Northern Country

How globalization changes capitalism, the economy and politics

Posts Tagged ‘BofA

Another stab at Goldman’s earnings

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2Q0910-Q-GS-cashflow

Accounting statements in accordance with the actual business are more and more becoming complex and bloated fixtures of financial institutions. At the end of third quarter 2008 Goldman Sachs listed six recent accounting developments on its consolidated financial statement 10-Q.

This changed dramatically for the most recent quarter and Goldman’s 17 accounting changes opened a new frontier for wild west style accounting. Though these days reading a financial statement and understanding it is almost impossible, tenacity can pay off and hopefully reveal some insight into the health of Wall Street’s former behemoths.

Under cash flow from operating activities there is a fixture called trading assets at fair value. There is nothing peculiar about this other than the fact that its value jumped beginning with the fourth quarter of 2008. Inquisitive minds might remember that a significant accounting change took place during this quarter.

The Financial Accounting Standards Board (FASB) introduced FAS 157-3 in October 2008. Staff Position 157-3 acknowledged the use of management estimates or assumptions in “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. In April 2009 this accounting rule was amended to FAS 157-4 to accept this kind of fair value estimates also to not orderly transactions with significantly decreased trading activity.

Goldman’s worst quarter ever was the third quarter ending August 29, 2008. This was the quarter before the accounting changes were implemented. During nine months ending August 2008 (GS fiscal year used to start in December before the firm changed its status to a bank holding company), cash flow item trading assets at fair value registered a meager inflow of $37.9 billion. A year earlier the company had even outflows of $92.7 billion on the same position.

From January to June 2009, in the first two quarters of the new bank holding company, inflows into this category of cash flow from operating activities had already taken off at $172.39 billion. A year earlier in the six months to May 2008 inflows came in at only $28.8 billion. The firm of course does not further specify trading assets at fair value and which assets create its cash flow. 

Since assets are designated fair value therefore not easily convertible to cash it is reasonable to assume that cash flow generated is associated with non-current assets. Associated cash flows are added back or subtracted from the income statement depending on inflows or outflows respectively. In that sense $172.39 billion of fair value inflows might have substantially contributed to positive earnings during the first two quarters of 2009.

I think is is fair to say that accounting change FAS 157-3 threw a lifeline to even our most venerable institutions on Wall Street. In the Huffington Post Nathan Lewis asked the question: Do We Need Goldman Sachs? Without FAS 157-3 this question would be redundant. Most likely GS would have already drowned in the stormy sea of mortgage backed securities and credit derivatives.

Could it be that recent celebrations on Wall Street are nothing but a smoke screen blowing hot air into the face of investors? In its August monthly report a congressional oversight panel (COP) evaluating troubled assets on the books of large and smaller BHCs came to the conclusion that a substantial portion of toxic assets from mortgage backed securities and real estate whole loans still remains on bank balance sheets.

Goldman Sachs and Bank of America are two examples of masterful deceit sanctioned by the appropriate agencies. I am beginning to think that former New York AG Spitzer is right and democratization of capital markets is no more.

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Written by Alfred

12. August 2009 at 4:53 pm

Merrill’s impact on Bank of America

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In September 2008 after bankruptcy of Lehman the financial industry as a whole nearly collapsed. Subsequent contraction of international trade was tangible proof for the serious threat Lehman posed to the stability of the system. Ben Bernanke putting the proverbial gun to Ken Lewis head while trying to rescue another Wall Street titan, Merrill Lynch,  broke the law but might as well have saved international commerce and the world from the brink of disaster.

A government report from the congressional oversight panel (COP) on troubled assets from financial institutions concludes that banks’ balance sheets are still clogged with possible future losses from hundreds of billions of impaired assets (also….). In the report’s data something else is being revealed too, with respect to Bank of America’s acquisition of former investment bank Merrill Lynch.

After the merger with Merril BofA’s most toxic level 3 assets jumped 127 percent to $126.9 billion in the first quarter of 2009. Loan quality in the form of 90+ day past due loans ballooned from $5 billion at the end of 2007 to $141.7 billion as of March 31, 2009. BofA’s credit derivative exposure to sub-investment grade assets experienced a significant uptick from little more than $500 billion to about $1.65 trillion over the last 15 months.

