By Katy Burne of Dow Jones Newswires

Financial derivatives, including bets on wobbly mortgage-related securities, were blamed for nearly blowing up the economy three years ago. Last year’s Dodd-Frank financial overhaul law was supposed to blaze sunshine onto the $583 trillion global market for over-the-counter derivatives, or those transactions carried out in private rather than on open exchanges.

J.P. Morgan Chase took what it says is a big step forward by trading credit derivatives with six customers Wednesday on terms that it believes are broadly consistent with new rules for the over-the-counter swaps market.

On the other side of the trades were a large unnamed U.S. bank; BlueCrest Capital Management; BlueMountain Capital Management; Diamond Notch Asset Management LLC; DCI LLC; and Pine River Capital Management LP.

Each traded different credit-default swaps electronically through a platform run by MarketAxess Holdings, which until now was better known for bond trading.

J.P. Morgan served as dealer to the swap customers as well as the agent that processed the trades through central clearing–a mechanism by which the trade is guaranteed in case either counterparty fails.

“From our perspective, today was about giving our clients the confidence that we have the infrastructure to do this across a number of client types, trade types, and clearing choices. Between MarketAxess and us, we have achieved that on a single platform,” said Dale Braithwait, global head of credit-derivatives clearing at J.P. Morgan, in an interview.

How firms should be allowed to trade swaps–given they were largely blamed for exacerbating the financial crisis–is one of the most contentious parts of the Dodd-Frank law passed last July. Even within the derivatives industry, there are different beliefs about how swap-execution rules should be written.

The Dodd-Frank law stipulates that any trade that can be accepted for clearing must be traded on registered futures exchanges or alternatives called swap-execution facilities–more commonly known as SEFs. Swaps that aren’t standardized enough for central clearing, or being executed by corporations that are exempt from the new swap rules, can remain private and off those trading platforms.

Regulators around the world are trying to bring more transparency to the highly opaque global OTC derivatives market, but the U.S. is arguably the furthest along.

MarketAxess is one firm hoping to be eligible as a SEF once the Commodity Futures Trading Commission and the Securities and Exchange Commission have their final rules in place. For now, firms are trying to test a range of technologies with customers to see if they can transact on terms that are compliant with early drafts of the rules.

Tradeweb, a company majority owned by Thomson Reuters that offers a rival trading platform, claimed last month to have conducted the first SEF-compliant trade between a swap dealer and swap customer–based on its own interpretation of the rule proposals. BlueMountain was the customer behind that trade, and Deutsche Bank was the dealer and clearing agent.

Meanwhile, members of the Wholesale Markets Brokers’ Association, Americas, or WMBAA–a trade group for inter-dealer brokers–said they have executed at least a million swap trades in the aggregate across virtually every asset class between bank and non-bank swap dealers in the spirit of the Dodd-Frank law.

J.P. Morgan said its trades were a precursor to how swaps trading could work under the new rules.

“We were able to show many of the features that will be in place for SEFs, but there were one or two areas where it wasn’t SEF-compliant,” said Jim Rucker, head of operations, credit and risk at MarketAxess. “There is no post-trade price reporting facility in place for us to report the trade,” which is a requirement under Dodd-Frank, he added. “And the SEF rules require surveillance and monitoring for credit derivatives, which MarketAxess doesn’t yet have in place.”

Shareholders of radio-station chain Citadel complained earlier this year that the company was refusing the listen to buyout offers because Citadel CEO Farid Suleman wanted to hold onto his job. Today, Citadel finally agreed to the deal, with rival Cumulus Media, at about $37 a share.

The deal values Citadel at roughly $2.4 billion. Wells Fargo analyst Marci Ryvicker said the announced deal “validates” the trading multiples for broadcasting stocks at about eight to 10 times earnings. Citadel management has indicated the company was on track to push out $250 million in Ebitda for 2010, Ryvicker wrote.

Citadel’s grab back of stock tickers (CDELA, CDELB and CDDGW) are soaring, though stock moves are magnified because of thin volume. Cumulus shares are down about 7.3% in early trading today.

Cumulus first announced in December that it was trying to buy Citadel, which last year stepped out of bankruptcy protection. Cumulus said Citadel was hurting shareholders by being unwilling to sell. At the time Cumulus was offering $31 a share, mostly in cash.

“We do not understand why you have been unwilling to engage with us to explore such a transaction and to consider its benefits to Citadel and its shareholders,” Cumulus boss Lew Dickey wrote in a December letter to Citadel chairman John L. Sanders.

Citadel has run into criticism before. Last year, after the company exited bankruptcy protection, it was forced to backtrack on compensation plans that shareholders criticized as unjust enrichment. Suleman, for example, was scheduled to be paid stock valued at more than $55 million. Directors were slated to get stock valued at $1.35 million apiece.

Citadel later said it would rescind its stock-pay plans amid complaints from one of its biggest shareholders, R2 Investments. The investment firm said Citadel violated terms it agreed to in its bankruptcy plan. R2 then later sharply criticized Citadel for refusing to negotiate a sale, saying that Citadel “would be better off with different leadership.”

But today’s deal is all smiles — assuming Cumulus can afford the deal. Cumulus said its getting help throwing money at Citadel thanks to up to $500 million in equity financing from Crestview Partners and Macquarie Capital, and debt financing to be led by UBS and Macquarie. Cumulus said it plans to refinance all of its debts, after the company has already said it’s had to work hard to stay in compliance with its debt covenants this year.

