Bear Stearns' Cayne concedes leverage was too high

WASHINGTON (Reuters) – The former chairman and chief executive of Bear Stearns conceded on Wednesday that the failed investment bank had taken on too much risk.

"That was the business. That was, really, industry practice. In retrospect, in hindsight, I would say leverage was too high," a weary-sounding James Cayne told a nine-hour hearing of the Financial Crisis Inquiry Commission.

Cayne's admission under questioning came after he and other former Bear executives had testified that market rumors and a classic run on the bank were to blame for the firm's collapse in March of 2008 and fire-sale to JPMorgan Chase & Co.

The 76-year-old showed little emotion at the hearing, giving no hint of his reputation for profane and hot-headed outbursts during nearly 15 years at the helm of the company before stepping down in January of 2008.

Commission Chairman Phil Angelides said Bear Stearns seemed to have taken on an extraordinary level of risk involving high leverage, a concentration in mortgage-backed securities and short-term funding of its operations.

"There's a form of financial Russian roulette that Bear Stearns was playing along with other investment banks," said Angelides.

The congressionally-appointed commission is charged with chronicling the causes of the worst financial crisis since the 1930s and has been holding a series of hearings. It is due to deliver a report to lawmakers and White House by December 15.

Congress is already working on a bill to overhaul financial regulation but Angelides has said there will still be scope for further reforms, including possible changes to mortgage financing.

On Thursday, the commission is due to hear from former Treasury Secretary Henry Paulson and current Treasury Secretary Timothy Geithner on financial firms and markets falling outside the traditional bank regulatory structure.

TSUNAMI OF RUMORS

Cayne's admission over risk-taking was a departure from the general thrust of testimony by himself and four other Bear Stearns executives. They said the firm's collapse was beyond their control: a tsunami of rumors and loss of confidence that overwhelmed its risk management models and drained liquidity in a matter of days.

"The market's loss of confidence, even though it was unjustified and irrational, became a self-fulfilling prophecy," he said.

Similar market fears later in 2008 led to the bankruptcy of Lehman Brothers and the reorganization of other major investment banks.

Cayne's successor as Bear Stearns CEO, Alan Schwartz, told the panel he believed the Securities and Exchange Commission did investigate whether market players were manipulating Bear's stock. But Schwartz said he did not know whether the SEC could separate who started the rumors against the bank and who was responding to the rumors.

"In my heart, I believe something was going on," he said.

The former Bear Stearns executives were grilled over whether the investment bank's leverage level and lack of foresight on a looming collapse of the U.S. mortgage market made it the first major victim of the financial crisis.

Angelides said by the end of 2007, Bear was leveraged 38-to-one, when measured in terms of tangible assets versus tangible common equity.

About a month before its collapse, Bear had about $12.5 billion in loans with either deficient or no documentation -- more than the firm's total equity, said Angelides.

"It seems like there were a lot of warnings signs, a lot of red and yellow lights going off," he said.

Paul Friedman, Bear's former senior managing director, said the loss of confidence in the firm was unwarranted given the firm's strong capital position and substantial liquidity.

Samuel Molinaro, Bear's former chief financial officer, told the commission that fears, rumors and innuendo in March 2008 resulted in "irrational behavior that caused a quintessential run on the bank at Bear Stearns."

Bill Thomas, vice chairman of the financial commission, did not buy these arguments.

"How could you folks, as sophisticated as you were, with the models that everyone felt comfortable with, believe you were the victim... of unsubstantiated rumors, fears and innuendo -- that your colleagues did you in?" Thomas asked.

HELP TOO LATE

Bear's fall was swift in March of 2008. Despite an emergency line of credit from the Federal Reserve, it became clear within days the firm could not survive on its own, and the Federal Reserve and U.S. Treasury scrambled to arrange a sale to JPMorgan for the eventual price of $10 per share.

Cayne, who took criticism over reports that he attended a bridge tournament in 2007 as two of the firm's hedge funds failed, said the Fed's decision in March of 2008 to open its discount lending window to investment banks came 45 minutes too late to save Bear Stearns.

He described the sale to JPMorgan in cataclysmic terms. "The outcome, I believe, was the best that could be anticipated when the world ended -- for a lot of us."

In September 2008, Lehman filed for bankruptcy and the remaining large investment banks -- Merrill Lynch, Goldman Sachs and Morgan Stanley -- sought safety in the form of federal oversight. Merrill was bought by Bank of America. Goldman and Morgan became bank holding companies and are now subject to much stricter capital requirements and regulation.

