Merrill's Successful Integration Undermined by Countrywide's Lingering Liabilities

The acquisition of Merrill Lynch during the financial crisis actually helped #BAC in its recent earnings report. #BAC which brought Merrill Lynch during the height of the financial crisis boosted its revenue by $3.5bn through its fixed income trading division.

The major weakness for #BAC is the lingering toxic mortgage assets that it purchased from Countrywide financial also during the financial crisis. #BAC spent $417m tied to loans that were issued years earlier, which have now been found to be faulty. Were it not for the fixed income trading revenues from #BAC Merrill Lynch its earnings would have been substantially worse.

In actual fact #BAC fixed income trading arm perform considerably better than its rivals #JPM and #GS both of which saw a decline in revenues in this sector. #BAC investment banking unit bolstered by Merrill Lynch boosted its earnings to $1.4bn compared to $900m in Q2.

If it wasn’t for the fact that #BAC had to write down $10.4bn in goodwill impairment charges the bank would have actually earned $3.1bn in the third quarter.

Source: http://topics.wsj.com/article/SB40001424052702304510704575561763244413610.html

One Disgraced Former CEO and a Missed Opportunity for Bank of America

Today (15-10-2010) in a settlement with the SEC it was announced that the disgraced CEO, Angelo Mozilo would pay $65.5m in charges relating to insider trading and alleged profit taking from the doling out risky mortgage whilst at the same time misleading investors about the risks involved. This settlement was reached by both parties to avoid what would have likely been a lengthy civil fraud trail.

The former Countrywide Financial CEO, Angelo Mozilo reaped approximately $406m through selling company stock between 1984 when the company launched its IPO and 2008 when the company was brought by Bank of America (BofA).

Source: http://finance.yahoo.com/news/Countrywide-CEO-Mozilo-apf-1381976931.html?x=0

This agreement demands that Mozilo pays $45m in disgorgement charges and a further $22.5m in civil penalties. After the settlement was reached the SEC Enforcement officer was quoted as saying it’s “the fitting outcome for a corporate executive who deliberately disregarded his duty to investors by hiding what he saw in the executive suite”. This settlement with the SEC represents a meagre 16% of Mozilo’s net worth given the total value of shares he sold whilst at Countrywide. Additionally Mozilo admitted to not wrongdoing.

To add insult to injury it has come to light that BofA the company that brought Countrywide Financial during the height of the financial crisis in 2008 is to pay $20m of Mozilo’s disgorgement charges. At a time when Western financial institutions are in the process of restoring their damaged reputations and tarnished image as a result of the financial crisis seems to defy logic. This act by BofA would seem to go completely against the grain of this given the nature of Angelo Mozilo’s changes. It would seem to me that Brian Moynihan the companies CEO has missed a golden opportunity to alleviate some of BofA tainted reputation by not refusing to pay part of Mozilo’s disgorgement charges.

However, despite all this the public can all breathe a sigh of relief for being safe in the knowledge that Angelo Mozilo is prevented from working for a public company again for life. Maybe there is some justice after all.
 
http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html?_r=1&hp=&pagewanted=all

http://finance.yahoo.com/news/Countrywide-CEO-Mozilo-apf-1381976931.html?x=0

Pessimism Overides Strong Coorperate Earnings

New data compiled by Bloomberg highlights growing pessimism among analysts, which is beginning to worry investors as their attention shifts from strong cooperate earnings to macro-economic data and the potential of a double-dip recession.

• For the first time since 1997 fewer than 29% of ratings for stocks covered by brokerages worldwide are "buys", according to 159,919 recommendations compiled by Bloomberg.
• This flies in the face of strong cooperate earnings, recently announced in the Q2 earnings season
• the reason for this is because investors are becoming increasingly concerned with the global economic outlook, which as recent economic data suggest is looking "unusually uncertain" to quote Ben Bernanke chairman of Federal Reserve.
• This kind of sentiment is summed up perfectly by Paul Zemsky, head of IG Investment Management who says  "Boy theses companies look pretty good, earnings look OK, they have plenty of cash. What if there is a double-dip"
• Also the recent announcement by Intel saying that Q3 earnings will be lower than previous estimates only adds to investor fears.
• Additionally the report also shows that 54% of ratings for companies in the US, UK, Japan & Brazil are holds, clearly demonstrating a market that currently lacks conviction
• This case is highlighted further when investors today (Mon 30th August) gave back most of the gains that were accumulated on Friday - a "sell the rally" approach that seems to dominating the market of late.

Despite all this pessimism, analysts say that profits for companies in the MSCI World Index of 24 developed nations will gain 28% in the next year. This index currently trades at 11.5X forecast earnings, which is historically low given the fact that apart from the six months starting from October 2008 the index has never traded below 12.5X reported earnings.

Main Article at http://noir.bloomberg.com/apps/news?pid=20601109&sid=aJJjeB34wnHs&pos=10

Quants: The Alchemists of Wall Street - An Insight

Gillian Tett Presents the Case to Stress Test America's GSE's

Gillian Tett presents a telling argument as to why the America’s huge Government Sponsored Enterprises should themselves be stress testes.

Picture Source: http://sightsonpennsylvania.blogspot.com/2010/06/fannie-mae-and-freddie-mac-delist.html

• First she highlights that in the entire 2,300 page document relating to the recent financial reform bill there is unbelievably little detail of the mortgage giants Fannie Mae & Freddie Mac.

• This demonstrates a woeful lack of understanding around the origins of the financial crisis itself, but more specifically the US mortgage market, of which Fannie Mae and Freddie Mac make up a staggering $5,500bn of outstanding mortgages in US or approximately 50%.

