Lehman Hid Risks by Channeling Billions of Dollars Through Alter Ego

Lehman Brothers’ headquarters in Midtown Manhattan in 2008. It is now the offices of Barclays Capital.

The New York Times - It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.
Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.

Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to subprime mortgages and commercial real estate. Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.

European Nations Offer $40 Billion to Help Greece

The New York Times - BRUSSELS — European leaders sought Sunday to quash any doubts about their resolve to help Greece, offering the country a one-year aid package of up to €30 billion at a much lower interest rate than investors have been demanding.

The plan, under which countries in the euro zone would lend Greece money at 5 percent interest — compared with as much as 7.5 percent the government paid on the bond markets last week — brought the currency union significantly closer to what would be the first rescue of a member in its history.

At the same time, the size of the financial commitment, the equivalent of $40.5 billion, which was above market expectations, could at least postpone the need for aid by reassuring investors and helping Greece refinance debt that comes due by the end of May.

Taxing the Banks For the Bailout

 President Obama with his economic team at the White House on Thursday. He said he planned to “recover every single dime” of bailout losses.

The New York Times - WASHINGTON — President Obama laid down his proposal for a new tax on the nation’s largest financial institutions on Thursday, saying he wanted “to recover every single dime the American people are owed” for bailing out the economy.

With both anti-Wall Street sentiment and the budget deficit running high, Democratic leaders on Capitol Hill welcomed the proposal, which could ultimately raise up to $117 billion to cover projected bailout losses. Republicans were uncharacteristically silent, their instinctive opposition to tax increases apparently checked by their fear of defending big bankers. And the financial industry lobby seemed splintered, with small community banks happily exempted
http://www.nytimes.com/2010/01/15/us/15tax.html

Wall Street, the Depression and the Lords of Finance

These six books — about financial history and how economics went astray — are informative and enjoyable.

What follows is my list of six for 2009, books that I found informative and enjoyable this year. Three of the books cover aspects of financial history, including one on the greatest capitalists ever and two on the era that led to the Great Depression. The other three deal with how economics went astray.

Bills Would Set Limits on Financial Companies to Alleviate Risk

President Franklin D. Roosevelt signed the Glass-Steagall Act, passed in 1933, separating commercial and investment banking.

Wall Street Journal  -  Democrats are advancing proposals in Congress designed to limit the size and complexity of financial companies so that any collapse wouldn't damage the broader economy, a sign that lawmakers are responding to anti-Wall Street sentiment by toughening the administration's rewrite of finance rules.

The proposals would allow the government to break up healthy financial companies, and in some cases, would reassert rigid demarcations within finance that were cleared away in 1999, such as barring commercial banking firms and investment banking firms from merging.

Large financial companies, and even some Obama administration officials, are nervously watching the debate. Lobbyists for large financial-services companies, including J. P. Morgan Chase & Co., Bank of America Corp., Prudential Financial Inc., and MetLife Inc. scrambled in recent days to reach out to Capitol Hill aides, people familiar with the matter said.

U.S. Considers Reining In ‘Too Big to Fail’ Institutions

A protester in March of 2008 framed the question that Barney Frank, chairman of the House Financial Services Committee, and Treasury Secretary Timothy F. Geithner will try to answer this week with proposals to tighten regulation.


 New York Times - WASHINGTON — Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year — how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble. The White House plan as outlined so far would already make it much more costly to be a large financial company whose failure would put the financial system and the economy at risk. It would force such institutions to hold more money in reserve and make it harder for them to borrow too heavily against their assets.
Setting up the equivalent of living wills for corporations, that plan would require that they come up with their own procedure to be disentangled in the event of a crisis, a plan that administration officials say ought to be made public in advance.

U.S. Expected to Own 70% of Restructured G.M.

DETROIT — In better times, many employees of General Motors called their company “Generous Motors” because of its rich benefits.

Now G.M. may stand for something else: Government Motors.

The latest plan for the troubled automaker, which is expected to file for bankruptcy by Monday, calls for the Treasury Department to receive about 70 percent of a restructured G.M.

