Lower Wattage Star Power at Lazard?

Posted by: Peter Carbonara on November 18

The board of investment bank Lazard Freres yesterday ended weeks of speculation and gossip about who would replace the firm's late CEO Bruce Wasserstein. The legendary and frequently controversial deal maker died suddenly last month at the age of 61. (The last, good long profile of Wasserstein appeared in the late semi-lamented Portfolio magazine. It is online here )To replace him, Lazard picked Kenneth Jacobs, 51, currently head of North American operations and a twenty two year veteran of the firm.

While Wasserstein was an A-list New York financial celebrity, a man who "came with his own lights" as they say, Jacobs is not well-known beyond Wall Street (where he is well-regarded) and has previously given few interviews. Lazard's stock rose modestly on news of his appointment.

In comments made to reporters after his appointment, Jacobs indicated he has no radical plans for the firm, intending to stick to its basic model of relying on income from giving M&A and bankruptcy advice (as well as asset management).

Observers credit him with expanding Lazard's midmarket deal work and opening new offices in Boston and Washington. He has advised on a number of big deals including GlaxoSmithKline acquistion of Stiefel Laboratories and Rohm &Haas' sale to Dow Chemical.

One thing Jacobs ascent may signal is a change in tone. In the past Lazard has been known for infighting at the top. The choice of a low-key, veteran insider may signal an intention to put that to rest permanently. (Although its worth noting that Jacobs got the top job over a number of other Lazard insiders who were considered more likely choices, including Gary Parr, a prominent financial services industry expert).

Paulson Protege Pellegrini on Bernanke's Fed: "Sheer Lunacy"

Posted by: Peter Carbonara on November 16

Some smart people are feeling at least cautiously optimistic about the U.S. economy at the moment--among them BW's own Jim Cooper. Paolo Pellegrini, however, is not.

Which might be worth noting because Pellegrini is the Rome-born analyst who helped hedge fund operator John Paulson make a ton of money on the subprime crash in 2007 and 2008. Pellegrini and his colleagues crunched tons of U.S. mortgage data, concluded that housing prices were due for a collapse, and invested accordingly. Paulson made over $3.5 billion on the trade. Pellegrini, now investing his personal money via his firm PSQR Capital, was ably profiled recently by our friends (and new owners) over at Bloomberg.

Pellegrini makes no secret of his disdain for Obama Administration policy in general and Fed chairman Ben Bernanke in particular. Speaking at private equity conference in New York last week, Pellegrini called Bernanke's low rate strategy "Sheer lunacy."

"Bernanke et al.," he said, "are telling us the solution to our problems is to keep rates low even as another bubble forms, threatening to lure still more retirement saving into a one-way trip to oblivion."

Recent rallies in equity and other markets, he says, are not signs of future growth. They are bear market rallies, not unlike those that followed the stock market crash of 1929. "Ben Bernanke is this great student of the Depression. I don't know what he learned from it."

Further, he believe signs of growth in the real economy are illusory. Pellegrini estimates the stimulus contributed 3 percentage points of the 3.5 percent real GDP growth the Commerce Department reported for the third quarter."We are currently experiencing a recovery in real economic activity based exclusively on the massive fiscal stimulus the government is providing." When that rush fades, which he expects by the end of the first half next year, the economy will resume sagging.

If that double dip happens, Pellegrini says, the already weakend dollar could collapse further. Bernanke and co. will have no monetary tools to fight back with. "Right now we essentially have zero rates," Pellegrini says, "If rates were 10 percent we could lower rates, but we used that up over the last 20 years and that's why we're in the fix we're in."

What to do? Pellegrini says the first order of business is to pay down U.S. household debt. He's proposed a plan to use TALF dollars to restructure underwater mortgages.

Beyond that Pellegrini thinks the Fed needs to exorcise the easy money ghost of Greenspan and return to the hardheaded example of Paul Volcker. He also think Congress needs to give regulators more authority to keep banks from taking huge risks. He doesn't expect either to happen.

Bear Fund Managers Go Free, Big Questions Unanswered

Posted by: David Henry on November 10

Because jury acquittals are absolute and cannot be appealed in the U.S., the not-guilty verdicts of two former Bear Stearns hedge fund managers on Tuesday ought to have provided a sense of closure. They did not.

