WASHINGTON (Reuters) –
Wall Street's chiefs acknowledged taking on "too much risk" and having "choked" on their own cooking, but stopped short of an apology as they sparred with a commission looking into the origins of the financial crisis.
The first public hearing of the Financial Crisis Inquiry Commission came on Wednesday as the Obama administration readies a plan to recoup taxpayer bailout funds through a special bank fee and lawmakers wrestle with changes to financial regulation.
With U.S. unemployment near a 26-year-high after the worst recession in decades, public fury is growing over the cost of U.S. taxpayer bailouts and huge bonuses for bankers, now that the banking industry has stabilized from the 2008 meltdown.
Phil Angelides, chairman of the commission and a former state treasurer of California, confronted the pugnacious, arm-waving Lloyd Blankfein, chief executive of Goldman Sachs, over his firm's pre-meltdown practices.
Angelides compared Goldman's practice of creating, then betting against, certain subprime mortgage-backed securities to "selling a car with faulty brakes and then buying an insurance policy on the buyer."
Blankfein responded that there was still demand for those products, and later compared the crisis that engulfed world capital markets to being hit by a series of hurricanes.
Angelides shot back: "Mr. Blankfein, I want to say this. Having sat on the board of the California Earthquake Authority, acts of God will be exempt. These were acts of men and women."
Testifying with Blankfein to the commission were JPMorgan Chase CEO Jamie Dimon, Bank of America CEO Brian Moynihan and Morgan Stanley Chairman John Mack.
Thursday's session will feature regulators and enforcement officials, including U.S. Attorney General Eric Holder, Securities and Exchange Commission Chairman Mary Schapiro and Sheila Bair, who chairs the Federal Deposit Insurance Corp.
As the bankers were grilled by the panel, White House spokesman Robert Gibbs told reporters that an apology from Wall Street leaders "would be the least of what anybody might expect."
Angelides' 10-member panel will hold hearings through the year and is expected to issue a report by December 15. It is modeled after the Pecora Commission, which investigated the 1929 Wall Street crash. Its findings helped lead to the creation of the SEC.
Whether the Angelides Commission has a similar impact remains to be seen but some are already skeptical, particularly as Congress is already weighing regulatory reforms.
"The logical thing would be to have had a commission and then based reform around what they found," said Charles Elson, the director of the Weinberg Center for Corporate Governance at the University of Delaware.
RISK MANAGEMENT FAILURES
The four bankers conceded that the financial system became over-leveraged in the years before the crisis and that their firms failed to properly manage the risks that resulted.
"We talked ourself into a complacency which we should not have gotten ourselves into, and which, after these events, will not happen again in my lifetime," Blankfein said.
Morgan Stanley's Mack acknowledged problems with mortgage-related securities created by his firm and others during the massive real estate bubble.
"On some of the product in mortgages, we did our own cooking and we choked on it. We kept positions and it did not work out," he said, adding that Morgan Stanley did not put enough resources into risk management ahead of the crisis.
Dimon told the commission there may be legitimate concerns that bonuses contributed to excessive risk taking, but he said JPMorgan's pay practices "have been and remain appropriate."
Elsewhere on Capitol Hill, Democratic Representative Barney Frank announced that the financial services committee he chairs will hold a January 22 hearing on financial industry pay, which he labeled a "cause of concern for the country as a whole."
Angelides and others on the commission showed a willingness to challenge the financial world's most powerful figures with tough questions, but the panel may be hard-pressed to find new answers about the beginnings of the crisis.
From the real estate price bubble and subprime mortgages, to runaway securitization and exotic debt instruments, the reasons for the financial system's spectacular failure late in the Bush administration are widely recognized.
Dimon said that before the crisis, JPMorgan did not stress-test for house prices dropping dramatically.
On securitization, Blankfein said it was worth pursuing the idea of forcing lenders to retain some risk on their books of the loans they package and sell onto the secondary debt market.
