| July 9, 2012
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Today's Top Stories
1. Judge asks why JPMorgan witheld emails
2. Banks take new risks in low-rate environment
3. NYSE to test retail investor dark pool
4. Goldman Sachs, Bank of America top political contributors
5. Historic LIBOR process may change Editor's Corner: Two views of hedge funds Also Noted: Spotlight On... Pimco ETF beats its bond fund
Goldman Sachs faces suit over Dutch pension and much more... News From the Fierce Network:
1. Nasdaq OMX under pressure to upgrade technology
2. Deutsche Bank launches closing volume algo
3. Exchanges want to start dark pools
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Two views of hedge funds
The Economist offers an interesting look at two recent books about the hedge fund industry, which together reflect starkly opposing views of the industry.
One book, "The Alpha Masters," profiles 11 of the industry's best-known managers, including all the familiar suspects: John Paulson, James Chanos, Ray Dalio, and so on. The book, written by CNBC journalist Maneet Ahuja, apparently is not a skeptical, hard-nosed journalistic effort but rather borders on hagiography. Throughout her book, Ahuja "seems to be in a trance herself, in thrall to the glamour of her subjects. She never questions the judgment of her alpha-men and always gives them the last word. She devotes dozens of pages to Mr. Paulson's rise in the hedge-fund industry, but glosses over his poor performance in 2011." Money talks, and this is the treatment that many hedge fund success stories have become accustomed to. If they are spreading their wealth around, they are accorded rock star treatment. The other book, "The Hedge Fund Mirage," was penned by Simon Lack, a 23 veteran of JPMorgan, where "he grew tired of the free hand that investors all too often gave managers." Though he was never a journalist, he produced a harder-nosed, skeptical look at the industry and some of its more dubious practices. "He has written a provocative book questioning a central tenet of the hedge-fund industry: its performance is always worth paying for. The promise of superior performance is wrong, he says. Of course some investors make a killing, but on average hedge funds have underperformed even risk-free Treasury bills. This is because the bulk of investors' capital has flooded in over the past ten years, whereas hedge funds performed best when the industry was smaller than it is now. What is more, it is hard to know how hedge funds actually fare, since indices that track industry performance tend to overstate the returns. Funds that do badly or implode are not usually included in the indices at all." Funds are discussed in depth. Lack estimates that hedge-fund managers have kept roughly 84 percent of profits generated since 1988, with investors only getting 16 percent. At this point, it is tempting to invoke the Hegelian notion of thesis and antithesis, which give way to synthesis. Both books have their place on the shelf, and both should be taken seriously. If you had to accord one more weight, it would have to be the latter, as skepticism is generally in shorter supply than adulation. -Jim Read more about: Hedge Funds, redemptions
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Today's Top News 1. Judge asks why JPMorgan witheld emails JPMorgan has received two subpoenas in the last three months to produce roughly 25 emails that may pertain to how it bid for various energy contracts, which are the subject of an inquiry by the Federal Energy Regulatory Commission (FERC). At issue is whether the bank manipulated markets in California and the Midwest to gain $73 million. The bank has so far declined to produce the emails, saying they are subject to attorney-client privilege. But the bank may be forced to come up with the emails soon. Bloomberg reports that U.S. District Judge Colleen Kollar-Kotelly has given JPMorgan until the end of July 13 to explain why it shouldn't be forced to turn over the evidence. The focus of the probe is Houston-based J.P. Morgan Ventures, which the FERC thinks might have extracted "excessive payments or above-market prices from and Midwest Independent Transmission System Operator Inc. and California ISO." This is yet another enforcement blemish for the bank, which has been bedeviled by a host of regulatory issues as of late. The danger here is that the bank continues to tarnish its once relatively clean image and takes on a Goldman Sachs-like persona. The bank says it believes it has complied "in all respects" with the law, as well as FERC rules and applicable tariffs. My guess is that a settlement will be forthcoming, but you have to wonder if this will open a flood of private litigation. For more:
- here's the article Read more about: JPMorgan, Enforcement Action
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2. Banks take new risks in low-rate environment The OCC has released its semi-annual look at risk in the banking industry, which reflects data as of the end of 2011. The report suggests that the industry is still grappling with the effects of the foreclosure fiasco and is struggling to come up with alternative revenue sources due to the slow economy and financial market volatility. The report also notes that in their search for higher profits, some banks may be taking inappropriate risks. It reports: - Underwriting standards are under pressure as banks compete for higher earning assets to improve profitability.
- "New product" risk is increasing as banks seek to enter new or less familiar markets to offset declines in revenues from core lines of business.
