Ads Attack Wall St Ties, No Matter How Flimsy

Wall Street has taken a beating this election season. Yet what is considered to be Wall Street may be surprising.

Take Keith J. Rothfus, a Republican candidate for Congress in Pennsylvania. A lawyer at a small firm, he specializes in drafting software-licensing agreements. While unglamorous, it helps pay the bills.

Among the clients he has represented is Bank of New York Mellon, which has a large presence in western Pennsylvania. Two commercials backed by Democratic groups are attacking Mr. Rothfus's relationship with his banking client.

“Millionaire Wall Street lawyer Keith Rothfus will fit right in in Washington,” said the narrator of one of the ads. The spot shows a plunging stock market and a grim-looking Mr. Rothfus entering what looks to be a bank. Over ominous music, the narrator goes on: “As a wealthy attorney, Keith Rothfus represented a Wall Street bank that received a bailout from taxpayers.”

In an interview, Mr. Rothfus called th e ad “deceitful, shameful and outrageous.” He said that while BNY Mellon took bailout funds, his work for the company - most of which predates Bank of New York's 2006 takeover of Mellon Financial of Pittsburgh - had no connection to the financial crisis.

“I'm a Stanwix Street lawyer, not a Wall Street lawyer,” Mr. Rothfus said, referring to his firm's downtown Pittsburgh address. “I visited Wall Street once, in 1980, as a tourist at the New York Stock Exchange. If I'm a Wall Street lawyer, then the 7,500 people that work for Mellon bank in western Pennsylvania are fast-money traders who charter private jets to the Hamptons on weekends.”

As campaigns enter their final month, a number of candidates are flooding the airwaves with advertisements demonizing Wall Street. From the presidential race to local Congressional contests, from Montana to New Mexico, candidates - both Democrats and Republicans - are relentlessly attacking their opponents by linking t hem to bankers and bailouts, no matter how tenuous the connection.

“Candidates are bashing each other over the heads for being in Wall Street's back pocket,” said Elizabeth Wilner of Kantar Media's Campaign Media Analysis Group. “Wall Street is this campaign season's punching bag, and it's bipartisan and it's escalating.”

In the turmoil of the 2008 financial crisis, Heather A. Wilson, then a Republican congresswoman from New Mexico, voted in favor of the Troubled Asset Relief Program, or TARP, which provided rescue funds to banks. Four years later, Ms. Wilson - a former Air Force officer - is running for the United States Senate. An opponent's ad assails what it characterizes as her deep ties to Wall Street.

“As a congresswoman from New Mexico, it wasn't Heather Wilson's job to represent Wall Street banks,” said the narrator in a spot paid for by a liberal super PAC. The ad shows a series of dark, shadowy Manhattan office towers - those of Bank of America, Morgan Stanley, Merrill Lynch, JPMorgan Chase and Citigroup. “But she voted time and again to give them special tax breaks, and then voted to bail them out.”

In Montana, the incumbent, Senator Jon Tester, a Democrat, is facing a fierce challenge from the state's sole congressman, Denny Rehberg. Mr. Tester, who has received substantial money from executives in the financial industry, has boasted in television spots that he “opposed all of those Wall Street bailouts.” Mr. Rehberg also voted against the bank bailout. So instead of focusing on TARP, ads pummel Mr. Rehberg for his longtime support for privatizing Social Security - in other words, putting retirement funds in the hands of Wall Street money managers.

One of the ads features the floor of the New York Stock Exchange and an electronic ticker showing shares in a nose dive. The narration features voices of market commentators: “A wild ride on Wall Streetthe biggest point dropa precipitou s fall these guys have been gamblinggamblingbad betsthey didn't know when to back away. A gamble. That's Congressman Denny Rehberg's plan for Social Security.”

Josh Mandel, the Republican Ohio state treasurer running for United State Senate as a Washington outsider, has an ad that goes after members of Congress on both sides of the aisle for supporting the bailout.

“Every Democrat and every Republican who took our tax dollars and used them to bail out Wall Street banks was dead wrong,” Mr. Mandel says in the spot, speaking in an angry tone to a group of factory workers. “It was fiscally irresponsible. It was morally wrong.”

The presidential candidates have also criticized one another for their Wall Street ties. Ads for President Obama have homed in on Mr. Romney's leadership of Bain Capital, the private equity firm he started. By focusing on private equity - a specific pocket of the financial industry - Mr. Obama has largely avoided a broader crit ique of Wall Street, where he has raised millions of dollars. On Monday, the Obama campaign announced a new ad that links Bain to a company outsourced American jobs. Republicans, meanwhile, depict Mr. Obama as a pawn of the financial services industry. One advertisement from the conservative organization American Future Fund titled “Obama's Wall Street” highlights Mr. Obama's vote in favor of TARP when he was a United States senator running for president and says that his cabinet is full of financiers. Another, called “Justice for Sale,” suggests that campaign contributions from the banking industry explain why the administration has not prosecuted more executives relating to their conduct during the financial crisis.

“Under Obama, Wall Street keeps winning, and Obama keeps taking their cash,” the narrator says. “Tell Obama to stop protecting his Wall Street donors.”

Mr. Rothfus, the Republican candidate in Pennsylvania, is locked in a tight race with his opponent, the Democratic incumbent Mark S. Critz. He has countered the attack ads with humorous “Keith Rothfus is a regular guy” 30-second spots. In one, he is shown gardening in his modest front yard, driving his kids around town and repairing his daughter's bicycle.

In response, the American Federation of State, County and Municipal Employees has produced an ad that starts, “Regular guy? Hardly. Keith Rothfus is a millionaire attorney for a Wall Street bank.” Banner headlines of the BNY Mellon's $3 billion bailout run across the screen.

Mr. Rothfus, who lives in Sewickley, Pa., with his wife and six children, has worked as a corporate lawyer since graduating from Notre Dame Law School in 1980. For the last 15 years he has practiced on and off at Yukevich, Marchetti, Liekar & Zangrilli, a 12-lawyer firm. He earned about $125,000 last year. His assignments for BNY Mellon constitute a tiny portion of his overall practice, which focuses on small- a nd medium-size businesses.

“I've never done anything close to securities work for Mellon, never came close to those C.D.O.'s,” said Mr. Rothfus, referring to collateralized debt obligations, the complex mortgage instruments that contributed to the near collapse of the financial system. “I've never even done an I.P.O.”

Spokesmen for organizations behind the attack ads against Mr. Rothfus - the Democratic House Majority PAC and Afscme - said that they stood behind the ads.

Despite Mr. Rothfus's modest salary - top Wall Street lawyers earn substantial seven-figure salaries - the millionaire epithet is accurate. That comes courtesy of his wife, the daughter of a successful Pittsburgh businessman. Based on his most recent financial disclosure, Mr. Rothfus's total assets, including those of his wife, range from $5.1 million to $13.9 million.

With clean-cut looks and wire-rimmed glasses, Mr. Rothfus does look the part of a button-down Wall Street law yer. But he is quick to point out that he favors Brooks Brothers off-the-rack suits instead of the bespoke variety and prefers Land's End neckwear to Hermès ties.

“There were certain individuals on Wall Street who were reckless and betrayed our trust,” he said. “But I wasn't one of them.”

In Stock Market Rebound, a Windfall for Wall St. Executives

Some four years after the financial crisis, many are still feeling the ill effects. But big bank executives are not among this unfortunate group, compensation data shows.

The executives who headed financial institutions in those uncertain times of early 2009, when markets and banks were being supported by the federal government, are now in line to receive windfall compensation in the hundreds of millions of dollars.

What did they do to deserve such a reward? It's hard to justify and it goes a long way toward explaining the persistent anger toward Wall Street. And we have the government partly to blame for it.

A large part of the reason is simply lucky timing.

In the depths of the financial crisis in 2008 and 20009, when the Standard & Poor's 500-stock index was touching below 700, bank executives were granted millions in options and stock incentives valued at incredibly low stock prices. The banks were encouraged to offer this compensation because o f the restrictions in the Troubled Asset Relief Program, which in many circumstances prohibited the payment of bonuses other than in long-term restricted stock. As a result, companies awarded more equity than they otherwise would have at the time.

Since then, the stock market has returned to near the level it was before the financial crisis, making those options and stock very valuable.

