Q1-08 Deals

Global M&A volumes fell 31% to $661 billion in the first quarter of 2008, according to Thomson Financial.

Buyout firms led the collapse in deals as their buying power evaporated and they saw a 77 percent fall in acquisitions after 6 years' growth.

The credit crunch has dented banks' confidence in lending to buyout firms, which rely on debt to achieve their returns.

Meantime slowing U.S. and European economies and volatile markets are making corporate CEOs reluctant to take large risks.

After four years U.S. M&A activity is on track to see its first annual decline since 2002, according to a recent report from Thomson Financial Proprietary Research.

Europe remained ahead of the U.S. in terms of deal volumes and also better-weathered the downturn. European M&A activity accounted for 301 bln usd, which is 10 pct lower than in the first quarter 2007.

Goldman Sachs advised on the most merger and acquisition deals worldwide in the first quarter of this year, followed by Lehman Brothers and Citigroup. Morgan Stanley, which had led the rankings in the same period last year, dropped to number 6.

The top global M&A advisors in the first quarter of 2008 are, in descending order:
Goldman Sachs , Lehman Brothers , Citigroup , Credit Suisse , Deutsche Bank, Morgan Stanley, Centerview Partners, JP Morgan, Merrill Lynch.

Goldman Sachs worked on 81 deals worth $231.5 billion, followed in the second and third spots by Lehman Brothers and Citigroup Inc, which advised on global deals worth $203 billion and $190 billion, respectively.

Citigroup was the most active adviser on deals with a European element. It worked on 42 of these transactions worth $161.6 billion. Credit Suisse was the next most active bank in this respect, working on 36 deals worth $149.7 billion, followed by Goldman, which advised on deals worth $147 billion.

Goldman led in terms of estimated fees for the quarter as well. It earned fees of $399.9 million from its global M&A work, including $200 million for deals including European element.

Merrill Lynch and Credit Suisse were the next most profitable in terms of global fee revenue. Merrill earned $291.8 million and Credit Suisse earned $287.6 million.

In Europe, Morgan Stanley (MS) was the second most lucrative fee earner. It generated $181 million in fees from M&A, followed by Merrill Lynch, which earned $168.6 million.

Announced M&A deals in the US were even lower at a five-year low of 189 bln usd, 53 pct lower than in the first quarter 2007 (401 bln usd). The US recorded the lowest first quarter figures since 2003 (71 bln usd).

Thomson Financial's M&A review also showed a shift in the ranking of investment banks advising on M&A deals in the first quarter of 2008.

Globally, Goldman Sachs Group Inc reached pole position in the year to date, with mandates for deals valued at 231.5 bln usd. In the first quarter of 2007 it was ranked second.

The investment banking arm of Lehman Brothers Holdings Inc soared from sixth place in the first quarter of 2007 to second place in the global ranking, with mandates valued at 203.5 bln usd this year.

In the category of transactions with any European involvement, Citigroup Inc led the pack in the first quarter of 2008, with mandates worth 161.6 bln usd, followed by Credit Suisse Group (149.7 bln usd), Goldman Sachs (147 bln usd) and Lehman Brothers (141.2 bln usd).

U.S. merger volumes are estimated to reach only about $1 trillion in 2008. Still, report said “Looking at the second half of 2008, an improving credit market along with a significant level of available funds for private equity to put to use will likely boost the environment for M&A gains,” the.

News and Related Story Links:

Reuters – Global M&A volumes tumbled by a third in Q1

The Age – M&A bankers suffer 35% drop in fees

CNN Money – Global M&A value drops 31 % to $661 bln in Q1; US value drops 54%

Money Morning – Don’t Be Fooled by a Lull in M&A Activity, More Deals Are on the Way

Fed's Says Banks' Problems Could Grow

The Federal Reserve headquarters in Washington, DC.

The woes of U.S. banks could mount as the economy slows down and with greater access to their confidential information, the Federal Reserve can make sound decisions, Boston Fed President Eric Rosengren said on Friday.

Rosengren is regarded as one of the most dovish members of the Fed, but is not a voting member of the central bank's Federal Open Market Committee this year.

"It is too soon to call whether or not we are in a recession. But regardless of what you call it, it is a period of very slow growth," he told reporters at the seminar.

On the troubles caused by the subprime loan crisis, he said: "We need to see some stabilisation in the housing market before I would be confident that the financial turmoil is over."

