The long-term mortgage, which began as a Depression-era remedy to keep Americans in their homes, may be out of step, given the current housing crisis.
Could it be time to say good-bye to the popular 30-year mortgage?
“The 30-year mortgage is outdated, the standard fixed-rate mortgage is outdated, and it has to be improved,” housing expert Robert J. Shiller told CNBC.
Shiller is Yale University professor and author, who is best known for co-creating the S&P/Case-Shiller Housing Indices, which track home prices in the United States.
“People want a more modern vehicle, and that's something we need to think about next,” Schiller said.
With the sweeping financial regulations bill nearly finished, the next big job of Congress may be to revamp the broken housing market and scrutinize all its key elements, even the vanilla 30-year mortgage.
Once Americans look more closely at this country’s housing situation, they may realize, and maybe even be surprised by, the fact that even though the US leads the world in 30-year mortgages, it doesn’t in home ownership.
“We spend a whole lot on housing in the US and don't necessarily get a very big bang for the buck,” said Mark A. Calabria of the Cato Institute.
American homeowners, it turns out, have a very sweet deal to buy their home sweet homes, with the government being their candy man. For instance, America is nearly alone in not charging a fee for paying off mortgages early. And it’s one of the most liberal countries in allowing interest to be tax-deductible.
“If America wants the government out of housing, it has to get used to a number of things,” said Raghuram G. Rajan former IMF economist, author of Fault Lines: How Hidden Fractures Still Threaten the World Economy and professor at the University of Chicago's Booth School of Business.
“For example, shorter mortgage durations, higher interest rates [and] potentially lower housing prices, because the cost of financing has gone up. Is it ready for that? I don't know.”
Wednesday, June 30, 2010
Tuesday, June 29, 2010
Financial Crisis: US Showed Extra Forgiveness for Big Banks in AIG Bailout - CNBC
At the end of the American International Group’s annual meeting last month, a shareholder approached the microphone with a question for Robert Benmosche, the insurer’s chief executive.
“I’d like to know, what does A.I.G. plan to do with Goldman Sachs ?” he asked. “Are you going to get — recoup — some of our money that was given to them?”
Mr. Benmosche, steward of an insurer brought to its knees two years ago after making too many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, A.I.G. has precious few.
When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.
But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.
This month, an Australian hedge fund sued Goldman on similar grounds. Goldman is contesting the suit and denies any wrongdoing. A spokesman for A.I.G. declined to comment about any plans to sue Goldman or any other banks with which it worked. A Goldman spokesman said that his firm believed that “all aspects of our relationship with A.I.G. were appropriate.”
A Legal Waiver
Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.
The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.
As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.
“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”
“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.
Regulators at the New York Fed declined to comment on the legal waiver but disagreed with that viewpoint.
“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. “This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies.”
This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.
About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G.
A Goldman spokesman said that he did not agree with that report’s assertion, noting that his firm considered itself to be insulated from possible losses on its A.I.G. deals.
Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground and, for that reason, regulators’ actions during the financial crisis need continued scrutiny. “We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,” he said.
Under the new legislation, the Federal Deposit Insurance Corporation will have the power to untangle the financial affairs of troubled entities, but bailed-out companies will pay most of their trading partners 100 cents on the dollar for outstanding contracts. (In some cases, the government will be able to recoup some of those payments later on, which the Treasury Department says will protect taxpayers’ interest. )
Sheila C. Bair, the chairwoman of the F.D.I.C., has said that trading partners should be forced to accept discounts in the middle of a bailout.
Regardless of the financial parameters of bailouts, analysts also say that real financial reform should require regulators to demonstrate much more independence from the firms they monitor.
In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.
On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.
From the moment the government agreed to lend A.I.G. $85 billion on Sept. 16, 2008, the New York Fed, led at the time by Timothy F. Geithner, and its outside advisers all acknowledged that a rescue had to achieve two goals: stop the bleeding at A.I.G. and protect the taxpayer money the government poured into the insurer.
One of the regulators’ most controversial decisions was awarding the banks that were A.I.G.’s trading partners 100 cents on the dollar to unwind debt insurance they had bought from the firm. Critics have questioned why the government did not try to wring more concessions from the banks, which would have saved taxpayers billions of dollars.
Mr. Geithner, who is now the Treasury secretary, has repeatedly said that as steward of the New York Fed, he had no choice but to pay A.I.G.’s trading partners in full.
But two entirely different solutions to A.I.G.’s problems were presented to Fed officials by three of its outside advisers, according to the documents. Under those plans, the banks would have had to accept what the advisers described as “deep concessions” of as much as about 10 percent on their contracts or they might have had to return about $30 billion that A.I.G. had paid them before the bailout.
Had either of these plans been implemented, A.I.G. may have been left in a far better financial position than it is today, with taxpayers at less risk and banks forced to swallow bigger losses.
A spokesman for Mr. Geithner, Andrew Williams, said it was easy to speculate about how the A.I.G. bailout might have been handled differently, but the government had limited tools. “At that perilous moment, actions were chosen that would have the greatest likelihood of protecting American families and businesses from a catastrophic failure of another financial firm and an accelerating panic, Mr. Williams said.
For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout. Mr. Paulson previously served as Goldman’s chief executive before joining the government.
A Close Association
Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis. According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.
Although the value of Goldman’s shares could have been affected by the terms of the A.I.G. bailout, Mr. Jester was not required to publicly disclose his stock holdings because he was hired as an outside contractor, a job title at Treasury that allowed him to forgo disclosure rules applying to appointed officials. In late October 2008, he stopped overseeing A.I.G. after others were given that responsibility, according to Michele Davis, a spokeswoman for Mr. Jester.
Ms. Davis said that Mr. Jester fought hard to protect taxpayer money and followed an ethics plan to avoid conflict with all of his stock holdings. Ms. Davis is also a spokeswoman for Mr. Paulson, and said that he declined to comment for this article.
The alternative bailout plans that regulators considered came from three advisory firms that the New York Fed hired: Morgan Stanley, Black Rock, and Ernst & Young.
One plan envisioned the government guaranteeing A.I.G.’s obligations in various ways, in much the same way the F.D.I.C. backs personal savings accounts at banks facing runs by customers. On Oct. 15, Ms. Dahlgren wrote to Mr. Geithner that the Federal Reserve board in Washington had said the New York Fed should try to get Treasury to do a guarantee. “We think this is something we need to have in our back pockets,” she wrote.
Treasury had the authority to issue a guarantee but was unwilling to do so because that would use up bailout funds. Once the guarantee was off the table, Fed officials focused on possibly buying the distressed securities insured by A.I.G. From the start, the Fed and its advisers prepared for the banks to accept discounts. A BlackRock presentation outlined five reasons why the banks should agree to such concessions, all of which revolved around the many financial benefits they would receive. BlackRock and Morgan Stanley presented a number of options, including what BlackRock called a “deep concession” in which banks would return $6.4 billion A.I.G. paid them before the bailout.
The three banks with the most to lose under these options were Société Générale, Deutsche Bank and Goldman Sachs. Société Générale would have had to give up $322 million to $2.1 billion depending on which alternative was used; Deutsche Bank would have had to forgo $40 million to $1.1 billion, while Goldman would have had to give up $271 million to $892 million, according to the documents.
Société Générale and Deutsche Bank both declined to comment.
Ultimately, the New York Fed never forced the banks to make concessions. Thomas C. Baxter Jr., general counsel at the New York Fed, explained that a looming downgrade of A.I.G. by the credit rating agencies\ on Nov. 10 forced the regulator to move quickly to avoid a default, which would have unleashed “catastrophic systemic consequences for our economy.”
“We avoided that horrible result, got the job done in the time available, and the Fed will eventually get out of this rescue whole,” he said in an interview.
And yet two Fed governors in Washington were concerned that making the banks whole on the A.I.G. contracts would be “a gift,” according to the document.
Gift or not, the banks got 100 cents on the dollar. And on Nov. 11, 2008, a New York Fed staff member recommended that documents for explaining the bailout to the public not mention bank concessions. The Fed should not reveal that it didn’t secure concessions “unless absolutely necessary,” the staff member advised. In the end, the Fed successfully kept most of the details about its negotiations with banks confidential for more than a year, despite opposition from the media and Congress.
During the A.I.G. bailout, New York Fed officials prepared a script for its employees to use in negotiations with the banks and it was anything but tough; it advised Fed negotiators to solicit suggestions from bankers about what financial and institutional support they wanted from the Fed. The script also reminded government negotiators that bank participation was “entirely voluntary.”
The New York Fed appointed Terrence J. Checki as its point man with the banks. In e-mail messages that November, he was deferential to bankers, including the e-mail message in which he thanked Mr. Blankfein for his patience.
Many Thank-Yous
After UBS, a Swiss bank, received details about the Fed’s 100-cents-on-the-dollar proposal, Mr. Checki thanked Robert Wolf, a UBS executive, for his patience as well. “Thank you for your responsiveness and cooperation,” he said in an e-mail message. “Hope the benign outcome helped offset any aggravation. Thank you again.”
The Congressional Oversight Panel, which interviewed A.I.G.’s trading partners about how tough the government was during the negotiations, concluded that many of the governments efforts were merely “desultory attempts.”
All of this was quite different from the tack the government took in the Chrysler bailout. In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.
During the A.I.G. bailout, the Fed seemed more focused on extracting concessions from A.I.G. than from the banks. Mr. Baxter, in an interview, conceded that the way that the New York Fed handled the negotiations meant that any resulting deal “took most of the upside potential away from A.I.G.”
The legal waiver barring A.I.G. from suing the banks was not in the original document that regulators circulated on Nov. 6, 2008 to dissolve the insurer’s contracts with the banks. A day later a waiver was added but the Congressional documents show no e-mail traffic explaining why that occurred or who was responsible for inserting it. The New York Fed declined to comment.
Policy experts say it is not unusual for parties to waive legal rights when public money is involved. Mr. Moss, the Harvard professor, said the government might have been concerned that the insurer would use taxpayer money to sue banks. “The question is: was this legitimate?” he asked. “The answer depends on the motivation. If the reason was to avoid a slew of lawsuits that could have further destabilized the financial system in the short term, this may have been reasonable.”
But two people with direct knowledge of the negotiations between A.I.G. and the banks, who requested anonymity because the talks were confidential, said the legal waiver was not a routine matter — and that federal regulators forced the insurer to accept it.
Even if the waiver was warranted, experts say it unfairly handcuffed A.I.G. and has undermined the financial interests of taxpayers. If, for example, the banks misled A.I.G. about the mortgage securities A.I.G. insured, taxpayer money could be recouped from the banks through lawsuits.
Unless A.I.G. can prove it signed the legal waiver under duress, it cannot sue to recover claims it paid on $62 billion of about $76 billion of mortgage securities that it insured. (A.I.G. retains the right to sue on about $14 billion of the mortgage securities that it insured.)
If A.I.G. had the right to sue, and if banks were found to have misrepresented the deals or used improper valuations on securities A.I.G. insured to extract heftier payouts from the firm, the insurer’s claims could yield tens of billions of dollars in damages because of its shareholders’ lost market value, according to Mr. Skeel.