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

The Trial of Raj

Trial gets under way: Galleon Group founder Raj Rajaratnam used a “corrupt network” of consultants, company insiders and associates to obtain inside information, generating tens of millions of dollars in illicit profits, a U.S. prosecutor said. [WSJ]

Cast of Characters: From a onetime beauty queen to the chief executive of Goldman Sachs Group Inc., the big insider trading trial that began with opening arguments Wednesday in a Manhattan federal courthouse will feature a cast of characters ranging from the powerful to the offbeat. [WSJ]

McKinsey: The consulting firm entangled in the government’s insider trading case against Raj Rajaratnam surfaced during opening statements in the trial for allegedly having a “dirty” person whom the defendant sought to cultivate. [FT.com]

Speaking of McKinsey: John Gapper writes: “The vast investigation into insider trading on Wall Street that culminated this week in Raj Rajaratnam going on trial in New York accused of securities fraud was always likely to ensnare a large institution – perhaps a big hedge fund or a Wall Street bank. No one, however, expected the institution in question to be McKinsey & Co.” [FT.com]

Mergers & Acquisitions

What will CME do? CME Group is losing interest in teaming up with Nasdaq OMX Group in a potential bid to break up NYSE Euronext’s deal with Deutsche Börse. [WSJ]

More exchange deals? Tokyo Stock Exchange Group Inc. , which runs the world’s second-largest equity market, plans to hold merger discussions with Osaka Securities Exchange Co. as takeovers sweep exchanges around the world. [Bloombrg]

Citadel Broadcasting: Cumulus agreed to acquire rival radio broadcaster Citadel Broadcasting in a $2.5 billion cash-and-stock deal. [WSJ]

NetApp: The data-storage gear maker agreed to buy LSI’s external storage systems business for $480 million. [WSJ]

Riversdale: Rio Tinto raised its bid for Riversdale by 3%t to A$3.9 billion ($3.9 billion) as share purchases by steelmakers threaten to scuttle the deal. [Bloomberg]

Is Failure AOL’s Best Option? It isn’t necessary to believe in Tim Armstrong’s strategy for AOL to see some value in the stock. In fact, it might be better not to. [Heard on the Street]

Financial Institutions

BofA: The funny thing about normalcy in banking is that it’s an awfully abnormal occurrence, writes David Weidner. [WSJ]

AIG: American International Group is taking steps to protect nearly $65 billion in tax benefits, as the bailed-out insurer prepares to exit majority government ownership over the next two years. [WSJ]

HSBC: The bank will halt its push for new clients of HSBC Premier, its flagship banking service aimed at wealthy international clients, as it tackles company-wide cost overruns the bank flagged in its 2010 annual results last week. [WSJ]

Morgan Stanley: The Wall Street firm will lay off 200 to 300 trainees and lower-producing financial advisers in its brokerage joint venture, likely bringing the Smith Barney unit’s work force to about 17,800 advisers. [WSJ]

Legal & Regulatory

Kaupthing Bank: Authorities arrested nine men—including a pair of high-profile U.K. property moguls—in connection with the collapse of Iceland’s Kaupthing Bank. [WSJ]

Stress Test: Europe’s banking supervisor defended its proposals for a new round of bank “stress tests,” saying criticism that the scrutiny isn’t tough enough is based on “a few points out of context.” [WSJ]

Related: he European Banking Authority’s new round of bank stress tests are a political exercise, and as there isn’t any single number that can capture the political risks involved in getting Europe out of its debt hole, it’s no use expecting the stress tests to provide one. [WSJ]

Mary Schapiro: SEC Chairman Mary Schapiro said she wasn’t concerned about a possible conflict of interest when she first learned from her former top lawyer that he had inherited money tied to Madoff’s Ponzi scheme. [WSJ]

Buyside

Rebound: Hedge-fund assets appear to have not only returned to the level they were at in September 2008 at the height of the financial crisis, but they also are on pace to top out at a record level by year’s end. [WSJ]

Buffett: An ordinary American investor would probably not put money into a foreign electric car start-up suspected of openly copying competitors, let alone one whose franchised dealers occasionally put other companies’ logos on its own vehicles. [Reuters]

Goldman Sachs: The investment bank’s special situations group agreed to invest as much as $65 million in closely held Management Dynamics, whose software helps companies automate international shipments. [Bloomberg]

Bankruptcy & Restructuring

Blockbuster: A federal bankruptcy judge is expected to rule on whether Blockbuster stays in business or is liquidated. [WSJ]

Related: Carl Icahn said that a disgruntled bondholder’s request to block him from making a competing bid to acquire Blockbuster “lacks logic,” although he stopped short of saying he would make a bid for the company. [WSJ]

People & Players

Nick Saggese: The former partner at Skadden, Arps, Slate, Meagher & Flom, has joined investment bank Moelis & Co. as a senior adviser. [WSJ]

Chris Liddell: General Motors’ CFO will leave the company April 1, to be succeeded by Treasurer Dan Ammann. [WSJ]

Capital Markets

HCA: The hospital operator priced its initial public offering at the high end of its range of $30 a share, making it the largest-ever private-equity-backed IPO in the U.S. [WSJ]

Hutchison Port: Bankers are bringing an early close to the institutional book of Hong Kong tycoon Li Ka-shing’s $5.8 billion ports unit’s initial public offering in Singapore because it is oversubscribed. [Reuters]

Styron Corp.: The company is planning an initial public offering less than nine months after Bain Capital LLC bought the company from Dow Chemical for $1.63 billion. [Bloomberg]

Forbes is out with the latest edition of its annual ranking of the world’s richest people.

So who is the richest person in the world? That would be Mexico’s Carlos Slim Helu, who also topped the Forbes global rich list a year ago. Slim’s net worth is $74 billion, according to Forbes, a fortune he amassed from his telecom and other business interests.

