The Front Office

[Vulcanl]

let the good times roll,

Yes, apparently JPM & Goldman are doing well (see below story from NY Times).  I question if this is a good development for the system as a whole, however.  These two banks wouldn't be around today if it wasn't for taxpayer money.  They need to do more than just repay that loan.  Excessive compensation for a limited number of people on the payroll will be a disgusting reaffirmation that they see this new era as 'business as usual.' 

In actuality the majority of the industry is still floundering, however.  It is not healthy for two banks to dominate whilst others will take years to work off their bloated debts.

Two Giants Emerge From Wall Street Ruins 

Jessica Ebelhar/The New York Times

JPMorgan Chase posted a $2.7 billion quarterly profit on Thursday, showing its turnaround.

Published: July 16, 2009

A new order is emerging on Wall Street after the worst crisis since the Great Depression — one in which just a couple of victors are starting to tower over the handful of financial titans that used to dominate the industry.

On Thursday, JPMorgan Chase became the latest big bank to announce stellar second-quarter earnings. Its $2.7 billion profit, after record gains for Goldman Sachs, underscores how the government’s effort to halt a collapse has also set the stage for a narrowing concentration of financial power.

“One theme here is that Goldman Sachs and JPMorgan really have emerged as the winners, as the last of the survivors,” said Robert Reich, a professor at the University of California, Berkeley, who was secretary of labor in the Clinton administration.

Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.

For the most part, the worst of the financial crisis seems to be over. Yet other large banks, including Citigroup and Bank of America, are still struggling to return to health. Both are expected to report a more profitable quarter on Friday, but a spate of management changes and looming losses from credit cards and commercial real estate have thwarted a stronger recovery.

And then there are the legions of regional and small banks that are falling in greater numbers across the country. While many have racked up large losses, they stand to bleed more red ink if the recession wears on. Fifty-three have failed this year, and the Federal Deposit Insurance Corporation is girding for scores to follow.

Uncertainties over the economy mean that Goldman and JPMorgan may be enjoying a fragile dominance, industry experts said. JPMorgan reported big declines in its consumer business on Thursday, and it has set aside more than $30 billion to cover future losses from surging credit card charge-offs and mortgage and home equity losses.

“Nobody is through this until unemployment turns around,” said Moshe Orenbuch, a Credit Suisse banking analyst.

And if regulation being considered in Washington is passed, banks would face new limits on the amount of their own capital they may trade. That could limit the profits that banks like Goldman and JPMorgan make from their trading businesses, and level the playing field, experts say.

Other former Wall Street stars like Morgan Stanley, which was hurt more by the crisis and has avoided taking big risks in the new era, may also rebound and begin to take on old rivals.

But for now, Goldman Sachs and JPMorgan are surging. “The stronger players are positioned to take advantage of the crisis and they will dominate clearly in the near term,” said James Reichbach, the head of Deloitte’s United States financial practice.

JPMorgan’s renewed strength, like Goldman’s, comes as it vaults ahead of longtime rivals, especially in investment banking, including bond and equity trading, and underwriting debt to help companies issue shares and bonds. Traders took advantage of big market swings and less competition to post big gains in fixed-income and equities.

Michael J. Cavanagh, the chief financial officer at JPMorgan, said its profit and fees from this business were “a record for us in a quarter and a record for anybody at any firm in any quarter.” The bank, he added, was “so very proud of those results.”

It has also profited from the demise of weaker banks to enlarge its market share in mortgages and retail banking. On Tuesday, as the CIT Group, a lender to many small businesses, negotiated with the government to avoid collapse, JPMorgan signaled that it was watching.

“It would be an opportunity for us in these states if CIT was unable to continue lending to borrowers,” Tom Kelly, a spokesman at Chase, was quoted by Dow Jones Newswires as saying.

And revenue from the retail bank Washington Mutual, which JPMorgan acquired last fall, is starting to help earnings. Morgan is also profiting from its government-assisted purchase of Bear Stearns last year. JPMorgan is now No. 1 globally in equity and debt capital markets, according to Dealogic.

Amid the surge, Jamie Dimon, JPMorgan’s chief executive, has cemented his status as one of America’s most powerful and outspoken bankers. He has vocally distanced himself from the government’s financial support, calling the $25 billion in taxpayer money the bank received in December a “scarlet letter” and pushing with Goldman Sachs, Morgan Stanley and others to repay the money swiftly. Those three banks repaid the money last month.

