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2. Pimco faces an uncertain future

The stunning success of the insider trading investigations has led to a chill in the once-rampant practice, scaring off would-be practitioners. A recent study by professors at Florida Atlantic University has quantified the extent of the big chill in at least one area: trading ahead of announcements of mergers, a classic insider trading strategy.

As noted by AllAboutAlpha, the scholars looked at pre-deal activity concluded that the chill pre-deal activity before the Raj Rajaratnam insider trading scandal blew open and compared that with pre-deal activity after the scandal. Recall that Rajaratnam was entened to 11 years in prison for his illegal trading. The study shows that "the market-adjusted abnormal stock price run-up of the target" in the days before an announcement was 5.1 percent before the Rajaratnam scandal and just 2.8 percent after the scandal.

"Put otherwise, pre-Galleon runups amounted to 14.8% of the takeover premium. The more modest post-Galleon run-ups amount to just 7.9% of that premium."

So it seems that would-be inside traders have been spooked and significantly reduced their activity, though such activity still appears to be going on. Equity hedge funds would have to be crazy to play it loose at a time like this, though it will likely not be long before some might find it safe to play the game again. At some point, the prosecutors will move on.

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Read more about: insider trading, Enforcement Action
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By Jim Kim

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3. Goldman Sachs, Morgan Stanley embrace private banking

For as long as younger Wall Street employees can remember, Pimco has been synonymous with bond market bullishness. The company was essentially built on ever-falling interest rates, which pushed Pimco to new heights, cresting as the fifth largest asset manager in the world.

But how the world has changed.

"Now, as interest rates have surged in the last two months, the company is showing several signs of stress," DealBook notes.

"Three-quarters of the company's popular exchange-traded funds have experienced outflows in June, with two of them losing nearly 40 percent of their holdings, according to data from Lipper. Meanwhile, nearly 70 percent of Pimco's mutual funds and E.T.F.'s have been underperforming their benchmarks, data from Morningstar shows."

In a not necessarily encouraging marketing move, two top executives have written articles "comparing their customers to passengers afloat in treacherous waters, with reassurances as to why they will survive." The PR and marketing folks really ought to rethink the Titanic imagery.

It will be tough for a firm with 90 percent of its assets in fixed-income products to sail through the current environment without some dings. At this point, it's understandable why some would think that the storied firm is due to take a back seat.

This points to the dynamism that capital markets inflection points represent. There's a sea change afoot, and it holds the power to reorder the industry, creating new stars. So who's next?

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Read more about: PIMCO, bonds
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By Jim Kim

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4. Mass. looks into sales practices targeting seniors

If there's one thing that all can agree on it's that top investment banks would be wise to expand their wealth management and private banking operations. The reality is that the shareholders appreciate efforts to develop reliable revenue streams that can smooth the volatility that comes with sales and trading activity and core investment banking activity. Goldman Sachs and Morgan Stanley are unsurprisingly expanding their wealth management and private banking businesses, notes the Financial Times. Goldman Sachs' private bank maintains $46 billion in assets, while Morgan Stanley maintains $131 billion. Both would like to grow.

The two banks for now are targeting different markets. Goldman focuses on the extremely wealthy, "unofficially those with a minimum of $10m in investible assets," while Morgan Stanley targets the merely very rich. Goldman Sachs employs 600 wealth advisors, while Morgan Stanley employs 16,000.

The need for a bank as well as a wealth management unit has become increasingly clear to both. Wealth management units owned by commercial banks have tried to use their ability to offer credit as a strategic differentiator. It's unclear how decisive that is in the minds of would-be clients, but if you can't offer loans, it's hard to call yourself a full-service wealth management operation.

Here's an intriguing thought: At some point, would it make sense for Goldman Sachs to go downstream and capture revenue from an enlarged market? Would an acquisition be out of the question?

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Read more about: private banking
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By Jim Kim

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5. Long prison terms for insider traders upheld

The investing landscape ismore complex these days, as brokers tend to push a lot more than stock and mutual funds. The really high-margin products for brokers tend to be structured products, complex partnerships, private trusts, hedge fund-lite products and so forth.

The sales folks can really spin a good tale---that's their job after all---that can make the prospects for strong returns perhaps a bit overly rosy, if you know what I mean. There's a fine line between good salesmanship and deception. William Galvin, the Massachusetts Secretary of State, who has long had an interest in financial services, is exploring the issue.

He has sent subpoenas to 15 banks and investment brokerage firms to investigate business practices related to sales of higher-risk alternative investments to older customers. The list of subpoena recipients include: Bank of America Merrill Lynch, Fidelity Brokerage Services, Charles Schwab & Co., Morgan Stanley, Wells Fargo Advisors, UBS Securities, TD Ameritrade, and LPL Financial.

This latest round of subpoenas stems from a previous investigation into the sale of REITs to seniors. Five independent broker dealers paid $11 million in fines in that case, as noted by the Boston Globe. Galvin apparently is seeking information about the volume of sales to seniors, the marketing programs involved and the volume of complaints the programs have generated.

To be sure, scams against seniors involving financial products have been a big issue as of late. We may see attorneys general in other states piggy back on this.

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- here's the article

Read more about: William Galvin, Enforcement Action
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By Jim Kim

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