As the WSJ also reported, finance, accounting and compliance folks at many companies spent the weekend combing through the fineprint to see how the downgrade would impact them.

And, this morning, we’re already starting to see the results of some of that weekend work.

Take the 10-Q that Morgan Stanley (MS) filed shortly after 8 am this morning, which added this new risk factor about the downgrade. Clearly, their compliance department didn’t spend the weekend in the Hamptons. Instead of a snip, we thought it was important enough to include the whole thing:

Concerns regarding downgrade of the U.S. credit rating and the sovereign debt crisis in Europe could have a material adverse effect on our business, financial condition and liquidity.

On August 5, 2011, Standard & Poor’s lowered its long term sovereign credit rating on the United States of America from AAA to AA+. While U.S. lawmakers reached agreement to raise the federal debt ceiling on August 2, 2011, the downgrade reflected Standard & Poor’s view that the fiscal consolidation plan within that agreement fell short of what would be necessary to stabilize the U.S. government’s medium term debt dynamics. This downgrade could have material adverse impacts on financial markets and economic conditions in the United States and throughout the world and, in turn, the market’s anticipation of these impacts could have a material adverse effect on our business, financial condition and liquidity. In particular, it could disrupt payment systems, money markets, long-term or short-term fixed income markets, foreign exchange markets, commodities markets and equity markets and adversely affect the cost and availability of funding and certain impacts, such as increased spreads in money market and other short term rates, have been experienced already as the market anticipated the downgrade. In addition, it could adversely affect our credit ratings, as well as those of our clients and/or counterparties and could require us to post additional collateral on loans collateralized by U.S. Treasury securities. Because of the unprecedented nature of negative credit rating actions with respect to U.S. government obligations, the ultimate impacts on global markets and our business, financial condition and liquidity are unpredictable and may not be immediately apparent.

While the Morgan Stanley disclosure may not come as much of a surprise, given its business and far-reaching tentacles, we’re starting to notice many more companies updating and changing their disclosures — from Dollar Thrifty (DTG) which added the potential — no weekend working for their compliance folks — of a downgrade to the earnings release it put out this morning. Even tiny Harris & Harris Group (TINY) had this to say about the credit downgrade in the 10-Q it filed this morning.

The downgrade in the U.S. credit rating could materially adversely affect our business, financial conditions and results of operations. On August 5, 2011, Standard & Poor’s downgraded the U.S. credit rating to AA+ from its top rank of AAA.  The current U.S. debt ceiling and budget deficit concerns have increased the possibility of other credit-rating agency downgrades and an economic slowdown.  The downgrade of the U.S. credit rating could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world.

We’re quite sure that more of these will continue to trickle in throughout the day and over the next few days as the impact of the downgrade starts to be more widely understood. And we’ll continue to watch them.

Image source: ANDREW BURTON/GETTY IMAGES

We’ve already written a few posts about how companies were handling debt-ceiling disclosures prior to Tuesday’s deal (including this one last Friday). But we thought it was worth revisiting the topic after reading the nearly 400-page 10-Q that Bank of America (BAC) filed yesterday afternoon. Here’s the part that caught our attention, which was at the top of page 9:

The U.S. government recently increased its borrowing capacity under the federal debt ceiling. However, there continues to be a perceived risk of a sovereign credit ratings downgrade of the U.S. government, including the ratings of U.S. Treasury securities. In July 2011, Moody’s Investors Service, Inc. (Moody’s) placed the U.S. government under review for a possible credit rating downgrade, and on August 2, 2011 it confirmed the U.S. government’s existing sovereign rating, but stated that the U.S. government’s rating outlook is negative. Also in July 2011 Standard & Poor’s Financial Services LLC (S&P) placed its sovereign credit ratings of the U.S. government on CreditWatch with negative implications. On August 2, 2011 Fitch, Inc. (Fitch) affirmed its existing sovereign rating of the U.S. government, but stated that the rating is under review. A downgrade of U.S. sovereign credit ratings could correspondingly impact the credit ratings of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government. We cannot predict if, when or how any changes to the credit ratings of these organizations will affect economic conditions or the resulting impact on the Corporation. Such ratings actions could result in a significant adverse impact to the Corporation.

