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HomeWall Street’s Oligopoly Flexes Its Muscle
Posted by Larry Doyle on March 15th, 2010 12:51 PM |
Pricing power is everything.
What businessman would not like greater control and influence over the pricing of his goods and services? How are prices determined? In a capitalist system, prices are a function of the competitive forces of supply and demand.
What happens when competition dwindles? Pricing power for the suppliers increases.
How does competition dwindle? When barriers to entry are so high or competitors go out of business. This economic reality is also known as an oligopoly and it defines the current state of our financial industry known as Wall Street.
Is Wall Street taking advantage of the lessened competition and flexing its muscle to drive revenue? Is the Pope Catholic? (more…)
Goldman’s Hatzius v Morgan’s Kasman: “Let’s Get Ready to Rumble”
Posted by Larry Doyle on October 30th, 2009 11:20 AM |
I love a good debate. Much like a prize fight, a healthy debate can ebb and flow as those ‘in the ring’ bob and weave while trying to score points. I so enjoyed a debate highlighted by The Wall Street Journal between the chief economists from Goldman Sachs and JP Morgan that I highlighted it in the Newsworthy section of Sense on Cents. For those who don’t visit that section of my site, I am compelled to replay this debate here.
In the inimitable words of Michael Buffer, “let’s get ready to rumble” as Goldman, J.P. Morgan Economists Debate Shape of Recovery:
The recession might be over, but how goes the recovery?
We posed that question to two prominent Wall Street economists with two very different views of 2010. Bruce Kasman, chief economist at J.P. Morgan, sees the U.S. growing at about a 3.5% pace for most of next year. That appears optimistic compared to Jan Hatzius, chief economist at Goldman Sachs, who sees gross domestic product growth of 2% or so at the start of the year tapering off to just 1.5% by year-end.
The following is an edited transcript of their remarks during a recent conference call with The Wall Street Journal.
Looking ahead to 2010, what kind of recovery do you see? (more…)
For JP Morgan’s Winters, ‘The Ledge Got Very Narrow and The Elbows Razor Sharp’
Posted by Larry Doyle on September 29th, 2009 12:30 PM |
Was it mere coincidence that JP Morgan’s co-head of investment banking Bill Winters recently voiced his disdain, genuine or not, for banker greed? I shared my assessment of Winters’ comments yesterday in writing, “JP Morgan’s Winters Identifies Problems, But Offers No Solutions.”
Why do I ask? Bill Winters was just shown the door at JP Morgan. Was Winters exacting a pound of flesh as he effectively went down the escalator? Bloomberg provides a measure of insight on these developments in writing, JP Morgan’s Staley to Run Investment Bank in Shake-Up:
JPMorgan Chase & Co. shook up the leadership of its investment bank, surprising analysts by announcing the immediate departure of co-chief executive officer William “Bill” Winters and naming asset-management chief Jes Staley to run the business.
Steve Black, who helped lead the investment bank with London-based Winters, will become executive chairman of the unit, the New York-based bank said today in a statement. Staley will be CEO of the business and Mary Callahan Erdoes, CEO of the private bank, will succeed Staley in running asset management.
These moves within the executive offices at JP Morgan are a classic example of what a friend and former colleague at Bear Stearns once told me about life within the upper-most echelon of Wall Street. He said, ‘the ledge is very narrow and the elbows are razor sharp.’
The simple fact is Winters was the outsider within that executive suite which he occupied with Steve Black. Is Steve Black a good guy? Does it matter? Steve Black has a longstanding relationship with Jamie Dimon from working with him back at Smith Barney in the early to mid-90s. Black, not unlike almost every chief executive on Wall Street, is a master at maneuvering on that ledge.
As for Mr. Winters, do not expect him to offer any statements critical of Black, Dimon, JP Morgan or any parts of JP Morgan’s franchise. Why? When any executive leaves a Wall Street firm, he is required to sign a release which handcuffs him from making any negative comments about the firm. Winters assuredly has significant JP Morgan stock and options outstanding. If he were to comment, he would jeopardize those holdings.
To that end, perhaps Bill Winters’ statement yesterday was his ‘Grove O’Rourke’ in the recently published Top Producer by Norb Vonnegut. What do I mean? Perhaps Winters’ interview in the London Evening Standard, JP Morgan’s London Head Slams ‘Greed’ of Bankers, was his conscience speaking and genuinely voicing his disdain for the greed that infects Wall Street and the City.
LD
Related Sense on Cents Commentary:
JP Morgan’s Winters Identifies Problem, But Offers No Solution (September 28, 2009)
Banks Build Better Mousetrap
Posted by Larry Doyle on July 9th, 2009 7:54 AM |
Is there truly any reason to trust financial institutions these days?
