Wall Street dips, but winners gain as quarter’s end near

By Caroline Valetkevitch
NEW YORK | Tue Mar 27, 2012 7:12pm EDT
(Reuters) – Stocks retreated from near four-year peaks on Tuesday, while a batch of large-cap shares hit new highs, with the help of portfolio managers snapping up top performers near the end of the quarter.

With the first quarter ending on Friday, portfolio managers adjusted holdings by buying some of the best performers to dress up their portfolios. A total of 175 stocks on the New York Stock Exchange hit new 52-week highs on Tuesday, including Dow components Home Depot (HD.N) and International Business Machines (IBM.N), along with high-end retailers.

“As long as the economy continues to improve, the market will continue to go up, and that’s what’s happened,” said Bryant Evans, investment advisor and portfolio manager at Cozad Asset Management, in Champaign, Illinois.

The moves follow three months of big gains, putting the S&P 500 on track for its best quarter since the third quarter of 2009. It follows a similarly strong run in the fourth quarter of 2011, with gains for the past six months totaling 25 percent.

On Monday, the three major U.S. stock indexes rallied more than 1 percent after Federal Reserve Chairman Ben Bernanke signaled that supportive monetary policy will remain in place.

On Tuesday, Bernanke said in an ABC News interview, when asked about the potential for more quantitative easing, that the Fed isn’t taking any options off the table.

The Dow Jones industrial average .DJI shed 43.90 points, or 0.33 percent, to close at 13,197.73. The Standard & Poor’s 500 Index .SPX dropped 3.99 points, or 0.28 percent, to 1,412.52. The Nasdaq Composite Index .IXIC dipped 2.22 points, or 0.07 percent, to 3,120.35.

Apple Inc (AAPL.O) hit another all-time high of $616.28, and closed with a market capitalization of $572.92 billion. The iPad and iPhone maker’s stock then pulled back from that peak to end at $614.48, still up 1.2 percent for the day.

Among Dow components hitting 52-week highs, IBM climbed to $208.56 and then retreated slightly from that peak to end down 0.3 percent at $207.18.

Walt Disney Co (DIS.N) rose to a 52-week high of $44.50, only to slip to $44.15, off 0.5 percent. Home Depot reached a 52-week high at $50.34, then gave up some of that gain to end at $50.04, off 0.2 percent for the day.

In the luxury segment of the retail sector, the stock of upscale department store operator Nordstrom (JWN.N) hit a 52-week high of $55.67. It ended at $55.40, up 0.2 percent.

Among sectors, the S&P technology and financial indexes led quarterly gains, with technology .GSPT last up 22.1 percent and financials .GSPF up 22 percent for the quarter so far.

Among top performing-stocks, Bank of America (BAC.N), the second-best performing S&P 500 stock for the quarter, is up 75 percent; Netflix (NFLX.O), the third best, is up 74.6 percent.

Apple, in the 10th-best spot, is up 51.9 percent for the first quarter so far.

“You’ll see fund managers continue to rotate, and the technical bias is up right now, so that bodes well for quarterly window dressing,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

Some investors believe further gains will be difficult to achieve since the rally has lasted for months without a major correction.

The market’s sharp gains have followed improving U.S. economic data, as well as accommodative measures by central banks around the world.

In the latest snapshot of the economy, the U.S. consumer confidence index dipped in March to 70.2, just a tad below the median forecast, while Americans ratcheted up inflation expectations to the highest level in 10 months, according to the Conference Board, a private industry group.

U.S. single-family home prices were unchanged in January, according to the S&P/Case-Shiller index, suggesting a battered housing market kept crawling along the bottom.

Homebuilders’ shares rallied, going against the overall market’s slight downturn for the day. The Dow Jones U.S. home builder index .DJUSHB jumped 3 percent.

Volume was 6.07 billion shares on the NYSE, the Nasdaq and the Amex, compared with the daily average for the year so far of 6.83 billion.

Decliners outnumbered advancers on the NYSE by a ratio of more than 4 to 3, while on the Nasdaq, more than five stocks fell for every three that rose.

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Apple’s gains make some mutual funds riskier

By David K. Randall
NEW YORK | Mon Mar 26, 2012 5:13pm EDT
(Reuters) – When it comes to Apple, investors could become victims of their own success.

It is a dilemma more mutual fund managers are wrestling with due to the company’s nearly 48 percent gain this year. Those who bought Apple well below its current price have seen the value of their investment balloon, sometimes to more than 10 percent of their fund’s assets.

That effectively turns a brilliant decision into a concentrated stake, undercutting the benefits of diversification and making some mutual funds riskier.

