Investors Appear to Shrug Off Puerto Rico’s Debt Downgrade

Investors’ faith in Puerto Rico’s debt appeared undaunted on Wednesday after Standard & Poor’s cut the island’s credit rating to junk a day earlier.

Analysts and traders said prices of some Puerto Rico bonds traded lower on Wednesday, but there was no mass selling that might indicate a panic. The spread between Puerto Rico’s 30-year general obligation bonds and a benchmark of highly rated municipal bonds was unchanged from Tuesday, when S.&P. issued its downgrade, according to Thomson Reuters Municipal Market Data.

Many investors shrugged off the downgrade, saying they had anticipated it months ago, while others said the possibility of a default remained remote.

“I think the market for Puerto Rico bonds has been oversold,” said James Colby, senior strategist for Van Eck’s municipal exchange-traded funds, which have exposure to Puerto Rico bonds. “Is there a possibility for further downgrades? Yes. Does it mean they are not going to pay? No.”

Such confidence in the beleaguered island’s ability to pay back its debts is based on a longstanding bargain: Investors have been willing to lend Puerto Rico billions of dollars to deal with its grave economic problems. In exchange, its bonds have historically generated some of the highest returns in the municipal debt market.

But that bargain has become increasingly precarious. In downgrading Puerto Rico on Tuesday, S.&P. warned that the island faced a worsening cash squeeze in the face of a challenged economy. Its downgrade could further strain the commonwealth’s liquidity because it could accelerate $940 million of debt payments and require additional interest rate swap collateral postings, according to S.&P.

Gov. Alejandro García Padilla said on Wednesday that the government would renegotiate those debt deals to prevent such accelerations while also working on “financing alternatives that will bring additional liquidity.” He added that he would seek to further reduce government budgets and achieve other costs savings.

The governor’s statement was also significant in what it did not say. It did not mention whether Puerto Rico had plans to borrow money from the municipal bond market, which ratings agencies consider a crucial test of the government’s liquidity.

Bankers and investors have said that Puerto Rico has been exploring a municipal bond sale of up to $2 billion. Many had expected a deal to happen last month or by the end of this month.

The lack of mention of a bond deal by the governor “indicates an increasing sense of dread among the leadership that the market is not open to them in any capacity,” said Robert Donahue, managing director at Municipal Market Advisors.

For now, some large investors say they have faith that the government can deliver on its promises to manage its cash.

“Our assumption is that they have sufficient liquidity to cover any immediate acceleration of notes or the posting of additional collateral,” said Joseph Rosenblum, director of municipal credit research at AllianceBernstein, who described his firm’s position in Puerto Rico debt as modest.

At this point, some long-term Puerto Rico investors may have little choice but to hold on to their bonds in hopes that the island can turn a corner and the prices can rise.

Prices on some bonds have dropped to about 65 cents on the dollar. “For the buy side, there has been some discussion of ‘50 cents’ as a reasonable price,” Mr. Donahue said in a note on Wednesday.

This steep drop in prices is creating opportunity for investors, like hedge funds and private equity firms.

“It’s currently trading at 8 percent, 9 percent and 10 percent tax-exempt yields,” said Laurence L. Gottlieb, chairman of Fundamental Advisors, a firm that manages private equity and hedge fund strategies with investments in Puerto Rico and other special situations in the municipal market.

But many hedge fund managers say the bond prices haven’t dropped far enough to justify a buying spree.

Some investors say there could be better buying opportunities ahead because they expect Puerto Rico’s situation to worsen in the coming months. Other credit rating firms could downgrade the commonwealth to junk, and the island could fail to renegotiate some of its accelerating debt deals.

One hedge fund manager said he was waiting for bond prices to fall further before buying. Then he is banking on the federal government coming up with a financial rescue for Puerto Rico, something it has so far been reluctant to consider.

Peter Hayes, who heads BlackRock’s giant municipal bonds group, said his firm has reduced all of its Puerto Rico exposure.

But Mr. Hayes said he would consider buying some of the island’s debt, especially if it looked as if the island were headed for a restructuring. “At some point,” he said, “it may be an opportunity.”

Mary Williams Walsh contributed reporting.

Apple Takes Down a Bitcoin App

Apple has taken down one of the last remaining iPhone mobile applications that allowed users to buy and sell Bitcoin.

The app, named BlockChain, had been downloaded 120,000 times, and was commonly used as a way to send and receive Bitcoins.

BlockChain’s chief executive, Nicolas Cary, claimed on Wednesday that Apple had made the move as a pre-emptive effort to protect the mobile payment systems Apple is developing. “It’s well known that Apple is developing its own payment system,” he said. “They are building a walled garden to interfere with innovation.”

Apple declined to comment.

Other Bitcoin apps have previously come and gone from the Apple App Store.

BlockChain received an email from Apple on Wednesday evening explaining that the app “has been removed from the App Store due to an unresolved issue.”

Mr. Cary said that Apple had not contacted it previously about any issues with the app, and that the app was essentially unchanged since Apple approved it for the store two years ago.

The Wall Street Journal recently reported that Apple was stepping up its efforts to create proprietary systems that will make it possible to make payments with an iPhone.

Jury in SAC Case Requests Documents Related to Defense Witness

Deliberating for a second day, jurors in the insider trading trial of Mathew Martoma, a former top portfolio manager at SAC Capital Advisors, on Wednesday requested documents supporting the defense’s claim that he is not guilty.

The jury of seven women and five men â€" which includes a lawyer, an New York University professor and a chief executive â€" began deliberating shortly after 10 a.m. Most had battled a winter storm and icy roads to arrive on time at the federal courthouse in Lower Manhattan.

Shortly after lunch, the jurors asked to see the transcript of testimony from one of the defense witnesses, raising the possibility that they may be weighing a not-guilty verdict. But predicting how a jury will vote based on evidence requests is difficult and can lead to erroneous conclusions, lawyers say.

Mr. Martoma is accused of seeking secret information from two doctors involved in a clinical drug trial for an experimental Alzheimer’s drug which was being developed by Elan and Wyeth. One of those doctors, Dr. Sidney Gilman, testified that he gave Mr. Martoma an advance look at the final results weeks before they were made public.

