2012年6月23日 星期六
Regulators Still Trying to Understand JPMorgan's Trading Flub
Just how did regulators miss the $2 billion trading loss at JPMorgan Chase (JPM)? And how can they prevent similar losses in the future? Those were the big questions Tuesday at a House Financial Services Committee hearing.
That five panelists were called on to testify shows the web of regulators that keep an eye on banks like JPMorgan. The Office of the Comptroller of the Currency oversees national banks, while the Commodity Futures Trading Commission regulates the type of derivatives trades that caused the bank’s loss. The Federal Deposit Insurance Corporation insures customer accounts in the event of bank failures, while the Federal Reserve Board of Governors keeps an eye on risks across the banking system. Then the Securities and Exchange Commission watches disclosures that banks make to their shareholders.
Responding to a grilling, the five regulators’ defense boiled down to three main points.
We didn’t get good info from the bank. Regulators said they needed better and more detailed information to spot how JPMorgan was taking on risk. Thomas Curry, the comptroller of the currency, said, “In hindsight, if the reporting were more robust or granular, we believe we may have had an inkling of the size and potential complexity and risk of the position.” Scott Alvarez, general counsel for the Federal Reserve Board of Governors, said that since JPMorgan’s own internal reports didn’t fully capture the risk, the regulators were limited. “We have to rely on information that we get from them,” he said.
We’re looking into it now. Curry, the primary regulator over JPMorgan, says the OCC is working now to examine what actually happened with the soured trade and is monitoring the “derisking” as JPMorgan unwinds its position. He also said the OCC is checking on its own procedures to see why it didn’t spot the trade in its ongoing examination of the bank. SEC Chairman Mary Schapiro said that her agency is looking into whether JPMorgan accurately reported changes to the model it used to measure risk in its first-quarter earnings. She said if those disclosures were insufficient, JPMorgan could face penalties.
We won’t miss it next time. Schapiro and Gensler both say that pending changes as part of Dodd-Frank financial reform will help regulators spot problems in the future. While much attention has been giving to whether the Volcker Rule would have prevented JPMorgan from making these trades, regulators pointed to lesser-known parts of Dodd-Frank with wonky names like “722(d)” and “Title VII regulatory regime” that are bringing more transparency to derivatives markets. For example, Gensler says that the CFTC will be able shrink what he called “the London loophole” in its interpretation of the 722(d) provision that gives U.S. regulators some oversight of overseas trades.
The regulators hope that when financial reform is finally implemented, they’ll have more data and powers at their disposal — so that next time, they won’t be a step behind.
A Royal Family Energy Windfall
It’s good to be the Queen. British monarch Elizabeth II, who celebrated 60 years on the throne in June, may see her income rise 16 percent after the Crown Estate’s earnings increased and lawmakers changed the way royal finances are calculated. The monarch will be entitled to ?36 million ($56 million) for the fiscal year that runs from April 2013 through March 2014, up from ?31 million for the current year.
The Crown Estate manages real estate surrendered by the monarchy in 1760 in exchange for annual payments. Its profit increased 4 percent to ?240.2 million in fiscal 2012, which ended March 31, thanks in part to revenue from offshore leases for wind farms, which more than doubled. The former landholdings for the royal family include the seabed around Britain extending to 12 nautical miles offshore. “They’re a landmark set of results,” Crown Estate Chief Executive Officer Alison Nimmo said in an interview at the corporation’s office off Regent Street in central London.
Getty Images(6); Bloomberg(1)
Another positive development for the royal family’s finances involves the sovereign grant, the amount the government provides to cover expenses the Queen incurs in her official duties. Under rules adopted by Parliament last year, it is pegged at 15 percent of the profit generated two years earlier by the Crown Estate. Previously, the amount was set once every 10 years by the Treasury and supplemented by grants.
