Flags fly outside 85 Broad St., the Goldman Sachs headquarters in New York's financial district, January 20, 2010. Credit: Reuters/Brendan McDermid By Pedro da Costa and Rachelle Younglai WASHINGTON | Thu Dec 2, 2010 7:26am GMT WASHINGTON (Reuters) - Goldman Sachs, Citigroup and other big U.S. banks repeatedly sought help from the Federal Reserve during the financial crisis, according to data on Wednesday that showed just how precarious their situation was at the time. Many of the firms now boasting solid profits had to rely on funding from the U.S. central bank, which essentially acted as the glue holding the financial system together in the tumultuous months that followed the bankruptcy of Lehman Brothers in September 2008. Citigroup, Morgan Stanley (MS.N) and Merrill Lynch, now part of Bank of America, were the three biggest recipients of the Fed's key emergency lending programs, according to a Reuters analysis of Fed data. Goldman Sachs was sixth on the list, contradicting claims from its top executives that the firm always had plenty of cash on hand. "It appears the investment banks clearly needed the money," said Lawrence Glazer, managing director at Mayflower Advisors in Boston. The Fed's disclosure of details of its $3.3 trillion in emergency lending, mandated by the Dodd-Frank financial reform bill enacted in July, showed Citigroup and Bank of America (BAC.N) leaning heavily on the U.S. central bank well into the spring of 2009. It also indicated foreign financial institutions were big beneficiaries of the Fed's largess. The U.S. central bank had fought efforts to pull back the veil on its secretive lending, and in the end Congress decided to demand only details of emergency programs, not past loans to commercial banks from the Fed's regular discount window. Details on the Fed's loans of commercial paper -- short-term lending used to fund day-to-day business operations -- revealed a motley cast of characters: borrowers ranged from Korea and the German state of Bavaria to Verizon Communications (VZ.N) and Harley Davidson (HOG.N). The results could reignite debate about whether some bailouts, such as the support for insurer AIG (AIG.N) and foreign banks, were appropriate. Still, U.S. stocks, which rallied on Wednesday on U.S. jobs and manufacturing data, greeted the release with a shrug. "It will serve to remind folks that we were in a bad place and the Fed stepped in to help, but might also reopen some old political wounds," said John Cannally, economist at LPL Financial Boston. "It's interesting historical background but the market has largely moved on." As the financial crisis that began in the summer of 2007 spread beyond the housing sector to the nation's biggest banks, the Fed, under the leadership of Chairman Ben Bernanke, devised increasingly complex facilities to help restore confidence. Among these were loans to broker-dealers made outside the Fed's usual discount lending window for troubled institutions, which is reserved for deposit-taking commercial banks. FOREIGN BANKS GET SUPPORT The Fed made more than 1,300 loans under the Primary Dealer Credit Facility, or PDCF, set up for broker-dealers, with the largest -- $47.9 billion -- going to London-based Barclays (BARC.L), the Fed's data showed. The facility marked the first time since the Great Depression that the Fed had lent to non-depository institutions. Many banks tapped the facility after it was launched in the wake of investment bank Bear Stearns' collapse in March 2008 but borrowing dried up by late summer.reuters.com |
Showing posts with label Banks. Show all posts
Showing posts with label Banks. Show all posts
Banking giants leaned heavily on Fed in crisis
Banks work to minimise impact of bonus rules
The industry is working frantically to put strategies in place ahead of publication of new rules on remuneration by the Committee of European Banking Supervisors in the second week of December. The Financial Services Authority will publish its own rules a few days after.
Tax advisers said options under consideration included structuring bonus payouts to minimise the amount of tax payable immediately; offering staff recourse loans to tide individuals over until their retained or deferred bonuses vest; issuing certificates of deposit or restricted loan notes in place of shares; and structuring payments to attract a capital gains tax liability instead of income tax.
However, any efforts to mitigate the rules will be closely scrutinised by the FSA, which has said it will clamp down on any attempts to get round the spirit of the rules.
Sam Whitaker, counsel in law firm Shearman & Sterling's executive compensation and employee benefits practice, said: "Most banks already have their strategy in place."
Financial News reported this month that under the proposed rules staff at UK banks who are paid more than £1m could end up paying out more in tax than they receive in cash.
Jon Terry, head of reward at accountancy firm PwC, said: "The primary focus this year is to ensure that staff don't get hit with a tax liability for the retention element of their bonus, and to get cash into the hands of their most senior people."
As the proposed rules stand, 60% of the total bonus for bankers who earn more than £1m must be deferred, 20% will go into a "retention" pot and 20% will be paid as cash. One of the priorities for the banks is ensuring top earners are not hit with a tax liability for the retention element of their bonus.
One way to avoid such a situation occurring is to structure the retention element so that there is a theoretical risk of losing, making the award ineligible for tax until delivery, according to one tax lawyer.
Banks are also considering issuing certificates of deposit or restricted loan notes. These can be issued to minimise a tax liability, but could also be used in place of shares as part of a deferral arrangements. Advisers are awaiting further clarification on this issue from the final CEBS guidelines.
Sophie Dworetzsky, a partner at law firm Withers, said: "If the recipient wants to be subject to capital gains tax rather than income tax when value is realised, it is possible to achieve this, but in this case income tax will have to be paid upfront on grant of the certificates of deposit. The employer can look into making a loan to discharge the income tax liability in this situation."
Another option for banks is to offer recourse loans to certain staff. CEBS sets out in its guidelines that non-recourse loans, where the loan could be written off after a certain period, are disallowed. However, recourse loans – which give power to the lender and cannot be written off – may be offered selectively to certain staff, say advisers.