All five investment banks were loosely supervised by the SEC for capital and liquidity requirements under the agency's voluntary Consolidated Supervised Entity program.

Angelides said the SEC was not on site examining Bear Stearns but said the agency still had the power to press firms to reduce their leverage.

Former SEC Chairman Christopher Cox, who was at the helm of the agency during the financial crisis, defended the regulator and said it was not set up to supervise investment banks for safety and soundness.

The agency's internal watchdog, however, criticized it for becoming aware of "numerous potential red flags" about Bear Stearns' risk-taking but not taking action.

The SEC monitoring program has since been dismantled.

Stocks end lower amid European debt fears

NEW YORK - The stock market extended its slide Wednesday after investors couldn't shake their concerns about European countries' big debt loads.

The Dow Jones industrial average ended down about 59 points to put its two-day drop at 284. The Dow halved its loss by the close but finished off its high of the day. Treasury prices rose and pushed down interest rates in the bond market for a second day.

A drop in the euro and a rise in the dollar continued to ram markets around the world. The stronger dollar hurts U.S. stocks by cutting into profits of U.S. companies that do business abroad. A higher dollar also hurts commodity prices by reducing demand from foreign buyers.

Investors are concerned that a $144 billion aid package for Greece won't be adequate to keep debt problems in Europe from spreading. There were also questions about whether the bailout would amount to more than a short-term fix for Greece. Investors don't want the trouble in Greece to spill to other countries and disrupt a global rebound.

Swings in global stock markets have intensified in the past week. Wednesday was the sixth time in seven days the Dow moved by more than 100 points. Investors have questions about Greece but they're also awaiting the government's April jobs report on Friday and monitoring Washington's overhaul of the rules that govern financial companies.

The problems in Greece are rattling the market partly because they are reminiscent of the subprime mortgage crisis in the U.S. that at first appeared contained. That bad debt cascaded through the world's financial system and pushed the U.S. economy into recession at the end of 2007.

German Chancellor Angela Merkel on Wednesday encouraged lawmakers in Berlin to rush the approval of Germany's share of the Greek rescue plan by Friday. Analysts say delays could bring more upheaval to global markets.

Investors fear that if a tourniquet for Greece's financial problems doesn't hold, it would be harder to help larger countries like Spain and Portugal that also face big deficits. Moody's Investors Service warned on Wednesday that it could cut Portugal's credit rating two notches in the next three months. Standard & Poor's cut Portugal's credit rating last week.

Adam Gould, senior portfolio manager at Direxion Funds in New York, said the uncertainty about what will happen in Europe is keeping investors from buying dips in the market the way they have for most of the 14-month climb in stocks.

"This is really a story that has the market spooked," Gould said. "First it was Greece. Now it's Spain and Portugal."

Fixing Greece's financial problems won't be easy. Riots erupted in Athens on Wednesday over tax hikes and government spending cuts that the International Monetary Fund and other European nations are requiring as part of the bailout. Three people were killed in the protests.

The problems of heavy government debts are a big test for the euro. Sixteen countries use the common currency. The euro fell against the dollar, sliding as low as $1.2805 in New York. That was its weakest level since March 2009.

The Dow fell 58.65, or 0.5 percent, to 10,868.12. It had been up as much as 20 points and down nearly 112 points.

The Dow is down 2.5 percent in two days, its steepest back-to-back drop in three months.

The broader Standard & Poor's 500 index fell 7.73, or 0.7 percent, to 1,165.87, while the Nasdaq composite index fell 21.96, or 0.9 percent, to 2,402.29.

Bond prices rose. The yield on the benchmark 10-year Treasury note fell to 3.54 percent from 3.60 percent late Tuesday.

Gold rose. Crude oil fell $2.77 to $79.97 per barrel on the New York Mercantile Exchange.

Kevin Mahn, chief investment officer at Hennion & Walsh in Parsippany, N.J., said the debt problems are severe but not new. He said investors had been looking for an excuse to sell stocks after the market's steep 14-month climb. Mahn expects the big back-and-forth moves will continue.

"I think it's going to be more of an extended pause than a correction," Mahn said.

The drop in commodity prices hurt energy and materials stocks. Retailers also fell ahead of April sales reports on Thursday.

Occidental Petroleum Corp. fell $3.66, or 4.2 percent, to $82.88, while Best Buy Co. slid $1.65, or 3.7 percent, to $42.90.

Investors looking for continued signs of a U.S. rebound found another encouraging sign on employment Wednesday. Payroll company ADP said private employers added 32,000 jobs last month. That was slightly above expectations.

