Know The Laws, Know Your Rights: Finance

“At what point does this stop?” asked Gary Lynch, the former director of enforcement for the Securities and Exchange Commission who has gone on to jobs with many leading Wall Street firms and is now global general counsel at Bank of America. He was referring to the escalation in penalties being levied on banks, culminating in the $13 billion JPMorgan Chase was forced to pay for a series of transgressions.

Speaking at a banking industry conference last month in New York, Mr. Lynch recalled that he had been working at Morgan Stanley in London before he returned to this country in 2011 to join Bank of America. He had thought, he said, that by then — three years after the collapse of Lehman Brothers set off the financial crisis — anger at banks would have declined.

He was wrong: “It was worse.”

Bankers don’t feel very popular in Europe, either. In Germany, Jürgen Fitschen, the co-chief executive of Deutsche Bank, the largest bank in the country, is furious with Wolfgang Schäuble, the German finance minister, for saying that “banks still show great creativity in evading regulation.” That meant, he said, that it was necessary to keep pushing on new bank regulations.

“It’s irresponsible to comment in such a populist manner,” Mr. Fitschen complained.

Deutsche Bank’s latest brush with regulators sounds positively puny by JPMorgan standards. It was forced by the European Union to pay 725 million euros — nearly $1 billion — for its role in fixing and manipulating the Libor rate.

Mr. Fitschen evidently views those sins as irrelevant now, explaining that it is wrong to think “things haven’t changed since 2008 or 2009.” Actually, the Libor violations at some banks continued until at least 2011, although we don’t know whether that was true at Deutsche as well.

It was only 11 years ago that the S.E.C., outraged by accounting fraud at Xerox, levied a $10 million fine. That was a record, recalled Steve Cutler, who was the commission’s director of enforcement at the time, speaking on the same panel as Mr. Lynch at the banking conference sponsored by The Clearing House, an organization of large banks.

“We should all be concerned that there doesn’t seem to be a natural end point to how high fines could go,” said Mr. Cutler, who is now the general counsel of JPMorgan and was involved in negotiating the $13 billion settlement. “One hundred million dollars is still meaningful,” he added, in what might be labeled wishful thinking.

It may not be easy to be sympathetic to the big banks, but it is easy to understand their surprise and frustration. They have gone from being viewed as national champions — proof of a country’s standing in the world — to being seen as a potential source of national disaster. Iceland and Ireland went broke because they had to, or chose to, bail out their irresponsible banks.

That no top bankers went to jail may be proper — it is not a crime to make stupid mistakes, and much of what happened in the years before the financial crisis was more foolish than venal — but it grated to see few of them fired while those who stayed went back to collecting multimillion-dollar bonuses.

Eric H. Holder Jr., the attorney general, did not help when he said last spring that the Justice Department had to keep in mind that filing criminal charges against a large bank could “have a negative impact on the national economy, perhaps even the world economy.” He quickly backtracked, but the perception was reinforced.

It seems likely that the reaction to his first statement played a role in causing the government to demand JPMorgan pay so much money.

This week five United States regulators — the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Commodity Futures Trading Commission and the S.E.C. — jointly issued new rules on the Volcker Rule passed as part of the Dodd-Frank law in 2010.

The regulators had some choice in details, because the rule, as passed by Congress, is a contradiction in terms. It bans “proprietary trading” by banks, or trading for their own gain, but carves out exceptions for “hedging” and “market making.” Define them broadly enough, and almost nothing would remain of the rule. Define them narrowly enough and the exceptions could be meaningless.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Thursday, October 24, 2013

Your Money: Finance Class on the Web, for Students of All Ages

After all, there are few entirely conflict-free places where investors can educate themselves on the topic, and there’s little to no money-related guidance offered within the public school system, which is where the financial groundwork should really be laid.

Joshua Rauh, a finance professor at the Stanford Graduate School of Business, is acutely aware of that. And it’s why he felt compelled to open his graduate-level course on the finance of retirement and pensions to the masses. “My goal is to try to empower people to make better decisions about their finances with an eye toward retirement and for retirees who are thinking about managing their money,” Professor Rauh said, “whether it is buying an annuity or having a spending rule.”

The course, which is offered free online, begins on Monday. I sat for nearly half of his online video lectures — on topics like “saving for retirement” and “making smart decisions as a stock market investor” — earlier this week. Watching remotely means you won’t be party to the discussion that will emerge from the Socratic method Professor Rauh uses in his traditional classroom on campus. And there are already 13,000 students, so it’s hard to expect any personal attention.

But there’s plenty that students will take away from his lessons, which you can watch anytime after the lecture is released, much as you might watch any series on your DVR. “A person that would really benefit is someone who is 40 and realizing they really need to start putting together a plan for retirement and haven’t thought much about it,” he said, though he says he believes that it will be equally helpful for people of all ages.

There aren’t many other places to turn, particularly where it costs nothing but your time. When I informally polled financial literacy advocates, financial planners and other experts if they knew of any other comprehensive retirement courses, they couldn’t come up with any, though one person mentioned the instructional videos at Khan Academy. (If you know of any classes, please share them in the comments section online).

