Also Noted: Spotlight On... Pay plan approved at Goldman Sachs meeting News From the Fierce Network:
Today's Top News1. Jamie Dimon's mandate to act
Given his surprising victory in the shareholder vote, Jamie Dimon has a surprisingly clear path laid out in front of him. He has been given a vote of confidence (despite the wrenching London Whale episode) to take care of business, which boils down to two essential tasks. First, he must justify his victory by re-committing the bank to sound risk management and compliance. The heavy load of investigations and enforcement actions are threatening to put the bank into the same legal risk category as Goldman Sachs (back in the day) and Bank of America. Dimon has religion on this issue. "His victory secure, Mr. Dimon is now redoubling his efforts toward repairing JPMorgan's frayed relationships with regulators, fortifying risk controls and bolstering the bank's businesses," reports DealBook. More specifically, Dimon plans "to marshal the momentum from the shareholder victory to try to strengthen the bank's compliance and audit controls, according to several people with knowledge of the matter. That cleanup work was already under way, but the victory gives him more of a mandate to tackle it head on." More resources will be ear-marked for compliance and internal audit. Second, Dimon must remake the board. It may well be "fait accompli" that the current risk policy committee will be wiped away, given the dismal support three members received from shareholders. But how the committee will be reconstituted, and with whom, remain key questions. At the same time, it would probably make sense to recruit new directors to fill key roles, such as the all-important lead independent director spot. A big issue is how to effect a quick, graceful transition. Related Articles: Read more about: Jamie Dimon, board 2. Sizing up the too big to fail funding advantage
The debate about too big to fail has taken some interesting twists lately. One of the big issues surrounds the funding advantage that big banks are said to enjoy thanks to their too big to fail status. The feeling is that investors implicitly price the idea the government will intervene to bailout a failing large systemically important bank into their market decisions. Indeed, the main debate has been over the size of this funding advantage. But a new argument has cropped up courtesy of Goldman Sachs researchers. They have issued a report that provocatively concludes that, in some cases, the funding advantage is actually negative. "We find that the six largest US banks by asset size have indeed experienced a bond funding advantage compared to others within the universe of bond-issuing US banks, but the advantage has been modest – just 31 basis points (bp) on average since 1999, even when we factor in the impact of explicit government support during the height of the financial crisis. From 1999 until the onset of the crisis in mid-2007, the advantage for the six largest banks was just 6bp on average. It widened sharply during the crisis but then reversed to a significant funding disadvantage during much of 2011 and all of 2012," it noted. The report makes the point that large companies tend to benefit in the bond markets due to sheer liquidity and the fact that they seem to be more stable. It's also true that the costs of the recently bailout of big banks were negative in that the government was able to turn a profit, in contrast to the bailout of smaller banks. The issue is most relevant when banks run into trouble. At those points, the value of being too big to fail really spikes. Think of how wide the funding gap would have been if the notion of a big bank bailout weren't assumed. The possibly negative or small funding advantage currently is a testament to the fact that the industry has generally cleaned up its balance sheet and no one is expecting anything resembling a credit event. If the large bank industry were to run into trouble, the assumption that a bailout will take place will work to their advantage in the funding markets. For more: Related Articles: Read more about: Goldman Sachs, Bailout 3. Goldman Sachs CEO touts the benefits of Utah
You know your annual meeting went smoothly when the big story wasn't the shareholder vote, but rather the venue. So give the PR folks at Goldman Sachs credit for adroitly focusing people on Utah. CEO Lloyd Blankfein was willing to talk about the bank's growing commitment to the state -- and some of the limits. Asked by a Bloomberg reporter whether the bank would consider erecting a trading floor in Utah, Blankfein said, "'Could I see a trading floor? I'd say it's possible…But guess what? We have a very big commitment to the New York area and we're already invested there and we already own the space.'" He cited limitations of having multiple trading floors, such as compliance, operations and technology. The reality is that Utah is mainly an outsourcing destination, not terribly dissimilar from Mumbai or Dallas. The highly skilled labor comes very cheap. It's tempting to call Salt Lake City a financial center, as more banks eye the benefits. But it would be more apt to call it a financial services outsourcing center. Outsourcing continues to claim higher-level value-add functions, like stock research and portions of the investment banking process. Blankfein said that, "It started out where we talked about what the savings were." He added that, "If you look at, though, we have almost every division of the firm represented here. We have lawyers who are here doing contracts. We have research people who are covering companies in Salt Lake City. We have several of our global businesses are operated globally from Salt Lake City." For more: Related Article: Read more about: Goldman Sachs, Annual Shareholder Meeting 4. The folly of not admitting or denying guilt
