Warren Buffett to inject up to $10bn into Goldman Sachs

“Start of the Super Banks ...”

Lloyd Blankfein, chief executive of Goldman Sachs, last night said he planned to raise up to $12.5 billion (£6.74 billion) of new funds by selling a stake to Warren Buffett and tapping other institutional shareholders.

The bank, which this week abandoned its investment bank status to become a traditional financial institution, is seeking to bolster its balance sheet with new cash as the US Federal Reserve, its new regulator, demands that it reduces its borrowings. Last night, Goldman Sachs said it had agreed to sell $5 billion worth of preferred shares to Berkshire Hathaway, the investment group controlled by Mr Buffett. Berkshire Hathaway has also secured an agreement to buy another $5 billion worth of stock. At the same time, Goldman said it was planning to raise $2.5 billion from other investors.

While banks such as Goldman Sachs do not need to raise the capital, it is seeking to address anxieties on Wall Street about the long-term future of financial institutions. However, Goldman is paying a hefty price for Mr Buffett’s stake, having agreed a 10 per cent coupon on the preferred stock. It is understood that Goldman can repurchase the shares from Mr Buffett at any time, but at a 10 per cent premium

In a statement, Mr Blankfein said:

“We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs.”

This week Morgan Stanley and Goldman Sachs got approval from the US Federal Reserve to turn themselves into traditional banks, relinquishing their investment bank roles. The difference in definition has two key implications. The first is that it allows Goldman Sachs the right to access emergency funds from the Federal Reserve’s lending facility on the same terms as retail banks, and the second is that it comes under the scrutiny of America’s central bank, which demands much more benign levels of debt.

Source: Times Online

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End of the Wall Street investment bank

“Goldman Sachs and Morgan Stanley last night abandoned their status as investment banks in a move marking the end of an era on Wall Street”

The two investment houses yesterday received the regulatory approval to transform themselves into traditional bank holding companies.

While the change appears to be a technicality, it means that both banks have equal and permanent rights to access emergency funds from the US central bank, the Federal Reserve. They will also be far more tightly regulated.

After the collapse of Bear Stearns, then Wall Street's smallest investment bank, in February, the Federal Reserve extended its emergency lending facilities — called the discount window — to investment banks as well as commercial ones. Investment banks were more limited with the types of collateral they could use as backing for the Fed loans so were at a disadvantage to their commercial rivals

The conversion of both banks is a watershed moment for Wall Street, effectively marking the end of the New York investment bank.

The credit crisis, which erupted on Wall Street a year ago, has shown that the business model of the investment bank no longer works. Commercial banks are cushioned by deposits from retail customers who hold savings accounts and mortgages. However, the bulk of business conducted by an investment bank is done with other banks, and such business can be withdrawn with a phone call.

Bear Stearns and Lehman Brothers, both investment banks, have collapsed, Merrill Lynch was acquired by Bank of America last weekend, and Goldman Sachs and Morgan Stanley have changed their status.

Source: Times Online

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Barclays and Nomura to decide Lehman's fate

“At least 700 investment banking jobs at Lehman Brothers in Europe appeared to be safe as Barclays and Nomura tabled their final offers ”

At least 700 investment banking jobs at Lehman Brothers in Europe appeared to be safe last night as Barclays and Nomura tabled their final offers to buy large swaths of the collapsed American investment bank.

Hundreds more of Lehman’s back-office and support staff could also find themselves new employers within the next 24 hours as the two banks submitted formal proposals to PricewaterhouseCoopers (PwC), the administrator for the bank in Britain and continental Europe.

Lehman employs about 1,500 staff in the cash equities business and the mergers and acquisitions advisory unit. The vast majority of them are based in Canary Wharf in East London, but there are also offices across the Continent and in the Middle East.

The two banks appeared to be neck and neck in the race for Lehman assets last night.

Source: Times Online

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Lehman set to go into insolvency

“Chapter 11 Bankruptcy looming for Lehman Brothers...”

Preparations are being made for US investment bank Lehman Brothers to file for bankruptcy protection. The firm was pushed to the brink on Sunday after UK bank Barclays pulled out of talks to buy most of Lehman. If no new financing is found before Wall Street opens on Monday, Lehman will have to seek so-called Chapter 11 bankruptcy protection. This could result in a severe shock to the global financial system, as banks unwind their complex deals with Lehman.

