Opinion

Ben Walsh

from Felix Salmon:

Counterparties: Ending capital punishment

Ben Walsh
Mar 6, 2013 23:27 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 toCounterparties.Reuters@gmail.com.

Apple may want to keep its capital, but big US banks want to return some of theirs. Tomorrow the Fed will release the first set of data from its stress tests. Bank execs will have to wait until next week to find out whether they’ll finally be allowed to return more capital to shareholders.

Bloomberg’s Dakin Campbell and Hugh Son write that US banks may return $41 billion to investors over the next year, using the average of estimates from research analysts at Barclays, Credit Suisse, and Morgan Stanley. As David Benoit notes, this is a turnaround from last year, when Bank of America and Citi were forced to keep their payouts at a pro forma cent a share.

Bank earnings rose 20% in 2012 and executives want to hand capital to shareholders, even if, as Benoit writes, they’re unlikely to return enough to drive major moves in bank stocks. Before they can do so, big banks must pass the Fed’s stress tests, which simulate two scenarios. Scenario 1 is six consecutive quarters of economic contraction with rising interest rates; Scenario 2 is 13% unemployment combined with a 52% fall in the stock market.

Jesse Eisinger thinks Bank of America, for one, is being overoptimistic with respect to the amount of capital it’s showing regulators. He says that the bank has low-balled the amount money it has set aside to pay future legal settlements, despite continuing to face lawsuits related to its ill-fated acquisition of Countrywide.

Jamie Dimon, consistent flip-flopper

Ben Walsh
Mar 1, 2013 15:47 UTC

He’s alternatively demonized and deified, but Jamie Dimon is rarely called a flip-flopper. You wouldn’t know it from recent reporting, or ego-revealing anecdotes and quotes, but he’s been surprisingly inconsistent on the issue of financial regulation.

He’s famously said some very negative things about financial regulation reform: accusing regulators of undermining economic growth; predicting that increased capital requirements would be “pretty much putting the nail in our coffin for big American banks”; comparing regulation of Wall Street pay to communist Cuba; and graphically condemning the organizational complexity of JP Morgan’s regulators.

But there’s also a mellower side to Dimon’s views on regulation. He doesn’t want to do “do a bunch of stupid stuff” (who does?), but he’s fine to “wait and see” what the impact of the Volcker Rule is. He agrees that higher capital ratios are an important factor in decreasing systemic risk and thinks increased liquidity requirements are, on balance, positive for markets (cut to the 1 hour, 50 minute mark). Dimon has even gone as far as saying that Dodd-Frank will help JP Morgan gain market share.

from Felix Salmon:

Counterparties: Bigger slices, bigger pie

Ben Walsh
Feb 26, 2013 23:10 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.

Right now is a lucrative time to be a banker. Profits at US banks rose almost 20% in 2012, to a post financial-crisis high of $141.3 billion*. The securities industry, while still unable to match its record-setting 2009 profits, is also doing well, earning $23.9 billion last year, up from $7.7 billion in 2011.

Despite America’s persistently high unemployment and tepid growth, its financial employees are doing well. New York State’s Comptroller Thomas DiNapoli, in his annual report on the state’s financial industry, reports that securities firms increased cash bonuses 8% to $20 billion in this bonus cycle. As the WSJ's Brett Philbin notes, that’s down 42% from the lofty levels of 2006 -- but it still comes to more than $122,000 per banker. What’s more, the comptroller's annual estimate is conservative: it fails to capture many types of deferred pay. For instance, $6.3 million of Citigroup CEO Michael Corbat’s $11.5 million 2012 pay is deferred.

Citi’s bold new compensation plan replaces one adjective with three bullet points

Ben Walsh
Feb 25, 2013 21:39 UTC

The last time Citigroup tried to pay its CEO, shareholders freaked out, albeit in a ceremonial way. This time around, Citi has made some changes to the way it pays its CEO. Antony Currie thinks the “broad structure [of the plan] looks good”. The problem is that structure is basically a compilation of cosmetic changes that won’t do much to prevent the exact kind of decisions that got shareholders so enraged last year. Despite that, they’re probably probably just enough to discourage the intense criticism the bank faced last year.

Here’s Nathaniel Popper and Jessica Silver-Greenberg’s succinct characterization of the new status quo:

[Citigroup] announced on Thursday that part of the $11.5 million in compensation awarded to the new chief executive, Michael L. Corbat, would be closely tied to performance.

from Felix Salmon:

Counterparties: All loans are risky loans

Ben Walsh
Feb 20, 2013 23:27 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.

What if boring banking is actually dangerous? James Surowiecki, citing research by Christian Laux and Christian Leuz, argues that it wasn’t high finance that pushed banks to fail during the financial crisis. Instead, banks simply “lent themselves right into insolvency”. Anat Admati and Martin Hellwig make the case in their book, “The Banker’s New Clothes”, that traditional lending can be just as risky as more as complex trading strategies -- it also didn’t help that banks borrowed excessively. Their solution: banks should fund themselves with more equity and less debt.

