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Today's Top News1. Pundit praises Bank of America on putback estimate
One of the biggest issues facing Bank of America has been its potential exposure to putback requests, at both the GSE level and the private-label level. One observer of the bank now gives it credit for a new transparency on the issue. As of the second quarter, the bank was reticent to speak up with a firm estimate of how much it expects future putback requests to cost in the future. The firm has since changed that tune, noting on the thid-quarter earnings conference call that "we currently estimate that the range of possible loss for both the GSEs [government-sponsored entities] and the non-GSEs for rep and warrant exposures could be up to $6 billion over our accruals at Sept. 30 and compared to the up to $5 billion over accruals at June 30, which, once again, were only for non-GSE reps and warrant exposures. The increase in the range of possible loss from our June 30 period is the net impact of, among other changes, updated assumptions and the inclusion of GSE rep and warrant exposure, as well as other developments." To get that specific is a good sign. "For the first time since the potentially fatal repurchase issue reared its ugly head, we now have an official estimate of the full extent of B of A's liability," the article notes, saying also that $6 billion above reserves is a very manageable level. All this plays into the view that "may have finally turned the corner. While its third-quarter earnings were nothing to write home about, the substance of its prepared remarks and the content of its earnings call mark a dramatic change in tone, from one focused exclusively on stemming losses to one directed toward growth and profitability." All that said, I'd still focus on revenue as well. Proven offsets to the Durbin Amendment losses on the consumer side have yet to emerge, and that can't be discounted. The more specific estimates of putback liability is definitely good news, but it speaks more to the bank getting its house in order than to becoming a growth story once again. For more: Related articles:
Read more about: Bank of America, putbacks
2. Frank: JPMorgan shouldn't be prosecuted for Bear Stearns crimes
The likes of JPMorgan, Wells Fargo and Bank of America have reason to be doubly steamed about various law enforcement actions against them. On the one hand, the government urged them to bail out, respectively, Bear Stearns, Wachovia and Merrill Lynch, only to turn around a few years later and charge the bailed-out banks with crimes that the new owners have to pay for. Barney Frank, who has been tough on banks as the chairman of the House Financial Services Committee, says this is wrong. "The decision now to prosecute J.P. Morgan Chase because of activities undertaken by Bear Stearns before the takeover unfortunately fits the description of allowing no good deed to go unpunished," Frank, the co-author of the 2010 Dodd-Frank reform law, told Reuters. He also thinks that Bank of America should be shielded from enforcement actions related to Merrill Lynch. New York Attorney General Eric Schneiderman sued JPMorgan this month for various wrong-doing over MBSs marketed by Bear Stearns. The flip-side of the argument is that if crimes were committed someone should have to pay, especially if the crimes were endemic. If the entire industry engaged in certain illegal activities, they shouldn't be able to escape the law. It would be a lot easier if the executives in charge of the bank at the time were targeted. But that's not the case. In any case, it seems ungrateful to hold the white knight accountable for crimes of the targets. Maybe this can be taken into account when negotiating the settlement. I do expect a settlement. For more: Related articles:
Read more about: Enforcement Action 3. S&P: Volcker rule could cut bank profits by $10b
Just how much will the Volcker Rule hurt banks? That's been a burning question since the rule was passed as part of Dodd-Frank. The answer is elusive in many regards because the final rule has yet to be passed. There are still plenty of questions about how certain exemptions--for market making and hedging, for example--will be handled, and whether certain types of hedge funds, such as those that act more like lenders, will be covered. Standard & Poor's has weighed in with a look at the credit implications. It contends that the top eight banks could lose up to $10 billion annually in pre-tax earnings. The report also lauded the rule for its likely effects on risk and volatility, which was the idea all along. So while the rule may reduce profits, it would also minimize risks. While Goldman Sachs and Morgan Stanley have the most to lose, as they are the banks most dependent on trading. But even smaller institutions may feel some effects, the likes of Wells Fargo and regional banks like PNC and U.S. Bancorp. "The Volcker Rule is perhaps the most complex and controversial part of the Dodd-Frank Act, and we believe the potential outcomes could vary widely, depending on the final rule," S.&P. wrote. My sense is that the furious lobbying effort on behalf of banks will likely bear fruit, and we'll see some favorable rules that will not reduce revenue greatly from market making and hedging. Many banks have already moved to comply with rules that limit ownership in alternative investments. In the end, from a credit rating point of view, the rule may be a wash. For more: Related articles:
Read more about: Volcker Rule, Dodd Frank 4. Decline in trading volume takes a toll
Big banks saw a surge in FICC-oriented sales and trading activity in the third quarter, relative to the year-ago quarter anyway, but the big picture going forward remains cloudy. For the most part, big buy-side institutions are rationalizing their costs. Greenwich Associates conducted a study of 232 head traders and traders at a variety of buy-side institutions, including pensions, endowments and hedge funds, asking about the organizational structure, staffing levels, budgets and operations of their trading desks. Forty-four percent of hedge funds participating in the study said their 2012 trading desk budgets were reduced from 2011, with approximately 40 percent reporting flat budgets and 17 percent reporting increases. Those results suggest that "hedge funds are moving much more aggressively than other types of institutional investors to adjust the size and cost of their trading desks in response to a general slowdown in securities trading activity." The most pain is being felt on the equity side, and we're starting to see some powerful ripples. MarketBeat reports that the stock trading and research division of ThinkEquity has shut down. A host of similar operations have also been shuttered. Independent research shops have also taken some big hits. The soft-dollar environment isn't what many hoped for, and there's just less to go around. In the end, all this is in keeping with the notion that a new era of equity trading is taking shape. For more:
Read more about: Ficc, Equity Trading 5. A twist in an upcoming insider trading trial
The Rajat Gupta guilty verdict in June proved that the government could indeed win an insider trading conviction without "smoking-gun" wiretap evidence. A jury convicted the former Goldman Sachs director based on circumstantial evidence, a "what else could they have been talking about" approach. Circumstantial evidence will again be the main evidence in the trial of Anthony Chiasson, co-founder of Level Global Investors, and Todd Newman, an ex-portfolio former manager at hedge fund Diamondback Capital Management. The twist here is that the same evidence could be used against both men, which has put the two defendants at odds with each other. The prosecution's strategy is to put analysts who communicated with both men on the stand to explain how they fed tips to insider traders. the two. In one case, an analysts fed lots of information to Newman but not Chiasson. DealBook notes that, "The problem for Mr. Newman is that a few hundred of those e-mails included him as a recipient. Many were sent by an analyst at Diamondback who has also pleaded guilty to being Mr. Newman's source of inside information. To the extent the e-mails show (that another witness) and others engaged in wrongdoing, they implicate Mr. Newman in the same criminal conduct. He could suffer some rather significant collateral damage if Mr. Chiasson argues that the e-mails are evidence of violations of the federal securities laws...The e-mails might hurt Mr. Newman's case, but that is of little concern to Mr. Chiasson because it has become a situation of 'every man for himself.' " Newman has unsurprisingly asked for a judge to sever his case from Chiasson's or to bar his co-defendant from using the e-mails as part of his defense. The prosecution has remained neutral on this, but it seems like the chances of getting at least one conviction go up if they are tried together. For more: Read more about: Insider Trading. Trial Also Noted
SPOTLIGHT ON... Will Citizens Financial be sold? According to the Boston Globe, speculation has spiked over whether RBS will be forced to sell its U.S.-based subsidiary, Citizens Financial Group, to raise capital. "Royal Bank has racked up billions of dollars in losses this year from accounting charges and faces potential lawsuits and government fines over revelations it may have helped traders manipulate the Libor lending rate index — which banks use to set a host of commercial and consumer loan rates. In addition, Spanish banking giant Santander backed out of a deal to buy more than 300 RBS branches in the United Kingdom for about $2.6 billion earlier this month." The bank so far has resisted calls to sell its valuable U.S. regional bank, which has helped the bank shore up profits. Article Company News:
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Wednesday, October 24, 2012
| 10.24.12 | Frank: JPMorgan shouldn't be prosecuted for Bear Stearns crime
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