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from Breakingviews:

JPMorgan loss kicks succession race into high gear

By Rob Cox This column appeared in the May 21 edition of Newsweek magazine. The author is a Reuters Breakingviews columnist. The opinions expressed are his own. A time-honored tradition for handling executive succession on Wall Street is the practice of putting two ferrets in a sack, figuratively speaking. That’s when a bank takes two promising managers and makes them co-heads of the same business. The expectation is that, like two feral mammals clawing each other in the darkness, one will emerge victorious. He will become CEO. The other is named deputy vice chairman of Bolivian equities. JPMorgan has yet to officially haul out the burlap sack, but the $2 billion trading loss it disclosed two weeks ago has accelerated the contest to succeed Jamie Dimon at the top of America’s biggest financial institution.

Not that Dimon is leaving anytime soon. His hair may be silver, but he’s only 56 and has every intention of running the place into his 60s. Moreover, the losses from bets on funky derivatives incurred by the chief investment office in London look manageable for a bank that minted a $5.4 billion profit in the first quarter and boasts nearly $200 billion in capital. But as Dimon readily admits, the trades were dumb. They certainly undermined many of his public arguments for resisting additional regulation of the banking industry. As a consequence, the question of who will one day fill Dimon’s wingtips has become a money-industry parlor game.

For clues, look no further than the cleanup crew for the trading snafu. Two of Dimon’s most capable lieutenants, Michael Cavanagh and Matt Zames, have been handed high-profile roles that will help determine their suitability in the eyes of the board, investors, and regulators to eventually run the $2.32 trillion bank. Zames, 41, is taking over the unit that made the crummy trades. Cavanagh, 46, is leading a team of senior officers to “oversee and coordinate” the bank’s response to the affair.

Both are important tasks. Zames must unwind the problem trades while minimizing losses. Given the size and public nature of JPMorgan’s wagers, that won’t be simple. Having run JPMorgan’s bond trading desk, he should be well-suited to the challenge, though it may be his stint at Long-Term Capital Management, the hedge fund that collapsed in 1998, that’s more applicable to the current situation.

But it’s Cavanagh’s job that has far larger ramifications for the bank as a whole. As Dimon says, “Mike will ensure that best practices and lessons learned are carried across the firm.” Read between the lines, and that means the former chief financial officer’s recommendations may include changes to governance, risk management and corporate controls that implicate flaws in Dimon’s stewardship. How successfully Cavanagh can constructively criticize his boss for the greater good of the institution may determine whether he emerges from the sack as bloodied ferret or CEO.

from Tales from the Trail:

Obama compromised by Wall Street contributions, conservative group alleges

President Obama is too closely tied to Wall Street, claims a new web video that takes the tone of Occupy Wall Street, though it was produced by a conservative group.

The video, released by the American Future Fund, an Iowa-based organization designed to be “a voice for conservative principles” and “free market ideals,” alleges that raising tens of millions of dollars from Wall Street gave Obama reason to let (presumably culpable) Wall Street executives off easy:

“Nearly four years after America’s financial collapse, not a single senior Wall Street executive has been charged with a crime. Not one. Why? Could it be because Obama raised $49 million from Wall Street – more than any candidate in history? He rewarded top Wall Street donors and supporters with senior jobs. His chief of staff made millions from Wall Street -- after Wall Street received billions in bailout money."

The ad names Jon Corzine, the former Democratic senator and New Jersey governor who headed MF Global until it filed for Chapter 11 bankruptcy last fall, as a particular example. Corzine “lost $1.6 billion in customers’ money but hasn’t been charged” the narrator says.

“Under Obama, Wall Street keeps winning, and Obama keeps taking their cash. Tell Obama to stop protecting his Wall Street donors.”

Watch, via the American Future Fund:

from Breakingviews:

When shareholder democracy trumps the real thing

By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own. This column appears in the May 14 issue of Newsweek.

