One of the biggest issues facing firms that merge is whether the cultural differences between both sides are so great that talented people just pick up and leave. I’ve seen that in countless brokerage mergers over the years, and the threat of firms losing the best and brightest has forced many investment banks to shell out huge retention bonuses, largely out of proportion to what even the most talented people are worth.

Right now, Merrill Lynch and money manager BlackRock are facing those same issues as they complete Merrill’s purchase of about a 50% stake in the money-management powerhouse. Last week we spoke to CEO Larry Fink who said he had verbal commitments from his top people to say.

But Fink isn’t taking any chances. CNBC has learned that he is now working a new plan to keep key people in his team from jumping ship. Remember, under the terms of the deal, Merrill bought its stake in Blackrock by transferring its entire asset management division, some $550 million in assets and hundred of people to BlackRock. Sources tell CNBC that Fink’s first order of business in the next few week will be coming up with a retention plan to lock those people in for four or five years.

After that, Fink will be working on his own people. People at BlackRock say that despite the verbal commitments made by his senior people to stay, Fink isn’t taking any chances. That’s because the financial incentives of senior BlackRock people to stay end after January 1, 2007. But CNBC has learned that Fink is now working on a plan to keep those people in place for five years after 2007.

One of the big unknowns here is just how much BlackRock will be shelling out to keep these people in place. People at the company say that there won’t be the huge retention bonuses you’ve seen at other firms during mergers (The massive bonuses shelled out to DLJ execs during its merger with CSFB back in 1999 come to mind). Instead Fink will be developing a long-term incentive plan, where executives get paid a combination of cash and stock that vests over a five-year period, at least that’s the way it’s being envisioned now.

Another big question is how all this effects the guy at the top, Larry Fink. Fink has many incentives to stay, not the least that he’s now running a $1 trillion money management firm and owns 1.8 million shares of BlackRock. But according to people inside the company, he will be covered by the same plan.

 

Charles Gasparino - CNBC

For years, the system of self-regulation that polices the big Wall Street firms has been filled with controversy as the both self-regulators, the New York Stock Exchange and the National Association of Securities Dealers, have come under intense criticism for missing the stock market scandals of the 1990s. Even with all the flack heaped on the brokerage regulators during this time, the federal agency that regulates the industry, the Securities and Exchange Commission has sat by and left the system alone.

But that might be changing. Senior officials at the SEC are leaning toward endorsing a system that essentially consolidates the NASD and the NYSE's regulatory systems into a single regulator, in what would be the biggest change in Wall Street's regulatory structure in about 30 years.

It's pretty difficult to find someone on Wall Street who supports the current system of dual regulation. The Wall Street firms say the duplication is too costly; the firms must meet with two sets of regulators on a regular basis for examinations and investigations. Both the NYSE and the NASD have their own investigatory staffs and they are often in competition to show who's tougher, meaning that the firms can find themselves answering subpoenas from two agencies over the same alleged transgression.

Now I’ve always been of the opinion that small investors should be wary of anything that Wall Street supports. But this may be a case when both sides find common ground. Over the years, as the NASD and NYSE competed over who is doing a better job cracking down on small-time scandals, they’ve missed the big stuff like conflicted research, and a host of other frauds. One of the reasons why the stock market scandals of the 1990s were able to reach such epic proportions is because the self-regulators at the NYSE and the NASD were simply asleep at the switch. They were supposed to be monitored by the SEC, but the commission is so stretched for personnel it just didn't have the manpower to keep adequate tabs on the self-regulators and monitor the securities markets at the same time.

The concept of a single regulator is supported by the NASD as well as the Securities Industry Association, Wall Street's main trade group, which has been lobbying the SEC and its Chairman Chris Cox in recent months to change the system.

So what's keeping the single regulator from happening? Apparently, the New York Stock Exchange, which is in the middle of becoming a public company with an upcoming IPO. The NYSE opposition is long standing; former Chairman Richard Grasso blocked attempts by the Nasdaq then run by Frank Zarb to join their regulatory units and save their member firms money. Grasso feared that the NYSE's floor specialists would be regulated by NASD officials who would put the stock exchange at a competitive disadvantage.

The NYSE is using a similar argument these days, though they're couching it differently. Spokesman Richard Adamonis says that the NYSE isn't against a "joint venture" of some kind, but there are "unique attributes" about the NYSE and its rules that makes it difficult to have a single regulator to do its job properly.

