Wine buffs complaining about their pockets being insufficiently lined to enjoy the town’s selection of fine vino can now rejoice – the newly opened Cuvee wine shop and bar aims to bring an eclectic mix of fine wines at prices that won’t force you to take a second mortgage.
The 70-seater bar, which is part of a series of interesting developments on Kangding Road, is in its soft-opening and has an ample selection of 115 everyday wines and a few crus. Wine lovers can pop by for a bottle costing as little as a bit over 200 yuan (US$29) or, if the occasion calls for it, something a little pricier for the desired effect.
“We’re not trying to be like Enoteca or ASC’s Wine Residence,” said proprietor Mathew Ryan, who is also a partner in the Justbeer enterprise that distributes Australian beers locally. “We’re also trying to be not like Senses.”
Ryan, who recently quit his job with Hewlett Packard, was best known in town for Senses Wine Bar and Lounge on Jianguo Road. While it had its heyday, the good times didn’t last forever and the investors eventually came to their wits and sold the venue.
Having been on the periphery of the nightspot business, the Sydney native has learned from mistakes at his previous bar as well as from other operators in the industry. “I’ve actually gone out of our way a bit to be different.”
An indication is the appointment of French manager Paul d’Allad. The Brittany native was previously in charge of the excellent but poorly located Epicvre on Xinle Road, and he will be lending a French touch to proceedings. “It’s not just about New World wine. Here, we’re very much about the French, as well as the Australian, and everything in between.”
Besides Ryan’s pedigree, Cuvee can also draw upon the vino expertise of Summergate’s Andrew Gardiner (the other partners have calculated the risks of exposure and prefer to remain silent for now). While the list currently offers a significant portion from the fine wine distributor, the Australian has actively engaged labels from all distributors to serve customers with the best selection of wines possible.
“When I started Senses, there were four people to buy wine from here we are purchasing from 18 different vendors. Those 115 spaces (on the list), we went through everyone’s lists, narrowed it down to 300 then to 115. We didn’t care if they had one or 15, we just took (the ones we wanted).”
Punters who come to Cuvee can walk into the cellar and pick what they want prices are listed on the bottles themselves, and they can then decide if they wish to take it home or consume it on the premises.
If a whole bottle is too much, then aficionados can also select from one of 10 wines by the glass (five red, five white). The selection is updated regularly, and the wines see enough traffic for a fresh bottle to be opened regularly.
Ryan is also toying with the idea of installing an Enomatic machine for top cuvees by the glass. The machine, which costs nearly 50,000 yuan, keeps wine fresh by pumping the bottles full of inert argon gas. Colourless and odourless, it does not allow wine to react with oxygen and thus oxidize.
One of the features of the chic, slick bar is the 24 wine lockers in a temperature-controlled (air-conditioned) room for members to keep their drops on the premises. While the contents are not insured, the lockers are not intended for punters to store their very best but rather to put aside a small selection of special labels for sharing with the rest of Cuvee’s wine-loving community.
Memberships are available at different levels. The basic package starts at 3,000 yuan and goes up to 20,000 yuan. These offer discounts on wines and corkage as well as invitations to members-only events.
Food is kept simple, with manager d’Allad plumping for large platters for sharing and a crafty cheese selection. A hot dish of the week will also be available.
He is also planning to bring in a Sunday brunch, with a simple antipasto buffet and one or two hot dishes such as omelettes to go with the choice of less run-of-the-mill bubblies.
Cuvee may not win prizes for being the most original design or concept, nor does it position itself to be ultra high-end. Instead, it looks to be a place for the wine-loving community to do just that - love wines.
Address: Room 103, Lane 528 Kangding Rd Tel: 6288-1189
ANNANDALE, Va. (MarketWatch) -- Sometimes you can't win for losing.
Just ask Harry Schultz. Or Howard Ruff. Or Jim Dines.
All three advisers, each of whom has been editing an investment newsletter at least since the 1970s, have built their investment careers by questioning conventional wisdom's trust in the soundness of the financial system. Not surprisingly, all three have been vociferous champions of gold and other precious metals.
You'd think that they would have cleaned up over the last year, since the disintegration of the financial system in recent months is almost exactly what they have been warning us about for decades.
But you'd be wrong.
Of the 181 newsletters on the Hulbert Financial Digest's monitored list, these three advisers' newsletters are in 173rd, 175th, and 176th places for year-to-date performances through October 31, with losses ranging from minus 64.9% to minus 70.0%.
How can this be?
The easy answer is that these advisers didn't put into their model portfolios the securities that would benefit from the financial collapse that they envisioned.
But that's not a very satisfying answer. Why didn't they construct their model portfolios around investments that would rise when the rest of the financial world was going down?
The answer, as I see it, has to do with how difficult it is to forecast when a collapse will actually take place. It's one thing to know that the financial system is shaky, and quite another to forecast when it actually will crumble. And these advisers would have lost even more over the last several decades had they bet aggressively on a collapse every time they thought that one was imminent.
In essence, these advisers came face to face with John Maynard Keynes' famous pronouncement that "the market can remain irrational longer than you can remain solvent."
In fact, it turns out to be surprisingly tricky to construct a portfolio to profit from an anticipated collapse. You can't just own securities that will skyrocket during such a collapse, for example, since they will lose huge amounts during the months and years you wait around for that collapse to occur.
As a result, advisers who worry about a collapse sometimes end up constructing portfolios that are not all that different from those of other advisers who are more sanguine about the health of the financial system.
The ironies are many.
Researchers refer to the consequences of these dynamics as the "limits to arbitrage." One famous study conducted in the mid 1990s by Harvard economist Andrei Schleifer and University of Chicago professor Robert Vishny, for example, found that arbitrageurs more often become momentum players rather than hedgers: Rather than betting against an apparently obvious mispricing, they often will bet that a mispricing will continue and become even more extreme.
That's the theory, at least. And it only partially applies in individual cases such as the letters edited by Schultz, Dines and Ruff.
But, clearly, these three advisers would have constructed far more profitable model portfolios this year if they had known that the financial collapse they have so long warned us about would happen in 2008.
Fuld Sought Buffett Offer He Refused as Lehman Sank
By Yalman Onaran and John Helyar
Nov. 10 (Bloomberg) -- It was the afternoon of Sept. 9, and tensions were rising in the 31st-floor office of Lehman Brothers Holdings Inc. Chief Executive Officer Richard S. Fuld Jr.
That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 p.m., Lehman's already battered stock had plunged another 43 percent.
Fuld was rat-a-tatting orders to associates seated at a table in his corner office, one wall of which featured photographs of lions taken by the boss himself in Africa. Herbert ``Bart'' McDade, installed as president in June, Vice Chairman Thomas A. Russo and Chief Financial Officer Ian T. Lowitt had been in and out of Fuld's lair all morning. Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.
``Here we go again,'' Fuld erupted at one point, the person recalled. ``Perception trumping reality once more.''
It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike. He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest. Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?
Fuld was grounded enough in reality to know one thing: ``We've got to act fast,'' he said, ``so this financial tsunami doesn't wash us away.''
Financial Armageddon
Six days later -- 158 years after its founding as a cotton brokerage in Alabama -- Lehman Brothers was gone. Treasury Secretary Henry M. Paulson Jr. said he didn't want to use taxpayer money to save Lehman, as the government had done in March when it pledged $29 billion to facilitate the sale of failing Bear Stearns Cos. to JPMorgan Chase & Co. Federal Reserve Chairman Ben S. Bernanke insisted there was nothing the government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.
Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.
Biggest Bankruptcy
The end came after months of frantic activity to find a solution -- reaching out to, then spurning an offer from Berkshire Hathaway Chairman Warren Buffett; meeting with executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.
Then, on the morning of Sept. 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched. The government persuaded a syndicate of banks to backstop a new entity that would take over $55 billion to $60 billion of Lehman's troubled assets, and London-based Barclays Plc agreed to acquire the rest of the firm, according to people familiar with the negotiations.
When the U.K.'s Financial Services Authority refused to sign off on the Barclays purchase late that morning, U.S. officials refused to take any steps to save the deal. At about 2 a.m. on Monday, Sept. 15, Lehman filed the biggest bankruptcy in U.S. history.
`Guilty Firm'
``Wall Street was giving the impression that after some bloodletting the crisis would be over, and the government bought that line,'' said Charles R. Geisst, author of ``100 Years on Wall Street'' and a finance professor at Manhattan College in New York. ``The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line.''
The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world. By Tuesday, Paulson and Bernanke had reversed course, agreeing to an $85 billion bailout of foundering American International Group Inc., at the time the world's largest insurer. The government has since decided to make $250 billion of capital infusions to bolster major U.S. banks. Only Lehman has paid the ultimate price of the financial meltdown to date -- obliteration by bankruptcy.
Reputation in Tatters
It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three U.S. attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.
Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy.
In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.
When asked why AIG was saved and Lehman wasn't, he leaned into a microphone, scowled and slowly replied: ``Until the day they put me in the ground, I will wonder.''
Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after testifying at a congressional hearing.
Fuld's Career
The fall of Lehman isn't another tale about an overmatched or under-engaged CEO. For the 16 years Fuld presided over Lehman, he was considered one of the industry's most skilled chief executives, boosting the firm's profit from $113 million in 1994 to $4.2 billion last year and multiplying its share price 20 times. Fuld was no E. Stanley O'Neal or Charles O. ``Chuck'' Prince, late of Merrill Lynch & Co. and Citigroup Inc. respectively, who'd gotten top jobs without being steeped in their institution's businesses. Nor was he a James ``Jimmy'' Cayne, who played bridge while New York-based Bear Stearns burned.
Fuld lived for and identified with his firm. It was his oxygen, a friend says. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades. When Fuld began working at Lehman in 1969, messengers lugged bags of stock certificates between brokers' offices to complete trades. His rise embodied the triumph of the trader and of the outsize bonus -- he took home about $300 million over the past eight years.
Starting on Lehman's commercial-paper desk, Fuld became a formidable fixed-income trader. He maintained a reputation as a keen risk manager until it became clear Lehman had taken on too many bad mortgage-related assets.
Quant Concoctions
The difference between risk management in the 1980s and in the new millennium was like the difference between playing checkers and three-dimensional chess. The instruments Lehman issued had become more complex than commercial paper, the stakes incomparably higher.
It was the same all over Wall Street. While CEOs of Fuld's generation spent their days in top-floor offices taking meetings, the firms' quants were downstairs cooking up synthetic financial gizmos and mind-bending trading strategies. What they concocted might produce monster profits -- or prove a Frankenstein's monster.
``Fuld took a franchise he'd built from almost nothing, brick by brick, and then trashed it in less than two years,'' said Sean Egan, president and founder of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``His biggest mistake was in not understanding the risks that had evolved since he was last active in debt markets. And he relied on the support of others whose interests were aligned with him.''
`The Gorilla'
A CEO needs good managers reporting to him to figure out the right risk-reward ratios and make the right decisions. Increasingly, Fuld wasn't getting good dope. He became isolated in recent years, people familiar with the firm's operations said. He countenanced little debate and delegated more responsibility to Joseph M. Gregory, 56, who became president and chief operating officer in 2004.
An intimidating figure -- he played in international squash competitions when he was younger and is still fit -- Fuld was known around the office as ``the Gorilla.'' His icy stare, people who worked at Lehman say, froze recipients with fear. No one wanted to tell Fuld something was wrong or to question how Lehman was run.
As it turned out, one of the lessons Fuld took away from Lehman's decline in the 1980s would contribute to its collapse in 2008.
Glucksman vs. Peterson
The earlier crisis grew out of a power struggle between two senior partners: Lewis Glucksman, who headed trading and was Fuld's mentor, and Peter Peterson, who ran investment banking. Glucksman maneuvered Peterson out of the chairmanship, setting off a rift between traders and bankers that so weakened the firm it wound up being acquired by American Express Co. in 1984.
It was traumatic for the partners, since the dispute cost them their independence and considerable income. When Lehman was spun off in 1994, Fuld vowed that no one would ever do unto him as Glucksman had done unto Peterson. For Fuld, that meant not having a strong No. 2.
Christopher Pettit, a longtime friend and ally of Fuld's, was forced out as chief operating officer when he balked at an executive reorganization in 1996. (He died three months later in a snowmobile accident.) Six years would go by before Fuld installed another chief operating officer. In the meantime, Fuld pushed potential rivals aside, say people familiar with the firm's operation. Michael F. McKeever, who ran investment banking, was stripped of his duties bit by bit and left in 2000. John Cecil, chief financial officer until 2000, was demoted to an adviser because he dared oppose Fuld, the people say.
Gregory's Role
The man Fuld finally appointed chief operating officer was Gregory, a trusted lieutenant who had worked at Lehman since 1974. He would make it his mission to keep Fuld's life uncomplicated by debate.
Any meeting with Gregory, say people who worked with him, was a soliloquy. The COO delivered lectures on matters as minute as improving the look of sloppy dressers. Management-committee meetings were conducted without discussion, attendees say.
The same was true of executive-committee meetings presided over by Fuld. While reviewing budgets for 2007, one committee member questioned the performance of a unit, according to a person who was in the room. Fuld stared at him coldly, then broke the silence: ``You've got some balls to say that, knowing how much I hate that topic.''
Authoritarian Climate
As Fuld returned to studying the papers in front of him, Gregory continued dressing down the committee member for his impertinence. He also upbraided him after the meeting, demanding that any objections be brought to Gregory privately and not voiced in front of the committee. Gregory didn't return calls seeking comment.
Word on proper comportment spread through the ranks. Fuld conducted an employee webcast every three months. He'd always end by asking if there were any questions. There rarely were.
The problem with this authoritarian climate was that when Lehman began to sputter, Fuld was cut off from dissenting opinion. Woe to the messenger who came to the 31st-floor bearing bad news.
The refusal of fixed-income chief Michael Gelband to play the yes-sir game cost him his job -- and Lehman one of its best risk managers. He was forced out by Gregory in May 2007, people familiar with the circumstances say. Four months later Gregory also shunted aside risk chief Madelyn Antoncic, when she fought for hedges on some of Lehman's investments. She was demoted to a peripheral government-relations job.