A.I.G. still has the right to sue in connection with exotic securities it insured called “synthetic collateralized debt obligations,” which are known as C.D.O.’s. Such instruments do not contain actual bonds, which is why they were not accepted as collateral by the Fed.
A.I.G. had insured $14 billion of synthetic C.D.O.’s, including seven Goldman deals known as Abacus. One of the Abacus deals is the subject of the S.E.C.’s suit against Goldman. A.I.G. did not insure that security, but A.I.G.’s deals with Goldman are similar to the one in the S.E.C. case.
Throughout the A.I.G. bailout, as Congressional leaders and the media pressed for greater disclosure, regulators fought fiercely for confidentiality.
Even after the New York Fed released a list of the banks made whole in the bailout, it continued to resist disclosing information about the actual bonds in the deals, including codes known as “cusips” that label securities. “We need to fight hard to keep the cusips confidential,” one New York Fed official wrote on March 12, 2009.
Regulators said they wanted confidentiality because they did not want investors trading against the government’s portfolio. Others dispute that, saying that Wall Street insiders already knew what bonds were in the portfolio. Only the public was left in the dark.
“The New York Fed recognizes the public’s interest in transparency and has over time made more information available about the A.I.G. transactions,” a Fed spokesman said about the matter.
It was not until a Congressional committee issued a subpoena in January that the New York Fed finally turned over more comprehensive records. The bulk remained private until May, when some committee staff members put them online, saying they lacked the resources to review them all.
This story originally appeared in the The New York Times
“I’d like to know, what does A.I.G. plan to do with Goldman Sachs ?” he asked. “Are you going to get — recoup — some of our money that was given to them?”
Mr. Benmosche, steward of an insurer brought to its knees two years ago after making too many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, A.I.G. has precious few.
When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.
But after the Securities and Exchange Commission’s civil fraud suit filed in April against Goldman for possibly misrepresenting a mortgage deal to investors, A.I.G. executives and shareholders are asking whether A.I.G. may have been misled by Goldman into insuring mortgage deals that the bank and others may have known were flawed.
This month, an Australian hedge fund sued Goldman on similar grounds. Goldman is contesting the suit and denies any wrongdoing. A spokesman for A.I.G. declined to comment about any plans to sue Goldman or any other banks with which it worked. A Goldman spokesman said that his firm believed that “all aspects of our relationship with A.I.G. were appropriate.”
A Legal Waiver
Unknown outside of a few Wall Street legal departments, the A.I.G. waiver was released last month by the House Committee on Oversight and Government Reform amid 250,000 pages of largely undisclosed documents. The documents, reviewed by The New York Times, provide the most comprehensive public record of how the Federal Reserve Bank of New York and the Treasury Department orchestrated one of the biggest corporate bailouts in history.
The documents also indicate that regulators ignored recommendations from their own advisers to force the banks to accept losses on their A.I.G. deals and instead paid the banks in full for the contracts. That decision, say critics of the A.I.G. bailout, has cost taxpayers billions of extra dollars in payments to the banks. It also contrasts with the hard line the White House took in 2008 when it forced Chrysler’s lenders to take losses when the government bailed out the auto giant.
As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldman’s relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout — signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders’ ability to recover damages.
“Even if it turns out that it would be a hard suit to win, just the gesture of requiring A.I.G. to scrap its ability to sue is outrageous,” said David Skeel, a law professor at the University of Pennsylvania. “The defense may be that the banking system was in trouble, and we couldn’t afford to destabilize it anymore, but that just strikes me as really going overboard.”
“This really suggests they had myopia and they were looking at it entirely through the perspective of the banks,” Mr. Skeel said.
Regulators at the New York Fed declined to comment on the legal waiver but disagreed with that viewpoint.
“This was not about the banks,” said Sarah J. Dahlgren, a senior vice president for the New York Fed who oversees A.I.G. “This was about stabilizing the system by preventing the disorderly collapse of A.I.G. and the potentially devastating consequences of that event for the U.S. and global economies.”
This month, the Congressional Oversight Panel, a body charged with reviewing the state of financial markets and the regulators that monitor them, published a 337-page report on the A.I.G. bailout. It concluded that the Federal Reserve Bank of New York did not give enough consideration to alternatives before sinking more and more taxpayer money into A.I.G. “It is hard to escape the conclusion that F.R.B.N.Y. was just ‘going through the motions,’ ” the report said.
About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Société Générale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G.
A Goldman spokesman said that he did not agree with that report’s assertion, noting that his firm considered itself to be insulated from possible losses on its A.I.G. deals.
Even with the financial reform legislation that Congress introduced last week, David A. Moss, a Harvard Business School professor, said he was concerned that the government had not developed a blueprint for stabilizing markets when huge companies like A.I.G. run aground and, for that reason, regulators’ actions during the financial crisis need continued scrutiny. “We have to vet these things now because otherwise, if we face a similar crisis again, federal officials are likely to follow precedents set this time around,” he said.
Under the new legislation, the Federal Deposit Insurance Corporation will have the power to untangle the financial affairs of troubled entities, but bailed-out companies will pay most of their trading partners 100 cents on the dollar for outstanding contracts. (In some cases, the government will be able to recoup some of those payments later on, which the Treasury Department says will protect taxpayers’ interest. )
Sheila C. Bair, the chairwoman of the F.D.I.C., has said that trading partners should be forced to accept discounts in the middle of a bailout.
Regardless of the financial parameters of bailouts, analysts also say that real financial reform should require regulators to demonstrate much more independence from the firms they monitor.
In that regard, the newly released Congressional documents show New York Fed officials deferring to bank executives at a time when the government was pumping hundreds of billions of taxpayer dollars into the financial system to rescue bankers from their own mistakes. While Wall Street deal-making is famously hard-nosed with participants fighting for every penny, during the A.I.G. bailout regulators negotiated with the banks in an almost conciliatory fashion.
On Nov. 6, 2008, for instance, after a New York Fed official spoke with Lloyd C. Blankfein, Goldman’s chief executive, about the Fed’s A.I.G. plans, the official noted in an e-mail message to Mr. Blankfein that he appreciated the Wall Street titan’s patience. “Thanks for understanding,” the regulator said.
From the moment the government agreed to lend A.I.G. $85 billion on Sept. 16, 2008, the New York Fed, led at the time by Timothy F. Geithner, and its outside advisers all acknowledged that a rescue had to achieve two goals: stop the bleeding at A.I.G. and protect the taxpayer money the government poured into the insurer.
One of the regulators’ most controversial decisions was awarding the banks that were A.I.G.’s trading partners 100 cents on the dollar to unwind debt insurance they had bought from the firm. Critics have questioned why the government did not try to wring more concessions from the banks, which would have saved taxpayers billions of dollars.
Mr. Geithner, who is now the Treasury secretary, has repeatedly said that as steward of the New York Fed, he had no choice but to pay A.I.G.’s trading partners in full.
But two entirely different solutions to A.I.G.’s problems were presented to Fed officials by three of its outside advisers, according to the documents. Under those plans, the banks would have had to accept what the advisers described as “deep concessions” of as much as about 10 percent on their contracts or they might have had to return about $30 billion that A.I.G. had paid them before the bailout.
Had either of these plans been implemented, A.I.G. may have been left in a far better financial position than it is today, with taxpayers at less risk and banks forced to swallow bigger losses.
A spokesman for Mr. Geithner, Andrew Williams, said it was easy to speculate about how the A.I.G. bailout might have been handled differently, but the government had limited tools. “At that perilous moment, actions were chosen that would have the greatest likelihood of protecting American families and businesses from a catastrophic failure of another financial firm and an accelerating panic, Mr. Williams said.
For its part, the Treasury appeared to be opposed to any options that did not involve making the banks whole on their A.I.G. contracts. At Treasury, a former Goldman executive, Dan H. Jester, was the agency’s point man on the A.I.G. bailout. Mr. Jester had worked at Goldman with Henry M. Paulson Jr., the Treasury secretary during the A.I.G. bailout. Mr. Paulson previously served as Goldman’s chief executive before joining the government.
A Close Association
Mr. Jester, according to several people with knowledge of his financial holdings, still owned Goldman stock while overseeing Treasury’s response to the A.I.G. crisis. According to the documents, Mr. Jester opposed bailout structures that required the banks to return cash to A.I.G. Nothing in the documents indicates that Mr. Jester advocated forcing Goldman and the other banks to accept a discount on the deals.
Although the value of Goldman’s shares could have been affected by the terms of the A.I.G. bailout, Mr. Jester was not required to publicly disclose his stock holdings because he was hired as an outside contractor, a job title at Treasury that allowed him to forgo disclosure rules applying to appointed officials. In late October 2008, he stopped overseeing A.I.G. after others were given that responsibility, according to Michele Davis, a spokeswoman for Mr. Jester.
Ms. Davis said that Mr. Jester fought hard to protect taxpayer money and followed an ethics plan to avoid conflict with all of his stock holdings. Ms. Davis is also a spokeswoman for Mr. Paulson, and said that he declined to comment for this article.
The alternative bailout plans that regulators considered came from three advisory firms that the New York Fed hired: Morgan Stanley, Black Rock, and Ernst & Young.
One plan envisioned the government guaranteeing A.I.G.’s obligations in various ways, in much the same way the F.D.I.C. backs personal savings accounts at banks facing runs by customers. On Oct. 15, Ms. Dahlgren wrote to Mr. Geithner that the Federal Reserve board in Washington had said the New York Fed should try to get Treasury to do a guarantee. “We think this is something we need to have in our back pockets,” she wrote.
Treasury had the authority to issue a guarantee but was unwilling to do so because that would use up bailout funds. Once the guarantee was off the table, Fed officials focused on possibly buying the distressed securities insured by A.I.G. From the start, the Fed and its advisers prepared for the banks to accept discounts. A BlackRock presentation outlined five reasons why the banks should agree to such concessions, all of which revolved around the many financial benefits they would receive. BlackRock and Morgan Stanley presented a number of options, including what BlackRock called a “deep concession” in which banks would return $6.4 billion A.I.G. paid them before the bailout.
The three banks with the most to lose under these options were Société Générale, Deutsche Bank and Goldman Sachs. Société Générale would have had to give up $322 million to $2.1 billion depending on which alternative was used; Deutsche Bank would have had to forgo $40 million to $1.1 billion, while Goldman would have had to give up $271 million to $892 million, according to the documents.
Société Générale and Deutsche Bank both declined to comment.
Ultimately, the New York Fed never forced the banks to make concessions. Thomas C. Baxter Jr., general counsel at the New York Fed, explained that a looming downgrade of A.I.G. by the credit rating agencies\ on Nov. 10 forced the regulator to move quickly to avoid a default, which would have unleashed “catastrophic systemic consequences for our economy.”
“We avoided that horrible result, got the job done in the time available, and the Fed will eventually get out of this rescue whole,” he said in an interview.
And yet two Fed governors in Washington were concerned that making the banks whole on the A.I.G. contracts would be “a gift,” according to the document.
Gift or not, the banks got 100 cents on the dollar. And on Nov. 11, 2008, a New York Fed staff member recommended that documents for explaining the bailout to the public not mention bank concessions. The Fed should not reveal that it didn’t secure concessions “unless absolutely necessary,” the staff member advised. In the end, the Fed successfully kept most of the details about its negotiations with banks confidential for more than a year, despite opposition from the media and Congress.