The Crown Estate has offered leases for offshore sites since 2000 to companies including Centrica (CNA), Dong Energy, and Siemens (SI). The parks in operation now generate 1.5 percent of the U.K.’s electricity production, and that should double next year as more sites become operational, lifting income. The Crown Estate also oversees 36 sites across the U.K. earmarked for tidal or wave power generation, Nimmo says.
Getty Images(6)
The Queen’s other sources of income are the estates and assets owned by the Duchy of Lancaster as well as her privately owned estates, Balmoral in Scotland and Sandringham in eastern England. The monarch owns the royal palaces, most of the royal art collection, and the Crown Jewels on behalf of the nation and therefore is prohibited from selling them for her personal gain.
The Crown Estate also is the majority owner of Regent Street in central London, along with half the land in the St. James district, as well as shopping centers across the U.K., golf courses, Ascot Racecourse, and farms.
Nimmo, 48, joined the Crown Estate in January after overseeing the design and construction of most venues for the London 2012 Olympic Games. She says she is proceeding with the next phases of a ?1 billion project to revamp Regent Street in London’s West End. Work done so far has transformed it into one of the U.K.’s premier shopping strips. A ?500 million makeover of the St. James neighborhood also is under way. Says Nimmo: “We are making serious investment in the development pipeline.”
The bottom line: Queen Elizabeth may see a 16 percent rise in income to $56 million next year thanks in part to revenue from offshore wind farms.
A Global Bond Rally With Grim Tidings
Mohamed El-Erian knows why bond markets from the U.S. to Germany and Japan have seen yields drop to record lows even after outstanding debt has ballooned. “We may be in a synchronized slowdown,” says El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest bond manager. “We could stay here for awhile.”
The credit markets are signaling tough times ahead. Yields on government securities in the U.S., Germany, the U.K., the Netherlands, and Australia tumbled to all-time lows this month as Europe’s debt crisis intensified and unemployment in the U.S. unexpectedly rose.
The average yield on bonds issued by Group of Seven nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the U.S.) has fallen to 1.23 percent as of June 12, from 3 percent in 2007. Germany’s two-year note yield fell to less than zero for the first time on June 1, while Switzerland’s has been negative since April 4, meaning investors are paying those nations to hold their money.
Those rates imply that bondholders don’t expect global economic growth to exceed 3 percent this year, according to John Lonski, chief economist at Moody’s Capital Markets Research Group (MCO). In comparison, the global economy expanded at an average of 4.7 percent in the five years before the financial crisis took root in 2008. “As far as developed economies are concerned, the credit market is coming to the conclusion that real economic growth will be slower than what we’ve become accustomed to since the Second World War,” says Lonski.
The slowdown matches the prediction by El-Erian in 2009 for a “new normal” in global economies characterized by a slower pace of expansion, higher unemployment, and a greater role for governments in private markets.
Gains in the bond market have come even as supply has expanded which, all things being equal, would depress bond prices and increase yields. The Bank of America Merrill Lynch Global Broad Market Index now tracks debt issues with a face value of $40 trillion compared with $23.9 trillion in June 2007, and up from $15.3 trillion in June 2002.
Some of that new supply is being bought by central banks, including the Fed, the European Central Bank, and Bank of Japan, as policy makers purchase government securities in attempts to bolster their economies. The holdings of the world’s six biggest central banks have more than doubled since 2006 to $13.2 trillion, according to Chicago-based Bianco Research. Financial institutions are also buying government bonds as they seek to increase their capital to meet regulations set by the Basel (Switzerland)-based Bank for International Settlements.
In recent months, bond investors have been rewarded by falling yields. Since March 20, when the 10-year Treasury yield peaked at 2.4 percent, U.S. government securities have returned 3.7 percent, with benchmark 10-year notes gaining 7.2 percent, Bank of America Merrill Lynch (BAC) indexes show. The MSCI All Country World Index of stocks declined 10 percent over the same period.
