Tags: art, Banks, Fed, living wills, Regulation
If you like or hate financial regulation you might take a quick look at today’s front-page New York Times article about how the art market is unregulated. Apparently this leads to terrible things like “chandelier bidding,” where auctioneers get the ball rolling by calling out a few fake bids, as well as conflicts of interest involved in third-party guarantees where someone writes the auction house a put on an artwork, is paid a variable commission for that put, and in some cases is allowed to credit that commission against his own bid for the artwork.1 One question you might ask is “why is that bad?”; the answer seems to be that some rich people who go to art auctions pay more for art than they would in the absence of these systems, and then feel vaguely uneasy about it. I think the whole thing disappears in the face of one more iteration of “well, why is that bad?,” but perhaps I am wrong.
There are places where you should think “customers should be protected from various sorts of sharp practices by dealers,” and there are places where you should not think that. I guess? Are there only the former?2 I come from a place that believes deeply in the separation between “sharp practices” and “illegal fraud” and works to keep them distinct. One thing the Times article mentions is that there is a law saying that stores have to display the price of their wares, and art dealers ignore that law, and this is bad for some reason. Try that law on derivatives dealers. One of the main driving forces behind financial innovation is finding novel places to hide fees.
The rest of the art-auctioneer tricks also seem pretty familiar. Imagine an M&A banker who couldn’t bluff, to the one serious bidder for an asset, that he had other bidders waiting in the wings. And of course the financial industry is very familiar with the creative use of options and guarantees to allocate value in ways beyond a headline purchase price. One flavor of that is “schmuck insurance.”3 Read more »
Tags: Banks, Davos, Elliott Management, Jamie Dimon, JPMorgan, Paul Singer
I feel like this exchange did not go well for Jamie Dimon:
[Elliott Capital's Paul] Singer said the unfathomable nature of banks’ public accounts made it impossible to know which were “actually risky or sound”. … Mr Singer noted that derivatives positions, in particular, were difficult for outside investors to parse and worried that banks did not always collateralise their positions. Mr Dimon said the bank did for all “major” clients. Mr Singer retorted: “Well, we’re a minor client then.”
Whoops! Guess someone else doesn’t know what positions banks collateralize. I suspect someone at Elliott is already on the phone with JPMorgan to renegotiate their CSA. Also so many other people; I count about $50 billion of uncollateralized (fair value) derivative exposure at JPMorgan, suggesting that it fully collateralizes a little under two-thirds of its trades.1 Perhaps those are the two-thirds with the major clients, but if so that seems a little irrelevant. That’s a lot of minor-client money.
Why does Singer care? Well I guess he wants better collateral terms from JPMorgan? More seriously … there is whatever incentive to say things that always exists at Davos sessions, which I guess is a thing, ugh.2 Then there is the broad question of whether banks are too opaque to invest in. Singer is not alone in thinking that the answer is no; we talked a while back about how a lot of smart people get kind of freaked out by bank financial statements; derivatives, as well as other buzzwords like prop trading and opacity, play a role in their conclusions as well. Also here is a funny article about how 60% of Bloomberg subscribers are basically commie anarchists: Read more »
Tags: Banks, deposits, earnings, Wells Fargo
Bank earnings season kicked off today with Wells Fargo’s announcement, and since I have nothing really to say about Wells Fargo earnings I figured the least I could do was put up some charts instead. Not on earnings – they’re up! net interest margin is down! on balance, gnash your teeth a little! – but on what Wells Fargo is doing with all the money it’s got.
This seems like a popular question to ponder, since it’s got rather a lot of money. So today brings the Journal‘s vividly headlined “Wads of Cash Squeeze Bank Margins”, and earlier we had Frank Partnoy and Jesse Eisinger’s attempt to find out where Wells is hiding all its fraud. The main thing is:
- Banks have lots of deposits because everybody’s scared of everything so they put their money in the bank.1
- Banks aren’t making lots of loans for some reason, with the reason ranging from “banks are a bunch of scumbags” to “you’re all a bunch of deadbeats.”
- So they have money left over.
- So they put it somewhere.
A natural question is “where is the somewhere?” and here is where Wells puts it:
That’s just various bits as a percentage of total deposits. You can see loans have decreased as a percentage of deposits since the crisis; other risky-type assets – trading assets and available-for-sale corporate and mortgage bonds, etc. – have increased a bit but not enough to make up for that drop: Read more »
Tags: Banks, capital, Goldman Sachs, research, stress tests
On Monday, as a bevy of banks were settling a zillion dollars of mortgage lawsuits and putting themselves on a path to (1) certainty and (2) giving money back to shareholders, Goldman released a research note with the results of a survey of investors’ expectations of bank capital return.1 Here is what some sample of investors expect:
Total payouts are expected to increase to an average of 58% post-CCAR/CapPR from 43% in 2012. … The survey results suggest the biggest increases in dividend payout ratios will be for Citi and Capital One, while PNC and Morgan Stanley are unlikely to meaningfully move higher. For buybacks, investors expect the biggest increase for BB&T and JP Morgan (vs. their actual buyback, not vs. 2012 approval levels), while there is little change expected for Morgan Stanley, Bank of New York and Northern Trust. … Many of the banks with the most variability of responses are those that are coming off subdued capital deployment levels in 2012, including Capital One, Bank of America, Citigroup and Regions. Given the lack of consensus, it seems that regardless of the announcement, the market is likely to be “surprised”.