To determine how large the windfall is, I asked Equilar, an executive compensation data firm, to compile the value of stock and options granted to the top five executives at each of the 18 largest American financial institutions - those that underwent stress tests in those years. (Ally Bank also received a stress test but was excluded because it was not public at the time). I also asked Equilar to determine what the packages were worth now, assuming the executives had held on to the stock and options.

It's a stupendous amount.

The top executives at those 18 financial i nstitutions received an aggregate of $142 million in stock and options from July 1, 2008, to June 30, 2009. It was a lot then, but these stock and options are now worth $457 million, an increase of $330 million, or 221 percent. On average, that is roughly $4 million per executive who received such compensation.

Individually, some of the gains are even more breathtaking. Take American Express and its chief executive, Kenneth I. Chenault. In 2007, before the financial crisis, American Express was trading for years at $50 to $60. Then the crisis hit, and in six months the stock fell below $10 a share.

In January 2009, American Express granted its top five executives stock options with a strike price of $16.71, which Equilar values at $7.63 million. According to American Express's public disclosure, Mr. Chenault received the largest grant of 1,196,888 options.

American Express stock is now back to about $57 a share. And that equity package is up 1,097 percent a nd valued at $91.36 million. Mr. Chenault's option package alone is now valued at almost $50 million.

That's a nice payday. Can anyone argue that it is owed to the executive's performance rather than to a recovery in the stock market?

American Express did not respond to requests for comment.

The biggest dollar winners are the executives of Capital One. According to Equilar, the credit card company's top five executives received an incentive pay package granted in 2009 valued at $19.9 million. The package is now worth $114 million. The reason for the huge compensation package: Capital One's options were granted at a price of $18.28 during the financial crisis. . Yet, Capital One's stock price is trading at almost $60 a share, below its precrisis price of around $80.

A Capital One spokesman said that the compensation was justified because Capital One “delivered solid results in 2009.” The spokesman added that Equilar's figures did not account for th e fact that some Capital One executives had already exercised their options. According to Capital One, if these exercises were taken into account, the package's value would be $87 million instead, still a fantastic amount.

All told, eight of these 18 firms, including Wells Fargo and SunTrust banks, gave executive pay packages during the financial crisis that are now more than 200 percent higher in value. Four of these financial institutions - BB&T, U.S. Bancorp, Capital One and American Express - awarded pay packages that are up more than 400 percent. Almost all of this value is attributable simply to the stock market's recovery.

And some of these packages reward what frankly appears to be poor performance. The top five executives of Fifth Third Bancorp received a pay package that is now 253 percent higher in value despite Fifth Third's stock being about a third its precrisis value.

How could this happen, you may ask?

The bank executives who stood to make the most were those who were paid more in options than in stock. Options provide greater gains when the stock goes up and so are increasingly in disfavor. For example, Equilar calculates that the options granted to the Capital One executives are up 838 percent, or almost $70 million, while the stock component is up only 212 percent, or about $25 million. You won't be surprised to hear that American Express's total 2009 incentive compensation was paid all in options.

Another explanation is that many of the financial institutions did not adjust the dollar amount of their financial compensation paid that year to take into account the stock market drop. In other words, the banks paid the same dollar amounts but had to grant more options and stock to meet this number because of the low price.

If you are shaking your head, you should know that these numbers are only for the top five executives at these companies. Lower-ranked employees who received equity compensa tion, which is largely undisclosed, may have also received such a windfall.

Indeed, The New York Times reported in 2010 that the partners and employees of Goldman Sachs had received a substantial equity grant of 36 million stock options during the financial crisis. And of course, this excess compensation was awarded at many other, smaller banks.

Taken together, this is a sobering view of executive compensation. It shows how compensation can have little to do with performance and more with stock market movements and the luck of having options granted instead of less valuable stock. More tellingly, it also shows how the government most likely enriched financial executives by pushing banks to award more equity compensation through TARP than they otherwise would have.

The sad thing is that these executives were compensated not because of the work they did at their firms, but because of a lucky rise in the stock market. It is anything but pay for performance. An d yes, if the financial crisis had not occurred, they were likely to have been much poorer otherwise. It's no wonder Main Street is still seething.

Equilar Analysis of 18 TARP Bank Equity Grants JPMorgan Chase plans to disclose part of the total losses on a bungled trade.

TOTAL EQUITYOPTIONSSTOCKCURRENT VALUEGRANT-DATE VALUE% CHG.CURRENT VALUEGRANT-DATE VALUE% CHG.CURRENT VALUEGRANT-DATE VALUE% CHG.

Includes all grants made between July 1, 2008 and June 30, 2009.
Capital One Financial
$114,142,199	$19,937,974	472%	$77,875,140	$8,298,897	838%	$36,267,059	$11,639,077	2 12%
American Express
91,360,635	7,632,486	1,097	91,360,635	7,632,486	1,097	â€"	â€"	n/a
PNC Financial Services
68,817,278	20,842,433	230	54,474,868	13,861,096	293	14,342,410	6,981,337	105
Wells Fargo
32,199,370	8,972,088	259	17,468,325	3,441,590	408	14,731,045	5,530,498	166
SunTrust
29,325,385	8,465,869	246	24,264,019	6,843,223	255	5,061,366	1,622,646	212
Regions Financial Corp.
22,133,383	9,564,120	131	8,953,001	3,607,602	148	13,180,382	5,956,518	121
BB&T
17,345,986	3,127,347	455	11,803,836	1,883,669	527	5,542,150	1,243,678	346
U.S. Bancorp
16,099,591	2,775,000	480	16,099,591	2,775,000	480	â€"	â€"	n/a
JPMorgan Chase
15,553,876	7,450,000	109	â€"	â€"	n/a	15,553,876	7,450,000	109
Bank of New York Mellon
13,792,147	11,885,005	16	5,915,846	5,665,420	4	7,876,300	6,219,585	27
Bank of America
12,519,196	20,000,008	-37	â€"	â€"	n/a	12,519,196	20,000,008	-37
KeyCorp
10,902,463	12,475,708	-13	5,245,500	6,373,250	-18	5,656,963	6,102,458	-7
MetLife
9,254,130	6,880,440	34	9,254,130	6,880 ,440	34	â€"	â€"	n/a
Fifth Third Bancorp
3,406,700	963,800	253	â€"	â€"	n/a	3,406,700	963,800	253
Citigroup
â€"	1,268,149	-100	â€"	1,268,149	-100	â€"	â€"	n/a
Goldman Sachs
â€"	â€"	n/a	â€"	â€"	n/a	â€"	â€"	n/a
State Street
â€"	â€"	n/a	â€"	â€"	n/a	â€"	â€"	n/a
Morgan Stanley
â€"	â€"	n/a	â€"	â€"	n/a	â€"	â€"	n/a
Total
$456,852,337	$142,240,427	221%	$322,714,891	$68,530,822	371%	$134,137,446	$73,709,605	82%

In the J.P. Morgan Suit, a Lack of New News

The lawsuit filed by New York Attorney General Eric Schneiderman against J.P. Morgan for flawed mortgage-backed securities issued by Bear Stearns arrives a bit late in the game.

It is the first case to emerge from the Residential Mortgage-Backed Securities Working Group, led by Mr. Schneiderman, which was formed in January.

Yet it contains little new information about how Wall Street bundled together several poorly underwritten subprime mortgages and sold them to investors on the promise that they were safe investments. And as a civil case, it may result in a finding of a violation, but that would come only after years of discovery and legal maneuvering.

Indeed, the complaint filed by Mr. Schneiderman quotes information from, among other sources, the Financial Crisis Inquiry Commission's report issued two years ago to show how mortgage underwriting standards were largely ignored by Bear Stearns.

The claimed losses from the instruments issued in 20 06 and 2007 total approximately $22.5 billion. That is not insignificant but hardly makes Bear Stearns the worst offender, or a unique actor in this area.

A number of similar lawsuits have been filed claiming that Wall Street firms failed to conduct anything close to the due diligence they promised in their offering materials for securities that lost billions of dollars in value when the mortgage market collapsed.

For example, the National Credit Union Administration is pursuing claims against a number of large banks, including J.P. Morgan, for losses from the residential mortgage-backed securities bought by credit unions before the financial crisis, and has already settled with others for $170 million.

A Justice Department press release noted that it helped in the New York case by reviewing “more than 50 deposition transcripts taken in other litigation for significant evidence.”

