Mergers Holding Steady

The third quarter was by far dominated by one of the largest deals in history: Verizon Communications’ $130 billion deal to take full control of its enormous wireless unit by buying out its partner, Vodafone. That deal catapulted the telecommunications sector to being the leading industry for deals this year.

In a sense, that could be the deal that begets other deals. Vodafone will be flush with cash to reinvest in its own businesses and to buy competitors in Europe and emerging markets.

For the first nine months of the year, Goldman Sachs claimed the top spot among financial advisers, having worked on 285 deals worldwide worth nearly $517 billion.

Among law firms, Wachtell Lipton Rosen & Katz led with 53 mergers worth a total of $277.5 billion. Both Goldman and Wachtell were advisers on the Verizon-Vodafone deal.

C.F.T.C.’s Enforcement Chief to Depart

David Meister is waging legal battles against some of the biggest names in finance.

There’s JPMorgan Chase, the nation’s largest bank. The CME Group, one of the world’s largest futures exchanges. And Jon S. Corzine, the former governor of New Jersey.

But now, Mr. Meister is poised to step down from his role as head of the Commodity Futures Trading Commission’s enforcement unit, a move that may put the future of those cases in question.

Mr. Meister is expected to announce his departure on Tuesday, capping his effort to embolden an agency once dismissed as “the watchdog that didn’t bark.”

Over a nearly three-year stretch, Mr. Meister helped write new rules to expand the enforcement unit’s authority, overhauled the unit’s management ranks and filed a record number of actions against the financial industry. An investigation into the banking industry’s manipulation of benchmark interest rates â€" a crackdown on banks like UBS and Barclays â€" defined his tenure.

Mr. Meister’s departure foreshadows the exit of Gary Gensler, the agency’s chairman, whose term expires in December. Mr. Gensler hired Mr. Meister and, much to the dismay of Wall Street, has imposed dozens of new regulations in the wake of the financial crisis.

Yet skeptics remain, by turns attacking the agency as too tough or too lenient. One of the agency’s own commissioners, for example, questioned Mr. Meister’s decision to impose only nominal fines on certain companies.

For his part, Mr. Meister points to the recent onslaught of enforcement cases. And unlike in past years, the agency opted to litigate rather than settle many of the cases. That change reflected a policy Mr. Meister outlined his first week in office in January 2011, when he told the enforcement staff, “While we won’t bring cases we don’t think we can win, if the best settlement a defendant offers is beneath what we think is acceptable, we won’t hesitate, and we won’t go lower,” according to a person who attended the speech.

In an interview on Monday, Mr. Meister said that he was leaving an invigorated enforcement unit. “We’re really in an upward trajectory,” he said, adding that he has not begun to search for another job. “There is a real energy in the agency.”

It is unclear whether Mr. Meister and Mr. Gensler will take some of that energy with them. Their exit comes at an awkward time for the agency, which is locked in litigation over some of its biggest cases.

The JPMorgan investigation centers on whether the bank’s traders in London built a position so big that they manipulated the market for financial contracts known as derivatives. While the agency has not sued JPMorgan, the enforcement unit began drafting charges after settlement talks broke down in recent weeks, people briefed on the case said.

The sticking point, the people said, was Mr. Meister’s demand that the bank acknowledge wrongdoing. The bank balked at that demand, though it was open to paying a $100 million fine.

JPMorgan and the agency reopened settlement talks about a week ago, the people said. Still, Mr. Meister may leave before a decision emerges.

Mr. Meister adopted a similarly aggressive stance with the CME Group, known to possess cozy ties to the trading commission. In the agency’s first ever action against CME, filed in February, Mr. Meister accused it of releasing confidential customer information to an outside broker.

CME, which continues to fight the case, has said that the “incidents have already been addressed and handled appropriately, and involved no harm to any customer or the markets.”

In pursuing Mr. Corzine, who ran MF Global when the brokerage firm collapsed two years ago, the agency never offered to settle. Instead, the agency sued Mr. Corzine in June, accusing him of failing to supervise an MF Global employee who misused customer money.

Mr. Meister’s departure, people close to the agency said, raises questions about whether his successor will hold steady, or choose to settle these cases.

Mr. Meister argued that the enforcement unit “was a great place before I came” and that many of the same enforcement officials would continue to oversee these same investigations. The agency is expected to announce that one of Mr. Meister’s deputies, Gretchen Lowe, will become the acting enforcement director. Ms. Lowe played a leading role in the agency’s rate-rigging cases.

“I have no doubt that the new acting director will do what’s right,” he said.

Mr. Meister, who took a 7 a.m. flight to Washington every Monday for three years, said he was leaving to spend more time with his family in New York. His youngest son, he said, is in his senior year of high school.

But early next year, he is expected to land in the private sector, people briefed on his plans said. Such a move would reignite concerns about the metaphorical revolving door that shuttles government employees to the private sector and back again.

“Clearly, the C.F.T.C. has taken a strong stance against Wall Street after the financial crisis, but in a broader context we do worry that the revolving door can make enforcement officials more sympathetic to the companies they oversee,” said Michael Smallberg, an investigator at Project on Government Oversight, a nonprofit group.

Mr. Meister is forever banned from handling any case that he investigated and will face a one-year “cooling off” period during which he cannot contact the agency for business reasons.

Mr. Meister, who is 50, arrived at the agency after long stints at the white-shoe law firms Clifford Chance and Skadden, Arps, Slate, Meagher & Flom. He also spent more than three years as a federal prosecutor at the United States attorney’s office in Manhattan, where he focused on insider trading and other financial fraud cases.

At the trading commission, Mr. Meister’s tenure has not been without controversy. Last year, after settling with Goldman Sachs for $1.5 million over accusations that the bank failed to supervise a rogue trader, one of Mr. Meister’s colleagues objected to the size of the fine.

“I believe that the monetary penalty should be significantly higher in order to represent a sufficient punishment,” Bart Chilton, a commissioner at the agency, said at the time. Others, however, have praised Mr. Meister for ramping up the enforcement unit. As the number of employees in Mr. Meister’s unit fell about 10 percent over the last three years, the number of cases jumped more than 90 percent. And, at Mr. Gensler’s urging, Mr. Meister eliminated several layers of management to speed up investigations.

“He built the C.F.T.C.’s strongest enforcement program in memory,” said Lorin Reisner, the head of the criminal division at the United States attorney’s office in Manhattan who worked with Mr. Meister at that office in the 1990s.

Mr. Meister’s most significant victory came in the rate-rigging cases. After years of investigation, the trading commission concluded that some of the world’s biggest bank’s manipulated the London interbank offered rate, known as Libor.

Mr. Meister’s first target was Barclays. As in the JPMorgan case, people briefed on the case said, Barclays initially balked at the agency’s demands, prompting Mr. Meister’s unit to prepare charges. Weeks later, however, the bank agreed to a $200 million fine and to adopt new controls to prevent a repeat of the problems.

That case paved the way for a $700 million settlement â€" the biggest in the agency’s history â€" with UBS. In that case, Mr. Meister and Mr. Gensler negotiated directly with the bank’s chairman, Axel Weber.

“David understands the importance of a vigorous enforcement arm,” Mr. Gensler said in an interview. “He didn’t shy away from a tough case.”

Doubts Raised on Value of Investment Consultants to Pensions

Here’s a brainteaser: Would you invest $10,000 in a mutual fund without knowing its past performance? Probably not. Yet, if you were in charge of $13 trillion of pension money, would you accept the recommendation of an investment consultant without knowing its performance record? The answer is yes. It happens every day.

Welcome to the bizarre world of pension funds and investment consultants. At a time when individual investors are increasingly demanding transparency in performance track records, the biggest slice of the investment world â€" pension funds â€" has conspicuously turned a blind eye to demanding track records from their most influential advisers, investment consultants.

A new study by professors at the University of Oxford is causing a stir in the staid pension investment industry, highlighting the subpar performance of most consultants and, more important, the lack of disclosure that would allow the public to even know about it.

The study demonstrates, perhaps for the first time, that the investment consultants that pension funds rely on to advise them about what funds and investments they should make â€" resulting in tens of millions of dollars in fees each year â€" are, as one of the authors of the survey says, “worthless.”

“It’s a waste of money listening to consultants,” Howard Jones, one of the authors of the study, told me he concluded. “It’s a service that is useless.”

Mr. Jones and his colleagues, Tim Jenkinson and Jose Vicente Martinez, examined the recommendations of investment consultants from 1999 to 2011 related to United States equities. It culled the data from Greenwich Associates, which had collected it anonymously from 29 firms, representing 91 percent of the entire investment consulting industry’s market share in the United States.

