Original Story: bloomberg.com
Ruined weekends, PowerPoint drudgery and overnight shifts in Manhattan skyscrapers once were a point of pride for the Harvard Business School graduates who went to Wall Street. Now young stars hold heads high about how lucrative and healthy their lives will be -- elsewhere.
"People used to brag and say, 'Oh yeah, 21-hour days, seven days a week for eight months,' that was a badge of honor,'' said Kiran Gandhi, who like others in this year's class applied to technology companies. "The humble brag is now, 'Oh yeah, I work 9 to 5, I get paid a ton of money, and I have a great life.' It's green juice from vats in the office and amazing organic iced coffee cold-brewed -- the quality of life.'' A Detroit business lawyer is following this story closely.
The allure of Silicon Valley, where hip startups are minting billionaires, is eclipsing that of staid investment banks under pressure to cut risks and costs. This year, a long slide in the number of Harvard MBAs joining banks may hit a new low, even after many of the biggest firms adopted policies to become more hospitable to new recruits. In 2007, about 13 percent of the school's graduates who landed jobs went into investment banking or trading, according to Harvard's reports. By last year, that fell to about 5 percent.
Now a preliminary survey of this year's grads shows only 4 percent intended to join a bank after getting degrees in May. Among the class's 46 Baker Scholars -- a designation Harvard grants the top 5 percent of MBAs -- only one expressed interest.
Those are the findings of Keima Ueno, who got his MBA from Harvard this year. As a student, he served as a peer mentor and wrote a blog on what life is like at the school. So when Harvard sent his class data from a pre-commencement survey, he used it to figure out where the Baker Scholars wanted to go. He wasn't surprised by the results.
"When we hear that our classmates managed to acquire a position with an investment bank, we say 'Congratulations,''' he said. "But we are thinking, 'I'm sorry to hear that.''' An Atlanta investment lawyer represents business and corporate finance clients.
Trading Places
Ueno spent three years in Morgan Stanley's investment bank before returning to school to earn his MBA. Now he's in Japan, running his family's health-care business and a startup Internet retailer.
Technology companies have been luring more top graduates with the promise that they'll not just make gobs of money, but also have a happier life, even if the hours are still long, according to students and recruiters. Last year, about 17 percent of Harvard's business school graduates poured into the industry, up from 7 percent in 2007, its figures show. Banks lost more recruits than any other sector. While Ueno's tally doesn't break out tech the same way, it shows startups alone are attracting 16 percent of this year's class, including six Baker Scholars. The raw survey data listed responses from every scholar but one.
Big banks are fighting back, promising recruits more hours to sleep, the occasional day off and reasonable deadlines. The effort, prompted by the death of a Bank of America Corp. intern in 2013, is driven in part by fear that the brightest students no longer see investment banking as a sustainable career. Goldman Sachs Group Inc. invited celebrity author Deepak Chopra to talk to its staff a few months ago about wellness, relaxation and the value of vacation.
What the banks can't promise is the kind of windfalls that attract graduates to startups. And average pay at investment banks has shriveled since the financial crisis because of a drop in revenue and a greater focus by regulators and shareholders on bonuses. Goldman Sachs per-employee compensation expense fell to $373,265 last year from $661,490 in 2007.
U.S. business schools don't typically release statistics showing where graduates landed until autumn, and Harvard wouldn't comment on Ueno's tally. Kristen Fitzpatrick, managing director of the business school's career and professional development office, said more students are thinking about banking because of the firms' recent efforts.
"The work has been appealing to a lot of people for a while,'' she said. "It's just that the lifestyle needed to get a little better.''
Other business schools are seeing similar trends for a range of reasons. New rules are forcing banks to curtail trading with their own money, pushing investing-focused graduates into hedge funds and buyout firms -- which pay well. The tech boom is luring away entrepreneurs seeking to strike it even richer -- à la Harvard College dropout Mark Zuckerberg.
Banks Losing Allure
While Harvard alumni Jamie Dimon, 59, and Lloyd Blankfein, 60, have amassed fortunes in their decades at Wall Street's biggest banks, such opportunities have diminished following 2008's financial crisis and pale to the quick riches possible in Silicon Valley. Dimon, a Baker Scholar, and Blankfein, who earned degrees at Harvard College and Harvard Law School, are each worth about $1.1 billion, according to the Bloomberg Billionaires index. Zuckerberg, the 31-year-old who built Facebook Inc., is worth about $41.2 billion. A Boston banking lawyer has extensive experience in banking and investment law.
At Harvard, it can't help that the pressure on junior bankers has become fodder for coursework, where students are briefed on real-life corporate dilemmas and debate strategies.
"There are several case studies dealing with investment banks wherein students discuss the brutal work environment and incredibly out-of-whack work-life balance,'' Ueno wrote in an e-mail. "The banks' efforts -- their success or lack thereof -- to bring about change have not been discussed, but what is consistently highlighted is the dark side of investment banks.''
Such attitudes vary among schools. When Training the Street, which conducts prep courses for entry-level analysts, surveyed MBA students at more than two dozen campuses this year, banking remained the top pick, drawing 26 percent. Still, buyout firms and hedge funds climbed to 16 percent, up from 11 percent last year.
"I think it's 'the grass is always greener,''' said the training firm's founder, Scott Rostan. "The lifestyle of any financial-services professional can be grueling,'' and an investment fund is "not necessarily night-and-day better.''
Bankers who graduated from the Wharton School of the University of Pennsylvania later expressed the lowest job satisfaction, despite relatively high pay, during a study conducted by Matthew Bidwell, an associate professor of management there. Usually, the two are positively correlated, he said.
"Being at somebody else's beck and call, I think it grinds people down,'' Bidwell said. "It's an extreme kind of long hours, whatever-it-takes, no-boundaries kind of culture.''
"The hours are horrendous, you won't see your family, you will miss your kids' birthdays.'' -- Alexandra Michel. An LA CPA provides a wide range of services to businesses in a variety of industries.
Alexandra Michel, an adjunct professor at the University of Pennsylvania, said that won't dissuade some MBAs from entering the field, particularly if it's to join a top-tier firm such as Goldman Sachs. She spent 12 years studying the culture at investment banks and has tried warning students.
"The hours are horrendous, you won't see your family, you will miss your kids' birthdays,'' she recalled telling them. "The candidate breathes a sigh of relief and says, 'Oh, I can deal with that.'''
Representatives from top investment banks said they're still drawing plenty of business school graduates. Goldman Sachs received more MBA applicants this year for its summer associate program, a feeder for the firm's full-time associate positions, according to Leslie Shribman, a spokeswoman.
"We continue to see strong interest in our programs from students at top MBA schools across the nation,'' said John Yiannacopoulos, a spokesman for Bank of America.
Gandhi, who played drums for M.I.A. on the rapper's international tour during her first year at Harvard, said her father, who was an investment banker, never encouraged her to enter the field. She took a job at the music-streaming service Spotify Ltd.
"When I first met people at HBS and they had worked in a bank, I would pick up on them feeling like they were almost ashamed,'' Gandhi said. "And maybe that wasn't the case when my dad was there 25 years ago, when being at an investment bank meant you were a baller.''
Showing posts with label Goldman Sachs. Show all posts
Showing posts with label Goldman Sachs. Show all posts
Thursday, August 13, 2015
Thursday, October 28, 2010
Shrinking Bank Revenue Signals Dawn of `Worst' Growth Decade
Bloomberg
Shrinking revenue at U.S. banks, led by Goldman Sachs Group Inc. and Citigroup Inc., may continue to fall as the industry heads into what could be its slowest period of growth since the Great Depression.
After the six largest U.S. banks posted record revenue in 2009, combined net revenue fell by an average of 8 percent in the third quarter from a year earlier and 16.3 percent over the last two quarters, according to data compiled by Bloomberg. Revenue so far this year is down by 4.1 percent, driven by declines in everything from trading at Goldman Sachs to home lending at Bank of America Corp. New laws restricting account and credit-card fees, as well as derivatives and capital rules, are also squeezing lenders.
Next year will kick off a decade that will bring the “worst revenue growth” for U.S. banks in 80 years, according to Mike Mayo, a banking analyst at Credit Agricole Securities USA Inc. in New York. Net revenue at U.S. commercial lenders has expanded at a slower pace in each of the last three decades, falling to 6 percent in the last decade from 12 percent in the 1970s, according to Federal Deposit Insurance Corp. data.
“Revenues aren’t just weak for this quarter, or even for this upcoming year, but for the entire upcoming decade,” said Mayo, a former Federal Reserve analyst who has more than 20 years of industry experience. “The speed limit’s been lowered for how fast banks can drive earnings.”
The trend over the last two quarters is hitting almost every line of income statements and is spread across the sector, affecting investment banks, consumer banks and commercial lenders. It’s eating away at profits, depressing stock prices and threatening bonuses and new hiring.