 

Charles Gasparino - CNBC

Here are some Pics From the Business Council we attended last week!

 

Double Click to enlarge

 

Enjoy!

               If you listen to New York AG Eliot Spitzer you would think that he had no choice but to file civil charges against former NYSE Chairman Dick Grasso over his enormous pay package. Spitzer has said time and again that a New York law stipulates that the pay of officials who run non-profits like the NYSE must be “reasonable,” and when John Reed, the former Citigroup chief who replaced Grasso in 2003, called on him to file charges against Grasso, by handing him a report on the pay controversy prepared by NYSE attorney Dan Webb he was duty bound to do so.

            He was recently on “Mad Money” and here’s what he told Jim Cramer about why he brought the case:

            “I had a duty to bring it when John Reed, who was then the CEO/Chairman of the board of the NYSE...walked into my office and gave me the Webb report and said Eliot our board doesn’t want to handle this, you have to. And I read the report and we did our investigation and we determined as a matter of the law we could not walk away from this. We tried to settle, I can’t talk more about it.”

            But Reed has recently put a different spin on the issue. In a deposition he gave last week to attorneys for Grasso and Spitzer, Reed said the decision to bring the case was Spitzer’s, and not his, and while he felt it was his responsibility to share the Webb report with regulators including Spitzer he would have been just as happy if Spitzer had dropped the report in the “waste basket.”

            Now some caveats: I do not have a copy of the deposition. What I’m reporting here comes from people who heard Reed’s deposition, so it’s impossible to know all the context of his remarks. Reed may have a good reason to be softening his stance against Grasso because the former NYSE chief is suing him for defamation over some allegedly negative statements he made to a reporter about Grasso just after he resigned as NYSE chair in 2003.

            But the substance of what I’m reporting comes from representatives of Ken Langone, former head of the NYSE Comp Committee who was also sued by Spitzer, Grasso and Reed. In fact, the Reed representative confirmed that it would be completely accurate to describe Reed’s rationale when it came to whether Spitzer should bring the case as “agnostic.” He also confirmed the “waste basket” statement.

            Now we’ll learn more about this in the coming days so we’ll get a full understanding of what was said, but if this does turn out to be what Reed really meant, I think it pokes another hole in Spitzer’s case. It essentially removes one of his key rationales for spending so much time and state taxpayer money filing charges against Grasso—that he had to do it because the head of a non-profit that he regulates asked him to do so.

            Spitzer’s office didn’t return telephone calls last night for comment.

 

Charles Gasparino - CNBC

 

New York Attorney General Eliot Spitzer and former New York Stock Exchange Chairman Richard Grasso are scheduled to meet in court sometime this summer or in the fall to argue the “reasonableness” of Grasso’s $139.5 million pay package that led to his dismissal as NYSE chief three years ago.

Before the court battle takes place, both sides continue to take depositions from some of Corporate America’s biggest stars that had served on the NYSE board during the Grasso era. Last week, we aired some of the video taped depositions of people like Goldman Sachs CEO Hank Paulson, Former AOL Time Warner Chief Gerald Levin, and Sirius CEO Mel Karmazin.

Lawyers for Spitzer and Grasso will be deposing former board members Madeline Albright, Leon Panetta, and H. Carl McCall and others in the coming weeks. CNBC has learned that Grasso’s attorneys are even debating whether to call former SEC Chairman William Donaldson in for testimony, since he launched an investigation into the pay package when news first broke.

But one of the biggest names in the entire case is scheduled to give his deposition next Thursday. John Reed, the former CEO of Citicorp, Co-CEO of Citigroup, took over as Chairman of the stock exchange when Grasso resigned in 2003. He resigned last year from the NYSE, but Reed may be more responsible for the current legal standoff than any single figure in the Grasso-Spitzer battle.

When Reed took over back in 2003, most people on Wall Street thought he would work to restore the NYSE’s battered image and keep a low profile. Instead, he immediately went on the offensive against Grasso, publicly demanding that Grasso return his compensation. When that didn’t work, he hired a former federal prosecutor Dan Webb to investigate the pay package, and when Grasso still refused to buckle, he turned over his findings to Spitzer calling on the AG to press a case against Grasso under New York’s not-for-profit law, which says that the compensation of any officer of a not-for-profit, like the NYSE, must be “reasonable” and commensurate with duties performed.

Even Spitzer has said on numerous occasions that he felt duty-bound to file the civil case against Grasso, and former NYSE board member Ken Langone, who as compensation committee chairman was responsible for many of Grasso’s big paydays, because of Reed.

