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May 3, 2008

Mr. Jerry Yang
CEO and Chief Yahoo
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089

Dear Jerry:

After over three months, we have reached the conclusion of the process regarding a possible combination of Microsoft and Yahoo!.

I first want to convey my personal thanks to you, your management team, and Yahoo!’s Board of Directors for your consideration of our proposal. I appreciate the time and attention all of you have given to this matter, and I especially appreciate the time that you have invested personally. I feel that our discussions this week have been particularly useful, providing me for the first time with real clarity on what is and is not possible.

I am disappointed that Yahoo! has not moved towards accepting our offer. I first called you with our offer on January 31 because I believed that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace. Our decision to offer a 62 percent premium at that time reflected the strength of these convictions.

In our conversations this week, we conveyed our willingness to raise our offer to $33.00 per share, reflecting again our belief in this collective opportunity. This increase would have added approximately another $5 billion of value to your shareholders, compared to the current value of our initial offer. It also would have reflected a premium of over 70 percent compared to the price at which your stock closed on January 31. Yet it has proven insufficient, as your final position insisted on Microsoft paying yet another $5 billion or more, or at least another $4 per share above our $33.00 offer.

Also, after giving this week’s conversations further thought, it is clear to me that it is not sensible for Microsoft to take our offer directly to your shareholders. This approach would necessarily involve a protracted proxy contest and eventually an exchange offer. Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo! undesirable as an acquisition for Microsoft.

We regard with particular concern your apparent planning to respond to a “hostile” bid by pursuing a new arrangement that would involve or lead to the outsourcing to Google of key paid Internet search terms offered by Yahoo! today. In our view, such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons:

* First, it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system. This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them. This would undermine the reliance on your display advertising business to fuel future growth.

* Given this, it would impair Yahoo’s ability to retain the talented engineers working on advertising systems that are important to our interest in a combination of our companies.

* In addition, it would raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit. Among other things, this would consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

* This would also effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo. In addition to whatever resulting legal problems, this seems unwise from a business perspective unless in fact one simply wishes to use this as a vehicle to exit the paid search business in favor of Google.

* It could foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services.

Accordingly, your apparent plan to pursue such an arrangement in the event of a proxy contest or exchange offer leads me to the firm decision not to pursue such a path. Instead, I hereby formally withdraw Microsoft’s proposal to acquire Yahoo!.

We will move forward and will continue to innovate and grow our business at Microsoft with the talented team we have in place and potentially through strategic transactions with other business partners.

I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares. By failing to reach an agreement with us, you and your stockholders have left significant value on the table.

But clearly a deal is not to be.

Thank you again for the time we have spent together discussing this.

Sincerely yours,
Steven A. Ballmer

Looks like that it's important to keep dividends, while it's okay to dilute shares.

http://www.nytimes.com/reuters/business/business-citigroup-stock.html

It's getting unbearable now. I hope they're talking, and getting closer, one way or the other.

http://kara.allthingsd.com/20080429/microhoo-how-to-talk-without-moving-your-lips/

Appraisers say WaMu cut corners to increase its mortgage business

Washington Mutual's mortgage woes come as no surprise to Graham Albertini, a real-estate appraiser who worked at WaMu's Bellevue office when its mortgage business was going gangbusters.

Over eight years, Albertini said, he watched the bank trade safety for speed in its home-lending operations. The trade-off, he said, eroded fundamental safeguards put in place to protect WaMu from lending more against homes than they were worth.

When Albertini began working for WaMu in 1999, most mortgages were supported by a complete appraisal, which included an on-site property inspection, detailed measurements of the house and a physical drive-by of comparable homes by bank appraisers to determine if the house was worth what the buyer was willing to pay for it.

Every appraisal was given a cursory review, while pricier homes and houses with unusual features or circumstances were given an even closer review by a second certified appraiser. If everything checked out, the loan was sent to the bank's underwriting department for completion.

"Up until 2001, it was a pretty good system. Every appraisal was looked at by a human being," said Albertini, who now works for American Home Appraisals on Mercer Island.

But as loan volume increased, so did the pressures — and the incentives — for WaMu appraisers to work faster and bypass safeguards that could have protected the bank against the high-risk mortgages now dragging it down, Albertini and other appraisers say.

"It's the elimination of oversight in pursuit of profit. ... That's a formula for a breakdown," said appraiser Richard Hagar, who works with Albertini and regularly trains other colleagues and law-enforcement fraud investigators on appraisal standards.

WaMu did not respond to several requests for comment. It recently announced it would lay off up to 3,000 employees, cut shareholder dividends and shutter its free-standing home-loan operations. In the latest four quarters it has set aside about $6.4 billion to cover loan losses, and financial analysts say the bank could lose up to $16 billion more.