Without any instruction manual, “people have to be their own chief financial officer,” said Annamaria Lusardi, a financial literacy advocate and economics professor at the George Washington University School of Business, who teaches a class on personal finance. “The large majority of the population lacks the knowledge of basic but fundamental concepts, from the power of interest compounding, to the effects of inflation, to the workings of risk diversification.”

This course may be a good place to start. Each of the 10 video lectures are about 45 minutes long, but they’re broken into bite-size segments, all of which were well produced and relatively engaging. As Professor Rauh explains each concept, animated visuals and colorful graphs appear alongside him, which helps make the concepts easier to grasp.

Each lecture includes a mix of financial theory and prescriptive advice, some of which people with a reasonable base of investment knowledge may already know: actively managed mutual funds aren’t worth the money, so buy index funds. Don’t time the market. Stocks don’t become less risky the longer you hold them.

But the illustrations that accompany the advice — how retiring in 2009, for instance, would have resulted in a nest egg 28 percent smaller than one resulting by retiring in 2012 — are instructive. “It’s not a rocket science idea, but people don’t see it without having it illustrated for them,” Professor Rauh said.

All of the lessons are rooted in what he calls “the economist’s view” of personal finance, which is built on the idea that there are no free lunches in financial markets, and that you can generate potentially higher returns only if you take substantial risk as well. It’s a message woven through his lectures. At times, it almost seems as if there should be a red blinking sign behind Professor Rauh that reads, “Proceed with caution. Stocks ahead!”

He clearly wants the lesson to linger long after you leave his virtual classroom and find yourself in a commission-based stockbroker’s office. “Too often, people just budget on the basis of an ‘expected return’ on their assets without thinking about the range of possible outcomes,” he explained.

He also explains why economists also believe that more people — not all, but more — should buy annuities. Not the high-priced complex contraptions sold to unwitting seniors, but the plain-vanilla immediate annuities, where you pay a giant pile of cash to an insurance company in exchange for a guaranteed stream of income for life.

Friday, October 4, 2013

High & Low Finance: After a Fraud, Regulators Go After a Bank

In such a scheme, money that is supposed to be invested is really used to line the pockets of the Ponzi promoter or to pay previous investors. A lot of money has to flow through bank accounts, and it flows in ways that differ from what the promoter tells investors is happening. Banks are in a unique position to notice what is going on before the money is all gone.

But it is extremely rare for a bank to face sanctions for not noticing.

The typical judicial attitude was expressed last year when the United States Court of Appeals for the 11th Circuit upheld the dismissal — before a trial or any discovery of evidence — of a class-action suit against Bank of America by investors who had lost money in a pyramid scheme run by a promoter named Beau Diamond.

Even assuming that the plaintiffs could prove that Mr. Diamond “engaged in atypical business transactions, such as numerous wire transfers unrelated to any legitimate business activity,” the appellate court ruled, that would not be enough. The allegations in the suit were insufficient to render “plausible” a conclusion that the bank had “actual knowledge” of what Mr. Diamond was doing, so there was no need for a trial.

See no evil, face no liability.

That is why a joint regulatory action filed last week by the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network, a part of the Treasury Department, seems so noteworthy. TD Bank, an American subsidiary of Canada’s large Toronto-Dominion Bank, agreed to pay $52.5 million to settle accusations that it had helped a Florida lawyer named Scott W. Rothstein commit one of the more brazen Ponzi schemes of recent years.

It is not clear, however, whether this represents a new attitude on the part of regulators to try to force banks to pay attention to possible Ponzi schemes — just as the Patriot Act requires them to monitor possible terrorist financing — or whether it is an isolated response to a particularly egregious case. Certainly the regulators had evidence, much of it provided by Mr. Rothstein in an effort to minimize his sentence, suggesting that one or more bank employees knew they were helping him deceive investors.

If regulators do not go after banks, the banks are usually home free. Some bankruptcy trustees for collapsed Ponzi schemes have tried to sue banks to recover money for defrauded investors only to have judges rule that because the trustee is standing in the shoes of the fraudster, such suits are not permitted. But when investors try to sue the banks, they can run up against rules limiting class-action suits and a Supreme Court decision saying that only the government — not victims — can bring suits contending that a bank, or anyone else, aided and abetted a fraud.

The Rothstein Ponzi scheme was created by a lawyer who had burst onto the Fort Lauderdale scene, living large and making highly publicized charitable donations. His firm, Rothstein, Rosenfeldt & Adler, employed 70 lawyers. He was vice chairman of a Florida Bar Association grievance committee that heard ethics complaints against lawyers. He was named to a committee to advise on state judicial appointments.

And he put together a $1.2 billion Ponzi scheme, according to the federal charges to which he pleaded guilty.

His scheme involved persuading investors to put money into “structured settlements.” Supposedly, these were settlements of cases that involved complaints like sexual harassment. The companies, he explained, had agreed to pay money over time to his clients in return for their silence. Those clients would sell the right to the payments in return for an upfront payment from the investor. He assured the investor that all the money had in fact been paid into escrow accounts he administered.

He spread the profits of the Ponzi scheme around, according to the federal charges, using money to “provide gratuities to high-ranking members of police agencies in order to curry favors with such police personnel and to deflect law enforcement scrutiny.” Political contributions were made with the money “in a manner designed to conceal the true source of such funds and to circumvent state and federal laws governing the limitations and contribution of such funds.” He sponsored fund-raisers for, among others, Gov. Charlie Crist, Senator John McCain and President George W. Bush.

