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U.S. Said to Tell Hedge Funds to Save Euro Trading Records

The U.S. is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests, as Europe and the U.S. step up scrutiny of the funds’ role in the Greek debt crisis.

The Department of Justice sent requests to save the records to at least some of the hedge funds whose executives attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8, said the person, who declined to be identified because the information is private.

The European Commission said yesterday it will investigate trades in sovereign credit-default swaps in the wake of the Greek crisis, which has pushed the euro lower and prompted officials to warn hedge funds they shouldn’t try to profit from the woes of the region’s nations. One of 23 themes discussed at the Feb. 8 dinner was a wager that the euro would fall against the dollar, according to an agenda obtained by Bloomberg News.

“It is clear in the current environment, and likely for a long time going forward, any entity that profits from another’s misfortune, in this case hedge funds versus Greece and the euro zone, risks being the target of public backlash, or worse, government retaliation,” said Kirby Daley, a senior strategist in Hong Kong with Newedge Group’s prime brokerage business.

Aaron Cowen, an executive at SAC Capital Advisors LP, David Einhorn, head of Greenlight Capital LLC, and Don Morgan, who runs Brigade Capital Management LLC, attended the dinner, as did a representative from Soros Fund Management LLC, the Wall Street Journal said Feb. 25.

Greece’s Woes

Spokespeople for the hedge funds declined to comment or didn’t return calls seeking a comment. Neil Crespi, president of Monness Crespi, couldn’t be reached for comment. Gina Talamona, a Department of Justice spokeswoman, declined to comment. The requests were reported earlier yesterday by CNBC.

The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, rose to 396 basis points on Jan. 28, the highest level since the start of the euro in 1999, making it more expensive for the country to sell new bonds. Sovereign credit-default swaps, used to insure against default, rose to a record last month.

European official have said the contracts can fuel speculation that may distort market perceptions. The German Finance Ministry said this week the over-the-counter products must be reviewed following the reaction of financial markets to the Greek debt crisis. French Finance Minister Christine Lagarde has said she wanted politicians to take a united approach against “speculators” betting on government bond defaults.

Record Bets

U.S. politicians plan to hold a hearing on the role that investment banks including Goldman Sachs Group Inc. may have played in Greece’s debt crisis. Federal Reserve Chairman Ben S. Bernanke said on Feb. 25 that the U.S. central bank is reviewing derivatives contracts arranged between Goldman Sachs other investment banks with Greece.

The woes of Greece, which has to finance the euro region’s largest budget shortfall, and concern they may spread to other countries have dragged down the euro, which has tumbled 11 percent since Nov. 25. It traded at $1.3613 at 8:09 a.m. in Tokyo.

Futures traders last week placed the biggest bets on record that the euro will fall against the dollar. The number of wagers by hedge funds and other large speculators for a decline in the 16-nation currency rose on Feb. 23 to 71,623 contracts more than those anticipating a gain, according to Commodity Futures Trading Commission data. It was the fourth consecutive week that the amount climbed to a record.

Even if the Department of Justice decides to request the records it has asked the hedge funds to save, that doesn’t necessarily mean that the managers will be investigated, said Jedd Wider, a partner at law firm Morgan, Lewis & Bockius LLP.

Bullish on Canada

Other ideas discussed at the dinner, which took place at the Townhouse, a private facility run by restaurant Park Avenue Winter, were bullish bets on the Canadian dollar and Philip Morris International and bearish wagers on Wells Fargo & Co. and Bank of America Corp.

“The big issue is whether the meeting was informational, and these various traders were simply responding in a parallel way to a common set of facts,” which would be legal, said Herbert Hovenkamp, who teaches antitrust law at the University of Iowa College of Law in Iowa City. “What’s not legal is for people to agree to trade at a particular price or against the euro to devalue it and start a stampede that devalues it further.”

Rejecting Speculation

Louis Bacon’s $14.6 billion Moore Capital Management LP and Brevan Howard Asset Management LLP, Europe’s largest hedge-fund firm, have rejected speculation they’re trying to benefit from Greece’s woes.

Bacon told investors in a Feb. 19 letter that he isn’t betting on a Greek default because European authorities will probably bail out the country. Moore has a net long duration position in Greek bonds, meaning it will benefit from a uniform decline in interest rates across the yield curve.

Brevan Howard said in an investor letter for the $22 billion Brevan Howard Master Fund that it hasn’t been betting against Greek debt since mid-December and has “no meaningful positions” through bonds or credit default swaps in Greece, Italy or Portugal.

Mar

03

2010

SEC Mulled National Security Status for AIG Bailout Details

U.S. securities regulators originally treated the New York Federal Reserve’s bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.

