Actual finance blog

Goldman Sachs Group Inc’s vaunted trading operations helped the dominant Wall Street firm quadruple its earnings, but investment banking results were lackluster and its shares fell.

Goldman, whose lavish compensation has drawn scrutiny, stayed on pace to hand out more than $20 billion in year-end bonuses. That would be equivalent to more than $630,000 per employee and could beat a record set for compensation in 2007.

But in a sign of weakness, Goldman’s investment banking and asset management revenues were lower. The bank fell to No. 2, behind Morgan Stanley, in merger and acquisition adviser rankings for deals announced globally through the third quarter, according to Thomson Reuters. It also dropped a spot to No. 7 in global capital markets.

“Goldman produced great numbers but apparently didn’t live up to those heightened expectations,” said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.

“Their real earnings, the question is how repeatable are they,” he said. “Trading gains come and go. They’re genuine earnings at the time, but it’s not like something you rely on quarter to quarter.”

Fixed income, currency and commodities (FICC) trading nearly quadrupled, helping propel overall revenue to a forecast beating $12.37 billion.

Yet the $5.99 billion in FICC revenue, fueled by credit products and mortgages, also lagged the second quarter and fell short of some high expectations.

“While it is difficult to call $6 bln in FICC trading a miss, we suspect the recent run-up in GS shares reflected expectations for a stronger trading revenue number,” analyst Jeff Harte of Sandler O’Neill wrote in a research note.

The New York-based firm posted third-quarter net income for common shareholders of $3.03 billion, or $5.25 a share, up from $845 million, or $1.81 per share, a year earlier.

It easily beat analysts’ average forecast of $4.24 a share, according to Thomson Reuters I/B/E/S. But one analyst noted the beat was helped by Goldman’s decision to set aside less than usual for compensation.

‘HEIGHTENED EXPECTATIONS’

Goldman, which has been under fire from some quarters over gold-plated pay so soon after taking government bailout funds, allocated 43 percent of net revenue in the third quarter to compensation and benefits, down from 49 percent in the first half.

Stellar results by rival JPMorgan Chase & Co on Wednesday may have prompted investors to raise the bar for Goldman.

JPMorgan’s lift from fixed income — its trading revenues in that area rose more than five-fold to $5 billion — in particular led analysts and investors to expect a similar or larger jump at Goldman, which has a reputation as a more aggressive risk-taker than the commercial bank.

Goldman shares fell 2.0 percent to $188.45 in afternoon trading, underperforming the Amex Securities Broker dealer index .XBD, which was 1.2 percent lower. The shares are up nearly 124 percent this year. 

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CIT Group Inc is eyeing a loan of up to $7 billion if a planned debt exchange offer fails and the commercial lender has to file for pre-packaged bankruptcy, two sources familiar with the matter said on Thursday.

The board of the lender, which caters to small and mid-sized businesses, was meeting on Thursday to consider a restructuring plan, a third source familiar with the matter said.

Under the terms of a rescue loan CIT received in July, Thursday is the deadline for the company to come up with a restructuring plan agreeable to lenders.

CIT plans to offer its unsecured debt holders two options — either exchange their debt voluntarily or face a pre-packaged bankruptcy.

If the company goes through a pre-packaged bankruptcy, it would need a debtor-in-possession (DIP) loan to finance it during the process. The company is eyeing a DIP loan of $5 billion to $7 billion, the sources said. No such loan has yet been finalized, they said.

CIT declined to comment. The sources declined to be identified because talks are not public.

CIT shares closed down 15 cents, or 12.4 percent, at $1.06 on the New York Stock Exchange.

Its bonds were mixed. The 7.625 percent bond due 2012 was the most actively traded earlier in the day, rising 1.5 cents to 66 cents on the dollar, according to MarketAxess.

RESTRUCTURING PLAN

In a regulatory filing on Thursday, CIT said it intends to restructure outside court through an exchange offer, but may have to file for pre-packaged bankruptcy if it was unsuccessful.

If neither of those work, CIT will likely have to file for bankruptcy without an agreed on plan, which may lead to asset liquidations, it said in a U.S. Securities and Exchange Commission filing.

On Tuesday, sources told Reuters that the exchange offer is likely to essentially turn the company over to bondholders.