It’s worrying to think that shareholder democracy is needed to rectify shortcomings of the real thing. Yet this week two of the nation’s biggest corporations will give their investors precisely that opportunity. Motions on the ballots at the annual meetings of Bank of America and 3M will effectively act as referendums on the U.S. Supreme Court’s flawed decision in the Citizens United case to effectively hand companies the same freedoms of speech accorded to people. Happily, supporting proposals to restrict the use of corporate money in politics isn’t just good for democracy, it is good business.

In the Citizens United ruling of 2010, the court struck down limits on spending by corporations and unions in politics, holding that such restrictions were prohibited under the First Amendment. The ruling may undermine faith in the democratic process by opening the floodgates for an unprecedented flow of money into campaigns. Justice John Paul Stevens summed it up best in his dissent: “A democracy cannot function effectively when its constituent members believe laws are being bought and sold.”

The Supreme Court could get another crack at the issue thanks to Montana’s high court, which decided the ruling did not supersede state laws on political corruption. In the meantime, though, it will be up to shareholder-citizens to blunt the impact of Citizens United.

They can start on Tuesday in St. Paul and Wednesday in Charlotte when the shareholders of 3M and BofA, respectively, gather. In addition to choosing directors and auditors, they’ll be voting on proposals submitted by Trillium Asset Management of Boston to “request that the board of directors adopt a policy prohibiting the use of corporate funds for any political election or campaign.”

Unsurprisingly, both the maker of Post-it notes and the nation’s largest bank recommend that shareholders turn down the proposals. The companies say they need to have as free a hand as their competitors in, as 3M puts it, “supporting candidates whose views are aligned with the company’s business interests.”

But shareholders must also consider that playing politics can backfire, as the retailer Target <TGT.N> discovered two years ago. After the Citizens United ruling, Target donated $150,000 of its shareholders’ money to a political fund, MN Forward, which supported the gubernatorial campaign of an anti-gay Republican. That led to an embarrassing customer boycott supported by intense social media campaigns. At best Target shareholders received no benefit from company management’s use of their treasure in the political game. At worst, the bosses’ behavior hit the bottom line.  

from Unstructured Finance:

UF Weekend Reads

A dreary looking day in the NYC environs today, but that won't overshadow birthday celebrations and other good news too cheer! A big shout to all UF members today. Oh, and fight for your right to party. Here then is Sam Forgione's suggested readings.

From The New York Times:

A former managing director of Bain Capital has a telling beef with art-history majors.

From AR:

Hedge fund managers are still leaving their safety zones for emerging markets, even as John Paulson is recovering from his Sino-Forest bet, writes Jan Alexander.

From The Washington Post:

from Breakingviews:

Nerds may get revenge on Woodstock of Capitalism

By Agnes T. Crane The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

This year’s Woodstock of Capitalism could turn into the revenge of the nerds. For the first time in the history of the closely watched annual gathering of Berkshire Hathaway shareholders, financial analysts have been invited to pepper Warren Buffett with questions in front of the 35,000 or so who will gather for the event. It’s the latest sign that times may be a-changin’ for the company.

The presence of spreadsheet-wielding Cliff Gallant of Keefe, Bruyette & Woods, Jay Gelb of Barclays Capital and Gary Ransom of Dowling & Partners won’t necessarily make the event any less festive or overly pointy-headed. But their addition to the trio of business journalists regularly brought in to pose questions should at least subtly reorient the meeting in a welcome way from the Oracle and his longtime right-hand man Charlie Munger to the nitty-gritty of the sprawling $200 billion conglomerate.

Berkshire has come a long way since the two octogenarians teamed up to create one of the most successful investment companies in the world. Their insights are still highly sought after at the Omaha powwows. But Berkshire has become much more than a glorified mutual fund. Big ticket purchases like railroad Burlington Northern and chemical manufacturer Lubrizol underscore the shift. As far as returns go, earnings from operations will increasingly become more relevant than stock picks.

Buffett’s recent diagnosis of prostate cancer, though it looks manageable, is also a reminder that he and his homespun touch won’t be around forever. So it’s not a bad idea to bring in the pocket-protector set to hopefully grill the Berkshire boss on some of the particulars that can get overlooked in the quest for his views on topics as wide-ranging as how to parent rich kids. It’s even more true now that the company’s book value has become so incredibly difficult to estimate - and can trigger future stock buybacks.