What sets this complaint apart is that it is not limited to just a f ew particular transactions. Unlike private investors who can file claims only for the specific securities they bought, Mr. Schneiderman assails the entire residential M.B.S. operation at Bear Stearns as designed to cater to the mortgage originators who supplied it with product to package than with protecting the buyers of the securities it was churning out.

The lawsuit cites the typically vulgar or callous e-mails that seem to be a staple of Wall Street's sales culture as evidence of Bear Stearns's disregard for the buyers. One internal e-mail described a securitization in scatological terms, while another sought to “close this dog” because it looked like a “going out of business sale.”

The most interesting claim is not that Bear Stearns had faulty underwriting and due diligence â€" that is hardly a surprise as firms did their best to push out mortgage bonds while the market remained hot. It is the allegation that the firm settled claims about bad mort gages that were put into its securities by taking payments from the mortgage originators and then keeping the money for itself rather than passing it on to the securities holders.

If true, that goes beyond just shoddy practices to something much more akin to theft by keeping payments that did not belong to the firm.

How much money may be involved is not clear, however, and Bear Stearns's dealings with the mortgage originators might not have been improper if it accounted for the funds under the requirements of the securities offering documents.

The decision to pursue civil charges under New York's Martin Act means that the state's attorney general will not have to prove fraudulent intent, only that the firm was negligent in making any false or misleading disclosures. While easier to prove, that also indicates that the evidence to prove fraud was not strong enough to bring more serious charges.

Like so many cases related to the financial crisis, no indi viduals are named in the complaint. Nor does it appear that any criminal charges will emerge this long after Bear Stearns was pushed into the arms of J.P. Morgan by the federal government in a transaction routinely described as a fire sale.

Even naming J.P. Morgan as a defendant is a bit of a misnomer because the bank was not involved in the misconduct in securitizing questionable subprime mortgages. So any penalty that might be imposed would simply add to the costs of the merger rather than constitute any real punishment of a wrongdoer.

There is a chance the case will go to trial, but I think that likelihood is small. As a spokesman for J.P. Morgan stated, “We're disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record - instead relying on recycled claims already made by private plaintiffs.”

Those are not really fighting words from a company that believes it has been unfairly accused. The complaint has little to do with the J.P. Morgan's current operations, so the case will probably settle once the two sides can come up with a suitable amount to be paid, because there are no remedial measures that would have to be put in place. And that may be all there is to the case.

New York AG v JP Morgan Bear Stearns Mortgage Complaint Oct 1 2012

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

Einhorn\'s Words Still Potent, but Not All Powerful

David Einhorn doesn't even have to say the word “short” for investors to get nervous.

During a presentation on Tuesday at which he was expected to reveal his latest bearish thesis, Einhorn, a hedge fund manager, introduced a discussion of General Motors with an ambiguous line. Mr. Einhorn, the president of Greenlight Capital, pivoted on the ticker symbol of Green Mountain Coffee Roasters, a target of his criticism last year.

“If you take the CR away from GMCR, you get G.M.,” Mr. Einhorn said.

Shares of General Motors plunged, before investors realized that the assessment of the automaker was positive.

Mr. Einhorn emphasized the folly of taking his ideas on faith.

“It doesn't make sense to blindly follow me or anyone else into a stock,” he said as a preface to his presentation at the Value Investing Congress in Manhattan. “Do your own work. And when a successful investor shows you their work, check their work.”

Despite his cautionary note, Mr. Einhorn's words do hold sway. His primary target on Tuesday was Chipotle Mexican Grill, whose shares initially fell about 6.5 percent after he said that he was short-selling the company. The Mexican food chain is vulnerable to competition, especially from Taco Bell, Mr. Einhorn said.

But not everyone in the market subscribed to Mr. Einhorn's bearish view, and investors do seem to be not taking everything he says at face value anymore.

“I don't think his comments make any sense at all,” said Damon Vickers, managing director of a boutique wealth management firm in Seattle that has a long position in Chipotle.

Other investors seemed to share Mr. Vickers's sentiment. Chipotle's shares recovered slightly as the day wore on, and were down about 5 percent as of late afternoon on Tuesday.

Bullish investors also challenged the hedge fund manager's views on Green Mountain Coffee Roasters, which had lost about three-quarters of its mark et value since Mr. Einhorn criticized it last year.

Mr. Einhorn revisited the company on Tuesday, saying the expiration of patents had left it vulnerable. He questioned Green Mountain's accounting, reiterating previous concerns.

And yet, Green Mountain's stock experienced a burst of investor optimism during the day, with its shares rising more than 2 percent.

Still, Mr. Einhorn has also been known to also have a positive effect on shares.

In a 120-side presentation titled “Kicking the Tires,” Mr. Einhorn made arguments about four different companies, including positive opinions of General Motors and the health care company Cigna. Those stocks rose as Mr. Einhorn spoke.

With MetroPCS Nearing a Sale, Leap Rises as Well

It's a good day to be a cellphone service provider, at least if there's a chance that you might be acquired.

Shares in Leap Wireless International jumped 8 percent on Tuesday after Deutsche Telekom confirmed that it's in talks to buy another low-cost provider, MetroPCS. At $7.59, Leap is reaching levels last seen in late April.

Why the enthusiasm? Because if MetroPCS is sold, Leap will the biggest independent cellphone network operator left for for potential buyers.

Leap, which operates the Cricket brand of cellphone service, claimed about 5.9 million customers as of the second quarter this year. And it offers Long Term Evolution, the high-speed data service that is already offered by the likes of Verizon Wireless and AT&T, and is one of the main draws of newer smartphones like the iPhone 5.

Leap had previously held merger talks with MetroPCS over the years, including as recently as two years ago. None of those discussions ever led to a deal, howeve r.

Investors appear to be betting that Leap may ultimately be a takeover takeover target by the likes of Sprint Nextel. Sprint had nearly struck its own deal to buy MetroPCS earlier this year. But Sprint's board voted down the plan at the 11th hour, scuppering the proposed transaction.

On Tuesday, Sprint shares slipped on news of a potential MetroPCS deal.

If Sprint is still looking to grow by acquisition - its chief executive, Daniel Hesse, hinted as much at a recent industry conference - Leap could make sense. Its phones operate on the CDMA network standard, the same one Sprint uses, and it offers the bigger network company a chance to expand its limited LTE coverage.

But some analysts remain cool to the idea of a tie-up between Sprint and Leap. Analysts at Nomura wrote on Tuesday that they view the smaller company to be a less attractive target than MetroPCS, owing to “a smaller subscriber base, lower margins and burns cash.”

With MetroPCS Nearing a Sale, Leap Rises as Well

It's a good day to be a cellphone service provider, at least if there's a chance that you might be acquired.

Shares in Leap Wireless International jumped 8 percent on Tuesday after Deutsche Telekom confirmed that it's in talks to buy another low-cost provider, MetroPCS. At $7.59, Leap is reaching levels last seen in late April.

Why the enthusiasm? Because if MetroPCS is sold, Leap will the biggest independent cellphone network operator left for for potential buyers.

Leap, which operates the Cricket brand of cellphone service, claimed about 5.9 million customers as of the second quarter this year. And it offers Long Term Evolution, the high-speed data service that is already offered by the likes of Verizon Wireless and AT&T, and is one of the main draws of newer smartphones like the iPhone 5.

Leap had previously held merger talks with MetroPCS over the years, including as recently as two years ago. None of those discussions ever led to a deal, howeve r.

Investors appear to be betting that Leap may ultimately be a takeover takeover target by the likes of Sprint Nextel. Sprint had nearly struck its own deal to buy MetroPCS earlier this year. But Sprint's board voted down the plan at the 11th hour, scuppering the proposed transaction.

On Tuesday, Sprint shares slipped on news of a potential MetroPCS deal.

If Sprint is still looking to grow by acquisition - its chief executive, Daniel Hesse, hinted as much at a recent industry conference - Leap could make sense. Its phones operate on the CDMA network standard, the same one Sprint uses, and it offers the bigger network company a chance to expand its limited LTE coverage.

But some analysts remain cool to the idea of a tie-up between Sprint and Leap. Analysts at Nomura wrote on Tuesday that they view the smaller company to be a less attractive target than MetroPCS, owing to “a smaller subscriber base, lower margins and burns cash.”

The Intangible Costs of Bankruptcies

Financial distress has a cost. Creditors would say I've just stated the obvious.

