SEC, Investors Friend, Fiend?-4

"The [SEC] joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts, a move that could heighten the ongoing debate about a broad overhaul of the financial-regulatory system. ... The proposal would have allowed employees in investment-banking and research departments at Wall Street firms to 'communicate with each other ... "outside the presence" of lawyers or compliance-department officials resposible for policing employee conduct--an activity strictly prohibited by the settlement'. ... After the bust, it was revealed that many of those analysts were touting stocks at the behest of their firms' investment-banking operations, which were profiting from initial public offerings. One solution to the conflict of interest was separating the analysts from the investment-banking operations. ... SEC spokesman John Nester said the agency believes there are other restrictions in place, such as keeping bankers physically separate and prohibiting bankers from influencing analyst coverage decisions. In a letter requesting the change, the SEC and the banks had stated 'it is appropriate to eliminate' certain provisions because the conduct is now covered by new rules and regulations. Securities firms covered by the settlement, including Goldman Sachs Group Inc., Morgan Stanley and the Merrill Lynch unit of Bank of America Corp., declined to comment. ... The SEC is at the heart of the battle because of its mistakes during the crisis. ... Also yesterday, the head of enforcement at the Financial Industry Regulatory Authority, Wall Street's self-regulatory boy, resigned. Like the SEC, Finra has been criticized for failing to detect abuses that led to the crisis and didn't uncover the Ponzi scheme run by Bernard Madoff. ... The settlement allows the firms and the SEC to seek a judge's approval to change the agreement under certain circumstances. ... In a letter to the judge, Lewis J. Liman, a lawyer representing the securities firms, said the Chinese wall is no longer needed because of securities regulations enforced by Finra. The securities firms and SEC 'believe that these rules adequately address the concern intended to be addressed' in the original settlement, Mr. Liman wrote", my emphasis, Susanne Craig & Kara Scannell at the WSJ, 18 March 2010, link:

http://online.wsj.com/article/SB10001424052748704743404575128122174622274.html.

Did the SEC join the 12 firms, or did it take orders? Investment-banking and retail brokerage should be severed. The settlement did not do that, so had no effect in my opinion. Enforced by Finra? Hahahahaha would the Mogambo Guru say. Physically separate? Did Nester ever hear of a telephone? Or the internet? You who take the SEC's case against Vampire Squid seriously, please read this.

Ken Lewis Scapegoat-3

"A federal judge harshly criticized but approved a $150 million settlement between Bank of America Corp. and the [SEC], resolving claims the bank should have disclosed billions in losses at Merrill Lynch & Co. before it was acquiired by the bank. US District Judge Jed. S. Rakoff on Monday said the fine was 'paltry' when considering the Merrill merger 'could have been a bank-destroying disaster if the US taxpayer had no saved the day.' He faulted the bank for 'hiding material information from its shareholders' and the SEC for being 'content with modest and misdirected sanctions'," Dan Fitzpatrick, Kara Scannell & Chad Bray at the WSJ, 23 February 2010, link:

http://online.wsj.com/article/SB10001424052748704454304575081373576395894.html.

This is nonsense. Could the SEC have fined the Treasury or the Fed?

SEC v. Cuomo

"In a swipe at New York Attorney General Andrew Cuomo, the [SEC] said in a court filing that the December 2008 firing of Bank of America [BofA] Corp.'s general counsel had nothing to do with his opinion about ballooning losses at Merril Lynch & Co. just before the securities firm's takeover by the giant bank. The SEC's court filing sets up a showdown between two securities regulators whose relationship has been fraught with tension for years. ... Mr. Cuomo alleged in a separate complaint filed last month that Timothy Mayopolous, [BofA's] former general counsel, was ignored by another executive when he tried to discuss Merrill's mounting losses and then terminated the next day. ... Meanwhile the swift action by Messrs. Spitzer and Cuomo to take on Wall Street occasionally has left the SEC looking flat-footed. The divergent stances in the [BofA] case could portend trouble for cooperation on other cases", Kara Scannell & Dan Fitzpatrick at the WSJ, 18 February 2010, link:

http://online.wsj.com/article/SB10001424052748703444804575071372283031624.html.

That the SEC and Cuomo are at each's throat means the truth may come out.

The Continuing SEC Circus

"In the headquarters of the [SEC], Mr. Madoff's name is rarely spoken. More than seven months after he was sentenced to prison for orchestrating a global Ponzi scheme, shaken SEC employees are still struggling to come to grips with how they failed to catch him before it was too late. ... It is the job of Robert S. Khuzami, the SEC head of enforcement, to unmask the next Madoff--and, equally daunting, to convince skeptics that the commission can reassert itself and adequately police Wall Street. ... Unlike some at the commission, Mr. Khuzami, 53, talks openly about the Madoff fiasco. 'For a group of people committed to investor protection and prevention, the tragedy of investors' losses are not lost on anyone,' he said in an interview in his bright, corner office in Washington. ... Wall Street vastly outdoes the SEC in terms of people, money and, many in the financial industry argue, talent. The administration has requested a budget of $1.3 billion for the SEC for 2011. ... On Monday, what SEC officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of SEC lawyers filed into a New York courtroom where the commission was trying to end its losing investigation into the takeover of Merrill Lynch by Bank of America [BofA]. But District Judge Jed S. Rakoff--who last September rejected as too low an earlier $33 million settlement that the SEC had reached with [BofA]--again raised questions about the commission's handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1. ... The commission also has not sattisfied critics on Capitol Hill--and many ordinary Americans--who had hoped to see charges leveled at banking executives after the financial collapse. Mr. Khuzami recognizes that the cases the SEC brings, or does not bring, will define his tenure and, possibly, the future of the commission. 'It's all about the cases in the end,' he said. ... The SEC has hired some talent from Wall Street. Norm Champ, the former general counsel of Chilton Investment Company, a multibillion-dollar hedge fund, was named last year as an associate director in the examinations group in New York. Richard Bookstaber, a former Wall Street risk manager, joined the new division of risk, strategy and financial innovation", my emphasis, Jenny Anderson & Zachery Kouwe at the NYT, 9 February 2010, link:

http://www.nytimes.com/2010/02/09/business/09sec.html.

Just what we need, more "former" Wall Streeters at the SEC. Khuzami is right about one thing: we will be interested in the cases the SEC doesn't bring. Who at the SEC cares about "investor protection" as opposed to protecting their former and future employers?

Ken Lewis-Scapegoat-2

"The bank bailouts of the last two years have been 'about as popular as a root canal,' as President Obama noted in his State of the Union address. ... So it was probably inevitable that New York Attorney General Andrew Cuomo would file civil fraud charges against Bank of America, its former CEO Ken Lewis, and its former CFO Joe Price, as he did this week. Everyone assumes Mr. Cuomo is running for governor this year, and BofA is conveniently based in Charlotte, not Wall Street. .... The Martin Act is a prosecutorial bludgeon that forces most defendants to settle out of court rather than risk being convicted merely for having been wrong on some facts. ... When Mr. Lewis told Treasury Secretary Hank Paulson and [Fed] Chairman Ben Bernanke that he was considering invoking this clause and scotching the deal, they insisted he buy the faltering trading house and later announced an additional taxpayer investment in BofA to allow the bank to digest Merrill. Mr. Lewis swallowed hard and went ahead with the merger. Mr. Cuomo says this was all a bluff by Mr. Lewis in order to trick the regulators into providing more TARP money. Never mind that Mr. Lewis had a contractual right to pull out of the deal if he felt material facts had changed. ... Mr. Cuomo's logic boils down to this: Mr. Lewis is guilty for not telling his shareholders about rising losses at Merrill, but he's also guilty for trying to protect his shareholders from the rising losses at Merrill. ... On the public evidence so far, Mr. Cuomo should be thanking Mr. Lewis, not suing him", my emphasis, WSJ Editorial, 6 February 2010, link:

http://online.wsj.com/article/SB10001424052748704533204575047421387157564.html.