BofA, JPMorgan
The 17.6 percent drop in net revenue since March 31 at Charlotte, North Carolina-based Bank of America, the largest U.S. bank by assets, came mostly from its mortgage-lending and credit-card businesses. The company reported a $7.3 billion loss in the third quarter after taking a $10.4 billion goodwill writedown against new debit-card laws.
JPMorgan Chase & Co., where revenue dropped 13.9 percent over the same time frame, has been hurt by bad credit-card loans. Revenue from credit cards at the New York-based lender, the second-largest in the U.S., fell more than 17.6 percent in the third quarter from a year earlier.
The bank’s revenue is also suffering, along with the rest of the industry, from new restrictions on the fees it can charge for credit cards, checking accounts and other consumer services. Chief Executive Officer Jamie Dimon, 54, told analysts Oct. 14 that the bank will lose about $750 million in profit as a result. He also said new derivatives rules will cost $1 billion in lost revenue.
Trading Revenue
Wells Fargo & Co.’s decline of 2.7 percent since the first quarter has come from its community-banking operations. New limits on overdraft fees trimmed revenue at the San Francisco- based lender by $380 million in the third quarter, Chief Financial Officer Howard Atkins told analysts on an Oct. 20 conference call.
Goldman Sachs and Citigroup, whose revenue fell 30 percent and 18 percent over the last two quarters, have been hampered by lower trading results. The two New York-based firms had the biggest drop of the six banks so far this year. Lucas van Praag, a Goldman Sachs spokesman, declined to comment. Shannon Bell, a spokeswoman for Citigroup, said it is “uniquely positioned to take advantage of growth opportunities in the emerging markets.”
Drawing Down Reserves
At Morgan Stanley, a fall in fixed-income and equity trading drove revenue down 25 percent over the six months. Goldman Sachs and New York-based Morgan Stanley posted declines in fixed-income trading revenue of more than 37 percent from a year earlier, while Citigroup’s investment banking revenue was down by 20 percent.
Lower credit costs and a less gloomy housing outlook allowed lenders to draw down reserves and set aside fewer provisions against consumer loan losses. That helped them to remain profitable. Net income for the first nine months was $39.6 billion for the six banks, compared with $39.5 billion for the same period last year. Still, some analysts questioned the growth prospects of an industry that made up as much as 20 percent of the profit from Standard & Poor’s 500 Index companies before the financial crisis, according to Bloomberg data.
“That five- or six-year period during the boom, that was just purchase activity created by credit,” said Christopher Whalen, a former Federal Reserve Bank of New York analyst and co-founder of Institutional Risk Analytics in Torrance, California. “The ‘new normal’ terminology, the cliche we all hate, is absolutely true. When you’ve withdrawn all of this credit from the economy, you’re also taking a component of revenue out.”
40-Year Trend
“We’ll be lucky” if revenue growth for U.S. banks is flat this decade, Whalen said.
Financial companies have trailed the broader equity market this year. The S&P 500 Financials Index is up 1 percent, while the overall S&P 500 Index has climbed 6.3 percent. Bank of America and Morgan Stanley have each fallen more than 17 percent through yesterday, while Citigroup had the only increase among the biggest six, jumping 27 percent before today.
The six largest lenders are trading at an average of 0.9 times their book value, less than half the average level over the last 10 years. Bank of America’s market value is about 53 percent of its book value, while Wells Fargo is trading at 1.2 times its book value.
Declining revenue growth rates for banks is a 40-year trend, according to FDIC data. U.S. banks had compound annual revenue growth of 12 percent from 1970 through 1979, about 10 percent during the 1980s, 8 percent in the 1990s and 6 percent over the most recent decade.
‘Not Your Friend’
“When it comes to decade-long revenue growth for banks, the trend is not your friend,” Mayo said. “Basic traditional banking is likely to remain weak. It’s a slower-growing economy, and banks can’t or shouldn’t try to overcome headwind by reaching for inappropriate risky growth.”
Gross domestic product in the U.S. is projected to grow by 2.7 percent this year, 2.4 percent next year and 3 percent in 2012, according to median estimates of 65 economists surveyed by Bloomberg.
To find growth, banks including JPMorgan are looking to expand their reach overseas, where GDP growth rates are about twice those of the U.S. The bank announced in February plans to double its 4 percent share of the Asian market over the next few years and has expanded its global commodities-trading unit through a $1.7 billion purchase of parts of RBS Sempra Commodities LLP earlier this year.
Brokerage Strategy
Citigroup, which already derives more than two-thirds of its revenue outside the U.S., is “well-aligned with the growth trends we see globally,” CEO Vikram Pandit, 53, told analysts Oct. 18.
Morgan Stanley is looking for growth from its brokerage unit after buying a controlling stake in a joint venture with Citigroup’s Smith Barney, more than doubling its brokerage ranks to about 18,000. Bank of America is also relying on its brokerage unit, Merrill Lynch, to sell investment services to existing bank customers, both in the U.S. and overseas.
Wells Fargo CEO John Stumpf told analysts Oct. 20 that his bank is making up for lost revenue growth by offering customers service across multiple platforms -- where they shop, at ATMs, online, via telephone and mobile banking.
Generating growth will be about “taking share away from other banks,” said Whalen of Institutional Risk Analytics. “At best the global economy will be a zero-sum game.”
Loan Growth
Bank revenue will benefit when loan growth returns, said Christopher Kotowski, an analyst at Oppenheimer & Co. in New York. In the savings and loan crisis of the 1990s, average annual loan volume didn’t grow until two years after the amount of new troubled assets peaked, he wrote in a July note to investors.
Consumer and commercial loans at U.S. banks climbed 0.6 percent in September to $6.8 trillion from a year earlier, the first rise in 15 months, according to data from the Federal Reserve Bank of St. Louis. That compares with an annual growth rate of 11 percent from 2005 through 2007 during the height of the housing boom. Loan volumes peaked at $7.29 trillion in 2008.
“Loan growth and job growth are always the last things to come back,” Kotowski said. “I know people are impatient because there’s a lot of pain out there, but I don’t think there’s a way to jumpstart the process. It needs to run its course.”
Appetites for Risk
William Rogers Jr., president of Atlanta-based SunTrust Banks Inc., told analysts Oct. 21 that large corporate customers are using about 17 percent of their loan capacity, compared with an average of “mid to high 20s.” For mid-size companies, the rate is in the “low 30s,” compared with an historic average in the low to mid 40s, he said. The rate of decline has abated this year, he said.
“I would hope that we’d start to see some kind of increase depending on some type of economic recovery,” he said.
Betsy Graseck, an analyst for Morgan Stanley in New York, said bank revenue will likely shrink this year and next before rebounding in 2012. Consumer loan growth and investor appetites for risk will begin to rise again late next year, she said.
“We’ve got two more years of slog and workout,” Graseck said. “We see the light at the end of the tunnel. It’s a faint glimmer, and it’s growing brighter over the course of the next two years.”
Operating Margins
Bank revenue in the first quarter surged in part because of two government programs designed to revive the U.S. housing market -- the Fed’s $1.25 trillion mortgage-bond purchase program that ended in March and a homebuyer tax credit that expired in April. Revenue has been weak since.
Expenses aren’t falling as fast as revenue at the six largest banks, which is squeezing their operating margins. Non- interest expenses, including compensation and rent, fell 3 percent in the third quarter from a year earlier. The overhead ratio for the six banks -- non-interest expenses divided by revenue -- climbed to more than 60 percent for the first time since the height of the financial crisis in 2008.
That helped lead to Bank of America and Morgan Stanley posting the first quarterly per-share losses this year among the six banks.
Dividend Impact
Slower revenue growth could hinder banks’ plans to raise dividends. The six banks currently pay quarterly dividends totaling 51 cents, down from $2.49 in 2007. JPMorgan’s Dimon told investors earlier this month that he hopes to raise his bank’s dividend in the first quarter of next year, and Wells Fargo’s Atkins said last week that an increase is a “top priority” for the bank.
Banks also may be forced to cut pay and headcount to control bank risk management if the revenue decline continues. Goldman Sachs reduced the amount it set aside for compensation in the first nine months of the year, as did the investment banking divisions at Morgan Stanley and JPMorgan. U.S. securities firms may cut as many as 80,000 jobs in the next 18 months as revenue growth slows, bank analyst Meredith Whitney, founder of New York-based Meredith Whitney Advisory Group LLC, said last month.
The size of the biggest banks places them at a disadvantage to increase revenue relative to smaller competitors.
“Size is a problem -- there are four banks that are over $1 trillion in assets, and it’s really tough for them to grow,” said Thomas Brown, CEO of Second Curve Capital LLC, a New York hedge fund that focuses on financial institutions. “The smaller banks have other issues, but their growth prospects are much better.”
