proprietary trading

Morgan Stanley cuts jobs, plans retail bank launch

Jim Kim — Wed, 12 Nov 2008 17:10:05 -0500

In addition to the 10 percent job excision earlier this year, Morgan Stanley intends to cut another 10 percent across is institutional securities business and almost 10 percent in its asset management business. This is hardly surprising. But the company is not in slash-mode across the entire company. While it intends to downsize in prime brokerage, proprietary trading, principal investments and commercial real estate origination, it plans to build up areas such as foreign exchange, commodities and investment banking, reports the AP. The biggest new area of investment will be retail banking and the world is anxiously awaiting more specific plans. Morgan Stanley just hired Cece Sutton as president of the retail banking and Jonathan Witter as COO of retail banking. Both come from Wachovia. The firm has 500 branch offices, but some will likely be part of an acquisition.

For more:
- here's the AP story via the Washington Post
- here's more the retail bank hires

Prop trading desks: A thing of the past?

Jim Kim — Tue, 11 Nov 2008 09:43:44 -0500

Prop trading isn't what it used to be. Traders in general are thought to be good candidates for downsizing right now. This is reflected by the fact that proprietary trading desks seem to be becoming a thing of the past. JPMorgan got rid of its desk. And Merrill Lynch is following suit, according to Financial News Online. There will still be some prop trading via specific asset class desks. You have to wonder if this is optimal. One benefit of a dedicated desk was that it could seek cross-asset opportunities, combing say derivatives and debt. But perhaps those opportunities just aren't worth it anymore for commercial banks. We're in a new world after all.

For more:
- here's the article

Reality catching up to Goldman Sachs

Jim Kim — Tue, 04 Nov 2008 19:13:17 -0500

The Teflon is wearing thin, and the credit crisis is sticking it to Goldman Sachs hard. We noted this week that at least one analyst now predicts a fourth quarter loss, which would be the firm's first loss as a public company. The latest hit, of course, is the news that its much-hyped hedge fund, Goldman Sachs Investment Partners, was down about 15 percent for the year. Which isn't that bad. It's faring only slightly worse than the average hedge fund this year and better than the average mutual fund. But 15 percent on $6 billion is a whole lot of dough. And the expectations were really high. The fund was supposed to wipe away memories of Goldman's troubled Global Alpha fund. Instead, it has revived the bad feelings. Goldman Sachs Investment Partners is managed by Raanan Agus and Kenneth Eberts, former heads of proprietary trading desks at Goldman. They have some time to right the ship. The limited partners agreed to a two year lock up.

For more:
- here's the FT article on the hedge fund

Related Article:
End of an era: Goldman to post first loss?

Goldman Sachs to lay off 10 percent of staff

Jim Kim — Thu, 23 Oct 2008 13:06:57 -0400

It's not surprising that Goldman Sachs will layoff about 10 percent of its staff, or about 3,200 jobs, according to media reports. That's a large cut, relatively. Merrill Lynch has cut about 5 percent so far, and Morgan Stanley has cut even less; in the case of Morgan Stanley, there may be a lot more cuts on the way.

Goldman Sachs is facing a wrenching transition to a more regulated commercial bank. Expect a low PE for a while, as it figures out the best path. We can't assume its investment banking and proprietary trading prowess will translate into golden status in the commercial banking world--where the likes of JPMorgan Chase and Bank of America dominate. But Goldman Sachs has some really smart people. They'll figure it out.

For more:
- here's the Reuters article

Goldman Sachs: Should it go private?

Jim Kim — Sat, 20 Sep 2008 21:21:31 -0400

This is not the first time Goldman Sachs has faced a crisis. Recall that in 1994, a bond market meltdown forced the partners to dig deep into their own bank accounts to finance a bailout. Breakingviews brings up the issue in the context of the current crisis, raising the notion of Goldman Sachs going private. Well, it would end the stock market route, but might do less to quell the CDS uncertainty. I agree with the article in that the world is different. What Goldman Sachs needs is access to capital that can support its current business model. That would suggest some kind of merger. It could survive alone, I believe. But it would have to scale back some operations, especially in the area of proprietary trading. Which wouldn't be such a bad thing. As the lone independent, however, it may be a too-lonely road.

