Today's Top Stories Also Noted: Spotlight On... JPMorgan now the most valuable bank
Today's Top News1. Great Rotation theory sparks skepticism
Is the Great Rotation for real? The idea seems to be taking hold. Banks such as Goldman Sachs are certainly taking the possibility seriously, working its portfolio and VAR levels so as to reduce the risks from a spike in interest rates. But while the theory strikes many as more than plausible, there are still some skeptics. Financial Times Alphaville notes that, "There are a bunch of reasons why it doesn't seem to be quite such a sure thing, at least for now." The biggest piece of evidence for the skeptics is that while we have seen some inflows into equities, we haven't necessarily seen corresponding outflows from fixed-income products. A Morgan Stanley strategist was quoted saying, "the idea of a 'great rotation' from debt into equity presupposes that there has been a massive rotation from equity to debt. It's not clear that that has happened. The great rotation of the past few years appears to have been from cash-like assets into debt, not from equity to debt." The big movement appears to have been from cash assets into debt funds, not stocks. While the recent expiration of unlimited TAG insurance on deposits over $250,000 may have prompted some movement into stocks, that alone perhaps does not make for a profound realignment. All that said, we may be at the beginning of a Great Rotation that will become clearer later this year. In the end, pensions may hold the key in terms of how profound this will be. For more: Related articles:
Read more about: Great Rotation
2. Deutsche Bank banker sues LAPD over beating
Investment banker Brian Mulligan of Deutsche Bank caused quite a stir in August, when he was arrested in Los Angeles. He was arrested for what appeared to be very odd behavior, allegedly opening the doors of car in the drive-through line of a fast food restaurant. What happened next is not entirely clear, and the police and the banker have different versions of events. But all agree the police ended up using force to subdue him--not the kind of headlines that Deutsche Bank, or any bank, wants. The media later reported that Mulligan told police that he had been using a type of stimulant that might have caused some aberrant behavior. In November, Mulligan was let go by Deutsche Bank, and he remains unemployed. But he has hit back against the LAPD anyway with a fresh laws suit, alleging that "he was beaten so badly that he needed emergency surgery...falsely imprisoned in a motel and defamed in a press release. The lawsuit follows an administrative claim filed by Mulligan seeking as much as $50 million in damages for mental and injuries that include 15 nasal fractures, a broken shoulder blade and post-traumatic stress," as noted by Bloomberg Businessweek. For more: Related articles: Read more about: lawsuit, Employment 3. Documents in JPMorgan case reveal more mortgage flaws
Bank of America thought it was getting a good deal when it bought Countrywide, but buyer's remorse quickly set in. Does the same hold true for JPMorgan, which bought Washington Mutual and Bear Stearns and what looked like sweetheart prices as the financial crisis raged? JPMorgan in some ways is still paying, but not quite to the extent that Bank of America has. The latest: involves emails revealed in a private lawsuit that have painted a rather ugly picture of the compliance processes regarding loans at all three banks, JPMorgan, Washington Mutual and Bear Stearns. The lawsuit was filed by Dexia, a Belgiun-French bank that acquired the portfolio of loans. It says it had been cheated into buying some $1.6 billion worth of mortgages that were marketed as sound but in fact were on the verge of collapse. "As they raced to produce mortgage-backed securities, Washington Mutual and Bear Stearns also scaled back their quality controls, the documents indicate. In an initiative called Project Scarlett, Washington Mutual slashed its due diligence staff by 25 percent as part of an effort to bolster profit. Such steps 'tore the heart out' of quality controls, according to a November 2007 e-mail from a Washington Mutual executive. Executives who pushed back endured 'harassment' when they tried to 'keep our discipline and controls in place,' the e-mail said. Even when flaws were flagged, JPMorgan and the other firms sometimes overlooked the warnings," as noted by DealBook. None of this is all that surprising. We've seen evidence of much the same activity at all the big originators and packagers during the mortgage boom years. JPMorgan has settled with regulators over various, mortgage-related issues. But other cases remain, and these revelations could figure in the outcome. Notably, JPMorgan is fighting a suit by the FHFA, which is seeking to recover $200 billion from 17 banks, including JPMorgan Chase. For more: Related articles: Read more about: mortgages, JPMorgan 4. Ruling augurs well for MBIA in fight against Bank of America
One of the bigger legal risks hanging over Bank of America right now is it acrimonious legal battle with monoline insurer MBIA, which has a lot riding on the outcome as well. For clues as to the outcome over this battle, check out the recent decision in the Assured Guaranty vs. Flagstar Bancorp battle. Assured Guaranty charged in a suit that Flagstar Bancorp packaged rotten mortgages into securities, mortgages that were riven with improprieties, misrepresentations and breached warranties. Had the insurer known that the securities were of such shoddy quality, the company said it would never have issued mortgage insurance. U.S. District Judge Jed S. Rakoff apparently agreed this week, handing Assured Guaranty a big $90 million victory over the bank. Assured Guaranty's stock soared on the news, which, interestingly enough, also led to a big rally in MBIA shares. The conventional wisdom is that the big win augurs well for MBIA in its battle with Bank of America, which is being waged over similar representation and warranty issues. TheStreet.com suggests that the ruling "may give the company the upper hand" in its fight with Bank of America, saying it "might set a precedent." For all the rancor, this case has generated, the most likely outcome is still some sort of settlement. It may be that this ruling prods the bank to move farther in that direction. For more: Related articles: Read more about: Bank of America 5. Study extols virtues of mega banks
Here's something the biggest banks can cheer about. A new study, albeit one that apparently has received funding from bank trade organizations, has concluded that megabanks are critical to the economy. The Washington Post suggests there is some merit to the study. "The first argument is also the simplest. This is a huge and complex global economy. With trillions of dollars in global trade and companies with hundreds of billions in assets, it takes giant banks with a global reach to supply them with the financial products they need to do business." A second argument is that "without huge, regulated banks, companies will turn to the unregulated 'shadow banking' sector to meet their financial needs, such as by issuing commercial paper. The collapse of the shadow banking system was a crucial factor in the 2008 crisis, and the government ultimately backstopped large portions of it, as well. If a bank break-up sparked a vast expansion of shadow banking, it would make the financial system more vulnerable." Seen in a larger context, the study is part of a coordinated industry response, a necessary one to be sure, to the uptick in industry critics who want to break up banks that might be "too big to fail." This is a debate that dates back to the financial crisis. But the industry obviously feels the need to stay on offense on the issue. While Britain seems to be move aggressively on this issue, I do not sense a profound movement in the U.S. to force bank break ups. Indeed, the economy has taken center stage and the higher goal now may be to get banks lending again. In any case, if big banks are to be broken up, the impetus will come less from the government than from shareholders. For more: Read more about: big banks, too big to fail Also NotedSPOTLIGHT ON... JPMorgan now the most valuable bank The two banks with the biggest market capitalization--JPMorgan Chase and Wells Fargo--will duel for the crown over the next year. JPMorgan fell behind a bit in the battle, but its stock has recovered from the London Whale fallout, and it was able to reclaim the title this week. That said, a big gain from Wells Fargo will push it right back into the top spot. We'll see who wins out over the long-term. Who would you say is the favorite? Article Company News:
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Friday, February 8, 2013
| 02.08.13 | Ruling augurs well for MBIA in fight against Bank of America
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