As Apple stock has marched higher, well-timed bets on the company have helped some growth-oriented and blended mutual funds outperform the broad market. But in doing so, many of those funds have now tied investor dollars closer to the performance of a single company.

This isn’t much of an issue when it comes to funds that market themselves as narrow bets on technology. But many funds whose broad holdings could be the core of a (401)k or similar retirement plan – Fidelity’s $14.7 billion Blue Chip Growth and the $28.7 billion T. Rowe Price Growth fund among them – are stocking up on Apple.

Apple makes up nearly 9 percent of Fidelity’s $80.8 billion Contrafund, for instance. The fund is the sixth-most popular holding in 401(k) plans nationwide, according to BrightScope, a firm that ranks company (401)k plans.

A dramatic fall in Apple’s shares, however unlikely that may seem at the moment, would quickly ripple across the retirement accounts of millions of investors who thought they were safer investing in funds than individual shares.

“It adds to the risk profile of a fund to have a significant stake in one stock because it makes them more susceptible to bad news on one or two stocks and they won’t be able to cushion the blow with diversification,” said Todd Rosenbluth, a senior fund analyst at Standard & Poor’s Capital IQ.

Generally in the mutual fund industry, any position over 5 percent of assets is considered a large bet that may influence a fund, said Dan Culloton, a fund analyst at Morningstar.

CONCENTRATED BETS

Shares of Apple have nearly doubled from the $310 they hit in June 2011, and at about $600 a share are up nearly 48 percent in 2012 alone.

Apple, currently the world’s most valuable company by market capitalization, now has a weighting of 4.2 percent in the broad S&P 500 portfolio, the benchmark against which the performance of most U.S. mutual funds are judged. That means 4.2 cents of every $1 invested in a S&P 500 index fund will be allocated to Apple shares, before fees.

By definition, actively managed mutual funds have overweight positions in companies they think will outperform the broad market, but usually not more than 5 or 6 percent.

But 46 funds tracked by Morningstar have stakes in Apple that exceed 9 percent of assets, or roughly double the company’s weighting in the S&P 500 index. This does not include sector funds that focus on technology or other specialized investment.

The $1.5 billion Oppenheimer Main Street Select fund, for instance, blends value and growth stocks in its portfolio of 34 companies. It had 10.5 percent of its assets, or two and half times the benchmark weight, in Apple as of the end of January, according to Morningstar data.

That concentrated bet is one reason that the fund is up 13.9 percent so far this year, or 2.6 percentage points above the broad S&P 500 index. A dip in Apple’s share price and the fund could fall more than the broad market. The fund managers declined to comment.

Fidelity’s Contrafund, meanwhile, focuses on growth stocks. It holds 427 stocks, but 8.6 percent of its portfolio, or a total of $6.6 billion, was concentrated in Apple at the end of January. That stake is more than even Apple’s weighting of 7.6 percent in the narrower Russell 1000 Growth index, which many growth fund managers use as an internal benchmark.

The Contrafund is up 13.7 percent since the start of 2012. Fidelity declined to comment.

Some reluctance on the part of portfolio managers to sell Apple shares is understandable. Trimming exposure could lead to underperformance for a fund.

“We hear about this a lot from portfolio managers. I have no doubt that they’d like to sell it and take their profits, but you have to be in it to win it and right now Apple’s momentum is going up,” said Howard Silverblatt, senior index analyst at S&P.

These fund managers usually realize that they are taking on additional risk, Silverblatt said. “What helped you on the way up kills you on the way down.”

CUTTING RISK

Some fund managers are taking steps to lower the weighting of Apple in their portfolios.

“We got to the point where it was an inordinate part of our portfolio, and in order to control risk it was only prudent to trim it back,” said Robert S. Bacarella, a Wheaton, Illinois fund manager who runs the $49 million Monetta fund with his son.

Bacarella first bought 10,000 shares of Apple in early 2005 when it traded at around $40 per share. In September 2005, those 10,000 shares were worth $536,100 and accounted for 0.9 percent of his portfolio, according to Morningstar data.

Fast forward to December 2011, and Bacarella again had 10,000 shares of Apple. This time, however, their value was nearly $4.1 million, which accounted for 9.3 percent of his fund’s weight. He trimmed his shares by 5,000 earlier this year. Apple now makes up 5 percent of his assets.

“This is about risk control. You never know what is going to happen,” he said. The sizeable positions built up by other funds would only exacerbate an Apple fall , he added.

“If everyone sees deceleration of earnings growth, what will you do?” Bacarella asks. “I would think that you’re going to bail and that will compound to the downside.”

