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2. Expenses still top priority at Bank of America?

Goldman Sachs made quite a splash with its recently announced eye-catching social impact bond deal aimed at financing an experimental effort to reduce recidivism among inmates at Rikers Island. The bank has launched a second such project, this time in Utah, where it has built up extensive operations.

The bank will provide up to $4.6 million to the United Way, which will use the funds to run the Utah High Quality Preschool Program. Goldman will be joined by Chicago investor J.B. Pritzker, who will provide a subordinate loan of up to $2.4 million.

"The investment's success will be measured by the level of cost savings when children do not need to use special education services, which are financed by the state. The loans carry an interest rate of 5 percent, which is paid along with the principal if the program is successful," according to DealBook.

What's striking about this deal is the lack of a third-party philanthropic organization that has pledged to guarantee the loan. In the case of the Rikers Island deal, a guarantor in the form of a local foundation, Bloomberg Philanthropies, was willing to play that role, which no doubt made it easier for Goldman Sachs to commit $9.6 million.

In the Utah program, Goldman Sachs' position is enhanced by the presence of a junior loan, which we presume will take the first losses, if the results lag targets.

In the end, we all hope for success and lots of government cost savings.

For more:
- here's the article
- here's some background on the movement

Read more about: Social Impact Bonds
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By Jim Kim

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3. CFPB pushing more consumers to the mob?

Since Project New BAC was announced back in April 2011, Bank of America has benefitted significantly, not only from the actual cost cutting but from the general view that executives were deadly serious about expenses. Full implementation of the plan was expected to lead to net expense reductions of $5 billion per year by 2014, on a baseline of $27 billion in annual expenses for the areas marked for review.

Most analysts give CEO Brian Moynihan high marks for execution on this program. The stock price appreciation as of late has been driven in part by the success management was having on expenses. But at some point, the success of the program will get baked into the price of the stock.

I suggested not too long ago that expense reduction may be a less powerful stock driver going forward. The biggest looming challenge now may well be revenue. CEO Brian Moynihan has been running the bank for three years now, and revenue has declined every year. That trend will likely continue.

That said, Morgan Stanley analyst Betsy Graseck, thinks that continuing expense reduction is a great reason to own the stock--and lots of institutions apparently agree.

"Expense declines more than offset bear case litigation risk," she wrote to clients, as noted by TheStreet.com. She says Bank of America "would get most of the savings by slashing pay in its investment banking unit and reducing retirement eligible compensation." She projects Bank of America will cut operating expenses to $16.3 billion in the second quarter of 2013 from $18.2 billion in the first. She has an overweight on the stock.

To support her view, Graseck conducted her own poll, which showed that investors were most likely to buy the stock in response to strong execution of expense reduction programs.

For more:
- here's the article

Read more about: Bank of America
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By Jim Kim

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4. When will Lloyd Blankfein leave Goldman Sachs?

The Consumer Financial Protection Board is taking a fresh look at overdraft fees, making clear that the issue is alive and well despite the much-discussed changes to Reg E a few years ago. The revival of these fees as a consumer issue has prompted analyst Richard Bove to suggest, as only he can, that the CFPB will ultimately push people into the hands of unsavory alternative lenders.

According to MoneyBeat, Bove argues in a new research note that the CFPB's examination of overdraft fees, coupled with its pressure on payday lenders, will force low-income Americans into an even seedier version of "shadow banking system: the Mafia."

"This is not theory," Bove wrote in his note to clients. "When I was a child, my father was ill due to a botched operation on his gall bladder. He was in the hospital for over one year. The only source of funding for my family at the time was the Mafia."

I'm not sure the Mafia is girding for bigger business. Indeed, overdraft fees are not about to disappear. The notion that banks in aggregate offer a wide range of overdraft services isn't all that controversial. And it may be that consumers are confused.

We're likely to see even more disclosure and perhaps some tinkering in the actual fee. All in all, banks will do what they have to in order to maintain this source of revenue. They can't really afford to do anything else.

We certainly hope more customers are pushed to lawn shops and payday lenders, though it must be said that more banks are offering payday lending-type services.

For more:
- here's the article

Read more about: Overdraft Fees, CFPB
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By Jim Kim

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5. Steven Cohen's philanthropic efforts aid local efforts

An intriguing article in DealBook offers an update on the CEO succession sweepstakes at Goldman Sachs, making the point that President Gary Cohn is not only ready but also restless to take over. The only thing standing in his way is his good friend and current CEO Lloyd Blankfein, who for whatever reason is staying put.

To be sure, anytime an article of this ilk hits certain publications, there is a lot tea-leaf reading to be done.

One might argue that this article was a plant from the Gary Cohn camp, to pressure Blankfein into leaving. The article pronounces him the heir apparent, whereas the previous conventional wisdom held that there were others in the mix. The article pays mere lip service to other contenders, but manages to note two: Harvey Schwartz, Goldman's chief financial officer, and David Solomon, the investment banking co-chief. The article thus suggests that J. Michael Evans, once held up as a candidate, has fallen out of contention.

"While Mr. Cohn is still the front-runner to succeed Mr. Blankfein, time is not his friend. The firm will continue to groom other contenders, increasing the chances that the leadership baton could be passed to one of them and not to Mr. Cohn."

One might also argue that Goldman Sachs itself wanted the information out, if only to let the world know where things stand: Blankfein is the CEO for the foreseeable future, and Cohn will just have to cool his heels.

Neither party could do much about the spin the publication gives the info: "Executive Covets Goldman Seat Where a Friend Snugly Sits." At least the headline writer didn't say, "smugly."

All in all, this is more grist for the rumor mill regarding one of Wall Street's favorite topics. My sense is that the time is right for Blankfein to step down. But it's clear that public service isn't the option it once was. But for the sake of the organization, a transition needs to be worked out. Perhaps Cohn would agree to have Blankfein serve as executive chairman for a year or two or until Blankfein finds the right opportunity.

Interestingly, the article makes clear that there's "a lack of visible tension between the two men," so at least they can be cordial about all this.

For more:
- here's the article

Read more about: Goldman Sachs, CEO succession
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By Jim Kim

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