Also Noted: Spotlight On... Investment bank revenues to be hit hard News From the Fierce Network:
Today's Top News1. Interest rate swaps could hit big banks
The market giveth, and the market taketh. You reap what you sow. Oh, how the worm turns. You can invoke a lot of clichés right now for the interesting developments in the interest-rate swap markets, which has been lucrative for big investment banks over the past few years. The likes of JPMorgan Chase, Bank of America and Wells Fargo have profited handsomely. Bloomberg notes that JPMorgan saw interest-rate derivatives boost income $19.9 billion from the beginning of 2009 through June 30 of this year. Bank of America added $7.3 billion in the same period. And Wells Fargo added 15.3 billion in income from the contracts. But as the interest rate start to creep up, these contracts are starting to move against the banks. It's unclear exactly how exposed they are, but it's fair to say that as rates rise, the amount they are entitled to receive from counterparties declines, as does the mark-to-mark value of the contracts. "Losses on swaps caused by higher long-term rates can either directly hit a bank's income statement or erode its equity before crimping future earnings, depending on how the contracts are characterized under accounting rules." There may be some schadenfreude seeping from the muni bond market, where lots of municipal entities were hit hard by an unexpected decline in interest rates not so long ago. The rate declines locked them into massive payments to their banks, causing lots of angst. Many contracts were reworked, though banks in general were loath to give up revenue. The ill will lingers to this day. Banks are in something of a quandary. Do they go ahead and set up complex hedges to offset expected losses? That's dangerous, as these hedges could easily explode if rates move in unexpected ways. The difficulty in setting up winning hedges was certainly one lesson of the London Whale fiasco. If the hedges blow up, they will not look like savvy risk management moves. Rather, they will look like dumb, proprietary bets. For more:
Read more about: Interest Rate Swaps
Is this a sign of the times? Nick Tiller, an energy portfolio manager and 12-year veteran of SAC Capital, is retiring to work at his charity, Sustainable America, and spend more time with his family, according to Bloomberg. "After years of researching and profiting from" investments in food and energy, Tiller said he will focus on alleviating shortages in "those same sectors." Like other departing SAC employees, he put the best possible face on the news. "Despite extreme scrutiny, we kept investing, and kept delivering results through solid fundamental research and good trading," Tiller said in a statement. One has to wonder about the many other talented individuals at the firm. While many held out as long as they could, reality is starting to set in. More are seeking opportunities elsewhere. It may well be that working for a family office, even one as well-funded as SAC Capital, doesn't have the same appeal as working for a hedge fund. That said, it could still be quite lucrative working for Cohen's office. He has hiked the incentives, and plenty will likely stay aboard, especially if they the job market less than hospitable given their affiliation. The fund is up 13 percent so far this year, better than the average hedge fund and in line with the broad market. For more: Read more about: SAC Capital, jobs 3. London Whale witness to be extradited
Amid reports that Javier Martin-Artajo, who has been charged in connection with the London Whale scandal at JPMorgan Chase, will be extradited to the United States, you still have to wonder if the prosecution chose the right ally. It's unclear when Martin-Artajo will be extradited from Spain, which has an extradition agreement with the United States. But he will arrive at some point, probably sooner rather than later, and it will be interesting to see how he proceeds legally. The fate of the other charged ex-employee, Julien Grout, is less certain. Apparently, Grout remains in France, which does not have a strong extradition agreement with the United States. Most assume that the pair will argue that the real mastermind of the financial crimes was none other than Bruno Iksil, the London Whale himself. Unfortunately, for them, the Whale has emerged as the government's top witness. He's been so valuable to them that they have agreed not to prosecute him. Some might think that the prosecution has essentially bet on the wrong horse, backing the mastermind against the accomplices, an inversion of justice. If this view is correct, it would mean Iksil has made his most amazing trade ever. We have to assume that the prosecution has built its case on more than one witness. If not, they might be vulnerable at trial. For more: Read more about: London Whale, JPMorgan Chase 4. New York AG to sue Wells Fargo
The national mortgage settlement, when it was announced in February 2012, was considered a watershed moment in the banking industry's drive to put its real estate crisis woes behind it. With the settlement, many thought the banks had agreed to the sort of corrective measures that would pave the way for new growth. Compliance was assumed, but the terms have proven to be somewhat onerous. Compliance certainly has not been a snap. In fact, living up to the terms of the deal has proven to be quite difficult, and regulators have taken note. The latest: New York state Attorney General Eric Schneiderman is said to be preparing a lawsuit against market leader Wells Fargo, one that accuses the bank of essentially flouting the deal and is 304 servicing standards. The two entities had been in negotiations to settle the dispute, but those talks have apparently fallen apart. "Mr. Schneiderman's office, people briefed on the matter said, had pushed Wells Fargo to acknowledge a systematic pattern of mortgage servicing errors and to commit to a new agreement codifying changes to the way the bank services mortgages. Wells Fargo balked, the people said, and the talks broke down last week," according to DealBook. Bank of America on the other hand has moved to settle similar accusation. Wells Fargo has little to gain by taking this to trial. It will only serve to highlight some of the more unsavory practices that have gone on at all the top mortgage servicers. Despite the posturing, we may yet see a deal. Other states may act in similar fashion soon. For more:
Read more about: Enforcement Action, National Mortgage Settlement 5. The need for yield has worked out well for the CLO market
Recall that in the wake of the financial crisis, the CLO market's reputation was tarnished and issuance essentially fell to nothing, along with certain mortgage backed securities. But in hindsight, it's clear that leveraged loans have performed better than subprime mortgages. And so it was hardly surprising last year when the market for CLOs came storming back, as investors of all stripes sought elevated yields. The composition of buyers has shifted a bit, but for the most part demand is strong across the tranches. As the Financial Times notes, a surge in sales last week has helped push U.S. issuance of CLOs to $55.41 billion, according to S&P Capital IQ LCD data. That's "the highest since the $88.94 billion sold in 2007, just before the financial crisis." What's impressive is that the surge has occurred at a time when people were assuming that rates would have to rise. With the Fed's decisions to hold off on tapering, that rise may stall a bit. In any case, the demand for CLOs will likely remain high. We may see more leveraged deals in the near-term. It's unclear how all this will play out in terms of supply and demand for high-yield structured products, but the market has certainly turned a corner. If issuance were to top pre-crisis highs, it would not be surprising. That said, as banks poured into higher-yielding fare, credit rating companies and others took note. It's been a long-running issue for international regulators, notable Basel III. For more: Read more about: Clos, Collateralized Loan Obligations Also NotedSPOTLIGHT ON... Investment bank revenues to be hit hard So how tough will the third quarter be for top investment banks? According to an estimate by JPMorgan Chase, revenue at the top investment banks may be down 18 percent in the third quarter, driven by weakness in FICC activity. Indeed, third-quarter FICC revenue may fall 35 percent year over year. A third-month spurt in bond activity unfortunately failed to materialize. Article Company News:
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Thursday, October 3, 2013
| 10.03.13 | Interest rate swaps could hit big banks
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