WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Showing posts with label wall street. Show all posts
Showing posts with label wall street. Show all posts
Sunday, November 13, 2011
Wall Street safety net still is full of holes
WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Wall Street safety net still is full of holes
WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Wall Street safety net still is full of holes
WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Wall Street safety net still is full of holes
WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Wall Street safety net still is full of holes
WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Wall Street safety net still is full of holes
WASHINGTON - After countless new rules designed to make Wall Street safer, it's come to this: Another securities firm has collapsed over risky, poorly disclosed bets.
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Not enough, in other words, has changed since the U.S. financial system nearly toppled three years ago.
The bankruptcy filing last week by MF Global Holdings Ltd. didn't freeze lending and panic investors around the world, as Lehman Brothers' did in 2008. But the rapid fall of the firm run by former New Jersey Gov. Jon Corzine shows risky behavior persists, despite a vast regulatory overhaul.
As lenders abandon Italy this week and stocks plummet on fear that defaults in Europe are all but inevitable, those new rules are about to be put to the test.
One question no one can answer: Is the financial system, with its expanding web of connections that even experts can't trace, any safer?
"People are making the same dumb bets," said investor Michael Lewitt of Harch Capital, who calls Washington's new rules inadequate.
MF Global's collapse suggests that:
Financial companies are making risky bets with borrowed money and hiding them off their balance sheets. In MF Global's case, scant disclosure made it harder for people to see the danger until it was too late.
Those bets are being made with their own money but are threatening customers and trading partners. Dodd-Frank, the Wall Street overhaul passed last year, focused on big, complex financial companies whose failure could topple other firms. The law bans these "systemically important" companies from making such bets with their own money, called proprietary trading. But it does little about smaller financial firms like MF Global.
Many financial companies operate without coordinated oversight by regulators. MF Global was watched over by several regulators. But no one was in charge of coordinating them. Financial companies, aside from the biggest, face the same patchwork oversight that failed to stop risky bets before the financial crisis.
The bust of MF Global itself is not an indictment of the new rules. Dodd-Frank wasn't designed to prevent all financial failures. In fact, some failures can be healthy if they discourage investors from taking on excessive risk.
But MF Global's collapse brought heavy costs. It caused millions in losses for investors. It threw commodity markets into disarray. And it left customers confused and angry because $593 million of their money is missing.
"The question for regulators is: 'How did this happen?'" said David Kotok, a money manager at Cumberland Advisors. "Could we have seen it coming?"
The answer: Yes -- but you had to look hard.
MF Global failed after buying billions of European government bonds on a hunch they were less risky than many investors assumed. The trouble wasn't so much the bet itself. It was how the firm disclosed it and financed it.
MF Global didn't recognize those bonds on its balance sheet for all to see. Instead, they were shunted "off-balance sheet," their presence noted deep in its financial statements. Some separate filings with regulators excluded them entirely.
This sleight-of-hand was possible because of an accounting maneuver used by Lehman to hide its debt before it failed: Instead of holding onto the bonds it had just bought, MF Global "sold" them to other companies in exchange for cash -- with the promise to buy them back later.
In effect, it was borrowing the cash but not calling it that because technically it came from a "sale." And because the bonds were off its books, MF Global didn't have to acknowledge the risk they posed.
Other firms have struck similar off-balance-sheet deals, but poor disclosure makes them difficult to track.
The lack of detail about financial companies' holdings can lead to panic selling. Fearing another MF Global, investors started dumping shares of broker Jefferies Group Inc. last month. The stock recovered after the company released details showing its bets were smaller and not funded by the same off-balance-sheet deals.
Janet Tavakoli, president of Tavakoli Structured Finance in Chicago, said the hidden debt at MF Global makes her wonder if regulators have learned anything from the financial crisis. She noted that American International Group Inc. used off-balance-sheet "swaps" to bet that U.S. homeowners would pay back their mortgages -- that is, until it collapsed and had to be bailed out by taxpayers.
"We've seen this movie before," Tavakoli said.
Under Dodd-Frank, large financial companies that played a big role in the financial crisis are subjected to new, stricter oversight. But that's not the case with smaller firms.
Christopher Whalen, managing director at Institutional Risk Analytics, noted that banks must file quarterly "call reports" listing a wide range of details about their risks -- but that no such disclosure is required of smaller financial firms like MF Global.