(Reporting By David Randall; Editing by Walden Siew, Jennifer Merritt and Tim Dobbyn)

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Exchange operator BATS stumbles in IPO debut

By Chuck Mikolajczak and Olivia Oran
NEW YORK | Fri Mar 23, 2012 3:10pm EDT
(Reuters) – A series of blunders hit the market debut of BATS Global Markets Exchange Inc (BATS.Z) Friday, causing its own shares to erroneously trade for less than a penny and confusing investors.

The problems also fouled a trade in shares of Apple Inc (AAPL.O), the world’s most valuable company, and caused a temporary halt in its shares.

It was an inauspicious debut for BATS, an exchange operator that priced 6.3 million shares at $16 per share late Thursday in an initial public offering. The BATS exchange trades both equities and equity options.

BATS stock dipped to $15.25 at the start of trading on its own exchange. Then a slew of bad trades at less than a penny went through. The trades were later voided.

As BATS began trading, a bad trade for 100 shares of Apple also went through, triggering a circuit breaker that temporarily halted trading of Apple.

At 11:07 a.m. the BATS exchange said it was investigating system issues with trading in symbols in the range “A” through “BF,” which include Apple and BATS.

“It’s just another black eye for the fragmented equity structure,” said Joe Saluzzi, co-head of equity trading at Themis Trading in Chatham, New Jersey. “Every day we see things like flash crashes and now IPOs that can’t get off the ground.”

The very low-priced BATS trades took place between 11:14 a.m. and 11:15 a.m. (1514 GMT and 1515 GMT)

The BATS exchange was forced to declare “self-help,” which means an exchange is dealing with internal problems processing trades and needs to send trades through other venues, such as Nasdaq. The erroneous trades were later canceled by Nasdaq.

BATS said on its website that trading on its exchange would resume at 1:20 p.m. (1720 GMT), but later said there was another delay. It set no time for a resumption, and trading remained halted at $15.25 at 2:20 p.m.

BATS could not be reached for comment.

The glitch on the first day did little to encourage investors. “The last thing you want to do as a listing exchange is mess up your introduction to the public investment world – the IPO,” said Jason Weisberg, managing director at Seaport Securities Corp.

The awkward debut comes as regulators, led by the Securities and Exchange Commission, have been cracking down on exchanges and looking at the relationship between high frequency trading systems and the exchanges.

The trading snags also came on the same day The Wall Street Journal printed a front-page story saying BATS was the subject of an SEC probe into high frequency trading.

More investigations against exchanges are pending, according to sources.

BATS, headed by 45-year-old Joe Ratterman, was formed in 2005 by major banks and trading firms looking to break the stranglehold that the NYSE (NYX.N) and Nasdaq (NDAQ.O) had on U.S. stock trading, forcing the traditional venues to modernize their technology.

Last November, BATS acquired pan-Europe equity exchange Chi-X Europe for $300 million to challenge that region’s dominant exchanges with faster and cheaper trading services.

According to BATS’ offering documents, the BATS exchange has an 11.3 percent share of the U.S. equity market and a 3.1 percent share of the U.S. equity options market. BATS was scheduled to be the first IPO to list on the exchange.

Its difficult debut Friday led some traders to question whether the exchange is reliable to compete with its bigger rivals.

“I think some companies might say ‘if they can’t handle the IPO of their own stock, how can they handle the IPO of our stock,'” said Dennis Dick, a Detroit-based market structure consultant and trading member at Bright Trading LLC. “There is going to be a confidence issue of listing on BATS.”

(Editing by Alwyn Scott, Dan Grebler and Leslie Adler)

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NYSE says will not appeal veto of D. Boerse deal

NEW YORK | Thu Mar 22, 2012 11:15am EDT
(Reuters) – NYSE Euronext said on Thursday it would not join Deutsche Boerse in appealing the European Commission’s decision to prohibit the $7.4 billion merger between the two exchange operators.

The deal would have created the world’s largest exchange. European regulators argued it would have given the combined group a near monopoly in the worldwide market for European derivatives.

Frustrated by the ruling and how it defined the derivatives market, Deutsche Boerse said on Monday it was appealing to Europe’s General Court, the lower chamber of the European Court of Justice.

NYSE said that while it believes the European Commission’s decision was based on an incorrect market definition, it does not believe the interests of its shareholders and of the company itself would be served by getting involved in a protracted appeal.

“We remain convinced of the original rationale for the proposed combination and the many benefits it would have created for the industry, our customers and the European economy,” NYSE said in a statement.

“However, as we said at the time of the prohibition, our sole focus has returned to executing our strategy and leveraging the significant opportunities we have to grow the business and continue to create long-term value for our shareholders, customers and employees.”

Antitrust lawyers have said they see little chance of success in Deutsche Boerse’s appeal and that it may be challenging the ruling only to ease the way for future deals.