Including the more than $20 billion that has already been spent to prop up G.M., the government will provide G.M. at least $50 billion to get the company through Chapter 11, people with direct knowledge of the situation said Tuesday. By some estimates in Detroit, tens of billions beyond that amount may be required.

The United Automobile Workers, meanwhile, will hold up to 20 percent through its retiree health care fund, and bondholders and other parties will get the remaining share. Shareholders would be virtually wiped out.

Although it has been clear for weeks that Treasury would have a majority stake of a reconstituted G.M., a 70 percent share — a figure that could still change — is higher than what had been expected. http://www.nytimes.com/2009/05/27/business/27auto.html

Obama Budget Cuts Point To Fights Ahead

Budget cuts detailed by the Obama administration Thursday set the President up for some fights down the road, WSJ's Jonathan Weisman reports. Despite cutbacks in 121 programs, the country's forecast deficit is still over a trillion dollars.

Poll Finds Obama More Popular With Public Than Policies

WASHINGTON -- A hundred days into his presidency, Barack Obama's standing with the public remains high, increasing the odds he can enact his ambitious agenda. Most Americans like their new president, even amid some reservations about his policy goals, a new Wall Street Journal/NBC News poll finds.

The poll paints the image of a popular president, but also offers cautionary notes for the White House, including growing worry over the rising federal deficit, a solid majority opposing his release of Bush-era memos on interrogation techniques and slipping support for his signature economic-stimulus bill. Mr. Obama faces both a rising number of people who view him as a liberal rather than a moderate, and a populist concern that he's not tough enough on Wall Street.

There is early, tentative support for some of Mr. Obama's most complex policy goals, including health-care and energy overhauls, and support for most of the major moves he's already made.
Poll Data

But the poll also finds that the president himself is more popular than his policies, a divide that may catch up with him as Congress begins debate over the big issues in earnest.

The poll finds yet another jump in the portion of the public that sees the nation headed in the right direction, despite the continued hard times, to the point where survey participants are now evenly divided between those who see things going in the right direction, and those who believe things are on the wrong track. That's the most optimistic finding in more than five years, and it suggests that the president himself is injecting this optimism into people, and that his own job approval numbers are likely to stay strong, pollsters say.http://online.wsj.com/article/SB124095605121565495.html

AIG Delays Proxy Filing to Reshuffle Its Board

The Wall Street Journal - A potential shakeup of the board of American International Group Inc. has precipitated a delay in the filing of the insurer's annual proxy statement, according to a person familiar with the matter.

The aim is to expand and reshuffle the company's 11-member board, this person said.

AIG's board has remained largely intact since the government rescued it from the brink of bankruptcy in September.

The maneuvers around the proxy illustrate the complicated oversight of AIG. Upon the rescue, the government took a nearly 80% stake in the company. The government has appointed three trustees to oversee taxpayers' stake.

Now, the American International Group board is accountable mostly to the trustees but also to the other shareholders owning a remaining stake that is slightly more than 20%.

It has been previously disclosed that three board members are expected not to stand for re-election to the board at AIG's coming annual meeting. In recent days there has been uncertainty at top levels of the company about reasons for the delay in the proxy filing, according to people familiar with the matter

House Approves 90% Tax on Bonuses After Bailouts

House Financial Services Committee members met in the Capitol Thursday to discuss taxing bonuses at some firms.

The New York Times - WASHINGTON — The House overwhelmingly approved on Thursday a near total tax on bonuses paid this year to employees of the American International Group and other firms that have accepted large amounts of federal bailout funds, rattling Wall Street as lawmakers rushed to respond to populist anger.

Despite questions about the legality of the retroactive 90 percent levy, Democrats and some Republicans said the tax on bonuses for traders, executives and bankers earning more than $250,000 was the quickest way to show angry Americans that Congress intended to recoup the extra dollars. Even backers of the measure noted it was an extraordinary step.

The House vote sent some employees into a panic about the prospect of, in effect, having to give up money they might already have spent. And it had regulators fearing it could undermine the Treasury’s efforts to stabilize the financial system if banks tried to flee the bailout program or if other firms refused to participate in coming rescue operations to protect their bonuses, some executives said.

