Mo Vaughn’s home runs

By Amanda Fung

Published: February 14, 2010 – 5:59 am

Six months after Mo Vaughn set up Omni New York in 2004, the fledgling real estate firm struck, snapping up a 286-unit affordable housing complex in the Bronx. By the end of its second year, Omni New York had tripled its holdings to a total of 869 units.

As far as most people were concerned, however, Mr. Vaughn was still a Mets first baseman, even though his baseball career ended in 2003.

“I wanted people to take us seriously and know that we were the real deal,” says Mr. Vaughn, who is seated at a Brooklyn eatery with his partner, Eugene Schneur, explaining his transition from baseball hero to real estate mogul—albeit one whose new uniform includes not just sharply tailored suits but large diamond-encrusted hoop earrings. “I wanted respect.”

These days he’s got it—not as the American League’s former MVP but as the managing director of one of the city’s best-regarded and most active buyers and managers of affordable housing. Along the way, Mr. Vaughn and company have earned a place as one of the city’s top choices for turning around distressed residential properties.

Today Omni ranks as a midsize firm capable of competing with the bigger players, swallowing up sprawling properties such as the decrepit 14-building, 416-unit complex in the South Bronx that Omni bought the mortgage on at a foreclosure auction—with the city’s blessing—in December. “Given their track record, they are ideally suited to deal with troubled projects,” says NYC Housing Preservation and Development Commissioner Rafael Cestero.

Since 2004, Omni has spent over $500 million buying and rehabilitating 21 affordable-housing buildings with a total of nearly 3,500 units in the Bronx, Brooklyn, Long Island and as far away as Wyoming. The majority of the buildings they own and manage are Section 8 buildings, whose low-income tenants rely on federal vouchers to help pay their rent. Omni finances its deals using tax-exempt bonds and the proceeds from the sale of low-income-housing tax credits.

Making money and doing good

That is exactly what it did when it acquired the Noble Drew Ali Plaza in the Brownsville section of Brooklyn—the 2007 deal that put Omni on the map. At the time, the five-building complex with 358 units was a haven for drug dealers and addicts, its hallways urine-soaked and graffiti-lined and its apartments crumbling.

Omni purchased the property out of bankruptcy for $23 million with financing from various city agencies, including HPD, as well as federal grants. The developer then poured $25 million into refurbishing everything from new elevators and energy-saving appliances to 326 security cameras. After two years of work, Messrs. Schneur and Vaughn capped off the revitalization by giving the complex a new handle: “The Plaza.”

“Noble Drew Ali, without a doubt, was one of the most complicated projects [we've seen],” says Mr. Cestero. “They restored it to a quality place for people to live by taking a very aggressive approach to renovating buildings.”

Today Mr. Vaughn, who played for the Boston Red Sox in the 1990s, spends most of his time on the operations side of the business, working with Omni’s construction, management and maintenance teams, while Mr. Schneur focuses on the dealmaking.

“I’m the eyes,” said Mr. Vaughn, who got his start in real estate by investing in Manhattan nightclubs with help from Mr. Schneur, then his attorney. “I make sure that everything that needs to get done gets done.”

In fact, Omni was his idea. In Ohio, where Mr. Vaughn spent his off-seasons, he met a developer successfully buying affordable housing using tax credits and decided to try the concept out in New York.

“They are smart people,” says Lisa Gomez, executive vice president of affordable housing developer L+M Development Partners. “They get how to do affordable housing and look to the double bottom line [of making money and doing good].”

Size doesn’t matter

But competition for distressed properties is increasing as the drought in luxury housing deals drags on. Meanwhile, the price of tax credits—a key currency in such deals—has plummeted by nearly a third, forcing Omni to scramble for more state and city subsidies to fill the gap.

“We used to be able to get deals done without subsidies,” says Mr. Schneur.

Omni’s rapid growth also presents challenges. By year’s end, it expects to have close to 5,000 units. For a firm whose two founders visited their early holdings as many as four times a week, the sheer scale of the portfolio now makes maintaining that degree of oversight difficult—even with the aid of a staff at its midtown headquarters that now numbers about 120.

“We can’t cut corners and be complacent,” says Mr. Vaughn. “If we continue to be humble and work hard, we will be fine.”

In fact, Mr. Vaughn and his partner are stepping up their act. Prior to the market collapse, Omni had been priced out of Manhattan. Mr. Schneur recalls one deal where Omni bid $20 million for a Manhattan building that went for $30 million.

Last month, Omni had better luck, buying its first Manhattan properties—two Section 8 buildings in Harlem with 53 units—for $5.5 million. Now, as a number of big, financially troubled properties, including Lawrence Gluck’s 1,230-unit Riverton in Harlem, make their way through foreclosure, they are weighing a bid. Even Manhattan’s vast middle-income oasis Stuyvesant Town-Peter Cooper Village looms as a potential target.

“Size doesn’t matter,” says Mr. Vaughn. “They fit within our philosophy of preserving decent affordable housing.”

Kennedy Death Cuts Broad Health Bill Odds, Hatch Says

By Nicole Gaouette

Aug. 30 (Bloomberg) — Congress is less likely to pass sweeping health-care overhaul legislation following the death of Senator Edward Kennedy, a leading Republican said.

“You’re not going to get this big, broad Democrat spending bill — you’re not going to get Republican support,” Senator Orrin Hatch, a Utah Republican and close friend of the Massachusetts Democrat, said on CNN’s “State of the Union” program.

Hatch said Kennedy’s status as Congress’s leading liberal often convinced Democrats they could support deals he had struck with Republicans. “That’s why Senator Kennedy was so important,” Hatch said. “I don’t know if another Democrat has the same clout in Congress.”

Expanding coverage to nearly 50 million uninsured Americans and lowering health-care costs was Kennedy’s life’s work, colleagues said, and is now President Barack Obama’s top domestic priority. Lawmakers failed to get health-care bills through Congress before the August recess. Obama, who is pushing lawmakers to overhaul a health-care system that accounts for about 18 percent of the nation’s economy, said Aug. 20 that “we’re going to get this done one way or another.”

Hatch said Kennedy provided deep experience on health care, united factions within the Democratic Party and worked well with Republicans.

Kennedy’s Work

“Kennedy could bring together all of the base groups of the Democratic Party,” Hatch said on ABC’s “This Week,” recalling that Kennedy worked on health legislation for more than three decades. “In every case, he fought as hard as he could, but when he recognized that he couldn’t get everything he wanted, he worked with the other side. If he was here, I don’t think we’d be in the mess we’re in right now.”

Kennedy’s illness meant he was absent from Congress for much of the past year, though his staff said he kept abreast of the health debate through frequent phone calls. Senator Christopher Dodd, the Connecticut Democrat who temporarily took over from Kennedy as chairman of the Senate Health, Education, Labor and Pensions Committee, told the panel that Kennedy was watching their debate on C-SPAN television and calling him daily to offer feedback.

Four of the five congressional committees with jurisdiction over health have passed bills that would cost about $1 trillion over 10 years. The Senate Finance Committee has stalled over a number of issues, including whether to create a government-run insurance plan, require employers to provide workers with insurance, and impose new taxes that could range from taxing the richest Americans to levies on generous health plans.

Public Plan

Not all Democrats support the idea of a public plan, which Obama has said would be his preferred way to generate more competition among health insurers. Louisiana Senator Mary Landrieu told CNN she would “tend not to” support a bill that included a public option. “I think we can do it without a public option,” the third-term Democrat said. “Hopefully we can keep working. That’s what Ted Kennedy would want us to do.”

John Kerry, now the senior Democratic senator from Massachusetts and a member of the Finance Committee, said he was confident a health-care bill would be passed and he urged Republicans to avoid being “bound by ideology.”

“When we get reality on the table we can have a good conversation,” Kerry said on the ABC program. “I believe we can do this. I think better judgment will prevail.”

Senate Bill

When the Senate returns in September, it will take up the bill the Senate health committee put together in July, Dodd said on NBC’s “Meet the Press.” He said the bill is “sitting there,” ready to be worked on with the Finance Committee.

“If we can get these bills together and sit down with each other, we can produce a strong, vibrant, vitally needed national health care legislation on accessibility, quality and affordability,” Dodd said.

Health-care costs now account for about 18 percent of GDP, according to the president’s Council of Economic Advisers, and are projected to rise to 34 percent by 2040.

“The country cannot afford this, Dodd said on CNN. “How we get there is the challenge before us.”

Senator Maria Cantwell, a Washington Democrat, said bipartisan cooperation on the issue was crucial. “Doing nothing and thinking that we’re going to get out of this expense is not an option,” Cantwell said on CNN’s “State of the Union.”

