Today's Top Stories Editor's Corner: Citigroup jumps the gun, announces capital intentions Also Noted: IBM News From the Fierce Network:
Today's Top News1. Scarcity of carried interest could rise
Carried interest has generated lots of controversy as of late. The main issue has been determining the appropriate tax rates applied to such interest. Should carried interest be taxed as capital gains or as normal income? Fortune notes another carried interest issue in the industry that revolves around the performance hurdles that private equity funds must leap before they are entitled to take a cut of the profits. Right now, in the view of at least one executive, hurdles have been set so high that it's taking much longer for funds to clear them, which is delaying the carried interest they can earn on funds. Jeremy Coller, founder and chief investment officer of Coller Capital, went public with this view at SuperReturns. He argues that "hurdle rates have become divorced from their original purpose -- compensation for extra investor risk inherent in a long-term, illiquid asset class like private equity. For example, hurdle rates originally were set at around 8%, because that is what investors would have been able to get were they to instead put their money in 10-year U.S. Treasuries." The result is that funds will likely not earn a cut of profits for many years if at all, as returns will likely not clear the hurdle. This is certainly an issue with profound consequences that strikes to the heart of the industry. Sure, the point is to make money for limited partners. But these guys aren't in the industry to merely tread water personally. They're livelihood is on the line as well. "This may not matter much at the senior levels, Coller said, but eventually could cause fewer young professionals to enter the industry. It also could cause some existing junior staffers to seek out other opportunities that are closer to the carry -- disruptions that ultimately could affect returns at the funds they leave behind." For proponents of higher carried interest taxes, the issue is significant as well. All the work toward taxing carried interest at a higher rate may prove to be less of a revenue raiser than they intended. The ultimate insult may be a situation in which taxes are levied at the higher ordinary income rate but the actual change in revenues ends up nil, as carried interest grows more scarce. For more: Related articles: Read more about: carried interest 2. MD rank more exclusive at Goldman Sachs
The executive ranks at Goldman Sachs are becoming even more exclusive. CNCB reports that after the Managing Director Class of 2013 is announced later this year, the bank will not name additional MDs until 2015, opting to name new MDs every two years. The company issued an email to all employees noting that the new policy became necessary because the number of MDs had reached "critical mass," which seems to be saying essentially that there are too many of them. The memo also noted that the original plan to name new MDS every two years was proposed all the way back in 1996. The upshot is that earning the coveted MD title will be that much harder, and likely take a little more time. If you already hold the title, the value in nonmonetary terms just appreciated. Overall, the move is in keeping with the bank's current efforts to keep the executive ranks a bit thinner. In the wake of the financial crisis, for an array of reasons, the top echelons had bloated up just a bit. Last year, about 50 partners left the storied bank, while 10 new ones were added. Most people assumed that the motivation to pare the ranks in part was financial; the bank continues to face pressure to keep expenses low. If the partner ranks are going to grow slowly (if at all) over the next several years, it makes sense to keep the MD ranks similarly pared down, as attaining the MD rank is a stepping stone to partner. For more: Related articles: Read more about: Goldman Sachs, managing director 3. The ultimate winner in the Dell sweepstakes
The battle for Dell is getting very interesting. For the moment, it appears to be a Michael Dell vs. shareholders battle, with the shareholders being led in part by Carl Icahn, who thinks each share in the company is worth $9 more than the current LBO offer. But there's a possibility that the big winner will be the short sellers. It would appear to be a risky bet to short a stock that appears to be in the throes of some sort of bidding war, but that is exactly what esteemed short-seller Jim Chanos has done. He tells CNBC that, "We are short Dell. We covered our [previous] Dell short in single digits last year. And we shorted it [again in 2013] into the deal." As for those who are long the stock, "I don't think they're looking at the numbers." In his view, both the balance sheet and the income statement at Dell reflect massive challenges that will eventually tank the stock. As for the balance sheet, at the end of January, "Dell had positive working capital plus receivables and long-term investments of about $8 billion. They had long-term liabilities of $13 billion. So it's a negative number before we get to the equity." And as for the income statement, "The business [at Dell] is not doing well at all. The cash flow is plummeting," he said on CNBC. It's unclear at what price he opened his short position. But it would appear that the downside is limited right now. There is an offer on the table after all, and if angry shareholders have their way, the price is only going to go higher. The only way the stock would tank is if deal on the table, offed by Dell himself and Silverlake, and other deals were scotched as well. It's hard to see that happening. At this point, it looks like current LBO offer may be the floor. Then again, Chanos may know something others don't. For more: Related articles: Read more about: lbo, short sellers 4. Columnist: Bank of America rains on DJIA parade