For their first wedding anniversary, in 2009, he and his wife, Kimberly, attended an Eagles concert, where Don Henley dedicated a song, “Life in the Fast Lane,” to them. That cost him a $100,000 charitable contribution.

Floyd Norris comments on finance and the economy at nytimes.com/economix

Saturday, August 10, 2013

High & Low Finance: Independent Agencies, Sometimes in Name Only

He did not have to look very far to find Mr. Grundfest, who is now a law professor at Stanford. “At the time,” Mr. Grundfest recalled this week, “I was working in the Reagan White House as counsel and senior economist at the Council of Economic Advisers.”

Under the law, no more than three members of the S.E.C. can be from the same party, so the seat had to go to someone who was not a Republican. Mr. Grundfest was a registered Democrat. The fact that he was serving in a Republican administration did not disqualify him, and he easily won Senate confirmation.

This year, two new members of the S.E.C., one Democrat and one Republican, have been confirmed by the Senate and are about to be sworn in. They were each nominated by President Obama. But the reality appears to be that he did not really choose them.

Instead, they were effectively chosen by senior senators. Both the Republican, Michael S. Piwowar, and the Democrat, Kara M. Stein, were aides on the Senate Banking Committee. It appears that their former bosses, Senator Michael D. Crapo of Idaho, the ranking Republican on the committee, and Senator Jack Reed of Rhode Island, the former chairman of the Subcommittee on Securities, Insurance and Investment, were instrumental in their selection.

That helps to explain why the S.E.C. has in recent years splintered into factions far more than ever before. “They tend,” said Arthur Levitt, the chairman of the S.E.C. from 1993 to 2001, “to embrace the philosophy of their mentors.”

I asked the Democrat whom Mr. Grundfest replaced, Bevis Longstreth, how he was chosen. The answer had nothing to do with a senator. In 1981, Mr. Longstreth, a partner in Debevoise & Plimpton, a New York-based law firm, knew James A. Baker III, President Reagan’s chief of staff at the time, who shepherded his appointment through the process.

Another former commissioner recalled never having talked to anyone on Capitol Hill before being nominated.

Of course, members of Congress always had influence, and presidents have sought advice and engaged in horse trading. But Harvey Pitt, who worked on the S.E.C. staff from 1968 to 1978, rising to general counsel, said things had changed by the time he returned as chairman in 2001. By then, he said, presidents were expected to nominate the people chosen by the opposition party’s senior senators, unless there was something clearly wrong with the person.

Mr. Pitt said he thought that began on a more formal basis after the Republicans took control of Congress in 1994, when Bill Clinton was president.

Mr. Pitt, who was appointed chairman by President George W. Bush, said that his recommendations and approval were sought by the White House for prospective Republican commissioners, but that while he met with Democratic choices before they were nominated, he did not feel he — or the White House — had much leeway in choosing whether to appoint them.

Now, there is some evidence that the president generally gets to choose the chairmen of independent commissions, but the other majority members are picked on Capitol Hill.

The result has been that chairmen of commissions can find it difficult to accomplish anything. Last year, Mary L. Schapiro, the chairwoman of the S.E.C. at the time, tried and failed to push changes in money market funds through the commission in the face of strong opposition from the money market fund industry. She could not get the Republican votes, and one of the Democrats on the commission also refused to go along.

That infuriated other financial regulators. The Financial Stability Oversight Council, composed of 10 top regulators including the S.E.C. chairman, looked for ways to force actions it thought were needed to assure such funds would not need federal support during a crisis, as happened in 2008.

This year, under the new chairwoman, Mary Jo White, the commission voted unanimously to seek comment on two possible changes, saying it might adopt either or both of them. Those proposals were severely diluted from the original proposal, and the industry appears to be ready to accept some change.

What has happened to the S.E.C. appears to have happened, in varying degrees, at other regulatory agencies.

Such agencies are called “independent” agencies because they are required to have members from both parties, keeping them from being strictly accountable to the president, as cabinet members are.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Friday, July 19, 2013

High & Low Finance: The Time Bernanke Got It Wrong

You could see that this week when Ben S. Bernanke, the Fed chairman, made his semiannual pilgrimage to Capitol Hill to discuss the state of the economy. Lawmakers voiced concern about possibly excessive regulation of banks, but not about the clearly inadequate capital the big banks — and many small ones — had before the crisis.

Some of them seemed to be upset that the Fed’s policies had caused stock prices to rise. Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee, seemed to think that all current economic problems could be traced to President Obama’s excessive spending.

He was upset that the “Federal Reserve has regrettably, in many ways, enabled this failed economic policy through a program of risky and unprecedented asset purchases.”

Mr. Bernanke, who is probably nearing the end of his tenure running the Fed, seemed to have had such criticisms in mind last week when he assessed “the first 100 years of the Federal Reserve” at a conference in Cambridge, Mass.

In analyzing the Fed’s failures during the Depression, he seemed to be taking clear aim at some of his current critics — and perhaps at other central banks that were far less aggressive after the credit crisis.

First, he appeared to address the idea, popular in some circles, that we need a new gold standard.

