Opinion

Ben Walsh

from Felix Salmon:

Counterparties: Breaking up, with Sheila Bair

Ben Walsh
May 25, 2012 21:31 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Sheila Bair, never too shy to make modest proposals, thinks that JPMorgan Chase should voluntarily split itself up:

[The] bank is worth more in smaller, easier-to-manage pieces. Let's face it, making a competitive return on equity is going to become even harder for megabanks as their capital requirements go up, their trading and derivatives activities are reined in, and their cost of borrowing rises as bond investors recognize that too-big-too-fail is over.

Or, as David Merkel puts it in a different context: "complexity has a price; avoid it unless well compensated for it". And, Felix notes, setting the Volcker Rule aside, if a business requires complexity and opacity to generate profit, it should be spun out of too-big-to-fail institutions. That would be a complex task, but things only grow murkier once a firm has failed.

The FDIC continues to clarify its resolution authority and currently thinks the best method to handle the failure of a large, complex financial institution is to place the "parent company into receivership and to pass its assets, principally investments in its subsidiaries, to a newly created bridge holding company". Stephen Lubben doubts that the hundreds of billions of dollars in private debtor-in-possession financing required for a tidy resolution to work would be available during a financial crisis.

Goldman gives itself a decade to clear a low bar on clean energy

Ben Walsh
May 25, 2012 16:18 UTC

With its third-ever tweet, Goldman Sachs announced its intention to finance or invest $40 billion in clean energy over the next decade (also known as $4 billion a year for 10 years). But you won’t hear Goldman say $4 billion a year. In an attempt to generate impressive headlines, Goldman decided to go with a number that looked big and settled on $40 billion.

Put that commitment in the context of Goldman’s overall investing and lending activity and its lack of heft is obvious. In 2011, Goldman Sachs did $258 billion in financing and made investments worth another $4.4 billion. Goldman’s $4 billion clean energy commitment is just 1.5% of this $262 billion total. And that number drops to 1.3% if you compare $4 billion to Goldman’s 2010 financing and investing activity. If the overall levels investing and financing grow, as I’m sure Goldman is planning for, the clean energy commitment becomes even more irrelevant compared to the firm’s comparable mainline businesses.

Things don’t look much better in the context of the overall clean energy market. Compare Goldman’s commitment to the $260 billion market for clean energy investing and financing in 2011 and you get get a market share of 1.5%. I can’t imagine Goldman ever tolerating, let alone celebrating, 1.5% market share in equity underwriting, M&A or any other business it was serious about.

from Felix Salmon:

Counterparties: Private equity’s public relations

Ben Walsh
May 24, 2012 21:44 UTC

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After Cory Booker's Meet the Press mishap, Noah Smith asks a great question: What does an economy without private equity look like? Smith says we should "sic the pirates on the zombies" of corporate Japan, where there isn't an active PE industry, productivity is low and labor costs are high.

In the US, the private equity industry's advocacy arm continues to focus on PE's role as a job creator, releasing another in a series of videos showcasing job growth after a PE acquisition. But Steven Rattner notes that job creation isn't the industry's primary goal. Private equity, he says, seeks profit first and "any job creation [is] a welcome but secondary byproduct".

from Felix Salmon:

Counterparties: The CBO rates the fiscal cliff

Ben Walsh
May 23, 2012 21:45 UTC

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The Congressional Budget Office released its analysis of the economic effects of the so-called fiscal cliff, and it's not pretty:

Growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent ... with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half ... such a contraction in output in the first half of 2013 would probably be judged to be a recession.

You say princelings, I say elite corps of investment bankers

Ben Walsh
May 23, 2012 05:39 UTC

A key part of the fascinating story of Bo Xilai’s fall from power is the opaque economic dealings of China’s ruling class. Or more specifically, of its so-called princelings, the oddly lyrical and wonderfully infantilizing term used for the now powerful descendants of former party leaders.

The New York Times has a great look at how princelings use their dynastic political and social power for economic gain. The son of former President Jiang Zemin, for instance, has brokered deals giving Dreamworks, Microsoft,  and Nokia access to the China and also manages numerous state-funded investments. His behavior is quite typical. Princelings, we are told, “often [play] central roles in businesses closely entwined with the state”, “[serving] as middlemen to a host of global companies and wealthy tycoons eager to do business in China” and have a Zelig-like ability to be “everywhere, as long as the industry is profitable”.

