Hurt us and you hurt the planet, Goldman Sachs CEO says

The best defense is a good offense, or so the old line goes.

That seems to be the playbook at the moment for Goldman Sachs Group CEO Lloyd Blankfein.

To many Americans, Goldman has become the preeminent symbol of Wall Street arrogance and greed -- the great vampire squid, as Rolling Stone’s Matt Taibbi famously labeled the firm.

Some in Congress, along with heavyweights such as former Federal Reserve Chairman Paul Volcker, want to break up the biggest financial institutions -- and restore the division between commercial banking and Wall Street -- to lessen the risk of another systemic meltdown.

But twice now this week Blankfein has insisted that the country badly misunderstands his company and its contributions to the well-being of humanity.

"Most of the activities we do, and you can be confused if you read the pop press, serve a real purpose," Blankfein said at a conference today in New York, according to Bloomberg News. "It wouldn’t be better for the world or the financial system" to change Goldman’s activities, he said.

Over the weekend the Times of London published a long feature on Goldman that included an interview with Blankfein. He was self-deprecating but wholly unrepentant about the firm’s power and massive profitability.

From the Times:

"I know I could slit my wrists and people would cheer," he says. But then, he slowly begins to argue the case for modern banking. "We’re very important," he says, abandoning self-flagellation. "We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

That doesn’t wash with Simon Johnson, a finance professor at the Massachusetts Institute of Technology and former economist at the International Monetary Fund.

In a radio interview with Bloomberg News today, Johnson said that Goldman’s assets had nearly quadrupled over the last decade. "What have we gained from a societal perspective from Goldman Sachs becoming four times bigger? Nothing," Johnson said. "Break Goldman Sachs up into four pieces, let them choose how they break up."

-- Tom Petruno

Photo: Goldman Sachs CEO Lloyd Blankfein. Credit: Spencer Platt / Getty Images

East West shares soar after deal to buy failed rival

Wall Street thinks Pasadena-based East West Bancorp made a sweet deal to buy rival United Commercial Bank in a takeover brokered Friday by the Federal Deposit Insurance Corp.

Shares of East West -- which now becomes by far the largest U.S. bank focused on the Chinese American market -- have rocketed more than 50% today. The stock was up $4.81 to $13.46 at about 12:20 p.m. PST.

The FDIC seized loss-ridden United Commercial on Friday and agreed to sell the San Francisco-based lender to East West. The deal will boost East West’s assets to about $19 billion, from $12.5 billion. The FDIC agreed to cover most of the expected additional losses on United Commercial's loan portfolio.

As my colleague E. Scott Reckard detailed over the weekend:

The takeover will greatly expand the reach of East West, which has concentrated on Southern California and the San Francisco Bay Area. In addition to 69 California offices, East West has full-service branches in Houston and Hong Kong.

United Commercial not only has dozens of branches in California but also has locations in key Chinese American areas, including New York, Boston, Seattle, Atlanta and Houston.

What's more, because of its 2007 acquisition of a Shanghai bank, United Commercial also has a banking license in China -- a "rare and hard-to-come-by" asset that makes it easier to operate and expand in that country, said RBC Capital Markets analyst Joe Morford. It has full-service offices in Shanghai, Hong Kong and Shantou, China.

Even though East West, too, is in the red this year as loan losses mount, Wall Street clearly now sees the bank as a survivor. Still, the stock remains far below its record high of $43.30 in 2004.

Several brokerage analysts rushed to boost their ratings on East West today. Michael Diana of Noble Financial Group in New York raised his rating to "buy" from "hold," citing the potential for "massive" cost savings in the merger from what he figures will be consolidation of overlapping East West and United Commercial branches in California.

East West CEO Dominic Ng, however, told The Times that he expected to see only a "few" branch closings as a result of the deal.

Morgan Stanley analyst Ken Zerbe boosted his East West rating to "overweight" from "equal weight," and Sandler O’Neill analyst Aaron Deer removed his "sell" rating, raising the stock to "hold."

-- Tom Petruno

Photo: East West CEO Dominic Ng. Credit: Mark Boster / Los Angeles Times

The last analyst says goodbye to FirstFed

Paul Miller, the last analyst covering FirstFed Financial Corp., gave up today, saying in a note that “it is unlikely that any value remains for shareholders” of the Los Angeles savings and loan company.

The FBR Research analyst had last published comments on the parent of First Federal Bank of California in February, when he advised investors to sell the stock. Back then, Miller valued FirstFed shares at 60 cents; the stock was unchanged at 32 cents today in the over-the-counter market.