Rounding out the Richie Rich top five:

#2: Bill Gates

#3: Warren Buffett

#4 Bernard Arnault, the head of European luxury goods company LVMH.

#5: Larry Ellison of Oracle

Check out the full Forbes report HERE. And surf over to WSJ’s Wealth Report, where Robert Frank reports that China, Russia, India and Brazil are eating into the U.S.’s lead in supplying billionaires to the world.

How much did investors like Bank of America’s first investor confab in four years? Enough to send the bank’s stock price up by 4.7% yesterday, lifting the entire stock market along with it.

The market scribblers who follow BofA now have weighed in with their takes on the dog-and-pony investor show, which was painstakingly illustrated with more than 230 PowerPoint slides, by one analyst’s count. (The good folks in Charlotte do seem to love their PowerPoint.)

The bottom line: Wall Street is feelin’ good about BofA, though analysts were quick to point out BofA’s growth strategy will take time to play out. Nomura analyst Glenn Schorr called Tuesday’s session a “confidence builder.” After yesterday’s rundup, BofA shares are down a touch today.

Here are some of the more interesting themes from the analyst notes.

Earnings Forecast: Good News

BofA said yesterday that it can generate $35 billion to $40 billion in annual “normalized” pre-tax income. (“normal” means “not in years when we have a financial crisis, or insane fallout from deal making gone bad, or crazy mortgage expenses.” Wait until 2013, for most BofA businesses.) The earnings forecast, which works out to about $2.15 to $2.50 in earnings per share, is “materially above consensus expectations,” Buckingham Research Group notes.

Even Better News: No More Deals

Brian Moynihan introduced a new word into our lexicon: the “peace dividend.” The BofA CEO pledged the bank would hold off on big deal making, a strategy that he said should help juice the company’s stock price just as a dividend would. Analysts also said they believed BofA’s earnings forecast baked in expected cost savings as the bank whacks away at merger-related expenses, and finishes doing the hard work of mashing together all the trading platforms, deposit systems and other technology it took on in the flurry of deal making under former CEO Ken Lewis.

More Cash for Shareholders

BofA hasn’t been specific about the numbers, but the company has said it hopes to raise its dividend “modestly” in the back half of this year, up from a measly penny a share right now. BofA eventually hopes to pay out about 30% of earnings in dividends, the bank said yesterday, and the bank said it’ll generate $30 billion in extra capital by 2014.

International Growth a Priority

“International growth is a significant opportunity as only 13% of revenue comes from outside the U.S. Global Banking and Markets head Tom Montag is targeting international revenue of 50% over the long term compared to 28% in 2010,” Raymond James writes. (But again, BofA said it won’t pay for growth with a foreign bank acquisition.)

Bad news: Expenses Still High

“Management continues to expect operating expenses to remain elevated in 2011. Our 2011 EPS estimates could come under pressure if operating expenses do not decline from 2010 levels.” Sandler O’Neill wrote.

That was a pretty good parting shot. Two weeks after the CEO, CFO, and board of Dynegy announced their resignations, they left their hedge-fund antagonists one last gift: A warning that the company could file for bankruptcy and its stock “reduced to zero” spooking the auditors into doubting the company’s viability.

“We told you so.” No one should be surprised here.  Ever since Seneca and Carl Icahn attacked management for agreeing to sell too cheap to Blackstone, management has been singing from the gloom and doom hymn book.

The CEO, CFO and directors can have personal liability on the SEC reports they sign. So with one foot out the door, is it any wonder they articulated their most negative concerns? It both confirms what they have been saying and protects them from bad things that may happen down the road.

Except investors may well ultimately ask them: Are things really so fundamentally different from last August, when their investor presentation said that things seemed under control? Just days before a record low in the stock price and signing the Blackstone deal in a panic, Dynegy trumpeted its “prudent financial management” and headlined “How Dynegy is Operating & Commercializing Well.”

What would Seneca have done? Seneca Capital, the hedge fund that successfully beat back both a Blackstone and Carl Icahn buyout effort, has always had a more upbeat view of Dynegy’s prospects. That is why management and the board are quitting: to leave it to Seneca and Icahn to work their magic.

Most managements would have fought tooth and nail against a going concern qualifications by the auditor and the mention of a possible bankruptcy. And there is little doubt that if Seneca had any say this is the result they would have pushed for. Seneca’s mantra during the campaign was “Dynegy’s capital structure provides very significant flexibility, with limited secured debt and ample liquidity options.”

This is a case where management saw the glass as 90% empty and Seneca saw it as half full—with the possibility of the glass being overflowing if the price of gas turns.

Does use of the “B” word or a going concern qualification really matter? Yes. Even if the view of old management is not surprising, these disclosures can be self-fulfilling prophecies.

For example, one way to improve liquidity is to sell assets. However, it is unlikely that a buyer would acquire assets from Dynegy while Dynegy is considering bankruptcy, unless the sale is part of the bankruptcy process.

This is because of “fraudulent conveyance” laws. These laws provide that a bankruptcy court can go back and look at pre-bankruptcy transactions. And if the court decides that Dynegy did not get “fair value,” it could go actually unwind a pre-bankruptcy asset sale—or even make a purchaser pay more than it agreed. No purchaser likes to deal with a potentially insolvent company and face these risks.

The auditor’s going-concern qualification and Dynegy’s disclosure of bankruptcy risk also affect how lenders classify their loans and the amount of reserves the lenders may need to take for potential loss. That will affect negotiations for amendments. And it will definitely put a chill on any new lending and affect the pricing of any such loans that might be obtained.

