Jan 23, 2012 21:03 UTC

Bank CEO pay suggests Wall Street may be waking up

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By Antony Currie

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street may be starting to get it – “it” being the post-crisis contempt over excessive bonuses for chief executives. In 2010, some banks unduly increased compensation for their bosses. The Goldman Sachs board, for one, doubled Chief Executive Lloyd Blankfein’s total pay even though the firm’s earnings, returns and stock price all fell. Based on the first few to release information about 2011, executive handouts are less out of whack.

James Gorman, the boss at Morgan Stanley, is taking home $10.5 million, or a quarter less than he did a year earlier. That could even arguably be more pain than was necessary. It’s almost twice the percentage drop in the bank’s net income and Gorman is actually shouldering more pain than employees. Compensation and benefits across the bank increased in 2011 by a couple of percentage points.

On the face of it, JPMorgan CEO Jamie Dimon is also making something of a sacrifice. His $18.8 million package represents a 17 percent cut on 2010, even though the bank’s net income and return on equity grew a bit last year, enough for the Federal Reserve to allow the bank to increase its dividend. And Vikram Pandit’s pay for his work leading Citi last year came to just $5.5 million against the nominal $1 he pocketed for the previous two years.

The restraint can’t be fully praised, however. Shares of all three banks tanked last year – 22 percent at JPMorgan and twice that at Citi and Morgan Stanley. And though Gorman took some charges to improve his firm’s balance sheet and earnings, without the gains from its own liabilities, Morgan Stanley’s bottom line plummeted by 73 percent. That means the board could easily have been stingier with Gorman.

There are also potentially cash bonuses to come at JPMorgan and Citi. If Dimon gets the same $5 million as he did a year ago, he’ll actually make slightly more than in 2010 thanks to an increase in his base salary, even though JPMorgan’s pre-provision profit fell 17 percent. But for now, at least, it seems possible that last year’s protest movements to some extent occupied the minds of compensation committees on Wall Street.

COMMENT

These greedy Banksters only care about themselves. They are only worried about not being able to fly their private jets and not being able to pay their billion dollar mansions. They make me sick!! They could care less if you are dying, got an operation, lost your job or any other unexpected inconvenience that might happen in your life.

If you would like more information about Bank of America’s racketeering practices please read here: “Bank of America is a Racketeering Enterprise?” http://www.piggybankblog.com/2010/11/16/ bofa-racketeering/

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Jan 23, 2012 11:27 UTC

Vodafone’s India tax victory may come with a twist

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By Jeff Glekin

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Vodafone’s victory over India’s tax authorities may have a sting in the tail. The UK phone giant’s $2.2 billion Supreme Court win is a boost to India’s battered reputation. It also bodes well for firms such as AT&T, which are threatened with similar tax bills. But if the government now changes the law, future offshore M&A deals may not escape so easily.

The verdict is clearly great news for Vodafone, which had set aside $5 billion in case the ruling went against it and it had to pay penalties on top of its tax bill.

It also looks promising for other firms which have been threatened with similar cases. These includes the likes of SABMiller, which has a pending case related to its 2006 purchase of the Indian division of Fosters, and multinationals including AT&T, E*Trade and Kraft.

And even though the ruling is bad for the Indian government’s coffers, it is good news for the country’s international standing. Foreign investors and even domestic firms appear genuinely delighted that the court has taken what they see as a fair legal decision rather than blindly siding with the government.

Vodafone argued successfully that the Indian government has no jurisdiction over a transaction between two foreign companies occurring on foreign soil. In no other major economy would a similar transaction between two foreign entities have faced such taxes. What’s more, if anyone was liable for tax it should have been the seller, Hutchison Whampoa, rather than Vodafone.

Jan 23, 2012 11:21 UTC

UK fee disclosure shows bankers rule the M&A roost

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By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

When it comes to carving up M&A fees, bankers rule. That’s the revelation from new UK rules that force buyers of listed companies to disclose how much they pay their armies of advisers. It’s too early to judge whether the new regime, probably the world’s most transparent, will force down takeover fees. But the initial data provides hard evidence of just how much banks benefit.