Prosecutors contend that Mr. Martoma used the information, which turned out to be negative trial results, as the basis to liquidate a $700 million investment in Elan and Wyeth shares a week before the public announcement. In doing so Mr. Martoma and SAC avoided losses and made gains totaling $275 million, the authorities say.

Prosecutors had long hoped Mr. Martoma would cooperate and provide the missing link in their pursuit of Steven A. Cohen, the billionaire founder of the hedge fund. Mr. Cohen has not been charged with any criminal wrongdoing, but is facing a civil action from the S.E.C.

Mr. Martoma, dressed in a dark suit and red tie that matched the red dress worn by his wife, Rosemary, listened as the judge read the jurors’ request.

The defense has argued that the information that Dr. Gilman gave Mr. Martoma was already published in a news release of preliminary results announced a month earlier by Elan and Wyeth.

During the case, now in its fifth week, Mr. Martoma’s lawyers brought Dr. Thomas Wisniewski, a professor of neurology at New York University, to the witness stand. He testified that there was “no substantial difference” between the June 17, 2008, news release and the draft of slides that Dr. Gilman told the jury he had shown Mr. Martoma on July 19, 2008.

Early in the morning as some jurors, arriving minutes late, were rushed through security at the courthouse, Mr. Martoma and his wife were ordering breakfast in the basement canteen.

The jurors did not reach a verdict at the end of the day and will continue deliberating Thursday morning. If convicted, Mr. Martoma could face a sentence of seven to ten years, legal experts say.

With El-Erian Leaving, Pimco Says It Is ‘Better’

Wall Street was stunned when Mohamed A. El-Erian announced last month that he would step down as chief executive and co-chief investment officer of Pimco, the giant asset manager where he was considered the heir apparent.

But on Wednesday, Pimco appeared to be already moving on.

“Believe me when I say, we are a better team at this moment than we were before,” William H. Gross, the company’s founder and co-chief investment officer, said in his latest investment outlook note.

Mr. El-Erian, a public face of the company who would frequently appear on television to opine on markets, is departing at a challenging time for Pimco. The company’s bond funds have struggled over the last year in the face of rising interest rates and falling bond prices. Investors in the firm’s Total Return Fund pulled out more than $40 billion last year.

The withdrawals from that fund continued in January, with investors taking out $3.5 billion, according to Morningstar, for the ninth-straight month of outflows.

Mr. Gross told Bloomberg News last month that he was disappointed when Mr. El-Erian told him he wanted to leave. “From our standpoint he was doing a great job,” Mr. Gross told the news service. “The answer we gave him was basically, ‘Hell no, you can’t go.’”

In the note on Wednesday, Mr. Gross urged investors to “stick with Pimco.”

The company reshuffled its leadership when it announced Mr. El-Erian’s departure, elevating two portfolio managers, Andrew Balls and Daniel Ivascyn, to become deputy chief investment officers and promoting the chief operating officer, Douglas M. Hodge, to chief executive.

Pimco announced more changes the following week, naming four additional deputy chief investment officers: Mark Kiesel, Virginie Maisonneuve, Scott Mather and Mihir Worah. The six will report to Mr. Gross. Mr. El-Erian is due to leave the company in March.

The word of the month at Pimco is “careful,” Mr. Gross said in the note on Wednesday. With credit growth slowing and the Federal Reserve reducing its extraordinary stimulus measures, economic growth in the United States may be slower than expected, he wrote.

“In any case, don’t be a pig in today’s or any day’s future asset markets,” he said. “The days of getting rich quickly are over, and the days of getting rich slowly may be as well.”

Coca-Cola to Buy 10% Stake in Green Mountain Coffee

Coca-Cola agreed on Wednesday to buy a 10 percent stake in Green Mountain Coffee Roasters, as it seeks to cement ties with the fast-growing coffee company.

Under the terms of the deal, Coke will buy about 16.7 million shares in Green Mountain for about $1.25 billion. The shares were priced at $74.98 each, representing the volume-weighted average price for the last 50 days.

In return, Green Mountain will be the official maker of the soda giant’s single-serve cold beverages, built on its popular Keurig pod-based system. Some of the proceeds from the investment will go toward expansion of the Keurig Cold product.

“This global relationship combines The Coca-Cola Company’s unparalleled brand, distribution and marketing strengths with GMCR’s innovative technology and beverage system expertise,” Brian P. Kelley, Green Mountain’s chief executive, said in a statement, referring to his company’s ticker symbol.

News of Wednesday’s deal sent shares in Sodastream, one of the biggest makers of at-home soda machines, tumbling more than 8 percent in after-hours trading.

To alleviate dilution caused by the new stock issuance, Green Mountain will buy back additional shares. The deal is expected to close next month.

Green Mountain was advised by Bank of America Merrill Lynch and the law firm Baker & McKenzie.

Lazard Swims With the Big Fish

Lazard has put its feet firmly in the big boys’ camp. The advisory and asset management firm didn’t just make progress on financial targets that its chief executive, Kenneth M. Jacobs, set two years ago. Its bankers also goosed revenue in the second half of the year. That makes Lazard look more like Goldman Sachs, Morgan Stanley and JPMorgan Chase than smaller rivals Evercore Partners and Greenhill.

Advisory revenue in the six months to December fell 18 percent at Evercore and 26 percent at Greenhill. Lazard and its bulge-bracket competitors, meanwhile, raked in more: Lazard by 27 percent and JPMorgan by more than a third.

They can thank the return of the kind of big-ticket deals that major banks live for. Lazard, for example, participated last year in two-fifths of completed deals above $10 billion and in 30 percent of those of $5 billion or more.

The boutiques, of course, aren’t necessarily excluded from the lofty side of the market. Greenhill’s chief executive, Scott L. Bok, and Ralph Schlosstein at Evercore both told investors last week that a bigger chunk of their firms’ top line came from larger deals. They also pointed to various data that showed the companies winning market share in recent years at the expense of mega banks.

That growth seemed to stall in the second half of last year, but not for Lazard, which may have closer relationships with the biggest clients. Its revival was well timed. Without the extra revenue, Mr. Jacobs’s firm might have struggled to hit its 21 percent adjusted operating margin for 2013. Now, he has to show he can crank that up to this year’s 25 percent goal - regardless of what size companies are hunting for deals.