“Getting true competition into the system and giving consumers choice is what the Democrats and Republicans should be joining ranks on,” Cantwell said.

Democrats Alone

Democrats including Senator Charles Schumer of New York have said that if Senate Finance negotiators — three Republicans and three Democrats — can’t reach a deal by Sept. 15, Democrats may have to pass the bill on their own.

The majority party could use a legislative maneuver called reconciliation which allows the Senate to pass a bill with 51 votes instead of the 60 typically needed for controversial pieces of legislation.

During the August recess, Finance Committee Chairman Max Baucus convened meetings of the six senators on the committee who are working on a bipartisan compromise.

Any agreement they reach would have to be coordinated with a plan passed by the Senate HELP committee. The three House committees with jurisdiction over health will meld their bills together after lawmakers return from recess. The House and Senate bills would have to be reconciled before being voted on by both chambers.

Protests at Meetings

The Senate adjourned on Aug. 7 and will reconvene on Sept. 8. Many of the town hall meetings lawmakers held to discuss health-care during the recess were disrupted by protests.

Administration officials have urged lawmakers to honor Kennedy by getting health reform passed.

“The best possible legacy is to pass health reform this year,” Secretary of Health and Human Services Kathleen Sebelius said recently. “Hopefully every step along the way they’ll ask themselves ‘What would Teddy do?’”

Dodd said Kennedy’s death will push his colleagues to work harder at passing legislation.

“We don’t have the luxury of wallowing in our grief; we’ve got to get up and get this done,” Dodd said. “We’re going to roll up our sleeves and do what Teddy would have done and get health-care done.”

– With assistance from Jeff Plungis in Washington. Editors: Ann Hughey, Bill Schmick

To contact the reporter on this story: Nicole Gaouette in Washington at ngaouette@bloomberg.net.

U.S. payment-card industry grapples with security

By Ross Kerber

BOSTON (Reuters) – Fresh details of large-scale cyber attacks against data processor Heartland Payment Systems Inc and supermarket chain Hannaford Brothers show the challenges facing the efforts of the U.S. credit-card industry to upgrade security measures.

While both companies say their computer networks met the tough new standards meant to prevent data breaches, Visa Inc said Heartland at least may have let its guard down.

The positions reflect broader disagreements in the industry, as squabbling between merchants and financial firms over technology and the cost of systems upgrades continues to impede progress, said Robert Vamosi, an analyst for California consulting firm Javelin Strategy & Research.

“They both need to fight fraud and they are fighting each other,” he said.

The financial stakes are getting higher. Fraud involving credit and debit cards reached $22 billion last year, up from $19 billion in 2007, according to California consulting firm Javelin Strategy & Research.

The security of consumer information came under renewed scrutiny on August 17 when a 28-year-old Florida man, Albert Gonzalez, was indicted along with two other unnamed hackers for breaching the computer networks of Heartland and Hannaford, both of which said they were in compliance with security requirements.

Those standards were set by a council that includes the world’s two largest credit card networks, Visa and MasterCard Inc; fast-food leader McDonald’s Corp; oil major Exxon Mobil Corp; and big banks Bank of America Corp and Royal Bank of Scotland Plc.

All these companies face rising costs linked to fraud and its prevention. Of the 275,284 complaints received last year by the government’s Internet Crime Complaint Center, 24,775 were tied to credit or debit card fraud, up from 13,033 in 2007 and 9,960 in 2006.

Yet some 5 percent of the largest retailers and restaurants still have not met compliance deadlines set in 2007, according to Visa.

Even companies that meet the standards could be vulnerable should they lower their guard, Visa security executive Ellen Richey said last spring in a speech critical of Heartland.

“It was the lack of ongoing vigilance in maintaining compliance that left the company vulnerable to attack,” she said in March.

Merchants, for their part, complain via trade groups like the National Retail Federation that Visa and MasterCard are asking them to pay more than their fair share for security upgrades.

Some retail executives also say Visa and MasterCard have been slow to adopt better encryption technology and cards with high-security computer chips because of the associated costs.

“I can’t even tell you how many sour, disgruntled calls I get from retailers,” said Gartner Inc technology consultant Avivah Litan, who also works with banks.

GOVERNMENT REGULATION?

At Heartland, Gonzalez was charged with stealing more than 130 million payment card numbers, a record. Previously the biggest such hacking case was at TJX Cos Inc, where federal prosecutors last year accused Gonzalez and others of conducting an electronic break-in starting in 2005 that companies said compromised as many as 100 million card numbers.

Gonzalez, who is awaiting trial, has pleaded not guilty to the charges related to TJX, which had not met security standards at the time of the data breach.

This time, prosecutors say Gonzalez and his co-conspirators penetrated Hannaford and Heartland’s systems in late 2007 with code known as “structured query language,” which the security standards require companies to protect themselves against.

They also charged the ring breached systems at convenience store operator 7-Eleven Inc, roughly in August 2007. The company said the breach only affected transactions at automated teller machines owned by a third party at some of its stores, and wouldn’t comment further.

A spokesman for Hannaford, a unit of Belgium’s Delhaize Group, said an audit unit of Verizon Communications Inc showed it met the security standards.

Heartland said through a spokesman that its systems had been checked by audit firm Trustwave of Chicago as recently as April 2008 — about four months after prosecutors say the hackers began their theft.

The security standards represent “the lowest common denominator and the bad guys have figured out how to get around some of the weaknesses,” the spokesman said.

A Verizon spokesman confirmed it had audited Hannaford and found it to meet the standards, but declined to elaborate. A Trustwave spokeswoman said the firm wouldn’t comment.

Security is critical to Heartland because it processes card payments for merchants, and its stock dropped sharply in the two months after the attack was discovered.

In response, Chief Executive Robert Carr has tried to reassure customers and stepped up calls for better data encryption.

Ultimately, should the payment card industry fail to get its act together, it could face more government regulation, said Cynthia Larose, an attorney at Mintz Levin in Boston.

“If the stakeholders cooperate, we would see much better security,” she said.

(Editing by Matthew Bigg and Gerald E. McCormick)

Kennedy’s Death Opens Up Succession Debate

A torch extinguished: Ted Kennedy dead at 77

HYANNIS PORT, Mass. – The greatest heights eluded Ted Kennedy over a lifetime of achievement and pain. No presidency. No universal health care, chief among his causes.

Instead, Kennedy built his Washington monument stone by stone, his imprint distinct on the Senate’s most important works over nearly half a century. He toiled across the Potomac River from the graveyard of his fallen brothers.

The last of the Kennedys who fascinated the nation with their ambition, style, idealism, tragedies — and sometimes sheer recklessness — Edward Moore Kennedy died late Tuesday night at 77. A black shroud and vase of white roses sat Wednesday on his Senate desk, which John Kennedy had used before him.

So dropped the final curtain on “Camelot,” the already distant era of the Kennedy dynasty.

The Massachusetts senator‘s extended political family of fellow Democrats and rival Republicans, steeled for his death since his brain-tumor diagnosis a year ago yet still jarred by it, joined in mourning. Kennedy was the Senate’s dominant liberal and one of its legendary dealmakers.

Just last year he jumped into a fractious Democratic presidential nomination fight to side with Barack Obama, giving the Illinois senator a boost that had the air of a family anointment.

“For his family, he was a guardian,” Obama said Wednesday. “For America, he was a defender of a dream.”

The president, vacationing in Martha’s Vineyard, was awakened after 2 a.m. and told of Kennedy’s death. He spoke soon after with the senator’s widow, Victoria, and ordered flags flown at half-staff on all federal buildings.

Kennedy will be buried Saturday at Arlington National Cemetery after a funeral Mass in Boston, where Obama is to deliver a eulogy.

Kennedy will lie in repose at the John F. Kennedy Presidential Library and Museum in Boston before that.

Also buried at Arlington, the military cemetery overlooking the capital city, are John and Robert Kennedy; John Kennedy’s wife, Jacqueline; their baby son, Patrick, who died after two days, and their stillborn child.

To Americans and much of the world, Kennedy was best known as the last surviving son of the nation’s most glamorous political family. Of nine children born to Joseph and Rose Kennedy, Jean Kennedy Smith is the only one alive.

To senators of both parties, he was one of their own.

“Even when you expect it, even when you know it’s coming, in this case it hurts a great deal,” said Democrat Patrick Leahy of Vermont.

Politicians also calculated the consequences for Obama’s push for expanded health coverage. For several months, at least, Kennedy’s death will deprive the Democrats of a vote that could prove crucial for his signature cause of health reform.

