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Today's Top News1. Wells Fargo steers clear of JPMorgan-like trading activity
In the wake of JPMorgan's multi-billion dollar trading fiasco, other big banks have moved to make clear to analysts that they do not engage in the sort of "hedging" that caused so much carnage at JPMorgan. Bank of America CEO Brian Moynihan has made that point, and Wells Fargo has followed suit. "You can't take out-sized risk in the financial services industry, and we do our best not to do it," Chief Financial Officer Tim Sloan said at a conference for analysts. As noted by Reuters, Wells Fargo executives had an interesting response to a question about its fixed-income portfolio, saying that the bank does not run its $230 billion securities portfolio like a business line. Instead it uses these investments to balance the bank's risk from interest rate changes. In that view, the bond portfolio itself is something of a natural hedge against interest rate shifts, which might suggest to some that all the hedging on the JPMorgan bond portfolio was really a way to justify directional bets. "As another example of Wells Fargo's attention to risk," executives said that "the bank's credit default swaps portfolio grew too large three years ago, but has now been reduced to about a quarter of its original size. JPMorgan's trading strategy involved credit default swaps, a kind of derivative that was at the center of the 2008 financial crisis." To be sure, it does seem as though JPMorgan was unusually aggressive in positioning its CIO unit as a trading profit center. For more: Related articles:
Read more about: Wells Fargo, CDSs
2. Gupta trial update: Goldman Sachs banker testifies
The prosecution is laying the groundwork for the bulk of its case, detailing the circumstances in which an alleged leak from defendant Rajat Gupta to convicted criminal Raj Rajaratnam took place. From the witness stand, ex-Goldman Sachs banker Byron Trott, who made a career out of handling the bank's Berkshire Hathaway business, testified about the deal that called for Berkshire Hathaway to invest $5 billion in Goldman Sachs to essentially extend a life line to the bank at the height of the financial crisis. Secrecy was a big concern, so much so that the Berkshire Hathaway CFO didn't even know such a deal was under discussion. Warren Buffett asked Trott to brief his own CFO after the deal was struck in principle. "Our entire foundation was built on confidential information, and it could never be breached," said Trott, as quoted by Bloomberg, and yet somehow, Rajaratnam knew about it and allegedly bought stock in anticipation of the deal. The prosecution at some point will link the leak back to Gupta, who was a director at Goldman Sachs at the time and was briefed on the deal. The defense will do what it can to obfuscate where the leaks came from. To that end, the team might try to conflate a lot of tips, including tips from Goldman Sachs employee Daniel Loeb, who has not been charged with any crimes. The prosecution maintains that the leaks from Loeb were about different stocks and shouldn't be confused with the leaks from Gupta. The suspense is building. For more: Related articles: Read more about: Rajat Gupta, insider trading 3. Fidelity's massive Facebook woes
Reuters notes that Fidelity, the mutual fund and retail brokerage powerhouse, is working with "thousands" of customers to resolve issues related to the botched Facebook IPO. Nearly a week after the deal was priced, "many investors have found that their orders for Facebook were not executed at the prices they thought, said advisers…" The Boston-based company was not shy about placing the onus on the Nasdaq. "On behalf of our customers, Fidelity's senior management has been working with the regulators, market makers and NASDAQ to represent all of our customer's trading issues from May 18, and we will continue to do so until we are confident that NASDAQ has done everything it can to mitigate the impact to our customers," a spokesman was quoted. The firm will no doubt be seeking to ensure that the exchange makes their customers whole. Such activity is going across the industry. Market maker Knight Capital has already pegged its losses at $35 million. Other brokerages, discount and full service, are no doubt going through exactly what Fidelity is going through. The big question here is how much is all this going to cost Nasdaq OMX. We'll just have to see. There's really know way of knowing. You can bet regulators are taking a keen interest in this. For more: Read more about: brokerage, Fidelity 4. Should Jamie Dimon resign from NY Fed bank?
In the aftermath of the multi-billion trading fiasco, Elizabeth Warren, the mother of the CFPB and a candidate for Senate, Tim Geithner, Treasury Secretary, Sen. Bernie Sanders and others have called on Jamie Dimon to step as a director of the New York Federal Reserve Bank. Optically speaking, it sure looks like the CEO of JPMorgan has a tough position to defend. "The conflicts of interest are so apparent that they're laughable," Sanders told CNN. "Here you have the Fed, which is supposed to regulate Wall Street. Then you have the CEO of the largest Wall Street company on the board which [it] is supposed to be regulating. This is the fox guarding the henhouse." How can this happen? As CNN notes, the arrangement by which a CEO of a top banks ended up on the regional fed bank board stretches back to 1913. The law requires that three of nine members who serve on the board must be bankers from the region covered by the bank. The other six must represent the public. Dimon serves as a bank representative along with CEOs from Banco Popular de Puerto Rico and Solvay Bank, a small bank based near Syracuse, N.Y. The board is not a typical board in that the head of the bank formally reports to it. Instead, it's more like an advisory board, Dimon has noted. The issue is likely to blow over soon, as Dimon is scheduled to rotate off in December. My guess is that he will serve out his full term. If he were to rotate off early, it could be seen as a gesture of conciliation with his critics, but some might see it as mere capitulation in the face of pressure, a show of weakness. For more: Related articles:
Read more about: Jamie Dimon, Federal Reserve
Senator Sherrod Brown, the chairman of the Senate Subcommittee on Financial Institutions and Consumer Protection, introduced the Safe, Accountable, Fair and Efficient Banking Act of 2012 (known as SAFE) on May 9, n a bid to end "corporate welfare for Wall Street megabanks." The very next day, JPMorgan announced the massive trading loss that will likely wipe out a large portion of the bank's second quarter earnings. Will the trading fiasco give the SAFE Act a better chance of passing? "There's more sympathy now than in 2010," Brown told the Financial Times. "I am confident that we will see the government over time requiring some divesting of assets because if [big banks] keep getting an advantage in the marketplace, and they keep growing and having a higher percentage of assets, it's basically a government-endowed advantage. Thank you, US taxpayers." The law would end "too big to fail" via three size limits: banks could not have deposits in excess of 10 percent of insured bank deposits; a single bank could not have nondeposit liabilities in excess of 10 percent of domestic financial sector liabilities; and no bank could have nondeposit liabilities above 2 percent of GDP. The limits would effectively enforce a break up. My sense is that the law will not be more successful this time around. The public anger is present, but the political will really isn't. In this election year, people will want to play it safe. The administration as of now has not supported the bill. One opponent of the law has advanced an interesting argument, which is that the law will merely create a lot of smaller banks that would be more likely to fail in economically trying times such that we're better off with megabanks. For more:
Read more about: break up, too big to fail Also Noted
SPOTLIGHT ON... Morgan Stanley CEO involved in Facebook IPO It's no secret that Morgan Stanley had a lot riding on the Facebook deal. It was so important that CEO James Gorman took the unusual step of joining a conference call that brought together the CFO of Facebook and the top underwriters to set a price. Gorman's role was to provide oversight. The price was quickly set at $38 without a massive discussion, Bloomberg reports. It all seemed so routine, other than Gorman's presence. He had no idea what calamity lay ahead. Article Facebook News: Company News: Industry News: Regulatory News: And Finally…Half of Detroit's street lights to go out. Article
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Friday, May 25, 2012
| 05.25.12 | Gupta trial update: Goldman Sachs banker testifies
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