Deals of the Day: Is It Back to Pre-Crash Days for Wall Street Pay?

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

Amazon: The company will buy rival online footwear retailer Zappos for about $847 million in cash and stock. [WSJ]
Related: Amazon takes out competitor Zappos.com, the on-line shoe seller, in an $807 million all stock deal. Read about deal making here. [WSJ]

Flush with cash: Bristol-Myers Squibb Co. is dipping into its warchest to buy partner MedarexInc. in a $2.1 billion deal that will give the drug giant access to a promising cancer treatment. [WSJ]

Opel up for grabs, still: General Motors and the German government still can’t agree on a buyer for Opel. [WSJ]

Porsche-VW: Porsche CEO Wendelin Wiedeking is leaving the German sports-car maker with immediate effect, hours after the company’s supervisory board approved his plan for a capital increase of at least €5 billion ($7.1 billion) and unanimously backed talks with Qatar over a capital injection. [WSJ]
Related: The fued between the two automakers may be close to a settlement with board meetings at both carmakers and now it’s VW that may end up owning Porsche. [Bloomberg]

Nortel: Remnants of telecom equipment maker are drawing interest. [Businessweek]

ING: The Dutch bank wants to sell its private-banking businesses in Europe and Asia. [WSJ]

Crosstown: Bertelsmann and KKR agreed to buy an 8,000-song catalog from the investment arm of Cargill, the first purchase for their music-rights joint venture. [Bloomberg]

Today in Financial Rescue

Fannie anf Freddie: The first big government bailout of the financial crisis — the takeover of mortgage finance giants Fannie Mae and Freddie Mac — is likely to cost taxpayers more than $100 billion. [CNNMoney]

Financial Institutions

Back to the good old days. That didn’t take long: Wall Street is on track to pay its employees as much as, or even more than, in the pre-crisis days. So far this year, the top six U.S. banks have set aside $74 billion to pay their employees, up from $60 billion in the corresponding period last year. [Washington Post]

CIT: Even though the lender was able to arrange $3 billion in emergency financing from bonholders, its creditors are still pushing for a “pre-packaged” bankruptcy restructuring of the firm by next month. [Bloomberg]

CIT’s loss is there gain: Rosenthal & Rosenthal and Sterling Bancorp may pick up clients after CIT’s brush with bankruptcy left some manufacturers without financing. [Bloomberg]

Wells Fargo’s souring lemons: There are signs that the loans that the bank acquired through its acquisition of Wachovia Corp. are worse than expected. [WSJ]

Goldman Sachs: The Wall Street firm became the first major bank to buy back warrants held by the U.S. Treasury. With the repaymet of the 1.1 billino in warrants taxpayers have been repaid the full $10 billion that the government originally invested in Goldman, along with $318m in dividends. [FT.com]

Bankruptcy & Restructuring

Delphi’s pension bailout: The Pension Benefit Guaranty Corp. agreed to take on $6.2 billion in pension liabilities from bankrupt auto supplier Delphi Corp. making it the second largest pension bail since that of the airlines. [WSJ]

The Tribune Co.: The newspaper company wants a bankruptcy judge to approve bonus plans for top managers. [AP via WSJ]

Buyside

Is it time to play it safe? Cerberus is among potential bidders for P&G’s prescription-drug division, a deal that would ultimately amount to milking cash from a company with a finite horizon. [WSJ]
Related: Relations between Japanese companies and Western investors have never been great. The latest turn could make things worse. Cerberus’s COO is the target of a lawsuit filed by Japanese conglomerate Kokusai Kogyo Holdings. [WSJ]


The Morning Leverage: Don Corleone Financing

In today’s media roundup:

News: Apax Partners is using a pretty hefty chunk of equity - $571 million - to buy personal-finance Web site Bankrate Inc. Despite seeing a steady increase in its traffic as the financial crisis continues, Bankrate, which relies heavily on advertising, has struggled financially along with its customers. LBO Wire’s coverage is here.

The Obama administration has sent a variety of really-difficult-to-interpret documents that purport to further financial reform to Capitol Hill. Feel free to try your hand at comparing the Securities Exchange Act of 1934 with the proposed changes to it, here, to figure out exactly what is going on, and then pity us, because that’s what we’ll be doing today.

The lenders who agreed to temporarily rescue CIT Group Inc. from bankruptcy are making a killing, reports Bloomberg News. According to the news service, the lenders, who include Centerbridge Partners LP and Oaktree Capital Management LLC, made an instant $100 million on an investment said to be almost risk-free. “This is called Don Corleone financing,” one observer told Bloomberg, evoking memories for us of another famous private-equity-is-worse-than-the-mafia reference.

Bloomberg also reports that the music-rights joint venture between Bertelsmann AG and Kohlberg Kravis Roberts & Co. has done its first deal, agreeing to buy an 8,000-song catalog from Carval Investors LLC that includes such priceless gems as Britney Spears’ “Toxic” and Cher’s “Believe.” Both these songs have a certain relevance to the private equity industry these days. We wonder if that had anything to do with the purchase.

The Chicago Tribune has details of Water Street Healthcare Partners’ Kip Kirkpatrick’s early fund-raising for his Illinois State Treasurer campaign. He raised $512,722 in 26 days in June, an amount that poses a serious challenge to his challenger.

Stella D’oro and its sponsor Brynwood Partners feel they’ve been depicted unfairly in all the coverage of ongoing labor issues at the cookie company’s Bronx plant. They want to set the record straight.