I'm with the WSJ. Cuomo's case against the BofA and Lewis was announced the same day as the SEC's new BofA settlement. Are Cuomo and the SEC engaging Lewis in a tag-team wrestling match? Cuomo apparently wants to run for NY Governor over Lewis corpse. I hope Lewis and the BofA take this one to the mat. That BofA is not headquartered in NY may be the reason Cuomo is pursuing this case to the Vampire Squid's applause.

Fed Rift?

"New documents submitted to Congressional investigators examining the 2008 rescue of the [AIG] show that officials at the [Fed] were deeply divided over the structure of the bailout and its long-term implications. At the same time, regulators had to contend with major banks that were AIG's trading partners and were unwilling to accept a discount from the government when closing out the contracts the banks had struck with the insurance giant. ... The Fed's decision to pay AIG's trading partners in full on tens of billions of dollars in contracts has been controversial because many analysts say they believe the government could have negotiated a price for a fraction of that amount, reducing taxpayer funds used in the rescue. Similar contracts were being settled at heavy discounts in other deals where the government was not involved. ... 'We asked for concessions, and they said no,' according to the notes. 'I wonder why we even bothered.' Mr. [Thomas] Baxter also said that Mr. [Timothy] Geithner verbally approved the decison to pay full price to the banks. ... According to a 13-page slide show prepared by the asset management firm BlackRock that was submitted to the committee, Merrill Lynch [ML] and French bank, Societe Generale, were 'resistant to deep concessions' on their AIG contracts. Goldman Sachs, another trading partner, was willing to accept only 'a small concession' on its contracts", my emphasis, Louise Story and Gretchen Morgenson at the NYT, 23 January 2010, link:

http://www.nytimes.com/2010/01/23/business/economy/23aig.html.

This is laughable. Imagine Vampire Squid (VS) told the Fed what it would accept. How many divisions has VS? Kill the Fed. Roll out that CNC guillotine and set it to work in front of 85 Broad Street. The correct response Zimbabwe Ben (ZB) was, "Well VS, ML recently settled some CDOs for 22 cents on the dollar. If you want more, put AIG's CDOs up for bid. By the way, I prepared a press release of the substance of your demands. If you do not do as you were told, I will hold a press conference at 9:00 AM tomorrow morning and tell 306 million Americans of your demands. What will you do if they respond and within 48 hours our 535 legislators are hit with 50 million e-mails and faxes saying "No bailout. No hell no way"? ZB isn't evil. Just cowardly. Now ZB, do us a favor, return to Princeton, play pinochle with Krugman and Blinder and leave us peasants alone. You are less capable negotiating with the VS than a 42nd Street three-card monte dealer. "Divided over ... implications"? How incompetent are the Fed's economists? "Unwilling to accept a discount"? When the alternative was AIG's bankruptcy? In July 2008 ML sold some CDOs for 22 cents on the dollar. ZB should have told ML, "The burden is yours. Why are the AIG CDSs worth more? Make me a believer. Show me"!

Real Estate Banking

"Bank of America Corp.'s [BofA] shotgun marriage to Merrill Lynch & Co. has produced plenty of ill will, and big profits in real-estate investment banking. ... The secret of success: [BofA] leveraged its relationships with real-estate borrowers to generate a flood of investment-banking work, much of it handled by former Merrill bankers who decided to stick around after the securities firm was acquired last year. ... Many expect a rash of initial public offerings by private companies comparable to the one that followed by commercial real-estate collapse of the early 1990s, with large payoffs for underwriters. ... [BofA] was a lead lender to REITS in 26 of the 39 stock offerings in which it was the left bookrunner, according to an analysis of data provided by Dealogic and SNL Financial. ... 'I have always taken the position that unless firms provide us with debt capital, we don't give them any business,' said Debra Cafaro, chief executive of Ventas Inc., a health-care related REIT that raised $312 million of equity in April with [BofA] as a lead bookrunner", Anton Troinovski at the WSJ, 13 January 2010, link:

http://online.wsj.com/article/SB10001424052748703672104574654802477763302.html.

All the more reason to separate investment and commercial banking. That Ventas can go to the same store for loans and equity is a problem for FDIC insured institutions. Bring back Glass-Steagall.

Leaving Vampire Squid

"Stockbrokers, AKA financial advisors, were always the other guys on Wall Street, watching their colleagues in the trading and investment banking departments rake in huge bonuses while they were wearing out their fingertips with cold calls. ... Brokers find themselves having to explain to clients why they should entrust money to the firms that employ them. ... Possibly the most compelling of the new opportunities for breakaway brokers is a Chicago firm called HighTower. It offers brokers with at least $100 million under management what it describes as an 'open source' alternative to firms like Merrill and Morgan Stanley Smith Barney. ... HighTower's two founders, Elliot Weissbluth and Drew Kornreich, expanded this model so that brokers affiliating with their firm also have the ability to choose from various custody firms, including JPMorgan Chase and Schwab, and clearing firms like Pershing and Fidelity's National Financial. ... Larry Gilbert, 40, was a heavy hitter in Goldman Sachs' private wealth group in Chicago before he joined HighTower in February 2009. 'I left Goldman because I wanted to be a true fiduciary,' says Gilbert. He says Goldman's pay was structured to encourage advisors to sell Goldman products first. 'During the financial crisis these products didn't hold up,' he says. Goldman denies Gilbert's claims", Matthew Schifrin at Forbes, 18 January 2010, link:

http://www.forbes.com/forbes/2010/0118/outfront-wall-street-brokers-hightower-second-acts.html.

What? Some Vampire Squid products did not perform as advertised? How dare you say that? Off with your head, Gilbert. This is why we should separate investment banking from retail brokerage.

SEC Waivers

"Forget too big to fail. In the eyes of federal regulators, many Wall Street firms are too big to punish. ... Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the [SEC] that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund business. ... However, on Friday, the SEC said it has expanded its probe of Bank of America to include the bank's possible failure to disclose mounting losses at Merrill Lynch. ... While the companies were punished in other ways, they were spared from what some claimed would be 'severe and irreparable hardships.' In fact, the last time the SEC's staff could recall a waiver being turned down was 1978. The SEC, however, declined to comment in detail in its decisions. ... The Goverment Accountability Office, Congress' investigative arm, reported this year that SEC enforcement workers have felt overwhelmed by their caseloads and undermined by SEC leaders hesitant to levy heavy punishment. ... Securities experts think companies wouldn't apply for waivers if they didn't think their applications would be granted. At the same time, the fact that the SEC could someday deny one is a major weapon in its arsenal, experts said. ... In 2003, Citigroup settled a case after the SEC accused it of manipulating stock research. The settlement 'permanently restrained and enjoined' Citigroup from violating a specific section of federal securities laws. Then in 2006, Citigroup and other companies were cited for improperly marketing 'auction rate securities,' bonds issued by municipalities, student loan entities and corporations. The SEC censured Citigroup and fined it $1.5 million", Chris Adams at the Houston Chronicle, 14 December 2009, link: http://www.chron.com/disp/story.mpl/headline/biz/6768581.html.