Debt investors would get some combination of new debt secured by assets and shares in the company. CIT’s overall debt levels would shrink.

CIT’s longer-term plan is to essentially turn itself into a bank. The company is one of scores of lenders and underwriters that relied on bond markets to fund their operations, only to suffer as the credit crunch has raged for two years.

In the filing, CIT said it expects to seek permission to transfer certain business platforms into its CIT Bank unit within 12 to 18 months after the completion of its restructuring. 

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Germany raised the pressure on General Motors on Friday to choose a buyer for its Opel unit, with Economy Minister Karl-Theodor zu Guttenberg telling the U.S. carmaker he expected a “fundamental decision” next week.

Speaking on ARD television, Guttenberg said there were offers for Opel which were ready to be signed and that it was time for the U.S. parent to “give in.”

Frustration with GM is mounting in the German government, which has come out strongly in favor Canadian auto parts group Magna’s bid for Opel.

Sources have told Reuters that some members of the GM board want to keep Opel instead and if that does not work would prefer to sell to Belgian-based financial investor RHJ International. Guttenberg said talks were focused on finding an investor solution for Opel, suggesting Berlin does not expect GM to keep the carmaker.

The government has said it would only provide billions of euros in aid to Opel if GM selects Magna. There are big questions about whether GM could come up with the funds it would need if it decided not to sell its European unit.

The head of GM Europe, Carl-Peter Forster, told Die Welt newspaper in comments released on Thursday that he believed Magna was most likely to win a bidding battle for Opel but that the carmaker could also thrive under the ownership of its U.S. parent.

“The greatest probability would be, for me, Magna, since all prerequisites are fulfilled, the contracts have been negotiated to their conclusion, and the financing is there,” he said in Friday’s edition of the German paper business cards.

GM sources said Forster, whom Magna has requested to stay on to run Opel should it win the deal, was not speaking for management.

The sources said a group of senior executives, including vice chairmen Bob Lutz and Tom Stephens favor either the RHJ bid or, increasingly, no sale at all.

Opel, which employs about 25,000 people in Germany, has been on the political agenda for months in Europe’s largest economy, which holds a federal election on September 27.

In an interview published on Friday, Chancellor Angela Merkel said she still expected Opel to be hived off from GM.

“We have no indication that GM is moving away from an investor-based solution,” Merkel told the Westdeutsche Allgemeine Zeitung daily.

Opel’s senior labor leader, Klaus Franz, on Thursday told General Motors that his workforce would not pitch in to reduce about $1.2 billion in costs if Detroit retained control of the European unit.

(Writing by Dave Graham, editing by Will Waterman)

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When the financial system was teetering, Federal Reserve Chairman Ben Bernanke flooded it with trillions of dollars to save the banks and free up credit for consumers and businesses.

Looming in the future is a high-risk challenge for the economy’s rescuer-in-chief: He will have to mop up that money without disrupting a nascent recovery.

And timing is vital. Act too fast, and Bernanke risks choking off lending to businesses and everyday Americans. Wait too long, and he risks setting off crippling inflation.

Assuming he manages to help usher in a sustained recovery, Bernanke, like his predecessors, will eventually face still another challenge: He will be under enormous political pressure to keep interest rates low, even though that could speed inflation.

But the Fed chief will face no task with quite the peril of withdrawing the trillions the Fed has pumped into the financial system in ways that had never been envisioned.

That money helped prop up shaky banks. It also was intended to unlock lending to people and companies, a key component of any recovery but one that so far has had only spotty success.

When to pull back the money is an issue sure to surface as Bernanke, his counterparts in other countries, academics and economists meet over the next couple of days at an annual Fed conference in Jackson Hole, Wyo.

Some analysts think it could take four or five years for the Fed to withdraw the money entirely and shrink a balance sheet that is now about $2 trillion, more than double what it was when the financial crisis struck free credit report without a credit card.

Already, the Fed has taken baby steps.

It has said it will allow one program intended to support money market mutual funds — one that hasn’t even been used — to expire Oct. 30. It’s also reduced the maximum it will lend to banks under two other programs.

But this week the Fed extended a separate program designed to increase lending and help the commercial real estate market. So far, about $40 billion in loans has been extended to investors — a small fraction of the $200 billion made available in the program’s first phase. And Americans still have trouble getting loans.