From the corporate point of view, there's tremendous value in not being forced to admit guilt when settling major enforcement actions with the SEC. The value -- and the sheer confusion -- that stems from such settlements has been highlighted by a Bloomberg columnist, who discusses a recent judge's decision to nix a private lawsuit that ACA Financial Guaranty had brought against Goldman Sachs. One might think that the bond insurer had a pretty good case against the gilded bank. After all, Goldman Sachs in 20120 paid a then-record $550 million to settle SEC fraud charges that included a claim that Goldman Sachs misled ACA Financial Guaranty in the infamous Abacus deal. Goldman Sachs was allowed to settle, and the no-guilt admission may have served it all. "The case captures perfectly why much of the public detests 'neither admit nor deny' regulatory settlements. We don't know whose facts to believe. Without trials or admissions of liability, the government's allegations remain unproven. Sure, Goldman paid a big fine. That doesn't establish anything. For all we know it paid the money just to make the SEC go away," the column noted. Legally speaking, there may be no contradiction. "There may not be anything factually inconsistent between this week's court ruling and the SEC's earlier allegations. To win a fraud suit as a private litigant, ACA needed to show that it justifiably relied on Goldman's misrepresentations. (The court said the insurer failed this test.) The SEC, by contrast, doesn't have to prove that an investor relied on a defendant's misstatements. Plus, the SEC said Goldman defrauded multiple parties, not just ACA." The "neither admit nor deny" controversy will continue to boil, though there may be some tinkering on the fringe. Indeed, the SEC has shown a recent willingness to require an admission of guilt as part of settlement. For example, it has charged S&P over faulty credit ratings, and so far, is requiring the firm to admit some sort of guilt. But in the end, it really comes down to the strength of the specific case. For more: Related Article: Read more about: ACA Financial Guaranty, Goldman Sachs 5. Surprise: Iowa AG heaps praise on Bank of America
The drumbeat of news regarding Bank of America's compliance (or lack thereof) with the national mortgage settlement has been unrelentingly negative. The news that New York Attorney General Eric Schneiderman was threatening to sue the bank, along with mortgage leader Wells Fargo, was a blow, given that Bank of America has struggled so hard to put the foreclosure behind it. But then came an unexpected ray of sunshine. Iowa Attorney General Tom Miller heaped praise on Bank of America for providing $27.9 billion in relief via the national mortgage settlement, more than any of the other four banks signed on to the agreement, according to the Washington Post. "They don't get mentioned in a positive way too often," Miller was quoted. But Bank of America "had the broadest and most effective and most successful principal reduction program." So what's going on? Is the bank doing a great job or a rotten job? Miller seems to have some sympathy for the fact that compliance with the settlement isn't exactly a snap for a massive, hidebound bank. Instant compliance perhaps is not reasonable, though it is required. "The whole idea is to make this system work. In some ways, it is working. In other ways, it's not working," he was quoted. It's a fact that the banks have not lived up to the letter of the law in every foreclosure instance. But that perhaps was always somewhat unrealistic. The issue here is what set of solutions will produce a better outcome. The threat of a lawsuit certainly underscores that banks had better solve their internal issues. At the same time, regulators and banks need to powwow to rethink some of the issues and figure out if there are better methods and metrics. While hardly perfect, the compliance process has yielded some benefits. The money is flowing --in some cases, far more than expected. Regulators and banks need to build on that progress in sound ways. For more: Related Articles: Read more about: Bank of America, Wells Fargo Also NotedSPOTLIGHT ON... Pay plan approved at Goldman Sachs meeting The Goldman Sachs annual shareholder meeting in Salt Lake City was relatively drama free and certainly nothing like the JPMorgan meeting. One item of note was that the executive pay plan was approved with 86 percent of the vote. There was little doubt that the pay plan would be approved, given the strong performance of the bank. Glass Lewis, however, did recommend against approving the plan. ISS was in favor of it. Article Company news:
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Friday, May 24, 2013
| 05.24.13 | Jamie Dimon's mandate to act
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