`Cheap Tar'
Gregory also set factions within Lehman against each other, the people say. New York executives, led by McDade, then head of equities, jousted with those in London, who gathered around international operations chief Jeremy M. Isaacs and who believed they deserved more power because the firm's top growth areas were outside the U.S. The intercontinental rivalry would prove a critical fault line for Lehman.
As cut off from information as Fuld may have been, it wasn't as if he didn't recognize the firm's problems. In November 2004, more than two years before the bull market reached its peak, Fuld was telling people around him that low interest rates and cheap credit would create a bubble that could one day pop.
``It's paving the road with cheap tar,'' he told colleagues in a meeting at the time. ``When the weather changes, the potholes that were there will be deeper and uglier.''
AIG Approach
Fuld also warned against taking on too much risk, such as leveraged loans, which are used to finance buyouts of firms, as Lehman tried to compete with commercial banks that used their bigger balance sheets to support investment banking operations. ``We're vulnerable if we throw our balance sheet around,'' Fuld said, according to a person at the meeting.
As early as March 2006, Fuld approached Martin J. Sullivan, then CEO of AIG, about a possible merger. Fuld saw Lehman becoming the investment banking unit of the insurer. A combination would have given Lehman a trillion-dollar balance sheet, funded by stable insurance premiums, which it could use to provide leverage to its clients, Fuld told his executive committee at an offsite at the Fairmont Turnberry Isle Resort & Club near Miami, according to a person who attended the meeting.
Sullivan wasn't interested, and the proposal didn't go beyond the initial contact, the person said. Sullivan, who left AIG in June 2008, didn't return calls seeking comment.
False Comfort
Lehman used its balance sheet to finance leveraged buyouts anyway. So did other Wall Street firms forced to compete with commercial banks, which were allowed to practice investment banking after the 1999 repeal of the Glass-Steagall Act.
Leveraged loans weren't Lehman's undoing, though. Fuld saw the dangers they posed and rid the firm of the riskiest ones in the fourth quarter of 2007, according to company filings.
What Fuld failed to do is take advantage of a rebound in the prices of fixed-income assets at the time to sell some of Lehman's $84 billion mortgage portfolio. He took false comfort in having hedged the firm's mortgage positions at the end of 2006. Because of the hedges, insiders say, Lehman executives were sanguine after the July 2007 implosion of two Bear Stearns hedge funds that had invested in subprime securities. Fuld even loaded up on mortgage-backed securities at the beginning of 2008, not seeing how vulnerable the firm would be when the subprime cancer metastasized to other asset classes.
Davos Predictions
The disconnect was on display at the World Economic Forum in Davos in January. On the one hand, Lehman Vice Chairman Russo, 65, presented a paper entitled ``Credit Crunch: Where Do We Stand?'' predicting the reset of interest rates on $550 billion of subprime mortgages in the next 12 months would trigger foreclosures and economic woe. On the other hand, Russo said it was no big deal for Lehman. ``Dick Fuld is very conscious of risk,'' he said in a Bloomberg TV interview. ``He's created a culture that's enabled us to do fine.''
Others weren't so sure. A Lehman employee of more than 20 years says she sat her subordinates down in January and told them to start considering options outside the firm.
By the end of the fiscal first quarter in February, after New York-based rivals Citigroup and Merrill had taken about $45 billion in writedowns, Lehman's mortgage portfolio had increased by 2 percent from the previous quarter. Associates say Fuld had concluded the market for mortgage-backed securities had hit bottom, and he didn't have people around him to warn about the spread of subprime troubles to so-called Alt-A mortgages --those made to borrowers without full documentation -- and the commercial real estate market.
Callan Appointment
Roger Nagioff, 44, a London equities trader who succeeded Gelband as fixed-income chief, was struggling to learn the business as the subprime rout began. He quit in February 2008 after realizing he couldn't get his head around Lehman's mortgage-related positions, people close to Nagioff said.
Lehman also had a rookie chief financial officer. Erin M. Callan, a 43-year-old investment banker, had been elevated to the job in December by Gregory, although she had no experience in the company's treasury, a typical training ground for CFOs. Fuld went along with the appointment and allowed her to become the public face of Lehman because he trusted Gregory and didn't get involved in staffing decisions, people say.
On March 17, a day after the sale of Bear Stearns, Lehman shares fell as much as 48 percent in New York Stock Exchange trading on concern the firm would be Wall Street's next victim.
Counter-Punching
To Fuld, the idea was outrageous. The hit was a matter of wrong perceptions, not weak fundamentals. So he got on the phone with the firm's biggest clients to tell them Lehman was no Bear Stearns, and he ordered other executives to do the same.
This was pure Fuld: When bloodied, counter-punch. That's how he turned things around in 1998, when Wall Street rumors had Lehman over-exposed to the Russian currency collapse and the ``Asian flu.'' His jawboning with clients, regulators and others pulled Lehman's stock out of a spiral from $21 to $6.
This time around Fuld also reached out to Omaha billionaire Buffett, the man who had ridden to the rescue of Salomon Inc. in 1987, according to two people with knowledge of the approach. He asked investment banking chief Hugh ``Skip'' McGee, 49, to call David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings Co., and see if Buffett might be interested in a stake in Lehman.
Spurning Buffett
The answer was yes, Sokol told McGee. So Fuld called the 78-year-old Buffett. Berkshire Hathaway would buy preferred shares that would pay a dividend of 9 percent and could be converted to common at the then-market price of $40, the people said. That was costlier than what other investors demanded, Fuld was told by associates, and he spurned the offer. A few days later, on April 1, Lehman sold $4 billion of convertible preferred stock to public investors with a 7.25 percent interest rate and a 32 percent conversion premium.
That meant those buying the convertibles were willing to pay one-third more than the market price for Lehman's shares if and when they wanted to convert. Buffett was willing to pay only the going price at the time, which would have meant more dilution for existing shareholders. A spokeswoman for Buffett declined to comment.
Fuld had saved some money, yet he rebuffed a Buffett stake, considered to be corporate America's Good Housekeeping seal of approval. Although that might have helped Lehman in the short run, it wouldn't have solved the firm's fundamental problem: Fuld needed to sell the entire mortgage-related portfolio at whatever price he could get and raise enough capital to cover the losses incurred in such a sale.
`Huge Brand'
Six months later Goldman Sachs Group Inc., the most profitable investment bank, agreed to even harsher terms with Buffett -- paying him a 10 percent annual return on a $5 billion investment. Yet the market had deteriorated so much by then that even the billionaire's blessing wasn't enough. Goldman's shares fell 36 percent in the two weeks after the deal was announced, only to recover after the government stepped in to buy stakes in the biggest U.S. banks.
Lehman's April 1 stock sale sent a signal that the firm continued to have access to capital and the confidence of investors and the government. Its shares rose 26 percent in the following three weeks. At a dinner at the Treasury Department on April 11, where Fuld chatted with Paulson, he came away with the impression, as he wrote in an e-mail to Russo that night, that we ``have huge brand with treasury'' and that Paulson ``loved our capital raise.'' The e-mail was later made public by U.S. Representative Henry A. Waxman, chairman of the House Committee on Oversight and Government Reform.
Finding a Buyer
Paulson would complain, in interviews with the New York Times and Charlie Rose after Lehman's demise, that he couldn't get Fuld off the dime in finding a buyer for Lehman. Brookly McLaughlin, a Treasury spokeswoman, said Paulson ``spoke to Fuld quite often'' between April and September. She wouldn't divulge the frequency or substance of their conversations. Fuld took Paulson's request to mean he should find a strategic partner to buy a stake in Lehman, which he was already searching for, according to people close to the CEO.
Why Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.
``Dick was so proud of Lehman that he was slow to recognize that others didn't share that belief,'' said George L. Ball, chairman of Houston-based investment firm Sanders Morris Harris Group Inc. and a friend of Fuld's.
`Hurting Einhorn'
One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall Street elite on the black-tie circuit. He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.
Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes. David Einhorn, president of Greenlight Capital Inc., a New York-based hedge fund, became enemy No. 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Callan's credibility.
The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 e-mail to Fuld from Lehman executive David Goldfarb, released by Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, ``hurting Einhorn bad!!'' Fuld's response: ``I agree with all of it.''
Bear Stearns Precedent
Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential-mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman -- at least not for the moment.
Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash. The Bear Stearns precedent, in which the government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.
Lehman sold $16 billion, or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses. Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a $2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another $6 billion in capital from investors.
Strategic Partner
The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Gregory. Callan was also pushed aside, replaced by Lowitt, 44.
One of the first things McDade did was to bring back Gelband, 49, to help him sort out the mess. He also asked investment banking chief McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 percent.
While the firm had been in talks with potential partners in the previous three years -- including Japan's Mizuho Financial Group Inc. and China's Citic Group and Ping An Insurance (Group) Co. -- they were always with the intention of cooperation in Asia, where Lehman was weaker than most of its rivals.
GE, Citic, KDB
Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America Corp. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina-based rival, which would own about 40 percent of the new entity. While CEO Kenneth D. Lewis wasn't keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.
Fuld also reached out to General Electric Co. CEO Jeffrey R. Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings Plc went nowhere. And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.
Only the Korea Development Bank seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May. In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 percent of the firm for $22 a share, about where the shares were trading at the time. Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued. By early September, Min was only willing to pay about $8 share, the executives said.
Codename Spinco
``The gap in assessing the size of potential writedowns was just too big,'' Min told reporters in Seoul on Sept. 16.
Some involved with the negotiations say Fuld and McDade didn't want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his government to do a deal, so he kept lowering the price to make sure it wouldn't happen. Min told legislators in Seoul on Sept. 18 that Lehman was unwilling to accept less than $17.50 a share.
Meanwhile, worried that his lieutenants wouldn't be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial-mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.
Management Shift
The U.S. Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: It would take at least three months to meet SEC requirements. Lehman didn't have three months.
The firm's announcement of another management shuffle on Sept. 7 hardly buoyed confidence. Isaacs, the international operations chief and former rival of McDade's, was out, as was Andrew J. Morton, global head of fixed income. Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.
Hedge Fund Squeeze
The beginning of the end came two days later when the KDB talks fell apart.
``The possibility of a Lehman deal wasn't big from the very beginning,'' Jun Kwang Woo, chairman of South Korea's Financial Services Commission, said after the collapse. Still, by Sept. 9, it was all Lehman investors had to pin their hopes on. With shares trading at $7.79 a share, below what KDB had been willing to pay a few days earlier, Lehman had a market value of $5.4 billion, one-sixth of what it had been a year earlier.
The cost of insuring Lehman's debt surged by almost 200 basis points after the KDB news, rising to 500, still not as high as where Bear Stearns's credit-default swaps were trading before its collapse. (A basis point equals one-hundredth of a percentage point.)
That caused Lehman's hedge fund clients to pull out, and short-term creditors cut lending lines. New York-based JPMorgan, Lehman's clearing agent for trades, demanded additional powers to seize cash and collateral in the firm's accounts.
$3.9 Billion Loss
The next day, Sept. 10, Fuld pre-announced quarterly results -- a $3.9 billion loss, after $5.6 billion of writedowns. He also said Lehman would auction off a majority stake in its asset-management division, and he revealed his Spinco plan. He was still talking defiantly.
``We have a long track record of pulling together when times are tough,'' Fuld said on a conference call with investors. ``We are on track to put these last two quarters behind us.''
Once again, Fuld was a step behind events. Before the day was out, Moody's Investors Service said it was reviewing Lehman's credit ratings and that it would downgrade the firm unless it made a deal with a strategic partner. Lehman's shares fell another 42 percent the next day to $4.22.
As things were spinning out of control, Fuld turned to the federal regulators with whom he had been talking since the demise of Bear Stearns.
He had approached Timothy F. Geithner, 47, president of the Federal Reserve Bank of New York, in July to see whether Lehman might become a bank-holding company, which would allow it to widen its funding base. Geithner was cool to the idea, according to a person familiar with the discussions, saying it wouldn't solve the problem of Lehman's troubled assets. Fuld never made a formal application.
Fed `Haircuts'
Now, Fuld went back to Geithner. With Lehman running out of cash -- it had only $1 billion left by week's end -- it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets didn't fit the criteria for collateral, Bernanke would later say. The Fed also raised its ``haircuts,'' or collateral requirements, a person familiar with the discussions said, making it harder for Lehman to borrow from the facility.
Meanwhile, Paulson was putting out the word there would be no more federal bailouts, that the government couldn't rescue every failing investment bank.
With the clock running out, Lehman executives reached out again to Bank of America. They also called Barclays, the second- largest U.K. bank by market value, and Nomura Holdings Inc., Japan's biggest brokerage. The message went out: Fuld was ready to sell.
Paulson's Pledge
On Sept. 12, one team of Lehman executives was camped out at the Lexington Avenue offices of New York-based law firm Simpson Thacher & Bartlett LLP, showing the firm's books to Barclays. Another group was at the Park Avenue office of Sullivan & Cromwell LLP doing the same for Bank of America. CEO Lewis agreed to the talks after Paulson urged him to consider a deal, a person with knowledge of the discussions said.
Two other Lehman executives -- McDade and Alexander Kirk, global head of principal investing -- were dispatched to the New York Fed on Liberty Street, where Geithner and Paulson had gathered a group of Wall Street leaders. There, Paulson reiterated that no taxpayer money would be used to save Lehman. He challenged the group to find a private solution to rescue the firm, saying it was in their own best interests.
Barclays Deal
One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.
That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.
Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.
No Lifeline
Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.
``The only reason it didn't happen,'' Leigh Bruce, a Barclays spokesman said today, ``is that there was no guarantee from the U.S. government, and a technical stock-exchange rule required prior shareholder approval for us to make a similar guarantee ourselves. We didn't have that approval, so it wasn't possible for us to do the deal. No U.K. bank could have done it. It was a technical rule that could not be overcome.''
At that point, the only way to save the deal would have been for U.S. regulators to make the temporary debt guarantee. They didn't. Paulson, who told the New York Times he didn't have the authority to rescue Lehman, didn't answer questions about Sunday's events submitted by Bloomberg. Nor did Geithner.
Failure's Furies
Fuld thought Paulson was in his corner, he told a person familiar with events, even as the Treasury secretary publicly resisted spending taxpayer money to help Lehman. Fuld was stunned, the person says, when Paulson didn't throw him a lifeline at the end.