His illness had sidelined him from an intense debate that would have found him at the core any other time. Conservative Sen. Orrin Hatch of Utah, his improbable Republican partner on children’s health insurance, volunteerism, student aid and more, said the Senate probably would have had a health care deal by now if Kennedy had been healthy enough to work with him.

“Iconic, larger than life,” Hatch said of his friend. “We were like fighting brothers.”

He was the last of the famous Kennedy brothers: John the assassinated president, Robert the assassinated senator and presidential candidate, Joseph the aviator killed in action in World War II when Ted was 12.

He lost his sister, Eunice Kennedy Shriver, less than two weeks ago, saw the bright promise of nephew John F. Kennedy Jr. end in a plane crash in 1999 and struggled with excesses of his own until he became a settled elder statesman.

Like Obama, Kennedy was a master orator. But the words that live for the ages seem to be those he uttered in tragedy or defeat.

Older Americans remember his eulogy of Robert Kennedy, when he asked history not to idealize his brother but remember him “simply as a good and decent man who saw wrong and tried to right it, saw suffering and tried to heal it, saw war and tried to stop it.”

Remembered, too, is his speech conceding the 1980 Democratic presidential nomination to the incumbent Jimmy Carter. “For all those whose cares have been our concern, the work goes on, the cause endures, the hope still lives and the dream shall never die,” he said.

By then, his hopes of reaching the White House had been damaged by his behavior a decade earlier in the scandal known as Chappaquiddick.

On the night of July 18, 1969, Kennedy drove his car off a bridge and into a pond on Chappaquiddick Island, on Martha’s Vineyard, and swam to safety while companion Mary Jo Kopechne drowned in the car. He pleaded guilty to leaving the scene of an accident; a judge said his actions probably contributed to the young woman’s death. He received a suspended sentence and probation.

Kennedy’s legislative legacy includes health insurance for children of the working poor, the landmark 1990 Americans with Disabilities Act, family leave and the Occupational Safety and Health Administration. He was also key to passage of the No Child Left Behind Education law and a Medicare drug benefit for the elderly, both championed by Republican President George W. Bush.

In the Senate, Republicans respected and often befriended him. But his essential liberalism marked him as a lightning rod, too. He proved a handy fundraising foil motivating Republicans to open their wallets to fight anything he stood for.

In 1980, Kennedy’s task of dislodging a president of his own party was compounded by his fumbling answer to a question posed by CBS’ Roger Mudd: Why do you want to be president?

“Well, I’m, uh, were I to, to make the, the announcement, to run, the reasons that I would run is because I have a great belief in this country,” he began.

It’s a question that all savvy politicians ever since make sure won’t catch them unprepared.

In his later years, Kennedy cut a barrel-chested profile, with a swath of white hair, a booming voice and a thick, widely imitated Boston accent. He coupled fist-pumping floor speeches with charm and formidable negotiating skills.

“I think that once he realized he was never going to be president — that that was not the legacy he had to follow — he really worked at becoming the best senator he possibly could,” Leahy said. “And he did.”

He was first elected to the Senate in 1962, taking the seat that his brother John had occupied before winning the White House, and he served longer than all but two senators in history.

Kennedy was diagnosed with a cancerous brain tumor in May 2008 and underwent surgery and a grueling regimen of radiation and chemotherapy.

He made a surprise return to the Capitol last summer to cast a decisive vote for the Democrats on Medicare. He made sure he was there again in January to see his former Senate colleague sworn in as president but suffered a seizure at a celebratory luncheon afterward.

His survivors include a daughter, Kara Kennedy Allen; two sons, Edward Jr. and Patrick, a congressman from Rhode Island, and two stepchildren, Caroline and Curran Raclin.

Edward Jr. lost a leg to bone cancer in 1973 at age 12. Kara had a cancerous tumor removed from her lung in 2003. In 1988, Patrick had a non-cancerous tumor pressing on his spine removed. He also has struggled with depression and addiction and recently spent time at an addiction treatment center.

___

Woodward reported from Washington. Associated Press writer Laurie Kellman in Washington, Philip Elliott in Oak Bluffs, Mass., and Bob Salsberg contributed to this report.

A Privileged World Begins to Give Up Its Secrets

About 10 years ago, when I was working in Frankfurt, Germany’s banking capital, I was invited to the top floor of the glittering skyscraper headquarters of one of the country’s most venerable banks. There, I was treated to something that, it was made clear to me, few eyes usually had the privilege of seeing — a tour of its private art collection, an impressive spattering of modern and ancient European and American masters.

The point was, those pictures reflected the bank’s wealth. And the fact the secretive treasures were kept forever behind closed doors for the enjoyment of the privileged few reflected its power.

If that seems like a different era, it is. Banks around the world are reeling, as we know; the European banks’ losses are among the most ruinous. And their prestige and putative secrecy and independence received a further blow last week, when the government of Switzerland agreed to release to the United States the names of 4,450 American citizens suspected of using secret Swiss accounts at UBS, the country’s biggest bank, for tax evasion.

The victory for the United States was made possible by evidence from an American-born whistleblower — code name Tarantula — a disgruntled former UBS employee from the Boston area who was working in Switzerland. Until he left the bank, he was part of a UBS team that made frequent trips across the Atlantic to aggressively market investment strategies to rich Americans to elude the scrutiny of the Internal Revenue Service.

But it would be wrong to see the settlement as a one-off strike against just one bank by a single government. It is in fact the result of a broader political moment created in the wake of the global financial crisis when disenchantment with financial globalization is causing governments to repatriate wealth back to within national borders, especially at a time when countries badly need to balance their books.

Just a few years ago, in the pre-crisis era, the shadowy workings of cross-border banking — and what may or may not have been happening there — were generally overlooked.

And, while some of the alleged tax evaders may be the war criminals, gunrunners or despots usually linked with secret foreign bank accounts, the target of the latest efforts are much more likely to include rich businessmen and high-net-worth individuals. “There is a political movement because of the financial debacle,” said one veteran European banker who insisted on speaking anonymously because he has retired. “They are turning toward the so-called rich and want to hurt them.”

Of course, the United States looks at it a bit differently. Prosecutors have contended that in the UBS case alone, wealthy Americans hid billions of dollars, thereby evading taxes of hundreds of millions of dollars a year.

While Switzerland is arguably the largest off-shore center, it is not the only one. Supporters of its banking secrecy code point out that the code is wrapped up in the country’s claims to neutrality and being above the global political fray. But secrecy has also turned out to be immensely lucrative; according to some estimates one-quarter of the world’s offshore money now resides in Switzerland.

Other countries or territories have copied the model — Liechtenstein, Bermuda, the Cayman Islands, Macao and Hong Kong among them. And while Switzerland is probably seen as the most conservative, blue chip, upstanding offshore haven, the others are measured by a sliding scale of probity and association with dubious business practices, if not crime. The European banker said that in the early 1990s, following the fall of the Soviet Union, he worked in Switzerland where he said agents of Russian expats would show up with “boxes of cash” from Cyprus, a popular haven for capital fleeing the Russian authorities and the country’s post-collapse chaos.

The backlash against this illicit world has not been confined to the United States; it is apparent across Europe, too.

France will become of one of the first European countries to put in place a new tax treaty with Switzerland to improve transparency and access to banking information. Germany is in discussions with Liechtenstein over issues related to tax evasion by German companies and individuals. Liechtenstein has also struck a disclosure agreement with Britain, encouraging British clients of Liechtenstein banks to volunteer information to British tax authorities in return for reduced penalties. In Italy, tax officials have started an investigation into whether the estate of the late Gianni Agnelli, the former chairman of Fiat, has money hidden away in Switzerland. In Britain, the government has become particularly exercised by tax competition — the offering of low tax rates and other advantages like tax secrecy to lure capital away.

In the Swiss settlement last week, the American authorities got the information they needed after they saw an opportunity in the weakness of UBS, a bank that once enjoyed a sterling global reputation but has suffered billions of dollars in losses linked to United States subprime securities and had to be saved by a big government bailout last October. For the Swiss government, the deal lifts the immediate threat of heftier legal action and frees the bank — one of the mainstays of the Swiss economy — to concentrate on recovery.

But will anything really change? Although the United States is supposed to learn the identities of a few thousand tax evaders, those names will go first to an intermediate tax administration in Switzerland for review. The actual process of recovering the names may become lost in bureaucracy and foot-dragging.

Moreover, as The Times reported last week, smaller Swiss banks say they are confident that they can continue to profit by finding new, more elaborate ways to protect the privacy of their clients. Those banks continue to help clients hide billions of dollars through complex structures in offshore havens.