The result of the study is nothing short of breathtaking if you’re in the investment management business: “The analysis finds no evidence that the recommendations of the investment consultant for these U.S. equity products enabled investors to outperform their benchmarks or generate alpha,” a measure of performance that adjusts for risk. The study found that, on average, the consultants’ recommendations underperformed their benchmarks by about 1 percent.

Those recommendations are worth big fees to the consulting firms. In 2012, Calpers, the big California pension fund, paid $33 million in fees to outside investment consultants. CalSTRS, the California teachers’ fund, spent nearly $9 million. New York State and Local Retirement System spent nearly $7 million. Pennsylvania State Employees’ Retirement System spent about $4 million. The list goes on.

The investment consulting industry has always been a powerful force in directing how trillions of dollars are allocated every year to different investment firms and hedge funds, but it has long hidden in the shadows. Pension funds hire the outside consultants to help them determine where to invest their money. “Consultants’ recommendations have a large influence on investor allocation decisions and confirms survey data which reports that manager selection is one of the most highly valued services offered by consultants,” the study found.

According to a survey conducted in 2011 by Pensions and Investments, 94 percent of pension funds use a consultant. Of those, nearly a quarter of the pension funds said the recommendation by a consultant was “crucial” to their decision and 40 percent said it was “very important.”

Yet the firms don’t disclose their track records. About six firms control about 60 percent of the market, Mr. Jones said. The biggest and most influential investment consultants are Mercer Investment Consulting, Russell Investments, Towers Watson Investment, Cambridge Associates, Hewitt EnnisKnupp, R. V. Kuhns & Associates, Callan Associates, Pension Consulting Alliance, Strategic Investment Solutions and Wilshire Associates. Wilshire has long been a top consultant to Calpers, for example.

Why do pension funds use outside investment consultants?

“It’s backside-covering,” Mr. Jones said. “It’s easy to say you took expert advice,” saying the rationale is similar to the adage “Nobody got fired for hiring I.B.M.”

That may be a bit unfair. There is clearly a place for consultants, who can often introduce pension funds to new asset classes or particular investment managers, a point Mr. Jones made as well. But as investors, consultants are, well, no better than consultants.

Mr. Jones’s study said that one reason pension funds don’t hold the consultants accountable for their advice was that they were considered “‘money doctors with whom investors develop a relationship of trust, and this in turn gives them confidence when they select fund managers.”

Still, the lack of transparency on performance track records seems to be a conspicuous hole in the investment process.

Somewhat oddly, Andrew Kirton, global chief investment officer at Mercer, was quoted this week in the trade magazine Pensions and Investments defending the lack of transparency.

“It’s in our clients’ interest to have the level of transparency that we have. We’re not forced by marketing purposes to give advice we think isn’t the best due to polishing numbers that makes us look better in a survey,” Mr. Kirton said. “You can make yourself potentially a hostage to data.”

Mr. Jones said he was perplexed when he read that. “They are not willing to be transparent with their own performance,” he said. “It has to make you very curious about their motivations.”

Ultimately, Mr. Jones said that the lesson of his research “would be to require investment consultants to provide the same high level of disclosure as that which is provided by fund managers on their performance, or the same level of disclosure provided by research analysts on their stock recommendations.”

Andrew Ross Sorkin is the editor at large of DealBook. Twitter: @andrewrsorkin

Markets Assess the Impact of a Federal Shutdown

As investors cautiously pulled back from the markets, economists were grappling with how much a government shutdown could dent confidence in an already fragile economy.

Stock markets around the world fell on Monday, though the declines were relatively modest in the United States, while negotiations in Congress remained stalled.

Many on Wall Street think the direct hit of a shutdown would be relatively minimal to the factors that drive stocks. An estimated two-thirds of the government â€" the so-called essential functions â€" will continue operating on Tuesday.

But several economists have said the shutdown would most likely have a broader impact on market psychology if it lasted for more than a few days, and could drag down an economic recovery that has had trouble gaining traction.

“You have an economy that has already shown some hesitation,” said Diane Swonk, the chief economist at Mesirow Financial. “That’s the last thing we need right now.”

Wall Street, however, is more worried that the clash on the government shutdown could be a harbinger of fights over the government’s borrowing limit.

The Treasury Department has estimated that it will no longer be able to issue new bonds after Oct. 17 without authorization from Congress. Several Tea Party Republicans have said they will not agree to lift the so-called debt ceiling without the White House making several compromises â€" something the White House has said it will refuse to do. If there is no agreement, the government would be forced to immediately operate on a balanced budget and could default on its debt â€" something that has never happened before.

“Before this week, I would have said to you that the odds of a government shutdown would be pretty small,” said Charles Comiskey, the head of Treasury bond trading at the Bank of Novia Scotia in New York. “What we are learning from this broken Congress we have is that anything is possible.”

Wall Street was still betting on Monday that a compromise would be reached before then. However, the continuing gulf between Democrats and Republicans over the shutdown brought a default into the realm of the possible, prompting several strategists to issue reports presenting dire consequences if no deal is reached on a debt ceiling.

“I’ve got no basis for guessing what would happen there because it would be unprecedented,” said Russ Koesterich, the chief investment strategist for BlackRock.

Large swaths of American business have come together behind the idea that the shutdown is a mistake that could have immediate economic repercussions. Over 250 industry groups signed into a letter on Monday calling for a quick resolution to the stalemate, departing from the more mixed prescriptions business groups have given during past budget battles.

“It is not in the best interest of the employers, employees or the American people to risk a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy,” said the letter, which was put together by the United States Chamber of Commerce.

President Obama is scheduled to meet on Wednesday with members of the Financial Services Forum, which includes the chiefs of banks like JPMorgan Chase and Goldman Sachs, who are in Washington for an annual meeting. The group is expected to discuss a range of financial issues including the debt ceiling, a person briefed on the talks said.

Investors are keeping a close eye on the market for United States Treasury bonds, one of the most heavily traded markets in the world, and a benchmark for the rest of the financial system.

If the government did stop paying interest on its outstanding bonds, those bonds would most likely become less attractive. But investors responded in unexpected ways the last time the government approached the debt ceiling in 2011. Back then, investors flocked to Treasury bonds as a safe haven, despite the fact that the turmoil was caused by concern about the future of those same bonds.

This time around, the dynamics of the market are even more complicated because bond prices have recently been driven by bets about whether the Federal Reserve will ease off the bond-buying programs it has used to stimulate the economy. Some bond traders are betting that political strife will make it more likely that the central bank will continue buying Treasury bonds, making those bonds more attractive.

On Monday, the movements in the bond market showed the complicated and sometimes contradictory forces at work. Even while stocks generally dropped, the price of Treasury bonds was volatile.

The yield on the benchmark 10-year bond fell to 2.62 percent, from 2.63 percent on Friday, and the price increased 3/32 to 99.

“It’s a little bit of a tug of war,” said Kevin Giddis, the head of bond trading at Morgan Keegan.

Though stocks had a down day, the direction was clearer. The Standard & Poor’s 500-stock index dropped 0.6 percent, or 10.20 points, to 1,681.55. The Dow Jones industrial average ended down 0.84 percent, or 128.57 points, to 15,129.67. The Nasdaq was off 0.27 percent, or 10.12 points, to 3,771.48.

The overhang of the shutdown provided a bad ending to what had been a good quarter, as the broader markets fell in seven of the last eight trading days. For the third quarter, the S.& P. rose 4.7 percent and the Nasdaq soared nearly 11 percent, and the Dow was up 1.48 percent.

In Asia and Europe, leading indexes fell even more sharply on Monday. European stocks were under additional pressure because a growing political crisis in Italy is threatening the government there.

The fears about a government shutdown were overshadowing a few recent indicators that the economy may have been strengthening. Manufacturing activity in the Chicago area picked up more than expected in September, according to a private index released Monday â€" the latest promising economic data.

Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said that a shutdown would not hit just the government employees sent home â€" it would also cause trouble for contractors and for the businesses where government employees spend money. He estimated that a shutdown could slow economic growth in the fourth quarter by 0.07 percent for each day it goes on.

“Investors who have been relaxed about this are going to get a very significant wake-up call if they’re not careful,” Mr. Shepherdson said.

Some of the complacency on Wall Street has come from the history of market movements during past shutdowns. The precedent is not all that frightening, according to data put together by Joseph P. Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management. When the government closed for 21 days in late 1995, for instance, the S.& P. 500 actually rose 0.1 percent during the shutdown.

But Mr. Quinlan was quick to point out that this time around was somewhat different because any shutdown would be immediately followed by debate over lifting the debt ceiling. While there is precedent for the government closing down, there is not for a default.

Perry Capital Cuts Stake in J.C. Penney

The hedge fund Perry Capital pared its stake in J.C. Penney by nearly half, as the troubled retailer announced plans last week to raise as much as $932 million in fresh capital.