It was McDade who called Fuld from the Fed meeting on Sunday afternoon, not Paulson. Far from helping Lehman, Paulson, Geithner and other officials, including SEC Chairman Christopher Cox, began pressing Lehman to declare bankruptcy. McDade told them that would have serious repercussions for other firms. Wall Street executives gathered at the Fed said a bankruptcy wouldn't be the end of the world. Goldman Sachs and Morgan Stanley both had war rooms with charts detailing Lehman's subsidiaries and their exposure to each one, and they thought their potential losses would be limited.
No one, not even Lehman, knew what furies the firm's failure was about to unleash.
Restless Nights
The end came at about 2 a.m. Sept. 15, when Fuld, out of running room, filed for bankruptcy. That day the Standard & Poor's 500 Index had its biggest daily drop since the September 2001 terrorist attacks, and bank-lending rates soared. Paulson, who was poised to let AIG fail, quickly re-thought the wisdom of that decision and approved an $85 billion bailout. He and Bernanke also went to Congress to push for a $700 billion federal bailout to buy bad assets from troubled banks.
Only Lehman ended up in the wrong place at the wrong time.
Fuld was hard-pressed to explain his fate when he appeared in front of Waxman's committee on Oct. 6. To many of the congressmen's hostile questions and accusations, he had no answers. ``I wake up every single night,'' Fuld said, ``thinking, `What could I have done differently?'''
It might have ended differently had Fuld not risked so much on mortgage-backed securities. It might have ended differently had Fuld been willing to acknowledge Lehman's falling valuations. It might have ended differently if Fuld had made a deal in June, or July, or August.
That would have required acknowledging that time had run out on Wall Street's over-leveraged, overpaid gilded age. Instead, in his stubbornness and isolation, Dick Fuld failed to save the firm he lived for.
WASHINGTON (AP) – Federal bank regulators have rejected a request by banks and consumer advocates for a program to let lenders forgive huge portions of credit card debt.
The Office of the Comptroller of the Currency rejected the request for a special program that would allow as much as 40 percent of credit card debt to be forgiven for consumers who don't qualify for existing repayment plans.
An unusual alliance of financial industry interests and consumer advocates, represented by the Financial Services Roundtable and the Consumer Federation of America, made the request to the Treasury Department agency on Oct. 29. It demonstrated the urgency of the situation in a deepening economic crisis: consumers — even those with strong credit records — defaulting at high levels on their credit cards, while banks battered by the credit crisis bleed tens of billions from the losses.
An agency official said the government objects to allowing banks to defer losses for several years on the forgiven debt, as would occur in accounting by lenders under the special program.
The agency "does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," Timothy Long, senior deputy comptroller for bank supervision policy, said in a letter to the two groups dated Monday and made public Wednesday.
"The timely identification, reporting and management of credit losses, along with adequate loan-loss reserves and capital levels, provide the public with ... confidence" in the banking system, Long wrote.
The Financial Services Roundtable, which represents more than 100 large banks, brokerage firms and insurance companies, will "continue to look for ways to help consumers in these extraordinary times," said the group's senior vice president, Scott Talbott.
Travis Plunkett, legislative director of Consumer Federation, said that with the number of deeply indebted consumers growing dramatically, "we still hope to work with bank regulators or Congress to create an alternative" to bankruptcy for them.
Under the proposal, borrowers would be able to defer payment of income taxes they owe on the forgiven part of the credit card debt until after the remainder was paid off. The lenders could wait until then to book their losses on the forgiven debt.
The two groups hoped such a pilot program would become permanent and that as many as 50,000 people struggling with credit card debt would be involved. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower's financial situation, up to a maximum of 40 percent. Consumers would be allowed to pay back the remainder over several years.
The largest credit-card banks each set aside between $1 billion and $3.5 billion in the third quarter for losses on card loans as their profits plummeted.
The biggest credit card lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.
Credit card charge-off rates, balances written off as unpaid, rose to 6.8 percent in August, up 48 percent from a year earlier, according to Moody's Investors Service.
Americans are weighed down by about $900 billion in credit card debt, according to the latest available Federal Reserve figures.
Fighting the financial crisis has put the U.S. on the hook for some $5 trillion a report says. So far.
For all the fury over Treasury Secretary Henry Paulson's $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government's response to the credit crisis.
According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.
The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets.
The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.
The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group. It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG's residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps.
The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae and Freddie Mac, to the tune of $200 billion.
The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.
Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.
Paulson and Bernanke have tried any number of ways to stop the free fall in housing prices and unfreeze the credit markets, with limited success. Rates that banks charge each other for three-month loans have dropped to 2.1% over the corresponding Treasury security, from their high of 4.8% in October. But lending is contracting as banks brace for rising credit costs and corporate borrowers hunker down.
The Treasury has turned its focus from attempting to buy troubled assets from banks, which was the original intent of the October Emergency Economic Stabilization Act, to injecting capital in the form of preferred equity stakes.
It started out with $125 billion worth of investments in eight major U.S. banks and has since expanded the program to an increasingly broad range of financial and nonfinancial companies. And with just $60 billion left of its initial $350 billion authorization under the emergency act, the Treasury faces a growing number of companies--including Detroit's automakers--begging for assistance.
David Hendler, an analyst at CreditSights, says it looks as if government is left holding the bag, and of course that translates into everyone.
"The losses have to be taken, but no one wants to take them," Hendler said at a conference Wednesday, speaking about the banks and their handling of troubled assets. "It seems like the taxpayers are going to be taking a good portion of that."
Russia Stocks Slide, Kuwait Shuts as Oil Roils Emerging Markets
By Denis Maternovsky and Laura Cochrane
Nov. 13 (Bloomberg) -- Russian stocks plunged and Kuwait suspended trading as the slump in oil to below $55 a barrel roiled emerging markets and increased concern that the ruble will be devalued.
Russia's Micex Index fell as much as 17 percent and was 8.6 percent lower at 1:09 p.m. in Moscow after it reopened following a 30-minute trading suspension. A court in Kuwait ordered a shutdown as traders lobbied for support after a sixth day of declines. The MSCI Emerging Markets Index slid 2.9 percent to 518.22, adding to an 8.5 percent drop since Nov. 11.
``Alarm bells are ringing,'' said Tom Fallon, head of emerging-market research at La Francaise des Placements in Paris, which manages $11 billion. ``Weaker oil raises a number of issues for deterioration in terms of trade and budget assumptions which are now being seriously called into question.''
Oil reached a 21-month low as the International Energy Agency lowered its 2009 global oil demand estimate by 670,000 barrels a day, or 0.8 percent, and Germany became the biggest economy to enter a recession this year. Oil is approaching ``worrying'' levels that may cause the ruble to weaken by as much as 9 percent against the dollar by the end of the year, Igor Yurgens, an adviser to President Dmitry Medvedev, said in Bloomberg Television interview late yesterday.
Oil, Russia's chief export, has fallen 63 percent since the July-high of $147. The ruble has plunged 21 percent against the dollar in the past four months, even as the central bank sold 16 percent of its currency reserves in an attempt to arrest declines. Reserves dropped $9.2 billion last week to the lowest this year at $475.4 billion, central bank said today.
Default Swaps
The ruble was 0.1 percent lower against the dollar at 27.5968 today. The ruble, which is managed against a basket of dollars and euros, will probably fall to 30 per dollar by the end of 2008, said Yurgens, who heads Moscow's Institute of Contemporary Development.
``Depreciating is almost inevitable,'' he said in a Bloomberg Television interview from Cannes, France. ``They will be depreciating the ruble, but in a very smooth way, not to create panic.''
The cost of contracts protecting against a Russian government default jumped to the highest in two weeks at 8.19 percent of the amount insured, up from 7.59 percent yesterday, according to credit-default swap prices from CMA Datavision in London.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.
OAO Rosneft, Russia's biggest oil company, was 9.9 percent lower after dropping as much as 25 percent in Moscow trading.
Trading Halt
The Kuwait Stock Exchange halted trading after a court ordered its closure to protect investors from further losses. The bourse's main index slid 31 percent this year. The market will stay closed until Nov. 17 when the court will sit again to consider whether to extend the suspension.
The stock exchange ``didn't agree to this out of any great conviction,'' John Lomax, a strategist at HSBC Holdings Plc wrote today in a research note. ``This was more a concession to political pressure. It may just buy some time for the weakened local investment companies to deal with and reschedule particularly external debts.''
Poland's WIG 20 Index declined 4.1 percent after three of the countries biggest energy companies reported earnings that missed estimates.
Bulgaria's benchmark stock index declined 5.3 percent, while Indonesia's Jakarta Composite Index fell 5 percent. The Indonesian rupiah fell 3.2 percent again the dollar, as the South Korean won and Indian rupee each dropped 2.4 percent.
The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries rose 1 basis point to 6.54 percentage points after a 61 basis-point increase yesterday, according to JPMorgan Chase & Co.'s EMBI+ Index.
LG Display, Sharp Shares Fall on Price-Fixing Fine
By Kevin Cho
Nov. 13 (Bloomberg) -- LG Display Co., Sharp Corp. and Chunghwa Picture Tubes Ltd. tumbled in Asian trading after the three liquid-crystal-display makers agreed to plead guilty and pay $585 million in fines for conspiring to fix prices.
LG Display, based in Seoul, dropped 11 percent to close at 20,100 won on the Korea Exchange. Osaka-based Sharp lost 8.4 percent on the Tokyo Stock Exchange. Chunghwa Picture fell by the 7 percent daily limit to an eight-year low in Taipei.
The fines will further undermine the LCD makers' earnings at a time when a glut in the $82 billion industry is driving down prices and forcing manufacturers to scale back production plans. The $400 million that LG Display, the world's second-largest LCD maker, agreed to pay is the second-highest criminal fine the U.S Department of Justice's antitrust division has imposed.
``This adds to the negative sentiment that's already plaguing the industry,'' said Jason Kang, an analyst at Daewoo Securities Co. in Seoul. ``The fine is bigger than expected and it will be difficult to predict favorable results from other regions such as the EU.''
Sharp will pay $120 million and Taoyuan, Taiwan-based Chunghwa Picture Tubes will pay $65 million for conspiring with LG Display and other unnamed companies, the Justice Department said yesterday.
Regulators in the U.S., South Korea, Japan and Europe first disclosed in December 2006 that they were investigating LCD makers, including industry leader Samsung Electronics Co., of price fixing.
Japanese, Korean Investigations
Japan's Fair Trade Commission is still conducting a separate investigation into price-fixing activities in the country, Toshiyuki Nanbu, director of management and planning at the regulator, said today, declining to say when a ruling may be made.
South Korea's antitrust regulator is also continuing its probe, Kim Dae Young, an official at the Korea Fair Trade Commission' International Cartel Division, said today.
Miwako Suetsune, a spokeswoman at the European Commission Delegation in Tokyo, wasn't immediately available for comment.
LG Display, Chunghwa and others met several times from 2001 to 2006 in so-called ``crystal meetings'' to set prices on desktop computer, laptop and television screens, Assistant Attorney General Thomas Barnett, who heads the antitrust division, said yesterday.
Under the plea deal, Sharp Chairman and Chief Executive Officer Katsuhiko Machida and other company directors will give back 10 percent to 30 percent of their compensation for three months beginning in December.
``Sharp understands the gravity of this situation and will strengthen and thoroughly implement measures to prevent the recurrence of this kind of problem,'' it said in a statement.
Over Five Years
LG Display will pay the fine over five years from 2009 and reflect the entire amount as non-operating expenses this quarter, said Park Sang Bae, a spokesman for the company. The panel maker said in a statement it doesn't expect its relationship with customers and future sales to be affected.
``We haven't engaged in any meetings nor communications on the matter with other LCD makers since the lawsuit started, and we will ensure we won't do so in the future,'' James Wu, chief financial officer of Chunghwa Picture, said by telephone.
Wu said the $65 million fine won't be booked as a one-time expense because the company had set aside special funds for legal expenses every month for some time.
Samsung, AU Optronics Corp. and Chi Mei Optoelectronics Corp. were among companies that said in 2006 they were being investigated for price-fixing.
Case Ongoing
``Samsung has pledged full and continuous cooperation with the DOJ's ongoing investigation,'' James Chung, a spokesman for the Suwon, Korea-based company, said today.
Yawen Hsiao, an AU spokeswoman, said she couldn't immediately comment, while Denis Chen, a finance director at Chi Mei, declined to comment.
LG Display said last month its third-quarter net income fell 44 percent while Samsung also posted a 44 decline in profit from LCDs because of falling panel prices. AU Optronics, the world's third-largest LCD maker, reported a bigger-than-estimated decline in quarterly profit.
Under EU rules, companies can be fined up to 10 percent of annual revenue for breaking antitrust laws. In Japan and South Korea, penalties may be as high as 10 percent of the related product's sales during the period of the offense.
Record EU Fine
Cie. de Saint-Gobain SA, Asahi Glass Co., and a Nippon Sheet Glass Co. unit were fined a record 1.38 billion euros ($1.7 billion) this week by the European Union over claims the companies fixed the price of car windows. Saint-Gobain, Europe's largest building-materials supplier, was fined 896 million euros, the highest against a single company, the European Commission said in a Nov. 12. statement.
In 2006, consumers sued LCD makers over price fixing, citing enforcement raids and investigations in Asia and Europe and a criminal grand jury investigation in San Francisco. Lawsuits filed in various states allege that the companies illegally conspired to fix prices for computer laptop and desktop monitors. The complaints, consolidated in San Francisco, seek unspecified damages and a refund for consumers.
In August this year, a federal judge refused to fully dismiss consumer claims against the companies.
GE Wins FDIC Insurance for Up to $139 Billion in Debt
By Rachel Layne and Rebecca Christie
Nov. 12 (Bloomberg) -- General Electric Co. said the U.S. government agreed to insure as much as $139 billion in debt for lending arm GE Capital Corp., the second time in a month it has turned to a federal program designed to help companies during a global credit crunch.
Granting GE Capital, which isn’t a bank, access to a new Federal Deposit Insurance Corp. program may reassure investors and help the unit compete with banks that already have government protection behind their debt, said Russell Wilkerson, a spokesman for the Fairfield, Connecticut-based company. Coverage would be for about $139 billion, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.
“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Wilkerson said. GE sent investors an e-mail about the program today and posted the letter on its Web site. “Our participation is a positive development for our investors.”
GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. GE last month started using a new Federal Reserve program designed to revive demand for commercial paper amid the global crisis.
The company’s exposure to the deepest global financial crisis since the 1930s has cut its market value by more than half this year, as Chief Executive Officer Jeffrey Immelt twice lowered his target for 2008 profit. GE fell $1.52, or 8.5 percent, to $16.29 at 4:15 p.m. in New York Stock Exchange composite trading amid a broad decline in U.S. stocks. The shares are at their lowest level since January 1997.
Increased Confidence
Credit default swaps on GE Capital, which rose in London earlier today, dropped 21 basis points to 391 basis points in New York, CMA Datavision prices show. A decline suggests an increase in investor confidence. GE Capital’s 5.625 percent notes due in 2018 jumped 2.2 cents on the dollar to 89.9 cents, the highest since September, for a yield of 7.1 percent as of 4:26 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service.
U.S. regulators introduced the FDIC program Oct. 14, making the insurance automatically available for banks on debt issued through June 30, 2009. Affiliated non-bank units have to apply separately, as GE did. Like the banks, GE would pay a premium for the insurance. GE said the coverage would begin on or before Nov. 14 and lasts through June 30, 2012.
‘Every Opportunity’
“If you’re a GE shareholder you’d be a fool not to want them to take advantage of every possible opportunity out there,” Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which oversees 6.12 million GE shares, said today. “By the same token there are far more pressing situations at companies that would be beneficiaries of taxpayer generosity. Should we really be expending here?”
The FDIC would gain the right to examine GE’s other finance units as a condition of participation. GE’s bank units already are regulated by the Office of Thrift Supervision. The program doesn’t require the U.S. to take a stake in GE, the e-mail said.
GE Capital, which carries the highest-possible AAA credit rating, includes divisions that are among the world’s largest lenders in commercial real estate, aircraft leasing and private- label credit cards. It also provides financing to help companies emerge from bankruptcy protection and so-called middle-market financing, or loans to smaller and midsized companies.
The unit makes money partly by taking advantage of the spread between the cost of debt it issues and the loans and finance contracts it writes.
FDIC’s Terms
GE’s finance divisions accounted for about half of sales and profit last year, and Immelt has said that percentage may shrink to about 40 percent in 2009. GE said Oct. 10 it still expects profit from the units to be about $9 billion this year.
U.S. regulators expanded the coverage last month after a similar move by European regulators to ease inter-bank lending. The insurance is offered through the FDIC’s Temporary Liquidity Guarantee Program, which also includes expanded deposit coverage for business checking accounts. It guarantees all new senior unsecured debt issued between Oct. 14 and June 30, 2009, up to a cap set for each institution when it signs up.
“All participants are on notice under the terms of the regulation that the FDIC reserves the right to expand their oversight,” Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey, said of the federal program.
The FDIC so far is taking an all-or-nothing approach on the terms of participation. Banks are automatically enrolled, unless they opt out. If a bank holding company joins, all of its banking subsidiaries must also join. Program terms apply to all commercial paper, promissory notes and other eligible debt.
GE Capital Debt
According to its Oct. 10 presentation to investors, GE Capital Services had $536 billion in debt at the end of the third quarter. Of that, commercial paper, or debt due in nine months or less, was $88 billion, or 17 percent. The company issues debt in 18 currencies, with about 60 percent in non-U.S. denominations.
GE Capital has about $81 billion in long-term debt maturing between now and the end of 2009, according to another Oct. 10 chart. Of that, $43 billion comes due by June 30.
GE is already among companies using a new short-term funding facility from the Federal Reserve opened to revive demand for commercial paper, the short-term borrowing that companies use to finance day-to-day operations. GE and its finance entities, top- rated issuers, had issued paper without interruption before tapping the facility.
Fee Structure
Banks have until Dec. 5 to decide whether to opt out of the FDIC program. If they do, they’ll have to start paying premiums for the coverage, which lasts until June 30, 2012. For now, all FDIC-insured banks are automatically covered at no cost.
In general, participating companies “will be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued, and calculated for the maturity period of that debt or June 30, 2012, whichever is earlier,” according to the FDIC interim regulation. The regulation also says no fees will be charged during the first 30 days of the program, and it includes several options for calculating the insurance premiums.
The FDIC now is in the process of revising its interim regulation in response to comments, so the final fee structure may be different.
Andrew Gray, a spokesman for the FDIC, wasn’t immediately available for comment.
New York -- The global economy is entering a slowdown of epic proportions comparable with the period after the 1929 crash, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.
Speaking at the company’s annual banking and financial services conference, Mr Thain said while he was cautiously optimistic about the future of the financial services industry, he lacked optimism about the near-term prospects of the US economy and global markets.
“Right now, the US economy is contracting very rapidly. We are looking at a period of global slowdown,” he told investors. “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slowdown we’re seeing now.”
Mr Thain also said the economic problems afflicting the US, where housing prices and other asset values were falling, would wreak havoc across the world.
“There is no such thing as decoupling,” he said, referring to the popular theory that emerging markets could sustain reasonable growth even while the world’s leading economies suffered recessions. “All equity markets are linked. Each individual economy will be more or less affected, depending on reliance on global trade and commerce.”
But Mr Thain expressed cautious optimism about the financial services industry. Referring to the US government’s $700bn bail-out package and the direct infusion of $125bn to recapitalise the country’s biggest banks, he said “all of that is starting to take effect”.
Mr Thain noted US dollar London interbank offered rates were starting to come down and the commercial paper market was starting to see a return of liquidity. Merrill itself recently issued some three-month commercial paper, he said, instead of the overnight paper that had dominated the market in recent weeks.
Still, he added, there remains “a huge amount of dislocation in credit markets. Although things are starting to improve, this is going to be a long process”.
Mr Thain was most optimistic about the forthcoming combination of his company with Bank of America. The deal would give Merrill Lynch’s wealth management advisers access to BofA’s “huge pool of wealthy individuals”, he said.
Shareholders of both companies are expected to vote on the deal on December 5, with the transaction closing on or about December 31, Mr Thain said.
By MICHAEL FELBERBAUM and VINNEE TONG 11 November 2008
RICHMOND, Va. (AP) -- Facing pressure from vendors and consumers who aren't spending, Circuit City Stores Inc. filed for bankruptcy protection Monday as it heads into the busy holiday season with hopes that the move will help it survive.
Under Chapter 11 protection, the nation's second-biggest electronics retailer can keep operating while it develops a reorganization plan. Its Canadian operations also filed for similar protection.
The company also said it cut 700 more jobs at its Richmond, Va., headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.
In court documents, Chief Financial Officer Bruce H. Besanko cited three factors: erosion of vendor confidence, decreased liquidity and the global economic crisis.
"Without immediate relief, the company is concerned that it will not receive goods for Black Friday and the upcoming holiday season, which could cause irreparable harm to the company and its stakeholders," Besanko said in the filing.
Its shares fell 14 cents, or about 56 percent, to 11 cents on Monday before being halted.
Circuit City, which has had only one profitable quarter in the past year, has faced significant declines in traffic and heightened competition from rival Best Buy Co. and others. The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers.
While the retail industry overall is facing what's expected to be the weakest holiday season in decades, Circuit City's struggles have intensified as nervous consumers spend less and credit has become tighter.
At a hearing in Richmond, U.S. Bankruptcy Judge Kevin Huennekens granted Circuit City interim approval to secure $1.1 billion in debtor-in-possession loans while it is in bankruptcy protection. Those funds, needed to stock merchandise and pay employees, replace a $1.3 billion asset-backed loan the company had been using.
Circuit City also was granted interim approval to abandon 150 leases at locations where it no longer operates stores, which it said costs $40 million annually.
The company, which said it had $3.4 billion in assets and $2.32 billion in liabilities as of Aug. 31, is hoping to exit court protection by early summer 2009, putting it in a position to find a buyer for the chain or operate as a standalone business.
Final approval of the motions will be addressed at a Dec. 5 hearing.
Analysts said much depends on Circuit City's relationship with its vendors and how it handles its real estate issues.
Circuit City is a well-known brand and could re-emerge from bankruptcy, Stifel Nicolaus & Co. analyst David Schick said in a note to investors. "We believe the marketplace has a slot for a higher-end chain with a commissioned sales force," he said.
But Stephen Lubben, a professor at Seton Hall Law School, said Circuit City's survival depends on whether its creditors work with the company "or whether they think they're a lost cause and cut them off permanently."
JPMorgan analyst Christopher Horvers agreed, saying it boiled down to merchandise. "If they can get inventory into the stores, I can think they'll remain competitive."
The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million) and Toshiba ($17.9 million). Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.
Deutsche Bank analyst Mike Baker told investors that consumers learning about Circuit City's bankruptcy may go elsewhere because of a lack of confidence in the company.
At a Circuit City Warehouse Store already slated for closure in Milwaukee, Courtney Bergeron, 29, said he heard the news about the company and figured he should see if there were any deals for flat-screen TVs.
Although he saw some discounts - about 15 percent off televisions at least 32 inches wide - Bergeron figured he should wait.
"On Black Friday, they're probably going to be lower than this," he said.
Bergeron and his friend, Bertha Harris, also 29, said they hadn't shopped much at Circuit City over the years. He said Circuit City's selection was limited, so he ended up buying more electronics from Best Buy and discounter Wal-Mart Stores Inc.
Harris said she was always dissatisfied with service at Circuit City. When she asked questions the workers couldn't answer them on their own, she said.
"They knew as much as I knew about things," she said, adding it wasn't much.
Circuit City announced a week ago it planned to close 155 of its more than 700 U.S. stores by Dec. 31. It is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.
Horvers said the reorganization could help Circuit City get out of leases for certain bad store locations - something Schick said had been one of the company's main issues.
Circuit City "had many problems in the end - but all began, in our view, with holding on to 1980s real estate too long," he wrote.
10 comments:
Wine lovers blend together for new shop and bar
Aubrey Buckingham
13 November 2008
Wine buffs complaining about their pockets being insufficiently lined to enjoy the town’s selection of fine vino can now rejoice – the newly opened Cuvee wine shop and bar aims to bring an eclectic mix of fine wines at prices that won’t force you to take a second mortgage.
The 70-seater bar, which is part of a series of interesting developments on Kangding Road, is in its soft-opening and has an ample selection of 115 everyday wines and a few crus. Wine lovers can pop by for a bottle costing as little as a bit over 200 yuan (US$29) or, if the occasion calls for it, something a little pricier for the desired effect.
“We’re not trying to be like Enoteca or ASC’s Wine Residence,” said proprietor Mathew Ryan, who is also a partner in the Justbeer enterprise that distributes Australian beers locally. “We’re also trying to be not like Senses.”
Ryan, who recently quit his job with Hewlett Packard, was best known in town for Senses Wine Bar and Lounge on Jianguo Road. While it had its heyday, the good times didn’t last forever and the investors eventually came to their wits and sold the venue.
Having been on the periphery of the nightspot business, the Sydney native has learned from mistakes at his previous bar as well as from other operators in the industry. “I’ve actually gone out of our way a bit to be different.”
An indication is the appointment of French manager Paul d’Allad. The Brittany native was previously in charge of the excellent but poorly located Epicvre on Xinle Road, and he will be lending a French touch to proceedings. “It’s not just about New World wine. Here, we’re very much about the French, as well as the Australian, and everything in between.”
Besides Ryan’s pedigree, Cuvee can also draw upon the vino expertise of Summergate’s Andrew Gardiner (the other partners have calculated the risks of exposure and prefer to remain silent for now). While the list currently offers a significant portion from the fine wine distributor, the Australian has actively engaged labels from all distributors to serve customers with the best selection of wines possible.
“When I started Senses, there were four people to buy wine from here we are purchasing from 18 different vendors. Those 115 spaces (on the list), we went through everyone’s lists, narrowed it down to 300 then to 115. We didn’t care if they had one or 15, we just took (the ones we wanted).”
Punters who come to Cuvee can walk into the cellar and pick what they want prices are listed on the bottles themselves, and they can then decide if they wish to take it home or consume it on the premises.
If a whole bottle is too much, then aficionados can also select from one of 10 wines by the glass (five red, five white). The selection is updated regularly, and the wines see enough traffic for a fresh bottle to be opened regularly.
Ryan is also toying with the idea of installing an Enomatic machine for top cuvees by the glass. The machine, which costs nearly 50,000 yuan, keeps wine fresh by pumping the bottles full of inert argon gas. Colourless and odourless, it does not allow wine to react with oxygen and thus oxidize.
One of the features of the chic, slick bar is the 24 wine lockers in a temperature-controlled (air-conditioned) room for members to keep their drops on the premises. While the contents are not insured, the lockers are not intended for punters to store their very best but rather to put aside a small selection of special labels for sharing with the rest of Cuvee’s wine-loving community.
Memberships are available at different levels. The basic package starts at 3,000 yuan and goes up to 20,000 yuan. These offer discounts on wines and corkage as well as invitations to members-only events.
Food is kept simple, with manager d’Allad plumping for large platters for sharing and a crafty cheese selection. A hot dish of the week will also be available.
He is also planning to bring in a Sunday brunch, with a simple antipasto buffet and one or two hot dishes such as omelettes to go with the choice of less run-of-the-mill bubblies.
Cuvee may not win prizes for being the most original design or concept, nor does it position itself to be ultra high-end. Instead, it looks to be a place for the wine-loving community to do just that - love wines.
Address: Room 103, Lane 528 Kangding Rd
Tel: 6288-1189
Getting it right and still losing
By Mark Hulbert
Nov 11, 2008
ANNANDALE, Va. (MarketWatch) -- Sometimes you can't win for losing.
Just ask Harry Schultz. Or Howard Ruff. Or Jim Dines.
All three advisers, each of whom has been editing an investment newsletter at least since the 1970s, have built their investment careers by questioning conventional wisdom's trust in the soundness of the financial system. Not surprisingly, all three have been vociferous champions of gold and other precious metals.
You'd think that they would have cleaned up over the last year, since the disintegration of the financial system in recent months is almost exactly what they have been warning us about for decades.
But you'd be wrong.
Of the 181 newsletters on the Hulbert Financial Digest's monitored list, these three advisers' newsletters are in 173rd, 175th, and 176th places for year-to-date performances through October 31, with losses ranging from minus 64.9% to minus 70.0%.
How can this be?
