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.
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 »
One way to make a lot of money in banking is just to be really good at it. But this is not a very good way! There are lots of people who want to make a lot of money in banking, and all of them1 have at least considered the approach of “just be good at it,” so you have no real competitive edge if that’s your strategy. You need to be creative and think outside the box, as you might say, if you were not very good at banking, as the law of large numbers says you are not.
I love me some Credit Suisse; they think outside the box. Then they sell the box to themselves in a roundabout fashion that magically removes it from their balance sheet. So when I saw this
“As we continue to reduce costs, continue to optimize our capital and we continue to have momentum on the client side we think we will be able to improve our return on equity toward that 15 percent target,” Dougan said in an interview with Bloomberg Television. “That’s something that’s achievable.”
I had so much hope! I mean, “reduce costs” is boring and sad, and “momentum on the client side” is just like “be good bankers” which whatever, but “optimize our capital” could mean all sorts of devious things.
It probably does but I couldn’t find them. I mean, other than the usual devious things, which start with “Basel II.5 core tier 1 ratio increased by 2.2 percentage points to 14.7%, total capital ratio increased by 1.0 percentage point to 21.2″ and segue right along into this funding stack: Read more »
A value-at-risk model basically works like this. You have some stuff, which is worth X today. Tomorrow it will be worth X + Y, where Y ranges from more or less negative infinity to positive infinity. Y is a function of a bunch of correlated random variables, rates and credit and stock prices and general whatnot. You look at a distribution of moves in those variables and take (usually) a 2-standard deviation daily move; if 95% of the time rates move by -10 to +10 basis points, your VaR model will assume a -10bp or +10bp move, whichever is bad for you. You take the 95%-worst-case, taking into account correlation etc., and tot up how much you’d lose in that case. Then you write that number down and feel a bit better, since you’ve sort of implicitly replaced “we have $X today and will have some number between negative and positive infinity tomorrow” with “we have $X today and will have some number between ($X – VaR) and positive infinity tomorrow,” though of course the first statement is true but unhelpful and the second is not true and also unhelpful.
But that aside! You get your VaR from a distribution of your variables, but the obvious question is what distribution. A good answer would be like “the distribution of those variables over the next three months,” say, for quarterly reporting, but of course that is only a good answer because it begs the question; if you knew what would happen over the next three months you would, one assume, always end those three months with more than $X and this VaR thing would be moot or moot-ish.1
So instead you look at things that you think will allow you to predict that future distribution as accurately as possible, which is epistemically troubling since VaR is a measure of how inaccurate your predictions might turn out to be. Anyway! You pick a distribution of variables based on the sort of stuff that you always use to estimate future distributions in your future-distribution-estimating business, which could mean distributions implied by market prices (e.g. option implied vol) but which seems to mostly mean historical distributions. You look at the last N days of data and assume that the world will be similarly distributed in the following M days, because really what else is there to do.
Picking the number of days to use is hard because, one, this is in some strict sense a nonsense endeavor, but also two, the world changes over time, so looking back one year is for instance rather different from looking back four years. Here is how different: Read more »
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.
Deutsche Bank had two weird little bits of gun-jumping news today, one good(ish), one bad (just bad). The good news is that Deutsche Bank has decided that it wasn’t manipulating Libor too much:
A Deutsche Bank internal probe has found that two of its former traders may have been involved in colluding to manipulate global benchmark interest rates but there was no indication of failure at the top of the organization, three people close to the investigation said.
So … great? Those two Deutsche Bank traders can look forward to possible jail, but the buck stops with them: the board-appointed probe has exonerated the board. Ha ha ha you say, but why not? Jailable Libor manipulation by traders seems conceptually distinct from approved-by-the-Fed-and-BoE Libor manipulation for the perceived good of the financial system, and while the former is worse for the traders and submitters the latter might be worse for the top officers. At Barclays, at least, senior people were not intervening to pick up half a basis point here and there on swaps trades, but they were intervening to make themselves look pretty in the eyes of markets and Paul Tucker. And now they’re gone! At Deutsche, we don’t know what this report says, but there’s at least fake statistical evidence that DB didn’t systematically skew Libor one way or another, suggesting that the einzigen Badapfel* theory might be true, or true enough for the board not to fire itself, which is a lower bar.
The bad news is that DB announced today that it expects to announce crummy earnings next week, to the tune of EUR1.0bn/700mm of pre/after-tax net income in 2Q2012, down from 1.8/1.2bn in 2Q2011 and off ~30% from analyst estimates. This puzzled me not so much in earnings being down – what else is new, new normal, etc. – but in that we’re getting a sneak preview a week before earnings. Why do that? 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 »