It could make for a slightly more sober affair. That may be a relief to some shareholders, especially after last year’s insider trading scandal involving potential Buffett successor David Sokol tainted the affair. Even the Woodstock generation eventually had to grow up.

from Breakingviews:

Even Predators’ Ball saves a dance for 99 pct

By Rob Cox The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s easy to spot vestiges of the old Predators’ Ball at this year’s Milken Institute Global Conference. The Ferraris and Bentleys jamming the Beverly Hilton driveway, for example, are evocative of the annual shindigs that Michael Milken put on for his Drexel Burnham Lambert clients in the go-go 1980s. Yet there’s a consensus emerging even among this elite demimonde that the rising disparity between the rich and the rest is a problem in need of attention. They disagree, however, on the solutions.

At its heart, this gathering of some 3,000 folks is an opportunity for Milken to reunite former cronies and customers from the Drexel diaspora to talk business and big ideas - and maybe party a little (though the legendary exploits of its precursor have been replaced with the mellower tones of Lionel Richie). Among the more notable Friends of Mike are Leon Black, who went on to start private equity powerhouse Apollo after Drexel went under, and Joshua Friedman, who established hedge fund Canyon Capital.

Among the attendees, there are more successful bankers, traders and investors who worked for Drexel or one of its many offshoots - from Jefferies to DLJ to Credit Suisse - than there are valet parking spots. They’re clogging conference rooms to hear panels on “Easy Money: Consequences of the Global Liquidity Glut” or “The Art of Collecting: Los Angeles and the Global Art Market.”

Despite the concentration of wealth, the most talked-about event was a lunch panel entitled “What’s Happened to the American Dream?” Most surprising was the absence of any apparent disagreement over its premise: that a decline in economic mobility and rising wealth disparity creates risks that endanger the stability of the capitalist system that has been so kind to Milken’s adherents.

Panelists sparred over possible remedies. Congressman-turned-banker Harold Ford took issue with Harvard University fellow Niall Ferguson’s contention that government welfare programs bear much of the blame. And judging by the applause for Ferguson’s position, it’s safe to assume there’s little sympathy for the redistributive chants emanating from a revived Occupy Wall Street movement. Either way, it’s clear that these one-time predators aren’t comfortable with the idea that the status quo will make them prey.

from MacroScope:

Ferguson’s fury: Harvard historian decries female welfare recipients

Another panel, another group of rich guys talking about income inequality in America.

That seemed to be a running theme of the Milken Global Conference by the time Tuesday afternoon rolled around in Los Angeles – particularly when the well-known and notably tart Harvard historian Niall Ferguson took to the stage to decry single welfare moms as lazy drags on society.

Ferguson was responding to comments made by Jeff Greene, the billionaire real estate investor and Democrat who lost (badly) a 2010 bid to represent Florida in the Senate.

Greene recalled a single mother with five children he met on the campaign trail. She was fat ("over 300 lbs") and depended on a welfare check of just over $600 to put food on the table for her kids, once numbering five. But one kid died in a gang fight, another was locked up and two others were involved in gangs and the drug trade, Greene recalled.

"She could barely take care of herself, much less her kids," he said, resigned to the idea that this unnamed woman would never work or even attempt to work, much less wean herself off welfare.

While Greene was busy commenting on how society needed to change for the sake of those kids and other members of the future workforce, Ferguson cut him short.

Why, he wondered, was Greene letting this lady off the hook? Why doesn't she get up off her fat lazy butt and get a job?!, he demanded, with his Scottish brogue in full Braveheart mode.

from MacroScope:

Is that a bailout in your pocket?

There was an awkward moment of tension at the Milken Global Conference in Los Angeles, when a buysider on one panel asked a Wall Street banker whether he had pocketed taxpayers' bailout cash.

The tit-for-tat began when several panelists at the "Outlook for M&A" session began griping about the U.S. government's tax policy, which they said dissuades corporations from bringing overseas profits back home because of punitive taxes.