Antony Currie is an associate editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

Jack Butler, a Top Bankruptcy Lawyer, Will Move to Hilco

One of the bankruptcy bar’s biggest names is planning to leave the law to take up a different perch in the world of restructuring.

John W. Butler Jr., a partner at the law firm Skadden, Arps, Slate, Meagher & Flom, will move to Hilco Global, a financial firm whose services include liquidating bankrupt companies, Hilco announced in an internal memorandum on Wednesday.

The move will signal a major shift for Mr. Butler, who is known as Jack and is one of the most prominent bankruptcy lawyers. In his 23 years at Skadden, he has been involved in some of the biggest â€" and most contentious â€" Chapter 11 filings in memory.

Those include the bankruptcies of American Airlines, where he represented the airline’s creditors committee and helped orchestrate the company’s merger with US Airways; Delphi, where he worked for the auto-part maker’s infamously protracted Chapter 11 case; and Kmart.

Other top bankruptcy lawyers have left the legal world to try their hand in other parts of the restructuring universe. David Kurtz, the global head of Lazard’s restructuring practice, formerly worked at Skadden.

Harvey R. Miller, a partner at Weil, Gotshal & Manges and one of the foremost practitioners in the field, left his firm to work at Greenhill & Company, a boutique investment bank, but returned after five years.

And James H. M. Sprayregen, a top partner at Kirkland & Ellis, spent two years at Goldman Sachs before coming back to the law.

A Michigan native, Mr. Butler graduated from Princeton and the University of Michigan’s law school, joining Skadden in 1990. He developed a reputation as a tough-headed negotiator, unafraid of negotiating for hours on end.

Mr. Butler will take that reputation to Hilco, a financial services firm whose array of businesses include appraising assets, providing corporate advice and running a private equity firm that owns brands like Polaroid and the fashion label Halston.

But roughly 70 percent of the firm’s business now involves working with healthy businesses, rather than distressed companies.

At Hilco, he will serve as an executive vice president, reporting to Jeffrey B. Hecktman, the firm’s chairman and chief executive.

In the memo, Mr. Hecktman praised his new hire as “one of the most well-known and highly regarded deal-makers and thought leaders in the restructuring, corporate reorganization and M.&A. community.”

Citadel Defied a Market Slump in January

In a dismal month for the stock market, one big hedge fund company in Chicago managed to record gains.

Citadel, the hedge fund giant led by Kenneth C. Griffin, told its investors on Wednesday that its two flagship funds rose 3.4 percent in January, according to a person briefed on the matter. The Standard & Poor’s 500-stock index declined 3.6 percent in that time.

The month’s performance caps a strong run for the funds, called Kensington and Wellington, which have rebounded after suffering steep losses in the financial crisis. The funds returned 19.4 percent in 2013, a year when the median return of funds that use a similar strategy was 10.62 percent, according to Hedge Fund Intelligence.

Other parts of Citadel also showed strength in January. The fixed-income fund, a relatively new business for the company, dating to 2011, logged a 5 percent return, the person briefed on the matter said.

The equities fund, which started in 2009, defied the broader slump in stocks, returning 2.9 percent in January.

Citadel is one of the most prominent hedge fund companies in the industry, with assets under management of $16 billion. The Kensington and Wellington funds, which use a multistrategy approach, have $8.2 billion in assets under management.

Mr. Griffin, 45, a Wall Street wunderkind who began trading in his Harvard dorm room, is now riding high after a trying period several years ago. He was down 55 percent in 2008, amid the carnage of the crisis, and was forced to hold a rare conference call to explain the difficulties to his noteholders.

A.I.G. Seeks to Delay Bank of America Mortgage Settlement

The American International Group is continuing its quest to upend an $8.5 billion settlement between Bank of America and a group of mortgage securities investors.

A.I.G.’s lawyers filed papers on Tuesday in New York State Supreme Court seeking to delay final approval of the settlement between Bank of American and a group of 22 investors.

Justice Barbara R. Kapnick approved most of the settlement last Friday, but allowed some of investors’ claims against the bank to stand. A.I.G. argued in court papers filed on Tuesday that the issues raised by Justice Kapnick needed to be aired before a final sign off was entered.

In a minor victory for A.I.G., the new judge overseeing the case, Justice Saliann Scarpulla scheduled a hearing on the issues for Feb. 19, according to lawyers in the case.

Justice Kapnick moved this week to the Appellate Division of the Supreme Court.

At issue in this case are 530 mortgage-backed securities involving troubled loans issued by Countrywide Financial. A group of the largest investors in the bonds agreed to settle their claims with Bank of America, which bought Countrywide in 2008.

But another big investor in the bonds, A.I.G., refused to sign the pact, arguing that the settlement was a fraction of the overall losses. A.I.G. also argued that the trustee for the bonds, Bank of New York Mellon, shirked its responsibility in pushing for more money in the settlement.

Justice Kapnick said in her ruling last Friday that Bank of New York acted reasonably in most instances during the settlement process, but she also noted that the bank had failed to adequately investigate certain claims related to mortgage modifications.

The trustee has argued that the mortgage modification claims have no merit.

But one of the Countrywide bond investors, Triaxx, has argued that the claims could potentially affect $31 billion of loans that were modified to allow borrowers to stay in their homes.

Triaxx’s lawyers have said that the terms of the mortgage-backed bonds clearly stated that if certain loans were modified, then the bank was obligated to repurchase them from investors.

To settle these outstanding claims, Bank of America may have to pay investors a larger settlement, or the bank could fight them in court. Either way, it means the case could drag on for many more months.

Another big issue left unsettled, according to A.I.G.’s lawyers, is how much each investor will be compensated from the $8.5 billion settlement.

“In the interest of fairness, efficiency and judicial economy, these open questions all should be resolved,’’ a lawyer for A.I.G., Mark Zauderer, wrote in the court filing on Tuesday.

Spokesmen for Bank of New York and Bank of America declined to comment on A.I.G.’s court motion.

Zell Backs Tom Perkins’s Arguments About Class Warfare

Sam Zell appeared on Bloomberg Television.

The Silicon Valley doyen Tom Perkins drew no small amount of criticism for drawing parallels between attacks on San Francisco’s wealthy class and Kristallnacht, a comparison for which he has since sort of apologized.

