Tag Archives: Company coverage
by Chris Roush
Paul Fishleder, the deputy investigations editor at The New York Times, was asked to comment by Talking Biz News about the paper’s recent investigation into Wal-Mart’s bribery tactics in Mexico.
The stories won reporter David Barstow the Talking Biz News co-Business Journalist of the Year Award for 2012.
Barstow’s reporting began with a tip from a source. He had two huge challenges to overcome. First off, he had to discover and recreate what had happened inside the secret precincts at the top of Wal-Mart without the hope of cooperation from anyone inside Wal-Mart. And in Mexico, he had to demonstrate that bribes had been paid even though no one would admit to receiving them.
He learned that a former Wal-Mart de Mexico lawyer named Sergio Cicero Zapata had contacted company executives in Arkansas and told them how for years he and his bosses had used systematic bribery to obtain zoning rulings and construction permits that allowed Wal-Mart to win market dominance in every corner of Mexico. There were hundreds of suspect payments, totaling more than $24 million.
Wal-Mart began its own investigation. Yet within months, just as the inquiry began to bear fruit, the company’s leaders shut it down. No doubt they believed that the matter would quietly end there. And it would have, but for Barstow.
Barstow obtained hundreds of highly confidential Wal-Mart documents, an amazing trove of memos and e-mails. He interviewed the key players here and in Mexico. Before he was through, he knew more about how Wal-Mart dealt with this sorry episode than Wal-Mart did. He was able to piece together the hidden corporate drama — in all its machinations and power plays — of an internal investigation that Wal-Mart’s leaders feared could cripple it as it expanded through Latin American and around the world.
Barstow found the smoking gun. He turned up Wal-Mart memos documenting that its investigators had in fact found powerful evidence that Cicero was right. There was “reasonable suspicion to believe that Mexican and USA laws have been violated,” they told their superiors. Yet Wal-Mart never notified law enforcement officials in either country.
Barstow did the shoe-leather investigation that Wal-Mart should have done in the first place, unearthing the wrongdoing that the bosses in Arkansas chose to ignore.
Traveling across Mexico with a Mexican reporter, Alejandra Xanic von Bertrab, he tunneled into the databases and filing cabinets of the local bureaucracies that govern construction permits and zoning issues. He discovered how, in city after city, Wal-Mart had paid bribes to win approvals that the law didn’t allow.
Where Barstow most completely exposed the corruption was in Teotihuacan, where in 2004, Wal-Mart bribed its way around regulation after regulation to build a supermarket in the shadow of the ancient pyramids, one of the most venerated places in Mexico.: There was the bribe for a crucial, last-minute change in a zoning map; the payment for a traffic permit; the payment for the blessing of the Institute of Archaeology and History, official guardian of Mexico’s cultural treasures, and the bribes to Teotihuacan’s mayor for the all-important construction permit. The store opened on schedule, in time for Christmas shopping.
As a direct result of Barstow’s reporting:
• The Justice Department and the Securities and Exchange Commission are investigating Wal-Mart for violations of the federal antibribery law, the Foreign Corrupt Practices Act.
* The Times’s revelations brought a sudden halt to a growing movement to ease up on FCPA enforcement.
* In Mexico, authorities are investigating Wal-Mart, the country’s largest private employer, for possible violations of its anticorruption laws.
• Even before his first piece was published, Barstow shook Wal-Mart into action. Wal-Mart was in a routine worldwide anticorruption audit when it learned that Barstow was on the Mexican case. The company hurriedly notified federal authorities and reopened its own investigation.
• In mid-November 2012, Wal-Mart disclosed in a regulatory filing that it was examining possible violations of the antibribery law in three of its other primary overseas markets — China, India and Brazil.
• Amid shareholder suits and protests, Wal-Mart has radically overhauled its compliance and investigative protocols, and a number of central players in the scandal have left the company.
• Its expansion plans have been compromised in Mexico and the United States, and are likely to be slowed in other overseas markets, too.
• By year’s end, Wal-Mart’s investigation had cost it nearly $100 million.
No company enjoys admitting that it is having financial troubles or is in danger of shutting its doors, and typically does everything in its power to spin a positive outlook to the media and consumers.
This desire to maintain a successful image makes it even trickier for a reporter to cover foundering companies.
