Banking Industry

An interesting look at the home equity loan bubble

Jim Kim — Thu, 14 Aug 2008 22:10:58 -0400

The New York Times offers a snap history of home equity loans, which used to be known as second mortgages, via the many memorable ads the banking industry churned out. Citigroup's "Live Richly" campaign, which cost some $1 billion from 2001 to 2006, was among the many that urged people to borrow against their homes. As one ad proclaimed: "There's got to be at least $25,000 hidden in your house. We can help you find it." A PNC ad used a wheelbarrow and the line, the "easiest way to haul money out of your house." At some point, debt lost its stigma. Being in debt up to your eyeballs was seen as a decent strategy, as long as you were fully invested in the booming stock market. The number of past due home equity borrowers is now 55 percent above the historical mean.

For more:
- here's the article
- here's the ads

Related Article:
Citigroup's ad campaign to go global

Where will all those bankers land?

Jim Kim — Tue, 24 Jun 2008 21:42:54 -0400

The paring down of investment banking jobs at Citigroup and Goldman Sachs made headlines this week, and other banks are following suit. This begs the question: Where will all these bankers land? The stars likely will land at private equity funds. As for the others? TheDeal.com reports that some could be snapped up by internal investment banking teams at various companies. There is one view that companies want to do more of their own investment banking. Still, despite a few eye-catching hires, it does not appear that there are enough jobs to go around at client companies. Some might try to catch a financial job at a smaller company, and a few have even made the leap into the academic world. But we have to face facts: some will be at the end of their careers. They will survive--and may even thrive. Perhaps they are the lucky ones.

For more:
- here's the article

What's up with Wachovia?

Jim Kim — Tue, 24 Jun 2008 21:41:05 -0400

First a CEO, now loan portfolios? After Wachovia ousted Ken Thompson, it reportedly hired Goldman Sachs to help it find a new CEO--an odd move to be sure, given the executive headhunting specialists out there. Now comes word that Wachovia has hired Goldman again, this time to advise on its loan portfolio. True, Goldman's moves with the SIV formerly known as Cheyne Finance suggest it has some savvy in this area. On the other hand, you have to wonder if there's more going on. Are we moving toward Goldman being retained by Wachovia to find a buyer? That's not out of the question. JPMorgan Chase has been rumored to be interested, as Wachovia's stock tanks.

For more:
- here's the article

Shareholders paying for banks' sins

Jim Kim — Mon, 23 Jun 2008 21:28:22 -0400

Banks have been a capital raising binge of late. Banks big and small are busy issuing more stock, of various types, and cutting their dividends--even as they look for big investors. Fifth Third and KeyCorp were among the regional banks that joined the trend recently. Things likely will get worse as other asset classes, such as constructions and small business-type loans, start to feel the heat of rising delinquencies. Unfortunately, as the AP reports, the losers in all this are shareholders. The article notes that 16 banks have cut dividends this year. All agree that more capital raising measures are necessary, so we may be in for more of the same. Perhaps this is one reason (of several) why some analysts have discerned some capitulation on the part of Mr. Market.

For more:
- here's the AP article on capital issues

Just how unique is Goldman Sachs?

Jim Kim — Fri, 20 Jun 2008 07:24:55 -0400

Breakingviews.com strikes a note that we've hit on recently: Goldman Sachs has separated itself from its peers. While Goldman has remained extremely competitive, a lot of good companies are stumbling as they try to keep up. You can't just automatically start generating predictable, steady gains on principal transactions. You can't just automatically start hedging better. Still, you have to wonder how long can all of this last? Clearly, it is innovative. And it is benefiting from the fear in counterparty-land that has bolstered its prime broker business. But Goldman Sachs still faces the industry's big question: What's next? As it takes on less leverage and risk, it needs to find a way to get back to growth. No one sees how yet.

For more:
- here's the article

Regional banks sharing the misery

Jim Kim — Tue, 17 Jun 2008 07:47:58 -0400

Most of the recent headlines have focused on the global banks--the likes of Bear Stearns and Lehman Brothers. But regional and near-regional banks are suffering as well. The mortgage situations at these banks are not healing themselves and the rumor-mill is active. Wachovia, of course, has been a huge loser. But Fortune notes that Mr. Market is also worried about the likes of KeyCorp, which cut its dividend, National City, which has inked some sort of agreement with regulators, and Fifth Third. There may well be some outright failures over the next 12 months. You can bet the regulators are all over this.

For more:
- here's the Fortune article

Goldman Sachs, Morgan Stanley earnings coming up

Jim Kim — Fri, 13 Jun 2008 13:55:10 -0400

Goldman Sachs and Morgan Stanley will report earnings next week, and there have been some rumors that Goldman Sachs would report a writedown. Still, neither company is expected to report a loss, notes CNNMoney.com, much less a staggering $2.8 billion loss that many are expecting from Lehman Brothers. We've noted that the credit crunch might re-order the financial services world a bit. But at least in investment banking, Goldman Sachs, with Morgan Stanley right behind, will remain on top. Before the crunch, the conventional wisdom held that Lehman was morphing from a bond shop into a more diverse company, one that might enter the elite ranks in the industry. Sadly, no one is talking about that now. The breadth of the top two has served them well and created some distance between them and their peers.

For more:
- here's the CNNMoney.com article

Private equity, banks still heading to the altar?

Jim Kim — Wed, 11 Jun 2008 07:46:54 -0400

Private equity firms would love to gain leverage at top-tier Wall Street banks. But investing in financial services firms is a tricky business. The biggest issue in most cases boils down to regulation. We've noted that banks have long been averse to regulation-heavy industries. But the need for capital is so great in the financial services industry that some, including Breakingviews.com, are speculating that powerful Wall Street lobbies might try to change them. Private equity firms certainly do not want to be seen as bank holding companies, or anything that would entail heightened regulation. Breakingviews.com notes some industry-targeted funds are being raised. They may be able to register as bank holding companies.

For more:
- here's the article

Wall Street's need for a new gravy train

Jim Kim — Thu, 05 Jun 2008 13:50:31 -0400

Consultant Larry Tabb is among the most astute observers of Wall Street, especially at that critical nexus where trading meets technology. In a recent commentary, he notes that fixed-income for the past few years has generated a big share of industry profits. For Merrill Lynch, Goldman Sachs and Morgan Stanley, fixed-income had accounted for between 50 and 60 percent of their global trading profits. But now that's all changed, and Tabb wonders (as we have over the past year) how banks can make up for that revenue drop off. It's doubtful the subprime-backed business--that once glorious gravy train--will come bounding back anytime soon. So what's the next big thing? What's the Internet to the desktop-bound computing model? I am not sure anyone knows at this point. It seems like it would have to be derivatives-based, but who really knows?

For more:
- here's the commentary on Wall Street & Technology

Hedging risk a big earnings issue?

Jim Kim — Mon, 02 Jun 2008 21:32:47 -0400

Hedging is a risky business. The bottom line is that it's really hard. We've said it before; there is fine line between hedging and speculating. I'm not sure anyone can lay out the full range of hedging techniques that top banks have employed. But more people are convinced that the to banks may have to own up to some failed hedges soon, according to MarketWatch. At a simple level, they may have bet against the ABX and other derivative indexes, only to watch them rally. They may have bought CDS on various leveraged loans or CDOs, only to see those swaps tank in value as the underlying securities rallied. This likely will be a big issue when second quarter earnings come out.

For more:
- here's the MarketWatch article