"While U.S. banks report detailed information on their balance sheets and their income statements, these reports do not provide sufficient information to allow central banks to really discern how banks are responding to problems," he said in a prepared text.

More from CNBC..

I Survived The Crisis

Never before in history was a financial crisis predicted so early as the current one.

But why were some banks able to see what was happening and react accordingly?

Why did some CEOs and risk managers ignore all the warning signs?

Winners were Goldman Sachs, Credit Suisse, Lehman Brothers while others, such as Citigroup, Merrill Lynch and UBS, just carried on playing the markets until they ran into a brick wall?

Close Management – Successful firms have CEOs with either a risk management or a trading background who have remained involved in day-to-day risk-related decisions. Their risk managers are empowered to take businesses apart and to insist that traders explain their positions and unwind them if necessary.

At Goldman at least 10 people in senior management have at one time or another run its mortgage business. Wilson Ervin, chief risk officer at Credit Suisse, has hands-on experience of product engineering.

Market Mistiming– The biggest write-downs were at firms that were still talking about ramping-up their risk or making acquisitions, when subprime default rates were rising steadily. – Why to catch-up with competitors.

Merrill Lynch, for example, bought First Franklin Financial for $1.3bn in September 2006. A year later (one month before he was ousted as chief executive), in an interview in Sep -07, Stan O’Neal justified the purchase by saying that Merrill had not bought a portfolio of bad loans, but had invested in an origination platform; despite the correction, this was still a good business, he argued. In the same interview he continued to argue that Merrill had not been taking enough risk.

Morgan Stanley when it bought non-prime lender Saxon Capital for $706m just as other banks were bailing out.

In July 2007 Citi’s CEO Chuck Prince famously said that the bank was “still dancing” to the tune of the buyout boom, shortly before investor demand for leveraged loans collapsed.

Market Intelligence – Some firms clearly been better at spotting when the markets turned and therefore better at getting out. – These have unrivalled market intelligence using, for example information from in-house mortgage servicing companies to track market gyrations.

Credit Suisse decided that the market was going the wrong way and took hits to its P&L in November and December 2006. Undoubtedly, additional market intelligence made a difference. Credit Suisse traders were helped by the bank’s ownership of Select Portfolio Servicing, a company which services about 270,000 subprime US residential mortgages. The insight that this provided on volumes and default trends must have given their hedging and trading strategies extra muscle.

Lehman Brothers, too, benefited from its US mortgage service provider (MSP), Aurora Loan Services, which at its height was servicing almost 1.5 million mortgages. (That said, it was not able to time the market so well: it did not move to shut down its American subprime lender BNC Mortgage until August 2007.)

Safety first – How did Goldman avoid big losses? Caution. – Bank simply followed the numbers: the more it had to mark losses in its mortgage book through Q4 2006 and Q1 2007, the more it began to hedge. In Q2 it stopped selling collateralised debt organisations and began closing product warehouses. The bank became increasingly cautious and by early Q3 it finally took the decision to buy protection on the entire mortgage portfolio.

Rise of the trading culture – As the trading businesses grew at every bank, they began to dwarf the classic investment banking operations.

At Deutsche Bank, for example, Q1 2007 figures (ie: prior to the subprime meltdown) revealed sales and trading revenue of €5.1bn, versus origination and advisory revenues of just €798m. Some bankers say that this shift undermined the client relationship-based culture of investment banking and replaced it with a transaction-based culture. Combined with a compensation structure that rewarded virtually unfettered risk taking, a crisis was inevitable.

Human Judgment And Experience – Wall Street is going to have to refocus on relationships with clients, and more importantly, with its own employees. It will have to return to making business decisions based on human judgment and experience, and that is ultimately a good thing for both clients and risk management.”

Soul searching – It is clear that the industry has entered a phase of reflection and adjustment. It is being forced to re-evaluate the way it measures, prices and, most of all, manages risk. Shortly after announcing writedowns, Morgan Stanley said it would be reviewing its risk management procedures.

Rethinking remuneration – Compensation structures tend to be based on longer-term and firm-wide results. – Mr Thain has stated that he will overhaul Merrill Lynch’s compensation structure in an effort to inculcate a sense of bank-wide responsibility and accountability. Bonuses will reflect the firm’s performance first, and then that of the business line, and lastly that of the individual, he says.