After the six largest U.S. banks posted record revenue in 2009, combined net revenue fell by an average of 8 percent in the third quarter from a year earlier and 16.3 percent over the last two quarters, according to data compiled by Bloomberg. Revenue so far this year is down by 4.1 percent, driven by declines in everything from trading at Goldman Sachs to home lending at Bank of America Corp. New laws restricting account and credit-card fees, as well as derivatives and capital rules, are also squeezing lenders.
Next year will kick off a decade that will bring the “worst revenue growth” for U.S. banks in 80 years, according to Mike Mayo, a banking analyst at Credit Agricole Securities USA Inc. in New York. Net revenue at U.S. commercial lenders has expanded at a slower pace in each of the last three decades, falling to 6 percent in the last decade from 12 percent in the 1970s, according to Federal Deposit Insurance Corp. data.
“Revenues aren’t just weak for this quarter, or even for this upcoming year, but for the entire upcoming decade,” said Mayo, a former Federal Reserve analyst who has more than 20 years of industry experience. “The speed limit’s been lowered for how fast banks can drive earnings.”
The trend over the last two quarters is hitting almost every line of income statements and is spread across the sector, affecting investment banks, consumer banks and commercial lenders. It’s eating away at profits, depressing stock prices and threatening bonuses and new hiring.
BofA, JPMorgan
The 17.6 percent drop in net revenue since March 31 at Charlotte, North Carolina-based Bank of America, the largest U.S. bank by assets, came mostly from its mortgage-lending and credit-card businesses. The company reported a $7.3 billion loss in the third quarter after taking a $10.4 billion goodwill writedown against new debit-card laws.
JPMorgan Chase & Co., where revenue dropped 13.9 percent over the same time frame, has been hurt by bad credit-card loans. Revenue from credit cards at the New York-based lender, the second-largest in the U.S., fell more than 17.6 percent in the third quarter from a year earlier.
The bank’s revenue is also suffering, along with the rest of the industry, from new restrictions on the fees it can charge for credit cards, checking accounts and other consumer services. Chief Executive Officer Jamie Dimon, 54, told analysts Oct. 14 that the bank will lose about $750 million in profit as a result. He also said new derivatives rules will cost $1 billion in lost revenue.
Trading Revenue
Wells Fargo & Co.’s decline of 2.7 percent since the first quarter has come from its community-banking operations. New limits on overdraft fees trimmed revenue at the San Francisco- based lender by $380 million in the third quarter, Chief Financial Officer Howard Atkins told analysts on an Oct. 20 conference call.
Goldman Sachs and Citigroup, whose revenue fell 30 percent and 18 percent over the last two quarters, have been hampered by lower trading results. The two New York-based firms had the biggest drop of the six banks so far this year. Lucas van Praag, a Goldman Sachs spokesman, declined to comment. Shannon Bell, a spokeswoman for Citigroup, said it is “uniquely positioned to take advantage of growth opportunities in the emerging markets.”
Drawing Down Reserves
At Morgan Stanley, a fall in fixed-income and equity trading drove revenue down 25 percent over the six months. Goldman Sachs and New York-based Morgan Stanley posted declines in fixed-income trading revenue of more than 37 percent from a year earlier, while Citigroup’s investment banking revenue was down by 20 percent.
Lower credit costs and a less gloomy housing outlook allowed lenders to draw down reserves and set aside fewer provisions against consumer loan losses. That helped them to remain profitable. Net income for the first nine months was $39.6 billion for the six banks, compared with $39.5 billion for the same period last year. Still, some analysts questioned the growth prospects of an industry that made up as much as 20 percent of the profit from Standard & Poor’s 500 Index companies before the financial crisis, according to Bloomberg data.
“That five- or six-year period during the boom, that was just purchase activity created by credit,” said Christopher Whalen, a former Federal Reserve Bank of New York analyst and co-founder of Institutional Risk Analytics in Torrance, California. “The ‘new normal’ terminology, the cliche we all hate, is absolutely true. When you’ve withdrawn all of this credit from the economy, you’re also taking a component of revenue out.”
40-Year Trend
“We’ll be lucky” if revenue growth for U.S. banks is flat this decade, Whalen said.
Financial companies have trailed the broader equity market this year. The S&P 500 Financials Index is up 1 percent, while the overall S&P 500 Index has climbed 6.3 percent. Bank of America and Morgan Stanley have each fallen more than 17 percent through yesterday, while Citigroup had the only increase among the biggest six, jumping 27 percent before today.
The six largest lenders are trading at an average of 0.9 times their book value, less than half the average level over the last 10 years. Bank of America’s market value is about 53 percent of its book value, while Wells Fargo is trading at 1.2 times its book value.
Declining revenue growth rates for banks is a 40-year trend, according to FDIC data. U.S. banks had compound annual revenue growth of 12 percent from 1970 through 1979, about 10 percent during the 1980s, 8 percent in the 1990s and 6 percent over the most recent decade.
‘Not Your Friend’
“When it comes to decade-long revenue growth for banks, the trend is not your friend,” Mayo said. “Basic traditional banking is likely to remain weak. It’s a slower-growing economy, and banks can’t or shouldn’t try to overcome headwind by reaching for inappropriate risky growth.”
Gross domestic product in the U.S. is projected to grow by 2.7 percent this year, 2.4 percent next year and 3 percent in 2012, according to median estimates of 65 economists surveyed by Bloomberg.
To find growth, banks including JPMorgan are looking to expand their reach overseas, where GDP growth rates are about twice those of the U.S. The bank announced in February plans to double its 4 percent share of the Asian market over the next few years and has expanded its global commodities-trading unit through a $1.7 billion purchase of parts of RBS Sempra Commodities LLP earlier this year.
Brokerage Strategy
Citigroup, which already derives more than two-thirds of its revenue outside the U.S., is “well-aligned with the growth trends we see globally,” CEO Vikram Pandit, 53, told analysts Oct. 18.
Morgan Stanley is looking for growth from its brokerage unit after buying a controlling stake in a joint venture with Citigroup’s Smith Barney, more than doubling its brokerage ranks to about 18,000. Bank of America is also relying on its brokerage unit, Merrill Lynch, to sell investment services to existing bank customers, both in the U.S. and overseas.
Wells Fargo CEO John Stumpf told analysts Oct. 20 that his bank is making up for lost revenue growth by offering customers service across multiple platforms -- where they shop, at ATMs, online, via telephone and mobile banking.
Generating growth will be about “taking share away from other banks,” said Whalen of Institutional Risk Analytics. “At best the global economy will be a zero-sum game.”
Loan Growth
Bank revenue will benefit when loan growth returns, said Christopher Kotowski, an analyst at Oppenheimer & Co. in New York. In the savings and loan crisis of the 1990s, average annual loan volume didn’t grow until two years after the amount of new troubled assets peaked, he wrote in a July note to investors.
Consumer and commercial loans at U.S. banks climbed 0.6 percent in September to $6.8 trillion from a year earlier, the first rise in 15 months, according to data from the Federal Reserve Bank of St. Louis. That compares with an annual growth rate of 11 percent from 2005 through 2007 during the height of the housing boom. Loan volumes peaked at $7.29 trillion in 2008.
“Loan growth and job growth are always the last things to come back,” Kotowski said. “I know people are impatient because there’s a lot of pain out there, but I don’t think there’s a way to jumpstart the process. It needs to run its course.”
Appetites for Risk
William Rogers Jr., president of Atlanta-based SunTrust Banks Inc., told analysts Oct. 21 that large corporate customers are using about 17 percent of their loan capacity, compared with an average of “mid to high 20s.” For mid-size companies, the rate is in the “low 30s,” compared with an historic average in the low to mid 40s, he said. The rate of decline has abated this year, he said.
“I would hope that we’d start to see some kind of increase depending on some type of economic recovery,” he said.
Betsy Graseck, an analyst for Morgan Stanley in New York, said bank revenue will likely shrink this year and next before rebounding in 2012. Consumer loan growth and investor appetites for risk will begin to rise again late next year, she said.
“We’ve got two more years of slog and workout,” Graseck said. “We see the light at the end of the tunnel. It’s a faint glimmer, and it’s growing brighter over the course of the next two years.”
Operating Margins
Bank revenue in the first quarter surged in part because of two government programs designed to revive the U.S. housing market -- the Fed’s $1.25 trillion mortgage-bond purchase program that ended in March and a homebuyer tax credit that expired in April. Revenue has been weak since.
Expenses aren’t falling as fast as revenue at the six largest banks, which is squeezing their operating margins. Non- interest expenses, including compensation and rent, fell 3 percent in the third quarter from a year earlier. The overhead ratio for the six banks -- non-interest expenses divided by revenue -- climbed to more than 60 percent for the first time since the height of the financial crisis in 2008.