But the I.R.S. commissioner, Doug Schulman, said the agreement with UBS was a “major step forward” in the government’s efforts to pierce bank secrecy, and he warned that “wealthy Americans who have hidden their money offshore will find themselves in a jam.”

In the new political climate, expect to see a few rich Americans shifting uncomfortably.

The Martha’s Vineyard Times

Mass in top 10 for stimulus spending

STATE HOUSE, BOSTON, AUG. 13, 2009…..The state, local governments and private entities in Massachusetts have received $4.44 billion and spent more than $2.02 billion, 45 percent, through the federal stimulus law, known as the American Recovery and Reinvestment Act.

That percentage of spending puts Massachusetts seventh among states in the rate of putting stimulus funds into the economy, Executive Office of Administration and Finance officials said Thursday. By the end of the life of the stimulus in fiscal 2011, the state expects to receive $9.22 billion for spending out of $514 billion doled out nationally, as well as $4.28 billion in tax benefits, compared to $272.52 billion nationally.

Testifying Thursday before the Legislature’s Committee on Federal Stimulus Oversight, budget officials said the federal funds had helped save budgets for important social welfare programs, spark infrastructure development and retain jobs. But “evolving” federal guidance has made it difficult to track the number of jobs created, they said.

Much of the funding has been used in the state budget, effectively preserving jobs that may have been cut.

Secretary of Administration and Finance Leslie Kirwan said stimulus spending was one facet of the Patrick administration’s effort to turn around the Massachusetts economy, which has seen tens of thousands of job losses and deteriorating tax collections in recent months. Other aspects include the state’s borrowing program, an accelerated bridge repair program, as well as investments in broadband, clean energy and life sciences.

Of the $2.02 billion in stimulus funds spent, state agencies are responsible for $1.47 billion, including $419 million for education, $1.02 billion for safety net programs, $12.4 million for public safety efforts, $8.1 million for labor and workforce development programs and $4.5 million for transportation programs. The rest flows directly into cities and towns, school districts and non-governmental entities.

Spending deadlines for hundreds of millions of dollars of transportation infrastructure funds have been met and exceeded, said Jeffrey Simon, director of the Patrick administration’s Office of Infrastructure Investment, which oversees much of the stimulus spending. Those deadlines included a 120-day window to spend $153 million on highway repairs – Massachusetts spent $191 million – and a 180-day timeframe to spend $159 million on transit – the state has spent $164 million as of two weeks ago – Simon said. If those deadlines had not been met, the state would have had to return the money to the federal government.

Administration officials said they were struggling to quantify the number of jobs created by ARRA funds because of “evolving” guidance for how to calculate job gains and job retention.

“We’re on version three now of directives from [the federal Office of Management and Budget],” Simon said. Simon pointed to an October 10 deadline for reporting such numbers, when the state hopes to have clearer guidance.

Sen. Marc Pacheco, who co-chairs the stimulus oversight committee, said he expected “a good news story” when those job numbers were available.

Kirwan later said she expected the numbers to show that “most likely thousands of local jobs” had been created or retained. She, as well as committee co-chair Rep. David Linsky, said the federal funds for safety net programs – food stamps, mental health services and others – had saved lives.

Since March 19, the last time Administration and Finance officials came before the committee to discuss stimulus funding, Simon’s office has hired two veterans of Attorney General Martha Coakley’s office to help oversee infrastructure spending. The two, Stephanie LeBlanc and Douglas Rice, who respectively serve as infrastructure assessment manager and compliance and reporting manager, worked on Big Dig cost recovery efforts for Coakley. Simon said hiring officials with that experience made “a statement” about the administration’s seriousness about ensuring that public dollars are spent wisely.

Kirwan told committee members the administration had hoped to evenly spread its stimulus funds through fiscal years 2009, 2010 and 2011, but steep deterioration in revenue collections moved state policymakers to frontload much of the stimulus spending to help balance the fiscal 2009 budget.

“When the governor first put this budget together for fiscal ’10, we had not yet experienced the revenue losses for April and June,” she said, noting that those two months saw revenues miss benchmarks by $500 million and $180 million, respectively. “At this time last year, we still had not lost a dollar of revenue. We did not until the middle of September last year have any loss of revenue.”

Comptroller Martin Benison also testified at the hearing, describing his office’s efforts to track and report on 34 separate grant awards overseen by OMB. Twenty departments – 16 executive agencies, two non-executive departments and two colleges – are responsible for administering those grants, which have totaled more than $500 million to date. Much of that includes a $412 million use of education funds to offset a fiscal 2009 local aid reduction.

Benison said his office holds weekly conference calls with stimulus stakeholders to coordinate reporting efforts.

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Young investors wary of jumping into market lows

By Erin Kutz

BOSTON (Reuters) – Young investors may accept the argument that those who begin investing when stocks are cheap end up with more retirement money, but after the turmoil of the past year, some find it hard to put their money in the market.

Asset managers and analysts say that those who invest in rock-bottom stocks of a bear market will see share values rise for decades.

But many in their 20s and early 30s are not buying rosy projections, due to immediate financial pressures and exposure to the longest recession since the 1930s Great Depression.

“I would keep all my money in cash,” said Alex Corbacho, a senior at Boston University.

The trend has some worrisome long-term implications. Stock brokers may find themselves largely shut out of a big customer base, and demand for equities will likely be crimped as investors favor safer havens, hurting the stock market’s prospects. It’s also unclear whether these young investors will have accumulated enough to fund their retirements when the time comes.

Corbacho is no stranger to markets. At age 13 he invested his birthday money and a matching donation from his father, $1,000 in total, in tech stocks only to feel the sting when the Internet bubble burst.

He carried the lesson with him in early 2008, after seeing signs of economic trouble as an intern at a Boston investment bank. He put the majority of his stock investments, which had reached about $5,000, into a certificate of deposit instead.

Corbacho doesn’t plan returning to stocks for a few years after graduation and is instead focusing on saving.

The recent market collapse has made holding cash for immediate expenses far more attractive to young people than investing, said Rodger Smith, managing director of Connecticut consulting firm Greenwich Associates.

“They are taken aback by how much they lost and how quickly they lost it,” Smith said.

The early exposure to such dramatic declines could restrain many from investing aggressively when they are older and have accumulated more money to put into the market, some say.

Asset managers, financial advisers and investors agree that young people will emerge from the financial crisis more educated, and more cautious, about managing their money.

“I do think they are taking a more practical and slightly more conservative view of the world,” said Michael Doshier, vice president of Fidelity’s Workplace Investing Group.

Corbacho said his generation should not expect to accumulate sudden wealth like some in the past.

“We might be a little smarter and a little wiser moving forward. We will have been more conservative and more observant and won’t have 65 percent of our life savings invested in equities,” he said.

Assets in U.S. retirement plans fell 22 percent in 2008 or nearly $4 trillion, with almost 75 percent of the drop in the second half of 2008, the Investment Company Institute found.

“These folks need to be resold on the idea that a 401k is a long-term investment,” said Smith, who oversees a profit-sharing plan for his firm and advises younger investors.

LONG-TERM CONCERNS

Financial advisers have long suggested that those further from retirement invest more heavily in equities, then switch to less risky assets as they near their golden years.

But the portfolios of those in their early 20s don’t reflect that advice. At Fidelity Investments, those 20-24 years old invest 31 percent of their 401ks in equities, compared to those 50-59 years old with 35 percent equities investments.

Overall, those saving for retirement have pulled back from stocks. In June, 48 percent of all Fidelity 401k participants were in equities, down from 53 percent a year ago.

Those in the investment industry say young investors should buy stock early and often.

“The key message is that it’s not a bad time for everybody,” said Christine Fahlund, senior financial planner at T. Rowe Price.

Ita Mirianashvili, a 35-year-old fellow at Massachusetts Institute of Technology’s Sloan School of Management, has confidence in long-term stock market prospects.

“I know the downturn cycle we are in will continue for some time but it will come back,” she said outside a MIT class that simulates a stock trading room.

But concerns about inflation, heavy government spending and rising bankruptcies has left many young investors uncertain.

“It’s still difficult to be bullish … for the long-run,” said Ashan Walpita, a 2009 Boston University graduate and former president of the school’s finance club.

Other short-term obstacles may hold young investors back. Employer-sponsored retirement plans often give people their first market exposure but with many graduates not finding work, they are yet to get started on making investments.

(Editing by Mark Egan and Cynthia Osterman)

Financial tech web plays arise from ashes of economy

Article Courtesy of:  MASS HIGH TECH

Former MIT computer scientist Jim Psota hopes that Panjiva can attract more gatherers of esoteric data to help serve traders.

