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Today's Top News1. JPMorgan's Blythe Masters might be charged
The New York Times reports that Blythe Masters, one of the most respected JPMorgan executives and a groundbreaking figure in the derivatives industry, might be in the crosshairs of prosecutors. The Federal Energy Regulatory Commission (FERC) has been investigating alleged energy markets abuse via various trading schemes by JPMorgan and other banks. In a confidential report, the agency says it will recommend an enforcement action against Masters to hold her individually accountable for alleged crimes. "The regulatory document cites her supposed 'knowledge and approval of schemes' carried out by a group of energy traders in Houston. The agency's investigators claimed that Ms. Masters had 'falsely' denied under oath her awareness of the problems and said that JPMorgan had made 'scores of false and misleading statements and material omissions' to authorities, the document shows," according to the Times. Regulators also believe she played a big role in what they call a systematic cover up to mask evidence of certain trades and a plan to obstruct investigations. "It is unclear whether the agency will file an action against JPMorgan based on the investigators' findings. A majority of the five-member commission must first endorse the case. If the regulator does proceed, it could fine the bank and Ms. Masters." The bank denies that Masters committed perjury or lied in any way. This is more bad news for a bank that has been beset with regulatory woes, calling into question not only the judgment of top executives, but also the structure of the executive ranks. The fact that many executives have left the company compounds the problems. At the upcoming annual meeting, shareholders will vote on whether to split the chairman and CEO jobs, both held by embattled CEO Jamie Dimon. For more: Related Articles: Read more about: JPMorgan Chase, Blythe Masters
The Brown-Vitter proposal, which would significantly raise capital requirements for big banks, has given rise to talk that the bill is really an effort to force big banks to break up. The operative idea is that the new requirements would be so onerous to fund that banks would effectively be forced to break up in order to avoid the harshest requirements, which of course are targeted at the largest banks. But a new report from The Boston Consulting Group makes clear that some banks will fall under pressure to shrink dramatically anyway, even if the bill never becomes law. The report suggests that the days of after-tax ROE levels of 15 to 20 percent for investment banks are over. The industry average was 10 to 13 percent at the end of 2012, with about 3 more percentage points to be subtracted due to regulation. An ROE of 12 percent is the minimum that shareholders will accept going forward, which means banks will be forced into dramatic action. "The capital markets and investment banking industry is in the midst of a multiyear transformation that necessitates tough strategic choices," said Philippe Morel, a BCG senior partner and a coauthor of the report. He added that, "Although the market for its services will remain vital, the value that banks will be able to capture will continue to shrink. Some players may be forced to exit the industry entirely, and many more will leave certain asset classes or gradually reduce their exposure and investments in unprofitable areas. In short, only the fittest will survive." In a sense, we're seeing this play out already, as many banks, for example UBS, are withdrawing from investment banking and trading activity to focus on wealth management. The report proposes six business models that will help banks get to the 12 percent, though there is no guarantee of success. The tips include: powerhouses, haute couture institutions, relationship experts, advisory specialists, hedge funds and utility providers. For more: Related Article: Read more about: capital, capital requirements, Brown Vitter 3. Directors at JPMorgan in crosshairs
It's not just JPMorgan Chase CEO and Chairman Jamie Dimon who is feeling job pressure from the bank's shareholders. Three members of the bank's risk policy committee have been targeted by activist shareholders and a proxy advisory firm, who generally argue that the employees failed to appropriately monitor the risk management processes, leading to the infamous London Whale "hedging" fiasco, which cost the bank $6.2 billion over two quarters. ISS Proxy Advisory Services has specifically identified directors David Cote, James Crown and Ellen Flutter as not worthy of re-election because of "material failures of stewardship and risk oversight," as noted by Reuters. In addition, CtW Investment Group, which advises union pensions and owns shares in the bank, has said it will vote against these three directors as well as Laban Jackson, chairman of the audit committee, which shares responsibility for oversight. CtW voted against all four directors last year, but back then it was publicly critical only of Futter. The group argued that, as the president of the American Museum of Natural History, she lacked industry experience. Last year, just 86 percent of shareholders voted for Futter, the lowest level of support for any director, according to DealBook. The board has indicated, however, that it supports Flutter, who is said to be knowledgeable of reputational risk and related matters. The board has been reaching out to influential shareholders to lobby on behalf of maintaining Jamie Dimon as both chairman and CEO. But it's clear they may need to lobby on behalf of others as well. You can see the outlines of a deal taking shape. Perhaps the forces that ardently support a chairman/CEO split would be appeased if the board were to promise an all-new risk policy committee. For more: Related Articles: Read more about: bank directors, Risk Management Committee 4. Paulson aims for big profits on GSEs
