Don’t think Goldman Sachs is finished putting its own capital at risk. The Wall Street firm may be rushing to either restructure or spin off its private equity and proprietary trading units to comply with the newly enacted Volcker Rule. But the directive remains vague and leaves ample room for Goldman and its Wall Street rivals to bet with plenty of the house’s money.
Investment banks can still use their own money if it helps facilitate trades for clients. They can mint — and burn — money doing that. The rules do, however, envisage limiting this support to what constitutes satisfying proper expected near-term demand for client trades. As ever, identifying where that ends and prop trading begins is a rather blurry line.
The U.S. administration should take a quick refresher course in recent European financial history. That could help it pitch General Motors’ upcoming initial public offering right. That’s important: If the IPO is priced too high and flops, it’ll be much harder for the government to offload the rest of its shares without taking a hit. But if GM’s stock market debut prices too low and shares surge, the White House would risk accusations of favoring Wall Street at taxpayers’ expense.
Europe’s wave of privatizations in the 1980s and 1990s offers some tips. Large portions of the deals were sold to the general public. Allocating a sizable slug of GM’s IPO to American citizens rather than institutional investors would be one way to allow them to share any upside in the stock of a company saved from extinction by their tax dollars.
Wall Street puts on one of its most overt displays of testosterone Tuesday when the bell rings for Corporate Challenge Boxing. Usually, the event is packed with fighters, most of whom by day hold middle-ranking positions at corporations. In one corner, there’s Morgan Stanley Smith Barney broker Austin “Monkey Fist” Philbin and in another, Strategic Capital Partners’ Albert “Kid Blanco” Gore, son of the former Vice President.
But what if Wall Street’s higher-ups, old and new, jumped into the ring instead?
Neither Goldman Sachs nor the Securities and Exchange Commission comes out of their slugfest looking pretty. But in settling fraud charges without admitting guilt, the Wall Street firm has beaten the regulator on points, despite a record penalty. That doesn’t mean Goldman can leave the ring just yet, though. It has conceded that its disclosure on the mortgage collateralized debt obligation at the heart of the SEC’s case was inadequate. That’s something that could rebound on Goldman and the rest of the finance industry.
Right now, Goldman has to stump up $550 million, the hardest penalty punch the SEC has ever landed on a single Wall Street target. But the firm should be able to roll with it. The settlement represents just 3.4 percent of its compensation bill last year, or the equivalent of the average annual compensation for just 1,100 of its 32,500 employees. That aside, three months in the regulatory sin bin may have taken the edge off Goldman’s appeal with clients — but that’s not clear yet.
Don’t count on a rebound in earnings to boost U.S. bank stocks. That’s the message to glean from JPMorgan’s second-quarter results. Granted, the bank’s performance was hardly disastrous, especially considering the slowdown across the industry in trading in May and June. But almost a third of the bank’s profit came from a $1.5 billion gain on releasing loan-loss reserves.
By itself, that’s another encouraging sign that the wounds inflicted by the financial and economic crisis are healing. There are others: JPMorgan’s credit card business made money for the first time in a while, thanks to lower charge-offs. And the bank has revised downwards estimated losses on problem mortgage loans.
Auto sales should be accelerating in the United States — at least according to a slew of rosy statistics. But June’s numbers show annual sales stuck in the low 11 million range — better than last year, but way off the typical rate of 16 million before the crash. If only customers weren’t so jittery about the economy.
That’s what’s quelling the optimism fueled by positive-looking data. First, there are stats suggesting pent-up demand. The median age of vehicles on the road, for example, is more than 10 years, rather than the eight or nine years to which the industry has become accustomed.
Tesla has sped off with a rare prize: a stock market hit. That must embolden General Motors, not to mention other non-auto companies, to push ahead with their own initial public offerings. The unprofitable electric sportscar maker isn’t expected to earn a dime until at least 2012. So if it can ride the markets so successfully, surely it’s a sign that investors are more receptive to new share sales after a turbulent six months.
After all, more U.S. IPOs have been pulled than have launched this year — by a 71 to 68 count. Of the ones that have come to market, 20 priced below the mooted range and 40 now trade lower than their IPO price, according to Thomson Reuters data. Yet Tesla has achieved a trifecta of new-issue achievements: increasing the number of shares sold, by a fifth; being one of just six to price above its range; and the stock surging on its first day of trading, by 40 percent — a feat even more impressive given the day’s broad market sell-off.
What’s the best way to value General Motors as it prepares to go public again? The usual price-to-earnings ratio seems to have lost favor with bankers, as has enterprise value-to-sales, an auto industry favorite. Instead, GM’s advisors are plumping for enterprise value as a multiple of something called EBITDAPO.
That’s the same as regular old earnings before interest, taxes, depreciation and amortization, but with pension costs and other post-retirement employee benefits (OPEB) — healthcare, basically — also stripped out. Using this metric in connection with GM’s planned initial public offering is a reminder that last year’s bankruptcy wasn’t a cure-all.
The stars are aligning for Jefferies. The second-tier firm announced a 37 percent gain in quarterly profit, news that sent its shares up by as much as 10 percent. The investment bank now finds itself trading at a juicy 1.7 times book value. That’s way ahead of bigger rivals. How has Jefferies managed that?
Some of it is down to what Jefferies isn’t rather than what it is. It isn’t weighed down by the problems that have beset its better-known brethren. JPMorgan’s investment bank is performing well, but its retail bank is still heavily exposed to the wobbly U.S. consumer. Goldman Sachs , meanwhile, stands accused of fraud and is everyone’s favorite bad boy. Morgan Stanley still needs to convince investors it’s back on track after a year of losses.
Nor does Jefferies have as much to lose from looming new regulation. For example, it has no fixed-income derivatives business to speak of. All in, these sorts of albatrosses have left Goldman, JPMorgan and Morgan Stanley trading just above or below book value.
But Jefferies is also making some of its own luck. For one, it’s expanding, after executives decided two years ago to take advantage of the bulge bracket’s pain to grow the trading and advisory arms. The move looks to be paying off, for now at least. On the second-quarter earnings call, management cheerfully trumpeted the increasing number of debt, equity and M&A deals the firm has been handling.
Jefferies has managed to get out in front in another way too. It switched its financial reporting from a calendar year-end to a November year-end, allowing it to release earnings a month before the big boys, rather than being largely forgotten as an afterthought.
But there was a bit of jiggery-pokery too. Changing the calendar allowed for some double counting. Jefferies’ second-quarter numbers included March, the industry’s best month of the year, and one that also figured in its results for the first quarter. It was well-flagged, but Jefferies was remarkably reluctant to provide more details.
Investors didn’t seem to care much about Jefferies’ reticence, and also shrugged off any fears the firm’s build-up could be temporary. It’s the most recent results that count.
General Motors’ looming share sale is turning Wall Street on its head. The restructured automaker could return to the public equity markets as soon as October, raising as much as $20 billion, according to Reuters. Investment bankers would normally be salivating at the prospect of handling such a bumper deal. But the fees are so low that winning the IPO mandate looks more like a loss leader for more lucrative business.
Usually it’s the other way round, with financiers raking in their biggest fees by taking firms public. The average take on U.S. IPOs since 2005 is 6.7 percent of the amount raised, according to Thomson Reuters data. Granted, they’re lower for mega-IPOs. But assuming GM sold $10 billion and paid the same 2.8 percent that Visa doled out on its $19.6 billion offering two years ago, the bankers would share $280 million.