“The degree to which the gold standard actually constrained U.S. monetary policy during the early 1930s is debated,” he said, “but the gold standard philosophy clearly did not encourage the sort of highly expansionary policies that were needed.” He said policy makers, following flawed economic theories, concluded “on the basis of low nominal interest rates and low borrowings from the Fed that monetary policy was appropriately supportive and that further actions would be fruitless.”

Was that a criticism of the European Central Bank under Jean-Claude Trichet, which lowered interest rates but did little else as the euro zone crisis grew? It certainly helped to explain why Mr. Bernanke felt the need to embark on quantitative easing and to focus on longer-term interest rates as well as short-term ones.

Then Mr. Bernanke pointed to “another counterproductive doctrine: the so-called liquidationist view, that depressions perform a necessary cleansing function.” That was the view pushed in the early 1930s by Andrew Mellon, the Treasury secretary, to such an extent that it angered even President Herbert Hoover, who did not, however, seem to think he could overrule the secretary. Now the comments could be read as a reproach to those, in the United States and Europe, who push for austerity above all else.

“It may be that the Federal Reserve suffered less from lack of leadership in the 1930s than from the lack of an intellectual framework for understanding what was happening and what needed to be done,” Mr. Bernanke concluded.

It seems to me that something similar could be said for the Fed before the debt crisis erupted. The intellectual framework it used simply could not cope with the idea that financial stability can itself become a destabilizing factor, as investors and bankers conclude that it is safe to take on more and more risk.

For a time, the period before the collapse was known as the “Great Moderation,” a term that Mr. Bernanke helped to publicize in a 2004 speech. Low levels of inflation, long periods of economic growth and low levels of employment volatility were viewed as unquestioned proof of success.

And what brought on that success? In 2004, Mr. Bernanke, then a Fed governor, conceded good luck might have helped, but his view was that “improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

In 2005, three Fed economists, Karen E. Dynan, Douglas W. Elmendorf and Daniel E. Sichel, proposed an additional explanation for the Great Moderation: the success of financial innovation.

“Improved assessment and pricing of risk, expanded lending to households without strong collateral, more widespread securitization of loans, and the development of markets for riskier corporate debt have enhanced the ability of households and businesses to borrow funds,” they wrote. “Greater use of credit could foster a reduction in economic volatility by lessening the sensitivity of household and business spending to downturns in income and cash flow.”

Floyd Norris writes on finance and the economy at nytimes.com/economix.

Friday, July 5, 2013

High & Low Finance: In Ireland, Dire Echoes Of a Bailout Gone Awry

Now we learn that it was based in no small part on manipulative lies by venal bankers.

The leak of audiotapes of phone conversations between top officials of Anglo Irish Bank, which was by far the worst of a very bad lot, has stunned Ireland and damaged its relations with Germany.

It now appears that the bank lied to Irish officials about how much trouble it was in when the government, at the end of September 2008, guaranteed all the bank’s liabilities.

On one tape, John Bowe, Anglo Irish’s director of the treasury, conceded that he had no rational basis for telling the government that 7 billion euros was all it would take to rescue the bank.

“If they saw the enormity of it up front, they might decide, they might decide they have a choice,” he said to his colleagues in a tape disclosed by The Irish Independent. “They might say the cost to the taxpayer is too high.”

It was important for the problem to look “big enough to be important, but not too big that it kind of spoils everything.”

The problem certainly did “spoil everything” and continues to do so. The Anglo Irish bailout turned out to cost tens of billions of euros from Irish taxpayers and the European Union. Had Irish officials acted more wisely then, the country would still be in bad shape now, but the cost to the government would be much lower. There probably would have been less need for the continuing austerity that has, once again, caused Ireland to lapse into recession.

But by then, the basic problem had been created. Ireland had inflated a property bubble far greater than the American one, and losses were going to be immense when prices collapsed. Regulators were clueless, or worse, about what was actually happening. There seems to have been no one in the government who was truly familiar with the bank. Outside experts were called in, but it is not easy during a crisis to evaluate something from scratch.

At the time, however, it was easy to think that the situation was not as bad as it turned out to be. Irish real estate prices had not collapsed — that would come soon — and it seemed possible that the problems affecting Irish banks, particularly Anglo Irish, were temporary.

The word was liquidity. If that was the only problem a bank had — if there was a temporary difficulty in raising money to reassure depositors but the underlying loans were solid — then a bailout could work with little or no long-term cost. But if the real problem was one of solvency, a bailout risked throwing good money after bad.

Two weeks before the Irish bank guarantee, the financial world was shaken by the collapse of Lehman Brothers in the United States. It showed that large financial institutions were interconnected in ways that no one had really considered before and quickly led to a consensus that the American government had erred in not somehow keeping Lehman afloat.

We now know that Lehman was broke, but at the time it appeared to have ample capital. What was missing, one leading American regulator assured me at the time, was a requirement that the bank retain sufficient liquidity to deal with a panic.

In that atmosphere, it may be understandable that Irish officials fell for the tempting story that there was no real problem, just a bit of unfounded panic. But once they did, the power shifted to the bankers. The tapes show that the bankers were furious about government delays in releasing money once the guarantee was offered.

