October 2008 Archives

Compensation, part two

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Today, BailoutSleuth continues its examination of executive compensation at the banks that are getting the biggest chunks of taxpayer money through the Treasury Department's $700 billion rescue program.

 

We'll start with Goldman Sachs Group Inc., long one of the most profitable investment banks on Wall Street. Goldman Sachs is getting $10 billion in new capital from the government, through the sale of preferred stock.

 

Treasury Secretary Henry M. Paulson Jr. is the former chairman and chief executive of Goldman Sachs. Neel Kashkari, the Treasury official directing the bailout program, was an investment banker there.

 

GOLDMAN SACHS

 

The lofty executive compensation levels at Goldman Sachs are a reflection of the company's success.

 

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Lloyd C. Blankfein, who replaced Paulson as chairman and chief executive in 2006, had $70.3 million in total compensation last year, up from $44.1 million the previous year. Roughly $27.6 million of last year's amount was in salary and bonus.

 

Blankfein had $25.9 million in stock awards and $16.4 million in options. Goldman Sachs's stock has fallen by more than half this year, so the stock awards have lost much of their value and the options are well below the price at which they could be exercised for a profit.

 

Two other Goldman Sachs executives had total compensation that exceeded Blankfein's last year. Gary D. Cohn, the company's co- president, had $72.5 million in compensation. Jon Winkelried, the other co-president, had $71.5 million. Each, however, received more than $40 million in stock and option awards that have declined sharply in value.

 

The company's two other highest-paid officers had a combined $107.5 million in compensation last year, with nearly 60 percent of that in stock and options rather than cash.

 

All told, the company's five top executives received $123 million in salary and bonus. All but $10 million of that was paid in cash, according to Goldman Sachs' proxy filing.

 

Goldman Sachs' stock closed Friday at $92.50, down from $213.21 at the end of 2007 and $196.34 at the end of 2006.

 

MERRILL LYNCH

 

Merrill Lynch also is getting $10 billion in federal money. It has replaced most of its top officers in the past year, after posting big losses tied primarily to investments in home loans. The company is in the process of being acquired by Bank of America Corp.

 

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John A. Thain, former head of the New York Stock Exchange, took over as Merrill's chairman and chief executive after the company ousted E. Stanley O'Neal last October. Merrill listed $17.3 million in total compensation for Thain. That total included a $15 million signing bonus, with half paid in cash and half in restricted stock.

 

Gregory J. Fleming, Merrill's president and chief operating officer, had $27.6 million in total compensation last year, down from $33.9 million in 2006. He received a salary of $350,000 and was not awarded a bonus. The bulk of his compensation came from $26.4 million in stock awards related to the company's performance in the five prior years.

 

Fleming collected $13.6 million in salary and bonus in 2006.


Merrill's stock has lost nearly 80 percent of its market value in the past two years. It closed Friday at $18.59 a share, down from $52.97 at the end of 2007 and $89.05 at the end of 2006.


Merrill listed $24.3 million in compensation for O'Neal, who resigned as chairman and chief executive on Oct. 30, 2007. He received $584,231 in salary, and got no bonus. Most of the remainder was stock awards.

 

Merrill reported $91.4 million in compensation for O'Neal in 2006, with $19.2 million of that in salary and bonus and nearly $70 million in stock awards.

 

Three other executives who left the company after its problems surfaced had a combined $21.7 million in compensation, down from $119.4 million the previous year. Much of their compensation for 2006 - nearly $75 million - was in the form of stock awards.

 

Merrill's executives had relatively modest stock-option compensation in recent years. The company listed a total of $3.9 million in option income for O'Neal in 2006 and 2007, and $1.34 million in option income for Thain last year. All but one of the other executives and former executives had less than $1 million each in option income for 2006 and 2007.

 

MORGAN STANLEY

 

Like Merrill, Morgan Stanley has posted big losses because of soured investments in subprime mortgages.

 

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In addition to seeking $10 million from the U.S. government, the company last year negotiated a $5 billion investment with China's sovereign wealth fund, China Investment Corp.

 

John J. Mack, Morgan Stanley's president and chief executive, had just $1.6 million in total compensation last year. He got $800,000 in salary, no bonus and no stock grants. His stock-option compensation was a mere $11,461.

 

The company's five other highest-paid executives fared much better. Colm Kelleher, who became chief financial officer in October, had $21 million in compensation, with $7.26 million of that in salary and bonus.

 

Robert W. Scully, who was co-president of Morgan Stanley, had $15.2 million in compensation. His package included $5.75 million in salary and bonus.

 

Each of the men had more than $11 million in stock awards and options. The stock awards have plunged in value along with the company's shares, and the options the men hold could not currently be exercised at a profit.

 

Morgan Stanley's stock closed Friday at $17.47, up $1.38. That compares with $51.47 at the end of 2007, and $64.57 at the end of 2006.

 

 

 

 

More bank investments

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Three more regional banks are raising additional capital by selling preferred stock to the Treasury Department.

 

Marshall & Ilsley Corp., based in Milwaukee, announced that it is getting as much as $1.7 billion in government funds. Zions Bancorporation of Salt Lake City will get $1.4 billion, and Umpqua Holdings Corp. of Portland, Ore., will get $214 million.