• Since the 2008 nationalisation of these two institutions, $145bn of taxpayers’ money has gone into propping the GSEs up.

• However these could rise dramatically from this figure with estimates varying from $390bn to a whopping $1trn, which as Gillian Tett puts it makes the “woes of the Spanish savings banks seem almost tame”.

• Doubts remain as to whether there will ever be a stress test for these GSEs , due to fact that they are the only thing keeping the US mortgage market afloat.

• This is highlighted by the fact that 9/10 mortgages last year were underwritten by Fannie Mae and Freddie Mac

• Additionally if the Obama administration were to embark on a radical reform programme, this would inevitably lead to huge conflict between the government and Federal Reserve given the size of their holdings of mortgage backed bonds.

However despite all this, there is momentum building behind the scenes both in Washington and on Wall Street for overhaul of GSEs. With calls for banks to organise a mutual, private sector insurance scheme to guarantee mortgages without state support. However there remains a huge stumbling block, which is that any type of reform at present given the fragility of the US housing market may tip the country back into recession (just look at last week’s housing sales figures, which showed a huge 27% drop in July – a 10 year low)

Given the fact it was the markets that forced austerity on Greece and the Bank Stress Test in Europe, it may again decide the fate of the GSEs and the US mortgage market should the markets repeat the events of May this year.

http://www.bbc.co.uk/news/business-11075006

For the US Gold Reign's Supreme as Emerging Markets Shift away from the Dollar

An article in this weekend (28th/29th August) FT Magazine, shows that according to the World Gold Council 70% of US foreign currency reserves are made up of Gold, substantially more than any other country in the world. (see figures below)

1. US - 8,133.5 Tonnes
2. Germany - 3,407
3. IMF (who recently announced it was selling 160 on the market with just under 3,000 tonnes)
4. Italy - 2,451.8
5. France - 2,435.4
6. Russia after its buying spree last year now has 668 tonnes
7. ECB (European Central Bank) with 501 tonnes
9 UK - 310

As far as China is concerned, which given that it now produces more gold than any other country in the world comes 8th on the list. However that could change depending on US fiscal policy and whether China still continues to believe that US can manage its debt and continues to buy its treasuries.

As emerging market central banks continue to diversify their own portfolios, Rogoff co-author of This Time it’s Different says they “will probably raise the share of gold in their foreign exchange reserves”. This is because their shift from an over-reliance on the dollar to currencies such as the euro is not “sufficient diversification against the risk – which is low, but certainly non-trivial – of a generalised global inflation.

Statistics Show Why Britain's Welfare System Needs A Radical Overhaul

A recent report by the Sunday Times newspaper, published on July 25th highlights the worrying cost to taxpayers of current welfare system, which this year alone will account for nearly £200bn of government spending.

In the last decade under the Labour government welfare ‘benefits’ spending in Britain has spiralled out of control.

Figures compiled by the Treasury, DWP (Department for Work & Pensions) and Civitas show that between 2000 and 2010 welfare spending went from £132bn to £192bn. Perhaps what is more concerning is the amount of people as a percentage of the population that rely on the welfare system; in 1960, 5% of population received benefits in stark contrast to today where a shocking 29% of the UK population receive benefits of some kind. A breakdown of the figures show the £30bn alone in spent on jobseekers allowance, housing benefit and income support, which represent the three most common forms of welfare payments. The yearly cost to the taxpayer of people claiming disability benefits is £11.5bn, which is larger than the entire budget for the Home Office. Also highlighted in the figures is the amount of people that are currently unemployed which currently stands at 5.9m. An alarming trend in these figures is that 1.4m of these have claimed 9 out of the last 10 years.

Also highlighted in the Sunday Times report is that over 3,000 families are claiming benefits of £26,000 a year. A rising trend seems to be where three generations of families are living on benefits, which is now creating a substantial strain on government spending in a time of austerity. This is making life increasingly difficult for policymakers who are trying to wean entire generations of families of benefits. As a consequence of this, is that they are becoming accustomed to a life of idleness, which then creates its own set of problem; one is that they as a result of spending long periods out of work become increasingly unemployable as a result of their physical condition and secondly they rapidly lose the skills necessary to carry those jobs in today rapidly changing job market.

Labour’s Sure Start scheme was designed to give children in deprived areas of Britain’s communities a better start in life a so called ‘early intervention’ program; however this was criticised as an expensive political piece of social engineering. The Conservatives proposed in their manifesto a ‘big society’ approach, which has also received criticism.

A more effective approach that has been proposed is the possibility of getting private businesses to invest money in projects for children at an early stage in the hope of getting returns on their initial investment at a later date. A report was published by Smith Institute and the Centre for Social Justice, which was founded by Ian-Duncan Smith with the purpose of mending a ‘broken Britain’. A comparative study was also carried out in the US back in the 1960s titled the Perry pre-school study focusing on African-Americans, with positive results.

John Bird, the founder of the Big Issue presented research to David Cameron that demonstrated that among his homeless magazine vendors that it has cost the state more to keep them in care as children as it would have cost to send them to Eton. Showing that simply throwing money at the problem isn’t necessarily the answer.

Perhaps the financial crisis will have one lasting positive effect on the Britain’s welfare system. The reason being is that in the ‘age of austerity’ weaning over-reliant people of benefits will have to speeded up since Britain can no longer afford to maintain its current rate of spending in this area. This will in turn bring forward the increased activity from the private sector in helping alleviate Britain’s social problems, which have positive long term impact on Britain’s economy. As Allen has stated “early intervention is not only cheaper but more effective”.