That helped lead to Bank of America and Morgan Stanley posting the first quarterly per-share losses this year among the six banks.
Dividend Impact
Slower revenue growth could hinder banks’ plans to raise dividends. The six banks currently pay quarterly dividends totaling 51 cents, down from $2.49 in 2007. JPMorgan’s Dimon told investors earlier this month that he hopes to raise his bank’s dividend in the first quarter of next year, and Wells Fargo’s Atkins said last week that an increase is a “top priority” for the bank.
Banks also may be forced to cut pay and headcount to control bank risk management if the revenue decline continues. Goldman Sachs reduced the amount it set aside for compensation in the first nine months of the year, as did the investment banking divisions at Morgan Stanley and JPMorgan. U.S. securities firms may cut as many as 80,000 jobs in the next 18 months as revenue growth slows, bank analyst Meredith Whitney, founder of New York-based Meredith Whitney Advisory Group LLC, said last month.
The size of the biggest banks places them at a disadvantage to increase revenue relative to smaller competitors.
“Size is a problem -- there are four banks that are over $1 trillion in assets, and it’s really tough for them to grow,” said Thomas Brown, CEO of Second Curve Capital LLC, a New York hedge fund that focuses on financial institutions. “The smaller banks have other issues, but their growth prospects are much better.”
Saturday, July 31, 2010
Goldman Sachs Bans use of Colorful Language in E-Mails
The Wall Street Journal
George Carlin Never Would've Cut It at the New Goldman Sachs
Firm Bans Naughty Words in Emails; An 'Unlearnable Lesson' on Wall Street?
Firm Bans Naughty Words in Emails; An 'Unlearnable Lesson' on Wall Street?
There will never be another s— deal at Goldman Sachs Group Inc.
The New York company is telling employees that they will no longer be able to get away with profanity in electronic messages. That means all 34,000 traders, investment bankers and other Goldman employees must restrain themselves from using a vast vocabulary of oft-used dirty words on Wall Street, including the six-letter expletive that came back to haunt the company at a Senate hearing in April.
"[B]oy, that timberwo[l]f was one s— deal," Thomas Montag, who helped run Goldman's securities business, wrote in a June 2007 email that was repeatedly referred to at the hearing.
Mr. Montag, who couldn't be reached for comment, wouldn't be allowed to send that email under Goldman's sanitized communications policy, which is being enforced by screening software. Even swear words spelled with asterisks are out.
A Goldman spokeswoman said: "Of course we have policies about the use of appropriate language and we are always looking for ways to ensure that they are enforced."
The new edict—delivered verbally, of course—has left some employees wondering if the rule also applies to shorthand for expletives such as "WTF" or legitimate terms that sound similar to curses.
In the spirit of the times, there is no written directive specifying which curses now are officially cursed. But screening tools being used by the firm would detect common swear words and acronyms.
Citigroup Inc. and J.P. Morgan Chase & Co. have policies against using swear words in company email, according to the companies. Morgan Stanley tells employees that their email should be "professional, appropriate and courteous at all times," but doesn't specifically forbid naughty words.
NYSE Euronext Inc. "unofficially discourages" the use of profanity on the floor of the New York Stock Exchange, according to a spokesman, and frequently issues memos reminding traders to exercise proper decorum. It began enforcing the policy more aggressively after TV networks started broadcasting live reports from the floor, traders say.
CME Group, which owns trading pits in Chicago and New York, says traders are expected to conduct themselves "with dignity and integrity." Its rulebook stipulates that the "use of profane, obscene or unbusinesslike language on the trading floor" could result in a fine. A first offense could be $1,000, while "an egregious violation" may result in a fine of up to $20,000.
The use of profanity on Wall Street came up at Morgan Stanley's annual meeting in May, where one shareholder asked Chairman John Mack about bad words attributed to bankers and policy makers in "Too Big to Fail," a book about the financial crisis. "The language was probably stronger than what was in the book," Mr. Mack responded, in a nod to the ingrained habit of swearing on Wall Street.
Goldman's employee emails have been a touchy subject ever since the Securities and Exchange Commission accused the firm in April of cheating clients by selling mortgage securities that were secretly designed by a hedge-fund firm to cash in on the housing market's collapse.
This month, Goldman agreed to pay $550 million to settle the civil charges, without admitting or denying the allegations.
In June, Citigroup told employees in a memo that "recent headlines involving inappropriate emails are an important reminder to 'think before writing, read before sending'."
The bank ordered employees to take within one month a 10-minute online course called "Improper Electronic Communications," which included a "briefing" on the "do's and don'ts of electronic communications."
Goldman's no-swearing dictate covers instant messages and texts from company-issued cellphones and emails. Verboten emails could get bounced to the compliance department. Others might be blocked completely, depending on the severity of the language.
There are no set disciplinary measures for offenders, but habitual profaners will be summoned by their managers to discuss cleaning up their language.
The late comedian George Carlin famously aired the issue of taboo lingo in his 1972 monologue, "Seven Words You Can Never Say on Television." One firm with a big presence on trading floors has an even bigger list.
New York-based media company Bloomberg LP says it has monitored emails for more than 10 years, using an application that scans messages for 70 words and phrases—in English and several other languages— considered profane.
When caught, an offending Bloomberg employee gets a pop-up message warning him or her not to send the message, which highlights the naughty word. Depending on the severity of the word, some emails will be blocked altogether from being sent. (The same technology also is available for clients of Bloomberg's terminals.)
"There is case after case of email disaster that is reported in newspapers or media, and you would think that the last thing any rational person would do would be to speak carelessly or use profanity in email," says Kendall Coffey, a former federal prosecutor and now a partner at law firm Coffey Burlington in Miami. "But it seems to be an unlearnable lesson."
Among famous emails is one in which former Merrill Lynch & Co. stock analyst Henry Blodget used the acronym "POS" (a.k.a. "piece of s—") to refer to a tech stock he was touting to the public on behalf of the bank. In 2003, Mr. Blodget agreed to a lifetime ban from the securities industry after touting stocks that he disparaged in private emails. He couldn't be reached for comment.
But using software to screen for obscenities doesn't always work. Satellite-services provider Intelsat SA, of Luxembourg, a few years ago began screening email for profanities. But it found the level of emails that were wrongly captured was too high, and so it dropped the screening. It now relies on a policy of reminding employees of "appropriate language for external use," a spokeswoman said.
And last year, J.P. Morgan had to briefly override its automated profanity detectors so it could write a press release that mentioned a charity called Feel Your Boobies Foundation. That is the name of a Pennsylvania breast-cancer prevention group, which got a grant from the bank.
The New York company is telling employees that they will no longer be able to get away with profanity in electronic messages. That means all 34,000 traders, investment bankers and other Goldman employees must restrain themselves from using a vast vocabulary of oft-used dirty words on Wall Street, including the six-letter expletive that came back to haunt the company at a Senate hearing in April.
"[B]oy, that timberwo[l]f was one s— deal," Thomas Montag, who helped run Goldman's securities business, wrote in a June 2007 email that was repeatedly referred to at the hearing.
Mr. Montag, who couldn't be reached for comment, wouldn't be allowed to send that email under Goldman's sanitized communications policy, which is being enforced by screening software. Even swear words spelled with asterisks are out.
A Goldman spokeswoman said: "Of course we have policies about the use of appropriate language and we are always looking for ways to ensure that they are enforced."
The new edict—delivered verbally, of course—has left some employees wondering if the rule also applies to shorthand for expletives such as "WTF" or legitimate terms that sound similar to curses.
In the spirit of the times, there is no written directive specifying which curses now are officially cursed. But screening tools being used by the firm would detect common swear words and acronyms.
Citigroup Inc. and J.P. Morgan Chase & Co. have policies against using swear words in company email, according to the companies. Morgan Stanley tells employees that their email should be "professional, appropriate and courteous at all times," but doesn't specifically forbid naughty words.
NYSE Euronext Inc. "unofficially discourages" the use of profanity on the floor of the New York Stock Exchange, according to a spokesman, and frequently issues memos reminding traders to exercise proper decorum. It began enforcing the policy more aggressively after TV networks started broadcasting live reports from the floor, traders say.
CME Group, which owns trading pits in Chicago and New York, says traders are expected to conduct themselves "with dignity and integrity." Its rulebook stipulates that the "use of profane, obscene or unbusinesslike language on the trading floor" could result in a fine. A first offense could be $1,000, while "an egregious violation" may result in a fine of up to $20,000.
The use of profanity on Wall Street came up at Morgan Stanley's annual meeting in May, where one shareholder asked Chairman John Mack about bad words attributed to bankers and policy makers in "Too Big to Fail," a book about the financial crisis. "The language was probably stronger than what was in the book," Mr. Mack responded, in a nod to the ingrained habit of swearing on Wall Street.