 

All three companies noted that they were financially healthy, and were accepting the new capital as part of the government's broader effort to spur lending by removing doubts about the solvency of the banking sector.

 

"We expect to deploy this new capital in the form of prudent lending in the markets we serve,'' said Harris Simmons, chairman and chief executive of Zions. "This new lending will be good for our country's economy, our customers and our company.''

 

Zions also announced that it was cutting its quarterly dividend by 20 percent to further strengthen its capital position. It is one of only a few banks participating in the Treasury Department's $700 billion rescue program that have cut payouts to shareholders after agreeing to accept taxpayer money.

 

The Treasury Department also has approved investments in two other banks, Old National Bancorp of Evansville, Ind., and Provident Bankshares Corp. of Baltimore. Neither of those institutions has decided how much money to take, if any.

 

Two more companies announced plans to seek capital through the federal program. Whitney Holding Corp. of New Orleans said it would apply for as much as $202 million, and International Bancshares Corp. of Laredo, Tex., said it would request as much as $200 million.

 

Park National Corp., a bank holding company in Newark, Ohio, said it might apply for as much as $140 million.

Bank compensation, part one

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Members of Congress are starting to question whether banks that got billions in government bailout money will use some of it to pay year-end bonuses to executives and other employees.

 

BailoutSleuth decided to take a look at compensation levels for the top officers at those banks, to see how much they were paid in recent years and whether the companies have made any adjustments in response to plunging profits or eroding asset values.

 

We'll start with four banks that got, or will get, $25 billion each by selling preferred stock and warrants to the Treasury Department. The companies on that list are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp.

 

Although Bank of America is getting $15 billion in direct government investment, it is in the process of buying Merrill Lynch Inc., which is getting an additional $10 billion.

 

Under the compensation rules in the Treasury Department's $700 billion rescue program, companies that receive government money can take tax deductions on only the first $500,000 of each executive's pay. That figure includes bonuses and stock awards.

 

Our survey of executive compensation at the banks participating most heavily in the program shows that pay levels for every one of their top officers far exceed the government's deductibility threshold. In fact, the lowest full-year compensation package we found at the four banks mentioned above was $3.99 million, for one of Wells Fargo's senior executive vice presidents.

 

Here is an overview of executive pay levels at the four companies that received the most government money (click on charts to view larger versions in a separate window):

 

WELLS FARGO

 

Richard M. Kovacevich, chairman of Wells Fargo, received $22.9 million in total compensation in 2007, down from $29.8 million a year earlier. His package included a salary of $995,000 and non-stock incentive compensation of $5.7 million.

 


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Kovacevich got a pair of stock option awards that the company valued at $11.2 million. Wells Fargo's share price has dipped below the exercise price for the options, meaning that they currently could not be exercised at a profit.

 

The next five highest-paid executives at Wells Fargo got a combined $34.5 million. Their individual compensation ranged from $3.99 million for Carrie L. Tolstedt, the senior executive vice president of community banking, to $12.6 million for President John G. Stumpf. However, more than a third of the total compensation for that group of executives was stock options that are currently out of the money.

 

Wells Fargo's proxy filing shows that Mark C. Oman, senior executive vice president for home and consumer finance, was the only listed officer who got no incentive bonus. He nevertheless had $6.42 million in total compensation, including stock options the company valued at $5.1 million.

 

Wells Fargo's stock has fared better in the downturn than the stock of most other banking companies. Its shares fell 12.1 percent in 2007, but have made up much of the lost ground this year, gaining 9.7 percent through Wednesday.

 

The bank had profits of $3.75 billion for the first half of this year. That compares with $8.06 billion for all of 2007 and $8.42 billion for all of 2006.

 

Wells Fargo agreed last month to buy ailing Wachovia Corp. for $15.1 billion. The Federal Deposit Insurance Corp. had initially enlisted Citigroup to buy the bank, but Wells Fargo made a higher offer.

 

CITIGROUP

 

Charles Prince, Citigroup Inc.'s former chairman and chief executive, got $15.1 million in total compensation in 2007, barely half of the $29.1 million that he received in 2006. Prince was ousted last November as the company's bad investments in mortgage-backed securities took a heavy toll on its earnings and balance sheet.

 

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Prince left Citigroup with stock and other benefits then valued at more than $95 million.

 

The next five highest-paid Citigroup executives split $48.7 million in 2007, with individual amounts ranging from $7.6 million to $19.4 million. The cash portion of their salary and bonuses ranged from $1.51 million to $14.5 million.

 

Two members of that group - Sallie Krawcheck, head of Citigroup's wealth-management business, and Michael Klein, head of its global banking business -- left the company after Vikram Pandit replaced Prince as chief executive.

 

Krawcheck had compensation of $7.14 million in 2007, and Klein received $7.86 million.

 

Citigroup's stock fell 44.8 percent in 2007, and is down an additional 54.3 percent his year.

 

Pandit got restricted stock and options valued at $48 million as a sign-on bonus. However, the decline in Citigroup's share price has slashed the value of the stock, and the options currently could not be exercised at a profit.