During the A.I.G. bailout, New York Fed officials prepared a script for its employees to use in negotiations with the banks and it was anything but tough; it advised Fed negotiators to solicit suggestions from bankers about what financial and institutional support they wanted from the Fed. The script also reminded government negotiators that bank participation was “entirely voluntary.”
The New York Fed appointed Terrence J. Checki as its point man with the banks. In e-mail messages that November, he was deferential to bankers, including the e-mail message in which he thanked Mr. Blankfein for his patience.
Many Thank-Yous
After UBS, a Swiss bank, received details about the Fed’s 100-cents-on-the-dollar proposal, Mr. Checki thanked Robert Wolf, a UBS executive, for his patience as well. “Thank you for your responsiveness and cooperation,” he said in an e-mail message. “Hope the benign outcome helped offset any aggravation. Thank you again.”
The Congressional Oversight Panel, which interviewed A.I.G.’s trading partners about how tough the government was during the negotiations, concluded that many of the governments efforts were merely “desultory attempts.”
All of this was quite different from the tack the government took in the Chrysler bailout. In that matter, the government told banks they could take losses on their loans or simply own a bankrupt company; the banks took the losses.
During the A.I.G. bailout, the Fed seemed more focused on extracting concessions from A.I.G. than from the banks. Mr. Baxter, in an interview, conceded that the way that the New York Fed handled the negotiations meant that any resulting deal “took most of the upside potential away from A.I.G.”
The legal waiver barring A.I.G. from suing the banks was not in the original document that regulators circulated on Nov. 6, 2008 to dissolve the insurer’s contracts with the banks. A day later a waiver was added but the Congressional documents show no e-mail traffic explaining why that occurred or who was responsible for inserting it. The New York Fed declined to comment.
Policy experts say it is not unusual for parties to waive legal rights when public money is involved. Mr. Moss, the Harvard professor, said the government might have been concerned that the insurer would use taxpayer money to sue banks. “The question is: was this legitimate?” he asked. “The answer depends on the motivation. If the reason was to avoid a slew of lawsuits that could have further destabilized the financial system in the short term, this may have been reasonable.”
But two people with direct knowledge of the negotiations between A.I.G. and the banks, who requested anonymity because the talks were confidential, said the legal waiver was not a routine matter — and that federal regulators forced the insurer to accept it.
Even if the waiver was warranted, experts say it unfairly handcuffed A.I.G. and has undermined the financial interests of taxpayers. If, for example, the banks misled A.I.G. about the mortgage securities A.I.G. insured, taxpayer money could be recouped from the banks through lawsuits.
Unless A.I.G. can prove it signed the legal waiver under duress, it cannot sue to recover claims it paid on $62 billion of about $76 billion of mortgage securities that it insured. (A.I.G. retains the right to sue on about $14 billion of the mortgage securities that it insured.)
If A.I.G. had the right to sue, and if banks were found to have misrepresented the deals or used improper valuations on securities A.I.G. insured to extract heftier payouts from the firm, the insurer’s claims could yield tens of billions of dollars in damages because of its shareholders’ lost market value, according to Mr. Skeel.
A.I.G. still has the right to sue in connection with exotic securities it insured called “synthetic collateralized debt obligations,” which are known as C.D.O.’s. Such instruments do not contain actual bonds, which is why they were not accepted as collateral by the Fed.
A.I.G. had insured $14 billion of synthetic C.D.O.’s, including seven Goldman deals known as Abacus. One of the Abacus deals is the subject of the S.E.C.’s suit against Goldman. A.I.G. did not insure that security, but A.I.G.’s deals with Goldman are similar to the one in the S.E.C. case.
Throughout the A.I.G. bailout, as Congressional leaders and the media pressed for greater disclosure, regulators fought fiercely for confidentiality.
Even after the New York Fed released a list of the banks made whole in the bailout, it continued to resist disclosing information about the actual bonds in the deals, including codes known as “cusips” that label securities. “We need to fight hard to keep the cusips confidential,” one New York Fed official wrote on March 12, 2009.
Regulators said they wanted confidentiality because they did not want investors trading against the government’s portfolio. Others dispute that, saying that Wall Street insiders already knew what bonds were in the portfolio. Only the public was left in the dark.
“The New York Fed recognizes the public’s interest in transparency and has over time made more information available about the A.I.G. transactions,” a Fed spokesman said about the matter.
It was not until a Congressional committee issued a subpoena in January that the New York Fed finally turned over more comprehensive records. The bulk remained private until May, when some committee staff members put them online, saying they lacked the resources to review them all.
This story originally appeared in the The New York Times
Stock Market and Investing - Wednesday Look Ahead: Wall Street's Rough Quarter Comes to An End - CNBC
Call it window 'undressing.'
Stocks took a beating in the second quarter, and the final days are bringing out the worst. Typically ahead of quarter end, institutions reshuffle portfolios or "windrow dress" to lock in profits and set up for the next quarter.
This time around, stocks were thrown over board and investors dove into the comfort of U.S. Treasurys, as they worried Europe's debt woes and slower global growth could result in a new recession.
Treasury yields touched stunning lows and the whip-sawed stock market set the stage for more volatility Wednesday, which is the quarter end. The Dow lost 268 points Tuesday or 2.7 percent to 9870. The S&P 500 finished down 33 or 3.1 percent, at 1041, but not before breaking the key technical level of 1040 in afternoon trading. Industrials, financials and tech stocks took the brunt of Tuesday's selling, as investors voted against global growth and risk.
The Dow, as of Tuesday, was poised to close out the quarter with a 9 percent loss, and the S&P would be down nearly 11 percent. The Nasdaq's quarterly loss, as of Tuesday, was also near 11 percent. The dollar gained nearly 10.8 percent against the euro in the second quarter, and was at a level of $1.2197 Tuesday.
Tuesday's economic reports showed consumer confidence took a surprising dip to 52.9 in June, from 62.7 in May, the latest in a series of disappointing data points. Even before that news, stocks were well into a sharp sell off on worries about European banks, and disappointing Chinese data. Each negative economic report lately helps build a case for bond market bulls, who pushed 10-year Treasury yields beneath 3 percent, the lowest level in 14 months, and 2-year notes to an all-time low of 0.59 percent, on an intraday basis.
"A lot of what's driven the market to these levels has to do with the date, June 29," said David Ader, chief Treasury strategist at CRT Capital. "The first half of this remarkable year is about to come to an end." He said investors have moved from short-covering positions in the bond market to becoming genuine buyers.
"As we move forward through the balance of this year, all the risks are weighted to the downside and we still have a degree of uncertainty about financial regulation, which would hurt financial profits. People are still upside down in their mortgages so the ability to refinance into a better place is limited. We'll lose a few hundred census workers as unemployment will pop up to 9.9 percent," he said, noting those are just U.S. concerns but that other issues loom globally.
He also said the bond market may take a breather after the start of the quarter, and that some investors may realize, as the new quarter begins, that they are too underweight in equities. "I would not be selling the (bond) market into strength at this juncture. There are certainly things that make me nervous," he said.
Pimco strategist Tony Crescenzi said the markets have been concerned about what the second half will bring. "Whenever there's weak data, it reminds us of fiscal austerity and weak economic activity. It brings us back to the broader theme of deleveraging," he said. He said July 1 launches a new wave of austerity as state and local governments begin their fiscal year, with more frugal budgets.
Jim Paulsen, chief investment strategist at Wells Capital Management, said in a note that declining Treasury yields would hurt stocks if the double dip fears get too strong. But he is looking ahead to Friday's June employment report, a major marker for financial markets this week.
"This won't be determined by today's fears, but rather by the "fundamental reports" coming out in the next three days. Market based on "lack of any meaningful fundamental news" has not been good," he said, adding that the data could "calm mindsets when we focus on fact that we are still creating jobs and profits are growing."
Wednesday's data includes the 8:15 a.m. ADP private payroll report, watched by traders, but increasingly discounted as a measure for the monthly jobs report. Chicago purchasing managers data is reported at 9:45 a.m.
The Real Stress Test
The big event for markets Wednesday comes before the New York open, when the market focuses on the July 1 expiration of a 12-month $442 billon euro European Central Bank lending program to European banks. Banks can either rollover from the loan program into a new 3-month facility or find private funding. The ECB is expected to announce the results of its three month auction just after 5 a.m. Eastern time.
Crescenzi said about 250 billion euros is expected to be rolled into the 3-month program. "All banks will probably have collateral deemed lower quality. The lower the number of the roll, the better," he said.
"It's an important event in that it will provide information about the quality of collateral the banks have. In a sense, it's a form of stress test in that there will be a revelation about the quality of assets and the ability to withstand shocks implicitly..Arguably, they should have done stress tests first. Maybe it's another mistimed event for the European Central Bank," he said.
Nomura Americas chief Treasury strategist George Goncalves said the results will be key for Wednesday's trading. "The market will be expecting that the full thing doesn't roll over. If it does get anywhere near it...the first thing is Libor will go higher and the spreads will widen and the stock market will go down.. A lot of it's been priced in," he said.
Goncalves also believes two-thirds of the move lower in yields is complete. "I think we're going to make a run to 2.75 (percent on 10-year)," he said. "That's why tomorrow is critical. We're at critical technical levels.
Getting Technical
Just as the bond market is breaching some technical levels, the stock market is also at a critical juncture. The S&P 500 broke through 1040 on an intraday basis, signaling to technicians more bearishness ahead. It also signals a head and shoulders formation is at hand.
John Roque, technical analyst at WJB Capital, said the head and shoulders formation is not quite formed yet, and it must be confirmed with heavy trading volume. "The 200-day moving average is still flat, but it's immaterial. The 200-day is going to start sloping down. It's going to happen. The pattern is less important than the action, and he action is nasty," he said.
Roque said his next downside target is 950.
Jordan Kotick, who heads technical analysis globally at Barclays, also said the pattern is not complete, but the signals are there. "The signals appeared last week, and there's the suggestion of some serious downside vulnerability in markets outside of stocks that tell you about stocks," he said. He pointed to the action in the euro versus the Swiss franc, which cracked record levels last week. He also said the break in multi-year ranges in global rates markets is another negative sign for stocks.
"The head and shoulders? That's just the bearish icing on the cake..It's not apocalyptic. It suggest a correction from the rally of March last year is not completed," he said.
He said a previous head and shoulders pattern, formed last May through July, did not result in negative activity, and the market, instead, sprang higher.
Scott Redler of T3Live.com says he believes the head and shoulders, a distribution pattern, is in place.
He said the "head and shoulders" historically leads to lower prices. The pattern started in mid-October, when the left shoulder rallied from a level of 1040 to a level of 1150 in January. At that point, the uptrend broke and created the 9 percent move lower into the Feb. 5 reversal, leading to a move to 1217. That uptrend broke May 4, creating the head. From May 4, the market declined back to 1040, which provided a bounce that became the "neck line." The market's next move to 1131, on June 21, built the top of the right shoulder.
What Else to Watch
The Financial Crisis Inquiry Commission takes testimony from former AIG Financial Products head Joseph Cassano and Goldman Sachs President Gary Cohn, as it explores the ties between Goldman Sachs and AIG.
