed deals totaling $4 billion.

The first of these deals is expected to be sold this week, according to documents obtained by Dow Jones Newswires, and is reportedly for a $1.8 billion offering. The documents say that the offerings pool assets held by failed banks that the agency has had to seize to protect depositors.

In fact, the FDIC, which is responsible for taking over all institutions that have failed as a result of the economic crisis, has had to take over a total of 165 financial institutions over the last two years.

In these new deals the buyer will pay 20 percent of the assets' value and try to work out the loans by reducing the interest rate, extending the maturity, writing off some principal or getting buyers to put up equity. Once the loans start to perform, the FDIC, which retains 80 percent ownership, shares in the returns. The arrangement, it is hoped, will allow the regulator to reduce its own risk.

Assets from the Franklin and Corus banks - which were took over by the FDIC in November 2008 and September 2009 respectively - include residential, commercial and construction loans and have been pooled - in addition to other failed bank assets - into the three notes totaling $4 billion, according to the leaked documents.

The deals, which are reportedly offered via the private-placement market, are led by Barclays Capital. The Barclays PLC unit declined to comment, as did the FDIC who declined to either confirm or deny that it was marketing a deal at all.

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BoA warrant sale date confirmed | US Banks lending falls at record pace | AIG sells Asian unit

BoA warrant sale date confirmed

Tue, 02 Mar 2010 16:00:00 +0000

The Treasury Department said yesterday that it will move on plans to auction 272 million warrants for Bank of America stock in order to recoup taxpayer money. The auctions will take place tomorrow (3 March) and will be divided into two classes of warrants.

Warrants are financial instruments that allow the holder to buy stock in the future at a fixed price. According to reports by the Associated Press (AP), the auction will be conducted by Deutsche Bank Securities Inc. and will begin at 08:00 EST and close at 18:30 EST the same day.

Bank of America, the US' largest lender, already repaid the government $45 billion in December as part of the firm's ties with the $700 billion bailout program. The AP reports that the auction of the warrants is taking place because Bank of America and the Treasury Department could not agree on a price for the warrants.

Pricing

The two classes of warrants, which the Treasury has labeled as "A warrants" and "B warrants" respectively have both been given a minimum bid price for the auction. "A warrants" - a label which applies to 150.38 million warrants - will each carry a minimum bid price of $7 per warrant; while "B Warrants" - a further 121.79 million warrants - will carry a minimum bid price of $1.50 per warrant.

Bank of America had received $25 billion from the government's Troubled Asset Relief Program (TARP) in October 2008 and then another $20 billion in January 2009 to help offset losses it absorbed as part of its acquisition of Merrill Lynch. And last week Bank of America's shareholders approved an increase in the number of the bank's common shares to fund repayment of the government bailout money.

In addition to the Bank of America auction, the Treasury has said it will hold further auctions over the next month for three other banks, including Washington Federal Inc. of Seattle; Texas Capital Bancshares Inc., based in Dallas, and Signature Bank, headquartered in New York City.

Matthew Buttell

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AIG sells Asian unit | US Banks lending falls at record pace | Wall Street pushes overdraft fees

AIG sells Asian unit

Mon, 01 Mar 2010 17:33:00 +0000

Marking the struggling firm's most ambitious effort yet to repay its $182.3 billion bailout, American International Group Inc. (AIG), has today agreed to sell its Asian life-insurance business to Prudential PLC. The deal is reportedly worth roughly $35.5 billion.

According to reports from this morning, AIG - the government controlled insurer - has now seen approval from its management board of the sale of American International Assurance Ltd (AIA). Federal Reserve and Treasury Departments officials have also joined the move, signing off on the deal themselves. The Wall Street Journal (WSJ) says that those familiar with the move said it happened on Sunday.

The sale of AIA, which is expected to coincide with a separate agreement anticipated for next week to sell another non-US insurer, American Life Insurance Co., to MetLife Inc, could generate proceeds of about $50 billion for AIG. Half of that amount has already been earmarked for the Federal Reserve Bank of New York.

Taxpayer funds

There has long been pressure on AIG, the single largest recipient of a taxpayer-funded aid during the bailouts, to make repayments. However, despite the prospects of this sale, the firm remains a way off from being able to loosen itself from the government's grasp. In fact, analysts believe that these two deals would only cover roughly half of the $97 billion that AIG is desperate to repay.