The Dow Jones Industrial Average hit an all-time high this week, prompting massive headlines and lots of giddy commentary. But leave it to a columnist in Charlotte, NC, the home of Bank of America (NYSE:BAC), to rain on the parade with some commentary about Bank of America. The stock has been on fire as of late, soaring more than 100 percent in 2012 and adding to those gains so far this year. Optimism remains strong that the bank's plans to return more capital to shareholders will be approved by the Federal Reserve Board as part of its on-going stress test. But here comes the rain: "In Banktown, however, there's good reason for sobriety. Our only local Dow Industrials stock is Bank of America Corp. And the past five-and-a-half years haven't exactly been a puke-and-rally. In fact, BofA is the second-worst performing Dow stock since the previous record high in October 2007. BofA shares are down 78.3% since then…." the article notes. So where does this important DJIA component go from here? It will be a long time before it gets back to its high water mark. Its pre-financial crisis high is certainly not a realistic goal. But the stock could get back to tangible book value at some point, and that would be a great victory for CEO Brian Moynihan. It's fair to say right now that analysts are generally fired up about not only Bank of America but the entire industry. Analyst Richard Bove thinks a virtuous 14-year upswing is starting to materialize. For more: Related articles: Read more about: Bank of America 5. So far, so good on stress tests
The first step in the Fed' stress tests, which have become a tough annual rite for the industry, has been completed and most banks have fared decently. But make no mistake: Adverse conditions, such as those contemplated by the tests, would take a massive toll. As the Federal Reserve's report notes: "The results of these projections suggest that, in the aggregate, the 18 BHCs would experience substantial losses under the severely adverse scenario. Over the nine quarters of the planning horizon, losses at the 18 BHCs under the severely adverse scenario are projected to be $462 billion, including losses across loan portfolios, losses on securities held in the BHCs' investment portfolios, trading and counterparty credit losses from the global market shock, and other losses." It also notes that, "Projected net revenue before provisions for loan and lease losses (pre-provision net revenue, or PPNR) at the 18 BHCs over the nine quarters of the planning horizon under the severely adverse scenario is $268 billion, which is net of losses related to operational-risk events and mortgage repurchases, as well as expenses related to disposition of owned real estate of $101 billion. Taken together, the high projected losses and low projected PPNR at the 18 BHCs results in projected net income before taxes of -$194 billion. These net income projections result in substantial projected declines in regulatory capital ratios for nearly all of the BHCs under the severely adverse scenario." But they would all likely survive. Indeed, the aggregate tier 1 common capital ratio would fall from 11.1 percent in the third quarter of 2012 to 7.7 percent in the fourth quarter of 2014 under the stress scenario. That's a big improvement from 2008, when the actual ratio was 5.6 percent. The only failure in the group was Ally Financial. Its capital ratio under the stress scenario would be less than 5 percent, the cut-off line for success. As noted by the Huffington Post, the biggest banks fared much better. Citigroup (NYSE:C) led the charge for the biggest consumer banks with a 8.3 hypothetical minimum capital ratio. JPMorgan (NYSE:JPM) came in with a 6.3 percent minimum ratio. Bank of New York Mellon led the overall pack at 13.2 percent ratio. As for the top investment banks, Morgan Stanley (NYSE:MS) came in at 5.7 percent, while Goldman Sachs (NYSE:GS) came in at 5.8 percent, fairly close to the cut-off. Attention will now shift to the capital return plans, which the Fed will hopefully bless. Some banks are really confident. For more: Related articles:
Read more about: Federal Reserve, Stress Tests Also Noted
SPOTLIGHT ON... Is Google the next Apple? Apple's stock swoon has generated lots of attention, but the bigger story may be the rise of Google's stock. CNBC notes that Apple has sunk 20 percent over the last three months, while Google has risen about the same percent. Some analysts think that Google is heading toward $1,000. Are these big innovators destined to trade opposite for one another for the foreseeable future? Article Company news:
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Monday, March 11, 2013
| 03.11.13 | Citigroup jumps the gun, announces capital intentions
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