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Today's Top News1. Vikran Pandit resigns as Citigroup CEO
The Citigroup board faces quite a conundrum. Vikram Pandit, the CEO since December 2007, has shocked Wall Street by resigning, which prompted President and COO John Havens to also resign. The company is putting the best spin possible on these moves, which come at a delicate time. "Given the progress we have made in the last few years, I have concluded that now is the right time for someone else to take the helm at Citigroup," Pandit said in a statement. Havens explained that he was planning to leave at the end of the year but decided to accelerate his plans in light of Pandit's resignation. Pandit had steered, quite controversially, the bank back to mild prosperity, capped off by a strong third-quarter earnings report. While some questioned his bona fides as a CEO, he was not seen as mere turnaround guy who would leave once the ship was righted. There was every expectation that he would be a permanent CEO. Obviously, there's a lot going on behind the scenes. One might speculate that these decisions were driven in part by the controversy over Pandit's pay, which was roundly rejected in the say-on-pay vote at the annual meeting. The board may have wanted to rejigger the package to please shareholders, and Pandit and Havens may have put down their feet, making a stand on principle. It will be interesting to see what the retirement package is like. In any case, the board has appointed Michael Corbat, who had been CEO of Europe, Middle East and Africa. For more:
Read more about: CEO, CEO succession
2. Rajat Gupta to be sentenced next week
Rajat Gupta is a sad riches to rags story. Gupta had reached the pinnacle of success as a consultant. He ran the most powerful consulting firm of all, McKinsey, and he was a director at the most successful bank of all, Goldman Sachs. His conviction for insider trading, for which he faces up to 20 years in prison, thus ranks as a shocking reversal of what should have been a feel-good end to stellar career. He no doubt rues the day he ever even heard of Raj Rajaratnam, who is serving 11 years in federal prison. Gupta is scheduled to be sentenced October 24 in front of U.S district judge Jed Rakoff. The defense team is making a final push in its bid for lenient treatment. Few people could generate letters of sympathy and character attestation from the likes of Bill Gates and Kofi Anan. The most moving and personal letters, however, have come from his wife and four daughters. As noted by Law Blog, his wife seemed to reference a stunning naiveté: "He invested with anybody who came to him or was sent to him by friends without asking too many questions much to our financial advisors dismay. He could never imagine his friends or business associates could be involved in unlawful activities or would try to cheat him….During the present crisis, a lot of his 'good friends' have disappeared or cooperated against him in the hope of getting leniency and some who could be helpful did not step forward." It's hard to see him as naïve, but in any case, his daughters have seen the strain. "Often these days, I see my father and notice an unfamiliar look of fear on his face," wrote his daughter Megha, as noted by Law Blog. "I'll put my arm on his shoulder and say, 'Don't worry, Baba.' He moves quickly to compose himself: 'I'll be alright, baby. Are you alright?'" For more: Read more about: insider trading, Conviction 3. Bank of America's legacy mortgages are huge resource sinkhole
It's no secret that Bank of America has given up the title of largest residential mortgage lender in the U.S. to Wells Fargo, which now controls more than one-third of the market. Some might conclude that the scale-back was effected by design, while others might argue that the bank had no choice, as it continues to struggle with legacy mortgages that require massive resources. For those in the latter camp, Reuters offers some interesting perspective, noting how "Bank of America now employs some 42,000 people - or nearly 1 in 6 of its 275,000 employees - in Legacy Asset Servicing, the unit that services problem mortgages. Operating costs in the mortgage servicing business reached $2.7 billion in the second quarter, up 29 percent from a year ago, as the bank added 7,000 workers to handle foreclosure reviews and loan modifications required under government settlements." For some perspective, the article notes that in 2008, Bank of America and Countrywide together had a combined 3,900 employees working on "housing retention." The 42,000 full-time current employees also include servicing for borrowers who have not defaulted. Still "servicing is the largest team within the group, and its overall staffing levels are a good proxy to show how much the bank has had to ramp up to deal with the mess." In addition, at various times, Bank of America has had 16,000 contractors working on these issues. The bank had previously said that it had retrained some employees to work on modification and foreclosure issues. All in all, it would appear that the bank's legacy mortgages are sucking up tremendous amounts of resources, relative to competitors, and that has disadvantaged the bank just the market seems poised to take off again. For more: Related articles: Read more about: mortgages, Foreclosure Cases 4. Goldman Sachs earnings beat estimates