And while some analysts are worried that this desperation could blindsight AIG to future deals, US officials are keen on the sale to Prudential because it will create $25 billion cash to repay taxpayers, versus $15 billion they were hoping to get from a planned initial public offering of AIA in coming months.

AIA and Alico are by far the two biggest chunks of AIG that it previously committed to sell as part of its push to pay back US taxpayers, who now own nearly 80 percent of the company. Other sales over the past 14 months fetched a total of $5.6 billion.

Matthew Buttell

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The aftermath of the 'Recession Olympics' | US Banks lending falls at record pace | Wall Street pushes overdraft fees

The aftermath of the 'Recession Olympics'

Mon, 01 Mar 2010 15:55:00 +0000

The global recession has hampered many things a country can do; major construction projects are put on hold or cancelled, budgets are slashed and tourism can suffer, but what if you're hosting an Olympic Games?

This was the situation for Vancouver, who had the distinction of hosting the first Olympics Games in the wake of the most recent global recession (Beijing had all their stadiums and arenas built by the time the recession struck in 2008).

For the city, hosting the 2010 Winter Olympics Games cost around $6 billion (totals vary) and history had shown that for Canada, hosting the Games can either be a blessing or a curse. The country has seen its past host cities see millions in returns on its investment, as well as at a dead loss.

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Financial disasters

In 1976 when Montreal hosted the Summer Olympics, Canada found themselves with debts for 30 years after the Games finished. A year before the Games began, work had fallen far behind schedule and work was still progressing weeks before the opening date. Debt rocked up to a $1 billion and it wasn't until December 2006 that the cost of the "The Big O" - the Olympic Stadium (or the "The Big Owe" as it was dubbed by witty critics), was paid in full.

After the 1976 Montreal Games suffered such massive financial losses, in 1984 only Los Angeles and New York showed any interest of hosting the Games.

Luck wasn't on Canada's side in 1988, when Calgary hosted the Winter Olympics. At that time the country's economy was at its lowest, with oil exports being hit hard by the National Energy Program and the financial woes of the Montreal Games still in many people's minds.

However, Calgary turned what was the most expensive Winter Olympics at the time ($1 billion), into a financial success by securing unprecedented $430 million in television rights. By the end, the organisers had made $130 million profit.

As such, when it was announced that Vancouver would host the 2010 Games, questions were asked whether the city would be able to do so, especially after the fact that it took decades to pay off the Montreal Games. However through some canny fund-raising, Vancouver managed to raise $5.7 billion to put on the event... and the region is hoping to see the benefits.

Olympic mania

Over the past 17 days, several hundred thousand tourists have flocked to Vancouver will hotels bursting at full capacity and local shops and restaurants seeing excellent trade. Traditionally though, after an Olympics Games, the area see a "halo effect" as increased tourism and investment comes to the region.

One part of the Olympic site that could see a kick-back is the Olympic Village, which has been touted as being used for apartments after the games. However, as Vancouver city authorities sought emergency powers to borrow up to $400m to finish construction of the village, after private financing stalled due to worsening economic conditions, local people are going to wonder how they will get their taxes back from that loan.

However, the region has seen other benefits - a new convention centre, a $2 billion paid transit line connecting Vancouver to the airport as well as a major infrastructure upgrade. It was hoped that the Games would bring in over $10 billion in financial returns, but currently, with the debts and the recession, this target is looking to be closer to $2 billion, though it is far to early to tell what the long term benefits will be.

Still, thinking back to Montreal it could be worse...

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Vancouver Olympic Village LEED Certified | US Banks lending falls at record pace | 2012 Olympics cost rises by £21m

Timon Singh

Timon Singh is a graduate of Liverpool University where he received a degree in Social and Economic History. He has previously worked for BBC Magazines on BBC Who Do You Think You Are? Magazine, the publication for the popular genealogy show.

US Banks lending falls at record pace

Thu, 25 Feb 2010 16:39:00 +0000

While US officials have been lavishly praising the nation's recovery plans, new evidence says that last year, US banks posted their sharpest decline in lending since 1942, suggesting that the industry's continued slide will make it harder for the economy to truly recover.

According to a quarterly report by the Federal Deposit Insurance Corp. (FDIC), the issue of recession is far from over. The report argues that, while top-tier banks are recovering well, the rest of the industry remains in limbo. In fact, many banks that are fighting for survival are (understandably) becoming more and more wary about extending loans, causing great problems for businesses and consumers who rely on this cashflow.