Congress, the White House and statehouses across America will probably exert intense pressure on the Fed to keep the money flowing and the emergency aid programs operating.

Keeping the easy money in place too long could feed high inflation by encouraging overborrowing and overspending. Surging inflation could then derail a recovery if the Fed aggressively boosts interest rates.

But pulling the plug too soon on the Fed’s emergency aid could set back a recovery even faster. If, for instance, the Fed dumped its mortgage securities and interest rates shot up, homeowners and the housing industry would take a further pounding.

To prevent inflation from surging, many economists also think the Fed will have to start raising its key bank lending rate next summer.

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Consumers, the cornerstone of U.S. economic activity, are still in disarray, data and central bank measures signaled on Monday, as households struggle amid the worst recession since the Great Depression.

The Federal Reserve announced the extension of programs to boost consumer lending, while credit-card issuers showed that people are increasingly having trouble paying their bills.

Manufacturing appears to be finding a floor, but without a pronounced recovery of consumer spending, any economic recovery is likely to be feeble, since consumers fuel about 70 percent of U.S. economic activity.

The Fed’s measures suggest that while the central bank’s emergency stopgaps for many parts of credit markets seem to be working, there is still much work to be done in revitalizing lending to consumers for everything from houses to cars, analysts said.

“It is rather like triage,” said Jay Mueller, senior portfolio manager with Wells Capital Management in Milwaukee. “Several of the markets that were in trouble are functioning much better. The Fed is putting resources where they are most needed,” he said.

In a joint announcement with the U.S. Treasury, the Fed said it would extend its Term Asset-Backed Securities Loan Facility to June 30, 2010 for newly issued commercial mortgage-backed securities.

The Fed and the Treasury also extended TALF through March 31 for newly issued asset-backed securities and already-issued, or “legacy,” commercial mortgage-backed securities. Both parts of the program were due to expire December 31.

In deciding to extend the TALF’s life, the Fed is trying to address the decline of commercial property markets, widely regarded as the next shoe to drop for many already debilitated smaller and medium-sized U payday loan.S. banks. “Everybody is concerned about commercial mortgage-backed securities,” said Mueller. Fed policy-makers “are still trying to get that market functioning,” he said.

After three years of sliding prices, housing activity, although stabilizing somewhat, remains depressed.

U.S. homebuilder sentiment in August rose to its highest level in over a year, a private survey showed on Monday. It added to mounting evidence that the housing market– and in turn, the economic recession — were leveling off.

The National Association of Home Builders/Wells Fargo Housing Market Index edged up to 18 from 17 in July, in line with market expectations.

But home improvement retailer Lowe’s Cos posted a 19 percent drop in quarterly profit on Monday and forecast current-quarter earnings below Wall Street estimates as consumers put off big home projects. It shares fell more than 8 percent.

ASSET FLOW WORRIES

Bond analysts also are concerned that over the long term, should foreign investors dump U.S. Treasuries, that could cause economy-wide borrowing costs, including mortgage rates, to soar, snuffing out any economic recovery.

The release of June U.S. asset flows data added to those anxieties. China, the biggest foreign holder of Treasuries, trimmed its overall holdings of U.S. government securities by $25 billion in the month, although analysts noted that one month’s decline was not enough to raise alarms, yet. 

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Citing weak demand for coal used to fuel power plants, Patriot Coal Corp. will shut a mine in southern West Virginia and eliminate 314 jobs.

Employees were notified that they’ll lose their jobs as of Oct. 5, Creve Coeur-based Patriot said in a statement.

The mine being closed produces about 2.5 million tons of coal a year. It is part of a complex that also includes an underground mine.

The recession and cooler weather across parts of the country have led to a decline in electricity demand. In response, coal producers have shut or idled mines and slashed budgets free business cards.

“Our strategy is to concentrate production at lower-cost mining complexes,” Patriot CEO Richard M. Whiting said in a statement. “By ceasing operations at this higher-cost surface mine, Patriot will keep valuable permitted reserves in the ground until the market yields more favorable pricing and margins.”

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In April 2008, as the "credit crunch" was becoming a "financial meltdown" and Bear Stearns had just collapsed on Wall Street, a new bank quietly opened in the St. Louis suburbs.