- Increased operational risk is a key concern as banks try to economize on systems and processes to enhance income and operating economies. This risk may be amplified by the use of third-party products or distribution systems.
- Credit performance overall remains vulnerable to weak economic growth and potential shocks, such as from global financial markets or energy markets.
- The low interest rate environment continues to make banks vulnerable to rate shocks. Small banks, in particular, are increasingly adding to investment portfolio positions and increasing duration to obtain higher yields.
- The unprecedented volume and scope of change in the domestic and international regulatory environment challenges business models and revenues.
These challenges increase the importance of strategic planning and prudent resource allocation. This new propensity for risk of course has to be viewed against new regulatory and capital standards designed to reduce banks' risky behavior. Some have counter-argued that higher international capital requirements will force bank to take higher risks, to maintain profitability. Hopefully, the efforts to reduce risk will not backfire colossally. For more:
- here's the report Read more about: banks
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3. NYSE to test retail investor dark pool I noted over on FierceFinanceIT recently that there's a lot of irony in the push by top exchange companies to launch their own dark pools. For so many years they argued that the national market system was well-served by bringing together all orders transparently to determine the NBBO. After watching dark venues eat away at their market share, it would appear that they have thrown up their hands and decided to join their adversary. The Financial Times notes the latest development: The Securities and Exchange Commission has approved a one-year pilot program that will allow the New York Stock Exchange to run its own internalization service. The idea is to attract retail order flow, and offer them bids and offers on more favorable terms than they might get now from wholesalers, the very champions of internalization. The idea of a dark pool for retail investors has been criticized in the past by those who generally favor lit trading. But the fact is that dark pools are here to stay, barring dramatic SEC action on market structure issues. "This moves us in the direction of leveling the playing field," one NYSE executive told the paper. "It gives us the ability to replicate and compete with what happens outside of exchanges as well as an additional pool of liquidity that will be available to give retail orders a better price." My sense is that the SEC needs to come up with a definitive concept of the market structure of the future. If it is okay with moving away from Reg NMS theories and premises, it needs to make that clear. As of now, we're still in a big hodge podge. For more:
- here's the article Related articles:
Exchanges want to start dark pools Read more about: Dark Pools, exchanges
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4. Goldman Sachs, Bank of America top political contributors When it comes to political fund raising, the Republicans seem to have seized the upper hand. 24/7 Wall St. decided to take a look at public companies' political contributions in this election, accounting for all funds given to political parties, candidates, and political action committees. "The figures are staggering and have prompted many to ask whether money can buy a seat in the House, Senate, or even the presidency itself." There are two big banks among the top 10 corporate givers, and Goldman Sachs comes in at No. 2. In this election, it has given $4.8 million, 71 percent to Republicans. "Over the past decade many of the largest corporate donors have been financial firms. And no financial company has contributed as much money or as consistently as Goldman Sachs, which has given $39 million since 1989. Since 2000, Goldman has been one of the 10 largest political donors among publicly traded companies in every election cycle, a distinction unique to the company. Twice, in 2004 and 2008, the company contributed more to political campaigns than any other business in the U.S. In the 2008 election cycle, Goldman spent slightly more than $7 million, the most it has ever contributed." Bank of America comes in No. 9. In this election, it has contributed $2.1 million, 74 percent of which went to the Republicans. "Since 2004, Bank of America's political contributions have exceeded $2 million in each election cycle. Following the bank's acquisition of financial institutions, including FleetBoston, MBNA, Countrywide Financial, and Merrill Lynch, the number of full-time employees rose to some 279,000. Donations from company's employees now make up over two-thirds of the bank's total contributions. In 2008 and 2009, the U.S. Department of the Treasury gave Bank of America $45 billion in TARP bailout funds. In March 2012, the company agreed to pay $11.8 billion in fines for abuses in home foreclosure proceedings." This is not hugely surprising, given the rhetoric that the Democrats have chosen. In the end, Wall Street is nothing if not pragmatic. It tends to back winners, and if the Democrats make gains, they will reap some rewards from the industry. For more:
- here's the article Related articles:
Democrats seek to rebuild Wall Street bridges
Mortgage companies give more to politicians Read more about: banks, Political Contributions