Perry Capital, based in New York, began to cut its stake on Friday, coinciding with J.C. Penney’s disclosure of a planned sale of as much as 96.6 million new common shares. The company is shoring up its reserves as it undertakes a difficult turnaround. But the move dilutes the value of existing shareholders’ stakes.

On Aug. 9, Perry Capital disclosed for the first time that had acquired a 7.3 percent stake in the company. By Monday, its stake was just 3.3 percent, according to a filing to the Securities and Exchange Commission.

While Perry appears to have made a dash for the exit, several hedge funds and other investment firms have been adding to their holdings. In a filing on Sept. 3, Glenview Capital said that it had increased its stake to 9.1 percent, from 3.8 percent in August. Soros Fund Management has also been adding shares and now has a 9.6 percent stake, according to its most recent S.E.C. filing at the end of August.

Hedge funds began to pile into J.C. Penney around the same time that the hedge fund manager William A. Ackman, of Pershing Square Capital Management, sold his 18 percent stake, or 39.1 million shares, in the company.

Mr. Ackman sold his stake suddenly in August, after a public battle with other J.C. Penney directors that resulted in his resignation from the board. He sold his shares for $12.90 a share, offering buyers a 3.4 percent discount to the trading share price at the time.

The question now is whether the retailer, still hobbled in the wake of missteps made by its former chief executive Ron Johnson, can make a comeback. Mr. Johnson had been brought in by Mr. Ackman in an attempt to turn the business around.

But much of what Mr. Johnson changed â€" getting rid of discounts and revamping stores for a more upscale market â€" sent existing customers away without attracting new ones. Mr. Johnson was forced to leave earlier this year.

On Monday, the shares closed at their lowest level in more than a decade, falling 2.7 percent to $8.81. The wider Standard & Poor’s 500 fell 0.6 percent.

Despite Cries of Unfair Treatment, JPMorgan Is No Victim

The government’s legal pursuit of JPMorgan Chase strikes many people on Wall Street as unfair.

The Justice Department, other regulators and the bank are trying to negotiate a settlement over allegations of mortgage abuses. To put the cases behind it, JPMorgan might end up paying more than $11 billion in fines and relief to homeowners, according to people briefed on the negotiations.

“There’s a lot of value to regulators and officials to show they’re really punishing people,” Alan D. Schwartz, who was chief executive of Bear Stearns when JPMorgan took the firm over in 2008, said in an interview on CNBC on Friday. “And I think it’s overdone,” he added.

The portrayal of JPMorgan as the victim goes back to the days of the financial crisis, when the bank bought Bear Stearns and the remains of Washington Mutual, a large savings and loan that was crippled with mortgage problems.

Those two former institutions appear to have committed most of the missteps that are at the heart of the settlement talks. Yet JPMorgan, which largely sidestepped the subprime debacle, is being held to account for troubles not of its own doing.

The government’s actions today also seem opportunistic and ungrateful to some banking experts. In 2008, JPMorgan’s decision to assume two problematic institutions helped the authorities manage the financial crisis. Now, they say they believe that the government is picking on JPMorgan, perhaps because its strong profits make it a tempting target.

Commenting last year on lawsuits relating to Bear Stearns, Jamie Dimon, JPMorgan’s chief executive, said, “Yes, I’d put it in the unfair category.” He added, “I think the government should think twice before they punish businesses every single time something goes wrong.”

But JPMorgan may not be the martyr some think it is.

One version of events says that the government pressed a reluctant JPMorgan into buying Bear Stearns and Washington Mutual. But at the time, JPMorgan was keen to use its relative strength to pick up financial firms at steep discounts.

The bank was interested in acquiring Washington Mutual months before it collapsed, but was rebuffed. JPMorgan had also considered Bear Stearns before it bought it. What stood out was Bear Stearns’s prime brokerage unit, a business that provides services and loans to hedge funds.

“If a special opportunity came up to acquire a prime broker at a decent return, we wouldn’t hesitate,” William T. Winters, a senior JPMorgan executive, told investors, some days before it swallowed the firm.

Another feature of the JPMorgan-as-victim narrative is that the bank simply didn’t have time to properly size up the true risks of buying Bear Stearns and Washington Mutual. The argument goes like this: To help save the financial system, JPMorgan rapidly took on hard-to-spot risks, for which it is getting unfairly punished after the fact.

But JPMorgan executives made comments at the time that cast doubt on that interpretation. “We’ve known Bear Stearns for a long time,” Michael J. Cavanagh, then JPMorgan’s chief financial officer, said when justifying what looked like a short due diligence period. “There are always uncertainties in deals,” Mr. Dimon said after the Washington Mutual deal. “Our eyes are not closed on this one.”

JPMorgan’s defenders say that the bank could not have foreseen the specific type of mortgage losses that are at the heart of the settlement talks. Bear Stearns and Washington Mutual packaged mortgages into bonds and sold them to investors. As part of that process, they vouched that the loans met certain, agreed-upon standards. It appears that many mortgages fell short of such warranties, contributing to huge losses for those bonds, and making them particularly vulnerable to lawsuits today.

Though legal actions relating to bond warranties hadn’t emerged in large number in 2008, it is not clear why JPMorgan’s lawyers didn’t anticipate them. By early 2009, purchasers were gaining immunity from these sorts of potential liabilities.

And it is not as if JPMorgan didn’t notice some serious mortgage-related problems at both firms. When buying Bear Stearns and Washington Mutual, it marked down their assets by a large amount, in part to reflect the mortgage risks. In its haste to make the acquisitions, JPMorgan may simply have miscalculated and underestimated the problems.

The notion that JPMorgan should be legally liable for the sins of other entities also stokes outrage on Wall Street.

But the practice of holding acquirers accountable for the missteps of purchased companies is quite common. For instance, Fiat now owns Chrysler, and it is in theory liable for warranties that Chrysler provided to consumers before Fiat bought its operations. Like an automaker, JPMorgan could have voluntarily paid up to honor the warranties. But in many cases, it has yet to do so.

Law enforcement agencies cannot simply ignore evidence of mortgage missteps as a favor to JPMorgan for its crisis-era actions. It is their job to ferret out wrongdoing and press forward with legal actions, if there are reasonable grounds for doing so.

Then there is the financial burden of the two acquisitions. While Bear Stearns and Washington Mutual have no doubt cost JPMorgan more than it expected, the bank derived many monetary advantages from the deals.

Using special deal accounting, JPMorgan substantially lessened the financial risks of the acquisitions. Before Washington Mutual was bought, its shareholders’ equity was nearly $40 billion. To reflect the perceived losses and expenses embedded in Washington Mutual’s balance sheet, JPMorgan adjusted its equity down to just $3.9 billion.

JPMorgan then paid $1.9 billion for that equity, which allowed it to immediately turn around and book a $2 billion gain. In other words, JPMorgan effectively got Washington Mutual free, wiped clean of more than $30 billion in potential losses.

This sort of accounting maneuver is one reason JPMorgan’s managers were so optimistic about the financial outlook of both acquisitions.

Soon after the deals, JPMorgan executives estimated that Bear Stearns would contribute $1 billion a year in net income. Washington Mutual would add $2.5 billion annually, they said. Using those figures, the two entities would have contributed nearly $16 billion in net income since the end of 2008.

There are good reasons both institutions might have fallen short of those figures, like lower-than-expected lending income at Washington Mutual. But other factors might have propelled them to do better than expected. For instance, the Bear Stearns operations most likely benefited from being subsumed into a strong bank like JPMorgan just as other firms were pulling back from Wall Street activities.

Washington Mutual and Bear Stearns have given JPMorgan sizable one-time gifts. It got a Madison Avenue skyscraper that Bear Stearns had just completed at an attractive price.

From Washington Mutual, JPMorgan inherited tax breaks worth more than $2 billion. The bank recently indicated it had been too pessimistic about some of its Washington Mutual costs. This quarter, JPMorgan expects to take a $750 million gain to reflect that mortgages made by Washington Mutual, often called WaMu, are performing better than expected.

“JPMorgan has pretty well subsumed WaMu and done a decent job paving over any benefit has received from that acquisition,” said Kevin Starke, an analyst at CRT Capital Group, a brokerage firm. “It probably is pretty significantly net positive.”

Still, the settlement could end up driving legal costs higher than analysts expected. Before reports of the talks, John E. McDonald, a bank analyst at Bernstein Research, thought JPMorgan’s maximum hit from mortgage litigation would be $21 billion, but he’s now thinking of increasing that to $25 billion. He calculates that JPMorgan has already taken $21 billion of reserves to absorb litigation costs since 2009. Some $6 billion of that appears to have already been used up on identifiable payouts, according to Mr. McDonald, leaving $15 billion for future legal costs.