The timing appeared to be all wrong. Signs of distress were everywhere. And there was no celebration that first day at Parkside Financial Bank & Trust, situated on the first floor of a Clayton office tower. Too much to do — from opening new accounts to reassuring worried shareholders.

"It was a little nerve-wracking," bank CEO Jim Wagner said.

But now, more than a year later, no regrets.

"It turned out to be a good time to open a bank," Wagner said.

"Fabulous time," corrected his brother, bank president Matthew Wagner.

The struggles of the nation’s banking sector have received plenty of attention — and bailouts — in this Great Recession. Already, 64 banks in the United States have failed this year, the most since 1992. But some new players are seeing opportunity in the chaos.

Last year, in the grips of the banking crisis, 89 new banks opened nationwide, according to the Federal Deposit Insurance Corp. That is a drop of nearly half from the go-go, good times of 2007. And 2009 is going even more slowly: 20 banks so far, on pace for just 35 all year.

"It’s tailed off dramatically," said Bob Turicchi, a new bank consultant with the American Bankers Association. "Who is going to purchase stock in a brand-new bank in this environment?"

But if they can find funding, some of those new banks — called de novo institutions, new banking charters that are not subsidiaries or branches of current banks — are reporting good times.

Parkside, which raised $21 million before opening, now has 165 clients, $130 million in assets and $100 million in loans, Jim Wagner said. No loans are past due, according to the FDIC.

"To be able to say that in this market is just unusual," said Jim Wagner, 44.

LEARN FROM MISTAKES

New banks might lack name recognition and multiple branches, but they also do not have ledgers full of soured real estate and auto loans. They have learned from the lending mistakes of the recent past. Turicchi said he suspected few new banks would make commercial loans backed only by real estate — a common and costly problem in the boom years. And with the Federal Reserve Bank offering funds at rates approaching zero, new loans promise a good return.

"It is quite an opportunity to not have the pressures of your existing portfolio going bad," Matthew Wagner, 37, said.

Parkside is not your typical bank. No giant bank vault, just a hidden safe. No ATM or drive-through lanes. Bank tellers sit at desks, not counters. The bank does not dream of being the next Bank of America, although people can walk in and open an account cash advance online. Parkside is aimed at a niche: commercial banking for privately held companies, and wealth management for what is termed "the mid-tier millionaire," people with a net worth of $5 million to $50 million.

(When the Wagners and a partner left jobs at other banks to start a new bank, they decided on the name Providian Bank. Just a few months before opening day, they got a letter telling them the name Providian, a now-defunct bank, was still registered. In a rush, they held an internal name-that-bank contest. And Parkside was born.)

COMPLICATED PROCESS

Opening a new bank is not a simple process, even in the best of times. It can take months. Success is not guaranteed. State and federal regulators pick apart applications for bank charters and set strict requirements for FDIC backing on consumer deposits. Turicchi said he had recently heard of banks’ withdrawing applications because shareholders had backed out. That could help explain why so few banks are seeking new charters this year.

In Missouri, not a single new charter application is in the pipeline, state regulators said. In Illinois, three banks have pending charter applications — all in the Chicago area — and one new bank opened in April: Burr Ridge Bank and Trust, which lists former sports star Bo Jackson on its board, is situated in the Chicago suburbs.

Parkside was one of just two new banks in Missouri last year.

The other was Springfield First Community Bank — which managed to open at an even worse time than Parkside.

In just the one month between getting its charter and the bank’s first day of business late last October, the stock market crashed. The government had seized Fannie Mae and Freddie Mac. Lehman Brothers and Washington Mutual had vanished. AIG was teetering. The government had just set up TARP to infuse banks with cash.

And then Springfield First opened in two plain modular units where a motel once stood in Springfield.

"Our timing, as it turned out," said bank CEO Brian Straughan, "couldn’t have been much better for us."

All 22 employees at the start-up bank used to work at Signature Bank, a Springfield-based company that was bought by an out-of-state bank in 2006. Straughan said the desire to again work at a locally managed institution led to the establishment of the new bank.

Springfield First is full-service bank, offering the familiar mix of free checking, senior checking and commercial loans and lines of credit. It is expected to move into new offices in October. The bank now has $135 million in assets — and, with just nine months in business, no bad loans.