Investors are also watching the latest developments in Congressional efforts to bring financial regulatory reform to a vote.
The House committee on Small Business will hold a hearing on claims against BP by small businesses. Kenneth Feinberg, who is administering the victims fund, will testify. Meanwhile, markets are also watching the storm in the Gulf of Mexico which has so far resulted in the shut in of 24.7 percent of Gulf oil output and 9.4 percent of natural gas output.
Earnings are expected from Monsanto and Shaw Communications. Apollo Group reports after the close.
Bright Spot
Electric car company Tesla Motors made its Wall Street debut and surged more than 40 percent to close at $23.89. The IPO was prices at $17 Monday night.
Stocks took a beating in the second quarter, and the final days are bringing out the worst. Typically ahead of quarter end, institutions reshuffle portfolios or "windrow dress" to lock in profits and set up for the next quarter.
This time around, stocks were thrown over board and investors dove into the comfort of U.S. Treasurys, as they worried Europe's debt woes and slower global growth could result in a new recession.
Treasury yields touched stunning lows and the whip-sawed stock market set the stage for more volatility Wednesday, which is the quarter end. The Dow lost 268 points Tuesday or 2.7 percent to 9870. The S&P 500 finished down 33 or 3.1 percent, at 1041, but not before breaking the key technical level of 1040 in afternoon trading. Industrials, financials and tech stocks took the brunt of Tuesday's selling, as investors voted against global growth and risk.
The Dow, as of Tuesday, was poised to close out the quarter with a 9 percent loss, and the S&P would be down nearly 11 percent. The Nasdaq's quarterly loss, as of Tuesday, was also near 11 percent. The dollar gained nearly 10.8 percent against the euro in the second quarter, and was at a level of $1.2197 Tuesday.
Tuesday's economic reports showed consumer confidence took a surprising dip to 52.9 in June, from 62.7 in May, the latest in a series of disappointing data points. Even before that news, stocks were well into a sharp sell off on worries about European banks, and disappointing Chinese data. Each negative economic report lately helps build a case for bond market bulls, who pushed 10-year Treasury yields beneath 3 percent, the lowest level in 14 months, and 2-year notes to an all-time low of 0.59 percent, on an intraday basis.
"A lot of what's driven the market to these levels has to do with the date, June 29," said David Ader, chief Treasury strategist at CRT Capital. "The first half of this remarkable year is about to come to an end." He said investors have moved from short-covering positions in the bond market to becoming genuine buyers.
"As we move forward through the balance of this year, all the risks are weighted to the downside and we still have a degree of uncertainty about financial regulation, which would hurt financial profits. People are still upside down in their mortgages so the ability to refinance into a better place is limited. We'll lose a few hundred census workers as unemployment will pop up to 9.9 percent," he said, noting those are just U.S. concerns but that other issues loom globally.
He also said the bond market may take a breather after the start of the quarter, and that some investors may realize, as the new quarter begins, that they are too underweight in equities. "I would not be selling the (bond) market into strength at this juncture. There are certainly things that make me nervous," he said.
Pimco strategist Tony Crescenzi said the markets have been concerned about what the second half will bring. "Whenever there's weak data, it reminds us of fiscal austerity and weak economic activity. It brings us back to the broader theme of deleveraging," he said. He said July 1 launches a new wave of austerity as state and local governments begin their fiscal year, with more frugal budgets.
Jim Paulsen, chief investment strategist at Wells Capital Management, said in a note that declining Treasury yields would hurt stocks if the double dip fears get too strong. But he is looking ahead to Friday's June employment report, a major marker for financial markets this week.
"This won't be determined by today's fears, but rather by the "fundamental reports" coming out in the next three days. Market based on "lack of any meaningful fundamental news" has not been good," he said, adding that the data could "calm mindsets when we focus on fact that we are still creating jobs and profits are growing."
Wednesday's data includes the 8:15 a.m. ADP private payroll report, watched by traders, but increasingly discounted as a measure for the monthly jobs report. Chicago purchasing managers data is reported at 9:45 a.m.
The Real Stress Test
The big event for markets Wednesday comes before the New York open, when the market focuses on the July 1 expiration of a 12-month $442 billon euro European Central Bank lending program to European banks. Banks can either rollover from the loan program into a new 3-month facility or find private funding. The ECB is expected to announce the results of its three month auction just after 5 a.m. Eastern time.
Crescenzi said about 250 billion euros is expected to be rolled into the 3-month program. "All banks will probably have collateral deemed lower quality. The lower the number of the roll, the better," he said.
"It's an important event in that it will provide information about the quality of collateral the banks have. In a sense, it's a form of stress test in that there will be a revelation about the quality of assets and the ability to withstand shocks implicitly..Arguably, they should have done stress tests first. Maybe it's another mistimed event for the European Central Bank," he said.
Nomura Americas chief Treasury strategist George Goncalves said the results will be key for Wednesday's trading. "The market will be expecting that the full thing doesn't roll over. If it does get anywhere near it...the first thing is Libor will go higher and the spreads will widen and the stock market will go down.. A lot of it's been priced in," he said.
Goncalves also believes two-thirds of the move lower in yields is complete. "I think we're going to make a run to 2.75 (percent on 10-year)," he said. "That's why tomorrow is critical. We're at critical technical levels.
Getting Technical
Just as the bond market is breaching some technical levels, the stock market is also at a critical juncture. The S&P 500 broke through 1040 on an intraday basis, signaling to technicians more bearishness ahead. It also signals a head and shoulders formation is at hand.
John Roque, technical analyst at WJB Capital, said the head and shoulders formation is not quite formed yet, and it must be confirmed with heavy trading volume. "The 200-day moving average is still flat, but it's immaterial. The 200-day is going to start sloping down. It's going to happen. The pattern is less important than the action, and he action is nasty," he said.
Roque said his next downside target is 950.
Jordan Kotick, who heads technical analysis globally at Barclays, also said the pattern is not complete, but the signals are there. "The signals appeared last week, and there's the suggestion of some serious downside vulnerability in markets outside of stocks that tell you about stocks," he said. He pointed to the action in the euro versus the Swiss franc, which cracked record levels last week. He also said the break in multi-year ranges in global rates markets is another negative sign for stocks.
"The head and shoulders? That's just the bearish icing on the cake..It's not apocalyptic. It suggest a correction from the rally of March last year is not completed," he said.
He said a previous head and shoulders pattern, formed last May through July, did not result in negative activity, and the market, instead, sprang higher.
Scott Redler of T3Live.com says he believes the head and shoulders, a distribution pattern, is in place.
He said the "head and shoulders" historically leads to lower prices. The pattern started in mid-October, when the left shoulder rallied from a level of 1040 to a level of 1150 in January. At that point, the uptrend broke and created the 9 percent move lower into the Feb. 5 reversal, leading to a move to 1217. That uptrend broke May 4, creating the head. From May 4, the market declined back to 1040, which provided a bounce that became the "neck line." The market's next move to 1131, on June 21, built the top of the right shoulder.
What Else to Watch
The Financial Crisis Inquiry Commission takes testimony from former AIG Financial Products head Joseph Cassano and Goldman Sachs President Gary Cohn, as it explores the ties between Goldman Sachs and AIG.
Investors are also watching the latest developments in Congressional efforts to bring financial regulatory reform to a vote.
The House committee on Small Business will hold a hearing on claims against BP by small businesses. Kenneth Feinberg, who is administering the victims fund, will testify. Meanwhile, markets are also watching the storm in the Gulf of Mexico which has so far resulted in the shut in of 24.7 percent of Gulf oil output and 9.4 percent of natural gas output.
Earnings are expected from Monsanto and Shaw Communications. Apollo Group reports after the close.
Bright Spot
Electric car company Tesla Motors made its Wall Street debut and surged more than 40 percent to close at $23.89. The IPO was prices at $17 Monday night.
Financial Reform: Bank Tax to Be Killed to Win Passage of Financial Overhaul - CNBC
Democrats on Tuesday planned to strip out a controversial tax from their landmark financial reform bill in order to win the swing votes needed to pass it through Congress.
With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.
Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, which got under way shortly after 5 p.m. EDT Tuesday.
Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill's costs by shutting down a $700 billion bank-bailout program.
The plan under consideration would shut down the $700 billion Troubled Asset Relief Program, which was set up in 2008 to buy up toxic assets from banks but was quickly used to bail out teetering Wall Street giants instead.
It has since been tapped to save Detroit automakers, and Democrats considered using it to spur job creation earlier this year.
Shutting it down before it expires in October could please Republicans who have fought its expansion. It also would raise $11 billion to defray the bill's costs, Dodd said.
The shutdown would not affect companies like General Motors that currently rely on the money, a Democratic aide said.
One memo being circulated on Tuesday showed Dodd was also considering a proposal to raise the Federal Deposit Insurance Corp premium ratio to 1.35.
Currently the FDIC by law must maintain the insurance fund at 1.15 percent of banks' covered deposits. The increase in the premium ratio would result in a rate hike on banks.
If negotiators agree on a solution, the House could vote on the measure on Wednesday. That conceivably could give the Senate enough time to approve it and send it to Obama by July 4.
The bill, which aims to prevent a repeat of the 2007-2009 financial crisis that shook the global economy, is a top priority for Obama and would give him and fellow Democrats a big legislative win ahead of November congressional elections.
"We continue to work with Congress to find all possible paths to ensuring Wall Street reform is enacted as soon as possible,'' an Obama administration official said.
The legislation would force banks to reduce, but not cease, risky trading and investing; set up a new government process for liquidating troubled financial firms; and establish a new consumer-protection bureau.
Bank stocks fell sharply when the market opened on Tuesday and closed down 4.4 percent, a sharper drop than markets as a whole. The reform bill, instability in Europe and fears of weaker-than-expected earnings were pushing prices lower, analysts said.
"I haven't talked to everybody, but I gather from a number of people they like this option,'' said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.
The bill had been expected to pass both chambers of Congress this week in time for President Obama to sign it into law by July 4. But supporters have been forced to scramble for votes in the Senate, putting that goal in jeopardy.
Analysts said while that timetable may slip, the bill was still likely to become law.
"We believe that this legislation will pass, timing and the bank tax remain the final question marks,'' wrote FBR Capital Markets analyst Edward Mills in a research note.
Democratic aides said it was still possible to pass the bill out of Congress by the end of the week.
Democrats are now two votes short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democratic Senator Robert Byrd died on Monday, depriving his party of a needed vote, and Republican Senator Scott Brown said on Tuesday he would withdraw his support unless Democrats strip out a $17.9 billion tax that would apply to large financial institutions.
The tax was added to cover the costs of the bill during a final all-night negotiating session last week.
"It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis,'' Brown wrote in a letter to the Democrats who are handling the bill.
Other moderate Republican senators who previously supported the bill have also expressed reservations over the new tax.
One of those Republicans, Senator Susan Collins of Maine, told reporters she was working with Dodd to get away from the tax and they were "making progress.''
"The bill is not perfect. But I believe if you take out the new bank tax that, on balance, it would improve our financial system and I would support it,'' she told reporters.
With crucial Republican moderates threatening to withdraw their support, Democrats were weighing alternative ways to fund the most sweeping rewrite of the Wall Street rulebook since the 1930s.