So just before turning the keys over, management has wrapped up the company, put a nice bow on and labeled it DOA . How sweet of them.

The greatest irony. The old board gave the CEO a nice golden handshake two weeks ago providing him several million of dollars to walk away. Ironically, that leaves him one of the greatest stakeholders in the future success of the Seneca strategy. That is because if there is a bankruptcy filing, there could be a clawback of some or all of those severance payments. Among other things, those same fraudulent conveyance laws apply to his severance package.

I cannot tell you who was right in this fight. But there is no doubt that this war has left Dynegy in a precarious position.

There is a good chance the company would have been better served if one side or the other had been able to execute quickly on its strategy. If Dynegy fails, we may look back at this as an example where shareholder democracy worked exactly the way it was supposed to and, in the process, failed shareholders.  Maybe we are a little too enthralled with those democratic principles in the corporate arena.

***

Ronald Barusch spent more than 30 years as an M&A practitioner at Skadden, Arps, Slate, Meagher & Flom LLP before retiring this year. He is no longer affiliated with the firm and the views expressed here are his own.

***

Goldman Sachs is telling clients to start placing bets now for a potentially big year for mergers and acquisitions.

Strategists at the firm said Wednesday that investors should use the options market to juice profits as expectations rise for more deals this year. Goldman believes the market has yet to aggressively target takeout candidates using options, leaving the prices of contracts in takeover candidates relatively cheap.

“While investors seem more comfortable trading M&A views with options, pre-positioning remains modest, offering compelling opportunities,” Goldman Sachs derivatives strategists Katherine Fogertey and John Marshall said in the report.

The pair said pricing trends in the options market point to opportunities for traders to make cheap bets on takeout candidates. Specifically, Goldman sees the relatively high volatility readings for longer-dated options contracts and relatively low volatility readings for shorter-term options.

On Goldman’s list of companies whose options contracts could rise most if a deal is announced? Allergan, DirecTV, VMware, Textron and Estee Lauder.

A spokesman for VMware said the company doesn’t comment on market speculation. Allergan, DirecTV, Textron and Estee Lauder didn’t immediately return calls seeking comment.

Longer-dated volatility measures have risen, with investor anxiety over the unrest in the Middle East and North Africa. Since the price of long-term options contracts tends to fall steeply in the wake of deal announcements, the strategists recommended investors sell long-term contracts.

At the same time, Goldman advised options traders to buy near-term calls that capture stock spikes that usually follow deal announcements. The strategy is designed to pay off if a deal materializes, but also benefit if the underlying stock rises in the absence of a deal. Calls convey the right to buy a company’s stock and puts convey the right to sell a company’s stock.

For DirecTV options, Goldman’s strategists suggested buying June $48 calls and selling $40 puts and $60 calls that expire in January, a trade known as a “strangle.” Shares of the satellite-TV provider fell $0.48, or 1%, to $46.29 in recent trading.

Goldman recommended a similar strategy for small-aircraft maker Textron. Goldman said options traders should buy June $28 calls and then sell January $25 puts and $35 calls. Shares rose $0.08, or 0.3%, to $27.38 recently.

For Allergan, Goldman advised owning April $75 calls and selling $65 puts and $90 calls that expire in December. Allergan shares fell $0.58, or 0.8% to $71.47 recently.

UPDATE: It’s official, HCA is the country’s biggest ever IPO of a private-equity-owned company. HCA late Wednesday sold 126.2 million shares at $30 each, the high end of the company’s expected IPO price. (Isn’t that handy how bankers manage to gauge these IPO temperatures juuust right?)

Hospital operator HCA Holdings is expected later today to price its much anticipated IPO – likely the biggest ever U.S. IPO of a private-equity-backed company.

HCA was one of the poster children of the PE megaboom of 2005-2007, characterized by big-ticket privatizations financed with whopping debt loads. HCA’s 2006 deal — valued at nearly $21 billion, according to Dealogic — was among the largest LBOs of the boom. (The biggest was the 2007 buyout of power company TXU, at $32 billion.)

HCA’s buyout was led by the company’s founder and by private-equity firms KKR and Bain Capital. Those investors stand to make billions of dollars in profit from their original investments.

These and other financial metrics provide a useful snapshot of HCA and its stock offering. Here’s a look at HCA’s IPO by the numbers:

$3.72 billion

Estimated size of IPO, which would make it the largest private-equity-backed IPO ever seen in the U.S. The previous record was last month’s offering for Kinder Morgan. Indeed, Kinder Morgan and another private-equity-backed company, TV-ratings company Nielsen Holdings, had strong IPO debuts so far this year. HCA likewise is being watched as a barometer for the rebuilding IPO market.

“Large, private equity-backed IPOs are the theme of this year, and this one will be a great litmus test for how the market will receive a company that was taken private, levered up with a lot of debt, and then spun back out to the public again,” Morningstar IPO strategic Bill Buhr told Deal Journal colleague Lynn Cowan.

$28.2 Billion

HCA’s debt level as of Dec. 31, according to its IPO prospectus. The debt is more than nine times HCA’s cash flow from operations for 2010. In its IPO documents, HCA cautions:

“Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations.”

$3 Billion

The paper and actual windfall Bain Capital and KKR – two big backers of the HCA buyout deal – stand to each make from their original $1.2 billion investments in HCA. That figure, sussed out earlier in Greg Zuckerman’s story, reflects 11.2 million shares each of the PE firms plans to sell in the IPO, the stock they will continue to own, and roughly $1 billion in dividends paid out to each firm. The figure assumes the IPO prices at the midpoint of the expected range.

