Opinion

Ben Walsh

Vikram Pandit, “create and capture” victim

Ben Walsh
Oct 26, 2012 21:06 UTC

When Vikram Pandit was ousted just a day after Citigroup reported earnings last week, he tried defuse most observers’ surprise, insisting that he had “been thinking about this for a long time”. That was a pretty feeble defense: in August he was telling people that he planned to say on as CEO for “several years“.

Thanks to reporting from Jessica Silver-Greenberg and Susanne Craig in the NYT, we now know Pandit didn’t see any of last Tuesday’s events coming:

Having fielded congratulatory e-mails about the earnings report in the morning that suggested the bank was finally on more solid ground, Mr. Pandit strode into the office of the chairman at day’s end on Oct. 15 for what he considered just another of their frequent meetings on his calendar.

Instead, Mr. Pandit… was told [by Citi Chairman Michael O'Neill that] three news releases were ready. One stated that Mr. Pandit had resigned, effective immediately. Another that he would resign, effective at the end of the year. The third release stated Mr. Pandit had been fired without cause. The choice was his.

The sources behind this new information are allies of Pandit who think O’Neil was “needlessly ruthless” and that Pandit’s performance was good, context considered. But this more detailed account doesn’t make much of a case that Pandit was mistreated. Silver-Greenberg and Craig write that “interviews with people close to the board describe how the chairman maneuvered behind the scenes for months ahead of that day to force Mr. Pandit out and replace him with Michael L. Corbat, the board’s chosen successor”. O’Neill began to work to get rid of Pandit from day one. He started with the board kept widening the circle of people who knew his intentions until Pandit had “no allies left”. Yet Pandit was “stunned”.

from Felix Salmon:

Counterparties: Earnings #fail

Ben Walsh
Oct 25, 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

The routine is simple: four times a year, public US companies release their results (54 companies reported today alone). Traders react, analysts weigh in, the media explains and we all move along, ready to repeat the whole thing in three months. How hard can it be? Plenty hard, it turns out.

First out of the blocks this week was Google. Or, rather, RR Donnelley, the financial printer that accidently filed Google’s earnings release early, incomplete and without authorization; the shares had to be suspended for most of the afternoon.

from Felix Salmon:

Counterparties: Why did markets move?

Ben Walsh
Oct 23, 2012 22:06 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

Today, the Dow Jones ended down 1.82% and the S&P 500 was off 1.44%. Of course, the media needed to come up with a reason why.

Here's a video from CNBC this morning that's just over five minutes long but offers a dozen reasons why stocks are down:

The Yogi Berra refi market

Ben Walsh
Oct 18, 2012 20:00 UTC

Last week I pointed to JP Morgan and Wells Fargo’s earnings as the latest evidence of refinancing boom in the US housing market. Cue a lengthy piece by Chris Taylor that seems to dent my thesis by highlighting the “hell” of actually refinancing a mortgage.

Anecdotally, Taylor’s piece is worrying, if not entirely shocking. Banks are capable of incredible feats of bureaucratic annoyance and the refinancing process is no different (see the comment here that echoes Taylor).

But these annoyances aren’t stopping the refi boom on a macro level. At the beginning of the month refinancing applications reached their highest levels since 2009 and and bank earnings show these applications are being converted into loans. Applications have dropped off slightly over the past few weeks, but there hasn’t been a real change in the dynamics that have driven refinancings for the last three quarters. And with an unlimited amount of QE3 fuel to burn, high levels of refis will continue.

from Felix Salmon:

Counterparties: Fragile China

Ben Walsh
Oct 18, 2012 22:16 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

As goes China's growth rate, so goes the world economy -- slowly. In the third quarter, Chinese growth dropped to 7.4% from 7.6% in the third quarter, the NYT's Bettina Wassener reports. That's the slowest growth rate since 2009 and below the government's target of 8%.

Despite companies like Nestlé and Nokia saying that China's slowing demand hit their profitability, indicators like industrial production and retail sales did increase. It’s also worth remembering that the Chinese economy has the wind of a $157 billion infrastructure program at its back.

from Felix Salmon:

Counterparties: Pandefenestration

Ben Walsh
Oct 16, 2012 21:47 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

Just one day after his company reported third quarter earnings, Vikram Pandit is unexpectedly out as Citigroup's CEO. Pandit and the board don't agree on why. Pandit claims that resigning was his decision and that he "been thinking about this for a long time". The board sees things differently. It reportedly ousted Pandit due to Citi's subpar financial performance and his "poor execution".