For FirstFed, which stumbled with its pay-option adjustable mortgages, the issue is no longer existing investors as much as whether new shareholders can be found. As Miller pointed out, regulators have ordered the company to liquidate itself, merge with another financial institution or find new investors to provide a shot of fresh capital.

FirstFed is hoping to sell new shares to private investors in a deal that would all but wipe out existing shareholders.

Part of the money raised would pay off holders of $150 million in FirstFed bonds at 20 cents on the dollar, and part would be used to bolster the thrift’s capital cushion against losses.

The thrift got some good news today as President Obama was expected to sign legislation allowing companies to use losses from 2008 and 2009 to offset taxable profits going back five years, rather than just two years. FirstFed has reported $547 million in losses since the beginning of 2008 -- losses that could be used to apply for greater tax refunds.

FirstFed’s executives weren’t talking today, saying they were in a “quiet period” because of the coming attempt to sell new shares. The Securities and Exchange Commission has yet to clear the offering so FirstFed can issue a prospectus describing the proposed stock sale.

In an SEC filing this week, FirstFed provided fresh evidence of how its operating focus is shifting from modifying loans for troubled borrowers to dealing with foreclosures for those who can’t be helped.

Single-family home loans that were 60 to 89 days delinquent -- the most serious threats to go into default -- totaled $7.5 million, down from $12.6 million a month earlier and $97 million on Sept. 30, 2008.

So the pipeline of sludge is drying up at the entry point. But there was still plenty to deal with at the other end.

Even after selling 356 foreclosed properties in the third quarter, the bank owned 665 foreclosures valued at $176 million at the end of September, up from 413 worth an estimated $98 million at the end of June.

-- E. Scott Reckard

Frank says financial industry should pay now for future bailouts

Rep. Barney Frank, chairman of the House Financial Services Committee, told reporters today that he would make significant changes to a proposed government fund to help pay for any large financial firms that would be seized and dismantled to prevent major damage to the economy.

The so-called resolution fund is a key part of legislation that Frank introduced last week following negotiations with the Treasury Department to give the government new power to avoid future financial crises. The fund is designed to make the industry -- not taxpayers -- pay the cost of future bailouts.

Under the bill, the fund would be paid by financial institutions with total assets of at least $10 billion each only after a government intervention to repay the outlay of taxpayer money. The legislation would not place any limit on how much taxpayer money the government could use to seize a major financial firm and would give Congress no say in any decision to use the money.

After some lawmakers and regulators criticized the plans for the fund last week, Frank said he would make changes as his committee begins to wrap up the legislation this week. The Massachusetts Democrat said he expected the full House to vote during the first week of December on all components of the proposed overhaul of financial regulations, including creation of a new agency to protect consumers in the marketplace.

As for the resolution fund, Frank said he would require firms to pay into it ahead of any use, as is now done by banks with the Federal Deposit Insurance Corp. fund that helps insure customer deposits.

That way the money would be in place to cover the costs of seizing and dismantling a major financial firm, limiting the outlay of government money. Frank also said he favored “some congressional involvement” if the Treasury Department needed to lend any money to the fund to cover a shortfall before more money could be collected from the industry.

“It will not be an unfettered executive decision,” Frank said. He suggested allowing any member of Congress to request a vote to stop a disbursement of taxpayer money into the fund.

Rep. Brad Sherman (D-Sherman Oaks) has criticized the legislation for creating what he called a permanent, unlimited version of the $700-billion bailout fund. Though he said Frank was moving in the right direction with the proposed changes, he wants more details.

Sherman said there was a major difference between a congressional vote to prevent the disbursement of money and one authorizing it. Under the first option, a bill to prevent Treasury from lending money to the fund could be vetoed by the president, which would require a two-thirds majority of both houses to override.

Requiring Treasury to seek congressional approval for any disbursement would mean that only a simple majority of both Houses would be needed to stop it. He said the committee debate on the bill would be important in structuring that mechanism.

“The less support there is for unlimited permanent bailout authority, the better the bill will be,” Sherman said.

-- Jim Puzzanghera

Photo: Barney Frank sits in the East Room of the White House on Oct. 9. Credit: Gerald Herbert / Associated Press.  

Dow Jones average approaches 10,000

Will the Dow Jones industrial average finally get back above 10,000 today?

The banking and technology sectors are doing their best to see that it does.

The Dow pushed to within nine points of 10,000 thanks to blockbuster earnings this morning from JPMorgan Chase & Co., and better-than-expected profits from Intel Corp. after the market closed Tuesday.