 

An earlier deal with Citigroup proved far more lucrative for Pandit. The bank paid $800 million in April 2007 for Old Lane LP, a hedge fund that he founded the previous year  with partner John Havens, now head of Citigroup's investment banking operations. Pandit's share of the proceeds was $162.5 million.

 

In May of this year, Citigroup allowed investors to withdraw their money from the $4 billion-plus fund, and in June it shut down the fund and rolled its remaining assets into the parent company.

 

Citigroup posted a loss of $7.6 billion for the first half of 2008. That compares with earnings of $3.62 billion for all of 2007, and $21.5 billion for all of 2006.

 

JPMORGAN CHASE

 

James S. Dimon, chairman and chief executive of JPMorgan Chase, collected $27.8 million in total compensation in 2007.  That package included a salary of $1 million and a bonus of $14.5 million. Dimon had total compensation of $39 million in 2006.

 

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Dimon's compensation last year included a grant of 269,431 shares of stock that JPMorgan Chase valued at nearly $10.7 million in March. The decline in the company's stock since then has reduced the market value of the shares by $1.1 million.

 

The options issued to Dimon and other executives in 2007 have at an exercise price of $46.79 a share, according to the company's proxy filing. With the decline in the company's stock, none of the options could be exercised at a profit today.

 

Two other JPMorgan executives made more than $20 million each in 2007. William T. Winters, co-head of the company's investment banking unit, had total compensation of $21.2 million. Steven D. Black, the other co-head, got $20.9 million.

 

The remaining two officers covered by the company's proxy filing had 

combined compensation of $25 million. Although stock awards accounted for much of the pay listed for Winters, Black and the other two executives. each received between $4.25 million and $9.2 million in salary and bonus.

 

JPMorgan Chase's stock fell 6.9 percent in 2007, and is off 15.2 percent so far this year. The bank's profits also have been declining. It posted net income of $4.29 billion for the first half of 2008. That compares with $14.4 billion for all of 2007 and $15.4 billion for 2006.

 

JPMorgan Chase agreed in September to buy most of the assets of Washington Mutual. The deal for that failing, Seattle-based bank was facilitated by the FDIC.

 

BANK OF AMERICA

 

Kenneth D. Lewis, Bank of America's chairman and chief executive, collected $24.8 million in total compensation in 2007, down from $27.9 million the previous year. His pay package for 2007 included $1.5 million in salary, a $4.25 million cash bonus,

restricted stock valued at $11.1 million and stock options valued at $4.57 million.

 

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Bank of America's stock fell 18.8 percent in 2007 and has fallen a further 42.8 percent this year.

 

Bank of America said in its proxy filing that Lewis' $11.1 million stock award was granted in early 2007 and was based on performance for prior years, including 2006. Because of the drop in the company's share price, the award has a current value of around $4.6 million.

 

The next five highest-paid Bank of America executives got $55.4 million in total compensation, with the individual amounts ranging from $9.33 million to $13.3 million. Those same people had $53.4 million in compensation in 2006.

 

The option awards granted to Bank of America's top executives in 2007 ranged in value from $2.14 million to $4.57 million per person. Because of the company's slumping stock price, none could currently be exercised at a profit.

 

Bank of America reported profits of $4.62 billion for the first half of 2008. That compares to $14.9 billion for all of 2007, and $21.2 billion for 2006.

 

THE WAXMAN LETTER

 

Henry A. Waxman, a California Democrat who heads the House Committee on Oversight and Reform, sent letters this week to the chief executives of nine banks slated to receive $125 million in aid from the Treasury Department.

 

He requested information on their compensation and bonus plans, noting that public filings show that those companies spent or reserved $108 billion for those purposes in the first nine months of 2008 - nearly the same amount as last year.

 

Waxman noted that some news reports suggesting that year-end bonuses would be bolstered by the infusion of federal money.

 

"While I understand the need to pay the salaries of employees, I question the appropriateness of depleting the capital that taxpayers just injected in the banks through payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record,'' he wrote.

 

 


The money list

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At least 27 banks have agreed to sell stakes in themselves to the Treasury Department under a federal plan to inject capital into the financial system.

 

The newest list of recipients includes Capital One Financial Corp. a big credit-card issuer based in McLean, Va.; Washington Federal Savings, a thrift in Seattle that recently reported its first quarterly loss in history; and Saigon National Bank, a small bank in Southern California which targets that region's ethnic Vietnamese.

 

The latest deals total $30 billion in investment by the Treasury Department. The agency has allocated $250 billion for the program, which calls for the government to provide capital to banks in exchange for preferred stock and warrants.

 

The investments announced since the program's inception earlier this month cover more than $160 billion of the available cash.

 

BailoutSleuth compiled this list of recipients from bank press releases and local media reports. We will make it a standing feature on our site, adding names and amounts as they become available.

