Commentaries

Cazenove lives it large in ECM

Thomson Reuters data on equity capital markets activity over the first 9 months of the year throws up some pretty exciting data if you are a Cazenove shareholder.

Top of the European league table by a country mile sits JP Morgan with $33.5 billion of deals. And that figure incorporates the ECM deals done by JPM’s UK subsidiary (50 percent plus a share) JP Morgan Cazenove. On its own JPM Caz was responsible for $24.2 billion of deals, making it top of the table by some distance. Its nearest rival was Morgan Stanley with $15.5 billion of deals.

This figure has particular resonance because of the possibility that JPM might buy out the Cazenove stake in JPM Caz.

$24.2 billion is a touch under 15 billion pounds. Underwriting fees are about 3.25 percent of value these days. Apply this to the figure and you get to about 480 million pounds. JPM Caz doesn’t get to keep all of this: it has to pay JPM for access to its balance sheet and share fees with other institutions when it sub-underwrites. There are also accountants and lawyers to pay.

A good rule of thumb might be that JPM Caz gets to keep about half the underwriting fees. That suggests that JPM Caz might have earned 240 million pounds from equity underwriting in the first nine months of the year. This figures compares with the 217 million pounds it earned from all corporate finance activities (including M&A fees) in the whole of 2008.

Were the ECM business to keep clanking along at the same rate in the fourth quarter, JPM Caz could be on track to make 320 million in revenues from just this source – not much less than the 350 million pounds the whole firm earned last year. It’s not clear exactly how much of the total revenue ECM accounts for – but somewhere around half might be a good stab.

Why the Gorman news isn’t big news

I’m still trying to figure out why much of the financial press seems to think the announcement that James Gorman will replace John Mack as CEO at Morgan Stanley is some shocking event. It would have been a big shock if Gorman didn’t get the job.

Sure, Morgan Stanley had to go through the obligatory search process. And there was always a chance someone other than Gorman would replace Mack.

But Mack brought Gorman into Morgan Stanley to be his heir apparent. And it seemed pretty clear he would be next line after he was appointed to oversee the integration of Morgan Stanley’s joint venture with Smith Barney.

In any event, here’s me talking about the changing of the guard at Morgan Stanley on Reuter’s Insider–our version of online TV.

Bye bye Mack

John Mack is making way for a changing of the guard at Morgan Stanley.

The Wall Street firm says Mack is stepping aside as CEO at year’s end to make way for James Gorman, long seen by many on Wall Street as Mack’s heir apparent.

Mack will remain as chairman.

The move is not surprising. The past year, of course, has been a grueling one for Mack and Morgan Stanley. But his energy level has been running on low and it’s clearly time for a new direction at the firm.

Moving-up Gorman, currently Morgan Stanley’s co-president, to CEO makes sense given the firm’s renewed commitment to more traditional lines of investment banking–including retail brokerage. In the wake of the financial crisis, Morgan Stanley has decided to take less risk in trading than some of its peers–most notably Goldman Sachs.

Morgan Stanley has rebounded from the crisis more slowly than Goldman and JPMorgan Chase because of its decision not to get back heavily into proprietary trading. Analysts have been critical of Mack’s decision to play it safe and it remains to be seen whether the 51-year-old Gorman will reverse that trend to better compete with Goldman.

But given Gorman’s long history of working in wealth management, it’s unlikey he will be quick to turn Morgan Stanley into a hot-bed of trading. And he’d be smart to stick to that plan–as there could be a demand from wealthy investors for savvy investment advice in the coming years.

Wall Street is being judged

Capitol Hill has yet to get its act together on financial regulatory reform. But another arm of the federal government, the judiciary, is emerging as the new best friend of investors.

It started a few weeks ago when Judge Jed Rakoff refused to approve the Securities and Exchange Commission’s wimpy $33 settlement with Bank of America over the bank’s failure to come clean with shareholders about its acquisition of Merrill Lynch.

The judge ordered the SEC to explain why it didn’t hold anyone at Bank of America personally accountable for Merrill’s decision to pay nearly $6 billion in bonuses before the merger was completed.

Now Judge Shira Scheindlin, who works in the same federal courthouse in lower Manhattan as Rakoff, has picked up the torch of investor rights.

Just before the start of the Labor Day holiday weekend, Scheindlin issued two decisions that could hold Wall Street accountable for more of its actions. In separate rulings, the judge sided with investors bringing lawsuits against a prime broker and two major credit rating agencies.

The prime broker case stems from the $1 billion hedge fund fraud perpetrated by Michael Lauer, who once managed money for Britney Spears, the University of Montreal Pension Plan and Morgan Stanley, among others.

Scheindlin ruled that the hedge funds’ offshore investors can press ahead with an aiding-and-abetting claim against Bank of America, which had been the prime broker for Lauer’s long defunct Lancer funds.

Songbird deal backs Canary Wharf

Nomura’s decision to move its Lehman staff from Canary Wharf to the City earlier this summer seemed a victory for London’s historic financial centre over its upstart rival.

However, the astonishing terms Nomura secured, combined with a recent rescue fund-raising for Songbird Estates, owner of much of Canary Wharf, show that the Docklands estate retains its pulling power. (more…)

Morgan Stanley keeps Goldman from top M&A slot

Despite top billing for M&A involving European companies as well as Asia-Pacific and Japanese corporates, Goldman is not top of the league tables for global M&A for the year to date.

Instead it is long-time rival Morgan Stanley leading the pack, capitalising on a sizeable advantage in deals involving U.S. companies. Goldman is in second place in the worldwide ranking and JP Morgan third.

