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2. Jumbo rates are relatively low, so what?

What is it about former Citigroup executives that make them so prone to supporting bank breakups?

Sandy Weill, of course, generated lots of media coverage when he went public with his views that some sort of break-up was in order. Now, the Financial Times notes that another former Citigroup CEO, John Reed, also favors a break-up that would return banks to the days of Glass Steagall. Who's next? Vikram Pandit?

Some might see some irony in Reed's position, given that he was an ardent defender and practitioner of the one-stop approach to financial services.

Now retired, Reed "firmly believes that the business logic behind the transaction was flawed, and that the old Glass-Steagall division should be reinstated. Mr Reed first expressed this view soon after the crisis erupted. Last year Sandy Weill, the other main architect of the Citicorp-Travelers deal, changed his position to support breaking up the banks."

Reed argues that "the greatest problem was of clashing cultures – and this went far beyond the strong cultures of the old Citibank and Salomon Brothers, the dominant institutions in the Citigroup merger. Rather, the problem had to do with compensation."

He seems to think that the as the trading culture has come to dominate the top investment banks, risk management has become that much harder.

"I do think that these cultures don't mix well and one tends to push out the other, and it does result in institutions whose behaviour isn't necessarily productive for the economy," he was quoted.

To be sure, there would appear to be little support behind the idea of separating investment banking and commercial banking these days, leading to the question: what would it take to really push the idea forward?

For more:
- here's the article

Read more about: Bank break ups
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By Jim Kim

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3. Independent analyst takes on sell-side analysts

All across the country, people are puzzling over mortgage rates, specifically the fact that rates for jumbo loans are now lower than rates for conventional loans.

It would be fair to call this situation unprecedented.

It's easy to see why rates on conforming loans have inched higher. GSE-oriented fees on these loans have risen. And as Fed-related tapering concerns sweep through the market, yields in general are rising. That represents a double-whammy for the loans that are backed by the GSEs.

As for the non-conforming loans, they are typically not sold into the loan marketplace as aggressively, and more often reside on the bank's balances sheet. Of course, one would think that many are privately insured, which would tend to raise their costs.

All in all, it's a bit hard to parse out the exact reasons why. It's probably best to assert that jumbo rates have been less susceptible to the underlying trend toward higher rates.

At the more macro level, if this situation persists, we might be forced to conclude that the industry deems jumbo loans more credit-worthy than conforming loans.

It may be that the financial crisis---and all the aftermath---has built in a near-permanent layer of new risk related to conforming loans, related to the higher likelihood of putback costs and related to uncertainty of dealing with Fannie Mae and Freddie Mac, which will not be reformed anytime soon.

In any case, the effect on mortgage revenues from this situation, if it were to persist long-term, is unclear, depending on some complex elasticities. But it would be sad if this inversion were to last, and the industry reorients around wealthy mortgage customers. I doubt it will.

For more:
- here's an article from the LATimes

Read more about: interest rates
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By Jim Kim

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4. Corzine fights charges of negligence; will he go to trial?

If you are a small research shop, you've got to stand out. That calls for savvy marketing.

These days, adroit marketers understand that social media plays a huge role in creating buzz. Witness the case of Kevin Kaiser, a 26-year-old analyst at an outfit called Hedgeye Risk Management. He sent out an email to clients that was rather damning about Kinder Morgan, calling it a "a house of cards, completely misunderstood and mispriced."

The email titled "New Best Idea: Short Kinder Morgan," was apparently a marketing blast for a report from the company. "No analysis was provided: only seven bullet points with topics that the report will address, including the valuation of the company's sprawling oil and gas business, which has surged as exploration companies tap into shale deposits driving a U.S. energy boom," according to Reuters.

"The missive and his comments on Twitter spooked investors who shaved $4 billion off the company's market capitalization and sent Kinder Morgan Inc shares down 6 percent last Wednesday. Analysts are not certain why Kaiser's comments resonated with so many investors, but they underscore the growing influence of social media like Twitter, which can deliver investment information - accurate or not - to thousands in seconds at the push of a button."

The problem is that if you are going to be that incendiary, you open yourself up to criticism. Via Twitter, the company and the analysts took some criticism. Some questioned the analyst's experience. Given the strident nature of his prediction, he has positioned himself against many of the sell-side analysts that remain bullish on the energy company.

In the end, is this sort of free-for-all is actually good in terms of the flow of information? Or is it simply sensationalistic marketing? Of course, if Princeton graduate Kaiser is right, then the argument is over.

For more:
- here's the article

By Jim Kim

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5. Wall Street banks face new risks from energy units

The conventional wisdom holds that the top executives of failed Wall Street banks got lucky in that they were never personally charged. EX-MFGlobal CEO Jon Corzine's name inevitably pops up when people think about those who got away clear. But in fact, Corzine is facing charges. He was hit with civil charges by the CFTC, which alleges a gross failure to supervise in the run-up to the commodities firm's spectacular implosion.

It's true that he has escaped criminal charges, fairly or not. But the tack taken by the CFTC is interesting to say the least. While it obviously does not have the goods in terms of charging him with direct crimes---criminal prosecutors never came up with the goods either---it seems fitting that he has been charged with something akin to negligence. It seems like poetic justice for those who think he was reckless, set the wrong tone and eventually allowed all this to happen, blaming others along the way.

It's somewhat ironic that he's being held accountable for the sins of a former lower-level executive, Edith O'Brien, whom he had suggested might be in the thick of money transfers that landed the firm in so much trouble. The CFTC has charged her as well.

In any case, Corzine's legal team was in action recently, seeking to nix the CFTC's case, arguing that "there is no evidence demonstrating that Mr. Corzine knowingly directed unlawful conduct or acted without good faith," as noted by DealBook.

My sense is that the indictment will stand. So the big issue is whether this will go to trial. It might not be in Corzine's best interests to subject him to that. He will at best look like he simply had no idea what was really going at his firm and at worst like he promoted a reckless, risky culture. If he's painted as an out-of-touch buffoon or as a plundering pirate, he loses, even if he wins.

For more:
- here's the article

Read more about: MF Global, Jon Corzine
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By Jim Kim

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