If you missed it, our coverage of yesterday’s pay-to-play moves by the Securities and Exchange Commission is here.

Analysis: In the New Yorker, Malcolm Gladwell uses former Bear Stearns chairman Jimmy Cayne as an example to suggest that the roots of the financial crisis “were not structural or cognitive so much as they were psychological.”

Just for fun: Also from the New Yorker, what would happen if the FDA tried to fix the financial crisis?

The Reformed Broker blog holds auditions, American Idol style, to see who might replace Russia in the BRIC-country axis.

Hispanic Immigration Down With Economy

The economy has pushed Mexican immigration to the lowest level in a decade, according this Journal article. But even though the economy has fallen hard on Latino laborers in the U.S., immigrants here aren’t returning home, according to the Pew Hispanic Center.

The reasons for this are also economic: Mexican immigrants risk their lives on the way here, in the process spending most everything they’ve got. Between stepped up border patrol, the high cost of “coyotes” who ferry undocumented workers across the border and Mexico’s own economic problems, immigrants already here have no incentive to return home.

“The sense I get from these numbers is that for the undocumented immigrants it’s been expensive and dangerous to get into the United States,” Jeffrey Passel, a senior demographer at Pew Hispanic, in an interview. “Given that they’re here, going back has both some immediate cost and has some potential cost to them because it’s going to be expensive and dangerous if they want to come back to the U.S.”

The movement of Hispanics into and around the U.S. has long been one of the more reliable economic indicators. In the boom years the growing number of construction and service jobs prompted many Hispanics to move away from the coasts and traditional gateway cities like Los Angeles, while new immigrants increasingly bypassed cities for the suburbs. And, as today’s Journal story notes, fewer Hispanics are showing up at all. The number of Mexicans, both legal and illegal, immigrating to the U.S. is down about 75% from its 2005 peak. Pew Hispanic estimates that the Mexican immigrant population in the U.S. slipped to 11.5 million from 11.6 million between March 2008 and March 2009, according to the story.

With the economy in recession, the spread of diversity around the country has slowed as cities and traditional gateway states reclaim their status as the big go to places for immigrants in search of work.

The results of this “Hispanic immigration indicator” are echoed in this report, released today from the Brookings Institution. The report notes that suburbs, and especially the outer lying areas known as exurbs, have been hit harder than in the last recession.


Placement Agents: Banned

Bad news for placement agents and the smaller private equity firms that rely on them: the Securities and Exchange Commission has proposed new rules that appear to effectively ban the use of placement agents by the private equity industry as far as public pensions are concerned.

Here’s the relevant language:

Banning Third-Party Solicitors: The proposed rule also would prohibit an [investment] adviser and certain of its executives and employees from paying a third party, such as a solicitor or placement agent, to solicit a government client on behalf of the investment adviser.

schapiro_E_20090722190119.jpgBloomberg News
SEC Chairman Mary Schapiro

The proposed rules, which you can read here, also would ban advisers from working with pension plans for two years if they contribute money to an elected official who is in a position to hire money managers. The rules would apply both to advisers as a whole and to certain of their employees, as well as to political incumbents and candidates.

“There should be no place for such practices in an investment advisory industry comprised of fiduciaries that are subject to high standards of ethical conduct,” SEC Chairman Mary Schapiro said in a prepared statement. She added:

“While the SEC can and has brought fraud cases related to kickbacks in adviser pay to play schemes, we are concerned there may be broader efforts and monetary payments being made to influence the selection of advisers to manage government plans.”

The rules are a response to an ongoing pay-to-play scandal at the New York State Common Retirement Fund that has also touched retirement systems in other states, including Arizona and California. They would extend nationwide the principles in a code of conduct recently issued by New York State Attorney General Andrew Cuomo.

The private equity industry has been highly critical of the code of conduct for being unnecessarily punitive to smaller firms, which don’t have the resources to hire internal staff and thus typically rely on placement agents to help them raise capital.

Cuomo issued a statement supporting the new rules.

“We applaud the SEC for the new rules it proposed today,” he said. “These rules will institutionalize on a national scale the principles we established in our Code of Conduct and settlement agreements with Carlyle [Group], Riverstone [Holdings LLC], PCG [Corporate Partners] and others. These reforms are essential to eliminating the corruption in the current system.”

Here’s some of our previous coverage of this topic.

-With Laura Kreutzer

Inside the Amazon-Zappos Deal

You’d think the owners of Zappos.com would want to take the cash and run.

But that wasn’t entirely the case, according to a person familiar with the deal who spoke to Deal Journal.

cowboyboot_DV_20090722191806.jpgJon-Paul Rorech via Flickr

In fact, Zappos’ management insisted on receiving only Amazon stock to pay for their business, which has grown into the largest online shoe retailer. The management viewed Amazon’s shares as undervalued.

So, apparently did Amazon, which initially insisted on paying only cash for the transaction. But Zappos won out, and it secured an all-stock transaction.

Both had a good nose for the market. Amazon shares are up 16.5% since mid-May, the start of the 45-day period over which Amazon averaged the shares it would award Zappos.

The two companies had been in tallks for months, said this person. Amazon’s logic in the deal, this person added, was to take out its largest competitor in the apparel space. One fear was that Zappos would branch out into new categories, eventually posing a bigger threat to Amazon, which itself began solely as an online bookseller.

