TUESDAY, AUGUST 3, 2010
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Economy & Business In devising punishments, SEC faced with competing interests Two competing factors have by Zachary A. Goldfarb
What’s $75 million? For Citigroup, it’s a week of
profits, less than 0.1 percent of its market value, a rounding error on a balance sheet worth more than $2 trillion. And for the Securities and Ex-
change Commission, it’s a fair price to pay for the bank to settle allegations that it misled its shareholders about nearly $40 billion in subprime mort- gage investments it held in 2007, the year before the bank began its slide into the abyss. The settlement of the Citi- group case last week, after settle- ments earlier this year with key Wall Street banks involved in the financial crisis, has raised a host of questions about how the SEC devises punishments to meet the alleged crimes.
been at play.
On the one hand, the agency wants headline-grabbing settle- ment numbers that send a mes- sage that regulators will be tough on companies that do bad things. On the other hand, the agency is cognizant that it’s a company’s shareholders, who might have been harmed in the first place, who ultimately pay when the agency assesses a fine. “The punishment of a corpo-
rate entity like Citigroup serves a limited purpose,” said Mark J. Roe, a professor at Harvard Law School. “There’s a lot of smoke and drama around it, but it ends up shifting money from one group of shareholders to an- other.” Two other major settlements
involving Wall Street banks this year have been with Goldman Sachs, which paid $550 million,
Stock market surges
after soothing reports Investors encouraged by European banks, U.S. manufacturers
by Jia Lynn Yang
Investors buoyed by solid bank earnings in Europe and promis- ing manufacturing numbers in the United States plowed into the markets Monday, extending the stock market’s July surge into the new month. The Dow Jones industrial aver-
age climbed 2 percent, or 208.44 points, to 10,674.38. The Standard & Poor’s 500-stock index rose 24.26, or 2.2 percent, to 1,125.86. And the tech-heavy Nasdaq com- posite index rose 40.66, or 1.8 per- cent, to 2,295.36. A closely watched manufactur- ing indicator released Monday highlighted the modest growth underway in the U.S. economy. The Institute for Supply Manage- ment said its manufacturing in- dex slipped to 55.5 points in July from 56.2 a month earlier. But any reading greater than 50 sig- nals economic expansion, and ob- servers look to the index — a sur- vey of company supply managers — as a leading indicator for the economy. News from Europe and Asia also provided encouraging cues
for Wall Street, giving the mar- kets a boost straightaway Monday morning.
European banks HSBC Hold- ings and BNP Paribas reported better-than-expected earnings, giving investors further assur- ance that the worst of the Euro- pean debt crisis could be over. HSBC announced that its profit doubled for the first half of the year, and BNP Paribas said its sec- ond-quarter net income was up 31 percent. Markets were jittery in May
and June as debt problems in Greece and Spain threatened to careen out of control. But strong bank earnings and better-than- expected results on European banks’ stress tests have begun easing investors’ nerves. “It just seems as if the situation
is starting to heal and the most dire, worst-case scenarios are not going to come to pass,” said Philip J. Orlando, chief equity market strategist for Federated Investors. “Maybe we’re going to skate on by and Armageddon is legitimately off the table.” The energy and materials sec- tors also welcomed signals from China that the government’s at- tempts to tamp down growth are working — and so officials might ease off the brakes soon. A key measure for manufactur-
ing levels in China showed signs of slowing for the first time since March 2009. The HSBC China
and Bank of America, which paid $150 million. In the Goldman case, the bank paid what amounted to two weeks of profit for allegedly sell- ing an investment to two clients that was secretly designed to fail. No senior executive was charged. In the Bank of America case, the bank was accused of conceal- ing billions of dollars in losses and compensation from share- holders. No executive was charged by the SEC, but a lawsuit against the bank filed by New York Attorney General Andrew Cuomo is pending. In
initially rejecting the
$33million Bank of America set- tlement, U.S. District Judge Jed S. Rakoff of the Southern District of New York was incredulous about the terms, saying the set- tlement suggested “a rather cyn- ical relationship between the parties.”
But even when executives are
charged and have to pay a fine, there is a question about wheth- er the price is high enough. The SEC doesn’t have criminal au- thority and so it can’t use that ul- timate weapon — jail — to deter and punish financial miscon- duct. For example, Gary Crittenden, former chief financial officer of Citigroup, is paying $100,000 for his alleged role in the coverup of subprime mortgage investments. In 2007, the year of the alleged
wrongdoing, Crittenden took home nearly $13million in com- pensation, including $3 million cash. He knew about the $50 bil- lion in subprime exposure, but took steps that led the public to think that the bank had only a $13 billion in exposure, accord- ing to the SEC. For his alleged role in misleading shareholders, he has agreed to pay less than 1
percent of his 2007 compensa- tion. The value of Crittenden’s compensation, which was largely stock-based, fell when Citi- group’s shares collapsed, but he’s still paying just 3 percent of his cash salary in 2007. A Crittenden spokesman said last week that he did not admit or deny any liability. Citigroup said he played a key role in help- ing the company navigate the fi- nancial crisis. A 2008 law review article by
Paul Atkins, then an SEC com- missioner, raised other questions about whether executives can use the size of a corporate penal- ty to face a smaller fine them- selves. “One moral hazard is the possibility that managers of com- panies might agree to a large cor- porate penalty in order to avoid or soften actions against cul- pable individuals,” Atkins and a colleague wrote.