Since the rules changed in September 2011, there have been only a handful of sizeable takeovers. In the case of Colfax’s takeover of engineering group Charter in October, and Theo Mueller’s recent purchase of dairy firm Robert Wiseman, bankers out-billed lawyers by a factor of seven or eight.

Half of the 106.4 million pounds in fees from Colfax-Charter went on financing, and another 35 percent on financial and broking advice. Lawyers took home just 11 percent of the total. In the Mueller-Wiseman deal, where the financing was simpler, 75 percent of the fees were for M&A advice.

True, lawyers did a bit better out of a third deal: Canaccord’s purchase of broker Collins Stewart. Perhaps that reflects knottier legal issues in financial services transactions. But even then, legal fees were just a fifth of the total. In all three deals, other advisers were little more than a rounding error: for example, public relations firms carved out just 1 percent of the total.

It’s not surprising that banks take the lion’s share. In Britain at least, they play a far bigger role in crafting deals than their nearest rivals, the lawyers. Banks also have multiple ways to rack up big bills: they can charge for M&A advice, for liaising with shareholders, and for financing.

Jan 19, 2012 21:45 UTC

A speech on taxes that would help Romney’s run

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By Daniel Indiviglio

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The following is an imagined speech that Mitt Romney could deliver to handle attacks on his private equity background and low personal tax rate while simultaneously appealing to moderate U.S. voters to help his run for the White House.

Today, I have released my 2011 tax return for my opponents to scrutinize. This disclosure marks a perfect opportunity to explain a big portion of my tax policy and why it’s better than the president’s.

Some on the left will criticize the 15 percent rate I have paid, due in large part to retirement earnings from my time working in private equity. They’ll say it’s unfair that investment managers can sometimes qualify to pay the relatively low capital gains tax rate on their compensation through a loophole called “carried interest.” To those critics, I say: I agree.

This area of tax policy, like many others, demands reform. When investment managers are paid based on the return earned on capital invested by clients, rather than themselves, then that compensation should be taxed as regular income. This would raise my tax rate much closer to the top income bracket of 35 percent.

Eliminating the carried interest exemption won’t have any detrimental effects on economic growth. Careers in private equity will still be plenty attractive. Best of all, it won’t in the least deter Americans from investing in jobs or good ideas.

COMMENT

Low taxes on capital gains do not encourage investments. Reagan proved that with the 1986 Act when it equalized the tax rates for capital gains and ordinary income. The real justification for taxing investment income at lower rates than other forms of income is that those earning it contribute generously to campaigns.

The most common form of capital gain for the bottom 99% is from selling their house. The first $500,000 of gain already is exempt from tax. Few of the bottom 99% earn capital gains, anyways. FactCheck.org noted that over 80% of capital gains inured to and were realized by those earning $200,000+. See http://www.factcheck.org/2008/04/impact- of-capital-gains-tax-on-the-middle-class  /. Thus, saying you’ll eliminate capital gains taxes for the bottom 99% is a throwaway line.

And if this were done, it is inevitable that we would immediately see political pressure, backed by massive campaign contributions and “studies” from marketing shops masquerading as “think tanks”, to raise the threshold for taxing capital gains. And President Romney would support it.

Further, to the extent the Internal Revenue Code treatment of income creates incentives or disincentives, then taxing salaries and wages at higher rates than capital gains punishes working for a living. One need not ask whether that is sound policy.

BTW, Warren Buffet once proposed imposing a surcharge on short-term capital gains to discourage speculation. I suspect that short-term for Mr. Buffet is less than 10 years.

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Jan 18, 2012 22:15 UTC

Connecticut finally steps up to vet utility merger

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By Rob Cox

The author is a Reuters Breakingviews columnist and a Northeast Utilities customer. The opinions expressed are his own.

More than a year after rubber-stamping Northeast Utilities’ $4.7 billion takeover of NSTAR, Connecticut’s regulators have decided, after all, to take a close look at the transaction, intended to create a $17 billion electric monopoly in New England. It took a couple of storms to expose Northeast’s incompetence and prod the Nutmeg State’s watchdogs into action. Now that they’ve woken up, they needn’t be shy of killing the deal.

