NEWS, 04.06.2012.

Spain puts on the pressure for financial rescue

 

Prime Minister Mariano Rajoy is pressing for a direct European rescue for Spain's banks with moral support from the European Commission, but Germany appeared to rule out such a "bailout lite" for the euro zone's fourth biggest member.A source with knowledge of the matter said Madrid is working along with European institutions to find a way to directly refinance banks using rescue funds without the government having to come under a full EU/IMF adjustment programme."Right now the most urgent issue is the banks, and there are negotiations to refinance the banks directly without it being an intervention. It's a mechanism for all (European) banks, not just for Spanish banks," the source said.Spain's borrowing costs have jumped in recent weeks, largely due to doubts over whether the government can raise enough funds for the rising bill to strengthen its banks, left with big holes after the 2008 crash of the housing and construction market.Under current rules Spain can get a loan from the European rescue fund, or EFSF, but it would come with tough conditions and intrusive supervision, with a high political cost for Rajoy. The new permanent European rescue fund, the European Stability Mechanism (ESM), due to enter into force in July, can lend to banks but the request still has to be made by the state.The source with knowledge of the matter said Spain believed the European Union's executive could take a plan for bank aid to a summit of the bloc's leaders on June 28-29.EU Economic and Monetary Affairs Commissioner Olli Rehn said Brussels was considering direct bank recapitalisation by the ESM to break the link between weak sovereigns and ailing banks, but it was not possible under the treaty currently being ratified by member states."This is not part of the ESM treaty for the moment, in its present form, but we see that it is important to consider this alternative of direct bank recapitalisation as we are now moving on in the discussion on the possible ways and means to create a banking union," Rehn said.Germany, the main contributor to the bailout fund, opposes changing the ESM treaty to allow direct bank recapitalisation and has veto power. Berlin contends that only a formal programme approved by national parliaments permits proper international supervision of how aid funds are spent."It is only for a national government to decide whether it draws on the rescue mechanism and the requirements that are linked to it. That of course is also true for Spain," government spokesman Steffen Seibert told a news conference when asked about media reports that Berlin was pushing Madrid to apply.Seibert also said Spain first needed to figure out how much money it needs to recapitalise its banks.After pressing in vain for the European Central Bank to ride to Spain's rescue by buying government bonds, Rajoy took a different line on Saturday, calling in a speech for a euro zone fiscal authority with powers to manage member states' budget policies, to show markets the euro project is irreversible.Some analysts saw the call as a way of preparing Spaniards for the need for a European rescue for their country. Others saw it as a goodwill gesture towards the Germans.Gary Jenkins, director at Swordfish Research, said the fact Rajoy was pushing for greater transfers of fiscal sovereignty was a sign of how urgent the situation was in Spain."Spain is heading towards requiring significant intervention in order to avoid a disaster scenario," he wrote.Spain meets criteria for aid Spain already complies with the terms for the state to tap the temporary European Financial Stability Facility (EFSF) under its "guidelines on recapitalisation of financial institutions".Those conditions are: it needs the money as a last resort to recapitalise systemic lenders, such as Bankia, and it has also started an independent audit of its banks in two stages.The ECB and key EU partners such as Berlin are keen to avoid a repeat of last year's events when they had to push Portugal to seek aid after former Prime Minister Jose Socrates resisted for months owing to the stigma attached to an "IMF bailout".The ECB stopped buying Portuguese bonds in the secondary market and Portuguese banks took the unprecedented step of warning the government that they too might stop buying its debt -- a move that probably tipped Socrates into seeking help.The head of Portugal's banking association, Antonio de Sousa, told Reuters in an interview at the time that the ECB had told the country's banks to cut exposure to government debt.German Finance Minister Wolfgang Schaeuble insisted then that aid could only be granted in the framework of a reform programme, the same stance Berlin is now taking towards Madrid.Bank audits Spain rescued its fourth biggest bank, Bankia, in May, in a bailout that will cost some 23.5 billion euros, much higher than anticipated, raising doubts over whether other Spanish banks have yet to recognise bigger losses.Independent auditors contracted by the government are due to report in mid-June on the state of the banks, and a detailed International Monetary Fund report on the financial system is due on June 11.Both studies should shed light on the scale of the final bill for plugging the holes in the banks, which have some 184 billion euros in exposure to repossessed property and sour loans to real estate developers.The government and the biggest banks hope the reports will show Bankia was an exception, that most of the banking system is solvent and that the rest has been addressed by regulations that have forced lenders to recognise more than 80 billion euros in losses.Still, after confusion over how Bankia's rescue would work damaged Madrid's market credibility, it's hard to imagine a bank rescue figure that will automatically restore confidence."What is not clear is whether it will be enough to recover the market confidence, that is not going to make things worse," said a senior Spanish banker, regarding the audits.Spain has said it will borrow money on the markets to recapitalise Bankia.Even with 10-year bond yields at 6.5 percent, the government says it does not face trouble tapping the markets because its average borrowing costs are lower, at 4.07 percent, and only 2 percent of public expenditures go to service debt.Political risk consultancy Eurasia Group said Europe would do its best to ease the pain for Rajoy, who has spread much of the blame for mismanaging the banking sector on his Socialist predecessors and the outgoing Bank of Spain governor."At this stage, EU political and policy elites are open to design a programme that would emphasize banks and would be light on conditionality to facilitate Rajoy's ability to manage internal constraints," it said in a report.But Eurasia Group said Rajoy would delay as long as possible to avoid the stigma that could affect his party in subsequent elections and because it will look as if his austerity programme and economic reforms had merely set the country up for a banking bailout instead of putting it back on track.One high-level government source argued that there is little motivation for Rajoy to take some 70 billion euros in aid for the banks if there are no guarantees it will actually bring down borrowing costs.