Priority: Closing the deal

Albertini and Hagar said key safeguards were compromised when the bank began a sweeping effort to capture a larger share of the mortgage market starting in 2001.

First came automation, which allowed the bank to replace the first set of eyeballs evaluating the appraiser's work — the cursory review by administrative staff — with a type of computer review that was becoming increasingly common in the industry.

Michael Evans, international treasurer with the American Society of Appraisers, said some lenders eventually began using computers alone to establish home values. Others used them conservatively, as an additional tool for their appraisal staff, recognizing that "speed can kill," he said.

At WaMu, field appraisers quickly learned that by stating that a house was being sold "as is" and listing its market value as greater than the requested loan amount, they could bypass a more in-depth review of their work and get paid more quickly, Albertini said.

The computer system also had glitches that obliterated appraiser comments about conditions that might affect the value of the property, things such as proximity to railroad tracks or unfinished remodeling. The glitches happened often enough, he said, that Albertini stopped working off the computer reports and instead asked appraisers to just send him copies of their original paperwork.

In 2003, the bank instituted a new commission system that paid field appraisers according to the volume of their work.

Then, in 2005, WaMu expanded assignments for its local reviewers, Albertini said. Instead of just checking the work of field appraisers on the Eastside, the reviewers began to conduct limited Internet reviews on appraisals done in Idaho, Utah, Alaska and New Mexico — markets the reviewers didn't know well, if at all.

By then, lenders such as WaMu had shifted away from simply collecting interest on loans they held. Their new business model was to collect fees for making the loans and resell many of the mortgages on Wall Street, where investors snapped them up as mortgage-backed securities.

To meet investor demand, banks including WaMu began acquiring more of their loans through independent mortgage brokers, paying a commission for each loan the broker arranged. The broker, in turn, selected the appraiser to determine if the house was worth the amount of the loan.

The entire home-financing system, Albertini and Hagar said, was geared toward closing the deal, and appraisers who were willing to play along could make a lot of money.

Those who didn't want to play complained loudly to federal banking regulators through professional organizations. By the thousands, they also posted their names on an Internet petition, warning as early as 2001 that undue pressure from aggressive brokers and lenders to bend the rules was endangering the nation's banking system and the economy.

In 2006, federal regulators said they wanted lenders to use appraisers who had no financial interest in the loan. WaMu laid off its appraisers, including Albertini, and hired an outside company to arrange the appraisals.

New York Attorney General Andrew Cuomo alleged in a suit late last year that WaMu corrupted that relationship and used the promise of more business to handpick favored appraisers who would sign off on inflated property values tied to WaMu loans.

The company sued by Cuomo, e-AppraiseIT, has denied any wrongdoing. So has WaMu, which is not a target of the suit.

Similar allegations surfaced again in February when a Sacramento, Calif., appraiser sued the bank, alleging that WaMu and its surrogates stopped using her services because she "refused to compromise her integrity, independence, and refused to violate the laws and include false and deceptive facts about existing market conditions."

The company denied the charge. The suit is pending.

Stupidity or duplicity?

WaMu's internal controls in overseeing loans also have been questioned.

In Washington state, a residential appraiser in Pacific County filed a complaint with the state Department of Licensing after determining that a home appraisal performed for WaMu had been inflated by at least $80,000.

Appraiser Elizabeth M. Stevens said WaMu hired her in November 2007 to review the work of another appraiser, who had valued a property for a couple looking to refinance their house. The first appraiser had been from an appraisal-management company under contract with WaMu.

During her review, Stevens discovered that the homeowners had tried selling the home for at least three months. When it didn't sell, they applied to refinance it for an amount higher than what they tried to sell it for.

"My opinion was the original appraisal was a piece of garbage," Stevens said. "If the property wouldn't sell at $200,000, why would it sell at $300,000?"

Stevens said she notified WaMu of her concerns and findings, essentially reporting that the owners were asking to borrow a lot more than the house was worth.

"They [WaMu] can come back and ask questions. In this case, they didn't," Stevens said recently. "I just received notice that WaMu ignored my review and loaned on the amount of the original appraisal."

She declined to provide the property address to The Seattle Times, citing confidentiality concerns, but said she reported it to the licensing department in her complaint against the appraiser.

Stevens said it was impossible to know whether the original appraisal was the result of error or fraud.

"Where does the line fall between someone being stupid and someone deliberately going out of their way to inflate a value to keep a certain client's business?"

 

The Federal Reserve or another new regulatory entity should be authorized to oversee and supervise all credit-creating institutions to assess their risk in exchange for giving them access to the Fed as lender of last resort.

The secretary said that commercial banks' access to the Fed's emergency lending ''discount window'' has traditionally been accompanied by regulatory oversight and supervision. ''Certainly any regular access to the discount window should involve the same type of regulation and supervision,'' Paulson said