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Today's Top News1. Goldman Sachs analysts' estimates off the mark
Somewhat obscured in the hoopla surrounding Goldman Sachs' stronger-than-expected earnings for the second quarter was the rather poor performance of most analysts. In the weeks leading up to the announcement, analysts chopped their estimates aggressively. A few went all the way down to the 80 to 85 cents range. The bank ultimately reported second quarter earnings, excluding special items, of $1.78 per share, down 4 percent from $1.85 per share a year ago. Analysts were expecting in the $1.10 to $1.12 range. So what explains the poor forecasting? To be sure, forecasting bank earnings have always been difficult. "The gaping difference appears to be Goldman's gains from investing operations in the quarter, which caught Wall Street off guard," notes Deal Journal. "Net revenues in that Goldman's segment were $203 million in sum. The debt and loans holdings posted a $222 gain in the quarter and 'other' investments, which include consolidated investments, posted a $287 million gain. Offsetting those gains, the bank's stake in Industrial and Commercial Bank of China Ltd. posted a loss of $194 million, which was better than widely expected, and the private equity operations had losses of $112 million. The analysts apparently misread Goldman's holdings." We'll see how the analysts adjust for the third quarter. For more: Related articles: Read more about: earnings, earnings estimates
2. Bank of America's AML processes at issue
Bank of America's anti-money laundering processes are again under scrutiny, in the wake of the news that the brother of an alleged leader of a Mexican cocaine-trafficking cartel used Bank of America accounts to invest drug money in the United States. Media reports on "alleged ties between the violent drug gang known as Los Zetas and the second-largest U.S. bank by assets" was based apparently in part on a 35-page affidavit filed in federal court in Texas last month. Bank of America has not been accused of any wrong-doing, and it maintains its AML processes are strong. As part of AML processes required by the Bank Secrecy Act, banks must report to federal authorities suspicious activity or cash transactions of more than $10,000. Banks also must maintain computer surveillance systems that can detect suspicious activity within their networks. The Huffington Post suggests that the bank may have some issues with its AML processes. It noted that Mexican drug syndicates in the not-distant past have allegedly used Bank of America accounts to buy planes to transport cocaine. The bank's accounts may also have involved as the "alleged destination for almost $10 million in illicit funds from an influential political family in Equatorial Guinea." To be sure, other big banks have had similar issues. In 2010, Wells Fargo paid $160 million to settle a case brought by the Justice Department that accused it of AML lapses. For more:
Read more about: Anti Money Laundering, AML 3. Goldman Sachs handily beats estimates
In the weeks before Goldman Sachs released its second quarter earnings, analysts seemed to be in a rush to lower their estimates. That rush served the bank well, as it was able to surprise on the upside in more dramatic fashion. The gilded bank reported second quarter earnings, excluding special items, of $1.78 per share, down 4 percent from $1.85 per share a year ago. Analysts were expecting in the $1.10 to $1.12 range. The top line was much less impressive. Revenue came in at $6.63 billion, a 9 percent decrease from year-ago levels and a whopping 33 percent decrease sequentially. The firm has made progress on expenses. Operating expenses were $5.21 billion, 8 percent lower than the second quarter of 2011 and 23 percent lower than the first quarter. The firm is implementing additional expense reductions. The accrual for compensation and benefits was a modest $2.92 billion for the second quarter, a 9 percent decline from the year-ago levels. The biggest second quarter surprise might have been FICC activity. Net revenues rose 37 percent to $2.19 billion year over year, reflecting higher net revenues in mortgages and commodities. Spreads on transactions must have been higher, as volume was constricted in the quarter. Elsewhere, the news was gloomier. The top line in investment banking sank 17 percent to $1.2 billion year over year. Principal activity offered no one-time pops. For more: Related articles: Read more about: Goldman Sachs, earnings 4. Banks, card networks settle antitrust suit with retailers
The power tide has turned in the long-running battle between banks and card network operators in one corner and retailers in the other. Following on the heels of implementation of the Durbin Amendment, which drastically cut swipe fees on debit cards, comes news that the two sides have settled an anti-trust suit over credit card swipe fees that dates back to 2005. Under the agreement, as noted by Reuters, Visa, MasterCard and more than a dozen of the country's largest card-issuing banks will pay $6 billion and reduce swipe fees 10 bps for eight months, a move valued at $1.2 billion. The settlement also calls merchants to negotiate collectively over future interchange fees. Merchants will be required to disclose information about card fees to customers, and credit card surcharges would be subject to a maximum. These rules would not affect 10 states that currently prohibit such surcharges, which include California, New York and Texas. In addition, $525 million will be paid to stores that sued individually. The timing of the settlement is interesting. It's been no secret that credit card fees, which were not covered by the Durbin Amendment, have cropped up as a possible regulatory issue. The Consumer Financial Protection Board has certainly taken an interest in credit card issues, specifically about fees paid by consumers. The settlement may be an attempt to preempt some action. For more: Related articles: Read more about: Interchange Fees, Durbin Amendment 5. AML issues heat up again for banks
Anti-money laundering issues seemed to move to the back burner from a regulatory perspective in recent years, but they are starting to crop up again. Bank of America, for example, has found itself in the spotlight due to reports that the brother of an alleged leader of a Mexican cocaine-trafficking cartel used Bank of America to invest drug money in the United States. Now comes news from a Senate report that the U.S. unit of HSBC was used for years as a "haven for foreign money laundering, drug-trafficking money and potential terrorist financing activities, largely because of the bank's woefully inadequate monitoring practices. The report chastises the bank's primary U.S. regulator, the Office of the Comptroller of the Currency, for failing to take more aggressive enforcement measures against the bank after the OCC became aware of illicit activities." HSBC's CEO last week said in a memo to employees that the firm's anti-money-laundering controls in recent years "should have been stronger and more effective, and we failed to spot and deal with unacceptable behavior," according to the Washington Post. HSBC currently is in settlement talks on another AML issue, this one over alleged links to money laundering activities by Mexican drug cartels. You can bet other banks have been scrutinized. This represents yet another legal risk for the top banks. Certainly, it is time for the executives to tighten back up on AML compliance issues. For more:
Read more about: Compliance Also Noted
SPOTLIGHT ON... Private equity giants eye China Chinese regulators will likely soon ease restrictions on private equity funds that want to do business in Hong Kong. According to Bloomberg, Blackstone and KKR have held early talks with Chinese authorities on a new wave of private renminbi funds that would invest in China deals. It won't be long before private equity firms registered in Shenzhen-Qianhai will be allowed to raise a fund from Hong Kong investors. "The plan is also for foreign funds in Qianhai to ultimately be able to complete deals without approval from China's Ministry of Commerce." Article Company News: Industry News: And Finally… Zuckerberg gets a 1 percent mortgage. Article
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Wednesday, July 18, 2012
| 07.18.12 | Bank of America's AML processes at issue
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