While the philosophical and
practical questions raised by as- sessing a company a financial penalty remain unsettled, re- search shows that the price paid by companies and executives can be well beyond what a regulator deems fair punishment. Ninety-three percent of exec- utives involved in an SEC or Jus- tice Department enforcement ac- tion lose their jobs, according a 2007 study by Jonathan Karpoff, a University of Washington pro- fessor. Another study by Karpoff shows that organizations suffer much more in terms of decreased stock price and damaged reputa- tions when they face regulatory sanction.
“Organizations suffer many more consequences that appear not to depend very much on the legal penalties” imposed by reg- ulators, Karpoff said.
goldfarbz@washpost.com
The three major U.S. indexes all increased Monday, along with shares of Chevron, ExxonMobil and Alcoa.
RICHARD DREW/ ASSOCIATED PRESS
A11
Manufacturing Purchasing Man- agers Index, compiled by Markit, dropped to 49.4 points from 50.4 in June. Readings above 50 in- dicate expansion. The promise of global growth led the price of oil to jump to a nearly three-month high Monday, past $81 a barrel. Shares of ExxonMobil rose 3.8 percent and Chevron gained 2.1 percent. Alu- minum company Alcoa increased 4.8 percent. “We’re watching some portfolio
managers play catch-up after the strong July where they were un- derinvested,” said Fred Dickson, chief market strategist at D.A. Da- vidson & Co. “They’re scrambling to put money back in.” But even as stocks rally, observ- ers worry that the economy re- mains anemic. Federal Reserve Chairman Ben S. Bernanke said Monday at the 64th annual meeting of the Southern Legislative Conference that the United States had a “con-
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Daily Stock Market Performance Index
Dow Jones Industrial Average
11,500 10,700 9900 9100
Nasdaq Composite Index
2650 2400 2150 1900
S&P 500 Index 1220 1170 1120 1070 1020 970
1125.86 +2.2 +1.0 2295.36 +1.8 +1.2 10,674.38
Close %Chg +2.0
Daily
%Chg +2.4
YTD
Industry Group Electrnc Eqp, Instr, Comp Energy Equipment & Svcs REITS
Gas Utilities
Building Products IT Services
Food & Staples Retailing Food Products
Office Electronics Health Care Technology
S&P 500 Industry Group Snapshot Daily
%Chg 4.24 4.17 3.69 3.67 3.60 1.01 0.98 0.95 0.84
–0.10
International Stock Markets Daily
Americas
Brazil (Bovespa) Canada (S&P/TSX Comp.) Mexico (Bolsa) Europe
Eurozone (DJ Stoxx 600) France (CAC 40) Germany (DAX) U.K. (FTSE 100)
Asia Pacific A S O N D J
Company 3M
Alcoa
AmExp AT&T BoA
Boeing
Caterpillar Chevron
Exxon Mobil GE
Dow Jones 30 Industrials Daily
Close 87.41
11.71
44.99 26.59 14.44 69.69 71.05 77.80
Cisco Systems 23.80 Coca-Cola DuPont
Home Depot 29.12 HP
47.56
Other Measures Index
56.41 41.62 61.94 16.41
%Chg %Chg 2.2
4.8 –27.4 0.8 2.5 2.8 2.3 1.9 2.1 3.2 2.4 2.3 3.8 1.8 2.1 3.3
YTD 5.7
11.0 –5.1 –4.1 28.7 24.7 1.1
–0.6 –1.0 23.6 –9.2 8.5 0.7
–7.7 Close
DJ Total Stock Market Index 11,735.78 Russell 2000
661.86
Post-Bloomberg DC Area Index 193.84 CBOE Volatility (VIX)
22.01 F M A M J
Company IBM
Intel J&J
JPMorgCh Kraft Foods McDonald's Merck
Microsoft P&G Co Pfizer
Travelers
United Tech Verizon
Wal-Mart Walt Disney
Close 130.76
21.15 58.72 41.64 29.49 70.25 35.07 26.33 62.06 15.48 50.85 72.61 29.56 51.41 34.48
Daily
2.7 1.1
3.4 1.0 0.7 1.8 2.0 1.5
J
%Chg %Chg 1.8
YTD –0.1 –8.8
3.7
–0.1 8.5
12.5 –4.0 –13.6 2.4
3.2 –14.9 0.8 2.1 1.7
0.4 2.3
2.0 4.6
–4.5 –3.8 6.9
