Treasury aims to exit Ally bailout
The government restructured its majority ownership of Ally Bank in a deal that aims to speed its exit from the $17 billion bailout of the former GMAC.
Treasury will boost its common stock stake in Ally to 74% from 56% under the deal outlined Thursday afternoon. Under the arrangement, Treasury will convert $5.5 billion of preferred stock to common shares.
Road to recovery?
The government emphasized that the deal will "accelerate Treasury's ability to exit its investment in the company," an important point at a time when the government is doing everything it can to paint the financial rescues of 2008 and 2009 as a win for taxpayers.
But by converting to common stock a large portion of the preferred stock Treasury received in propping the company up at the end of 2008, the deal also boosts a key measure of Ally's financial strength.
The bank's Tier 1 common ratio – measuring the proportion of stockholder capital available to absorb losses in a downturn – will rise to 9%, in line with the biggest U.S. banks, from 5% beforehand, officials said. That's important as policymakers brace for another downturn in the U.S. housing market and possible knock-on effects on the car business, which is where Ally does much of its financing.
The government rescued GMAC, which was faltering thanks to its souring mortgage business and its ties to the collapsing auto industry, at the end of 2008.
Thursday's announcement comes on the heels of a series of similar maneuvers by the government to show progress in extricating taxpayers from the bailouts that started in 2008 under the Bush administration. Treasury in recent weeks has held an initial public offering of General Motors (GM), sold the last of its common stock in Citigroup (C) and revamped for the umpteenth time its investment in AIG (AIG).
"Our action today parallels the actions we took in converting Citigroup preferred stock and in the pending conversion of AIG preferred stock to common stock," said Treasury Acting Assistant Secretary for Financial Stability Tim Massad. "Our ultimate goal in all these investments is to exit as quickly as possible on terms that realize the most value for the taxpayer, and this transaction will facilitate that."
Under the arrangement outlined Thursday, Treasury will be left with $8.6 billion of preferred stock, some of which it will sell with help from Ally.
The news comes on the heels of another major development at Ally, which this week agreed to pay $462 million to settle a mortgage dispute with Fannie Mae (FNMA).
The terms struck some observers as surprisingly favorable to Ally and prompted Chris Whalen, who watches the industry for the Institutional Risk Analytics consultancy and has been on the lookout for backdoor subsidies to the banks, to call the deal "a gift from Uncle Sam," which now controls Fannie.
Ex-car czar Steve Rattner settles pay-to-play scandal
After more than a year of wrangling, obfuscation and name-calling, Steven Rattner has finally 'fessed up to having done wrong.
The former car czar and private equity boss today agreed to pay $10 million in restitution to the State of New York, for his role in the state's public pension kickback scandal. He also has agreed to refrain from "appearing in any capacity" before any New York pension fund for the next five years.
This follows Rattner's earlier deal with the SEC, under which he agreed to repay $6.2 million and agree to a two-year ban from the securities industry.
In an official statement, Rattner said:
"I am pleased to have reached a settlement with the New York Attorney General's Office, which allows me to put this matter behind me. I apologize if during the course of this process there is anything I did that may have made reaching this agreement more difficult. I respect the work of the Attorney General and his staff to ensure that the New York State Common Retirement Fund operates properly and in the best interests of New Yorkers."
That's a far cry from what Rattner said just last month:
While settling with the S.E.C. begins the process of putting this matter behind me, I will not be bullied simply because the attorney general's office prefers political considerations instead of a reasoned assessment of the facts.
This episode is the first time during 35 years in business that anyone has questioned my ethics or integrity — and I certainly did not violate the Martin Act. That's why I intend to clear my name by defending myself vigorously against this politically motivated lawsuit.
For the uninitiated, Rattner's restitution is based on his time as a co-founding partner of Quadrangle Group, a New York-based private equity firm that invested in media, communications and information services companies. Here's the rundown, based on legal filings (note, I'm cribbing what follows from earlier posts, because nothing in the settlement appears to alter the underlying allegations):
- Rattner secured a video distribution deal for the brother of New York pension fund CIO David Loglisci, via a (now defunct) Quadrangle portfolio company. The deal was done over the initial objections of portfolio company management. Not only does this indicate pay-to-play, it also would seem to mean that Rattner violated his fiduciary obligations to Quadrangle limited partners (not letter of obligations, but spirit).
