Also Noted: Spotlight On... Bair: Banks no longer 'too big to fail'
Today's Top News1. New legal risk for Bank of America: mortgage kickbacks
Earlier this month, the Consumer Financial Protection Bureau (CFPB) charged four private mortgage insurers with paying kickbacks, money funneled to banks as reinsurance premiums in exchange for business. All four firms--Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, Radian Guaranty and United Guaranty Corporation--have settled the charges, agreeing to pay a combined $15 million. The big mystery in all this is which mortgage companies were involved. Bank of America is likely one bank. It already has been sued privately for an alleged kickback scheme that also involved fake reinsurance revenue. A U.S. District Court in Philadelphia just denied the bank's request to nix the lawsuit because of an expiring statute of limitations, according to Bloomberg. The suit, no doubt seeking class action status, was filed by three Pennsylvania homeowners last year claiming the kickback scheme cost borrowers $284.7 million between 2004 and the end of 2011. "That's the amount Bank of America allegedly collected from private mortgage insurers as its share of insurance premiums for referring borrowers, according to the complaint." The homeowners, who took out mortgage loans from the bank in 2005 and 2007, also named Radian Guaranty, Genworth Financial, Genworth Mortgage Insurance, and United Guaranty Residential Insurance, which are of course implicated in the CFPB suit. So this would appear to be a new legal risk for Bank of America and other large mortgage originators. At some point, they'll likely have to set aside funds to cover the costs of litigation, settlement and the like. For more: Related articles: Read more about: Legal Settlement, Reinsurance
2. Pensions consider alternatives to straight equity investing
Pensions haven't had the greatest luck with their traditional equity investment in recent years. The market had been stuck in the doldrums until just recently, hampering returns, and active management was especially faltering. But as the market comes roaring back amid a brewing Great Rotation, public pensions are pondering new approaches. One idea that has generated interest is the so-called Smart Beta approach, which aims to allow pensions to "follow certain benchmark indices passively but allow investors to tilt weightings themselves based on their preferences such as volatility or momentum, allowing them outperform the main index," according to Reuters. "Smart Beta is half way between active and passive investing. For example, an investor can take the S&P 500 index but overweight stocks with lower volatility to create a new smart index. Investing in this has potential to outperform the original benchmark index and is cheaper than paying an active manager to trade S&P stocks," said Reuters. Smart Beta often involves the use of ETFs to make it easier for pension funds to buy and sell exposure in a cost efficient manner. Nomura estimates ETFs' assets associated with Smart Beta have grown to $160 billion, up 166 percent since 2008. Anything that lowers management cost and delivers some form of additional control to the pensions will draw some interest these days. Managed accounts are another great example. For more: Read more about: pensions 3. Goldman Sachs beats estimates amid investment banking surge
Goldman Sachs became the latest large bank to offer an upside earnings surprise. The bank reported that first-quarter earnings increased to $2.26 billion, or $4.29 a share, up from $2.11 billion, or $3.92 a share, from a year ago. Revenue rose to $10.9 billion from $9.95 billion. Analysts were expecting earnings of about $3.90 a share and revenue of $9.67 billion. Of note, the annualized return on common shareholders' equity was a solid 12.4 percent for the first quarter. In 2012, the ROE was roughly 10.7 percent, up from a low of 3.7 percent in 2011. Operating expenses were $6.72 billion, essentially unchanged from a year ago but 36 percent higher sequentially. The accrual for compensation and benefits was $4.34 billion (43 percent of net revenues), essentially unchanged. As for risk, the closely watched average daily VAR was $76 million, the same as in the fourth quarter of 2012 and down from $95 million a year ago. Net revenues in Institutional Client Services--the largest contributor to revenues--were $5.14 billion, 10 percent lower than a year ago but 18 percent higher sequentially. FICC activity was weak year over year, falling 7 percent; weakness in interest rate activity drove the overall category decline. In equities, net revenues were $1.92 billion, 15 percent lower year over year, reflecting weakness in derivatives activity that was partly offset by cash products activity. A major bright spot in the quarter was investment banking, which generated revenues of $1.57 billion, up 36 percent year over year and up 12 percent sequentially. These results were driven by strong underwriting activity; revenue hit $1.08 billion, up 63 percent year over year. Debt underwriting activity was strong, reflecting strong leveraged finance and commercial mortgage-related activity. Equity underwriting revenue was also solid. Investing and lending activity contributed $2.07 billion to overall revenue, as the company booked more than $1 billion in gains from various holdings. For more: Related articles: Read more about: Capital Markets, Goldman Sachs 4. Banks seek offsets to weaker mortgage activity