Goldman's employee emails have been a touchy subject ever since the Securities and Exchange Commission accused the firm in April of cheating clients by selling mortgage securities that were secretly designed by a hedge-fund firm to cash in on the housing market's collapse.
This month, Goldman agreed to pay $550 million to settle the civil charges, without admitting or denying the allegations.
In June, Citigroup told employees in a memo that "recent headlines involving inappropriate emails are an important reminder to 'think before writing, read before sending'."
The bank ordered employees to take within one month a 10-minute online course called "Improper Electronic Communications," which included a "briefing" on the "do's and don'ts of electronic communications."
Goldman's no-swearing dictate covers instant messages and texts from company-issued cellphones and emails. Verboten emails could get bounced to the compliance department. Others might be blocked completely, depending on the severity of the language.
There are no set disciplinary measures for offenders, but habitual profaners will be summoned by their managers to discuss cleaning up their language.
The late comedian George Carlin famously aired the issue of taboo lingo in his 1972 monologue, "Seven Words You Can Never Say on Television." One firm with a big presence on trading floors has an even bigger list.
New York-based media company Bloomberg LP says it has monitored emails for more than 10 years, using an application that scans messages for 70 words and phrases—in English and several other languages— considered profane.
When caught, an offending Bloomberg employee gets a pop-up message warning him or her not to send the message, which highlights the naughty word. Depending on the severity of the word, some emails will be blocked altogether from being sent. (The same technology also is available for clients of Bloomberg's terminals.)
"There is case after case of email disaster that is reported in newspapers or media, and you would think that the last thing any rational person would do would be to speak carelessly or use profanity in email," says Kendall Coffey, a former federal prosecutor and now a partner at law firm Coffey Burlington in Miami. "But it seems to be an unlearnable lesson."
Among famous emails is one in which former Merrill Lynch & Co. stock analyst Henry Blodget used the acronym "POS" (a.k.a. "piece of s—") to refer to a tech stock he was touting to the public on behalf of the bank. In 2003, Mr. Blodget agreed to a lifetime ban from the securities industry after touting stocks that he disparaged in private emails. He couldn't be reached for comment.
But using software to screen for obscenities doesn't always work. Satellite-services provider Intelsat SA, of Luxembourg, a few years ago began screening email for profanities. But it found the level of emails that were wrongly captured was too high, and so it dropped the screening. It now relies on a policy of reminding employees of "appropriate language for external use," a spokeswoman said.
And last year, J.P. Morgan had to briefly override its automated profanity detectors so it could write a press release that mentioned a charity called Feel Your Boobies Foundation. That is the name of a Pennsylvania breast-cancer prevention group, which got a grant from the bank.
Monday, April 26, 2010
The Busted Homes Behind a Big Bet
The Wall Street Journal
Underlying Goldman Deal, a Different Set of Risk-Takers
ABERDEEN TOWNSHIP, N.J.—The government's civil-fraud allegation against Goldman Sachs Group Inc. centers on a deal the firm crafted so that hedge-fund king John Paulson could bet on a collapse in U.S. housing prices.
It was a dizzyingly complex transaction, involving 90 bonds and a 65-page deal sheet. But it all boiled down to whether people like Stella Onyeukwu, Gheorghe Bledea and Jack Booket could pay their mortgages.
They couldn't, and Mr. Paulson made $1 billion as a result.
Mr. Booket, a 44-year-old heating and air-conditioning repairman, owed $300,000 on his three-bedroom home in Aberdeen Township. His house was one of thousands that wound up in a pool of mortgages that were referenced in the so-called collateralized debt obligation, or CDO, which Goldman created for Mr. Paulson. The hedge-fund manager invested heavily in a form of insurance that could yield huge gains if the borrowers grew unable to pay.
In 2006, Mr. Booket got hit by a car while riding a motorcycle from a late-night party, was unable to find much work and couldn't pay the bank. In October 2008, he lost the house to foreclosure and plans to move out by next week. He says he bears no grudge against Mr. Paulson and Goldman.
"The man came up with a scheme to get rich, and he did it," says Mr. Booket, who had refinanced his mortgage just months before the accident. "So more power to him."
More than half of the 500,000 mortgages from 48 states contained in the Goldman deal—known as Abacus 2007-AC1—are now in default or foreclosed.
Mr. Paulson didn't have any direct involvement in the mortgages contained in the Goldman deal under scrutiny by the Securities and Exchange Commission. And the bets that Mr. Paulson placed on Abacus didn't affect whether or not homeowners defaulted. Rather, he used Wall Street to help structure hugely lucrative side bets that homeowners such as Mr. Booket couldn't make their monthly mortgage payments.
One loser in the deal, German bank IKB Deutsche Industriebank AG, saw most of its $150 million Abacus investment evaporate. It had believed that borrowers broadly could afford the loans. The bank says it is cooperating with the SEC's inquiry.
"There's no question we made money in these transactions," said a Paulson spokesman in a statement. "However, all our dealings were through arms-length transactions with experienced counterparties who had opposing views based on all available information at the time. We were straightforward in our dislike of these securities but the vast majority of people in the market thought we were dead wrong and openly and aggressively purchased the securities we were selling."
Some of the people whose mortgages underpinned Mr. Paulson's wager were themselves taking a gamble—that U.S. housing prices would continue to march upward, making it possible for them to eventually pay off loans they couldn't afford.
The Wall Street Journal identified homeowners in the Abacus portfolio by taking the 90 bonds listed in a February 2007 Abacus pitchbook and matching them with court records, foreclosure listings, title records and loan servicing reports. The bonds contained nearly 500,000 mortgage loans.
One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house in a subdivision called Highlands Ranch. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.
Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55%—but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000.
She defaulted in early 2008 and was evicted from the house in early 2009.
Fremont didn't respond to requests for comment.
In early 2007, Paulson was identifying different bonds from across the country that it wanted to place bets against. Paolo Pellegrini, Mr. Paulson's right-hand man, began working with Goldman trader Fabrice Tourre to choose bonds for the Abacus portfolio, say people familiar with the deal.
Abacus was a "synthetic" CDO, meaning that it didn't contain any actual bonds. Rather, it allowed Paulson's firm to buy insurance on bonds it didn't own. If the bonds performed well, Paulson would make a steady stream of small payments—much like insurance premiums. If they performed poorly, Paulson would receive potentially large payouts.
According to the SEC complaint, Mr. Paulson especially wanted to find risky subprime adjustable-rate mortgages that had been given to borrowers with low credit scores who lived in California, Arizona, Florida, and Nevada—states with big spikes in home prices that he reckoned would crash.
Mr. Pellegrini and a colleague had purchased an enormous database capable of tracking the characteristics of more than six million mortgages in various parts of the country. They spent long hours scouring it all, according to people familiar with the matter.
The home mortgage of Gheorghe Bledea was among those that wound up in the Abacus portfolio.
In May of 2006, a broker had approached Mr. Bledea, a Romanian immigrant, to pitch him a deal on a loan to refinance the existing mortgage on his Folsom, Calif., home.
Mr. Bledea, who is suing his lender in Superior Court of California in Sacramento on allegations that he was defrauded, wanted a 30-year fixed-rate loan, according to his complaint. His broker told him the only one available was an adjustable-rate mortgage carrying an 8% interest rate, according his court filing.
Mr. Bledea, who says he has limited English-speaking skills, was told that he'd be able to exit the risky loan in six months and refinance into yet another one carrying a lower 1% rate. Mr. Bledea agreed to take out the $531,000 loan on July 21, 2006.
The new loan never materialized. Within months, Mr. Bledea and his family were struggling under the weight of a $5,800 monthly note, says his son, Joe Bledea.
"We were putting ourselves in a lot of debt," Joe Bledea says. By spring of 2009, the loan was in default. The elder Mr. Bledea is now appealing to the court to avoid eviction from his ranch-style house, says family attorney Will Ramey.
The loan, underwritten by Washington Mutual, itself had moved through the U.S. mortgage machine.
It was put into a debt pool, or residential-mortgage backed security, with the arcane name of Long Beach Mortgage Loan Trust 2006-8.
A spokesman for J.P. Morgan Chase & Co., which acquired WaMu in September of 2008, said the bank was unable to comment on the loan.
By mid-October of 2007, just seven months after Abacus was formed, 83% of the bonds in its portfolio had been downgraded. By then, sheriff departments across the U.S. were seizing homes and putting them up for sale at public auction as souring Abacus-related loans metastasized.
In Dayton, Ohio, a two-story home that served as collateral for Abacus now stands empty. The house was purchased for $75,000 in 2006 by a borrower who used a subprime loan from a California-based mortgage bank. That $67,500 loan was placed into a pool called Structured Asset Investment Loan Trust 2006-4, which underpinned Abacus.