But it will be impossible for a single bank to change the system. Any reworking of compensation philosophy will have to be industry-wide to prevent the leaching of senior bankers from low-bonus to high-bonus firms.

Culture – Only time will tell how well banks have prepared for any further market dislocations but one thing is clear. But when investment banks emerge from this latest crisis, they must tackle their cultural problems head-on.

Complete Article from the Banker..

John Thain… The Fixer

To be offered one of the toughest jobs on Wall Street is an opportunity afforded to few; to be offered at two i-banks at the same time is extraordinary.

Citi-group and Merrill Lynch at the end of last year had one man’s name at the top of their short lists: John Thain, Wall Street’s “Mr Fix-it”.

In the end, the former co-president of Goldman Sachs turned down Citi and accepted the role of chairman and chief executive at Merrill.

His rivals say he picked the right job. “Citi still has big problems; Merrill is a simpler story and it is fixable,” said one.

Mr. Thain, who developed a reputation as a fixer at the NYSE, has wasted no time trying to repair the damage at Merrill.

It’s been nearly 70 days since he took on the job and so far he has managed to patch up Merrill’s wounds with more than sticking plaster.

He has tapped into the cash-rich sovereign funds to raise $13 billion in new capital. Now he says “We will not have to go back to the market to raise capital."

Mr. Thain disclosed $15 billion of sub-prime mortgage-related write-downs - the largest quarterly loss since the broker was founded 94 years ago. He accepts there could be more write-offs, but says they are unlikely to be on the same scale.

He has also overhauled risk management, to ensure the same mistakes are never repeated.

He said he wants every part of the bank thinking about its actions, and the likely knock-on effects of other parts of the bank

Now he wants to focus on rebuilding the firm. He is trying to find ways to further exploit growth opportunities in its international wealth-management and banking businesses as well as explore the synergies between them.

“In terms of growth, we will focus our opportunities outside America because that’s where the world’s economy is growing. If you exclude our high-net-worth business, about 60% of our revenues are already generated overseas,” he said.

The plan is to expand wealth-management operations as well as the equities and fixed-income arms further into the Middle East, Russia, India, China and Brazil.

Mr. Fix it is likely to focus on China, but Merrill has to apply for a licence to operate there, a process that it is about to start.

Another area where Thain wants to concentrate is operating as a single firm across the group. The biggest implication of this is how staff would be remunerated?

“Over the last few years Merrill had moved to compensating people more on their individual businesses and I want to move towards paying them on the basis of how well the firm does first and also paying them using equity so they have a longer-term perspective,” he said.

He takes a dispassionate view of the financial meltdown on Wall Street. He said: “We won’t overreact to that, we’ll be prudent in managing our expenses but we want to maintain our strategic direction.”

As credit issues begin to surface on all forms of consumer lending, from auto loans to credit cards and in consumer lending. Thain is not predicting a quick cure; he foresees a wave of lawsuits as people seek compensation for their losses and problems in the capital markets.

Go to Article from Times>>

Further read >> John Thain on His New Job as CEO of Merrill Lynch

If he can manage to steer Merrill back on course in the first half, and if the economy comes right again in the second half, as Fed chairman Ben Bernanke predicts, then he and the bank should be in a good position to sail full steam ahead.

Mr. Mack Faces Share Holder Wrath

This is a response by John Mack for a shareholder query in 2007 AGM

“Do we take a lot of risk? Yes,” he said forcefully, in response to a shareholder who questioned him about Morgan Stanley’s reliance on risky trades and increased debt to finance these positions. “I think this firm has the capacity to take a lot more risk than it has in the past.”

At 2008 AGM, Mr. Mack is unlikely to be so bold.

The CtW Investment Group, a shareholder activist group representing union-sponsored pension funds with about $1.4 trillion, is weighing a campaign aimed at persuading Morgan Stanley investors to withhold their vote for Mr. Mack as chairman. The hope is to persuade Morgan Stanley’s board to appoint an independent chairman.

The proposal does not suggest that Mr. Mack leave the board or resign from his job as chief executive.

In a statement, a spokesman for the board, Mark Lake, said, “We are comfortable with John Mack’s role as both C.E.O. and chairman of Morgan Stanley and also have a strong independent lead director.”

Mr. Mack, still enjoys plenty of support from directors and shareholders, and they are expected to preserve his dual status for now.