The easy answer is that these advisers didn't put into their model portfolios the securities that would benefit from the financial collapse that they envisioned.
But that's not a very satisfying answer. Why didn't they construct their model portfolios around investments that would rise when the rest of the financial world was going down?
The answer, as I see it, has to do with how difficult it is to forecast when a collapse will actually take place. It's one thing to know that the financial system is shaky, and quite another to forecast when it actually will crumble. And these advisers would have lost even more over the last several decades had they bet aggressively on a collapse every time they thought that one was imminent.
In essence, these advisers came face to face with John Maynard Keynes' famous pronouncement that "the market can remain irrational longer than you can remain solvent."
In fact, it turns out to be surprisingly tricky to construct a portfolio to profit from an anticipated collapse. You can't just own securities that will skyrocket during such a collapse, for example, since they will lose huge amounts during the months and years you wait around for that collapse to occur.
As a result, advisers who worry about a collapse sometimes end up constructing portfolios that are not all that different from those of other advisers who are more sanguine about the health of the financial system.
The ironies are many.
Researchers refer to the consequences of these dynamics as the "limits to arbitrage." One famous study conducted in the mid 1990s by Harvard economist Andrei Schleifer and University of Chicago professor Robert Vishny, for example, found that arbitrageurs more often become momentum players rather than hedgers: Rather than betting against an apparently obvious mispricing, they often will bet that a mispricing will continue and become even more extreme.
That's the theory, at least. And it only partially applies in individual cases such as the letters edited by Schultz, Dines and Ruff.
But, clearly, these three advisers would have constructed far more profitable model portfolios this year if they had known that the financial collapse they have so long warned us about would happen in 2008.
Fuld Sought Buffett Offer He Refused as Lehman Sank
By Yalman Onaran and John Helyar
Nov. 10 (Bloomberg) -- It was the afternoon of Sept. 9, and tensions were rising in the 31st-floor office of Lehman Brothers Holdings Inc. Chief Executive Officer Richard S. Fuld Jr.
That morning news broke that the Korea Development Bank had pulled out of talks to buy a stake in the New York-based securities firm. By 1 p.m., Lehman's already battered stock had plunged another 43 percent.
Fuld was rat-a-tatting orders to associates seated at a table in his corner office, one wall of which featured photographs of lions taken by the boss himself in Africa. Herbert ``Bart'' McDade, installed as president in June, Vice Chairman Thomas A. Russo and Chief Financial Officer Ian T. Lowitt had been in and out of Fuld's lair all morning. Now the CEO was staring daggers at responses he deemed too slow or too fuzzy to help right his listing ship, said a person familiar with events that day. And he was lashing out at the injustice of it all.
``Here we go again,'' Fuld erupted at one point, the person recalled. ``Perception trumping reality once more.''
It was vintage Fuld, a man so physically imposing, so volcanically explosive that, even at age 62, he scared underlings and competitors alike. He was raging on the captain's bridge, while a storm engulfed the company he had willed into becoming one of Wall Street's finest. Couldn't the short-sellers see how much he had done to shed bad assets? Couldn't they understand what a great franchise it still was?
Fuld was grounded enough in reality to know one thing: ``We've got to act fast,'' he said, ``so this financial tsunami doesn't wash us away.''
Financial Armageddon
Six days later -- 158 years after its founding as a cotton brokerage in Alabama -- Lehman Brothers was gone. Treasury Secretary Henry M. Paulson Jr. said he didn't want to use taxpayer money to save Lehman, as the government had done in March when it pledged $29 billion to facilitate the sale of failing Bear Stearns Cos. to JPMorgan Chase & Co. Federal Reserve Chairman Ben S. Bernanke insisted there was nothing the government could have done in the end, even though Fuld had warned that Lehman's collapse could trigger a financial Armageddon.
Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal.
Biggest Bankruptcy
The end came after months of frantic activity to find a solution -- reaching out to, then spurning an offer from Berkshire Hathaway Chairman Warren Buffett; meeting with executives of banks on three continents, devising a last-ditch plan to spin off Lehman's toxic assets; and pleading with government officials.
Then, on the morning of Sept. 14, after a series of weekend meetings at the New York Fed, a private deal to save the firm from bankruptcy was hatched. The government persuaded a syndicate of banks to backstop a new entity that would take over $55 billion to $60 billion of Lehman's troubled assets, and London-based Barclays Plc agreed to acquire the rest of the firm, according to people familiar with the negotiations.
When the U.K.'s Financial Services Authority refused to sign off on the Barclays purchase late that morning, U.S. officials refused to take any steps to save the deal. At about 2 a.m. on Monday, Sept. 15, Lehman filed the biggest bankruptcy in U.S. history.
`Guilty Firm'
``Wall Street was giving the impression that after some bloodletting the crisis would be over, and the government bought that line,'' said Charles R. Geisst, author of ``100 Years on Wall Street'' and a finance professor at Manhattan College in New York. ``The thought was to make an example of a guilty firm, and Lehman just happened to be the next one in line.''
The Dow Jones Industrial Average fell 504 points on the day Lehman collapsed, triggering an increase in bank borrowing costs and a run on money-market funds and financial institutions around the world. By Tuesday, Paulson and Bernanke had reversed course, agreeing to an $85 billion bailout of foundering American International Group Inc., at the time the world's largest insurer. The government has since decided to make $250 billion of capital infusions to bolster major U.S. banks. Only Lehman has paid the ultimate price of the financial meltdown to date -- obliteration by bankruptcy.
Reputation in Tatters
It's little comfort to Fuld that he was right to forecast Armageddon and regulators were wrong. His reputation is in tatters; his days are filled with lawyers; three U.S. attorneys are investigating whether he misled investors about the firm's financial condition; his anger is palpable.
Fuld declined to be interviewed for this article as did his lawyer, Patricia Hynes of Allen & Overy.
In October, he appeared before the House Committee on Oversight and Reform wearing his emotions on the sleeve of his dark blue suit.
When asked why AIG was saved and Lehman wasn't, he leaned into a microphone, scowled and slowly replied: ``Until the day they put me in the ground, I will wonder.''
Here's the kind of year it has been for the man who went from being the toast of Wall Street to toast. In January he was hobnobbing with the elite at the World Economic Forum in Davos, Switzerland. Nine months later he was heckled all the way to his limo after testifying at a congressional hearing.
Fuld's Career
The fall of Lehman isn't another tale about an overmatched or under-engaged CEO. For the 16 years Fuld presided over Lehman, he was considered one of the industry's most skilled chief executives, boosting the firm's profit from $113 million in 1994 to $4.2 billion last year and multiplying its share price 20 times. Fuld was no E. Stanley O'Neal or Charles O. ``Chuck'' Prince, late of Merrill Lynch & Co. and Citigroup Inc. respectively, who'd gotten top jobs without being steeped in their institution's businesses. Nor was he a James ``Jimmy'' Cayne, who played bridge while New York-based Bear Stearns burned.
Fuld lived for and identified with his firm. It was his oxygen, a friend says. He had spent his entire career there, so his saga is also a story of Wall Street over the past four decades. When Fuld began working at Lehman in 1969, messengers lugged bags of stock certificates between brokers' offices to complete trades. His rise embodied the triumph of the trader and of the outsize bonus -- he took home about $300 million over the past eight years.
Starting on Lehman's commercial-paper desk, Fuld became a formidable fixed-income trader. He maintained a reputation as a keen risk manager until it became clear Lehman had taken on too many bad mortgage-related assets.
Quant Concoctions
The difference between risk management in the 1980s and in the new millennium was like the difference between playing checkers and three-dimensional chess. The instruments Lehman issued had become more complex than commercial paper, the stakes incomparably higher.
It was the same all over Wall Street. While CEOs of Fuld's generation spent their days in top-floor offices taking meetings, the firms' quants were downstairs cooking up synthetic financial gizmos and mind-bending trading strategies. What they concocted might produce monster profits -- or prove a Frankenstein's monster.
``Fuld took a franchise he'd built from almost nothing, brick by brick, and then trashed it in less than two years,'' said Sean Egan, president and founder of Egan-Jones Ratings Co. in Haverford, Pennsylvania. ``His biggest mistake was in not understanding the risks that had evolved since he was last active in debt markets. And he relied on the support of others whose interests were aligned with him.''
`The Gorilla'
A CEO needs good managers reporting to him to figure out the right risk-reward ratios and make the right decisions. Increasingly, Fuld wasn't getting good dope. He became isolated in recent years, people familiar with the firm's operations said. He countenanced little debate and delegated more responsibility to Joseph M. Gregory, 56, who became president and chief operating officer in 2004.
An intimidating figure -- he played in international squash competitions when he was younger and is still fit -- Fuld was known around the office as ``the Gorilla.'' His icy stare, people who worked at Lehman say, froze recipients with fear. No one wanted to tell Fuld something was wrong or to question how Lehman was run.
As it turned out, one of the lessons Fuld took away from Lehman's decline in the 1980s would contribute to its collapse in 2008.
Glucksman vs. Peterson
The earlier crisis grew out of a power struggle between two senior partners: Lewis Glucksman, who headed trading and was Fuld's mentor, and Peter Peterson, who ran investment banking. Glucksman maneuvered Peterson out of the chairmanship, setting off a rift between traders and bankers that so weakened the firm it wound up being acquired by American Express Co. in 1984.
It was traumatic for the partners, since the dispute cost them their independence and considerable income. When Lehman was spun off in 1994, Fuld vowed that no one would ever do unto him as Glucksman had done unto Peterson. For Fuld, that meant not having a strong No. 2.
Christopher Pettit, a longtime friend and ally of Fuld's, was forced out as chief operating officer when he balked at an executive reorganization in 1996. (He died three months later in a snowmobile accident.) Six years would go by before Fuld installed another chief operating officer. In the meantime, Fuld pushed potential rivals aside, say people familiar with the firm's operation. Michael F. McKeever, who ran investment banking, was stripped of his duties bit by bit and left in 2000. John Cecil, chief financial officer until 2000, was demoted to an adviser because he dared oppose Fuld, the people say.
Gregory's Role
The man Fuld finally appointed chief operating officer was Gregory, a trusted lieutenant who had worked at Lehman since 1974. He would make it his mission to keep Fuld's life uncomplicated by debate.
Any meeting with Gregory, say people who worked with him, was a soliloquy. The COO delivered lectures on matters as minute as improving the look of sloppy dressers. Management-committee meetings were conducted without discussion, attendees say.
The same was true of executive-committee meetings presided over by Fuld. While reviewing budgets for 2007, one committee member questioned the performance of a unit, according to a person who was in the room. Fuld stared at him coldly, then broke the silence: ``You've got some balls to say that, knowing how much I hate that topic.''
Authoritarian Climate
As Fuld returned to studying the papers in front of him, Gregory continued dressing down the committee member for his impertinence. He also upbraided him after the meeting, demanding that any objections be brought to Gregory privately and not voiced in front of the committee. Gregory didn't return calls seeking comment.
Word on proper comportment spread through the ranks. Fuld conducted an employee webcast every three months. He'd always end by asking if there were any questions. There rarely were.
The problem with this authoritarian climate was that when Lehman began to sputter, Fuld was cut off from dissenting opinion. Woe to the messenger who came to the 31st-floor bearing bad news.
The refusal of fixed-income chief Michael Gelband to play the yes-sir game cost him his job -- and Lehman one of its best risk managers. He was forced out by Gregory in May 2007, people familiar with the circumstances say. Four months later Gregory also shunted aside risk chief Madelyn Antoncic, when she fought for hedges on some of Lehman's investments. She was demoted to a peripheral government-relations job.
`Cheap Tar'
Gregory also set factions within Lehman against each other, the people say. New York executives, led by McDade, then head of equities, jousted with those in London, who gathered around international operations chief Jeremy M. Isaacs and who believed they deserved more power because the firm's top growth areas were outside the U.S. The intercontinental rivalry would prove a critical fault line for Lehman.
As cut off from information as Fuld may have been, it wasn't as if he didn't recognize the firm's problems. In November 2004, more than two years before the bull market reached its peak, Fuld was telling people around him that low interest rates and cheap credit would create a bubble that could one day pop.
``It's paving the road with cheap tar,'' he told colleagues in a meeting at the time. ``When the weather changes, the potholes that were there will be deeper and uglier.''
AIG Approach
Fuld also warned against taking on too much risk, such as leveraged loans, which are used to finance buyouts of firms, as Lehman tried to compete with commercial banks that used their bigger balance sheets to support investment banking operations. ``We're vulnerable if we throw our balance sheet around,'' Fuld said, according to a person at the meeting.
As early as March 2006, Fuld approached Martin J. Sullivan, then CEO of AIG, about a possible merger. Fuld saw Lehman becoming the investment banking unit of the insurer. A combination would have given Lehman a trillion-dollar balance sheet, funded by stable insurance premiums, which it could use to provide leverage to its clients, Fuld told his executive committee at an offsite at the Fairmont Turnberry Isle Resort & Club near Miami, according to a person who attended the meeting.
Sullivan wasn't interested, and the proposal didn't go beyond the initial contact, the person said. Sullivan, who left AIG in June 2008, didn't return calls seeking comment.
False Comfort
Lehman used its balance sheet to finance leveraged buyouts anyway. So did other Wall Street firms forced to compete with commercial banks, which were allowed to practice investment banking after the 1999 repeal of the Glass-Steagall Act.
Leveraged loans weren't Lehman's undoing, though. Fuld saw the dangers they posed and rid the firm of the riskiest ones in the fourth quarter of 2007, according to company filings.
What Fuld failed to do is take advantage of a rebound in the prices of fixed-income assets at the time to sell some of Lehman's $84 billion mortgage portfolio. He took false comfort in having hedged the firm's mortgage positions at the end of 2006. Because of the hedges, insiders say, Lehman executives were sanguine after the July 2007 implosion of two Bear Stearns hedge funds that had invested in subprime securities. Fuld even loaded up on mortgage-backed securities at the beginning of 2008, not seeing how vulnerable the firm would be when the subprime cancer metastasized to other asset classes.
Davos Predictions
The disconnect was on display at the World Economic Forum in Davos in January. On the one hand, Lehman Vice Chairman Russo, 65, presented a paper entitled ``Credit Crunch: Where Do We Stand?'' predicting the reset of interest rates on $550 billion of subprime mortgages in the next 12 months would trigger foreclosures and economic woe. On the other hand, Russo said it was no big deal for Lehman. ``Dick Fuld is very conscious of risk,'' he said in a Bloomberg TV interview. ``He's created a culture that's enabled us to do fine.''