Shiela Bair, Chairman of the FDIC, said told the Wall Street Journal (WSJ) that "banks are just bumping along the bottom of the credit cycle", highlighting that the number of bank of failures in 2010 now looks likely to eclipse the 140 that were recorded in 2009.

Failing

In fact, according to the report, the number of US banks at risk of failing has now hit a 16-year high at 702, with more than five percent of all loans at least three months past due - which is the highest level recorded in the 26 years the data has been collected.

What's more, the struggling banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years.

Ultimately, while it remains unclear whether the sharp decline stems from the fact that banks are tightening standards and a fear of lending or from weak demand from potential borrowers, the reality is that the declines need to be addressed by the industry - particularly if recovery is ever likely to really begin.

Matthew Buttell

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Wall Street pushes overdraft fees | Big bonuses for the smaller bosses

Wall Street pushes overdraft fees

Tue, 23 Feb 2010 16:04:00 +0000

With the government coming down hard on the way financial institutions charge fees, banks are looking at new ways to apply just enough pressure that will ensure the fees keep rolling in. But now, new concerns from consumers suggest that banks aren't playing fair, sparking a new debate about how much customers can trust their bank.

In a strategic marketing ploy, Wall Street behemoths such as JPMorgan Chase and Bank of America are engaging in an aggressive campaign that is aimed at ensuring billions of dollars in penalty income continues to flow. In an article in The New York Times, Chase's attack was highlighted yesterday. According to the article, Chase has been "fanning special letters out to consumers" that offers them a deal that the banks says they can't refuse.

The letter, reportedly issued in blood-red ink, warns consumers that their debit card may not soon work in the same way anymore, unless consumers contact the bank. "If you don't contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 - even in an emergency," it warns.

Freeze on accounts

But Chase isn't alone in its assault. One Bank of America customer told The New York Times that he had been informed that, if he tried to buy gas on his card, a gas station might place a hold on his account and he might not be able to fill up at all, even if he had enough money in the bank to cover a full tank- all because he had attempted to turn off the overdraft function on his debit card.

In fact, one Bank of America spokeswoman surreptitiously said that the bank's efforts - including giving consumers a document called "Opting Out of Overdraft Coverage" - had not been issued to encourage customers to remain in overdraft services, but to make sure that they understood the complexity of the overdraft issue.

At Chase, a spokesman said that the firm had "begun to reach out to customers and are encouraging them to sit down with a branch banker to make sure they understand overdraft services, which can be confusing. We want them to make an informed decision."

However, with such aggressive methods being deployed to get consumers into branch, the plans only stink of having ulterior motives.

Of course, in the banks' defense, amid growing public concern over overdraft fees, several large banks announced changes to their overdraft policies last year.

Bank of America, for instance, said it would not charge a fee when customers exceeded their balance by $10 or less per day and would limit overdraft fees to four per day.

And at the end of March this year, Chase has said that it will be eliminating overdrafts for customers whose accounts are overdrawn by $5 or less and has already limited overdrafts to three per day.

Nonetheless, even with those changes, customers could still incur more than $100 in fees a day if they opt to take overdraft coverage - a concern that, until it is addressed, is likely to be one of Wall Street's biggest hurdles in restoring confidence in the sector.

Matthew Buttell

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Return to Merrill for investment veterans

Mon, 22 Feb 2010 14:15:00 +0000

Two investment bankers who left Merrill Lynch & Co. as part of a mass exodus at the height of the financial crisis are now set to return to their old firm, according to reports.

Sam Chapin and Todd Kaplan, both veterans of the ailing financial services firm were let go when the securities firm was sold to the Bank of America in an effort to save it from collapsing. But now, the Wall Street Journal (WSJ) reports that those familiar with the situation at Merrill Lynch, believe that both Chapin and Kaplan, aged 52 and 45 respectively, are set to return.

The move will see both men named as Executive Vice Chairmen of Global Banking, with the two men both reporting directly to none other than Global Banking and Markets President Tom Montag. While the reports currently are only subject to rumor, the Bank of America is expected to make announcement about the moves later today.

Sign of growth

Analysts believe the return of the two bankers marks a sign of growth for Merrill Lynch now that it is owned by the nation's largest bank [Bank of America]. The Wall Street Journal reports that return of both Chapin, who will be based in New York, and Kaplan, who will be based in Chicago, is of great significance to the firm.

