I don’t have much insight into Citi’s earnings but I do enjoy the reporting of them. When a car or Facebook company reports earnings you basically ask questions like “how many cars or Facebooks did it sell?” and “how much money did it make on each one?” and those questions are kind of answerable and their answers give you a sense of how you should feel in your heart about the company. When a bank – like, a bank bank – reports earnings you can ask “how many mortgages did it sell?” and “how much money did it make on each one?” and those answers will be useful to you too, though there will be murky liquidity and valuation overhangs that will reduce their usefulness.
If you asked those questions of Citi, you might or might not get answers that might or might not be useful, but you’d be hard pressed to translate them into the headlines on Citi’s earnings. Big banks are not primarily engines for selling products and collecting a margin on them; they are bundles of accounting decisions, and this is never more apparent than at earnings time. This is pretty far removed from economic activity in the world:
Citigroup Inc.’s third-quarter profit fell 88% as the bank took charges tied to the value of its debt and the sale of a stake in its brokerage joint venture …
Others chose to emphasize economic activity in the world, at the cost of, y’know, GAAP: Read more »
When the financial crisis hit, financial services employees could have easily decided that patronizing strip clubs, alone or with clients, was an expense that had to go. Spent a few more hours on YouPorn and, when there were particularly substantial fees at stake, offered an enthusiastic hand job in the back of the cab after dinner. But guess what? Wall Street didn’t stop hitting up strip clubs and, on the contrary, redoubled its support. So much so that one gentlemen’s club in particular would like to express its appreciation. A little thank you, for always being there to shove 20′s in g-strings. Read more »
UBS announced earnings today and I tell you, it is hard work to get people to focus on the strong fundamentals of your business when you keep distracting them with enormous screw-ups. Today’s:
Due to the gross mishandling of Facebook’s market debut by NASDAQ, we recorded a loss of CHF 349 million [$356mm] in our US Equities business as a result of our efforts to provide best execution for our clients. As a market maker in one of the largest IPOs in US history, we received significant orders from clients, including clients of our wealth management businesses. Due to multiple operational failures by NASDAQ, UBS’s pre-market orders were not confirmed for several hours after the stock had commenced trading. As a result of system protocols that we had designed to ensure our clients’ orders were filled consistent with regulatory guidelines and our own standards, orders were entered multiple times before the necessary confirmations from NASDAQ were received and our systems were able to process them. NASDAQ ultimately filled all of these orders, exposing UBS to far more shares than our clients had ordered. UBS’s loss resulted from NASDAQ’s multiple failures to carry out its obligations, including both opening the Facebook stock for trading and not halting trading in the stock during the day. We will take appropriate legal action against NASDAQ to address its gross mishandling of the offering and its substantial failures to perform its duties.
Once upon a time two months ago Felix Salmon said “The fact is that if UBS ended up losing anywhere close to $350 million on Facebook stock, it has no business being in the equity capital markets at all,” and I laughed, and, um, well, how do people feel about that today? Read more »
You can’t possibly care about GS earnings can you? “Beat Diminished Expectations” is an elegant summary. FICC looks anemic relative to JPM and C but as Glenn Schorr of Nomura pointed out on the call some of what those guys call FICC Goldman calls “Investing & Lending” and an important principle of selling financial services generally is that non-comparability helps you so good work Viniar!
Good work Viniar generally; my favorite bit was when Schorr asked about all the recent partner departures and Viniar said basically that they were making up for lost time what with all the partner non-departures over the last four years, when it was a “tough economic environment, a tough reputational environment,” and partners – well they were so “completely loyal” that they just couldn’t leave GS in the lurch at trying times like those. This tickled me because, boy, don’t you wish you were a Goldman partner? In my line of work, when nobody was hiring and if they were hiring they weren’t hiring Goldman alums because Goldman was a vampire squid sucking the stuffing out of muppets, staying at Goldman until conditions improved was just simple pragmatism and nothing to be proud of: if you can’t get a job elsewhere, and you need a job, it stands to reason that you keep the job you’ve got. But once you’re making ten bucks a year the same behavior is the height of loyalty: since you don’t need a job anywhere, you show that you’re unbowed by the bad job environment and Goldman’s tarnished reputation by continuing to draw your partner paychecks. That seems right actually, and I promise you that I will grow many delightful moral qualities if you pay me $10 million a year. Read more »
I have nothing particularly useful to tell you about Citi’s earnings – they were good, yay, well done Vik, one day maybe you’ll be able to pay a dividend – so let me ask you some useless things. My favorite useless thing is DVA, which is the thing where if you are a bank you “lose” “money” when your credit improves and you “make” “money” when your credit gets worse, which is in some ways the opposite of right though also not, like, totally away from reality. Citi suffered thereby for its virtue:
Citigroup reported improved first-quarter earnings on Monday, with steady growth in the bank’s globe-spanning consumer businesses and a rebound in investment banking from a poor previous quarter.
Net income was $3.4bn in the first quarter compared with $3.2bn a year earlier as revenue grew just 1 per cent to $20.2bn. Those measures exclude the impact of so-called “debt valuation adjustments” – an accounting rule that makes companies take gains or losses from swings in the price of their own debt. On a reported basis, including DVA, Citi’s net earnings were down at $2.9bn.
So three useless thoughts/questions for you on that:
(1) WTF guys: Read more »
JPMorgan had a … quarter, whatever, go read about it. Top and bottom-line beats with revs up and net income down y/o/y. And JPMorgan’s investment bank had a … you’d have to say pretty good quarter, with fees still not where I’d like to see them as a former fee-getting banker but with FICC bouncing back nicely from last quarter.