In most cases, the borrower incurs the cost in the form of higher interest rates and fees up front, although unanticipated costs, and costs imposed on tort victims, are created by those creditors.

The costs of corporate bankruptcy or reorganization are often considered to encompass two concepts. First, there are the direct costs, composed chiefly of the professionals fees associated with reorganization. But they also include other lesser costs, like court filing fees and, in the United States, quarterly fees due to the United States Trustee's office.

Academics, including myself, examine these costs a lot, in part because they are easy to study. They are spelled out in precise dollars.

In addition, there are indirect costs of a company's financial distress, which are more abstract, like lost revenue, lost opportunities and lost good will.

Some of these costs may be of concern to the company's stakeholders, but not to policy makers if, for example, financial distress simply results in the shifting of sales from the distressed firm to a competitor firm â€" unless the competitor is abroad.

American Airlines, which filed for bankruptcy protection in November 2011, is incurring those costs right now in a public way.

Seats are loose, bloggers are complaining, and pilots are (understandably) unwilling to cut the company any breaks, since the company wants to cut the costs of pilots.

A recent paper in The Journal of Financial Economics (here's a free version) shows that these sorts of indirect costs are incurred for years before the company formally defaults. Rather than a sudden, Lehman-style collapse, the authors say that it is far more common for firms to experience a slow erosion of value.

This finding has a lot of important implications. First of all, it suggests that academics may be focusing too narro wly on fees. Chapter 11 professional fees are sensational â€" the media loves to talk about the high-priced lawyers that help companies go broke â€" but they don't seem to be an important part of the cost here.

And if most of the cost is incurred long before bankruptcy, then we may need to reform the Chapter 11 portion of the bankruptcy code in a way that will allow those costs to be cut sooner.

Of course, management always expects that the turnaround that will help it avoid bankruptcy is just around the corner.

Often it's called terminal optimism.

Stephen J. Lubben holds the Harvey Washington Wiley chair in corporate governance and business ethics at the Seton Hall University School of Law and is an expert on bankruptcy.

As MetroPCS Talks Deal, Sprint Sinks

Investors are worried again about the prospects of Sprint Nextel.

On Tuesday, shares of Sprint had slipped by nearly 5 percent after Deutsche Telekom said that it was in talks to buy MetroPCS and merge it with its T-Mobile USA unit.

If Deutsche Telekom acquires MetroPCS, Sprint could face a newly emboldened competitor.

Sprint, which has 56.4 million customers, ranks as the third-largest cell phone provider in the United States, significantly trailing AT&T and Verizon. T-Mobile USA, the American subsidiary of Deutsche Telekom, has 33.2 million customers, according to the industry consulting firm Ovum.

But the acquisition of MetroPCS would significantly bolster T-Mobile's business. Combined, the two carriers would have 42.5 million customers, significantly closing the gap with Sprint.

Sprint had tried to buy MetroPCS in a bid to bulk up its business. But the deal fell apart this year after Sprint's board rejected the proposed takeover.

Sp rint's management has moved to improve the company's fortunes. It added the iPhone to its lineup and invested in customer service in an effort to combat the attrition problem. Over the last 12 months, shares of Sprint have more than doubled.

But the company continues to struggle financially. In the second quarter, the company lost $1.4 billion, compared with a loss of $847 million the previous year.

Deutsche Telekom Said to Be Near a Deal to Buy MetroPCS

Deutsche Telekom is nearing a deal to buy MetroPCS and merge it with its T-Mobile USA unit, people briefed on the matter said on Tuesday, as it seeks to bolster its flagging business in the United States.

Talks are ongoing, and a deal may be announced as soon as Wednesday, these people said, cautioning that negotiations may still break down.

If completed, a deal would come nearly a year after T-Mobile's proposed $39 billion sale to AT&T collapsed amid fierce opposition from antitrust regulators. And it would help shore up the Deutsche Telekom subsidiary's position as a lower-cost alternative to Verizon Wireless and AT&T.

Shares in MetroPCS shot up nearly 18 percent on Tuesday, to $13.60, after Bloomberg News reported talks between the two sides. That valued MetroPCS at about $4.9 billion.

Representatives for Deutsche Telekom and MetroPCS declined to comment or were not immediately available for comment.

Deutsche Telekom has been keen for years to find a way to strengthen its American subsidiary, which has lost customers to bigger rivals that offer faster data services and, perhaps more importantly, the iPhone. With 33,168 customers T-Mobile currently trails its bigger competitors, which also include Sprint Nextel, by considerable margins. And it lost 205,000 subscribers in its second quarter this year, quadruple what it reported a year ago.

Adding MetroPCS would give T-Mobile 9.3 million customers, though their phones currently operate on a different network technology.

Based in Richardson, Tex., MetroPCS has long been seen as a target for consolidation within the cellphone service industry. Earlier this year, the company's deal to sell itself to Sprint for stock and cash collapsed after the bigger network operator's board vetoed the proposed transaction.

MetroPCS and another low-cost service provider, Leap Wireless, have considered merging several times over recent years, though those talks bro ke down repeatedly over price.

In JPMorgan Case, the Martin Act Rides Again

The New York attorney general's new lawsuit against JPMorgan Chase over mortgage-backed securities showcases one of the legal weapons most feared on Wall Street: the Martin Act.

In using the law, the attorney general, Eric T. Schneiderman, is drawing upon the securities fraud statute behind many of the biggest actions against financial firms in recent years.

The Martin Act, which was enacted in 1921 as a deterrent against “blue-sky” fraud, allows New York's attorney general to pursue criminal or civil charges against companies. But the law does not require the government to show proof that the defendant intended to defraud anyone, or that fraud actually took place. So the state has a lower bar to bring cases.

Attorneys general can use the law to seek an enormous amount of information from businesses based in New York, and they can also disclose an unusually large amount of information about their investigations. (Here are two primers on what the act allows.)

Those looser guidelines proved invaluable to aggressive officials like Albert Ottinger, who used it to shutter the Consolidated Stock Exchange in the 1920s. Jacob Javits succeeded in adding the ability to bring criminal prosecutions to the law.

It was Eliot L. Spitzer who unleashed the full powers of the Martin Act, transforming it from a baton used against small-time hustlers into a mace capable of cowing Wall Street firms.

Together, Mr. Spitzer and a top lieutenant, Eric R. Dinallo, wielded the law to batter Merrill Lynch over analysts' hyping of Internet stocks. Other banks and their practices soon came into Mr. Spitzer's cross hairs, culminating in a global settlement that encompassed 10 banks and $1.4 billion in fines.

Mr. Spitzer also used the Martin Act to take on the mutual fund industry for the practices of late trading and market timing, as well as the pay package of Richard A. Grasso, onetime head of the New York Stock Exchange. A state appeals court eventually dismissed the claims against Mr. Grasso, and Andrew M. Cuomo, then the successor to Mr. Spitzer, declined to appeal.

Mr. Spitzer also put pressure on the American International Group, prompting the ouster of Maurice R. Greenberg as its chief executive. A.I.G. eventually settled for $1.6 billion and admitted to deceiving the public. Mr. Spitzer also sued Mr. Greenberg, and court battles are continuing.

As attorney general, Mr. Cuomo deployed the Martin Act as well. He used the law to investigate a pay-to-play scandal at the New York state comptroller's office during the tenure of Alan G. Hevesi. And he pursued charges against Ernst & Young for enabling fraud at Lehman Brothers by approving an accounting technique known as Repo 105. The technique allowed the investment bank to temporarily improve the appearance of its balance sheet.

Mr. Cuomo so liked the Martin Act that at one point, he considered amending the law to let a trus ted lieutenant, Benjamin M. Lawsky, use it at the new Department of Financial Services. After encountering fiery criticism, Mr. Cuomo dropped those plans.

Mr. Schneiderman has already used the Martin Act to investigate natural gas companies' plans to drill in upstate New York. He has also sued Bank of New York Mellon over foreign exchange fees.

Einhorn Bets Against Chipotle

The share price of Chipotle Mexican Grill is dropping like a lead burrito after hedge fund manager David Einhorn called the fast-food chain overvalued.

Chipotle is the latest “short” idea from Mr. Einhorn.