Both men were among a large group of veteran investment bankers and top executives who left the firm before and after the buyout by Bank of America was completed at the start of last year. Reports show that these exits watered down Merrill's senior ranks and fed concerns about the ultimate success of the merger.

However now that the firm is regaining ground, it is trying to recoup some of its lost talent. And according to the WSJ, as an incentive, the investment bank set aside more than $4 billion in compensation for investment bankers and traders in 2009, meaning the average worker is receiving pay similar to a peak compensation year of 2006.

And now, with the return of both Chapin and Kaplan, it seems that Merrill Lynch's gamble may be paying off.

The two returning executives will join three other top Merrill bankers who also have the same executive vice chairman title - Fares Noujaim, Harry McMahon and Stefan Selig.

Matthew Buttell

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Paulson derails Obama's reform high

Mon, 15 Feb 2010 15:23:00 +0000

Former US Treasury secretary Hank Paulson has attacked President Barack Obama's proposals to break up big banks and clamp down on their trading activities. The move, which came in an exclusive interview with British newspaper The Sunday Times yesterday, has sent ramifications across the US.

Paulson, who is accredited along with Ben Bernanke as having orchestrated America's financial bailouts at the height of the economic crisis, told the newspaper that the plans to stop banks from betting their own capital on the financial markets would "not solve the problem" or prevent a future crisis.

Obama's plan, known as the Volcker rule after US economist Paul Volcker, would restrict banks from making speculative investments that do not benefit their customers and limit the ability of the largest banks to use borrowed money to fund expansion plans - ultimately capping the size of banks - remains an unimplemented proposal; but there is a large amount of support behind the plan.

Wind down

Paulson's attack, however, marks his first public attack against Obama's proposals, and goes a long way to highlight just what Paulson thinks is wrong with the idea. In fact, Paulson believes that big banks are needed to kick-start the global economy, and suggests that "instead of breaking them up", regulators should focus on how to "wind them down in times of crisis," a recommendation that has also been made by Mervyn King, governor of the Bank of England.

"I do not believe that the idea of a ban on proprietary trading for one type of institution is going to solve the problem," Paulson told The Sunday Times, taking the opportunity to talk about alternative proposals for financial reform - as highlighted in Paulson's new book on the global crisis, On the Brink. "The problem we had in [the US], and [across the globe] was broad-based. It wasn’t limited to one type of institution or one type of activity.

"These large institutions pose a dangerously large risk, but [...] I would like to see regulators deal with it, not politicians coming up with a set of rules that will become outmoded and outdated over time," he said.

Matthew Buttell

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Big bonuses for the smaller bosses | Goldman fights NY Times' claims

Big bonuses for the smaller bosses

Fri, 12 Feb 2010 15:48:00 +0000

New data looking into who earns what on Wall Street has revealed that some of finance's biggest earners are located miles away from Wall Street, suggesting a significant shift in the paradigm of the Wall Street bonus.

According to an analysis of 2009 compensation levels in the industry, John G. Stumpf, head of Wells Fargo (based in San Francisco) tops the list of big earners. In fact, evidence shows that Stumpf was paid a personal best of $18.7 million in cash and stock for 2009, that's up 64 percent from 2007, just before the financial crisis hit.

It seems, then, that some of highest-paid banking executives now come from those institutions who largely avoided becoming embroiled in the compensation debate, essentially leaving Wall Street far behind them. The statistics for 2009 show that Stumpf, for instance, is actually now earning twice as much as Lloyd C. Blankfein, CEO at Goldman Sachs. And that in itself is an interesting figure, given that, as The New York Times reports, Blankfein has come to represent a "new period of Wall Street riches", earning $9.7 million for 2009 - a figure reportedly less than some analysts had anticipated.

Snakes and ladders

What's more, while the US banking industry may not have experienced a full-on overhaul, things certainly are changing. Much of the fluctuating pay levels are associated to the fact that chief executives, once at the top of the pay pile, have come under such scrutiny since the crisis struck and are now taking home roughly the same amounts as executives who work for them - sometimes even less.

Meanwhile, executives outside of Wall Street's closely scrutinized institutions, have remained pretty steady in terms of pay levels, having avoided being singled-out for excessive bonuses and seeing their high levels of pay essentially go unnoticed.

Now the leaders in the pay sweepstakes include the heads of the credit card giants Visa, Mastercard Worldwide, Capital One Financial and American Express, with CEOs earning between roughly $13 and $15.5 million respectively.