Developments within the credit card space have exposed the true colors of these institutions . . . not that there was ever any doubt. Recall how consumer outrage at rapidly rising interest rates on credit cards pressured Washington to rein in the usurious business practices of the financial industry.
New legislation was badly needed as banks clearly utilized abusive business practices. The Wall Street Journal highlighted these developments in writing on May 21st, Credit-Card Fees Curbed:
“Credit cards are a tremendously valuable and useful tool for consumers, providing them with relief during critical moments,” said Senate Banking Committee Chairman Christopher Dodd. “This is a very important industry….We just want it to work better.”
The legislation marked a major defeat for the credit-card industry, as lawmakers complained that consumers are being hit with tricks and traps on their cards.
Well, while the legislators were in the front room having the photo ops, the bankers were in the back room building a new and better mousetrap, at least from their perspective.
The Los Angeles Times sheds light on how Credit Card Firms Try End Run Around New Federal Rules:
Banks are quietly changing the terms of millions of credit card accounts as they brace for a tough new law that will limit rate hikes.
The law would restrict interest rate increases unless a credit card has a variable rate. So at least two major lenders are switching their cards with fixed rates to — you guessed it — variable rates.
“It’s completely unfair,” said Linda Sherry, a spokeswoman for Consumer Action. “It’s an end run around the intent of the new law.”
That law is the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama affixed with his signature in May. Its various provisions will be phased in between next month and February.
Who are these two major lenders? Bank of America and JP Morgan Chase. Given the size of their operations, watch every other credit card issuer set the same trap. (more…)
Let’s Look Under the Washington Mutual Rock
Posted by Larry Doyle on May 28th, 2009 1:02 PM |
Many people may think Washington Mutual is just another large financial conglomerate that has since gone into thrift heaven via its takeover by JP Morgan. While WaMu is now part of the JPM franchise, it continues to send very real signs which provide great insight as we navigate the economic landscape.
Thank you to our friends at 12th Street Capital for highlighting a release put forth yesterday by Jamie Dimon, chairman and CEO of JP Morgan. As the Financial Times reports, JP Morgan Warns on Credit Card Woes:
Jamie Dimon, JPMorgan Chase chief executive, warned on Wednesday that loss rates on the credit card loans of Washington Mutual, the troubled bank acquired last year by JPMorgan, could climb to 24 per cent by the year end.
In the past, credit card loss rates have tracked the unemployment rate but that relationship has been breaking down for more troubled credit card portfolios, such as the $25.9bn in WaMu credit card loans.
At the end of the first quarter, 12.63 per cent of the WaMu credit card loans were deemed uncollectable by JPMorgan. The bank estimates that figure could reach 18 to 24 per cent by the end of 2009, depending on economic conditions.
The initial question begs as to how and why the credit performance of WaMu’s cardholders could be that much worse than the industry as a whole. For those unfamiliar with Washington Mutual, the institution made a failed attempt to penetrate the Wall Street fortress via leveraging its credit origination platform. WaMu was one of the most aggressive lenders across the spectrum of products. As I wrote back on November 12th in The Wall Street Model Is Broken….and Won’t Soon Be Fixed:
At the turn of the century, the Wall Street model was a pure “originate to distribute” model with little to no residual risk on behalf of the originators or underwriters. When there is no residual risk, those who “WIN” are the players that can purely process the most volume. Well, how does one get volume? Lower the credit standards, put fewer restrictions on borrowers, little to no covenants (NINA Loans: no income, no asset check).
Washington Mutual was the poster child for aggressive, if not irresponsible, lending. When their distribution capabilities ceased, the institution was left “holding the bag.” That bag was filled with credit cards now projected by the TOP banker on the street to default at twice the norm. What more can we learn in this process? Let’s dig deeper. (more…)
Will Jamie Dimon be the Next Treasury Secretary?
Posted by Larry Doyle on March 20th, 2009 9:02 PM |
The pressure on Treasury Secretary Tim Geithner is increasing from within the Democratic Party, across the aisle, and the media. Will Tim be fed to the lions? Well, the standard procedures of implementing change seem to be occurring. What are those steps?
JP Morgan Chairman and CEO, Jamie Dimon
1. A vote of confidence by the Administration. Always a kiss of death!
2. Leak the name of a strong prospective secretary.
Who might that be? JP Morgan Chairman and CEO, Jamie Dimon.
Dimon is enormously well respected in Washington and Wall Street. He can quickly build a team. He has run very large organizations. He has been a longtime Democratic supporter and publicly promoted President Obama and his plans.
I find it interesting that Dimon’s name was bandied about last October as a prospective leader of Treasury. Market Watch highlighted this fact in reporting The Next Treasury Secretary Is…
As the firestorm over the prospective legislation to restrict Wall Street bonuses grows, do not be surprised to see Dimon ride in on the white horse to broker peace between Washington, the financial community, and the public at large.