 

Here are the banks known to have selected for federal investments:

 

Citigroup Inc. (New York) -- $25 billion

 

JPMorgan Chase & Co. (New York) - $25 billion

 

Wells Fargo & Co. (San Francisco) -- $25 billion

 

Bank of America Corp. (Charlotte, N.C.) -- $15 billion

 

Goldman Sachs Group Inc. (New York) -- $10 billion

 

Merrill Lynch Inc. (New York) -- $10 billion

 

Morgan Stanley (New York) -- $10 billion

 

PNC Financial Services Group Inc. (Pittsburgh) -- $7.7 billion

 

Capital One Financial Corp. (McLean, Va.) -- $3.55 billion

 

Regions Financial Corp. (Birmingham, Ala.) -- $3.5 billion

 

SunTrust Banks Inc. (Atlanta) -- $3.5 billion

 

Fifth Third Bancorp (Cincinnati) -- $3.4 billion

 

BB&T Corp. (Winston-Salem, NC) -- $3.1 billion

 

Bank of New York Mellon (New York) -- $3 billion

 

Keycorp (Cleveland) -- $2.5 billion

 

Comerica Inc. (Dallas) -- $2.25 billion

 

State Street Corp. (Boston) -- $2 billion

 

Northern Trust Corp. (Chicago) -- $1.5 billion

 

Huntington Bancshares Inc. (Columbus, Ohio) -- $1.4 billion

 

First Horizon National Corp. (Memphis, Tenn.)  -- $866 million

 

City National Corp. (Beverly Hills, Calif.) -- $395 million

 

Valley National Bancorp (Wayne, N.J.) -- $330 million

 

UCBH Holdings Inc. (San Francisco) -- $298 million

 

Washington Federal Savings (Seattle) -- $200 million

 

First Niagara Financial Group Inc. (Buffalo, N.Y.)  -- $186 million

 

HF Financial Corp. (Sioux Falls, S.D.) -- $25 million

 

Saigon National Bank (Westminster, Calif.) -- $1.2 million

 

 

 

The next wave

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A new group of smaller, regional banks have begun announcing their participation in the federal government's $700 billion rescue program.

Regions Financial Corp., based in Birmingham, Ala., said in a press release that it had been approved for a $3.5 billion preferred stock investment by the Treasury Department. First Horizon National Corp., headquartered in Memphis, Tenn., will get $866 million.

City National Corp. in Beverly Hills, Calif., is set to receive $395 million. The announcements come amid reports that the Treasury Department is set to disclose investments in 20 or so additional financial institutions.

Although the investment program is only a few weeks old, some bank watchers already are  questioning whether the recipients of the taxpayer money will use it to make loans and ease the credit crunch, or use it for other purposes, such as acquisitions.

Regions Financial said when it released third-quarter earnings last week that its profits plunged 79.8 percent and its non-performing assets doubled as a percentage of total loans. Nevertheless, the bank's financial conditional put it above the "well capitalized'' threshold set by federal standards.

"Regions believes this government program is important to restoring the flow of funds to consumers and businesses, both large and small, who are at the core of our economy," its  chairman, C. Dowd  Ritter, said in a prepared statement.  "These funds, while still strengthening our capital base, will enable us  to expand lending and step up acquisitions."

Regions said in its release that it would pay the government a 5 percent dividend on the preferred stock, or $175 million  annually, for five years, and would pay 9 percent in later years unless it redeemed the stock. The government will also get 10-year warrants for common stock, which will give the Treasury the opportunity to benefit from any increase in its share price.

Regions also was chosen by the Federal Deposit Insurance Corp. in August to take over the deposits of failed Integrity Bank, which was based in Alpharetta, Ga., and had roughly $1.1 billion in assets.

 

Compensation questions

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Although the $700 billion bailout package passed by Congress includes provisions aimed at holding down executive compensation at companies getting federal help, the early reviews suggest that it will have little real impact.

 

Under Treasury Department rules, the banks that are getting capital injections from the government can take tax deductions on only the first $500,000 of an executive's pay, down from the standard Internal Revenue Service limit of $1 million.

 

The new rules even apply to stock options and grants. But critics say that the companies covered by the new restrictions will simply pay more in taxes rather than pay less to executives. Indeed, none of the companies that has signed on for federal bailout money has announced plans to slash salaries and bonuses, or to substantially overhaul their executive compensation schemes.

 

The German government has taken a more stringent approach with banks participating in its bailout program. Companies there would have to cap salaries for top executives at 500,000 Euros, or roughly $635,000. The German plan also would prohibit them from receiving bonuses until the debt to the government is repaid.

 

Other countries providing assistance to their struggling financial institutions also are imposing salary caps or restrictions.

 

Over the next few days, BailoutSleuth will highlight the pay packages of top executives at the nine U.S. banks that have agreed to receive federal aid by selling preferred stock to the Treasury Department.

 

We welcome reader input on the subject, as well as tips on specific situations that deserve more scrutiny. Please send your comments to Chris Carey at chris@sharesleuth.com.

 

 

 

 

 

Picking winners

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PNC Financial Services Group Inc. will absorb National City Corp. after federal officials turned down National City's request for new capital under the government's $700 billion rescue program.

 

PNC agreed to pay $5.6 billion for National City, an Ohio-based bank holding company that ran into trouble because of expansion and exposure to subprime mortgage loans. The price of $2.23 a share reflects a roughly 19 percent discount to National City's closing price the day before the deal was announced.