$1.5 million for Citigroup and Craig Gile goes to prison, my 25 June 2008 post: http://skepticaltexascpa.blogspot.com/2008/06/citigroups-joe-jett.html. The SEC and SDNY US attorney's office are sick jokes. Some threat, that a waiver might be denied.

Vampire Squid Exposed

"Goldman Sachs Group [GSG] played a bigger role than has been publicly disclosed in fueling the mortgage bets that nearly felled [AIG]. [GSG] was one of 16 banks paid off when the US government last year spent billions closing out soured trades that AIG made with the financial firms. ... [GSG] originated or bought protection from AIG on about $33 billion of the $80 billion of US mortgage assets that AIG insured during the housing boom. That is roughly twice as much as Societe Generale and Merrill Lynch, the banks with the biggest exposure to AIG after [GSG], according an analysis of ratings-firm reports and an internal AIG document that details several financial firms' roles in the transactions. ... The trades yielded [GSG] less than $40 million in profits, which were mostly booked from 2004 to 2006, according to a person familar with the matter. But they piled risks onto AIG's books, which later came to haunt the insurer and [GSG]. The trades also gave [GSG] a unique window into AIG's exposure to losses on securities linked to mortgages. ... A [GSG] spokesman says that until AIG was rescued by the government, the insurer 'was viewed as one of the most sophisticated financial counterparties in the world. It wasn't until the government intervened in September 2008 that the full extent of AIG's problems became apparent. ... More clarity has emerged recently over the roles that firms such as [GSG] played as complex deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month a government audit of part of the AIG bailout described [GSG's] middleman role. ... The trades seemed prudent at the time given AIG's strong credit rating and the fact that AIG agreed to make payments to [GSG]. known as collateral, if the value of the CDOs declined", Serena NG and Carrick Mollenkamp at the WSJ, 12 December 2009, link: http://online.wsj.com/article/SB10001424052748704201404574590453176996032.html.

Where was PWC which "audited" AIG and GSG during the relevant time? Why hasn't the PCAOB yanked PWC's practice rights? There's more to come out.

China's AIG?

"A Chinese economic official blamed 'fraudulent practices' at some large international investment banks for large losses incurred by Chinese state-owned companies on derivative contracts, in the government's strongest criticism yet of the role played by foreign banks. ... Mr. Li [Wei], writing in the latest issue of the Study Times, a newspaper published by the Party School of the Central Committee of the Communist Party, also criticized Citigroup Inc., along with Merrill Lynch and Morgan Stanley, for developing 'extremely complicated' derivatives products. He said 68 state-owned enterprises incurred combined book losses of 11.4 billion yuan ($1.67 billion) on 125 billion yuan worth of derivatives investments by the end of October. ... Soon after those contracts were signed, oil prices fell below the exercise prices of the options, which caused losses on both sides of the contracts, he said. ... 'Some fraudulent practices by some international investment banks resulted in major losses,' Mr. Li said. Chinese companies should bear some responsibility, but the losses 'arte also closely related to hostile sales of certain fraudulent, complciatedly designed high-leveraged products by international investment banks", Victoria Ruan at the WSJ, 4 December 2009, link: http://online.wsj.com/article/SB10001424052748703735004574573443614069228.html.

Li exercise your "option", sell Zimbabwe Ben these contracts at 100 cents on the dollar. Why let ZB treat your companies worse than Vampire Squid (VS) in the AIG fiasco? Besides, the People's Liberation Army has more divisions than VS, see my 25 September 2009 post: http://skepticaltexascpa.blogspot.com/2009/09/how-many-divisions-has-goldman.html. If anyone should realize he can't collect these debts its Lloyd Antoinette Blankfein (LAB). LAB is a kid from the 'hood. He went to "Tommy Jeff". He understands. Even LAB is not fool enough to bring a writ to a gunfight.

Vampire Squid Wins Again

"The [Fed] of New York [NYFed] gave up much of its power in high-pressure negotiations with the American International Group's [AIG] trading partners last year, according to a government report made public on Monday. Just two days before the [NYFed] paid AIG's partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut--but it never got the chance. ... But UBS's good-faith gesture was quickly drowned out by Goldman Sachs [GSG] and the top French bank regulator. They argued, with others, that it would be improper and perhaps even criminal to force AIG's trading partners to bear losses outside of bankruptcy court. The banks and the regulator were confident that the [NYFed] was not willing to push AIG into bankruptcy, because earlier in the fall the [NYFed] had stepped in with $85 billion to prop up the insurer. ... The Fed 'refused to use its considerable leverage,' Neil M. Barofsky, the special inspector general for the [TARP], wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make AIG's trading partners whole when people and businesses were taking painful losses in the financial markets. There have been suggestions that the Fed chose to negotiate weakly, Mr. Barofsky said, to give a 'backdoor bailout' to AIG's banks. He said Mr. Geithner and the Fed's lawyers had denied this, but added that 'irrespective of their stated intent,' there was no doubt about the result: 'Tens of billions of government money was funnelled inexorably and directly to AIG's counterparties.' ... Mr. Barofsky said that Goldman's hedges were unlikely to have held up amid the market turbulence of late last year. ... A spokesman for Goldman ... said any additional exposure to AIG's losses was a moot point, because the Fed's intervention had eliminated the risk", my emphasis, Mary Walsh at the NYT, 17 November 2009, link: http://www.nytimes.com/2009/11/17/business/17aig.html.

"The [NYFed] caved in to demands by [AIG's] trading partners that they be paid in full for complex securities they had insured with the company, saving soem of the world's biggest banks from billions in losses, according to a government audit. ... The banks that were paid off in full included [GSG]. Merrill Lynch and large French banks Societie Generale and Calyon, the investment bank unit of Credit Agricole Group, which were represented by the French bank regulator in negotiations with the [NYFed] last November, the report said. ... The audit provides a window into a bailout effort that has been shrouded by a lack of disclosure--raised in the report--and questions over why the US government in effect funneled tens of billions of dollars to the US and European banks that were AIG's trading partners", my emphasis, Serena Ng & Carrick Mollenkamp at the WSJ, 17 November 2009, link: http://online.wsj.com/article/SB10001424052748704431804574540290325376348.html.

"For more than a year, [GSG] has maintained that it wouldn't have suffered material losses had the government allowed one of its major trading partners, [AIG] to collapse. ... A revamped rescue package in November led to Goldman and 15 other banks being paid in full for $62 billion worth of insurance contracts they had with AIG to protect against losses tied to mortgage assets. ... The government auditor's report broadly fouind that the [NYFed] left itself little room in nogotiating with the banks for a better deal for taxpayers. ... In a separate series of trades, Goldman had sold protection against losses on the same assets to other trading firms. ... Goldman has said it was insulated against a material loss by an AIG default. And the audit pointed our that Goldman in fact was protected against some losses. For example, the firm had collected $8.4 billion worth of collateral--cash or a liquid equivalent--from AIG on a $13.9 billion portion of its bets. Separately, Goldman took steps to try and buy insurance against insurance by purchasing protection against an AIG default. ... The audit said, however, that given the fact that the market for those securities had tanked in November 2008, and then an AIG default would have sparked a rout, Goldman would have had a difficult time obtaining value for those assets. ... The bottom line: The audit said those assets that Goldman held would have been worth a lot less had AIG defaulted. ... The audit also raised questions about the insulation Goldman had purchased against an AIG default", my emphasis, Carrick Mollenkamp and Serena Ng at the WSJ, 18 November 2009, link: http://online.wsj.com/article/SB10001424052748504538404574542192562568738.html.

"Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by [GSG], AIG's largest trading partner and recipient of $12.9 billion in taxpayer money in the bailiut, that it had facced no material risk in an AIG default--that, in effect, had AIG cratered, [GSG] wouldn't have suffered damage. ... As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky's reminds us how the taxpayer bailout of AIG benefited Goldman. ... Regarding his firm's own dealings with AIG, Mr. [Lucas] van Praag said that Goldman believed that its 'exposure was close to zero; because it insulated itself from a downturn in AIG's fortunes through hedges and collateral it had already received. ... So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm. 'On Sept. 16, 2008, David Viniar, [GSG's] chief financial officer, said that whatever the outcome at AIG, the direct impact of Goldman's credit exposure would be immaterial,' she said. 'That was false. The report states that if the [NYFed] had negotiated concessions Goldman would have suffered a loss.' ... 'The prices of the collateralized debt obligations against which Goldman bought protection from AIG were in sickening free fall, and the cost of replacing AIG's protection would have been sky-high,' she said. 'Goldman must have known this, because it underwrote some of those value-destroying CDO's.' Ms. Tavakoli argues that [GSG] should refund the money it received in the bailout and take back the toxic CDO's now residing on the Fed's books--and to do so before it begins showering bonuses on its taxpayer-protected employees. 'AIG, a sophisticated investor, foolishly took this risk,' she said. 'But the US taxpayer never agreed to be a victim of investment that should undergo a rigorous audit'," my emphasis, Gretchen Morgenson at the NYT, 22 November 2009, link: http://www.nytimes.com/2009/11/22/business/22gret.html.

The NYFed didn't play "chicken" with Vampire Squid (VS). The correct response was to have VS's executives "shadowed" by FBI agents 24 hours a day. Like what happened to Joe Jett in 1994. I'm sure even Lloyd Antoinette Blankfein would realize if VS had pressed any claims, he would be indicted for something. As Laverntiy Beria said, "Show me the man, and I'll find you the crime", my 16 October 2009 post: http://skepticaltexascpa.blogspot.com/2009/10/which-mob-3.html. Well Mary Schapiro, read this and compare it to VS's claim it was fully hedged and had no AIG exposure. If true, it's because Timmy Boy put $85 billion into AIG. I think Barofksy is close to the truth here. "Improper and criminal"? Fine, VS, The NYFed should have said, "We will put out a press release 9:00 AM tomorrow with your statement. You have until 8:59 AM tomorrow to retract it. What do you want"? Even VS's attorneys could figure out what that meant. Suggestions? Read my 12 and 13 May 6 September 2009 posts: Hey Preet Bharara(PB), can you indict David Viniar (DV) for securities fraud based on his public pronouncements? Look into it. Boy. Or are you on VS's payroll? Here are some of my prior related posts:

http://skepticaltexascpa.blogspot.com/2009/05/goldman-aig-and-18-usc-152.html.
http://skepticaltexascpa.blogspot.com/2009/05/pricewatergates-waterloo.html.

http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.

Why? To bail out VS, that's why.

VS had no exposure to an AIG bankruptcy. We know so because VS said it. I doubt VS could have kept the $8.4 billion in collateral it supposedly got. Was AIG then insolvent? Should AIG's "bankruptcy trustee" grab it as a preference payment? PriceWaterhouseCoopers (PWC), was AIG insolvent? You "audited" AIG and VS. Well? In 2008 AIG paid PWC $120 million, VS paid PWC $62 million. For $182 million, what did you do? Hey, VS audit committee, sight unseen, I can do a better audit than PWC. Here's my fee: only $50 million. Well? Of course, I might look DV in the eye and tell him VS will get an adverse opinion based on its supposed "hedge accounting", but I will be thorough. And I will not be intimidated.

VS believed this? It was wrong or lied. PWC, did you find this? What's wrong with VS's internal controls? PWC declared them Kosher for Passover on 22 January 2009. Well, Mary Schapiro, what will you do about this? Beat up some micro cap registrants to show us your brass cojones? Hey PB, Tavakoli (I love her) appears to allege the elements of a securities fraud count. What will you do about this?

SEC-DOJ Dilemma

"On Monday, US District Judge Jed. S. Rakoff told the [SEC] to be ready to begin the civil insider-trading trial in five months. ... Ordinarily, civil and criminal investigators coordinate their activities. In instances where both file charges, most judges allow the government to 'stay,' or postpone the SEC case until the criminal case is completed to avoid complicating the criminal matter, according to lawyers and people familiar with the situation. ... That is possible since the SEC wouldn't want to jeopardize the government's criminal case, lawyers say. The [DOJ's] US Attorney's office in Manhattan declined to comment, as did a lawyer for [Raj] Rajaratnam. ... 'Defendants in criminal cases don't have that ability. In a criminal case, the first time a defense lawyer may see critical witnesses is in the courtroom when they're testifying,' [Michael Schacter, Wilkie Farr & Gallagher lawyer said]. ... If the SEC withdraws its case, it could be another blow for the agency, which has drawn fire from its critics recently. ... The ruling puts the spotlight back on Judge Rakoff, whose harsh SEC rulings recently have been on display. In August, the judge critcized the SEC's $33 million settlement with [BofA] Corp. over disclosure of bonuses following the bank's purchase of Merrill Lynch last year. ... Judge Rakoff has long experience in insider-trading cases. As a defense lawyer before being nominated to the federal judiciary, Mr. Rakoff represented Martin Siegel, the Kidder, Peabody & Co. investment banker, who the US alleged passed inside information about takeover deals to Ivan Boesky in exchange for suitcases of cash in the 1980s. Mr Siegel pleaded guilty to securities fraud. ... An SEC trial in advance of a criminal trial would give defendants the opportunity to depose, or interview the government's witnesses in the case. The government doesn't want to have its witnesses on the record saying anything before its put them on the stand under oath. ... Judge Rakoff in 2005 refused to postpone an SEC civil suit against Anuradha Saad, chief executive of a cancer-information company, and other executives, who were also charged by federal prosecutors. ... In an opinion rejecting the postponement, Judge Rakoff noted that because the litigation was both a criminal and civil matter, the defendants were 'fully entitled to to the timely discovery that federal law grants them in defending such an action.' In the decision, he said 'parallel proceedings' of the US Atttorney and SEC had 'bizarre aspects' and that it is 'stranger still' that the two can combine their efforts in a case 'against some hapless defendant'," my emphasis, Susan Pulliam and Kara Scannell at the WSJ, 27 October 2009, link: http://online.wsj.com/article/SB125657477463408409.html.

More WSJ editorializing in a news article. What "harsh" rulings? I like Rakoff more every day. Preet Bharara (PB) why not let Rajaratnam depose "your" witnesses? Are you afraid they might be impeached with inconsistent statements? Or your coaching them to give perjured testimony might be exposed? Would you suborn perjury? Would you buy my bridge over the East River? It's only $1 billion. Well PB? Will anything like this happen to Lloyd Antoinette Blankfein? hah! This case looks like another DOJ waste of time.

