Today's Top Stories Editor's Corner: Fund companies embrace floating NAV values voluntarily Also Noted: Opal Financial Group News From the Fierce Network:
Today's Top News1. James Gorman remaking Morgan Stanley
For all those who thought that James Gorman would always exist in the large shadow of his predecessor, John Mack, recent events have proven them dead wrong. Gorman seems bent on stamping the bank with his own print, remaking it for the future. At this point, it's unclear exactly what his vision is. It seems to be eschewing the Goldman Sachs' trader-oriented model and swerving more toward a Credit Suisse-like model, only less extreme. The bank's 1,600 jobs cuts, on top of the 4,000 job cuts last year, have certainly drawn attention. Wealth Briefing notes that client-facing employees in wealth management have been spared any cuts, though some back office employees may be swept out. Is that a telling sign of where the bank wants to go? As of late, it has been whittling away at the institutional business and building up in wealth management, as evidence by its purchase of all of Morgan Stanley Smith Barney. You cannot blame Gorman for wanting to diversify the bank. Change is always necessary. At the same time, he will be second-guessed no matter what. If trading results fall short of Goldman Sachs, critics will emerge. If wealth management results suffer some hiccups, another set of critics will emerge. What the bank needs to do is firmly articulate a roadmap with projected milestones and targets so the world is clear on what the Morgan Stanley of the future will look like. That conversation may get started with the fourth quarter earnings report. For more: Related articles: Read more about: Morgan Stanley, wealth management
2. Technology glitches mar stock exchange executions
Over on FierceFinanceIT, I've often discussed the near-epidemic of software bugs that have had consequences both merely annoying and life altering. This week, the nation's third-largest stock exchange operator, BATS, alerted its customers that a programming error resulted in 435,000 trades being executed at the wrong price over the last four years. The cost was minimal, $420,000, but the implications are huge in terms of market structure and the NBBO. he New York Times offs a run-down of other incidents, noting that, "A day earlier, the trading software used by the National Stock Exchange stopped functioning properly for nearly an hour, forcing other exchanges to divert trades around it. The New York Stock Exchange, the nation's largest exchange, has had two similar, though shorter-lived, breakdowns since Christmas and two separate problems with its data reporting system. And traders were left in the dark on Jan. 3 after the reporting system for stocks listed on the Nasdaq exchange, the second-biggest exchange, broke down for nearly 15 minutes." There are large market structure implications to all these problems. At the same time, one could view them as a simple exercise in software quality assurance. The code has got to be pristine before it is loaded onto the national market system. The SEC has taken up the issue, levying increasing fines. In October, it put together an expert panel that came up with some recommendations, including adopting some sort of kill switch at the exchange level to contain problems. The roundtable was set up in response to a string of incidents, notably the Knight Capital fiasco that resulted in a $440 million loss in less than an hour---and ultimately the sale of the company. This will likely remain an issue this year. For more: Related articles: Read more about: Market Structure, NBBO 3. Is Bank of America overvalued?
For all the Bank of America bulls still giddy over the 100 percent plus gain that the bank's stock racked up for 2012, a dose of reality hit hard in the form a mildly bearish report from Credit Suisse this week. You might have grown accustomed to bullish reports. The report was a timely reminder that there are no sure shots in the industry. As noted by TheStreet.com, the analyst says the stock's "current valuation appears to be ahead of the company's near- to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting. At its current valuation, the shares appear to be discounting at least a 16% improvement in costs over the next year vs. our estimate of 10%." The article notes also that "Bank of America's shares certainly appear expensive to forward earnings when compared to other U.S. banking giants. The shares closed at $11.98 Tuesday, trading for 0.9 times their reported Sept. 30 tangible book value, and for 12.4 times the consensus 2013 earnings estimate of 97 cents, among analysts polled by Thomson Reuters. The consensus 2014 earnings per share (EPS) estimate is $1.27." The fundamentals leave plenty of reasons to be bullish. But it may not be easy to justify an above-$10 share price. As always, the bank's earnings report next week will be closely parsed. For more: Related articles: Read more about: Bank of America, Bank Stocks 4. New CFPB mortgage rules may prevent future bubbles
It's been four years since the mortgage meltdown began in earnest, and we're just now getting around to passing some rules that disallow the most destructive mortgage types, the ones that wreaked the most havoc on consumers and the economy. It took the creation of the Consumer Financial Protection Bureau, which was mandated by Dodd-Frank, to arrive at this point. Unsurprisingly, the new rule set will nix negative amortization, stated income, excessive points and other types of controversial loan features. It all falls under the umbrella of an "ability to pay" concept that calls for banks to ensure that the loan is appropriate for the client. If they satisfy these requirements, lenders will be given legal "safe harbor" that will protect them from suits. This strikes me as roughly akin to the suitability requirement that brokers must abide and might strike some as too little, too late. The fact is that the volume of these types of loans--at least the most pernicious types--has drastically declined. The negative publicity and regulatory attention has made lenders loathe to offer them. Subprime loans still exist, and there's still decent demand from those who have no choice but to pay for them. Overall, the loan landscape has trended back to safer fare, but the rules are important in this respect: The market will heat up again, and when it does, there will be rules in place to prevent shady operators from once again taking advantage of the hot market to sell dubious loans. The new CFPB rules will hopefully keep future bubbles from inflating at inappropriate rates. For more: Related articles: Read more about: mortgages, Consumer Financial Protection Bureau 5. Reverse mortgage volumes face decline
Reverse mortgages suffered a reputational black-eye in 2012. There were plenty of critics of these loans for seniors, and the criticism may have prompted big reputable banks, like Bank of America, MetLife, Wells Fargo and Citibank to stop originating new HECM program mortgages. Their absence spelled opportunity for other lenders, some of which were perhaps not quite as reputable. Some of these newcomers were former subprime loan specialists, and the complaints nowadays are troublingly familiar. Some say that seniors are being duped into taking out these loans, even though they can't afford the high fees. Some say the risks are not being explained. The Consumer Financial Protection Board has made this a priority and will likely issue new rules soon that will lead to more disclosure. One big issue is the extent to which federal guarantees of these sorts of credits will remain in place. The FHA has been forced to kill one reverse mortgage program. The LA Times notes that, "The HECM program has been racking up outsized losses for the FHA, in part attributable to foreclosures on homes whose market values have fallen below the insured amounts provided to the borrowers. In the FHA's annual independent audit report to Congress, losses on reverse mortgages contributed $2.8 billion to the agency's capital reserve deficiency and increased the chances that the FHA might have to seek a bailout from the Treasury next year." Without robust federal support, the quality of loans will suffer. And while there are problems with these loans, there is also considerable appeal if they are done right. It may only be a matter of time before banks re-engage, especially if housing prices continue to rise. For more: Related articles: Read more about: mortgages, Reverse Mortgages Also Noted
SPOTLIGHT ON... Higher carried interest taxes still on table In this political climate, it's a wonder that tax rates on carried interest at private equity firms have not been raised. But no one in the industry is betting that such tax changes are not still possible. Bloomberg reports, "Congress faces a series of deadlines in the next few months over spending cuts, the debt ceiling and the annual budget. Democrats including President Barack Obama want to raise more revenue, and carried interest is an obvious candidate." The industry is gearing up for another fight. Article Company News:
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Monday, January 14, 2013
| 01.14.13 | James Gorman remaking Morgan Stanley
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