WASHINGTON – An inquiry panel is hearing from former CEOs of two big banks that succumbed to the financial crisis, Lehman Brothers and Wachovia Corp., as it delves into the "too big too fail" predicament and potential systemwide risk from financial institutions.
Federal bank regulators also are appearing Wednesday before the bipartisan Financial Crisis Inquiry Commission, established by Congress to investigate the financial meltdown that plunged the economy into the most severe recession since the 1930s.
After the subprime mortgage bubble burst in 2007, complex investments called credit default swaps, which insured against default of securitiess tied to the mortgages, collapsed. That brought the stunning downfall of Lehman Brothers Holdings Inc. Its implosion into the biggest bankruptcy in U.S. history on Sept. 15, 2008 triggered a worldwide panic in financial markets.
U.S. officials, as they scrambled to avert economic catastrophe, declined to rescue the once-venerable Wall Street titan while injecting tens of billions of dollars into others — like the insurance conglomerate American International Group Inc.
Aided and prodded by the government, Wells Fargo & Co. acquired Charlotte, N.C.-based Wachovia, which had done a huge business in adjustable-rate mortgages, enticing borrowers who later defaulted on their home loans. That $12.7 billion deal, announced in early October 2008, created a coast-to-coast powerhouse with operations in 39 states and the District of Columbia.
Scheduled to testify at Wednesday's hearing are Wachovia's former President and CEO Robert Steel; former Lehman Chairman and CEO Richard S. Fuld Jr.; Scott Alvarez, general counsel of the Federal Reserve; Thomas Baxter, general counsel and executive vice president of the New York Fed; John Corston, an official of the Federal Deposit Insurance Corp.; and Barry Zubrow, chief risk officer at JPMorgan Chase & Co.
Under the landmark financial overhaul law enacted in July, regulators are empowered to shut down financial institutions whose collapse could threaten the system, ending the doctrine of "too big to fail."
Fuld, a towering figure whose nickname was "Gorilla," has publicly conceded no errors or misjudgments in the chaotic period that led to Lehman's bankruptcy. He told a congressional hearing in October 2008 that the firm did everything it could to limit its risks and save itself. It failed, he said, because of a "crisis in confidence" on Wall Street, market manipulation in which investors preyed on distressed financial players by betting on their demise, and would-be buyers who waited for the government to step in to help fund a sale.
More recently, a court-ordered autopsy of Lehman found that an accounting gimmick called Repo 105 provided financial relief to the firm in the months before its collapse. After saddling itself with tens of billions of troubled assets that couldn't easily be sold, Lehman masked its debt and its perilous financial condition by using the accounting artifice, an examiner appointed by the bankruptcy court found in a report issued in March.
Lehman's estate has claimed in a lawsuit that JPMorgan Chase helped drive Lehman into bankruptcy by forcing it to give up billions of dollars in cash reserves that it otherwise could have used to stay afloat. JPMorgan was Lehman's clearing agent, acting as intermediary between Lehman and its trading partners.
SINGAPORE – Oil prices rose slightly to above $72 a barrel Wednesday in Asia after a steep drop the previous day amid evidence that U.S. crude supplies remain high and demand weak.
Benchmark crude for October delivery was up 34 cents to $72.26 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange. The contract lost $2.78 to settle at $71.92 on Tuesday.
Crude inventories jumped 4.7 million barrels last week, the American Petroleum Institute said late Tuesday. Analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., had forecast an increase of 1.9 million barrels. Inventories of gasoline and distillates fell, the API said.
The Energy Department's Energy Information Administration reports its weekly supply data later Wednesday.
Oil has traded mostly in the $70s for the past year amid investor concerns the economic recovery from last year's recession in developed countries may peter out once massive stimulus spending fades.
High crude inventories in the U.S. suggest consumer demand remains sluggish.
"The fundamentals are dreadful to the point of being historically among the worst supply and demand factors ever seen," Cameron Hanover said in a report.
In other Nymex trading in September contracts, heating oil rose 1.33 cents to $2.005 a gallon and gasoline gained 0.96 cent to $1.867 a gallon. Natural gas for October delivery fell 3.3 cents to $3.783 per 1,000 cubic feet.
Brent crude was up 46 cents at $75.10 a barrel on the ICE futures exchange.
LOS ANGELES/TOKYO (Reuters) – Hitachi Ltd (6501.T) (HIT.N) is planning an initial public offering of its hard-drive unit in the United States, possibly by year's end, sources familiar with the situation said.
Bankers are in discussions with the Japanese company about an IPO and underwriters could be named in early September, the sources said. Unofficially, Goldman Sachs Group Inc (GS.N) has been chosen as one of the underwriters, they said.
