CBLOG

1. Morgan Stanley vs. Goldman Sachs: a different take

Abigail Johnson has found herself in the unenviable position of having to turn around a once-proud mutual fund company. Her task is complicated by the fact that the big stumble took place while her father, the iconic Ned Johnson, was running the shop.

It's clear that she will have to do much more than fill his shoes. "Assets in Fidelity Investments' actively managed stock funds fell 16 percent in the past five years, and management and advisory fees were down an estimated 13 percent. Operating profit for all of Fidelity fell 31 percent in 2012 to an estimated $2.3 billion. Near-zero interest rates have forced the firm to waive fees for managing the $427 billion in its money-market funds to keep the funds' returns positive. In April, Standard & Poor's lowered the outlook for the ratings on Fidelity's long-term debt to negative from stable," notes Bloomberg Markets.

"And Fidelity is the last of the big money-management firms to take advantage of one of the most significant developments in personal finance: the shift into exchange-traded funds."

It may be unfair to say, as some critics have, that the firm has been sitting back, oddly disinterested in innovation. Employees note Abigail Johnson is pushing the firm into Fidelity-branded ETFs and exploring how social media can drive sales.

But what is sorely missing is an overarching vision of how the company will return to glory. It may be that she has not figured it out yet.

The danger is that some really negative perceptions develop and then fester. It's not a good sign when magazines pronounce you "among the most mysterious executives in finance." In her 15 months at the helm, "she has said nothing publicly about her vision or goals for the company. She declined to grant an interview and has rejected all such requests since she became president."

You can get away with this at a closely held, family run company. But at some point, even at a private company, you have to be bold with your mission if you ant to stay at the fore of the industry.

Hopefully, that day is coming.

Today's Top News

By Jim Kim

Comment |

2. JPMorgan Ph.D program stokes concern

One angle on the competition to land the top position on the Twitter IPO tombstone is the time-honored battle between Morgan Stanley and Goldman Sachs. People tend to see the two as bitter rivals, which they no doubt are. But these days there's much more of a club feel to the top investment banking mandates. "Wall Street's biggest rivalry is fading further into history. Back in the days of so-called relationship banking, Goldman Sachs and Morgan Stanley slugged it out for exclusive assignments. Now, when it comes to mergers and new stock sales, they are working together more often," notes Breakingviews.

And here's the proof: The two companies have "united as bookrunners some two dozen times already this year, according to Thomson Reuters data. A decade ago, admittedly when markets were still hurting from the bursting of the tech bubble, the two firms joined forces on only four occasions. Even in 2006, the two banks collaborated on fewer than a dozen debuts."

As for the IPO market specifically, Goldman Sachs splits an IPO fee with Morgan Stanley "more often than with any other competitor. And only Credit Suisse appears on the same tombstone as Morgan Stanley more frequently than does Goldman. It's a similar story in M&A, where deals done as co-advisers accounted for 16 percent of Goldman's total volume from 2010 to 2012 and nearly a fifth of Morgan Stanley's."

So what's going on?

In IPO transactions, multiple bookrunners have been the norm for many years. The list of institutions with a piece of the Twitter deal will eventually be very long. As for merger work, companies seem increasingly averse to getting caught in a battle. They want to spread the work around as best they can, feeding as many mouths as they can, which makes sense given the size and complexity of deals these days.

For more:
- here's the article

Read more about: Morgan Stanley, Goldman Sachs
back to top

By Jim Kim

Comment |

3. Fed employee sues for wrongful termination linked to Goldman Sachs deal

JPMorgan Chase has pledged $16.5 billion to the University of Delaware to fund a proposed Ph.D program in financial analytics, stoking concerns about how much influence the bank will have over the program.

This may well be an indirect consequence of the financial crisis and the regulatory aftermath. JPMorgan in particular has found itself the target of lots of enforcement activity, which may have tainted its reputation just a bit.

According to Bloomberg, the donation would cover about half of the cost of the program over a decade: $14 million for scholarships and salaries and $2.5 million to expand a building. The bank would retain the right to hold a seat on the dissertation committee, and while it would not be able to approve hiring decisions, it will have the right to advise on all hires.