Pandit is being replaced, effective immediately, by Michael Corbat, the man who until yesterday was responsible for Citi's business in Europe, the Middle East, and Africa. As recently as August, such a change seemed unlikely. Pandit "told colleagues that he intends to stay [on as CEO] for several years", according to Suzanne Kapner at the WSJ. Even then, however, there was increasing pressure from the board of directors to outline succession plans and groom his potential replacements.

from Felix Salmon:

Counterparties: Economists who did good

Ben Walsh
Oct 15, 2012 22:20 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

Lloyd Shapley and Alvin Roth have won the Nobel Prize in economics "for the theory of stable allocations and the practice of market design". To put it differently, they won the Nobel for their work on "matching markets" through investigations into marriage, or dwarf tossing, or illegal horse meat.

Alex Tabarrok of Marginal Revolution drills down into exactly why matching markets matter to our everyday lives: "Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients."

A bubble we can use: mortgage refinancing

Ben Walsh
Oct 12, 2012 22:45 UTC

Since the financial crisis, banks have struggled to fill the multi-billion-dollar hole that mortgage securitization caused in their income statements. Announcing their quarterly earnings this morning, JP Morgan and Wells Fargo seem to have found at least a partial replacement: mortgage refinancing.

JP Morgan’s third quarter produced a record $5.7 billion in profit. Importantly, that result also reversed a four-quarters-long trend of declining year-over-year financial performance. Their mortgage business originated $47 billion in loans and produced a record $2.4 billion in revenue (full financial details here). But this wasn’t a sudden blow-out: JP Morgan has had over $2 billion in mortgage related revenue for each of the first three quarters of 2012, a 234% increase over the same period in 2011.

Wells Fargo also came in with a strong $4.9 billion in profit, up 22% from last year’s third quarter. They originated $139 billion in mortgages and $131 billion in the second quarter.  Mortgage revenue and income were down substantially, but only, it seems, because of a decision to keep more mortgages on balance sheet, thus missing out on an estimated $200 million in revenues from selling mortgages it originated. But the value is still there.

from Felix Salmon:

Counterparties: Small enough to fail?

Ben Walsh
Oct 11, 2012 22:13 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

Too big to fail is a problem that has ostensibly been solved, thanks in part to banks' "living wills". But, as Sheila Bair has argued, simply saying that you're no longer too big too fail does little to remedy the market's perception of an implicit government backstop.

Daniel Tarullo, the Fed's expert this thorny issue, has a simple proposal -- he wants to limit the amount that banks can borrow from the markets.

Why un-revised jobs numbers matter

Ben Walsh
Oct 9, 2012 19:14 UTC

Ignore Friday’s completely baseless conspiracy-mongering from Jack Welch about the jobs numbers. The really interesting and pretty simple question is whether you should even pay attention to the Bureau of Labor Statistics’ monthly jobs data and economists’ predictions of them at all. Matt Yglesias argues the revisions are consistently large enough that we should all just chill out and just wait for more reliable data. He’s not alone in scolding the hype surrounding a number that’s going to change anyway. If you’re an ordinary observer, that argument makes complete sense. If you’re a trader, though, there’s plenty of reason to pay attention to the initial numbers: it moves markets, and that’s as much a rationale as a trader needs. There’s also a data-driven explanation of why both economists’ consensus of the initial number and the number itself should move markets.

This month, BLS’ numbers showed that the US economy added 114,000 jobs in September. Based on the Reuters poll of economists, the consensus prediction was an increase of 115,000.  In the context of a labor force larger than 150 million people, that’s a pretty accurate prediction. Economists aren’t always that good, of course, but they’re better than most people think.

Over the last ten years, according to data from Thomson Reuters Datastream, the correlation between the economists’ consensus, represented by the Reuters poll, and the initial BLS reported number has been 0.921 — darn strong. And much stronger than the correlation between the the far less labor-intensive “it’ll just be the same this month as it was last month” method: month over month correlation is 0.811. That gap between the two correlations quantifies the skill and expertise that goes into producing economists’ consensus. Consensus is the closest thing we have to tomorrow’s jobs numbers today and it tends to be closer than it’s given credit for.

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