250%

The gain, over five years, that the HCA investors, including Bain Capital, KKR, BofA and the brother of former Senate Majority Leader Bill Frist, stand to make in the IPO. In 2006, when the deal was struck to take HCA private, The Journal reported the transaction was intended to produce annual returns of greater than 20% for the buyout group.

40.7%

The percentage of HCA’s 2010 revenue derived from the two big government healthcare programs, Medicare and Medicaid. Both programs are under pressure from rising costs and closer political scrutiny of healthcare spending. In its IPO documents, HCA warns that any reductions to Medicare and Medicaid “may significantly impact us.”

At least five research shops today started their stock coverage on Florida financial institution BankUnited, which went from collapse to IPO star. Here is some of what they’re writing, along with their ratings on BankUnited shares.

Just a reminder: Shares of BankUnited, which went public in late January at $27 a share, recently changed hands at $28.28 each. Big slugs of the company are owned by investors who helped rescue BankUnited – including financier Wilbur Ross, the Blackstone Group, Carlyle Group and Centerbridge Partners.

(Typically, banks involved in an IPO have to wait 40 days after the IPO before starting stock ratings on the company. The BankUnited IPO was led by Morgan Stanley, BofA Merrill Lynch, Deutsche Bank and Goldman Sachs.)

Morgan Stanley, “Equal Weight”

“BankUnited is well positioned to take market share in Florida through organic growth and acquisitions; management has a track record of doing both….Given BankUnited’s anticipated excess capital, we estimate that acquisitions could add ~$6 to the share price; however, we think this is already partly priced in.” Target price: $31.

Goldman Sachs, “Neutral”

“BankUnited has among the most notable growth prospects within our coverage universe and at the same time has the least amount of residual credit risk due to the structure of its FDIC transaction. However, with valuation already at 10X our “levered” 2013 estimates, the market already appears to be incorporating much of this potential growth, in our view.” 12-Month Target Price: $27

RBC, “Outperform”

“Investors have an opportunity to get in on the ground floor with an investment in a bank that could provide meaningful outperformance….We believe the alignment of its FDIC loss sharing agreement, the price paid for legacy BankUnited, FSB, recovery in the U.S. economy, demographic trends in Florida, management’s expertise, and expected continued consolidation of the banking industry suggest to us that investors could be richly rewarded over the long term by owning BankUnited’s stock.” Target Price: $31

Keefe, Bruyette & Woods, “Market Perform”

“While we like the longer-term growth prospects available to BankUnited, we believe that the near-term upside is limited as BankUnited faces a need to deploy capital given its shrinking earnings and profitability. We believe this capital deployment may come with more difficulty than at first glance with organic growth stagnant and acquisition pricing on an upward trajectory.” Target price: $28

Bank of America Merrill Lynch, “Buy”

“BKU has both compelling valuation and a unique earnings growth story – a combination we find rare in the regional bank space. As such, BKU is our top regional bank pick….We believe BKU will aggressively deploy excess capital into accretive deals in FL near-term and expand in the NY metro market long-term –potentially providing upside to EPS power.” Price target: $35

Economists have confirmed what Deal Journal already suspected: Americans have less faith in financial institutions than ever. And the bad economy may be to blame.

The percentage of Americans who said they have a great deal of confidence in financial institutions fell to 23% in 2010, from 42% in 2007, Betsey Stevenson and Justin Wolfers of the University of Pennsylvania’s Wharton School found in an analysis of global polling data from the Gallup Organization. The Gallup surveys started in 1973, and confidence in the financial sector is lower than in any previous survey period.

The Wharton economics found a correlation between a rise in unemployment and the loss of public confidence in banks – meaning faith may largely be a function of the economy. “Data suggest that much of the recent decline in confidence—particularly in the financial sector—may simply be a standard response to a cyclical downturn,” Stevenson and Wolfers wrote.

(Read Deal Journal colleague Justin Lahart’s story about the economists’ research. and click HERE to read their academic paper.)

The “good” news for banks? Americans trust Congress even less.

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

The Trial of Raj

Galleon: For the next 10 weeks, prosecutors will battle Galleon Group founder Raj Rajaratnam in courtroom 17B in lower Manhattan. But they will win or lose the insider-trading case in a nearby “war room.” [WSJ]

Mergers & Acquisitions

Sprint-T-Mobile: Sprint Nextel is again discussing options for combining its business with rival T-Mobile, as the two struggle to keep customers from defecting to larger rivals. [WSJ]

CitiFinancial: Citigroup is offering partial financing to bidders for its CitiFinancial unit and is open to retaining a stake in the consumer finance business as well. [Reuters]

Tognum: Daimler and Rolls-Royce said they would bid $4.44 billion for industrial diesel engine maker Tognum. [Reuters]
Related: A large Tognum shareholder said the offer undervalues the company. [Dow Jones Newswires]

Extract Resources: The company plans to ask Australia’s securities watchdog to force China Guangdong Nuclear Power to make a bid for the company if CGNP goes ahead with a takeover of Extract’s top shareholder, Kalahari Minerals. [Reuters]

Financial Institutions

BofA: Bank of America CEO Brian Moynihan said the bank can earn between $35 billion and $40 billion a year before taxes when it puts the financial crisis behind it. The funds will make possible a range of payments to shareholders. [WSJ]
Related: Showing resistance for the first time against government pressure to write off tens of billions worth of mortgage debt, Bank of America executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans. [NY Times]

UBS: The Swiss bank’s profit margins in Asia may shrink for as long as two years as competition for bankers in the world’s fastest-growing major economies drives up compensation costs. [Bloomberg]

