Securities and Investments
Posted on 12 May 2010.
Securities and Investments
Posted in cdo, concealment, conspiracy, foreclosure, foreclosure fraud, fraud digest, goldman sachs, Lynn Szymoniak ESQ, S.E.C., securitizationComments (0)
Posted on 13 April 2010.
Not Much Has Changed! What could we have learned?
Aegis, which was founded in 1993, closed its mortgage production operations on August 6. Two days later, employees were warned that there would be layoffs within 60 days and that benefits would be terminated effective midnight August 10, according to Aegis employees. They were also told that earned paid-time off would not be paid out and that there would be no severance. When the layoffs came on Monday, August 13, 782 people out of 1,302 employees were fired. Those let go were shocked to find that they were not eligible for COBRA. While Federal law requires businesses with more than 20 employees to offer departing workers the chance to buy an extra 18 months of health insurance, it is only required for companies with an active benefit plan, and Aegis had terminated its plan days before. Moreover, Aegis admitted in its bankruptcy filing that it didn’t have the money to pay employee benefits anyway.
Those actions have some up in arms. Richard Thompson, who co-founded Aegis in 1993, is asking Cerberus and Aegis to take care of its employees. “As a founder of Aegis, one of our stated corporate values was to always do the right thing,” says Thompson, who was CEO until October 2006, when Cerberus ousted him. “The right thing is to reinstate the company’s health insurance policy for the thousands of families affected by their actions last week.”
Thompson, of course, has reason to dislike Cerberus. Not only was he fired, he is suing Cerberus for mismanaging the company and destroying its chance to go public. Other observers note that many companies that go bankrupt leave their employees stranded. John Challenger, head of executive outplacement firm Challenger Gray Christmas, says: “Creditors will line up, so the company is taking these harsh actions to save what they can. You’re going to see lots of fighting over the company assets.” In its bankruptcy filing, Aegis said it had $625 million in debt and owed banks including Goldman Sachs, Deutsche Bank, Merrill Lynch and Morgan Stanley. Madeleine LLP, a subsidiary of Cerberus, is also in line for money.
Cerberus declined to comment; an Aegis spokesman said that the company is doing what it can to help its remaining 500 or so employees, including providing health care and job training.
What happened to Aegis? The company managed to survive the mortgage meltdown and S&L problems of the ’90s, but it had been wounded. Plans in 1997 to hold an IPO for its REIT business were scrapped when the REIT sector began to exhibit problems. The conditions were perfect for a company like Cerberus, which regularly scoops up distressed businesses it believes will be winners in the future. The mortgage business was suffering in the late 1990s, but the industry is cyclical and Cerberus was betting on returns during the upswing. (Indeed, even as the subprime business began to melt down this spring, Cerberus agreed to buy sub-prime lender Option One Mortgage from H&R Block this April.)
So in 1998, Cerberus agreed to buy a controlling stake in Aegis, which had $2.5 million in equity. Following a familiar pattern, Cerberus immediately injected a huge amount of money into the company ($47 million), placed its own people on the board and kept the management team, including Thompson, in place. It rolled pieces of other dying lenders into Aegis and built a thriving mortgage lending operation.
In late 2006, the company had grown its capital in reserves to $361 million, and like all other lenders it couldn’t issue mortgages fast enough for the Wall Street machine that used them to create high-risk, very profitable bonds. At the height of the mortgage origination boom, Aegis employed about 3,500 people, mostly in the Houston area. But Aegis lost it all in just nine months when the market for mortgage loans tanked.
The failure calls into question the management and health of Cerberus’s other loan plays. Cerberus owns a majority stake in GMAC and its mortgage subsidiary ResCap. Thanks to the credit crunch, the ratings agencies have downgraded ResCap, thus making it more expensive for the company to operate. The rising cost of capital may hurt Chrysler Financial, too, the healthy operation within Chrysler that should have been able to help fund the ailing automaker’s turnaround. At a minimum, Cerberus will take a financial hit because of Aegis and the bankruptcy is an embarrassment amid the firm’s recent spate of high-profile acquisitions.
“Cerberus has become a major player in the global economy. Its many constituents rightly will expect a higher standard of behavior than was exhibited last week with Aegis,” says Thompson. It’s a sober reminder that even the vaunted geniuses of private equity can’t save every company, and that employees – more than investors – are the real victims when they go under.
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Posted on 23 March 2010.