But another investment mogul thinks that his fellow 1-percenter was right: Samuel Zell, the real estate veteran whom Forbes estimates is worth $4 billion.

Here’s what Mr. Zell told Bloomberg Television’s Betty Liu on Wednesday (the comments start around 2:45):

I guess my feeling is that he’s right. The 1 percent are being pummeled because it’s politically convenient to do so. The problem is that the world and this country should not talk about envy of the 1 percent. It should talk about emulating the 1 percent. The 1 percent work harder. The 1 percent are much bigger factors in all forms of our society.

Though he said he didn’t feel “persecuted” for his wealth, Mr. Zell espoused his belief that class warfare was hurting the American economy. A longtime donor to conservative causes, he blamed overreaching government regulations for exacerbating a gulf between society’s richest and everyone else.

That’s in line with what Mr. Perkins said. Though he regretted using the comparison to Nazi Germany, the legendary venture capitalist insisted that sniping against the top economic ranks of the country was real and wrong.

“It’s absurd to demonize the rich for being rich and doing what the rich do, which is get richer by creating opportunities for others,” Mr. Perkins told Bloomberg Television last week.

Anheuser-Busch InBev Buys Blue Point Brewing Company

Anheuser-Busch InBev, the country’s largest brewer, has agreed to buy the Blue Point Brewing Company in a move that could help it capitalize on the popularity of craft beer.

The deal, announced on Wednesday, would bring a Long Island beer company with a devoted following into a family of brands that includes Budweiser, Stella Artois, Beck’s and - as of last year - Corona. Blue Point, which calls itself “Long Island’s oldest and most award-winning brewery,” is known for its creativity and independent spirit.

Terms of the deal between Blue Point and the United States arm of Anheuser-Busch InBev were not disclosed. It is expected to close in the second quarter.

For Anheuser-Busch InBev, the deal is the latest move to expand its reach. Last month, it agreed to repurchase Oriental Brewery, a South Korean brewer, nearly five years after it sold the company to the private equity firm Kohlberg Kravis Roberts.

And last year, Anheuser-Busch InBev completed a merger with Grupo Modelo of Mexico, a marriage that was only possible after an antitrust settlement with the Justice Department. Under that pact, Anheuser gave up the rights to distribute Corona and other Modelo brands in the United States, though it kept the ability to sell the beers in Mexico and elsewhere.

Blue Point Brewing, based in Patchogue, N.Y., since its founding 15 years ago, will continue to operate there, according to the announcement. The deal will give it capital to expand its operational ability and “enhance the consumer experience,” the announcement said.

“Together, our talented brewing team and Anheuser-Busch will have the resources to create new and exciting beers and share our portfolio with even more beer lovers,” Mark Burford, a co-founder of Blue Point, said in a statement.

Blue Point sold about 60,000 barrels last year, with half of the volume attributable to its flagship Toasted Lager. Its brands also include Hoptical Illusion, Sour Cherry Imperial Stout, Blueberry Ale, Toxic Sludge and various seasonal brews.

The company, whose other founder is Peter Cotter, won a World Beer Cup award in 2006 for Toasted Lager.

“As we welcome Blue Point into the Anheuser-Busch family of brands, we look forward to working with Mark and Peter to accelerate the growth of the Blue Point portfolio and expand to new markets, while preserving the heritage and innovation of the brands,” Luiz Edmond, the chief executive of the United States arm of Anheuser-Busch InBev, said in a statement.

Blue Point received financial advice from Ippolito Christon & Company and legal advice from Ettelman & Hochheiser.

Maintaining Ethics in the Move From Regulator to Regulated

Sheila Bair took a banking job last week â€" an occasion for breaking out the axes and giving them a good grinding.

Ms. Bair, who served under Presidents Bush and Obama as the head of the Federal Deposit Insurance Corporation, will be a director of the Spanish banking giant Santander. Because Ms. Bair has been a persistent critic of the major banks and had spoken out on the perils of the revolving door, the move prompted a bit of outrage in the financial world

Just as Ms. Bair was taking her new job, Mary L. Schapiro, the former chairwoman of the Securities and Exchange Commission, was giving one up. Nine months ago, Ms. Schapiro took a managing director job with the financial services consulting firm Promontory. She has decided to leave that position (although she is staying on the firm’s advisory board).

Post-regulatory life is fraught, especially if you try to have standards. Both Ms. Bair and Ms. Schapiro grappled with the issues raised by moving from regulator to regulated. Each created a set of personal principles to avoid conflicts, ones that are much stronger than the current law.

From the outset, Ms. Bair decided not to work for a financial services firm in the United States. She had been approached by American financial institutions and by institutional investors and reform groups to see if they could entice her to join bank boards. She declined.

“I wanted to stay away from the U.S. because of the revolving-door concerns,” Ms. Bair told me in an interview. When she gives a speech to a bank that the F.D.I.C. oversaw in any fashion, her fee goes to charity.

As for Ms. Schapiro, she had set up much stricter personal rules for herself than the Obama administration has, which are in fact stricter than the rules for civil servants. The former S.E.C. chief decided that she would never lobby regulators on behalf of any clients.

“We all went through hell together for four years, seven days a week,” she told me, referring to the financial crisis and the herculean rule-making that followed. “I never wanted to go back to the team that I led through all of that to ask them for anything.”

Ms. Schapiro didn’t find that her job at Promontory fit her well. Technically, the firm doesn’t lobby, according to the Washington rules of what constitutes lobbying. But just as banking has its shadow banking, lobbying has its shadow lobbying. Promontory lives in a shadow kingdom between banks and regulators, “interpreting the rules” in exchange for large fees from the banks.

Perhaps Ms. Schapiro’s tight restrictions made her less useful to Promontory.

Given her own guidelines, Ms. Bair chooses jobs carefully. She said she joined Santander because it was one of a handful of moneymaking opportunities that would deliver intellectual stimulation without obvious conflicts of interest with her previous work.

Santander’s structure appealed to her. The Spanish giant is like a collection of regional banks â€" in Europe and Latin America and with a small subsidiary in the United States. The top entity has its own board, on which Ms. Bair will serve. Subsidiary banks have their own boards and management that provide more localized oversight.