(Reporting By John McCrank)

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IADB and China launch $1 billion Latam investment fund

By Antonio De la Jara and Alonso Soto
MONTEVIDEO | Mon Mar 19, 2012 3:54pm EDT
(Reuters) – China and the Inter-American Development Bank said on Monday they are starting a $1 billion fund to invest in Latin America, though the Asian giant’s latest push to expand its influence in the region prompted words of caution from Brazil.

To feed its fast-growing economy’s voracious appetite for raw materials, China has invested tens of billions of dollars in the region, from Mexico to Argentina, over the last decade to acquire strategic assets or companies in sectors such as oil, minerals and food products.

“This shows the enormous interest that China has in the Latin American region,” IADB President Luis Alberto Moreno told reporters at the IADB’s annual meeting in Montevideo.

The deal with the IADB also shows China is strengthening its ties to prominent institutions in Latin America. China has been able to expand its leverage in what was traditionally seen as the backyard of the United States partly because Washington was distracted for much of the last decade with wars in Iraq and Afghanistan.

But some countries, namely Brazil, Latin America’s largest economy, have been wary about China’s deep pockets and labor practices even as Brazil has ramped up exports to Beijing.

“We need to look at these kind of proposals cautiously because the Chinese presence in some places has meant that they bring over their own workers and practices,” Brazil’s planning minister, Miriam Belchior, told Reuters at the IADB meeting.

Brazil and China have clashed over trade and investment rules as the two, both members of the BRICS group of emerging economies, race to protect local industries from foreign competition and a slowing global economy. Brazil has raised taxes on some imports and last week succeeded in getting Mexico to rework a decade-old trade deal by agreeing to quotas on exports, raising fears of protectionism in the emerging-markets world.

China has not given full clearance for Brazil’s Vale SA VALE.SA, the world’s largest iron ore producer, to dock its giant “Valemax” iron ore ships in Chinese ports. Analysts say it could be a roundabout effort to protect Chinese shipbuilders.

Brazilian companies are also competing with China for more influence in Latin American and other emerging regions like Africa as their economic clout soars.

China has come under fire for some of its labor practices in Africa that include importing Chinese workers and paying low wages.

Rapidly growing China has surpassed the United States as the main trade partner of Brazil as well as many other commodity-rich countries of Latin America.

Latin America’s leaders have looked to Beijing for trade and investment deals to offset slow economic growth in the United States and Europe.

China has free-trade pacts with Chile and Peru. But a slowdown in the Chinese economy is seen as a risk to commodity prices for many Latin American nations like Brazil, Chile and Peru.

In addition to the fund with China, the IADB said it would make available more than $300 million to help improve the capacity of public security and anti-crime strategies in a region with more than 30 percent of the world’s murders but only 8 percent of the global population. Crime has risen despite economic growth, Moreno said.

(Additional reporting by Terry Wade and Guido Nejamkis; Editing by W Simon, Dan Grebler, Leslie Adler)

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Deutsche Boerse to sue EU over veto of NYSE deal

By John McCrank and Jonathan Gould
Mon Mar 19, 2012 7:18pm EDT
NEW YORK/FRANKFURT, MARCH 19 – Deutsche Boerse AG (DB1Gn.DE) plans to sue the European Commission for blocking its $9 billion merger with NYSE Euronext (NYX.N), to recoup merger costs and keep the door open for future deals in the derivative markets.

The European Commission cited antitrust reasons for its February 1 decision to block the D.Boerse-NYSE merger, saying it would have led to a near-monopoly in European financial derivatives worldwide.

“Deutsche Boerse is of the view that several aspects of the decision are incorrect,” the operator of the Frankfurt stock exchange said in a statement on Monday. It said it would bring the suit before the European court in Luxembourg.

Deutsche Boerse would not comment on the suit beyond its statement, but Chief Executive Reto Francioni said on a conference call last month that an appeal might force European regulators to change their definition of the derivatives markets, which does not include over-the-counter trading.

European regulators did not take into account the over-the-counter derivatives market when assessing the antitrust implications of the proposed deal.

Deutsche Boerse is concerned that allowing that definition to stand could keep it from future deals for derivatives markets in Europe, a source familiar with the company’s thinking said.

The exchange operator would also attempt to recoup the $82.2 million euros it spent pursuing the failed merger, the source said.

The person, who asked to remain anonymous because of the sensitivity of the issue, said Deutsche Boerse had no plans to try to revitalize the merger with NYSE Euronext.

NYSE Euronext declined to comment.

The move to sue the European Commission for blocking a merger is unusual but not unheard of. General Electric (GE.N) unsuccessfully appealed the EU Commission decision to block its 2001 merger with Honeywell (HON.N).