On Tuesday, Mr. Einhorn outlined the bearish case for the company, arguing that Chipotle's business is vulnerable to competition. His statements sent the stock tumbling nearly 6.5 percent

Mr. Einhorn, the president of Greenlight Capital, noted that Taco Bell's new upscale menu, Cantina Bell, would lure customers away from Chipotle, which offers higher-priced options. Size matters, too. Taco Bell has 5,600 retail locations while Chipotle has 1,200 restaurants.

“Taco Bell has started to eat Chipotle's lunch,” Mr. Einhorn said at the Value Investing Congress, an industry conference in Midtown Manhattan.

Einhorn has built a cult following on Wall Street for his shorts, which take aim at companies with vulnerable share prices. He infamous ly took Lehman Brothers to task months before the firm went belly up. He also called out Allied Capital for questionable accounting and valuations. More recently, he took aim at Green Mountain Coffee Roasters.

Business Day Live: Conflict Over \'Love Hotel\' Sale

Cargill finds trouble in Japanese ‘love hotel' deal. | Why Americans could pay higher taxes come January. | American Express to pay refunds over debt collection practices.

MetroPCS Spikes on Deal Speculation

Shares of MetroPCS Communications spiked on speculation on Tuesday that it was nearing a deal with Deutsche Telekom.

MetroPCS, the cell phone service provider, has been posited as a potential deal target for awhile. Sprint Nextel moved to buy the company earlier this year. But proposed takeover fell apart after Sprint's board rejected the acquisition.

Now, new deal chatter has emerger. Last week, DealReporter said that MetroPCS had held talks with potential suitors.

On Tuesday, Bloomberg reported that Deutsche Telekom was close to securing a transaction, citing people familiar with the knowledge. Bloomberg noted that the German company would use such a transaction to bulk up T-Mobile USA, following the failed sale of the American subsidiary to AT&T.

After the latest report, shares of the cell phone service provider rose more than 21 percent to roughly $14.

Deutsche Telekom could have the firepower to make a deal with MetroPCS. Last week, T-Mob ile agreed to sell the rights to some of its towers to Crown Castle for $2.4 billion.

Regulator Urges Appeal of Dodd-Frank Court Ruling

After a recent court decision overturned limits on speculative trading, a financial regulator on Tuesday slammed the judicial ruling as “deeply flawed” and vulnerable to appeal.

Bart Chilton, a Democratic member of the the Commodity Futures Trading Commission, called for his agency to challenge the ruling handed down last week by a federal judge in Washington. The decision tossed out the agency's new so-called position limits rule, which took aim at speculative Wall Street trading tied to soaring energy prices.

“Position limits are simply too important,” Mr. Chilton said in prepared remarks for a speech in Rome at the United Nations Food and Agriculture Organization headquarters.

Position limits would cap the number of derivatives contracts a trader can hold on 28 commodities, including energy products like oil and natural gas. The rule, Mr. Chilton and other supporters say, would protect consumers from speculative commodities trading. Some studie s link speculative trading to inflated prices at the gas pump and the grocery store.

The rule is rooted in the Dodd-Frank act, the financial regulatory overhaul passed in response to the financial crisis. When the C.F.T.C. adopted the limits last fall, it did so in the face of significant Wall Street opposition.

In December, the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association sued the agency over its rule. The Wall Street trade groups pointed to the fine print of Dodd-Frank, saying the law leaves it to regulators to enforce position limits only “as appropriate.”

The agency had a different interpretation, saying that lawmakers gave it no choice but to impose position limits. The “appropriate” requirement, the agency argued, refers to setting position limits at a reasonable level.

“They knew limits were urgent and important,” Mr. Chilton said, referring to the lawmakers who passed Dodd-Frank in 2010. “That means we set the limit levels correctly.”

The status of the rule is unclear. Judge Robert L. Wilkins of the United States District Court for the District of Columbia vacated the C.F.T.C.'s plan, sending it back to the agency for “further proceedings.”

But in a statement last week, the agency hinted it would plow ahead with the rule.

“I believe it is critically important that these position limits be established as Congress required,” the agency's chairman, Gary Gensler, said in the statement. “I am disappointed by today's ruling, and we are considering ways to proceed.”

One route could lead the agency to appeal to the The United States Court of Appeals for the District of Columbia. Mr. Chilton also urged the agency to seek court approval for enforcing position limits, until the regulator has exhausted its options. The limits were supposed to take effect later this month.

But the agency's chances with th e appeals court are spotty. The court has been unfriendly to financial regulators in the past, throwing out Securities and Exchange Commission rules six times in seven years.

Mr. Chilton suggested a contingency plan: appease Mr. Wilkins.

“We should start drafting yet another rule proposal to address any concerns the court had,” he said. “I am confident we can do so.”

Thiel Fund Leads Investment in Brazilian Start-Up

SíO PAULO, Brazil - Peter Thiel's Valar Ventures Management has made its first foray in Brazil, leading an investment in an e-commerce start-up that is trying to shake up the traditional furniture market here and take on an established retailer recently acquired by the Carlyle Group.

Oppa, a design and furniture e-commerce company based in São Paulo, recently closed on $10.47 million in financing, according to securities filings. Mr. Thiel's Valar led the round.

Oppa was founded by Max Reichel, a German expatriate. A former McKinsey consultant with an M.B.A. from Harvard, Mr. Reichel is trying to bridge e-commerce with design, selling products the company itself creates while also expanding opportunities for designers.

Founded last year, the company initially raised $2.36 million, according to filings. Monashees Capital, based in São Paulo, Kaszek Ventures and Thrive Capital invested in that round. They also joined the recent one led by Valar, accordin g to Mr. Reichel.

Representatives of Valar, which for now appears to invest Mr. Thiel's own capital, first visited Brazil in March, according to a partner, Andrew McCormack, and have since made four or five more visits.

Mr. McCormack said he first met Mr. Reichel in March at a Founders Forum event in Rio de Janeiro, and was drawn to his “very dogged determination” and what Mr. McCormack called typical founders' experiences - including maxing out his credit card and crashing on his friend's couch while getting started.

Even with the new investment, Mr. Reichel still has his work cut out for him. The giant brick-and-mortar furniture retailer Tok & Stok recently sold 60 percent of the company to the Carlyle Group for about $347 million.

Tok & Stok has been slow to migrate online, but once Brazilian regulatory authorities approve the deal, the company plans to “pay more attention” to e-commerce, said Daniel Sterenberg, a director with Carlyle's bu yout team for Latin America.

“We want to focus and invest more in Tok & Stok's online channel as part of our growth plans,” Mr. Sterenberg said.

Other retailers are likely to do the same.

While Oppa is Valar's first Brazilian investment, Mr. Thiel has indirectly made at least one other, investing in 2010 in the first institutional fund of Felicis Ventures. That fund, based in Palo Alto, Calif., invested in two financing rounds for Baby, an e-commerce site for baby products based in São Paulo.

Given Brazil's high taxes, vexing regulations and pro-labor laws, at first glance the country would appear to be an unusual market for Mr. Thiel, who is an avowed libertarian. Brazil was No. 48 in the latest World Economic Forum Global Competitiveness ranking, behind Estonia, Panama and the Czech Republic. That was a slight improvement from 2011, when it was No. 53.

Still, Mr. McCormack said that if Valar put too much weight on regulatory factors and m acroeconomic risks, the firm would be forced to rule out too many companies and countries.

“Even though Brazil has many layers of government, among the BRICs it is quite a good place to do business,” he said, referring to Brazil, Russia, India and China.

Bain\'s Offshore Tactics Were Lucrative for Romney

Buried deep in the tax returns released by 's presidential campaign are references to dozens of offshore holdings with names like Ursa Funding (Luxembourg) S.à.r.l. and Sankaty Credit Opportunities Investors (Offshore) IV, based in the Cayman Islands.

Mr. Romney, responding to opponents' barbs about his use of overseas tax havens, has offered a narrow defense, saying only that the investments, many made through the firm he founded, , have yielded him “not one dollar of reduction in taxes.”

A review of thousands of pages of financial documents and interviews with tax lawyers found that in some cases, the offshore arrangements enabled his to avoid taxes on its investments and may well have reduced Mr. Romney's personal income tax bills.

But perhaps a more significant impact of Mr. Romney's offshore investments has been on the profit side of the ledger - in the way Bain's tax-avoidance strategies have enhanced his income.

Some of the offshore entities enabled Bain-owned companies to sidestep certain taxes, increasing returns for Mr. Romney and other investors. Others helped Bain attract foreign investors and nonprofit institutions by insulating them from taxes, again augmenting Mr. Romney's bottom line, since he shared in management fees based on the size of each Bain fund.