We can hope that the other Santander directors will start to have some interesting conversations. European banks have not done as much to reduce their leverage and improve their capital as American banks have. (And many think American bank capital is still too low.) Ms. Bair has been a consistent and loud voice for more capital and stronger regulation.

“Financial stability and long-term shareholders’ interests are aligned,” she said.

Kudos to Santander for putting a bank reformer on its board. No big American bank has been so moved.

“How about Simon Johnson on the Chase board? Gary Gensler at Goldman Sachs? Anat Admati at Deutsche Bank?” Ms. Bair proposes, referring to the former top economist for the International Monetary Fund, the just-departed head of the Commodity Futures Trading Commission and the Stanford finance professor.

All are reformers who “understand banking and markets but have a different perspective on the role of regulation and financial stability,” she said.

This is likely to happen as soon as Lloyd C. Blankfein steps down from his role as chairman and chief executive of Goldman Sachs to devote his life to making sand mandalas.

Ah, but did Ms. Bair get caught in a bit of hypocrisy? In her 2012 book, “Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,” she wrote that regulators should be barred for life from serving for financial firms they regulated.

Amid the hullabaloo, a nuance has been lost: She was referring to bank examiners, the staff that looks most closely at bank operations. She wants to give examiners raises and wants them treated with respect, in an attempt to accord them the prestige of Foreign Service officers.

The revolving door is clearly a problem for capitalist democracies, but of what sort? Officials work in government, learn the weaknesses in the law and how to work their way through the halls of Congress and sell those skills to the highest bidder. Government work serves as an internship program for law firms and large corporations, many of which are seeking to test the boundaries of the law and regulations if not subvert their intent.

Yet government officials cannot be monks, taking vows to live only lives if not of poverty than of civil servitude. Regulatory bodies need to import professionals with real-world expertise. The regulated entities benefit when they hire former regulators who have respect for the rules. Pure prohibitions aren’t the solution.

And regulatory alumni aren’t remotely the sole problem. The financial industry employs plenty of brilliant legal and business minds who have never worked a day for government.

Ms. Schapiro made this point to me: The industry’s resources are of greater concern than prodigal alumni. The volume of lobbying is “extraordinary,” she said. Bank lobbyists sometimes write bills for Congress. And loopholes in rules governing Washington’s revolving door are rife, as a New York Times article showed this weekend.

“It wasn’t the people.” Ms. Shapiro said. “ It was the sheer amount of influencing that became an issue.”

Yes, it turns out people who have never worked in government can also lobby quite effectively, thank you. Even stricter rules can’t solve that.

Two Senior Foreign Exchange Executives to Step Down

LONDON - Citigroup and Goldman Sachs have lost two senior executives in their foreign exchange businesses as the industry continues to grapple with a series of investigations into potential manipulation of the currency markets.

Anil Prasad, who has served as global head of Citigroup’s foreign exchange and local markets operations since 2008, is leaving the bank to “pursue other interests,” according to an internal memo reviewed by DealBook.

Steven Cho, the global head of Group of 10 nations spot and forward trading at Goldman Sachs in New York, is retiring from the investment bank, according to a person briefed on the matter.

It is not unusual for executives thinking of making a change to leave at this time of year.

The prior year’s bonus compensation has already been paid out and banks, looking to cull their executive ranks, often encourage older or underperforming employees to move if they’re not in a company’s future plans.

“Anil informs me that he has been considering this for some time, and feels the time is right for him to move on to the next stage of his career,” wrote Paco Ybarra, Citigroup’s global head of markets and securities services, in the memo.

He will leave the post in March and his successor is expected to be named in the coming weeks, according to the memo.

Mr. Prasad started with Citigroup in 1986 and, minus a three-year stint with Natwest Capital Markets, had been with the bank for the majority of his career.

“Anil’s decision is his own and entirely unrelated to the on-going FX investigations,” a person familiar with the matter said.

Mr. Cho joined Goldman in 1996 in London and later relocated to New York. He has been a partner at the bank since 2010.

Still, the departures come at a time when many of the world’s largest banks, including Citigroup and Goldman Sachs, have acknowledged that they are facing inquiries from regulators in Britain, the United States and other parts of the world regarding potential manipulation of the $5-trillion-a-day currency markets.

New York’s financial regulator, Benjamin M. Lawsky, has begun his own investigation into whether more than a dozen banks manipulated the price of foreign currencies. Mr. Lawsky recently sent the banks â€" including Credit Suisse, the Royal Bank of Scotland, Deutsche Bank and Standard Chartered â€" a request for documents about the suspected manipulation.

Mr. Lawsky, known for taking a hard line with Wall Street in past investigations, is the first state regulator to scrutinize the currency trading. His jurisdiction covers any bank operating with a New York State charter.

On Tuesday, the chief executive of Britain’s Financial Conduct Authority, Martin Wheatley, said that the foreign exchange manipulation allegations are “every bit as bad as they have been with Libor.”

Banks have paid billions of dollars of fines in the past two years stemming from the manipulation of the London interbank offered rate, or Libor, and other global benchmark interest rates.

More than a dozen currency traders at some of the world’s largest banks, including Barclays, UBS and JPMorgan Chase, have been placed on leave over questions about whether they colluded to manipulate benchmark currency rates.

Deutsche Bank, the largest player in the currency trading market with about a 15.2 percent share, fired the head of its emerging markets foreign exchange trading desk in New York and two traders this week, according to a person familiar with the matter.

In January, Citigroup fired the head of its European spot currency trading desk after he was placed on leave last year.

Neither the banks nor any of the traders who have been suspended or fired have been accused of wrongdoing.

Ben Protess contributed to this article.

Lazard’s Profit Rises 35%, Aided by Asset Management

Lazard said on Wednesday that its profits rose 35 percent in the fourth quarter, as it benefited from improvements in its advisory and asset management businesses.

The firm reported $110 million in adjusted net income for the last three months of 2013, or 81 cents a share. That figure, which excludes some accounting charges, beat the average analyst estimate of 61 cents a share, as compiled by Standard & Poor’s Capital IQ.

For all of 2013, Lazard earned $269 million, up 38 percent from the previous year.

Using generally accepted accounting principles, the firm earned $53 million for the quarter and $160 million for the year.

“These were solid results for the year,” Kenneth M. Jacobs, Lazard’s chief executive, said by phone. “The model performed as we had hoped.”