“You’re putting the government at risk with your delays,” said David Drumm, Anglo Irish’s chief executive, in discussing what he would say to officials at a meeting. Talk of due diligence was ridiculous. Ireland had told the world “we’re all solvent.” Now, it should simply write “a two or three billion check and get on with it.”

He described such a check as “very small.” Relative to the ultimate cost, he was right.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Sunday, June 23, 2013

Tax Programs to Finance Clean Energy Catch On

Then a developer, Blue Horizon Energy, made a proposal: Grandview Tire and Auto, using a new loan program, could borrow the $34,000 to install the system and pay it back over 10 years, but instead of making traditional loan payments, they would be made through his property taxes.

Now, with 117 panels on one of his five stores, he is saving $3,600 a year and bringing in new customers attracted to the company’s green image.

The program, he said, “made the concept of adding solar to our business reality.”

After years of fits, starts and unanticipated pitfalls, the long-term loan program — championed by the White House but stymied by federal housing officials — is gaining traction across the country, especially among businesses like Grandview. Known as Property Assessed Clean Energy financing, the approach allows owners to borrow the money for conservation or clean energy upgrades and pay it back over the long haul, often 20 years, through a property tax surcharge.

Since June 2011, the number of projects completed with the financing has more than doubled, to at least 168 worth $33 million, from 75 worth $10 million, according to PACENow, a nonprofit advocacy group that tracks the programs. The group says that 30 states and the District of Columbia have passed laws allowing the program, and estimates that the number of projects could easily double by the end of next year.

And the approach is on the verge of becoming more widespread. A week ago, Gov. Rick Perry of Texas signed legislation that would allow more commercial and industrial projects to go forward. Texas joins seven other states that are amending their laws this year to allow the financing, while several local and state governments, including Connecticut, Sacramento, Miami and Atlanta, either have new districts with loan programs or soon will.

“It’s an idea that resonates and is catching on,” said David Gabrielson, the PACENow executive director. “I see encouraging signs in the build-out of a whole new approach to funding energy efficiency.”

Despite the program’s growth among businesses, the group it was originally intended for — homeowners — is still largely left out. The Federal Housing Finance Agency, which oversees financing for two-thirds of new residential mortgages through Fannie Mae and Freddie Mac, does not allow those agencies to buy mortgages for properties with liens that have a higher priority for payback, as PACE loans often do.

Local governments have long used special taxing districts to finance improvements to private property that benefit the public. The idea behind PACE was to turn that idea toward upgrades like new windows and insulation or solar arrays that often cost more than property owners could pay upfront but less than they would save on electricity bills over time. Berkeley, Calif., pioneered the concept in 2008, and it quickly expanded, sometimes with the help of grants from the Department of Energy to pilot projects in several towns and states across the country.

But the program hit a snag in 2010 when the F.H.F.A., under pressure to improve its balance sheet during the housing crisis, derailed the program largely because in most cases the PACE loans would have to be repaid before the mortgages during a foreclosure.

Congressional and legal challenges to the agency’s rulings have failed to overturn them, but advocates remain hopeful that a federal policy change could open up the loans to more homeowners.

“What’s frustrating is when there’s something which is an obvious win — it’s not even contentious — and it doesn’t go forward,” said Dan Kammen, director of the Renewable and Appropriate Energy Laboratory at the University of California, Berkeley, who helped design and study early PACE programs.

Monday, May 13, 2013

Bits Blog: Microsoft Names First Female Finance Chief

Microsoft Amy Hood, Microsoft’s new chief financial officer.

Microsoft named Amy Hood, an executive at the company, as its chief financial officer, the first woman to hold the top finance job at Microsoft.

Ms. Hood, 41, joined Microsoft in late 2002 and was most recently the chief financial officer of Microsoft’s business division, the unit that oversees its lucrative Office suite of applications. She replaces Peter Klein, Microsoft’s chief financial officer who announced recently that he was resigning to spend more time with his family.

A number of women have risen to Microsoft’s top ranks, but like most technology companies, its senior leadership is still dominated by men. One exception is Lisa Brummel, who, as chief people officer, runs the company’s human resources department. Late last year, Microsoft appointed two women, Julie Larson-Green and Tami Reller, to run the engineering and finance operations of the company’s Windows division, one of its most important units.

As chief financial officer, Ms. Hood will play a bigger role in helping Microsoft adapt to major changes in its business, most notably the shift to mobile devices from PCs and the transformation of traditional software into cloud services. In a sign of these changes, for the last six months, Steve Ballmer, the chief executive officer, has begun talking about Microsoft as a devices and services company.

Ms. Hood will also serve as Microsoft’s ambassador to Wall Street, which has for years looked skeptically at the company’s efforts to enter new businesses like Internet search. After a recent solid earnings report from Microsoft, investors have become more bullish on the company’s prospects. Its shares now trade near their 52-week high.

In an e-mail to Microsoft employees on Wednesday, Mr. Ballmer said Ms. Hood had helped lead the change of Microsoft Office into a cloud service. He said that he worked closely with her on two big acquisitions, that of Skype and Yammer, and that her critical thinking would be an important skill in her new job.

“Amy is a great collaborator with a history of successful cross-group projects, and I am looking forward to having her as a member of my leadership team,” Mr. Ballmer wrote.

