Commentaries

Rights and wrongs at Lloyds Banking

If you’ve ever wondered how the big-shot investment bankers “earn” their bonuses, the document launching Britain’s biggest rights issue will give you a clue. Lloyds Banking Group is issuing 36,505,088,579 new shares, to add to the 27,161,682,366 currently in issue.

The new shares will raise 13.5 billion pounds, of which 500 million pounds will disappear in the expenses of the offer. Much of this is paid to the banks which are guaranteeing that Lloyds gets its money, a reward for the risk they are taking that the shareholders will fail to take up their rights.

So just how big is this risk? Here’s one way to look at it. The rights price is 37 pence, and as long as the Lloyds share price remains above that, the risk is minimal. At 37 pence, engorged Lloyds, with 63,666,770,945 in issue, would be capitalised at 23.5 billion pounds, including the 13.5 billion pounds of new money. On Tuesday, the day the issue was priced, with Lloyds old shares at 91 pence, the business was valued at 23.5 billion pounds.

 In other words, for the underwriters to pay up, the value of old Lloyds would have to slump from 23.5 billion pounds to 10 billion pounds – and all by December 11, the day on which the new money is due.

Bye bye Mack

John Mack is making way for a changing of the guard at Morgan Stanley.

The Wall Street firm says Mack is stepping aside as CEO at year’s end to make way for James Gorman, long seen by many on Wall Street as Mack’s heir apparent.

Mack will remain as chairman.

The move is not surprising. The past year, of course, has been a grueling one for Mack and Morgan Stanley. But his energy level has been running on low and it’s clearly time for a new direction at the firm.

Moving-up Gorman, currently Morgan Stanley’s co-president, to CEO makes sense given the firm’s renewed commitment to more traditional lines of investment banking–including retail brokerage. In the wake of the financial crisis, Morgan Stanley has decided to take less risk in trading than some of its peers–most notably Goldman Sachs.

Morgan Stanley has rebounded from the crisis more slowly than Goldman and JPMorgan Chase because of its decision not to get back heavily into proprietary trading. Analysts have been critical of Mack’s decision to play it safe and it remains to be seen whether the 51-year-old Gorman will reverse that trend to better compete with Goldman.

But given Gorman’s long history of working in wealth management, it’s unlikey he will be quick to turn Morgan Stanley into a hot-bed of trading. And he’d be smart to stick to that plan–as there could be a demand from wealthy investors for savvy investment advice in the coming years.

from Rolfe Winkler:

SEC should get tougher with BofA

In the Bank of America Merrill Lynch bonus imbroglio, the SEC has proposed a settlement in which, once again, the defendants neither admit nor deny wrongdoing.

Once again, the corporation would pick up the fine while responsible individuals escape uninjured. And once again, the public would be left wondering what actually happened. This isn't justice, nor will it deter fraud.

These were the frustrations expressed by Judge Jed Rakoff in court yesterday. He refused to approve the settlement because he wants to know the truth: Who was responsible for misleading shareholders, and how did they settle on a fine of $33 million?

He told both sides to return to court with more details in two weeks. For the public's sake, it's a good thing he did.

In this case, it isn't just shareholder's money at stake. It's taxpayers'. Our bail-out cash saved the bank, and we deserve to know what went on.

What the judge can accomplish isn't clear. But the simple exercise of forcing the SEC to provide more details of its case would be very valuable.

The SEC's eagerness to settle without naming names is particularly frustrating. It insists Bank of America, not executives, misled shareholders about Merrill bonuses by deliberately omitting relevant documents from its public filings.

The SEC is still lame

Don’t believe the hype about the new sense of “urgency” at the Securities and Exchange Commission.

The Wall Street Journal reports that the SEC’s recent string of enforcement actions against Bank of America, General Electric and former AIG chieftain Hank Greenberg is part of a new get tough campaign by SEC Chairman Mary Schapiro. But don’t believe it.

Settling investigations that are so old that the case files are getting green mold on them isn’t the sign of regulatory toughness. It’s simply an attempt by regulators to clean-up the docket so the litigation papers can be sent to cold storage.

Sure, the SEC gets some credit for moving quickly on the Merrill Lynch hidden bonus investigation. But the $33 million fine that Bank of America has agreed to pay to resolve the matter is chump change. And BofA CEO Ken Lewis has an incentive to settle, as he tries to sweep last year’s messy merger with Merrill under the rug.

But as US District Judge Jed Rakoff showed during a Monday court hearing, the SEC’s proposed $33 million settlement with BofA is nothing more than business as usual for the nation’s top securities cop. Rakoff got BofA’s lawyer to acknowledge that in agreeing to the settlement, the big bank doesn’t believe it did anything wrong in failing to disclose to investors that Merrill paid big bonsues to some of its employees.