When the world financial markets fell apart last fall, the prognosis was dire for startups bent on selling information technology to financial services firms. But entrepreneurs and investors in Massachusetts’ financial services IT sector didn’t blink: And now, three new companies founded or funded here are developing new models for both individual investors and data-driven money managers.

Panjiva Inc., a New York company with a Cambridge-based development team, is aggregating, cleaning and analyzing global trade data. Another New York firm, Covestor Inc., has taken funding from Boston-based Spark Capital for a service that allows users to automatically co-invest with other investors. A third company, Lexington-based StreamBase Systems Inc., has applied its real-time complex event-processing engine to the rising global tide of micro-blog posts on Twitter.

Providing investors with new sources of information, however obscure, remains a good business model, said Battery Ventures general partner Michael Brown, who invested in Panjiva. “When it comes to the guys who are managing money, it’s all about that little nugget of data that you can use,” he said.

Founded in 2007 by MIT computer scientist Jim Psota and former Boston Consulting Group associate Josh Green, Panjiva has taken in $5.5 million so far from Battery and a dozen angel investors. Its data sources include the U.S. Department of Homeland Security shipping records, reports from overseas factory inspectors, and a Chinese government insurer’s due diligence on eight million  companies. Last week, the company launched a partnership program designed to attract other gatherers of esoteric data relevant to trade.

The two originally envisioned a customer base of importers, but Panjiva has seen growing interest from the data distribution channels that target investor communities, Green said. Overseas factories often shutter with no warning, crippling a company’s supply chain. “To the investor community, there’s often little transparency about how much (supply chain) risk those companies are facing,” he said.

Last week, StreamBase, founded in 2003 by serial entrepreneur Michael Stonebraker, announced it had adapted its complex event processing system to support semantic analysis in real time on the stream of comments and dialog on the microblog sharing service Twitter.

“It’s pretty well understood on Wall Street that companies with the best data are going to make the most money,” said StreamBase CTO Richard Tibbetts. Changing trends in brand sentiment on Twitter may be the data point that influences a decision, he said.

Covestor hopes to capitalize on trends at the opposite end of the pool, where private individuals are disillusioned with Wall Street money managers. The company’s online service, launched last week, is designed to let investors piggy back on trades and investments made by a single other investor — who may or may not be a professional.

“Right now, you’re only able to follow the however many thousand professionals around the world,” said co-founder Perry Blacher. “We all know people we think are good at investing. Why can’t I invest alongside one of them?”

To navigate prohibitions against paying commissions to nonqualified, private investors, Covestor treats its record of investors’ trades as publishable information and charges a subscription fee, Blacher said. Followed investors receive $120 a year per subscriber, and the company itself reaps a fixed management fee of 0.5 to 1.5 percent.

Covestor is similar to existing services like the Motley Fool website’s Caps network, which lets investors share predictions — except it takes out the work of researching and making investments yourself, said Richard Gibble, director of the Hughey Center for Financial Services at Bentley University.

For investors chary of part-time day trading and mistrustful of Wall Street money managers, that “plug-and-play model” may be a compelling offering, he said. “The markets are complicated,” Gibble said. “Even if you know what you’re doing, it’s not easy to make money. Even for me, I like to think I know what I’m talking about, but it takes a lot of time. If you don’t have that time, you have to outsource it.”

White House reviewing ‘cash for clunkers’ program

WASHINGTON – The White House said Thursday it was reviewing what has turned out to be a wildly popular “cash for clunkers” program amid concerns the $1 billion budget for rebates for new auto purchases may have been exhausted in only a week.

Transportation Department officials called lawmakers’ offices earlier Thursday to alert them of plans to suspend the program as early as Friday. But a White House official said later the program had not been suspended and officials there were assessing their options.

“We are working tonight to assess the situation facing what is obviously an incredibly popular program,” White House press secretary Robert Gibbs said of the Car Allowance Rebate System. “Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored.”

Gibbs said the administration was “evaluating all options” to keep the program funded.

A Transportation Department official said the department was working with Congress and the White House to keep the program going. The administration officials spoke on condition of anonymity because they were not authorized to speak publicly about the discussions.

The CARS program offers owners of old cars and trucks $3,500 or $4,500 toward a new, more fuel-efficient vehicle.

Congress last month approved the program to boost auto sales and remove some inefficient cars and trucks from the roads. The program kicked off last Friday and was heavily publicized by car companies and auto dealers

Through late Wednesday, 22,782 vehicles had been purchased through the program and nearly $96 million had been spent. But dealers raised concerns about large backlogs in the processing of the deals in the government system, prompting talk of a possible suspension.

A survey of 2,000 dealers by the National Automobile Dealers Association found about 25,000 deals had not yet been approved by NHTSA, or nearly 13 trades per store. It raised concerns that with about 23,000 dealers taking part in the program, auto dealers may already have surpassed the 250,000 vehicle sales funded by the $1 billion program.

“There’s a significant backlog of ‘cash for clunkers’ deals that make us question how much funding is still available in the program,” said Bailey Wood, a spokesman for the dealers association.

Alan Helfman, general manager of River Oaks Chrysler Jeep in Houston, said he was worried that the government wouldn’t pay for some of the clunker deals his dealership has signed because they aren’t far enough along in the process.

His dealership has done paperwork on about 20 sales under the clunker program, but in some cases the titles haven’t been obtained yet or the vehicles aren’t yet on his lot.

“There’s no doubt I’m going to get hammered on a deal or two,” Helfman said.

The clunkers program was set up to boost U.S. auto sales and help struggling automakers through the worst sales slump in more than a quarter-century. Sales for the first half of the year were down 35 percent from the same period in 2008, and analysts are predicting only a modest recovery during the second half of the year.

So far this year, sales are running under an annual rate of 10 million light vehicles, but as recently as 2007, automakers sold more than 16 million cars and light trucks in the United States.

Even before the suspension, some in Congress were seeking more money for the auto sales stimulus. Rep. Candice Miller, R-Mich., wrote in a letter to House leaders on Wednesday requesting additional funding for the program.

“This is simply the most stimulative $1 billion the federal government has spent during the entire economic downturn,” Miller said Thursday. “The federal government must come up with more money, immediately, to keep this program going.”

Michigan lawmakers planned to meet on Friday to discuss the program.

Brendan Daly, a spokesman for House Speaker Nancy Pelosi, D-Calif., said they would work with “the congressional sponsors and the administration to quickly review the results of the initiative.”

General Motors Co. spokesman Greg Martin said Thursday the automaker hopes “there’s a will and way to keep the CARS program going a little bit longer.”

___

AP Auto Writer Tom Krisher in Detroit contributed to this report.

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Dealers riding clunkers to the bank

Allure of $4,500 boost for trade-in pulls buyers into auto showrooms

By Sean Sposito, Globe Correspondent  |  July 30, 2009

Massachusetts auto dealers say the new “cash for clunkers’’ voucher program is giving them a much-needed boost in business this week.

The federal promotion – which offers buyers an instant discount of up to $4,500 when a qualifying vehicle is traded in for a new, fuel-efficient model – was rolled out over the weekend, and by yesterday dealers were reporting a jump in sales. Buyers have an additional incentive, too – avoiding the 25 percent increase in the state sales tax that takes effect Saturday.

While there have been complaints that the program is too complicated and won’t ultimately cure automakers’ ills, for now area dealers are just happy to see customers flocking to their showrooms.

“It’s the best week in several years for people in the automotive industry,’’ said Dan Quirk, president of Quirk Auto Dealerships. Quirk said the prospect of shaving thousands of dollars off the price of a car is driving up activity at his 10 showrooms.

Quirk said he usually sells about 1,500 cars a month, but expects to do significantly better in July. “We’ve probably sold 350 just this weekend, 120 through cash for clunkers,’’ he said.

Kevin Haggerty, 60, of Pembroke was shopping at Quirk Chevrolet in Braintree on Monday, hoping to trade in his 1999 Ford F-150, which he estimates is worth around $1,600, as a clunker. The Chevrolet Colorado he was eyeing had already been sold, but Haggerty expects to eventually buy a new car under the voucher program.

“I’m 90 percent sure that I’m going to make a move, unless something is too pricey,’’ he said.

Juan Banos, lead sales manager at Expressway Toyota in Dorchester, said his dealership closed about 30 cash for clunkers deals over the weekend alone. Banos said that even if the program increases monthly sales modestly, he’ll consider it a success.

“An extra 10 to 30 deals, we make at least an average of $1,000 per deal, that’s $30,000 for the dealership just in one weekend,’’ he said. “That could either make it or break it, as far as quotas go.’’