"We’re cooking right along," Straughan said.

It’s an assessment many established banks would love to share.

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The federal government has appointed a task force to work on a national strategy for financial literacy.

You may have some questions about this announcement, which came just before the July 1 holiday.

What is financial literacy anyway?

Sadly, there’s no agreed-upon definition. The task force will have to define this elusive term to make it meaningful, and desirable, for everyone.

"I think it’s an essential skill for all Canadians, whether rich or poor or middle class," says Peter Nares, executive director of Social and Enterprise Development Innovations (SEDI).

During his non-profit career, Nares has worked on projects to help build household assets and make low-income Canadians more resilient. His lobbying helped make the task force a reality.

He sees financial literacy as not only about learning facts, but changing behaviour. "You need to know when you need help and where to go to get it," Nares says.

"You need to use it responsibly and confidently and act on it."

How financially literate are Canadians?

Again, there’s no definitive measurement. Statistics Canada has started doing a telephone survey of financial capability, involving 20,000 adults in private households in 10 provinces. The study is designed to be repeatable, so there’s a baseline against which to measure the level of literacy.

Other countries – such as Australia, Japan, South Korea, the United Kingdom and the United States – have done such surveys. All concluded that consumers lack information about financial issues and need education to make good decisions about their money.

Don’t we have enough info already?

Absolutely. You can find many useful publications put out by banks, credit unions, investment dealers and government agencies.

The challenge is to get this info to people at a time when they’re ready to hear it and act on it quick payday loans.

Financial education should take place over an entire lifetime, not just when children are in school.

Adolescents want to know about buying cars and applying for credit. Young adults will soak up details on making real estate offers and taking out a mortgage.

Only when information means something to your life do you really pay attention. Educators have to take advantage of "teachable moments," which come when people are desperate to learn about something and anxious to avoid making poor decisions.

Who’s on this task force?

The chair is Donald Stewart, chief executive of Sun Life Financial. The vice-chair is L. Jacques Ménard, chairman of BMO Nesbitt Burns. It’s not clear why large financial institutions have such a prominent role, unless the government wanted to ensure other financial institutions would pay attention.

Among the 11 other members are a journalist (Pat Foran of CTV News), an educator (Evelyn Jacks of the Knowledge Bureau), a credit counsellor (Laurie Campbell of Credit Canada) and a former provincial finance minister (Janice MacKinnon of the University of Saskatchewan). The task force is supposed to come up with a strategy by the end of next year.

Why do we lag behind other countries?

We tend to be risk-averse and slow to take on innovative projects.

Our constitution makes education a provincial responsibility. As a result, there’s little coordination and standardization of courses offered in schools. But since we’re coming in late, we can learn from work done elsewhere. New Zealand, the U.K. and the U.S. already have a national strategy on financial literacy. I’ll have more on their efforts next week.

eroseman@thestar.ca

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UBS cannot comply with a U.S. request to disclose the identity of 52,000 U.S. secret account holders, the bank’s chief executive Oswald Gruebel said in an internal memorandum, according to a source familiar with the situation.

The UBS chief executive officer sent the confidential memorandum to the bank’s top executives on Thursday, the source said, confirming comments reported earlier in the day by the New York Times.

Gruebel, hired in February to turn around the troubled Swiss wealth manager, said turning over the names “would require UBS to violate Swiss criminal law, and we simply cannot comply,” the paper quoted Gruebel as saying in the memo.

A court hearing seeking to assess whether UBS is to disclose the names to U.S. tax authorities is due to start on Monday.

The judge presiding the hearing has ordered the U.S. government to say by 1600 GMT on Sunday whether it was prepared to shut UBS in the United States as part of a battle to learn the identity of the accounts suspected of being used by Americans to avoid taxes.

Switzerland, the world’s biggest offshore banking center, vowed in filings to the U.S. court to prevent UBS from handing over client data to the Internal Revenue Service (IRS) to defend bank secrecy laws, saying the tax case is souring diplomatic ties car loans.

UBS said in an emailed statement: “The IRS summons puts UBS in an untenable position, caught between the laws of two sovereign nations.”

“Honoring the IRS summons would require UBS to violate Swiss criminal law.”

A UBS spokesman in Hong Kong declined to comment on the memo.