Yet JPMorgan’s transformation into one of the industry’s strongest players is underpinned by the shelter it received from the government: The bank used the money as a cushion until it was able to raise new capital. “There is no doubt all of us benefited from the government help — all of us,” said a senior executive at another Wall Street bank.

A spokesman for JPMorgan said the bank accepted aid at the request of the government but would not comment beyond that.

Few banks have undergone such a turnaround. Only a few years ago, JPMorgan was struggling after years of poor management and a failure to digest a series of big acquisitions. But under Mr. Dimon, it cut costs and strengthened its balance sheet.

The payoff began last year. With the industry teetering on the verge of collapse, JPMorgan snapped up Bear Stearns in March 2008 and Washington Mutual last fall in two government-assisted transactions. Clients say that its growing dominance has given it more leverage to charge for lending and other services.

After aggressively lobbying to repay its taxpayer money, Mr. Dimon has also been driving a hard bargain over the repurchase of warrants the government received from the bank last autumn in exchange for taxpayer support. JPMorgan is now planning to let the Treasury Department auction off the warrants to private investors after the two sides failed to agree on a price.

Mr. Dimon is also gearing up for a series of battles in Washington. One is over tighter regulations for derivatives, a business where the bank generates lucrative fees as one of the industry’s largest players.

Another is the creation of a new consumer protection agency, which could threaten the profitability of the bank’s mortgage and credit card businesses if it introduces tougher regulations.

JPMorgan’s stock has risen 20 percent since early March. It closed Thursday at $35.76.

Eric Dash and David Jolly contributed reporting.

[Vulcanl]

I agree with my President, and so should any person of conscience:

Wall Street profits show culture has changed little, says Obama 05:55 AM Jul 22, 2009 WASHINGTON

(from TodayOnline via various news AGENCIES)

United States President Barack Obama said second-quarter profits at Wall Street firms that received taxpayer bailout funds were a sign that some institutions had not learned lessons from the financial crisis.

"The problem that I've seen, at least, is you don't get a sense that folks on Wall Street feel any remorse for taking all these risks," Mr Obama said on PBS television on Monday. "You don't get a sense that there's been a change of culture and behaviour as a consequence of what has happened. And that's why the financial regulatory reform proposals that we put forward are so important," he said.

Mr Obama said that with the unemployment rate poised to hit at least 10 per cent this year, the administration would keep up the pressure on Wall Street to free up more credit for businesses and consumers. The issue also adds urgency to the effort to revamp financial regulations, he said.

Bank of America, JPMorgan Chase and Citigroup - the three biggest US lenders - reported more than US$10 billion ($14.4 billion) in profits for the second quarter. They had relied on investment banking and asset sales to counter growing losses on consumer loans.

But Mr Obama said that even though Wall Street "took excessive risks, acted irresponsibly and almost dragged the entire economy into a depression", he did not regret the government's intervention last year to rescue the troubled financial institutions.

"Our job is to - with the resources that we've got - try to maximise the help that we're getting to Main Street and to try to pressure Wall Street to do its part in making sure that credit is available so that businesses can start picking up again,"Mr Obama said.

[Keep rollin']

Let the good times roll!! Can't wait for bonus time!

[fantastic]

I agree with my President, and so should any person of conscience:

Wall Street profits show culture has changed little, says Obama 05:55 AM Jul 22, 2009 WASHINGTON

(from TodayOnline via various news AGENCIES)

United States President Barack Obama said second-quarter profits at Wall Street firms that received taxpayer bailout funds were a sign that some institutions had not learned lessons from the financial crisis.

"The problem that I've seen, at least, is you don't get a sense that folks on Wall Street feel any remorse for taking all these risks," Mr Obama said on PBS television on Monday. "You don't get a sense that there's been a change of culture and behaviour as a consequence of what has happened. And that's why the financial regulatory reform proposals that we put forward are so important," he said.

Mr Obama said that with the unemployment rate poised to hit at least 10 per cent this year, the administration would keep up the pressure on Wall Street to free up more credit for businesses and consumers. The issue also adds urgency to the effort to revamp financial regulations, he said.

Bank of America, JPMorgan Chase and Citigroup - the three biggest US lenders - reported more than US$10 billion ($14.4 billion) in profits for the second quarter. They had relied on investment banking and asset sales to counter growing losses on consumer loans.