One professor was quoted: "People have to be very careful to take the money and make sure there's no strings attached." She also said: "Are we becoming the JPMorgan business school? The relationship might be a little bit too close. I understand deans need money."

To be sure, there are plenty of supporters of the bank. Said one professor: "I'd be worried if JPMorgan had no interest in giving us advice. In a fast-moving field, sometimes industry can run ahead of the academics and you need that reality check and need the ability to test the relevance of what we're working on."

All in all, I think the deal will move forward. But both sides should spell out clearly what the rules and expectations are. Hopefully, JPMorgan will take a light hand in school affairs.

For more:
- here's the article

Read more about: JPMorgan Chase
back to top

By Jim Kim

Comment |

4. JPMorgan reports massive litigation reserves hike

Goldman Sachs conflicts of interest in the Kinder Morgan deal for the El Paso Corporation are well known; the controversy spilled into the public eye in a big way. But as all this played out, there was a related conflict-of-interest drama that until now was kept under wraps.

ProPublica, via the Washington Post, reports that a former senior examiner for the Federal Reserve Bank of New York has filed a wrongful termination suit, arguing that she was fired because she would not change her view that Goldman Sachs lacked adequate controls over possible internal conflicts of interest. She was in favor of an enforcement action to remedy the situation.

The findings stemmed in part from her review of the Kinder Morgan-El Paso situation. Carmen Segarra remains convinced that her findings were backed up by plentiful evidence. The group in which Segarra worked was tasked with "examining how their banks complied with a Fed regulation issued in 2008 that requires firmwide conflict-of-interest policies and other programs to manage risk." Segarra was specifically asked to look at Goldman Sachs. But rather than back up her conclusions, her supervisors argued against her findings and tried to get her to back down. Soon they said they had lost confidence in her, and she was fired.

This practically screams that internal personality conflicts and egos were an issue. It's likely that cooler heads in the heat of the battle could have yielded a compromise.

But now it's a legal issue. The issue is not whether Segarra was right in terms of Goldman Sachs's controls, though the details are fascinating. The issue is whether she was illegally fired for not giving in to her supervisors. It will be interesting to see if this suit makes it to a trial, as it will open a fascinating window into the bank regulatory culture at the Fed.

The Fed declined to respond to ProPublica, citing privacy considerations among other things.

For more:
- here's the article

Read more about: Goldman Sachs, Federal Reserve
back to top

By Jim Kim

Comment |

5. Wells Fargo sails on reserve release

With a massive settlement over mortgage fraud still in the works (we hope anyway), JPMorgan Chase took a massive hit in the third quarter, setting aside reserves of $9.2 billion for litigation and legal costs. That took a toll on the bank's earnings.

Indeed, the bank posted its first quarterly loss ever under CEO Jamie Dimon. The bank lost $0.4 billion, compared with a gain of $5.7 billion in the third quarter of 2012. Earnings per share declined, coming in at a 17 cent loss, compared with $1.40 gain a year ago. Excluding one-time charges, including the massive legal reserve hit and a reserve release of $1.6 billion, third-quarter net income would have been $5.8 billion, or $1.42 per share, which was ahead of analysts' expectations.

Tellingly, revenue was weak. For the third quarter, revenues totaled $23.9 billion, compared with $25.9 billion in the prior year.

There were definitely some brighter spots. Consumer banking, for example, turned in a solid performance; revenue came in at $12 billion, up 13 percent year over year and up 8 percent sequentially. Mortgage activity was weak as expected. Mortgage originations came in at $40.5 billion, down 14 percent from the prior year and 17 percent sequentially. The bank was able to cut its losses in mortgage servicing.

As for investment banking, fees came at $1.5 billion, up 6 percent from the prior year, driven by higher equity and debt underwriting fee revenue. Fixed income-related sales and trading revenue came in at $3.4 billion, down 8 percent, compared with a strong prior year.

The story going forward may continue to revolve around litigation costs. While the biggest hit may now be out of the way, there could be additional reserving action to come.

For more:
- here's the release

Read more about: earnings, JPMorgan Chase
back to top

By Jim Kim

Comment |