The rap sheet against Northeast and its Connecticut Light & Power subsidiary is lengthy. Hurricane Irene last August and a freak October snowstorm left millions of residents without power, many for more than a week. Their experience contrasted poorly with what happened to customers of nearby power companies, including small municipally-owned utilities. Their tribulations occurred despite paying the highest retail electricity rates in the continental United States.

An independent report commissioned by Connecticut Governor Dannel Malloy documented myriad failings on the part of Northeast in preparing for the storms and dealing with their aftermath. Out-of-state emergency crews complained of poor coordination, and some even said they had not been paid after Irene, so declined to help two months later. The picture that emerges was of a hapless and unaccountable monopoly. Eventually, the head of Northeast’s business in the state was let go.

After all this, it’s no wonder Connecticut’s regulators are finally questioning whether it is wise to allow the company to buy Massachusetts-based NSTAR and spread itself even more thinly. The Connecticut report, written by a former federal emergency official, listed 27 recommendations for Northeast to improve its planning, procedures, training, and performance. At a minimum, regulators should insist these be implemented before approving any deal.

The time needed to do that would extend far beyond the April 16 drop-dead date the companies set when they announced their merger in October 2010. But when corporations are granted monopolies that remove market-based competition, the quid pro quo is supposed to be exactly this kind of scrutiny from regulators. Connecticut would be doing its residents – and others deprived of choice by similar monopolies across the nation – a disservice if it fails to take a stand in such a clear-cut case.

Jan 18, 2012 14:39 UTC

Japan makes better hangar for RBS air unit

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By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Royal Bank of Scotland’s aircraft leasing arm has flown to a better place: Japan. The UK bank’s $7.3 billion deal to sell the division, which includes 206 planes, to Japan’s Sumitomo Mitsui Financial Group will free up vital capital at a good price. For the buyer, which now becomes the world’s number three leaser of planes, it should provide a much needed lift to returns.

Forced sellers like RBS, which was effectively taken over by the UK government in 2008, don’t often get good prices. Yet Sumitomo paid 4 percent above book value for the leasing business. By comparison, leasing giant ILFC sold a bundle of 53 aircraft to Australia’s Macquarie for just less than book in 2010. The fact that RBS’s fleet is relatively modern – mostly under five years old – will have added some gloss. RBS’s desire to shrink, meanwhile, oiled the wheels of this deal.

Sumitomo’s largesse rests on two factors. First, Asia is expected to take delivery of more than 8,000 aircraft in the next 20 years – 15 times what Airbus supplied globally in 2011. Aircraft finance is a good way into that trend, since planes make dependable, portable collateral. Even when airlines get into trouble, leasing losses tend to be small.

Secondly there’s the divergence in funding costs. Sumitomo is flush, with a loan-to-deposit ratio of just 78 percent at the end of September, compared with RBS’s 112 percent. Japan’s rich pool of savings, its lack of bank crises and undemanding investor base mean banks can borrow cheaply. Aircraft leasing is all about spread – and compared to Sumitomo’s 1.2 percent net interest margin, an aircraft leasing yield of around 5 percent sounds positively supersonic.

More such deals from corporate Japan would be a good thing and a strong yen puts Japanese buyers in a position to pounce. Just as importantly, diversification is long overdue. Over the last three years Japan’s megabanks have stuffed themselves with low-yielding government bonds, dooming investors to lackluster returns. Sumitomo, for example, holds JGBs equivalent to 22 percent of its total assets. In aviation terms that’s what’s known as a real drag.

Jan 17, 2012 21:15 UTC

BankUnited sends ominous sign with its white flag

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By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own. BankUnited’s stock market return represented a rare glimmer of hope in American banking a year ago. Here was a failed Florida lender rescued from the dustbin, impregnated with fresh capital and led by highly incentivized and experienced managers. They planned to forge an exemplary industry path, rolling up small banks, squeezing out efficiencies and creating more competition. Now they’re waving a white flag.