With JPMorgan’s shares up nearly 30 percent over the last 12 months, investors don’t seem too concerned about the long-term legal costs. The $21 billion litigation expense is reduced to $15.5 billion when applying JPMorgan’s corporate tax rate. The overall bank, enjoying whatever profits Bear Stearns and Washington Mutual are churning out, is performing strongly.

In JPMorgan’s 2008 annual report, Mr. Dimon predicted that Washington Mutual “will add enormous value to JPMorgan Chase in the future.” Bear Stearns, he added, “has added significantly to our franchise.”

Even if it settles for billions of dollars, such words may still be true.

How the Deal for Rue21 Could Fall Apart

The fashion retailer Rue21 is about to find out how much reputation in private equity deals still matters.

Back in 2007 and 2008, the general rule was that if a private equity deal no longer made economic sense, it would fall apart, no matter how strong the contract or the risk to reputation.

We saw this time and again in buyouts involving Huntsman, Penn National Gaming, Clear Channel and other private equity deals which either failed or, if the targets were lucky, were renegotiated when the purchasing private equity firm attempt to walk away.

It is now rue21’s turn to see if things have changed since the financial crisis. Rue21 agreed in May to be acquired by Apax Partners in a $1.1 billion deal. Last month, rue21 said that it had had weak sales in August, typically a strong back-to-school period. Same store sales were down 7.6 percent from a comparable period a year earlier, the company said.

Apax is financing this deal by putting in up to $283 million of its own money and borrowing up to $780 million. This deal will only work if it can borrow hundreds of millions of dollars.

But the sales decline has spooked the debt market. The three banks on the deal â€" JPMorgan Chase, Bank of America and Goldman Sachs â€" are now trying to sell the $780 million in debt, but there are reports that potential buyers are only willing to pay around 80 to 85 cents on the dollar. This would leave the banks with a total loss of perhaps more than $150 million, with JPMorgan losing 45 percent of the total, Bank of America another 45 percent and Goldman 10 percent.

The reverse termination fee, which Apax would have to pay if the deal fails due to financing being unavailable, is only $62.718 million. The economic incentive here, absent the parties’ contractual and moral obligations, is to walk away from the deal (or for the banks to just pay that amount to rue21, halving their loss).

The question is what happens next.

We’ve seen this dance before, primarily in the $27.5 billion Clear Channel deal. In that 2008 transaction, the banks ended up being the ones that served as a catalyst for renegotiating the deal after the debt financing became uneconomical. The banks and the private equity firms buying Clear Channel sued each other to get out of the banks’ commitment to finance the debt, leading to a renegotiation of the transaction

As in Clear Channel, the banks have the biggest incentive right now to try and walk, but Apax itself may also be wondering if this deal still makes sense.

Let’s start with Apax’s ability to exit the deal.

The acquisition agreement is pretty much state of the art and reflects some of the target friendly provisions added in the wake of the financial crisis. Apax is required to use its reasonable best efforts to obtain financing for the transaction. This specifically includes a requirement that Apax, if necessary, pursue, in good faith, litigation against the banks to force the banks to finance the debt. If the financing cannot be obtained after litigation and any other efforts, Apax is required to pay that $62.718 million termination fee. But otherwise, that is its only obligation.

So Apax may have some defenses, including arguing that specific performance is unavailable, as was done in the Dow Chemical/Rohm & Haas deal. But that is probably a losing argument. (Specific performance, by the way, is a legal term meaning that a party can force the other party to do what is required under the contract instead of paying financial damages.) In the rue21 deal, the argument would be that specific performance typically requires that financial damages be unavailable, and so cannot be given. That would leave Apax liable for only the reverse termination fee instead of the larger loss for completing the deal. Apax’s problem with this claim is that it said in the acquisition agreement that specific performance could be granted by a court, making it a likely loser.

Nor is a material adverse change claim likely to get far. If rue21 experiences a material adverse change, Apax can walk away without paying a dime. But the problem is that a material adverse claim is hard to establish under Delaware law, the law governing the acquisition agreement. Such a claim must show that the material adverse change â€" that is, damage to the company â€" is long term in effect as well as unexpected. Moreover, the way the clause is defined in the acquisition agreement, the material adverse claim would have to be counted against any adverse effects to rue21 over and above the rest of the industry. While Apax can raise this claim as a litigation strategy, this is a high standard and unlikely to be a winner. In fact, Delaware has never found that a material adverse claim was established.

So with Apax locked in, that leaves the banks. The banks’ obligations will be guided by the debt commitment letter in which they promised Apax to finance this debt. Any litigation brought by the bank will be in New York under the terms of the debt commitment letter.

The banks also have a material adverse claim clause in the debt commitment letter that allows them to exit the transaction if Apax establishes a material adverse claim. But since this clause mirrors the one in the main agreement between Apax and rue21, the banks are unlikely to get far with such a claim.

But the banks have at least two other outs.

The first, and best, option is to argue that rue21 is insolvent. To be required to finance the debt, the banks need a certificate from rue21’s chief financial officer attesting that rue21 is solvent. This issue came up in the $41 billion BCE private equity buyout which fell apart because a solvency opinion could not be obtained.

In this case, the form of the solvency certificate is appended to the debt commitment letter. It requires rue21’s chief financial officer to certify three things: that (1) the value at which the company or its assets can be sold in an independent transaction exceeds the actual and contingent liabilities of rue21; (2) after the transaction, rue21 has enough capital to function; and (3) rue21 can pay its debts after the transaction.

It may be that rue21 can service this debt, but the issue here is going to be the first certification â€" the test of whether rue21’s debt after the transaction exceeds the fair value of rue21. And while the chief financial officer, Keith A. McDonough, is the one giving this certificate, he will rely on rue21’s auditor, Ernst & Young, in giving it. But Ernst & Young may balk, as the accountants did in BCE. And even if the certificate is provided, the banks can litigate its veracity.

The second ground for the banks to defeat this deal is a complicated one, but comes up in the context again of specific performance. Essentially, the banks can argue, as they did in Clear Channel, that they can’t be forced to finance this debt. While this would leave them with a possible monetary damages claim with Apax, given that these parties deal with each other all the time, that can be worked out. In any event, the financial damages would be the $62 million reverse termination fee. This is a tough claim to make in New York but totally untested. So it is probably worthwhile for the banks to pursue.

What this means is that there is enough here for the banks to fight in litigation to kill this deal. Any litigation against the banks would have to be brought by Apax which itself might not want to fight too hard. While rue21 can join in, perhaps with a claim of interference of contract, it must also also sue in New York, given that the contract requires that rue21 litigate any matter against the banks on this transaction in that state. This Is not as big a threat as perhaps suing in Pennsylvania, rue21’s home jurisdiction.

Ultimately, the banks, and perhaps Apax, have enough to make a claim. This is true despite all the new features put in private equity deals since the financial crisis. The question is whether the banks or Apax want to risk their reputations for $100 million or more. During the financial crisis, reputation didn’t go far. But perhaps things have changed.

Final Note: I go over these failed deals from the financial crisis and the varying claims brought in my book “Gods at War: Shot-Gun Takeovers, Government by Deal and the Private Equity Implosion.”

For Markets, a Shutdown Is Usually a Ripple

As a government shutdown draws closer, many analysts are looking to past shutdowns for some guide as to what might happen â€" particularly in the markets. The precedent is not all that frightening, according to data put together by Joseph P. Quinlan, chief market strategist at U.S. Trust, Bank of America Private Wealth Management. The chart below shows how much the Standard & Poor’s 500-stock index moved from the beginning of the shutdown to the end. The last time it happened, in early 1996, the market actually ended up slightly.

“Because shutdowns typically break the prevailing climate of political gridlock, a market positive, investors typically look through closures and begin to price in less political risk,” Mr. Quinlan wrote.

This time around, though, there is an additional threat to the market, and that is the looming debt ceiling. Even if a government shutdown is averted, Congress still has to agree on a way to lift the government’s borrowing limit. If lawmakers don’t, there will be no precedent for how the markets will react.

Goldman as Case Study, Not Hero or Villain

There once was a time, before JPMorgan Chase’s woes dominated headlines, when Goldman Sachs was the symbol for Wall Street’s dark side. The bank’s depiction as a blood-sucking “vampire squid” in a Rolling Stone article captured the public’s imagination. And “Why I Am Leaving Goldman Sachs,” a resignation letter published as an opinion piece in The New York Times, also touched a nerve, describing the bank’s culture as “toxic.”

Amid the vitriol, Goldman has had plenty of defenders. They argue that the bank performed far better than its peers during the financial crisis and continues to be a profit-making machine. It still lands the biggest, most prestigious banking assignments, has unparalleled risk management and remains the bank of choice for top scholastic recruits.

