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Today's Top News1. S&P has upper hand as trial awaits
Prosecutions built mainly on email evidence have not fared well at trial. There have been several examples of this, notably the trial of Matthew Tannin and Ralph Cioffi, then of Bear Stearns, who were acquitted in a trial over charges that they mislead investors about the extent of hedge fund losses. Another example is the trial of Citigroup manager Brian Stoker, who was personally accused by the SEC of fraud for his role in various CDO deals that he was involved with at Citigroup. The issue is relevant in relation to the Justice Department's on-going prosecution of Standard & Poor's for shoddy work in rating various mortgage backed securities. Much has been made of the fact that Moody's had better internal policies aimed at reducing paper trials that might turn into evidence. Still, despite the abundance of email evidence, the government may face a long road to conviction, according to Reuters. "The lawsuit suffers from many of the same problems that have plagued dozens of other unsuccessful cases against the rating agencies in recent years. It will be hard for prosecutors to argue that S&P alone was privy to a unique window into the shaky state of the U.S. housing market in early 2007, which the Wall Street banks churning out the securities, or even the U.S. Federal Reserve, didn't have. Other lawyers point out that S&P's ratings on residential mortgage bonds in early 2007 weren't much different from those of Moody's Investors Service, a rival rating agency the government hasn't sued," Reuters notes. The rating company may also argue that it relied on information from U.S. banks to make their ratings and that the alleged victims were sophisticated enough to know what they were investing in. All that said, the government's case would be greatly bolstered if it had some former insiders who could testify about what they directly saw and even participated in. Barring that, the consensus at this point is that the rating company has the upper hand. For more: Related articles: Read more about: Enforcement Action, Indictment
2. Private equity payouts higher than ever
The good news about private equity funds is that they are distributing more cash than ever. As noted by the Financial Times, citing data from Hamilton Lane, funds distributed $318 billion to their limited partners as of June 2012, and $330 billion in 2011, through dividends and asset sales. Those are impressive levels, when you consider that fund distributions in 2007, at the height of the madness, was just $305 billion. The not-so-good news, however, is that distributions as a percentage of private equity holdings have shrunk since the industry peaked, reflecting the challenging environment for massive funds raised as the bubble was deflating. The data shows that the value of private equity holdings increased to more than $1.8 trillion in 2012, up from $1.73 trillion a year earlier and $938 billion in 2007, largely "helped by rising public stock markets, which fund managers use to evaluate assets." Consequently, "annual distributions as a percentage of total net asset fell from 24 per cent in 2011 to 18 per cent in 2012. They represented 43 per cent of total assets in 2007 and 25 per cent on average since 2003." The upshot is that many limited partners have de facto kept their allocations to this asset class relatively high, rendering new commitments less necessary. As the economy improves, however, we will likely see a change over the next few years. Exits---and thus distributions---will become more plentiful as total holdings decline, reflecting smaller funds raised as of late. For more: Related articles: Read more about: Private Equity Returns, Distributions 3. eToys IPO documents: Banks demand commissions
And you thought the dotcom era was over. A New York Times columnist, one who has long maintained that investment banks are more interested in serving institutional investors than issuers when it comes to stock offerings, has unearthed a treasure trove of documents related to a suit over the--get ready for a blast from the past--IPO of eToys back in 1999. The frenzy over the offering was typical of the era, as the stock price zoomed from an offer price of $20 to $78. That led to charges, also a staple of that era, that the bank had deliberately low-balled the price, cheating the issuing company while fattening the profit of the investors that got in at the offer price. The underwriter, Goldman Sachs (NYSE:GS), was sued subsequently, and the suit has dragged on to this day. The unearthed documents are noteworthy in that they suggest that Goldman Sachs was quite deliberate in its attempt to come up with a low-ball price. The documents make clear that Goldman Sachs sales folks demanded that a large percentage of the fat profits generated for investors be returned to the company in the form of commissions. "After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman's I.P.O.'s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case." In at least one case, this led to meaningless trades executed solely for the purpose of repaying Goldman Sachs. The interesting part is Goldman Sachs and other investment banks eventually settled charges of a host of IPO abuses, but not this one. So the question remains: does this practice still exist or has it faded along with the dotcom era? Certainly, it's harder to price offering to guarantee a big jump. But as the documents show, banks have good reason to shower riches on institutional investors. For more:
Read more about: IPOs, underwriters 4. Regional banks make inroads against big banks
For years now, people have been buzzing about the prospects of boutique banks siphoning off business from the bulge bracket investment banks, especially when it comes to deal advisory work. But the assault on the bulge bracket banks really is much broader, including regional banks, diversified mid-market investment banks like Jefferies, private equity firms bent on diversification and a host of others. The Financial Times notes that as the environment becomes more deal friendly, the nine global bulge bracket firms will likely lose market share. "The world's nine leading 'bulge-bracket' banks have long dominated corporate finance with a market share of almost two-thirds as recent as a decade ago. However in the past three years, their share of the overall investment banking wallet – bankers' slang for fees paid for mergers and acquisition advice as well as underwriting of bonds and shares – hovered at only 45 to 46 percent." While boutiques get the most credit as the prime reason, the article takes a look at regional competitors, and their ability to steal market share in their respective geographies. "These banks, which range from Wells Fargo in the US to Santander in Europe, have collectively taken up 27.6 per cent of the fee pool last year, up from 22 per cent a decade ago." The article notes that these new smaller banks in some cases have invested heavily, while the big banks were forced to cut back. The best example may well be Wells Fargo, which is trying to diversify a bit out of consumer banking and mortgages. It inherited the Wachovia investment banking assets and has been aiming to build on that in Charlotte, NC. At the same time, it has made a move in merchant banking and alternative investments. For more: Read more about: big banks, Regional Bank 5. Stress test scores leading to confusion
Judging by the initial results of the Federal Reserve Board's 2013 stress tests, Citigroup (NYSE:C)would appear to be safer than JPMorgan Chase (NYSE:JPM). The initial report showed that Citigroup's Tier 1 capital ratio would fall to 8.3 percent in the event of significant stress, while JPMorgan's capital ratio would fall to 6.3 percent. Reuters notes, "That conclusion is at odds with the views of investors, bond analysts and credit-rating agencies, as well as when measured by a yardstick regulators themselves want to use in the future." It also notes, "Some of the numbers the regulators published left analysts and bank executives groping for explanations." In addition, various banks have come up with different results when self-testing against the adverse conditions sketched out by the Fed. Indeed, banks in general were a bit more optimistic with their self-testing. It isn't necessarily surprising that banks would give themselves the benefit of the doubt. Still, it would behoove all to get together than talk about how the Fed analysts arrived at their conclusions. The danger is that it going forward, the tests start to take on a black box sort of feel. The differences will likely be readily explained once both sides lay out their methods. As of right now, the big event remains the thumbs-up-or-down rulings on capital return plans expected soon. If banks do not get the outcome they were hoping for, the differing methodologies could take on more importance. For more:
Read more about: Stress Tests Also Noted
SPOTLIGHT ON... Banks face more skeptical credit rating companies The mortgage-backed securities market is starting to hum again. This is pitting banks against bond rating companies over a debate on representation and warranty issues, which proved so controversial when the residential mortgage bubble burst five years ago. Banks want terms that will limit their potential liability, fearing a replay of litigation explosion that they have yet to work off. Bond rating companies are wary of these efforts, and have made them a rating issue. Article Company news:
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Wednesday, March 13, 2013
| 03.13.13 | Private equity payouts higher than ever
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