"The problem is, they are still very opaque," Whalen said.
In the case of MF Global, it not only made "proprietary" bets banned at larger firms, it did so with gobs of borrowed money.
One measure of that, its so-called leverage ratio, hit 31-1 in September, similar to Lehman's before it failed. Most big banks are closer to 10-1 now.
Of course, the risks taken by MF Global may prove more an exception than a rule. But Louise Purtle, an analyst at research firm CreditSights, is worried.
She wrote in a report last week that, as regulators crack down on the largest financial companies, risk could be building in the "shadow banking system" -- the thousands of hedge funds, small brokers, money managers and other non-bank financial firms out of the spotlight.
by Daniel Wagner Associated Press Nov. 11, 2011 12:00 AM
Wall Street safety net still is full of holes
Sunday, October 23, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Oct. 20 (Bloomberg) -- The biggest Wall Street firms posted their worst quarter in both trading and investment banking since the depths of the financial crisis as they face questions about the future of their business.
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley posted $13.5 billion in trading revenue minus accounting gains for the third quarter, down 35 percent from a year earlier. Investment- banking revenue plunged 41 percent from the second quarter to $4.47 billion.
Bank of America posted a roughly 90 percent drop in fixed- income trading revenue and Goldman Sachs had its lowest debt underwriting quarter since 2003. Corporations put off capital raises and investors sold riskier assets on concern that the U.S. economy was slowing and Europe’s debt crisis would spread.
“The micro has caught up with the macro, and the strains of the financial system have hit these companies,” Charles Peabody, an analyst at Portales Partners LLC in New York, said yesterday on Bloomberg Television’s “Inside Track.” “The question is, does that continue going forward?”
The five banks’ combined trading revenue so far this year, excluding debt valuation adjustments, or DVA, is down 16 percent from the same period last year. DVA are accounting gains taken when the value of a firm’s own debt declines, and losses taken when it rises.
The Standard & Poor’s 500 Index dropped 14 percent during the period, the worst decline since the fourth quarter of 2008. The Chicago Board Options Exchange Volatility Index, or VIX, which measures the cost of buying insurance against drops in the S&P 500, surged 160 percent to its highest quarterly reading since the first three months of 2009.
Buying Derivatives
The Markit CDX North America Investment Grade Index, which measures the price of buying derivatives to protect against a default on the corporate debt of 125 borrowers, climbed the most in the quarter since 2008.
“Whether it was a volatile and unpredictable market that made new equity issuances very difficult to execute, or our asset-management clients having much less conviction on investment decisions, the broader environment served as a significant headwind to clients moving forward with their business objectives,” Goldman Sachs Chief Financial Officer David Viniar said on a conference call this week.
Firms are also grappling with questions about the potential impact of the Volcker rule, which seeks to ban proprietary trading and limit hedge-fund and private-equity investments at deposit-taking banks. Regulators are seeking feedback from banks after releasing a draft of the proposal.
Flow Trading
Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under one proposal contained within the Volcker rule draft that may target so-called flow trading, Brad Hintz, an analyst at Sanford C. Bernstein & Co., wrote in a note to investors earlier this month.
Banks shut down stand-alone proprietary trading desks in anticipation of the rule, which has already affected trading. Citigroup said its 73 percent year-over-year decline in equities-trading revenue, excluding DVA, was driven by losses from a prop-trading group it is closing.
Bank of America attributed part of its fixed-income revenue drop to the winding down of its prop business, which contributed $434 million in the first half and zero in the third quarter.
Morgan Stanley is “constantly reassessing” whether the current environment represents a cyclical or secular change, Chief Executive Officer James Gorman said yesterday on a conference call.
Generating Return
“Over the next several months, it will become clearer which of the businesses that use a lot of balance sheet and take on a lot of risk can be expected to generate the kind of return that shareholders need,” Gorman said in a Bloomberg Television interview.
The 10 largest global investment banks, which include the five U.S. firms, are likely to trim their headcount of revenue producers by 5 percent in this year’s second half, according to an August report from industry consultant Coalition Ltd.
“If the market’s going to be and the economy’s going to be such that the revenues are going to be lower, we’re going to continue to take down the cost structure,” Bank of America CEO Brian Moynihan said on a conference call this week. “One of the easy things in this business versus other businesses is so much of it is variable comp, which comes down easier. But ultimately we have to reduce the heads and the infrastructure.”