In my weekend reading, I came across an article from The Wall Street Journal, “For Four Retailers, Do or Die.” The article highlighted Best Buy Co., J.C. Penney Co., RadioShack Corp. and Sears Holdings Corp. as four retailers who, going into 2013, have 12 critical months ahead of them to either turn around or fail.
In addition to these four companies that have gotten the brunt of tough coverage from analysts and retail reporters in the past year as they’ve faced financial woes, smaller chains such as Abercrombie & Fitch Co., Pacific Sunwear of California Inc. and Barnes & Noble Inc. have also experienced trouble.
As roundups of the year are published and commentators are predicting which companies will may disappear in 2013, such as this one by 24/7 Wall St., I’m left wondering how business journalists should best approach stories about struggling retailers and also how they should handle the relationship with those companies.
What is the best way to approach the public relations team and company executives for commentary and honest answers when both parties know that the article most likely won’t make the company involved look good?
I’ve looked at some stories that have been published during the past year to see how news outlets have covered these retailers and how journalists have worked with the company to quote it in the story.
From most of the stories that I read, the best stories that covered difficult subjects removed any opinion about a company and inserted indisputable facts and figures first, before quoting analysts or investors, who obviously influence the tone of a story. Many of the stories cited sales figures, comparing them to previous years and to competitors, or took a look at market share.
The reporters would also look at retail trends in recent years and illustrate whether retailers had kept pace or stayed ahead of trends or had fallen behind and started too late.
The most reliable of the stories also made mentions of attempting to talk to a company, or, at best, quoted executives at the company or public relations officials with whom the reporters had had personal conversations.
Bloomberg published a story in October about Abercrombie’s declining sales and bizarre requests by its Chief Executive Officer Michael Jeffries during corporate jet flights. The only comment from the company present in the article is an e-mailed statement provided by the company that said the board supported Jeffries’s strategy for the company.
“In an e-mailed statement provided by the company, lead independent director Craig Stapleton said the board supports Jeffries’s strategy. The company doesn’t comment on rumors and speculation, General Counsel Rocky Robins said in the same e- mail.”
This type of general e-mailed statement provides no information, and refusals by a company to comment at all seems far too common in company coverage stories. Those kind of statements aren’t beneficial to the company and its public relations team, to the reporter or to the consumers of news.
A lack of comment doesn’t allow the company to share its side of the story and only makes it look guilty or having no good answer or rebuttal to the questions a reporter is asking. A simple statement, such as the e-mailed one in the Abercrombie story, is better than no commentary, but not by much.
If companies are offered a voice in a story about them — and they should be if a story is fair an accurate — then they should take it.
The best type of comment, of course, is one that provides both accurate information and insight into a company’s situation from either a PR person for the company or from an executive. This is more rare, and sometimes when this does happen, the person will ask for anonymity in a story.
In the past, I’ve covered a company whose public relations team called me with some negative information about the company and provided me with supporting quotes, but would not let me give the names of my sources in the story. No matter how much I asked, they refused to budge.
In this case, unfortunately, the PR team seems to have the upper hand, as the reporter wants to scoop the information and can typically get permissions from editors to publish the story. In August, The Journal wrote a story about Best Buy’s turnaround plan, quoting “people familiar with the matter,” which is one of the most common ways to quote an anonymous source.
Other popular ways that I’ve seen reporters quote a company in a story that has negative undertones is typically to pull quotes from a conference call, such as this story about J.C. Penney’s marketing strategy by The Journal in June.
A significant number of business stories quote conference calls, which I don’t believe is the best way to get the voice of a company into a story. This shortcut can be beneficial when a reporter is pressed for time and needs to get a story out quickly or has repeatedly tried to get a company to comment to no avail.
Using a conference call or investor conference quote as a replacement to interacting personally with public relations seems lazy and takes away the possibility of developing a relationship with the company and receiving newsbreaking information in the future.
While calling to ask probing or negative questions about a company isn’t always the easiest, it provides the opportunity to receive the most accurate and original answers, which can lead to the best story.
by Chris Roush
David Barstow of The New York Times had two bylines in 2012.
But those two stories have shaken the world’s largest retailer and what investors and consumers think about it.
The first story, published on April 21, disclosed how Wal-Mart’s Mexican operations were using bribes to expand their business. Through nearly 8,000 words, Barstow’s expose presenting damning evidence, and the company’s stock price fell 5 percent.