With rates so low, buying government bonds is not likely to deliver similar profits anytime soon. Investors from Leon Cooperman, founder of hedge fund Omega Advisors, to Warren Buffett, the chairman of Berkshire Hathaway (BRK.A), have said investors should avoid bonds. Bond yields at current levels are not sustainable and investors should buy stocks instead, says Marc Faber, author of the Gloom, Boom & Doom Report. “The government bond bubble will also burst,” Faber said in a June 7 interview on Bloomberg Television. “I don’t know whether it’s going to be tomorrow or in three months. But I suspect that it will happen sooner rather than later.”
Other analysts say the strong demand for bonds shouldn’t be compared to the housing boom or the mania for Internet stocks. “You’re not talking about a bubble because a bubble is about greed,” says Jeffrey Rosenberg, chief investment strategist at BlackRock (BLK). The bond boom is “not a reflection of ‘I expect prices to go higher and I have to jump in,’” he says. It’s “a reflection of ‘I want to preserve my principal.’”
Stuart Thomson, a money manager at Ignis Asset Management in Glasgow, discounts the possibility of a sudden spike in rates that would inflict big losses on bondholders. “Yields are extremely low for a very good reason, and that’s fear,” he says. “History suggests in an environment of extreme risk aversion, yields will go down in an elevator but go up on an escalator.”
The bottom line: Bond yields approaching 1 percent suggest that global economies will grow at 3 percent annually or less.
2012年6月22日 星期五
Chris Foley, Jester of Wall Street
Chris Foley was so stressed working as a stockbroker that in 2008 he started getting Botox injections in his armpits to reduce perspiration. He developed rashes and suffered through a monthlong bout of diarrhea. His body, he says, was telling him he was in the wrong profession.
Photograph by John Loomis for Bloomberg Businessweek
Foley tells this and other stories in his one-man show, Off the Desk (Tales of a Mediocre Stockbroker), which he performed on May 8 and 9 at the Barrow Group Theater in New York. The show recounts his experiences in finance and lampoons the bullies and chauvinists he encountered. “The year I made the most money, I’d never been more unhappy,” he says in an interview.
John Loomis for Bloomberg Businessweek
For 7 of his 13 years on Wall Street—which included jobs at Lehman Brothers and other major firms—he moonlighted as a stand-up comedian in New York clubs. The lure of financial stability kept him at desk jobs until he was laid off in 2010. Foley took it as an opportunity to give acting a shot. Like most novice performers, he faced a lot of rejection. Casting agents tended to see him only in cop roles.
So he wrote, rewrote, and rehearsed with his acting teacher. “I rehearsed to the point where I was almost numb,” says Foley, now 38.
Photograph by John Loomis for Bloomberg Businessweek
Both performances of Off the Desk sold out at the 100-seat theater. Foley hopes to take the show to other cities. He is also working on ideas for a television series using characters from his act.
“You can be mediocre in Wall Street and still make a low-six-figure salary,” he says. “In acting, if you’re mediocre, it won’t work. You have to be great.”
FOLEY’S BEST ADVICE
1. Leave your apartment
After losing my job, I had to get out of my head, stay active, and avoid being isolated in my apartment. Good distractions: long walks, free museum tours, meditation, and yoga.
2. Make your pennies scream
I figure out what I need rather than what I want and cut back on spending. I cook at home more often and use the subway everywhere I go in New York.
A Hedge Fund Hunts for Greece's Hidden Gems
George Elliott is used to being treated as a curiosity. As founder of Naftilia Asset Management, the financier is raising money for a hedge fund that plans to buy nothing but Greek stocks. In March he met in London with an investment manager who within seconds of sitting down made it clear that he had no interest in wagering on Greece. He just wanted to hear about the hedge fund’s strategy, Elliott says.
Elliott responded by asking a few questions of his own, including whether the money manager had invested in Russia after its 1998 currency crisis, in Argentina 10 years ago after the nation defaulted on its debt, or in the Standard & Poor’s 500-stock index in March 2009 when the benchmark plunged to its lowest point in 13 years. In all cases, the answer was no. “Then you are not qualified to be discussing Greece with me because you have missed the best investment opportunities over the past 20 years,” Elliott says he retorted.
