Investment Banks

Inside a hedge fund disaster

Jim Kim — Thu, 13 Nov 2008 14:16:21 -0500

What to make of Ospraie's Dwight Anderson? He built a $9 billion commodities hedge fund that stumbled badly this summer. Anderson seemed to have done everything right. Fortune notes his passion for understanding business, even working on factory floors. He was equally passionate about due diligence. His list of mentors include Julian Robertson and Paul Tudor Jones, who set him up with his own commodity fund, Ospraie--in which, some big-name investment banks invested. In September, Ospraie announced it was closing its main fund, which was down nearly 40 percent by the end of August. Anderson can take comfort in the fact that he's not alone.

For more:
- here's the profile

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Ospraie news from FierceFinance

BlackRock's role in the crisis

Jim Kim — Fri, 31 Oct 2008 11:39:06 -0400

BlackRock CEO Larry Fink is dominating the headlines like he did a few months ago, when it seemed like he was a candidate for every high-profile open CEO position. His firm is playing an active role as the bailout industry gears up. BlackRock has been hired by AIG, Lehman Brothers, Fannie Mae and Freddie Mac--not to mention the Treasury Department.

Fortune notes the irony: "Keep in mind that 25 years ago [Fink] was an early and vigorous promoter of the CMO (collateralized mortgage obligation). Today the CMO and other asset-backed securities have become the monsters responsible for the credit crisis."

In some ways, that's unfair. You can't blame him for the recent decisions at some investment banks. He has his company poised to profit from the bailout process, and that strikes some as an enviable position.

For more:
- here's the article

Era of big exec pay over already?

Jim Kim — Wed, 24 Sep 2008 14:05:16 -0400

Even as executive pay emerges as an issue in the bailout plan haggling in Washington, some are speculating that the era of big pay has ended on Wall Street. Independent investment banks are dead. The commercial banking model has won out. And that carries lower pay and lower bonuses. Last year, Goldman Sachs spent a record $12.1 billion on bonuses for roughly 30,500 employees, which works out to an average nearing $400,000 per person. By contrast, Citigroup reportedly spent $11 billion for its 100,000 investment banking employees, or a little over $100,000 per person, the New York Post reports. Lower bonuses, of course, would reflect less business and lower profits. It will be interesting see what happens when the good times return. But that's far in the future.

For more:
- here's the article

Some perspective on the Lehman implosion

Jim Kim — Mon, 22 Sep 2008 09:36:24 -0400

TheDeal.com offers an interesting take on the Lehman Brothers failure. Lehman's liabilities totaled $613 billion at the time of its bankruptcy filing. Unsecured claims of the top 30 claimants show credit of approximately $150 billion. Here are some benchmarks: WorldCom, the previous corporate bankruptcy record-holder, had $34.3 billion in liabilities. Russia defaulted on debt of about $100 billion years ago. And get this: the Resolution Trust Corp. in the '90s shut down more than 700 institutions. Their total assets were just over half the amount of Lehman's total $639 billion. Lehman Brothers, of course, was fairly small compared to the other once-independent investment banks. So the issues as you can imagine are fairly complex. And remember this was a bank the regulators decided to let die.

For more:
- here's the article

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The Death of Lehman Brothers

CDS spreads continue to widen

Jim Kim — Wed, 17 Sep 2008 09:30:29 -0400

The Lehman Brothers news, the AIG fiasco and the Merrill Lynch deal offer up quite a cocktail for the markets to digest. It's fair to say that there's a lot of acid in stomachs out there, still. Credit Derivatives Research's Counterparty Risk Index, which tracks credit default swaps on 15 leading financial firms, has been soaring. As you would expect, spreads on AIG CDSs soared thousands of points. The fear is palpable. In addition, the two remaining independent investment banks, Morgan Stanley and Goldman Sachs, have also seen their spreads widen a bit. The gut-wrenching turn of events may create some lasting uncertainty. It's hard to see what will offer any real salve in the immediate future.