Ultimately though, the big money remains in Wall Street. "There are probably thousands of people that are in the Millionaire Club - or even the Ten Millionaire Club - that have gotten no heat [from the bonus scandal]," Alan Johnson, a longtime Wall Street compensation consultant explained to The New York Times, highlighting how many senior managers at the likes of JPMorgan and Goldman Sachs remain very near the top of the biggest earners lists.

Nonetheless, the fact that pay options and bonus packages are seemingly beginning to change should give some investors hope as they cling onto the notion that he US economy is beginning to recover.

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Goldman fights NY Times' claims | Salaries equal big bucks for Wall Street

Goldman fights NY Times' claims

Tue, 09 Feb 2010 15:36:00 +0000

While yesterday The New York Times reported that Goldman Sachs - one of the few banks on Wall Street to fair comparatively well despite the economic crisis - may have played a part in AIG's demise, today sees Goldman fight back.

According to The New York Times article yesterday, a conference call had been held between 21 executives at both financial services firms on the 28 January 2008 to try to resolve a "rancorous dispute that had been escalating for months."

The article highlights how AIG has long insured complex mortgage securities owned by Goldman and other firms against possible defaults. But according to authors Gretchen Morgenson and Louise Story, the deepening housing crisis in 2007 meant that AIG, once the world's biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

The conference call came about as executives at the struggling insurer looked to get some of its money back, with execs insisting that Goldman had "inflated potential losses." According to the article, however, Goldman Sachs insisted "that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities."

Morgenson and Story write that "after more than an hour of debate, the two sides on the call signed off with nothing settled" - all this according to internal AIG documents and an audio recording reviewed by The New York Times.

Ongoing dispute

The article goes on to insinuate that the pricing dispute has left some questions over whether Goldman had other reasons for underestimating the value of the securities that AIG had insured with them. In fact, Bill Brown, a law professor at Duke University, who is a former employee of both Goldman and AIG, told The New York Times that "the dispute between the two companies was the tip of the iceberg of this whole crisis.

"Its not just who was right and who was wrong," Brown is reported to have said. "I also want to know their motivations. There could have been an incentive for Goldman to say, 'AIG, you owe me more money'."

But now, Goldman have reacted to the story that ran yesterday. Appearing on the company's websites is the following statement, which seems to suggest the Wall Street giant is keen to stand their ground over the claims made against them.

"Today, The New York Times wrote another story about certain aspects of the relationship between Goldman Sachs and AIG titled 'Testy Conflict With Goldman Helped Push AIG to Edge.' "

Several errors

The statement goes on to list several errors in the assertions made by The New York Times, including the claim that Goldman Sachs stood to gain from the housing market's implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured.

"This statement is misleading and mischaracterizes how we positioned ourselves at the start of 2007," reads Goldmanm's amendment. "Goldman Sachs, like most other financial firms, was long the mortgage market at the end of 2006. In order to bring our exposure closer to flat, we began hedging our mortgage holdings in the first quarter of 2007.

"Those hedges certainly limited our exposure to the declining housing market, but we also recorded substantial writedowns on our residential mortgage holdings. Moreover, in most of the trades with AIG described in the article, Goldman Sachs was hedged by an offsetting position and did not have a short directional bet on the mortgage market."

The statement on Goldman's website today seems to declare all out war against The New York Times, sighting that this latest article marks the third theory the paper has put forward since September 2008.

"The theories are contradictory and many of the supporting 'facts' don't stand up to serious scrutiny," claims Goldman.

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US bond rating under threat | Salaries equal big bucks | Obama: set for revolution

US bond rating under threat

Mon, 08 Feb 2010 16:25:00 +0000

Yesterday saw Treasury Secretary Timothy Geithner announce that the US wasn't in danger of losing its triple-A bond rating, despite a warning to the contrary from Moody's Investors Services.

Geither's defiance came as part of an interview with ABC News's "This Week" program and saw him arguing that this "will never happen to this country" when asked about the prospect of the US losing its top rating.

He was quizzed over the issue after Moody's, the bond rating agency, announced on Wednesday of last week that the US could soon be stripped of triple-A ratings of treasury bonds unless the government is either able to reduce its federal budget deficit or the economy recovers.