Others weren't so sure. A Lehman employee of more than 20 years says she sat her subordinates down in January and told them to start considering options outside the firm.
By the end of the fiscal first quarter in February, after New York-based rivals Citigroup and Merrill had taken about $45 billion in writedowns, Lehman's mortgage portfolio had increased by 2 percent from the previous quarter. Associates say Fuld had concluded the market for mortgage-backed securities had hit bottom, and he didn't have people around him to warn about the spread of subprime troubles to so-called Alt-A mortgages --those made to borrowers without full documentation -- and the commercial real estate market.
Callan Appointment
Roger Nagioff, 44, a London equities trader who succeeded Gelband as fixed-income chief, was struggling to learn the business as the subprime rout began. He quit in February 2008 after realizing he couldn't get his head around Lehman's mortgage-related positions, people close to Nagioff said.
Lehman also had a rookie chief financial officer. Erin M. Callan, a 43-year-old investment banker, had been elevated to the job in December by Gregory, although she had no experience in the company's treasury, a typical training ground for CFOs. Fuld went along with the appointment and allowed her to become the public face of Lehman because he trusted Gregory and didn't get involved in staffing decisions, people say.
On March 17, a day after the sale of Bear Stearns, Lehman shares fell as much as 48 percent in New York Stock Exchange trading on concern the firm would be Wall Street's next victim.
Counter-Punching
To Fuld, the idea was outrageous. The hit was a matter of wrong perceptions, not weak fundamentals. So he got on the phone with the firm's biggest clients to tell them Lehman was no Bear Stearns, and he ordered other executives to do the same.
This was pure Fuld: When bloodied, counter-punch. That's how he turned things around in 1998, when Wall Street rumors had Lehman over-exposed to the Russian currency collapse and the ``Asian flu.'' His jawboning with clients, regulators and others pulled Lehman's stock out of a spiral from $21 to $6.
This time around Fuld also reached out to Omaha billionaire Buffett, the man who had ridden to the rescue of Salomon Inc. in 1987, according to two people with knowledge of the approach. He asked investment banking chief Hugh ``Skip'' McGee, 49, to call David L. Sokol, chairman of Berkshire Hathaway-owned MidAmerican Energy Holdings Co., and see if Buffett might be interested in a stake in Lehman.
Spurning Buffett
The answer was yes, Sokol told McGee. So Fuld called the 78-year-old Buffett. Berkshire Hathaway would buy preferred shares that would pay a dividend of 9 percent and could be converted to common at the then-market price of $40, the people said. That was costlier than what other investors demanded, Fuld was told by associates, and he spurned the offer. A few days later, on April 1, Lehman sold $4 billion of convertible preferred stock to public investors with a 7.25 percent interest rate and a 32 percent conversion premium.
That meant those buying the convertibles were willing to pay one-third more than the market price for Lehman's shares if and when they wanted to convert. Buffett was willing to pay only the going price at the time, which would have meant more dilution for existing shareholders. A spokeswoman for Buffett declined to comment.
Fuld had saved some money, yet he rebuffed a Buffett stake, considered to be corporate America's Good Housekeeping seal of approval. Although that might have helped Lehman in the short run, it wouldn't have solved the firm's fundamental problem: Fuld needed to sell the entire mortgage-related portfolio at whatever price he could get and raise enough capital to cover the losses incurred in such a sale.
`Huge Brand'
Six months later Goldman Sachs Group Inc., the most profitable investment bank, agreed to even harsher terms with Buffett -- paying him a 10 percent annual return on a $5 billion investment. Yet the market had deteriorated so much by then that even the billionaire's blessing wasn't enough. Goldman's shares fell 36 percent in the two weeks after the deal was announced, only to recover after the government stepped in to buy stakes in the biggest U.S. banks.
Lehman's April 1 stock sale sent a signal that the firm continued to have access to capital and the confidence of investors and the government. Its shares rose 26 percent in the following three weeks. At a dinner at the Treasury Department on April 11, where Fuld chatted with Paulson, he came away with the impression, as he wrote in an e-mail to Russo that night, that we ``have huge brand with treasury'' and that Paulson ``loved our capital raise.'' The e-mail was later made public by U.S. Representative Henry A. Waxman, chairman of the House Committee on Oversight and Government Reform.
Finding a Buyer
Paulson would complain, in interviews with the New York Times and Charlie Rose after Lehman's demise, that he couldn't get Fuld off the dime in finding a buyer for Lehman. Brookly McLaughlin, a Treasury spokeswoman, said Paulson ``spoke to Fuld quite often'' between April and September. She wouldn't divulge the frequency or substance of their conversations. Fuld took Paulson's request to mean he should find a strategic partner to buy a stake in Lehman, which he was already searching for, according to people close to the CEO.
Why Fuld was unable to find a buyer for all or part of Lehman remains a matter of dispute. It was not for want of trying, although some people familiar with those efforts throughout the spring and summer say he was unwilling to accept the rapidly falling valuation of his firm.
``Dick was so proud of Lehman that he was slow to recognize that others didn't share that belief,'' said George L. Ball, chairman of Houston-based investment firm Sanders Morris Harris Group Inc. and a friend of Fuld's.
`Hurting Einhorn'
One obstacle, say people close to Fuld, is that he was more of an inside man. He didn't like to mingle with the Wall Street elite on the black-tie circuit. He didn't go in much for the genteel game of golf, preferring the sweaty game of squash, often on his own home court in Greenwich, Connecticut. He didn't care for public speaking.
Throughout the crisis, Fuld was too quick to blame his detractors for his own mistakes. David Einhorn, president of Greenlight Capital Inc., a New York-based hedge fund, became enemy No. 1 on May 21, when he went public with his analysis that Lehman was propping up its numbers with aggressive valuations and challenged CFO Callan's credibility.
The short-seller put pressure on Lehman's stock and aroused Fuld's ire. A May 26 e-mail to Fuld from Lehman executive David Goldfarb, released by Waxman's committee, suggested that the firm should use capital it was hoping to raise to buy back Lehman stock, ``hurting Einhorn bad!!'' Fuld's response: ``I agree with all of it.''
Bear Stearns Precedent
Meanwhile, the company's financial situation continued to deteriorate. The value of Lehman's residential-mortgage portfolio and commercial real estate assets kept declining as the prospect of recession grew. Nobody wanted to buy into Lehman -- at least not for the moment.
Even interested parties figured the price would keep coming down, as real estate valuations fell and Lehman got more desperate for cash. The Bear Stearns precedent, in which the government stepped in to facilitate a deal, also gave prospective buyers a reason to wait.
Lehman sold $16 billion, or about one-fifth, of its mortgage assets during the second quarter of 2008. Selling assets that nobody wanted meant taking significant losses. Market volatility had also rendered many of the hedges ineffective during the quarter. That led Lehman to announce a $2.8 billion second-quarter loss on June 9, its first since being spun off from American Express. Lehman also reported that it had raised another $6 billion in capital from investors.
Strategic Partner
The loss led Fuld to panic, say some people who interacted with him at the time. For the first time, he started worrying that he might lose the firm. McDade, 49, who as head of equities was instrumental in raising capital from trading clients, persuaded Fuld to promote him to president, ousting Gregory. Callan was also pushed aside, replaced by Lowitt, 44.
One of the first things McDade did was to bring back Gelband, 49, to help him sort out the mess. He also asked investment banking chief McGee to redouble efforts to find a strategic partner who would buy a stake of at least 10 percent.
While the firm had been in talks with potential partners in the previous three years -- including Japan's Mizuho Financial Group Inc. and China's Citic Group and Ping An Insurance (Group) Co. -- they were always with the intention of cooperation in Asia, where Lehman was weaker than most of its rivals.
GE, Citic, KDB
Now, as summer began, the stakes were higher. Talks began in July with executives at Bank of America Corp. One Lehman proposal was to merge with the investment banking unit of its Charlotte, North Carolina-based rival, which would own about 40 percent of the new entity. While CEO Kenneth D. Lewis wasn't keen on that idea, talks continued on other possible combinations, people familiar with the discussions said.
Fuld also reached out to General Electric Co. CEO Jeffrey R. Immelt, a fellow board member of the New York Fed. He said no. An overture to London-based HSBC Holdings Plc went nowhere. And Fuld came up empty after meeting in August with executives from Citic, China's biggest state-owned investment firm.
Only the Korea Development Bank seemed eager to make a deal. The bank's chief executive officer, Min Euoo Sung, had run Lehman's operations in Seoul until May. In early August, according to Lehman executives involved in the talks, KDB offered to buy 25 percent of the firm for $22 a share, about where the shares were trading at the time. Then talks bogged down on issues like how much management say the Korean bank would have and how Lehman's mortgage positions should be valued. By early September, Min was only willing to pay about $8 share, the executives said.
Codename Spinco
``The gap in assessing the size of potential writedowns was just too big,'' Min told reporters in Seoul on Sept. 16.
Some involved with the negotiations say Fuld and McDade didn't want to cede any management control and that Min grew concerned about further Lehman writedowns. Others say Min never had approval from his government to do a deal, so he kept lowering the price to make sure it wouldn't happen. Min told legislators in Seoul on Sept. 18 that Lehman was unwilling to accept less than $17.50 a share.
Meanwhile, worried that his lieutenants wouldn't be able to fetch a fair price from an investor, Fuld was pursuing another strategy. The plan his associates devised would offload Lehman's toxic commercial-mortgage portfolio to an independent company, codenamed Spinco. The new company's stock would be owned by Lehman shareholders, and its startup capital would be provided by the firm. While Lehman would have to raise fresh capital to replace what it transferred to Spinco, investors would be buying into an investment bank with a scrubbed balance sheet.
Management Shift
The U.S. Securities and Exchange Commission gave the plan initial approval, Lehman executives said. There was only one hitch: It would take at least three months to meet SEC requirements. Lehman didn't have three months.
The firm's announcement of another management shuffle on Sept. 7 hardly buoyed confidence. Isaacs, the international operations chief and former rival of McDade's, was out, as was Andrew J. Morton, global head of fixed income. Isaacs had actually resigned in June, although the announcement was delayed for three months at Fuld's request. His decision to leave the firm after McDade's ascension, at a time when he could have been instrumental in negotiating a foreign deal, only served to widen the rift between the London and New York offices.
Hedge Fund Squeeze
The beginning of the end came two days later when the KDB talks fell apart.
``The possibility of a Lehman deal wasn't big from the very beginning,'' Jun Kwang Woo, chairman of South Korea's Financial Services Commission, said after the collapse. Still, by Sept. 9, it was all Lehman investors had to pin their hopes on. With shares trading at $7.79 a share, below what KDB had been willing to pay a few days earlier, Lehman had a market value of $5.4 billion, one-sixth of what it had been a year earlier.
The cost of insuring Lehman's debt surged by almost 200 basis points after the KDB news, rising to 500, still not as high as where Bear Stearns's credit-default swaps were trading before its collapse. (A basis point equals one-hundredth of a percentage point.)
That caused Lehman's hedge fund clients to pull out, and short-term creditors cut lending lines. New York-based JPMorgan, Lehman's clearing agent for trades, demanded additional powers to seize cash and collateral in the firm's accounts.
$3.9 Billion Loss
The next day, Sept. 10, Fuld pre-announced quarterly results -- a $3.9 billion loss, after $5.6 billion of writedowns. He also said Lehman would auction off a majority stake in its asset-management division, and he revealed his Spinco plan. He was still talking defiantly.
``We have a long track record of pulling together when times are tough,'' Fuld said on a conference call with investors. ``We are on track to put these last two quarters behind us.''
Once again, Fuld was a step behind events. Before the day was out, Moody's Investors Service said it was reviewing Lehman's credit ratings and that it would downgrade the firm unless it made a deal with a strategic partner. Lehman's shares fell another 42 percent the next day to $4.22.
As things were spinning out of control, Fuld turned to the federal regulators with whom he had been talking since the demise of Bear Stearns.
He had approached Timothy F. Geithner, 47, president of the Federal Reserve Bank of New York, in July to see whether Lehman might become a bank-holding company, which would allow it to widen its funding base. Geithner was cool to the idea, according to a person familiar with the discussions, saying it wouldn't solve the problem of Lehman's troubled assets. Fuld never made a formal application.
Fed `Haircuts'
Now, Fuld went back to Geithner. With Lehman running out of cash -- it had only $1 billion left by week's end -- it had to borrow money from the Fed's broker-dealer facility by Monday if it wanted to stay in business. Again the New York Fed, on whose board Fuld sat until the day before, was of no help. He was told Lehman's assets didn't fit the criteria for collateral, Bernanke would later say. The Fed also raised its ``haircuts,'' or collateral requirements, a person familiar with the discussions said, making it harder for Lehman to borrow from the facility.
Meanwhile, Paulson was putting out the word there would be no more federal bailouts, that the government couldn't rescue every failing investment bank.
With the clock running out, Lehman executives reached out again to Bank of America. They also called Barclays, the second- largest U.K. bank by market value, and Nomura Holdings Inc., Japan's biggest brokerage. The message went out: Fuld was ready to sell.
Paulson's Pledge
On Sept. 12, one team of Lehman executives was camped out at the Lexington Avenue offices of New York-based law firm Simpson Thacher & Bartlett LLP, showing the firm's books to Barclays. Another group was at the Park Avenue office of Sullivan & Cromwell LLP doing the same for Bank of America. CEO Lewis agreed to the talks after Paulson urged him to consider a deal, a person with knowledge of the discussions said.
Two other Lehman executives -- McDade and Alexander Kirk, global head of principal investing -- were dispatched to the New York Fed on Liberty Street, where Geithner and Paulson had gathered a group of Wall Street leaders. There, Paulson reiterated that no taxpayer money would be used to save Lehman. He challenged the group to find a private solution to rescue the firm, saying it was in their own best interests.
Barclays Deal
One of the attendees, Merrill CEO John A. Thain, 53, took stock of his own company's best interests and initiated merger talks with Bank of America. Lewis had concluded on Friday that he couldn't do a deal with Lehman without government backing, which he thought would be forthcoming. After Paulson made it clear to Lewis that a government role wasn't in the cards, the Bank of America CEO pulled his team out of the Lehman talks.
