Levine on Wall Street: Bank Troubles and Oil Worries

JPM earnings missed, BAC is firing clients, C is firing whole cities, DB is re-strategizing, and something with bitcoin.

JPMorgan had earnings.

It's a miss, $1.19 per share versus $1.31 estimates, with fixed-income revenue down in part because of the sale of the commodities unit, and in part because, you know, trading:

“The tough part about this group is that it kind of has to be Goldilocks volatility -- too little, and you can’t make anything on the trades, and too much, you lose money making a market,” Konrad said in a telephone interview before JPMorgan released its results. “It’s been frustrating because we’ve gone from one extreme to the other.”

Debt underwriting was strong, mortgage production was weak, and there's $990 million of new legal reserves. Full-year compensation at the investment bank was down 3.6 percent from last year, for an average of $204,365 per employee. Here's the release, the presentation, and the supplement; don't miss the "preferred stock dividend allocation change," which is just geeky fun.

Elsewhere in banks.

Bank of America apparently fired 150 clients last year in its prime brokerage group:

The second-largest U.S. bank made the decisions based on which relationships were profitable enough to keep amid new capital and liquidity rules, according to two people familiar with the bank’s strategy, who asked not to be named because details are private. The cuts included the majority of its quantitative hedge fund customers, or those that use computer programs to trade, one of the people said.

Is that about those funds using too much leverage, or about them being insufficiently susceptible to profitable sales pitches? It is sort of obvious in a generic way that if you write new regulations with the goal of making banks more conservative with their money, the result of those regulations will be that some clients will have less access to the credit and financial products they crave. And if you oppose those regulations, the trick is to find sympathetic clients who might plausibly lose that access under the new regulations, and trot them before the regulators and say "won't somebody please think of the home-buyers and municipal bond issuers and swaps end-users?" I doubt a lot of regulators are losing sleep over the quant funds cut adrift by Bank of America though.

Elsewhere in unprofitable clients, a Goldman Sachs vehicle called Oak Finance made a loan to Banco Espirito Santo in July, and BES got bailed out and restructured as a good-bank/bad-bank in August, and Goldman got whacked:

Goldman officials believed that the Oak Finance loan would be protected in the new structure, in part because a senior Bank of Portugal official said so in writing, Goldman spokeswoman Fiona Laffan said. 

This turned out to be a misunderstanding, the loan was written down, and "On Christmas Eve, a group of senior Goldman executives held a conference call to discuss the writedown and how it would affect employee bonuses," and they were not exactly filled with the Christmas spirit, though it sounds like the hits will come primarily to the bonuses of "up to 50 people" in the group that did the loan.

Meanwhile, Citigroup "has been quietly scaling back its consumer banking presence in some of the world's major cities," going from 120 to 100 of "the world's top 150 cities," and, sorry, Tokyo and Houston, but you no longer make the cut. And here's a story about how Deutsche Bank's executives are planning to "refresh their strategy by the end of June," to deal with the fact that Deutsche has the worst-performing stock among global investment banks. But there doesn't yet seem to be, um, a strategy for refreshing the strategy: "No decisions have been made" by Deutsche management (though "job cuts, winding down business lines at the investment bank and selling assets" are on the table), and here is an inspiring quote:

“It’s time for management to be asking themselves what they can be doing differently,” said Viktor Hund, who helps manage about 56 billion euros ($66 billion) including Deutsche Bank shares at LBBW Asset Management in Stuttgart, Germany. “Things can’t go on like they have up until now.”

Sounds like they need a strategy.

Today in oil.

"We're going to go below $40," says the head of research at Soc Gen in New York, so that's exciting. That makes Arctic drilling rather less attractive, with Statoil and others cutting back on exploration. "Among Wall Street strategists there are notable differences of opinion as to how falling oil prices will influence the overall market," with some analysts bullish, but Jeff Gundlach sees a "sinister" side to the oil decline that will negatively affect economic growth. On the other hand, "Refiners, tankage firms and traders that invested in oil storage capacity are benefiting as the slump in crude to below $45 a barrel deepened what’s called contango, a relatively rare situation where prices for oil delivery later this year are higher than current prices." But here is Izzy Kaminska, our great modern bard of commodities contango, with some skepticism:

In short, because the industry can bring new supply to market relatively quickly, we go from a spare capacity model, to a just-in-time model instead.

The key consequence of that fact: the market no longer needs so great a risk premium embedded into the spot price, because supply can be delivered to the market as and when needed, without too much concern of a system-chocking shortage ever happening.

This changes the capital structure underpinning the commodity market significantly. 

