I feel like I’m on the “the too-big-to-fail subsidy is negative!” beat, even though I only kind of believe it, so in that spirit here is a fun paper from Goldman Sachs’ Global Markets Institute1 that finds that the too-big-to-fail subsidy is negative. That is, Goldman concludes, contrary to popular belief, that the biggest U.S. banks actually don’t have a funding advantage over smaller banks due to the possibility that they’ll be bailed out by the government. Here is the money picture:
If that’s hard to read: the bonds of the six biggest U.S. banks – the ones whom everyone thinks the government would rescue if they blew up, JPM-C-BAC-GS-MS-WFC – yielded on average 6bps more than the average non-TBTF-bank bond before the start of the crisis in 2007. They traded hundreds of basis points tighter during the crisis (TBTF subsidy!), but now are back to trading wider: Read more »
Yesterday’s delightful insider trading settlement with Richard Moore, the CIBC banker who deduced the identity of a buyout target through sheer clingyness, is a good reminder that insider trading is weird. Nobody told Moore any material nonpublic information, but he got in trouble anyway.
It’s also a good reminder of this new-ish (March 2013) paper that I came across the other day, in which some academics went and interviewed sell-side research analysts about how they do their jobs. They don’t say anything all that surprising, though I guess if you’ve never met a sell-side analyst it’s sociologically interesting. But it’s a nice counterpoint Richard Moore: reading smoke signals and figuring out an acquisition is illegal insider trading, but having the company tell you stuff and then using it to make trading decisions isn’t. If you do it right.
Why would you talk to management? There are a bunch of reasons but one is surely that they might tell you stuff.1 And they will, though the phrasing is careful: Read more »
I realize it doesn’t actually work this way but I always imagine that sell-side analysts at big banks who cover other big banks enjoy sabotaging each other a little. “Take that, you Deutsche Bank jerks!,” Jernej Omahen might have thought as he hit send on this one:
Deutsche Bank AG fell the most in more than five months after Goldman Sachs Group Inc. cut the company to sell from hold, saying it may have to transfer $13 billion to its U.S. unit under new capital rules.
Deutsche Bank slid as much as 6.2 percent, the biggest intraday drop since Sept. 26, and traded at 33.07 euros at 1:40 p.m. in Frankfurt [closing at 33.66 / down 4.6%]. The stricter requirements may hurt profit at Europe’s biggest bank by assets and require it to ask shareholders for more money, Goldman Sachs analysts including Jernej Omahen wrote in an e-mailed report from London today.
Goldman’s note addresses two impacts of recent Fed moves to make international banks’ US operations safer: the capital impact, and the funding impact. The capital stuff is wholly imaginary, though I guess the economic consequences might be real enough. Start with this chart, and note that “Taunus” is basically shorthand for “Deutsche Bank’s US operations”:
If GS is right – I have no idea, I’ll just assume they are, but there are some assumptions and guesses here – the problem with Deutsche’s U.S. operations isn’t that they’re undercapitalized; it’s that they have negative capital. Read more »
Wall Street banks’ research on their competitors is not only a window into analysts’ anxieties about their own banks’ prospects, but also a ripe area for conflicts between investment advice and industry advocacy. The days of analysts writing research reports that were like “Facebook should really do a huge equity offering and hire my bank as sole underwriter,” or whatever, are mostly behind us, but when banks write about their industry you might wonder if they’re giving dispassionate advice or pushing their employer’s interests. And when they write about their competitors it must be tempting to be a bit underminey. So various banks have published research saying “actually breaking up the big banks would be bad for shareholders,” which may be true but also not un-self-interested, as breaking up the big banks would surely be bad for the equity research analysts they employ. And then Morgan Stanley published a don’t-break-up-the-banks piece saying “… except Citi,”1 and if you knew that MS is in the process of trying to buy a chunk of Citi cheaply you might be like hmmm. Today Goldman recommends that Morgan Stanley get out of fixed-income trading, and, again: suspicious!
That’s arguably not their main point; much like JPMorgan last week, GS set out to quantify how much of their fun financial regulation is ruining, which again you could read as advocacy. Even though it’s the opposite of what Lloyd is advocating. Here’s Bloomberg:
New bank regulations and capital requirements are “structural” changes to the industry that are more to blame for declining profits than the U.S. economic slump, Goldman Sachs Group Inc. analysts said.
“The operating environment is unlikely to change any time soon, and we see shareholders of challenged banks becoming more demanding in asking management teams to lay out a path to unlocking value in the near term,” analysts led by Richard Ramsden in New York wrote in a report published today.
Their view contrasts with Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, who said in November, “I don’t think we can conclude that the slowdown is secular rather than cyclical change.”
Here is their main chart, which is sad though perhaps too soon to call secular: Read more »
I like reading banks’ research reports on other banks these days because they give off a certain the-call-is-coming-from-inside-the-house vibe; you imagine the analyst running the numbers, looking them over, and saying “my God, this can’t be right, can it? This seems to say … I’m fired?” JPMorgan’s analysts maybe suffer from this less than most but it still imparts a certain tension to the marvelous, strange, 100-page research note out of J.P. Morgan Cazenove today about global investment banks.* There are two big important points** which are:
(1) European banks are pretty pretty aggressive with how they risk-weight their risk-weighted assets, especially compared to US banks. Basel’s Standards Implementation Group is moving in the direction of requiring convergence on RWA measurement, and JPM thinks that that will lead to the European banks having to revise their RWA measurements – meaning that those banks’ capital positions will look much worse than they do now and they will need to shed RWAs and/or raise capital.
