Archive for the “Government Bailout” Category

As Citigroup stock approached record lows of just above $1, CEO Vikram Pandit dismissed the performance in a memo to employees, telling them that Citi’s capital strength and earnings power ultimately would prevail.

Pandit’s memo was reproduced in a March 9 article in the Wall Street Journal. In the letter, Pandit acknowledged his disappointment with Citigroup’s stock price and what he called broad-based misperceptions about the company and its financial position.

“I don’t believe it reflects the strengths of Citi; our newly strengthened capital base, our unique global franchise and most importantly, the quality of our people. These are unprecedented times in the markets, but over time, the markets will recognize the many strengths of Citi.”

The memo went on to cite Citigroup’s best quarter-to-date performance since the third quarter of 2007 - the last time it made a quarterly net profit. Revenues, excluding externally disclosed marks, were $19 billion in January and February.

Pandit said the bank was confident about its capital strength after undertaking stress tests and using assumptions that were more pessimistic than those of the Federal Reserve. He failed to reveal, however, details about the so-called stress tests that Citigroup reportedly went through.

Pandit’s assessments of Citigroup’s future viability may come as a surprise to employees and investors alike. Since October, the company has received two federal bailouts: $45 billion from the Treasury Department’s Troubled Asset Relief Program (TARP) and an agreement for the government to cap losses on $300 billion of toxic assets.

One lawmaker who’s been opposed to bailing out troubled banks with taxpayers’ money is Sen. Richard Shelby. On March 8, the senator, who is a member of the Senate Banking Committee, referred to Citigroup as a “problem child.”

According to Pandit, the problem child is reforming itself. Only time will tell if investors are impressed with the results. So far, a $1 stock price indicates Citigroup has a long way to go before it regains investor confidence.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Summoned to Capitol Hill by furious lawmakers, Bank of America’s Ken Lewis, Citigroup’s Vikram Pandit and Jamie Dimon of JPMorgan Chase faced the wrath of Congress on Feb. 11 over how their firms have spent the first $350 billion of taxpayers’ money under the Troubled Asset Recovery Program (TARP).

CEOs from eight of the nation’s biggest banks arrived early Wednesday morning to answer questions from the U.S. House Financial Services Committee. This time, unlike what occurred in November 2008 when CEOs of the Big Three auto companies came to Washington to request taxpayer bailout money in private jets, the bank CEOs arrived via public transportation.

The CEOs presented their testimony in alphabetical order. All of the statements are posted on the House Financial Services Committee Web site. As expected, the executives defended their companies’ use of the TARP funds.

The TARP Accountability: Use of Federal Assistance by the First TARP Recipients meeting is the first of what some say will be regular examinations held by Congress as it moves to increase federal oversight of Wall Street.

And that oversight couldn’t come at a more appropriate time. Taxpayers and investors are justifiably up in arms over how financial institutions are reaping the benefits of the government’s massive multibillion bailout plan, but producing little in return. Instead of improving the state of the credit market, banks apparently spent the money on corporate bonuses, press junkets and, in the case of Merrill Lynch’s John Thain, on a $1.4 million office redecorating project.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

At the very moment Merrill Lynch’s CEO John Thain was pleading for an emergency bailout from the U.S. federal government to the tune of billions of dollars in taxpayer money, the brokerage giant already had begun to dole out $4 million in bonus checks to executives. A few days later, with the help of government funds, Merrill Lynch was acquired by Bank of America (BofA).

On Jan. 22, Thain abruptly resigned from his post at BofA. Now, both Thain and Bank of America, which has received $45 billion in bailout funds, face harsh criticism for what many are calling an outlandish misuse of taxpayer money.

Adding to Thain’s PR troubles is news of a lavish spending spree totaling $1.2 million to decorate his corporate office during a time when Merrill Lynch was drowning in financial losses and slashing jobs. Among his purchases:

• $800,0000 for the services of interior designer Michael Smith
• $35,115 for a commode
• $1,400 for a trash can
• $37,000 for six dining room chairs
• $131,000 on two area rugs
• $68,000 on a credenza

In addition to Thain’s over-the-top decorating, he reportedly paid his driver a salary, including bonuses and overtime, of $230,000 for one year’s worth of work. Drivers for executives of Thain’s stature are usually paid about half that amount.

Thain also at one time had tried to secure a big bonus for himself before the sale of Merrill Lynch to Bank of America. In October, the 53-year-old suggested a sum of between $30 million and $40 million. Later, it was reduced to $10 million. In the end, he received no bonus at all.

Thain’s departure from Bank of America comes less than a month after being named head of the firm’s global banking, securities and wealth management division. Apparently, BofA CEO Ken Lewis flew to New York on the morning of Jan. 22 to meet with Thain and call for his resignation.