The one thing that big banks need now more than ever is a fresh source of revenue. They are reaching the point at which the extreme focus on costs will start to offer diminishing returns. It would be hard to argue that the top line doesn't matter for much longer. Mortgage activity, especially refinancing activity, was a burst of fresh air over the last year, as more consumers took advantage of low rates. But earnings results for the first quarter have raised questions about how sustainable the recent gains will be. Neither Wells Fargo now JPMorgan lit the world on fire with their mortgage results. At JPMorgan Chase, for example, while mortgage originations were strong, mortgage banking as a whole was weak. Mortgage banking net income was $673 million, a decrease of 31 percent year over year. "Underscoring a slowdown in refinancing, Wells Fargo said those loans accounted for 65 percent of mortgage originations in the first quarter, down from 76 percent in the period a year earlier. The bank's mortgage banking income also slipped 3 percent, presenting potential problems for Wells Fargo, whose fortunes rise and fall with the mortgage market. And while handling $109 billion in mortgage originations might be a feat for some banks, it was a 16 percent drop for Wells Fargo," according to DealBook. The grand hope is that more actual homebuyers will emerge from the woodwork to offset the waning growth in refinancing activity. But that's hardly a sure shot. The better bet for the next few quarters would be on a rebound in investment banking activity as well as in sales and trading activity. For more: Read more about: Bank Mortgage 5. Dell special committee inks accord with Icahn
The special committee set up by the Dell board is under lot of pressure as it ponders how to maximize shareholder value. When a known shareholder activist like Carl Icahn, who knows all the tricks of the trade, arrives on the scene, there is plenty of reason to worry. On the one hand, the committee can't do anything that would foster the impression that it isn't actively seeking bids. However, it doesn't want to let him build up undue influence and hijack the process. In an effort at some sort of balanced solution, the committee has inked a deal with Icahn that imposes a cap on his stake in the company. He has agreed not to buy more than 10 percent of Dell's shares and not to enter agreements with other shareholders such that the combined ownership stake would top 15 percent. In return, Dell has also granted the Icahn entities a limited waiver under Section 203 of the Delaware General Corporation Law, allowing him to "engage" other stockholders, with the idea that they can come up with a strong proposal to maximize shareholder value. The committee said in a statement that it "believes that granting the limited waiver to Mr. Icahn while capping his share ownership will maximize the chances of eliciting a superior proposal from Mr. Icahn while at the same time protecting shareholders against potential accumulation of an unduly influential voting interest." Right now, Icahn is seen as something of an underdog, while Blackstone comes across as the firm most likely to win the backing of Michael Dell, which will put it in the driver's seat. That said, this is far from over. For more: Related articles: Read more about: Leveraged Buyout Also NotedSPOTLIGHT ON... Bair: Banks no longer 'too big to fail' Former FDIC chair Sheila Bair has weighed in on the "too big to fail" debate, arguing that new rules make it more likely that a bank could indeed be wound down without taxpayer support in the event of extreme turbulence. "There's an explicit ban on future taxpayer bailouts in Dodd-Frank," Bair explained to the Daily Ticker. And with Dodd-Frank, "there's a new resolution process--a government-controlled bankruptcy process--to be used to deal with these large so-called systemic institutions if they get into trouble, in a way that imposes the losses on their shareholders and creditors and protects the rest of us." Article Company News:
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Wednesday, April 17, 2013
| 04.17.13 | New legal risk for Bank of America: mortgage kickbacks
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