Basic confidence

Despite this though, Geithner believes that, when investors were nervous about a glob

al financial crisis, they sought safety in US Treasury securities and the US dollar. Geithner now calls this "a very, very important sign of basic confidence in our capacity as a country to together to fix these problems."

In fact, according to reports in today's Wall Street Journal, Geithner has expressed how the Obama administration has proven that it is "deeply serious" about deficit reduction. Geithner himself, for instance, has endorsed the creation of a bipartisan commission that would be charged with recommending ways to reduce the federal deficit over the long haul.

However, Geithner did admit how economic recovery "is going to take a while", adding how recovery will be "uneven." He also highlighted how, while the risks of a double-dip recession are much lower than they have been, he said, "we have more work to do" to spur job creation.

"We have an economy now that's growing again," he optimistically suggested. "With growth, you're going to see jobs created."

Swiss government backs away from deal with US

Thu, 28 Jan 2010 16:20:00 +0000

The Swiss government are backing away from an agreement with the US which required them to provide names of wealthy American clients of the Swiss bank UBS who were suspected of tax evasion.

The announcement threatens to open a new front in the investigation into UBS by the Justice Department.

The Swiss cabinet, known as the Swiss Federal Council, said in a statement that it would continue talks with the US on the matter. It said there was a risk that the US would resume civil proceedings filed against UBS in a Florida court last year. That case sought to force UBS to disclose the names of 52,000 wealthy American clients suspected of tax evasion through UBS's private bank.

That lawsuit was suspended in August when the Swiss government, acting on behalf of UBS during months of intense negotiations, promised to hand over 4450 UBS client names.

The Swiss cabinet said it might put the disclosure of the names up for approval before the Swiss Parliament - but only if it received detailed information from the Internal Revenue Service on how many UBS clients had come forward under a voluntary disclosure program which ended in November.

The program brought in 14,700 clients from many banks, including UBS. This could allow the Swiss to avoid having to identify people who had already come forward.

The Swiss cabinet said it was not contesting Switzerland's disclosure of 250 names to the Justice Department in February. That move was part of a deal that helped UBS avoid indictment and instead pay a $780 million fine and admit to criminal wrongdoing with its offshore private banking services sold to Americans.

The Swiss did not explain how the disclosure of the 250 names was not deemed to be a breach of Swiss privacy laws while disclosure of the 4,450 was.

Statement from UBS

In a statement, UBS said that it "welcomes the fact that the Swiss Federal Council is pursuing a dialogue with the US authorities."

"UBS's new management will fully support the search for a solution. As before, we will fulfill all our commitments under the agreement."

Peter J. Henning, a law professor at Wayne State University Law School in Detroit and a former Justice Department criminal fraud investigator, said to The New York Times that with the original August deal, "the Swiss tried to pull a fast one on their own country. They really haven't changed their underlying bank secrecy laws, and their courts, and now their government, are saying, ‘You can't just do that.' The Swiss government is in a really bad situation. They have to confront the issue of bank secrecy - what do they want, what are they willing to live with."

Salaries equal big bucks for Wall Street

Wed, 27 Jan 2010 14:27:00 +0000

As the financial crisis rumbles on, tactics on Wall Street are changing. While once, pay structures correlated closely with banks' financial performance, a new trend seems to developing that says, no matter a struggling balance sheet: magnanimity remains high on the agenda.

According to reports in the US, some of the financial services sector's biggest players - who continue to struggle in an difficult economy - are, by some measures at least, the industry's best employers. An article in today's New York Times writes, "Roughly 90 cents out of every dollar that these banks earned in 2009 - and sometimes more - is going toward employee salaries, bonuses and benefits, according to company filings."

In fact, according to reports, in order to compete with their rival banks, the likes of Citigroup, for instance, paid its employees so much money in 2009 - an incredulous $24.9 billion - that the company more than wiped out every penny of profit. The New York Times reports that, as such, after paying its employees and returning billions of bailout dollars, Citigroup posted a $1.6 billion annual loss.

Rethinking

Concerns about such irresponsible management are multifaceted, not least because of the ongoing debate surrounding taxpayer's bailout loans and the continuing excessive rewards being reaped by US bankers.

Because of this, this bonus season sees banking executives rethinking how to play the bonus bubble. Reports suggest that Goldman Sachs, one of the least impacted of Wall Street's giants - is giving its employees an unusually small cut of its profits - about 45 cents out of every dollar. This figure, known as a payout ratio, represents the amount of compensation that Goldman is meting out relative to the pool of profits available for compensation; the interesting point being that, until recently, the ratio for most Wall Street banks hovered around 60 cents of every dollar, in line with other labor- and talent-intensive industries.