- Rattner also helped connect Logiscli's brother with people at film channel IFC, in which Quadrangle was an investor.
- Presumably at Loglisci's suggestion, Rattner secretly hired Hank Morris as a "placement agent," in order to secure a $100 million fund commitment for Quadrangle from the New York State Common Retirement Fund (it was later increased to $150m). This came after Quadrangle's legitimate placement agents had only been able to secure between $25 million and $50 million. Morris got Quadrangle the money without ever setting up or attending any meetings with CRF on Quadrangle's behalf.
- Morris also helped get Quadrangle $75 million from New York City pension systems, via a third-party who since has pled guilty to securities fraud.
- One of Loglisci's brothers put Rattner in touch with potential investors on the West Coast. These included Elliott Broidy, who sat on the board of the Los Angeles Fire & Police Pension Fund. LAFPPF committed $10 million to Quadrangle, and Broidy has since pled guilty to felony charges of rewarding official misconduct.
- In 2006, Morris allegedly asked Rattner for a contribution to the reelection campaign of State Comptroller Alan Hevesi (Loglisci's boss, who last week pled guity to fraud). Rattner demurred, saying that he had a policy against making contributions to public officials with oversight over investments, Morris suggested that Rattner contribute the money via a third party. Soon after, Rattner tapped a Democratic donor who subsequently contributed approximately $25k to Hevesi (plus another $25k from the donor's wife). That donor was not identified in court documents, but appears to have been Haim Saban. A source tells me that Saban was unaware of Rattner's backroom shenanigans.
A few final thoughts on this story:
1. This could have been FAR worse for Rattner, and perhaps would have been were Cuomo not leaving the AG's office in just two days. Cuomo originally sought restitution of between $18 million and $20 million in private, and then bumped it up to $26 million in a pair of lawsuits (both dropped today, as part of the settlement). He also had precedent on his side, based on the $20 million shelled out by Riverstone Group founder David Leuschen, for other activities related to Hank Morris, New York pensions and the aforementioned film (a horrendous piece of dreck called "Chooch"). Finally, Cuomo also was seeking a lifetime securities industry ban.
Not only did Rattner get off relatively cheaply -- and never face possible criminal charges -- but he even got a bit of a PR boon by settling on a day when half of the world is on vacation (or still stuck at an airport, as the case may be).
2. On the other hand, the timing makes a bad week even worse for Mike Bloomberg. Hizzoner used to employ Rattner as his personal money manager, via a Quadrangle wealth management group, and still sort of does (the Quadrangle unit broke off into a new group with which Rattner is affiliated).
When asked about Rattner over the summer, Bloomberg said: "I don't think [Rattner] did anything wrong… I happen to think the charge against him is ridiculous... I've always stood up for anybody that works with me who gets attacked by the press." He has since stuck by his friend, refusing to cut ties with someone who has tacitly admitted to public corruption in Bloomberg's own state.
3. We've seen private equity kickback scandals in a variety of state pension systems, including California and New Mexico, but the New York affair was enabled by a sole fiduciary structure. It's not coincidence that the only other state with such a structure, Connecticut, was rocked by a similar scandal that ended up with its treasurer in prison. A bill was proposed last year to drop the single fiduciary in favor of a board structure, but went nowhere. It's almost as if New York legislators are begging for its public pensioners to again be defrauded.
4. Now that this is settled, here's hoping that Rattner will sit down to speak about the situation with an informed interviewer who sdoesn't mind asking hard questions. No, not you Charlie Rose. I'll officially throw my hat in the ring, but won't hold my breath...
Goldman bonus pool looking shallower
Perhaps less is more
The days of the $500,000 average paycheck are long gone, even at Wall Street's most gilded firm.
So predicts a report issued Thursday by Credit Suisse analyst Howard Chen. He slashed his fourth-quarter earnings estimate on Goldman Sachs (GS) to $3.70 a share from $5.08, citing its latest soft trading quarter and higher non-compensation expenses.
"Due to persisting choppy market conditions and our expectations for a weaker finish to 2010 for fixed income sales & trading, we reduce our forward estimates," he wrote in a note to clients.