The admission by BofA’s lawyer reveals a fundmental flaw in how the SEC goes about settling high profile cases. By allowing parties to pay a fine without “admitting or denying” the alleged regulatory offense, the SEC is nothing more than a collection agency.

It’s high time for the SEC in signature cases to require a bank, broker or rogue Wall Street executive to admit some liability before settling a civil enforcement action. And if that condition is a dealbreaker, then go ahead and sue ‘em.

from Rolfe Winkler:

Judge Rakoff wants facts! Notes from yesterday’s hearing

Hopped over to courtroom 14-B at 500 Pearl Street yesterday afternoon where I saw Judge Jed Rakoff hammer SEC and Bank of America lawyers over the proposed settlement regarding Merrill Lynch bonuses.

The news is that Rakoff refused to approve the settlement.  He ordered the lawyers to get to the bottom of the "who/what/where" of the case, saying the settlement "seems to be lacking in transparency."  He's asked them to file briefs answering those questions on the 24th, and then responses on September 9th.

The hearing itself was very interesting.  Rakoff was clearly very skeptical of the arguments presented by both legal teams, which seemed rather unimpressive.

The judge wondered immediately why, given the "serious questions" raised in its complaint, the SEC wasn't going after more facts.  If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn't the SEC trying to figure out who is responsible?  "Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?" said Rakoff.

David Rosenfeld, lead lawyer for the SEC, meekly replied that they haven't made any allegations against specific individuals.  This clearly didn't satisfy Rakoff who argued that to make the complaint, they "must have determined who physically committed these acts."

[By the way, Rosenfeld struck a few of us in the gallery as badly prepared.  He seemed to stumble a lot, and the judge and court reporter repeatedly told him to speak up.  He wasn't familiar with specifics so frequently had to defer to another SEC lawyer.  Even though the hearing revolved around BofA's proxy filing, Rosenfeld and his team didn't have a copy of the document with them.]

So who led the merger negotiations when the discussion of bonuses came up?  The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill.  Of which the SEC says it has only spoken to one: Fleming.

Judge Rakoff’s People’s Court

Judge Jed Rakoff’s courtroom at the federal district court in Manhattan will turn into a people’s court of sorts as he looks to get to the bottom of the paltry $33 million Bank of America settlement with the SEC, which was looking into whether the bank misled shareholders about bonuses paid to Merrill Lynch employees.

The settlement amount is peanuts next to the $5.8 billion in authorized Merrill bonuses and the billions the government injected into the bank to keep it afloat.

Reuters reported last week that lawyers expect the judge “to focus on whether the fine is in the public’s interest, particularly given that Bank of America has taken $45 billion of taxpayer funds from the federal Troubled Asset Relief Program.”

As fellow blogger, and also editor for the U.S. commentary service at Reuters, noted last week, the hearing is also an opportunity to answer some of the questions alleged in the complaint.

The judge’s refusal to rubber stamp the S.E.C. settlement is admirable. The failure to disclose the agreement on bonuses was not simply an oversight or unintended misdirection. The bank, according to the S.E.C. complaint, made statements that were “materially false and misleading.”

Yet the only one at Bank of America who appears to have lost his job as a result of the bonuses was John Thain, who took the fall and was unfairly made to appear as if he was responsible for the bank’s lack of candor.

Bank of America needs to come clean about the Merrill acquisition. Monday’s hearing would be a good place to start.

The hearing is scheduled to start at 4pm.

Not everyone is happy to see BofA go through the wringer again, though.

Time for BofA to come clean

It may be outrage fatigue, but it is surprising that there has not been more of a public outcry over whether Bank of America misled investors about its acquisition of Merrill Lynch.

Yes, there were three House committee hearings about the deal, but the focus of those was on whether the Treasury and Federal Reserve bullied Ken Lewis, the Bank of America, into closing the deal for the good of the financial system.

But how much did Bank of America know about the scale and direction of the selling losses at Merrill Lynch before shareholders voted on the acquisition on Dec. 5? Why didn’t the bank speak out about the agreement with Merrill on bonuses?

Now a federal judge wants to get some answers. Judge Jed Rakoff of the federal district court in Manhtattan has held up the settlement reached this week between Bank of America and the Securities and Exchange Commission over the bank’s disclosure on the Merrill bonuses, Reuters reports. The judge has ordered a hearing for Monday afternoon.

“Despite the public importance of this case, the proposed Consent Judgment would leave uncertain the truth of the very serious allegations made in the complaint.” The hearing has been set for Monday afternoon.