The hard-drive unit, Hitachi Global Storage Technologies (HGST), is the world's No. 3 hard drive maker and analysts said it could be valued at about $3 billion, based on its revenue over the last 12 months and the value of its main competitors, Seagate Technology Plc (STX.O) and Western Digital Corp (WDC.N).
Although an IPO is the most likely scenario, Hitachi is also considering a sale of all or part of HGST, several sources said.
Shares in Hitachi, Japan's biggest electronics conglomerate, rose 1.5 percent to 345 yen on the news versus a steady Tokyo electrical machinery sector subindex (.IELEC.T).
"Hitachi has been buying up subsidiaries to make them wholly-owned, so this move would go against that," said Yuichi Ishida, an analyst at Mizuho Investors Securities in Tokyo.
"But HGST can generate funds through this and its earnings have been improving, so I believe there are positive factors that pushed Hitachi to go against what it has been doing."
Hitachi has been trying to streamline its sprawling operations that include 900 group firms to focus more on infrastructure-related businesses such as power plants and industrial systems.
As part of the effort, it made five then-listed subsidiaries into wholly-owned units earlier this year, while reducing its stakes in other units such as those make chips and mobile phones, judging they fall outside of its focus areas.
Banks gave presentations earlier this month to HGST in San Jose, California, where the unit is based, one source said. Another said bank teams had also traveled to Japan.
Last month, in an unusual move not tied to any event except the end of a financial quarter for HGST, Hitachi emailed analysts and fund managers an investor package highlighting the strengths of the unit.
Analysts said Hitachi may be looking to an IPO or sale to generate cash.
A sale might be a more attractive option, given the struggling U.S. IPO market and a sudden surge in tech-related M&A activity. Bankers have said more companies are now pursuing both options simultaneously.
"An independent business structure is ideal for a business like this one where price volatility is so severe and there is the need for such big capital investment," said a Hitachi executive who declined to be named.
A Tokyo-based Hitachi spokesman said: "We have not made any decision on the future (of HGST). Our stance from before -- that we have been exploring various possibilities for the direction of the business -- has not changed."
Hitachi moved to raise about $4.5 billion last year to shore up its battered capital base by issuing new shares and convertible bonds, its first public offering in 27 years.
The company, on track for its first annual net profit in five years, has said it is targeting acquisitions in IT service providers, particularly in Europe and the United States, and has boosted investment in infrastructure-related areas such as power and industrial systems.
Some analysts have said hard drive manufacturing may fall outside that mandate and shedding the business could help the company's overall finances.
"They are sort of cash-strapped, so this would get money to the firm, it would help them financially," said Hemant Hebbar, an analyst with Wedbush Securities.
The outlook for the hard disk drive industry is uncertain, with PC demand seen weaker than previously expected, especially among consumers in mature markets. Intel Corp (INTC.O) last week warned of a sales shortfall in the third quarter.
HGST turned profitable in 2008 for the first time since it was founded in 2003 after Hitachi bought IBM's hard disk drive operations.
HGST posted an operating profit of $186 million on revenue of $1.5 billion for the 2010 second quarter.
Noble Financial Group analyst Mark Miller said some of HGST's business decisions in the quarter -- including boosting production in a tight market -- could be viewed as an attempt to gain market share and prepare for a spinoff.
But HGST's high output led to lower hard drive prices for the overall industry and could end up hurting HGST's valuation. Analysts noted that rivals Seagate, the No. 1 hard-drive manufacturer by revenue, and Western Digital are trading at historically low price-to-earnings ratios.
Weak markets have depressed valuations and spurred increased M&A activity. Miller said there had been speculation in recent months that Web giant Google Inc (GOOG.O) or infrastructure systems provider EMC Corp (EMC.N) could buy a hard drive manufacturer to get an internal supply of drives for their data systems. But he said the speculation has cooled recently as hard drive prices have declined.
In 2007, when HGST was mired in losses, Hitachi looked into selling a stake in the unit to investment funds such as U.S. private equity firm Silver Lake, according to sources. The Japanese parent decided not to pursue the deal when HGST started turning a profit.
Hitachi President Hiroaki Nakanishi, who was then heading HGST, announced afterward HGST would rebuild on its own, but that he would not rule out one day receiving outside capital for the unit.
HGST is currently led by President and Chief Executive Officer Steve Milligan, who previously was chief financial officer for Western Digital.
(Additional reporting by Clare Baldwin and Ritsuko Ando in New York and Kentaro Hamada, Sachi Izumi and Taro Fuse in Tokyo; Editing by Lincoln Feast)