So which is it?

Steven G. Mandis, a Ph.D. candidate in sociology at Columbia University, takes a measured, academic approach to the question in a new book, “What Happened to Goldman Sachs,” an examination of the bank’s evolution from an elite private partnership to a vast public corporation - and the effects of that transformation on its culture. The book, published by Harvard Business Review Press, comes out on Tuesday.

“You read about Goldman Sachs and it’s either the bank is the best or the bank is the worst,” Mr. Mandis said. “This is not one of those books - things are never black or white.”

Mr. Mandis, who also teaches at Columbia’s business school, has special insights into Goldman beyond his academic training - he worked at the bank for a dozen years.

The son of Greek immigrants, Mr. Mandis, 43, grew up in Grand Rapids, Mich. He joined Goldman in 1992 after earning an economics degree from the University of Chicago and served in a variety of posts. He worked for several years as a mergers-and-acquisitions banker and later joined the proprietary trading desk, making bets with Goldman’s own money.

Mr. Mandis left Goldman in 2004 to join a hedge fund firm, and after four years there did stints at the management consulting firm McKinsey & Company and Citigroup. In 2008, he began taking classes at Columbia and was later accepted to the Ph.D. program in sociology. After writing a paper about organizational change, a professor encouraged him to write about Wall Street.

“He said no one in sociology understands banks so you can make a contribution in that area,” Mr. Mandis said.

That prompted the budding sociologist to pose a series of questions. Did the culture change at his former employer? And if so, why and how?

Mr. Mandis said that the two popular explanations for what might have caused a shift in Goldman’s culture - its 1999 initial public offering and subsequent focus on proprietary trading - are only part of the explanation. Instead, Mr. Mandis deploys a sociologicial theory called “organizational drift” to explain the company’s evolution.

“Organizational drift is a process whereby an organization’s culture, including its business practices, continuously and slowly movies, carried along by pressures, departing from an intended course in a way that is so incremental and gradual that it is not noticed,” Mr. Mandis writes.

The essence of his argument is that Goldman came under a variety of pressures that resulted in incremental changes to the firm’s culture, resulting in a much different place than in 1979, when the bank’s former co-head, John Whitehead, wrote its much-vaunted business principles.

These changes included the shift to a public company structure, a move that limited Goldman executives’ personal exposure to risk and shifted it to shareholders. The I.P.O. also put pressure on the bank to grow, causing trading to become a more dominant focus. And Goldman’s rapid growth led to more potential for conflicts of interest and not putting clients’ interests first, Mr. Mandis says.

A Goldman spokesman, David Wells, said in a written statement that after the financial crisis, the bank has “done a lot of work since then to reinforce and strengthen the most important parts of our culture, but it’s not unusual for a person to think the place he or she worked isn’t the same after he has left.”

“We wish him all the best,” Mr. Wells added.

Mr. Mandis said that he is neither for nor against Goldman but instead trying to make a contribution to the science of organizational behavior and management.

“The book is for executives whose companies have grown from 10,000 to 50,000 people and want to better understand the consequences of that growth,” he said.

Though it grew out an academic paper, “What Happened at Goldman Sachs” is accessible and clearly written. Goldman-philes will also find it useful for its appendices, which include a timeline of the bank’s history and biographical sketches of its key leaders through the years. There is also a complete list of the several hundred Goldman partners at the time of its 1999 I.P.O. and the value of their stock holdings after the first day of trading. (Spoiler alert: The I.P.O. made them really rich.)

Mr. Mandis, who lives on the Upper East Side of Manhattan with his wife and two daughters, is teaching a course at Columbia Business School this fall on investment banking while pursuing his doctorate. He also continues to invest; last month, a small-business lender he backed, RapidAdvance, was sold to an affiliate of Quicken Loans in a deal valuing the company at $100 million.

He is also not the only author in his family. Last year, with the help of her parents, Mr. Mandis’s older daughter, Tatiana, 12, self-published “Athens: Top 50 Places to Visit and Interesting Stories That Bring Them to Life.” The travel book grew out of the family’s visits to Greece.

“Now that book,” said the proud father, “is a whole lot more impressive than writing a Ph.D. thesis.”

Apollo’s Energy I.P.O. Gives New Life to Quick Flips

Apollo Global Management’s latest sale gives new life to the quick flip. Leon Black’s shop is taking EP Energy public less than 18 months after leading a $7.2 billion takeover of the oil and gas company. That contrasts starkly with the trend of longer buyout holding times. The prospect of a twofold return shows that private equity can still dig into its old bag of tricks.

When Mr. Black said earlier this year he was ready to part with everything not nailed down, EP didn’t seem an obvious candidate for inclusion. After all, Apollo and partners Riverstone Holdings, Access Industries and Korea National Oil had barely owned EP long enough to locate the office supply closet.

What’s more, in the aftermath of the crisis, buyout firms have been hanging onto their portfolio companies for longer. It took TPG and Warburg Pincus eight years to unload Neiman Marcus and Blackstone about six to try and return Hilton Hotels to the public markets. That’s more in line with the new normal. According to Preqin, the average private equity holding period has climbed from around four years pre-2008 to nearly six years.

The potential investment return on EP for Apollo and friends makes the hasty turnaround even more impressive. Assuming second-half growth matches what analysts expect for rivals like Concho Resources, EP’s full-year earnings before interest, taxes, depreciation and amortization, or Ebitda, should be about $1.3 billion. A basket of competitors, including EOG Resources and Pioneer Natural Resources, trades on average at about nine times forecast 2013 Ebitda. That would make EP worth some $11.3 billion.

Back out $5.1 billion of net debt and throw in a $337 million dividend the Apollo-led group paid itself last year, and it would on paper double its $3.3 billion equity investment at that valuation.

While the new owners larded EP with far more debt than its peers carry, they also restructured the operation in some healthy ways. Riskier assets in Egypt were divested and the production focus has shifted away from cheaper gas to more lucrative oil. Timing also played its part. U.S. gas prices, while still lingering near historical lows, have rallied by 60 percent since the buyout.

While brand-name private equity firms, in particular, have been reshaping their business models lately, Apollo is showing with EP that some things may never change.

Christopher Swann is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Barclays Names Top Aerospace Banker

Barclays has announced that Jay Caldwell will join the bank as global head of its aerospace and defense team.

Mr. Caldwell is arriving from RBC Capital Markets, where he worked on deals including Triumph Group‘s $1.4 billion acquisition of Vought Aircraft Industries, and the sale of Northrop Grumman‘s TASC consulting unit to Kohlberg Kravis Roberts and General Atlantic for $1.65 billion.

Before working on Wall Street, Mr. Caldwell was a carrier fighter pilot in the U.S. Navy, where he flew missions out of the Red Sea during Operation Desert Shield.

The industrials sector, which includes aerospace and defense, is a rare bright spot in an lackadaisical mergers market, and represents the second largest fee pool globally after telecommunications, media and technology. Barclays has done more industrial deals by volume than any other bank this year.

No Limit on Strikes for JPMorgan

The effort by JPMorgan Chase’s chief executive, Jamie Dimon, to resolve a host of Justice Department cases will most likely result in a multibillion-dollar fine and the usual promises not to violate the law again. Simply paying money to get rid of investigations raises questions about whether the bank should be viewed as a recidivist, and if so how the law should treat it.

In just the last two months, JPMorgan agreed to pay $410 million in penalties and forfeited profits to the Federal Energy Regulatory Commission for manipulation of energy markets by one of its subsidiaries. To settle inquiries into the “London Whale” trading that caused the bank to lose more than $6 billion, it paid regulators a total of $920 million even without resolving investigations by the Justice Department and Commodity Futures Trading Commission.

DealBook reported that Mr. Dimon met with the attorney general, Eric H. Holder Jr., last Thursday for nearly an hour to try to settle investigations into the bank’s sales of residential mortgage-backed securities and shoddy mortgages, some of which involve conduct by Bear Stearns before its acquisition in 2008.

Yet a settlement with the Justice Department is only one seemingly small step in dealing with a multitude of cases that seem to pop up like weeds for the bank. The most recent inquiry involves possible violations of the Foreign Corrupt Practices Act related to the hiring of the children of powerful government officials in Asian countries. And looming on the horizon is the broad investigation into manipulation of Libor and other benchmarks that is likely to ensnare several large banks.

It is not as if JPMorgan’s entanglements with government agencies is a recent event. Over the last decade, the bank has settled enforcement cases with the Securities and Exchange Commission for its role in:

As part of the settlement of the Enron case, the court issued a broad injunction, sometimes called a “sin no more” order, prohibiting any future violations of the federal securities laws by the bank.