Ken Lewis-Scapegoat

"Dogged by shareholder lawsuits and by multiple law-enforcement investigations into his bank's ill-fated merger with Merrill Lynch [ML], [BofA] CEO Ken Lewis announced on Sept. 30 that he would leave his post by the end of the year. ... At the root of Lewis's woes is a merger that more closely resembles a shotgun wedding. [BofA] negotiated a hasty takeover agreenment with [ML] over the course of a single September weekend following the shocking collapse of Lehman Brothers. Treasury Secretary Hank Paulson aggressively championed the deal as integral to his effort to stem the rising financial crisis. ... Merrill's staggering losses required [BofA] to accept a $20 billion infusion of additonal federal cash immediately following the merger., and [BofA] shares now trade at a fraction of their former value. ... The numerous civil complaints say that Lewis sold out their interests by saddling them with a disproportionate share of the cost of rescuing the world economy at the behest of bureaucrats in Washington. ... But the events surrounding the merger indicate that Paulson and Bernanke may have placed improper pressure on Lewis to disregard his duties to his shareholders. If that is true, then Lewis looks less like a criminal than like the hapless pawn of top government regulators determioned to stem the crisis at any cost. ... Lewis clarified that Paulson did not want the government to be required to disclose that it was committing additional TARP funds to bail out [BofA] until after the merger with Merrill had taken place. ... [BofA's] shareholders were surely shortchanged in the merger, but was Lewis criminally responsible, or was he punk'd by a duo of super-regulators determined to control the fate of [BofA] by installing a whole new management team, if necessary? The latter seems likely. ... In reality, a former Trasury secretary and a cerrent [Fed] chairman are unlikely to be indicted for cormers they cut in their efforts to stave off the collapse of the financial system. ... But letting Paulson and Bernanke off the hook will only redouble the determination of politicos and shareholders to exact punishment on the only remaining culprit. ... Courts have also recognized a second defense that might apply to Lewis: a defendant's reasonable belief that a government official had exempted his conduct from the law may negate the required mens rea, or ciminal intent, needed for convicton. ... To prosecute Lewis while giving Paulson and Bernanke a free pass would send an even worse signal: that the government will take care of its own, and that politicians will find their scapegoats among those who attempt to run productive enterprises rather than those who regulate them", Marie Gryphon at National Review, 7 October 2009, link: http://article.nationalreview.com/print/?q=ODdiMmNjNzJiYTQ2MmI3NjgyMjYxYTZkND1jNjVkMTQ=Q.

"The Treasury Department's pay czar pushed outgoing [BofA] Chief Executive Kenneth D. Lewis into giving back about $1 million he received so far this year and forgoing the rest of his $1.5 million salary for 2009, say people familar with the matter. ... Kenneth ... Feinberg pushed for the deal because he thought the package of retirement benefits and unvested stock Mr. Lewis takes with him when he steps down at year's end--currently worth at least $69.3 million, according to securities filings--was large enough and possibly too big. ... Thursday's decision caps a rocky relationship between Mr. Lewis and the US government", Deborah Solomon and Dan Fitzpatrick at the WSJ, 16 October 2009, link: http://online.wsj.com/article/SB125564137421788337.html.

This is the way it looks to me.

Is it a coincidence that Feinberg "sticks up" Lewis on the same day GSG announces $16.71 billion in bonuses? Is this a federal "head fake"? Lloyd Blankfein has 3,354,836 GSG shares worth $621 million at $184.96 each. Why doesn't Feinberg TELL Blankfein "You will donate the proceeds of the sale of these shares to the Treasury? Won't you"? See my 6 September 2009 post: http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.

Ken Lewis Whistleblower?-3

"When [BofA] bought Merrill Lynch last winter, the political class applauded and called CEO Ken Lewis a solid citizen. Now, from the safety of noncrisis hindsight, our politicians claim that the bank's shareholders may have been mistreated. Few of those shareholders are complaining, given the profits Merrill has been generating for the bank in recent months, but the pols apparently want a scapegoat for bailouts and bonuses. Mr. Lewis fits the bill. ... Of course, proxies rarely make anything clear, because, like all SEC-mandated disclosures, they are created to ensure regulatory compliance rather than inform invstors. Was this one worse than average? ... Anyone who cared enough to read the proxy probably consumer enough financial news to understand that BofA was willing to pay to maintain Merrill's principal asset--its employees. ... But count us as skeptical that BofA managers would risk violating securities laws in order to make sure that other people could collect large bonuses, or to hide another firm's losses so they could have the privilege of overpaying to acquire it. ... If Mr. Cuomo wants to do a public service, he could focus on the government's own role in this episode. ... Here's a theory of the case that won't help Mr. Cuomo become governor, and won't help Mr. [Edolphus] Towns make headlines, but might even be true and fair: Amid the autumn and winter financial panic, everyone involved was operating under tremendous pressure with incomplete information. Federal officials all but ordered Mr. Lewis to buy Merrill and they certainly knew all about the bonuses", original italics, my emphasis, Editorial at the WSJ, 21 September 2009, link: http://online.wsj.com/article/SB10001424052970204518504574419050445773522.html.

"After fighting to keep his grip on the bank he helped build from a scrappy Southern outsider to the nation's largest in assets, [BofA] Chief Executive Kenneth D. Lewis said he will resign by year end. ... Even as the board backed Mr. Lewis publicly, there were signs that his interests and the bank's were diverging. Mr. Lewis has hired his own lawyers, former US Attorney Mary Jo White and James Wyatt III, a criminal-defense expert in Charlotte, while the board and the bank have separate representation on the various lawsuits and investigations relating to the bank's purchase of Merrill Lynch", Dan Fitzpatrick and Joann Lublin at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB125434715693053835.html.

It is inconceivable that Zimbabwe Ben and Hank Paulson didn't know.

Uh oh. Ken, watch your new lawyers like a hawk. You hired Mary Jo "Ping Pong Ball Fed" White. You don't know who your lawyers represent. My advice: get a Roy Cohn, if you can find one. One who would be unafraid to let the Fed, Treasury and DOJ know: If you come down, you will crash their whole corrupt system.

The SEC-BofA Circus

"Beware of regulators bearing the gift of quick settlements, especially amid a populist stampede. That seems to be the healthy attitude of Judge Jed Rakoff to the recent SEC fine against [BofA] for handing out unpopular bonuses. ... This tale begins in the panicked days of last year's financial crisis. ... Enter new SEC chief Mary Schapiro, who has used the episode to signal a new era of supposedly get-tough enforcement. The SEC brought a civil lawsuit, alleging that BofA had misled inveastors by failing to disclose the bonuses in the proxy documents it sent to shareholders. ... In pursuing BofA, Ms. Schapiro broke with the SEC's policy of pursuing individuals, rather than companies, in cases of alleged fraud against investors. ... Next enter Judge Rakoff, a Clinton appointee, who the SEC expected would rubber stamp the deal. But the judge has proven to be skeptical of the SEC's case. The judge first asked why behavior that the SEC considered so egregious merited a fine of merely $33 million. ... The SEC's defense is that it would be too difficult to go after BofA management, since individuals will claim their decisions were advised by corporate lawyers and are protected by attorney-client privilege. ... Then again, perhaps the real reason the SEC is reluctant to go after individuals is because, regarding the BofA, all roads lead back to the federal government. ... Buried within a brief filed recently to Judge Rakoff, the SEC included the bombshell detail that BofA had in fact supplied the Fed and Treasury with a financial document that included information about the bonuses. ... If the Fed and Treasury were fine with these payouts, and didn't demand their discliosure, pehaps Messers. Paulson and Bernanke should be the parties in the SEC dock", my emphasis, Editorial at the WSJ, 5 September 2009, link: http://online.wsj.com/article/SB10001424052970204731804574387044194076168.html.