Though a supposedly final version of the bill had been hammered out last week, Democrats in charge of the process called a fresh negotiating session, which got under way shortly after 5 p.m. EDT Tuesday.
Democratic lawmakers and aides said they planned to remove a $17.9 billion tax on large financial institutions. Instead, they would cover most of the bill's costs by shutting down a $700 billion bank-bailout program.
The plan under consideration would shut down the $700 billion Troubled Asset Relief Program, which was set up in 2008 to buy up toxic assets from banks but was quickly used to bail out teetering Wall Street giants instead.
It has since been tapped to save Detroit automakers, and Democrats considered using it to spur job creation earlier this year.
Shutting it down before it expires in October could please Republicans who have fought its expansion. It also would raise $11 billion to defray the bill's costs, Dodd said.
The shutdown would not affect companies like General Motors that currently rely on the money, a Democratic aide said.
One memo being circulated on Tuesday showed Dodd was also considering a proposal to raise the Federal Deposit Insurance Corp premium ratio to 1.35.
Currently the FDIC by law must maintain the insurance fund at 1.15 percent of banks' covered deposits. The increase in the premium ratio would result in a rate hike on banks.
If negotiators agree on a solution, the House could vote on the measure on Wednesday. That conceivably could give the Senate enough time to approve it and send it to Obama by July 4.
The bill, which aims to prevent a repeat of the 2007-2009 financial crisis that shook the global economy, is a top priority for Obama and would give him and fellow Democrats a big legislative win ahead of November congressional elections.
"We continue to work with Congress to find all possible paths to ensuring Wall Street reform is enacted as soon as possible,'' an Obama administration official said.
The legislation would force banks to reduce, but not cease, risky trading and investing; set up a new government process for liquidating troubled financial firms; and establish a new consumer-protection bureau.
Bank stocks fell sharply when the market opened on Tuesday and closed down 4.4 percent, a sharper drop than markets as a whole. The reform bill, instability in Europe and fears of weaker-than-expected earnings were pushing prices lower, analysts said.
"I haven't talked to everybody, but I gather from a number of people they like this option,'' said Democratic Senator Christopher Dodd, one of the lawmakers in charge of the bill.
The bill had been expected to pass both chambers of Congress this week in time for President Obama to sign it into law by July 4. But supporters have been forced to scramble for votes in the Senate, putting that goal in jeopardy.
Analysts said while that timetable may slip, the bill was still likely to become law.
"We believe that this legislation will pass, timing and the bank tax remain the final question marks,'' wrote FBR Capital Markets analyst Edward Mills in a research note.
Democratic aides said it was still possible to pass the bill out of Congress by the end of the week.
Democrats are now two votes short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democratic Senator Robert Byrd died on Monday, depriving his party of a needed vote, and Republican Senator Scott Brown said on Tuesday he would withdraw his support unless Democrats strip out a $17.9 billion tax that would apply to large financial institutions.
The tax was added to cover the costs of the bill during a final all-night negotiating session last week.
"It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis,'' Brown wrote in a letter to the Democrats who are handling the bill.
Other moderate Republican senators who previously supported the bill have also expressed reservations over the new tax.
One of those Republicans, Senator Susan Collins of Maine, told reporters she was working with Dodd to get away from the tax and they were "making progress.''
"The bill is not perfect. But I believe if you take out the new bank tax that, on balance, it would improve our financial system and I would support it,'' she told reporters.
Monday, June 28, 2010
Financial Regulation: Wall Street Bill Seen as 'Too Big to Fail,' Delay Looms - CNBC
Political momentum was expected to carry a sweeping Wall Street reform bill to approval in the U.S. Congress, but the death of Senator Robert Byrd threatened to delay final action until mid-July.
Democratic backers of the bill scrambled on Monday to replace a crucial vote of support that was lost when Byrd, 92, passed away, with the bill's fate turning on the views of a handful of swing-vote senators.
In the give-and-take of securing their support, reform advocates warned the bill could be further watered down.
"If they have to reopen the bill to make concessions to get additional votes... the bill will get weaker, not stronger," said Barbara Roper, director of investor protection at the Consumer Federation of America, a watchdog group.
The bill is the biggest overhaul of financial regulation since the 1930s biggest overhaul of financial regulation since the 1930s and a top priority of President Barack Obama following a severe banking crisis that slammed the economy.
It would force banks to reduce, but not cease, risky trading and investing; set up a new government process for liquidating troubled financial firms; and impose a $19 billion fee on the largest firms to pay for these and other changes.
The House of Representatives was on track to approve the legislation as early as Tuesday evening or Wednesday.
But both chambers must pass the bill before it can go to President Barack Obama to be signed into law. The White House has wanted a signing ceremony by July 4. That could still happen, but an aide indicated Senate action could slip until the week of July 12, after Congress takes a weeklong break.
"We expect this massive rewrite of U.S. banking law will pass the House this week, but the situation in the Senate is getting more complicated," said Brian Gardner, policy analyst at investment firm Keefe Bruyette & Woods.
Investors Moving On
While Democrats try to nail down enough votes to ensure final passage, investors and analysts were largely assuming the bill would become law.
The KBW Banks index closed down less than 1 percent on Monday in an otherwise largely flat stock market.
Final passage of the bill will alleviate some of the uncertainty that has weighed on bank stocks, but the long implementation period ahead presents many unknowns, said Goldman Sachs financial services industry analysts.
Two of the biggest question marks are appointments Obama must make. One will be the first director of a new Consumer Financial Protection Bureau called for by the bill. It would regulate mortgages, credit cards and other financial products.
Elizabeth Warren, a Harvard Law School professor, tops most short lists of contenders for the new job as the government's top financial consumer watchdog. She now chairs a panel overseeing the $700 billion Wall Street bailout.
Obama must soon name a replacement for U.S. Comptroller of the Currency John Dugan, whose role as a top bank supervisor will be made more powerful by the bill. Dugan's term expires in August. He has said he will step down then.
The biggest banks are expected to face constraints on their profits and growth after enactment of the Dodd-Frank bill, named for its chief authors, Senator Christopher Dodd and Representative Barney Frank, both Democrats.
But some of the sharpest edges were softened to secure support as a Senate-House panel wrapped up negotiations with a marathon, 21-hour session that ended early Friday morning.
Since Byrd's passing, backers of the bill are one vote short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democrats could wait for West Virginia's governor, a Democrat, to appoint Byrd's interim successor, who would likely be a Democrat, but that process could take weeks.
Key Senators Targeted
For now, Democrats were keenly focused on trying to gather and hold support among a handful of key lawmakers.
One of the biggest winners in the negotiating process was Senator Scott Brown, a moderate Republican who won major concessions for financial interests in his home state of Massachusetts and voted for the Senate version of the bill.
Brown, however, has threatened to withdraw his support due to a $19 billion industry tax that was inserted during the final negotiating session.
Senator Olympia Snowe, another moderate Republican who had previously supported the bill, also said she was concerned by the tax. "I would have preferred the bank tax not to be included," she told reporters on Monday.
That tax was added to ensure that the bill does not add to the government's ballooning budget deficit. The nonpartisan Congressional Budget Office estimated on Monday night that the $26.9 billion in additional spending over a 10-year period would be offset by $26.9 billion in new revenues.
Two Democratic senators, Russ Feingold and Maria Cantwell, who voted against the Senate bill last month, saying it was not tough enough, will face pressure to support it now.
Feingold said on Monday he would not change his position.
Cantwell is still studying the 2,000-page bill and has not decided whether to support it, a spokesman said.
"We believe that sheer guilt and momentum will unify all 58 Democrats. A phone call from Obama and every liberal on the planet ... could well bring over Feingold and Cantwell," said policy analysts Teddy Downey and Chris Krueger at investment firm Concept Capital.
They pointed out that 60 votes are needed to overcome the procedural hurdle in the Senate, but only 51 are needed for final passage, giving reluctant Democrats voting options.
Republican Senator Charles Grassley, who has backed the bill at stages in its journey through Congress, has not made up his mind on the final version, an aide said on Saturday.
Democratic backers of the bill scrambled on Monday to replace a crucial vote of support that was lost when Byrd, 92, passed away, with the bill's fate turning on the views of a handful of swing-vote senators.
In the give-and-take of securing their support, reform advocates warned the bill could be further watered down.
"If they have to reopen the bill to make concessions to get additional votes... the bill will get weaker, not stronger," said Barbara Roper, director of investor protection at the Consumer Federation of America, a watchdog group.
The bill is the biggest overhaul of financial regulation since the 1930s biggest overhaul of financial regulation since the 1930s and a top priority of President Barack Obama following a severe banking crisis that slammed the economy.
It would force banks to reduce, but not cease, risky trading and investing; set up a new government process for liquidating troubled financial firms; and impose a $19 billion fee on the largest firms to pay for these and other changes.
The House of Representatives was on track to approve the legislation as early as Tuesday evening or Wednesday.
But both chambers must pass the bill before it can go to President Barack Obama to be signed into law. The White House has wanted a signing ceremony by July 4. That could still happen, but an aide indicated Senate action could slip until the week of July 12, after Congress takes a weeklong break.
"We expect this massive rewrite of U.S. banking law will pass the House this week, but the situation in the Senate is getting more complicated," said Brian Gardner, policy analyst at investment firm Keefe Bruyette & Woods.
Investors Moving On
While Democrats try to nail down enough votes to ensure final passage, investors and analysts were largely assuming the bill would become law.
The KBW Banks index closed down less than 1 percent on Monday in an otherwise largely flat stock market.
Final passage of the bill will alleviate some of the uncertainty that has weighed on bank stocks, but the long implementation period ahead presents many unknowns, said Goldman Sachs financial services industry analysts.
Two of the biggest question marks are appointments Obama must make. One will be the first director of a new Consumer Financial Protection Bureau called for by the bill. It would regulate mortgages, credit cards and other financial products.
Elizabeth Warren, a Harvard Law School professor, tops most short lists of contenders for the new job as the government's top financial consumer watchdog. She now chairs a panel overseeing the $700 billion Wall Street bailout.
Obama must soon name a replacement for U.S. Comptroller of the Currency John Dugan, whose role as a top bank supervisor will be made more powerful by the bill. Dugan's term expires in August. He has said he will step down then.
The biggest banks are expected to face constraints on their profits and growth after enactment of the Dodd-Frank bill, named for its chief authors, Senator Christopher Dodd and Representative Barney Frank, both Democrats.
But some of the sharpest edges were softened to secure support as a Senate-House panel wrapped up negotiations with a marathon, 21-hour session that ended early Friday morning.
Since Byrd's passing, backers of the bill are one vote short of the 60 needed to clear a Republican procedural hurdle in the Senate. Democrats could wait for West Virginia's governor, a Democrat, to appoint Byrd's interim successor, who would likely be a Democrat, but that process could take weeks.
Key Senators Targeted
For now, Democrats were keenly focused on trying to gather and hold support among a handful of key lawmakers.
One of the biggest winners in the negotiating process was Senator Scott Brown, a moderate Republican who won major concessions for financial interests in his home state of Massachusetts and voted for the Senate version of the bill.
Brown, however, has threatened to withdraw his support due to a $19 billion industry tax that was inserted during the final negotiating session.