I too prefer to order my life so that I’m surprised by everything.2
Anyway the interesting/disappointing part for me is what investors thought about what GS calls the “Mulligan rule.” This refers to the fact that, in the 2012 bank stress tests, banks asked regulators for approval to return an amount of capital, and if the regulators said no then the banks basically couldn’t do anything (ex regular dividends etc.) for another year, but in the 2013 tests if the regulators say no the banks can go back and ask once more for another, lower amount of capital return. I was pretty bullish on this: the do-over gives you a chance to be more aggressive once, and scale back if regulators say no, so you’d think that at least some banks would be aggressive and get away with it, while others will be too aggressive and have to cut back to a more moderate capital return but still no harm no foul. Or so I would think. I am in the minority:
And here, conveniently, is why banks wouldn’t be aggressive – because their own shareholders would get mad at them for being too aggressive: Read more »
Tags: Banks, market making, Regulation, Volcker Rule, Wells Fargo
There’s a huge article by Frank Partnoy and Jesse Eisinger in the Atlantic today about how banks are so horribly complicated that even sophisticated investors, meaning basically Bill Ackman, don’t trust them any more. I suppose this provides an excuse for me to trot out a toy theory that’s been congealing in my head, which is roughly that you can have two of the following in a publicly traded financial company, but not three:
- “market making,”
Like: you could, or someone could, make some educated guesses about what goes on at a bank that takes deposits and makes mortgage and commercial loans, and decide whether or not it’s a good business that you should invest in. You could even make such guesses and decisions about what goes on at an old-school broker-dealer that trades securities for a living. (Maybe? I’m less confident of this leg.) But for universal banks I’m kind of with Ackman – and Partnoy and Eisinger – that you have to give up on making intelligent decisions, or failing that have your intelligent decision be “I’m gonna need a 50% discount to book value before I invest in this thing.”
You can attribute the opacity of modern banking to like “bankers are eeeeeeevil,” which I don’t particularly believe, or “regulators are weeeeeeeak,” which seems sort of lame. Me I tentatively like “banking + market-making = insoluble complexity.”
The heart of the Atlantic article is an attempted deep dive into Wells Fargo’s financials, which ends up splattering against the rocks that guard those financials. Here is where things start to get alarming, for some value of alarming: Read more »
Tags: Banks, flensing, JPMorgan, London Whale, OCC
I didn’t really understand this morning’s Journal headline – “Regulatory ‘Whale’ Hunt Advances” – since the whale in question, JPMorgan’s Bruno Iksil, has been caught, harpooned, killed, flensed, picked clean by sharks, and his skeleton mounted in the American Museum of Unfortunate Trades. So the OCC’s hunt is … somewhat late no?
The Office of the Comptroller of the Currency, led by Comptroller Thomas Curry, is preparing to take a formal action demanding that J.P. Morgan remedy the lapses in risk controls that allowed a small group of London-based traders to rack up losses of more than $6 billion this year, according to people familiar with the company’s discussions with regulators.
The OCC, the primary regulator for J.P. Morgan’s deposit-taking bank, isn’t expected to levy a fine, at least initially.
I submit to you that:
- JPMorgan has at the very least talked a good game about remedying the lapses in risk controls that led to the Whale’s losses, insofar as it’s wound down the trade, fired everyone involved, appointed new risk managers, changed the models, moved the relevant portfolio out of the division that used to house it, and otherwise done everything in its power to make its chief investment office a no-cetaceans zone, and
- If the OCC disagrees, and thinks that JPMorgan hasn’t taken commercially reasonable risk-management steps to remedy the lapses that led it whaleward, then there may be bigger problems than can be fixed by a notice saying “oh hey you might want to look into that.”
Anyway. Yesterday the OCC also released its Semiannual Risk Perspective for Fall 2012; December 20 is technically fall but the document has data through June 30 so that too seems a bit behind the times. The OCC: your time-shifted banking overseer.
But it’s an interesting, and broadly encouraging, read in a circle-of-life way. Things are, or were in June, pretty good, or at least improving, credit-wise:1 Read more »
Tags: Banks, FINMA, FSA, LIBOR, Libor manipulation, UBS
The UBS Libor settlements are really a garden of infinite delights; there are many semi-literate, fully criminal emails and IMs and you can read them here or here or here or here or in the FSA Final Notice. It is hard to pick a favorite thing but here’s a quirky one from the FSA:
58. Certain [interdealer] Brokers also routinely disseminated their views about where LIBOR would set based on their market knowledge, including information about transactions in the relevant cash markets. These market views, commonly referred to as “run throughs”, were of assistance to market participants, including Panel Banks when determining their JPY LIBOR submissions. A number of Panel Banks relied on run throughs and on occasions some of them simply adopted them when making their submissions.
59. In addition to asking Brokers to make specific requests of Panel Banks for specific submissions, Trader A also asked Brokers to tailor their run throughs to benefit UBS’s JPY positions.
So: Trader A, the yen swaps trader who seems to have been the worst1 Libor manipulator at UBS, sometimes asked his brokers to lie when they wrote down their guesses of the rate that other people would guess those other people could borrow at. UBS in general, and Trader A in particular, seem to have been all-around horrible, granted, but it’s worth taking a step back to notice the oddity of the system they lived in:
Trader A manipulated a second derivative of borrowing rates: not a rate, not a guess of a rate, but a guess of a guess of a rate. David Enrich finds this troubling: Read more »