Morgan Stanley advised Zappos. Lazard Ltd. advised Amazon. The assignments are a coup for both banks, coming amid a dearth of new deal announcements.

And it is also another crowning moment for Sequoia Capital’s Michael Moritz, who put in $35 million in two separate rounds in 2004 and 2005. While it’s unclear what Moritz’s exact ownership stake now is, he would have to retain only a 4% stake to break even at an $807 million valuation. Suffice to say, Moritz can probably buy some new Nikes today.

—By Jeffrey McCracken and Michael Corkery


Morgan Stanley Channels its Inner Hamlet

“We didn’t take as much risk as we could have done,’’ said Morgan Stanley Chief Financial Officer, Colm Kelleher in explaining the firm’s trading revenues on Wednesday.

As wudda, cudda, shuddas go, this one neatly captures Morgan Stanley’s inner Hamlet on the subject of risk. The Wall Street firm has been locked in a seemingly eternal struggle about what risks to take and when to take them. Its second quarter results were a sign that yet again the bank failed to time things correctly.

In the second quarter, Morgan Stanley has largely missed the boat by failing to increase its proprietary trading in fixed income and equities trading to capture the huge profits logged by Goldman Sachs.

Morgan Stanley now plans to “gradually increase its risk,” Kelleher said in an interview with Dow Jones Newswires earlier on Wednesday. It also made a special announcement on Monday to say that it had hired a former hedge fund manager to run its bond and currency trading operation, a move that suggests an embrace of that old bugaboo — risk.

That’s a turnaround from 2007 and 2008. Back then, Morgan Stanley was chastened by $7.8 billion losses from mortgage backed securities. At the time the firm emphasized repeatedly that risk management was a top priority. Morgan Stanley beefed up its risk management ranks and shuffled or ousted executives overseeing those trades.

In April, Kelleher was still playing a cautious tune. “We will show people are ready to take risk when the risk-adjusted returns are attractive,” he said.

In the second quarter, Goldman has shown that trading returns can be quite attractive. Goldman’s risk levels were at all time highs and so were its profits. Envious, Morgan Stanley is now playing a different tune: Risk is back in. The question is whether trading revenues, which tend to be volatile, can be sustained in the second half of the year or whether Morgan Stanley will miss the boat again.

“Now that we’ve got market stability, we feel much more positive about
applying capital to segments and taking advantage of trades,” Kelleher told analysts during Wednesday’s conference call.


More Merrill Lynch Bankers Leave BofA

Four more former Merrill Lynch managing directors have joined the exodus at Bank of America, taking another team of bankers with them.

James Boylan, a managing director in Merrill’s health-care investment-banking unit, recently left the firm and will become head of investment banking at Leerink Swann, a boutique investment bank in Boston that specializes in middle-market health-care deals.

Joining Boylan are former Merrill managing directors Bryan Giraudo, Tony Gibney and Mark Page, each of whom had been with Merrill for several years working on pharmaceutical, biotechnology and medical-device deals.

Boylan, who spent 12 years at Merrill, is taking an additional dozen vice presidents and associates from the former Merrill health-care group. He worked on deals including the sale of bio-surgery firm Lifecell for $1.7 billion to Kinetic Concepts in early 2008 and biotechnology concern Celgene’s $2.9 billion purchase of Pharmion in late 2007.

“The dislocation we’ve all seen has created an opportunity for the specialty firms,” said Boylan, 42 years old, who left Merrill in May. “I was not of the mindset I had to leave. But this firm is known for its health-care knowledge.”

The move comes amid some turbulence in Bank of America’s integration of Merrill, which it acquired late last year. About 20 managing directors have departed in recent months, of about 300 managing directors in Merrill’s investment bank at the end of 2008.

Among those to leave were health-care banker Alan Hartman, who worked on Pfizer’s $68-billion purchase of Wyeth and jumped to boutique investment bank Centerview, and William Rifkin, former Merrill co-chairman of mergers and acquisitions, who left this summer for J.P. Morgan Chase.

A Merrill representative declined to comment. Bank of America Merrill Lynch still has about 60 bankers in the health-care sector in the Americas.

Leerink Swann, which also has offices in New York and San Francisco, has about 35 bankers. Jeff Leerink, who co-founded the firm in 1995, said movement at the bigger investment banks is helping smaller firms. “Clearly there are a lot of mergers out there that created cultures people aren’t as comfortable with, a merger that creates a company focused on being a lender and not as much an adviser. I think this round of musical chairs will continue well into next year,” he said.


Treasury Offers More Details on Which Firms Might Face Tougher Rules

The Treasury Department specified on Wednesday the criteria it envisions the Federal Reserve using to determine which companies are Tier 1 financial holding companies and thus would face tougher scrutiny. This would all have to be approved by Congress, and Treasury was just detailing its proposal on Wednesday.

Treasury said the Fed could designate a U.S. firm as a Tier 1 financial holding company if it finds that “material financial distress at the company could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress based on a consideration of the following criteria:

“(i) the amount and nature of the company’s financial assets;
“(ii) the amount and types of the company’s liabilities, including the degree of reliance on short-term funding;
“(iii) the extent of the company’s off-balance sheet exposures;
“(iv) the extent of the company’s transactions and relationships with other major financial companies;
“(v) the company’s importance as a source of credit for households, businesses and State and local governments and as a source of liquidity for the financial system;
“(vi) the recommendation, if any, of the Financial Services Oversight Council; and
“(vii) any other factors that the Board deems appropriate.