 

The Treasury Department and the Federal Deposit Insurance Corp. helped arrange the takeover. The deal marked the first time that the government has intervened in picking winners and losers in the financial industry since Treasury officials announced that part of the $700 billion in bailout money would be used to make direct investments in banks rather than to buy their troubled assets.

 

The Treasury Department said earlier this month that it would invest $125 billion in nine big banks, including Citigroup Inc., Bank of America Corp. and Goldman Sachs & Co. It is taking applications from other banks for an additional $125 billion, with requests due by Nov. 14.

 

PNC, which is based in Pittsburgh, will get $7.7 billion in fresh capital through the sale of preferred shares and warrants to the government. The merger with National City will make it the fifth-largest U.S. bank in terms of deposits.

 

Peter E. Raskind, National City's chairman and chief executive, will become a vice chairman of PNC. He and other National City officers will qualify for millions of dollars in payouts under the change-in-control provisions in their employment contracts. The packages include cash payments equal to three times their annual salary and incentive bonuses.

 

According to National City's proxy filing with the Securities and Exchange Commission in March, Raskind stood to receive $19.9 million in cash, before taxes, and $2.45 million in stock, which at the time was valued at $16.46 a share. It pegged the after-tax value of his change-in-control package at $8.8 million.

 

The proxy filing put the payouts for National City's top three executives at $45 million, before taxes, with $30.5 million of that in cash.

  

PNC said in a press release that its estimated internal return rate on the acquisition will exceed 15 percent, and that the deal should add to the company's earnings in the second year after it is completed. PNC's stock price rose $2.00 on Friday, or 3.5 percent, to close at $58.88.

 

In other banking news, the FDIC and Georgia Regulators shut down Alpha Bank & Trust of Alpharetta, Ga., on Friday. The FDIC struck a deal with Stearns Bank NA of St. Cloud, Minn., to assume Alpha Bank's more than $340 million in insured deposits.

 

According to an FDIC summary, Alpha Bank is the 16th bank that the agency has shut down this year.

 

A new appointment

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From L to R: Neel Kashkari, James H. Lambright, and Henry M. Paulson, Jr.


The Treasury Department tapped James H. Lambright, head of the Export-Import Bank, as the interim chief investment officer for the $700 billion Troubled Asset Relief Program.

 

Under the rescue program authorized by Congress, the Treasury Department is injecting capital into banks through equity investments and is buying distressed assets, such as mortgage-backed securities. to strengthen their balance sheets.

 

Lambright, 38, is a former Credit Suisse Group investment banker who has been with the Export-Import Bank since 2001. He will retain his position as that institution's chairman and president.

 

The Export-Import Bank provides financing assistance to U.S. businesses seeking to sell products overseas.

 

The bailout program is being directed by Neel Kashkari, who had been senior advisor to Treasury Secretary Henry M. Paulson Jr. Both men came to the government from Goldman Sachs & Co., the New York investment bank.

 

The Treasury Department previously announced that Reuben Jeffery, a State Department official, would fill the chief investment officer post. But Paulson and Secretary of State Condoleezza Rice decided Jeffery should remain in his current position in order to participate in the upcoming global summit on financial markets, which will include the leaders from 20 of the world's biggest economies.

 

BailoutSleuth is looking into Lambright's history, accomplishments and connections, and will report on what we find.

 

The Treasury Department has hired two big accounting firms to help keep tabs on the government's financial-industry rescue program, and once again certain basic elements of the deals are shrouded in secrecy.

PricewaterhouseCoopers LLP will provide internal controls for the government's $700 billion bailout fund. Ernst & Young will provide general accounting and consulting. The Treasury Department said the first phase of the three-year contracts will be worth $191,469.27 and $492.006.95, respectively.

That sort of specific detail is lacking in the agreements themselves. The PricewaterhouseCoopers contract released by the Treasury Department on Tuesday has blacked-out text in the area covering the firm's bid, and also conceals the name of the PricewaterhouseCoopers partner who signed the deal.

Another section listing the names of the PricewaterhouseCoopers employees designated to work on the contract also is blacked out.

Price Waterhouse Coopers 1

Price Waterhouse Coopers 2

The Ernst & Young contract has no blacked-out sections, just notes saying that two parts of the agreement were redacted. Those were the firm's price quotation and technical quote.

Earnst & Young 1

The Treasury Department said it contacted 12 accounting firms about the contracts, and received six bids for each of the engagements.

BailoutSleuth believes that transparency is vital to the success of the taxpayer-funded bailout program. The $700 billion allocated for the Troubled Asset Relief Program translates to roughly $2,300 for every man, woman and child in America.

The contracts between the Treasury Department and PricewaterhouseCoopers and Ernst & Young have extensive language covering potential conflicts of interest. They include a provision allowing the firms to beg off certain assignments if they think the conflicts are too great.

PricewaterhouseCoopers and Ernst & Young have connections to at least two companies whose troubles helped ignite the financial crisis.

Ernst & Young was the auditor for Lehman Brothers Holdings Inc., which filed for bankruptcy on Sept. 15 after potential buyers walked away and federal officials declined to rescue the firm. Certain Lehman executives are the subject of at least three grand-jury investigations. According to news reports, Ernst & Young also has been subpoenaed as part of the probe.