(2) You can quantify the return-on-equity effects of new banking regulation – including Basel RWA convergence, but also things like derivatives clearing, the Volcker Rule, etc. – on the big global banks, and those effects are bad. Bad for shareholders, anyway: per JPMorgan, global-bank average ROE would be 16% in 2013 but for those regulations, while after giving effect to them it will be just 6.3%.
But I presume that like any good utility maximizer you care only about your comp, so the important takesaways are (1) 6.3% is not good enough and (2) it will be remediated out of your pocket. Which leads JPMorgan into the truly chilling: Read more »
The SEC had a feisty week last week, telling off Congress with cheery abandon. Darrell Issa sent them a pretty crazy letter a few months back demanding that all IPOs be Dutch auctions for some reason, and last week Mary Schapiro sent him a deeply researched 32-page letter telling him, with appropriate condescension, that that wasn’t happening. Also a few months back Congress passed a JOBS Act demanding that the SEC allow much more fraud in connection with sub-$1bn-company IPOs, in particular by occasionally allowing bankers and analysts to be in the same room with each other, and last Wednesday the SEC released a Q&A saying that that wasn’t happening either.*
There is much to ponder but let’s talk about the overall tone, which is:
- the SEC wants to make sure you don’t get bad information, but
- it’s not so concerned with you getting good information, or at least, not all the information you might want, or at least, not all the information that somebody richer and better-looking than you might get.
So there is a lot of protection against research analysts shading their analysis to win IPO business, and a lot of discussion in the letter to Issa about the danger to investors of getting incomplete information if they are given anything other than the 200-page chock-full-o-risk-factors prospectus for an IPO. But there is not much discussion of the fact that some people get more information – in particular, the fact that in the Facebook IPO the company seems to have told the banks’ analysts to revise their estimates downwards, and the analysts seem to have done so and then told their biggest customers (and nobody else), and then those big customers seem to have piled out of the deal leaving it to retail investors who didn’t know any better. Read more »
Which, it turns out, were not very helpful. Read more »
Rochdale analyst Dick Bové loves fairy tales as much as the next guy. He loves the romance, he loves the drama, he loves the idea of magical footwear. Does he start every morning asking the question, “Mirror, Mirror on the wall, who’s the fairest analyst of them all?”? Yes. Does he consider Mike Mayo and Meredith Whitney his evil step-sisters? Yes. Does he dream about being awoken from his slumber by a handsome prince? YES. But even Dick knows that five minutes after the prince wakes you up you’re going to be bitching to your girlfriends about being stuck with this asshole who lets the dishes pile up like you’re the god damn maid service. Read more »
This weekend the New York Times published an amazing, front-page-of-Sunday-business article about … well, there was this guy, see, and he was annoyed because he thought some people had access to his personal opinions that he had formed based on public information before some other people had access to those personal opinions, and he decided that that was “insider trading” even though he had no inside information about any public company, and he spent seven years complaining about it to a bunch of people, and they all pretty much ignored him because they knew what insider trading is, and then at the end of the seven years he complained to Gretchen Morgenson, who had the advantage, from his perspective, of not knowing what insider trading is, and so she wrote a huge article that was like “HERE IS CRAZY NEWS FROM 2005.” Life is too short etc., and others admirably debunked the bunk, so, y’know, moving on.*
Except did Gretchen Morgenson have inside information that this old story would become relevant again? Because here is a thing that happened lo this very decade: Read more »
We’ve talked a little before about how I don’t understand Wall Street research. Let’s start slow: why publish research? There are I think three, or three-ish, possibilities:
1. To inform your investing clients (asset managers and such) about your best views on how they should manage their money, so that they can manage their money well and thus one day have more of it,
2a. To induce your investing clients to do trades that generate trading revenues for you,
2b. To induce your investing clients to do trades that optimize your book (i.e. slapping a Buy on whatever you need to sell and vice versa), or
3. To induce banking clients (corporate issuers) to pick you as an underwriter.
So, #1, ha ha ha. Choosing between #2 and #3 is harder and if you wanted to be serious about it you might ask questions like how much revenue does trading bring in versus underwriting (more!), how good is that revenue (market making for pennies using your capital: probably not as good as risk-free 7% IPO gross spreads), and how much does research influence trading (meh?) vs. how much does it influence underwriting (meh?).
This weekend, though, we got kind of a strange data point via this FT article about the JOBS Act and the research settlement. In brief, as we’ve discussed, the JOBS Act lets banks basically do whatever they want for research on “emerging growth” companies, including in particular publish research pre-IPO and have bankers and analysts and the company all in the same room pitching business and generally scheming. But there’s a catch, which is that the ghost of Eliot Spitzer, in the form of the global research settlement, still restricts that activity, so all the banks subject to the settlement (the bulge-bracket ones) are disadvantaged vis-à-vis their smaller cousins. But, the FT points out, the big banks have a trick up their sleeves, which is to make all the small banks sign an agreement preventing them from publishing research ahead of the big banks, as a condition of joining the syndicate for any deal: Read more »
Oh, the world. Go read Jeremy Grantham’s GMO quarterly letter; as always it’s pretty fun. Then go read this HSBC report that Paul Murphy wrote about on Alphaville. These are things you probably know already but are worth remembering. First, Grantham:
The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in “fair value” for the stock market. This difference is massive – two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend. The market’s actual price – brought to us by the workings of wild and wooly individuals – is within plus or minus 19% two-thirds of the time. Thus, the market moves 19 times more than is justified by the underlying engines!
You probably knew that, though the numbers were new to me.* This though seemed like a useful breakdown: Read more »