With Fannie Mae posting record profits, hedge fund managers are intrigued with the idea that the big GSEs might someday represent a gold mine. Funds have been loading up on ultra-cheap preferred shares, betting that Fannie Mae and Freddie Mac may someday rise from the ashes by paying off their debts to taxpayers and becoming fully rehabilitated private entities. John Paulson has jumped on this trend. If it all works out, he'll have the distinction of making billions and then some from the housing collapse if he can indeed ride the big GSEs back to big profits. As noted by Bloomberg, Paulson and others are now in lobbying mode. Hedge funds recently "met with members of the Senate Banking Committee and with staff members in the House of Representatives." Other hedge funds involved in this include Claren Road Asset Management and Perry Capital. The bet will only work if the hedge funds can convince congress not to liquidate the two entities. Such a liquidation has been in the works for several years, achieving rare bipartisan support. But for now, there is little urgency to definitively solving the GSE conundrum. The housing market is creaking back to life, and lawmakers are loath to mess with that. At the same time, the big GSEs are making hefty dividend payments to the government, which bailed them out, and the payments are more than welcome at a time like this. A long-term solution will not be forthcoming soon, which means the hedge funds have time to work out a deal that might recapitalize the entities and keep them functioning albeit in altered form. They might be wise to hire some lobbyists, promising to pay for performance by giving them a stake in the vehicles that bought the preferred shares. Now that's incentive. For more: Related Articles: Read more about: GSEs, Fannie Mae 5. Banks still offloading stakes in Chinese banks
Banks have been paring or exiting their stakes in big China banks as of late, and the trend is likely to continue. As noted by a Forbes commentary, HSBC Group is expected in the next few months to sell its 8.0 percent stake in the Bank of Shanghai, which is on track for an offering soon. The bank may reduce its stake on other Chinese banks as well. "The investment community is even talking about a once-unthinkable event, the disposal of HSBC's 18.7% holding in Bank of Communications," Forbes noted. HSBC was once thought to have designs on owning the entire bank, and they are hardly alone in their actions. Bank of America exited its stake in China Construction Bank holding in 2011, and Goldman Sachs sold of a portion of its stake in Industrial and Commercial Bank of China this year. So what's going on? Banks may have grown frustrated with the lack of progress in terms of using their investment stakes to pry open new markets. At the same time, the value of the investments had fared well, so perhaps banks decided to lock in a principal gain. That's the conventional wisdom as of now. The timing might be decent, as some speculate that the near-in future of Chinese banks is anything but rosy. Forbes notes that, "There are growing concerns that Chinese banks are perched at the edge of a cliff. They have been hiding substantial liabilities through various means, including moving unwanted assets off their books into 'wealth management products'—high-yielding investments offered by technically unrelated pools—while nonetheless retaining risk of loss. The China Banking Regulatory Commission, to its credit, issued regulations at the end of last month to force banks to rein in the shadowy products, but as a practical matter the rules only begin to address systemic problems." Banks may be wise to pare back now. For more: Related Article: Read more about: U.S. banks, Chinese stakes, China Also Noted
SPOTLIGHT ON... Banks shut branches in low-income areas According to a Bloomberg report, banks have shut 1,826 branches since late 2008. More than 90 percent of the closings were in postal codes in which "household income is below the national median." Banks are in a tight spot on this issue. You have to understand their desire to force all branches to earn their own keep. At the same time, withdrawing from lower income neighborhoods can be problematic for these communities. So there's a fine line to be walked. Article Company news: Industry news:
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Monday, May 6, 2013
| 05.06.13 | JPMorgan's Blythe Masters might be charged
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