WRFest 30Mar08(Finance Industry): End of Wall St. as We Know It ?
Here's our collection of story excerpts for the Finance Industry. With all the near-death experiences we were going thru we didn't get the excerpts for the week of 23Mar up so they've been combined with last week's in one kind of massive posting. Nonetheless they make interesting reading taken all together, particularly in light of the market's huge rally with the SP500 up almost 4% and the Dow up just short of 400 points. Of course we've seen a lot more days like that in the last couple of months than not. And, for our money and for several of the commentators in our stories, the writedowns are far from over, the downsizings have just begun and we've got a long way to go. And we assure you that these weren't selected to excerpt just because they agree with our views. They capture some of the better thinking. We'll especially call you attention to the stories by Michael Lewis (Mr. Liar's Poker) and Merdith Whitney (who'll soon be known as Mrs. Dr. Doom for telling it like it is) who both point to troubles to come.
Our title comes from a Fortune article which got re-covered but came to a similar conclusion this week as well. And just happens to coincide with our assessments about the future of the Finance Industry which we've been harping away at in all the related posts. Another story worth paying attention to is the one reporting estimates of 200,000 job losses on Wall St., which is an unprecedented number.
Now tell me - is the worst over for the industry and financial stocks ? Or are we just at the gust front of the storm as the artificially inflated profits and earnings of the last decade are destroyed, the share of industry profits in national income begins to reverse, a new regulatory regime that'll change the rules systematically and systemically goes into effect ? And most especially (cf our earlier comments about good business practices) as the basic business models, management systems and leadership development of the industry are re-thought !
Interesting times indeed.
FINANCE INDUSTRY READINGS
End of Wall Street as we know it Financial firms have relied on a highly flawed business model for years. The time has come to fix it. The standards that rule most businesses - avoiding excessive leverage, reining in rampant pay and the massive dilution that goes with it - didn't apply to Wall Street. So what if investors didn't understand all those arcane instruments and sophisticated hedging strategies? Wall Street was the black box on the Hudson that worked its own brand of magic. Today, the magic is fading fast. It's time to step back and analyze how financial firms actually operate.The truth is that they've been relying on a highly-flawed business model for years. Put simply, Wall Street firms used towering leverage to make tons of money in a long-running bull market that blatantly underpriced risk. At the same time, they handed a huge chunk of the gains to employees in the form of excessive pay. Now that run is over, and the price of risk is rising dramatically. That's driving down value of everything from junk bonds to mortgaged backed securities. Wall Street's addiction to leverage is cutting the wrong way.
- Truth trading at a premium as financial crisis accelerates, A lack of trust spells crisis in every financial language,Insight: The sacrificial lamb of Wall Street
- WRFest 20Jan08(FinInd): Re-thinking, Re-Thinking, Re-Thinking ?
Is the Financial Crisis Over? The Debate Is Already On After the Federal Reserve's aggressive moves this week to ease the credit crunch, Wall Street is starting to wonder if the worst is finally over. Well-known banking analyst Richard Bove even delivered a report on the financial sector Thursday with the bold heading, "The Financial Crisis Is Over." Bove, of |Punk Ziegel, admitted in the note that such a proclamation "sounds ridiculous," but he genuinely believes the crisis is over. "There will be more negative developments, but they will be meaningless," Bove wrote. "I admire a courageous call by Dick Bove," Art Cashin, director of floor operations for UBS Financial Services, told CNBC, but "I’m not sure we’re totally out of the woods." "The focus is going to shift from the brokers and the bankers to the hedge funds now, Cashin said. "And that’s so opaque that the rumor mongers are going to have a field day." That sentiment was echoed later by Marc Pado, U.S. market strategist at Cantor Fitzgerald, who told CNBC that he agrees that the crisis will now ripple into hedge funds and we'll see another Carlyle-like collapse.
What's wrong with Wall St. - and how to fix it Until the recent tempest, Wall Street firms looked like just about the world's best businesses. Year after year they boasted sumptuous profitability, ever-rising share prices, and, if you believed their claims, a new generation of chief executives who had mastered the art and science of risk management. True, it was hard to decipher exactly how they made money. But make it they did, on an epic scale. From 2002 to 2006 the five big independent firms - Goldman Sachs (GS, Fortune 500), Merrill Lynch, Morgan Stanley, Lehman Bros. (LEH, Fortune 500), and Bear Stearns - tripled earnings to more than $30 billion and, at their peak, achieved an average return on equity of 22%, rivaling such royalty as the pharmaceutical and energy industries. The standard rules of management, a righteous list that includes avoiding excessive debt and shunning excessive pay, didn't apply to Wall Street. So what if investors only dimly understood CDOs, CLOs, and the alphabet soup of arcane instruments that dominated the business, not to mention the super-geek hedging strategies the firm's leaders kept bragging about? Wall Street was the black box on the Hudson that worked its own mysterious magic.Today the magic is gone, baby, gone.