Senator Olympia Snowe, another moderate Republican who had previously supported the bill, also said she was concerned by the tax. "I would have preferred the bank tax not to be included," she told reporters on Monday.
That tax was added to ensure that the bill does not add to the government's ballooning budget deficit. The nonpartisan Congressional Budget Office estimated on Monday night that the $26.9 billion in additional spending over a 10-year period would be offset by $26.9 billion in new revenues.
Two Democratic senators, Russ Feingold and Maria Cantwell, who voted against the Senate bill last month, saying it was not tough enough, will face pressure to support it now.
Feingold said on Monday he would not change his position.
Cantwell is still studying the 2,000-page bill and has not decided whether to support it, a spokesman said.
"We believe that sheer guilt and momentum will unify all 58 Democrats. A phone call from Obama and every liberal on the planet ... could well bring over Feingold and Cantwell," said policy analysts Teddy Downey and Chris Krueger at investment firm Concept Capital.
They pointed out that 60 votes are needed to overcome the procedural hurdle in the Senate, but only 51 are needed for final passage, giving reluctant Democrats voting options.
Republican Senator Charles Grassley, who has backed the bill at stages in its journey through Congress, has not made up his mind on the final version, an aide said on Saturday.
Faulty Computer Suit is Window to Dell’s Decline - CNBC
After the math department at the University of Texas noticed some of its Dell computers failing, Dell examined the machines. The company came up with a unusual reason for the computers’ demise: the school had overtaxed the machines by making them perform difficult math calculations.
Dell, however, had actually sent the university, in Austin, desktop PCs riddled with faulty electrical components that were leaking chemicals and causing the malfunctions. Dell sold millions of these computers from 2003 to 2005 to major companies like Wal-Mart and Wells Fargo, institutions like the Mayo Clinic and small businesses.
“The funny thing was that every one of them went bad at the same time,” said Greg Barry, the president of PointSolve, a technology services company near Philadelphia that had bought dozens. “It’s unheard-of, but Dell didn’t seem to recognize this as a problem at the time.”
Documents recently unsealed in a three-year-old lawsuit against Dell show that the company’s employees were actually aware that the computers were likely to break. Still, the employees tried to play down the problem to customers and allowed customers to rely on trouble-prone machines, putting their businesses at risk. Even the firm defending Dell in the lawsuit was affected when Dell balked at fixing 1,000 suspect computers, according to e-mail messages revealed in the dispute.
The documents chronicling the failure of the PCs also help explain the decline of one of America’s most celebrated and admired companies. Perhaps more than any other company, Dell fought to lower the price of computers.
Its “Dell model” became synonymous with efficiency, outsourcing and tight inventories, and was taught at the Harvard Business School and other top-notch management schools as a paragon of business smarts and outthinking the competition.
“Dell, as a company, was the model everyone focused on 10 years ago,” said David B. Yoffie, a professor of international business administration at Harvard. “But when you combine missing a variety of shifts in the industry with management turmoil, it’s hard not to have the shine come off your reputation.”
For the last seven years, the company has been plagued by serious problems, including misreading the desires of its customers, poor customer service, suspect product quality and improper accounting.
Dell has tried to put those problems behind it. In 2005, it announced it was taking a $300 million charge related, in part, to fixing and replacing the troubled computers. Dell set aside $100 million this month to handle a potential settlement with the Securities and Exchange Commission over a five-year-old investigation into its books, which will most likely result in federal accusations of fraud and misconduct against the company’s founder, Michael S. Dell.
The problems affecting the Dell computers stemmed from an industrywide encounter with bad capacitors produced by Asian PC component suppliers. Capacitors are found on computer motherboards, playing a crucial role in the flow of current across the hardware. They are not meant to pop and leak fluid, but that is exactly what was happening earlier this decade, causing computers made by Dell, Hewlett-Packard, Apple and others to break.
According to company memorandums and other documents recently unsealed in a civil case against Dell in Federal District Court in North Carolina, Dell appears to have suffered from the bad capacitors, made by a company called Nichicon, far more than its rivals. Internal documents show that Dell shipped at least 11.8 million computers from May 2003 to July 2005 that were at risk of failing because of the faulty components. These were Dell’s OptiPlex desktop computers — the company’s mainstream products sold to business and government customers.
A study by Dell found that OptiPlex computers affected by the bad capacitors were expected to cause problems up to 97 percent of the time over a three-year period, according to the lawsuit.
As complaints mounted, Dell hired a contractor to investigate the situation. According to a Dell filing in the lawsuit, which has not yet gone to trial, the contractor found that 10 times more computers were at risk of failing than Dell had estimated. Making problems worse, Dell replaced faulty motherboards with other faulty motherboards, according to the contractor’s findings.
But Dell employees went out of their way to conceal these problems. In one e-mail exchange between Dell customer support employees concerning computers at the Simpson Thacher & Bartlett law firm, a Dell worker states, “We need to avoid all language indicating the boards were bad or had ‘issues’ per our discussion this morning.”
In other documents about how to handle questions around the faulty OptiPlex systems, Dell salespeople were told, “Don’t bring this to customer’s attention proactively” and “Emphasize uncertainty.”
“They were fixing bad computers with bad computers and were misleading customers at the same time,” said Ira Winkler, a former computer analyst for the National Security Agency and a technology consultant. “They knew millions of computers would be out there causing inevitable damage and were not giving people an opportunity to fix that damage.”
Mr. Winkler served as the expert witness for Advanced Internet Technologies, which filed the lawsuit in 2007, saying that Dell had refused to take responsibility for 2,000 computers it sold A.I.T., an Internet services company. A.I.T. said that it had lost millions of dollars in business as a result. Clarence E. Briggs, the chief executive of A.I.T., declined to comment on the lawsuit.
Some of the documents in the case that were sealed under a protective order became public this month. Those documents show that after A.I.T. complained, Dell representatives looked at the failed computers and contended that A.I.T. had driven many of the computers too hard in a hot, confined space. Dell’s sales representatives discussed trying to sell A.I.T. more expensive computers as a resolution.
Jess Blackburn, a Dell spokesman, said the company would not comment on pending litigation. Lawyers for Dell deny A.I.T.’s claims, and contend that A.I.T. has cherrypicked and misinterpreted documents in the case. Dell’s lawyers wrote in a response to A.I.T.: “There was a Nichicon problem, and it affected different customers in different ways.”
In addition to the charge, Dell extended its warranty on the systems and often replaced computers when customers complained. (In 2007, Dell restated its earnings for 2003 to 2006, as well as the first quarter of 2007, and lowered its sales and net income totals for that period. An audit revealed that Dell employees had manipulated financial results to meet growth targets.)
But, as Dell did not recall the computers, many of Dell’s OptiPlex customers may be unaware that they had problematic computers or realize why their computers broke. A.I.T. says in court documents that the faulty capacitors touched off a variety of other problems that were often misdiagnosed. Dell could potentially face a raft of new complaints from some of its biggest customers.
Crucially, in their complaints to Dell in the lawsuit, customers describe losing valuable information when their computers malfunctioned. Dell, by contrast, denied that that the capacitor issue had caused data loss.
Dell’s supply chain had always stood out as one of its important assets. The company kept costs low by limiting its inventory and squeezing suppliers. If prices for components changed, Dell could react more quickly than its competitors, offering customers the latest parts at the lowest cost.
But the hundreds of Dell internal documents produced in the lawsuit show a company whose supply chain had collapsed as it failed to find working motherboards for its customers, including the firm representing Dell in the lawsuit, Alston & Bird.
According to a person who saw Dell’s 2005 internal communications, company executives carefully devised a public relations policy around the OptiPlex situation. Mr. Dell and Kevin B. Rollins, then Dell’s chief executive, were told that the news media would be informed of Dell’s commitment to fix any systems that failed, that Dell was working with customers to resolve problems in the most effective manner possible and that the problems posed no safety or data loss risk.
Carey Holzman, a computer expert who investigated the capacitor problems and collected photos from people with broken motherboards, had a different take on the safety situation.
“Of course it’s dangerous,” Mr. Holzman said. “Having leaking capacitors is a huge problem.” He found that the capacitor problems could cause computers to catch fire.
As late as 2008, after Mr. Dell had replaced Mr. Rollins and returned as chief executive, Dell continued to circulate internal memorandums trying to deal with the fallout from the capacitor situation. Dell salespeople, according to the lawsuit, fretted that technology directors at companies who used to buy from Dell could “justify their job” by advising their companies of Dell’s PC failures and recommending the purchase of H.P. and Lenovo computers.
To counter such lingering bad impressions, Dell salespeople were told to emphasize that the company’s direct model allowed it to identify and fix problems faster than competitors.
Dell, however, had actually sent the university, in Austin, desktop PCs riddled with faulty electrical components that were leaking chemicals and causing the malfunctions. Dell sold millions of these computers from 2003 to 2005 to major companies like Wal-Mart and Wells Fargo, institutions like the Mayo Clinic and small businesses.
“The funny thing was that every one of them went bad at the same time,” said Greg Barry, the president of PointSolve, a technology services company near Philadelphia that had bought dozens. “It’s unheard-of, but Dell didn’t seem to recognize this as a problem at the time.”
Documents recently unsealed in a three-year-old lawsuit against Dell show that the company’s employees were actually aware that the computers were likely to break. Still, the employees tried to play down the problem to customers and allowed customers to rely on trouble-prone machines, putting their businesses at risk. Even the firm defending Dell in the lawsuit was affected when Dell balked at fixing 1,000 suspect computers, according to e-mail messages revealed in the dispute.
The documents chronicling the failure of the PCs also help explain the decline of one of America’s most celebrated and admired companies. Perhaps more than any other company, Dell fought to lower the price of computers.
Its “Dell model” became synonymous with efficiency, outsourcing and tight inventories, and was taught at the Harvard Business School and other top-notch management schools as a paragon of business smarts and outthinking the competition.
“Dell, as a company, was the model everyone focused on 10 years ago,” said David B. Yoffie, a professor of international business administration at Harvard. “But when you combine missing a variety of shifts in the industry with management turmoil, it’s hard not to have the shine come off your reputation.”
For the last seven years, the company has been plagued by serious problems, including misreading the desires of its customers, poor customer service, suspect product quality and improper accounting.
Dell has tried to put those problems behind it. In 2005, it announced it was taking a $300 million charge related, in part, to fixing and replacing the troubled computers. Dell set aside $100 million this month to handle a potential settlement with the Securities and Exchange Commission over a five-year-old investigation into its books, which will most likely result in federal accusations of fraud and misconduct against the company’s founder, Michael S. Dell.
The problems affecting the Dell computers stemmed from an industrywide encounter with bad capacitors produced by Asian PC component suppliers. Capacitors are found on computer motherboards, playing a crucial role in the flow of current across the hardware. They are not meant to pop and leak fluid, but that is exactly what was happening earlier this decade, causing computers made by Dell, Hewlett-Packard, Apple and others to break.
According to company memorandums and other documents recently unsealed in a civil case against Dell in Federal District Court in North Carolina, Dell appears to have suffered from the bad capacitors, made by a company called Nichicon, far more than its rivals. Internal documents show that Dell shipped at least 11.8 million computers from May 2003 to July 2005 that were at risk of failing because of the faulty components. These were Dell’s OptiPlex desktop computers — the company’s mainstream products sold to business and government customers.
