Also Noted: Spotlight On... Bank of America predicts bond collapse News From the Fierce Network:
Today's Top News1. Prime brokers nervous as SAC drama plays out
As DealBook notes, the SAC Capital drama continues to rivet Wall Street. A story about whether investors will yank funds was the most-viewed article on Bloomberg terminals for a while. The cliffhanger aspect of the story -- who and how many investors will jump ship? -- makes it narratively appealing, but there's another reason people are interested, at least on the sell-side. The article notes that, "SAC has generated billions of dollars in revenues for brokerage firms over the years. Several executives — all citing client confidentiality — said that the prospect of a severely diminished SAC would hurt their bottom line, which has created fear and anxiety on trading desks across Wall Street." The firm funnels massive amounts of business to prime brokers across Wall Street, from the big boys like Goldman Sachs and Morgan Stanley to many others, paying out hundreds of millions of dollars a year in commissions. "While Mr. Cohen's investors have benefited from the superior performance, so have the Wall Street brokerage firms that have catered to Mr. Cohen's firm. The main reason, they say, boils down to one word: leverage. To juice its investment returns, SAC borrows heavily from banks, which earn big fees on the loans. The fund borrows, on average, about $3 for every dollar in the fund. At $15 billion managed, SAC had a staggering $45 billion in buying power," Dealbook noted. If investors yank funds and SAC Capital becomes a family office, prime brokers may indeed suffer in the short-term, as money is pulled off the table. But limited partners will at some point reinvest. The prime brokers will have to scramble, though it's possible that the total size of the revenue pie will not be significantly dented, even if the SAC family office takes a less leveraged approach sans clients. For more: Related Articles: Read more about: Morgan Stanley, Goldman Sachs 2. Banks still face a cloudy future
The conventional wisdom as of late is that big banks have put the worst behind them and are poised to fare well as the economy grows. Heck, stock prices might even get back to book-value per share. Reflecting the optimism, banks stocks have been on fire, with the KBW index up about 20 percent this year. But an esteemed columnist for the New York Times writes that, "Clearly, the United States banking industry as a whole is better off than it has been for years. But, as is often the case, a more nuanced tale emerges when you look more closely at the profit figures. Put simply, there is less to the headline number than some investors may think." Earnings growth hasn't been uniform across the industry, loan loss provision trends have been somewhat worrisome and loan quality has taken a negative turn. But the single most vexing issue has to be net interest margins. This crucial aggregate statistics has been deteriorating in this zero-rate environment. Average NIM fell to 3.27 percent from 3.51 percent a year earlier, the lowest since 2006, according to the FDIC. This isn't exactly a new problem. Margin compression intensified last year, posing all sorts of balance sheet risks for banks small and large. One issue is that as higher-yield securities fall out of bank portfolios, banks must find ways to maintain as much of the revenue as possible. And that might entail plowing funds into lower quality-higher yielding fare. Mortgage-backed securities will be in heavy demand all over again. They'll likely be of higher quality this time around. For more:
Read more about: economic outlook, banks 3. Is Wells Fargo CEO the next industry spokesman?