Meanwhile, the U.S. Senate Banking Committee is engaged in sensitive closed-door negotiations on a sweeping overhaul of financial regulation with the aim of preventing another banking crisis.
The House of Representatives approved a regulation reform bill in December. Congress is expected to hammer out a House-Senate compromise early this year, to send to President Barack Obama to be signed into law.
(Additional reporting by Karey Wutkowski, Steve Eder, Dan Margolies, with Elinor Comlay in New York, Joe Rauch in Charlotte, N.C.; Editing by Tim Dobbyn)
NEW YORK (Reuters) –
U.S. stocks rose on Wednesday as investors bet on recently weakened technology and financial shares ahead of earnings from bellwethers Intel Corp (INTC.O) and JPMorgan Chase & Co (JPM.N), taking the Dow industrials to a fresh 15-month high.
A brokerage upgrade of drugmaker Merck & Co (MRK.N) and an upbeat outlook from Kraft Foods Inc (KFT.N) gave an extra boost to the healthcare and consumer sectors.
After a rough start to earnings season with Alcoa Inc's disappointing results, investors are looking for companies to
meet or beat expectations to fuel a stocks rally that has lifted the S&P 500 almost 70 percent from its March lows.
Chipmaker Intel is scheduled to post quarterly results on Thursday and bank JPMorgan on Friday.
JPMorgan shares, up 1.8 percent to $44.25, led gains in the KBW bank index (.BKX), while chipmaker Advance Micro Devices (AMD.N) jumped 5.8 percent to $9.15 after falling nine of the last 11 sessions.
Intel shares rose 1.7 percent to $20.96 and a semiconductor index (.SOXX) gained 1.6 percent.
"Heading into Intel and JPMorgan earnings, I think there was a sense things have sold off enough and buyers have felt more comfortable buying into semiconductors and financials," said Michael James, senior trader at Wedbush Morgan in Los Angeles.
The Dow Jones industrial average (.DJI) gained 53.51 points, or 0.50 percent, to 10,680.77. The Standard & Poor's 500 Index (.SPX) added 9.46 points, or 0.83 percent, to 1,145.68. The Nasdaq Composite Index (.IXIC) rose 25.59 points, or 1.12 percent, to 2,307.90.
The Federal Reserve said in its periodic report, the Beige Book, that while economic activity was at a low level, "conditions have improved modestly further, and those improvements are broader geographically than in the last report.
Wall Street, which had its worst session so far this year on Tuesday, fell at the open weighed down by resource shares, but the Dow got its biggest boost from Merck shares, up 3.7 percent to $38.93 after Credit Suisse upgraded the stock.
Kraft raised its 2009 earnings outlook and rose for most of the trading day but finished down at 0.2 percent to $29.23.
Chocolate maker Hershey Co (HSY.N) was preparing a bid for Cadbury Plc (CBRY.L) that would top Kraft's hostile $17 billion takeover offer, the Financial Times reported on Wednesday. Hershey shares fell 3 percent to $36.61.
Google Inc's (GOOG.O) shares fell 0.6 percent to $587.09 after the Internet search giant said it may shut its China operations over censorship and hacking.
Shares of rival Chinese search engine Baidu Inc (BIDU.O) jumped 13.7 percent to $439.48 and led percentage gains on the Nasdaq 100 (.NDX).
Crude oil prices settled 1.4 percent lower below $80 per barrel and Chevron Corp (CVX.N) was the biggest drag on the Dow, falling 0.8 percent to $79.80.
The heads of Wall Street's biggest banks defended the lucrative pay practices and size of their businesses before a commission investigating the 2008 financial crisis.
"I think the rally (in financial shares) is more a function of gaining back yesterday's losses than what was going on in Washington," Wedbush Morgan's James said.