That left only Barclays, since Nomura told Lehman it was unable to move fast enough. Fuld, who rarely left his office that weekend -- working the phones, fielding calls from deputies, talking to Barclays executives -- thought he had a deal Saturday night. Barclays was willing to buy Lehman for about $5 a share if it could leave behind the most troublesome assets, the ones Lehman had proposed spinning off into a separate company as well as some others Barclays didn't want.
Sunday morning brought a false dawn. Geithner and Paulson had talked a syndicate of banks into backstopping the creation of a new entity that would take over $55 billion to $60 billion of Lehman's problem assets, according to people with knowledge of the negotiations.
No Lifeline
Everyone was basking in what seemed a done deal until word came at 11:30 a.m. in New York that the U.K.'s FSA, which regulates that country's banks, refused to waive normal shareholder-approval requirements or to allow Barclays to guarantee Lehman's debts until obtaining that approval. The reason, people familiar with the decision say, was that Barclays lacked sufficient capital to absorb Lehman.
``The only reason it didn't happen,'' Leigh Bruce, a Barclays spokesman said today, ``is that there was no guarantee from the U.S. government, and a technical stock-exchange rule required prior shareholder approval for us to make a similar guarantee ourselves. We didn't have that approval, so it wasn't possible for us to do the deal. No U.K. bank could have done it. It was a technical rule that could not be overcome.''
At that point, the only way to save the deal would have been for U.S. regulators to make the temporary debt guarantee. They didn't. Paulson, who told the New York Times he didn't have the authority to rescue Lehman, didn't answer questions about Sunday's events submitted by Bloomberg. Nor did Geithner.
Failure's Furies
Fuld thought Paulson was in his corner, he told a person familiar with events, even as the Treasury secretary publicly resisted spending taxpayer money to help Lehman. Fuld was stunned, the person says, when Paulson didn't throw him a lifeline at the end.
It was McDade who called Fuld from the Fed meeting on Sunday afternoon, not Paulson. Far from helping Lehman, Paulson, Geithner and other officials, including SEC Chairman Christopher Cox, began pressing Lehman to declare bankruptcy. McDade told them that would have serious repercussions for other firms. Wall Street executives gathered at the Fed said a bankruptcy wouldn't be the end of the world. Goldman Sachs and Morgan Stanley both had war rooms with charts detailing Lehman's subsidiaries and their exposure to each one, and they thought their potential losses would be limited.
No one, not even Lehman, knew what furies the firm's failure was about to unleash.
Restless Nights
The end came at about 2 a.m. Sept. 15, when Fuld, out of running room, filed for bankruptcy. That day the Standard & Poor's 500 Index had its biggest daily drop since the September 2001 terrorist attacks, and bank-lending rates soared. Paulson, who was poised to let AIG fail, quickly re-thought the wisdom of that decision and approved an $85 billion bailout. He and Bernanke also went to Congress to push for a $700 billion federal bailout to buy bad assets from troubled banks.
Only Lehman ended up in the wrong place at the wrong time.
Fuld was hard-pressed to explain his fate when he appeared in front of Waxman's committee on Oct. 6. To many of the congressmen's hostile questions and accusations, he had no answers. ``I wake up every single night,'' Fuld said, ``thinking, `What could I have done differently?'''
It might have ended differently had Fuld not risked so much on mortgage-backed securities. It might have ended differently had Fuld been willing to acknowledge Lehman's falling valuations. It might have ended differently if Fuld had made a deal in June, or July, or August.
That would have required acknowledging that time had run out on Wall Street's over-leveraged, overpaid gilded age. Instead, in his stubbornness and isolation, Dick Fuld failed to save the firm he lived for.
Regulators nix credit card debt forgiveness plan
By Marcy Gordon
Nov 12, 2008
WASHINGTON (AP) – Federal bank regulators have rejected a request by banks and consumer advocates for a program to let lenders forgive huge portions of credit card debt.
The Office of the Comptroller of the Currency rejected the request for a special program that would allow as much as 40 percent of credit card debt to be forgiven for consumers who don't qualify for existing repayment plans.
An unusual alliance of financial industry interests and consumer advocates, represented by the Financial Services Roundtable and the Consumer Federation of America, made the request to the Treasury Department agency on Oct. 29. It demonstrated the urgency of the situation in a deepening economic crisis: consumers — even those with strong credit records — defaulting at high levels on their credit cards, while banks battered by the credit crisis bleed tens of billions from the losses.
An agency official said the government objects to allowing banks to defer losses for several years on the forgiven debt, as would occur in accounting by lenders under the special program.
The agency "does not consider any plan that defers the timely recognition of loss as prudent, and any such proposal cannot be viewed favorably by us," Timothy Long, senior deputy comptroller for bank supervision policy, said in a letter to the two groups dated Monday and made public Wednesday.
"The timely identification, reporting and management of credit losses, along with adequate loan-loss reserves and capital levels, provide the public with ... confidence" in the banking system, Long wrote.
The Financial Services Roundtable, which represents more than 100 large banks, brokerage firms and insurance companies, will "continue to look for ways to help consumers in these extraordinary times," said the group's senior vice president, Scott Talbott.
Travis Plunkett, legislative director of Consumer Federation, said that with the number of deeply indebted consumers growing dramatically, "we still hope to work with bank regulators or Congress to create an alternative" to bankruptcy for them.
Under the proposal, borrowers would be able to defer payment of income taxes they owe on the forgiven part of the credit card debt until after the remainder was paid off. The lenders could wait until then to book their losses on the forgiven debt.
The two groups hoped such a pilot program would become permanent and that as many as 50,000 people struggling with credit card debt would be involved. On an individual basis, the amount of debt to be forgiven would rise according to the severity of the borrower's financial situation, up to a maximum of 40 percent. Consumers would be allowed to pay back the remainder over several years.
The largest credit-card banks each set aside between $1 billion and $3.5 billion in the third quarter for losses on card loans as their profits plummeted.
The biggest credit card lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.
Credit card charge-off rates, balances written off as unpaid, rose to 6.8 percent in August, up 48 percent from a year earlier, according to Moody's Investors Service.
Americans are weighed down by about $900 billion in credit card debt, according to the latest available Federal Reserve figures.
Washington's $5 Trillion Tab
Elizabeth Moyer
12 November 2008
Fighting the financial crisis has put the U.S. on the hook for some $5 trillion a report says. So far.
For all the fury over Treasury Secretary Henry Paulson's $700 billion emergency economic relief fund, it seems downright puny when compared to the running total of the government's response to the credit crisis.
According to CreditSights, a research firm in New York and London, the U.S. government has put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system.
The estimate includes many of the various solutions cooked up by Paulson and his counterparts Ben Bernanke at the Federal Reserve and Sheila Bair at the Federal Deposit Insurance Corp., as the credit crisis continues to plague banks and the broader markets.
The Fed has taken on much of that total, including lending a cumulative $1 trillion in overnight or short-term loans since March to primary dealers through its emergency discount window and making a cumulative $1.8 trillion available through its term auction facility, a series of short-term transactions it began making available twice a month in January. It should be noted that a portion of the funds lent in these programs has been repaid and that the totals represent what has been made available.
The Fed also took on tens of billions in debt, including $29 billion in debt of Bear Stearns, and made $60 billion of credit available to American International Group. It is committing $22.5 billion to set up a special purpose vehicle to manage some of AIG's residential mortgage-backed securities, and it is financing $30 billion of a second fund to hold $70 billion of multi-sector collaterized debt obligations on which AIG wrote credit default swaps.
The Treasury, in addition to the $700 billion raised in the Emergency Economic Stabilization Act, agreed to guarantee money market funds against losses up to $50 billion, will inject $40 billion of capital into AIG and is backing the conservatorship of Fannie Mae and Freddie Mac, to the tune of $200 billion.
The FDIC, meanwhile, is guaranteeing $1.5 trillion of senior unsecured bank debt.
Not included in the total are the Fed's long-existing discount window lending to commercial banks, the mortgage modification plan announced by regulators on Tuesday, support for the Federal Home Loan Banks and a myriad of other programs.
Paulson and Bernanke have tried any number of ways to stop the free fall in housing prices and unfreeze the credit markets, with limited success. Rates that banks charge each other for three-month loans have dropped to 2.1% over the corresponding Treasury security, from their high of 4.8% in October. But lending is contracting as banks brace for rising credit costs and corporate borrowers hunker down.
The Treasury has turned its focus from attempting to buy troubled assets from banks, which was the original intent of the October Emergency Economic Stabilization Act, to injecting capital in the form of preferred equity stakes.
It started out with $125 billion worth of investments in eight major U.S. banks and has since expanded the program to an increasingly broad range of financial and nonfinancial companies. And with just $60 billion left of its initial $350 billion authorization under the emergency act, the Treasury faces a growing number of companies--including Detroit's automakers--begging for assistance.
David Hendler, an analyst at CreditSights, says it looks as if government is left holding the bag, and of course that translates into everyone.
"The losses have to be taken, but no one wants to take them," Hendler said at a conference Wednesday, speaking about the banks and their handling of troubled assets. "It seems like the taxpayers are going to be taking a good portion of that."
Russia Stocks Slide, Kuwait Shuts as Oil Roils Emerging Markets
By Denis Maternovsky and Laura Cochrane
Nov. 13 (Bloomberg) -- Russian stocks plunged and Kuwait suspended trading as the slump in oil to below $55 a barrel roiled emerging markets and increased concern that the ruble will be devalued.
Russia's Micex Index fell as much as 17 percent and was 8.6 percent lower at 1:09 p.m. in Moscow after it reopened following a 30-minute trading suspension. A court in Kuwait ordered a shutdown as traders lobbied for support after a sixth day of declines. The MSCI Emerging Markets Index slid 2.9 percent to 518.22, adding to an 8.5 percent drop since Nov. 11.
``Alarm bells are ringing,'' said Tom Fallon, head of emerging-market research at La Francaise des Placements in Paris, which manages $11 billion. ``Weaker oil raises a number of issues for deterioration in terms of trade and budget assumptions which are now being seriously called into question.''
Oil reached a 21-month low as the International Energy Agency lowered its 2009 global oil demand estimate by 670,000 barrels a day, or 0.8 percent, and Germany became the biggest economy to enter a recession this year. Oil is approaching ``worrying'' levels that may cause the ruble to weaken by as much as 9 percent against the dollar by the end of the year, Igor Yurgens, an adviser to President Dmitry Medvedev, said in Bloomberg Television interview late yesterday.
Oil, Russia's chief export, has fallen 63 percent since the July-high of $147. The ruble has plunged 21 percent against the dollar in the past four months, even as the central bank sold 16 percent of its currency reserves in an attempt to arrest declines. Reserves dropped $9.2 billion last week to the lowest this year at $475.4 billion, central bank said today.
Default Swaps
The ruble was 0.1 percent lower against the dollar at 27.5968 today. The ruble, which is managed against a basket of dollars and euros, will probably fall to 30 per dollar by the end of 2008, said Yurgens, who heads Moscow's Institute of Contemporary Development.
``Depreciating is almost inevitable,'' he said in a Bloomberg Television interview from Cannes, France. ``They will be depreciating the ruble, but in a very smooth way, not to create panic.''
The cost of contracts protecting against a Russian government default jumped to the highest in two weeks at 8.19 percent of the amount insured, up from 7.59 percent yesterday, according to credit-default swap prices from CMA Datavision in London.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.
OAO Rosneft, Russia's biggest oil company, was 9.9 percent lower after dropping as much as 25 percent in Moscow trading.
Trading Halt
The Kuwait Stock Exchange halted trading after a court ordered its closure to protect investors from further losses. The bourse's main index slid 31 percent this year. The market will stay closed until Nov. 17 when the court will sit again to consider whether to extend the suspension.
The stock exchange ``didn't agree to this out of any great conviction,'' John Lomax, a strategist at HSBC Holdings Plc wrote today in a research note. ``This was more a concession to political pressure. It may just buy some time for the weakened local investment companies to deal with and reschedule particularly external debts.''
Poland's WIG 20 Index declined 4.1 percent after three of the countries biggest energy companies reported earnings that missed estimates.
Bulgaria's benchmark stock index declined 5.3 percent, while Indonesia's Jakarta Composite Index fell 5 percent. The Indonesian rupiah fell 3.2 percent again the dollar, as the South Korean won and Indian rupee each dropped 2.4 percent.
The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries rose 1 basis point to 6.54 percentage points after a 61 basis-point increase yesterday, according to JPMorgan Chase & Co.'s EMBI+ Index.
LG Display, Sharp Shares Fall on Price-Fixing Fine
By Kevin Cho
Nov. 13 (Bloomberg) -- LG Display Co., Sharp Corp. and Chunghwa Picture Tubes Ltd. tumbled in Asian trading after the three liquid-crystal-display makers agreed to plead guilty and pay $585 million in fines for conspiring to fix prices.
LG Display, based in Seoul, dropped 11 percent to close at 20,100 won on the Korea Exchange. Osaka-based Sharp lost 8.4 percent on the Tokyo Stock Exchange. Chunghwa Picture fell by the 7 percent daily limit to an eight-year low in Taipei.
The fines will further undermine the LCD makers' earnings at a time when a glut in the $82 billion industry is driving down prices and forcing manufacturers to scale back production plans. The $400 million that LG Display, the world's second-largest LCD maker, agreed to pay is the second-highest criminal fine the U.S Department of Justice's antitrust division has imposed.
``This adds to the negative sentiment that's already plaguing the industry,'' said Jason Kang, an analyst at Daewoo Securities Co. in Seoul. ``The fine is bigger than expected and it will be difficult to predict favorable results from other regions such as the EU.''
Sharp will pay $120 million and Taoyuan, Taiwan-based Chunghwa Picture Tubes will pay $65 million for conspiring with LG Display and other unnamed companies, the Justice Department said yesterday.
Regulators in the U.S., South Korea, Japan and Europe first disclosed in December 2006 that they were investigating LCD makers, including industry leader Samsung Electronics Co., of price fixing.
Japanese, Korean Investigations
Japan's Fair Trade Commission is still conducting a separate investigation into price-fixing activities in the country, Toshiyuki Nanbu, director of management and planning at the regulator, said today, declining to say when a ruling may be made.