After the borrower defaulted, the trust acquired the home through foreclosure in October 2007 and resold it to an investor in April 2008 for $7,500, a tenth of the price paid two years before.
Neighbor Lonnie Ross, sitting on the porch Tuesday morning while enjoying a cigarette, says most homes on the block are vacant or occupied by squatters.
Inside the unoccupied house, which is missing its front door knob, hardwood floors are strewn with old bills. A fake Christmas tree is still decorated with candy canes. Instant pudding and other discarded food litters the kitchen. Dirty dishes are soaking in a sink.
A few blocks away, a homemade sign reads: "This community is dead already. We need leadership to rebuild this community. Too many run down houses need to be torn down."
But not all homes have gone south.
In a wealthy Denver neighborhood, neighbors are thrilled that Joel Champagne rescued a house on East Alameda Circle, where a previous mortgage was contained in the Abacus deal via a pool called First Franklin Mortgage Loan Trust 2006-FF9.
Mr. Champagne bought the home last year for $370,000. The prior owner, according to title records, had paid $1.2 million, borrowing the entire amount from First Franklin. The owner had started on a renovation and then vanished, says Mr. Champagne and neighbors, leaving the home with no plumbing, wiring or roof shingles.
Today, kids' chalk drawings are scrawled across the drive and hyacinths are starting to peep through the flower beds.
"I'm very fortunate. We capitalized on the market and we were very fortunate to be in a position to do that," says the 45-year- old. "I don't know enough details to say if I'm upset with Goldman Sachs or whoever. The problem's bigger than that. Everyone made a lot of mistakes back then."
It was a dizzyingly complex transaction, involving 90 bonds and a 65-page deal sheet. But it all boiled down to whether people like Stella Onyeukwu, Gheorghe Bledea and Jack Booket could pay their mortgages.
They couldn't, and Mr. Paulson made $1 billion as a result.
Mr. Booket, a 44-year-old heating and air-conditioning repairman, owed $300,000 on his three-bedroom home in Aberdeen Township. His house was one of thousands that wound up in a pool of mortgages that were referenced in the so-called collateralized debt obligation, or CDO, which Goldman created for Mr. Paulson. The hedge-fund manager invested heavily in a form of insurance that could yield huge gains if the borrowers grew unable to pay.
In 2006, Mr. Booket got hit by a car while riding a motorcycle from a late-night party, was unable to find much work and couldn't pay the bank. In October 2008, he lost the house to foreclosure and plans to move out by next week. He says he bears no grudge against Mr. Paulson and Goldman.
"The man came up with a scheme to get rich, and he did it," says Mr. Booket, who had refinanced his mortgage just months before the accident. "So more power to him."
More than half of the 500,000 mortgages from 48 states contained in the Goldman deal—known as Abacus 2007-AC1—are now in default or foreclosed.
Mr. Paulson didn't have any direct involvement in the mortgages contained in the Goldman deal under scrutiny by the Securities and Exchange Commission. And the bets that Mr. Paulson placed on Abacus didn't affect whether or not homeowners defaulted. Rather, he used Wall Street to help structure hugely lucrative side bets that homeowners such as Mr. Booket couldn't make their monthly mortgage payments.
One loser in the deal, German bank IKB Deutsche Industriebank AG, saw most of its $150 million Abacus investment evaporate. It had believed that borrowers broadly could afford the loans. The bank says it is cooperating with the SEC's inquiry.
"There's no question we made money in these transactions," said a Paulson spokesman in a statement. "However, all our dealings were through arms-length transactions with experienced counterparties who had opposing views based on all available information at the time. We were straightforward in our dislike of these securities but the vast majority of people in the market thought we were dead wrong and openly and aggressively purchased the securities we were selling."
Some of the people whose mortgages underpinned Mr. Paulson's wager were themselves taking a gamble—that U.S. housing prices would continue to march upward, making it possible for them to eventually pay off loans they couldn't afford.
The Wall Street Journal identified homeowners in the Abacus portfolio by taking the 90 bonds listed in a February 2007 Abacus pitchbook and matching them with court records, foreclosure listings, title records and loan servicing reports. The bonds contained nearly 500,000 mortgage loans.
One mortgage in the Abacus pool was held by Ms. Onyeukwu, a 43-year-old nursing-home assistant in Pittsburg, Calif. Ms. Onyeukwu already was under financial strain in 2006, when she applied to Fremont Investment & Loan for a new mortgage on her two-story, six-bedroom house in a subdivision called Highlands Ranch. With pre-tax income of about $9,000 a month from a child-care business, she says she was having a hard time making the $5,000 monthly payments on her existing $688,000 mortgage, which carried an initial interest rate of 9.05%.
Nonetheless, she took out an even bigger loan from Fremont, which lent her $786,250 at an initial interest rate of 7.55%—but that would begin to float as high as 13.55% two years later. She says the monthly payment on the new loan came to a bit more than $5,000.
She defaulted in early 2008 and was evicted from the house in early 2009.
Fremont didn't respond to requests for comment.
In early 2007, Paulson was identifying different bonds from across the country that it wanted to place bets against. Paolo Pellegrini, Mr. Paulson's right-hand man, began working with Goldman trader Fabrice Tourre to choose bonds for the Abacus portfolio, say people familiar with the deal.
Abacus was a "synthetic" CDO, meaning that it didn't contain any actual bonds. Rather, it allowed Paulson's firm to buy insurance on bonds it didn't own. If the bonds performed well, Paulson would make a steady stream of small payments—much like insurance premiums. If they performed poorly, Paulson would receive potentially large payouts.
According to the SEC complaint, Mr. Paulson especially wanted to find risky subprime adjustable-rate mortgages that had been given to borrowers with low credit scores who lived in California, Arizona, Florida, and Nevada—states with big spikes in home prices that he reckoned would crash.
Mr. Pellegrini and a colleague had purchased an enormous database capable of tracking the characteristics of more than six million mortgages in various parts of the country. They spent long hours scouring it all, according to people familiar with the matter.
The home mortgage of Gheorghe Bledea was among those that wound up in the Abacus portfolio.
In May of 2006, a broker had approached Mr. Bledea, a Romanian immigrant, to pitch him a deal on a loan to refinance the existing mortgage on his Folsom, Calif., home.
Mr. Bledea, who is suing his lender in Superior Court of California in Sacramento on allegations that he was defrauded, wanted a 30-year fixed-rate loan, according to his complaint. His broker told him the only one available was an adjustable-rate mortgage carrying an 8% interest rate, according his court filing.
Mr. Bledea, who says he has limited English-speaking skills, was told that he'd be able to exit the risky loan in six months and refinance into yet another one carrying a lower 1% rate. Mr. Bledea agreed to take out the $531,000 loan on July 21, 2006.
The new loan never materialized. Within months, Mr. Bledea and his family were struggling under the weight of a $5,800 monthly note, says his son, Joe Bledea.
"We were putting ourselves in a lot of debt," Joe Bledea says. By spring of 2009, the loan was in default. The elder Mr. Bledea is now appealing to the court to avoid eviction from his ranch-style house, says family attorney Will Ramey.
The loan, underwritten by Washington Mutual, itself had moved through the U.S. mortgage machine.
It was put into a debt pool, or residential-mortgage backed security, with the arcane name of Long Beach Mortgage Loan Trust 2006-8.
A spokesman for J.P. Morgan Chase & Co., which acquired WaMu in September of 2008, said the bank was unable to comment on the loan.
By mid-October of 2007, just seven months after Abacus was formed, 83% of the bonds in its portfolio had been downgraded. By then, sheriff departments across the U.S. were seizing homes and putting them up for sale at public auction as souring Abacus-related loans metastasized.
In Dayton, Ohio, a two-story home that served as collateral for Abacus now stands empty. The house was purchased for $75,000 in 2006 by a borrower who used a subprime loan from a California-based mortgage bank. That $67,500 loan was placed into a pool called Structured Asset Investment Loan Trust 2006-4, which underpinned Abacus.
After the borrower defaulted, the trust acquired the home through foreclosure in October 2007 and resold it to an investor in April 2008 for $7,500, a tenth of the price paid two years before.
Neighbor Lonnie Ross, sitting on the porch Tuesday morning while enjoying a cigarette, says most homes on the block are vacant or occupied by squatters.
Inside the unoccupied house, which is missing its front door knob, hardwood floors are strewn with old bills. A fake Christmas tree is still decorated with candy canes. Instant pudding and other discarded food litters the kitchen. Dirty dishes are soaking in a sink.
A few blocks away, a homemade sign reads: "This community is dead already. We need leadership to rebuild this community. Too many run down houses need to be torn down."
But not all homes have gone south.