As of 8:30 a.m. PDT, the Dow was up 115.86 points, or 1.2%, to 9,986.92. JPMorgan shares were up 3.6% and Bank of America Corp. had gained 2.8%.

Intel was up 3%, with Hewlett-Packard Co. and Cisco Systems Inc. rising more than 2%.

A spate of generally strong earnings reports is helping the market extend its seven-month upward ramble. After sputtering two weeks ago in the face of troublesome employment data, the Dow and other major indexes have regained their footing amid enthusiasm over earnings.

JPMorgan blew past earnings estimates with third-quarter profit of $3.6 billion, or 82 cents a share. Analysts had expected 51 cents a share.

But given that JPMorgan has a sizable presence in both investment banking and commercial banking, its results also underscore the notably contrasting fortunes of Wall Street and Main Street.

Its results were driven by strength in fixed-income issuance and investment banking activities such as giving merger advice. That’s adding up to lush paydays for bankers and traders at JPMorgan and other Wall Street stalwarts, such as Goldman Sachs Group, which is expected to uncork blowout earnings Thursday.

On the other hand, JPMorgan earmarked $2 billion to cover expected consumer loan losses. That’s another reminder of how ordinary Americans are struggling to pay their bills in a stolid economy with rising joblessness.

-- Walter Hamilton

Singapore cashes in half of its Citigroup stake

"Nobody ever went broke taking a profit," as the old line goes. The government of Singapore appears to have heeded that advice by selling half its stake in Citigroup Inc. after the recent big rally in the bank’s shares.

From Bloomberg News:

The Singapore government pared its stake in Citigroup to less than 5%, realizing a $1.6 billion profit as the city-state’s investment companies reduce holdings in European and U.S. banks.

Government of Singapore Investment Corp. sold the stock after converting preferred shares in the New York-based bank into a more than 9% common-equity stake, it said in a statement. The company, manager of more than $100 billion of foreign-exchange reserves, also has a $1.6 billion paper profit on its remaining holding.

Singapore made a $6.9-billion investment in Citi preferred shares in January 2008. Those shares were convertible into common stock at a conversion price of $3.25 each.

For much of this year Singapore was underwater on the conversion price as Citi’s common stock languished.

But the rush of speculators into the stock in August -- driving the price from $3.17 at the end of July to $5 by the end of August -- put Singapore’s stake back into the black. The government converted its preferred shares to common on Sept. 11. Citi’s shares closed that day at $4.61.

Singapore said it sold half its stake to reduce its investment to the level it intended when the preferred stock was purchased. The government said it would continue to hold the rest of its Citi stock "as we are confident of its long-term prospects," according to Reuters.

News of the sale isn’t unnerving other Citi investors today: The stock was up 23 cents, or 5.2%, to $4.66  at about 10:45 a.m. PDT.

Wall Street has been focused on expectations that Citi will takes steps soon to reduce the federal government’s 34% stake in the bank, the price of Uncle Sam’s rescue of the company late last year.

Citi is considering a plan to issue new shares to the public while cashing out some of the goverment’s stake, the Wall Street Journal reported last week.

-- Tom Petruno

AIG shares soar on hopes for easing of bailout terms

Speculators are stoking another big run in American International Group shares today, on word that former Chief Executive Hank Greenberg’s ideas for restructuring the U.S. rescue of the firm will get another hearing.

From Bloomberg News:

Rep. Edolphus Towns may start talks with Treasury Department and Federal Reserve officials about the plan from . . . Greenberg, said a Towns aide.

Greenberg visited Towns, the New York Democrat who leads the House Committee on Oversight and Government Reform Committee, on Thursday, according to the staffer, who declined to be identified because the meeting was private.

"I’ve directed the committee staff to take a look at Hank Greenberg’s proposal to restructure the debt, because I think it is something to which we should give serious consideration," Towns said today in an e-mailed statement. Congress should help AIG recover "and that means looking at a number of options, including restructuring the federal loans."

AIG shares were up $7.50, or 19%, to $47.41 at about 12:10 p.m. PDT. The stock has rocketed from less than $10 in early July, and hit a recent closing high of $50.23 on Aug. 28, as speculators have pounced on it.

Since the company’s U.S. rescue a year ago AIG’s shareholders have been left to wonder what, if anything, will be left for them after the company eventually repays a bailout package worth as much as $182 billion, including loans. The bailout left Uncle Sam with an 80% stake in the insurer.

Greenberg’s workout proposal includes cutting the government’s stake in the company, reducing the interest rate on federal loans and giving the firm more time to repay debt, the Towns aide told Bloomberg.

