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2. Surge of buyouts bad news for bond holders

Len Blavatnik, the billionaire rags-to-riches story, is known for his investment prowess, buying companies that much more often than not worked out well for him.

He has not won with every deal, however. His 2007 buyout of the chemical company Lyondell fared poorly, as the company was forced into bankruptcy court within two years, leading to all manner of litigation. Did he blunder again by choosing JPMorgan ($JPM) as his bank of choice to invest about $1 billion in personal funds?

He has sued the bank, alleging that JPMorgan acted "negligently" by investing some of his funds in risky assets, which later declined sharply in value, according to the Financial Times. Blavatnik claims the bank invested his funds as if it were a hedge fund, whereas the funds were to be invested in a much more conservative style.

JPMorgan disputes the allegations and says the risk parameters were negotiated with employees of Blavatnik. It also said that allegations that the bank was shorting various mortgage-backed securities, while customers such as Blavatnik were put in long positions, are without merit.

That this case made it to trial is surprising to some extent. Blvatnik told the FT that, "If the government sues them they settle immediately and it could be billions. If it's individuals or small corporations they litigate you to death and who can take them on?"

He added that, "Nobody apologized until recently. I appreciate it but it was basically in the context of 'settle for no money'. It shows arrogance."

A decision is expected soon.

For more:
- here's the article

Related articles:
JPMorgan heading to trial

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By Jim Kim

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3. Making peace in age old war between bankers, traders and brokers

While the stock market cheers the spate of recent deals, anxiety is building in the bond market. Leveraged transactions often make for negative credit news, as the rated debt reacts to the news that the target will load up with billions in debt.

That often results in haircuts for existing bond holders and the likelihood of credit downgrades ahead, often to junk status.

"On the day the Heinz news broke, prices of existing triple-B-rated Heinz bonds fell by over two cents on the dollar, while the cost to insure those bonds through credit-default swaps soared by over 25% to a new high," notes Barron's.

As for Dell, I suggested recently that the buyout was leading to lots of angst by bondholders. That seems to be coming true.

"Just in case there weren't enough risks in today's overheated, overbought, low-yielding corporate bond markets, we now welcome back an old friend: buyout risk," the article notes.

As of this point, bond analysts are no doubt working overtime, hoping to predict the next crop of LBO or leveraged deal targets. There are some who believe that the historic bull run in bonds may be nearing anyway. Some think a Great Rotation is in the offing. If so, buyout risk would be just one more reason to rotate.

That said, there's no way of knowing with certainty if more large deals will actually materialize, which of course adds to the general nervousness.

For more:
- here's the article

Related articles:
Deal announcements accelerate

Read more about: lbo, deals
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By Jim Kim

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4. Bank industry approaching a new era

People tend to think of the main fault line within a top investment bank as dividing traders from bankers, a storied divide on Wall Street, one famously depicted in Greed and Glory on Wall Street, the classic account of the fall of Lehman. But there is another great divide, one that make partners of bankers and traders as they together sneer at poor retail brokers.

Traders and bankers have long dripped with condescension over anyone that works retail accounts, but it has to be said that retail brokerage is a much more stable business, and you can't blame Morgan Stanley for emphasizing retail. The business model depends on the steady returns that unit will hopefully generate.

So it is not surprising, as DealBook reports, that the bank is bent on finding more synergies between the investment bank and the retail brokerage unit. Morgan Stanley ($MS) is in the process of acquiring all of Morgan Stanley Smith Barney from Citigroup ($C).

"Gregory J. Fleming, the chief of the brokerage business, and Mr. Kelleher have been under pressure from shareholders to coax greater profits from the low-margin brokerage business by finding ways for retail and investment banking to work better together. The two men are said to have a good working relationship, leading to renewed optimism that the company can finally find synergies among its various divisions," Dealbook noted.

The question remains as to what meaningful synergies are left. The IPO market comes to mind. When the market was hot not too long ago, retail access was a huge deal for brokers and bankers alike.

Management has apparently put together a list of 35 areas of possible cooperation. The biggest issue may be lending. Commercial bank-owned brokerages have been able boost lending to clients, and many see that as a huge advantage over brokerages owned by investment banks, which are disadvantaged from a lending point of view. Finding ways to delivering low-cost loans may end up being the top priority.

For more:
- here's the article

Read more about: bankers, brokers
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By Jim Kim

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5. Bank of America CEO gets a bonus hike

At this point in the banking industry, it's appropriate to ask: Is the glass half full or half empty? Obviously, bank stocks have been on fire for the last year. Bank of America ($BAC) roared to a more than 100 percent gain. Other banks followed in the same direction.

And yet, the Washington Post points out that bank stocks still trade well below their tangible book value per share and at just 50 percent of the prices hit in 2007. So do stocks continue to rally and soon hit book value per share, or is this about all we can expect of them?

Every analyst has an opinion, but they will always be a rather bullish lot collectively. Most are still recommending big banks, including Richard Bove, who thinks we are at the beginning of a 14-year virtuous cycle.

The industry may indeed be close to some sort of inflection point. I certainly hope that we're entering an era of renewed prosperity, as the economy slowly gathers steam and interest rates begin to rise. More hedge funds are willing to make that bet these days. But still expectations need to be wisely set.

Given the new rules and regulations, it would be unwise and unrealistic think that we're somehow destine to achieve our former high-water mark as an industry. The new normal may be much less interesting than the pre-2007 normal.

For more:
- here's the article

Read more about: Bank of America, banks
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By Jim Kim

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