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Today's Top News1. MERS now winning the judicial wars
MERS has generated a lot of litigation as the foreclosure fiasco continues in many states. There have been two interesting decisions just recently. In Nevada, the state Supreme Court has seemingly validated the use of the controversial electronic registry, which was started in 1995 by big mortgage lenders and GSEs to ease administrative burdens of mortgage ownership transfers. In a 26-page ruling, seven justices unanimously agreed that hundreds of thousands of mortgages involving the MERS could proceed in foreclosure after some technical adjustments. Some have suggested that this paves the way for a wave of actual foreclosures in the state, a victory for the banks. There have been some legal setbacks for MERS in other areas, however. One of the biggest issues in this controversy has been the extent to which MERS illegally withheld fees from county registrars. On that score, a federal district judge in Pennsylvania just dealt Reston, VA-based MERS a defeat. A suit that seeks class action status on behalf of country recorders in the state was upheld. The judge argued that, "the recording statute does require recordation of all conveyances," and said that Becker has the right to sue under a part of the law that allows "quiet title actions," which relates to compelling someone to record documents that may clear up property ownership, according to Bloomberg Businessweek. There has been a blizzard of lawsuits and decisions, so who is winning on balance? Mortgage Daily reports that MERS seems to be "winning the war." It "has faced some setbacks recently," but "dozens of decisions have been issued in favor of the registry by judges in several states." For more: Related articles:
Read more about: Mers
2. FICC activity powers big bank earnings
So what will drive big bank earnings for the next several quarters? Based on the third quarter results, it's tempting to say that capital markets activity will provide the biggest gains. In the quarter, healthy bond issuance, tighter fixed-income spreads, and an equity market rally fueled a rebound in capital markets revenues for the largest U.S. banks, allowing some banks to post upside earnings surprises. Fitch notes that aggregate capital markets revenues (excluding debt valuation adjustments) for the top five U.S. trading banks rose 13 percent sequentially and 40 percent from the third quarter of last year. The big show remains FICC trading. Such trading drove the bulk of the gains in the quarter, collectively accounting for 55 percent of aggregate capital markets revenues. That allowed banks to offset still-weak investment banking revenue growth, which has been held back by slow equity underwriting and a relative lack of deal advisory fees. Total advisory revenue for the top five banks fell 6 percent versus the year-earlier period. Unfortunately for anyone trying to model earnings, FICC activity will remain uncertain for the rest of the year, as there are lots of economic issues that could have an effect one way or the other. I've been saying for a while that revenue from mortgage activity has the potential to provide an element of stability at banks with large consumer operations. Such activity may be the differentiator going forward. For more:
Read more about: trading, Ficc 3. Lloyd Blankfein on the Greg Smith book
One might get the impression from the post-release reaction to Greg Smith's book "Why I left Goldman Sachs" that the top executives at the bank pooh-poohed the book's content with barely a sniff. But to hear Goldman Sachs CEO Lloyd Blankfein talk about it, the truth was just the opposite. He said on CNBC that the bank was "probably going to be a better firm" after conducting a "tremendous deep dive" into the accusations leveled by Smith about the firm's culture. Blankfein says the internal investigation was anything but a whitewash aimed at PR. "I'll tell you the truth, I have anxiety about these things. I don't know always what we don't know," Blankfein was quoted. "We checked on everything exhaustively and we didn't find anything. And when the book came out, I think a lot of people who reviewed the book didn't find anything," he said. To be sure, you have to wonder what would have been the response if the inquiry had found that the culture of the bank has been corrupted by a trading mentality that has become the ethos of the entire firm, all the way to the top. Still, as far as responses to negative media goes, the bank did a fine job and seems to have received some good advice about how to proceed in these negative-media situations. Goldman Sach's timely leaks about Smith's performance evaluations and money concerns really undercut the message. It's somewhat surprising still that the CEO addressed the issue. For more: Related articles:
Read more about: Goldman Sachs, CEO 4. Bank of America better positioned to hike dividends in 2013
Bank of America CEO Brian Moynihan declared victory last week over the naysayers who thought the bank was a laggard in terms of raising capital and fixing its balance sheet. Bloomberg quotes him at an employee meeting noting that, "We're going to officially declare victory...the reason why is, we have the top capital in the industry, the top liquidity in the industry." The bank has made tremendous improvement, and it has been given a thumbs up from a capital ratio perspective from the Fed. So that raises an obvious issue: Will the bank once again seek to hike its dividend? It passed the stress tests last year in part because it had no plans, but it seems to be in better position to make this milestone move in 2013. There are reasons that the bank may want to stay cautious on any capital return plans, however. The bank's "capital may be no better than at other large banks," according to Barclays. To arrive at its estimate of an 8.97 percent Tier 1 common ratio in the third quarter, Bank of America "assumed regulators would approve how the firm measures its risk-weighted assets…That assumption added 0.4 to 1 percentage point to the capital ratio," and removing it would "pull Bank of America back into the pack of peers' disclosed ratios." Goldman Sachs and JPMorgan Chase have ratios of about 8.5 percent without the assumption Bank of America makes, the analysts' noted. Morgan Stanley is in even better shape, as its ratio exceeds 9 percent. And of course any big losses, which can't be counted out, would pressure the bank's capital needs, erasing some of the gains. It would not be a stretch, however, to think that the bank will once again ask the Fed for a moderate dividend increase early next year. Moynihan has indicated it will be "on the table." For more: Related articles: Read more about: Bank of America, capital ratios 5. Boutiques beat estimates but still struggle
One of the big surprises in the second quarter was the strong rally by boutique banks. Lazard and Evercore helped lead a surge in stock prices, but the weak economy and tepid pace of deals hit hard in the third quarter. Lazard said that it earned $35 million in adjusted profit for the quarter, amounting to 26 cents a share. That still bested the average analyst estimate of 22 cents a share. Evercore also beat estimates. Adjusted net income fell to $17.3 million, or 40 cents per share, beating third-quarter estimates of about 34 cents per share. The estimate-beating results ignited a rally in both stocks, but both have some real issues, starting with core advisory revenue amid a deal slowdown, though asset management revenue seems to be providing a nice offset. Indeed, at Lazard, asset management actually accounted for more revenue than deal advisory work, a first for the bank. Still, perhaps at the prompting of big investor Trian, the bank has embarked on a $125 million cost reduction plan, which is expected to hit compensation hard. Significant staff reductions are expected. Both boutiques have been hit hard by a weak deal environment that doesn't appear to be changing anytime soon. The macro headwinds are powerful right now. The fiscal cliff situation domestically is a source of uncertainty for all banks, of course. So the big story will likely remain cost cuts, staff reductions and asset management gains going forward. That said, you never know when big deals will rebound again. For more: Related articles: Read more about: boutiques, bank earnings Also Noted
SPOTLIGHT ON... Growth pains hit Asia PE In terms of sheer size of funds, Asia-based private equity funds have been experiencing growth pains as of late. LPs are grumbling about management fees, according to Private Equity Beat. "LPs have also been complaining that growing fund sizes mean that excessive capital in the market is playing havoc with company valuations, pushing them up beyond public markets, as funds chase similar deals." Article Company News:
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Friday, October 26, 2012
| 10.26.12 | MERS now winning the judicial wars
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