The judge also seemed to suggest that the proposed, paltry $33 million penalty in the settlement may be something of a wash trade for taxpayers: “The proposed Consent Judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bail out.’ ”

The judge’s refusal to rubber stamp the S.E.C. settlement is admirable. The failure to disclose the agreement on bonuses was not simply an oversight or unintended misdirection. The bank, according to the S.E.C. complaint, made statements that were “materially false and misleading.”

Come on Massey: man or mouse?

Bank of America’s settlement with the Securities and Exchange Commission sheds some light on the shambolic merger agreement the bank struck with Merrill Lynch last autumn, and how it neglected to inform its own investors of the monster bonuses it then allowed Merrill to carry off.

The word “allowed” is the mot juste here, by the way. The key schedule to the merger agreement (undisclosed by BofA but revealed by the SEC) makes it clear that BofA authorised what was in the end a payola of $3.6 billion in accelerated bonuses to Merrill bankers, 60 per cent of which was paid in cash.

That’s $2.2 billion of cash out. At BofA’s low point in Febrary, it was a fifth more than the value the deal’s terms placed on the whole of Merrill.

What’s more, what the SEC raises a lot of questions about the testimony BofA boss Ken Lewis gave to Congress on the subject in February.

“[Merrill] were a public company until the first of the year, they had a separate board, separate compensation committee and we had no authority to tell them what to do, just urged them what to do,” said the chief executive. Well yes, up to a point. But only because BofA had specifically authorised Merrill to pay out bonuses within certain defined cash limits subject only to “consultation” with it.

Yet when Thain was pushed out in January 2008, the BofA spin machine was in overdrive suggesting that Thain had not kept Lewis informed about the scale of Merrill’s losses, had blindsided him with the bonus payments and also some lavish interior work Thain did on his office. This was pretty much all bilge. BofA spokesmen may have been the ones whispering in journalists’ ears but they must have been acting with Lewis’s consent.

BofA needs to put the disastrous Merrill acquisition behind it. But it can only do this when the board has got to the bottom of the Thain dispute (and remembered to tell investors this time). If Lewis has abused his position or lied, he must go at once.

John Thain was right

John Thain has been pilloried for the billions of dollars in bonuses paid to Merrill Lynch employees despite the firm’s $27.6 billion loss for 2008. He has taken the brunt of the criticism because Bank of America has said that the decision to pay $3.6 billion in Merrill bonuses before the end of the year, before the deal closed, was solely Thain’s. The former Merrill CEO has protested, telling the Wall Street Journal in April that “the suggestion Bank of America was not heavily involved in this process, and that I alone made these decisions, is simply not true.”

It turns out that true to his reputation as a straight-arrow Boy Scout, Thain was telling the truth. BofA was not forthcoming on the bonus process, according to the Securities and Exchange Commission, which says that the bank made “false and misleading statements” about bonuses in its joint proxy statement on the deal. The S.E.C.’s complaint, which BofA agreed to settle by paying a $33 million penalty, says:

On November 3,2008, in a joint proxy statement soliciting votes from the shareholders ofboth companies, Bank of America represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing ofthe merger without Bank of America’s consent. In fact, contrary to the representation in the merger agreement, Bank of America had agreed that Merrill could pay up to $5.8 billion –nearly 12% of the total consideration to be exchanged in the merger — in discretionary year-end and other bonuses to Merrill executives for 2008.

So who at BofA is responsible for hiding the truth about the Merrill bonuses? The credibility of BofA’s managment has completely evaporated as a result of the Merrill acquisition. The questions about whether the bank did adequate due diligence and whether it was bullied by regulators should have been sufficient for the board of Bank of America to oust Ken Lewis as chief executive. The regulatory embarassment over the Merrill bonuses ought to have erased any lingering doubts.

Apocalypse Then

How bad was the financial crisis in the bleak depths of September?

At today’s House Oversight subcommittee hearing on the Bank of America/Merrill Lynch merger, Representative Paul Kanjorski, the Pennsylvania Democrat, tried to coax Hank Paulson, the former Treasury secretary, to describe the potential doom and gloom policy makers were contemplating as the TARP proposal was being drafted.

Paulson was reluctant to be drawn out on what he and others had feared, but said that “when a financial system breaks down… the number of unemployment we were looking at was much greater than the number we are looking at now.”

Kanjorski said he had been in New York recently, where some in the financial industry told him that at the time they were afraid the country would have “gone back to the 16th century.” (One assumes that didn’t mean a return to the colonial economy of fur trapping and tobacco farming. )

Paulson said that for Ben Bernanke and himself, the fear was a slide into a new Great Depression. “I knew it was going to be very bad,” Paulson said.