A quick skim of Bank of America’s other major filings — all of which could easily serve as hefty paperweights — reveals that this warning is new. But equally interesting is the company’s choice of words to describe what is more commonly called material in most other filings. In yesterday’s Q, Bank of America used the phrase 4 times, compared to just twice in the 10-Q that it filed back in early May. In the 10-K, which was filed in February and came in at over 750 pages, the phrase was used 12 times.

Given the recent performance of Bank of America’s stock, no doubt the extra warnings are well-placed. Just using that simple phrase as an indicator to get out of the stock back in February now seems like a very wise choice.

Image source: Jin Lee, Associated Press

It’s Q season and we’re expecting a big Friday night dump later today (there was already a big one yesterday even though it was a Thursday). We’ll be reading all of those filings and giving our best stuff to subscribers to footnotedPro. For more information, please contact todd.serpico@morningstar.com.

The noise over the subject in Washington contrasts sharply with the a near silence on the matter in the formal disclosures of the country’s biggest companies. Publicly traded companies are supposed to disclose their litany of potential woes — their Risk Factors — each year in their 10-K filings, and update them at least quarterly, as changed circumstances warrant. But so far, we’ve noticed just two companies sounding the alarm.

MetLife is circumspect about its concerns, which it disclosed in the 10-Q it filed on May 10 by working them into a longer, existing risk factor warning that “Difficult Conditions in the Global Capital Markets and the Economy Generally May Materially Adversely Affect Our Business…” After noting that market and economic volatility can affect both the company’s investment portfolio and its claims payable, and pointing to concerns over European sovereign debt, the company continues:

“In the event political discord in the U.S. prevents agreement on a national debt ceiling or budget, the U.S. could default on obligations, which would further exacerbate concerns over sovereign debt of other countries.”

Then it goes on to warn about the Japanese economy in the wake of the earthquake, tsunami and nuclear crisis there, and the potential consequences of these various situations generally.

KKR is more specific in the 10-Q it filed on May 5, disclosing a new risk factor dedicated to the debt ceiling, titled “A failure or the perceived risk of a failure to raise the statutory debt limit of the United States could have a material adverse effect on our business, financial condition and results of operations.”  KKR continues that failing to raise the debt limit

“would increase the risk of default by the United States on its obligations, as well as the risk of other economic dislocations. Such a failure or the perceived risk of such a failure consequently could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. It could also limit our ability and the ability of our funds and portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies and other assets held by our funds. Under such circumstances, the risks we face and any resulting adverse effects on our business, financial condition and results of operations would be significantly exacerbated…”

It’s a little curious that so few big companies seem to be concerned. While unique in their own way, both KKR and MetLife are squarely in the mainstream of the financial-services sector; presumably, anything affecting them would affect competitors. Nor is it like this is a new development that was off the radar screen until very recently, meaning some companies might just have filed before it became a big enough deal: The debt-ceiling debate has been heating up for weeks.

Of course, risk-factor disclosures are a curious beast: While they sometimes seem to include the kitchen sink, they don’t have to encompass risks that managers consider so remote as to be irrelevant. (We note, for example, that not a single company appears to have warned about much-publicized predictions by some religious groups that the world will end on Saturday. Though that might make for a pretty interesting going-concern clause.) So maybe everyone else thinks the threat is remote, and KKR and MetLife are the Chicken Littles of the stock market.

Then again, whatever the odds of an actual default by the U.S., at least a couple big companies with seemingly smart management are sounding alarms. What do the other corporations know that KKR and MetLife don’t? Or are other companies simply oblivious to the danger that lurks in the federal budget follies?

Image source: Architect of the Capitol

The blogosphere has been quick to blast the deal as too little, too soon. Goldman shares actually rose after the announcement, though it’s impossible to know whether that’s from relief over the fact of a settlement — any settlement — or giddy joy over its size.

Here at footnoted, we did what we do best: We went to the filings to find some measure of comparison. We found a few, and they aren’t pretty.

Goldman had $27 billion in cash and short-term securities on March 31, according to its latest 10-Q. That means the settlement, at barely 2% of the total, is in fact pocket change for the company. For a household with net worth of $60,000, the equivalent percentage works out to $1,219 — not trivial, but hardly a major expense.