In the wake of the financial crisis, JPMorgan Chase CEO Jamie Dimon was widely considered the most influential of the top bank executives. But then came the swirl of enforcement issues and the infamous London Whale fiasco, bringing with it lots of negative press, as the board found itself under fire (especially the risk policy committee) and as activist shareholders sought to force Dimon to give up the chairman job. In the end, he won a resounding vote, but he has yet to recover all of his political capital and his image has been dented. So who's the next great industry spokesman? A lot of people would say Lloyd Blankfein, the CEO of Goldman Sachs, which has put its enforcement woes behind it. But what about John Stumpf, CEO of Wells Fargo? The consumer banking powerhouse seems to be interested in raising its CEO's profile. According to the Financial Times, Stumpf has "warned the Federal Reserve against forcing banks to hold more long-term debt, a measure that central bank officials believe will help end the phenomenon of institutions judged 'too big to fail'. John Stumpf said the Fed was giving mixed messages on debt and his bank should not be punished for the fact that it is largely funded by deposits." By letting it be known that Stumpf was leading the charge, the bank seems to be positioning him as an industry spokesman. His comments came "as he plays a more active role as a spokesman for the banking industry, particularly after Jamie Dimon, chief executive of JPMorgan Chase, has reined in his criticism of regulators amid multiple probes into his bank." Stumpf told the FT that, "We tend to speak out one-on-one with regulators and legislators but I'm trying to make sure there's another side to this public debate." For more: Related Article: Read more about: Jamie Dimon, CEO 4. Rajaratnam's brother may have led investigators to SAC Capital
It's no secret that convicted criminal mastermind Raj Rajaratnam blames his younger brother, Rengan, for the insider trading mess that engulfed him. According to the author of a book about insider trading involving Raj Rajaratnam, the younger Rajaratnam may have also prodded investigators to take a closer look at SAC Capital way back in 2006. It notes that, "On July 24, at 2:06 p.m., Rengan called the SAC trader and the two spoke for about a minute and a half. Three minutes later, Rengan sent an instant message to his brother saying that the SAC trader 'is checking and will get back to me in 45 minutes,' according to government documents. Then, at 2:35 p.m., the chief operating officer of Sedna sent an instant message to Rengan and said the SAC trader had called. 'Asks that you call him on his cell.' Shortly after 3 p.m., minutes after Rengan hung up with the trader, he called Raj. The next day, Sedna accumulated a short position in Arris of 707,000 shares and SAC Capital built up a bearish bet of 140,000 shares in the company's stock, adding to a short position of 17,000 shares SAC accumulated the previous day, according to government documents." The similarity of various trades between Sedna and SAC and the communications between Rengan and the SAC trader, "struck S.E.C. investigators as potentially significant." Their instincts in general seemed to be right on. If Rengan ends up in jail, he may want to avoid serving at the Federal Medical Center in Massachusetts, where his brother is serving an 11-year sentence. For more:
Read more about: insider trading 5. Bond funds taking losses as rates rise
This could be the beginning of the end. It's an issue that's been on the mind of just about every fixed-income fund manager, who this year have become accustomed to lots of chatter about the end of an amazing era. Some call the market a bubble ready to burst. Others expect a more orderly wind down. But it seems that we've hit a point at which all expect further rate declines. It's just a matter of timing. A recently noted report from Casey, Quirk & Associates, estimates that U.S. investors, who are increasingly nervous about a zero- or rising- interest-rate environment, will withdraw up to $1 trillion from traditional fixed income products, creating massive risk for U.S. fixed income managers. For a sign of that, turn to the month of May, when lots of bond funds took their lumps, even as inflows into these funds held up well. According to Lipper, domestic funds that invest in higher-rated bonds with average maturities of under 10 years lost an average 1.8 percent in May, marking their worst performance since October 2008. One victim was Bill Gross, who manages Pimco's massive Total Return Fund. He had "bulked up on US Treasuries, saying they are the safest holding in a world in which 'almost all asset markets are bubbles and mispriced.' However, Treasury prices fell as yields on US 10-year government bonds rose from 1.6 per cent at the start of May to 2.1 per cent on Friday. The Total Return Fund lost 2.2 per cent, making it one of the worst performers last month, Lipper said." This may well be a blip. The market might rally next week, but the secular pattern will likely be downward. This is yet another sign that managers ought to re-think their asset allocation plans. For more: Read more about: Bond Funds Also NotedSPOTLIGHT ON... Bank of America predicts bond collapse You can add Bank of America strategist Michael Hartnett to the many voices predicting some major turbulence in the fixed-income markets. In a note to clients, reported by Moneynews, he had a memorable line. He said that, "It's hard to believe that the greatest bond bull market in history will end without some bloodshed." Bank of America's strategists say the 10-year Treasury yield will rise to 2.25 percent by year-end, as the Fed begins paring bond purchases in April. Article Company news:
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Wednesday, June 5, 2013
| 06.05.13 | Prime brokers nervous as SAC drama plays out
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