"Put another way," she adds, "storage economics becomes redundant because long-term contango-style storage has to compete directly with additional production." And here is Cardiff Garcia on oil, financial-market contagion, and Keystone. And while there's a lot of energy-sector high-yield debt, most of it is relatively long-dated, and Citi "wouldn't be surprised to see companies take advantage of deeply-discounted prices through liability management." And if it makes you feel any better, palm oil is rallying.

And bitcoin.

Is bitcoin in contango? Hahaha no what would that even mean? But bitcoin mining is becoming less profitable as prices crash, and you might be like "oh well less supply, that's good for prices," except that bitcoin mining is how the whole blockchain distributed trust etc. thing works. So you can't just shut down all the miners and have it still be a thing. And here's another "Can Bitcoin Clean Up Its Act?" story.

The ECB can probably buy bonds.

Good news! The European Central Bank has promised to buy government bonds using Outright Monetary Transactions, but certain Germans opposed that version of quantitative easing as too inflationary and not quite allowed by European Union treaties. And today there was a preliminary ruling on the question, from European Court of Justice advocate general Cruz Villalon. And the ruling was positive for the ECB's plan:

“The ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECBs activity,” Mr. Villalon wrote.

The OMT program is “suitable” to lower interest rates and wouldn’t lead the ECB to take on risks that would “necessarily” leave it vulnerable to insolvency, he added.

Today in money laundering.

"Wild Parties, Secret Cash Drops, Offshore Accounts: Meet Brazil's Black-Market Central Banker," reads this headline, but you have to pair it with the picture of Alberto Youssef at a parliamentary committee hearing for the full effect. I would party with him. He's a former whiskey smuggler and money launderer with nine arrests, who is now implicated in a kickback scandal at Petrobras, though he is not actually a central banker, as I was sort of hoping. He just, like, has a lot of money and is involved in a bunch of shady stuff. Elsewhere in money laundering, HSBC Holdings "has spent hundreds of millions of dollars to overhaul its anti-money-laundering system" and still can't quite get it right.

Here's the SEC's Equity Market Structure Advisory Committee.

Are you on it? Joseph Stiglitz isn't, which created some controversy a while back, so I figured I'd point you to the actual list now that it's out. Is it all evil high-frequency traders? I don't know, how do you feel about Brad Katsuyama, chief executive of IEX and hero of "Flash Boys"? But, sure, it's pretty tilted toward equities-trading industry people, and people who are generally familiar with the current market structure. (There are a couple of professors, a couple of people from places like AARP and T. Rowe Price, and a lot of people from banks, exchanges, and trading firms. 1 ) Which is how these committees work. You don't just staff them with wild-eyed anarchists who want to tear down the whole system and start over. You're thinking of Congress. Regulatory advisory bodies are about tweaking. And like I've said, my view of the Securities and Exchange Commission -- which after all picks its advisers -- is that it's mostly okay with current market structure, so it's not exactly in the mood to be berated by people who disagree.

Elsewhere in market structure, DRW is buying Chopper Trading. And elsewhere in the SEC, here are its 2015 examination priorities, "which focus on three areas: protecting retail investors, especially those saving for or in retirement; assessing market-wide risks; and using data analytics to identify signs of potential illegal activity." 

Human beats algorithm.

It's a theme recently, so I thought I'd point out that I had some success against the "veteran computer" in the New York Times's Rock-Paper-Scissors game, winning 8, tying 7, and losing only 4 of my first 20 ... throws? rounds? whatever you call it. In a larger sense, though, what sort of "success" is it to play rock-paper-scissors against a computer 20 times? Anyway I advise you to play rock-paper-scissors against a computer, what else are you doing with your life really.

Things happen.

What Can We Learn From The Impending S&P Settlement? Carlos Slim's New York Times options are nearing expiration, and are very in-the-money. "Another Picasso is up for sale," says a guy, metaphorically, about the Brooklyn Nets. (Related.) "Computer hackers hold a law firm's files hostage and demand a ransom," on "The Good Wife" but also for real in Canada. Ocwen might lose its California mortgage-servicing license. "Never pose for a 'most eligible bachelors in finance' thing" is right up there with "never record a corporate parody song" for career advice, but people keep doing it, with disastrous results. "Jamba Juice Already Added Kale. Now It’s Adding Two Activists." Instacart and the precariat in Slate, The Awl, Twitter. "BlackBerry is tweeting from an iPhone." Dog rides bus.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

  1. Plus someone from Bloomberg Tradebook, the alternative trading system owned by Bloomberg LP, the parent of Bloomberg News.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net

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