Treasury said the Fed could also designate a foreign firm as a Tier 1 financial holding company using similar criteria but not if that firm “does not have substantial assets or operations in the United States.”


Timing For Goldstein To Leave Hellman & Friedman Could Be Better

If Jeffrey Goldstein departs Hellman & Friedman LLC to become the Treasury Department’s undersecretary for domestic finance, it wouldn’t exactly be music to the ears of the firm’s investors. But it’s not the end of the world, either.

treasury_E_20090722164449.jpgAssociated Press

Goldstein is not one of the three managing directors - Chairman Brian Powers, Chief Executive Philip Hammarskjold and Deputy Chief Executive Patrick Healy - who are included in the first tier of the firm’s key-man clause. If any two of those three leave, a suspension of the fund occurs.

“Brian Powers, Philip Hammarskjold and Patrick Healy really run the show,” said a consultant who has clients that invest with the firm.

Goldstein also was only with the firm for five years, less than most of the other managing directors, and was not a member of the investment committee. Prior to joining Hellman & Friedman, Goldstein was chief financial officer of the World Bank.

Goldstein is, however, a “designated managing director” in the key-man clause, according to partnership documents. If a majority of those so designated leave the firm, that also triggers a key-man event. Before Goldstein’s departure, there are 12 such managing directors.

He is also one of only 15 managing directors at the firm, which is a smaller group than that at many comparable firms, creating a sizable gap just as Hellman & Friedman attempts to wrap up fund-raising for Hellman & Friedman Capital Partners VII LP. That fund so far has raised at least $6 billion.

“It won’t help fund-raising,” said one long-time investor who is participating in Fund VII. “They have a pretty concentrated team so any departure is more material than at other large-cap managers.”

As of Sept. 30, the firm had invested $11.7 billion in 69 companies across six funds since its inception, generating a total net internal rate of return of 27%.

“All of us at Hellman & Friedman are extremely proud that President Obama has announced his intention to nominate Jeffrey Goldstein,” Powers said in a statement. “It is a critical time for our economy and we support Jeffrey’s decision to pursue his continued commitment to public service. We wish him all the best in his new role.”

Mean Street: No Health-Care Reform? It’s Your Own Fault, America

Here’s a question for you, America. Who is more dishonest when it comes to health-care reform?

The Democrats for proposing a multi-trillion dollar health-care overhaul with no new taxes on the middle class? The Republicans for asserting there is no real need to ration government-funded health-care? Or you, for wanting to pay little but receive everything when it comes to your own health?

You know the answer. Of course, it’s you. The politicians are merely doing your bidding.

meanstreet

And that’s exactly why our messy health-care system won’t be properly reformed anytime soon. Sure, President Obama may come up with a giant fudge of health-care reform by year-end.

But true reform? Forget it. The American people refuse to make the hard choices that real reform entails. Heck, Americans don’t even know that there are four basic food groups.

We have a nation in which 27% of us are obese. The airlines have a tough enough time charging an extra carrying penalty for our most rotund travelers. So would you accept healthcare legislation or special taxes that discriminate on the basis of weight?

It’s your choice.

We have a huge, unaffordable national Medicare program that kicks in at the age of 65. Today, there are 44 million of us on Medicare. By 2030 that figure will rise to 79 million and the system will be bankrupt. Would you bless a higher eligibility age or more aggressive means-testing on Medicare to control the program’s uncontrollable expense?

It’s your choice.

We have a giant healthcare system constructed and operating on the assumption that there will be a lawsuit anytime, anything goes wrong. The costs of “defensive medicine” — doctors running scores of tests and procedures “just in case” — easily runs into the tens of billions of dollars annually. But would you be you be willing to sign a waiver of liability to your physician before open-heart surgery?

Nobody is saying these are easy choices. But they are exactly the choices that we have to make. Because, contrary, to some of the assertions of our politicians, we can’t have everything. We simply can’t afford it.

It’s easy to lecture in the abstract. But once things turn personal, it’s hard not to get uneasy. Just look at my own family. My grandmother lived to 91. My grandfather lived to 99. They received taxpayer-subsidized health-care benefits for decades, on top of their Social Security checks.

My grandmother spent the last five years of her life in a nursing home. The last three were expensive ones for the American taxpayer. Median household income for a US family is just about $50,000. Once her savings were used up, it was easily costing Medicare (that means you) more than $50,000 a year to care for her.

Yes, my grandmother had worked and yes, she had supplemental insurance. But the cash she took out of the health-care system was many multiples of what she put in. This gets us to the brutal reality we must confront, both personally and as a country: My grandmother’s numbers just didn’t add up.

And now, President Obama wants to add 40 or 50 million uninsured Americans to a health-care equation that already doesn’t work.

Now, I’m not an ethicist and I’m not a health-care expert. But I can do the math. And the math tells me that what all the politicians are currently fighting about is not true health-care reform. 
That will require much, much harder choices.

America, are you ready?


How One Mine Got a $1.05 Billion Loan Amid the Global Financial Crisis

The past year has seen the global economy go into a free fall, the credit markets seize up, the price of commodities tumble and governments around the world pump hundreds of billions of dollars into their nations’ financial systems.

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Worker at a copper mine in Chile

Not exactly the best time to go out into the market in search of financing.

