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Today's Top News1. Blankfein back to being the elder statesman
I wondered recently who might emerge as the next elder statesman of the banking industry. The conventional wisdom holds that JPMorgan Chase CEO Jamie Dimon's reputation has been damaged by the recent London Whale scandal, toppling him from his perch. One candidate that might be an old one would be Goldman Sachs CEO Lloyd Blankfein. He has weathered some massive storms as of late, and he has the bank in relatively good shape. Customers are in the truck, the stock price is on a tear and things are so good that he might even consider stepping aside. Blankfein is certainly sounding more like an elder statesman these days. He actually agrees with the notion that banks need strong regulation and enhanced capital requirements. "You have to go out and you have to take steps. You have to have different regulation, maybe more regulation in certain respects," he was quoted at a recent event. "I think it is absurd to talk about just the burdens of regulation without talking about what's driving people to want to regulate." He also said that, "We have to accept the fact that the pendulum may swing a bit far, because of how recent the trauma was." Such words might be anathema to other executives in the industry, but to regulators and lawmakers, they are pearls of conciliation, making him a good bet to regain his status as the world's most influential banker. That's a title he would retain even if he were to become chairman only of the bank as part of a transition process. For more:
Read more about: Goldman Sachs
2. A negative harbinger of third quarter earnings
In addition to being a mid-market investment banking powerhouse, Jefferies has become something of an early warning system for the results of the bulge bracket-type banks. Jefferies' quarters close one month ahead of the biggest banks, which means they often reflect what's ahead. For the third quarter, unfortunately, the implications are less than bullish. The good news is that if you count a gain stemming from Jefferies' white-knight investment in Knight Capital, the bank beat the estimates. However, if you exclude such gains, which you probably should, the bank lagged expectations, a fact that explains why the stock sold off. The main issue was weak bond trading, which has implications for other banks. There may be a seasonal element at work, as trading activity tends to slow in the summer, but perhaps that can't explain for the 9.2 percent slump in bond activity quarter-to-quarter, which was disappointing to the markets. However, revenues were up significantly year-over-year. The same was true of equity trading. It would not surprise many if we see similar results elsewhere. That said, sales and trading activity has been strong in September, and that will offset weakness in the previous two months. For more: Related articles: Read more about: stocks, Bank Stocks 3. Sheila Bair sounds off on Citigroup CEO
At the height of the financial crisis on Wall Street, it was no secret that there was no love between FDIC head Sheila Bair and Citigroup CEO Vikram Pandit. The conventional wisdom at the time was that Bair considered the CEO barely north of competent and eventually concluded that he should be ousted as CEO of the bank. An excerpt in Fortune from Bair's new book makes clear that the conventional wisdom was right on. She recounted a fateful meeting at which the CEOs of the top banks were informed that they would all be required to accept TARP money. "Out of the corner of my eye I caught Vikram Pandit looking our way. Pandit was the CEO of Citigroup , which had earlier bollixed its own attempt to buy Wachovia. There was bitterness in his eyes. He and his primary regulator, Timothy Geithner, the head of the New York Federal Reserve Bank, were angry with me for refusing to object to the Wells acquisition of Wachovia, which had derailed Pandit's and Geithner's plans to let Citi buy it with financial assistance from the FDIC. I had had little choice. Wells was a much stronger, better-managed bank and could buy Wachovia without help from us. Wachovia was failing and certainly needed a merger partner to stabilize it, but Citi had its own problems -- as I was becoming increasingly aware. The last thing the FDIC needed was two mismanaged banks merging. Paulson and Bernanke did not fault my decision to acquiesce in the Wells acquisition." She also writes that, "Pandit looked nervous, and no wonder. More than any other institution represented in that room, his bank was in trouble. Frankly, I doubted that he was up to the job. He had been brought in to clean up the mess at Citi. He had gotten the job with the support of Robert Rubin, the former secretary of the Treasury who now served as Citi's titular head. I thought Pandit had been a poor choice. He was a hedge fund manager by occupation and one with a mixed record at that. He had no experience as a commercial banker, yet now he was heading one of the biggest banks in the country." In the end, perhaps here assessment proved to be less that spot-on. He has steered the bank back from the brink, with the help of TARP of course, though he remains hugely controversial for his gargantuan compensation package. For more: Read more about: Citigroup, Vikram Pandit 4. Goldman Sachs compensation still an issue