The investment bank benefited the most from improvements in its asset management arm, which is meant to provide a steady stream of income to counterbalance the more volatile business of advising on transactions. The division reported a 20 percent rise in operating revenue for the quarter, to $293 million, as assets under management rose to a record $187 billion.

Lazard’s core financial advisory arm reported a smaller gain, with operating revenue rising 2 percent, to $315 million. The business continued to be propelled by merger advisory work, while restructuring distressed or bankrupt companies continued to lag as the level of Chapter 11 filings remained low.

Mr. Jacobs said the firm expected to see an improvement in deal activity this year as more corporate management teams felt emboldened by pockets of economic recovery, particularly in the United States.

“The improvement in sentiment is leading to a pickup in activity,” he said.

Though Lazard’s particular niche has become more crowded by an influx of boutique and independent investment banks like Centerview Partners and Moelis & Company, Mr. Jacobs said his firm remained competitive, participating in an estimated 40 percent of transactions worth more than $10 billion.

Among the assignments it worked on that closed during the quarter - important because that is when an investment bank receives the bulk of its fees - were the IntercontinentalExchange’s $11 billion takeover of NYSE Euronext, Amgen’s $10.4 billion purchase of Onyx Pharmaceuticals and NV Energy’s $10 billion sale to MidAmerican Energy.

“The field has narrowed to just a few firms that can handle large cross-border transactions,” Mr. Jacobs said. “While there have been more boutiques and independent banks, you’ve probably seen only one and a half Lazards among them.”

The firm also managed to continue restraining costs, after having enacted an initiative to clamp down on expenses. Its ratio of awarded compensation to revenue was 58.3 percent for the year, down from 59.4 percent. And adjusted noncompensation expenses fell 3 percent for the year, to $409 million.

The firm added that it had raised its dividend by 20 percent, to 30 cents, in an effort to return more money to shareholders.

“We have achieved our objectives,” Mr. Jacobs said. “There’s a lot of cost discipline around here.”

A Debt Downgrade for Puerto Rico

Standard & Poor’s lowered the debt of Puerto Rico to junk status on Tuesday, sending shock waves through the investor community, which has long enjoyed the tax-exempt interest generated by the island’s municipal bonds. While S.&P. only dropped Puerto Rico’s rating to BB+ from BBB-, the one-notch downgrade has intensified a cash squeeze for the commonwealth, Mary Williams Walsh writes in DealBook.

Though much of the island’s debt was issued with promises to make cash payments if it fell below investment grade, Puerto Rico is currently lacking the cash to make good on its word despite recent efforts to shore up liquidity. To make matters worse, some institutional holders of the debt have rules saying they cannot hold junk-rated debt â€" but only if two of the three top rating agencies downgrade the debt to below investment grade. While Moody’s Investors Service and Fitch Ratings both rate the island’s debt a single notch above junk, S.&P.’s downgrade has eroded market confidence, leaving investors fearing the worst.

MORGAN STANLEY TO PAY $1.25 BILLION IN MORTGAGE CASE  |  Another day, another settlement. Morgan Stanley agreed on Tuesday to pay $1.25 billion to the Federal Housing Finance Agency to resolve claims that it sold faulty mortgage securities to Fannie Mae and Freddie Mac. If the Morgan Stanley settlement becomes final, it would be the third-largest monetary payment by a Wall Street firm to settle an F.H.F.A. lawsuit, Michael Corkery and Jessica Silver-Greenberg write in DealBook.
But the F.H.F.A. still has pending mortgage securities cases against about a dozen other financial institutions.

Still, progress is being made. In a separate action on Tuesday, JPMorgan Chase agreed to a $614 million deal with federal prosecutors who accused the bank of violating the rules of the Federal Housing Administration’s mortgage insurance program. And last Friday, a New York State Supreme Court judge approved an $8.5 billion settlement between Bank of America and a group of investors that purchased mortgage securities that went sour during the credit crisis.

MICROSOFT’S NEW CHIEF  |  After an intense period of speculation, Microsoft has announced its new leader. The company on Tuesday named Satya Nadella as its chief executive, only the third in Microsoft’s almost 40-year history. The selection of Mr. Nadella to succeed Steven A. Ballmer came at the same time as news that Bill Gates, the company’s founder, had stepped down from his role as chairman to become a technology adviser to Mr. Nadella. John W. Thompson became the company’s new chairman.

Mr. Gates said Mr. Nadella is “a proven leader with hard-core engineering skills, business vision and the ability to bring people together.” Though he is known for using technical jargon in his conversations and speeches, he is nevertheless seen by many as likable and able to take charge.

“Mr. Nadella is probably as good a choice as the company could make,” Robert Cyran of Reuters Breakingviews writes. “The old guard is slipping into the background,” giving Mr. Nadella plenty of room to “turn Microsoft toward a more focused, and potentially valuable, future.”

ON THE AGENDA  |  The ADP national employment report for January is out at 8:15 a.m. The I.S.M. nonmanufacturing index for January is released at 10 a.m. The House Committee on Financial Services holds a hearing at 10 a.m. to discuss the effect of the Volcker Rule on job creation, its second on the subject. The House Oversight and Investigations Subcommittee reviews its annual report of the Office of Financial Research at 2 p.m. Two regional Federal Reserve presidents give speeches on the economic outlook â€" Charles I. Plosser, president of the Philadelphia Fed, takes the stage at 12:30 p.m. and Dennis P. Lockhart, president of the Atlanta Fed, is on at 1:40 p.m. Laurence D. Fink, chairman and chief executive of BlackRock, is on Bloomberg TV at 11 a.m. Twitter reports fourth-quarter earnings after the market closes, its first update on how the company is doing since i went public on Nov. 7.

A LESSON ON HERBALIFE’S VOLATILE STOCK PRICE  |  When William A. Ackman, founder of the hedge fund Pershing Square Capital Management, announced a year ago that his firm had taken a $1 billion short position in Herbalife, he was essentially betting that the company was operating as a pyramid scheme. Herbalife, of course, vehemently denied Mr. Ackman’s claims. “It’s now a year later, and I still don’t know who is right,” Steven M. Davidoff writes in the Deal Professor column.