Lewis’ disappointment with Thain no doubt has something to do with Merrill’s unexpected $15.4 billion fourth-quarter loss, which forced BofA to seek an additional $20 billion of funding from the government last week.

As for Thain’s ill-timed gamble of paying $4 million in bonuses to Merrill Lynch executives, that matter is now under investigation by New York State Attorney General Andrew Cuomo. 

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

Saddled with extensive damage from the ongoing financial crisis, a loss of investor confidence, and massive job lay-offs, New York-based Citigroup is reportedly in talks to sell its prized Smith Barney brokerage unit to Morgan Stanley.

According to reports in the Wall Street Journal and the New York Times, the deal would be structured as a joint venture and entail payment from Morgan Stanley for an undisclosed sum that would give Morgan a larger stake in the transaction.

News of a potential deal appeared shortly after Citigroup announced that Robert Rubin, former U.S. Treasury secretary under Bill Clinton, had resigned from his post as senior adviser and director of the bank. Rubin’s resignation came after ongoing criticism for his role in encouraging the bank to increase its trading of high-risk mortgage-related securities - a move that many say led to Citigroup’s current financial troubles.

In the past six months, Citigroup has been rocked with staggering financial losses. Despite a second, $20 billion injection of capital from the government’s $700 billion bailout, along with federal guarantees to cover more than $300 billion of the bank’s exposure to toxic mortgage-backed securities, Citigroup continued to experience problems. With losses totaling more than $20 billion, its stock value responded by plunging nearly 80% in 2008.

Faced with eroding investor confidence and a stock price that continued to slide downward, CEO Vikram Pandit reportedly initiated private talks in November with his top executive team regarding the sale of all or parts of the financial services company.

A joint venture between Citigroup and Morgan Stanley would reconnect Pandit with his former employer. Pandit abruptly left Morgan Stanley in 2005 after being passed over for a promotion. He had been with the company for 22 years. After leaving Morgan Stanley, Pandit founded his own hedge fund firm, Old Lane, and later sold the fund for $800 million to Citigroup. Pandit had been on the job with Citigroup for only five months before taking the reins of the company as CEO. His predecessor had been Charles Prince, who resigned following shockingly large losses connected to investments in subprime mortgages.

Meanwhile, an official deal between Citigroup and Morgan Stanley could be announced as early as next week.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

In the wake of more $1 trillion in write-downs and losses at financial institutions in 2008, mark-to-market, or fair-value, accounting has become a hotbed for controversy. Critics of the accounting standard, which banks use to determine the market value of their assets, say it is unfair that they are required to use the rule when reporting hard-to-value assets such as mortgage-backed securities. Proponents say changes to mark-to-market accounting puts investors at risk and allows banks to resort to “mark-to-make-believe” accounting.

A recent study by the U.S. Securities and Exchange Commission is weighing on the side of investors, and says mark-to-market accounting should be maintained. The 259-page report does, however, provide several recommendations to improve transparency, including the development of additional guidance from regulators for determining the fair value of investments in inactive markets. Currently in an illiquid market, an asset’s value is based on an estimate provided by management and/or computer models.

In October, following the government’s approval of a $700-billion bailout package for U.S. financial institutions, Congress instructed the SEC to examine the impact of fair-value accounting on 2008 bank failures and the many financial problems affecting Wall Street.

Apparently, the accounting rule was not a major factor in creating either issue. Instead, the report attributed the collapse of 25 banks in 2008 to be the result of “growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence.”

A summary of the SEC’s report can be found at http://www.sec.gov/news/press/2008/2008-307.htm

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

A growing debate among financial institutions has been decided once and for all. Following the collapse of some 25 banks in 2008, along with a financial breakdown on Wall Street, many bankers called upon Congress to suspend mark-to-market accounting. Critics of the accounting rule say its suspension would give financial institutions more leeway to determine the value of hard-to-sell assets in illiquid markets. On the flip side, proponents contend fair-value accounting increases financial reporting transparency and facilitates better investment decision-making.

On Dec. 31, 2008, the Securities and Exchange Commission (SEC) issued its opinion in a 259-page report, stating that mark-to-market accounting will remain in place. The report went on to say that the accounting rule did not play any meaningful role in the collapse of 25 banks last year.

Mark-to-market accounting requires companies and financial institutions to value their assets based on current market values. For institutions that own certain assets like mortgage-backed securities, the practice can wreak havoc on their bottom line when the assets’ values decrease.

The SEC report did call for some changes to mark-to-market accounting, including a standardization process for dealing with impaired assets and issuing more guidance on how to determine asset values when markets are inactive.