While the usual suspects are top of the tables, the big banks aren’t having it all their own way. Evercore Partners stands in 5th position for advising on deals with a U.S. flavour, behind Morgan Stanley, Goldman, JP Morgan and Citi.

But with five months still to go and M&A mandates scarcer than before, there is bound to be plenty of scrapping for top slot before 2009 is done.

Mack is no Blankfein, thankfully

John Mack is being pilloried by some on Wall Street for not being more like Goldman Sachs’ Lloyd Blankfein, after Morgan Stanley reported a larger-than-expected second-quarter loss largely because of several onetime expenses.

But the “Be like Lloyd” rallying cry is mainly coming from traders with Twitter-like attention spans, who simply want Mack and Morgan Stanley to engage in the same kind of government-backed risk-taking that Blankfein’s Goldman Sachs is doing when it comes to proprietary trading.

Just how much less risk is Morgan Stanley taking on compared to Goldman?

Simply compare both firms’ so-called value at risk, an estimate of how much money a firm could conceivably lose in a day if all of its trading bets and hedges went awry. At quarter’s end, Morgan Stanley’s VaR was $154 million, compared with $245 million at Goldman.

Admittedly, the VaR is a highly imperfect way of measuring risk. If anything it underestimates risk, otherwise Lehman Brothers and Bear Stearns might still be with us. That said, however, the numbers speak for themselves: Goldman is an infinitely more risky firm than Morgan.

Sure, it must be tempting for Mack to simply pile on risk and try to replicate the outsized trading revenues Goldman churns out. Indeed, the federal government has all but given the green light to Goldman to resume its hedge fund trading ways — except now Goldman can trade with the implicit knowledge the government won’t let it fail.

That was a road that Morgan Stanley presumably could have taken as well, but the firm has instead decided to go in a more conservative direction.

from MediaFile:

Most teens find “tweeting” pointless — Morgan Stanley

Taking a break from flogging the latest tired media business model, Morgan Stanley published a short report on Friday entitled, "How Teenagers Consume Media" by 15-year-old summer intern Matthew Robson that offers a frank discussion of what young digital media consumers are up to.  The FT has highlighted it on its front page, perhaps as an antidote to wall-to-wall coverage of the annual Sun Valley media moguls conference in recent days.

The most memorable moment in the report is its discussion of the irrelevancy of Twitter to teenagers:

Facebook is popular as one can interact with friends on a wide scale. On the other hand, teenagers do not use twitter. Most have signed up to the service, but then just leave it as they release that they are not going to update it (mostly because texting twitter uses up credit, and they would rather text friends with that credit). In addition, they realise that no one is viewing their profile, so their ‘tweets’ are pointless.

Many of the issues higlighted in the 4-page report are obvious: Teenagers are consuming more media, but not prepared to pay for it. They resent intrusive advertising, while print media and radio are largely irrelevant to them. These observations may be nothing new to anyone who bothers to ask kids what they are up to.

As with previous generations, the answers aren't always what adults hope they are doing. But they have sobering implications for complacent media investors.

On newspapers:

No teenager that I know of regularly reads a newspaper, as most do not have the time and cannot be bothered to read pages and pages of text while they could watch the news summarised on the internet or on TV. The only newspapers that are read are tabloids and freesheets (Metro, London Lite…) mainly because of cost...

Stop the Wall Street pay stories

OK. I know it’s probably too hard for an editor to resist running out another story on excessive Wall Street pay–especially on the day when you know the US government is going to release another set of ugly jobs numbers.

So it doesn’t really surprise me to see a story in The Wall Street Journal about “big pay packages” at Goldman Sachs and Morgan Stanley. Populist outrage sells papers.

Now there’s nothing technically wrong with the Journal story. It does have the benefit of relying on some facts, unlike a story in The Observer that had none when it predicted record bonuses at Goldman.

Then again, the Journal in predicting near record levels of compensation at Goldman and Morgan, relied on analyst revenue estimates for the rest of the year. And we all know what analyst estimates are worth.

But here’s the point: people who work on Wall Street are always going to make a lot of money as long as investors and companies keep giving them their money to manage and play with.  I’m all for restructuring the way bonuses are paid on Wall Street. It’s criminal that traders can get bonuses on multi-year trades that payoff now but may end up going seriously south a year or two later.

Still the best way to stop Wall Street firms from making record revenues at a time of misery for so many others is to simply take your money elsewhere. Put it into an index fund, a mutual fund, or simply manage it yourself through an online broker.

If you don’t want to juice the profits and bonuses shelled-out at a Wall Street firm stop buying what they are selling. That means taking a pass on fee-churning structured notes. Saying no to the next  iteration of auction rate securities. Turning a cold shoulder to any security a broker can’t explain to you in a short email or a phone conversation.

Beware the Tarp repayments

Shares of Goldman Sachs and Morgan Stanley are trading like the financial crisis never happened. In fact, Goldman’ stock is trading at  price that’s right around where it was the Friday before Lehman Brothers filed for bankruptcy last September.

But it looks the rally may have gotten ahead of itself. Roger Freeman, a Barclays Capital analyst, is scaling back his second-quarter estimates for Goldman and Morgan–largely because of the cost to both firms of repaying money to the Troubled Asset Relief Program.

Freeman now projects a 70 cents share loss for Morgan in the quarter, instead of a narrow 40 cents a shares profit. Goldman’s projected second quarter profit declines to $3.55 a share from $5.20 a share. Expect other analysts to follow suit.

Of course, the thing everyone is looking at with the big banks is how they do with trading with the Fed keeping bank borrowing costs near zero.