The documents - which include confidential Bain prospectuses and foreign regulatory filings, many previously unreported - illustrate how these tax-avoidance strategies are woven into the fabric of Bain's deal making. While hardly a novel concept and not unique to Bain, the inevitable result is that elite investors like Mr. Romney are able to increase their fortunes in ways unavailable to most taxpayers.

“Private equity fund managers have a responsibility to their investors to maximize their investors' returns, and part of that responsibility involves minimizing taxes,” said David S. Miller, a tax partner at Cadwalader, Wickersham & Taft.

Many of the details of the Romneys' wealth - estimated at $250 million - remain hidden, partly because Mr. Romney has released only the last two years of his tax returns. Those returns show an effective tax rate of about 14 percent, because most of the earnings came from investments and are taxed at 15 percent, significantly lower than rates on ordinary income.

In a statement, the Romney campaign said, “Governor and Mrs. Romney have scrupulously followed the tax laws and have paid 100 percent of what they owed.”

Mr. Romney ran Bain for 15 years before leaving to manage the 2002 Salt Lake City Olympics. But he has continued to share in the profits of subsequent Bain funds, thanks to the terms of his retirement agreement.

The sophisticated tax strategies of Bain and other private equity firms begin with the basic architecture of their funds. Though headquartered in Boston, Bain and its credit affiliate, Sankaty Advisors, have set up at least 137 entities in the Caymans, using local lawyers and others who provide an islands address for paperwork purposes.

Contrary to veiled assertions by some of Mr. Romney's Democratic foes, hiding assets from the is probably not part of their rationale. Some might still assail the arrangements as “tax dodges.” Others, however, would say they are simply efforts to make Bain's funds more “tax efficient.”

“You can call these loopholes,” Mr. Miller said. “But they're really just inadvertent consequences of an extremely complicated system.”

To navigate that system, Bain said in a statement, “Like virtually all global asset managers, we use widely accepted, fully legal and recognized structures so that investors may receive predictable tax treatment on investment gains for their constituents.”

The reasons for organizing the funds offshore are varied, each based on a specific tax situation, tax lawyers said.

A variety of Bain funds in the Romneys' portfolio have controlling stakes in foreign companies. Had those funds been set up in the United States, the Romneys and other American investors would probably have been subject to certain federal taxes for their ownership of “controlled foreign corporations.” Setting up the funds in the Caymans allowed them to avoid those taxes.

Mortgage Task Force Targets JPMorgan

Mortgage Task Force Targets JPMorgan  |  Those financial crisis deals just keep coming back to haunt banks. Last week, Bank of America settled a lawsuit over its acquisition of Merrill Lynch. Now, JPMorgan Chase is facing fresh claims related to Bear Stearns.

The federal task force formed to investigate mortgage fraud has sued Bear Stearns and its lending unit, EMC Mortgage, the first case brought by the federal group, The New York Times reports. The civil lawsuit, according to The Times, cites “a broad pattern of misconduct in the packaging and sale of mortgage securities during the housing boom.”

The accusations are hardly new. A JPMorgan spokesman, Joseph Evangelisti, called them “recycled claims.” But others, like Gerald H. Silk, a lawyer at Bernstein Litowitz Berger & Grossmann, welcomed the lawsuit. “The government's action represents a comp lete validation of the cases brought by investors,” Mr. Silk said.

The government announced the resolution of another case on Monday: American Express agreed to refund $85 million to about 250,000 customers to settle accusations that it violated federal law in its marketing, billing and debt collection, The New York Times reports. The settlement is another milestone for the new Consumer Financial Protection Bureau, which recently reached a similar pact with Discover Financial Services, and also took action against Capital One over the summer.

 

Too Much Dry Powder  |  You can have too much money, at least if you are a private equity firm. The industry is sitting on a collective $1 trillion - money that investors may demand back if it's not used soon, writes Andrew Ross Sorkin in the DealBook column. The so-called dry powder could signal a surge of deal-making, if firms can find the right prey. Mr. Sorkin writes: “Some private equity firms have put the word out to Wall Street banks that they want to go ‘elephant hunting' - seeking big deals worth as much as $10 billion - and are willing to pay a special bounty for bringing them acquisition targets.” Of course, it could also signal a spate of bad deal-making as firms chase acquisitions.

Still, the industry keeps trying to drum up more money. Private equity firms amassed more than $64 billion from investors in the third quarter, 10 percent more than in the period a year earlier, Reuters reports, citing data from the research firm Preqin.

 

High-Frequency Trading Under a Microscope  |  How can we prevent blowups when high-speed traders rule the stock market? The Securities and Exchange Commission will discuss the issue at a conference on Tuesday in Washington. Among the panelists is C hris Isaacson, chief operating officer of BATS Global Markets. Though many are pushing for new rules for high-frequency trading, there is little agreement on what exactly those rules should be. The author Roger Lowenstein proposes in a column in The New York Times that “intraday trades should be taxed at 50 percent. And ‘investments' that mature in 60 seconds should be regarded as, in effect, electronic errors - with any profit going to the government.”

 

On the Agenda  |  Day two of the Value Investing Congress features David Einhorn at 10:30 a.m. At past conferences, Mr. Einhorn, the Greenlight Capital president, has showcased short-selling ideas, which have been known to move stocks. The subject of a recent New Yorker article, Leon Cooperman of Omega Advisors, is on CNBC at 12:30 p.m. Larry Ellison, the Oracle chief executive, is on CNBC at 4:05.

Lawyers for Kazu o Okada, the ousted shareholder of Wynn Resorts, are appearing in a Nevada court on Tuesday to try to overturn the forced redemption of Mr. Okada's stake.

 

Bain Capital's Offshore Havens  |  They are the gifts that keep on giving. Bain Capital's offshore arrangements - which are “woven” into the fabric of the private equity firm's deal-making - not only limited Mitt Romney's tax bill, they also increased his income, according to The New York Times: “Some of the offshore entities enabled Bain-owned companies to sidestep certain taxes, increasing returns for Mr. Romney and other investors. Others helped Bain attract foreign investors and nonprofit institutions by insulating them from taxes, again augmenting Mr. Romney's bottom line, since he shared in management fees based on the size of each Bain fund.”

 

Law Firms Woo Start-Up Clients  |  Wilson Sonsini Goodrich & Rosati, the half-century-old law firm, is trying to be hip and cool. The firm's new office in San Francisco has the look and feel of a start-up, part of a broader strategy to attract young technology companies to its fold, writes DealBook's Evelyn M. Rusli. Wilson Sonsini and its rivals are “offering free services, cozying up to incubators and writing blogs” in an effort to secure business that could pay off big down the road.

 

Merrill Looking to Pounce on Morgan Stanley  |  Bank of America's Merrill Lynch unit is looking to poach brokers from the newly rebranded Morgan Stanley Wealth Management, The Wall Street Journal reports. The most sought-after financial advisers could make at least $1.5 million upfront plus deferred compensation for jumping ship, according to The Journal, which cites unidentified people familiar with Merrill's recruiting. Merrill Lynch, the newspaper says, is “pushing to capitalize on technological and reputational blows at Morgan Stanley.”