Vikram S. Pandit, chief executive of Citigroup, lobbied against the legislation in a meeting Thursday with the Senate majority leader, Senator Harry Reid, according to an industry official.

But the rush to curb the bonuses by lawmakers, many of whom have previously been torn about limiting executive compensation, reflected Congressional anxiety about heightened public dismay over the bailout. The Senate is expected to consider a similar tax on bonuses but has some differences with the House, which could slow final action.http://www.nytimes.com/2009/03/20/business/20bailout.html

Scorn Trails A.I.G. Executives, Even in Their Driveways

The New York Times - The A.I.G. executive who was nicknamed “Jackpot Jimmy” by a New York tabloid walked up the driveway toward his bay-windowed house in Fairfield, Conn., on Thursday afternoon. "How do I feel?” said the executive, James Haas, repeating the question he had just been asked. “I feel horrible. This has been a complete invasion of privacy."

Mr. Haas walked on, his pink shirt a burst of color on a slate-gray afternoon. The words came haltingly. "You have to understand,” he said, “there are kids involved, there have been death threats. ..." His voice trailed off. It looked as if he was fighting back tears.

"I didn’t have anything to do with those credit problems,” said Mr. Haas, 47. “I told Mr. Liddy” — Edward M. Liddy, the chief executive of A.I.G., the insurance giant — “I would rescind my retention contract.”

He ended the conversation with a request: “Leave my neighbors alone.”

Too late. Jean Wieson, who has lived down the block for 24 years, had stopped her car in front of Mr. Haas’s house before he arrived home. She was angry about the millions of dollars in bonuses paid to its executives, the credit-default swaps that brought American International Group to its knees, the $170 billion the federal government has spent to prop it up. "It makes me absolutely sick," she said. "It’s despicable. It’s disgusting what these people have done. They should be forced to give every cent back.http://www.nytimes.com/2009/03/20/nyregion/20siege.html

A.I.G. Sues its Owner - U.S. Government Asking Taxes Be Returned

Demonstrators marched in New York’s financial district Thursday to protest corporate excesses.

The New York Times - While the American International Group comes under fire from Congress over executive bonuses, it is quietly fighting the federal government for the return of $306 million in tax payments, some related to deals that were conducted through offshore tax havens.

A.I.G. sued the government last month in a bid to force it to return the payments, which stemmed in large part from its use of aggressive tax deals, some involving entities controlled by the company’s financial products unit in the Cayman Islands, Ireland, the Dutch Antilles and other offshore havens.

A.I.G. is effectively suing its majority owner, the government, which has an 80 percent stake and has poured nearly $200 billion into the insurer in a bid to avert its collapse and avoid troubling the global financial markets. The company is in effect asking for even more money, in the form of tax refunds. The suit also suggests that A.I.G. is spending taxpayer money to pursue its case, something it is legally entitled to do. Its initial claim was denied by the Internal Revenue Service last year.

The lawsuit, filed on Feb. 27 in Federal District Court in Manhattan, details, among other things, certain tax-related dealings of the financial products unit, the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall. Other deals involved A.I.G. offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg, A.I.G.’s former chairman, and the Starr International Company, a privately held enterprise incorporated in Panama, and commonly known as SICO.http://www.nytimes.com/2009/03/20/business/20aig.html

Obama Administration Launches Housing Plan

The Wall Street Journal - WASHINGTON -- The Obama administration Wednesday unveiled key guidelines for its housing market rescue plan that should enable loan servicers to immediately start modifying eligible mortgages.

Two weeks ago, the president laid out a clear path forward to helping up to 9 million families restructure or refinance their mortgages to a payment that is affordable now and into the future," Treasury Secretary Timothy Geithner said Wednesday in a statement. "Today, we are providing servicers with the details they need to begin helping eligible borrowers."

The administration's new housing rescue effort includes a program aimed at reducing the amount homeowners owe per month. Under the program, the lender will have to first reduce monthly payments on mortgages so that the borrowers' monthly mortgage payment is no greater than 38% of his or her income. The program will then match further reductions in monthly payments dollar-for dollar from 38% down to 31% debt-to-income ratio for the borrower.