The SEC created its report, SEC Report to Congress on Mark-to-Market Accounting, at the request of Congress. In October, following the passage of a $800 billion bailout for Wall Street, lawmakers mandated that the SEC explore the impact of mark-to-market accounting on the recent financial troubles of banks and lenders.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

The year of 2008 will likely be remembered as the year subprime mortgages and corporate scandals changed the face of Wall Street. Buried under the weight of the subprime crisis, financial institutions took nearly $800 billion in writedowns and losses. The value of stocks worldwide plummeted by more than $30 trillion. Goliath investment houses like Bear Stearns fell apart. State, municipal and corporate pension funds reported massive losses from investments tied to faulty valuation models and high-risk mortgage-backed securities and their derivative spin-offs, collateralized debt obligations (CDOs).

Then there’s the near financial collapse of mortgage giants Fannie Mae and Freddie Mac and American Insurance Group (AIG), which required a financial intervention courtesy of the U.S. government. Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection in 2008. Washington Mutual and IndyMac, along with some 20 other banks were forced to close their doors. Government bailouts reached an astronomical $9 trillion. And as a final nod to 2008, investors lost some $50 billion in a Ponzi scheme orchestrated by the former Nasdaq chairman, Bernard (Bernie) Madoff.

For investors, 2008 is the year that went from bad to worse. It began with the collapse of the auction-rate securities market in February and continued with credit default swaps and structured investment products. For the first time since the 1930s, the Dow Jones Industrial Average experienced losses of more than 30%, closing the year at 8,776.39. By comparison, the Dow finished out 2007 at 13,264.82. Bank stocks in particular took a beating in 2008, with Bank of America and Citigroup losing nearly 70% of their value. As for shareholders, they saw about $7 trillion of their wealth wiped out.

In the world of ultra-short bond funds, 2008 provided the lesson that ultra short does not translate to “ultra safe.” A number of supposedly safe and conservative ultra-short funds got into trouble in 2008 by investing in risky mortgage-backed securities and collateralized mortgage obligations (CMOs). When losses in those toxic assets began to skyrocket, investors lined up to pull their money out in droves, sparking a wave of fund redemptions.

As a result, several fund managers were forced to liquidate their funds’ assets. State Street Global Advisors’ SSgA Yield Plus Fund began liquidating in May after the fund fell 19%. It turns out more than 50% of the fund’s assets were tied to mortgage-related securities funds. One month later, the Evergreen Ultra-Short Opportunities Fund liquidated, as well, when its assets plunged more than 20% in value. Finally, there is Charles Schwab’s YieldPlus Fund. Marketed to investors as a safe alternative to cash, the fund suffered the most losses of any ultra-short bond fund in 2008, losing more than 40% of its value.

Investors, meanwhile, are suing all three funds, charging that they investments were represented as conservative “cash alternatives” and similar to money-market funds. Far from safe or conservative, the funds were heavily concentrated in risky mortgage and asset-backed securities. And, in the case of Schwab’s YieldPlus Fund, several investors who have filed lawsuits claim various Schwab executives and fund manager Kimon Daifotis committed “acts of gross misconduct” by encouraging investors to hold on to their YieldPlus shares, while simultaneously dumping millions of YieldPlus shares from the portfolios of Schwab’s other mutual funds.

Capping out 2008, of course, is the Bernie Madoff scandal. The disgraced hedge fund manager was arrested Dec. 11 by federal agents on charges of securities fraud for scamming $50 billion from investors. Meanwhile, the Securities and Exchange Commission (SEC), the supposed protector of investors and their investments, apparently turned a blind eye to Madoff’s subterfuge over the years by ignoring red flags that signaled problems with his funds and their “too-good-to-be-true” returns.

For investors, the Madoff affair may well be the final nail in the coffin when it comes to confidence in Wall Street. Already shaken from a year that was punctuated by the subprime crisis and corporate scandals - including the implosion of Bear Stearns, the collapse of the auction rate securities market, the bankruptcy of Lehman Brothers and inept accounting practices by Fannie Mae and Freddie Mac and other institutions - Wall Street has its work cut out in 2009 as it tries to renew investors’ faith once again.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

GMAC LLC, the financing lender of General Motors Corporation, got a welcome shot in the arm recently when the Federal Reserve gave approval for its conversion to a bank holding company, thereby providing access to much-needed sources of new funding, including the government’s $700 billion bailout fund.

Detroit-based GMAC, which provides financing for GM dealers and customers, as well as home mortgage loans via its Residential Capital LLC unit, has been plagued by money problems lately. In the past year, GMAC has racked up nearly $8 billion in losses. Without the Fed’s financial lifeline, it’s likely the auto financing company would have filed for bankruptcy.

As part of GMAC’s deal with the Fed, both GM, which owns 49% of GMAC, and Cerberus Capital Management LP, which owns the remaining 51%, will significantly reduce their ownership stakes in the company. GM will reduce its equity share to less than 10%, Cerberus to 33%.

