Editor's Corner: SEC's charges against SAC Capital: high stakes for all Also Noted: Spotlight On... JPMorgan directors step down News From the Fierce Network:
Today's Top News1. The future of Morgan Stanley
Given the pyrotechnics in the wake of the financial crisis, quite a few investment banks decided to adjust their business model. The new model stressed stable, income-generating businesses, such as wealth management. The most extreme example may be UBS, which wanted out of investment banking and capital markets all together and in to wealth management. Morgan Stanley ranks, however, as the highest profile institution to embrace this new model. So how's it going? "The perception that Gorman has downgraded investment banking in his priorities has irked some of his employees, many of whom were already upset over cuts in pay. At a time of general austerity in the industry, Gorman tightened belts more than most. Last year, the bank capped cash bonuses at $125,000 and this year deferred 100% of bonuses for some senior bankers and traders, which means they will get a bulk of their compensation in the future. Employees in wealth management didn't face similar bonus deferral. Gorman made clear he had no tolerance for complaints, saying if bankers were really unhappy, they could leave." notes Quartz. Others at the bank argue that the bank intends to be first rate in both investment banking and wealth management. And the second quarter results indicate that the bank is moving in that direction. The reality at the moment is that the bank faces something of an identity crisis. "Overall, Morgan Stanley hasn't completely adjusted to the world after the financial crisis. In Wall Street's map of the world, the bank is in something of a no-man's land." In the end, for all the talk of historic change, the net effect of all the changes is that the bank has merely diversified a bit more into wealth management, which is a good thing. For more: Read more about: Morgan Stanley 2. Great Rotation slow to materialize in early summer
One of the great themes of 2013 has been the looming Great Rotation. At times, the world seemed to agree that a massive rotation out of fixed income products and into stocks all but inevitable. Despite a lot of rhetoric about the world-changing implications, the massive movement has yet to materialize in a galvanic way. "We think we are a long way away from the 'Great Rotation' that so many market strategists are anticipating. Far more of the money coming out of bonds seems to be making its way under the mattress than into equities," said Trim Tabs in a report noted by CNBC. According to Trim Tabs, bond mutual funds and ETFs saw outflows of $67.9 billion in June, and $11.8 billion from July 1 to July 11. Meanwhile savings deposits surged by a whopping $74.8 billion in the month of June, and retail money market funds took in $33 billion. By contrast, equity mutual funds and ETFs only received $20.8 billion since the start of June to July 11, Trim Tabs said. That of course is all poised to turn around. To some, it's a matter of when. So at the consumer level anyway, is there still a lot of reluctance to embrace equities? The report is obviously based on a small set of data. My sense is that the rotation is real, but it might play out over a longer-than-expected time period. For more:
Read more about: Great Rotation 3. Do hedge funds suck, really?
The conventional wisdom lately has been that the hedge funds industry, while still dynamic from an entrepreneurial point of view, remains mired in poor performance and isn't likely to soon stage a rebound. Correlation remains vexingly high, rendering sustained stellar performance difficult. Limited partners have been reduced to throwing darts. For confirmation, we can turn to a recent cover story in Bloomberg Businessweek, which concludes: "Hedge funds may have gotten too big for their yachts, for their market, and for their own possibilities for success. After a decade as rock stars, hedge fund managers seem to be fading just as quickly as musicians do. Each day brings disappointing headlines about the returns generated by formerly highflying funds…." This year has been a performance nightmare in aggregate. "According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor's 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg." With alpha so hard to come by, should we fret about the future of the industry? As of now, pensions still have a strong appetite for these funds. As long as that holds true, the industry can breathe somewhat easy. But the game has gotten much more difficult especially for poor performers, as lagging returns will not be tolerated long. The industry's top players deep down understand that outsized performance year over year will be all but impossible. They will perhaps gradually become more asset gathering machines than performance machines. The marketing will have to be adjusted accordingly. For more: Read more about: Hedge Fund Performance 4. Does Michael Dell still have the upper hand?