Banks which pay bonuses in January – including JP Morgan and Goldman Sachs – are expected to present their plans to staff in the next few weeks. Others are unlikely to make any concrete plans until the CEBS guidelines have been confirmed.
Several European and US banks have already announced they will increase fixed pay to minimise the cash impact of incoming bonus rules. HSBC this month confirmed it was increasing base salaries as a proportion of total compensation. It follows similar moves from Credit Suisse and Royal Bank of Scotland.
Credit Suisse and Goldman Sachs also paid selected staff mid-year bonuses in expectation of the new rules. Credit Suisse paid out cash bonuses to around 400 senior London-based staff in September. Goldman Sachs, which capped bonuses at £1m last year, handed out shares to about 80 senior bankers also in September.
Any attempts to soften the blow for bankers are likely to get short shrift from regulators. Employee trusts, which had been used by banks to minimise the tax burden on deferred bonuses in the past, are being challenged in the courts by HM Revenue & Customs.
Jonathan Fenn, a partner at law firm Slaughter and May, said: "Recent challenges by the Revenue, and the Revenue's announcement that it is reviewing the use of trusts and other vehicles in the remuneration context have made tax planners increasingly nervous about using 'highly engineered' structures .
A spokeswoman for the FSA said: "We would encourage firms to engage with the new rules as soon as possible. The CRD [Capital Requirements Directive] contains anti-avoidance measures and the FSA would take a very dim view of any efforts to avoid the rules. Firms need to comply not only with the rules but also the spirit of the code."
Alistair Woodland, a partner at law firm Clifford Chance, said: "The truth is that no one will escape the new bonus rules completely."
Liam Vaughan and Tara Loader Wilkinson contributed to this article.
READ MORE - Banks work to minimise impact of bonus rules
Tax advisers said options under consideration included structuring bonus payouts to minimise the amount of tax payable immediately; offering staff recourse loans to tide individuals over until their retained or deferred bonuses vest; issuing certificates of deposit or restricted loan notes in place of shares; and structuring payments to attract a capital gains tax liability instead of income tax.
However, any efforts to mitigate the rules will be closely scrutinised by the FSA, which has said it will clamp down on any attempts to get round the spirit of the rules.
Sam Whitaker, counsel in law firm Shearman & Sterling's executive compensation and employee benefits practice, said: "Most banks already have their strategy in place."
Financial News reported this month that under the proposed rules staff at UK banks who are paid more than £1m could end up paying out more in tax than they receive in cash.
Jon Terry, head of reward at accountancy firm PwC, said: "The primary focus this year is to ensure that staff don't get hit with a tax liability for the retention element of their bonus, and to get cash into the hands of their most senior people."
As the proposed rules stand, 60% of the total bonus for bankers who earn more than £1m must be deferred, 20% will go into a "retention" pot and 20% will be paid as cash. One of the priorities for the banks is ensuring top earners are not hit with a tax liability for the retention element of their bonus.
One way to avoid such a situation occurring is to structure the retention element so that there is a theoretical risk of losing, making the award ineligible for tax until delivery, according to one tax lawyer.
Banks are also considering issuing certificates of deposit or restricted loan notes. These can be issued to minimise a tax liability, but could also be used in place of shares as part of a deferral arrangements. Advisers are awaiting further clarification on this issue from the final CEBS guidelines.
Sophie Dworetzsky, a partner at law firm Withers, said: "If the recipient wants to be subject to capital gains tax rather than income tax when value is realised, it is possible to achieve this, but in this case income tax will have to be paid upfront on grant of the certificates of deposit. The employer can look into making a loan to discharge the income tax liability in this situation."
Another option for banks is to offer recourse loans to certain staff. CEBS sets out in its guidelines that non-recourse loans, where the loan could be written off after a certain period, are disallowed. However, recourse loans – which give power to the lender and cannot be written off – may be offered selectively to certain staff, say advisers.
Banks which pay bonuses in January – including JP Morgan and Goldman Sachs – are expected to present their plans to staff in the next few weeks. Others are unlikely to make any concrete plans until the CEBS guidelines have been confirmed.
Several European and US banks have already announced they will increase fixed pay to minimise the cash impact of incoming bonus rules. HSBC this month confirmed it was increasing base salaries as a proportion of total compensation. It follows similar moves from Credit Suisse and Royal Bank of Scotland.
Credit Suisse and Goldman Sachs also paid selected staff mid-year bonuses in expectation of the new rules. Credit Suisse paid out cash bonuses to around 400 senior London-based staff in September. Goldman Sachs, which capped bonuses at £1m last year, handed out shares to about 80 senior bankers also in September.
Any attempts to soften the blow for bankers are likely to get short shrift from regulators. Employee trusts, which had been used by banks to minimise the tax burden on deferred bonuses in the past, are being challenged in the courts by HM Revenue & Customs.
Jonathan Fenn, a partner at law firm Slaughter and May, said: "Recent challenges by the Revenue, and the Revenue's announcement that it is reviewing the use of trusts and other vehicles in the remuneration context have made tax planners increasingly nervous about using 'highly engineered' structures .
A spokeswoman for the FSA said: "We would encourage firms to engage with the new rules as soon as possible. The CRD [Capital Requirements Directive] contains anti-avoidance measures and the FSA would take a very dim view of any efforts to avoid the rules. Firms need to comply not only with the rules but also the spirit of the code."
Alistair Woodland, a partner at law firm Clifford Chance, said: "The truth is that no one will escape the new bonus rules completely."
Liam Vaughan and Tara Loader Wilkinson contributed to this article.
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