Thinking about this behavior in a slightly different context, aren’t princelings just really good bankers?

from Felix Salmon:

Counterparties: Facebook’s share price is a number

Ben Walsh
May 18, 2012 20:56 UTC

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Facebook is now a public company. And on its first day of trading, Facebook, well, traded, and investors who bought a $38 stock now own a $38 stock, after Facebook's underwriting banks stepped in.

Here's a great graphic from the NYT that puts Facebook's offering in the context of previous tech IPOs (hint: it was pretty damn big). For stock analysis, here's NYU professor Aswath Damodaran. And for bearish perspective, take a look at Friendster and its nagging investors; MySpace and its "mismanagement, a flawed merger and countless strategic blunders"; and Ning with its wildly overblown notions of "double viral expansion loops."

from Felix Salmon:

Counterparties: 1 Pinterest=1.5 Instagrams

Ben Walsh
May 17, 2012 22:01 UTC

As Facebook, at eight years of age, prepares for its landmark IPO, two-year-old Pinterest has managed to raise $100 million at a jaw-dropping $1 billion valuation. If you're scoring at home, 1 Pinterest = 1.5 Instagrams.

Both Pinterest and Instagram are perfect examples of the delicate art of valuing companies with little to no revenue. This conundrum also faced investors in Tumblr, Foursquare and Twitter. Of course, when you have zero revenue, current revenue multiples are not the right place to turn to justify an investment. As the WSJ's Dennis Berman put it:

@dkberman: Oct. 2011: Pinterest is valued at $200M, roughly infinity times revenue. May 2012: Pinterest valued at $1.5B, roughly infinity times revenue.

from Felix Salmon:

Counterparties: Your massive guide to JPMorgan’s failed hedge

Ben Walsh
May 11, 2012 21:23 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

It turns out we probably should fear Voldemort. Yesterday Jamie Dimon hastily scheduled a 5 p.m. conference call in which he was forced to explain a sudden $2 billion loss in his Chief Investment Office, a division that was supposed to safely hedge the bank's risk.

JPMorgan's stock fell more than 9% on the news. Dimon, who last month called the issue a "tempest in a teapot", said the hedges implemented by the "London Whale" (aka Bruno Iksil) were a "bad strategy, executed poorly"; he also conceded "many errors", "sloppiness" and "bad judgement".

Why Goldman accused the Fed of killing jobs

Ben Walsh
May 11, 2012 15:45 UTC

On April 30, Goldman Sachs sent a letter to the Fed commenting on the implementation of a number of regulations. The Fed then published the letter and the FT quickly zeroed in on the most explosive claim it contained: if counterparty exposure limits were implemented as proposed, real GDP growth would slow by between 0.15 and 0.40% per year. The result, said Goldman, would be the loss of between 150,000 and 300,000 US jobs.

300,000 US jobs, killed by the Fed with a single rule. In an economy struggling to create 115,000 jobs in single month, the idea that regulation could wipe out more than twice that number is alarming. And very specific. As Mark Gongloff noted, almost too specific.

The Fed’s proposed rule limits the amount of exposure financial firms can have to a single other counterparty. Large firms like Goldman would be limited to 10% of total credit exposure, while smaller firms would be limited to 25%. The idea is that if a central counterparty goes bust, it won’t take other big players down with it.

from Felix Salmon:

Counterparties: Pondering a Grexit

Ben Walsh
May 9, 2012 22:05 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

Europe's "slow motion trainwreck" – Nouriel Roubini's words, not ours – now looks increasingly like it's coming closer to a halt for Greece.

After elections last week, the Greek left has been unable to form a coalition, and the country may be forced to have yet another election. Greece's left is refusing to join a coalition with any party that supports austerity, which puts the country in an extremely tough position between euro zone-led economic goals and mass dissent. The BBC's Paul Mason, who suggests that "to be in power [in Greece] is to commit political suicide," puts the predicament this way:

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