After Lehman's collapse, Hong Kong's government hired Ernst & Young to assess the residual value of certain securities that had been guaranteed by Lehman and sold by Hong Kong banks.
 
PricewaterhouseCoopers became the administrator for Lehman Brothers International (Europe), the European branch of the investment company. It has been winding down that branch's operations and seeking buyers for its businesses and assets.

Both firms also worked for American International Group Inc., the big insurer that has been propped up by the Federal Reserve through more than $120 billion in funding, which essentially makes the government the company's biggest shareholder.

PricewaterhouseCoopers is AIG's longtime outside auditor. It put pressure on AIG earlier this year to change the way it valued certain securities tied mainly to sub-prime mortgage. In February, AIG said that PricewaterhouseCoopers had found a "material weakness'' in its accounting, and warned that it would have to write down the value of those investments by $4.88 billion.

Ernst & Young last year agreed to pay $1.6 million in penalties to settle Securities and Exchange Commission charges that it violated independent auditing standards in connection with work it did for AIG and PNC Financial Services Group Inc. in 2001.

Ernst & Young neither admitted nor denied guilt in the case, which involved a financial service developed by AIG that allowed companies to transfer volatile financial assets to so-called special purpose entities and remove them from their publicly reported financial statements. 

According to the SEC, Ernst & Young helped AIG market the service. PNC was one of Ernst & Young's audit clients. PNC later was forced to restate or revise its financial results for the second, third and fourth quarters of 2001, as well as its results for the full year.

The SEC said PNC tried to hide some $760 million in troubled loans and other assets by shifting them into special purpose entities it created with AIG.

The SEC settled charges with AIG in 2004, as part of a deal that also resolved related criminal charges. AIG neither admitted nor denied guilt, but agreed to pay $126 million in disgorgement, penalties and interest.

The SEC issued a cease-and-desist order against PNC in connection with the case.

 

When the Treasury Department's bailout czar provided an update this week on the government's $700 billion plan to rescue troubled financial institutions, he vowed that it would be an "open and transparent program with appropriate oversight.''

 

The next day, the Treasury Department put out an announcement about a major bailout-related contract with Bank of New York Mellon Corp. that fell short in the transparency department.



The copy of the agreement that was made public had blacked-out paragraphs in the section covering Bank of New York Mellon's compensation. If the Treasury Department is unwilling to disclose the particulars of that contract -- or even the general outline of the compensation scheme -- that raises questions about how it will treat disclosure of other bailout transactions.

Contract 1

One thing that the critics and supporters of the bailout agree upon is that transparency is one of the keys to winning public trust in the taxpayer-funded program.

 

The Treasury Department has not returned our calls requesting more information on the blacked-out sections of text in the contracts it issued to Bank of New York Mellon and another advisor, the law firm of Simpson Thacher & Bartlett LLP.

 

Contract 2

A spokesman for Bank of New York Mellon said he did not know why the compensation information was redacted, and referred our question to the Treasury Department.

 

The bank has one of the biggest jobs in the federal government's $700 billion bailout of troubled financial institutions - running the auctions used to purchase distressed assets, then holding those assets and tracking their disposition.

 

Its three-year contract clearly comes with a big price tag. But taxpayers have no way of knowing how big, until the Treasury Department releases a complete version of the contract.

 

Bank of New York Mellon's compensation is covered on the 25th page of a 28-page agreement. The section comes just after a description of the banks duties, and just before a section in which the bank promises to safeguard the information it receives through its assignment, and to adhere to certain disclosure and conflict of interest rules.

 

The Treasury Department told other news organizations that the information on the bank's compensation will be released when other details of the program, such the hiring of subcontractors, are finalized.

 

Kevin Heine, a spokesman for Bank of New York Mellon, said the bank does not expect the information to be kept secret.

 

"I know there has to be some transparency about that at some point,'' he said.

 

The Treasury Department also blacked out the hourly rate that it was paying employees of Simpson Thacher. That firm has a one-year, $300,000 contract to provide advice on the injection of capital into major banks in return for a government ownership stake.

 

The chart in the contract listed the estimated hours that would be worked by various classes of employees, from partner to legal assistant, but redacted the rate for each category.

 

The contract that the Treasury Department gave Simpson Thacher was awarded through competitive bidding, although only two firms made proposals. Without the information on the hourly rates, it is impossible for outside observers to say for sure whether the government got a good deal.

 

These are the types of transactions that BailoutSleuth intends to track to help ensure the transparency of the process. We will continue to examine the fine print of the Treasury Department's deals and report on what we find.

 

Blacked Out

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The Treasury Department has hired three outside firms this week to help administer its $700 billion, taxpayer-funded bailout of troubled banks. But some key details of those contracts remain a mystery.

 

The agreements with Bank of New York Mellon Corp. and Simpson Thacher & Bartlett LLP that the Treasury Department posted on its web site each had blacked-out paragraphs in the sections dealing with compensation.

 

The government's three-year contract with Bank of New York Mellon does not show how much the company will be paid to act as the master custodian of the bailout fund. The contract says that the bank will be paid a monthly fee, but that fee is blacked out.