The second story, published on Dec. 18, looked closer at the problem. Barstow wrote:
Rather, Wal-Mart de Mexico was an aggressive and creative corrupter, offering large payoffs to get what the law otherwise prohibited. It used bribes to subvert democratic governance — public votes, open debates, transparent procedures. It used bribes to circumvent regulatory safeguards that protect Mexican citizens from unsafe construction. It used bribes to outflank rivals.
Through confidential Wal-Mart documents, The Times identified 19 store sites across Mexico that were the target of Wal-Mart de Mexico’s bribes. The Times then matched information about specific bribes against permit records for each site. Clear patterns emerged. Over and over, for example, the dates of bribe payments coincided with dates when critical permits were issued. Again and again, the strictly forbidden became miraculously attainable.
Ryan Chittum of Columbia Journalism Review called the first story “one of the most damning exposés of corporate corruption I’ve seen in years. It’s an incredible piece of journalism.” And it is for these two stories that Barstow is named the Talking Biz News co-Business Journalist of the Year for 2012.
To be sure, Barstow’s work has not been while assigned to the business news desk. The stories have been while he is part of the investigative desk run by Matt Purdy. But the stories are classical business journalism, using internal company documents and extensive on-the-ground interviews to uncover a company’s corrupt practices. The fact that it’s one of the largest companies in the world makes the stories even better.
The first story led to the longest PR response to a journalist’s story that I have ever seen a company issue. And the first story has already awarded the Barlett & Steele Award for Investigative Business Journalism by the Donald W. Reynolds National Center for Business Journalism. I’d expect it to be a serious Pulitzer contender next year.
Barstow, who joined the paper on the metro desk in 1999, has been an investigative reporter for The Times since 2002. This is not the first time that his work has garnered national recognition.
In 2002 and 2003, Barstow reported extensively on workplace safety in America, leading a team of journalists that produced two series for The Times and an hour-long documentary for the PBS program “Frontline.” The two series, “Dangerous Business” and “When Workers Die,” won the Pulitzer Prize for public service in 2004. The two series and the documentary were also recognized with the duPont Silver Baton, an award long regarded as the Pulitzer Prize of television reporting.
In 2009, he won the Pulitzer Prize for investigative reporting for “Message Machine,” two articles that exposed a covert Pentagon campaign to use retired military officers, working as analysts for television and radio networks, to reiterate administration “talking points” about the war on terror.
Before joining the paper, Barstow worked for The St. Petersburg Times in Florida beginning in 1990, reporting on a wide range of issues. While there, he was a finalist for three Pulitzer Prizes: in 1997, he was the lead writer for coverage of race riots and was a finalist for spot news reporting; in 1998, he helped lead coverage of financial wrongdoing at the National Baptist Convention and was a finalist for investigative reporting; and, that same year, he wrote a series of stories about tobacco litigation and was a finalist for explanatory journalism.
Before joining The St. Petersburg Times, Barstow was a reporter for The Rochester Times-Union in upstate New York.
by Chris Roush
The Securities and Exchange Commission charged digital financial media company TheStreet.com and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.
The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year. The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance.
They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting, the government agency alleges. Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services. The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.
The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges.
“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, director of the SEC’s New York Regional Office, in a statement. “The SEC will continue to root out accounting fraud and punish the executives responsible.”
According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes. After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud.
Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years. Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years. Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws.
Read more here.
by Chris Roush
Michelle Leder of Footnoted.org has an interesting post on Tuesday noting that Wal-Mart Stores warned in its 10-Q filing two weeks ago about the New York Times article that ran Tuesday about its Mexican operations.
Leder writes, “As with most of what we find, we’ll often flag something, and wait for events to unfold. Sometimes, this happens relatively quickly and sometimes it can take six months or longer. At Wal-Mart, it took exactly two weeks. Here’s the new disclosure that caught our attention two weeks ago:
“The Company expects that there will be ongoing media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company’s role as a corporate citizen.”
“The additional news article that Wal-Mart seemed to be referring to was this sharply researched piece in today’s New York Times, which talked about a shocking pattern of corruption. Here’s a key paragraph from the Times’ piece:
“Rather, Wal-Mart de Mexico was an aggressive and creative corrupter, offering large payoffs to get what the law otherwise prohibited. It used bribes to subvert democratic governance — public votes, open debates, transparent procedures. It used bribes to circumvent regulatory safeguards that protect Mexican citizens from unsafe construction. It used bribes to outflank rivals.”
