Editor's Corner: The mother of all private equity buyouts? Also Noted: Spotlight On... Yale frowns on private equity
Today's Top News1. Muddy Waters targets another China ADR
Muddy Waters strikes again! If you hold any kind of China ADR, the news that a big-name short-seller has prepared a report about your company is bad news. If that short seller is Muddy Waters, it is especially bad news. Some institutions might be tempted to sell, even if they think the company might be legitimate, because the downdraft is going to be strong. That's the sort of clout that Muddy Waters has developed over the past few years. Since June 2010, the firm has targeted five stocks, four of which were halted by market officials. Its most famous target was perhaps Sino-Forest, which it also called a fraud in a report. The stock tanked, and stuck investors with massive losses. Hedge-fund mogul John Paulson lost $450 million in one day. He subsequently exited his position. The short-seller has most recently targeted NQ Mobile, whose stock dropped nearly 50 percent in one day last recently. That brought a massive rally to a halt. Since Oct. 23, its shares had risen 279 percent. "We believe it is a zero," the company led by Carson Block wrote in a report emailed to media outlets. "At least 72 percent of NQ's purported 2012 China security revenue is fictitious." NQ Mobile said that the allegations are false and that it will issue a quick rebuttal. In the end, lots of companies try to fight back. But by then the damage has been done. And whether the company is legitimate or not almost becomes moot. For more: Read more about: China ADRs, Short seller
New rules proposed by the Federal Reserve tread a fine line, but one that banks will ultimately be able to traverse with little additional hardship. The proposal requires the largest U.S. banks to hold enough cash or cash equivalents to fund normal operations for 30 days in the face of a liquidity event that results in scare funding. The idea of course is to prevent another financial crisis. The Fed proposal goes beyond the rules set by Basel III regulators, reflecting the view that big U.S. banks pose heightened risks to the global financial system. Banks with $250 billion or more in assets would be required to meet the proposed requirement in full, while banks with less than $50 billion would be exempt. In-between banks would have to meet graduated targets. The proposal has taken a harder line as to what might be considers a safe asset. It also calls for U.S. banks to meet the new requirements by 2017, two years ahead of the Basel III deadline. Big U.S. banks may object, but they appear to be in fine shape to comply, which is good news for the Fed. It needs to demonstrate to the global financial community that it takes the threat to the global system posed by massive, complex U.S. banks seriously, while at the same time, making sure that its rules do not drag the still-recovering U.S. banking industry. It pretty much has to be pro-growth as well as pro-safety. A tricky line to walk. For more: Read more about: Basel III 3. Cut and paste trades by Bernard Madoff
The trial of five former associates of Bernard Madoff has given people---those still interested in the world-altering Ponzi Scheme---a glimpse of the ground-level criminal operations at the company. In some cases, the methods seem rather prosaic, hardly high-tech. Last week, the jury was treated to a discussion of "cut and paste" trades as part of fabricated account statements. Annette Bongiorno, who worked for Madoff for 40 years and is now one of five defendants on trial, "would request trade dates and prices as much as a year old be used on account statements to reach pre-determined profit goals for customers, and cut out trade data to be taped onto some statements," according to her former assistant, Winnie Jackson, who is testifying for the prosecution, as noted by Bloomberg. Jackson testified that she never actually saw her boss cut and paste trades onto account statements, "though she said her former boss oversaw the creation of the statements and the practice wasn't uncommon or unusual." Prosecutors showed the jury examples of such statements, "which included hand-written notes that Jackson identified as Bongiorno's. The example included trades for Microsoft Corp. in 2004 that had been taped onto the paper. No trades actually took place at the investment advisory business." It remains to be seen how all this play in the minds of jurors. They may forget before too long. The reality is that the trial is expected to last a total of five months. The defendants include Bongiorno; Daniel Bonventre, his director of operations for investments; JoAnn Crupi, an account manager; and computer programmers Jerome O'Hara and George Perez. All seem to have agreed upon the same general strategy, which is to argue that they were duped by Madoff and never knew they were involved in high crimes. For more: Read more about: trial, Bernard Madoff 4. Morgan Stanley vs. Goldman Sachs: the battle continues
