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2. Goldman Sachs to lead Twitter IPO effort

Big investment banks have taken their lumps as of late over concerns about their role in the energy market. JPMorgan has been the highest profile of these banks. It has recently settled charges that it manipulated prices with FERC, but it also faces potentially more charges in the future. The FBI is currently taking an active look. Unfortunately for the bank, its energy woes do not end there.

The New York Times weighs in with a lengthy investigation into its role in the obscure market for ethanol credits. These credits were created by federal regulation as a way to facilitate a robust market for ethanol-blended fuel. JPMorgan contends that it does not trade these credits the way it trades other securities, which seems obvious on its face. But the complaints have a familiar ring.

"Traders for big banks and other financial institutions, these people say, amassed millions of the credits just as refiners were looking to buy more of them to meet an expanding federal requirement. Industry executives familiar with JPMorgan Chase's activities, for example, told The Times that the bank offered to sell them hundreds of millions of the credits earlier this summer. When asked how the bank had amassed such a stake, the executives said they were told by the bank that it had stockpiled the credits," the Times notes.

The bank denies that stockpiles the credits and notes that its involvement is indirect, via partnerships and minority stakes in companies. "The fact of the matter is, we simply don't trade (these credits), nor do we carry an inventory other than a marginal amount for compliance purposes," the bank was quoted.

In any case, the recent hoarding has generated lots of angst. The Valero Energy Corporation, a refiner that owns thousands of gas stations, "says the squeeze in ethanol credits might cost it $800 million. PBF Energy, also a refiner, puts its bill at about $200 million."

The issues here are complex, but the prominent media treatment guarantees more robust investigation by enforcement authorities. Already, the CFTC has indicated that the issue is on its radar. That's precisely what the bank doesn't need right now. In the end, the bank would be wise to end this non-core activity soon, as it simply will not be worth the agony.

For more:
- here's the article

Read more about: Energy Commodities, JPMorgan
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By Jim Kim

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3. Is Richard Fuld beyond redemption?

There's been some confusion as to which banks will handle the Twitter IPO. As the smoke clears, it looks like Goldman Sachs has won the lead spot, with Bank of America Merrill Lynch, Morgan Stanley and JPMorgan Chase also playing major roles. The list of all underwriters will ultimately be very long, as this will be a huge deal. There's a lot of fee revenue to go around fortunately.

Goldman Sachs was said to have secured its role as the "lead left" position in the list of underwriters weeks ago, reports DealBook, "with other banks notified only in recent days."

It would be hard to interpret Goldman Sachs' victory as anything but a defeat for Morgan Stanley, which had carved out a massive beachhead as the go-to investment bank in Silicon Valley---until the Facebook fiasco anyway. "Speculation that Morgan Stanley was in line to lead the Twitter I.P.O. grew earlier this year after the San Francisco-based social media company hired one of the firm's bankers, Cynthia Gaylor. Ms. Gaylor had advised other technology companies on I.P.O.s in the past, and joined Twitter to lead corporate development. Announcing her move, she posted her first tweet: 'look forward to joining and focusing on M&A + strategy. pointed north … let the migration begin!' "

One issue here is how much of a discount Goldman Sachs offered to win the mandate.

Traditionally, fees ranged as high as 7 percent for smaller deals. Lately, that has plunged. For the Facebook IPO, the underwriters took just 1.1 percent of the proceeds. That still amounted to a hefty $176 million for the banks. One would think that the Twitter IPO will generate a comparable fee percentage.

Another big question is where the stock will trade. If the bank were to choose the NYSE, it will mark a telling defeat for the Nasdaq, which horribly botched the Facebook IPO. The consequences of that perhaps are about to become even more stark.

For more:
- here's the article

Read more about: equity underwriting, IPOs
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By Jim Kim

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4. Banks to release reserves tied to mortgage in third quarter

It's fair to say that he's been vilified more than any other executive who suffered through the financial crisis. He's been lampooned on Saturday Night Live. He's been called "the Greek tragedy of the financial crisis." He's been the subject of a formal management study called: When Does Narcissistic Leadership Become Problematic? Dick Fuld at Lehman Brothers. And he has been portrayed as an absolute wretch of a CEO in such movies as Too Big To Fail.

Says Bloomberg Businessweek: "His real problem is that he's forever associated with the Lehman bankruptcy, and anyone who hires him, or even speaks up for him, risks having this connection rub off on them. Fuld has become Wall Street's Hester Prynne, forever branded with a scarlet B." Ouch!

He's that toxic---even now. He even took to introducing himself as the "most hated man in America" not too long ago.

If there is one guy who perhaps is destined to remain out of the industry, it's Fuld. He has tried to get back in the game, but he seemed to pick the wrong spots. He's an old bond trading buy, not a deal pitching sort of guy. Nothing he has worked on since the crisis has worked out. He has racked up no successes. Unfortunately, he has instead seen himself ensnared in tabloid-worthy incidents that he would rather keep private.

And on top of it all, he doesn't have the luxury of having his legal bills covered in full. "Perhaps as a result, Fuld has been winding down a lifestyle that a friend confides was costing him $5 million a year. He sold his 6,000-square-foot apartment at 640 Park Ave. for $25.9 million. His wife, an avid art collector, stepped down from the MoMA board and enlisted Christie's to sell 16 rare drawings that netted at least $20 million."

For more:
- here's the article

Read more about: Lehman Brothers, Richard Fuld
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By Jim Kim

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5. How Goldman Sachs won in the mortgage meltdown

The real estate market gives and it takes.

It gave generously for much of the past year, when the real estate mortgage market creaked back to life, thanks in part to healthy, pent-up demand for refis. That certainly goosed earnings. That refi wave has waned, however, as rates creep back up, prompting many banks to manage their capacity in this market by laying off thousands workers.

As for the third quarter, the earnings impact will be offset by the release of previously set-aside reserves for losses. As the economy improves, the number of mortgages at risk has fallen. Banks will be offsetting slowing growth in mortgages with these reserve releases.

According to Reuters, JPMorgan is expected to release around $1.5 billion in the third quarter from areas including credit card loans and mortgages. Wells Fargo will likely release more reserves than the $500 million in the second. Analysts estimate Bank of America could release $1.6 billion in the third quarter.

So this is one more piece of the third-quarter earnings puzzle. As a source of revenue, it's not a recurring stream. Still, it speaks to the quality of current mortgages and ought to be seen as good news. There are a lot of other issues at play in the third quarter. It will be interesting.

For more:
- here's the article

Read more about: earnings, Reserve Releases
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By Jim Kim

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