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2. Goldman Sachs sports lowest compensation ratio

When it comes to anything technically complex -- a massive revenue generating project, a compliance project or some such -- who would you trust for implementation: big banks or the government? Some of you might opt for neither. In that case, the only other option is a consulting firm.

No doubt, we're living in something of a Golden Era for banking and financial services consulting, as the likes of Promontory, Rust Consulting, Deloitte and others have thrived by taking on complex projects for the public and private sector.

But it appears as though some projects are beyond even the technical competence of these firms. We've seen some notable flubs recently. Just look at all those bounced checks that were intended for victims of bank foreclosure abuse. Look also at the vast numbers of checks that contained the wrong amounts. Rust Consulting botched both mailings, leading to lots of public outrage.

Perhaps the best example of a consultancy raising brows is the powerful Promontory Financial, which has adroitly hired many ex-regulators to work on behalf of bank clients. The great fear is that they have become de facto regulators in that banks turn to them for complex projects, assuming that if the consultancy approves then regulators will also.

As of now, a great debate has emerged among regulators. The New York Times reports that the Fed still seems to accord consultants great respect, even requiring banks to hire them. New York state financial regulators on the other hand are bent on holding at least one firm, Deloitte, accountable for the sins of its clients, notably Standard Chartered, which agreed to pay $340 million to the state for AML lapses. The bank later paid $327 million to settle with upstaged federal regulators. The state's top regulator, the controversial Benjamin Lawsky, has taken the eye-catching step of fining Deloitte $10 million and banning it from bank business for 1 year. Whew!

For more:
- here's the article

Read more about: regulation, Bank Consultants
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By Jim Kim

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3. SEC to change "no admission of guilt" policy

Compensation ratios have been a big issue as of late, as more shareholders are looking for signs that banks are holding the line on expenses. SNL Financial analysts took a look at the industry and found that many banks seem to be faring well on this front.

Goldman Sachs, for example, has been able to reduce its compensation ratio to 43 percent from 44 percent a year ago. It would appear to have one of the lowest compensation-to-revenue ratios of the top banks. In 2012, the company ratio was even lower, 37.9 percent, its second-lowest mark as a publicly traded company. Morgan Stanley's ratio is much higher, 50 percent; a year ago, it was a whopping 62 percent. The drop was driven in part by debt valuation adjustments.

Of the top 10 largest publically traded investment banking companies, only Stifel Financial and Jefferies saw their compensation to revenue ratio increase in the first quarter year over year, according to SNL data. Stifel saw the largest increase; the ratio moved up nearly 8 percentage points to 71.5 percent. Ouch! "Charges, such as retention costs, related to the acquisition of KBW LLC, drove Stifel's comp ratio higher. The company would have reported a 63.8% comp ratio without the charges."

All in all, the best way to lower the ratio is to jack revenues, but that's easier said than done, especially in this market. All in all, expenses will continue to be closely watched.

For more:
- here's the item

Read more about: Goldman Sachs, bank compensation
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By Jim Kim

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4. Jefferies results lead to worries

SEC Chairman Mary Jo White waded into the controversy over "neither admit nor deny wrongdoing" early in her tenure. It wasn't necessarily surprising that she would publicly state she was tackling the issue. What was surprising was that she has made some decisions on the issue so soon. I thought her review would move into regulatory limbo, with nary another word for at least a year.

Instead, White has affirmed that the SEC will be tweaking its policy. "We are going to, in certain cases, be seeking admissions going forward," White said at a conference, as quoted by the Washington Post. "Public accountability in particular kinds of cases can be quite important, and if you don't get them, you litigate them."

In an e-mail sent this week, the co-directors of the enforcement division said that cases in which the defendant engaged in "egregious intentional misconduct" may justify requiring an admission, as would the obstruction of an SEC investigation or "misconduct that harmed large numbers of investors."

It remains to be seen just how profound a shift this will be. To be sure, if the SEC were to change its policy such that it would always require an admission of guilt, the costs would be tremendous. The agency simply wouldn't have the resources to try so many cases. Companies, fearing an onslaught of private litigation, would feel they have no choice but to go to trial. (That's the conventional thinking anyway.)

That said, there may be a few high profile cases in which the stars align, and the agency is able to wrangle a guilty plea. An interesting test case looms. If the $600 million plus SAC Capital settlement is not approved, then the SEC will have tricky situation on its hands. It may have no choice but to go to trial.

For more:
- here's the article

Read more about: settlements, SEC
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By Jim Kim

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5. Securities lending suit against Wells Fargo under way

Jefferies, a mid-market investment banking powerhouse, has structured its fiscal year such that its quarters end a month before the premiere banks. It has thus emerged as an early warning system for bigger banks when it comes to quarterly earnings, especially trading earnings.

So what is the early warning system flashing now?

Jefferies reported that its second quarter FICC-oriented results were weaker than expected, falling nearly 30 percent year over year. Overall, earnings fell 34 percent. The big issue, according to the company, is QE3, and the extent to which it will remain in force for the remainder of the year. There are plenty of concerns that the economy is humming along at a growth rate that may no longer justify massive stimulus. That has apparently cast a chill across the FICC spectrum, leading to a pause in activity.

As noted by Dow Jones, Jefferies CEO Richard Handler termed the environment "cautious and tepid." Handler said stimulus-related concerns led to "subdued fixed-income secondary volumes and opportunities, particularly when compared to our exceptionally strong first-quarter performance." The good news, however, is that equity-related trading activity soared 22 percent.

The results will be taken seriously by analysts and investors, as they await results from the likes of Goldman Sachs and JPMorgan Chase next month.

To be sure, not everyone thinks that Jefferies' second quarter results will prove a reliable indicator of earnings elsewhere. Other banks, notable JPMorgan Chase, have dropped hints that perhaps they were less perversely affected than the Jefferies' results would suggest, according to Breakingviews. In addition, the mix of business at Jefferies may not be representative of the larger banks.

For more:
- here's an article from Dow Jones
- here's the Breakingviews article

Read more about: Jefferies, bank earnings
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By Jim Kim

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