AIG: The Treasury Department said it has received a $6.9 billion repayment from AIG, the troubled insurer it helped bail out at the height of the financial crisis. [WSJ]

RBS: The U.K. bank awarded CEO Stephen Hester shares worth about $7.3 million under a long-term incentive plan, adding to a £2.04 million all-share bonus. [WSJ]

Buyside

SWFs: Sovereign wealth funds increased their assets under management by 11 per cent over the past year to $4 trillion, for the second year in succession. [FT.com]

People & Players

Michael Carr and Dusty Philip: Goldman Sachs Group has appointed Michael Carr and Dusty Philip as new co-heads of mergers and acquisitions for the Americas. [WSJ]

Bankruptcy & Restructuring

Dynegy: The company said it may be forced to seek bankruptcy protection if it is unable to renegotiate credit agreements with its banks. [WSJ]

Legal & Regulatory

Europe stress test: European officials are poised to let regulators in individual countries use their own definitions of a key gauge of banks’ health in coming “stress tests,” threatening to undermine efforts to buttress faith in the Continent’s ailing financial system. [WSJ]

One of the zany takeover dramas in recent months was the two failed attempts to buy Dynegy, the Houston power generator, and the resignation of the company’s CEO, CFO and nearly the entire board of directors. Throughout the saga, Dynegy loudly insisted it might not survive if the deals didn’t go through.

It turns out that Dynegy’s accountants agree with that assessment.

In its annual report filed with the SEC late yesterday, Ernst & Young slaps Dynegy with the accounting death knell: doubts about the company’s ability to continue as a “going concern” (i.e., stay in business.)

Ernst & Young writes:

Dynegy Inc. projects that it is likely that it will not be able to comply with certain debt covenants throughout 2011.  This condition and its impact on Dynegy Inc.’s liquidity raises substantial doubt about Dynegy Inc.’s ability to continue as a going concern.

The SEC filing was released after the close of trading on Tuesday. In pre-market trading this morning, Dynegy shares are falling about 5%. The company also said in the filing — as it said during its failed sale attempts — that it may need to file for bankruptcy protection, or may be pushed into bankruptcy protection. (Read the Journal’s Rebecca Smith’s story on the Dynegy’s SEC filing.)

The reason for Dynegy’s troubles are pretty well worn at this point: Dynegy needs to rework a significant debt agreement, and it has warned it may not be able to land a new credit pact on similar terms. Natural gas prices have been faling, which hurts Dynegy’s business. The company has high levels of debt and may not be able to meet strict levels of financial results required by its lenders. And so on.

Now, accountants take these “going concern” assessments seriously. Though it does happen that companies limp along for years, with their auditors continuing to issue those paragraphs doubting the entity’s ability to survive.

But for those Dynegy shareholders who said “no” to the two prior sale offers from Blackstone Group and Carl Icahn, we may have to invent a new term: “Non-Seller’s Remorse.”

In a recent interview and emails with the New York Times, admitted fraudster Bernie Madoff said he had provided “instrumental” information to help his former investors recover money they lost. But that version of events was refuted today.

Iriving Picard, the lawyer who has been clawing back billions of dollars for victims of Madoff’s Ponzi scheme, today held a press conference billed as an update on the “Madoff recovery effort.” (Deal Journal colleague Michael Rothfeld wrote about a major focus of the press conference: the delayed distributions of some of the money Picard has secured from some Madoff investors and associates.)

But in the telephone press conference today, Picard’s top lawyer, David Sheehan, also downplayed Madoff’s role in efforts to recover assets from the Ponzi scheme.

Sheehan said the attorneys working with Picard indeed interviewed Madoff in prison. Sheehan characterized Madoff as a “confirming source” who helped them nail down the facts and analysis they already had strung together from their own work unraveling the Madoff scheme. The chats with Madoff “didn’t alter our view of what we’d already put together,” Sheehan said.

Madoff is perhaps not an entirely reliable witness for his own account, but here’s what he told New York magazine about those jailhouse interviews with Picard’s team:

Most of his victims, he says, will get a substantial amount of their money back—he’s met with the trustee’s lawyers and tried to help lead them to the money. “It’s 50 cents on the dollar,” he told me. “These people probably would’ve lost all that money in the market. I’m not trying to justify what I did for one minute. I’m not.”

Goldman Sachs today named two executives to lead its M&A work in the Americas. (Deal Journal colleague Anupreeta Das has the details.)

Here is Goldman’s internal memo announcing the M&A leadership changes.

***

Leadership Changes in Mergers & Acquisitions

We are pleased to announce that Tim Ingrassia will join Jack Levy and Gene Sykes as a co-chairman of Global Mergers & Acquisitions. We are also pleased to announce that Michael Carr and Dusty Philip will become co-heads of Americas Mergers & Acquisitions.

Tim, together with Jack and Gene, will focus on serving our clients and strengthening our M&A franchise globally by expanding our market share across all regions and industries. Tim will play an important role in sourcing and executing transactions in addition to continuing his current coverage responsibilities.

Michael and Dusty will focus on driving our M&A business in the Americas. Their priorities will be to ensure that we optimally meet our clients’ M&A objectives, expand our market share by deepening client relationships, enhance our leading execution standards and strengthen the integration of M&A with our financing products. Michael and Dusty will retain their coverage responsibilities for their respective natural resources, healthcare and industrial clients.

Tim has been the head of Americas M&A since 2008. Tim joined the firm in 1986, became a managing director in 1996, and a partner in 1998.

Michael joined the firm in 1998 as a partner and managing director.