But Mr Obama said that even though Wall Street "took excessive risks, acted irresponsibly and almost dragged the entire economy into a depression", he did not regret the government's intervention last year to rescue the troubled financial institutions.

"Our job is to - with the resources that we've got - try to maximise the help that we're getting to Main Street and to try to pressure Wall Street to do its part in making sure that credit is available so that businesses can start picking up again,"Mr Obama said.

A couple of points.

First, how much of the recent profits came from CDOs or mortgage backed securities.  These were the main issues.

Second, apparently banks were taking excessive risks (mostly this stemmed from lending money to people who couldn't afford it).  One sentence later he wants banks to start extending credit errr.....

If these businesses are profitable then let them do a rights issue and NOT take on credit.  If not, let them fail.

[Vulcanl]

"...First, how much of the recent profits came from CDOs or mortgage backed securities..."

This is an excellent question.  In the case of Goldman Sachs in particular, no one knows for sure and GS is not being very forthcoming.  This is dangerous

"...These were the main issues..."

I would add to these issues the fact that the front office had a completely free hand to to as it wished, bullying others if necessary to get their way

"...Second, apparently banks were taking excessive risks (mostly this stemmed from lending money to people who couldn't afford it)..."

This statement needs amplification.  The front office sought out unsophisticated, uninformed and otherwise hapless rubes to 'invest' in the 'innovative products' and borrow their cheap money.  It was an active and aggressive all-out campaign to rob the public and take their freedom from them.  Not at all unlike the tobacco companies intentionally spiking their products to keep their 'customers' coming back for more.  The buyer had no idea and it was not good for them

"...One sentence later he wants banks to start extending credit errr....."

"...If these businesses are profitable then let them do a rights issue and NOT take on credit.  If not, let them fail..."

Yes I agree with you on this.  Taking on more debt is not going to get us out of this mess

[fantastic]

"...First, how much of the recent profits came from CDOs or mortgage backed securities..."

This is an excellent question.  In the case of Goldman Sachs in particular, no one knows for sure and GS is not being very forthcoming.  This is dangerous

Maybe not.  CS this morning reported stellar earnings as well and this was after taking a huge charge due to own credit improving (this means the fair value of their liabilities increased).  They didn't make much on CDOs and mortgages, in certain areas they took major additional write downs in those areas.

"...These were the main issues..."

I would add to these issues the fact that the front office had a completely free hand to to as it wished, bullying others if necessary to get their way

I think you overstate this.  The only people really worth bullying are product control or whoever does price testing in your bank, others have little say in valuations.  Risk management manage nothing, they just report risk, allocation of risk is made by front office at around board level, all risk management do is look and see if you exceeded a limit, they have sod all to do with setting it so who is getting bullied anyway?  Credit risk may have a say vs counterparties but that is about it.  You may want to question this model but most risk guys don't understand risk anyway.  Regulators also suck but then if you pay peanuts.....

"...Second, apparently banks were taking excessive risks (mostly this stemmed from lending money to people who couldn't afford it)..."

This statement needs amplification.  The front office sought out unsophisticated, uninformed and otherwise hapless rubes to 'invest' in the 'innovative products' and borrow their cheap money.  It was an active and aggressive all-out campaign to rob the public and take their freedom from them.  Not at all unlike the tobacco companies intentionally spiking their products to keep their 'customers' coming back for more.  The buyer had no idea and it was not good for them

Disagree, they facilitated commercial banks making stupid loans by re-packaging and selling them on.  Other than DLJ (who no longer exist) I am not aware of any IBs making direct mortgage loans.  Commercial banks should have better controls over who they lend to as well rather than going *** it, can get rid anyway.  If you want to bunch the two together as co-conspirators then I guess I agree.

On the rubes, again pay peanuts....  Why do people like (ok ages ago) Orange County put morons in charge of managing their money?  That doesn't excuse the banks but still.  That is different to selling toxic shit retail (which SG banks seem to be fine with - don't believe me, I have some term sheets you would be shocked by).

"...One sentence later he wants banks to start extending credit errr....."

"...If these businesses are profitable then let them do a rights issue and NOT take on credit.  If not, let them fail..."