This end without a true resolution was set in place more than a year ago, when federal prosecutors decided that their best chance of winning a conviction was to try to prove that Ralph Cioffi and Matthew Tannin lied to their fund investors. The prosecutors did not design their case to end with a day in court where there was any real finding-out about whether the two men knew the harm they were causing to millions of people, the financial system, and the economy as they gambled for two years with tens of billions of dollars on securities backed by subprime mortgages.

Instead, the prosecutors set a more modest goal: Prove that Cioffi and Tannin lied on specific occasions to a few dozen well-off, and presumably sophisticated, people about the funds' condition. The Feds tried to avoid having to say anything more about collateralized debt obligations, repos with brokerage houses, and total return swaps than was absolutely necessary. Their decision was logical: There is a long history of cases in which jurors simply did not understand complicated transactions. (That the prosecutors could not achieve their seemingly more modest goal may discourage other law enforcers from trying to make cases from complicated dealings that brought the failures of Lehman Brothers and AIG.)

To be sure, prosecutors may not have held back evidence that Cioffi and Tannin did anything criminal in leveraging their funds to buy more and more subprime. The men are presumed innocent.

But left unexplored and unanswered for the public is to what extent Cioffi and Tannin were responsible for significant losses at Citigroup and Bank of America. The men were certainly involved. They put together deals that worked to finance subprime mortgages with cash that investors had originally sent to money market funds. The deals pumped up the credit bubble. Their hedge funds obtained essential leverage from Citigroup for three such deals, a series of CDO-squareds named Klio. When the CDOs began to unravel in last summer 2007, Citi was suddenly stuck with the losses that triggered the resignation of CEO Chuck Prince. The Bear funds did a fourth CDO-squared with leverage from Bank of America. The fourth and biggest CDO, for some $4 billion in spring 2007, was the final blow-out of Wall Street's excesses in subprime mortgage finance.

Such basic facts of Cioffi and Tannin's use of the CDOs are disclosed in deal documents. There's no telling what more the prosecutors, with their subpoena power, might have found out about these very transactions that undermined what used to be the two biggest banks in the nation. There's no telling because the prosecutors took the smaller matters to the jury, and lost.

Hostile Takeovers Heating Up

Posted by: Jessica Silver-Greenberg on November 09

Who said dealmaking is dead? While overall merger and acquisition activity has plummeted, there is one area of the deal market that’s abuzz with activity: the hostile takeovers, or unsolicited takeover bids, for those who’d like to put a friendlier gloss on the transaction. Kraft Foods made a $16.3 billion bid today for British candy-maker Cadbury. The food giant isn’t the only well-heeled company to launch that kind of bid. In May PepsiCo tried to acquire PepsiAmericas Inc. And recently Roche, Samsung, and InBev tried their hands at takeovers as well. In fact, hostile takeovers actually make up over 10% of M&A activity in the past 12 months. That means the vultures are feasting.

With overall deal-making still in the doldrums, why are hostile bids on the rise? Cash is the key. Buyers have more cash on hand than just a year earlier. Aggregate cash currently available at the 500 companies listed on the Standard and Poor's index has ballooned in the past year. The financial crisis basically forced companies to massively cut operating costs, to slim down and hoard cash for the coming frozen credit markets. In an effort to save some cash, many companies didn’t do shareholder-buyback programs. Now, companies have the cash to buy, and the credit markets are opening up as well. Hungry buyers with cash on hand can essentially go on a shopping spree.

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The Commercial Loan Nightmare Facing U.S. Banks

Posted by: Mara Der Hovanesian on November 05

Banks are in for another ugly year in 2010. But this time the problem will be the big batch of deteriorating commercial real estate loans on their books. That's because the big banks were operating with the same loose standards--and aggressive behavoir--as the investment banks in order to compete in the real estate market during the boom years. (Read our cover story about why this real estate bust is different.) Commercial real estate loans that banks underwrote and held on their books skyrocketed to approximately $190 billion in 2007, up from $11 billion in a single year, a decade earlier. In all, banks hold some $1.8 trillion of commercial real estate debt on their books.

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BusinessWeek's Adrienne Carter, Jessica Silver-Greenberg, and David Henry deconstruct the mysteries of high finance, Wall Street, and hedge funds for pros and ordinary investors. E-mail them directly if you've got tips about big deals, a hedge fund, or even securities industry gossip.

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