Saturday, May 11, 2013

Bits Blog: Apple’s Peter Oppenheimer Is Highest Paid Finance Chief

Apple Peter Oppenheimer, Apple’s chief financial officer.

Being a tax ninja pays off at Apple. Its chief financial officer, Peter Oppenheimer, who has helped the company sidestep billions of dollars in taxes, was the highest paid chief financial officer of 2012, according to data compiled by Bloomberg News.

Mr. Oppenheimer was awarded a $68.6 million package, much higher than the $4.17 million that went to Tim Cook, Apple’s chief executive, says Bloomberg. Oracle’s financial chief, Safra Catz, was the second highest paid with $51.7 million; Google’s Patrick Pichette was third with $38.7 million.

Of course, all corporations do their best to minimize taxes. Apple’s Mr. Oppenheimer has done an exceptional job managing the company’s cash, finding legal ways to side step billions of dollars in taxes, allocating about 70 percent of its profits overseas, where tax rates are often much lower.

Last month, Apple’s Mr. Oppenheimer raised a bond deal of $17 billion to fund a $100 billion payout to shareholders. By borrowing money, or issuing debt, Apple avoided $9.2 billion in United States taxes.

Saturday, October 27, 2012

High & Low Finance: Euro Avoids Collapse, but Its Future Remains Uncertain

Only a few months ago, it was front-page news. Would the euro collapse? Would most of southern Europe go broke, unable to borrow money at any reasonable rate? Would that bring on a new world recession?

But in this week’s foreign policy debate between President Obama and Mitt Romney, the euro never came up. Europe was mentioned once, but the reference had nothing to do with economics. Mr. Romney did refer to Greece, but only to say we were in danger of going down the same path if we did not change our ways.

To a surprising extent, the perception seems to be that the European situation is under control. That is true if all you worry about is whether bondholders will get paid. It is false if you have a broader perspective.

The focus of the last couple of years on borrowing costs for peripheral members of the euro zone was, in retrospect, unfortunate. It was always clear that Europe, as a whole, had the ability to solve that issue if it wished to do so. The European Central Bank, like the United States Federal Reserve, has the ability to print money, and that is what it finally did.

But the real issue was — and remains — whether the peripheral countries could turn into successful economies while staying in the euro zone. On that issue, progress is painfully slow.

“The actions of the E.C.B. and other policy makers in Europe have generally had the effect of filling large financial gaps in periphery bank and sovereign funding,” wrote Bob Prince of Bridgewater Associates this week, “but have done relatively little to resolve competitive imbalances among these economies.”

Banks are hesitant to lend. On Thursday, the European Central Bank report on loan activity in September showed a record 1.4 percent year-over-year decline in loans outstanding to private sector companies and individuals in the euro zone. “These numbers are rather consistent with the bleak picture painted by business surveys, showing an ongoing contraction of activity,” wrote François Cabau and Phillippe Gudin of Barclays Capital in a note to clients.

If peripheral countries simply had fixed exchange rates, rather than a common currency, they could and almost certainly would have devalued their currencies long before now. That is the normal prescription for countries in financial distress. Couple it with austerity and revivals can be surprisingly rapid, as exports surge and imports plunge.

As it is, the process is sure to be long and painful, but not certain to succeed.

As Europe stumbles and slows, there has been a temptation in the United States to turn our attention elsewhere, to Asia for economic reasons and to the Mideast for political ones. Mr. Romney has tried to add South America to that mix. But neither the Romney nor Obama campaign has wanted to talk much about Europe, a fact that has been noted with a little alarm in Europe.

Richard Lambert, the chancellor of Britain’s Warwick University — and a former editor of The Financial Times as well as a former central banker — was in New York this week trying to convince Americans that they should care, and predicting that the euro will survive.

“The European Union has the capacity to get its affairs into order, if it has the political determination to do so,” he said in a speech at New York University. “This is a crisis about economic imbalances within the euro zone, more than it is about fault lines with the rest of the world.”

That is a point worth remembering. The euro zone as a whole is running smaller budget and current account deficits than is the United States. If it were one country, there might be articles about depressed regions, but not talk of collapse.

But it is not one country. It is taking halting steps in that direction, with a move to unified bank supervision, but political union is not going to happen; Angela Merkel’s name is never going to be on a ballot outside of Germany. Nor is there going to be easy labor mobility around Europe, even though that is supposedly guaranteed now. Cultural and language differences assure that.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Wednesday, October 10, 2012

Two Firms Bolster Japan Finance Groups

Morrison & Foerster and White & Case have bolstered their Tokyo offices with new finance hires.

Masahiro Shiga, a Japanese-qualified lawyer, or bengoshi, joins Morrison & Foerster as a partner from the Tokyo office of Skadden, Arps, Slate, Meagher & Flom, where he was also a partner and headed the Japan real estate practice.

Shiga has advised on the purchase of over $12 billion in Japanese real estate, as well as the issuance of more than $7 billion in real estate securities.

Morrison & Foerster has one of the largest Japan offices among Western firms, with 125 lawyers, including 50 bengoshi.

White & Case, also one of the largest foreign firms in Japan with over 100 lawyers, has added Timothy Jaffares as an of counsel in Tokyo.

Jaffares was head of Clifford Chance's Tokyo office from 2004 to 2008, when he relocated to the firm's Frankfurt office.

