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Today's Top News1. Ex-employees punish JPMorgan via CDS trades
It was no secret that hedge funds were swooping in to drive nails in coffin of the JPMorgan's infamous hedge via bond index CDSs. There have been some interesting twists in all the drama. I noted recently that one counterparty to the trade is a mutual fund operated by JPMorgan. As it turns out, other counterparties include a long list of former employees. Fortune reports that, "Wall Streeters who specialize in the CDS market say it appears that dozens of hedge funds have piled into the anti-JPMorgan trade. A number of the funds, including BlueMountain Capital and Lucidus Capital, are run by traders who formerly worked at JPMorgan. Perhaps that's not all that surprising. CDS contracts were basically created at JPMorgan more than a decade ago. So it makes sense that the traders with the most expertise in the market would come from the bank. But it's just another sign that many traders who are fleeing the big banks are coming back to haunt their old employers." One issue here is how long these positions will remain open. At some point, the hedge funds may try to unload the securities, which will likely be very hard in this environment. There is a chance that JPMorgan can exact a modicum of revenge. At some point, once the froth from all this abates, the bond market may well come storming back, which would redound to JPMorgan's benefits. Hedge funds may be forced to swallow some losses if they cannot unload the CDSs quickly. These securities are much less liquid than most people assume. For more: Related articles: Read more about: Hedge Funds, JPMorgan
2. Prosecution presents Goldman Sachs-Buffett deal timeline
The prosecution presented a timeline of events that it hopes will lead the jury in the Rajat Gupta trial to one conclusion: The only person who could have tipped convicted hedge fund manager Raj Rajaratnam about a pending Goldman Sachs deal was Gupta. Here's how Reuters describes it: "The jury was shown a document detailing the time he called into a special Goldman board meeting convened to approve the Buffett deal. When the call ended at about 3.53 p.m. New York time, he dialed Rajaratnam at Galleon Group, the document showed. There is no FBI wiretap of that call, which ended at about 3.55 p.m., but prosecutors played the jury a conversation recorded early the next morning between Rajaratnam and his principal trader, Ian Horowitz. 'I got a call, right, saying something good's gonna happen,' Rajaratnam told Horowitz, who was not in the office on September 23, 2008. The jury heard Rajaratnam say that it was 3:58 - just two minutes before markets closed - when he ordered traders to buy Goldman shares. Galleon made about $840,000 in illegal profits." To force jurors to the conclusion that Gupta tipped the hedge fund manager, it would be in the interests of the prosecution to play as many tapes of the two on the phone as possible. It has to drive home that these guys spoke often about deals. Contrary to earlier reports, there are tapes of Gupta and Rajaratnam on the phone. One tape captured the two men discussing Goldman's need to possibly buy a commercial bank, the subject of a recent board meeting. Prosecutors have played tapes already of the two casually discussing business issues. The Goldman-Buffett deal may be strong for the prosecution, as it may be hard for the defense to show that alternative tippers at Goldman Sachs knew about that deal. For more: Related articles: Read more about: insider trading, trial 3. Officials still weighing charges against Lehman Brothers
I, like many others, have long since concluded that prosecutors will not bring a case--either civil or criminal--against Lehman Brothers or any of its top executives. To some, they seem to have gotten away with nary an official slap on the wrist. For those hoping for some sort of enforcement action, the final nail was ostensibly an official internal SEC document that said, "The staff has concluded its investigation and determined that charges will likely not be recommended," as reported by Bloomberg. That was hardly surprising. What was surprising was the news that "officials have weighed issuing a public report on their findings that would stop short of an enforcement action while highlighting the firm's questionable conduct." If charges are not possible, then such a report would be in the public interest. It's disappointing that some sort of case was not possible, especially after the Anton Valukas report, which seems so old now, was so damning. But hopes springs eternal. In a follow-up, DealBook reports that the memo--an update on recent SEC enforcement activity--has been updated and notes that senior officials still consider charges a possibility. While there are some at the SEC who would like to keep the possibility of charges open, you get the idea that the time has passed. The issue is what to do with the results of its investigatory efforts. The public would benefit from a complete airing of events as pieced together over the years. Some sort of report would salvage the long investigative effort, rendering it not completely fruitless. For more: Related articles: Read more about: Lehman Brothers, SEC 4. Durbin Amendment's varied effect
The Durbin Amendment went into effect with great fanfare Oct. 1, and since then it's been a bit murky as to who is benefitting. While large banks have taken a hit, the effect at the merchant level has been more varied. To be sure, some retailers have experienced quite a coup, as their interchange fees have been dramatically reduced. But not every merchant has been so fortunate. Small ticket merchants, for example, have been among the losers. Businesses with a small average transaction prices no longer benefit from special tiered pricing. Some have been forced to hike prices. A great example is Netflix. Another group of retailers that perhaps hasn't benefitted as much as expected: E-tailers. Internet Retailer notes that "most e-retailers are still waiting to see any benefit from the interchange reduction….. Only 14.6 percent of online retailers that responded to the survey say they're paying lower fees on debit card transactions, while 17.7 percent say they're paying more and 67.7 percent say their debit processing fees have not changed in the past year." This might affect firms that are on a bundled discount pricing plan, which blends all the fees into a single price. According to Litle & Co., firms that use a pass-through billing model, also known as cost-plus pricing model, are more likely to have seen "the full interchange savings from Durbin. In a pass-through model, the processor reports separately on all of the constituent components (interchange, assessments, and processor fees)." All in all, it seems that the effect on various constituencies in the merchant universe wasn't thought through in depth. In any case, banks are living with the amendment; they're hunting for new revenue sources. And we're not seeing a credible movement to have the Durbin Amendment repealed. We may see an effort by regulators to soon take a look at credit card interchange fees. For more: Related articles: Read more about: banks, Debit Cards 5. European contagion may hit investment bank revenues
Will the woes of the European economy and banking sector hit U.S. banks? Quite a debate has broken out, and JMP Securities thinks the contagion effect will be significant. Analyst David Trone, as noted by Reuters, downgraded Goldman and Morgan Stanley to "market underperform" from "market outperform." The analyst also lowered its rating on Citigroup, Bank of America Corp and JPMorgan by a notch to "market underperform." His rationale: "Our base case scenario (60 percent chance and the basis for our estimate cuts) is Greek exit/no contagion, where the bulge firms would suffer some losses to Greece, and capital markets activity still sags substantially over worries about contagion." Trone cut his price targets on shares of Goldman to $77 from $169 and on Morgan Stanley to $11 from $26. He has a share price target of $5.50 for Bank of America, $23 for Citigroup and $28 for JPMorgan. On the other side of the debate is KBW analyst Fred Cannon, who tells clients that the fallout will likely be limited. As noted by TheStreet.com, a "modest contagion" for financial stocks "should allow domestically focused financial stocks to stabilize in the coming weeks." KBW thinks big bank stocks may soon recover from the recent turbulence driven by Greek/Eurozone fears and the JPMorgan trading debacle. Trone maintains "Outperform" ratings on Goldman Sachs, with a price target of $150; JPMorgan Chase, with a price target of $55; and State Street, with a price target of $53.00. For more:
Read more about: earnings, banks Also Noted
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Tuesday, May 29, 2012
| 05.29.12 | Ex-employees punish JPMorgan
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