That didn’t stop Antofagasta from obtaining a $1.05 billion loan from a consortium of banks and lenders to help finance the development of Minera Esperanza, a copper-mining joint venture between a Chilean mining concern and Japan’s Marubeni. Last year, Marubeni acquired the stake in the Esperanza project from Antofagasta for $1.3 billion. The consortium lenders include: government-run export credit agencies Japan Bank for International Cooperation, Export Development Canada and Germany’s KfW IPEX-Bank GmbH and commercial banks Mizuho Financial Group, Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Banking Corp., Calyon, ING Capital, Santander and Natixis.

For insight into how this deal got done, Deal Journal chatted with Sergio Galvis, a partner with Sullivan & Cromwell who heads the law firm’s Latin American Group and coordinates its practice in Spain. Sullivan & Cromwell advised on the deal.

* * *

Deal Journal: In October when you began negotiating the financing, the credit markets were frozen, the global financial crisis was in full swing and each week seem to bring a new bank rescue. So how did you get this deal done?
Sergio Galvis:The sponsors developed a very good strategy. First, Antofagasta brought in Marubeni, and then together they developed a financing plan with two types of lenders. This really gets to the question of how this got done in this environment. There were government lenders, basically export credit agencies, which were working from a view point that copper is a strategic resource and they wanted to make sure the customers have access to this strategic resource. Therefore, they were committed to lending in order to build capacity even in the midst of the economic crisis, because they knew this capacity would be there for the next 20-30 years. At the same time, commercial banks were brought in to lend side-by-side with the government lenders, so that this is very much a commercial-terms driven financing instead of a public-sector driven financing.

DJ: How important was it to the commercial lenders to have governments also willing to lend here?
Galvis: It’s important in couple of ways. First, there is the management of political risk, especially in emerging markets. If you are lending side-by-side with governments, you take comfort as a commercial lender that the government where the project is located is less likely to take action that will hurt other governments. Second, in this environment, the export credit agencies added substantially to the overall availability of credit in the market.

DJ: Given the economic climate and slide in the price of copper, did the commercial lenders ever get skittish?
Galvis: What the lenders did was traditional, on-balance-sheet commercial lending. They focused on the fact that it is an asset that they are lending against, not a securitized mortgage, but a real asset. They focused on traditional criteria like debt-service coverage ratios, debt-equity ratios, and life of loan and life-of-mine coverage ratios.

DJ: How was the deal structured so that the drop in copper prices did not become an issue?
Galvis: The financing was shaped in a way so that there was a lot of tolerance for movement in copper prices. The reason is because it is a 12-year loan, and over the course of that period there can be a lot of movement in prices. Even though copper prices fell dramatically and quickly back in October, there was still enough flexibility for the financing to go forward.

The real point is that both the export credit agencies and the commercial lenders were acting as the long-term lenders, not as short term guys that were creating financial instruments that they would distribute to the market. It could not be more different than subprime mortgage lending–a strong asset, focused on the long term demand for the product, and with long term off-takers for the product.

DJ: When did the project line up big customers, or off-takers, and did doing so create a certain level of comfort for the lenders?
Galvis: Securing long-term off-takers for the product was one of the strategies the project settled on early on. So the lenders knew there was a market there for the next 10-12 years. They knew as long as the project was built–and Antofagasta has the reputation for being able to build mines–the copper was going to ship and there was going to be an off taker at the other end.

DJ: How did you keep all the different lenders on the same page?
Galvis: One of the reasons this deal got done was that the decision was made very early on that, rather than being reactive, the legal and financial teams would work closely with the sponsors to develop a financing plan that would be acceptable to market. We actually drafted the papers in advance. It’s quite extraordinary. We drafted a 60-plus page detailed term sheet, which was sent out in order to select prospective lenders. The project was then able to say to the lenders, ‘We think we fit the market right on these terms, are you willing to participate under these terms?’ This was very important because it allowed us to get the financing done on a reasonable basis and with a disparate group of lenders and keep everyone on the same page with common terms and conditions. If each of the lenders had been supplying their own terms, that would have been very difficult. The selection of the lenders was based on their reaction to out proposal.

DJ: With so many banks running into trouble, was there concern that one of the lenders might need to drop out?
Galvis: To manage the risk through the banking crisis, the sponsors focused on creating overcapacity of lending capability, just in case they lost a lender. In the end, all the lenders were there to fund. The other step the sponsors took to mitigate risk was to secure the off-take arrangements. They moved very quickly to get the customers lined up. This is very interesting: There was no way the customers wouldn’t be there. I think this is why you are seeing so much activity in the mining sector: The customers are focused on securing long-term supplies.


Afternoon Reading: The Bottom Line of a Goldman Image Problem

Goldman’s image problem: “Sticks and stones will break your bones but names will never hurt you.” Parents have repeated that adage to their children for generations, and it is the position Goldman Sachs Group typically has taken when critics spew vitriol its way. This time, though, that approach might not work, writes Bloomberg’s David Reilly. Why? This time the criticism might end up hurting Goldman’s earnings and its share price. Writes Reilly: “Goldman is at the center of the debate over regulation of too-big-to-fail institutions that benefited from what was estimated this week to be a $23.7 trillion bailout of the financial system…The danger for Goldman is that it becomes a focal point for populist bailout ire, leading the government to take a tougher stance on regulation.”

