One reason that you’re in for seven lean years in the investment banking business is that bank capital requirements are going up due to Basel III, and “capital is expensive” in some loose sense, so banks will have less money to use to make loans and/or pay you. Some people think that this is mostly bull, because capital is not actually any more “expensive” than any other form of funding, though those people often actually don’t care that much about paying you so it may not be worth listening to them. In any case here is the abstract to an amusing new paper by Karlo Kauko of the Finnish central bank, because yes I make a point of being up to date on everything published by the Finnish central bank:

Bank managers often claim that equity is expensive relative to debt, which contradicts the Modigliani-Miller irrelevance theorem. … An opaque bank must signal its solvency by paying high and stable dividends in order to keep depositors tranquil. This signalling may require costly liquidations if the return on assets has been poor, but not paying the dividend might cause panic and trigger a run on the bank. The more equity has been issued, the more liquidations are needed during bad times to pay the expected dividend to each share.

Don’t worry if you don’t get that name dropping, it doesn’t matter. Also don’t worry too much about the paper itself, which is amusing but also sort of nuts.* The basic idea to come away with is that bank equity is where the bank puts all its hopes and dreams, and that, if banks are more or less reflections of hopes and dreams, the people who provide the real funding for the banks – repo counterparties and clearing banks and suchlike – are going to be inordinately influenced by reading equity tea leaves. Because what else are they going to read? Continue reading »

  • 27 Jan 2012 at 1:41 PM

Layoffs Watch ’12: BarCap

Cuts are said to have gone down at the House of Diamond. Continue reading »

“People are furious.” Continue reading »

Opening Bell: 01.27.12

Larry Summers: ‘A Lot of Work’ Needed to Fix Economy (CNBC)
“We have all got a lot of work to do,” Summers, who played a key role in the early years of President Barack Obama’s administration, said. He believes that European governments should be “redoubling” their efforts to solve the crisis. The euro zone debt crisis has been top of the agenda in Davos this week. German Chancellor Angela Merkel opened the conference with a downbeat speech emphasizing the need to solve the problems in the euro zone. The European Central Bank injected more liquidity into the European markets through a long term refinancing operation (LTRO) in December, which Summers described as “a very important step.” “That’s lubricating credit and economic activity. The sense that we are near the edge of a precipice has been clawed back,” Summers said.

Greek Debt Wrangle May Pull Default Trigger (Bloomberg)
Any agreement between the Greek government and the Washington-based Institute of International Finance on debt writedowns will only bind 50 percent of investors in the 206 billion euros ($270 billion) of notes being negotiated, Barclays Capital estimates. Hedge funds may resist a deal, seeking to get paid in full or compensated from insurance contracts.

U.S. Economy Grows 2.8%, Less Than Forecast (Bloomberg)
The U.S. economy expanded less than forecast in the fourth quarter as consumers curbed spending and government agencies cut back, validating the Federal Reserve’s decision to keep interest rates low for a longer period. Gross domestic product, the value of all goods and services produced, climbed at a 2.8 percent annual pace following a 1.8 percent gain in the prior quarter, Commerce Department figures showed today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 3 percent increase.

In Punishing Year for Hedge Funds, Biggest One Thrived (Dealbook)
Bridgewater Associates posted returns of 23 percent in 2011 — a year when the average hedge fund portfolio lost 5 percent. Against the backdrop of fear over European debt and stagnant global growth, the hedge fund, led by one of Wall Street’s more enigmatic titans, Ray Dalio, sidestepped the mess. The fund did it with bets on United States Treasuries, German bonds and the Japanese yen, according to people familiar with the firm’s investment strategy, who spoke on condition of anonymity because the information is private. Continue reading »

Write-Offs: 01.26.12

$$$ Cameron rebukes euro leaders over crisis [FT]

$$$ BofA to Limit Cash Bonuses for Bankers, Traders [Bloomberg]

$$$ Bank of America: The turnaround challenge of the century [Term Sheet]

$$$ How Allen Stanford kept the SEC at bay [Reuters]

$$$ In case you were wondering: Poll Shows Dropping Support for Paterno Firing [AP]

$$$ Packages containing 40lbs of cocaine were found at UN headquarters [NYP]
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The Queen did want to acknowledge all the work he’s done, though, so she threw the government worker a bone he can collect a few years from now. Continue reading »