Dusty joined the firm in 1991, became a managing director in 1999, and a partner in 2000.

Please join us in wishing Tim, Michael and Dusty success in their new roles.

David Solomon
John S. Weinberg
Gordon E. Dyal

It’s safe to say 2010 was a year Goldman Sachs would like to forget, particularly in its relations with governments and regulators around the globe. But this year feels a tad lighter so far. Could it be Goldman is no longer Public Enemy No. 1  in Washington, Brussels and London?

First, a thumbnail rundown of some of Goldman’s government headaches last year: SEC lawsuit. Fabulous Fab Tourre. And Tourre again. Fallout from “God’s Work.” Need we go on?

But 2011 may be the year of the Goldman comeback in official state dealings. Sure, there was that troubling matter of Goldman barring its U.S. clients from investing in Facebook, to avoid potentially running afoul of regulators. But here are five signs Goldman is moving from government pariah into valued partner in world capitals.

1)  Lloyd Blankfein appeared today with Secretary of State Hillary Clinton to announce a partnership aimed at supporting women entrepreneurs in developing countries. The partnership with the – gasp! – Obama Administration, is billed as an extension of Goldman’s 10,000 Women initiative. A year ago, it would have been tough for folks in Washington to tie themselves to a Goldman initiative, even one as uncontroversial as advancing the cause of women.

2) Goldman was lead underwriter on last week’s $9.67 billion sale of MetLife Inc. stock held by AIG, the government-owned insurer. Goldman also is the lead underwriter on other AIG transactions this year, as the company sells off assets to repay the U.S. Treasury’s 2008 AIG bailout. Remember, it was only last summer that Goldman, which knew it was too disliked in Washington to land a gig leading the General Motors IPO, essentially lobbed a lowball bid that crimped fees for the eventual winning underwriters.

3) The SEC in January appointed Eileen Rominger, the former chief investment officer for Goldman’s asset management arm, to lead the agency’s division of investment management. We’ll repeat this. A former official at Goldman Sachs – which the SEC sued a year ago for misleading investors in a CDO deal — now is in charge of investor protection at the SEC. That rift healed nicely.

4) The Bank of England’s monetary policy committee announced this week the appointment of a senior Goldman economist, Ben Broadbent, to the board that sets the U.K. central bank’s monetary policy. In the U.K., where anti-banker sentiment has been more vitriolic than it was here, Goldman has been a lightening rod for criticism. One member of Parliament last year said big bonuses paid to Goldman employees showed the bank was “living in an Alice in Wonderland world.”

5) Mario Draghi, governor of Italy’s central bank, is a leading candidate to succeed Jean-Claude Trichet as head of the European Central Bank. Draghi is ex-vice chairman at Goldman Sachs, and he’s taken some criticism for his role. (Also, he’s Italian.) But Draghi still looks like the man likeliest to win the job.

By Katy Burne of Dow Jones Newswires

Charlie Sheen loves tiger blood, machetes and goddesses. But is he also a closet commodities fan?

A person writing under the name “Charlie Sheen,” the disgraced sitcom actor, filed a comment with the Commodity Futures Trading Commission last week, and he recommended the agency adopt more conservative position limits on derivatives tied to silver.

Market participants were buzzing about the appearance of Sheen’s name in the otherwise low-gloss world of commodities.

(It’s not as though silver bugs, already a crew prone to conspiracy theories about speculators and market manipulation, needed more reasons to worry.)

CFTC spokesman Dennis Holden was unable to confirm that the March 1 filing was posted under a bogus name. The letter attributed to Charlie Sheen was erased from the agency’s archives on Tuesday following inquiries from Dow Jones Newswires.

An identical memo was posted under the name of David J. Dunak, a self-described silver investor, on Feb. 24. In an interview on Tuesday, Dunak said he took cues for his wording from precious metals commentator Ted Butler. Other comments on the CFTC website also contain language that mirrors Butler’s online commentary.

It’s possible other silver investors also picked up similar language from Butler — even a sitcom star recently fired from his day job, or stand-ins for Sheen.

On the website SilverSeek.com, Butler invites readers to “rattle on the cages” of the CFTC, among others, and lists the email addresses of CFTC staffers “for those who wish to contact the regulators.” He provides a separate sample letter for regulators on the website of Investment Rarities Incorporated.

An email to Butler Research LLC, Butler’s publishing company, was not immediately returned Tuesday.

Representatives at CBS, the network airing Sheen’s former sitcom “Two and a Half Men,” didn’t immediately return requests for comment. Sheen couldn’t be reached.

Dunak said he had no knowledge of the Sheen memo. “I don’t assume any other identities,” Dunak said. “I never have.”

In “Charlie Sheen’s” March 1 memo, the writer asks the CFTC to re-adjust its proposed position limits in silver.

“Sheen” says that the “current formula would result in a position limit of over 5,000 contracts for any single speculator.” The memo writer said that limit is equivalent to 25 million ounces of silver. Only three mining companies worldwide produce that much silver each year.

It turns out that even real silver experts agree with “Charlie Sheen.” Critics of the CFTC’s proposed rules have called for a revised cap of 1,500 contracts or fewer to prevent market manipulation in silver.

If Charlie Sheen, Martin Sheen or any other actors want to weigh in on the CFTC proposed rules, the agency’s website is accepting comments through March 28.

All credit to Ford CEO Alan Mulally. His was the lone Detroit automaker that didn’t require a massive government bailout. Ford shares are up about 12% in the past year.

And for his work, Mulally is being richly compensated.

The auto maker awarded him more than 3.8 million company shares, according to an SEC filing today. Those shares are worth about $55.4 million at Ford’s current stock price.