Gregg McCutcheon of Brockton said he was motivated to shop by the promise of cash for clunkers, formally the Car Allowance Rebate System, or CARS. The $1 billion program, which will run through Nov. 1 – or as long as the funds last – allows $3,500 to $4,500 trade-ins on cars that get less than 18 miles per gallon and are less than 25 years old. The money can be applied only toward new cars, and there are other restrictions.

“Cash for clunkers is what got us out here,’’ said McCutcheon, 57, after he bought a car from Mansfield Jeep-Chrysler. But McCutcheon ended up with a 2007 Chrysler Town & Country van instead of a current model.

“I’m 6-foot-6,’’ he said. “The dashboards on the new ones seemed to come out a little bit further, so I picked up a used one.’’

Not buying a new car meant McCutcheon wasn’t eligible for the CARS program, however.

Despite the upbeat moods in showrooms, some dealers said the paperwork associated with the federal program has been overwhelming. Reidar Davies, general sales manager of Prime Honda in West Roxbury, said his dealership has already written more than 40 cash for clunkers deals, but it has required a lot of extra effort.

“The paperwork is extremely, extremely rigorous and demanding,’’ he said. “It requires a ton of data entry.’’

And submitting the deals for government approval online has been painfully slow, Davies said.

Melissa Steffy, general manager at Herb Chambers BMW and Mini in Boston, said sales made with customers over the weekend are just now getting processed online.

“It’s a matrix to put these deals together,’’ Steffy said.

Even signing up to participate in the program was a headache for some dealers. Karen Aldana, a spokeswoman for the National Highway Traffic Safety Administration, said more than 20,000 of the nation’s 25,000 auto dealers have enrolled in the program. But the demand was so high that some dealers could not get onto the agency’s website, she said.

Some local auto industry officials are trying to put the promotion in perspective. With Chrysler merging with Fiat to survive, and General Motors emerging from bankruptcy propped up by $50 billion in taxpayer funds, no one is saying automakers’ troubles are history.

“It’s a $1 billion program and the money will go fast,’’ Quirk said of cash for clunkers. The funding translates to about 225,000 vehicles – just one week of sales across the country.

Sean Sposito can be reached at ssposito@globe.com.

Uneasy times for the Shapiro family

Ties to Madoff could spur effort to recover investment gains

The festive affair belied the uneasy times for the Shapiro family. Three days before attending the party, Shapiro son-in-law Robert Jaffe was accused by federal regulators of delivering $1 billion in client funds to Madoff, reaping $150 million in improper payments in return. Jaffe denies the charges.

Trans-Atlantic tall ship race open to Mass. public

The Associated Press

BOSTON—Months of squabbling between the mayor of Boston and organizers of the Tall Ships Atlantic Challenge 2009 ended with a deal that should provide clear sailing for a scheduled five-day visit by the vessels next month.Boston Mayor Thomas Menino and Massachusetts Gov. Deval Patrick on Wednesday announced a deal they brokered to cover security costs associated with the event and allow free public access to the tall ships—usually square-rigged sailing ships with tall masts.

Menino had threatened to keep spectators away from docks and said he would ask the Coast Guard to bar the tall ships from entering Boston Harbor unless Sail Boston, the sponsors of the event, paid the city for security costs. He maintained that the city was being forced to tighten its belt fiscally and could not afford the additional police overtime.

Sail Boston 2000, the last such extravaganza, drew 2 million visitors to the waterfront. That event cost the city $2 million in police overtime, security and other costs, Menino said in 2004.

The plan includes a $1 million contribution by the Massachusetts Convention Center Authority to cover security costs and an agreement by the Massachusetts Port Authority to bear the costs of docking at Massport’s piers.

Sail Boston also agreed to pay $250,000 to defer Massachusetts State Police costs.

“Government works best when all parties work together,” Menino said in a statement. “Hosting a public event that is both

free and open to all will be a welcome attraction this year as many of our residents and families are cutting back on vacation travel.”This year, nearly 50 ships set off in late April from Vigo, Spain, for the trans-Atlantic journey. They will make five other stops—in the Canary Islands, Bermuda, the United States and Canada—before concluding in Belfast, Northern Ireland, in August.

The first of the ships’ two American stops will be in Charleston, S.C., where they arrive June 25 for the city’s Harbor Fest for a five-day visit before continuing on to Boston on July 8.

Some previously planned elements of the event have been scaled back in Boston because of financial constraints. A parade of tall ships into the harbor has been scrapped, as have two fireworks displays.

By DAMIAN PALETTA

WASHINGTON — Documents unearthed by congressional investigators reveal disagreements among senior Federal Reserve officials about how to handle Bank of America Corp.’s acquisition of Merrill Lynch, fueling concern on Capitol Hill over giving the central bank even more power to regulate the financial system.

The glimpse inside the regulatory machinery provided by emails, memorandums and handwritten notes show a Fed that wrestled with how tough it should be on Bank of America, one of the biggest U.S. banks. It also shows Fed officials questioning more broadly their response to the financial crisis months earlier.

In December, Bank of America approached top U.S. officials about abandoning a deal, forged in the heat of the crisis, to buy investment bank Merrill Lynch. In the end, the government arranged a $20 billion rescue package for the bank to cover growing losses at Merrill.

In between, the documents show areas of disagreement within some of the Fed’s 12 regional reserve banks.

The Federal Reserve Bank of Richmond, where supervision of Bank of America’s parent company is based, pushed for a tougher approach than other regulators, emails suggest. Bank of America officials appealed more than once to the Fed’s Washington headquarters to intervene.

Bank of America CEO “Ken [Lewis] may also raise his favorite perennial issue — that is, is the Richmond supervisory team on the same page as the [Fed] Board,” Fed governor Kevin Warsh wrote in an email Dec. 30 to Fed Chairman Ben Bernanke and other senior officials. “Richmond staff was on our call today, but prior to the call, it sounds like they may have threatened a little more than ideal…”

On Jan. 10, Fed General Counsel Scott Alvarez wrote to Mr. Bernanke and others that Richmond Fed President Jeffrey Lacker was raising some issues over the final deal. Mr. Lacker wanted the entire Federal Open Market Committee to vote on any loan to Bank of America.

Mr. Bernanke responded at 2:01 a.m.: “Thanks. If we are nimble we can manage this.”

Whether or not Mr. Bernanke threatened Mr. Lewis’s ouster over the rescue remains a source of contention. Mr. Lewis suggested in testimony to New York Attorney General Andrew Cuomo that the Fed chief did just that. Mr. Bernanke has denied making such a threat to Mr. Lewis.

On Jan. 16, just days before government aid for the deal was supposed to be announced, Federal Reserve Bank of Boston president Eric Rosengren sent Mr. Bernanke an email saying that the Fed shouldn’t dismiss too hastily the idea of tossing management at Bank of America.

Mr. Rosengren suggested such a shake up might be necessary, “particularly if we believe that existing management is a significant source of the problem.”

Mr. Bernanke, at a contentious hearing Thursday, defended the Fed against suggestions it had been too lenient with management.

“The supervisory process is not a onetime thing. It’s an ongoing process, and in an ongoing supervisory process, we have made demands of the Bank of America on terms of their board and management,” he told Rep. Dennis Kucinich (D., Ohio).

The documents reveal Fed officials questioning the central bank’s response to the financial crisis even before negotiations began on the effort to aid Bank of America’s acquisition of Merrill Lynch.

“At this point I have [the] sense that the hearts and minds war in Iraq was handled better than it has been in this crisis, particularly within the Fed system,” wrote Meg McConnell, a top Federal Reserve Bank of New York official, on the day the House of Representatives voted down the Bush administration’s first financial-rescue package, sending the Dow industrials down almost 800 points.

The Obama administration earlier this month proposed giving the Fed powers to oversee and examine the largest companies in the financial system.

The disclosures could bolster the central bank’s argument that it needs more power to manage future crises. One reason for the government’s lurching response last year, officials say, was that it didn’t have the needed tools.

The Fed has been dealing with a steady stream of criticism from Republicans. Democrats have recently joined in, and the disclosures being aired through the congressional inquiry have put the central bank on the defensive.

Write to Damian Paletta at damian.paletta@wsj.com

State Street fights to put uncertainty behind it

A Boston stalwart fights its way through a crisis that’s putting even its steady strategy to the test

By Beth Healy, Globe Staff | June 14, 2009

Ronald Logue had a nagging suspicion the financial climate was getting dangerous. But he didn’t know where the risks were looming, or how close they would come to his company.

