Archive for the “Government Bailout” Category

Lehman Brothers CEO Richard Fuld can’t catch a break - and with good reason. The embattled executive is at the center of controversy for his role in the financial troubles that ultimately led to the firm’s bankruptcy filing on Sept. 15. Now, federal prosecutors are turning up the heat on Fuld and Lehman, issuing subpoenas to a number of Wall Street securities firms and individual analysts for information to determine if investors were intentionally misled about the state of Lehman’s financial health.

As the supposed “eyes and ears” of investors, any information obtained from analysts could play a key role in getting to the truth on whether Lehman valued its assets at artificially high levels before filing for bankruptcy protection, according to an Oct. 22 story in the Wall Street Journal.

Fuld also has receiveded a subpoena to testify before a grand jury.

In a conference call held less than one week before Lehman Brothers filed for bankruptcy protection, the company told analysts it was financially sound. Twenty-four hours prior to that call, however, Lehman’s own executives stated the firm needed at least $3 billion in new capital.

On Sept. 15, when Lehman filed for Chapter 11 bankruptcy, the 158-year-old firm mad e history as becoming the largest bankruptcy in the United States. It had $613 billion of debt.

Meanwhile, the company’s CEO Richard Fuld pocketed more than $45 million in salary and bonuses in 2007, as well as directed that millions of dollars be given to Lehman executives even though at the time the company was pleading for a federal bailout.

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.

Apparently some things are better the second time around. After saying “no” on Sept. 29, the House of Representatives debated and then passed in a vote of 263 to171 a $700-plus billion rescue plan for Wall Street today, the centerpiece of which gives the U.S. Treasury the green light to buy up billions of dollars in toxic mortgage securities and other bad debt from financial institutions. Earlier in the week, in a vote of 74 for and 25 against, the U.S. Senate overwhelming passed the controversial bailout bill.

The House may have changed its mind because of several revisions made to the original bill.

Among the changes:

• An insurance program that would provide a guarantee on the value of some of the mortgage-backed assets purchased by the Treasury.

• Authority for the Securities and Exchange Commission (SEC) to change “mark-to-market” accounting rules. Wall Street banks and other financial services firms use the rules to value assets at their current market value instead of their projected value.

• A temporary increase in the amount of bank deposits covered by the Federal Deposit Insurance Corporation (FDIC) to $250,000 from $100,000.

• Retention of limits for executive bonuses at companies that benefit from the bailout.

• Some $150 billion of taxpayer benefits unrelated to the bailout, including a one-year delay of higher tax rates under the Alternative Minimum Tax; a clean-energy tax package; and extensions on tax deductions for tuition and education expenses.

When the House conducted its first vote on the bailout plan several days ago, the bill fell 13 votes short of passing. As members readied for today’s second vote, at least 24 lawmakers said they would switch their previous votes of “no” to a “yes.”

Representative Steve Cohen (D-Tenn.) was one of the individuals who tried to garner support from the opposition, making an analogy to musical lyrics by Mick Jagger of the Rolling Stones: “Sometimes you get what you want. Sometimes you get what you need.”

Only time will tell if that indeed becomes the case. Stay tuned.

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 $700 billion bailout plan for Wall Street - the result of closed-door deal-making on Capitol Hill over the weekend - failed to muster enough support in the House of Representatives today, with a vote of 228-205 against the controversial measure. A total of 95 Democrats and 133 Republicans voted “no.”

Supporters of the plan fervently tried to get the opposition on board, keeping the vote open much longer than the standard 15-minute time frame. But even those efforts failed.

When news of the bill’s defeat became known, the response from the financial markets was swift. The Dow Jones Industrial Average plunged by more than 700 points at one point, with both the Nasdaq and the Standard & Poor’s 500 Index dropping nearly 7%. Tremors of panic were seen with regional banks, as well, with shares in National City falling 66% to their lowest since April 1982.

The legislation, titled the “Emergency Economic Stabilization Act,” would have given the federal government an immediate $250 billion to buy up troubled assets from investment banks and financial services companies as a way to shore up the ailing economy. The final version of the bill also included a cap on golden parachutes received by executives whose companies participated in the bailout program.

Supporters of the bailout package say they intend to bring the bill up for consideration again in the immediate future.

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.

One more bank has bitten the dust. In yet another deal orchestrated by the U.S. federal government, Wachovia Corp. will be bought by Citigroup for approximately $2.1 billion. According to a statement issued by the Federal Deposit Insurance Corporation (FDIC) on Sept. 29, Citigroup will absorb up to $42 billion in losses on Wachovia’s most risky mortgages, with the FDIC taking on any losses beyond that amount. In exchange, Citigroup will hand over $12 billion in preferred stock and warrants to the FDIC.