The request to keep the details secret were made by the New York Federal Reserve—a regulator that helped orchestrate the bailout—and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that “special security procedures” would be used to handle the document.

The SEC, according to an email sent by a New York Fed lawyer on Jan. 13, 2009, agreed to limit the number of SEC employees who would review the document to just two and keep the document locked in a safe while the SEC considered AIG’s confidentiality request.

The SEC had also agreed that if it determined the document should not be made public, it would be stored “in a special area where national security related files are kept,” the lawyer wrote.

In another email, a New York Fed official said the SEC suggested in late December 2008, that AIG file the document under seal and then apply to the regulatory agency for so-called confidential treatment, if central bankers wanted to stop the information from becoming public.

The emails were included in the mountain of documents the New York Fed turned over last week to the House Committee on Oversight and Government Reform, which will hold a hearing Wednesday into the AIG bailout and the New York Fed’s role in trying keep the specific terms of that Fed-engineered rescue in November 2008, from being made public.

More than a year later, the Fed’s bailout of AIG remains controversial because it funneled nearly $70 billion to 16 big U.S. and European banks that had bought credit default swaps from AIG. Banks like Goldman Sachs, Societe Generale and Deutsche Bank had bought those insurance-like derivatives to guard against defaults on hundreds of securities backed by subprime mortgages.

‘Backdoor Bailout’

Lawmakers on Capitol Hill have labeled the AIG bailout, in which the New York Fed created a special entity to purchase those securities from the banks at essentially their face value, a “backdoor bailout” for the 16 financial institutions.

The new batch of emails, along with others that have become public in recent weeks, reveal that some at the New York Fed had gone to great lengths to keep the terms of the bailout private and the SEC may have played a role in contributing to some of the secrecy surrounding the AIG rescue package.

“The New York Fed was orchestrating what can only be characterized as an extreme effort to ensure that details of the counterparty deal stayed secret,” Rep. Darrell Issa from California, the ranking Republican on the House Oversight Committee, said through a spokesman. “More and more it looks as if they would’ve kept the details of the deal secret indefinitely, if they could have.”

In March, some of the secrecy surrounding the AIG bailout began to fall away when the insurer, under pressure from Congress and the SEC, agreed to publicly name the 16 banks that got money in the rescue package and how much each received.

But AIG, largely at the prodding of the New York Fed, refused to make public all of the information in the controversial document, officially called “Schedule A—List of Derivative Transactions,” according to the emails turned over by the central bank to Capitol Hill. AIG continued to seek confidential treatment from the SEC for the redacted portions of the five-page filing.

Last May, the SEC did grant AIG’s request for confidential treatment for the remaining redacted portions of the Schedule A filing. The redacted parts include the CUSIP, or trading ID, number for each security on which AIG wrote a CDS contract, as well as the face value of each individual security that AIG had insured against default.

The SEC agreed to let AIG keep that information confidential until November 2018—or the 10th anniversary of the bailout. Critics contend that without the redacted information, it is difficult to determine which of the 16 banks had held the worst-performing securities, and which banks originated the worst of the troubled securities.

Geithner Under Microscope

The New York Fed has argued the information needs to remain confidential to enable BlackRock Inc , which manages the portfolio of securities bought from the banks, to compete with hedge funds on an even playing field.

U.S. Treasury Secretary Timothy Geithner, who has drawn fire for his role in the bailout, was set to testify before the House Oversight Committee on Wednesday. Geithner, who led the New York Fed at the time of the AIG bailout, has said he was not privy to the discussions about what information AIG should or should not release to the public and the SEC.

New York Fed spokeswoman Deborah Kilroe said on Friday that the more than 250,000 pages of documents provided by the central bank to Congress “demonstrate that the FBNY’s actions assisted AIG in ensuring the accuracy of its disclosures and protected important U.S. taxpayer interests.”

For its part, SEC has said it pushed AIG to make public the list of banks getting bailout money and only signed off on the request for confidential treatment after the insurer released that information. SEC spokesman John Nestor said: “The SEC required AIG to make public all of the information in Schedule A that was material to an investor in AIG.”

But this latest round of emails reveals that it was an official with the SEC in December 2008 who recommended that AIG and the New York Fed could seek confidential treatment for the Schedule A document as an alternative to making the entire document public.

In November, a New York Fed lawyer, in another email, had said he thought it was “highly unlikely” the SEC would grant confidential treatment for the document.

AIG and the New York Fed took the SEC’s advice and filed a heavily redacted version of the Schedule A on Jan. 14, 2009, and at the same time requested confidential treatment for the redacted portions.