Logue, the chief executive of State Street Corp., a financial services giant in Boston that handles investments around the world, said he first started to worry in 2007, while traveling abroad on business. He feared that markets were becoming so complex and intertwined that the next hedge fund meltdown or foreign currency crisis could threaten the financial system, and ultimately State Street.

He was right about the mounting risks. But they weren’t brewing in some far-flung corner of the world; rather, they were lurking in the US debt markets and right inside the halls of State Street’s downtown offices. By early this year, State Street said it was facing $9 billion in potential losses on seemingly safe debt investments, and shareholders reacted violently, cutting its stock price in half in a single day last January.

“I think the market stepped back and said, ‘Oh my God, even State Street?’ ” Logue said in a recent Globe interview.

Logue has spent the past six months trying to convince investors that a company known as a careful steward of other people’s money had not lost its way. He has repeatedly made the case that State Street stuck to safe kinds of investments. The debt instruments in question were backed by basic consumer loans – for autos and homes, for example. The only real risk with the securities was if, inexplicably, the trading markets were to freeze up.

Which is exactly what happened. When the global credit markets melted down last year, State Street had no way to value those assets and so was forced to acknowledge the potential multibillion-dollar losses. It was something no one could have predicted, Logue said. Still, Wall Street analysts were laying the blame at his feet.

“If there were just 50 percent illiquidity in the marketplace, we would have handled this fine,” Logue said.

On Tuesday, Logue and State Street completed a portion of a tumultuous journey back from those dark days. The company received permission from the US Treasury to repay the government the $2 billion it was forced to accept last October, in the first wave of the bank bailout launched by the Bush administration to prop up the tottering financial system.

Logue had pledged from the beginning to get out of the federal program as soon as possible. At last month’s annual shareholder meeting, he said the company had gone a long way toward completing that effort, by raising $2.8 billion in stock and debt to repay the government. And last week, he declared victory of sorts, saying State Street had “assisted the federal government’s efforts in stabilizing the financial markets.”

It has been a longer road than Logue could have imagined to this place.

How did centuries-old State Street – which made its name as “a stodgy old record keeper,” as Logue says – become ensnared in the subprime mortgage debacle that brought down far racier investment houses? State Street makes its money managing $1.4 trillion for pension funds and other large investors, and handling accounting and record keeping for $12 trillion in mutual fund and hedge fund assets. Since Logue took over as chief executive in 2004, he has pressed the company to grow, including using its vast pools of cash to invest more aggressively.

“You could question whether they went overboard on growing the investment portfolio, and with greater risk,” said Gerard Cassidy, a longtime State Street watcher and banking analyst for RBC Capital Markets in Portland, Maine. Senior management of the bank bears responsibility for that, he said: “They accepted that risk and now they’re paying the penalty for it.”

Logue’s strategy made money for the shareholders, and for himself, as he reaped one of the biggest paychecks in banking. Indeed, even in 2008, while Wall Street titans were crumbling, State Street posted a record $1.8 billion profit. But that success was overshadowed by the uncertainty around the troubled investments.

Nearly half of that looming liability emerged from a surprising place: a small side business that produced just $59 million in revenue last year, a tiny sliver of the company’s $10.7 billion in total revenues. That business was providing mutual fund clients, particularly money market funds, with a way to make a little extra on cash. State Street issued short-term debt for those clients to buy, which financed the purchase of what it deemed to be safe, longer-term debt, such as mortgage loans, car loans, and student loans. These pools of investments, called conduits, never had problems until the debt markets froze, making the underlying assets difficult to sell or even price.

“Two years ago, no one had a clue what a conduit was,” Logue said, weary of having to discuss the issue. While the business was started long before Logue became CEO, it was on his watch that the risks came to far outweigh the modest rewards. Assets in the conduits had grown to $29 billion by early 2008, without any red flags being raised.

“They’re not buying anything different than they were buying in 1992,” Logue said. “What happened is the markets changed dramatically.”

Meanwhile, a similar problem developed in State Street’s investment portfolio, where it had about $5.3 billion in unrealized losses on securities at the end of last year. According to one director during this period, the investment risks the company had accumulated were something of a surprise. “We were aware of it – but not how much risk and the extent of it,” this person said, speaking on condition of anonymity because of the sensitivity of the subject.

But there were warning signs along the way. An early signal came in a presentation by company executives to analysts in November 2004, reproduced in a regulatory filing. An item on the PowerPoint slides told investors of the shifting strategy: “Beginning to reposition investment securities to enhance yield while controlling risk.” That was a cue that the company was taking on more risk, said a former State Street financial executive, who asked not to be named so he would not anger the company. By February 2008, the company disclosed it had $6.2 billion of assets backed by subprime mortgages. Bear Stearns Cos. would fail the next month.

By then, not only was Logue worried about the investments, but so was State Street’s board. In April 2008, Logue hired Maureen J. Miskovic, a member of State Street’s board and a polished British veteran of several Wall Street firms, to be chief risk officer. She was also made a member of the company’s operating committee, or group of senior executives. Logue dispatched Miskovic to make sure there were no other hidden time bombs buried in the business.

Last month, Logue acted to end the negative questions dogging State Street. After months of insisting the conduits would not prove a permanent problem, the company moved the securities onto its balance sheet, effectively taking a $3.7 billion hit even though the assets continue to pay interest. In so doing, State Street said, it would put the uncertainty behind it, but still earn money on the investments.

It was one of several moves that have gone Logue’s way since mid-May. State Street raised $2.8 billion in new capital, and its stock recovered from the January bloodletting, buoyed by news that the company was sound enough to repay the government. Shares closed at $47.56 on Friday.

On the morning of May 20, 36 floors above the city, Logue faced shareholders at the company’s annual meeting with a remarkably bullish tone. He boasted that State Street was now one of the “most well-capitalized banks in the country.” He talked about finding opportunity in the aftermath of the financial earthquake.

And he allowed himself to show just a glimmer of the frustration he has felt these many months. Times have been tough, he said, but, “We never lost a penny through all of this.”

Beth Healy can be reached at bhealy@globe.com.

Boston moves ahead in world finance rank

The global recession has actually enhanced Boston’s reputation as one of the top financial centers in the world.

A new report ranks the Hub within the top 10 financial centers in the world, moving from 11th place to ninth place, as many other financial hotspots tumbled along with the global economy.

The “Global Financial Centres Index,” prepared for the City of London Corp., indicates that major investment players across the globe appreciate Boston’s steady environment for financial firms and experts at a time of deep market turmoil.

Previous rankings by other firms usually have Boston in top 20 lists of financial cities – thanks to the large number of mutual-fund, wealth-management, venture capital and private-equity firms based here.

But the City of London Corp.’s study, which was conducted by the UK-based Z/Yen Group, stands out because, in addition to data measuring the amount of funds flowing through a city, it relies on surveys of financial executives who are asked to rate cities.

Those interviewed are also dominated by European executives, confirming that Boston has an international, Old World flare appealing to those on the other side of the Atlantic.

Jim Lowell, editor of Fidelity Investor, an independent print and online newsletter, said Boston is considered a “hidden gem” by some international investors.

“Boston has long been known for being staid, fiduciary (minded) and for its long-term asset management,” said Lowell.

Those somewhat conservative traits have apparently helped Boston during tough financial times.

London and New York remain the unquestioned leaders of the financial world, the index report said.

If anything, London and New York’s leads may have solidified, despite London, in general, and New York, in particular, being epicenters of the current financial crisis. The two cities have maintained their lead partly because many up-and-coming, fast-growing cities in Asia and elsewhere took heavy hits during the current economic crisis, the City of London report said.

Boston was also a beneficiary of the recession, in terms of rankings.

The Hub rated particularly high for its financial “infrastructure” and “market access” to funds and deals, the report said.

How long Boston can maintain its strong, top-tier status is in question.

Cities throughout Asia and the Middle East – such as Shanghai, Beijing and Dubai – are emerging as financial powerhouses that want a larger piece of the funds and jobs flowing to more established financial centers, the report said.

Article URL: http://www.bostonherald.com/business/general/view.bg?articleid=1174535

Facebook raises $150 million more to cash out employees

Matt Marshall | May 16th, 2009
Facebook

Facebook has almost finished raising $150 million in capital, in an extraordinary move by the company to buy out shares of hundreds of regular employees.

Hundreds of the Palo Alto, Calif.’s employees have now toiled at the company for more than two years, and many have worked three to five years. Increasingly, some have become restless, and would like to cash in on the huge value they’ve created. Most employees were awarded several thousands of shares valued at far less than a dollar each. Now, by selling to those shares investors for a private market value of $10 each, employees can enjoy a nice windfall. According to our sources, the transaction will include the buying out of roughly 15 million common shares – thus equaling around $150 million total value.