For more:
- here's the article from MarketWatch

Morgan Stanley beats expectations

Jim Kim — Tue, 16 Sep 2008 19:53:50 -0400

Morgan Stanley--one of the two last full-service independent investment banks--reported results a day earlier than scheduled. Thankfully, it did not add to the drumbeat of depressing news. Like Goldman Sachs, it beat expectations for the third quarter. It earned $1.32 a share, compared with expected earnings of 78 cents, so this would appear to be a decisive beat. Unlike Goldman Sachs, Morgan's revenue actually rose. Its core prime brokerage, commodities and equities businesses were generally strong. But the pressure is really on Morgan Stanley to prove that it should remain untethered to a commercial bank. This will not be a case made in one quarter. A deal at some point is not out of the question.

For more:
- here's the AP article

Brave new financial regulatory structure needed?

Jim Kim — Mon, 15 Sep 2008 09:47:37 -0400

What to make of the pyrotechnics from a regulatory point of view? You could argue it two ways: When push came to shove, Henry Paulson and Tim Geithner somehow pulled off a workable rescue, aided in part by Bank of America's and Merrill Lynch's deal. In that sense, the system held, assuming the CDS markets don't stop functioning. At the same time, a big-name bank was allowed to fail--and that in itself is a victory. There's a lot of moral hazard on Wall Street. But given all this, there's a sense that the markets and investment banking have outrun the current regulatory structure. The OTC derivatives market is, from a regulator's point of view, a black hole. It's hard to even get good information. So we may see this be addressed once the crisis has passed. We'll likely see more oversight of investment banks by the Fed, whose primary duty now, on paper anyway, is commercial banking.

For more:
- here's a Washington Post article

Related Article:
The long-term fix for financial crises

Lehman Brothers, another Bear Stearns after all

Jim Kim — Thu, 11 Sep 2008 21:40:11 -0400

This wasn't supposed to happen. Some people thought it couldn't happen. Lehman Brothers couldn't be another Bear Stearns because the Fed had extended a novel credit window to it (and other investment banks). That meant, we all thought, that "failure" wasn't an option. But boy is it. CDS spreads on Lehman bonds are even wider now than Bear spreads were just before it died. There is less rumor-mongering this time around. But in most respects, we're seeing a repeat. The most ominous sign is that the Treasury and the Fed are involved in efforts to facilitate a buyer. They might not necessarily be driving the process, but any buyers want the same assurances JPMorgan got with its Bear deal. We'll likely get an effective take-under sometime soon. Goldman Sachs is apparently out of the running. Bank of America is surprisingly--very!--said to be in the running.

For more:
- here's an AP backgrounder

Lehman Brothers to lay off 1,500

Jim Kim — Thu, 28 Aug 2008 17:26:11 -0400

The New York Times reports that Lehman Brothers will lay off about 6 percent of its workforce, or about 1,500 employees. That brings the total axed jobs to 7,500 since June 2007. You have to think that all business lines will be affected, including bankers and traders. The news guarantees that little will get accomplished over the next few weeks. Everyone will be distracted--at all levels. Not even CEO Richard Fuld has job security right now. The sad fact is that the news will likely not matter much. Fuld has to do a lot more than save on expenses. He needs a dramatic capital infusion to offset a third-quarter loss that will likely be in the $3.5 billion range. The clock is ticking. The drama builds.

For more:
- here's the article

Would private banks have fared better?

Jim Kim — Wed, 20 Aug 2008 21:05:54 -0400

The New York Times' Deal Professor raises an interesting point: Would top investment banks have fared better had they remained partnerships instead of converting to public companies? One could easily argue that partners-owners-managers would have had a lot more disincentives not to play so fast and loose. Their personal assets were on the line, and they were cut in for the long term. The public company structure allows for "directors and managers [who] may have interests and goals that are different than those of shareholders: A nicer private jet, more pay, short-term-ism and sometimes more nefarious antics." Those who tout the superiority of the partnership model often point to private equity firms, which are--ahem--now bent on going public.

For more:
- here's the column