It could take weeks or even months to complete and put banks around the world in a state of extreme uncertainty. In the UK, accountancy firm PWC has been lined up to run the British operations of Lehman.

Potential implications
BBC business editor Robert Peston says Barclays' decision to walk away from a Lehman deal was a huge setback for the effort to rescue the fourth-largest investment bank in the United States. A source close to the talks told the BBC that Barclays was unlikely to change its mind.

Barclays terminated the negotiations because it was unable to obtain guarantees in relation to financial commitments faced by Lehman when markets open on Monday. Unless the US government does a U-turn and puts taxpayers' money into Lehman, the bank will have to file for bankruptcy protection.

Bad bank, good bank

The rescue effort for Lehman is being co-ordinated by the US Treasury and the New York Federal Reserve. In the light of the credit crunch and the parlous state of financial markets, Barclays feels it would be running a crazy risk if it took [Lehman's obligations] on without any protection right now

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The US government had hoped to arrange a bailout under which other US investment banks - such as Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs - would finance a "bad bank" that would hold the most "toxic" investments of Lehman in the property and mortgage market.

The "good bank" or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK's Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks. However, it appears that this plan is falling apart.

The only thing that can prevent Lehman collapsing would be a huge injection of taxpayers' money," a banker close to the talks told the BBC, but added that US Treasury Secretary "Hank Paulson has made it clear he doesn't want to do that.

Bank of America to buy Merrill?

Our business editor adds that in the light of the credit crunch and the parlous state of financial markets, Barclays feels it would be to risky to take on Lehman's obligations without any protection.

Bank of America, meanwhile, is said to be unconvinced that buying Lehman would be in the interest of its shareholders.

Instead, according to a report in the New York Times, Bank of America is in "advanced talks" to buy investment bank Merrill Lynch for more than $38bn.

Like other US investment banks Merrill has suffered losses of tens of billions of dollars in the subprime crisis, and has seen its share price plummet during recent months.

'Too difficult to value'

"No other large firm should buy Lehman whole - its toxic real estate and securities are too difficult to value," said Peter Morici of the business school of the University of Maryland.

Only a fool would think he could fairly assess their value, unless those are assigned them a value of zero.

Lehman is up for sale after it reported a $3.9bn (£2.2bn) quarterly loss last week amid concerns over its long term financial viability.

The firm's share price has plummeted as fears over its future have mounted.

Unless a bailout deal can be arranged and another large bank steps up to buy the good bits of Lehman, the US firm will have to file for bankruptcy protection.

This would deal a severe blow to the global banking industry, which is based on the expectation that the other party will always honour its commitments.

It could take weeks or months to unwind Lehman's complex deals with and obligations to other banks, both inside and outside the US.

'Difficult decision'

Former Federal Reserve boss Alan Greenspan said the US government faces "very difficult decisions" over Lehman if it cannot secure a rescue deal that does not involve public funds.

"They [will then] have to make a very difficult decision as to whether or not they allow it to liquidate or they support it," he said.

Yet Mr Greenspan said it would be "unsustainable" for the government to bail out every US bank that got itself into difficulty. Predicting that Lehman would not be the last to require rescuing, Mr Greenspan added that this would not necessarily pose a problem. "The ordinary course of financial change has winners and losers," he said.

Source: BBC News

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Bankers Everywhere - Change On Bonuses, Or You're Out!

“It's no longer about 'you', it's now all about 'us'”

Merrill Lynch CEO John Thain is changing his firm's bonus philosophy, tying bonus payouts more closely to the performance of Merrill as a whole, rather than individual employee results. Thain's intentions are good - fostering a more consultative and cooperative culture at Merrill, hopefully avoiding a repeat of the situation last year, where 100 or so fixed income traders wreaked havoc on the firm's profits and screwed up what promised to be a very good year for the firm. But Merrill's boss might have difficulty persuading his employees (and perhaps as importantly potential new hires) that they should rely on others when it comes to their year-end bonus pay-outs.

According to Monday's "Here In The City" quick reader poll ...

Many bankers are happy to have their bonus allocated on the basis of the performance of their desk, or immediate team, the majority still expect to eat what they kill and be paid out based on their own performance. Very few bankers are content to be rewarded first on the basis of how well their firm does as a whole.

Poll results:

50.7% of respondents said that they expected to be rewarded on the basis of their own performance

48.2% said that they were happy to be rewarded on the basis of their desk, or team, performance

1.1% said that they were content to be rewarded on the basis that they get paid first on how well their firm as a whole does.