Facebook declined comment on the financing.

The deal has not quite closed yet. But it’s another sign that large private companies like Facebook are desperately seeking ways to find “liquidity” for their employees – especially now that the IPO market remains difficult, in particular for unprofitable companies.

Because of the size of the round, Facebook’s existing investors – Accel, Greylock, Founders Fund and several others – found it a stretch to supply the full amount of capital. We’re hearing the final part of the deal is being sold to new Asian investors.

Speculation about Facebook raising cash has swirled for several months, but most reports have misunderstood the reason why Facebook wanted to do so. Some outsiders claim the social networking company needs the cash to cover high storage and server costs, now that more than 200 million users are sharing photos at an increasing rate. But the company has constantly rejected such arguments, and now our sources are corroborating that.

The company declined to comment specifically on the fundraising, or the amount. Spokesman Larry Yu confirmed the existence of a Facebook common stock sale program, which lets employees sell up to 20 percent of their common share holdings, but he wouldn’t comment on any other details. “Facebook is a private company, so as a matter of policy, we don’t typically share details about our financial plans or comment on rumor and speculation,” he said, using a prepared statement. The company delayed the program in October, but we’re hearing the program will resume once this latest funding is finalized, which should happen very soon.

Before this, the company raised more than 400 million. It also raised debt of at least $100 million, much of that coming last year, and most of it in the form of a lease line to buy servers.

There’s no denying the company faces significant costs in covering photo-sharing costs. However, over the past six months, the company dedicated a crack team of three engineers to drive down the costs considerably. The initiative, called Haystack, replaced off-the-shelf storage products – which contained a lot of “head room” costs – with a proprietary architecture that shrunk the company’s computing costs to what really mattered. There’s also no sign the company is holding back from rolling out new high-bandwidth initiatives. It’s about to roll out a new live video chat feature, according to a report by AllFacebook (Update: We’ve since heard from another source that, while this is video chat feature in testing, there are no current plans to launch it).

Yu said speculation last last year by TechCrunch about Facebook’s server costs were an “order of magnitude wrong:” He added: “There’s a perception that our costs are skyrocketing…But those costs are not as nearly as radical as people are beginning to report.” He said that if nothing were to change at all, the company is on a “clear path to be cash-flow positive in 2010.” This is possible given Facebook’s cash in the bank, its managing of infrastructure costs and growth of its business, he said.

The company has repeated several times that it doesn’t need cash. Last month, the company’s COO Sheryl Sandberg told Bloomberg: We could not be doing better financially … We might take money-but it doesn’t mean we need to.”

The buyout of employee shares in this latest transaction should be distinguished from the separate process of “secondary market” transactions, in which former Facebook employees sell their shares to accredited investors. Those transactions are commonplace. Until now, however, Facebook has asked its current employees to refrain from such sales.

GM to drop 1,100 dealers

At least 12 Mass. outlets notified Restructuring deadline is June 1

Ricky Smith Buick Pontiac GMC in Weymouth is among the 1,110 dealers nationwide that received letters from General Motors about ending their franchise agreement as of October 2010. Massachusetts has 96 GM dealerships. (Essdras M Suarez/Globe Staff)

By Erin Ailworth and Johnny Diaz, Globe Staff | May 16, 2009

General Motors Corp. said it wants to eliminate about 40 percent of its nearly 6,000 dealerships nationwide by the end of next year, a day after Chrysler LLC unveiled plans to close almost 800 new-car outlets.

GM started the process yesterday by sending letters to 1,100 dealer locations scheduled to be phased out. The automaker did not release a list, but at least 12 of the 96 GM dealers in Massachusetts are among those slated to close, according to a lawyer who said he has been contacted by some of those affected.

The company said additional cuts will be made as it divests itself of the Hummer, Saturn, and Saab brands, as well as through voluntary closings and dealership mergers. GM said the dealerships expected to be shuttered do not sell enough new cars – just 35 annually, on average – or have poor customer-service rankings.

The company, which is running out of money and on the verge of bankruptcy, is under a June 1 deadline imposed by the federal government to restructure. The government and the United Auto Workers union would have major stakes in a reorganized and smaller GM.

Rick Smith, owner of Ricky Smith Buick Pontiac GMC in Weymouth, said he found out by letter yesterday that his business is one of those targeted by GM.

“They are not planning on renewing our franchise agreement as of October 2010,” said Smith, whose father Richard “Ricky” Smith opened the dealership in 1959. “I am taken aback. We have always been one of their best dealerships.”

Other GM dealers were reluctant to say whether they have received similar letters, possibly fearing a drop in sales if the news was made public.

“One sure way to keep people out of your showroom is to tell them you’re getting closed,” said Robert O’Koniewski, spokesman for the Massachusetts State Automobile Dealers Association, which was trying to track the closing notifications.

“Anything higher than zero is unsustainable in our eyes because dealers did not create this problem,” O’Koniewski said. According to the trade group, Massachusetts’ 96 GM dealers operate at an estimated 200 locations. Overall, the state has 460 new-vehicle dealerships for all brands. Together, they have 20,000 employees and account for about 20 percent of the retail economy in Massachusetts, according to the dealers group.

Even before the Chrysler and GM announcements, dealerships have been closing at a rapid rate as US auto sales have declined, especially as the recession has deepened. Since January 2007, the number of Massachusetts dealerships has declined by about 15 percent.

Nationwide, GM sold 173,007 vehicles in April, down 33.7 percent from the same period last year. For all of 2008, the automaker sold 2.98 million vehicles, off 23 percent from 2007.

Mark LaNeve, vice president of GM vehicle sales, service and marketing in North America, said the company wants to cut its network through a “gradual wind down” timed to coincide with the expiration of many of the affected dealer’s franchise contracts. LaNeve said that would allow GM to help its departing dealers get rid of remaining inventory through sales, buybacks, and transfers to other locations.

Speaking from his Cadillac Escalade, LaNeve said the impending closings are part of a survival plan that “this leadership team has no choice but to take now.”

“Dealers are not a problem at GM. They’re an asset to GM,” he said, but the industry can no longer support so many of them.

John Wolkonowicz, a senior auto analyst with the forecasting firm IHS Global Insight in Lexington, said the long time frame of GM’s dealership downsizing is partially dictated by the fact that the company is still governed by franchising laws.

“A car company, under franchising laws, cannot simply cancel a dealer’s franchise without cause,” Wolkonowicz said. Most of the franchise agreements with the affected dealers expire in October 2010.

“GM is trying to be a good guy here and is telling these people what is coming down the pike,” he said. But if it goes into bankruptcy, those laws could be superseded, he said, and closings could take place earlier. Chrysler already has filed for bankruptcy and wants to shut down dealerships – including 12 of 60 in Massachusetts – next month.

In any case, Wolkonowicz said, the closings will hurt many communities economically, at least until dealers figure out what to do next – whether that means finding another franchise, operating as used-car dealers, or getting into another business altogether.

“It’s not just the dealers and the people they employed,” he said. “It’s the McDonald’s down the street [that served employees and customers]. Everything is going to be affected by these people losing their jobs.”

Scott Silverman, a partner at the Boston office of law firm McCarter & English, which has a large automotive practice, said dealers may decide to fight to keep their franchises.

“There are going to be many dealers that will not and should not just accept [that] this is a foregone conclusion,” said Silverman, who represents about 50 GM dealers throughout New England. Silverman said his firm is already working with about a dozen Massachusetts dealers that received closing letters from GM.

“They will be standing up and making sure their rights are protected and General Motors complies with its obligations under the local franchise statute,” he said.

Smith, of Ricky Smith Buick Pontiac GMC, said he will appeal the forced shutdown of his business, which he said he expanded last year at GM’s urging to include Buicks. But in recent years, business has slowed, he said, and sales of new cars so far this year are down about 35 percent from the same period in 2008.

“We’re pretty lean,” Smith said, adding that he has reduced employee hours and left some vacant jobs open. Still, the Weymouth dealership has managed to remain a community supporter – it donates money to Weymouth Babe Ruth League and a cheerleading group, and sponsors two $1,000 scholarships to graduating Weymouth high school seniors.

If he loses his GM franchise, Smith said, he hopes to stay open selling used cars, which already account for about 75 percent of his revenue.

“We will be selling new cars for another year and a half, at least,” he said. “I expect them to reverse their decision. I hope they do.”

Globe Correspondent Julie Balise contributed to this report. Erin Ailworth can be reached at eailworth@globe.com, Johnny Diaz can be reached at jodiaz@globe.com.