Like Shiga, Jaffares also focuses on real estate finance and securitizations. He also handles syndicated loan deals and leveraged finance transactions.

Sunday, October 7, 2012

High & Low Finance: U.S. Justice vs. Foreign Fraud

This spring he was convicted of securities fraud, wire fraud and mail fraud and sentenced to 12 years in prison. Judge Paul A. Crotty of the United States District Court in Lower Manhattan ordered him sent to prison immediately and directed him to forfeit $50 million.

But now he seems likely to have his convictions overturned. The prestigious Association of the Bar of the City of New York has filed a brief with the appeals court in his support, and the United States Court of Appeals for the Second Circuit has ordered him freed on bail pending appeal.

Why? He showed what turned out to be good judgment in both whom he defrauded, and where. Most of the victims were British, and the securities were traded in London, not New York.

In 2010, the Supreme Court ruled that a civil suit contending securities fraud could not proceed because the law did not apply to foreign transactions. In that case, Morrison v. National Australia Bank, foreign shareholders were suing a foreign bank whose share price had plummeted when it was disclosed the bank was taking a big loss caused by its American mortgage business. That bank’s securities did not trade in the United States.

The case has become known as the “3-F” ruling, at least in securities law circles. Foreign issuer, foreign investors and foreign trading added up to no American jurisdiction. The fact that some of the supposedly deceptive statements were made in United States was not enough for the court, which said Congress had not authorized the application of that statute to crimes committed outside the United States.

“It is a rare case of prohibited extraterritorial application that lacks all conduct with United States territory,” wrote Justice Antonin Scalia. “But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.”

The Supreme Court opinion was quiet as to whether it also applied to criminal cases; that is the issue in a number of pending appeals.

The government argues that it does not. But the Second Circuit Court seems to be poised to rule that it does. In another case, the appeals court this week ordered the release on bail of Alberto W. Vilar, the former head of Amerindo investments, who was convicted of securities fraud in 2008. His lawyers argued that the Morrison precedent made it highly likely that he would win his appeal.

In his appeal, Mr. Mandell argues all of the claimed American victims who testified at his trial conducted their trades so long ago that the statute of limitations bars charging him with crimes for those trades, and that the rest were British. His lawyers say the Morrison case requires that the conviction be overturned.

It is at least conceivable that the mail fraud and wire fraud convictions could stand even if the securities fraud conviction did not. In a concurring opinion in Morrison, Justice Stephen Breyer said as much. But it was not clear that the majority would agree.

The government argues that Section 10(b) of the securities act may apply in criminal cases “even if the transactions at issue were executed overseas.”

It is that argument that drew the opposition from the city bar association’s white-collar crime committee. The government’s position “that Section 10(b) can simultaneously have two authoritative constructions — an extraterritorial reading that applies in criminal cases, and a purely domestic one that applies in civil cases — is mistaken,” argues the brief filed by the committee’s chairman, John F. Savarese, a partner in Wachtell, Lipton, Rosen & Katz.

If Mr. Mandell’s conviction is overturned and he goes free, one of the more colorful securities law violators will be back on the scene. As far back as 1995, he was suspended from the New York Stock Exchange for unauthorized trading. He later attributed those problems to drug usage.

Aware of his background, American regulators required Sky Capital, Mr. Mandell’s brokerage firm, to promise that he would have no supervisory authority. The government says he ignored that promise.

Sky Capital went public in Britain in 2002 and was traded on London’s Alternative Investment Market, where there are fewer rules than on other markets. The charges say that stock was one of the securities used to defraud investors, with Mr. Mandell promising some investors that the price would double. The shares have not traded since 2006.

In 2009, he says, he was days away from starting a “mixed martial arts franchise,” only to have it delayed after he was indicted. He then tried to sell his life story — including the trial — as a reality television show. In the show’s trailer, he proclaimed his innocence and determination to fight the charges.

“Always a fighter, ready to face any challenge, Ross Mandell continues to live his life as a husband to his wife, a father to his children, and as an entrepreneur, who is free on $5 million bail. He is a defendant facing criminal charges, the subject of a new reality television show and a recovering alcoholic with 19 years sobriety. Ross Mandell has got a lot on the line, a lot to lose and a lot to live for as the drama continues to unfold in this real life saga,” says the pitch accompanying the video, which is posted on YouTube.

Mr. Mandell did not respond to an interview request. His lawyer said he would have no comment.

His Web site asks those visiting there to vote on his innocence or guilt, and 1,000 have, with a small majority saying he is innocent.

The jury in federal court, however, was unanimous in finding him guilty. He evidently continues to live large. His video shows him driving an expensive sports car in Boca Raton, Fla., proclaiming “I have a perfect life.”

The government says the money he gained from defrauding investors paid for “first-class flights, five-star hotel suites, expensive meals, adult entertainment and personal spending,” even though his firm was losing money. It says some of the money was used for “work done on Mandell’s penthouse apartment at Trump U.N. Plaza” in Manhattan.

The Supreme Court opinion in Morrison was based on its reading of the Securities Act, and the court made clear that Congress could change the law if it wished.

