Goldman Sachs is coming down to earth with a bit of a bump. Sure, the Wall Street giant’s third-quarter earnings of $1.9 billion handily beat analysts’ expectations. That’s good news in any quarter, and especially after talk of a summer slowdown. But Goldman’s results usually lead the pack. Not this time.
Take the firm’s market-leading franchise in fixed income, currency and commodities trading, where revenue fell 14 percent from the second quarter, or around 10 percent once accounting for losses taken marking up the value of its own debt.
Vikram Pandit has snatched some of Jamie Dimon’s market mojo. The JPMorgan boss has been setting a smooth tone for earnings season of late. But growing foreclosure fears overshadowed the bank’s latest set of decent results. Now Pandit, his counterpart at Citigroup, seems to be the one reassuring investors.
That might not make immediate sense. After all, it’s not as if Citi’s third quarter was a blow-out performance. Its $2.2 billion of earnings equates to an annualized return on equity of just 5.4 percent, below what the bank reported in the previous two quarters and virtually half what JPMorgan managed in the three months to September. And Citi had to rely on its lower tax rate of just 21 percent to eke out even that paltry return.
Prospective investors in General Motors’ upcoming initial public offering have the automaker and its majority investor, the U.S. Treasury, over a barrel. Sure, GM is pottering along nicely and no longer burning cash. But the early hard sell about the size and timing of the deal has backfired, leaving Treasury looking like a distressed seller.
For months, the message leaking from Detroit was that GM’s share sale would raise up to $20 billion, which would make it the largest ever U.S. IPO. On top of that, insiders, from top executives like Ed Whitacre to Treasury Secretary Timothy Geithner, fanned expectations the deal would launch in the fourth quarter.
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.