It’s easy to see BankUnited’s decision to hire Goldman Sachs to canvass buyers as confirmation that Chief Executive John Kanas and his private equity backers wanted a quick flip all along. With the bank worth some $2.5 billion, they’ve already made their $900 million back and then some.

But there’s an alternative narrative worth considering. The hopes of Kanas and his crew from Carlyle, Blackstone and WL Ross to quadruple BankUnited into a $40 billion-asset institution, with its attendant economies of scale, were vanquished by a confluence of crummy economics, potentially delusional industry rivals and zealous regulators.

In the new banking world, loan growth is highly correlated to GDP growth. With the latter sluggish, so must be the former. That should catalyze the country’s 7,000 dinky banks to seek efficiencies though consolidation. But even willing sellers – to the frustration of BankUnited, which looked at 50 of them – are holding out for pre-crisis valuations. They seem to believe good times will come again.

Regulators know it won’t happen and so should be prodding the strong to capture the weak to form more medium-sized lenders capable of taking on customer-numb giants like Bank of America. Instead, they’re struggling to comply with Dodd-Frank.

In BankUnited’s case, that meant coughing up detailed personal financial disclosures of investors, including Carlyle’s David Rubenstein and Blackstone’s Steven Schwarzman, even though they’re not on the board. That was a Federal Reserve precondition for BankUnited’s $70 million purchase and charter switch of a bank in New York, where Kanas wanted to fire up the competitive dynamics.

Instead, BankUnited seems destined to be swallowed up by a super-regional. Competition will be forestalled and Kanas and his coterie will cash out handsomely. If they’re giving up the game, others may soon follow.

Jan 17, 2012 21:11 UTC

TPG can be forgiven its mile-high club fetish

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By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

David Bonderman hasn’t forgotten his first fling. The former lawyer parlayed his 1982 experience as trustee for Braniff Airlines into a deal to buy Continental Airlines out of its second Chapter 11 filing a little over a decade later. That successful bet enabled the Texas takeover artist to co-create buyout biggie TPG. Since then, he has continued to chase airlines the world over, including now bankrupt American. A recent failure hasn’t dampened Bonderman’s ardor.

Few private equity shops have the stomach for the industry. Even Gordon Gekko trashed the business: “Don’t like airlines, lousy unions.” But Bonderman, known for jetting around in his own Gulfstream, still remembers the thrill of the nearly 12 times he made on Continental and has kept trying to replicate it. In the last 20 years, TPG has been linked to carrier bids on six continents. Japan Airlines, Australia’s Qantas, Spain’s Iberia, Italy’s Alitalia, Air Canada and South African Airways are among the ones that didn’t achieve liftoff. Others did, though.

TPG doesn’t seem to follow a set script. After putting some $40 million into America West as it emerged from bankruptcy in 1994, the firm still had a stake when the company merged with rival USAir in 2005. A small 1996 investment in Ryanair provided a hefty return when the Irish airline capitalized on deregulated European skies and went public. Bonderman is also in his sixteenth year as chairman of Ryanair’s board. Two years ago, TPG bought 10 percent of a promising Brazilian start-up airline, Azul.

It hasn’t been smooth sailing of late, though. TPG’s buyout of in-flight caterer Gate Gourmet turned into a messy nightmare in Britain several years ago. Bond investors have started to show some concern for its five-year-old, $5 billion co-acquisition with Silver Lake of travel technology firm Sabre Holdings. And TPG lost most of its share of a $450 million co-investment in Midwest Airlines in 2008, which was unloaded for $31 million.

The sum of that history suggests that being part of any takeover of American Airlines is a long shot for TPG. But given the balance of his returns, Bonderman can be forgiven any attempts to recapture them and his fetish for the mile-high investment club.

Jan 12, 2012 22:23 UTC

Carlyle’s big payday does private equity no favors

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By Jeffrey Goldfarb

 The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Carlyle Group isn’t doing its industry any favors. As part of the private equity firm’s initial public offering process, this week it revealed the lucre reaped by its three founders last year. David Rubenstein, William Conway and Daniel D’Aniello took home a combined $400 million in cash payouts. That’s on top of their nearly $4 million salaries and the profits on $200 million of distributions on personal investments in the firm’s funds. Carlyle’s timing is impeccable.