In a wealthy Denver neighborhood, neighbors are thrilled that Joel Champagne rescued a house on East Alameda Circle, where a previous mortgage was contained in the Abacus deal via a pool called First Franklin Mortgage Loan Trust 2006-FF9.
Mr. Champagne bought the home last year for $370,000. The prior owner, according to title records, had paid $1.2 million, borrowing the entire amount from First Franklin. The owner had started on a renovation and then vanished, says Mr. Champagne and neighbors, leaving the home with no plumbing, wiring or roof shingles.
Today, kids' chalk drawings are scrawled across the drive and hyacinths are starting to peep through the flower beds.
"I'm very fortunate. We capitalized on the market and we were very fortunate to be in a position to do that," says the 45-year- old. "I don't know enough details to say if I'm upset with Goldman Sachs or whoever. The problem's bigger than that. Everyone made a lot of mistakes back then."
Monday, April 19, 2010
Goldman Contends it was Blindsided by Lawsuit
The Wall Street Journal
Goldman Sachs Group Inc. officials said they knew as far back as August 2008 that regulators were examining controversial mortgage securities created by the firm but were stunned by the bombshell civil fraud suit lodged against it Friday, with most having learned about it from news reports.
Firms typically get a chance to settle such suits, but not in this case, Goldman said. The Wall Street giant said it was alerted to the probe in the summer of 2008 and was warned that it might face a suit in July 2009.
It says it then responded in detail to the Securities Exchange Commission's inquiry in September, but heard nothing back from the government until Friday's unveiling of the civil suit. The SEC usually notifies firms ahead of a lawsuit as a courtesy to give them a chance for a last-ditch settlement or to prepare for the public fallout.
The move showed a combative streak from the SEC, which has been under mounting pressure after letting slip through its fingers early probes into the Ponzi scheme of Bernard Madoff and the alleged fraud of Texas financier R. Allen Stanford.
The case, SEC v. Goldman Sachs & Co. and Fabrice Tourre, sets the stage for what could become the signature lawsuit from the financial-crisis era.
It comes at a time when the Obama administration is trying to move through Congress a bill to overhaul financial regulations in the wake of the crisis, legislation that would likely affect the regulation of products used in the Goldman deal. The effort is being resisted by major banks and by Republican lawmakers.
Lawsuits by the SEC are subject to a vote by the agency's five commissioners, and the tally on the Goldman case will be closely watched in Washington, as the current commission is split along party lines—with two Republicans and two Democrats, plus one independent who was appointed by President Obama.
The way the SEC launched the suit "certainly doesn't follow the spirit" or practice of the agency, said Paul Atkins, who served as a Republican SEC commissioner last decade.
An SEC spokesman said the agency followed standard practices in pursuing the case. The SEC said the suit's timing wasn't influenced by external events.
White House spokeswoman Jen Psaki noted that the SEC is an independent agency, "and it does not coordinate with the White House the announcement of its enforcement actions. We were not given advance notice at the White House about the announcement."
The SEC suit centers on a deal Goldman structured by the name of Abacus. In early 2007, Goldman was helping one of its clients, hedge fund Paulson & Co., design a security known as a collateralized debt obligation, which was built out of a set of risky mortgage assets that the fund and founder John Paulson helped select. Paulson then placed a "short" bet that mortgages contained in the Abacus CDO would fall in value. The CDO had three investors: Paulson, securities firm ACA Capital Ltd. and German bank IKB Deutsche Industriebank AG.
The SEC alleges that Goldman should have disclosed Mr. Paulson's involvement in creating the portfolio and his bearish bet. The portfolio quickly lost value and delivered huge returns for the hedge fund. Both Goldman and Paulson say the nature of the deal and the sophisticated investors involved meant that no such disclosure was necessary.
Goldman said it first heard from the SEC about the investigation in August 2008, when it received a subpoena from attorneys requesting documents related to the transaction.
It sent about eight million pages, said a person familiar with the matter.
Five Goldman employees, including Fabrice Tourre, the trader involved in marketing Abacus who was named as a defendant by the SEC, were interviewed, say people familiar with the matter. Mr. Tourre has not responded to repeated requests for comment.
In July 2009, Goldman and Mr. Tourre received so-called Wells notices from the SEC. Such notices are a formal warning that regulators intend to file civil charges, and serve as a point of negotiation about a settlement. By September 2009, both Goldman and Mr. Tourre had responded to the charges in a 41-page document, according to people familiar with the matter.
The gist of Goldman's defense: The disclosure of Mr. Paulson's involvement would not have had any real effect on buyers of the CDO created by Goldman.
"If this matter is litigated, Goldman Sachs is confident that a fuller record...will underscore that no one in fact considered Paulson's role important and that no one was misled," Goldman told the SEC in September 2009, in a document reviewed by The Wall Street Journal.
That was the last contact Goldman had with the SEC about the matter until late March, when Goldman placed a phone call inquiring about the case.
The call wasn't returned, Goldman said. On Friday, the SEC moved ahead with charges, stunning Goldman officials. Perhaps more than any other Wall Street firm, Goldman has been steadfast in defending its actions during the credit boom.
As employees gathered around television sets Friday, they groused about getting scapegoated in Washington.
The SEC's enforcement division, meanwhile, has been under pressure to show it has teeth. Last fall, federal Judge Jed Rakoff rejected as too lenient the SEC's proposed $33 million settlement with Bank of America over disclosures made to shareholders about its takeover of Merrill Lynch.
Firms typically get a chance to settle such suits, but not in this case, Goldman said. The Wall Street giant said it was alerted to the probe in the summer of 2008 and was warned that it might face a suit in July 2009.
It says it then responded in detail to the Securities Exchange Commission's inquiry in September, but heard nothing back from the government until Friday's unveiling of the civil suit. The SEC usually notifies firms ahead of a lawsuit as a courtesy to give them a chance for a last-ditch settlement or to prepare for the public fallout.
The move showed a combative streak from the SEC, which has been under mounting pressure after letting slip through its fingers early probes into the Ponzi scheme of Bernard Madoff and the alleged fraud of Texas financier R. Allen Stanford.
The case, SEC v. Goldman Sachs & Co. and Fabrice Tourre, sets the stage for what could become the signature lawsuit from the financial-crisis era.
It comes at a time when the Obama administration is trying to move through Congress a bill to overhaul financial regulations in the wake of the crisis, legislation that would likely affect the regulation of products used in the Goldman deal. The effort is being resisted by major banks and by Republican lawmakers.
Lawsuits by the SEC are subject to a vote by the agency's five commissioners, and the tally on the Goldman case will be closely watched in Washington, as the current commission is split along party lines—with two Republicans and two Democrats, plus one independent who was appointed by President Obama.
The way the SEC launched the suit "certainly doesn't follow the spirit" or practice of the agency, said Paul Atkins, who served as a Republican SEC commissioner last decade.
An SEC spokesman said the agency followed standard practices in pursuing the case. The SEC said the suit's timing wasn't influenced by external events.
White House spokeswoman Jen Psaki noted that the SEC is an independent agency, "and it does not coordinate with the White House the announcement of its enforcement actions. We were not given advance notice at the White House about the announcement."
The SEC suit centers on a deal Goldman structured by the name of Abacus. In early 2007, Goldman was helping one of its clients, hedge fund Paulson & Co., design a security known as a collateralized debt obligation, which was built out of a set of risky mortgage assets that the fund and founder John Paulson helped select. Paulson then placed a "short" bet that mortgages contained in the Abacus CDO would fall in value. The CDO had three investors: Paulson, securities firm ACA Capital Ltd. and German bank IKB Deutsche Industriebank AG.
The SEC alleges that Goldman should have disclosed Mr. Paulson's involvement in creating the portfolio and his bearish bet. The portfolio quickly lost value and delivered huge returns for the hedge fund. Both Goldman and Paulson say the nature of the deal and the sophisticated investors involved meant that no such disclosure was necessary.
Goldman said it first heard from the SEC about the investigation in August 2008, when it received a subpoena from attorneys requesting documents related to the transaction.
It sent about eight million pages, said a person familiar with the matter.
Five Goldman employees, including Fabrice Tourre, the trader involved in marketing Abacus who was named as a defendant by the SEC, were interviewed, say people familiar with the matter. Mr. Tourre has not responded to repeated requests for comment.
In July 2009, Goldman and Mr. Tourre received so-called Wells notices from the SEC. Such notices are a formal warning that regulators intend to file civil charges, and serve as a point of negotiation about a settlement. By September 2009, both Goldman and Mr. Tourre had responded to the charges in a 41-page document, according to people familiar with the matter.
The gist of Goldman's defense: The disclosure of Mr. Paulson's involvement would not have had any real effect on buyers of the CDO created by Goldman.