The emails also discuss that BusinessWeek magazine had submitted a Freedom of Information Act request for the document and the confidential treatment request was a way of dealing with that and other possible requests by the media for the document.

Jan

29

2010

Goldman Sachs’s Top Managers to Get All-Stock Bonuses

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Goldman Sachs Group Inc., derided for allocating $16.7 billion to pay employees after a bailout by taxpayers, said its top 30 executives will get year-end bonuses in stock they can’t sell for five years.

The awards will be comprised of so-called shares-at-risk, allowing Goldman Sachs to repossess them if the firm determines that the executive failed to adequately analyze or raise concern about risks, the New York-based company said in a statement today. Goldman Sachs will also give shareholders a non-binding vote on compensation.

“They’re trying to take the heat off the very large amounts of compensation they’re going to pay,” said Alan Johnson, president and founder of compensation consultant Johnson Associates Inc. in New York. The tactic may not work because the public will focus on the dollar value of the bonuses, which may not be reduced by today’s change, he said.

Goldman Sachs, the most profitable securities firm in Wall Street history, has been criticized for allocating a near-record amount to pay employees in the first nine months of 2009 after benefiting from government support last year. The new policy will apply to the 30 members of Goldman Sachs’s management committee, including Chairman and Chief Executive Officer Lloyd Blankfein, Chief Financial Officer David Viniar and the leaders of the firm’s global and regional divisions.

‘Populist Movement’

“It’s been done to address the populist movement that has put so much pressure on the financials over the last year,” said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees about $900 million, including Goldman Sachs shares. “As a shareholder, I view this very favorably. This better aligns our interests with theirs as a management team.”

Two-thirds of Americans say they have an unfavorable view of financial executives and more than half say big financial companies are only out to enrich themselves, according to a Bloomberg National Poll conducted Dec. 3-7. The size of Goldman Sachs’s pay has been criticized by politicians including Senator Jon Tester, a Democrat from Montana, and Senator Bernard Sanders, an Independent from Vermont.

Goldman Sachs, which had 31,700 employees as of September, set a Wall Street pay record in 2007 when it set aside $20.2 billion for compensation, including $16.9 billion in the first nine months. Blankfein, 55, was awarded a $67.9 million bonus that year, an all-time high for a securities firm CEO. It included $26.8 million in cash and $41.1 million in restricted stock and options.

Vesting Period

The new shares-at-risk will be treated like restricted stock and will vest in equal portions over three years, although employees won’t be allowed to sell them for five years, said Lucas van Praag, a spokesman. Goldman Sachs recognizes the expense of stock awards when they vest, he said.

Johnson at Johnson Associates doesn’t expect competitors to follow Goldman Sachs’s example. “Certainly they’re going to consider it, but I think at the end of the day, most won’t do it, because I think they’re not going to pay as much as Goldman Sachs,” he said.

The announcement came a day after Chancellor of the Exchequer Alistair Darling said the U.K. will require banks to pay a 50 percent tax on any bonus to employees for 2009 that exceeds 25,000 pounds ($40,672). Six of the 30 members of Goldman Sachs’s management committee are based in the U.K.

Geithner’s Call

U.S. Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television last week, called for an end to “an era of irresponsibly high bonuses” and called for “fundamental constraints on how senior executives are paid” at big banks.

Goldman Sachs’s “announcement makes it much more difficult for Congress or the administration to impose a one-off tax on Goldman or others,” said Michael W. Robinson, a senior vice president of Levick Strategic Communications and former head of public affairs at the Securities and Exchange Commission. “These are the best practices that corporate governance advocates have been calling for.”

In today’s statement, Blankfein said “we believe our compensation policies are the strongest in our industry and ensure that compensation accurately reflects the firm’s performance and incentivizes behavior that is in the public’s and our shareholders’ best interests.”

Management Committee

By limiting the bonus restrictions to management committee members, Goldman Sachs will remain free to pay cash bonuses to the traders, bankers and sales people who generate the revenue, said Optique’s Fitzpatrick.

“I would want to make sure those folks are compensated in line with market conditions,” Fitzpatrick said. “It’s more important to protect the producers than the management folks.”

Last year Goldman reported its first quarterly loss as a public company and accepted $10 billion in taxpayer funds from the U.S. Treasury, which it repaid with dividends in June. Blankfein and six of his top deputies agreed to forgo bonuses last year, accepting only their $600,000 cash salaries.

During last year’s crisis, the company also raised $5 billion from Berkshire Hathaway Inc., the company led by billionaire Warren Buffett. As a condition of that deal, Blankfein, Viniar, President Gary Cohn and former Co-President Jon Winkelried are prohibited from selling more than 10 percent of their stock until Oct. 1, 2011, or when Berkshire redeems its $5 billion in preferred stock, whichever comes first.