He also received options on 884,433 company shares, as well as 543,734 units that will be converted to stock in 2013, as our MarketWatch colleagues point out.

Are the nation’s third and fourth largest wireless carriers about to get hitched?

This morning Bloomberg reported that Deutsche Telekom has held on-and-off talks about selling its T-Mobile USA unit to Sprint Nextel in exchange for a major stake in the combined entity. The WSJ reports that a deal is unlikely in the near term.

People familiar with matter tell the Journal that any deal faces a number of hurdles, such as valuing T-Mobile USA, determining ownership and leadership of a combined company, and figuring out how a transaction might be financed.

Still, the market reacted positively to the Bloomberg News report that the two carriers are in talks. Sprint’s stock was up nearly 5%, and Deutsche Telekom’s stock was up more than 3%.

Here is a look at analysts’ take:

Timothy Horan, Oppenheimer: “In our opinion, a merger between Sprint and T-Mobile is inevitable simply because they do not have the scale or spectrum to effectively compete with AT&T and Verizon in the long term. T and VZ have 30% market share each and growing, which gives them a major cost advantage. Their spectrum position also gives them a quality advantage. However, we believe that T-Mobile is going to want a substantial premium in any merger given the significant complexities that Sprint has in shutting down its legacy networks and migrating to a 4G strategy. For these reasons a merger is more likely in 3 years or so, but we admit the strategic rationale to doing so now is compelling given how far ahead VZ and T are pulling with 4G.”

Philip Cusick, J.P. Morgan Chase: The analyst points out that while a deal between the two has been discussed for years, it seems more likely now. For one, a combination would enable the carriers “to gain enough scale to significantly improve operating margins and compete more effectively.” For Deutsche Telekom, T-Mobile “represents a potential cash flow burden and a merger presents an opportunity to avoid a large spend on spectrum.”

Christopher C. King, Stifel Nicolaus: “We believe such a deal would be viewed as generally positive for the U.S. wireless industry, resulting in consolidation from four national wireless carriers to three, and thus, creating additional rationalization for the industry. Verizon Wireless and AT&T Mobility would likely be viewed as longer-term winners from any such consolidation of major U.S. wireless players.”

Mike McCormack, Nomura: “While we continue to believe that the U.S. wireless industry remains plagued by an oversupply of carriers with the potential for continued price and margin (in the form of advertising, marketing and subsidy) erosion for the industry, we do not expect to see a near-term deal to rectify the situation.” McCormack continues, “We continue to believe that Sprint faces significant hurdles in its own organic turnaround and that the introduction of a merger with T-Mobile USA would further exacerbate the challenges it faces.”

In the early innings of the Galleon Group insider-trading trial, the judge today read in open court a litany of possible witnesses and related people, companies and places that could come up in the case.

(Read HERE the full list of possible witnesses and companies in the trial of Galleon Group co-founder Raj Rajaratnam.)

The recitation was part of the quizzing of the jury pool, to figure out whether the people weighing the government’s case can be impartial about all the people and companies involved. Among the list of more than 100 people and companies, were some notable names:

* Lloyd Blankfein: The Journal previously reported that the Goldman Sachs CEO agreed to testify for the government, in order to establish evidence related to a former Goldman director accused of passing insider information to Rajaratnam.

* Danielle Chiesi: The hedge fund analyst has been a central — and fashionable! — figure in the Galleon case. She recently pleaded guilty in connection with receiving secret tips about tech companies IBM, Sun Microsystems and AMD.

* Robert Moffat: The former IBM executive was accused of spilling the company’s secrets to Chiesi, who acted as an information conduit to Galleon. Moffat pleaded guilty to criminal charges in the case, without agreeing to cooperate with government prosecutors.

* Kieran Taylor: As a senior director of global marketing at Akamai, Taylor was allegedly passing inside information about the company’s earnings to Chiesi.

* Rengan Rajaratnam, “R.K.” Rajaratnam: The older and younger brothers of the Galleon Group co-founder. Prosecutors have alleged that R.K., a Clorox vice president and a former Galleon employee, was a co-conspirator in Raj’s insider-trading scheme. Rengan’s now shuttered hedge fund previously drew the interest of insider-trading investigators.

*David Viniar: the Goldman Sachs CFO. Presumably he, like Blankfein, can establish evidence linking the former Goldman director to tips allegedly passed to Raj Rajaratnam. (Or, he’s there to explain his embarrassing email about Goldman’s CDO deal.)

We’ve heard you, bank investors. We know you’ve been dying for the companies you hold to restart the dividend spigot long ago plugged up by the financial crisis.

Bank of America hears your cry, too.

BofA CEO Brian Moynihan said at an investor conference today that his bank has no intention of doing more big acquisitions, and instead will funnel “every dollar” in stray capital to shareholders, as Deal Journal colleague David Benoit relayed from BofA’s investor session in New York.

Dividends could amount to $12 billion in 2013, 2014 and beyond, Benoit notes, and the bank would still have roughly $30 billion or more to dole out in stock buybacks and special dividends.

BofA ‘s dividend was slashed to just a penny a share per quarter in the wake of the financial crisis. In 2007, the bank had paid out as much as 64 cents a share in quarterly dividends.

BofA recently has repeatedly said it expects to “modestly increase” stock dividends in the second half of this year, pending approval from the Federal Reserve. The Fed recently conducted another round of bank stress tests — the results of which are expected shortly — to determine which financial institutions are healthy enough to return cash to shareholders.

Ok, BofA investors. What do you think of the bank’s plans to return shareholder capital?