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Today's Top News1. Mortgage concentration frustrates monetary policy
Back in 2007, the king of the mortgage market was Countrywide, which controlled nearly 17 percent of the market. Wells Fargo was the second largest player, with 11.2 percent. Fast forward to now for glimpse of how life has changed. The top player is by far Wells Fargo, which controls one-third of the market, followed by JPMorgan Chase, which controls 11 percent of the market. Following are U.S. Bank (5.4 percent) and fading Bank of America (4.4 percent) and Citigroup (3.8 percent), which come in third through fifth. What we have now is an unprecedented degree of concentration, which surely was not the intent of policy makers. One cost of such concentration was highlighted by the Financial Times: QE3 is now being frustrated. While Wells Fargo and JPMorgan are feasting on more revenue from mortgage activity, there are signs that the market has not fully passed on the benefits of QE3. "The Fed's new $40 billion-a-month, open-ended program of quantitative easing, known as QE3, has driven down the yield on mortgage-backed securities. But the interest rate on new mortgages for consumers has not fallen in line. In a fully competitive market, the two rates should track each other, because banks typically package new mortgages into securities that are sold to investors." Another interpretation is that while big banks have benefitted, no one or two institutions by themselves can fully pass on the benefits. For that, you need a thriving competitive industry. At the same time, you cannot discount the effect of more stringent policies by GSEs, which has obviously had an effect. Perhaps the biggest issue is that lots of smaller banks are having trouble riding the wave because they simply don't have the infrastructure to handle the volume. For more:
Read more about: market share, mortgages
2. Book highlights Goldman Sachs options tactics
Information from Greg Smith's book about Goldman Sachs continues to dribble out in pieces, and I'll try to offer a more formal review a bit later. As of now, the first chapter has gotten the most attention. I'd like to look at some revelations as reported by Politico, which got a look at the entire book. One anecdote was interesting, and noted that "By the time Smith arrived in London in 2011 to help start Goldman's U.S. equity derivatives business in Europe (by then the bank had weathered a meltdown of the global financial system and was accused of having committed fraud during the subprime mortgage crisis), the firm was busy convincing clients to buy or sell options on big European banks such as SocGen, BNP Paribas and UniCredit, all while countries such as Greece, Portugal and Spain faced a serious debt crisis. The idea was to advise clients to bet on the opposite outcome of what the firm believed would happen so it could profit by taking the other stance, he wrote." Now that's a fairly shocking statement. If the Goldman Sachs' advice (and presumably "research") was truly nothing but a marketing piece designed to get someone to stupidly take the other side of the bank's trades, something is wrong. It calls into question every piece of advice that the bank puts out. To some people, that's downright fraudulent. Goldman Sachs holds that the firm never acted as a principal on any of those options trades. Critics have faulted the book for not providing specific examples where it did. Moreover, Smith sold U.S. equities and derivatives while he was in London, not European ones, according to the bank. All in all, this might be the most salacious of the charges in the book. The bank's PR team has certainly succeeded in diminishing the book's claims of actual wrongdoing, and casting doubt on lots of the other anecdotes. For more: Read more about: Goldman Sachs, Options 3. Banker's secretary charged with stealing
William R. Salomon is a storied name on Wall Street. He is the 98-year-old son of one of three brothers who founded Salomon Brothers, which rose to be an esteemed investment bank and a pioneer in the MBS market. It was bought by Travelers in 1998, and Travelers was bought by Citigroup later in the same year. The Salomon name survived as part of Salomon Smith Barney, which was the investment banking unit of Citigroup, but in 2003, the name was changed. Sso storied is the name, however, that William Salomon is still given office space at Citigroup, along with a secretary, who unfortunately has just been charged with embezzling $2 million from him. Court papers filed by prosecutors show that Karen Febles has been accused of the crime. A Citigroup spokesman told DealBook that the bank "informed law enforcement immediately upon discovery of suspicious account activity by this former employee, and we have cooperated fully to ensure that justice is done." Febles, 47, of Palisades Park, N.J., has pleaded not guilty and is scheduled to go on trial in Newark next month. "Experts say that these incidents arise for several reasons. Investment bankers and corporate lawyers are often on the road, working 60 to 80 hours a week, and they give secretaries a lot of discretion. They also say that class envy often factors into these crimes. And in cases like the one involving Mr. Salomon, elder abuse can play a role." The ruse was simple, according to prosecutors. Salomon authorized Febles to prepare personal checks for him to sign and she would simply "alter the withdrawal amount and deposit excess funds in her own bank account, according to the government's complaint." For more:
Read more about: Embezzlement 4. Probe into Facebook IPO coming up empty
The botched IPO of Facebook was one of those events that prompted lots of public outrage, which will usually bring forth an investigation. The SEC has been taking a look at the IPO but so far has found much to get prosecutors excited. According to Bloomberg, the SEC "hasn't found evidence that the company withheld material information from investors...The SEC, whose investigation is continuing, is still looking at other IPO-related issues, including whether retail investors were harmed by misleading information from brokers or selective disclosures to analysts by the company's bankers regarding Facebook's prospects for mobile customers." One issue here is the role of the SEC itself. Bloomberg has previously reported that SEC officials were quite proactive as they reviewed the disclosure material from the issuer. The head reviewer made notable requests of the social media giant to better disclose what it actually stood to gain from mobile trends and to lessen the confusion about statement that might have been interpreted as fact not marketing. The extent to which the company depended on Zynga was also an issue. "By the end of February, the SEC had amassed a list of 92 matters on which it sought further information. The volley of messages among SEC officials, Chief Financial Officer David Ebersman, and Facebook's law firm Fenwick & West LLP, resulted in very complete disclosures on key issues before the offering." It would appear that the SEC's solid job ahead of the offering might actually reduce the liability of the issuer. An ironic twist. So Facebook ought to be thanking the SEC in a sense. There may still be an issue on the table about how information was communicated by the underwriters to clients. The big controversy at the time was whether a change in information about mobile clients and advertising was selectively disclosed. For more: Read more about: Nasdaq OMX, Facebook IPO 5. Experts: Anti-trust suit against PE firms may be weak
It was huge news when a federal judge in Boston released previously sealed court material in a class action anti-trust suit against 11 big players in the private equity industry, including Blackstone, Carlyle Group, Goldman Sachs, and Bain Capital. The plaintiffs argue that shareholders in portfolio companies lost billions because of club deals that resulted in lower prices for companies in the hot-and-heavy 2003 to 2007 time span. The released material included lots of emails that on the surface seem to be quite incriminating. Here's an example: "In one email cited prominently in the opening pages of the complaint, Silver Lake Partners co-founder Glenn Hutchins seemingly anticipated that his fund would participate in rivals' future deals after bringing a half dozen others into the 2005 buyout of SunGard Data Systems. 'We invited you into Sun(G)ard and have a reasonable expectation of your reciprocating,' Hutchins wrote to Blackstone's James, according to the complaint." Another example notes that, "Blackstone Group LP President Tony James wrote in an email to KKR & Co co-founder George Roberts: 'We would much rather work with you guys than against you. Together we can be unstoppable but in opposition we can cost each other a lot of money.' Roberts, the lawsuit said, replied later that day: 'Agreed.' " Reuters weighs in suggesting the case may be weaker than it appears, and I would tend to agree. If recent white-collar trials have shown anything, it's that emails alone are rarely enough to persuade a jury. At the same time, "Legal experts say much of the alleged collusion outlined in the antitrust lawsuit may have been nothing more than firms working together in perfectly acceptable ways to spread the risk of taking on a big investment. The practice, they say, allowed the investment firms to pursue the largest deals and offer premiums to shareholders." For more: Read more about: club deals, Collusion Also Noted
SPOTLIGHT ON... Timberwolf suit against Goldman Sachs continues Timberwolf was one of several CDOs to generate lawsuits--and it has lived for another day. A state judge in New York has denied the bank's request to nix the suit. Basis Yield Alpha Fund, which is based in Australia, is seeking $67 million in recouped losses plus $1 billion of punitive damages from the transactions at issue. The judge dismissed some charges, including allegations of breach of contract and breach of implied covenant of good faith and fair dealing, notes Reuters. Article Company News: And Finally…Is "The Jungle" alive and well? Article
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Tuesday, October 23, 2012
| 10.23.12 | Probe into Facebook IPO coming up empty
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