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Reserves against loan losses were a large drain on bank earnings in the aftermath of the financial crisis. But then the economic and operating environment improved, and releases of reserves ended up being a powerful source of much-needed earnings. So the sword cuts both ways.

The issue is topical in light of a recent proposal by the FASB that would change the way banks approach the decision to reserve against loan losses. Under current rules, the "incurred-loss" approach, banks set aside reserves when there are already signs of a loss. Under the proposed "expected-loss" standard, however, banks would be able to look ahead, using their own forecasts of loan losses, in order to reserve against expected losses.

The big controversy in all this involves the likelihood that banks will be able to use the new expected-loss standard to smooth earnings to an unseemly extreme. Reuters quotes one expert who said that, "If I had to dream up a way to manage earnings, I think this is probably as good as it gets."

Another sounds a more ominous note noting that, "The question isn't so much will somebody do bad accounting with this; somebody will…The question is, will it become widespread, accepted practice to do the accounting badly?"

Some have called for an approach that would rely more on mark-to-market valuations. We'll likely hear more possible alternatives as more public comments hit the FASB. Comments are due May 31.

For more:
- here's the article

Read more about: Fasb, Loan Loss Reserves
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2. Hedge funds wager on gold

By Jim Kim

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3. Morgan Stanley wins with wealth management

Is the gold market a sucker's bet, or an amazing buying opportunity?

It's hard to sit on the fence when it comes to the gold market. Lots of people have jumped off the bandwagon this year. Since 2011, when gold traded at $250 an ounce, it has been on a massive run fueled by lots of scary economic news and plenty of raw speculation. The price peaked at $1,880 in August of 2011 and now trades at about $1,350. Last week, the market suffered its biggest one-day decline in 30 years before staging a strong comeback.

Lots of analysts, including the team at Goldman Sachs, have recommended exiting the commodity, but hedge funds are more than willing to buck that advice. Led by John Paulson, who has benefitted massively from the long-term gold run-up, hedge funds are now boosting their positions.

In Paulson's view, as noted by Bloomberg, central-bank stimulus will "eventually lead to inflation." The hedge fund is the biggest shareholder in the SPDR Gold Trust, the largest exchange-traded fund backed by the metal. The articles also notes CFTC data showing that fund managers and other speculators boosted net-long positions in gold almost 10 percent.

For the moment, short covering may be behind the short-term recovery. A larger battle will rage for years. In seems like a classic hedge funds vs. central banks war is brewing.

For more:
- here's the article

Read more about: Hedge Funds, John Paulson
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By Jim Kim

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4. Silver Lake likely to proceed with Dell deal

Morgan Stanley (NYSE: MS) would like wealth management to emerge as a larger contributor to earnings. That concept has been in vogue for the past few years, as lots of banks, especially in Europe, have cratered in investment banking and sales and trading. It would be hard to claim that Morgan Stanley has cratered to the extent that UBS, has. Still, it seems wise to want to build up in wealth management.

Its purchase of Smith Barney from Citigroup as of now looks like a winning move, after few years during which the technical integration was a big question mark. In the first quarter, wealth management pre-tax income soared nearly 50 percent to almost $600 million. While the unit accounted for 42 percent of net revenue, it contributed about half of the entire bank's pre-tax net income.

LEX makes the following point: "If the rally has legs, and wealth management is officially past its post-crisis gloom, buying Smith Barney looks, in retrospect, like a wise move."

Indeed, as more people count on a rotation into equities, wealth management looms as strategically more important these days, especially as Morgan Stanley's investment banking and capital markets business stumble. Net revenues from FICC at the bank stands as a great example; it fell 42 per cent.

"Morgan Stanley is reducing risk-weighted assets and pruning its business, but not withdrawing outright from any areas," LEX notes.

This makes built-in offsets, as represented by wealth management, more important. That said, the competition will be fierce as some think that brokerage units owned by commercial banks have a big advantage, as they can integrate credit into their offerings.

For more:
- here's the item

Read more about: Morgan Stanley
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By Jim Kim

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5. S&P claims it is innocent of fraud

What a difference one personal computer sales report can make.

Since research firms IDC and Gartner issued reports this month documenting double-digit drops in the global market for personal computers, the ground has shifted beneath Dell's feet. The reports quickly led to Blackstone's decision to stop pursuing a deal to buy the computer marker, all but scuttling hopes that a bidding battle between at least two would-be buyers would break out.

Now the focus shifts back to Silver Lake, which put forward a proposal with the backing of Michael Dell and Microsoft in February to buy the company for $13.65 a share.

One could argue now that the offer appears to be too high, given the new data. But Bloomberg notes that it will be hard for Silver Lake to back out of the deal because of some contractual restrictions and a break-fee agreement that could cost the private equity company $750 million if it wanted out.

If Silver Lake really wanted out of the deal, it would have to come up with a MAC. It possibly could argue that it relied on overly rosy sales projections. But at this point, there has been no indication that the firm wants to back out. But you never know what sort of discussions are underway behind closed doors.

For more:
- here's the article

Related Articles:
Dell board to make quick ruling on bids

Read more about: Leveraged Buyout, Dell
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By Jim Kim

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