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5. Historic LIBOR process may change When most people think of an interest rate, they think of supply and demand curves for credit, with the interest rate being the point at which the curves intersect. There may be many rates that are set by markets, but not the LIBOR, the London interbank offer rate. For more than 15 years, the rate has been set by a trade association of banks, each of which submit their costs of funding. The top and low rates are deleted, and the rest are averaged. That's how the world gets the LIBOR, which is hugely influential. The British Bankers' Association is under fire right now, as the rate-rigging scandal continues to unfold. To be fair, "in recent years, as questions have been raised about the accuracy of Libor, the bankers' association has taken steps to create a Chinese wall of sorts to separate its core lobbying function from its crucial role as an independent setter of interest rates," notes DealBook. "The Libor oversight committee is now deemed to be independent from the association and is overseen by a board distinct from the association's board," but this will not likely be enough to appease regulators. To be sure, the committee did not have control of the rates submitted by banks, but the whole set-up seems like an anachronism. Back in the day, banks set the rates based on a sense of trust and responsibility. These days, few think -- fairly or not -- that the industry is defined by these virtues. For more:
- here's the article Related articles:
LIBOR probes heating up
LIBOR investigation goes global Read more about: LIBOR Scandal
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Also Noted SPOTLIGHT ON... Pimco ETF beats its bond fund Pimco's Total Return Fund, the world's largest mutual fund, has returned 3.2 percent since March 1. The Pimco Total Return ETF, which launched at the end of February with a similar objective, has gained 6.8 percent, according to Bloomberg. The ETF is more free "to snap up notes with the biggest-potential returns," while the mutual fund is stuck "managing thousands of securities as debt-trading volumes become less predictable." I would add that the fact that the ETF does not invest in derivatives is also salient. The mutual fund is forced to use derivatives, which hampers its flexibility. Article Company News:
> RMS forced to sell mansion. Article
> Goldman Sachs faces suit over Dutch pension. Article
> Diamond notes others low-balled bids. Article
> JPMorgan shuts European money market funds. Article
> BNY Mellon takes a charge to account for losses. Article
Industry News:
> Facebook takes other valuations down. Article
> Irish syndicated bond plan takes flight. Article
Regulatory News:
> SEC mulls trade increments. Article
> SEC picks new mutual fund chief. Article And Finally…Art of email subject line. Article > Investment Consultants Forum - The Crowne Plaza Times Square, New York, NY - March 2, 2012 This conference provides a unique environment for developing dialogue between plan sponsors, managers and consultants. This event will feature panel-driven discussions focused on specific investment techniques of fixed income and hedge fund managers, the evolving role of institutional consultants, the manager evaluation process and more. Register today. > NFC Ticketing Europe 2012 - March 20-21 - London Come and join MasterCard, Renfe, Deutsche Bahn, Visa Europe, Orange, Arriva Netherlands, O2 and many more for the first event to bring together the whole NFC Ticketing industry for discussion, debate and quality networking. Click here. > Public Funds Summit East - July 23-25 2012 - Newport Marriott, Newport, RI Opal Financial Group's annual public funds conference will address issues that are most critical to the investment success of senior public pension fund officers and trustees. It will cover how surplus returns should affect employee benefit plans, the processes for selection and evaluation of investment managers, legal concerns with fund investment and management policies as well as the benefits and pitfalls of a wide variety of investment strategies. Register today. > NYIF Introduction to Private Equity Investments - July 19-20 - New York, NY This course shows the potential rewards and risks within the context of portfolio theory. In addition to discussing the investment characteristics, attendees compare private equity investments to traditional stock and bond investments. Comparisons are also made to commodities and real estate investments. Register today and discover key regulatory requirements, marketing issues, and client reporting practices. > NYIF Portfolio Management Program - August 8-17 - New York, NY This program is a challenging, but rewarding, eight-day educational experience. Consisting of three modules: a three-day Fixed Income Portfolio Management class, a three-day Equity Portfolio Management class, and a two-day Theory & Practice class, these modules blend traditional lectures, case studies, and site visits, and all attendees will receive a Texas Instruments BA II Plus calculator and a tablet or Netbook to contribute to their learning experience. Register now. > BAI Retail Delivery Conference & Expo - October 9-11 - Washington, DC BAI Retail Delivery 2012, taking place October 9-11 in Washington, DC, is the financial services industry’s premier event for the best thinking, research and strategic insights that have an immediate impact on retail banking. With more than 200 exhibitors and thousands of senior-level decision makers in attendance, BAI Retail Delivery brings you the best ideas from business leaders inside and outside of financial services. Register now at www.BAIRetailDelivery.com or call 888-284-4076. > NYIF Advanced Alternative Investments - October 3-4 - New York, NY This advanced course gives an investment approach for evaluating the opportunities and pitfalls of alternative investments. Alternative investments discussed include real estate, hedge funds, venture capital, private equity, commodities, as well as some other specialized areas such as collectibles, entertainment financing and hypertrading. While this course covers some of the basics, it revolves around examples and discussions in class in order to enrich the knowledge of this topic. Register today.
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