Chen continues to rate the stock buy, thanks in part to what he calls "continued expense discipline" at the firm. He expects Goldman to set aside a little more for pay and perks this year than last, but to be far thriftier on that front than it has for most of its public history.
He estimates the firm will devote 40% of 2010 revenue to cover employee-related costs. That would bring the firm's compensation expense for the year to $15.8 billion, or around $446,327 for each of the firm's 35,000 or so employees as of September.
That compares with the $498,000 average the firm arrived at last year, after an unusual year-end bonus pool reduction, and the $662,000 peak the Goldman payout reached in the bubble year of 2007.
Strong results in the first half of 2010 helped launch Goldman on what looked like a track for a return to a $500,000-plus average payout. But the firm suffered along with Morgan Stanley (MS) and the rest of Wall Street in a summer trading slowdown, and execs presumably remain loath to bring on any more bonus rage than is necessary.
Chen isn't the only one who sees Goldman paying less. David Hilder, an analyst at Susquehanna who also rates Goldman stock buy, predicted last week that Goldman would set aside 39.5% of 2010 revenue aside for employee pay. That's up from last year's 36% but remains the second-lowest figure in the decade or so since the firm went public.
Goldman shares were flat Thursday and are down less than 1% for the year.
Dominion CEO: Patience and policy on the path to renewable energy
Dominion Resources (D) CEO Thomas Farrell
Dominion Resources (D) CEO Thomas Farrell is coming up on his fifth year anniversary for the position this January. He spoke with Fortune about how the company dumped oil and gas assets in the nick of time, why his family's military background has kept safety on his mind and the biggest challenge for energy companies in the future.
Fortune: Your tenure as CEO has straddled the recession. How has the company changed?
Farrell: In 2005, our mix of earnings and businesses was very different than it is today. Almost a third of the company's earnings were in oil and gas production—think deepwater rigs.
We were reaping great benefits from that in the short term, but our view was that it was unsustainable because whenever prices are high, people drill like crazy. It's a classic boom bust business. Right now, it's in an extended bust. We saw that spilling over into electric prices, and we didn't expect that to be very popular, so we decided to sell our oil and gas business in 2006 and 2007. More
Don't believe the rosy forecasts
Most economists and pundits predict a continued upward trend for most assets next year, but they will eventually be proven wrong.
In one of my classes at the University of Chicago Business School in the 1970s, the eminent 
statistician Harry V. Roberts liked to tell a story showing the homespun wisdom of his colleague and idol, economist Milton Friedman. The great monetarist was part of a panel evaluating a PhD presentation on forecasting growth rates for the U.S. economy. The candidate painstakingly described his methodology for fitting a broad array of variables––global capital flows, future exchange rates, immigration trends, and sundry other factors––into a computer model that, presto, spat out a prediction for the following year's GDP.
According to Roberts, Friedman delivered a brief, cutting critique––probably in the same nasal monotone I remember when, decades later, he returned my long-distance calls collect. Declared Uncle Miltie: "Why would this extremely complex model, based on factors that are themselves hard to forecast and could easily be wrong, produce a better number than taking the growth rates for the past five years, and dividing by five?"
For Roberts, the anecdote amounted to a parable on the pitfalls of economic forecasting. Friedman also liked to use the aphorism, "Predictions are extremely difficult, especially when they're about the future." More
Big sale: Groupon discloses $500 million investment
Just weeks after spurning a takeover offer from Google, online coupon site Groupon is in the money via a giant new investment. So are many of its earliest backers.
Groupon, the online coupon site that recently turned down a $6 billion acquisition offer from Google (GOOG), has raised $500 million in venture capital funding, according to a filing with the SEC.
No new board members are listed, meaning that we do not know the identities of participating investors. Other media reports, however, have suggested that new backers include Morgan Stanley (good way to get the inside track for an IPO), T. Rowe Price and Fidelity.
Digital Sky Technologies, which led the company's $135 million Series C round this past spring, also is believed to be heavily involved.
Groupon's SEC filing indiates that the company still plans to raise upwards of another $450 million, which it first disclosed via an ammended certificate of incorporation. It is worth emphasizing, however, that the $950 million "offering amount" may represent an upper limit to the investment, rather than a target (sometimes companies list artificially-high numbers, in order to provide financial/accounting flexibility).
