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Today's Top News1. Finra sues Series 7 test firm
The financial services industry has become a test-prep culture in many ways. The need to get ahead has pervaded all segments of society to the point that we now have kindergartners studying for standardized exams aimed at gaining entrance to gifted and talented programs in elementary school. Has society gone to an extreme? I raise this in light a Reuters story that notes that FINRA is suing an exam-preparation firm, "alleging that its employees took securities industry licensing exams to share questions with the company's customers." FINRA, in a lawsuit filed in a California federal court, charges that the president of Training Consultants and her three children, who work for the company, took 64 FINRA exams between October, 2001 and August 2012, a "highly unusual number." A pattern "suggests the Leahys did not intend to pass the exam but rather memorize and copy questions for their customers to use, FINRA alleged." For the record, the family failed 52 of the 64 exams they took. Training Consultants has been providing test prep services for the securities industry for more than 30 years. "The lawsuit highlights FINRA's challenges to police possible cheating on the licensing exams it administers. The regulator, in other instances, has disciplined securities brokers for cheating on exams through means such as looking at a study guide during a break, according to a review of FINRA's database of disciplinary actions. Brokers caught cheating are typically barred from the securities industry." For more: Read more about: FINRA 2. Discover discounts idea of Wells Fargo merger
Discover doesn't think much of the idea that it would make a great fit with big consumer bank Wells Fargo. The head of payment services at the company told Deal Journal that, "We were all chuckling at this story too. We hear speculation like that all the time." One benefit to Discover, according to the Susquehanna analyst who floated the merger idea, would be much lower costs of funding, given Wells Fargo financial heft and member of FDIC. But the Discover executive suggested that the payment firm is already addressing its funding costs by boosting its retail deposit base in its home market. Discover had $46.6 billion in outstanding credit-card loans as of May 31, and its various network businesses handled $78.4 billion in payments volume during the fiscal second quarter. The executive was quoted: "We do take consumer deposits in the U.S. The financial crisis led us down a path of developing a very diverse funding strategy." Of course, growing significantly organically will take a long time. There has long been merger speculation about Discover, since it was spun off from Morgan Stanley. It would likely be more of a target if it were a leading edge player in the unfolding mobile payments battle that some think will revolutionize the payments industry. That would be a great business for a card issuer to own and great base on which a bank could optimize its card operations for the future. For more: Related articles: Read more about: mergers, Wells Fargo 3. Possible earnings pain from NIM shifts
The Fed's move to christen the voyage of QE3 will be good news for banks in the sense that they are economically sensitive. A repairing economy can help create better lending conditions, but the rise of QE3 is not a simple issue. There's plenty of reason for worry about the implications of declining net interest margins (NIMs), which may end up undercutting an improving economy. TheStreet.com highlights Wells Fargo, whose CFO has said recently that "the bank's portfolio of bond securities carrying pre-crisis yields faces maturities that will push interest earnings lower. Wells Fargo now expects interest margins to fall 17 basis points and resemble year-ago levels in the third quarter. Sloan highlighted two key factors: declining gains from the write up of credit-impaired loans acquired during the crisis [Wells Fargo bought Wachovia in 2008] - and a run-off of higher-yielding debt securities. Previously, those factors helped Wells Fargo more than double net interest earnings since 2007. While interest earnings have risen modestly as a result of the Wachovia acquisition, interest cost is off roughly 60% in the past five years." As offsets dry up, we're going to see some big hits to interest-based earnings, according to some. Analysts warn of substantial losses as early as this year. One KBW analyst ranks Wells Fargo "as the most exposed large cap bank to the negative impact interest rate dynamics." As balance sheets turn over, more banks will be hit. I've noted regional banks seem especially vulnerable to NIM pressures as well. For more: Related articles:
Read more about: Net Interest Margins 4. Krawcheck: Banks are too complex
The "too big to fail" nut has yet to be cracked. The largest banks, and perhaps a few other companies, are certainly systemically important, and if one of them ran into trouble, it would leave the door open for negative financial impact. This doesn't sit well Sallie Krawcheck, the former Citigroup and Bank of America executive. She was quoted at the recent Bloomberg Markets 50 Summit saying that, "If you look at the job of the board, if you look at the job of investors, it's the concern about complexity." She also said, that "it makes you weep blood from your eyes," as noted by DealBook. Krawcheck agrees that the Volcker Rule and legislation requiring a break-up of SIFI-like banks were two means to a desirable outcome. All that suggests to me that she is no longer interested in workling as a top executive at one of the premier banks. All in all, by the "too big to fail" yardstick, Dodd-Frank has yet to prove successful, but it seems to be making strides toward making it less likely that any big bank will have to invoke its Living Will. Ruth Porat, CFO of Morgan Stanley, said at the same conference that the system was improving, pointing to the new OTC derivatives rules that are aimed at making the more market safer, more transparent, better collateralized and more efficient in terms of clearing and settling. She noted that, "My concern is when the products themselves become too complex to understand, one begins to have a problem." In the end, the only way we'll see a break up of a bank is if shareholders demand one. That's possible, but not likely. For more: Related article:
Read more about: too big to fail 5. JPMorgan Chase recovers from Whale Trade dip
Did the JPMorgan London Whale "hedging fiasco" amount to a gigantic buying opportunity? Bloomberg reports that the bank's stock price has recovered the ground it lost in the wake of the shocking disclosure that the botched hedges led to losses of $5.8 billion in the first two quarters of the year. One interpretation might be that CEO Jamie Dimon, though he lost some of his Teflon, took the necessary steps to ensure that the episode was a mere anomaly. He revamped his executive line-up more than once, he scaled back the CIO unit, and he agreed in theory to claw back funds from executives who were responsible. So some might conclude that Mr. Market has come to its senses and is once again judging JPMorgan as a "best in class" sort of stock. Of course, the bank got a boost along with other banks by the news that the Federal Reserve will christen the QE3. The knee-jerk reaction was that big banks will benefit, but that remains to be seen. The bank may have limited upside from here as analysts sort out exactly which banks are in line to benefit the most. At the same time, there are lots of wildcards that will whip bank stocks, like litigation costs from put backs and Libor settlements. Deutsche Bank recently changed its rating on JP Morgan to hold from buy and cut the price target to 440 from $43, suggesting the stock is fairly valued in general right now. For more: Related articles: Read more about: Equity Analysts, JPMorgan Also NotedSPOTLIGHT ON... Jefferies to benefit from Knight investment Jefferies' white knight investment in Knight Capital will be immediately effective in terms of earnings, according to KBW. Analysts at the bank specialist estimate that Jefferies is sitting on an unrealized gain of $105 million on its $125 million investment, which could lift third-quarter EPS by 11 cents. However, KBW cut its EPS view by $0.02 after growing less optimistic on core investment-banking revenue, an industry-wide issue. Article Company News: And Finally…America's latest billionaire. Article
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Monday, September 17, 2012
| 09.17.12 | Finra sues Series 7 test firm
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