“The likelihood of success is as close to zero as you can possibly measure,” said Evan Stewart, an antitrust lawyer and managing partner at Zuckerman Spaeder LLP in New York.

He said it was also highly unlikely that the exchange operator would be able to recover any monetary damages from the government body.

In arriving at its decision to block the deal, the European Commission said it consulted more than 700 market participants and stakeholders.

The proposed merger was just one of several international deals among exchanges to have failed in the past year.

Nasdaq OMX (NDAQ.O) and IntercontinentalExchange Inc’s (ICE.N) bid for NYSE Euronext was rejected by the U.S. Department of Justice. London Stock Exchange’s (LSE.L) takeover of TMX Group (X.TO) was rejected by shareholders of the Toronto Stock Exchange operator, and Singapore Exchange Ltd’s (SGXL.SI) bid for Australia’s ASX Ltd (ASX.AX) was stopped by the Australian government.

(Reporting by Jonathan Gould in Frankfurt and John McCrank in New York; Editing by Gerald E. McCormick and Steve Orlofsky)

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MF Global customers seek to streamline liquidation

By Nick Brown
Fri Mar 16, 2012 8:13pm EDT
(Reuters) – The primary advocate group for former MF Global customers is undertaking an effort to convert the commodities broker’s bankruptcy status to one that allows a more streamlined liquidation process, saying it would preserve more potential payback for customers.

The Commodity Customer Coalition, which represents thousands of customers of the fallen broker, told Reuters on Friday it wants to ask the U.S. Bankruptcy Court to handle the case under Chapter 7 of the bankruptcy code, designed specifically for liquidation of assets.

A spokesman said the coalition has reached out to the Commodity Futures Trading Commission (CFTC), the U.S. futures regulator, in hopes of gathering support for a planned court filing to change the case from Chapter 11, which allows a company to keep operating while it tries to reorganize and negotiate with creditors.

MF Global Holdings Ltd collapsed after it revealed exposure to risky European sovereign debt. With liquidation the only realistic option, the money being spent to keep it afloat in Chapter 11 serves no purpose, coalition spokesman John Roe said on Friday.

The cost of the case has drawn harsh criticism, including from U.S. Congressional leaders, amid reports that the trustee managing MF Global’s assets in bankruptcy may seek court approval of bonuses for three top executives still on the payroll.

Trustee Louis Freeh said last week he has made no decisions on bonuses.

Customers of MF Global’s brokerage are missing an estimated $1.6 billion that investigators say was improperly used to cover corporate transactions and is now scattered among MF Global affiliates, banks, exchanges and other parties.

While Chapter 11 includes the option of liquidation if the company cannot renegotiate its debt, Roe said Chapter 7 would allow a more streamlined liquidation with no committee of creditors paid for from the bankrupt company’s estate.

Chapter 7 would be cheaper and would guarantee that customers of MF Global’s brokerage could pursue recoveries from the parent company’s estate, an issue currently in dispute.

“Chapter 7 better ensures customer priority if commingled funds are traced to the holding company, and the sooner we get there ensures there will be assets left to pay us,” Roe said.

According to monthly expense filings, MF Global has spent more than $11 million since filing for bankruptcy on October 31. It is surviving on about $26 million in cash that had been pledged to JPMorgan Chase & Co as collateral on loans.

CHALLENGES

Obstacles stand in the coalition’s way, not least among them cost.

Roe estimated that legal fees associated with a conversion motion would approach $100,000, and said the group has asked for donations from all its members.

According to a coalition term sheet obtained by Reuters, the group in particular has sought donations from three of MF Global’s largest and most high-profile customers: oil giant ConocoPhilips, whose account topped $310 million when MF Global went bust; Carl Icahn, who had an $85 million account; and Coca-Cola Co, which had a roughly $17 million account.

A Coca-Cola spokesman declined to comment on Friday. Representatives for Icahn and Conoco could not immediately be reached.

The coalition is hoping the CFTC will file the motion itself, and has met with Commissioners Jill Sommers and Scott O’Malia to discuss the issue, according to the term sheet.

While O’Malia seemed more receptive to the idea than did Sommers, Roe said, neither commissioner could immediately say whether and to what extent the commission could help.

Calls to a CFTC spokesman were not immediately returned on Friday. A spokeswoman and a lawyer for Freeh declined to comment on Friday.

Prior court rulings are also stacked against the coalition.

Judge Martin Glenn has already rejected one attempt to convert the case, filed by commodities customer Sapere Wealth Management.

While the coalition could pose a different legal theory than the one that sunk Sapere — for example, by arguing creditors would receive higher payouts under Chapter 7 — Judge Glenn has indicated he would be hard-pressed to convert.