Even though tension between the two nations has been raised, Swiss National Bank Chairman Roth said he had no doubt that the lawsuit against the country’s former flagship bank UBS in the United States would be resolved.

“We have no doubt that this bilateral fight will be resolved,” Roth told the German daily Handelsblatt according to a version of the interview on the paper’s website.

“This fight is obviously an important issue for UBS. But the bank has also taken measures to reduce risks. UBS today is a strongly capitalized bank today.”

(Additional reporting by Lisa Jucca in Zurich)

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Unionized workers at the Globe and Mail have been asked by their bargaining committee to vote on the latest company contract offer this weekend, an offer the union committee has recommended they reject.

The move comes after Globe management sent a revised offer today to staff that will replace their expiring contract, with all concessions and changes to be implemented by July 1.

The union has already been given a mandate to call a strike by its membership in an earlier vote. But Brad Honywill – Communications, Energy and Paperworkers Union representative – said Globe employees will vote on the offer Saturday at a Toronto hotel and other bureau locations.

Management's revised proposal includes reducing the collective agreement's length to five years from six years. It also gives existing employees the option to convert their defined-benefits pension plan into a defined-contribution plan – which offers a lower payment – or stick with their defined plan under an increased member contribution rate.

New hires would be started only in a defined contribution plan.

"Based on the economic climate we find ourselves in – the recession and the media landscape – we believe this offer is fair and reasonable," Phillip Crawley, Globe publisher and CEO, said in an interview.

Crawley said the Globe isn't planning to lock employees out when their existing contract expires.

"The company remains available to bargain at any point," he added.

The offer emailed today maintains the previously proposed annual wage increases of zero per cent in 2009 and 2010, 1.5 per cent in 2011, two per cent in 2012 and 2.5 per cent in 2013.

However, the latest offer removes a plan to give workers one unpaid week off each year, though it holds to a workday increase to 7 1/2 hours from seven, increasing the work week to 37 1/2 hours.

Union negotiator Howard Law believes the company removed "straw men" from the proposals to look like they're making concessions, but that it was up to Globe staff to decide if they agree.

"The union's policy is that no matter how bad the company's offer is, and even if the union bargaining team can't recommend it … we take it back for a vote," Law said. "We basically refresh our strike mandate."

Last weekend, editorial, advertising and circulation workers voted 97 per cent in favour to give the union a mandate to call for a strike at the Globe, one of Canada's oldest and most influential newspapers payday loan lenders.

The contract that expires on Tuesday affects about 480 employees at the company.

Many Canadian media outlets are coping with change as advertisers slash their budgets and people migrate to the Internet for their information.

Montreal's La Presse, one of the biggest papers in Quebec, has stopped publishing its Sunday edition while the National Post, owned by Canwest Global Communications (TSX: CGS), has canned the Monday edition for the summer.

The Globe told its staff that advertising revenues have been steadily declining in recent quarters. In May, ad revenue fell 28 per cent over the same time a year earlier, it said.

"We have to balance, on the one hand, being fair to you, our employees, and on the other hand making sure our owners and shareholders continue to see The Globe and Mail as a viable long-term business," the company wrote in the email.

"Bargaining unit employees who come to work on July 1, 2009 will work under the terms and conditions of this offer."

The Globe is owned by CTVglobemedia Inc, which itself is owned by a group that includes Woodbridge, the Thomson family owned investment company, Torstar Corp. (TSX: TS.B), the Ontario Teachers Pension Plan and BCE Inc. (TSX: BCE), Canada's largest telecom company.

Other news organizations have also been looking to cut operating costs in recent quarters.

Canwest has asked organized workers and senior managers for wage concessions it said could save it up to $20 million a year.

The Winnipeg-based multimedia company is also in talks with creditors and banks to restructure a $3.9 billion debt that has weighed down the company's operations for years.

Canadian media conglomerate Quebecor Inc. (TSX: QBR.B) is reworking its operations to regionalize some smaller local papers in Quebec and Ontario.

Other Canadian news organizations, from publishers to broadcasters, have been slashing hundreds of jobs to streamline and become more efficient as they cope with the advertising slump.

In the United States, dozens of papers are in bankruptcy courts and have been slashing jobs just to survive.

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