The money manager eventually agreed to invest in Naftilia’s Greek Opportunity Fund, says Elliott, declining to identify his new client. Once he starts talking about specific stocks, “then people start to get excited,” says Elliott, who’s been fundraising since October. “At the same time, we are extremely lonely. We are one of the few people out there feeling optimistic.”
Hard to imagine why. Greece is struggling through a fifth year of recession and has an unemployment rate of 21.9 percent. The Athens Stock Exchange has plunged 90 percent since the end of 2007. “There’s a huge uncertainty about the clarity and the sustainability of earnings” for Greek companies, says James Butterfill, a global equity strategist at Coutts & Co. in London. “If you have a very high-risk profile, then maybe you can pick out opportunities.”
Even so, Elliott, 39, has raised more than €50 million ($63 million) for the fund, according to a person with direct knowledge of the matter. He has not put any of that money to work, while waiting for the Greeks to get a government in place. On June 20 Antonis Samaras, leader of Greece’s New Democracy party, was sworn in as prime minister after political leaders agreed on a coalition that will seek relief from austerity measures tied to international loans.
Kostas Tsironis/BloombergElliott opened an office in Athens to scout for stocks
After studying money management at City University London, Elliott started his finance career in 1997 as an investment banker at Societe Generale (SCGLY). Naftilia manages about $400 million and runs hedge funds focused on the global shipping and nuclear energy industries. Naftilia’s main shipping fund, started in 2004, rose 29 percent in its first year and gained in the three following years before dropping 26 percent in 2008 and 20 percent last year, according to a person briefed on its performance, who was not authorized to speak publicly. Elliott was based in Dubai until he decided to open an office in his native Athens in October 2010. He has spent the past year and a half examining corporate balance sheets, building a network of contacts in government and the business community, hiring analysts from banks, and meeting with investors.
Elliott says he’s focusing on companies punished by the stigma of being in Greece that generate most of their business outside the country, and companies whose cheap share prices may make them attractive takeover targets. He will avoid banks. “When Argentina defaulted, they had incredible returns on the stock market but incredible volatility on the currency as well,” says Elliott. “If Greece remains in the euro, we think this is going to be an incredible investment opportunity.”
If Greece returns to the drachma, which Elliott says is very unlikely, investors can buy stocks even more cheaply. “If we go to the drachma again, there will be tremendous amounts of money to be made for speculators,” he says. That would also create hardship for Greeks. The National Bank of Greece estimates per capita income would drop by at least 55 percent in euro terms after the introduction of a new currency. “Whether we are going to take advantage of such a situation and try to make money on the back of a population that is really going to have a tough time is going to be a tough debate for me,” says Elliott. “I don’t know whether I would be able to do it.”
The bottom line: With the Greek market down 90 percent since the end of 2007, Elliott has raised more than $63 million to invest in stocks.
China's Top Regulator Woos Investors
Carrie Pan is about as intrepid as they come. Since she began investing in Chinese stocks six years ago, the 29-year-old Shanghai accountant has seen almost half the value of her portfolio evaporate, including a 40 percent loss last year alone. Undeterred, Pan recently bought 1,000 shares of Yang Quan Coal Industry Group. “I believe stocks will rise,” says Pan, watching her holdings on a computer screen in her two-bedroom apartment on a recent afternoon of maternity leave. “Guo has already done lots of things to support the stock market since he took office, and he is very keen on improving the market’s performance.”
That would be Guo Shuqing, who in October was appointed chairman of the China Securities Regulatory Commission, the equivalent of the U.S. Securities & Exchange Commission. A fluent English speaker, Guo is also a former vice governor of the central bank and most recently was chairman of China Construction Bank, the nation’s second-largest lender by market value. His challenge is modernizing China’s capital markets so that they can better support the country’s $6 trillion economy.
