CBLOG

2. Pensions win with rising interest rates

It wasn't a huge surprise when the Fed decided to embrace the Basel III common capital ratio, essentially throwing its weight behind the international guidelines. Such guidelines call for banks to maintain a minimum common equity capital ratio requirement of 4.5 percent, plus a capital conservation buffer of 2.5 percent---for a total of 7 percent. It's still possible that the international guidelines will call for an additional surcharge on the largest banks. Even with an added surcharge, however, the large banks are in decent shape to meet the milestones set over the next couple of years.

But there's still a lot of uncertainty for big banks on the capital ratio front. As this publication has discussed, while the world seems to have embraced risk-weighted capital ratios, there is a lot of disagreement on the companion leverage ratio, which can be seen as more pure capital ratio in that it relies much less on the idea of risk-weighting. As of now, it is quite possible that the U.S. regulators will impose a leverage ratio requirement in excess of the 3 percent recommended by Basel III. The U.S. requirement could be anywhere from 6 to 8 percent.

At the same time, the Brown-Vitter bill, which is still far from ever becoming a law, has managed to inject itself into the debate. It would impose, as currently written, a draconian leverage ratio of roughly 15 percent.

As long as capital ratio issues remain unsettled, the bank lobby will active. And this is far from over. Many expect the Fed to impose more requirements in this general area soon.

For more:
- here's a DealBook article

Read more about: Capital Ratio, Leverage Ratio
back to top

By Jim Kim

Comment |

3. How Goldman Sachs intends to win in Japan

Back in the 1980s, when rates were still super high, American retirees somewhat smugly got by on their savings. Many of them assumed they were getting phenomenal returns on their nest eggs, not worrying about the fact that interest rates were super high as well, lowering their real interest rates dramatically.

As rates now begin to rise again, will retirees end up better off? That's a good question, one that pension funds and pensioners must grapple with.

On one hand, one could argue that pensions that loaded up on fixed-income products will lose, at least initially, as the rise of rates pushes down the portfolio value of the bonds. But from an accounting perspective, it's clear that the rise in rates has helped pensions narrow their deficits, outweighing the loss of portfolio value.

As noted by Reuters, a JPMorgan study has found that the bond selloff, as of the end of May, pushed the accounting deficits of U.S. and U.K. defined benefit pensions to their lowest since 2011. "The subsequent rise in yields this month - another 40 basis points on 10-year Treasuries for example - will have helped further, outweighing the drop in equities."

The study also said that "assuming asset prices such as equities hold steady from here, they reckoned defined benefit deficits would again be fully covered with a further increase of about 80-90 basis point in yields in the UK and slightly less in the U.S."

There are other benefits as well. The cost of insuring future liabilities has dropped, and many pensions may be tempted to buy even more bonds as yields rise, counteracting the rush to sell by others.

For more:
- here's the article

Read more about: interest rates, pensions
back to top

By Jim Kim

Comment |

4. Michael Dell faces pressure to raise offer

Is the Abe trade alive and well?

Earlier this year, hedge funds rushed into an obvious trade. Buoyed by the QE3-ish monetary policy and expansionist fiscal policies of Prime Minister Abe Shinzo, they aggressively shorted the Yen and longed Japanese equities. The trade worked out spectacularly for a while, until the global dislocations hit home.

The Nikkei 225 index fell about 20 percent from its high before rebounding a bit recently. It's only about 10 percent lower than it peak as of now. But even after the drop, Japan has outperformed all major equity markets this year, notes Bloomberg.

Goldman Sachs certainly senses opportunity. In its view, the Abe trade ranks as a winner still. It is encouraging Japanese clients to strike while the iron is hot. It is advising issuers to take advantage of the moment to aggressively issue new shares, for which they will hopefully find rabid demand.

"Goldman Sachs, which employs about 100 investment bankers in Tokyo, has managed seven global equity deals in Japan this year." It led the underwriting for Japan Tobacco's $7.5 billion share sale, and it worked on Suntory Beverage's initial public offering, valued at about $4 billion. It faces a lot of local competition from the likes of Nomura and Daiwa.

For more:
- here's the article

Read more about: Goldman Sachs, Abe Trade
back to top

By Jim Kim

Comment |

Carl Icahn seems to have hit a turning point in the Dell buyout drama.

The conventional wisdom as of late is that he faced an uphill battle ahead of the July 18 special shareholder vote on the buyout proposal by Michael Dell and Silver Lake. But now that Icahn has lined up more definitive financing for his leveraged recap proposal, he seems to have gained credibility.

In fact, the special committee has let it be known that it has gone back to Michael Dell and Silver Lake with some pointed advice: they should raise their $24.4 billion offer, which seemed like a winner just a week ago. According to Reuters, "The special committee, which was formed to independently assess what the best option for Dell shareholders is, came to that conclusion based on its meetings with investors as well as concerns over a key upcoming recommendation by investment advisory firm ISS."

Media reports hold that as of now Michael Dell is non-committal about raising his bid. If he makes that move, one could argue that Icahn has won a significant victory, raising the value of his large stake in the company.

The next big milestone, one that Michael Dell and Silver Lake cannot ignore, may the recommendations of big proxy advisory companies. ISS is evaluating the deal and will report its conclusions soon.

If ISS recommends against Michael Dell's proposal, his options will be limited and he may have no choice but to raise his bid.

For more:
- here's the article

Read more about: Leveraged Buyout, Dell
back to top

5. Joyce steps down at KCG

By Jim Kim

Comment |

Twitter |