But to some investors in Herbalife, the truth does not seem to matter. Though hedge funds and even individual investors have jumped into the fray, these outsiders have not provided any clarity on Herbalife’s business model, creating extreme volatility in the company’s stock as investors trade on speculation and innuendo rather than fact.

Mr. Davidoff writes: “What we have here is the opposite of a search for truth. No one has shown a great interest in examining the company to find out what is exactly going on.”

ANOTHER ‘WOLF OF WALL STREET’ BOOK DEAL  |  The book, by Christina McDowell, whose father Tom Prousalis went to prison for his involvement with the “Wolf of Wall Street” kingpin, Jordan Belfort, will be based on this open letter, which she wrote to discourage people from seeing the movie. The memoir is slated to come out in the spring of 2015.

‘IT’S TIME WE TALK ABOUT WHERE START-UPS COME FROM’  |  A father and son discuss the lure of joining a start-up. From McSweeney’s Internet Tendency.

NOT SO SNEAKY TRADERS AT IT AGAIN  |  The Securities and Exchange Commission announced charges against two traders on Tuesday, claiming that one trader temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus. The media for their scheme? Instant messages and text messages. “Check your text messages in like 3 minutes,” one trader wrote, to which the other responded, “haha, ok … sneaky sneaky.” Word to the wise: the phrase “sneaky sneaky” is likely to attract the S.E.C.’s attention.

DEBT CEILING WATCH  |  On Friday, the United States Treasury will lose its ability to issue new net debt. From a DealBook article in October, after a last-minute agreement to raise the nation’s borrowing limit was reached: “Many investors were left worrying that the budget crises that have become more frequent in recent years could spin on endlessly, with no long-term resolution.”

#APOLOGYWATCH: TARGET  |  John J. Mulligan, the chief financial officer of Target, said he was “deeply sorry” for the data breach the company allowed over the holiday shopping period. Help DealBook keep track of new apologies by leaving a comment on the website and on Twitter using the hashtag #ApologyWatch.

PASS THE HOT CHOCOLATE  |  It’s snowing again in New York. This time, there’s also some freezing rain.

 

Mergers & Acquisitions »

Entegris to Purchase ATMI for $1.15 Billion  |  Entegris announced on Tuesday that it would buy ATMI for $1.15 billion in a deal that would combine two semiconductor industry suppliers, Reuters reports. REUTERS

Lenovo Shares Tumble in Wake of Company’s Deal Spree  |  Tuesday was the stock’s first full day of trading since Lenovo announced it would buy Motorola Mobility from Google for $2.9 billion last week. DealBook »

A Microsoft Breakup Could Bolster Valuation  |  With new leadership in place, Microsoft could double its valuation if it splits off some of its businesses, Bloomberg News writes. BLOOMBERG NEWS

Foursquare Gets $15 Million Investment from Microsoft  |  Foursquare, the location sharing application, has announced a data licensing partnership and a $15 million investment from Microsoft, which will be used to incorporate Foursquare recommendations into Microsoft’s local and search products over the next four years, the Bits blog reports. NEW YORK TIMES BITS

INVESTMENT BANKING »

British Insurer Names R.B.S.’s Former Chief as Its C.E.O.  |  Stephen Hester, who took the top job at Royal Bank of Scotland after a government bailout in 2008, succeeds Stephen Lee, who resigned as chief of the RSA Group after a profit warning and a £200 million shortfall in the reserves related to its Irish business. DealBook »

Signs of Progress in UBS’s Investment Bank Overhaul  |  UBS has cut its personnel expenses, increased profitability and started looking past its scandals. As a result, the bank’s 2013 bonus pool was increased 28 percent. DealBook »

Veteran Banker to Lead Citigroup’s British Business  |  James Bardrick, Citigroup’s co-chief of corporate and investment banking for Europe, the Middle East and Africa, will succeed Maurice Thompson, who is leaving the bank. DealBook »

Deutsche Bank Bolsters U.S. Business  |  Deutsche Bank is adding senior staff, including a new co-chief of fixed-income trading in New York, and infusing billions of dollars in capital to its United States business as part of its effort to re-establish its position in the American investment banking market, The Financial Times reports. FINANCIAL TIMES

Former Banker Teams With Chef to Sell Lunchboxes  |  Osamu Ito, a former banker at Morgan Stanley MUFG Securities Company, is starting a crowdfunding company to invest in start-ups, including a company overseen by a Michelin-starred chef that would provide diet lunchboxes, Bloomberg News writes. BLOOMBERG NEWS

Why Banking and Work-Life Balance Do Not Mix  |  “It is easy for banks to tell employees not to work too hard, but in practice you either put in the hours to get the work done or pay for it with your career prospects,” Sanjay Sanghoee writes in Fortune. “If banks really want to alter this dynamic, they need to streamline the work process, but that too is easier said than done given the nature of the business and the demands of clients.” FORTUNE

PRIVATE EQUITY »

Sony Nears Sale of Computer Unit  |  Sony is said to be in talks with Japan Industrial Partners, a private equity fund backed by Bain Capital and Mizuho Securities, to sell Vaio, its personal computer business, in a deal worth up to $490 million, The Financial Times reports. FINANCIAL TIMES

Canada Pension Board Opens Brazil Office  |  The Canada Pension Plan Investment Board announced on Wednesday that it would open an office in São Paulo in April, Reuters reports. The board’s chief executive said the fund might target private equity investments as capital frees up in the region. REUTERS

HEDGE FUNDS »

Activist Investor Takes Aim at Helen of Troy  |  Sachem Head Capital Management, a $1 billion activist hedge fund led by a protégé of William A. Ackman, sent a public letter to Helen of Troy’s board on Tuesday, demanding that the consumer company explore strategic alternatives including a sale of some of its assets. DealBook »

Ackman’s Pershing Square Fund Rises 3.8 Percent  |  William A. Ackman’s flagship Pershing Square L.P. fund rose 3.8 percent in January, bolstered in part by the Mr. Ackman’s investment in the whiskey maker Beam Inc., which was acquired by Suntory of Japan for $13.6 billion last month, The Wall Street Journal reports. WALL STREET JOURNAL

I.P.O./OFFERINGS »