 

 

 

Mergers & Acquisitions '

Washington Post Company Acquires Health Care Provider  |  The company run by Donald E. Graham agreed to buy a majority stake in Celtic Healthcare. WASHINGTON POST

 

3M to Buy Ceradyne for $860 Million  |  Ceradyne shareholders will receive $35 a share in cash through a tender offer that is expected to begin within the next two weeks, a 43 percent premium to the ceramics maker's closing price on Friday. DealBook '

 

Qantas to Buy Air Freight Company  |  The Australian airline Qantas agreed to buy 100 percent of Australian Air Express, Reuters reports. REUTERS

 

Glencore Buys Stake in Russian Port  | 
REUTERS

 

INVESTMENT BANKING '

Moody's Says Tests Understate Needs of Spanish Banks  |  The credit rating agency Moody's said Spanish banks could require up to $135 billion in additional capital, almost twice the government's recent estimate. BLOOMBERG NEWS

 

Barclay s Adds 2 New Members to Executive Committee  |  The British bank has added two new members to its executive committee as it continues to reshape itself in the wake of a rate-rigging scandal. DealBook '

 

The J. Aron Takeover of Goldman Sachs  |  When Goldman Sachs bought the commodities broker J. Aron & Company in 1981, the cultures clashed, but now J. Aron alumni control the elevator to the executive suite. DealBook '

 

The Bullish Case for Goldman Sachs  |  Shares of Goldman Sachs rose as much as 4 percent in trading on Monday morning, as investors considered a bullish argument for the firm that appeared in Barron's this weekend. DealBook '

 

What's It Like to Run Goldman Sachs?  |  In some ways, it's less challenging than running a small business, said the firm's Lloyd C. Blankfein. “As I'm listening to the entrepreneurs, I'm thinking, ‘Gosh, could I do that?'” Mr. Blankfein said at an event in Long Beach, Calif., to honor graduates of Goldman's small-business program. BLOOMBERG NEWS

 

Low Volume Expected to Weigh on Equity Trading Revenue  |  According to an estimate by a JPMorgan Chase analyst, the volume of equity trading in the third quarter probably fell 14 percent compared with the period a year earlier. BLOOMBERG NEWS

 

Asian Investment Banks Feel a Lack of I.P.O.'s  |  An increase in other lines of business, like mergers and acquisitions and debt sales, has not offset the decline in I.P.O.'s in Hong Kong, The Wall Street Journal writes. WALL STREET JOURNAL

 

PRIVATE EQUITY '

Would an Obama Presidency Be Better for Private Equity?  |  Fortune's Dan Primack writes that if Mitt Romney became president, “the appearance of conflicts could prompt regulators to unfurl new, largely artificial red tape.” FORTUNE

 

Benefits of Diversity in Private Equity  |  Bloomberg News reports: “Private equity firms that are diverse or minority-owned achieved higher gains than the broader industry, according to a report today by t he National Association of Investment Companies.” BLOOMBERG NEWS

 

Carlyle's Brazil Strategy Centers on Consumer Goods  |  Fernando Borges, the head of the Carlyle Group's South American team, told Bloomberg News: “Our focus will keep being companies related to consumption, rising income and the growing middle class.” BLOOMBERG NEWS

 

HEDGE FUNDS '

Elliott's Campaign Against BMC Advances as Company Explores a Sale  |  Elliott Management has made strides in its latest activist campaign against a technology company, as BMC Software has retained Bank of America Merrill Lynch to explore a potential sale of itself, a person briefed on the matter told DealBook on Monday . DealBook '

 

How Institutional Money Changed Hedge Funds  |  Money from the “kind of staid institutions that hedgies once tried to be an alternative to” now represents the majority of the hedge fund industry's capital, leading some hedge funds to scale back risk-taking, The Wall Street Journal writes. WALL STREET JOURNAL

 

Ackman Steps Up Pressure on General Growth  |  William Ackman, the hedge fund manager, reiterated on Monday his position that General Growth Properties, a Chicago-based mall operator, should consider selling itself to the Simon Property Group. DealBook '

 

Jana Partners Takes Aim at Fertilizer Company < span class="divider"> |  Speaking at a conference in New York, Barry Rosenstein of Jana Partners urged Agrium, a Canadian fertilizer company, to spin off its retail business, The Wall Street Journal reports. WALL STREET JOURNAL

 

Hedge Fund Manager Criticizes Splunk  |  Shares of Splunk, a data analytics company, fell on Monday as a hedge fund manager, Zack Buckley, made a case for betting against the stock, Reuters reports. REUTERS

 

I.P.O./OFFERINGS '

CVR Energy Looks to Raise $300 Million  |  The oil refiner CVR Energy, controlled by Carl C. Icahn, is forming a master limited partnership for certain assets after it failed to find a buyer, Bloomberg Ne ws reports. BLOOMBERG NEWS

 

Facebook Lets Advertisers Target Users  |  The Wall Street Journal reports: “To amp up the effectiveness of its ads, Facebook in recent months has begun allowing marketers to target ads at users based on the e-mail address and phone number they list on their profiles, or based on their surfing habits on other sites. It has also started selling ads that follow Facebook members beyond the confines of the social network.” WALL STREET JOURNAL

 

Workday Sets Price Range for I.P.O.  |  Workday, a provider of cloud-based applications for human resources, said on Monday that it would seek to price its initial public offering at $21 to $24 a share. DealBook '

 

Investors Take a Shine to Enterprise Technology  |  The performance of I.P.O.'s like Palo Alto Networks and ServiceNow bodes well for Workday, The Wall Street Journal's Heard on the Street column writes. WALL STREET JOURNAL

 

VENTURE CAPITAL '

A Tepid Quarter for Venture-Backed I.P.O.'s  | 
WALL STREET JOURNAL

 

Square Acquires a Design Agency  |  The mobile payments company Square has picked up the design agency 80/20, and “an office in SoHo,” according to Jack Dorsey, Square's founder. 8020

 

LEGAL/REGULATORY '

Whistle-Blower Lawyers Throw Support Behind Obama  |  Lawyers who represent whistle-blowers have made millions as the Obama administration cracks down on corporate fraud. Those who specialize in filing fraud claims with the federal government on behalf of clients with evidence of wrongdoing have raised more than $3 million for President Obama's re-election campaign, Eric Lipton writes in The New York Times. DealBook '

 

In Goldman Programmer Case, a Way Around Double Jeopardy  |  There is a significant loophole in the double jeopardy clause - known as the “dual sovereignty” doctrine - that permits different governments to pursue the same case, Peter J. Henning writes in the White Collar Watch column. DealBook '

 

Foreign Corruption Offers Big Business for Law Firms  | 
WALL STREET JOURNAL

 

More Charges for Former Madoff Employees  |  According to the expanded charges, Bernard L. Madoff's conspiracy to defraud investors started about two decades earlier than previously alleged, Reuters reports. REUTERS

 

SAC Manager Said to Be Placed on Leave  |  Michael Steinberg, whose name recently emerged as an unindicted co-conspirator in the government's insider trading case against SAC Capital, is now on paid leave, The Wall Street Journal reports, citing an unidentified person familiar with the matter. WALL STREET JOURNAL

 

When ‘Expert Advice' Can Lead to Legal Trouble  |  “The lawyers have signed off on the deal” or “the accountants are supporting our tax position” may seem like a reasonable defense, but it must accurately reflect professional advice that directors can rely on in good faith, writes Michael W. Peregrine, a partner at the law firm McDermott Will & Emery. DealBook '

 

Dynegy Emerges From Bankruptcy  |  The energy company Dynegy said on Monday that it had exited Chapter 11, with plans to list on the New York Stock Exchange on Wednesday. REUTERS

 

Volcker to Appear Before British Bank Investigators  |  Andrew Tyrie, chairman of Britain's Commission of Banking Standards, says in a column in The Financial Times that Paul A. Volcker is set to speak before the panel on Oct. 17. FINANCIAL TIMES

 

Former IndyMac Chief Settles S.E.C. Case  |  Michael Perry, a former head of the failed mortgage lender IndyMac Bancorp, is paying $80,000 to resolve accusations that he misrepresented the company's financial condition, The Wall Street Journal reports. WALL STREET JOURNAL

 

Europe\'s Banks Should Isolate Risky Businesses

BRUSSELS - Banks in the must split their most risky activities into legally separate units to safeguard the financial system and avoid future bailouts of lenders at taxpayers' expense, a group of financial experts said on Tuesday.

The recommendations, by a group led by Erkki Liikanen, the governor of the Bank of Finland, echoed the of the 1930s that split investment banking from retail lending in the wake of the stock market crash in the United States. That makes the recommendations another measure of how seriously policymakers have taken recent bank failures in countries from Britain to Spain that have left European governments with huge debts, stymied growth, and helped perpetuate the region's lingering .

Mr. Liikanen acknowledged that some members of his group wanted to recommend far less aggressive forms of regulation, such as requiring banks with investment banking arms to put extra money aside in the form of so-called capital buffers.

But Mr. Liikanen said that structural reform including legal separation would be the best way to protect the “socially most vital parts” of banks, including everyday deposit taking and the kinds of lending that keep businesses and economies ticking over.

“The Group's recommendations regarding separation concern businesses which are considered to represent the riskiest parts of trading activities and where risk positions can change most rapidly,” Mr. Liikanen wrote in a letter to summarize the conclusions. “Separation of these activities into separate legal entities within a group is the most direct way of tackling banks' complexity and interconnectedness,” he insisted.

