Today's Top Stories Also Noted: OpenText News From the Fierce Network:
Today's Top News1. Are private equity firms looking for an elephant?
I noted recently that as loads of dry powder continue to sit unused, private equity activity is simmering -- but hardly boiling. Total dry powder, by one estimate, exceeds $190 billion. Funds would much rather commit that capital in truly profitable ways, rather than finding water-treading deals in the secondary market. The esteemed Deal Book columnist made a splash a while back with his statement that "some private equity firms have put the word out to Wall Street banks that they want to go 'elephant hunting' — seeking big deals worth as much as $10 billion — and are willing to pay a special bounty for bringing them acquisition targets." Is such a deal likely? Well, it might be hard. Club deals are not really in favor right now, and the market has been in rally mode, reducing the imperative for a large going-private sort of deal. A recent survey has in fact found that few massive deals are really expected within the industry, but you never know. Interest rates are really low, and that helps. All in all, the outlook is stable but not robust, according to Bain. At this point, the more likely bet is that general partners will seek arrangements by which they will get an extension on the dates by which dry powder must be used. Some will also continue to seek secondary market deals, as they await better days. For more: Related articles: Read more about: LBOs, deals
2. Goldman Sachs employees turn to Romney
Goldman Sachs employees were ardent supports of President Barack Obama four years ago, but the relationship has now soured in a more than a few cases. This year, the gilded bank has reversed course, and Deal Journal reports that Goldman employees "have given just $136,000 to Obama, down from $1 million….The Wall Street's firm's employees aren't just withholding money from Obama, they are giving money to his challenger. Goldman employees have given Mitt Romney's campaign $900,000, plus another $900,000 to the super PAC founded to help him. In the four decades since Congress created the campaign-finance system, no company's employees have switched sides so abruptly, moving from top supporters of one camp to the top of its rival, according to a WSJ analysis." So why the switch? The article suggests that the big issue is the Volcker Rule, which some feel was a surprise. Bank executives apparently feel that the Obama administration should have consulted with the bank before plowing ahead. What's going on at Goldman Sachs isn't hugely different that what's going on across Wall Street, and Romney's advantage stems less from his roots as a private equity guy and more from disdain for the President. For more: Related articles: Read more about: campaign contributions, Politics 3. Wells Fargo charged with mortgage fraud
Wells Fargo became the latest bank to be hit with charges that it defrauded government mortgage programs, and the specifics of the cases are somewhat familiar. "As the complaint alleges, yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," U.S. Attorney Preet Bharara said in a release. The lawsuit alleges the bank failed to properly underwrite more than 100,000 mortgages in an effort to make them eligible for FHA insurance. It was also said to provide incentives for employees to close more such loans. In addition, the bank failed to notify HUD, which administers the FHA program, as required, the suit charges. As of now, Wells Fargo denies all charges and has told the media it acted in good faith. It also noted that the charges are not new, as they had been previously addressed by HUD. Given that the charges were brought in part under the False Claims Act, you have to wonder if there is whistleblower involved. In any case, I expect a settlement at some point. The LA Times noted that three mortgage cases brought by Bharara's office have already settled: CitiMortgage for $158.3 million, Flagstar Bank for $132.8 million, and Deutsche Bank and MortgageIT for $202.3million. For more: Related article:
Read more about: Wells Fargo, mortgages 4. Put into perspective, banks earnings strong
Despite the state of the economy, the long bitter aftermath of the financial crisis, and the prices of banks stocks, banks are as profitable as ever in absolute terms. Bloomberg reports that the top six banks over the four quarters through June have generated $63 billion in profit, which "is more than they earned in any calendar year since the peak in 2006," adding that "Bank of America "made more in the 12-month period than Walt Disney Co. and McDonald's Corp. combined." Citigroup "earned more than Caterpillar and Boeing," and JPMorgan Chase generated profits of more than $17 billion even after reporting the $5.8 billion trading loss linked to the harpooned London Whale. But you can look at profitability in other ways. ROE remains at just one-third of 2006 levels, and few people are convinced that the future is golden all over again. For now, the profits are being boosted by a manic cost-cutting that has borne lots of fruit. At some point, however, the engine will have to be organic revenue generation, and as of now, the next big revenue thing isn't exactly clear. On the consumer side, there's been no real answer to the Durbin Amendment. On the institutional side, an MBS-like gravy train has yet to emerge. So for the moment, there's no rationale to think that stock prices will permanently soar past tangible book values per share, despite record profits. What do you think it will take to finally get these banks moving again? For more: Related article: Read more about: bank earnings 5. McKinsey's sobering conclusions about the U.S. banking industry
McKinsey has weighed in on the state of the U.S. banking industry, and its conclusions are sobering. U.S. banks had an average ROE of 7 percent last year, up from 6.2 percent in 2010 as credit quality gradually improved, but "are still far from earning their cost of equity," McKinsey said, as noted by Reuters. "Even if interest rates rise and banks reprice their services upward, they are 'unlikely to return ROE to acceptable levels' any time soon, the report said." I've suggested all along that the great revenue drought represents the thorniest issue. At some point, the industry has to find the next great thing, and get the top line moving north again aggressively. But so far, the next great thing remains elusive. Bank revenue globally rose 3 percent to $3.4 trillion in 2011 from the previous year, slowing from a 9 percent rise from 2009 to 2010. Returns on equity last year fell to an average of 7.6 percent from the low double-digits and profit fell by 2 percent. Cost cutting can only achieve so much. Expenses for U.S. banks last year "exploded" to 68 percent of income from 60 percent in 2010, according to the study, but that has clearly reversed in 2012. The conclusion of the report is that the industry has yet to find a business model to create and sustain above-average growth. One might quibble that the study is dated, but we think the conclusions remain valid. Once the cost-cutting effects wane, the industry will be forced to confront its top-line problems even more directly. For more: Read more about: banks, Mckinsey Also Noted
SPOTLIGHT ON... High praise for Realogy deal The Deal Professor has weighed in with a look at Apollo's Realogy success story, calling it an example of how financial wizardry can save a company. On the eve of the Realogy IPO, it's clear that this was a high stake gamble by the private equity firm. It ploughed more money into the once-left-for-dead real estate company, and loaded it up with more debt, and it certainly now looks like it will turn a profit and leave the company in much better shape. Article Company News:
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Thursday, October 11, 2012
| 10.11.12 | McKinsey's sobering conclusions about the U.S. banking industry
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