Today's Top Stories Editor's Corner: Bank credit downgrade savior: "too big to fail" Also Noted: Quest Software News From the Fierce Network:
Today's Top News1. SEC probes exchange industry's guts
Nasdaq OMX has long prided itself on its technology. For as long as the floorless, dealer-driven approach has been around, it has been touting its technology as the future of trading. This has been going on for decades, but in the wake of the absolute fiasco that was the Facebook IPO and the disaster that was the aborted BATS IPO attempt on its own market, the SEC may see fit to take a closer look at the guts of the exchange industry's systems. The exact focus of the SEC investigation is not known. While Nasdaq OMX has blamed technical glitches, "regulators suspect it may be something more. The Securities and Exchange Commission has opened an investigation into the exchange for its role in the initial public offering of Facebook, according to people briefed on the inquiry. Regulators are examining whether Nasdaq failed to properly test its trading systems, which broke down during the I.P.O., and whether the exchange violated rules when it rewrote computer code to jump-start trading. The Facebook investigation comes after a broader inquiry into trading breakdowns and other problems at the nation's largest exchanges, including two previously undisclosed cases involving Nasdaq's archrival, the New York Stock Exchange," according to DealBook. This may also bleed into the agency's examination of private market data feeds, which have proven so controversial as of late. For more:
Read more about: BATS, Nasdaq OMX 2. Credit Suisse suffers the biggest downgrade
So who fared the worst in the Moody's downgrade derby? Ahead of the actual release, it looked like Morgan Stanley would fare the worst, as many were counting on a 3-notch cut in its long-tern senior debt. But in the end, it was Credit Suisse that fared the worst. Its rating was cut three notches fom Aa1 all the way to A1. It was the only bank of the 15 that had its rating reduced so much. If you look at the standalone credit risk rating, which is the rating net of the assumptions of government and other support, its rating fell from Aa3 all the way to Baa1, a full 4 notches. Again, no other banks had its standalone credit rating reduced so much. So what's going on? Moody's cites the following: "(i) a relatively high proportion of revenues and earnings from, and a clear commitment to, the global capital markets business; (ii) the large absolute size of the bank's wholesale funding requirements; and (iii) relatively." There are plenty of offsets, however, strong risk management practices, reduced exposure to Europe, a large wealth management unit and the likes. It boils down to the fact that "the bank's commitment to this business creates interconnectedness with other large capital markets intermediaries, drives demand for a significant level of wholesale funding and exposes creditors to a high degree of opacity of risk taking, a high velocity of risk positions and a more volatile earnings profile. Moody's believes these characteristics can pose significant risks for bondholders." What really helps is that Moody's thinks the likelihood of government support in Switzerland is strong. That assumption accounted for a full 3 notches of its total rating. For more: Related articles: Read more about: banks 3. Citigroup fights back at Moody's
Citigroup has come out swinging in the wake of Moody's downgrade action. It promptly released a statement, noting: "Citi strongly disagrees with Moody's analysis of the banking industry and firmly believes its downgrade of Citi is arbitrary and completely unwarranted. Moody's approach is backward-looking and fails to recognize Citi's transformation over the past several years, the strength and diversity of Citi's franchise, and the substantial improvements in Citi's risk management, capital levels and liquidity." It took a few veiled shots at the credit rating company, suggesting that fixed-income investors today have become "much more sophisticated in their credit analysis over the past few years." It says that "few rely on ratings alone – particularly from a single agency – to make their credit decisions. We applaud this development and believe that it should be encouraged…. In our view, investors and clients should make their own decisions and not rely on ratings the genesis of which is opaque." So take that Moody's. Citigroup was downgraded two notches from A1 to A3. It lumped the bank in with a group that "have been affected by problems in risk management or have a history of high volatility, while their shock absorbers are in some cases thinner or less reliable than those of higher-rated peers. Most of the firms in this group have undertaken considerable changes to their risk management or business models, as required to limit the risks from their capital markets activities. Some are implementing business strategy changes intended to increase earnings from more stable activities. These transformations are ongoing and their success has yet to be tested." For more: Related articles: Read more about: Moody's, Credit Rating 4. Morgan Stanley dodges credit bullet
The big question about Morgan Stanley in the Moody's downgrade saga was always "how much" instead of "if." We all knew that the operating unit's long-term senior-debt rating was going to head lower. But would it be a full three notches, the biggest possible cut, as signaled by Moody's? Or would it be only one notch? As it turns out, Moody's cut the rating by 2 notches, to A3 from A1. So it could have been a lot worse. Indeed, the market may have been pricing in a 3-notch cut. In an e-mail sent to employees, CEO James Gorman wrote: "While we do not believe that this outcome reflects all of the transformative changes we have made to the firm, there is an acknowledgment in Moody's decision today that real progress has been made at Morgan Stanley, in what is an extremely difficult environment for our industry." Indeed, other banks have noted that the downgrades reflected a backward-looking analysis. So the good news for Morgan Stanley is that its efforts to mitigate it volatility in this areas will likely pay fruit going forward. The downgrade isn't necessarily permanent. As DealBook notes, "Since taking the helm in 2010, Mr. Gorman has been on a mission to reduce the firm's level of risk. He has expanded the firm's wealth management operations, a steady fee-based business that does not require Morgan to invest much capital. Regulators have forced change in other areas. Like much of the industry, Morgan Stanley has left riskier businesses like proprietary trading and increased its capital cushion, a move that should help in tough times." For more: Related articles: Read more about: banks, Moody's 5. More hedge fund ETFs on the way
Will exchange-traded funds that act like hedge funds find a huge audience with retail investors? You could argue it both ways. On one hand, you could argue that the retail world has soured on the stock market, convinced that it is rigged against them. That will keep them away from exotic stock market-linked products. On the other hand, you could argue that lots of retail investors will want to mimic the portfolios of top hedge funds, the guys that are said to be the beneficiaries of rigged markets. Whatever you believe, it's clear that more cloned hedge fund ETFs are on the way. The new AlphaClone Alternative Alpha Exchange-Traded Fund "will seek to replicate the AlphaClone Hedge Fund Long/Short Index, a benchmark that is constructed based on publicly disclosed positions of hedge funds and institutional investors. The underlying index includes holdings that are disclosed by managers with the highest 'clone score,' a metric that measures the efficacy of following a manager based on their publicly disclosed holdings," according to ETFdb. It joins a slew of others. Global X is planning to bring at least four new such ETFs to market soon, and Horizons Morningstar Hedge Fund Index ETF, based on an index licensed from Morningstar, recently launched on the Toronto Stock Exchange. To be sure, some advisors may sense heavy demand for such products. But there are plenty of others who would advise the masses to stay away. Kiplinger, whose target audience is individual investors, for example warns people to steer clear. For more: Read more about: Hedge Funds, ETFs Also Noted
SPOTLIGHT ON... Goldman Sachs: Go long and short the S&P 500 In late March, Goldman Sachs' Chief Global Equity strategist Peter Oppenheimer made the case that stocks were historically cheap relative to bonds and said that the moment was ripe to go long the market. Last week, by Noah Weisberger, the Head of Goldman's Macro Equity team, recommended that clients short the S&P 500 index, saying that it expected a 5 percent drop. There was debate about this in some quarters, but I see nothing all that odd about it. Article Company News: And Finally… Writing on the wall at MSFT? Article
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Monday, June 25, 2012
| 06.25.12 | Bank credit downgrade savior: "too big to fail"
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