The usual banking suspects are falling under the gaze of regulators for a trading strategy known as "dividend arbitrage" which helps their hedge fund clients reduce taxes, and from which the banks earn more than $1B in fees annually.
The strategy - typically run from London - involves banks temporarily transferring ownership of stock to a lower-tax jurisdiction about the time when the client expects to receive a dividend on those shares. It's perfectly legal say the banks and hedge funds.
Bank of America (NYSE:BAC), however, has been questioned by the Richmond Fed (Charlotte comes under its purview) about the legal and reputational risks of such maneuvers, reports the WSJ.
It isn't clear if other banks have been similarly questioned, but a number of other lenders do the same thing. Among the hedge funds which benefit from dividend arbitrage is Och-Ziff Capital Management (NYSE:OZM).
JPMorgan (NYSE:JPM) is on track to keep its top spot in the full-year league tables (it's been #1 since Coalition began publishing rankings in 2010), leading the way in H1 with $11.5B in investment banking revenue. Goldman Sachs and Deutsche Bank share second place.
In fixed income, currencies, and commodities (FICC), JPMorgan tied with Citigroup and Deutsche in first place with $5.9B, but the bank pulled ahead of the pack with its deals advisory business. Of note for FICC, JPMorgan did $7.6B in business in H1 of 2013. Coalition expects full-year FICC revenue at the top 10 global investment banks to fall 9% this year to $67.4B.
In a surprising blow to the world's largest banks, a federal judge upholds rules laid out by the CFTC giving it the power to apply new derivatives rules far beyond American borders.
For years, banks have kind of had their way in the courts battling new regulations, but this case makes three recent wins for the CFTC. At issue here are new derivatives rules, and the CFTC wants the power to apply those to overseas firms guaranteed by a U.S. bank, i.e. Goldman Sachs International, or the London branches of Citigroup.
Back when Gary Gensler pushed things through (he's no longer at the CFTC), he though he had worked out a compromise with the banks, but the lenders decided he had gone too far and sued, arguing about "guidance" vs. a "formal rule," and whether the costs imposed by the rule had been fully considered.
The Fed intends to impose a capital surcharge on banks tougher than the international standard, according to Fed Governor Daniel Tarullo's prepared remarks for the Senate Banking Committee. Those banks with heavier reliance on short-term funding like overnight loans - i.e. Goldman Sachs (GS -1%) and Morgan Stanley (MS -1.8%) - will likely face even more rigorous requirements.
Officials haven't yet decided on a number, but reportedly are considering as much as 200 basis points more than the top range of 2.5% of risk-weighted assets agreed to by international regulators.
What's not yet clear is who would need to raise capital to meet the new, tougher standard.
Citigroup (C -1%), Bank of America (BAC -0.6%), JPMorgan (JPM -1.3%), Wells Fargo (WFC -0.4%), State Street (STT -1.1%), Bank of New York Mellon (BK -0.9%)
Global M&A deals in H1 totaled $1.571T, according to Mergermarket, up 56% over the same period in 2013, and up 29.8% from last year's 2nd half. in the U.S., $694.6B of deals in H1 nearly doubled that of one year prior. European deals of $453.6B gained 35.5%, and Asian deals of $286.7B rose 56.8%.
The M&A boom could help offset at least some of the widely expected continued trading slowdown this quarter (banks begin reporting their Q2s in about 10 days), and Goldman (GS +0.1%) tops the advisor tables with $533.8B in deals in H1, up 112% from a year ago. With $495.6M (up 180.4% Y/Y), Morgan Stanley (MS +0.5%) in in 2nd place. In third place, Bank of America (BAC +2.3%) deals grew 141.7%, and in fifth place, Citigroup (C +1.5%) saw a 177.2% boost in deals. JPMorgan (JPM -1.1%) took 4th place with $324.8B in deals, but saw just a 25.3% rise.
"Five years ago, if the risk group recommended against a strategy or product, it might just be one part of a debate," says Wells Fargo (WFC -0.4%) chief risk officer Michael Loughlin. Now, "when we say no, it's usually no."
The naysayers are gaining power and multiplying across the banking industry as lenders bow to pressure from regulators to simplify and make safer their operations in the hope of preventing the next financial collapse. For its part, Wells has 2.3K employees in its core risk-management department, up from 1.7K two years ago, and the unit's annual budget has doubled to $500M over that period. Earlier this year, Goldman Sachs (GS -0.2%) made its chief risk officer part of the trader/rainmaker-dominated company management committee for the first time ever.
The changes are expensive and come at a time of sluggish loan growth and trading revenue, but the banks have no choice as regulators wield the power given them by Dodd-Frank.
KeyCorp (KEY +0.1%), for instance, used to pay loan officers for meeting profit goals. Now those bonuses can be lost if their work falls short of new risk-management standards. It's no doubt one factor behind sharply lower loan commitments for construction and real-estate development.
Banks could lose up to $4.5B in annual revenue as new regulations alter how swaps are traded, according to a report from McKinsey & Co. That amount is equal to 35% of the $13B in revenue booked by banks from trading in rate derivatives, and it comes at a time when FICC business is already on the decline.
At issue are new rules requiring swaps trade on electronic systems rather than over the phone ("Thanks, big boy"), and the greater transparency should bite into profits. To counter this, says McKinsey's Roger Rudisuli, banks will have to cut costs and realign teams to focus attention on fewer customers.