Photograph by Jason Lee/Reuters
In the last few months he has set about instituting reforms to shore up investor confidence, wean businesses off state-backed financing, and lure more foreign money into China. “Our current stage of work is focused on improving the fair play of the market, protecting investors’ legal rights, and enhancing the ability of serving the real economy,” Guo, 56, said in a People’s Daily report posted on the CSRC website in March.
A key aim for Guo is restoring the trust of investors who’ve taken a beating in the stock market over the last few years. After peaking at 6,092 in 2007, the benchmark Shanghai Composite Index fell to just above 1,700 by the end of 2008. Four trillion yuan ($630 billion) of government stimulus provided a temporary lift in 2009, yet the market fell another 33 percent from 2010 through 2011. China’s 50 million individual investors lost an average of 40,000 yuan last year, according to a May 9 People’s Daily report. To entice them back into the market, Guo has urged listed companies to pay more cash dividends and persuaded the Shanghai and Shenzhen exchanges to cut stock-trading fees by 25 percent.
He also has taken aim at China’s initial public offerings. Over the last year individual investors were burned by a series of overpriced offerings that plunged after their debuts, including that of Sinovel Wind Group, China’s biggest maker of wind turbines. The stock is down about 60 percent since the company began trading in January 2011. The CSRC has taken steps to prevent overpricing of IPOs. If the price-to-earnings ratio of an IPO is expected to be 25 percent higher than that of publicly traded companies in the same industry, the company will need to disclose the factors that went into the pricing decision, the CSRC said in an April 28 statement. The CSRC will now invite as many as 10 individual investors to advise on IPO pricing, a role previously restricted to institutional investors. Guo is dealing with “all the historical hangover,” says Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting. “That’s definitely very helpful for the healthy, long-term development of China’s capital market.”
Guo also has moved to attract more cash from outside the country. Only approved foreign institutional investors can buy or sell yuan-denominated securities. In April the CSRC announced that it would nearly triple the amount that approved investors can invest in Chinese securities, to $80 billion.
Next on the agenda: the bond market. For years China’s bond market has amounted to little more than money shuffling between state entities, with state-owned companies selling their debt to state-owned banks at controlled interest rates, and banks holding the bonds on their books. In this cozy system, corporations aren’t allowed to default. Borrowers that come close are bailed out by local governments and banks. As a result, China’s bond market is tiny. At $661 billion, it’s just 9 percent of China’s gross domestic product. In the U.S., the $7.9 trillion in fixed-income securities equals more than half the country’s total economic output. A more active bond market would provide funding for small businesses and divert risk away from banks, which provide 75 percent of the nation’s credit via loans.
In early June Guo launched a plan to let small and medium-sized companies sell debt comparable to speculative-grade bonds. Translation: Get ready for Chinese junk bonds. The first went on sale as a private placement on June 8, with a 50 million yuan offering by Suzhou Huadong Coating Glass. Speculative-grade offerings could lead to China’s first corporate default—which could be a good thing because it would help bond investors price risk, says John Sun, managing director at Citic Securities International in Hong Kong. “The high-yield issuers will be small companies, so the impact on the whole market will be small,” he says. Psychologically, though, it will be important because it will show investors that the market is operating freely. “For a mature bond market, we should allow some firms to go bust,” says Sun.
Pushing through these reforms has required Guo to consolidate his power over other regulatory agencies, moves that could create enemies who might stymie his efforts. “What he needs to do is pick fights he can win,” says Fraser Howie, a Singapore-based managing director of CLSA Asia-Pacific Markets.
Guo has already shown his bureaucratic dexterity. From 2001 through 2005 he was head of the State Administration of Foreign Exchange, which manages China’s foreign exchange reserves. In that role Guo pushed through reforms by forging relationships between departments and building support for his positions, according to Hong Weizhi, a former SAFE spokesman. In the end, it’s all about inspiring confidence, something Guo seems to be good at. Says Hao Hong, chief China strategist at Bocom International Holdings in Hong Kong, “Guo is the man.”
The bottom line: Guo is trying to build a bond market and lure investors back to stocks after the market fell 33 percent from 2010 through 2011.