Goldman, Lehman Slash Prices to Unload Backlog in Buyout Debt -- U.S. banks from Goldman Sachs Group Inc. to Lehman Brothers Holdings Inc. have whittled their holdings of leveraged buyout loans to $129 billion from $163 billion at the beginning of the year by offering the debt at discounts, according to analysts at Bank of America Corp. Banks have been breaking ranks from their lending groups and offering their own pieces of the LBO loans at as little as 80 cents on the dollar to get the debt off their books. New York- based Lehman yesterday said it has reduced its LBO backlog by $6.1 billion to $17.8 billion since the beginning of the year. Goldman Sachs halved its holdings to $20 billion and Morgan Stanley reduced its pipeline by 20 percent. Some of the same LBO firms that generated the debt in the first place are raising funds to buy it back at reduced prices. Blackstone raised a $1.4 billion fund last November to buy bank loans, and Leon Black's Apollo has bought $1 billion of distressed loans and bonds. In addition to the buyout firms, traditional loan investors and hedge funds are also buying the debt.
What Wall Street's CEOs Don't Know Can Kill You: Michael Lewis On March 14, a Friday, the market believed that Bear Stearns Cos. was worth $30 a share. Say what you will about Bear Stearns on that day, you can't say that it was flying below the radar. It was as intently scrutinized as a public corporation can be, by some of the shrewdest people on our planet, and perhaps some smarter people from distant planets, too. For nine months it had been in obvious distress; in just the previous three days its shares had fallen $30. Over that weekend -- days when the markets were closed and there was no material news about the company -- Bear Stearns was believed to be worth $2 a share, so long as the Federal Reserve assumed the downside risk of almost $30 billion of its mortgage securities. All of this raises an obvious question: If the market got the value of Bear Stearns so wrong, how can it possibly believe it knows even the approximate value of any Wall Street firm? And if it doesn't, how can any responsible investor buy shares in a big Wall Street firm? At what point does the purchase of such shares cease to be intelligent investing, and become the crudest sort of gambling?
- Merrill Lynch Profit Estimate for 2008 Slashed 45% by Analyst at JPMorgan
- Thornburg Jumps on Plan to Sell $1.35 Billion Debt With Initial 18% Yield
- Citigroup Loss Estimate Increased by Whitney of Oppenheimer on Writedowns
- Deutsche Bank Says Profit Forecast Is Hard to Meet, Outlook `Challenging'
- Oppenheimer's Whitney Says Merrill Lynch, UBS to Post Losses This Quarter
Grim prophet Meredith Whitney, the Oppenheimer analyst who has become the Jeremiah of the financial crisis, says there is a way out of the wilderness for banks like Citigroup. But like many of her pronouncements over the last five months, it's grim. "The best-case scenario is that financial firms take the pain quickly and purge assets from their balance sheets. That could bring stock valuations down by as much as 50%, which would be enough so that you could legitimately buy long-term positions," says Whitney. Given the fact that many large investment banks have lost a third of their value since the credit crisis began last summer (with Citi down by more than half), it's unlikely they'll take the pain. So Whitney fires off a worse case scenario. Some may be surprised to find that the only acronym Whitney has after her name is B.A., and that it's in history, not economics, from Brown University. "When I was in college in the early 90s, I didn't even know what research analysts were," she says. "But an MBA isn't necessarily an advantage in my job. Curiosity is an advantage. Being able to find a story is an advantage. It's what historians do. Everything happening now we've seen before, just with different characters. "This is the human story of power and hubris. If you know Shakespearean tragedy, you understand what's going on [in the market]."
Citigroup's overhaul Citigroup said Monday it was reorganizing its consumer group into two businesses as part of a broader overhaul of its corporate structure. The group will be divided into consumer banking and global cards, the company said. Citi also said it was revamping its overall structure, with an eye toward regional autonomy. "Citi has established a regional structure to bring decision-making closer to clients," the company said in a statement. "It is empowering the leaders of the geographic regions with the authority to make decisions on the ground."