NEWS,14.03.2012.

Banker quits, calling firm 'toxic and destructive'

The Goldman Sachs Group, New York's lower Manhattan 

Goldman Sachs faced an unprecedented assault from one of its own after a banker published  a withering attack in the New York Times, calling the Wall Street titan a "toxic" place where managing directors referred to their own clients as "muppets." It was the latest blow for the storied investment bank, which has long supplied senators and cabinet secretaries to Washington but now draws comparisons to a "great vampire squid wrapped around the face of humanity.” In an opinion column in the Times, Greg Smith, who worked in equity derivatives, said Goldman had become "as toxic and destructive as I have ever seen it.” It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as 'muppets,'" Smith said. In the United States "muppet" brings to mind lovable puppets like Kermit the Frog, but in Britain, "muppet" is slang for a stupid person. Goldman Sachs issued a short statement in response:” We disagree with the views expressed, which we don't think reflect the way we run our business. In our view, we will only be successful if our clients are successful. This fundamental truth lies at the heart of how we conduct ourselves.” In a subsequent memo to staff, Goldman Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn said Smith's views were in the minority among his 12,000 fellow vice presidents around the world.” And, what do our people think about how we interact with our clients? Across the firm at all levels, 89% of you said that the firm provides exceptional service to them," they said in the memo. Goldman shares were down 3.7% in trading, on a day when broader markets were only slightly lower. The company, which sometimes lacks for defenders given the hits to its reputation in recent years, garnered at least some public support in response to Smith.” The many people we have dealt with there have all been exceptionally talented and high-grade, and never once have we had a negative experience in which we felt that they took advantage of us or didn't do what they said they would do," well-known fund manager Whitney Tilson said in a note. While Smith, who did not return calls for comment, carried the title of executive director, it was not nearly as illustrious as it might sound. Worldwide, Goldman has roughly 12,000 vice presidents and executive directors. That compares with 450 managing directors, the next rung up in the Goldman hierarchy and a job classification that Smith didn't achieve. Overall, the company has about 33,000 employees, meaning that 36% of Goldman's workforce carried a similar title as Smith. According to the British Financial Services Authority's register, he joined Goldman's UK unit a year ago. Johannesburg-born Smith attended universities in his home country and in the United States, where he received a degree in economics from Stanford University in 2001. He also interviewed to be a Rhodes Scholar in South Africa in 2002.While at student at Stanford he had a summer internship at Paine Webber in 1999 and a summer internship at Goldman in 2000. Upon graduating from Stanford in 2001, he landed a job at Goldman as a financial stock analyst. He most recently worked a vice president for Goldman Sachs Services Ltd.Though relatively little is known about Smith otherwise, a friend of Smith's who knows him from London and is connected to him on Facebook, said he was a man of integrity.” He’s always been very honest and open. I wasn't aware he had any of those views. He always seemed to be happy. He's always been very social," the friend said, speaking anonymously. In contrast, questions began to arise about accomplishments that Smith trumpeted in his op-ed piece. Smith spoke with