Review by James Pressley :BLOOMBERG REVIEWS
March 22 (Bloomberg) — Alan Greenspan, the master of monetary mumbo jumbo, leaned back in his chair and grew uncharacteristically forthright.
“If they’re too big to fail, they’re too big,” the former Federal Reserve chairman said when asked about the dangers of outsized financial institutions.
It was October 2009, and the man who helped make megabanks possible was sounding more like Teddy Roosevelt than the Maestro as he entertained what he called a radical solution.
“You know, break them up,” he told an audience at the Council on Foreign Relations in New York. “In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole.”
Greenspan the bank buster crops up near the end of “13 Bankers,” Simon Johnson and James Kwak’s reasoned look at how Wall Street became what they call “the American oligarchy,” a group of megabanks whose economic power has given them political power. Unless these too-big-to-fail banks are broken up, they will trigger a second meltdown, the authors write.
“And when that crisis comes,” they say, “the government will face the same choice it faced in 2008: to bail out a banking system that has grown even larger and more concentrated, or to let it collapse and risk an economic disaster.”
The banks in their sights include Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. Though Wall Street may not like “13 Bankers,” the authors can’t be dismissed as populist rabble-rousers.
Cash for Favors
Johnson is an ex-chief economist for the International Monetary Fund who teaches at the Massachusetts Institute of Technology. Kwak is a former McKinsey & Co. consultant. In September 2008, they started the Baseline Scenario, a blog that became essential reading on the crisis. When they call Wall Street an oligarchy, they’re not speaking lightly.
Drawing parallels to the U.S. industrial trusts of the late 19th century and Russian businessmen who rose to economic dominance in the 1990s, the authors apply the term to any country where “well-connected business leaders trade cash and political support for favors from the government.”
Oligarchies weaken democracy and distort competition. The Wall Street bailouts boosted the clout of the survivors, making them bigger and enlarging their market shares in derivatives, new mortgages and new credit cards, the authors say.
Suicidal Risk-Taking
These megabanks emerged from the meltdown more opposed to regulation than ever, the authors say. If they get their way — and they will, judging from current congressional maneuvering over President Barack Obama’s proposed regulatory overhaul — Wall Street will retain its license to gamble with the taxpayer’s money. This isn’t good for anyone, including the banks themselves, which often feel compelled by competitive pressure to take suicidal risks.
“There is another choice,” they write: “the choice to finish the job that Roosevelt began a century ago, and to take a stand against concentrated financial power just as he took a stand against concentrated industrial power.”
Obama finds himself in the middle of a struggle that has coursed throughout U.S. history — the struggle between democracy and powerful banking interests. The book’s title alludes to one Friday last March when 13 of the nation’s most powerful bankers met with Obama at the White House amid a public furor over bailouts and bonuses.
The material that sets this book apart can be found at the beginning and end. Chapters three through six present an all- too-familiar, though meticulously researched, primer on how the economy became “financialized” over the past 30 years.
Regulatory Arbitrage
Crisis buffs won’t miss much if they skip ahead to the last chapter, where the authors debunk arguments that curbing the size of banks is too simplistic. A more complex approach, they say, would invite “regulatory arbitrage, such as reshuffling where assets are parked.”
They propose that no financial institution should be allowed to control or have an ownership interest in assets worth more than 4 percent of U.S. gross domestic product, or roughly $570 billion in assets today. A lower limit should be imposed on investment banks — effectively 2 percent of GDP, or roughly $285 billion, they say.
If hard caps sound unreasonable, consider this: These ceilings would affect only six banks, the authors say: Bank of America, JPMorgan Chase, Citigroup Inc., Wells Fargo & Co., Goldman Sachs and Morgan Stanley.
“Saying that we cannot break up our largest banks is saying that our economic futures depend on these six companies,” they say. “That thought should frighten us into action.”
Though Jamie Dimon won’t like this (any more than John D. Rockefeller did), incremental regulatory changes and populist rhetoric about “banksters” are getting us nowhere. It’s time for practical solutions. This might be a place to start.
“13 Bankers: The Wall Street Takeover and the Next Financial Meltdown” is from Pantheon (304 pages, $26.95). To buy this book in North America, click here.
(James Pressley writes for Bloomberg News. The opinions expressed are his own.)
To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net.
Last Updated: March 21, 2010 20:00 EDT
Posted in bank of america, bernanke, bloomberg, citi, Dick Fuld, federal reserve board, geithner, jpmorgan chaseComments (0)
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