Peabody and Shannon Stemm at Edward Jones & Co. expect capital markets revenue to pick up from the current levels. The impact of the economic environment may lessen once investors get more clarity from European leaders over their response to the region’s credit crisis, Stemm said.
“It’s our view it does eventually lift and we move back into an environment whereby the investment-banking revenues recover from these levels,” Stemm said. “It’s anybody’s guess how soon that happens.”
by Michael J. Moore Bloomberg Businessweek Oct 20, 2011
Wall Street Has Worst Quarter Since Crisis in Banking, Trading - Businessweek
Sunday, July 25, 2010
Sense of unease gripping Wall Street
by Tom Petruno Los Angeles Times July 17, 2010 12:00 AM
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Sense of unease gripping Wall Street
by Tom Petruno Los Angeles Times July 17, 2010 12:00 AM
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Sense of unease gripping Wall Street
by Tom Petruno Los Angeles Times July 17, 2010 12:00 AM
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Sense of unease gripping Wall Street
by Tom Petruno Los Angeles Times July 17, 2010 12:00 AM
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Sense of unease gripping Wall Street
by Tom Petruno Los Angeles Times July 17, 2010 12:00 AM
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
Investors in stock mutual funds couldn't have asked for a smoother ride higher in the 12 months through March. But that just made the second-quarter market sell-off all the more jarring.
Most equity funds lost 9 to 14 percent in the three months that ended June 30, halting a winning streak that had lifted the average U.S. stock fund nearly 50 percent over the previous four quarters.
It wasn't that investors were unprepared for a pullback. Everyone knew the stock market would "correct" at some point. But many thought the catalyst would be rising interest rates triggered by a V-shaped economic recovery.
Instead, the mood turned grim as a rapid pileup of bad news - the government-debt crisis in Europe, a shocking lack of job growth in the U.S., the Gulf of Mexico oil-spill catastrophe and more - fueled fresh doubts about the global economy's ability to sustain its recovery.
A report released Friday showed that consumer confidence fell in July to its lowest point in nearly a year. American consumers appear to be having second thoughts about the recovery, clamping down on their spending in May and June.
Equity investors now have to contend with a chorus of well-known economists asserting that deflation and depression are becoming real risks again.
Princeton University economist Paul Krugman became one of the loudest voices, warning in June about a depression. He contends that Europe, Japan and the U.S. should roll out more stimulus money to fill the void left by still-weak private-sector and local-government spending.
Instead, Europe and Japan are pledging to cut government outlays to pare their budget deficits, and pressure is rising on Congress to do the same. Policy makers, Krugman says, are repeating the mistakes of the 1930s.
In the Treasury bond market, a stampede of buying during the quarter showed that some people were taking the deflation/depression talk to heart, much as they did in late 2008.
Painting a dire picture of investors' fears, the benchmark 10-year T-note yield dived to 2.93 percent by the end of June, from nearly 4 percent in early April, as investors rushed for the perceived safety of U.S. bonds.
Given all that, the surprise may be that stocks didn't fare worse. Losses in most of the world's stock markets have stayed within the limits of a classic short-term correction, meaning a 10 to 20 percent drop from the highs reached in early spring.
By Wall Street's traditional yardstick, it takes a decline of more than 20 percent to mark a new bear market.
The Standard & Poor's 500 index of big-name stocks dropped 16 percent from its second-quarter peak of 1,217.28 on April 23 to its recent low of 1,022.58 on July 2.
In July, the selling has abated and indexes have risen. The S&P 500 is still up more than 60 percent from the 12-year low reached in March 2009.
Foreign-stock funds, which on average fell more sharply than domestic funds in the second quarter because of Europe's government-debt woes and the dollar's strength, have been outperforming domestic funds over the past few weeks, partly because of a reversal in the dollar.
With the stock market's losses modest so far - certainly compared with the crash of 2008-09 - investors who fear the economy will crumble have time to rethink their tolerance for risk.
The good news is that basic portfolio diversification worked well in the first half. Bond mutual funds, which saw record inflows of cash in 2009 as many Americans sought to play it safer with their nest eggs, mostly scored total returns of 2.5 to 5 percent in the first six months, according to Morningstar Inc.
Sense of unease gripping Wall Street
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