Daily%Chg YTD%Chg 2.1 1.7 2.1
–6.3
2.1 5.8 3.5 1.5
Australia (ASX 200) China (CSI 300) Hong Kong (Hang Seng) Japan (Nikkei)
4541.60 2917.28
21,412.79 9570.31
Cross Currency Rates EU €
US $
US $ per EU € per
Japan ¥ per Britain £ per Brazil R$ per
Canada $ per Mexico $ per
1.3177 0.7588 86.4600 113.9300
0.6293 0.8293 0.0073 1.7525 1.0234
12.5832 16.5825 0.1460
Interest Rates Consumer Rates
Money market funds 6-Month CDs 1-Year CDs 5-Year CDs New car loan Home-equity loan
0.75
0.80 1.14 2.42 6.16 7.35
2.3096 0.0203 1.3487 0.0118
Japan ¥ 0.0116 0.0088
1.1 1.7 1.8 0.3
Britain £
1.5891 0.5706 1.2058 0.4330
Brazil R$ Canada $ Mexico $ 0.9771 0.0795 0.7414 0.0603
137.3700 49.3394 84.4700 6.8700 0.3590
2.7855 1.6263 0.5838
0.6149 0.0500 1.7128 0.1393 0.0813
19.9960 7.1800 12.2950 Close
68,517.46 11,713.43 32,816.52
262.09 3752.03 6292.13 5397.11
%Chg 1.5
–0.1 1.6
2.6 3.0 2.3 2.6
YTD%Chg –20%
–5.0% 0 +5.0%
Commodities Futures
Copper Corn
Crude Oil Gold
Natural Gas Data and graphics by
siderable way to go to achieve a full recovery in our economy, and many Americans are still grap- pling with unemployment, fore- closure and lost savings.”
All eyes are on Friday’s monthly jobs report. Analysts expect un- employment to rise slightly, from 9.5 to 9.6 percent.
yangjl@washpost.com
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$3.3850 $1183.40
Close %Chg +2.4
Daily
$3.9050 –0.6 $81.34
+3.0 +0.1
$4.70 –4.5
Value of $1000 invested for the past: Daily
0% +20%
Exchange-Traded (Ticker) %Chg Coffee (COFF.L) Copper (COPA.L) Corn (CORN.L) Cotton (COTN.L) Crude Oil (CRUD.L) Gasoline (UGAS.L) Gold (BULL.L)
–1.8 2.5 3.1 1.9 4.9 4.7 0.7
Natural Gas (NGAS.L) Silver (SLVR.L)
Gainers PolyOne
–1.7 2.8
Gainers and Losers from the S&P 1500 Index Daily
Close %Chg $11.46 11.2
Office Depot
Anadarko Petroleum $53.27 8.4 ION Geophysical Goodyear Tire Peabody Energy Liz Claiborne
Cliffs Natural Res MarineMax
Marshall & Ilsley Headwaters Inc New York Times Barnes & Noble Boyd Gaming
Allergan Meredith Terex Corp
0.44% 0.25% 3.25%
Bank Prime Federal Funds LIBOR 3-Month
3.19% 4.04% 4.56%
10-year note Yield:
30-Year fixed mortgage 15-Year fixed mortgage 1-Year ARM
5-year note Yield:
2.96 1.64
4:30 p.m. New York time.
$4.77 10.4 $4.72 7.5
$11.45 7.3 $48.39 7.2 $5.08 7.2 $60.60 7.1 $8.14 7.1 $7.52 7.0 $3.70 6.9 $9.32 6.6 $13.82 6.6 $9.01
SmithMicroSoftware $10.46 Oceaneering Intl LSI
6.5 6.4
$52.62 6.3 $4.28 6.2 $64.72 6.0 $33.64 6.0 $20.89 5.8
Losers
Integral Systems Itron
Adaptec
Charles River Labs Lawson Products Mastercard
SYKES Enterprises Bel Fuse
Close %Chg $6.98 –7.7
Daily
$60.55 –6.9 $2.90 –4.9
First Commonwealth $5.05 –4.7 Newport
$12.15 –4.6 $29.87 –3.9 $17.13 –3.8 $202.52 –3.6 $15.30 –3.5 $22.81 –3.3
CommunityHealthSys $31.38 –3.2 The Knot Inc Radisys Corp Akamai
Mercury General
$59.71 –2.8 $53.82 –2.6 $67.60 –2.5 $21.35 –2.5
$7.97 –3.2 $9.56 –3.1 $37.20 –3.0 $41.84 –3.0
Univ Health Service $34.92 –2.9 JM Smucker Haemonetics Boston Beer Brink's Co
Treasury Performance Over Past Three Months
2-year note Yield:
6-month bill Yield:
0.55 0.19
Note: Bank prime is from 10 major banks. Federal Funds rate is the market rate, which can vary from the federal target rate. LIBOR is the London Interbank Offered Rate. Consumer rates are from Bankrate. All figures as of
Orange Juice Silver
Soybeans Sugar Wheat
$800
$1.4830 $18.42
$10.5325 $0.1940 $6.9325
day $1000
Close %Chg +1.2 +2.3 +0.1 –0.9 +4.8
Daily
month $1200
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