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2. Analysts grill Goldman Sachs, JPMorgan over leverage ratio

Is this a bad omen for Michael Dell's attempt to buy his own company?

The board's special committee, tasked with overseeing the bidding process, has let it be known that it is considering a delay to the scheduled July 18 vote on the founder's $13.65 a share offer, which so far has been supported by the committee, which also evaluated a leveraged recap proposal from Carl Icahn.

The committee is now exploring a postponement of about a week, according to Bloomberg. The group "is likely to make a decision by the morning of July 18 if the votes already cast against the buyout are enough to scuttle it." The fact that an insider is putting a delay to the voting on the table might be suggestive of the early returns. The fact that the notion that there may be enough votes to scuttle the deal already casts is perhaps even more suggestive.

"Adjourning the vote would allow buyers Dell and Silver Lake Management LLC time to boost the bid or declare the current offer of $13.65 a share as best and final, said the person. It would also give shareholders, who can recast their votes up until the last minute, a chance to change their minds."

The article also notes that BlackRock, which owns 4.4 percent stake in the computer marker, has voted against the deal, which is big news in and of itself. That development comes on the heel of T. Rowe Price's public declaration that it too will oppose the deal. As of now, the fight may be too close to call.

In the end, Michael Dell may have no choice but to sweeten his bid, if he can.

For more:
- here's the article

Read more about: Leveraged Buyout, Dell
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By Jim Kim

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3. Trial of Tourre, a watershed or a farce?

You have to sympathize with CFOs in the face of a plethora of questions about their leverage ratios. JPMorgan's CFO was asked about it for insured deposits units. Goldman Sachs was asked about it for the holding company. Both declined to provide a definitive answer.

That's only smart at this point. The reality is that the FDIC's new leverage ratio proposal is still quite new, and the last thing you want to do is shoot from hip when announcing where your bank stands in relation to future targets. Analysts of course have every right to question management aggressively.

"What I hear you saying is, 'Trust us, we will be there,'" esteemed analyst Mike Mayo was quoted at the Goldman Sachs meeting (Reuters). "On the other hand, you're not disclosing a number like your peers have done and perhaps other peers will do. So on a disclosure basis, you're behind peers."

"Our first assessment is we're very comfortable with where we are," Goldman Sachs' CFO Harvey Schwartz was quoted. "The only reason I'm not being more specific about numbers at this stage is the team really hasn't had the time to go through the kind of diligence that we would normally want them to."

Schwartz also cautioned that the rule is not final, and may change before being implemented. As it stands, U.S. regulators have proposed that large banks should hold equity capital equal to 6 percent of total assets at insured units and 5 percent of total assets at holding companies.

At the JPMorgan analysts meeting, CFO Marianne Lake did not offer a specific number when asked about the leverage ratio at insured deposit units. She did offer some information, however, noting that the insured unit ratio was lower than the holding company ratio, which stands at about 4.7 percent. A few minutes later, a bank analyst at Morgan Stanley said, "I'm just wondering why no bank-sub disclosure. I realize that is different, but — and I heard your answer earlier — but I'm just wondering," she asked, why the number was not provided.

Lake's response, "There's nothing sinister underlying it."

CFO offices should think about following up with analysts and providing a solid schedule that will lead to full disclosure, in accord with Reg FD of course. That's about the most they can do at this point.

For more:
- here's the article

Read more about: Leverage Ratio
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By Jim Kim

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4. Goldman Sachs wins on higher rates

So is the trial of Fabrice Tourre a watershed moment in the post-financial crisis enforcement effort, or a complete waste of time? The truth may reside somewhere in the middle, but perhaps closer to the "waste of time" end of the spectrum.

Some say that Goldman Sachs has a lot at stake in the trial. And it's possible that the bank could end up looking back in numerous ways. It might be painted as reckless in pursuit of profits, as shielding the top executives, while sacrificing Tourre, a mid-level executive, or as simply being deceptive as regards customers.

One commentator for The Guardian goes a step further: "Goldman Sachs is not on trial for Abacus. The bank paid a fine, neither admitted nor denied wrongdoing, and endured a few days of public embarrassment in 2011 as a result of a very entertaining congressional grilling," she writes.

"With Goldman off the hook, we're supposed to believe that Fabrice Tourre was solely responsible for Abacus. There is no chance this could be the case: he is the lowest-ranking face on the totem pole of Goldman's former mortgage team, and Goldman cut him loose to fend for himself. The expectation of the SEC is that Tourre could put a face on the recklessness of the mortgage crisis.

"And he might – knowing how these public trials work – but it would be a false face. The mortgage crisis did not start or end with people like Tourre; it began in the executive offices of banks. No prosecution, however, is likely to reach that high."

The party with the most at stake might be the SEC. If they could have brought a case against someone who had more responsibility, I'm sure they would have. But the evidence wasn't there. So they were left with Tourre. My sense is that they would have preferred to settle.

At trial, the agency had better come up with more than emails sent by Tourre. If they don't have better evidence, they will have a hard time prevailing. At this point, the prosecution would appear to have the hardest road to travel. We'll soon see.

For more:
- here's the article

Read more about: Goldman Sachs, Fabrice Tourre
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By Jim Kim

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5. Tourre scheduled to testify on his own behalf

Goldman Sachs became the fourth large bank to post a significant upside earnings surprise. The bank reported second-quarter net income of $1.93 billion, or $3.70 a share (diluted), compared with $962 million, or $1.78 a share a year ago. The second quarter results trounced analysts' expectations of $2.83 a share. The top line growth was perhaps even more impressive. Revenues hit $8.6 million, up 30 percent from $6.6 billion a year ago.

Rising interest rates tend to be two-edged sword for banks, especially consumer banks. Goldman Sachs benefitted by the surge in sales and trading activity that accompanied the rate spike in the quarter.

Net revenues in Institutional Client Services were $4.31 billion, up 11 percent year over year---but down 16 percent sequentially. FICC revenues specifically were $2.46 billion, up 12 percent year over year, "reflecting significantly higher net revenues in currencies,

credit products and commodities. These increases were partially offset by significantly lower net revenues in mortgages and lower net revenues in interest rate products."

Investment banking also fared well. Revenues hit $1.55 billion, up nearly 30 percent year over year. Underwriting business was strong, racking up $1.07 billion in revenue, up 45 percent, reflecting leveraged finance activity and stronger equity underwriting.

The laggard might have been wealth management, which posted little growth in revenue.

As for the closely watched compensation stats, the accrual for such expenses hit $3.70 billion for the second quarter, up 27 percent year over year. The compensation ratio for the first half of the year was 43 percent, compared with 44 percent a year ago.

In addition, the average daily VAR kicked up to $81 million, up from $76 million at the end of the first quarter.

For more:
- see the results

Read more about: bank earnings
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By Jim Kim

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