“Shortly after the story first posted yesterday on the Times’ site, Wal-Mart put out this statement, which included a video taped by Wal-Mart Vice President for Corporate Communications David Tovar. The statement includes numbers that we haven’t seen in Wal-Mart’s SEC disclosures on the scope of its ongoing efforts related to the Foreign Corrupt Practices Act investigation, including hiring more than 300 third-party legal and accounting experts. (In the Q, the company notes that it spent $48 million on this during the third quarter and $99 million during the first three quarters).”
Read more here.
by Chris Roush
Tim Worstall of Forbes.com writes about a writing technique used by some business journalists when covering daily stock price changes.
Worstall writes, “A little insight into the way that a certain form of financial journalism works. The financial journalism that talks about short term movements in prices on markets that is. In this case, the fall in Apple‘s share price on Friday.
“Here’s what we get told up at the top:
Apple Inc shares fell 3.9 percent on Friday after the iPhone 5 debuted in China to a cool reception and two analysts cut shipment forecasts.
“OK, note the ‘after’ there. We’re not actually directly being told that Apple share fell because of the analysts or the cool reception. But everyone will take it as actually meaning that.
“And that’s not how share prices actually work. The best description from the academic literature is as a ‘random walk.’ Sure, over the long term, share prices are indeed driven by real events. Apple’s the world’s most valuable company because it’s one of the most gargantually profitable. Over periods of months or years stock markets do get prices around right. But over hours or days, just not so much. All of the academic research says that these very short term movements really are just random. So on a particular day a few more want to sell than buy: the price goes down. A couple of days (hours, seconds?) the reverse is true and the reverse happens.
“However, we humans are story telling creatures. And where there isn’t one we’ll invent one so that we can make sense of the world. Things just happening doesn’t suit our worldview: so share prices don’t move based upon the animal instincts of investors. There has to be some news, a story, to have made them change their minds and thus prices.”
Read more here.
by Liz Hester
European Union banks are getting a new monitor, which will have the ability to require them to hold more capital and unwind those that are hurting the system.
Here are some of the details from the Wall Street Journal:
European Union finance ministers reached a landmark deal early Thursday that would bring many of the continent’s banks under a single supervisor, in what governments hope will be a major step toward resolving their three-year-old debt crisis.
Ministers said the European Central Bank would start policing the most important and vulnerable banks in the euro zone and other countries that choose to join the new supervisory regime next year. Once it takes over, the ECB will be able to force banks to raise their capital buffers and even shut down unsafe lenders.
German Finance Minister Wolfgang Schäuble said national parliaments will be able to ratify the new supervisor by the end of February and “we should have the supervisor in place by the first of March.”
The EU’s Internal Markets Commissioner Michel Barnier, in a tweet, called the agreement “historic.” “Taking these decisions on the supervisor was a night well spent,” he added.
With the deal, which still needs to be signed off by the European Parliament, the currency union has cleared the first real hurdle on the road to a “banking union,” designed to cut the debilitating link between weak banks and their governments.
The huge costs of bailing out failing lenders have already forced Ireland, Spain and Cyprus to ask for help from the currency union’s bailout funds, taking on large debts in the process. Because of that euro-zone leaders decided in June that, once an effective banking supervisor has been set up, they would allow their rescue funds to recapitalize banks directly—thereby shielding their governments from going down with them.
Here’s a few more pieces of the deal from the New York Times:
The pact was hashed out in an all-night session of finance ministers that ended Thursday morning after France and Germany made significant compromises. Under the agreement, between 100 and 200 large banks in the euro zone will fall under the direct supervision of the European Central Bank.
A round of talks a week earlier broke up amid French-German discord over how many banks in the currency union should be covered by the new system.
In a concession to Germany, the finance ministers agreed that thousands of smaller banks would be primarily overseen by national regulators. But to satisfy the French, who wanted all euro zone banks to be held accountable, the E.C.B. would be able to take over supervision of any bank in the region at any time.
The agreement by the finance ministers, which still requires the approval of the European Parliament and some national parliaments including the German Bundestag, made it possible for E.U. leaders arriving here later Thursday to gather in a spirit unity.
One of the most important pieces is that banks that need help can request it directly from the E.C.B. Here’s how, according to Bloomberg:
Under today’s agreement, euro-area finance ministers could use the ESM to recapitalize banks directly if they make a unanimous request to the ECB to take over direct oversight of a troubled institution. Finance chiefs will need to develop guidelines for when they might offer aid to banks, instead of going through national governments as they did with Spain’s financial-sector rescue program.
