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Today's Top News1. Gupta hit with additional SEC fine
The hits keep coming for Rajat Gupta, who was convicted of insider trading in June and sentenced to two years in jail in October. Piling on the former Goldman Sachs director and one-time head of McKinsey, the SEC has hit him with another civil enforcement action, which will call for him to pay $13.9 million. Gupta was also permanently barred from acting as an officer or director of a publically traded company and from associating with brokers, dealers, and investment advisers. The penalty follows the $92.8 million penalty it levied on Raj Rajaratnam, the hedge fund manager to whom Gupta leaked corporate secrets about Goldman Sachs. The SEC was happy to trumpet the news. "The sanctions imposed today send a clear message to board members who are entrusted with protecting the confidences of the companies they serve," said George S. Canellos, Co-Director of the SEC's Division of Enforcement in a statement. "If you abuse your position by sharing confidential company information with friends and business associates in exchange for private gain, you will be prosecuted to the fullest extent by the SEC." To be sure, Gupta remains free on bail, pending his appeal, which will be closely watched. Some think that he has a decent chance of winning, which would call into question not only his criminal conviction but his civil convictions as well. This is not the end of the episode. For more: Read more about: Enforcement Action, Rajat Gupta 2. Bank of America hit by rising rates?
Now that the applause has quieted down over surprisingly good second quarter earnings, we'll see more attention paid to balance sheet issues. One big issue is the extent to which rising interest rates will affect balance sheets. This issue has loomed large for well over a year, with a lot of analytical work devoted to which banks will be the hardest hit. The fact is that the combination of a low-yield environment and a high risk environment for loan growth has made it tough on banks' looking to boost their NIMs. In search of income, they pretty much had to embrace fixed income products, especially those of the structured variety. Bank of America in particular has relied on MBSs. One analyst says that Bank of America has a higher percentage of RMBS in its available-for-sale portfolio than JPMorgan and Citigroup, which exposes it to greater unrealized losses due to rising rates "They shine at taking rate risk over time, but it can come back to haunt them, too," the analyst tells Reuters. He rates Bank of America an "underperform," and last month "correctly predicted that the bank would generate billions of dollars of losses in its available-for-sale portfolio." At some point, this could affect to some extent the bank's schedule for raising capital in accord with regulations and for returning capital to shareholders. To be sure, all banks are struggling with this, and all have differing securities compositions in their portfolios. This will remain a hot-button issue going forward. For more: Read more about: NIMs, balance sheet 3. JPMorgan to settle energy charges
JPMorgan Chase seems to be coming around to the view that it has nothing to gain by digging in its heels and fighting the Federal Energy Regulatory Commission's allegations that it manipulated energy markets. The fact is that the bank has become the new Bank of America (which at some point became the then-new Goldman Sachs) in terms of enforcement actions. JPMorgan Chase is now facing off against no less than eight federal agencies. All this has created a perception of a rogue-ish bank, which is a bitter pill for CEO Jamie Dimon, who had been so successful in keeping the bank's image shiny after the financial crisis. According to media reports, the bank now aims to avoid a showdown by settling FERC charges that it manipulated prices. It will be interesting to see if the bank admits any wrong-doing, which doesn't appear likely. The price for settlement is apparently right. Media reports hold that the bank will be able to settle for $500 million to $1 billion. For FERC, that would be a record-breaking fine. My sense is that the figure will be closer to $500 million, as the bank set aside $600 million for litigation. For JPMorgan Chase, a $500 million fine would be more than manageable. It also appears that Blythe Masters and other executives will not be personally charged in a civil enforcement action. That's no doubt a relief to her, one of the highest profile executives in the derivatives industry. Previously, FERC investigators had planned to hold her and others personally liable. The move to settle strikes me as quite practical, and an acknowledgment that the bank's regulatory woes run deep. Even if they can put the FERC issues behind, it faces many more, including several related to the London Whale fiasco. Unfortunately, the weight of all these investigations has taken a toll on the bank's once-pristine reputation. It likely will aim to settle them all, as long as it can avoid admitting any wrongdoing. For more: Read more about: Enforcement Action 4. Morgan Stanley hits earnings milestone in wealth management
Morgan Stanley joined other firms in posting an upside earnings surprise for the second quarter, but the magnitude of the surprise was somewhat muted. Excluding the DVA and expenses related to Smith Barney deal, the bank reported earnings of $872 million, or 45 cents a share. That compares with the average analysts' estimate of about 43 cents a share. Like other banks, JPMorgan was able to hike revenues in eye-catching fashion; second quarter earnings came in at $8.3 billion (excluding the DVA), up 35 percent from $6.6 billion a year ago. The earning release signals an important milestone for Morgan Stanley. The bank was given the go-ahead recently to complete the purchase of Smith Barney, and this earnings release was the first to reflect the full results of that unit. The news was good, as the acquisition helped boost the pre-tax margins in the important wealth management unit to 18.5 percent. Revenues were up 9 percent to $3.5 billion. While the bank has suggested over the past few years that it would not be averse to reducing its historic reliance on sales and trading activity, that part of the company fared quite well, in keeping with trends at other investment banks. In its institutional service unit, which includes FICC activity and advisory activity, revenues surged 30 percent to $4.3 billion. The strong performance reflected good performances in equity sales and trading, FICC sales and trading, and investment banking. Good news for employees: Compensation expenses were $4.1 billion, up from $3.6 billion a year ago. Morgan Stanley's average trading VAR was $61million compared with $72 million in the first quarter of 2013 and $76 million a year ago. In contrast, Goldman Sachs kicked its VAR up to $81 million from $76 million sequentially. For more: Read more about: Morgan Stanley, bank earnings 5. Dell shareholders face uncertain near-term future
The Dell special committee, as expected, elected to adjourn the scheduled special meeting without voting on the $13.65 a share deal that the committee had been backing. It would appear that there are just too many shareholders unwilling to support it. In the past few days, the likes of BlackRock, Vanguard, T. Rowe and others have made clear that they think the deal shortchanges them. To the bitter end, Dell founder Michael Dell and partner Silver Lake stuck to their guns, electing to dig in and to try to persuade shareholders that there deal was a good one. At one point, it seemed like the dire forecasts in the PC market were working in their favor. But in the end, the idea of being forced to swallow massive capital losses didn't sit well with shareholders, many of whom expected a higher bid---and were disppointed. It does not appear that his lobbying campaign worked. And the committee has let it be known that it has advised Michael Dell to raise his bid. Carl Icahn is certainly smiling as these events transpire. But there's no guarantee that his offer of a leveraged recap will fare much better. The special committee certainly did not think that much of it, as they recommended that shareholders support the founder's offer instead. So where does that leave shareholders? It's still possible that Michael Dell will find a way to raise his bid. If not, the conventional wisdom is that the stock may be in for some turbulence. Some analysts predict a precipitous drop. At that point, shareholders can only hope that another bid emerges. But there are no guarantees, and the likelihood of a higher bid declines as the woes of the PC market accelerate. For more: Read more about: Dell, Leveraged Buyout Also Noted
SPOTLIGHT ON... Morgan Stanley speaks on leverage ratio Morgan Stanley deserves credit for going where other big banks refused. It boldly stated its leverage ratio for the second quarter. It said the ratio stood at 4.2 percent for the holding company, a number that lags the 5 percent that regulators recently proposed. The bank thinks it will be in good shape to comply by the deadline, however. The good news was that the bank already exceeds the 6 percent proposed requirement for insured deposit units, not that it has an extensive FDIC-insured business. Article Company News:
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Friday, July 19, 2013
| 07.19.13 | Bank of America hit by rising rates?
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