The interesting thing about the on-going battle for Dell is that things haven't changed all that much, despite a lot of drama. To be sure, the Dell board's special committee decision to adjourn the special meeting to vote on founder Michael Dell's proposal without an actual vote was a setback. While Michael Dell and Silver Lake had the support of three proxy advisory firms, they still could not generate enough momentum with shareholders to carry them over the winning line. But with the vote now pushed to July 24, what has really changed? The fact remains that the PC market continues to deteriorate. At some point, people might even suggest that Michael Dell's $13.65 offer looking untenably high. Silver Lake has been mum throughout the process, claiming it is but a minority investor, but you wonder if they are getting nervous about overpaying. Investors are right to worry about alternatives. Carl Icahn has proven to be a master tactician. But "even so, the headline price on the billionaire investor's offer is only 2.5 percent higher than his rival's and involves dubious stub equity and the issuance of warrants of questionable value," notes Breakingviews. "Assessing two unconventional offers in a rapidly changing industry has made it tough on long-term Dell owners and merger arbitrageurs alike. In fact, it seems unlikely that Silver Lake could be as enthusiastic about the buyout as it once was. It's presumably too expensive, with a $750 million break fee, to walk away, but a sweetened bid – unless orchestrated cleverly to offer shareholders more upside – is probably equally cost-prohibitive. Icahn remains an option. A similarly complicated offer worked out reasonably well for CVR Energy's owners – and especially so for the billionaire investor – who faced a similar conundrum last year. In the end, though, it's a path that entails considerable financial and strategic uncertainty. Upon a bit further reflection, Dell shareholders will probably come to the conclusion it isn't a risk worth taking." Perhaps the odds still favor Michael Dell. But he needs to get this deal approved as soon as possible. The PC market simply isn't cooperating. For more: Read more about: Leveraged Buyout, Dell 5. SEC steadies its case at Tourre trial
In the minds of some, one of Fabrice Tourre's supervisors at Goldman Sachs, Jonathon Egol, should have been charged by the SEC alongside Tourre. But for whatever reason, that didn't happen. Egol instead has emerged as witness for the SEC, which sorely needs to salvage its case before the jury. One might imagine that the threat of prosecution played a role in his decision to testify. In any case, he proved to be a better witness than Paolo Pellegrini, who strangely reversed his position on the witness stand and provided testimony directly counter to his previous statements. He seemed to be going out of his way to blow up the prosecution's case, so much so that the SEC sought permission to treat him as a hostile witness. For the SEC, this played out like a bad movie. Thankfully for the prosecution, Egol didn't undermine their case. According to DealBook, at one point, he said he was not aware of any disclosure of John Paulson's role in the selection of securities for the CDO at issue. But his testimony was far from a homerun for the government. The defense was able to elicit some interesting admissions, such as the fact that the buyer of the deal also had some input into what went into the structured product. In the end, it's still unclear how all this will play in the minds of the jurors. It's anyone's game. One troubling issue is that the arcana of these deals have proved to be mind-numbingly boring. Media reports have noted that several had trouble staying awake. For more: Read more about: Fabrice Tourre, SEC Also NotedSPOTLIGHT ON... JPMorgan directors step down Two controversial directors have stepped down at JPMorgan. Many expected the move by David Cote, who served more than 5 years, and Ellen Futter, who served 16 years. Both were pilloried as members of the risk policy committee in the wake of the London Whale fiasco. While Jamie Dimon won a resounding victory at the annual shareholders meeting, Cote and Futter received such low percentages of the vote that it would have been untenable if they remained. The bank perhaps tried to distance their departures from the actual vote. But that was merely a face-saving move. This will not be the only director departure most likely. Article Company News:
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Monday, July 22, 2013
| 07.22.13 | Does Michael Dell still have the upper hand?
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