Today's Top Stories Editor's Corner: Shareholders reject Citigroup's CEO pay Also Noted: Spotlight On... Citigroup sued over exec pay
Today's Top News1. Morgan Stanley grappling with credit rating review
Back in September, Moody's cut its credit rating on Bank of America's long-term debt of the holding company and consumer bank two notches, to Baa1 and to A2, respectively. That prodded the bank 's counterparties to pressure the bank to shift a large portion of its derivatives contracts out of the bank holding company and into a unit that benefits from FDIC insurance, sparking outrage among some activists. Other banks also have their derivatives held in units with some degree of FDIC coverage, but not Morgan Stanley. Will the decision not to shift derivatives come back to haunt it? Moody's says that Morgan Stanley is one of 17 banks that it is reviewing for possible action. It has indicated that Morgan Stanley's rating could fall as much as three notches. For its part, Morgan Stanley has suggested that the impact of a downgrade has been overplayed. It notes that only 8 percent of its derivative contracts have rating triggers that would force counterparties to immediately cease business with it. It also notes that it has made a slew of changes, regarding prop trading for example, that should also augur well for its chances during the credit rating review. On top of all that, its first quarter earnings and capital position were strong. One thing seems certain: It is not likely to shift its contract into a retail-oriented unit that enjoys FDIC coverage. That would be dicey politically, and the bank is betting that it will get through this without such drastic action. For more: Related articles:
Read more about: Morgan Stanley, Credit Rating 2. The real tipper inside Goldman Sachs
"The wrong man is on trial." That pretty much sums up a major defense tactic in the upcoming insider trading trial of Rajat Gupta, the former Goldman Sachs director and head of McKinsey. The defense is bent on showing that someone other than Gupta was the one providing inside information. In March, when the defense made this point, observers wondered if Gary Naftalis, the top lawyer for Mr. Gupta, was referring to either of two other Goldman executives, David Loeb and Henry King, who are known to be under investigation. Both Loeb, a top salesman, and King, a technology stock analyst, apparently had close ties to Rajaratnam and others at the Galleon Group. But now comes another stunning courtroom revelation: There may be yet another Goldman Sachs insider under investigation. As detailed by Bloomberg, the defense has informed a judge that U.S. Attorneys in California are investigating an executive currently. The name of that person and any real details have yet to be disclosed. So who is this possible tipper and how does he or she play into the Gupta saga? This is a potentially powerful piece of news for the defense, as they will try to show that the Rajaratnam could've gleaned his information from people other than Gupta. If they can muddy the water a bit on this issue, it might be enough to create doubt in the minds' of jurors. In any case, the prosecution would appear to have a tough road ahead of it in the absence of direct wiretap evidence. One question is whether Rajaratnam has weighed in. He could exonerate his old friend, or he could sink him, if he chooses to participate. For more: Related articles: Read more about: Goldman Sachs, insider trading 3. Banks reaching out to shareholders
Executive pay is a hot topic as proxy season continues. The stunning "no" majority vote cast by Citigroup shareholders against CEO Vikram Pandit's pay package was certainly a wake-up call. We are confident that many banks have worked through hot-button issues in sufficient detail to avoid such votes. A great of example of how this arduous process works comes from Barclays. According to the Financial Times, "After a series of bruising meetings with Barclays' biggest shareholders over the past few weeks, Bob Diamond, chief executive, volunteered on Thursday to forgo half his 2.7 million pounds bonus for 2011 until Barclays had improved profitability. The concession came a week before what was expected to be a stormy annual meeting at which some of Barclays' leading owners had threatened to oppose its multimillion-pound executive pay scheme. Barclays has come under fire from many of its largest investors — led by Standard Life Investments and including Fidelity, Scottish Widows Investment Partnership and F&C Asset Management — after it revealed that (CEO) Diamond's take-home pay last year was 25 million pounds, including a 5.75 million pounds tax equalization payment. Many investors had said they would vote against the remuneration report and against directors on the remuneration committee." More banks are reaching out to shareholder groups in advance of meetings to avoid embarrassing votes. Ever after the fact, Citigroup needs to reach out as well. It will be interesting to see what kind of tweaks it makes. For more: Related articles: Read more about: ceo pay, executive pay 4. Wells Fargo criticized over treatement of foreclosed properties
One of the hidden consequences of the foreclosure fiasco is that banks have ended up with a surplus of properties via foreclosures and short sales. Managing all these properties has proven to be a massive challenge. Some banks have resorted to basically giving them away, while others have resorted to destroying the ones that cannot be salvaged. Banks have faced criticism that they have become slumlords responsible for decimating hard-hit neighborhoods. Wells Fargo is the latest to face criticism. According to Developments, the National Fair Housing Alliance and affiliated organizations filed the complaint with the Department of Housing and Urban Development, charging that the bank has done a "shoddy job of maintaining foreclosed homes in low-income, minority neighborhoods while keeping properties in affluent areas in better shape." The group alleges "significant racial disparities" in maintenance and marketing of foreclosed homes for sale. Homes in affluent neighborhoods get better treatment, while homes in poorer minority neighborhoods often aren't maintained and sometime even lack 'for sale' signs, the complaint alleged. For example, the group says more than half of foreclosed homes in minority neighborhoods had trash piling up compared with 30 percent of foreclosed homes in white neighborhoods. To be sure, banks need to work through their strategies for grappling with properties that will be hard if impossible to sell. If disposal is the only choice, they need to move forthrightly. For more: Related article: Read more about: Wells Fargo, mortgages 5. More strategic defaults possible
There's been a lot said about moral hazard at the executive level, and how hard it is to end the sense that big banks will always be bailed out. Less has been said about moral hazard at the retail level, but the grand $25 billion settlement between states and top banks has presented the opportunity for discussion. A recent survey of bank risk professionals by FICO found that nearly half of respondents expect the volume of strategic defaults in 2012 to surpass 2011 levels, as more than 25 percent of U.S. homeowners owe more on their mortgages than their homes are worth. "After five years of a brutal housing market, many people now view their homes more objectively and with less sentimentality," the company explains. "Regardless of legal or ethical issues around strategic defaults, lenders must account for this risk when they evaluate mortgage applications in declining markets. Many homeowners who find themselves upside down on mortgages in the future are likely to consider strategic default as an acceptable exit strategy." Indeed, there's a lot of anecdotal evidence that some people, including many well-off people, are throwing up their hands and walking away, either to force their lender into a modification or to just rid themselves of the situation, no matter what the consequences. Hard evidence is more elusive, but it is an issue. Despite the study's finding, there's evidence to suggest the housing market is stabilizing, and that might keep the strategic defaulters at bay. For more: Related articles: Read more about: Moral Hazard, strategic defaults Also NotedSPOTLIGHT ON... Citigroup sued over exec pay An individual Citigroup shareholder has sued Citigroup and its directors, seeking to force CEO Vikram Pandit and the board to pay damages. This follows the stunning "no" majority votes cast by shareholders at the annual meeting on the say-on-pay issue. We'll see if this gains traction. Many shareholders will be content to wait and see how the bank reacts. To be sure, shareholder siuits are often all about the fees. People, even shareholders, tend to be cynical about their effectiveness in forcing change. Article Company News: Industry News: Regulatory News: And finally … World's oldest living man. Article
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Monday, April 23, 2012
| 04.23.12 | Shareholders reject Citigroup's CEO pay
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