Second Acts on Wall Street: Just who will forgive CEOs for running their company into the ground or for bringing the nation’s financial system to the brink or for sending the global economy into a tailspin? Perhaps private equity, writes Erin Griffith over at peHUB. Recently Robert Nardelli (granted he didn’t bring the financial system to its knees or send the global economy into a tailspin, but his tenure at Chrysler was hardly noteworthy), former Wachovia CEO Ken Thompson and Fannie Mae’s former head Daniel Mudd all have found shelter at PE firms.

Which College Grads Earn the Most? Everyone likes rankings, whether of football or basketball teams or things academic. PayScale, a site that collects data on salaries for different professions, now offers a ranking of which colleges and degrees end up paying off most for grads, writes Economix. Dartmouth graduates have the highest median midcareer salary and in terms of majors, while Loma Linda grads have the highest median starting salary. In terms of majors, study engineering or really any quantitative-oriented major if you want a high starting salary. And you might want to avoid majoring in drama, social work and education if a high midcareer salary is your goal.

Ethics 101: There is nothing like a financial crisis to put questions of ethics in business front and center. At least one school wants to address the problem. The New England College of Business and Finance, which caters mainly to about 650 adults doing online course work, is offering a master’s degree in business ethics and compliance, the Boston Globe reports.

A PE Deal: It might not be big, but it is private equity. Apax Partners has agreed to acquire Bankrate for about $571 million. This comes after WSJ reported that P&G’s prescription-drug business may be drawing a little PE interest.


Gloves Are Off Over New Consumer Financial Product Agency

House Democrats on Wednesday fought back against the banking industry and said Democrats would intensify their efforts to create a new regulator for consumer financial products.

[Barney Frank]
Frank

The idea was proposed by the Obama administration in June but has come under heavy attack from the financial industry and Republicans, who have argued that it would stifle innovation and shut off access to credit.

House Financial Services Committee Chairman Barney Frank (D., Mass.) held a press conference with other Democrats on his panel, including Maxine Waters of California, Brad Miller of North Carolina, Keith Ellison of Minnesota and Luis Gutierrez of Illinois. Rep. Frank said the proposal has become “somewhat more controversial than I expected it to” become.

Rep. Frank: “People opposed to this, banks and elsewhere, have troops on the ground and they have brought them into this effort. I accept the fact that they want to have a big national debate over this. And so that’s what we are going to have…I welcome a national debate. Frankly if I were the bankers I would not invite a debate over whether or not [the banks have] been all that great in the consumer area and whether or not consumers should just trust” them.


Would You Stand on Short Flights if It Meant Cheaper Fares?

Irish-based discount airline Ryanair recently polled 120,000 passengers on its Web site with the following question: would you be willing to stand on short flights?

Rollercoaster rider or airline passenger? (Getty Images)

The answer was an overwhelming “yes” — if the tickets were free. Two-thirds of respondents said they’d stand on flights of less than an hour if their tickets were free; 42% were willing to do so for tickets that were half-off.

According to Marketwatch.com: A spokesman for Ryanair, Stephen McNamara, said the airline is looking to replace traditional seats with “vertical ones,” which on a typical flight would allow between 50 and 60 additional passengers.

The vertical seats sound like something you might find in an amusement park: Mr. McNamara said the airline envisages having the passengers supported and restrained, and not simply holding a rail, so they could handle turbulence or an emergency landing safely, Steve Gelsi reports.

Ryanair would need approval both from U.S. and European Union authorities, as well as Boeing, which makes its aircraft. Mr. McNamara said it could take three years before they could even pilot the program, and then additional time to launch it.

Ryanair, which yesterday reported that it will cut capacity at Stansted airport by 40% this winter and reduce weekly flights by 30%, is no stranger to experimenting with ways to shake up air travel. Another controversial idea -– charging for toilet use on flights –- is “still under consideration,” according to Mr. McNamara.


Monthly FHFA Home-Price Gain Not Enough to Call Bottom

U.S. home prices posted a 0.9% month-to-month increase in May, according to the Federal Housing Finance Agency. But the data don’t necessarily indicate that prices are firming everywhere.

Prices are still down 5.6% from a year earlier and about 10% from their peak. The index also can distort the national picture because it has a limited sample size. FHFA only includes loans backed by Fannie Mae and Freddie Mac, and is based on comparable pairs for the same house. Houses originally bought with subprime or jumbo loans can’t be included, because even if the new mortgage is agency-backed, there’s no other side to the pair. New-home sales also aren’t included, and prices in that sector have been pressured by the rising supply of foreclosures.

Regional disparities emerged, as the Northeast showed monthly price declines with a 2% drop in New England, while the West and South Atlantic (home to badly hit markets California and Florida, respectively) both showed gains over 1% in May from April. Price increases in hard-hit areas may indicate the possibility of a bottom forming. Or they may represent homes that once needed jumbo loans moving back into the FHFA sphere of influence.

The data can be volatile, but economists at Goldman Sachs said that when combined with other housing indicators the May results indicate that the pace of decline “has slowed sharply over the past 6 months.” The seasonally-adjusted index for the first five months of this year is up 0.3%, or 0.7% on an annualized basis.

The S&P/Case Shiller home-price index, which includes a broader swath of homes, will offer a clearer picture when it is released next Tuesday. But it still appears too early to call a bottom in home prices.