Under these conditions Lewis’s reluctance to close the deal is understandable, so is Bernanke’s assertiveness on this issue. The following diagrams reveal survival of the financial system and the well being of international commerce might have been at stake in those crucial days of late 2008. It seems that BofA will chew on this piece of financial crap from Merrill’s almost bankruptcy for years to come.

All the while executives at the firm and elsewhere are starting to rejoice again on better than feared earnings for the most recent quarter and reward themselves with another round of lavish bonuses. Wall Street star analyst Richard Bove in a note to investors cut short any hopes for a sustainable recovery in financials claiming bank earnings won’t improve in the third or even the fourth quarter.

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Written by Alfred

12. August 2009 at 12:19 pm

Fed chair Bernanke grilled over BofA-Merrill deal

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BernankeTestimonyonBAMer-dealJune252009

It is always a special day when the powerful and mighty are commanded to defend their innocence in front of  a panel of congressional judges. The judges are appointed by the American public and form the House Oversight and Government Reform Committee and the defendant is chairman of the Federal Reserve, Ben Bernanke. In question is the alleged role of the Federal government, which the Fed is part of, in the takeover of investment firm Merrill Lynch (MER) by Bank of America (BofA) in December of last year.

Some lawmakers accuse the Fed and Bernanke in particular to have Ken Lewis, chairman of BofA, pressured into the deal with Merrill. Earlier this month Lewis testified in front of the same panel and left committee members in doubt about the Fed’s role during the acquisition.

After analyzing a number of email conversations between Fed officials, Ben Bernanke and then Secretary of the Treasury, Henry Paulson, one of the key questions for the Fed chairman centered around an email from Jeffrey Lacker, president of the Richmond Fed, about a conversation he had with Bernanke regarding a potential withdrawal of BofA from the Merrill deal on the grounds of a material adverse change (MAC) clause.

“Just had a long talk with Ben (Bernanke). Says that they think the MAC threat is irrelevant because it’s not credible. Also intends to make it even more clear that if they play that card and they need assistance, management is gone,” Lacker wrote, according to the sources.

In his sworn testimony Bernanke assured the panel that he did not tell BofA’s management that the federal reserve would take action against the board or management if they decided to invoke the MAC clause.

Initially the brisk questioning from lawmakers about the Lacker email seem to physically upset Bernanke. For the most part he denied any accusations and could not recall any details about the conversation. After being asked if he thinks that Lacker is incorrect in his statement Bernanke again stated that he did not know the details of that conversation.

Being asked by Congressman Burden if he believes that Mr. Lacker is lying he again insisted that he did not know if he did say these things or not. Annoyed by Bernanke stonewalling the investigation Burden asked him: “Are you sure you cannot remember?”, and the Fed chairman answered: “I am sure that I can’t remember”.

After it became known that losses at Merrill would be higher than previously thought CEO Lewis intended to evoke the MAC clause. This provoked the Fed and Bernanke to conclude that BofA exerted a serious lack of due diligence and misjudgment in the course of the deal. Congressman Chaffetz from Utah asked Bernanke if he had the power to replace the board, which he affirmed. Chaffetz continued and asked if claiming misjudgment could not be seen as a threat to BofA, which Bernanke again denied by reiterating that he never said anything about firing the board to Lewis.

Congresswoman Kaptur from Ohio touched on an interesting point regarding the relationship of investment firm BlackRock with the Fed in purchasing toxic mortgage related assets. The Fed has several contracts with BlackRock involving programs to purchase and manage a portfolio of toxic mortgage assets the Fed has acquired in the course of diverse bail-outs. Kaptur asked Bernanke if the Fed will support an FBI investigation of BlackRock handling Freddie Mac paper? Bernanke replied that the Fed will certainly not stand in the way if there is an appropriate FBI investigation.

The rest of the questions were rather benign. The chairman seemed to be able during this hearing to pull his head out of the noose, at least for this time , but it seems clear that his reputation is bruised. Even if he did not personally press Ken Lewis into this deal he certainly made his wishes been forcefully known. Whether that constitutes an overreach of government power is not clear at this point. It is too early to see if this will impact his reappointment in January of next year. President Obama has already lent his support to Bernanke. Of great interest will be a hearing before the same committee of Henry Paulson and his recollection of the events around the Merrill-BofA deal next month.