"The letter on Tuesday from David A. Markowitz, the chief of Mr. Cuomo's Investor Protection Bureau, said that 'attorney-client privilege is hindering this office's ability to make fair and fully informed decisions as to what charges, if any, to bring and whether individual [BofA] officers should be charged.' in its response, [BofA] disputed that assertion on several fronts, writing that 'because [BofA] did not violate the law, it has not offered reliance on legal advice as a defense'," Zachery Kouwe at the NYT, 10 September 2009, link: http://www.nytimes.com/2009/09/10/business/10bank.html.

"A federal judge threw out the [SEC's] proposed settlement with [BofA] over its disclosure of controversial bonuses paid to Merrill Lynch [ML] employees, in an unusual ruling that casts doubt about how the agency handles probes of major US companies. ... The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversy over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff's massive fraud despite several red flags. ... In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on [BofA] 'does not comport with the most elementary notions of justice and morality' because the company's shareholders--the victims of the alleged misconduct--are the same people being asked to pay the fine. He set a trial date for Feb. 1. ... Securities lawyers said they couldn't recall such a high-profile case being forced into a trial after the government and a company agreed to a settlement. In his ruling, Judge Rakoff often wrote that if bank executives in fact relied on legal counsel in crafting the proxy language, 'why are the penalties not then sought from the lawyers?' ... SEC spokesman John Nester said Monday the settlement, ... 'properly balanced all of the relevant considerations.' ... Wachtell, Lipton, Rosen & Katz, which represented [BofA], declined to comment. A lawyer for Shearman & Sterling, which represented [ML], declined to comment", my emphasis, Kara Scannell, Liz Rappaport & Jess Bravin at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB125294493976909051.html.

"'If the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them?' On this point, we think the judge is soft-pedaling the coercive nature of regulatory prosecution. ... Given all the dirty laundry already aired about this deal, including claims that [Fed] Chairman Ben Benrnake and former Treasury Secretary Hank Paulson forced a reluctant BofA to conclude its Merrill purhase, it's not surprising if the BofA was willing to pay for it to go away", Editorial at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB10001424052970203917304574413242609077958.html.

"With one rebuke from a federal judge, the [SEC's] tool for regulating financial markets and protecting investors faces daunting questions. Legal experts said Monday's rejection by US District Judge Jed. S. Rakoff of the agency's proposed $33 million settlement with [BofA] Corp. could bring tougher scrutiny of other settlements over alleged wrongdoing. For decades, the SEC has resolved more than 90% of its investigations through settlements, lawyers estimate. Defendants neither admit nor deny wrongdoing, and judges sign off on the deal with little scrutiny. In the process, government officials get to send a message of deterrence without blowing their enforcement budget, which could happen if too many cases went to trial. ... Other legal scholars noted that the judge undercut the derterrence message the SEC intended to deliver, suggesting that the proposed penalty was too light", my emphasis, Kara Scannell at the WSJ, 16 September 2009, link: http://online.wsj.com/article/SB125305845632913893.html.

"New York's attorney general, Andrew Cuomo, ramping up his investigation of Merrill Lynch's purchase by [BofA], issued subpoenas to the five directors on the bank's audit committee at the time fo the deal, according to people familiar with the situation. ... In a comment Wednesday, Mr. Cuomo said he wonders broadly where the boards were in this financial crisis, and whether BofA directors 'protected the rights of shareholders, were they misled, or were they little more than rubber stamps for management's decision-making?' ... 'Subpoenas by an attorney general of outside directors [are] quite unusual' for any reason, said Charles Elsdon, head of the Weinberg Center for Corporate Governance at the University of Delaware's business school", Liz Rappaport, Dan Fitzpatrick and Joann Lublin at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125312111880316599.html.

Get tough enforcement? Against whom? The Feds encouraged the BofA to violate securities law? Never. The SEC's case stinks.

Did the SEC violate New York Law?

I'm sure Nester is right. What were the "considerations"? A managing directorship at say GSG, four New York BigLaw partnerships, and what else Nester? Who says the SEC can't be bought? We remember Nester. He appears in my 23 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/who-is-stephen-cutler-2.html.

Would the BofA pay $33 million to stay in Zimbabwe Ben's good graces? It's peanuts. Through interest rate suppression, the BofA gets much more than $33 million a year from the Fed.

The SEC's "biggest tool" is as threatening as Monty Python's "comfy chair" wielded by the Spanish Inquisition. Consent decrees are an SEC tool. To protect miscreants, not investors. For decades I have advocated the SEC be deprived of this tool. The message the SEC sends with these settlements is: it can be bought off. Cheaply with big jobs to SEC enforcement personnel.

Will Cuomo's inveastigation lead to ZB and Henry Paulson? If not, what's he doing? IS the FBI looking to "Spitzer" Cuomo? Stay tuned.

Who Does the SEC Protect?

"The [SEC] is in the hot seat again. ... With the SEC taking the heat, the other government agencies involved in the melee over the BofA-Merrill merger--the [Fed] and the Treasury--must be breathing a sigh of relief. For now, at least. ... According to the SEC, BofA executives told the agency that they supplied the Fed and Treasury with a financial document that included an expected incentive compensation payout of $3.37 billion to Merrill executives. This document was circulated at a meeting in December 2008 during which BofA exectives and federal officials met to discuss the unexpectedly large fourth-quarter losses at Merrill. ... This revelation, buried in the SEC legal brief, is the first mention that Treasury and the Fed were made aware of the Merrill bonuses before they approved federal assistance for BofA", my emphasis, Michael Corkery at the WSJ, 26 August 2009, link: http://blogs.wsj.com/deals/2009/08/25/bofa-to-sec-fed-and-treasury-knew-about-merrill-bonuses/

"Federal judge Jed. S. Rakoff fired a new shot in his challenge to a $33 million settlement by [BofA] over investor disclosures, saying the government's justification for letting individual executives off the hook is 'at war with common sense.' ... The SEC has said it couldn't investigate individual executives' culpability because they said they relied on lawyers' advice. Unless the executives waived their right to keep the advice private, the SEC said it would face 'substantial obstacles" to building a case. ... If that were the regulator's policy, 'it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel.' He said if the company insists on attorney-client privilege, there is no way to test the assertion and determine whether executives or their lawyers were culpable", my emphasis, Jess Bravin at the WSJ, 26 August 2009, link: http://online.wsj.com/article/SB125123100930658077.html.

"A federal judge told the [SEC] on Tuesday to give a better explanation of why it had agreed to a settlement with [BofA] over bonus disclosures without pressing the bank's executives harder. ... Responding swiftly, the judge questioned why the SEC did not insist that [BofA] waive attorney-client privilege before striking a $33 million settlement. He also questioned whether bank executives--or the outside lawyers--should be charged in the case. ... 'It is extremely unsual for a judge to want to look under the bonnet,' said George B. Newhouse Jr., a former prosecutor and now a partner at Brown, White & Newhouse, a law firm in Los Angeles", Louise Story at the NYT, 26 August 2009, link: http://www.nytimes.com/2009/08/26/business/26bank.html.