The modified payments will be kept in place for five years and the loan rate will be capped for the life of the loan, Treasury said in technical documents provided Wednesday morning. After five years, "the interest rate can be gradually stepped-up by 1% per year to the conforming loan survey rate in place at the time of the modification."

Treasury said that in order to reach that 31% debt-to-income ratio level, interest payments will first be reduced down to as low as 2%.

Meanwhile, servicers will receive an upfront fee of $1,000 for each eligible modification meeting guidelines established under this initiative. Servicers will also receive "pay for success" fees, as long as the borrower is successful at staying in the program, of $1,000 each year for three years, said Treasury.

http://online.wsj.com/article/SB123617623602129441.html

Banks May Need to Be Nationalized

Automakers Seek $14 Billion More in Aid

G.M.'s headquarters in downtown Detroit.
The New York Times - DETROIT — The price tag for bailing out General Motors and Chrysler jumped by another $14 billion Tuesday, to $39 billion, with the two automakers saying they would need the additional aid from the federal government to remain solvent.

In return, the two companies also promised to make further drastic cuts to all parts of their operations, in the hope that they can eventually strike a balance between their bloated cost structures and a dismal market for new car sales.

G.M., for example, said it would cut 47,000 more of its 244,000 workers worldwide; close five more plants in North America, leaving it with 33; and cut its lineup of brands in half, to just four: Chevrolet, Cadillac, GMC and Buick.

The Pontiac brand will have a much smaller role, if any, in G.M.’s future, and the company also said it would phase out its Saturn brand, which it once hoped would build small cars to counter the best of the Japanese brands.

G.M. also said it had made progress in discussions with the United Automobile Workers union and its bondholders to reduce its costs further.

The cash crisis will require fast action by the administration’s new cabinet-level Presidential Task Force on Autos, which is overseeing the reorganization of G.M. and Chrysler.

The deteriorating finances of the two companies present the Obama administration with two options, neither of them appealing.

It can provide the money in the hopes that the companies will stabilize, and no longer have to keep pushing workers into a growing pool of people without jobs. But there are no guarantees, as the Treasury Department learned on Tuesday when the automakers filed updates on their restructuring plans, that they might not be forced to come back again with requests for more money.

But if the federal government balks at the automakers’ requests, that would mean the two companies probably would have no choice but to file for bankruptcy protection, because they are losing hundreds of millions of dollars each month.

And the car companies said on Tuesday that the cost of a bankruptcy reorganization, with the government providing financing to help it through that process, would be far greater than their latest loan requests. Without such help, the companies would have to liquidate, creating staggering new job losses.

In a statement, the administration said Tuesday night that its task force would be reviewing the carmakers’ reports in coming days, adding that “more will be required from everyone involved — creditors, suppliers, dealers, labor and auto executives themselves — to ensure the viability of these companies going forward.”

The third Detroit auto company, Ford Motor, has not received federal assistance and has no requests pending.http://www.nytimes.com/2009/02/18/business/18auto.html

Bailout Likely to Focus on Most Afflicted Homeowners

The long-awaited housing bailout will finally be announced on Wednesday.

In a speech in Phoenix, a signature real estate boomtown gone bust, President Obama will explain his plan to reduce foreclosures. And the key to understanding that plan will be remembering that there are two different groups of homeowners who are at risk of foreclosure.

The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.

The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off.http://www.nytimes.com/2009/02/18/business/economy/18leonhardt.html

Bailout Needs Some Strings Attached to Limit Pay

The New York Times - JUST in case you missed it: The Congressional Oversight Panel monitoring the Treasury Department’s bailout of broken banks — the Troubled Asset Relief Program — reported last week that Henry M. Paulson Jr.’s team at Treasury paid significantly more for the assets it bought from banks than they were worth when the deal was announced in the fall.

“The panel’s analysis revealed that in the 10 largest transactions made with TARP funds, for every $100 spent by Treasury, it received assets worth, on average, only $66,” the report said. “This disparity translates into a $78 billion shortfall for the first $254 billion in TARP funds that were spent.”

More taxpayer money down the drain, alas. And all the more reason to focus closely on executive pay restrictions at any bank that receives TARP funding.

Although our long-running financial despond has produced few real positives, surely this is one: Investors are finally seeing just how regally executives live on their shareholders’ dimes. Maybe now they will do something about it.

During good times, banks either hide or try to justify such perks as fleets of corporate jets and Las Vegas junkets. But as companies run to taxpayers for their bailout billions, they are now being forced to forgo the Gulfstreams, the tee times at Pebble Beach and those sumptuous spa treatments.

Could shame, that long-lost American character trait, be making a comeback? Not likely. So it’s important to make Washington’s plan to rein in executive pay airtight. Loud rebukes against executive excess are amusing, but a $500,000 cap on salary means only that the executives will be paid some other way. And requiring companies to recover compensation only if an executive is found to have lied on financial statements? Good luck with that. http://www.nytimes.com/2009/02/08/business/08gret.html?partner=permalink&exprod=permalink

Congress Strikes $789 Billion Stimulus Deal

The Wall Street Journal - WASHINGTON -- Congress and the White House reached accord on a $789.5 billion economic-recovery package that would shower hundreds of billions of dollars in tax relief on individuals and businesses and spark an infrastructure building boom, from the nation's ports and waterways to its schools and military bases. The deal all but clinches passage of one of the largest economic rescue programs since Franklin Roosevelt launched the New Deal.

President Barack Obama, speaking at a Northern Virginia construction site, hailed an "endeavor of enormous scope and scale." The package dwarfs the military budget and exceeds the cost of the entire Iraq war since the invasion of 2003.

Defying two decades of mostly Republican-led efforts to diminish federal authority and focus on lifting the economy through tax cuts, the legislation would expand unemployment insurance, tilt federal assistance to the poor, launch major efforts to streamline health-care delivery and give Washington a larger hand in local education spending.

The plan may be only a down payment on the Obama administration's effort to turn around an economy that has shed 3.6 million jobs since December 2006. Both Mr. Obama and Democratic leaders lowered their work-creation expectation Wednesday. They had originally said their goal was to create, or save, four million jobs. Last night, they cut that to 3.5 million.

The president has framed the deal as the first leg of an economic program aimed also at unclogging credit markets, lifting the housing market and tightening regulation of the financial and banking sector.

The agreement came late Wednesday after last-minute dickering over education and school-construction funds that dramatized the intensity of negotiations. The House and Senate convened a conference committee to bless the legislation and clear the way for action in the House as early as Thursday. Both chambers are expected to pass the compromise shortly.http://online.wsj.com/article/SB123436825805373367.html?mod=testMod

Market Pans Economic Stimulus

The Wall Street Journal - WASHINGTON -- Treasury Secretary Timothy Geithner promised forceful action to get credit flowing again in the economy, but the lack of detail in his much-anticipated speech helped drive stocks down nearly 5%, the worst selloff since President Barack Obama assumed office.

Announcing the Obama administration's financial-rescue plan in the Treasury's ornate Cash Room, Mr. Geithner described a mix of efforts that were mostly already known in their outlines. They included a fresh round of capital injections into banks, an expansion of a Federal Reserve lending program and a public-private effort to relieve banks of soured assets. The steps are aimed at getting $1 trillion to $2 trillion in financing flowing through the economy to kick-start both consumer and business lending.

The other prong of the administration's economic program advanced Tuesday as the Senate passed a $838 billion stimulus bill, setting up a conference with the House to reach a final bill, possibly by the end of this week.

Mr. Geithner committed the government to spending $50 billion to stem home foreclosures but said the details remain to be worked out in the next few weeks. Officials also will take the coming weeks to flesh out details, in consultation with the public, of a planned Public-Private Investment Fund to take soured assets off banks' books.

After his speech, Mr. Geithner met with lawmakers. The Treasury could find itself back on Capitol Hill at some point seeking more financial-rescue funds. Officials said they have enough for the time being, but didn't rule out asking for more.http://online.wsj.com/article/SB123427167262568141.html