Dutch Finance Minister Jeroen Dijsselbloem said the timing of bank aid remains up in the air. “We did not make any agreement on when banks can expect direct recapitalization from the ESM,” he said.
The oversight deal also lays out size thresholds for banks to get direct ECB supervision once the new system is in place. Ministers agreed on central oversight for banks with more than 30 billion euros in assets or with balance sheets that represent at least 20 percent of a nation’s economic output. The guidelines include at least the top three biggest banks of every participating nation unless “justified by particular circumstances.”
What will be interesting to see is how investors, especially those who take stakes in banks and their debt, react to the news. It should help standardize bank valuations across those that are overseen by the E.U. But there are many details to work out and for large, multi-national banks, it’s yet another regulator they’ll have to comply with, increasing costs across the board.
by Chris Roush
Richard Dukas, who runs a public relations firm in New York, wrote earlier this week here on Talking Biz News about how business journalists can get the most out of their relationships with PR people. His piece has got some great advice.
Dukas advised that business journalists should avoid having an adversarial relationship with PR people if they want to get the most out of them. Treating them with respect, he wrote, is often reciprocated. In theory, that’s a nice, warm feeling to have.
In reality, I say bunk.
An adversarial relationship means that you, the business journalist, are often pushing the company into telling you things that they don’t want to divulge. That’s a good business journalist.
In addition, an adversarial relationship is often required because of mistreatment by PR.
Let me give you a few examples from my career as a business journalist where I believe an adversarial relationship was warranted.
In the 1990s, I covered a large beverage company based in Atlanta for both the Atlanta Journal-Constitution and then Bloomberg News.
One time I proposed a story to the PR people at the company examining its sports marketing strategy. The PR people thought it was a great idea and said they would get back to me to set up some interviews. A week went by, and I heard nothing. So I called again, and I was assured they were working on setting up some interviews.
After another week, the silence got to me. In a phone conversation with a source at the company, I discovered that the PR people had taken my sports marketing strategy story pitch and given it to a reporter who also covered the company at a national newspaper. I was told by my source that a story was likely to appear the next day in that national newspaper.
I was livid, but I did not call the company that day. Instead, I worked as hard as I could to report and write my own story for tomorrow’s paper so it would not seem to my bosses that I had been scooped on my beat.
The next day, however, was extremely adversarial. I rarely, if ever, yell at someone. But two PR people at the company felt my wrath that day. How could I trust or work with them in the future? The situation demanded that I be adversarial, especially after they admitted what they had done.
This was not the only time where a confrontational attitude was warranted toward the PR people at this company. Later, while at Bloomberg, I had requested interviews with the company’s new leadership team. I was promised I would get my interviews. Yet, I saw the company drag its feet in dealing with me so that the executives could speak to The Wall Street Journal and Fortune magazine.
I complained multiple times to a vice president who oversaw corporate communications, which resulted in a verbal confrontation in front of other employees at the company because I felt as if Bloomberg was not being given the respect it deserved.
I encountered another situation at Bloomberg when I wrote a story about a Charlotte-based company being a likely takeover candidate. The company’s stock price was moving abnormally higher, and after making some calls, an analyst who covered the company told me that he thought the business was an M&A target and that was what was causing the higher stock price.
The analyst was quoted in my story. Before I published, I also called the company and was told that its PR person was out of the office and no one else was available to comment. I emphasized to several people at the company the importance of the story and the need for it to respond to what the analyst said. Still, no one returned my calls.
The next day, after the story ran, the PR person left a nasty voice mail for me, questioning my journalistic integrity and why I felt the need to write such a story. I replied back with my own voice mail explaining to him that my story was based on what sources had told me. The conversation degenerated from there into name calling on both sides.
Such an adversarial relationship continues from time to time here at Talking Biz News. For the past 18 months, a business news organization has not talked to me after a blog item ran that was based on original reporting of its market share. They wanted me to run the blog post by them before I posted it. They also accused me of getting the data from their competitor. After they gave me the cold shoulder, I proceeded to spend the next six months posting identical blog items about its market share, updated with the latest data — which I emphasized in the blog posts came from neither the company nor its competitor to prove my point.
That adversarial relationship continues today with this business news organization, which I find ironic. I think my reporting of that business news organization is better because of it. I don’t have to worry about the PR people calling me and trying to spin the message.
