Observer | Wall Street

Financial Reform May Force Goldman to Dump Its $$-Making Trading Desk

Now that financial reform has passed the Senate, Goldman Sachs and other Wall Street titans have to figure out what, if anything, they can legally do to retain some of their chief moneymaking businesses.

Goldman's principal strategies group -- one of the sexiest outfits on Wall Street, if Wall Street outfits turn you on -- now faces potential dissolution following the establishment of new rules that prohibit proprietary trading. The New York Times says, "Goldman is considering several options, including moving the traders to another division or shutting the unit altogether, according to people briefed on the matter."

That's a big deal. Year-to-date, Goldman has derived 78% of its revenue from its trading and principal investments division. Fortunately for Goldman, its competitors -- Morgan Stanley, Bank of America, JPMorgan Chase and Citigroup also face tough questions about what to do with some of their top units.

Lauren LaCapra at TheStreet.com reports that few experts can find legal loopholes to the reform bill, meaning that the banks need to take action. Still, since the laws are subject to SEC enforcement (and the SEC doesn't exactly inspire confidence), there may still be some room for hanky panky.

In the meantime, though, the enhanced regulations may engender a major staff exodus from top Wall Street firms, as banks like Goldman are forced to somehow make some of their most powerful units legal. Big-time traders are unlikely to take less-exciting and less remunerative work out of sheer loyalty to their parent companies.

Carlos Slim Offers to Up Stake in Brazilian Cable-TV Giant

Carlos Slim Helu, a Mexican telecoms baron, usurious creditor to The New York Times and the richest person alive, is offering $2.6 billion to ramp up his stake in Brazilian cable-TV company Net Servicos de Comunicacao.

Slim, who's known to many New Yorkers more for his substantial stake in The New York Times and his recent purchase of a Fifth Avenue mansion in Manhattan, clearly hasn't been confining his expansionist proclivities to the Empire City. In an offer for an increased stake in Net Servicios, is Brazil's largest cable TV company, Slim's Participacoes is offering a 15% premium over the company's closing price yesterday. Bloomberg reports:

Slim, who owns Embratel through wireless carrier America Movil SAB, seeks to bundle video service with wireless, Internet and traditional land-line phone offerings to lure more customers from companies controlled by Telefonica SA. Slim is awaiting a change in Brazilian law to allow foreign control of cable-TV companies.

In picking up the story from The Wall Street Journal, the Times' DealBook has helpfully provided a link to the Portuguese-language press release. Pavoroso!

AIG Thinks It's Ready to Remove Taxpayer-Funded Training Wheels

As AIG, the insurance firm that's most in hock to the U.S. government, reported second-quarter earnings this morning, the company began making noises about ending its investor relationship with the U.S. government.

The company, which is about 80% owned by you, me, and other taxpayers, reported an adjusted profit that was better than Wall Street expected. (Including restructuring charges, though, it lost $2.7 billion.) And on the heels of those results, CEO Robert H. Benmosche said in a statement: "AIG’s continuing insurance operating results remain solid, while the company continues to execute on its restructuring plans and prepares for separation from the U.S. government."

The financial crisis -- specifically AIG's sale of credit-default swaps, a form of protection against defaults on loans -- has spurred AIG to accept a bailout of $182.3 billion. The company has been offloading its truckload of assets, like its aircraft-leasing business, in an effort to raise enough money to pay back the money it owes the government.

Here Are the Companies That Are Least Likely to Screw You

The financial crisis sure has revealed that investors and clients ought to be skeptical of companies' statements of their own performance! And so, with an eye to finding the firms that aren't quite as hell-bent on deception, Forbes has published analytics company Audit Integrity's list of the most trustworthy companies.

Audit Integrity looked through financial statements and balance sheets and probed more than 100 other factors to "identify the measures most highly associated with fraud and to quantify the risks that companies' stock prices will tank, that their managers will be forced to restate their financials and that outsiders will hit them with securities lawsuits," says Forbes Sounds useful!

So how well did the titans of business do? Perhaps unsurprisingly, "Fewer than 5% of public companies make Audit Integrity's Most Trustworthy Companies list." Yet less surprising: Few of the big names most people would recognize from credit-crisis headlines are included in the list Forbes published.

Some of the best companies:

• Westfield Financial, a bank
• U.S. Cellular, a telecoms firm
• Cool-clothes retailer Hot Topic
• Bowling company Bowl America
• Food-processing firm Overhill Farms

Some of the worst:

• Health-industries firm Clarient
• Syrupy drink purveyor Coca-Cola Enterprises
• Dollar-store operator Family Dollar

Bank of America Would Like to Escape Secret Government Scrutiny

Gargantuan lender Bank of America is trying to get out of a financial crisis - era government restriction that subjects big decisions like dividend increases to regulatory scrutiny, The Wall Street Journal reports.

From a perch in BofA's North Carolina headquarters, regulators currently scrutinize the bank's major moves and are privy to the bank's daily operations. Says the Journal:

Another benefit of lifting the sanction would be freedom from the memorandum's psychological stigma; it remains the most serious procedural action taken against Bank of America as a result of the financial crisis.

[...]

People close to the bank thought Bank of America would be free by now, saying the bank has done everything asked of it by regulators. But one person familiar with the discussions said the bank hasn't completed all the requirements.

Pesky government meddling in Bank of America's business doesn't stop there; New York Attorney General Andrew Cuomo continues his investigation into a potential fraud by BofA, its former CEO Kenneth Lewis and its former CFO Jeff Price. Cuomo accuses the bank of misleading the government about the danger posed by its 2009 acquisition of Merrill Lynch, effectively tricking Uncle Sam into coughing up $20 billion in bailout money.

The July Unemployment Rate: Still Horrible

There's a reason most of you probably don't feel any more or less employed than you did a month ago. The July employment numbers released today by the Department of Labor showed that the U.S. the unemployment rate held steady through June and July at 9.5%. The number of unemployed people is holding steady at 14.6 million, and the number of people still sending out resumes after 6 months without work stayed at 6.6 million.

Total nonfarm payrolls fell by 131,000, worse than the Wall Street consensus estimate of a loss of 65,000 jobs, per Reuters.

As for demographics, 9.7% of men were out of work, vs. 7.9% for women. Asians managed to stay employed the best, with an unemployment rate of 8.2%. White people came in second at 8.6%, followed by Hispanics (12%) and black people (16%).

Newly out of work: 143,000 U.S. census workers, whose temporary employment at the government's once-a-decade head-counting operation offered brief reprieve from dismal employment prospects.

The private sector added 71,000 jobs, compared with a gain of 31,000 jobs in June.

Friday Morning Roundup

• After ponying up $32.2 billion to clean up the Gulf Oil Disaster and compensate its victims, BP may come to owe an additional $17.6 billion in civil penalties -- $1,100 a barrel if the spill wasn't BP's fault, $4,300 a barrel if it was. [BusinessWeek]
• In an effort to remain solvent, the U.K. plans to cut its budget. That's too bad for U.K. contractors, who won't remain solvent unless the government keeps spending tons of money. [Bloomberg]
• Remember the May 6 "Flash Crash," when the Dow dropped more than 900 points because evil machines had taken over the New York Stock Exchange? Those evil machines will probably attack again. [WSJ]
• American investors and politicians are so ungrateful for the second-quarter upswing in corporate profits, perhaps because of that whole "widespread unemployment" thing. [Economist]
• Speaking of jobs, the Labor Department will tell us this morning just how many more of them our economy lost in July. The over-under's at 60,000. [MarketWatch]