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Today's Top News1. JPMorgan, a counterparty to itself
Hedge funds were only too happy to take the other sides of transactions that the JPMorgan CIO office was aggressively pushing. As a group, they have fared well, as JPMorgan's massive $2 billion loss on its "hedge" translated into concomitant gains for all counterparties, who are giddy right now. DealBook notes that one of the counterparties is a JPMorgan mutual fund, the Strategic Income Opportunities Fund, which manages $13 billion for clients. It holds about $380 million worth of insurance, in the form of CDSs, identical to the kind the London whale was selling. The fund "began to buy the insurance contracts roughly a year ago. By last May, the mutual fund had built a position of about $150 million in coverage, which it doubled over the summer. Since then, the position increased about $80 million through March." There's not really anything untoward about this, though the irony may strike some as interesting. "It may turn out to be a silver lining. If nothing else, it indicates that the asset management division, run by Mary Callahan Erdoes, acted independently from the bank, as is required." Clients of the fund are no doubt happy. The again, equity funds managed by the bank are likely just the opposite if the bank's stock was in their portfolios. For more: Related articles:
Read more about: proprietary trading, hedging
The highest profile IPOs tend to have hiccups, if only because the scrutiny is so intense. Recall the accounting snafu that bedeviled the Groupon IPO. Recall also the article in Playboy that caused so much regulatory consternation when Google went public. Facebook has avoided such mini-fiascos, but the debate about its future has been unusually intense, and that makes the move by GM significant to say the least, as Facebook heads toward a Friday stock market debut. The big auto maker has announced it will cease paid advertising on the social network, saying that the return on investment just isn't there. This is a blow no doubt, as GM's move might prompt other big advertisers to rethink their approaches. GM ranks as a top-three advertiser on the internet, so its influence cannot be discounted. It may be that future investors have factored in this sort of potential downside already, as the issue not new. The social network "leads the Web in display advertising revenue, according to a February report from the online advertising analysis firm eMarketer, but it is on a pace to lose its lead to Google by the end of the year," notes the Washington Post. In any case, the timing of the announcement raised brows. This isn't going to derail the deal but it does add some color to the debate about how the stock will fare in the aftermarket. It just might be fairly valued on offer. For more: Related articles: Read more about: IPO, Facebook 3. What is the Dimon Principle?
I suggested recently that a "humbling" was at hand for JPMorgan Chase CEO Jamie Dimon, who is facing calls that he step down as a board member at the New York Federal Reserve Bank. A MarketWatch columnist has formulated what he calls the "Dimon Principle." He describes it this way: "After the bank emerged virtually unscathed from the 2008 financial crisis, it would have taken saint-like restraint on the part of CEO Jamie Dimon to not downplay luck's role in that success and not overestimate his own genius. Fast forward through his, and his bank's, overconfidence over several years, and we shouldn't at all be surprised by the multi-billion-dollar trading loss that now tarnishes his, and its, reputation. Let's call this overconfidence followed by a fall, for want of a better title, the Dimon Principle." But in the end, the columnist, suggests what's really important is how someone--an executive or adviser--responds to the adversity. At some point, "we may want to even prefer such an adviser — since his recent subpar performance is more likely to lead him to have a healthy dose of humility and make him less likely, relative to an adviser who is coming off an unbroken string of successes, to do something stupid." This principle has played out on an even more dramatic scale with Goldman Sachs and its CEO Lloyd Blankfein. After the proper penance is paid, customers and investors seem willing to forgive. For more: Related articles: Read more about: Jamie Dimon, CEO 4. Retail investors key to Facebook IPO
The Facebook IPO is at hand, and the great debate about its prospects as a public company will rage until the moment the stock hits the market. It's quite possible that the fate of the IPO in the immediate after market will be determined by retail investors. Discount broker E*Trade Financial, which according to Reuters was added to the list of IPO underwriters at the last minute, offers some help. Last week, its home page offered a pop-up box explaining how investors can place orders for the shares. Some may be tempted to see this as a red flag, a sign that the top underwriter, Morgan Stanley, sensed the need to jack up orders from the retail sector. To be sure, many brokers and advisors have advised against buying the stock. One expert suggests that buying in now requires a leap of faith, calling it Faithbook. But that hasn't stopped a retail craze from developing. Reuters says a "frenzy surrounding Silicon Valley's biggest initial public offering" is breaking out. If a retail investor can get in at the IPO price, the frenzy might pay off. But for those who can't get that price--the upper bound of which was recently boosted--and up buying in the aftermarket, well, the outcome is less likely to be a good one, though some are still holding out hope for a Google-like extended run. This is shaping up as one of the frothiest IPOs in recent memory. This is also starting to resemble the dotcom days -- and we know how that ended. For more: Related articles: Read more about: IPO, Facebook 5. Time to rethink hedge fund fees?
Since the financial crisis of 2008, a big power transition has occurred in the alternatives industry. Limited partners gained much more clout, which has allowed them to wrangle some concessions that would have been all but unthinkable before the crisis. Redemptions are easier, that's for certain. Towers Watson has been at the fore of the movement to reform asset management fees in the alternatives industry, and it has come out with new research that hits some of the key issues. Its recommendations are certainly eye-catching. Regarding management fees, the 1-2 percent industry standard makes less sense than a system that would align management fees with operating costs. While novel, a few firms have taken steps toward this. The idea is that the management fee should be enough to keep the company afloat, while performance fees represent the main avenue for manager income. Regarding performance fees, "generally used to pay staff bonuses and equity holders and typically charged at 20% of returns, we believe historical performance fee structures do not sufficiently align manager and investor interests. Managers share profits, but there is often no mechanism for them to share losses so there is an incentive to take excessive risk rather than targeting high long-term returns. Structures that contain hurdles, high watermarks and those that defer fees with the ability to claw back in the event of subsequent drawdowns are therefore preferable." Towers Watson says that well-aligned structures will include: Management fees that properly reflect the position of the business, appropriate hurdle rates, non-resetting high watermarks, extension of the performance fee calculation period, clawback provisions, and reasonable pass through expenses. To be sure, many funds have embraced some of these recommendations already. For more: Related articles: Read more about: Hedge Funds, fees Also Noted
SPOTLIGHT ON... How canny is Jamie Dimon? You can bet the PR people at JPMorgan weighed in on just how CEO Jamie Dimon should express himself in the wake of the $2 billion trading fiasco. One author suggests that he was canny by saying the bank was stupid and sloppy. The message is that they were dumb and messed up but that they were certainly not fraudulent. "These admissions are a way to get ahead of the story, express some uncharacteristic humility and try to frame the story — for the public and for regulators." Article Company News: Industry News: Regulatory News: And Finally…Does renting still work in a buyers' market? Article
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Thursday, May 17, 2012
| 05.17.12 | A hiccup for Facebook
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