Yes I agree with you on this.  Taking on more debt is not going to get us out of this mess

But that is what the politicians are pushing.  Credit is ok where it is responsible, banks refusing to lend to each other is dangerous (that is what caused Lehman to fail), responsibility is key.

The SG housing market is a good example of stupid credit.  OK they don't have RMBS but the multiples are ridiculous.  In SG IBs are well regulated, commercial banks do whatever the f*ck they like (see above as well).

I agree with you overall but I think the commercial banking system has a larger share of the blame than you give it.

[Yay!!!]

Because there are SO MANY uints for sale there!

Why do you suppose all the desperate sellers of The Sail units haven't been gulping the same koolaid as the agent/landlord trolls on this b.o.a.r.d?

[Vulcanl]

"...CS this morning reported stellar earnings..."

And BoA, Citigroup and Morgan Stanley are still on the ropes.  This banking 'recovery' is uneven at best

"...allocation of risk is made by front office at around board level..."

Precisely the problem!!!

"...Why do people like (ok ages ago) Orange County put morons in charge of managing their money..."

Better example is a county named Jeffersonville (I think that is the name but not certain), in Alabama.  They entered into complicated interest rate swap agreements pitched to them by the front office sleazeballs.  A municipality like this can't afford to defend themselves.  I would turn the question around and ask why is it even legal for the front office to be allowed to present to places like this to begin with!??!?!?

"...I agree with you overall but I think the commercial banking system has a larger share of the blame than you give it..."

I make no distinction between commercial and IBs.  The culture of greed, of profit at the expense of all else is what I detest. 

There should be a point where morals and not money dictate one's actions

[fantastic]

"...CS this morning reported stellar earnings..."

And BoA, Citigroup and Morgan Stanley are still on the ropes.  This banking 'recovery' is uneven at best

"...allocation of risk is made by front office at around board level..."

Precisely the problem!!!

"...Why do people like (ok ages ago) Orange County put morons in charge of managing their money..."

Better example is a county named Jeffersonville (I think that is the name but not certain), in Alabama.  They entered into complicated interest rate swap agreements pitched to them by the front office sleazeballs.  A municipality like this can't afford to defend themselves.  I would turn the question around and ask why is it even legal for the front office to be allowed to present to places like this to begin with!??!?!?

So suggest something.  They have crudloads of money, they gonna stick it under a mattress?  So they can't talk to the current lot then someone else will do it (and likely offload the risk to the current lot the same way SG retail banks do).  End of the day, you have people managing large, large lumps of dough, be nice if they weren't ***ing stupid.  Until THAT changes you merely move who sells them crap.

"...I agree with you overall but I think the commercial banking system has a larger share of the blame than you give it..."

I make no distinction between commercial and IBs.  The culture of greed, of profit at the expense of all else is what I detest. 

You should hate Singapore then.  That is the culture.

Anyway....

They don't get paid the same way - it matters.  Your behaviour is governed by the way you expect to get paid, your stated objectives are bollocks if they are not aligned to that.

[mmmMMoonnneeyy]

GUESS WHO'S BACK IN DEMAND? - Investment bankers and private bankers are getting job offers again as the big turnaround in financial markets makes more banks refill their decimated ranks in Asia. Recently, Royal Bank of Scotland has taken on half a dozen people to grow its Asian equities business. Merrill Lynch has taken in some 100 people in the last 10 weeks. Deutsche Bank was a net hirer in 2008 in both the Asia Pacific and globally and OCBC is selectively adding new people at all units of the bank. Headhunters have seen bidding wars erupt over senior relationship managers in recent weeks as well. (Source: Financial Times)

MORGAN STANLEY SETS ASIDE 72% OF REVENUE FOR EMPLOYEES’ PAY - Morgan Stanley set aside 72 percent of its second-quarter revenue for compensation and benefits amid a “war for talent” with rivals that generate more money. The average ratio of compensation to revenue at securities firms this decade has been about 48 percent. The number of employees rose to 62,215 at the end of June, which included 20,004 people from the company’s new Morgan Stanley Smith Barney retail brokerage joint venture with Citigroup Inc. (Source: Asian Wall Street Journal)

[Vulcanl]

"...So suggest something..."

My suggestion is that the front office grow a moral backbone and rely on it to make their business decisions.  Not all said decisions should be based strictly on the bottom line

"...You should hate Singapore then.  That is the culture..."