If an individual had committed this many violations, a sentencing judge would probably “throw the book” at the person by imposing a higher sentence for any subsequent violations. The “Three Strikes and You’re Out” laws that authorize substantial prison terms for repeat offenders are just one example of how punishment of recidivists has been increased.

But large publicly traded corporations are treated much differently because it is difficult to ascribe the same type of criminal mentality to an organization as one can to an individual. JPMorgan has 260,000 employees and engages in many different lines of business in more than 60 countries, which means that multiple violations are almost bound to occur.

Unlike the person who engages in a series of crimes, determining when a company has crossed the line into being a recidivist is much harder to assess. Should a violation of distinct laws by separate divisions or subsidiaries be ascribed to the entire company, and what time frame should be used to â€" 10 years, or perhaps 20?

An even greater challenge is figuring out how to punish repeat offenders. The federal sentencing guidelines increase a company’s “culpability score” for violations that occur within 10 years for similar misconduct, so a judge can impose a higher fine on companies the engage in multiple violations. But few cases involving public companies come within these guidelines because most investigations these days are settled without a criminal conviction but instead through a deferred or nonprosecution agreement that does not require any judicial oversight of the penalty.

Misconduct that also violates an injunction previously imposed on a company in a securities case could authorize the S.E.C. to pursue either a civil or criminal contempt case, but these are also of limited utility. A finding of civil contempt can result only in a fine or other penalty designed to compel the violator to comply with the terms of the injunction but not as a punishment. That means the S.E.C. would have to prove a continuing violation, and not just one that occurred in the past.

The S.E.C. could pursue a criminal contempt finding that can result in a punishment for a violation, a proceeding it could initiate on its own without needing the participation of the Justice Department. But criminal contempt requires showing a willful violation of the injunction, which would be difficult to do for a company the size of JPMorgan.
The settlement Mr. Dimon is trying to secure with the Justice Department is unlikely to make any reference to other JPMorgan cases. And I doubt the size of the fine will reflect consideration of whether prosecutors view the bank as a recidivist, even though the London Whale case included an admission of misconduct.

Each case seems to be treated like a separate silo, with no connection to other violations. That gives the impression that companies will pay the penalty and move on, much like one would handle a speeding ticket.
Dealing with corporate recidivism presents a challenge to the government to figure out how to make sure an organization tries to change its culture. The S.E.C. and other regulators do not have the authority to pursue higher penalties for repeat offenders, something they may want to seek from Congress.

Corporate monitors were one way the Justice Department sought to ensure companies improved their compliance as part of deferred and nonprosecution agreements. These have largely fallen by the wayside but could be a means to improve the commitment to following the law to prevent future violations when a company seems to violate the law repeatedly.

There is no realistic prospect of a corporate “Three Strikes” law, however, because large organizations are not held to the same standard as individuals, and most likely cannot be. But tying past violations to the resolution of current investigations would send the message that recidivism is something that has caught the government’s attention.

Mutual Fund Billionaire Gives $250 Million to Yale

The mutual fund billionaire Charles B. Johnson has pledged $250 million to Yale, the largest gift in the university’s history, according to an announcement by the university’s president on Monday.

Mr. Johnson, the retired chairman of the money management company Franklin Resources, and a member of the Yale class of 1954, already has his name attached to several Yale institutions that he has supported over the years. His latest donation will go toward the construction of two new residential colleges at Yale, the president, Peter Salovey, said in an e-mail to students, faculty, administrators and alumni.

A son of the founder of Franklin Resources, Mr. Johnson was the company’s chief executive for much of the second half of the 20th century, taking the company public in 1971. He retired as chairman in June, succeeded by his son, Gregory.

Franklin Resources, also known as Franklin Templeton Investments, manages the Franklin and Templeton mutual funds. The firm had $815 billion in assets under management as of June.

A baseball fan, Mr. Johnson is the largest shareholder of the San Francisco Giants. Forbes estimates his net worth at $5.6 billion.

His surname is a familiar one around Yale’s campus. Gifts from Mr. Johnson have supported the Johnson Field, the Johnson Center for the Study of American Diplomacy and the Brady-Johnson Program in Grand Strategy.

The $250 million donation puts Yale closer to meeting its fund-raising goal for the new residential colleges, with $80 million still to be raised, Mr. Salovey said on Monday. The construction of the new colleges, hindered by the economic downturn, would represent the first expansion of Yale College since 1969, when women were first admitted, Mr. Salovey said.

“Charlie’s vision of enabling access to a Yale College education to a greater number of astonishingly talented students tracks perfectly with my hopes for a more accessible and excellent Yale,” Mr. Salovey said in the e-mail.

Among his classmates, Mr. Johnson’s financial success is well known. On the Web site for the class of 1954, Mr. Johnson is called “our class’s only billionaire.”

But an asterisk is included, with a note that reads: “To the best of my knowledge. If there are others in our class, let me know.”

Active Network in $1.05 Billion Buyout

Active Network, which provides online tools and data management for events, said on Monday that it had agreed to be acquired by the private equity firm Vista Equity Partners in a deal valued at $1.05 billion.

Vista Equity is offering $14.50 a share in cash, a premium of 27 percent from Active Network’s closing stock price on Friday.

Active Network went public in May 2011 at $15 a share. Earlier, this year, the stock fell as low as $3.95.

Vista Equity, which has offices in Austin, Tex., Chicago and San Francisco, has been active of late, with 14 previous acquisitions this year, including a $1.05 billion buyout of Websense, a cybersecurity company in June, according to Standard & Poor’s Capital IQ.

“We believe the partnership with Vista will position us to execute on our strategy and further enhance our industry leadership, Jon Belmonte, interim chief executive of Active Network, said in a statement.

Citigroup and the law firm DLA Piper advised Active Network. Bank of America Merrill Lynch and the law firm Kirkland & Ellis advised Vista Equity. Bank of America Merrill Lynch, RBC Capital Markets and BMO Capital Markets have agreed to provide debt financing in connection with the transaction.

Morning Agenda: Fiscal Fight Unsettles Markets

The current fiscal battle raging in Washington, and the looming threat of a government shutdown on Tuesday, is causing greater unease than past political disputes and may rattle markets when they open on Monday, Nathaniel Popper reports in DealBook. Stocks in Japan closed down 2.06 percent, while major markets in Europe were down about 1 percent at midday. Stock index futures in the United States are pointing to a lower opening on Monday.

The chief fear for investors is that a government shutdown would set the stage for a more consequential fight over the debt ceiling. Without an agreement to raise the borrowing limit by mid-October, the government will not be able to issue more bonds and could default on its outstanding borrowing, Mr. Popper writes. “The threat of a default, however remote, seems to be on the table now,” said Gregory R. Valliere, the chief political strategist at the Potomac Research Group.

A number of analysts are arguing that a shutdown â€" which is seen as relatively benign from the perspective of the broader economy â€" might actually reduce the risk of a more damaging default. Alec Phillips, a Goldman Sachs economist, said on Friday that a shutdown could “ease passage of a debt-limit increase” because House Republicans could lose their bargaining leverage. The Republicans “are going to be more resistant to raising the debt ceiling if they feel they didn’t even stand and fight” on the shutdown issue, Ezra Klein and Evan Soltas argue in The Washington Post.

Still, the prospect of the first government shutdown in 17 years would be the latest dispiriting development for a public that is already deeply unhappy with Congress, The New York Times writes. “With a temporary shutdown appearing inevitable without a last-ditch compromise, the battle on Sunday became as much about blaming the other side as searching for a solution.”

S.E.C. TAKES ON MARK CUBAN IN INSIDER CASE  | Mark Cuban, no stranger to a fight, is sparring with the federal government. The Securities and Exchange Commission’s insider trading trial against the billionaire opens in a federal courtroom in Dallas on Monday, the culmination of a five-year battle, DealBook’s Ben Protess reports. “Mr. Cuban’s star power, coupled with the S.E.C.’s renewed ambition for taking cases to court, underpins the importance of this trial.”

“For Mr. Cuban, who has a net worth pegged at $2.5 billion, the courtroom fight is not about the money,” Mr. Protess writes. “If found liable, he faces a fine of about $2 million. Having doled out about that much in fines to the National Basketball Association, Mr. Cuban is instead fighting to clear his name and dress down an agency that accused him of trading on confidential information when dumping his stake in an Internet company.”

GAME MAKER BEHIND CANDY CRUSH SEEKS I.P.O.  |  The British game maker King, which created Candy Crush Saga, has its eye set on becoming a top technology initial public offering across the Atlantic Ocean from its home country, DealBook’s Michael J. de la Merced reports. The company has filed for an I.P.O. in the United States, according to people briefed on the matter, in what promises to be one of the biggest debuts by a gaming company in over a year. The company has retained Bank of America Merrill Lynch, Credit Suisse and JPMorgan Chase to lead the offering, according to the people.