And it’s not just the Spitzer-Grasso case that Reed will have to provide information for; Grasso has also counter sued Reed for defamation over some of the statements he made against Grasso when he resigned in 2003 that Grasso says violated a non-disparagement clause in his contract.

Grasso’s attorneys are expected to press Reed on the reasons why he went after Grasso, and why he chose to hand the case to Spitzer and not take legal action on his own.  These are many of the same questions Wall Street CEOs are asking as they spend countless hours giving testimony in a case they all wish would go away.

 

Charles Gasparino - CNBC

The Board of the New York Mercantile Exchange is scheduled to meet tonight to put the final touches on its deal with private equity firm General Atlantic Partners, which is looking to buy 10% stake in the world’s largest futures exchange, a precursor to a public offering later in the year.

            But another item on the agenda, people at the NYMEX tell CNBC, will be to discuss a plan to offer for the first time in NYMEX’s history a fully functional electronic trading component in its oil and gas futures contracts.

            Even as other exchanges, like the NYSE have moved toward an electronic trading model, the NYMEX has hung on to its “open outcry” trading system, where traders roam the floor of the exchange bidding on contracts. At the moment, the NYMEX has some electronic trading, but it accounts for a relatively small percentage of the overall volume, and the leadership of the NYMEX seemed unwilling to embrace electronic trading in a major way.

            But people at the NYMEX tell CNBC that all changed abruptly last week, when the Intercontinental Exchange last week encroached on the NYMEX’s turf, and offered oil contracts that traded electronically. The move sent a chill through the upper management of the exchange, which faces a seat holder revolt over its management practices, as the ICE future produced strong results in just its first day of trading.

            The plan, at least for now, is to offer what NYMEX seat holders say is “side-by-side” electronic trading. What that means, no one really knows at the moment, but the plan, is to offer investors a choice of whether to trade electronically or through the open outcry system.

            A spokeswoman for the NYMEX wouldn’t comment specifically on the matter, other than to say the NYMEX is evaluating all its options, which suggests, at least to me, that management at the exchange really doesn’t have a clue what’s going to happen. The NYMEX is a fairly unruly place, comprised of warring factions. At the moment, there is a growing movement to oust current management, including the NYMEX’s chairman, Mitchell Steinhause, which could delay implementation of electronic trading even further into the future.

            The entire board of the NYMEX, meanwhile, is up for re-election, and adding some additional uncertainty to the who will make the final cut is a new regulation handed down by the CFTC which prevents any board member with $5,000 or more in fines from serving another term. From what I understand, that will mean at least two current board members will not be able to serve another term.

 

Charles Gasparino - CNBC

Google has been grabbing headlines not just for its unbelievable stock price, or its founders Sergey and Larry rubbing elbows in Davos last week with the likes of Bono and Becky. In recent weeks, a slew of analysts have raised the issue that the company’s business model faces a major headache over something called “click fraud,” which they say has inflated profits and in the process Google’s stock price.

But CNBC has learned that the headache could get worse in the not so distant future now that the “click fraud” issue has now caught the eye of regulators at the Securities and Exchange Commission.

Over 90% of Google’s revenues come when people click on ads that run on its website. The more people click, the more money advertisers must pay Google. These clicks give Google its cache; Google attracts the more advertisers than any other search engine because it touts itself as receiving more clicks than any of its competitors. But analysts say a significant number of those clicks come from fraudsters-who are paid by one company to drive up the advertising costs of its competitors.

It is, of course, impossible to put a number on the click fraud problem. No one, not even Google, really tracks it, so it’s impossible to know how much of Google’s or any search engine’s revenues are improperly inflated.

That’s likely to change. People at the Securities and Exchange Commission tell CNBC that click fraud is definitely on the commission’s radar screen. The commission’s accounting regulation division is keenly aware of the problem and is deciding what to do next.

We need to be clear here: There is no formal or informal investigation of click fraud at any major search engine company, whether it’s Google, Yahoo or Microsoft. But with so much in the news, it’s only a matter of time before the commission takes a closer look to determine how much of a problem it is for these companies and whether or not it’s improperly inflating revenues. 

Google declined to comment about the SEC’s interest. But the company says revenues attributed to click fraud are small. Even so, the company said in statement that it “takes this issue extremely seriously.” Google says it has software to screen out invalid clicks and those advertisers charged for invalid clicks receive refunds.