"If this matter is litigated, Goldman Sachs is confident that a fuller record...will underscore that no one in fact considered Paulson's role important and that no one was misled," Goldman told the SEC in September 2009, in a document reviewed by The Wall Street Journal.
That was the last contact Goldman had with the SEC about the matter until late March, when Goldman placed a phone call inquiring about the case.
The call wasn't returned, Goldman said. On Friday, the SEC moved ahead with charges, stunning Goldman officials. Perhaps more than any other Wall Street firm, Goldman has been steadfast in defending its actions during the credit boom.
As employees gathered around television sets Friday, they groused about getting scapegoated in Washington.
The SEC's enforcement division, meanwhile, has been under pressure to show it has teeth. Last fall, federal Judge Jed Rakoff rejected as too lenient the SEC's proposed $33 million settlement with Bank of America over disclosures made to shareholders about its takeover of Merrill Lynch.
U.K., Germany Plan to Seek Information on Goldman
The Wall Street Journal
The U.K. and Germany said their financial regulators would seek information from the U.S. Securities and Exchange Commission about the case in which Goldman Sachs Group Inc. is accused of defrauding investors, in order to establish whether British and German banks were victims of wrongdoing.
The two countries count as Goldman's most important markets in Europe, and government investigations there would be another challenge for Goldman as it tries to fend off the charges in the U.S.
On Sunday, U.K. Prime Minister Gordon Brown said he would instruct the Financial Services Authority to conduct an immediate special investigation into how Goldman's alleged actions affected British banks, including the Royal Bank of Scotland Group PLC.
"There is a moral bankruptcy reflected in what I am reading about and hearing about," Mr. Brown told the BBC's Andrew Marr show.
Mr. Brown's statement came after a spokesman for German Chancellor Angela Merkel said Germany's financial regulator Bafin would ask the SEC for information as a possible prelude to legal action in Germany.
"First we must ask for the documents, then evaluate [them] and then decide about legal steps," said the chancellor's spokesman over the weekend.
A spokesman for Goldman Sachs declined to comment.
The threats of possible legal action against Goldman in Europe are a sign of the continuing anger at banks among European voters and officials, many of whom believe that Goldman and other banks, having benefited from bailouts by their respective governments, have reverted to the kind of risky trading that led to the financial crisis.
The U.S. government alleges Goldman sold mortgage investments without telling buyers they were crafted with input from a client who was betting against them.
RBS, which since the financial crisis has been majority owned by the U.K. government, was a large investor in the Goldman-constructed complex securities at the heart of the SEC case. An RBS spokesman declined to comment.
Germany's interest in the case stems from the fact that IKB Deutsche Industriebank AG bought a significant amount of the collateralized debt obligations in question, contributing to the lender's heavy losses on U.S. mortgage-related securities. Those losses led to a €3.5 billion ($4.73 billion) bailout of IKB in mid-2007, with most of the money coming from IKB's major shareholder, German state bank KfW. An IKB spokeswoman declined to comment.
IKB's near-failure marked the start of an escalating banking crisis in Germany in 2007, which found that numerous state and private-sector banks in Europe's biggest economy had invested and lost heavily in U.S. mortgage-related securities. The losses undermined German officials' claims that the subprime-mortgage crisis was a U.S. problem and forced Germany to announce a €500 billion bailout of its banking sector in October 2008.
The FSA is an independent government agency, and it isn't clear how Mr. Brown's statement will impact the U.K. regulator. A person familiar with the matter said Sunday that the FSA was monitoring the U.S. probe into Goldman and was trying to obtain additional information before deciding whether to formally open its own investigation.
In the U.K., the Goldman case is becoming a political football with too-close-to-call national elections due May 6.
The banking industry, deeply unpopular among the British public in the wake of government bailouts and lofty pay packages, has already been a theme in the elections. Politicians from all parties have been vying to outdo each other with promises to tighten control of banks' risky activities. Goldman's alleged actions, especially at the expense of a bank that later needed a taxpayer bailout, are likely to add fuel to the fire.
On Sunday, U.K. Prime Minister Gordon Brown said he would instruct the Financial Services Authority to conduct an immediate special investigation into how Goldman's alleged actions affected British banks, including the Royal Bank of Scotland Group PLC.
"There is a moral bankruptcy reflected in what I am reading about and hearing about," Mr. Brown told the BBC's Andrew Marr show.
Mr. Brown's statement came after a spokesman for German Chancellor Angela Merkel said Germany's financial regulator Bafin would ask the SEC for information as a possible prelude to legal action in Germany.
"First we must ask for the documents, then evaluate [them] and then decide about legal steps," said the chancellor's spokesman over the weekend.
A spokesman for Goldman Sachs declined to comment.
The threats of possible legal action against Goldman in Europe are a sign of the continuing anger at banks among European voters and officials, many of whom believe that Goldman and other banks, having benefited from bailouts by their respective governments, have reverted to the kind of risky trading that led to the financial crisis.
The U.S. government alleges Goldman sold mortgage investments without telling buyers they were crafted with input from a client who was betting against them.
RBS, which since the financial crisis has been majority owned by the U.K. government, was a large investor in the Goldman-constructed complex securities at the heart of the SEC case. An RBS spokesman declined to comment.
Germany's interest in the case stems from the fact that IKB Deutsche Industriebank AG bought a significant amount of the collateralized debt obligations in question, contributing to the lender's heavy losses on U.S. mortgage-related securities. Those losses led to a €3.5 billion ($4.73 billion) bailout of IKB in mid-2007, with most of the money coming from IKB's major shareholder, German state bank KfW. An IKB spokeswoman declined to comment.
IKB's near-failure marked the start of an escalating banking crisis in Germany in 2007, which found that numerous state and private-sector banks in Europe's biggest economy had invested and lost heavily in U.S. mortgage-related securities. The losses undermined German officials' claims that the subprime-mortgage crisis was a U.S. problem and forced Germany to announce a €500 billion bailout of its banking sector in October 2008.
The FSA is an independent government agency, and it isn't clear how Mr. Brown's statement will impact the U.K. regulator. A person familiar with the matter said Sunday that the FSA was monitoring the U.S. probe into Goldman and was trying to obtain additional information before deciding whether to formally open its own investigation.
In the U.K., the Goldman case is becoming a political football with too-close-to-call national elections due May 6.
The banking industry, deeply unpopular among the British public in the wake of government bailouts and lofty pay packages, has already been a theme in the elections. Politicians from all parties have been vying to outdo each other with promises to tighten control of banks' risky activities. Goldman's alleged actions, especially at the expense of a bank that later needed a taxpayer bailout, are likely to add fuel to the fire.
Thursday, February 18, 2010
Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’
Bloomberg
Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.
No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
‘Fear the Worst’
The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.
The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.
No ‘Smoking Gun’
Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.
“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.
Cross-Currency Swap
European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.
That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.
“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.
“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
‘Fear the Worst’
The yield on Greek 10-year government bonds jumped to as much as 7.2 percent on Jan. 28 amid the worst crisis in the euro’s 11-year history. The premium, or spread, investors demand to hold Greek 10-year notes instead of German bunds, Europe’s benchmark government securities, widened yesterday by 18 basis points to 323 basis points.
The spread reached 396 basis points last month, the most since the year before the euro’s debut in 1999, compared with an average of 57 basis points in the past decade. A basis point is 0.01 percentage point.
“When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.
No ‘Smoking Gun’
Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”
The swap enabled Greece to improve its budget and deficit and meet a target needed to remain within the region’s single currency. Knowledge of their existence may have changed investors’ perception of the risk associated with Greece, and the price they may have been willing to pay for the country’s securities.
“From what we know, this is an egregious example of a conflict of interest” for Goldman Sachs, MIT’s Johnson said. “Even if the deal had been authorized, it doesn’t let them off the hook.”
A Greek government inquiry this month identified a series of swaps agreements with securities firms that allowed the country to hide its mounting deficit. Greece used the swaps to defer interest payments, causing “long-term damage” to the Greek state, according to the Feb. 1 document, commissioned by the Finance Ministry.
Cross-Currency Swap
European Union officials said this week they only recently became aware of the transaction with Goldman. The swaps don’t necessarily break EU rules, European Commission spokesman Amadeu Altafaj told reporters in Brussels on Feb. 15.
The transaction with Goldman consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, according to Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time.
That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece, Sardelis said. He declined to give specifics on how the swap affected the country’s deficit or debt.
European politicians such as Luxembourg Treasury Minister Jean-Claude Juncker this week criticized Goldman Sachs for arranging the Greek swap and are pressing the firm and Greece for more disclosure. Chancellor Angela Merkel’s Christian Democrats aim to push for new rules that will force euro-region nations and banks to disclose bond swaps that have an impact on public finances, financial affairs spokesman Michael Meister said.
“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”
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