LD
AIG Contracts a Brain Freeze
Posted by Larry Doyle on March 17th, 2009 9:27 AM |
Given the public outrage over the millions in bonus payments at AIG, is there any doubt that there has been a massive failure to perform by all involved?
When AIG was on the verge of bankruptcy last September, I am willing to bet the topic of employment contracts was not the lead item on the agenda. In fairly short order, though, as AIG was moving ahead with its attempt to sell divisions and repay the government loan, I have to believe outstanding liabilities, such as employment contracts, became a topic of discussion.
Let’s bring the main players at that point in the process back to the table. What does Hank Paulson have to say? How about Robert Willumstad, former AIG CEO? How about current AIG CEO, Edward Liddy?
Make no mistake, both the government and AIG executives could have imposed their will to renegotiate – if not outright dismiss – any outstanding contracts. How? When an entity such as the government takes over a company, a change of control occurs. That change of control does not unilaterally extinguish outstanding liabilities, but it certainly opens them for renegotiation. The fact that these contracts were not seriously renegotiated is a massive failure to perform on behalf of the government officials and AIG executives. (more…)
Lessons from Bear Stearns
Posted by Larry Doyle on March 16th, 2009 10:37 AM |
It was one year ago that the Federal Reserve and Treasury delivered Bear Stearns into the hands of JP Morgan for $2 a share. Bear Stearns stock had traded above $170 a share in 2006. With the passage of time, what are some of the lessons learned and what questions remain unanswered.
1. Although Bear Stearns employees and shareholders may not qualify a price of $2 a share (revised to $10 a few weeks later) as being saved, would the financial system have been better off letting Bear totally fail? Why? If Bear had failed, many people do not believe we would have had the breakdowns in our financial systems that occurred because of Lehman’s failure.
2. Did Dick Fuld, CEO of Lehman, assume that the Fed and Treasury would save Lehman much as they did Bear? Was he less aggressive in pursuing increased capital injections during the Summer 2008 as a result? Many people believe this to be the case. (more…)
Can We ‘TRACE’ JP Morgan’s Business?
Posted by Larry Doyle on July 17th, 2009 9:09 AM |
On Wall Street, information is everything!! Access to the information is invaluable. Why? Given the speed with which markets move, any early hint of developing news is priceless in terms of the ability to transact quickly and profitably.
Why is ‘high frequency program trading’ viewed with such skepticism? Select participants with advanced computer programs gain access to market flows prior to other participants and are able to act on it. That playing field is not level. I shared my disdain for this practice in writing, “Why High Frequency Program Trading Smells.”
What other battles are being waged by Wall Street firms looking to defend their turf at the expense of consumers and investors? Credit cards and credit derivatives. Which Wall Street firm has the greatest combined exposure to these businesses? None other than JP Morgan Chase.
The Financial Times highlights how JP Morgan Chief Hits at Credit Card Rules:
While Mr. Dimon is railing on new legislation aimed to protect consumer interests in the credit card space, he conveniently avoids mentioning how both JP Morgan Chase and Bank of America are already implementing procedures to skirt that legislation. How might these financial behemoths do that? Shift from fixed rate credit cards to variable rate. I exposed this maneuver a few weeks back in writing, “Banks Build Better Mousetrap.”
Dimon continues his defense of JP Morgan’s franchise:
In regard to derivatives activity, JP Morgan has a dominant position in the market. Why? Their strong capital position, enormous balance sheet, and strong credit rating make them an attractive counterparty for customers. Make no mistake, JP Morgan has a license to ‘print’ money, and a lot of it, across the entire derivatives platform.
While Washington will tout how they are increasing regulation of the derivatives space, this business is truly multi-pronged. There are plain vanilla derivatives in more highly liquid sectors of the market. These ’standardized’ derivatives will most certainly move to an exchange to create total transparency. Value added for customers will be minimal only because these markets are already fairly well defined and exposed. JP Morgan and other Wall Street firms will cede this ’standardized’ space while they fight tooth and nail to maintain their enormously advantageous position in the area of ‘customized’ derivatives.
There is little to no transparency in the world of customized derivatives and as a result the bid-ask spreads are very wide. Cha-ching, cha-ching. Jamie and his friends on Wall Street are working extremely hard to keep it this way.
In their defense, it is likely not functionally feasible to move many customized derivatives to an exchange. What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine. This system currently only covers transactions within the cash markets and not derivatives. What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.
I won’t make many friends on Wall Street, and perhaps lose some of my current friends, but TRACE should be implemented across all product lines. For those involved in the markets, please access the TRACE system to gain a wealth of pricing data while keeping your brokers and financial planners honest!!
LD
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Posted in Bank of America, Banking Institutions, Credit Card companies, General, JP Morgan, Jamie Dimon, regulation | 1 Comment »