Also Noted: Spotlight On... John Paulson hit by gold woes News From the Fierce Network:
Today's Top News1. Banks fight back against mandatory auditor rotation
Mandatory auditor rotation really heated up as an issue last year, as the Public Company Accounting Oversight Board put the issue squarely on the auditing reform table. Over on FierceComplianceIT, I've noted that the response so far has been decidedly negative, and the drumbeat for this sort of reform has quieted down considerably. But the issue is alive and well for banks and their audit firms. Across the pond, for example, RBS and Lloyds are embarking on a campaign to head off any attempt to force them to change auditors every so often. The general idea is that mandatory auditor rotation can actually lessen the quality of audits, as newcomers will have to come up to speed and tricky issues will have to be resolved all over again. Critics also argue that the notion that mandatory rotation will usher in new competition is misguided, as the Big Four, PwC, Deloitte, KPMG and Ernst & Young, will simply shift business among themselves. But it's always a good idea to do more than just say no. As noted by the Financial Times, "in its formal response to the proposed reforms, Lloyds favoured the softer approach taken by the lead accounting regulator, the Financial Reporting Council, which encourages companies to re-tender their audit contract at least once a decade. Lloyds, which is audited by PwC, said it would be 'counter-productive' to prevent a company from keeping its audit firm if a tender process had confirmed it as the best option." In the U.S., I doubt that regulators will take up the call for mandatory rotation again anytime soon. But you never know. For more: Related articles:
Read more about: banks, Mandatory Auditor Rotation 2. Wells Fargo reduces third-party products on brokerage shelf
A Wells Fargo executive recently explained why the brokerage unit was culling third-party money management products that Wells Fargo can offer customers via its private advisor network. "Our clients, of course, think they're good strategies because otherwise we wouldn't offer them, but it was time for us to deliver on that belief," the executive said. The statement seems rather raw on the surface, as if the bank was suggesting that they weren't vetting products that were being offered by brokers. That's probably too aggressive of an interpretation. But it's fair to say that the shelf was getting a little heavy with third-party product, and that there's no point in taking undue risks from the brokerage perspective, especially if the returns are only so-so. The last thing you want is a suitability nightmare if one of the products implodes, like so many money market funds in the aftermath of the financial crisis. "Currently the approved list has more than 1,000 investment strategies from about 470 portfolio managers. Starting next month, brokers will no longer be allowed to solicit money for 633 of the strategies offered by 220 of the outside managers," according to Reuters. "The extensive list in part reflects Wells Fargo's December 2008 acquisition of Wachovia Corp. Wachovia's broker-dealer was an amalgam of more than a dozen smaller firms - including A.G. Edwards, Prudential Securities and Everen Securities - and brokers at the firms who had ties to many little-known portfolio managers," the article noted. The move has caused some discontent within the ranks. A few told Reuters that the timeline was somewhat aggressive, as the changes are being rolled out internally only a few weeks before they are scheduled to take effect. Others said that products that are now disallowed tended to be more profitable for the broker as opposed to the firm. For more:
Read more about: Mutual Funds, fees 3. Morgan Stanley beats estimates, wealth management fares well
If you exclude the DVA, which tends to whip revenues and earnings around, and focus on continuing operations, Morgan Stanley (NYSE:MS) was able to post an upside earnings surprise for the first quarter, joining several other top banks. For the quarter, net revenues were $8.5 billion compared with analysts' expectations of $8.35 billion. Net income was $1.2 billion, or $0.61 per diluted share, compared with analysts' estimates of about 57 cents. Including the DVA and income from discontinued operations, net income was $0.49 per diluted share, compared with a net loss of $0.06 per diluted share a year earlier. The biggest generator of revenue was the institutional securities segment. Excluding DVA, net revenues for the quarter were $4.4 billion compared with $5.1 billion a year ago. Pre-tax net income was $1.14 billion vs. $1.6 billion. The big story would appear to be weakness in FICC activity, as sales and trading net revenues were $1.5 billion compared with $2.6 billion a year ago reflecting declines in commodities and rates, which were partly offset by better results in securitized products. There were some pockets of strength fortunately, notably strong equity and debt underwriting activity and strong activity in the bank's Japan subsidiary. Morgan Stanley seems to be continuing to de-risk and its average trading VAR was $72 million compared with $78 million in the fourth quarter of 2012. The wealth management group fared better. Revenues rose to $3.5 billion from $3.3 billion a year earlier. Pre-tax income from continuing operations rose to $597 million, up a whopping 48 percent from a year earlier. After accounting for the noncontrolling interest allocation to Citigroup, income was $476 million. For more: Read more about: Morgan Stanley, bank earnings 4. Citigroup aims for lobbying presence
