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Today's Top News1. Pandit may be forced to give up millions
Shareholders may indeed get the last say on former Citigroup CEO Vikram Pandit's pay. Recall that shareholders offered a very high-profile thumbs down to Pandit's compensation put forward by the board back in proxy season. The non-binding say-on-pay vote was basically a strong signal that shareholders thought he hadn't delivered enough for the millions he was scheduled to receive. It's unclear how the board would have acted had Pandit not quit, but given that he has stepped down, he will now forego almost $33 million in cash and stock from a retention package, according to Bloomberg. Pandit would have had to remain as CEO of Citigroup until at least May 17, 2013, to be eligible for payments under a lucrative profit- sharing plan. The big question is how the board will structure a severance package. It's still unclear just how rancorous all this was. If the tension was indeed tremendous, then I would expect to see a rather stingy severance package. If it was all planned and worked out amicably, the payout might be fairly generous. At this point, we just don't know. The whole transition was rather odd, and it seems obvious that something happened to precipitate the dramatic change. For more: Related articles: Read more about: shareholders, Severance Packages
2. What's holding back the mortgage market?
There's been some frustration over the past year or so with the state of the residential mortgage market. Rates are low, as are home prices, and while the market for originations and refinancing has picked up, there's a still a sense that lots of demand is going unmet. Consumers say banks have made it hard for even qualified mortgage holders to refi or get a loan. Bankers tend to blame government regulations for this. These are convenient scapegoats. The government always is. DealBook offers some counter-arguments to that time-worn narrative. "First, government support to the housing market far outweighs any negative impact for banks. The mortgage market is benefiting from three huge sources of stimulus and subsidy…All this aid has made it possible for banks like JPMorgan to carry out one of the most profitable, low-risk 'trades' that has ever existed in modern capital markets. They simply make mortgages and flip them to bond investors, after attaching the federal guarantee. In the third quarter, JPMorgan booked $1.78 billion in revenue from that type of transaction, a 36 percent increase from the year-earlier period." The essay also argues that banks are overstating the regulatory uncertainty over the market. The idea that banks will not make more loans because they are unsure if the loans meet the "qualified residential mortgages" criteria. "But debating the effect of all these various mortgage rules misses an important point: Banks like JPMorgan are currently willing to hold all sorts of assets that face regulatory uncertainty, some of them arguably riskier and harder to quickly sell than residential mortgages. One such asset is credit-default swaps, which led to large trading losses earlier this year at JPMorgan. The bank is still a huge player in that market, despite a range of new rules that are still being drawn up." All in all, the entire debate, like many political debates these days, has proven long on rhetoric and short on substance. In any case, banks like Wells Fargo are cleaning up in the market. Other big banks have to find a way to deploy their resources to keep up. For more: Read more about: mortgages 3. Are you ready for the new Morgan Stanley?
Who is the true visionary on Wall Street right now? A Bloomberg columnist makes the case that James Gorman, CEO of Morgan Stanley deserves the title. "Gorman has decided, correctly, that rather than hope for a revival of the glory days on Wall Street when return on equity was more than 20 percent -- most often because traders were swinging for those fences -- the time has come to refashion Wall Street into a lower-risk, presumably far safer enterprise that helps companies raise capital whenever and wherever they need it around the globe, provides them with advice on mergers and acquisitions, and offers institutions and individuals wealth management expertise." His deal to acquire all of Morgan Stanley Smith Barney amounts to a big bet on the fee-generating prowess of retail customers who are perhaps best seen as a few steps down from the type that Goldman Sachs goes for. While embracing retail clients, Gorman seems more than willing to get out of the proprietary trading game. He was quoted saying, "We don't do prop trading. We wouldn't allow it. We don't do it. We don't have treasury functions that run as little hedge funds." He's also taking on another sacred cow on Wall Street: Pay. He's been frank that some banker should just leave it they don't like their pay. He's emerged as a good friend of shareholders on this issue. All in all, you have to applaud what he's attempting to do. There will be some bumps. What is imperative here is that bank management makes a case strongly to analysts and institutions that it has embraced an entirely new business model that no longer warrants strict comparison with Goldman Sachs. That will be harder in quarters like the third quarter, when the big story was that FICC-like activity powered the bank's results. It goes to show that the transition may well be tricky. For more: Related articles: Read more about: Morgan Stanley 4. Morgan Stanley beats Q3 estimates
Morgan Stanley became the latest bulge-bracket-type bank to post an up-side earnings surprise. For the third quarter, the bank posted a loss of $.055 a share, compared with a profit of $1.15 a year ago. Excluding the DVA and nonrecurring restructuring cost, profit came in at $.035 a share, which was well above the average estimate of $0.25. Of particular note, the bank was able to grow its top line. Excluding DVA, which was hugely negative in the second quarter and hugely positive in the year-ago quarter, net revenues for the current quarter were $7.6 billion compared with $6.4 billion. The big mover was fixed-income sales and tradingFixed Income & Commodities sales and trading net revenues were $1.5 billion compared with $1.1 billion a year ago. The third quarter 2012 results were generally higher than analysts expected. The increase in net revenues from last year's third quarter reflected higher results in interest rate products and gains in credit products compared to losses in the prior year quarter. Equity sales and trading net revenues declined slightly to about $1.2 billion. Other activity also declined. The bank was able to take down its VAR to $63 million compared with $76 million in second quarter of 2012 and $99 million in the third quarter of the prior year. So what to make of all this? I've noted elsewhere that the bank has been outspoken in its desire to move away from what might be called the Goldman Sachs model, which is heavily dependent on FICC-like trading. But the bank certainly benefited from such activity in the most recent quarter. All in all, diversifying away from trading activity makes a lot of sense, and will hopefully add more stability to future results. There will be quarters where trading is weak. In such cases, perhaps asset management and other emerging areas will provide powerful offsets. That's the hope anyway. For more: - here's a Reuters article Read more about: earnings 5. Recycled charges sustain suits against banks
While many have suggested that the worst of the mortgage meltdown and foreclosure fiasco has passed for big banks, we're seeing even more lawsuits filed. Some of these suits are based on previous suits, suggesting that a pile-on effect is still in force. The latest example is the suit filed by the American Civil Liberties Union (ACLU) against Morgan Stanley, charging that the "is culpable for predatory loans made through the New Century Financial Corporation because the investment bank lent billions of dollars to New Century, a now-defunct subprime lender, and pressured it to make troublesome loans to African-American borrowers who could not afford them," notes the New York Times. The suit is a spin on previous litigation, adding a civil rights component. These issues were highlighted in an action by the Massachusetts attorney general in 2010. In June 2010, Morgan Stanley agreed to pay $102 million to settle the investigation. Another recent example is the charges by a new task force against JPMorgan Chase, on charges that had been highlighted in previous private litigation. So it would appear that some lawyers have every incentive to keep the legal gravy train rolling along. That said, I really do think the worst is over, and that banks have reserved adequately--for now anyway. For more: Related articles: Read more about: Lawsuits, Enforcement Action Also Noted
SPOTLIGHT ON... Asia alternatives struggle Deal Journal reports that private-equity funds raised in Asia Pacific in the third quarter of this year have declined by 50 percent, from $19.8 billion to $10.8 billion. Hedge funds have also seen similar trends when it comes to flows from limited partners. The issue may be macro in nature as the slowing Chinese economy weighs on the minds of investors. Article Company News:
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Friday, October 19, 2012
| 10.19.12 | Pandit may be forced to give up millions
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