 

The Treasury Department's six-month deal with Simpson Thacher for legal advice on equity purchases in U.S. banks has a value of $300,000. But the contract posted on the Treasury Department's web site Thursday did not show the hourly rates the government will be paying the firm. The figures for all the employee classifications, from partner to legal assistant, were redacted.

 

One of the reasons that we created BailoutSleuth was to help ensure that the process, including the selection and compensation of contractors, is as transparent as possible.

 

All three of the contracts that the Treasury Department awarded this week were subject to competitive bidding. However, the legal-services deal was open only to six firms that the government sought out, and just two of them submitted proposals.

 

The Treasury Department did not respond to our request for comment on the blacked-out portions of the contracts. A spokesperson told other news organizations that the particulars of Bank of New York Mellon's compensation would be revealed sometime in the next few months, when other details are finalized.

 

Bank of New York Mellon and Simpson Thacher did not respond to our request for comment.

 

The Treasury Department's third contract, with EnnisKnupp and Associates Inc., had no redactions. That agreement runs for a year and calls for $2,495,190 in compensation -- $2.4 million for labor and $95,190 for travel expenses.

 

The Treasury Department hired EnnisKnupp to provide advice on its plan to buy distressed assets from banks and investment companies. The firm has a large contingent of employees working on the project, including President Stephen Cummings and other principals, said Harmony Watling, spokeswoman at it headquarters in Chicago.

 

 

 

Death Watch

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The bailout drama playing out in Washington and New York has implications far beyond the banks and investment firms that were rocked by bad bets on risky investments.

 

Businesses small and large are having a hard time getting the credit they need to finance operations, equipment and expansion. To help track the impact of the crisis, BailoutSleuth is creating a "Death Watch" section devoted to companies that have gone out of business because of the credit squeeze or appear to be imperiled by it.

 

Gainey Corp., a trucking company in Grand Rapids, Mich., sought bankruptcy protection this week. The company blamed the filing on the credit crunch, saying efforts to negotiate with its lenders were met with a "series of increasingly aggressive actions.''

 

Wachovia Corp., one of the banks hit hardest by the financial crisis, sued Gainey in late September, seeking the repayment of some $238 million remaining on a loan the company took out in 2006. It asked that a receiver be appointed to liquidate the company, which has about 2,000 workers.

 

Wells Fargo & Co. agreed earlier this month to buy Wachovia for $15 billion, after the Federal Deposit Insurance Corp. sought to broker a deal for the troubled bank. 

 

Another company, Linens 'n Things Inc., said Tuesday that it would liquidate after a scheduled auction of its assets produced no buyers. The retailer, which is based in Clifton, N.J., was taken private in a leveraged buyout two years ago. It filed a Chapter 11 bankruptcy petition in May, in part because the slumping housing market cut into sales and exacerbated other problems.

 

Linens 'n Things had developed a reorganization plan. When credit became scarcer, it decided to sell its 371 remaining stores. No one beyond the original "stalking horse'' bidder came forward. Analysts said it was unlikely that potential buyers would have been able to line up financing for the deal.

 

Linens 'n Things employed more than 17,000 people at the start of this year.

 

The economic upheaval claimed its first financial-services victim in Japan last week, when Yamato Life Insurance filed for bankruptcy. Yamato cited a decline in the value of its investment holdings. It listed debts of roughly $2.6 billion.

 

Real estate developers across the United States have been hit hard by the credit crunch, and industry analysts say that some big commercial property companies may have to seek bankruptcy protection if they are unable to sell assets or refinance looming debts.

 

Car dealers also are under intense pressure, because of declining demand and the unwillingness of some lenders to extend credit for vehicle inventory and customer purchases. Bill Heard Enterprises, the nation's biggest Chevrolet dealer, shut down its 13 dealerships on Sept. 24 and laid off 2,700 workers.

 

BailoutSleuth intends to compile a list of notable companies that have gone out of business or filed for bankruptcy as a result of the credit crisis. Our list also will include companies that have suffered significant setbacks because of a loss or decline in funding -- especially those who relied heavily on the banks or investment firms at the heart of the crisis.

 

If you know of any companies that should be included on the list, or considered for it, please send the details to Chris Carey at chris@sharesleuth.com.

 

Big Firms, Small World

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Given the size and geographic scope of the banks and professional firms involved in the federal government's $700 bailout plan, it is inevitable that some of them will have prior business relationships.

 

One of the reasons that we started BailoutSleuth was to monitor the process for conflicts of interest that could undermine the returns to taxpayers.

 

In choosing the New York law firm of Simpson Thacher & Bartlett LLP to advise it on the purchase of equity stakes in major banks, the Treasury Department picked a firm that has been busy on multiple fronts of the financial crisis.

 

A check by BailoutSleuth of recent deals shows that Simpson Thacher represented the bankrupt Lehman Brothers Holdings Incin the sale of its North American investment operations to Barclays Capital. It continues to represent Lehman in matters related to its bankruptcy, one of the biggest in U.S. history.

 

Simpson Thacher also represented a failed savings and loan, Washington Mutual Inc., in the sale of its assets to JPMorgan Chase & Co.