Live Blogging Morgan Stanley’s Earnings Conference Call

Morgan Stanley continues to lag the pack on Wall Street, reporting its third consecutive quarterly loss, while rivals like Goldman Sachs reported record profits in the same quarter. Morgan Stanley says it is making changes, including hiring a new head of bond and currency trading. (The announcement was made a few days before earnings, signaling that trading revenue would be weak. Sure enough, Morgan Stanley lived up to it). Many of the firm’s losses was driven by accounting charges related to TARP repayments and other one-time charges. But investors are likely to be unhappy about mounting real estate losses and lagging trading and asset management revenue. Morgan Stanley’s shares sank in early morning trading. The conference call has just begun.

11:08: Morgan Stanley is talking about the one clear bright spot: the firm’s M&A advisory work. Morgan Stanley advised Rio Tinto and General Motors, helping making the firm No 1 in the Thomson Reuters rankings. But it admits that advisory revenues remain “subdued” due to the slowdown in M&A pipeline.

11:13: Morgan Stanley’s CFO Colm Kelleher says the newly hired head of bond and currency trading, hedge fund manager, Jack Dimaio, will help boost that business, which has been lagging. (In other words, here’s how much we value risk now. We are hiring the head of a hedge fund to run our trading business)

11:15: The overall VaR — value at risk — is up to $154 million from $142 million. But its trading VaR actually declined. That compares with Goldman, which reported its highest VaR since becoming a public company.

11:19: There’s bad news in asset management business. Clients have been pulling their money out of money market funds, “related to our past performance issues.”

11:20: On the other hand, the integration of Smith Barney is “on track”

11:23: Questions have started. Bank of America is asking why is book value staying flat even though you booked a loss of $1.10 per share? (The analyst is getting at some of the complicated, and somewhat confusing numbers in Morgan’s release, which includes a maze of accounting charges and credit spread issues)

11:25: Morgan Stanley says that one reason for this discrepancy was that the charges related to the integration of Smith Barney did not go through the P&L,, which helped boost the book value number.

11:30: Glenn Schorr of UBS: the outflows from asset management business are “pretty brutal.”

11:33: MS CFO doesn’t try to sugar coat it, but says MS is making changes: “We have better management and have hired new people and cut costs.”

11:34: Prime brokerage is a mixed bag. MS CFO: Our larger (tier one) clients have increased 14% in prime brokerage, but that increase was offset by trading losses in derivatives.

11:37: Credit Suisse asks will you repurchase stock or increase dividends since you are now saying you are “overcapitalized.”

11:37: MS CFO: too early to say.

11:40: Goldman Sachs asks when will Morgan Stanley start to free up more of its capital to take more risk.

11:42: MS CFO: We look at risk adjusted returns. We could have done a better job than we did. But we are not about to crank up risk in this current market.

11:43: Analyst Mike Mayo asks, do you have “buyers remorse” in the Smith Barney consolidation since net new asset values are down from the firm.

11:44: MS CFO: We have no buyers remorse. We are very comfortable with the JV. The net asset numbers are “a lot of noise.”

11:45: Barclays asks where is the trend in compensation, as a percentage of revenue, headed for the remainder of the year.

11:47: MS CFO: Clearly we have to pay competitively. We would like to have more revenue to reduce that ratio.

11:49: Barclays: What can we expect in terms of write downs on Crescent, the property company which has been consolidated on the books. Overall commercial real estate write downs in the quarter were 20%, while Crescent write down totaled 8%. Why the discrepancy?

11:50: MS CFO: I can’t go into the details on projected write downs on specific holdings.

11:51: Analyst Meredith Whtiney asks what’s the MS estimate for the timing of a credit and capital market turnaround?

11:54: MS CFO: I am constructive, but I am not bullish. There are clear signs of market stability. You are getting access to unsecured debt. We just reopened hybrid debt market. Those things make me very constructive about the market stability. What I am concerned about is macro issues such as consumer de-leveraging. We did provide more capital to markets, but we could have traded better in one or two areas.

He then adds (in a comment that could sum up the quarter) “We didn’t take as much risk as we could have.”

11:58: Morgan Stanley is asked what is the long term strategy for the asset management business?

11:59: It’s a slow thing to fix. We are focused on reducing costs.

12:00 Question: Any chance Morgan Stanley would buy another asset manager to bolster the business.

MS CFO: At the moment, we need to focus on what we have and making sure it’s efficient. No deals in the works.

The call ends precisely one hour after it started. The overall message from MS: We fell behind competitors in our trading strategy. Investors seem to be taking a “wait and see” approach. The stock is largely flat at noon. The question is whether the trading boom was a one quarter window caught by Goldman and JPMorgan, or whether there will be still be opportunity for Morgan Stanley to capitalize in the second half of the year.


Morgan Stanley v. Goldman: Breaking Down the Earnings Reports

Morgan Stanley wasn’t expected to match the stellar results of archrival Goldman Sachs Group in the second quarter. And it didn’t.

morganstanley_D_20090702110754.jpgAssociated Press

In fact, Morgan Stanley came nowhere close to the blowout earnings Goldman reported last week. Here is how the two Wall Street firms stacked up.

Profits: Morgan Stanley swung to a loss from continuing operations of $159 million or $1.37 a share, from income of $689 million, or 61 cents a share a year earlier. That was much worse than the analysts’ estimate of a 54 cent-a-share loss. Goldman posted a record profit of $3.44 billion, or $4.93 a share, easily surpassing analysts’ estimates of $3.54 a share.

Sales and Trading: “We are not satisfied with our performance in key areas of fixed-income trading,”’ Morgan Stanley Chief Executive John Mack said in a statement.