Groupon CEO Andrew Mason so far has declined to discuss the new funding, beyond the following Tuesday tweet:
Groupon is in the process of completing a new round of financing - we'll let everyone know when there's more to announce.
One purpose of Groupon's massive new round is to provide liquidity for existing shareholders, including those who may have been ticked off that the company spurned Google. Fortune has learned that all Groupon shareholders recently received a letter offering to buy back up to 15% of current stock holdings, and the SEC filing indicates that $345 million of the $500 million will be used to cash out insiders (both investors and management).
In addition to DST, Groupon previously raised venture capital from firms like Accel Partners, Battery Ventures, New Enterprise Associates and a whole host of individuals.
What is yet to be seen is if this will go down as the largest venture capital deal of all time. Most industry trackers only include "new equity" in their calculations, which would shrink the current Groupon raise from $500 million to just around $155 million. Still a large number, but nowhere near an all-time record. For example, movie studio DreamWorks (then a startup) raised $500 million from Paul Allen's Vulcan Capital in 1995. Moreover, both Better Place ($350m) and Twitter ($200m) have raised large "new equity" rounds just this past year.
Were Groupon to raise another $450 million of "new" equity, however, then it would indeed be the largest round (according to MoneyTree, a consortium that includes PwC, the National Venture Capital Association and Thomson Reuters).
In terms of total venture capitalization, Groupon would come in at around $776 million (including the new $450m, excluding the cash-out). According to a Business Insider analysis from this past summer, that would put Groupon fourth on the all-time list.
Steve Young: From the NFL to private equity
The private equity world is littered with folks who are famous for doing something else. Bono at Elevation Partners. Bill Frist at Cressey & Co. Mike Richter at Environmental Capital Partners. Colin Powell at Kleiner Perkins.
In most cases, the celebrity partner is used to wow potential investors, make some high-powered introductions and be on call. Every now and then, however, the celebrity partner actually spends his days sourcing deals, serving on portfolio company boards or the myriad of other tasks endemic to the typical private equity pro.
Among this latter group is Steve Young, the Hall of Fame quarterback who currently serves as a managing director with Huntsman Gay Global Capital. Young previously worked at a firm called Sorenson Capital -- along with many of the other Huntsman Gay partners -- and also was a member of Northgate Capital (run by fellow NFL alum Tommy Vardell).
Below is a brief profile of Young's new career by CNBC's Brian Schachtman. Two quick disclaimers: (1) Patriots owner Bob Kraft is effusive in his praise of Young, but it also should be known that Huntsman Gay was one of the first tenants in Kraft's Patriot Place facility. (2) I also happened to be in the suite where Schactman filmed much of his segment (to meet with sources, of course, not to watch Pats vs. Jets)...
More from Fortune:
Pre-Marketing 12.30.10
* Les Leopold: Wall Street's 10 biggest lies of 2010
* Scoundrel: Is New Mexico Gov. Bill Richardson about to pardon Billy the Kid?
* Julia Ioffe: Facebook wants to move up from fifth place in Russia, whose citizens spend more time on social networks than any other nation
* Morning Call: U.S. futures look flat, London falls early, European shares slip and the Nikkei loses 3%.
* Floyd Abrams: Why WikiLeaks isn't the Pentagon Papers
* Brett Arends: 10 reasons why I don't believe in this Santa rally
* Felix Salmon: Blogger spats have moved to Twitter, and it's a regrettable development
* Sarah Lacy tells the SEC to back off of secondary market trading. I still think this inquiry is more about the 500-person rule than disclosure, but a good read nonetheless...
* Paul Kedrosky: Is Moore's Law finally about to catch up with lithium-ion battery prices?
* Boston's Hancock Tower sells for $930 million, a remarkable turnaround that provides a template for other deals
* Indiana cities may soon be allowed to file for Chapter 9 bankruptcy protection. Maybe it's time to unload those Gary, IN muni bonds...
* Tweet of the Day: @darrenrovell: Brett Favre makes $11,373 per minute of every game. That means he's only giving up 4 1/2 MINUTES OF PAY for Sterger fine
* Term Sheet's daily email newsletter is on a holiday hiatus, but sign up for its return next week
* Marty Lipton explains why he invented the poison pill:
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