Given the firm is based in the nation’s capital it might have better attuned its disclosure to the political climate. Mitt Romney, the frontrunner for the Republican nomination, is smack in the middle of a pounding over his time spent running Carlyle rival Bain Capital. Fellow candidates, including Newt Gingrich and Jon Huntsman, who are no strangers to the benefits of private equity largess, have unleashed a full-blown roasting of Romney’s record. With the issue going mainstream as part of broad coverage of the race for the White House, it can’t help but damage private equity’s plight in the public eye.

Carlyle’s whopper payday won’t do much to help the image of the 1 percent. At least the firm can reasonably claim to have benefited the 99 percent, too. The pension funds representing teachers and other public workers that have entrusted their wealth to the firm’s funds will have taken a commensurate cut of Carlyle’s bumper year. And Rubenstein and his co-founders , who manage some $148 billion, remain strongly aligned with those alongside it: they plowed most of their earnings back into the funds.

But just as the fervor against private equity scales new heights, the Carlyle windfall provides a stark reminder of a major disparity. The firm’s senior members will pay only a 15 percent tax rate on the $400 million-plus of carried interest they snagged, instead of the 35 percent rate paid on wages. That means the three men cost Uncle Sam at least $80 million.

After multiple failed attempts to rewrite this particular wrinkle in the tax code, the tide may finally change in Congress now that even Republicans are taking the industry to task. Indeed, that could actually explain Carlyle’s high distribution rate last year. While the eye-popping riches won’t do the buyout business any favors, the timing may in fact have been just right for Carlyle’s founders.

Jan 12, 2012 14:43 UTC

Ferretti’s yachts find fitting berth in China

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By Quentin Webb The author is a Reuters Breakingviews columnist. The opinions expressed are his own

Few companies embody the highs and lows of turbo-charged modern finance better than Ferretti. Once the luxury yachtmaker made a mint for private equity. Now a state-backed Chinese industrial conglomerate is buying it for at most a fifth of its peak value.

Ferretti’s financial journey launched in 1998. Previously family-owned, the firm became a small, wildly successful investment for a forerunner of Permira, the European buyout house. Turnover quadrupled in three years, and the backers made more than 50 times their money back in a 2000 flotation. That valued Ferretti at about 400 million euros including debt.

Two years later, luxury stocks were languishing. Another Permira fund bought Ferretti back, in an 833-million-euro deal. Ferretti gobbled up rivals, and sales soared yet higher, aided by the rise of the super-rich. Permira sold a majority to rival Candover in 2006. This “secondary buyout” valued Ferretti at 1.7 billion euros. Talk followed of a 3 billion euro flotation.

Then things went adrift. As the financial crisis set in, customers no longer felt filthy rich. High costs, plunging orders, and 1.1 billion euros of debt proved toxic for Ferretti. Candover lost control in 2009, hastening its own downfall.

Enter Shandong Heavy Industry Group-Weichai Group, which is taking control in a second restructuring. The lengthily named Chinese firm and Ferretti aren’t obvious bedfellows, but there is some logic. Shandong Heavy already makes marine engines. China is minting millionaires daily, and the only way is up for its tiddling yacht market.

The Chinese are paying 178 million euros for 75 percent of Ferretti’s equity and providing 116 million euros of new term debt, which implies an overall enterprise value of about 350 million euros. Major lenders RBS and Strategic Value Partners, a hedge fund, get the remaining equity for 25 million euros. Previous debt, totalling about 690 million euros, will be repaid at about 32 cents on the dollar, a person familiar with the matter says.

COMMENT

Ferreti’s yachts tells s atory of reality in the business world. Like a wheel, sometimes you are on top, at the peak; and sometimes you’re down. However, Ferreti’s yachts prove themselves when even in downfall, they try to stand back on top again in the hands of the Chinese. Impressive!

Nichelle from baignoire douche 

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