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2. Pimco transitions to life after Gross

In the aftermath of the financial crisis, Goldman Sachs asked a lot of partners to delay retirement so as to not paint a picture of top executives bailing out of a sinking ship. The issue is relevant in light of the recent move by Frank Bisignano, co-chief operating officer at JPMorgan Chase, who is stepping down to become the CEO of First Data.

"With Mr. Bisignano's departure, executives who once surrounded Mr. Dimon as he helped steer the bank through the 2008 financial crisis will be even thinner. Several other executives have already left, including Heidi Miller, James E. Staley, Bill Winters and Steve Black," notes DealBook.

It would be very hard to conclude that JPMorgan Chase is a sinking ship and that top executives across the board are bailing out. This is hardly an existential issue. The viability of the firm going forward is not at stake.

But the bank faces criminal prosecutions in several areas, notably about whether it misled regulators and investors about the botched London Whale trades, which cost the firm so dearly. At a time like this, it's understandable that people will interpret as somehow linked to the London Whale controversy.

All in all, the chance to run a big company like First Data doesn't come around often. Many would leap at the opportunity. That's likely the prime motivation for Bisignano.

For more:
- here's the article

Read more about: First Data, JPMorgan Chase
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By Jim Kim

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3. Legislation may push big banks to break up

Bill Gross is the prototypical "Key Man" at an asset management company. He is still synonymous with Pimco in the eyes on many, but you have to applaud the board of the company for diversifying a bit with an eye on the future.

Bloomberg reports that the firm is "becoming less dependent on Bill Gross, preparing for an eventual future without the world's best-known bond investor and adding pressure on its rising stars to live up to his legacy."

The company has no choice now but to downplay the strong personal brand that it once marketed so well. Concrete steps have been obvious. Gross oversees a smaller share of Pimco's mutual-fund assets and pulls in less of its total cash. The $289 billion Pimco Total Return Fund got 19 percent of Pimco's new mutual-fund deposits for the past two years, down from 42 percent in the prior period. The article also notes that the percentage of mutual-fund assets managed by Gross personally fell to 63 percent as of March 31 from 84 percent a decade ago.

The future of the firm hopefully will fall seamlessly into the laps of the rising stars, identified as fixed-income managers Daniel Ivascyn of Pimco Income, Chris Dialynas of Pimco Unconstrained Bond Fund and Mark Kiesel, global head of corporate bonds.

The pressure is also on Mohamed El Erian, who was hired as CEO and co-CIO, to work alongside Gross. It will be up to him to shape the firm of the future, and try to become the new face of Pimco over time. He's well on his way.

For more:
- here's the article

Related Articles:
PIMCO employee plays hardball

Read more about: PIMCO, Bill Gross
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By Jim Kim

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4. The return of portfolio risk

There have been many calls for big banks to break themselves up, either to enhance shareholder value or to end the "too big to fail" controversy. But no big bank has decided to take that route, despite their still-weak stock prices.

So what would it take for them to finally take such a step?

Some think the answer is at hand in the Brown-Vitter proposal, which would dramatically restructure the balance sheet of top banks, forcing them to eschew debt financing in favor of equity financing and to hold what some see as draconianly high levels of capital. Indeed, the biggest banks would be required to hold up to 15 percent of assets in reserve. In contrast, 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).

The banks will fight the stepped up capital requirement proposal with everything they've got. The lobbying battle will be one for the ages. But let's assume for a moment that they'll lose -- what then?

As noted by a Washington Post editorial, "This would likely force the Big Four to spin off much of their current business, defusing systemic risk that Mr. Brown and Mr. Vitter believe they now pose."

You will hear a lot of rhetoric from banks about the evils of the higher and simpler capital requirement proposal. If such rhetoric is substantially true, then big bank boards would have to seriously consider whether it would be better for shareholders to break up into smaller pieces. Such break-ups might end up being a stroke of genius.

For more:
- here's the item

Read more about: Capital Ratio, Bank break ups
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By Jim Kim

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5. Do banks use loan-loss reserves to pad earnings?

Record low interest rates have presented some massive asset allocation challenges for banks. Net interest margins remain under pressure, and that is forcing banks to consider their balance sheets in a whole new light. Some will be forced to make some big changes in a search for higher yields, increasing their exposure to higher-yielding fare such as lower-rated corporate bonds, CMBSs, and CLOs and perhaps even CDOs.

Of course, banks could also boost their loans significantly, and find ways to charge higher rates. As of now, that seems less likely than a shift in the investment portfolio. The hunt for yield is a phenomenon not limited to banks. The entire credit buy-side is facing the same issue, and they will have even less qualms about plowing forward into risker securities.

The Financial Times notes that, "You might think the prospect of a flood of junk bonds and leveraged loans, should Silver Lake's buyout bid for Dell be accepted, would be enough to chill debt markets, but you would be wrong. Among the bankers who scoop up all these loans and package them into new securities for sale to investors, a common complaint is a shortage of 'product'. Dell is product. The complaint should be a warning sign. Too much demand from Wall Street could lead to riskier lending practices, as lenders race to get loans written and ready for selling on. It is a tail-wags-dog situation similar to the US housing market mania before 2007."

Certainly, the CMBS market is heating up. At some point, the RMBS will as well.

With the financial crisis of 2008 still fresh in the minds regulators, structured finance is as hot as ever. I can only hope that the understanding of such techniques has deepened in the corridors of regulatory bodies, as well as on Wall Street.

For more:
- here's the article

Read more about: Structured Finance, Portfolio Risk
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By Jim Kim

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