Like many companies, one of Goldman’s most significant recurring expenses is its personnel. It accrued compensation and benefits expense of $5.49 billion in the first quarter — 10 times what it’s paying out to settle this case.

And finally, the one that puts both Wall Street pay and the penalty onto a human scale: Since the beginning of Goldman’s 2007 fiscal year, Lloyd Blankfein and four other men (the company’s other top-paid officers) have made more than $288 million among them, according to Goldman’s proxy — or about 52% of the penalty amount. In other words, those five men could probably scrape together enough to pay the fine themselves.

All told, not terribly impressive. But there’s also the SEC’s perspective. Obama asked Congress for $1.26 billion to fund the agency for fiscal 2011, an increase of about $139 million over fiscal 2010 — and just barely double what Goldman will shell out without breaking a sweat. This speaks volumes about the resources available to Wall Street’s beat cops.

So from the SEC’s perspective, Khuzami hooked a whale. From Goldman’s, it’s more like a minnow. Which view matters when it comes to deterring future bad behavior?

Image source: dawnzy58 via Flickr

————

See more of what’s in the filings: Check out FootnotedPro, where we highlight unusual opportunities and potential problems well in advance of the market. For more information or to inquire about a trial subscription, email us at pro@footnoted.com.

At any rate, that’s the provocative argument we got this afternoon while we were talking with Daniel Alpert, founding managing director of investment bank Westwood Capital.

Here’s the part that caught our attention the most: Much of American stock holdings is tied up in huge mutual funds. That just intensifies the diffusion of ownership that leaves shareholders with pretty indirect influence over the managers that run their companies.

You’d think the big funds would have clout, but they’re hamstrung, too. They have to keep billions of dollars invested in a given industry, making it difficult to boycott bad companies — especially when doing so could jeopardize the fund’s all-important performance, leaving it to lag its benchmark index. This is particularly true in the financial sector, where increasing consolidation means the biggest names are becoming an ever-bigger proportion of the industry — making them even harder for investment managers to avoid should they behave badly.

“In that environment, the ability of large shareholders, including mutual funds and others, to vote with their feet is limited,” Alpert said. “There’s a complete collapse of shareholders policing the investments that they make. … It’s endemic in our system right now that corporate governance doesn’t work any more.”

Case example: The financial crisis and our hard slog back from the brink. Banks misbehaved by loading up on risk, and far from losing support and suffering the discipline of the capital markets, shareholders didn’t peep.

And that, he argues, is why the government has to step in and tighten regulation. If Apple’s shareholders let Steve Jobs run roughshod over them, “the world has a few fewer iPhones,” as Alpert puts it. If the same thing happens in the financial sector, we’re all in serious trouble.

“You don’t get to operate independently and operate on the theory that the market is somehow going to discipline you, because the market has shown no discipline,” Alpert said. “The state has to come in and do what the shareholders are unwilling to do.”

That’s harsh medicine. Is he right?

————

See more of what’s in the filings: Check out FootnotedPro, where we highlight unusual opportunities and potential problems well in advance of the market. For more information or to inquire about a trial subscription, email us at pro@footnoted.com.

While there’s not going to be one, identifiable moment where we can collectively sigh and say, “Whew!  Finally, the economy is fixed!”, we’ve noticed that many companies seem to be a bit more bullish in their filings this year.

One that particularly captured our attention was the annual report that the NASDAQ OMX Group, Inc. (NDAQ) filed recently.  (NASDAQ OMX is the world’s largest exchange company, with 3700 companies listed that have a market value of $4.1 trillion.)

Its outlook for 2010 (on pp. 45-46) is one of the most positive that we’ve seen.  After stating that the end of 2009 brought “signs of a recovery in the IPO market,” it stated:

We believe that the most challenging economic conditions in this cycle are behind us and the year ahead will likely prove more positive for our business drivers and our operations. We believe that our aggressive steps in meeting our cost, revenue, and technology synergies in 2008 and 2009 will enable us to benefit from improving economic conditions in 2010. We expect to further diversify our business with enhanced product offerings and/or acquisitions which are complementary to our existing businesses.

Granted, the focus here is primarily on NASDAQ OMX’s own bottom line; however, its positive projections are based on the observations that the economy really is starting to recover.