The judge in a January court ruling said he believes a Chapter 7 conversion would cause expenses to increase, rather than decrease.

While Chapter 7 is designed for liquidation, companies can liquidate under Chapter 11, as well. In complex cases involving many creditor factions, the more collaborative nature of Chapter 11 can be beneficial, as it gives creditors an active seat at the table.

The case is In re MF Global Holdings Ltd, U.S. Bankruptcy Court, Southern District of New York, No. 11-15059.

(Reporting By Nick Brown in New York; additional reporting by Tom Polansek in Chicago)

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European client pans Goldman slowness to reassure clients

By Sinead Cruise
LONDON | Thu Mar 15, 2012 10:42pm EDT
(Reuters) – Joining a growing chorus of criticism, one of Europe’s largest asset managers lashed out at Goldman Sachs Group Inc for not communicating quickly enough with clients after ex-banker Greg Smith publicly condemned the way the bank treats clients.

APG, a Dutch investment adviser that runs 300 billion euros of assets for more than 4.5 million people in the Netherlands, said it was surprised it took the Wall Street bank more than a day to offer APG any reassurance on points raised in Greg Smith’s resignation letter.

“We would have expected that a company that faces such a big media backlash over something so core to their business such as client trust would have instantly reached out to those clients to say something,” APG spokesman Harmen Geers told Reuters.

Smith’s scathing remarks, published in the New York Times on Wednesday, have prompted an outpouring of criticism, ridicule – and defense – of Goldman, the storied Wall Street firm that has become a lightning rod for anti-bank sentiment.

After the piece appeared, Goldman Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn issued a memo to staff describing the views and observations of the former vice president as “foreign” to most of his 12,000 peers.

Blankfein also sent Goldman Sachs employees a voicemail on Wednesday urging them to reach out to clients and saying they had support from CEOs all over the world, a person familiar with the situation said.

On the voicemail, Blankfein read out two examples of support from clients, the source added.

Geers said the bank contacted APG late on Thursday offering a copy of the staff memo and telephone explanation of its message, a gesture he described as “too little, too late.”

Goldman Sachs made no immediate comment when asked how it was communicating with clients.

SUPPORT FOR GOLDMAN

While the criticism has sparked numerous “me too” responses, at least one client using Goldman’s investment banking advisory services said it respected the firm’s knowledge and experience.

“We’ve had a love-hate relationship with Goldman for a number of years,” United Technologies Corp Chief Financial Officer Greg Hayes told reporters in New York on Thursday.

“For us it’s about what these banks bring to the table. I think Goldman has the intellectual capital, they’ve got the know-how to do these transactions. There’s other banks out there, but Goldman is still the preeminent investment bank and they give solid advice.”

The diversified U.S. manufacturer has hired Goldman to sell some of the industrial units of its Hamilton Sundstrand arm.

Hayes said Smith’s resignation letter would not change his opinion of the firm.

“There’s bad apples and there’s bad actors at every one of these companies. Banks have a bad reputation anyway,” Hayes said. “But I think Goldman can add value.”

Yet, Goldman recently drew criticism from a prominent Delaware judge for serving as both an adviser to and beneficiary of El Paso Corp’s $23 billion sale to Kinder Morgan.

And among investment managers, faith in Goldman’s reputation appeared more tattered.

“One of the more important messages (Smith) gave was the need for the bank to refocus attention on clients and attend more closely to their needs … but even now, Goldman, as well as some media, seem to be overlooking that,” Geers of APG said.

The lack of quick, direct communication with APG underlined how much work Goldman needs to do to prove it puts its customers first, the Dutch group said.

“I have seen the internal memo from Goldman to its employees which says ‘we all know this isn’t true,’ but perception is reality and a service provider lives or dies by whether they have happy clients,” Geers said.

“What about trying to re-win trust?” he said. “Goldman’s clients are now being forced to explain to their clients why they are doing business with Goldman. We are now obliged to answer questions because of their company culture. From the bank’s point of view, that is very bad.”

Goldman has bounced back from several dents to its image in recent years, but industry insiders say the unprecedented attack from a former employee could start to push much larger volumes of prospective business to rivals. And it stirred a wide range of reactions.

Jamie Dimon, CEO of rival bank JPMorgan Chase & Co, cautioned employees against trying to “seek advantage from a competitor’s alleged issues.”

IMPACT ON BANK REFORMS?

At least one wasted no time in saying it put clients first. “In my experience … client success and firm success can peacefully coexist; in fact thrive,” Harris Private Bank Chief Investment Officer Jack Ablin said in an open letter. He oversees $60 billion of investments for individuals and families.