But definitely NOT what I see where I live

"...They don't get paid the same way - it matters.  Your behaviour is governed by the way you expect to get paid, your stated objectives are bollocks if they are not aligned to that..."

This strikes right at the heart of my issues with the front office.  Why does everything have to be about a PAYDAY? 

[Vulcanl]

mmmMMoonnneyy,

Let us not lose sight of the fact that none of the firms you mention would be around right now if it wasn't for taxpayer money.  They OWE the masses their existence.

As a result they need to do the right thing going forward.

Deploy the vast amounts of cash created out of thin air by central banks to productive use.  Shun speculation.  Be respectable members of the World community.

It is no longer acceptable to be just about making MONEY

[Vulcanl]

This is more like it, and a step in the right direction towards making the front office a more respectable business unit:

JPMorgan to raise salaries for bankers
By Francesco Guerrera and Julie MacIntosh in New York

FT.com
Published: July 24 2009 19:02 | Last updated: July 25 2009 01:08

JPMorgan Chase is to raise salaries and cut bonuses for more than 12,000 bankers around the world in a sign that financial groups are scrambling to defuse public anger at excessive pay while trying to avoid an exodus of talent.

The group told employees of its investment bank on Thursday it would increase salaries for those whose bonuses at present accounted for between 25 and 50 per cent of total pay. The changes are expected to affect about half the 25,000-plus staff at JPMorgan’s investment bank in Wall Street, the City of London and other financial centres.

Increases would be accompanied by corresponding cuts in bonuses to leave bankers’ remuneration, and JPMorgan’s wage bill, unchanged, said people close to the matter.

The move, which mirrors decisions by Morgan Stanley, Citigroup and UBS, underlines the balancing act being ­performed by banks as they strive to devise a post-crisis pay system. Financial groups have had to respond to political pressure to reform their high-risk-high-reward culture without triggering a rush for the exit by bankers unhappy at their pay, especially during what promises to be a bumper year.

Jamie Dimon, JPMorgan chief executive, last week complained about rising competition for top bankers. Unlike Morgan Stanley and Citi, which raised salaries with immediate effect, JPMorgan’s bankers will not see changes until January, when 2009 compensation will be set.

“We want bankers to understand that it’s no longer just about the bonus,” a senior Wall Street executive said on Friday, pointing out that bonuses had often made up more than three-quarters of bankers’ multimillion-dollar pay cheques.

However, some bankers have criticised the drive to increase salaries at the expense of bonuses, arguing that it is a public relations stunt to impress politicians and weakens the link between pay and individual performance.

“To increase fixed costs in a hugely cyclical business is the wrong move,” said a senior JPMorgan banker. The changes would do little to reform Wall Street’s pay culture, he added, because even after planned salary increases, bonuses would still be the bulk of top bankers’ pay.

A boom in trading revenues at many banks in the first half raised bankers’ hopes for a bumper payday at the end of 2009. After strong results, JPMorgan set aside $14.5bn for pay in the first two quarters – a 22 per cent rise on the same period. Goldman Sachs could also dole out record bonuses.

JPMorgan’s move comes as executive pay is set to recapture US Congress attention. Barney Frank, House financial services committee chairman, said a bill to curb pay could be introduced as soon as next Friday.

In a hearing on Friday on financial regulatory reform, Tim Geithner, Treasury secretary, said: “We do not believe we can go back to the set of practices and compensation that prevailed over the last decade and helped contribute to this crisis,” but added that reform must be accompanied by other constraints on risk-taking.

Additional reporting by Sarah O’Connor in Washington
.Copyright The Financial Times Limited 2009

[nothing new]

As the article notes, others did this already.  Other banks on top of those listed are also considering it.

May help in some ways but not all.  As a comment notes, higher fixed costs are not good in a cyclical business, will increase the fire and hire mentality.  It also makes little difference to those on very large bonuses, it will still make up a substantial part of their income.

[Vulcanl]

"...May help in some ways but not all..."

But a step in the right direction of de-linking the incentive to increase bonus at all cost and above all else - including unethical practices and outright fraud that results in painful consequences for everyone else  BUT the front office

"...higher fixed costs are not good in a cyclical business, will increase the fire and hire mentality..."

Then why doesn't the front office use all their intellectual capacity to devise a pay mechanism where you don't have to fire everyone, keep the legitimate honest, productive employees and jettisons the parasites?