So when is a bank branch dedication ceremony much more than that? When it takes place in Washington, DC, right on K Street, that's when. The media could have focused on the Citigroup's seemingly new approach to bank branches. Many other banks are opening branches that seem inspired by Apple retail outlets and Starbucks shops, with wi-fi for customers and lots of technology bells and whistles, not to mention lots of impressive green elements. "But a hulking bank with close to $2 trillion in assets and more than 4,600 branches around the globe doesn't send its chief executive to open a new store. And it's not as if its latest store in Washington is the first of its kind to display all the new gadgetry. Citigroup has already built that into some of its so-called smart banking locations," according to DealBook. Citigroup has certainly invested in coming up with the bank branch of the future. And the technology alone isn't going to attract the Washington financial industry A list. "Some of that industry's biggest names popped by to the invitation-only event, including the Financial Services Forum's chief executive, Robert S. Nichols; the Financial Services Roundtable's boss, Tim Pawlenty; and the Business Roundtable's president, John Engler." One way to read all this is as a sign that CEO Corbat intends to be a player when it comes to regulatory affairs. If Jamie Dimon decides to scale back his presence in the wake of all his woes, there may indeed be room for another industry power broker to emerge. For more: Read more about: Lobbying, Bank Branches 5. A call for more capital for broker dealer units
Capital requirements have been a big issue around the globe as of late, as some are convinced that big banks in particular should be required to hold more to cushion losses. Basel III asks that banks hold 7 percent of Tier 1 capital as a percent of risk-weighted assets, plus as much as 2.5 percent extra for super-sized banks (so far none have been put in that category). A recently proposed bill in Congress would go even farther. The current draft of the legislation calls for a 10 percent requirement for all banks and an additional surcharge of 5 percent for institutions with more than $400 billion in assets, which means that it would apply to JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. We're likely to hear other proposals bubble forth. Boston Federal Reserve President Eric Rosengren has thrown an idea into the public hat. He argues that banks should be required to hold more capital if they own a broker-dealer subsidiary, which in theory pose greater market risk, especially in times of financial stress. "Despite the central role that broker-dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem," he said in prepared remarks at a conference. "I firmly believe that a reexamination of the solvency risks of large broker-dealers is warranted." This isn't as draconian as recent calls to split universal banks along the old Glass-Steagall divide. The industry will fight it with energy. One could argue that this point of view discounts the risks that stemmed from the insured side of the business in the financial crisis. Such risks proved to be profound and prompted regulators to expand insurance coverage on retail deposits greatly to minimize the chances of an old-fashioned run. That said, we did in fact see a run on the wholesale side. As of now, there's no capital penalty for universal banks that are active on both sides of the Glass Steagall divide. Would such a penalty prompt some breakups? For more:
Read more about: capital, capital ratios Also NotedSPOTLIGHT ON... John Paulson hit by gold woes For hedge fund manager John Paulson, gold was a bright spot in an otherwise dreary stretch of bad performance in previous years. This year, however, the reverse has held true. While his main funds are faring better, the recent woes of gold has cut into his returns. Next week, Paulson, "who has made billions off his gold investments in past years, will update his clients about all of his funds, including a fund dedicated specifically to investing in gold," according to Reuters. Article Company news:
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Friday, April 19, 2013
| 04.19.13 | Banks fight back against mandatory auditor rotation
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