On further inspection Greenlight Capital’s unfortunate relations with Punch Taverns went down more or less as I had thought: they had an un-wall-crossed conversation with management that David Einhorn took to be a sign to sell, and sold without ever agreeing to keep any information confidential. One key and sort of amusing difference – if you believe Greenlight’s explanation – is that, contrary to what I and the FSA thought, the sell signal in Einhorn’s mind wasn’t “Punch is going to raise equity.” It was “the CEO of this company thinks it’s a piece of crap.” Which I guess is also material nonpublic information.

Anyway here is something Einhorn said on his call yesterday:

The Decision Notice … doesn’t seem object to my having sold the stock. The problem is that I didn’t get permission first. “It was a serious error of judgement on Mr Einhorn’s part to make the decision after the Punch Call to sell Greenlight’s shares in Punch without first seeking any compliance or legal advice despite the ready availability of such resources within Greenlight.” It was already obvious to me that I was clear to trade. I have no idea why a compliance officer would have reached a different conclusion. It is highly unlikely that asking would have led to a decision to restrict ourselves.

Here is an alternative view: Continue reading »

“We’re entering the year-end process of compensation reviews. I think it’s an open discussion during the year of how businesses and how individuals perform and now we’re just trying to execute on the balance that we all try and strike between being responsible and being competitive. I think people get it. I think industry compensation is down this year because the performance in the industry is down. So I think they get it…I think if we weren’t treating [top producers] fairly we would look at it objectively and try and get to the underlying causes, but I think everyone has a decision to make about what industry they want to work in or what firm they want to work for… Not everyone wants to be in this industry. But I’ll give you a statistic that is important. Last year, we had applications from 107,000 kids at university, of which we had positions for 1,500. So there’s still a lot of people who want to come into the financial services industry.” [Bloomberg TV]

Today is bonus communication day in BofA global markets and while there are no specifics to be had just yet, a couple things to note: 1) it’s not looking good and 2) this hurts them more than it hurts you. Continue reading »

Those of you who’ve been in the working world for a while have probably experienced the IM softball/soccer/basketball thing. What you probably haven’t experienced is being on a team that actually puts in the work to go all the way, rather than simply showing up to dick around for a free tee-shirt and to maybe get trashed with colleagues after games. For the men who’ve earned the privilege of serving on the JPMorgan 2012 London basketball team, things are going to be a bit different, as noted in the extremely detailed strategy email sent out by its amped up captain and obtained by Deadspin. For starters, in addition to two training sessions (plus games) each week, there’s going to be homework. Come prepared and it’s all good; show up not knowing your shit and so help you god.

From: redacted at jpmorgan dot com
Sent: Wednesday, January 25, 2012 7:11 PM
Subject: Training

Fellas,
Thanks to all of you who were able to attend last night’s session. I’m amped because we are finally approaching the right commitment levels to become a really strong squad. We have a very talented group of individuals, but our growth as a team will be dictated by the amount of work we put in together. I hope you guys share my enthusiasm for what we can become.

Continue reading »

Opening Bell: 01.26.12

Business Leaders Air Their Grievances (WSJ)
Complaints about perceived obstacles thrown up by U.S. politics, regulation and even its legal system were aired by corporate and finance leaders who lunched together at a Wall Street Journal CEO Council event here in Davos, Switzerland, on Wednesday. Barry Silbert, chief executive of SecondMarket, said Mr. Obama gave the country “nothing to rally behind.” Daniel Loeb, founder of hedge fund Third Point, counted himself as one falling away from previous support of the president. Mr. Loeb insisted President Obama was engaging in “class warfare.” He said business people such as himself “get sick and tired” of constantly being criticized for “engaging in the capitalist system.”