The Fed and Treasury knew before the BofA-Merrill merger. Amazing.

If the SEC's legal staff is so weak, it is unaware of the "crime-fraud" exception to lawyer-client privilege and that the "advice of counsel" defense will not dismiss a criminal indictment, Mary Schapiro should fire her legal staff. Eric Holder, what say you? Isn't "advice of counsel" a defense an accused can raise to show he lacked mens rea? Since it is no element of a crime, it will not dismiss an indictment, correct? The SEC pursues civil actions and thinks the "advice of counsel" defense prohibits its investigating the BofA-Merrill deal. Who is the SEC kidding? Good show judge Rakoff. Keep these rulings coming.

It is unusual Newhouse. Unfortunately. Did the SEC protect some New York BigLaws in return for seven-figure jobs in 2-3 years for some SEC staff attorneys? Or to protect Zimbabwe Ben? Or Hank "fomerly of Goldman Sachs" Paulson? Stay tuned.

Danger, Uncle Sam at Work

"Bank of America Corp. [BofA] agreed to pay $33 million to settle a civil lawsuit alleging that it misled shareholders about billions of dollars in bonuses promised to Merrill Lynch & Co. employees when it bought the troubled firm at the height of the financial crisis last year. ... [BofA], the largest US bank in assets, neither admitted nor denied wrongdoing in settling the lawsuit, describing the agreement with the [SEC] as a 'constructive conclusion' to the matter. The case reflects the SEC's heightened effort to speed up cases, as new SEC Chairman Mary Schapiro and new enforcement director Robert Khuzami take a harder line with companies and individuals under investigation. ... The SEC said the documents show Merrill wouldn't pay year-end bonuses before the deal closed without [BofA's] consent. The bank's view is that the proxy didn't state Merrill bonuses would go unpaid and that it was well known that Merrill had been holding money for year-end awards, according to people familair with the bank's thinking on the matter. ... The US ultimately provided an additional $20 billion to push the deal forward, making [BofA] the second lagest recipient of bank bailout funds after Citigroup", my emphasis, Dan Fitzpatrick and Kara Scannell at the WSJ, 4 August 2009, link: http://online.wsj.com/article/SB124931920883302049.html.

I'm with the BofA on this. This is another empty SEC settlement. Uncle Sam gives the BofA $20 billion and the SEC gets $33 million, .165% back. Big deal. That Merrill held the bonus money was public knowledge. I see this settlement as Uncle Sam's continuing intimidation effort at BofA.

Fed Transparency

"To the conspiracy theorists, the [Fed] is a dangerous, shadowy and unaccountable organisation--like the [UN] or CIA but without the black helicopters. For more than 200 years, [sic, the Fed was founded in 1913] critics of the central bank have railed against an alleged lack of transparenncy, a threat to the fabric of the US by unelected moneymen. ... Defenders of free-market capitalism worry about the actions of Ben Bernanke, Fed chairman, who is alleged to have coerced Bank of America into completing its acquisition of Merrill Lynch in spite of mounting losses. ... There are fears of global skullduggery that Mr. [Ron] Paul outlined as he cross-examined Donald Kohn, vice-chairman of the Fed, last week. 'You say it's the public's interest, I don't that [that] reassures a lot of people, because all of a sudden we think, "What are you doing? Are you protecting the bankers' interests?"' ... Defenders of the Fed--including Tim Geithner, the former New York Fed chairman who is now Treasury secretary, and Barney Frank, the House financial services committee chairman--are trapped. ... The Fed does not believe that the sky will fall in if it faces more audits from the Government Accountability Office, as Mr. Paul's bill proposes, but it is concerned about the movement towards increased congressional oversight and the potentially chilling effects of its board discussions", Tom Braithwaite at the FT, 15 July 2009.

The move toward more Fed transparency is laughable. To effect monetary policy, the Fed must mislead the market. Think about it. Kill the Fed. Now! I don't ask if the Fed protects bankers. That's one of its jobs!

Stress Test Kabuki Dance

"The [Fed] directed at least seven of the nation's biggest banks to bolster their capital levels by $65 billion while effectively blessing the stability of six others, marking for the first time a bold line between some of the nation's stronger and weaker banks. ... By contrast, regulators have told Bank of America Corp. it must take steps to address a roughly $34 billion capital shortfall, the biggest gap among its peers. Wells Fargo & Co. needs to find $13 billion to $15 billion; GMAC LLC, $11.5 billion; Citigroup Inc., $5 billion; and Morgan Stanley, $1.5 billion. ... Financial markets seemed to shrug off news of the capital shortfalls. ... Some investors said the news was less negative than many had feared. Others held out the idea that many banks would be able to boost their capital without having to seek fresh government funds. The stress tests--designed to examine individual banks' ability to withstand future losses--helped alleviate the near-panic that investors felt at the beginning of the year as many worried some banks might have to be nationalized. ... 'I think this will be a confidence-instilling announcement,' [FDIC] Chairman Shelia Bair told a Senate panel Wednesday. 'There will be additional needs for capital buffers for some institutions, but I think there will be mechanism to do that within the next six months.' ... Now, some of the stronger banks will be permitted to repay funds borrowed from the government under its [TARP] and escape the related restrictions on compensation and dividend payments. ... Banks are being told to boost their capital not because they are in trouble, but because regulators think they don't have a big enough buffer to continue lending if the economy worsens in the coming months", my emphasis, Deborah Solomon, David Enrich and Damian Paletta (SE&P) at the WSJ, 7 May 2009.

"For nearly three months, more than 150 federal employees have been scrutinizing bank books, questioning bankers' projections and comparing each bank's expectations. The government now knows more about the 19 banks, which represent about two-thirds of all US bank assets, than anyone", my emphasis, David Wessel (DW) at the WSJ, 7 May 2009.

"BofA needs to boost common equity by about $35 billion following the tests. Conveniently, it has about $33 billion of private preferred shares. ... True, forcing a conversion solely on private investors could make it hard for banks to sell preferred into private markets for years to come. ... Meanwhile, amid the euphoria, it is important to remember that switching preferred for common is just juggling capital, not raising new money", Peter Eavis at the WSJ, 7 May 2009.

"A shareholder revolt cost Ken Lewis, [BofA's] chief executive, his title as chairman of the board last week, but yesterday's news that BofA will probably need to raise $34bn in new capital could cost him the other part of his job. ... Jeffrey Sonnenfeld of the Yale School of Management said the latest revelations about BofA's financial condition were grounds for Mr. Lewis' dismissal. ... He added that BofA's acquisition of Countrywide Financial and Merrill Lynch in the past year were handled poorly, especially because Mr. Lewis did not inform BofA's shareholders about the size of Merrill's losses prior to the vote on approving the deal: 'Ken Lewis way overpaid on two acquisitions, and failed to inform his true owners of the status of the purchases he was going to make'," my emphasis, Greg Farell at the FT, 7 May 2009.