Nevertheless, the move strikes a wounding blow to Mr. Mack. And by forcing investors to contemplate the risk measures, it raises awkward questions for the Morgan Stanley board about Mr. Mack’s decision-making, strategy and succession plans.

Chief executives of Wall Street firms that have taken major write-downs have stepped down, but Mr. Mack is the only one who remains in his post.

CtW is also weighing a call to withhold votes for C. Robert Kidder, Morgan Stanley’s lead director, and Howard J. Davies, the former head of the Financial Services Authority, Britain’s top financial regulator.

Both directors were on Morgan Stanley’s audit committee in 2005 when Mr. Mack took over as chairman and chief executive and allowed the top risk officer to report to Ms. Cruz instead of Mr. Mack.

The group has also sent letters to the boards of Merrill Lynch, Citigroup, Bank of America, Washington Mutual and Wachovia questioning the conduct of the audit committees of those financial institutions. Merrill Lynch, Bank of America and Wachovia all have chairmen that also hold the chief executive title.

To date, Mr. Mack has convinced investors as well as his board that the firm’s write-down was the unfortunate but isolated result of a group of traders who made a disastrous bet on the subprime market.

By doing so, Morgan Stanley has argued, they saddled the firm with an illiquid and ultimately worthless position in collateralized debt obligations.

Mr. Mack took full responsibility and asked his board not to pay him a bonus last year. He has also appointed a senior executive, Kenneth M. deRegt, to oversee risk and report to him.

Mr. Mack’s critics contend that it is not so much the faulty subprime trade that should be held against him as it has been a combination of other factors. Those include not only failed deals for Saxon Capital, a mortgage originator, and Goldfish, a credit card company, but more broadly, what they see as his failure to manage the firm’s capital position effectively.

Increased borrowing and an accumulation of risky assets put excessive strain on the firm’s equity position, they note, forcing Morgan Stanley to raise expensive funds from China when the trading losses arose, even though the firm made $2.3 billion in profit last year.

Mr. Patterson representing less then 1% said, “There was a failure of Mr. Mack’s leadership when the board restructured the risk reporting structure,” he said. “Shareholders should review this and they will review this.”

How investors will react remains unclear. While many top Morgan Stanley investors said privately how unhappy they were with Mr. Mack’s performance last year, they have not pushed Morgan Stanley to replace him. Their refrain has been a consistent one: who better is there to succeed him?

In fact, people who have spoken with board members about Mr. Mack say that directors share a similar view. While they too are unhappy with the losses, they see Mr. Mack, who is 63 and has spent 30 years at Morgan Stanley, as the person best placed to lead the firm to recovery.

Some disgruntled investors have begun to discuss names of outside executives who might be not only viable successors to Mr. Mack, but also would lend a degree of independent stature to a board that many investors say has become too beholden to its chairman and chief executive.

Go to Article from New York Times..

$305m For Top 5 At Goldman… Woooh !!

Five senior executives at Goldman Sachs received bonuses totaling $305m with Lloyd Blankfein, chairman and chief executive, Gary Cohn and Jon Winkelried, presidents and chief operating officers, each receiving more than $66.9m.

Blankfein received a bonus of $67.9m, a record for the chief executive of a Wall Street bank, in addition to his salary of $600,000 according to Goldman’s proxy statement.

Cohn and Winkelried each received bonuses of $66.9m. David Viniar, chief financial officer, was awarded a bonus of $56.9m and Edward Forst, chief administrative officer, was paid a bonus of $43.4m.

Mr. Cohn, 47, and Mr. Winkelried, 48, received 40 percent of their compensation in cash and 60 percent in restricted stock and options, Goldman said in latest proxy filing

The filing said: “At the time the committee made compensation decisions, our financial performance was very strong relative to our core competitor group in terms of year-on-year growth in net revenues, net earnings and earnings per share. Based on final 2007 results, we had the highest growth in the group for each of these measures.”

Mr Blankfein's pay, initially disclosed in December, was up from $54m in 2006. Mr Cohn, former co-head of global sales and trading, received $53m in 2006, as did Mr Winkelried, who spent much of his career in Goldman's fixed income trading unit.

Mr Blankfein elevated Mr Winkelried and Mr Cohn to their co-president roles after taking over as chief executive in the summer of 2006.