South Korea's antitrust regulator is also continuing its probe, Kim Dae Young, an official at the Korea Fair Trade Commission' International Cartel Division, said today.
Miwako Suetsune, a spokeswoman at the European Commission Delegation in Tokyo, wasn't immediately available for comment.
LG Display, Chunghwa and others met several times from 2001 to 2006 in so-called ``crystal meetings'' to set prices on desktop computer, laptop and television screens, Assistant Attorney General Thomas Barnett, who heads the antitrust division, said yesterday.
Under the plea deal, Sharp Chairman and Chief Executive Officer Katsuhiko Machida and other company directors will give back 10 percent to 30 percent of their compensation for three months beginning in December.
``Sharp understands the gravity of this situation and will strengthen and thoroughly implement measures to prevent the recurrence of this kind of problem,'' it said in a statement.
Over Five Years
LG Display will pay the fine over five years from 2009 and reflect the entire amount as non-operating expenses this quarter, said Park Sang Bae, a spokesman for the company. The panel maker said in a statement it doesn't expect its relationship with customers and future sales to be affected.
``We haven't engaged in any meetings nor communications on the matter with other LCD makers since the lawsuit started, and we will ensure we won't do so in the future,'' James Wu, chief financial officer of Chunghwa Picture, said by telephone.
Wu said the $65 million fine won't be booked as a one-time expense because the company had set aside special funds for legal expenses every month for some time.
Samsung, AU Optronics Corp. and Chi Mei Optoelectronics Corp. were among companies that said in 2006 they were being investigated for price-fixing.
Case Ongoing
``Samsung has pledged full and continuous cooperation with the DOJ's ongoing investigation,'' James Chung, a spokesman for the Suwon, Korea-based company, said today.
Yawen Hsiao, an AU spokeswoman, said she couldn't immediately comment, while Denis Chen, a finance director at Chi Mei, declined to comment.
LG Display said last month its third-quarter net income fell 44 percent while Samsung also posted a 44 decline in profit from LCDs because of falling panel prices. AU Optronics, the world's third-largest LCD maker, reported a bigger-than-estimated decline in quarterly profit.
Under EU rules, companies can be fined up to 10 percent of annual revenue for breaking antitrust laws. In Japan and South Korea, penalties may be as high as 10 percent of the related product's sales during the period of the offense.
Record EU Fine
Cie. de Saint-Gobain SA, Asahi Glass Co., and a Nippon Sheet Glass Co. unit were fined a record 1.38 billion euros ($1.7 billion) this week by the European Union over claims the companies fixed the price of car windows. Saint-Gobain, Europe's largest building-materials supplier, was fined 896 million euros, the highest against a single company, the European Commission said in a Nov. 12. statement.
In 2006, consumers sued LCD makers over price fixing, citing enforcement raids and investigations in Asia and Europe and a criminal grand jury investigation in San Francisco. Lawsuits filed in various states allege that the companies illegally conspired to fix prices for computer laptop and desktop monitors. The complaints, consolidated in San Francisco, seek unspecified damages and a refund for consumers.
In August this year, a federal judge refused to fully dismiss consumer claims against the companies.
GE Wins FDIC Insurance for Up to $139 Billion in Debt
By Rachel Layne and Rebecca Christie
Nov. 12 (Bloomberg) -- General Electric Co. said the U.S. government agreed to insure as much as $139 billion in debt for lending arm GE Capital Corp., the second time in a month it has turned to a federal program designed to help companies during a global credit crunch.
Granting GE Capital, which isn’t a bank, access to a new Federal Deposit Insurance Corp. program may reassure investors and help the unit compete with banks that already have government protection behind their debt, said Russell Wilkerson, a spokesman for the Fairfield, Connecticut-based company. Coverage would be for about $139 billion, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.
“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Wilkerson said. GE sent investors an e-mail about the program today and posted the letter on its Web site. “Our participation is a positive development for our investors.”
GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. GE last month started using a new Federal Reserve program designed to revive demand for commercial paper amid the global crisis.
The company’s exposure to the deepest global financial crisis since the 1930s has cut its market value by more than half this year, as Chief Executive Officer Jeffrey Immelt twice lowered his target for 2008 profit. GE fell $1.52, or 8.5 percent, to $16.29 at 4:15 p.m. in New York Stock Exchange composite trading amid a broad decline in U.S. stocks. The shares are at their lowest level since January 1997.
Increased Confidence
Credit default swaps on GE Capital, which rose in London earlier today, dropped 21 basis points to 391 basis points in New York, CMA Datavision prices show. A decline suggests an increase in investor confidence. GE Capital’s 5.625 percent notes due in 2018 jumped 2.2 cents on the dollar to 89.9 cents, the highest since September, for a yield of 7.1 percent as of 4:26 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service.
U.S. regulators introduced the FDIC program Oct. 14, making the insurance automatically available for banks on debt issued through June 30, 2009. Affiliated non-bank units have to apply separately, as GE did. Like the banks, GE would pay a premium for the insurance. GE said the coverage would begin on or before Nov. 14 and lasts through June 30, 2012.
‘Every Opportunity’
“If you’re a GE shareholder you’d be a fool not to want them to take advantage of every possible opportunity out there,” Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which oversees 6.12 million GE shares, said today. “By the same token there are far more pressing situations at companies that would be beneficiaries of taxpayer generosity. Should we really be expending here?”
The FDIC would gain the right to examine GE’s other finance units as a condition of participation. GE’s bank units already are regulated by the Office of Thrift Supervision. The program doesn’t require the U.S. to take a stake in GE, the e-mail said.
GE Capital, which carries the highest-possible AAA credit rating, includes divisions that are among the world’s largest lenders in commercial real estate, aircraft leasing and private- label credit cards. It also provides financing to help companies emerge from bankruptcy protection and so-called middle-market financing, or loans to smaller and midsized companies.
The unit makes money partly by taking advantage of the spread between the cost of debt it issues and the loans and finance contracts it writes.
FDIC’s Terms
GE’s finance divisions accounted for about half of sales and profit last year, and Immelt has said that percentage may shrink to about 40 percent in 2009. GE said Oct. 10 it still expects profit from the units to be about $9 billion this year.
U.S. regulators expanded the coverage last month after a similar move by European regulators to ease inter-bank lending. The insurance is offered through the FDIC’s Temporary Liquidity Guarantee Program, which also includes expanded deposit coverage for business checking accounts. It guarantees all new senior unsecured debt issued between Oct. 14 and June 30, 2009, up to a cap set for each institution when it signs up.
“All participants are on notice under the terms of the regulation that the FDIC reserves the right to expand their oversight,” Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey, said of the federal program.
The FDIC so far is taking an all-or-nothing approach on the terms of participation. Banks are automatically enrolled, unless they opt out. If a bank holding company joins, all of its banking subsidiaries must also join. Program terms apply to all commercial paper, promissory notes and other eligible debt.
GE Capital Debt
According to its Oct. 10 presentation to investors, GE Capital Services had $536 billion in debt at the end of the third quarter. Of that, commercial paper, or debt due in nine months or less, was $88 billion, or 17 percent. The company issues debt in 18 currencies, with about 60 percent in non-U.S. denominations.
GE Capital has about $81 billion in long-term debt maturing between now and the end of 2009, according to another Oct. 10 chart. Of that, $43 billion comes due by June 30.
GE is already among companies using a new short-term funding facility from the Federal Reserve opened to revive demand for commercial paper, the short-term borrowing that companies use to finance day-to-day operations. GE and its finance entities, top- rated issuers, had issued paper without interruption before tapping the facility.
Fee Structure
Banks have until Dec. 5 to decide whether to opt out of the FDIC program. If they do, they’ll have to start paying premiums for the coverage, which lasts until June 30, 2012. For now, all FDIC-insured banks are automatically covered at no cost.
In general, participating companies “will be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued, and calculated for the maturity period of that debt or June 30, 2012, whichever is earlier,” according to the FDIC interim regulation. The regulation also says no fees will be charged during the first 30 days of the program, and it includes several options for calculating the insurance premiums.
The FDIC now is in the process of revising its interim regulation in response to comments, so the final fee structure may be different.
Andrew Gray, a spokesman for the FDIC, wasn’t immediately available for comment.
Merrill chief sees severe global slowdown
By Greg Farrell
November 11 2008
New York -- The global economy is entering a slowdown of epic proportions comparable with the period after the 1929 crash, John Thain, chairman and chief executive of Merrill Lynch, warned on Tuesday.
Speaking at the company’s annual banking and financial services conference, Mr Thain said while he was cautiously optimistic about the future of the financial services industry, he lacked optimism about the near-term prospects of the US economy and global markets.
“Right now, the US economy is contracting very rapidly. We are looking at a period of global slowdown,” he told investors. “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slowdown we’re seeing now.”
Mr Thain also said the economic problems afflicting the US, where housing prices and other asset values were falling, would wreak havoc across the world.
“There is no such thing as decoupling,” he said, referring to the popular theory that emerging markets could sustain reasonable growth even while the world’s leading economies suffered recessions. “All equity markets are linked. Each individual economy will be more or less affected, depending on reliance on global trade and commerce.”
But Mr Thain expressed cautious optimism about the financial services industry. Referring to the US government’s $700bn bail-out package and the direct infusion of $125bn to recapitalise the country’s biggest banks, he said “all of that is starting to take effect”.
Mr Thain noted US dollar London interbank offered rates were starting to come down and the commercial paper market was starting to see a return of liquidity. Merrill itself recently issued some three-month commercial paper, he said, instead of the overnight paper that had dominated the market in recent weeks.
Still, he added, there remains “a huge amount of dislocation in credit markets. Although things are starting to improve, this is going to be a long process”.
Mr Thain was most optimistic about the forthcoming combination of his company with Bank of America. The deal would give Merrill Lynch’s wealth management advisers access to BofA’s “huge pool of wealthy individuals”, he said.
Shareholders of both companies are expected to vote on the deal on December 5, with the transaction closing on or about December 31, Mr Thain said.
Circuit City files for bankruptcy protection
By MICHAEL FELBERBAUM and VINNEE TONG
11 November 2008
RICHMOND, Va. (AP) -- Facing pressure from vendors and consumers who aren't spending, Circuit City Stores Inc. filed for bankruptcy protection Monday as it heads into the busy holiday season with hopes that the move will help it survive.
Under Chapter 11 protection, the nation's second-biggest electronics retailer can keep operating while it develops a reorganization plan. Its Canadian operations also filed for similar protection.
The company also said it cut 700 more jobs at its Richmond, Va., headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.
In court documents, Chief Financial Officer Bruce H. Besanko cited three factors: erosion of vendor confidence, decreased liquidity and the global economic crisis.
"Without immediate relief, the company is concerned that it will not receive goods for Black Friday and the upcoming holiday season, which could cause irreparable harm to the company and its stakeholders," Besanko said in the filing.
Its shares fell 14 cents, or about 56 percent, to 11 cents on Monday before being halted.
Circuit City, which has had only one profitable quarter in the past year, has faced significant declines in traffic and heightened competition from rival Best Buy Co. and others. The company laid off about 3,400 retail employees last year and replaced them with lower-paid workers, a move analysts said could backfire, hurting morale and driving away customers.
While the retail industry overall is facing what's expected to be the weakest holiday season in decades, Circuit City's struggles have intensified as nervous consumers spend less and credit has become tighter.
At a hearing in Richmond, U.S. Bankruptcy Judge Kevin Huennekens granted Circuit City interim approval to secure $1.1 billion in debtor-in-possession loans while it is in bankruptcy protection. Those funds, needed to stock merchandise and pay employees, replace a $1.3 billion asset-backed loan the company had been using.
Circuit City also was granted interim approval to abandon 150 leases at locations where it no longer operates stores, which it said costs $40 million annually.
The company, which said it had $3.4 billion in assets and $2.32 billion in liabilities as of Aug. 31, is hoping to exit court protection by early summer 2009, putting it in a position to find a buyer for the chain or operate as a standalone business.
Final approval of the motions will be addressed at a Dec. 5 hearing.
Analysts said much depends on Circuit City's relationship with its vendors and how it handles its real estate issues.
Circuit City is a well-known brand and could re-emerge from bankruptcy, Stifel Nicolaus & Co. analyst David Schick said in a note to investors. "We believe the marketplace has a slot for a higher-end chain with a commissioned sales force," he said.
But Stephen Lubben, a professor at Seton Hall Law School, said Circuit City's survival depends on whether its creditors work with the company "or whether they think they're a lost cause and cut them off permanently."
JPMorgan analyst Christopher Horvers agreed, saying it boiled down to merchandise. "If they can get inventory into the stores, I can think they'll remain competitive."
The company's biggest creditors are its vendors: Hewlett-Packard has a $118.8 million claim followed by Samsung ($115.9 million), Sony ($60 million), Zenith ($41.2 million) and Toshiba ($17.9 million). Smaller creditors include GPS navigation system maker Garmin, Nikon, Lenovo, Eastman Kodak and Mitsubishi.
Deutsche Bank analyst Mike Baker told investors that consumers learning about Circuit City's bankruptcy may go elsewhere because of a lack of confidence in the company.
At a Circuit City Warehouse Store already slated for closure in Milwaukee, Courtney Bergeron, 29, said he heard the news about the company and figured he should see if there were any deals for flat-screen TVs.
Although he saw some discounts - about 15 percent off televisions at least 32 inches wide - Bergeron figured he should wait.
"On Black Friday, they're probably going to be lower than this," he said.
Bergeron and his friend, Bertha Harris, also 29, said they hadn't shopped much at Circuit City over the years. He said Circuit City's selection was limited, so he ended up buying more electronics from Best Buy and discounter Wal-Mart Stores Inc.
Harris said she was always dissatisfied with service at Circuit City. When she asked questions the workers couldn't answer them on their own, she said.
"They knew as much as I knew about things," she said, adding it wasn't much.
Circuit City announced a week ago it planned to close 155 of its more than 700 U.S. stores by Dec. 31. It is laying off about 17 percent of its domestic work force, which could affect up to 7,300 people.
Horvers said the reorganization could help Circuit City get out of leases for certain bad store locations - something Schick said had been one of the company's main issues.
Circuit City "had many problems in the end - but all began, in our view, with holding on to 1980s real estate too long," he wrote.
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