“King may still have to overcome skepticism about the last gaming company to make a highly public offering, Zynga,” Mr. de la Merced writes. “After its much-ballyhooed market debut in December 2011, Zynga has struggled amid declining popularity, employee layoffs and costly missteps like the nearly $200 million purchase of OMGPOP, a game maker that the company has since shut down.”

For another closely watched technology company, the I.P.O. process is said to be moving forward. After filing confidentially for an I.P.O., Twitter may make those documents public this week, according to Quartz and The Wall Street Journal.

ON THE AGENDA  | The chairman of Toyota, Takeshi Uchiyamada, speaks at the Economic Club of Washington at 8:10 a.m. Steve Case, the AOL co-founder, is on CNBC at 7 a.m. Alexandra Lebenthal, head of the financial firm Lebenthal & Company, is on CNBC at 10 a.m. Without a deal in Washington, the government is scheduled to shut down at midnight.

BREAKING BUFFETT  | Warren E. Buffett has not been particularly active on Twitter since opening an account in May. But the billionaire investor emerged on Sunday in honor of the final episode of AMC’s “Breaking Bad.” The Twitter account posted a photograph of Mr. Buffett made to look like Walter White, the science teacher turned drug lord who is the show’s main character. “Not even the Oracle knows what will happen tonight,” the tweet read, with the tag, “#waltsuccessor.”

Mergers & Acquisitions »

Schwarzman Reflects on BlackRock Sale, With Regret  |  Stephen A. Schwarzman, the chief executive of the Blackstone Group, said in an interview on Bloomberg Radio that his decision 19 years ago to sell a unit that became BlackRock, the world’s biggest money manager, was “a heroic mistake.” He continued: “We all stumble on and have some success. But it’s a humbling experience to see what you don’t do right.” BLOOMBERG NEWS

Former Xstrata Chief in New Mining Venture  |  The trading house Noble Group and the American private equity firm TPG Capital will each invest $500 million in a private mining venture led by Mick Davis, the former Xstrata chief executive who lost out in the Glencore takeover. DealBook »

In Sale of Washington Post, Several Prospective Buyers  |  Before deciding to sell The Washington Post to Jeffrey P. Bezos, Donald E. Graham and his advisers “approached Robert Allbritton, owner of Politico and whose family once owned the Washington Star; Michael R. Bloomberg, who some people believed would want a daily print outlet in addition to his economic-driven subscriber news and data service; David Rubenstein, co-founder of the Carlyle Group and a major Washington philanthropist; and Eric Schmidt, who was chief executive of Google for 10 years,” The Post reports. WASHINGTON POST

The Rise and Fall of BlackBerry  |  President Obama and Queen Elizabeth have been among BlackBerry’s fans. Now, with the company struggling, the smartphones may become relics. NEW YORK TIMES

Hand-Wringing Among Lovers of BlackBerry’s Keyboard  |  It appears that BlackBerry could soon be leaving the business of making smartphones, “leaving fewer options for a vocal minority still committed to phones with its once popular physical keyboard,” The New York Times reports. NEW YORK TIMES

J.C. Penney’s Troubling Stock Sale  |  Capital misallocation is a new bad sign for the struggling retailer, Robert Cyran of Reuters Breakingviews writes. REUTERS BREAKINGVIEWS

INVESTMENT BANKING »

Issuance of a Loan Product Returns to Pre-Crisis Level  |  Sales of packaged corporate loan products, known as collateralized loan obligations, “have reached a fresh post-crisis record as investors clamor for higher returns from the structured financial products,” The Financial Times reports. FINANCIAL TIMES

Former Bear Stearns Chief Questions JPMorgan’s Mortgage Deal  |  Alan D. Schwartz, formerly chief of Bear Stearns when it collapsed in 2008 and was absorbed by JPMorgan Chase, told Andrew Ross Sorkin that a proposed $11 billion settlement with the Justice Department “doesn’t feel like it makes sense, but it makes good headlines.” DealBook »

R.B.S. to Sell Stake in Bank Branch Network  |  The Royal Bank of Scotland agreed on Friday to sell a stake in its branch network for £600 million, or $966 million, to a consortium of investors led by Corsair Capital and Centrebridge Partners. DealBook »

Citigroup Is Approved for China Free-Trade Zone  |  After receiving regulatory approval for its Chinese unit, Citigroup would be “among the first foreign banks to target business” in Shanghai’s new free-trade zone, The Wall Street Journal reports. WALL STREET JOURNAL

What We Resist Persists  |  Acknowledging uncomfortable feelings can be viewed as self-indulgent, but unspoken tensions can take a toll in the workplace, Tony Schwartz writes in the Life@Work column. DealBook »

PRIVATE EQUITY »

AXA to Spin Out Its Private Equity Business  |  AXA Private Equity, a $32 billion private equity business, “will announce early this week that it has spun out of the French insurer in a management-led buyout that creates a stand-alone European heavyweight,” The Financial Times reports. FINANCIAL TIMES

Firm Backed by TPG Plans $1 Billion Fund for Asia  |  The Northstar Group, a private equity firm backed by TPG Capital, “is seeking to raise around $1 billion in a new fund to invest in Southeast Asia’s fast-growing economies,” Reuters reports, citing unidentified people familiar with the matter. REUTERS

HEDGE FUNDS »

Falcone Funds Sell Harbinger Shares to Leucadia  |  Three funds run by Philip Falcone’s Harbinger Capital Partners sold $158 million of Harbinger Group shares to the Leucadia National Corporation, as the investment firm moves to liquidate assets after a deal with regulators, Bloomberg News reports. BLOOMBERG NEWS

A Hedge Fund Investor on Twitter  |  Sahm Adrangi, the 32-year-old founder of Kerrisdale Capital, is the “hedge-fund world’s first full-on social-media-savvy investor,” New York magazine’s Kevin Roose reports. NEW YORK

I.P.O./OFFERINGS »

Counting Down to Twitter’s Public I.P.O. Filing  |  Twitter, which has filed confidentially for an initial public offering, intends to make the I.P.O. documents public this week, Quartz reports, citing an unidentified person familiar with the plan. QUARTZ

VENTURE CAPITAL »

Tumblr’s Path to a Sale to Yahoo  |  “Anyone paying attention to Tumblr’s burn rate should have been expecting an exit,” Molly Young writes in New York magazine. NEW YORK

Wall Street Money Behind a Start-Up’s Loans  |  The investors making loans on the peer-to-peer lending platform Lending Club “are increasingly hedge funds, or high-net-worth brokerage clients, or other pools of money highly redolent of the Wall Street of old,” Felix Salmon writes in New York magazine. NEW YORK

Revolution Ventures Closes a $200 Million Fund  | 
ALLTHINGSD

LEGAL/REGULATORY »

In Europe, Bank Overhaul May Be Delayed  |  “If all goes as planned, by November European political leaders will anoint the central bank as supreme bank enforcer of the euro zone, with the power to separate healthy banks from the walking dead that are sucking the life from the region’s economy,” The New York Times writes. “But even before the central bank has received the legal authority for its new role, questions are being raised about whether Germany and perhaps other countries could postpone critical parts of the European banking overhaul for political reasons.” NEW YORK TIMES

Judges Take a Harsher Tone With Banks  |  “District court judges are not generally known as flamethrowers, but some seem to be losing patience with the banks,” Gretchen Morgenson writes in the Fair Game column in The New York Times. NEW YORK TIMES

Fed and Investors Fail to Communicate  |  A number of economists agreed that Ben S. Bernanke and the Federal Reserve bore at least some responsibility for the market’s confusion after the central bank’s announcement that it would not immediately begin tapering its asset purchases, James B. Stewart writes in the Common Sense column in The New York Times. NEW YORK TIMES

In China, Real Estate Mogul Is Sentenced to Prison  |  The enterprising banker Gong Aiai, who was accused of amassing high-end properties by forging or illegally purchasing documents, was sentenced on Sunday to three years in prison, according to the state-run Xinhua news service, The New York Times reports. NEW YORK TIMES

Former Xstrata Chief in New Venture

LONDON â€" Mick Davis, the former Xstrata chief executive who lost out in the Glencore takeover, is attempting a comeback.

Trading house Noble Group and the American private equity firm TPG will each invest $500 million in a private mining venture led by Mr. Davis, according to a statement on Monday. The business, called X2 Resources, is intended to create a “mid-tier” metals and mining company.

Mr. Davis is credited with expanding Xstrata from a small collection of mining assets into one of the world’s largest mining groups. He was ousted as chief executive earlier this year after the company’s takeover by its largest shareholder, Glencore International, the Swiss-based trading house founded in 1974 by Marc Rich.