Its good news for Goldman employees: if compensation were spread evenly among the bank’s 36,200 employees, each would take home about $447,000 - a fact likely to stir some form of envy among most hard-working Americans

Leftovers

The concern overall, however, is that - in an effort to keep up pace with Goldman - the likes of ailing Citigroup are dolling out huge slices of their profits, leaving little left over for their shareholders. Reports show that Citigroup is, in effect, paying its employees $1.45 for every dollar the company took in last year, while Bank of America is spending 88 cents of every dollar it made in 2009 to compensate its workers. At Morgan Stanley, that figure is up to 94 cents.

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Obama: set for banking revolution

Fri, 22 Jan 2010 16:25:00 +0000

New financial proposals, which include limits in the size of banks and restrictions on riskier trading, have been announced by US President Barack Obama in an effort to prevent future financial crises.

According to Obama, the plans - which mark the US's most far-reaching proposals to date - will ensure that the American taxpayer is never "held hostage by banks that are too big to fail again." He added he was ready for a "fight" with any banks prepared to lobby against tougher regulations.

Shockwaves

The news, which sent shockwaves across Wall Street when it came to light on Thursday, is likely to leave investors running scared as they fear such limits will only be detrimental to the strength of certain firms.

That's because the plan, which is largely aimed at limiting so-called "excessive" risks, will prevent banks and other financial institutions from owning, investing in or sponsoring hedge funds or private equity funds.

Reports suggest that such a move would most likely force a financial firm to choose between proprietary activities - trading in stocks and sometimes risky financial instruments on its own account - and commercial activities, like making loans and collecting deposits.

What's more, the proposals, which still need approval by Congress, also include plans to limit the consolidation of the financial sector, placing broader limits on "excessive growth of the market share of liabilities" at the largest financial firms.

A return to form?

There are concerns now surfacing that the proposed plans could mark a significant setback for the financial system, largely because the plans mimic a number of the measures from a Depression-era law that separated investment banks and commercial banks, known as the Glass-Steagall Act.

For instance, Sung Won Sohn, economist at California State University, warned that, even if approved, the move might not achieve its desired impact because the global system is interconnected.

"Most countries, including Europe, have no acts kind of Glass-Steagall in place anymore, so they have a free range to get into almost every aspect of finance," he told the Associated Press. "I don't think we should handicap American institutions."

However, according to top Obama aide Austan Goolsbee, the real goal of the proposed Volcker rule - named after Paul Volcker, former head of the Federal Reserve and current Chair of the Economic Recovery Advisory Board - said the goal is to refocus banks but is "not a return to Glass-Steagall."

BoA posts massive loss

Thu, 21 Jan 2010 08:59:00 +0000

For some on Wall Street, things are looking up. Some of the US's largest financial institutions have reported massive profits from their investment banking units, but, despite this, consumer lending portfolios continue to dampen spirits - and, in some cases, wash out any sense of hope in the all together.

The issue is simple: cash-strapped and struggling Americans - the everyday customer of any bank's facilities - are struggling to repay debt. Today, according to reports in the New York Times, Bank of America was the latest of Wall Street's giants to fall foul of the consumer lending conundrum.

The firm, who had acquired struggling rival Merrill Lynch in 2008 at the pinnacle of the financial crisis, reported a fourth-quarter net loss of $5.2 billion (60 cents a share), compared with a net loss of $2.4 billion a year earlier. Its a significant blow to the firm, who has been expected to post a loss of just 52 cents a share, according to analysts.

The loss means that, for the year, the bank lost $2.2 billion or 29 cents a share, compared with a profit of $2.6 billion or 54 cents in 2008.

TARP

According to reports from the firm, Bank of America said that a $45 billion repayment to the Treasury of money from the Troubled Asset Relief Program weighed on its quarterly results, with an associated cost of about $4 billion. Reports suggest that without the TARP repayment and dividends it paid on preferred stock, it said its fourth-quarter loss would have been $194 million.

As such the New York Times reports that the financial giant is "encouraged" by signs that the economy is improving. However, according to a statement Brian T.Moynihan, the bank's new chief executive, "That said, economic conditions remain fragile and we expect high unemployment levels to continue, creating an ongoing drag on consumer spending and growth."