No less than FoxBusiness columnist Charles Gasparino noted recently that Morgan Stanley CDS prices dipped below Goldman Sachs CDS prices, suggesting that the market now accords Goldman Sachs a higher likelihood of some sort of credit default event. To be sure, neither bank is any danger of such an event. But in the ongoing, inevitable comparison of the two banks, such price movements have meaning. "Traders and analysts say the move is an indication that investors have more confidence in the risk management expertise of Morgan Stanley's chief executive James Gorman over Lloyd Blankfein, his counterpart at Goldman Sachs and long considered among Wall Street's best risk managers. Since taking over as Morgan's chief executive in 2010, Gorman has moved the firm away from risk-taking such as trading, and emphasized advice through Morgan's retail brokerage arm and its investment bank -- both of which have propelled the firm's earnings over Goldman's in the third quarter," Gasparino writes. For support, he turns to the influential and ubiquitous analyst Richard Bove: "In the past couple of weeks it is apparent that investors have decided that Gorman's approach to the business is better than Blankfein's." The third-quarter results may be prompting some to agree. The seemingly FICC-dependent Goldman Sachs fared a lot worse than Morgan Stanley, which has sought to grow wealth management as a revenue contributor. In the third quarter, wealth management net revenue ($3.5 billion) was close to institutional securities net revenue ($3.9 billion). We may even see the former start to contribute even more revenue than the latter in coming quarters. This will be a concept and idea worth watching for the near future, even as CDS spreads even out. All in all, we may be at a critical turning point, with Morgan Stanley taking—finally—the upper hand. For more: Read more about: Goldman Sachs, Morgan Stanley 5. Goldman Sachs Foundation stoking internal angst?
DealBook offers an interesting look at the Goldman Sachs Foundation and the extent to which it is being used as a corporate image tool as well as an organization financing worthy causes. It's hard to argue that the initiatives aimed at helping women form businesses overseas and aiding small businesses here in the United States aren't doing good things. If it helps Goldman Sachs' image along the way, well, that's all the better. But the really interesting part of the article is the dirty laundry that some at the bank seem to be airing. "Executives inside the bank say the Goldman Sachs Foundation, the clearinghouse of the company's giving, has been given more resources at a time when the bank itself has been cutting back sharply on expenses — and people — on big trading desks," the article notes. "This has created bitterness among some employees — bitterness stoked by the favored status seemingly granted to Dina Powell, who runs the foundation. At a firm where pay is almost always tied to what money you bring in, Ms. Powell, who is in charge of giving money away, has made roughly $2 million annually in some recent years, according to people familiar with her compensation but not authorized to speak on the record. Her pay, which is considered high to some at the firm, is up there with some of the leaders of the best-paying charities, who receive between $1.8 million and $3 million, according to the Chronicle of Philanthropy. Those inclined to look for signs of status also note that the 20-year-old daughter of Goldman's chief executive, Lloyd C. Blankfein, worked as an intern in Ms. Powell's department last summer." To be sure, there is always palace intrigue around anything that Goldman Sachs does. But I would expect some sort of internal probe of the writer's sources. PR departments frown on these sorts of leaks, especially when it touches on CEO family issues. But if the leaker were super high up in the company, the dynamic changes a bit. In any case, the revelations were unusual. For more:
Read more about: Goldman Sachs foundation, Pr Also NotedSPOTLIGHT ON... Yale frowns on private equity The Yale endowment has been pruning its total exposure to private equity funds for the first time in eight years, according to the Financial Times. The consensus "among the tea-leaf readers" is that the fund "wants to wipe a bit of illiquidity risk off the counter at a time when returns on stocks are outpacing those provided by a number of private equity funds." Another way to say it: the fund "is not reaping enough of a profit to justify the risk Yale takes when it is locked into private equity funds for a period of years." Article
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Monday, October 28, 2013
| 10.28.13 | The mother of all private equity buyouts?
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