New AIG CEO Robert Benmosche helped fuel last month’s 245% surge in AIG shares after saying he would seek advice from Greenberg.

Towns says he’s interested in getting the best return he can on the government’s controlling stake.

From Bloomberg:

Towns, 75, said regulators have pressured AIG to liquidate the company at "fire-sale" prices. "What’s the rush if we can get a better return on our money a few years down the road and save a major company and thousands of jobs?" he said.

Separately, the Associated Press reports that a Government Accountability Office report found "some progress in AIG's ability to repay the federal assistance." But the report concluded that "the ultimate success of AIG's restructuring and repayment efforts remains uncertain."

-- Tom Petruno

The stock market doesn't care what you think (if you're a bear)

Halfway through September, the stock market pullback that was widely predicted for this month is a no-show.

Once again, Mr. Market demonstrates that he doesn’t like to be told what to do.

Instead of the 10%-plus decline that many sidelined investors were hoping for, stocks have padded their gains of the spring and summer rally. The Standard & Poor’s 500 index, at 1,052.63 as of Tuesday’s close, was up 3.1% for the month, 16.5% for the year and 55.6% from its 12-year low reached March 9. Stocks are broadly higher again today.

You can sense the exasperation of the bears. They thought they had something going at the turn of the month as the S&P slid 3.5% in the four trading sessions ended Sept. 2.

Since then, however, the index has risen every day but for the 0.1% slip last Friday.

It was a logical call, coming into September, that the market was vulnerable after six straight months of gains. Classic measures of market sentiment were strongly bullish, which often signals at least a short-term top in stock prices.

Other warning signs: Corporate insiders were heavy sellers of their own shares; the Chinese market, which led the global rebound in equities early this year, had tumbled 22% in August; and speculators were running wild in garbage penny stocks such as Fannie Mae and Freddie Mac.

And, of course, there was September’s historical track record as the market’s worst month of the year.

Market bulls, however, expected investors to keep focusing on the economy and whether the evidence supported the idea that a recovery was underway.

The evidence has cooperated: From Aug. 31 to Friday, nearly two-thirds of the 26 major U.S. economic reports released in that period either beat or matched analysts’ expectations, according to Bespoke Investment Group.

The economy may not feel good to many people, but relatively speaking, it looks good to investors who’ve just wanted more signs that the recession has ended. (Cue Billy Crystal in his Fernando Lamas persona of the mid-1980s.)

No wonder, then, that the leading sectors in this month’s stock rally are those whose fortunes ride on prospects for a global economic rebound -- industrial companies, producers of basic materials and energy firms.

Bringing up the rear: financial issues, which have been held back in part as many of the junkiest names (Fannie, Freddie, AIG and Citigroup) have deflated from their August peaks, but without taking the rest of the market with them.

Buyers are finding plenty to like: Rising stocks have outnumbered losers by more than 2 to 1 on the New York Stock Exchange in seven of the last eight sessions.

That encourages bulls like Ned Davis Research, a well-known market research firm in Venice, Fla. that  correctly called the rally earlier this year and has maintained the view that stocks are going higher.

"So much money has been sitting on the sidelines and now is looking for a place to go" as confidence in a recovery rises, said Tim Hayes, the firm’s chief investment strategist.

Ned Davis believes this is "cyclical" bull market within a longer-term, or "secular," bear market. But given the firm's forecast for the S&P 500 to peak sometime in 2010 in the range of 1,200 to 1,300, it makes no sense to sit out the cyclical rebound, Hayes said.

Reluctant investors, he said, will eventually get the pullback they've been praying for. "We probably will get a decent correction at some point" in the near future, Hayes said. "But we’re not going to try to time that."

-- Tom Petruno

 

Speculators have run amok with a few stocks. And so?

Speculators are having a wild time with a handful of stocks this month, and they’re driving the blogosphere into its own kind of speculative frenzy -- speculating on what level of ruin this will bring.

By now, anyone paying even marginal attention to the market action of the last few weeks knows about the huge percentage gains in shares of federal bailout beneficiaries American International Group, Freddie Mac and Fannie Mae, all three of which have surged more than 230% since July 31.

Citigroup, up 59% this month, looks like a piker compared with those three, though not compared with the 4.4% rise in the Standard & Poor’s 500 index.

This week, speculators have piled into another name: telecom services company Vonage Holdings. The shares soared from 46 cents last Friday to $2.17 by Wednesday, before pulling back to $1.99 on Thursday.

The manic price moves in these few stocks have been accompanied by off-the-charts trading volume -- to the point where they’ve been accounting for more than a third of all New York Stock Exchange volume in recent days.