Less than 1 billion shares changed hands on the New York Stock Exchange, far below last year's estimated daily average of 2.18 billion. On the Nasdaq, about 2.32 billion shares traded, more than last year's daily average of 1.63 billion.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of about 14 to 5, while on the Nasdaq nearly 2 stocks rose for every one that fell.
(Editing by Kenneth Barry)
SHANGHAI/SAN FRANCISCO (Reuters) –
Google Inc threatened to quit China, the world's biggest Internet market, warning it would no longer tolerate strict censorship of its
The threat by the world's leading Internet search provider may win it praise for seemingly putting ethics above business, but give Microsoft and a handful of local rivals an edge in the huge yet problematic Chinese Internet market.
Google generated 53 percent of its $5.9 billion in third-quarter revenue outside the United States, although it does not disclose the size of its business in China.
While Google's potential exit from a Chinese search market that is growing at 40 percent would have little impact on its short-term revenues, analysts said that cutting itself out of this important market may carry a longer-term strategic cost.
Google issued its warning after discovering what it called "a sophisticated and targeted" cyber attack on its email service. Google said it believed hackers were targeting Chinese human rights activists.
That attack follows years of frustration in China for Google, which was heavily criticized for self-censorship when it entered the market in 2006.
China has more than 350 million Web surfers and annual search revenue topping $1 billion, but its Internet market has been a thorny one, with companies having to adhere to strict self-censorship rules dictated by Beijing.
Anyone disobeying those rules, which prohibit sites on sensitive issues like Tibetan independence or the outlawed Falun Gong spiritual movement, can have their site blocked or closed.
"Google's move is related to censorship and not a business decision at all," said a high-level industry executive close to Google's former China chief, Lee Kai Fu, speaking on condition of anonymity because of the subject's extreme sensitivity.
"Google has been agonizing for a very long over this decision. Since last year, Google was talking about making a gesture to show the Chinese government it will no longer tolerate strict censorship over its operations," the source said.
In a statement, Google's chief legal officer David Drummond said the cyber attacks and other attempts to limit free speech on the Web had prompted the company to review its China business.
"We have decided we are no longer willing to continue censoring our results on
LEAVING A HOLE
China is one of the few markets where Google is not a leader, lagging Baidu, which has a 60 percent share of the Chinese Internet search market versus Google's 30 percent.
Other homegrown Chinese Web firms that also practice self censorship include Web portal operators Sina and Sohu, two of the country's best known Internet names.
Microsoft recently launched a Chinese version of its highly hyped Bing search engine in China, and said it is taking the market very seriously. Microsoft, whose rival Hotmail e-mail service is also available in China, said it had no indication that any of its mail properties had been compromised in China.
A Google exit from China could open up the field for others, including Microsoft, and allow Baidu to increase its dominance.
"We believe there's a high chance that Google.cn will not be allowed to operate without censoring search results," JPMorgan analyst Dick Wei wrote in a note, adding Baidu would be a major beneficiary as it offers many of the same services as Google.
"If Google.cn is not allowed to run in China, this could also benefit up-and-coming search engines like Tencent's SoSo, Sohu's Sogou and NetEase's Youdao."
Shares of Google fell 1.3 percent in after-hours trading on Tuesday, while Baidu jumped 6.8 percent.
While some reckon Google could ultimately leave China rather than continue to censor itself there, other observers saw the company's announcement as a strategic move as it braces for tough negotiations with China.
"My feeling is that it is more a comment than an announcement,' said Credit Suisse analyst Wallace Cheung. "It seems like a statement before meeting with China's government."
Others also doubted Google would pull out of China.
"We believe Google will probably stay as China is a vital market," said CLSA analyst Elinor Leung in a research note. "Any China Internet veteran understands the need to work within the system and the Chinese preference for gradual change."
Many of Google's primary services, such as Gmail and
(Additional reporting by Doug Young in HONG KONG, Edwin Chan in LOS ANGELES and Jim Finkle in BOSTON; Editing by Ian Geoghegan)