I’m not here to say that an adversarial relationship between business journalists and public relations professionals is the preferred mode of operation. I would much rather prefer to work with PR people in a professional manner, and 99 percent of my relationships with PR people have been just that.
But when an adversarial relationship is needed, I find it to be a necessary tool in the business journalist’s arsenal. I would expect the same from PR people if they too felt abused.
by Liz Hester
Four years after the government injected billions of dollars into American International Group Inc. as it teetered on the brink of bankruptcy and was deemed too intertwined with the financial system to fail, it’s all over. The U.S. Treasury said Tuesday is was selling the last of its holdings for a profit.
Here are a few details from the Wall Street Journal:
The Treasury Department said it would generate $7.6 billion in proceeds from its sale of American International Group Inc. shares, as it sells nearly all its remaining holdings in the insurer it helped rescue at the height of the financial crisis.
The government said Tuesday it would sell about 234 million common shares at $32.50 each, matching the price it got when it sold an even larger slug of shares in September. AIG’s stock closed Monday at $33.36, and jumped 1.6% to $33.90 in heavy pre-market trading Tuesday.
The transaction is expected to close on Friday. By Treasury’s calculation, the final round of sales means the government will have a net positive return on its AIG bailout of $22.7 billion.
This step in AIG’s turnaround, which essentially closes the book on one of the most controversial bailouts of the financial crisis, seemed nearly unattainable in 2008, when the insurer’s imminent collapse sent shockwaves through the global economy. At the time, U.S. officials cobbled together a rescue package for AIG that effectively nationalized the insurer, arguing that AIG needed to survive to prevent a financial apocalypse.
And overall, the deal has been much better than expected according to this account from the New York Times:
With the latest sale, taxpayers have gained about $22.7 billion from a bailout that many predicted would prompt a staggering loss. In an effort to stabilize the global banking system, the government rescued A.I.G. just days after the failure of Lehman Brothers.
The stock sale also means that A.I.G. is a fully private enterprise once more, after the government owned as much as 92 percent of its shares. After the sale, the Treasury Department will hold only warrants to buy about 2.7 million shares of A.I.G. common stock, which will also be sold to generate a profit.
“On behalf of the 62,000 employees of A.I.G., it is my honor and privilege to thank America for giving us the opportunity to keep our promise to make America whole on its investment in A.I.G. plus a substantial profit,” Robert H. Benmosche, the insurer’s chief executive, said in a statement. “Thank you America. Let’s bring on tomorrow.”
Bloomberg wrote a piece about larger-than-life CEO Robert Benmosche and his strategy for the company. Excerpts follow:
“We are not at the finish line,” Benmosche, 68, wrote yesterday in a memo to employees of the New York-based firm after the U.S. said it would record a $22.7 billion profit on the $182.3 billion rescue. “We have to exceed the expectations of our clients, our investors, our regulators, and our other stakeholders around the world.”
Benmosche, who took over in 2009, is cutting costs and seeking to restore the reputation of a firm tarnished by its near collapse. After selling non-U.S. life insurance operations, the company is increasingly reliant on property-casualty coverage at the unit previously known as Chartis, a business that has reported an underwriting loss for four straight years.
AIG is “investing a lot of its energy in trying to execute a turnaround in Chartis,” said Josh Stirling, an analyst at Sanford C. Bernstein & Co. “When this starts to work, earnings are going to start to recover.”
AIG is seeking an underwriting profit of 5 to 10 cents on every dollar of premiums it collects for property-casualty coverage by the end of 2015, according to goals it laid out in a regulatory filing last year. Stirling said the company can get there by cutting expenses, raising prices for coverage, and doing a better job of evaluating risk and handling claims.
And I just love the Reuters story for putting the whole situation into context:
The sale will close the chapter on one of the most politically contentious government rescues of the global financial crisis and turn a profit for taxpayers, which was once thought to be inconceivable.
At one point, the government estimated that it would never recover all of the bailout money, but as AIG restructured and returned to viability, it was able to repay the entire rescue fund plus generate a profit for U.S. taxpayers.
“No taxpayer should be pleased that the government had to rescue this company, but all taxpayers should be pleased with today’s announcement, ending the largest of the government’s financial industry bail-outs with a profit to the Treasury Department,” Jim Millstein, the Treasury’s former chief restructuring officer, said in a statement.
