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2. Will private equity firms become home lenders?

Morgan Stanley has joined the rather trendy movement, especially among big, ailing European banks, to scale back in FICC-oriented sales and trading and focus on more reliable income generators, like wealth management.

According to Trefis research, "Morgan Stanley reported the lowest revenue figures from its fixed-income, currencies & commodities (FICC) trading unit among the country's five largest investment banks for each of the last six quarters," adjusting for DVAs/CVAs. For the record, the top five are JPMorgan Chase, Citigroup, Goldman Sachs, and Bank of America.

"The declining focus on debt trading for Morgan Stanley is evident from the fact that for quite some quarters now, the revenues from this business have been less than half that of the nearest U.S. competitor. And with tighter regulation for the industry on the cards, the importance of the unit is only expected to dwindle further over coming periods. The $1.5-$2.5 billion revenue estimates provided by Colm Kelleher, president of the bank's institutional securities, clearly highlight this fact as they are a far cry from the $3.4 billion in quarterly revenues the unit churned out at its peak in Q1 2007."

Operating a massive operation with disappointing returns just isn't going to cut it anymore, so the bank has embarked on a "shrink to profitability" strategy, one that is quite reminiscent of the one underway at UBS and others.

To be sure, we're seeing an interesting separation in the market, in which the likes of Goldman Sachs and JPMorgan thrive while others fall back. Goldman Sachs, in a recent report based on executive interviews with several banks, reported a "universally lackluster" tone in the market. The analysts say "more pain is expected ahead as new derivatives trading rules, higher capital requirements and the long-awaited Volcker rule are implemented."

One issue is managing the scale-back in a way that doesn't prod customers to switch quickly to a competitor. It seems wise to scale back slowly, if that's possible. In some ways, this is a winner-take-all market.

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By Jim Kim

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3. Carlyle in spotlight over Booz Allen investment

As more private equity firms rush into the retail home market, they have generated lots of controversy. Some hold that these Wall Street-backed firms have bid up real estate so fast and so far that local folks are having a much harder time buying homes. Wall Street of course is a convenient target.

Unstructured Finance notes that there are some interesting options that private equity firms might ponder, which would allow them to cash out of their investments and aid local would-be homeowners at the same time.

As of now, people assume that private equity home buyers will package their holdings into a REIT that will then be sold via the public markets.

However, "if the institutional buyers are serious about renting out homes as opposed to being fast-money flippers, becoming a source of financing for prospective buyers may be the best way to guarantee there will buyers in the future. The financing could be part of a rent-to-own strategy, or a way to lure potential homeowners who might have difficulty getting a mortgage from a more conventional lender. National home builders long have had their own mortgage operations to help enable first-time buyers to get themselves into a new home."

One benefit is that the firm would be able to market themselves locally as an entity that enables homeownership, like a local thrift or community bank.

"And if the appetite is right, any loans issued by the national home buyers could be bundled into securities–the next wave of residential mortgage backed securities."

So we may see Blackstone in the home lending market at some point.

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By Jim Kim

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4. S&P upgrade: a ho-hum event

There was once a day when the Carlyle Group was stereotyped as a shadowy private equity firm with deep ties to the government by dint of high profile hires, the likes of George H.W. Bush and James Baker. That was always somewhat overblown, but the stereotype has come back into play with the controversy over Booz Allen, the massive government contractor that does lots of intelligence IT-oriented work.

Edward Snowden, who leaked information about a surveillance program, was an employee of the firm. He remains overseas, as extradition issues play out.

For the Carlyle Group, the controversy is lamentable in part because it has worked so hard to put its image woes behind it. The company has fairly recently embraced a new openness, at least from a marketing and PR point of view.

The firm is on tricky ground with Booz Allen. For one thing, it is fabulously profitable. "The buyout firm bought Booz Allen's government contracting arm for $2.5 billion in 2008, when the consultancy separated the business from its commercial arm. The investment has worked out well for Carlyle so far, with Booz Allen having paid out more than $612 million in special dividends before its 2010 initial public offering," according to the New York Times.

Carlyle holds two-thirds of the stock of Booz Allen, and commands three seats on the firm's board.

At some point, the controversy may prove to be too much. But its ownership stake would appear to be much more tenable than Cerberus's ownership stake in the Freedom Group, which made the gun that was used in the Newtown massacre. Cerberus quickly announced plans to sell its stake in the company. It's doubtful that Carlyle Group will be forced to follow suit. But the publicity is uncomfortable.

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By Jim Kim

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5. More social impact bond projects to rise

Recall that back in August 2011, the credit rating company Standard & Poor's downgraded the debt of the United States, stripping it of the AAA rating which people took for granted for more than a generation. The market reaction was strong, but ultimately investors bid Treasury up after a brief sell-off.

Flash forward to the present. S&P has decided that the fiscal outlook of the United States now is strong enough to warrant an upgrade, and the bonds are back at AAA. This time around, the market reaction was muted. And that seems to reflect a shift in attitude about the top credit rating companies.

Some might argue that the fiascoes involving the AAA ratings of all those MBSs and CDOs that imploded in the financial crisis have left credit ratings companies with dramatically less influence. To be sure, though, they remain a key check-off in the world of finance, as issues cannot be brought to market without some sort of rating. But nothing really seems to have changed, as much-ballyhooed reform measures never really got off the ground in a dramatic way.

We still hear calls for reform. And S&P has been indicted on grounds that it falsely issued AAA ratings to securities not worthy of the rating. But all in all, the same pay-for-ratings system endures. The difference is that the world is much more cognizant of the process of these for-profit companies, which have shareholders to answer to, after all. A AAA rating may be necessary to keep a deal alive and the fees rolling in, but it's not necessarily seen as the definitive word in creditworthiness anymore. The world has wised up. And that's a good thing.

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By Jim Kim

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