Mexican Airline Is Said to Explore I.P.O. of Frequent-Flier Program  |  Grupo Aeroméxico, the largest airline in Mexico, is considering an initial public offering of its frequent-flier rewards program, Bloomberg News reports, citing unidentified people familiar with the situation. BLOOMBERG NEWS

Continental Building Products Prices I.P.O.  |  Continental Building Products, a construction products maker backed by private equity, priced its initial public offering at $14 a share, below its expected range of $16 to $18 a share, Reuters writes, citing an underwriter. REUTERS

Drug Development Start-Ups Prepare I.P.O.’s  |  Eleven companies are planning to go public this week, many of which are small deals for start-ups that develop drugs, The Wall Street Journal reports. WALL STREET JOURNAL

VENTURE CAPITAL »

Venture Capital Firm Focused on the Midwest Raises a $250 Million Fund  |  “We truly believe the best place in America to build your company is in the Midwest,” says one of the partners behind Drive Capital, which aims to bring Silicon Valley-style investing to the Midwest. DealBook »

PillPack Receives $4 Million in Funding  |  PillPack, a start-up that ships customers medication in presorted dose packs, has raised $4 million from both a Series A funding round and an angel investment, The Wall Street Journal reports. The company is using the money to obtain licenses to do business in all 50 states. WALL STREET JOURNAL

500 Startups Tops List of Venture Capital Investors  |  500 Startups made 57 new deals in 2013, taking the top position on a list of the most active venture capital firms, The Wall Street Journal reports. Coming in second was Andreessen Horowitz, which made 56 new deals. WALL STREET JOURNAL

Noom Raises $7 Million  |  Noom, a maker of smartphone apps for weight loss and fitness, has raised $7 million in Series A funding led by RRE Ventures, ReCode reports. RECODE

LEGAL/REGULATORY »

Regulator Compares Currency Investigation to Libor Case  |  Martin Wheatley, chief executive of Britain’s Financial Conduct Authority, said at a parliamentary hearing on Tuesday that he was surprised by the breadth of the investigation into accusations of manipulation of the foreign exchange market. DealBook »

Welcome Relief for Homeowners, Then the Tax Bill  |  JPMorgan Chase can write off $1.5 billion in debt relief, but it will be treated as taxable income for homeowners, resulting in burdensome costs for many families, The New York Times writes. NEW YORK TIMES

Budget Deficit Projected to Fall  |  A Congressional Budget Office analysis released on Tuesday estimated that the budget deficit would fall to $514 billion in the 2014 fiscal year, or about 3 percent of economic output, from $1.4 trillion in 2009, The New York Times reports. NEW YORK TIMES

Brisk Business in Big Law Firms Hiring Other Firms’ Partners, Study Finds  |  As firms jockey to expand, lawyers specializing in corporate law are in greatest demand, according to data compiled by The American Lawyer. DealBook »

Market for Patents Was Softer in 2013, Firms Say  |  Technology companies have for years been stockpiling patents as a defense against lawsuits. But patent prices and transfers were down in 2013, according to data from two companies. DealBook »

Judge Approves JPMorgan’s Madoff Settlement  |  A judge approved JPMorgan Chase’s $543 million settlement with Irving H. Picard, the trustee seeking money for victims of Bernard L Madoff’s huge Ponzi scheme, Bloomberg News reports. BLOOMBERG NEWS

Deutsche Bank Is Said to Fire 3 Currency Traders in New York

Deutsche Bank has fired three currency traders in New York as regulators worldwide ramp up their investigations into potential manipulation of the $5-trillion-a-day foreign exchange market, according to a person briefed on the matter.

The three employees include the head of Deutsche Bank’s emerging markets foreign exchange trading desk in New York and two traders, said the person, who was not authorized to discuss the matter publicly.

Deutsche Bank, the largest trader of currencies, with about 15.2 percent of the market, placed several traders in New York on leave in January.

The bank declined to comment on Wednesday, citing its policy not to discuss individual employees.

Deutsche Bank has said it is cooperating with the investigations and would “take disciplinary action with regards to individuals if merited.”

Reuters first reported the firings on Tuesday.

The news comes as the chief executive of Britain’s Financial Conduct Authority, Martin Wheatley, described the currency manipulation charges on Tuesday as “every bit as bad as they have been with Libor.”

In the last two years, banks have combined to pay more than $5 billion in fines related to manipulation of the London interbank offered rate, or Libor, and other benchmark interest rates.

At least 10 people in Britain and the United States are facing criminal charges related to Libor. The first criminal case in Britain is expected to go to trial next year.

Regulators in Britain, the United States, Germany, Switzerland and Hong Kong have started investigations into the currency markets in the last year, all of which are in the early stages.

More than a dozen foreign exchange traders at some of the world’s largest banks, including Barclays, UBS and JPMorgan Chase, have been placed on leave over questions about whether they colluded to manipulate benchmark currency rates.

This week, the Lloyds Banking Group placed a senior currency trader on leave as part of its own internal investigation, according to people briefed on the matter.

In January, Citigroup fired the head of its European spot currency trading desk after he was placed on leave last year.

Citigroup and HSBC have each suspended currency traders in recent weeks.

Neither the banks nor any of the traders who have been suspended or fired have been accused of wrongdoing.

Co-Head of Fixed Income Appointed at Deutsche Bank

LONDON - Deutsche Bank has chosen a veteran trader in London to serve as the new co-head of its fixed-income trading business.

Rich Herman, the head of the bank’s institutional client group since 2008, will become co-head of the fixed income and currencies business alongside Zar Amrolia, according to an internal memorandum reviewed by DealBook.

“He will work closely with Zar to steer the FIC business through the new competitive and regulatory environment, bringing his wealth of experience with clients to the FIC franchise,” the memo says.

Mr. Herman, who spent 15 years in trading prior to heading the institutional business, will relocate to New York, while Mr. Amrolia will remain in London.

He will replace Wayne Felson, who will focus on risk, capital, leverage and technology issues as a member of the bank’s executive committee for its corporate banking and securities business, according to the memo.

Anshu Jain, the co-chief executive of Deutsche Bank, called the fixed income business a “core franchise” last month.

The German lender reported a surprise fourth-quarter loss of 965 million euros, or about $1.3 billion, last month. A drop in bond trading in the fourth quarter contributed to a 16 percent decline in its revenue.