Congressman Barney Frank, an architect of the 2010 Dodd-Frank financial reform law, said Smith’s piece would have “a big impact” on the banking industry’s efforts to push back against financial reform.

“It puts the burden on Goldman Sachs and others to show us how what they do benefits the clients and therefore the broader economy,” he told Reuters.

One London-based former hedge fund client of the bank, who declined to be named, said some asset managers and family offices were thinking twice about doing business with the bank before Greg Smith’s remarks.

“We took them off our system some months back … I used to know a few guys there, there were a few good ones in that bunch and I have noticed that just about all of them have left in the last year,” the manager said.

“They used to tell me that they loved the firm; that it looked after its people and that it had a really good ‘code.’ And now those people are leaving, so it reflects what (Smith) is saying.”

Goldman shares ended 2.2 percent higher on Thursday amid gains for the broader banking sector.

(Reporting by Sinead Cruise and Scott Malone in New York Editing by Alexander Smith, Alwyn Scott, Andre Grenon and Muralikumar Anantharaman)

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Bank of America’s stock soars after passing stress test

By Rick Rothacker
Wed Mar 14, 2012 6:46pm EDT
(Reuters) – Bank of America Corp (BAC.N) shares on Wednesday hit their highest level in seven months after a Federal Reserve stress test affirmed one of the more troubled U.S. banks had made progress in improving its capital levels.

The second-largest U.S. bank had been expected to pass the review, but its conservative capital plan allowed it to contrast with other banks, notably Citigroup Inc (C.N), that had their proposals for dividend increases and share buybacks denied by the Fed.

Last year, the Fed rejected a modest dividend increase the bank had requested, embarrassing Chief Executive Brian Moynihan. This year, Bank of America said it wasn’t asking to hike its penny-per-quarter payout or to buy back shares. Instead, it would continue to build capital as it works to absorb mortgage-related losses and meet new international standards.

Bank of America’s performance in the stress test was “adequate” and without the drama of last year, said Gary Townsend, chief executive of Hill-Townsend Capital in Maryland, which invests in bank stocks.

“For once, they read the body language of regulators and didn’t push the envelope as Moynihan did last year,” Townsend said.

The move gave the bank better capital ratios under the stress test than nine of 19 banks when counting proposed dividend increases and share buybacks. But it also left the bank out of another round of improved payouts to shareholders.

“Higher quality” banks such as JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N) and U.S. Bancorp (USB.N) began to differentiate themselves from other banks with higher dividend yields and share repurchase plans, said Guggenheim Partners analyst Marty Mosby. JPMorgan, for example, on Tuesday got approval to boost its quarterly dividend to 30 cents per share from 25 cents, compared to Bank of America’s 1 cent.

Still, Mosby noted conservative capital plans such as Bank of America’s were better received by the Fed than more aggressive ones. Citigroup and SunTrust Banks Inc (STI.N) did not stay above the minimum capital threshold when including their plans for dividends and buybacks. Details of those rejected plans were not disclosed.

After showing it was able to pass the stress test, Bank of America could be in a position to ask for a modest dividend increase next year but no share buybacks, Mosby said. The bank needs to keep accumulating capital to meet so-called Basel III capital standards, which will start being phased in next year, he noted.

While banks have until 2019 to meet the new requirements, “it’s better to show they can get there pretty soon,” he said.

Bank of America’s shares climbed 4.1 percent to close at $8.84, while the KBW Bank Index BKX. rose 1.3 percent. For the year, the bank’s shares are up about 59 percent, after falling 58 percent last year on concerns about the bank’s capital.

Some of the numbers released by the Fed detail the challenges that still await Charlotte, North Carolina-based Bank of America. Of the 19 banks, the Fed expected Bank of America to lose the most before income taxes from the fourth quarter of 2011 to the fourth quarter of 2013 under the stress scenario: $51.3 billion. Citigroup fared the second worst, with a projected loss of $50.3 billion.

The Fed emphasized that its estimates were not forecasts of expected losses and that the hypothetical stress scenario, which included U.S. unemployment of 13 percent, was more adverse than expected.

Under the scenario, Bank of America was expected to experience loan losses equal to 8.3 percent of its average balances, compared to the average of 8.1 percent for the 19 banks. Its home-equity portfolio would experience losses of 15 percent, compared to 13.2 percent for all of the banks.

Bank of America showed progress in improving its capital levels, even though additional capital it built in the fourth quarter of 2011 was not counted. But the stress tests also highlighted its other major challenge: revenue.