For more:
- here's the Breakingviews article

Related Article:
More on the Goldman Sachs bailout

Second-quarter earnings still a question mark

Thu, 15 May 2008 06:59:55 -0400

Goldman Sachs analyst William Tanona has reduced his second-quarter earnings estimates at Bear Stearns, Lehman Brothers and Morgan Stanley, notes the AP. For the second-quarter, the sources of reduced earnings growth likely will shift. The key contributors this time will not be writedowns from troubled securities, CDOs and leveraged loans. Rather, it will come from weakness in core business lines, such as investment banking and principal and proprietary trading. As noted previously, losses from credit spreads on their own debt (a fair value issue) will lead to losses, even though there might be write-ups from other securities (see previous item). All in all, he also believes that on a valuation basis, top banks are now a good buy.

For more:
- here's the AP article

Earnings anxiety takes toll, expected to linger

Wed, 12 Mar 2008 07:59:54 -0400

First quarter earnings from the top investment banks will start rolling out next week. Analysts already have taken a bearish tilt despite a recent Fed-induced pop. Financial News Online notes they have cut estimates by one-third already. They say it will take three years for underwriting and advisory levels to return to the levels hit during the recent boom. So in this environment, the banks that will thrive will find alternative revenue sources. It's possible one or two could hit a proprietary trading home run. Goldman Sachs is adept at timing sales of portfolio companies to give earnings a pop. But the reality is, we could be settling in a for a long slump. One or two big deals might really make a difference.

For more:
- here's the article

Related Articles:
Deal trends not so great in 2008; opportunity? Article
Do analysts' estimates mean anything anymore? Article

Details on rogue trader's red flags

Tue, 05 Feb 2008 06:59:58 -0500

Goldman Sachs' hugely successful business model, which relies on proprietary trading, seems to be catching on at some companies. At Societe Generale, however, it has proven disastrous. The New York Times notes the bank was emphasizing proprietary trading and encouraging traders to take more risk at the time Jerome Kerviel came around. The bank even had an elite group of quant-like traders, known as "les moines-soldats," or the soldier-monks. Jerome Kerviel was not part of this group. He was from the back-office and was made a trader via a special program to promote from less glamorous parts of the bank. His special power was his extensive knowledge of the back-office system, which he gamed relentlessly. At one point, he was up $2 billion. Then it all crashed. Along the way, there were tons of red flags.

For more:
- here's the New York Times article

Goldman Sachs to stumble in 2008?

Fri, 21 Dec 2007 06:59:58 -0500

We've suggested that Goldman Sachs really has no where to go but down. What really set the firm apart in 2007 of course was its savvy use of its balance sheet. The fact is that you can't run the tables forever. They hedged well against the subprime-inspired implosion but in this regard the cliche rings true: past performance is no guarantee of future success. It probably has a list asset to be sold in a timely fashion for maximum earnings benefit. But do not be surprised if its proprietary trading prowess loses its Midas touch. Calling the bottom of the credit crunch will not be easy. And those hedges, if they still exist, could easily produce some losses. Sadly, there will be lots of people rooting for Goldman to stumble. If its prop trading earnings tumble, it will be subject to the same market forces that all others are subject to; it will be mortal again.

Related articles:
- Criticism of Goldman Sachs criticism
- More talk still about Goldman's Sachs good fortune
- Goldman Sachs earnings beat expectations--again
- Video: Goldman Sachs 4Q analysis

Morgan Stanley walking the plank? China deal announced

Wed, 19 Dec 2007 06:59:58 -0500

Ouch! Morgan Stanley's 4Q results were not good. The bank lost $3.61 per share in the period, far greater than the 39 cents expected on average by analysts. Writedowns for the quarter totaled $9.4 billion. This was $5.7 billion more than the bank announced in early November. The full year itself wasn't bad at all, but at this point no one cares about full year records. John Mack announced he will not accept a bonus for 2007. He's vowing changes with an eye on "a small trading team in one part of the firm." It said it will beef up its risk management processes and consolidate proprietary trading under Michael Petrick. Walid Chammah and James Gorman were tapped as co-presidents. The biggest news perhaps was that Morgan Stanley has inked a deal with China Investment Corporation. Sovereign wealth! CIC will acquire $5 billion in convertibles but receive no voting rights. This is an indication of the straights Morgan's capital position put the bank in. Dramatic stuff here.

For more:
- here's the release
- here's a prediction of Morgan Stanley's 4Q earnings video
- listen to the webcast of the live conference call at 11 a.m. ET
- here's the transcript for the Lehman Brothers conference call

Related articles:
- Expect more sovereign wealth to flow into financial firms
- Video: 4Q predictions for Goldman, Bear and Morgan Stanley
- 4Q Earnings on tap