AIG was rescued just before it would have been forced to file for bankruptcy protection in September 2008 as losses on risky derivatives mounted. It was bailed out as the world’s financial system stood at the brink of disaster, shortly after Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America Corp (BAC.N).
AIG was one of the Treasury Department’s most hotly contested bailouts. U.S. lawmakers began calling for Treasury Secretary Timothy Geithner’s resignation after it was revealed that AIG paid $165 million in retention bonuses to employees of the derivatives unit that has been blamed for the company’s financial distress at that time.
No matter what you think of the bonuses, the bailout or the financial crisis, this is good news – exiting a bailout with an unexpected profit. Now that’s reason to celebrate.
by Liz Hester
Bank fines reached a new height yesterday. HSBC Holdings Plc is reportedly planning to settle money-laundering charges for $1.9 billion. Here’s are a few of the details from Bloomberg:
HSBC (HSBA) Holdings Plc will pay at least $1.9 billion in a deferred prosecution agreement that settles U.S. probes of money laundering tied to Europe’s largest bank, a person familiar with the matter said, making it the largest such accord ever.
HSBC, whose top executives were accused of lax oversight by a U.S. Senate subcommittee in July, will forfeit $1.25 billion, the biggest forfeiture ever by a bank, said another person familiar with the matter. It will also pay an addition $665 million in civil penalties, the person said.
In a deferred prosecution agreement, the government allows a target to avoid charges by meeting certain conditions — including the payment of fines or penalties — and by committing to specific reforms, either under the guidance of a monitor, or the creation of an internal compliance panel. The HSBC agreement is set to be announced today, said the people, both of whom asked not to be identified because the matter isn’t public.
Yesterday, Standard Chartered Plc (STAN), Britain’s second-largest bank by market value, agreed to pay $327 million in fines after regulators alleged it violated U.S. sanctions with Iran. The two banks have been the target of investigations by several U.S. regulators. The Department of Justice, the Treasury Department’s Office of Foreign Assets Control, the Federal Reserve, the Office of the Comptroller of the Currency, New York state regulators and the Manhattan District Attorney have all probed HSBC, Standard Chartered, or both.
Here’s the reason for the fines, according to the New York Times:
The settlement with HSBC stems from accusations that the British banking giant transferred billions of dollars on behalf of sanctioned nations like Iran and enabled Mexican drug cartels to launder money through the American financial system, according to officials briefed on the matter. The deal, which will force the bank to forfeit more than $1.2 billion and pay additional penalties, is the largest to emerge from an investigation that has spanned several years and involved multiple government agencies.
The settlement on Tuesday is expected to include a deal with the Manhattan district attorney’s office and a deferred prosecution agreement with the Justice Department, according the officials. The Treasury Department is also expected to join the settlement.
Since January 2009, the Justice and Treasury Departments and Manhattan prosecutors have charged six foreign banks, including Credit Suisse and Barclays. In June, ING Bank reached a $619 million settlement to resolve claims that it had transferred billions of dollars in the United States for Cuba and Iran.
HSBC has been working to offset some problems recently, the Wall Street Journal reported.
The bank, whose history dates to an era when the British empire was at its height, has spent the past two years selling off unprofitable businesses and centralizing its global structure stretched across 80 countries.
HSBC officials now blame that structure for much of their U.S. legal trouble, which began when Immigration and Customs Enforcement agents in 2007 looked at suspicious cash flows involving HSBC branches in Mexico and the U.S.
In the past year, the bank has hired several former U.S. government money-laundering experts to help improve its financial controls. It named Stuart Levey as its top legal officer. Mr. Levey formerly served as the Treasury Department’s top official tracking terrorism and illicit financing. His portfolio includes managing legal officers in HSBC operations around the world.
Many of the HSBC money-laundering problems centered on bulk-cash, U.S. dollar transactions between HSBC’s Mexico and U.S. units. The transactions were detailed in a U.S. Senate investigative report published this past summer.
The report by the Senate Permanent Subcommittee on Investigations detailed a regulatory culture at HSBC that shocked even its own employees, according to testimony provided to the committee and at a hearing.
Senate investigators concluded HSBC did little to clean up operations that should have raised concerns. HSBC’s Mexico bank had a branch in the Cayman Islands that had no offices or staff but held 50,000 client accounts and $2.1 billion in 2008, the report said.
I’m sure there are a many people who are happy to see a fine that’s in proportion to the bank’s revenues. It will be interesting to see if this is the new normal in fines or an outlier.