Under the stress scenario, the Fed said Bank of America would have net revenue before loan-loss provisions of $40.1 billion, trailing JPMorgan ($59.3 billion), Wells Fargo ($53.3 billion) and Citigroup ($41.2 billion). The revenue figure, which also covers the fourth quarter of 2011 through the fourth quarter of 2013, includes expenses from investor requests to buy back soured mortgage loans and foreclosure costs, one of Bank of America’s biggest troubles.

(Reporting By Rick Rothacker; Editing by Alwyn Scott and Bernard Orr)

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Yahoo sues Facebook for infringing 10 patents

By Dan Levine and Alexei Oreskovic
SAN FRANCISCO | Mon Mar 12, 2012 7:09pm EDT
(Reuters) – Yahoo Inc sued Facebook Inc over 10 patents that include methods and systems for advertising on the Web, opening the first major legal battle among big technology companies in social media.

The lawsuit, filed in a San Jose, California federal court on Monday, marks a major escalation of patent litigation that has already swept up the smartphone and tablet sectors and high-tech stalwarts such as Apple Inc, Microsoft Corp and Motorola Mobility Holdings Inc.

Yahoo’s patent lawsuit follows Facebook’s announcement of plans for an initial public offering that could value the company at about $100 billion.

Facebook spokesman Jonathan Thaw said Facebook learned of the lawsuit through the media.

“We’re disappointed that Yahoo, a longtime business partner of Facebook and a company that has substantially benefited from its association with Facebook, has decided to resort to litigation,” he said.

In an emailed statement, Yahoo said it is confident it will prevail.

“Unfortunately, the matter with Facebook remains unresolved and we are compelled to seek redress in federal court,” the company said in a statement.

Yahoo, one of the Web’s pioneering companies, has seen its revenues decline in recent years at a time when rivals such as Facebook and Google have thrived. In January, Yahoo appointed former PayPal President Scott Thompson as its new chief executive, replacing Carol Bartz, who was fired in September.

Yahoo said late last month it was seeking licensing fees from Facebook over its patents and that other companies have already agreed to such licensing deals.

IPO COMPANIES VULNERABLE

Colleen Chien, a professor at Santa Clara Law in Silicon Valley, said companies are usually more vulnerable to patent suits when they are in the IPO process.

“As a general proposition, when a company is about to go public, the last thing it needs is to get involved in a knock-down, drag out litigation fight,” Chien said.

“So that might make Facebook more willing to resolve its differences with Yahoo.”

Yahoo has used similar timing to its advantage in the past. Google agreed to issue shares to Yahoo nine days before Google went public in 2004 in exchange for a license to Yahoo’s patents. Google later took a $201 million non-cash charge related to the transaction.

In deciding to sue Facebook, Yahoo has retained the same law firm, Quinn Emanuel Urquhart & Sullivan, used by Google and other manufacturers in many Android-related smartphone patent cases. Google is a player in social media with its Google+ service.

Quinn Emanuel also counts social gaming service Zynga Inc as a client, according to the law firm’s website.

Yahoo has not said whether it will bring patent claims against other social networking companies and a Google spokesman declined to comment on Quinn Emanuel’s involvement. Zynga also declined to comment.

In the lawsuit, Yahoo says Facebook was considered “one of the worst performing sites for advertising” prior to adapting Yahoo’s ideas.

“Mr. Mark Zuckerberg, Facebook’s founder and CEO, has conceded that the design of Facebook is not novel and is based on the ideas of others,” the lawsuit said.

ONLINE ADVERTISING

Only two of the 10 patents at issue are directly related to social networking technology. Most focus on online advertising, including methods for preventing “click fraud,” as well as privacy and technology for customizing the information users see on a Web page.

“If what Yahoo is saying is literally true, then it seems like a lot of companies would be liable,” said Shubha Ghosh, a professor who specializes in intellectual property at The University of Wisconsin Law School. But he added, much would depend on whether a judge defines the patents broadly or narrowly.

Several social networking companies, including Facebook, have seen an uptick in patent claims asserted against them as they move through the IPO process.

However, most of those lawsuits have been filed by patent aggregators that buy up intellectual property to squeeze value from it via licensing deals and none by a large tech company such as Yahoo.

The lawsuit is a change for Yahoo because the company has never initiated offensive patent litigation against such a large publicly traded company, according to a search of federal court dockets on legal database Westlaw, a Thomson Reuters unit.

A classic defense for companies targeted with patent claims is to threaten a countersuit using its own patents. But Yahoo possesses far more patents than Facebook. According to a U.S. government database, Yahoo has over 3,300 patents and published patent applications, while Facebook has 160.

The case in U.S. District Court, Northern District of California is Yahoo Inc. v. Facebook Inc., 12-cv-1212.

(Reporting By Dan Levine and Alexei Oreskovic; editing by Andre Grenon)

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