pride about his success in competitive table tennis, but it is not clear how much success he actually achieved. The website Table Tennis Nation reported that Smith was a regular at a club in New York's Chinatown neighbourhood; though other players said he lacked serious competitive talent. Internally, Smith's op-ed piece was not necessarily well received by former colleagues. A trader, who knew Smith but not well, said the company, is telling staff that Smith is a disgruntled employee who is leaving because he didn't make managing director. This trader, who did not want to be named, says former Goldman colleagues are saying that Smith "wasn't very commercial," which means he wasn't producing the kind of sales the company wanted. Outside Goldman's London headquarters on Fleet Street, one company employee said with a shrug of his shoulders, "He worked here for 12 years apparently. Then, suddenly, he changed his mind." Goldman Sachs - fourth among investment banks last year based on fee-income rankings compiled by Thomson Reuters and Freeman Consulting - was once described as "a great vampire squid" in Rolling Stone magazine. The reference was to Goldman's the extensive influence in politics and business. A lawyer representing an Australian fund in a suit against Goldman over mortgage-backed securities said he may seek Smith's deposition to help bolster his case.” Part of Goldman's defence is everybody is sophisticated and everybody knew as much as we knew did," the lawyer, Eric Lewis, said. "But if you're calling your clients muppets - most muppets don't have the cranial capacity of Goldman.” In recent years the company has faced other high-profile incidents damaging to its image after the near-collapse of the global banking system in 2008.Earlier this month it was accused of a major conflict of interest for advising El Paso Corp on its sale to Kinder Morgan, while being a significant shareholder in Kinder Morgan. One of its bankers, Fabrice Tourre - who referred to himself as "fabulous Fab" in emails - is still embroiled in legal claims in the United States after allegations that he duped buyers of a complex credit instrument. And two years ago, Chief Executive Lloyd Blankfein caused a media storm when he said that as a banker he was just "doing God's work," defending high banker pay and the role their institutions play in the economy. Paul Volcker, a former Federal Reserve chairman, called the Smith piece a "reflection of the change in market mentality over the last 15, over the last 20 years.” At an economics summit in Washington hosted by the Atlantic magazine, he said when Goldman went public in the 1990s and bought a large trading operation, "it became a trading organization and not customer oriented. Unsurprisingly, Smith's resignation letter captured the imagination of Twitter users. "Greg Smith" was a worldwide trending topic, meaning it had suddenly spiked in interest, while both that and "Goldman Sachs" were trending in the United States. Many of the commentators expressed surprise about the allegations in the piece, while others called for Smith to shed light on why he left the bank, or pointed out that he seemed to have been employed in a comparatively junior role. The letter also garnered mention on Facebook, which features pages like "Goldman Sachs Are Financial Terrorists.” As happens on the Internet in cases like this, near-instant parodies of Smith's letter cropped up. The most popular by far had Darth Vader of "Star Wars" fame resigning from the Empire via a letter similar to Smith’s.” To put the problem in the simplest terms, throttling people with your mind continues to be sidelined in the way the firm operates and thinks about making people dead," the film franchise's dark lord wrote.