And even though there’s no danger that Wall Street will be confused with Pamplona any time soon, perhaps it’s at least reassuring to believe that the bulls are coming back.

Image source:  Comtours

The big news — if you could call it that — was AIG’s decision to pay the stock salary of its top executives with stock units, which according to the 8-K “reflects a value of a “basket” of certain AIG subsidiaries”. The other option was to pay this in AIG common stock, which we’re guessing was not as palatable. In any event, it doesn’t really meet the normal “let’s file this late before a holiday” threshold — at least in our book.

Far more interesting –and attached to the 8K — was the “final determination” letter that Pay Czar Kenneth Feinberg sent to AIG CEO Robert Benmosche last week. The letter was an update to the initial determination letter sent back on Oct. 23.

Comparing the two documents via 10KWizard turns up some interesting changes, including AIG’s request on Nov. 20 for Feinberg to change some aspects of the initial determination. Here’s the section that caught our attention:

On November 20, 2009, AIG submitted a written request for reconsideration (the “Reconsideration Request”) of the Initial Ruling with respect to one Top 25 Employee. AIG’s prior submissions to the Office of the Special Master indicated that the Top 25 Employee would terminate employment with AIG during 2009, and the Initial Determination with respect to the Top 25 Employee reflected those submissions. The Reconsideration Request indicated, however, that the Top 25 Employee will remain in the employ of AIG. In light of that information, which was not previously considered by the Special Master, AIG requested that the Special Master reconsider the compensation payments approved in the Initial Determination for the Top 25 Employee.

From the filing, we know that this is not about General Counsel Anastasia Kelly or Deputy General Counsel Suzanne Folsom, whose resignations were reported here on Thursday. How? Because the letter uses the pronoun “his” to describe the employee. Here’s another snip:

AIG’s Reconsideration Request states that, rather than depart AIG prior to the end of 2009, the Specified Employee will remain in the employ of AIG. AIG has indicated that the employee is critical to AIG’s long-term performance and stability, and that his continued employment by AIG will significantly aid AIG’s ability to repay the taxpayer.

Adding it up, it means an extra $4.3 million for the unnamed employee, which certainly seems worthy of a pre-holiday dump.

Image source: Mark Lennihan/Associated Press

Given the paucity of filings on Friday, we couldn’t help but pay attention to the 10-K that TFS Financial Corp. (TFSL) filed. The company actually tried to sneak it in late Wednesday — around 6:30 pm. But the SEC was closed for Thanksgiving by then so it wound up getting accepted on Friday morning.

Granted, TFS Financial isn’t exactly a household name. It’s the holding company for Third Federal Savings and Loan Association of Cleveland and operates 22 full-service offices in Ohio and 17 full-services branches in Florida. But we thought it provided an interesting snapshot of some of the issues that many banks of a similar size face — banks that don’t often make it into the headlines.

In the discussion about its market area, the company acknowledges that both Ohio and Florida have been hit particularly hard by the economic downturn.  Citing both a “dramatic [increase] in foreclosures and reductions in employment rates and housing values,” the filing adds that “The depressed housing market and employment uncertainties have created an aura of pessimism and apprehension, which is manifested in suppressed consumer housing demand.”  To make matters worse, TFS said that “a number of troubled financial institutions” that compete for market share in Ohio and Florida have “significantly increased their interest rates paid to depositors.”  So at the same time that demand has dropped, competing for customers has just gotten more expensive, a combination that the filing said “could adversely affect future operating results.”

There’s no question that the housing markets in Ohio and Florida were, indeed, hit hard.  But after looking at the company’s web site (see the “About Us/History & Values” page) and reading some of the company’s self-congratulatory marketing claims, they don’t square with what was going on pre-March 2009.  The web page states: “We’re Strong, Stable and Safe:  We’re Third Federal Savings and Loan. We’re known for our Guaranteed Lowest mortgage rates. We’re also the bank that doesn’t believe in putting customers at risk through questionable loan practices like sub-prime lending and zero-down mortgages.” [emphasis added]

According to the filing, that wasn’t exactly the holding company’s policy until recently.  Page 8 states that the company did offer “interest only” residential real estate mortgage loans until March 11, 2009.  As of September 30, 2009 (p.9), those loans accounted for $150.2 million on the company’s books.