Written by Alfred

25. June 2009 at 11:34 pm

CEO needed for some – historic bonuses for others

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Ramifications from the credit crisis have reverberated around the World. Millions have already lost their jobs and many more will do so in the months and years to come. Even the Federal Reserve admits that unemployment will increase further from already painful levels.

While certainly nobody sheds a tear about high paid CEO’s the WSJ takes it up and reports on the difficulties of firms in the financial-services industry to find replacement for their vacant CEO positions. About 18 percent of the 2500 biggest firms in the US have lost their CEO in 2008, the highest rate of forced succession in any industry.

This is a unique situation which goes counter to anything the industry has experienced in the last couple of years where high paying jobs were in strong demand. After Lehman the strain of the credit crisis, curbs on executive compensation and the specter of government scrutiny have cut short this once rosy scenario. Some of the most venerable applicants for open CEO positions are also tarnished with a reputation of being responsible for the problems that have emerged since September of last year.

"Let’s face it: There is no one" . Obviously people inside the struggle for CEO succession at BofA and Citigroup face a dilemma. These mighty institutions are left with lack of interest in their highest job openings, something that is either very sad or very dumb.

According to the WSJ, Jerry Grundhofer, the former chief executive of regional bank U.S. Bancorp, hesitates to take the lead at Citi. He expressed concern about the relatively low pay that likely would come with the job. By the way he seemed also worried about the government’s involvement in the firm, most likely because of limited compensation measures. Robert Steel (former Treasury Department undersecretary), John Thain (former Merrill Lynch CEO) and David Moffett (exCEO of Freddie Mac) are among the most lucrative CVs being handed down to the boards of American International Group, Hartford Financial Services Group, mortgage company Freddie Mac, BofA and Citi.

But there are also those who can only smile and shake their head in disbelieve at this problem. Employees and executives at investment firm Goldman Sachs are faced with the specter of the largest bonus program in the firm’s 140 year history. Last week, after Goldman paid back all TARP money it received in the wake of the bail-out, it has paved the way for this stunning development. The firm’s second quarter results will not be known until next month but a jump in earnings is expected and that despite the company’s pay back of $10 billion to the US government. This has led some to speculate that GS never needed government funds in the first place but was forced to participate in the TARP program (Was TARP just a ruse?; see video-center).

The fact that some of the biggest financial institutions are being able to pay their highest bonuses in history and reap the profits of a crisis they helped to create is deplorable. It certainly is the wrong signal at the wrong time.

Written by Alfred

24. June 2009 at 1:39 pm

Bernanke’s ‘shotgun marriage’ got him an invitation

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Few institutions enjoy such powerful position and reputation of the highest order like the Federal Reserve Bank in the US. The men who chaired it like Volcker, Greenspan and now Ben Bernanke are among the foremost economists and most influential people on the face of the Earth. While Greenspan’s role in the crisis, that has destroyed Wall Street and crippled the global economy, has been criticized the bank and its current chairman seemingly were left unharmed. To the contrary in the course of the crisis the Fed’s balance sheet has doubled and tripled and the role as lender of last resort has lifted Bernanke into the status of the almighty savior. 

That Ben Bernanke is no saint has now even reached into the halls of the US Congress. Last week Lewis CEO of Bank of America, a financial institution hit very hard by the crisis on Wall Street, testified before The House Committee on Oversight and Government Reform to the acquisition of investment bank Merrill Lynch in September of 2008. This panel has now ‘invited’ Bernanke to speak about the government’s role in this acquisition. This time it will be quite different though for the chairman, nothing like any of his scheduled testimonies before members of the House and the Senate.

The accusation is serious. According to Lewis government officials threatened to remove BofA’s management if they would step down from the Merrill deal. The House Committee’s questions will focus on numerous emails between Bernanke and other Fed officials from last December. Representative Darrell Issa, a Republican from California, stated at the hearing with Lewis that government officials do not have the power to ‘force shotgun weddings’. The Bernanke hearings will be held on June 25, certainly a day to mark in the calendar.

In another development a Congressman from Texas who is a notorious critic of the Federal Reserve has finally won sufficient support for his bill. Ron Paul and 221 of his colleagues signed on to the Fed Transparency Act, which would require a fresh outside audit of the Federal Reserve. It will now go to the Senate and should it pass it would mean for the first time in history sunshine could fall on this mighty institution. We can only chime in and sing in the age of Aquarius ‘Let the sunshine in’.

Written by Alfred

17. June 2009 at 6:15 pm