Goldman Sachs posted strong third-quarter earnings, yet another upside surprise for what has been a solid third quarter for the industry. One could argue that the strong performance reflected in large part a weak year-ago quarter. Total net revenue soared to $8.4 billion, up 133 percent from the weak third quarter of 2011. That said, sequential gains were also surprisingly strong, up 26 percent. Diluted earnings per common share came in at $2.85 (well ahead of estimates) versus $0.84 for the third quarter of 2011 and $1.78 for the second quarter of 2012. Annualized return on average common shareholders' equity (ROE) remained weak at 8.6 percent, up from 5.4 percent in the second quarter. The more things change in the banking industry, the more things seem to stay the same at Goldman Sachs. The big show was the FICC unit, which generated $2.2 billion revenue, up 28 percent year over year. Total investment banking revenue also fared well, soaring 49 percent to 41.2 billion in revenue. In both cases, the revenue was down just a bit from the previous quarter. Investing and lending, however, did well on a sequential basis. As for compensation ratios, the firm set aside $3.68 billion, about 44 percent of revenue, for compensation. So far this year, the bank has allocated $11 billion for compensation and benefits, 10 percent from a year earlier. As headcount has fallen, it would appear that employees are in line to do quite well this year in terms of compensation. For more: Read more about: Goldman Sachs, earnings 5. Simmering tension explodes at Citigroup
You have to give the Citigroup board credit for keeping under whaps what appears to be some intense tension between chairman Michael O'Neill and CEO Vikram Pandit. It's not unusual for such tension to spill into the media, which is usually a deliberate move that hearkens some sort of change. But in this case, there was none of that. So the announcement that Pandit would step down came as a complete shock. But everything about the move screamed that something was amiss, and it is all spilling out now. DealBook reports that there was "long-simmering tensions with the bank's board. In particular, the board's chairman, Michael E. O'Neill, had been increasingly critical of Mr. Pandit's management of the sprawling global bank." Fortune says the final nail in the coffin was the bank's inability to catch the mortgage boom that has lifted other players, notably Wells Fargo and JPMorgan Chase. "Following a long telegraphed move by the Federal Reserve, falling mortgage rates have spurred a refinancing wave in home loans. What's more, a higher than normal spread between mortgage rates and other interest rates have allowed a number of banks to mint money in their home loans division. Citigroup is the exception. Mortgage lending dropped in the quarter from a year ago. Citi's CFO admitted on Monday that the bank was late to staffing up in the area. The bank's lack of ability to pivot and get back into the housing market, something its rivals appeared to do with ease, could have been what finally pushed the board to decide that Pandit should go." All that said, third-quarter earnings were better than expected, and few had expected Citigroup to emerge as a mortgage giant. I've suggested all along that a new mortgage hierarchy was developing. Bank of America and Citigroup were not expected to be leaders. For more: Related articles:
Read more about: CEO, board Also Noted
SPOTLIGHT ON... Wells Fargo to expand in capital markets Wachovia has saddled Wells Fargo with lots of headaches, but it has also provided entry into the securities and trading market. The bank has formed a new markets unit that will seek to compete with the big boys of Wall Street. The division will be one of five main units under Wells Fargo Securities and will include equity and fixed-income sales and trading, commodities, prime services and futures clearing, the bank said. Article Company News:
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Wednesday, October 17, 2012
| 10.17.12 | Rajat Gupta to be sentenced next week
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