The government’s deal with Citigroup is similar in structure to the agreement that it put together in March, when the Federal Reserve provided financial backing to JPMorgan Chase for the takeover of the 85-year-old investment firm of Bear Stearns.

For months, Wachovia’s financial picture has been in a downward spiral, the root of which was connected to its 2006 purchase of Golden West Financial. California-based Golden West specialized in optional adjustable-rate mortgages (ARMs) - mortgages that offered low payments at the beginning of a borrower’s home loan, followed by much higher payments later on.

With its portfolio burdened from massive losses on these optional ARMs, Wachovia’s stock plummeted more than 80% in value this year.

The final outcome for Wachovia illustrates the increasing toll that subprime problems have levied on the nation’s banking industry. In July, there was the collapse of IndyMac Bank. And, just last week, Washington Mutual - the country’s largest savings and loan – had been teetering on the brink of bankruptcy before its seizure by the government and subsequent sale to JPMorgan Chase.

In order to buy Wachovia, Citigroup must sell $10 billion in common stock, as well as slash its quarterly dividend - the second time it has done so this year - in half to 16 cents.

Once the deal with Citigroup has been finalized, Wachovia will remain a public company, with two main divisions: its brokerage arm, Wachovia Securities, and its investment management business, Evergreen Asset Management.

Interestingly, it was just two years ago that the Federal Reserve had imposed a ban on Citigroup from making any major acquisitions because of the bank’s inadequate risk-management controls and regulatory problems. Earlier this summer, Citigroup agreed to buy back some $7.3 billion in illiquid auction-rate securities from individual investors, charities and businesses, as well as pay a hefty fine of $100 million to settle potential fraud charges by New York Attorney General Andrew Cuomo over auction-rate securities sales and destruction of subpoenaed documents.

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 took nearly five days, a phone call to billionaire investor Warren Buffett and unexpected concessions from Republicans and Democrats alike, but consensus was finally reached Sunday, Sept. 28 on landmark legislation designed to save Wall Street from a total financial break-down. The long-awaited bailout plan, which goes to the House floor on Sept. 29 for a vote, followed a weekend of late-night sessions and seemingly endless in-fighting between both parties and the Bush administration over specific components contained in the historic rescue plan.

The end result is the “Emergency Economic Stabilization Act of 2008” - a $700 billion taxpayer-funded bill that will be remembered as the largest financial bailout in history, as well as one of the most dramatic interventions enacted on the part of the U.S. federal government since the Great Depression.

Highlights of the new proposal - which is still considered in draft form - include the following:

Amount of money: Treasury Secretary Henry Paulson initially requested an up-front sum of $700 billion to allow the government to buy up bad loans from Wall Street investment banks and other financial services firms. The new bill will provide an immediate $250 billion, with the remaining money given to the federal government in installments.

The government also will receive a stake in any company that participates in the bailout program under the new proposal, with the intent for taxpayers to potentially benefit if those companies prosper in the future.

Accountability: Paulson’s initial bailout plan essentially gave the government carte blanche in terms of administering the bailout program. Now, however, an independent oversight board will be established, with members to include Democratic and Republican lawmakers and a special inspector general. Any transactions that the board takes in regard to the bailout funds will be made known to the public.

Executive compensation: The new bill puts strict pay limits on “golden parachutes” for executives whose firms seek help through the bailout. Certain tax breaks for companies also will be removed if they benefit from the bailout. In addition, the bill requires that unearned bonuses for executives be returned.

Homeownership preservation: The new bill requires the U.S. Treasury to modify troubled loans wherever possible in order to help families keep their homes. The bill also directs other federal agencies to modify loans that they own or control.

Number of pages in bailout proposal: The first proposal was a mere three pages in length. The new version spans a total of 106 pages.

In announcing the agreed-to bailout plan at a 5 p.m. EST press conference on Sunday, Senate Banking Committee Chairman Chris Dodd called the occasion a “sad day,” adding that the impetus for the legislation “wasn’t a phenomenon or an act of God, but rather the result of excesses and irresponsible and reckless behavior on the part of Wall Street.”

The rescue bill now heads to House of Representatives on Monday morning, with the Senate to vote on it by Oct. 1. President George W. Bush is expected to sign the bill into law shortly thereafter.“

Emergency Economic Stabilization Act of 2008” can be read in its entirety at: http://www.house.gov/apps/list/press/financialsvcs_dem/press092808.shtml

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.