But who cares about the investment bank? Turns out we’ve been looking at the wrong JPMorgan all along, per this sweet Bloomberg story that examines the London Whale in his native ecosystem:
JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has transformed the bank’s chief investment office in the past five years, increasing the size and risk of its speculative bets, according to five former executives with direct knowledge of the changes.
Achilles Macris, hired in 2006 as the CIO’s top executive in London, led an expansion into corporate and mortgage-debt investments with a mandate to generate profits for the New York- based bank, three of the former employees said. Dimon, 56, closely supervised the shift from the CIO’s previous focus on protecting JPMorgan from risks inherent in its banking business, such as interest-rate and currency movements, they said.
Some of Macris’s bets are now so large that JPMorgan probably can’t unwind them without losing money or roiling financial markets, the former executives said, based on knowledge gleaned from people inside the bank and dealers at other firms.
Har har har. Much of my admiration for Jamie Dimon comes from the fact that JPMorgan more or less does what Goldman is always accused of doing, and more or less gets away with it, so it’s nice to have proof that JPMorgan is Just A Giant Hedge Fund Masquerading As A Bank. And the story is juicy; I loved the description of Macris as “always ha[ving] off-the-wall ideas, but in hindsight sort of smart ideas,” which golly I have met people like that and I wouldn’t necessarily trust them with all my cash. Read more »
I know I’ve said that the Jamie & Doug in the Morning Show is the best call-in program in finance, given Jamie Dimon’s reliably amusing anti-regulation rant, but the true connoisseur should also really get a kick out of David Viniar’s calmer, wonkier, more NPR-appropriate chat. I certainly do. We’ll maybe have more to say about it later.
My enjoyment is, however, complicated by the fact that at this time of year I feel certain feelings. Specifically, feelings about Goldman Sachs comp, which will be terrible, horrible, down 115%, whatever, and yet … still … somehow … I want it. Have we talked about this before? Sometimes I miss investment banking. A thing that some people not in the industry don’t know about investment banking is that it is an awesome job, in the specific sense that many people would do it for free, or even pay money to do it, and in the even more specific sense that sometimes they do. (For, um, fairly loose definitions of “pay money.”) This happened twice during my time at Goldman. Let’s all luxuriate in a chart:
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Goldman Sachs said profit dropped 58 percent, beating analysts’ estimates as the company cut compensation in response to falling revenue. Fourth-quarter net income dropped to $1.01 billion, or $1.84 a share, from $2.39 billion, or $3.79, in the same period a year earlier, the New York-based company said today in a statement. Per-share earnings exceeded the $1.23 average estimate of 26 analysts surveyed by Bloomberg, whose predictions ranged from 70 cents to $2.50. “There seems to be continued emphasis on cost control and compensation control and that’s a good thing,” said Charles Bobrinskoy, the Chicago-based vice chairman and director of research at Ariel Investments. [Bloomberg, earlier]
Blackstone reported an unexpected third- quarter loss as an 11 percent drop in the value of its buyout holdings forced the reversal of previously booked fees. Economic net income, a measure of earnings excluding some costs tied to the firm’s initial public offering, showed a loss of $341.9 million, or 31 cents a share, compared with a profit of $339.3 million, or 31 cents, a year earlier…“The third quarter presented extremely challenging market conditions, dominated by risk aversion and volatility,” Schwarzman said in today’s statement. “Our earnings were not immune to the sharp downward trajectory of global markets.” [Bloomberg, related]
If you are in the business of selling derivatives you have to value them from time to time, because counterparties want to know what their thing is worth, and regulators want to know how deep in the hole you are. This is not always as easy as valuing a stock by just going out and getting a quote. But the principles can be stated sort of simply: you just take an integral of your net discounted cash flows over every possible future state of the world, appropriately probability weighted.*
Easy to say, but hard to do, because you have only so much direct access to possible future states of the world. Fortunately there are rules of thumb for this, of greater or lesser reliability, which exclude the unlikely and immaterial states of the world (your BAC warrants are worth zero if the world ends this Friday, but that’s unlikely; you’re perhaps equally likely to eat a bacon bowl or a salad for lunch tomorrow, but your choice will have only an immaterial effect on the value of your BAC warrants). All of these methods, however, provide only market-sanctioned guesses about the fair value of your derivatives; if the future world moves in ways not contemplated by the moving parts of your model your calculations are just wrong.
This is, I’ve always thought, a nice way to think of the world, and certainly more conceptually satisfying than “it’s worth what people will pay for it” or “it’s worth what the formula says.” And once you get into thinking of things this way, you can have fun thinking of all the possible things that (1) are not trivially unlikely and (2) would have a not trivial effect on your stuff.
Like, it turns out, your own demise. Read more »
You could probably think a few things about GS’s earnings released this morning. If you’re an employee, you might gulp nervously at that $292k comp accrual so far and the 1,300 folks whose mastery of the universe became less masterful this quarter. If you’re a shareholder, you have to be modestly pleased with mostly adequate revenues in most businesses though kind of pissed about ICBC. If you’re an accounting purist, you thrill to the idea of a bank that managed not to book billions in DVA gains.
Here, though, is a thing not to think: “Goldman Sachs lost money by doing all of the things the Volcker Rule says it shouldn’t be doing.”
Read more »