The panelists – including James Casey, co-head of global debt capital markets for JP Morgan, Anthony Armstrong, an investment banker at Credit Suisse, and Raymond McGuire, global head of corporate and investment banking at Citigroup – predicted that the M&A market might get a big boost if the U.S. were to offer a tax holiday of sorts for repatriated profits.

They also suggested such a move could be a boon for hiring and economic growth: Tilman Fertitta, a panelist who is chairman and CEO of the consumer products company Landry's, said he would certainly feel the incentive to do more deals and invest more at home if he could bring back his overseas profits without being taxed. He even wondered why Mitt Romney and Barack Obama hadn't made such a proposal a key point in their election campaigning.

But just before the executives could launch into a profit repatriation samba, another panelist stopped the music.

Maria Boyazny, CEO of distressed debt investing firm MB Global Partners, pointed out that previous government actions that were supposedly intended to spur the economy had only saved Too Big To Fail banks and bolstered the financial industry's fortunes. ("No offense to anybody on the panel," she said in that but-I'm-going-to-offend-you-anyway tone.)

In the intervening time, she said, corporate America has only gotten richer by cutting jobs and hoarding capital. She then wondered aloud where all the $700 billion in bailout money and trillions of dollars in Federal Reserve stimulus programs had actually gone.

from Breakingviews:

TARP success doesn’t make it good finance

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The dramatic $700 billion bailout of U.S. banks calmed markets and helped stabilize the financial system, but that doesn’t mean taxpayers will see any direct returns from the investment. The Treasury says the Troubled Asset Relief Program might turn a profit. But the agency’s fuzzy math wouldn’t fly with any sensible portfolio manager. What it calls a gain looks more like a loss of at least $230 billion.

Treasury’s rosy projections aren’t half as bad as its methodology. The government declares a return when an investment’s payments exceed the initial cash outlay. That boldly disregards the cost of money and its value over time.

By contrast, consider Warren Buffett’s bet on Goldman Sachs. In the thick of the crisis, he loaned the bank $5 billion in exchange for 10 percent annual interest and stock warrants. Goldman paid back the Oracle of Omaha a few years later. Though hanging on to the warrants may cost him in the end, even without them he booked an annualized return of 14 percent.

Compare that to TARP, which had seven broad components. Start with the banks. Treasury estimates an ultimate profit of $22 billion. Even if that’s achieved by year’s end, taxpayers will have earned a paltry annualized return of 2 percent. Simply investing in the S&P 500 index would have earned 14 percent a year. Worse, applying Buffett’s Goldman return as the risk-based cost of capital turns the net present value of the bank rescue into a loss exceeding $15 billion.

Then there’s Fannie Mae and Freddie Mac. Treasury says its “loss” may shrink to $28 billion in a decade, generously assuming that profits from the giant mortgage backers will exceed housing-bubble era averages. Even using that questionable projection generates a net present value loss of $88 billion. Tabulate automakers and AIG similarly, figure a $28 billion loss on mortgage backed securities Treasury bought and sold, and accept Treasury’s estimated $46 billion loss on foreclosure programs and its $3 billion gain on its flop of a public-private toxic asset scheme - and it all adds up to a whopping $230 billion loss, adjusting for the cost of capital.

Even using a more conservative discount rate of 10 percent would still leave the loss at over $190 billion. The U.S. Treasury isn’t a hedge fund, so was willing to invest poorly for the bigger, unquantifiable return delivered by stability. But rather than try and obscure the painful price tag of its rescue, it should be emphasizing that avoiding a global meltdown was worth the cost.

from Unstructured Finance:

UF Weekend Reads

Nice weather today in NYC. Enjoy it today before Sunday's deluge. Here's Sam Forgione's picks. You can now follow Sam on twitter @samuelforgione

From The New Yorker:

Nicholas Lemann explores new books that illustrate the ties between politics and the economy.

From BusinessWeek:

Lazard's Michele Lamarche takes on the tough task of courting debt-strapped nations.

From Harvard Business Review: