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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

Apple Tablet Will Need to Trigger IPhone-Like Frenzy

Apple Inc.’s tablet may have to repeat the iPhone’s breakthrough success or risk going the way of personal digital assistants and so-called third devices — products that lack the appeal of phones or personal computers.

The Cupertino, California-based company sent out invitations yesterday to an event on Jan. 27, asking reporters to “Come see our latest creation.” Apple is planning to unveil a tablet computer that will probably go on sale in March, a person familiar with the matter said earlier this month.

Consumers haven’t embraced the idea of carrying around a third device in addition to their laptop and mobile phone, said Ken Dulaney, an analyst at Stamford, Connecticut-based Gartner Inc. Tablet computers, also known as slates, account for less than 1 percent of the PC market even though they have been available since the 1990s.

“They buy a large device when they want to get serious, and they buy something that will fit in their pocket,” he said. “Everything that’s in between has turned out to be a temporary category.”

In 2009, PC makers sold 122,000 slate computers — devices without keyboards — according to Framingham, Massachusetts- based research firm IDC. That number will increase by 49,000 this year, IDC said. Computer companies such as Hewlett-Packard Co. also sell convertible laptops that have hinged, rotating screens that fold over a keyboard. About 965,000 convertible computers were sold last year, IDC said.

Earnings Boost

Apple fell $3.50 to $205.93 on Jan. 15 in Nasdaq Stock Market trading. The shares, which more than doubled last year, closed at a record $214.38 on Jan. 5. U.S. markets were closed yesterday for the Martin Luther King Jr. holiday.

Steve Dowling, an Apple spokesman, declined to comment on the Jan. 27 event.

If Apple sells 3 million tablets for $750 each in the first year, the devices may boost earnings by 21 cents a share, Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co. in New York, said in a note last week. That estimate includes lost sales of Apple’s notebooks and iPod Touch as a result of the tablet debut.

At $750, the product would be priced between the $399 top- of-the-line iPod Touch and the $999 entry-level MacBook notebook, Sacconaghi said.

Apple isn’t alone in creating devices that combine the functions of phones and computers: Hewlett-Packard and Dell Inc. showed tablet designs at the Consumer Electronics Show in Las Vegas this month. Still, products that serve as a halfway point between phones and computers may not catch on, said Motorola Inc. Chief Executive Officer Sanjay Jha.

IPhone Effect

“My strong point of view is that if it doesn’t fit in your pocket, you don’t take it to dinner with you, and therefore the usability of that device and the volume is meaningfully lower,” Jha said in an interview this month. “A lot of very smart people have different views. But I am not sure that the middle point is the right answer.”

Apple CEO Steve Jobs has overcome skepticism before. The 2007 introduction of the iPhone removed any doubts that consumers would use phones to access the Internet, said Intel Corp. executive Eric Kim.

“Smartphones had the Internet and browsers for many years, but nobody got it right until Apple delivered the iPhone,” said Kim, who heads a business at Intel that develops consumer- electronics chips. “After that, the rest was history.”

Apple has sold more than 33 million iPhones since the device first went on sale in June 2007.

Apple Newton

Apple’s record in popularizing new product categories isn’t perfect. Its Newton PDA failed to win over customers in the 1990s. Palm Inc. had more success with its version of the PDA, only to lose out later to smartphones.

In addition to surfing the Web, Apple’s tablet may display books, textbooks, magazine stories and news reports — with links to related content such as photos, video and author interviews, said Kathryn Huberty, an analyst with Morgan Stanley in New York.

Apple may have signed up a large number of print publishers to offer content on the tablet, Sacconaghi said. HarperCollins Publishers, a unit of News Corp., is in talks with Apple to make electronic books available on the device, the Wall Street Journal reported yesterday, citing people familiar with the matter. Erin Crum, a spokeswoman for HarperCollins, declined to comment.

New York Times Co. may strike a partnership with Apple as part of its strategy to charge for stories, New York magazine reported on Jan. 17. Diane McNulty, a spokeswoman for the newspaper company, said it will announce its decision on whether to charge for Internet content when it has “crafted the best possible business approach.”

Tablet computers have fallen short in the past because companies haven’t produced custom software or content for the devices, said David Daoud, an IDC analyst.

“I suspect if Apple gets into that market, the story will be around user experience, not from a hardware perspective only,” Daoud said. The tablet idea hasn’t had that kind of support in the past, he said. “No one championed that product.”

Jan

20

2010

Citi could face heavy U.S. influence for some time

Citigroup

Citigroup Inc’s (C.N) Vikram Pandit endured a brutal capital raising episode this week in an effort to win the bank’s freedom from close government oversight, but the bank’s CEO may have won less than he hoped.

In a blow to both the No. 3 U.S. bank and the Treasury, Citigroup sold $17 billion of shares at $3.15 apiece, below the $3.25 price at which the government bought its Citi stake.

The share sale, part of a $20 billion capital raise to help repay funds from the Troubled Asset Relief Program, was meant to reduce the government’s say over compensation and other matters at the bank.

But the sale went poorly enough that a key element of Citigroup’s plan to extract itself from the government’s clutches did not happen: the U.S. government did not sell the up to $5 billion of shares it hoped to shed at the same time as the bank’s offering. The government holds 7.7 billion Citigroup shares, now equal to about a quarter of the company.

The government does not want to sell at a loss, a point that Herbert Allison, Treasury assistant secretary for financial stability, emphasized in Congressional testimony on Thursday.

But selling at a profit in the near term could be difficult. If Citigroup’s shares rise above $3.25, the government is likely to think about selling off part of its stake in the bank and that pressure could push the shares back below $3.25, analysts said.

“If you have a big seller at $3.25, the chances of your getting there are much smaller,” said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania.

There are at least two possible scenarios that could lift Citigroup’s shares well above $3.25 apiece: a broad rally in the stock market, or the bank posting out-sized profits over the next few quarters.

Analysts are not expecting the second scenario — the mean estimate for Citigroup’s fourth quarter, for example, is a loss of 7 cents a share, and for the first quarter, it is a loss of a penny a share.

The direction of the broader market is more difficult to forecast, but a surge in the stock market in the coming months is hardly a sure thing.

In short, there is a chance the government will have little opportunity to sell Citigroup shares at a profit for some time. The bank said on Monday the U.S. Treasury plans to sell its shares in six to 12 months, but some investors fear that period could be closer to 12 months than six months.

“This may translate into the government holding onto its stake for some time,” Stewart’s Polley said.

STRINGS ATTACHED

With the government holding a large stake in Citigroup, it has a material say in how the bank runs itself, a person close to Citigroup said, which reduces some of the value of the bank’s efforts to exit TARP by the end of the year.

One key area where Citigroup was looking to shed government influence is executive compensation. The Obama administration’s pay czar, Kenneth Feinberg, has a say over compensation for the top 100 employees at Citigroup for 2009.

When Citigroup repays $20 billion to the government and ends the guarantee it gets from the United States on a pool of assets, it will be able to avoid that oversight, a step expected in 2010.

But if the government holds onto Citi shares for longer, that could translate into pay restrictions at the bank for longer, albeit in a less overt form, said Dan Alpert, managing director at investment bank Westwood Capital in New York.

“As long as the government is a major shareholder, Citi can’t go crazy on pay,” Alpert said.

This oversight does not necessarily mean Pandit is on his way out, analysts said, even if Federal Deposit Insurance Corp Chairman Sheila Bair has in the past pushed for Pandit to leave.

The bank’s board of directors seems to support Pandit and, if the bank is not generating big losses, regulators are unlikely to press for his ouster, analysts said.

It is unclear who could step in to do a better job and, although Pandit’s tenure has not been free of miscalculations — including, some investors believe, the rush to repay bailout funds — many of the bank’s problems predate Pandit’s arrival.

But longer term, if the bank is unable to generate real profitability, Pandit’s future is more uncertain, analysts said.

“There’s a lot of pressure on Pandit now to deliver,” said one analyst at a hedge fund.

Dec

18

2009

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

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