Mr. Davis was originally supposed to be chief executive of the combined company, now known as GlencoreXstrata, but after an improved offer, Glencore chief Ivan Glasenberg became ceo.

The name X2 appears to be a not-so-subtle suggestion that the new venture is an effort to replicate Mr. Davis’s success at Xstrata. Whether a similar opportunity exists today in mining is open to question. In his former role, Mr. Davis was able to cash in on the huge rise in the price of iron ore, copper and other commodities in the early part of this century generated by a building and industrial boom in China and other emerging markets.

“He was the most bullish of C.E.O.’s in the biggest bull cycle we have ever seen,” said Paul Gait, a mining analyst with Bernstein Research in London. “We are not going to see that kind of structural change again. ”

After the boom years, the mining industry has been rocked by slower demand and cooling prices. Deals concluded at high prices no longer look smart and most of the chief executives of large mining companies have lost their jobs. Mr. Glasenberg, who is more trader than miner, is one of the few left.

Mr. Gait believes that X2 could profit from picking up assets that other mining companies, which are under pressure financially to raise money to fund ongoing projects, are forced to sell cheaply in a downturn.

But X2 may need more capital than it has now. Even after the boom good mining assets tend to cost several billion dollars, possibly putting them out of X2’s reach. X2’s statement says it is “in discussions with a further select group of potential investors”.

X2 will also try to use Noble’s trading smarts to gain market intelligence in the way Xstrata is thought to have worked with Glencore.

The industry believes Xstrata’s close ties to Glencore gave it a strategic advantage in making decisions on how to deploy capital. In return, Noble will be given “preferred” status in marketing whatever output X2 Resources eventually produces, according to the statement.

S.E.C. Again Takes On Mark Cuban in Insider Case

Mark Cuban has tussled with Bill O’Reilly, Donald Trump and an array of N.B.A. referees.

Next up? The federal government.

The Securities and Exchange Commission’s insider trading trial against Mr. Cuban opens in a federal courtroom in Dallas on Monday, the culmination of a five-year battle. Mr. Cuban, a 55-year-old reality TV regular best known for his courtside antics at games of the Dallas Mavericks, the basketball team he owns, is one of the few celebrities to land on the agency’s radar.

Mr. Cuban’s star power, coupled with the S.E.C.’s renewed ambition for taking cases to court, underpins the importance of this trial.

After enduring its share of losses at trial and a public lashing for missing signs of the financial crisis, the agency is fresh off its most significant courtroom victory in recent memory with a win over Fabrice Tourre, a former Goldman Sachs trader at the center of a toxic mortgage deal. A victory in Mr. Cuban’s case might further embolden the S.E.C. as it seeks to hold individuals accountable at trial, a policy championed by its new chairwoman, Mary Jo White.

For Mr. Cuban, who has a net worth pegged at $2.5 billion, the courtroom fight is not about the money. If found liable, he faces a fine of about $2 million. Having doled out about that much in fines to the National Basketball Association, Mr. Cuban is instead fighting to clear his name and dress down an agency that accused him of trading on confidential information when dumping his stake in an Internet company.

Over five years and in three different courthouses, Mr. Cuban’s case has had many twists and turns. A judge dismissed the lawsuit in 2009 and an appeals court reinstated it a year later. This year, Mr. Cuban sought to delay the trial to accommodate what the S.E.C. mocked as his “Hollywood production schedule” â€" a swipe at his commitment to film the latest season of the reality show “Shark Tank.”

Mr. Cuban has fired his own shots in the case, using his blog to criticize the agency for a “facts be damned” approach, suing it to uncover records about its investigation and even suggesting that the insider trading case stemmed from an S.E.C. employee who questioned Mr. Cuban’s involvement in a documentary film that smeared “the good name of a patriot like President Bush.”

While the employee was fired, an inquiry by the S.E.C.’s inspector general cleared the agency of any misconduct, concluding that the employee was not involved in the investigation of Mr. Cuban.

The contentious back story will not figure into the trial, but Mr. Cuban’s feistiness very likely will. And that personality, which will enter the spotlight when Mr. Cuban takes the witness stand as expected, might sway a jury of Dallas residents who have largely embraced Mr. Cuban.

“He does things I never thought he’d do,” said L.T. Johnson, a Dallas resident and Mavericks fan. “He should be up in a box like the other owners, but instead he’s on the floor, with the players and fans.”

Mr. Cuban made his fortune on the eve of the dot-com crash in 1999, selling his start-up, Broadcast.com, to Yahoo for nearly $6 billion. He bought the Mavericks months later, and now has co-ownership stakes in the movie chain Landmark Theaters, among other media companies.

The S.E.C.’s case traces to June 2004, when the Internet search engine company Mamma.com was planning a private offering of its stock. The company expected Mr. Cuban to balk at the deal, which was likely to hurt Mamma.com’s stock price and dilute the holdings of existing shareholders like Mr. Cuban.

Yet Mamma.com hoped to win over Mr. Cuban, who already owned 6.3 percent of the company’s shares. During an eight-minute phone call on June 28, 2004, Mamma.com’s chief executive, Guy Fauré, made his pitch for the private offering.

According to the S.E.C., Mr. Cuban agreed to keep the information confidential. And after becoming “very upset and angry” when learning about the private offering, the S.E.C. said, Mr. Cuban declared “I can’t sell” the existing shares because he had access to inside information.

Mr. Fauré urged Mr. Cuban to consult the investment bank arranging the private offering, Merriman Curhan Ford, now Merriman Capital, before deciding. When Mr. Cuban spoke to a Merriman employee, according to the S.E.C., he learned “additional confidential details” about the deal.

One minute after the call with Merriman ended, Mr. Cuban ordered his stockbroker to dump his entire stake in Mamma.com. By unloading the shares just hours before Mamma.com announced the offering, Mr. Cuban avoided about $750,000 in losses.

More than four years later, the S.E.C. charged Mr. Cuban with insider trading. Since then, the S.E.C. has argued that Mr. Cuban tried to “conceal his wrongful trading” and concocted “a cover story,” by sending an e-mail to his broker saying, “I want to make sure I was 100 pct kosher on that trade.”

Mr. Cuban’s lawyers dispute those accusations.

“Mr. Cuban’s e-mail to his broker, which asked that the investment bank’s compliance department be consulted, obviously sought more scrutiny of his entirely proper trading, not to cover it up,” the lawyers, Christopher J. Clark of Latham & Watkins, Stephen Best of Brown Rudnick and Thomas M. Melsheimer of Fish & Richardson, said in a statement. They added that “far from concealing his trading, Mr. Cuban voluntarily spoke to the S.E.C. without an attorney when they called him about an unrelated” investigation into Mamma.com.

“We expect that when the facts come out,” the statement said, “Mark will be vindicated.”

The defense has several factors working in its favor. For one, the judge assigned to the case, Sidney A. Fitzwater, has been skeptical of the S.E.C. from the start.

Judge Fitzwater dismissed the case in 2009, ruling that the S.E.C. had to show two things: that Mr. Cuban agreed to keep the information confidential and that he agreed not to trade on it. The S.E.C.’s complaint was “deficient” in proving the second, Judge Fitzwater ruled, noting that Mr. Fauré never asked Mr. Cuban not to trade.

The United States Court of Appeals for the Fifth Circuit reversed the judge’s dismissal a year later. This March, Judge Fitzwater allowed the case to proceed to trial, calling his decision “in some respects a close one.”

The S.E.C. could face additional problems at trial as its case hinges on the testimony, and memory, of Mr. Fauré. There is no recording of Mr. Fauré’s call with Mr. Cuban. And Mr. Cuban does not recall the nine-year-old conversation.

To further bolster the defense, Mr. Cuban’s lawyers are likely to portray Mr. Fauré as unreliable.

During his initial interview with the S.E.C., Mr. Fauré did not mention that Mr. Cuban immediately agreed to keep the information confidential. It was not until his second interview with the S.E.C. that Mr. Fauré recounted how Mr. Cuban said “something to the effect” of “um hum, go ahead” in response to hearing that Mamma had “confidential information” to share.

Mr. Cuban’s lawyers will most likely highlight the curious timing of Mr. Fauré’s additional testimony. Mr. Fauré, according to court records, changed his story about two weeks after learning that the S.E.C. dropped an unrelated investigation into Mamma.com.

The lawyers will also stress that Mr. Fauré’s e-mails to Mr. Cuban did not mention a confidentiality agreement. Mr. Fauré chose not to pursue such an agreement, court records say, even though one of Mamma.com’s outside lawyers advised the company to obtain a signed contract from Mr. Cuban.

If Mr. Cuban escapes unscathed in the courtroom, his problems will very likely shift to the basketball court, where the season is poised to start. The Mavericks, champions in 2011, are coming off a disappointing season in which they missed the playoffs.