The ADP report is seen an early indicator of the government's monthly employment report, though there are often wide variations because the ADP only accounts for private-sector jobs.

The Labor Department is expected to report Friday that the unemployment rate was unchanged at 9.7 percent last month while employers added 200,000 jobs. Unemployment is considered the main obstacle to a sustained recovery of the U.S. economy.

A trade group said that services industries expanded in April at a slower pace than economists expected. The Institute for Supply Management said its service sector index was unchanged at 55.4 in April from March. Analysts expected an increase. Still, a reading above 50 indicates growth.

About four stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.5 billion shares, in line with Tuesday.

The Russell 2000 index of smaller companies fell 11.12, or 1.6 percent, to 698.58.

Britain's FTSE 100 fell 1.3 percent, Germany's DAX index dropped 0.8 percent, and France's CAC-40 fell 1.4 percent. In Greece, the main stock index fell 3.9 percent. Portugal's PSI 20 lost 1.5 percent and Spain's main index fell 2.2 percent.

Senate Backs Anti-Bailout Changes to Financial Bill

The U.S. Senate today broke a logjam in the debate over financial-overhaul legislation, approving two amendments that strengthen language aimed at ending taxpayer- funded bailouts.

Lawmakers voted 93-5 for an amendment offered by Senators Christopher Dodd, a Connecticut Democrat, and Richard Shelby, an Alabama Republican, to drop a $50 billion industry-supported fund to cover the cost of unwinding a failing firm and ensure that shareholders and unsecured creditors bear losses when the government liquidates a business.

The Senate also voted 96-1 in favor of an amendment offered by Senator Barbara Boxer, a California Democrat, to bar use of taxpayer funds to rescue failing financial companies.

“We’ve ended the too-big-to-fail debate,” Dodd, the Senate Banking Committee chairman who drafted the overhaul bill, told reporters after the votes. “No longer do I expect any argument to be made that this bill exposes the American taxpayer.”

Both amendments were aimed at allaying Republican concerns that Dodd’s bill would leave loopholes that would allow future bailouts of Wall Street firms. The Senate is debating the proposal for a sweeping rewrite of rules governing Wall Street, intended to prevent a repeat of the 2008 financial crisis that led the U.S. to extend $700 billion in taxpayer aid to companies including Citigroup Inc. and Bank of America Corp.

Republicans had focused their opposition on a provision giving the government authority to liquidate failing financial firms whose collapse would roil the economy.

Held Up Votes

Dodd today announced he and Shelby struck a deal on the amendment after a week of negotiations that held up votes on other changes.

After the floor debate began last week, Democrats said Republicans were obstructing progress by refusing to consider any changes until the Shelby-Dodd language was completed. Today’s votes open the door to discussions of the other amendments.

The measure would bar the Federal Reserve from propping up firms such as New York-based insurer American International Group Inc. and require that the Fed only use its emergency lending authority to help solvent firms. It calls for most large financial companies to be liquidated through bankruptcy and Congress to approve the use of debt guarantees.

Shelby

Shelby said his agreement with Dodd didn’t mean he supported the broader bill.

“This over 1,500-page bill contains a broad reach into the global financial system and the American economy,” Shelby said on the Senate floor. “Now that we are over this particular hurdle, we will be addressing many additional concerns that we have in the coming days.”

The Boxer amendment would require firms seized by regulators to be liquidated. Any funds the government spends to unwind a failed firm would be recovered through the sale of the company’s assets or fees on the financial industry.

Dodd’s bill, which was approved by the Senate Banking Committee in March over Republican opposition, is based on a proposal President Barack Obama released last June. The measure is similar to legislation approved by the House of Representatives in December.

Life With The iPad: Enterprise Ready

It's been two full days of travel with only an iPad, and I have almost stopped reaching for the mouse, remembering instead that I can merely touch the screen.

Back in the office, I confess I have touched my MacBook Pro screen several times now. I still badly want to swipe between apps but almost instinctively hit the home button now, effectively leaving one program to start another, resigned to single tasking.

I yearn at times for a transparent file system; I sometimes call this device an iPadlock. But through a series of powerful new iPad apps, and a few, simple, glued-together solutions, I can say that this flawed but stunning new device is a capable productivity tool for nearly anyone, either as an addition to a mobile office or as a stand-in replacement during a short business trip.

What follows are my personal experiences, including some details on what I would consider enterprise-class professional productivity application. In some cases, I've included short video demonstrations of these applications. Each is available today, many of them are free (at least the client-side iPad application), and often they require some information from an IT department to function, I'll focus first on the highs and lows of the iPad. Then, I'll explain my application adventures in depth.