Goldman Sachs' stock has rallied impressively as of late. It hit a 52-week high of $128.72 in March only to tumble precipitously, falling toward $90 a share in June. Since then, it has soared to nearly $120, and it may have more room to run. Still, the stock remains under tangible book value per share, a fact that shareholders are keenly aware of. One obvious course of action is to continue to reduce expenses, an idea that has kept compensation on the front burner as an issue. Reuters notes that, "Goldman has brought compensation costs down, in part, by firing, nudging into retirement, or happily accepting the resignation of people who make a whole lot of money. (Viniar, whose salary clocked in at $15.8 million last year, is among that group.) Overall, the bank reduced comp costs by $3.2 billion last year and has cut 3,400 staffers from its payroll since the end of 2010. But some shareholders think Goldman should be doing even more. One prominent investor who focuses on financial stocks said Goldman is facing 'the Lazard problem' — a culture where employees expect to get paid a lot, and will leave if they don't. But, he says, management is not seeing things the same way as shareholders because they have fared much better financially, even in bad times." Here's an interesting comparison: Return-on-equity for common shareholders vs. compensation as portion of common equity. According to one calculation, "Goldman employees have done better than shareholders by 10 percentage points, on average, since the firm went public in 1999. That equates to $34.7 billion over those 12 years, he said, not including what Goldman spends to repurchase shares issued to employees. To put that figure in perspective, Goldman's current market cap is about $57.5 billion. In good times, when everyone was profiting from a rising market, this issue seemed to matter less. But given that Goldman is trading just shy of tangible book value — a measure of what the company would be worth if liquidated — investors have become less forgiving." And they may demand more, which will keep up the pressure in terms of employee cuts. This could make for an interesting proxy season next year. For more: Read more about: Goldman Sachs, banker pay 5. More MBS woes for Wells Fargo, Morgan Stanley
Law firm Gibbs & Bruns put itself on the Wall Street map last year when it negotiated the controversial $8.5 billion settlement on behalf of big MBS investors, including BlackRock and PIMCO, with Bank of America. Since then, it has been targeting other banks, such as JPMorgan Chase. The Houston-based firm's cross hairs are now firmly turning in the direction of Wells Fargo and Morgan Stanley. Gibbs & Bruns, in a statement, has "cited at least $15 billion of Wells Fargo's residential mortgage-backed securities and $5 billion from Morgan Stanley where holders have 25 percent or 50 percent or more of the voting rights…The dispute also covers $23 billion of Morgan Stanley-issued RMBS and $30 billion of Wells Fargo's RMBS where holders 'have significant voting rights, but less than 25 percent or 50 percent.' " This is not necessarily bleak news for the banks. Some sort of legal settlement is inevitable, and it may be that firm will seek settlements favorable to the banks. Recall that Bank of America deal was considered such a sweet deal for the bank that it sparked a host of controversy and litigation in large part over the trustee that helped strike the settlement accord, which bondholders not party to the deal characterized as insufficient. That case remains mired in the legal process. It remains to be seen what kind of deal can be inked with Wells Fargo and Morgan Stanley. Bondholders not part of the Gibbs & Bruns group will surely take note. For more: Read more about: mortgage backed securities, MBS Also NotedSPOTLIGHT ON... Merrill Lynch loses $10 million on botched trade A series of apparently botched dividend trades let to a $10 million loss at Merrill Lynch. That pales in comparison to other trade snafus we've seen recently, but it does underscore the importance of trade errors in a high frequency era. No customers were affected. It's unclear if this were a fat finger mistake, software issue, or something else. Trading shops do need to worry about these sort of snafus. Article Company News:
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Monday, September 24, 2012
| 09.24.12 | Goldman Sachs compensation still an issue
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