Today's Top Stories Editor's Corner: Dubious distinction for Knight Capital Also Noted: Kaseya News From the Fierce Network:
Today's Top News1. KBW weighs in break up debate
TheStreet.com notes that the pro-break-up crowd has picked up another adherent: Keefe Bruyette & Woods CEO Thomas Michaud. He argued this week that, "I think the market's telling us that it has to happen. If you look at the six universal banks in the country and you pull out Wells Fargo, the remaining five trade at 65 percent of tangible book value…These are the biggest banks in the nation and I think that's unsustainable. Either the banks' performance has to get better or if book value's real they're going to have to realize it on behalf of shareholders." The twist is that he's looking toward a gradual break up, not a massive one-shot break up. This is not the same as the breakup of Standard Oil or AT&T, which in the face of a court order, broke itself up into Baby Bells. What is more likely for the banking industry is a de facto, over-time winnowing down to core business lines. One has to ask at this point what exactly defines a break up. For one of the top universal banks to be considered truly "broken up," what would be required? Some would argue that you could sell off all extraneous assets and that would be akin to a break up. Others might argue that the sine qua non of a bank break up would the separation of commercial and investment banking. There may be some intermediate definitions that reside somewhere in between. For more: Related articles: Read more about: Bank break ups
2. Knight Capital's survival chances soar
It was a touch-and-go for days, but it looks now like Knight Capital will survive. The beleaguered market maker was said to be closing in on a deal with a consortium that included Blackstone Group, General Atlantic, TD Ameritrade and others. The plan calls for the White Knights to invest an undisclosed amount, receiving convertible preferred securities that give them the right to buy new common shares at $1.50 each, according to DealBook. The rescue package was arranged by the Jefferies Group and will significantly alter the ownership structure of the firm, with the White Knights owning roughly 70 percent. Such is the price of survival. There are still a lot of questions to be answered, such as the exact terms of the investment. There's no doubt the White Knights will enjoy a souped-up coupon, not unlike Warren Buffet when he rode to the rescue of Goldman Sachs at the depths of the financial crisis, and Matsushita when it invested in Morgan Stanley. One issue will also be the extent to which TD Ameritrade will wield influence at Knight Capital and whether it will seek advantages over the other retail brokerages that send trades to Knight. Other retail brokerages have reason to be concerned. For more: Related articles: Read more about: Market Maker, Knight Capital 3. Where were the humans in Knight Capital incident?
If the shocking $440 million in losses had ended up killing Knight Capital, the market maker would have earned the dubious distinction of becoming the first firm be put out of business by a computer glitch. While Knight Capital will survive, it has a lot of questions to answer. The New York Times raises an obvious question: Why did the firm allow the computer program to run wild for so long? "When computerized stock trading runs amok, as it did this week on Wall Street, the firm responsible typically can jump in and hit a kill switch. But as a torrent of faulty trades spewed Wednesday morning from a Knight Capital Group trading program, no one at the firm managed to stop it for more than a half-hour. Some Knight employees and New York Stock Exchange officials noticed the blizzard of erratic orders in the minutes after trading started and sent alarmed messages to Knight managers." The SEC will take a hard look at this. While most of the regulatory discussion has revolved around the technology implications of algorithmic techniques, such issues cannot be wholly separated from human action. The issue of basic competence has to be explored. Obviously, risk management practices at Knight were substandard, allowing the programs to run wild. The question of course is how to remedy this. Will regulators ask to review code and specific program upgrade plans? This is a tricky area to be sure. The industry needs to get its act together pronto. For more: Related articles: Read more about: Market Maker, Knight Capital 4. Banks lobby to preserve TAG
It's tempting these days to think that the lengthy process of bailing out banks with public funds is winding down, but there are some stubborn reminders that that's not always the case. Think of all the banks that have yet to repay their TARP obligations. Add to that the Transaction Account Guarantee (TAG) program, which insures all bank deposits in checking accounts above the $250,000 coverage already provided by the FDIC. Recall that the TAG program was born in the 2008 financial crisis by bank regulators to help to reassure business depositors that their bank deposits were safe. In 2010, Congress extended the TAG program through the end of 2012. This has been a huge source of comfort to small business, municipal governments and of course small banks, which hold about $1.3 trillion of TAG-insured deposits. But the program is set to expire at the end of 2012, a fact that has prompted banks to start lobbying for yet another extension. The Independent Community Bankers of America "insists that business lending in distressed communities depends on the program," notes Reuters. The banks have a powerful argument, but "time is not on the bankers' side on this issue. Only about three weeks of legislative days are left to craft an extension of the TAG insurance program before the presidential election." The best bet is for the lobbyists to succeed in attaching the extension to a winning bill, but that has yet to happen. The bank lobby has a lot on the line. For more:
Read more about: banks, Lobbying 5. Founder-led buyout in the works at Best Buy
Richard Schulze, who stepped down from the board of Best Buy in June, has offered to take the ailing retailer private. He has offered to pay Best Buy shareholders $24 to $26 for each of their shares, according to a letter sent to the board. The offer represents a premium of roughly 30 to 45 percent over the company's share price. Schulze has been dismayed at what has become of the firm, which has been struggling to beat back Amazon and other online retailers, and has been in talks with several private equity firms, though he has not revealed which ones. He intends to finance the deal through "a combination of investments from the private equity firms, reinvestment of approximately $1 billion of his own equity, and debt financing." Credit Suisse, Schulze's financial advisor, has informed him it is "highly confident"--now there's a term that will ring nostalgic for many of old guard bankers--it can arrange the necessary debt financing. Schulze has also held discussions with former Best Buy executives, including former CEO Brad Anderson and former President and COO Allen Lenzmeier, whom he suggests might rejoin the company. In Schulze's view, the only way to save the company is to operate it as a private entity, though at some point a more specific strategy will be called for. The industry certainly hopes that this will spark something of a movement. The conditions are ripe for more such deals, as financial would appear to be sufficient and PE firms have enough dry powder at their disposal. The strategic need in some cases may also be compelling. For more: Related articles: Read more about: lbo, deals Also Noted
SPOTLIGHT ON... Swiss banks face bleak future The vaunted secrecy by Swiss banks has been irreparably pierced. Once the tax regulators were able to make such strong in-roads, wealthy customer have generally been less keen to see numbered account at Swiss banks as a haven from authorities. That has presented some existential questions for the likes of UBS and others. Bloomberg notes that EFG International last month reported outflows from continental Europe in the first half, while net new money from private clients at Vontobel fell 86 percent to 100 million francs from a year earlier. Article Company News: And Finally…Apple vs. Samsung a slugfest. Article
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Tuesday, August 7, 2012
| 08.07.12 | Dubious distinction for Knight Capital
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