Economic Gains Aid Obama (WSJ)
Partial results from the poll, released Wednesday, found voters feeling more positively about the economy and of Mr. Obama’s handling of it. Some 30% believed the country was headed in the right direction, up eight percentage points from a month ago. Some 60% said the country was on the wrong track, down from 69% in December and from 74% in October. The question is considered an important measure of voters’ mood. For the first time in seven months, the poll found that more people approve of Mr. Obama’s job performance than disapprove, 48% to 46%. Some 45% said they approve of his handling of the economy—up six points from mid-December.

Greek Debt Talks Resume in Athens as Policy Makers Squabble Over Haircut (Bloomberg)
Charles Dallara and Jean Lemierre, negotiating on behalf of private creditors, return to Athens after European finance ministers insisted bondholders take bigger losses on their Greek debt. The International Monetary Fund further roiled the discussions by suggesting that public holders of Greek bonds might also have to increase support. The parties are groping for a solution three months after private bondholders agreed with European officials to implement a 50 percent cut in the face value of more than 200 billion euros ($262 billion) of debt by voluntarily swapping bonds for new securities. Since then, an economic contraction that exceeded estimates has made the goal of cutting Greece’s debt to 120 percent of gross domestic product by 2020 harder. An accord is tied to a second bailout for the country, which faces a 14.5 billion-euro bond payment on March 20.

Dimon: Impact of Greek Default on US Banks Almost Zero (CNBC)
“The direct impact of a Greek default is almost zero,” Dimon said. “The effect it has on the global economy will obviously filter down to the American banks too,” he added, but although “there may be a surprise somewhere,” he expressed little concern over such a development. “There’s a teeny chance of a catastrophic outcome, which is why the muddle-through is the only good strategy. There is no other good strategy.”

Buffett Defends Proposed Tax Rate Change (Reuters)
“The question is what is fair when you have to raise multi-trillions to fund the United States of America,” Buffett said in a joint interview with his long-time secretary, Debbie Bosanek, on ABC News. “Raising taxes will not change my behavior. I have paid all different kinds of rates and I’ve always been interested in making money. I believe this should be a defining issue. Debbie works just as hard as I do and she pays twice the rate I do,” said Buffett, a Democrat and Obama supporter. Bosanek pays a tax rate of 35.8 percent on her income, ABC said. She attended Tuesday’s State of the Union address as a guest of first lady Michelle Obama. “I just feel like an average citizen. I represent the average citizen who needs a voice,” Bosanek told ABC. “Everybody in our office is paying a higher tax rate than Warren.”

Bonus Grinches At Bloomberg (NYP)
The company, founded by Mayor Mike Bloomberg, said revenue rose $720 million, or 10.5 percent, to $7.59 billion during a tough year for its biggest Wall Street clients, according to an internal memo…Bloomberg, known for its ubiquitous financial terminals on trading floors, said it fell short of its own internal sales targets, to which employee pay is tied. According to the employee memo from Chairman Peter Grauer and CEO Dan Doctoroff, employee pay based on terminal sales, known as “certs,” will be below expectations because of the terminal shortfall.

Newt: America WILL Have A Permanent Lunar Base By End Of My Presidency (TPM)
By the end of my second term we will have the first permanent base on the moon and it will be American,” he said. According to Newt, the base would be used for “science, tourism, and manufacturing” and create a “robust industry” modeled on the airline business in the 20th century. From there, Gingrich suggested moving towards a Mars mission by the end of the next decade. He proposed setting aside 10% of NASA’s budget in prize money for private research into interplanetary exploration. “I accept the charge that I am grandiose,” he said. “Because Americans are instinctively grandiose.” Continue reading »

Write-Offs: 01.25.12

$$$ Fed Expects Low Rates Through 2014 [WSJ]

$$$ IMF Warns of Hit to Creditors on Greece Deal [WSJ]

$$$ U.S. Banks Face Pressure on Margins [Bloomberg]

$$$ “Allen Stanford, the Texas banker accused of running a $7bn Ponzi scheme, changed the numbers in one of his annual reports after they failed to add up, a former employee testified on Wednesday.” [FT]

$$$ People are better at thinking outside the box when there’s a big box in the room and they stand outside of it. [Ideas Market]
Continue reading »

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