Will this information surprise, or concern, Thain? No, determined to create a cohesive team-like atmosphere at Merrill, he won't want those who put themselves first at his firm anyway. And in this approach Thain, may well be leading what could turn out to be a sea-change for the industry - it's no longer about 'you', it's now all about 'us'.

Source: Here Is The City

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Top-tier investment banks set to pay out $38bn in bonuses

“Wall Street giants split $38bn bonus pool”

Wall Street’s largest investment banks are planning to pay out about $38bn (€25.9bn) in bonuses to employees this year, despite shareholders in the securities industry losing $74bn of their equity, reports Bloomberg. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns will split the figure between about 186,000 staff, up from the $36bn paid out last year. The larger bonus pool derives from record fees for mergers and acquisition advisory and underwriting initial public offerings and comes in spite of losses incurred as a result of the collapse of the US sub-prime mortgage market and its effect on the global credit markets.

Source: e-Financials News

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Bank chiefs face three tough issues

“3 pressing Issues for Incoming chief executives of investment banks Q407-2008”

How will they reward their best people?
Which growth bets are they going to take?
How can they control non-compensation costs, which have rocketed?

1. Compensation: Massive writedowns in fixed income and leveraged loan businesses have put staff bonuses under threat. But with some equity capital markets and mergers and acquisitions departments producing record revenues, banks must strike the right balance to keep top performers.

Upside: removal of department heads, holding departmental heads accountable, reshuffles are positive because group-think can set in during a downturn ...

2 Making the right bets: expectations of a full recovery in the credit markets but not until after 2008, banks and shareholders anticipate more growth next year and more (geographic (or) business) risk,

Upside: growth areas in emerging markets, non-debt related structured products and commodities ...

3 Controlling costs: in the past five years infrastructure cost (IT and Risk management) has rocketed. Fall in revenues exposes how much banks’ platform costs have increased. Big banks look to take ‘offshoring’ to the limit -- exporting costs to external providers, even Human Resources. Growth in emerging markets (Russia, Turkey and the Middle East) ...

Upside: constant investment and upgrades in infrastructure. Small banks considering giving more budgetary power to individual business units in order to impose cost controls more locally ...

Source: e-Financials News

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Reputation Repairing, All change at the top Investment Banks

“John Thain, the head of NYSE Euronext, appointed as Merrill Lynch new chairman and chief executive”

His appointment, effective on December 1, follows the recent departure of Stan O’Neal after Merrill was forced to admit that it had racked up vast credit crunch-related losses. Mr Thain, viewed as a leading contender for the top job at Citigroup, spent more than 20 years at Goldman Sachs, working on its mortgage bond trading desk before becoming president of the group after stints as head of operations, technology and finance, and chief financial officer.

He moved from Goldman to his NYSE role in January 2004 and is credited with transforming the Big Board from a domestic, nonprofit membership organisation into a global bourse. The 52-year-old also master-minded the group’s push into automated trading. Last year, he merged NYSE Group with Euronext to build the first transatlantic exchange operator.

Source: Times

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Goldman Sachs pay exceeds Bear Stearns market cap

“Goldman Sachs has earmarked $16.9bn (€11.5bn) for compensation and benefits for the first nine months of this year”

If its employees pooled all their pay they would be able to buy struggling rival investment bank Bear Stearns with money to spare. The stock market values Bear Stearns at about $14.7bn, so Goldman bankers and other workers would be able to buy the bank led by Jimmy Cayne with more than $2bn left over, according to Bloomberg.

Goldman was the best-performing investment bank in the third quarter when it reported a 79% surge in net profits, while most of its rivals suffered lower or non-existent profits. This enabled the bank to raise compensation for the third quarter by 68%, compared to the same period a year ago, to $5.9bn.

Compensation and benefits expenses were increased by 21% for the first nine months of the year, from $14bn at the same stage in 2006.

Compensation at Bear Stearns for the nine months of the year was $3.1bn, down 5.9% on a year earlier.

Goldman employed 29,905 people at the end of August, while Bear Stearns had almost half that number, with 15,516 workers. Based on those figures, the average compensation of a Goldman employee this year stands at about $565,000, compared to about average pay of about $200,000 at Bear Stearns.

Source: Financial News Online . Dominic Elliott

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