Wall Street’s bankers and traders are getting jittery again. This time, it’s not fear of regulatory backlash that has them concerned, it’s the more traditional worries about bonuses and layoffs. That’s because the industry has suffered a couple of tough quarters right after banks started to hire again. Unless business picks up soon, the prospect of less revenue feeding more mouths means job cuts are in the offing.
The cull may have started already. Bank of America is trimming up to 5 percent of staff in parts of its investment bank. Others may not be far behind. One place to look for vulnerabilities is the line in earnings reports detailing the average compensation per employee banks have put aside.
Bankers returning from summer vacations have some reason to be happy to be back at work. After all, the momentum suggests business at something closer to normal for the rest of 2010. But markets remain choppy, and that could mean an extended, and unwanted, break for some.
The temperature wasn’t the only thing hot in August. This was a record August for new junk bond sales and the best for announced mergers and acquisitions since 1999, according to Thomson Reuters. With interest rates still low, such deal-making may well continue.
The ghost of Ken Lewis continues to haunt Bank of America’s shareholders. The Charlotte-based bank has made progress since he resigned as chief executive almost a year ago following a second bailout by the U.S. government. Yet the megabank’s stock has fallen 38 percent from this year’s high, more than rivals, and now trades at a whopping 43 percent discount to last quarter’s book value. Investors may have taken fright too easily.
Granted, the ghouls of Lewis’s expansionism are still rattling their chains. In early August, the bank revealed that it may be on the hook to buy back up to $11.1 billion of mortgages made by the bank or the troubled mortgage business, Countrywide, that it acquired in 2008. That’s up 45 percent from the end of 2009 and almost three times what Wells Fargo’s saddled with and almost four times JPMorgan’s load.
Bankers must be thankful for the surprisingly hot August M&A market. The prospect of more cash-rich firms joining this month’s surprising deal boom is enough to forget the beach. This past week has already been the best in any August since 2006, racking up $90 billion in deal flow. And at almost $200 billion so far, this month could end up beating the record $275 billion in August 1999, according to Thomson Reuters. But the summer scorcher may not lead to more rain on Wall Street.
Even the busiest of Augusts don’t stack up against the rest of the year: the 1999 showing was still almost $100 billion off the 10th-largest month on record, March 2000. And it’s barely more than half the biggest month ever, the $524 billion of deals announced in May 2007.
General Motors’ much anticipated initial public offering filing finally landed on Wednesday. But investors shouldn’t get too caught up in the hype. Sure, the automaker looks in pretty decent shape thanks to last year’s bankruptcy clean-up, and car sales are motoring away from last year’s lows. But to repay U.S. taxpayers in full, GM needs to at least double its earnings.
That’s assuming the carmaker is valued at the same earnings multiple as Ford Motor. Granted, GM and its bankers could argue that it has advantages over its cross-town rival that may warrant a higher valuation. It has far less debt, for starters. And it has a stronger position in fast-growing China.
Fixing up U.S. mortgage finance involves more than just Fannie Mae, Freddie Mac and the private home loan market. The Obama administration was right to finally put the bailed-out mortgage giants on center stage at a conference convened on Tuesday. But the crisis had a third leg: borrowers got ahead of themselves.
In the decade of easy money before the crash, homeownership rates shot up to 69 percent by 2004 from an historical and fairly steady average since the 1960s of roughly 64 percent. This effectively means 5 million properties were bought by people who perhaps should never have owned them. The rate had dropped back to about 67 percent as of June, implying part of the excess has been painfully worked out.
Washington faces a mortgage market conundrum. A conference on Tuesday hosted by the U.S. Treasury is supposed, finally, to start addressing what to do with Fannie Mae and Freddie Mac. But the bunch of fixes proposed by regulators and lawmakers in attempts to make private home loans safer is causing other problems.
Assuming the eventual goal is to sharply reduce the role of government agencies in mortgage finance, then there’s a matching need to increase private sector funding for mortgages. The most obvious difficulty is crowding out by the subsidized agencies. But there are other structural barriers to private lending, too.
It’s more management on the fly at General Motors. That’s certainly the impression left by its sudden change in chief executives. Swapping in Dan Akerson for Ed Whitacre may be a better long-term solution. But clumsily announcing the switcheroo on the eve of a potential IPO filing adds to fears the company isn’t quite ready for prime time.
Not that Akerson is a bad choice. He was involved in GM’s major post-bankruptcy decisions as a board member. And his background running Carlyle’s buyout funds, and before that XO Communications, suggests he has useful restructuring experience.
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.