The usual suspects make up the 5 largest U.S. swaps dealers: JPM, C, BAC, GS, and MS.
Sometimes providing an early window into the results for publicly traded investment banks, Jefferies Group - owned by Leucadia National (LUK) - posted a 55% surge in earnings to $61.3M for the quarter ended May 31. Revenues gained 9.8%.
Fixed-income trading revenue fell just 5%, and overall trading revenue rose 6.5% thanks to a 25% jump in equities trading. Investors are bracing for double-digit declines from the larger banks.
Investment banking revenue of $331.M grew 19%, with capital markets revenue of $230.7M up 23%, and CEO Richard Handler says Jefferies is continuing to grow the headcount on its investment banking team.
A guarded "no," argue KBW's Frederick Cannon and Matthew Dinneen. "It is beginning to be difficult to envision an environment where earnings headwinds, regulatory pressure, the structure of interest rates and investor sentiment get worse for universal banks ... [Further] credit conditions are likely to improve through 2015. Thus it is a good time, in our view, for contrarians to take another look at universal banks."
RBC's Jonathan Golub has 4.5 reasons to like the banks: 1) Rising rates will benefit; 2) Loan growth is set to accelerate (the team notes eased C&I lending standards); 3) Capital returns; 4) Credit improvement; 4.5) M&A activity is picking up, through trading business remains sluggish.
Pushing back against French disgust over the possible $10B fine to be levied against BNP Paribas (BNPQF +0.6%), sources at Justice let leak to Reuters that they initially wanted a $16B penalty.
To put the $10B in perspective, BNP earned about $11.2B last year, and getting a $2B slice of that $10B will be the NY State Dept. of Financial Services, whose annual budget is $552M. BNP has reserved $1.1B against the fine.
Forgetting the Hollande government for a moment, bank executives are no doubt looking on in alarm at these massive fines being tossed about like nickels and dimes. "I think everyone realizes that it's an exuberant market," says a defense lawyer who has been involved in settlements with the DOJ. Maybe the banks should just take their chances at trial?
"The market has permanently shrunk," says RBC's Gerard Cassidy of fixed-income trading business at banks. FICC income of $22B in Q1 was off 37% from a year ago, and updates recently from the likes of Citigroup (C +0.6%), JPMorgan (JPM -0.5%), and Goldman Sachs (GS -0.4%) suggest Q2 could be worse.
Of the two reasons - a new regulatory regime putting the squeeze on bank business practices and the absence of volatility, one may go away, but the other isn't.
The new regime has banks cutting staff and restructuring units - especially from the likes of European players like Barclays (BCS +0.2%), Credit Suisse (CS +0.3%), and UBS (UBS -0.7%).
“What these companies have decided to do, some more dramatic more than others, is restructure their business,” says Cassidy. “You just have to manage your business differently by realigning your cost structure to the new level of revenues due to the changes form rules, regulations and laws."
The agency will have fewer of its people stationed in the offices of the largest U.S. banks, instead bringing the workers back to OCC offices where they can develop a broader perspective on what may be happening in the financial system.
The move comes after Comptroller Thomas Curry - who took the reins in 2012 - brought in external consultants to review the OCC's examination program which failed to sniff out much in the way of systemic risk ahead of the financial crisis.
This action stands in contrast to that of regulators like the FRBNY (which also whiffed on the financial crisis), which is boosting its on-site presence at banks.
It's only about the "fifth inning" of mortgage investigations, says Michael Stevens, in a phrase likely to send a chill through the boardrooms of banks across the country. Stevens is the FHFA's acting inspector general, and Bloomberg's Jody Shenn - in attendance at the MBA event where Stevens is speaking - says there was a "loud, collective gasp" from the crowd when he uttered that line.
Stevens says investigators have found improper actions "not only occasionally, but in the end, with almost every" deal examined. “I don’t see anything in the near future that’s going to wipe the slate clean with all of the investigations.”
"Multiple currencies" have been subject to attempted manipulation, says Raimund Roseler, head of banking supervision at Germany's BaFin. Those targeted tended to be the smaller currencies as opposed to large ones like the dollar and euro, he adds.
The news comes on the same day the EU charged three banks for anti-competitive behavior in interest rates and one day after Credit Suisse plead guilty to U.S. charges of tax evasion. Two months back, Swiss competition watchdog Weko became the first regulator to claim it had spotted illegal activity in currencies.
“We see continued deterioration of the litigation environment especially in the U.S.," said Deutsche Bank CFO Stefan Krause yesterday. Indeed.
A check of the global banks finds the group pacing market declines in morning action after Friday night's warning on Q2 trading revenue from JPMorgan (JPM -2.2%).
Nomura's Steven Chubak is first out with lower JPMorgan earnings estimates.
Jim Cramer sums up sentiment: "This has been a house of pain. You can't own these right now. You just can't."
Morgan Stanley (MS -1.9%), Goldman Sachs (GS -1.5%), Citigroup (C -1.2%), and Bank of America (BAC -1%), Deutsche Bank (DB -1.2%). Far less trading dependent than the other Too Big Too Fails is Wells Fargo (WFC -0.2%).
Broker-Dealers (IAI) looking strong...bests on money being put to work back into the stock market and return of trading volume?
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shaker33+ FollowFollowing- Unfollow|Send Message20 Jan 2012
: Return of trading volume?
shaker33+ FollowFollowing- Unfollow|Send Message20 Jan 2012
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