The group of 10 people included former bankers, economists, regulatory experts, and a representative from a consumer group. José Manual Barroso, the president of the European Commission, and Michel Barnier, the E.U. commissioner for financial services, named Mr. Liikanen to head the group in January this year.

The recommendations are likely to encounter fierce opposition from investment bankers who had wanted the group to avoid recommending mandatory rules on legal separation, and Mr. Barnier still must decide whether to come forward with legislative proposals.

“This report will feed our reflections on the need for further action,” Mr. Barnier said in a statement on Tuesday.

The activities that should be separated would include proprietary trading of securities and derivatives, and other closely linked activities, according to the report. Many of the banks conducting these forms of risky trading would need to place those activities in units that are funded and capitalized separately, the report said.

The separation could be carried out using a single holding company, and it would only be mandatory if the risky activities amounted to a significant share of a bank's business, the report said.

To qualify for mandatory separation, the bank would need to have assets for trading and available-for-sale that amounted to between 15 percent and 25 percent of total assets, or those assets would need be valued at "100 billion or more. The European Commission would then conduct an additional review to determine the precise terms of the separation.

The recommendations, if adopted, should not spell the end of so-called universal banks, the kind of soup-to-nuts institutions that combine trading with large retail arms and are well established in countries like France, according to the group. The form of separation “aims to maintain banks' ability efficiently to provide a wide range of financial services” so that “the same marketing organization can be used to meet the various customer needs,” the group said in a summary of its findings.

But the group offered a stinging indictment the way that modern investment banking had become so elaborate and impenetrable that many supervisors and participants in the markets no longer have an adequate understanding of its workings.

“The difficulties of governance and control have been exacerbated by the shift of bank activity towards more trading and market-related activities,” the group concluded. “This has made banks more complex and opaque and, by extension, more difficult to manage. It has also made them more difficult for external parties to monitor, be they market participants or supervisors.”

The group blamed excessive risk taking, often in trading highly complex instruments or real estate-related lending, and excessive reliance on short-term funding, for helping create the financial crisis.

To help remedy those failings, the group recommended a bevy of new rules for the way banks should be run, including the introduction of so-called “fit-and-proper tests” to evaluate the suitability of management and board candidates.

The group also recommended additional limits how bankers should be compensated, including making the overall amount of bonuses less than what banks pay in dividends.

To punish wrongdoers, banking supervisors “must have effective sanctioning powers to enforce risk management responsibilities, including sanctions against the executives concerned, such as lifetime professional ban and claw-back on deferred compensation,” the group said.

Rubenstein Goes Back to College

The Carlyle Group co-founder David M. Rubenstein spoke on Friday at Duke University, his alma mater. "I was not a great academic star; a student government leader; a fraternity officer -- I was never even invited to join a fraternity," Mr. Rubenstein said, adding, "I managed to be cut from an intramural basketball team with only four other players on the team."

Barclays Adds 2 New Members to Executive Committee

LONDON â€"Barclays announced on Tuesday that it has added two new members to its executive committee as the British bank continues to reshape itself in the wake of the rate-rigging scandal.

Valerie Soranno Keating, head of the firm's Barclaycard division, and Ashok Vaswani, who will lead Barclays' global retail and business banking operations, will join the bank's executive committee immediately, according to a statement from Barclays.

The announcement comes just over a month since Antony Jenkins was appointed as chief executive of the British bank. David Walker will take over as Barclays' chairman in November.

Barclays agreed to a $450 million settlement with authorities in June after some of its traders were founded to have attempted to manipulate the London interbank offered rate, or Libor, for financial gain.

In the aftermath of the scandal, the firm's then chief executive, Robert E. Diamond Jr., and chairman, Marcus Agius, resigned.

JPMorgan Unit Is Sued Over Mortgage Securities Pools

The federal mortgage task force that was formed in January by the Justice Department filed its first complaint against a big bank on Monday, citing a broad pattern of misconduct in the packaging and sale of mortgage securities during the housing boom.

The civil suit against & Company, now a unit of , was brought in New York State Supreme Court by Eric T. Schneiderman, the attorney general who is also a co-chairman of the task force, known as the Residential Mortgage-Backed Securities Working Group.

The complaint contends that Bear Stearns and its lending unit, EMC Mortgage, defrauded investors who purchased mortgage securities packaged by the companies from 2005 through 2007.

The firms made material misrepresentations about the quality of the loans in the securities, the lawsuit said, and ignored evidence of broad defects among the loans that they pooled and sold to investors.

Moreover, when Bear Stearns identified problematic loans that it had agreed to purchase from a lender, it was required to make the originator buy them back. But Bear Stearns demanded cash payments from the lenders and kept the money, rather than passing it on to investors, the suit contends.

Unlike many of the other mortgage crisis cases brought by regulators such as the , the task force's action does not focus on a particular deal that harmed investors or an individual who was central to a specific transaction. Rather, the suit contends that the improper practices were institutionwide and affected numerous deals during the period.

A spokesman for Mr. Schneiderman declined to comment on the filing. A representative for JPMorgan, which acquired Bear Stearns in a fire sale in March 2008, said it would contest the allegations.

“We're disappointed that the New York A.G. decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record - instead relying on recycled claims already made by private plaintiffs,” said Joseph Evangelisti, the bank's spokesman. He added that the allegations predate JPMorgan's acquisition.

The allegations in the suit against Bear and EMC are not new. The task force complaint closely echoes legal arguments made in recent years by numerous private litigants trying to recover losses in mortgage securities. Most of these cases continue to inch their way through the courts.

Late last week, for example, JPMorgan lost a round in one of these battles when Jed S. Rakoff, a federal judge in Manhattan, rejected the bank's request to dismiss a complaint brought by Dexia, a Belgian-French bank. The European bank had bought $1.6 billion in mortgage securities issued by Bear Stearns and Washington Mutual, another institution taken over by JPMorgan during the credit crisis.

Nevertheless, some lawyers who are battling the large banks and investment firms on behalf of mortgage investors said they welcomed the action by the task force. Gerald H. Silk, a lawyer at Bernstein Litowitz Berger & Grossmann in New York, said: “The government's action represents a complete validation of the cases brought by investors who were duped by the fraudulent sale of mortgage-backed securities by JPMorgan, WaMu and Bear Stearns.”

The suit encompasses work begun by Mr. Schneiderman's office in the spring of 2011, according to people briefed on the investigation. The attorney general subpoenaed documents from JPMorgan Chase and from large mortgage insurers that had also brought cases against the banks for failing to live up to their promises about the types and quality of mortgages placed in loan pools and sold.

New York investigators also capitalized on a cooperation agreement struck by Andrew M. Cuomo, the previous attorney general, with Clayton Holdings, a major firm in the business of evaluating mortgages. The firm provided documents and e-mails showing that Bear Stearns routinely ignored major defects on loans it was purchasing and pooling so that it could preserve its relationship with mortgage originators.

After the mortgage fraud task force was created in early 2012, Mr. Schneiderman's office combined its efforts with the Housing and Urban Development Department, the S.E.C., the inspector general of the Federal Housing Finance Agency, the Federal Bureau of Investigation and the Justice Department.

The lawsuit's filing, just days before the first and a little over a month before the election, may be a way for the Obama administration to try to convince voters that it is working to hold mortgage miscreants accountable for wrongdoing. But, lawyers say, filing a case is not the hard part; winning it is.

The complaint contends that Bear Stearns defrauded investors when it assured them of the stringent reviews being made of the loans the firm was bundling. “Rather than carefully reviewing loans for compliance with underwriting guidelines,” it said, “defendants instead implemented and managed a fundamentally flawed due diligence process that often, and improperly, gave way to originators' demands.”

Bear Stearns and EMC took other steps to keep mortgages flowing and their originators happy.

Even after the loans it was bundling began failing at monumental rates, the complaint said, Bear Stearns did not require originators to buy them back as they were obligated to do. Instead, the firm allowed the originators to settle the put-back claims confidentially “by making cash payments that were a fraction of the contractual repurchase price,” according to the lawsuit.

The suit was brought under New York's Martin Act, the state law that gives the attorney general wide latitude to bring fraud cases without demonstrating a defendant intended to defraud. The suit does not seek specific damages but asks for restitution for investors victimized by the deceptive practices and disgorgement of money received in connection with the fraud.