Also on page 9, the company discusses its “Home Today program,” adding that until March 27, 2009 the loans that were written under that program had “higher risk characteristics.”  According to the filing:  “The Association did not classify it as a sub-prime lending program based on the exclusion provided to community development loans in the Office of Thrift Supervision’s Expanded Guidance for Sub-prime Lending.”  But the loans were problematic enough that on March 27, 2009, the company revised the Home Today underwriting guidelines “so as to be substantially the same as for our traditional first mortgage product.”  [Page 17 includes a sentence that underscores how much riskier the Home Today loans were:  “At September 30, 2009, we had $291.7 million of loans that were originated under the Home Today program, 37.9% of which were delinquent 30 days or more in repayments, compared to 2.2% for the portfolio of non-Home Today loans as of that date.]

Finally, the company’s leaders predict that their loan-related woes are going to get worse before they get better.  From page 17 of the filing:

Loans delinquent 90 days and over have continued to increase. Loans delinquent 90 days and over increased 47.9% to $255.7 million at September 30, 2009, from $172.9 million at September 30, 2008. The inability of borrowers to repay their loans is primarily a result of rising unemployment and uncertain economic prospects in our primary lending markets. Inasmuch as job losses and unemployment levels both continue to increase, we expect some borrowers who are current on their loans at September 30, 2009 to experience payment problems in the future. The excess number of housing units available for sale in the market today also may limit their ability to sell a home they can no longer afford. In Florida, housing values continue to remain depressed due to prior rapid building and speculation, which is now resulting in considerable inventory on the market and may limit a borrower’s ability to sell a home. As a result, we expect the level of loans delinquent 90 days and over will increase in the future.

That nearly 50% increase in delinquent loans may explain why the bank tried to file this so late on Wednesday night.

That’s not to say that a few things didn’t catch our eye. We liked this 8K filed by Bank of America (BAC) on Friday just after the market closed. In the filing, the company disclosed that it was lowering the salaries for two of its top executives — CFO Joe Price and Mortgage President Barbara Desoer and replacing some of that cash in the form of stock unit awards. The WSJ has a summary of the details here.

But by far the best filing — out of admittedly a small crop — was this 8K filed by AIG (AIG) late Wednesday. In it, the company announced the settlement of all disputes with former Chairman Maurice “Hank” Greenberg that could have AIG paying up to $150 million in legal fees, but which settles all claims. This Bloomberg story has a good summary of the details.

The part we especially liked was Exhibit B of of the MOU, which spelled out the things that AIG is required to return to Greenberg. Here’s the list:

1. Photographs of Mr. Greenberg and Cornelius Vander Starr located in AIG’s Washington, D.C. office.
2. Photographs of Mr. Greenberg and Chinese leaders in AIG’s Shanghai building.
3. Persian rug previously located in anteroom of board room on 18th floor of 70 Pine Street.
4. Any other materials of a personal nature that are not AIG business records that were located in AIG facilities at the time of Mr. Greenberg’s retirement and that are still maintained in such facilities.

Admittedly, we’re not particularly knowledgeable about Persian rugs, but it must be a pretty special one if it’s worth this kind of fight over.

Talk about propitious timing because we had planned to write about coffee anyway this morning since coffee kingpin Starbucks (SBUX) filed its 10-K late Friday. The filing had a number of things that caught our attention, but the thing that really jumped out at us was how many fewer people Starbucks employed this year as compared with last year: a whopping 34,000. As the filing notes, the bulk of those job losses — 32,000 or 94% — were in the United States. Most of this shouldn’t be all that surprising, given Starbucks well-publicized restructuring and the $53.2 million restructuring charge the company took during the fourth quarter.

Still, given the current state of the economy, jobs at Starbucks, which famously offer health benefits, aren’t just for unemployed actors any more. I’ve personally known a few people, who, facing a prolonged job loss and hefty insurance payments, have chosen to work there. But if Starbucks is no longer an option due to its restructuring, what’s left? Whole Foods (WFMI)? Or, maybe Diedrich’s if the war over who will acquire them continues to heat up? After all, options there are suddenly a lot more valuable these days!