If the courts free Mr. Mandell, and Congress does not act, the government will be sending an unfortunate message to foreign investors: If American brokers defraud Americans, the government can prosecute them. But if they defraud foreigners, and arrange to have the fraudulent securities traded overseas, there is nothing the American government will do about it.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Wednesday, October 3, 2012

K&L Gates Adds Sidley Austin Partner Trio to London Finance Practice

By Alex NewmanAll Articles

The National Law Journal

September 25, 2012

K&L Gates has completed the hire of a three-partner London team from Sidley Austin, in a major boost for the U.S. firm's City finance practice.

The arrival of Theresa Kradjian this month sees her reunited with Matthew Duncan and Paul Matthews, both of whom joined K&L Gates earlier this summer.

The trio worked together at Sidley and were hired as a team. Duncan was made up to partner at the U.S. firm in 2004, while Kradjian and Matthews were promoted in 2007.

London chief Tony Griffiths cited particular expertise in the group that K&L Gates had been keen to add to its City finance capabilities, pointing to Kradjian's trans-Atlantic experience in capital markets and securities, Duncan's knowledge of residential mortgage-backed securities, and Matthews' work in derivatives.

Griffiths said: "The growth of our London commercial mortgage-backed securities structured finance capability has made a significant contribution to the office's 18 percent revenue growth over the past two years."

K&L Gates' structured finance practice was one of the top performing sectors for the firm during 2011, and a main driver behind the London office's 10 percent revenue growth to £33 million. The firm also opened bases in Brussels, Doha and Sao Paulo over the course of the year.

Sunday, September 30, 2012

High & Low Finance: The Myth of Fixing the Libor - High & Low Finance

So it was a few years ago with senior tranches of asset-backed securities. Investors perceived a need for risk-free assets with floating rates, and Wall Street banks served up trillions of dollars worth of such paper — or at least they said they did.

So it is now with Libor — the London interbank offered rate — which not coincidentally was an important component of that other folly. That there was fraud based on made-up numbers is clear. That the system can be fixed is not.

But Martin Wheatley, Britain’s top financial regulator, has concluded Libor can be saved. “Although the current system is broken, it is not beyond repair,” he said in remarks prepared for delivery on Friday.

He may turn out to be overly optimistic. Libor is, and is likely to remain, a fiction. You can maintain the fiction, or you can embrace a much less palatable reality.

The Libor fiction began in the 1980s, when finance felt a need for a private sector, virtually risk-free interest rate to serve as a benchmark. Banks had learned that there was a big risk to making a long-term fixed-rate loan — the risk that market interest rates would rise and leave them with loans that were paying less than it was costing the bank to pay for the loan. Short-term loans could solve that problem, but at the risk that the borrower might be forced to repay at any time a loan that was taken out for a long-term project.

Enter Libor. A loan could be long term, but with a rate that periodically reset based on the cost of funds to banks. If a loan were priced at, say, three percentage points above the three-month Libor, the bank would be getting a reasonable risk premium, and would face no risk from changing market rates, since the interest rate would be reset every three months. The borrower would get long-term money.

There were two implicit assumptions in Libor. One was that banks were virtually risk-free, or at least that their risk was small and would not vary much over time. The other was that there was a way to actually calculate what the rate was. Both assumptions turned out to be wrong.

Libor rates are calculated each day by the British Bankers’ Association, a trade group that makes good money from licensing the use of Libor rates. Each day panels of banks tell the association the rate they will have to pay for unsecured loans at maturities ranging from overnight to 12 months. They do that for each of 10 currencies, including the United States dollar, the euro, the Swedish krona and the New Zealand dollar.

The scandal made clear that those reports were faked before and during the financial crisis by at least some of the banks. But what is not as widely appreciated is that there is substantial evidence that the deception goes on. Banks continue to report figures that strain credulity, both in their level and in their lack of volatility from day to day or week to week. The scandal might never have surfaced, or might have done so in a sanitized fashion, had bank regulators had their way. But the banks had the bad fortune that the investigation of it was spearheaded by the United States Commodity Futures Trading Commission, a market regulator that under Gary S. Gensler, the chairman appointed by President Obama, has changed from lap dog to bulldog. It had no institutional need to protect the banks, and it did not.

This week Mr. Gensler, testifying before a European Parliament committee, laid out the evidence that the deception continues, although he was nice enough not to put it in such stark terms. He noted the wide swings in the cost of credit-default swaps on debts issued by major banks, while those same banks were reporting that their costs of unsecured borrowing were varying hardly at all.

“It is critical that markets be able to rely on something that is credible and honest. The data in the market now strains that credibility,” Mr. Gensler said in an interview before Mr. Wheatley’s conclusions were announced. “History shows that something that is prone to abuse will be abused, and that even people of good faith can have a difficult time estimating when there are no observable transactions.”

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Tuesday, September 25, 2012

K&L Gates Adds Sidley Austin Partner Trio to London Finance Practice

By Alex NewmanAll Articles

The National Law Journal

September 25, 2012

K&L Gates has completed the hire of a three-partner London team from Sidley Austin, in a major boost for the U.S. firm's City finance practice.

The arrival of Theresa Kradjian this month sees her reunited with Matthew Duncan and Paul Matthews, both of whom joined K&L Gates earlier this summer.

The trio worked together at Sidley and were hired as a team. Duncan was made up to partner at the U.S. firm in 2004, while Kradjian and Matthews were promoted in 2007.