Here is why Mack is so glum: While revenue in the fixed-income side of the business increased 44% to $973 million, tightening credit spreads erased that gain and resulted in a $1.3 billion loss. Meantime its equity sales and trading revenue tumbled to $681 million from $2.2 billion. That is largely because its derivatives and cash business, including the prime brokerage that caters to hedge funds, suffered from waning client activity. But over at Goldman, executives said its trading results were driven by “strong client drive activity.’’ How strong? Equity trading revenue surged 28%, while fixed income, currency and commodity trading jumped to $6.80 billion from $2.38 billion.

Real Estate: At first glance, both banks reported losses of $700 million, driven largely by souring commercial real-estate values. But Morgan Stanley’s hit goes deeper. The bank had to spend $400 million related to bringing the Crescent Real Estate portfolio of offices and resorts onto its balance sheet

Risk: Morgan Stanley admits it needs to step up its trading risk after seeing competitors reap such big rewards. Morgan Stanley’s value-at-risk–an estimate of the probability of losses on trading positions–was $173 million in the second quarter. Goldman’s VaR was $245 million, the highest since the firm went public.

M&A: The quarter wasn’t a complete shut out. Morgan Stanley was the No. 1 adviser on global mergers and acquisitions, a notch ahead of No. 2 Goldman, according to Thomson Reuters. (Dealogic ranks Goldman at the top and Morgan Stanley at No. 2.) Whatever the measure, Morgan Stanley’s star is clearly rising again, after falling near the back of the big firm rankings last year. It might not mean much for revenue (advisory fees totaled a mere $268 million) but it suggests Morgan Stanley is building relationships and reputation that will help when the deal pipeline begins to flow again.

Compensation: Still, in the all important category (to employees, at least) of pay, Morgan Stanley’s compensation expense rose to $3.9 billion from $3.1 billion, but Goldman’s surged to $6.65 billion from $4.52 billion.


The Morning Leverage: Worst. Year. Ever.

In this morning’s media roundup:

News: Calstrs and Calpers suffered their worst annual performance to date, reporting preliminary declines of almost 25% each for the fiscal year. Both funds took a significant dent based on losses from alternatives (including private equity, which provided a 27.6% decline and a 31.4% decline respectively). The funds had a break in hemorrhaging during the stock market rebound, but Calstrs was still facing a long-term benefits funding shortfall of over $20 billion at the end of June. Read the full story via LBO Wire.

It was only a matter of time before buyout firms started going after big(ger) game again. The Wall Street Journal reports Cerberus Capital Management is among those in the hunt for Procter & Gamble’s prescription-drug business, which could be valued at $3 billion. At that price level, it would be close to the biggest buyout of the year - Permira’s purchase of NDS Group, which closed in February, was worth roughly $3.6 billion - and by far the largest U.S. buyout. But strategic bidders could offer tough competition.

The Nortel bankruptcy is turning into the business version of a telanovela, full of overtures, last-ditch rescue plans and thwarted suitors. Bondholder MatlinPatterson, which has repeatedly expressed desire to shepherd Nortel through bankruptcy intact, topped a $650 million bid from Nokia Siemens for two Nortel segments with a $725 million offer. The same assets were also being pursued by BlackBerry maker Research In Motion, which dropped out of the race with complaints about the auction process. Read on in LBO Wire.

Analysis: The outcome of a suit against Cerberus COO Mark Neporent could have far-reaching effects on Japanese/Western investor relations, according to the Wall Street Journal’s Heard on the Street Column. A lawsuit filed by Japanese conglomerate Kokusai Kogyo alleges Neporent, along with two other Kokusai board members, took action that resulted in $560 million of losses for the company. Read details of the lawsuit here and analysis of its implications here.

The New York Times’ Deal Professor uses Bain Capital and Huawei Technologies as an example of “the perils of secret conditions.”

Just For Fun: Warren Buffett has no trouble talking about business or the birds and the bees, or how those two compare. The Motley Fool has a collection of some of the “Oracle of Omaha’s” saltier sayings. Our favorite is about derivatives.

Live Blog: Bernanke Returns to Congress in Second Day of Testimony

Ben Bernanke visits the Senate Banking Committee today for the final Humphrey-Hawkins testimony of his four-year term as Federal Reserve chairman. He’ll face senators who have plenty to say about the Fed’s response to the housing crisis, its rescues of major financial institutions and its transparency. (Watch the hearing live.)

Yesterday, the central bank chief faced the House Financial Services Committee. The hearing was less contentious than Bernanke’s recent appearances, but it was clear there are still plenty of skeptics.

How do senators feel about Mr. Bernanke? Are they inclined to confirm the central bank chief for another four-year term if President Obama reappoints him?

We’ll be covering the hearing live starting at 10 a.m. Click Continue Reading for updates.

10:05: Bernanke emerges from the his pre-hearing meet-and-greet with the committee. Photographers get a couple extra minutes to get that perfect up-close shot of Bernanke while senators stroll in.

10:07: Banking Committee Chairman Christopher Dodd gets the hearing started. He has some “serious issues” about the institutional response to the crisis.  Then he gets into his prepared statement.

10:15: Sen. Richard Shelby, the top Republican, begins his prepared statement. He’s not terribly pleased with the Fed’s performance as a regulator.

10:19: Bernanke begins his testimony, which repeats yesterday’s House statement.