Tom Braithwaite thinks that’s already happened and that the desire to increase return on equity, which is well below its pre-crisis peak, will make banks safer. “They are channelled away from [riskier activities] because Basel III puts tough ‘risk weights’ on riskier businesses... safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’”. That placid view, however, is countered by the role that reducing risk-weighted assets seems to have had in spurring JP Morgan’s London Whale debacle.

The key to unlocking shareholder value: Mayonnaise tweets

Ben Walsh
Feb 15, 2013 14:07 UTC

Attempts to explain why markets move are generally pretty silly, as proven by qualitative case studies. Just look at this master class from CNBC, which spends five minutes offering a dozen different explanations for why the market might be doing what the market is doing. All twelve reasons could be right, or they could be wrong, or the truth might lie somewhere in any one of the millions of permutations of those dozen explanations.

That of course is why people believe these explanation, because they’re stories. For instance, here’s an amusing theory: Groupon stock rises because the petulant CEO tweeted his displeasure about the way mayonnaise is dispensed at sandwich stores. It exists — George Anders has written it at Fortune. First, here’s the rundown of Mason’s comments:

Mason deplores some sandwich shops’ habits of putting mayonnaise on their lunchtime creations, regardless of whether customers want mayo or not. Mayonnaise by default “makes no sense,” Mason asserts. It would be much better if sandwich shops let customers decide for themselves whether to put mayo on their bread. Abstainers would enjoy a mayo-free meal; indulgers would savor their spread on less soggy bread.

An economic minister, a banker, and a hedge fund manager walk into a meeting

Ben Walsh
Feb 13, 2013 18:14 UTC

The first sentence of this Bloomberg story about Russia’s latest investor charm offensive could be real conspiracy fodder, if it weren’t in fact so mundane: “Goldman Sachs has been hired by the Russian government to burnish the nation’s image overseas and attract more institutional investors”. Goldman Sachs makes millions convincing community banks to buy mortgage securities backed by Black Sea housing projects! Or something else that a Matt Taibbi column auto-generator would spit out.

What’s actually going on is pretty simple, and not that unusual, even if it is buried almost halfway through the story. Goldman Sachs has an agreement with Russia “similar to a corporate broking arrangement”, which are very common. The services provided here are pretty nondescript — setting up meetings with investors, handling the logistics of getting executives or government ministers from city to city, providing a modicum of input on what should and shouldn’t be said.

For a company or country, the value is pretty clear. They get to meet with investors, which they were probably going to do anyway. With a bank involved, the head of investor relations has an easier job: he gets someone else to blame when a meeting with a mildly unsavory hedge-fund that is probably short the company’s stock gets onto the day’s schedule.

from Felix Salmon:

Counterparties: A minimal vision at Barclays

Ben Walsh
Feb 12, 2013 23:26 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.

At the recently revamped house of Barclays, the inspiration for the full-year earnings announcement was minimalism: 3,700 fewer employees, $2.6 billion in cut costs, and promises to reduce the size of what the Guardian called its “industrial scale” tax avoidance business. There was, however, an inevitable hangover from the the prior regime: a $1.6 billion loss in fiscal-year 2012. That came thanks to the $1.6 billion set aside to compensate clients for mis-selling derivatives and loan insurance.

Extolling the virtues of virtue appears to be key to the new identity. New CEO Anthony Jenkins described the results of a strategic review, which was sparked by Barclays role in the Libor-fixing scandal. Business units, Jenkins said, will be evaluated, in part, on “their strategic attractiveness, including their impact on Barclays reputation”.

from Felix Salmon:

Counterparties: The devil’s in the emails

Ben Walsh
Feb 6, 2013 22:49 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.

There’s a certain inevitability to RBS’s $612 million Libor-rigging settlement and the Justice Department’s civil charges against S&P for faulty ratings. Like at Barclays, Goldman Sachs, Standard Chartered, and UBS, RBS and S&P’s scandals come complete with how-could-they-put-that-in-writing electronic communications.

RBS’s contributions to this now-venerable tradition come courtesy of the CFTC and FSA, and are wrapped up nicely by Dealbook and FT Alphaville. One trader asked that the rate set be at a certain level by writing to the submitter that “if u did that i would come over there and make love to you”. Another said  “its just amazing how libor fixing can make you that much money”. Believing that the US dollar Libor was being watched by the Fed, a Yen trader said “dun think anyone cares the JPY Libor”. Scattered throughout is the requisite amount of trading floor profanity, along with a decent number of emoticons.

from Felix Salmon:

Counterparties: Not all that bursts is a bubble

Ben Walsh
Feb 5, 2013 22:53 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.

If you aren’t terrified about the coming bond bubble, you should be, according to those who have taken it upon themselves to play interest-rate Paul Revere. Finance heavyweights like Lloyd Blankfein, Gary Cohn, Bill Gross, and Jeff Gundlach have each voiced their concern. Fitch has chimed in too.

There’s nothing particularly new about these warnings. Businessweek’s Roben Farzad charts the “many cautionary, even alarmist, headlines” that have appeared over the last six months. Quartz’s Matt Phillips says that we are now in the fifth year of headlines warning of a spike in rates.

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