Today's Top Stories Editor's Corner: The final days of MF Global Also Noted: Spotlight On... NYSE Euronext piles on Nasdaq News From the Fierce Network:
Today's Top News1. Do hedge funds face a "make or break year"?
"This is a make-or-break year for hedge funds. If they have another low-to-zero return year then you will have had a three-year cycle of very low absolute returns," so says the head of hedge fund allocations at a major investment firm to Reuters. It was not a great year for funds in aggregate. The average hedge fund fell 5.2 percent, according to Hedge Fund Research, while the S&P 500 index rose 2.09 percent. "The losses made 2011 the second negative year in four - funds fell 19 percent in 2008 during the worst of the credit crisis as markets tumbled and prime brokers cut back borrowing. In 2010 the average fund gained 10.3 percent, although this lagged the S&P's rise." But it's doubtful that allocations to hedge funds in aggregate will be affected much by performance issues. The fact is that big institutions are near-desperate for gains that they have no choice but the keep plowing funds into alternatives. I expect hedge fund aggregate assets to continue to soar from the current $2.1 trillion level. However, there will be plenty of angst at individual funds and funds of funds. If funds cannot maintain strong performance numbers, they will surely find themselves off the shelf. More lenient redemption policies in general will make such transitions easier. So far, the industry has fared well in 2012 from a performance perspective. I can only hope, funds can keep it up. For more: Related articles: Read more about: Hedge Funds, Hedge Fund Performance
2. Who really benefits from credit derivatives?
Some interesting facts resulted from the new Fitch study of the 100 largest companies and fixed income derivatives. Six companies--JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, Morgan Stanley and Wells Fargo--hold more than 75 percent of total derivative assets and liabilities in the sample reviewed by Fitch. The notional amount of all derivatives held by the 100 companies was approximately $300 trillion at the end of 2011. This level has remained between $290-$300 trillion since 2009. With that said, the notional value of credit derivatives in particular has declined 40 percent to $21.6 trillion at year-end 2011 from $36 trillion in March 2009. One big issue concerns the idea that credit derivatives are used as a hedging tool. When defending its activity broadly, Wall Street firms often suggest that their financial products are used by companies for legitimate purposes, like hedging financial risks, rather than speculative purposes. But when it comes to credit derivatives, only 16 of the 100 companies reviewed reported exposure to credit derivatives, with six banks accounting for 99.5 percent of the total exposures. When it comes to currency swaps or interest rate swaps, our guess would be that much more than 16 of the largest 100 companies have some exposure. To be sure, banks have lots of bonds that they might want to hedge against, and to that extent, it makes sense that banks would be heavily exposed. But 99.5 percent? All in all, you have to wonder if the point of the CDS market is really speculation--by banks and hedge funds mainly--as opposed to any hedging at all by nonfinancial companies, which no doubt have some bond exposure. For more: Related articles: Read more about: banks, Credit Derivatives 3. Easing out top executive pays off at OCC
The Office of the Comptroller of the Currency has found itself on the defensive as of late, thanks mainly to the multibillion dollar trading fiasco at JPMorgan, which has led to questions about whether the 65 regulators the OCC has embedded at the bank were asleep at the wheel. The questions have been uncomfortable, but the OCC's situation could have been even worse if it weren't for a move back in October to ease the OCC's then-top dog, David Wilson, into another position. The reason was simple: He is married to a Bank of America executive, one who has worked at the bank for more than nine years and currently serves as senior vice president, senior credit products manager for commercial real estate banking in the Southeast region, according to the American Banker. She holds a substantial amount of stock in the bank. The move was made four months after Wilson had ascended to the top job. OCC ethics managers initially cleared the appointment, as long as Wilson recused himself appropriately. However, Treasury officials reopened the matter, leading to the change. Had that not have happened, the political fallout from the more recent JPMorgan "hedging" blunder would have been much worse. This is a tricky issue. Had it not been for the poisonous political environment, especially regarding banks, this likely wouldn't have been controversial. But every conflict is magnified these days, and you can't blame the OCC's overseers from making the change. For more:
Read more about: Occ, Regulatory Affairs 4. Morgan Stanley to sell stake on commodities unit
Morgan Stanley was a Wall Street pioneer in energy trading, combining the paper trades and the physical exchange of actual goods. According to Reuters, "The commodities unit at Morgan, one of the original 'Wall Street refiners' that pioneered the modern energy derivatives market two decades ago, has earned the bank $17 billion in estimated revenue over the past decade, trading both financial contracts and physical markets like diesel. But with a deepening role in illiquid cash markets and physical assets through subsidiaries TransMontaigne Inc and Heidmar Inc, the unit has also become a weight on the bank's capital base at a time it is facing a potential credit downgrade -- one that could force a multibillion-dollar margin call." The bank is now mulling selling a large stake in its commodity unit. CNBC has reported that the bank has been exploring the sale of a stake since at least last year and has talked to several parties, including private equity firm Blackstone Group, which said no deal is on the table. The pressure to hike capital isn't like to abate. Moody's has several banks on review for credit rating adjustments, and Morgan Stanley has the most at stake. It faces a possible 3-notch downgrade all the way to Baa2 from A2. We may well see some asset sales. Many take for granted the bank's dominance as an energy power, but it may be time for a change, as the commodities unit at the bank seems to be slipping. Morgan Stanley fell to fourth place in the OTC market for commodity derivatives among corporations and investors, behind JPMorgan, Goldman and Barclays, according to Greenwich Associates. For more: Related articles: Read more about: commodities, trading 5. Phone records link Gupta to insider trading
The prosecution in the trial of Rajat Gupta might have saved its best for last. The trial has been called boring and tedious -- even the presiding judge has said as much. But then FBI agent James Barnacle, a former financial advisor, took the stand and connected all the dots from the prosecution point of view. Under questioning, he walked the jury through the phone evidence, showing the close contact in which Gupta stayed with the convicted insider trading hedge fund manager Raj Rajaratnam. During a nine-month period, the two logged more than 150 calls. Some of those calls closely coincided with key Goldman Sachs events. After some calls, Galleon made large trades in either Goldman Sachs or P&G. Only one call between Gupta and Rajaratnam was recorded by federal agents. In that call, Gupta told the hedge fund manager that the Goldman Sachs board was considering buying a commercial bank. No trades flowed from that conversation. One call in particular is eye-catching. According to DealBook, phone records showed that on March 12, 2007, a Goldman board audit committee call was scheduled. It was to last about 15 minutes and offer a preview to the directors of the earnings announcement that would be released the next day. "That same day, at 11:32 a.m., records show that a phone number at Galleon called Mr. Gupta's line in Connecticut — a call that also lasted 15 minutes." Make of that what you will. DealBook suggests that Gupta somehow listened to the call from the galleon office. After the call ended, Rajaratnam loaded up on shares. "The next day, Goldman announced a better-than-expected quarter, surprising Wall Street analysts by posting earnings that were 32 percent above estimates. Galleon made about $2 million on the trade." For more: Related articles: Read more about: insider trading Also NotedSPOTLIGHT ON... NYSE Euronext piles on Nasdaq One company that might have been smiling just a little as the Facebook IPO fiasco unwound was NYSE Euronext. Not surprisingly, the CEO of the company told CNBC that, "This has clearly eroded investor confidence, the way it was handled." No doubt the NYSE will make marketing hay out of this as it competes for more tech company IPOs. The company was faring well with tech companies even before the Facebook fiasco. Article Company News: Industry News: Regulatory News: And Finally…Google dips toe in customer service. Article
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Monday, June 11, 2012
| 06.11.12 | Who really benefits from credit derivatives?
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