Top Five

The average tenure at Goldman Sachs of the 30 members of the firm’s management committee is 19 years, according to a presentation to shareholders that Goldman Sachs published on its Web site. Only the pay of the five top executives, known as the named executive officers, is made public in the firm’s regulatory filings.

Two of Goldman Sachs’s management committee members have recently raised cash by selling stock and exercising options acquired in previous years. J. Michael Evans, the firm’s Hong Kong-based vice chairman, sold $23.7 million of stock during the last week of November, keeping stock worth about $106 million, according to regulatory filings. Michael Sherwood, the firm’s London-based vice chairman, booked a profit of $15.7 million by exercising options on 182,860 shares over eight days from Nov. 13 to Nov. 24, according to regulatory filings.

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Dec

10

2009

Bank of America’s $19.3 Billion Is Biggest U.S. Sale Since 2000

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Bank of America Corp., the largest U.S. lender, raised $19.3 billion selling securities at $15 apiece in the biggest sale of stock or preferred shares by a U.S. public company since at least 2000.

The bank, which plans to repay $45 billion of U.S. rescue funds, sold 1.286 billion so-called common equivalent securities, according to Bloomberg data. The security is made up of one depositary share and one warrant and is convertible into one common share, subject to stockholder approval, according to a regulatory filing by the Charlotte, North Carolina-based bank.

Bank of America plans to use the proceeds to free itself from government restrictions after accepting funds from the Troubled Asset Relief Program. Banks, brokerages and insurers have raised $1.5 trillion to shore up capital after the biggest financial crisis since the Great Depression spurred more than $1.7 trillion in writedowns and credit losses globally.

“It’s a good thing for Bank of America, it’s a healthy thing and it needs to happen,” said Jason Brady, a managing director of Santa Fe, New Mexico-based Thornburg Investment Management, whose $4 billion Thornburg Income Builder Fund owns Bank of America bonds. “It doesn’t mean necessarily that Bank of America stock is a wonderful investment because they spent a bunch of money to get the government out of the way.”

In May, Bank of America raised $13.5 billion issuing 1.25 billion common shares at $10.77 each in response to government stress tests and to help cushion losses tied to the takeover of Merrill Lynch & Co. The tests gauged the ability of banks to absorb losses in an extended recession, prompting Bank of America to boost capital by almost $40 billion.

Succession Battle

The repayment may ease efforts to replace Chief Executive Officer Kenneth D. Lewis, who’s leaving the bank Dec. 31. His successor inherits a company ranked first by assets and deposits in the U.S. The plan saves billions of dollars in TARP dividends and ends extra U.S. oversight of operations and salaries, Wells Fargo Advisors analyst Matthew Burnell wrote.

“Repaying TARP is going to allow a lot more flexibility for the incoming CEO as he handpicks his individual management team,” said Todd Hagerman, an analyst in New York with Collins Stewart Plc, who has a “buy” rating on Bank of America.

Bank of America rose 11 cents to $15.76 yesterday after advancing as much as 7 percent. Michael Mayo of Calyon Securities USA Inc. raised his rating to “outperform” from “underperform” and boosted his target to $19 from $12, which had been the lowest among analysts surveyed by Bloomberg.

The bank plans to repay the U.S. using $26.2 billion of cash and the proceeds from the share sale, according to a statement. It expects to increase equity by $4 billion through asset sales and will issue $1.7 billion of restricted stock instead of year-end bonuses to some employees.

Wells Fargo & Co., based in San Francisco, raised $8.6 billion in May in a secondary offering, while Goldman Sachs Group Inc. sold $5.75 billion in shares in April. Wells Fargo accepted $25 billion in TARP funds last year. Goldman has repaid $10 billion received through the program.

Dec

03

2009

Goldman likely to pay annual bonus in stock: report

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Goldman Sachs Chief Lloyd Blankfein is weighing plans to increase the share of compensation paid out in equity to executives in a bid to quell public anger over the probability of large pay-outs, the Financial Times said.

Senior executives, including Blankfein, could be awarded all annual bonus in company stock, the Financial Times said, citing people familiar with Goldman’s thinking.

On Wednesday, the Wall Street Journal had reported that the company was meeting with major investors in an effort to head off a possible backlash over its record bonuses.

Goldman officials said the meetings were an effort to explain why the company’s pay levels are reasonable in light of its performance and to get feedback from key stakeholders.

The Financial Times said on Friday that Goldman’s board, however, seemed hesitant to grant shareholders a non-binding, advisory vote on pay policy as it could lead to investors pushing for a bigger say on other policies.

Dec

03

2009

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