Levine on Wall Street: When Your Bank Says No, BP Says Yes
Energy companies are getting into
the energy hedging business
A neat story of commodity hedging goes something like: Oil drillers want to buy insurance against the price of oil going down, and, I don't know, airlines want to buy insurance against the cost of oil going up, and a bank stands in between those two natural opposite-way users of derivatives, writing them both insurance and collecting a profit. But here is a fascinating story about how the commodity derivatives business is increasingly being dominated by non-bank corporates like BP plc and Royal Dutch Shell, Cargill, Koch Industries, and EDF, which have gotten into the business of helping other commodity producers hedge. So for instance "investment banks now account for only about half of the U.S. oil and gas-hedging business, with corporate merchants accounting for some 40 percent, up from almost nothing just a few years ago." The corporates have advantages over banks that include commodity expertise and the ability to make proprietary trades free of the Volcker Rule. They mess with that neat hedging story a little though; there's something odd about one oil company writing a collar on oil for another oil company.
Bank of America used the term "Office of the CEO" loosely
Lots of people had complaints about their Bank of America mortgages, particularly about how BofA handled its obligations under the government's Home Affordable Modification Program. If those people complained enough -- one person says "I complained to my congressman, the attorney general, television stations" -- then they found their way to Bank of America's "Office of the CEO and President." Which still didn't do much for them! Because it was a Colorado contractor called Urban Lending Solutions that basically stonewalled them. "Bank of America authorized Urban Lending to refer to itself as the Office of the CEO and President in letters and telephone conversations to provide a seamless experience for homeowners who complained directly to Moynihan," said a Bank of America representative. A seamless experience! Not a good one, mind you; the experience was bad. And not a truthful one, since chief executive officer Brian Moynihan's office was in fact in Charlotte, and at Bank of America, not in Colorado and at Urban Lending Solutions. But a seamless experience. That is something.
Someone is wrong about bonuses
Here is a story about how London bank managing directors expect their average bonus to "increase to 166,955 pounds ($271,686) from 115,618 pounds a year earlier," which is apparently "more than double their average salary, up from 88 percent in 2012." (What?) Meanwhile, as you may have heard, "The European Union brokered a deal in February to outlaw banker bonuses that are more than twice fixed pay." Bankers responding to recruiters' surveys have a natural tendency to puff up their bonus expectations, so I guess there's no sense in taking their numbers too seriously. At the same time it is not clear how seriously we should take that EU bonus limits deal either, and I generally think bankers know more about banker pay than the EU does. We'll see soon enough I guess.
The European bank resolution process is complicated
I suppose it is not entirely surprising that the eurozone's process for resolving failed banks "could involve nine panels and up to 143 votes being cast, from its supervisor raising a warning flag to the final wind-up decision," but there it is. Here is where I guess I say that that sounds too complicated to persuade markets that banks would actually be wound up under the rules, but, meh, I am not convinced that is a function of complexity. There's always a mechanical legal bank resolution regime; the question is whether following it would produce results that are too scary to tolerate. Arguably the eurozone's traditional process of having lots of panels and votes and confusing everyone and constantly changing the rules is as good at averting panic as anything else.
Investors love corporate bonds
"We love corporate bonds," says the chief investment officer for fixed income at J.P. Morgan Asset Management, and remember that no matter what you think of anything there's a 50 percent chance that that statement will come back to haunt him. This is called the efficient markets hypothesis. Anyway spreads are at their lowest levels since 2007: "High-grade corporate debt now yields 1.21 percentage points more than comparable U.S. Treasurys, while the gap, or spread, between junk-rated debt and Treasurys is 3.96 percentage points."
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Matthew S Levine at email@example.com