Inside the Demise of Bear Stearns The past six days have shaken American capitalism. Policy makers, regulators and bankers struggled to keep the trouble from spreading. Bear Stearns was whipsawed by the rapidly unfolding events. In the end, Washington threw out its rule book and Bear disappeared into the arms of J.P. Morgan.
- Bear Stearns' shareholders should take the $2 and run It doesn't matter that Bear Stearns may ultimately be profitable. It doesn't matter that investors continue to bid up Bear stock above the $2-a-share sale price. It doesn't matter that Bear's assets may turn out to be worth more than the $236 million J.P. Morgan is paying. Here's what matters: on March 16 Alan Schwartz, the chief executive of Bear Stearns, faced the certainty that when the broker opened its doors the next day it would fail. Without the Federal Reserve's backing and J.P. Morgan's pledge, Bear Stearns today would be a case number in bankruptcy court. Bear Stearns brought this upon itself, not J.P. Morgan. That's the cold truth that the Bear Stearns board of directors, including Schwartz and Chairman Jimmy Cayne, faced a few days ago. Sure, the current environment seems rosier now, but that's because Bear already is part of J.P. Morgan.
· Who is to Blame for Bear Stearn's Demise? These excuses are a steaming pile of organic, enzyme-free donkey fazoo. One in particular stands out as more manure laden than the rest. I wish to draw your attention to the third excuse, as it was penned earlier this week by, of all people, three Bear Stearns economists. Its titled "Apart From That, Mrs. Lincoln, How Was The Play?" You see, it turns out that because the Fed kept rates so low, we ended up with all this bad paper, which ultimately led to the increase in foreclosures, then a sub-prime implosion, a housing debacle, derivative collapse, counter-party risk, recession, etc. If only the Fed raised rates more rapidly, their argument goes none of this would have happened. Um, sure it is, if you say so. Now, put the keyboard down, and back away from the laptop.To me, this is the equivalent of blaming McDonalds (MCD) for your being obese. Why-oh-why must they make the Quarter Pounder (with cheese) so delicious? Who amongst us can possibly resist its mouthwatering sesame seed buns, its delectable, fat-laden goodness? Hmmmmm, so scrumptious!
Banking to lose 200,000 jobs The U.S. financial industry has been shedding jobs at a record clip, and some analysts predict the pace will only accelerate over the next year-and-a-half as banks cut costs in the face of the housing market slump and the weak economy. Analysts at the financial research firm Celent LLC said in a report Tuesday that they expect the U.S. commercial banking industry - essentially, all companies that lend or collect deposits - to lose 200,000 of its two million jobs over the next 12 to 18 months. An annual loss of 200,000 jobs at the nation's commercial banks would be an unprecedented number. In 2007, the entire financial services sector - which consists of mostly commercial banks - announced job cuts that totaled a record 153,000, according to the job placement consultancy Challenger, Gray & Christmas Inc. More than half of those cuts were in the mortgage-lending business, and occurred all over the country, particularly in New York and California.
Bank stocks: April Fool or the real deal? It's another gloomy day for the financial services industry. UBS (UBS) and Deutsche Bank (DB) are reporting more multibillion dollar subprime-related writedowns .Lehman Brothers needs to raise $4 billion to quell credit concerns. Legg Mason (LM) is talking a nearly $200 million charge to bail out a struggling money market fund. And National City hit hard by the mortgage meltdown, has hired Goldman Sachs to shop it around. Wait..there's more! Goldman Sachs slashed its earnings estimates on Citigroup and Merrill Lynch Tuesday morning due to expectations of more credit writedowns. And Morgan Stanley analysts in London wrote in a report that "the industry is facing the most severe investment banking crisis in 30 years." Ouch! But I'm sorry. Did I say it was a gloomy day for banks? April Fool! For some reason, investors are treating this latest round of bad news as a good sign...a possible indication that the worst may soon finally be over for the beleaguered financial services industry. But declaring that the worst is really over might be a bit, dare I say it, foolish. Keep in mind that many investors were hopeful back in October that banks were reporting a kitchen sink of subprime charges in their third quarter so that they would not have to disclose any more bad news beyond that. And bank bulls said the same thing in January when many financials were reporting huge losses in the fourth quarter. We're now preparing for another wave of red ink in the first quarter. So that's the third consecutive quarter in which banks will be hit with big charges...and the third straight time that these charges are supposed to represent the last of the big writedowns. And some pretty smart people are still scared about the future of the financial services industry.