For the latest Apple tablet news, opinion and conversation, be sure to check out InformationWeek's Special Report: Tablet Wars -- Can Apple Three-peat?

The Bad Stuff

The iPad's shortcomings have been well documented, but it's lack of multitasking is its biggest downfall, and for some it may be a deal-killer, at least until an OS upgrade fixes this in the fall. It's unfathomable that a machine that probably has the processing power of a Cray can't do more than two things at once. More than anything, it's just annoying: a personal productivity killer at worst and inelegant at best. Not being able to listen to Pandora while crafting a document or reading e-mail just seems all 1980s.

I'm sure it's all about battery life, and not Apple's inability to program a virtual memory operating system. Programs like e-mail and AIM keep their lights on, so if you're working in one program, you'll get an AIM alert, including the actual IM right there, along with an option to relaunch the app or ignore it. E-mail also keeps tally of your message volume in its icon on the desktop. Calendar alerts also bust through any app.

Lieberman encouraged energy bill will be on track

WASHINGTON (AP) - A day after bipartisan support for an energy and climate change bill appeared to crumble, a Senate sponsor said Sunday he was optimistic the coalition would regroup and lawmakers would consider the measure this year.

Sen. Joe Lieberman, a Connecticut independent, said in an interview with The Associated Press that he was encouraged after talking to Majority Leader Harry Reid, D-Nev., and Sen. Lindsey Graham, R-S.C., who were at odds over Reid's suggestion that an immigration overhaul might be considered ahead of the energy bill.

Lieberman said Reid pledged to bring the energy bill to the full Senate as soon as possible this year. In a separate conversation, according to Lieberman, Graham reiterated his support for the energy bill once it's no longer tangled up with immigration legislation.

"Now I'm encouraged," Lieberman said. Asked when the energy bill might advance, he said, "Sometime soon, as soon as we can get Lindsey on board."

Graham has threatened to withhold his support for the energy bill if Senate Democrats opt to deal first with immigration. He accused Reid of a "cynical political ploy" in suggesting the change, which comes as Reid faces a difficult re-election in heavily Hispanic Nevada and immigration legislation is a priority for Hispanics.

Sen. John Kerry, D-Mass., who worked with Graham and Lieberman on the energy bill, has postponed releasing the legislation on Monday in light of the dispute over what Reid may do with the immigration bill.

Reid's spokesman Jim Manley, discussing the energy bill, said Sunday that Reid "fully plans to bring the final product to the floor, but it's going to need broad bipartisan support."

Lieberman said it is unlikely immigration legislation would advance without Graham's support. Democrats are one vote shy of the 60 votes needed to push a bill toward a final vote. United opposition from Republicans would stop the bill from going that far.

Senators appearing on the Sunday television news shows disagreed about whether immigration should be on the Senate agenda this year and whether the energy bill could be handled before the end of the year if immigration legislation were considered first.

"I just don't think this is the right time to take up this issue with the border security problems, the drug wars going on across the border, 10 percent unemployment," said Minority Leader Mitch McConnell, R-Ky. "It just strikes me that our time would be better spent at the federal level on other issues."

Sen. Robert Menendez, D-N.J., said he believes whichever legislation is ready first will be dealt with first in the Senate. However, Sen. Saxby Chambliss, R-Ga., said he thought neither bill should be taken up because of the time needed for financial regulation legislation and for the annual budget bills.

McConnell appeared on "Fox News Sunday" while Menendez and Chambliss spoke on CNN's "State of the Union."

Retailers see green in ‘green’ business

CINCINNATI - Going green has become good business.

Just look at store shelves: Sales of "green" products, such as organic foods and natural personal care items, have jumped 15 percent since 2006, according to research firm Mintel International.

A wave of promotion is hitting consumers during this week's 40th anniversary Earth Day observances: Hanes says it can put you in eco-friendly underwear, Frito-Lay offers Sun Chips from a bag you can toss in a compost pile, and Target stores invite you to use their recycling bins.

Some promotions sound more like image-buffing than Earth-saving, and big companies still have a long way to go to significantly reduce their impacts on air, water and other resources. But environmentalists say the drivers of American consumer culture are starting to make real strides.

"It's a far cry from where we were," said Elizabeth Sturcken, who manages corporate partnerships for the Environmental Defense Fund. "Companies are seeing the economic value of going green."

It's not just products. Cutting lighting and heating costs, using less packaging, streamlining transportation to save gas, recycling more instead of throwing away — those all help both the environment and the bottom line.