Goldman's earnings rose 21 per cent to $11.6bn last year after it avoided big subprime mortgage losses, and its pay and benefits bill increased 23 per cent to $20.2bn.

Go to Article from Financial Times»

Would Goldman missed it if any of the top 5 left? Hmmm….Hank Paulson left and they didn’t skip. Looks like Wall Street is all about getting what you can and making those around you think that you earned it because without you they wouldn’t have made anything.

Executives who got $XXX millions need to do something with it. In theory, they could hire a manager for their investing, that they will be severely “distracted” from their paid job to invest in their own pet projects.

J.P. Morgan Still Biggest Hedge Fund

Assets at the largest US hedge funds grew by more than a third last year, even though three of the 10 largest funds lost a combined $24bn in assets. According to the biannual survey by Absolute Return magazine.

JPMorgan retained its position as the largest US hedge fund manager, with $44.7bn under management at yearend, even though it lost $8.5bn in assets over the course of the year. The losses were mainly due to redemptions and losses from a statistical arbitrage fund.

JP Morgan has a number of hedge funds under its management, including JP Morgan Asset Management and Highbridge Capital Management

The biggest loser of 2007 was Goldman Sachs Asset Management, which fell to seventh place from second as assets dropped 27% in the second half to end the year at $29.20 billion. D.E. Shaw fell to sixth place, from third.

Goldman Sachs also lost heavily as a result of problems at quant funds that fell victim to heightened market volatility.

The second-and third-placed firms were Bridgewater Associates and Farallon Capital Management, both of which now manage $36bn in assets.

Renaissance Technologies, which took a hit in its quant funds, recovered to rise to fourth place with $34bn.

Och Ziff Capital Management, which went public last year, rose to fifth place with $33.2bn.

Not surprisingly, the biggest winner in terms of asset growth last year was Paulson and Company, which entered the top 10 for the first time after its assets soared 306 per cent last year to $29bn as a result of its early and correct bet against the US subprime mortgage sector.

CNNMoney.com

Why Did I-Banks Fail In Subprime Crisis

There is a clear difference between big I-banks that recorded massive losses stemming from the subprime mortgage-lending crisis, and those firms that have been able to avoid this calamity. – Risk Controls

On Wall Street, it is true that you have to take risks to make money, but excessive risk-taking can also turn into financial dynamite.

The recent market crisis has provided a real-life test of risk controls. Unfortunately, many firms have scored failing grades.

As the level of sophisticated trading products expands and capital markets continue to become more complex and interconnected. This growing trend, coupled with the need to ensure a healthy balance in risk taking, requires strong firm-wide risk controls.

Examples of firms with strong risk-control cultures include Goldman Sachs, Lehman Brothers and Credit Suisse. They were able to minimize their financial exposure to this subprime market debacle.

The common characteristics of these risk-focused firms include board participation in setting corporate risk appetite and tolerance, committee participation and active involvement in risk-related questions and concerns.

These firms require adherence to company-stated risk-management policies, procedures and controls. Such risk policies and controls are also frequently updated to reflect changes within the companies and to insure that policies are not easily circumvented.

These firms understand that effective risk management requires that risks be evaluated and understood prior to deciding whether to take them.

Risk managers at these firms are not viewed as traffic cops who are asked only to show up at the accident scene. Their risk concerns are never just dismissed.

Risk controls in such firms are built on the principle that risk management can provide valuable insights prior to taking on risk, and accurate monitoring once bets have been taken.

Firms that have not been able to fully understand the risks that they are taking on have experienced devastating financial losses. Many of these I-banks (e.g., Merrill Lynch, Citicorp, UBS AG, Bear Stearns and Morgan Stanley) shared a common characteristic--they had weak or lax risk controls.

Many of these firms entered into the mortgage derivatives business without a full understanding of the level of risk actually being taken, or if they did understand it, they simply ignored the risk in the pursuit of lucrative bonuses. For such firms, these actions were a deliberate failure to adequately control risk--from the board level on down.

Until these investment banks fix these fundamental risk-control problems, including the lack of strong board and risk-management oversight, many remain vulnerable to future losses. Several of these firms have already begun to overhaul their risk-management functions, but this is only a first step.

As more information about the level and types of control failures come to light, we can reasonably expect that shareholder and regulatory pressure will also help to make sure that these lax firms move swiftly to correct their control deficiencies.

Go to Article from Forbes »