 

JPMorgan is one of the firm's longtime clients. Simpson Thacher advised that company in its 2004 acquisition of Bank One Corp. According to a summary on its web site, the firm still represents JPMorgan in numerous civil suits, including more than 20 securities cases stemming from the collapse of Enron Corp.

 

JPMorgan Chase is slated to get a $25 billion equity infusion under the government's plan to buy as much as $250 billion of preferred stock in U.S. banks. It is one of nine banks that will receive money in the first wave of deals, totaling $125 billion.

 

Those proposed investments were announced Tuesday.

 

Neel Kashkari, the Treasury Department official overseeing the government's broader bailout effort, said this week that Simpson Thacher was one of six law firms contacted about providing advice on the equity purchase program. He said Simpson Thacher was one of just two firms that submitted proposals.

 

We're not suggesting that there is any problem with Simpson Thacher's selection. But   taxpayers might want to know more about the firm's past and present associations, as the details of the bailout program become clearer and as the dealmaking intensifies.

 

The Treasury Department developed an official conflict of interest policy in connection with the bailout program. It calls for contractors to disclose potential conflicts and offer possible solutions. Law firms typically have their own systems for avoiding conflicts between assignments.  

 

Simpson Thacher has represented many of the other companies whose names have figured prominently in the financial crisis. The firm was involved in the sale of Bear Stearns to JPMorgan, and in the pending sale of Wachovia Corp. to Wells Fargo & Co.  

 

The Federal Reserve Bank of New York hired Simpson Thacher to represent it earlier this year, when Bear Stearns shareholders threatened legal action over JPMorgan's $2-a-share-offer for that investment firm. JPMorgan later increased its offer to $10 a share.

Simpson Thacher also advised Wachovia in its proposed $12 billion sale to Wells Fargo & Co., and in its earlier deal with Citigroup Inc. Wells Fargo is supposed to get $25 billion in fresh equity under the government plan, as is Citigroup.

 

Simpson Thacher advised the board of directors of American International Group Inc. as that troubled insurance and investment company negotiated the exit of its then-chief executive, Martin J. Sullivan. He left the company in June, taking with him a $47 million severance package.

 

The government agreed in September to provide AIG with $85 billion in financing, in a deal that saved the company from bankruptcy and gave taxpayers what amounts to an 80 percent ownership stake. The total amount of credit available to AIG has since been increased by $37.8 million, bringing the total to more than $120 billion.

 

Simpson Thacher also represents two of the biggest private equity firms, Blackstone Group L.P. and Kohlberg Kravis Roberts & CoThe law firm advised Blackstone on its initial public offering, and is representing KKR as it prepares to a stock sale.

 

Both of those firms expressed interest in buying some of Lehman's assets, and could be potential buyers for some of the assets being sold by troubled banks participating in the bailout.

 

Blackstone's chief legal officer, Robert L. Friedman, is a former Simpson Thacher partner. So is KKR's general counsel, David J. Sorkin, who joined the buyout firm in 2007.

 

The Bailout Begins

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Today, BailoutSleuth begins tracking the federal government's $700 billion plan to rescue troubled banks and financial services companies by using public money to buy distressed assets or inject additional capital

 

We'll be posting daily updates on the bailout, with an emphasis on monitoring the government's deals and examing the companies and individuals involved in them.

 

We've decided to start by posting the remarks that the Treasury Department's newly appointed bailout czar Neel Kashkari made this morning to the Institute of International Bankers, outlining key elements of the program.

 

 

Interim Assistant Secretary for Financial Stability Neel Kashkari Remarks before the Institute of International Bankers

 

Washington- Good morning and thank you for that kind welcome.

I am here today to provide a comprehensive update on the Treasury Department's progress in implementing the Troubled Asset Relief Program (TARP).

As you know, our credit markets are frozen and lending has become extremely impaired. In recent months our government has taken strong and decisive actions, but a more systemic approach was needed. Secretary Paulson and Chairman Bernanke asked Congress for extraordinary authorities to address the extraordinary challenges in our financial markets. Every American depends on the flow of money through our financial system. They depend on it for car loans, home loans, student loans and their individual family needs. Congress recognized the threat frozen credit markets posed to Americans and to our economy as a whole. On Friday October 3, Congress passed and President Bush signed into law the bipartisan Emergency Economic Stabilization Act of 2008.

The law gives the Treasury Secretary broad and flexible authority to purchase and insure mortgage assets, and to purchase any other financial instrument that the Secretary, in consultation with the Federal Reserve Chairman, deems necessary to stabilize our financial markets -- including equity securities. Treasury worked hard with Congress to build in this flexibility because the one constant throughout the credit crisis has been its unpredictability.

The law empowers Treasury to design and deploy numerous tools to attack the root cause of the current turmoil: the capital hole created by illiquid troubled assets. Addressing this problem should enable our banks to begin lending again. Our nation has successfully worked through every economic challenge we have faced and we are confident this new program will help us overcome these challenges as well.

Today, I will brief you about three areas. First, I will discuss Treasury's strategy to develop multiple tools under the Troubled Asset Relief Program. Second, I will give you a detailed update on the many steps we have already taken to begin to implement the program. And finally, I will briefly discuss our next steps.