Two distinct groups are getting the credit, or blame, for this apparent nuttiness: a swelling pool of amateur day traders, and the high-frequency trading firms, or HFTs, whose incredibly fast computers feed on, and profit from, these kinds of manias.

Not surprisingly, the frantic activity has triggered warnings from  market bloggers like Karl Denninger, a professional trader who wrote on Seeking Alpha this week:

If there was ever an argument to be made for the NYSE having turned into a gigantic "hot potato" parlor game, this is it -- in your face in an impossible-to-explain-away fashion.

The ordinary investor who has a brain sees it as an amusing sideshow, but the unfortunate fool who gets sucked into the maelstrom is going to get destroyed when the computers move on to some other issue and the price collapses as there is no authentic bid out there for any of this crap.

RobotTrader at ZeroHedge blog humanizes some of Denninger's unfortunate fools in an entertaining recap of the scene at a Starbucks store:

Two days in a row . . .I found young, slacker, unemployeds huddled around a table with their laptops daytrading stocks.

Today, I saw two surfer/skateboard slackers, complete with flatbill caps, sunglasses worn backwards, "Affliction" t-shirts, etc. One guy was clearly the fast talker, teaching his friend how to daytrade using "resistance" and "support" on a 5-minute chart. Wanna bet what stocks he was talking about? Yep. AIG and Vonage. It was all I could do to keep from bursting out laughing.

For the vast majority of investors who aren't in this particular game, the question is what, if anything, the casino action implies about prospects for the rest of the market.

Let’s say, for argument’s sake, that these stocks are mini-bubbles that will soon burst. Would that have to drag down the broader market? Why would it -- if the market as a whole isn’t taking its cue from these few names as they go vertical?

Also note that, because AIG, Citi, Fannie and Freddie already are wards of the federal government, no emergency would be triggered if their shares plunged again. They've already had their emergencies.

The summer rally in most stocks (the S&P 500 is up 17.3% since July 10) has had a fundamental underpinning: data that have, pretty consistently, pointed to a bottoming of the recession. That has raised hopes that some kind of economic recovery is on the horizon.

So when Wall Street gets back to work after Labor Day, it seems reasonable to assume that most investors will be far more likely to care about the latest economic numbers -- and what companies are saying about third-quarter sales -- than whether August's small band of rocket stocks come crashing back to Earth.

-- Tom Petruno

Farmers Insurance to gut workforce at 21st Century unit in Woodland Hills

Another blow to the San Fernando Valley economy: Jobs will be slashed at the Woodland Hills office of low-cost auto insurer 21st Century as the company’s operations are consolidated with its new parent, L.A.-based Farmers Insurance Group.

Farmers says it expects to cut 554 of 979 jobs at the Woodland Hills location by the end of this year, and  200 more by the end of 2010, my colleague Marc Lifsher reports.

American International Group, the federally bailed-out insurance giant, sold 21st Century to Farmers for $1.9 billion last month. AIG has been seeking to raise cash to gets its operations back on track after its near-collapse last year, and to begin repaying $180 billion in federal aid.

Farmers Chief Executive Robert Woudstra has called 21st Century "the perfect strategic fit" for 81-year-old Farmers, because it allows the company to harness 21st Century's business model of marketing auto insurance directly to customers via the Internet and by phone.

Farmers, by contrast, sells insurance via a huge network of agents.

21st Century was founded in L.A. by insurance agent Louis Foster in 1958. Woodland Hills has been the company's main California office since 1980.

AIG took a minority stake in 21st Century in 1994 and bought the remaining shares in September 2007. AIG was in the process of rebranding the company as Aigdirect.com when the financial-system meltdown struck last year. AIG then decided to keep the 21st Century brand name, but in April opted to sell the entire operation.

Ironically, 21st Century workers now may be wishing they were still part of AIG: The company’s new CEO, Robert Benmosche, told the Wall Street Journal today that he wants to take a go-slow approach in selling other operations to repay bailout funds.

From the Journal:

He's willing to wait up to three years, he said, to offer stakes in two multibillion-dollar foreign units that the insurer had been racing to spin off.

"It's not a question of if, but when," Mr. Benmosche said. "Once the market gives us a price that I think is fair, we can go forward.... If we sell too soon, everyone loses."

Benmosche took over as AIG's CEO on Aug. 10. AIG shares have rocketed this summer, including a 27% surge today, as the company’s finances have stabilized and speculators have bet on what might be left for shareholders after the firm repays Uncle Sam.

-- Tom Petruno