GMAC’s access to the government’s $700 billion bailout fund also bodes well for GM. In the past year, the automaker has been forced to absorb about $1.2 billion in losses from its stake in GMAC.

In becoming a bank, GMAC could receive up to $6.3 billion in capital through the Fed’s Troubled Asset Relief Program (TARP). The lender also may issue as much as $17.5 billion of guaranteed debt under the government-backed Temporary Liquidity Guarantee Program.

Meanwhile, GMAC still faces a midnight deadline to swap $38 billion of debt to satisfy capital requirements to become a bank. However, given that the Fed has pre-approved GMAC’s conversion via the use of its emergency powers, it’s unlikely such details will hold up the process.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Like municipal and state pension funds, corporate pension funds across the country are reeling from the effects of the economic downturn. Now, some businesses, including Pfizer Inc., International Business Machines Corp., United Parcel Service and others are taking their case to Capitol Hill, pleading before lawmakers to suspend a federal rule that requires them to infuse billions of dollars into company retirement plans in order to make up for this year’s massive losses in the stock market.

Skeptics, however, aren’t buying the latest outcry from Corporate America. As reported Dec. 8 on Bloomberg, some financial experts believe corporations simply are using the current financial crisis as an easy scapegoat to bypass a 2006 law that mandates increased retirement-funding provisions.

Others contend many pension fund money managers took far too many risks regarding certain investments, and funds that stuck with prudent and conservative investment strategies were better able to mitigate major market losses.

“This is a failure of risk management by America’s pension plans,” said Jeremy Gold, founder of Jeremy Gold Pensions, a New York-based actuarial consulting firm, in the Bloomberg article.

“They failed to reduce their exposure to the equities markets, they continued to gamble, and they lost the gamble,” he said. “So like all the other losers, they’re standing on the Capitol Hill steps, saying ‘Help!’”

Gold has a point. Market forces aside, the success of a pension fund is contingent on the entities managing the fund’s assets. As more pension fund losses come to light, it’s apparent that some of this work has been severely flawed - from inappropriate bets on risky investments such as collateral debt obligations to the methods used to determine the value of a fund’s assets.

New Funding Levels

Compounding the problems for pension funds is the Pension Protection Act of 2006, which dictates new minimum funding standards for pension funds. By the end of this year, the funding level will be 92%. By 2011, it goes up to 100%. For companies that fail to reach the required funding threshold in any given year, a stiff penalty will be imposed. Pension plans that enter an “endangered status,” meaning they fall below an 80% funding level, face even tougher sanctions, including the possibility of immediate lump-sum payments.

A recent analysis by the consulting firm Mercer LLC shows that some 800 companies in Standard & Poor’s 1500 Index have pension funds. Collectively, the companies were nearly $300 billion short of the funds needed to pay projected benefits as of Nov. 30. By comparison, the same funds started out 2008 with an estimated $60 billion surplus.

“Some companies have already taken steps to address pension plan financial risk by modifying their investment and contribution strategies,” says Adrian Hartshorn of Mercer’s Financial Strategy Group. “However, many companies have not yet addressed the issue, or the steps taken to date have proved inadequate in the current market conditions.

“Changes in the value of pension plan liabilities not matched by changes in the value of plan assets will result in pension plan surpluses or deficits,” he adds. “If companies are unable to tolerate the impact of the changing financial position of the plan, company management needs to manage the risk, much as it would manage any other risk in the business,” Hartshorn says.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses. 

It’s almost impossible to comprehend: $7 trillion. Yet, reportedly that’s what it will take to fix the nation’s economic troubles. To put $7 trillion in perspective, consider this: The amount is “half the value of everything produced in the nation last year,” according to Bloomberg. To put it another way, it amounts to about $25,000 for every American citizen, and it’s more than double what was spent on World War II, after adjustments are made for inflation.

Regardless of how you spin it, $7 trillion is huge - and the figure is likely to climb much, much higher when all is said and done. So far, the government’s financial commitments to bail out the nation come to around $3 trillion. Of that amount, some of the big-ticket items include:

• $800 billion, which was committed in November to support consumer loan and mortgage-backed securities;

• $700 billion, approved in early October under the Troubled Asset Relief Program (TARP);

• $200 billion to prevent the bankruptcy of Fannie Mae and Freddie Mac;• $150 billion to stave off the demise of American International Group (AIG);

• $50 billion to guarantee money-market funds against losses;

• $45 billion to Citigroup; and$29 billion in the form of a loan to JPMorgan Chase for the purchase of Bear Stearns in March.

Keep this in mind: The $7 trillion figure still doesn’t account for the trillions of additional dollars held in “off balance sheet” assets by Wall Street firms. When those assets eventually come back on to their books, the final tally could make $7 trillion seem like peanuts by comparison.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.