"It would be easy to say that companies really care about the environment only in the third week of April," said Joel Makower, a consultant and executive editor of Greener World Media Inc. "But most big companies have been taking significant steps. ... The fact is, they're doing it for all the right business reasons."

Wal-Mart’s efforts
The behemoth that might drive even more serious improvements is retailer Wal-Mart Stores Inc. It's urging its suppliers to reduce 20 million metric tons of greenhouse gas emissions by the end of 2015, on top of its own moves to build more energy-efficient stores, use more alternative fuels in its trucks, and reduce packaging.

Shopper Jim Farmer, 68, voiced his approval while looking through Earth Day-themed aisles recently at a West Chester, Ohio, Supercenter.

"I think Wal-Mart is trying to help, and that's great," Farmer said. "I have children and grandchildren, and we want to make the Earth a better place for them."

While surveys show that many consumers want to buy environmentally friendly products, the Great Recession made them reluctant to pay more for them, dampening what had been rapid sales growth.

Mintel International says sales of natural and organic foods and beverages rose 24 percent in 2006-'08, then slowed to less than 2 percent last year; sales of green personal care products jumped 18 percent in '06-'08, but only 1.2 percent last year.

Wal-Mart tells shoppers in promoting its environmental moves that the cost savings are passed on in low prices: "not just Earth-friendly, we're also being wallet-friendly." And P&G's current "Future Friendly" campaign touts both the environmental and financial benefits of products such as Tide Cold Water detergent, which curtails the toll on utility bills of heating washer water. The consumer products giant also is giving coupons for its green products, and pledges to reach 50 million households with educational information.

That's only part of a sustainability drive that P&G has made companywide. In one effort, it created a unit three years ago to find new uses for byproducts and leftovers that would otherwise go into incinerators and landfills.

So now, Clairol hair coloring ingredients help make tires shine, Duracell batteries help make bricks, and materials from Pampers diapers and Always maxi pads absorb industrial leaks and spills.

Consumer guide
Scott Burns, who heads the unit, said the program has reduced waste disposal by 30 percent, saving money and increasing recycling revenue.

One area where product makers still need to improve, activists say, is in telling consumers in detail about ingredients so they can make their own decisions.

Chris Haack, a Mintel consumer market analyst, adds that many products that claim to be green, natural or organic might have only one ingredient or material that fits the bill. And there aren't consistent standards for what qualifies as environmentally helpful.

"There is still a lot of what's called greenwashing out there," Haack said. "There are a million labels ... consumers are befuddled. They just don't know what to trust."

With the explosion in green promotional claims, the Federal Trade Commission is reviewing its guidelines for environmental marketing. Meanwhile, Wal-Mart says it has been working with suppliers to develop a "Sustainable Product Index" to help guide consumers.

Goldman's CEO and board are named in lawsuit

NEW YORK – Goldman Sachs's CEO and other top officers are accused in a pair of shareholder lawsuits of lax oversight in deals involving risky mortage-backed securities that later went bad.

The lawsuits filed Thursday in New York State Supreme Court name Lloyd Blankfein and the firm's entire board of directors as defendants.

The suits follow civil fraud charges filed last week by the Securities and Exchange Commission over the same investments.

The SEC says Goldman committed fraud by failing to disclose important information about the securities that might have scared off investors.

The two suits, filed by shareholders Robert Rosinek and Morton Spiegel, accuse Blankfein and other officers of "systematic failure" over 3 1/2 years for not properly vetting 23 mortgage-linked deals at the center of the SEC suit. Those deals, called Abacus, led to $1 billion in losses.

A Goldman spokesman declined to comment.

The suits appear to be the first shareholder cases related to the Abacus deals. If so, they may mark the start of what legal experts expect will be a flood of shareholder cases against Goldman Sachs.

The plaintiffs seek unspecified monetary damages.

The mortgage-backed securities at the heart of the lawsuits are widely blamed for worsening the financial system's troubles by allowing investors to place massive bets on the direction of the housing market. That triggered major losses at a number of financial institutions after the housing market started to crumble.

As in the SEC case, the shareholders allege that Goldman should have noted in marketing the Abacus securities that a hedge fund betting they would fall in value had helped choose the mortgages on which they were based.

Within a few months of being sold to investors, the value of the Abacus securities fell fast. The hedge fund, Paulson & Co., run by billionaire John Paulson, pocketed $1 billion in profits, the suits says.

Paulson has not been accused of wrongdoing by SEC, and is not as a defendant in the shareholder cases.