"The federal government projected that 19 of the nation's largest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves. The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues. ... But questions remain about the stress tests' rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks. ... The information provided by the stress tests will 'make is easier for banks to raise new equity from private sources,' Mr. [Tim] Geithner said. ... Nine of the stress-tested banks--including titans like JP Morgan Chase & Co. and ... [GSG] as well as several regional institutions--have adequate capital. That finding essentially represents a seal of approval from the Fed. ... The test results were vigorously contested by some banks, which argued they were superficial and didn't reflect significant differences in the health of various banks' loan portfolios", my emphasis, David Enrich, Robin Sidel and Deborah Solomon at the WSJ, 9 May 2009.

"Why did the stress tests treat [GSG] better than Morgan Stanley [MS]? ... As a result of Thursday's stress test, [MS] raised $4 billion in common stock. That shareholder dilution mightn't have been needed if the authorities had come up with stronger earnings generation for [MS]. Were the stress tests' assumptions 'stacked in [GSG's] favor?' asks Michael Hecht at JMP Securities. ... The government documents don't give enough detail to explain the gap. ... Few would argue that [GSG] isn't the stronger of the two, and the government may have its [GSG] projections right. But the numbers appear to bake in the idea that [GSG] is savvier at making money from taking risk. The US had better be right", Peter Eavis at the WSJ, 9 May 2009.

"The [Fed] significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of bargaining. In addition, according to bank and government officials, the Fed used a different measure of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. ... Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor. ... [BofA] was 'shocked' when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations. ... At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as 'asinine,' were particularly heated, according to people familar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings. ... With the stress tests, government officials were walking a fine line. If the regulators were too tough on banks, they risked angering their constituents and spooking markets. But if they were too soft, the tests could have lost their credibility, defeating their basic confidence-building purpose", my emphasis, David Enrich, Dan Fitzpatrick and Marshall Eckblad (EF&E) at the WSJ, 9 May 2009.

"I've been thinking about stresses. Actually I've been thinking about Treasury Secretary Geithner's stress tests, rosy scenarios, the missing laugh track, the classes of 2009, households, and the automotive giants. ... You see an army of 200 federal examiners had gone over the books and calculated the impact of growing unemployment, asset (particularly real estate portfolio lending) deterioration, potential exposure on other investments, and various personal-credit/ loan write-offs. The unstated goal was to re-assure the general public that our banking behemoths were on solid ground and that there was no reason to fear any 1930's type meltdown. ... It was set up from the get go to advance all of them to the next grade level in the spirit of 'no child (or mega bank) left behind.' Well, guess what? THAT is exactly what happened! ... The worst case scenarios (of what can go wrong, will go wrong) for the coming two years suggested a 'further potential exposure' of a mere $599 BILLION in losses (roughly 5.1% of total assets)", Fred Cederholm (FC) Financial Sense, 11 May 2009, link: http://www.financialsense.com/editorials/cederholm/2009/0511.html.

"Are America's banks: a) healthy, b) insolvent, or c) being kept alive by the government but delighted to pretend otherwise? ... That any bank can sell equity is one big benefit of the stress test. By producing a credible estimate of losses over the next two years--$600 billion--officials have restored some confidence in the banks' word. ... But investors can now buy a bank's shares and be confident that its books are not being cooked flagrantly and that it is not about to be nationalised", my emphasis, Economist, 14 May 2009, link: http://www.economist.com/finance/PrinterFriendly.cfm?story_id=13665327.

"Finally, a stimulus plan Wall Street can get behind. ... But thanks to the government's stress tests, Wall Street is being flooded with fees. A number of the stress-tested 19 financial institutions, whether told by the [Fed] to raise money or to boost their capital cushions or not, are rushing to sell new shares. The 10 that have been told to plug a capital hole have a month to submit a capital-raising plan and than six months to raise the cash. ... What does that mean for Wall Street? Plenty of underwriting fees. ... Add to those offerings [GSG's] sale of $5 billion in common stock last month, and the fees that were generated from TARP bank follow-on deals in the past two months stand at more than $670 million. The big winners? The investment banks of [GSG], [MS], JPMorgan Chase, Barclays, and Wells Fargo and its Wachovia unit, which will share in this fee party, according to Dealogic", Stephen Grocer at the WSJ, 14 May 2009.

"Federal officials have pressured [BofA] to revamp its board by bringing in directors with more banking experience, as regulators place the bank under increasingly heavy government scrutiny. The move represents unusual influence by the federal government over the workings of a financial institution in which it doesn't own a stake. It's particularly significant because many of the bank's woes stem from its purchase of Merrill Lynch & Co.--an acquisition that was completed after heavy prodding by federal regulators. The Merrill deliberations were the beginning of regulators' deepening involvement in the Charlotte, NC, lender's day-to-day operations. ... Prior to those moves, federal banking regulators--the [Fed] and the Office of the Comptroller of the Currency--had signalled to the bank's leadership that such steps would be well received by the federal government. Government officials also suggested that the task of reshuffling the board be led by independent directors, and that the board needed more members with banking expertise", my emphasis, Dan Fitzpatrick and Damian Paletta at the WSJ, 15 May 2009.

Come on SE&P, you can do better than this. How do you know what Zimbabwe Ben (ZB) thinks? Would ZB make a confidence shattering announcement? What do we learn from this? Ken Lewis "rats out" ZB and Hank Paulson, the BofA gets dinged for $34 billion. GSG wants to return its TARP funds, it's fine. How can anyone take these tests seriously? Is the BofA worse off than Citigroup? I have no idea what these tests consisted of. ZB said on television they were not solvency tests. What then?

DW, are you serious? I'll "audit" you comment. Assume 175 of ZB's "finest" worked 50 hours a week for 11 weeks. Further, if they were Big 87654 drones, they would be billed at a $325 per hour weighted average. By the magic of multiplication I get: 175 x 11 x 50 x $325 = $31.3 million. This is my "shadow" Big 87654 stress test price. Last year KPMG billed Citi $98 million, PWC billed BofA $83 million, that's $181 million already! What did the "stress testers" do? My surmise: a whole lotta nuttin'. The Big 87654 should be furious with DW for suggesting ZB & Co. know more about these banks than the Big 87654. On the other hand ...

Has Eavis ever got this right.

Is Sonnenfeld working for ZB?

Beware round numbers. I surmise ZB decided the stress tests' minimum future losses were $600 billion to still have "market cred". Starting with $600 billion, the stress testers job was: allocate losses to favored and disfavored banks, like GSG and BofA respectively. If a bank's losses exceed ZB's projections, can its stockholders sue the Fed as if it was a CPA firm rendering an opinion? Seal of approval? Is the Fed now an underwriter?

Quoted without comment.

Did EF&E read their article? Who wants a Fed which is "responsive to industry feedback"? Isn't that partially responsible for "the crisis"? I'd welcome Wells Fargo's lawsuit. Who knows what discovery might reveal? Regulators "risked angering their constituents". Who are? TBTF bank managements, or the members of Pat Buchanan's pitchfork brigade? The tests were a "confidence-building" measure. The Fed could have saved plenty. It could have asked the DOJ to let Bernie Madoiff run the stress tests in return for a reduced sentence. How about it ZB and Eric Holder? Bernie needs something to do with his time.

Well said FC. FC is an Illinois CPA who is an S&L crisis veteran.

Does the Economist realize it indicted the: Big 87654, SEC, OCC and PCAOB all at once? Ye who favor more regulation, think about this.

It's good to see GSG will get something out of this.

Who does the Fed want added to BofA's board? Vikram Pandit? Lloyd Blankfein? That this is retaliation for Ken Lewis violating the Fed's "omerta" becomes more obvious every day.