A study by Dell found that OptiPlex computers affected by the bad capacitors were expected to cause problems up to 97 percent of the time over a three-year period, according to the lawsuit.
As complaints mounted, Dell hired a contractor to investigate the situation. According to a Dell filing in the lawsuit, which has not yet gone to trial, the contractor found that 10 times more computers were at risk of failing than Dell had estimated. Making problems worse, Dell replaced faulty motherboards with other faulty motherboards, according to the contractor’s findings.
But Dell employees went out of their way to conceal these problems. In one e-mail exchange between Dell customer support employees concerning computers at the Simpson Thacher & Bartlett law firm, a Dell worker states, “We need to avoid all language indicating the boards were bad or had ‘issues’ per our discussion this morning.”
In other documents about how to handle questions around the faulty OptiPlex systems, Dell salespeople were told, “Don’t bring this to customer’s attention proactively” and “Emphasize uncertainty.”
“They were fixing bad computers with bad computers and were misleading customers at the same time,” said Ira Winkler, a former computer analyst for the National Security Agency and a technology consultant. “They knew millions of computers would be out there causing inevitable damage and were not giving people an opportunity to fix that damage.”
Mr. Winkler served as the expert witness for Advanced Internet Technologies, which filed the lawsuit in 2007, saying that Dell had refused to take responsibility for 2,000 computers it sold A.I.T., an Internet services company. A.I.T. said that it had lost millions of dollars in business as a result. Clarence E. Briggs, the chief executive of A.I.T., declined to comment on the lawsuit.
Some of the documents in the case that were sealed under a protective order became public this month. Those documents show that after A.I.T. complained, Dell representatives looked at the failed computers and contended that A.I.T. had driven many of the computers too hard in a hot, confined space. Dell’s sales representatives discussed trying to sell A.I.T. more expensive computers as a resolution.
Jess Blackburn, a Dell spokesman, said the company would not comment on pending litigation. Lawyers for Dell deny A.I.T.’s claims, and contend that A.I.T. has cherrypicked and misinterpreted documents in the case. Dell’s lawyers wrote in a response to A.I.T.: “There was a Nichicon problem, and it affected different customers in different ways.”
In addition to the charge, Dell extended its warranty on the systems and often replaced computers when customers complained. (In 2007, Dell restated its earnings for 2003 to 2006, as well as the first quarter of 2007, and lowered its sales and net income totals for that period. An audit revealed that Dell employees had manipulated financial results to meet growth targets.)
But, as Dell did not recall the computers, many of Dell’s OptiPlex customers may be unaware that they had problematic computers or realize why their computers broke. A.I.T. says in court documents that the faulty capacitors touched off a variety of other problems that were often misdiagnosed. Dell could potentially face a raft of new complaints from some of its biggest customers.
Crucially, in their complaints to Dell in the lawsuit, customers describe losing valuable information when their computers malfunctioned. Dell, by contrast, denied that that the capacitor issue had caused data loss.
Dell’s supply chain had always stood out as one of its important assets. The company kept costs low by limiting its inventory and squeezing suppliers. If prices for components changed, Dell could react more quickly than its competitors, offering customers the latest parts at the lowest cost.
But the hundreds of Dell internal documents produced in the lawsuit show a company whose supply chain had collapsed as it failed to find working motherboards for its customers, including the firm representing Dell in the lawsuit, Alston & Bird.
According to a person who saw Dell’s 2005 internal communications, company executives carefully devised a public relations policy around the OptiPlex situation. Mr. Dell and Kevin B. Rollins, then Dell’s chief executive, were told that the news media would be informed of Dell’s commitment to fix any systems that failed, that Dell was working with customers to resolve problems in the most effective manner possible and that the problems posed no safety or data loss risk.
Carey Holzman, a computer expert who investigated the capacitor problems and collected photos from people with broken motherboards, had a different take on the safety situation.
“Of course it’s dangerous,” Mr. Holzman said. “Having leaking capacitors is a huge problem.” He found that the capacitor problems could cause computers to catch fire.
As late as 2008, after Mr. Dell had replaced Mr. Rollins and returned as chief executive, Dell continued to circulate internal memorandums trying to deal with the fallout from the capacitor situation. Dell salespeople, according to the lawsuit, fretted that technology directors at companies who used to buy from Dell could “justify their job” by advising their companies of Dell’s PC failures and recommending the purchase of H.P. and Lenovo computers.
To counter such lingering bad impressions, Dell salespeople were told to emphasize that the company’s direct model allowed it to identify and fix problems faster than competitors.
Friday, June 25, 2010
Financial Reform— Lawmakers Reach Agreement on Financial Reform - CNBC
A Senate-House of Representatives conference panel approved a landmark bill on Friday to overhaul financial regulations, working through the night on the thorniest provisions.
The legislation next heads to the full Senate and House where it is expected to win final approval and President Barack Obama could sign it into law before July 4.
Lawmakers agreed to allow banks to trade in-house many types of over-the-counter derivatives, watering down a controversial plan that would have required banks to spin off much of their lucrative swaps dealing desks.
Under the deal, banks can trade in-house foreign exchange and interest rate swaps, gold and silver swaps, and derivatives designed to hedge their own risk.
But banks will need to spin off dealing desks to affiliates to handle agricultural, energy and metals swaps, equity swaps, and uncleared credit default swaps.
Lawmakers neared a breakthrough in their historic rewrite of financial regulations as they agreed to tough new limits on banks' trading activity and floated a compromise on derivatives.
Democrats faced enormous pressure to complete work on the bill in the coming hours, before Obama discusses recovery and reform with leaders of other economic powers at the Group of 20 meeting in Canada.
In the fifteenth hour of a marathon negotiation session, Democrats agreed on a modified version of the so-called "Volcker rule," which would prohibit most trading and investment activity by banks.
It would give regulators little wiggle room to waive the trading ban but would also allow banks to invest up to 3 percent of their tangible equity in hedge funds and private equity funds.
The legislation next heads to the full Senate and House where it is expected to win final approval and President Barack Obama could sign it into law before July 4.
Lawmakers agreed to allow banks to trade in-house many types of over-the-counter derivatives, watering down a controversial plan that would have required banks to spin off much of their lucrative swaps dealing desks.
Under the deal, banks can trade in-house foreign exchange and interest rate swaps, gold and silver swaps, and derivatives designed to hedge their own risk.
But banks will need to spin off dealing desks to affiliates to handle agricultural, energy and metals swaps, equity swaps, and uncleared credit default swaps.
Lawmakers neared a breakthrough in their historic rewrite of financial regulations as they agreed to tough new limits on banks' trading activity and floated a compromise on derivatives.
Democrats faced enormous pressure to complete work on the bill in the coming hours, before Obama discusses recovery and reform with leaders of other economic powers at the Group of 20 meeting in Canada.
In the fifteenth hour of a marathon negotiation session, Democrats agreed on a modified version of the so-called "Volcker rule," which would prohibit most trading and investment activity by banks.
It would give regulators little wiggle room to waive the trading ban but would also allow banks to invest up to 3 percent of their tangible equity in hedge funds and private equity funds.
Thursday, June 24, 2010
EU Debt Crisis - Trichet Explains Why Soros Is Wrong About the Euro - CNBC
As German chancellor Angela Merkel prepares to take her austerity message to the G20 in Toronto this weekend, the head of the European Central Bank Jean-Claude Trichet has held her up as an example to the rest of the euro zone.
Merkel’s actions will boost confidence among households, investors and companies and will help consolidate the recovery, Trichet said in an interview with Italy's La Repubblica.
That view is at odds with what George Soros said Wednesday, when the legendary investor told an audience in Berlin that the euro is a flawed construct.
"By insisting on pro-cyclical policies, Germany is endangering the European Union," Soros warned. "I realize that this is a grave accusation, but I am afraid it is justified."
Trichet dismissed this, saying the euro [EUR=X 1.2285 -0.0031 (-0.25%) ] was a very credible currency that has kept its value from its debut and has guaranteed price stability for 11 and a half years, with an annual average inflation of 1.98 percent in the euro-zone in that period.
"A currency that guarantees such stable prices, it's of value in the eyes of domestic and international investors" Trichet told the Italian paper.
The single European currency fell against the dollar since worries over certain euro zone countries' ability to pay their debt begun.
On Wednesday, Soros said that "by cutting its budget deficit and resisting a rise in wages to compensate for the decline in the purchasing power of the euro, Germany is actually making it more difficult for the other countries to regain competitiveness."
Merkel defended her actions over the weekend, saying they will prevend future crises.
Deflation Risks
But Trichet does not believe that austerity measures being put in place by European governments will cause deflation.
Some of the more bearish investors are betting that cuts in government spending across the European Union will add to deflationary pressures at a time when consumers and businesses are de-leveraging.
Growth will fall sharply, with private sector deflation pushing yields on 10-year bonds down to 2 percent, triggering a new wave of quantitative easing, Bob Janjuah, chief markets strategist at RBS told CNBC earlier this month.
"I don't think that such risks could materialize," said Trichet, adding that inflation expectations were well anchored. "As regards the economy, the idea that austerity measures could trigger stagnation is incorrect."
Reforming the real economy in each country in the euro zone is what is needed, according to Trichet.
"We ask all governments to be determined to carry out structural reforms to increase the potential growth," he said. "I insist on the need to boost work productivity: in the medium- and long-term, growth depends right on this."
Merkel’s actions will boost confidence among households, investors and companies and will help consolidate the recovery, Trichet said in an interview with Italy's La Repubblica.
That view is at odds with what George Soros said Wednesday, when the legendary investor told an audience in Berlin that the euro is a flawed construct.
"By insisting on pro-cyclical policies, Germany is endangering the European Union," Soros warned. "I realize that this is a grave accusation, but I am afraid it is justified."
Trichet dismissed this, saying the euro [EUR=X 1.2285 -0.0031 (-0.25%) ] was a very credible currency that has kept its value from its debut and has guaranteed price stability for 11 and a half years, with an annual average inflation of 1.98 percent in the euro-zone in that period.
"A currency that guarantees such stable prices, it's of value in the eyes of domestic and international investors" Trichet told the Italian paper.
The single European currency fell against the dollar since worries over certain euro zone countries' ability to pay their debt begun.
On Wednesday, Soros said that "by cutting its budget deficit and resisting a rise in wages to compensate for the decline in the purchasing power of the euro, Germany is actually making it more difficult for the other countries to regain competitiveness."
Merkel defended her actions over the weekend, saying they will prevend future crises.
Deflation Risks
But Trichet does not believe that austerity measures being put in place by European governments will cause deflation.
Some of the more bearish investors are betting that cuts in government spending across the European Union will add to deflationary pressures at a time when consumers and businesses are de-leveraging.
Growth will fall sharply, with private sector deflation pushing yields on 10-year bonds down to 2 percent, triggering a new wave of quantitative easing, Bob Janjuah, chief markets strategist at RBS told CNBC earlier this month.
"I don't think that such risks could materialize," said Trichet, adding that inflation expectations were well anchored. "As regards the economy, the idea that austerity measures could trigger stagnation is incorrect."
Reforming the real economy in each country in the euro zone is what is needed, according to Trichet.
