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2. Analyst: Banks fare well in trading

According to the WSJ, prosecutors are considering bringing a case against SAC Capital founder Steven Cohen based on a "willful blindness" theory. The idea is that if Cohen strove to give himself plausible deniability by simply remaining blind to possible criminal acts at his firm, then he could be charged. The paper provides an unflattering analogy: A drug courier who consciously does not try to determine the content of what's being delivered.

The article suggests that the structure of the firm is interesting in that it relies on something of a spoke-and-hub structure, in which Cohen sits in the middle and takes advice that's filtered from various funds or teams set up by the firm. There are said to be multiple layers between the sources of trading ideas and Cohen himself, making it less likely perhaps that he'll know the nitty-gritty of the origins of some trade ideas.

How unique is this structure in the industry?

Reuters notes that a handful of firms operate on a similar structure in that the firms allocate money to several funds or portfolio teams within their structure. "Large hedge-fund firms structured like SAC, where Cohen allocates capital to dozens of portfolio teams that trade mainly in stocks, stand to benefit most from the ongoing insider trading probe." The article names Millennium Management, "which has long had a rivalry with SAC," Balyasny Asset Management, Visium Asset Management, Citadel, and Hutchin Hill.

To be sure, these funds have been untouched by the insider trading scandal. Millennium, however, paid $180 million in 2005 to settle charges of improper mutual-fund trading. "It now has what some insiders are calling some of the toughest compliance requirements in the industry."

All in all, it would be unwise to assume that fund firms of this ilk all operate like SAC Capital, which was thoroughly dominated by a single personality and is perhaps seen by prosecutors as unique.

For more:
- here's the Reuters article
- here's the WSJ article

Read more about: insider trading
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By Jim Kim

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3. Leverage ratio steps closer to reality

When Jefferies released its quarterly earnings last week, its weaker-than-expected results gave rise to worries as to the strength of bigger bank FICC sales and trading results. But those fears would appear to be overblown.

In the view of Matt Burnell, a Wells Fargo analyst, trading revenue at the five largest firms may rise 13 percent from a year earlier and investment-banking revenue could climb 17 percent, as noted by Bloomberg. "While that represents a 16 percent fall from the first three months, it would be the smallest percentage drop from the first quarter since 2009."

Seasonality plays a role in quarter-to-quarter trading results, especially as it relates to fixed-income activity. A lot of companies like to frontload their issuance activity, which often leads to drop-off when comparing sequential quarters.

For confirmation of a more bullish look, we can turn to the co-head of JPMorgan's corporate and investment bank, who said last month that trading revenue was about 10 percent to 15 percent greater at that time than a year earlier. In addition, Morgan Stanley CEO James Gorman has been quoted as saying he expects his bank to post a "material improvement" from the second quarter of last year.

To be sure, the biggest banks may be faring better than their smaller peers. All in all, while the general view is that extreme volatility can depress sales and trading activity, that may not hold true for all banks.

For more:
- here's the article

Read more about: bonds, fixed income
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By Jim Kim

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4. Banks to take rate-driven hits to capital positions

Leverage ratios have generated controversy in international banking circles as of late, as it became clear that these ratios just might become the rule globally. Certainly the lobbyists have been active on this front. One might argue that they have been dealt a blow by the Basel Committee on Banking Supervision, which remains unwavering in its support of this capital requirement.

The committee basically favors a leverage ratio as an alternative capital ratio to complement the much more publicized minimum common equity capital ratio. As of now, the minimum common equity capital ratio requirement standsat 4.5 percent, with a capital conservation buffer of 2.5 percent---for a total of 7 percent. This of course is a risk-weighted measure. The beauty of the leverage ratio is that in theory anyway it is much less of a risk-weighted measure, and thus more pure.

This week, the Basel group announced it had agreed on a common formula for the leverage ratio. It aims to force banks to meet a minimum ratio of at least 3 per cent in 2018, according to the Financial Times.

"In setting the calculation method, the committee chose conservative definitions that will constrain a wide variety of different banking activities.

"Investment banks will be hit by rules that prevent them from using collateral to reduce the size of their derivatives exposures. Rules that will limit banks' ability to net exposures to the same counterparty will constrain bank payment systems, which tend to maintain large credit and debit balances for customers. Mortgage lenders are also likely to find the leverage ratio a challenge."

This is not the definitive rule-making. The committee has apparently agreed to study the issue more before implementation, leaving plenty of time for the lobbyists to continue their efforts.

For more:
- here's the article

Read more about: banks, capital ratios
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By Jim Kim

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5. Funds of private equity funds lose favor

Banks have been forced to restructure their balance sheets in the wake of the financial crisis. The reality is that their relative unwillingness to take on more lending risk and the pressure of generating a decent return in a low-rate environment has forced them to embrace fixed-income products with a structured bent.

As NIMs compressed, banks had no choice but to embrace higher-yielding securities, potentially including corporate bonds of varying ratings, CMBS, CLOs and the like.

The reality, however, is that the industry's fixed-income buying binge has left it exposed to the vicissitudes of interest rates. Bank of America, for example, has a $315 billion securities portfolio, 90 percent of which is parked in mortgage-backed securities and Treasuries.

The Financial Times notes the capital requires banks to take a hit to their equity capital positions due to unrealized losses on their "available for sale" portfolios, which could hit banks' capital positions fairly hard as rates go higher, which seems inevitable. "Some trading portfolios could report losses immediately when banks begin reporting second-quarter earnings in two weeks. The fall in value of larger AFS portfolios is not immediately reflected in income but does hit tangible book values under new Basel III capital rules."

This has been one of those things that everyone knew would eventually happen -- a car wreck that was inevitable.

For more:
- here's the article

Read more about: bonds, banks
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By Jim Kim

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