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2. Ackman to face more pain as Herbalife soars

Payday lenders in all their variants have been under fire recently, as politicians and regulators grow more concerned about this rough and tumble industry, one that embroiled bigger banks eyeing larger fee revenues.

A New York Times columnist has weighed in an interesting suggestion: if regulators really want to crack down on this form of lending, which they see as modern-day usury, why not go after the source of funds.

It's one thing to go after the store fronts. A host of states have moved, for example, against Western Sky Financial and its affiliate Cash Call. A suit by the New York State attorney general found that rates charged to borrowers by these companies ranged from 89 to 343 percent, far above the caps set by state law. Someone borrowing $1,000 could end up paying $5,000 over two years, according to the complaint.

Western Sky has suspended operations, though Cash Call still operates.

The columnist suggests: "When prosecutors pursue payday lenders, why not go further? Investigators should track down — and disclose — the institutions and individuals who make these operations possible by providing the capital that such companies need to conduct their business.

"The capital needs of companies like Western Sky are crucial because, unlike banks, they don't take in deposits that they can turn around and lend. They have to rely on financing from other sources."

The columnists did some sleuthing and found that among the companies providing capital to this operation in the past were Deutsche Bank Securities and a unit of Citigroup, known as the CIGPF 1 Corporation. "Deutsche Bank Securities led the senior facility, or line of credit, which was backed by a variety of lenders, including CIGPF. The lawsuit said that this Citigroup unit had $20 million invested in this lending facility." Both Deutsche Bank and Citigroup have since stopped funding the operation.

That raises the question of how lending operations of these sorts are financed. It's all a bit shadowy, but investigators would be wise to heed the columnist's advice: "Follow the money."

For more:
- here's the article

Read more about: Payday Loans, Direct Loans
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By Jim Kim

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3. Big banks bracing for FICC losses in third quarter

When will William Ackman, founder of Pershing Square Capital Management, capitulate on Herbalife?

That's a fair question, one that his limited partners are no doubt pondering. The reality is that Ackman has taken a beating on his $1 billion short bet against the company. He continues to maintain that a devastating enforcement action is on the way, but who knows when, or really even if, that will come down. In the meantime, the stock continues to levitate, punishing the shorts and rewarding the longs, including Carl Icahn.

The latest development: a DA Davidson analyst, one who has been correctly bullish on the company, has predicted that a leveraged stock buyback is in the offing. It might happen just as soon as the company gets a thumbs-up from its new auditor, PricewaterhouseCoopers. The analyst predicts a tender offer for $2 billion worth of shares, as noted by Forbes.

Ackman has discounted the possibility of such a deal in the past. "In his second-quarter letter to his Pershing Square hedge fund investors, Ackman said that he did not think a buyback at current stock prices would be accretive to Herbalife's earnings or materially shrink the outstanding share float even if Herbalife would be able to raise financing."

Of course, the real reason to embark on such a transaction is to squeeze the shorts, forcing them to cover, which will push the stock even higher.

If this plays out, Ackman---who likely bought in at about $50 a share---will suffer greatly, and the speculation about when he'll close his short position, if only partially, will intensify.

For more:
- here's the article

Read more about: William Ackman, Herbalife
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By Jim Kim

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4. Indicted Ex-JPMorgan trader: just following orders

How big of a debacle will the third quarter be with respect to fixed income earnings?

A JPMorgan analyst estimates that fixed income trading will decline 26 percent year-over-year. Given that investment banks' fixed income business traditionally accounts for more than half of their income, this looms as a pretty big hit to the bottom line, one that will only be partially offset by a rise in equities trading income. European banks will be especially hard hit, according to the Financial Times.

U.S. banks have been taking pains to prep the market for tough news. Marianne Lake, CFO at JPMorgan, told a conference last week that she expected adjusted markets revenues to be in the range of "flat to down 5 per cent," the FT notes.

Ruth Porat, Morgan Stanley's chief financial officer, was quoted at the same conference: "I think [trading] volumes this third quarter industry-wide have been a bit lower than last year. The [advisory] pipeline for September is very strong. But you never want to say the pipeline is done until it is done."

To be sure there are a lot of headwinds. In the end, most banks will likely remain profitable, albeit less so. The big benefit may come from the expected releases of mortgage loss reserves, which unfortunately will not be sustainable as the year progresses.

For more:
- here's the article

Read more about: fixed income trading, Ficc
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By Jim Kim

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5. Fed decision: third quarter results hang in the balance

So who is to blame for the Whale Trade fiasco that has cost JPMorgan so dearly?

We could debate culpability at the very top all day long, noting that JPMorgan has recommitted to integrity in compliance and that Ina Drew, the executive in charge, was forced out.

From an enforcement standpoint, however, for better or worse, the sights have been trained much lower. As is turns out one man has been indicted, one man has been charged but remains overseas, and one has been spared. The spared man turns out to be the main witness against the other two---one was his boss, the other was his underling.

The underling was Julien Grout, who reported to Bruno Iksil, the London Whale himself, who has adroitly won a pledge of immunity for his efforts on behalf of prosecutors. Grout maintains, through his lawyer, that he was "totally dependent on Iksil's instructions and relied in good faith on his expertise," as noted by Bloomberg.

The lawyer's statement continued: "It is astonishing that the prosecutors are relying on Iksil's testimony when he is the one who taught Mr. Grout how the bank was marking the portfolio, gave specific instructions on where he should mark positions, and personally approved the marks on a daily basis."

We can only hope that prosecutors can back up their actions so far with other evidence. To be sure, one danger in a situation like this is that prosecutors end up overly dependent on one guy, who plays them for a fool in a bid to save himself.

As of now, the full picture has yet to emerge. All we know for now is that Iksil is the center of the government's case.

For more:
- here's the article

Read more about: JPMorgan, London Whale
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By Jim Kim

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