"We ask all governments to be determined to carry out structural reforms to increase the potential growth," he said. "I insist on the need to boost work productivity: in the medium- and long-term, growth depends right on this."
Wednesday, June 23, 2010
Wednesday, June 9, 2010
Saturday, June 5, 2010
Stock Market and Investing: All Eyes on Europe's Sovereign Debt Crisis - CNBC
Week Ahead: All Eyes on Europe's Sovereign Debt Crisis
The weakening euro could continue to strong-arm markets in the week ahead, as investors worry about contagion from Europe's sovereign debt crisis and the potential for a bigger setback in the U.S. economic recovery.
Stocks Friday suffered their second largest decline of the year from the double whammy of fresh worries about Hungary and a disappointing U.S. employment report, which showed little in the way of private sector job creation. But it was a sharp decline in the euro that really took stocks on a ride downhill, as the market followed each dip. The euro closed the week at $1.1966, its lowest level since March, 2006.
In the coming week, the U.S. market would normally have focused on Fed Chairman Ben Bernanke's testimony before a House committee Wednesday, as well as monthly retail sales Friday and other economic reports, but the focus will likely be on news from abroad. Over the weekend, G-20 finance ministers meet in Korea. Then early in the week, euro zone finance ministers meet in Luxembourg Monday and Tuesday. Separately, Hungary is expected to release a new budget after the EU turned down the government's request to run a higher deficit.
"I think the combination of the European problems, and the disappointing U.S. jobs data forces people to the side lines and makes people question how strong a recovery we are getting," said Marc Chandler, Brown Brothers Harriman chief currency strategist.
The problems in Hungary bubbled to the surface Thursday after an official of the newly elected government said the country's fiscal condition was worse than expected and likened its situation to Greece. The comment jarred already nervous markets, sending spreads on Europe's weakest sovereigns sharply wider.
The Dow lost 204 points, or 2 percent for its fifth weekly loss in six weeks. At 9931, the Dow is now 11.4 percent from its late April high. The S&P 500 lost 2.3 percent for the week, to 1064, its lowest close since Feb. 8. The Nasdaq in the past week lost 1.7 percent to 2219, and the Russell 2000 was off 4.2 percent at 633.
Traders have been watching the S&P 500 which moved well below its 200-day moving average in the low 1100 zone.
"You're still above the 1050 level which was the recent low, and if you break through that I think you're in new territory and you've re-established a strong downtrend," said Karl Mills, president of money manager Jurika, Mills and Keifer.
"Technical support levels matter until they don't matter. We blew through some of them very easily. There's always some level to watch. I think what's really going to drive it is the fundamentals in Europe, so what you're watching is credit spreads, Libor, interbank lending and the flow of credit," he said.
Mills said he has been positioned defensively, holding a large amount of cash and is sticking to highly liquid global companies with innovative products or important services. One of those companies is Apple, and he said he is looking forward to its developers meeting Monday.
May's employment report, released Friday morning, showed the creation of 431,000 non farm payrolls, but the bulk of those were were temporary workers hired for the government census and only 41,000 private sector jobs were created.
Economists had expected a number closer to 530,000, with 190,000 private sector workers. "The silver lining in an otherwise dismal report is that the work week increased and incomes increased...second quarter GDP is probably going to be unaffected by today's report," Chandler said. "It's a slower than average recovery, but it's still a recovery."
Richard Bernstein of Richard Bernstein Capital Management said he is not as much as worried about Europe as about the domestic jobs picture. The indicator he watches the most is the weekly jobless claims, which have stalled out in the mid 400,000 range.
"I still think that U.S. assets are perhaps the most attractive in the world, but it's going to take more global volatility for the consensus to come my way," he wrote in a quick note after the jobs report Friday. "USD appreciating. That more than anything else supports my longer-term bullish view."
Bernstein, in an earlier interview, said that the jobs picture needs to improve, but that Europe could actually help stimulate the U.S. economy. "We'll get lower gasoline prices, higher dollar which increases purchasing power and lower interest rates," he said.
"People are just not patient enough, and they want everything to happen rapidly, and these things don't happen that rapidly. I think job creation will continue. I think the economy will continue to progress, and the odds of a double dip are lower than people think," he said.
Barclays Capital chief U.S. economist Dean Maki said monthly jobs reports are volatile, and it's better to look at a three-month trend. "Over the last three months, we created an average of 139,000 private sector jobs," he said. He added that there could be some substitution factor at work, as workers took temporary better paying census jobs rather than take some lower paying private sector jobs, and that could reverse as the census workers are let go during the summer.
Maki also does not think the European sovereign concerns at this point are hurting the U.S. economy. That would change, however, if the stock market decline gets more severe and dampens consumer spending.
In the coming week, he is focused on Bernanke's testimony and retail sales, which he expects to rise 0.4 percent. Bernanke testifies before the House Budget committee. "It's hard to see him dramatically changing his view. He likely will be asked about Europe and will probably address it briefly in his prepared remarks. I would expect him to continue to sound reasonably upbeat on the economic outlook but sight headwinds as a reason to be cautious," said Maki.
What Else to Watch
The U.S. Treasury auctions $70 billion in 3-year and 10-year notes and 30-year bonds Tuesday, Wednesday and Thursday.
Other U.S. data expected this week includes wholesale trade Wednesday and international trade Thursday. The beige book is released Wednesday and weekly jobless claims are reported Thursday.
Later in the week, the European Central Bank holds a rates meeting and news briefing. There is also fresh data from China on its trade balance Thursday, and retail sales, industrial production and CPI Friday.
"In addition to Bernanke, that's likely to be the next major pulse taking of the global recovery," said Brian Dolan of GFT Forex.
The frustration surrounding BP's [BP 37.16 -2.11 (-5.37%) ] inability to stop its spewing oil continues to grow, and traders increasingly mention it as a problem darkening the mood of investors. "I just think if it got turned off, the market would act better," said one trader.
The weakening euro could continue to strong-arm markets in the week ahead, as investors worry about contagion from Europe's sovereign debt crisis and the potential for a bigger setback in the U.S. economic recovery.
Stocks Friday suffered their second largest decline of the year from the double whammy of fresh worries about Hungary and a disappointing U.S. employment report, which showed little in the way of private sector job creation. But it was a sharp decline in the euro that really took stocks on a ride downhill, as the market followed each dip. The euro closed the week at $1.1966, its lowest level since March, 2006.
In the coming week, the U.S. market would normally have focused on Fed Chairman Ben Bernanke's testimony before a House committee Wednesday, as well as monthly retail sales Friday and other economic reports, but the focus will likely be on news from abroad. Over the weekend, G-20 finance ministers meet in Korea. Then early in the week, euro zone finance ministers meet in Luxembourg Monday and Tuesday. Separately, Hungary is expected to release a new budget after the EU turned down the government's request to run a higher deficit.
"I think the combination of the European problems, and the disappointing U.S. jobs data forces people to the side lines and makes people question how strong a recovery we are getting," said Marc Chandler, Brown Brothers Harriman chief currency strategist.
The problems in Hungary bubbled to the surface Thursday after an official of the newly elected government said the country's fiscal condition was worse than expected and likened its situation to Greece. The comment jarred already nervous markets, sending spreads on Europe's weakest sovereigns sharply wider.
The Dow lost 204 points, or 2 percent for its fifth weekly loss in six weeks. At 9931, the Dow is now 11.4 percent from its late April high. The S&P 500 lost 2.3 percent for the week, to 1064, its lowest close since Feb. 8. The Nasdaq in the past week lost 1.7 percent to 2219, and the Russell 2000 was off 4.2 percent at 633.
Traders have been watching the S&P 500 which moved well below its 200-day moving average in the low 1100 zone.
"You're still above the 1050 level which was the recent low, and if you break through that I think you're in new territory and you've re-established a strong downtrend," said Karl Mills, president of money manager Jurika, Mills and Keifer.
"Technical support levels matter until they don't matter. We blew through some of them very easily. There's always some level to watch. I think what's really going to drive it is the fundamentals in Europe, so what you're watching is credit spreads, Libor, interbank lending and the flow of credit," he said.
Mills said he has been positioned defensively, holding a large amount of cash and is sticking to highly liquid global companies with innovative products or important services. One of those companies is Apple, and he said he is looking forward to its developers meeting Monday.
May's employment report, released Friday morning, showed the creation of 431,000 non farm payrolls, but the bulk of those were were temporary workers hired for the government census and only 41,000 private sector jobs were created.
Economists had expected a number closer to 530,000, with 190,000 private sector workers. "The silver lining in an otherwise dismal report is that the work week increased and incomes increased...second quarter GDP is probably going to be unaffected by today's report," Chandler said. "It's a slower than average recovery, but it's still a recovery."
Richard Bernstein of Richard Bernstein Capital Management said he is not as much as worried about Europe as about the domestic jobs picture. The indicator he watches the most is the weekly jobless claims, which have stalled out in the mid 400,000 range.
"I still think that U.S. assets are perhaps the most attractive in the world, but it's going to take more global volatility for the consensus to come my way," he wrote in a quick note after the jobs report Friday. "USD appreciating. That more than anything else supports my longer-term bullish view."
Bernstein, in an earlier interview, said that the jobs picture needs to improve, but that Europe could actually help stimulate the U.S. economy. "We'll get lower gasoline prices, higher dollar which increases purchasing power and lower interest rates," he said.
"People are just not patient enough, and they want everything to happen rapidly, and these things don't happen that rapidly. I think job creation will continue. I think the economy will continue to progress, and the odds of a double dip are lower than people think," he said.
Barclays Capital chief U.S. economist Dean Maki said monthly jobs reports are volatile, and it's better to look at a three-month trend. "Over the last three months, we created an average of 139,000 private sector jobs," he said. He added that there could be some substitution factor at work, as workers took temporary better paying census jobs rather than take some lower paying private sector jobs, and that could reverse as the census workers are let go during the summer.
Maki also does not think the European sovereign concerns at this point are hurting the U.S. economy. That would change, however, if the stock market decline gets more severe and dampens consumer spending.
In the coming week, he is focused on Bernanke's testimony and retail sales, which he expects to rise 0.4 percent. Bernanke testifies before the House Budget committee. "It's hard to see him dramatically changing his view. He likely will be asked about Europe and will probably address it briefly in his prepared remarks. I would expect him to continue to sound reasonably upbeat on the economic outlook but sight headwinds as a reason to be cautious," said Maki.
What Else to Watch
The U.S. Treasury auctions $70 billion in 3-year and 10-year notes and 30-year bonds Tuesday, Wednesday and Thursday.
Other U.S. data expected this week includes wholesale trade Wednesday and international trade Thursday. The beige book is released Wednesday and weekly jobless claims are reported Thursday.
Later in the week, the European Central Bank holds a rates meeting and news briefing. There is also fresh data from China on its trade balance Thursday, and retail sales, industrial production and CPI Friday.
"In addition to Bernanke, that's likely to be the next major pulse taking of the global recovery," said Brian Dolan of GFT Forex.
The frustration surrounding BP's [BP 37.16 -2.11 (-5.37%) ] inability to stop its spewing oil continues to grow, and traders increasingly mention it as a problem darkening the mood of investors. "I just think if it got turned off, the market would act better," said one trader.
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